-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HZED1nBbpEQQ+/3DUXZHQdkscT7NVuAtpuOzNPZwaTL2xaILrul1qhLcRBC2Hqa4 7jyXCbH99wulPq7ryfq8Dw== 0000896595-00-000046.txt : 20001219 0000896595-00-000046.hdr.sgml : 20001219 ACCESSION NUMBER: 0000896595-00-000046 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001201 ITEM INFORMATION: FILED AS OF DATE: 20001218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UMPQUA HOLDINGS CORP CENTRAL INDEX KEY: 0001077771 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 931261319 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-25597 FILM NUMBER: 791079 BUSINESS ADDRESS: STREET 1: 445 SE MAIN STREET STREET 2: P.O. BOX 1820 CITY: ROSEBURG STATE: OR ZIP: 97470 BUSINESS PHONE: 5414403961 MAIL ADDRESS: STREET 1: UMPQUA HOLDINGS CORP STREET 2: 445 SE MAIN ST P.O. BOX 1820 CITY: ROSEBURG STATE: OR ZIP: 97470 8-K 1 0001.txt DECEMBER 1, 2000 FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): December 1, 2000 Umpqua Holdings Corporation ------------------------------------------------------ (Exact Name of Registrant as specified in its charter) Oregon 000-25597 93 - 1261319 - ----------------- ------------ ------------------- (State or other (Commission (IRS Employer jurisdiction File Number) Identification No.) of incorporation) 445 S.E. Main Street, Roseburg, Oregon 97470 - ------------------------------------- -------- Address of Principal Executive Office Zip Code Registrant's telephone number including area code: 541-440-3961 (Former name or former address, if changed since last report) Item 2. Acquisition or Disposition of Assets On December 1, 2000, the registrant completed a previously announced merger with VRB Bancorp pursuant to an Agreement and Plan of Reorganization (the "Merger Agreement"), dated August 14, 2000, by and among Umpqua Holdings Corporation, its wholly owned banking subsidiary South Umpqua Bank, VRB Bancorp and its wholly owned banking subsidiary, Valley of the Rogue Bank. Pursuant to the Merger Agreement and a related Plan of Merger, the registrant acquired all of the outstanding shares of VRB Bancorp in exchange for newly issued shares of the registrant's common stock. Each outstanding share of VRB common stock was converted into the right to receive 0.8135 share of the registrant's common stock, with cash paid in lieu of fractional shares. Approximately 6,767,978 shares of the registrant's common stock were issued in the transaction. Item 7. Financial Statements and Exhibits (a) Financial statements of business acquired. The financial statements of VRB Bancorp called for by this Item 7(a) are included in this report beginning immediately following the signature page. (b) Pro Forma Financial Information The pro forma financial information called for by this Item 7(b) are included in this report immediately following the financial statements of VRB Bancorp called for by Item 7(a). (c) Exhibits. The following exhibits are being filed herewith and this list shall constitute the exhibit index: Exhibit ------- 2 Agreement and Plan of Reorganization, incorporated by reference to the definitive proxy statement filed under Schedule 14A by the registrant on October 26, 2000 2 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 hereunto duly authorized. UMPQUA HOLDINGS CORPORATION (Registrant) Date: December 15, 2000 By: /s/ Daniel A. Sullivan -------------------------------------- Daniel A. Sullivan Senior Vice President and Chief Financial Officer 3 CONSOLIDATED BALANCE SHEETS
December 31, September 30, ------------------------------ 2000 1999 1998 ------------- -------------- -------------- (unaudited) ASSETS Cash and due from banks $ 17,772,137 $ 17,086,676 $ 14,513,570 Interest-bearing deposits with other banks 9,900,000 1,600,000 3,100,000 Federal funds sold 2,500,000 - 23,000,000 ------------- -------------- -------------- Total cash and cash equivalents 30,172,137 18,686,676 40,613,570 ------------- -------------- -------------- Held-to-maturity securities: State and municipal subdivisions 17,059,136 18,010,109 17,454,188 ------------- -------------- -------------- Available-for-sale securities: U.S. Treasuries and agencies 54,662,559 54,755,835 57,070,000 Collateralized mortgage obligations and other investments 106,161 134,146 193,631 ------------- -------------- -------------- Total available-for-sale securities 54,768,720 54,889,981 57,263,631 ------------- -------------- -------------- Federal Home Loan Bank stock 1,992,500 1,898,800 1,765,220 ------------- -------------- -------------- Loans held-for-sale 794,188 1,182,951 - ------------- -------------- -------------- Loans, net of allowance for loan losses and unearned income 222,904,374 196,818,024 175,188,200 Premises and equipment, net of accumulated depreciation and amortization 8,097,217 7,797,420 6,499,131 Goodwill, net of amortization 8,263,783 8,798,661 9,511,831 Other real estate owned - - 51,161 Accrued interest and other assets 3,726,295 3,421,075 2,870,121 ------------- -------------- -------------- Total assets $ 347,778,350 $ 311,503,697 $ 311,217,053 ============= ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Demand deposits $ 84,760,500 $ 74,804,533 $ 72,134,186 Interest-bearing demand deposits 121,567,225 119,569,318 110,900,199 Savings deposits 22,909,317 23,512,119 24,269,197 Time deposits 80,500,571 58,479,936 66,818,719 ------------- -------------- -------------- Total deposits 309,737,613 276,365,906 274,122,301 Borrowed funds - ------------- -------------- -------------- Accrued interest and other liabilities 2,455,578 1,528,447 1,859,297 ------------- -------------- -------------- Total liabilities 312,193,191 277,894,353 275,981,598 ------------- -------------- -------------- Commitments and contingencies (Note 12) 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, 8,303,596 and 8,694,286 issued and outstanding at June 30, 2000, December 31, 1999 and 1998, respectively 18,747,003 18,699,060 21,583,869 Retained earnings 17,991,587 16,428,287 13,590,957 Accumulated other comprehensive (loss) income, net of taxes (1,153,431) (1,518,003) 60,629 ------------- -------------- -------------- Total shareholders' equity 35,585,159 33,609,344 35,235,455 ------------- -------------- -------------- Total liabilities and shareholders' equity $ 347,778,350 $ 311,503,697 $ 311,217,053 ============= ============== ==============
See accompanying notes to consolidated financial statements. F-1 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------------------------------------------- 2000 1999 1999 1998 1997 ------------- ------------- -------------- -------------- -------------- (unaudited) INTEREST INCOME Interest and fees on loans $ 14,459,991 $ 12,868,231 $ 17,345,427 $ 19,099,960 $ 11,443,683 Interest on investment securities held-to-maturity: State and municipal subdivisions 682,828 696,139 929,551 945,018 944,226 Interest on investment securities available-for-sale: U.S. Treasuries and agencies 2,513,693 2,494,418 3,340,584 1,648,543 1,336,882 Collateralized mortgage obligations and other investments 99,710 106,628 8,721 27,624 78,310 Federal Home Loan Bank stock dividends 133,792 137,720 88,500 Federal funds sold 15,470 525,376 683,822 1,537,913 655,746 Interest on deposits in banks 96,411 190,087 251,678 514,895 407,337 ------------- ------------- ---------------------------------------------- Total interest income 17,868,103 16,880,879 22,693,575 23,911,673 14,954,684 ------------- ------------- ---------------------------------------------- INTEREST EXPENSE Interest-bearing demand deposits 2,565,866 2,260,614 3,095,169 3,210,401 2,414,951 Savings deposits 350,765 365,940 486,210 523,341 336,830 Time deposits 2,475,632 2,135,765 2,831,771 3,932,290 1,309,999 Other borrowings 153,253 - - 4,490 - ------------- ------------- ---------------------------------------------- Total interest expense 5,545,516 4,762,319 6,413,150 7,670,522 4,061,780 ------------- ------------- ---------------------------------------------- NET INTEREST INCOME 12,322,587 12,118,560 16,280,425 16,241,151 10,892,904 PROVISION FOR LOAN LOSSES - - - - 250,000 ------------- ------------- ---------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,322,587 12,118,560 16,280,425 16,241,151 10,642,904 ------------- ------------- ---------------------------------------------- NON-INTEREST INCOME Service charges on deposit accounts 1,097,230 958,448 1,300,921 1,294,878 1,019,786 Other operating income 760,791 541,389 754,731 846,102 650,853 ------------- ------------- ---------------------------------------------- Total non-interest income 1,858,021 1,499,837 2,055,652 2,140,980 1,670,639 ------------- ------------- ---------------------------------------------- NON-INTEREST EXPENSES Salaries and benefits $ 4,775,768 $ 4,682,709 $ 6,317,618 $ 5,984,912 $ 4,120,469 Net occupancy 1,114,644 924,943 1,157,013 1,024,860 813,915 Amortization of goodwill 563,634 565,038 713,170 739,616 110,299 Communications 341,388 333,533 452,014 386,461 239,721 Data processing 187,315 254,345 325,376 306,499 181,460 Supplies 187,244 191,676 267,454 289,675 230,255 Advertising 250,686 282,356 293,889 260,454 247,668 Professional fees 118,859 152,364 192,401 266,446 180,658 FDIC insurance premium 41,545 22,956 30,603 47,270 18,201 Merger related expenses 217,786 Other expenses 558,024 374,061 814,906 1,183,255 730,278 ------------- ------------- -------------- -------------- -------------- Total non-interest expenses 8,356,893 7,783,981 10,564,444 10,489,448 6,872,924 ------------- ------------- -------------- -------------- -------------- INCOME BEFORE INCOME TAXES 5,823,715 5,834,416 7,771,633 7,892,683 5,440,619 PROVISION FOR INCOME TAXES 2,267,525 2,198,250 2,883,250 2,966,000 1,737,000 ------------- ------------- -------------- -------------- -------------- NET INCOME $ 3,556,190 $ 3,636,166 $ 4,888,383 $ 4,926,683 $ 3,703,619 ============= ============= ============== ============== ============== OTHER COMPREHENSIVE INCOME Unrealized gain (loss) on securities, net of tax: Unrealized holding gain (loss) arising during period (1,578,632) 12,087 (2,964) Reclassification adjustment for gain included in net income - - - - (4,283) ------------- ------------- -------------- -------------- -------------- Other comprehensive income (loss) (132,564) (1,052,330) (1,578,632) 12,087 (7,247) ------------- ------------- -------------- -------------- -------------- COMPREHENSIVE INCOME $ 2,325,641 $ 1,376,266 $ 3,309,751 $ 4,938,770 $ 3,696,372 ============= ============= ============== ============== ============== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Basic $ 0.43 $ 0.42 $ 0.57 $ 0.57 $ 0.48 ============= ============= ============== ============== ============== Diluted $ 0.43 $ 0.42 $ 0.57 $ 0.56 $ 0.48 ============= ============= ============== ============== ==============
See accompanying notes to consolidated financial statements. F-2 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Number of Common Retained Accumulated Total Common Stock Earnings Other Shareholders' Shares Comprehensive Equity Income (Loss) -------------- --------------- --------------- -------------- -------------- BALANCE, December 31, 1996 3,574,682 $ 9,480,330 $ 10,652,015 $ 55,789 $ 20,188,134 Stock options exercised (February to August 1997) 17,475 85,230 - - 85,230 2 for 1 stock split (September 10, 1997) 3,592,157 - - - - Stock options exercised (September to October 1997) 6,430 26,152 - - 26,152 Income tax benefit from stock options exercised - 86,896 - - 86,896 Cash dividend ($.14 per share, paid October 31, 1997) - - (1,006,333) - (1,006,333) Stock offering (November 1997) 1,150,000 8,784,104 - - 8,784,104 Net income and comprehensive loss - - 3,703,619 (7,247) 3,696,372 -------------- --------------- --------------- -------------- -------------- BALANCE, December 31, 1997 8,340,744 18,462,712 13,349,301 48,542 31,860,555 Stock options exercised (March to September 1998) 19,410 50,128 - - 50,128 Income tax benefit from stock options exercised - 60,500 - - 60,500 Cash dividend ($.20 per share, paid October 1, 1998) - - (1,672,031) - (1,672,031) 4% stock dividend (October 1, 1998) 334,132 3,010,529 (3,010,529) - - Payments for fractional shares related to stock dividend - - (2,467) - (2,467) Net income and comprehensive income - - 4,926,683 12,087 4,938,770 -------------- --------------- --------------- -------------- -------------- BALANCE, December 31, 1998 8,694,286 21,583,869 13,590,957 60,629 35,235,455 Stock options exercised March to December 1999 36,179 219,126 - - 219,126 Cash dividend ($0.12 per share, paid May 21, 1999 and October 15, 1999) - - (2,051,053) - (2,051,053) Stock repurchased (April to December 1999) (426,869) (3,103,935) - - (3,103,935) Net income and comprehensive loss - - 4,888,383 (1,578,632) 3,309,751 -------------- --------------- --------------- -------------- -------------- BALANCE, December 31, 1999 8,303,596 18,699,060 16,428,287 (1,518,003) 33,609,344 -------------- --------------- --------------- -------------- -------------- Net income and comprehensive loss 3,556,190 3,556,190 Other Comprehensive Income, net of tax unrealized gains on securities arising during this period. 364,572 364,572 Stock options exercised 13,837 97,197 - 97,197 Cash dividend ($0.12) per share, declared March 30, and September 25, 2000 - - (1,992,890) - (1,992,890) 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 ============== =============== =============== ============== ==============
See accompanying notes to consolidated financial statements. F-3 CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30 Years Ended December 31, ---------------------------- --------------------------------------- 2000 1999 1999 1998 1997 ------------ -------------- ------------ ----------- ------------ (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,556,190 $ 3,636,166 $ 4,888,383 $ 4,926,683 $ 3,703,619 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 1,160,665 802,639 1,220,546 1,134,242 392,547 Loss (gain) on sales of assets - - 18,423 (18,931) (8,429) Provision for loan losses - - - - 250,000 FHLB stock dividend (93,700) (99,580) (133,580) (137,720) (88,500) Deferred taxes - - (167,988) 89,269 22,684 Compensation expense - stock options - - 89,763 93,340 57,312 Change in cash due to changes in certain assets and liabilities: Net change in accrued interest and other assets (370,917) (93,398) 324,277 410,555 215,220 Net change in accrued interest and other liabilities (70,001) (400,481) (313,041) (1,292,613) 323,300 ------------ -------------- ------------ ----------- ------------ Net cash from operating activities 4,182,237 3,845,346 5,926,783 5,204,825 4,867,753 ------------ -------------- ------------ ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the maturity of held-to-maturity securities 955,000 575,000 575,000 3,425,000 215,000 Purchases of held-to-maturity securities - (1,125,587) (1,125,587) (2,371,411) - Proceeds from the maturity or sales of available-for-sale securities 527,043 10,541,579 10,559,844 33,611,023 3,455,408 Purchases of available-for-sale securities (10,500,000) (10,500,000) (64,980,969) (3,000,000) Net (increase) decrease in loans (25,913,881) (9,423,417) (22,963,084) 31,608,420 (15,888,096) Cash paid, net of cash acquired from acquisition - - - (1,644,499) - Sale of credit card portfolio obtained in acquisition - - - 939,583 - Purchase of premises and equipment (688,830) (1,467,319) (1,795,106) (675,541) (699,013) Proceeds from the sale of other real estate - - 186,500 420,850 - Proceeds from the sale of premises and equipment - - 8,585 - 2,600 ------------ -------------- ------------ ----------- ------------ Net cash from investing activities (25,120,668) (11,399,744) (25,053,848) 332,456 (15,914,101) ------------ -------------- ------------ ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 33,371,707 6,293,905 2,243,605 (6,930,019) 17,607,889 Net borrowing - - - - Proceeds from public stock offering, net of 97,197 131,619 expenses - - - - 8,784,104 Cash dividends and fractional share payments (995,758) (1,046,126) (2,051,053) (1,674,498) (1,006,333) Cash received from exercise of common stock options 111,554 36,517 88,068 Repurchase of common stock (49,254) (2,413,716) (3,103,935) - - ------------ -------------- ------------ ----------- ------------ Net cash from financing activities 32,423,892 2,965,682 (2,799,829) (8,568,000) 25,473,728 ------------ -------------- ------------ ----------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,485,461 (4,588,716) (21,926,894) (3,030,719) 14,427,380 CASH AND CASH EQUIVALENTS, beginning of period 18,686,676 40,613,570 40,613,570 43,644,289 29,216,909 ------------ -------------- ------------ ----------- ------------ CASH AND CASH EQUIVALENTS, end of period $ 30,172,137 $ 36,024,854 $ 18,686,676 $ 40,613,570 $ 43,644,289 ============ ============== ============ =========== ============ SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid for interest $ 5,462,509 $ 4,843,138 $ 6,486,065 $ 7,464,255 $ 4,048,741 ============ ============== ============ =========== ============ Cash paid for taxes $ 2,005,000 $ 2,206,100 $ 2,944,100 $ 2,805,000 $ 1,320,994 ============ ============== ============ =========== ============ SCHEDULE OF NONCASH ACTIVITIES Stock dividends declared $ - $ - $ - $ 3,010,529 $ - ============ ============== ============ =========== ============ Transfer of loan balances to other real estate $ - $ - $ 150,309 $ 453,079 $ - ============ ============== ============ =========== ============ Unrealized gain (loss) on available-for-sale securities, net of tax $ 364,572 $ (1,106,087) $ (1,578,632) $ 12,087 $ (7,247) ============ ============== ============ =========== ============ Income tax benefit of stock options exercised $ - $ - $ - $ 60,500 $ 86,896 ============ ============== ============ =========== ============
