Real Estate Lease - UMPQUA HOLDINGS CORP - 3-30-2000

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Real Estate Lease - UMPQUA HOLDINGS CORP - 3-30-2000 Powered By Docstoc
					Real Estate Lease THIS LEASE is made and entered into this 25th day of February, 1999 between NE Broadway Partners ("Landlord"), and South Umpqua Bank ("Tenant"). 1. Basic Lease Provisions and Identification of Exhibits. 1.1 Basic Lease Provisions. Leased Premises: Approximately 3,419 square feet of rentable floor space located at 1448 NE Weidler, Portland, Oregon and as depicted in Exhibit A
Applicable Percentage: Lease Term:

54.792% Five (5) years

Commencement Date: May 1, 1999, or the opening of business, whichever occurs first. Monthly Base Rent: Tenant shall pay a monthly base rent as follows:
Year Year Year Year Permitted Uses: Tenant's Broker: Landlord's Broker: 1 - 2 3 4 5 $5,408.00 $5,692.91 $5,977.83 $6,262.75

Bank and Financial Service Norris & Stevens HSM Pacific

Exhibits:

Leased Premises, Tenant's Improvements, and Rules and Regulations

Option to Renew,

1.2 Identification of Exhibits. The Exhibits identified in and attached to this Lease are incorporated in this Lease by reference. 2. Leased Premises. Landlord hereby leases to Tenant, and Tenant hereby accepts from Landlord, subject to and with the benefit of the terms and provisions of this Lease, the Leased Premises as described in Section 1.1. The real property and 1

improvements in which the Leased Premises are located are hereinafter referred to as the "Building." 3. Term. This Lease shall be in effect for the period of time specified in Section 1.1 known as "Lease Term" and hereinafter referred to as the "Term." 4. Monthly Base Rent, Other Charges, Late Charge, Utilities, and Deposit

improvements in which the Leased Premises are located are hereinafter referred to as the "Building." 3. Term. This Lease shall be in effect for the period of time specified in Section 1.1 known as "Lease Term" and hereinafter referred to as the "Term." 4. Monthly Base Rent, Other Charges, Late Charge, Utilities, and Deposit 4.1 Monthly Base Rent. Commencing on the Commencement Date, Tenant shall pay to Landlord, without notice or demand and without any deduction whatsoever, the monthly sums set forth in Section 1.1, above, (the "Monthly Base Rent'), which Tenant shall pay in advance on or before the first day of each calendar month of the Term. 4.2 Other Charges. In addition to the Monthly Base Rent, Tenant shall pay to Landlord in the manner provided in Section 4.2 (c), Tenant's share of the following items (hereinafter called "Other Charges"): (a) Tenant shall pay to Landlord Tenant's prorata share of the operating costs of the Building. Tenant's share shall be an amount equal to the total operating costs during each calendar year of the Term, multiplied by the "Applicable Percentage". The "Applicable Percentage" is 54.792%, and represents the percentage that Tenant's useable space is of the total useable space in the Building. For the purposes of this Section 4.2 (a), the term "operating costs of the Building" means the total costs and expenses that are actual, reasonable and necessary, and directly attributable to operating, maintaining, repairing and cleaning the Land, and Building, including, but not limited to, standard all-risk insurance coverage, fire and extended coverage, including earthquake insurance, the cost of public liability and property damage insurance, rental insurance, personal property taxes and assessments payable on the land and improvements comprising the Building, all repairs not required by Landlord referred to in Section 10 hereof, asphalt patching and resurfacing, lighting, sanitary control, removal of snow, trash and other refuse, rental maintenance Lease and repair of machinery and equipment used in such maintenance, the cost of personnel to implement such services, utility charges for 2

common areas, and a reasonable allowance to Landlord for Landlord's supervision of the operation, maintenance, repair, etc. of the common area, however, such allowance shall not exceed ten percent 10% of operating costs. In addition, Tenant shall pay its prorata share of all real and personal property taxes. The term "Property Taxes" shall include all real and personal property taxes, assessments, and other governmental charges, general and special, ordinary, and extraordinary, of any kind and nature whatsoever levied by any governmental authority against the land and improvements comprising the Building and any personal property used in its operation, maintenance and repair, and all costs and expenses incurred by Landlord in attempts to obtain reductions in such taxes or assessments. Property Taxes include, without limitation, assessments for roads or other public improvements or benefits which are levied, assessed or imposed during the Term of this Lease, and which become a lien upon the Building or any part thereof, together with any taxes upon rental payable by Tenant hereunder if such taxes are substituted in whole or in part for presently existing ad valorem real property taxes but only to the extent to which such taxes upon rentals are substituted for said real property taxes. However, "Property Taxes" shall not include any franchise, excise, gift, estate, inheritance, succession, capital levy or transfer tax of Landlord in connection with this Lease or Landlord's rights in the Leased Premises, or any income, excess profits or revenue tax charge or levy against Landlord upon the business, sales or operations of Landlord. Nothing herein shall prevent or prohibit Tenant at its own expense from contesting or instituting all proceedings reasonably necessary to contest the validity or amount of any real or personal property taxes and assessments applicable to the Leased Premises. (b) Notwithstanding anything contained herein to the contrary, the following shall not be included in the Other Charges:

common areas, and a reasonable allowance to Landlord for Landlord's supervision of the operation, maintenance, repair, etc. of the common area, however, such allowance shall not exceed ten percent 10% of operating costs. In addition, Tenant shall pay its prorata share of all real and personal property taxes. The term "Property Taxes" shall include all real and personal property taxes, assessments, and other governmental charges, general and special, ordinary, and extraordinary, of any kind and nature whatsoever levied by any governmental authority against the land and improvements comprising the Building and any personal property used in its operation, maintenance and repair, and all costs and expenses incurred by Landlord in attempts to obtain reductions in such taxes or assessments. Property Taxes include, without limitation, assessments for roads or other public improvements or benefits which are levied, assessed or imposed during the Term of this Lease, and which become a lien upon the Building or any part thereof, together with any taxes upon rental payable by Tenant hereunder if such taxes are substituted in whole or in part for presently existing ad valorem real property taxes but only to the extent to which such taxes upon rentals are substituted for said real property taxes. However, "Property Taxes" shall not include any franchise, excise, gift, estate, inheritance, succession, capital levy or transfer tax of Landlord in connection with this Lease or Landlord's rights in the Leased Premises, or any income, excess profits or revenue tax charge or levy against Landlord upon the business, sales or operations of Landlord. Nothing herein shall prevent or prohibit Tenant at its own expense from contesting or instituting all proceedings reasonably necessary to contest the validity or amount of any real or personal property taxes and assessments applicable to the Leased Premises. (b) Notwithstanding anything contained herein to the contrary, the following shall not be included in the Other Charges: (1) The cost of any capital addition to the Building or the land on which the Building is located, including the cost to prepare space for occupancy by a new tenant; 3

(2) Expenses for which Landlord is or will be reimbursed by another source; (3) Expenses for the defense of Landlord's title to the Leased Premises or the Building; (4) Structural repairs and replacements which are required of Landlord under Section 10.1; (5) Depreciation and amortization of the Building, financing costs, including interest and principal amortization of debts; (6) Charitable or political contributions; (7) Cost of improving, renovating, or cleaning space for a tenant or space vacated by a tenant or items and services selectively supplied to any other tenant; (8) Any amounts expended by Landlord as environmental response costs for removal, enclosure, encapsulation, clean-up, remediation or other activities regarding Landlord's compliance with federal, state, municipal or local hazardous waste and environmental laws, regulations or ordinances unless the need for such expenditure by Landlord is caused in whole or part by Tenant's use and occupancy of the Leased Premises; (9) Costs to correct original defects in the design, construction or latent defects in the Leased Premises or the Building; (10) Expenses payable directly by tenant(s) for any reason (such as excessive utility use); (11) Any repair, rebuilding or other work necessitated by condemnation, fire, windstorm or other insured casualty or hazard; (12) Any amounts due as a result of Landlord's violation or failure to comply with any governmental regulations and rules or any court order, decree or judgment;

(2) Expenses for which Landlord is or will be reimbursed by another source; (3) Expenses for the defense of Landlord's title to the Leased Premises or the Building; (4) Structural repairs and replacements which are required of Landlord under Section 10.1; (5) Depreciation and amortization of the Building, financing costs, including interest and principal amortization of debts; (6) Charitable or political contributions; (7) Cost of improving, renovating, or cleaning space for a tenant or space vacated by a tenant or items and services selectively supplied to any other tenant; (8) Any amounts expended by Landlord as environmental response costs for removal, enclosure, encapsulation, clean-up, remediation or other activities regarding Landlord's compliance with federal, state, municipal or local hazardous waste and environmental laws, regulations or ordinances unless the need for such expenditure by Landlord is caused in whole or part by Tenant's use and occupancy of the Leased Premises; (9) Costs to correct original defects in the design, construction or latent defects in the Leased Premises or the Building; (10) Expenses payable directly by tenant(s) for any reason (such as excessive utility use); (11) Any repair, rebuilding or other work necessitated by condemnation, fire, windstorm or other insured casualty or hazard; (12) Any amounts due as a result of Landlord's violation or failure to comply with any governmental regulations and rules or any court order, decree or judgment; (13) Leasing commissions, advertising expenses and other costs incurred in leasing or procuring new tenants; 4

(14) The salaries and benefits of executive officers of Landlord, if any; (15) Attorney's fees, accounting fees and expenditures incurred in connection with negotiations, disputes and claims of other tenants or occupants of the Building with other third parties except as specially provided in the Lease; as well as cost to prepare financial statements or tax returns; or (16) Cost of the initial stock of tools and equipment for operations, repair and maintenance of the Building. (c) Prior to the expiration of each calendar year during the Term (or as soon thereafter as such information becomes available) Landlord will notify Tenant in writing of Landlord's estimate of Tenant's share of the Other Charges due for the next calendar year. Landlord's estimate shall be based, to the extent possible, upon the actual amount of the Other Charges for the immediately preceding calendar year. Tenant shall pay their estimated amount in advance in twelve (12) equal monthly installments on the first day of each month of such calendar year. Within thirty (30) days after the end of each calendar year. Landlord will compute Tenant's share for such calendar year based upon the actual amount of the Other Charges for the calendar year, and if the total amount of Tenant's share for calendar year is less than the actual amount of Tenant's share for such calendar year, Tenant shall pay Landlord any deficiency. If the total amount paid by Tenant for such calendar year exceeds the actual amount of Tenant's share, Landlord shall credit such excess to the next monthly payments which thereafter become due. If this Lease commences at a time other than the beginning of a calendar year, Tenant shall pay the estimate of Tenant's share for the portion remaining of the calendar year based upon the number of days the Lease is in force. If this Lease expires at a time other than the expiration date of a calendar year, Tenant shall be obligated to pay immediately any deficiencies which shall be computed at the expiration of that calendar year. If the estimated amount Tenant has paid for that calendar year

(14) The salaries and benefits of executive officers of Landlord, if any; (15) Attorney's fees, accounting fees and expenditures incurred in connection with negotiations, disputes and claims of other tenants or occupants of the Building with other third parties except as specially provided in the Lease; as well as cost to prepare financial statements or tax returns; or (16) Cost of the initial stock of tools and equipment for operations, repair and maintenance of the Building. (c) Prior to the expiration of each calendar year during the Term (or as soon thereafter as such information becomes available) Landlord will notify Tenant in writing of Landlord's estimate of Tenant's share of the Other Charges due for the next calendar year. Landlord's estimate shall be based, to the extent possible, upon the actual amount of the Other Charges for the immediately preceding calendar year. Tenant shall pay their estimated amount in advance in twelve (12) equal monthly installments on the first day of each month of such calendar year. Within thirty (30) days after the end of each calendar year. Landlord will compute Tenant's share for such calendar year based upon the actual amount of the Other Charges for the calendar year, and if the total amount of Tenant's share for calendar year is less than the actual amount of Tenant's share for such calendar year, Tenant shall pay Landlord any deficiency. If the total amount paid by Tenant for such calendar year exceeds the actual amount of Tenant's share, Landlord shall credit such excess to the next monthly payments which thereafter become due. If this Lease commences at a time other than the beginning of a calendar year, Tenant shall pay the estimate of Tenant's share for the portion remaining of the calendar year based upon the number of days the Lease is in force. If this Lease expires at a time other than the expiration date of a calendar year, Tenant shall be obligated to pay immediately any deficiencies which shall be computed at the expiration of that calendar year. If the estimated amount Tenant has paid for that calendar year exceeds the actual amount of Tenant's share, and if Tenant has otherwise complied with all the terms and provisions of this Lease, Landlord shall 5

refund such excess to Tenant Tenant's obligations under this Section shall survive the expiration or termination of this Lease. (d) Landlord shall keep records showing all expenditures incurred as Other Charges and/or Additional Rent for each year for a period of three years following each year, and such records shall be made available for inspection by Tenant and/or its agents during such period. (e) Any dispute with respect to Landlord's calculations of Other Charges under this Lease shall be submitted to an independent, certified public accountant selected by both Landlord and Tenant, whose decision shall be binding on the parties. If Landlord and Tenant are unable to agree on such an accountant, either party may apply to the Presiding Judge of the judicial district where the Leased Premises are located for appointment of an independent certified public accountant. Where there is a variance of two percent (2%) or more between said decision and Landlord's determination of Tenant's share of Building Charge, Common Area Charge and/or Additional Rent, Landlord shall pay the costs of said audit and shall credit any overpayment toward the next Monthly Base Rent payment due. If there is no variance or a variance of less than two percent (2%), Tenant shall pay such costs including the cost of audit to Landlord within ten (10) days after demand by Landlord. 4.3 Late Charge. If any Monthly Base Rent installment is not received by Landlord from Tenant by the tenth (10th) day of the month for which such installment is due, Tenant shall immediately pay to Landlord a late charge equal to five percent (5%) of such installment. 4.4 Utilities. Tenant shall pay before delinquency, at its sole cost and expense, all charges for water, gas, heat, electricity, refrigeration, power, telephone service, sewer service charges, and all other services or utilities used in, upon or about the Leased Premises during the Term; provided, however, that if any such services or utilities shall be billed

refund such excess to Tenant Tenant's obligations under this Section shall survive the expiration or termination of this Lease. (d) Landlord shall keep records showing all expenditures incurred as Other Charges and/or Additional Rent for each year for a period of three years following each year, and such records shall be made available for inspection by Tenant and/or its agents during such period. (e) Any dispute with respect to Landlord's calculations of Other Charges under this Lease shall be submitted to an independent, certified public accountant selected by both Landlord and Tenant, whose decision shall be binding on the parties. If Landlord and Tenant are unable to agree on such an accountant, either party may apply to the Presiding Judge of the judicial district where the Leased Premises are located for appointment of an independent certified public accountant. Where there is a variance of two percent (2%) or more between said decision and Landlord's determination of Tenant's share of Building Charge, Common Area Charge and/or Additional Rent, Landlord shall pay the costs of said audit and shall credit any overpayment toward the next Monthly Base Rent payment due. If there is no variance or a variance of less than two percent (2%), Tenant shall pay such costs including the cost of audit to Landlord within ten (10) days after demand by Landlord. 4.3 Late Charge. If any Monthly Base Rent installment is not received by Landlord from Tenant by the tenth (10th) day of the month for which such installment is due, Tenant shall immediately pay to Landlord a late charge equal to five percent (5%) of such installment. 4.4 Utilities. Tenant shall pay before delinquency, at its sole cost and expense, all charges for water, gas, heat, electricity, refrigeration, power, telephone service, sewer service charges, and all other services or utilities used in, upon or about the Leased Premises during the Term; provided, however, that if any such services or utilities shall be billed to Landlord and are not separately metered to the Leased Premises, the amount thereof shall be prorated by Landlord among all users of the Building based on use of such services or utilities, and Tenant shall pay to Landlord upon demand Tenant's pro rata share of such charges. In 6

determining this proration of such charges among tenants of the Building, Landlord shall consider the customary and historical uses of such services by similar tenants in similar locations and by Tenant in similar locations. If Tenant disagrees with Landlord's determination, the dispute shall be subject to arbitration pursuant to ORS 33.210 et seq. with costs to be paid by the losing party as designated by the arbitrator. Landlord or Tenant, as the case may be. shall pay the amount owed to the other as set forth in the arbitrator's award. In no event shall Landlord be liable for an interruption or failure in the supply of any such utilities to the Leased Premises. 5. Personal Property Taxes. Tenant shall pay, or cause to be paid, before delinquency, any and all taxes levied or assessed during the Term upon all Tenants leasehold improvements, equipment, furniture, fixtures, and any other personal property located in the Leased Premises. 6. Licenses and Taxes. Tenant shall be liable for, and shall pay throughout the Term, all license and excise fees and business and occupation taxes covering the business conducted by Tenant on the Leased Premises but excluding any fee or charge on the net income or revenue of Landlord. 7. Use. 7.1 Permitted Uses.

determining this proration of such charges among tenants of the Building, Landlord shall consider the customary and historical uses of such services by similar tenants in similar locations and by Tenant in similar locations. If Tenant disagrees with Landlord's determination, the dispute shall be subject to arbitration pursuant to ORS 33.210 et seq. with costs to be paid by the losing party as designated by the arbitrator. Landlord or Tenant, as the case may be. shall pay the amount owed to the other as set forth in the arbitrator's award. In no event shall Landlord be liable for an interruption or failure in the supply of any such utilities to the Leased Premises. 5. Personal Property Taxes. Tenant shall pay, or cause to be paid, before delinquency, any and all taxes levied or assessed during the Term upon all Tenants leasehold improvements, equipment, furniture, fixtures, and any other personal property located in the Leased Premises. 6. Licenses and Taxes. Tenant shall be liable for, and shall pay throughout the Term, all license and excise fees and business and occupation taxes covering the business conducted by Tenant on the Leased Premises but excluding any fee or charge on the net income or revenue of Landlord. 7. Use. 7.1 Permitted Uses. Tenant shall not use or permit or allow the use of the Leased Premises for any business or purpose other than set forth in Section 1.1 above without Landlord's prior written consent which shall not be unreasonably withheld, conditioned, or delayed. Tenant shall not do or permit anything to be done in or about the Leased Premises other than as specified in Section 1.1 or bring or keep anything therein which will in any way increase the existing rate or premiums or affect any fire or other insurance upon the Leased Premises or the Building, or cause a cancellation of any insurance policy covering the Leased Premises or the Building or any part thereof or any of its contents. Tenant shall not do or permit or allow anything to be done in or about the Leased Premises 7

which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building. To the extent compliance is within Tenant's control, Tenant shall conform to all applicable laws and regulations of any public authority affecting the Leased Premises and the condition and use thereto, and correct at Tenants own expense any failure of compliance created through Tenant's fault or by reason of Tenant's use. 7.2 Hazardous Substances. (a) Tenant shall use its best efforts to ensure that Hazardous Substances are not spilled, leaked, disposed of, or otherwise released on or under the Leased Premises. Tenant may use or otherwise handle on the Leased Premises only those Hazardous Substances typically used or sold in the prudent and safe operation of Tenant's business conducted on the Leased Premises. Tenant may bring upon the property, use and store materials of a type and quantity consistent with the operation of its permitted business use, provided that said storage and use are consistent with all current State of Oregon and federal law, statute, rule or regulation regarding the handling, storage and use of said materials. (b) Upon twenty (20) days prior written notice to Tenant (except in the case of an emergency) Landlord may, but is not obligated to, enter upon the Leased Premises and take such actions and incur such costs and expenses to effect such compliance as it deems advisable to protect its interest in the Leased Premises. Tenant shall reimburse Landlord for the full amount of all costs and expenses incurred by Landlord in connection with such compliance activities, and such obligation shall continue even after the termination of this Lease. Tenant shall notify Landlord immediately of any release of any Hazardous Substance on the Leased Premises. (c) Tenant agrees to indemnify and hold Landlord harmless against any and all losses, liabilities, suits, obligations, fines, damages, judgments, penalties, claims, charges, cleanup costs, remedial actions, costs and expenses

which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building. To the extent compliance is within Tenant's control, Tenant shall conform to all applicable laws and regulations of any public authority affecting the Leased Premises and the condition and use thereto, and correct at Tenants own expense any failure of compliance created through Tenant's fault or by reason of Tenant's use. 7.2 Hazardous Substances. (a) Tenant shall use its best efforts to ensure that Hazardous Substances are not spilled, leaked, disposed of, or otherwise released on or under the Leased Premises. Tenant may use or otherwise handle on the Leased Premises only those Hazardous Substances typically used or sold in the prudent and safe operation of Tenant's business conducted on the Leased Premises. Tenant may bring upon the property, use and store materials of a type and quantity consistent with the operation of its permitted business use, provided that said storage and use are consistent with all current State of Oregon and federal law, statute, rule or regulation regarding the handling, storage and use of said materials. (b) Upon twenty (20) days prior written notice to Tenant (except in the case of an emergency) Landlord may, but is not obligated to, enter upon the Leased Premises and take such actions and incur such costs and expenses to effect such compliance as it deems advisable to protect its interest in the Leased Premises. Tenant shall reimburse Landlord for the full amount of all costs and expenses incurred by Landlord in connection with such compliance activities, and such obligation shall continue even after the termination of this Lease. Tenant shall notify Landlord immediately of any release of any Hazardous Substance on the Leased Premises. (c) Tenant agrees to indemnify and hold Landlord harmless against any and all losses, liabilities, suits, obligations, fines, damages, judgments, penalties, claims, charges, cleanup costs, remedial actions, costs and expenses (including, without limitations, attorneys' fees and disbursements) which may be imposed on, incurred or paid by, or asserted against Landlord or the Leased Premises by reason of, or in connection with (1) any misrepresentation, breach of warranty or other default by Tenant under this Lease, or (2) the acts or omissions of Tenant, or any subtenant or other person for whom Tenant would 8

otherwise be liable, resulting in the release of any Hazardous Substance. (d) In the event of a violation and/or emergency with immediate threat to life, property or environment, Landlord reserves the right to begin immediate action to correct said violation and/or emergency. Any measures taken by Landlord will not relieve Tenant of responsibility for said violation and/or emergency. 7.3 Use and Maintenance of Common Area. (a) The use and occupation by Tenant of the Leased Premises shall include a right to use the Common Area and other facilities as may be designated from time to time by Landlord, subject, however, to the terms and conditions of this Lease. The Common Area and facilities, which Tenant may be permitted to use and occupy pursuant to this paragraph are to be used and occupied under a revocable license, and if the amount of such areas is diminished, Landlord shall not be subject to any liability nor shall Tenant be entitled to any compensation, diminution or abatement of rent, nor shall such diminution of such areas be deemed constructive or actual eviction. (b) Landlord shall at all times during the Term of this Lease have the following rights with respect to the Common Area. (1) Landlord shall have the right from time to time to make changes in the Common Area, including the location and relocation of driveways, entrances, exits, parking spaces, the direction and flow of traffic, landscaped areas, and all other facilities thereof. (2) Landlord shall have the right to establish, change, alter, amend and to enforce against Tenant and other users of the Common Area, such reasonable rules and regulations as may be deemed necessary or advisable for the proper and efficient operation and maintenance of the Common Area. The rules and regulations herein provided

otherwise be liable, resulting in the release of any Hazardous Substance. (d) In the event of a violation and/or emergency with immediate threat to life, property or environment, Landlord reserves the right to begin immediate action to correct said violation and/or emergency. Any measures taken by Landlord will not relieve Tenant of responsibility for said violation and/or emergency. 7.3 Use and Maintenance of Common Area. (a) The use and occupation by Tenant of the Leased Premises shall include a right to use the Common Area and other facilities as may be designated from time to time by Landlord, subject, however, to the terms and conditions of this Lease. The Common Area and facilities, which Tenant may be permitted to use and occupy pursuant to this paragraph are to be used and occupied under a revocable license, and if the amount of such areas is diminished, Landlord shall not be subject to any liability nor shall Tenant be entitled to any compensation, diminution or abatement of rent, nor shall such diminution of such areas be deemed constructive or actual eviction. (b) Landlord shall at all times during the Term of this Lease have the following rights with respect to the Common Area. (1) Landlord shall have the right from time to time to make changes in the Common Area, including the location and relocation of driveways, entrances, exits, parking spaces, the direction and flow of traffic, landscaped areas, and all other facilities thereof. (2) Landlord shall have the right to establish, change, alter, amend and to enforce against Tenant and other users of the Common Area, such reasonable rules and regulations as may be deemed necessary or advisable for the proper and efficient operation and maintenance of the Common Area. The rules and regulations herein provided may include, without limitation, the hours during which the Common Area shall be open for use but in no event shall the parking lot be closed until a reasonable period of time after Tenant closes its Leased Premises. Tenant agrees to conform to and abide by all rules and regulations in its 9

use and the use by its customers and patrons of the Common Area, provided, however, that all such rules and regulations and such types of operation and other matters affecting the customers and patrons of Tenant shall apply equally and without discrimination to all persons entitled to the use of the Common Area. (3) Landlord shall have the sole and exclusive control of the Common Area, and may at any time and from time to time exclude and restrain any person from use or occupancy thereof, excepting, however, bona fide customers, patrons and suppliers of Tenant, and other tenants of Landlord who make use of the Common Area in accordance with the rules and regulations established by Landlord from time to time with respect thereto. Nothing herein shall limit the rights of Landlord at any time to remove any unauthorized persons. The rights of Tenant in and to the Common Area shall at all times be subject to the rights of Landlord and of other tenants in the Building to use the same in common with Tenant, and it shall be the duty of Tenant to keep all of the Common Area free and clear of any obstructions created or permitted by Tenant or resulting from Tenant's operation and to permit the use of the Common Area only for the purpose hereinabove set forth. (4) Landlord shall have the right to designate specific areas for the parking of vehicles of the agents and employees of Tenant. Tenant shall cause its agents and employees to park its vehicles only within such designated areas. 8. Alterations. Tenant shall not make any alterations, additions or improvements in or to the Leased Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. 9. Removal of Tenant's Property.

use and the use by its customers and patrons of the Common Area, provided, however, that all such rules and regulations and such types of operation and other matters affecting the customers and patrons of Tenant shall apply equally and without discrimination to all persons entitled to the use of the Common Area. (3) Landlord shall have the sole and exclusive control of the Common Area, and may at any time and from time to time exclude and restrain any person from use or occupancy thereof, excepting, however, bona fide customers, patrons and suppliers of Tenant, and other tenants of Landlord who make use of the Common Area in accordance with the rules and regulations established by Landlord from time to time with respect thereto. Nothing herein shall limit the rights of Landlord at any time to remove any unauthorized persons. The rights of Tenant in and to the Common Area shall at all times be subject to the rights of Landlord and of other tenants in the Building to use the same in common with Tenant, and it shall be the duty of Tenant to keep all of the Common Area free and clear of any obstructions created or permitted by Tenant or resulting from Tenant's operation and to permit the use of the Common Area only for the purpose hereinabove set forth. (4) Landlord shall have the right to designate specific areas for the parking of vehicles of the agents and employees of Tenant. Tenant shall cause its agents and employees to park its vehicles only within such designated areas. 8. Alterations. Tenant shall not make any alterations, additions or improvements in or to the Leased Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. 9. Removal of Tenant's Property. All trade fixtures and equipment placed upon the Leased Premises or installed by Tenant during the Term of this Lease shall remain the property of Tenant. Upon expiration and/or termination of this Lease, however caused, 10

