UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K10-K
[ x ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 20042005
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to .
Commission File Number: 000-25597
UMPQUA HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
| | | |
| OREGON | | 93-1261319 |
(State or Other Jurisdiction
of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
ONE SW COLUMBIA STREET, SUITE 1200, PORTLAND, OREGON 97258
(Address of principal executive offices) (zip code)
(503) 546-2491727-4100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | |
| Title of each class | | Name of each exchange on which registered |
| | |
| NONE | | |
| | |
Securities registered pursuant to Section 12(g) of the Act:
| |
Common Stock |
| | |
| | (Title of Class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ x ] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ x ]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act. Check one:
Large Accelerated filer [ x ] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ x ] No [ x ]
Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practical date:
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2004,2005, based on the closing price on that date of $20.99$23.54 per share, was $561,085,537.$961,028,857. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded because those persons may be deemed affiliates. The number of shares of the Registrant’s common stock (no par value) outstanding as of June 30, 20042005 and February 28, 20052006 were 28,219,67744,453,407 and 44,390,084,44,702,580, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 20052006 Annual Meeting of Shareholders of Umpqua Holdings Corporation to be held on April 27, 2005 are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.
Umpqua Holdings Corporation
FORM 10-K CROSS-REFERENCE CROSS REFERENCE INDEX
1
Umpqua Holdings Corporation
PART I
This Annual Report on Form 10-K contains certain forward-looking statements, which statements are made pursuantintended to be covered by the safe harbor provisions offor “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. StatementsThese statements may include statements that expressly or implicitly predict future results, performance or eventsevents. All statements other than statements of historical fact are forward-looking. In addition, the words “expect,” believe,” “anticipate” and other similar expressions identify forward-looking statements. You can find many of these statements by looking for words such as “anticipates,” “expects,” believes,” “estimates” and “intends” and words or phrases of similar meaning. Forward-looking statements are subject to certaininvolve substantial risks and uncertainties, that could cause actual resultsmany of which are difficult to differ materially from those expected. Factors that could cause or contribute to such differencespredict and are generally beyond the control of Umpqua. Risks and uncertainties include but are not limited to, the risk factors discussed below in “Risk Factors” and the following:
| | |
| | • | The ability to attract new deposits and loans |
| |
| | • | Competitive market pricing factors |
| |
| | • | Deterioration in economic conditions that could result in increased loan losses |
| |
| | • | Market interest rate volatility |
| |
| | • | Changes in legal or regulatory requirements |
| |
| | • | The ability to recruit and retain certain key management and staff |
| |
| | • | Risks associated with merger integration |
ReadersThere are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. For a more detailed discussion of some of the risk factors, see the section entitled“Risk Factors“below. We do not intend to update these forward-looking statements. You should consider any forward looking statements in light of this report should not place undue relianceexplanation, and we caution you about relying on forward-looking statements contained herein, which speak only as of the date of this report. Umpqua Holdings Corporation undertakes no obligation to revise any forward-looking statements to reflect subsequent events or circumstances.statements.
Introduction
Umpqua Holdings Corporation (referred to in this report as “we,” “our,” “Umpqua,” and “the Company”), an Oregon corporation, is a financial holding company formed in March 1999. At that time, we acquired 100% of the outstanding shares of South Umpqua Bank, an Oregon state-chartered bank formed in 1953. We became a financial holding company in March 2000 under the provisions of the Gramm-Leach-Bliley Act. Umpqua has two principal operating subsidiaries, Umpqua Bank (the “Bank”) and Strand, Atkinson, Williams and York, Inc. (“Strand”).
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, periodic current reports on Form 8-K, proxy statements and other information with the Securities and Exchange Commission (“SEC”). You may obtain these reports, and any amendments, from the SEC’s website atwww.sec.gov. You may obtain copies of these reports, and any amendments, through our website atwww.umpquaholdingscorp.com. These reports are available through our website as soon as reasonably practicable after they are filed electronically with the SEC. All of our SEC filings since November 14, 2002 wereare made available on our website within two days of filing with the SEC.
Risk Factors
The following summarizes certain risks that management believes are specific to our business. This should not be viewed as including all risks.
Merger with Humboldt Bancorp
On July 9, 2004, Humboldt Bancorp (“Humboldt”) merged with and into Umpqua and on July 10, 2004, Humboldt Bank merged with and into the Bank. The merger is expected to generate after-tax cost savings and expense reductions through the consolidation of facilities, increased purchasing efficiencies, and elimination of duplicative technology, operations, outside services and redundant staff. The combined company may fail to realize some or all of the anticipated cost savings and other benefits of the transaction. See Management’s Discussion and Analysis of Financial Condition and Results of Operations— “Non-interest Expense” in Item 7 of this report.
2
Umpqua Holdings Corporation
We are pursuing an aggressive growth strategy that may include mergers and acquisitions, which could place heavy demands on our management resources.
Umpqua is a dynamic organization that is among the fastest-growing community financial services organizations in the United States. Since 2000, we have completed the acquisition and integration of five other financial institutions. Although all of these acquisitions were integrated in a successful manner, there is no assurance that future acquisitions will be integrated in a manner as successful as those previously completed. We have announced our intent to open new stores in Oregon, Washington and California, and to continue our growth strategy. If we pursue our growth strategy too aggressively, or if factors beyond management’s control divert attention away from our integration plans, we might not be able to realize some or all of the anticipated benefits. Moreover, we are dependent on the efforts of key personnel to achieve the synergies associated with our acquisitions. The loss of one or more of our key persons could have a material adverse effect upon our ability to achieve the anticipated benefits.
The remodeling of our stores may not be completed smoothly or within budget, which could result in reduced earnings.
The Bank has, over the past several years, been transformed from a traditional community bank into a community-oriented financial services retailer. In pursuing this strategy, we have remodeled many bank branches to resemble retail stores that include distinct physical areas or boutiques such as a “serious about service center,” an “investment opportunity center” and a “computer café.” Remodeling involves significant expense, disrupts banking activities during the remodeling period, and presents a new look and feel to the banking services and products being offered. There are risks that remodeling costs will exceed forecasted budgets and that there may be delays in completing the remodels, which could cause confusion and disruption in the business of those stores.
Involvement in non-bank businesses involves unique risks.
Strand’s retail brokerage operations present special risks not borne by community banks. For example, the brokerage industry is subject to fluctuations in the stock market that may have a significant adverse impact on transaction fees, customer activity and investment portfolio gains and losses. Likewise, additional or modified regulations may adversely affect Strand’s operations. A significant decline in fees and commissions or trading losses suffered in the investment portfolio could adversely affect Strand’s income and potentially require the contribution of additional capital to support its operations. Strand is subject to claim arbitration risk arising from customers who claim their investments were not suitable or that their portfolios were too actively traded. These risks increase when the market, as a whole, declines. The risks associated with retail brokerage may not be supported by the income generated by those operations. See Management’s Discussion and Analysis of Financial Condition and Results of Operations— “Non-interest Income” in Item 7 of this report.
The majority of our assets are loans, which if not paid would result in losses to the Bank in excess of loss allowances.
The Bank, like other lenders, is subject to credit risk, which is the risk of losing principal or interest due to borrowers’ failure to repay loans in accordance with their terms. Although we have established underwriting and documentation criteria and most loans are secured by collateral, a downturn in the economy or the real estate market in our market areas or a rapid increase in interest rates could have a negative effect on collateral values and borrowers’ ability to repay. To the extent loans are not paid timely by borrowers, the loans are placed on non-accrual, thereby reducing interest income. To the extent loan charge-offs exceed expectations, additional amounts may be charged to the provision for loan losses, which reduces income.
Although management believes that the allowance for loan losses and reserve for unfunded commitments at December 31, 2004 are adequate, no assurance can be given that an additional provision for loan losses or unfunded commitments will not be required. See Management’s Discussion and Analysis of Financial Condition and Results of Operations— “Allowance for Loan Losses and Reserve for Unfunded Commitments,” “Provision for Loan Losses” and “Asset Quality and Non-Performing Assets” in Item 7 of this report.
A rapid change in interest rates could make it difficult to maintain our current interest income spread and could result in reduced earnings.
Our earnings are largely derived from net interest income, which is interest income and fees earned on loans and investments, less interest paid on deposits and other borrowings. Interest rates are highly sensitive to many factors that are beyond the
3
control of our management, including general economic conditions and the policies of various governmental and regulatory authorities. As interest rates change, net interest income is affected. With fixed rate assets (such as fixed rate loans) and liabilities (such as certificates of deposit), the effect on net interest income depends on the maturity of the asset or liability. Although we strive to manage interest rate risk through asset/liability management policies, from time to time maturities are not balanced. Any rapid increase in interest rates in the future could result in interest expense increasing faster than interest income because of fixed rate loans and longer-term investments. Further, substantially higher interest rates generally reduce loan demand and may result in slower loan growth than previously experienced. An unanticipated rapid decrease or increase in interest rates could have an adverse effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore on the level of net interest income. See Quantitative and Qualitative Disclosures about Market Risk in Item 7A of this report.
The volatility of our mortgage banking business can adversely affect earnings.
Changes in interest rates greatly affect the mortgage banking business. One of the principal risks in this area is prepayment of mortgages and their effect on mortgage servicing rights (“MSR”). We can mitigate this risk by purchasing financial instruments, such as fixed rate investment securities and interest rate contracts, which tend to increase in value when long-term interest rates decline. The success of this strategy, however, depends on management’s judgments regarding the amount, type and mix of MSR risk management instruments that we believe are appropriate to manage the changes in the fair value of our MSR asset. If these decisions and strategies are not successful, our net income could be adversely affected. See Management’s Discussion and Analysis of Financial Condition and Results of Operations— “Mortgage Servicing Rights” in Item 7 of this report.
Our banking and brokerage operations are subject to extensive government regulations, that have increased and are expected to become more burdensome, increasing our costs and/ or making us less competitive.
We and our subsidiaries are subject to extensive regulation under federal and state laws. These laws and regulations are primarily intended to protect customers, depositors and the deposit insurance fund, rather than shareholders. The Bank is an Oregon state-chartered commercial bank whose primary regulator is the Oregon Division of Finance and Corporate Securities. The Bank is also subject to the supervision by and the regulations of the Washington Department of Financial Institutions, the California Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”), which insures bank deposits. Strand is subject to extensive regulation by the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Umpqua is subject to regulation and supervision by the Board of Governors of the Federal Reserve System, the SEC and NASDAQ. Federal and state regulations may place banks at a competitive disadvantage compared to less regulated competitors such as finance companies, credit unions, mortgage banking companies and leasing companies. Although we have been able to compete effectively in our market area in the past, there can be no assurance that we will be able to continue to do so. Further, future changes in federal and state banking and brokerage regulations could adversely affect our operating results and ability to continue to compete effectively.
The financial services industry is highly competitive.
We face significant competition in attracting and retaining deposits and making loans as well as in providing other financial services throughout our market area. We face pricing competition for loans and deposits. We also face competition with respect to customer convenience, product lines, accessibility of service and service capabilities. Our most direct competition comes from other banks, brokerages, mortgage companies and savings institutions. We also face competition from credit unions, government-sponsored enterprises, mutual fund companies, insurance companies and other non-bank businesses.
General Background
Through a succession of three mergers with VRB Bancorp ($348 million of assets), Linn–Benton Bank ($119 million of assets) and Independent Financial Network, Inc. ($440 million of assets) in 2000 and 2001, we expanded the Company’s footprint in southern Oregon, the Oregon coast and north along theI-5 corridor in the Willamette Valley. During 2002, we completed the acquisition of Centennial Bancorp, (“Centennial”), the parent company of Centennial Bank, which at the time of acquisition had total assets of approximately $840 million and 22 branches located principally in the Portland metropolitan and Willamette Valley areas of Oregon along theI-5 corridor. During the third quarter of 2004, we completed the acquisition of Humboldt
4
Umpqua Holdings Corporation
Bancorp, the parent company of Humboldt Bank, which at the time of acquisition had total assets of approximately $1.5 billion and 27 branches located throughout Northern California. On February 8, 2006, we announced the signing of a definitive agreement to acquire Western Sierra Bancorp and its principal operating subsidiaries, Western Sierra Bank, Central California Bank, Lake Community Bank and Auburn Community Bank. At the time of the announcement, Western Sierra Bancorp had total assets of approximately $1.3 billion and 31 branches located throughout Northern California. This transaction is expected to close in the second quarter of 2006.
Our headquarters is located in Portland, Oregon, and we engage primarily in the business of commercial and retail banking and the delivery of retail brokerage services. The Bank provides a wide range of banking, mortgage banking and other financial services to corporate, institutional and individual customers. Along with our subsidiaries, we are subject to the
2
Umpqua Holdings Corporation
regulations of state and federal agencies and undergo periodic examinations by these regulatory agencies. See “Supervision and Regulation” below for additional information.
We are considered one of the most innovative community banks in the United States, combining a retail product delivery approach with an emphasis on quality-assured personal service. Since 1995, we transformed the Bank from a traditional community bank into a community-oriented financial services retailer by implementing a variety of retail marketing strategies to increase revenue and differentiate ourselves from our competition.
Strand is a registered broker-dealer and investment advisor with offices in Portland, Salem, Eugene, Roseburg and Medford, Oregon, and Kalama, Washington, and offers a full range of investment products and services including: stocks, fixed income securities (municipal, corporate, and government bonds, CDs, money market instruments), mutual funds, annuities, options, retirement planning, money management services, life insurance, disability insurance and medical supplement policies.
| | |
| • | Stocks |
|
| • | Fixed Income Securities (municipal, corporate, and government bonds, CDs, money market instruments) |
|
| • | Mutual Funds |
|
| • | Annuities |
|
| • | Options |
|
| • | Retirement Planning |
|
| • | Money Management Services |
|
| • | Life Insurance, Disability Insurance and Medical Supplement Policies |
Business Strategy
Our principal objective is to become the leading community-oriented financial services retailer throughout the Pacific Northwest and Northern California. We plan to continue the expansion of our market from Seattle to Sacramento, primarily along the I-5 corridor. We intend to continue to grow our assets and increase profitability and shareholder value by differentiating ourselves from competitors through the following strategies:
Capitalize On Innovative Product Delivery System.Our philosophy has been to develop an environment for the customer that makes the banking experience enjoyable. With this approach in mind, we have developed a unique store concept that offers “one-stop” shopping and that includes distinct physical areas or boutiques, such as a “serious about service center,” an “investment opportunity center” and a “computer café,” which make the Bank’s products and services more tangible and accessible. We expect to continue remodeling existing and acquired stores in metropolitan locations to further our retail vision.
Deliver Superior Quality Service.We insist on quality service as an integral part of our culture, from the boardBoard of directorsDirectors to our new sales associates, and believe we are among the first banks to introduce a measurable quality service program. Under our “return on quality” program introduced in 1995, each sales associate’s and store’s performance is evaluated monthly based on specific measurable factors such as the “sales effectiveness ratio” that totals the average number of banking products purchased by each new customer. The evaluations also encompass factors such as the number of new loan and deposit accounts generated in each store, reports by incognito “mystery shoppers” and customer surveys. Based on scores achieved, the “return on quality” program rewards both individual sales associates and store teams with financial incentives.
Through such programs, we believe we can measure the quality of service provided to our customers and maintain employee focus on quality customer service.
Establish Strong Brand Awareness.As a financial services retailer, we devote considerable resources to developing the “Umpqua Bank” brand. This campaign has included the redesign of the corporate logo to emphasize our geographical origin,
5
and promotion of the brand in advertising and merchandise bearing the Bank’s logo, such as mugs, tee-shirts, hats, umbrellas and bags of custom roasted coffee beans. The store’s unique “look and feel” of our stores and our innovative product displays help position us as an innovative, customer friendly retailer of financial products and services. We build consumer preference for our products and services through strong brand awareness. In JanuaryDuring 2005, we announced that the Bank secured naming rights to the former Benj. Franklin Plaza office tower in Portland, Oregon in connection with leasing additional office space to accommodate growth. Thewhich our administrative offices and main branch are now located. This downtown building now displays prominent illuminated signage with the Bank’s name and logo.
Use Technology to Expand Customer Base.Although our strategy will continue to emphasize superior personal service, we continue to expand user-friendly, technology-based systems to attract customers that may prefer to interact with their financial institution electronically. We offer technology-based services including voice response banking, debit cards, automatic payroll deposit programs, “ibank@Umpqua” online banking, bill pay and cash management, advanced function ATMs and an internet web site. We believe the availability of both traditional bank services and electronic banking services enhances our ability to attract a broader range of customers.
Increase Market Share in Existing Markets and Expand Into New Markets.As a result of our innovative retail product orientation, measurable quality service program and strong brand awareness, we believe that there is significant potential to increase business with current customers, to attract new customers in our existing markets and to enter new markets.
3
Marketing and Sales
Our goal of increasing our share of financial services in our market areas is driven by a marketing and sales plan comprisingwith the following key components:
Media Advertising.Over the past five years, we have introduced several comprehensive media advertising campaigns. These campaigns augment our goal of strengthening the “Umpqua Bank” brand image and heightening public awareness of our innovative product delivery system. Campaign slogans such as “Why Not?,” “The Banking Revolution,” “Expect the Unexpected,” and “Different for a Reason” were designed to showcase our innovative style of banking and our commitment to providing quality customer service. Our current “Be a Localist” campaign highlights our commitment to the communities we serve. Our marketing campaigns utilize various forms of media, including television, radio, print, billboards and direct mail flyers and letters.
Retail Store Concept.As a financial services provider, we believe that the store environment is critical to successfully market and sell products and services. Retailers traditionally have displayed merchandise within their stores in a manner designed to encourage customers to purchase their products. Purchases are made on the spur of the moment due to the products’ availability and attractiveness. Umpqua Bank believes this same concept can be applied to financial institutions and accordingly displays financial services and products through tactile merchandising within our stores. Unlike many financial institutions whose strategy is to discourage customers from visiting their facilities in favor of ATMs or other forms of electronic banking, we encourage customers to visit our stores, where they are greeted by well-trained sales associates and encouraged to browse and to make “impulse purchases.” The latest store design, referred to as the “Pearl,” includes features like wireless laptop computers customers can use, opening rooms with fresh fruit and refrigerated beverages and innovative products like the Community Interest Account that pays interest to non-profit organizations. The stores host a variety of after-hours events, from poetry readings to seminars on how to build an art collection.
To bring financial services to our customers in a cost-effective way, we have createdare creating “neighborhood stores.” We build these facilities near high volume traffic areas, close to neighborhood shopping centers. These stand-alone stores are, on average, approximately 1,100 to 3,000 square feet in size and include many of the features of the retail store described above. To strengthen brand recognition, all neighborhood stores arewill be nearly identical in appearance.
Sales Culture.Although a successful marketing program will attract customers to visit our stores, a sales environment and a well-trained sales team are critical to selling our products and services. We believe that our sales culture has become well established throughout the organization due to the unique facility design and our ongoing training of sales associates on all aspects of sales and service. We train our sales associates in our in-house training facility known as “The World’s Greatest Bank University” and pay commissions for the sale of the Bank’s products and services. This sales culture has helped transform us from a traditional community bank to a nationally recognized marketing company focused on selling financial products and services.
6
Umpqua Holdings Corporation
Products and Services
We offer a full array of financial products to meet the banking needs of our market area and targeted customers. To ensure the ongoing viability of itsour product offerings, we regularly examine the desirability and profitability of existing and potential new products. To make it easy for new prospective customers to bank with us and access our products, we offer a “Switch Kit,” which allows a customer to open a primary checking account with Umpqua Bank in less than ten minutes. Other avenues through which customers can access our products include our web site, internet banking through the “ibank@Umpqua” program, and our 24-hour telephone voice response system.
Deposit Products.We offer a traditional array of deposit products, including non-interest-bearing checking accounts, interest-bearing checking and savings accounts, money market accounts and certificates of deposit. These accounts earn interest at rates established by management based on competitive market factors and management’s desire to increase certain types or maturities of deposit liabilities. We also offer a line of “Life Cycle Packages” to increase the number of relationships with customers and increase service fee income. These packages comprise several products bundled together to provide added value to the customer and increase the customer’s ties to us. We also offer a seniors program to customers over fifty years old, which includes an array of banking services and other amenities, such as purchase discounts, vacation trips and seminars.
Retail Brokerage Services.Strand provides a full range of brokerage services including equity and fixed income products, mutual funds, annuities, options, retirement planning and money management services. Additionally, Strand offers life insurance, disability insurance and medical supplement policies. At December 31, 2004,2005, Strand had 5442 Series 7-licensed
4
Umpqua Holdings Corporation
representatives serving clients at 54 stand-alone retail brokerage offices and “Investment Opportunity Centers” located in 11nine Bank stores.
Private Client Services.Our Private Client Services division provides integrated banking and investment products and services by coordinating the offerings of the Bank and Strand, focusing principally on serving high value customers. The “Prosperity” suite of products includes 24-hour access to a private client executive, courier service, preferred rates on deposit and loan products, brokerage accounts and portfolio management.
Commercial and Commercial Real Estate Loans.We offer specialized loans for business and commercial customers, including accounts receivable and inventory financing, equipment loans, real estate construction loans and permanent financing and SBA program financing. Additionally, we offer specially designed loan products for small businesses through our Small Business Lending Center. Commercial real estate lending is the primary focus of our lending activities and a significant portion of our loan portfolio consists of commercial real estate loans. We provide funding for income-producing real estate, though a substantial share of our commercial real estate loans are for owner-occupied projects of commercial loan customers and for borrowers we have financed for many years. For regulatory reporting purposes, some of our commercial loans are designated as real estate loans because the loans are secured by mortgages and trust deeds on real property, even though the loans may be made for purposes of financing commercial activities, such as providing working capital support and funding equipment purchases.
Residential Real Estate Loans.Real estate loans are available for construction, purchase and refinancing of residential owner-occupied and rental properties. Borrowers can choose from a variety of fixed and adjustable rate options and terms. We sell most residential real estate loans that we originate into the secondary market. Real estate loans reflected in the loan portfolio are in large part loans made to commercial customers that are secured by real property.
Consumer Loans.We also provide loans to individual borrowers for a variety of purposes, including secured and unsecured personal loans, home equity and personal lines of credit and motor vehicle loans.
Market Area and Competition
The geographic markets we serve are highly competitive for deposits, loans and retail brokerage services. We compete with traditional banking and thrift institutions, as well as non-bank financial service providers, such as credit unions, brokerage firms and mortgage companies. In our primary market areas of Oregon and Northern California, major banks and large regional banks generally hold dominant market share positions. By virtue of their larger capital bases, thesemajor banks and super-regional banks have significantly larger lending limits than we do and generally have more expansive branch networks. Competition also includes other commercial banks that are community-focused, some of which were recently formed as “de novo” institutions seeking to
7
capitalize on any perceived marketplace void resulting from merger and acquisition consolidation. In some cases, the directors and key officers of de novo banks were previously associated with the Bank or banks previously acquired by Umpqua.
Our primary competitors also include non-bank financial services providers, such as credit unions, brokerage firms, insurance companies and mortgage companies. As the industry becomes increasingly dependent on and oriented toward technology-driven delivery systems, permitting transactions to be conducted by telephone, computer and the internet, such non-bank institutions are able to attract funds and provide lending and other financial services even without offices located in our primary service area. Some insurance companies and brokerage firms compete for deposits by offering rates that are higher than may be appropriate for the Bank in relation to its asset/liability objectives. However, we offer a wide array of deposit products and believe we can compete effectively through rate-driven product promotions. We also compete with full service investment firms for non-bank financial products and services offered by Strand.
Credit unions present a significant competitive challenge for our banking services and products. As credit unions currently enjoy an exemption from income tax, they are able to offer higher deposit rates and lower loan rates than we can on a comparable basis. Credit unions are also not currently subject to certain regulatory constraints, such as the Community Reinvestment Act, which, among other things, requires us to implement procedures to make and monitor loans throughout the communities we serve. Adhering to such regulatory requirements raises the costs associated with our lending activities, and reduces potential operating profits. Accordingly, we seek to compete by focusing on building customer relations, providing superior service and offering a wide variety of commercial banking products that do not compete directly with products and services typically offered by the credit unions, such as commercial real estate loans, inventory and accounts receivable financing, and SBA program loans for qualified businesses.