See accompanying notes to consolidated financial statements. F-4 NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The accompanying consolidated financial statements include the accounts of VRB Bancorp (VRB), a bank holding company, and its wholly-owned subsidiary, Valley of the Rogue Bank (the Bank). Substantially all activity of VRB is conducted through its subsidiary bank and all significant intercompany accounts and transactions have been eliminated in the preparation of the consolidated financial statements. Description of business The Bank is a state-chartered institution authorized to provide banking services by the State of Oregon. With its headquarters in Rogue River, Oregon, it also has branch operations in Josephine and Jackson County, Oregon. The Bank conducts a general banking business. Its activities include the usual deposit functions of a commercial bank: commercial, real estate, installment, and mortgage loans; checking and savings accounts; automated teller machines (ATM's); collection services; and, safe deposit facilities. Both VRB Bancorp and Valley of the Rogue Bank are subject to the regulations of certain Federal and State agencies and undergo periodic examinations by those regulatory authorities. Management's estimates and assumption In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Investment securities The Bank is required to specifically identify under generally accepted accounting principles its investment securities as "held-to-maturity," "available-for-sale," or "trading accounts." Accordingly, management has determined that all investment securities held at June 30, 2000 and at December 31, 1999 and 1998, are either "available-for-sale" or "held-to-maturity" and conform to the following accounting policies: Securities held-to-maturity Bonds, notes, and debentures for which the Bank has the intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Securities available-for-sale Available-for-sale securities consist of bonds, notes, debentures, and certain equity securities not classified as held-to-maturity securities. Securities are generally classified as available-for-sale if the instrument may be sold in response to such factors as: (1) changes in market interest rates and related changes in the security's prepayment risk, (2) needs for liquidity, (3) changes in the availability of and the yield on alternative instruments, and (4) changes in funding sources and terms. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of equity until realized. Fair values F-5 for investment securities are based on quoted market prices. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary, result in write-downs of the individual securities to their fair value. The related write-downs would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Loans, net of allowance for loan losses and unearned income Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and unearned income. Interest on loans is calculated by using the simple-interest method on daily balances of the principal amount outstanding. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank's reserve for loan losses. Such agencies may require the Bank to recognize additions to the reserve based on their judgment of information available to them at the time of their examinations. Loans receivable that will not be repaid in accordance with their contractual terms are measured using a discounted cash flow methodology or the fair value of the collateral for certain loans. Accrual of interest is discontinued on impaired loans when management believes, after considering economic and business conditions, collection efforts, and collateral position that the borrower's financial condition is such that collection of interest is doubtful. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment to the yield of the related loan. Premises and equipment Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. Depreciation is based on useful lives of 3 to 25 years on furniture and equipment; 15 to 40 years for buildings and components; and, 15 to 20 years on leasehold improvements. Other real estate Real estate acquired by the Bank in satisfaction of debt is carried at the lower of cost or estimated net realizable value. When property is acquired, any excess of the loan balance over its estimated net realizable value is charged to the allowance for loan losses. Subsequent write-downs to net realizable value, if any, or any disposition gains or losses are included in noninterest income and expense. F-6 Goodwill Goodwill represents the costs in excess of net assets acquired arising principally from the purchase of Colonial Banking Company (see Note 2), and is being amortized over 15 years. Income taxes Deferred income tax assets and liabilities are determined based on the tax effects of differences between the book and tax bases of the various balance sheet assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Statement of cash flows Cash equivalents are generally all short-term investments with a maturity of three months or less. Cash and cash equivalents normally include cash on hand, amounts due from banks, and federal funds sold. Off-balance-sheet financial instruments The Bank holds no derivative financial instruments. However, in the ordinary course of business, the Bank enters into off-balance-sheet financial instruments consisting of commitments to extend credit as well as commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. Fair value of financial instruments The following methods and assumptions were used by the Bank in estimating fair values of financial instruments as disclosed herein: Cash and cash equivalents - The carrying amounts of cash and short-term instruments approximate their fair value. Held-to-maturity and available-for-sale securities - Fair values for investment securities, excluding restricted equity securities, are based on quoted market prices. The carrying values of restricted equity securities approximate fair values. Loans receivable - For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Deposit liabilities - The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit (CDs) approximate their fair values at the reporting date. Fair F-7 values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-term borrowings - The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Bank's current incremental borrowing rates for similar types of borrowing arrangements. Long-term debt - The fair values of the Bank's long-term debt are estimated using discounted cash flow analyses based on the Bank's current incremental borrowing rates for similar types of borrowing arrangements. Accrued interest - The carrying amounts of accrued interest approximate their fair values. Off-balance-sheet instruments - The Bank's off-balance-sheet instruments include unfunded commitments to extend credit and standby letters of credit. The fair value of these instruments is not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs. Advertising Advertising costs are charged to expense during the year in which they are incurred. Advertising expenses were $293,889, $260,454, and $247,668 for the years ended December 31, 1999, 1998, and 1997, respectively. Stock options VRB applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its stock option plans. Accordingly, compensation costs are recognized as the difference between the exercise price of each option and the market price of VRB's stock at the date each grant becomes further vested. Accordingly, compensation costs charted to income were $89,673, $93,340, and $57,312 in 1999, 1998, and 1997, respectively. Had compensation for VRB's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards No. 123, the Bank's net income would have been affected as described in Note 14. Recently issued accounting standards In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that VRB recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. SFAS No. 133, as amended by SFAS No. 137, shall be effective for F-8 all fiscal quarters of all fiscal years beginning after June 15, 2000. However, management of VRB believes this accounting standard will have no effect on the financial condition and results of operation of the Bank. Other issued but not yet required FASB statements are not currently applicable to the Bank's operations. Management believes these pronouncements will also have no material effect upon VRB's financial position or results of operation. Reclassifications Certain reclassifications have been made to the 1998 and 1997 consolidated financial statements to conform with current year presentations. Interim Financial Statements The unaudited consolidated financial statements for June 30, 1999 and 2000 and the six month periods then ended 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 operating results for the six months ended June 30, 2000 and 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. See VRB's Management's Discussion and Analysis for further interim information. NOTE 2 -- ACQUISITION OF COLONIAL BANKING COMPANY VRB Bancorp completed its acquisition of Colonial Banking Company (CBC) effective January 5, 1998. VRB paid former stockholders of CBC $15.7 million in cash for the common and preferred stock of CBC. This acquisition was treated as a purchase for accounting purposes. Accordingly, under generally accepted accounting principles, the assets and liabilities of CBC have been recorded on the books of the Bank at their respective fair market values at the effective date the acquisition was consummated. Goodwill, the excess of the purchase price over the net fair value of the assets and liabilities acquired, was recorded at $9.5 million. Amortization of goodwill over a 15-year period will result in a charge to earnings of approximately $635,000 per year. The following are the fair values of assets acquired and liabilities assumed as of the January 5, 1998, acquisition date (in thousands): Investment securities $ 4,797 Federal Home Loan Bank stock 420 Loans, net 92,775 Premises and equipment, net 1,802 Goodwill 9,526 Accrued interest and other assets 1,710 -------- Total assets $111,030 ======== Deposits $107,876 Accrued interest and other liabilities 1,510 Cash paid for acquisition, net of cash acquired 1,644 -------- Total liabilities $111,030 ======== The financial statements for the year ended December 31, 1998, include the operations of CBC from January 6, 1998 to December 31, 1998. Actual results of F-9 operations for the year ended December 31, 1998, would not have been materially different had the acquisition occurred on January 1, 1998. The following information presents unaudited pro forma results of operations for the year ended December 31, 1997, as though the acquisition had occurred on January 1, 1997. The pro forma results do not necessarily indicate the actual result that would have been obtained had the acquisition of CBC actually occurred on January 1, 1997. Net interest income before provision for loan loss $ 16,404 Net income $ 3,713 Earnings per common share: Basic $ 0.51 Diluted $ 0.50 NOTE 3 -- INVESTMENT SECURITIES The amortized cost and estimated market values of investment securities at December 31, 1999 and 1998, are as follows (in thousands):