Tenant may, at Tenant's own expense remove any or all such fixtures and equipment Tenant shall repair any physical damage resulting from the removal. If Tenant fails to remove such property, Landlord may give Tenant twenty (20) days written notice requiring Tenant to remove the property. Following such twenty (20) day written notice, in the event Tenant has not removed its property, Landlord may treat the property as abandoned and retain the property or Landlord may effect a removal of the property and place it in public storage on Tenant's account. In the event of a removal, Tenant may be liable to Landlord for the cost of removal, restoration of the Leased Premises, transportation to storage, and storage. 10. Maintenance and Repairs. 10.1 Landlord's Obligations. The following shall be the responsibility of Landlord at Landlord's expense: (a) Repair and maintenance of the roof, gutters, exterior walls and foundation of the Leased Premises. (b) Repair and maintenance of exterior water, sewer, gas and electrical services up to the point of entry to the Leased Premises. Except as otherwise specifically provided herein and unless Landlord is grossly negligent in performing repairs, alterations or improvements, there shall be no abatement of Monthly Base Rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Leased Premises or Building of which the Leased Premises is a part or in or to fixtures, appurtenances and equipment therein; provided, however, if Landlord fails to commence repairs of the Building as required in this Section 10.1 within twenty (20) days after written notice from Tenant, Tenant may perform such repairs and deduct the costs thereof from the installments of Monthly Base Rent next falling due; and provided further, if such disrepair has the effect that

Tenant may, at Tenant's own expense remove any or all such fixtures and equipment Tenant shall repair any physical damage resulting from the removal. If Tenant fails to remove such property, Landlord may give Tenant twenty (20) days written notice requiring Tenant to remove the property. Following such twenty (20) day written notice, in the event Tenant has not removed its property, Landlord may treat the property as abandoned and retain the property or Landlord may effect a removal of the property and place it in public storage on Tenant's account. In the event of a removal, Tenant may be liable to Landlord for the cost of removal, restoration of the Leased Premises, transportation to storage, and storage. 10. Maintenance and Repairs. 10.1 Landlord's Obligations. The following shall be the responsibility of Landlord at Landlord's expense: (a) Repair and maintenance of the roof, gutters, exterior walls and foundation of the Leased Premises. (b) Repair and maintenance of exterior water, sewer, gas and electrical services up to the point of entry to the Leased Premises. Except as otherwise specifically provided herein and unless Landlord is grossly negligent in performing repairs, alterations or improvements, there shall be no abatement of Monthly Base Rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Leased Premises or Building of which the Leased Premises is a part or in or to fixtures, appurtenances and equipment therein; provided, however, if Landlord fails to commence repairs of the Building as required in this Section 10.1 within twenty (20) days after written notice from Tenant, Tenant may perform such repairs and deduct the costs thereof from the installments of Monthly Base Rent next falling due; and provided further, if such disrepair has the effect that Tenant cannot reasonably operate the business for the use set forth in Section 1.1, then the Monthly Base Rent shall be abated until the Leased Premises can be reasonably operated for such use. Notwithstanding anything contained herein to the contrary, Landlord shall use best efforts to avoid materially or unreasonably affecting or interrupting Tenant's use, business or operations on or decreasing access or visibility of the Leased Premises. 11

10.2 Tenant's Obligations The following shall be the responsibility of Tenant at Tenant's expense: (a) Repair of interior walls, ceilings, doors, windows, and related hardware, floors (including floor coverings), all electrical equipment. light fixtures, switches, and wiring and plumbing from the point of entry to the Leased Premises and all other appliances and equipment within or attached to the Leased Premises. In addition, Tenant shall at its sole cost and expense install or construct any improvements, equipment, or fixtures required by any governmental authority or agency as a consequence of Tenant's use and occupancy of the Leased Premises. Tenant shall replace, any damaged glass within forty-eight (48) hours of the occurrence of such damage. (b) Any repairs necessitated by the negligence of Tenant, its agents, employees, and invitees, except as provided in Section 13.3 dealing with waiver of subrogation, but including repairs that would otherwise be the responsibility of Landlord under Section 10.1. (c) Repair and maintenance of the heating and air conditioning system. (1) Landlord will employ and pay a contractor satisfactory to Landlord, engaged in the business of maintaining systems, to perform regularly scheduled inspections of the Heating, Ventilation and Air Conditioning (HVAC) systems serving the Leased Premises and to perform any necessary work, maintenance or repair thereon, provided said rates are competitive. Tenant shall reimburse Landlord for all sums paid by Landlord in connection therewith.

10.2 Tenant's Obligations The following shall be the responsibility of Tenant at Tenant's expense: (a) Repair of interior walls, ceilings, doors, windows, and related hardware, floors (including floor coverings), all electrical equipment. light fixtures, switches, and wiring and plumbing from the point of entry to the Leased Premises and all other appliances and equipment within or attached to the Leased Premises. In addition, Tenant shall at its sole cost and expense install or construct any improvements, equipment, or fixtures required by any governmental authority or agency as a consequence of Tenant's use and occupancy of the Leased Premises. Tenant shall replace, any damaged glass within forty-eight (48) hours of the occurrence of such damage. (b) Any repairs necessitated by the negligence of Tenant, its agents, employees, and invitees, except as provided in Section 13.3 dealing with waiver of subrogation, but including repairs that would otherwise be the responsibility of Landlord under Section 10.1. (c) Repair and maintenance of the heating and air conditioning system. (1) Landlord will employ and pay a contractor satisfactory to Landlord, engaged in the business of maintaining systems, to perform regularly scheduled inspections of the Heating, Ventilation and Air Conditioning (HVAC) systems serving the Leased Premises and to perform any necessary work, maintenance or repair thereon, provided said rates are competitive. Tenant shall reimburse Landlord for all sums paid by Landlord in connection therewith. 10.3 Failure to Maintain. If Tenant fails to keep and preserve the Leased Premises as set forth in Section 10.2, above, Landlord may, at its option, put or cause the same to be put in the condition and state of repair agreed upon, and in such case, upon receipt of written statements from Landlord, Tenant shall promptly pay the entire cost thereof. Landlord shall have the right, without liability, to enter the Leased Premises for the purpose of 12

making such repairs upon the failure of Tenant to do so with fifteen (15) days' notice to Tenant, unless Landlord deems entry necessary without notice due to an emergency. 10.4 Common Area Maintenance and Repair. All repairs to the Leased Premises which Landlord is not required to make under Section 10.1 and Tenant is not required to make under Section 10.2 shall be deemed Common Area Maintenance and Repair and will be maintained by Tenant as per Section 24.11. 10.5 Landlord's Duties. Landlord shall not be in default under this Lease or liable for any damages resulting from or incidental to, nor shall it be an actual or constructive eviction of Tenant, nor shall the Monthly Base Rent be abated by reason of: (a) The interruption of any of the services described in this Section 10; (b) Failure to furnish or delay in furnishing any such services when such failure or delay is caused by accident or any condition beyond the reasonable control of Landlord, including the making of necessary repairs or improvements to the Leased Premises or to the Building; (c) Any limitation, curtailment, rationing or restrictions on the use of electricity, water, gas or any other form of energy serving the Leased Premises or the Building; or

making such repairs upon the failure of Tenant to do so with fifteen (15) days' notice to Tenant, unless Landlord deems entry necessary without notice due to an emergency. 10.4 Common Area Maintenance and Repair. All repairs to the Leased Premises which Landlord is not required to make under Section 10.1 and Tenant is not required to make under Section 10.2 shall be deemed Common Area Maintenance and Repair and will be maintained by Tenant as per Section 24.11. 10.5 Landlord's Duties. Landlord shall not be in default under this Lease or liable for any damages resulting from or incidental to, nor shall it be an actual or constructive eviction of Tenant, nor shall the Monthly Base Rent be abated by reason of: (a) The interruption of any of the services described in this Section 10; (b) Failure to furnish or delay in furnishing any such services when such failure or delay is caused by accident or any condition beyond the reasonable control of Landlord, including the making of necessary repairs or improvements to the Leased Premises or to the Building; (c) Any limitation, curtailment, rationing or restrictions on the use of electricity, water, gas or any other form of energy serving the Leased Premises or the Building; or (d) Failure to make any repair or to perform any maintenance, unless such failure shall persist for an unreasonable time after written notice of the need for such repair or maintenance is given to Landlord by Tenant. Landlord shall use reasonable efforts to remedy any interruption in the furnishing of such services. 11. Liens and Encumbrances. (a) Tenant shall keep the Leased Premises and the Building free from any liens or encumbrances arising out of any work performed, materials furnished or obligations incurred by Tenant, and shall indemnify and hold Landlord harmless from any and all costs, liability or expenses (including attorneys' fees) arising therefrom. 13

(b) Tenant may withhold payment of any claim in connection with a good-faith dispute over the obligation to pay, as long as Landlord's property interests are not jeopardized. If a lien is filed as a result of nonpayment, Tenant shall, within ten (10) days after knowledge of the filing, secure the discharge of the lien or post a cash deposit or satisfactory surety bond in an amount sufficient to discharge the lien plus any costs, attorney fees, and other charges that could accrue as a result of a foreclosure or sale under the lien. 12. Assignment and Subletting. No part of the Leased Premises may be assigned, mortgaged, or subleased, nor may a right of use of any portion of the property be conferred on any third person by any other means, without the prior written consent of Landlord which will be subject to the factors discussed below. This provision shall apply to all transfers by operation of law. If Tenant is a corporation or partnership, this provision shall apply to any transfer of a majority voting interest in stock or partnership interest of Tenant. No consent in one instance shall prevent the provision from applying to subsequent instances. In determining whether to consent to assignment Landlord may consider the following factors: financial ability of assignee; business experience of assignee; compatibility of use with other tenants in the Building; zoning or other use restrictions; and other factors which Landlord may deem prudent. 13. Insurance and Indemnity. 13.1 Insurance.

(b) Tenant may withhold payment of any claim in connection with a good-faith dispute over the obligation to pay, as long as Landlord's property interests are not jeopardized. If a lien is filed as a result of nonpayment, Tenant shall, within ten (10) days after knowledge of the filing, secure the discharge of the lien or post a cash deposit or satisfactory surety bond in an amount sufficient to discharge the lien plus any costs, attorney fees, and other charges that could accrue as a result of a foreclosure or sale under the lien. 12. Assignment and Subletting. No part of the Leased Premises may be assigned, mortgaged, or subleased, nor may a right of use of any portion of the property be conferred on any third person by any other means, without the prior written consent of Landlord which will be subject to the factors discussed below. This provision shall apply to all transfers by operation of law. If Tenant is a corporation or partnership, this provision shall apply to any transfer of a majority voting interest in stock or partnership interest of Tenant. No consent in one instance shall prevent the provision from applying to subsequent instances. In determining whether to consent to assignment Landlord may consider the following factors: financial ability of assignee; business experience of assignee; compatibility of use with other tenants in the Building; zoning or other use restrictions; and other factors which Landlord may deem prudent. 13. Insurance and Indemnity. 13.1 Insurance. (a) During the entire Term Tenant shall, at its expense, maintain adequate liability insurance with an insurance company or companies acceptable to Landlord with a combined single limit of $1,000,000 for personal injuries and property damage, to indemnify both Landlord and Tenant against any such claims, demands, losses, damages, liabilities and expenses. Landlord shall be named as an additional insured and shall be furnished with a certificate of insurance, which shall bear an endorsement that the same shall not be canceled except upon not less than thirty (30) days' prior written notice to Landlord. Tenant shall also at its own expense maintain, during the Term, all-risk insurance covering its furniture, fixtures, equipment and inventory in an amount equal to the replacement cost thereof, and insurance covering all plate glass and other glass on the Leased Premises. Tenant shall provide Landlord with 14

copies of the policies of insurance or certificates thereof. Landlord shall carry all-risk fire insurance on the Building. (b) Landlord will not carry insurance of any kind on any of Tenant's improvements or on Tenant's furniture or furnishings or on any fixtures, equipment, improvements or appurtenances of Tenant under this Lease, and Landlord shall not be obligated to repair any damage thereto or replace the same, except for damages or loss caused by Landlord or Landlord's agents or by the gross negligence of Landlord or Landlord's agents. 13.2 Indemnification. (a) Landlord shall not be liable for injury to any person, or for the loss of or damage to any property (including property of Tenant) occurring in or about the Leased Premises from any cause whatsoever, except for Landlord's gross negligence or misconduct. Tenant hereby indemnifies and holds Landlord harmless from and agrees to defend Landlord against any and all claims, charges, liabilities, obligations, penalties, damages, costs and expenses (including attorneys' fees) arising, claimed, charged or incurred against or by Landlord from any matter or thing arising from Tenant's use of the Leased Premises, the conduct of its business or from any activity, work or other things done or permitted by Tenant in or about the Leased Premises. Tenant shall further indemnify and hold Landlord harmless from and against any and all claims arising from any breach or default in the performance of any obligation on Tenant's part or to be performed under the terms of this Lease, or arising from any act or negligence of Tenant, or any officer, agent, employee, guest, or invitee of Tenant, and from all costs, attorneys' fees, and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon and in case any action or proceeding be brought against Landlord by reason of such claim. Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. The indemnification provided for in this Section with respect to any acts or omission during the Term of this Lease

copies of the policies of insurance or certificates thereof. Landlord shall carry all-risk fire insurance on the Building. (b) Landlord will not carry insurance of any kind on any of Tenant's improvements or on Tenant's furniture or furnishings or on any fixtures, equipment, improvements or appurtenances of Tenant under this Lease, and Landlord shall not be obligated to repair any damage thereto or replace the same, except for damages or loss caused by Landlord or Landlord's agents or by the gross negligence of Landlord or Landlord's agents. 13.2 Indemnification. (a) Landlord shall not be liable for injury to any person, or for the loss of or damage to any property (including property of Tenant) occurring in or about the Leased Premises from any cause whatsoever, except for Landlord's gross negligence or misconduct. Tenant hereby indemnifies and holds Landlord harmless from and agrees to defend Landlord against any and all claims, charges, liabilities, obligations, penalties, damages, costs and expenses (including attorneys' fees) arising, claimed, charged or incurred against or by Landlord from any matter or thing arising from Tenant's use of the Leased Premises, the conduct of its business or from any activity, work or other things done or permitted by Tenant in or about the Leased Premises. Tenant shall further indemnify and hold Landlord harmless from and against any and all claims arising from any breach or default in the performance of any obligation on Tenant's part or to be performed under the terms of this Lease, or arising from any act or negligence of Tenant, or any officer, agent, employee, guest, or invitee of Tenant, and from all costs, attorneys' fees, and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon and in case any action or proceeding be brought against Landlord by reason of such claim. Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. The indemnification provided for in this Section with respect to any acts or omission during the Term of this Lease shall survive any termination or expiration of this Lease. Except for conditions under Landlords control. Landlord shall not be liable for interference with light or air or view or for any latent defect in the Leased Premises. Tenant shall promptly notify Landlord 15

of casualties or accidents occurring in or about the Leased Premises. (b) Landlord shall indemnify and defend Tenant from any claim, loss, liability, cost or expense, including Tenant's reasonable attorney fees and costs, arising out of or related to any activity of Landlord, its employees, agents or contractors, on the Leased Premises or any condition of the Leased Premises caused or contributed to by Landlord, its agents, employees, or contractors, or any breach of any duty, representation or warranty of Landlord under this Lease; provided, however, that Landlord shall have no liability for damages due to natural causes or causes outside Landlord's reasonable control or supervision. 13.3 Waiver of Subrogation. Landlord and Tenant hereby mutually release each other from liability and waive all right of recovery against each other, their agents, employees, customers and invitees for any loss in or about the Leased Premises, from perils insured against under their respective fire and all-risk insurance contracts, including any extended coverage endorsements thereof, whether due to negligence or any other cause; provided that this Section shall be inapplicable if it would have the effect, but only to the extent it would have the effect, of invalidating any insurance coverage of Landlord or Tenant. 14. Eminent Domain. 14.1 Partial Taking. If a portion of the Leased Premises is condemned and Section 14.2 does not apply, the Lease shall continue on the following terms: (a) Landlord shall be entitled to the proceeds of condemnation attributable to the real property and improvements (except for Tenant's leasehold improvements and trade fixtures). Tenant shall have no claim against Landlord as a

of casualties or accidents occurring in or about the Leased Premises. (b) Landlord shall indemnify and defend Tenant from any claim, loss, liability, cost or expense, including Tenant's reasonable attorney fees and costs, arising out of or related to any activity of Landlord, its employees, agents or contractors, on the Leased Premises or any condition of the Leased Premises caused or contributed to by Landlord, its agents, employees, or contractors, or any breach of any duty, representation or warranty of Landlord under this Lease; provided, however, that Landlord shall have no liability for damages due to natural causes or causes outside Landlord's reasonable control or supervision. 13.3 Waiver of Subrogation. Landlord and Tenant hereby mutually release each other from liability and waive all right of recovery against each other, their agents, employees, customers and invitees for any loss in or about the Leased Premises, from perils insured against under their respective fire and all-risk insurance contracts, including any extended coverage endorsements thereof, whether due to negligence or any other cause; provided that this Section shall be inapplicable if it would have the effect, but only to the extent it would have the effect, of invalidating any insurance coverage of Landlord or Tenant. 14. Eminent Domain. 14.1 Partial Taking. If a portion of the Leased Premises is condemned and Section 14.2 does not apply, the Lease shall continue on the following terms: (a) Landlord shall be entitled to the proceeds of condemnation attributable to the real property and improvements (except for Tenant's leasehold improvements and trade fixtures). Tenant shall have no claim against Landlord as a result of the condemnation except that Tenant shall be entitled to receive any proceeds for interruption of Tenant's business and to any award attributable to Tenant's leasehold improvements, trade fixtures and equipment. 16

(b) Landlord shall proceed as soon as reasonably possible to make such repairs and alterations to the Leased Premises as are necessary to restore the remaining Leased Premises to a condition as reasonably practicable to that existing at the time of the condemnation. Base Rent shall be abated to the extent that the Leased Premises is unusable by Tenant during the period of alteration and repair. (c) After the date on which title vests in the condemning authority or an earlier date on which alterations or repairs are commenced by Landlord to restore the balance of the Leased Premises in anticipation of taking, the Monthly Base Rent shall be reduced in proportion to the reduction in value of the Leased Premises as an economic unit on account of the partial taking. If the parties are unable to agree on the amount of the reduction of Monthly Base Rent, the amount shall be determined by arbitration. 14.2 Total Taking. If a condemning authority takes all of the Leased Premises or a portion sufficient to render the remaining Leased Premises reasonably unsuitable for the use that Tenant was then making of the Leased Premises, the Lease shall terminate as of the date the title vests in the condemning authorities. Such termination shall have the same effect as a termination under Section 14.1. Landlord shall be entitled to the proceeds of condemnation attributable to the real property and improvements (except for Tenants leasehold improvements and Tenant's trade fixtures). Tenant shall have no claim against Landlord as a result of the condemnation, provided Tenant shall be entitled to receive any proceeds for interruption of Tenant's business or relocation expenses made available by the condemning authority and Tenant shall be entitled to any award attributable to Tenant's leasehold improvements and Tenant's trade fixtures and equipment. 14.3 Sale in Lieu of Condemnation.

(b) Landlord shall proceed as soon as reasonably possible to make such repairs and alterations to the Leased Premises as are necessary to restore the remaining Leased Premises to a condition as reasonably practicable to that existing at the time of the condemnation. Base Rent shall be abated to the extent that the Leased Premises is unusable by Tenant during the period of alteration and repair. (c) After the date on which title vests in the condemning authority or an earlier date on which alterations or repairs are commenced by Landlord to restore the balance of the Leased Premises in anticipation of taking, the Monthly Base Rent shall be reduced in proportion to the reduction in value of the Leased Premises as an economic unit on account of the partial taking. If the parties are unable to agree on the amount of the reduction of Monthly Base Rent, the amount shall be determined by arbitration. 14.2 Total Taking. If a condemning authority takes all of the Leased Premises or a portion sufficient to render the remaining Leased Premises reasonably unsuitable for the use that Tenant was then making of the Leased Premises, the Lease shall terminate as of the date the title vests in the condemning authorities. Such termination shall have the same effect as a termination under Section 14.1. Landlord shall be entitled to the proceeds of condemnation attributable to the real property and improvements (except for Tenants leasehold improvements and Tenant's trade fixtures). Tenant shall have no claim against Landlord as a result of the condemnation, provided Tenant shall be entitled to receive any proceeds for interruption of Tenant's business or relocation expenses made available by the condemning authority and Tenant shall be entitled to any award attributable to Tenant's leasehold improvements and Tenant's trade fixtures and equipment. 14.3 Sale in Lieu of Condemnation. Sale of all or part of the Leased Premises to a purchaser with the power of eminent domain in the face of a threat or probability of the exercise of the power shall be treated for the purposes of this Section 14.3 as a taking by condemnation. 17

15.1 Default. Any of the following shall constitute a default by Tenant under this Lease: (a) Tenant's failure to pay rent or any monetary obligation under this Lease within 10 days after it is due provided, however, Landlord will not be required to notify Tenant more than one time during any twelve (12) month period of failure to pay rent. (b) Tenant's insolvency, business failure or assignment for the benefit of its creditors. Tenant's commencement of proceedings under any provision of any bankruptcy or insolvency law or failure to obtain dismissal of any petition filed against it under such laws within the time required to answer; or the appointment of a receiver for Tenant's properties. (c) Assignment or subletting by Tenant in violation of Section 12. (d) Vacation or abandonment of the Leased Premises without the written consent of Landlord or failure to occupy the Leased Premises within twenty (20) days after notice of tendering possession. (e) Tenant's failure to comply with any other term or condition within twenty (20) days following written notice from Landlord specifying the noncompliance. If such noncompliance cannot be cured within the twenty (20) day period, this provision shall be satisfied if Tenant commences correction within such period and thereafter proceeds in good faith and with reasonable diligence to effect compliance as soon as possible. 15.2 Legal Expenses. In case of default as described in Section 15.1, Landlord shall have the right to the following remedies which are

15.1 Default. Any of the following shall constitute a default by Tenant under this Lease: (a) Tenant's failure to pay rent or any monetary obligation under this Lease within 10 days after it is due provided, however, Landlord will not be required to notify Tenant more than one time during any twelve (12) month period of failure to pay rent. (b) Tenant's insolvency, business failure or assignment for the benefit of its creditors. Tenant's commencement of proceedings under any provision of any bankruptcy or insolvency law or failure to obtain dismissal of any petition filed against it under such laws within the time required to answer; or the appointment of a receiver for Tenant's properties. (c) Assignment or subletting by Tenant in violation of Section 12. (d) Vacation or abandonment of the Leased Premises without the written consent of Landlord or failure to occupy the Leased Premises within twenty (20) days after notice of tendering possession. (e) Tenant's failure to comply with any other term or condition within twenty (20) days following written notice from Landlord specifying the noncompliance. If such noncompliance cannot be cured within the twenty (20) day period, this provision shall be satisfied if Tenant commences correction within such period and thereafter proceeds in good faith and with reasonable diligence to effect compliance as soon as possible. 15.2 Legal Expenses. In case of default as described in Section 15.1, Landlord shall have the right to the following remedies which are intended to be cumulative and in addition to any other remedies provided under applicable law: (a) Landlord may at its option terminate the Lease by notice to Tenant. With or without termination, Landlord may retake possession of the 18

Leased Premises and may use or relet the Leased Premises without accepting surrender or waiving the right to damages. Following such retaking of possession, efforts by Landlord to relet the Leased Premises shall be sufficient if Landlord uses reasonable and good faith efforts for finding tenants for the space at rates not less than the current rates for other comparable space in the Building. If Landlord has other vacant space in the Building, prospective tenants may be placed in such other space without prejudice to Landlord's claim to damages or loss of rentals from Tenant. (b) Landlord may recover all damages caused by Tenant's default which shall include an amount equal to rentals lost because of the default, lease commissions paid for this Lease, and the unamortized cost of any tenant improvements installed by Landlord to meet Tenant's special requirements. Landlord may sue periodically to recover damages as they occur throughout the Term, and no action for accrued damages shall bar a later action for damages subsequently accruing. Landlord may elect in any one action to recover accrued damages plus damages attributable to the remaining Term of the Lease. Such damages shall be measured by the difference between the Monthly Base Rent under this Lease and the reasonable rental value of the Leased Premises for the remainder of the Term discounted to the time of judgment at the prevailing interest rate on judgments. (c) Landlord may make any payment or perform any obligation which Tenant has failed to perform, in which case Landlord shall be entitled to recover from Tenant upon demand all amounts so expended, plus interest from the date of the expenditure at the rate of one and one-half percent (1.5%) per month. Any such payment or performance by Landlord shall not waive Tenant's default. 16. Default by Landlord. Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within twenty

Leased Premises and may use or relet the Leased Premises without accepting surrender or waiving the right to damages. Following such retaking of possession, efforts by Landlord to relet the Leased Premises shall be sufficient if Landlord uses reasonable and good faith efforts for finding tenants for the space at rates not less than the current rates for other comparable space in the Building. If Landlord has other vacant space in the Building, prospective tenants may be placed in such other space without prejudice to Landlord's claim to damages or loss of rentals from Tenant. (b) Landlord may recover all damages caused by Tenant's default which shall include an amount equal to rentals lost because of the default, lease commissions paid for this Lease, and the unamortized cost of any tenant improvements installed by Landlord to meet Tenant's special requirements. Landlord may sue periodically to recover damages as they occur throughout the Term, and no action for accrued damages shall bar a later action for damages subsequently accruing. Landlord may elect in any one action to recover accrued damages plus damages attributable to the remaining Term of the Lease. Such damages shall be measured by the difference between the Monthly Base Rent under this Lease and the reasonable rental value of the Leased Premises for the remainder of the Term discounted to the time of judgment at the prevailing interest rate on judgments. (c) Landlord may make any payment or perform any obligation which Tenant has failed to perform, in which case Landlord shall be entitled to recover from Tenant upon demand all amounts so expended, plus interest from the date of the expenditure at the rate of one and one-half percent (1.5%) per month. Any such payment or performance by Landlord shall not waive Tenant's default. 16. Default by Landlord. Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within twenty (20) days after written notice by Tenant to Landlord which describes the default; provided, however, that if the nature of Landlord's obligation is such that more than twenty (20) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such twenty (20) day period and thereafter diligently prosecutes the same to completion. 19

17. Damage or Destruction. No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Leased Premises or the Building. 17.1 Destruction. If the Leased Premises or the Building in which the Leased Premises are located are destroyed or damaged such that the cost of repair exceeds fifty percent (50%) of the value of the structure before the damage, either party may elect to terminate the Lease a~ of the date of the damage or destruction by notice given to the "other in writing not more than sixty (60) days following the date of damage. If neither party elects to terminate, Landlord shall diligently proceed to restore the Leased Premises to substantially the same or better form as prior to the damage or destruction so as to provide Tenant with usable space equivalent in quantity and character and in the same location as existed prior to the damage or destruction. Tenant shall be responsible for the cost to rebuild any fixtures or improvements not insured under the insurance policy referred to in Section 13.1 unless such damage or destruction was caused or by the gross negligence of Landlord, its agents or employees, or persons under the control or supervision of Landlord. Work shall commence as soon as reasonably possible and thereafter shall proceed without interruption except for work stoppages on account of labor disputes and matters beyond Landlord's reasonable control. 17.2 Rent Abatement. Rent shall be abated during the repair of any damage to the extent the Leased Premises are untenantable, except that there shall be no rent abatement where the damage occurred as the result of the negligence of Tenant, its employees, agents or contractors.