Many of our stores are located in markets that have experienced growth below statewide averages and the economy of Oregon is particularly sensitive to changes in the demand for forest and high technology products. Currently,Over the past few years, Oregon sufferssuffered from one of the highest unemployment rates in the nation as a lingering result of the recent slowdown in those business segments. With the completion of the Humboldt acquisition, the Bank’s market was expanded to include most of Northern California exclusive of the Bay Area. Like Oregon, some California stores are located in communities with growth rates that lag behind the state average. During the past several years, the State of California has experienced some financial
5
difficulties. Despite these fiscal problems, many of the Northern California communities served by the Bank, particularly those located in the Sacramento Valley region, have continued to experience solid economic growth and significant appreciation of real estate values. To the extent California’s fiscal condition does not improve, there could be an adverse effect on business conditions in the state that would negatively impact the prospects for the Bank’s operations located there.
The following table presents the Bank’s market share percentage and rank for total deposits in each county where we have operations. The table also indicates the ranking by deposit size in each market. All information in the table was obtained from SNL Financial of Charlottesville, Virginia, which compiles deposit data published by the FDIC as of June 30, each year2005 and
8
Umpqua Holdings Corporation
updates the information for any bank mergers completed subsequent to the reporting date. The number of stores shown is as of December 31, 2004.
| | | | | | | | | | | | | | | |
| Oregon | Oregon | | Oregon | |
| | | | | |
| | | Market | | | Market | | | Number | | | Market | | | Market | | | Number | |
| County | | Share | | | Rank | | | of Stores | | | Share | | | Rank | | | of Stores | |
| | | | | |
| Benton | | | 8.0 | % | | | 6 | | | 1 | | | | 8.0 | % | | | 6 | | | 1 | |
| Clackamas | | | 1.6 | % | | | 10 | | | 4 | | | | 2.2 | % | | | 10 | | | 4 | |
| Coos | | | 33.8 | % | | | 1 | | | 5 | | | | 32.0 | % | | | 1 | | | 5 | |
| Curry | | | 15.9 | % | | | 3 | | | 1 | | | | 16.1 | % | | | 3 | | | 1 | |
| Deschutes | | | 0.1 | % | | | 13 | | | 1 | | | | 2.3 | % | | | 9 | | | 1 | |
| Douglas | | | 44.2 | % | | | 1 | | | 9 | | | | 45.4 | % | | | 1 | | | 9 | |
| Jackson | | | 12.2 | % | | | 3 | | | 8 | | | | 12.2 | % | | | 3 | | | 8 | |
| Josephine | | | 16.4 | % | | | 2 | | | 5 | | | | 15.6 | % | | | 2 | | | 5 | |
| Lane | | | 19.7 | % | | | 1 | | | 9 | | | | 18.8 | % | | | 1 | | | 9 | |
| Lincoln | | | 10.1 | % | | | 6 | | | 2 | | | | 10.8 | % | | | 4 | | | 2 | |
| Linn | | | 13.9 | % | | | 4 | | | 3 | | | | 12.3 | % | | | 4 | | | 3 | |
| Marion | | | 3.4 | % | | | 7 | | | 3 | | | | 3.4 | % | | | 8 | | | 3 | |
| Multnomah | | | 1.6 | % | | | 7 | | | 8 | | | | 1.7 | % | | | 6 | | | 8 | |
| Washington | | | 2.4 | % | | | 9 | | | 4 | | | | 4.3 | % | | | 7 | | | 3 | |
| | | | | | | | | | | | | | | |
| California | California | | California | |
| | | | | |
| | | Market | | | Market | | | Number | | | Market | | | Market | | | Number | |
| County | | Share | | | Rank | | | of Stores | | | Share | | | Rank | | | of Stores | |
| | | | | |
| Butte | | | 2.3 | % | | | 9 | | | 2 | | | | 2.3 | % | | | 9 | | | 2 | |
| Colusa | | | 24.8 | % | | | 3 | | | 2 | | | | 23.2 | % | | | 3 | | | 2 | |
| Glenn | | | 20.2 | % | | | 3 | | | 2 | | | | 20.0 | % | | | 3 | | | 2 | |
| Humboldt | | | 30.9 | % | | | 1 | | | 7 | | | | 26.4 | % | | | 1 | | | 7 | |
| Mendocino | | | 2.8 | % | | | 8 | | | 1 | | | | 2.4 | % | | | 7 | | | 1 | |
| Napa | | | 0.4 | % | | | 16 | | | 1 | | | | 0.5 | % | | | 17 | | | 1 | |
| Placer | | | 3.2 | % | | | 8 | | | 3 | | | | 3.9 | % | | | 7 | | | 3 | |
| Shasta | | | 2.1 | % | | | 10 | | | 1 | | | | 1.9 | % | | | 10 | | | 1 | |
| Sutter | | | 15.4 | % | | | 4 | | | 2 | | | | 14.6 | % | | | 4 | | | 2 | |
| Tehama | | | 22.3 | % | | | 2 | | | 2 | | | | 18.5 | % | | | 3 | | | 2 | |
| Trinity | | | 21.9 | % | | | 2 | | | 1 | | | | 25.4 | % | | | 2 | | | 1 | |
| Yolo | | | 1.5 | % | | | 11 | | | 1 | | | | 1.5 | % | | | 11 | | | 1 | |
| Yuba | | | 20.5 | % | | | 3 | | | 2 | | | | 21.7 | % | | | 3 | | | 2 | |
| | | | | | | | | | | | | | | |
| Washington | Washington | | Washington | |
| | | | | |
| | | Market | | | Market | | | Number | | | Market | | | Market | | | Number | |
| County | | Share | | | Rank | | | of Stores | | | Share | | | Rank | | | of Stores | |
| | | | | |
| Clark | | | 2.3% | | | 9 | | | 2 | | | | 2.1 | % | | | 9 | | | 2 | |
| King | | | | 0.0 | % | | | 46 | | | 1 | |
6
Umpqua Holdings Corporation
Lending and Credit Functions
The Bank makes both secured and unsecured loans to individuals and businesses. At December 31, 2004,2005, real estate construction/development, real estate mortgage, commercial/industrial and consumer/other loans represented
9
approximately 14%16%, 62%63%, 21%19% and 3%2% respectively, of the total loan portfolio. Specific risk elements associated with each of the lending categories include, but are not limited to:
| |
| Real Estate Construction/ Development—Inadequate collateral and long-term financing agreements; inability to complete projects on time and within budget. |
|
| Real Estate Mortgage—Changes in local economy affecting borrower’s financial condition; insufficient collateral value due to decline in property value. |
|
| Commercial/ Industrial—Industry concentrations; inability to monitor the condition of collateral (inventory, accounts receivable and equipment); lack of borrower management expertise; increased competition; use of specialized or obsolete equipment as collateral; insufficient cash flow from operations to service debt payment. |
|
| Consumer/ Other—Loss of borrower’s employment; changes in local economy; the inability to monitor collateral (vehicles, boats, and mobile homes). |
Inter-agency guidelines adopted by federal bank regulators mandate that financial institutions establish real estate lending policies with maximum allowable real estate loan-to-value limits, subject to an allowable amount of non-conforming loans as a percentage of capital. We have adopted as loan policy loan-to-value limits that range from 5% to 10% less than the federal guidelines as the maximum allowable limits;for each category; however, policy exceptions are permitted for real estate loan customers with strong financial credentials.
Allowance for Loan Losses (ALL) Methodology
The Bank performs regular credit reviews of the loan portfolio to determine the credit quality of the portfolio and the adherence to underwriting standards. When loans are originated, they are assigned a risk rating that is assessed periodically during the term of the loan through the credit review process. The risk ratings are a primary factor in determining an appropriate amount for the allowance for loan losses. During 2004, the Bank formed a management ALL Committee, which is responsible for, among other things, regular review of the ALL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALL Committee also reviews loans that have been placed on non-accrual status and approves placing loans on orimpaired status. The ALL Committee also approves removing loans that are impaired from impaired orimpairment and non-accrual status. The Bank’s Audit and Compliance & Governance Committee provides board oversight of the ALL process and reviews and approves the ALL methodology on a quarterly basis.
Each risk rating is assessed an inherent credit loss factor that determines the amount of the allowance for loan losses provided for that group of loans with similar risk rating. Credit loss factors may vary by region based on management’s belief that there may ultimately be different credit loss rates experienced in each region.
The regular credit reviews of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALL committee whoCommittee which reviews and approves designating loans as impaired. A loan is considered impaired when based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments.
When we identify a loan as impaired, we measure the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows.
If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment reserve as a specific requirementcomponent to be provided for in the allowance for loan losses.
The combination of the risk rating based allowance requirementscomponent and the impairment reserve allowance requirementscomponent lead to an allocated allowance for loan losses requirement.losses. The Bank also maintains an unallocated allowance amount to provide for other credit losses inherent in a loan portfolio that may not have been contemplated in the credit loss factors.
This unallocated amount generally comprises less than 5% of the allowance. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends.
Management believes that the ALL was adequate as of December 31, 2004.2005. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALL thatand could possibly result in additional charges to the provision for
10
Umpqua Holdings Corporation
loan losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan losses in future periods if the results of their review warrant.
Employees
As of December 31, 2004,2005, we had a total of 1,3281,396 full-time equivalent employees. None of the employees are subject to a collective bargaining agreement and management believes its relations with employees to be good. Umpqua Bank was named #1#9 onOregon Businessmagazine’s 2006 large companies list of “The 100 Best Companies to Work for in Oregon” large companies list for 2004 byOregon Businessmagazine.. Information regarding employment agreements with our executive officers is contained in the Proxy Statement for the 2005 annual meeting of shareholders.Item 11 below.
Government Policies
The operations of our subsidiaries are affected by state and federal legislative changes and by policies of various regulatory authorities. These policies include, for example, statutory maximum legal lending rates, domestic monetary policies of the
7
Board of Governors of the Federal Reserve System, United States fiscal policy, and capital adequacy and liquidity constraints imposed by federal and state regulatory agencies.
Supervision and Regulation
General.We are extensively regulated under federal and state law. These laws and regulations are generally intended to protect depositors and customers, not shareholders. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. Any change in applicable laws or regulations may have a material effect on our business and prospects. Our operations may be affected by legislative changes and by the policies of various regulatory authorities. We cannot accurately predict the nature or the extent of the effects on our business and earnings that fiscal or monetary policies, or new federal or state legislation may have in the future.
Holding Company Regulation.We are a registered financial holding company under the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”), and are subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a financial holding company, we are examined by and file reports with the Federal Reserve.
Financial holding companies are bank holding companies that satisfy certain criteria and are permitted to engage in activities that traditional bank holding companies are not. The qualifications and permitted activities of financial holdings companies are described below under “Regulatory Structure of the Financial Services Industry.Industry.”
Federal and State Bank Regulation.Umpqua Bank, as a state chartered bank with deposits insured by the FDIC, is subject to the supervision and regulation of the Oregon Department of Consumer and Business Services Division of Finance and Corporate Securities, the Washington Department of Financial Institutions, the California Department of Financial Institutions and the FDIC. These agencies may prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices. Our primary state regulator (the State of Oregon) makes regular examinations of the Bank or participates in joint examinations with the FDIC.
The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial institutions within its jurisdiction, the FDIC evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or new facility. A less than “Satisfactory” rating would result in the suspension of any growth of the Bank through acquisitions or opening de novo branches until the rating is improved. As of the most recent CRA examination in November 2004,August 2005, the Bank’s CRA rating was “Satisfactory.”
Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interest of such persons. Extensions of credit must be made on substantially the same terms, including interest rates and collateral as, and follow credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with persons not affiliated with the bank, and must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and other regulatory sanctions.
11
The Federal Reserve Act and related Regulation W limit the amount of certain loan and investment transactions between the Bank and its affiliates, require certain levels of collateral for such loans, and limit the amount of advances to third parties that may be collateralized by the securities of Umpqua or its subsidiaries. Regulation W requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. Umpqua and its subsidiaries have adopted an Affiliate Transactions Policy and have entered into an Affiliate Tax Sharing Agreement.
The Federal Reserve and the FDIC have adopted non-capital safety and soundness standards for institutions under their authority. These standards cover internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that it will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. We believe that the Bank is in compliance with these standards.
8
Umpqua Holdings Corporation
Federal Deposit Insurance.The Bank’s deposits are currently insured to a maximum of $100,000 per depositor by the FDIC. In general, bank deposits are insured through the Bank Insurance Fund (“BIF”) and savings institution deposits are insured through the Savings Association Insurance Fund (“SAIF”). A SAIF member may merge with a bank as long as the acquiring bank continues to pay the SAIF insurance assessments on deposits acquired. The Bank pays SAIF assessments on certain deposits related to branches that Humboldt acquired from savings institutions prior to July 2004, when the Humboldt merger was completed.
The amount of FDIC assessments paid by each member institution is based on its relative risk of default as measured by regulatory capital levels, regulatory examination ratings and other factors. The current assessment rates range from $0.00 to $0.27 per $100 of deposits annually. At December 31, 2004,2005, the Bank’s assessment rate was $0.00. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis in order to manage the BIF and SAIF to prescribed statutory target levels. An increase in the assessment rate could have a material adverse effect on our earnings, depending upon the amount of the increase.
The FDIC may terminate the deposit insurance of any insured depository institution if it determines that the institution has engaged in or is engaging in unsafe and unsound banking practices, is in an unsafe or unsound condition or has violated any applicable law, regulation or order or any condition imposed in writing by, or pursuant to, any written agreement with the FDIC. The termination of deposit insurance for the Bank could have a material adverse effect on our financial condition and results of operations due to the fact that the Bank’s liquidity position would likely be affected by deposit withdrawal activity.
Dividends.Under the Oregon Bank Act and the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the Bank is subject to restrictions on the payment of cash dividends to its parent company. Dividends paid by the Bank provide substantially all of Umpqua’s (as a stand-alone parent company) cash flow. A bank may not pay cash dividends if that payment would reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. In addition, under the Oregon Bank Act, the amount of the dividend may not be greater than net unreserved retained earnings, after first deducting to the extent not already charged against earnings or reflected in a reserve, all bad debts, which are debts on which interest is unpaid and past due at least six months; all other assets charged off as required by the Oregon Director or state or federal examiner; and all accrued expenses, interest and taxes. In addition, state and federal regulatory authorities are authorized to prohibit banks and holding companies from paying dividends that would constitute an unsafe or unsound banking practice. We are not currently subject to any regulatory restrictions on dividends other than those noted above.
During the second quarter of 2004, Umpqua’s board of directors approved increasing the quarterly cash dividend rate to $0.06 from $0.04 per share. This increase was made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels and expected asset growth. We expect that the dividend rate will be reassessed on a quarterly basis by the board of directors in accordance with the dividend policy.
12
Umpqua Holdings Corporation
Capital Adequacy.The federal and state bank regulatory agencies use capital adequacy guidelines in their examination and regulation of holding companies and banks. If capital falls below the minimum levels established by these guidelines, a holding company or a bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities.
The FDIC and Federal Reserve have adopted risk-based capital guidelines for holding companies and banks. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profile among holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The capital adequacy guidelines limit the degree to which a holding company or bank may leverage its equity capital.
Federal regulations establish minimum requirements for the capital adequacy of depository institutions, such as the Bank. Banks with capital ratios below the required minimums are subject to certain administrative actions, including prompt corrective action, the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing.
FDICIA requires federal banking regulators to take “prompt corrective action” with respect to a capital-deficient institution, including requiring a capital restoration plan and restricting certain growth activities of the institution. Umpqua could be required to guarantee any such capital restoration plan required of Umpquathe Bank if Umpquathe Bank became undercapitalized. Pursuant to FDICIA, regulations were adopted defining five capital levels: well capitalized, adequately capitalized, undercapitalized, severely undercapitalized and critically undercapitalized. Under the regulations, the Bank is considered “well capitalized” as of December 31, 2004.2005.
Effects of Government Monetary Policy.Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve
9
implements national monetary policy for such purposes as curbing inflation and combating recession, bythrough its open market operations in U.S. Government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits. These activities influence growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.
Broker-Dealer and Related Regulatory Supervision.Strand is a member of the National Association of Securities Dealers and is subject to its regulatory supervision. Areas subject to this regulatory review include compliance with trading rules, financial reporting, investment suitability for clients, and compliance with stock exchange rules and regulations.
Regulatory Structure of the Financial Services Industry.Federal laws and regulations governing banking and financial services underwent significant changes in recent years and are subject to significant changes in the future. From time to time, legislation is introduced in the United States Congress that containcontains proposals for altering the structure, regulation, and competitive relationships of the nation’s financial institutions. If enacted into law, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, and other financial institutions. Whether or in what form any such legislation may be adopted or the extent to which our business might be affected thereby cannot be predicted.
The GLB Act, enacted in November 1999, repealed sections of the Banking Act of 1933, commonly referred to as the Glass-Steagall Act, that prohibited banks from engaging in securities activities, and prohibited securities firms from engaging in banking. The GLB Act created a new form of holding company, known as a financial holding company, that is permitted to acquire subsidiaries that are variously engaged in banking, securities underwriting and dealing, and insurance underwriting.
A bank holding company, if it meets specified requirements, may elect to become a financial holding company by filing a declaration with the Federal Reserve, and may thereafter provide its customers with a broader spectrum of products and services than a traditional bank holding company is permitted to do. A financial holding company may, through a subsidiary, engage in any activity that is deemed to be financial in nature and activities that are incidental or complementary to activities that are financial in nature. These activities include traditional banking services and activities previously permitted to bank
13
holding companies under Federal Reserve regulations, but also include underwriting and dealing in securities, providing investment advisory services, underwriting and selling insurance, merchant banking (holding a portfolio of commercial businesses, regardless of the nature of the business, for investment), and arranging or facilitating financial transactions for third parties.
To qualify as a financial holding company, the bank holding company must be deemed to be well-capitalized and well-managed, as those terms are used by the Federal Reserve. In addition, each subsidiary bank of a bank holding company must also be well-capitalized and well-managed and be rated at least “satisfactory” under the Community Reinvestment Act. A bank holding company that does not qualify, or has not chosen, to become a financial holding company must limit its activities to traditional banking activities and those non-banking activities the Federal Reserve has deemed to be permissible because they are closely related to the business of banking.
The GLB Act also includes provisions to protect consumer privacy by prohibiting financial services providers, whether or not affiliated with a bank, from disclosing non-public personal, financial information to unaffiliated parties without the consent of the customer, and by requiring annual disclosure of the provider’s privacy policy.
Legislation enacted by Congress in 1995 permits interstate banking and branching, which allows banks to expand nationwide through acquisition, consolidation or merger. Under this law, an adequately capitalized bank holding company may acquire banks in any state or merge banks across state lines if permitted by state law. Further, banks may establish and operate branches in any state subject to the restrictions of applicable state law. Under Oregon law, an out-of-state bank or bank holding company may merge with or acquire an Oregon state chartered bank or bank holding company if the Oregon bank, or in the case of a bank holding company, the subsidiary bank, has been in existence for a minimum of three years, and the law of the state in which the acquiring bank is located permits such merger. Branches may not be acquired or opened separately, but once an out-of-state bank has acquired branches in Oregon, either through a merger with or acquisition of substantially all the assets of an Oregon bank, the acquirer may open additional branches. The Bank now has the ability to open additional de novo branches in the states of Oregon, California and Washington.
10
Umpqua Holdings Corporation
Anti-Terrorism Legislation.The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (“USA Patriot Act”), enacted in 2001:
| | |
| | • | prohibits banks from providing correspondent accounts directly to foreign shell banks; |
| |
| | • | imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; |
| |
| | • | requires financial institutions to establish an anti-money-laundering (“AML”) compliance program; and |
| |
| | • | generally eliminates civil liability for persons who file suspicious activity reports. |
The USA Patriot Act also increases governmental powers to investigate terrorism, including expanded government access to account records. The Department of the Treasury is empowered to administer and make rules to implement the Act. While the USA Patriot Act, to some degree, affects our record-keeping and reporting expenses, we do not believe that the Act has a material adverse effect on our business and operations. Should the Bank’s AML compliance program be deemed insufficient by federal regulators, we would not be able to grow through acquiring other institutions or opening de novo branches.
Sarbanes-Oxley Act of 2002.The Sarbanes-Oxley Act of 2002 addresses public company corporate governance, auditing, accounting, executive compensation and enhanced and timely disclosure of corporate information.
The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and regulation of the relationship between a boardBoard of directorsDirectors and management and between a boardBoard of directorsDirectors and its committees.
The Sarbanes-Oxley Act provides for, among other things:
| | |
| | • | prohibition on personal loans by Umpqua to its directors and executive officers except loans made by the Bank in accordance with federal banking regulations; |
14
Umpqua Holdings Corporation
| | |
| | • | independence requirements for Board audit committee members and our auditors; |
| |
| | • | certification of Exchange Act reports by the chief executive officer, and the chief financial officer and principal accounting officer; |
| |
| | • | disclosure of off-balance sheet transactions; |
| |
| | • | expedited reporting of stock transactions by insiders; and |
| |
| | • | increased criminal penalties for violations of securities laws. |
The Sarbanes-Oxley Act also requires:
| | |
| • | management to establish, maintain and evaluate disclosure controls and procedures; |
|
| • | report on its annual assessment of the effectiveness of internal controls over financial reporting; |
|
| • | our external auditor to attest to management’s assessment of internal controls. |
The SEC has adopted regulations to implement various provisions of the Sarbanes-Oxley Act, including disclosures in periodic filings pursuant to the Exchange Act. Also, in response to the Sarbanes-Oxley Act, NASDAQ adopted new standards for listed companies. In 2004, the Sarbanes-Oxley Act substantially increased our reporting and compliance expenses, but we do not believe that the Act will have a material adverse effect on our business and operations.
ITEM 1A. RISK FACTORS.
The following summarizes certain risks that management believes are specific to our business. This should not be viewed as including all risks.
Merger with Western Sierra Bancorp creates integration risk.
On February 8, 2006, Umpqua announced the signing of a definitive agreement to acquire Western Sierra Bancorp and its principal operating subsidiaries, Western Sierra Bank, Central California Bank, Lake Community Bank and Auburn Community Bank. The merger is expected to generate cost savings and expense reductions through the consolidation of facilities,
11
increased purchasing efficiencies, and elimination of duplicative technology, operations, outside services and redundant staff. The combined company may fail to realize some or all of the anticipated cost savings and other benefits of the transaction.
We are pursuing an aggressive growth strategy that is expected to include mergers and acquisitions, which could create integration risks.
Umpqua is a dynamic organization that is among the fastest-growing community financial services organizations in the United States. Since 2000, we have completed the acquisition and integration of five other financial institutions. There is no assurance that future acquisitions will be successfully integrated. We have announced our intent to open new stores in Oregon, Washington and California, and to continue our growth strategy. If we pursue our growth strategy too aggressively, or if factors beyond management’s control divert attention away from our integration plans, we might not be able to realize some or all of the anticipated benefits. Moreover, we are dependent on the efforts of key personnel to achieve the synergies associated with our acquisitions. The loss of one or more of our key persons could have a material adverse effect upon our ability to achieve the anticipated benefits.
Store construction may not be completed smoothly or within budget, which could result in reduced earnings.
The Bank has, over the past several years, been transformed from a traditional community bank into a community-oriented financial services retailer. We have announced plans to build new stores in Oregon, Washington and California as part of our de novo branching strategy. We also continue to remodel acquired bank branches to resemble retail stores that include distinct physical areas or boutiques such as a “serious about service center,” an “investment opportunity center” and a “computer cafe.” Store construction involves significant expense and risks associated with locating store sites and delays in obtaining permits and completing construction. Remodeling involves significant expense, disrupts banking activities during the remodeling period, and presents a new look and feel to the banking services and products being offered. There are risks that construction or remodeling costs will exceed forecasted budgets and that there may be delays in completing the projects, which could cause disruption in those markets.