Amortized Gross Gross Estimated Cost Unrealized Unrealized Market Gains Losses Value ---------------------------------------------------------------------- December 31, 1999 Held-to-maturity securities: State and municipal subdivisions $ 18,010 $ 137 $ (249) $ 17,898 ========== ========== ========== ========== Available-for-sale securities: U.S. Treasuries and agencies $ 56,990 $ - $ (2,234) $ 54,756 Collateralized mortgage obligations 132 2 - 134 ---------- ---------- ---------- ---------- $ 57,122 $ 2 $ (2,234) $ 54,890 ========== ========== ========== ========== December 31, 1998 Held-to-maturity securities: State and municipal subdivisions $ 17,454 $ 793 $ - $ 18,247 ========== ========== ========== ========== Available-for-sale securities: U.S. Treasuries and agencies $ 56,977 $ 177 $ (84) $ 57,070 Collateralized mortgage obligations 195 - (1) 194 ---------- ---------- ---------- ---------- $ 57,172 $ 177 $ (85) $ 57,264 ========== ========== ========== ==========
The amortized cost and estimated market value of investment securities at December 31, 1999, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE SECURITIES ----------------------------------------------------------- Estimated Estimated Amortized Cost Market Value Amortized Cost Market Value -------------- ------------- ------------- ------------- Due in one year or less $ 205 $ 206 $ 2,572 $ 2,549 Due after one year through five years 3,394 3,418 38,050 36,672 Due after five years through ten years 3,089 3,108 15,500 14,756 Due after ten years 11,132 11,166 1,000 913 -------------- ------------- ------------- ------------- $ 18,010 $ 17,898 $ 57,122 $ 54,890 ============== ============= ============= =============
For purposes of the maturity table, collateralized mortgage obligations, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. Collateralized mortgage obligations may mature earlier than their weighted-average contractual maturities because of principal prepayments. F-10 At December 31, 1999 and 1998, investment securities with an amortized cost of $6,185,993 and $8,168,284, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is required to maintain an investment in capital stock of the FHLB. The FHLB stock is not actively traded but is redeemable by FHLB at its current book value. NOTE 4 -- LOANS AND ALLOWANCE FOR LOAN LOSSES The loan portfolio (including loans held-for-sale) consisted of the following (in thousands): 1999 1998 ------------ ------------- Real estate - construction $ 29,034 $ 23,552 Real estate - residential and commercial 134,765 126,675 Commercial 23,940 16,418 Installment 13,946 12,327 Other loans 51 98 ------------ ------------- 201,736 179,070 ------------ ------------- Allowance for loan losses (3,503) (3,539) Unearned loan fee income (232) (343) ------------ ------------- $ 198,001 $ 175,188 ============ ============= The following is an analysis of the changes in the allowance for loan losses (in thousands):
1999 1998 $ 1,997 ------------ ------------- ------------- Beginning balance $ 3,539 $ 1,780 $ 1,632 Acquired upon CBC acquisition (Note 2) - 1,898 - Provision for possible loan losses - - 250 Loans charged off (86) (189) (141) Recoveries 50 50 39 ------------ ------------- ------------- Ending balance $ 3,503 $ 3,539 $ 1,780 ============ ============= =============
The Bank's recorded investment in impaired loans was $523,857 and $262,456 at December 31, 1999 and 1998, respectively. The average recorded investment in impaired loans approximates their recorded investment at December 31, 1999 and 1998. The total allowance for loan losses related to these loans at December 31, 1999 and 1998, was approximately $70,000 and $42,000, respectively. Interest income recognized on impaired loans during the years ended December 31, 1999, 1998, and 1997, was not significant. Management estimates that in 1999, approximately $42,600 of interest income was not recognized on impaired loans on nonaccrual status, compared with approximately $35,300 in 1998 and $29,600 in 1997. F-11 NOTE 5 -- BANK PREMISES AND EQUIPMENT Bank premises, furniture, and equipment consisted of the following (in thousands): 1999 1998 ------------ ------------- Land $ 2,069 $ 1,613 Buildings 6,001 5,375 Furniture and equipment 4,268 4,136 ------------ ------------- 12,338 11,124 Less: accumulated depreciation (4,541) (4,625) ------------ ------------- $ 7,797 $ 6,499 ============ ============= NOTE 6 -- ACCRUED INTEREST AND OTHER ASSETS Accrued interest and other assets consisted of the following (in thousands): 1999 1998 ------------ ------------- Accrued interest receivable $ 1,925 $ 1,931 Prepaid expenses 272 234 Deferred taxes 1,099 553 Other assets 125 152 ------------ ------------- $ 3,421 $ 2,870 ============ ============= NOTE 7 -- TIME DEPOSITS Time certificates of deposit of $100,000 and over aggregated $8,574,472 and $8,089,537 at December 31, 1999 and 1998, respectively. At December 31, 1999, the scheduled maturities for time deposits is as follows (in thousands): 2000 $ 52,802 2001 2,459 2002 2,774 2003 222 2004 and thereafter 223 ------------ $ 58,480 ============ NOTE 8 -- INCOME TAXES The income tax provision consisted of the following (in thousands):
1999 1998 $ 1,997 ------------ ------------- ------------- Currently payable $ 2,665 $ 2,877 $ 1,715 Deferred 168 89 22 ------------ ------------- ------------- Provision for income taxes $ 2,833 $ 2,966 $ 1,737 ============ ============= =============
Deferred income taxes represent the tax effect of differences in timing between financial income and taxable income. Deferred income taxes, according to the timing differences, which caused them, were as follows (in thousands): F-12
1999 1998 1997 ------------ ------------- ------------- Accounting loan loss provision less than (in excess of) tax provision $ 14 $ 69 $ (58) Accounting depreciation less than tax depreciation 42 46 3 Deferred compensation 15 9 (6) Accounting loan fees in excess of tax loan fees 178 67 66 Federal Home Loan Bank stock dividends 54 52 28 Cash to accrual adjustment - (72) - Option compensation expense (36) (72) - Other differences (99) (10) (11) ------------ ------------- ------------- $ 168 $ 89 $ 22 ============ ============= =============
The net deferred tax benefits included in other assets in the accompanying consolidated balance sheets include the following components (in thousands):
1999 1998 ------------ ------------- Deferred tax assets: Loan loss reserve $ 1,062 $ 1,076 Deferred compensation 64 100 Other 242 86 ------------ ------------- Deferred compensation 1,368 1,262 ------------ ------------- Deferred tax liabilities: Accumulated depreciation (193) (151) Deferred loan fees (543) (365) Federal Home Loan Bank stock dividends (247) (193) ------------ ------------- (983) (709) ------------ ------------- Net deferred tax asset $ 385 $ 553 ============ =============
The exercise of stock options which have been granted under VRB Bancorp's stock option plan for directors give rise to compensation which is includable in the taxable income of the applicable employees and deductible by the Bank for federal and state income tax purposes. Such compensation results from increases in the fair market value of VRB Bancorp's common stock subsequent to the date of grant of the applicable exercised stock options and, accordingly, in accordance with APB Opinion No. 25, such compensation is not recognized as an expense for financial accounting purposes and the related tax benefits are taken directly to common stock. For the years ended December 31, 1998 and 1997, these transactions resulted in federal and state tax deductions and benefits, which have increased common stock. Management believes, based upon the Bank's historical performance, that net deferred tax assets will be realized in the normal course of operations and, accordingly, management has not reduced net deferred tax assets by a valuation allowance. The tax provision differs from the federal statutory rate of 34% due principally to tax exemptions for interest received on municipal investments and nondeductible goodwill expense amortization. The 1997 provision for income taxes reflects a reduction in the state income tax rate from 6.6% to 3.8%. A reconciliation between the statutory federal income tax rate and the effective tax rate is as follows (in thousands): F-13
