This past year's financial performance was poor and not one your management team is proud of. Our numbers were directly impacted by the size of the addition to our loan loss provision, which totaled $209.1 million for 2009. To put this in perspective, prior to the housing meltdown that fueled the recession, Umpqua's average annual loan provision fell within a range of $2 to $7 million. Obviously this year's charge to earnings is significant and it led the company to report a loss for the year of $166.3 million. Of this amount, $112 million was a goodwill impairment that did not impact our regulatory capital levels or liquidity. Without this goodwill charge, the company's net loss from operations was $54.1 million. It is important to know that the core earnings of the bank, described as net earnings before taxes and credit costs, are healthy and generating annual income for the bank in excess of $160 million. Clearly, the core "engine" of Umpqua is operating on all cylinders. Troubled credits are the reason for this year's loss. Other elements of this year's performance are as follows:

• Residential Mortgage Lending: An excellent year for this division of the bank as loan production volume of $757 million was 131% higher than in 2008.
• Community Banking: Also achieved high performance levels with total deposit growth more than $850 million, while the cost of interest bearing deposits dropped to 1.35% in the fourth quarter of 2009.
• Loan Production: There has been a great deal of political rhetoric around the notion that "banks are not lending". At Umpqua this is simply not true. Last year the loan professionals of the company originated more than $1.7 billion in new loans—a clear indication that we are putting funds to work within our local communities.
• Credit Quality: Management continues to aggressively address the credit issues facing the company. To this end, we are writing down non-performing assets to disposition value and charging off any related impairments. At year end our non-performing asset to total asset ratio was 2.38%. This number is higher than we like and yet less than half of our peer banks' average non-performing asset ratio. Although we have charged off loans for regulatory and accounting purposes, we continue to collect as much of the contract balance as possible. Our credit professionals have endured a tough two and a half years as we have navigated the company through this recession and our related credit issues. We could not be more proud of them.

Access to capital markets and maintaining a strong capital position is critical for any financial institution during an economic downturn. Your company's capital position is excellent, as evidenced by the company's total riskbased capital ratio in excess of 17% at year end. The company also completed two successful capital raises, one in August of 2009 and another in early February 2010. Total capital raised from each offering was $259 million and $303 million, respectively. Our August offering was to position the company to repay our TARP Capital Purchase Program investment by the U.S. Treasury and to enable the company to take advantage of acquisition opportunities. The second capital infusion was to repay the TARP investment and to add to our already strong capital position as we expand the company into strategic markets through FDIC-assisted acquisitions. Both of these offerings were welcomed by investors and were successful.

In our quarterly shareholder letters to you we have continued to state that our position on repaying the government's preferred stock investment was contingent on the state of the economy. In February of 2010, we received approval from the Federal Reserve to commence payback of the TARP funds and completed that repayment on February 17, 2010.

The financial industry has been going through significant change during the last couple of years including the consolidation of failed institutions into stronger ones. Watching the FDIC be appointed receiver of a bank is not something that we like to see happen to our competitors, since it impacts so many people in different ways. Staff, customers, vendors and shareholders are all impacted, and many negatively. However, it is positive that there are healthy banks that stand ready to step in and assume the operations of these banks. In January 2009, Umpqua assumed the operations of The Bank of Clark County, in Vancouver, Washington and in January of 2010 we assumed the operations of EvergreenBank in Seattle, Washington. Both of these acquisitions, which totaled more than $530 million in assets and nine locations, will be immediately accretive to earnings. Umpqua will continue to remain opportunistic on additional acquisitions. Umpqua has a disciplined approach to bidding on these opportunities, which includes evaluating the strategic rational for our participation. This past year, we have focused on building our Washington state presence with an emphasis on the greater Puget Sound market.

As the economy begins its climb out of this recession we believe it is vital for any healthy company to implement strategies that will help position it for better days. Umpqua's management team has been engaged in this activity for several months now, as indicated by the following:

• Our Wealth Management Division was introduced early in 2009 and it now includes Umpqua Private Bank, our retail brokerage unit, Umpqua Investments, and our affiliation with Ferguson/Wellman, one of Oregon's premier money management companies.
• Our International Banking Division was created in 2009. Headquartered in San Francisco, this division has already started to generate income and we look forward to additional growth in the years to come.
• We expanded our commercial lending teams as we prepare the company for new loan growth in the coming years. Commercial teams were added in San Francisco and Walnut Creek, California, as well as Portland, Oregon and Seattle, Washington. These additions have been supplemented with credit administrators and special asset professionals rounding out the resources required to grow the company's loan balances.
• We are also opening bank stores aggressively with more than 10 new stores either under construction or in lease negotiations at the time of this letter. Our organic growth strategy has worked well for our company during the last 15 years and we remain committed to it as we continue to build our company.

In conclusion, 2009 was a very difficult year, one that we are glad to have behind us. Even while operating in this difficult environment, the associates of Umpqua continue to assist and motivate others in need through our Connect program. In 2009 alone our associates volunteered more than 30,800 hours to the communities we serve. And we are proud to be included as one of FORTUNE Magazine's Top 100 Companies to Work For in the country for the fourth consecutive year and to be listed by Forbes magazine as the 19th best bank in the United States.

Like last year, 2010 will present challenges to your company as we move through the remainder of the country's recession. However, we are prepared for the "upturn" and as the economy continues to rebound, look forward to reporting better results to you in the near future.

Thank you for your continued support.