Involvement in non-bank business creates risks associated with securities industry.
Strand’s retail brokerage operations present special risks not borne by community banks. For example, the brokerage industry is subject to fluctuations in the stock market that may have a significant adverse impact on transaction fees, customer activity and investment portfolio gains and losses. Likewise, additional or modified regulations may adversely affect Strand’s operations. The departure of established brokers often results in the loss of customer accounts. A significant decline in fees and commissions or trading losses suffered in the investment portfolio could adversely affect Strand’s income and potentially require the contribution of additional capital to support its operations. Strand is subject to claim arbitration risk arising from customers who claim their investments were not suitable or that their portfolios were too actively traded. These risks increase when the market, as a whole, declines. The risks associated with retail brokerage may not be supported by the income generated by those operations. See Management’s Discussion and Analysis of Financial Condition and Results of Operations— “Non-interest Income” in Item 7 of this report.
The majority of our assets are loans, which if not paid would result in losses to the Bank in excess of loss allowances.
The Bank, like other lenders, is subject to credit risk, which is the risk of losing principal or interest due to borrowers’ failure to repay loans in accordance with their terms. Underwriters and documentation controls do not always work properly. A downturn in the economy or the real estate market in our market areas or a rapid increase in interest rates could have a negative effect on collateral values and borrowers’ ability to repay. To the extent loans are not paid timely by borrowers, the loans are placed on non-accrual status, thereby reducing interest income. To the extent loan charge-offs exceed expectations, additional amounts may be charged to the provision for loan losses, which reduces income.
No assurance can be given that an additional provision for loan losses or unfunded commitments will not be required. See Management’s Discussion and Analysis of Financial Condition and Results of Operations— “Allowance for Loan Losses and Reserve for Unfunded Commitments”, “Provision for Loan Losses” and “Asset Quality and Non-Performing Assets” in Item 7 of this report.
A rapid change in interest rates could make it difficult to maintain our current interest income spread and could result in reduced earnings.
Our earnings are largely derived from net interest income, which is interest income and fees earned on loans and investments, less interest paid on deposits and other borrowings. Interest rates are highly sensitive to many factors that are beyond the control of our management, including general economic conditions and the policies of various governmental and regulatory
12
Umpqua Holdings Corporation
authorities. As interest rates change, net interest income is affected. With fixed rate assets (such as fixed rate loans and most investment securities) and liabilities (such as certificates of deposit), the effect on net interest income depends on the cash flows associated with the maturity of the asset or liability. Asset/ Liability Management policies may not be successfully implemented and from time to time our risk position is not balanced. An unanticipated rapid decrease or increase in interest rates could have an adverse effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore on the level of net interest income. For instance, any rapid increase in interest rates in the future could result in interest expense increasing faster than interest income because of fixed rate loans and longer-term investments. Further, substantially higher interest rates generally reduce loan demand and may result in slower loan growth than previously experienced. See Quantitative and Qualitative Disclosures about Market Risk in Item 7A of this report.
The volatility of our mortgage banking business can adversely affect earnings if our mitigating strategies are not successful.
Changes in interest rates greatly affect the mortgage banking business. One of the principal risks in this area is prepayment of mortgages and their effect on the value of mortgage servicing rights (“MSR”). Hedging strategies to mitigate risk depend on management decisions. If these decisions and strategies are not successful, our net income could be adversely affected. See Management’s Discussion and Analysis of Financial Condition and Results of Operations— “Mortgage Servicing Rights” in Item 7 of this report.
Our banking and brokerage operations are subject to extensive government regulation that is expected to become more burdensome, increase our costs and/or make us less competitive compared to financial services firms that are not subject to the same regulation.
We and our subsidiaries are subject to extensive regulation under federal and state laws. These laws and regulations are primarily intended to protect customers, depositors and the deposit insurance fund, rather than shareholders. The Bank is an Oregon state-chartered commercial bank whose primary regulator is the Oregon Division of Finance and Corporate Securities. The Bank is also subject to the supervision by and the regulations of the Washington Department of Financial Institutions, the California Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”), which insures bank deposits. Strand is subject to extensive regulation by the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Umpqua is subject to regulation and supervision by the Board of Governors of the Federal Reserve System, the SEC and NASDAQ. Federal and state regulations may place banks at a competitive disadvantage compared to less regulated competitors such as finance companies, credit unions, mortgage banking companies and leasing companies. Further, future changes in federal and state banking and brokerage regulations could adversely affect our operating results and ability to continue to compete effectively.
The financial services industry is highly competitive.
We face significant competition in attracting and retaining deposits and making loans as well as in providing other financial services throughout our market area. We face pricing competition for loans and deposits. We also face competition with respect to customer convenience, product lines, accessibility of service and service capabilities. Our most direct competition comes from other banks, brokerages, mortgage companies and savings institutions. We also face competition from credit unions, government-sponsored enterprises, mutual fund companies, insurance companies and other non-bank businesses.
Our business is highly reliant on technology and our ability to manage the operational risks associated with technology.
We depend on internal and outsourced technology to support all aspects of our business operations. Interruption or failure of these systems creates a risk of business loss such as civil fines or damage claims from privacy breaches, and adverse customer experience. Risk management programs are expensive to maintain and will not protect the company from all risks associated with maintaining the security of customer information, proprietary data, external and internal intrusions, disaster recovery and failures in the controls used by vendors.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIESPROPERTIES.
The executive offices of Umpqua are located at One SW Columbia Street in Portland, Oregon in office space that is leased. The main office of Strand is located at 200 SW Market Street in Portland, Oregon in office space that is leased. The Bank owns its main office located in Roseburg, Oregon. At December 31, 2004,2005, the Bank conducted business at 9396 locations includingin Northern California, Oregon and Washington along the main office,I-5 corridor; in Bend, Oregon; along the Northern California and Oregon Coasts; and in Bellevue, Washington, of which 55 are owned and 3841 are leased under various agreements. As of December 31, 2004,
13
2005, the Bank also operated 2112 facilities for the purpose of administrative functions, such as data processing, of which 43 are owned and 179 are leased. All facilities are in a good state of repair and appropriately designed for use as banking or administrative office facilities. As of December 31, 2004,2005, Strand leased 5four stand-alone offices from unrelated third parties and also leased space in 11nine Bank stores under lease agreements that are based on market rates.
Additional information with respect to owned premises and lease commitments is included in Notes 7 and 13,14, respectively, of theNotes to Consolidated Financial Statementsin Item 8 below.
ITEM 3. LEGAL PROCEEDINGSPROCEEDINGS.
Because of the nature of our business, we are involved in legal proceedings in the regular course of business. At this time, we do not believe that there is pending litigation the unfavorable outcome of which would result in a material adverse change to our financial condition, results of operations or cash flows.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERSHOLDERS.
(a) Not Applicable.
(b) Not Applicable.
(c) Not Applicable.
(d) Not Applicable.No matters were submitted to the shareholders of the Company, through the solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 2005.
1514
Umpqua Holdings Corporation
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Our Common Stock is traded on the NASDAQ Stock Market National Market System under the symbol “UMPQ.” As of December 31, 2004,2005, there were 100,000,000 common shares authorized for issuance. The following table presents the high and low sales prices of our common stock for each period, based on inter-dealer prices that do not include retail mark-ups, mark-downs or commissions:
| | | | | | | | | | | | | | | | | |
| | | | | | | Cash Dividend | | | | | | | Cash Dividend | |
| Quarter Ended | | High | | | Low | | | Per Share | | | High | | | Low | | | Per Share | |
| | | | | |
| December 31, 2005 | | | $ | 29.25 | | $ | 22.58 | | $ | 0.12 | |
| September 30, 2005 | | | $ | 25.30 | | $ | 23.10 | | $ | 0.08 | |
| June 30, 2005 | | | $ | 24.23 | | $ | 19.63 | | $ | 0.06 | |
| March 31, 2005 | | | $ | 25.41 | | $ | 22.99 | | $ | 0.06 | |
| December 31, 2004 | | $ | 26.39 | | $ | 22.37 | | $ | 0.06 | | | $ | 26.39 | | $ | 22.37 | | $ | 0.06 | |
| September 30, 2004 | | $ | 23.74 | | $ | 20.73 | | $ | 0.06 | | | $ | 23.74 | | $ | 20.73 | | $ | 0.06 | |
| June 30, 2004 | | $ | 21.09 | | $ | 18.13 | | $ | 0.06 | | | $ | 21.09 | | $ | 18.13 | | $ | 0.06 | |
| March 31, 2004 | | $ | 21.50 | | $ | 19.23 | | $ | 0.04 | | | $ | 21.50 | | $ | 19.23 | | $ | 0.04 | |
| December 31, 2003 | | $ | 22.21 | | $ | 18.90 | | $ | 0.04 | | |
| September 30, 2003 | | $ | 19.75 | | $ | 18.15 | | $ | 0.04 | | |
| June 30, 2003 | | $ | 21.12 | | $ | 17.95 | | $ | 0.04 | | |
| March 31, 2003 | | $ | 20.50 | | $ | 16.25 | | $ | 0.04 | | |
As of February 28, 2005,2006, our common stock was held of record by approximately 3,5243,472 shareholders, a number that does not include beneficial owners who hold shares in “street name”, or shareholders from previously acquired companies that have not exchanged their stock. At December 31, 2004,2005, a total of 1,877,3081,845,690 stock options and 47,020 restricted shares were outstanding. Additional information about stock options and restricted shares is included in Note 1920 of theNotes to Consolidated Financial Statementsin Item 8 below and in Item 12 below.
The payment of future cash dividends is at the discretion of our Board and subject to a number of factors, including results of operations, general business conditions, growth, financial condition and other factors deemed relevant by the boardBoard of directors.Directors. Further, our ability to pay future cash dividends is subject to certain regulatory requirements and restrictions discussed in theSupervision and Regulationsection in Item 1 above. During the fourth quarter of 2005, Umpqua’s board of directors approved increasing the quarterly cash dividend rate to $0.12 from $0.08 per share in the third quarter of 2005 and $0.06 per share in the second quarter of 2005. This increase was made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels and expected asset growth. We expect that the dividend rate will be reassessed on a quarterly basis by the board of directors in accordance with the dividend policy.
We have a dividend reinvestment plan that permits shareholder participants to purchase shares at the then-current market price in lieu of the receipt of cash dividends. Shares issued in connection with the dividend reinvestment plan are purchased in open market transactions.
Although we have an authorized stock repurchase plan and certain stock option plans which provide for the payment of the option exercise price by tendering previously owned shares, no shares were repurchased, and no shares were tendered in connection with option exercises during the three months ended December 31, 2004. The(b) Not applicable.
(c) Our share repurchase plan, which was approved by the Board and announced in August 2003, originally authorized the repurchase of up to 1.0 million shares. The authorization was subsequently amended to increase the repurchase limit initially to 1.5 million shares. On June 8, 2005, the Company announced an expansion of the repurchase plan by increasing the repurchase limit to 2.5 million shares and extending the plan to expire on June 30, 2007. No shares were repurchased during the three months ended December 31, 2005. As of December 31, 2004, 1.12005, 2.1 million shares were available for repurchase under the plan,plan.
We also have certain stock option and restricted stock plans which expires on June 30,provide for the payment of the option exercise price or withholding taxes by tendering previously owned or recently vested shares. No shares were tendered in connection with option exercises during the three months ended December 31, 2005. Restricted shares cancelled to pay withholding taxes totaled 204 shares during the three months ended December 31, 2005.
1615
Umpqua Holdings Corporation
ITEM 6. SELECTED FINANCIAL DATADATA.
Umpqua Holdings Corporation
Annual Financial Trends
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share data) | (in thousands, except per share data) | | | | 2003 | | | 2002 | | | 2001 | | | 2000 | | (in thousands, except per share data) | | | | 2004 | | | 2003 | | | 2002 | | | 2001 | |
| | | | 2004 | | | | | | | | | | | | 2005 | | | | | | | | | |
| | | | | |
| Interest income | Interest income | | $ | 198,058 | | $ | 142,132 | | $ | 100,325 | | $ | 88,038 | | $ | 82,068 | | Interest income | | $ | 282,276 | | $ | 198,058 | | $ | 142,132 | | $ | 100,325 | | $ | 88,038 | |
| Interest expense | Interest expense | | | 40,371 | | | 28,860 | | | 23,797 | | | 32,409 | | | 31,362 | | Interest expense | | | 72,994 | | | 40,371 | | | 28,860 | | | 23,797 | | | 32,409 | |
| | | | | | | |
| | Net interest income | | | 157,687 | | | 113,272 | | | 76,528 | | | 55,629 | | | 50,706 | | Net interest income | | | 209,282 | | | 157,687 | | | 113,272 | | | 76,528 | | | 55,629 | |
| Provision for loan losses | Provision for loan losses | | | 7,321 | | | 4,550 | | | 3,888 | | | 3,190 | | | 1,936 | | Provision for loan losses | | | 2,468 | | | 7,321 | | | 4,550 | | | 3,888 | | | 3,190 | |
| Non-interest income | Non-interest income | | | 41,373 | | | 38,001 | | | 27,657 | | | 22,716 | | | 16,960 | | Non-interest income | | | 47,782 | | | 41,373 | | | 38,001 | | | 27,657 | | | 22,716 | |
| Non-interest expense | Non-interest expense | | | 119,582 | | | 93,187 | | | 63,962 | | | 54,271 | | | 46,220 | | Non-interest expense | | | 146,794 | | | 119,582 | | | 93,187 | | | 63,962 | | | 54,271 | |
| Merger-related expense | Merger-related expense | | | 5,597 | | | 2,082 | | | 2,752 | | | 6,610 | | | 1,972 | | Merger-related expense | | | 262 | | | 5,597 | | | 2,082 | | | 2,752 | | | 6,610 | |
| | | | | | | |
| | Income before income taxes and discontinued operations | | | 66,560 | | | 51,454 | | | 33,583 | | | 14,274 | | | 17,538 | | Income before income taxes and discontinued operations | | | 107,540 | | | 66,560 | | | 51,454 | | | 33,583 | | | 14,274 | |
| Provision for income taxes | Provision for income taxes | | | 23,270 | | | 17,970 | | | 12,032 | | | 6,138 | | | 6,738 | | Provision for income taxes | | | 37,805 | | | 23,270 | | | 17,970 | | | 12,032 | | | 6,138 | |
| | | | | | | |
| Income from continuing operations | Income from continuing operations | | | 43,290 | | | 33,484 | | | 21,551 | | | 8,136 | | | 10,800 | | Income from continuing operations | | | 69,735 | | | 43,290 | | | 33,484 | | | 21,551 | | | 8,136 | |
| Income from discontinued operations, net of tax | Income from discontinued operations, net of tax | | | 3,876 | | | 635 | | | 417 | | | 414 | | | 309 | | Income from discontinued operations, net of tax | | | — | | | 3,876 | | | 635 | | | 417 | | | 414 | |
| | | | | | | |
| | Net income | | $ | 47,166 | | $ | 34,119 | | $ | 21,968 | | $ | 8,550 | | $ | 11,109 | | |
| Net income | | Net income | | $ | 69,735 | | $ | 47,166 | | $ | 34,119 | | $ | 21,968 | | $ | 8,550 | |
| | | | | | | |
| YEAR END | YEAR END | | | | | | | | | | | | | | | | | YEAR END | | | | | | | | �� | | | | | | | | | |
| Assets | Assets | | $ | 4,873,035 | | $ | 2,963,815 | | $ | 2,555,964 | | $ | 1,428,711 | | $ | 1,159,150 | | Assets | | $ | 5,360,639 | | $ | 4,873,035 | | $ | 2,963,815 | | $ | 2,555,964 | | $ | 1,428,711 | |
| Earning assets | Earning assets | | | 4,201,709 | | | 2,589,607 | | | 2,210,834 | | | 1,281,227 | | | 1,044,750 | | Earning assets | | | 4,622,071 | | | 4,201,709 | | | 2,589,607 | | | 2,210,834 | | | 1,281,227 | |
| Loans | Loans | | | 3,467,904 | | | 2,003,587 | | | 1,778,315 | | | 1,016,142 | | | 752,010 | | Loans | | | 3,921,631 | | | 3,467,904 | | | 2,003,587 | | | 1,778,315 | | | 1,016,142 | |
| Deposits | Deposits | | | 3,799,107 | | | 2,378,192 | | | 2,103,790 | | | 1,204,893 | | | 993,577 | | Deposits | | | 4,286,266 | | | 3,799,107 | | | 2,378,192 | | | 2,103,790 | | | 1,204,893 | |
| Shareholders’ equity | Shareholders’ equity | | $ | 687,613 | | $ | 318,969 | | $ | 288,159 | | $ | 135,301 | | $ | 111,486 | | Shareholders’ equity | | | 738,261 | | | 687,613 | | | 318,969 | | | 288,159 | | | 135,301 | |
| Shares outstanding | Shares outstanding | | | 44,211 | | | 28,412 | | | 27,981 | | | 19,953 | | | 18,728 | | Shares outstanding | | | 44,556 | | | 44,211 | | | 28,412 | | | 27,981 | | | 19,953 | |
| AVERAGE | AVERAGE | | | | | | | | | | | | | | | | | AVERAGE | | | | | | | | | | | | | | | | |
| Assets | Assets | | $ | 3,919,985 | | $ | 2,710,388 | | $ | 1,614,775 | | $ | 1,223,718 | | $ | 1,074,506 | | Assets | | $ | 5,053,417 | | $ | 3,919,985 | | $ | 2,710,388 | | $ | 1,614,775 | | $ | 1,223,718 | |
| Earning assets | Earning assets | | | 3,392,475 | | | 2,359,142 | | | 1,449,250 | | | 1,111,941 | | | 981,058 | | Earning assets | | | 4,353,696 | | | 3,392,475 | | | 2,359,142 | | | 1,449,250 | | | 1,111,941 | |
| Loans | Loans | | | 2,679,576 | | | 1,915,170 | | | 1,157,423 | | | 838,348 | | | 695,214 | | Loans | | | 3,628,548 | | | 2,706,346 | | | 1,915,170 | | | 1,157,423 | | | 838,348 | |
| Deposits | Deposits | | | 3,090,497 | | | 2,212,082 | | | 1,364,424 | | | 1,043,564 | | | 911,061 | | Deposits | | | 4,002,153 | | | 3,090,497 | | | 2,212,082 | | | 1,364,424 | | | 1,043,564 | |
| Shareholders’ equity | Shareholders’ equity | | $ | 490,724 | | $ | 303,569 | | $ | 161,774 | | $ | 118,411 | | $ | 104,162 | | Shareholders’ equity | | | 711,765 | | | 490,724 | | | 303,569 | | | 161,774 | | | 118,411 | |
| Basic shares outstanding | Basic shares outstanding | | | 35,804 | | | 28,294 | | | 21,054 | | | 18,782 | | | 18,713 | | Basic shares outstanding | | | 44,438 | | | 35,804 | | | 28,294 | | | 21,054 | | | 18,782 | |
| Diluted shares outstanding | Diluted shares outstanding | | | 36,345 | | | 28,666 | | | 21,306 | | | 19,006 | | | 18,899 | | Diluted shares outstanding | | | 45,011 | | | 36,345 | | | 28,666 | | | 21,306 | | | 19,006 | |
| PER SHARE DATA | PER SHARE DATA | | | | | | | | | | | | | | | | | PER SHARE DATA | | | | | | | | | | | | | | | | |
| Basic earnings | Basic earnings | | $ | 1.32 | | $ | 1.21 | | $ | 1.04 | | $ | 0.46 | | $ | 0.59 | | Basic earnings | | $ | 1.57 | | $ | 1.32 | | $ | 1.21 | | $ | 1.04 | | $ | 0.46 | |
| Diluted earnings | Diluted earnings | | | 1.30 | | | 1.19 | | | 1.03 | | | 0.45 | | | 0.59 | | Diluted earnings | | | 1.55 | | | 1.30 | | | 1.19 | | | 1.03 | | | 0.45 | |
| Basic earnings—continuing operations | Basic earnings—continuing operations | | | 1.21 | | | 1.18 | | | 1.02 | | | 0.43 | | | 0.58 | | Basic earnings—continuing operations | | | 1.57 | | | 1.21 | | | 1.18 | | | 1.02 | | | 0.43 | |
| Diluted earnings—continuing operations | Diluted earnings—continuing operations | | | 1.19 | | | 1.17 | | | 1.01 | | | 0.43 | | | 0.57 | | Diluted earnings—continuing operations | | | 1.55 | | | 1.19 | | | 1.17 | | | 1.01 | | | 0.43 | |
| Book value | Book value | | | 15.55 | | | 11.23 | | | 10.30 | | | 6.78 | | | 5.95 | | Book value | | | 16.57 | | | 15.55 | | | 11.23 | | | 10.30 | | | 6.78 | |
Tangible book value | Tangible book value | | | 6.31 | | | 5.61 | | | 4.55 | | | 5.49 | | | 5.36 | | Tangible book value | | | 7.40 | | | 6.31 | | | 5.61 | | | 4.55 | | | 5.49 | |
| Cash dividends declared | Cash dividends declared | | $ | 0.22 | | $ | 0.16 | | $ | 0.16 | | $ | 0.22 | | $ | 0.19 | | Cash dividends declared | | | 0.32 | | | 0.22 | | | 0.16 | | | 0.16 | | | 0.22 | |
| PERFORMANCE RATIOS | | PERFORMANCE RATIOS | | | | | | | | | | | | | | | | |
| Return on average assets | | Return on average assets | | | 1.38% | | | 1.20% | | | 1.26% | | | 1.36% | | | 0.70% | |
| Return on average shareholders’ equity | | Return on average shareholders’ equity | | | 9.80% | | | 9.61% | | | 11.24% | | | 13.58% | | | 7.22% | |
| Efficiency ratio(2) | | Efficiency ratio(2) | | | 56.93% | | | 60.58% | | | 62.05% | | | 62.73% | | | 75.74% | |
| Efficiency ratio—Bank* | | Efficiency ratio—Bank* | | | 52.47% | | | 53.51% | | | 55.49% | | | 55.58% | | | 58.23% | |
| Average equity to average assets | | Average equity to average assets | | | 14.08% | | | 12.52% | | | 11.20% | | | 10.02% | | | 9.68% | |
| Leverage ratio(3) | | Leverage ratio(3) | | | 10.09% | | | 9.55% | | | 8.73% | | | 8.38% | | | 8.83% | |
| Net interest margin (fully tax equivalent)(4) | | Net interest margin (fully tax equivalent)(4) | | | 4.84% | | | 4.68% | | | 4.85% | | | 5.38% | | | 5.12% | |
| Non-interest revenue to total revenue | | Non-interest revenue to total revenue | | | 18.59% | | | 20.78% | | | 25.12% | | | 26.55% | | | 28.99% | |
| Dividend payout ratio | | Dividend payout ratio | | | 20.38% | | | 16.67% | | | 13.22% | | | 15.38% | | | 47.83% | |
17
| | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share data) | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | |
| | |
| PERFORMANCE RATIOS | | | | | | | | | | | | | | | | | | | | |
| Return on average assets | | | 1.20% | | | | 1.26% | | | | 1.36% | | | | 0.70% | | | | 1.03% | |
| Return on average shareholders’ equity | | | 9.61% | | | | 11.24% | | | | 13.58% | | | | 7.22% | | | | 10.67% | |
| Efficiency ratio | | | 60.58% | | | | 62.05% | | | | 62.73% | | | | 75.74% | | | | 69.40% | |
| Efficiency ratio—Bank* | | | 53.51% | | | | 55.49% | | | | 55.58% | | | | 58.23% | | | | 59.05% | |
| Average equity to average assets | | | 12.52% | | | | 11.20% | | | | 10.02% | | | | 9.68% | | | | 9.69% | |
| Leverage ratio | | | 9.55% | | | | 8.73% | | | | 8.38% | | | | 8.83% | | | | 8.02% | |
| Net interest margin (fully tax equivalent) | | | 4.68% | | | | 4.85% | | | | 5.38% | | | | 5.12% | | | | 5.30% | |
| Non-interest revenue to total revenue | | | 20.78% | | | | 25.12% | | | | 26.55% | | | | 28.99% | | | | 25.06% | |
| Dividend payout ratio | | | 16.67% | | | | 13.22% | | | | 15.38% | | | | 47.83% | | | | 32.20% | |
| ASSET QUALITY | | | | | | | | | | | | | | | | | | | | |
| Non-performing assets | | $ | 23,552 | | | $ | 13,954 | | | $ | 20,604 | | | $ | 4,427 | | | $ | 1,581 | |
| Allowance for loan losses | | | 44,229 | | | | 25,352 | | | | 24,731 | | | | 13,221 | | | | 9,838 | |
| Net charge-offs | | | 4,485 | | | | 3,929 | | | | 2,234 | | | | 1,670 | | | | 1,715 | |
| Non-performing assets to total assets | | | 0.48% | | | | 0.47% | | | | 0.81% | | | | 0.31% | | | | 0.14% | |
| Allowance for loan losses to loans | | | 1.28% | | | | 1.27% | | | | 1.39% | | | | 1.30% | | | | 1.31% | |
| Net charge-offs to average loans | | | 0.17% | | | | 0.21% | | | | 0.19% | | | | 0.20% | | | | 0.25% | |
*Excludes merger-related expenses.