1999 1998 1997 ------------ ------------- ------------- Federal income taxes at statutory rate $ 2,647 $ 2,684 $ 1,850 State income tax expense, net of federal income tax benefit 370 344 237 Effect of nontaxable interest income (389) (321) (294) Non-deductible goodwill 275 219 - Other (70) 40 (56) ------------ ------------- ------------- $ 2,833 $ 2,966 $ 1,737 ============ ============= ============= Effective tax rate 37% 38% 32% ============ ============= =============
NOTE 9 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and financial guarantees. Those instruments involve elements of credit and interest-rate risk similar to the amounts recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank's experience has been that a majority of loan commitments are drawn upon by customers. While most commercial letters of credit are not utilized, a significant portion of such utilization is on an immediate payment basis. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral varies but may include cash, accounts receivable, inventory, premises and equipment, and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third-party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary. The Bank has not been required to perform on any financial guarantees during the past two years. The Bank has not incurred any losses on its commitments in either 1999, 1998, or 1997. A summary of the notional amounts of the Bank's financial instruments with off-balance-sheet risk at December 31, 1999 and 1998, follows: F-14 1999 1998 ------------ ------------- Commitments to extend credit $ 32,106,632 $ 21,165,221 Commercial and standby letters of credit $ 1,113,024 $ 1,090,009 NOTE 10 -- FAIR VALUES OF FINANCIAL INSTRUMENTS The following table estimates fair value and the related carrying values of the Bank's financial instruments (in thousands):
1999 1998 ----------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------------------- ---------------------- Financial assets: Cash and due from banks $ 17,087 $ 17,087 $ 14,514 $ 14,514 Interest-bearing deposits with other banks $ 1,600 $ 1,600 $ 3,100 $ 3,100 Federal funds sold $ -- $ -- $ 23,000 $ 23,000 Securities held-to-maturity $ 18,010 $ 17,898 $ 17,454 $ 18,247 Securities available-for-sale $ 54,890 $ 54,890 $ 57,264 $ 57,264 Federal Home Loan Bank stock $ 1,899 $ 1,899 $ 1,765 $ 1,765 Loans held-for-sale $ 1,183 $ 1,183 $ -- $ -- Loans, net of allowance for loan losses and unearned income $196,818 $196,208 $175,188 $ 17,233 Accrued interest $ 1,925 $ 1,925 $ 1,931 $ 1,931 Financial liabilities: Demand and savings deposits $217,886 $217,886 $207,304 $207,304 Time deposits $ 58,480 $ 58,355 $ 66,819 $ 67,196 Accrued interest $ 275 $ 275 $ 348 $ 348
While estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that were the Bank to have disposed of such assets or liabilities at December 31, 1999 and 1998, the estimated fair values would necessarily have been realized at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 1999 and 1998, should not necessarily be considered to apply at subsequent dates. In addition, other assets and liabilities of the Bank that are not defined as financial instruments are not included in the above disclosures, such as premises and equipment. Also, nonfinancial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the earnings potential of loan servicing rights, the trained work force, customer goodwill, and similar items. NOTE 11 -- CONCENTRATIONS OF CREDIT RISK All of the Bank's loans, commitments, and commercial and standby letters of credit have been granted to customers in the Bank's market area. Investments in state and municipal securities are not significantly concentrated within any one region of the United States. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Commercial and standby letters of credit were granted primarily to commercial borrowers as of December 31, 1999. The Bank's loan policy does not allow the extension of credit to any single borrower or group of related borrowers in excess of a total of $1,250,000 without approval from the Board of Directors. F-15 NOTE 12 -- COMMITMENTS AND CONTINGENCIES Litigation - In the ordinary course of business, the Bank becomes involved in various litigation arising from normal banking activities. In the opinion of management, the ultimate disposition of these actions will not have a material adverse effect on the consolidated financial position or results of operations. Operating leases - The Bank leases certain branch premises and equipment. The following is a schedule of future minimum lease payments under operating leases in effect as of December 31, 1999: Years ending December 31, 2000 $ 249,453 2001 244,031 2002 241,065 2003 177,844 2004 161,646 Thereafter 361,598 ------------ Total minimum payments required $ 1,435,637 ============ Total rental expense was $239,785, $226,920, and $94,350 in 1999, 1998, and 1997, respectively. Year 2000 - Because of the unprecedented nature of the Year 2000 issue, its effects, if any, may not be identified until a future date. Management cannot assure that VRB or the Bank have has identified all Year 2000 issues, that VRB's or the Bank's remediation efforts has been successful in whole or in part, or that parties with whom VRB or the Bank does business will not be significantly impacted by Year 2000 issues. NOTE 13 -- BORROWING AGREEMENTS The Bank has federal fund borrowing agreements with Bank of America and Wells Fargo Bank for $5,000,000 and $3,000,000, respectively. There is no stated rate of interest on these borrowings. As of December 31, 1999, there were no borrowings outstanding under these agreements. The Bank also participates in the Cash Management Advance Program with the Federal Home Loan Bank of Seattle (FHLB). Under the program, the Bank may borrow to a maximum of 10% of total assets (approximately $30 million at December 31, 1999 and 1998) with interest at the FHLB's cash management rate. There were no borrowings outstanding at December 31, 1999 and 1998. NOTE 14 -- STOCK OPTION PLANS The Bank has two stock option plans, which were approved by the shareholders during 1991 and amended in 1994. The plans provide for an aggregate of 754,514 shares of the Bank's unissued common stock to be granted to key employees and nonemployee directors. The 1994 amendment removed the requirement for a five-year vesting schedule for any future grants from the Employees' Plan, thus leaving the setting of any vesting schedule to the discretion of the Board of Directors. The Directors' Plan was amended to extend the time in which options may be exercised following resignation or retirement. F-16 With the exception of certain options granted to nonemployee directors, all options granted and outstanding under both the Directors' and Employees' Plans are noncompensatory and exercisable at purchase prices which approximate fair value on the date of grant. Because certain options granted to the Bank's directors were based on purchase prices below the fair value of the stock as of the grant date, they are considered compensatory transactions and give rise to the recognition of compensation expense. Accordingly, the Bank has recognized $89,763, $93,340, and $57,312 as compensation expense relating to 15,695, 16,851, and 18,790 shares of common stock optioned to its directors during 1999, 1998, and 1997, respectively. The following summarizes options available and outstanding under both the Directors' and Employees' Plans as of December 31, 1999, after the effect of the current year's stock dividend (in thousands with the exception of the exercise price):
Directors' Plan Employees' Plan Combined Plans --------------------------- ------------------------ ----------- Shares Weighted Shares Weighted Shares Average Average Option Option Price Price ------------ ------------- ----------- ----------- ----------- Options outstanding at December 31, 1996 37 $ 1.75 123 $ 2.78 160 ============ ============= =========== =========== =========== Options exercisable at December 31, 1996 37 $ 1.75 35 $ 1.62 72 ============ ============= =========== =========== =========== Options reserved at December 31, 1996 165 197 362 ============ =========== =========== Options outstanding at December 31, 1996 37 $ 1.75 123 $ 2.78 160 Options granted in 1997 19 2.72 147 8.59 166 Options exercised in 1997 (9) 2.46 (33) 1.93 (42) Options forfeited - - (5) 3.47 (5) ------------ ----------- ----------- Options outstanding at December 31, 1997 47 $ 2.01 232 $ 5.81 279 ============ ============= =========== =========== =========== Options exercisable at December 31, 1997 47 $ 2.01 14 $ 1.96 61 ============ ============= =========== =========== =========== Options reserved at December 31, 1997 146 55 201 ============ =========== =========== Options outstanding at December 31, 1997 47 $ 2.01 232 $ 5.81 279 Options granted in 1998 17 3.67 18 10.62 35 Options exercised in 1998 (13) 1.89 (8) 1.67 (21) Options forfeited - - (5) 8.14 (5) ------------ ----------- ----------- Options outstanding at December 31, 1998 51 $ 2.58 237 $ 6.28 288 ============ ============= =========== =========== =========== Options exercisable at December 31, 1998 51 $ 2.58 40 $ 5.40 91 ============ ============= =========== =========== =========== Options reserved at December 31, 1998 129 42 171 ============ =========== =========== Options outstanding at December 31, 1998 51 $ 2.58 237 $ 6.28 288 Options granted in 1999 16 4.05 5 7.17 21 Options exercised in 1999 (25) 3.09 (11) 3.06 (36) Options forfeited - - (32) 8.12 (32) ------------ ----------- ----------- Options outstanding at December 31, 1999 42 $ 2.82 199 $ 6.18 241 ============ ============= =========== =========== =========== Options exercisable at December 31, 1999 42 $ 2.82 52 $ 5.54 94 ============ ============= =========== =========== =========== Options reserved at December 31, 1999 113 69 182 ============ =========== ===========
