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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the
Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11)c) or Rule 14a-12
VRB Bancorp
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
5) Total fee paid:
-----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------
2) Form, Schedule or Registration No.:
------------------------------------
3) Filing Party:
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4) Date Filed:
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[VRB Bancorp Letterhead]
October ____, 2000
Dear Shareholder:
As I wrote to you in August, VRB Bancorp signed an Agreement with Umpqua
Holdings Corporation to merge together as equals. Much work has been done since
then and we expect to complete the Merger during December. Regulatory
applications have been filed and we anticipate approvals soon. One of the
remaining steps is to secure approval of the Merger from our shareholders. You
will find enclosed a Joint Proxy Statement which gives you information
concerning the proposed Merger. I urge you to read it carefully.
Our special shareholders' meeting will be held on ________, November
____, 2000. I hope you will be able to attend. Whether you can attend or not,
the Board of Directors request that you complete and return the Revocable Proxy
included in this package, in the envelope provided.
We are particularly excited about our merger with Umpqua and hope to
receive your support.
Best regards,
William A. Haden
President & CEO
VRB Bancorp
<PAGE> 3
[VRB Bancorp Letterhead]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _____________, NOVEMBER _____, 2000
A special meeting of shareholders of VRB Bancorp will be held at the
_______________________, at ___________ Medford, Oregon, at __ p.m. on November
____, 2000 for the following purposes:
1. To vote on an Agreement and Plan of Reorganization and accompanying
Plan of Merger providing for the merger of VRB Bancorp with Umpqua
Holdings Corporation.
2. To transact other business as may properly come before the meeting.
If you are a shareholder of record of VRB Bancorp as of October ____,
2000, you will receive a copy of this notice and will be entitled to vote at the
meeting.
The Board of Directors is soliciting your proxy to vote your shares at
the meeting. We are sending you this Proxy Statement to give you important
information about the business that will take place at the meeting.
You do not need to attend the meeting to vote your shares. Instead, you
may simply complete, sign and return the enclosed Revocable Proxy.
Your Board of Directors has unanimously voted in favor of the Merger and
recommends your approval.
You should rely only on the Proxy Statement or other documents that we
refer you to, concerning VRB Bancorp, Umpqua Holdings Corporation and the
proposed Merger. We have not authorized anyone to provide you with information
that is different. Attached to the Proxy Statement is a copy of the Agreement
and Plan of Reorganization and Plan of Merger.
October _____, 2000
<PAGE> 4
BEFORE THE DIRECTOR OF THE DEPARTMENT
OF CONSUMER AND BUSINESS SERVICES
OF THE STATE OF OREGON
In the mater of Exchange of Common ) NOTICE OF HEARING
Stock of Umpqua Holdings Corporation ) ON PLAN TO
For the Common Stock of VRB Bancorp ) EXCHANGE SECURITIES
To: Shareholders of VRB Bancorp
Umpqua Holdings Corporation ("Umpqua"), has entered into an Agreement
and Plan of Reorganization and related Plan of Merger (collectively, the
"Plan"), with VRB Bancorp ("VRB"). Under the Plan, VRB will merge into Umpqua,
with VRB shareholders receiving 0.8135 shares of common stock of Umpqua in
exchange for each share of common stock of VRB. Under certain circumstances as
set forth in the Plan, the exchange ratio could increase up to 0.8500. The
offering of shares of Umpqua in exchange for the shares of VRB cannot be
lawfully made without the prior approval of the Director of the Department of
Consumer and Business Services for the State of Oregon.
Umpqua has requested approval of the Plan and has filed a Joint Proxy
Statement (serving as a Detailed Statement of the Plan of Exchange) with the
Oregon Director. A copy of the Joint Proxy Statement is enclosed with this
Notice. A representative of the Oregon Director will consider the fairness of
the terms and conditions of the Plan at a hearing to be held at _____ p.m. on
November ____, 2000, at the _____________________ at _________________ Street,
Medford, Oregon. All shareholders of VRB are invited to attend, to ask questions
of the representatives of Umpqua with respect to the Plan and to express their
views on the fairness of the Plan. Shareholders may also present their views and
comments by letter directed to _______________, ________________, Division of
Finance and Corporate Securities, 21 Labor & Industries Building, Salem, Oregon
97310, or directly by telephone at (503) 378-4387. The Oregon Director will
either approve the Plan, approve the Plan subject to certain conditions,
limitations or restrictions, or deny the Plan.
Approval of the Plan by the Oregon Director will not signify an
endorsement or recommendation by the state of Oregon. The approval is merely a
legal prerequisite to the completion of the Merger, and the shareholders of VRB
will have the opportunity to vote on the Plan at a special meeting of
shareholders to be held on November _____, 2000.
Dated: October ____, 2000 UMPQUA HOLDINGS CORPORATION
The Proponent of the Plan
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JOINT
PROXY STATEMENT
Umpqua Holdings Corporation VRB Bancorp
445 SE Main Street 110 Pine Street
Roseburg, OR 97470 Rogue River, OR 97537
Each company is holding a special shareholders' meeting on November
____, 2000 to consider and vote on a proposal to merge our two companies. Each
will hold separate meetings as follows:
<TABLE>
<S> <C>
Umpqua Holdings Corporation VRB Bancorp
_____ p.m. _____ p.m.
November _____, 2000 November _____, 2000
Rogue Valley Country Club
_______________ Street _______________ Street
Roseburg, Oregon Medford, Oregon
</TABLE>
At the Umpqua meeting, shareholders will also consider and vote on the
adoption of a new stock option plan. The board of directors of your company is
soliciting your proxy to vote your shares at the meeting. We are sending you
this proxy statement to give you more information about the business that will
be considered at the special meetings. We are providing this information so you
will be fully informed about these matters when you vote your shares. You do not
need to attend the meeting to vote your shares, although you are cordially
invited to do so. If you choose not to attend, you may simply complete, sign and
return the enclosed proxy. Even if you do plan to attend, we encourage you to
complete and return a proxy.
In addition to the shareholder meetings, there will be a hearing at
________ p.m. on ___________________, 2000 at _________________________,
Medford, Oregon, at which a representative of the Oregon Division of Finance and
Corporate Securities will take evidence and hear testimony as to the fairness of
the proposed Merger. This hearing (the "Fairness Hearing") is part of a
procedure to register the shares of Umpqua common stock to be issued to VRB
shareholders in the Merger.
A vote in favor of the Merger is an investment decision that involves
risks. You should read the information under "Risk Factors" before sending in
your proxy for voting your shares.
You should only rely on the information in this document or in other
documents that we refer you to concerning the companies and the proposed Merger.
We have not authorized anyone to provide you with information that is different.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSIONER, NOR THE OREGON DIVISION OF FINANCE AND CORPORATE SECURITIES, HAS
PASSED UPON THE ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
October ______, 2000
<PAGE> 6
MAP
[Map of Oregon showing all locations of Umpqua and VRB offices and ATM's]
"What makes this merger of equals so unique is how well each company
complements the other. We both are extremely strong organizations in adjacent
markets, and share a firm commitment to providing quality service to our
customers. Once the transaction is approved, I believe we will be better
positioned for additional growth than any other financial institution in the
Northwest. Our partnership will not only carry on past successes, but will forge
new and exciting ground as we expand our product line and services throughout
the state."
Bill Haden, President and Chief Executive Officer, VRB Bancorp
[NEW BANK LOGO]
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE ...................................... 4
SUMMARY .............................................................................. 5
THE DEAL AT A GLANCE ................................................................. 5
INITIAL QUESTIONS AND ANSWERS ABOUT THE MERGER ....................................... 5
Special Meetings .................................................................. 8
Opinion of Investment Bankers ..................................................... 9
No Dissenters' Rights ............................................................. 9
Approval of New Stock Option Plan (Umpqua Shareholders Only) ...................... 9
Selected Financial Data (Unaudited) ............................................... 9
Equivalent Per Share Data ......................................................... 12
STOCK PRICE AND DIVIDEND INFORMATION ................................................. 13
Umpqua ............................................................................ 13
VRB ............................................................................... 14
RISK FACTORS ......................................................................... 14
The Integration of the Two Banking Operations May Not Be Completed Smoothly
Resulting in Loss of Customers .................................................... 15
Involvement in Non-Bank Businesses May Involve New Risks .......................... 15
The Restructuring and Integration Costs Could Exceed Estimates; Expected
Consolidation Savings May Not Materialize ......................................... 15
UMPQUA SPECIAL MEETING ............................................................... 16
When and Where the Meeting Will Be Held ........................................... 16
Purpose of the Meeting ............................................................ 16
Who May Vote ...................................................................... 16
Voting By Proxy ................................................................... 16
Revoking a Proxy .................................................................. 16
How We Determine a Quorum ......................................................... 17
How We Count Votes ................................................................ 17
How Many Shares Do Directors and Officers Own ..................................... 17
Costs of Solicitation ............................................................. 17
VRB SPECIAL MEETING .................................................................. 18
When and Where the Meeting Will Be Held ........................................... 18
Purpose of the Meeting ............................................................ 18
Who May Vote ...................................................................... 18
Voting By Proxy ................................................................... 18
Revoking a Proxy .................................................................. 18
How We Determine a Quorum ......................................................... 18
How We Count Votes ................................................................ 19
How Many Shares Do Directors and Officers Own ..................................... 19
Costs of Solicitation ............................................................. 19
BACKGROUND OF AND REASONS FOR MERGER ................................................. 19
</TABLE>
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<TABLE>
<S> <C>
How Did the Merger Come About? .................................................... 19
Reasons for the Merger - General .................................................. 20
Reason for Merger - Umpqua ........................................................ 21
Reasons for the Merger - VRB ...................................................... 22
Recommendations of Boards of Directors ............................................ 23
Opinion of Umpqua's Financial Advisor ............................................. 23
Opinion of VRB's Financial Advisor ................................................ 28
THE MERGER ........................................................................... 34
General ........................................................................... 35
Conversion of VRB Common Stock; Effects on Umpqua Shareholders .................... 35
Exchange of Stock Certificates .................................................... 36
Treatment of Outstanding Stock Options ............................................ 37
Merger of Subsidiary Banks; Name Change ........................................... 37
Resulting Board of Directors of Umpqua and Umpqua Bank ............................ 37
Executive Officers of Umpqua and Umpqua Bank ...................................... 40
Conduct of Business Pending the Merger ............................................ 43
No Solicitations .................................................................. 43
Employment Related Matters ........................................................ 43
Conditions to the Merger .......................................................... 43
Waiver of Conditions; Amendment or Termination of the Merger Agreement ............ 44
Effective Date of the Merger ...................................................... 45
Interests of Certain Persons in the Merger ........................................ 45
Commitments of Directors .......................................................... 47
Certain Federal Income Tax Consequences ........................................... 47
Accounting Treatment .............................................................. 47
No Dissenters' Rights ............................................................. 48
Resales of Stock by Affiliates of VRB ............................................. 48
Expenses .......................................................................... 48
Umpqua and VRB Stock Option Agreements ............................................ 48
HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS ..................... 50
UMPQUA HOLDINGS CORPORATION 2000 STOCK OPTION PLAN ................................... 57
INFORMATION ABOUT UMPQUA ............................................................. 59
Introduction ...................................................................... 59
Business Strategy ................................................................. 60
Marketing and Sales ............................................................... 61
Products and Services ............................................................. 62
Employees ......................................................................... 63
Information Regarding Umpqua Directors and Executive Officers ..................... 63
Stock Option Plan ................................................................. 67
Transactions with Directors and Officers .......................................... 68
Compliance with Section 16 Filing Requirements .................................... 68
Security Ownership of Umpqua Management and Others ................................ 69
STOCK PERFORMANCE GRAPH .............................................................. 71
UMPQUA'S MANAGEMENT'S DISCUSSION AND ANALYSIS ........................................ 71
</TABLE>
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<TABLE>
<S> <C>
Financial Highlights .............................................................. 71
Analysis of Changes in Interest Differential ...................................... 75
Investment Portfolio .............................................................. 80
Trading Account Assets ............................................................ 81
Loans ............................................................................. 81
Non-Performing Loans .............................................................. 83
Allowance for Loan Losses ......................................................... 83
Capital Expenditures .............................................................. 85
Asset-Liability Management/Interest Rate Sensitivity .............................. 86
Liquidity ......................................................................... 88
Capital ........................................................................... 89
Inflation ......................................................................... 89
INFORMATION CONCERNING VRB BANCORP ................................................... 89
Introduction ...................................................................... 89
Products and services ............................................................. 90
Market Area ....................................................................... 90
Employees ......................................................................... 90
Security Ownership of VRB Management and Others ................................... 90
Transactions With Management ...................................................... 91
Compliance with Section 16 Filing Requirements .................................... 92
VRB MANAGEMENT'S DISCUSSION AND ANALYSIS ............................................. 92
COMPETITION .......................................................................... 101
CERTAIN REGULATORY CONSIDERATIONS .................................................... 102
DESCRIPTION OF CAPITAL STOCK ......................................................... 107
Umpqua ............................................................................ 107
VRB ............................................................................... 108
Anti-Takeover Provisions .......................................................... 108
CERTAIN LEGAL MATTERS ................................................................ 109
AVAILABLE INFORMATION ................................................................ 109
INDEX TO FINANCIAL STATEMENTS ........................................................ F-1
APPENDICES
Appendix I Agreement and Plan of Reorganization ............................. App-1
Appendix II Opinion of Ragen MacKenzie Incorporated .......................... App-72
Appendix III Opinion of D.A. Davidson & Co .................................... App-75
Appendix IV Umpqua Holdings Corporation 2000 Stock Option Plan ............... App-78
</TABLE>
iii
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FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE
This Proxy Statement includes forward-looking statements that are based
on the current beliefs of the management of Umpqua and VRB, as well as
assumptions made by and information currently available to management of both
companies. All statements other than statements of historical fact included in
this Proxy Statement regarding either company's financial position, business
strategies, and plans and objectives of management for future operations, are
forward-looking statements. The words "anticipate," "believe," "estimate," and
"intend," and words or phrases of similar meaning, as they relate to the
companies or their management, are intended to help identify forward-looking
statements. Although management believes that the expectations reflected in such
forward-looking statements are reasonable, they can give no assurance that such
expectations will prove to have been correct. Based upon changing conditions,
the occurrence of certain risks or uncertainties, or if any underlying
assumptions prove incorrect, actual results may vary materially and adversely
from those expectations and intentions. The companies do not intend to update
these forward-looking statements. All subsequent written and oral
forward-looking statements attributable to the companies and/or persons acting
on their behalf are expressly qualified in their entirety.
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SUMMARY
This Summary highlights information discussed in greater detail
elsewhere in this Proxy Statement. This Summary does not contain all the
information that may be important to you. You should read the entire Proxy
Statement before deciding how to vote your shares.
THE DEAL AT A GLANCE
THE PARTIES Umpqua Holdings Corporation, a financial holding company,
operating South Umpqua Bank and Strand, Atkinson, Williams &
York, a retail investment firm.
VRB Bancorp, a bank holding company operating Valley of the
Rogue Bank.
TRANSACTION A Merger of Equals between Umpqua and VRB.
EFFECT VRB merges with Umpqua.
Valley of the Rogue Bank merges with South Umpqua Bank and the
combined bank's name changes to Umpqua Bank.
CONSIDERATION VRB shareholders receive 0.8135 shares of Umpqua for each
share of VRB stock held.
INITIAL QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Who are the parties to the Merger?
A: UMPQUA HOLDINGS CORPORATION is a financial holding company which
operates two subsidiaries: South Umpqua Bank with $411 million in assets
and office locations in Multnomah, Douglas, Lane and Marion Counties;
and Strand, Atkinson, Williams & York, Inc., the second largest
Oregon-based full service retail investment firm, with offices in
Portland, Salem, Eugene, Roseburg and Medford. Umpqua's stock trades on
the Nasdaq National Market under the symbol "UMPQ." See "INFORMATION
ABOUT UMPQUA."
VRB BANCORP is a bank holding company with assets of $330 million. VRB
is the parent company of Valley of the Rogue Bank. Formed in 1968,
Valley of the Rogue Bank is the oldest independent community bank in
southern Oregon. VRB operates 13 banking offices from Ashland to Grants
Pass, Oregon along the southern Oregon I-5 corridor. VRB's stock trades
on the Nasdaq National Market under the symbol "VRBA." See "INFORMATION
ABOUT VRB."
Q: What is the effect of the Merger?
A: If the Merger occurs, VRB will merge with Umpqua and Valley of the Rogue
Bank will merge with South Umpqua Bank operating under the new name of
"Umpqua Bank."
Q: Why was the "Umpqua Bank" name chosen?
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A: Management of both companies believe that the use of the Umpqua Bank
name together with the stylized tree and river logo will give the
combined bank a name synonymous with the Pacific Northwest, one
currently displayed and recognized in all major Oregon markets as well
as the largest Oregon-based ATM network and a name unique and
innovative, differentiating it from other community banks with generic,
traditional names.
Q: What will VRB stockholders receive in the Merger?
A: Shareholders of VRB will receive 0.8135 shares of Umpqua stock for each
share of VRB stock held (the "Exchange Ratio") and cash in lieu of any
fractional share. The Exchange Ratio could increase to as high as 0.8500
shares of Umpqua stock if at a specified time prior to Closing:
- The average price of Umpqua stock prior to closing is less than
$6.75 per share;
- The average price of Umpqua shares drops ten percentage points
more than the Nasdaq Bank Index; and
- Umpqua elects to increase the Exchange Ratio to avoid VRB's
termination of the Merger Agreement.
For more information, see "THE MERGER - Conversion of VRB Common Stock."
Q: Why are the companies proposing to merge?
A: Both companies share a belief in community banking that emphasizes
responsiveness to local markets and the delivery of personalized
services to customers. The company believe that the Merger will not
change that commitment but believes that the Merger will strengthen the
organization, permitting the combined bank to provide additional
services and products to its depositors and larger loans to its
borrowing customers. The Merger will also make available to customers of
VRB the retail securities investment products from Strand, Atkinson,
Williams & York, Umpqua's investment brokerage subsidiary.
The combined company will have approximately twice the assets, market
capitalization, number of shareholders and shares outstanding than
either company alone and shareholders can be expected to benefit from
the increased liquidity in trading of their shares. See "BACKGROUND AND
REASONS FOR THE MERGER."
THE BOARDS OF DIRECTORS OF BOTH COMPANIES UNANIMOUSLY RECOMMEND THAT
THEIR RESPECTIVE SHAREHOLDERS APPROVE THE MERGER.
Q: What is a "Merger of Equals?"
A: The Merger is proposed as a "merger of equals" because it will result in
a simple combination of the two companies; shareholders of both
companies will continue as shareholders of the combined organization,
the resulting Board of Directors will consist of directors from both
organizations, the senior management of both organizations are expected
to continue with the combined company, there is no overlap of market
areas, no banking offices are expected to be closed, and the Exchange
Ratio is based on a ratio that reflects the approximate relative book
value of each organization.
Q: Who will manage the combined company?
A: The Board of Directors of Umpqua Holdings Corporation and Umpqua Bank
following the Merger will consist of 11 directors, 6 of whom are
designated by Umpqua and 5 of whom
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are designated by VRB. All shareholders of the combined company will
vote on directors as their term of office expires. See "THE MERGER -
Resulting Board of Directors of Umpqua and Umpqua Bank" for the identity
and background of the continuing directors.
Raymond P. Davis, President and CEO of Umpqua Holdings Corporation, will
continue in that position with the holding company. William A. Haden,
President and CEO of VRB and its subsidiary bank, will serve as the
President and CEO of Umpqua Bank. The senior officers of both
organizations are expected to continue with the combined company.
Q: What do I need to do now?
A: Just read this Joint Proxy Statement and mail your signed proxy card in
the enclosed return envelope as soon as possible, so that your shares
can be represented at the Umpqua or VRB special shareholders meeting.
The Umpqua special meeting will take place on November ___, 2000 at
_________. The VRB special meeting will take place on November _____,
2000 at ________. See "UMPQUA SPECIAL MEETING" or "VRB SPECIAL MEETING,"
as appropriate.
Q: Can I change my vote after I have mailed my signed proxy card?
A: Yes. You can change your vote at any time before your proxy is voted at
the special meeting. You can do this in one of three ways. First, you
can send a written notice stating that you would like to revoke your
proxy. Second, you can complete and submit a new proxy card. If you
choose either of these two methods, you must submit your notice of
revocation or your new proxy card to Umpqua or VRB, as the case may be.
Third, you can attend the special meeting and vote in person. Simply
attending the meeting, however, will not revoke your proxy. See "UMPQUA
SPECIAL MEETING - Revoking a Proxy" or "VRB SPECIAL MEETING - Revoking a
Proxy."
Q: If my shares are held in "street name" by my broker, will my broker vote
my shares for me?
A: Your broker may vote your shares only if you provide instructions on how
to vote. Please tell your broker how you would like him or her to vote
your shares. If you do not tell your broker how to vote, your broker
will not vote your shares. This will have the same effect as a "no" vote
on the Merger.
Q: Should VRB stockholders send their stock certificates in now?
A: No. After the Merger is completed, Umpqua will send VRB shareholders
written instructions for exchanging their stock certificates. See "THE
MERGER - Exchange of Stock Certificates."
Q: What is the Fairness Hearing?
A: In order to comply with federal securities laws regarding the issuance
of Umpqua shares to VRB shareholders, a hearing will be held by the
Director of the Oregon Department of Consumer and Business Services (the
"Oregon Director") through a representative from the Oregon Division of
Finance and Corporate Securities. The Oregon Director, after the
hearing, will consider the fairness of the terms and conditions of the
Merger and, if the Oregon Director finds that the Merger is fair, just
and equitable and free from fraud, he will approve it subject to any
conditions, limitations or restrictions as he finds necessary or
appropriate.
Q: Need I attend the Fairness Hearing?
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<PAGE> 14
A: No. Although VRB shareholders are invited to attend the hearing if they
choose, no input from them is required or expected. If a VRB shareholder
would like to comment on the Merger, they may do so in writing as set
forth in the notice sent to the VRB shareholders with this Proxy
Statement.
Q: When do you expect the Merger to be completed?
A: Umpqua and VRB are working to complete the Merger as quickly as
possible. In addition to Umpqua and VRB shareholder approval, certain
regulatory approvals must be obtained, and there are other conditions to
completing the Merger. Umpqua and VRB expect the Merger to be completed
as early as December 1, 2000. See "THE MERGER - Conditions to the
Merger."
Q: Will I still receive regular cash dividends?
A: VRB management expects that VRB shareholders will receive a regular
semi-annual $0.12 per share dividend in October 2000. Umpqua
shareholders are expected to receive a regular quarterly cash dividend
of $0.04 per share in December 2000. If the Merger is effective prior to
the record date for the Umpqua December dividend, VRB shareholders will
also receive that cash dividend. Dividends in future years would be paid
to all shareholders at the time and in the amounts determined by the
company's new Board of Directors.
Q: What are the tax consequences of the Merger?
A: The Merger generally will be tax-free to you for federal income tax
purposes. To review the tax consequences to shareholders in greater
detail, see "THE MERGER - Certain Federal Income Tax Consequences."
SPECIAL MEETINGS
Umpqua Meeting
The Umpqua meeting will be held at ______ p.m. on November __, 2000, at
________________, Roseburg, Oregon. If you are an Umpqua shareholder as of the
close of business on October ____, 2000, you may vote at the Umpqua meeting. At
the meeting, Umpqua shareholders will consider and vote on two items of
business:
- The Merger
- The adoption of the 2000 Stock Option Plan
VRB Meeting
The VRB meeting will be held at ______ p.m. on November ____, 2000, at
Rogue Valley Country Club, ________________, Medford, Oregon. If you are a VRB
shareholder as of the close of business on October 2, 2000, you may vote at the
VRB meeting. At the meeting, VRB shareholders will consider and vote on the
Merger but not on the Stock Option Plan.
Voting at the Meetings
Whether you are an Umpqua or VRB shareholder, you do not need to attend
the meeting, although we invite you to do so. You may vote your shares by proxy
if you wish, and we encourage you to complete and return your proxy even if you
plan to attend the meeting. You should mark the enclosed revocable proxy to
indicate your vote on the matters presented at the
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meeting and your shares will be voted as you instruct. You may still attend the
meeting even if you submit a proxy.
If you submit a proxy with no instructions, your shares will be voted in
favor of the Merger and, for Umpqua shareholders, in favor of the new stock
option plan. In addition, the named proxy holders will vote your shares in their
discretion on any other business properly brought before the meeting.
You may revoke your proxy any time before the vote is taken at the
meeting by notifying the Corporate Secretary of your intention to do so.
OPINION OF INVESTMENT BANKERS
Ragen MacKenzie, Inc. has delivered its written opinion to Umpqua and
D.A. Davidson & Co. has delivered its written opinion to VRB, to the effect that
the Merger, including the Exchange Ratio, is fair from a financial point of view
to the holders of each respective shareholder group.
NO DISSENTERS' RIGHTS
Under Oregon law, holders of Umpqua and VRB stock do not have the right
to dissent from the Merger and obtain payment of the appraised value of their
shares.
APPROVAL OF NEW STOCK OPTION PLAN (UMPQUA SHAREHOLDERS ONLY)
Umpqua shareholders will also be voting to approve the 2000 Stock Option
Plan that was approved by Umpqua's Board of Directors on September ___ 2000. The
current stock option plan was adopted in 1995 and authorized the issuance of a
total of up to 1,150,000 shares upon the exercise of options granted under the
plan (but no more than 10% of all outstanding shares). The number of available
shares is currently 431,000 prior to the application of the 10% limit. The
Merger Agreement provides for substitute options totaling 197,000 shares to be
issued to existing VRB option holders as of the effective date of the Merger,
leaving only 234,000 shares remaining for future grants. The Board of Directors
has adopted the new plan subject to approval by the Umpqua shareholders, which
would authorize grants of up to 1,000,000 shares but continue the limitation
that no grant can be made if existing options and later grants under the 2000
Stock Option Plan exceed 10% of outstanding shares. If the 2000 Stock Option
Plan is approved, the 1995 Plan would be terminated and no further grants would
be made under the 1995 Plan. No grants under the new plan have been made or
committed to any person at this time.
THE UMPQUA BOARD OF DIRECTORS HAS RECOMMENDED THAT SHAREHOLDERS APPROVE
THE NEW PLAN.
SELECTED FINANCIAL DATA (Unaudited)
The following tables present selected unaudited consolidated financial
data for Umpqua and VRB and selected pro forma combined financial data for the
combined company, giving effect to the Merger on a pooling-of-interests basis
for the periods specified. The data has been derived in part from, and should be
read in conjunction with, the consolidated financial statements and notes
thereto and other financial information with respect to Umpqua and VRB included
elsewhere in this Proxy Statement. The data in the following tables is qualified
in their entirety by reference to those financial statements. The pro forma
income statement items have been prepared assuming the Merger occurred at the
beginning of the periods presented. The pro forma income statement items and
related per share amounts do not include anticipated revenue enhancements,
operating cost savings or the after-tax impact of merger-related costs expected
as a result of the Merger. The
9
<PAGE> 16
pro forma balance sheet items give effect to the Merger as if it occurred at the
beginning of the period presented and includes adjustments to reflect the
after-tax impact of merger-related costs. See "Unaudited Pro Forma Condensed
Combined Financial Information."
UMPQUA HISTORICAL
<TABLE>
<CAPTION>
Six months
ended June 30, Years ended December 31,
-------------------- --------------------------------------------------------
(Dollars in thousands except share data) 2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results
-----------------
Interest income $ 14,458 $ 11,665 $ 24,680 $ 20,918 $ 17,542 $ 13,618 $ 11,609
Interest expense 5,424 3,977 8,456 7,294 6,493 4,851 3,862
-------- -------- -------- -------- -------- -------- --------
Net interest income 9,034 7,688 16,224 13,624 11,049 8,767 7,747
Provision for credit losses 1,034 655 1,392 1,025 562 600 488
Noninterest income 4,703 1,935 4,424 3,371 3,056 1,939 1,530
Noninterest expense 8,509 5,250 11,702 9,478 8,800 6,356 5,409
-------- -------- -------- -------- -------- -------- --------
Income before income taxes 4,194 3,718 7,554 6,492 4,743 3,750 3,380
Provision for income taxes 1,495 1,342 2,681 2,382 1,699 1,389 1,173
-------- -------- -------- -------- -------- -------- --------
Net income $ 2,699 $ 2,376 $ 4,873 $ 4,110 $ 3,044 $ 2,361 $ 2,207
======== ======== ======== ======== ======== ======== ========
Per Share Data
--------------
Earnings per common share $ 0.35 $ 0.31 $ 0.64 $ 0.56 $ 0.47 $ 0.36 $ 0.34
Diluted earnings per share 0.35 0.30 0.63 0.55 0.46 0.35 0.34
Dividends declared per common share 0.08 0.08 0.16 0.115 0.08 0.07 0.06
Ratio of dividends declared to net income 22.9% 25.8% 25.0% 20.5% 17.0% 19.4% 17.6%
Financial Ratios
----------------
Return on average equity 14.45% 13.26% 13.55% 13.14% 16.50% 14.71% 15.38%
Return on average assets 1.42% 1.50% 1.45% 1.47% 1.31% 1.27% 1.37%
Efficiency ratio 60.98% 53.50% 55.60% 55.31% 61.86% 58.91% 57.93%
Net interest margin 5.35% 5.39% 5.37% 5.37% 5.24% 5.14% 5.15%
Balance Sheet Data at Period End
--------------------------------
Loans $261,097 $208,199 $248,534 $186,167 $155,078 $112,861 $ 82,713
Allowance for loan losses $ 3,770 $ 2,942 $ 3,469 $ 2,664 $ 2,141 $ 1,991 $ 1,237
Allowance as percentage of loans 1.44% 1.41% 1.40% 1.43% 1.38% 1.76% 1.50%
Total assets $411,078 $333,242 $386,737 $318,887 $257,746 $203,838 $172,096
Total deposits $344,601 $271,119 $301,673 $255,805 $221,726 $172,837 $149,751
Total equity $ 38,880 $ 35,702 $ 36,716 $ 36,146 $ 19,973 $ 17,022 $ 15,211
</TABLE>
10
<PAGE> 17
VRB HISTORICAL
<TABLE>
<CAPTION>
Six months
ended June 30, Years ended December 31,
-------------------- -----------------------------------------------------
(Dollars in thousands except share data) 2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results
-----------------
Interest income $ 11,613 $ 11,129 $ 22,693 $ 23,912 $ 14,955 $ 13,188 $ 11,973
Interest expense 3,491 3,143 6,413 7,671 4,062 3,627 2,989
-------- -------- -------- -------- -------- -------- --------
Net interest income 8,122 7,986 16,280 16,241 10,893 9,561 8,984
Provision for credit losses - - - - 250 250 -
Noninterest income 1,216 988 2,055 2,141 1,671 1,370 1,380
Noninterest expense 5,437 5,086 10,564 10,489 6,873 5,828 6,061
-------- -------- -------- -------- -------- -------- --------
Income before income taxes 3,901 3,888 7,771 7,893 5,441 4,853 4,303
Provision for income taxes 1,443 1,460 2,883 2,966 1,737 1,602 1,395
-------- -------- -------- -------- -------- -------- --------
Net income $ 2,458 $ 2,428 $ 4,888 $ 4,927 $ 3,704 $ 3,251 $ 2,908
======== ======== ======== ======== ======== ======== ========
Per Share Data
--------------
Earnings per common share $ 0.30 $ 0.28 $ 0.57 $ 0.57 $ 0.48 $ 0.44 $ 0.40
Diluted earnings per share 0.30 0.28 0.57 0.56 0.48 0.43 0.39
Dividends declared per common share 0.12 0.12 0.24 0.19 0.13 0.13 0.08
Ratio of dividends declared to net income 40.0% 42.9% 42.1% 33.7% 28.0% 28.3% 19.0%
Financial Ratios
----------------
Return on average equity 14.21% 13.40% 14.17% 14.60% 15.60% 17.30% 17.80%
Return on average assets 1.57% 1.58% 1.57% 1.60% 2.00% 1.99% 2.02%
Efficiency ratio 56.61% 54.94% 56.22% 55.60% 52.60% 50.99% 56.73%
Net interest margin 5.94% 5.98% 5.98% 6.00% 6.69% 6.73% 7.13%
Balance Sheet Data at Period End
--------------------------------
Loans $219,019 $187,941 $201,502 $178,727 $117,194 $101,408 $ 90,379
Allowance for loan losses 3,494 3,544 3,503 3,539 1,780 1,632 1,407
Allowance as percentage of loans 1.60% 1.89% 1.74% 1.98% 1.52% 1.61% 1.56%
Total assets 326,595 311,504 311,504 311,217 206,653 177,107 151,485
Total deposits 279,077 276,366 276,366 274,122 173,176 155,568 132,744
Total equity 34,926 33,609 33,609 35,235 31,861 20,188 17,470
</TABLE>
11
<PAGE> 18
PRO FORMA COMBINED
<TABLE>
<CAPTION>
Six months ended June 30, Years ended December 31,
------------------------- --------------------------------------
(Dollars in thousands except share data) 2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Results
-----------------
Interest income $ 26,071 $ 22,794 $ 47,373 $ 44,829 $ 32,497
Interest expense 8,915 7,119 14,869 14,964 10,555
-------- -------- -------- -------- --------
Net interest income 17,156 15,675 32,504 29,865 21,942
Provision for credit losses 1,034 655 1,392 1,025 812
Noninterest income 5,919 2,923 6,480 5,512 4,727
Noninterest expense 13,946 10,336 22,265 19,967 15,672
-------- -------- -------- -------- --------
Income before income taxes 8,095 7,607 15,327 14,385 10,185
Provision for income taxes 2,938 2,802 5,565 5,348 3,437
-------- -------- -------- -------- --------
Net income $ 5,157 $ 4,805 $ 9,762 $ 9,037 $ 6,748
======== ======== ======== ======== ========
Per Share Data
--------------
Earnings per common share $ 0.36 $ 0.33 $ 0.67 $ 0.63 $ 0.53
Diluted earnings per share $ 0.36 $ 0.32 $ 0.66 $ 0.62 $ 0.52
Financial Ratios
----------------
Return on average equity 14.62% 13.58% 14.18% 14.25% 16.67%
Return on average assets 1.48% 1.54% 1.51% 1.54% 1.61%
Efficiency ratio 59.19% 54.24% 55.90% 55.46% 57.46%
Net interest margin 5.67% 5.74% 5.67% 5.70% 5.89%
Balance Sheet Data at Period End
--------------------------------
Loans $484,032 $397,203 $450,036 $364,894 $272,272
Allowance for loan losses $ 7,264 $ 6,486 $ 6,971 $ 6,203 $ 3,921
Allowance as percentage of loans 1.50% 1.63% 1.55% 1.69% 1.43%
Total assets $737,372 $640,825 $697,941 $629,804 $464,100
Total deposits $623,678 $542,558 $578,039 $529,927 $394,901
Total equity $ 72,186 $ 69,271 $ 68,705 $ 69,761 $ 50,213
</TABLE>
EQUIVALENT PER SHARE DATA
The table below presents:
- the closing price per share for Umpqua and VRB common stock as
reported by the Nasdaq Stock Market on August 14, 2000, the last
full trading day prior to the public announcement of the Merger,
and as of _____________, 2000, the most recent date prior to the
date of this Proxy Statement, together with the pro forma
equivalent market value of VRB shares after giving effect to the
Merger.
- the historical earnings, book value and cash dividends per share
as of June 30, 2000 and the six months then ended, and as of
December 31, 1999 and three years then ended, for Umpqua and
VRB, together with the pro forma amounts for Umpqua and the pro
forma equivalent amounts for VRB after giving effect to the
Merger on a pooling-of-interests basis assuming the Merger had
been effective during all the periods presented.
12
<PAGE> 19
The pro forma data assume an Exchange Ratio of 0.8135 shares of Umpqua
for each VRB share, but are not necessarily indicative of actual or future
operating results or the financial position that would have occurred or will
occur upon the consummation of the Merger. The pro forma equivalent per share
data is calculated by multiplying the pro forma per share data for Umpqua by
0.8135, the anticipated Exchange Ratio. Under certain circumstances, the
Exchange Ratio could be increased to 0.8500, but the increase would not
materially affect the pro forma per share data. This data should be read in
conjunction with the financial statements and other financial and pro forma
financial information included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
Umpqua VRB
---------------------- ----------------------
Pro Forma Pro Forma
Historical Combined Historical Equivalent
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Market Value per share at Aug. 14, 2000 $ 8.25 $ -- $5.188 $6.711
Market Value per share at Oct. _, 2000 $ ____ $ ____ $ ____ $ ____
Earnings per share for the periods ended:
June 30, 2000 $ 0.35 $ 0.36 $ 0.30 $ 0.29
December 31, 1999 0.64 0.67 0.57 0.55
December 31, 1998 0.56 0.63 0.57 0.51
December 31, 1997 0.47 0.53 0.48 0.43
Book Value per share at:
June 30, 2000 $ 5.10 $ 5.02 $ 4.21 $ 4.08
December 31, 1999 4.82 4.78 4.05 3.89
December 31, 1998 4.71 4.73 4.05 3.85
December 31, 1997 3.07 3.78 3.82 3.08
Cash Dividends per share declared for the periods ended:
June 30, 2000 $ 0.08 $ 0.08 $ 0.12 $ 0.07
December 31, 1999 0.16 0.16 0.24 0.13
December 31, 1998 0.12 0.12 0.20 0.09
December 31, 1997 0.08 0.08 0.14 0.06
</TABLE>
STOCK PRICE AND DIVIDEND INFORMATION
UMPQUA
The common stock of Umpqua is traded on the National Market System of
the Nasdaq Stock Market under the symbol "UMPQ." The common stock is registered
under the Securities Exchange Act of 1934 and is eligible to be held in margin
accounts. The following lists the high and low closing prices as reported by the
Nasdaq Stock Market for each period beginning with April 1, 1998, and as
adjusted for subsequent stock dividends. Prior to that date, the prices reflect
the high and low closing bid prices during each period as reported by the
Bulletin Board Service of the Nasdaq. Prices do not include retail mark-ups,
mark-downs or commissions. On ______, 2000, the common stock was held of record
by approximately ______ shareholders, a number which does not include beneficial
owners who hold shares in "street name." As of ___________, 2000, the most
recent date prior to the date of this Proxy Statement, the last sale price of
the common stock was $________ per share.
13
<PAGE> 20
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------ ----------------------------- -------------------------------
Market Price Cash Market Price Cash Market Price Cash
------------------ Dividends ----------------- Dividends ------------------ Dividends
High Low Declared High Low Declared High Low Declared
------- ------- --------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $ 10.00 $ 5.50 $ 0.04 $ 11.00 $ 8.75 $ 0.04 $ 18.88 $ 9.00 $ 0.025
2nd Quarter $ 9.00 $ 6.75 $ 0.04 $10.625 $ 8.25 $ 0.04 $ 16.75 $ 13.25 $ 0.025
3rd Quarter $ ____ $ ____ $ 0.04 $10.625 $ 8.00 $ 0.04 $14.375 $ 7.75 $ 0.025
4th Quarter $ ____ $ ____ $ ____ $ 11.00 $ 8.50 $ 0.04 $11.875 $ 7.25 $ 0.04
(through Oct. __, 2000)
</TABLE>
Umpqua Dividend Reinvestment Plan. Umpqua maintains a dividend
reinvestment plan under which shareholders who elect to participate receive
shares of common stock in lieu of cash dividends. Cash dividends otherwise
payable to participating shareholders are used to purchase shares of Umpqua
common stock in the open market by a registered broker-dealer acting as agent
for plan participants.
Expenses incurred in acquiring shares for the plan, including brokerage
commissions, are charged to the participating shareholders on a pro rata basis.
Participants may also be assessed an administrative charge for transactions,
including enrolling in or withdrawing from the plan, and withdrawal of shares
from the plan. As trading activity in the common stock has been limited, the
broker-dealer is permitted to acquire shares over a 30-day period. Participating
shareholders receive quarterly statements of their accounts, and do not receive
certificates for shares acquired under the plan unless requested. Umpqua serves
as the plan administrator.
VRB
The common stock of VRB is traded on the National Market System of the
Nasdaq Stock Market under the symbol "VRBA." VRB's common stock is registered
under the Securities Exchange Act of 1934 and is eligible to be held in margin
accounts. The following lists the high and low closing sales prices for each
period, as reported by the Nasdaq Stock Market, and as adjusted for subsequent
stock dividends. Prices do not include retail mark-ups, mark-downs or
commissions. On ____________, 2000, VRB's common stock was held of record by
approximately ______ shareholders, a number which does not include beneficial
owners who hold shares in "street name." As of ___________, 2000, the most
recent date prior to the date of this Proxy Statement, the last sale price of
the common stock was $________ per share.
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------------- -------------------------------- --------------------------------
Market Price Cash Market Price Cash Market Price Cash
------------------ Dividends ------------------ Dividends ------------------ Dividends
High Low Declared High Low Declared High Low Declared
------ ------ --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $ 6.50 $ 4.69 $ 0.12 $ 9.50 $ 7.00 $ 0.12 $11.78 $ 9.62 $ --
2nd Quarter $ 5.38 $ 4.75 $ -- $ 8.63 $ 7.03 $ -- $11.54 $ 9.38 $ --
3rd Quarter $ ____ $ ____ $ 0.12 $ 8.44 $ 6.50 $ 0.12 $10.00 $ 7.33 $ 0.20
4th Quarter $ ____ $ ____ $ -- $ 7.38 $ 5.75 $ -- $10.23 $ 7.00 $ --
(through Oct. __, 2000)
</TABLE>
RISK FACTORS
Completion of the Merger represents an investment by VRB shareholders in
Umpqua's common stock and an investment by Umpqua in VRB's assets and
liabilities, each of which will subject the respective investor to certain
risks. You should carefully consider the following risk factors as well as other
information contained in this Proxy Statement, before deciding how to vote on
the Merger.
14
<PAGE> 21
THE INTEGRATION OF THE TWO BANKING OPERATIONS MAY NOT BE COMPLETED SMOOTHLY
RESULTING IN LOSS OF CUSTOMERS
At the time of the Merger, the two subsidiary banks, Valley of the Rogue
Bank and South Umpqua Bank, will merge into one organization under the name of
"Umpqua Bank." VRB banking customers are accustomed to traditional community
bank branch facilities and services. South Umpqua Bank has transformed itself
from a traditional community bank into a community-oriented financial services
retailer. Among the steps taken by Umpqua to change its facilities, it has
remodeled many of its banking branches to resemble retail stores that include
distinct physical areas or boutiques such as a "serious about service center,"
"investment opportunity center" and "a computer cafe." Over a period of month
following the Merger, Umpqua intends to remodel and convert the larger Valley of
the Rogue Bank branches in a similar fashion. Such a conversion will involve
significant expenses, disrupt banking activities during the remodeling period
and would present a new look and feel to the banking services and products being
offered. There is a risk that some of the existing VRB customers will not stay
with Umpqua Bank during the remodeling period or after the conversion is
completed. Additionally, the cost of remodeling the branches and training VRB
personnel could exceed estimates and might not result in increased banking
activity, revenues or profits. Further, there may be delays in effecting the
conversion which could cause confusion and disruption in the business of those
branches.
INVOLVEMENT IN NON-BANK BUSINESSES MAY INVOLVE NEW RISKS
Within the last year, Umpqua has acquired two licensed retail
broker-dealers, Strand, Atkinson, Williams & York, Inc. and Adams, Hess, Moore &
Co., both now operating under the Strand, Atkinson, Williams & York name as an
Umpqua subsidiary. The operation of commercial banking and retail investment
banking under common ownership has only recently been permitted by federal law
and the retail investment banking operations present special risks not
previously borne by community banks. For example, the investment banking and
brokerage industry is subject to fluctuations in the stock market that may have
a significant adverse impact on investment banking fees, customer activity and
investment portfolio gains or losses. Likewise, additional or modified
regulations may affect Umpqua's banking, investment banking and brokerage
operations. A decline in fees and commissions or losses suffered in the
investment portfolio could adversely affect the subsidiary's contribution to the
income of the holding company, and may increase the subsidiary's capital needs.
In its continuing expansion, Umpqua may acquire other financial services
companies whose successful integration is not assured and may present additional
management challenges and new risks to the company.
THE RESTRUCTURING AND INTEGRATION COSTS COULD EXCEED ESTIMATES; EXPECTED
CONSOLIDATION SAVINGS MAY NOT MATERIALIZE
The companies estimate that they will incur approximately $2.0 million
in restructuring costs and related expenses at the time the Merger is
consummated. These costs include investment banking, accounting and legal fees
in connection with the Merger as well severance or change of control payments
under employment contracts and to employees whose positions may be eliminated.
Additional costs include system integration, store remodeling and disposal of
duplicative equipment. The actual costs could exceed these estimates.
Further, Umpqua anticipates that as a result of the Merger, various cost
savings will accrue to the combined organization by eliminating duplicate
positions and outside services including
15
<PAGE> 22
accounting, regulatory compliance, marketing and data processing. There is the
risk that Umpqua will not be able to realize the cost savings anticipated in the
amount or within the time anticipated.
UMPQUA SPECIAL MEETING
WHEN AND WHERE THE MEETING WILL BE HELD
The Umpqua special meeting of shareholders' will be held on November
___, 2000, commencing at ___ p.m., local time at _____________________,
Roseburg, Oregon.
PURPOSE OF THE MEETING
The purpose of the Umpqua meeting is to consider and vote upon:
- Approval of the Merger
- Adoption of the 2000 Stock Option Plan
Approval of the Merger by the shareholders of Umpqua will also
constitute the election of new directors of the combined company to the terms
described under "THE MERGER -- Board of Directors of the Combined Company."
WHO MAY VOTE
If you were a shareholder of Umpqua as of the close of business on
October 2, 2000, you are entitled to vote at the meeting. As of that date, there
were ___________ shares outstanding held by approximately ____ holders of
record.
VOTING BY PROXY
You do not have to attend the meeting to vote your shares. You may vote
your shares by proxy if you wish. You may mark the enclosed proxy card to
indicate your vote on the matters presented at the meeting, and the individuals
whose names appear on the proxy card will vote your shares as you instruct.
If you submit a proxy with no instructions, the named proxy holders will
vote your shares in favor of the Merger and in favor of adoption of the 2000
Stock Option Plan. In addition, the named proxy holders will vote in their
discretion on such other matters that may be considered at the shareholders'
meeting. The Board of Directors has named __________________ and
___________________ as the proxy holders. Their names appear on the proxy form
accompanying this proxy statement. You may name another person to act as your
proxy if you wish, but that person would need to attend the meeting in person or
further vote your shares by proxy.
REVOKING A PROXY
You may revoke your proxy at any time before the vote is taken at the
meeting. You may revoke your proxy by submitting a proxy bearing a later date or
by notifying the Corporate Secretary of Umpqua (personally, in writing or by
mail) of your wish to revoke your proxy. You may also revoke your proxy by oral
request if you are present at the meeting.
You may still attend the meeting even if you have submitted a proxy. You
should be aware that simply attending the meeting will not, of itself, revoke a
proxy.
16
<PAGE> 23
PLEASE COMPLETE, DATE, AND SIGN THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY TO US IN THE ENCLOSED, POSTAGE-PAID ENVELOPE, EVEN IF YOU PLAN TO
ATTEND THE MEETING.
HOW WE DETERMINE A QUORUM
We must have a quorum to conduct any business at the meeting.
Shareholders holding at least a majority of the outstanding shares of common
stock must either attend the meeting or submit proxies to have a quorum. If you
come to the meeting or submit a proxy but you abstain from voting on a given
matter, we will still count your shares as present for determining a quorum.
HOW WE COUNT VOTES
The named proxies will vote your shares as you instruct on your proxy.
We will not count abstentions or broker non-votes for or against a matter
submitted to a vote of shareholders. Each share is entitled to one vote.
A broker non-vote occurs when a broker or other nominee holder, such as
a bank, submits a proxy representing shares that another person actually owns,
and that person has not given voting instructions to the broker or other
nominee. A broker may only vote those shares if the beneficial owner gives the
broker voting instructions. We will count broker non-votes as present for
establishing a quorum.
Approval of the Merger
The affirmative vote of the holders of a majority of all shares of
Umpqua common stock outstanding on October 2, 2000 is required to approve the
Merger. An abstention or a broker non-vote will therefore have the effect of a
vote against the Merger.
Approval of the 2000 Stock Option Plan
The proposal to adopt the 2000 Stock Option Plan will be approved if
more shares are voted in favor of the proposal than voted against the proposal.
Therefore, we will not count abstentions and broker non-votes as votes for or
against the proposal.
HOW MANY SHARES DO DIRECTORS AND OFFICERS OWN
As of October 2, 2000, directors and executive officers of Umpqua
beneficially owned ___________ shares, of which ________ are entitled to vote.
Those shares constitute ______% of the total shares outstanding and entitled to
be voted at the meeting. Pursuant to the Merger Agreement, each member of the
Umpqua Board of Directors has agreed to vote their shares in favor of the
Merger. We expect all directors and executive officers to vote in favor of both
proposals.
COSTS OF SOLICITATION
Umpqua will bear the cost of soliciting of proxies from its
shareholders. In addition to using the mail, proxies may be solicited by
personal interview, telephone, and electronic communication. Banks, brokerage
houses, other institutions, nominees, and fiduciaries will be requested to
forward their proxy soliciting material to their principals and obtain
authorization for the execution of proxies. Officers and other employees or
agents of Umpqua and its bank subsidiary, South Umpqua Bank, acting on Umpqua's
behalf, may solicit proxies personally. Umpqua may pay compensation for
soliciting proxies, and will, upon request, pay the standard charges and
expenses of banks, brokerage houses, other institutions, nominees, and
fiduciaries for forwarding proxy materials to and obtaining proxies from their
principals. However, no such
17
<PAGE> 24
payment will be made to any of Umpqua's subsidiaries acting through their
nominees or acting as a fiduciary.
VRB SPECIAL MEETING
WHEN AND WHERE THE MEETING WILL BE HELD
The VRB special meeting of shareholders will be held on November ___,
2000, commencing at ____ p.m., local time at _________________________, Medford,
Oregon.
PURPOSE OF THE MEETING
At the meeting, VRB shareholders will consider and vote on approval of
the Merger. Approval of the Merger will also constitute the election of
directors of the combined company to the terms described under "THE MERGER --
Board of Directors of the Combined Company."
WHO MAY VOTE
If you were a VRB shareholder as of the close of business on October 2,
2000, you are entitled to vote at the meeting. As of that date, there were
___________ shares outstanding held by approximately ____ holders of record.
VOTING BY PROXY
Shareholders do not have to attend the meeting, although we invite you
to do so. You may vote your shares by proxy if you wish, and we ask that you
provide a proxy even if you intend to attend the meeting. You may mark the
enclosed proxy card to indicate your vote on the matters presented at the
meeting, and the individuals whose names appear on the proxy card will vote your
shares as you instruct.
If you submit a proxy with no instructions, the named proxy holders will
vote your shares in favor of the Merger. In addition, the named proxy holders
will vote in their discretion on such other matters that may be considered at
the shareholders' meeting. The Board of Directors has named James D. Coleman and
William A. Haden as the proxy holders. Their names appear on the proxy form
accompanying this proxy statement. You may name another person to act as your
proxy if you wish, but that person would need to attend the meeting in person or
further vote your shares by proxy.
REVOKING A PROXY
You may revoke your proxy at any time before the vote is taken at the
meeting. You may revoke your proxy by submitting a proxy bearing a later date or
by notifying the Corporate Secretary of VRB (personally, in writing or by mail)
of your wish to revoke your proxy. You may also revoke your proxy by oral
request if you are present at the meeting.
You are invited to attend the meeting even if you have submitted a
proxy. You should be aware that simply attending the meeting will not, of
itself, revoke a proxy.
PLEASE COMPLETE, DATE, AND SIGN THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY TO US IN THE ENCLOSED, POSTAGE-PAID ENVELOPE, EVEN IF YOU PLAN TO
ATTEND THE MEETING.
HOW WE DETERMINE A QUORUM
We must have a quorum to conduct any business at the meeting.
Shareholders holding at least a majority of the outstanding shares of common
stock must either attend the meeting or
18
<PAGE> 25
submit proxies to have a quorum. If you come to the meeting or submit a proxy,
but you abstain from voting on a given matter, we will still count your shares
as present for determining a quorum.
HOW WE COUNT VOTES
The named proxies will vote your shares as you instruct on your proxy.
We will not count abstentions or broker non-votes for or against a matter
submitted to a vote of shareholders but they will have the effect of a vote
against the proposal. Each share is entitled to one vote.
A "broker non-vote" occurs when a broker or other nominee holder, such
as a bank, submits a proxy representing shares that another person actually
owns, and that person has not given voting instructions to the broker or other
nominee. A broker may only vote those shares if the beneficial owner gives the
broker voting instructions. We will count broker non-votes as present for
establishing a quorum.
The affirmative vote of the holders of a majority of all shares of VRB
common stock outstanding on October 2, 2000 is required to approve the Merger.
An abstention or a broker non-vote will therefore have the effect of a vote
against the Merger.
HOW MANY SHARES DO DIRECTORS AND OFFICERS OWN
As of October 2,2000, VRB directors and executive officers beneficially
owned ___________ shares, of which ________ are entitled to vote. Those shares
constitute ____% of the total shares outstanding and entitled to be voted at the
meeting. Pursuant to the Merger Agreement, each member of the VRB Board of
Directors has agreed to vote their shares in favor of the Merger Agreement. We
expect all directors and executive officers to vote in favor of the Merger.
COSTS OF SOLICITATION
VRB will bear the cost of soliciting proxies from its shareholders. In
addition to using the mail, proxies may be solicited by personal interview,
telephone, and electronic communication. Banks, brokerage houses, other
institutions, nominees, and fiduciaries will be requested to forward proxy
soliciting materials to their principals and obtain authorization for the
execution of proxies. Officers and other employees or agents of VRB and its bank
subsidiary, Valley of the Rogue Bank, acting on VRB's behalf, may solicit
proxies personally. VRB may pay compensation for soliciting proxies, and will,
upon request, pay the standard charges and expenses of banks, brokerage houses,
other institutions, nominees, and fiduciaries for forwarding proxy materials to
and obtaining proxies from their principals. However, no such payment will be
made to any of VRB's subsidiaries acting through their nominees or acting as a
fiduciary.
BACKGROUND OF AND REASONS FOR MERGER
HOW DID THE MERGER COME ABOUT?
South Umpqua Bank was founded in Canyonville, Oregon in 1953. Its early
growth was accomplished by opening branches in Douglas County, but its growth
accelerated in 1994 when it focused its efforts on being a financial services
retailer, opening four new branches in Eugene and more recently a branch in each
of Salem and Portland, Oregon.
Valley of the Rogue Bank opened in Rogue River in 1968 and has grown to
13 branches in Jackson and Josephine Counties. Much of this growth came from the
acquisition of Medford State
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<PAGE> 26
Bank in 1987 and Colonial Banking Company in 1998 and the purchase from the FDIC
of two branches of banks that failed in the 1980s.
Each company has long preferred to remain independent and continue their
community banking services in their local communities. Each has pursued a growth
strategy founded on progressive expansion of its geographic market through
branch acquisitions or new branches in areas contiguous to its existing market
area or in areas where expansion opportunities were consistent with the overall
operating and strategic plan. Nonetheless, each believed that under appropriate
circumstances, an alliance or merger with similar community bank organizations
could provide benefits for both shareholders and customers.
Over the past few years, Umpqua and VRB senior management have had
informal conversations regarding a potential merger, but the discussions never
progressed beyond brief inquiries. However, prompted in part by the possibility
that pooling-of-interest accounting treatment might be terminated at the end of
2000 and in response to previous informal invitations for additional dialogue,
the president of VRB met with the president of Umpqua in April and discussed the
parameters of a possible merger of equals. At this meeting, initial discussions
covered the name of the continuing institution, board representation, possible
exchange ratios and senior management positions. Over the ensuing weeks, many
conversations occurred between senior management and between senior management
and their respective Boards of Directors regarding the progress of these
preliminary conversations. Umpqua retained Ragen MacKenzie on May 24, 2000 to
provide financial advisory services. In June, draft agreements were circulated
which helped focus on open issues. The parties exchanged confidential
information based upon a Nondisclosure and Confidentiality Agreement signed June
14, 2000. In June, the Boards of Directors of both companies met and authorized
their management to continue to proceed with the negotiations of a definitive
agreement. By mid July, the essential terms of the Merger had been negotiated.
On July 19, 2000, the Umpqua Board of Directors met with legal counsel and its
financial advisors, Ragen MacKenzie Inc., to review the terms of the Agreement
and give final approval to the transaction. As it appeared that an agreement was
possible, VRB retained D.A. Davidson, an investment banking firm, to provide an
opinion on whether the transaction was fair to the VRB shareholders from a
financial point of view. On July 20, 2000, VRB Board of Directors met with its
legal counsel, Davis Wright Tremaine LLP, Moss Adams LLP, its independent
auditors, and D.A. Davidson & Co., to discuss the terms of the proposed
Agreement, the status of due diligence, and the recommendations of its financial
advisors and outside accounting firm. At a subsequent meeting on August 14,
2000, the VRB Board of Directors received the final due diligence report and a
presentation by D.A. Davidson & Co., and authorized the execution of the Merger
Agreement.
REASONS FOR THE MERGER - GENERAL
Both Umpqua and VRB share a common banking philosophy and strategy,
which emphasizes responsiveness to local markets and the delivery of
personalized services. The companies intend that the Merger will not alter their
community bank focus but will enhance the services to customers. The parties'
geographic markets and products are complementary. South Umpqua's primary market
is Douglas and Lane County with an emerging presence in the Portland and Salem
market areas. VRB's primary market area is immediately south of Douglas County
in Jackson and Josephine Counties. Following the Merger, the combined bank will
have operations in all of the major population centers along the Oregon I-5
corridor. The expansion into the Portland and Salem markets is expected to
provide the combined bank with additional loan
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<PAGE> 27
opportunities which should further diversify its loan portfolio. Further, the
increased capital of the combined bank will permit larger loans to existing and
new customers.
The Merger is expected to provide increased efficiencies and other cost
savings, particularly in data processing and other administrative operations.
The larger size of the combined company also will enable it to acquire and
utilize technology and human resources more efficiently then could either of the
existing banks individually. The Merger is also expected to increase the
management depth of the combined company and its banking subsidiary, enhancing
its competitive ability.
The Merger can be expected to result in a broader public market for the
common stock, which may increase the combined company's shareholder base and
market capitalization, in turn providing a greater market interest in, and
liquidity for, shareholder investments.
Umpqua's and VRB's Board of Directors each believe for the above reasons
as well as the reasons set forth below, that the Merger would be in the best
interest of its company's shareholders.
REASON FOR MERGER - UMPQUA
At its meeting on July 19, 2000, the Board of Directors determined that
the Merger was fair to and in the best interest of Umpqua and its shareholders
based in part on the initial opinion of its financial advisor.
The Umpqua Board of Directors determined the Merger would accelerate its
business strategy of providing banking services throughout the Oregon population
centers along the I-5 corridor. After the Merger, the combined company would be
the third largest community bank in Oregon, thereby potentially providing
customers and shareholders with certain advantages of both a community banking
organization and a larger, regional bank organization.
The Umpqua Board of Directors determined that the Merger would best
advance its strategic plan because the combination of two financially strong
institutions with complementary business strategies would create a stronger
institution with greater size, flexibility, breadth of services, efficiency and
profitability than Umpqua would possess on a stand-alone basis. The Umpqua Board
of Directors believe that each institution is well managed and possesses
management philosophies and a strategic focus that are compatible to those of
the other.
In reaching this determination, the Umpqua Board of Directors consulted
with Umpqua's management as well as its financial, accounting and legal advisors
and considered a number of factors including:
(a) The effectiveness of the Merger in implementing and
accelerating Umpqua's growth strategy;
(b) A presentation by management of (i) its due diligence review
of VRB, including the business, operations, earnings, asset quality, financial
conditions, and corporate culture of VRB on a historical, prospective, and pro
forma basis, (ii) product compatibility, the compatibility of corporate goals
and the respective contributions the parties would bring to a combined
institution, (iii) the enhanced opportunities for acquisition and growth that
the Merger makes possible as a result of greater capitalization of the combined
companies and the anticipated enhanced liquidity of its stock, and (iv) the
expanded opportunities for revenue enhancement and synergies that are expected
to result from the Merger;
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<PAGE> 28
(c) The terms of the Merger, the Umpqua and VRB Stock Option
Agreements and other documents executed in connection with the Merger, which are
generally reciprocal in nature;
(d) The opinion of Ragen MacKenzie, Inc., discussed elsewhere in
this Proxy Statement, that as of July 19, 2000 (and as of October ___, 2000),
that the Exchange Ratio was fair, from a financial point of view, to the holders
of Umpqua Stock;
(e) The opportunity to strengthen and deepen the management team
by integrating the existing management teams of both Umpqua and VRB; and
(f) The financial, tax and accounting effects of the Merger.
The Umpqua Board of Directors did not assign any specific or relative
weight to the foregoing factors in the course of its consideration.
REASONS FOR THE MERGER - VRB
At its meeting held on August 14, 2000, VRB's Board of Directors
authorized the execution of the Merger Agreement and recommended approval of the
Merger by the shareholders of VRB. The Board of Directors believes that the
Merger enhances shareholder value by expanding the Company's business
geographically while retaining the service strategies that are unique to
community banking. VRB's Board of Directors believes that Umpqua is an
innovative financial services company that has goals and philosophies similar to
those of VRB, that Umpqua has demonstrated a history of strong growth and
quality customer services, and that it operates in geographic markets in which
VRB desires to conduct business. Because these factors fit closely with VRB's
business objectives, and because the Merger affords VRB's management, directors
and shareholders a significant voice in the resulting enterprise, the Board did
not extensively consider a sale of VRB or any other transaction as an
alternative to the Merger, although it did examine a variety of strategic
options before deciding to pursue a transaction with Umpqua. VRB's Board
believes that a merger of equals transaction presents a unique strategic
opportunity that should be considered on its own merits. The board also
considered that the Merger would not necessarily preclude consideration of other
transactions in the future for the combined companies if the opportunity should
arise.
In addition, the VRB Board of Directors considered a variety of factors
including:
(a) The terms of the Merger, including the Exchange Ratio, the
Umpqua and VRB Stock Option Agreements and the other documents executed in
connection with the Merger, which are generally reciprocal in nature;
(b) A presentation by management of (i) its due diligence review
of Umpqua, and that of its attorneys, accountants and financial advisor
including the business, operations, earnings, asset quality, financial
conditions, and corporate culture of Umpqua on a historical, prospective, and
pro forma basis, (ii) product compatibility, the compatibility of corporate
goals and the respective contributions the parties would bring to a combined
institution, (iii) the enhanced acquisition and growth opportunities that the
Merger makes possible as a result of greater capitalization of the combined
companies and the anticipated enhanced liquidity of its stock, and (iv) the
expanded opportunities for revenue enhancement and synergies that are expected
to result from the Merger;
(c) The opinion of D.A. Davidson & Co., discussed elsewhere in
this Proxy Statement, that as of August 14, 2000 (and as of October _____,
2000), the Exchange Ratio was fair, from a financial point of view, to the VRB
shareholders;
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<PAGE> 29
(d) VRB's long-term strategy of (i) seeking to expand its
operations along the I-5 corridor, and in particular its goal of extending its
banking operations into the Willamette Valley market area; and (ii) enhancing
the range of financial services available to its customers, such as the retail
brokerage services provided by Umpqua's subsidiary, Strand, Atkinson, Williams &
York, Inc.;
(e) The market value of Umpqua Stock that VRB shareholders will
receive based upon the Exchange Ratio, including possible adjustments to that
ratio that have the effect of protecting VRB's shareholders from certain price
declines prior to closing;
(f) The greater number of shareholders and the increased market
capitalization of the combined company which may result in increased interest in
Umpqua's stock from institutional investors and market professionals, resulting
in improved liquidity for shareholders;
(g) The representation VRB Directors will have on the Board of
Directors of both Umpqua and Umpqua Bank and the positions VRB's senior
management will assume in the combined organization; and
(h) The benefits to VRB's existing customers afforded by
increased capital of the combined bank.
The VRB Board of Directors did not assign any specific or relative
weight to the foregoing factors in the course of its consideration.
RECOMMENDATIONS OF BOARDS OF DIRECTORS
The Boards of Directors of VRB and Umpqua unanimously recommend that
their respective shareholders vote for the approval of the Merger.
OPINION OF UMPQUA'S FINANCIAL ADVISOR
Ragen MacKenzie was retained on May 24, 2000 by Umpqua to provide
financial advisory services regarding the proposed transaction with VRB.
Ragen MacKenzie delivered its oral opinion on July 19, 2000, to the
Umpqua Board, confirmed by a written opinion dated as of July 19, 2000, that, as
of that date, the Exchange Ratio was fair from a financial point of view to the
Umpqua shareholders. Ragen MacKenzie reconfirmed its opinion in writing as of
October __, 2000 (the "Umpqua Opinion").
The full text of the Umpqua Opinion, which sets forth the assumptions
made, procedures followed, matters considered and limitations on the review
undertaken, is attached as Appendix II to this Proxy Statement with the firm's
consent and is incorporated herein by reference. The Umpqua Opinion is directed
only to the fairness to the Umpqua shareholders of the Exchange Ratio from a
financial point of view and does not constitute a recommendation to any Umpqua
stockholder as to how to vote on the Merger. This description of the Umpqua
Opinion is qualified in its entirety by reference to Appendix II. Umpqua
shareholders are urged to read the Umpqua Opinion in its entirety.
About Ragen MacKenzie
Ragen MacKenzie, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. Ragen
MacKenzie
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provides a full range of financial advisory and securities services and, in the
course of its normal trading activities, may from time to time effect
transactions and hold securities, including derivative securities, of Umpqua or
VRB for its own account and for the accounts of customers.
Scope of Review
- In connection with the Umpqua Opinion, Ragen MacKenzie reviewed,
among other things, the Agreement;
- a preliminary draft of this Proxy Statement;
- Annual Reports to Shareholders and Annual Reports on Form 10-K
of Umpqua and VRB for the 3 years ended December 31, 1999;
- the offering circular dated April 1, 1998, as amended, relating
to the public offering of Umpqua common stock;
- the registration statement on Form S-1 dated October 3, 1997, as
amended, relating to the public offering of VRB's common stock;
- interim reports to shareholders and Quarterly Reports on Form
10-Q of Umpqua and VRB;
- other communications from Umpqua and VRB to their respective
shareholders; and
- internal financial analyses and forecasts of Umpqua and VRB
prepared by their respective managements, including forecasts of
cost savings and revenue opportunities (the "Synergies")
expected to be achieved as a result of the Merger.
Ragen MacKenzie also held discussions with members of the senior
management of Umpqua and VRB regarding the strategic rationale for, and the
potential benefits of the Merger. In addition, Ragen MacKenzie reviewed the
reported price and trading activity for the Umpqua common stock and the VRB
common stock, compared financial and stock market information for Umpqua and VRB
with similar information for other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the commercial banking industry specifically and performed such
other studies and analyses as it considered appropriate.
Assumptions
Ragen MacKenzie assumed and relied upon the accuracy and completeness of
all the financial and other information that it reviewed in rendering the Umpqua
Opinion. In that regard, Ragen MacKenzie assumed, with the Umpqua Board's
consent, that the financial forecasts (including, without limitation, the
Synergies and projected restructuring charges) had been reasonably prepared on a
basis reflecting the best currently available judgments and estimates of Umpqua
and VRB, and that such forecasts will be realized in the amounts and at the
times contemplated thereby. Ragen MacKenzie is not an expert in the evaluation
of loan portfolios for purposes of assessing the adequacy of the allowances for
losses with respect thereto and assumed, with the Umpqua Board's consent, that
such allowances for each of Umpqua and VRB are in the aggregate adequate to
cover all such losses. In addition, Ragen MacKenzie did not review individual
credit files nor did it make an independent evaluation or appraisal of the
assets and liabilities of Umpqua or VRB or any of their subsidiaries, and it had
not been furnished with any such evaluation or appraisal. Ragen MacKenzie also
assumed, with the Umpqua Board's consent, that the Merger will be accounted for
as a pooling-of-interests and that obtaining any necessary
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<PAGE> 31
regulatory approvals and third party consents for the Merger or otherwise will
not have a material adverse effect on Umpqua or VRB or the combined company. In
addition, the Umpqua Opinion does not address the relative merits of the Merger
as compared to any alternative business transaction that might be available to
Umpqua.