17. Damage or Destruction. No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Leased Premises or the Building. 17.1 Destruction. If the Leased Premises or the Building in which the Leased Premises are located are destroyed or damaged such that the cost of repair exceeds fifty percent (50%) of the value of the structure before the damage, either party may elect to terminate the Lease a~ of the date of the damage or destruction by notice given to the "other in writing not more than sixty (60) days following the date of damage. If neither party elects to terminate, Landlord shall diligently proceed to restore the Leased Premises to substantially the same or better form as prior to the damage or destruction so as to provide Tenant with usable space equivalent in quantity and character and in the same location as existed prior to the damage or destruction. Tenant shall be responsible for the cost to rebuild any fixtures or improvements not insured under the insurance policy referred to in Section 13.1 unless such damage or destruction was caused or by the gross negligence of Landlord, its agents or employees, or persons under the control or supervision of Landlord. Work shall commence as soon as reasonably possible and thereafter shall proceed without interruption except for work stoppages on account of labor disputes and matters beyond Landlord's reasonable control. 17.2 Rent Abatement. Rent shall be abated during the repair of any damage to the extent the Leased Premises are untenantable, except that there shall be no rent abatement where the damage occurred as the result of the negligence of Tenant, its employees, agents or contractors. 17.3 Damage Late in Term. If damage or destruction to which Section 17.1 would apply occurs within one year before the end of the thencurrent Term, Tenant may elect to terminate the Lease by written notice to Landlord given within thirty (30) days after the date of the damage. 20

17.4 Express Agreement. The provisions of this Section shall be considered an express agreement governing any case of damage or destruction of the Building or Leased Premises by fire or other casualty. 18. Subordination and Attornment 18.1 Subordination. This Lease shall be subordinate to any existing or future mortgages or deeds of trust on the Building or on the leasehold interest held by Landlord, and to any extensions, renewals, or replacements thereof. At the request of Landlord, Tenant shall promptly execute and deliver all instruments which may be appropriate to further secure and document such subordination. 18.2 Attornment. If the interest of Landlord is transferred to any person or entity by reason of foreclosure or other proceedings for enforcement of any mortgage, deed of trust or security or by delivery of a deed in lieu of foreclosure or other proceedings, Tenant shall upon delivery to Tenant by said transferee of a nondisturbance agreement, immediately and automatically attorn to such person or entity. In the event of such transfer, this Lease and Tenant's rights hereunder shall continue undisturbed so long as Tenant is not in default. 18.3 Tenant's Certificate.

17.4 Express Agreement. The provisions of this Section shall be considered an express agreement governing any case of damage or destruction of the Building or Leased Premises by fire or other casualty. 18. Subordination and Attornment 18.1 Subordination. This Lease shall be subordinate to any existing or future mortgages or deeds of trust on the Building or on the leasehold interest held by Landlord, and to any extensions, renewals, or replacements thereof. At the request of Landlord, Tenant shall promptly execute and deliver all instruments which may be appropriate to further secure and document such subordination. 18.2 Attornment. If the interest of Landlord is transferred to any person or entity by reason of foreclosure or other proceedings for enforcement of any mortgage, deed of trust or security or by delivery of a deed in lieu of foreclosure or other proceedings, Tenant shall upon delivery to Tenant by said transferee of a nondisturbance agreement, immediately and automatically attorn to such person or entity. In the event of such transfer, this Lease and Tenant's rights hereunder shall continue undisturbed so long as Tenant is not in default. 18.3 Tenant's Certificate. Tenant and or Landlord shall at any time and from time to time upon not less than three days' prior written notice from Landlord and or Tenant execute, acknowledge and deliver to Landlord and or Tenant a statement in writing (a) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as so modified is in full force and effect), and the date to which the rents are paid in advance, if any, and (b) acknowledging that there are not, to Tenant's and or Landlord's knowledge, any uncured defaults on the part of Landlord and or Tenant hereunder, or specifying such defaults if any are claimed, and (c) setting forth the date of commencement of Monthly Base Rents. Any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the Building. 21

18.4 Transfer or Sale of Property. Should Landlord sell or transfer, in any way, its ownership interest or a portion thereof of the Leased Premises, the new owner shall be required to honor this Lease including extensions thereof so long as Tenant is not in default. 19. Access by Landlord. Landlord or Landlord's employees, agents, and contractors shall have the right to enter the Leased Premises with reasonable notice to examine the same or to make such repairs, alterations, improvements or additions as Landlord may deem necessary or desirable. If Tenant is not personally present to permit entry and an entry is necessary, Landlord may in case of emergency forcibly enter the same, without rendering Landlord liable therefor. Nothing contained herein shall be construed to impose upon Landlord any duty of repair of the Leased Premises or the Building except as otherwise specifically provided for herein. 20. Abandonment of Leased Premises. Should Tenant vacate or abandon the Leased Premises or be dispossessed by process of law or otherwise for more than twenty (20) business days, such abandonment, vacation or dispossession shall be deemed a breach of this Lease, and, in addition to any other rights which Landlord may have, Landlord may remove any personal property belonging to Tenant which remains on the Leased Premises and store the same, the cost of such removal and storage to be charged to the account of Tenant.

18.4 Transfer or Sale of Property. Should Landlord sell or transfer, in any way, its ownership interest or a portion thereof of the Leased Premises, the new owner shall be required to honor this Lease including extensions thereof so long as Tenant is not in default. 19. Access by Landlord. Landlord or Landlord's employees, agents, and contractors shall have the right to enter the Leased Premises with reasonable notice to examine the same or to make such repairs, alterations, improvements or additions as Landlord may deem necessary or desirable. If Tenant is not personally present to permit entry and an entry is necessary, Landlord may in case of emergency forcibly enter the same, without rendering Landlord liable therefor. Nothing contained herein shall be construed to impose upon Landlord any duty of repair of the Leased Premises or the Building except as otherwise specifically provided for herein. 20. Abandonment of Leased Premises. Should Tenant vacate or abandon the Leased Premises or be dispossessed by process of law or otherwise for more than twenty (20) business days, such abandonment, vacation or dispossession shall be deemed a breach of this Lease, and, in addition to any other rights which Landlord may have, Landlord may remove any personal property belonging to Tenant which remains on the Leased Premises and store the same, the cost of such removal and storage to be charged to the account of Tenant. 21. Attorney's Fees and Court Costs. The prevailing party shall recover from the losing party, attorney's fees and costs if an attorney is hired to collect the rental due herewith or to enforce compliance with any of the terms, covenants or conditions of this Lease. The losing party promises and agrees to pay the prevailing party's reasonable attorney's fees and costs even though no suit or action is filed hereon. However, if a suit or action is filed, the amount of such reasonable attorney's fees shall be fixed by the court or courts in which the suit or action, including any appeal therein, is tried, heard or decided. Such sum shall include an amount estimated by the court as the reasonable costs and fees to be incurred by the prevailing party in collecting any monetary judgment or award or otherwise enforcing each order, judgment or decree entered in such suit, action or other proceedings. Attorney's fees and costs 22

include those attorney's fees and costs incurred seeking relief from stay in bankruptcy courts. 22. Quiet Enjoyment Tenant, upon fully complying with and promptly performing all of the terms, covenants and conditions of this Lease on its part to be performed, and upon the prompt and timely payment of all sums due hereunder, shall have and quietly enjoy the Leased Premises for the Term set forth herein as against any adverse claim of Landlord or any third party claiming by, through or under Landlord. 23. Signs. Tenant shall not place or suffer to be placed on the exterior walls of the Leased Premises or upon the roof or any exterior door or wall or on the exterior or interior of any window thereof any sign, awning, canopy, marquee, advertising matter, decoration, letter or other thing of any kind, without the prior written consent of Landlord. Tenant, at Tenant's expense, shall have the right to install signage consistent with Landlord's size and design guidelines upon Landlord's written approval, which shall not be unreasonably withheld. 24. Holdover. If Tenant shall continue to occupy the Leased Premises after the expiration or sooner termination of this Lease, Tenant shall pay, as liquidated damages, for each month of continued occupancy an amount equal to one and

include those attorney's fees and costs incurred seeking relief from stay in bankruptcy courts. 22. Quiet Enjoyment Tenant, upon fully complying with and promptly performing all of the terms, covenants and conditions of this Lease on its part to be performed, and upon the prompt and timely payment of all sums due hereunder, shall have and quietly enjoy the Leased Premises for the Term set forth herein as against any adverse claim of Landlord or any third party claiming by, through or under Landlord. 23. Signs. Tenant shall not place or suffer to be placed on the exterior walls of the Leased Premises or upon the roof or any exterior door or wall or on the exterior or interior of any window thereof any sign, awning, canopy, marquee, advertising matter, decoration, letter or other thing of any kind, without the prior written consent of Landlord. Tenant, at Tenant's expense, shall have the right to install signage consistent with Landlord's size and design guidelines upon Landlord's written approval, which shall not be unreasonably withheld. 24. Holdover. If Tenant shall continue to occupy the Leased Premises after the expiration or sooner termination of this Lease, Tenant shall pay, as liquidated damages, for each month of continued occupancy an amount equal to one and one-half (1.5) times the monthly rent being paid for the month the Lease expires or is terminated. No receipt of money by Landlord from Tenant after expiration or termination of this Lease shall reinstate or extend this Lease or affect any prior notice given by Landlord to Tenant. 25. Miscellaneous. 25.1 Tenant Defined. The word "Tenant" as used herein shall mean each and every person, partnership or corporation who is mentioned as a Tenant herein or who executes this Lease as Tenant. 25.2 Joint Obligation. If there be more than one Tenant, the obligations hereunder imposed shall be joint and several. 23

25.3 Broker's Commission. Landlord and Tenant represent and warrant that they have incurred no liabilities or claims for brokerage commissions or finder's fees in connection with the execution of this Lease and that they have not dealt with or have any knowledge of any real estate broker, agent or salesperson in connection with this Lease other than the individuals named in Section 1.1. 25.4 Recording. Tenant shall not record this Lease without the prior written consent of Landlord. 25.5 Notices. Any notice required in accordance with any of the provisions herein if to Landlord shall be delivered or mailed by first class US mail to the address of Landlord as set forth by the signature of the Parties, or at such other place as Landlord may in writing from time to time direct to Tenant, and if to Tenant, shall be delivered or mailed by first class US mail to Tenant at the Leased Premises. If there is more than one Tenant, any notice required or permitted hereunder may be given by or to any one thereof, and shall have the same force and effect as if given by or to all thereof. Notices shall be deemed received on the date hand delivered or on the date that is three days

25.3 Broker's Commission. Landlord and Tenant represent and warrant that they have incurred no liabilities or claims for brokerage commissions or finder's fees in connection with the execution of this Lease and that they have not dealt with or have any knowledge of any real estate broker, agent or salesperson in connection with this Lease other than the individuals named in Section 1.1. 25.4 Recording. Tenant shall not record this Lease without the prior written consent of Landlord. 25.5 Notices. Any notice required in accordance with any of the provisions herein if to Landlord shall be delivered or mailed by first class US mail to the address of Landlord as set forth by the signature of the Parties, or at such other place as Landlord may in writing from time to time direct to Tenant, and if to Tenant, shall be delivered or mailed by first class US mail to Tenant at the Leased Premises. If there is more than one Tenant, any notice required or permitted hereunder may be given by or to any one thereof, and shall have the same force and effect as if given by or to all thereof. Notices shall be deemed received on the date hand delivered or on the date that is three days after proper mailing if sent by first class US mail. 25.6 Time. Time is of the essence of this Lease and each and all of its provisions in which performance is a factor. 25.7 Prior Agreements. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreements or understanding pertaining to any such matters shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any party until fully executed by both parties hereto. 24

25.8 Choice of Law. This Lease shall be governed by the laws of the state in which the Leased Premises are located. 25.9 Confidentiality. Tenant agrees to keep all terms and conditions of this Lease strictly confidential and not directly or indirectly divulge such information to any third party without Landlord's prior written consent except that the Tenant may report any information required by laws or regulations applicable to tenant. 25.10 Portion of Rent. In the event of commencement or termination of this Lease at a time other than the beginning or end of one of the specified rental periods, then the Monthly Base Rent shall be prorated as of the date of commencement or termination and in the event of termination for reasons other than default, all prepaid rent shall be refunded to Tenant or paid on its account. 25.11 Net Lease. Landlord and Tenant acknowledge that this Lease is a "net lease" with respect to taxes, insurance, utility service, repairs and maintenance of the Leased Premises and Common Areas. Landlord shall receive all Monthly Base Rents and all payments hereunder that Tenant is required to make to Landlord free from any charges,

25.8 Choice of Law. This Lease shall be governed by the laws of the state in which the Leased Premises are located. 25.9 Confidentiality. Tenant agrees to keep all terms and conditions of this Lease strictly confidential and not directly or indirectly divulge such information to any third party without Landlord's prior written consent except that the Tenant may report any information required by laws or regulations applicable to tenant. 25.10 Portion of Rent. In the event of commencement or termination of this Lease at a time other than the beginning or end of one of the specified rental periods, then the Monthly Base Rent shall be prorated as of the date of commencement or termination and in the event of termination for reasons other than default, all prepaid rent shall be refunded to Tenant or paid on its account. 25.11 Net Lease. Landlord and Tenant acknowledge that this Lease is a "net lease" with respect to taxes, insurance, utility service, repairs and maintenance of the Leased Premises and Common Areas. Landlord shall receive all Monthly Base Rents and all payments hereunder that Tenant is required to make to Landlord free from any charges, assessments, impositions, expenses, deductions and offsets. IN WITNESS WHEREOF, the parties hereto have executed this instrument the day and year first above set forth.
LANDLORD NE Broadway Partners P0 Box 529 Eugene, OR 97440 TENANT South Umpqua Bank 1448 NE Weidler Portland, OR 97232

25

EXHIBIT A Floor Plan showing Useable Space and Shared Common Area 26

EXHIBIT B NE Broadway Partners Real Property Lease Tenant lmprovement Provisions. 1. Building Standard Components Provided By Landlord. Landlord agrees to deliver the Leased Premises with all utilities and mechanical systems in good working order and all existing portable fixtures removed from the Leased Premises. 2. Tenant lmprovement Allowance Provided By Landlord. In addition to the items specified in paragraph 1 above, Landlord will provide an allowance of $30,000. Such

EXHIBIT A Floor Plan showing Useable Space and Shared Common Area 26

EXHIBIT B NE Broadway Partners Real Property Lease Tenant lmprovement Provisions. 1. Building Standard Components Provided By Landlord. Landlord agrees to deliver the Leased Premises with all utilities and mechanical systems in good working order and all existing portable fixtures removed from the Leased Premises. 2. Tenant lmprovement Allowance Provided By Landlord. In addition to the items specified in paragraph 1 above, Landlord will provide an allowance of $30,000. Such allowance will be used by Tenant in the Leased Premises to provide: lighting, partitions, carpet, paint, etc. and shall be paid to Tenant upon receipt of a Certificate of Occupancy and the release of all liens. 3. lmprovements Constructed By Tenant. 3.1 All work that is to be performed in connection with Tenant Improvements on the Leased Premises by Tenant or Tenant's contractor is hereafter referred to as tenant's work ("Tenant's Work"), and is subject to the following conditions: 3.2 Such Tenant's Work shall not proceed until Landlord's written approval which shall not be unreasonably withheld of each of the following items: (1) Tenant's contractor; (2) public liability and property damage insurance carried by Tenant or its contractor; and (3) schematic plans and specifications which shall be prepared by Tenant's Planner at Tenant's expense. All such Tenant's Work shall be done in strict conformity with such final plans and specifications. 3.3 Tenant shall obtain at Tenant's expense any required building permits. All Tenant's Work shall be performed at Tenant's sole expense in accordance with the building permits and all applicable governmental regulations. Notwithstanding any failure by Landlord to object to any such Tenant's Work, Landlord shall have no responsibility for Tenant's failure to meet all applicable regulations. Tenant shall hold Landlord harmless from any and all liability, costs, damages, expenses (including attorneys' fees) and from any liens resulting from Tenant's Work. 27

3.4 If, in conjunction with the application for or issuance of any permits, or certificates to either Landlord or Tenant or to their respective designees with respect to the commencement and/or completion of either Landlord's work or Tenant's work, any governmental or quasi-governmental authority having jurisdiction requires the performance of any work to correct or modify Building structure or Building access (including front or back entry/door to Tenant's space) in order to receive permit or certificate, then this work shall be performed by Landlord at Landlord's sole expense. 3.5 Tenant shall provide Landlord with work commencement notice and Tenant's contractors construction schedule for all Tenant's work. Landlord shall be informed in advance of any Tenant's work requiring access to the adjoining tenant's leased space or disruption of any utility service to the Building.

EXHIBIT B NE Broadway Partners Real Property Lease Tenant lmprovement Provisions. 1. Building Standard Components Provided By Landlord. Landlord agrees to deliver the Leased Premises with all utilities and mechanical systems in good working order and all existing portable fixtures removed from the Leased Premises. 2. Tenant lmprovement Allowance Provided By Landlord. In addition to the items specified in paragraph 1 above, Landlord will provide an allowance of $30,000. Such allowance will be used by Tenant in the Leased Premises to provide: lighting, partitions, carpet, paint, etc. and shall be paid to Tenant upon receipt of a Certificate of Occupancy and the release of all liens. 3. lmprovements Constructed By Tenant. 3.1 All work that is to be performed in connection with Tenant Improvements on the Leased Premises by Tenant or Tenant's contractor is hereafter referred to as tenant's work ("Tenant's Work"), and is subject to the following conditions: 3.2 Such Tenant's Work shall not proceed until Landlord's written approval which shall not be unreasonably withheld of each of the following items: (1) Tenant's contractor; (2) public liability and property damage insurance carried by Tenant or its contractor; and (3) schematic plans and specifications which shall be prepared by Tenant's Planner at Tenant's expense. All such Tenant's Work shall be done in strict conformity with such final plans and specifications. 3.3 Tenant shall obtain at Tenant's expense any required building permits. All Tenant's Work shall be performed at Tenant's sole expense in accordance with the building permits and all applicable governmental regulations. Notwithstanding any failure by Landlord to object to any such Tenant's Work, Landlord shall have no responsibility for Tenant's failure to meet all applicable regulations. Tenant shall hold Landlord harmless from any and all liability, costs, damages, expenses (including attorneys' fees) and from any liens resulting from Tenant's Work. 27

3.4 If, in conjunction with the application for or issuance of any permits, or certificates to either Landlord or Tenant or to their respective designees with respect to the commencement and/or completion of either Landlord's work or Tenant's work, any governmental or quasi-governmental authority having jurisdiction requires the performance of any work to correct or modify Building structure or Building access (including front or back entry/door to Tenant's space) in order to receive permit or certificate, then this work shall be performed by Landlord at Landlord's sole expense. 3.5 Tenant shall provide Landlord with work commencement notice and Tenant's contractors construction schedule for all Tenant's work. Landlord shall be informed in advance of any Tenant's work requiring access to the adjoining tenant's leased space or disruption of any utility service to the Building. 3.6 If any work performed by Tenant or Tenant's contractor is not performed properly or if the Leased Premises are not properly cleaned, Landlord shall notify Tenant and Tenant shall correct such work and clean the Leased Premises. 28

3.4 If, in conjunction with the application for or issuance of any permits, or certificates to either Landlord or Tenant or to their respective designees with respect to the commencement and/or completion of either Landlord's work or Tenant's work, any governmental or quasi-governmental authority having jurisdiction requires the performance of any work to correct or modify Building structure or Building access (including front or back entry/door to Tenant's space) in order to receive permit or certificate, then this work shall be performed by Landlord at Landlord's sole expense. 3.5 Tenant shall provide Landlord with work commencement notice and Tenant's contractors construction schedule for all Tenant's work. Landlord shall be informed in advance of any Tenant's work requiring access to the adjoining tenant's leased space or disruption of any utility service to the Building. 3.6 If any work performed by Tenant or Tenant's contractor is not performed properly or if the Leased Premises are not properly cleaned, Landlord shall notify Tenant and Tenant shall correct such work and clean the Leased Premises. 28

EXHIBIT C NE Broadway Partners Real Property Lease Option to Renew. At the end of the original Lease Term, providing Tenant is not then in default, Tenant shall have the right and option to renew this Lease for an additional five (5) year term. In the event Tenant exercises the option to renew, Tenant shall give Landlord written notice of intent to renew not less than one-hundred eighty (180) days and not more than two-hundred ten (210) days prior to the end of the original Term. In the event Tenant is not in default and gives the notice to Landlord within the time set forth above, this Lease shall be renewed for a period of five (5) years upon the same terms and conditions as set forth herein except for rent. The parties shall meet within thirty (30) days of the date Tenant gives Landlord notice of intent to renew the Lease and agree upon the rent which will be determined by market rates then in effect. At the end of the first option period described above, providing Tenant is not then in default, Tenant shall have the right and option to renew this Lease for an additional five (5) year term. In the event Tenant exercises the option to renew, Tenant shall give Landlord written notice of intent to renew not less than one-hundred eighty (180) days and not more than two-hundred ten (210) days prior to the end of the original Term. In the event Tenant is not in default and gives the notice to Landlord within the time set forth above, this Lease shall be renewed for a period of five (5) years upon the same terms and conditions as set forth herein except for rent. The parties shall meet within thirty (30) days of the date Tenant gives Landlord notice of intent to renew the Lease and agree upon the rent which will be determined by market rates then in effect. Arbitration. If a dispute arises between the parties concerning the rental rates for the option periods, either party may request arbitration and appoint as an arbitrator an independent real estate professional having knowledge of valuation of rental properties comparable to the Leased Premises. The other party shall also choose an arbitrator with such qualifications, and the two arbitrators shall choose a third. If the choice of the second or third arbitrator is not made within ten (10) days of the choosing of the prior arbitrator, then either party may apply to the presiding judge of the judicial district where the Leased Premises are located for appointment of the required arbitrator. The arbitration shall proceed according to the Oregon statutes governing arbitration, and the award of arbitrators shall have the effect therein provided. The arbitration shall take place in the county where the Leased Premises are located. Costs of the arbitration shall be shared equally by the parties, but each party shall pay its own attorney fees incurred in connection with the arbitration. The purpose of the arbitrators is to establish a fair market rental value.

EXHIBIT C NE Broadway Partners Real Property Lease Option to Renew. At the end of the original Lease Term, providing Tenant is not then in default, Tenant shall have the right and option to renew this Lease for an additional five (5) year term. In the event Tenant exercises the option to renew, Tenant shall give Landlord written notice of intent to renew not less than one-hundred eighty (180) days and not more than two-hundred ten (210) days prior to the end of the original Term. In the event Tenant is not in default and gives the notice to Landlord within the time set forth above, this Lease shall be renewed for a period of five (5) years upon the same terms and conditions as set forth herein except for rent. The parties shall meet within thirty (30) days of the date Tenant gives Landlord notice of intent to renew the Lease and agree upon the rent which will be determined by market rates then in effect. At the end of the first option period described above, providing Tenant is not then in default, Tenant shall have the right and option to renew this Lease for an additional five (5) year term. In the event Tenant exercises the option to renew, Tenant shall give Landlord written notice of intent to renew not less than one-hundred eighty (180) days and not more than two-hundred ten (210) days prior to the end of the original Term. In the event Tenant is not in default and gives the notice to Landlord within the time set forth above, this Lease shall be renewed for a period of five (5) years upon the same terms and conditions as set forth herein except for rent. The parties shall meet within thirty (30) days of the date Tenant gives Landlord notice of intent to renew the Lease and agree upon the rent which will be determined by market rates then in effect. Arbitration. If a dispute arises between the parties concerning the rental rates for the option periods, either party may request arbitration and appoint as an arbitrator an independent real estate professional having knowledge of valuation of rental properties comparable to the Leased Premises. The other party shall also choose an arbitrator with such qualifications, and the two arbitrators shall choose a third. If the choice of the second or third arbitrator is not made within ten (10) days of the choosing of the prior arbitrator, then either party may apply to the presiding judge of the judicial district where the Leased Premises are located for appointment of the required arbitrator. The arbitration shall proceed according to the Oregon statutes governing arbitration, and the award of arbitrators shall have the effect therein provided. The arbitration shall take place in the county where the Leased Premises are located. Costs of the arbitration shall be shared equally by the parties, but each party shall pay its own attorney fees incurred in connection with the arbitration. The purpose of the arbitrators is to establish a fair market rental value. 29

EXHIBIT D NE Broadway Partners Real Property Lease Rules and Regulations. 1. No sign, placard, picture, advertisement, name or notice shall be posted or affixed on or to any part of the outside of the Building or the Leased Premises except a suite number and Tenant name outside the Leased Premises entry door without the prior consent of Landlord, and Landlord shall have the right to remove any sign, placard, picture, advertisement, name or notice posted in violation of this rule, without notice to and at the expense of Tenant. 2. The sidewalks, exits or entrances shall not be obstructed by any Tenant or used for any purpose other than for

EXHIBIT D NE Broadway Partners Real Property Lease Rules and Regulations. 1. No sign, placard, picture, advertisement, name or notice shall be posted or affixed on or to any part of the outside of the Building or the Leased Premises except a suite number and Tenant name outside the Leased Premises entry door without the prior consent of Landlord, and Landlord shall have the right to remove any sign, placard, picture, advertisement, name or notice posted in violation of this rule, without notice to and at the expense of Tenant. 2. The sidewalks, exits or entrances shall not be obstructed by any Tenant or used for any purpose other than for ingress and egress from the Leased Premises. The exits, entrances, and roof are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of Landlord shall be prejudicial to the safety, character, reputation and interests of the Building and its tenants. 3. Tenant shall not alter any lock or install any new or additional locks or any bolts on any door of the Leased Premises or the Building without the prior written consent of Landlord. 4. The restrooms and the fixtures and equipment contained therein shall not be used for any purpose other than that for which they were constructed. Restroom fixtures shall not be used for the disposal of foreign substances (e.g. coffee grounds) and the expense of any breakage, stoppage or damage resulting from violation of this rule shall be borne by the responsible Tenant. 5. Tenant shall not permit the Leased Premises to be occupied or used in a manner offensive or objectionable to the other occupants of the Building, persons having business therein, or the occupants of neighboring buildings. Specifically, Tenant shall not use, keep or permit to be used or kept any noxious gas or odorous substance in the Leased Premises. Tenant shall not allow any animals of any kind to be brought into or kept in or about the Leased Premises or the Building. Tenant shall not make or permit to be made any loud or disturbing noises, whether by any musical instrument, audio equipment, appliance, or in any other way. Tenant shall not install any radio or television antenna, loudspeaker, or other device on the roof or exterior walls or windows of the Building. 30

6. Tenant shall not install vinyl, tile, carpet or other similar floor covering so that the same shall be affixed to any floor of the Leased Premises in any manner except as approved by Landlord. The expense of repairing any damage resulting from a violation of this rule or of removing any floor coverings affixed in violation of this rule shall be borne by Tenant. 7. Before leaving the Building, Tenant and Tenant's employees shall (1) see that the doors of the Leased Premises are closed and securely locked; (2) shut off all water faucets and water-using appliances; and (3) shut off all lights except security night lights and appliances which consume electricity, so as to prevent waste or damage. Tenant shall indemnify Landlord and other tenants for any injuries sustained by any of them as a result of any violation of this rule. 8. Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the Rules and Regulations of the Building. 9. The requirements of Tenant will be attended to only upon application at the Building management office. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee will admit any person (tenant or otherwise) to any office without specific instruction from Landlord.