1816
Umpqua Holdings Corporation
| | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share data) | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | |
| | |
| ASSET QUALITY | | | | | | | | | | | | | | | | | | | | |
| Non-performing assets | | $ | 7,563 | | | $ | 23,552 | | | $ | 13,954 | | | $ | 20,604 | | | $ | 4,427 | |
| Allowance for loan losses | | | 43,885 | | | | 44,229 | | | | 25,352 | | | | 24,731 | | | | 13,221 | |
| Net charge-offs | | | 2,812 | | | | 4,485 | | | | 3,929 | | | | 2,234 | | | | 1,670 | |
| Non-performing assets to total assets | | | 0.14% | | | | 0.48% | | | | 0.47% | | | | 0.81% | | | | 0.31% | |
| Allowance for loan losses to loans | | | 1.12% | | | | 1.28% | | | | 1.27% | | | | 1.39% | | | | 1.30% | |
| Net charge-offs to average loans | | | 0.08% | | | | 0.17% | | | | 0.21% | | | | 0.19% | | | | 0.20% | |
*Excludes merger-related expenses.
| |
| (1) | Average shareholders’ equity less average intangible assets divided by shares outstanding at the end of the year. |
| (2) | Non-interest expense divided by the sum of net interest income (fully tax equivalent) and non-interest income. |
| (3) | Tier 1 Capital divided by leverage assets. Leverage assets are defined as quarterly average total assets, net of goodwill, intangibles and certain other items as required by the Federal Reserve. |
| (4) | Net interest margin (fully tax equivalent) is calculated by dividing net interest income (fully tax equivalent) by average interest-earning assets. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOPERATION.
Forward Looking Statements and Risk Factors
See the discussion of forward-looking statements and risk factors in Part I Item 1 and Item 1A of this report.
Executive Overview
At December 31, 2004,2005, we had total consolidated assets of $4.9$5.4 billion, total loans of $3.5$3.9 billion, total deposits of $3.8$4.3 billion and total shareholders’ equity of $688$738.3 million.
The year 2004 sawIn 2005, Umpqua continued to demonstrate solid financial performance coupled with many significant accomplishments and some challenges, some of which were not necessarily reflected in our operating results. During the past year, we:
| | |
| | • | Completed the acquisition and successful integration of Humboldt Bancorp, which expanded our market footprint to include 27 stores located throughout Northern California. This acquisition increased our asset size by approximately 50%. As of December 31, 2004, we operated 92 stores throughout Oregon, Northern California and Southwestern Washington. |
|
| • | Continued our track record of double-digit organic growth (that is, excluding growth from acquisitions) loanin loans and deposit growth.deposits. For 2004,2005, organic loan and deposit growth was 20% and 10%, respectively.were both 13%. |
| |
| | • | Maintained exceptional credit quality standards, with net charge-offs of only 0.17%0.08% of average loans for 2004.2005. The ratio of non-performing assets to total assets at December 31, 20042005 was 0.48%0.14%, up onedown 34 basis point from year-end 2003.2004. |
| |
| | • | Completed the sale of our merchant bankcard portfolio, which resultedAchieved a 19% increase in an after-tax gain of $3.4 million. We believe this transaction will result in a reduction of our risk exposurebasic and diluted earnings per share as compared to a business line where scale is essential. |
|
| • | Produced record brokerage revenue of $11.8 million, up 25% over 2003. The retail brokerage segment contribution to net income for 2004 was $557,000, up from $15,000 in 2003.2004. |
| |
| | • | Increased our cash dividend by 50%,100% from year-end 2004, to $0.06$0.12 per quarter, effective in the secondfourth quarter of 2004.2005. Our boardBoard of directorsDirectors plans to review the dividend payout on a quarterly basis. |
| |
| | • | Opened our new data center locatedstores in Gresham, OregonBellevue, Washington, and new training facility (the “World’s Greatest Bank University”) in Roseburg, Oregon.Napa, California. |
| |
| • | Successfully addressed the significant new compliance requirements of the Sarbanes-Oxley Act. We believe that, as a result of internal efforts expended on this project, our internal control structure has never been stronger. |
However, the past year was not without some challenges, including:
| | |
| | • | Mortgage banking revenue declined by 33%, and the net income contribution from our mortgage division fell by 53%16%, mostly due to a reduction in$1.6 million net impairment charge to the levelvalue of mortgage refinance activity. During 2004, we took steps to strengthen theservicing right portfolio. This impairment resulted from a decline in mortgage division management team and also terminated wholesale channel originations. Our mortgage focus is now solely on developing profitable business through our retail store network, including unique products such as a “single close” construction loan that automatically converts into a permanent mortgage loan upon completion. |
|
| • | Our net interest margin continued to compress due to historically low short-term market interest rates andduring the structure of our balance sheet. The fully tax-equivalent net interest margin for 2004 was 4.68%, down 17 basis points from 2003 and down 70 basis points from 2002. The prospects for margin improvement in 2005 appear to be bright, given recent increases in short-term rates and the asset-sensitive structure of our balance sheet. The fully tax-equivalent net interest margin for the fourth quarter of 2004 was 4.74%, up 10 basis points over the first quarter of 2004.year. |
In February 2006, we announced the signing of a definitive agreement for the Company to acquire Western Sierra Bancorp and its principal operating subsidiaries, Western Sierra Bank, Central California Bank, Lake Community Bank and Auburn Community Bank. The agreement provides for Western Sierra shareholders to receive 1.61 shares of the Company’s common stock for each share of Western Sierra common stock, giving the acquisition a total value of approximately $355 million. This transaction is expected to close during the second quarter of 2006.
Upon completion of the acquisition expected in the second quarter of 2006, all Western Sierra Bancorp branches will operate under the Umpqua Bank name. The acquisition will add Western Sierra’s complete network of 31 Northern California
17
branches, including locations in the Sacramento, Auburn, Lakeport and Sonora areas, to our network of 96 Northern California, Oregon and Washington locations, and result in a combined institution with assets of approximately $6.9 billion.
Summary of Critical Accounting Policies
The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Our significant accounting policies are described in Note 1 in theNotes to Consolidated Financial Statementsfor the year ended December 31, 2004 in Item 8 of this report. Not all of these critical accounting policies require management to make difficult, subjective or complex judgments or estimates. However, managementManagement believes that
19
the following policies and those disclosed in theNotes to Consolidated Financial Statementscouldwould be considered critical under the SEC’s definition.
Allowance for Loan Losses and Reserve for Unfunded Commitments
The Bank performs regular credit reviews of the loan portfolio to determine the credit quality of the portfolio and the adherence to underwriting standards. When loans are originated, they are assigned a risk rating that is assessed periodically during the term of the loan through the credit review process. The risk ratings are a primary factor in determining an appropriate amount for the allowance for loan losses. During 2004, the Bank formed a management ALL Committee, which is responsible for, among other things, regular review of the ALL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALL Committee reviews loans that have been placed on non-accrual status and approves placing loans on impaired status. The ALL Committee also approves removing loans that are impaired from impairment and non-accrual status. The Bank’s Audit and Compliance Committee provides board oversight of the ALL process and reviews and approves the ALL methodology on a quarterly basis.
Each risk rating is assessed an inherent credit loss factor that determines the amount of the allowance for loan losses (“ALL”)provided for that group of loans with similar risk rating. Credit loss factors may vary by region based on management’s belief that there may ultimately be different credit loss rates experienced in each region.
The regular credit reviews of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALL Committee which reviews and approves designating loans as impaired. A loan is establishedconsidered impaired when based on current information and events, we determine that we will probably not be able to absorb knowncollect all amounts due according to the loan contract, including scheduled interest payments.
When we identify a loan as impaired, we measure the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows.
If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment reserve as a specific component to be provided for in the allowance for loan losses.
The combination of the risk rating based allowance component and the impairment reserve allowance component lead to an allocated allowance for loan losses. The Bank also maintains an unallocated allowance amount to provide for other credit losses inherent in a loan portfolio that may not have been contemplated in the credit loss factors.
This unallocated amount generally comprises less than 5% of the allowance. The unallocated amount is reviewed periodically based on trends in credit losses, attributable to loansthe results of credit reviews and leases outstanding. overall economic trends.
The reserve for unfunded commitments (“RUC”) is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line of credit. The adequacy of the ALL and RUC are monitored on a regular basis and are based on management’s evaluation of numerous factors. These factors include the quality of the current loan portfolio; the trend in the loan portfolio’s risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent information.
Management believes that the ALL was adequate as of December 31, 2005. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALL and could possibly result in additional charges to the provision for loan losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan losses in future periods if the results of their review warrant. Approximately 76%78% of our loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the allowance for loan losses.
18
Umpqua Holdings Corporation
Mortgage Servicing Rights
Retained mortgage servicing rights are measured by allocating the carrying value of the loans between the assets sold and the interest retained, based on their relative fair values at the date of the sale. The subsequent measurements are determined using a discounted cash flow model. Mortgage servicing rights assets are amortized over the expected life of the loan and are evaluated periodically for impairment. The expected life of the loan can vary from management’s estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of management’s estimates would negatively impact the recorded value of the mortgage servicing rights. The value of the mortgage servicing rights is also dependent upon the discount rate used in the model. Management reviews this rate on an ongoing basis based on current market rates. A significant increase in the discount rate would reduce the value of mortgage servicing rights.
Valuation of Goodwill and Intangible Assets
At December 31, 2004,2005, we had approximately $408$408.5 million in goodwill and other intangible assets as a result of business combinations. We adopted Financial Accounting Standard (“SFAS”) No. 142,Goodwill and Other Intangible Assets,, effective January 1, 2002. In accordance with the standard, goodwill and other intangibles with indefinite lives are no longer being amortized but instead are periodically tested for impairment. Management performs an impairment analysis for the intangible assets with indefinite lives on a quarterly basis and determined that there was no impairment as of December 31, 2004.2005. The valuation is based on discounted cash flows or observable market prices on a segment basis. A 10% or 20% decrease in market price is not expected to result in an impairment. If impairment was deemed to exist, a write down of the asset would occur with a charge to earnings.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R,Share Based Payment,a revision to the previously issued guidance on accounting for stock options and other forms of equity-based compensation. SFAS No. 123R requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based forms of compensation issued to employees. For us,the Company, this standard will becomebecame effective for the third quarter of 2005.
on January 1, 2006. The method of determining the grant date fair value of stock options under SFAS No. 123R is substantially the same at the method currently used to calculate the pro forma impact on net income and earnings per share as presented in Note 1 of theNotes to Consolidated Financial Statementsin Item 8 below. Accordingly, we doCompany does not expect the impact of adoption of SFAS No. 123R on earnings per share will be materially different from the current fair value pro forma disclosure.disclosure contained in Note 1 of theNotes to Consolidated Financial Statements.
Companies may elect one of two methods for adoption ofWe adopted SFAS No. 123R. Under123R on January 1, 2006 under themodified prospectivemethod which means any awards that are granted or modified after the date of adoption will be measured and accounted for under the provisions of SFAS No. 123R. The unvested portion of previously granted awards will continue to be accounted for under SFAS No. 123,Accounting for Stock-Based Compensation,, except that the compensation expense associated with the unvested portions will be recognized in the statement of income.
In March 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force regarding issue 03-1The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments(“EITF 03-01”).The consensus provided guidance for determining when an investment is other-than-temporarily-impaired and established disclosure requirements for investments with unrealized losses. The guidance was effective for periods beginning after June 15, 2004. On September 30, 2004, the FASB deferred the implementation of the recognition criteria of EITF 03-01. In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP nullifies certain requirements of Issue 03-1. Based on the clarification provided in FSP FAS 115-1 and FAS 124-1, the amount of any other-than-temporary impairment that needs to be recognized will continue to be dependent on market conditions, the occurrence of certain events or changes in circumstances relative to an investee and an entity’s intent and ability to hold the impaired investment at the time of the valuation. FSP FAS 115-1 and FAS 124-1 are effective for reporting periods beginning after December 15, 2005. Adoption of this FSP is not expected to have a material effect on our financial condition or results of operations.
In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-3,Accounting for Certain Loans and Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for acquired loans that show evidence of having deteriorated in terms of credit quality since their origination and for which a loss is deemed probable of occurring. SOP 03-3 requires acquired loans to be recorded at their fair value, defined as the present value of future cash flows including interest income, statement. Underto be recognized over themodified retrospectivemethod, all amounts previously reported are restated to reflect life of the amountsloan. SOP 03-3 prohibits the carryover of an allowance for loan loss on certain acquired loans within its scope considered in the SFAS No. 123 pro forma disclosure. We expect to makefuture cash flows assessment. SOP 03-3 was effective for loans acquired in fiscal years beginning after December 15, 2004 and has not had a decision with respect to the methodmaterial effect on our financial condition or results of adoption during the second quarter of 2005.operations.
Additional information regarding other recent accounting pronouncements is included in Note 1 of theNotes to Consolidated Financial Statementsin Item 8 below.
19
Results of Operations—Overview
For the year ended December 31, 2004,2005, net income was $47.2$69.7 million, or $1.30$1.55 per diluted share, an increase of 9%19% on a per diluted share basis. Income from continuing operations for the year ended December 31, 2004,2005, which excludes the after-tax operating results from and gain on the sale of our merchant bankcard portfolio, was $69.7 million, or $1.55 per diluted share, an increase of 30% on a per diluted share basis compared to $43.3 million or $1.19 per diluted share for the year ended December 31, 2004. Additional information on discontinued operations is provided under the headingDiscontinued Operationsbelow. The improvement in diluted earnings per share from continuing operations for 2005 is principally attributable to improved net interest income, offset by increased operating expenses.
Net income for 2004 was $47.2 million, or $1.30 per diluted share, an increase of 9% on a per diluted share basis over 2003. Income from continuing operations for the year ended December 31, 2004, was $43.3 million, or $1.19 per diluted share, an increase of 2% on a per diluted share basis. Additional information on discontinued operations is provided under the
20
Umpqua Holdings Corporation
headingDiscontinued Operationsbelow. The improvement in diluted earnings per share from continuing operations for 2004 iswas principally attributable to improved net interest income, offset in part by a decrease in mortgage banking revenue and increased operating expenses. We completed the acquisition of Humboldt on July 9, 2004, and the result’sresults of the acquired operations are only included in our financial results starting on July 10, 2004.
Net income for 2003 was $34.1 million, or $1.19 per diluted share, an increase of 16% on a per diluted share basis over 2002. The improvement in diluted earnings per share for 2003 was principally due to growth in net interest income, offset by an increase in operating expenses. We completed the acquisition of Centennial on November 15, 2002, and the results of the acquired operations are only included in our financial results starting on November 16, 2002.
We incur significant expenses related to the completion and integration of mergers. Accordingly, we believe that our operating results are best measured on a comparative basis excluding the impact of merger-related expenses, net of tax. We defineoperating incomeas income before merger related expenses, net of tax, and we calculateoperating income per diluted shareby dividing operating earnings by the same diluted share total used in determining diluted earnings per share (see Note 1415 of theNotes to Consolidated Financial Statementsin Item 8 below). Operating income and operating income per diluted share are considered “non-GAAP” financial measures. Although we believe the presentation of non-GAAP financial measures provides a better indication of our operating performance, readers of this report are urged to review the GAAP results as presented in theFinancial Statements and Supplementary Datain Item 8 below.
The following table presents a reconciliation of operating income and operating income per share to net income and net income per share for years ended December 31, 2005, 2004 2003 and 2002:2003:
Reconciliation of Operating Income to Net Income
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | | | | | | | | | |
| (in thousands, except per shae data) | | 2004 | | | 2003 | | | 2002 | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| Net income | | $ | 47,166 | | $ | 34,119 | | $ | 21,968 | | | $ | 69,735 | | $ | 47,166 | | $ | 34,119 | |
| Merger-related expenses, net of tax | | | 3,583 | | | 1,332 | | | 1,721 | | | | 157 | | | 3,583 | | | 1,332 | |
| | | | | |
| Operating income | | $ | 50,749 | | $ | 35,451 | | $ | 23,689 | | | $ | 69,892 | | $ | 50,749 | | $ | 35,451 | |
| | | | | |
| PER DILUTED SHARE: | | | | | | | | | | | | | | | | | | | | |
| | |
| Net income | | $ | 1.30 | | $ | 1.19 | | $ | 1.03 | | | $ | 1.55 | | $ | 1.30 | | $ | 1.19 | |
| Merger-related expenses, net of tax | | | 0.10 | | | 0.05 | | | 0.08 | | | | — | | | 0.10 | | | 0.05 | |
| | | | | |
| Operating income | | $ | 1.40 | | $ | 1.24 | | $ | 1.11 | | | $ | 1.55 | | $ | 1.40 | | $ | 1.24 | |
| | | | | |
2120
Umpqua Holdings Corporation
The following table presents the returns on average assets, average shareholders’ equity and average tangible shareholders’ equity for the years ended December 31, 2005, 2004 2003 and 2002.2003. For each of the years presented, the table includes the calculated ratios based on reported net income and income from continuing operations, and operating income as shown in the Table above. Our return on average shareholders’ equity is negatively impacted as the result of capital required to support goodwill under bank regulatory guidelines. To the extent this performance metric is used to compare our performance with other financial institutions that do not have merger-related intangible assets, we believe it beneficial to also consider the return on average tangible shareholders’ equity. The return on average tangible shareholders’ equity is calculated by dividing net income by average shareholders’ equity less average intangible assets. The return on average tangible shareholders’ equity is considered a non-GAAP financial measure and should be viewed in conjunction with the return on average shareholders’ equity.
Returns on Average Assets, Shareholders’ Equity and Tangible Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | | | | | | | | | |
| (in thousands) | | 2004 | | | 2003 | | | 2002 | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| RETURNS ON AVERAGE ASSETS: | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 1.20% | | | 1.26% | | | 1.36% | | | | 1.38% | | | 1.20% | | | 1.26% | |
| Income from continuing operations | | | 1.10% | | | 1.24% | | | 1.33% | | | | 1.38% | | | 1.10% | | | 1.24% | |
| Operating income | | | 1.29% | | | 1.31% | | | 1.47% | | | | 1.38% | | | 1.29% | | | 1.31% | |
| RETURNS ON AVERAGE SHAREHOLDERS’ EQUITY: | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 9.61% | | | 11.24% | | | 13.58% | | | | 9.80% | | | 9.61% | | | 11.24% | |
| Income from continuing operations | | | 8.82% | | | 11.03% | | | 13.32% | | | | 9.80% | | | 8.82% | | | 11.03% | |
| Operating income | | | 10.34% | | | 11.68% | | | 14.64% | | | | 9.82% | | | 10.34% | | | 11.68% | |
| RETURNS ON AVERAGE TANGIBLE SHAREHOLDERS’ EQUITY: | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 22.27% | | | 23.87% | | | 18.33% | | | | 22.91% | | | 22.27% | | | 23.87% | |
| Income from continuing operations | | | 20.44% | | | 23.43% | | | 17.98% | | | | 22.91% | | | 20.44% | | | 23.43% | |
| Operating income | | | 23.97% | | | 24.80% | | | 19.76% | | | | 22.96% | | | 23.97% | | | 24.80% | |
| CALCULATION OF AVERAGE TANGIBLE SHAREHOLDERS’ EQUITY: | | | | | | | | | | | | | | | | | | | | |
| Average shareholders’ equity | | $ | 490,724 | | $ | 303,569 | | $ | 161,774 | | | $ | 711,765 | | $ | 490,724 | | $ | 303,569 | |
| Less: average intangible assets | | | (278,975) | | | (160,639) | | | (41,902) | | | | (407,313) | | | (278,975) | | | (160,639) | |
| | | | | |
| Average tangible shareholders’ equity | | $ | 211,749 | | $ | 142,930 | | $ | 119,872 | | | $ | 304,452 | | $ | 211,749 | | $ | 142,930 | |
| | | | | |
Discontinued Operations
During the fourth quarter of 2004, we completed a strategic review of our merchant bankcard portfolio. The review concluded that shareholder value would be maximized, on a risk-adjusted basis, through a sale of the portfolio to a third party. In December 2004, the Bank sold its merchant bankcard portfolio to a third party for $5.9 million in cash, resulting in a gain on sale (after selling costs and related expenses) of $5.6 million, or $3.4 million after-tax. In accordance with generally accepted accounting principles, the operating results related to the merchant bankcard portfolio (including the gain on sale) have been reclassified asincome from discontinued operations,, net of tax, for all periods presented. We retained no ongoing liability related to the portfolio subsequent to the sale and entered into an agreement whereby we will refer all merchant applications exclusively to the buyer for a period of seven years. In consideration for the referrals, we will receive remuneration for each accepted application and an on-going royalty based on a percentage of net revenue generated by the account as defined in the agreement. We do not expect the referral revenue will have a material impact on our non-interest income.
ForIn 2005, we recognized no revenue related to the years ended December 31, 2004, 2003 and 2002, we recognizedmerchant bankcard portfolio. The revenue related to the merchant bankcard portfolio ofwas $827,000 and $1.0 million, respectively, in 2004 and $686,000, respectively.2003. As a result of the sale, we will no longer have the benefit of this revenue stream. Since, for the year ended December 31, 2004, merchant bankcard revenue comprised only about 2% of total non-interest income, we do not expect the loss of revenue willdid not have a material impact on our results of operations in 2005.
Additional information on discontinued operations is provided in Note 2 of theNotes to Consolidated Financial Statementsin Item 8 below.
21
Net Interest Income
Net interest income is the largest source of our operating income. Net interest income for 2005 was $209.3 million, an increase of $51.6 million, or 33% over 2004. This increase is attributable to growth in outstanding average interest-earning assets offset by growth in interest-bearing liabilities over 2004, primarily due to the Humboldt merger, which was completed on July 9, 2004. The fair value of interest-earning assets acquired on that date totaled $1.3 billion, and interest-bearing liabilities totaled $836 million.
The net interest margin (net interest income as a percentage of average interest-earning assets) on a fully tax-equivalent basis was 4.84% for 2005, an increase of 16 basis points as compared to 2004. This increase is due to growth in non-interest-bearing deposits as well as increased yield on interest-earning assets. The increased yield on interest-earning assets, primarily from short term interest rate increases, was somewhat offset by a corresponding increase in our cost of interest-bearing liabilities.
Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, changes in volume, as well as changes in the yields earned on interest-earning assets and rates paid on deposits and borrowed funds, or rates. The following table presents condensed average balance sheet information, together with interest income and yields on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for the years ended December 31, 2005, 2004 and 2003:
22
Umpqua Holdings Corporation
Net Interest Income
Average Rates and Balances
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2005 | | | 2004 | | | 2003 | |
| | | | 2004 | | | 2003 | | | 2002 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Interest | | | | | | | Interest | | | | | | | Interest | | | |
| | | | | | Interest | | | | | | | Interest | | | | | | | Interest | | | | | | | | Income | | | Average | | | | | Income | | | Average | | | | | Income | | | Average | |
| | | | | | Income | | | Average | | | | | Income | | | Average | | | | | Income | | | Average | | | | Average | | | or | | | Yields or | | | Average | | | or | | | Yields or | | | Average | | | or | | | Yields or | |
| | | | Average | | | or | | | Yields or | | | Average | | | or | | | Yields or | | | Average | | | or | | | Yields or | | | | Balance | | | Expense | | | Rates | | | Balance | | | Expense | | | Rates | | | Balance | | | Expense | | | Rates | |
| ($000’s) | | Balance | | | Expense | | | Rates | | | Balance | | | Expense | | | Rates | | | Balance | | | Expense | | | Rates | | |
| | | | | |
| Interest-Earning Assets: | Interest-Earning Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-Earning Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans and leases(2) | | $ | 2,706,346 | | $ | 170,791 | | | 6.31% | | $ | 1,915,170 | | $ | 126,900 | | | 6.63% | | $ | 1,157,423 | | $ | 86,967 | | | 7.51% | | |
| Loans and leases(1) | | Loans and leases(1) | | $ | 3,628,548 | | $ | 251,715 | | | 6.94% | | $ | 2,706,346 | | $ | 170,791 | | | 6.31% | | $ | 1,915,170 | | $ | 126,900 | | | 6.63% | |
| | Taxable securities | | | 601,151 | | | 24,330 | | | 4.05% | | | 345,553 | | | 12,273 | | | 3.55% | | | 176,430 | | | 9,408 | | | 5.33% | | Taxable securities | | | 613,748 | | | 26,432 | | | 4.31% | | | 601,151 | | | 24,330 | | | 4.05% | | | 345,553 | | | 12,273 | | | 3.55% | |
| | Non-taxable securities(1) | | | 51,218 | | | 3,569 | | | 6.97% | | | 56,522 | | | 3,716 | | | 6.57% | | | 62,509 | | | 4,586 | | | 7.34% | | Non-taxable securities(2) | | | 62,931 | | | 3,872 | | | 6.15% | | | 51,218 | | | 3,526 | | | 6.88% | | | 56,522 | | | 3,716 | | | 6.57% | |
| Temporary investments(3) | Temporary investments(3) | | | 33,760 | | | 544 | | | 1.61% | | | 41,897 | | | 465 | | | 1.11% | | | 52,888 | | | 836 | | | 1.58% | | Temporary investments(3) | | | 48,469 | | | 1,484 | | | 3.06% | | | 33,760 | | | 544 | | | 1.61% | | | 41,897 | | | 465 | | | 1.11% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total interest-earning assets | | | 3,392,475 | | | 199,234 | | | 5.87% | | | 2,359,142 | | | 143,354 | | | 6.08% | | | 1,449,250 | | | 101,797 | | | 7.02% | | | Total interest earning assets | | | 4,353,696 | | | 283,503 | | | 6.51% | | | 3,392,475 | | | 199,191 | | | 5.87% | | | 2,359,142 | | | 143,354 | | | 6.08% | |
| | |
| Cash and due from banks | | | 116,431 | | | | | | | | | 92,163 | | | | | | | | | 64,082 | | | | | | | | |
| Allowance for credit losses | Allowance for credit losses | | | (35,326) | | | | | | | | | (25,352) | | | | | | | | | (15,939) | | | | | | | | Allowance for credit losses | | | (44,866) | | | | | | | | | (35,326) | | | | | | | | | (25,352) | | | | | | | |
| Other assets | Other assets | | | 446,405 | | | | | | | | | 284,435 | | | | | | | | | 117,382 | | | | | | | | Other assets | | | 744,587 | | | | | | | | | 562,836 | | | | | | | | | 376,598 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total assets | | $ | 3,919,985 | | | | | | | | $ | 2,710,388 | | | | | | | | $ | 1,614,775 | | | | | | | | | Total assets | | $ | 5,053,417 | | | | | | | | $ | 3,919,985 | | | | | | | | $ | 2,710,388 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| Interest-Bearing Liabilities: | | Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing checking and savings accounts | Interest-bearing checking and savings accounts | | $ | 1,570,610 | | $ | 14,069 | | | 0.90% | | $ | 1,065,574 | | $ | 9,269 | | | 0.87% | | $ | 591,919 | | $ | 5,898 | | | 1.00% | | Interest-bearing checking and savings accounts | | $ | 2,041,090 | | $ | 30,343 | | | 1.49% | | $ | 1,570,610 | | $ | 14,069 | | | 0.90% | | $ | 1,065,574 | | $ | 9,269 | | | 0.87% | |
| Time deposits | Time deposits | | | 771,507 | | | 16,930 | | | 2.19% | | | 602,502 | | | 14,339 | | | 2.38% | | | 463,003 | | | 15,647 | | | 3.38% | | Time deposits | | | 993,215 | | | 29,235 | | | 2.94% | | | 771,507 | | | 16,930 | | | 2.19% | | | 602,502 | | | 14,339 | | | 2.38% | |
| Federal funds purchased and repurchase agreements | Federal funds purchased and repurchase agreements | | | 70,443 | | | 794 | | | 1.13% | | | 43,021 | | | 502 | | | 1.17% | | | 27,020 | | | 372 | | | 1.38% | | Federal funds purchased and repurchase agreements | | | 86,201 | | | 2,207 | | | 2.56% | | | 70,443 | | | 794 | | | 1.13% | | | 43,021 | | | 502 | | | 1.17% | |
| Term debt | Term debt | | | 101,321 | | | 2,023 | | | 2.00% | | | 41,699 | | | 1,035 | | | 2.48% | | | 26,743 | | | 1,024 | | | 3.83% | | Term debt | | | 31,161 | | | 659 | | | 2.11% | | | 101,321 | | | 2,023 | | | 2.00% | | | 41,699 | | | 1,035 | | | 2.48% | |
| Notes payable on junior subordinated debentures and trust preferred securities | Notes payable on junior subordinated debentures and trust preferred securities | | | 130,644 | | | 6,555 | | | 5.02% | | | 76,444 | | | 3,715 | | | 4.86% | | | 16,068 | | | 856 | | | 5.33% | | Notes payable on junior subordinated debentures and trust preferred securities | | | 165,981 | | | 10,550 | | | 6.36% | | | 130,644 | | | 6,555 | | | 5.02% | | | 76,444 | | | 3,715 | | | 4.86% | |
| | | | | | | | | | | | | | | |
| | | Total interest-bearing liabilities | | | 2,644,525 | | | 40,371 | | | 1.53% | | | 1,829,240 | | | 28,860 | | | 1.58% | | | 1,124,753 | | | 23,797 | | | 2.12% | | | | | | | | | | | | | | | |
| | | | Total interest-bearing liabilities | | | 3,317,648 | | | 72,994 | | | 2.20% | | | 2,644,525 | | | 40,371 | | | 1.53% | | | 1,829,240 | | | 28,860 | | | 1.58% | |
| Non-interest-bearing deposits | Non-interest-bearing deposits | | | 748,380 | | | | | | | | | 544,006 | | | | | | | | | 309,502 | | | | | | | | Non-interest-bearing deposits | | | 967,848 | | | | | | | | | 748,380 | | | | | | | | | 544,006 | | | | | | | |
| Other liabilities | Other liabilities | | | 36,356 | | | | | | | | | 33,573 | | | | | | | | | 18,746 | | | | | | | | Other liabilities | | | 56,156 | | | | | | | | | 36,356 | | | | | | | | | 33,573 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total liabilities | | | 3,429,261 | | | | | | | | | 2,406,819 | | | | | | | | | 1,453,001 | | | | | | | | | Total liabilities | | | 4,341,652 | | | | | | | | | 3,429,261 | | | | | | | | | 2,406,819 | | | | | | | |
| Shareholders’ equity | Shareholders’ equity | | | 490,724 | | | | | | | | | 303,569 | | | | | | | | | 161,774 | | | | | | | | Shareholders’ equity | | | 711,765 | | | | | | | | | 490,724 | | | | | | | | | 303,569 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total liabilities and shareholders’ equity | | $ | 3,919,985 | | | | | | | | $ | 2,710,388 | | | | | | | | $ | 1,614,775 | | | | | | | | | Total liabilities and shareholders’ equity | | $ | 5,053,417 | | | | | | | | $ | 3,919,985 | | | | | | | | $ | 2,710,388 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NET INTEREST INCOME(1) | | | | | $ | 158,863 | | | | | | | | $ | 114,494 | | | | | | | | $ | 78,000 | | | | | |
| NET INTEREST INCOME(2) | | NET INTEREST INCOME(2) | | | | | $ | 210,509 | | | | | | | | $ | 158,820 | | | | | | | | $ | 114,494 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NET INTEREST SPREAD | NET INTEREST SPREAD | | | | | | | | | 4.34% | | | | | | | | | 4.50% | | | | | | | | | 4.90% | | NET INTEREST SPREAD | | | | | | | | | 4.31% | | | | | | | | | 4.34% | | | | | | | | | 4.50% | |
| AVERAGE YIELD ON EARNING ASSETS(1),(2) | AVERAGE YIELD ON EARNING ASSETS(1),(2) | | | | | | | | | 5.87% | | | | | | | | | 6.08% | | | | | | | | | 7.02% | | AVERAGE YIELD ON EARNING ASSETS(1),(2) | | | | | | | | | 6.51% | | | | | | | | | 5.87% | | | | | | | | | 6.08% | |
| INTEREST EXPENSE TO EARNING ASSETS | INTEREST EXPENSE TO EARNING ASSETS | | | | | | | | | 1.20% | | | | | | | | | 1.23% | | | | | | | | | 1.64% | | INTEREST EXPENSE TO EARNING ASSETS | | | | | | | | | 1.67% | | | | | | | | | 1.19% | | | | | | | | | 1.23% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NET INTEREST INCOME TO EARNING ASSETS(1),(2) | NET INTEREST INCOME TO EARNING ASSETS(1),(2) | | | | | | | | | 4.68% | | | | | | | | | 4.85% | | | | | | | | | 5.38% | | NET INTEREST INCOME TO EARNING ASSETS(1),(2) | | | | | | | | | 4.84% | | | | | | | | | 4.68% | | | | | | | | | 4.85% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 35% effective rate. The amount of such adjustment was an addition to recorded income of $1,176, $1,222 and $1,472 for 2004, 2003 and 2002, respectively.
| |
(2)(1) | Non-accrual loans are included in average balance. Includes mortgage loans held for sale. |
| (2) | Tax-exempt income has been adjusted to a tax equivalent basis at a 35% tax rate. The amount of such adjustment was an addition to recorded income of approximately $1.2 million each for the years ended December 31, 2005, 2004, and 2003, respectively. |
| (3) | Temporary investments include federal funds sold and interest-bearing deposits at other banks. |
23
The following table sets forth a summary of the changes in net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for 2005 compared to 2004 and 2004 compared to 2003. Changes in interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionately between both variances.
Rate/ Volume Analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 Compared to 2003 | | | 2003 Compared to 2002 | |
| | | | | | | |
| | | Increase (Decrease) in Interest | | | Increase (Decrease) in Interest | |
| | | Income and Expense Due to | | | Income and Expense Due to | |
| | | Changes in | | | Changes in | |
| (dollars in thousands) | | | | | | |
| | | Volume | | | Rate | | | Total | | | Volume | | | Rate | | | Total | |
| | |
| Interest income: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans and leases | | $ | 50,187 | | | $ | (6,296) | | | $ | 43,891 | | | $ | 51,237 | | | $ | (11,304) | | | $ | 39,933 | |
| | Investment securities | | | 9,849 | | | | 2,140 | | | | 11,989 | | | | 6,354 | | | | (4,730) | | | | 1,624 | |
| | | |
| | | Total increase (decrease) in interest income | | | 60,035 | | | | (4,155) | | | | 55,880 | | | | 57,591 | | | | (16,034) | | | | 41,557 | |
| |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Interest-bearing checking and savings accounts | | | 4,516 | | | | 284 | | | | 4,800 | | | | 4,202 | | | | (831) | | | | 3,371 | |
| | Time deposits & IRA accounts | | | 3,777 | | | | (1,186) | | | | 2,591 | | | | 4,011 | | | | (5,319) | | | | (1,308) | |
| | Borrowed funds | | | 4,389 | | | | (269) | | | | 4,120 | | | | 2,976 | | | | 24 | | | | 3,000 | |
| | | |
| | | Total increase (decrease) in interest expense | | | 12,682 | | | | (1,171) | | | | 11,511 | | | | 11,189 | | | | (6,126) | | | | 5,063 | |
| | | |
| Total increase (decrease) in net interest income | | $ | 47,353 | | | $ | (2,984) | | | $ | 44,369 | | | $ | 46,402 | | | $ | (9,908) | | | $ | 36,494 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | | | | | | | | | |
| | | 2005 Compared to 2004 | | | 2004 Compared to 2003 | |
| | | | | | | |
| | | Increase (Decrease) in Interest | | | Increase (Decrease) in Interest | |
| | | Income and Expense Due to | | | Income and Expense Due to | |
| | | Changes in | | | Changes in | |
| | | | | | | |
| | | Volume | | | Rate | | | Total | | | Volume | | | Rate | | | Total | |
| | |
| Interest-Earning Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans | | $ | 62,671 | | | $ | 18,253 | | | $ | 80,924 | | | $ | 50,187 | | | $ | (6,296) | | | $ | 43,891 | |
| | Taxable securities | | | 518 | | | | 1,584 | | | | 2,102 | | | | 10,144 | | | | 1,913 | | | | 12,057 | |
| | Non-taxable securities(1) | | | 748 | | | | (402) | | | | 346 | | | | (361) | | | | 170 | | | | (191) | |
| | Temporary investments | | | 306 | | | | 634 | | | | 940 | | | | (102) | | | | 181 | | | | 79 | |
| | | |
| | | Total(1) | | | 64,243 | | | | 20,069 | | | | 84,312 | | | | 59,868 | | | | (4,032) | | | | 55,836 | |
| Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Interest-bearing checking and savings accounts | | | 5,082 | | | | 11,192 | | | | 16,274 | | | | 4,516 | | | | 284 | | | | 4,800 | |
| | Time deposits | | | 5,624 | | | | 6,681 | | | | 12,305 | | | | 3,777 | | | | (1,186) | | | | 2,591 | |
| | Repurchase agreements and federal funds purchased | | | 211 | | | | 1,202 | | | | 1,413 | | | | 310 | | | | (18) | | | | 292 | |
| | Term debt | | | (1,477) | | | | 113 | | | | (1,364) | | | | 1,225 | | | | (237) | | | | 988 | |
| | Junior subordinated debentures | | | 2,011 | | | | 1,984 | | | | 3,995 | | | | 2,715 | | | | 125 | | | | 2,840 | |
| | | |
| Total | | | 11,451 | | | | 21,172 | | | | 32,623 | | | | 12,543 | | | | (1,032) | | | | 11,511 | |
| | | |
| Net increase in net interest income(1) | | $ | 52,792 | | | $ | (1,103) | | | $ | 51,689 | | | $ | 47,325 | | | $ | (3,000) | | | $ | 44,325 | |
| | | |
| |
| (1) | Tax exempt income has been adjusted to a tax equivalent basis at a 35% tax rate. |
Provision for Loan Losses
The provision for loan losses was $2.5 million for 2005, compared with $7.3 million for 2004 compared withand $4.6 million for 2003 and $3.9 million for 2002.2003. As a percentage of average outstanding loans, the provision for loan losses recorded for 20042005 was 0.27%0.07%, an increasea decrease of three20 basis points from 20032004 and down seven17 basis points from 2002.2003. The decrease in the provision for loan losses in 2005 is principally attributable to improved asset quality trends. The increase in the provision for loan losses in 2004 as compared to 2003 is principally attributable to growth in the loan portfolio, both on an organic basis and as a result of the Humboldt acquisition. The increase in provision in 2003 as compared to 2002 is principally attributable to growth, both on an organic basis and as a result of the Centennial acquisition.
The provision for loan losses is based on management’s evaluation of inherent risks in the loan portfolio and a corresponding analysis of the allowance for loan losses. Based on current portfolio and economic information, we expect net charge-offs for 2005 will fall in the range of 20 to 25 basis points of average loans, although quarterly results may be higher or lower than this range. Additional discussion on loan quality and the allowance for loan losses is provided under the headingAsset Quality and Non-Performing Assetsbelow.
24
Umpqua Holdings Corporation
Non-Interest Income
Non-interest income in 2005 was $47.8 million, an increase of $6.4 million, or 15%, over 2004. Non-interest income for 2004 was $41.4 million, an increase of $3.4 million, or 9%, over 2003. The following table presents the key components of non-interest income for years ended December 31, 2005, 2004 2003 and 2002:2003:
Non-Interest Income
| | | | | | | | | | | | | |
| Years Ended December 31, | | | | | | |
| (in thousands) | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | |
| Deposit service charges | | $ | 17,404 | | | $ | 12,556 | | | $ | 8,640 | |
| Brokerage fees | | | 11,829 | | | | 9,498 | | | | 9,012 | |
| Mortgage banking revenue | | | 7,655 | | | | 11,473 | | | | 9,075 | |
| Net gain (loss) on sale of securities | | | 19 | | | | 2,155 | | | | (497) | |
| Ancillary bank services | | | 752 | | | | 565 | | | | 436 | |
| Gain on sale of loans | | | 976 | | | | 767 | | | | 587 | |
| Earnings on bank-owned life insurance | | | 1,155 | | | | 224 | | | | 3 | |
| Gains on sale of other real estate owned | | | 330 | | | | 113 | | | | — | |
| Other | | | 1,253 | | | | 650 | | | | 401 | |
| | | |
| | | $ | 41,373 | | | $ | 38,001 | | | $ | 27,657 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | | | | | | | | | | | | | |
| (in thousands) | | | | | | | | | | | | | | | | |
| | | 2005 Compared to 2004 | | | 2004 Compared to 2003 | |
| | | | | | | |
| | | | | Change | | | Change | | | | | Change | | | Change | |
| | | 2005 | | | 2004 | | | Amount | | | Percent | | | 2004 | | | 2003 | | | Amount | | | Percent | |
| | |
| Deposit service charges | | $ | 21,697 | | | $ | 17,404 | | | $ | 4,293 | | | | 25 | % | | $ | 17,404 | | | $ | 12,556 | | | $ | 4,848 | | | | 39 | % |
| Brokerage fees | | | 11,317 | | | | 11,829 | | | | (512 | ) | | | -4 | % | | | 11,829 | | | | 9,498 | | | | 2,331 | | | | 25 | % |
| Mortgage banking revenue, net | | | 6,426 | | | | 7,655 | | | | (1,229 | ) | | | -16 | % | | | 7,655 | | | | 11,473 | | | | (3,818 | ) | | | -33 | % |
| Net gain on sale of investment securities | | | 1,439 | | | | 19 | | | | 1,420 | | | | NM | | | | 19 | | | | 2,155 | | | | (2,136 | ) | | | NM | |
| Other | | | 6,903 | | | | 4,466 | | | | 2,437 | | | | 55 | % | | | 4,466 | | | | 2,319 | | | | 2,147 | | | | 93 | % |
| | | | | | | | | | | |
| Total | | $ | 47,782 | | | $ | 41,373 | | | $ | 6,409 | | | | 15 | % | | $ | 41,373 | | | $ | 38,001 | | | $ | 3,372 | | | | 9 | % |
| | | | | | | | | | | |
NM—Not meaningful
24The increase in deposit service charges in 2005 over 2004 is principally attributable to the increased volume of deposit accounts as a result of the Humboldt acquisition. There were $1.4 million in gains on the sale of securities in 2005. The remaining increase in other non-interest income results primarily from increased revenue related to the Humboldt acquisition.
Umpqua Holdings CorporationThe increase in deposit service charges in 2004 over 2003 was principally attributable to the Humboldt acquisition. Our brokerage division produced record revenue of $11.8 million in 2004, up 25% from 2003. There were $19,000 in gains on the sale of securities in 2004 compared to $2.2 million in 2003. The remaining increase in other non-interest income in 2004 over 2003 results primarily from increased revenue related to the Humboldt acquisition.
The following table presents the major elements of mortgage banking revenue for the years ended December 31, 2005, 2004 2003 and 2002:2003:
Mortgage Banking Revenue
| | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | | | | | | | | | |
| (in thousands) | | 2004 | | | 2003 | | | 2002 | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| Gains on sale of mortgage loans | | $ | 6,688 | | $ | 13,884 | | $ | 10,675 | | | $ | 7,266 | | $ | 6,688 | | $ | 13,884 | |
| Servicing fee expense, net | | | (148) | | | (2,321) | | | (379) | | |
| Valuation recovery/ (impairment) | | | 1,115 | | | (90) | | | (1,221) | | |
| Servicing fee revenue (expense), net | | | | 742 | | | (148) | | | (2,321) | |
| Valuation (impairment) / recovery | | | | (1,582) | | | 1,115 | | | (90) | |
| | | | | |
| | | $ | 7,655 | | $ | 11,473 | | $ | 9,075 | | | $ | 6,426 | | $ | 7,655 | | $ | 11,473 | |
| | | | | |
The decrease in mortgage banking revenue for 20042005 as compared to 2003 and 20022004 is principally attributable to a $1.6 million net impairment charge to the value of mortgage servicing rights portfolio. This impairment resulted from a decline in mortgage interest rates during the year.
In 2004, mortgage banking revenue declined by 33% compared to 2003, mostly due to a reduction in loan origination volumes resulting from a decrease inthe level of the mortgage refinance activity. During 2004, we took steps to strengthen the mortgage division management team and also terminated wholesale channel originations. Our mortgage focus is now solely on developing profitable business through our retail store network, including specialized products such as a “single close” construction loan that automatically converts into a permanent mortgage loan upon completion.
25
Non-Interest Expense
Non-interest expense for 2005 was $147.1 million, an increase of $21.9 million or 17% compared to 2004. Non-interest expense for 2004 was $125.2 million, an increase of $29.9 million or 31% over 2003. The following table presents the key elements of non-interest expense for the years ended December 31, 2005, 2004 2003 and 2002.2003.
Non-Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | | | | Years Ended December 31, | | 2005 compared to 2004 | | | 2004 compared to 2003 | |
| (in thousands) | | 2004 | | | 2003 | | | 2002 | | (in thousands) | | | | | | |
| | | | | | | Change | | | Change | | | | | Change | | | Change | |
| | | | | 2005 | | | 2004 | | | Amount | | | Percent | | | 2004 | | | 2003 | | | Amount | | | Percent | |
| | | | | |
| Salaries and employee benefits | | $ | 67,351 | | $ | 53,090 | | $ | 37,117 | | Salaries and employee benefits | | $ | 82,467 | | $ | 67,351 | | $ | 15,116 | | | 22 | % | | $ | 67,351 | | $ | 53,090 | | $ | 14,261 | | | 27 | % |
| Net occupancy and equipment | | | 19,765 | | | 14,833 | | | 9,596 | | Net occupancy and equipment | | | 24,693 | | | 19,765 | | | 4,928 | | | 25 | % | | | 19,765 | | | 14,833 | | | 4,932 | | | 33 | % |
| Communications | | | 5,752 | | | 4,630 | | | 3,147 | | Communications | | | 5,841 | | | 5,752 | | | 89 | | | 2 | % | | | 5,752 | | | 4,630 | | | 1,122 | | | 24 | % |
| Marketing | | | 4,228 | | | 3,567 | | | 1,837 | | Marketing | | | 4,564 | | | 4,228 | | | 336 | | | 8 | % | | | 4,228 | | | 3,567 | | | 661 | | | 19 | % |
| Services | | | 9,414 | | | 7,367 | | | 5,043 | | Services | | | 13,245 | | | 9,414 | | | 3,831 | | | 41 | % | | | 9,414 | | | 7,367 | | | 2,047 | | | 28 | % |
| Supplies | | | 1,995 | | | 2,100 | | | 1,591 | | Supplies | | | 2,706 | | | 1,995 | | | 711 | | | 36 | % | | | 1,995 | | | 2,100 | | | (105 | ) | | | -5 | % |
| Intangible amortization | | | 1,512 | | | 404 | | | 405 | | Intangible amortization | | | 2,430 | | | 1,512 | | | 918 | | | 61 | % | | | 1,512 | | | 404 | | | 1,108 | | | 274 | % |
| Merger-related expenses | | | 5,597 | | | 2,082 | | | 2,752 | | Merger-related expenses | | | 262 | | | 5,597 | | | (5,335 | ) | | | -95 | % | | | 5,597 | | | 2,082 | | | 3,515 | | | 169 | % |
| Other | | | 9,565 | | | 7,196 | | | 5,226 | | Other | | | 10,848 | | | 9,565 | | | 1,283 | | | 13 | % | | | 9,565 | | | 7,196 | | | 2,369 | | | 33 | % |
| | | | | | |
| | | $ | 125,179 | | $ | 95,269 | | $ | 66,714 | | Total | | $ | 147,056 | | $ | 125,179 | | $ | 21,877 | | | 17 | % | | $ | 125,179 | | $ | 95,269 | | $ | 29,910 | | | 31 | % |
| | | | | | |
The increase in non-interest expense in 2005 over 2004 and 2004 over 2003 is primarily attributable to the inclusion of expenses from California operations as a result of the Humboldt acquisition. Salaries and employee benefits have continued to increase due to increased incentives, benefit costs, additional staff at new stores, and primarily the addition of approximately 350 associates in July 2004 as a result of the Humboldt acquisition. Net occupancy and equipment also continues to increase reflecting the addition of 27 new banking locations as a result of the Humboldt acquisition. We incur significant expenses in connection with the completion and integration of bank acquisitions that are not capitalizable. Classification of expenses as merger-related is done in accordance with the provisions of a board-approvedBoard-approved policy.
The following table presents the merger-related expenses by major category for the years ended December 31, 2005, 2004 2003 and 2002.2003. Substantially all of the merger-related expense for 2005 and 2004 was related to the Humboldt acquisition and substantially all of the merger-related expense recognized during 2003 and 2002 was related to the Centennial acquisition. We do not expect to incur any additional merger-related expenses in connection with the Humboldt or any other previous merger.
Merger-Related Expense
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | Years Ended December 31, | | | | | | | Years Ended December 31, | | | | | | |
| (in thousands) | (in thousands) | | | | | | | (in thousands) | | | | | | |
| | | | 2004 | | | 2003 | | | 2002 | | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| Professional fees | Professional fees | | $ | 835 | | $ | 92 | | $ | 224 | | Professional fees | | $ | 211 | | $ | 835 | | $ | 92 | |
| Compensation and relocation | Compensation and relocation | | | 607 | | | 526 | | | 726 | | Compensation and relocation | | | — | | | 607 | | | 526 | |
| Communications | Communications | | | 98 | | | 169 | | | 1,079 | | Communications | | | — | | | 98 | | | 169 | |
| Premises and equipment | Premises and equipment | | | 2,636 | | | 657 | | | — | | Premises and equipment | | | (65) | | | 2,636 | | | 657 | |
| Charitable contributions | Charitable contributions | | | 131 | | | — | | | — | | Charitable contributions | | | — | | | 131 | | | — | |
| Other | Other | | | 1,290 | | | 638 | | | 723 | | Other | | | 116 | | | 1,290 | | | 638 | |
| | | | | | | |
| | Total | | $ | 5,597 | | $ | 2,082 | | $ | 2,752 | | Total | | $ | 262 | | $ | 5,597 | | $ | 2,082 | |
| | | | | | | |
25
Income Taxes
Our consolidated effective tax rate as a percentage of pre-tax income from continuing operations for 20042005 was 35.0%35.2%, compared to 35.0% for 2004 and 34.9% for 2003 and 35.8% for 2002.2003. The effective tax rates were below the federal statutory rate of 35% and the apportioned state rate of 5% (net of the federal tax benefit) principally because of non-taxable income arising from bank owned life insurance, income on tax exempttax-exempt investment securities, tax credits arising from low income housing investments and exemptions related to loans and hiring in certain designated enterprise zones.
Additional information on income taxes is provided in Note 1213 of theNotes to Consolidated Financial Statementsin Item 8 below.
26
Umpqua Holdings Corporation
Investment Securities
The composition of our investment securities portfolio reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income. The investment securities portfolio also mitigates interest rate and credit risk inherent in the loan portfolio, while providing a vehicle for the investment of available funds, a source of liquidity (by pledging as collateral or through repurchase agreements) and collateral for certain public funds deposits.
Total investment securities as of December 31, 2005 were $680.5 million, as compared to $687.8 million at December 31, 2004. This decrease is principally attributable to maturities and sale of $169.2 million in investment securities and decrease in fair market value of available-for-sale securities of $14.1 million, offset by the purchase of $175.5 million in investment securities in 2005.
Investment securities for each of the last three years is as follows:
Summary of Investment Securities
| | | | | | | | | | | | | |
| As of December 31, | | | | | | |
| (in thousands) | | 2005 | | | 2004 | | | 2003 | |
| | |
| Available-For-Sale: | | | | | | | | | | | | |
| U.S. Treasury and agencies | | $ | 196,538 | | | $ | 206,629 | | | $ | 172,774 | |
| Mortgage-backed securities and collateralized mortgage obligations | | | 359,583 | | | | 365,468 | | | | 255,390 | |
| Obligations of states and political subdivisions | | | 67,836 | | | | 54,936 | | | | 24,267 | |
| Other investment securities | | | 47,911 | | | | 48,951 | | | | 49,473 | |
| | | |
| | | $ | 671,868 | | | $ | 675,984 | | | $ | 501,904 | |
| | | |
| Held-To-Maturity: | | | | | | | | | | | | |
| Obligations of states and political subdivisions | | $ | 8,302 | | | $ | 11,432 | | | $ | 14,237 | |
| Other investment securities | | | 375 | | | | 375 | | | | 375 | |
| | | |
| | | $ | 8,677 | | | $ | 11,807 | | | $ | 14,612 | |
| | | |
The following table presents information regarding the amortized cost, fair value, average yield and maturity structure of the investment portfolio at December 31, 2004.2005.
Investment Securities Composition*
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2004 | | Amortized | | | Fair | | | Average | | |
| December 31, 2005 | | December 31, 2005 | | Amortized | | | Fair | | | Average | |
| (in thousands) | (in thousands) | | Cost | | | Value | | | Yield | | (in thousands) | | Cost | | | Value | | | Yield | |
| | | | | |
| U.S. Treasury and agencies | U.S. Treasury and agencies | | | | | | | | | | | U.S. Treasury and agencies | | | | | | | | | | |
| One year or less | One year or less | | $ | 1,499 | | $ | 1,512 | | | 6.62% | | One year or less | | $ | 17,686 | | $ | 17,471 | | | 2.77% | |
| One to five years | One to five years | | | 146,359 | | | 145,548 | | | 3.51% | | One to five years | | | 183,864 | | | 179,067 | | | 3.83% | |
| Five to ten years | | | 59,944 | | | 59,569 | | | 4.35% | | |
| | | | | | | |
| | | | | 207,802 | | | 206,629 | | | 3.77% | | | | | 201,550 | | | 196,538 | | | 3.74% | |
| Obligations of states and political subdivisions: | Obligations of states and political subdivisions: | | | | | | | | | | | Obligations of states and political subdivisions: | | | | | | | | | | |
| One year or less | One year or less | | | 4,243 | | | 4,296 | | | 6.54% | | One year or less | | | 1,230 | | | 1,218 | | | 6.29% | |
| One to five years | One to five years | | | 14,549 | | | 15,013 | | | 6.58% | | One to five years | | | 4,727 | | | 4,692 | | | 7.11% | |
| Five to ten years | Five to ten years | | | 18,764 | | | 19,856 | | | 7.89% | | Five to ten years | | | 37,232 | | | 36,705 | | | 6.03% | |
| Over ten years | Over ten years | | | 27,255 | | | 27,599 | | | 7.11% | | Over ten years | | | 34,347 | | | 33,622 | | | 5.69% | |
| | | | | | | |
| | | | | 64,811 | | | 66,764 | | | 7.18% | | | | | 77,536 | | | 76,237 | | | 5.95% | |
| Serial Maturities | Serial Maturities | | | 366,689 | | | 365,468 | | | 4.41% | | Serial Maturities | | | 367,388 | | | 359,583 | | | 4.63% | |
| Other investment securities | Other investment securities | | | 50,492 | | | 49,326 | | | 3.20% | | Other investment securities | | | 50,442 | | | 48,286 | | | 3.96% | |
| | | | | | | |
| | Total securities | | $ | 689,794 | | $ | 688,187 | | | 4.39% | | Total securities | | $ | 696,916 | | $ | 680,644 | | | 4.47% | |
| | | | | | | |
*Weighted average yields are stated on a federal tax-equivalent basis of 35%, and. Weighted average yields for available-for-sale investments have been annualized, where appropriate.calculated on an amortized cost basis.
27
The mortgage-related securities in “Serial Maturities” in the table above include both pooled mortgage-backed issues and high-quality CMOcollaterized mortgage obligation structures, with an average duration of fivethree years. These mortgage-related securities provide yield spread to U.S. Treasury or agency securities; however, the cash flows arising from them can be volatile (even in the best structures) due to refinancing of the underlying mortgage loans. The structure of most of the mortgage-related securities provides for minimal extension risk in the event of increased market rates.
Equity securities in “Other Investment Securities” in the table above at December 31, 20042005 consisted principally of investments in two mutual funds comprised largely of mortgage-related securities, although the funds may also invest in U.S. government or agency securities, bank certificates of deposit insured by the FDIC or repurchase agreements.
Because the Bank has the ability and intent to hold these investments until a market price recovery or to maturity, none of the investment securities are considered other than temporarily impaired. Additional information about the investment securities portfolio is provided in Note 5 of theNotes to Consolidated Financial Statementsin Item 8 below.
26
Umpqua Holdings Corporation
Loans
Total loans outstanding at December 31, 20042005 were $3.5$3.9 billion, an increase of $1.5 billion,$453.7 million, or 73%13%, from year-end 2003.2004. The growth in loans was principally due to the Humboldt acquisition ($1.1 billion of loans as of the acquisition date) and organic loan growth in both the Oregon/ Southern Washington and Northern California markets.
The Bank provides a wide variety of credit services to its customers, including construction loans, commercial lines of credit, secured and unsecured commercial loans, commercial real estate loans, residential mortgage loans, home equity credit lines, consumer loans and commercial leases. Loans are principally made on a secured basis to customers who reside, own property or operate businesses within the Bank’s principal market area.
The following table presents the composition of the loan portfolio as of December 31 2004, 2003, 2002, 2001 and 2000:for each of the last five years:
Loan Portfolio Composition
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, | As of December 31, | | | | | | | | | | | | | | | | | | | | | As of December 31, | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | (in thousands) | | | | | | | | | | | (in thousands) | | | | | | | | | | |
| | | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | | | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Type of Loan | Type of Loan | | Amount | | | Percentage | | | Amount | | | Percentage | | | Amount | | | Percentage | | | Amount | | | Percentage | | | Amount | | | Percentage | | Type of Loan | | Amount | | | Percentage | | | Amount | | | Percentage | | | Amount | | | Percentage | | | Amount | | | Percentage | | | Amount | | | Percentage | |
| | | | | |
| Real estate secured loans: | Real estate secured loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate secured loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction | Construction | | $ | 481,836 | | | 13.9 | % | | $ | 232,792 | | | 11.6 | % | | $ | 270,115 | | | 15.2 | % | | $ | 151,468 | | | 14.9 | % | | $ | 67,789 | | | 9.0 | % | Construction | | $ | 638,555 | | | 16.3 | % | | $ | 481,836 | | | 13.9 | % | | $ | 232,792 | | | 11.6 | % | | $ | 270,115 | | | 15.2 | % | | $ | 151,468 | | | 14.9 | % |
| Mortgage | Mortgage | | | 2,135,435 | | | 61.6 | % | | | 1,106,998 | | | 55.3 | % | | | 866,878 | | | 48.7 | % | | | 556,935 | | | 54.8 | % | | | 443,414 | | | 59.0 | % | Mortgage | | | 2,436,432 | | | 62.1 | % | | | 2,135,435 | | | 61.6 | % | | | 1,106,998 | | | 55.3 | % | | | 866,878 | | | 48.7 | % | | | 556,935 | | | 54.8 | % |
| | | | | | | |
| | Total real estate loans | | | 2,617,271 | | | 75.5 | % | | | 1,339,790 | | | 66.9 | % | | | 1,136,993 | | | 63.9 | % | | | 708,403 | | | 69.7 | % | | | 511,203 | | | 68.0 | % | Total real estate loans | | | 3,074,987 | | | 78.4 | % | | | 2,617,271 | | | 75.5 | % | | | 1,339,790 | | | 66.9 | % | | | 1,136,993 | | | 63.9 | % | | | 708,403 | | | 69.7 | % |
| Commercial | Commercial | | | 733,876 | | | 21.2 | % | | | 566,092 | | | 28.3 | % | | | 554,748 | | | 31.2 | % | | | 235,809 | | | 23.2 | % | | | 161,709 | | | 21.5 | % | Commercial | | | 753,131 | | | 19.3 | % | | | 733,876 | | | 21.2 | % | | | 566,092 | | | 28.3 | % | | | 554,748 | | | 31.2 | % | | | 235,809 | | | 23.2 | % |
| Leases | Leases | | | 18,351 | | | 0.5 | % | | | 10,918 | | | 0.5 | % | | | 6,698 | | | 0.4 | % | | | 4,098 | | | 0.4 | % | | | 3,756 | | | 0.5 | % | Leases | | | 17,385 | | | 0.4 | % | | | 18,351 | | | 0.5 | % | | | 10,918 | | | 0.5 | % | | | 6,698 | | | 0.4 | % | | | 4,098 | | | 0.4 | % |
| Installment and other | Installment and other | | | 98,406 | | | 2.8 | % | | | 86,787 | | | 4.3 | % | | | 79,876 | | | 4.5 | % | | | 67,832 | | | 6.7 | % | | | 75,342 | | | 10.0 | % | Installment and other | | | 76,128 | | | 1.9 | % | | | 98,406 | | | 2.8 | % | | | 86,787 | | | 4.3 | % | | | 79,876 | | | 4.5 | % | | | 67,832 | | | 6.7 | % |
| | | | | | | |
| | Total loans | | $ | 3,467,904 | | | 100.0 | % | | $ | 2,003,587 | | | 100.0 | % | | $ | 1,778,315 | | | 100.0 | % | | $ | 1,016,142 | | | 100.0 | % | | $ | 752,010 | | | 100.0 | % | Total loans | | $ | 3,921,631 | | | 100.0 | % | | $ | 3,467,904 | | | 100.0 | % | | $ | 2,003,587 | | | 100.0 | % | | $ | 1,778,315 | | | 100.0 | % | | $ | 1,016,142 | | | 100.0 | % |
| | | | | | | |
28
Umpqua Holdings Corporation
The following table presents as of December 31, 2004, the concentration distribution of our loan portfolio by major type:
Loan Concentrations
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2004 | | | | | |
| As of December 31, 2005 | | As of December 31, 2005 | | | | | | | | |
| (in thousands) | (in thousands) | | | | | (in thousands) | | | | | | | | |
| | | | | 2005 | | | 2004 | |
| | | | | | | | | |
| Type of Loan | Type of Loan | | Amount | | | Percentage | | Type of Loan | | Amount | | | Percentage | | | Amount | | | Percentage | |
| | | | | |
| Construction and development | Construction and development | | $ | 481,836 | | | 13.9% | | Construction and development | | $ | 638,555 | | | 16.3 | % | | $ | 481,836 | | | 13.9 | % |
| Farmland | Farmland | | | 39,662 | | | 1.1% | | Farmland | | | 54,039 | | | 1.4 | % | | | 39,662 | | | 1.1 | % |
| Home equity credit lines | Home equity credit lines | | | 126,264 | | | 3.6% | | Home equity credit lines | | | 125,508 | | | 3.2 | % | | | 126,264 | | | 3.6 | % |
| Single family first lien mortgage | Single family first lien mortgage | | | 116,457 | | | 3.4% | | Single family first lien mortgage | | | 121,955 | | | 3.1 | % | | | 116,457 | | | 3.4 | % |
| Single family second lien mortgage | Single family second lien mortgage | | | 20,729 | | | 0.6% | | Single family second lien mortgage | | | 18,570 | | | 0.5 | % | | | 20,729 | | | 0.6 | % |
| Multifamily | Multifamily | | | 182,526 | | | 5.3% | | Multifamily | | | 161,844 | | | 4.1 | % | | | 182,526 | | | 5.3 | % |
| Commercial real estate | Commercial real estate | | | 1,649,797 | | | 47.6% | | Commercial real estate | | | 1,954,516 | | | 49.8 | % | | | 1,649,797 | | | 47.6 | % |
| | | | | | | |
| | Total real estate secured | | | 2,617,271 | | | 75.5% | | Total real estate secured | | | 3,074,987 | | | 78.4 | % | | | 2,617,271 | | | 75.5 | % |
| Commercial and industrial | Commercial and industrial | | | 699,471 | | | 20.2% | | Commercial and industrial | | | 711,913 | | | 18.2 | % | | | 699,471 | | | 20.2 | % |
| Agricultural production | Agricultural production | | | 34,405 | | | 1.0% | | Agricultural production | | | 41,218 | | | 1.1 | % | | | 34,405 | | | 1.0 | % |
| Consumer | Consumer | | | 77,903 | | | 2.2% | | Consumer | | | 51,702 | | | 1.3 | % | | | 77,903 | | | 2.2 | % |
| Leases | Leases | | | 18,351 | | | 0.5% | | Leases | | | 17,385 | | | 0.4 | % | | | 18,351 | | | 0.5 | % |
| Other | Other | | | 20,503 | | | 0.6% | | Other | | | 24,426 | | | 0.6 | % | | | 20,503 | | | 0.6 | % |
| | | | | | | |
| | Total loans | | $ | 3,467,904 | | | 100.0% | | Total loans | | $ | 3,921,631 | | | 100.0 | % | | $ | 3,467,904 | | | 100.0 | % |
| | | | | | | |
27
Commercial, agriculture and construction loans are the most sensitive to interest rate changes. The following table presents the maturity distribution of our commercial and construction loan portfolios and the sensitivity of these loans to changes in interest rates as of December 31, 2004:2005:
Maturities and Sensitivities of Loans to Changes in Interest Rates
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Loans Over One Year | |
| | | | | | Loans Over One Year | | | By Maturity | | | By Rate Sensitivity | |
| | | | By Maturity | | | By Rate Sensitivity | | | | | | | |
| | | | | | | | | | One Year | | | One Through | | | Over Five | | | | | Fixed | | | Floating | |
| | | | One Year | | | One Through | | | Over Five | | | | | Fixed | | | Floating | | | or Less | | | Five Years | | | Years | | | Total | | | Rate | | | Rate | |
| (in thousands) | | or Less | | | Five Years | | | Years | | | Total | | | Rate | | | Rate | | |
| | | | | |
| Commercial and Agriculture | Commercial and Agriculture | | $ | 300,228 | | $ | 250,097 | | $ | 183,551 | | $ | 733,876 | | $ | 155,023 | | $ | 278,625 | | | $ | 353,065 | | $ | 302,896 | | $ | 97,170 | | $ | 753,131 | | $ | 122,345 | | $ | 277,721 | |
| Real Estate–construction | Real Estate–construction | | | 360,165 | | | 75,784 | | | 45,887 | | | 481,836 | | | 5,310 | | | 116,361 | | | | 472,428 | | | 117,982 | | | 48,145 | | | 638,555 | | | 35,049 | | $ | 131,078 | |
| | | | | | |
| | Total | | $ | 660,393 | | $ | 325,881 | | $ | 229,438 | | $ | 1,215,712 | | $ | 160,333 | | $ | 394,986 | | | $ | 825,493 | | $ | 420,878 | | $ | 145,315 | | $ | 1,391,686 | | $ | 157,394 | | $ | 408,799 | |
| | | | | | |
Asset Quality and Non-Performing Assets
We manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s loan administration functionCredit Quality Group is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. The provision for loan losses charged to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level adequate to absorb probable incurred losses. The amount of provision charge is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of loan portfolio quality, general economic conditions that can impact the value of collateral, and other trends. The evaluation of these factors is performed through an analysis of the adequacy of the allowance for loan losses. Reviews of non-performing, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, as well asand to determine the adequacy of the allowance, are conducted on a quarterly basis. These reviews are performed by Bank staff or an independent third party, and consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors.
The process for determining the adequacy of the allowance for loan losses was modified during 2004 in connection with the Humboldt acquisition. These modifications did not result in a material adjustment to the allowance for loans losses. Additional
29
information regarding the methodology used in determining the adequacy of the allowance for loan losses is contained in Part I Item 1 of this report in the section titledLending and Credit Functions.
Non-performing loans, which include non-accrual loans and accruing loans past due over 90 days totaled $6.4 million, or 0.16% of total loans, at December 31, 2005, which represents a significant decline as compared to $22.6 million, or 0.65% of total loans, at December 31, 2004, as compared to $11.4 million, or 0.57% of total loans, at December 31, 2003.2004. Non-performing assets, which include non-performing loans and foreclosed real estate (“other real estate owned”), totaled $7.6 million, or 0.14% of total assets as of December 31, 2005, compared with $23.6 million, or 0.48% of total assets as of December 31, 2004, compared2004.
Loans are classified as non-accrual when collection of principal or interest is doubtful—generally if they are past due as to maturity or payment of principal or interest by 90 days or more—unless such loans are well-secured and in the process of collection. Additionally, all loans that are “impaired” in accordance with $14.0 million,SFAS No. 114,Accounting by Creditors for the Impairment of a Loan,are considered for non-accrual status. These loans will typically remain on non-accrual status until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear relatively certain. Foreclosed properties held as other real estate owned are recorded at the lower of the recorded investment in the loan or 0.47%market value of total assets as of
28
Umpqua Holdings Corporation
the property less expected selling costs. Other real estate owned at December 31, 2003. 2005 totaled $1.1 million and consisted of three commercial properties.
The following table summarizes our non-performing assets as of December 31 for each of the last five years.