The following is a brief summary of the material, financial analyses
presented to the Umpqua Board on July 19, 2000 by Ragen MacKenzie.
Exchange Ratio History. Ragen MacKenzie calculated the ratio of the
average market price per share of VRB common stock to the average market price
per share of Umpqua common stock over selected periods ending on July 14, 2000
(the "Base Date") and dating back two years.
<TABLE>
<CAPTION>
Twenty Days Prior One Year Prior Two Years Prior to
Base Date to the Base Date to the Base Date the Base Date
--------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Average Exchange 0.6133 0.6162 0.6753 0.7546
Ratio
</TABLE>
Public Market Comparison. Ragen MacKenzie presented a public market
comparison of VRB and Umpqua and a selected group of other publicly traded
community banking organizations in Oregon (the "Oregon Companies") consisting
of:
- Cascade Bancorp - Centennial Bancorp
- Columbia Bancorp
- Independent Financial Network
- Umpqua Holdings Corporation
- VRB Bancorp
- West Coast Bancorp
Ragen MacKenzie also analyzed a secondary group of publicly traded
community banking organizations in the state of Washington (the "Washington
Companies") consisting of:
- Columbia Banking Systems
- Frontier Financial Corp.
- Washington Banking Corp.
- City Bank
- United Security Bancorp
This comparison was presented on the basis of various financial ratios
and other indicators, including among other things, market price to earnings per
share ("EPS") ratios, historical price to stated book value and tangible book
value ratios, and projected 2001 EPS. The Oregon Companies and Washington
Companies were selected for comparison purposes through a review of publicly
traded banking institutions with similar operating characteristics. In general,
financial data presented was as of the quarter ended June 30, 2000 and market
data was as of July 14, 2000. Efficiency ratios and net interest margins were
presented as of December 31, 1999.
Ragen MacKenzie compared estimated ratios of price to EPS for VRB (based
on management projections
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<PAGE> 32
provided by VRB and Umpqua (based on management projections provided by Umpqua
with the harmonic mean of the ratios for the Oregon Companies and Washington
Companies for 2000 and 2001. The harmonic mean is calculated by taking the
reciprocal of the arithmetic mean of the reciprocals of a finite set of numbers.
Ragen MacKenzie believes this mean calculation handles outlier data points in a
less subjective manner than excluding them. Additionally, Ragen MacKenzie
presented a public market comparison of VRB, Umpqua and the Oregon Companies, on
the basis of, among other things, return on average common equity ("ROACE"),
return of average assets ("ROAA"), net interest margin, efficiency ratios, and
deposit premiums similar multiple comparisons were made with the Washington
Companies. The following table shows the comparisons.
<TABLE>
<CAPTION>
Price as a Multiple to
-------------------------------------
Estimated Estimated Net
2000 2001 Book Value Interest Efficiency Deposit
Net Income Net Income (6/30/00) ROACE ROAA Margin Ratio Premium
---------- ---------- ---------- ----- ---- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Umpqua 11.5x 10.1x 1.62x 13.38% 1.42% 5.37% 55.60% 6.96%
VRB 8.2x 7.8x 1.22x 14.20% 1.57% 5.98% 57.61% 2.54%
Oregon Companies' Harmonic Mean 9.4x 8.4x 1.32x 12.15% 1.44% 5.92% 59.76% 4.70%
Washington Companies' Harmonic Mean 11.0x 10.2x 1.56x
</TABLE>
Discounted Dividend Stream and Terminal Value Analysis--Umpqua. Ragen
MacKenzie performed a discounted dividend stream analysis for Umpqua based upon
management's projected dividend payout for the years 2000, 2001, 2002, and using
the three-year average payout ratio of 22% to estimate the dividend payout in
2003, and using Terminal Values ranging from 12x to 16x and discount rate of
10-14%. Based on this methodology, Ragen MacKenzie calculated implied share
values for Umpqua common stock ranging from $8.51 to $12.44.
Discounted Dividend Stream and Terminal Value Analysis--VRB. Ragen
MacKenzie performed a discounted dividend stream analysis for VRB based on a
three-year average payout ratio of 35% and using Terminal Values ranging from
12x to 16x and discount rate of 10-14%. Based on this methodology, Ragen
MacKenzie calculated implied share values for VRB common stock ranging from
$6.44 to $9.32.
Contribution Analysis. Ragen MacKenzie analyzed certain historical and
estimated financial information for VRB and Umpqua and the pro forma combined
entity resulting from the Merger. The following table shows the percentage
contributions of each company to the indicated values to the combined company.
<TABLE>
<CAPTION>
PERCENTAGE OF COMBINED VRB UMPQUA
---------------------- --- ------
<S> <C> <C>
Shares outstanding 47.0% 53.0%
Market capitalization (as of 7/14/00) 40.0% 60.0%
Shareholders equity (6/30/00) 47.3% 52.7%
2000 Income (est.) 47.6% 52.4%
2001 Income (est.) 46.6% 53.4%
Total assets (as of 6/30/00) 44.3% 55.7%
Total deposits (as of 6/30/00) 44.7% 55.3%
Total loans (as of 6/30/00) 45.6% 54.4%
</TABLE>
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Pro Forma Combined Financial Analysis. Ragen MacKenzie presented pro
forma combined EPS to analyze the pro forma combined impact of the Merger. This
analysis is based on management's projections of financial results as well as
the synergies relating to the Merger.
For Umpqua, the 2000 standalone and pro forma combined EPS were each
$0.72 and $0.73, respectively, representing 1.2% accretion; the 2001 standalone
and pro forma combined EPS were $0.81 and $0.87, respectively, representing 6.7%
accretion.
Comparable Transaction Analysis - Ragen MacKenzie also analyzed selected
recent transactions ("Comparable Transactions") deemed relevant to the proposed
transaction in which certain public companies acquired other companies. For this
analysis, Ragen MacKenzie reviewed seven transactions of banks located in the
Western US including:
- Whitney Holdings/Bank of Houston
- Greater Bay Bancorp/Mount Diablo Bancshares
- Gold Banc Corp/Countybanc Holding Corp
- Wells Fargo/North County Bancorp
- Compass Bancshares/Western Bancshares
- US Bancorp/Penisula Bank
- SJNB Financial/Saratoga Bancorp
Ragen MacKenzie's analysis of the consideration paid in the Comparable
Transactions generated harmonic mean multiples of transaction value to equity,
tangible equity, and net income of 2.72x, 2.90x, and 15.42x, respectively,
compared to 1.60x, 2.10x and 11.33x, respectively, for the Merger. Ragen
MacKenzie also analyzed the deposit premiums of the Comparable Transactions
which had a harmonic mean of 15.8%, compared to 7.6% for the Merger.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Ragen
MacKenzie believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering the analyses taken as a
whole, would create an incomplete view of the process underlying the analyses
set forth in the Umpqua Opinion. In addition, Ragen MacKenzie considered the
results of all such analyses and did not assign relative weights to any of the
analyses, so the ranges of valuations resulting from any particular analysis
described above should not be taken to be Ragen MacKenzie view of the actual
value of Umpqua or a combination of Umpqua and VRB.
In performing its analyses, Ragen MacKenzie made numerous assumptions
with respect to industry performance, general business, economic and regulatory
conditions and other matters, many of which are beyond the control of Umpqua or
VRB. The analyses performed by Ragen MacKenzie are not necessarily indicative of
actual values, trading values or actual future results which might be achieved,
all of which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as part of Ragen MacKenzie's
analysis of the fairness of the Exchange Ratio to Umpqua Stockholders from a
financial point of view. The analyses do not purport to be appraisals or to
reflect the prices at which a company might be sold. In addition, as described
above, the Umpqua Opinion was one of many factors taken into consideration by
the Umpqua Board in making its determination to approve the Merger.
Consequently, the analyses described above should not be viewed as determinative
of the Umpqua Board's or Umpqua management's opinion with respect to the value
of Umpqua or a combination
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<PAGE> 34
of Umpqua and VRB, or of whether the Umpqua Board or Umpqua management would
have been willing to agree to a different exchange ratio. Umpqua placed no
limits on the scope of the analysis performed, or opinion expressed, by Ragen
MacKenzie.
Umpqua has agreed to pay Ragen MacKenzie a fee of $100,000 in cash for
the delivery of the opinion dated July 19, 2000, and an additional fee of
$375,000 in cash upon consummation of the Merger. In addition, Umpqua has agreed
to indemnify and hold harmless Ragen MacKenzie and certain related parties, to
the full extent lawful, from and against certain liabilities and expenses,
including certain liabilities under the federal securities laws, incurred in
connection with its engagement.
OPINION OF VRB'S FINANCIAL ADVISOR
D.A. Davidson & Co. was retained to provide VRB's board with an opinion
of the fairness from a financial viewpoint of the Exchange Ratio. The written
opinion dated August 14, 2000, reconfirmed October __, 2000, is attached as
Appendix III with the consent of D.A. Davidson & Co. Davidson, as part of its
investment banking business, is engaged in the valuation of banking and other
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. VRB's Board of Directors retained Davidson based
upon its experience as a financial advisor in mergers and acquisitions of
financial institutions and its knowledge of financial institutions. VRB did not
retain Davidson to negotiate the proposed transaction and the terms and
conditions of the transaction were negotiated directly by and between VRB and
Umpqua and their respective other representatives.
Review Procedures. In connection with providing its opinion, Davidson
- reviewed the Merger Agreement;
- reviewed certain publicly available financial statements and
regulatory information concerning VRB and Umpqua;
- reviewed certain internal financial statements and other
financial and operating data of VRB and Umpqua provided to it by
managements of VRB and Umpqua;
- discussed the past and current operations, financial condition,
and future prospects of VRB and Umpqua with their executive
managements, including the chief executive officer of Strand,
Atkinson, Williams & York;
- compared the relative contributions of assets, liabilities,
income and expenses to the combined corporation by VRB and
Umpqua in the Merger to those of certain other banks and thrifts
in the United States which recently engaged in a merger of
equals transaction;
- analyzed the pro forma results that the combined company could
produce through the end of 2002 based upon forecasts prepared by
managements of VRB and Umpqua; and
- performed other analyses and reviews as it deemed appropriate.
In connection with its review, Davidson relied upon and assumed the
accuracy and completeness of all of the information listed above provided to it
or made publicly available. Davidson did not assume any responsibility for
independent verification of the information. We assumed that the internal
confidential financial projections prepared independently by the parties'
respective management were reasonably prepared, reflecting the best currently
available estimates and judgments of the future financial performance of the
combined operation, and did not independently verify the validity of their
assumptions.
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<PAGE> 35
Davidson did not make any independent evaluation or appraisal of the
assets and liabilities of VRB or Umpqua, nor was it furnished with any
appraisals. With VRB's consent, Davidson did not examine individual loan files
of VRB or Umpqua. Davidson's personnel are not experts in the evaluation of loan
portfolios for the purpose of assessing the adequacy of the allowance for loan
losses and assumed that these allowances are, in the aggregate, adequate to
cover the losses.
The Davidson opinion was predicated on the Merger receiving tax-free
reorganization treatment and qualifying as a pooling of interests for accounting
purposes. Davidson provided its opinion without regard to the necessity for, or
level of, any restrictions, obligations, undertakings or other actions, which
may be imposed or required in the course of obtaining regulatory approval for
the Merger.
The opinion was necessarily based upon economic, market and other
conditions in effect on and the information made available to Davidson as of
August 14, 2000. No limitations were imposed on Davidson regarding the scope of
its investigation or otherwise by VRB or Umpqua.
Based on the results of the various analysis described below, Davidson
concluded that the Exchange Ratio specified in the Merger Agreement is fair,
from a financial point of view, to VRB shareholders.
The following is a summary of the analyses performed by Davidson in
connection with its opinion. The following discussion contains financial
information concerning VRB and Umpqua as of June 30, 2000.
Valuation Methods. In connection with providing its opinion, Davidson
performed a variety of financial analyses, including those summarized in the
following sections. The information provided is not a complete description of
the analyses that were used in reaching its opinion. The preparation of its
fairness opinion involves various determinations and judgments as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances.
A fairness opinion is not readily susceptible to a partial analysis or
summary description. While we provided the Board with the results of the various
analyses that follow, Davidson believes that all of our analysis must be
considered in its entirety and that selecting portions of its analysis and
factors considered by it, without considering all analyses and factors, or
attempting to assign relative weights to some or all such analyses and factors,
or including other discrete analyses or factors, could create an incomplete view
of the evaluation process underlying our opinion.
In performing our analyses, Davidson made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of VRB, Umpqua, the combined
company and Davidson.
The following lists the summary analyses presented by Davidson to VRB's
Board of Directors on August 14, 2000:
- Comparable Company Analysis and Historical Stock Data Analysis
- Exchange Ratio Analysis and Analysis of Relative Contributions
of Parties
- Comparable Transaction Analysis
- Pro Forma Merger Analysis
29
<PAGE> 36
Comparable Company Analysis. Davidson compared the financial performance
and market performance of VRB and Umpqua based on various financial measures of
earnings performance, operating efficiency, capital adequacy and asset quality
and various measures of market performance, including but not limited to,
price-to-book values, price-to-earnings and dividend yields to those selected
bank holding companies.
For the purpose of such analysis, the financial information used by
Davidson was as of and for the quarter ending June 30, 2000. Market price
information was as of August 11, 2000. Davidson selected publicly traded banking
companies in the western United States on which its routinely publishes an
equity research monitor list for institutional investors.
Davidson's analysis showed the following concerning VRB's financial
performance:
<TABLE>
<CAPTION>
VRB
Performance Average Median
----------- ------- ------
<S> <C> <C> <C>
Return on average assets 1.57% 1.34% 1.33%
Return on average equity 14.20% 12.30% 14.10%
Net Interest Margin 5.94% 5.79% 5.69%
Efficiency Ratio 58.20% 64.80% 62.00%
Ratio of total equity to total assets 10.50% 9.90% 9.50%
Ratio of non-performing assets to total
loans plus other real estate owned 0.09% 0.62% 0.45%
</TABLE>
Davidson's analysis further showed the following concerning VRB's market
performance:
- VRB's price to earnings per share multiple based on 2000
projected earnings was 8.61 times, compared to an average of
13.50 and median of 11.30;
- the price to earnings per share multiple based on 2001 projected
earnings was 7.95 times, compared to an average of 10.10 and
median of 9.60;
- the price to book value per share was 1.21 times, compared to an
average of 1.52 and median of 1.47; and
- the dividend yield was 4.57% compared to an average of 2.25% and
median of 2.36%.
Davidson's analysis showed the following concerning Umpqua's financial
performance:
<TABLE>
<CAPTION>
Umpqua
Performance Average Median
----------- ------- ------
<S> <C> <C> <C>
Return on average assets 1.44% 1.34% 1.33%
Return on average equity 14.70% 12.30% 14.10%
Net Interest Margin 5.40% 5.79% 5.69%
Efficiency 59.40% 64.80% 62.00%
Ratio of total equity to total assets 9.50% 9.90% 9.50%
Ratio of non-performing assets to total
loans plus other real estate owned 0.24% 0.62% 0.45%
</TABLE>
Davidson's analysis further showed the following concerning Umpqua's
market performance:
- that Umpqua's price to earnings per share multiple based on 2000
projected earnings was 11.46 times, compared to an average of
13.50 and median of 11.30;
30
<PAGE> 37
- the price to earnings per share multiple based on 2001 projected
earnings was 10.06 times, compared to an average of 10.10 and
median of 9.60;
- the price to book value per share was 1.62 times, compared to an
average of 1.52 and median of 1.47; and
- the dividend yield was 1.94% compared to an average of 2.25% and
median of 2.36%.
Historical Stock Data Analysis. Davidson reviewed weekly stock price
data for VRB common stock and Umpqua common stock compared to the Nasdaq Bank
Index and S&P Banking Index for the period from January 1999 through August 11,
2000. This analysis showed that on a relative performance basis, VRB's and
Umpqua's stock prices went down 32% and 15%, respectively, compared with a
reduction of 10% for the Nasdaq Bank Index and 10% for the S&P Banking Index.
Merger Of Equals. For a merger to be considered a merger of equals
rather than an acquisition of one party by the other, the two parties must be of
relatively equal size, based on assets, revenues, net income, profitability, or
some other relevant financial measure. Another primary condition that
differentiates a merger of equals from an acquisition is the fact that neither
merger partners' shareholders receive a significant premium for their shares.
Whether a premium has been paid in a merger between two companies with publicly
traded stocks that have well established, reliable market prices can be easily
assessed based on the stock exchange ratio and relative market prices.
On the other hand, for closely-held companies or those lacking well
established markets for their stock, this assessment is commonly based on the
relative impact on the per share measures of book value and earnings for the
merger partners, expressed in terms of accretion/dilution. In this context,
accretion refers to an increase in the book value or earnings represented by the
shares of the new, combined entity over the book value or earnings represented
by the shares of the parties to be merged. Dilution is the term used if the book
value or earnings on an equivalent share basis is less in the combined entity
than in the separate parties to the Merger.
Exchange Ratio Analysis. In a merger of equals between two thinly traded
companies, such as Umpqua and VRB, it is not necessary to explicitly establish
an absolute dollar value for either of the two companies. The relevant value to
be determined is the relative value of one partner to the other. These values
are represented by the exchange ratio. Comparisons between mergers of equals can
be made based on the contribution the two partners make to the new aggregate
entity and the impact to the book value and earnings per share for each group of
shareholders, expressed in terms accretion or dilution.
A large range between the accretion to one merger partner and the
dilution to the other generally shows that there are factors to be considered
that are not reflected in the equity balances or in net income, such as an
expected material decline in future earnings or balance sheet growth. After a
due diligence review of VRB and Umpqua and consultation with their managements,
Davidson did not discover any such factors that would materially impact the
Exchange Ratio.
Analysis Of Relative Contributions Of Parties. The following chart
depicts the relative financial contributions of VRB and Umpqua to the merged
entity based on various items reported in their respective balance sheets and
income statements.
31
<PAGE> 38
RELATIVE CONTRIBUTIONS AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
VRB Umpqua
------ ------
<S> <C> <C>
Assets 44.30% 55.70%
Loans 45.60% 54.40%
Deposits 44.70% 55.30%
Equity 47.30% 52.70%
Net Interest Income 47.30% 52.70%
Non-Interest Income 20.50% 79.50%
Non-Interest Expense 39.00% 61.00%
Net Income 47.70% 52.30%
</TABLE>
Each of these measures shows that the relative contributions of VRB and
Umpqua to the combined company are very close. The relative contributions track
well to the proposed 0.8135 Exchange Ratio.
Applying the exchange ratio to VRB's common stock results in VRB
shareholders owning approximately 47% of the combined company. The data in the
chart above shows that this percentage is very close to the percentage
contribution of VRB assets, equity and earnings to the combined company among
other variables.
For VRB shareholders, the Merger will result in a decrease in book value
per share of 1.4% and a decrease in earnings per share of 3.3%. For Umpqua
shareholders, the merger will result in an increase in book value per share of
0.7% and will be neutral to earning per share. The accretion/dilution analysis
shows that the impact of the Exchange Ratio on both VRB and Umpqua shareholders
is similar and that the difference is very narrow as compared to similar
transactions.
The calculation of the Exchange Ratio based only upon stated book at
June 30, 2000 without certain typical adjustments slightly favors VRB
shareholders as adjustments to the Exchange Ratio based upon stated vs. tangible
book value per share, mark-to-market of held for sale in the company's
investment portfolio and options outstanding and/or vested would lower the
Exchange Ratio.
Comparison to Selected Transactions. After completing its analysis of
the Exchange Ratio based on the relative contributions of the parties, Davidson
reviewed comparable transactions to validate its analysis. Davidson performed an
analysis of selected pending or recently completed mergers of equals of banking
organizations in the United States with comparable characteristics to the
Merger. Generally, the comparable transactions reinforced Davidson's opinion
that the Exchange Ratio was fair.
Davidson's initial selection of a guideline group yielded 22
transactions covering a period from January 1, 1999 to June 30, 2000. In
reviewing this selection, Davidson determined that a number of transactions were
acquisitions, not mergers of equals. Another group of transactions was clearly
not comparable to the subject transaction, generally due to size. And, finally,
in many cases the financial data were inadequate for purposes of comparison.
Therefore, five transactions from the original group are presented as being
representative to test its conclusion.
These comparable transactions consisted of five mergers of banks with
assets of between $100 million and $600 million that were announced between
January 1, 1999 and June 30, 2000 for which complete data were available:
- Marathon Financial/Rockingham Heritage Bank
32
<PAGE> 39
- First Sterling Banks/Main Street Banks
- BankIllinois Financial Corp./First Decatur Bancshares
- Harbor Bancorp/Bank of the Pacific
- Sharon Bancshares/First NW Bancshares
<TABLE>
<CAPTION>
Absolute % Differences
----------------------------------
Pre & Pre & Post
Post EPS Book Value
-------- ----------
<S> <C> <C>
Marathon/Rockingham 12.5% 0.5%
First Sterling/Main Street 4.8% 9.5%
BankIllinois/First Decatur 4.0% 1.0%
Harbor/Bank of the Pacific 2.9% 5.4%
Sharon/First NW 22.4% 9.5%
Umpqua/VRB 3.3% 2.1%
</TABLE>
As illustrated by the chart above, the comparable transactions showed
much wider ranges of accretion to dilution than the proposed merger between
Umpqua and VRB. If the results for the Merger had fallen outside range for the
comparative transactions, Davidson would have questioned the fairness of the
Exchange Ratio to VRB shareholders. From a comparative perspective, the effect
of the proposed Exchange Ratio in this merger best mimics the relative
contributions of the two companies when examined against other comparable
transactions.
Conclusions. Based on the foregoing analysis, Davidson concluded that
the narrow range of accretion to dilution in the Merger between supports an
opinion that the exchange ratio is fair, from a financial point of view, to VRB
shareholders. Davidson's conclusion is based on the following results of its
comparison of the selected transactions to the results for the merger between
Umpqua and VRB:
- The absolute difference between the accretion and dilution to
book value within a transaction ranged from 0.5% to 9.5%
compared with the absolute difference of the accretion and
dilution implied in the proposed Merger of 2.1% based on the
June 30, 2000 book values for VRB and Umpqua without adjusting
book value for any options.
- The absolute difference between the accretion and dilution to
earnings within a transaction ranged from 2.9% to 22.4% compared
with the absolute difference of the accretion and dilution
implied in the proposed Merger of 3.3% based on the six months
earnings to June 30, 2000 for Umpqua and VRB and applying the
treasury stock method for calculating fully diluted weighted
average shares outstanding for the period.
- Dilution to book value ranged from 0.2% to 4.4% compared to
dilution to VRB book value implied in this Merger of 1.4%.
Dilution to earnings ranged from 1.0% to 10.2% compared to
dilution to VRB earnings implied in the proposed Merger of 3.3%.
The analysis assumes no adjustment to book value for options but
does include options in calculation of fully diluted shares.
- Accretion to earnings ranged from 1.9% to 12.2% compared to the
neutral effect on Umpqua's earnings implied in this Merger.
Accretion to book value ranged from 0.3% to 5.3% compared to
accretion to Umpqua book value implied in the Merger of 0.7%.
This
33
<PAGE> 40
analysis assumes no adjustment to book value for options but
does include options in calculation of fully diluted shares.
PRO FORMA MERGER ANALYSIS
Davidson reviewed projections prepared by VRB management for year-end
2000 and 2001, and performed an arithmetic adjustment to year-end 2001 results
to forecast 2002 results. This adjustment consisted of applying the same
percentage increase or decrease between 2000 and 2001 to the change between 2001
and 2002.
Davidson also reviewed projections prepared by Umpqua management for
year-end 2000, 2001 and 2002 and prepared a combined forecast based upon the
information prepared by VRB and Umpqua managements and the adjustment that
Davidson made for the VRB's projected 2002 results.
Davidson did not use the forecasts and projections in analyzing the
exchange ratio, but provided this information to VRB as an illustrative overview
of the proposed combined corporation. The most striking difference in the
performance of the combined entity and the historic record of VRB is that the
rate of growth of assets, loans and deposits is substantially greater than the
growth historically at VRB.
This analysis ignored any expense reductions or synergies that may be
gained as a result of the merger. These projections assume that there will be no
substantial shift in future economic, financial market, competitive and
regulatory conditions, all of which are difficult or impossible to predict and
largely beyond the control of both parties to this merger.
Actual results achieved by the combined company following the merger may
vary from this and other forecasts, and the variations may be material. Like all
forward-looking statements, this analysis produces results that are inherently
uncertain.
Davidson's opinion is directed only to the VRB board and the question of
whether the exchange ratio is fair from a financial perspective and does not
constitute a recommendation to any VRB stockholder to vote in favor of the
Merger.
Davidson acts as a market maker in VRB and Umpqua common stock. In the
ordinary course of Davidson's business, Davidson and its affiliates may actively
trade securities of VRB and Umpqua for their own and for the accounts of
customers, and may, therefore, at any time hold a long or short position in such
securities.
VRB retained Davidson to deliver a fairness opinion in connection with
the merger. VRB agreed to pay Davidson a total fee of $100,000, plus expenses.
VRB also agreed to indemnify Davidson and its officers and employees against
certain liabilities in connection with its services under the engagement letter.
THE MERGER
The following description of the Merger is not complete and is qualified
in its entirety by reference to the Merger Agreement attached as Appendix I.
Shareholders are urged to read the Merger Agreement in its entirety.
34
<PAGE> 41
GENERAL
The Merger Agreement provides that VRB will be merged with and into
Umpqua. Upon consummation of the Merger (the "Effective Date"), the separate
corporate existence of VRB will cease, Umpqua will be the continuing company and
the shareholders of VRB will become shareholders of Umpqua. At the same time,
Valley of the Rogue Bank will merge with and into South Umpqua Bank and the
continuing bank will change its name to "Umpqua Bank."
CONVERSION OF VRB COMMON STOCK; EFFECTS ON UMPQUA SHAREHOLDERS
Conversion of VRB Common Stock. At the Effective Date, each share of VRB
common stock will be converted into the right to receive 0.8135 Shares of Umpqua
common stock (the "Exchange Ratio").
The Exchange Ratio could increase to as high as 0.8500 if:
- The average closing price of Umpqua common stock is below $6.75,
- That average price, compared to the Nasdaq Bank Index, has
declined ten percentage points more than the corresponding
change in the Bank Index, and
- Umpqua elects to increase the Exchange Ratio after receiving
notice from VRB that it otherwise intends to terminate the
Merger.
More specifically, if the average closing price of Umpqua common stock
for the twenty consecutive trading days ending on and including the tenth
calendar day preceding the projected Effective Date is less than $6.75 per share
and if the difference between that average closing price and $8.15 (the price
per share on August 11, 2000), expressed as a percentage, obtained by dividing
that difference by $8.15, exceeds the Index Differential (defined below) by more
than ten percentage points, the VRB Board of Directors would have the option
(but not the obligation) to terminate the Merger Agreement unless Umpqua chooses
in its sole discretion to increase the Exchange Ratio by an amount determined by
multiplying 0.8135 by $6.75 and dividing that product by the average closing
price. In no event would the Exchange Ratio calculated by this formula be
greater than 0.8500. If the average Umpqua closing price is less than $6.10 and
the difference between that price and $8.15, expressed as a percentage, exceeds
the Index Differential by more than ten percentage points, the VRB Board of
Directors nonetheless have the option (but not the obligation) to terminate the
Merger Agreement.
The "Index Differential" is calculated by dividing the Nasdaq Bank Index
for the twenty consecutive trading days ending on and including the tenth
calendar day proceeding the projected Effective Date by 1,588.3, which was the
average Bank Index for the twenty trading days prior to August 11, 2000. The
Nasdaq Bank Index is a broad-based capitalization-weighted index of domestic and
foreign common stocks of banks that are traded on the Nasdaq National Market as
well as the Small Cap Market.
The Exchange Ratio is a fixed ratio entitling VRB shareholders to
receive 0.8135 shares of Umpqua stock. The potential adjustment is intended to
protect the value VRB expects to receive in the Merger by giving the VRB Board
the option to terminate the transaction if the market value of Umpqua common
stock suffers a decline that is disproportionate to a decline in the market of
bank stocks in general. Should that occur, Umpqua may, in its sole discretion,
increase the Exchange Ratio to provide additional shares to VRB (up to a maximum
Exchange Ratio of 0.8500) and if it chooses to do so, the Merger would proceed.
However, if the average closing price for Umpqua
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<PAGE> 42
common stock is below $6.10 and that decline exceeds any decline in the Bank
Index by more than ten percentage points, the VRB Board of Directors could
nonetheless terminate the Agreement.
The following are examples of the Exchange Ratio if both triggering
conditions were to occur and Umpqua were to elect to increase the Exchange Ratio
in accordance with the Merger Agreement:
<TABLE>
<CAPTION>
Average Closing Price of Umpqua Stock Exchange Ratio
------------------------------------- --------------
<S> <C>
$ 6.75 and above 0.8135
6.65 0.8257
6.55 0.8334
6.5 0.8448
6.46 0.85
6.10 and above 0.85
</TABLE>
Effect on Umpqua Shareholders. At the Effective Date, each share of
Umpqua common stock will continue as one share of the combined company.
Share Ownership at Effective Date. As a result of the Merger, former
Umpqua shareholders will hold approximately 53% of the shares and former holders
of VRB shareholders will hold approximately 47% of shares of the combined
company.
Cash for Fractional Shares. No fractional shares of Umpqua common stock
will be issued in the Merger. Each VRB Shareholder who otherwise would be
entitled to a fraction of a share of Umpqua common stock will be paid the cash
value of such fractional share, valued as of the Effective Date.
EXCHANGE OF STOCK CERTIFICATES
Manner of Exchange - VRB Certificates. Umpqua has selected ChaseMellon
Shareholder Services as exchange agent ("Exchange Agent") to effect the exchange
of certificates representing shares of VRB common stock in connection with the
Merger. Promptly after the Effective Date, the Exchange Agent will mail to each
VRB shareholder a notice that the Merger has been completed. The notice will be
accompanied by a certificate transmittal form that will contain instructions as
to the procedure for the surrendering VRB certificates in exchange for Umpqua
stock certificates.
VRB SHAREHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATE TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED A CERTIFICATE TRANSMITTAL FORM. CERTIFICATES
SHOULD NOT BE RETURNED WITH THE ENCLOSED PROXY.
Rights of Holders of VRB Stock Certificates Prior to Surrender. Until
certificates representing shares of VRB common stock are surrendered, no
dividends or other distributions declared or payable to holders of record of
Umpqua common stock as of any time subsequent to the Effective Date will be paid
to the holder of any unsurrendered certificate. Such holder will have other
rights as an Umpqua shareholder, including the right to vote on any matter
submitted to the shareholders for their approval.
Certificates for Umpqua Common Stock. All shares of Umpqua common stock
issued and outstanding at the Effective Date will remain issued and outstanding
as shares of Umpqua and no action is required of any Umpqua shareholder (other
than the vote solicited hereby) to conclude the Merger.
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<PAGE> 43
Lost Certificates. In the event that any certificates representing VRB
common stock or Umpqua common stock have been lost, stolen, or destroyed, the
shareholder must submit an affidavit of that fact and, if required, post a
reasonable bond as indemnity against any claim that may be made against Umpqua
with respect to that certificate.
TREATMENT OF OUTSTANDING STOCK OPTIONS
As of ______________, 2000, there were _________ unexercised options
outstanding under various employee and director stock option plans of VRB
(collectively, the "VRB Option Plans") to purchase shares of VRB common stock at
prices ranging from $______ to $_____ per share.
On the Effective Date, Umpqua will assume VRB's obligations with respect
to each outstanding VRB option, whether or not then exercisable. Thereafter, (a)
each option may be exercised only for Umpqua common stock, (b) each option will
become an option to purchase the number of shares of Umpqua common stock equal
to the Exchange Ratio multiplied by the number of shares of VRB common stock
subject to such option and, (c) the exercise price per share of the Umpqua
common stock will be an amount computed by dividing the exercise price per share
of VRB common stock by the Exchange Ratio. All previously outstanding Umpqua
stock options will remain outstanding and are unaffected by the Merger.
MERGER OF SUBSIDIARY BANKS; NAME CHANGE
Immediately following the Effective Date, Valley of the Rogue Bank will
merge with South Umpqua Bank, which will change its name to "Umpqua Bank."
RESULTING BOARD OF DIRECTORS OF UMPQUA AND UMPQUA BANK
The Merger Agreement provides that the current Umpqua Board of Directors
will designate six individuals, and the current VRB Board of Directors will
designate five individuals, to serve as directors of the combined company
commencing on the Effective Date. These same individuals will also serve as
directors of the combined bank. The Umpqua Board of Directors is a classified
board of directors with the directors serving terms of 1, 2 or 3 years. Two VRB
directors will be appointed to serve a 3-year term, two individuals to serve
2-year terms, and one to serve a 1-year term (each case the length of term being
reducible to reflect the annual meeting schedule of Umpqua shareholders). The
Umpqua designees will similarly be divided evenly among each of the three terms.
The following persons have been selected to serve the terms designated.
A vote in favor of the Merger will constitute a vote to elect these persons to
the Umpqua Board to serve following the Merger.
<TABLE>
<CAPTION>
NAME PRESENT BOARD AFFILIATION
----------------------------------------------- -------------------------
<S> <C>
Term expiring at the first annual shareholders'
meeting after the Effective Date
Umpqua
--------------------------------
Umpqua
--------------------------------
VRB
--------------------------------
Term expiring at the second annual shareholders'
</TABLE>
37
<PAGE> 44
<TABLE>
<S> <C>
meeting after the Effective Date
Umpqua
---------------------------------
Umpqua
---------------------------------
VRB
---------------------------------
VRB
---------------------------------
Term expiring at the third annual shareholders'
meeting after the Effective Date
Umpqua
---------------------------------
Umpqua
---------------------------------
William A. Haden VRB
James D. Coleman VRB
</TABLE>
If, prior to the Effective Date, any of the foregoing persons becomes
unavailable to serve or if a director resigns or otherwise ceases to serve as a
director following the Effective Date and before the second annual meeting of
the combined company, the Board will fill any vacancy in accordance with
Umpqua's Bylaws, as restated in connection with the Merger, and as required by
the governing provisions of the Oregon law, based on nominations by affirmative
votes of a majority of the remaining VRB-designated directors (if the vacancy
relates to a VRB-designated director) or by Umpqua-designated directors (if the
vacancy relates to an Umpqua-designated director).
Governance Limitation. As of the Effective Date, the bylaws of Umpqua
will be amended and restated to provide that prior to the second anniversary of
the Effective Date, directors may not take any of the following actions without
the approval of two-thirds of the directors:
- A decision to change the number or composition of the Umpqua
Board of Directors or Umpqua Bank except in connection with a
plan of merger or other acquisition;
- Enter into a merger, share exchange, sale or acquisition of all
or substantially all of the assets or similar transaction where
the Umpqua shareholders would hold less than 50% of the voting
securities of the combined entity following the transaction;
- Nominate or solicit proxies for the election of nominees to
succeed a previous VRB-designated director; or
- Enact a resolution or amendment which would change the articles
of incorporation or bylaws of Umpqua or Umpqua Bank in a manner
that would reduce the percentage voting requirement or the
duration of these restrictions.
The following information is provided for all current Umpqua directors
and the current VRB directors who are proposed to serve on the combined Board of
Directors following the Merger.
Current Umpqua Directors
HAROLD L. BALL, age 62, has served as a Director since 1990. Mr. Ball is
the President and Chief Executive Officer of Orenco Systems, Inc., located in
Sutherlin, Oregon, that produces
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<PAGE> 45
hardware to implement filter and pressure sewer designs. Mr. Ball has 36 years
of civil engineering experience in public works and private practice.
RAYMOND P. DAVIS, age 50, serves as Director, President and Chief
Executive Officer of Umpqua. Mr. Davis has served as Director, President and
Chief Executive Officer of South Umpqua Bank since June, 1994. Prior to joining
South Umpqua Bank in 1994, he was President of US Banking Alliance in Atlanta,
Georgia, a bank consulting firm. He has 25 years experience in banking and
banking related industries.
RONALD O. DOAN, age 55, has served as a Director since 1995. Mr. Doan
currently is the Operations Officer for Cow Creek Government Offices.
Previously, Mr. Doan served as the General Business Director of Pacific Power
and Light Co., an electric utility company, for Mid and Southern Oregon and
Northern California. Mr. Doan has 31 years of management, sales and human
resources experience. Mr. Doan has served as President of the Douglas County
Industrial Development Board and the Roseburg Area Chamber of Commerce.
ALLYN C. FORD, age 58, serves as Chairman of the Board of Directors and
has served as a Director since 1971. Mr. Ford is President and General Manager
of Roseburg Forest Products, a company located in Roseburg, Oregon, that is a
fully integrated wood products manufacturer. Mr. Ford has over 29 years of
management experience with Roseburg Forest Products.
DAVID B. FROHNMAYER, age 59, has served as a Director since 1996. Mr.
Frohnmayer is the President of the University of Oregon in Eugene, and has
served in that capacity since 1994. He is the former Dean of the University of
Oregon School of Law and former State of Oregon Attorney General.
LYNN K. HERBERT, age 48, has served as a Director since 1993. Mr.
Herbert is Manager of Herbert Lumber Company in Riddle, Oregon, and has served
in that capacity since 1988. Mr. Herbert has over 19 years of management
experience with Herbert Lumber Company. Mr. Herbert is the son of Milton
Herbert, a significant shareholder and one of the founders of South Umpqua Bank.
NEIL D. HUMMEL, age 53, has served as a Director since 1986. Mr. Hummel
is the owner of and a broker with The Neil Company Realtors in Roseburg, Oregon.
He has over 20 years of experience as a real estate agent and broker.
FRANCES JEAN PHELPS, age 56, has served as a Director since 1997. Ms.
Phelps has served as the Executive Director of Relief Nursery, a private
nonprofit child abuse prevention agency in Eugene, Oregon, since 1984.
SCOTT CHAMBERS, age 40, has served as a Director since 1999. Mr.
Chambers is President of Chambers Communication Corp. of Eugene, Oregon, a
telecommunications company that owns and operates cable television systems,
network broadcast television stations, a film and video production company, and
an interest in a computer animation company. Mr. Chambers serves on the
Executive Board for CableLabs and is a board member of the National Cable
Television Association.
VRB Directors proposed to be elected to the Umpqua Board of Directors
[DELETE THOSE WHO WILL NOT SERVE ON NEW BOARD]
JAMES D. COLEMAN, age 61, serves as Chairman of Director the Board of
Directors. Mr. Coleman was previously a director of Medford State Bank which VRB
acquired in 1987. He is
39
<PAGE> 46
President and owner of Crater Lake Motors, a Ford and Mercedes automobile
dealership in Medford, Oregon.
JOHN O. DUNKIN, age 61, currently serves as Vice Chairman Director of
the Board of Directors. Mr. Dunkin is Chief Executive Officer of Grants Pass
Moulding, Rogue Valley Sash & Door, and Pacific Lumber, all located in Grants
Pass, Oregon.
MICHAEL DONOVAN, age 49. Mr. Donovan is co-owner of the Chateaulin
Director Restaurant & Wine Shoppe in Ashland, Oregon.
APRIL SEVCIK, age 53. Ms. Sevcik is the owner and President of Director
General Credit Service Inc. in Medford, Oregon.
GARY LUNDBERG, age 61. Mr. Lundberg was formerly an owner of Director
Lundberg's Funeral Home in Grants Pass, Oregon.
ROBERT J. DeARMOND, age 69. Mr. DeArmond formerly served (22 years) as
Director a director of Mountain States Savings Bank in Coeur d'Alene Idaho and
as Chairman of the Board of Idaho Forest Products until his retirement in 1995.
LARRY L. PARDUCCI, age 55. Mr. Parducci is the owner/operator of
Director Holiday RV Park in Phoenix, Oregon. Mr. Parducci also serves as mayor
for the city of Phoenix.
TOM ANDERSON, age 49. Mr. Anderson served as Executive Vice Director
President & Secretary for VRB Bancorp and Executive Vice President & Chief
Operating Officer for Valley of the Rogue Bank up until June 30, 1999. Mr.
Anderson has since established Tom Anderson Consulting Services, Inc. and works
with a number of independent businesses in the Rogue Valley
WILLIAM A. HADEN, age 51. Mr. Haden currently serves as President &
President and Director CEO for VRB Bancorp and President & CEO for Valley of the
Rogue Bank.
EXECUTIVE OFFICERS OF UMPQUA AND UMPQUA BANK
It is anticipated that each of the following persons will serve in the
designated capacity following the Effective Date. Three current VRB executives,
William Haden, Brad Copeland and Kathy Peckham, have entered into employment
contracts with Umpqua which, among other things, designate their titles,
compensation and responsibilities with respect to Umpqua and Umpqua Bank.
40
<PAGE> 47
UMPQUA
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
NAME POSITION PRESENT AFFILIATION
------------------------------------------------------------------------------------------------
<S> <C> <C>
Raymond P. Davis President, Chief Executive Officer Umpqua
William A. Haden Executive Vice President VRB
Daniel A. Sullivan Executive Vice President, Chief Umpqua
Financial Officer
Felice Belfiore Senior Vice President/Finance VRB
Lani MacCormack Vice President/Marketing Umpqua
------------------------------------------------------------------------------------------------
</TABLE>
UMPQUA BANK
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
NAME POSITION PRESENT AFFILIATION
------------------------------------------------------------------------------------------------
<S> <C> <C>
William A. Haden President, Chief Executive Officer VRB
Brad Copeland Executive Vice President/Chief VRB
Credit Officer
Steve May Executive Vice President/Retail Umpqua
Banking
Gary Pierpoint Senior Vice President/Business Umpqua
Development
Rodger Terrall Senior Vice President, Chief Umpqua
Lending Officer
Dolly Lusty Senior Vice President, Credit Umpqua
Administrator
Kathy Peckham Senior Vice President/Retail VRB
Banking, Southern Region
------------------------------------------------------------------------------------------------
</TABLE>
Current Umpqua Executive Officers
In addition to Mr. Davis, Umpqua's President and Chief Executive
Officer, whose background is identified above, the following are the other
current executive officers of Umpqua and Umpqua Bank.
DANIEL A. SULLIVAN, age 48, serves as Senior Vice President and Chief
Financial Officer of Umpqua. He has served as Senior Vice President and Chief
Financial Officer of South Umpqua Bank since 1997. Prior to that time, Mr.
Sullivan served as Vice President of Finance for Instromedix of Hillsboro,
Oregon (1997) and has also worked as Senior Vice President and Controller for US
Bancorp in Portland, Oregon (1983 to 1996).
STEVEN A. MAY, age 47, serves as Senior Vice President/Retail Banking of
South Umpqua Bank, a position he has held since 1994. Prior to that time, Mr.
May served as Vice President and District Manager of the US Bank of Oregon from
1988 to 1994, as the administrator of a group of four retail branches.
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<PAGE> 48
GERALD (GARY) L. PIERPOINT, age 61, was hired in 1996 as Senior Vice
President/Eugene Operations of South Umpqua Bank and has over 35 years of
banking experience. Mr. Pierpoint served as Vice President and Regional Manager
of the Bank of California in Eugene, Oregon (1989 to 1996) and as Regional Vice
President of First Interstate Bank (1983 to 1989).
RODGER L. TERRALL, age 45, serves as Senior Vice President / Chief
Lending Officer of South Umpqua Bank, a position held since October, 1996. He
previously was the head of commercial lending in Eugene for Union Bank of
California (1989-1996).
DORA (DOLLY) C. LUSTY, age 52, was hired in May 1997 and serves as
Senior Vice President/Credit Administrator of South Umpqua Bank. Mrs. Lusty was
a senior bank examiner for the State of Oregon serving in that capacity for six
years. Mrs. Lusty holds a Bank Management Diploma from the American Institute of
Banking, and she has attended numerous FDIC and Federal Reserve System
examination and credit schools.
LANI MACCORMACK, age 33, serves as Senior Vice President and Director of
Marketing for Umpqua. She has served in this position since 1998. Prior to that
time, Ms. MacCormack was an account executive with Cawood, an advertising and
public relations firm in Eugene, Oregon (1993-1998), and from 1990-1992 served
as Marketing Director for Fisko Magazine in San Francisco.
Current VRB Executive Officers
The following information regarding the other executive officers of VRB
who will become executive officers of Umpqua following the Merger.
WILLIAM A. HADEN, age 51, has served as President and Chief Executive
Officer of VRB and Valley of the Rogue Bank since January 1996. He served as
Senior Vice President of Valley of the Rogue Bank between 1996 and July 1993,
when he joined the bank. Prior to joining Valley of the Rogue Bank, Mr. Haden
served as President of Family Bank of Commerce, from 1985 until its merger into
Valley of the Rogue Bank in 1993.
BRAD COPELAND, age 51, has served as Executive Vice President and Credit
Administrator of VRB and its subsidiary Valley of the Rogue Bank since January
1998. Mr. Copeland served as Senior Vice President and Credit Administrator from
July 1997 through January 1998. Mr. Copeland was retained by Valley of the Rogue
Bank in October 1996 to fill the anticipated vacancy created by the retirement
of the bank's previous Senior Vice President and Credit Administrator. Prior to
joining Valley of the Rogue Bank Mr. Copeland served as Senior Vice President
and Senior Credit Officer for Bank of America Alaska (1987 to 1996).
FELICE BELFIORE, age 30, has served as Senior Vice President and Chief
Financial Officer of VRB and its subsidiary Valley of the Rogue Bank since
January 1998. Ms. Belfiore has also served as Secretary of Bancorp since July 1,
1999. She served as Vice President and Chief Financial Officer from June 1997
until January 1998. Prior to joining VRB, Ms. Belfiore, a certified public
accountant, was employed with Moss Adams LLP, a regional accounting and
consulting firm.
KATHY PECKHAM, age 41, has served as Senior Vice President and Corporate
Sales Manager of VRB and Valley of the Rogue Bank since January 1999. She served
as Vice President and Corporate Sales Manager from November 1996 to December
1998. Ms. Peckham joined Valley of the Rogue Bank in September 1995 as a
Commercial Lender and Business Development Officer.
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<PAGE> 49
CONDUCT OF BUSINESS PENDING THE MERGER
Umpqua and VRB have agreed that, prior to the Effective Date, each will
continue to conduct its respective business only in the ordinary course, and use
all reasonable efforts to preserve its present business organizations, retain
the current management, and preserve the goodwill of all persons with whom it
has business dealings. Umpqua and VRB have also agreed that, without the consent
of the other party, neither party will engage in transactions affecting its
capitalization, assets or obligations, including declaring extraordinary
dividends, stock splits or other recapitalizations, disposing of assets, making
material commitments, making or renewing any loan over $1,500,000 to any person
(or over $250,000 to any affiliate) without furnishing a copy of the loan report
to the other party within three business days following approval, or entering
into any other transaction or activity not in the ordinary course of business.
Umpqua is specifically permitted to pay its regular quarterly dividends of $0.04
per share with record dates of September and December 2000, and VRB is permitted
to pay its regular $0.12 per share semi-annual dividend with a record date in
October 2000.
NO SOLICITATIONS
The Merger Agreement provides that neither VRB, Umpqua nor their
respective Boards of Directors or agents may initiate contact with any person or
entity in an effort to solicit a merger, acquisition proposal or similar
transaction with another party. Further, neither party may provide non-public
information to any other person in connection with a possible alternative
transaction except to the extent specifically authorized by its board of
directors in good faith and in the exercise its fiduciary duties based upon
advice of its legal counsel. Each party must notify the other if it receives any
alternative acquisition transaction.
EMPLOYMENT RELATED MATTERS
Umpqua has agreed to provide VRB and Valley of the Rogue Bank employees
with compensation and benefits packages and employment terms no less favorable
than those made available to Umpqua and Umpqua Bank employees of similar tenure
and responsibilities. For purpose of participation in Umpqua bonus plans, profit
sharing plans and arrangements, or similar benefits, VRB and Valley of the Rogue
Bank employees will receive credit for length of service and will be entitled to
participate in bonus compensation plans and awards following the Effective Date.
CONDITIONS TO THE MERGER
The Merger is subject to certain conditions set forth in the Merger
Agreement. In the event that those conditions remain unsatisfied and the Merger
has not been completed by March 31, 2001, the Agreement may be terminated by
either party.
The Merger can only occur if:
- VRB's and Umpqua's shareholders approve the Merger at their
respective special shareholders' meetings;
- The FDIC and the Oregon Director approve the Merger of the two
subsidiary banks;
- Umpqua receives an order of registration from the Oregon
Director covering the shares of Umpqua stock to be issued in the
Merger; and
- Umpqua receives a waiver of jurisdiction from the Federal
Reserve Board under the Bank Holding Company Act of 1956.
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<PAGE> 50
Umpqua has filed applications or waiver requests with all regulatory
agencies and expects to receive the necessary approvals in due course.
Certain other conditions must be satisfied or waived, and other events
must occur before the parties will be obligated to complete the Merger. Each
party's obligations are conditioned on satisfaction by the other parties of
their obligations under the Merger Agreement and other conditions. Specifically,
these obligations and conditions include:
- The representations and warranties given by each party are true
in all material respects as of the effective date of the Merger,
and each party has complied with its covenants in the Agreement;
- There has been no material adverse change in the business or
financial condition of either party;
- The parties have provided one another with opinions of experts
with respect to certain tax treatment and legal matters,
accounting and fairness; and
- There are no actions or proceedings commenced or threatened
against any party to restrain, prohibit or invalidate the
Merger.
WAIVER OF CONDITIONS; AMENDMENT OR TERMINATION OF THE MERGER AGREEMENT
Waiver. The Merger Agreement provides that VRB or Umpqua may waive any
condition precedent to its own obligations under the Merger Agreement, including
any default in performance of any obligation of the other or the time for
compliance or fulfillment of any obligation of the other, provided that such a
waiver is permitted by law.
Amendment. The Merger Agreement may be amended at any time prior to the
Effective Date upon approval of each party's Board of Directors; however no
increase in the Exchange Ratio beyond 0.8500 can be made without the approval of
Umpqua shareholders and no decrease in the Exchange Ratio below 0.8135 can be
made without the approval of VRB shareholders.
Termination. The Merger Agreement may be terminated, and the Merger
abandoned, at any time prior to the Effective Time:
(a) By the mutual consent of both VRB and Umpqua for any
reason;
(b) By either VRB or Umpqua any time after March 31, 2001,
if the Merger has not been consummated by the date
through no fault of the terminating party;
(c) By either VRB or Umpqua in the event of a material
breach by the other party of its representations,
warranties, covenants, or agreements contained in the
Merger Agreement;
(d) By VRB or Umpqua upon advice of their respective legal
counsel that the fiduciary duties of the directors of
such company require that the company do so (a
"Fiduciary Out");
(e) By VRB if (i) the twenty day average closing price of
Umpqua common stock ten days prior to the anticipated
Effective Date is less than $6.75, and (ii) the
difference between such average closing price and $8.15,
expressed as a percentage of $8.15, is more than ten
percentage points greater than the change in the Nasdaq
Bank Index and Umpqua elects not to increase the
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<PAGE> 51
Exchange Ratio (see "THE MERGER - Conversion of VRB
Common Stock"); or
(f) By VRB if (i) the average closing price (as determined
above) of Umpqua common stock is less than $6.10 and
(ii) the decline in the average price of Umpqua common
stock, expressed as a percentage of $8.15, exceeds the
change in the Nasdaq Bank Index by more than ten
percentage points.
Effect of Termination. If the Agreement is terminated as a result of a
party's shareholders' failure to approve the Merger or the exercise of a
Fiduciary Out by such party, that party must pay the reasonable expenses
incurred by the other party in connection with negotiating and performing its
obligations under the Agreement. In addition, if the Agreement is terminated
because of a Fiduciary Out or failure to obtain shareholder approval, and the
terminating party enters into an alternative acquisition transaction (as
defined) prior to December 31, 2001 and (i) the alternative acquisition
transaction had been proposed prior to the date of the special shareholders'
meeting or (ii) at the time of the shareholder meeting the terminating company
or its directors had materially failed to comply with their covenants under the
Merger Agreement, that party will pay a $3,000,000 termination fee to the
non-terminating party. If the non-terminating party exercises the stock option
agreement, it would waive the right to receive the additional cash payment (see
"THE MERGER - Umpqua and VRB Stock Option Agreements").
EFFECTIVE DATE OF THE MERGER
The Merger will become effective when Umpqua files the articles of
merger with the Secretary of State of the State of Oregon. The Effective Date
will occur as promptly as practical after the date upon which all the conditions
to the Merger are satisfied or duly waived or at such time and date as VRB and
Umpqua agree. The parties currently anticipate that the Merger will be completed
prior to year-end 2000.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
General. Certain members of management, and certain members of the VRB
and Umpqua Board of Directors, may be deemed to have interests in the Merger in
addition to their interests as shareholders. The Board of Directors of VRB and
of Umpqua were aware of these interests and considered them, among other
matters, in approving the Merger.
Continuation of Certain Persons as Directors and Executive Officers. The
Merger Agreement provides that six current Umpqua directors and five current VRB
directors will serve after the Effective Date as directors of Umpqua and Umpqua
Bank. Those individuals are identified above under "THE MERGER -- Board of
Directors and Certain Executive Officers of the Combined Company." Also as noted
elsewhere, all the executive officers of both companies are expected to continue
following the Effective Date, some with new titles and responsibilities and at
higher compensation levels as noted below.
Executive Employment Agreements. Pursuant to the recommendation of
management of Umpqua, and upon the approval of the respective Boards of
Directors of Umpqua and VRB, Umpqua has entered into executive employment
agreements with three VRB executives, William A. Haden, Brad Copeland and Kathy
Peckham. The employment agreements are conditioned upon completion of the Merger
and will become effective as of the Effective Date, replacing their current
employment or severance agreements.
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<PAGE> 52
Each new executive employment agreement provides that the executive
shall be employed for a two year term following the Effective Date in the
position specified above. Messrs. Haden and Copeland will receive base salaries
of $192,300 and $166,700 a year, respectively, and Ms. Peckham will receive a
base salary of $83,300 per year. Although Felice Belfiore has elected not to
enter into an employment agreement with Umpqua, she will continue as an employee
of the surviving company and her base salary will be $91,700. In addition, Mr.
Haden will have an opportunity to earn up to 30% of his base salary each year as
a cash bonus pursuant to an incentive compensation plan to be developed and
approved by the Umpqua Board of Directors. Mr. Copeland, Ms. Belfiore and Ms.
Peckham have an opportunity to earn up to 20% of their base salaries as a cash
bonus pursuant to that plan. The employment agreements also provide for other
perquisites consistent with those afforded to Umpqua's other senior executives
and relocation expenses for those required to move.
Under the employment agreements, if an executive's employment is
terminated prior to the expiration of the two year term without cause (as
defined) or terminated by the executive for good reason (as defined), the
executive will be entitled to one year's compensation, paid monthly, so long as
the executive does not compete (as defined) with Umpqua during that payment
period. Executives are also entitled to a severance equal to three months base
salary (six months with respect to Mr. Haden) if the executive terminates
employment for any reason between 180 days and one year after the Effective
Date. Any severance payment would be conditioned upon the executive not
competing with Umpqua during the payment period.
The employment agreements also provide for severance payments under
certain circumstances in connection with a change of control (as defined) after
the initial term of their employment contract. Generally, if the executive is
terminated without cause, or the executive terminates his or her employment for
good reason, the executive is entitled to severance equal to one years'
compensation (six month's compensation if the termination occurs more than six
months, after the change of control). The executive is also entitled to
severance payments of three month's compensation (six months with respect to Mr.
Haden) if the executive voluntarily resigns between 180 days and one year after
the date of the change of control. The executive would be entitled to severance
only if they do not compete with Umpqua or its successor during the payment
period. Severance payable upon voluntary resignation would be extended to an
additional three months (six months with respect to Mr. Haden) if the executive
is not employed during that extended severance period.
Control Payment and Accelerated Right to Exercise Stock Options.
Pursuant to William A. Haden's current employment contract, he is entitled to a
payment of $188,000 in the event of a change of control. Completion of the
Merger would be a change of control, and Mr. Haden will be entitled to receive
payment on or immediately after the Effective Date. Further, certain stock
option agreements held by Mr. Haden, Brad Copeland and Felice Belfiore permit
them to exercise their outstanding stock options not otherwise vested in the
event of a change of control. With respect to Mr. Haden, this early right to
exercise would apply to 80,538 shares at an average exercise price of $5.22,
with respect to Mr. Copeland and Ms. Belfiore, 20,800 shares at an exercise
price of $8.17. If these executives choose not to exercise their stock options
at the Effective Date, the options would revert to their existing vesting
schedule and would convert to options to purchase Umpqua stock in the same
manner as other VRB options. With respect to all other options outstanding under
the VRB stock option plans, the VRB Board of Directors could permit the grantees
a 30 day period prior to the Effective Date to exercise all stock options
(vested or not) in lieu of any continuing rights under the outstanding option
agreements. However, such
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<PAGE> 53
an election by the Board of Directors might preclude the ability of the Merger
to be accounted for under the pooling-of-interest methods and as a result, the
Board has indicated they do not intend to make such an election.
COMMITMENTS OF DIRECTORS
Each VRB and Umpqua director has agreed to use his or her best efforts
to complete the Merger, recommend (subject to their fiduciary duties) approval
of the Merger by their shareholders and vote all their shares in favor of the
Merger. Further, except with the consent of Umpqua, each non-employee director
has agreed that for two years following service on the Board of Directors of
Umpqua or VRB, he or she will not be associated in any way with any financial
institution with branches competitive with Umpqua or with respect to directors
not serving after the Effective Date, competition with the branches of either
South Umpqua Bank or Valley of the Rogue Bank, as the case may be. Umpqua has
granted limited exceptions to these obligations for two VRB directors, April
Sevcik and Thomas Anderson. Each of the Umpqua and VRB Directors has also agreed
to vote all his or her shares for the Merger and in favor of the director
candidates nominated by the Umpqua Board of Directors for election or
re-election in accordance with the Merger Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a tax-free reorganization under
Section 368(a)(1)(A) of the Internal Revenue Code for federal income tax
purposes. A condition of the Merger is a receipt by the parties of an opinion
from Foster Pepper & Shefelman LLP that the Merger will constitute a tax-free
reorganization for federal and Oregon income tax purposes. That opinion will not
bind the Internal Revenue Service or preclude the Internal Revenue Service from
adopting a contrary position. The opinion will be based upon certain facts and
assumptions and specific representations and assurances made by Umpqua and VRB.
The federal income tax discussion set forth below may not apply to
particular categories of Umpqua and VRB shareholders subject to special
treatment under the federal income tax laws, such as foreign holders, and
shareholders whose stock was acquired as compensation. In addition, there may be
relevant state, local or other tax consequences, none of which are described
below. Shareholders are urged to consult their tax advisors to determine the
specific personal tax consequences of the Merger, including the applicability
and effect of foreign, state, local and other tax laws.
The Foster Pepper & Shefelman LLP opinion will state that the
transaction contemplated by the Merger Agreement will be a reorganization within
the meaning of Section 368(a) of the Code; that the parties to the Agreement and
to the Plans of Merger will each be "a party to a reorganization" within the
meaning of Section 368(b) of the Code; that no taxable gain or loss will be
recognized by the shareholders of VRB; that the basis in the Umpqua common stock
to be received by the recipients will be the same as the basis in their VRB
common stock; and that, provided the stock exchanged was held as a capital asset
on the Effective Date, the holding period of the Umpqua common stock to be
received will include the holding period of the VRB common stock previously
held, prior to the Effective Date.
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for as a
pooling-of-interests for accounting and financial reporting purposes. Under this
method of accounting, recorded assets and liabilities of Umpqua and VRB are
carried forward at their previously recorded amounts; income of the combined
company will include income of Umpqua and VRB for the entire year in which the
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<PAGE> 54
Merger occurs; and the reported income of the separate companies for prior
periods will be combined. No recognition or amortization of goodwill arising
from the Merger is required of any party to the Merger. Under the Merger
Agreement, it is a condition to the obligations of the respective parties to
consummate the Merger that they shall have received a letter from Deloitte &
Touche LLP that the Merger will qualify for pooling-of-interests treatment.
The unaudited pro forma combined financial information contained in this
Proxy Statement has been prepared using the pooling-of-interests accounting
method to account for the Merger. See "Unaudited Pro Forma Combined Financial
Statements"
NO DISSENTERS' RIGHTS
Under applicable Oregon law, shareholders do not have the right to
dissent from the Merger and obtain payment for the appraised value of their
shares.
RESALES OF STOCK BY AFFILIATES OF VRB
The Umpqua common stock to be issued in the Merger will be freely
transferable by VRB shareholders, except for those persons deemed to be VRB
affiliates (controlling persons), such as all directors, executive officers and
holders of more than 10% of VRB's outstanding stock immediately prior to the
Merger. VRB affiliates may not sell their Umpqua shares received in the Merger
except pursuant to an effective registration statement under the Securities Act
of 1933, as amended, or pursuant to the provisions of Rules 144 and 145 under
the Securities Act, unless in the opinion of counsel reasonably satisfactory to
Umpqua, those shares may be sold pursuant to an exemption from registration.
In addition, to permit the Merger to be accounted for as a
pooling-of-interests, VRB affiliates may not sell any of their VRB shares for a
period beginning 30 days prior to and continuing through the effective date of
the Merger, nor may they sell any Umpqua shares received in the Merger until
after Umpqua publishes financial results covering at least 30 days of combined
operations. Certificates issued in the Merger to VRB affiliates will bear
legends reflecting those restrictions.
EXPENSES
The Merger Agreement provides, in general, that VRB and Umpqua will each
pay their own expenses in connection with the Merger including fees and expenses
of their own financial and other consultants, accountants, and counsel except
under certain termination events. Upon completion of the Merger, other expenses,
including severance payments, will be incurred paid by the combined company.
UMPQUA AND VRB STOCK OPTION AGREEMENTS
At the time the Merger Agreement was signed, Umpqua executed and
delivered the Umpqua Option Agreement, pursuant to which Umpqua granted VRB an
option to purchase up to 19.9% of the outstanding Umpqua common stock under
specified conditions. At the same time, VRB executed and delivered the VRB
Option Agreement, pursuant to which VRB granted to Umpqua an option to purchase
up to 19.9% of the outstanding shares of VRB common stock under specified
conditions. Umpqua and VRB approved and entered into the Option Agreements to
induce each other to enter into the Merger Agreement. One effect of the Option
Agreements is to increase the likelihood that the Merger will be consummated by
making it more difficult and more expensive for another party to obtain control
of or acquire either Umpqua or VRB. Umpqua and VRB believe that the exercise of
an Issuer Option (as defined below) would likely bar any acquiror
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<PAGE> 55
of the Issuer (as defined below) from accounting for an acquisition of, or
merger with, the Issuer using the pooling-of-interests accounting method for a
period of up to two years.
Except as otherwise noted below, the terms and conditions of the Option
Agreements are identical in all material respects. For the purposes of this
section, except as otherwise noted, (a) Umpqua and VRB, as issuer of their
common stock upon exercise of the Umpqua Option and the VRB Option,
respectively, are sometimes individually referred to as the "Issuer," (b) Umpqua
and VRB, as the holder of the VRB Option and the Umpqua Option, respectively,
are sometimes individually referred to as the "Optionee," (c) each of the
options granted under the respective Option Agreements is sometimes referred to
as the "Issuer Option," and (d) Umpqua common stock and VRB common stock are
sometimes individually referred to as the "Issuer common stock."
The Umpqua Option provides for the purchase by VRB of up to 1,517,500
shares (the "Umpqua Option Shares" or the "Issuer Option Shares," as the case
may be) of Umpqua common stock at an exercise price of $8.15 per share (the
average of the closing prices per share of Umpqua common stock for the twenty
trading days ended on August 11, 2000), subject to adjustment as provided in the
option agreement, payable in cash. The Umpqua Option Shares would represent
approximately 19.9% of the Umpqua common stock issued and outstanding on August
14, 2000.
The VRB Option provides for the purchase by Umpqua of up to 1,653,450
shares (the "VRB Option Shares" or the "Issuer Option Shares," as the case may
be) of VRB common stock at an exercise price of $5.07 per share (the average of
the closing prices per share of VRB common stock for the twenty trading days
ended on August 11, 2000), subject to adjustment as provided in the option
agreement, payable in cash. The VRB Option Shares would represent approximately
19.9% of the VRB common stock issued and outstanding on August 14, 2000.
The number of shares and option price of Issuer common stock subject to
the Issuer Option would be appropriately adjusted in the event of any stock
dividends, split-ups, mergers, recapitalization, combinations, subdivisions,
conversions, exchanges of shares, or the like, relating to the Issuer.
The Optionee or any other holder or holders of the Issuer Option (as
used in this section, collectively, the "Holder") may exercise the Issuer
Option, in whole or in part, subject to regulatory approval and certain notice
requirements if:
- The Issuer or its Board of Directors enters into an
agreement or recommends to their shareholders an
agreement which would result in an acquisition or merger
of the Issuer or any of its assets or securities, the
result of which the Issuer's shareholders would hold
less than 50% of the stock of the surviving company;
- Any person who does not currently own 10% of the Issuer
acquires beneficial ownership of more than 10% of the
voting securities of the Issuer (25% if "control" is not
presumed); or
- With certain exceptions, the Issuers' Board of Directors
fails to recommend or withdrawals its recommendation of
the Merger or the shareholders of the Issuer fail to
approve the Merger after a person announces publicly or
communicates in writing an alternative acquisition
transaction (as defined) or communicates an intention to
acquire
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<PAGE> 56
25% or more of the voting shares of the Issuer or
substantially change the composition of its Board of
Directors.
The Optionee cannot exercise the Option Agreement if the Optionee has
elected to receive the three million dollar ($3,000,000) termination fee
provided for in the Merger Agreement.
HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give
effect to the Merger of Umpqua and VRB on a pooling-of-interests basis. The
unaudited pro forma combined balance sheet assumes the Merger took place on June
30, 2000. The unaudited pro forma combined statements of income assume the
Merger was consummated as of the beginning of the first period presented.
These unaudited pro forma combined financial statements should be read
in conjunction with the historical financial statements and the related notes
thereto to Umpqua and VRB included in this Proxy Statement.
The unaudited pro forma statements of income are not necessarily
indicative of operating results which would have been achieved had the Merger
been consummated as of the beginning of the first period presented and should
not be construed as representative of future operations.
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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
Historical
-------------------------
Umpqua Adjustments
Holdings VRB Related to Pro Forma
(in thousands) Corporation Bancorp the Merger Combined
-------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Cash and balances due from banks $ 58,193 $ 17,723 $ 75,916
Investment securities held to maturity -- 17,243 17,243
Investment securities available-for-sale at fair value 71,579 53,988 125,567
Trading accounts assets 1,066 -- 1,066
Loans receivable 265,013 219,019 484,032
Less: Allowance for loan losses (3,770) (3,494) (7,264)
Federal Home Loan Bank stock, at cost 2,423 1,960 4,383
Premises and equipment, net 9,550 7,854 (300)(B) 17,104
Intangible assets 2,257 8,442 10,699
Accrued interest receivable 2,494 1,910 4,404
Other assets 2,272 1,950 4,222
--------- --------- --------- ---------
$ 411,077 $ 326,595 $ (300) $ 737,372
--------- --------- --------- ---------
Demand, non interest-bearing $ 69,082 $ 81,632 $ 150,714
Demand, interest-bearing 154,272 133,749 288,021
Time deposits 121,247 63,696 184,943
--------- --------- --------- ---------
Total deposit liabilities 344,601 279,077 623,678
Borrowed funds 25,263 11,000 36,263
Accrued interest payable 604 252 856
Other liabilities 1,729 1,340 1,320(B) 4,389
--------- --------- --------- ---------
Total liabilities 372,197 291,669 665,186
Common stock 25,824 18,686 4,183(C) 48,693
Retained earnings 14,798 17,891 (1,620)(B) 26,886
(4,183)(C)
Unrealized loss on available for sale securities (1,742) (1,651) (3,393)
--------- --------- --------- ---------
Total equity 38,880 34,926 72,186
--------- --------- --------- ---------
$ 411,077 $ 326,595 $ (300) $ 737,372
--------- --------- --------- ---------
</TABLE>
51
<PAGE> 58
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Historical
----------------------
Umpqua
Holdings VRB Pro Forma
(in thousands except per share amounts) Corporation Bancorp Combined
-------------------------------------- ----------- -------- ---------
<S> <C> <C> <C>
Interest and fee income on loans $11,842 $ 9,387 $21,229
Interest on taxable investment securities 2,087 1,766 3,853
Interest on tax exempt investment securities 529 460 989
------- ------- -------
Total interest income 14,458 11,613 26,071
Interest on demand deposits 1,468 1,657 3,125
Interest on savings accounts 198 234 432
Interest on time deposits 2,840 1,489 4,329
Interest on borrowed funds 918 111 1,029
------- ------- -------
Total interest expense 5,424 3,491 8,915
Provision for loan losses 1,034 - 1,034
------- ------- -------
Net interest income after provision for loan losses 8,000 8,122 16,122
Non interest income
Service fees 1,591 707 2,298
Brokerage commissions and fees 2,740 - 2,740
Gain in sale of mortgaging rights - - -
Loss on sale of investment securities - - -
Other 372 509 881
------- ------- -------
Total non interest income 4,703 1,216 5,919
Non interest expense
Salaries and benefits 4,815 3,193 8,008
Occupancy and equipment expense 1,140 734 1,874
Intangible amortization 112 376 488
Communications 448 299 747
Marketing 358 162 520
Professional services 979 87 1,066
Supplies 231 120 351
Other 426 466 892
------- ------- -------
Total non interest expense 8,509 5,437 13,946
Income before provision of income taxes 4,194 3,901 8,095
Provision for income taxes 1,495 1,443 2,938
------- ------- -------
Net income $ 2,699 $ 2,458 $ 5,157
======= ======= =======
Earnings per common share
Basic $ 0.35 $ 0.30 $ 0.36
Diluted $ 0.35 $ 0.30 $ 0.36
</TABLE>
52
<PAGE> 59
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Historical
---------------------
Umpqua
Holdings VRB Pro Forma
(in thousands except per share amounts) Corporation Bancorp Combined
-------------------------------------- ----------- ------- ---------
<S> <C> <C> <C>
Interest and fee income on loans $ 8,947 $ 8,526 $17,473
Interest on taxable investment securities 2,313 2,141 4,454
Interest on tax exempt investment securities 405 462 867
------- ------- -------
Total interest income 11,665 11,129 22,794
Interest on demand deposits 1,425 1,443 2,868
Interest on savings accounts 204 242 446
Interest on time deposits 1,700 1,457 3,157
Interest on borrowed funds 648 - 648
------- ------- -------
Total interest expense 3,977 3,142 7,119
Provision for loan losses 655 - 655
------- ------- -------
Net interest income after provision for loan losses 7,033 7,987 15,020
Non interest income
Service fees 1,396 630 2,026
Brokerage commissions and fees 190 - 190
Gain in sale of mortgaging rights - - -
Loss on sale of investment securities - - -
Other 349 358 707
------- ------- -------
Total non interest income 1,935 988 2,923
Non interest expense
Salaries and benefits 2,612 3,077 5,689
Occupancy and equipment expense 800 582 1,382
Intangible amortization - 377 377
Communications 352 280 632
Marketing 361 187 548
Professional services 675 88 763
Supplies 144 125 269
Other 306 370 676
------- ------- -------
Total non interest expense 5,250 5,086 10,336
Income before provision of income taxes 3,718 3,889 7,607
Provision for income taxes 1,342 1,460 2,802
------- ------- -------
Net income $ 2,376 $ 2,429 $ 4,805
======= ======= =======
Earnings per common share
Basic $ 0.31 $ 0.28 $ 0.33
Diluted $ 0.30 $ 0.28 $ 0.32
</TABLE>
53
<PAGE> 60
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Historical
----------------------
Umpqua
Holdings VRB Pro Forma
(in thousands except per share amounts) Corporation Bancorp Combined
-------------------------------------- ----------- ------- ---------
<S> <C> <C> <C>
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
</TABLE>
54
<PAGE> 61
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Historical
----------------------
Umpqua
Holdings VRB Pro Forma
(in thousands except per share amounts) Corporation Bancorp Combined
-------------------------------------- ----------- ------- ---------
<S> <C> <C> <C>
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
</TABLE>
55
<PAGE> 62
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Historical
------------------------
Umpqua
Holdings VRB Pro Forma
(in thousands except per share amounts) Corporation Bancorp Combined
-------------------------------------- ----------- -------- ----------
<S> <C> <C> <C>
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
</TABLE>
56
<PAGE> 63
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.
UMPQUA HOLDINGS CORPORATION
2000 STOCK OPTION PLAN
APPROVAL OF 2000 STOCK OPTION PLAN BY UMPQUA SHAREHOLDERS
In 1995, Umpqua adopted, and its shareholders approved, the 1995 Stock
Option Plan that provided for the grant of options to employees, directors and
other individuals who provide services of value to Umpqua. To date, Umpqua has
used that plan solely to grant non-statutory stock options (options that do not
qualify as incentive stock options under the Internal Revenue Code) to executive
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<PAGE> 64
officers and a other key employees. The 1995 Plan authorized the issuance of up
to 1,150,000 shares, adjusted for previous stock splits, but in no event may
options exceed 10% of the shares issued and outstanding at the time of a grant.
On the Effective Date, there will be approximately 234,000 shares
available for future grants after substitute options are issued to the VRB
option holders pursuant to the Merger Agreement. The remaining authorized shares
would be expected to be exhausted in the near future. Accordingly, Umpqua's
Board of Directors believes it necessary and appropriate to provide for
additional shares for which options may be granted in the future. Further, the
1995 Plan was adopted before the company had become a SEC reporting company and
does not include provisions considered appropriate for plans of public
companies. Accordingly, the Board of Directors has approved the new plan to be
effective immediately following the Effective Date of the Merger. At that time,
the 1995 Stock Option Plan would be terminated and no future grants would be
made under the 1995 Plan.
Umpqua believes that it is important and beneficial to the company to
give employees an opportunity to participate in the ownership of the company.
Equity compensation, in addition to regular salaries, enables Umpqua to attract
and retain highly qualified employees in a competitive market. Stock options
provide employees with incentives to increase productivity and profitability,
thereby enhancing shareholder value. A new stock option plan will permit the
company to continue the program of equity participation and long term
incentives.
The Umpqua's Board of Directors has approved, and is recommending to its
shareholders, the adoption of the 2000 Stock Option Plan. The more important
features of the plan are discussed below, but you should read the entire plan
before you vote. A copy of the 2000 Plan is attached as Appendix IV to this
Proxy Statement.
The 2000 Plan provides for the issuance of up to 1,000,000 shares of
common stock upon exercise of incentive stock or nonqualified stock options. In
the event any option granted expires without being exercised, the unexercised
shares formerly subject to that option would again become available for options
to be granted. The 2000 Plan further provides that no grants may be made when
the total options outstanding on the Effective Date plus the future grants under
the 2000 Plan exceed 10% of the then-outstanding shares.
The 2000 Plan will become effective immediately following the Effective
Date of the Merger, subject to approval by Umpqua shareholders, and will
terminate 10 years thereafter. No further options would be granted under the
existing 1995 Plan. The Plan will be administered by a committee of the Board of
Directors or, if no committee is appointed, by the full Board of Directors.
Each person receiving an option must execute a written agreement which
sets forth the terms and conditions of the option. Options are exercisable for a
set period of time not to exceed ten years from the date of the grant, and may
be subject to a vesting schedule, becoming incrementally exercisable over a
period of time.
In the event of a transaction involving a change of control of the
company, such as a merger or acquisition in which the company's shareholders own
less than a majority of the shares outstanding after the transaction, option
holders would be immediately entitled to exercise all of their options,
notwithstanding any vesting schedule, unless the terms of the transaction make
adequate provision for the continuation of the rights of such option holders.
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<PAGE> 65
Options may be exercised only while the recipient is employed or is
serving as a director, or within 30 days after termination of service unless the
person is disabled or dies, in which case all options terminate after one year
from the date of the disability or death. Options are not transferable except
(i) by will or the laws of descent and distribution, or (ii) with respect to
nonqualified stock options, by gift to family members with the consent of the
committee.
Options are designated as either "Incentive Stock Options," as defined
in Section 422 of the Internal Revenue Code, or "Nonqualified Stock Options" and
are exercisable at a per share price not less than 100% of the fair market value
of the common stock on the date of the grant. Incentive stock options granted to
any person with a beneficial ownership of 10% or more of the outstanding shares
must be exercisable at a per share price not less than 110% of the fair market
value of the common stock on the date of the grant. The 2000 Plan permits, at
the discretion of the committee, the option holder to pay the exercise price of
any options with cash, company stock held by the option holder for at least six
months, or by the application of shares that could be received upon exercise of
the options (a "net" exercise) with such shares valued at the difference between
the option exercise price and the fair market value of the underlying shares.
The 2000 Plan also permits broker-assisted cashless exercises of stock options.
Nonqualified stock options do not result in income to the grantee under
federal income tax law currently in effect until the option is exercised. At the
time of exercise of a nonqualified stock option, the recipient of the option
will realize ordinary income, and the company will be entitled to a deduction
for tax purposes, in the amount by which the market value of the shares issued
on exercise of the option exceeds the exercise price.
Incentive stock options have no tax consequences for the option
recipient or the company upon grant or exercise, except for possible application
to the option recipient of the alternative minimum tax under certain
circumstances. Upon sale of the shares received from the exercise of incentive
stock options, any gain realized is treated as capital gain if two years have
elapsed from the date of the grant and one year has elapsed from the date of
exercise. If these holding periods are not satisfied, the sale is deemed a
disqualifying disposition, and that portion of any gain realized, which is
represented by the difference between the exercise price and the fair market
value of the shares as of the date of exercise of the option, is treated as
ordinary income and the company will be entitled to a corresponding compensation
expense deduction for income tax purposes if certain conditions are satisfied.
INFORMATION ABOUT UMPQUA
INTRODUCTION
Umpqua Holdings Corporation was formed in March 1999 to be a holding
company of South Umpqua Bank. In March 2000, Umpqua became a financial holding
company under the newly enacted Gramm-Leach-Bliley Act. As a financial holding
company, Umpqua may engage in non-banking activities such as securities and
insurance sales, without further approval from the Federal Reserve Board.
Umpqua, headquartered in Roseburg, Oregon, engages primarily in the
business of commercial and retail banking and the delivery of retail brokerage
services. It provides a wide range of banking, asset management, mortgage
banking, and other financial services to corporate, institutional and individual
customers through its wholly owned banking subsidiary South Umpqua Bank. It also
provides retail investment brokerage service through its wholly owned subsidiary
59
<PAGE> 66
Strand, Atkinson, Williams & York, Inc. Umpqua and its subsidiaries are subject
to the regulations of certain national and state agencies and undergo periodic
examinations by those regulatory agencies.
South Umpqua Bank is one of the most innovative community banks in the
United States, combining a retail product delivery approach with an emphasis on
quality-assured personal service. South Umpqua is the fourth largest community
bank in the state of Oregon, currently operating 14 full-service stores (or
branches) in Douglas, Lane, Marion and Multnomah Counties in Oregon. At June 30,
2000, South Umpqua had assets of $411 million and deposits of $345 million.
Since 1995, South Umpqua has transformed itself from a traditional
community bank into a community-oriented financial services retailer by
implementing a variety of retail marketing strategies to increase revenue and
differentiate itself from its competition. To establish itself as a financial
services retailer, South Umpqua has remodeled most of its branches to resemble
retail stores. These new stores incorporate "serious about service centers" that
are the focal point for customer information, and "investment opportunity
centers" providing broker-dealer services and featuring financial and investment
information in a multimedia format. The bank has introduced smaller, 1,100
square foot "neighborhood stores," which are lower cost, new format stores
located in residential areas. To monitor the quality of its customer service,
South Umpqua introduced a "return on quality" program for its sales associates
and implemented an in-house "banking college" to train its personnel in
cross-selling and effective customer service.
Strand, Atkinson, Williams & York, Inc., a registered broker-dealer and
investment advisor with offices in Portland, Salem, Eugene, Roseburg and
Medford, offers a full range of investment products and services including:
stocks; fixed income securities (municipal, corporate, and government bonds,
CDs, money market instruments); mutual funds; annuities; options; retirement
planning; money management services; and life insurance, disability insurance
and medical supplement policies.
BUSINESS STRATEGY
Umpqua's objective is to become the leading community-oriented financial
services retailer throughout Oregon. It intends to continue to grow its assets
and increase profitability and shareholder value by differentiating itself from
its competitors through the following strategy:
Capitalize On Its Innovative Product Delivery System. Umpqua's
philosophy has been to develop an environment for the customer that makes the
customer's banking experience an enjoyable one. With this approach in mind,
South Umpqua developed a prototype store that offers "one-stop" shopping and
that includes distinct physical areas or boutiques, such as a "serious about
service center," an "investment opportunity center" and a "computer cafe," which
make the bank's products and services more tangible and accessible. South
Umpqua's initial prototype store was opened in 1996 in Roseburg, Oregon, a
community with historically low deposit growth. This new store, nevertheless,
captured $12 million in deposits from competitors by the end of its first year
of operation. On the basis of this initial success, the bank opened four
additional stores featuring the new format during 1997, two additional stores in
1999, and plans to open additional stores in the near future.
Deliver Superior Quality Service. Umpqua has insisted on quality service
as an integral part of the company's culture, from the Board of Directors to new
sales associates. South Umpqua believes it was among the first banks to
introduce a measurable quality service program. Under its "return on quality"
program introduced in 1995, each sales associate's and store's performance is
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<PAGE> 67
evaluated monthly based on specific measurable factors such as the "sales
effectiveness ratio" that totals the average number of banking products
purchased by each new customer. The evaluations also encompass factors such as
the number of referrals generated for the sale of investment products, the
number of new loans and deposits generated in each store, reports by incognito
"mystery shoppers" and customer surveys. Based on scores achieved, the "return
on quality" program rewards both individual sales associates and store teams
with financial incentives. Through such programs, the bank believes it can
measure the quality of service provided to its customers and maintain employee
focus on quality customer service.
Establish Strong Brand Awareness. As a financial services retailer,
Umpqua has devoted considerable resources to developing the "South Umpqua Bank"
brand. This campaign has included the redesign of the Umpqua's corporate logo to
emphasize its geographical origin, and promotion of the "South Umpqua Bank"
brand in advertising and merchandise bearing the South Umpqua Bank logo, such as
coffee beans, mugs, tee-shirts, hats and umbrellas. The store's unique "look and
feel" and innovative product displays help position South Umpqua as an
innovative, customer friendly retailer of financial products and services.
Umpqua believes it can build consumer preference for its products and services
through high quality service and strong brand awareness.
Use Technology to Expand Customer Base. Although Umpqua's strategy will
continue to emphasize superior personal service, the bank will also continue to
expand user-friendly, technology-based systems to attract customers that may
prefer to interact with their financial institution electronically. Over the
past years, it has introduced technology-based services which include voice
response banking, debit cards, automatic payroll deposit programs, a "bank@home"
program, automated loan machines, advanced function ATMs and an internet web
site. Umpqua believes the availability of both traditional bank services and the
newer electronic banking services will enhance its ability to attract a broad
range of customers.
Increase Market Share in Existing Markets and Expand Into New Markets.
As a result of its innovative retail product orientation, measurable quality
service program and strong brand awareness, Umpqua believes that there is
significant potential to increase business with current customers, to attract
new customers in its existing markets and to enter new markets. Since its
introduction of these programs, South Umpqua has experienced significant growth
in deposits within Douglas County, increasing its share of commercial bank
deposits from 21.1% at June 30, 1995 to 31.5% at June 30, 2000. In July 1996,
South Umpqua opened its first store in Eugene, Oregon, and as of June 30, 2000,
had four new-format stores in the Eugene market with total deposits of $89.0
million. Within the last year, Umpqua opened new stores in Salem and Portland,
Oregon. Umpqua plans to expand into other markets through acquisitions and the
opening of new stores.
MARKETING AND SALES
Umpqua's goal to increase its share of financial services in the market
areas it serves is driven by a marketing plan comprising several key components.
Media Advertising. Over the years, Umpqua has introduced several
comprehensive media advertising campaigns. These campaigns augment the company's
goal of strengthening its brand image and heightening public awareness of its
innovative product delivery system. These campaigns, entitled "The Banking
Revolution" and "Expect the Unexpected," were designed to showcase South
Umpqua's innovative style of banking, as well as it's commitment to providing
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<PAGE> 68
quality service to its customers. "The Banking Revolution" campaign is designed
to differentiate South Umpqua from other financial institutions in its market
area, while "Expect the Unexpected" challenged them to visit the bank's stores
and experience first-hand its quality service. Both of these campaigns utilized
various forms of media, including television, radio, print, billboards and
direct mail flyers and letters.
Retail Store Concept. As a financial services provider, Umpqua believes
that store environment is critical to successfully market and sell its products
and services. Retailers for years have displayed their merchandise within their
stores to encourage customers to purchase their products. Purchases are made on
the spur of the moment due to the products' availability and attractiveness.
South Umpqua believes this same concept can be applied to financial institutions
and accordingly displays its financial services and products through tactile
merchandising within its stores. Recent displays have included enticements for
mortgage loans, retirement accounts, investments, and checking account programs.
Unlike many financial institutions whose strategy is to discourage customers
from visiting their facilities in favor of ATMs or other forms of electronic
banking, South Umpqua encourages its customers to visit its stores, where they
are greeted by well-trained sales associates, and encouraged to browse and to
make "impulse buys." South Umpqua introduced its first "prototype" store in
mid-1996, which included such services as a 24-hour banking vestibule with an
automated loan machine, an advanced function ATM and a 24-hour self-service U.S.
Postal service center.
Neighborhood Stores. To bring financial services to the customer in a
cost-effective way, South Umpqua has created "neighborhood stores." These
facilities are constructed near high volume traffic areas, close to neighborhood
shopping centers. These stand-alone stores are, on average, approximately 1,100
square feet in size and include all the features of the prototype store
described above. To strengthen brand recognition, all neighborhood stores are
identical in appearance. The bank currently has three neighborhood stores, all
located in the Eugene/Springfield area.
Sales Culture. Although a successful marketing program will attract
customers to visit its stores, a sales environment and a well-trained sales team
is critical to selling Umpqua's products and services. The company believes that
its sales culture has become well established throughout the organization due to
its unique facility design and its commitment to ongoing training of sales
associates on all aspects of sales and service. South Umpqua trains its sales
associates in its own banking college and pays commissions for the sale of
Umpqua's products and services. This sales culture has helped South Umpqua
transform itself from a traditional community bank to a nationally recognized
marketing company focused on selling financial products and services.
PRODUCTS AND SERVICES
Umpqua offers a full array of financial products to meet the banking
needs of its market area and targeted customers. To ensure the ongoing viability
of its product offerings, the company regularly examines the desirability and
profitability of existing and potential new products. To make it easy for new
prospective customers to bank with South Umpqua and access its products, the
bank introduced its "Switch Kit," which allows a customer to open their primary
checking account with South Umpqua in less than four minutes. This unique
program has helped the bank grow its number of deposit accounts from 18,200 in
1994 to 40,000 in 1999, a 100% increase. Other avenues through which customers
can access Umpqua's products include its web site and its 24-hour voice response
system.
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<PAGE> 69
Deposit Products. South Umpqua has a traditional array of deposit
products, including non-interest checking accounts, interest-bearing checking
and savings accounts, money market accounts and certificates of deposit. These
accounts earn interest at rates established by management based on competitive
market factors and management's desire to increase certain types or maturities
of deposit liabilities. In order to increase the number of relationships with
customers and increase service fee income, the bank also introduced its line of
"Value Packages" in 1996. These packages comprise several products bundled
together to provide added value to the customer and increase the customer's ties
to the bank. South Umpqua also offers a seniors program, the "Platinum Account,"
which offers an array of banking services and other amenities such as purchase
discounts, vacation trips and seminars, to customers over fifty years old.
Retail Investment Services. Strand, Atkinson, Williams & York, Inc.
provides a variety of investment products and services. These products include:
equity and debt securities, annuities, certificates of deposit, mutual funds,
retirement plans, life and health insurance and U.S. Government securities. The
firm has six stand-alone retail brokerage offices with 38 licensed broker-dealer
professionals. Additionally, ten South Umpqua banking stores have "Investment
Opportunity Centers" which are periodically staffed by a licensed sales
representative. Special appointments can be arranged for meetings in any store.
Commercial Loans. South Umpqua offers specialized loans for its business
and commercial customers, including equipment and inventory financing, real
estate construction loans and SBA loans for qualified businesses. Commercial
lending is the primary focus of the bank's lending activities and a significant
portion of its loan portfolio consists of commercial loans. For regulatory
reporting purposes, a substantial portion of the bank's commercial loans are
designated as real estate loans, because the loans are secured by mortgages and
trust deeds on real property, even though the loans may be made for purposes of
financing commercial activities, such as accounts receivable, equipment
purchases and leasing.
Real Estate Loans. Real estate loans are available for construction,
purchase and refinancing of residential owner-occupied and rental properties.
Borrowers can choose from a variety of fixed and adjustable rate options and
terms. Generally, the bank originates residential real estate loans as an
accommodation to its customers and sells most mortgages into the secondary
market. Real estate loans reflected in the loan portfolio are in large part
loans made to commercial customers that are secured by real property.
Consumer Loans. South Umpqua provides loans to individual borrowers for
a variety of purposes, including secured and unsecured personal loans, home
equity and personal lines of credit and motor vehicle loans.
EMPLOYEES
At June 30, 2000, Umpqua had a total of 209 full-time equivalent
employees. None of the employees are subject to a collective bargaining
agreement and Umpqua considers its relationships with its employees to be good.
INFORMATION REGARDING UMPQUA DIRECTORS AND EXECUTIVE OFFICERS
The current Umpqua directors are identified in "THE MERGER - Resulting
Board of Directors of Umpqua and Umpqua Bank." Umpqua held 12 meetings of the
Board of Directors
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<PAGE> 70
during 1999. All directors attended at least 75 percent of the total number of
meetings held during 1999.
Committees of the Board of Directors
The Audit Committee appoints and reviews the reports of our independent
public accountants, regulatory examinations and internal audit reports. Reports
of all examinations are reviewed with the entire Board. The committee consists
of Directors Hummel (Chairperson), Frohnmayer, Doan and Phelps.
The Budget and Compensation Committee reviews and oversees our budgeting
process, and compensation strategies. On a quarterly basis, the results of their
meetings are reviewed with the entire Board of Directors. The committee consists
of Directors Doan (Chairperson), Ball, Herbert, Davis and Hummel.
The Loan and Investment Committee approves certain loans, reviews the
adequacy of our allowance for loan losses, maintains an appropriate balance in
the interest rate sensitivity of our loan and investment portfolios, and
determines the liquidity, type and term of investment securities we purchase.
The committee consists of directors Herbert (Chairperson), Ball, Davis, Doan and
Hummel.
The Business Development Committee, consisting of directors Phelps
(Chairperson), Davis, Chambers and Doan, is responsible for reviewing our
overall marketing and business development strategies, which include deposit
growth, return on quality service and new product announcements.
The Strategic Positioning Committee, consisting of directors Frohnmayer
(Chairperson), Doan, Chambers, Phelps, Herbert, and Davis, is responsible for
the review and oversight of strategic planning, and the review of technology and
expansion strategies.
Director Compensation
Each non-employee director received a fee of $2,250 per quarter during
1999. The Chairman received $2,750 per quarter. These amounts are payable in
shares of Umpqua Holdings Corporation stock. Shares of Umpqua Holdings
Corporation stock are purchased quarterly by Ragen MacKenzie brokerage firm for
each director. The President received no additional compensation for his service
on the Board or any of its Committees.
Limitation of Liability and Indemnification
Under the Oregon Business Act, a corporation's articles of incorporation
may provide for the limitation of liability of directors and for the
indemnification of directors and officers, under certain circumstances. As
permitted by Oregon law, both Umpqua's and VRB's Articles of Incorporation
provide that directors are not personally liable to the corporation or its
shareholders for monetary damages for conduct as a director, except for (i) any
breach of a director's duty of loyalty to the corporation, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) any distribution to shareholders which is unlawful,
or (iv) any transaction from which the director received an improper personal
benefit.
The Articles of Incorporation of both companies also provide for
indemnification of any person who is or was made a party, or is threatened to be
made a party, to any civil, administrative or criminal proceeding by reason of
the fact that the person is or was a director or officer of the company or any
of its subsidiaries, or is or was serving at the request of the company, as a
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<PAGE> 71
director, officer, partner, agent or employee or another bank or entity, against
expenses, including attorney's fees, judgments, fines and amounts paid in
settlement, actually and reasonably incurred by the person if (i) the person
acted in good faith and in a manner reasonably believed to not be opposed to the
best interest of the company, or (ii) the act or omission giving rise to such
action or proceeding is ratified, adopted or confirmed by the company, or the
benefit thereof was received by the company. Indemnification is available under
this provision of the Articles of Incorporation in the case of derivative
actions, unless the person is adjudged to be liable for gross negligence or
deliberate misconduct in the performance of the person's duty to the company. To
the extent a director, officer, employee or agent (including an attorney) is
successful on the merits or otherwise in defense of any action to which this
provision is applicable, the person is entitled to indemnification for expenses
actually and reasonably incurred by the person in connection with that defense.
EXECUTIVE OFFICERS
Information regarding Umpqua's executive officers is set forth in "THE
MERGER - Executive Officers of Umpqua and Umpqua Bank."
Executive Compensation
The following table sets forth all compensation paid during the last
three calendar years to the Chief Executive Officer and the five most highly
compensated Executive Officers. No other executive officer received salary and
bonuses during the year ended December 31, 1999 in excess of $100,000.
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<PAGE> 72
<TABLE>
<CAPTION>
Other Securities
Annual Underlying All Other
Name and Principal Position Year Salary Bonus (1) Compensation(2) Option/SARs Compensation
--------------------------- ---- ------ --------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Raymond P. Davis 1999 $179,792 $55,500 $8,520 $ 12,000 (4)
President and Chief Executive Officer 1998 $166,500 $51,750 $7,750 $ 16,549 (4)
1997 $155,468 $48,150 $8,430 $276,559 (3)
Gary L. Pierpoint 1999 $ 98,880 $16,800 $8,568 15,000 $ 18,343 (4)
Senior Vice President/Eugene area 1998 $ 98,880 $14,820 $8,400 $ 9,216 (4)
1997 $ 96,000 $19,200 $5,640 $ 11,604 (4)
Steven A. May 1999 $ 90,000 $14,400 $1,860 15,000 $ 8,250 (4)
Senior Vice President/Retail Banking 1998 $ 84,800 $20,000 $1,750 $ 7,860 (4)
1997 $ 80,000 $20,000 $1,680 $ 9,236 (4)
Daniel A. Sullivan (5) 1999 $106,325 $23,000 $6,934 25,000 $ 15,468 (4)
Senior Vice President and 1998 $ 97,923 $20,900 $4,486 $ - (4)
Chief Financial Officer 1997 $ 15,833 $14,033 $ - $ - (4)
Rodger L. Terrall 1999 $ 87,500 $14,875 $1,560 15,000 $ 7,687 (4)
Senior Vice President and 1998 $ 83,200 $15,000 $ - $ 7,440 (4)
Chief Lending Officer 1997 $ 80,000 $16,000 $ - $ - (4)
Dolly Lusty (6) 1999 $ 69,750 $15,600 $ - 7,500 $ -
Senior Vice President and
Credit Administrator
</TABLE>
-----------
(1) Includes bonuses paid, or to be paid, during the subsequent year but
attributable to the year indicated.
(2) Perquisites and other personal benefits, if any, did not exceed the lesser
of $50,000 or 10% of the total annual salary and bonus for the named executive
officer for any of the periods indicated.
(3) In connection with the grant of stock options to Mr. Davis in 1995, the Bank
entered into a stock appreciation rights agreement ("SAR") providing for a cash
payment to him of an amount determined by the increase in the market price of
the Bank's common stock in each of the years ended December 31, 1995, 1996 and
1997. Mr. Davis' entitlement to the payment was conditioned upon his continuing
as an employee and President through year end 1997. Under the SAR, he was
entitled to a payment of $777,594 upon the expiration of the SAR as of December
31, 1997, reflecting the significant increase in market value of the Bank's
common stock over the preceding three years, which payment was made in February
1998. The amounts included in 1996 and 1997 as other compensation reflect that
portion of the SAR expiring in each of those years, as well as the Bank's
contribution to the 401(k) Profit Sharing Plan for Mr. Davis' benefit.
(4) Consists of the Bank's contribution to employees' 401(k) Plan for the
benefit of Messrs Davis, May, Pierpoint, Sullivan, Terrall and Ms. Lusty's
benefit.
(5) Mr. Sullivan started working for South Umpqua Bank in November, 1997.
(6) Ms. Lusty became an Executive Officer in 1999.
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<PAGE> 73
Executive Compensation Plans and Agreements
Employment and Change of Control Agreements. We have entered into
special agreements with certain executive officers. These agreements are
intended to motivate the executives to remain employed by us. We have entered
into an agreement expiring in July, 2002 with Raymond P. Davis that provides for
his employment as President and Chief Executive Officer and further provides for
a payment of an amount equal to nine months' base salary, plus any pro-rated
executive incentive bonus if we terminate his employment for any reason other
than "cause." In addition, we agreed to provide medical benefits to Mr. Davis
for the maximum time allowed by law. Should Mr. Davis' employment terminate as a
result of a change in control, the agreement provides for payment of an amount
equal to two times the average of the total annual compensation (including
incentive bonuses) paid to Mr. Davis during the last two full calendar years of
employment.
STOCK OPTION PLAN
Umpqua's non-qualified stock option plan, approved by shareholders in
1995, reserves an aggregate of 1,150,000 shares of common stock for grants to
key employees. The Board of Directors designates those key employees who are
eligible. The maximum number of shares which may be issued at any given time is
limited to 10% of the shares outstanding at the time the options are granted,
excluding shares issued pursuant to the plan. Options granted under the plan may
have a term not exceeding 11 years from the date of grant and the exercise price
of the options will not be less than the fair market value of the common stock
on the date of grant.
The purpose of the plan is to provide additional incentive to key
employees to enhance shareholder value by giving them an opportunity to
participate in the increase of such value and gain an ownership interest.
Vesting of such options occurs annually based on our financial performance for
each fiscal year measured by the return on equity and return on gross book
value. If such performance standards are not met, the options vest on the sixth
anniversary of the date of grant.
During 1999, options for 150,000 shares of common stock were issued to
employees under the 1995 Stock Option Plan. The following table set forth grants
to the named executive officers.
<TABLE>
<CAPTION>
Options Granted in Last Fiscal Year
-----------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term (1)
------------------------------------------------------- ------------------------------
Percentage
of Total
Number of Options
Securities Granted to Exercise
Underlying Employees Price
Options in Fiscal (Dollars Expiration
Granted Year per Share) Date 5% ($) 10% ($)
---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Steven A. May 15,000 10.00% $ 9.63 5/3/10 $ 103,887 $ 271,018
Daniel A. Sullivan 25,000 16.70% $ 9.63 5/3/10 $ 173,145 $ 451,697
Gary L. Pierpoint 15,000 10.00% $ 9.63 5/3/10 $ 103,887 $ 271,018
Rodger L. Terrall 15,000 10.00% $ 9.63 5/3/10 $ 103,887 $ 271,018
Dolly Lusty 7,500 5.00% $ 9.63 5/3/10 $ 51,944 $ 135,509
</TABLE>
------------
(1) The potential realizable value of the options granted is calculated by
multiplying the difference between the exercise price of the option and
the market value per share of the underlying stock (assuming a 5% or
10%, as the case may be, compounded annual increase of the stock price
from the date of grant to the final expiration of the option) by the
number of shares underlying the options granted.
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<PAGE> 74
<TABLE>
<CAPTION>
Aggregate Option Exercises Last Fiscal Year and Fiscal Year-End Option Values (1)
--------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at FY-End (#) at FY-End ($)
Acquired on Value ------------------------------- --------------------------------
Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
-------------- --------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Raymond P. Davis 14,400 $91,083 271,425 35,000 $1,680,866 $ -
Steven A. May 3,600 $19,855 10,600 34,600 $ 30,492 $25,047
Daniel A. Sullivan - $ - 13,000 52,000 $ 5,000 $ 7,500
Gary L. Pierpoint - $ - 17,000 38,000 $ 48,000 $32,000
Rodger L. Terrall - $ - 17,000 38,000 $ 40,500 $27,000
Dolly Lusty - $ - - 7,500 $ - $ -
</TABLE>
--------------
(1) All share amounts have been adjusted to reflect subsequent stock
dividends and stock splits through September 30, 2000.
(2) On December 31, 1999, the market price of Umpqua common stock was $9.25
per share. For purposes of the foregoing table, all stock options issued
before 1998 have an exercise price less than that amount and are
therefore considered to be "in-the-money" and have a value equal to the
difference between $9.25 and the exercise price of the stock option,
multiplied by the name of shares covered by the stock option. All stock
options issued in 1998 and 1999 were issued with exercise prices
exceeding $9.25 and are therefore not "in-the-money" at fiscal year-end.
TRANSACTIONS WITH DIRECTORS AND OFFICERS
Some of the directors and officers and members of their immediate
families and firms and corporations with which they are associated have been
parties to transactions with South Umpqua Bank, including borrowings and
investments in time deposits. All such loans and investments in time deposits
have been made in the ordinary course of business, have been made on
substantially the same terms, including interest rates paid or charged and
collateral required, as those prevailing at the time for comparable transactions
with unaffiliated persons, and did not involve more than the normal risk of
collectibility or present other unfavorable features. As of December 31, 1999,
the aggregate outstanding amount of all loans to executive officers, directors,
principal shareholders and their associated and affiliated companies was
approximately $3,654,000 which represented 9.95% of the consolidated
shareholders' equity at that date. All such loans are currently in good standing
and are being paid in accordance with their terms.
COMPLIANCE WITH SECTION 16 FILING REQUIREMENTS
At the time of the public offering in April, 1998, South Umpqua Bank
became subject to the reporting requirements of the Securities Exchange Act of
1934 (the "Exchange Act"). As a state-chartered bank, South Umpqua Bank filed
its periodic reports, proxy materials, and other information with the FDIC. Upon
completion of the holding company formation in March 1999, Umpqua Holdings
Corporation succeeded to the Exchange Act reporting obligations of South Umpqua
Bank, and now files its periodic reports, proxy materials, and other information
with the Securities and Exchange Commission.
Section 16 of the Exchange Act requires that all executive officers,
directors and persons who beneficially own more than 10 percent of the common
stock file an initial report of their
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<PAGE> 75
beneficial ownership of common stock and to periodically report changes in their
ownership. The reports must now be made with the SEC.
Based solely upon a review of the copies of the Section 16 filings with
respect to the fiscal year ended December 31, 1999, other than as stated below,
all reporting persons made all required Section 16 filings with respect to such
fiscal year on a timely basis. The Annual Statement of Changes in Beneficial
Ownership filing for Raymond P. Davis, Steven A. May, Daniel A. Sullivan, Gary
L. Pierpoint, Rodger L. Terrall, and Dolly C. Lusty were filed three days beyond
the filing deadline in order to accurately report the Company's contribution to
the respective employees' 401(k) Profit Sharing Plan account.
SECURITY OWNERSHIP OF UMPQUA MANAGEMENT AND OTHERS
The following table sets forth the shares of Umpqua common stock
beneficially owned as of October 2, 2000, by each director and each named
executive officer, the directors and executive officers as a group and those
persons known to beneficially own more than 5% of Umpqua's common stock:
[Update Table as of October 2, 2000]
<TABLE>
<CAPTION>
Number of Shares Percentage
Beneficially of
Name and Position Owned (1) Class
----------------- ---------------- -----------
<S> <C> <C>
Lynn K. Herbert, Director 537,311 (3) 7.06%
Raymond P. Davis, Director, President/Chief Executive Officer 310,418 (4) 3.93%
Allyn C. Ford, Director 121,944 (5) 1.60%
Neil D. Hummel, Director 34,261 (6) *
Harold L. Ball, Director 32,309 (7) *
Rodger L. Terrall, Sr. VP/Chief Lending Officer 29,725 (8) *
Gary L. Pierpoint, Sr. VP/Eugene Operations 29,027 (8) *
Daniel A. Sullivan, Sr. VP/Chief Financial Officer 27,515 (9) *
Steven A. May, Sr. VP/Retail Banking 20,752 (10) *
Frances Jean Phelps, Director 6,391 (2) *
David B. Frohnmayer, Director 5,166 (2) *
Ronald O. Doan, Director 6,151 (2) *
Dolly C. Lusty, Sr. VP/Credit Administrator 2,203 (12) *
Scott Chambers, Director 1,380 *
All directors and executive officers as a group (14 persons) 1,164,553 (2,11) 14.56%
Milton Herbert, Shareholder, Canyonville, OR 920,548 (2) 12.09%
</TABLE>
---------------
* Less than 1.0%.
(1) Shares held directly with sole voting and investment power, unless
otherwise indicated, and shares held in the Dividend Reinvestment Plan
have been rounded down to the nearest whole share.
(2) Includes shares held with or by his/her spouse.
(3) Includes shares held jointly with his spouse. Includes shares held as
custodian for minor children.
(4) Includes shares held jointly with or by his spouse. Includes 286,425
shares covered by options exercisable within 60 days.
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<PAGE> 76
(5) Includes 97,661 shares held as Agent for Ford Family Investment Pool.
(6) Includes shares held jointly with his spouse and includes 20,898 shares
held as trustee for The Neil Co. Realtors Money Purchase Pension Plan.
(7) Includes shares held jointly with or by his spouse. Does not include
shares beneficially owned by Mr. Ball's adult sons as to which shares
Mr. Ball disclaims beneficial ownership.
(8) Includes 25,750 shares covered by options exercisable within 60 days.
(9) Includes 24,250 shares covered by options exercisable within 60 days.
(10) Includes 19,350 shares covered by options exercisable within 60 days.
(11) Includes 383,400 shares covered by options exercisable within 60 days.
(12) Includes 1,875 shares covered by options exercisable within 60 days.
REPORT OF THE BUDGET AND COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Budget and Compensation Committee is responsible for establishing
and administering our executive compensation program.
Compensation Philosophy and Objectives The philosophy underlying the
development and administration of our compensation plan is the alignment of the
interests of executive management with those of the shareholders. Key elements
of this philosophy are:
- Set base compensation at a level to attract and retain competent
executives.
- Establish incentive compensation plans which deliver bonuses
based on the financial performance of the company.
- Provide significant equity based incentives for executives to
ensure they are motivated over the long term to respond to the
company's business challenges and opportunities, as owners
rather than just employees.
Incentive Plan for Senior Management. Our Incentive Plan provides for a
performance incentive payable to the President/CEO at least annually. Payment is
targeted to be 30% of the President/CEO's year-end rate of base pay for the year
in question if we meet or exceed our projected financial goals for the preceding
year. The amount of bonuses (which can exceed the target) is solely at the
discretion of the Board of Directors. Distribution normally occurs during the
first quarter of the following year.
The plan for other key executives is payable at least annually, and is
targeted at 20% of the Executive's base pay for the year. Payment of such
performance bonus is contingent upon both our performance and the executive's
personal performance during the year. Distribution normally occurs during the
first quarter of the following year.
The 1995 Stock Option Plan is the vehicle by which executives can earn
additional compensation depending on our financial performance. Grants are made
at the discretion of the Board of Directors and awarded to individual
executives, thereby providing additional incentive for executives to increase
shareholder value. Executives receive value from these options when our stock
appreciates over the long term.
Budget and Compensation Committee Members
Ronald O. Doan (Chairperson)
Lynn K. Herbert
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<PAGE> 77
Neil D. Hummel
Harold L. Ball
Raymond P. Davis
STOCK PERFORMANCE GRAPH
The chart, shown below, compares the yearly percentage change in the
cumulative shareholder return on Umpqua Holdings Corporation's common stock
during the ten fiscal years ended December 31, 1999, with (i) the Total Return
Index for The Nasdaq Stock Market (U.S. Companies) as reported by the Center for
Research in Securities Prices, and (ii) the Total Return Index for Nasdaq Bank
Stocks as reported by the Center for Research in Securities Prices. This
comparison assumes $100.00 was invested on December 31, 1989, in Umpqua Holdings
Corporation's common stock, and the comparison indices, and assumes the
reinvestment of all cash dividends prior to any tax effect, and retention of all
stock dividends. Prior to April 1998, Umpqua Holdings Corporation common stock
was not quoted on Nasdaq. Prior to its listing on Nasdaq trading activity was
limited. For purposes of computing return information for the periods being
compared, the chart is based on price information for trades that were reported
to Umpqua Holdings Corporation prior to April 1998. Price information from April
1998 to December 31, 1999, was obtained by using the Nasdaq quote as of that
date.
<TABLE>
<CAPTION>
12/89 12/90 12/91 12/92 12/93 12/94
------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Return Index $100.00 $ 114.92 $ 136.70 $ 177.83 $ 282.75 $ 397.48
------------------- ------- -------- -------- -------- -------- --------
NASDAQ U.S. $100.00 $ 84.907 $136.134 $158.480 $181.869 $177.874
NASDAQ Bank Stocks $100.00 $ 73.229 $120.069 $174.762 $199.367 $198.639
S&P 500 $100.00 $ 96.758 $126.450 $136.166 $149.450 $151.519
</TABLE>
<TABLE>
<CAPTION>
12/95 12/96 12/97 12/98 12/99
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Total Return Index $ 570.60 $ 693.89 $1,327.60 $1,317.43 $1,270.92
------------------- -------- -------- --------- --------- ---------
NASDAQ U.S. $251.398 $309.309 $ 379.001 $ 534.062 $ 964.842
NASDAQ Bank Stocks $295.975 $390.790 $ 654.290 $ 649.776 $ 624.568
S&P 500 $208.473 $256.799 $ 342.645 $ 442.138 $ 535.989
</TABLE>
UMPQUA'S MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL HIGHLIGHTS
For the six months ended June 30, 2000 the company earned $2,699
compared with $2,376 for the comparable period in 1999, a 13.6% increase.
Diluted earnings per share were $0.35 for the first six months of 2000, up from
$0.30 during the same period in 1999. Return on equity was 14.4% and return on
assets was 1.42% for the six months ended June 30, 2000 compared with a return
on equity of 13.26% and a return on assets of 1.50% for the same period in 1999.
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Loans and deposits grew to record highs at June 30, 2000. Loans have
increased from $248.5 million at December 31, 1999 to $261.1 million at June 30,
2000. Deposits have increased $42.9 million, or 14.2% since December 31, 1999 to
$344.6 million at June 30, 2000.
Net income was $4.9 million in 1999, up 18.6% over 1998 earnings of $4.1
million. Diluted earnings per share also improved to $0.63 in 1999 compared with
$0.55 in 1998. The return on average shareholders' equity improved to 13.55% for
1999 compared with 13.14% for 1998. Total loans grew over 33% in 1999 to $248.5
million at year-end, while total deposits increased 17.9% to $301.7 million
during the same period.
RESULTS OF OPERATIONS
The following discussion is intended to provide information to
facilitate the understanding and assessment of significant changes and trends
related to the financial condition and results of operations. This discussion
and analysis should be read in conjunction with consolidated financial
statements and notes appearing elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
PERCENTAGE
1999 1998 GROWTH
------------- ------------- ----------
<S> <C> <C> <C>
Average assets $ 336,010,000 $ 279,123,000 20.4%
Average deposits 271,194,000 231,781,000 17.0%
Average loans and loans held for sale 212,824,000 167,222,000 27.3%
Net income 4,874,000 4,110,000 18.6%
Return on average assets 1.45% 1.47% (1.4)%
Return on average equity 13.55% 13.14% 3.1%
Basic earnings per common share $ 0.64 $ 0.56 14.3%
Diluted earnings per common share $ 0.63 $ 0.55 14.5%
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA
The following tables set forth Umpqua's unaudited consolidated financial
data regarding operations for each quarter of 1999 and 1998. This information,
in the opinion of management, includes all normal recurring adjustments
necessary to state fairly the information set forth therein. Certain amounts
previously reported have been reclassified to conform with current presentation.
These reclassifications had no net impact on the results of operations.
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<PAGE> 79
2000
<TABLE>
<CAPTION>
First Second
(in thousands)(unaudited) Quarter Quarter
------------------------ ------- -------
<S> <C> <C>
INCOME STATEMENT DATA
Interest income $7,051 $7,408
Interest expense 2,664 2,760
------ ------
Net interest income 4,387 4,648
Provisions for loan losses 450 585
------ ------
Net interest income after provision for loan losses 3,937 4,063
Non-interest income 2,404 2,299
Non interest expense 4,314 4,195
------ ------
Income before provision for income taxes 2,027 2,167
Provision for income taxes 715 780
------ ------
Net income $1,312 $1,387
====== ======
Basic earnings per common share $ 0.17 $ 0.18
Diluted earnings per common share $ 0.17 $ 0.18
</TABLE>
1999
<TABLE>
<CAPTION>
First Second Third Fourth
(in thousands)(unaudited) Quarter Quarter Quarter Quarter
------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income $5,723 $5,941 $6,282 $6,734
Interest expense 1,941 2,036 2,131 2,348
------ ------ ------ ------
Net interest income 3,782 3,905 4,151 4,386
Provisions for loan losses 328 327 226 511
------ ------ ------ ------
Net interest income after provision for loan losses 3,454 3,578 3,925 3,875
Non-interest income 978 958 955 1,533
Non interest expense 2,537 2,713 2,926 3,525
------ ------ ------ ------
Income before provision for income taxes 1,895 1,823 1,954 1,883
Provision for income taxes 691 651 712 627
------ ------ ------ ------
Net income $1,204 $1,172 $1,242 $1,256
====== ====== ====== ======
Basic earnings per common share $ 0.16 $ 0.15 $ 0.16 $ 0.16
Diluted earnings per common share $ 0.15 $ 0.15 $ 0.16 $ 0.16
</TABLE>
73
<PAGE> 80
1998
<TABLE>
<CAPTION>
First Second Third Fourth
(in thousands)(unaudited) Quarter Quarter Quarter Quarter
------------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income $4,823 $5,140 $5,388 $5,567
Interest expense 1,781 1,785 1,872 1,856
------ ------ ------ ------
Net interest income 3,042 3,355 3,516 3,711
Provisions for loan losses 274 237 180 334
------ ------ ------ ------
Net interest income after provision for loan losses 2,768 3,118 3,336 3,377
Non-interest income 847 847 840 837
Non interest expense 2,194 2,324 2,379 2,581
------ ------ ------ ------
Income before provision for income taxes 1,421 1,641 1,797 1,633
Provision for income taxes 528 611 660 583
------ ------ ------ ------
Net income $ 893 $1,030 $1,137 $1,050
====== ====== ====== ======
Basic earnings per common share $ 0.14 $ 0.13 $ 0.15 $ 0.14
Diluted earnings per common share $ 0.13 $ 0.13 $ 0.15 $ 0.13
</TABLE>
74
<PAGE> 81
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
The following table shows average balances and interest income or
interest expense, with the resulting average yield or rates by category of
average earning asset or interest-bearing liability:
<TABLE>
<CAPTION>
Year-end December 31, 1999 Year-end December 31, 1998 Year-end December 31, 1997
------------------------------ --------------------------- --------------------------
Interest Average Interest Average Interest Average
Income Yields Income Yields Income Yields
Average or or Average or or Average or or
Balance Expense Rates Balance Expense Rates Balance Expense Rates
--------- ------- ------- -------- --------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
INTEREST-EARNING ASSETS:
Loans (1) (2) $212,446 $19,144 9.01% $166,032 $15,625 9.41% $135,988 $13,087 9.62%
Loans held for sale 378 49 12.96% 1,190 112 9.41% 449 34 7.57%
Investment securities
Taxable securities 63,774 3,966 6.22% 69,811 4,196 6.01% 57,214 3,406 5.95%
Non-taxable securities(1) 19,925 1,307 6.56% 9,017 569 6.31% 4,573 329 7.19%
Temporary investments 12,201 611 5.01% 10,209 558 5.47% 14,736 806 5.47%
-------- ------- -------- ------- -------- -------
Total interest earning assets 308,724 25,077 8.12% 256,259 21,060 8.22% 212,960 17,662 8.29%
Cash and due from banks 18,611 15,506 13,248
Allowance for loan losses (2,991) (2,446) (2,159)
Other assets 11,616 9,804 9,158
-------- -------- --------
Total assets $336,010 $279,123 $233,207
======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing checking and
savings accounts $137,488 $ 3,417 2.49% $121,568 $ 3,208 2.64% $105,523 $ 2,827 2.68%
Time deposits 77,586 3,660 4.72% 64,419 3,262 5.06% 55,868 2,860 5.12%
Term debt 26,678 1,379 5.17% 14,669 825 5.61% 13,756 806 5.86%
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 241,752 8,456 3.50% 200,686 7,295 3.64% 175,147 6,493 3.71%
Non-interest-bearing deposits 56,120 45,794 37,795
Other liabilities 2,174 1,370 1,818
-------- -------- --------
Total liabilities 300,046 247,850 214,760
Shareholders' equity 35,964 31,273 18,447
-------- -------- --------
Total liabilities and
shareholders' equity $336,010 $279,123 $233,207
======== ======== ========
NET INTEREST INCOME(1) $16,621 $13,765 $11,169
======= ======= =======
NET INTEREST SPREAD 4.62% 4.58% 4.58%
Average yield on earning assets(1)(2) 8.12% 8.22% 8.29%
Interest expense to earning assets 2.75% 2.85% 3.05%
---- ---- ----
Net interest income to earning assets(1)(2) 5.37% 5.37% 5.24%
==== ==== ====
</TABLE>
--------------
(1) Tax exempt income has been adjusted to a tax equivalent basis at a 34%
effective rate. The amount of such adjustment was an addition to
recorded income of $397, $142 and $120 for 1999, 1998 and 1997,
respectively.
(2) Non-accrual loans are included in average balance.
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL
The following table sets forth, on a tax-equivalent basis, a summary of
the changes in net interest income resulting from changes in volumes and rates.
Changes not due solely to volume or rate changes are allocated to rate.
75
<PAGE> 82
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Increase (Decrease)
---------------------------------- ----------------------------------
Due to change in Due to change in
------------------- ---------- ------------------- ----------
(in thousands) Volume Rate Net Change Volume Rate Net Change
------------- ------- ----- ---------- ------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1) $ 4,368 $(849) $ 3,519 $ 2,891 $(353) $ 2,538
Loans held for sale (76) 13 (63) 56 22 78
Investment securities
Taxable securities (363) 133 (230) 750 40 790
Non-taxable securities (1) 688 50 738 320 (80) 240
Temporary investments 109 (56) 53 (248) - (248)
------- ----- ------- ------- ----- -------
Total (1) 4,726 (709) 4,017 3,769 (371) 3,398
INTEREST-BEARING LIABILITIES:
Interest-bearing checking and
savings accounts 420 (211) 209 430 (49) 381
Time deposits 667 (269) 398 438 (36) 402
Term debt 672 (118) 554 55 (36) 19
------- ----- ------- ------- ----- -------
Total 1,759 (598) 1,161 923 (121) 802
------- ----- ------- ------- ----- -------
Net increase (decrease) in
net interest income $ 2,967 $(111) $ 2,856 $ 2,846 $(250) $ 2,596
======= ===== ======= ======= ===== =======
</TABLE>
NET INTEREST INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
The primary component of earnings for financial institutions is net
interest income. Net interest income is the difference between interest income,
primarily from loans and investments, and interest expense on deposits and
borrowings. Changes in net interest income result from changes in "volume,"
changes in "spread," and changes in "margin." Volume refers to the level of
average interest-earning assets and average interest-bearing liabilities. Spread
refers to the difference between the yield on interest-earning assets and the
cost of interest-bearing liabilities. Margin refers to the ratio of net interest
income to interest-earning assets and is influenced by the mix of
interest-earning assets and interest-bearing liabilities as well as the relative
proportion of interest-bearing liabilities to interest-earning assets.
Net interest income on a taxable equivalent basis for the six months
ended June 30, 2000 improved $1,389 over the same period in 1999 to $9,252. The
improvement was due almost entirely to increases in the volume of earning
assets. Average earning assets increased $53.8 million in 2000 compared with
1999. Average loans, the largest component of average interest earning assets
increased $61.9 million for the six month ended June 30, 2000 compared with the
same period in 1999. The yield on earning assets improved 0.43% and the cost of
interest bearing deposits also increased 0.43% while the net interest margin
decreased slightly for the six months ended June 30, 2000 to 5.36% from 5.39%
for the same period in 1999.
Net interest income on a taxable equivalent basis was $16.6 million for
1999, a $2.9 million or 20.7% improvement over 1998. The primary reason for this
increase was an increase in the volume of earning assets, which averaged $308.7
million during 1999 compared with $256.3 million during 1998. The primary
reasons for the increase in average interest-earning assets were increases in
loans and non-taxable investment securities. Average loans were $46.4 million
higher in 1999 when compared with 1998 and average non-taxable securities
increased $10.9 million
76
<PAGE> 83
during the same period. The increase in average loans was due primarily to an
increase in commercial real estate loans (see additional discussion under
Loans). The increase in average non-taxable investments was due to the
comparative attractiveness of yields available on municipal securities versus
taxable securities in 1999. The yield on average loans during 1999 declined
0.40% compared with 1998 to 9.01%. This decline was due primarily to loan
repricings in the company's variable-rate loan portfolio and was consistent with
overall rate movements during the period. The average prime rate in 1999 was
7.99% compared with 8.36% in 1998. Although the yield on loans declined 0.40%,
the yield on average interest-earning assets declined by only 0.10% due to
improvements in the mix of interest-earning assets. Average loans comprised
68.8% of earning assets during 1999 compared with 64.8% during 1998. The
increase in interest-earning assets was funded by a combination of
interest-bearing deposits, term debt, and non-interest-bearing liabilities and
equity. Average interest-bearing deposits increased $29.1 million, and average
term debt increased $12.0 million. The average cost of interest-bearing
liabilities declined 0.14% compared with 1998 to 3.50% during 1999. This decline
was consistent with overall market rates during the period.
Comparing 1998 with 1997, net interest income increased $2.6 million,
and the margin improved 0.13% to 5.37%. The increase in net interest income was
primarily attributable to increases in average earning assets, which were up
$43.3 million. The improvement in the margin was primarily attributable to
higher non-interest-bearing liabilities and equity as a proportion of earning
assets. Average non-interest-bearing funding was 30.6% of average earning assets
in 1998 compared with 27.3% in 1997.
PROVISION FOR LOAN LOSSES FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND THE YEARS
ENDED DECEMBER 31, 1999, 1998 AND 1997
The provision expense is management's estimate of the amount necessary
to maintain an allowance for loan losses at a level which is considered adequate
based on the risk of losses inherent in the loan portfolio (see additional
discussion under Allowance for Loan Losses). The provision for loan losses for
the six months ended June 30, 2000 was $1,035 compared with $655 during the same
period in 1999. Net charge-offs were $734 for the six months ended June 30, 2000
compared with net charge-offs of $376 for the same period in 1999. Nonperforming
assets increased from $1,604 at December 31, 1999 to $1,718 at June 30, 2000.
The allowance for loan losses totaled $3,770, or 1.44% of total loans, at June
30, 2000 compared with $3,469, or 1.40% of total loans at December 31, 1999.
Management believes the allowance has been maintained at an adequate
level with the provision for loan loss expense of $1,392,000 in 1999, $1,025,000
in 1998 and $562,000 in 1997. Loan charge-offs, net of loan recoveries, were
$587,000, $502,000 and $412,000 for the years 1999, 1998 and 1997, respectively.
NON-INTEREST INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
Noninterest income was $4,703 for the six months ended June 30, 2000
compared with $1,936 for the same period in 1999. The increase is primarily
attributable to $2,724 of noninterest income generated by the Umpqua's retail
brokerage subsidiary Strand, Atkinson, Williams and York. Service charges on
deposit also increased $195 for the six-month period ending June 30, 2000
compared with the same period in 1999. This increase was due to increases in the
number of
77
<PAGE> 84
accounts as well as selected service fee repricing that occurred at the end of
the second quarter 1999.
Non-interest income was $4,424,000 and $3,371,000 for the years ended
1999 and 1998, respectively. Service fees, the largest component of non-interest
income, increased $759,000 over 1998 to $2,973,000 in 1999. This 34.2% increase
was due primarily to service charges on checking accounts which were up
$435,000, and ATM fee income which was up $317,000. The increase in service
charges was due to deposit fee repricing and an increase in the number of
checking accounts. ATM fees increased due to expansion of the Umpqua's ATM
network. Other income was $370,000 in 1999 compared with $284,000 in 1998, an
$86,000 increase. Brokerage commissions and fees increased to $830,000 in 1999
compared with $523,000 in 1998. The primary reason for the increase was revenue
generated by the Umpqua's brokerage subsidiary, Strand, Atkinson, Williams &
York, Inc, which was acquired in November 1999. Gain on sale of loans declined
to $251,000 in 1999 from $349,000 in 1998. Gains on sales of loans result
primarily from the origination and sale of single family residential loans.
Loans sold were approximately $16.1 million in 1999 and $29.3 million in 1998.
Comparing 1998 to 1997, total non-interest income increased $315,000 to
$3,371,000. Improvements in service fees, commissions and gain on sale of loans
were partially offset by a decline in the gain on sale of mortgage servicing
rights. Service fees were up due to growth in deposit accounts and expansion of
the Umpqua's ATM network. The bank sold its mortgage servicing rights in March
1997 resulting in a $583,000 gain. As a result, there was no loan servicing
income in 1999 or 1998.
NON-INTEREST EXPENSE FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
Non-interest expense consists principally of employees' salaries and
benefits, occupancy costs, communications expenses, marketing, professional fees
and other non-interest expenses. For the six months ended June 30, 2000
noninterest expense was $8,509 compared with $5,250 for the same period in 1999.
The primary reason for the increase was due to expenses incurred by Strand,
Atkinson, Williams & York. Details of noninterest expense by business segment is
detailed below:
<TABLE>
<CAPTION>
For the six months ended June 30, 200
----------------------------------------------------------------
Retail
Community Brokerage Admini-
Banking Services stration Eliminations Consolidated
--------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $3,111 $1,704 $ - $ - $4,815
Premises and equipment 1,076 64 - - 1,140
Other noninterest expense 1,968 552 82 (48) 2,554
------ ------ --- ---- ------
Total noninterest expense $6,155 $2,320 $82 $(48) $8,509
====== ====== === ==== ======
</TABLE>
78
<PAGE> 85
<TABLE>
<CAPTION>
For the six months ended June 30, 1999
-------------------------------------------------------------
Retail
Community Brokerage Admini-
Banking Services stration Eliminations Consolidated
--------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $2,612 $ - $ - $ - $2,612
Premises and equipment 800 - - - 800
Other noninterest expense 1,751 - 92 (5) 1,838
------ ------ ------ ------ ------
Total noninterest expense $5,163 $ - $ 92 $ (5) $5,250
====== ====== ====== ====== ======
</TABLE>
The primary reason for the increase in salaries and employee benefits in
the community banking segment was staff associated with the opening of the
Portland store in July 1999 and the Salem store in January 2000 as well as
additional lending staff. Premises and equipment expense also increased as a
result of the two new stores.
One measure of a Company's ability to contain non-interest expense is
the efficiency ratio. It is calculated by dividing total non-interest expense by
the sum of net interest income on a tax-equivalent basis and non-interest
income. Umpqua's efficiency ratio for 1999 was 55.6% compared with 55.3% in 1998
and 61.9% in 1997. The increase in 1999 was due partially to the operating
expenses of Strand, Atkinson, Williams & York, Inc. The operating costs for the
retail brokerage business are higher than those for the bank. Excluding the
income and operating costs of Strand, Atkinson, Williams & York, Inc., the
efficiency ratio for 1999 would have been 55.2%.
Non-interest expense for 1999 increased $2,224,000 over 1998 to
$11,702,000. Salaries and benefits increased $1,115,000. Salaries and benefits
expenses at Strand, Atkinson, Williams & York, Inc. accounted for $259,000 of
the increase while the remainder was due to expansion at the Bank. Full-time
equivalent employees at the bank grew from 157 at the end of 1998 to 175 at the
end of 1999. Occupancy expense increased $240,000 over 1998 to $945,000 for
1999. This increase was due to the opening of a new Portland store, a new loan
center, the relocation and expansion of the Sutherlin store, and the opening of
a Support and Accounting Office. Marketing expense increased $206,000 over 1998
to $942,000 in 1999 as the result of increased marketing efforts and the
expansion into new markets. Communications expenses, which consist primarily of
postage and telephone expense, were $786,000 in 1999 compared with $630,000 in
1998. The increase was due to the bank's increased loan and deposit base, as
well as expansion of the bank's ATM network and costs associated with new and
remodeled facilities. Professional services include director fees, attorney
fees, accountant fees, security services and other fees. Professional fees were
up $322,000 in 1999 compared with 1998 due primarily to the expansion and
servicing of the bank's ATM network and increased internal audit and accounting
fees.
Comparing 1998 with 1997, total non-interest expense increased $678,000
to $9,478,000. Communications expense in 1998 increased $127,000 compared with
1997 due to the bank's increased loan and deposit base, as well as costs
associated with the ATM network. Professional fees were $1,021,000 in 1998
compared with $796,000 in 1997. The increase from 1997 was due to increased
security services related to store and ATM network expansion, and additional
expenses as the result of becoming a publicly traded company in 1998.
79
<PAGE> 86
INCOME TAXES FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND THE YEARS ENDED DECEMBER
31, 1999, 1998 AND 1997
The effective tax rate for Umpuqa was 36.0% during the second quarter of
2000 compared with 35.7% during the second quarter of 1999. For the six months
ended June 30, 2000 the company's effective tax rate was 35.6% compared with
36.1% for the same period in 1999.
The provision for income taxes was $2,681,000, $2,382,000 and $1,699,000
for the years 1999, 1998 and 1997, respectively. The provision resulted in
effective combined federal and state tax rates of 35.5%, 36.7% and 35.8%. The
1.2% decrease in the effective rate from 1998 to 1999 was due to increased
non-taxable revenue generated by the company. In 1997 Umpqua's state income tax
rate was reduced from 6.6% to 3.8% due to surplus revenues received by the State
of Oregon.
INVESTMENT PORTFOLIO
Investment securities have not materially changed since between December
31, 1999 and June 30, 2000. Investment securities held at December 31, 1999 were
$76,869,000 compared with $84,888,000 at December 31, 1998. The objectives of
the investment portfolio are to provide liquidity, offset interest rate risk
positions and provide a profitable interest yield to the company. Umpqua
classifies all of its investment securities as "available-for-sale" and
consequently carries them at fair value. At December 31, 1999 the company had
net unrealized losses of $2,872,000 compared with net unrealized gains at
December 31, 1998 of $1,023,000. Unrealized gains/ losses reflect changes in
market conditions and do not represent the amount of actual profits or losses
the company may ultimately realize. Actual gains and losses are recognized at
the time investment securities are sold or redeemed. The net unrealized losses
resulted from the effect that increasing market interest rates had on the
company's fixed-rate investment portfolio. The following tables provide details
of the company's investment portfolio and its maturity distribution and yields.
The following table provides the carrying values of the company's
portfolio of investment securities as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31,
------------------------
(in thousands) 1999 1998
------------- -------- --------
<S> <C> <C>
INVESTMENT SECURITIES AVAILABLE-FOR-SALE AT FAIR VALUE:
Obligations of U.S. Government agencies $ 39,153 $ 41,054
U.S. Treasury securities 2,509 6,081
U.S. Government agency mortgage-backed securities 13,695 22,344
Obligations of states and political subdivisions 21,512 14,261
Mutual Fund - 1,148
--------- ---------
$ 76,869 $ 84,888
========= =========
</TABLE>
80
<PAGE> 87
The maturity distribution and yields of securities at December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Weighted
Amortized Approximate Average
December 31, 1999 Cost Market Value Yield (1)
----------------- --------- ------------ ---------
<S> <C> <C> <C>
(in thousands)
U.S. TREASURIES AND AGENCIES:
One year or less $ 2,500 $ 2,509 6.65%
One to five years 11,285 11,131 6.33%
Five to ten years 29,703 28,022 6.39%
Over ten years - - 0.00%
-------
Total 43,488 41,662 6.39%
-------
OBLIGATIONS OF STATES AND
POLITICAL SUBDIVISIONS:
One year or less 266 266 6.70%
One to five years 6,111 6,045 6.67%
Five to ten years 15,652 14,992 6.48%
Over ten years 219 209 7.42%
-------
Total 22,248 21,512 6.54%
Serial Maturities (2) 14,005 13,695 6.26%
-------
$79,741 $76,869 6.41%
=======
</TABLE>
(1) Weighted average yields are stated on a federal tax equivalent basis at
a 34% effective tax rate.
(2) Serial maturities include mortgage-backed securities, collateralized
mortgage obligations and asset-backed securities.
TRADING ACCOUNT ASSETS
Trading account assets have not materially changed since between
December 31, 1999 and June 30, 2000. Umpqua had trading account assets of
$475,000 at December 31, 1999 and $0 at December 31, 1998. Umpqua's entire
trading portfolio is the result of the Strand, Atkinson, Williams & York, Inc.
acquisition, and represents securities held at year end for sale to retail
clients. Trading account assets are recorded at fair value and gains/losses are
recognized in income currently.
LOANS
Loans have increased $12.6 million since December 31, 1999 to $261.1
million at June 30, 2000. Details of the loan portfolio at June 30, 2000 were as
follows:
81
<PAGE> 88
<TABLE>
<CAPTION>
June 30, 2000
--------------
<S> <C>
Commercial & Industrial $ 59,208
Real Estate:
Construction 32,984
Residential Mortgage 26,162
Commercial Real Estate 111,063
Individuals 30,691
Other 989
-----------
Total Loans $ 261,097
===========
</TABLE>
Outstanding loans, excluding mortgage loans held for sale, were $248.5 million
at December 31, 1999 compared with $186.2 million at December 31, 1998. Real
estate mortgage loans increased $34.4 million from year-end 1998 to year-end
1999 while construction loans increased $16.2 million during the same period.
The bank also experienced strong growth in the Commercial and Industrial loan
segment, which was up $12.0 million between December 31, 1998 and December 31,
1999. The bank's loan portfolio carries credit risk, which could result in loan
charge-offs. The company manages this risk through the use of credit policies
and review procedures. (See additional information under the Allowance for Loan
Losses discussion.)
The following table presents the composition of the Company's loan
portfolio at December 31 of the years indicated:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------------- --------------- ---------------- ---------------- ------------------
(in thousands) Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ------ -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 60,137 24.2% $ 48,140 25.9% $ 44,487 28.7% $ 28,848 25.6% $ 16,966 20.5%
Real estate:
Construction 29,962 12.1% 13,766 7.4% 10,761 6.9% 6,235 5.5% 4,081 5.0%
Mortgage 128,003 51.4% 93,592 50.2% 69,824 45.0% 53,120 47.1% 42,518 51.4%
Individuals 30,228 12.2% 30,309 16.3% 29,548 19.1% 24,259 21.5% 18,952 22.9%
Other 204 0.1% 360 0.2% 458 0.3% 399 0.3% 196 0.2%
-------- ----- -------- ----- -------- ------ -------- ------ -------- ------
Total $248,534 100.0% $186,167 100.0% $155,078 100.0% $112,861 100.0% $ 82,713 100.0%
-------- ----- -------- ----- -------- ------ -------- ------ -------- ------
</TABLE>
82
<PAGE> 89
The following table sets forth Umpqua's loan portfolio maturities on
fixed-rate loans and the repricing dates on variable-rate loans, at December 31,
1999:
<TABLE>
<CAPTION>
Within One Year One to Five Years After Five Years Total
--------------- ----------------- ---------------- ----------
<S> <C> <C> <C> <C>
(in thousands)
FIXED-RATE LOAN MATURITIES
Commercial and industrial $ 2,158 $ 6,545 $ 8 $ 8,711
Real estate 10,491 2,763 7,488 20,742
Individuals 2,166 9,399 6,737 18,302
Other - - - -
-------- ------- ------- --------
Total $ 14,815 $18,707 $14,233 $ 47,755
-------- ------- ------- --------
ADJUSTABLE-RATE LOAN REPRICING
Commercial and industrial $ 49,947 $ 1,478 $ - $ 51,425
Real estate 63,099 74,124 - 137,223
Individuals 11,927 - - 11,927
Other 204 - - 204
-------- ------- ------- --------
Total $125,177 $75,602 $ - $200,779
-------- ------- ------- --------
</TABLE>
NON-PERFORMING LOANS
Commercial and real estate loans are placed on non-accrual status when
they are 90 days past due as to principal or interest, unless the loans are both
well-secured and in the process of collection. Non-performing assets have not
materially changed between December 31, 1999 and June 30, 2000. The increase in
non-accrual loans between 1999 and 1998 was primarily due to the addition of one
large commercial loan in late 1999.
The following table presents information with respect to non-performing assets:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
(in thousands) 1999 1998 1997 1996 1995
------ ---- ------ ---- ----
<S> <C> <C> <C> <C> <C>
Loans on non-accrual status $1,398 $457 $1,157 $218 $222
Loans past due greater than 90 days but
not on non-accrual status 206 159 101 26 7
Other real estate owned - - - - -
------ ---- ------ ---- ----
Total non-performing assets $1,604 $616 $1,258 $244 $229
------ ---- ------ ---- ----
Percentage of non-performing loans to total loans 0.65% 0.33% 0.81% 0.22% 0.28%
</TABLE>
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained at a
level considered by management to be adequate to absorb losses inherent in the
loan portfolio. Management monitors and evaluates the adequacy of the allowance
on an ongoing basis. The following tools are used to manage and evaluate the
loan portfolio:
- Internal credit review and risk grading system
- Regulatory examination results
- Monitoring of charge-off, past due and non-performing activity
and trends
- Assessment of economic and business conditions in our market
areas
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<PAGE> 90
On a quarterly basis, losses inherent in the portfolio are estimated by
reviewing the following key elements of the loan portfolio:
- Portfolio performance measures
- Portfolio mix
- Portfolio growth rates
- Historical loss rates
- Portfolio concentrations
- Current economic conditions in our market areas
Umpqua also tests the adequacy of the allowance for loan losses using the
following methodologies:
- Loss allocation by internally assigned risk rating
- Loss allocation by portfolio type, based on historic loan loss
experience
- The allowance as a percentage of total loans
The allowance for loan losses is based upon estimates of losses inherent
in the portfolio. The amount of losses actually incurred can vary significantly
from these estimates. Assessing the adequacy of the allowance on a quarterly
basis allows management to adjust these estimates based upon the most recent
information available.
At December 31, 1999 the allowance for loan losses was $3,469,000, or
1.4% of total loans, and is considered by management adequate to absorb credit
losses on specifically identified loans as well as estimated credit losses
inherent in the portfolio.
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<PAGE> 91
The following table shows activity in the allowance for loan losses for
the periods indicated:
<TABLE>
<CAPTION>
Summary of Loan Loss Experience Years Ended December 31,
---------------------------------------------------------------
(in thousands) 1999 1998 1997 1996 1995
-------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of year $248,534 $186,167 $155,078 $ 112,861 $82,713
-------- -------- -------- --------- -------
Average loans outstanding $212,446 $166,032 $135,988 $ 97,985 $71,860
-------- -------- -------- --------- -------
Allowance for loan losses, beginning of year $ 2,664 $ 2,141 $ 1,991 $ 1,237 $ 812
Loans charged off:
Commercial 549 255 82 34 -
Real estate - - - - -
Consumer 288 349 391 97 92
-------- -------- -------- --------- -------
Total loans charged off 837 604 473 131 92
-------- -------- -------- --------- -------
Recoveries:
Commercial 213 44 39 266 1
Real estate - - - - -
Consumer 37 58 22 19 28
-------- -------- -------- --------- -------
Total recoveries 250 102 61 285 29
-------- -------- -------- --------- -------
Net loans charged off (recovered) 587 502 412 (154) 63
Provision charged to income 1,392 1,025 562 600 488
-------- -------- -------- --------- -------
Allowance for loan losses, end of year $ 3,469 $ 2,664 $ 2,141 $ 1,991 $ 1,237
-------- -------- -------- --------- -------
Ratio of net loans charged off to average
loans outstanding 0.28% 0.30% 0.30% (0.16)% 0.09%
-------- -------- -------- --------- -------
Ratio of allowance for loan losses to
ending total loans 1.40% 1.43% 1.38% 1.76% 1.50%
-------- -------- -------- --------- -------
</TABLE>
The following table sets forth the allocation of the allowance for loan
losses at December 31, 1999:
<TABLE>
<CAPTION>
Percentage of Loans in Each
(in thousands) Amount Category to Total Loans
-------------- ------ ---------------------------
<S> <C> <C>
Commercial and industrial $1,364 24.2%
Real estate 1,694 63.5%
Loans to individuals 399 12.2%
Other 12 0.1%
------ ------
$3,469 100.0%
------ ------
</TABLE>
CAPITAL EXPENDITURES
Capital expenditures for premises and equipment were $2.9 million, $0.5
million and $2.1 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Capital expenditures in 1999 included a Support and Accounting
Office, a new Sutherlin store, a new Portland store, additional ATMs, a remodel
of the company's executive offices, and the construction of a store in Salem,
which opened in January 2000.
DEPOSITS AND BORROWINGS
Total deposits increased to $344,601 at June 30, 2000, a $42.9 million
increase over December 31, 1999. The increase consisted primarily of a $30.5
million increase in time deposits and a $9.4 million increase in noninterest
bearing deposits. Deposits at the company's Salem store which opened in January
2000 were $17.7 million at June 30, 2000.
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<PAGE> 92
Total deposits increased $45.9 million over year-end 1998 to $301.7
million at December 31, 1999. Deposits in Lane County increased $26.8 million as
the bank continued to expand its penetration into that market. Deposits in
Douglas County also increased $15.2 million during 1999. Umpqua does not depend
on brokered deposits or higher than market priced time deposits. At December 31,
1999 time certificates of deposit of $100,000 or more were $28.9 million
compared with $24.0 million at December 31, 1998.
Borrowings increased $21.0 million during 1999 due to strong loan demand
and the building up of liquidity in anticipation of possible Year 2000 depositor
withdrawals. Approximately $6 million of the increase in borrowings was due to
the liquidity build-up. The $6 million of borrowings were repaid in January
2000.
The following table sets forth the average balances of the company's
interest-bearing liabilities, interest expense and average rates paid for the
periods indicated:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------- ---------------------------- -------------------
Average Interest Average Average Interest Average Average Interest Average
(in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------- -------- -------- -------- -------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES
Interest-bearing checking $115,552 $ 2,984 2.58% $102,513 $ 2,792 2.72% $ 88,614 $ 2,442 2.76%
Savings accounts 21,936 433 1.97% 19,055 416 2.18% 16,909 385 2.28%
Time Deposits 77,586 3,660 4.72% 64,419 3,262 5.06% 55,868 2,860 5.12%
Borrowed funds 26,678 1,378 5.17% 14,699 825 5.61% 13,756 806 5.86%
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $241,752 $ 8,455 3.50% $200,686 $ 7,295 3.64% $175,147 $ 6,493 3.71%
-------- -------- --------
Non-interest-bearing liabilities 58,294 47,164 39,613
-------- -------- --------
Total liabilities $300,046 $247,850 $214,760
-------- -------- --------
</TABLE>
ASSET-LIABILITY MANAGEMENT/INTEREST RATE SENSITIVITY
Asset and liability management is an integral part of managing a
financial institution's primary source of income, net interest income. Umpqua
manages the balance between the rate-sensitive assets and rate-sensitive
liabilities being repriced in any given period with the objectives of minimizing
fluctuations in net interest income. The company considers its rate-sensitive
assets to be those that either contain a provision to adjust the interest rate
periodically or mature within one year. These assets include certain loans and
investment securities and interest-bearing deposits in other banks.
Rate-sensitive liabilities are those liabilities that are considered sensitive
to periodic interest rate changes within one year, including maturing time
certificates, certain savings deposits and interest-bearing demand deposits. The
difference between the aggregate amount of assets and liabilities that reprice
within various time frames is called the "gap." Generally, if repricing assets
exceed repricing liabilities during a time frame, the company would be deemed to
be asset sensitive. If aggregate repricing liabilities exceeded aggregate
repricing assets during a time frame, the company would be deemed to be
liability sensitive during that time frame. The company generally seeks to
maintain a balanced position within one year, whereby the difference between
assets and liabilities repricing is minimized. This is accomplished by
maintaining a significant level of loans, investment securities and deposits
available for repricing within one year.
According to the traditional financial institution industry static gap
basis table set forth on the following page, the company was slightly liability
sensitive within one year. Changes in interest rates would not be expected to
have a significant impact on net interest margin.
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<PAGE> 93
In addition to this static gap report, management performs a financial
analysis (dynamic gap) to specifically analyze the change in net interest margin
from a changing rate environment. The estimate of interest rate sensitivity
takes into account the differing time intervals and differing rate change
increments of each type of interest sensitive asset and liability. It then
measures the projected impact of changes in market interest rates on the
company's net interest income, net interest margin, and return on equity.
The interest rate gaps in the following table arise when assets are
funded with liabilities having different repricing intervals. Since these gaps
are actively managed and change daily as adjustments are made in interest rate
views and market outlook, positions at the end of any period may not be
reflective of the company's interest rate sensitivity in subsequent periods.
Active management dictates that longer-term economic views are balanced against
prospects for short-term interest rate changes in all repricing intervals. For
purposes of the analysis above, repricing of fixed-rate instruments is based
upon the contractual maturity of the applicable instruments. Actual payment
patterns may differ from contractual payment patterns. The change in net
interest income may not always follow the general expectations of an asset
sensitive or liability sensitive balance sheet during periods of changing
interest rates, because interest rates earned or paid may change by differing
increments and at different time intervals for each type of interest sensitive
asset or liability. As a result of these factors, at any given time, the company
may be more sensitive or less sensitive to changes in interest rates than
indicated in the following table.
INTEREST RATE SENSITIVITY- STATIC GAP BASIS
<TABLE>
<CAPTION>
Non-
BY REPRICING INTERVAL Interest-
------------------------------------------------- Bearing
December 31, 1999 (in thousands) 0-3 Months 3-12 Months 1-5 Years Over 5 Years Funds Total
---------- ----------- --------- ------------ --------- -------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest -bearing deposits in other banks $15,630 $ - $ - $ - $ - $ 15,630
Securities available-for-sale 2 8,219 19,005 49,643 - 76,869
Trading account assets 475 - - - - 475
Loans 92,417 47,574 94,309 14,234 - 248,534
Non-interest-earning assets and allowance for credit losses - - - - 45,229 45,229
------- -------- ------- ------ -------- --------
Total 108,524 55,793 113,314 63,877 45,229 386,737
--------
LIABILITIES AND SHAREHOLDERS' EQUITY -
Interest-bearing demand deposits 32,080 32,081 64,160 - - 128,321
Savings deposits 5,720 5,720 11,438 - - 22,878
Time deposits -
Over $100,000 13,854 14,801 200 - - 28,855
Under $100,000 19,035 31,927 9,247 1,701 - 61,910
Term debt 16,000 - 30,158 - - 46,158
Non-interest-bearing liabilities and shareholders' equity - - - - 98,615 98,615
-------- --------
Total 86,689 84,529 115,203 1,701 98,615 386,737
--------
Interest rate sensitivity gap 21,835 (28,736) (1,889) 62,176 (53,386)
Cumulative $21,835 $ (6,901) $(8,790) $53,386 $ -
------- -------- ------- ------ -------
Cumulative gap as a % of earning assets 6.4% (2.0)% (2.6)% 15.6%
------- -------- ------- ------ -------
</TABLE>
Umpqua's asset liability position has not changed materially between
December 31, 1999 and June 30, 2000.
Based on a financial analysis (dynamic gap) performed as of December 31,
1999, which takes into account how the specific interest rate scenario would be
expected to affect each interest-
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<PAGE> 94
earning asset and each interest-bearing liability, the company estimates that
changes in the prime rate of interest would affect the company's performance as
follows:
<TABLE>
<CAPTION>
Increase (decrease) in Net Interest Margin Return on Equity
Net Interest Income (000's) 1999 =5.37% 1999=13.55%
--------------------------- ------------------- ----------------
<S> <C> <C> <C>
(Current prime rate is 8.50%)
PRIME RATE INCREASE OF:
2% TO 10.50% $ 521 5.55% 14.38%
1% TO 9.50% $ 262 5.47% 13.97%
PRIME RATE DECREASE OF:
2% TO 6.50% $ (435) 5.24% 12.86%
1% TO 7.50% $ (210) 5.32% 13.22%
</TABLE>
Return on average assets and average equity and certain other ratios for
the periods indicated are presented below:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
(dollars in thousands, except per share data)
Net income $ 4,874 $ 4,110 $ 3,044
Average assets $ 336,010 $ 279,123 $ 233,207
Return on average assets 1.45% 1.47% 1.31%
Net income $ 4,874 $ 4,110 $ 3,044
Average equity $ 35,964 $ 31,273 $ 18,447
Return on average equity 13.55% 13.14% 16.50%
Cash dividends declared per share $ 0.16 $ 0.115 $ 0.08
Basic earnings per common share $ 0.64 $ 0.56 $ 0.47
Dividend payout ratio 25.00% 20.54% 17.02%
Average equity $ 35,964 $ 31,273 $ 18,447
Average assets $ 336,010 $ 279,123 $ 233,207
Average equity to average assets ratio 10.70% 11.20% 7.91%
</TABLE>
LIQUIDITY
Liquidity enables the bank to meet the borrowing needs of its customers
and withdrawals of its depositors. Umpqua meets its liquidity needs of the bank
through the maintenance of cash resources, lines of credit with other financial
institutions, and a stable base of core deposits. Excess funds, when available,
are deposited on a short-term basis with the Federal Home Loan Bank (FHLB),
whose interest rates approximate Federal Funds sold. The bank's main source of
funds is the deposits of its individual and commercial customers. Having a
stable and diversified deposit base is a significant factor in the company's
long-term liquidity structure.
Umpqua's liquidity position has not materially changed between December
31, 1999 and June 30, 2000.
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<PAGE> 95
At December 31, 1999 the bank had a total funding line with the FHLB of
$88.2 million. The outstanding balance of term advances was $46.2 million at
December 31, 1999 leaving an available balance of $42.0 million. The bank also
had available lines of $18.4 million from financial institutions. At December
31, 1999 the bank had $15.6 million in interest-bearing deposits with the FHLB.
The company also has the flexibility of selling securities from its
available-for-sale portfolio to meet liquidity needs.
CAPITAL
Management seeks to maintain capital at a level that provides
shareholders, customers and regulators with assurance of the company's financial
soundness, while at the same time employing leverage to achieve a desirable
level of profitability.
On February 8, 1999 the Board of Directors authorize the repurchase of
up to 500,000 shares of the company's common stock. The company repurchased
89,625 shares during 1999.
The bank is subject to certain minimum regulatory capital standards.
These minimum standards include maintaining Tier 1 Capital at 4.0% and Total
Capital at 8.0% of risk-weighted assets. At December 31, 1999 the bank had a
Tier 1 ratio of 13.81% and a Total Capital ratio of 15.06%
INFLATION
Assets and liabilities of a financial institution are primarily monetary
in nature. Therefore, inflation has a less significant impact on financial
institutions than fluctuations in interest rates. Inflation, as measured by the
Consumer Price Index, has not changed significantly during the past two years
and has not had a material impact on the company.
INFORMATION CONCERNING VRB BANCORP
INTRODUCTION
VRB Bancorp was organized in 1983 as the holding company for Valley of
the Rogue Bank, an Oregon state-chartered bank organized in 1967. VRB conducts
its business solely through Valley of the Rogue Bank, headquartered in Rogue
River, Oregon.
VRB is the second largest community bank based in southern Oregon,
currently operating 13 full service branches. The bank has prospered by
providing excellent customer service to consumers and small to medium sized
businesses, and has acquired four other financial institutions since its
inception. Over the last five years, earnings have grown by 68% and the return
to shareholders has consistently exceeded 14%. Other traditional indicators of
financial strength, such as a strong loan portfolio and a robust capital
position, are indicative of the bank's success in implementing its business
plans.
VRB emphasizes a personalized approach to banking, and targets those
customers that utilize traditional products and services. The technological
sophistication of the region is growing, and use of the bank's ATM network,
debit cards and 24 hour telephone banking is now routine for most customers. VRB
has recently committed to purchase and implement an Internet banking product
that includes the cash management functionality that is key to developing and
retaining business customers. VRB believes that investment in technology is
vital to its survival, and it has improved its own infrastructure with new voice
and data communications systems, high-speed
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<PAGE> 96
Internet connectivity, and real time virus containment. In addition, the bank
has started to build a bridge to other paperless processes including check
imaging.
PRODUCTS AND SERVICES
Commercial banking
The commercial banking group features personalized commercial banking
services to small and mid-sized businesses and makes available real estate
construction, commercial real estate and operating lines of credit. Such loans
often include innovative or flexible programs that are specifically designed to
target certain market sectors such as the professional services and healthcare
industries. As of June 30, 2000, the bank had approximately $175 million in
commercial loans and $81 million in business deposits.
Consumer banking
The consumer banking business includes the sale of all consumer deposit
products, including checking accounts, money market accounts and time deposits
as well as the origination of mortgage loans through VRB Mortgage, the bank's
mortgage division. The bank also offers consumer loan products that include
second equity mortgage loans, personal lines of credit, and automobile, boat,
and recreational vehicle loans. As of June 30, 2000, the bank had approximately
$198 million in consumer deposits and a consumer loan portfolio of $44 million.
MARKET AREA
VRB primarily conducts its business in Jackson and Josephine counties in
southern Oregon. The two counties have experienced significant growth, and the
area continues to attract an influx of retirees who find the cost of living to
be substantially lower than neighboring states. VRB has expanded as the area
becomes increasingly urbanized and now garners 17.7% and 9.6% in market share
for Josephine and Jackson counties, respectively. VRB seeks to refine its branch
network, and in those areas where multiple locations are unnecessary to maintain
a competitive advantage, is inclined to close or consolidate branches that are
in close proximity.
The bank's long-term strategies include expansion outside its current
market. VRB's management expects that such expansion would be centered along the
1-5 corridor and extending its banking services into the Willamette Valley
regions to the north.
EMPLOYEES
As of June 30, 2000, VRB had a total of 172 full-time equivalent
employees. A number of benefit plans are available to eligible employees,
including paid sick leave and vacation, group medical plans, a 401(k) plan, and
a discretionary stock option plan. None of VRB's employees are subject to a
collective bargaining agreement and the company considers its relationships with
its employees to be good.
SECURITY OWNERSHIP OF VRB MANAGEMENT AND OTHERS
The following table sets forth the shares of VRB common stock
beneficially owned as of October 2, 2000, by each director and executive officer
of VRB, and all directors and executive officers as a group:
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<PAGE> 97
<TABLE>
<CAPTION>
COMMON STOCK
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE OF CLASS
------------------------ ------------------ --------------------
<S> <C> <C>
James D. Coleman 129,868 (1) 1.5%
John O. Dunkin 53,753 (2) *
Michael Donovan 6,949 (3) *
April Sevcik 15,582 (4) *
Gary A. Lundberg 23,658 (4) *
Robert J. DeArmond 142,962 (4) 1.7%
Larry L. Parducci 33,699 (4) *
Tom Anderson 83,320 (5) *
William A. Haden 72,768 (6) *
Brad Copeland 18,998 (7) *
Felice Belifiore 7,730 (8) *
Kathy Peckham 7,555 (9) *
ALL DIRECTORS AND EXECUTIVE OFFICERS 596,842 7.1%
(12 persons)
</TABLE>
---------------
* Less than 1.0%
(1) Includes 2,370 shares which could be acquired within 60 days by exercise
of stock options.
(2) Includes 27,573 shares, which could be acquired within 60 days by
exercise of stock options, and 25,180 shares held under JCLS limited
partnership of which Mr. Dunkin is general partner.
(3) Includes 6,689 shares which could be acquired within 60 days by exercise
of stock options.
(4) Includes 2,222 shares which could be acquired within 60 days by exercise
of stock options.
(5) Includes 1,111 shares which could be acquired within 60 days by exercise
of stock options.
(6) Includes 48,323 shares which could be acquired within 60 days by
exercise of stock options and 22,445 shares held in the Valley of the
Rogue Bank 401(k) Profit Sharing Plan, in a segregated self-directed
account for the benefit of Mr. Haden.
(7) Includes 13,520 shares which could be acquired within 60 days by
exercise of stock options, and 1,946 shares held in the Valley of the
Rogue Bank 401(k) Profit Sharing Plan, in a segregated self-directed
account for the benefit of Mr. Copeland.
(8) Includes 7,280 shares which could be acquired within 60 days by exercise
of stock options.
(9) Includes 624 shares which could be acquired within 60 days by the
exercise of stock options, and 6,224 shares held in the Valley of the
Rogue Bank 401(k) Profit Sharing Plan, in a segregated self-directed
account for the benefit of Ms. Peckham.
TRANSACTIONS WITH MANAGEMENT
Various Directors and executive officers are customers of and have had
banking transactions with Valley of the Rogue Bank, in the ordinary course of
business, and the bank
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<PAGE> 98
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 rate and collateral) as
those prevailing at the time for comparable transactions with other persons and,
in the opinion of 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, and companies with which
they are associated was $5,542,248 at December 31, 1999.
COMPLIANCE WITH SECTION 16 FILING REQUIREMENTS
Section 16 of the Securities Exchange Act of 1934, as amended, requires
that all executive officers and directors, and all persons who beneficially own
more than 10 percent of VRB's common stock, file an initial report of their
ownership of VRB's securities on Form 3 and report changes on their ownership of
VRB's securities on Form 4 or Form 5. These filings must be made with the
Securities and Exchange Commission with a copy sent to VRB.
Based solely upon our review of the copies of the filings that it
received with respect to the fiscal year ended December 31, 1999, we believe
that all reporting persons made all required Section 16 filings with respect to
such fiscal year on a timely basis.
VRB MANAGEMENT'S DISCUSSION AND ANALYSIS
INDUSTRY TRENDS AND COMPANY ANNOUNCEMENTS
Branch openings and closures: On January 31, 2000, VRB opened a
temporary branch in Central Point, Oregon. Central Point continues to be one of
the fastest growing communities in southern Oregon and initial acceptance of the
temporary branch has been very positive. Branch assets and deposits have grown
to $9 million and $1.5 million, respectively as of June 30, 2000. Construction
on the permanent facility has commenced and the new facility is expected to be
open for business in the fourth quarter of 2000.
On May 15, 2000, the bank announced the impending closure of one of its
four branches located in Medford, Oregon. The branch closure, which took place
on August 15, 2000, came as a result the company's plan to streamline its branch
network and reduce operating overhead.
Interest Rate environment: Prior to the third quarter of 1999, VRB
operated under a relatively low interest rate environment. Subsequently,
interest rates rose rapidly as a result of a number of successive rate hikes. By
the end of the second quarter of 2000, the bank's prime lending rate had risen
to 9.25%, 1.50% higher than prime one year ago. While rate volatility has
influenced the yield on loans and interest paid on deposits, the bank's net
interest margin has remained close to the 6% mark in both 1999 and 2000
year-to-date. In addition, loan demand appears unhindered, with growth of 23%
over the last 18 months.
RESULTS OF OPERATIONS
Net income for the six-month periods ended June 30, 2000 and 1999. Net
income for the six months ended June 30, 2000 increased 1.2% to $2,458,000
compared to the same period last year. On a per share basis, earnings increased
from $.28 in 1999 to $.30 in 2000, an increase of 7%. VRB's share repurchase
plan (in effect throughout 1999) reduced the company's average shares
outstanding by approximately 400,000 shares, which enhanced the company's
earnings on a per share basis.
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<PAGE> 99
Net income for the years ended December 31, 1999 and 1998. Net income in
1999 totaled $4.9 million, substantially unchanged from that in 1998. Earnings
per share for each period was also consistent, averaging $0.57 per outstanding
share. Internal departmental restructuring, and pressure on interest margins
influenced earnings growth. Costs to establish a brand image, and strengthen the
lending and technological capabilities of the bank also lead to higher costs.
Management believes that these costs will be recovered in the form of future
efficiencies and profitability.
NET INTEREST INCOME
For financial institutions, the primary component of earnings is net
interest income, which is the difference between interest income from loans and
investment securities and interest expense on deposits. Over the last 18 months,
VRB has sustained its net interest income levels in the face of rapidly changing
interest rates and increased competitive pressures. At the close of the second
quarter, the profile of the company had changed significantly from that in 1999.
Loans growth was strong, liquidity had diminished, and deposit rates were rising
under an extremely competitive market.
Net interest income for the six-month periods ended June 30, 2000 and
1999. Net interest income (on a tax equivalent basis) increased from $8,270,000
to $8,389,000 when comparing the six months ended June 30, 1999 and 2000. The
increase reflected the net effect of the following:
- Interest earned on loans grew by 9.9%, due primarily to higher
volume.
- Unusually strong loan growth caused the bank to utilize its line
of credit with the Federal Home Loan of Seattle, and 84% of
second quarter loan growth was funded with short-term debt. For
the period, the bank averaged $3.4 million in overnight
borrowings, resulting in interest expense of approximately
$111,000.
- Interest expense grew as the bank paid a higher average rate on
interest bearing deposits (primarily time certificates of
deposit). Overall, the bank's cost of funds grew from 2.33% to
2.45%.
Net interest income for the years ended December 31, 1999 and 1998.
During 1999, the average yield on interest earning assets declined by 0.48%,
reflecting the low interest rate environment in effect for most of 1999. The
decline is also due to the mix of earning assets, which grew to include a higher
percent of lower yielding available-for-sale securities. Offsetting the decline
in asset yields, the cost of interest bearing liabilities also declined from
3.71% to 3.18%. In addition, VRB experienced a $14.3 million decline in time
certificates of deposits, which are typically more expensive than other deposit
products. Declining time certificates of deposit were replaced by less expensive
funding, which resulted in a lower average cost of funds for the year.
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<PAGE> 100
AVERAGE BALANCES & AVERAGE RATES EARNED AND PAID
The following table shows average balances and interest income or interest
expense, with the resulting average yield or rates by category of average
earning asset or interest-bearing liability:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1999 1998
----------------------------------------- ----------------------------------
(in thousands) Balance Interest Rate Balance Interest Rate
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Federal funds sold $ 18,792 $ 936 0.05% $ 38,206 $ 2,053 5.37%
Held-to-maturity securities 18,004 1,382 7.68 18,432 1,410 7.65
Available-for-sale securities 57,340 3,483 6.07 28,573 1,814 6.35
Commercial Loans 149,589 13,845 9.26 156,049 15,261 9.78
Consumer Loans 36,226 3,501 9.66 37,397 3,852 10.30
--------- --------- --------- --------- --------- ---------
Total earning assets 279,951 23,147 8.27 278,657 24,390 8.75
Non-earning assets 35,947 33,161
Less: Loan loss reserve (3,835) (4,062)
--------- ---------
Total assets $ 312,063 $ 307,756
========= =========
Interest bearing liabilities
Interest bearing checking 32,813 321 0.98 33,188 446 1.34
Money market 84,549 2,774 3.28 75,519 2,764 3.66
Savings 24,764 486 1.96 24,336 523 2.15
Time 59,252 2,832 4.78 73,627 3,932 5.34
--------- --------- --------- --------- --------- ---------
Total interest bearing deposits 201,378 6,413 3.18 206,670 7,665 3.71
Non-interest bearing deposits 73,610 64,733
--------- ---------
Total interest bearing deposits 274,988 271,403
Other liabilities 2,588 2,571
--------- ---------
Total liabilities 277,576 273,974
Shareholders' equity 34,487 33,782
--------- ---------
Total liabilities and shareholders' equity $ 312,063 $ 307,756
========= =========
Net interest income $ 16,734 $ 16,725
Interest Income as a percentage
of average earning assets 8.27% 8.75%
Interest expense as a percentage
of average earning assets 2.29 2.75
--------- ---------
Net interest margin 5.98% 6.00%
========= =========
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997
----------------------------------------
(in thousands) Balance Interest Rate
--------- --------- ---------
<S> <C> <C> <C>
Interest-earning assets
Federal funds sold $ 19,556 $ 1,063 5.44%
Held-to-maturity securities 18,480 1,431 7.74
Available-for-sale securities 22,486 1,504 6.69
Commercial Loans 71,016 7,531 10.60
Consumer Loans 38,565 3,913 10.15
--------- --------- ---------
Total earning assets 170,103 15,442 9.08
Non-earning assets 17,056
Less: Loan loss reserve (1,597)
---------
Total assets $ 185,562
=========
Interest bearing liabilities
Interest bearing checking 20,256 299 1.48
Money market 53,036 2,116 3.99
Savings 15,358 337 2.19
Time 26,285 1,310 4.98
--------- --------- ---------
Total interest bearing deposits 114,935 4,062 3.53
Non-interest bearing deposits 45,552
---------
Total interest bearing deposits 160,487
Other liabilities 1,415
---------
Total liabilities 161,902
Shareholders' equity 23,660
---------
Total liabilities and shareholders' equity $ 185,562
=========
Net interest income $ 11,380
Interest Income as a percentage
of average earning assets 9.08%
Interest expense as a percentage
of average earning assets 2.39
---------
Net interest margin 6.69%
=========
</TABLE>
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ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL
The following table sets forth, on a tax-equivalent basis, a summary of
the changes in net interest income resulting from changes in volumes and rates.
Changes not due solely to volume or rate changes are allocated to rate.
<TABLE>
<CAPTION>
December 99 over December 98 over
December 98 December 97
Increase (decrease) Increase (decrease)
in interest in interest
due to changes in due to changes in
---------------------- ----------------------
Interest earning assets Average Average Average Average
Volume Rate Net Effect Volume Rate Net Effect
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Federal funds sold $ (967) $ (150) $(1,117) $ 1,002 $ (12) $ 990
Held-to-maturity securities (33) 5 (28) (4) (17) (21)
Available-for-sale securities 1,747 (78) 1,669 386 (76) 310
Commercial loans (598) (818) (1,416) 8,316 (586) 7,730
Consumer loans (113) (238) (351) (107) 46 (61)
------- ------- ------- ------- ------- -------
Total 36 (1,279) (1,243) 9,593 (645) 8,948
------- ------- ------- ------- ------- -------
Interest bearing liabilities
------- ------- ------- ------- ------- -------
Interest bearing checking (4) (121) (125) 174 (27) 147
Money market 296 (286) 10 823 (175) 648
Savings 8 (45) (37) 193 (7) 186
Time deposits (687) (413) (1,100) 2,528 94 2,622
------- ------- ------- ------- ------- -------
Total (387) (865) (1,252) 3,718 (115) 3,603
------- ------- ------- ------- ------- -------
Net increase in net interest income $ 423 $ (414) $ 9 $ 5,875 $ (530) $ 5,345
======= ======= ======= ======= ======= =======
</TABLE>
FEE INCOME
For the six month periods ended June 30, 2000 and 1999. Fee income, or
non-interest income, increased by $228,000, or 23%, when comparing the first six
months of 1999 and 2000. In May, the bank updated its fee structure, which
resulted in the more frequent assessment of account charges for certain products
and services. Also contributing to the increase in fee income were ATM surcharge
fees beginning February 2000.
For the years ended December 31, 1999 and 1998. Fee income, or
non-interest income, totaled $2.1 million, a 4% decline when compared to the
prior year. As a percent of total revenues, fee income equaled 8.3% of total
revenues in 1999, substantially unchanged from 1998. The decline in non-interest
income is due to the decrease in residential mortgage loans originated through
the bank's mortgage lending department.
In the third quarter of 1999, the mortgage lending process was
restructured and moved in-house to include local processing, underwriting and
closing of residential real estate loans. In connection with the restructure,
the department introduced new products and expanded its mortgage services.
Management believes the mortgage department is now positioned to capture a much
larger share of the market; however, the origination and refinance of mortgage
loans and related fees are dependent on the general level and direction of
interest rates. Accordingly, there can be no assurance that such income will
improve in the future.
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<PAGE> 102
COST OF OPERATIONS
For the six months ended June 30, 2000 and 1999. Cost of operations, or
non-interest expense, grew to $5.4 million year-to-date. Salaries and
depreciation expense were primarily responsible for the 7% increase, reflecting
the bank's investment in both people and technology during this period.
The bank's efficiency ratio, or non-interest expense as a percentage of
total net interest income plus non-interest income, was 56.6% for the six months
ended June 30, 2000 compared to 54.9% for the same period in 1999. Excluding the
amortization of intangibles, such as goodwill from VRB's acquisition of Colonial
Banking Company ("CBC") (an approximate charge of $640,000 per year), the
efficiency ratio improves to 52.7% and 50.9% for the periods ended June 30, 2000
and 1999, respectively.
For the years ended December 31, 1999 and 1998. Cost of operations grew
to $10.6 million, an increase of less than one percent. VRB hired a number of
senior lending and calling officers in 1999 to generate loan growth. As a
results, salaries and benefits rose from $6.0 million to $6.3 million, a 5.6%
increase. VRB had 177 full time equivalent employees at December 31, 1999
compared to 167 full time equivalent employees at December 31, 1998.
Occupancy costs, including depreciation, rent and small equipment,
increased by 12.9% to $1.2 million. In 1999, VRB embarked on a campaign to
upgrade operating equipment and streamline data and voice communications,
investing $1.1 million into capital projects and company infrastructure.
With the exception of communication costs (primarily postage and phone
service), other administrative expenses declined slightly, centered around
reductions in professional fees and other one-time expenses related to the
acquisition of CBC in 1998 (see Note 2 in Notes to consolidated financial
statements).
In 1999, VRB maintained an efficiency margin of 56.2%, slightly higher
than 1998's efficiency margin of 55.6%. Excluding the amortization of goodwill
from the measurement, the efficiency margin drops to 52.4% and 51.7% for 1999
and 1998, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
1998 AND 1997
In the first quarter of 1998, VRB acquired CBC. CBC was a state charted
bank with approximately $116 million in total assets. CBC added four branches to
VRB's existing branch network in Southern Oregon. VRB paid $15.7 million in
cash, which was approximately 2.5 times book value. The acquisition of CBC
brought increased market share to the company and preempted the acquisition of
CBC by potential competitors looking to enter the Rogue Valley market.
Earnings grew to $4.9 million in 1998, up $1.2 million or 33% when
compared to 1997. Diluted earnings per share grew to $.57, an increase of 18%
from $.48 in 1997. Earnings accretion from the CBC acquisition was partially
diluted by the sale of 1.1 million shares of VRB common stock, the proceeds of
which were used to finance the CBC acquisition.
The acquisition of CBC altered VRB's deposit structure with a new
emphasis in high cost certificates of deposit (27% of total deposits compared
16% pre acquisition). CBC also brought an unusually large concentration of out
of area commercial loans with very low interest rates. The net portfolio return
on CBC loans was approximately 70 basis points lower than VRB's then-current
average. While net interest income grew by $1.3 million, VRB's interest margin
declined to from
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<PAGE> 103
6.69% to 6.01%. Noninterest income and expenses also reflected the acquisition,
growing 28% and 52% respectively.
FINANCIAL CONDITION
LENDING AND CREDIT MANAGEMENT
As of June 30, 2000 and December 31, 1999, and 1998. Outstanding loans
totaled $219.4 million at June 30, 2000, representing a $17.6 million increase
when compared to loans of $201.7 million as of December 31, 1999 and a $40.3
million increase when compared to December 31, 1998. Loan growth has been
diversified across all categories, with the biggest gains in commercial real
estate and commercial lines of credit. Loan growth is the result of aggressive
calling strategies, innovative terms and favorable economic conditions.
Commitments to extend credit totaled $34 million as of June 30, 2000, relatively
unchanged when compared to commitments outstanding as of the end of the previous
two years.
The following table presents the composition of the bank's loan portfolio at the
dates indicated:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999 December 31, 1998
------------------------- ------------------------- --------------------------
Amount Percentage Amount Percentage Amount Percentage
-------- ---------- -------- ---------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 36,793 16.77% $ 23,940 11.87% $ 16,418 9.17%
Real estate construction 19,714 8.99% 29,034 14.39% 23,552 13.15%
Real estate residential mortgage 44,267 20.18% 41,225 20.44% 0.00%
Real estate commercial mortgage 103,688 47.27% 93,540 46.37% 126,675 70.74%
Consumer and other 14,901 6.79% 13,997 6.94% 12,425 6.94%
-------- -------- -------- -------- -------- --------
Total $219,363 100.00% $201,736 100.00% $179,070 100.00%
======== ======== ======== ======== ======== ========
Loans at fixed rates 59,306 27.04% 53,440 26.49% 56,775 31.71%
Loans at variable rates 160,057 72.96% 148,296 73.51% 122,295 68.29%
-------- -------- -------- -------- -------- --------
Total $219,363 100.00% $201,736 100.00% $179,070 100.00%
======== ======== ======== ======== ======== ========
</TABLE>
LOAN LOSS RESERVE
As of June 30, 2000 and December 31, 1999, and 1998. 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 based on internally established guidelines, an
evaluation that is influenced by current overall levels of non-performing loans,
value of collateral securing a particular loan, general and local economic
conditions, and the bank's overall historical loan loss experience. Management
seeks to control credit losses by maintaining strong underwriting standards and
by closely monitoring each borrower's financial condition.
VRB has established credit policies and guidelines that control and
monitor credit risk on an ongoing basis. Managing credit risk is the
responsibility of all loan officers, working under the oversight of the bank's
loan administrator. Each credit is regularly evaluated as to the likelihood that
a borrower will repay a loan from expected sources. When collateral is involved,
this includes evaluating whether sufficient collateral is obtained at the
outset, and verifying that the value of the collateral remains sufficient to
support the credit.
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<PAGE> 104
<TABLE>
<CAPTION>
Loan loss experience June 30, December 31,
2000 1999 1998
------- -------- ------------
<S> <C> <C> <C>
(in thousands)
Loan loss reserve balance, beginning of year $3,503 $3,539 $1,780
Loan losses
Commercial -- -- 21
Real Estate -- 28 95
Consumer 17 58 69
------ ------ ------
Total 17 86 185
Recoveries
Commercial 3 38 36
Real Estate 3 -- --
Consumer 2 12 10
------ ------ ------
Total 8 50 46
------ ------ ------
Net loan losses 9 36 139
Provision of loan losses -- -- --
Changes incidental to merger -- -- 1,898
------ ------ ------
Balance, end of year $3,494 $3,503 $3,539
====== ====== ======
Loan loss reserve / total loans 1.59% 1.74% 1.98%
====== ====== ======
Net loan losses / average loans outstanding 0.01% 0.02% 0.07%
====== ====== ======
</TABLE>
Non-performing assets include assets that are on nonaccrual status, loans past
due greater than 90 days but not on nonaccrual status, and other real estate
owned (OREO). Non-performing assets have consistently averaged less than a
quarter of one percentage point over the last several periods.
<TABLE>
<CAPTION>
Loan loss experience June 30, December 31,
-------- ----------------------
2000 1999 1998
----- ----- ----
<S> <C> <C> <C>
(in thousands)
Loans on non-accrual status $ 202 $ 551 $262
Loans past due greater than 90 days -- -- 4
----- ----- ----
Total non-performing loans 202 551 266
Other real estate owned -- -- 51
----- ----- ----
Total non-performing assets $ 202 $ 551 $317
===== ===== ====
Non-performing loans/total loans 0.09% 0.27% 0.15%
===== ===== ====
Non-performing assets/total assets 0.06% 0.18% 0.10%
===== ===== ====
</TABLE>
INVESTMENTS
As of June 30, 2000 and December 31, 1999, and 1998. Investment
securities are purchased to help manage liquidity and generate after-tax profits
consistent with the risk guidelines established by management and the Board of
Directors. As of June 30, 2000, the bank's portfolio of investment securities
totaled $73.2 million, virtually unchanged when compared to the December 31,
1999 and 1998 balance of $74.8 and $76.5 million, respectively.
As of June 30, 2000, the bank's investment portfolio that is currently
available-for-sale ("AFS") totaled $54.0 million, or approximately 74% of the
total portfolio. Due to rising interest
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<PAGE> 105
rates, the market value of the bank's AFS portfolio has dropped by approximately
$2.6 million, before accruing for tax benefits. This represents a 4.5% percent
decline in the aggregate market value of the bank's AFS 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 interest 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.
The following table provides the book value of the bank's investment
portfolio as divided between HTM and AFS as of June 30, 2000 and December 31,
1999 and 1998:
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
(in thousands)
Investments available-for-sale
U.S. Treasury and agencies $53,873 $54,756 $57,070
Corporate and other investments 115 134 194
------- ------- -------
$53,988 $54,890 $57,264
======= ======= =======
Investments held-to-maturity
States and political subdivisions $17,243 $18,010 $17,454
======= ======= =======
FHLB stock $ 1,961 $ 1,899 $ 1,765
======= ======= =======
</TABLE>
DEPOSITS
As of June 30, 2000 and December 31, 1999, and 1998. Deposits are the
bank's principal source of funds available for lending and other investment
opportunities. Deposit inflows and outflows are influenced by general interest
rate changes, competition and local, regional and national economic conditions.
Substantially all of the bank's depositors are individuals or businesses located
in southern Oregon.
Total deposits increased $2.7 million, or 1%, when comparing June 30,
2000 to the end of the prior fiscal year. Non-interest bearing deposits have
increased to 29.3% of total deposits, up from 27.1% at year-end. High
concentrations in non-interest bearing accounts provide inexpensive funding
evidenced by the fact that the bank's cost of funds has averaged 2.50% for the
year, to date. However, non-interest bearing account balances are also prone to
volatility and can fluctuate from day to day depending on the time of month and
external events like tax deadlines.
The bank's current deposit mix is further illustrated below:
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<PAGE> 106
<TABLE>
<CAPTION>
Percentage Percentage Percentage
June 30, of Total December 31, of Total December 31, of Total
2000 Deposits 1999 Deposits 1998 Deposits
-------- ---------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Demand $ 81,632 29.3% $ 74,805 27.1% 72,134 26.3%
Interest bearing demand 110,651 39.6 119,569 43.3 110,900 40.5
Savings 23,098 8.3 23,512 8.5 24,269 8.9
Time deposits 63,696 22.8 58,480 21.1 66,819 24.4
-------- -------- -------- -------- -------- --------
$279,077 100.0% $276,366 100.0% $274,122 100.0%
======== ======== ======== ======== ======== ========
</TABLE>
LIQUIDITY
As of June 30, 2000. Liquidity enables VRB to meet the borrowing needs
of its customers and deposit withdrawals of its depositors. VRB manages its
liquidity through a mature and stable base of customer deposits, various lines
of credit with other financial institutions and cash flows from continuing
operations.
VRB maintains a cash management credit facility with the Federal Home
Loan Bank. The credit facility is limited to 10% of the holding company's total
assets (approximately $30 million at December 31, 1999) measured on a quarterly
basis. The credit facility is collateralized by FHLB stock owned by VRB and by
all VRB's other assets. In addition, VRB maintains federal funds lines with
correspondent banks as an alternative source of temporary liquidity. At June 30,
2000, VRB had available federal funds lines totaling $8 million.
Overall liquidity declined in 2000 as loan balances grew while deposits
remained relatively unchanged. As a result, the bank drew from its line of
credit with the Federal Home Loan Bank ("FHLB") intermittently during the
period. At the end of the second quarter, the bank had $11 million in overnight
borrowings. Management expects that the bank will continue to borrow from the
FHLB and that the volume of such borrowings will depend on deposit growth and on
the bank's ability to continue to grow its loan portfolio.
For the first six months of 2000, the bank experienced net cash outflows
(cash and federal funds) of approximately $1,000,000. The net impact of cash
inflows and outflows included net loan growth of $17.5 million, funded by a
combination of $11.0 million in debt (reflected in an increase in the FHLB line
of credit), new deposits of $2.7 million and $2.9 million in cash from ongoing
operations.
CAPITAL RESOURCES
As of June 30, 2000. As of June 30, 2000, shareholders' equity totaled
$34.9 million, an increase of $1.3 million when compared to total shareholders'
equity as of the end of the last fiscal year. The increase in shareholders'
equity reflects earnings of $2.5 million offset by dividends of $1.0 million
($0.12 per share) paid May 1, 2000.
The bank is required to maintain minimum amounts of capital to
"risk-weighted" assets, as defined by banking regulators. At June 30, 2000, the
bank was required to have Tier 1 and Total Capital ratios of 4.0% and 8.0%,
respectively. The bank's actual ratios at that date were 10.9% and 12.1%,
respectively.
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<PAGE> 107
MARKET RISK
In the normal course of business, interest rate and credit risks are the
most significant market risks that could have an adverse impact on the bank's
financial condition and results of operations. Other types of market risk, such
as foreign currency exchange rate risk and commodity price risk, do not have a
material effect on the bank's operations at this time.
Interest rate risk. Interest rate risk is the risk that changes in
market interest rates will have an adverse impact on VRB's earnings. The
greatest source of interest rate risk results from the mismatch of maturities
and repricing intervals for rate sensitive assets, liabilities and off balance
sheet commitments. To further illustrate, if VRB makes long term fixed rate
loans and finances them with floating-rate deposits, a gap mismatch is created
because the repricing period for loans and deposits are different. If interest
rates were to rise in this scenario, VRB may be obligated to pay more interest
on deposits while receiving the same amount of interest on loans.
VRB measures its interest rate risk using asset/liability simulation
modeling which quantifies variations in net interest income due to changes in
the rate environment. The analysis incorporates maturity and repricing
characteristics of VRB's current configuration of interest bearing assets and
liabilities. By adjusting interest rates up or down in even increments of 100
and 200 basis points in a series of "rate shocks," VRB can develop a range of
possible outcomes.
As of June 30, 2000, the table below sets forth the estimated changes in
VRB's unaudited net interest income over a period of one year under the
scenarios set forth.
<TABLE>
<CAPTION>
Adjusted
--------------------------
Increase (Decrease)
Change in in Net Interest Net Interest Return On
Prime Rate Income Income Equity
---------- ------------------- ------------ ---------
<S> <C> <C> <C>
current: 9.25% 5.94% 14.29%
2.00% $(618) 5.72% 13.08%
1.00% $(309) 5.83% 13.64%
-1.00% $ 341 6.06% 14.83%
-2.00% $ (71) 5.91% 14.08%
</TABLE>
Certain shortcomings are inherent in the above analysis. Management has
made relatively broad assumptions regarding customer behavior in periods of
changing interest rates, including the prepayment characteristics of loans and
the repricing and withdrawal of deposits. Additionally, certain assets, such as
adjustable rate loans have features, which restrict changes in interest rates.
The interest rate sensitivity of VRB's net interest income could vary
significantly if different assumptions were used, or if actual experience
differs from the assumptions used.
COMPETITION
The community banking business is highly competitive. The companies
compete with other commercial banks and with other financial institutions,
including savings and loan associations, mutual savings banks, finance
companies, mortgage banking companies, credit unions, and investment companies.
In recent years, competition has increased from institutions not subject to the
same regulatory restrictions as banks and bank holding companies.
101
<PAGE> 108
The geographic market areas served by both South Umpqua and Valley of
the Rogue Bank are highly competitive for both deposits and loans. Each competes
with traditional banking and thrift institutions, as well as non-bank financial
services providers, such as credit unions, brokerage firms and mortgage
companies. The major commercial bank competitors are super-regional institutions
headquartered outside the state of Oregon, and their deposits represent a
significant majority of total statewide commercial bank deposits. The major
banks have competitive advantages over the banks in that they have higher
lending limits and are able to offer statewide facilities and services that
neither of the banks currently offer.
The banks, however, view non-bank financial services providers, such as
credit unions, brokerage firms, insurance companies and mortgage companies, as
its principal competition. As the industry becomes increasingly dependent on and
oriented toward technology-driven delivery systems permitting transactions to be
conducted by telephone, computer and the internet, such non-bank institutions
are able to attract funds and provide lending and other financial services even
without offices located in the bank's primary service area. Some insurance
companies and brokerage firms compete for deposits by offering rates that are
higher than may be appropriate for a bank in relation to its asset/liability
objectives, although the banks offers a wide array of deposit products and
believes they can compete effectively through select rate-driven product
promotions.
Credit unions present a significant competitive challenge. As credit
unions currently enjoy an exemption from corporate income taxes, they are able
to offer higher deposit rates and lower loan rates than the banks. Credit unions
are also not currently subject to certain regulatory constraints applicable to
the banks such as the Community Reinvestment Act, which, among other things,
requires regulated financial institutions to implement procedures to make and
monitor loans throughout the communities it serves. Adhering to such regulatory
requirements raises the costs associated with the bank's lending activities, and
reduces potential operating profits. Accordingly, the banks seek to compete by
focusing on building customer relations, providing superior service and offering
a wide variety of commercial banking products such as commercial real estate
loans, inventory and accounts receivable financing, and SBA loans for qualified
businesses, that do not compete directly with products and services offered by
the credit unions.
The acquisition by Umpqua of Strand, Atkinson, Williams & York, Inc., a
retail brokerage firm, further permits Umpqua to offer a full range of brokerage
services and investment insurance products to its banking customers as well as
to other customers of the firm. Management of Umpqua believes that providing
these additional financial services through its banking stores will help
differentiate it from many other banks and provide additional revenue for the
company.
CERTAIN REGULATORY CONSIDERATIONS
Umpqua is a registered Financial Holding Company under the
Gramm-Leach-Bliley Act of 1999 (the "Act"), and is subject to the supervision
of, and regulation by, the Board of Governors of the Federal Reserve System (the
"Federal Reserve"). To continue its status as a financial holding company,
Umpqua must maintain its "well capitalized" and "well managed" status.
Additionally, its subsidiary must also receive "satisfactory or better" ratings
on the last CRA exam. The Federal Reserve reserves authority to limit the
activities of a financial holding company if it finds the company as a whole
lacks the financial or managerial strength to engage in new activities, make new
acquisitions or retain ownership of companies engaged in financial activities.
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<PAGE> 109
VRB is a registered bank holding company and is also subject to the
supervision of, and regulation by, the Federal Reserve.
General - Both subsidiary banks and Umpqua's broker-dealer subsidiary
are extensively regulated under federal and state law. These laws and
regulations are generally intended to protect depositors, borrowers and other
customers, not shareholders. To the extent that the following information
describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory or regulatory provisions. Any change in
applicable laws or regulations may have a material effect on the business and
prospects of the companies. Neither company can accurately predict the nature or
the extent of the effects on its business and earnings that fiscal or monetary
policies, or new federal or state legislation may have in the future.
Federal and State Bank Regulation - The banks, as state chartered banks
with deposits insured by the Federal Deposit Insurance Corporation, are also
subject to supervision and regulation by the Oregon Director of the Department
of Consumer and Business Services and the FDIC. These agencies may prohibit the
banks from engaging in what the agencies believe constitute unsafe or unsound
banking practices.
The Community Reinvestment Act ("CRA") requires that, in connection with
examinations of financial institutions within its jurisdiction, the FDIC
evaluate the record of the financial institutions in meeting the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those institutions. These
factors are also considered in evaluating mergers, acquisitions and applications
to open a branch or new facility. Both banks' current CRA ratings are
"satisfactory."
Banks are also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal
shareholders or any related interest of such persons. Extensions of credit (i)
must be made on substantially the same terms, including interest rates and
collateral as, and follow credit underwriting procedures that are not less
stringent than, those prevailing at the time for comparable transactions with
persons not affiliated with the bank, and (ii) must not involve more than the
normal risk of repayment or present other unfavorable features. Banks are also
subject to certain lending limits and restrictions on overdrafts to such
persons. A violation of these restrictions may result in the assessment of
substantial civil monetary penalties on the affected bank or any officer,
director, employee, agent or other person participating in the conduct of the
affairs of that bank, the imposition of a cease and desist order, and other
regulatory sanctions. Neither bank is aware of any material violation of these
laws and regulations.
Under the Federal Deposit Insurance Corporation Improvement Act
("FDICIA"), each federal banking agency has prescribed, by regulation,
non-capital safety and soundness standards for institutions under its authority.
These standards cover internal controls, information and internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, and standards for asset quality, earnings and
stock valuation. An institution which fails to meet these standards must develop
a plan acceptable to the agency, specifying the steps that the institution will
take to meet the standards. Failure to submit or implement such a plan may
subject the institution to regulatory sanctions. Management of both companies
believes that their companies and subsidiary banks are in substantial compliance
with these standards.
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<PAGE> 110
Deposit and Account Insurance - The deposits of each bank are currently
insured to a maximum of $100,000 per depositor through the Bank Insurance Fund
("BIF"), administered by the FDIC. Each bank is required to pay semi-annual
deposit insurance premium assessments to the FDIC. The customer accounts of
Strand, Atkinson, Williams & York, Inc. are insured to a maximum of $100,000 for
any failure of the brokerage firm by the Securities Investors Protection
Corporation.
Under the federal deposit insurance system, banks are assessed insurance
premiums according to how much risk they are deemed to present to the BIF. Banks
with higher levels of capital and a low degree of supervisory concern are
assessed lower premiums than banks with lower levels of capital or involving a
higher degree of supervisory concern. Both banks qualify for the lowest premium
level, and currently pay only the statutory minimum rate.
Dividends - Under the Oregon Bank Act, a bank is subject to restrictions
on the payment of cash dividends to its shareholders, or in the case of South
Umpqua and Valley of the Rogue, parent company. A bank may not pay cash
dividends if that payment would reduce the amount of its capital below that
necessary to meet minimum applicable regulatory capital requirements. In
addition, the appropriate regulatory authorities are authorized to prohibit
banks and bank holding companies from paying dividends which would constitute an
unsafe or unsound banking practice.
Capital Adequacy - The federal and state bank regulatory agencies use
capital adequacy guidelines in their examination and regulation of financial
holding companies, bank holding companies and banks. If the capital falls below
the minimum levels established by these guidelines, a holding company or a bank
may be denied approval to acquire or establish additional banks or non-bank
businesses or to open new facilities.
The FDIC and Federal Reserve have adopted risk-based capital guidelines
for banks and holding companies. The risk-based capital guidelines are designed
to make regulatory capital requirements more sensitive to differences in risk
profile among banks and holding companies, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
current guidelines require all holding companies and federally-regulated banks
to maintain a minimum risk-based total capital ratio equal to 8%, of which at
least 4% must be Tier 1 capital. Generally, banking regulators expect banks to
maintain capital ratios well in excess of the minimum.
Tier 1 capital for banks includes common shareholders' equity,
qualifying perpetual preferred stock (up to 25% of total Tier 1 capital, if
cumulative; under a Federal Reserve rule, redeemable perpetual preferred stock
may not be counted as Tier 1 capital unless the redemption is subject to the
prior approval of the Federal Reserve) and minority interests in equity accounts
of consolidated subsidiaries, less intangibles, except as described above. Tier
2 capital includes: (i) the allowance for loan losses of up to 1.25% of
risk-weighted assets; (ii) any qualifying perpetual preferred stock which
exceeds the amount which may be included in Tier 1 capital; (iii) hybrid capital
instruments (iv) perpetual debt; (v) mandatory convertible securities and (vi)
subordinated debt and intermediate term preferred stock of up to 50% of Tier 1
capital. Total capital is the sum of Tier 1 and Tier 2 capital less reciprocal
holdings of other banking organizations, capital instruments and investments in
unconsolidated subsidiaries.
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<PAGE> 111
Banks' assets are given risk-weights of 0%, 20%, 50%, and 100%. In
addition, certain off-balance sheet items are given credit conversion factors to
convert them to asset equivalent amounts to which an appropriate risk-weight
will apply. These computations result in the total risk-weighted assets.
Most loans are assigned to the 100% risk category, except for first
mortgage loans fully secured by residential property, which carry a 50% rating.
Most investment securities are assigned to the 20% category, except for
municipal or state revenue bonds, which have a 50% risk-weight, and direct
obligations of or obligations guaranteed by the U.S. Treasury or U.S. Government
agencies, which have 0% risk-weight. In converting off-balance sheet items,
direct credit substitutes, including general guarantees and standby letters of
credit backing financial obligations, are given 100% conversion factor. The
transaction-related contingencies such as bid bonds, other standby letters of
credit and undrawn commitments, including commercial credit lines with an
initial maturity of more than one year, have a 50% conversion factor.
Short-term, self-liquidating trade contingencies are converted at 20%, and
short-term commitments have a 0% factor.
The FDIC also has implemented a leverage ratio, which is Tier 1 capital
as a percentage of total assets less intangibles, to be used as a supplement to
risk-based guidelines. The principal objective of the leverage ratio is to place
a constraint on the maximum degree to which a bank may leverage its equity
capital base. The FDIC requires a minimum leverage ratio of 3%. However, for all
but the most highly rated holding companies and for banks seeking to expand or
experiencing or anticipating significant growth, the FDIC requires a minimum
leverage ratio of 4%.
The FDICIA created a statutory framework of supervisory actions indexed
to the capital level of the individual institution. Under regulations adopted by
the FDIC, an institution is assigned to one of five capital categories depending
on its total risk-based capital ratio, Tier 1 risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which are
deemed to be "undercapitalized" are subject to certain mandatory supervisory
corrective actions. Both banks are considered well capitalized and management
does not believe that these regulations have any material effect on their
respective operations.
As a registered broker-dealer, Strand, Atkinson, Williams & York, Inc.
is required to maintain capital levels adequate to cover its underwriting
activities. Since its acquisition by Umpqua, its current activities have not
been impeded by its capital level and Umpqua believes that its subsidiary's
capital position is adequate for its expected activities over the next year.
Effects of Government Monetary Policy - The earnings and growth of the
companies are affected not only by general economic conditions, but also by the
fiscal and monetary policies of the federal government, particularly the Federal
Reserve. The Federal Reserve can and does implement national monetary policy for
such purposes as curbing inflation and combating recession, by its open market
operations in U.S. Government securities, control of the discount rate
applicable to borrowings from the Federal Reserve, and establishment of reserve
requirements against certain deposits. These activities influence growth of bank
loans, investments and deposits, and also affect interest rates charged on loans
or paid on deposits. The nature and impact of future changes in monetary
policies and their impact on the companies cannot be predicted with certainty.
Changing Regulatory Structure of the Banking Industry - The laws and
regulations affecting banks and holding companies are subject to significant
change. Bills are now pending or expected to be introduced in the United States
Congress that contain proposals for altering the structure,
105
<PAGE> 112
regulation, and competitive relationships of the nation's financial
institutions. If enacted into law, these bills could have the effect of
increasing or decreasing the cost of doing business, limiting or expanding
permissible activities, or affecting the competitive balance among banks,
savings associations, and other financial institutions. Some of these bills
would reduce (or, increase) the extent of federal deposit insurance, broaden the
powers or the geographical range of operations of holding companies, and realign
the structure and jurisdiction of various financial institution regulatory
agencies. Whether or in what form any such legislation may be adopted or the
extent to which the business of the companies might be affected thereby, cannot
be predicted with certainty.
Of particular note is legislation enacted by Congress in 1995 permitting
interstate banking and branching, which allows banks to expand nationwide
through acquisition, consolidation or merger. Under this law, an adequately
capitalized holding company may acquire banks in any state or merge banks across
state lines if permitted by state law. Further, banks may establish and operate
branches in any state subject to the restrictions of applicable state law. Under
Oregon law, an out-of-state bank or holding company may merge with or acquire an
Oregon state chartered bank or holding company if the Oregon bank, or in the
case of a holding company, the subsidiary bank, has been in existence for a
minimum of three years, and the law of the state in which the acquiring bank is
located permits such merger. Branches may not be acquired or opened separately,
but once an out-of-state bank has acquired branches in Oregon, either through a
merger with or acquisition of substantially all the assets of an Oregon bank,
the acquirer may open additional branches.
In December 1999, Congress enacted the Gramm-Leach-Bliley Act and
repealed the nearly 70-year prohibition on banks and bank holding companies
engaging in the businesses of securities and insurance underwriting imposed by
the Glass-Steagall Act.
Under the GLB Act, a bank holding company may, if it meets certain
criteria, elect to be a "financial holding company," which is permitted to
offer, through a non-bank subsidiary, products and services that are "financial
in nature" and to make investments in companies providing such services. A
financial holding company may also engage in investment banking, and an
insurance company subsidiary of a financial holding company may also invest in
"portfolio" companies, without regard to whether the businesses of such
companies are financial in nature.
The GLB Act also permits eligible banks to engage in a broader range of
activities through a "financial subsidiary," although a financial subsidiary of
a bank is more limited than a financial holding company in the range of services
it may provide. Financial subsidiaries of banks are not permitted to engage in
insurance underwriting, real estate investment or development, merchant banking
or insurance portfolio investing. Banks with financial subsidiaries must (i)
separately state the assets, liabilities and capital of the financial subsidiary
in financial statements; (ii) comply with operational safeguards to separate the
subsidiary's activities from the bank; and (iii) comply with statutory
restrictions on transactions with affiliates under Sections 23A and 23B of the
Federal Reserve Act.
Activities that are "financial in nature" include activities normally
associated with banking, such as lending, exchanging, transferring and
safe-guarding money or securities, and investing for customers. Financial
activities also include the sale of insurance as agent (and as principal for a
financial holding company, but not for a financial subsidiary of a bank),
investment advisory services, underwriting, dealing or making a market in
securities, and any other activities previously determined by the Federal
Reserve to be permissible non-banking activities.
106
<PAGE> 113
Financial holding companies and financial subsidiaries of banks may also
engage in any activities that are incidental to, or determined by order of the
Federal Reserve to be complementary to, activities that are financial in nature.
To be eligible to elect status as a financial holding company, a bank
holding company must be well-capitalized, under the Federal Reserve capital
adequacy guidelines, and to be well-managed, as indicated in the institution's
most recent regulatory examination. In addition, each bank subsidiary must also
be well-capitalized and well-managed, and must have received a rating of
"satisfactory" in its most recent CRA examination. Failure to maintain
eligibility would result in suspension of the institution's ability to commence
new activities or acquire additional businesses until the deficiencies are
corrected. The Federal Reserve could require a non-compliant financial holding
company that has failed to correct noted deficiencies within 180 days to divest
one or more subsidiary banks or to cease all activities other than those
permitted to ordinary bank holding companies under the regulatory scheme in
place prior to enactment of the GLB Act.
In addition to expanding the scope of financial services permitted to be
offered by banks and bank holding companies, the GLB Act addressed the
jurisdictional conflicts between the regulatory authorities that supervise
various types of financial businesses. Historically, supervision was an
entity-based approach, with the Federal Reserve regulating member banks and bank
holding companies and their subsidiaries. As holding companies are now permitted
to have insurance and broker-dealer subsidiaries, the supervisory scheme is
oriented toward functional regulation. Thus, a financial holding company is
subject to regulation and examination by the Federal Reserve, but a
broker-dealer subsidiary of a financial holding company is subject to regulation
by the Securities and Exchange Commission, while an insurance company subsidiary
of a financial holding company would be subject to regulation and supervision by
the applicable state insurance commission.
The GLB Act also includes provisions to protect consumer privacy by
prohibiting financial services providers, whether or not affiliated with a bank,
from disclosing non-public, personal, financial information to unaffiliated
parties without the consent of the customer, and by requiring annual disclosure
of the provider's privacy policy. Each functional regulator is charged with
promulgating rules to implement these provisions.
DESCRIPTION OF CAPITAL STOCK
UMPQUA
The Articles of Incorporation of Umpqua authorize the issuance of up to
20 million shares of common stock with no par value and 2 million shares of
preferred stock with no par value. As of October 2, 2000, there were
______________ shares of common stock issued and outstanding. Following the
Merger, a total of approximately ______ shares are expected to issued and
outstanding. No preferred shares have been issued. Each outstanding share of
common stock has the same relative rights and preference as each other shares of
common stock, including the rights to the net assets of Umpqua upon liquidation.
Each share is entitled to one vote on matters submitted to a vote of
shareholders. Holders of common stock are not entitled to preemptive rights and
may not cumulate votes in the election of directors. All issued and outstanding
shares are, and all shares to be issued to VRB shareholders pursuant to the
Merger will be, fully paid and non-assessable. The terms of the preferred stock
are not established in the Articles, but may be designated in one or more series
by the Board of Directors when the shares are issued.
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<PAGE> 114
The Board of Directors is authorized to issue or sell additional capital
stock of Umpqua, at its discretion and for fair value, and to issue future cash
or stock dividends, without prior shareholder approval except as otherwise
required by law or the listing requirements of the Nasdaq National Market.
A total of 1,150,000 shares of common stock have been reserved for
issuance under Umpqua's existing stock option plan, of which ______ shares were
subject to options outstanding as of October 2, 2000. An additional
approximately ___________ shares will be subject to substitute options granted
to VRB stock option holders upon completion of the Merger. The maximum number of
options which may be issued pursuant to the plan is limited to 10% of the issued
and outstanding shares, excluding shares issued upon exercise of previously
granted options. The Umpqua shareholders are voting on a proposal at their
special meeting to approve a new stock option plan providing for grants of
options to acquire up to _______ shares.
VRB
The Articles of Incorporation of VRB authorize the issuance of up to
30,000,000 shares of common stock with no par value and 10,000,000 shares of
preferred stock with a par value of $5.00 per share. As of October 2, 2000,
there were ______________ shares of common stock issued and outstanding. No
preferred shares have been issued. Each outstanding share of common stock has
the same relative rights and preference as each other shares of common stock,
including the rights to the net assets of VRB upon liquidation. Each share is
entitled to one vote on matters submitted to a vote of shareholders. Holders of
common stock are not entitled to preemptive rights and may not cumulate votes in
the election of directors. All issued and outstanding shares are fully paid and
non-assessable. The terms of the preferred stock are not established in the
Articles, but may be designated in one or more series by the Board of Directors
when the shares are issued.
The Board of Directors is authorized to issue or sell additional capital
stock of VRB, at its discretion and for fair value, and to issue future cash or
stock dividends, without prior shareholder approval except as otherwise required
by law or the listing requirements of the Nasdaq National Market.
A total of ___________ shares of common stock have been reserved for
issuance under VRB's stock option plans, of which ______ shares were subject to
options outstanding as of October 2, 2000.
ANTI-TAKEOVER PROVISIONS
The Articles of Incorporation of Umpqua also authorize the Board of
Directors, when evaluating a merger, tender offer or exchange offer, to consider
the social, legal and economic effects on employees, customers and suppliers of
the company, and on the communities and geographical areas in which the company
operates, as well as the state and national economies and the short- and
long-term interests of the company and its shareholders. This provision may be
amended only by the affirmative vote of at least 75% of the outstanding shares.
Such provisions may have the effect of discouraging potential acquirors, and may
be considered anti-takeover defenses. Under the Oregon Business Act, a proposed
merger or plan of exchange requires the approval of the Board of Directors and
the affirmative vote of a majority of the outstanding shares.
The articles of incorporation for both companies contain certain
provisions that could make more difficult their acquisition by means of an
unsolicited tender offer or proxy contest. The articles of incorporation of both
companies authorize the issuance of voting preferred stock, which, although
intended primarily as a financing tool and not as a defense against takeovers,
could
108
<PAGE> 115
potentially be used by management to make more difficult uninvited attempts to
acquire control by, for example, diluting the ownership interest or voting power
of a substantial shareholder, increasing the consideration necessary to effect
an acquisition, or selling authorized but previously unissued shares to a
friendly third party. In addition, the articles of incorporation authorize the
issuance of warrants, rights, options or other obligations convertible into, or
entitling the holder thereof, to purchase shares of any class of stock, the
issuance of which may also have the effect of diluting the ownership interest of
a shareholder or increasing the consideration necessary to effect an acquisition
of a controlling interest in the companies.
CERTAIN LEGAL MATTERS
The validity of Umpqua common stock to be issued in the Merger will be
passed upon for Umpqua by its counsel, Foster Pepper & Shefelman LLP, 101 SW
Main Street, Fifteenth Floor, Portland, Oregon.
AVAILABLE INFORMATION
Each of VRB and Umpqua is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), and in
accordance therewith files reports, proxy statements, and other information with
the Securities and Exchange Commission ("SEC"). Umpqua has included this Proxy
Statement as an exhibit to a Registration Statement filed with the Oregon
Department of Consumer and Business Services, Division of Finance and Corporate
Securities, 21 Labor and Industries Building, 350 Winter St., NE, Salem, Oregon
97310. Both Umpqua and VRB have also filed the Proxy Statement with Schedule 14A
with the SEC in compliance with their Exchange Act reporting requirements. This
Proxy Statement omits certain of the information contained in such Registration
Statement and reference is hereby made thereto and related exhibits for further
information with respect to VRB, Umpqua and the securities being offered by
Umpqua. Statements contained herein concerning the provisions of any documents
are not necessarily complete, and, in each instance, reference is made to the
copy of any such documents filed as an exhibit to such Registration Statements
or other documents filed with the SEC. Each such statement is qualified in its
entirety by such reference. The Registration Statement and the exhibits filed
therewith may be inspected at the office of the Oregon Department of Consumer
and Business Services, Division of Finance and Corporate Securities during
regular business hours. The proxy statements, and other information filed with
the SEC by VRB and Umpqua under the Exchange Act may be inspected and copied at
prescribed rates at the public reference facilities maintained by the SEC at
Room 1204, Judiciary Plaza, 450 Fifth Street, NW, Washington, DC 20549, and at
the regional offices of the SEC located at 7 World Trade Center, Thirteenth
Floor, Chicago, Illinois 60661. Copies of such material may also be obtained at
prescribed rates from the Public Reference Section of the SEC at 450 Fifth
Street, NW, Washington, DC 20549 or from the SEC website at www.sec.gov.