F-17 Had compensation cost for the Bank's 1999, 1998 and 1997 grants for stock-based compensation plans been determined consistent with the fair value provisions of SFAS No. 123, the Bank's net income, and net income per common share for December 31, 1999, 1998 and 1997 would approximate the pro forma amounts below (in thousands except per share data):
1999 --------------------------- As Pro Forma Reported ------------ ------------- Net income $4,888 $4,788 Basic earnings per common and common equivalent share $ 0.57 $ 0.56 Diluted earnings per common and common equivalent share $ 0.57 $ 0.56
1998 --------------------------- As Pro Forma Reported ------------ ------------- Net income $4,927 $4,735 Basic earnings per common and common equivalent share $ 0.58 $ 0.56 Diluted earnings per common and common equivalent share $ 0.58 $ 0.56
1997 --------------------------- As Pro Forma Reported ------------ ------------- Net income $3,704 $3,497 Basic earnings per common and common equivalent share $ 0.48 $ 0.46 Diluted earnings per common and common equivalent share $ 0.48 $ 0.46
The fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) dividend yields of 3.24% in 1999, 5.75% in 1998, and 1.52% in 1997; (2) expected volatility of 28.57% in 1999, 18.35% in 1998, and 28.00% in 1997; (3) risk-free rates of 6.50% in 1999, 4.75% in 1998; and 6.50% in 1997; and, (4) expected life of one to ten years for all three years. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. NOTE 15 -- EMPLOYEE BENEFIT PLANS The Bank has a defined contribution profit sharing plan. All permanent employees are eligible to participate once they meet the age and length of employment requirements. Contributions are determined annually by the Board of Directors and were $337,418, $313,562, and $168,557 in 1999, 1998, and 1997, respectively, excluding additional amounts set aside for funding through the Bank's bonus program. Voluntary employee contributions are required to share in Bank contributions. Employee contributions were $222,313, $226,381, and $189,640 in 1999, 1998, and 1997, respectively. The Bank has established a bonus program as part of the compensation package it provides to employees. At December 31, 1999, the Bank employed approximately 190 individuals eligible to participate in this program. Under the program, a bonus pool for nonexecutives is established and funded based on net profits of the current and immediately preceding year. An executive bonus program is similarly funded and is based on current year profits with payments measured on the basis of return on assets. For the years ending December 31, F-18 1999, 1998, and 1997, $660,000, $620,000, and $542,400, respectively, was expensed to fund these programs with their related payroll and benefit costs. The Bank has also established supplemental retirement agreements with certain executive officers. The agreements provide for established post-retirement payments to covered executives for up to ten years after their retirement. The supplemental programs are self-funded by the Bank through the setting aside of funds into a bank-controlled deposit account. As of December 31, 1999, a liability for the supplemental retirement plans was recognized and funded in the amount of $225,736. During 1999, 1998, and 1997, the Bank recorded distributions of $38,600, $38,600, and $21,000, respectively. NOTE 16 - 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 year. Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options under the Bank's stock option plans. Comparative earnings per share data for the years ended December 31, 1998 and 1997, have been restated to conform with the current year presentation. The following table illustrates the computations of basic and diluted earnings per share for the six months ended June 30, 2000 and 1999 (unaudited) and the years ended December 31, 1999, 1998, and 1997 (dollars in thousands except per share amounts): F-19
Income Shares Per Share (Numerator) (Denominator) Amount --------------------------------------------- For the six months ended June 30, 2000 (unaudited) 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 ============= =============== =========== For the six months ended June 30, 1999 (unaudited) 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 ============= =============== =========== Year ended December 31, 1999 Basic earnings per share - Income available to common shareholders $ 4,888 $ 8,579 $ 0.57 =========== Effect of dilutive securities Outstanding common stock options - 43 ------------- --------------- Income available to common shareholders plus assumed conversions $ 4,888 $ 8,622 $ 0.57 ============= =============== =========== Year ended December 31, 1998 Basic earnings per share - Income available to common shareholders $ 4,927 $ 8,685 $ 0.57 =========== Effect of dilutive securities Outstanding common stock options - 77 ------------- --------------- Income available to common shareholders plus assumed conversions $ 4,927 $ 8,762 $ 0.57 ============= =============== =========== Year ended December 31, 1997 Basic earnings per share - Income available to common shareholders $ 3,704 $ 7,639 $ 0.48 =========== Effect of dilutive securities Outstanding common stock options - 21 ------------- --------------- Income available to common shareholders plus assumed conversions $ 3,704 $ 7,660 $ 0.48 ============= =============== ===========
NOTE 17 -- TRANSACTIONS WITH RELATED PARTIES Certain directors, executive officers, and principal stockholders are customers of and have had banking transactions with the Bank in the ordinary course of business, and the Bank expects to have such transactions in the future. All loans and commitments to loan included in such transactions were made in compliance with applicable laws on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons and, in the opinion of the management of the Bank, do not involve more than the normal risk of collectibility or present any other unfavorable features. The amount of loans outstanding to directors, executive officers, principal stockholders, and companies with which they are associated was as follows: F-20 1999 1998 ------------ ------------- Beginning balance $ 1,946,548 $ 1,354,803 Loans made 4,194,000 891,665 Loans paid (584,600) (299,920) ------------ ------------- Ending balance $ 5,555,948 $ 1,946,548 ============ ============= NOTE 18 -- REGULATORY MATTERS VRB Bancorp and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on VRB Bancorp and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, VRB Bancorp and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require VRB Bancorp and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 1999, that VRB Bancorp and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1999, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. VRB Bancorp's capital ratios are not significantly different from those of the Bank.
To be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio ---------- ---------- ---------- ---------- ---------- ---------- As of December 31, 1999 (in thousands) Total capital to risk-weighted assets $ 28,728 12.7% $ 18,080 > 8.0% $ 22,601 > 8.0% Tier 1 capital to risk-weighted assets $ 25,895 11.5% $ 9,040 > 4.0% $ 13,560 > 6.0% Tier 1 capital to average assets $ 25,895 8.3% $ 12,442 > 4.0% $ 15,553 > 5.0% As of December 31, 1998 (in thousands) Total capital to risk-weighted assets $ 28,019 14% $ 16,011 > 8.0% $ 20,013 >10.0% Tier 1 capital to risk-weighted assets $ 25,509 12.7% $ 8,034 > 4.0% $ 12,051 > 6.0% Tier 1 capital to average assets $ 25,509 8.5% $ 12,004 > 4.0% $ 15,005 > 5.0%
F-21 NOTE 19 -- PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for VRB Bancorp (unconsolidated parent company only) is as follows:
Condensed Balance Sheet 1999 1998 ------------ ------------ ASSETS Cash $ 387,667 $ 49,986 Investment in subsidiary 33,239,060 35,126,747 Goodwill 51,675 58,722 ------------ ------------ Total assets 33,678,402 35,235,455 ============ ============ LIABILITIES Other liabilities 69,058 - ------------ ------------ SHAREHOLDERS' EQUITY Common stock 18,699,060 21,583,869 Retained earnings 16,428,287 13,590,957 Accumulated other comprehensive income (loss), net of taxes (1,518,003) 60,629 ------------ ------------ Total liabilities and shareholders' equity $ 33,678,402 $ 35,235,455 ============ ============ Condensed Statement of Income 1999 1998 1997 ------------ ------------ ------------ INCOME Equity in undistributed (excess distribution of) earnings of subsidiary bank $ (416,627) $ 4,133,730 $ 2,810,666 Dividends 5,320,000 800,000 900,000 Other income 57 - - EXPENSES Goodwill and other administrative expenses (7,047) (7,047) (7,047) Professional fees (8,000) - - ------------ ------------ ------------ Net income 4,888,383 4,926,683 3,703,619 ============ ============ ============ Condensed Statement of Cash Flows CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,888,383 $ 4,926,683 $ 3,703,619 Adjustments to reconcile net income to net cash from operating activities: Equity in undistributed (excess distribution of) earnings of subsidiary bank 416,627 (4,133,730) (2,810,666) Amortization 7,047 7,047 7,047 Increase in liabilities 69,058 - - ------------ ------------ ------------ Net cash from operating activities 5,381,115 800,000 900,000 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Cash investment in subsidiary - - (8,000,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from public stock offering, net of costs - - 8,784,104 Cash dividends and fractional share payments (2,051,053) (1,674,498) (1,006,333) Repurchase of common stock (3,103,935) - - Cash received from exercise of common stock options 111,554 36,517 88,068 ------------ ------------ ------------ Net cash from financing activities (5,043,434) (1,637,981) 7,865,839 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 337,681 (837,981) 765,839 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 49,986 887,967 122,128 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 387,667 $ 49,986 $ 887,967 ============ ============ ============
NOTE 20 -- STOCK OFFERING During November 1997, the Bank registered 1,150,000 shares of common stock for sale to the public at a price of $8.50 per share, for an aggregate offering price of $9,775,000. All shares were sold, resulting in net proceeds of $8,784,104, after deducting $990,896 for underwriting discounts and commissions, legal, accounting and printing fees, and other offering expenses. Net proceeds to the Bank were used in connection with the acquisition of F-22 Colonial Banking Company in early January 1998 (see Note 2). Pending such use, the net proceeds were invested in short-term, investment-grade securities. NOTE 21 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1999 Quarter ended ----------------------------------------------------- December 31 September 30 June 30 March 31 ------------ ------------ ------------- ----------- Results of operations Interest income $ 5,798 $ 5,755 $ 5,605 $ 5,536 Interest expense 1,650 1,620 1,540 1,603 ------------ ------------ ------------- ----------- Net interest income 4,148 4,135 4,065 3,933 Provision for credit losses - - - - Noninterest income 556 512 479 508 Noninterest expense 2,766 2,702 2,656 2,441 ------------ ------------ ------------- ----------- Income before income taxes 1,938 1,945 1,888 2,000 Provision for income taxes 685 738 710 750 ------------ ------------ ------------- ----------- Net income $ 1,253 $ 1,207 $ 1,178 $ 1,250 ============ ============ ============= =========== Earnings per common share $ 0.15 $ 0.14 $ 0.14 $ 0.14 ============ ============ ============= =========== Diluted earnings per common share $ 0.15 $ 0.14 $ 0.14 $ 0.14 ============ ============ ============= ===========
1998 Quarter ended ----------------------------------------------------- December 31 September 30 June 30 March 31 ------------ ------------ ------------- ----------- Results of operations Interest income $ 5,914 $ 5,886 $ 6,009 $ 6,103 Interest expense 1,733 1,941 1,953 2,043 ------------ ------------ ------------- ----------- Net interest income 4,181 3,945 4,056 4,060 Provision for credit losses - - - - Noninterest income 573 535 522 510 Noninterest expense 2,717 2,599 2,565 2,608 ------------ ------------ ------------- ----------- Income before income taxes 2,037 1,881 2,013 1,962 Provision for income taxes 780 701 765 720 ------------ ------------ ------------- ----------- Net income $ 1,257 $ 1,180 $ 1,248 $ 1,242 ============ ============ ============= =========== Earnings per common share $ 0.14 $ 0.14 $ 0.14 $ 0.15 ============ ============ ============= =========== Diluted earnings per common share $ 0.14 $ 0.13 $ 0.14 $ 0.15 ============ ============ ============= ===========
F-23 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders of VRB Bancorp We have audited the accompanying consolidated balance sheets of VRB Bancorp as of December 31, 1999 and 1998, and the related statements of income and comprehensive income, changes in shareholders' equity, and cash flows for the years ended December 31, 1999, 1998, and 1997. These financial statements are the responsibility of VRB Bancorp's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of VRB Bancorp as of December 31, 1999 and 1998, and the results of its operations and cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Moss Adams LLP Portland, Oregon January 14, 2000 F-24 Unaudited Pro Forma Combined Balance Sheet as of September 30, 2000
Historical ----------------------- Umpqua Adjustments Holdings VRB Related to Pro Forma (in thousands) Corp Bancorp the Merger Combined -------------------------------------------------- Cash and balances due from banks $ 52,943 $ 30,172 $ 83,115 Investment securities held to maturity - 17,059 17,059 Investment securities available-for-sale at fair value 71,154 54,768 125,922 Trading accounts assets 1,478 - 1,478 Loans receivable 276,413 227,196 503,609 Less: Allowance for loan losses (4,119) (3,498) (7,617) Federal Home Loan Bank stock, at cost 2,462 1,993 4,455 Premises and equipment, net 10,287 8,097 (300) (B) 18,084 Intangible assets 3,435 8,264 11,699 Accrued interest receivable 2,720 2,123 4,843 Other assets 2,084 1,604 3,688 -------------------------------------------------- $ 418,857 $347,778 $ (300) $ 766,335 -------------------------------------------------- Demand, non interest-bearing $ 71,198 $ 84,761 $ 155,959 Demand, interest-bearing 149,709 144,476 294,185 Time deposits 134,177 80,500 214,677 -------------------------------------------------- Total deposit liabilities 355,084 309,737 664,821 Borrowed funds 19,735 - 19,735 Accrued interest payable 758 358 1,116 Other liabilities 2,636 2,098 1,320 (B) 6,054 -------------------------------------------------- Total liabilities 378,213 312,193 691,726 Common stock 25,824 18,747 4,163 (C) 48,734 Retained earnings 15,903 17,991 (1,620) (B) 28,111 (4,163) (C) Unrealized loss on available for sale securities (1,083) (1,153) (2,236) -------------------------------------------------- Total equity 40,644 35,585 74,609 -------------------------------------------------- $ 418,857 $347,778 $ (300) $ 766,335 --------------------------------------------------
F-25 Unaudited Pro Forma Combined Statement of Income for the Nine Months Ended September 30, 2000
Historical ----------------------------- Umpqua Holdings VRB Pro Forma (in thousands) Corp Bancorp Combined ------------------------------------------ Interest and fee income on loans $ 18,206 $ 14,460 $ 32,666 Interest on taxable investment securities 2,653 2,725 5,378 Interest on tax exempt investment securities 1,515 683 2,198 ------------------------------------------ Total interest income 22,374 17,868 40,242 Interest on demand deposits 2,262 2,566 4,828 Interest on savings accounts 283 351 634 Interest on time deposits 4,782 2,476 7,258 Interest on borrowed funds 1,168 153 1,321 ------------------------------------------ Total interest expense 8,495 5,546 14,041 Provision of loan losses (1,409) - (1,409) ------------------------------------------ Net interest income after provision for loan losses 12,470 12,322 24,792 Non interest income Service fees 2,424 1,097 3,521 Brokerage commissions and fees 4,519 - 4,519 Gain in sale of mortgaging rights - - - Loss on sale of investment securities - - - Other 588 761 1,349 ------------------------------------------ Total non interest income 7,531 1,858 9,389 Non interest expense Salaries and benefits 7,643 4,776 12,419 Occupancy and equipment expense 1,752 1,115 2,867 Intangible Amortization 189 564 753 Communications 710 341 1,051 Marketing 566 251 817 Merger related expenses - 218 218 Professional services 1,171 119 1,290 Supplies 357 187 544 Other 1,181 786 1,967 ------------------------------------------ Total non interest expense 13,569 8,357 21,926 Income before provision of income taxes 6,432 5,823 12,255 Provision for income taxes 2,322 2,267 4,589 ------------------------------------------ Net income $ 4,110 $ 3,556 $ 7,666 ========================================== Earnings per common share Basic $ 0.54 $ 0.43 $ 0.53 Diluted $ 0.53 $ 0.43 $ 0.53
F-26 Unaudited Pro Forma Combined Statement of Income for the Nine Months Ended September 30, 1999
Historical ------------------------------ Umpqua Holdings VRB Pro Forma (in thousands) Corp Bancorp Combined ----------------------------------------------- Interest and fee income on loans $ 13,801 $ 12,868 $ 26,669 Interest on taxable investment securities 3,035 3,316 6,351 Interest on tax exempt investment securities 1,111 696 1,807 ----------------------------------------------- Total interest income 17,947 16,880 34,827 Interest on demand deposits 2,178 2,260 4,438 Interest on savings accounts 317 366 683 Interest on time deposits 2,639 2,136 4,775 Interest on borrowed funds 974 - 974 ----------------------------------------------- Total interest expense 6,108 4,762 10,870 Provision of loan losses (881) - (881) ----------------------------------------------- Net interest income after provision for loan losses 10,958 12,118 23,076 Non interest income Service fees 2,159 959 3,118 Brokerage commissions and fees 254 - 254 Gain in sale of mortgaging rights - - - Loss on sale of investment securities - - - Other 478 541 1,019 ----------------------------------------------- Total non interest income 2,891 1,500 4,391 Non interest expense Salaries and benefits 4,076 4,683 8,759 Occupancy and equipment expense 1,249 925 2,174 Intangible Amortization - 565 565 Communications 541 334 875 Marketing 574 282 856 Professional services 1,066 152 1,218 Supplies 254 192 446 Other 416 651 1,067 ----------------------------------------------- Total non interest expense 8,176 7,784 15,960 Income before provision of income taxes 5,673 5,834 11,507 Provision for income taxes 2,054 2,198 4,252 ----------------------------------------------- Net income $ 3,619 $ 3,636 $ 7,255 =============================================== Earnings per common share Basic $ 0.47 $ 0.42 $ 0.49 Diluted $ 0.46 $ 0.42 $ 0.49
F-27 Unaudited Pro Forma Condensed Combined Statement of Income for the Year Ended December 31, 1999
Historical ------------------------ Umpqua Holdings VRB Pro Forma (in thousands except per share amounts) Corporation Bancorp Combined ----------------------------------------- Interest and fee income on loans $19,192 $17,345 $36,537 Interest on taxable investment securities 4,577 4,430 9,007 Interest on tax exempt investment securities 911 918 1,829 ----------------------------------------- Total interest income 24,680 22,693 47,373 Interest on demand deposits 2,985 3,095 6,080 Interest on savings accounts 433 486 919 Interest on time deposits 3,660 2,832 6,492 Interest on borrowed funds 1,378 - 1,378 ----------------------------------------- Total interest expense 8,456 6,413 14,869 Provision for loan losses 1,392 - 1,392 ----------------------------------------- Net interest income after provision for loan losses 14,832 16,280 31,112 Non interest income Service fees 2,973 1,301 4,274 Brokerage commissions and fees 830 - 830 Gain in sale of mortgaging rights - - - Loss on sale of investment securities - - - Other 621 755 1,376 ----------------------------------------- Total non interest income 4,424 2,056 6,480 Non interest expense Salaries and benefits 5,731 6,319 12,050 Occupancy and equipment expense 1,807 1,157 2,964 Amortization of goodwill - 713 713 Communications 786 570 1,356 Marketing 942 294 1,236 Professional services 1,343 192 1,535 Supplies 384 267 651 Other 708 1,052 1,760 ----------------------------------------- Total non interest expense 11,701 10,564 22,265 Income before provision of income taxes 7,555 7,772 15,327 Provision for income taxes 2,681 2,884 5,565 ----------------------------------------- Net income $ 4,874 $ 4,888 $ 9,762 ========================================= Earnings per common share Basic $ 0.64 $ 0.57 $ 0.67 Diluted $ 0.63 $ 0.57 $ 0.66
F-28 Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31, 1998
Historical ------------------------ Umpqua Holdings VRB Pro Forma (in thousands except per share amounts) Corporation Bancorp Combined ---------------------------------------- Interest and fee income on loans $15,737 $19,100 $34,837 Interest on taxable investment securities 4,754 3,866 8,620 Interest on tax exempt investment securities 427 945 1,372 ---------------------------------------- Total interest income 20,918 23,911 44,829 Interest on demand deposits 2,792 3,211 6,003 Interest on savings accounts 416 523 939 Interest on time deposits 3,262 3,932 7,194 Interest on borrowed funds 824 4 828 ---------------------------------------- Total interest expense 7,294 7,670 14,964 Provision for loan losses 1,025 - 1,025 ---------------------------------------- Net interest income after provision for loan losses 12,599 16,241 28,840 Non interest income Service fees 2,215 1,295 3,510 Brokerage commissions and fees 523 - 523 Gain in sale of mortgaging rights - - - Loss on sale of investment securities - - - Other 633 846 1,479 ---------------------------------------- Total non interest income 3,371 2,141 5,512 Non interest expense Salaries and benefits 4,616 5,985 10,601 Occupancy and equipment expense 1,472 1,025 2,497 Amortization of goodwill - 740 740 Communications 630 496 1,126 Marketing 736 260 996 Professional services 1,021 266 1,287 Supplies 366 290 656 Other 637 1,427 2,064 ---------------------------------------- Total non interest expense 9,478 10,489 19,967 Income before provision of income taxes 6,492 7,893 14,385 Provision for income taxes 2,382 2,966 5,348 ---------------------------------------- Net income $ 4,110 $ 4,927 $ 9,037 ======================================== Earnings per common share Basic $ 0.56 $ 0.57 $ 0.63 Diluted $ 0.55 $ 0.56 $ 0.62
F-29 Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31, 1997
Historical ------------------------ Umpqua Holdings VRB Pro Forma (in thousands except per share amounts) Corporation Bancorp Combined ----------------------------------------- Interest and fee income on loans $13,113 $11,444 $24,557 Interest on taxable investment securities 4,212 2,567 6,779 Interest on tax exempt investment securities 217 944 1,161 ----------------------------------------- Total interest income 17,542 14,955 32,497 Interest on demand deposits 2,442 2,415 4,857 Interest on savings accounts 385 337 722 Interest on time deposits 2,860 1,310 4,170 Interest on borrowed funds 806 - 806 ----------------------------------------- Total interest expense 6,493 4,062 10,555 Provision for loan losses 562 250 812 ----------------------------------------- Net interest income after provision for loan losses 10,487 10,643 21,130 Non interest income Service fees 1,658 1,020 2,678 Brokerage commissions and fees 425 - 425 Gain in sale of mortgaging rights 583 - 583 Loss on sale of investment securities (75) - (75) Other 465 651 1,116 ----------------------------------------- Total non interest income 3,056 1,671 4,727 Non interest expense Salaries and benefits 4,551 4,120 8,671 Occupancy and equipment expense 1,452 814 2,266 Amortization of goodwill - 111 111 Communications 503 322 825 Marketing 698 247 945 Professional services 796 181 977 Supplies 370 230 600 Other 429 848 1,277 ----------------------------------------- Total non interest expense 8,799 6,873 15,672 Income before provision of income taxes 4,744 5,441 10,185 Provision for income taxes 1,700 1,737 3,437 ----------------------------------------- Net income $ 3,044 $ 3,704 $ 6,748 ========================================= Earnings per common share Basic $ 0.47 $ 0.48 $ 0.53 Diluted $ 0.46 $ 0.48 $ 0.52
F-30 Notes to Unaudited Pro Forma Combined Financial Statements: Note A. Basis of Presentation. The unaudited pro forma financial information has been prepared under the pooling-of-interests method of accounting and is based on the historical financial statements of Umpqua and VRB assuming the Merger had been concluded at the beginning of the periods indicated. Certain amounts in the historical financial statements of VRB have been reclassified to conform to Umpqua's historical financial presentation. The pro forma adjustments represent management's best estimate based on available information at this time. These adjustments may change as additional information becomes available. Note B. Merger and Integration Costs. In connection with the Merger, the combined company expects to incur pre-tax merger related costs of $2 million ($1.6 million, after tax), $1.0 million of which is expected to occur at the Effective Date with the remaining $1.0 million to be incurred within the following six months. The estimated costs include $500,000 in severance payments, $200,000 in conversion costs (primarily system reconfiguration and enhancements, customer forms, and other communications), $1.0 million in professional costs (primarily legal and accounting costs, investment banking fees and marketing campaigns), and $300,000 in write-off of duplicate equipment and other capital assets. These amounts, net of tax, have been reflected in the Unaudited Pro Forma Combined Balance Sheet as of June 30, 2000. These adjustments are not reflected in the Unaudited Pro Forma Combined Statements of Income, as they are not expected to have a continuing impact on Umpqua. These amounts will be recorded in the financial statements in accordance with generally accepted accounting principles. Note C. Capital. In conjunction with the transaction, Umpqua will exchange 0.8135 shares of Umpqua stock for each share of common stock of VRB. VRB had 8,301,361 shares outstanding as of June 30, 2000. The common stock has been adjusted to reflect the stated value of Umpqua stock to be issued, with a related adjustment to retained earnings. Pro forma combined retained earnings reflects the adjustments for anticipated merger-related costs as discussed above. Note D. Operating Costs Savings and Revenue Enhancements. Umpqua expects to achieve pre-tax savings of $1.2 million through consolidation of data processing and back office functions, and reduced professional fees. Approximately $800,000 of the operating cost savings are expected to be achieved by the end of 2001, with the remainder achieved in 2002. In addition, pre-tax revenue enhancement opportunities have been identified amounting to $400,000, less $100,000 related to possible deposit run-off. No adjustment has been included in the unaudited pro forma combined financial information for the anticipated cost savings or revenue enhancements. There can be no assurance that anticipated operating cost savings or revenue enhancements will be achieved in the amounts or at the times anticipated. F-31 -----END PRIVACY-ENHANCED MESSAGE-----