Non-Performing Assets
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, | As of December 31, | | | | | | | | | | | As of December 31, | | | | | | | | | | |
| (in thousands) | (in thousands) | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | | (in thousands) | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | |
| | | | | |
| Loans on nonaccrual status | Loans on nonaccrual status | | $ | 21,836 | | $ | 10,498 | | $ | 15,152 | | $ | 3,055 | | $ | 1,275 | | Loans on nonaccrual status | | $ | 5,953 | | $ | 21,836 | | $ | 10,498 | | $ | 15,152 | | $ | 3,055 | |
| Loans past due 90 days or more and accruing | Loans past due 90 days or more and accruing | | | 737 | | | 927 | | | 3,243 | | | 311 | | | 306 | | Loans past due 90 days or more and accruing | | | 487 | | | 737 | | | 927 | | | 3,243 | | | 311 | |
| | | | | | | |
| | Total nonperforming loans | | | 22,573 | | | 11,425 | | | 18,395 | | | 3,366 | | | 1,581 | | Total nonperforming loans | | | 6,440 | | | 22,573 | | | 11,425 | | | 18,395 | | | 3,366 | |
| Other real estate owned | Other real estate owned | | | 979 | | | 2,529 | | | 2,209 | | | 1,061 | | | — | | Other real estate owned | | | 1,123 | | | 979 | | | 2,529 | | | 2,209 | | | 1,061 | |
| | | | | | | |
| | Total nonperforming assets | | $ | 23,552 | | $ | 13,954 | | $ | 20,604 | | $ | 4,427 | | $ | 1,581 | | Total nonperforming assets | | $ | 7,563 | | $ | 23,552 | | $ | 13,954 | | $ | 20,604 | | $ | 4,427 | |
| | | | | | | |
| Allowance for loan losses | Allowance for loan losses | | $ | 44,229 | | $ | 25,352 | | $ | 24,731 | | $ | 13,221 | | $ | 9,838 | | Allowance for loan losses | | $ | 43,885 | | $ | 44,229 | | $ | 25,352 | | $ | 24,731 | | $ | 13,221 | |
| Reserve for unfunded commitments | Reserve for unfunded commitments | | | 1,338 | | | — | | | — | | | — | | | — | | Reserve for unfunded commitments | | | 1,601 | | | 1,338 | | | — | | | — | | | — | |
| | | | | | | |
| Allowance for credit losses | Allowance for credit losses | | $ | 45,567 | | $ | 25,352 | | $ | 24,731 | | $ | 13,221 | | $ | 9,838 | | Allowance for credit losses | | $ | 45,486 | | $ | 45,567 | | $ | 25,352 | | $ | 24,731 | | $ | 13,221 | |
| | | | | | | |
| Asset quality ratios: | Asset quality ratios: | | | | | | | | | | | | | | | | | Asset quality ratios: | | | | | | | | | | | | | | | | |
| Non-performing assets to total assets | Non-performing assets to total assets | | | 0.48% | | | 0.47% | | | 0.81% | | | 0.31% | | | 0.14% | | Non-performing assets to total assets | | | 0.14% | | | 0.48% | | | 0.47% | | | 0.81% | | | 0.31% | |
| Non-performing loans to total loans | Non-performing loans to total loans | | | 0.65% | | | 0.57% | | | 1.03% | | | 0.33% | | | 0.21% | | Non-performing loans to total loans | | | 0.16% | | | 0.65% | | | 0.57% | | | 1.03% | | | 0.33% | |
| Allowance for loan losses to total loans | Allowance for loan losses to total loans | | | 1.28% | | | 1.27% | | | 1.39% | | | 1.30% | | | 1.31% | | Allowance for loan losses to total loans | | | 1.12% | | | 1.28% | | | 1.27% | | | 1.39% | | | 1.30% | |
| Allowance for credit losses to total loans | Allowance for credit losses to total loans | | | 1.31% | | | 1.27% | | | 1.39% | | | 1.30% | | | 1.31% | | Allowance for credit losses to total loans | | | 1.16% | | | 1.31% | | | 1.27% | | | 1.39% | | | 1.30% | |
| Allowance for credit losses to total non-performing loans | Allowance for credit losses to total non-performing loans | | | 202% | | | 222% | | | 134% | | | 393% | | | 622% | | Allowance for credit losses to total non-performing loans | | | 706% | | | 202% | | | 222% | | | 134% | | | 393% | |
At December 31, 2004,2005, approximately $18.2$4.0 million of loans were classified as restructured.restructured as compared to $18.2 million at December 31, 2004. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. Substantially all of the restructured loans as of December 31, 2005 and 2004 were classified as impaired and $935,000 and $12.0 million, respectively, were included as non-accrual loans in the Tabletable above.
We have not identified any other potential problem loans that were not classified as non-performing but for which known information about the borrower’s financial condition caused management to have concern about the ability of the borrowers to comply with the repayment terms of the loans. A decline in the economic conditions in our general market areas or other factors could adversely impact individual borrowers or the loan portfolio in general. Accordingly, there can be no assurance that loans will not become 90 days or more past due, become impaired or placed on non-accrual status, restructured or transferred to other real estate owned in the future.
Additional information about the loan portfolio is provided in Note 6 of theNotes to Consolidated Financial Statementsin Item 8 below.
30
Umpqua Holdings Corporation
Allowance for Loan Losses and Reserve for Unfunded Commitments
The allowance for loan losses (“ALL”) totaled $43.9 million, $44.2 million $25.4 million and $24.7$25.4 million at December 31, 2005, 2004 and 2003, and 2002, respectively. The increase in the ALL from year-end 2003 is principally attributable to the Humboldt acquisition ($17.3 million) and provision for loan losses in excess of net charge-offs ($2.8 million).
The following table sets forth the allocation of the allowance for loan losses:
Allowance for Loan Losses Composition
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | |
| | | | | | | | | | | |
| | | | | Percentage of | | | | | Percentage of | | | | | Percentage of | | |
| | | | | Loans in | | | | | Loans in | | | | | Loans in | | |
| | | | | Each Category | | | | | Each Category | | | | | Each Category | | |
| As of December 31, | | As of December 31, | | | | | | | | | | |
| (in thousands) | (in thousands) | | Amount | | | To Total Loans | | | Amount | | | To Total Loans | | | Amount | | | To Total Loans | | (in thousands) | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | |
| | | | | |
| Commercial | Commercial | | $ | 12,334 | | | 21.7 | % | | $ | 11,091 | | | 28.4 | % | | $ | 11,010 | | | 31.3 | % | Commercial | | $ | 11,230 | | $ | 12,334 | | $ | 11,091 | | $ | 11,010 | | $ | 3,760 | |
| Real estate | Real estate | | | 29,464 | | | 75.5 | % | | | 12,689 | | | 67.3 | % | | | 11,302 | | | 65.9 | % | Real estate | | | 30,137 | | | 29,464 | | | 12,689 | | | 11,302 | | | 7,919 | |
| Loans to individuals | | | 1,126 | | | 2.8 | % | | | 1,225 | | | 4.3 | % | | | 1,653 | | | 2.8 | % | |
| Loans to individuals and overdrafts | | Loans to individuals and overdrafts | | | 669 | | | 1,126 | | | 1,225 | | | 1,653 | | | 1,128 | |
| Unallocated | Unallocated | | | 1,305 | | | — | | | 347 | | | — | | | 766 | | | — | | Unallocated | | | 1,849 | | | 1,305 | | | 347 | | | 766 | | | 414 | |
| | | | | | | |
| | Allowance for loan losses | | $ | 44,229 | | | 100.0 | % | | $ | 25,352 | | | 100.0 | % | | $ | 24,731 | | | 100.0 | % | Allowance for loan losses | | $ | 43,885 | | $ | 44,229 | | $ | 25,352 | | $ | 24,731 | | $ | 13,221 | |
| | | | | | | |
29
The decrease in ALL reflects the continuing improvement in the credit quality of the loan portfolio. The unallocated portion of ALL provides for coverage of credit losses inherent in the loan portfolio but not provided for in other components of ALL analysis, and acknowledges the inherent imprecision of all loss prediction models. Additionally the ALL composition should not be interpreted as an indication of specific amounts or loan categories in which future charge-offs may occur.
The following table provides a summary of activity in the ALL by major loan type for each of the five years ended December 31, 2004:31:
Summary ofActivity in the Allowance for Loan Loss ExperienceLosses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | Years Ended December 31, | | | | | | | | | | |
| (in thousands) | (in thousands) | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | | (in thousands) | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | |
| | | | | |
| Balance at beginning of year | Balance at beginning of year | | $ | 25,352 | | $ | 24,731 | | $ | 13,221 | | $ | 9,838 | | $ | 9,617 | | Balance at beginning of year | | $ | 44,229 | | $ | 25,352 | | $ | 24,731 | | $ | 13,221 | | $ | 9,838 | |
| Loans charged off: | Loans charged off: | | | | | | | | | | | | | | | | | Loans charged off: | | | | | | | | | | | | | | | | |
| Real estate | Real estate | | | (42) | | | (15) | | | (679) | | | (111) | | | (105) | | Real estate | | | (132) | | | (42) | | | (15) | | | (679) | | | (111) | |
| Commercial | Commercial | | | (5,244) | | | (5,429) | | | (1,685) | | | (1,380) | | | (1,205) | | Commercial | | | (6,538) | | | (5,244) | | | (5,429) | | | (1,685) | | | (1,380) | |
| Consumer and other | Consumer and other | | | (1,143) | | | (633) | | | (428) | | | (655) | | | (531) | | Consumer and other | | | (1,082) | | | (1,143) | | | (633) | | | (428) | | | (655) | |
| | | | | | | |
| | Total loans charged off | | | (6,429) | | | (6,077) | | | (2,792) | | | (2,146) | | | (1,841) | | Total loans charged off | | | (7,752) | | | (6,429) | | | (6,077) | | | (2,792) | | | (2,146) | |
| Recoveries: | Recoveries: | | | | | | | | | | | | | | | | | Recoveries: | | | | | | | | | | | | | | | | |
| Real Estate | Real Estate | | | 292 | | | 123 | | | 31 | | | 25 | | | 6 | | Real Estate | | | 32 | | | 292 | | | 123 | | | 31 | | | 25 | |
| Commercial | Commercial | | | 1,292 | | | 1,761 | | | 440 | | | 308 | | | 53 | | Commercial | | | 4,344 | | | 1,292 | | | 1,761 | | | 440 | | | 308 | |
| Consumer and other | Consumer and other | | | 360 | | | 264 | | | 87 | | | 143 | | | 67 | | Consumer and other | | | 564 | | | 360 | | | 264 | | | 87 | | | 143 | |
| | | | | | | |
| | Total recoveries | | | 1,944 | | | 2,148 | | | 558 | | | 476 | | | 126 | | Total recoveries | | | 4,940 | | | 1,944 | | | 2,148 | | | 558 | | | 476 | |
| | | | | | | |
| Net charge-offs | Net charge-offs | | | (4,485) | | | (3,929) | | | (2,234) | | | (1,670) | | | (1,715) | | Net charge-offs | | | (2,812) | | | (4,485) | | | (3,929) | | | (2,234) | | | (1,670) | |
| Addition incident to mergers | Addition incident to mergers | | | 17,257 | | | — | | | 9,856 | | | 1,863 | | | — | | Addition incident to mergers | | | — | | | 17,257 | | | — | | | 9,856 | | | 1,863 | |
| Reclassification(1) | | | (1,216) | | | — | | | — | | | — | | | — | | |
| Reclassification (1) | | Reclassification (1) | | | — | | | (1,216) | | | — | | | — | | | — | |
| Provision charged to operations | Provision charged to operations | | | 7,321 | | | 4,550 | | | 3,888 | | | 3,190 | | | 1,936 | | Provision charged to operations | | | 2,468 | | | 7,321 | | | 4,550 | | | 3,888 | | | 3,190 | |
| | | | | | | |
| Balance at end of year | Balance at end of year | | $ | 44,229 | | $ | 25,352 | | $ | 24,731 | | $ | 13,221 | | $ | 9,838 | | Balance at end of year | | $ | 43,885 | | $ | 44,229 | | $ | 25,352 | | $ | 24,731 | | $ | 13,221 | |
| | | | | | | |
| Ratio of net charge-offs to average loans | Ratio of net charge-offs to average loans | | | 0.17% | | | 0.21% | | | 0.19% | | | 0.20% | | | 0.25% | | Ratio of net charge-offs to average loans | | | 0.08% | | | 0.17% | | | 0.21% | | | 0.19% | | | 0.20% | |
| Ratio of provision to average loans | Ratio of provision to average loans | | | 0.27% | | | 0.24% | | | 0.34% | | | 0.38% | | | 0.28% | | Ratio of provision to average loans | | | 0.07% | | | 0.27% | | | 0.24% | | | 0.34% | | | 0.38% | |
| Recoveries as a percentage of charge-offs | Recoveries as a percentage of charge-offs | | | 30% | | | 35% | | | 20% | | | 22% | | | 7% | | Recoveries as a percentage of charge-offs | | | 64% | | | 30% | | | 35% | | | 20% | | | 22% | |
| |
| (1) | Reflects amount of allowance related to unfunded commitments, which was reclassified during the third quarter of 2004. |
During the third quarter of 2004, a portion of the ALL related to unfunded credit commitments, such as letters of credit and the available portion of credit lines, was reclassified from the ALL to other liabilities on the balance sheet in accordance with bank regulatory requirements.generally accepted accounting principles. Prior to July 1, 2004, our ALL adequacy model did not allocate any specific component of the ALL to loss exposure for unfunded commitments.
31
Also during the third quarter of 2004, we revised our methodology (the “ALL model”) for determining the adequacy of the ALL. This was done principally as a result of the Humboldt acquisition, which increased our loan portfolio by approximately $1.1 billion, or 49%. Substantially all of the loans acquired from Humboldt were to borrowers in Northern California and approximately 77% were secured by real estate, with construction/development and commercial real estate representing 19% and 45%, respectively. Although Humboldt’s underwriting standards were similar to ours, differences did exist for loans acquired. Subsequent to the date the acquisition was completed, all loans were originated in accordance with the Bank’s underwriting guidelines, policies and procedures.
The level of actual losses, as indicated by the ratio of net-charge-offs to totalaverage loans, declined slightly during 20042005 as compared to the two previous years. The loss factors usedyears and recoveries as a percentage of charge-offs reached their highest levels in the ALL model were adjusted for the Oregon/ Washington and California portfoliospast five years. These factors combined with improving trends in non-performing assets resulted in a decreased ratio of provision to average loans as of September 30, 2004; no changes were made during the fourth quarter ofcompared to 2004.
We have not identified any potential problem loans that were not classified as non-performing but for which known information about the borrower’s financial condition caused management to have concern about the ability of the borrowers to comply with the repayment terms of the loans. A decline in the economic conditions in our general market areas or other factors could adversely impact individual borrowers or the loan portfolio in general. Accordingly, there can be no assurance that loans will not become 90 days or more past due, become impaired or placed on non-accrual, restructured or transferred to other real estate owned in the future.
30
Umpqua Holdings Corporation
The following table presents a summary of activity in the reserve for unfunded commitments (“RUC”) since being established at September 30, 2004:
Summary of Reserve for Unfunded Commitments Activity
| | | | | |
| (in thousands) | | |
| | |
| Balance at September 30, 2004 | | $ | 1,216 | |
| Increase charged to other expenses | | | 122 | |
| Charge-offs | | | — | |
| Recoveries | | | — | |
| | | | |
| Balance at December 31, 2004 | | $ | 1,338 | |
| | | | |
| | | | | | | | | |
| Years Ended December 31, | | | |
| (in thousands) | | 2005 | | | 2004 | |
| | |
| Balance, beginning of period | | $ | 1,338 | | | $ | — | |
| Reclassification | | | — | | | | 1,216 | |
| Net increase charged to other expenses | | | 263 | | | | 122 | |
| | | |
| Balance, end of period | | $ | 1,601 | | | $ | 1,338 | |
| | | |
We believe that the ALL and reserve for unfunded commitmentsRUC at December 31, 20042005 are sufficient to absorb losses inherent in the loan portfolio and credit commitments outstanding as of that date, respectively, based on the best information available. This assessment, based in part on historical levels of net charge-offs, loan growth, and a detailed review of the quality of the loan portfolio, involves uncertainty and judgment; therefore, the adequacy of the ALL and RUC cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan losses in future periods if the results of their review warrant such.
Mortgage Servicing Rights
The following table presents the key elements of our mortgage servicing rights asset as of December 31, 2005, 2004 2003 and 2002:2003:
Summary of Mortgage Servicing Rights
| | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | | | | |
| (in thousands) | | 2004 | | | 2003 | | | 2002 | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| Balance, beginning of year | | $ | 10,608 | | $ | 9,316 | | $ | 4,876 | | | $ | 11,154 | | $ | 10,608 | | $ | 9,316 | |
| Additions for new mortgage servicing rights capitalized | | | 2,643 | | | 6,671 | | | 8,067 | | | | 3,318 | | | 2,643 | | | 6,671 | |
| Amortization of servicing rights | | | (3,212) | | | (5,289) | | | (2,406) | | | | (2,000) | | | (3,212) | | | (5,289) | |
| Impairment recovery/ (charge) | | | 1,115 | | | (90) | | | (1,221) | | |
| Impairment (charge)/ recovery | | | | (1,582) | | | 1,115 | | | (90) | |
| | | | | |
| Balance, end of year | | $ | 11,154 | | $ | 10,608 | | $ | 9,316 | | | $ | 10,890 | | $ | 11,154 | | $ | 10,608 | |
| | | | | |
| Balance of loans serviced for others | | $ | 1,064,000 | | $ | 1,170,000 | | $ | 985,000 | | | $ | 1,016,000 | | $ | 1,064,000 | | $ | 1,170,000 | |
| MSR as a percentage of serviced loans | | | 1.05% | | | 0.91% | | | 0.95% | | | | 1.07% | | | 1.05% | | | 0.91% | |
As of December 31, 2004,2005, we serviced residential mortgage loans for others with an aggregate outstanding principal balance of approximately $1.1$1.0 billion for which servicing assets have been recorded. In accordance with generally accepted accounting principles, the servicing asset recorded at the time of sale is amortized over the term of, and in proportion to, net servicing revenues.
For the year ended December 31, 2004,2005, total mortgage loan origination volume was $438$365.3 million, a decrease of $425$73.3 million, or 49%17%, from 2003.2004. This decrease is principally attributable to a lower level of refinance activity (due to higher market interest rates) and the termination of wholesale channel originations during the third quarter of 2004.
3132
Umpqua Holdings Corporation
Our servicing portfolio is segmented for purposes of determining impairment. To the extent the fair value for any segment is less than the carrying value, an impairment reserve is recorded. The following table presents information about the segmentation of our mortgage servicing rights portfolio as of December 31, 2004:2005:
Mortgage Servicing Rights Valuation Analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | (in thousands) | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Servicing Asset | | | | | | | | | | | | | Net | | | Estimated Change in Fair | |
| | | | | | | | | Net | | | Estimated Change in Fair | | | | Aggregate | | | Servicing Asset | | | Carrying | | | Value for Rate Change of | |
| | | | Aggregate | | | | | Carrying | | | Value for Rate Change of | | | | Principal | | | Net | | | | | Net | | | Value/Agg. | | | | |
| | | | Principal | | | Net | | | | | Net | | | Value/Agg. | | | | | | | Balance | | | Book | | | Fair | | | Valuation | | | Carrying | | | Prin. | | | Down | | | Down | | | Up | | | Up | |
| (in thousands) | | Balance | | | Book | | | Fair | | | Valuation | | | Carrying | | | Prin. | | | Down | | | Down | | | Up | | | Up | | |
| Segment | Segment | | Outstanding | | | Value | | | Value | | | Reserve | | | Value | | | Balance | | | 50bp | | | 25bp | | | 25bp | | | 50bp | | Segment | | Outstanding | | | Value | | | Value | | | Reserve | | | Value | | | Balance | | | 50bp | | | 25bp | | | 25bp | | | 50bp | |
| | | | | |
| ARM/ Hybrid ARM | ARM/ Hybrid ARM | | $ | 192,896 | | $ | 1,817 | | $ | 1,131 | | $ | 686 | | $ | 1,131 | | | 0.59% | | $ | (170) | | | (91) | | | 21 | | $ | 57 | | ARM/ Hybrid ARM | | $ | 142,214 | | $ | 1,496 | | $ | 795 | | $ | (701) | | $ | 795 | | | 0.56% | | $ | (26) | | $ | (5) | | $ | 28 | | $ | 42 | |
| Fixed less than 5.50% | Fixed less than 5.50% | | | 281,438 | | | 3,594 | | | 3,646 | | | — | | | 3,594 | | | 1.28% | | | (761) | | | (390) | | | 75 | | | 165 | | Fixed less than 5.50% | | | 270,436 | | | 3,795 | | | 3,204 | | | (591) | | | 3,204 | | | 1.18% | | | (107) | | | (21) | | | 117 | | | 171 | |
| Fixed 5.50%–6.24% | Fixed 5.50%–6.24% | | | 340,453 | | | 4,069 | | | 4,282 | | | — | | | 4,069 | | | 1.20% | | | (1,507) | | | (867) | | | 198 | | | 563 | | Fixed 5.50%–6.24% | | | 399,882 | | | 5,648 | | | 4,806 | | | (842) | | | 4,806 | | | 1.20% | | | (315) | | | (43) | | | 185 | | | 273 | |
| Fixed 6.25%–6.99% | Fixed 6.25%–6.99% | | | 174,584 | | | 1,858 | | | 1,752 | | | 106 | | | 1,752 | | | 1.00% | | | (506) | | | (396) | | | 102 | | | 301 | | Fixed 6.25%–6.99% | | | 151,252 | | | 1,840 | | | 1,599 | | | (241) | | | 1,599 | | | 1.06% | | | (220) | | | (69) | | | 137 | | | 193 | |
| Fixed 7% or greater | Fixed 7% or greater | | | 74,477 | | | 608 | | | 692 | | | — | | | 608 | | | 0.82% | | | (98) | | | (62) | | | 11 | | | 68 | | Fixed 7% or greater | | | 52,308 | | | 486 | | | 497 | | | — | | | 486 | | | 0.93% | | | (493) | | | (21) | | | 43 | | | 70 | |
| | | | | | | |
| | Total portfolio | | $ | 1,063,848 | | $ | 11,946 | | $ | 11,503 | | $ | 792 | | $ | 11,154 | | | 1.05% | | $ | (3,042) | | $ | (1,806) | | $ | 407 | | $ | 1,154 | | Total portfolio | | $ | 1,016,092 | | $ | 13,265 | | $ | 10,901 | | $ | (2,375) | | $ | 10,890 | | | 1.07% | | $ | (1,161) | | $ | (159) | | $ | 510 | | $ | 749 | |
| | | | | | | |
The value of mortgage servicing rights is impacted by market rates for mortgage loans. Historically low market rates which were experienced during 2003, can cause prepayments to increase as a result of refinancing activity. To the extent prepayment speeds exceed thoseloans are prepaid sooner than estimated at the time servicing assets are originally recorded, it is possible that certain mortgage servicing rights assets may become impaired to the extent that the fair value is less than carrying value (net of any previously recorded amortization or valuation reserves). Generally, the fair value of our mortgage servicing rights will increase as market rates for mortgage loans rise and decrease if market rates fall.
AAt December 31, 2005, we had a valuation reserve of $792,000 was recorded as of December 31, 2004$2.4 million based on the estimated fair value of the servicing portfolio. The valuation reserve is adjusted on a quarterly basis through adjustments to mortgage banking revenue.
Goodwill and Core Deposit Intangible Assets
At December 31, 2004,2005, we had goodwill and core deposit intangibles of $398.8 million and $9.7 million, respectively, as compared to $396.4 million and $12.1 million, respectively, as compared to $157.6 million and $2.0 million, respectively, at year-end 2003.2004. This increase in goodwill is attributed to tax adjustments related to the Humboldt acquisition. The goodwill recorded in connection with the Humboldt acquisition represented the excess of the purchase price over the estimated fair value of the net assets acquired. A portion of the purchase price was allocated to the value of Humboldt’s core deposits, which included all deposits except certificates of deposit. The value of the core deposits was determined by a third party based on an analysis of the cost differential between the core deposits and alternative funding sources. We amortize core deposit intangible assets on an accelerated basis over an estimated ten-year life.
Substantially all of the goodwill is associated with our community banking operations. We evaluate goodwill for possible impairment on a quarterly basis and there were no impairments recorded for the years ended December 31, 2005, 2004 2003 or 2002.2003.
Additional information regarding our accounting for goodwill and core deposit intangible assets is included in Notes 1 and 9 of theNotes to Consolidated Financial Statementsin Item 8 below.
Deposits
Total deposits were $3.8$4.3 billion at December 31, 2004,2005, an increase of $1.4 billion,$487.2 million, or 60%13%, from the prior year-end. ExcludingThis growth is attributed to our unique delivery process, service quality focus, marketing and product design. Information on average deposit balances and average rates paid is included under the impactNet Interest Incomesection of deposit liabilities assumed in connection with the Humboldt acquisition ($1.2 billion), total deposits grew by $229 million, or 10%, during 2004.this report. Additional information regarding deposits is included in Note 1011 of theNotes to Consolidated Financial Statementsin Item 8 below.
3233
Umpqua Holdings Corporation
The following table presents the deposit balances by major category as of December 31:
Deposits
| | | | | | | | | | | | | | | | | | |
| As of December 31, | | | | | | | | |
| (in thousands) | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | | | | | |
| | | Amount | | | Percentage | | | Amount | | | Percentage | |
| | |
| Non-interest bearing | | $ | 987,714 | | | | 23% | | | $ | 891,731 | | | | 23% | |
| Interest bearing demand | | | 576,037 | | | | 13% | | | | 578,723 | | | | 15% | |
| Savings and money market | | | 1,597,311 | | | | 38% | | | | 1,378,358 | | | | 37% | |
| Time, $100,000 or greater | | | 601,616 | | | | 14% | | | | 487,344 | | | | 13% | |
| Time, less than $100,000 | | | 523,588 | | | | 12% | | | | 462,951 | | | | 12% | |
| | | |
| | Total | | $ | 4,286,266 | | | | 100% | | | $ | 3,799,107 | | | | 100% | |
| | | |
The following table presents the scheduled maturities of time deposits of $100,000 and greater as of December 31, 2004:2005:
Maturities of Time Deposits of $100,000 and Greater
| | | | | | | | | | | |
| (in thousands) | (in thousands) | | (in thousands) | |
| | | | | |
| Three months or less | Three months or less | | $ | 141,033 | | Three months or less | | $ | 187,397 | |
| Three months to six months | Three months to six months | | | 72,999 | | Three months to six months | | | 165,768 | |
| Six months to one year | Six months to one year | | | 106,587 | | Six months to one year | | | 100,151 | |
| Over one year | Over one year | | | 150,066 | | Over one year | | | 148,300 | |
| | | | | | | | | |
| | Total | | $ | 470,685 | | Total | | $ | 601,616 | |
| | | | | | | | | |
Borrowings
At December 31, 2004,2005, the Bank had outstanding term debt of $88.5$3.2 million. Advances from the Federal Home Loan Banks of San Francisco and Seattle (“FHLB”) amounted to $87.5$2.4 million of the total and are secured by investment securities and residential mortgage loans. The FHLB advances outstanding at December 31, 20042005 had fixed interest rates ranging from 1.76%6.08% to 8.08%7.44%. Approximately $85$1.0 million, or 97%41%, of the FHLB advances mature prior to December 31, 2005, and $86 million, or 98%, mature prior to December 31, 2007. Management expects continued use of FHLB advances as a source of short and long-term funding. Additional information regarding term debt is provided in Note 1617 ofNotes to Consolidated Financial Statementsin Item 8 below.
Junior Subordinated Debentures
We had junior subordinated debentures with carrying values of $166.3$165.7 million and $97.9$166.3 million, respectively, at December 31, 20042005 and 2003. The increase in outstanding junior subordinated debentures during 2004 is attributable to the Humboldt acquisition and the assumption of obligations of five special purpose trust subsidiaries of Humboldt. In connection with the purchase accounting for the acquisition, the carrying value of Humboldt’s $58.9 million of outstanding junior subordinated debentures was adjusted to yield an interest cost at then current market rates. As a result, the issued amount of debentures was increased by recording a premium of $9.6 million that is being amortized over the contractual lives of each issuance.2004.
At December 31, 2004,2005, approximately $119$121.1 million, or 75%73% of the total issued amount, had interest rates that are adjustable on a quarterly basis based on a spread over LIBOR. Increases in short-term market interest rates during 20042005 have resulted in increased interest expense for junior subordinated debentures. Although any additional increases in short-term market interest rates will increase the interest expense for junior subordinated debentures, we believe that other attributes of our balance sheet will serve to mitigate the impact to net interest income on a consolidated basis.
As of December 31, 2004,2005, $156.9 million (representing the entire issued amount) of junior subordinated debentures qualified as Tier 1 capital under regulatory capital purposes. Additional information regarding the terms of the junior subordinated debentures, including maturity/call dates and interest rates, is included in Note 1718 of theNotes to Consolidated Financial Statementsin Item 8 below.
Liquidity and Cash Flow
The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of itsour customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs.
We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and the repayments and maturities of loans and investment securities, the Bank can utilize established uncommitted federal funds lines of credit, sell securities under agreements to repurchase, borrow on a secured basis from the FHLB or issue brokered certificates of deposit.
34
Umpqua Holdings Corporation
At December 31, 2005, the outstanding balance of federal funds purchased was $55 million at a rate of 4.325%. This compared to an outstanding balance of federal funds purchased at December 31, 2004 of $28 million. The Bank had available lines of credit with the FHLB totaling $158 million at December 31, 2005. The Bank had uncommitted federal funds line of credit agreements with four additional financial institutions totaling $98 million and $83 million at December 31, 2005 and 2004, respectively. Availability of the lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs, and the agreements restrict the consecutive day usage.
The Company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of Umpqua’sthe Company’s revenues are obtained from dividends declared and paid by the Bank. In 2005, the Bank paid the Company $20.0 million in dividends. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to Umpqua.the Company. We believe that such restrictions will not have an adverse impact on the ability of Umpquathe Company to meet its ongoing cash obligations, which consist principally of debt service of approximately $9.8 million annually on the $156.9 million (issued amount) of outstanding junior subordinated debentures. As of December 31, 2004, Umpqua2005, the Company did not have any borrowing arrangements.arrangements of its own.
As disclosed in theConsolidated Statements of Cash Flowsin Item 8 of this report, net cash provided by operating activities was $86$100.2 million during 2004.2005. The principal source of cash provided by operating activities was net income. Net cash of $318$474.0 million used in investing activities consisted principally of $418$455.7 million of net loan growth, purchases of $175.5 million of investment securities available for sale and $12.1 million of premises and equipment, offset by net cash acquired in
33
connection with the Humboldt acquisitionsales and maturities of $51investment securities available for sale of $169.2 million. The $216$417.3 million of cash provided inby financing activities primarily consisted of $230$487.6 million of net deposit growth, and $9$27.0 million of proceeds from the exercise of stock options,increase in Fed funds purchased, offset by $14$85.2 million of financing outflows related to stock repurchasesrepayment of term loans and dividend payments.$11.6 million payment of dividends.
Off-Balance Sheet Arrangements
In the normal course of business, we utilize financial instruments with off-balance sheet risk to meet the financing needs of our customers, including loan commitments to extend credit, commitments to extend overdrafts, commitments to originate residential loans and related forward sales commitments, and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses that may require payment of a fee by the customer. Since many of the commitments will expire without being drawn upon, the total commitment amounts do not necessarily reflect future cash requirements. At December 31, 2004,The following table presents a summary of the Bank’s commitments to extend credit and standby letters of credit were approximately $907 millioncontingent liabilities:
Commitments and $26 million, respectively.Contingent Liabilities
| | | | | |
| As of December 31, 2005 | |
| (in thousands) | |
| | |
| Commitments to extend credit | | $ | 1,050,768 | |
| Commitments to extend overdrafts | | $ | 92,439 | |
| Commitments to originate residential loans | | $ | 68,140 | |
| Forward sales commitments | | $ | 7,500 | |
| Standby letters of credit | | $ | 31,090 | |
35
The following table presents a summary of significant contractual obligations extending beyond one year fromas of December 31, 2004:2005 and maturing as indicated:
Future Contractual Obligations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2005 | | As of December 31, 2005 | | | | | | | | | | |
| (in thousands) | | (in thousands) | | Less than | | | 1 to 3 | | | 3 to 5 | | | More than | | | |
| | | | Less than | | | 1 to 3 | | | 3 thru 5 | | | More than | | | | | | 1 Year | | | Years | | | Years | | | 5 Years | | | Total | |
| (in thousands) | | 1 Year | | | Years | | | Years | | | 5 Years | | | Total | | |
| | | | | |
| Term debt | Term debt | | $ | 85,010 | | $ | 1,000 | | $ | — | | $ | 2,190 | | $ | 88,200 | | Term debt | | $ | — | | $ | 1,000 | | $ | — | | $ | 2,012 | | $ | 3,012 | |
| Junior subordinated debentures | Junior subordinated debentures | | | — | | | — | | | — | | | 156,862 | | | 156,862 | | Junior subordinated debentures | | | — | | | — | | | — | | | 156,862 | | | 156,862 | |
| Operating leases | Operating leases | | | 5,128 | | | 10,047 | | | 7,622 | | | 17,594 | | | 40,391 | | Operating leases | | | 6,411 | | | 11,950 | | | 8,813 | | | 26,681 | | | 53,855 | |
| Other long-term liabilities | | | 747 | | | 1,861 | | | 1,817 | | | 15,723 | | | 20,148 | | |
| Other long-term liabilities(1) | | Other long-term liabilities(1) | | | 1,746 | | | 3,816 | | | 3,710 | | �� | 20,082 | | | 29,354 | |
| | | | | | | |
| | Total contractual obligations | | $ | 90,885 | | $ | 12,908 | | $ | 9,439 | | $ | 192,369 | | $ | 305,601 | | Total contractual obligations | | $ | 8,157 | | $ | 16,766 | | $ | 12,523 | | $ | 205,637 | | $ | 243,083 | |
| | | | | | | |
| |
| (1) | Include payments related to employee benefit plans. Additional information about employee benefit plans is provided in Note 16 of theNotes to Consolidated Financial Statementsin Item 8 below. |
The table above does not include deposit liabilities, or interest payments or purchase accounting adjustments related to term debt or junior subordinated debentures.
Although we expect the Bank’s and Umpqua’sthe Company’s liquidity positions to remain satisfactory during 2005,2006, increases in market interest rates during the second half of 2004 have resulted in increased competition for bank deposits. It is possible that our deposit growth for 20052006 may not be maintained at previous levels due to increased pricing pressure or, in order to generate deposit growth, our pricing may need to be adjusted in a manner that results in increased interest expense on deposits.
Concentrations of Credit Risk
The Company grants real estate mortgage, real estate construction, commercial, agricultural and installment loans and leases to customers throughout Oregon, Washington and California.
In management’s judgment, a concentration exists in real estate-related loans, which represented approximately 78% and 76% of the Company’s loan portfolio at December 31, 2005 and 2004, respectively. Commercial real estate concentrations are managed to assure wide geographic and business diversity. Although management believes such concentrations to have no more than the normal risk of collectibility, a substantial decline in the economy in general, or a decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the collectibility of these loans. Personal and business income represent the primary source of repayment for a majority of these loans.
The Bank recognizes the credit risks inherent in dealing with other depository institutions. Accordingly, to prevent excessive exposure to any single correspondent, the Bank has established general standards for selecting correspondents as well as internal limits for allowable exposure to any single correspondent. In addition, the Bank has an investment policy that sets forth limitations that apply to all investments with respect to credit rating and concentrations per issuer.
Capital Resources
Shareholders’ equity at December 31, 20042005 was $688$738.3 million, an increase of $369$50.6 million, or 115%7%, from December 31, 2003.2004. The increase in shareholders’ equity during 20042005 was principally due to the issuance of shares valued at $327 million in connection with the Humboldt acquisition, the exercise and related tax benefit of $9.0 million of stock options and the retention of $39.1$55.5 million, or approximately 83%80%, of net income for the year and issuance of common stock under stock plans and related tax benefit of $5.2 million, partially offset by $6.1$8.8 million of common stock repurchases.unrealized losses on securities arising during the year. Book value per share as of December 31, 20042005 was $15.55$16.57 and tangible book value (total shareholders’ equity less intangible assets, divided by total shares outstanding) per share was $6.31.$7.40.
The Federal Reserve Board has in place guidelines for risk-based capital requirements applicable to U.S. banks and bank/financial holding companies. These risk-based capital guidelines take into consideration risk factors, as defined by regulation, associated with various categories of assets, both on and off-balance sheet. Under the guidelines, capital strength is measured in two tiers, which are used in conjunction with risk-adjusted assets to determine the risk-based capital ratios. The guidelines require an 8% total risk-based capital ratio, of which 4% must be Tier I capital. Our consolidated Tier I capital, which consists of shareholders’ equity and qualifying trust-preferred securities, less other comprehensive income, goodwill and deposit-based intangibles, totaled $431$488.4 million at December 31, 2004.2005. Tier II capital components include all, or a portion of, the allowance for loan losses and the portion of trust preferred securities in excess of Tier I statutory limits. The total of Tier I capital plus
36
Umpqua Holdings Corporation
Tier II capital components is referred to as Total Risk-Based Capital, and was $475$533.9 million at December 31, 2004.2005. The percentage ratios, as calculated under the guidelines, were 10.51%10.59% and 11.59%11.58% for Tier I and Total Risk-Based Capital, respectively, at December 31, 2004.2005.
A minimum leverage ratio is required in addition to the risk-based capital standards and is defined as period-end shareholders’ equity and qualifying trust preferred securities, less other comprehensive income, goodwill and deposit-based intangibles, divided by average assets as adjusted for goodwill and other intangible assets. Although a minimum leverage ratio of 4% is required for the highest-rated financial holding companies that are not undertaking significant expansion programs, the Federal Reserve Board may require a financial holding company to maintain a leverage ratio greater than 4% if it is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve Board. The Federal Reserve Board uses the leverage and risk-based capital ratios to assess capital adequacy
34
Umpqua Holdings Corporation
of banks and financial holding companies. Our consolidated leverage ratios at December 31, 2005 and 2004 and 2003 were 9.55%10.09%, and 9.40%9.55%, respectively.
At December 31, 2004,2005, all three of the capital ratios of the Bank exceeded the minimum ratios required by federal regulation. Management monitors these ratios on a regular basis to ensure that the Bank remains within regulatory guidelines. Further information regarding the actual and required capital ratios is provided in Note 1819 of theNotes to Consolidated Financial Statements in Item 8 below.
OurDuring the fourth quarter of 2005, Umpqua’s Board of Directors approved increasing the quarterly cash dividend rate to $0.12 from $0.08 per share was increased by 50%, toin the third quarter of 2005 and $0.06 per share in the second quarter effective with the declaration in June 2004.of 2005. This increase was approved by the Board of Directors in connection with its annual review ofmade pursuant to our capital planexisting dividend policy and in consideration of, the growth in net income per share.among other things, earnings, regulatory capital levels and expected asset growth. The payment of cash dividends is subject to regulatory limitations as described under theSupervision and Regulationsection of Part I of this report. There is no assurance that future cash dividends will be declared or increased. The following table presents cash dividends declared and dividend payout ratios (dividends declared per share divided by basic earnings per share) for the years ended December 31, 2005, 2004 2003 and 2002:2003:
Cash Dividends and Payout Ratios
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| Dividend declared per share | | $ | 0.22 | | $ | 0.16 | | $ | 0.16 | | | $ | 0.32 | | $ | 0.22 | | $ | 0.16 | |
| Dividend payout ratio | | | 17% | | | 13% | | | 15% | | | | 20% | | | 17% | | | 13% | |
Our boardBoard of directorsDirectors has approved a stock repurchase plan for up to 1.52.5 million shares of common stock. As of December 31, 2004,2005, a total of 1.12.1 million shares remain available for repurchase under this authorization, which expires on June 30, 2005.2007. In addition, our stock option plans provide for option holders to pay for the exercise price in part or whole by tendering previously held shares. Although no shares were repurchased in open market transactions during the third or fourth quartersquarter of 2004,2005, we do expect to continue to repurchase additional shares in the future. The timing and amount of such repurchases will depend upon the market price for our common stock, securities laws restricting repurchases, asset growth, earnings and our capital plan.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The absolute level and volatility of interest rates can have a significant impact on our profitability. The objective of interest rate risk management is to identify and manage the sensitivity of net interest income to changing interest rates to achieve our overall financial objectives. Based on economic conditions, asset quality and various other considerations, management establishes tolerance ranges for interest rate sensitivity and manages within these ranges. Net interest income and the fair value of financial instruments are greatly influenced by changes in the level of interest rates. We manage exposure to fluctuations in interest rates through policies that are established by the Asset/ Liability Management Committee (“ALCO”). The ALCO meets monthly and has responsibility for developing asset/liability management policy, formulating and implementing strategies to improve balance sheet positioning and earnings and reviewing interest rate sensitivity. The Board of Directors’ Loan and Investment Committee provides oversight of the asset/liability management process, reviews the results of the interest rate risk analyses prepared for the ALCO and approves the asset/liability policy on an annual basis.
Management utilizes an interest rate simulation model to estimate the sensitivity of net interest income to changes in market interest rates. Such estimates are based upon a number of assumptions for each scenario, including the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments. Interest rate sensitivity is a function of the repricing characteristics of our interest earninginterest-earning assets and interest bearinginterest-bearing liabilities. These repricing characteristics are the time frames within which the interest bearinginterest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity during the life of the instruments. Interest rate sensitivity management focuses on the maturity structure of assets and
37
liabilities and their repricing characteristics during periods of changes in market interest rates. Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable timeframe, thereby minimizing the impact of interest rate changes on net interest income. Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities at a point in time that are subject to repricing at various time horizons: immediate to three months, four to twelve months, one to five years, over five years, and on a cumulative basis. The differences are known as interest sensitivity gaps. The table below sets forth interest sensitivity gaps for these different intervals as of December 31, 2004.
35
2005.
Interest Sensitivity Gap
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | | (in thousands) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | By Repricing Interval | | | | | |
| | | | By Repricing Interval | | | | | | | | | | | Non-Rate- | | | |
| December 31, 2004 | | | | | Non-Rate- | | | | |
| (in thousands) | | 0-3 Months | | | 4-12 Months | | | 1-5 Years | | | Over 5 Years | | | Sensitive | | | Total | | |
| | | | | | 0-3 Months | | | 4-12 Months | | | 1-5 Years | | | Over 5 Years | | | Sensitive | | | Total | |
Assets | | | | | | | | | | | | | | | | | | | | |
| Temporary investments | | $ | 23,646 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 23,646 | | |
| | | | |
| ASSETS | | ASSETS | | | | | | | | | | | | | | | | | | | |
| Temporary Investments | | Temporary Investments | | $ | 10,233 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 10,233 | |
| Securities available-for-sale | Securities available-for-sale | | | 108,436 | | | 123,298 | | | 337,982 | | | 109,320 | | | (3,052 | ) | | | 675,984 | | Securities available-for-sale | | | 82,649 | | | 70,440 | | | 350,841 | | | 180,501 | | | (12,563 | ) | | | 671,868 | |
| Securities held-to-maturity | Securities held-to-maturity | | | — | | | 30 | | | 2,680 | | | 9,097 | | | — | | | 11,807 | | Securities held-to-maturity | | | 1,997 | | | 2,190 | | | 3,415 | | | 1,075 | | | — | | | 8,677 | |
| Trading account assets | Trading account assets | | | 1,577 | | | — | | | — | | | — | | | — | | | 1,577 | | Trading account assets | | | 601 | | | — | | | — | | | — | | | — | | | 601 | |
| Loans and loans held for sale | Loans and loans held for sale | | | 1,521,215 | | | 512,678 | | | 1,335,104 | | | 111,256 | | | 8,442 | | | 3,488,695 | | Loans and loans held for sale | | | 1,571,754 | | | 531,934 | | | 1,683,103 | | | 152,130 | | | (8,229 | ) | | | 3,930,692 | |
| Non-interest-earning assets | Non-interest-earning assets | | | — | | | — | | | — | | | — | | | 671,326 | | | 671,326 | | Non-interest-earning assets | | | — | | | — | | | — | | | — | | | 738,568 | | | 738,568 | |
| | | | | | | |
| | Total assets | | | 1,654,874 | | | 636,006 | | | 1,675,766 | | | 229,673 | | | 676,716 | | $ | 4,873,035 | | Total assets | | | 1,667,234 | | | 604,564 | | | 2,037,359 | | | 333,706 | | | 717,776 | | $ | 5,360,639 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | |
| Interest-bearing demand deposits | Interest-bearing demand deposits | | | 1,504,397 | | | | | | | | | | | | | | | 1,504,397 | | Interest-bearing demand deposits | | | 576,037 | | | — | | | — | | | — | | | — | | $ | 576,037 | |
| Savings deposits | | | 452,686 | | | | | | | | | | | | | | | 452,686 | | |
| Savings and money-market deposits | | Savings and money-market deposits | | | 1,597,311 | | | — | | | — | | | — | | | — | | | 1,597,311 | |
| Time deposits | Time deposits | | | 256,327 | | | 368,408 | | | 310,795 | | | 14,763 | | | | | | 950,293 | | Time deposits | | | 354,659 | | | 481,758 | | | 283,822 | | | 4,616 | | | 349 | | | 1,125,204 | |
| Securities sold under agreements to repurchase | Securities sold under agreements to repurchase | | | 60,267 | | | | | | | | | | | | | | | 60,267 | | Securities sold under agreements to repurchase | | | 58,865 | | | — | | | — | | | — | | | — | | | 58,865 | |
| Federal funds purchased | Federal funds purchased | | | 28,000 | | | | | | | | | | | | | | | 28,000 | | Federal funds purchased | | | 55,000 | | | — | | | — | | | — | | | — | | | 55,000 | |
| Term debt | Term debt | | | 117,787 | | | 60,000 | | | 29,451 | | | 37,824 | | | 9,645 | | | 254,707 | | Term debt | | | 37 | | | 117 | | | 1,730 | | | 541 | | | 759 | | | 3,184 | |
| Non-interest-bearing liabilities and shareholders’ equity | | | — | | | — | | | — | | | — | | | 1,622,685 | | | 1,622,685 | | |
| Junior subordinated debentures | | Junior subordinated debentures | | | 118,561 | | | — | | | 27,836 | | | 10,465 | | | 8,863 | | | 165,725 | |
| Non-interest bearing liabilities and shareholders’ equity | | Non-interest bearing liabilities and shareholders’ equity | | | — | | | — | | | — | | | — | | | 1,779,313 | | | 1,779,313 | |
| | | | | | | |
| | Total liabilities and shareholders’ equity | | | 2,419,464 | | | 428,408 | | | 340,246 | | | 52,587 | | | 1,632,330 | | $ | 4,873,035 | | |
| Total liabilities and shareholders’ equity | | Total liabilities and shareholders’ equity | | | 2,760,470 | | | 481,875 | | | 313,388 | | | 15,622 | | | 1,789,284 | | $ | 5,360,639 | |
| | | | | | | | | | | | | |
| Interest rate sensitivity gap | Interest rate sensitivity gap | | | (764,590 | ) | | | 207,598 | | | 1,335,520 | | | 177,086 | | | (955,614 | ) | | | | | Interest rate sensitivity gap | | | (1,093,236 | ) | | | 122,689 | | | 1,723,971 | | | 318,084 | | | (1,071,508 | ) | | | — | |
| Cumulative interest rate sensitivity gap | Cumulative interest rate sensitivity gap | | $ | (764,590 | ) | | $ | (556,992 | ) | | $ | 778,528 | | $ | 955,614 | | $ | — | | | | | Cumulative interest rate sensitivity gap | | $ | (1,093,236 | ) | | $ | (970,547 | ) | | $ | 753,424 | | $ | 1,071,508 | | $ | — | | | | |
| | | | | | | | | | | | | |
| Cumulative gap as a % of earning assets | Cumulative gap as a % of earning assets | | | -18.2% | | | -13.3% | | | 18.5% | | | 22.7% | | | | | | | | Cumulative gap as a % of earning assets | | | -23.5 | % | | | -20.9 | % | | | 16.2 | % | | | 23.1 | % | | | | | | | |
| | | | | | | | | | | | | |
Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset and its supporting liability can vary significantly, while the timing of repricing for both the asset and the liability remains the same, thus impacting net interest income. This characteristic is referred to as basis risk and generally relates to the possibility that the repricing characteristics of short-term assets tied to the prime rate are different from those of short-term funding sources such as certificates of deposit. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest rate sensitivity analysis. These prepayments may have a significant impact on our net interest margin. Because of these factors, an interest sensitivity gap analysis may not provide an accurate assessment of our exposure to changes in interest rates.
We utilize an interest rate simulation model to monitor and evaluate the impact of changing interest rates on net interest income. The estimated impact on our net interest income over a time horizon of one year as of December 31, 20042005 is indicated in the table below. For the scenarios shown, the interest rate simulation assumes a parallel and sustained shift in market interest rates ratably over a twelve-month period and no change in the composition or size of the balance sheet. For example, the “up 200 basis points” scenario is based on a theoretical increase in market rates of 16.7 basis points per month for twelve months.
3638
Umpqua Holdings Corporation
Interest Rate Simulation Impact on Net Interest Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, | | | | | | | | | | | | | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | | | | | | | |
| | | Increase (Decrease) | | | | | Increase (Decrease) | | | | | Increase (Decrease) | | | | | Increase (Decrease) | | | | | Increase (Decrease) | | | |
| | | in Net Interest | | | | | in Net Interest | | | | | in Net Interest | | | | | in Net Interest | | | | | in Net Interest | | | |
| | | