<PAGE> 1
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:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the
Commission Only (as permitted by Rule
14a-6(e)(2))
[X] 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:
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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:
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[ ] 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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<PAGE> 2
[VRB BANCORP LOGO]
October 17, 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 in December. Regulatory applications
have been filed and we anticipate final approval soon.
One of the remaining steps is to secure approval of the Merger from our
shareholders. You will find enclosed a Notice of a Special Meeting of
Shareholders and a Joint Proxy Statement, which gives you information concerning
the proposed Merger.
You are cordially invited to attend the Special Meeting of Shareholders, to be
held at the Rogue Valley Country Club, 2660 Hillcrest Road, Medford, Oregon, on
Wednesday, November 29, 2000 at 1:00 p.m. I hope you will be able to attend.
The Board of Directors of VRB Bancorp has unanimously approved the Merger and
recommends that you vote FOR the approval of the Merger.
Regardless of the number of shares that you own, or whether you plan to attend
the Special Meeting, it is very important that your shares be represented and
voted at the meeting. A failure to vote, either by not returning the enclosed
proxy or by checking the "Abstain" box thereon, will have the same effect as a
vote against approval of the Merger. Please read the enclosed materials
carefully and complete, sign and return the enclosed proxy in the postage paid
envelope provided.
On behalf of the VRB Bancorp Board of Directors, I thank you for your support
and urge you to vote FOR approval of the Merger.
Best regards,
/s/ William A. Haden
William A. Haden
President & CEO
<PAGE> 3
[Inside Front Cover]
Introducing
UMPQUA BANK
[map of the state of Oregon, showing locations of all
branch offices and ATM locations of the resulting bank]
[symbol] Umpqua Bank Stores [symbol] Strand, Atkinson, Williams & York
[symbol] Umpqua Bank ATM's
South Umpqua Bank and Valley of the Rogue Bank will come together as Umpqua
Bank, upon approval by regulatory agencies and both companies' shareholders
"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."
- William A. Haden, President and Chief Executive Officer, VRB Bancorp
<PAGE> 4
BEFORE THE DIRECTOR OF THE DEPARTMENT
OF CONSUMER AND BUSINESS SERVICES
OF THE STATE OF OREGON
<TABLE>
<S> <C> <C>
In the matter of Exchange of Common ) NOTICE OF HEARING
Stock of Umpqua Holdings
Corporation ) ON PLAN TO
For the Common Stock of VRB Bancorp ) EXCHANGE SECURITIES
</TABLE>
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 2:00 p.m. on
November 27, 2000, at the Red Lion Hotel, 200 N. Riverside Ave., 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 Patricia A. Locnikar, Chief, Licensing/Registration,
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 29, 2000.
Dated: October 17, 2000 UMPQUA HOLDINGS CORPORATION
The Proponent of the Plan
<PAGE> 5
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD AT 1:00 P.M. ON NOVEMBER 29, 2000
NOTICE HEREBY GIVEN that a special meeting of shareholders of VRB Bancorp
will be held at the Rogue Valley Country Club, 2660 Hillcrest Road, Medford,
Oregon, at 1:00 p.m. on November 29, 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 were a shareholder of record of VRB Bancorp as of October 2, 2000,
you are entitled to receive this notice and 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 information in the Proxy Statement or in 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 17, 2000
<PAGE> 6
JOINT PROXY STATEMENT
<TABLE>
<S> <C>
Umpqua Holdings Corporation VRB Bancorp
445 SE Main Street 110 Pine Street
Roseburg, OR 97470 Rogue River, OR 97537
</TABLE>
Each company is holding special shareholders' meetings 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
6:00 p.m. 1:00 p.m.
November 30, 2000 November 29, 2000
South Umpqua Bank, Main Office Rogue Valley Country Club
445 SE Main Street 2660 Hillcrest Road
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 so that we can be certain your shares are
represented.
In addition to the shareholder meetings, there will be a hearing at 2:00
p.m. on November 27, 2000 at the Red Lion Hotel, 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 that will 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 17, 2000
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE............. 1
SUMMARY..................................................... 2
THE DEAL AT A GLANCE........................................ 2
INITIAL QUESTIONS AND ANSWERS ABOUT THE MERGER.............. 2
Special Meetings.......................................... 6
Approval of New Stock Option Plan (Umpqua Shareholders
Only).................................................. 6
Selected Financial Data (Unaudited)....................... 7
Equivalent Per Share Data................................. 10
STOCK PRICE AND DIVIDEND INFORMATION........................ 11
Umpqua.................................................... 11
VRB....................................................... 12
RISK FACTORS................................................ 13
The Integration of the Two Banking Operations May Not Be
Completed Smoothly Resulting in Loss of Customers...... 13
Involvement in Non-Bank Businesses May Involve New
Risks.................................................. 13
The Restructuring and Integration Costs Could Exceed
Estimates; Expected Consolidation Savings May Not
Materialize............................................ 13
UMPQUA SPECIAL MEETING...................................... 14
When and Where the Meeting Will Be Held................... 14
Purpose of the Meeting.................................... 14
Who May Vote.............................................. 14
Voting By Proxy........................................... 14
Revoking a Proxy.......................................... 14
How We Determine a Quorum................................. 15
How We Count Votes........................................ 15
Shares Owned by Directors and Officers.................... 15
Costs of Solicitation..................................... 15
VRB 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................................. 16
How We Count Votes........................................ 17
Shares Owned by Directors and Officers.................... 17
Costs of Solicitation..................................... 17
BACKGROUND OF AND REASONS FOR THE MERGER.................... 17
How Did the Merger Come About?............................ 17
Reasons for the Merger -- General......................... 18
Reason for the Merger -- Umpqua........................... 19
Reasons for the Merger -- VRB............................. 19
Recommendations of Boards of Directors.................... 21
Opinion of Umpqua's Financial Advisor..................... 21
Opinion of VRB's Financial Advisor........................ 25
</TABLE>
i
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE MERGER.................................................. 32
General................................................... 32
Conversion of VRB Common Stock; Effects on Umpqua
Shareholders........................................... 32
Exchange of Stock Certificates............................ 33
Treatment of Outstanding Stock Options.................... 34
Merger of Subsidiary Banks; Name Change................... 34
Resulting Boards of Directors of Umpqua and Umpqua Bank... 34
Executive Officers of Umpqua and Umpqua Bank.............. 38
Conduct of Business Pending the Merger.................... 39
No Solicitations.......................................... 40
Employment Related Matters................................ 40
Conditions to the Merger.................................. 40
Waiver of Conditions; Amendment or Termination of the
Merger Agreement....................................... 41
Effective Date of the Merger.............................. 42
Interests of Certain Persons in the Merger................ 42
Commitments of Directors.................................. 43
Federal Income Tax Consequences........................... 43
Accounting Treatment...................................... 44
No Dissenters' Rights..................................... 44
Resales of Stock by Affiliates of VRB..................... 44
Expenses.................................................. 45
Umpqua and VRB Stock Option Agreements.................... 45
HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS................................................ 47
UMPQUA HOLDINGS CORPORATION 2000 STOCK OPTION PLAN.......... 55
INFORMATION ABOUT UMPQUA.................................... 56
Introduction.............................................. 56
Business Strategy......................................... 57
Marketing and Sales....................................... 58
Products and Services..................................... 59
Employees................................................. 60
Information Regarding Umpqua Directors and Executive
Officers............................................... 60
Stock Option Plan......................................... 63
Transactions with Directors and Officers.................. 64
Compliance with Section 16 Filing Requirements............ 64
Security Ownership of Umpqua Management and Others........ 66
Report of the Budget and Compensation Committee........... 67
STOCK PERFORMANCE GRAPH..................................... 68
UMPQUA MANAGEMENT'S DISCUSSION AND ANALYSIS................. 68
INFORMATION ABOUT VRB BANCORP............................... 87
Introduction.............................................. 87
Products and Services..................................... 87
Market Area............................................... 87
Employees................................................. 88
Security Ownership of VRB Management and Others........... 89
Transactions with Management.............................. 89
VRB MANAGEMENT'S DISCUSSION AND ANALYSIS.................... 90
</TABLE>
ii
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMPETITION................................................. 99
CERTAIN REGULATORY CONSIDERATIONS........................... 100
DESCRIPTION OF CAPITAL STOCK................................ 104
Umpqua.................................................... 104
VRB....................................................... 105
Anti-Takeover Provisions.................................. 105
CERTAIN LEGAL MATTERS....................................... 106
AVAILABLE INFORMATION....................................... 106
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
<PAGE> 10
FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE
This Proxy Statement includes forward-looking statements containing
assumptions and estimates of the managements of Umpqua and VRB, based upon
currently available information. All statements other than statements of
historical fact included in this Proxy Statement regarding either company's
financial position, business strategies, and management's plans and objectives
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 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.
1
<PAGE> 11
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, Inc., 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
VRB share.
INITIAL QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Who are the parties to the Merger?
A: UMPQUA HOLDINGS CORPORATION is a financial holding company with two
operating 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 $348 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 BANCORP."
Q: What will be 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?
A: Management of both companies believe that the Umpqua Bank name, together
with the stylized tree and river logo, is identified with the Pacific
Northwest and is currently displayed and recognized in all major Oregon
markets. Umpqua Bank will have the largest Oregon-based ATM network and a
unique name that differentiates it from other community banks with
traditional, generic names.
2
<PAGE> 12
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 companies believe that the Merger will not change that
commitment, but rather 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 OF AND
REASONS FOR 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 are designated by VRB. All shareholders of the
combined company will vote on directors as their terms of office expire. 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: Please read this Joint Proxy Statement and then 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
3
<PAGE> 13
November 30, 2000 at 6:00 p.m. at the main office of South Umpqua Bank,
Roseburg, Oregon. The VRB special meeting will take place on November 29,
2000 at 1:00 p.m. at the Rogue Valley Country Club, Medford, Oregon. 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 shares are 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 inform the Corporate Secretary that you wish to 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, the Director of the Oregon Department of
Consumer and Business Services (the "Oregon Director") will hold a hearing
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?
A: Attendance at the hearing is not required, but VRB shareholders are invited
to attend the hearing if they choose. VRB shareholders who wish to make
comments on the record regarding the proposed Merger may do so at the
hearing or in writing as set forth in the notice sent to 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 be satisfied
before 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 shareholders will receive a regular semi-annual $0.12 per share dividend
in October 2000. Umpqua expects to declare a regular quarterly cash dividend
of $0.04 per share in December 2000. If the Merger is completed before the
record date for the Umpqua December dividend,
4
<PAGE> 14
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 -- Federal Income Tax Consequences."
Q: Is this a fair deal?
A: Ragen MacKenzie, Inc. has delivered its written opinion to Umpqua and D.A.
Davidson & Co. has delivered its written opinion to VRB, each to the effect
that the Merger, including the Exchange Ratio, is fair from a financial
point of view to each respective shareholder group.
Q: What if I just want cash for my VRB shares?
A: Under Oregon law, shareholders do not have the right to dissent from the
Merger and obtain payment for the appraised value of their shares. You may
sell your shares in the stock market if you wish. See "STOCK PRICE AND
DIVIDEND INFORMATION -- VRB."
THE BOARDS OF DIRECTORS OF BOTH COMPANIES UNANIMOUSLY RECOMMEND THAT THEIR
RESPECTIVE SHAREHOLDERS APPROVE THE MERGER.
5
<PAGE> 15
SPECIAL MEETINGS
Umpqua Meeting
The Umpqua meeting will be held at 6:00 p.m. on November 30, 2000, at the
main office of South Umpqua Bank, 444 SE Main Street, Roseburg, Oregon. If you
were an Umpqua shareholder as of the close of business on October 2, 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 1:00 p.m. on November 29, 2000, at the
Rogue Valley Country Club, 2660 Hillcrest Road, Medford, Oregon. If you were 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 a 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 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.
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 29, 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 under the 1995 plan 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 would
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. Approval of the stock
option plan requires a favorable vote from a majority of the shares present at
the Umpqua meeting.
THE UMPQUA BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS APPROVE THE NEW
PLAN.
6
<PAGE> 16
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 its 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 pro forma balance sheet items give effect to the Merger as if it
occurred at the beginning of the period presented and include adjustments to
reflect the after-tax impact of merger-related costs. See "Historical and
Unaudited Pro Forma Combined Financial Information."
UMPQUA HISTORICAL
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<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 $ 0.12 $ 0.08 $ 0.07 $ 0.06
Ratio of dividends declared to net
income............................ 22.9% 25.8% 25.0% 20.5% 16.5% 18.2% 18.5%
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............................... $265,013 $209,262 $248,534 $187,947 $156,144 $113,887 $ 83,797
Allowance for loan losses........... $ 3,770 $ 2,942 $ 3,469 $ 2,664 $ 2,141 $ 1,991 $ 1,237
Allowance as percentage of loans.... 1.42% 1.41% 1.40% 1.42% 1.37% 1.75% 1.48%
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>
7
<PAGE> 17
VRB HISTORICAL
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Interest income..................... $ 11,613 $ 11,129 $ 22,693 $ 23,911 $ 14,955 $ 13,188 $ 11,973
Interest expense.................... 3,491 3,142 6,413 7,670 4,062 3,627 2,989
-------- -------- -------- -------- -------- -------- --------
Net interest income............. 8,122 7,987 16,280 16,241 10,893 9,561 8,984
Provision for credit losses......... -- -- -- -- 250 250 --
Noninterest income.................. 1,216 988 2,056 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 3,889 7,772 7,893 5,441 4,853 4,303
Provision for income taxes.......... 1,443 1,460 2,884 2,966 1,737 1,602 1,395
-------- -------- -------- -------- -------- -------- --------
Net income........................ $ 2,458 $ 2,429 $ 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 $307,883 $311,504 $311,217 $206,653 $177,107 $151,485
Total deposits...................... $279,077 $271,439 $276,366 $274,122 $173,176 $155,568 $132,744
Total equity........................ $ 34,926 $ 35,189 $ 33,609 $ 35,235 $ 31,861 $ 20,188 $ 17,470
</TABLE>
8
<PAGE> 18
PRO FORMA COMBINED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<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 $366,674 $273,338
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>
9
<PAGE> 19
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 October 13,
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.
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 -- $ 5.19 $ 6.71
Market Value per share at Oct. 13, 2000.......... $ 8.13 -- $ 5.88 $ 6.61
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 0.19 0.09
December 31, 1997.............................. 0.08 0.08 0.13 0.06
</TABLE>
10
<PAGE> 20
STOCK PRICE AND DIVIDEND INFORMATION
UMPQUA
The common stock of Umpqua is traded on the Nasdaq National 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 Stock Market. Prices do not include retail mark-ups, mark-downs or
commissions. On October 2, 2000, the common stock was held of record by
approximately 597 shareholders, a number which does not include beneficial
owners who hold shares in "street name." As of October 13, 2000, the most recent
date prior to the date of this Proxy Statement, the last sale price of the
common stock was $8.125 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......................... $10.000 $5.500 $0.04 $11.000 $8.75 $0.04 $18.880 $ 9.00 $0.025
2nd Quarter......................... $ 9.000 $6.750 $0.04 $10.625 $8.25 $0.04 $16.750 $13.25 $0.025
3rd Quarter......................... $ 8.625 $7.375 $0.04 $10.625 $8.00 $0.04 $14.375 $ 7.75 $0.025
4th Quarter (through Oct. 13,
2000)............................. $ 8.125 $7.875 $11.000 $8.50 $0.04 $11.875 $ 7.25 $ 0.04
</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.
11
<PAGE> 21
VRB
The common stock of VRB is traded on the Nasdaq National 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 October 2, 2000, VRB's
common stock was held of record by approximately 745 shareholders, a number
which does not include beneficial owners who hold shares in "street name." As of
October 13, 2000, the most recent date prior to the date of this Proxy
Statement, the last sale price of the common stock was $5.875 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.............................. $6.13 $4.84 $0.12 $8.44 $6.50 $0.12 $10.00 $7.33 $0.19
4th Quarter (through Oct. 13, 2000)...... $6.00 $5.75 $ -- $7.38 $5.75 $ -- $10.23 $7.00 $ --
</TABLE>
12
<PAGE> 22
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.
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,"
an "investment opportunity center" and "a computer cafe." Over a period of
months following the Merger, Umpqua intends to remodel and convert the larger
Valley of the Rogue Bank branches in a similar fashion. Such a conversion would
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
completing 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 by the time the Merger is consummated.
These costs include investment banking, accounting and legal fees in connection
with the Merger, as well as severance or change of control payments under
employment contracts and severance payments 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.
13
<PAGE> 23
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 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 30,
2000, commencing at 6:00 p.m., local time at the main office of South Umpqua
Bank, 445 SE Main Street, Roseburg, Oregon.
PURPOSE OF THE MEETING
The purpose of the Umpqua meeting is to consider and vote on:
- 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 -- Resulting Boards of Directors of Umpqua and Umpqua Bank."
WHO MAY VOTE
If you were an Umpqua 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
7,625,627 shares outstanding held by approximately 597 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 Allyn C. Ford and Raymond P. Davis 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.
14
<PAGE> 24
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 as of the
record date 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.
SHARES OWNED BY DIRECTORS AND OFFICERS
As of October 2, 2000, directors and executive officers of Umpqua
beneficially owned 1,205,503 shares, of which 843,103 are entitled to vote.
Those shares constitute 11.1% 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 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
payment will be made to any of Umpqua's subsidiaries acting through their
nominees or acting as a fiduciary.
15
<PAGE> 25
VRB SPECIAL MEETING
WHEN AND WHERE THE MEETING WILL BE HELD
The VRB special meeting of shareholders will be held on November 29, 2000,
commencing at 1:00 p.m., local time at the Rogue Valley Country Club, 2660
Hillcrest Road, 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 -- Resulting
Boards of Directors of Umpqua and Umpqua Bank."
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
8,309,433 shares outstanding held by approximately 745 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 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.
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<PAGE> 26
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, such as a bank,
submits a proxy representing shares that another person actually owns, and that
person has not given voting instructions to the 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.
SHARES OWNED BY DIRECTORS AND OFFICERS
As of October 2, 2000 VRB directors and executive officers beneficially
owned 596,842 shares, of which 480,464 are entitled to vote. Those shares
constitute 5.8% 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 THE 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 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 its
community banking services in its local community. 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
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<PAGE> 27
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, Inc., an investment
banking firm, 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 proceed with the
negotiation 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 Ragen MacKenzie 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 & Co., 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, the 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 executed 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 Counties 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 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.
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<PAGE> 28
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 their respective shareholders.
REASONS FOR THE MERGER -- UMPQUA
At its meeting on July 19, 2000, the Umpqua 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 possesses 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:
- The effectiveness of the Merger in implementing and accelerating Umpqua's
growth strategy;
- 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 company 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;
- 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;
- The opinion of Ragen MacKenzie, Inc., discussed elsewhere in this Proxy
Statement, that as of July 19, 2000 (and as of October 17, 2000), the
Exchange Ratio was fair, from a financial point of view, to the holders
of Umpqua Stock;
- The opportunity to strengthen and deepen the management team by
integrating the existing management teams of both Umpqua and VRB; and
- 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
VRB shareholders. The Board of Directors believes that the Merger enhances
shareholder value by expanding the company's
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<PAGE> 29
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
determined that the Merger would not necessarily preclude consideration of other
transactions in the future for the combined company if the opportunity should
arise.
In addition, the VRB Board of Directors considered a variety of factors
including:
- 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;
- 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 company 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;
- The opinion of D.A. Davidson & Co., discussed elsewhere in this Proxy
Statement, that as of August 14, 2000 (and as of October 17, 2000), the
Exchange Ratio was fair, from a financial point of view, to the VRB
shareholders;
- 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.;
- 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 the value VRB's shareholders would
receive in the Merger from certain price declines in Umpqua stock prior
to closing;
- 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;
- 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
- 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.
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<PAGE> 30
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 Umpqua
shareholders. Ragen MacKenzie reconfirmed its opinion in writing as of October
17, 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
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 each of 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.
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<PAGE> 31
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
expected 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 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.
Analysis
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
BASE DATE TO THE BASE DATE TO THE BASE DATE TO THE BASE DATE
--------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Average Exchange Ratio........... 0.6133 0.6162 0.6753 0.7546
</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
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<PAGE> 32
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 provided by VRB and 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 extreme 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 2000 ESTIMATED 2001 BOOK VALUE NET INTEREST EFFICIENCY DEPOSIT
NET INCOME NET INCOME JUNE 30, 2000 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.
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<PAGE> 33
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>
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 stand-alone and pro forma combined EPS were each $0.72
and $0.73, respectively, representing 1.2% accretion; the 2001 stand-alone 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
western U.S. 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/Peninsula 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's view of the actual
value of Umpqua or a combination of Umpqua and VRB.
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<PAGE> 34
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 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 17, 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;
25
<PAGE> 35
- 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. Davidson 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.
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 Davidson provided the Board with the results of the
various analyses that follow, Davidson believes that the analysis must be
considered in its entirety and that selecting portions of its analysis and
factors considered, 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 the opinion.
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<PAGE> 36
In performing the 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
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 it routinely publishes an equity
research monitor list for institutional investors (a "peer group").
Davidson's analysis showed the following concerning VRB's financial
performance:
<TABLE>
<CAPTION>
VRB PEER GROUP PEER GROUP
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 for the peer group;
- 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 for
the peer group;
- the price to book value per share was 1.21 times, compared to an average
of 1.52 and median of 1.47 for the peer group; and
- the dividend yield was 4.57% compared to an average of 2.25% and median
of 2.36% for the peer group.
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<PAGE> 37
Davidson's analysis showed the following concerning Umpqua's financial
performance:
<TABLE>
<CAPTION>
UMPQUA PEER GROUP PEER GROUP
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 for the peer group;
- 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 for
the peer group;
- the price to book value per share was 1.62 times, compared to an average
of 1.52 and median of 1.47 for the peer group; and
- the dividend yield was 1.94% compared to an average of 2.25% and median
of 2.36% for the peer group.
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 of accretion or dilution.
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<PAGE> 38
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.
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 earnings 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 value 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 securities 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. Finally, in many cases the
financial data
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<PAGE> 39
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
- 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/Pacific Financial Corporation............. 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 the 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.
Conclusion. Based on the foregoing analysis, Davidson concluded that the
narrow range of accretion to dilution in the Merger 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.
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<PAGE> 40
- 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 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 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 VRB's 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.
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<PAGE> 41
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.
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 VRB 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 of $8.15, 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 of $8.15,
exceeds the Index Differential by more than ten percentage points, the VRB Board
of Directors nonetheless would have the option (but not the obligation) to
terminate the Merger Agreement.
The "Index Differential" is calculated by dividing the average 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 for each share of VRB stock. The potential
adjustment is intended to protect the value VRB expects its shareholders to
receive in the Merger by giving the VRB Board the option to terminate the
transaction if the market value of Umpqua common stock declines
disproportionately in
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<PAGE> 42
comparison to the market for 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
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 assuming 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
6.50............................................. 0.8448
6.46............................................. 0.8500
6.10 and below................................... 0.8500
</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. After the Merger, former Umpqua
shareholders will hold approximately 53% of the shares and former 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 the 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 with instructions as to the
procedure for surrendering VRB certificates in exchange for Umpqua stock
certificates.
VRB SHAREHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES 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 VRB
certificates 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.
The shareholder 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 voting on the Merger) 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 October 2, 2000, there were options outstanding under various
employee and director stock option plans of VRB (collectively, the "VRB Option
Plans") to purchase 240,904 shares of VRB common stock at prices ranging from
$1.25 to $10.81 per share.
On the Effective Date, Umpqua will assume VRB's obligations with respect to
each outstanding VRB option, whether or not then exercisable, by issuing a
replacement option under Umpqua's 1995 Stock Option Plan. 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. No fractional shares will be issued
upon exercise of VRB options or replacement options under Umpqua's 1995 option
plan. Optionees will receive cash in lieu of fractional shares at the then
current market value. 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 BOARDS 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 staggered three-year terms. Each
VRB-designated director will be assigned to one of the three classes, such that
two VRB directors will be appointed to serve a 3-year term, two to serve a
2-year term, and one to serve a 1-year term (in each case the length of term
being reducible to reflect the schedule of the annual meeting of Umpqua
shareholders). The Umpqua designees will similarly be divided evenly among each
of the three terms.
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<PAGE> 44
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
Raymond P. Davis................................... Umpqua
David B. Frohnmayer................................ Umpqua
William A. Haden................................... VRB
Term expiring at the second annual shareholders'
meeting after the Effective Date
Allyn C. Ford...................................... Umpqua
Ronald O. Doan..................................... Umpqua
James D. Coleman................................... VRB
Michael Donovan.................................... VRB
Term expiring at the third annual shareholders'
meeting after the Effective Date
Lynn K. Herbert.................................... Umpqua
Scott Chambers..................................... Umpqua
Larry L. Parducci.................................. VRB
John O. Dunkin..................................... VRB
</TABLE>
If, prior to the Effective Date, any of the proposed directors 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 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.
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<PAGE> 45
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 63, 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 hardware to implement filter and pressure sewer
designs. Mr. Ball has 37 years of civil engineering experience in public works
and private practice.
RAYMOND P. DAVIS, age 51, 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 56, 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 59, 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 60, 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 49, 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 54, 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 21 years of experience as a real estate agent and broker.
FRANCES JEAN PHELPS, age 57, 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 41, 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.
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VRB Directors proposed to be elected to the Umpqua Board of Directors
JAMES D. COLEMAN, age 61, serves as Chairman of the Board of Directors. Mr.
Coleman was previously a director of Medford State Bank, which VRB acquired in
1987. He is 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 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
Restaurant & Wine Shoppe in Ashland, Oregon.
LARRY L. PARDUCCI, age 55. Mr. Parducci is the owner/operator of Holiday RV
Park in Phoenix, Oregon. Mr. Parducci also serves as mayor for the city of
Phoenix.
WILLIAM A. HADEN, age 51. Mr. Haden currently serves as President & CEO for
VRB Bancorp and President & CEO for Valley of the Rogue Bank.
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EXECUTIVE OFFICERS OF UMPQUA AND UMPQUA BANK
It is anticipated that each of the following persons will serve as
executive officers 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.
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 Financial Umpqua
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 Credit VRB
Officer
Steve May............................ Executive Vice President/Retail Banking Umpqua
Gary Pierpoint....................... Senior Vice President/Business Development Umpqua
Rodger Terrall....................... Senior Vice President, Chief Lending Umpqua
Officer
Dolly Lusty.......................... Senior Vice President, Credit Administrator Umpqua
Kathy Peckham........................ Senior Vice President/Retail Banking, VRB
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 49, 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 48, 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.
GERALD (GARY) L. PIERPOINT, age 62, 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 46, serves as Senior Vice President and 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).
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DORA (DOLLY) C. LUSTY, age 53, was hired in May 1997 and serves as Senior
Vice President and 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 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 is 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 joined the
bank in July 1993 and served as Senior Vice President until 1996. 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 VRB 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.
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 in September and December 2000, and VRB
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<PAGE> 49
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 purposes 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.
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 party of its
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;
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<PAGE> 50
- 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:
- By the mutual consent of both VRB and Umpqua for any reason;
- By either VRB or Umpqua any time after March 31, 2001, if the Merger has
not been consummated by that date through no fault of the terminating
party;
- 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;
- 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");
- 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 (iii) Umpqua elects
not to increase the Exchange Ratio (see "THE MERGER -- Conversion of VRB
Common Stock"); or
- 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").
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<PAGE> 51
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 -- Resulting
Boards of Directors of Umpqua and Umpqua Bank." 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.
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. The executive
is 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
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employment for good reason, the executive is entitled to severance equal to one
year's compensation (six months' compensation if the termination occurs more
than six months, after the change of control). The executive is also entitled to
severance payments of three months' 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 he or she does 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, stock option agreements held by
Mr. Haden, Brad Copeland and Felice Belfiore permit them to exercise options,
even if 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 each at an exercise price of $8.17 and $7.03 respectively. 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 an election by the Board of Directors might preclude the ability
of the Merger to be accounted for under the pooling-of-interest method and as a
result, the Board has indicated it does 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, and to recommend (subject to their fiduciary duties)
approval of the Merger by their shareholders. 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,
competitive with 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 Tom Anderson. Each of the
Umpqua and VRB Directors has also agreed to vote all of 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.
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
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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 VRB stock exchanged was held by a VRB shareholder
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 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
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 "HISTORICAL AND 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 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.
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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 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 control 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 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.
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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 withdraws 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 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.
46
<PAGE> 56
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.
47
<PAGE> 57
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
HISTORICAL
----------------------
UMPQUA ADJUSTMENTS
HOLDINGS VRB RELATED TO PRO FORMA
CORPORATION BANCORP THE MERGER COMBINED
----------- -------- ----------- ---------
(IN THOUSANDS)
<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 1,320 665,186
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 (1,620) 72,186
-------- -------- ---------- --------
$411,077 $326,595 $ (300) $737,372
======== ======== ========== ========
</TABLE>
48
<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
CORPORATION BANCORP COMBINED
------------- --------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<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 on 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 for 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>
49
<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
CORPORATION BANCORP COMBINED
------------- --------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<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 on 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 for 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>
50
<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
CORPORATION BANCORP COMBINED
------------- --------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest and fee income on loans...................... $19,192 $17,345 $36,537
Interest on taxable investment securities............. 4,577 4,418 8,995
Interest on tax exempt investment securities.......... 911 930 1,841
------- ------- -------
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 on 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 6,318 12,049
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 1,053 1,761
------- ------- -------
Total non interest expense....................... 11,701 10,564 22,265
Income before provision for 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>
51
<PAGE> 61
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL
--------------------------
UMPQUA
HOLDINGS VRB PRO FORMA
CORPORATION BANCORP COMBINED
------------- --------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<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 on 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 for 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>
52
<PAGE> 62
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
--------------------------
UMPQUA
HOLDINGS VRB PRO FORMA
CORPORATION BANCORP COMBINED
------------- --------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<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 on 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 for 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>
53
<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.
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<PAGE> 64
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 nonqualified stock options (options that do not
qualify as incentive stock options under the Internal Revenue Code) to executive
officers and 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 public company, subject to the reporting
requirements of the Securities Exchange Act of 1934, and does not include
provisions considered appropriate for plans of public companies.
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.
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 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 grant may be made when the total
options outstanding on the effective date of the plan 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, if approved 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,
55
<PAGE> 65
notwithstanding any vesting schedule, unless the terms of the transaction make
adequate provision for the continuation of the rights of such option holders.
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
Strand, Atkinson,
56
<PAGE> 66
Williams & York, Inc. Umpqua and its subsidiaries are subject to the regulations
of certain federal 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
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
57
<PAGE> 67
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 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 enhances 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 of increasing its share of financial services in its market
areas 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 its commitment to providing
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 traditionally 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
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<PAGE> 68
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.
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
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<PAGE> 69
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
Boards of Directors of Umpqua and Umpqua Bank." Umpqua held 12 regular meetings
of the Board of Directors 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 Umpqua's
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 Umpqua's
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 the allowance for loan losses, maintains an appropriate balance in
the interest rate sensitivity of the loan and investment portfolios, and
determines the liquidity, type and term of investment securities. The committee
consists of directors Herbert (Chairperson), Ball, Davis, Doan and Hummel.
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<PAGE> 70
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 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 Corporation 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
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.
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<PAGE> 71
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.
<TABLE>
<CAPTION>
SECURITIES
OTHER 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 C. 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, and Terrall and Mrs.
Lusty.
(5) Mr. Sullivan started working for South Umpqua Bank in November, 1997.
(6) Mrs. Lusty became an Executive Officer in 1999.
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<PAGE> 72
Executive Compensation Plans and Agreements
Employment and Change of Control Agreements. Umpqua has entered into
special agreements with certain executive officers. These agreements are
intended to motivate the executives to remain employed by Umpqua. Umpqua has
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 his employment is terminated for any
reason other than "cause." In addition, Umpqua 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 nonqualified 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 Umpqua's 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
-------------------------------------------------------------------------
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------- VALUE AT
PERCENTAGE ASSUMED ANNUAL
OF TOTAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES PRICE OPTION TERM(1)
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 C. Lusty.............. 7,500 5.00% $9.63 5/3/10 $ 51,944 $135,509
</TABLE>
-------------------------
(1) The potential realizable value of the options granted is calculated by
multiplying the difference between the exercise price of the option and the
market value per share of the underlying stock (assuming a 5% or 10%, as the
case may be, compounded annual increase of the stock price from the date of
grant to the final expiration of the option) by the number of shares
underlying the options granted.
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<PAGE> 73
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES(1)
-------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END(#) AT FY-END($)(2)
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 C. 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 required by the Exchange Act, 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 beneficial ownership of common stock and
to periodically report changes in their ownership. The reports must now be made
with the SEC.
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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 filings 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.
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<PAGE> 75
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:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
BENEFICIALLY OF
NAME AND POSITION OWNED(1) CLASS
----------------- ---------------- ----------
<S> <C> <C>
Lynn K. Herbert, Director................................... 544,066(3) 7.13%
Raymond P. Davis, Director, President/Chief Executive
Officer................................................... 310,456(4) 3.94%
Allyn C. Ford, Director..................................... 138,932(5) 1.82%
Neil D. Hummel, Director.................................... 35,197(6) *
Harold L. Ball, Director.................................... 33,340(7) *
Gary L. Pierpoint, Sr. VP/Eugene Operations................. 32,558(8) *
Daniel A. Sullivan, Sr. VP/Chief Financial Officer.......... 31,521(9) *
Rodger L. Terrall, Sr. VP/Chief Lending Officer............. 29,792(8) *
Steven A. May, Sr. VP/Retail Banking........................ 21,210(10) *
Frances Jean Phelps, Director............................... 7,061(2) *
Ronald O. Doan, Director.................................... 6,847(2) *
Scott Chambers, Director.................................... 6,619 *
David B. Frohnmayer, Director............................... 5,698(2) *
Dolly C. Lusty, Sr. VP/Credit Administrator................. 2,206(12) *
All directors and executive officers as a group (14
persons).................................................. 1,205,503(2-11) 15.09%
Milton Herbert, Shareholder, Canyonville, OR................ 928,812(2) 12.18%
</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 261,425 shares
covered by options exercisable within 60 days.
(5) Includes 118,202 shares held as Agent for Ford Family Investment Pool.
(6) Includes shares held jointly with or by his spouse and includes shares held
as custodian for minor children. Includes 20,965 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 28,250 shares covered by options exercisable within 60 days.
(10) Includes 19,350 shares covered by options exercisable within 60 days.
(11) Includes 362,400 shares covered by options exercisable within 60 days.
(12) Includes 1,875 shares covered by options exercisable within 60 days.
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REPORT OF THE BUDGET AND COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Budget and Compensation Committee is responsible for establishing and
administering the executive compensation program.
Compensation Philosophy and Objectives
The philosophy underlying the development and administration of Umpqua's
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. The 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 the company meets or exceeds 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 the company's 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 Umpqua's 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 the stock
appreciates over the long term.
Budget and Compensation Committee Members
Ronald O. Doan (Chairperson)
Lynn K. Herbert
Neil D. Hummel
Harold L. Ball
Raymond P. Davis
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STOCK PERFORMANCE GRAPH
The chart 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, (ii) the Total Return Index for Nasdaq Bank Stocks as
reported by the Center for Research in Securities Prices and (iii) the S & P
500. 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 MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
FINANCIAL HIGHLIGHTS
For the six months ended June 30, 2000 the company earned $2.7 million
compared with $2.4 million 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.
68
<PAGE> 78
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 $301.7 million
during the same period.
<TABLE>
<CAPTION>
PERCENTAGE
GROWTH ($ IN THOUSANDS) 1999 1998 GROWTH
----------------------- -------- -------- ----------
<S> <C> <C> <C>
Average assets................................ $336,010 $279,123 20.40%
Average deposits.............................. $271,194 $231,781 17.00%
Average loans and loans held for sale......... $212,824 $167,222 27.30%
Net income.................................... 4,874 4,110 18.60%
Return on average assets...................... 1.45% 1.47% (1.40)%
Return on average equity...................... 13.55% 13.14% 3.10%
Basic earnings per common share............... $ 0.64 $ 0.56 14.30%
Diluted earnings per common share............. $ 0.63 $ 0.55 14.50%
</TABLE>
69
<PAGE> 79
SELECTED QUARTERLY FINANCIAL DATA
The following tables set forth Umpqua's unaudited consolidated financial
data regarding operations for the first two quarters of 2000 and 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.
2000
<TABLE>
<CAPTION>
FIRST SECOND
QUARTER QUARTER
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <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
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<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>
70
<PAGE> 80
1998
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<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>
71
<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
-------------------------------- --------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME YIELDS AVERAGE INCOME YIELDS
BALANCE OR EXPENSE OR RATES BALANCE OR EXPENSE OR RATES
-------- ---------- -------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(1)(2)...................... $212,446 $19,144 9.01% $166,032 $15,625 9.41%
Loans held for sale.............. 378 49 12.96% 1,190 112 9.41%
Investment securities
Taxable securities............. 63,774 3,966 6.22% 69,811 4,196 6.01%
Non-taxable securities(1)...... 19,925 1,307 6.56% 9,017 569 6.31%
Temporary investments.......... 12,201 611 5.01% 10,209 558 5.47%
-------- ------- -------- -------
Total interest earning assets.... 308,724 25,077 8.12% 256,259 21,060 8.22%
Cash and due from banks.......... 18,661 15,506
Allowance for loan losses........ (2,991) (2,446)
Other assets..................... 11,616 9,804
-------- --------
Total assets................. $336,010 $279,123
======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing checking and
savings accounts............... $137,488 $ 3,417 2.49% $121,568 $ 3,208 2.64%
Time deposits.................... 77,586 3,660 4.72% 64,419 3,262 5.06%
Term debt........................ 26,678 1,379 5.17% 14,699 825 5.61%
-------- ------- -------- -------
Total interest-bearing
liabilities................ 241,752 8,456 3.50% 200,686 7,295 3.64%
Non-interest-bearing deposits.... 56,120 45,794
Other liabilities................ 2,174 1,370
-------- --------
Total liabilities............ 300,046 247,850
Shareholders' equity............. 35,964 31,273
-------- --------
Total liabilities and
shareholders' equity....... $336,010 $279,123
======== ========
Net interest income(1)........... $16,621 $13,765
======= =======
Net interest spread.............. 4.62% 4.58%
Average yield on earning
assets(1)(2)................... 8.12% 8.22%
Interest expense to earning
assets......................... 2.75% 2.85%
----- ----
Net interest income to earning
assets(1)(2)................... 5.37% 5.37%
===== ====
<CAPTION>
YEAR-END DECEMBER 31, 1997
--------------------------------
INTEREST AVERAGE
AVERAGE INCOME YIELDS
BALANCE OR EXPENSE OR RATES
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(1)(2)...................... $135,988 $13,087 9.62%
Loans held for sale.............. 449 34 7.57%
Investment securities
Taxable securities............. 57,214 3,406 5.95%
Non-taxable securities(1)...... 4,573 329 7.19%
Temporary investments.......... 14,736 806 5.47%
-------- -------
Total interest earning assets.... 212,960 17,662 8.29%
Cash and due from banks.......... 13,248
Allowance for loan losses........ (2,159)
Other assets..................... 9,158
--------
Total assets................. $233,207
========
INTEREST-BEARING LIABILITIES:
Interest-bearing checking and
savings accounts............... $105,523 $ 2,827 2.68%
Time deposits.................... 55,868 2,860 5.12%
Term debt........................ 13,756 806 5.86%
-------- -------
Total interest-bearing
liabilities................ 175,147 6,493 3.71%
Non-interest-bearing deposits.... 37,795
Other liabilities................ 1,818
--------
Total liabilities............ 214,760
Shareholders' equity............. 18,447
--------
Total liabilities and
shareholders' equity....... $233,207
========
Net interest income(1)........... $11,169
=======
Net interest spread.............. 4.58%
Average yield on earning
assets(1)(2)................... 8.29%
Interest expense to earning
assets......................... 3.05%
----
Net interest income to earning
assets(1)(2)................... 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.
72
<PAGE> 82
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>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) INCREASE (DECREASE)
---------------------- ----------------------
DUE TO CHANGE IN DUE TO CHANGE IN
---------------------- NET ---------------------- NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
-------- ------- ------ -------- ------- ------
(IN THOUSANDS)
<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>
(1) Tax-exempt interest income has been adjusted to a tax-equivalent basis at a
34% effective rate.
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 $1.4 million over the same period in 1999 to $9.3
million. 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 months 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.
73
<PAGE> 83
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 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 for loan losses 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 $1.0 million compared
with $655,000 during the same period in 1999. Net charge-offs were $734,000 for
the six months ended June 30, 2000 compared with net charge-offs of $376,000 for
the same period in 1999. Nonperforming assets increased from $1.6 million at
December 31, 1999 to $1.7 million at June 30, 2000. The allowance for loan
losses totaled $3.8 million, or 1.44% of total loans, at June 30, 2000 compared
with $3.5 million, 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 $1.4 million in 1999, $1.0 million
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
Non-interest income was $4.7 million for the six months ended June 30, 2000
compared with $1.9 million for the same period in 1999. The increase is
primarily attributable to $2.7 million of non-interest income generated by
Umpqua's retail brokerage subsidiary Strand, Atkinson, Williams and
74
<PAGE> 84
York, Inc. ("Strand Atkinson"), which was acquired in November 1999. Service
charges on deposits also increased $195,000 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 accounts as well as selected service fee repricing
that occurred at the end of the second quarter 1999.
Non-interest income was $4.4 million and $3.4 million for the years ended
1999 and 1998, respectively. Service fees, the largest component of non-interest
income, increased $759,000 over 1998 to $3.0 million 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 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
Umpqua's brokerage subsidiary, Strand Atkinson. Gain on sale of loans declined
to $251,000 in 1999 from $349,000 in 1998. Gains on sales of loans resulted
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
$3.4 million. 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 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 employee salaries and
benefits, occupancy costs, communications expenses, marketing, professional fees
and other non-interest expenses. For the six months ended June 30, 2000
non-interest expense was $8.5 million compared with $5.3 million for the same
period in 1999. The primary reason for the increase was due to expenses incurred
by Strand Atkinson. Details of non-interest expense by business segment is
detailed below:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------
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>
<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>
75
<PAGE> 85
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. The operating costs for the retail brokerage business are
higher than those for the bank. Excluding the income and operating costs of
Strand Atkinson the efficiency ratio for 1999 would have been 55.2%.
Non-interest expense for 1999 increased $2.2 million over 1998 to $11.7
million. Salaries and benefits increased $1.1 million. Salaries and benefits
expenses at Strand Atkinson 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
$9.5 million. 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 $1.0 million 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.
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 Umpqua 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 $2.7 million, $2.4 million, and $1.7
million 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 between December 31, 1999
and June 30, 2000. Investment securities held at December 31, 1999 were $76.9
million compared with $84.9 million at December 31, 1998. The objectives of the
investment portfolio are to provide
76
<PAGE> 86
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 $2.9 million compared with net
unrealized gains at December 31, 1998 of $1.0 million. 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,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<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>
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)
----------------- --------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
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....................................... -- -- --
------- ------- ----
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.
77
<PAGE> 87
TRADING ACCOUNT ASSETS
Trading account assets have not materially changed 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:
<TABLE>
<CAPTION>
JUNE 30,
2000
--------------
(IN THOUSANDS)
<S> <C>
Commercial and 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 loan portfolio at
December 31 of the years indicated:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
(IN THOUSANDS)
<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>
78
<PAGE> 88
The following table sets forth the loan portfolio maturities on fixed-rate
loans and the repricing dates on variable-rate loans at December 31, 1999:
<TABLE>
<CAPTION>
WITHIN ONE TO AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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 REPRICINGS
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,
----------------------------------------
1999 1998 1997 1996 1995
------ ---- ------ ---- ----
(IN THOUSANDS)
<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
79
<PAGE> 89
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 $3.5 million, 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.
80
<PAGE> 90
The following table shows activity in the allowance for loan losses for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
SUMMARY OF LOAN LOSS EXPERIENCE 1999 1998 1997 1996 1995
------------------------------- -------- -------- -------- -------- -------
(IN THOUSANDS)
<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 CATEGORY
AMOUNT TO TOTAL LOANS
------ -------------------
(IN THOUSANDS)
<S> <C> <C>
Commercial and industrial.................... $1,364 24.20%
Real estate.................................. 1,694 63.50%
Loans to individuals......................... 399 12.20%
Other........................................ 12 0.10%
------ ------
$3,469 100.00%
====== ======
</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.
81
<PAGE> 91
DEPOSITS AND BORROWINGS
Total deposits increased to $344.6 million 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.
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
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
(IN THOUSANDS)
<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.
82
<PAGE> 92
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.
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,
83
<PAGE> 93
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>
BY REPRICING INTERVAL
---------------------------------------- NON-INTEREST-
0 - 3 3 - 12 1 - 5 OVER 5 BEARING
DECEMBER 31, 1999 MONTHS MONTHS YEARS YEARS FUNDS TOTAL
----------------- -------- -------- -------- ------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
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.
84
<PAGE> 94
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-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 NET INTEREST MARGIN RETURN ON EQUITY
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
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
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 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.
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. Umpqua also had
available lines of $18.4 million from financial institutions. At December 31,
1999 the company had $15.6 million in interest-bearing deposits with the FHLB.
85
<PAGE> 95
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 authorized 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.
86
<PAGE> 96
INFORMATION ABOUT 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.
Valley of the Rogue Bank 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 on equity 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 who 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 continued prosperity, and it has improved its own infrastructure
with new voice and data communications systems, high-speed 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
87
<PAGE> 97
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 strategy includes expansion outside its current
market. VRB's management expects that such expansion would be centered along the
I-5 corridor and extend its banking services north into the Willamette Valley.
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.
88
<PAGE> 98
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:
<TABLE>
<CAPTION>
COMMON STOCK PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED 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 Belfiore............................................. 7,730(8) *
Kathy Peckham............................................... 7,555(9) *
All Directors and Executive Officers (12 persons)........... 596,842(1 - 9) 7.1%
</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 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
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<PAGE> 99
present any other unfavorable features. The amount of loans outstanding to
directors, executive officers, and companies with which they are associated was
$5.7 million at June 30, 2000.
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 Federal
Reserve. By the end of the second quarter of 2000, the bank's prime lending rate
had risen to 9.25%, 150 basis points 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.
NET INCOME
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 $2.5 million
compared to the same period last year. On a per share basis, earnings increased
from $0.28 in 1999 to $0.30 in 2000, an increase of 7.0%. 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.
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 led 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.
Loan growth was strong, liquidity had diminished, and deposit rates were rising
in an extremely competitive market.
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<PAGE> 100
Net interest income for the six-month periods ended June 30, 2000 and
1999. Net interest income (on a tax equivalent basis) increased from $8.3
million to $8.4 million 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 Bank of Seattle. For the period, the
bank averaged $3.4 million in overnight borrowings, resulting in interest
expense of approximately $111,000. (See discussion under "Liquidity.")
- 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> 101
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 ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- --------------------------- ---------------------------
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ---- -------- -------- ----- -------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Federal funds sold................ $ 18,792 $ 936 4.98% $ 38,206 $ 2,053 5.37% $ 19,556 $ 1,063 5.44%
Held-to-maturity securities....... 18,004 1,382 7.68 18,432 1,410 7.65 18,480 1,431 7.74
Available-for-sale
securities(1)................... 57,340 3,483 6.07 28,573 1,814 6.35 22,486 1,504 6.69
Commercial loans(2)............... 149,589 13,845 9.26 156,049 15,261 9.78 71,016 7,531 10.60
Consumer loans(2)................. 36,226 3,501 9.66 37,397 3,852 10.30 38,565 3,913 10.15
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total earning assets............ 279,951 23,147 8.27 278,657 24,390 8.75 170,103 15,442 9.08
Non-earning assets................ 35,947 33,161 17,056
Less: Loan loss reserve........... (3,835) (4,062) (1,597)
-------- -------- --------
Total assets.................... $312,063 $307,756 $185,562
======== ======== ========
Interest-bearing liabilities
Interest-bearing checking......... $ 32,813 $ 321 0.98% $ 33,188 $ 446 1.34% $ 20,256 $ 299 1.48%
Money market...................... 84,549 2,774 3.28 75,519 2,764 3.66 53,036 2,116 3.99
Savings........................... 24,764 486 1.96 24,336 523 2.15 15,358 337 2.19
Time.............................. 59,252 2,832 4.78 73,627 3,932 5.34 26,285 1,310 4.98
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total interest-bearing
deposits...................... 201,378 6,413 3.18 206,670 7,665 3.71 114,935 4,062 3.53
Non-interest-bearing deposits..... 73,610 64,733 45,552
-------- -------- --------
Total interest-bearing
deposits...................... 274,988 271,403 160,487
Other liabilities................. 2,588 2,571 1,415
-------- -------- --------
Total liabilities............... 277,576 273,974 161,902
Shareholders' equity.............. 34,487 33,782 23,660
-------- -------- --------
Total liabilities and
shareholders' equity.......... $312,063 $307,756 $185,562
======== ======== ========
Net interest income(1)............ $16,734 $16,725 $11,380
Interest income as a percentage of
average earning assets.......... 8.27% 8.75% 9.08%
Interest expense as a percentage
of average earning assets....... 2.29 2.75 2.39
---- ----- -----
Net interest margin............... 5.98% 6.00% 6.69%
==== ===== =====
</TABLE>
-------------------------
(1) Tax exempt income has been adjusted to a tax equivalent basis at a 37%
effective rate.
(2) Nonaccrual loans are included in average balances.
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<PAGE> 102
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
------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE NET EFFECT VOLUME RATE NET EFFECT
------- -------- ---------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
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> 103
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, 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 ratio of 56.2%, slightly higher than
1998's efficiency ratio of 55.6%. Excluding the amortization of goodwill from
the measurement, the efficiency ratio 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 chartered
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 $0.57, an increase of 18% from $0.48
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 from 6.69% to 6.01%. Noninterest income and expenses also reflected the
acquisition, growing 28% and 52% respectively.
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<PAGE> 104
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 $17.7 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 46,678 26.07
Real estate commercial
mortgage................... 103,688 47.27 93,540 46.37 79,997 44.67
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
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<PAGE> 105
evaluating whether sufficient collateral is obtained at the outset, and
verifying that the value of the collateral remains sufficient to support the
credit.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------
LOAN LOSS EXPERIENCE 2000 1999 1998
-------------------- -------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Loan loss reserve balance, beginning of year........ $3,503 $3,539 $1,780
Loan losses
Commercial........................................ -- -- 21
Real Estate....................................... -- 28 95
Consumer.......................................... 17 58 73
------ ------ ------
Total.......................................... 17 86 189
Recoveries
Commercial........................................ 3 38 36
Real Estate....................................... 3 -- --
Consumer.......................................... 2 12 14
------ ------ ------
Total.......................................... 8 50 50
------ ------ ------
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....................... 1.60% 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>
DECEMBER 31,
JUNE 30, ----------------
LOAN LOSS EXPERIENCE 2000 1999 1998
-------------------- -------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
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.
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<PAGE> 106
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 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
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
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 2.5% for the
year, to date. However, non-interest bearing account balances are also prone to
volatility and can fluctuate from day to day depending on the time of month and
external events like tax deadlines.
The bank's current deposit mix is further illustrated below:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE PERCENTAGE
JUNE 30, OF TOTAL DECEMBER 31, OF TOTAL DECEMBER 31, OF TOTAL
2000 DEPOSITS 1999 DEPOSITS 1998 DEPOSITS
-------- ---------- ------------ ---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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>
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<PAGE> 107
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 $8.0 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 $11.0 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 $1.0 million. 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.
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 mismatch or gap 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.
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<PAGE> 108
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) -------------------------
IN NET INTEREST NET INTEREST RETURN ON
CHANGE IN PRIME RATE INCOME MARGIN EQUITY
-------------------- ------------------- ------------ ---------
(IN THOUSANDS)
<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.
The geographic market areas served by both South Umpqua Bank 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
their 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 offer a wide array of deposit
products and believe they can compete effectively through select rate-driven
product promotions.
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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 banks' 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 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. Strand Atkinson, however,
competes with other regional and national brokerage firms, many of which are
larger and have more market visibility and may offer services that Strand
Atkinson does not offer.
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 banking 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.
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 practices that the agencies believe constitute unsafe or
unsound banking.
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."
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<PAGE> 110
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, 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.
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; in the case of South Umpqua
Bank and Valley of the Rogue Bank to its 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
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<PAGE> 111
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.
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%.
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
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<PAGE> 112
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, 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
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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.
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 7,625,627
shares of common stock issued and outstanding. Following the Merger, a total of
approximately 14,385,351 shares are expected to issued and outstanding, assuming
an exchange ratio of 0.8135. 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
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<PAGE> 114
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 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 653,125 shares were subject
to options outstanding as of October 2, 2000. An additional approximately
197,000 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
1,000,000 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 8,309,433 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 754,514 shares of common stock have been reserved for issuance
under VRB's stock option plans, of which 240,904 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 Corporation 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
potentially be
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<PAGE> 115
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 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 Statement 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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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UMPQUA HOLDINGS CORPORATION
Consolidated Balance Sheets............................... F-2
Consolidated Statements of Income......................... F-3
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income............................... F-4
Consolidated Statements of Cash Flows..................... F-5
Notes to Consolidated Financial Statements................ F-6
Report of Independent Public Accountants.................. F-27
VRB BANCORP
Consolidated Balance Sheets............................... F-28
Consolidated Statements of Income and Comprehensive
Income................................................. F-29
Consolidated Statements of Changes in Stockholders'
Equity................................................. F-30
Consolidated Statements of Cash Flows..................... F-31
Notes to Consolidated Financial Statements................ F-32
Report of Independent Public Accountants.................. F-53
</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............................. 2,086,396 2,312,754 4,576,785 4,754,115 4,212,145
Interest on tax-exempt investment
securities............................. 529,724 405,455 910,946 426,937 216,937
----------- ---------- ----------- ----------- -----------
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................................ 526,079 387,251 863,408 767,072 796,390
Communications........................... 448,194 352,082 785,966 630,199 502,913
Marketing................................ 357,890 361,290 941,618 735,976 698,333
Professional services.................... 979,117 674,908 1,343,276 1,020,922 796,124
Supplies................................. 230,802 144,337 384,215 365,839 369,504
Other.................................... 537,917 305,971 707,580 637,375 428,774
----------- ---------- ----------- ----------- -----------
Total non-interest expense............. 8,509,211 5,250,375 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 AND 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 29,091
-----------
Comprehensive income.......................... $ 2,728,199
===========
Stock repurchased............................. (9,100) (67,408)
Proceeds from stock options exercised (Note
14)......................................... 25,000 113,018
Cash dividends, $0.08 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
available-for-sale................................... -- -- -- -- 2,932,813
Net loan originations.................................. (22,684,208) (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
F-6
<PAGE> 122
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contractual maturity, adjusted for anticipated prepayments. Certain 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
F-7
<PAGE> 123
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-8
<PAGE> 124
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-9
<PAGE> 125
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
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 state 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>
F-10
<PAGE> 126
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
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 state 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.
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
AVAILABLE-FOR-SALE
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.
F-11
<PAGE> 127
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- LOANS RECEIVABLE
The breakdown of loan receivable is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<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 AFTER
1 YEAR 1 TO 5 YEARS 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.
Repayments of $2,302,000 and new advances of $2,263,000 were made during the
year ended December 31, 1999.
F-12
<PAGE> 128
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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..................... (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>
At December 31, 1999 the Company had loans totalling $1,051,700 considered
impaired under SFAS No. 114, Accounting for Impaired Loans, included in
non-accrual loans. The Company did not have any impaired loans at December 31,
1998. The allowance allocated to impaired loans was $540,000 at December 31,
1999. The amount of the allowance against impaired loans were determined after
measuring impairment based on the present value of the expected future cash
flows discounted at the loan's effective rate. The average recorded investment
in impaired loans was $87,600 and $0 for the years ended December 31, 1999 and
1998. The Company has no commitment to extend additional credit on loans which
are non-accrual or impaired at December 31, 1999.
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
F-13
<PAGE> 129
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and 1997, respectively. The following table sets forth by remaining maturity,
time certificates of deposit at December 31, 1999:
<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 totaling approximately $66,000. These capital lease obligations are
included in other liabilities.
F-14
<PAGE> 130
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 determined 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
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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............................... $2,699,108 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 YEAR ENDED DECEMBER 31, 1999
-----------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
---------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders... $4,873,941 7,636,191 $ 0.64
Effect of dilutive securities:
Stock options........................... 136,584 (0.01)
---------- --------- ------
Diluted EPS............................... $4,873,941 7,772,775 $ 0.63
========== ========= ======
</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.
F-17
<PAGE> 133
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The options, which expire from March 31, 2009 to November 2010, were outstanding
at December 31, 1999.
<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, 1997
---------------------------------------
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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> <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> <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
F-19
<PAGE> 135
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the 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 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:
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 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,
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
F-20
<PAGE> 136
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-21
<PAGE> 137
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Outstanding options at December 31, 1999 are as follows:
<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 $12.00 April 2009
82,500............................. 0 $ 9.63 May 2010
2,500.............................. 0 $10.25 October 2010
65,000............................. 0 $ 9.75 December 2009
</TABLE>
In 1997, compensation expense under a stock appreciation right agreement
totalled $256,594. The agreement, which has been fully funded, terminated in
1997.
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.
F-22
<PAGE> 138
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<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.
F-23
<PAGE> 139
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
INCOME
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>
F-25
<PAGE> 141
UMPQUA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
OPERATING ACTIVITIES:
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-26
<PAGE> 142
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 for 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-27
<PAGE> 143
VRB BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
2000 1999 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
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......................................... 1,643,472 1,182,951 --
------------ ------------ ------------
Loans, net of allowance for loan losses and unearned
income.................................................... 213,881,401 196,818,024 175,188,200
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-28
<PAGE> 144
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
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
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 11,129,375 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........................................ 391,344 259,469 814,906 1,183,255 730,278
----------- ----------- ----------- ----------- -----------
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) (1,052,330) (1,578,632) 12,087 (7,247)
----------- ----------- ----------- ----------- -----------
Comprehensive Income.................................... $ 2,325,641 $ 1,376,266 $ 3,309,751 $ 4,938,770 $ 3,696,372
=========== =========== =========== =========== ===========
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Basic................................................. $ 0.30 $ 0.28 $ 0.57 $ 0.57 $ 0.48
=========== =========== =========== =========== ===========
Diluted............................................... $ 0.30 $ 0.28 $ 0.57 $ 0.56 $ 0.48
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE> 145
VRB BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
NUMBER OF COMPREHENSIVE TOTAL
COMMON COMMON RETAINED INCOME SHAREHOLDERS'
SHARES STOCK EARNINGS (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-30
<PAGE> 146
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 the maturity or sales of
available-for-sale securities...................... 518,281 10,526,996 10,559,844 33,611,023 3,455,408
Purchases of available-for-sale securities........... (10,500,000) (10,500,000) (64,980,969) (3,000,000)
Net (increase) decrease in loans..................... (17,523,898) (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.......................................... 36,502 131,620 111,554 36,517 88,068
Repurchase of common stock......................... (49,257) (508,365) (3,103,935) -- --
------------ ------------ ------------ ------------ ------------
Net cash from financing activities............... 12,702,241 (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) (3,030,719) 14,427,380
CASH AND CASH EQUIVALENTS, beginning of period......... 18,686,676 40,613,570 40,613,570 43,644,289 29,216,909
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period............... $ 17,722,662 $ 27,663,708 $ 18,686,676 $ 40,613,570 $ 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-31
<PAGE> 147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
VRB Bancorp (VRB), a bank holding company, and its wholly-owned subsidiary,
Valley of the Rogue Bank (the Bank). Substantially all activity of VRB is
conducted through its subsidiary bank and all significant intercompany accounts
and transactions have been eliminated in the preparation of the consolidated
financial statements.
DESCRIPTION OF BUSINESS
The Bank is a state-chartered institution authorized to provide banking
services by the State of Oregon. With its headquarters in Rogue River, Oregon,
it also has branch operations in Josephine and Jackson County, Oregon. The Bank
conducts a general banking business. Its activities include the usual deposit
functions of a commercial bank: commercial, real estate, installment, and
mortgage loans; checking and savings accounts; automated teller machines
(ATM's); collection services; and, safe deposit facilities. Both VRB Bancorp and
Valley of the Rogue Bank are subject to the regulations of certain Federal and
State agencies and undergo periodic examinations by those regulatory
authorities.
MANAGEMENT'S ESTIMATES AND ASSUMPTION
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
INVESTMENT SECURITIES
The Bank is required to specifically identify under generally accepted
accounting principles its investment securities as "held-to-maturity,"
"available-for-sale," or "trading accounts." Accordingly, management has
determined that all investment securities held at June 30, 2000 and at December
31, 1999 and 1998, are either "available-for-sale" or "held-to-maturity" and
conform to the following accounting policies:
SECURITIES HELD-TO-MATURITY
Bonds, notes, and debentures for which the Bank has the intent and ability
to hold to maturity are reported at cost, adjusted for premiums and discounts
that are recognized in interest income using the interest method over the period
to maturity.
SECURITIES AVAILABLE-FOR-SALE
Available-for-sale securities consist of bonds, notes, debentures, and
certain equity securities not classified as held-to-maturity securities.
Securities are generally classified as available-for-sale if the instrument may
be sold in response to such factors as: (1) changes in market interest rates and
related changes in the security's prepayment risk, (2) needs for liquidity, (3)
changes in the availability of and the yield on alternative instruments, and (4)
changes in funding sources and terms. Unrealized holding gains and losses, net
of tax, on available-for-sale securities are reported as a net amount in a
separate component of equity until realized. Fair values for investment
securities are
F-32
<PAGE> 148
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-33
<PAGE> 149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
F-34
<PAGE> 150
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Short-term borrowings -- The carrying amounts of federal funds
purchased, borrowings under repurchase agreements, and other short-term
borrowings maturing within 90 days approximate their fair values. Fair
values of other short-term borrowings are estimated using discounted cash
flow analyses based on the Bank's current incremental borrowing rates for
similar types of borrowing arrangements.
Long-term debt -- The fair values of the Bank's long-term debt are
estimated using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest -- The carrying amounts of accrued interest
approximate their fair values.
Off-balance-sheet instruments -- The Bank's off-balance-sheet
instruments include unfunded commitments to extend credit and standby
letters of credit. The fair value of these instruments is not considered
practicable to estimate because of the lack of quoted market prices and the
inability to estimate fair value without incurring excessive costs.
ADVERTISING
Advertising costs are charged to expense during the year in which they are
incurred. Advertising expenses were $293,889, $260,454, and $247,668 for the
years ended December 31, 1999, 1998, and 1997, respectively.
STOCK OPTIONS
VRB applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for its stock option plans. Accordingly,
compensation costs are recognized as the difference between the exercise price
of each option and the market price of VRB's stock at the date each grant
becomes further vested. Accordingly, compensation costs charted to income were
$89,673, $93,340, and $57,312 in 1999, 1998, and 1997, respectively. Had
compensation for VRB's stock option plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the method
of Statement of Financial Accounting Standards No. 123, the Bank's net income
would have been affected as described in Note 14.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 137 "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that VRB recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. SFAS No. 133, as amended by
SFAS No. 137, shall be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. However, management
F-35
<PAGE> 151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
F-36
<PAGE> 152
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-37
<PAGE> 153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contractual maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE SECURITIES
------------------------------ ------------------------------
ESTIMATED ESTIMATED
AMORTIZED COST MARKET VALUE AMORTIZED 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........... 11,132 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 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>
F-38
<PAGE> 154
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-39
<PAGE> 155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1997
------ ------ ------
<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):
<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>
F-40
<PAGE> 156
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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%.
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>
F-41
<PAGE> 157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and financial guarantees. Those instruments involve elements
of credit and interest-rate risk similar to the amounts recognized in the
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of the Bank's involvement in particular classes
of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, and financial guarantees written, is represented by
the contractual notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank's experience has been that a
majority of loan commitments are drawn upon by customers. While most commercial
letters of credit are not utilized, a significant portion of such utilization is
on an immediate payment basis. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
it is deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral varies but may
include cash, accounts receivable, inventory, premises and equipment, and
income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third-party. These guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds cash, marketable securities, or real estate as collateral
supporting those commitments for which collateral is deemed necessary.
The Bank has not been required to perform on any financial guarantees
during the past two years. The Bank has not incurred any losses on its
commitments in either 1999, 1998, or 1997.
A summary of the notional amounts of the Bank's financial instruments with
off-balance-sheet risk at December 31, 1999 and 1998, follows:
<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>
F-42
<PAGE> 158
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
Cash and due from banks.................. $ 17,087 $ 17,087 $ 14,514 $ 14,514
Interest-bearing deposits with other
banks................................. $ 1,600 $ 1,600 $ 3,100 $ 3,100
Federal funds sold....................... $ -- $ -- $ 23,000 $ 23,000
Securities held-to-maturity.............. $ 18,010 $ 17,898 $ 17,454 $ 18,247
Securities available-for-sale............ $ 54,890 $ 54,890 $ 57,264 $ 57,264
Federal Home Loan Bank stock............. $ 1,899 $ 1,899 $ 1,765 $ 1,765
Loans held-for-sale...................... $ 1,183 $ 1,183 $ -- $ --
Loans, net of allowance for loan losses
and unearned income................... $196,818 $196,208 $175,188 $ 17,233
Accrued interest......................... $ 1,925 $ 1,925 $ 1,931 $ 1,931
Financial liabilities:
Demand and savings deposits.............. $217,886 $217,886 $207,304 $207,304
Time deposits............................ $ 58,480 $ 58,355 $ 66,819 $ 67,196
Accrued interest......................... $ 275 $ 275 $ 348 $ 348
</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.
NOTE 11 -- CONCENTRATIONS OF CREDIT RISK
All of the Bank's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Bank's market area. Investments in
state and municipal securities are not significantly concentrated within any one
region of the United States. The concentrations of credit by type of loan are
set forth in Note 4. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Commercial and standby
letters of credit were granted primarily to commercial borrowers as of December
31, 1999. The Bank's loan policy does not allow the extension of credit to any
single borrower or group of related borrowers in excess of a total of $1,250,000
without approval from the Board of Directors.
F-43
<PAGE> 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
<S> <C>
Years ending December 31,
2000.............................................. $ 249,453
2001.............................................. 244,031
2002.............................................. 241,065
2003.............................................. 177,844
2004.............................................. 161,646
Thereafter........................................ 361,598
----------
Total minimum payments required................ $1,435,637
==========
</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 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
F-44
<PAGE> 160
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
<TABLE>
<CAPTION>
COMBINED
DIRECTORS' PLAN EMPLOYEES' PLAN PLANS
--------------------- --------------------- --------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES OPTION PRICE SHARES OPTION 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
F-45
<PAGE> 161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
<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
F-46
<PAGE> 162
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The Bank has also established supplemental retirement agreements with
certain executive officers. The agreements provide for established
post-retirement payments to covered executives for up to ten years after their
retirement. The supplemental programs are self-funded by the Bank through the
setting aside of funds into a bank-controlled deposit account. As of December
31, 1999, a liability for the supplemental retirement plans was recognized and
funded in the amount of $225,736. During 1999, 1998, and 1997, the Bank recorded
distributions of $38,600, $38,600, and $21,000, respectively.
NOTE 16 -- EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the year. Diluted earnings per share reflect the
potential dilution that could occur if common shares were issued pursuant to the
exercise of options under the Bank's stock option plans. Comparative earnings
per share data for the years ended December 31, 1998 and 1997, have been
restated to conform with the current year presentation. The following table
illustrates the computations of basic and diluted earnings per share for the six
months ended June 30, 2000 and 1999 (unaudited) and the years ended December 31,
1999, 1998, and 1997 (dollars in thousands except per share amounts):
<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
====== ====== ======
</TABLE>
F-47
<PAGE> 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Basic earnings per share --
Income available to common shareholders.......... $4,888 $8,579 $ 0.57
======
Effect of dilutive securities
Outstanding common stock options............... -- 43
------ ------
Income available to common shareholders plus
assumed conversions............................ $4,888 $8,622 $ 0.57
====== ====== ======
YEAR ENDED DECEMBER 31, 1998
Basic earnings per share --
Income available to common shareholders.......... $4,927 $8,685 $ 0.57
======
Effect of dilutive securities
Outstanding common stock options............... -- 77
------ ------
Income available to common shareholders plus
assumed conversions............................ $4,927 $8,762 $ 0.57
====== ====== ======
YEAR ENDED DECEMBER 31, 1997
Basic earnings per share --
Income available to common shareholders.......... $3,704 $7,639 $ 0.48
======
Effect of dilutive securities
Outstanding common stock options............... -- 21
------ ------
Income available to common shareholders plus
assumed conversions............................ $3,704 $7,660 $ 0.48
====== ====== ======
</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
F-48
<PAGE> 164
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
have a direct material effect on VRB Bancorp and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, VRB Bancorp and the Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require VRB Bancorp and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined). Management believes, as of December 31, 1999, that
VRB Bancorp and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1999, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category. VRB Bancorp's capital ratios are not significantly
different from those of the Bank.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL 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 $10.0%
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 14.0% $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-49
<PAGE> 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 -- PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for VRB Bancorp (unconsolidated parent
company only) is as follows:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
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>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
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
========== ========== ==========
</TABLE>
F-50
<PAGE> 166
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
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>
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.
F-51
<PAGE> 167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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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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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 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.
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(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.
(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.
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(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.
(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 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
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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 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
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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.
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.
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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 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
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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 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 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.
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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, 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.
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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;
(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
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material adverse change in 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.
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
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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, 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
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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 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 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)
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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 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.
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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 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
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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.
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
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
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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 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
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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 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,
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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 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 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;
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(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 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
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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 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
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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 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 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
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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 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
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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 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
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March 31, 2000, Umpqua has not and prior to the Effective Date shall not,
reverse any provision taken for loan losses.
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 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.
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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 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;
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(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, 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
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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 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 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
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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.
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;
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(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;
(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;
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(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, 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, 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.
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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 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.
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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 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
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plans and arrangements, and similar programs through the Effective Date, in
accordance with the terms thereof.
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:
(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
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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 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
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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 "pooling of interests" in accordance with APB Opinion
No. 16, and the related interpretations of the AICPA consensus's 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, lease, and operate
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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 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.
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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 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 consensus's 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.
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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 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
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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) 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 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
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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, 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
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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 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
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sent via confirmed facsimile to the respective parties at their addresses or
facsimile numbers set forth below:
If to Umpqua:
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.
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
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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.
(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
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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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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.
<TABLE>
<S> <C>
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
</TABLE>
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.
<TABLE>
<S> <C>
/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
</TABLE>
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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.
<TABLE>
<S> <C>
/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
</TABLE>
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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 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
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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 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
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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 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
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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.
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.
<TABLE>
<S> <C>
UMPQUA HOLDINGS CORPORATION VRB BANCORP
By: By:
------------------------------------------ ------------------------------------------
Raymond P. Davis, William A. Haden,
President, Chief Executive Officer President, Chief Executive Officer
</TABLE>
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APPENDIX A
DIRECTORS AND OFFICERS OF UMPQUA HOLDINGS CORPORATION
[TO BE COMPLETED PRIOR TO FILING]
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<PAGE> 220
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 SE 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
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
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<PAGE> 221
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.
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.
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<PAGE> 222
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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<PAGE> 223
APPENDIX A
DIRECTORS AND OFFICER OF SURVIVING BANK
[TO BE COMPLETED PRIOR TO FILING]
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<PAGE> 224
APPENDIX B
BRANCH OFFICES
[TO BE COMPLETED PRIOR TO FILING]
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<PAGE> 225
APPENDIX II
RAGEN MACKENZIE INCORPORATED
October 17, 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; (ii) certain publicly available financial
statements of Umpqua and other historical financial information provided by
Umpqua that we deemed relevant; (iii) certain publicly available financial
statements of VRB and other historical financial information provided by VRB
that we deemed relevant; (iv) 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; (v) 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;
(vi) the pro forma impact of the Merger; (vii) 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; (viii) the financial terms of recent business combinations in the
banking industry deemed relevant to our analysis; (ix) the current market
environment generally and the banking environment in particular; and (x) 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,
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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's 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
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's 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 17, 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;
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;
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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 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 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.
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(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.
(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.
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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 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 Stock Option
Agreement (as defined in Section 6.1) or Nonqualified Stock Option Agreement (as
defined in Section 7.1).
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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 sec. 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 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.
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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.
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. Notwithstanding Section 9.2 of this Plan or the terms set forth in
the Incentive Stock Option Agreement, 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 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
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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.
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.
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
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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. Notwithstanding Section 9.2 of this Plan or the terms
set forth in the written option agreement, 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 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.
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,
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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 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
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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 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
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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 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
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<PAGE> 239
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.
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;
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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.
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 September 29, 2000.
Approved by the shareholders of the Company on November , 2000.
Effective , 2000.
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<PAGE> 241
[outside back cover]
A MERGER OF
EQUALS
[VRB/ VALLEY OF THE ROGUE BANK LOGO] [SOUTH UMPQUA BANK LOGO]
<PAGE> 242
REVOCABLE PROXY
VRB BANCORP
SPECIAL MEETING OF SHAREHOLDERS
NOVEMBER 29, 2000
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints James D. Coleman and William A. Haden,
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 29, 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.