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<PAGE> 116
UMPQUA HOLDINGS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
UMPQUA HOLDINGS CORPORATION
Consolidated Balance Sheets F-2
Consolidated Statement of Income F-3
Consolidated Statements of Cash Flow F-5
Consolidated Statements of Changes In Stockholders' Equity F-4
Notes to Consolidated Financial Statements F-6
Report of Independent Public Accountants F-26
VRB BANCORP
Consolidated Balance Sheets F-27
Consolidated Statement of Income F-28
Consolidated Statements of Cash Flow F-30
Consolidated Statements of Changes In Stockholders' Equity F-29
Notes to Consolidated Financial Statements F-31
Report of Independent Public Accountants F-51
</TABLE>
F-1
<PAGE> 117
UMPQUA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------
2000 1999 1998
------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks, non-interest-bearing (Note 2) $ 27,065,839 $ 30,058,897 $ 17,765,938
Interest-bearing deposits in other banks 31,127,364 15,630,197 19,201,605
------------- ------------- -------------
Total cash and cash equivalents 58,193,203 45,689,094 36,967,543
Investment securities available-for-sale at fair value (Note 3) 71,578,854 76,868,536 84,887,992
Trading account assets 1,065,608 474,782 --
Mortgage loans held for sale, at cost which approximates market (Note 9) 3,916,403 -- 1,780,225
Loans receivable (Note 4) 261,096,726 248,533,933 186,166,966
Less: Allowance for loan losses (3,769,593) (3,469,350) (2,663,914)
------------- ------------- -------------
Loans, net 257,327,133 245,064,583 183,503,052
Federal Home Loan Bank stock, at cost 2,422,600 2,346,200 1,949,200
Premises and equipment, net (Note 5) 9,549,886 9,419,744 7,161,950
Deferred tax asset (Note 8) 1,139,420 1,141,308 --
Intangible assets (Note 17) 2,256,709 2,284,415 --
Accrued interest receivable 2,493,655 2,422,829 2,131,553
Other assets 1,134,045 1,025,225 505,467
------------- ------------- -------------
$ 411,077,516 $ 386,736,716 $ 318,886,982
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposit liabilities
Demand, non-interest-bearing $ 69,081,882 $ 59,709,104 $ 52,235,927
Demand, interest-bearing 131,444,702 128,321,434 111,389,033
Savings 22,827,234 22,877,722 19,968,138
Time deposits (Note 6) 121,246,775 90,765,095 72,211,623
------------- ------------- -------------
Total deposit liabilities 344,600,593 301,673,355 255,804,721
Securities sold under agreements to repurchase 625,271 -- --
Term debt (Note 12) 24,638,000 46,158,000 25,198,000
Accrued interest payable 604,200 543,424 353,054
Deferred tax liability (Note 8) -- -- 318,398
Other liabilities 1,729,072 1,645,715 1,067,183
------------- ------------- -------------
372,197,136 350,020,494 282,741,356
Commitments and contingencies (Note 15)
SHAREHOLDERS' EQUITY (NOTES 13 AND 14)
Common stock, no par value, 10,000,000 shares authorized; issued and
outstanding: 7,625,627 in 2000, 7,609,727 in 1999 and 7,667,552 in 1998 25,823,869 25,778,259 26,425,200
Retained earnings 14,797,825 12,708,368 9,055,331
Accumulated other comprehensive (loss) income (1,741,314) (1,770,405) 665,095
------------- ------------- -------------
38,880,380 36,716,222 36,145,626
------------- ------------- -------------
$ 411,077,516 $ 386,736,716 $ 318,886,982
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 118
UMPQUA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
---------------------------- --------------------------------------------
2000 1999 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 11,842,406 $ 8,946,613 $ 19,192,599 $ 15,737,046 $ 13,113,266
Interest on taxable investment securities 2,302,290 2,478,360 4,576,785 4,754,115 4,212,145
Interest on tax-exempt investment securities 313,830 239,849 910,946 426,937 216,937
------------ ------------ ------------ ------------ ------------
Total interest income 14,458,526 11,664,822 24,680,330 20,918,098 17,542,348
INTEREST EXPENSE
Interest on demand deposits 1,467,808 1,424,495 2,984,813 2,791,870 2,442,045
Interest on savings accounts 197,881 204,238 432,725 416,281 384,687
Interest on time deposits (Note 6) 2,840,449 1,700,193 3,659,957 3,261,761 2,860,345
Interest on borrowed funds and repurchase
agreements 917,533 648,212 1,378,453 824,555 805,976
------------ ------------ ------------ ------------ ------------
Total interest expense 5,423,671 3,977,138 8,455,948 7,294,467 6,493,053
------------ ------------ ------------ ------------ ------------
Net interest income 9,034,855 7,687,684 16,224,382 13,623,631 11,049,295
Provision for loan losses (Note 4) 1,034,500 655,000 1,392,250 1,024,650 562,180
------------ ------------ ------------ ------------ ------------
Net interest income after provision for loan losses 8,000,355 7,032,684 14,832,132 12,598,981 10,487,115
NON-INTEREST INCOME
Service fees 1,591,220 1,396,203 2,973,400 2,214,891 1,657,655
Brokerage commissions and fees 2,740,293 190,237 829,554 523,162 424,948
Gain on sale of loans 133,436 122,055 251,069 349,203 124,278
Loan servicing (Note 9) -- -- -- -- 56,496
Gain on sale of mortgage servicing rights (Note 9) -- -- -- -- 583,334
Loss on sale of investment securities -- -- -- -- (74,700)
Other 238,015 227,367 370,209 283,662 284,081
------------ ------------ ------------ ------------ ------------
Total non-interest income 4,702,964 1,935,862 4,424,232 3,370,918 3,056,092
NON-INTEREST EXPENSE
Salaries and benefits (Note 11) 4,815,668 2,612,146 5,730,972 4,616,162 4,551,197
Occupancy expense 613,544 412,390 944,598 704,262 656,209
Equipment 526,079 352,082 863,408 767,072 796,390
Communications 448,194 352,082 785,966 630,199 502,913
Marketing 357,890 361,290 941,618 735,976 698,333
Professional services 979,117 587,051 1,343,276 1,020,922 796,124
Supplies 230,802 144,337 384,215 365,839 369,504
Other 537,917 428,996 707,580 637,375 428,774
------------ ------------ ------------ ------------ ------------
Total non-interest expense 8,509,211 5,250,374 11,701,633 9,477,807 8,799,444
Income before provision for income taxes 4,194,108 3,718,172 7,554,731 6,492,092 4,743,763
Provision for income taxes (Note 8) 1,495,000 1,342,138 2,680,790 2,381,711 1,699,267
------------ ------------ ------------ ------------ ------------
Net income $ 2,699,108 $ 2,376,034 $ 4,873,941 $ 4,110,381 $ 3,044,496
============ ============ ============ ============ ============
EARNINGS PER COMMON SHARE (NOTE 10)
Basic $ 0.35 $ 0.31 $ 0.64 $ 0.56 $ 0.47
Diluted $ 0.35 $ 0.30 $ 0.63 $ 0.55 $ 0.46
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 119
UMPQUA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY & COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Number of Accumulated Other
Common Common Retained Comprehensive Comprehensive
Shares Stock Earnings Income (Loss) Income (Loss)
------------ ------------ ------------ -------------- -----------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 6,499,152 $ 10,353,990 $ 6,868,672 $ (200,931)
Net income 3,044,496 $ 3,044,496
Other comprehensive income, net of tax
Unrealized gains on securities arising
during the period 369,389 369,389
------------
Comprehensive income $ 3,413,885
============
Transfer from retained
earnings to surplus (Note 13) 3,611,004 (3,611,004)
Stock options exercised (Note 14) 9,200 41,434
Cash dividends, $.0775 per share (504,397)
------------ ------------ ------------ ------------
Balance at December 31, 1997 6,508,352 $ 14,006,428 $ 5,797,767 $ 168,458
============ ============ ============ ============
BALANCE AT JANUARY 1, 1998 6,508,352 $ 14,006,428 $ 5,797,767 $ 168,458
Net income 4,110,381 $ 4,110,381
Other comprehensive income, net of tax
Unrealized gains on securities arising
during the period 558,777 558,777
Unrealized losses on securities transferred
from held-to-maturity to available-for-sale (62,140) (62,140)
------------
Comprehensive income $ 4,607,018
============
Stock issuance, net of issuance costs
of $1,416,000 1,150,000 12,384,000
Stock options exercised (Note 14) 9,200 34,772
Cash dividends, $.115 per share (852,817)
------------ ------------ ------------ ------------
Balance at December 31, 1998 7,667,552 $ 26,425,200 $ 9,055,331 $ 665,095
============ ============ ============ ============
BALANCE AT JANUARY 1, 1999 7,667,552 $ 26,425,200 $ 9,055,331 $ 665,095
Net income 4,873,941 $ 4,873,941
Other comprehensive income, net of tax
Unrealized gains on securities arising
during the period (2,435,500) (2,435,500)
------------
Comprehensive income $ 2,438,441
============
Stock repurchased (89,625) (857,041)
Proceeds from stock options
exercised (Note 14) 31,800 210,100
Cash dividends, $0.16 per share (1,220,904)
------------ ------------ ------------ ------------
Balance at December 31, 1999 7,609,727 $ 25,778,259 $ 12,708,368 $ (1,770,405)
============ ============ ============ ============
BALANCE AT JANUARY 1, 2000 7,609,727 $ 25,778,259 $ 12,708,368 $ (1,770,405)
Net income 2,699,108 $ 2,699,108
Other comprehensive income, net of tax
Unrealized gains on securities arising
during the period 29,091
------------
Comprehensive income $ 2,728,199 29,091
============
Stock repurchased (9,100) (67,408)
Proceeds from stock options
exercised (Note 14) 25,000 113,018
Cash dividends, $0.16 per share (609,651)
------------ ------------ ------------ ------------
Balance at June 30, 2000 (unaudited) 7,625,627 $ 25,823,869 $ 14,797,825 $ (1,741,314)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 120
UMPQUA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
--------------------------- ------------------------------------------
2000 1999 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,699,108 $ 2,376,034 $ 4,873,941 $ 4,110,381 $ 3,044,496
Adjustments to reconcile net income to net cash
provided by operating activities:
Federal Home Loan Bank stock dividends (76,400) (73,100) (148,300) (142,700) (132,400)
Net increase in trading account assets (590,826) -- -- -- --
Deferred income tax expense -- -- 34,339 288,050 95,117
Amortization of investment premiums, net 75,230 91,447 195,222 266,396 242,151
Origination of loans held for sale (9,913,409) (9,045,400) (14,163,995) (29,667,550) (11,988,870)
Proceeds from sales of loans held for sale 6,043,139 9,878,969 16,142,424 29,294,904 11,948,468
Provision for loan losses 1,034,500 655,000 1,392,250 1,024,650 562,180
Gain on sales of mortgage servicing rights -- -- -- -- (583,334)
Gain on servicing release premiums (46,133) (116,422) (198,204) (341,577) --
Gain on sales of loans (87,303) (5,663) (52,866) (7,626) (124,278)
Net realized losses on sale of investment
securities available-for-sale -- -- -- -- 74,700
Depreciation of premises and equipment 469,931 341,548 727,726 651,651 609,148
Amortization of intangibles 112,130 -- 18,326 -- --
Net (increase) in other assets (280,283) (95,925) (461,386) (261,832) (568,382)
Net increase (decrease) in other liabilities 189,761 (398,124) 440,842 (889,965) 908,056
------------ ------------ ------------ ------------ ------------
Net cash provided by operating activities (370,555) 3,608,364 8,800,319 4,324,782 4,087,052
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities -- (11,442,038) (11,445,247) (34,428,831) (25,604,231)
Purchases of Federal Home Loan Bank stock -- -- (248,700) -- --
Maturities of investment securities 3,196,473 4,774,244 6,917,235 6,813,012 6,883,413
Principal repayments received on mortgage-backed
and related securities 2,065,171 5,111,235 8,457,039 11,076,719 8,215,214
Proceeds from sales of investment securities -- -- -- -- 2,932,813
available-for-sale
Net loan originations (22,684,209) (22,676,669) (65,036,790) (29,761,580) (41,632,079)
Purchase of loans (5,362) (1,001,927) (1,541,989) (2,060,223) (1,810,000)
Acquisition of Strand, Atkinson, Williams & York,
Inc., net of cash acquired -- -- (2,828,182) -- --
Proceeds from sales of loans 9,479,823 1,275,864 3,677,864 238,553 1,520,818
Purchases of premises and equipment (600,073) (1,268,803) (2,885,697) (454,604) (2,121,362)
------------ ------------ ------------ ------------ ------------
Net cash used by investing activities (8,548,176) (25,228,094) (64,934,467) (48,576,954) (51,615,414)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit liabilities 42,927,238 15,314,504 45,868,634 34,079,193 48,889,024
Net increase in securities sold under agreements
to repurchase 625,271 -- -- -- --
Dividends paid on common stock (609,651) (611,741) (1,220,904) (852,817) (504,397)
Net proceeds from stock offering -- -- -- 12,384,000 --
Proceeds from stock options exercised 67,390 105,011 105,010 34,773 41,434
Retirement of common stock (67,408) (689,210) (857,041) -- --
Proceeds from (repayments of) Federal Home Loan
Bank borrowings, net (21,520,000) (20,000) 20,960,000 11,460,000 1,160,000
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 21,422,840 14,098,564 64,855,699 57,105,149 49,586,061
Net increase (decrease) in cash and cash equivalents 12,504,109 (7,521,166) 8,721,551 12,852,977 2,057,699
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, beginning of period 45,689,094 36,967,543 36,967,543 24,114,566 22,056,867
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 58,193,203 $ 29,446,377 $ 45,689,094 $ 36,967,543 $ 24,114,566
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 5,362,895 $ 3,952,019 $ 8,265,578 $ 7,371,202 $ 6,668,178
Income taxes $ 1,540,000 $ 1,410,000 $ 2,685,000 $ 1,949,109 $ 1,856,010
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 121
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Umpqua Holdings Corporation (the Company) is a bank holding company formed in
March 1999. At that time, the Company acquired 100% of the outstanding shares of
South Umpqua Bank. The Company is headquartered in Roseburg, Oregon, and engages
primarily in the business of commercial and retail banking and the delivery of
retail brokerage services. The Company provides a wide range of banking, asset
management, mortgage banking, and other financial services to corporate,
institutional and individual customers through its wholly-owned banking
subsidiary South Umpqua Bank (the Bank). The Company engages in the retail
brokerage business through its wholly-owned subsidiary Strand, Atkinson,
Williams & York, Inc. The Company and its subsidiaries are subject to the
regulations of certain National and State agencies and undergo periodic
examinations by these regulatory agencies.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and with prevailing practices within
the banking and securities industries. In preparing such financial statements,
management is required to make certain estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the balance sheet ,and the reported amounts of
revenues and expenses for the reporting period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change relate to the determination of the allowance
for loan losses.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Umpqua Holdings Corporation, South Umpqua Bank, and Strand, Atkinson, Williams &
York, Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the accompanying statements of cash flows, cash and cash
equivalents includes cash and due from banks, and interest-bearing balances due
from other banks.
TRADING ACCOUNT ASSETS
Debt securities held for resale are classified as trading account securities and
reported at fair value. Realized and unrealized gains or losses are recorded in
non-interest income.
INVESTMENT SECURITIES
Investment securities held-to-maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts. Securities
available-for-sale are stated at fair value. Gains and losses on sales of
securities, recognized on a specific identification basis, are included in
non-interest income. Net unrealized gain or loss on securities
available-for-sale are included, net of tax, as a component of shareholders'
equity. Mortgage-backed and related securities represent participating interests
in pools of mortgage loans originated and serviced by the issuers of the
securities. Premiums and discounts are amortized using a method that
approximates the level-yield method over the remaining period to contractual
maturity, adjusted for anticipated prepayments. Certain
F-6
<PAGE> 122
UMPQUA HOLDINGS CORPORATION
obligations of U.S. Government agencies are callable by the agency. Premiums on
these securities are amortized using a method that approximates the level-yield
method over the remaining period to the first call date. Discounts are amortized
using a method that approximates the level-yield method over the remaining
period to scheduled maturity. The Company adopted Statement of Financial
Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The accounting for changes in the
fair value of a derivative (that is, gains and losses) depends on the intended
use of the derivative and resulting designation. The Company adopted the
standard effective September 30, 1998. As permitted by the standard, the Company
transferred its held-to-maturity investment portfolio to the available-for-sale
designation, resulting in a charge to accumulated other comprehensive income of
$62,140, net of tax. The adoption of the statement did not have a material
impact on the consolidated financial position or financial results of the
Company.
LOANS HELD FOR SALE
Loans held for sale include mortgage loans and are reported at the lower of cost
or market value. Gains or losses on the sale of loans that are held for sale are
recognized at the time of the sale on a specific identification basis and
determined by the difference between net sale proceeds and the net book value of
the loans sold.
LOANS
Loans are reported net of unearned income. All discounts and premiums are
recognized over the life of the loan as yield adjustments.
IMPAIRED LOANS
Loans specifically identified as impaired are measured based on the present
value of expected future cash flows, discounted at the loans' observable market
price, or the fair value of the collateral if the loan is collateral dependent.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement, including scheduled interest
payments. If the measurement of the impaired loan is less than the recorded
investment in the loan, impairment is recognized by creating or adjusting an
existing allocation of the allowance for loan losses. Interest received on
impaired loans is applied first against the recorded impaired loan until paid in
full, next as a recovery up to any amounts charged off related to the impaired
loan, and finally as interest income.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established to absorb known and inherent losses
primarily resulting from loans outstanding and related off-balance sheet
commitments. Accordingly, all loan losses are charged to the allowance and all
recoveries are credited to it. The provision for loan losses charged to
operating expense is based on past loan loss experience and other factors which,
in management's judgment, deserve current recognition in estimating possible
loan losses. Such other factors include growth and composition of the loan
portfolio, credit concentrations, trends in portfolio volume, maturities,
delinquencies and non-accruals, the relationship of the allowance for loan
losses to outstanding loans, and general economic conditions. While management
uses the best information available to base its estimates, future adjustments to
the allowance may be necessary if economic conditions, particularly in the
Company's market, differ substantially from the
F-7
<PAGE> 123
UMPQUA HOLDINGS CORPORATION
assumptions used. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Company's allowance for
loan losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examinations. The Company's principal lending activity is
concentrated in Douglas County, Lane County, and Multnomah County, Oregon.
LOAN FEES AND DIRECT LOAN ORIGINATION COSTS
Loan origination fees and direct loan origination costs are capitalized and
recognized as an adjustment to the yield over the life of the related loans.
NON-ACCRUAL LOANS
Commercial and real estate loans are placed on non-accrual status when they are
90 days past due as to principal or interest, unless the loan is both
well-secured and in process of collection. When a loan is placed on non-accrual
status, unpaid interest that is deemed uncollectible is reversed and charged
against current earnings, and all amortization of net deferred fees or costs is
discontinued.
INCOME TAXES
Income taxes are accounted for using the asset and liability method. Under this
method, a deferred tax asset or liability is determined based on the enacted tax
rates which will be in effect when the differences between the financial
statement carrying amounts and tax basis of existing assets and liabilities are
expected to be reported in the Company's income tax returns. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. Valuation allowances are established to reduce
the net carrying amount of deferred tax assets if it is determined to be more
likely than not that all or some portion of the potential deferred tax asset
will not be realized.
MORTGAGE SERVICING
Fees related to the servicing of mortgage loans of others are recorded as income
when payments are received. Late charges and miscellaneous other fees are
credited to income when collected. The costs of servicing loans are expensed as
incurred.
PREMISES, EQUIPMENT AND OTHER LONG-LIVED ASSETS
Company premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is provided over the estimated useful life of the
respective assets, 5 to 39 years, on a straight-line or accelerated basis.
Expenditures for major renovations and betterments of the Company's premises and
equipment are capitalized. In accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
management reviews long-lived assets and intangibles any time that a change in
circumstance indicates that the carrying amount of these assets may not be
recoverable. Recoverability of these assets is determined by comparing the
carrying value of the asset to the forecasted undiscounted cash flows of the
operation associated with the asset. If the evaluation of the forecasted cash
flows indicates that the carrying value of the asset is not recoverable, the
asset is written down to fair value. Goodwill, the price paid over the net fair
value of acquired businesses, is amortized on a straight-line basis over 15
years. Other intangible assets are amortized over their estimated useful lives
on a straight-line basis. Intangibles are evaluated periodically for impairment.
F-8
<PAGE> 124
UMPQUA HOLDINGS CORPORATION
OTHER REAL ESTATE OWNED
Other real estate owned by the Company represents property acquired through
foreclosures or settlement of loans and is carried at the lower of the principal
amount of the loans outstanding at the time acquired or at the estimated fair
market value of the property. The Company had no other real estate owned at
December 31, 1999 or 1998.
PROFIT SHARING AND STOCK OPTION PLANS
The Company has a profit sharing plan covering substantially all its employees.
The contribution is determined annually by the Board of Directors at its
discretion. The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the closing market value of the shares
on the date of grant. The Company accounts for stock option grants in accordance
with APB Opinion 25, Accounting for Stock Issued to Employees, and accordingly
recognizes no compensation expense for the stock option grants.
COMPUTATION OF EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of common and
common equivalent shares outstanding during each year.
FEDERAL HOME LOAN BANK STOCK
The Bank's investment in Federal Home Loan Bank (FHLB) stock is carried at par
value, which reasonably approximates its fair value. As a member of the FHLB
system, the Bank is required to maintain a minimum level of investment in FHLB
stock based on specific percentages of its outstanding mortgages, total assets,
or FHLB advances. At December 31, 1999, the Bank's minimum required investment
was approximately $2,008,000. The Bank may request redemption at par value of
any stock in excess of the minimum required investment. Stock redemptions are at
the discretion of the FHLB.
RECLASSIFICATIONS
Certain amounts reported in prior years' financial statements have been
reclassified to conform to the current presentation.
COMPREHENSIVE INCOME.
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and displaying comprehensive income and its components in
general-purpose financial statements. Comprehensive income includes net income
and several other items that current accounting standards require to be
recognized outside of net income. This SFAS is effective for fiscal years
beginning after December 15, 1997, and as such, was adopted by the Company in
1998.
BUSINESS SEGMENTS
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, requires public enterprises to report certain information about
their operating segments in a complete set of financial statements to
shareholders. It also requires reporting of certain enterprise-wide information
about the Company's products and services, its activities in different
geographic areas, and its reliance on major customers. The basis for determining
the Company's operating segments is the manner in which management operates the
business. This SFAS is effective for financial statements for periods beginning
after December 15, 1997 and, as such, was adopted by the Company in 1998. The
Company has no foreign operations, no customers that provide more than 10
percent of gross revenue, and has determined that it has only one operating
segment.
F-9
<PAGE> 125
UMPQUA HOLDINGS CORPORATION
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 Umpqua's Management's Discussion and Analysis for further interim
information.
NOTE 2 -- CASH AND DUE FROM BANKS
The Company is required to maintain an average reserve balance with the Federal
Reserve Bank or maintain such reserve balance in the form of cash. The amount of
average required reserve balance for the period including December 31, 1999 and
1998 was approximately $6,993,000 and $5,003,000, respectively, and was met by
holding cash and maintaining an average balance with the Federal Reserve Bank.
NOTE 3 -- INVESTMENT SECURITIES
The amortized costs, unrealized gains, unrealized losses and approximate fair
values of investment securities are as follows:
F-10
<PAGE> 126
UMPQUA HOLDINGS CORPORATION
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------------------------
AVAILABLE-FOR-SALE Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Obligations of U.S.
Government agencies $40,987,663 $ 4,931 $ 1,839,607 $39,152,987
U.S. Treasury securities 2,500,485 8,109 -- 2,508,594
U.S. Government
agency mortgage-
backed securities 14,004,761 3 309,324 13,695,440
Obligations of
states and political
subdivisions 22,247,610 26,441 762,536 21,511,515
----------- ----------- ----------- -----------
$79,740,519 $ 39,484 $ 2,911,467 $76,868,536
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------------------
AVAILABLE-FOR-SALE Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Obligations of U.S.
Government agencies $40,272,133 $ 831,583 $ 49,769 $41,053,947
U.S. Treasury securities 6,001,119 79,584 6,080,703
U.S. Government
agency mortgage-
backed securities 22,484,684 26,758 166,764 22,344,678
Obligations of
states and political
subdivisions 13,959,102 327,420 25,588 14,260,934
Mutual fund 1,147,730 -- -- 1,147,730
----------- ----------- ----------- -----------
$83,864,768 $ 1,265,345 $ 242,121 $84,887,992
=========== =========== =========== ===========
</TABLE>
Investment securities having a carrying value of $19,412,725 and $10,980,722 at
December 31, 1999 and 1998, respectively, were pledged to secure public deposits
and for other purposes required or permitted by law.
The carrying value and fair value of debt securities at December 31, 1999 with
contractual maturity dates are shown below. Securities with serial maturities,
which include mortgage-backed securities, collateralized mortgage obligations,
and asset-backed securities, are detailed on a separate line. Serial maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. Certain
obligations of U.S. Government agencies and states and political subdivisions
are callable by the applicable agency or political subdivision. These borrowers
also have the right to call or prepay obligations with or without call or
prepayment penalties.
F-11
<PAGE> 127
UMPQUA HOLDINGS CORPORATION
<TABLE>
<CAPTION>
Amortized
Available-For-Sale Cost Fair Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 2,766,439 $ 2,775,008
Due after one year through five years 17,396,544 17,146,122
Due after five years through ten years 45,354,081 43,042,554
Due after ten years 218,694 209,412
Serial maturities 14,004,761 13,695,440
----------- -----------
Total $79,740,519 $76,868,536
=========== ===========
</TABLE>
There were no sales of securities available-for-sale during 1999 or 1998.
NOTE 4 - LOANS RECEIVABLE
The breakdown of loan receivable is as follows:
<TABLE>
<CAPTION>
12/31/99 12/31/98
------------ ------------
<S> <C> <C>
Commercial and industrial $ 60,136,523 $ 48,139,687
Real estate 157,965,202 107,357,913
Individuals 30,228,336 30,309,517
Other 203,872 359,849
------------ ------------
Total $248,533,933 $186,166,966
============ ============
</TABLE>
Included in the above balances are net deferred fees of $326,000 and $248,000 at
December 31, 1999 and 1998, respectively. At December 31, 1999, loans are
comprised of fixed and variable rate instruments as follows:
<TABLE>
<S> <C>
Loans at fixed rates $ 47,754,605
Loans at variable rates 200,779,328
------------
$248,533,933
============
</TABLE>
Loans at variable rates include loans that reprice immediately, as well as loans
that reprice any time prior to maturity.
Approximate loan portfolio maturities on fixed-rate loans and repricings on
variable-rate loans at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
WITHIN 1 YEAR 1 TO 5 YEARS AFTER 5 YEARS TOTAL
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Commercial and industrial $ 52,105,550 $ 8,022,561 $ 8,412 $ 60,136,523
Real estate 73,589,804 76,887,538 7,487,860 157,965,202
Individuals 14,092,599 9,398,501 6,737,236 30,228,336
Other 203,872 -- -- 203,872
------------ ------------ ------------ ------------
Total $139,991,825 $ 94,308,600 $ 14,233,508 $248,533,933
============ ============ ============ ============
</TABLE>
Approximately $125,177,000 of variable-rate loans will reprice within one year.
Variable residential real estate loans have maturities between 20 and 30 years;
variable commercial and industrial real estate loans typically have maturities
between 5 and 10 years. In the ordinary course of business, the Company has made
loans to its directors, executive officers, principal shareholders and their
associated and affiliated companies ("related parties"). All such loans have
been made on the same terms as those prevailing at the time of origination to
other borrowers. At December 31, 1999 and 1998, outstanding loans to related
parties were $3,654,000 and $2,397,000, respectively.
<PAGE> 128
UMPQUA HOLDINGS CORPORATION
Repayments of $2,302,000 and new advances of $2,263,000 were made during the
year ended December 31, 1999. Transactions in the allowance for loan losses of
the Company for the indicated years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance January 1 $ 2,663,914 $ 2,140,970 $ 1,990,817
Provision for loan losses 1,392,250 1,024,650 562,180
----------- ----------- -----------
4,056,164 3,165,620 2,552,997
Loans charged off (836,717) (603,886) (472,874)
Recoveries 249,903 102,180 60,847
----------- ----------- -----------
Net loans (charged off) recovered (586,814) (501,706) (412,027)
----------- ----------- -----------
Balance December 31 $ 3,469,350 $ 2,663,914 $ 2,140,970
=========== =========== ===========
</TABLE>
A summary of non-accrual loans and the related loss of interest income is
presented below:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Non-accrual loans December 31 $1,398,439 $ 457,131
Interest income that would have been earned
during the year at original contractual rates $ 146,648 $ 49,866
Interest income actually recognized
during the year $ 89,871 $ 25,345
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
The detail of premises and equipment is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Buildings and land $ 8,012,986 $ 6,459,875
Furniture,fixtures and equipment 4,928,965 3,696,769
Computer software 700,690 638,686
----------- -----------
13,642,641 10,795,330
Less accumulated depreciation
and amortization 4,222,897 3,633,380
----------- -----------
Total $ 9,419,744 $ 7,161,950
=========== ===========
</TABLE>
NOTE 6 - TIME DEPOSITS
Included in time deposits at December 31, 1999, 1998 and 1997 are $28,854,652,
$24,035,496 and $17,778,828, respectively, of deposits $100,000 or greater.
Interest expense on time deposits $100,000 or greater amounted to $1,086,968,
$815,853 and $775,566 for the years ended 1999, 1998 and 1997, respectively. The
following table sets forth by remaining maturity, time certificates of deposit
at December 31, 1999:
F-13
<PAGE> 129
UMPQUA HOLDINGS CORPORATION
<TABLE>
<CAPTION>
Time Deposits of All Other
$100,000 or more Time Deposits Total
---------------- ------------- -----------
<S> <C> <C> <C>
Three months or less $11,434,552 $ 7,637,293 $19,071,845
Over three months through
twelve months 16,415,978 44,657,427 61,073,405
Over one year through
five years 400,000 9,036,556 9,436,556
Over five years 604,122 579,167 1,183,289
----------- ----------- -----------
Total $28,854,652 $61,910,443 $90,765,095
=========== =========== ===========
</TABLE>
NOTE 7 -- LEASES
The Bank is obligated under a number of non-cancelable operating leases for
land, buildings and equipment. The majority of these leases have renewal
options. In addition, some of the leases contain escalation clauses tied to the
consumer price index with caps. The Bank's future minimum rental payments
required under land, building and equipment operating leases that have initial
or remaining non-cancelable lease terms of one year or more are as follows:
<TABLE>
<CAPTION>
Year Ending December 31:
------------------------
<S> <C>
2000 $ 316,620
2001 322,655
2002 330,541
2003 335,747
2004 293,165
Thereafter 1,361,676
----------
Total $2,960,404
==========
</TABLE>
Rent expense applicable to operating leases for the years ended December 31,
1999, 1998 and 1997 was $269,220, $154,160 and $169,158 respectively. The Bank
leases a portion of its Eugene, Oregon building to other tenants. The leases
provide for monthly lease payments to the Bank in the amount of $6,900 through
December 2001. In connection with the acquisition of Strand, Atkinson, Williams
& York, Inc., the Company became liable for certain capitalized lease
obligations totalling approximately $66,000. These capital lease obligations are
included in other liabilities.
F-14
<PAGE> 130
UMPQUA HOLDINGS CORPORATION
NOTE 8 - INCOME TAXES
The following is a summary of consolidated income tax expense:
<TABLE>
<CAPTION>
Current Deferred Total
---------- ---------- ----------
<S> <C> <C> <C>
Year ended December 31,1999:
U.S.Federal $2,144,090 $ 28,430 $2,172,520
State 502,361 5,909 508,270
---------- ---------- ----------
Total $2,646,451 $ 34,339 $2,680,790
========== ========== ==========
Year ended December 31,1998:
U.S.Federal $1,733,363 $ 238,479 $1,971,842
State 360,298 49,571 409,869
---------- ---------- ----------
Total $2,093,661 $ 288,050 $2,381,711
========== ========== ==========
Year ended December 31,1997:
U.S.Federal $1,438,474 $ 75,514 $1,513,988
State 165,676 19,603 185,279
---------- ---------- ----------
Total $1,604,150 $ 95,117 $1,699,267
========== ========== ==========
</TABLE>
A reconciliation of the Company's expected tax expense using the U.S. Federal
income tax statutory rate to the actual effective rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Statutory Federal income tax rate 34.00% 34.00% 34.00%
Tax exempt income -3.50% -1.90% -1.40%
State excise tax, net of
Federal income tax benefit 4.40% 4.40% 2.50%
Other 0.60% 0.20% 0.70%
----- ----- -----
Effective income tax rate 35.50% 36.70% 35.80%
===== ===== =====
</TABLE>
F-15
<PAGE> 131
UMPQUA HOLDINGS CORPORATION
The tax effects of temporary differences which give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Loans receivable, due to
allowance for loan losses $ 1,102,126 $ 843,290 $ 676,627
Unrealized loss on
investment securities 1,101,578 -- --
Deferred bonus -- -- 306,848
Accrued liabilities 45,676 50,380 29,988
Other 3,184 -- --
----------- ----------- -----------
Total gross deferred tax assets 2,252,564 893,670 1,013,463
Less valuation allowance -- -- --
----------- ----------- -----------
Net deferred tax assets 2,252,564 893,670 1,013,463
Deferred tax liabilities:
Investment securities,due to
accretion of discount 10,605 11,142 17,828
Excess tax over book depreciation 106,940 104,860 110,365
Investment securities,
due to FHLB stock dividends 333,736 276,854 222,120
Unrealized gain on investment
securities -- 392,467 90,708
Deferred loan fees 639,659 426,745 335,369
Other 20,316 -- --
----------- ----------- -----------
Total gross deferred tax liabilities 1,111,256 1,212,068 776,390
----------- ----------- -----------
Net deferred tax assets (liabilities) $ 1,141,308 $ (318,398) $ 237,073
=========== =========== ===========
</TABLE>
There was no valuation allowance for deferred tax assets as of December 31,
1999, 1998 and 1997. The Company has deter-mined that it is not required to
establish a valuation allowance for the deferred tax assets as management
believes it is more likely than not that the deferred tax assets of $2,252,564,
$893,670 and $1,013,463 at December 31, 1999, 1998 and 1997, respectively, will
be realized principally through carrryback to taxable income in prior years,
future reversals of existing taxable temporary differences, and to a minor
extent, future taxable income. Management believes that future taxable income
will be sufficient to realize the benefits of temporary deductible differences
that cannot be realized through carryback to prior years or through the reversal
of future temporary taxable differences.
F-16
<PAGE> 132
NOTE 9 - MORTGAGE SERVICING
Changes in capitalized mortgage servicing rights for 1999, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ------ ---------
<S> <C> <C> <C>
BALANCE, JANUARY 1 $ -- $ -- $ 151,352
Originated servicing rights 95,905
Amortization (1,988)
Sale of servicing rights (245,269)
Balance, December 31 -- -- --
--------- ------ ---------
Valuation allowance -- -- --
--------- ------ ---------
NET BALANCE, DECEMBER 31 $ -- $ -- $ --
========= ====== =========
</TABLE>
In 1997, the Company sold its mortgage servicing rights, which, at the time of
sale, had a carrying basis of $245,269. Proceeds from the sale amounted to
$828,603, resulting in a recognized gain of $583,334.
NOTE 10 - EARNINGS PER SHARE
The following table reconciles basic earnings per common share (EPS) to diluted
EPS:
<TABLE>
<CAPTION>
For the Six Months ended
June 30, 2000 (unaudited)
--------------------------------------
Weighted Per Share
Income Average Shares Amount
---------- -------------- --------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $2,699,108 7,617,430 $ 0.35
Effect of dilutive securities:
Stock options -- 114,462 --
---------- --------- --------
Diluted EPS $2,699,109 7,731,892 $ 0.35
========== ========= ========
</TABLE>
Options to purchase 340,374 shares of common stock for prices ranging from
$8.375 to $12.00 per share were outstanding during the quarter ended June 30,
2000 but were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price of
the common shares during the period.
<TABLE>
<CAPTION>
For the Six Months ended
June 30, 2000 (unaudited)
--------------------------------------
Weighted Per Share
Income Average Shares Amount
---------- -------------- --------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $2,699,108 7,617,430 $ 0.35
Effect of dilutive securities:
Stock options -- 114,462 --
---------- --------- --------
Diluted EPS $2,699,109 7,731,892 $ 0.35
========== ========= ========
</TABLE>
Options to purchase 194,100 shares of common stock at prices ranging from $9.75
to $12 per share were outstanding during 1999, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. The options, which expire from
March 31, 2009 to November 2010, were outstanding at December 31, 1999.
F-17
<PAGE> 133
UMPQUA HOLDINGS CORPORATION
<TABLE>
<CAPTION>
For the Year ended December 31, 1998
-----------------------------------------------------
Weighted Per Share
Income Average Shares Amount
---------- -------------- --------
<S> <C> <C> <C>
Basic EPS
Income available to
common shareholders $4,110,381 7,372,614 $ 0.56
Effect of dilutive securities:
stock options 163,588 (0.01)
---------- ---------- --------
Diluted EPS $4,110,381 7,536,202 $ 0.55
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
For the Year ended December 31, 1998
-----------------------------------------------------
Weighted Per Share
Income Average Shares Amount
---------- -------------- --------
<S> <C> <C> <C>
Basic EPS
Income available to
common shareholders $3,044,496 6,507,420 $ 0.47
Effect of dilutive securities:
stock options 165,210 (0.01)
---------- ---------- --------
Diluted EPS $3,044,496 6,672,630 $ 0.46
========== ========== ========
</TABLE>
NOTE 11 -- PROFIT SHARING PLAN
The Bank's employees participate in a defined contribution profit sharing and
401(k) plan sponsored by the Bank. At the discretion of the Bank's Board of
Directors, the Bank may elect to contribute to the profit sharing plan based on
profits of the Bank. Employees become eligible to participate in the profit
sharing plan the first year they achieve 1,000 hours of service. The provision
for profit sharing costs charged to expense amounted to $315,000, $249,000 and
$232,000 in 1999, 1998 and 1997, respectively. Strand, Atkinson, Williams &
York, Inc. employees participate in a defined contribution profit sharing and
401(k) plan sponsored by Strand, Atkinson, Williams & York, Inc. At the
discretion of Strand, Atkinson, Williams & York, Inc.'s board of directors,
Strand, Atkinson, Williams & York, Inc. may elect to contribute to the profit
sharing plan based on profits of Strand, Atkinson, Williams & York, Inc.
Employees become eligible to participate in the profit sharing plan upon
completion of 2 years of service. The provision for profit sharing costs charged
to net income amounted to $1,345 in 1999.
F-18
<PAGE> 134
UMPQUA HOLDINGS CORPORATION
NOTE 12 - TERM DEBT
The Bank had outstanding notes from the FHLB at December 31, 1999 and 1998 as
follows:
<TABLE>
<CAPTION>
December 31,1999
-----------------------------------------------------
Amount Maturity Interest Rate
----------- ------------- -------------
<S> <C> <C>
$ 6,000,000 January 2000 5.84%
10,000,000 February 2000 6.04%
7,500,000 October 2001 4.85%
12,500,000 December 2002 5.78%
158,000 November 2003 5.75%
3,000,000 December 2003 4.53%
7,000,000 December 2003 5.30%
-----------
Total $ 46,158,000
===========
</TABLE>
<TABLE>
<CAPTION>
December 31,1998
-----------------------------------------------------
Amount Maturity Interest Rate
----------- ------------- -------------
<S> <C> <C>
$ 7,500,000 October 2001 4.85%
7,500,000 June 2002 5.39%
198,000 November 2003 5.75%
3,000,000 December 2003 4.53%
7,000,000 December 2003 5.30%
-----------
Total $25,198,000
===========
</TABLE>
Interest on the above borrowings is due monthly with the principal due at
maturity, with the exception of the note due November 2003, where, in addition
to interest, a portion of the principal is due monthly. The $12,500,000 note,
scheduled to mature in December 2002, is callable on a quarterly basis by the
FHLB after March 2, 2000. The $3,000,000 note scheduled to mature in December
2003, is callable on a quarterly basis by the FHLB after June 11, 2000.
The Bank has pledged as collateral for these notes all FHLB stock, all funds on
deposit with the FHLB, all notes or other instruments representing obligations
of third parties, securities issued, insured or guaranteed by the United States
Government or any agency thereof, and its instruments, accounts, general
intangibles, equipment and other property in which a security interest can be
granted by the Bank to the FHLB. The Bank had unused lines of credit with the
FHLB of $42,079,000 at December 31, 1999. The Bank also had unused lines of
credit with financial institutions amounting to $18,366,000 at December 31,
1999. The FHLB requires the Bank to maintain a required level of investment in
FHLB stock to qualify for notes.
NOTE 13 -- SHAREHOLDERS' EQUITY
The Company had routinely transferred amounts in retained earnings to surplus to
increase its legal lending limit. It transferred $3,611,004 in 1997. Based on
changes made in the related regulations in late 1997, such transfers will no
longer be required as all elements of capital are now considered part of the
legal lending limit base. The Company is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have a
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the
F-19
<PAGE> 135
UMPQUA HOLDINGS CORPORATION
Company's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about risk components, asset risk weighting, and other factors.
Risk-based capital guidelines issued by the Federal Reserve Bank establish a
risk adjusted ratio relating capital to different categories of assets and
off-balance-sheet exposures for bank holding companies. The Company's Tier 1
capital is comprised primarily of common equity, and excludes the equity impact
of adjusting available-for-sale securities to fair value. Total capital also
includes a portion of the allowance for loan losses, as defined according to
regulatory guidelines.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital to risk-weighted assets (as defined
in the regulations), and of Tier I capital to average assets (as defined in the
regulations). Management believes, as of December 31, 1999, that the Company
meets all capital adequacy requirements to which it is subject.
The Company's actual capital amounts and ratios are presented in the following
table:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
------------------------ ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
Total capital (to risk
weighted assets) $39,482,000 15.06% $20,974,640 8.00% $25,758,900 10.00%
Tier I capital (to risk
weighted assets) $36,202,000 13.81% $10,487,320 4.00% $15,455,340 6.00%
Tier I capital (to average assets) $36,202,000 9.99% $14,500,520 4.00% $18,125,650 5.00%
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
------------------------ ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total capital (to risk
weighted assets) $38,028,000 18.67% $16,293,120 8.00% $20,366,400 10.00%
Tier I capital (to risk
weighted assets) $35,481,000 17.42% $ 8,146,560 4.00% $12,219,840 6.00%
Tier I capital (to average assets) $35,481,000 12.71% $11,164,920 4.00% $13,956,150 5.00%
</TABLE>
The Bank is a state chartered bank with deposits insured by the Federal Deposit
Insurance Corporation (FDIC) and is not a member of the Federal Reserve System,
and is subject to the supervision and regulation of the Director of the Oregon
Department of Consumer and Business Services, administered through the Division
of Finance and Corporate Securities, and to the supervision and regulation of
the FDIC. As of December 31, 1999, the most recent notification from the FDIC
categorized the Bank as well-capitalized under the regulatory framework for
prompt corrective action. There are no conditions present since the notification
that management believes have changed the institution's category.
F-20
<PAGE> 136
UMPQUA HOLDINGS CORPORATION
NOTE 14 - EMPLOYEE STOCK OPTION PLAN
The Company has an employee stock option plan whereby options may be granted to
its employees for up to 1,150,000 shares of common stock. Under the plan, the
exercise price of each option equals the market price of the Company's stock on
the date of the grant, and an option's maximum term is 11 years. Options vest
upon meeting performance criteria, but in all circumstances no later than six
years after the date of the grant. The following table summarizes information
about stock options outstanding at December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -------------------------
Average Average Average
Options Price per Options Price per Options Price per
Outstanding Share Outstanding Share Outstanding Share
----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 497,624 $ 5.68 376,824 $ 3.92 362,824 $ 2.98
Grants 150,000 9.69 130,000 12.00 60,000 6.58
Exercised (31,800) 3.30 (9,200) 3.78 (9,200) 3.81
Cancelled and returned to plan -- -- -- -- (36,800) 3.81
----------- ----------- -----------
Balance, end of year 615,824 $ 6.78 497,624 $ 5.68 376,824 $ 3.92
=========== =========== ===========
Options exercisable at end of year 333,624 309,224 243,059
Average fair value of options
granted during year $ 4.43 $ 3.57 $ 1.95
</TABLE>
The fair value per share of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions for grants in 1999, 1998 and 1997: Dividend yield from 1.2%
to 2.9%, risk-free interest rate of 5.5%-6.0%, volatility of 0%-47% and expected
lives of six years.
The Company applies APB Opinion No. 25 in accounting for its plan; accordingly,
no compensation cost has been recognized for its stock option in the
accompanying consolidated financial statements because the stock options are
granted at the fair value of the stock on the date of the grant. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under the Black-Scholes option-pricing model described above, as
permitted in SFAS No. 123, the Company's net income would have been reduced to
the pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income, as reported $ 4,873,941 $ 4,110,381 $ 3,044,496
Net income, pro forma $ 4,777,231 $ 4,073,549 $ 2,995,587
Basic EPS, as reported $ 0.64 $ 0.56 $ 0.47
Basic EPS, pro forma $ 0.63 $ 0.55 $ 0.46
Diluted EPS, as reported $ 0.63 $ 0.55 $ 0.46
Diluted EPS, pro forma $ 0.61 $ 0.54 $ 0.45
</TABLE>
Outstanding options at December 31, 1999 are as follows:
F-21
<PAGE> 137
UMPQUA HOLDINGS CORPORATION
<TABLE>
<CAPTION>
Exercise Price
Total Shares Vested Shares per Share Expiration
------------ ------------- -------------- --------------
<S> <C> <C> <C>
256,424 256,424 $ 2.70 March 2006
19,400 10,200 3.81 January 2007
20,000 12,000 5.25 January 2008
20,000 12,000 5.88 June 2008
20,000 8,000 8.63 November 2008
130,000 35,000 12 April 2009
82,500 0 9.63 May 2010
2,500 0 10.25 October 2010
65,000 0 9.75 December 2009
</TABLE>
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are defendants in various legal proceedings.
Management, after reviewing these actions and proceedings with legal counsel,
believes that the outcome of such proceedings will not have a materially adverse
effect upon the financial position or results of operations of the Company and
its subsidiaries.
In the normal course of business, there are various commitments and contingent
liabilities outstanding, such as commitments to extend credit. At December 31,
1999 the Company had approximately $357,366 committed under standby letters of
credit. The Company issues these standby letters of credit using the same
guidelines as a direct loan. Management anticipates no material losses as a
result of these transactions.
At December 31, 1999 outstanding commitments to advance funds amounted to
approximately $68,735,000 of which approximately $18,703,000 were for fixed-rate
loans and approximately $50,032,000 were for variable-rate loans.
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is presented pursuant to the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair values
of the Company's financial instruments are as follows:
F-22
<PAGE> 138
UMPQUA HOLDINGS CORPORATION
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 45,689,094 $ 45,689,094 $ 36,967,543 $ 36,967,543
Trading account securities 474,782 474,782 -- --
Investment securities 76,868,536 76,868,536 84,887,992 84,887,992
Loans 248,533,933 246,282,919 186,166,966 186,579,779
FHLB stock 2,346,200 2,346,200 1,949,200 1,949,200
Mortgage loans held for sale -- -- 1,780,225 1,780,225
Financial liabilities:
Deposits $301,673,355 $301,350,151 $255,804,721 $256,165,103
Term debt 46,158,000 44,460,820 25,198,000 25,114,190
Off-balance-sheet financial instruments:
Loan commitments $ 68,735,000 $ 68,735,000 $ 72,761,000 $ 72,761,000
Letters of credit 357,000 357,000 207,000 207,000
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value. The estimated fair value amounts have been determined using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Potential tax ramifications related to the
realization of unrealized gains and losses that would be incurred in an actual
sale have not been taken into consideration.
CASH AND SHORT-TERM INVESTMENTS
For short-term instruments, including cash and due from banks, interest-bearing
deposits with banks, the carrying amount is a reasonable estimate of fair value.
SECURITIES
For trading securities and securities available-for-sale, fair values are based
on quoted market prices or dealer quotes.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, including commercial, real estate
and consumer loans. Each loan category is further segregated by fixed and
variable rate, performing and non-performing categories. For variable-rate
loans, carrying value approximates fair value. Fair value of fixed-rate loans is
calculated by discounting contractual cash flows at rates which similar loans
are currently being made.
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as non-interest-bearing
deposits, savings and interest checking accounts, and money market accounts, is
equal to the amount payable on demand as of December 31, 1999 and 1998. The fair
value of certificates of deposit is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
F-23
<PAGE> 139
UMPQUA HOLDINGS CORPORATION
TERM DEBT
The fair value of medium-term notes is calculated based on the discounted value
of the contractual cash flows using current rates at which such borrowings can
currently be obtained.
NOTE 17 -- ACQUISITION OF STRAND, ATKINSON, WILLIAMS & YORK, INC.
In November 1999, the Company completed its acquisition of Strand, Atkinson,
Williams & York, Inc. Strand, Atkinson, Williams & York, Inc. provides a full
range of brokerage services to its clients. The results of operations of this
company are included in Umpqua Holdings Corporation for the month of December
1999. The acquisition was accounted for under the purchase method of accounting;
accordingly, the cost of the acquisition of $2,700,000 was allocated to the
assets acquired and liabilities assumed. The cost of intangible assets acquired
are being amortized over the life of such assets. The residual premium
(goodwill) is being amortized over 15 years, using the straight-line method. The
purchase agreement provides for future contingent payments to Strand, Atkinson,
Williams & York, Inc. shareholders if certain earnings objectives are achieved
by Strand, Atkinson, Williams & York, Inc. during the next three years. If these
contingent payments occur, they will be accounted for as additional goodwill and
will be amortized over the remaining life of the original goodwill. The
following table presents pro-forma results for 1999 and 1998 as if the
acquisition had occurred on January 1, 1998.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Operating revenue (net interest income plus
non-interest income) $24,563,420 $20,716,865
Income before income taxes $ 7,350,570 $ 6,306,324
Net income $ 4,690,830 $ 3,950,095
Basic earnings per common share $ 0.61 $ 0.54
Diluted earnings per common share $ 0.60 $ 0.52
</TABLE>
F-24
<PAGE> 140
UMPQUA HOLDINGS CORPORATION
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1999
-----------------
<S> <C>
Assets
Non-interest-bearing deposits with subsidiary banks $ 49,955
Investments in:
Bank subsidiary 33,844,570
Nonbank subsidiary 2,808,305
Receivable from bank subsidiary 410,000
Other assets 41,501
-----------
Total assets $37,154,331
===========
Liabilities and Shareholders' Equity
Payable to bank subsidiary $ 45,571
Other liabilities 392,538
-----------
Total liabilities 438,109
Shareholders' equity 36,716,222
-----------
Total liabilities and shareholders' equity $37,154,331
===========
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Income Year Ended December 31, 1999
----------------------------
<S> <C>
Dividends from subsidiaries $ 4,610,000
Equity in undistributed earnings of subsidiaries 318,062
Other income 387
-----------
Total income 4,928,449
-----------
Expenses
Management fees paid to subsidiaries 25,710
Other expenses 62,557
-----------
Total expense 88,267
-----------
Income before income tax 4,840,182
Income tax benefit (33,759)
-----------
Net income $ 4,873,941
===========
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Operating activities: Year Ended December 31, 1999
----------------------------
<S> <C>
Net income $ 4,873,941
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries (318,062)
Increase in other liabilities 421,461
Increase in other assets (41,501)
-----------
Net cash provided by operating activities 4,935,839
Investing activities:
Investment in subsidiary (2,720,793)
Net increase in receivables from subsidiaries (410,000)
-----------
Net cash used by investing activities (3,130,793)
Financing activities:
Net increase in payables to subsidiaries 45,571
Dividends paid (1,220,905)
Stock repurchased (617,173)
Proceeds from exercise of stock options 37,416
-----------
Net cash used by investing activities (1,755,091)
-----------
Change in cash and cash equivalents 49,955
Cash and cash equivalents at beginning of year --
-----------
Cash and cash equivalents at end of year $ 49,955
===========
</TABLE>
F-25
<PAGE> 141
UMPQUA HOLDINGS CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of Umpqua Holdings Corporation:
We have audited the accompanying consolidated balance sheets of Umpqua Holdings
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 audit 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 Umpqua Holdings
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows of each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Portland, Oregon
January 21, 2000
F-26
<PAGE> 142
VRB BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------------------
2000 1999 1998
------------- ------------- -------------
ASSETS (unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 17,722,662 $ 17,086,676 $ 14,513,570
Interest-bearing deposits with other banks -- 1,600,000 3,100,000
Federal funds sold -- -- 23,000,000
------------- ------------- -------------
Total cash and cash equivalents 17,722,662 18,686,676 40,613,570
------------- ------------- -------------
Held-to-maturity securities:
State and municipal subdivisions 17,242,784 18,010,109 17,454,188
------------- ------------- -------------
Available-for-sale securities:
U.S. Treasuries and agencies 53,872,905 54,755,835 57,070,000
Collateralized mortgage obligations and other
investments 114,872 134,146 193,631
------------- ------------- -------------
Total available-for-sale securities 53,987,777 54,889,981 57,263,631
------------- ------------- -------------
Federal Home Loan Bank stock 1,960,500 1,898,800 1,765,220
------------- ------------- -------------
Loans held-for-sale -- 1,182,951 --
------------- ------------- -------------
Loans, net of allowance for loan losses and
unearned income 215,524,873 196,818,024 175,188,200
Premises and equipment, net of accumulated
depreciation and amortization 7,853,675 7,797,420 6,499,131
Goodwill, net of amortization 8,442,076 8,798,661 9,511,831
Other real estate owned -- -- 51,161
Accrued interest and other assets 3,860,929 3,421,075 2,870,121
------------- ------------- -------------
Total assets $ 326,595,276 $ 311,503,697 $ 311,217,053
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand deposits $ 81,631,576 $ 74,804,533 $ 72,134,186
Interest-bearing demand deposits 110,651,167 119,569,318 110,900,199
Savings deposits 23,097,697 23,512,119 24,269,197
Time deposits 63,696,219 58,479,936 66,818,719
------------- ------------- -------------
Total deposits 279,076,659 276,365,906 274,122,301
Borrowed Funds 11,000,000 -- --
------------- ------------- -------------
Accrued interest and other liabilities 1,592,145 1,528,447 1,859,297
------------- ------------- -------------
Total liabilities 291,668,804 277,894,353 275,981,598
------------- ------------- -------------
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 18,686,305 18,699,060 21,583,869
Retained earnings 17,890,734 16,428,287 13,590,957
Accumulated other comprehensive (loss) income,
net of taxes (1,650,567) (1,518,003) 60,629
------------- ------------- -------------
Total shareholders' equity 34,926,472 33,609,344 35,235,455
------------- ------------- -------------
Total liabilities and shareholders' equity $ 326,595,276 $ 311,503,697 $ 311,217,053
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 143
VRB BANCORP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------- -----------------------------------------
2000 1999 1999 1998 1997
------------ ------------ ------------ ------------ ------------
INTEREST INCOME (unaudited)
<S> <C> <C> <C> <C> <C>
Interest and fees on loans $ 9,386,688 $ 8,525,906 $ 17,345,427 $ 19,099,960 $ 11,443,683
Interest on investment securities held-to-maturity:
State and municipal subdivisions 460,047 461,796 929,551 945,018 944,226
Interest on investment securities available-for-sale:
U.S. Treasuries and agencies 1,674,884 1,646,167 3,340,584 1,648,543 1,336,882
Collateralized mortgage obligations and
other investments 4,017 4,932 8,721 27,624 78,310
Federal Home Loan Bank stock dividends 61,768 66,248 133,792 137,720 88,500
Federal funds sold 1,895 323,459 683,822 1,537,913 655,746
Interest on deposits in banks 23,521 100,867 251,678 514,895 407,337
------------ ------------ ------------ ------------ ------------
Total interest income 11,612,820 11,129,895 22,693,575 23,911,673 14,954,684
------------ ------------ ------------ ------------ ------------
INTEREST EXPENSE
Interest-bearing demand deposits 1,656,588 1,443,176 3,095,169 3,210,401 2,414,951
Savings deposits 233,946 242,244 486,210 523,341 336,830
Time deposits 1,489,205 1,457,088 2,831,771 3,932,290 1,309,999
Other borrowings 111,050 -- -- 4,490 --
------------ ------------ ------------ ------------ ------------
Total interest expense 3,490,789 3,142,508 6,413,150 7,670,522 4,061,780
------------ ------------ ------------ ------------ ------------
NET INTEREST INCOME 8,122,031 7,986,867 16,280,425 16,241,151 10,892,904
PROVISION FOR LOAN LOSSES -- -- -- -- 250,000
------------ ------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,122,031 7,986,867 16,280,425 16,241,151 10,642,904
------------ ------------ ------------ ------------ ------------
NON-INTEREST INCOME
Service charges on deposit accounts 706,979 630,556 1,300,921 1,294,878 1,019,786
Other operating income 509,088 357,708 754,731 846,102 650,853
------------ ------------ ------------ ------------ ------------
Total non-interest income 1,216,067 988,264 2,055,652 2,140,980 1,670,639
------------ ------------ ------------ ------------ ------------
NON-INTEREST EXPENSES
Salaries and benefits $ 3,193,020 $ 3,077,196 $ 6,317,618 $ 5,984,912 $ 4,120,469
Net occupancy 734,432 581,620 1,157,013 1,024,860 813,915
Amortization of goodwill 356,584 356,584 713,170 739,616 110,299
Communications 234,223 224,402 452,014 386,461 239,721
Data processing 130,537 171,214 325,376 306,499 181,460
Supplies 119,957 125,031 267,454 289,675 230,255
Advertising 161,700 186,725 293,889 260,454 247,668
Professional fees 87,279 88,461 192,401 266,446 180,658
FDIC insurance premium 27,817 15,583 30,603 47,270 18,201
Other expenses 391,344 259,469 914,906 1,183,255 730,318
------------ ------------ ------------ ------------ ------------
Total non-interest expenses 5,436,893 5,086,285 10,564,444 10,489,448 6,872,924
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 3,901,205 3,888,846 7,771,633 7,892,683 5,440,619
PROVISION FOR INCOME TAXES 1,443,000 1,460,250 2,883,250 2,966,000 1,737,000
------------ ------------ ------------ ------------ ------------
NET INCOME 2,458,205 2,428,596 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 (132,564) (1,052,330) (1,578,632) 12,087 (2,964)
Reclassification adjustment for gain included
in net income -- -- -- -- (4,283)
------------ ------------ ------------ ------------ ------------
Other comprehensive income (loss) (132,564) -- (1,578,632) 12,087 (7,247)
------------ ------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 2,325,641 $ 1,376,266 $ 3,309,751 $ 4,938,770 $ 3,696,372
============ ============ ============ ============ ============
BASIC EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.30 $ 0.28 $ 0.57 $ 0.57 $ 0.48
============ ============ ============ ============ ============
DILUTED EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.30 $ 0.28 $ 0.57 $ 0.56 $ 0.48
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 144
VRB BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Number of Other Total
Common Common Retained Comprehensive Shareholders'
Shares Stock Earnings Income (Loss) Equity
--------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
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
------------ ------------ ------------ ------------ ------------
Stock options exercised 5,765 36,502 -- -- 36,502
Cash dividend ($0.12) per share,
paid May 1) -- -- (995,758) -- (995,758)
Stock repurchased (8,000) (49,257) -- -- (49,257)
Net income and comprehensive loss -- -- 2,458,205 (132,564) 2,325,641
------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 2000 (unaudited) 8,301,361 $ 18,686,305 $ 17,890,734 $ (1,650,567) $ 34,926,472
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE> 145
VRB BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
---------------------------- --------------------------------------------
2000 1999 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,458,205 $ 2,428,596 $ 4,888,383 $ 4,926,683 $ 3,703,619
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 681,634 516,045 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 (61,700) (66,180) (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 (203,951) (660,119) 324,277 410,555 215,220
Net change in accrued interest and other liabilities 63,698 (573,490) (313,041) (1,292,613) 323,300
------------ ------------ ------------ ------------ ------------
Net cash from operating activities 2,937,886 1,644,852 5,926,783 5,204,825 4,867,753
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the maturity of held-to-maturity
securities 770,000 520,000 575,000 3,425,000 215,000
Purchases of held-to-maturity securities -- (1,125,587) (1,125,587) (2,371,411) --
Proceeds from maturity of available-for-sale
securities 518,281 10,526,996 -- -- 446,971
Proceeds from sales of available-for-sale
securities -- -- 10,559,844 33,611,023 3,008,437
Purchases of available-for-sale securities (17,523,898) (10,500,000) (10,500,000) (64,980,969) (3,000,000)
Net (increase) decrease in loans (9,304,673) (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 (368,524) (605,458) (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 (16,604,141) (10,488,722) (25,053,848) 332,456 (15,914,101)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 2,710,754 (2,683,121) 2,243,605 (6,930,019) 17,607,889
Net borrowing 11,000,000 -- -- -- --
Proceeds from public stock offering, net of
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 35,502 131,620 111,554 36,517 88,068
Repurchase of common stock (49,257) (508,365) (3,103,935) -- --
------------ ------------ ------------ ------------ ------------
Net cash from financing activities 12,701,241 (4,105,992) (2,799,829) (8,568,000) 25,473,728
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (964,014) (12,949,862) (21,926,894) (3,030,718) 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 $ 17,722,662 $ 27,663,708 $ 18,686,676 $ 40,613,571 $ 43,644,289
============ ============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION
Cash paid for interest $ 3,514,421 $ 3,214,684 $ 6,486,065 $ 7,464,255 $ 4,048,741
============ ============ ============ ============ ============
Cash paid for taxes $ 1,206,000 $ 1,572,288 $ 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 $ 132,564 $ (1,052,330) $ (1,578,632) $ 12,087 $ (7,247)
============ ============ ============ ============ ============
Income tax benefit of stock options exercised $ -- $ -- $ -- $ 60,500 $ 86,896
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 146
VRB BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(JUNE 30, 2000 UNAUDITED)
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 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
F-31
<PAGE> 147
VRB BANCORP
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 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-32
<PAGE> 148
VRB BANCORP
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
values for fixed-rate CDs are estimated using a discounted cash flow
calculation that applies interest rates
F-33
<PAGE> 149
VRB BANCORP
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 $137,276, $169,524, and $114,670 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 all fiscal quarters of all fiscal years
F-34
<PAGE> 150
VRB BANCORP
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):
<TABLE>
<S> <C>
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
========
</TABLE>
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
operations for the year ended
F-35
<PAGE> 151
VRB BANCORP
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.
<TABLE>
<S> <C>
Net interest income before provision for loan loss $ 16,404
Net income $ 3,713
Earnings per common share:
Basic $ 0.51
Diluted $ 0.50
</TABLE>
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):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
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.
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
Securities Securities
------------------------- -------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
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 11,322 11,166 1,000 913
--------- ------------ --------- ------------
$ 18,010 $ 17,898 $ 57,122 $ 54,890
========= ============ ========= ============
</TABLE>
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
F-36
<PAGE> 152
VRB BANCORP
contractual maturities of underlying collateral. Collateralized mortgage
obligations may mature earlier than their weighted-average contractual
maturities because of principal prepayments.
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):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
The following is an analysis of the changes in the allowance for loan losses (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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.
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<PAGE> 153
VRB BANCORP
NOTE 5 -- BANK PREMISES AND EQUIPMENT
Bank premises, furniture, and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
NOTE 6 -- ACCRUED INTEREST AND OTHER ASSETS
Accrued interest and other assets consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Accrued interest receivable $1,925 $1,931
Prepaid expenses 272 234
Deferred taxes 1,099 553
Other assets 125 152
------ ------
$3,421 $2,870
====== ======
</TABLE>
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):
<TABLE>
<S> <C>
2000 $52,802
2001 2,459
2002 2,774
2003 222
2004 and thereafter 223
-------
$58,480
=======
</TABLE>
NOTE 8 -- INCOME TAXES
The income tax provision consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 $1,997
------ ------ ------
<S> <C> <C> <C>
Currently payable $2,665 $2,877 $1,715
Deferred 168 89 22
------ ------ ------
Provision for income taxes $2,833 $2,966 $1,737
====== ====== ======
</TABLE>
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-38
<PAGE> 154
VRB BANCORP
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
The net deferred tax benefits included in other assets in the
accompanying consolidated balance sheets include the following components (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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%.
F-39
<PAGE> 155
VRB BANCORP
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
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%
======= ======= =======
</TABLE>
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.
F-40
<PAGE> 156
VRB BANCORP
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:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Commitments to extend credit $32,106,632 $21,165,221
Commercial and standby letters of credit $ 1,113,024 $ 1,090,009
</TABLE>
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):
<TABLE>
<CAPTION>
1999 1998
---------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets:
State and municipal subdivisions $ 18,010 $ 137 $ (249) $ 17,898
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 $ 17,545 $ 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
</TABLE>
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.
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<PAGE> 157
VRB BANCORP
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.
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:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
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
==========
</TABLE>
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
F-42
<PAGE> 158
VRB BANCORP
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.
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):
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<PAGE> 159
VRB BANCORP
<TABLE>
<CAPTION>
Combined
Directors' Plan Employees' Plan Plans
--------------------- -------------------- ------
Weighted Weighted
Average Average
Option Option
Shares Price Shares Price Shares
------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
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
====== ==== ====
</TABLE>
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):
F-44
<PAGE> 160
VRB BANCORP
<TABLE>
<CAPTION>
1999
---------------------------
As
Reported Pro Forma
--------- ---------
<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------
As
Reported Pro Forma
--------- ---------
<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------
As
Reported Pro Forma
--------- ---------
<S> <C> <C>
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
</TABLE>
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,
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.
F-45
<PAGE> 161
VRB BANCORP
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
Plan expenses of $38,600, $38,600, and $21,000, respectively.
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):
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
F-46
<PAGE> 162
VRB BANCORP
<TABLE>
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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
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VRB BANCORP
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.
<TABLE>
<CAPTION>
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
F-48
<PAGE> 164
VRB BANCORP
NOTE 19 -- PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for VRB Bancorp (unconsolidated parent
company only) is as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET 1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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<PAGE> 165
VRB BANCORP
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 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)
<TABLE>
<CAPTION>
1999 Quarter ended
------------------------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
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
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1998 Quarter ended
------------------------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
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
====== ====== ====== ======
</TABLE>
F-50
<PAGE> 166
VRB BANCORP
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
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<PAGE> 167
APPENDIX I
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization is entered into effective this
14th day of August, 2000 (the "Agreement"), by and among Umpqua Holdings
Corporation ("Umpqua"), South Umpqua Bank ("Surviving Bank"), VRB Bancorp
("VRB"), and Valley of the Rogue Bank ("Valley").
RECITALS:
A. Umpqua is an Oregon corporation, and registered financial holding
company, with its principal office at 445 SE Main Street, Roseburg, Oregon.
B. Surviving Bank is an Oregon state chartered bank with its principal
office at 445 SE Main Street, Roseburg, Oregon.
C. VRB is an Oregon corporation, and registered bank holding company,
with its principal office at 110 Pine Street, Rogue River, Oregon.
D. Valley is an Oregon state chartered bank with its principal office at
110 Pine Street, Rogue River, Oregon.
E. The parties hereto desire to enter into a strategic business
combination as a "merger of equals" pursuant to the terms of this Agreement.
F. The parties intend that the transaction contemplated hereby shall
qualify as a tax free reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended, and as a "pooling of the interests"
transaction within the meaning of the Securities and Exchange Commission's Staff
Accounting Bulletin No. 65.
AGREEMENT
In consideration of the mutual covenants herein contained, the parties
hereby enter into this Agreement and agree as follows:
DEFINITIONS. For purposes of this Agreement, the following terms shall
have the definitions given:
(a) "Alternative Acquisition Transaction" means any of the following
circumstances: (A) a party or its board of directors enters into
an agreement or recommends to its shareholders an agreement
(other than this Agreement) pursuant to which any entity, person
or group, within the meaning of Section 13(d)(3) of the Exchange
Act (any of the foregoing hereinafter in this definition, a
"Person"), would (i) merge or
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<PAGE> 168
consolidate with such party, with its shareholders holding less
than 50 percent of the stock of the surviving entity, (ii)
acquire 50 percent or more of the assets or liabilities of, or
enter into any similar transaction with such party or its
subsidiary, or (iii) purchase or otherwise acquire (including by
merger, consolidation, share exchange or any similar transaction)
securities representing or convertible into 50 percent or more of
the stock of such party or its subsidiary; (B) or a Person
acquires 50 percent or more of the stock of such party.
(b) "Bank Merger" means the merger of Valley with and into Surviving
Bank in accordance with the Bank Plan of Merger.
(c) "Bank Plan of Merger" means the Plan of Merger to be executed by
Surviving Bank and Valley and delivered to the Oregon Director
for filing substantially in the form attached hereto as Exhibit
B.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Effective Date" is the date on which the Articles of Merger for
the Holding Company Merger are filed with the Oregon Secretary of
State.
(f) "Employee Benefit Plan" means an employee benefit plan as defined
by Section 3 of ERISA.
(g) "ERISA" means the Employee Retirement Income Security Act of
1984, as amended.
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and, to the extent the context requires, the rules
promulgated thereunder.
(i) "Exchange Agent" means Surviving Bank or such other bank
designated by Umpqua to perform the duties of Exchange Agent in
this Agreement.
(j) "Exchange Ratio" means 0.8135 or such higher number not to exceed
0.8500 as may be determined in accordance with Section 11 (f)
(i).
(k) "FDIC" means the Federal Deposit Insurance Corporation.
(l) "FHA" means the Federal Housing Administration.
(m) "FHLMC" means the Federal Home Loan Mortgage Corporation.
(n) "FNMA" means the Federal National Mortgage Association.
(o) "FRB" means Federal Reserve Board.
(p) "GNMA" means the Government National Mortgage Association.
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<PAGE> 169
(q) "Holding Company Merger" means the merger of VRB with and into
Umpqua on the Effective Date in accordance with the Holding
Company Plan of Merger.
(r) "Holding Company Plan of Merger" means the Plan of Merger to be
executed by Umpqua and VRB and delivered together with Articles
of Merger to the Oregon Secretary of State for filing on the
Effective Date substantially in the form attached hereto as
Exhibit A.
(s) "Named Executive Officers" means those persons listed on Schedule
3.2 (i) and 3.2 (ii).
(t) "Oregon Director" means the Director of the Oregon Department of
Consumer and Business Services.
(u) "Oregon Bank Act" means Chapter 706 through 716 of the Oregon
Revised Statutes.
(v) "Plans of Merger" means the Bank Plan of Merger and the Holding
Company Plan of Merger.
(w) "PBGC" means the Pension Benefit Guaranty Corporation.
(x) "SBA" means the Small Business Administration of the Department
of Commerce.
(y) "SEC" means the Securities and Exchange Commission.
(z) "Securities Act" means the Securities Act of 1933, as amended,
and to the extent the context requires, the rules promulgated
thereunder.
(aa) "Subsidiary" means, with respect to a party to this Agreement,
any entity in which such party owns, directly or indirectly, more
than fifty percent of the voting securities, other than in such
party's capacity as a fiduciary or a secured party.
(bb) "VA" means the Veterans Administration.
(cc) "VRB" means VRB Bancorp, an Oregon corporation, and includes,
unless the context otherwise suggests, each of its Subsidiaries.
(dd) "VRB Common Stock" means shares of common stock, no par value, of
VRB, and which will be cancelled or converted into the right to
receive Umpqua stock at the Effective Date.
(ee) "Umpqua" means Umpqua Holdings Corporation, an Oregon
corporation, and includes, unless the context otherwise suggests,
each of its Subsidiaries.
App-3
<PAGE> 170
(ff) "Umpqua Common Stock" means shares of common stock, no par value,
of Umpqua which are to be issued to VRB shareholders pursuant to
the Holding Company Plan of Merger.
2. MERGERS
2.1. Transactions Pursuant to the Holding Company Plan of Merger. Upon
performance of all of the covenants of the parties hereto and
fulfillment or waiver (to the extent waiver is permitted by law)
of all of the conditions contained herein, on the Effective Date:
2.1.1. VRB shall be merged with and into Umpqua under Oregon law
on the terms and conditions set forth in the Holding
Company Plan of Merger. The Holding Company Plan of
Merger, the form of which is attached hereto as Exhibit A,
and the Holding Company Articles of Merger shall be filed
with the Secretary of State of the State of Oregon to
effect the Holding Company Merger.
2.1.2. As provided in the Holding Company Plan of Merger, as of
the effectiveness of the Holding Company Merger, Umpqua
shall be the surviving corporation, and the Articles of
Incorporation of Umpqua attached as Exhibit C and the
Bylaws of Umpqua attached as Exhibit D shall be the
Articles of Incorporation and Bylaws of the surviving
corporation. Until the second anniversary of the Effective
Date, the Articles of Incorporation of Umpqua and the
Bylaws of Umpqua shall not be amended other than in
compliance with Section 3.1 of this Agreement.
2.1.3. On and after the Effective Date, each share of Umpqua
capital stock outstanding immediately prior to the Holding
Company Merger shall remain outstanding and shall be
deemed to be one share of the capital stock of the
surviving corporation.
2.1.4. As provided in the Holding Company Plan of Merger, as of
the Effective Date, each outstanding share of VRB Common
Stock shall be converted into the right to receive the
number of shares of Umpqua Common Stock determined by the
Exchange Ratio, except that cash shall be paid in lieu of
any resulting fractional shares.
2.1.5. On the Effective Date, by virtue of the Holding Company
Merger and without any action on the part of any holder of
any such option or warrant, all existing stock option
plans of VRB shall terminate, no further options shall be
granted thereunder, and each outstanding option to acquire
VRB Common Stock (each a "VRB Option") shall automatically
be converted and exchanged into an Umpqua stock option (a
"Converted Option") to purchase shares of Umpqua Common
Stock, and each shall continue on the same terms upon
which granted; provided that (i) the number of shares of
App-4
<PAGE> 171
Umpqua Common Stock issuable upon exercise of the
Converted Option shall be equal to the product of (a) the
number of shares of VRB Common Stock issuable upon
exercise of the VRB Option, and (b) the Exchange Ratio;
and (ii) the exercise price of such Converted Option shall
be equal to the result of (a) the exercise price of the
VRB Option, divided by (b) Exchange Ratio; provided,
however, that all other terms and conditions of such
outstanding options, including vesting schedules, if any,
and aggregate exercise price, shall not be affected by the
Merger except as may be set forth in such option
agreements. With respect to any VRB Option that is an
incentive stock option within the meaning of Section 422
of the Code, the foregoing adjustments shall be effected
in a manner consistent with Section 424(a) of the Code.
2.2. Transactions Pursuant to the Bank Plan of Merger. Upon
performance of all of the covenants of the parties hereto and
fulfillment or waiver (to the extent waiver is permitted by law)
of all of the conditions contained herein, and promptly following
the Effective Date:
2.2.1. Valley will be merged with and into Surviving Bank in
accordance with the provisions of the Oregon Bank Act. The
Bank Plan of Merger, the form of which is attached hereto
as Exhibit B shall be filed with the Oregon Director for
purposes of obtaining a Certificate of Merger.
2.2.2. As of the date set forth in the Certificate of Merger,
Valley will merge with Surviving Bank, with Surviving Bank
being the resulting bank and having its head office in
Roseburg, Oregon.
2.2.3. The Articles of Incorporation, Bylaws and banking charter
of Surviving Bank in effect immediately prior to the date
set forth on the Certificate of Merger shall be the
Articles of Incorporation, Bylaws and banking charter of
the resulting bank.
2.2.4. Upon effectiveness of the Bank Merger, each outstanding
share of Surviving Bank common stock shall remain
outstanding as shares of the resulting bank, the holders
of such shares shall retain their rights with respect to
such shares as in effect prior to the Bank Merger, and
each outstanding share of Valley Common Stock will be
cancelled.
3. GOVERNANCE OF COMBINED ENTITY.
3.1. Directors; Certain Governance Limitations. Following the Closing,
the Boards of Directors of Umpqua and Surviving Bank shall each
be comprised of eleven directors, consisting of six persons to be
named by Umpqua (the "Umpqua Designees") and five persons to be
named by VRB (the "VRB Designees"). The Directors of Umpqua and
Surviving Bank shall be apportioned such that following the
Closing two of the directors named by VRB shall be appointed to
serve three year terms, two to serve two year terms, and one to
serve a one year term (in each
App-5
<PAGE> 172
case the length of terms being reducible to reflect the annual
meeting schedule of Umpqua shareholders). Prior to the second
anniversary of the Effective Date, the Board of Directors of
Umpqua or Surviving Bank shall not, without the approval of
two-thirds of the directors, approve a Major Decision except as
may otherwise be required by law. For purposes of this Agreement
a Major Decision shall mean any one or more of the following: (i)
a decision to change the number or composition of the Board of
Directors of Umpqua or Surviving Bank except in connection with a
plan of merger or other acquisition; (ii) voluntary entry by
Umpqua or Surviving Bank (as the case may be) into any merger,
share exchange, sale or acquisition of all or substantially all
of the assets, or similar transaction, a result of which is that
the Persons who were shareholders of Umpqua or Surviving Bank
prior to such transaction shall own less than fifty percent (50%)
of the voting securities of the combined entity following such
transaction; (iii) the selection by the Board of Directors of
nominees or the solicitation by the Board of Directors of Umpqua
of proxies for the election such nominees, of a director to
succeed any VRB Designee; and (iv) a change to the Articles of
Incorporation or Bylaws of Umpqua or the Surviving Bank which
would reduce the percentage voting requirement or the duration of
such requirement to effect a Major Decision. Each of the
directors of Umpqua or VRB signing this Agreement agrees that he
or she shall for two years following the Effective Date vote all
of his or her shares of Umpqua Common Stock in favor of
candidates nominated by the Umpqua Board of Directors in
accordance with the foregoing clause.
3.2. Officers. On the Effective Date and subject to such persons'
continued employment by the parties in their current positions,
the executive officers of Umpqua shall be those persons named on
Schedule 3.2(i) (the "Umpqua Named Executive Officers") and the
executive officers of Surviving Bank shall be those persons named
on Schedule 3.2(ii) (the "Surviving Bank Named Executive Officers
and, together with the Umpqua Named Executive Officers, the
"Named Executive Officers").
3.3. Name of Surviving Bank. Upon the filing of the Bank Plan of
Merger, the name of the Surviving Bank shall be Umpqua Bank, an
Oregon state chartered bank.
4. REPRESENTATIONS AND WARRANTIES OF VRB
Except as disclosed in one or more schedules to this Agreement delivered
prior to execution of this Agreement, VRB represents and warrants to Umpqua as
follows:
4.1. Organization, Existence, and Authority. VRB is a corporation duly
organized and validly existing under the laws of the State of
Oregon and has all requisite corporate power and authority to
own, lease, and operate its properties and assets and carry on
its business in the manner now being conducted. Valley is a bank
duly organized, validly existing, and in good standing under the
laws of the State of Oregon and has all requisite corporate power
and authority to own, lease, and operate its properties and
assets and carry on its business in the manner now being
conducted. Each of VRB and Valley is qualified to do business and
is in good standing in every jurisdiction in which such
qualification is required except where the failure to so qualify
would not result in any material adverse effect on its business
operation, financial condition or properties.
App-6
<PAGE> 173
4.2. Authorized and Outstanding Stock, Options, and Other Rights. The
authorized capital stock of VRB consists of (i) 10,000,000 shares
of undesignated preferred stock, with $5.00 par value per share,
of which no shares are issued or outstanding, and (ii) 30,000,000
shares of common stock, with no par value per share, of which
8,308,792 shares are outstanding, all of which are validly
issued, fully paid and nonassessable. The authorized capital
stock of Valley consists of 110,500 shares of common stock with a
par value of $10.00 per share, all of which shares are
outstanding, validly issued, fully paid and nonassessable. Other
than as set forth in Schedule 4.2, no subscriptions, options,
warrants, convertible securities or other rights or commitments
which would enable the holder to acquire any shares of capital
stock or other investment securities of VRB, or which enable or
require VRB to acquire shares of its capital stock or other
investment securities from any holder, are authorized, issued or
outstanding.
4.3. Public Reports. Since January 1, 1997, VRB has timely filed with
the SEC all reports and statements required to be filed pursuant
to the Exchange Act (the "VRB Public Reports"). Until the
Effective Date, VRB will file with the SEC (and will furnish
copies to Umpqua within two days thereafter) all additional
reports and other documents which VRB is required by the Exchange
Act to file or otherwise files with the SEC. The financial
information included in the VRB Public Reports has been and will
be prepared in accordance with generally accepted accounting
principles, consistently applied, and present fairly the
financial position and results of operation of VRB and its
subsidiaries on the dates and for the periods covered thereby. As
of the date filed, each VRB Public Report has been and, as to
those reports to be filed on or after the date of this Agreement
and the Closing, will be accurate and complete as of the date
filed, and each complies or will comply with all requirements
applicable to such filing.
4.4. Articles of Incorporation, Bylaws, Minutes. The copies of the
Articles of Incorporation, as amended, and the Bylaws of each of
VRB and Valley delivered to Umpqua as Schedule 4.4, are true,
correct and complete copies of existing Articles of Incorporation
and Bylaws of VRB and Valley, as the case may be, as amended to
date. Neither VRB nor Valley is in violation of any provision of
its Articles of Incorporation or Bylaws. The minute books of VRB
and Valley which have been or will be made available to Umpqua
for its review contain accurate and complete minutes of all
meetings and all consents evidencing actions taken without a
meeting by its Board of Directors (and any committees thereof)
and by its shareholders.
4.5. No Holding Company, Joint Venture, or Other Subsidiaries. Other
than as to VRB with respect to Valley, no corporation or other
entity is registered or, to the knowledge of VRB or Valley, is
required to be registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended, because of
ownership or control of VRB or Valley. Neither VRB nor Valley,
directly or indirectly, owns or controls, either by power to
control the investment or power to vote, any shares of capital
stock of any other corporation or entity, other than
App-7
<PAGE> 174
shares held in a fiduciary or custodial capacity in the ordinary
course of business and shares representing less than five percent
of the outstanding shares of such corporation acquired in partial
or full satisfaction of debts previously contracted. Neither VRB
nor Valley is a part of any joint venture, or general or limited
partnership, or a member of any unincorporated association.
4.6. Shareholder Reports. VRB has delivered to Umpqua as Schedule 4.6
copies of all of VRB's reports and other communications to
stockholders since January 1, 1999, including all proxy
statements and notices of shareholder meetings, to the extent
such reports and communications have not been filed with any VRB
Public Reports. Until the Effective Date, VRB will furnish to
Umpqua copies of all future communications within two days such
materials are first sent to its shareholders.
4.7. Books and Records. The books and records of VRB and Valley
accurately reflect in all material respects the transactions to
which it is a party or by which it or its properties are bound or
subject. Such books and records have been and are accurate and
complete and comply in all material respects with applicable
legal, regulatory and accounting requirements.
4.8. Legal Proceedings. Except for regulatory examinations conducted
in the normal course of regulation of VRB and Valley, and except
as disclosed in Schedule 4.8 delivered to Umpqua, there are no
actions, suits, proceedings, claims or governmental
investigations pending or, to the knowledge of VRB, threatened
against or affecting VRB before any court, administrative officer
or agency, other governmental body or arbitration which might,
individually or in the aggregate, result in any material adverse
change in the business, assets, earnings, operation or condition
(financial or otherwise) of VRB or which might hinder or delay
the consummation of the transactions contemplated by this
Agreement.
4.9. Compliance with Lending Laws and Regulations. Except as disclosed
in Schedule 4.9 and except for such errors or oversights the
financial effect of which are adequately reserved against:
(a) The conduct by each of VRB and Valley of its respective
business and the operation of the properties or other assets
owned or leased by it does not violate or infringe any domestic
laws, statutes, ordinances, rules or regulations or, to the
knowledge of VRB and Valley, any foreign laws, statutes,
ordinances, rules or regulations, the enforcement of which,
individually or in the aggregate, would have a material adverse
effect on either VRB or Valley, its business, properties or
financial condition. Specifically, but without limitations, each
of VRB and Valley is in compliance in all material respects with
every local, state or federal law or ordinance, and any
regulation or order issued thereunder, now in effect and
applicable to it governing or pertaining to fair housing,
anti-redlining, equal credit opportunity, truth-in-lending, real
estate settlement procedures, fair credit reporting and every
other prohibition against unlawful discrimination in residential
lending, or governing consumer credit, including, but not limited
to, the Community
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Reinvestment Act, the Consumer Credit Protection Act,
Truth-in-Lending Act, and Regulation Z promulgated by the FRB,
and the Real Estate Settlement Procedures Act of 1974. All loans,
leases, contracts and accounts receivable (billed and unbilled),
security agreements, guarantees and recourse agreements, of
either VRB or Valley, as held in its portfolios, or as sold with
recourse into the secondary market represent and are valid and
binding obligations of their respective parties and debtors,
enforceable in accordance with their respective terms; each of
them is based on a valid, binding and enforceable contract or
commitment, each of which has been executed and delivered in full
compliance, in form and substance, with any and all federal,
state or local laws applicable to VRB, or to the other party or
parties to the contract(s) or commitment(s), including without
limitation the Truth-in-Lending Act, Regulations Z and U of the
FRB, laws and regulations providing for nondiscriminatory
practices in the granting of loans or credit, applicable usury
laws, and laws imposing lending limits; and all such contracts or
commitments have been administered in full compliance with all
applicable federal, state or local laws or regulations. All
Uniform Commercial Code filings, or filings of trust deeds, or of
liens or other security interest documentation that are required
by any applicable federal, state or local government laws and
regulations to perfect the security interests referred to in any
and all of such documents or other security agreements have been
made, and all security interests under such deeds, documents or
security agreements have been perfected, and all contracts have
been entered into or assumed in full compliance with all
applicable material legal or regulatory requirements.
(b) All loan files of Valley are complete and accurate in all
material respects and have been maintained in accordance with
good banking practice.
(c) All notices of default, foreclosure proceedings or
repossession proceedings against any real or personal property
collateral have been issued, initiated and conducted by VRB or
Valley in material formal and substantive compliance with all
applicable federal, state or local laws and regulations, and no
loss or impairment of any security interest, or exposure to
meritorious lawsuits or other proceedings against VRB or Valley
has been or will be suffered or incurred by VRB or Valley.
(d) Neither VRB nor Valley is in material violation of any
applicable servicer or any other requirements of the FHA, VA,
FNMA, GNMA, FHLMC, SBA or any private mortgage insurer which
insured or guaranteed any loans owned by VRB or Valley or as to
which either has sold to other investors, the effect of which
violation would materially and adversely affect the business,
assets, earnings, operation or condition (financial or otherwise)
of VRB or Valley, and with respect to such loans VRB or Valley
has not done or failed to do, or caused to be done or omitted to
be done, any act the effect of which act or omission impairs or
invalidates (i) any FHA insurance or commitments of the FHA to
insure, (ii) any VA guarantee or commitment of the VA to
guarantee, (iii) any SBA guarantees or commitments of the SBA to
guarantee, (iv) any private mortgage insurance or commitment of
any private mortgage insurer to insure, (v) any title insurance
policy, (vi) any hazard
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insurance policy, or (vii) any flood insurance policy required by
the National Flood Insurance Act of 1968, as amended, which would
materially and adversely affect the business, assets, earnings,
operation or condition (financial or otherwise) of VRB or Valley.
(e) Neither VRB nor Valley have knowingly engaged principally, or
as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying any margin
stock.
4.10. Commitments. Schedule 4.10 is a listing of all outstanding
commitments, including outstanding letters of credit, repurchase
agreements and unfunded agreements to lend of Valley.
4.11. Hazardous Wastes. To the knowledge of the directors and officers
of VRB and Valley, neither VRB nor Valley, or any other person
having an interest in any property which VRB or Valley owns or
leases, or has owned or leased, or in which either holds any
security interest, mortgage, or other liens or interest including
but not limited to as beneficiary of a trust deed ("Property")
has engaged in the generation, use, manufacture, treatment,
transportation, storage (in tanks or otherwise), or disposal of
Hazardous Material on or from such Property. Individually or in
the aggregate, there has been no: (i) presence, use, generation,
handling, treatment, storage, release, threatened release,
migration or disposal of Hazardous Material; (ii) condition that
could result in any use, ownership or transfer restriction; or
(iii) condition of nuisance on or from such Property, any of
which individually or collectively would have a material adverse
effect on the business, assets, earnings, operation or condition
(financial or otherwise) of VRB. VRB has received no notice of,
or has no reason to know of, a condition that could give rise to
any private or governmental suit, claim, action, proceeding or
investigation against VRB, Valley, any such other person or such
Property as a result of any of the foregoing events. "Hazardous
Material" means any chemical, substance, material, object,
condition, or waste harmful to human health or safety or to the
environment due to its radioactivity, ignitability, corrosivity,
reactivity, explosivity, toxicity, carcinogenicity,
infectiousness or other harmful or potentially harmful properties
or effects, including, without limitation, petroleum or petroleum
products, and all of those chemicals, substances, materials,
objects, conditions, wastes or combinations of them which are now
or become listed, defined or regulated in any manner by any
federal, state or local law based, directly or indirectly, upon
such properties or effects.
4.12. Contingent and Other Liabilities. Schedule 4.12 is a list of
contingent and other liabilities not set forth in other
schedules, and includes copies of documents evidencing those
liabilities. Except as set forth in any schedules to this
Agreement, and except for FDIC insured deposits and federal funds
purchased and securities sold under agreements to repurchase
arising out of transactions subsequent to the date of the latest
balance sheet filed as with a VRB Public Report, VRB and Valley
have no obligations or liabilities of any nature (whether
accrued, absolute,
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contingent or otherwise) which are material or which, when
combined with all other such obligations or liabilities would be
material to the business, assets, earnings, operation or
condition (financial or otherwise) of VRB or Valley.
4.13. No Adverse Changes. Except as set forth in Schedule 4.13, since
March 31, 2000, (a) there has been no material adverse change in
the business, assets, earnings, operation or condition (financial
or otherwise) of VRB; (b) no cash, stock or other dividends, or
other distributions with respect to capital stock, have been
declared or paid by VRB, nor has VRB purchased or redeemed any of
its shares; and (c) there has not been any damage, destruction or
loss (whether or not covered by insurance) materially and
adversely affecting any asset material to VRB. As of the
Effective Date, VRB will have no obligations or liabilities of
any nature, whether absolute, accrued, contingent or otherwise,
in excess of $50,000 individually, or $150,000 in the aggregate,
other than:
(a) Obligations and liabilities disclosed in VRB Public Reports
as of March 31, 2000, or in the schedules provided herewith;
(b) Obligations and liabilities incurred in, or as a result of,
the normal and ordinary course of business, consistent with past
practices, which do not, in the aggregate, have a material
adverse effect on the business, assets, earnings, operation or
condition (financial or otherwise) of VRB; and
(c) Obligations and liabilities incurred otherwise than in or as
a result of the normal and ordinary course of business consistent
with past practices, provided Umpqua shall have consented
thereto.
To the best knowledge of VRB, there is no basis for any claim
against VRB or any other obligation or liability of any nature,
in excess of $50,000 individually or $150,000 in the aggregate.
4.14. Regulatory Approvals Required. The nature of the business and
operations of VRB does not require any approval, authorization,
consent, license, clearance or order of, any declaration or
notification to, or any filing or registration with, any
governmental or regulatory authority in order to permit VRB to
perform its obligations under this Agreement, or to prevent the
termination of any material right, privilege, license or
agreement of VRB, or any material loss or disadvantage to its
business, upon consummation of the Holding Company Plan of Merger
or Bank Plan of Merger, except for:
(a) Approval of the Bank Plan of Merger by the Oregon Director
and the FDIC;
(b) Approval from, or waiver of jurisdiction by, the FRB of the
Holding Company Merger;
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(c) Filing of the Holding Company Plan of Merger and Articles of
Merger with the Oregon Secretary of State;
(d) Participation along with Umpqua in a fairness hearing before
the Oregon Director relating to the Oregon Director's approval of
the transactions contemplated hereby; and
(e) Filing with the SEC of the definitive Joint Proxy Statement
in accordance with the Exchange Act rules governing proxy
solicitations.
4.15. Corporate and Shareholder Approval of Agreement, Binding
Obligations. VRB and Valley each has all requisite corporate
power to execute, deliver and perform its obligations under this
Agreement. The execution, delivery and performance of this
Agreement, and the transactions contemplated thereby, have been
duly authorized by the Board of Directors of each of VRB and
Valley. No other corporate action on the part of VRB or Valley
other than shareholder approval is required to authorize this
Agreement or the Holding Company Plan of Merger or Bank Plan of
Merger or the consummation of the transactions contemplated
thereby. This Agreement has been duly executed and delivered by
VRB and Valley and constitutes the legal, valid and binding
obligation of each of them enforceable in accordance with its
terms. The Holding Company Plan of Merger and Bank Plan of
Merger, when duly executed and delivered by VRB or Valley, as the
case may be, will constitute the legal, valid and binding
obligations of VRB and Valley, as the case may be, enforceable in
accordance with their terms.
4.16. No Defaults from Transaction. Subject to compliance with the
governmental approvals described in Section 4.14, neither the
execution, delivery and performance of this Agreement and the
Holding Company Plan of Merger or Bank Plan of Merger by VRB and
Valley, as the case may be, nor the consummation of the
transactions contemplated thereby will conflict with, result in
any breach or violation of, or result in any default or any
acceleration of performance under, any of the terms, conditions
or provisions of the Articles of Incorporation or Bylaws of
either VRB or Valley, or (assuming the accuracy of Umpqua's and
Surviving Bank's representations and warranties, compliance with
their covenants, and the performance of their obligations under
this Agreement and the Holding Company Plan of Merger and Bank
Plan of Merger) of any statute, regulation or existing order,
writ, injunction or decree of any court or governmental agency,
or of any contract, agreement or instrument to which either is a
party or by which either is bound, or will result in the
declaration or imposition of any lien, charge or encumbrance upon
any of the assets of VRB or Valley which are material to their
business. Assuming the accuracy of Umpqua's and Surviving Bank's
representations and warranties, compliance with their covenants,
and the performance of their obligations under this Agreement and
the Holding Company Plan of Merger and Bank Plan of Merger, the
consummation of the transactions contemplated by this Agreement
will not result in any material adverse change in
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the business, assets, earnings, operations or conditions
(financial or otherwise) of VRB or Valley.
4.17. Tax Returns. VRB has filed all federal, state and other income,
franchise or other tax returns, required to be filed by it; each
such return is complete and accurate in all material respects;
and all taxes and related interest and liabilities to be paid in
connection therewith have been paid or adequate reserve has been
established for the timely payment thereof. VRB and Valley have
timely and accurately filed all currency transaction reports
required by the Bank Secrecy Act, as amended, and has timely and
accurately filed all required information returns and reports,
including without limitation forms 1099, and has exercised due
diligence in obtaining certified taxpayer identification numbers
as required by the Code and Treasury Regulations. VRB has not
received notice of any federal, state or other income, franchise
or other tax assessment or notice of a deficiency to date which
has not been paid or for which adequate reserve has not been
provided, and VRB does not know of any pending or threatened
audit or investigation of VRB with respect to any tax
liabilities. There are currently no agreements in effect with
respect to VRB to extend the period of limitations for assessment
or collection of any tax. Schedule 4.17 includes copies of VRB's
federal and state tax returns for years 1997 through 1999.
4.18. Real Property, Leased Personal Property. Schedule 4.18 is a list
setting forth all real property owned by VRB or Valley as
present, former or future bank premises and all real property
currently held as other real estate owned. Except as set forth in
that Schedule or except for disposition of other real estate
owned in the ordinary course of business, VRB or Valley will own
all of such real property, presently owned, on the Effective
Date. Except as may be noted on that Schedule, all real property
reflected in the VRB Public Reports as of March 31, 2000 is
included in that Schedule. The leases pursuant to which VRB or
Valley leases real and personal property, copies of which have
also been delivered to Umpqua as part of Schedule 4.18, are valid
and effective in accordance with their respective terms and there
is not under any such lease any default nor has there occurred
any event which, with the giving of notice, lapse of time, or
otherwise, would constitute an event of default. Except as
disclosed in Schedule 4.18 or arising pursuant to the leases
relating thereto, the real and personal property leased by VRB or
Valley is free of any adverse claims. Except as noted on Schedule
4.18, all buildings and structures on the real property, the
equipment located thereon, and the real and personal property
leased by VRB or Valley, are in all material respects in good
operating condition and repair and conform in all material
respects to all applicable laws, ordinances and regulations.
Except as disclosed in Schedule 4.18 or arising pursuant to the
leases relating thereto, VRB and Valley have good and marketable
title to all of their real and personal property, subject to no
mortgages, pledges, encumbrances, liens or charges of any kind,
except liens for taxes not delinquent. VRB and Valley owns or
leases all property on which their continued business operations
are materially dependent.
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4.19. Insurance. Except as set forth in Schedule 4.19, for each of the
past six years and continuing to date, VRB has insured its
business and real and personal property against all risks of a
character usually insured against by banks, including but not
limited to financial institution bond, directors and officers
liability, property and casualty and commercial liability
insurance, with customary amounts of coverage, deductibles and
exclusions by reputable insurers authorized to transact insurance
in the State of Oregon and such other jurisdictions where it
operates or owns property, and it will maintain all existing
insurance through the Effective Date. VRB is in compliance with
all existing insurance policies and has not failed to give timely
notice of, or present properly, any material claim thereunder.
Schedule 4.19 includes copies of all insurance policies currently
in force with respect to VRB's business and real and personal
property.
4.20. Trademarks. VRB owns or has valid licenses to use all patents,
trademarks, copyrights or trade names which it considers to be
material to its business taken as a whole, and has not been
charged with infringement or violation of any patent, trademark,
copyright or trade name which would be likely to have a material
adverse effect on its business.
4.21. Contracts and Agreements. Schedule 4.21 includes copies of all
material outstanding contracts, agreements, leases or
understandings to which VRB or Valley is a party or to which any
of its properties are subject except for any contracts or
agreements entered into with its customers in the ordinary course
of business. Such documents include, without limitation, all
agreements, contracts, leases or understandings with officers and
directors of VRB, all of which are related to, and have been
entered into in the ordinary course of VRB's banking business.
VRB is not in material default or breach, and there has not
occurred any event which with notice or lapse of time would
constitute a material breach or default, under any contract,
agreement, instrument, lease or understanding, and, excluding any
loan agreements or notices with VRB customers reflected in VRB's
regular delinquent loan reports which have been and will be made
available to Umpqua, VRB does not know of any default by any
other party thereto; and no contract, agreement, lease or
undertaking referred to in this Section 4.21, or in such other
schedules will be modified or changed prior to the Effective Date
without the prior written consent of Umpqua. No consent or
approval by the parties thereto is required by reason of this
Agreement to maintain such contracts, agreements, leases and
undertakings in effect. No waiver or indulgence has been granted
by any of the landlords under any such leases.
4.22. Employee Benefits.
(a) Each Employee Benefit Plan sponsored or maintained by VRB or
any affiliate of VRB as determined under Section 414(b), (c), (m)
or (o) of the Code ("ERISA Affiliate") is set forth in Schedule
4.22. Except as set forth in such Schedule, neither VRB nor any
ERISA Affiliate maintains nor has sponsored any other pension,
profit sharing, thrift, savings, bonus, retirement, vacation,
life insurance,
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health insurance, severance, sickness, disability, medical or
death benefit plans, whether or not subject to ERISA.
Except as set forth on Schedule 4.22, there are no employment
contracts entered into by VRB or Valley and no other deferred
compensation contracts, agreements, arrangements or commitments
maintained or agreed to by it that provides for or could result
in the payment to any VRB or Valley employee or former employee
of any money or other property rights or accelerate the vesting
or payment of such amounts or rights to any employee as a result
of the transactions contemplated herein, whether or not such
payment or acceleration would constitute a parachute payment
within the meaning of Code Section 280G. There are no other
compensation, employment or collective bargaining agreements,
stock options, stock purchase agreements, life, health, accident
or other insurance, bonus, deferred or incentive compensation,
change-in-control, severance or separation, profit sharing,
retirement, or other employee fringe benefit policies or
arrangements of any kind that could result in the payment to any
employees or former employees or other persons of VRB or Valley
of any money or other property.
(b) The only "employee welfare benefit plans" (as defined in
Section 3(1) of ERISA) sponsored or maintained by VRB or any
ERISA Affiliate, or to which VRB or any ERISA Affiliate
contributes ("Welfare Benefit Plan") or are required to
contribute, are as set forth in Schedule 4.22. Schedule 4.22
includes the amount of liability of VRB for payments more than
thirty days past due with respect to such Welfare Benefit Plans
as of December 31, 1999, the amount of monthly payments due and
owing for each month that such plans are continued, and the
amount of liability for claims if VRB were to terminate such
plans and the costs involved in any such termination. Each
Welfare Benefit Plan which is a group health plan (within the
meaning of Section 5000(b)(1) of the Code) complies with and has
been maintained and operated in accordance with each of the
requirements of Section 4980B of the Code and Part 6 of the
Subtitle B of Title I of ERISA. Schedule 4.22 sets forth the
individuals with rights to continuation coverage under Section
4980B of the Code or Part 6 of Subtitle B of title I of ERISA or
state law, including those individuals within the applicable
election period.
(c) Other than as set forth in Schedule 4.22, VRB or any ERISA
Affiliate has not maintained a pension benefit plan that is
subject to title 1, subtitle B, part 3 of ERISA ("Pension Benefit
Plan"). With respect to any such Pension Benefit Plan, the amount
of liability for any contribution paid or owing with respect to
such Pension Benefit Plan for the last or current plan year and
the plan year in which the Effective Date occurs are set forth on
Schedule 4.22. There are no other material liabilities that would
be incurred in connection with a termination of the Plan, and the
Plan is fully funded.
(d) VRB and, to the knowledge of the executive officers and
directors of VRB, all persons having fiduciary or other
responsibilities or duties with respect to any Employee Benefit
Plan, are, and have since inception been, in compliance in all
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material respects with, and each such Employee Benefit Plan is
and has been operated in accordance with, its provisions and in
compliance with the applicable laws, rules and regulations
governing such Plan, including, without limitation, the rules and
regulations promulgated by the Department of Labor, the Pension
Benefit Guaranty Corporation and the Internal Revenue Service
under ERISA or the Code. Each Pension Benefit Plan and any
related trust agreements or annuity contracts (or any other
funding instruments) comply currently, and have complied in the
past, both as to form and operation, with the provisions of ERISA
and the Code (including Section 410(b) of the Code relating to
coverage), where required in order to be tax-qualified under
Section 401(a) or 403(a) or other applicable provisions of the
Code, and all other applicable laws, rules and regulations; all
necessary governmental approvals for the Employee Benefit Plans
have been obtained; and a favorable determination as to the
qualification under the Code of each Pension Benefit Plan set
forth in Schedule 4.22 and each amendment thereto has been made
by the Internal Revenue Service. No Plan is a "multi-employer
pension plan," as such term is defined in Section 3(37) of ERISA.
To the best knowledge of VRB, all contributions or other amounts
payable by VRB as of the Effective Date with respect to each Plan
in respect of current or prior plan years have been paid or
accrued in accordance with GAAP and Section 412 of the Code, and
there are no pending, threatened or anticipated claims (other
than routine claims for benefits) by, on behalf of or against any
of the Plans or any trusts related thereto which would,
individually or in the aggregate, have or be reasonably expected
to have a material adverse effect on VRB.
(e) Each Welfare Benefit Plan and each Pension Benefit Plan has
been administered to date in material compliance with the
requirements of the claims procedure of the Code and ERISA. All
reports required by any government agency and disclosures to
participants with respect to each Welfare Benefit Plan and each
Pension Benefit Plan have been timely made or filed. Each
Employee Benefit Plan has been operated since inception in
material compliance with the governing instruments and applicable
federal or state law. In particular, but without limitation, each
Welfare Benefit Plan has been administered in material compliance
with federal law, including without limitation the health care
continuation requirements of federal law ("COBRA"). No Employee
Benefit Plan provides benefits, including without limitation
death or medical benefits (whether or not insured), with respect
to current or former employees of VRB or any ERISA Affiliate
beyond their retirement or other termination of service, other
than (i) coverage mandated by applicable law, (ii) death benefits
or retirement benefits under any "employee pension plan," as that
term is defined in Section 3(2) of ERISA, (iii) any deferred
compensation benefits accrued as liabilities on the books of VRB
or any ERISA Affiliates or (iv) benefits the full cost of which
is borne by the current or former employee (or his beneficiary).
(f) Neither VRB nor, to its knowledge, any plan fiduciary of any
Welfare Benefit Plan or Pension Benefit Plan, has engaged in any
transaction in violation of Section 406(a) or (b) of ERISA (for
which no exemption exists under Section 408 of
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ERISA) or any "prohibited transaction" (as defined in Section
4975(c)(1) of the Code) for which no exemption exists under
Section 4975(c)(2) or (d) of the Code or in any prohibited
transactions under predecessor provisions of the Code. To the
best knowledge of VRB, neither VRB nor any ERISA Affiliate has
engaged in a transaction in connection with which VRB or any
ERISA Affiliate could be subject to either a material civil
penalty assessed pursuant to Section 409 or 502(i) of ERISA or a
material tax imposed pursuant to Section 4975 or 4976 of the
Code.
(g) VRB has had no liability to the Pension Benefit Guaranty
Corporation ("PBGC"). No material liability to the PBGC has been
or will be incurred by VRB or other trade or business under
"common control" with VRB (as determined under Section 414(c),
(b), (m) or (o) of the Code) on account of any termination of an
employee pension benefit plan subject to title IV of ERISA.
Except as set forth in Schedule 4.22, since September 1, 1974, no
filing has been made by VRB (or any ERISA Affiliate) with the
PBGC (and no proceeding has been commenced by the PBGC) to
terminate any employee pension benefit plan subject to title IV
of ERISA maintained, or wholly or partially funded by VRB (or any
ERISA Affiliate). Neither VRB nor any ERISA Affiliate has (i)
ceased operations at a facility so as to become subject to the
provisions of Section 4062(e) of ERISA, (ii) withdrawn as a
substantial employer so as to become subject to the provisions of
Section 4063 of ERISA, (iii) ceased making contributions on or
before the Effective Date to any employee pension benefit plan
subject to Section 4064(a) of ERISA to which VRB (or any ERISA
Affiliate) made contributions during the five years prior to the
Effective Date, or (iv) made a complete or partial withdrawal
from a multi-employer plan (as defined in Section 3(37) of ERISA)
so as to incur withdrawal liability as defined in Section 4201 of
ERISA (without regard to subsequent reduction or waiver of such
liability under Section 4207 or 4208 or ERISA).
(h) Complete and correct copies of the following documents have
been furnished to Umpqua as Schedule 4.22:
(i) Each Employee Benefit Plan and any related trust
agreements;
(ii) The most recent summary plan descriptions of each
Employee Benefit Plan subject to ERISA;
(iii) The most recent determination letters of the Internal
Revenue Service with respect to the qualified status of a Pension
Benefit Plan;
(iv) Annual Reports (on form 5500 series) required to be
filed with any governmental agency for the last two years;
(v) Financial information which identifies (x) all asserted
or unasserted claims arising under any Employee Benefit Plan, (y)
all claims presently outstanding against any Employee Benefit
Plan, and (z) a description of any future
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compliance action required with respect to any Employee Benefit
Plan under ERISA, or federal or state law.
(vi) Any actuarial reports and PBGC Forms 1 for the last 2
years.
(i) Each Welfare Benefit Plan and each Pension Benefit Plan is
legally valid and binding and in full force and effect and there
are no defaults thereunder.
4.23. Employment Disputes. There is no labor strike, dispute, slowdown
or stoppage pending or, to the best knowledge of VRB, threatened
against VRB, and VRB does not have any knowledge of any attempt
to organize any employees of VRB or Valley into a collective
bargaining unit. Consummation of the Plans of Merger will not
(either alone or in combination with any other act or event)
result in any payment of severance pay or any other payment
becoming due from VRB to any of its employees except as set forth
in Schedule 4.23. VRB is not a party to any agreement involving
payments to any person or entity based upon the profits, revenues
or other financial performance of VRB except as set forth on
Schedule 4.23.
4.24. Reserve for Loan Losses. VRB's reserve for loan losses, as
established from time to time, is adequate as determined by the
standards applied to VRB and Valley by the applicable bank
regulatory agencies and pursuant to generally accepted accounting
principles. Since March 31, 2000, VRB has not and prior to the
Effective Date shall not, reverse any provision taken for loan
losses.
4.25. Repurchase Agreement. VRB has valid and perfected first position
security interests in all government securities subject to
repurchase agreements and the market value of the collateral
securing each such repurchase agreement equals or exceeds the
amount of the debt secured by such collateral under such
agreement.
4.26. Shareholder List. The list of shareholders of VRB dated July 14,
2000, provided to Umpqua as Schedule 4.26, is a true, correct and
complete list of the names, addresses and holdings of all record
holders of VRB Common Stock as of that date. Based on information
made available to VRB and on filings with the SEC pursuant to
Sections 13(d) and 16(a) of the Exchange Act, VRB shall notify
Umpqua of any change in such stock ownership of over one percent
(1%) through the Effective Date.
4.27. Proxy Statement. The registration statement to be filed by Umpqua
with the Oregon Director and the proxy statement to be used by
VRB to solicit proxies from the holders of VRB Common Stock for
the meeting of shareholders held to consider and vote upon this
Agreement and the Holding Company Plan of Merger, and the
transactions contemplated thereby (in its definitive form, the
"Proxy Statement"), will fairly describe the transaction and VRB,
and will contain no untrue statement of any material fact and
will not omit to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading, except those
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statements in or omission from the Proxy Statement which may be
made with respect to Umpqua. VRB will promptly advise Umpqua in
writing if at any time prior to the Effective Date VRB shall
obtain knowledge of any facts that might make it necessary or
appropriate to amend or supplement the Proxy Statement in order
to make the statements therein not misleading or to comply with
applicable law.
4.28. Interests of Directors and Others. Except as disclosed in any VRB
Public Reports, no officer or director of VRB or Valley has any
material interest in any assets or property (whether real or
personal, tangible or intangible), of or used in the business of
VRB or Valley other than as an owner of outstanding securities or
deposit accounts of VRB or Valley, or as borrowers under loans
fully performing in accordance with their terms, which terms are
no more favorable than those available to unaffiliated parties
made at or about the same time.
4.29. Schedules to this Agreement. The information contained in each
schedule to this Agreement prepared by or on behalf of VRB
constitutes additional representations and warranties made by VRB
hereunder and is incorporated herein by reference. The copies of
documents furnished as part of these schedules are true, correct
and complete copies and include all amendments, supplements, and
modifications thereto and all express waivers applicable
thereunder.
4.30. No Misstatements or Omissions. No representation or warranty of
VRB or Valley in this Agreement or in any statement, certificate
or schedule furnished or to be furnished by VRB pursuant to this
Agreement or in connection with the transaction contemplated by
this Agreement, contains or will contain any untrue statements of
a material fact or omits or will omit to state any material fact.
5. REPRESENTATIONS AND WARRANTIES OF UMPQUA
Except as disclosed in one or more schedules to this Agreement delivered
prior to execution of this Agreement, Umpqua represents and warrants to VRB as
follows:
5.1. Organization, Existence, and Authority. Umpqua is a corporation
duly organized and validly existing under the laws of the State
of Oregon and has all requisite corporate power and authority to
own, lease, and operate its properties and assets and carry on
its business in the manner now being conducted and as proposed to
be conducted. Surviving Bank is a bank duly organized, validly
existing, and in good standing under the laws of the State of
Oregon and has all requisite corporate power and authority to
own, lease, and operate its properties and assets and carry on
its business in the manner now being conducted. Each of Umpqua
and Surviving Bank is qualified to do business and is in good
standing in every jurisdiction in which such qualification is
required except where the failure to so qualify would not result
in any material adverse effect on its business operation,
financial condition or properties.
App-19
<PAGE> 186
5.2. Authorized and Outstanding Stock, Options, and Other Rights. The
authorized capital stock of Umpqua consists of (i) 2,000,000
shares of undesignated preferred stock, with no par value per
share, of which no shares are issued or outstanding, and (ii)
20,000,000 shares of common stock, with no par value per share,
of which 7,625,627 shares are outstanding, all of which are
validly issued, fully paid and nonassessable. The authorized
capital stock of Surviving Bank consists of 2,000,000 shares of
undesignated preferred stock, with no par value per share, of
which no shares are issued and outstanding and 20,000,000 shares
of common stock with no par value per share, of which 7,664,752
shares are outstanding, all of which are validly issued, fully
paid and nonassessable. Other than as set forth in Schedule 5.2,
no subscriptions, options, warrants, convertible securities or
other rights or commitments which would enable the holder to
acquire any shares of capital stock or other investment
securities of Umpqua, or which enable or require Umpqua to
acquire shares of its capital stock or other investment
securities from any holder, are authorized, issued or
outstanding.
5.3. Public Reports. Since January 1, 1997, Umpqua has timely filed
with the SEC all reports and statements required to be filed
pursuant to the Exchange Act (the "Umpqua Public Reports"). Until
the Effective Date, Umpqua will file with the SEC (and will
furnish copies to VRB within two days thereafter) all additional
reports and other documents which Umpqua is required by the
Exchange Act to file or otherwise files with the SEC. The
financial information included in the Umpqua Public Reports has
been and will be prepared in accordance with generally accepted
accounting principles, consistently applied and present fairly
the financial position and results of operation of Umpqua and its
subsidiaries on the dates and for the periods covered thereby. As
of the date filed, each Umpqua Public Report has been and, as to
those reports filed after the date hereof, will be, accurate and
complete as of the date filed, and each complies or will comply
with all requirements applicable to such filing.
5.4. Articles of Incorporation, Bylaws, Minutes. The copies of the
Articles of Incorporation, as amended and the Bylaws of each of
Umpqua and Surviving Bank delivered to Umpqua as Schedule 5.4,
are true, correct and complete copies of existing Articles of
Incorporation and Bylaws of Umpqua and Surviving Bank, as the
case may be, as amended to date. Neither Umpqua nor Surviving
Bank is in violation of any provision of its Articles of
Incorporation or Bylaws. The minute books of Umpqua and Surviving
Bank which have been or will be made available to VRB for its
review contain accurate and complete minutes of all meetings and
all consents evidencing actions taken without a meeting by its
Board of Directors (and any committees thereof) and by its
shareholders.
5.5. No Holding Company, Joint Venture, or Other Subsidiaries. Other
than for Umpqua with respect to Surviving Bank, no corporation or
other entity is registered or, to the knowledge of Umpqua or
Surviving Bank, is required to be registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended,
because of ownership or control of Umpqua or Surviving Bank.
Neither
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Umpqua nor Surviving Bank, directly or indirectly, owns or
controls, either by power to control the investment or power to
vote, any shares of capital stock of any other corporation or
entity, other than its subsidiaries set forth in Schedule 5.5 and
shares held in a fiduciary or custodial capacity in the ordinary
course of business and shares representing less than five percent
of the outstanding shares of such corporation acquired in partial
or full satisfaction of debts previously contracted. Neither
Umpqua nor any of its Subsidiaries is a part of any joint
venture, or general or limited partnership, or a member of any
unincorporated association.
5.6. Shareholder Reports. Umpqua has delivered to VRB as Schedule 5.6
copies of all of Umpqua's reports and other communications to
stockholders since January 1, 1999, including all proxy
statements and notices of shareholder meetings, to the extent
such reports and communications have not been filed with any
Umpqua Public Reports. Until the Effective Date, Umpqua will
furnish to VRB copies of all future communications within two
days such materials are first sent to its shareholders.
5.7. Books and Records. The books and records of Umpqua and its
Subsidiaries accurately reflect in all material respects the
transactions to which it is a party or by which it or its
properties are bound or subject. Such books and records have been
and are accurate and complete and comply in all material respects
with applicable legal, regulatory and accounting requirements.
5.8. Legal Proceedings. Except for regulatory examinations conducted
in the normal course of regulation of Umpqua and Surviving Bank,
and except as disclosed in Schedule 5.8 delivered to VRB, there
are no actions, suits, proceedings, claims or governmental
investigations pending or, to the knowledge of Umpqua, threatened
against or affecting Umpqua before any court, administrative
officer or agency, other governmental body or arbitration which
might, individually or in the aggregate, result in any material
adverse change in the business, assets, earnings, operation or
condition (financial or otherwise) of Umpqua or which might
hinder or delay the consummation of the transactions contemplated
by this Agreement.
5.9. Compliance with Lending Laws and Regulations. Except as disclosed
in Schedule 5.9 and except for such errors or oversights the
financial effect of which are adequately reserved against:
(a) The conduct by each of Umpqua and Surviving Bank of its
respective business and the operation of the properties or other
assets owned or leased by it does not violate or infringe any
domestic laws, statutes, ordinances, rules or regulations, or to
the knowledge of Umpqua and Surviving Bank any foreign laws,
statutes, ordinances, rules or regulations, the enforcement of
which, individually or in the aggregate, would have a material
adverse effect on either Umpqua or Surviving Bank, its business,
properties or financial condition. Specifically, but without
limitations, each of Umpqua and Surviving Bank is in compliance
in all material respects with every local, state or federal law
or ordinance, and any regulation or
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<PAGE> 188
order issued thereunder, now in effect and applicable to it
governing or pertaining to fair housing, anti-redlining, equal
credit opportunity, truth-in-lending, real estate settlement
procedures, fair credit reporting and every other prohibition
against unlawful discrimination in residential lending, or
governing consumer credit, including, but not limited to, the
Community Reinvestment Act, the Consumer Credit Protection Act,
Truth-in-Lending Act, and Regulation Z promulgated by the FRB,
and the Real Estate Settlement Procedures Act of 1974. All loans,
leases, contracts and accounts receivable (billed and unbilled),
security agreements, guarantees and recourse agreements, of
either Umpqua or Surviving Bank, as held in its portfolios, or as
sold with recourse into the secondary market represent and are
valid and binding obligations of their respective parties and
debtors, enforceable in accordance with their respective terms;
each of them is based on a valid, binding and enforceable
contract or commitment, each of which has been executed and
delivered in full compliance, in form and substance, with any and
all federal, state or local laws applicable to Umpqua, or to the
other party or parties to the contract(s) or commitment(s),
including without limitation the Truth-in-Lending Act,
Regulations Z and U of the FRB, laws and regulations providing
for nondiscriminatory practices in the granting of loans or
credit, applicable usury laws, and laws imposing lending limits;
and all such contracts or commitments have been administered in
full compliance with all applicable federal, state or local laws
or regulations. All Uniform Commercial Code filings, or filings
of trust deeds, or of liens or other security interest
documentation that are required by any applicable federal, state
or local government laws and regulations to perfect the security
interests referred to in any and all of such documents or other
security agreements have been made, and all security interests
under such deeds, documents or security agreements have been
perfected, and all contracts have been entered into or assumed in
full compliance with all applicable material legal or regulatory
requirements.
(b) All loan files of Surviving Bank are complete and accurate in
all material respects and have been maintained in accordance with
good banking practice.
(c) All notices of default, foreclosure proceedings or
repossession proceedings against any real or personal property
collateral have been issued, initiated and conducted by Umpqua or
Surviving Bank in material formal and substantive compliance with
all applicable federal, state or local laws and regulations, and
no loss or impairment of any security interest, or exposure to
meritorious lawsuits or other proceedings against Umpqua or
Surviving Bank has been or will be suffered or incurred by Umpqua
or Surviving Bank.
(d) Neither Umpqua nor Surviving Bank is in material violation of
any applicable servicer or any other requirements of the FHA, VA,
FNMA, GNMA, FHLMC, SBA or any private mortgage insurer which
insured or guaranteed any loans owned by Umpqua or Surviving Bank
or as to which either has sold to other investors, the effect of
which violation would materially and adversely affect the
business, assets, earnings, operation or condition (financial or
otherwise) of Umpqua or Surviving
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<PAGE> 189
Bank, and with respect to such loans Umpqua or Surviving Bank has
not done or failed to do, or caused to be done or omitted to be
done, any act the effect of which act or omission impairs or
invalidates (i) any FHA insurance or commitments of the FHA to
insure, (ii) any VA guarantee or commitment of the VA to
guarantee, (iii) any SBA guarantees or commitments of the SBA to
guarantee, (iv) any private mortgage insurance or commitment of
any private mortgage insurer to insure, (v) any title insurance
policy, (vi) any hazard insurance policy, or (vii) any flood
insurance policy required by the National Flood Insurance Act of
1968, as amended, which would materially and adversely affect the
business, assets, earnings, operation or condition (financial or
otherwise) of Umpqua or Surviving Bank.
(e) Neither Umpqua nor its Subsidiaries (except through its
registered broker dealer Subsidiary) have knowingly engaged
principally, or as one of its important activities, in the
business of extending credit for the purpose of purchasing or
carrying any margin stock.
5.10. Commitments. Schedule 5.10 is a listing of all outstanding
commitments, including outstanding letters of credit, repurchase
agreements and unfunded agreements to lend of Surviving Bank.
5.11. Hazardous Wastes. To the knowledge of the directors and officers
of Umpqua and Surviving Bank, neither Umpqua nor its
Subsidiaries, or any other person having an interest in any
property which Umpqua or its Subsidiaries owns or leases, or has
owned or leased, or in which either holds any security interest,
mortgage, or other liens or interest including but not limited to
as beneficiary of a trust deed ("Property") has engaged in the
generation, use, manufacture, treatment, transportation, storage
(in tanks or otherwise), or disposal of Hazardous Material on or
from such Property. Individually or in the aggregate, there has
been no: (i) presence, use, generation, handling, treatment,
storage, release, threatened release, migration or disposal of
Hazardous Material; (ii) condition that could result in any use,
ownership or transfer restriction; or (iii) condition of nuisance
on or from such Property, any of which individually or
collectively would have a material adverse effect on the
business, assets, earnings, operation or condition (financial or
otherwise) of Umpqua. Umpqua has received no notice of, or has no
reason to know of, a condition that could give rise to any
private or governmental suit, claim, action, proceeding or
investigation against Umpqua, any Subsidiary of Umpqua, any such
other Person, or such Property as a result of any of the
foregoing events. "Hazardous Material" means any chemical,
substance, material, object, condition, or waste harmful to human
health or safety or to the environment due to its radioactivity,
ignitability, corrosivity, reactivity, explosivity, toxicity,
carcinogenicity, infectiousness or other harmful or potentially
harmful properties or effects, including, without limitation,
petroleum or petroleum products, and all of those chemicals,
substances, materials, objects, conditions, wastes or
combinations of them which are now or become listed, defined or
regulated in any manner by any
App-23
<PAGE> 190
federal, state or local law based, directly or indirectly, upon
such properties or effects.
5.12. Contingent and Other Liabilities. Schedule 5.12 is a list of
contingent and other liabilities not set forth in other
schedules, and includes copies of documents evidencing those
liabilities. Except as set forth in any schedules to this
Agreement, and except for FDIC insured deposits and federal funds
purchased and securities sold under agreements to repurchase
arising out of transactions subsequent to the date of the latest
balance sheet filed as with a Umpqua Public Reports, Umpqua and
its Subsidiaries have no obligations or liabilities of any nature
(whether accrued, absolute, contingent or otherwise) which are
material or which, when combined with all other such obligations
or liabilities would be material to the business, assets,
earnings, operation or condition (financial or otherwise) of
Umpqua or Surviving Bank.
5.13. No Adverse Changes. Except as set forth in Schedule 5.13, since
March 31, 2000, (a) there has been no material adverse change in
the business, assets, earnings, operation or condition (financial
or otherwise) of Umpqua; (b) no cash, stock or other dividends,
or other distributions with respect to capital stock, have been
declared or paid by Umpqua, nor has Umpqua purchased or redeemed
any of its shares; and (c) there has not been any damage,
destruction or loss (whether or not covered by insurance)
materially and adversely affecting any asset material to Umpqua.
As of the Effective Date, Umpqua will have no obligations or
liabilities of any nature, whether absolute, accrued, contingent
or otherwise, in excess of $50,000 individually, or $150,000 in
the aggregate, other than:
(a) Obligations and liabilities disclosed in Umpqua Public
Reports as of March 31, 2000, or schedules provided herewith;
(b) Obligations and liabilities incurred in, or as a result of,
the normal and ordinary course of business, consistent with past
practices, which do not, in the aggregate, have a material
adverse effect on the business, assets, earnings, operation or
condition (financial or otherwise) of Umpqua; and
(c) Obligations and liabilities incurred otherwise than in or as
a result of the normal and ordinary course of business consistent
with past practices, provided Umpqua shall have consented
thereto.
To the best knowledge of Umpqua, there is no basis for any claim
against Umpqua or any other obligation or liability of any
nature, in excess of $50,000 individually or $150,000 in the
aggregate.
5.14. Regulatory Approvals Required. The nature of the business and
operations of Umpqua does not require any approval,
authorization, consent, license, clearance or order of, any
declaration or notification to, or any filing or registration
with, any governmental or regulatory authority in order to permit
Umpqua to perform its
App-24
<PAGE> 191
obligations under this Agreement, or to prevent the termination
of any material right, privilege, license or agreement of Umpqua,
or any material loss or disadvantage to its business, upon
consummation of the Holding Company Plan of Merger or Bank Plan
of Merger, except for:
(a) Approval of the Bank Plan of Merger by the Oregon Director
and the FDIC;
(b) Approval from, or waiver of jurisdiction by, the FRB of the
Holding Company Merger;
(c) Filing of the Holding Company Plan of Merger and Articles of
Merger with the Oregon Secretary of State;
(d) Registration with the Oregon Director of the Umpqua Common
Stock to be issued to the VRB shareholders and a finding that the
transaction is fair, just and equitable and free from fraud in
accordance with ORS 59.095;
(e) Registration with the issuance of permits from or the
perfection of exemptions from registration from applicable state
blue sky administrators of the Umpqua Common Stock to be issued
to the VRB shareholders;
(f) Filing with the SEC of the definitive Joint Proxy Statement
in accordance with the Exchange Act rules governing proxy
solicitations; and
(g) Approval by the Nasdaq Stock Market of the listing
application relating to the Umpqua Common Stock to be issued in
connection herewith.
5.15. Corporate and Shareholder Approval of Agreement, Binding
Obligations. Umpqua and Surviving Bank each has all requisite
corporate power to execute, deliver and perform its obligations
under this Agreement. The execution, delivery and performance of
this Agreement, and the transactions contemplated thereby, have
been duly authorized by the Board of Directors of each of Umpqua
and Surviving Bank. No other corporate action on the part of
Umpqua or Surviving Bank other than shareholder approval is
required to authorize this Agreement or the Holding Company Plan
of Merger or Bank Plan of Merger or the consummation of the
transactions contemplated thereby. This Agreement has been duly
executed and delivered by Umpqua and Surviving Bank and
constitutes the legal, valid and binding obligation of each of
them enforceable in accordance with its terms. The Holding
Company Plan of Merger and Bank Plan of Merger, when duly
executed and delivered by Umpqua or Surviving Bank, as the case
may be, will constitute the legal, valid and binding obligations
of Umpqua and Surviving Bank, as the case may be, enforceable in
accordance with their terms.
5.16. No Defaults from Transaction. Subject to compliance with the
governmental approvals described in Section 5.14, neither the
execution, delivery and performance of this Agreement and the
Holding Company Plan of Merger or Bank
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<PAGE> 192
Plan of Merger by Umpqua and Surviving Bank, as the case may be,
nor the consummation of the transactions contemplated thereby
will conflict with, result in any breach or violation of, or
result in any default or any acceleration of performance under,
any of the terms, conditions or provisions of the Articles of
Incorporation or Bylaws of either Umpqua or Surviving Bank, or
(assuming the accuracy of VRB and Valley's representations and
warranties, compliance with their covenants, and the performance
of their obligations under this Agreement and the Holding Company
Plan of Merger and the Bank Plan of Merger) of any statute,
regulation or existing order, writ, injunction or decree of any
court or governmental agency, or of any contract, agreement or
instrument to which either is a party or by which either is
bound, or will result in the declaration or imposition of any
lien, charge or encumbrance upon any of the assets of Umpqua or
its Subsidiaries which are material to the business of Umpqua or
Surviving Bank. Assuming the accuracy of Umpqua's and Surviving
Bank's representations and warranties, compliance with their
covenants, and the performance of their obligations under this
Agreement and the Holding Company Plan of Merger and Bank Plan of
Merger, the consummation of the transactions contemplated by this
Agreement will not result in any material adverse change in the
business, assets, earnings, operations or conditions (financial
or otherwise) of Umpqua or Surviving Bank.
5.17. Tax Returns. Umpqua has filed all federal, state and other
income, franchise or other tax returns, required to be filed by
it; each such return is complete and accurate in all material
respects; and all taxes and related interest and liabilities to
be paid in connection therewith have been paid or adequate
reserve has been established for the timely payment thereof.
Umpqua and Surviving Bank have timely and accurately filed all
currency transaction reports required by the Bank Secrecy Act, as
amended, and has timely and accurately filed all required
information returns and reports, including without limitation
forms 1099, and has exercised due diligence in obtaining
certified taxpayer identification numbers as required by the Code
and Treasury Regulations. Umpqua has not received notice of any
federal, state or other income, franchise or other tax assessment
or notice of a deficiency to date which has not been paid or for
which adequate reserve has not been provided, and Umpqua does not
know of any pending or threatened audit or investigation of
Umpqua with respect to any tax liabilities. There are currently
no agreements in effect with respect to Umpqua to extend the
period of limitations for assessment or collection of any tax.
Schedule 5.17 includes copies of Umpqua's federal and state tax
returns for years 1997 through 1999.
5.18. Real Property, Leased Personal Property. Schedule 5.18 is a list
setting forth all real property owned by Umpqua or any of its
Subsidiaries as present, former or future bank premises and all
real property currently held as other real estate owned. Except
as set forth in that Schedule or except for disposition of other
real estate owned in the ordinary course of business, Umpqua or
the applicable Subsidiary will own all of such real property,
presently owned, on the Effective Date. Except as may be noted on
that Schedule, all real property reflected in the Umpqua Public
Reports as of March 31, 2000 is included in that Schedule. The
leases pursuant to
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<PAGE> 193
which Umpqua or the applicable Subsidiary leases real and
personal property, copies of which have also been delivered to
VRB as part of Schedule 5.18, are valid and effective in
accordance with their respective terms and there is not under any
such lease any default nor has there occurred any event which,
with the giving of notice, lapse of time, or otherwise, would
constitute an event of default. Except as disclosed in Schedule
5.18 or arising pursuant to the leases relating thereto, the real
and personal property leased by Umpqua and its Subsidiaries is
free of any adverse claims. Except as noted on Schedule 5.18, all
buildings and structures on the real property, the equipment
located thereon, and the real and personal property leased by
Umpqua or its Subsidiaries, are in all material respects in good
operating condition and repair and conform in all material
respects to all applicable laws, ordinances and regulations.
Except as disclosed in the title reports therefor or arising
pursuant to the leases relating thereto, Umpqua and its
Subsidiaries have good and marketable title to all of their real
and personal property, subject to no mortgages, pledges,
encumbrances, liens or charges of any kind, except liens for
taxes not delinquent. Umpqua and its Subsidiaries own or lease
all property on which their continued business operations are
materially dependent.
5.19. Insurance. Except as set forth in Schedule 5.19, for each of the
past six years and continuing to date, Umpqua has insured its
business and real and personal property against all risks of a
character usually insured against by banks, including but not
limited to financial institution bond, directors and officers
liability, property and casualty and commercial liability
insurance, with customary amounts of coverage, deductibles and
exclusions by reputable insurers authorized to transact insurance
in the State of Oregon and such other jurisdictions where it
operates or owns property, and it will maintain all existing
insurance through the Effective Date. Umpqua is in compliance
with all existing insurance policies and has not failed to give
timely notice of, or present properly, any material claim
thereunder. Schedule 5.19 includes copies of all insurance
policies currently in force with respect to Umpqua's business and
real and personal property.
5.20. Trademarks. Umpqua owns or has valid licenses to use all patents,
trademarks, copyrights or trade names which it considers to be
material to its business taken as a whole, and have not been
charged with infringement or violation of any patent, trademark,
copyright or trade name which would be likely to have a material
adverse effect on its business.
5.21. Contracts and Agreements. Schedule 5.21 includes copies of all
material outstanding contracts, agreements, leases or
understandings to which Umpqua or Surviving Bank is a party or to
which any of its properties are subject except for any contracts
or agreements entered into with its customers in the ordinary
course of business. Such documents include, without limitation,
all agreements, contracts, leases or understandings with officers
and directors of Umpqua, all of which are related to, and have
been entered into in the ordinary course of, Umpqua's banking
business. Umpqua is not in material default or breach, and to the
knowledge of Umpqua there has not occurred any event which with
notice or lapse of time would
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<PAGE> 194
constitute a material breach or default, under any contract,
agreement, instrument, lease or understanding, and, excluding any
loan agreements or notices with Umpqua customers reflected in
Umpqua's regular delinquent loan reports which have been and will
be made available to Umpqua, Umpqua does not know of any default
by any other party thereto; and no contract, agreement, lease or
undertaking referred to in this Section 5.21, or in such other
schedules will be modified or changed prior to the Effective Date
without the prior written consent of VRB. No consent or approval
by the parties thereto is required by reason of this Agreement to
maintain such contracts, agreements, leases and undertakings in
effect. No waiver or indulgence has been granted by any of the
landlords under any such leases.
5.22. Employee Benefits.
(a) Each Employee Benefit Plan, sponsored or maintained by Umpqua
or any affiliate of Umpqua as determined under Section 414(b),
(c), (m) or (o) of the Code ("ERISA Affiliate") is set forth in
Schedule 5.22. Except as set forth in such Schedule, neither
Umpqua nor any ERISA Affiliate maintains nor has sponsored any
other pension, profit sharing, thrift, savings, bonus,
retirement, vacation, life insurance, health insurance,
severance, sickness, disability, medical or death benefit plans,
whether or not subject to ERISA.
Except as set forth on Schedule 5.22, there are no employment
contracts entered into by Umpqua or Surviving Bank and no other
deferred compensation contracts, agreements, arrangements or
commitments maintained or agreed to by it that provides for or
could result in the payment to any Umpqua or Surviving Bank
employee or former employee of any money or other property rights
or accelerate the vesting or payment of such amounts or rights to
any employee as a result of the transactions contemplated herein,
whether or not such payment or acceleration would constitute a
parachute payment within the meaning of Code Section 280G. There
are no other compensation, employment or collective bargaining
agreements, stock options, stock purchase agreements, life,
health, accident or other insurance, bonus, deferred or incentive
compensation, change-in-control, severance or separation, profit
sharing, retirement, or other employee fringe benefit policies or
arrangements of any kind that could result in the payment to any
employees or former employees or other persons of Umpqua or
Surviving Bank of any money or other property.
(b) The only "employee welfare benefit plans" (as defined in
Section 3(1) of ERISA) sponsored or maintained by Umpqua or any
ERISA Affiliate, or to which Umpqua or any ERISA Affiliate
contributes ("Welfare Benefit Plan") or are required to
contribute, are as set forth in Schedule 5.22. Schedule 5.22
includes the amount of liability of Umpqua for payments more than
thirty days past due with respect to such Welfare Benefit Plans
as of December 31, 1999, the amount of monthly payments due and
owing for each month that such plans are continued, and the
amount of liability for claims if Umpqua were to terminate such
plans and the
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<PAGE> 195
costs involved in any such termination. Each Welfare Benefit Plan
which is a group health plan (within the meaning of Section
5000(b)(1) of the Code) complies with and has been maintained and
operated in accordance with each of the requirements of Section
4980B of the Code and Part 6 of Subtitle B of Title I of ERISA.
Schedule 5.22 sets forth the individuals with rights to
continuation coverage under Section 4980B of the Code or Part 6
of Subtitle B of Title I of ERISA or state law, including those
individuals within the applicable election period.
(c) Other than as set forth in Schedule 5.22, Umpqua or any ERISA
Affiliate has not maintained a pension benefit plan that is
subject to title 1, subtitle B, part 3 of ERISA ("Pension Benefit
Plan"). With respect to any such Pension Benefit Plan, the amount
of liability for any contribution paid or owing with respect to
such Pension Benefit Plan for the last or current plan year and
the plan year in which the Effective Date occurs are set forth on
Schedule 5.22. There are no other material liabilities that would
be incurred in connection with a termination of the Plan, and the
Plan is fully funded.
(d) Umpqua and, to the knowledge of the executive officers and
directors of Umpqua, all persons having fiduciary or other
responsibilities or duties with respect to any Employee Benefit
Plan, are, and have since inception been, in compliance in all
material respects with, and each such Employee Benefit Plan is
and has been operated in accordance with, its provisions and in
compliance with the applicable laws, rules and regulations
governing such Plan, including, without limitation, the rules and
regulations promulgated by the Department of Labor, the Pension
Benefit Guaranty Corporation and the Internal Revenue Service
under ERISA or the Code. Each Pension Benefit Plan and any
related trust agreements or annuity contracts (or any other
funding instruments) comply currently, and have complied in the
past, both as to form and operation, with the provisions of ERISA
and the Code (including Section 410(b) of the Code relating to
coverage), where required in order to be tax-qualified under
Section 401(a) or 403(a) or other applicable provisions of the
Code, and all other applicable laws, rules and regulations; all
necessary governmental approvals for the Employee Benefit Plans
have been obtained; and a favorable determination as to the
qualification under the Code of each Pension Benefit Plan set
forth in Schedule 5.22 and each amendment thereto has been made
by the Internal Revenue Service. No Plan is a "multi-employer
pension plan," as such term is defined in Section 3(37) of ERISA.
To the best knowledge of Umpqua, all contributions or other
amounts payable by Umpqua as of the Effective Date with respect
to each Plan in respect of current or prior plan years have been
paid or accrued in accordance with GAAP and Section 412 of the
Code, and there are no pending, threatened or anticipated claims
(other than routine claims for benefits) by, on behalf of or
against any of the Plans or any trusts related thereto which
would, individually or in the aggregate, have or be reasonably
expected to have a material adverse effect on Umpqua.
(e) Each Welfare Benefit Plan and each Pension Benefit Plan has
been administered to date in material compliance with the
requirements of the claims procedure of the
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Code and ERISA. All reports required by any government agency and
disclosures to participants with respect to each Welfare Benefit
Plan and each Pension Benefit Plan have been timely made or
filed. Each Employee Benefit Plan has been operated since
inception in material compliance with the governing instruments
and applicable federal or state law. In particular, but without
limitation, each Welfare Benefit Plan has been administered in
material compliance with federal law, including without
limitation the health care continuation requirements of federal
law ("COBRA"). No Employee Benefit Plan provides benefits,
including without limitation death or medical benefits (whether
or not insured), with respect to current or former employees of
Umpqua or any ERISA Affiliate beyond their retirement or other
termination of service, other than (i) coverage mandated by
applicable law, (ii) death benefits or retirement benefits under
any "employee pension plan," as that term is defined in Section
3(2) of ERISA, (iii) any deferred compensation benefits accrued
as liabilities on the books of Umpqua or any ERISA Affiliates or
(iv) benefits the full cost of which is borne by the current or
former employee (or his beneficiary).
(f) Neither Umpqua nor, to its knowledge, any plan fiduciary of
any Welfare Benefit Plan or Pension Benefit Plan, has engaged in
any transaction in violation of Section 406(a) or (b) of ERISA
(for which no exemption exists under Section 408 of ERISA) or any
"prohibited transaction" (as defined in Section 4975(c)(1) of the
Code) for which no exemption exists under Section 4975(c)(2) or
(d) of the Code or in any prohibited transactions under
predecessor provisions of the Code. To the best knowledge of
Umpqua, neither Umpqua nor any ERISA Affiliate has engaged in a
transaction in connection with which Umpqua or any ERISA
Affiliate could be subject to either a material civil penalty
assessed pursuant to Section 409 or 502(i) of ERISA or a material
tax imposed pursuant to Section 4975 or 4976 of the Code.
(g) Umpqua has had no liability to the Pension Benefit Guaranty
Corporation ("PBGC"). No material liability to the PBGC has been
or will be incurred by Umpqua or other trade or business under
"common control" with Umpqua (as determined under Section 414(c),
(b), (m) or (o) of the Code) on account of any termination of an
employee pension benefit plan subject to title IV of ERISA.
Except as set forth in Schedule 5.22, since September 1, 1974, no
filing has been made by Umpqua (or any ERISA Affiliate) with the
PBGC (and no proceeding has been commenced by the PBGC) to
terminate any employee pension benefit plan subject to title IV
of ERISA maintained, or wholly or partially funded by Umpqua (or
any ERISA Affiliate). Neither Umpqua nor any Common Control
Entity has (i) ceased operations at a facility so as to become
subject to the provisions of Section 4062(e) of ERISA, (ii)
withdrawn as a substantial employer so as to become subject to
the provisions of Section 4063 of ERISA, (iii) ceased making
contributions on or before the Effective Date to any employee
pension benefit plan subject to Section 4064(a) of ERISA to which
Umpqua (or any ERISA Affiliate) made contributions during the
five years prior to the Effective Date, or (iv) made a complete
or partial withdrawal from a multi-employer plan (as defined in
Section 3(37) of ERISA) so as to incur withdrawal liability as
defined in Section 4201 of ERISA (without regard
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to subsequent reduction or waiver of such liability under Section
4207 or 4208 or ERISA).
(h) Complete and correct copies of the following documents have
been furnished to VRB as Schedule 5.22:
(i) Each Employee Benefit Plan and any related trust
agreements;
(ii) The most recent summary plan descriptions of each
Employee Benefit Plan subject to ERISA;
(iii) The most recent determination letters of the Internal
Revenue Service with respect to the qualified status of a Pension
Benefit Plan;
(iv) Annual Reports (on form 5500 series) required to be
filed with any governmental agency for the last two years;
(v) Financial information which identifies (x) all asserted
or unasserted claims arising under any Employee Benefit Plan, (y)
all claims presently outstanding against any Employee Benefit
Plan, and (z) a description of any future compliance action
required with respect to any Employee Benefit Plan under ERISA,
or federal or state law.
(vi) Any actuarial reports and PBGC Forms 1 for the last 2
years.
(i) Each Welfare Benefit Plan and each Pension Benefit Plan is
legally valid and binding and in full force and effect and there
are no defaults thereunder.
5.23. Employment Disputes. There is no labor strike, dispute, slowdown
or stoppage pending or, to the best knowledge of Umpqua,
threatened against Umpqua, and Umpqua does not have any knowledge
of any attempt to organize any employees of Umpqua or Surviving
Bank into a collective bargaining unit. Consummation of the Plans
of Merger will not (either alone or in combination with any other
act or event) result in any payment of severance pay or any other
payment becoming due from Umpqua to any of its employees except
as set forth in Schedule 5.23. Umpqua is not a party to any
agreement involving payments to any person or entity based upon
the profits, revenues or other financial performance of Umpqua
except as set forth on Schedule 5.23.
5.24. Reserve for Loan Losses. Umpqua's reserve for loan losses, as
established from time to time, is adequate as determined by the
standards applied to Umpqua and Surviving Bank by the applicable
bank regulatory agencies and pursuant to generally accepted
accounting principles. Since March 31, 2000, Umpqua has not and
prior to the Effective Date shall not, reverse any provision
taken for loan losses.
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5.25. Repurchase Agreement. Umpqua has valid and perfected first
position security interests in all government securities subject
to repurchase agreements and the market value of the collateral
securing each such repurchase agreement equals or exceeds the
amount of the debt secured by such collateral under such
agreement.
5.26. Shareholder List. The list of shareholders of Umpqua dated June
30, 2000, provided to VRB, is a true, correct and complete list
of the names, addresses and holdings of all record holders of
Umpqua Common Stock as of that date. Based upon the information
made available to Umpqua and on filings with the SEC pursuant to
Section 13(d) and 16(a) of the Exchange Act, Umpqua shall notify
VRB of any change in such stock ownership of over one percent
(1%) through the Effective Date.
5.27. Proxy Statement. The registration statement to be filed by Umpqua
with the Oregon Director and the Proxy Statement to be used by
Umpqua to solicit proxies from the holders of Umpqua Common Stock
for the meeting of shareholders held to consider and vote upon
this Agreement and the Holding Company Plan of Merger, and the
transactions contemplated thereby (in its definitive form the
"Proxy Statement"), will fairly describe the transaction and
Umpqua, and will contain no untrue statement of any material fact
and will not omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, except those statements in or omission from the Proxy
Statement which may be made with respect to VRB. Umpqua will
promptly advise VRB in writing if at any time prior to the
Effective Date Umpqua shall obtain knowledge of any facts that
might make it necessary or appropriate to amend or supplement the
Proxy Statement in order to make the statements therein not
misleading or to comply with applicable law.
5.28. Interests of Directors and Others. Except as disclosed in any
Umpqua Public Reports, no officer or director of Umpqua or
Surviving Bank has any material interest in any assets or
property (whether real or personal, tangible or intangible), of
or used in the business of Umpqua or Surviving Bank other than as
an owner of outstanding securities or deposit accounts of Umpqua
or Surviving Bank, or as borrowers under loans fully performing
in accordance with their terms, which terms are no more favorable
than those available to unaffiliated parties made at or about the
same time.
5.29. Schedules to this Agreement. The information contained in each
schedule to this Agreement prepared by or on behalf of Umpqua
constitutes additional representations and warranties made by
Umpqua hereunder and is incorporated herein by reference. The
copies of documents furnished as part of these schedules are
true, correct and complete copies and include all amendments,
supplements, and modifications thereto and all express waivers
applicable thereunder.
5.30. No Misstatements or Omissions. No representation or warranty of
Umpqua or Surviving Bank in this Agreement or in any statement,
certificate or schedule
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furnished or to be furnished by Umpqua pursuant to this Agreement
or in connection with the transaction contemplated by this
Agreement, contains or will contain any untrue statements of a
material fact or omits or will omit to state any material fact.
6. COVENANTS OF VRB
6.1. Certain Actions. During the period between the date hereof and
the earlier of the Effective Date or the termination of this
Agreement, VRB covenants to Umpqua for itself and on behalf of
Valley, that, without first obtaining the written approval of
Umpqua:
(a) It shall not amend its Articles of Incorporation or Bylaws;
(b) It shall not declare or pay any dividend (except VRB's
regular $0.12 per share semi-annual dividend with a record date
in October 2000), redeem, repurchase or otherwise acquire or
agree to acquire any of VRB's Stock; or make or commit to make
any other distribution to VRB's stockholders;
(c) It shall not, except under options and convertible securities
identified in Schedule 4.2, issue, sell, or deliver; agree to
issue, sell or deliver; or grant or agree to grant any shares of
any class of the stock of VRB; any securities convertible into
any of such shares; or any options, warrants, or other rights to
purchase;
(d) It shall not, except in the ordinary course of business,
borrow or agree to borrow any funds or voluntarily incur, assume
or become subject to, whether directly or by way of guarantee or
otherwise, any commitment, obligation or liability (absolute or
contingent); or cancel or agree to cancel any debts or claims;
(e) It shall not, except in the ordinary course of business,
lease, sell or transfer; agree to lease, sell or transfer; or
grant or agree to grant any preferential rights to lease or
acquire, any of its assets, property or rights; make or permit
any amendment or termination of any contract, agreement,
instrument or other right to which VRB is a party and which is
material to VRB's business, assets, earnings, operation or
condition (financial or otherwise); or mortgage, pledge or
subject to a lien or any other encumbrance any of its assets,
tangible or intangible;
(f) It shall not violate, or commit a breach of or default under
any contract, agreement or instrument to which it is a party or
to which any of its assets may be subject and which is material
to its business, assets, earnings, operation or condition
(financial or otherwise); or knowingly violate any applicable
law, regulation, ordinance, order, injunction or decree or any
other requirements of any governmental body or court, relating to
its assets or business;
(g) Other than with respect to agreements in effect on the date
of this Agreement (including without limitation the Employment
Agreement between Valley and
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<PAGE> 200
William A. Haden dated January 10, 1996), it shall not increase
or agree to increase the compensation payable to any officer,
director, employee or agent, except for merit increases to
non-management personnel in the ordinary course of business
consistent with past practices; enter into any contract of
employment (i) for a period greater than 30 days or (ii)
providing for severance payments upon termination of employment
or upon the occurrence of any other event including but not
limited to the consummation of the Plans of Merger; or enter into
or make any change in any material Employee Benefit Plan except
as required by law; provided that this Section 6.1(g) shall not
preclude the payment in January 2001 of bonuses earned by VRB
employees during fiscal year 2000 and prior to the Effective Date
under existing bonus plans;
(h) It shall not, except in the ordinary course of business
through foreclosure or transfer in lieu thereof in the collection
of loans to customers, acquire control of or any other ownership
interest in any other corporation, association, joint venture,
partnership, business trust or other business entity; acquire
control or ownership of all or a substantial portion of the
assets of any of the foregoing; merge, consolidate or otherwise
combine with any other corporation; or enter into any agreement
providing for any of the foregoing except in connection with the
enforcement of bona fide security interests;
(i) It shall not acquire an ownership or leasehold interest in
any real property whether by foreclosure, deed in lieu of
foreclosure or otherwise without making an environmental
evaluation that, in its opinion, is reasonably appropriate;
(j) It shall not make any payment in excess of $50,000 in
settlement of any pending or threatened legal proceeding
involving a claim against VRB or Valley;
(k) It shall not engage in any activity or transaction which is
other than in the ordinary course of business including the sale
of any properties, securities, servicing rights, loans or other
assets except as specifically contemplated hereby, or which would
be reasonably expected to have a material adverse effect on the
business, assets, earnings, operation or condition (financial or
otherwise) of VRB or Valley;
(l) It shall not acquire, open or close any office or branch
other than the closing of Valley's branch located at 701 East
Jackson, Medford, and the relocation of Valley's Central Point
branch;
(m) It shall not do any act which causes VRB not to remain in
material compliance with the regulations, permits and orders
issued by regulatory authorities having jurisdiction over its
business operations;
(n) It shall not make or commit to make any capital expenditures,
capital additions or capital improvements involving an amount in
excess of $100,000; provided,
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<PAGE> 201
however, written consent shall not be required if prior
consultation with Umpqua has taken place;
(o) It shall not make, renew, commit to make, or materially
modify any loan over $1,500,000 or a series of loans or
commitments over $1,500,000 to any person or group of related
persons without furnishing a copy of the report provided to
Valley's loan committee to Umpqua within three (3) business days
after such approval;
(p) It shall not enter into or modify any agreement or
arrangement (except for renewals of previously disclosed
indebtedness) which alone or together with all similar
arrangements exceeds $250,000, with any director or officer of
VRB, any person who, to the knowledge of VRB, owns more than five
percent (5%) of the outstanding capital stock of VRB, or any
business or entity in which such director, officer or beneficial
owner has an ownership interest in excess of ten percent (10%)
without furnishing a copy of the report provided to Valley's loan
committee to Umpqua within three (3) business days after such
approval; and
(q) Since March 31, 2000, it has not and will not sell any
investment securities at a gain except as necessary to provide
liquidity, in accordance with past practices.
6.2. No Solicitation. Between the date hereof and the Effective Date,
VRB and its Board of Directors shall not directly or indirectly
initiate contact with any person or entity in an effort to
solicit any Alternative Acquisition Transaction. Between the date
hereof and the Effective Date, VRB shall not authorize or
knowingly permit any officer or any other person representing or
retained by VRB to directly furnish or cause to be furnished any
non-published information concerning its business, properties, or
assets to any person or entity in connection with any possible
Alternative Acquisition Transaction other than to the extent
specifically authorized by its Board of Directors in the good
faith exercise of its fiduciary duties based upon the advice of
Davis Wright Tremaine LLP. VRB shall promptly orally notify
Umpqua followed by written notice, of any Alternative Acquisition
Transaction, whether oral or written, by any person or persons to
VRB, or any indication from any person that it is considering
making any Alternative Acquisition Transaction. Each VRB director
further agrees to use his or her best efforts to obtain the
approval of the Agreement by VRB shareholders and to vote his or
her VRB Common Stock and any shares over which he or she have
voting control in favor of the Agreement. Neither VRB nor any of
its directors or officers shall be required by this section to
violate the duties imposed by law on VRB's directors or officers
to VRB's shareholders.
6.3. Filing Reports and Returns, Payment of Taxes. During the period
between the date hereof and the earlier of the Effective Date or
the termination of this Agreement, VRB shall duly and timely (by
the due date or any duly granted extension thereof) file all
reports and returns required to be filed with federal, state,
local, foreign and other regulatory authorities, including,
without limitation, reports required to be
App-35
<PAGE> 202
filed with the SEC, FRB, FDIC or Oregon Director and all required
federal, state and local tax returns. Unless it is contesting the
same in good faith and, if appropriate, has established
reasonable reserves therefore, VRB will promptly pay all taxes
and assessments indicated by tax returns as due or otherwise
lawfully levied or assessed upon it or any of its properties and
withhold or collect and pay to the proper governmental
authorities or hold in separate bank accounts for such payment
all taxes and other assessments which are required by law to be
so withheld or collected.
6.4. Preservation of Business. During the period between the date
hereof and the earlier of the Effective Date or the termination
of this Agreement, VRB shall use its best efforts to preserve
intact its business organization; to preserve its relationships
and goodwill with its customers, employees and other having
business dealings with it; and to keep available the services of
its present officers, agents and employees. VRB will not
institute any novel, unusual or material change in its methods of
management, lending policies, personnel policies, accounting,
marketing, investments or operations.
6.5. Best Efforts. VRB will use its best efforts to obtain and to
assist Umpqua in obtaining all necessary approvals, consents and
orders, including but not limited to approval of the FDIC, FRB
and the Oregon Director, to the transactions contemplated by this
Agreement and the Plans of Merger, and to obtain the approval of
the shareholders of VRB to the Agreement and to the Plans of
Merger. Further, VRB will use its reasonable best efforts to
cause the written assent at the end of this Agreement of the
Directors of VRB.
6.6. Continuing Accuracy of Representatives and Warranties. During the
period between the date hereof and the earlier of the Effective
Date or the termination of this Agreement, VRB will not take any
action which would cause or constitute a breach of any of the
representations or warranties of VRB contained in this Agreement
or which would cause any such representations or warranties, if
made on and as the date of such event or the Effective Date, to
be untrue or inaccurate in any material respect (other than an
event so affecting a representation or warranty which is
permitted hereby or is expressly limited to a state of facts
existing at a time prior to the occurrence of such event).
Promptly upon becoming aware of the occurrence of or the pending
or threatened occurrence of any event which would cause or
constitute such a breach or inaccuracy, VRB will give detailed
written notice thereof to Umpqua and will use its best efforts to
prevent or promptly remedy such breach or inaccuracy.
6.7. Updating Schedules. During the period between the date hereof and
the earlier of the Effective Date or the termination of this
Agreement, VRB will, no less frequently than monthly as
appropriate, revise and supplement the schedules hereto prepared
by or on behalf of VRB to ensure that such schedules remain
accurate and complete. Notwithstanding anything to the contrary
contained herein, supplementation of such schedules following the
execution of this Agreement shall
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<PAGE> 203
not be deemed a modification of VRB's representations or
warranties contained herein.
6.8. Rights of Access. During the period between the date hereof and
the earlier of the Effective Date or the termination of this
Agreement, VRB agrees to permit Umpqua, and its employees, agents
and representatives full access to the premises of VRB on
reasonable notice and to all books, files and records of VRB,
including but not limited to loan files, litigation files and
federal and state examination reports, and to furnish to Umpqua
such financial and operating data and other information with
respect to the business and assets of VRB as Umpqua shall
reasonably request.
6.9. Delivery of Reports. During the period between the date hereof
and the earlier of the Effective Date or the termination of this
Agreement, VRB will deliver to Umpqua promptly upon preparation
copies of:
(a) Minutes of meetings of VRB's and Valley's shareholders, Board
of Directors, and management or director committees; and
(b) Valley's loan committee reports and reports of loan
delinquencies, foreclosures and other adverse developments
regarding loans; and of developments regarding other real estate
owned or other assets acquired through foreclosure or action in
lieu thereof.
6.10. Payment of Obligations. During the period between the date hereof
and the earlier of the Effective Date or the termination of this
Agreement, VRB will pay promptly upon receipt of billings all
accounts payable, including professional fees for legal,
financial and accounting services, and will maintain its assets
in accordance with good business practices.
6.11. Shareholder Meeting. VRB shall promptly call a meeting of its
shareholders to consider and vote upon this Agreement the Holding
Company Plan of Merger and the transactions contemplated thereby.
VRB shall give notice of the meeting in accordance with Oregon
law and all requirements of laws and regulations applicable to
the merger transaction. VRB shall deliver to its shareholders a
proxy statement complying with the representations and warranties
of Section 4.27 hereof. Provided that the representations and
warranties of Umpqua contained herein continue to be accurate,
the Board of Directors of VRB will recommend to the shareholders
approval of this Agreement, the Holding Company Plan of Merger
and the transactions contemplated hereby unless, upon advise of
counsel, their fiduciary duties otherwise require, and each of
them hereby agree to vote all VRB shares held or controlled by
them for the approval of all such matters.
6.12. Title Reports. Prior to Closing, VRB will provide Umpqua with
either copies of title reports or a preliminary title report with
respect to all material real property held as other real estate
or used or held for future use in its business.
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<PAGE> 204
6.13. Other Actions. VRB covenants and agrees to execute, file and
record such documents and do such other acts and things as are
necessary or appropriate to obtain required government and
regulatory approvals to and to otherwise accomplish this
Agreement and the Plans of Merger.
7. COVENANTS OF UMPQUA
7.1. Certain Actions. During the period between the date hereof and
the earlier of the Effective Date or the termination of this
Agreement, Umpqua covenants, for itself and on behalf of its
subsidiaries, that, without first obtaining the written approval
of VRB:
(a) It shall not amend its Articles of Incorporation or Bylaws;
(b) It shall not declare or pay any dividend (except its regular
quarterly dividends of $0.04 per share with a record date of
September and December 2000), redeem, repurchase or otherwise
acquire or agree to acquire any of Umpqua's capital stock; or
make or commit to make any other distribution to Umpqua's
stockholders;
(c) It shall not, except under options and convertible securities
identified in Schedule 5.2, issue, sell, or deliver; agree to
issue, sell or deliver; or grant or agree to grant any shares of
any class of the stock of Umpqua; any securities convertible into
any of such shares; or any options, warrants, or other rights to
purchase;
(d) It shall not except in the ordinary course of business, or to
finance the transactions contemplated by the Agreement, borrow or
agree to borrow any funds or voluntarily incur, assume or become
subject to, whether directly or by way of guarantee or otherwise,
any liability (absolute or contingent); or cancel or agree to
cancel any debts or claims;
(e) It shall not lease, except in the ordinary course of business
or otherwise anticipated or permitted by the Agreement, sell or
transfer; agree to lease, sell or transfer; or grant or agree to
grant any preferential rights to lease or acquire, any of its
assets, property or rights; make or permit any amendment or
termination of any contract, agreement, instrument or other right
to which it is a party and which is material to its business,
assets, earnings, operation or condition (financial or
otherwise); mortgage, pledge or subject to a lien or any other
encumbrance any of its assets, tangible or intangible;
(f) It shall not violate, or commit a breach of or default under
any contract, agreement or instrument to which it is a party or
to which any of its assets may be subject and which is material
to its business, assets, earnings, operation or condition
(financial or otherwise); or knowingly violate any applicable
law, regulation, ordinance, order, injunction or decree or any
other requirements of any governmental body or court, relating to
its assets or business;
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<PAGE> 205
(g) Other than with respect to agreements in place as of the date
of this Agreement, it shall not increase or agree to increase the
compensation payable to any officer, director, employee or agent,
except for merit increases to non-management personnel in the
ordinary course of business consistent with past practices; enter
into any contract of employment (i) for a period greater than 30
days or (ii) providing for severance payments upon termination of
employment or upon the occurrence of any other event, including
but not limited to the consummation of the Plans of Merger; or
enter into or make any material change in any Employee Benefit
Plan except as required by law; provided that this Section 7.1
(g) shall not preclude the payment in January 2001 of bonuses
earned by Umpqua employees during fiscal year 2000 and prior to
the Effective Date under existing bonus plans;
(h) It shall not, except in the ordinary course of business
through foreclosure or transfer in lieu thereof in the collection
of loans to customers, acquire control of or any other ownership
interest in any other corporation, association, joint venture,
partnership, business trust or other business entity; acquire
control or ownership of all or a substantial portion of the
assets of any of the foregoing; merge, consolidate or otherwise
combine with any other corporation; or enter into any agreement
providing for any of the foregoing except in connection with the
enforcement of a bona fide security interest;
(i) It shall not acquire an ownership or leasehold interest in
any real property whether by foreclosure, deed in lieu of
foreclosure or otherwise without making an environmental
evaluation that is, in its opinion, reasonably appropriate;
(j) It shall not make any payment in excess of $50,000 in
settlement of any pending or threatened legal proceeding
involving a claim against Umpqua or Surviving Bank;
(k) It shall not engage in any activity or transaction which is
other than in the ordinary course of business, including the sale
of any properties, securities, servicing rights, loans or other
assets except as specifically contemplated hereby, or which would
be reasonably expected to have a material adverse effect on the
business, assets, earnings, operation or condition (financial or
otherwise) of Umpqua;
(l) It shall not acquire, open or close any office or branch;
(m) It shall not do any act which causes Umpqua not to remain in
compliance with the regulations, permits and orders issued by
regulatory authorities having jurisdiction over its business
operations;
(n) It shall not make or commit to make any capital expenditures,
capital additions or capital improvements involving an amount in
excess of $100,000; provided,
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<PAGE> 206
however, written consent shall not be required if prior
consultation with VRB has taken place;
(o) It shall not make, renew, commit to make, or materially
modify any loan over $1,500,000 or a series of loans or
commitments over $1,500,000 to any person or group of related
persons without furnishing a copy of the report provided to
Surviving Bank's loan committee to VRB within three (3) business
days after such approval;
(p) It shall not enter into or modify any agreement or
arrangement (except for renewals of previously disclosed
indebtedness) which alone or together with all similar
arrangements exceeds $250,000, with any director or officer of
Umpqua, any person who, to the knowledge of Umpqua, owns more
than five percent (5%) of the outstanding capital stock of
Umpqua, or any business or entity in which such director, officer
or beneficial owner has an ownership interest in excess of ten
percent (10% without furnishing a copy of the report provided to
Surviving Bank's loan committee to VRB within three (3) business
days after such approval;
(q) Since March 31, 2000, it has not and will not sell any
investment securities at a gain except (i) as necessary to
provide liquidity, in accordance with past practices, or (ii)
indirectly in regular-course broker-dealer transactions through
its retail brokerage Subsidiaries.
7.2. No Solicitation. Between the date hereof and the Effective Date,
Umpqua and its Board of Directors shall not directly or
indirectly initiate contact with any person or entity in an
effort to solicit any Alternative Acquisition Transaction (as
defined below). Between the date hereof and the Effective Date
Umpqua shall not authorize or knowingly permit any officer or any
other person representing or retained by Umpqua to directly
furnish or cause to be furnished any non-published information
concerning its business, properties, or assets to any person or
entity in connection with any possible Alternative Acquisition
Transaction other than to the extent specifically authorized by
its Board of Directors in the good faith exercise of its
fiduciary duties based upon the advice of Foster Pepper Shefelman
LLP. Umpqua shall promptly orally notify VRB followed by written
notice, of any Alternative Acquisition Transaction, whether oral
or written, by any person or persons to Umpqua, or any indication
from any person that it is considering making any Alternative
Acquisition Transaction. Each Umpqua director further agrees to
use his or her best efforts to obtain the approval of the
Agreement by Umpqua shareholders and to vote his or her Umpqua
Common Stock and any shares over which he or she have voting
control in favor of the Agreement. Neither Umpqua nor any of its
directors or officers shall be required by this section to
violate the duties imposed by law on Umpqua's directors or
officers to Umpqua's shareholders.
7.3. Filing Reports and Returns, Payment of Taxes. During the period
between the date hereof and the earlier of the Effective Date or
the termination of this Agreement,
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Umpqua shall duly and timely (by the due date or any duly granted
extension thereof) file all reports and returns required to be
filed with federal, state, local, foreign and other regulatory
authorities, including, without limitation, reports required to
be filed with the SEC, FRB, FDIC and the Oregon Director and all
required federal, state and local tax returns. Unless it is
contesting the same in good faith and, if appropriate, has
established reasonable reserves therefore, Umpqua will promptly
pay all taxes and assessments indicated by tax returns as due or
otherwise lawfully levied or assessed upon it or any of its
properties and withhold or collect and pay to the proper
governmental authorities or hold in separate bank accounts for
such payment all taxes and other assessments which are required
by law to be so withheld or collected.
7.4. Preservation of Business. During the period between the date
hereof and the earlier of the Effective Date or the termination
of this Agreement, Umpqua shall use its best efforts to preserve
intact its business organization; to preserve its relationships
and goodwill with its customers, employees and other having
business dealings with it; and to keep available the services of
its present officers, agents and employees. Umpqua will not
institute any novel, unusual or material change in its methods of
management, lending policies, personnel policies, accounting,
marketing, investments or operations.
7.5. Best Efforts. Umpqua will use its best efforts to obtain and to
assist VRB in obtaining, all necessary approvals, consents and
orders, including but not limited to approvals of the FRB, FDIC
and the Oregon Director, to the transactions contemplated by this
Agreement and the Plans of Merger, and to obtain the approval of
the shareholders of Umpqua to the Agreement and the Holding
Company Plan of Merger, and the issuance of the Umpqua Common
Stock pursuant to the transaction. Further, Umpqua will use its
reasonable best efforts to cause the written assent at the end of
this Agreement of the Directors of Umpqua.
7.6. Continuing Accuracy of Representatives and Warranties. During the
period between the date hereof and the earlier of the Effective
Date or the termination of this Agreement, Umpqua will not take
any action which would cause or constitute a breach of any of the
representations or warranties of Umpqua contained in this
Agreement or which would cause any such representations or
warranties, if made on and as the date of such event or the
Effective Date, to be untrue or inaccurate in any material
respect (other than an event so affecting a representation or
warranty which is permitted hereby or is expressly limited to a
state of facts existing at a time prior to the occurrence of such
event). Promptly upon becoming aware of the occurrence of or the
pending or threatened occurrence of any event which would cause
or constitute such a breach or inaccuracy, Umpqua will give
detailed written notice thereof to VRB and will use its best
efforts to prevent or promptly remedy such breach or inaccuracy.
7.7. Updating Schedules. During the period between the date hereof and
the earlier of the Effective Date or the termination of this
Agreement, Umpqua will, no less
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frequently than monthly as appropriate, revise and supplement the
schedules hereto prepared by or on behalf of Umpqua to ensure
that such schedules remain accurate and complete. Notwithstanding
anything to the contrary contained herein, supplementation of
such schedules following the execution of this Agreement shall
not be deemed a modification of Umpqua's representations or
warranties contained herein.
7.8. Rights of Access. During the period between the date hereof and
the earlier of the Effective Date or the termination of this
Agreement, Umpqua agrees to permit VRB and its employees, agents
and representatives full access to the premises of Umpqua on
reasonable notice and to all books, files and records of Umpqua,
including but not limited to loan files, litigation files and
federal and state examination reports, and to furnish to VRB such
financial and operating data and other information with respect
to the business and assets of Umpqua as VRB shall reasonably
request.
7.9. Delivery of Reports. During the period between the date hereof
and the earlier of the Effective Date or the termination of this
Agreement, Umpqua will deliver to VRB promptly upon request,
copies of:
(a) Minutes of meetings of Umpqua's and Surviving Bank's
shareholders, Board of Directors, and management or director
committees; and
(b) Surviving Bank's loan committee reports and reports of loan
delinquencies, foreclosures and other adverse developments
regarding loans; and of developments regarding other real estate
owned or other assets acquired through foreclosure or action in
lieu thereof.
7.10. Payment of Obligations. During the period between the date hereof
and the earlier of the Effective Date or the termination of this
Agreement, Umpqua will pay promptly upon receipt of billings all
accounts payable, including professional fees for legal and
accounting services, and will maintain its assets in accordance
with good business practice.
7.11. Shareholder Meeting. Umpqua shall promptly call a meeting of its
shareholders to consider and approve this Agreement, the Holding
Company Plan of Merger, the transaction and the issuance of
Umpqua Common Stock contemplated thereby. Umpqua shall give
notice of the meeting in accordance with Oregon law and all
requirements of laws and regulations applicable to the merger
transaction and approval of the Umpqua shares. Umpqua shall
deliver to its shareholders a proxy statement complying with the
representations and warranties of Section 5.27 hereof. Provided
that the representations and warranties of VRB contained herein
continue to be accurate, the Board of Directors of Umpqua will
recommend to the shareholders approval of this Agreement, the
Holding Company Plan of Merger and the transactions contemplated
hereby and the issuance of the Umpqua Common Stock unless, upon
advise of counsel, their fiduciary duties otherwise require, and
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each of them hereby agree to vote all Umpqua shares held or
controlled by them for the approval of all such matters.
7.12. Securities Registration; Fairness Hearing. Promptly following
execution of this Agreement, Umpqua will take all necessary and
appropriate steps to register under Oregon securities laws the
shares of Umpqua Common Stock to be issued to VRB shareholders in
the Holding Company Merger. Umpqua shall, in connection with the
application for registration of the shares, request a hearing
pursuant to ORS 59.095 on the fairness of the transactions
contemplated by this Agreement and the Plans of Merger.
7.13. Title Reports. Prior to Closing, Umpqua will provide VRB with
either copies of title reports or a preliminary title report with
respect to all material real property held as other real estate
or used or held for future use in its business.
7.14. Other Actions. Umpqua covenants and agrees to execute, file and
record such documents and do such other acts and things as are
necessary or appropriate to obtain required government and
regulatory approvals to and to otherwise accomplish this
Agreement and the Plans of Merger.
7.15. Appointment to Umpqua and Surviving Bank Boards. The members of
the Board of Directors of Umpqua and Surviving Bank following the
Merger shall consist of eleven members, six selected by Umpqua
and five by VRB. Umpqua's current Chairman of the Board will
initially serve as the Chairman of both Umpqua and Surviving Bank
following the Mergers.
7.16. Appointment of Certain Officers. The officers of Umpqua and
Surviving Bank following the Merger shall include the Named
Executive Officers.
7.17. Employee Matters. Compensation and benefits made available by
Umpqua and Surviving Bank to employees of VRB and Valley promptly
following the Effective Date (but no later than January 1, 2001
if the Effective Date is on or before December 31, 2000) shall be
on terms and conditions no less favorable than the compensation
and benefits made available to Umpqua and Surviving Bank
employees of similar tenure and responsibilities. Promptly after
the Effective Date, Umpqua shall ensure that VRB and Valley
employees are permitted to participate in the employee benefit
programs then made available to Umpqua employees with credit for
service with VRB and Valley deemed service with Umpqua for
eligibility and vesting purposes. For purposes of participation
in Umpqua bonus plans, profit sharing plans and arrangements, and
similar benefits, VRB and Valley employees shall receive credit
for length of service and (except as may otherwise be provided in
employment contracts) shall be entitled to participate in bonus
compensation plans and awards beginning on the Effective Date, it
being expressly recognized that VRB employees are to be paid in
January 2001 their accrued bonus compensation under VRB's and
Valley's bonus plans, profit sharing plans and arrangements, and
similar programs through the Effective Date, in accordance with
the terms thereof.
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8. CONDITIONS TO OBLIGATIONS OF UMPQUA
The obligations of Umpqua under this Agreement and the Plans of Merger
to consummate the Holding Company Merger and the Bank Merger shall be subject to
the satisfaction, on or before the Effective Date, of the following conditions
(unless waived by Umpqua in writing and not required by law):
8.1. Shareholders Approvals. Approval of this Agreement and the Plans
of Merger by the shareholders of Umpqua and VRB.
8.2. No Litigation. Absence of any suit, action, or proceeding (made
or threatened) against Umpqua, VRB, or any of their directors or
officers, seeking to challenge, restrain, enjoin, or otherwise
affect this Agreement or the Plans of Merger or the transactions
contemplated thereby; seeking to restrict the rights of the
parties or the operation of the business of VRB or Umpqua after
consummation of the Bank Merger and Holding Company Merger; or
seeking to subject the parties to this Agreement or the Plans of
Merger or any of their officers or directors to any liability,
fine, forfeiture or penalty on the grounds that the parties
hereto or their directors or officers have violated or will
violate their fiduciary duties to their respective shareholders
or will violate any applicable law or regulation in connection
with the transactions contemplated by this Agreement and the
Plans of Merger.
8.3. No Banking Moratorium. Absence of a banking moratorium or other
suspension of payment by banks in the United States or any new
material limitation on extension of credit by commercial banks in
the United States.
8.4. Regulatory Approvals. Procurement of all consents, orders and
approvals required by law, and the satisfaction of all other
necessary or appropriate legal requirements, including but not
limited to approvals by FRB, FDIC and the Oregon Director of the
transaction contemplated by the Agreement and the Plans of
Merger, without any conditions which Umpqua determines to be
materially disadvantageous or burdensome, and the expiration of
all regulatory waiting periods.
8.5. Compliance with Securities Laws. Receipt of an order of
registration from the Oregon Director relating to the shares of
Umpqua Common Stock to be issued in the Holding Company Merger,
and receipt of such other registration and qualification orders
as may be necessary under applicable laws and regulations.
8.6. Other Consents. Receipt of all other consents and approvals
necessary for consummation of the transactions contemplated by
this Agreement and the Plans of Merger.
8.7. Opinion of Counsel. Receipt by Umpqua of a favorable opinion by
Davis Wright Tremaine LLP, counsel to VRB, in form and substance
satisfactory to Umpqua and its counsel, to the effect that:
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(a) VRB is a corporation duly organized and validly existing
under the laws of the State of Oregon, Valley is a state
chartered bank, duly organized, validly existing and in good
standing under the laws of the State of Oregon and each has all
requisite corporate power and authority to own, lease and operate
its properties and assets and carry on its business in the manner
being conducted on the Effective Date;
(b) VRB and Valley each has all requisite corporate power and
authority to execute, deliver and perform its respective
obligations under the Agreement and the Plans of Merger; the
execution, delivery and performance of the Agreement and the
Plans of Merger, and the consummation of the transactions
contemplated thereby, have been duly authorized by all requisite
corporate action on the part of VRB and Valley; and the Agreement
and the Plans of Merger has been duly executed and delivered by
VRB and Valley, and constitute the legal, valid, and binding
obligation of VRB and Valley, enforceable in accordance with
their terms, except as the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws or by
equitable principles; and
(c) The authorized capital stock of VRB consists of 10,000,000
shares of preferred stock, $5,00 par value, none of which is
issued and outstanding, and 30,000,000 shares of common stock, no
par value, of which [COMPLETE AS OF THE EFFECTIVE DATE] shares
have been duly issued and are validly outstanding, fully paid and
nonassessable. Such shares are the only shares of capital stock
of VRB authorized, issued or outstanding; and to the best of
counsel's knowledge, VRB is not a party to, and is not obligated
by, any commitment, plan or arrangement to issue or to sell any
shares of capital stock or any equity interest in VRB. None of
the shares of VRB Common Stock has been issued in violation of
the pre-emptive rights of any stockholder.
8.8. Corporate Documents. Receipt by Umpqua of:
(a) Current certificate of existence and good standing
certificate for VRB and Valley, respectively, issued by the
appropriate governmental officer as of a date immediately prior
to the Effective Date; and
(b) A copy, certified by each Secretary of VRB and Valley, of
resolutions adopted by the Board of Directors and shareholders of
VRB and Valley approving this Agreement and the Plans of Merger.
8.9. Continuing Accuracy of Representations and Warranties. Except as
expressly contemplated hereby, the representations and warranties
of VRB being true at and as of the Effective Date as though such
representations and warranties were made at and as of the
Effective Date; provided that, in the case of Section 4.13, the
discovery of a claim against VRB or any other obligation or
liability of VRB, not
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previously known, of less than $250,000 individually or $500,000
in the aggregate shall not be deemed a breach of VRB's
representation and warranties hereunder.
8.10. Compliance with Covenants and Conditions. Compliance by VRB with
all agreements, covenants and conditions on its part required by
this Agreement to be performed or complied with prior to or at
the Effective Date.
8.11. No Adverse Changes. Between March 31, 2000 and the Effective
Date, the absence of any material adverse change in the business,
assets, liabilities, income, or conditions, financial or
otherwise, of VRB, except changes contemplated by this Agreement
and such changes as may have been previously approved in writing
by Umpqua.
8.12. Certificate. Receipt by Umpqua of a Certificate of the President
and the Chief Financial Officer of VRB, dated as of the Effective
Date, certifying to the best of their knowledge the fulfillment
of the conditions specified in Sections 8.1, 8.2, 8.3, 8.6, 8.9,
8.10 and 8.11 hereof, and such other matters with respect to the
fulfillment by VRB of any of the conditions of this Agreement as
Umpqua may reasonably request.
8.13. Tax Opinion. Receipt of a favorable opinion of Foster Pepper &
Shefelman LLP, special counsel to Umpqua, dated as of the
Effective Date, in form and substance satisfactory to Umpqua to
the effect that the transaction contemplated by the Agreement and
the Plans of Merger will be a reorganization within the meaning
of Section 368 of the Code; that the parties to the Agreement and
to the Plans of Merger will each be "a party to a reorganization"
within the meaning of Section 368(b) of the Code; and no taxable
gain or loss will be recognized by the shareholders of VRB who
will receive solely Umpqua Common Stock (except for cash, if any,
received in lieu of fractional shares); that the basis in the
Umpqua Common Stock to be received by the recipients will be the
same as the basis in their VRB Common Stock exchanged (except for
cash to be received for any fractional share interests); and
that, provided the stock exchanged was held as a capital asset on
the Effective Date, the holding period of the Umpqua Common Stock
to be received will include the holding period of the VRB Common
Stock previously held, prior to the Effective Date.
8.14. Fairness Opinion. Umpqua will have received from Ragen MacKenzie
an opinion, dated as of the date the Board of Directors of Umpqua
shall have approved this Agreement and updated immediately before
Umpqua mails the Proxy Statement to its shareholders, to the
effect that the financial terms of the transactions contemplated
by this Agreement are financially fair to Umpqua's shareholders.
VRB will provide Umpqua's investment advisor such information as
it may reasonably request in order to render its opinion.
8.15. Accounting Treatment. It will have been determined to the
satisfaction of Umpqua that the Holding Company Merger will be
treated for accounting purposes as a
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"pooling of interests" in accordance with APB Opinion No. 16, and
the related interpretations of the AICPA consensuses of the
FASB's Emerging Issue Task Force, and the rules and regulations
of the SEC, and Umpqua will have received a letter to such effect
from Deloitte & Touche LLP, certified public accountants.
9. CONDITIONS TO OBLIGATIONS OF VRB
The obligations of VRB under this Agreement and the Plans of Merger to
consummate the Holding Company Merger and the Bank Merger, shall be subject to
the satisfaction, on or before the Effective Date, of the following conditions
(unless waived by VRB in writing and not required by law):
9.1. Shareholder Approval. Approval of this Agreement and the
respective Plans of Merger by the shareholders of VRB and Umpqua.
9.2. No Litigation. Absence of any suit, action, or proceeding (made
or threatened) against Umpqua, VRB or their directors or
officers, seeking to challenge, restrain, enjoin, or otherwise
affect this Agreement or the Plans of Merger or the transactions
contemplated thereby; or seeking to subject any of them or their
officers or directors to any liability, fine, forfeiture or
penalty on the grounds that such parties have violated or will
violate their fiduciary duties to their respective shareholders
or will violate any applicable law or regulation in connection
with the transactions contemplated by this Agreement and the
Plans of Merger.
9.3. No Banking Moratorium. Absence of a banking moratorium or other
suspension of payment by banks in the United States or any new
material limitation on extension of credit by commercial banks in
the United States.
9.4. Regulatory Approvals. Procurement of all consents, orders and
approvals required by law, and the satisfaction of all other
necessary or appropriate legal requirements, including but not
limited to approvals by FRB, FDIC and the Oregon Director of the
transactions contemplated by the Agreement and the Plans of
Merger, without any conditions which VRB determines to be
materially disadvantageous or burdensome, and the expiration of
all regulatory waiting periods.
9.5. Other Consents. Receipt of all other consents and approvals
necessary for consummation of the transactions contemplated by
this Agreement and the Plans of Merger.
9.6. Opinions of Counsel. Receipt by VRB of a favorable opinion of
Foster Pepper & Shefelman LLP, special counsel to Umpqua, dated
as of the Effective Date, in form and substance satisfactory to
VRB and its counsel to the effect that:
(a) Umpqua is a corporation, duly organized and validly existing
under the laws of the State of Oregon, and has all requisite
corporate power and authority to own,
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lease, and operate its properties and assets and carry on its
business in the manner being conducted on the Effective Date;
(b) Surviving Bank is a state banking corporation, duly
organized, validly existing and in good standing under the laws
of the State of Oregon, has all requisite corporate power and
authority to own, lease, and operate its properties and assets,
and to carry on a general banking business;
(c) Umpqua and Surviving Bank each have all requisite corporate
power and authority to execute, deliver and perform its
obligations under the Agreement and the Plans of Merger; the
execution, delivery and performance of the Agreement and the
Plans of Merger and the consummation of the transactions
contemplated thereby, have been duly authorized by all requisite
corporate action on the part of each; and the Agreement and the
Plans of Merger have been duly executed and delivered by them and
constitute the legal, valid and binding obligation of each,
enforceable in accordance with its terms, except as the same may
be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws or by equitable principles;
(d) The authorized capital stock of Umpqua consists of 2,000,000
shares of preferred stock, no par value per share, none of which
is issued and outstanding, and 20,000,000 shares of common stock,
no par value per share, of which [COMPLETE AS OF THE EFFECTIVE
DATE] shares are outstanding and are validly issued, fully paid
and nonassessable. Such shares are the only shares of capital
stock of Umpqua authorized, issued or outstanding; and to the
best of knowledge of Foster Pepper & Shefelman LLP, Umpqua is not
a party to, and is not obligated by, any commitment, plan or
arrangement to issue or to sell any shares of capital stock or
any other equity interest in Umpqua, except as set forth in the
Umpqua Public Reports.
(e) All of the issued and outstanding capital stock of Surviving
Bank is owned by Umpqua.
(f) The Umpqua Common Stock to be issued in accordance with the Holding
Company Plan of Merger, when delivered in exchange (or in partial exchange) for
the shares of VRB Common Stock, will be authorized, validly issued, fully paid
and nonassessable; and
(g) The Umpqua Common Stock to be issued to the VRB shareholders
has been registered under Oregon securities laws, and is exempt
from registration under the Securities Act and to the best of
Foster Pepper & Shefelman LLP's knowledge, no stop order
suspending the effectiveness of the Oregon registration or the
issuance of the shares in any jurisdiction has been issued and no
proceeding for that purpose has been initiated or pending or are
contemplated under the Act or any other securities laws. The
issuance of Umpqua Common Stock has been registered or qualified
or is exempt from registration or qualification except when such
failure would not (i) be material to Umpqua, or (ii) pose a
material risk of material liability
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to any person who was, immediately prior to the Effective Date,
an officer, director, employee or agent of VRB. The Umpqua Common
Stock to be issued to the VRB shareholders has been listed for
trading on the Nasdaq National Market System, and is not
"restricted securities" as that term is defined in Rule 144(a)(3)
under the Act (other than that Umpqua Common Stock issued to
persons to whom Rule 145 applies).
9.7. Corporate Documents. Receipt by VRB of:
(a) Current certificate of existence and good standing
certificate for Umpqua and Surviving Bank, respectively, issued
by the appropriate governmental officer as of a date immediately
prior to the Effective Date;
(b) A copy, certified by each Secretary of Umpqua and Surviving
Bank, of the resolutions adopted by the Board of Directors of
each approving this Agreement and the respective Plans of Merger.
9.8. Continuing Accuracy with Representations and Warranties. Except
as contemplated hereby, the representations and warranties of
Umpqua being true at and as of the Effective Date as though such
representations and warranties were made at and as of the
Effective Date; provided that, in the case of Section 5.13, the
discovery of a claim against Umpqua or any other obligation or
liability of Umpqua, not previously known, of less than $250,000
individually or $500,000 in the aggregate shall not be deemed a
breach of Umpqua's representation and warranties hereunder.
9.9. Compliance with Covenants and Conditions. Umpqua having complied
with all agreements, covenants and conditions on their part
required by this Agreement to be performed or complied with prior
to or at the Effective Date.
9.10. No Adverse Changes. Between March 31, 2000 and the Effective
Date, the absence of any material adverse change in the business,
assets, liabilities, income or condition, financial or otherwise,
of Umpqua and its Subsidiaries taken as a whole, except changes
contemplated by this Agreement and such changes that may have
been previously approved in writing by VRB.
9.11. Tax Opinion. Receipt of a favorable opinion of Foster Pepper &
Shefelman LLP, special counsel to Umpqua, dated as of the
Effective Date, in form and substance satisfactory to VRB to the
effect that the transaction contemplated by the Agreement and the
Plans of Merger will be a reorganization within the meaning of
Section 368 of the Code; that the parties to the Agreement and to
the Plans of Merger will each be "a party to a reorganization"
within the meaning of Section 368(b) of the Code; and no taxable
gain or loss will be recognized by the shareholders of VRB who
will receive solely Umpqua Common Stock (except for cash, if any,
in lieu of fractional shares); that the basis in the Umpqua
Common Stock to be received by the recipients will be the same as
the basis in their VRB Common Stock (except for cash to be
received for any fractional share interests); and that, provided
the stock
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exchanged was held as a capital asset on the Effective Date, the
holding period of the Umpqua Common Stock to be received will
include the holding period of the VRB Common Stock previously
held, prior to the Effective Date.
9.12. Certificates. Receipt by VRB of a Certificate of the President
and Chief Financial Officer of Umpqua, dated as of the Effective
Date, certifying to the best of their knowledge the fulfillment
of the conditions specified in Sections 9.1, 9.2, 9.4, 9.5, 9.8,
9.9, and 9.10 hereof and such other matters with respect to the
fulfillment by Umpqua of any of the conditions of this Agreement
as VRB may reasonably request.
9.13. Fairness Opinion. VRB will have received from D.A. Davidson & Co.
an opinion, dated as of the date the Board of Directors of VRB
shall have approved this Agreement and updated immediately before
VRB mails the Proxy Statement to its shareholders, to the effect
that the financial terms of the Merger are financially fair to
VRB's shareholders. Umpqua will provide VRB's investment advisor
such information as it may reasonably request in order to render
its opinion.
9.14. Accounting Treatment. It will have been determined to the
satisfaction of VRB that the Holding Company Merger will be
treated for accounting purposes as a "pooling of interests" in
accordance with APB Opinion No. 16, and the related
interpretations of the AICPA consensuses of the FASB's Emerging
Issue Task Force, and the rules and regulations of the SEC, and
VRB will have received a letter to such effect from Deloitte &
Touche LLP, certified public accountants.
9.15. Bylaw Amendment. Umpqua and Surviving Bank shall have passed
enabling resolutions and adopted amendments to their respective
Bylaws in a form reasonably acceptable to counsel for VRB, to
effect the provisions set forth in Section 3.1.
10. CLOSING
The transactions contemplated by this Agreement and the Plans of Merger
will close in the office of Foster Pepper & Shefelman LLP at such time and on
such date within seven (7) days following the satisfaction of all conditions to
closing set forth in Sections 8 and 9 (not waived or to be satisfied by delivery
of documents or opinions or a state of facts to exist at closing), as set by
notice from Umpqua to VRB or such other time and place as the parties may agree.
11. TERMINATION
11.1. Procedure for Termination. This Agreement may be terminated
before the Effective Date:
(a) By the mutual consent of the Boards of Directors of Umpqua
and VRB acknowledged in writing;
(b) By Umpqua or VRB acting through their Boards of Directors
upon written notice to the other parties, if (i) at the time of
such notice the Mergers shall not
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have become effective by March 31, 2001 (or such later date as
shall have been agreed to in writing by Umpqua and VRB acting
through their respective Boards of Directors), (ii) shareholders
of VRB shall not have approved the Agreement, the Plans of Merger
and the transactions contemplated thereby prior to March 31,
2001, (iii) shareholders of Umpqua shall not have approved the
Agreement, the Plans of Merger and the transactions contemplated
thereby and the issuance of the Umpqua Common Stock prior to
March 31, 2001, or (iv) Deloitte & Touche LLP, Umpqua's auditors,
advise that the transaction proposed by the Agreement and the
Plans of Merger would not be accounted for as a
pooling-of-interests;
(c) By Umpqua, acting through its Board of Directors upon written
notice to VRB, if there has been a material misrepresentation or
material breach on the part of VRB in its representations,
warranties and covenants set forth herein or if there has been
any material failure on the part of VRB to comply with its
obligations hereunder which misrepresentation, breach or failure
is not cured within thirty (30) days notice to VRB of such
misrepresentation, breach or failure; or by VRB, acting through
its Board of Directors upon written notice to Umpqua, if there
has been a material misrepresentation or material breach by
Umpqua in its representations, warranties and covenants set forth
herein or if there has been a material failure on the part of
Umpqua to comply with its obligations hereunder which
misrepresentation, breach or failure is not cured within thirty
(30) days notice to Umpqua of such misrepresentation, breach or
failure;
(d) By Umpqua upon advice of Foster Pepper & Shefelman LLP that
the fiduciary duties of the Directors so require; and
(e) By VRB upon advice of Davis Wright Tremaine LLP that the
fiduciary duties of the Directors so require.
(f) By VRB, in accordance with the following provisions:
(i) At any time during the five-business-day period
commencing on the tenth calendar day preceding the Effective
Date, if both of the following conditions are satisfied:
(A) The Average Closing Price is less than $6.75; and
(B) The number, expressed as a percentage, obtained by
dividing the Average Closing Price by $8.15 is more than
ten percentage points less than the Index Differential.
Provided however, if the Average Closing Price is $6.10 or higher
and Umpqua notifies VRB at least two days (2) prior to the
Effective Date of its election to increase the exchange ratio in
accordance with the following formula, any notice given by VRB
under this Section 11 (f) shall be deemed withdrawn and the
Exchange Ratio shall be the number (carried out to four
significant digits)
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calculated by multiplying 0.8135 times $6.75 and dividing that
product by the Average Closing Price, but in no event will the
Exchange Ratio calculated by this formula be greater than 0.8500.
(ii) Definitions. For the purposes of this Section 11.1(f) of
this Agreement, the following terms shall have the meanings set
forth in this Subparagraph (ii). Additional terms may be defined
elsewhere herein.
(A) "Average Closing Price." The average (rounded
to the nearest penny) of each Daily Sales Price of Umpqua Common
Stock for the twenty consecutive trading days ending on and
including the tenth calendar day preceding the projected
Effective Date (or, if that calendar day is not a trading day,
the most closely preceding day that is a trading day).
(B) "Average Bank Index." The average of the
closing Nasdaq Bank Index (Bloomberg-CBNK) for the twenty
consecutive trading days ending on and including the tenth
calendar day preceding the projected Effective Date (or, if that
calendar day is not a trading day, the most closely preceding day
that is a trading day).
(C) "Daily Sales Price." For any trading day,
subject to the following sentence, the last reported trade price
as such prices are reported by the automated quotation system of
the National Association of Securities Dealers, Inc., or in the
absence thereof by such other source upon which Umpqua and VRB
shall mutually agree. If there are no reported trades on any
trading day, such day shall be deemed to be a non-trading day.
(D) "Index Differential." The number, expressed as
a percentage, obtained by dividing the Average Bank Index by
1,588.3.
11.2. Effect of Termination.
11.2.1. In the event this Agreement is terminated pursuant to
Section 11.1(a), 11.1(b)(i), or 11.1(b)(iv), it shall
become wholly void and of no further force and effect and
there shall be no liability on the part of any party or
their respective Boards of Directors as a result of such
termination or abandonment.
11.2.2. If the Agreement is terminated by VRB or Umpqua pursuant
to Section 11.1(b)(ii), by Umpqua pursuant to Section
11.1(c) or by VRB pursuant to Section 11.1(e) or (f), then
VRB agrees to pay to Umpqua its reasonable expenses
incurred in entering into and attempting to consummate the
transaction. In addition to the foregoing, if, prior to
December 31, 2001, VRB enters into an Alternative
Acquisition Transaction and (a) an Alternative Acquisition
Transaction had been proposed prior to the date of the VRB
shareholder meeting or (b) at the
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time of such shareholder meeting VRB or its Directors fail
to materially comply with the covenants set forth in
Section 6, and in either event if at the time of VRB's
shareholder meeting there was no material failure by
Umpqua to meet the conditions set forth in Section 9, then
VRB will, within thirty (30) days after Umpqua's request,
pay Umpqua an additional $3,000,000. This Section 11.2.2
shall be the sole remedy in favor of Umpqua for
termination of this Agreement pursuant to the sections
named in the preceding sentence, and Umpqua specifically
waives the protections of any equitable remedies that
otherwise might be available to Umpqua.
11.2.3. If the Agreement is terminated by Umpqua or VRB pursuant
to Section 11.1(b)(iii), by VRB pursuant to Section
11.1(c) or by Umpqua pursuant to Section 11.1(d), then
Umpqua agrees to pay to VRB its reasonable expenses
incurred in entering into and attempting to consummate the
transaction. In addition to the foregoing, if, prior to
December 31, 2001, Umpqua enters into an Alternative
Acquisition Transaction and (a) an Alternative Acquisition
Transaction had been proposed at the time of the Umpqua
shareholder meeting or (b) at the time of such
shareholders meeting Umpqua or its Directors fail to
materially comply with the covenants set forth in Section
7, and in either event if at the time of Umpqua's
shareholders meeting there was no material failure by VRB
to meet the conditions set forth in Section 8, then Umpqua
will, within thirty (30) days after VRB's request, pay VRB
an additional $3,000,000. This Section 11.2.2 shall be the
sole remedy in favor of VRB for termination of this
Agreement pursuant to the sections named in the preceding
sentence, and VRB specifically waives the protections of
any equitable remedies that otherwise might be available
to VRB.
11.3. Documents from VRB. In the event of termination of this
Agreement, Umpqua will promptly deliver to VRB all originals and
copies of documents and work papers obtained by Umpqua from VRB,
whether so obtained before or after the execution hereof, and
will not use any information so obtained, and will not disclose
or divulge such information so obtained; provided, however, that
any disclosure of such information may be made to the extent
required by applicable law or regulation or judicial or
regulatory process; and provided further that Umpqua shall not be
obligated to treat as confidential any such information which is
publicly available or readily ascertainable from public sources,
or which was known to Umpqua at the time that such information
was disclosed to it by VRB or which is rightfully received by
Umpqua from a third party. The obligations arising under this
Section 11.3 shall survive any termination or abandonment of this
Agreement.
11.4. Documents from Umpqua. In the event of termination of this
Agreement, VRB will promptly deliver to Umpqua all originals and
copies of documents and work papers obtained by VRB from Umpqua,
whether so obtained before or after the execution hereof, and
will not use, disclose or divulge any information so obtained;
provided,
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however, that any disclosure of such information may be made to
the extent required by applicable law, regulation or judicial or
regulatory process; and provided further, VRB shall not be
obligated to treat as confidential any information which is
publicly available or readily ascertainable from public sources,
or which was known to VRB at the time that such information was
disclosed to it by Umpqua or which is rightfully received by VRB
from a third party. The obligations arising under this Section
11.4 shall survive any termination or abandonment of this
Agreement.
12. MISCELLANEOUS PROVISIONS
12.1. Amendment or Modification. Prior to the Effective Date, this
Agreement and the Plans of Merger may be amended or modified,
either before or after approval by the shareholders of VRB and
Umpqua, only by an agreement in writing executed by the parties
hereto upon approval of their respective boards of directors;
provided, however, that no such amendment or modification shall
increase the amount or modify the form of consideration to be
received by the VRB shareholders pursuant to the Holding Company
Plan of Merger without the approval of the Umpqua shareholders,
or decrease the amount or modify the form of consideration to be
received by the VRB shareholders pursuant to the Holding Company
Plan of Merger without the approval of the VRB shareholders.
12.2. Public Statements. No party to this Agreement shall issue any
press release or other public statement concerning the
transactions contemplated by this Agreement without first
providing the other parties hereto with a written copy of the
text of such release or statement and obtaining the consent of
the other parties to such release or statement, which consent
will not be unreasonably withheld. The consent provided for in
this section shall not be required if the delay would preclude
the timely issuance of a press release or public statement
required by law or any applicable regulations. The provisions of
this section shall not be construed as limiting the parties from
communications consistent with the purposes of this Agreement,
including but not limited to seeking regulatory and shareholder
approvals necessary to complete the transactions contemplated by
this Agreement and the Plans of Merger.
12.3. Confidentiality. Each party shall use the non-public information
that it obtains from the other parties to this Agreement solely
for the effectuation of the transactions contemplated by this
Agreement and the Plans of Merger or for other purposes
consistent with the intent of this Agreement and shall not use
any such information for other purposes, including but not
limited to the competitive detriment of the other parties. Each
party shall maintain strictly confidential all non-public
information it receives from the other parties and shall, upon
termination of this Agreement prior to the Effective Date, return
such information in accordance with Sections 11.3 and 11.4
hereof. The provisions of this section shall not prohibit the use
of information consistent with the provisions of those sections
or to prohibit disclosure of information to the parties
respective counsel, accountants, tax
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advisors, and consultants, provided that those parties also agree
to maintain such information confidential in accordance with this
section and Sections 11.3 and 11.4 hereof.
12.4. Waivers and Extensions. Each of the parties hereto may, by an
instrument in writing, extend the time for or waive the
performance of any of the obligations of the other parties hereto
or waive compliance by the other parties hereto of any of the
covenants or conditions contained herein or in the Plans of
Merger, other than those required by law. No such waiver or
extension of time shall constitute a waiver of any subsequent or
other performance or compliance. No such waiver shall require the
approval of the shareholders of any party.
12.5. Expenses. Each of the parties hereto shall pay their respective
expenses in connection with this Agreement and the Plans of
Merger and the transactions contemplated thereby, except as
otherwise may be specifically provided.
12.6. Financial Advisors. Each party is solely responsible for the
payment of their own financial advisor fees.
12.7. Binding Effect, No Assignment. This Agreement and all the
provisions hereof shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder, shall be assigned by
any of the parties hereto without the prior written consent of
the other parties.
12.8. Representations and Warranties. The respective representations
and warranties of each party hereto contained herein shall not be
deemed to be waived or otherwise affected by any investigation
made by the other parties, and except for claims based upon fraud
of the parties or their representatives, shall not survive the
closing hereof.
12.9. Remedies. Except for claims based upon fraud of the parties or
their representatives, the only remedy available to any party
hereunder is for amounts payable pursuant to Section 11.2.
12.10. No Benefit to Third Parties. Nothing herein expressed or implied
is intended or shall be construed to confer upon or give any
person or entity, other than the parties hereto, any right or
remedy under or by reason hereof.
12.11. Notices. Any notice, demand or other communication permitted or
desired to be given hereunder shall be in writing and shall be
deemed to have been sufficiently given or served for all purposes
if personally delivered or mailed by registered or certified
mail, return receipt requested, or sent via confirmed facsimile
to the respective parties at their addresses or facsimile numbers
set forth below:
If to Umpqua:
App-55
<PAGE> 222
Umpqua Holdings Corporation
445 SE Main Street
Roseburg, Oregon 97470
Attn: Raymond P. Davis, President
Fax: 541-440-8840
Copies of Notices to Umpqua to:
Kenneth E. Roberts, Esq.
Foster Pepper & Shefelman LLP
One Main Place, 15th Floor
101 SW Main Street
Portland, OR 97204-3223
Fax: 1-800-601-9234
If to VRB:
VRB Bancorp
100 NE Midland
Grants Pass, Oregon 97526
Attn: William A. Haden, President
Fax: 541-476-1405
Copies of Notices to VRB to:
Marcus J. Williams
Davis Wright Tremaine LLP
1300 SW 5th Ave., Suite 2300
Portland, OR 97201
Fax: 503-778-5299
Any party from time to time may change such address or facsimile number
by so notifying the other parties hereto of such change, which address
or number shall thereupon become effective for purposes of this section.
12.12. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Oregon.
12.13. Entire Agreement. This Agreement, including all of the schedules
and exhibits hereto and other documents or agreements referred to
herein constitute the entire agreement between the parties with
respect to the Mergers and other transactions contemplated hereby
and supersedes all prior agreements and understandings between
the parties with respect to such matters.
App-56
<PAGE> 223
12.14. Headings. The article and section headings in this Agreement are
for the convenience of the parties and shall not affect the
interpretation of this Agreement.
12.15. Counterparts. At the convenience of the parties, this Agreement
may be executed in counterparts, and each such executed
counterpart shall be deemed to be an original instrument, but all
such executed counterparts together shall constitute but one
Agreement.
12.16. Non-Competition Agreement. Except as may be consented to in
writing by Umpqua, each non-employee member of the Board of
Directors of VRB and Umpqua signing at the end of this Agreement
agrees that he/she will not, for a period of two years following
his/her service on the Board of Directors of Umpqua, or Surviving
Bank, VRB or Valley, as the case may be, be associated in any way
with any financial institution other than Umpqua (or any of its
affiliates) with branches in Jackson, Josephine, Lane, Marion,
Multnomah or Douglas Counties, Oregon, whether directly or
indirectly, alone or as a member of a partnership, or as an
officer, director, stockholder or employee; provided, however,
for any Director not serving in such position following the
Effective Date, the limitation shall be restricted to Jackson and
Josephine Counties for any VRB Director or Lane, Marion,
Multnomah and Douglas Counties, for any Umpqua Director.
Ownership of less than one percent of the stock of a publicly
held corporation shall not be deemed to be prohibited by this
provision.
12.17. Restrictions On Transfer. Umpqua will not deliver any Umpqua
Common Stock into which the outstanding shares of VRB are to be
converted pursuant to the provisions of the Holding Company Plan
of Merger to any shareholder who, in the opinion of counsel for
Umpqua, is or may be an "affiliate" (as defined in Rule 144
promulgated by the SEC pursuant to the Securities Act) of VRB,
except upon receipt by Umpqua of a letter or other written
commitment from that shareholder to comply with Rule 145 as
promulgated by the SEC, in a form reasonably acceptable to its
counsel.
The certificates representing shares to be issued to "affiliates"
of VRB will bear the following legend until such time as Umpqua
shall have received an opinion of counsel satisfactory to Umpqua
to the effect that the shares may be transferred without
restriction and that the legend is no longer needed:
"The shares represented by this certificate (i) were
issued pursuant to a business combination and (ii) may be
sold only in accordance with the provisions of Rule 145
under the Securities Act of 1933, as amended (the "Act"),
or pursuant to an effective registration statement under
the Act or an exemption therefrom."
12.18. Pooling Accounting.
App-57
<PAGE> 224
(a) The parties hereto intend for the Holding Company Merger to
be treated as a pooling of interests for accounting purposes.
From and after the date of this Agreement and until the Effective
Date, neither Umpqua nor VRB nor any of their affiliates (i)
shall knowingly take any action, or shall knowingly fail to take
any action, that would jeopardize the treatment of the Holding
Company Merger as a "pooling of interests" for accounting
purposes; or (ii) shall enter into any contract, agreement,
commitment or arrangement with respect to the foregoing;
provided, however, that no action or omission by any party shall
constitute a breach of this sentence if such action or omission
is specifically permitted by the terms of this Agreement or is
made with the written consent of the other parties hereto. The
members of the Board of Directors of VRB and Valley may be deemed
to be "affiliates" of VRB ("VRB Affiliates") for purposes of the
SEC's Codification of Financial Reporting Policies Section 201.01
and the SEC's Staff Accounting Bulletin No. 65 (collectively "SAB
65"). Umpqua will receive from each person so identified a
written agreement in the form of Schedule 12.18. Prior to the
Effective Date, VRB agrees to use all reasonable efforts to cause
any additional person who becomes or is identified as a "VRB
Affiliate" to execute such a letter agreement.
(b) Umpqua shall have the right to place a restrictive legend on all
shares of Umpqua Common Stock to be received by a VRB Affiliate so as to
preclude their transfer or disposition in violation of such letter agreement, to
instruct its transfer agent not to permit the transfer of any such shares and/or
to take any other steps reasonably necessary to ensure compliance with SAB 65.
Prior to 30 days before the Effective Date, stock certificates evidencing
ownership of all VRB Common Stock by VRB Affiliates shall be delivered to VRB
and VRB (prior to the Effective Date) and Umpqua (after the Effective Time)
shall retain such certificates or the certificates of Umpqua Common Stock into
which they are exchanged until such time as financial results covering at least
30 days of combined operations of Umpqua and VRB shall have been published, at
which time such certificates shall be released. Umpqua covenants and agrees to
promptly return such certificates to the VRB Affiliates with such restrictive
legends removed after the publication of such combined results.
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<PAGE> 225
IN WITNESS WHEREOF, the parties hereto, pursuant to the approval and
authority duly given by resolutions adopted by a majority of their respective
Boards of Directors, have each caused this Agreement to be executed by its duly
authorized officers.
UMPQUA HOLDINGS CORPORATION VRB BANCORP
By: /s/ Raymond P. Davis By: /s/ William A. Haden
------------------------------ -----------------------------
President President
SOUTH UMPQUA BANK VALLEY OF THE ROGUE BANK
By: /s/ Raymond P. Davis By: /s/ William A. Haden
------------------------------ -----------------------------
President President
The undersigned, Members of the Board of Directors of VRB execute this Agreement
for the limited purpose of Sections 6.2, 6.5, 6.11, 12.16, 12.17 and 12.18
hereof.
/s/ James Coleman /s/ Tom Anderson
----------------------------------- -------------------------------------
James Coleman Tom Anderson
/s/ Robert J. DeArmond /s/ Michael Donovan
----------------------------------- -------------------------------------
Robert J. DeArmond Michael Donovan
/s/ John O. Dunkin /s/ William Haden
----------------------------------- -------------------------------------
John O. Dunkin William Haden
/s/ Gary Lundberg /s/ Larry L. Parducci
----------------------------------- -------------------------------------
Gary Lundberg Larry L. Parducci
/s/ April Sevcik
-----------------------------------
April Sevcik
App-59
<PAGE> 226
THE UNDERSIGNED, MEMBERS OF THE BOARD OF DIRECTORS OF UMPQUA EXECUTE THIS
AGREEMENT FOR THE LIMITED PURPOSE OF SECTIONS 7.2, 7.5, 7.11, 12.16 AND 12.18
HEREOF.
/s/ Allyn C. Ford /s/ Neil D. Hummel
----------------------------------- -------------------------------------
Allyn C. Ford Neil D. Hummel
/s/ Raymond P. Davis /s/ Harold L. Ball
----------------------------------- -------------------------------------
Raymond P. Davis Harold L. Ball
/s/ Ronald O. Doan /s/ David B. Frohnmayer
----------------------------------- -------------------------------------
Ronald O. Doan David B. Frohnmayer
/s/ Lynn K. Herbert /s/ Frances Jean Phelps
----------------------------------- -------------------------------------
Lynn K. Herbert Frances Jean Phelps
/s/ Scott Chambers
-----------------------------------
Scott Chambers
App-60
<PAGE> 227
EXHIBIT A TO AGREEMENT AND PLAN OF REORGANIZATION
PLAN OF MERGER
This Plan of Merger (the "Plan of Merger") is dated __________, 2000,
and is by and between Umpqua Holdings Corporation ("Umpqua"), an Oregon
corporation, and VRB Bancorp ("VRB"), an Oregon corporation.
RECITALS
A. The Board of Directors of each of Umpqua and VRB has approved this
Plan of Merger and authorized its execution and the performance of all of its
obligations hereunder.
B. This Plan of Merger is part of an Agreement and Plan of
Reorganization, dated as of August 14, 2000, by and among Umpqua, VRB, South
Umpqua Bank (Umpqua's wholly owned subsidiary bank) and Valley of the Rogue Bank
(VRB's wholly owned subsidiary bank), which agreement sets forth certain
conditions precedent to the effectiveness of this Plan of Merger and other
matters relative to the merger contemplated by this Plan of Merger (the
"Merger"), including certain defined terms.
C. At or prior to the date the Merger becomes effective, the parties
shall have taken all such actions as may be necessary or appropriate in order to
effectuate the Merger.
AGREEMENT
In consideration of the mutual covenants herein contained, the parties
hereby adopt this Plan of Merger:
1. EFFECTIVE DATE AND TIME. This Plan of Merger shall be effective at
the time (the "Effective Time") of filing of Articles of Merger with the Oregon
Secretary of State. The date on which the Articles of Merger are filed is
referred to herein as the "Effective Date".
2. MERGER. At the Effective Time, VRB shall merge with and into Umpqua,
which will be the surviving corporation (the "Merger"). The name of the
surviving corporation shall be "Umpqua Holdings Corporation".
3. ARTICLES OF INCORPORATION, BYLAWS, DIRECTORS, OFFICERS. Until
altered, amended or repealed, the Articles of Incorporation and Bylaws of Umpqua
on the Effective Date shall be the Articles of Incorporation and Bylaws of the
surviving corporation. Until their successors are elected or appointed and
qualified, and subject to prior death, resignation or removal, the officers and
directors of Umpqua shall be, as of the Effective Date, the individuals
identified in Appendix A hereto serving the terms designated.
4. EFFECTIVE OF MERGER. Until changed by the Board of Directors of
Umpqua, all corporate acts, plans, policies, contracts, approvals and
authorizations of Umpqua and VRB, and their shareholders, officers, agents,
Boards of Directors, and committees elected or
App-61
<PAGE> 228
appointed thereby, which were valid and effective immediately prior to the
Effective Date shall be taken for all purposes as the acts, plans, policies,
contracts, approvals and authorizations of Umpqua and shall be as effective and
binding thereon as the same were with respect to Umpqua and VRB prior to the
Effective Date.
4.1 At the Effective Date, the corporate existence of Umpqua and
VRB shall, as provided by Oregon law, be merged into and continued in Umpqua,
and the separate existence of Umpqua and VRB shall terminate. All rights,
franchises and interests of Umpqua and VRB, respectively, in and to every type
of property (whether real, personal, tangible or intangible) and chooses in
action shall be transferred to and vested in Umpqua by virtue of the Merger
without any deed or other transfer, and Umpqua, without any order or action on
the part of any court or otherwise, shall hold and enjoy all such rights and
property, franchises, and interests, including appointments, designations and
nominations, and in every other fiduciary capacity, in the same manner and to
the same extent as such rights, franchises, and interests were held or enjoyed
by Umpqua and VRB, respectively, on the Effective Date.
4.2 On the Effective Date, the liabilities of Umpqua and VRB
shall become the liabilities of Umpqua, and all debts, liabilities, and
contracts of Umpqua and VRB, respectively, matured or unmatured, whether
accrued, absolute, contingent or otherwise, and whether or not reflected or
reserved against on balance sheets, books of accounts, or records of Umpqua and
VRB, shall be those of Umpqua and shall not be released or impaired by the
Merger; and all rights of creditors and other obligees and all liens on property
shall be preserved unimpaired.
5. CAPITALIZATION OF UMPQUA. The present authorized capital of Umpqua
consists of 2,000,000 shares of undesignated preferred stock with no par value
of which no shares are issued or outstanding and 20,000,000 shares of common
stock without par value of which [INSERT LAST NUMBER AT TIME OF FILING] shares
are, issued outstanding and fully paid ("Umpqua Common Stock"). Except as set
forth in the Reorganization Agreement or the schedules thereto, there are no
outstanding options, warrants or other rights to purchase or receive Umpqua
securities.
6. CAPITALIZATION OF VRB. The present authorized capital of VRB consists
of 10,000,000 shares of undesignated preferred stock, with $5.00 par value per
share, of which no shares are issued or outstanding and 30,000,000 shares of
common stock without par value, of which [INSERT LAST NUMBER AT TIME OF FILING]
shares are issued outstanding and fully paid ("VRB Common Stock"). Except as set
forth in the Reorganization Agreement or the schedules thereto, there are no
outstanding options, warrants or other rights to purchase or receive VRB
securities.
7. EXCHANGE OF SHARES. At the Effective Time, by virtue of the Merger
and without any action on the part of any party or any shareholder, the
following shall occur:
7.1 Each share of Umpqua Common Stock outstanding immediately
prior to the Merger shall remain outstanding.
7.2 Each outstanding share of VRB Common Stock shall be
converted into the right to receive [INSERT EXCHANGE RATIO AS DETERMINED FROM
THE AGREEMENT AND PLAN OF
App-62
<PAGE> 229
REORGANIZATION] shares of Umpqua Common Stock, except that cash shall be paid in
lieu of any resulting fractional shares as set forth below in Section 8.
7.3 All of the shares of VRB Common Stock, whether issued or
unissued, will be canceled and the holders of certificates for shares thereof
shall cease to have any rights as shareholders of VRB, other than the right to
receive any dividend or other distribution with respect to such VRB Common Stock
with a record date occurring prior to the Effective Time and the right to
receive Umpqua Common Stock as provided above. After the Effective Time, the
stock transfer register of VRB shall be closed, and there shall be no transfers
of shares of VRB Common Stock recorded on the stock transfer books of VRB.
7.4 All existing stock option plans of VRB shall terminate, no
options thereunder shall be granted, and each outstanding option to acquire VRB
Common Stock (each a "VRB Option") shall automatically be converted and
exchanged into an Umpqua stock option (a "Converted Option") to purchase shares
of Umpqua Common Stock, and each shall continue on the same terms upon which
granted; provided that (i) the number of shares of Umpqua Common Stock issuable
upon exercise of the Converted Option shall be equal to the product of (a) the
number of shares of VRB Common Stock issuable upon exercise of the VRB Option,
and (b) [INSERT EXCHANGE RATIO AS DETERMINED FROM THE AGREEMENT AND PLAN OF
REORGANIZATION]; and (ii) the exercise price of such Converted Option shall be
equal to the result of (a) the exercise price of the VRB Option, divided by (b)
[INSERT EXCHANGE RATIO AS DETERMINED FROM THE AGREEMENT AND PLAN OF
REORGANIZATION]; provided, however, that all other terms and conditions of such
outstanding options, including vesting schedules, if any, and aggregate exercise
price, shall not be affected by the Merger except as may be set forth in such
option agreements. With respect to any VRB Option that is an incentive stock
option within the meaning of Section 422 of the Code, the foregoing adjustments
shall be effected in a manner consistent with Section 424(a) of the Code.
8. NO FRACTIONAL SHARES. Notwithstanding any other provision hereof, no
fractional shares of Umpqua Common Stock and no certificates or scrip therefor,
or other evidence of ownership thereof, will be issued. Instead, Umpqua will pay
to each holder of VRB Common Stock who would otherwise be entitled to a
fractional share of Umpqua Common Stock an amount in cash (without interest)
determined by multiplying such fraction by the closing price for Umpqua Common
Stock on the Effective Date as reported by the Nasdaq National Market.
9. EXCHANGE PROCEDURES.
9.1 At or promptly after the Effective Time, Umpqua shall
deposit or cause to be deposited with Chase Mellon Shareholder Services, (the
"Exchange Agent") for the benefit of the holders of certificates for VRB Common
Stock, for exchange in accordance with this Plan of Merger, certificates
representing the shares of Umpqua Common Stock ("New Certificates") for which
outstanding shares of VRB Common Stock are to be exchanged in connection with
the Merger and cash sufficient to make payment in lieu of fractional shares in
accordance with Section 8 hereof.
9.2 As promptly as practicable after the Effective Time, the
Exchange Agent shall send or cause to be sent to each holder of record of VRB
Common Stock transmittal materials for use in exchanging such shareholders' VRB
Common Stock certificates for the consideration set
App-63
<PAGE> 230
forth in this Plan of Merger. Umpqua shall cause the New Certificates into which
a shareholder's VRB Common Stock is converted at the Effective Time, and checks
for fractional share interests or dividends or distributions such person shall
be entitled to receive, to be delivered to such shareholder upon delivery to the
Exchange Agent of certificates representing such VRB Common Stock (or indemnity
reasonably satisfactory to Umpqua and the Exchange Agent, if any of such
certificates are lost, stolen or destroyed) owned by such holder. No interest
will be paid on any such cash to be paid pursuant to this Plan of Merger upon
such delivery. The transmittal materials will specify that delivery of
certificates theretofore representing VRB Common Stock shall be effected, and
risk of loss and title to the VRB Common Stock certificates will pass, if and
only if proper delivery of such certificates is made to the Exchange Agent.
9.3 Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to any former holder of VRB Common Stock for any
amount properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
9.4 No dividends or other distributions with respect to Umpqua Common
Stock with a record date occurring after the Effective Time shall be paid to the
holder of any unsurrendered certificates representing shares of VRB Common Stock
converted in the Merger into shares of Umpqua Common Stock until the holder
thereof shall surrender such certificates in accordance with this Plan of
Merger. After the surrender in accordance with this Plan of Merger, the record
holder thereof will be entitled to receive any such dividends or other
distributions, without any interest thereon, which theretofore had become
payable with respect to shares of Umpqua Common Stock represented by such
certificate.
9.5 Any of the New Certificates and any funds held by the Exchange Agent
for payment in cash for fractional shares that remain unclaimed for twelve
months after the Effective Time shall be returned or paid to Umpqua. Any holders
of VRB Common Stock who have not theretofore complied with this Section 9 shall
thereafter look to Umpqua only for payment of the Merger consideration and
unpaid dividends and distributions (if any) on Umpqua Common Stock deliverable
in respect of VRB Common Stock such shareholders hold as determined pursuant to
this Agreement, in each case without any interest thereon.
10. DISSENTERS' RIGHTS. The shareholders of Umpqua and VRB have no
rights under Oregon law to dissent from this Plan of Merger.
11. SHAREHOLDER APPROVAL. This Plan of Merger has been ratified and
approved by the shareholders of Umpqua and VRB at meetings called and held in
accordance with the applicable provisions of law and their respective Articles
of Incorporation and Bylaws. Each of Umpqua and VRB have procured all other
consents and approvals, taken all other actions, and satisfied all other
requirements prescribed by law or otherwise, necessary for consummation of the
Merger on the terms herein provided.
12. CONDITIONS TO THE MERGER. All conditions precedent to the
effectiveness of this Plan of Merger as set forth in the Reorganization
Agreement has been satisfied or waived.
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IN WITNESS WHEREOF, the parties hereto have caused this Plan of Merger
to be executed by their duly authorized officers as of the date first above
written.
UMPQUA HOLDINGS CORPORATION VRB BANCORP
By: By:
-------------------------------- ---------------------------------
Raymond P. Davis, President, William A. Haden, President,
Chief Executive Officer Chief Executive Officer
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APPENDIX A
DIRECTORS AND OFFICERS OF UMPQUA HOLDINGS CORPORATION
[TO BE COMPLETED PRIOR TO FILING]
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EXHIBIT B TO AGREEMENT AND PLAN OF REORGANIZATION
BANK PLAN OF MERGER
This Bank Plan of Merger (the "Bank Plan of Merger") is dated this _____
day of __________, 2000, and is by and between South Umpqua Bank ("SUB"), an
Oregon state chartered bank and Valley of the Rogue Bank ("Valley"), an Oregon
state chartered bank.
RECITALS
A. SUB and Valley are each FDIC insured banks.
B. Valley has its head office at 110 Pine Street, Rogue River, Oregon.
C. SUB has its head office at 445 S.E. Main Street, Roseburg, Oregon.
D. The Board of Directors of each of SUB and Valley has approved this
Bank Plan of Merger and authorized its execution and the performance of all of
its obligations hereunder.
E. This Bank Plan of Merger is part of an Agreement and Plan of
Reorganization (the "Reorganization Agreement"), dated as of August 14, 2000, by
and among SUB, Valley, Umpqua Holdings Corporation (SUB's parent holding
company) and VRB Bancorp (Valley's parent holding company), which agreement sets
forth certain conditions precedent to the effectiveness of this Bank Plan of
Merger and other matters relative to the merger contemplated by this Bank Plan
of Merger (the "Bank Merger"), including certain defined terms.
F. At or prior to the date the Bank Merger becomes effective, the
parties shall have taken all such actions as may be necessary or appropriate in
order to effectuate the Bank Merger.
AGREEMENT
In consideration of the mutual covenants herein contained, the parties
hereby adopt this Bank Plan of Merger:
1. EFFECTIVE DATE. The effective date (the "Effective Date") of this
Bank Plan of Merger shall be the date set forth in a Certificate of Merger
issued by the Oregon Director.
2. BANK MERGER. On the Effective Date, Valley shall merge with and into
SUB with SUB being the surviving bank (the "Surviving Bank").
3. NAME CHANGE. On the Effective Date, the name of the Surviving Bank
shall be "Umpqua Bank."
4. ARTICLES OF INCORPORATION, BYLAWS, DIRECTORS AND OFFICERS. The
Articles of Incorporation and Bylaws of SUB on the Effective Date shall be
amended to change the name of the SUB to "Umpqua Bank", and, as so amended,
shall be the
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Articles of Incorporation and Bylaws of the Surviving Bank. Until their
successors are elected or appointed and qualified, and subject to prior death,
resignation or removal, the officers and directors of the Surviving Bank shall
be, as of the Effective Date, the individuals identified in Appendix A hereto.
5. EFFECT OF THE BANK MERGER.
5.1 Until changed by the Board of Directors of the Surviving
Bank, the locations and names of the existing offices of SUB and Valley shall
become the location of offices of the Surviving Bank, under the names listed on
Appendix B; and all corporate acts, plans, policies, contracts, approvals and
authorizations of SUB and Valley, and their shareholders, officers, agents,
Boards of Directors, and committees elected or appointed thereby, which were
valid and effective immediately prior to the Effective Date shall be taken for
all purposes as the acts, plans, policies, contracts, approvals and
authorizations of Surviving Bank and shall be as effective and binding thereon
as the same were with respect to SUB and Valley prior to the Effective Date.
5.2 At the Effective Date, all rights, franchises and interests
of SUB and Valley, respectively, in and to every type of property (whether real,
personal, tangible or intangible) and chooses in action shall be vested in
Surviving Bank by virtue of the merger without any deed or other transfer, and
Surviving Bank, without any order or action on the part of any court or
otherwise, shall hold and enjoy all such rights and property, franchises, and
interests, including appointments, designations and nominations, and in every
other fiduciary capacity, in the same manner and to the same extent as such
rights, franchises, and interests were held or enjoyed by SUB and Valley,
respectively, on the Effective Date.
5.3 On the Effective Date, all liabilities of SUB and Valley
shall become liabilities of Surviving Bank; and all debts, liabilities, and
contracts of SUB and Valley, respectively, matured or unmatured, whether
accrued, absolute, contingent or otherwise, and whether or not reflected or
reserved against on balance sheets, books of accounts, or records of SUB and
Valley, shall be those of Surviving Bank and shall not be released or impaired
by the Bank Merger; and all rights of creditors and other obligees and all liens
on property shall be preserved unimpaired.
6. CAPITALIZATION OF SUB. The present authorized capital of SUB consists
of 2,000,000 shares of undesignated preferred stock, no par value, none of which
are issued or outstanding and 20,000,000 authorized shares of common stock with
no par value, of which 7,664,752 are issued, outstanding and fully paid. There
are no outstanding options, warrants or other rights to purchase or receive SUB
securities.
7. CAPITALIZATION OF VALLEY. The present authorized capital of Valley
consists of 110,500 shares of common stock ($10.00 par value), all of which are
issued outstanding and fully paid. There are no outstanding options, warrants or
other rights to purchase or receive Valley securities.
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8. CONVERSION OF SHARES. As of the Effective Date, each outstanding
share of SUB capital stock, all of which are held by Umpqua Holdings
Corporation, shall continue to be outstanding as shares of Surviving Bank, the
holders of such shares shall retain their rights with respect to such shares as
in effect prior to the Bank Merger, and each outstanding share of Valley capital
stock, all of which will be held by Umpqua Holdings Corporation, will be
cancelled.
9. SHAREHOLDER APPROVAL. This Plan of Merger has been ratified and
approved by the sole shareholders of each of SUB and Valley in accordance with
the applicable provisions of law and their respective Articles of Incorporation
and Bylaws. Each of SUB and Valley have procured all other consents and
approvals, taken all other actions, and satisfied all other requirements
prescribed by law or otherwise, necessary for consummation of the Merger on the
terms herein provided.
10. CONDITIONS TO THE BANK MERGER. All conditions precedent to the
effectiveness of this Bank Plan of Merger as set forth in the Reorganization
Agreement has been satisfied or waived.
IN WITNESS WHEREOF, the parties hereto have caused this Bank Plan of
Merger to be executed by their duly authorized officers as of the date first
above written.
SUB:
SOUTH UMPQUA BANK
By:
---------------------------------
Raymond P. Davis, President and
Chief Executive Officer
Valley:
VALLEY OF THE ROGUE BANK
By:
---------------------------------
William A. Haden, President and
Chief Executive Officer
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APPENDIX A
DIRECTORS AND OFFICER OF SURVIVING BANK
[TO BE COMPLETED PRIOR TO FILING]
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APPENDIX B
BRANCH OFFICES
[TO BE COMPLETED PRIOR TO FILING]
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APPENDIX II
RAGEN MACKENZIE INCORPORATED
September 14, 2000
(Reconfirmed October __, 2000)
Board of Directors
Umpqua Holdings Corporation
445 S.E. Main Street
Roseburg, OR 97470
Ladies and Gentlemen:
We understand that Umpqua Holdings Corporation ("Umpqua") and VRB
Bancorp ("VRB") entered into an Agreement and Plan of Reorganization dated as of
August 14, 2000 (the "Agreement"), pursuant to which VRB will be merged with and
into Umpqua (the "Merger"). Under the terms of the Agreement, upon consummation
of the Merger, each share of VRB common stock, no par value, issued and
outstanding immediately prior to the effective time of the Merger, other than
certain shares specified in the Agreement, will be converted into the right to
receive 0.8135 shares (the "Exchange Ratio") of Umpqua common stock, no par
value. The terms and conditions of the Merger are more fully set forth in the
Agreement. You have requested our opinion as to the fairness, from a financial
point of view, of the Exchange Ratio to the holders of shares of Umpqua common
stock.
Ragen MacKenzie Incorporated, as part of its investment banking
business, is customarily engaged in the valuation of businesses, including
financial institutions, and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, and other corporate transactions. In connection with
rendering this fairness opinion, Ragen MacKenzie reviewed, among other things:
(i) the Agreement and exhibits thereto; (iii) certain publicly available
financial statements of Umpqua and other historical financial information
provided by Umpqua that we deemed relevant; (iv) certain publicly available
financial statements of VRB and other historical financial information provided
by VRB that we deemed relevant; (v) certain financial analyses and forecasts of
Umpqua prepared by and reviewed with management of Umpqua and the views of
senior management of Umpqua regarding Umpqua's past and current business
operations, results thereof, financial condition and future prospects; (vi)
certain financial analyses and forecasts of VRB prepared by and reviewed with
management of VRB and the views of senior management of VRB regarding VRB's past
and current business operations, results thereof, financial condition and future
prospects; (vii) the pro forma impact of the Merger; (viii) the publicly
reported historical price and trading activity for Umpqua's and VRB's common
stock, including a comparison of certain financial and stock market information
for Umpqua and VRB with similar publicly available information for certain other
publicly traded companies; (ix) the financial terms of recent business
combinations in the banking industry deemed relevant to our analysis; (x) the
current market environment generally and the banking environment
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in particular; and (xi) such other information, financial studies, analyses and
investigations and financial, economic and market criteria as we considered
relevant.
In preparing its fairness opinion, Ragen MacKenzie has assumed and
relied upon, without independent verification, the accuracy and completeness of
all the financial information, analyses and other information that was publicly
available or otherwise furnished to, reviewed by or discussed with us, and we do
not assume any responsibility or liability therefor. We did not make an
independent evaluation or appraisal of the specific assets, the collateral
securing assets or the liabilities (contingent or otherwise) of Umpqua or VRB or
any of their subsidiaries, or the collectibility of any such assets, nor have we
been furnished with any such evaluations or appraisals. With respect to the
financial projections reviewed with management, we have assumed that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the respective managements of the respective future
financial performances of Umpqua and VRB and that such performances will be
achieved, and we express no opinion as to such financial projections or the
assumptions on which they are based. We have also assumed that there has been no
material change in Umpqua's or VRB's assets, results of operations, financial
condition, business or prospects since the date of the last financial statements
made available to us. We have assumed in all respects material to our analysis
that Umpqua and VRB will remain as going concerns for all periods relevant to
our analyses, that the Merger will be accounted for as a pooling of interests,
that all of the representations and warranties contained in the Agreement and
all related agreements are true and correct, that each party to such agreements
will perform all of the covenants required to be performed by such party under
such agreements and that the conditions precedent in the Agreement are not
waived.
Our opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Events occurring after the date hereof could materially affect this
opinion. We have not undertaken to update, revise or reaffirm this opinion or
otherwise comment upon events occurring after the date hereof. We are expressing
no opinion herein as to what the value of Umpqua's common stock will be when
issued to VRB's shareholders pursuant to the Agreement or the prices at which
Umpqua' or VRB's common stock will trade at any time.
We have acted as Umpqua's financial advisor in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon consummation of the Merger. In the past, we have also
provided, and may in the future provide, certain other investment banking
services for Umpqua and have received, and will receive, compensation for such
services.
In the ordinary course of our business, we may actively trade debt and
equity securities of Umpqua and VRB for our own account and for the accounts of
our customers and, accordingly, may at any time hold a long or short position in
such securities.
This fairness opinion is directed to the Board of Directors of Umpqua in
connection with its consideration of the Merger and does not constitute a
recommendation to any stockholder of Umpqua as to how such stockholder should
vote at any meeting of stockholders called to consider and vote upon the Merger.
Our opinion is not to be quoted or referred to, in whole or in part, in a
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registration statement, prospectus, proxy statement or in any other document,
nor shall this opinion be used for any other purposes, without Ragen MacKenzie's
prior written consent; provided, however, that we hereby consent to the
inclusion of this opinion as an appendix to Umpqua' and VRB's Joint Proxy
Materials to be distributed to their shareholders and to the references to this
opinion therein.
Based upon and subject to the foregoing, it is our opinion, as of the
date hereof, that the Exchange Ratio is fair, from a financial point of view, to
the holders of shares of Umpqua common stock.
Very truly yours,
RAGEN MACKENZIE INCORPORATED
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APPENDIX III
D.A. DAVIDSON & CO.
August 14, 2000
(Reconfirmed October __, 2000)
Board of Directors
VRB Bancorp
110 Pine Street
Rogue River, Oregon 97537
Ladies & Gentlemen:
You have asked D.A. Davidson & Co. ("Davidson") to provide this written opinion
as to the fairness to the holders of the outstanding shares of common stock of
VRB Bancorp ("VRB"), Rogue River, Oregon, from a financial point of view, of the
exchange ratio to be used for the purpose of converting shares of VRB common
stock into shares of common stock of Umpqua Holdings Corporation ("Umpqua"),
Roseburg, Oregon in the proposed merger of equals between VRB and Umpqua.
We reviewed the August 11, 2000 draft of the Agreement and Plan of Merger to be
dated as of August 14, 2000, (the "Agreement"). The Agreement states that VRB
will merge into Umpqua, which will be the surviving corporation. One hundred
percent of the outstanding common stock shares of VRB will be converted into
shares of common stock of Umpqua according to the exchange ratio specified in
the Agreement.
Davidson, as part of its investment banking business, is engaged in the
valuation of banking and other businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. We make a market in the
common stock of VRB but do not publish a research recommendation on the stock.
We do not make a market in nor publish a research recommendation on the stock of
Umpqua. Davidson will receive a fee for providing our opinion to you.
In connection with our opinion, we have, among other things:
1. Evaluated financial and operating information relating to VRB and Umpqua
including without limitation, financial reports of both companies filed
with the SEC and other regulatory agencies for the fiscal years ending
December 31, 1998 and 1999 and for the periods ending March 31, 2000 and
June 30, 2000, and other internal operating reports and analyses, asset
quality evaluations and related information;
2. Conducted conversations with executive management regarding recent and
projected financial performance of both;
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3. Compared operating results of both with those of certain other banks in
the United States, which have recently engaged in a merger of equals
transaction;
4. Compared the relative contributions of assets, liabilities, income and
expenses to the resulting company in the merger to those of certain
other banks in the United States, which have recently engaged in a
merger of equals transaction;
5. Analyzed the pro-forma results that the resulting company could produce
through 2002 based upon assumptions provided by management; and
6. Performed such other analyses, as we deemed appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information provided to us by both companies for the
purpose of this opinion. Additionally, where appropriate, we have relied upon
publicly available information that we believe to be reliable, accurate and
complete; however, we cannot guarantee the reliability, accuracy or completeness
of any such publicly available information. We have also assumed the
reasonableness of and relied upon the estimates and judgments of each company's
management as to the resulting company's future business and financial
prospects.
We have not made an independent evaluation of the assets or liabilities of VRB
or Umpqua, nor has either company furnished us with such appraisals. We are not
experts in the evaluation of loan portfolios for the purposes of assessing the
adequacy of the allowance for loan and lease losses and have assumed that such
allowances for each of the companies are, in the aggregate, adequate to cover
such losses.
Our opinion is necessarily based upon economic, market and other conditions as
in effect on, and the information made available to us as of the August 14,
2000. Events occurring after August 14, 2000 could materially affect the
assumptions used in preparing this opinion.
The preparation of an opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances. Consequently, this opinion is not
readily susceptible to partial analysis of summary description. Moreover, the
evaluation of fairness, from a financial point of view, of the Exchange Ratio is
to some extent subjective, based on our experience and judgment, and not merely,
the result of mathematical analysis of financial data. Accordingly, not
withstanding the separate factors summarized above, we believe that our analyses
must be considered as a whole and that selecting portions of our analysis and of
the factors considered by us, without considering all analyses and factors,
could create an incomplete view of the evaluation process underlying our
opinion.
Our opinion is limited to the fairness of the Exchange Ratio, from a financial
point of view, to the holders of VRB common stock. This letter is intended for
the benefit and sole use of the VRB Board of Directors and may not be used for
any other purpose. Although consent is given to include the opinion in VRB's
proxy statement, the opinion is not a recommendation to any VRB
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common stockholder as to how such holder should vote with respect to the Merger.
Our opinion does not address the underlying business decision to proceed with
the Merger.
Based upon the foregoing and other such matters we have deemed relevant, it is
our opinion, as of August 14, 2000 that the exchange ratio of 0.8135 which will
be used to convert VRB common shares into shares of Umpqua common stock as
specified in the Agreement is fair, from a financial point of view, to the
common stock holders of VRB.
Very truly yours,
D.A. DAVIDSON & CO.
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APPENDIX IV
UMPQUA HOLDINGS CORPORATION
2000 STOCK OPTION PLAN
ARTICLE I
PURPOSE OF THE PLAN
The purpose of this 2000 Stock Option Plan (the "Plan") is to advance
the interests of Umpqua Holdings Corporation, an Oregon business corporation
(the "Company") and its shareholders by enabling the Company to attract and
retain the services of people with training, experience and ability and to
provide additional incentive to employees and non-employee directors of the
Company and others who provide services to the Company by giving them an
additional opportunity to participate in the ownership of the Company.
ARTICLE II
DEFINITIONS
As used herein, the following definitions will apply:
(a) "Available Shares" means the number of shares of Common Stock
available at any time for issuance pursuant to Incentive Stock
Options or Nonqualified Stock Options under this Plan as provided in
Article III.
(b) "Award" means any grant of an Incentive Stock Option and any grant
of a Nonqualified Stock Option under this Plan.
(c) "Board of Directors" means the Board of Directors of the Company.
(d) "Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended.
(e) "Committee" means any committee appointed by the Board of Directors
in accordance with Article V of this Plan, or, if no such committee
has been appointed, shall mean the Board of Directors.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Umpqua Holdings Corporation, an Oregon business
corporation, and, unless the context otherwise requires, any
majority owned subsidiary of the Company and any successor or
assignee of the Company by merger, consolidation, acquisition of all
or substantially all of the assets of the Company or otherwise.
(h) "Disabled" means a mental or physical impairment which has lasted or
which is expected to last for a continuous period of 12 months or
more and which renders an Optionee unable, in the Committee's sole
discretion, of performing the duties which were assigned to the
Optionee during the 12 month period prior to such determination. The
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Committee's determination of the existence of an individual's
disability will be effective when communicated in writing to the
Optionee and will be conclusive on all of the parties.
(i) "Effective Date" means the date immediately following the date the
merger of the Company and VRB Bancorp is effective.
(j) "Employee" means any person employed by the Company.
(k) "Exercise Price" means the price per share at which a shares of
Common Stock may be purchased upon exercise of an Incentive Stock
Option or Nonqualified Stock Option.
(l) "Fair Market Value" means:
1) If the Common Stock is traded on a national securities exchange
or on either the Nasdaq National Market or Nasdaq SmallCap
Market, the average between the lowest and highest reported sales
price per share of Common Stock for such date, or if no
transactions occurred on such date, on the last date on which
trades occurred;
2) If the Common Stock is not traded on a national securities
exchange or on Nasdaq but bid and asked prices are regularly
quoted on the OTC Bulletin Board Service, by the National
Quotation Bureau or any other comparable service, the average
between the highest bid and lowest asked prices per share of
Common Stock as reported by such service for such date or, if
such date was not a business day, on the preceding business day;
or
3) If there is no public trading of the Common Stock within the
terms of subparagraphs 1 or 2 of this subsection, the price per a
share of Common Stock, as determined by the Committee in its sole
discretion.
(m) "Incentive Stock Option" means an option to purchase shares of
Common Stock that the Committee indicates is intended to qualify as
an incentive stock option within the meaning of Section 422 of the
Internal Revenue Code and is granted under Article VI of this Plan.
(n) "Nonqualified Stock Option" means an option to purchase shares of
Common Stock that the Committee either indicates is intended to be a
nonqualified stock option or indicates is not intended to qualify as
an incentive stock option within the meaning of Section 422 of the
Internal Revenue Code and is granted under Article VII of this Plan.
(o) "Optionee" means any individual who is granted either an Incentive
Stock Option or a Nonqualified Stock Option under this Plan.
(p) "Reserved Shares" means the number of shares of Common Stock
reserved for issuance pursuant to Awards under this Plan as provided
in Section 3.1 of Article III but in no event shall the sum of (i)
the number Reserved Shares from time to time and (ii) the number of
shares subject to options outstanding as of the Effective Date,
exceed 10% of the total shares of Common Stock issued and
outstanding, from time to time.
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(q) "Securities Act" means the Securities Act of 1933, as amended.
(r) "Significant Shareholder" means any person who owns stock possessing
more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any parent or subsidiary of
the Company. For purposes of this definition a person shall be
considered as owning all stock owned, directly or indirectly by or
for such person's brothers and sisters, spouse, ancestors and lineal
descendants. In addition, stock owned, directly or indirectly, by or
for a corporation, partnership, estate or trust shall be considered
as being owned proportionately by or for its shareholders, partners
or beneficiaries to the extent required by Section 422 of the
Internal Revenue Code.
ARTICLE III
STOCK SUBJECT TO THE PLAN
3.1 AGGREGATE NUMBER OF RESERVED SHARES. Subject to adjustment in
accordance with Section 9.1, the total number of shares of Common Stock reserved
for issuance pursuant to all Awards under this Plan is initially established at
1,000,000 shares.
3.2 NUMBER OF AVAILABLE SHARES. At any point in time, the number of
Available Shares shall be the number of Reserved Shares at such time minus:
(a) the number of shares of Common Stock issued upon the exercise of
Incentive Stock Options and Nonqualified Stock Options prior to
such time; and
(b) the number of shares covered by Incentive Stock Options and
Nonqualified Stock Options that have been granted and that have
not yet expired, been terminated or been cancelled to the extent
that such options have not been exercised at such time.
As a result of the foregoing, if an Incentive Stock Option or Nonqualified Stock
Option expires, terminates or is cancelled for any reason without having been
exercised in full, the shares of Common Stock covered by such option that were
not purchased through the exercise of such option will be added back to the
Available Shares. However, shares of Common Stock used by an Optionee to satisfy
withholding obligations upon the exercise of a Nonqualified Stock Option shall
nonetheless, for purposes of this Plan, be considered as having been issued upon
the exercise of such option.
3.3 RESERVATION OF SHARES. Available Shares shall consist of authorized
but unissued shares of Common Stock of the Company. The Company will, at all
times, reserve for issuance shares of Common Stock equal to the sum of (i) the
number of shares covered by Incentive Stock Options and Nonqualified Stock
Options that have been granted and which have not yet expired, been terminated
or been cancelled to the extent that such options have not been exercised at
such time and (ii) the number of Available Shares.
3.4 ANNUAL LIMIT ON NUMBER OF SHARES TO ANY ONE PERSON. No person will
be eligible to receive Awards under this Plan which, in aggregate, exceed 75,000
shares in any
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calendar year except in connection with the hiring or commencement of services
from such person in which case such limit shall be 100,000 shares during such
calendar year.
ARTICLE IV
COMMENCEMENT AND DURATION OF THE PLAN
4.1 EFFECTIVE DATE OF THE PLAN. This Plan will be effective as of the
Effective Date, subject to the provisions of Section 4.2.
4.2 SHAREHOLDER APPROVAL OF THE PLAN. This Plan will be submitted for
the approval of the shareholders of the Company within twelve (12) months of the
Effective Date. This Plan will be deemed approved by the shareholders if
approved by a majority of the votes cast at a duly held meeting of the Company's
shareholders at which a quorum is present in person or by proxy. Awards may be
made under this Plan prior to such shareholder approval provided that such
Awards are conditioned upon such approval and state by their terms that they
will be null and void if such shareholder approval is not obtained.
4.3 TERMINATION OF THE PLAN. This Plan will terminate ten years from the
Effective Date. In addition, the Board of Directors will have the right to
suspend or terminate this Plan at any time. Any termination of this Plan will
not affect the exercisability of any Incentive Stock Options or Nonqualified
Stock Options granted under this Plan prior to such termination. Termination of
the Plan will not terminate or otherwise affect any Incentive Option Agreement
(as defined in Section 6.1), Nonqualified Option Agreement (as defined in
Section 7.1) or Restricted Stock Agreement (as defined in Section 9.1) then in
effect.
ARTICLE V
ADMINISTRATION OF THE PLAN
Subject to the provisions of this Plan and any additional terms or
conditions which may, from time to time, be imposed by the Board of Directors,
the Committee will administer this Plan and will have the authority, in its sole
discretion, to grant Incentive Stock Options and to grant Nonqualified Stock
Options in accordance with Articles VI and VII, respectively. The Committee may,
from time to time, adopt rules and regulations relating to the administration of
this Plan and may, but is not required to, seek the advice of legal, tax,
accounting and compensation advisors. Decisions of the Committee with respect to
the administration of this Plan, the interpretation or construction of this Plan
or the interpretation or construction of any written agreement evidencing an
Award will be final and conclusive, subject only to review by the full Board of
Directors. The Committee may correct any defect, supply any omission or
reconcile any inconsistency in this Plan or in any agreement evidencing an Award
in the manner and to the extent it deems appropriate.
The Board of Directors shall appoint the members of the Committee, which
shall consist of at least two directors from the Board of Directors. For
purposes of this paragraph, directors who are not "outside directors" as such
term is defined in Treasury Regulation Section 1.162-27(e)(3) and directors who
are not "non-employee directors" as such term is defined in Rule 16b-3 issued by
the Securities and Exchange Commission under Section 16 of the Securities
Exchange Act of 1934, as amended, ("Rule 16b-3") shall be referred to as
"disqualified directors." Disqualified directors may serve on
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the Committee. However, disqualified directors shall be deemed (notwithstanding
any statement to the contrary which may be contained in minutes of a meeting of
the Committee) to have abstained from any action requiring under Section 162(m)
of the Internal Revenue Code the approval of a committee consisting solely of
outside directors or from any action requiring under Rule 16b-3 the approval of
a committee consisting solely of non-employee directors. The assent of any such
disqualified director shall be ignored for purposes of determining whether or
not any such actions were approved by the Committee. If the Committee proposes
to take an action by unanimous consent in lieu of a meeting and such action
would require under Section 162(m) of the Internal Revenue Code the approval of
a committee consisting solely of outside directors or such action would require
under Rule 16b-3 the approval of a committee consisting solely of non-employee
directors, the disqualified director shall, for purposes of such consent, be
deemed to not be a member of the Committee.
If no Committee is appointed, the Board of Directors shall act as the
Committee and will have all the powers, duties and responsibilities of the
Committee as set forth in this Plan. In addition, the Board of Directors may at
any time by resolution abolish the Committee and assume the duties and
responsibilities of the Committee.
ARTICLE VI
INCENTIVE STOCK OPTION TERMS AND CONDITIONS
Incentive Stock Options may be granted under this Plan in accordance
with the following terms and conditions.
6.1 REQUIREMENT FOR A WRITTEN INCENTIVE STOCK OPTION AGREEMENT. Each
Incentive Stock Option will be evidenced by a written option agreement
("Incentive Stock Option Agreement"). The Committee will determine from time to
time the form of Incentive Stock Option Agreement to be used. The terms of the
Incentive Stock Option Agreement must be consistent with this Plan and any
inconsistencies will be resolved in accordance with the terms and conditions
specified in this Plan. Except as otherwise required by this Section 6, the
terms and conditions of each Incentive Stock Option do not need to be identical.
6.2 WHO MAY BE GRANTED AN INCENTIVE STOCK OPTION. An Incentive Stock
Option may be granted to any Employee who, in the judgment of the Committee, has
performed or will perform services of importance to the Company in the
management, operation and development of the business of the Company or of one
or more of its subsidiaries. The Committee, in its sole discretion, shall
determine when and to which Employees Incentive Stock Options are granted under
this Plan.
6.3 NUMBER OF SHARES COVERED BY AN INCENTIVE STOCK OPTION. The
Committee, in its sole discretion, shall determine the number of shares of
Common Stock covered by each Incentive Stock Option granted under this Plan. The
number of shares covered by each Incentive Stock Option shall be specified in
the Incentive Stock Option Agreement evidencing such option.
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6.4 VESTING SCHEDULE UNDER AN INCENTIVE STOCK OPTION. The Committee, in
its sole discretion, shall determine whether an Incentive Stock Option is
immediately exercisable as to all of the shares of Common Stock covered by such
option or whether it is only exercisable in accordance with a vesting schedule
as determined by the Committee, in its sole discretion. The vesting terms and
conditions, if any, of each Incentive Stock Option as determined by the
Committee shall be specified in the Incentive Stock Option Agreement evidencing
such option. Notwithstanding the foregoing, to the extent that an Incentive
Stock Option (together with other incentive stock options within the meaning of
Section 422 of the Internal Revenue Code held by such Optionee with an equal or
lower exercise price per share) purports to become exercisable for the first
time during any calendar year as to shares of Common Stock with a Fair Market
Value (determined at the time of grant) in excess of $100,000, such excess
shares shall be considered to be covered by a nonqualified stock option and not
an incentive stock option within the meaning of Section 422 of the Internal
Revenue Code. Any Incentive Stock Option granted under this Plan that was not
either approved by (i) a committee of non-employee directors within the
requirements of Rule 16b-3 or (ii) the full board of directors of the Company,
shall, notwithstanding Section 9.2 of this Plan or the terms set forth in the
Incentive Stock Option Agreement not be exercisable until at least six months
after the date of such grant.
6.5 EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. The Exercise Price
under each Incentive Stock Option will be at least 100% of the Fair Market Value
of a share of Common Stock as of the date on which the Incentive Stock Option
was granted. However, the Exercise Price under each Incentive Stock Option
granted to an Optionee who is a Significant Shareholder will be at least 110% of
the Fair Market Value of a share of Common Stock as of the date on which the
Incentive Stock Option was granted.
6.6 DURATION OF AN INCENTIVE STOCK OPTION--GENERALLY. The Committee will
determine, in its sole discretion, the term of each Incentive Stock Option
provided that such term will not exceed 10 years from the date on which such
option was granted. However, the term of each Incentive Stock Option granted to
an Optionee who is a Significant Shareholder will not exceed 5 years from the
date on which such option was granted. The term of each Incentive Stock Option
shall be set forth in the written option agreement evidencing such option. The
Optionee shall have no further right to exercise an Incentive Stock Option
following the expiration of such term.
6.7 THE EFFECT OF TERMINATION OF THE OPTIONEE'S EMPLOYMENT ON THE TERM
OF AN INCENTIVE STOCK OPTION. If an Optionee, while possessing an Incentive
Stock Option that has not expired or been fully exercised, ceases to be an
Employee of the Company for any reason other than as a result of the death or
disability of the Optionee (as provided for in Section 6.8 and 6.9,
respectively), the Incentive Stock Option may be exercised, to the extent not
previously exercised and subject to any vesting provisions contained in the
Incentive Stock Option Agreement, at any time within 30 days following the date
the Optionee ceased to be an Employee of the Company except that this provision
will not extend the time within which an Incentive Stock Option may be exercised
beyond the expiration of the term of such option. The Incentive Stock Option
Agreement may, in the discretion of the Committee, provide that if the
Optionee's employment is terminated by the Company for cause, as determined by
the Company's President or Board of Directors in their reasonable discretion,
the Incentive Stock Option will terminate immediately upon the Company's notice
to the Optionee of such termination.
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6.8 THE EFFECT OF THE DEATH OF AN OPTIONEE ON THE TERM OF AN INCENTIVE
STOCK OPTION. If an Optionee, while possessing an Incentive Stock Option that
has not expired or been fully exercised, ceases to be an Employee of the Company
as a result of the death of the Optionee, the Incentive Stock Option may be
exercised, to the extent not previously exercised and subject to any vesting
provisions contained in the Incentive Stock Option Agreement, at any time within
12 months following the date of the Optionee's death except that this provision
will not extend the time within which an Incentive Stock Option may be exercised
beyond the expiration of the term of such option.
6.9 THE EFFECT OF THE DISABILITY OF AN OPTIONEE ON THE TERM OF AN
INCENTIVE STOCK OPTION. If an Optionee, while possessing an Incentive Stock
Option that has not expired or been fully exercised, ceases to be an Employee of
the Company as a result of the Optionee becoming Disabled, the Incentive Stock
Option may be exercised, to the extent not previously exercised and subject to
any vesting provisions contained in the Incentive Stock Option Agreement, at any
time within 12 months following the date of the Optionee becoming Disabled
except that this provision will not extend the time within which an Incentive
Stock Option may be exercised beyond the expiration of the term of such option.
6.10 TRANSFERABILITY. No Incentive Stock Option may be transferred by
the Optionee other than by will or the laws of descent and distribution upon the
death of the Optionee.
6.11 TAX TREATMENT AND SAVINGS CLAUSE. Nothing contained in this Plan,
any Incentive Stock Option Agreement, any document provided by the Company to an
Optionee or any statement made by or on behalf of the Company shall constitute a
representation or warranty of the tax treatment of any option or that such
option shall qualify as an incentive stock option under Section 422 of the
Internal Revenue Code. Any option that is designated as an Incentive Stock
Option but which, either in whole or in part, fails for any reason to qualify as
an incentive stock option within the meaning of Section 422 of the Internal
Revenue Code or which fails to satisfy requirements under this Plan which apply
only to Incentive Stock Options shall be treated as an incentive stock option to
the fullest extent permitted under Section 422 of the Internal Revenue Code and
this Plan and shall otherwise, notwithstanding such designation, be treated as a
Nonqualified Stock Option under this Plan.
ARTICLE VII
NONQUALIFIED STOCK OPTION TERMS AND CONDITIONS
Nonqualified Stock Options may be granted under this Plan in accordance
with the following terms and conditions.
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7.1 REQUIREMENT FOR A WRITTEN NONQUALIFIED STOCK OPTION AGREEMENT. Each
Nonqualified Stock Option will be evidenced by a written option agreement
("Nonqualified Stock Option Agreement"). The Committee will determine from
time-to-time the form of Nonqualified Stock Option Agreement to be used under
this Plan. The terms of the Nonqualified Stock Option Agreement must be
consistent with this Plan and any inconsistencies will be resolved in accordance
with the terms and conditions specified in this Plan. Except as otherwise
required by this Section 7, the terms and conditions of each Nonqualified Stock
Option do not need to be identical.
7.2 WHO MAY BE GRANTED A NONQUALIFIED STOCK OPTION. A Nonqualified Stock
Option may be granted to any Employee, any director of the Company and any other
individual who, in the judgment of the Committee, has performed or will perform
services of importance to the Company in the management, operation and
development of the business of the Company or of one or more of its
subsidiaries. The Committee, in its sole discretion, shall determine when and to
whom Nonqualified Stock Options are granted under this Plan.
7.3 NUMBER OF SHARES COVERED BY A NONQUALIFIED STOCK OPTION. The
Committee, in its sole discretion, shall determine the number of shares of
Common Stock covered by each Nonqualified Stock Option granted under this Plan.
The number of shares covered by each Nonqualified Stock Option shall be
specified in the Nonqualified Stock Option Agreement evidencing such option.
7.4 VESTING SCHEDULE UNDER A NONQUALIFIED STOCK OPTION. The Committee,
in its sole discretion, shall determine whether a Nonqualified Stock Option is
immediately exercisable as to all of the shares of Common Stock covered by such
option or whether it is only exercisable in accordance with a vesting schedule
as determined by the Committee, in its sole discretion. The vesting terms and
conditions, if any, of each Nonqualified Stock Option as determined by the
Committee shall be specified in the Nonqualified Stock Option Agreement
evidencing such option. Any Nonqualified Stock Option granted under this Plan
that was not either approved by (i) a committee of non-employee directors within
the requirements of Rule 16b-3 or (ii) the full board of directors of the
Company, shall, notwithstanding Section 9.2 of this Plan or the terms set forth
in the written option agreement not be exercisable until at least six months
after the date of such grant.
7.5 EXERCISE PRICE OF A NONQUALIFIED STOCK OPTION. The Exercise Price
under each Nonqualified Stock Option will be at least 100% of the Fair Market
Value of a share of Common Stock as of the date on which the Nonqualified Stock
Option was granted. However, if it is subsequently determined that the Exercise
Price as stated in the Nonqualified Stock Option Agreement is less than 100% of
the Fair Market Value of a share of Common Stock as of the date on which an
option was granted, such fact will not invalidate a Nonqualified Stock Option.
7.6 DURATION OF A NONQUALIFIED STOCK OPTION--GENERALLY. The Committee
will determine, in its sole discretion, the term of each Nonqualified Stock
Option provided that such term will not exceed 10 years from the date on which
such option was granted. The term of each Nonqualified Stock Option shall be set
forth in the Nonqualified Stock Option Agreement evidencing such option. The
Optionee shall have no further right to exercise a Nonqualified Stock Option
following the expiration of such term.
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7.7 THE EFFECT OF TERMINATION OF THE OPTIONEE'S EMPLOYMENT OR SERVICE AS
A DIRECTOR ON THE TERM OF A NONQUALIFIED STOCK OPTION. If an Optionee, while
possessing a Nonqualified Stock Option that has not expired or been fully
exercised, ceases to be an Employee of the Company (or, in the case of an
Optionee who is not an Employee but is a director of the Company, ceases to be a
director of the Company) for any reason other than as a result of the death or
disability of the Optionee (as provided for in Section 7.8 and 7.9,
respectively), the Nonqualified Stock Option may be exercised, to the extent not
previously exercised and subject to any vesting provisions contained in the
Nonqualified Stock Option Agreement, at any time within 30 days following the
date the Optionee ceased to be an Employee (or a director as the case may be) of
the Company except that this provision will not extend the time within which an
Nonqualified Stock Option may be exercised beyond the expiration of the term of
such option. The Nonqualified Stock Option Agreement may, in the discretion of
the Committee, provide that if the Optionee's employment is terminated by the
Company for cause, as determined by the Company's President or Board of
Directors in their reasonable discretion, the Nonqualified Stock Option will
terminate immediately upon the Company's notice to the Optionee of such
termination.
7.8 THE EFFECT OF THE DEATH OF AN OPTIONEE ON THE TERM OF A NONQUALIFIED
STOCK OPTION. If an Optionee, while possessing a Nonqualified Stock Option that
has not expired or been fully exercised, ceases to be an Employee, ceases to
serve as a director of the Company or ceases to provide services to the Company
as a result of the Optionee's death, the Nonqualified Stock Option may be
exercised, to the extent not previously exercised and subject to any vesting
provisions contained in the Nonqualified Stock Option Agreement, at any time
within 12 months following the date of the Optionee's death except that this
provision will not extend the time within which a Nonqualified Stock Option may
be exercised beyond the expiration of the term of such option.
7.9 THE EFFECT OF THE DISABILITY OF AN OPTIONEE ON THE TERM OF A
NONQUALIFIED STOCK OPTION. If an Optionee, while possessing a Nonqualified Stock
Option that has not expired or been fully exercised, ceases to be an Employee,
ceases to serve as a director of the Company or ceases to provide services to
the Company as a result of the Optionee becoming Disabled, the Nonqualified
Stock Option may be exercised, to the extent not previously exercised and
subject to any vesting provisions contained in the Nonqualified Stock Option
Agreement, at any time within 12 months following the date of the Optionee
becoming Disabled except that this provision will not extend the time within
which a Nonqualified Stock Option may be exercised beyond the expiration of the
term of such option.
7.10 TRANSFERABILITY. The Committee may, in the Nonqualified Stock
Option Agreement evidencing any Nonqualified Stock Option, provide that such
Nonqualified Stock Option be transferred by gift to the Optionee's spouse,
children or a trust for the exclusive benefit of any combination of the
Optionee, the Optionee's spouse and the Optionee's children provided that any
transfer of a Nonqualified Option shall be conditioned upon the Optionee and the
transferee of such Nonqualified Stock Option executing and delivering to the
Company a form of Transfer/Assumption of Nonqualified Stock Option Agreement as
the Company may request. Notwithstanding any transfer of a Nonqualified Stock
Option, the Optionee shall remain liable to the Company for any income tax
withholding amounts which the Company is required to withhold at the time that
the transferred Nonqualified Stock Option is exercised. If the Nonqualified
Stock Option Agreement does not expressly provide that such Nonqualified Stock
Option is transferable, such Nonqualified Stock
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Option may not be transferred by the Optionee, other than by will or the laws
of descent and distribution upon the death of the Optionee, without the prior
written consent of the Committee, which consent may be withheld in the
Committee's sole discretion.
ARTICLE VIII
EXERCISE OF OPTIONS TO PURCHASE SHARES
8.1 NOTICE OF EXERCISE. An Incentive Stock Option or Nonqualified Stock
Option may only be exercised by delivery to the Company of written notice signed
by the Optionee (or, in the case of exercise after death of the Optionee, by the
executor, administrator, heir or legatee of the Optionee, as the case may be)
directed to the President of the Company (or such other person as the Company
may designate) at the principal business office of the Company. The notice will
specify (i) the number of shares of Common Stock being purchased, (ii) the
method of payment of the Exercise Price, (iii) the method of payment of the Tax
Withholding if the option is a Nonqualified Stock Option, and (iv), unless a
registration under the Securities Act is in effect with respect to the Plan at
the time of such exercise, the notice of exercise shall contain such
representations as the Company determines to be necessary or appropriate in
order for the sale of shares of Common Stock being purchased pursuant to such
exercise to qualify for exemptions from registration under the Securities Act.
8.2 PAYMENT OF EXERCISE PRICE. No shares of Common Stock will be issued
upon the exercise of any Incentive Stock Option or Nonqualified Stock Option
unless and until payment or adequate provision for payment of the Exercise Price
of such shares has been made in accordance with this subsection. Unless the
Committee, in its sole discretion, determines otherwise, payment of the Exercise
Price shall be in cash, by delivery of a full-recourse promissory note, by the
surrender of shares of Common Stock or other securities issued by the Company
(provided that such other securities have been held by the Optionee for at least
six months prior to the date on which the Option is being exercised) in
accordance with Section 8.4, or by any combination of the foregoing. The
Committee may, in its sole discretion, permit an Optionee to elect to pay the
Exercise Price by authorizing a duly registered and licensed broker-dealer to
sell the shares of Common Stock to be issued upon such exercise (or, at least, a
sufficient portion thereof) and instructing such broker-dealer to immediately
remit to the Company a sufficient portion of the proceeds from such sale to pay
the entire Exercise Price.
8.3 PAYMENT OF TAX WITHHOLDING AMOUNTS. Unless the Committee, in its
sole discretion, determines otherwise, each Optionee must, upon the exercise of
a Nonqualified Stock Option (including Nonqualified Stock Options transferred by
the Optionee), either with the delivery of the notice of exercise or upon
notification of the amount due, pay to the Company or make adequate provision
for the payment of all amounts determined by the Company to be required to
satisfy applicable federal, state and local tax withholding requirements ("Tax
Withholding"). The Nonqualified Option Agreement may provide for, or the
Committee may allow in its sole discretion, the payment by the Optionee of the
Tax Withholding (i) in cash, (ii) by the Company withholding such amount from
other amounts payable by the Company to the Optionee, including salary, (iii) by
surrender of shares of Common Stock or other securities of the Company in
accordance with Section 8.4, (iv) by the application of shares that could be
received upon exercise
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of the Nonqualified Stock Option in accordance with Section 8.4, or (v) any
combination of the foregoing.
By receiving and exercising a Nonqualified Stock Option, the Optionee
shall be deemed to have consented to the Company withholding the amount of any
Tax Withholding from any amounts payable by the Company to the Optionee. The
Committee may, in its sole discretion, permit an Optionee to elect to pay the
Tax Withholding by authorizing a duly registered and licensed broker-dealer to
sell the shares to be issued upon such exercise (or, at least, a sufficient
portion thereof) and instructing such broker-dealer to immediately remit to the
Company a sufficient portion of the proceeds from such sale to pay the Tax
Withholding. No shares will be issued upon an exercise of a Nonqualified Stock
Option unless and until payment or adequate provision for payment of the Tax
Withholding has been made. If the Company determines that additional withholding
is or becomes required beyond any amount paid or provided for by the Optionee,
the Optionee will pay such additional amount to the Company immediately upon
demand by the Company. If the Optionee fails to pay the amount demanded, the
Company may withhold that amount from other amounts payable by the Company to
the Optionee, including salary.
8.4 PAYMENT OF EXERCISE PRICE OR WITHHOLDING WITH OTHER SECURITIES. To
the extent permitted in Section 8.2 and Section 8.3 above, the Exercise Price
and Tax Withholding may be paid by the surrender of shares of Common Stock or
other securities of the Company. The notice of exercise shall indicate that
payment is being made by the surrender of shares of Common Stock or other
securities of the Company. Payment shall be made by either (i) delivering to the
Company the certificates or instruments representing such shares of Common Stock
or other securities, duly endorsed for transfer, or (ii) delivering to the
Company an attestation in such form as the Company may deem to be appropriate
with respect to the Optionee's ownership of the shares of Common Stock or other
securities of the Company. Shares of Common Stock shall, for purposes of this
Section 8 be valued at their Fair Market Value as of the last business day
preceding the day the Company receives the Optionee's notice of exercise. Other
securities of the Company shall, for purposes of this Section 8, be valued at
the publicly reported price, if any, for the last sale on the last business day
preceding the day the Company receives the Optionee's notice of exercise, or, if
there are no publicly reported prices of such other securities of the Company,
at the fair market value of such other securities as determined in good faith by
the Board of Directors. To the extent permitted in Section 8.3 above, Tax
Withholding may, if the Optionee so notifies the Company at the time of the
notice of exercise, be paid by the application of shares which could be received
upon exercise of any other stock option issued by the Company. This application
of shares shall be accomplished by crediting toward the Optionee's Tax
Withholding obligation the difference between the Fair Market Value of a share
of Common Stock and the Exercise Price of the stock option specified in the
Optionee's notice. Any such application shall be considered an exercise of the
other stock option to the extent that shares are so applied.
8.5 COMPLIANCE WITH SECURITIES LAWS. No shares will be issued with
respect to the exercise of any Incentive Stock Option or Nonqualified Stock
Option unless the exercise and the issuance of the shares will comply with all
relevant provisions of law, including, without limitation, the Securities Act,
any registration under the Securities Act in effect with respect to the Plan,
all applicable state securities laws, the Securities Exchange Act of 1934, as
amended, the Internal Revenue Code, the respective rules and regulations
promulgated thereunder, and the
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requirements of any stock exchange upon which the Common Stock may then be
listed, and will be further subject to the approval of counsel for the Company
with respect to such compliance. The Company will not be liable to any Optionee
or any other person for failure to issue shares upon the exercise of an option
where such failure is due to the inability of the Company to obtain all permits,
exemptions or approvals from regulatory authorities which are deemed by the
Company's counsel to be necessary. The Board may require any action or agreement
by an Optionee as may from time to time be necessary to comply with the federal
and state securities laws. The Company will not be obliged to prepare, file or
maintain a registration under the Securities Act with respect to the Plan or to
take any actions with respect to registration or qualification under any state
securities laws.
8.6 ISSUANCE OF SHARES. Notwithstanding the good faith compliance by the
Optionee with all of the terms and conditions of an Incentive Option Agreement
or Nonqualified Option Agreement and with this Article VIII, the Optionee will
not become a shareholder and will have no rights as a shareholder with respect
to the shares covered by such option until the issuance of shares pursuant to
the exercise of such option is recorded on the stock transfer record of the
Company. Notwithstanding the foregoing, the Company shall not unreasonably delay
the issuance of a stock certificate and shall exercise reasonable efforts to
cause such stock certificate to be issued to the Optionee as soon as is
practicable after the compliance by the Optionee with all of the terms and
conditions of the Incentive Option Agreement or Nonqualified Option Agreement,
as the case may be, and with this Article VIII.
8.7 NOTICE OF ANY DISQUALIFYING DISPOSITION AND PROVISION FOR TAX
WITHHOLDING. Any Optionee that exercises an Incentive Stock Option and then
makes a "disqualifying disposition" (as such term is defined under Section 422
of the Internal Revenue Code) of the shares so purchased, shall immediately
notify the Company in writing of such disqualifying disposition and shall pay or
make adequate provision for all Tax Withholding as if such Incentive Stock
Option was a Nonqualified Stock Option in accordance with Section 8.3.
ARTICLE IX
CHANGES IN CAPITAL STRUCTURE
9.1 ADJUSTMENTS OF NUMBER OF SHARES AND EXERCISE PRICE. Except as
provided in Section 9.2, if the outstanding shares of Common Stock are hereafter
increased, decreased, changed into or exchanged for a different number or kind
of shares of Common Stock or for other securities of the Company or of another
corporation, by reason of any reorganization, merger, consolidation,
reclassification, stock split-up, combination of shares of Common Stock, or
dividend payable in shares of Common Stock, the Committee will make such
adjustment as it deems appropriate in the number and kind of shares of Common
Stock or other securities covered by subsequent Awards. In addition, the
Committee will at such time make such adjustment in the number and kind of
shares of Common Stock or other securities covered by outstanding Incentive
Stock Options and outstanding Nonqualified Stock Options, as well as make an
adjustment in the Exercise Price under each option as the Committee deems
appropriate. Any determination by the Committee as to what adjustments may be
made, and the extent thereof, will be final, binding on all parties and
conclusive.
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9.2 ACCELERATION OF VESTING. In the event of any dissolution or
liquidation of the Company, or any merger or consolidation with one or more
corporations in which the Company is not the surviving entity, or in which the
security holders of the Company prior to such transaction do not receive in the
transaction securities with voting rights with respect to the election of
directors equal to 50% or more of the votes of all classes of outstanding
securities of the surviving corporation immediately after such transaction, each
outstanding Incentive Stock Option and each outstanding Nonqualified Stock
Option shall become immediately exercisable in its entirety, notwithstanding any
vesting schedule included in the respective Incentive Stock Option Agreement or
Nonqualified Stock Option Agreement, fifteen (15) days prior to such event and
shall, unless the event fails to occur, continue to be exercisable in such
manner for forty-five (45) days after such event, unless, as an expressed term
of such transaction, adequate provision is made for the continuation of the
rights of holders of such outstanding option after the consummation of such
transaction.
ARTICLE X
UNDERWRITERS LOCK-UP
Each written agreement evidencing an Award will specify that the
Optionee, by accepting the Award agrees that whenever the Company undertakes a
firmly underwritten public offering of its securities, the Optionee will, if
requested to do so by the managing underwriter in such offering, enter into an
agreement not to sell or dispose of any securities of the Company owned or
controlled by the Optionee provided that such restriction will not extend beyond
12 months from the effective date of the registration statement filed in
connection with such offering.
ARTICLE XI
EMPLOYMENT RIGHTS
Nothing in this Plan nor in any written agreement evidencing an Award
will confer upon any Optionee any right to continued employment with the Company
or to limit or affect in any way the right of the Company, in its sole
discretion, (a) to terminate the employment of such Optionee at any time, with
or without cause, (b) to change the duties of such Optionee, or (c) to increase
or decrease the compensation of the Optionee at any time. Unless the written
agreement evidencing an Award expressly provides otherwise, vesting under such
agreement shall be conditioned upon:
1) for Employees of the Company, the continued employment of the
Optionee;
2) for independent contractors, the Optionee continuing to provide
services to the Company on substantially the same terms and
conditions as such services were provided at the time of the Award;
or
3) for directors who are not Employees, the Optionee continuing to
serve as a director of the Company;
and nothing in this Plan shall be construed as creating a contractual or implied
right or covenant by the Company to continue such employment, service as an
independent contractor or service as a director.
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ARTICLE XII
AMENDMENT OF PLAN
The Board of Directors may, at any time and from time to time, modify or
amend this Plan as it deems advisable except that any amendment increasing the
number of shares of Common Stock issuable under the Plan, or any amendment that
expands the group of persons eligible to receive Awards, shall only become
effective if and when such amendment is approved by the shareholders of the
Company. Except as provided in Section 9 hereof, no amendment shall be made to
the terms or conditions of an outstanding Incentive Stock Option or Nonqualified
Stock Option without the written consent of the Optionee.
Approved by the Board of Directors of the Company on ___________________ , 2000.
Approved by the shareholders of the Company on November _____, 2000.
Effective December ____, 2000.
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REVOCABLE PROXY
VRB BANCORP
SPECIAL MEETING OF SHAREHOLDERS
NOVEMBER ______, 2000
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints _______________________ and
______________________, and each of them, proxies with full power of
substitution to vote on behalf of the undersigned all shares of common stock of
VRB Bancorp at the Special Meeting to be held on November ______, 2000, and any
adjournments thereof, with all powers the undersigned would possess if
personally present, with respect to the following:
1. AGREEMENT AND PLAN OF REORGANIZATION AND PLAN OF MERGER. If approved,
VRB Bancorp would merge with Umpqua Holdings Corporation, VRB shareholders will
receive 0.8135 shares of Umpqua stock for each share of VRB stock held and a new
Board of Directors of the combined company will serve the terms as set forth in
the Proxy Statement.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. OTHER MATTERS. At the discretion of the proxy holder, on such other
business as may properly come before the meeting and any adjournments thereof.
THE BOARD OF DIRECTORS OF VRB HAS UNANIMOUSLY VOTED IN FAVOR OF THE MERGER AND
RECOMMENDS YOUR VOTE TO APPROVE THE PROPOSAL.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED ABOVE, BUT IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE AGREEMENT AND PLAN OF
REORGANIZATION AND PLAN OF MERGER. THE PROXIES MAY VOTE IN THEIR DISCRETION AS
TO OTHER MATTERS WHICH MAY COME BEFORE THE MEETING.
Dated: _______________________, 2000 _____________________________
_____________________________
PLEASE DATE AND SIGN EXACTLY
AS YOUR NAME APPEARS ON YOUR
STOCK CERTIFICATE(s) (WHICH
SHOULD BE THE SAME AS THE
NAME OF THE ADDRESS LABEL ON
THE ENVELOPE IN WHICH THIS
PROXY WAS SENT TO YOU),
INCLUDING DESIGNATION AS
EXECUTOR, TRUSTEE, ETC., IF
APPLICABLE. A CORPORATION
MUST SIGN ITS NAME BY THE
PRESIDENT OR OTHER AUTHORIZED
OFFICER. ALL CO-OWNERS MUST
SIGN.