6. Tenant shall not install vinyl, tile, carpet or other similar floor covering so that the same shall be affixed to any floor of the Leased Premises in any manner except as approved by Landlord. The expense of repairing any damage resulting from a violation of this rule or of removing any floor coverings affixed in violation of this rule shall be borne by Tenant. 7. Before leaving the Building, Tenant and Tenant's employees shall (1) see that the doors of the Leased Premises are closed and securely locked; (2) shut off all water faucets and water-using appliances; and (3) shut off all lights except security night lights and appliances which consume electricity, so as to prevent waste or damage. Tenant shall indemnify Landlord and other tenants for any injuries sustained by any of them as a result of any violation of this rule. 8. Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the Rules and Regulations of the Building. 9. The requirements of Tenant will be attended to only upon application at the Building management office. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee will admit any person (tenant or otherwise) to any office without specific instruction from Landlord. 10. Without the prior written consent of Landlord, Tenant shall not use the name of the Building to promote or advertise the business of Tenant except as Tenant's address. 11. Tenant agrees that it shall comply with all fire and security regulations that may be issued from time to time by Landlord. Tenant shall also provide Landlord with the name of a designated responsible employee to represent Tenant in all matters pertaining to fire or security regulations. 12. Landlord reserves the right to rescind, alter or waive, by written notice to Tenant, any rule or regulation prescribed for the Building when, in Landlord's judgment, it is necessary, desirable or proper to take such action in the best interest of the Building and its tenants. The waiver of a rule or regulation for the benefit of a particular tenant or tenants shall not be construed as a waiver of such rule or regulation in favor of any other tenant or tenants, nor shall any such waiver prevent Landlord from thereafter enforcing the rules or regulation in question against any or all tenants of the Building. 13. These Rules and Regulations supplement and shall not be construed to modify or amend the provisions of the Lease Agreement or other agreement between Landlord and Tenant. In the event of any conflict between these Rules and Regulations and the Lease Agreement and any agreement executed by Landlord and Tenant, the Lease Agreement shall prevail. 31

14. Landlord may require Tenant to provide Landlord the license number at automobiles to be parked in the parking lot pursuant to the rights granted hereunder. Landlord may provide parking stickers to Tenant to identify automobiles parked in such parking lot. In such event, any automobiles parked in areas allocated for Tenants of the Building which are not properly identified as automobiles belonging to Tenant, or employees or agents thereof, may be removed by Landlord without notice to Tenant. The cost of any such removal shall be borne by Tenant. In the event of any repeated violations of the rules and regulations promulgated by Landlord with respect to the parking lot, Landlord shall have the right to revoke Tenant's parking privileges granted hereunder without terminating this Lease. Any such revocation shall be evidenced by delivery of written notice to Tenant. 32

ADDENDUM Signage. Landlord understands that Tenant will pursue approval for increased signage beyond the current thirtytwo (32) square feet maximum with the City of Portland. If approval is granted, Tenant intends to install

14. Landlord may require Tenant to provide Landlord the license number at automobiles to be parked in the parking lot pursuant to the rights granted hereunder. Landlord may provide parking stickers to Tenant to identify automobiles parked in such parking lot. In such event, any automobiles parked in areas allocated for Tenants of the Building which are not properly identified as automobiles belonging to Tenant, or employees or agents thereof, may be removed by Landlord without notice to Tenant. The cost of any such removal shall be borne by Tenant. In the event of any repeated violations of the rules and regulations promulgated by Landlord with respect to the parking lot, Landlord shall have the right to revoke Tenant's parking privileges granted hereunder without terminating this Lease. Any such revocation shall be evidenced by delivery of written notice to Tenant. 32

ADDENDUM Signage. Landlord understands that Tenant will pursue approval for increased signage beyond the current thirtytwo (32) square feet maximum with the City of Portland. If approval is granted, Tenant intends to install individualized dimensional lettering, which is the mutually preferred solution for the building. If Tenant is unable to receive increase their allowed square footage for signage, Landlord will approve appropriately sized and designed acceptable alternate signage. Final approval will be contingent upon Landlord's review of complete shop drawings showing placement, construction and connections prior to work commencing. 33

LEASE AGREEMENT THIS LEASE AGREEMENT, made in duplicate originals at Roseburg, Oregon, on this 5th day of November 1998, by and between G & I INVESTMENTS, an Oregon Partnership, hereinafter designated as "LANDLORD", and SOUTH UMPQUA BANK, hereinafter designated as "TENANT". W I T N E S S E T H: Landlord is constructing a building (Building) and related site improvements on a parcel of property located at the corner of Pine and Cass Streets, Roseburg, Oregon. Tenant desires to lease a portion of the first floor of the building, which will consist of approximately 4,828 square feet of usable space, which area is depicted on attached Exhibits "A". The area leased to Tenant under this agreement is referred to herein as the "Leased Premises." In consideration of the covenants, agreements and stipulations herein contained on the part of the Landlord and Tenant to be observed and faithfully performed, and in consideration of the rentals to be paid as herein provided, Landlord hereby leases to Tenant, and Tenant hereby rents from Landlord the leased premises. (1) Occupancy: a. Bui1ding and Tenant Improvements: Landlord shall construct the Building and related site improvements and all improvements for the Leased Premises (on a build-to-suit, turn-key basis, except as provided below) in accordance with plans and specifications to be approved by Landlord and Tenant. Plans and specifications for the Building and leasehold improvements shall be consistent with schematic plans prepared by Dallas W. Horn, architect, dated October 8, 1998, subject to changes thereto agreed by Landlord and Tenant. Landlord will be constructing the Building and leasehold improvements on a "fast track" basis. Final plans and specifications/working drawings for each phase of the project shall be submitted by Landlord to Tenant for approval. Such approval shall not be unreasonably withheld as long as such plans and specifications/ working drawings conform substantially to the approved schematics. The Building and Tenant improvements shall be constructed with quality materials in a good and workmanlike manner. Landlord shall construct and install all leasehold improvements for the Leased Premises including, but not limited to (except as noted below), the following: (i) All ceilings, light fixtures, floor coverings, and wall finishes, of good quality and as reasonably approved by

ADDENDUM Signage. Landlord understands that Tenant will pursue approval for increased signage beyond the current thirtytwo (32) square feet maximum with the City of Portland. If approval is granted, Tenant intends to install individualized dimensional lettering, which is the mutually preferred solution for the building. If Tenant is unable to receive increase their allowed square footage for signage, Landlord will approve appropriately sized and designed acceptable alternate signage. Final approval will be contingent upon Landlord's review of complete shop drawings showing placement, construction and connections prior to work commencing. 33

LEASE AGREEMENT THIS LEASE AGREEMENT, made in duplicate originals at Roseburg, Oregon, on this 5th day of November 1998, by and between G & I INVESTMENTS, an Oregon Partnership, hereinafter designated as "LANDLORD", and SOUTH UMPQUA BANK, hereinafter designated as "TENANT". W I T N E S S E T H: Landlord is constructing a building (Building) and related site improvements on a parcel of property located at the corner of Pine and Cass Streets, Roseburg, Oregon. Tenant desires to lease a portion of the first floor of the building, which will consist of approximately 4,828 square feet of usable space, which area is depicted on attached Exhibits "A". The area leased to Tenant under this agreement is referred to herein as the "Leased Premises." In consideration of the covenants, agreements and stipulations herein contained on the part of the Landlord and Tenant to be observed and faithfully performed, and in consideration of the rentals to be paid as herein provided, Landlord hereby leases to Tenant, and Tenant hereby rents from Landlord the leased premises. (1) Occupancy: a. Bui1ding and Tenant Improvements: Landlord shall construct the Building and related site improvements and all improvements for the Leased Premises (on a build-to-suit, turn-key basis, except as provided below) in accordance with plans and specifications to be approved by Landlord and Tenant. Plans and specifications for the Building and leasehold improvements shall be consistent with schematic plans prepared by Dallas W. Horn, architect, dated October 8, 1998, subject to changes thereto agreed by Landlord and Tenant. Landlord will be constructing the Building and leasehold improvements on a "fast track" basis. Final plans and specifications/working drawings for each phase of the project shall be submitted by Landlord to Tenant for approval. Such approval shall not be unreasonably withheld as long as such plans and specifications/ working drawings conform substantially to the approved schematics. The Building and Tenant improvements shall be constructed with quality materials in a good and workmanlike manner. Landlord shall construct and install all leasehold improvements for the Leased Premises including, but not limited to (except as noted below), the following: (i) All ceilings, light fixtures, floor coverings, and wall finishes, of good quality and as reasonably approved by Tenant; 1

(ii) All restrooms, fully fixtured; (iii)All built-in counters shown on the schematics, with counter areas in conference rooms and the meeting room on the first floor plumbed and fixtured, with sink; (iv) All conduits for fiber optics, phone, and computer lines;

LEASE AGREEMENT THIS LEASE AGREEMENT, made in duplicate originals at Roseburg, Oregon, on this 5th day of November 1998, by and between G & I INVESTMENTS, an Oregon Partnership, hereinafter designated as "LANDLORD", and SOUTH UMPQUA BANK, hereinafter designated as "TENANT". W I T N E S S E T H: Landlord is constructing a building (Building) and related site improvements on a parcel of property located at the corner of Pine and Cass Streets, Roseburg, Oregon. Tenant desires to lease a portion of the first floor of the building, which will consist of approximately 4,828 square feet of usable space, which area is depicted on attached Exhibits "A". The area leased to Tenant under this agreement is referred to herein as the "Leased Premises." In consideration of the covenants, agreements and stipulations herein contained on the part of the Landlord and Tenant to be observed and faithfully performed, and in consideration of the rentals to be paid as herein provided, Landlord hereby leases to Tenant, and Tenant hereby rents from Landlord the leased premises. (1) Occupancy: a. Bui1ding and Tenant Improvements: Landlord shall construct the Building and related site improvements and all improvements for the Leased Premises (on a build-to-suit, turn-key basis, except as provided below) in accordance with plans and specifications to be approved by Landlord and Tenant. Plans and specifications for the Building and leasehold improvements shall be consistent with schematic plans prepared by Dallas W. Horn, architect, dated October 8, 1998, subject to changes thereto agreed by Landlord and Tenant. Landlord will be constructing the Building and leasehold improvements on a "fast track" basis. Final plans and specifications/working drawings for each phase of the project shall be submitted by Landlord to Tenant for approval. Such approval shall not be unreasonably withheld as long as such plans and specifications/ working drawings conform substantially to the approved schematics. The Building and Tenant improvements shall be constructed with quality materials in a good and workmanlike manner. Landlord shall construct and install all leasehold improvements for the Leased Premises including, but not limited to (except as noted below), the following: (i) All ceilings, light fixtures, floor coverings, and wall finishes, of good quality and as reasonably approved by Tenant; 1

(ii) All restrooms, fully fixtured; (iii)All built-in counters shown on the schematics, with counter areas in conference rooms and the meeting room on the first floor plumbed and fixtured, with sink; (iv) All conduits for fiber optics, phone, and computer lines; (v) Designated circuits to the computer room; Excluded from Landlord's responsibility are any modular units to be installed by Tenant, any cabinetry behind the reception area, other than built-in counters/cabinets to be provided by Landlord, appliances (except as specified above). Landlord shall be responsible for pulling all fiber optic, phone and computer lines. Landlord shall provide access to Tenant for completion of Tenant's work so that the space will be ready for occupancy when Landlord's work is completed. Any change orders made after approval of any phase of the project will be paid for by the party requesting the change order. b. Completion Date: Landlord shall substantially complete the Building and leasehold improvements for the Leased Premises by January 1, 1999. As used herein, "substantial completion" means that the Building and leasehold improvements have been completed in accordance with plans and specifications, as certified by Landlord's architect and accepted by Tenant, that a certificate of occupancy has been issued and the Leased Premises are ready for occupancy and use by Tenant, with only minor details of construction (punch list items)

(ii) All restrooms, fully fixtured; (iii)All built-in counters shown on the schematics, with counter areas in conference rooms and the meeting room on the first floor plumbed and fixtured, with sink; (iv) All conduits for fiber optics, phone, and computer lines; (v) Designated circuits to the computer room; Excluded from Landlord's responsibility are any modular units to be installed by Tenant, any cabinetry behind the reception area, other than built-in counters/cabinets to be provided by Landlord, appliances (except as specified above). Landlord shall be responsible for pulling all fiber optic, phone and computer lines. Landlord shall provide access to Tenant for completion of Tenant's work so that the space will be ready for occupancy when Landlord's work is completed. Any change orders made after approval of any phase of the project will be paid for by the party requesting the change order. b. Completion Date: Landlord shall substantially complete the Building and leasehold improvements for the Leased Premises by January 1, 1999. As used herein, "substantial completion" means that the Building and leasehold improvements have been completed in accordance with plans and specifications, as certified by Landlord's architect and accepted by Tenant, that a certificate of occupancy has been issued and the Leased Premises are ready for occupancy and use by Tenant, with only minor details of construction (punch list items) remaining to be done which do not interfere with Tenant's occupancy or use. If Landlord requires additional time and Tenant approves, the substantial completion date shall be modified to a date that is acceptable to both Landlord and Tenant. If Landlord fails to substantially complete the Building and leasehold improvements by the substantial completion date specified above or as mutually modified, Landlord shall be responsible to Tenant for any additional costs, expenses or losses that Tenant incurs because of such failure. c. Outside Completion Date: Notwithstanding any other provisions of this Lease to the contrary, if the Building and leasehold improvements have not been substantially completed by January 31, 1999, Tenant shall have the right to terminate the Lease. d. Tenant's Work: Tenant shall have access to the Leased Premises prior to substantial completion of Landlord's work, to permit Tenant to 2

install its wiring for phone and computer hookups and to install its modular units in the Leased Premises. e. Original Term: The original term of this Lease shall be a period of 5 years, commencing 10 days following the date of substantial completion (as determined under Paragraph 1) but not sooner than February 1, 1999. f. Addendum: Leased Premises shall be measured to determine the area and the parties shall sign an instrument which establishes the area of the Leased Premises, the commencement date, and the termination date of this Lease. g. Renewal Terms: Tenant shall have the option of renewing this Lease for two successive terms of five years each. Each renewal term shall commence on the day following the expiration of the preceding term. The option may be exercised by written notice to Landlord not later than 90 days prior to the last day of the expiring term. The terms and conditions of the Lease for each renewal term shall be identical with the original term except for rent and except Tenant shall no longer have an option to renew this lease that has been exercised. Basic rent for the renewal term shall be an increase of the amount of basic for the original term in a percentage equal to the increase in the consumer price index published by the United States Labor Statistics, subject to the Preferred Tenant Status Clause herein. (2) Basic Rent: The Tenant shall pay to Landlord as rental for the above described property the sum of: a. $1.15 per square foot, which shall be payable on the 1st day of each month, in advance at such place as may

install its wiring for phone and computer hookups and to install its modular units in the Leased Premises. e. Original Term: The original term of this Lease shall be a period of 5 years, commencing 10 days following the date of substantial completion (as determined under Paragraph 1) but not sooner than February 1, 1999. f. Addendum: Leased Premises shall be measured to determine the area and the parties shall sign an instrument which establishes the area of the Leased Premises, the commencement date, and the termination date of this Lease. g. Renewal Terms: Tenant shall have the option of renewing this Lease for two successive terms of five years each. Each renewal term shall commence on the day following the expiration of the preceding term. The option may be exercised by written notice to Landlord not later than 90 days prior to the last day of the expiring term. The terms and conditions of the Lease for each renewal term shall be identical with the original term except for rent and except Tenant shall no longer have an option to renew this lease that has been exercised. Basic rent for the renewal term shall be an increase of the amount of basic for the original term in a percentage equal to the increase in the consumer price index published by the United States Labor Statistics, subject to the Preferred Tenant Status Clause herein. (2) Basic Rent: The Tenant shall pay to Landlord as rental for the above described property the sum of: a. $1.15 per square foot, which shall be payable on the 1st day of each month, in advance at such place as may be designated by Landlord, except that the rental for the first month of the term hereby created has been paid upon the execution of this lease, together with the rental for the last month of the term hereby created, and Landlord acknowledges receipt of said sum. If rent has not been received by Landlord by 5:00 p.m. on the 7th of the month, Tenant shall pay to the Landlord a late fee in the amount of $500.00. b. Rent for the first and last months of this lease term shall be prorated on a daily basis if the lease commences (by reason of prior rental payments) on a day other than the first day of the month. 3

c. Preferred Tenant Status: Landlord hereby agrees to give Tenant preferred Tenant Status and further agrees that Landlord will not rent any space in the building, a portion of which is occupied by Tenant, for less rent per square foot than what Landlord is renting to Tenant. (3) Charges. Each party shall promptly pay all charges which hereafter may be lawfully levied or imposed upon said premises and chargeable to either. All sums which either party is required to pay to protect its interest in said property shall, at its election, and after notice to the other, be added or subtracted (whichever is appropriate) to unpaid rental, or, in the alternative, shall be billed to the other and shall accrue 9% interest. Such remedy shall not be deemed exclusive. (4) Additional Rent: All utility charges and personal property taxes that Tenant is required to pay by this Lease, and any other sum that Tenant is required to pay to Landlord (such as its prorata share of taxes and insurance under Paragraph (6) below) or to third parties shall be additional rent. (5) Tenant sha11 a1so pay: a. All taxes upon Tenant's personal property on the Premises, including trade fixtures owned by Tenant; b. All charges for heat, light, power, water, internal security, and other services or utilities separately metered to and used by Tenant in the Leased Premises; c. All janitorial services for the Leased Premises; d. Expenses for interior maintenance of the Leased Premises; e. Tenant shall also pay a prorata share of (i) janitorial costs for the common restrooms on the first floor of the

c. Preferred Tenant Status: Landlord hereby agrees to give Tenant preferred Tenant Status and further agrees that Landlord will not rent any space in the building, a portion of which is occupied by Tenant, for less rent per square foot than what Landlord is renting to Tenant. (3) Charges. Each party shall promptly pay all charges which hereafter may be lawfully levied or imposed upon said premises and chargeable to either. All sums which either party is required to pay to protect its interest in said property shall, at its election, and after notice to the other, be added or subtracted (whichever is appropriate) to unpaid rental, or, in the alternative, shall be billed to the other and shall accrue 9% interest. Such remedy shall not be deemed exclusive. (4) Additional Rent: All utility charges and personal property taxes that Tenant is required to pay by this Lease, and any other sum that Tenant is required to pay to Landlord (such as its prorata share of taxes and insurance under Paragraph (6) below) or to third parties shall be additional rent. (5) Tenant sha11 a1so pay: a. All taxes upon Tenant's personal property on the Premises, including trade fixtures owned by Tenant; b. All charges for heat, light, power, water, internal security, and other services or utilities separately metered to and used by Tenant in the Leased Premises; c. All janitorial services for the Leased Premises; d. Expenses for interior maintenance of the Leased Premises; e. Tenant shall also pay a prorata share of (i) janitorial costs for the common restrooms on the first floor of the Building, (ii) real property taxes and assessments, general and special, levied upon the Building, parking areas and common areas by the City of Roseburg, Douglas County, or the State of Oregon, and (iii) casualty insurance premiums paid by Landlord for the Building. (iv) Costs of ordinary maintenance of the exterior of the Building, excluding the roof, costs of maintaining the courtyard and landscaping and other common areas of the Building. Tenant's prorata share shall be a percentage equal to the ratio that the usable area of the Leased Premises bears to the total leasable space in the Building; 4

f. Tenant shall bear the expense of any insurance insuring the property of Tenant on the Premises on risks but shall not be required to insure; g. All amounts which Tenant is required to reimburse Landlord for expenses incurred by Landlord in discharging Tenant's obligations; and h. All amounts which Tenant is required to pay by any other provision of this Lease. i. Tenant shall also reimburse Landlord a prorata portion of any repairs for the HVAC which are other than ordinary maintenance. Such prorata share shall be determined by the number of months remaining on the then current term of the lease, with Tenant's responsibility being a percentage determined by dividing the number of months remaining on the then current term of the lease by the total number of the months of that term. (6) Permitted Use: The premises shall be used for general office use. (7) Restrictions on Use: In connection with the use of the premises, Tenant shall: a. Conform to all applicable laws and regulations of any public authority affecting the premises and the use, and correct at Tenant's own expense any failure of compliance created through Tenant's fault or by reason of Tenant's use. Tenant shall not otherwise be required to make expenditures to comply with any laws or regulations, including the Americans with Disabilities Act, and in no event shall Tenant be required to make any structural changes to effect such compliance. Notwithstanding the foregoing, Tenant warrants that the Building and the

f. Tenant shall bear the expense of any insurance insuring the property of Tenant on the Premises on risks but shall not be required to insure; g. All amounts which Tenant is required to reimburse Landlord for expenses incurred by Landlord in discharging Tenant's obligations; and h. All amounts which Tenant is required to pay by any other provision of this Lease. i. Tenant shall also reimburse Landlord a prorata portion of any repairs for the HVAC which are other than ordinary maintenance. Such prorata share shall be determined by the number of months remaining on the then current term of the lease, with Tenant's responsibility being a percentage determined by dividing the number of months remaining on the then current term of the lease by the total number of the months of that term. (6) Permitted Use: The premises shall be used for general office use. (7) Restrictions on Use: In connection with the use of the premises, Tenant shall: a. Conform to all applicable laws and regulations of any public authority affecting the premises and the use, and correct at Tenant's own expense any failure of compliance created through Tenant's fault or by reason of Tenant's use. Tenant shall not otherwise be required to make expenditures to comply with any laws or regulations, including the Americans with Disabilities Act, and in no event shall Tenant be required to make any structural changes to effect such compliance. Notwithstanding the foregoing, Tenant warrants that the Building and the Leased Premises will fully comply at all times with the Americans with Disabilities Act now in effect or as hereafter amended. b. Refrain from any activity which would make it impossible to insure the premises against casualty, would increase the insurance rate or would prevent Landlord from taking advantage of any ruling of the Oregon Insurance Rating Bureau, or its successor, allowing Landlord to obtain reduced premium rates for long-term fire insurance policies, unless the Tenant pays the additional cost of the insurance, and affirmatively takes such precautions as shall be recommended by the Landlord. 5

(8) Land1ord's Obligations: The following shall be the responsibility of the Landlord up to the point of entry to the premises: a. Maintenance and repair of the roof and foundations and any repairs necessitated by disrepair or defect of the roof and foundations, exterior maintenance (including periodic painting) of the Building and maintenance and repair of all common areas of the Building, parking areas, courtyard and landscaping, and repair of the heating and ventilation system in the Premises other than ordinary maintenance or repairs due to misuse, abuse of the system by Tenant or Tenant's failure to properly maintain the system. Landlord shall also be responsible for maintenance and repair of the elevator. b. All repairs or restoration made necessary by fire or other peril which could be covered by a standard fire insurance policy with an extended coverage endorsement, or by reason of war, or by earthquake or other natural casualty. (9) Tenant's Obligations: The following shall be the responsibility of the Tenant: a. Any interior decorating. b. Any repairs necessitated by the negligence of Tenant or Tenant's agents, employees or contractors, except for damage covered by Landlord's insurance required under paragraph (15). c. Ordinary maintenance of the heating and air conditioning systems and repairs necessary because of misuse or abuse of the system or improper maintenance.

(8) Land1ord's Obligations: The following shall be the responsibility of the Landlord up to the point of entry to the premises: a. Maintenance and repair of the roof and foundations and any repairs necessitated by disrepair or defect of the roof and foundations, exterior maintenance (including periodic painting) of the Building and maintenance and repair of all common areas of the Building, parking areas, courtyard and landscaping, and repair of the heating and ventilation system in the Premises other than ordinary maintenance or repairs due to misuse, abuse of the system by Tenant or Tenant's failure to properly maintain the system. Landlord shall also be responsible for maintenance and repair of the elevator. b. All repairs or restoration made necessary by fire or other peril which could be covered by a standard fire insurance policy with an extended coverage endorsement, or by reason of war, or by earthquake or other natural casualty. (9) Tenant's Obligations: The following shall be the responsibility of the Tenant: a. Any interior decorating. b. Any repairs necessitated by the negligence of Tenant or Tenant's agents, employees or contractors, except for damage covered by Landlord's insurance required under paragraph (15). c. Ordinary maintenance of the heating and air conditioning systems and repairs necessary because of misuse or abuse of the system or improper maintenance. d. Any repairs or alterations required under Tenant's obligation to comply with laws and regulations as set forth in paragraph 7 above. e. All other repairs to the premises necessary to Tenant's use of the premises which Landlord is not required to make under paragraph 9 above. (10) Land1ord's Interference with Tenant: Any repairs, replacements, alterations or other work performed on or around the leased premise by Landlord shall be done in such a way as to interfere as little as reasonably possible with use of the premises; and work shall be done so as to result in no significant reduction in Tenant's usable area. Tenant shall have the right to an abatement of rent for any claim against Landlord for any inconvenience or disturbance resulting from Landlord's activities performed in conformance with the requirements of this provision. 6

(11) Reimbursement for Repairs Assumed: If either party fails or refuses to make repairs which are required by this lease, the other party may make the repairs and charge the actual costs of repairs to the first party. Such expenditures by the Landlord shall bear 9% interest per annum from the date of expenditure by the Landlord. Such expenditures by the Tenant may be deducted from rent and other payments subsequently becoming due, or at Tenant's election, collected directly from the Landlord. Except in an emergency creating an immediate risk of personal injury or property damage, neither party may perform repairs which are the obligation of the other party and charge the other party for the resulting expenses unless at least thirty (30) days before work is commenced the defaulting party is given notice in writing outlining with reasonable particularity the repairs required, and such party fails within that time to initiate such repairs in good faith. (12) Inspection of Premises: Landlord shall have the right to inspect the premises at any reasonable time or times during normal business hours to determine the necessity of repair. Whether or not such inspection is made, the duty of the Landlord to make repairs as outlined above in any area of Tenant's possession and control shall not mature until a reasonable time after Landlord has received from Tenant notice in writing of the repairs that are required. (13) Alterations: a. Tenant may make such alterations or improvements, including signage, to the leased premises as required by

(11) Reimbursement for Repairs Assumed: If either party fails or refuses to make repairs which are required by this lease, the other party may make the repairs and charge the actual costs of repairs to the first party. Such expenditures by the Landlord shall bear 9% interest per annum from the date of expenditure by the Landlord. Such expenditures by the Tenant may be deducted from rent and other payments subsequently becoming due, or at Tenant's election, collected directly from the Landlord. Except in an emergency creating an immediate risk of personal injury or property damage, neither party may perform repairs which are the obligation of the other party and charge the other party for the resulting expenses unless at least thirty (30) days before work is commenced the defaulting party is given notice in writing outlining with reasonable particularity the repairs required, and such party fails within that time to initiate such repairs in good faith. (12) Inspection of Premises: Landlord shall have the right to inspect the premises at any reasonable time or times during normal business hours to determine the necessity of repair. Whether or not such inspection is made, the duty of the Landlord to make repairs as outlined above in any area of Tenant's possession and control shall not mature until a reasonable time after Landlord has received from Tenant notice in writing of the repairs that are required. (13) Alterations: a. Tenant may make such alterations or improvements, including signage, to the leased premises as required by Tenant's use of said premises except that all alterations and improvements so made shall comply with all applicable federal, local and state laws, rules and regulations. (14) Insurance Required: Landlord shall keep the Building and other improvements, including the Leased Premises, insured against all risks of direct physical loss or damage of the type normally covered by a standard fire insurance policy with endorsements for extended and special extended coverage, including coverage for additional costs resulting from debris removal and reasonable coverage for enforcement of any ordinance or law regulating reconstruction or replacement of any damaged portions of the building required to be demolished or removed by reason of enforcement of any building, zoning, safety or land use laws as a result of a covered loss, for replacement value and containing a waiver of subrogation and inflation guard protection. The cost of such insurance shall be subject to reimbursement by Tenants of the Building on a prorata basis, as provided in Paragraph (6) above. Tenant shall bear the expense of any insurance insuring the property of Tenant on the premises against such risks, but shall not be required to insure said property, whether or not said property be personal or an improvement to said premises. 7

(15) Waiver of Subrogation: The parties shall obtain from their respective insurance carriers waivers of subrogation against the other party, agents, employees and, as to the Tenant, invitees. Neither party shall be liable to the other for any loss or damage caused by fire or any of the risks enumerated in a standard fire insurance policy with an extended coverage endorsement if such insurance was obtainable at the time of such loss or damage. The party benefiting from a waiver of subrogation clause in an insurance policy shall pay any additional premium required to obtain such a clause within 10 days after being notified by the other party of such additional cost, unless the benefiting party can obtain such insurance satisfactory to the first party. (16) Partial Damage: If the leased premises are partly damaged and paragraph 17 below does not apply, the property shall be repaired as follows: If the Leased Premises are partly damaged and Paragraph (17) does not apply, the Leased Premises shall be repaired by Landlord at Landlord's expense. Repairs shall be accomplished with all reasonable dispatch, subject to interruptions and delays from labor disputes and matters beyond the control of Landlord. Rent shall be abated to the extent the Leased Premises is untenantable subsequent to the damage and during the period of repair. (17) Destruction: If the Building or the Leased Premises are destroyed or damaged such that the cost of repair exceeds fifty per cent (50%) of the value before the damage, the parties shall proceed as follows: a. Either Landlord or Tenant may elect to terminate the lease as of the date of damage or destruction by notice given to the other party in writing not more than 45 days following the date of damage. In such event all rights and

(15) Waiver of Subrogation: The parties shall obtain from their respective insurance carriers waivers of subrogation against the other party, agents, employees and, as to the Tenant, invitees. Neither party shall be liable to the other for any loss or damage caused by fire or any of the risks enumerated in a standard fire insurance policy with an extended coverage endorsement if such insurance was obtainable at the time of such loss or damage. The party benefiting from a waiver of subrogation clause in an insurance policy shall pay any additional premium required to obtain such a clause within 10 days after being notified by the other party of such additional cost, unless the benefiting party can obtain such insurance satisfactory to the first party. (16) Partial Damage: If the leased premises are partly damaged and paragraph 17 below does not apply, the property shall be repaired as follows: If the Leased Premises are partly damaged and Paragraph (17) does not apply, the Leased Premises shall be repaired by Landlord at Landlord's expense. Repairs shall be accomplished with all reasonable dispatch, subject to interruptions and delays from labor disputes and matters beyond the control of Landlord. Rent shall be abated to the extent the Leased Premises is untenantable subsequent to the damage and during the period of repair. (17) Destruction: If the Building or the Leased Premises are destroyed or damaged such that the cost of repair exceeds fifty per cent (50%) of the value before the damage, the parties shall proceed as follows: a. Either Landlord or Tenant may elect to terminate the lease as of the date of damage or destruction by notice given to the other party in writing not more than 45 days following the date of damage. In such event all rights and obligations of the parties shall cease as of the date of termination, and Tenant shall be entitled to the reimbursement of any prepaid rent or other amounts paid by Tenant and attributable to the anticipated term subsequent to the termination date. b. In the absence of an election under (a) above, Landlord shall proceed to restore the leased premises to substantially the same form as prior to the damage or destruction so as to provide for the Tenant usable space equivalent in quantity and character to that before the damage. Work shall be commenced as soon as reasonably possible, and thereafter shall proceed without interruption except 8

for work stoppages on account of labor disputes and matters not under control of the Landlord. Rent shall be abated from the date of damage until the premises are tenantable. c. In either event, rent shall be abated from the date of damage except when the damage occurs solely because of the fault of the Tenant. (18) Damage Late in Term: If damage or destruction to which the paragraph immediately above would apply occurs within six (6) months prior to the end of the then-current lease term, Tenant may elect to terminate the lease by notice in writing to Landlord given within thirty (30) days after the date of the damage. Such termination shall have the same effect as termination by the Landlord under paragraph 17(a) above. (19) Partial Taking: If a portion of the leased premises is condemned and paragraph 20 does not apply, the lease shall continue on the following terms: a. The proceeds of condemnation shall be divided between Tenant and Landlord in accordance with the allocation of said damages made by the condemning authority. b. Landlord shall proceed as soon as reasonably possible to make such repairs and alterations to the premises as are necessary to restore the remaining premises to a condition as comparable as reasonably practicable to Landlord may, but shall not be required to, perform alterations prior to the actual taking after the portion to be taken has been finally determined. Rent shall be abated to the extent the premises are untenantable during the period of alterations and repair. c. After the date on which title vests in the condemning authority, or an earlier date on which alterations or repairs are commenced by Landlord to restore the balance of the property in anticipation of taking, the rent shall be

for work stoppages on account of labor disputes and matters not under control of the Landlord. Rent shall be abated from the date of damage until the premises are tenantable. c. In either event, rent shall be abated from the date of damage except when the damage occurs solely because of the fault of the Tenant. (18) Damage Late in Term: If damage or destruction to which the paragraph immediately above would apply occurs within six (6) months prior to the end of the then-current lease term, Tenant may elect to terminate the lease by notice in writing to Landlord given within thirty (30) days after the date of the damage. Such termination shall have the same effect as termination by the Landlord under paragraph 17(a) above. (19) Partial Taking: If a portion of the leased premises is condemned and paragraph 20 does not apply, the lease shall continue on the following terms: a. The proceeds of condemnation shall be divided between Tenant and Landlord in accordance with the allocation of said damages made by the condemning authority. b. Landlord shall proceed as soon as reasonably possible to make such repairs and alterations to the premises as are necessary to restore the remaining premises to a condition as comparable as reasonably practicable to Landlord may, but shall not be required to, perform alterations prior to the actual taking after the portion to be taken has been finally determined. Rent shall be abated to the extent the premises are untenantable during the period of alterations and repair. c. After the date on which title vests in the condemning authority, or an earlier date on which alterations or repairs are commenced by Landlord to restore the balance of the property in anticipation of taking, the rent shall be reduced commensurately with the reduction in value of the leased premises as an economic unit on account of the partial taking. If the parties are unable to agree upon the amount of the reduction of rent, the amount shall be determined by arbitration in the same manner as is provided for determination of rent during a renewal period. d. If a portion of the Landlord's property not included in the leased premises is taken and severance damages are awarded on account of the leased premises as a result of change of grade of adjacent streets or other activity by a public body not involving a physical taking of any portion of the land, this shall be regarded 9

as a partial condemnation to which paragraphs (a) and (c) next above apply, and the rent shall be reduced to the extent of diminution of value of the premises as though a portion had been physically taken. (20) Total Taking: If a condemning authority takes all of the leased premises or a portion sufficient to render the remaining premises reasonably unsuitable for the use which Tenant was then making of the premises, the lease shall terminate as of the date title vests in the condemning authorities. Shall the parties not agree whether the premises are reasonably unsuitable, they shall select an agreeable arbitrator to decide if the premises are reasonably unsuitable. The decision of the arbitrator shall be binding upon the parties. Such termination shall have the same effect as a termination under paragraph 17(a) above. The proceeds of condemnation shall be divided between Tenant and Landlord in accordance with the allegation of said damages made by the condemning authority, or as their intent may equitably appear if such allocation is not made. (21) Sale in Lieu of Condemnation: Sale of all or part of the leased premises to a purchaser with the power of eminent domain in the face of a threat or probability of the exercise of the power shall be treated for the purposes of this lease as a taking by condemnation. (22) Liens: a. Except with respect to activities for which Landlord is responsible, the Tenant shall pay as due all claims for work done on and for services rendered or materials furnished to the leased premises and shall keep the premises free from any liens. If Tenant fails to pay any such claims or to discharge any lien, Landlord may do so and collect the cost as additional rent. Any amount so added shall bear interest at the rate of 9% per annum from the date

as a partial condemnation to which paragraphs (a) and (c) next above apply, and the rent shall be reduced to the extent of diminution of value of the premises as though a portion had been physically taken. (20) Total Taking: If a condemning authority takes all of the leased premises or a portion sufficient to render the remaining premises reasonably unsuitable for the use which Tenant was then making of the premises, the lease shall terminate as of the date title vests in the condemning authorities. Shall the parties not agree whether the premises are reasonably unsuitable, they shall select an agreeable arbitrator to decide if the premises are reasonably unsuitable. The decision of the arbitrator shall be binding upon the parties. Such termination shall have the same effect as a termination under paragraph 17(a) above. The proceeds of condemnation shall be divided between Tenant and Landlord in accordance with the allegation of said damages made by the condemning authority, or as their intent may equitably appear if such allocation is not made. (21) Sale in Lieu of Condemnation: Sale of all or part of the leased premises to a purchaser with the power of eminent domain in the face of a threat or probability of the exercise of the power shall be treated for the purposes of this lease as a taking by condemnation. (22) Liens: a. Except with respect to activities for which Landlord is responsible, the Tenant shall pay as due all claims for work done on and for services rendered or materials furnished to the leased premises and shall keep the premises free from any liens. If Tenant fails to pay any such claims or to discharge any lien, Landlord may do so and collect the cost as additional rent. Any amount so added shall bear interest at the rate of 9% per annum from the date expended by Landlord and shall be payable on demand. Such action by Landlord shall not constitute a waiver of any right or remedy which Landlord may have on account of Tenant's default. b. Tenant may withhold payment of any claim in connection with a good-faith dispute over the obligation to pay, so long as Landlord's property interests are not jeopardized. If a lien is filed as a result of nonpayment, Tenant shall within ten (10) days after knowledge of the filing, secure the discharge of the lien or deposit with Landlord cash or a sufficient corporate surety bond or other security satisfactory to Landlord in an amount sufficient to discharge the lien plus any costs, attorney fees and other charges 10

that could accrue as a result of a foreclosure or sale under the lien. (23) Indemnification: Tenant shall indemnify and defend Landlord from any claim, loss or liability arising out of or related to any activity of Tenant on the leased premises, or any condition created by Tenant including the presence of hazardous substances on, in or about the premises placed there by Tenant, of the leased premises in the possession or under the control of Tenant, or failure to effect any repair or maintenance required by this lease. Tenant's duty to indemnify shall not apply to or prevent any claim by Tenant against Landlord for injury or damage to Tenant or Tenant's property for which Landlord may be liable. Landlord shall indemnify and defend Tenant from any claim, loss or liability arising out of or relating to any activity of Landlord on the property, or any condition of the Building, other than a condition created by Tenant and arising out of or related to the presence of hazardous substances, on, in or about the property unless placed there by Tenant. (24) Liability Insurance: Before going into possession of the premises, Tenant shall procure, and thereafter during the term of this lease shall continue to carry, the following insurance at Tenant's cost: a. Public liability and property damage insurance in a reasonable company with limits of not less than $500,000 for injury to one person, $1,000,000 for injury to two or more persons in one occurrence, and $500,000 for damage to property. Such insurance shall cover all risks arising directly or indirectly out of Tenant's activities on, or any condition of, the leased premises. Certificates evidencing such insurance and bearing endorsements requiring ten (10) days written notice to Landlord prior to any change or cancellation shall be furnished to Landlord prior to Tenant's occupancy of the property. b. Worker's Compensation from the State Accident Insurance fund or from a responsible private carrier. Private insurance shall provide the schedule of employee benefits required by law and shall provide employer's liability

that could accrue as a result of a foreclosure or sale under the lien. (23) Indemnification: Tenant shall indemnify and defend Landlord from any claim, loss or liability arising out of or related to any activity of Tenant on the leased premises, or any condition created by Tenant including the presence of hazardous substances on, in or about the premises placed there by Tenant, of the leased premises in the possession or under the control of Tenant, or failure to effect any repair or maintenance required by this lease. Tenant's duty to indemnify shall not apply to or prevent any claim by Tenant against Landlord for injury or damage to Tenant or Tenant's property for which Landlord may be liable. Landlord shall indemnify and defend Tenant from any claim, loss or liability arising out of or relating to any activity of Landlord on the property, or any condition of the Building, other than a condition created by Tenant and arising out of or related to the presence of hazardous substances, on, in or about the property unless placed there by Tenant. (24) Liability Insurance: Before going into possession of the premises, Tenant shall procure, and thereafter during the term of this lease shall continue to carry, the following insurance at Tenant's cost: a. Public liability and property damage insurance in a reasonable company with limits of not less than $500,000 for injury to one person, $1,000,000 for injury to two or more persons in one occurrence, and $500,000 for damage to property. Such insurance shall cover all risks arising directly or indirectly out of Tenant's activities on, or any condition of, the leased premises. Certificates evidencing such insurance and bearing endorsements requiring ten (10) days written notice to Landlord prior to any change or cancellation shall be furnished to Landlord prior to Tenant's occupancy of the property. b. Worker's Compensation from the State Accident Insurance fund or from a responsible private carrier. Private insurance shall provide the schedule of employee benefits required by law and shall provide employer's liability coverage with limits as required by law. Tenant shall supply Landlord with satisfactory evidence of public coverage or with certificates of private coverage in the same form as required above for Tenant's general liability insurance. 11

(25) Landlord's Warranty: Landlord warrants that it is the owner of the leased premises free of all encumbrances except the balance owed upon any loans to pay the purchase price and has the right to lease them. Landlord will defend Tenant's right to quiet enjoyment of the lease premises from the lawful claims and demands of all persons during the lease term. Landlord has complied with all Environmental Laws at its premises and the business of Landlord has been conducted there so as not to give rise to any claim, whether directly or indirectly, from the use, treatment, storage, disposal, release, spill, generation, manufacture, transportation or handling of hazardous substances. As used in this Lease, "Environmental Laws" shall mean any federal, state or local law, statute, regulation or ordinance which lists, defines, regulates, controls or proscribes the use, treatment, storage, disposal, generation, manufacture, transportation or handling of "hazardous substances". As used in this Lease, "hazardous substances" shall mean materials that, because of their quantity, concentration of physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The term includes, without limitation, petroleum products or crude oil or any fraction thereof and any and all hazardous or toxic substances, materials or wastes as defined or listed under any Environmental Laws. (26) Assignment and Sublease: No part of the leased property may be assigned, mortgaged or otherwise subleased, nor may a right of use of any portion of the leased property be conferred on any third person, except as provided hereinabove, without the prior written consent of Landlord. This provision shall apply to all transfers by operation of law and executors and legatees. No consent in one instance shall prevent this provision from applying to a subsequent instance. The Landlord shall consent to a transaction where Landlord's consent is required by this provision when withholding such consent would be unreasonable in the circumstances. (27) Default: The following shall be events of default: a. Failure of Tenant to comply with any term or condition or fulfill any obligation of this lease, including payment,

(25) Landlord's Warranty: Landlord warrants that it is the owner of the leased premises free of all encumbrances except the balance owed upon any loans to pay the purchase price and has the right to lease them. Landlord will defend Tenant's right to quiet enjoyment of the lease premises from the lawful claims and demands of all persons during the lease term. Landlord has complied with all Environmental Laws at its premises and the business of Landlord has been conducted there so as not to give rise to any claim, whether directly or indirectly, from the use, treatment, storage, disposal, release, spill, generation, manufacture, transportation or handling of hazardous substances. As used in this Lease, "Environmental Laws" shall mean any federal, state or local law, statute, regulation or ordinance which lists, defines, regulates, controls or proscribes the use, treatment, storage, disposal, generation, manufacture, transportation or handling of "hazardous substances". As used in this Lease, "hazardous substances" shall mean materials that, because of their quantity, concentration of physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The term includes, without limitation, petroleum products or crude oil or any fraction thereof and any and all hazardous or toxic substances, materials or wastes as defined or listed under any Environmental Laws. (26) Assignment and Sublease: No part of the leased property may be assigned, mortgaged or otherwise subleased, nor may a right of use of any portion of the leased property be conferred on any third person, except as provided hereinabove, without the prior written consent of Landlord. This provision shall apply to all transfers by operation of law and executors and legatees. No consent in one instance shall prevent this provision from applying to a subsequent instance. The Landlord shall consent to a transaction where Landlord's consent is required by this provision when withholding such consent would be unreasonable in the circumstances. (27) Default: The following shall be events of default: a. Failure of Tenant to comply with any term or condition or fulfill any obligation of this lease, including payment, within thirty (30) days after written notice by Landlord specifying the nature of the default with reasonable particularity. b. Insolvency of Tenant; an assignment by Tenant for the benefit of creditors; the filing by Tenant of a voluntary petition in bankruptcy; an adjudication that Tenant is bankrupt or the appointment of a receiver of the properties of Tenant; the filing of 12

an involuntary petition of bankruptcy and failure of Tenant to secure a dismissal of the petition within thirty (30) days after filing; attachment of or the levying of execution on the leasehold interest and failure of Tenant to secure discharge of the attachment or release of the levy of execution within ten (10) days. (28) Termination: In the event of a default, the lease may be terminated at the option of the Landlord by notice in writing to Tenant. The notice may be given before or within thirty (30) days after the running of the grace period for default and may be included in a notice of failure of compliance given under paragraph 28(b) and (c) above. If the property is abandoned by Tenant in connection with a default, termination shall be automatic and without notice. (29) Damages Without Termination: If this lease is not terminated by election of Landlord or otherwise, Landlord shall be entitled to recover damages from Tenant. (30) Re-entry After Termination: If the lease is terminated for Tenant's defaults, Tenant's liability to Landlord for damages shall survive such termination, and the rights and obligations of the parties shall be as follows: a. Tenant shall vacate the property immediately, remove any property of Tenant including any fixtures which Tenant is required to remove at the end of the lease term, perform any clean up, alterations or other work required to leave the property in the condition required at the end of the term, and deliver all keys to Landlord. b. Landlord may re-enter, take possession of the premises and remove any personal property by legal action or

an involuntary petition of bankruptcy and failure of Tenant to secure a dismissal of the petition within thirty (30) days after filing; attachment of or the levying of execution on the leasehold interest and failure of Tenant to secure discharge of the attachment or release of the levy of execution within ten (10) days. (28) Termination: In the event of a default, the lease may be terminated at the option of the Landlord by notice in writing to Tenant. The notice may be given before or within thirty (30) days after the running of the grace period for default and may be included in a notice of failure of compliance given under paragraph 28(b) and (c) above. If the property is abandoned by Tenant in connection with a default, termination shall be automatic and without notice. (29) Damages Without Termination: If this lease is not terminated by election of Landlord or otherwise, Landlord shall be entitled to recover damages from Tenant. (30) Re-entry After Termination: If the lease is terminated for Tenant's defaults, Tenant's liability to Landlord for damages shall survive such termination, and the rights and obligations of the parties shall be as follows: a. Tenant shall vacate the property immediately, remove any property of Tenant including any fixtures which Tenant is required to remove at the end of the lease term, perform any clean up, alterations or other work required to leave the property in the condition required at the end of the term, and deliver all keys to Landlord. b. Landlord may re-enter, take possession of the premises and remove any personal property by legal action or by self-help with the use of a reasonable force and without liability for damages. (31) Reletting: Following re-entry or abandonment, Landlord shall make all reasonable efforts to relet the premises and in that connection may: a. Make any suitable alterations or refurbish the premises, or both, or change the character or use of the premises. b. Relet the premises for a term longer or shorter than that term of this lease upon reasonable terms and conditions. (32) Damages: In the event of termination on default, Landlord shall be entitled to recover immediately, without waiting until the due date of 13

any future rent or until the date fixed for expiration of the lease term, the following amounts as damages: a. Any excess of: (i) the value of all of Tenant's obligations under this lease, including the obligation to pay rent, from the date of default until the end of the term, over (ii) the reasonable rental value of the property for the same period figured as of the date of default, the net result to be discounted to the date of default at 121 per annum. b. The reasonable costs of re-entry and reletting, including without limitation the cost of clean up, removal of Tenant's property and fixtures, or any other expense occasioned by Tenant's failure to quit the premises upon termination and to leave them in the required condition, attorney fees, court costs, broker commissions and advertising costs. c. Remedies Cumulative. The foregoing remedies shall be in addition to and shall not exclude any other remedy available to Landlord under applicable law. (33) Condition of Premises: Upon expiration of the lease term or earlier termination on account of default or termination without default, Tenant shall deliver all keys to the Landlord and surrender the leased premises in good condition, reasonable wear and tear excepted. Alterations constructed by Tenant shall not be removed by Tenant unless such alterations can be removed without damage to the remaining premises, or such damage to the remaining premises as is occasioned by the removal of said alterations is repaired. Depreciation and wear from ordinary use for the purpose for which the premises were let need not be restored to original condition, but all

any future rent or until the date fixed for expiration of the lease term, the following amounts as damages: a. Any excess of: (i) the value of all of Tenant's obligations under this lease, including the obligation to pay rent, from the date of default until the end of the term, over (ii) the reasonable rental value of the property for the same period figured as of the date of default, the net result to be discounted to the date of default at 121 per annum. b. The reasonable costs of re-entry and reletting, including without limitation the cost of clean up, removal of Tenant's property and fixtures, or any other expense occasioned by Tenant's failure to quit the premises upon termination and to leave them in the required condition, attorney fees, court costs, broker commissions and advertising costs. c. Remedies Cumulative. The foregoing remedies shall be in addition to and shall not exclude any other remedy available to Landlord under applicable law. (33) Condition of Premises: Upon expiration of the lease term or earlier termination on account of default or termination without default, Tenant shall deliver all keys to the Landlord and surrender the leased premises in good condition, reasonable wear and tear excepted. Alterations constructed by Tenant shall not be removed by Tenant unless such alterations can be removed without damage to the remaining premises, or such damage to the remaining premises as is occasioned by the removal of said alterations is repaired. Depreciation and wear from ordinary use for the purpose for which the premises were let need not be restored to original condition, but all repair for which Tenant is responsible shall be completed before the latest practical date prior to such surrender. (34) Fixtures: a. All fixtures placed upon the leased premises during the term by Tenant shall be the Tenant's property provided Tenant shall remove said fixtures prior to the latest practical date prior to surrender of the leasehold. All other personal property shall remain the property of Tenant if placed on the lease premises by Tenant. b. The time for removal of any property or fixtures which the Tenant has the right to remove and wishes to remove from the leased premises upon termination shall be as follows: 14

(i) On or before the date the lease terminates because of expiration of the original or any renewal, or because of default. (ii) Within thirty (30) days after notice from the Landlord requiring such removal where the property to be removed is a fixture which Tenant is not required to remove. (35) Holdover a. At the expiration of the lease term, Tenant may continue to occupy said premises as a month-to-month tenant subject to Landlord's right to terminate such tenancy upon thirty (30) days' notice. Such occupancy shall be subject to all of the provisions of the lease except the provisions for term and renewal. Failure of Tenant to remove fixtures, furniture, furnishings, or trade fixtures which the Tenant may remove under this lease shall constitute a failure to vacate to which this paragraph shall apply if the property not removed substantially interferes with the occupancy of the premises by another Tenant or with occupancy by Landlord for any purpose. b. If a month-to-month tenancy results from a holdover by Tenant, the tenancy shall be terminable upon thirty (30) days' written notice. (36) Nonwaiver: Waiver by either party of strict performance of any provision of this lease shall not be a waiver of or prejudice the party's right to require strict performance of the same provision in the future, or of any other provision. (37) Attorney's Fees: If a civil action is instituted in connection with any controversy arising out of this lease, the prevailing party shall be entitled to recover in addition to costs such sum as the Court may adjudge reasonable as

(i) On or before the date the lease terminates because of expiration of the original or any renewal, or because of default. (ii) Within thirty (30) days after notice from the Landlord requiring such removal where the property to be removed is a fixture which Tenant is not required to remove. (35) Holdover a. At the expiration of the lease term, Tenant may continue to occupy said premises as a month-to-month tenant subject to Landlord's right to terminate such tenancy upon thirty (30) days' notice. Such occupancy shall be subject to all of the provisions of the lease except the provisions for term and renewal. Failure of Tenant to remove fixtures, furniture, furnishings, or trade fixtures which the Tenant may remove under this lease shall constitute a failure to vacate to which this paragraph shall apply if the property not removed substantially interferes with the occupancy of the premises by another Tenant or with occupancy by Landlord for any purpose. b. If a month-to-month tenancy results from a holdover by Tenant, the tenancy shall be terminable upon thirty (30) days' written notice. (36) Nonwaiver: Waiver by either party of strict performance of any provision of this lease shall not be a waiver of or prejudice the party's right to require strict performance of the same provision in the future, or of any other provision. (37) Attorney's Fees: If a civil action is instituted in connection with any controversy arising out of this lease, the prevailing party shall be entitled to recover in addition to costs such sum as the Court may adjudge reasonable as attorney fees at trial or by any appellate court upon appeal. (38) Context: The covenants herein shall be binding upon the benefits and advantages shall inure to the respective heirs, legal representatives, successors and assigns of the parties hereto. Whenever used, "Landlord" and "Tenant" shall include their successors in interest, the singular the plural, the plural the singular, and the use of any gender shall be applicable to all genders. (39) Notices: Any notice required or permitted under this lease shall be given when actually delivered or when deposited in the United States mail, addressed as follows: 15
Landlord: G & I Investments P.O. Box 909 Roseburg, OR 97470 South Umpqua Bank Registered Agent: 445 SE Main Street Roseburg, OR 97470

Tenant:

or to such other address as may be specified from time to time by either of the parties in writing. (40) Parking: Landlord shall provide Tenant with not less than 8 spaces, marked and designated for the exclusive use of Tenant and its customers, located on the north side of the building, and an additional nine (9) spaces for employee parking in the lot on the south side of the building closest to Mosher Street. (41) Taxes: Landlord shall pay all real property taxes and assessments levied on the building and the land upon which it is situated, including the parking areas for the Building, subject to Tenant's obligation to reimburse Landlord for Tenant's prorata share of such taxes, as provided in Paragraph 6e. If the land upon which the Building and the parking areas for the Building are situated consists of more than one tax lot or if the tax lots on which the Building and parking for the Building are situated are used by others or for purposes in addition to the Building and its Tenants, in calculating the taxes which are subject to reimbursement on a prorata basis, the amount of taxes for the land shall be only that portion of the land taxes that are reasonably attributable to the

Landlord:

G & I Investments P.O. Box 909 Roseburg, OR 97470 South Umpqua Bank Registered Agent: 445 SE Main Street Roseburg, OR 97470

Tenant:

or to such other address as may be specified from time to time by either of the parties in writing. (40) Parking: Landlord shall provide Tenant with not less than 8 spaces, marked and designated for the exclusive use of Tenant and its customers, located on the north side of the building, and an additional nine (9) spaces for employee parking in the lot on the south side of the building closest to Mosher Street. (41) Taxes: Landlord shall pay all real property taxes and assessments levied on the building and the land upon which it is situated, including the parking areas for the Building, subject to Tenant's obligation to reimburse Landlord for Tenant's prorata share of such taxes, as provided in Paragraph 6e. If the land upon which the Building and the parking areas for the Building are situated consists of more than one tax lot or if the tax lots on which the Building and parking for the Building are situated are used by others or for purposes in addition to the Building and its Tenants, in calculating the taxes which are subject to reimbursement on a prorata basis, the amount of taxes for the land shall be only that portion of the land taxes that are reasonably attributable to the Building and parking for the Building, including common areas, as determined by Landlord and as reasonably approved by Tenant. (42) Signage: Tenant shall have the exclusive right to place a sign on the north side of the building. The sign shall be secured flat on the wall of the building and shall be no larger than _____ feet by _______ feet. Landlord agrees that it shall not allow any other tenant to place a sign on the exterior of the building without first obtaining the written permission of South Umpqua Bank, which shall not be unreasonably withheld. In addition, Tenant shall have the right to place a pilon sign in the landscaping area around the building, the specific site to be mutually agreed on between the Landlord and Tenant. 16

IN WITNESS WHEREOF, the parties hereto have set their hands the day and year first above written. LANDLORD: G & I INVESTMENTS
By: /s/ David Gilbert ---------------------------David Gilbert

TENANT: SOUTH UMPQUA BANK
By: /s/ Raymond P. Davis ---------------------------Raymond P. Davis Registered Agent 11/5/98

Index to Financial Information

IN WITNESS WHEREOF, the parties hereto have set their hands the day and year first above written. LANDLORD: G & I INVESTMENTS
By: /s/ David Gilbert ---------------------------David Gilbert

TENANT: SOUTH UMPQUA BANK
By: /s/ Raymond P. Davis ---------------------------Raymond P. Davis Registered Agent 11/5/98

Index to Financial Information Page Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 17 Independent Auditors' Report .......................................... 29 Consolidated Balance Sheets ........................................... 30 Consolidated Statements of Income ..................................... 31 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income .............................................. 32 Consolidated Statements of Cash Flows ................................. 33 Notes to Consolidated Financial Statements ............................ 34 Corporate Information ................................................. 44

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Disclosure Regarding Forward Looking Statements The following narrative includes a discussion of certain significant business trends and uncertainties, as well as other forward looking statements, and is intended to be read in conjunction with and is qualified in its entirety by reference to the consolidated financial statements and accompanying notes included elsewhere in this Annual Report. This Annual Report includes forward looking statements that are based on the current beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management.

Index to Financial Information Page Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 17 Independent Auditors' Report .......................................... 29 Consolidated Balance Sheets ........................................... 30 Consolidated Statements of Income ..................................... 31 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income .............................................. 32 Consolidated Statements of Cash Flows ................................. 33 Notes to Consolidated Financial Statements ............................ 34 Corporate Information ................................................. 44

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Disclosure Regarding Forward Looking Statements The following narrative includes a discussion of certain significant business trends and uncertainties, as well as other forward looking statements, and is intended to be read in conjunction with and is qualified in its entirety by reference to the consolidated financial statements and accompanying notes included elsewhere in this Annual Report. This Annual Report includes forward looking statements that are based on the current beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. All statements other than statements of historical fact included in this Annual Report regarding the Company's financial position, business strategy, and plans and objectives of management of the Company for future operations, are forward looking statements. When used in this Annual Report, the words "anticipate," "believe," "estimate," and "intend," and words or phrases of similar meaning, as they relate to the Company or Company management, are intended to identify forward looking statements. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Based upon changing conditions, the occurrence of certain risks or uncertainties, or if any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward looking statements. All subsequent written and oral forward looking statements attributable to the Company and/or persons acting on its behalf are expressly qualified in their entirety. Overview

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Disclosure Regarding Forward Looking Statements The following narrative includes a discussion of certain significant business trends and uncertainties, as well as other forward looking statements, and is intended to be read in conjunction with and is qualified in its entirety by reference to the consolidated financial statements and accompanying notes included elsewhere in this Annual Report. This Annual Report includes forward looking statements that are based on the current beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. All statements other than statements of historical fact included in this Annual Report regarding the Company's financial position, business strategy, and plans and objectives of management of the Company for future operations, are forward looking statements. When used in this Annual Report, the words "anticipate," "believe," "estimate," and "intend," and words or phrases of similar meaning, as they relate to the Company or Company management, are intended to identify forward looking statements. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Based upon changing conditions, the occurrence of certain risks or uncertainties, or if any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward looking statements. All subsequent written and oral forward looking statements attributable to the Company and/or persons acting on its behalf are expressly qualified in their entirety. Overview Umpqua Holdings Corporation (the Company) is a bank holding company headquartered in Roseburg, Oregon. It is the parent company of South Umpqua Bank, a commercial bank (the Bank) and Strand, Atkinson, Williams & York, Inc., a retail brokerage firm. The Company provides financial solutions for its customers along the Interstate 5 corridor from Portland to Medford, Oregon. The Company's strategy is to differentiate itself through superior customer service, innovative product delivery, and the establishment of strong brand awareness and customer loyalty. The Company continued its expansion plans in 1999 with the establishment of a new loan center in February, the formation of a holding company in March, the relocation and expansion of its Sutherlin store in June, the opening of its first Portland-area store in July, and the acquisition of Strand, Atkinson, Williams & York, Inc. in November. In January 2000 the Company opened its first store in Salem. Financial Highlights The Company earned $4.9 million in 1999, up 18.6% over 1998 earnings of $4.1 million. Diluted earnings per share also improved to $0.63 in 1999 compared with $0.55 in 1998. The return on average shareholders' equity improved to 13.55% for 1999 compared with 13.14% for 1998. Total loans grew over 33% in 1999 to $248.5 million at year end, while total deposits increased 17.9% to $301.7 million during the same period. Results of Operations The following discussion is intended to provide information to facilitate the understanding and assessment of significant changes and trends related to the financial condition and results of operations of the Company. This discussion and analysis should be read in conjunction with Company's consolidated financial statements and notes appearing elsewhere in this Annual Report.
Percentage 1999 1998 Growth --------------------------------------------------------------------------------------Average assets ...................... $ 336,010,000 $ 279,123,000 20.4% Average deposits .................... 271,194,000 231,781,000 17.0% Average loans and loans held for sale 212,824,000 167,222,000 27.3% Net income .......................... 4,874,000 4,110,000 18.6% Return on average assets ............ 1.45% 1.47% -1.4%

Return on average assets ............ Return on average equity ............ Basic earnings per common share ..... Diluted earnings per common share ...

$ $

1.45% 13.55% 0.64 0.63

$ $

1.47% 13.14% 0.56 0.55

-1.4% 3.1% 14.3% 14.5%

17

SELECTED QUARTERLY FINANCIAL DATA The following tables set forth the Company's unaudited consolidated financial data regarding operations for each quarter of 1999 and 1998. This information, in the opinion of management, includes all normal recurring adjustments necessary to state fairly the information set forth therein. Certain amounts previously reported have been reclassified to conform with current presentation. These reclassifications had no net impact on the results of operations.
1999 ---------------------------------First Second Third Fourth (in thousands) Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------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 Provision for loan losses ......................... 328 327 226 511 --------------------------------Net interest income after provision for loan losses 3,454 3,578 3,925 3,875 Noninterest income ................................ 978 958 955 1,533 Noninterest 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

1998 ---------------------------------First Second Third Fourth (in thousands) Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------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 Provision 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

18

SELECTED QUARTERLY FINANCIAL DATA The following tables set forth the Company's unaudited consolidated financial data regarding operations for each quarter of 1999 and 1998. This information, in the opinion of management, includes all normal recurring adjustments necessary to state fairly the information set forth therein. Certain amounts previously reported have been reclassified to conform with current presentation. These reclassifications had no net impact on the results of operations.
1999 ---------------------------------First Second Third Fourth (in thousands) Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------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 Provision for loan losses ......................... 328 327 226 511 --------------------------------Net interest income after provision for loan losses 3,454 3,578 3,925 3,875 Noninterest income ................................ 978 958 955 1,533 Noninterest 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

1998 ---------------------------------First Second Third Fourth (in thousands) Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------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 Provision 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

18

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 liabilty:
Year ended December 31, 1999 Year ended December 31, 1998 Ye

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 liabilty:
Year ended December 31, 1999 Year ended December 31, 1998 Ye ----------------------------------------------------------------Interest Average Interest Average Income Yields Income Yields Average or or Average or or Av (in thousands) Balance Expense Rates Balance Expense Rates Ba --------------------------------------------------------------------------------------------------------INTEREST-EARNING ASSETS: Loans (1)(2) ........................ $ 212,446 $ 19,144 9.01% $ 166,032 $ 15,625 9.41% $ 1 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% 2 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 $ 2 INTEREST-BEARING LIABILITIES: Interest-bearing checking and savings accounts ................. Time deposits ....................... Term debt ........................... Total interest-bearing liabilities Non-interest-bearing deposits ....... Other liabilities ................... Total liabilities ................ Shareholders' equity ................ Total liabilities and shareholders' equity

$ 137,488 $ 3,417 77,586 3,660 26,678 1,379 --------------------241,752 8,456 56,120 2,174 --------300,046 35,964 --------$ 336,010 ========= $ 16,621 ========

2.49% 4.72% 5.17% 3.50%

$ 121,568 $ 3,208 64,419 3,262 14,699 825 --------------------200,686 7,295 45,794 1,370 --------247,850 31,273 --------$ 279,123 ========= $ 13,765 =========

2.64% 5.06% 5.61% 3.64%

$ 1

--1

--2 --$ 2 ===

NET INTEREST INCOME (1) NET INTEREST SPREAD AVERAGE YIELD ON EARNING ASSETS (1),(2) INTEREST EXPENSE TO EARNING ASSETS NET INTEREST INCOME TO EARNING ASSETS (1),(2)

4.62% 8.12% 2.75% ----5.37% =====

4.58% 8.22% 2.85% ----5.37% =====

(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. 19

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.
1999 COMPARED TO 1998 -------------------------------------------

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.
1999 COMPARED TO 1998 ------------------------------------------INCREASE (DECREASE) INCREA DUE TO CHANGE IN DUE T ------------------------------------------VOLUME RATE NET CHANGE VOLUM ------------------------------------------(in thousands) INTEREST-EARNING ASSETS: Loans(1) ................................................. Loans held for sale ...................................... Investment securities Taxable securities .................................... Non-taxable securities(1) ............................. Temporary investments ................................. Total (1) .......................................... INTEREST-BEARING LIABILITIES: Interest-bearing checking and savings accounts ....................................... Time deposits ............................................ Term debt ................................................ Total .............................................. Net increase (decrease) in net interest income ...........

$ 4,368 (76)

$(849) 13

$ 3,519 (63)

$ 2,8

(363) 133 (230) 7 688 50 738 3 109 (56) 53 (2 ------------------------------------------4,726 (709) 4,017 3,7

420 (211) 209 4 667 (269) 398 4 672 (118) 554 ------------------------------------------1,759 (598) 1,161 9 ------------------------------------------$ 2,967 $(111) $ 2,856 $ 2,8 ===========================================

(1) Tax-exempt interest income has been adjusted to a tax equivalent basis at a 34% effective tax rate. Net Interest Income for 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 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. 20

Provision for Loan Losses for the Years Ended December 31, 1999, 1998 and 1997 The provision expense is management's estimate of the amount necessary to maintain an allowance for loan losses at a level which is considered adequate based on the risk of losses inherent in the loan portfolio (see additional discussion under Allowance for Loan Losses). Management believes the allowance has been maintained at an adequate level with the provision for loan loss expense of $1,392,000 in 1999, $1,025,000 in 1998 and $562,000 in 1997. Loan charge-offs, net of loan recoveries, were $587,000, $502,000 and $412,000 for the years 1999, 1998 and 1997, respectively. Non-Interest Income for the Years Ended December 31, 1999, 1998 and 1997 Non-interest income was $4,424,000 and $3,371,000 for the years ended 1999 and 1998, respectively. Service fees, the largest component of non-interest income, increased $759,000 over 1998 to $2,973,000 in 1999. This 34.2% increase was due primarily to service charges on checking accounts which were up $435,000, and ATM fee income which was up $317,000. The increase in service charges was due to deposit fee repricing and an increase in the number of checking accounts. ATM fees increased due to expansion of the Company's ATM network. Other income was $370,000 in 1999 compared with $284,000 in 1998, an $86,000 increase. Brokerage commissions and fees increased to $830,000 in 1999 compared with $523,000 in 1998. The primary reason for the increase was revenue generated by the Company's brokerage subsidiary, Strand, Atkinson, Williams & York, Inc, which was acquired in November 1999. Gain on sale of loans declined to $251,000 in 1999 from $349,000 in 1998. Gains on sales of loans result primarily from the origination and sale of single family residential loans. Loans sold were approximately $16.1 million in 1999 and $29.3 million in 1998. Comparing 1998 to 1997, total non-interest income increased $315,000 to $3,371,000. Improvements in service fees, commissions and gain on sale of loans were partially offset by a decline in the gain on sale of mortgage servicing rights. Service fees were up due to growth in deposit accounts and expansion of the Company's ATM network. The Company 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 Years Ended December 31, 1999, 1998 and 1997 Non-interest expense consists principally of employees' salaries and benefits, occupancy costs, communications expenses, marketing, professional fees and other non-interest expenses. 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. The Company's efficiency ratio for 1999 was 55.6% compared with 55.3% in 1998 and 61.9% in 1997. The increase in 1999 was due partially to the operating expenses of Strand, Atkinson, Williams & York, Inc. The operating costs for the retail brokerage business are higher than those for the commercial bank. Excluding the income and operating costs of Strand, Atkinson, Williams & York, Inc., the efficiency ratio for 1999 would have been 55.2%. Non-interest expense for 1999 increased $2,224,000 over 1998 to $11,702,000. Salaries and benefits increased $1,115,000. Salaries and benefits expenses at Strand, Atkinson, Williams & York, Inc. accounted for $259,000 of the increase while the remainder was due to expansion at the Bank. Full-time equivalent employees at the Bank grew from 157 at the end of 1998 to 175 at the end of 1999. Occupancy expense increased $240,000 over 1998 to $945,000 for 1999. This increase was due to the opening of a new Portland store, a new loan center, the relocation and expansion of the Sutherlin store, and the opening of a Support and Accounting Office. Marketing expense increased $206,000 over 1998 to $942,000 in 1999 as the result of increased marketing efforts and the expansion into new markets. Communications expenses, which consist primarily of postage and telephone expense, were $786,000 in 1999 compared with $630,000 in 1998. The

Provision for Loan Losses for the Years Ended December 31, 1999, 1998 and 1997 The provision expense is management's estimate of the amount necessary to maintain an allowance for loan losses at a level which is considered adequate based on the risk of losses inherent in the loan portfolio (see additional discussion under Allowance for Loan Losses). Management believes the allowance has been maintained at an adequate level with the provision for loan loss expense of $1,392,000 in 1999, $1,025,000 in 1998 and $562,000 in 1997. Loan charge-offs, net of loan recoveries, were $587,000, $502,000 and $412,000 for the years 1999, 1998 and 1997, respectively. Non-Interest Income for the Years Ended December 31, 1999, 1998 and 1997 Non-interest income was $4,424,000 and $3,371,000 for the years ended 1999 and 1998, respectively. Service fees, the largest component of non-interest income, increased $759,000 over 1998 to $2,973,000 in 1999. This 34.2% increase was due primarily to service charges on checking accounts which were up $435,000, and ATM fee income which was up $317,000. The increase in service charges was due to deposit fee repricing and an increase in the number of checking accounts. ATM fees increased due to expansion of the Company's ATM network. Other income was $370,000 in 1999 compared with $284,000 in 1998, an $86,000 increase. Brokerage commissions and fees increased to $830,000 in 1999 compared with $523,000 in 1998. The primary reason for the increase was revenue generated by the Company's brokerage subsidiary, Strand, Atkinson, Williams & York, Inc, which was acquired in November 1999. Gain on sale of loans declined to $251,000 in 1999 from $349,000 in 1998. Gains on sales of loans result primarily from the origination and sale of single family residential loans. Loans sold were approximately $16.1 million in 1999 and $29.3 million in 1998. Comparing 1998 to 1997, total non-interest income increased $315,000 to $3,371,000. Improvements in service fees, commissions and gain on sale of loans were partially offset by a decline in the gain on sale of mortgage servicing rights. Service fees were up due to growth in deposit accounts and expansion of the Company's ATM network. The Company 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 Years Ended December 31, 1999, 1998 and 1997 Non-interest expense consists principally of employees' salaries and benefits, occupancy costs, communications expenses, marketing, professional fees and other non-interest expenses. 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. The Company's efficiency ratio for 1999 was 55.6% compared with 55.3% in 1998 and 61.9% in 1997. The increase in 1999 was due partially to the operating expenses of Strand, Atkinson, Williams & York, Inc. The operating costs for the retail brokerage business are higher than those for the commercial bank. Excluding the income and operating costs of Strand, Atkinson, Williams & York, Inc., the efficiency ratio for 1999 would have been 55.2%. Non-interest expense for 1999 increased $2,224,000 over 1998 to $11,702,000. Salaries and benefits increased $1,115,000. Salaries and benefits expenses at Strand, Atkinson, Williams & York, Inc. accounted for $259,000 of the increase while the remainder was due to expansion at the Bank. Full-time equivalent employees at the Bank grew from 157 at the end of 1998 to 175 at the end of 1999. Occupancy expense increased $240,000 over 1998 to $945,000 for 1999. This increase was due to the opening of a new Portland store, a new loan center, the relocation and expansion of the Sutherlin store, and the opening of a Support and Accounting Office. Marketing expense increased $206,000 over 1998 to $942,000 in 1999 as the result of increased marketing efforts and the expansion into new markets. Communications expenses, which consist primarily of postage and telephone expense, were $786,000 in 1999 compared with $630,000 in 1998. The increase was due to the Company's increased loan and deposit base, as well as expansion of the Company'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 Company's ATM network and increased internal audit and accounting fees. Comparing 1998 with 1997, total non-interest expense increased $678,000 to $9,478,000. Communications expense in 1998 increased $127,000 compared with 1997 due to the Company's increased loan and deposit base, as well as costs associated with the ATM network. Professional fees were $1,021,000 in 1998 compared

with $796,000 in 1997. The increase from 1997 was due to increased security services related to store and ATM network expansion, and additional expenses as the result of becoming a publicly traded Company in 1998. Income Taxes for the Years Ended December 31, 1999, 1998 and 1997 The provision for income taxes was $2,681,000, $2,382,000 and $1,699,000 for the years 1999, 1998 and 1997, respectively. The provision resulted in effective combined federal and state tax rates of 35.5%, 36.7% and 35.8%. The 1.2% decrease in the effective rate from 1998 to 1999 was due to increased non-taxable revenue generated by the Company. In 1997 the Company's state income tax rate was reduced from 6.6% to 3.8% due to surplus revenues received by the State of Oregon. 21

Investment Portfolio Investment securities held at December 31, 1999 were $76,869,000 compared with $84,888,000 at December 31, 1998. The objectives of the investment portfolio are to provide liquidity, offset interest rate risk positions and provide a profitable interest yield to the Company. The Company classifies all of its investment securities as "available-for-sale" and consequently carries them at fair value. At December 31, 1999 the Company had net unrealized losses of $2,872,000 compared with net unrealized gains at December 31, 1998 of $1,023,000. Unrealized gains/ losses reflect changes in market conditions and do not represent the amount of actual profits or losses the Company may ultimately realize. Actual gains and losses are recognized at the time investment securities are sold or redeemed. The net unrealized losses resulted from the effect that increasing market interest rates had on the Company's fixed-rate investment portfolio. The following tables provide details of the Company's investment portfolio and its maturity distribution and yields. The following table provides the carrying values of the Company's portfolio of investment securities as of December 31, 1999 and 1998:
December 31, ---------------(in thousands) 1999 1998 -----------------------------------------------------------------------------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 ================

The maturity distribution and yields of securities at December 31, 1999 were as follows:
December 31, 1999 -----------------------------------------Weighted Amortized Approximate Average Cost Market Value Yield(1) ------------------------------------------------------------------------------------------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 One year or One to five Five to ten of States and Political Subdivisions: less ................................ years ............................... years ...............................

266 6,111 15,652

266 6,045 14,992

6.70% 6.67% 6.48%

Investment Portfolio Investment securities held at December 31, 1999 were $76,869,000 compared with $84,888,000 at December 31, 1998. The objectives of the investment portfolio are to provide liquidity, offset interest rate risk positions and provide a profitable interest yield to the Company. The Company classifies all of its investment securities as "available-for-sale" and consequently carries them at fair value. At December 31, 1999 the Company had net unrealized losses of $2,872,000 compared with net unrealized gains at December 31, 1998 of $1,023,000. Unrealized gains/ losses reflect changes in market conditions and do not represent the amount of actual profits or losses the Company may ultimately realize. Actual gains and losses are recognized at the time investment securities are sold or redeemed. The net unrealized losses resulted from the effect that increasing market interest rates had on the Company's fixed-rate investment portfolio. The following tables provide details of the Company's investment portfolio and its maturity distribution and yields. The following table provides the carrying values of the Company's portfolio of investment securities as of December 31, 1999 and 1998:
December 31, ---------------(in thousands) 1999 1998 -----------------------------------------------------------------------------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 ================

The maturity distribution and yields of securities at December 31, 1999 were as follows:
December 31, 1999 -----------------------------------------Weighted Amortized Approximate Average Cost Market Value Yield(1) ------------------------------------------------------------------------------------------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% ==========================================

(1) Weighted average yields are stated on a federal tax equivalent basis at a 34% effective tax rate. (2) Serial maturities include mortgage-backed securities, collateralized mortgage obligations and asset-backed securities.

Trading Account Assets The Company had trading account assets of $475,000 at December 31, 1999 and $0 at December 31, 1998. The Company'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. 22

Loans Outstanding loans, excluding mortgage loans held for sale, were $248.5 million at December 31, 1999 compared with $186.2 million at December 31, 1999. 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 Company 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 Company's loan portfolio carries credit risk, which could result in loan charge-offs. The Company manages this risk through the use of credit policies and review procedures. (See additional information under the Allowance for Loan Losses discussion.) The following table presents the composition of the Company's loan portfolio at December 31 of the years indicated:
1999 1998 1997 1996 ----------------------------------------------------------------------------(in thousands) Amount % Amount % Amount % Amount % --------------------------------------------------------------------------------------------------------Commercial and industrial $60,137 24.20% $48,140 25.90% $44,487 28.70% $28,848 25 Real estate: Construction 29,962 12.10% 13,766 7.40% 10,761 6.90% 6,235 5 Mortgage 128,003 51.40% 93,592 50.20% 69,824 45.00% 53,120 47 Individuals 30,228 12.20% 30,309 16.30% 29,548 19.10% 24,259 21 Other 204 0.10% 360 0.20% 458 0.30% 399 0 ----------------------------------------------------------------------------Total $248,534 100.00% $186,167 100.00% $155,078 100.00% $112,861 100 =============================================================================

The following table sets forth the Company's loan portfolio maturities on fixed-rate loans and the repricing dates on variable-rate loans, at December 31, 1999:
Within One to After (in thousands) One Year Five Years Five Years Total ---------------------------------------------------------------------------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 ..... Real estate ................... Individuals ................... Other ......................... Total ....................

$ 49,947 $ 1,478 $ - $ 51,425 63,099 74,124 137,223 11,927 11,927 204 204 ------------------------------------------$125,177 $75,602 $ - $200,779 ===========================================

23

Loans Outstanding loans, excluding mortgage loans held for sale, were $248.5 million at December 31, 1999 compared with $186.2 million at December 31, 1999. 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 Company 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 Company's loan portfolio carries credit risk, which could result in loan charge-offs. The Company manages this risk through the use of credit policies and review procedures. (See additional information under the Allowance for Loan Losses discussion.) The following table presents the composition of the Company's loan portfolio at December 31 of the years indicated:
1999 1998 1997 1996 ----------------------------------------------------------------------------(in thousands) Amount % Amount % Amount % Amount % --------------------------------------------------------------------------------------------------------Commercial and industrial $60,137 24.20% $48,140 25.90% $44,487 28.70% $28,848 25 Real estate: Construction 29,962 12.10% 13,766 7.40% 10,761 6.90% 6,235 5 Mortgage 128,003 51.40% 93,592 50.20% 69,824 45.00% 53,120 47 Individuals 30,228 12.20% 30,309 16.30% 29,548 19.10% 24,259 21 Other 204 0.10% 360 0.20% 458 0.30% 399 0 ----------------------------------------------------------------------------Total $248,534 100.00% $186,167 100.00% $155,078 100.00% $112,861 100 =============================================================================

The following table sets forth the Company's loan portfolio maturities on fixed-rate loans and the repricing dates on variable-rate loans, at December 31, 1999:
Within One to After (in thousands) One Year Five Years Five Years Total ---------------------------------------------------------------------------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 ..... Real estate ................... Individuals ................... Other ......................... Total ....................

$ 49,947 $ 1,478 $ - $ 51,425 63,099 74,124 137,223 11,927 11,927 204 204 ------------------------------------------$125,177 $75,602 $ - $200,779 ===========================================

23

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. The increase in nonaccrual loans between 1999 and 1998 was primarily due to the addition of one large commercial loan in late 1999. The Company is currently addressing the issues involved with this credit, and final resolution is anticipated in the third quarter of 2000.
Year ended December 31,

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. The increase in nonaccrual loans between 1999 and 1998 was primarily due to the addition of one large commercial loan in late 1999. The Company is currently addressing the issues involved with this credit, and final resolution is anticipated in the third quarter of 2000.
Year ended December 31, -----------------------------------------------------(in thousands) 1999 1998 1997 1996 1995 --------------------------------------------------------------------------------------------------------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

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: o Internal credit review and risk grading system o Regulatory examination results o Monitoring of charge-off, past due and non-performing activity and trends o Assessment of economic and business conditions in our market areas On a quarterly basis, losses inherent in the portfolio are estimated by reviewing the following key elements of the loan portfolio: o Portfolio performance measures o Portfolio mix o Portfolio growth rates o Historical loss rates o Portfolio concentrations o Current economic conditions in our market areas The Company also tests the adequacy of the allowance for loan losses using the following methodologies: o Loss allocation by internally assigned risk rating o Loss allocation by portfolio type, based on historic loan loss experience o The allowance as a percentage of total loans The allowance for loan losses is based upon estimates of losses inherent in the portfolio. The amount of losses actually incurred can vary significantly from these estimates. Assessing the adequacy of the allowance on a quarterly basis allows management to adjust these estimates based upon the most recent information available. At December 31, 1999 the allowance for loan losses was $3,469,000, or 1.4% of total loans, and is considered by management adequate to absorb credit losses on specifically identified loans as well as estimated credit losses inherent in the portfolio. 24

The following table shows activity in the allowance for loan losses for the periods indicated:

The following table shows activity in the allowance for loan losses for the periods indicated:
Years ended December 31, Summary of Loan Loss Experience ------------------------------------------------------(in thousands) 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------------------------------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% -------------------------------------------------------

The following table sets forth the allocation of the allowance for loan losses at December 31, 1999:
Percentage of Loans in Each Category (in thousands) Amount to Total Loans ------------------------------------------------------------------------------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% =========================

Capital Expenditures Capital expenditures for premises and equipment were $2.9 million, $0.5 million and $2.1 million for the years ended December 31, 1999, 1998 and 1997, respectively. Capital expenditures in 1999 included a Support and Accounting Office, a new Sutherlin store, a new Portland store, additional ATMs, a remodel of the Company's executive offices, and the construction of a store in Salem, which opened in January 2000. Deposits and Borrowings Total deposits increased $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 Company continued to expand its penetration into that market. Deposits in Douglas County also increased $15.2 million during 1999. The Company 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. 25

The following table sets forth the average balances of Company's interest-bearing liabilities, interest expense and average rates paid for the periods indicated:
Year ended December 31, --------------------------------------------------------------1999 1998 --------------------------------------------------------------Average Interest Average Average Interest Average Av (in thousands) Balance Expense Rate Balance Expense Rate Ba --------------------------------------------------------------------------------------------------------Liabilities Interest-bearing checking ............ $ 115,552 $2,984 2.58% $102,513 $2,792 2.72% $ Savings accounts ..................... 21,936 433 1.97% 19,055 416 2.18% Time deposits ........................ 77,586 3,660 4.72% 64,419 3,262 5.06% Borrowed funds ....................... 26,678 1,378 5.17% 14,699 825 5.61% ------------------------------------Total interest-bearing liabilities 241,752 $8,455 3.50% 200,686 $7,295 3.64% 1 ====== ====== Non-interest-bearing liabilities ..... 58,294 47,164 ----------------Total liabilities .................... 300,046 247,850 2 ========= ======== ==

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. The Company manages the balance between the rate-sensitive assets and rate-sensitive liabilities being repriced in any given period with the objectives of minimizing fluctuations in net interest income. The Company considers its rate-sensitive assets to be those that either contain a provision to adjust the interest rate periodically or mature within one year. These assets include certain loans and investment securities and interest-bearing deposits in other banks. Rate-sensitive liabilities are those liabilities that are considered sensitive to periodic interest rate changes within one year, including maturing time certificates, certain savings deposits and interest-bearing demand deposits. The difference between the aggregate amount of assets and liabilities that reprice within various time frames is called the "gap." Generally, if repricing assets exceed repricing liabilities during a time frame, the Company would be deemed to be asset sensitive. If aggregate repricing liabilities exceeded aggregate repricing assets during a time frame, the Company would be deemed to be liability sensitive during that time frame. The Company generally seeks to maintain a balanced position within one year, whereby the difference between assets and liabilities repricing is minimized. This is accomplished by maintaining a significant level of loans, investment securities and deposits available for repricing within one year. According to the traditional financial institution industry static gap basis table set forth on the following page, the Company was slightly liability sensitive within one year. Changes in interest rates would not be expected to have a significant impact on net interest margin. 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,

The following table sets forth the average balances of Company's interest-bearing liabilities, interest expense and average rates paid for the periods indicated:
Year ended December 31, --------------------------------------------------------------1999 1998 --------------------------------------------------------------Average Interest Average Average Interest Average Av (in thousands) Balance Expense Rate Balance Expense Rate Ba --------------------------------------------------------------------------------------------------------Liabilities Interest-bearing checking ............ $ 115,552 $2,984 2.58% $102,513 $2,792 2.72% $ Savings accounts ..................... 21,936 433 1.97% 19,055 416 2.18% Time deposits ........................ 77,586 3,660 4.72% 64,419 3,262 5.06% Borrowed funds ....................... 26,678 1,378 5.17% 14,699 825 5.61% ------------------------------------Total interest-bearing liabilities 241,752 $8,455 3.50% 200,686 $7,295 3.64% 1 ====== ====== Non-interest-bearing liabilities ..... 58,294 47,164 ----------------Total liabilities .................... 300,046 247,850 2 ========= ======== ==

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. The Company manages the balance between the rate-sensitive assets and rate-sensitive liabilities being repriced in any given period with the objectives of minimizing fluctuations in net interest income. The Company considers its rate-sensitive assets to be those that either contain a provision to adjust the interest rate periodically or mature within one year. These assets include certain loans and investment securities and interest-bearing deposits in other banks. Rate-sensitive liabilities are those liabilities that are considered sensitive to periodic interest rate changes within one year, including maturing time certificates, certain savings deposits and interest-bearing demand deposits. The difference between the aggregate amount of assets and liabilities that reprice within various time frames is called the "gap." Generally, if repricing assets exceed repricing liabilities during a time frame, the Company would be deemed to be asset sensitive. If aggregate repricing liabilities exceeded aggregate repricing assets during a time frame, the Company would be deemed to be liability sensitive during that time frame. The Company generally seeks to maintain a balanced position within one year, whereby the difference between assets and liabilities repricing is minimized. This is accomplished by maintaining a significant level of loans, investment securities and deposits available for repricing within one year. According to the traditional financial institution industry static gap basis table set forth on the following page, the Company was slightly liability sensitive within one year. Changes in interest rates would not be expected to have a significant impact on net interest margin. In addition to this static gap report, management performs a financial analysis (dynamic gap) to specifically analyze the change in net interest margin from a changing rate environment. The estimate of interest rate sensitivity takes into account the differing time intervals and differing rate change increments of each type of interest sensitive asset and liability. It then measures the projected impact of changes in market interest rates on the Company's net interest income, net interest margin, and return on equity. The interest rate gaps in the following table arise when assets are funded with liabilities having different repricing intervals. Since these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlook, positions at the end of any period may not be reflective of the Company's interest rate sensitivity in subsequent periods. Active management dictates that longer-term economic views are balanced against prospects for short-term interest rate changes in all repricing intervals. For purposes of the analysis above, repricing of fixed-rate instruments is based upon the contractual maturity of the applicable instruments. Actual payment patterns may differ from contractual payment patterns. The change in net interest income may not always follow the general expectations of an asset sensitive or liability sensitive balance sheet during periods of changing interest rates, because interest rates earned or paid may change by differing increments and at different time intervals for each type of interest sensitive asset or liability. As a result of these factors, at any given time, the Company may be more sensitive or less sensitive to changes in interest rates than indicated in the following table.

26
By Repricing Interval ----------------------------------0-3 3-12 1-5 O December 31, 1999 (in thousands) Months Months Years --------------------------------------------------------------------------------------------------------Assets Interest-bearing deposits in other banks ............................ $ 15,630 $ -$ -$ Securities available-for-sale ....................................... 2 8,219 19,005 Trading account assets .............................................. 475 --Loans ............................................................... 92,417 47,574 94,309 Non-interest-earning assets and allowance for credit losses ......... ------------------------------------Total ......................................................... 108,524 55,793 113,314 Liabilities and Shareholders' Equity Interest-bearing demand deposits .................................... Savings deposits .................................................... Time deposits Over $100,000 ................................................. Under $100,000 ................................................ Term debt ........................................................... Non-interest-bearing liabilities and shareholders' equity ........... Total ......................................................... Interest Rate Sensitivity - Static Gap Basis

32,080 5,720

32,081 5,720

64,160 11,438

13,854 14,801 200 19,035 31,927 9,247 16,000 -30,158 ------------------------------------86,689 84,529 115,203

Interest rate sensitivity gap ....................................... Cumulative .......................................................... Cumulative gap as a % of earning assets .............................

21,835 (28,736) (1,889) $ 21,835 $ (6,901) $ (8,790) $ ================================== 6.4% (2.0%) (2.6%)

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 interestbearing liability, the Company estimates that changes in the prime rate of interest would affect the Company's performance as follows:
Increase (decrease) in Net Interest Net Interest Return on Income Margin Equity (Current prime rate is 8.50%) (000's) 1999 = 5.37% 1999 = 13.55% ------------------------------------------------------------------------------------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%

27

Return on average assets and average equity and certain other ratios for the periods indicated are presented below:
Years ended December 31, -------------------------------(dollars in thousands, except per share data) 1999 1998 1997 -----------------------------------------------------------------------------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 .................................. Average equity .............................. Return on average equity .................... $ 4,874 $ 35,964 13.55% $ 4,110 $ 31,273 13.14% $ 3,044 $ 18,447 16.50%

By Repricing Interval ----------------------------------0-3 3-12 1-5 O December 31, 1999 (in thousands) Months Months Years --------------------------------------------------------------------------------------------------------Assets Interest-bearing deposits in other banks ............................ $ 15,630 $ -$ -$ Securities available-for-sale ....................................... 2 8,219 19,005 Trading account assets .............................................. 475 --Loans ............................................................... 92,417 47,574 94,309 Non-interest-earning assets and allowance for credit losses ......... ------------------------------------Total ......................................................... 108,524 55,793 113,314 Liabilities and Shareholders' Equity Interest-bearing demand deposits .................................... Savings deposits .................................................... Time deposits Over $100,000 ................................................. Under $100,000 ................................................ Term debt ........................................................... Non-interest-bearing liabilities and shareholders' equity ........... Total .........................................................

Interest Rate Sensitivity - Static Gap Basis

32,080 5,720

32,081 5,720

64,160 11,438

13,854 14,801 200 19,035 31,927 9,247 16,000 -30,158 ------------------------------------86,689 84,529 115,203

Interest rate sensitivity gap ....................................... Cumulative .......................................................... Cumulative gap as a % of earning assets .............................

21,835 (28,736) (1,889) $ 21,835 $ (6,901) $ (8,790) $ ================================== 6.4% (2.0%) (2.6%)

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 interestbearing liability, the Company estimates that changes in the prime rate of interest would affect the Company's performance as follows:
Increase (decrease) in Net Interest Net Interest Return on Income Margin Equity (Current prime rate is 8.50%) (000's) 1999 = 5.37% 1999 = 13.55% ------------------------------------------------------------------------------------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%

27

Return on average assets and average equity and certain other ratios for the periods indicated are presented below:
Years ended December 31, -------------------------------(dollars in thousands, except per share data) 1999 1998 1997 -----------------------------------------------------------------------------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 .................................. Average equity .............................. Return on average equity .................... Cash dividends declared per share ........... Basic earnings per common share ............. $ 4,874 $ 35,964 13.55% $ $ 0.16 0.64 $ 4,110 $ 31,273 13.14% $ $ 0.115 0.56 $ 3,044 $ 18,447 16.50% $ $ 0.08 0.47

Return on average assets and average equity and certain other ratios for the periods indicated are presented below:
Years ended December 31, -------------------------------(dollars in thousands, except per share data) 1999 1998 1997 -----------------------------------------------------------------------------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 .................................. Average equity .............................. Return on average equity .................... Cash dividends declared per share ........... Basic earnings per common share ............. Dividend payout ratio ....................... Average equity .............................. Average assets .............................. Average equity to average assets ratio ...... $ 4,874 $ 35,964 13.55% $ $ 0.16 0.64 25.00% $ 4,110 $ 31,273 13.14% $ $ 0.115 0.56 20.54% $ 3,044 $ 18,447 16.50% $ $ 0.08 0.47 17.02%

$ 35,964 $336,010 10.70%

$ 31,273 $279,123 11.20%

$ 18,447 $233,207 7.91%

Liquidity Liquidity enables the Company to meet the borrowing needs of its customers and withdrawals of its depositors. The Company 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 shortterm basis with the Federal Home Loan Bank (FHLB), whose interest rates approximate Federal Funds sold. The Company'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. At December 31, 1999 the Company had a total funding line with the FHLB of $88.2 million. The outstanding balance of term advances was $46.2 million at December 31, 1999 leaving an available balance of $42.0 million. The Company 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. 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 Company 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 Company 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. 28

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.
/S/ KPMG LLP KPMG LLP Portland, Oregon January 21, 2000

29

CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------1999 1998 --------------------------------------------------------------------------------------------------------Assets Cash and due from banks, non-interest-bearing (Note 2) ................. $ 30,058,897 $ 17,765,938 Interest-bearing deposits in other banks ............................... 15,630,197 19,201,605 ------------------------Total cash and cash equivalents .................................... 45,689,094 36,967,543 Investment securities available-for-sale at fair value (Note 3) ........ 76,868,536 84,887,992 Trading account assets ................................................. 474,782 -Mortgage loans held for sale, at cost which approximates market (Note 9) Loans receivable (Note 4) .............................................. Less: Allowance for loan losses .................................... Loans, net ............................................................. Federal Home Loan Bank stock, at cost .................................. Premises and equipment, net (Note 5) ................................... Deferred tax asset (Note 8) ............................................ Intangible assets (Note 17) ............................................ Accrued interest receivable ............................................ Other assets ........................................................... -248,533,933 (3,469,350) ------------245,064,583 2,346,200 9,419,744 1,141,308 2,284,415 2,422,829 1,025,225 ------------$ 386,736,716 ============= 1,780,225 186,166,966 (2,663,914 ------------183,503,052 1,949,200 7,161,950 --2,131,553 505,467 ------------$ 318,886,982 =============

Liabilities and Shareholders' Equity Deposit liabilities Demand, non-interest-bearing ....................................... Demand, interest-bearing ........................................... Savings ............................................................ Time deposits (Note 6) .............................................

$

59,709,104 128,321,434 22,877,722 90,765,095

$

52,235,927 111,389,033 19,968,138 72,211,623

CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------1999 1998 --------------------------------------------------------------------------------------------------------Assets Cash and due from banks, non-interest-bearing (Note 2) ................. $ 30,058,897 $ 17,765,938 Interest-bearing deposits in other banks ............................... 15,630,197 19,201,605 ------------------------Total cash and cash equivalents .................................... 45,689,094 36,967,543 Investment securities available-for-sale at fair value (Note 3) ........ 76,868,536 84,887,992 Trading account assets ................................................. 474,782 -Mortgage loans held for sale, at cost which approximates market (Note 9) Loans receivable (Note 4) .............................................. Less: Allowance for loan losses .................................... Loans, net ............................................................. Federal Home Loan Bank stock, at cost .................................. Premises and equipment, net (Note 5) ................................... Deferred tax asset (Note 8) ............................................ Intangible assets (Note 17) ............................................ Accrued interest receivable ............................................ Other assets ........................................................... -248,533,933 (3,469,350) ------------245,064,583 2,346,200 9,419,744 1,141,308 2,284,415 2,422,829 1,025,225 ------------$ 386,736,716 ============= 1,780,225 186,166,966 (2,663,914 ------------183,503,052 1,949,200 7,161,950 --2,131,553 505,467 ------------$ 318,886,982 =============

Liabilities and Shareholders' Equity Deposit liabilities Demand, non-interest-bearing ....................................... Demand, interest-bearing ........................................... Savings ............................................................ Time deposits (Note 6) ............................................. Total deposit liabilities ....................................... Term debt (Note 12) .................................................... Accrued interest payable ............................................... Deferred tax liability (Note 8) ........................................ Other liabilities ......................................................

59,709,104 128,321,434 22,877,722 90,765,095 ------------301,673,355 46,158,000 543,424 -1,645,715 ------------350,020,494 -------------

$

52,235,927 111,389,033 19,968,138 72,211,623 ------------255,804,721 25,198,000 353,054 318,398 1,067,183 ------------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: 7,609,727 in 1999 and 7,667,552 in 1998 Retained earnings Accumulated other comprehensive (loss) income

25,778,259 12,708,368 (1,770,405) ------------36,716,222 ------------$ 386,736,716 =============

26,425,200 9,055,331 665,095 ------------36,145,626 ------------$ 318,886,982 =============

See accompanying notes to consolidated financial statements. 30

CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, ----------------------------------1999 1998 1 --------------------------------------------------------------------------------------------------------Interest Income Interest and fees on loans ........................................ $ 19,192,599 $ 15,737,046 $ 13, Interest on taxable investment securities ......................... 4,576,785 4,754,115 4, Interest on tax-exempt investment securities ...................... 910,946 426,937 -----------------------------------

CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, ----------------------------------1999 1998 1 --------------------------------------------------------------------------------------------------------Interest Income Interest and fees on loans ........................................ $ 19,192,599 $ 15,737,046 $ 13, Interest on taxable investment securities ......................... 4,576,785 4,754,115 4, Interest on tax-exempt investment securities ...................... 910,946 426,937 ----------------------------------Total interest income ........................................ 24,680,330 20,918,098 17, ----------------------------------Interest Interest Interest Interest Interest Expense on demand deposits ....................................... on savings accounts ...................................... on time deposits (Note 6) ................................ on borrowed funds ........................................

Total interest expense ....................................... Net interest income .......................................

2,984,813 2,791,870 2, 432,725 416,281 3,659,957 3,261,761 2, 1,378,453 824,555 ----------------------------------8,455,948 7,294,467 6, ----------------------------------16,224,382 13,623,631 11, ----------------------------------1,392,250 1,024,650 ----------------------------------14,832,132 12,598,981 10,

Provision for loan losses (Note 4) ................................ Net interest income after provision for loan losses Non-Interest Income Service fees ...................................................... Brokerage commissions and fees .................................... Gain on sale of loans ............................................. Loan servicing (Note 9) ........................................... Gain on sale of mortgage servicing rights (Note 9) ................ Loss on sale of investment securities ............................. Other ............................................................. Total non-interest income ....................................

2,973,400 2,214,891 1, 829,554 523,162 251,069 349,203 ------370,209 283,662 ----------------------------------4,424,232 3,370,918 3, -----------------------------------

Non-Interest Expense Salaries and benefits (Note 11) ................................... Occupancy expense ................................................. Equipment ......................................................... Communications .................................................... Marketing ......................................................... Professional services ............................................ Supplies .......................................................... Other ............................................................. Total non-interest expense ...................................

5,730,972 4,616,162 4, 944,598 704,262 863,408 767,072 785,966 630,199 941,618 735,976 1,343,276 1,020,922 384,215 365,839 707,580 637,375 ----------------------------------11,701,633 9,477,807 8, ----------------------------------7,554,731 6,492,092 4, 2,680,790 2,381,711 1, ----------------------------------$ 4,873,941 $ 4,110,381 $ 3, ===================================

Income before provision for income taxes .......................... Provision for income taxes (Note 8) ............................... Net income ........................................................

Earnings per Common Share (Note 10) Basic ........................................................ Diluted ......................................................

$ 0.64 $ 0.56 =================================== $ 0.63 $ 0.55 ===================================

See accompanying notes to consolidated financial statements. 31

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accu Number of O Common Common Retained Comprehensive Compr Shares Stock Earnings Income (Loss) Incom --------------------------------------------------------------------------------------------------------Balance at January 1, 1997 6,499,152 $10,353,990 $6,868,672 $ (2 Net Income 3,044,496 3,044,496 Other comprehensive income, net of tax Unrealized gains on securities arising during the period 369,389 3 ---------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 $ 1 ==================================== ==== Balance at January 1, 1998 6,508,352 Net Income Other comprehensive income, net of tax Unrealized gains on securities arising during the period Unrealized losses on securities transferred from held-to-maturity to available-for-sale Comprehensive income Stock Issuance, net of issuance costs of $1,416,000 Stock options exercised (Note 14) Cash dividends $.115 per share Balance at December 31, 1998 $14,006,428 $5,797,767 4,110,381 $ 4,110,381 1

558,777 (62,140) ---------$4,607,018 ========== 12,384,000 34,772

5 (

1,150,000 9,200

(852,817) -----------------------------------7,667,552 $26,425,200 $9,055,331 ==================================== 7,667,552 $26,425,200 $9,055,331 4,873,941

---$ 6 ==== $ $4,873,941 6

Balance at January 1, 1999 Net Income Other comprehensive income, net of tax Unrealized losses on securities arising during the period Comprehensive income Stock repurchased Proceeds from stock options exercised (Note 14) Cash dividends $0.16 per share Balance at December 31, 1999

(2,435,500) ---------$2,438,441 ========== (89,625) 31,800 (857,041) 210,100

(2,4

(1,220,904) -----------------------------------7,609,727 $25,778,259 $12,708,368 ====================================

---$(1,7 ====

See accompanying notes to consolidated financial statements. 32

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years end -----------------------1999 ---------------Cash flows from operating activities: Net income ............................................................ Adjustments to reconcile net income to net cash provided by operating activities: Federal Home Loan Bank stock dividends ............................ Deferred income tax expense ....................................... $ 4,873,941 $ 4,

(148,300) 34,339

(

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years end -----------------------1999 ---------------Cash flows from operating activities: Net income ............................................................ Adjustments to reconcile net income to net cash provided by operating activities: Federal Home Loan Bank stock dividends ............................ Deferred income tax expense ....................................... Amortization of investment premiums, net .......................... Origination of loans held for sale ................................ Proceeds from sales of loans held for sale ........................ Provision for loan losses ......................................... Gain on sales of mortgage servicing rights ........................ Gain on servicing release premiums ................................ Gain on sales of loans ............................................ Net realized losses on sale of investment securities available for sale ................................. Depreciation of premises and equipment ............................ Amortization of intangibles ....................................... Net (increase) in other assets .................................... Net increase (decrease) in other liabilities ...................... Net cash provided by operating activities ............. Cash flows from investing activities: Purchases of investment securities .................................... Purchases of FHLB stock ............................................... Maturities of investment securities ................................... Principal repayments received on mortgage-backed and related securities ............................................ Proceeds from sales of investment securities available-for-sale ................................................ Net loan originations ................................................ Purchase of loans ..................................................... Acquisition of Strand, Atkinson, Williams & York, net of cash acquired ............................................ Proceeds from sales of loans .......................................... Purchases of premises and equipment ................................... Net cash used by investing activities ................. Cash flows from financing activities: Net increase in deposit liabilities ................................... Dividends paid on common stock ........................................ Net proceeds from stock offering ...................................... Proceeds from stock options exercised ................................. Retirement of common stock ............................................ Proceeds from Federal Home Loan Bank borrowings, net .................. Net cash provided by financing activities ............. $ 4,873,941 $ 4,

(148,300) 34,339 195,222 (14,163,995) 16,142,424 1,392,250 -(198,204) (52,866) -727,726 18,326 (461,386) 440,842 -----------8,800,319 -----------(11,445,247) (248,700) 6,917,235 8,457,039 -(65,036,790) (1,541,989) (2,828,182) 3,677,864 (2,885,697) -----------(64,934,467) -----------45,868,634 (1,220,904) -105,010 (857,041) 20,960,000 -----------64,855,699 -----------8,721,551 36,967,543 -----------$ 45,689,094 ============

(

(29, 29, 1, (

( ( ----4, ----(34, 6, 11,

(29, (2,

( ----(48, ----34, ( 12,

11, ----57, ----12, 24, ----$ 36, =====

Net increase (decrease) in cash and cash equivalents ...................... Cash and cash equivalents, beginning of year ..............................

Cash and cash equivalents, end of year ....................................

Supplemental disclosures of cash flow information: Cash paid during the year for: Interest .......................................................... Income taxes ......................................................

$ $

8,265,578 2,685,000

$ $

7, 1,

See accompanying notes to consolidated financial statements. 33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Umpqua Holdings Corporation (the Company) is a bank holding company formed in March 1999. At that time, the Company acquired 100% of the outstanding shares of South Umpqua Bank. The Company is headquartered in Roseburg, Oregon, and engages primarily in the business of commercial and retail banking and the delivery of retail brokerage services. The Company provides a wide range of banking, asset management, mortgage banking, and other financial services to corporate, institutional and individual customers through its wholly-owned banking subsidiary South Umpqua Bank (the Bank). The Company engages in the retail brokerage business through its wholly-owned subsidiary Strand, Atkinson, Williams & York, Inc. The Company and its subsidiaries are subject to the regulations of certain National and State agencies and undergo periodic examinations by these regulatory agencies. Basis of Financial Statement Presentation The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and with prevailing practices within the banking and securities industries. In preparing such financial statements, management is required to make certain estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet, and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. Consolidation The accompanying consolidated financial statements include the accounts of Umpqua Holdings Corporation, South Umpqua Bank, and Strand, Atkinson, Williams & York, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Cash and Cash Equivalents For purposes of the accompanying statements of cash flows, cash and cash equivalents includes cash and due from banks, and interest-bearing balances due from other banks. Trading Account Assets Debt securities held for resale are classified as trading account securities and reported at fair value. Realized and unrealized gains or losses are recorded in non-interest income. Investment Securities Investment securities held-to-maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts. Securities available-for-sale are stated at fair value. Gains and losses on sales of securities, recognized on a specific identification basis, are included in non-interest income. Net unrealized gain or loss on securities available-for-sale are included, net of tax, as a component of shareholders' equity. Mortgage-backed and related securities represent participating interests in pools of mortgage loans originated and serviced by the issuers of the securities. Premiums and discounts are amortized using a method that approximates the level-yield method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Certain 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. 34

Impaired Loans Loans specifically identified as impaired are measured based on the present value of expected future cash flows, discounted at the loans' observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. If the measurement of the impaired loan is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. Interest received on impaired loans is applied first against the recorded impaired loan until paid in full, next as a recovery up to any amounts charged off related to the impaired loan, and finally as interest income. Allowance for Loan Losses The allowance for loan losses is established to absorb known and inherent losses primarily resulting from loans outstanding and related off-balance sheet commitments. Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The provision for loan losses charged to operating expense is based on past loan loss experience and other factors which, in management's judgment, deserve current recognition in estimating possible loan losses. Such other factors include growth and composition of the loan portfolio, credit concentrations, trends in portfolio volume, maturities, delinquencies and non-accruals, the relationship of the allowance for loan losses to outstanding loans, and general economic conditions. While management uses the best information available to base its estimates, future adjustments to the allowance may be necessary if economic conditions, particularly in the Company's market, differ substantially from the 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

Impaired Loans Loans specifically identified as impaired are measured based on the present value of expected future cash flows, discounted at the loans' observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. If the measurement of the impaired loan is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. Interest received on impaired loans is applied first against the recorded impaired loan until paid in full, next as a recovery up to any amounts charged off related to the impaired loan, and finally as interest income. Allowance for Loan Losses The allowance for loan losses is established to absorb known and inherent losses primarily resulting from loans outstanding and related off-balance sheet commitments. Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The provision for loan losses charged to operating expense is based on past loan loss experience and other factors which, in management's judgment, deserve current recognition in estimating possible loan losses. Such other factors include growth and composition of the loan portfolio, credit concentrations, trends in portfolio volume, maturities, delinquencies and non-accruals, the relationship of the allowance for loan losses to outstanding loans, and general economic conditions. While management uses the best information available to base its estimates, future adjustments to the allowance may be necessary if economic conditions, particularly in the Company's market, differ substantially from the assumptions used. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations. The Company's principal lending activity is concentrated in Douglas County, Lane County, and Multnomah County, Oregon. Loan Fees and Direct Loan Origination Costs Loan origination fees and direct loan origination costs are capitalized and recognized as an adjustment to the yield over the life of the related loans. Non-Accrual Loans Commercial and real estate loans are placed on non-accrual status when they are 90 days past due as to principal or interest, unless the loan is both well-secured and in process of collection. When a loan is placed on non-accrual status, unpaid interest that is deemed uncollectible is reversed and charged against current earnings, and all amortization of net deferred fees or costs is discontinued. Income Taxes Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company's income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the potential deferred tax asset will not be realized. Mortgage Servicing Fees related to the servicing of mortgage loans of others are recorded as income when payments are received. Late charges and miscellaneous other fees are credited to income when collected. The costs of servicing loans are expensed as incurred. Premises, Equipment and Other Long-Lived Assets Company premises and equipment are stated at cost less accumulated depreciation and amortization.

Depreciation is provided over the estimated useful life of the respective assets, 5 to 39 years, on a straight-line or accelerated basis. Expenditures for major renovations and betterments of the Company's premises and equipment are capitalized. In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, management reviews long-lived assets and intangibles any time that a change in circumstance indicates that the carrying amount of these assets may not be recoverable. Recoverability of these assets is determined by comparing the carrying value of the asset to the forecasted undiscounted cash flows of the operation associated with the asset. If the evaluation of the forecasted cash flows indicates that the carrying value of the asset is not recoverable, the asset is written down to fair value. Goodwill, the price paid over the net fair value of acquired businesses, is amortized on a straight-line basis over 15 years. Other intangible assets are amortized over their estimated useful lives on a straight-line basis. Intangibles are evaluated periodically for impairment. 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. 35

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.

Profit Sharing and Stock Option Plans The Company has a profit sharing plan covering substantially all its employees. The contribution is determined annually by the Board of Directors at its discretion. The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the closing market value of the shares on the date of grant. The Company accounts for stock option grants in accordance with APB Opinion 25, Accounting for Stock Issued to Employees, and accordingly recognizes no compensation expense for the stock option grants. Computation of Earnings Per Share Earnings per common share are based on the weighted average number of common and common equivalent shares outstanding during each year. Federal Home Loan Bank Stock The Bank's investment in Federal Home Loan Bank (FHLB) stock is carried at par value, which reasonably approximates its fair value. As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At December 31, 1999, the Bank's minimum required investment was approximately $2,008,000. The Bank may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB. Reclassifications Certain amounts reported in prior years' financial statements have been reclassified to conform to the current presentation. Comprehensive Income. SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and displaying comprehensive income and its components in general-purpose financial statements. Comprehensive income includes net income and several other items that current accounting standards require to be recognized outside of net income. This SFAS is effective for fiscal years beginning after December 15, 1997, and as such, was adopted by the Company in 1998. Business Segments SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, requires public enterprises to report certain information about their operating segments in a complete set of financial statements to shareholders. It also requires reporting of certain enterprise-wide information about the Company's products and services, its activities in different geographic areas, and its reliance on major customers. The basis for determining the Company's operating segments is the manner in which management operates the business. This SFAS is effective for financial statements for periods beginning after December 15, 1997 and, as such, was adopted by the Company in 1998. The Company has no foreign operations, no customers that provide more than 10 percent of gross revenue, and has determined that it has only one operating segment. 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:
December 31, 1999 -----------------------------------------------------Amortized Unrealized Unrealized Cost Gains Losses Fair Value --------------------------------------------------------------------------------------------------------Available-For-Sale Obligations of U.S. Government agencies ........ $40,987,663 $ 4,931 $ 1,839,607 $39,152,987 US Treasury securities ......................... 2,500,485 8,109 -2,508,594 US Government agency mortgage-backed securities 14,004,761 3 309,324 13,695,440 Obligations of states and political subdivisions 22,247,610 26,441 762,536 21,511,515 Mutual fund .................................... ---------------------------------------------------------$79,740,519 $ 39,484 $ 2,911,467 $76,868,536 ======================================================

December 31, 1998 -----------------------------------------------------Amortized Unrealized Unrealized Cost Gains Losses Fair Value --------------------------------------------------------------------------------------------------------Available-For-Sale Obligations of U.S. Government agencies ........ $40,272,133 $ 831,583 $ 49,769 $41,053,947 US Treasury securities ......................... 6,001,119 79,584 -6,080,703 US Government agency mortgage-backed securities 22,484,684 26,758 166,764 22,344,678 Obligations of states and political subdivisions 13,959,102 327,420 25,588 14,260,934 Mutual fund .................................... 1,147,730 --1,147,730 -----------------------------------------------------$83,864,768 $ 1,265,345 $ 242,121 $84,887,992 ======================================================

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. 36

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.
Available-for-Sale ---------------------------Amortized Cost Fair Value ------------------------------------------------------------------------------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 ============================

There were no sales of securities available-for-sale during 1999 or 1998. NOTE 4 - LOANS RECEIVABLE The breakdown of loans receivable is as follows:

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.
Available-for-Sale ---------------------------Amortized Cost Fair Value ------------------------------------------------------------------------------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 ============================

There were no sales of securities available-for-sale during 1999 or 1998. NOTE 4 - LOANS RECEIVABLE The breakdown of loans receivable is as follows:
December 31, ---------------------------1999 1998 ------------------------------------------------------------------------------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 ============================

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:
Loans at fixed rates ................................ Loans at variable rates ............................. $ 47,754,605 200,779,328 -----------$248,533,933 ============

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:
Within One to After one year five years Five years Total ------------------------------------------------------------------------------------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 ............. Other ................... Total .................

14,092,599 9,398,501 6,737,236 30,228,336 203,872 --203,872 --------------------------------------------------------$139,991,825 $ 94,308,600 $ 14,233,508 $248,533,933 =========================================================

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. Transactions in the allowance for loan losses of the Company for the indicated years ended December 31 are summarized as follows:
1999 1998 1997 -----------------------------------------------------------------------------Balance January 1 ............... $ 2,663,914 $ 2,140,970 $ 1,990,817 Provision for loan losses ..... 1,392,250 1,024,650 562,180 ------------------------------4,056,164 3,165,620 2,552,997 Loans charged off ............. (836,717) (603,886) (472,874) Recoveries .................... 249,903 102,180 60,847 ------------------------------Net loans (charged off) recovered (586,814) (501,706) (412,027) ------------------------------Balance December 31 ............. $ 3,469,350 $ 2,663,914 $ 2,140,970 =========== =========== ===========

A summary of non-accrual loans and the related loss of interest income is presented below:
1999 1998 -----------------------------------------------------------------------------Non-accrual loans December 31 ...................... $1,398,439 $ 457,131 Interest income that would have been earned ........ $ 146,648 $ 49,866 during the year at original contractual rates Interest income actually recognized during the year $ 89,871 $ 25,345

37

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 was 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 $0 for the years ended December 31, 1999 and 1998. The Company has no commitment to extend additional credit on loans which are non-accrual or impaired at December 31, 1999. NOTE 5 - PREMISES AND EQUIPMENT The detail of premises and equipment is as follows:
1999 1998 --------------------------$ 8,012,986 $ 6,459,875 4,928,965 3,696,769

Buildings and land ............................... Furniture, fixtures and equipment ................

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 was 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 $0 for the years ended December 31, 1999 and 1998. The Company has no commitment to extend additional credit on loans which are non-accrual or impaired at December 31, 1999. NOTE 5 - PREMISES AND EQUIPMENT The detail of premises and equipment is as follows:
1999 1998 --------------------------$ 8,012,986 $ 6,459,875 4,928,965 3,696,769 700,690 638,686 --------------------------13,642,641 10,795,330 4,222,897 3,633,380 --------------------------$ 9,419,744 $ 7,161,950 ===========================

Buildings and land ............................... Furniture, fixtures and equipment ................ Computer software ................................

Less accumulated depreciation and amortization ...

NOTE 6 - TIME DEPOSITS Included in time deposits at December 31, 1999, 1998 and 1997 are $28,854,652, $24,035,496 and $17,778,828, respectively, of deposits $100,000 or greater. Interest expense on time deposits $100,000 or greater amounted to $1,086,968, $815,853 and $775,566 for the years ended 1999, 1998 and 1997, respectively. The following table sets forth by remaining maturity, time certificates of deposit at December 31, 1999:
Time Deposits of $100,000 All other or more Time Deposits Total --------------------------------------$11,434,552 $ 7,637,293 $19,071,845 16,415,978 44,657,427 61,073,405 400,000 9,036,556 9,436,556 604,122 579,167 1,183,289 --------------------------------------$28,854,652 $61,910,443 $90,765,095 =======================================

Three months or less ............... Over three months through twelve months .................... Over one year through five years ... Over five years .................... Total ............................

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:
Year Ending December 31: ------------------------------------------------------2000 $ 316,620 2001 322,655 2002 330,541 2003 335,747 2004 293,165

2004 Thereafter Total

293,165 1,361,676 --------$2,960,404 ==========

Rent expense applicable to operating leases for the years ended December 31, 1999, 1998 and 1997 was $269,220, $154,160 and $169,158 respectively. The Bank leases a portion of its Eugene, Oregon building to other tenants. The leases provide for monthly lease payments to the Bank in the amount of $6,900 through December 2001. In connection with the acquisition of Strand, Atkinson, Williams & York, Inc., the Company became liable for certain capitalized lease obligations totalling approximately $66,000. These capital lease obligations are included in other liabilities. NOTE 8 - INCOME TAXES The following is a summary of consolidated income tax expense:
Current Deferred Total -------------------------------------Year ended December 31, 1999: U.S. Federal ..................... State ............................ Total $2,144,090 $ 28,430 $2,172,520 502,361 5,909 508,270 -------------------------------------$2,646,451 $ 34,339 $2,680,790 ======================================

Year ended December 31, 1998: U.S. Federal ..................... State ............................ Total

$1,733,363 $ 238,479 $1,971,842 360,298 49,571 409,869 -------------------------------------$2,093,661 $ 288,050 $2,381,711 ======================================

Year ended December 31, 1997: U.S. Federal ..................... State ............................ Total

$1,438,474 $ 75,514 $1,513,988 165,676 19,603 185,279 -------------------------------------$1,604,150 $ 95,117 $1,699,267 ======================================

38

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:
1999 1998 1997 ------------------------------34.0% 34.0% 34.0% -3.5% -1.9% -1.4% 4.4% 4.4% 2.5% 0.6% 0.2% 0.7% ------------------------------35.5% 36.7% 35.8% ===============================

Statutory Federal income tax rate Tax exempt income State excise tax, net of Federal income tax benefit Other Effective income tax rate

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:
1999 1998 1997 ---------------------------------------Deferred tax assets:

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:
1999 1998 1997 ------------------------------34.0% 34.0% 34.0% -3.5% -1.9% -1.4% 4.4% 4.4% 2.5% 0.6% 0.2% 0.7% ------------------------------35.5% 36.7% 35.8% ===============================

Statutory Federal income tax rate Tax exempt income State excise tax, net of Federal income tax benefit Other Effective income tax rate

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:
1999 1998 1997 ---------------------------------------Deferred tax assets: Loans receivable, due to allowance for loan losses ................................. Unrealized loss on investment securities .......... Deferred bonus .................................... Accrued liabilities ............................... Other ............................................. Total gross deferred tax assets ................. Less valuation allowance ...................... Net deferred tax assets ..................... Deferred tax liabilities: Investment securities, due to accretion of discount Excess tax over book depreciation ................. Investment securities, due to FHLB stock dividends Unrealized gain on investment securities .......... Deferred loan fees ................................ Other ............................................. Total gross deferred tax liabilities ............ Net deferred tax assets (liabilities) ...............

$ 1,102,126 $ 843,290 $ 676,627 1,101,578 ----306,848 45,676 50,380 29,988 3,184 -----------------------------------------2,252,564 893,670 1,013,463 ------------------------------------------2,252,564 893,670 1,013,463

10,605 11,142 17,828 106,940 104,860 110,365 333,736 276,854 222,120 -392,467 90,708 639,659 426,745 335,369 20,316 -----------------------------------------1,111,256 1,212,068 776,390 ---------------------------------------$ 1,141,308 $ (318,398) $ 237,073 ========================================

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 $1,013,463 at December 31, 1999, 1998 and 1997, respectively, will be realized principally through carrryback to taxable income in prior years, future reversals of existing taxable temporary differences, and to a minor extent, future taxable income. Management believes that future taxable income will be sufficient to realize the benefits of temporary deductible differences that cannot be realized through carryback to prior years or through the reversal of future temporary taxable differences. NOTE 9 - MORTGAGE SERVICING Changes in capitalized mortgage servicing rights for 1999, 1998 and 1997 were as follows:
1999 1998 1997 --------------------------------------$ $ $ 151,352 95,905 (1,988) (245,269) ---------------------------------------

Balance, January 1 Originated servicing rights Amortization Sale of servicing rights

Balance, December 31 Valuation allowance Net balance, December 31

----------------------------------------------------------------------------$ $ $ =======================================

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:
For the year ended December 31, 1999 ----------------------------------------Weighted Average Per Share Income Shares Amount ----------------------------------------Basic EPS Income available to common shareholders Effect of dilutive securities: stock options Diluted EPS 7,636,191 $ 0.64 136,584 (0.01) ----------------------------------------$4,873,941 7,772,775 $ 0.63 ========================================= $4,873,941

For the year ended December 31, 1998 ----------------------------------------Weighted Average Per Share Income Shares Amount ----------------------------------------Basic EPS Income available to common shareholders Effect of dilutive securities: stock options Diluted EPS 7,372,614 $ 0.56 163,588 (0.01) ----------------------------------------$4,110,381 7,536,202 $ 0.55 ========================================= $4,110,381

For the year ended December 31, 1997 ----------------------------------------Weighted Average Per Share Income Shares Amount ----------------------------------------Basic EPS Income available to common shareholders Effect of dilutive securities: stock options Diluted EPS 6,507,420 $ 0.47 165,210 (0.01) ----------------------------------------$3,044,496 6,672,630 $ 0.46 ========================================= $3,044,496

Options to purchase 194,100 shares of common stock at prices ranging from $9.75 to $12 per share were outstanding during 1999, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. The options, which expire from March 31, 2009 to November 2010, were outstanding at December 31, 1999. 39

NOTE 11 - PROFIT SHARING PLAN

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 $1,345 in 1999. NOTE 12 - TERM DEBT The Bank had outstanding notes from the FHLB at December 31, 1999 and 1998 as follows:
December 31, 1999 ----------------------------------------------Amount Maturity Interest Rate ----------------------------------------------$ 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% ----------$46,158,000 =========== December 31, 1998 ----------------------------------------------Amount Maturity Interest Rate ----------------------------------------------$ 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% ----------$25,198,000 ===========

Interest on the above borrowings is due monthly with the principal due at maturity, with the exception of the note due November 2003, where, in addition to interest, a portion of the principal is due monthly. The $12,500,000 note, scheduled to mature in December 2002, is callable on a quarterly basis by the FHLB after March 2, 2000. The $3,000,000 note scheduled to mature in December 2003, is callable on a quarterly basis by the FHLB after June 11, 2000. The Bank has pledged as collateral for these notes all FHLB stock, all funds on deposit with the FHLB, all notes or other instruments representing obligations of third parties, securities issued, insured or guaranteed by the United States Government or any agency thereof, and its instruments, accounts, general intangibles, equipment and other property in which a security interest can be granted by the Bank to the FHLB. The Bank had unused lines of credit with the FHLB of $42,079,000 at December 31, 1999. The Bank also had unused lines of credit with financial institutions amounting to $18,366,000 at December 31, 1999.

The FHLB requires the Bank to maintain a required level of investment in FHLB stock to qualify for notes. NOTE 13 - SHAREHOLDERS' EQUITY The Company had routinely transferred amounts in retained earnings to surplus to increase its legal lending limit. It transferred $3,611,004 in 1997. Based on changes made in the related regulations in late 1997, such transfers will no longer be required as all elements of capital are now considered part of the legal lending limit base. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the 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. 40

The Company's actual capital amounts and ratios are presented in the following table:
To be well capitalized For Capital under prompt corrective Actual Adequacy purposes action provisions ---------------------------------------------------------------------------------------------------Amount Ratio Amount Ratio Amount Ratio ---------------------------------------------------------------------------------------------------As of December 31, 1999: 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) Tier I Capital (to Average Assets)

36,202,000

13.81%

$10,487,320

4.00%

$15,455,340

6.00%

36,202,000

9.99%

$14,500,520

4.00%

$18,125,650

5.00%

As of December 31, 1998: Total Capital (to Risk Weighted Assets) $38,028,000 Tier I Capital (to Risk Weighted Assets) Tier I Capital (to Average Assets)

18.67%

$16,293,120

8.00%

$20,366,400

10.00%

35,481,000

17.42%

8,146,560

4.00%

12,219,840

6.00%

35,481,000

12.71%

11,164,920

4.00%

13,956,150

5.00%

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

The Company's actual capital amounts and ratios are presented in the following table:
To be well capitalized For Capital under prompt corrective Actual Adequacy purposes action provisions ---------------------------------------------------------------------------------------------------Amount Ratio Amount Ratio Amount Ratio ---------------------------------------------------------------------------------------------------As of December 31, 1999: 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) Tier I Capital (to Average Assets)

36,202,000

13.81%

$10,487,320

4.00%

$15,455,340

6.00%

36,202,000

9.99%

$14,500,520

4.00%

$18,125,650

5.00%

As of December 31, 1998: Total Capital (to Risk Weighted Assets) $38,028,000 Tier I Capital (to Risk Weighted Assets) Tier I Capital (to Average Assets)

18.67%

$16,293,120

8.00%

$20,366,400

10.00%

35,481,000

17.42%

8,146,560

4.00%

12,219,840

6.00%

35,481,000

12.71%

11,164,920

4.00%

13,956,150

5.00%

The Bank is a state chartered bank with deposits insured by the Federal Deposit Insurance Corporation (FDIC) and is not a member of the Federal Reserve System, and is subject to the supervision and regulation of the Director of the Oregon Department of Consumer and Business Services, administered through the Division of Finance and Corporate Securities, and to the supervision and regulation of the FDIC. As of December 31, 1999, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions present since the notification that management believes have changed the institution's category. 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:
1999 1998 1997 ---------------------------------------------------------------Average Average Options price per Options price per Options outstanding share outstanding share outstanding --------------------------------------------------------------------------------------------------------Balance, beginning of year 497,624 $ 5.68 376,824 $ 3.92 362,824 Grants 150,000 9.69 130,000 12.00 60,000 Exercised (31,800) 3.30 (9,200) 3.78 (9,200 Cancelled and returned to plan (36,800 ---------------------------------------------------------------615,824 $ 6.78 497,624 $ 5.68 376,824 ================================================================ Options exercisable at end of year 333,624 309,224 243,059 Average fair value of options $ 4.43 $ 3.57

The fair value per share of each option grant is estimated on the date of the grant using the Black-Scholes optionpricing 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

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 optionpricing 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: 41
1999 1998 1997 ---------------------------------------------------------------------------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

Outstanding options at December 31, 1999 are as follows:
Exercise Price Total Shares Vested Shares per Share Expiration --------------------------------------------------------------------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

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 variablerate loans. NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following is presented pursuant to the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The estimated fair values of the Company's financial instruments are as follows:

1999 1998 1997 ---------------------------------------------------------------------------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

Outstanding options at December 31, 1999 are as follows:
Exercise Price Total Shares Vested Shares per Share Expiration --------------------------------------------------------------------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

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 variablerate loans. NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following is presented pursuant to the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The estimated fair values of the Company's financial instruments are as follows:
December 31, 1999 December 31, 1998 ----------------------------------------------------------Carrying Carrying amount Fair value amount Fair value ----------------------------------------------------------Financial assets: Cash and due from banks .............. Trading account assets ............... Investment securities ................ Loans ................................ FHLB stock ........................... Mortgage loans held for sale ......... Financial liabilities: Deposits ............................. $ 45,689,094 474,782 76,868,536 248,533,933 2,346,200 -$ 45,689,094 474,782 76,868,536 246,282,919 2,346,200 -$ 36,967,543 -84,887,992 186,166,966 1,949,200 1,780,225 $ 36,967,543 -84,887,992 186,579,779 1,949,200 1,780,225

301,673,355

301,350,151

255,804,721

256,165,103

Deposits ............................. Federal Home Loan Bank borrowings .... Off-balance-sheet financial instruments: Loan commitments ..................... Letters of credit ....................

301,673,355 46,158,000

301,350,151 44,460,820

255,804,721 25,198,000

256,165,103 25,114,190

68,735,000 357,000

68,735,000 357,000

72,761,000 207,000

72,761,000 207,000

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. 42

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

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.
1999 1998 -----------------------------------------------------------------------------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 $ 0.65 Dilluted earnings per common share ........... $ 0.60 $ 0.52

NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS CONDENSED BALANCE SHEET
December 31, 1999 ----------------Assets Non-interest-bearing deposits with subsidiary banks ........ Investments in: Bank subsidiary .......................................... Nonbank subsidiary ....................................... Receivable from bank subsidiary ............................ Other assets ............................................... Total assets ................................................. Liabilities and Shareholders' Equity Payable to bank subsidiary ................................. Other liabilities .......................................... Total liabilities ........................................ Shareholders' Equity ....................................... Total liabilities and shareholders' equity ................... $ 49,955

33,844,570 2,808,305 410,000 41,501 ----------$37,154,331 =========== 45,571 392,538 438,109 36,716,222 ----------$37,154,331 =========== $

CONDENSED STATEMENT OF INCOME Year Ended December 31, 1999 -----------------

----------------Income Dividends from subsidiaries .............................. Equity in undistributed earnings of subsidiaries ......... Other income ............................................. Total income ............................................... $ 4,610,000 318,062 387 ----------4,928,449 -----------

Expenses Management fees paid to subsidiaries ..................... Other expenses ........................................... Total expense ..............................................

25,710 62,557 ----------88,267 ----------4,840,182 (33,759) ----------$ 4,873,941 ===========

Income before income tax ................................... Income tax benefit ......................................... Net income .................................................

CONDENSED STATEMENT OF CASH FLOWS December 31, 1999 ----------------Operating Activities: Net income ................................................. Adjustment to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries ......... Increase in other liabilities ............................ Increase in other assets ................................. Net cash provided by operating activities .............. Investing activities: Investment in subsidiary ................................. Net increase in receivables from subsidiaries ............ Net cash used by investing activities .................. Financing activities: Net increase in payables to subsidiaries ................. Dividends paid ........................................... Stock repurchased ........................................ Proceeds from exercise of stock options .................. Net cash used by investing activities .................. $ 4,873,941

(318,062) 421,461 (41,501) ----------4,935,839

(2,720,793) (410,000) ----------(3,130,793)

45,571 (1,220,905) (617,173) 37,416 ----------(1,755,091) ----------49,955 -----------$ 49,955 ===========

Change in cash and cash equivalents ........................ Cash and cash equivalents at beginning of year ............. Cash and cash equivalents at end of year ...................

43

SUBSIDIARIES OF UMPQUA HOLDINGS CORPORATION
Jurisdiction of Name Under Which Name of Subsidiary Incorporation Business Is Conducted -----------------------------------------------------------------------------South Umpqua Bank Oregon South Umpqua Bank Strand, Atkinson, Williams & York Oregon Strand, Atkinson, Williams & York

SUBSIDIARIES OF UMPQUA HOLDINGS CORPORATION
Jurisdiction of Name Under Which Name of Subsidiary Incorporation Business Is Conducted -----------------------------------------------------------------------------South Umpqua Bank Oregon South Umpqua Bank Strand, Atkinson, Williams & York Oregon Strand, Atkinson, Williams & York

CONSENT OF INDEPENDENT AUDITORS The Board of Directors Umpqua Holding Corp.: We consent to incorporation by reference in the Registration Statement (No. 333-77259) on Form S-8 of Umpqua Holding Corp. of our report dated January 21, 2000, relating to the consolidated balance sheets of Umpqua Holding Corp. 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, which report appears in the December 31, 1999 annual report on Form 10-K of Umpqua Holding Corp.
/s/ KPMG LLP Portland, Oregon January 21, 2000

ARTICLE 9 (Replace this text with the legend) CIK: 0001077771 NAME: Umpqua Holdings Corporation MULTIPLIER: 1,000 CURRENCY: U.S.Dollars

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END EXCHANGE RATE CASH INT BEARING DEPOSITS FED FUNDS SOLD TRADING ASSETS INVESTMENTS HELD FOR SALE INVESTMENTS CARRYING INVESTMENTS MARKET LOANS ALLOWANCE TOTAL ASSETS DEPOSITS SHORT TERM LIABILITIES OTHER LONG TERM PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITIES AND EQUITY

12 MOS DEC 31 1999 JAN 01 1999 DEC 31 1999 1.0 30,058,897 15,630,197 0 474,782 76,868,536 0 0 248,533,933 3,469,350 386,736,716 301,673,355 0 2,189,139 46,158,000 0 0 25,778,259 10,937,963 386,736,716

CONSENT OF INDEPENDENT AUDITORS The Board of Directors Umpqua Holding Corp.: We consent to incorporation by reference in the Registration Statement (No. 333-77259) on Form S-8 of Umpqua Holding Corp. of our report dated January 21, 2000, relating to the consolidated balance sheets of Umpqua Holding Corp. 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, which report appears in the December 31, 1999 annual report on Form 10-K of Umpqua Holding Corp.
/s/ KPMG LLP Portland, Oregon January 21, 2000

ARTICLE 9 (Replace this text with the legend) CIK: 0001077771 NAME: Umpqua Holdings Corporation MULTIPLIER: 1,000 CURRENCY: U.S.Dollars

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END EXCHANGE RATE CASH INT BEARING DEPOSITS FED FUNDS SOLD TRADING ASSETS INVESTMENTS HELD FOR SALE INVESTMENTS CARRYING INVESTMENTS MARKET LOANS ALLOWANCE TOTAL ASSETS DEPOSITS SHORT TERM LIABILITIES OTHER LONG TERM PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITIES AND EQUITY INTEREST LOAN INTEREST INVEST INTEREST OTHER INTEREST TOTAL INTEREST DEPOSIT INTEREST EXPENSE INTEREST INCOME NET LOAN LOSSES SECURITIES GAINS EXPENSE OTHER INCOME PRETAX INCOME PRE EXTRAORDINARY EXTRAORDINARY CHANGES NET INCOME

12 MOS DEC 31 1999 JAN 01 1999 DEC 31 1999 1.0 30,058,897 15,630,197 0 474,782 76,868,536 0 0 248,533,933 3,469,350 386,736,716 301,673,355 0 2,189,139 46,158,000 0 0 25,778,259 10,937,963 386,736,716 19,192,599 4,876,731 611,000 24,680,330 7,077,495 8,455,948 16,224,382 1,392,250 0 11,701,633 7,554,731 7,554,731 0 0 4,873,941

ARTICLE 9 (Replace this text with the legend) CIK: 0001077771 NAME: Umpqua Holdings Corporation MULTIPLIER: 1,000 CURRENCY: U.S.Dollars

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END EXCHANGE RATE CASH INT BEARING DEPOSITS FED FUNDS SOLD TRADING ASSETS INVESTMENTS HELD FOR SALE INVESTMENTS CARRYING INVESTMENTS MARKET LOANS ALLOWANCE TOTAL ASSETS DEPOSITS SHORT TERM LIABILITIES OTHER LONG TERM PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITIES AND EQUITY INTEREST LOAN INTEREST INVEST INTEREST OTHER INTEREST TOTAL INTEREST DEPOSIT INTEREST EXPENSE INTEREST INCOME NET LOAN LOSSES SECURITIES GAINS EXPENSE OTHER INCOME PRETAX INCOME PRE EXTRAORDINARY EXTRAORDINARY CHANGES NET INCOME EPS BASIC EPS DILUTED YIELD ACTUAL LOANS NON LOANS PAST LOANS TROUBLED LOANS PROBLEM ALLOWANCE OPEN CHARGE OFFS RECOVERIES ALLOWANCE CLOSE ALLOWANCE DOMESTIC ALLOWANCE FOREIGN ALLOWANCE UNALLOCATED

12 MOS DEC 31 1999 JAN 01 1999 DEC 31 1999 1.0 30,058,897 15,630,197 0 474,782 76,868,536 0 0 248,533,933 3,469,350 386,736,716 301,673,355 0 2,189,139 46,158,000 0 0 25,778,259 10,937,963 386,736,716 19,192,599 4,876,731 611,000 24,680,330 7,077,495 8,455,948 16,224,382 1,392,250 0 11,701,633 7,554,731 7,554,731 0 0 4,873,941 0.64 0.63 5.37 1,398,000 206,000 0 0 2,664,000 837,000 250,000 3,469,000 3,469,000 0 0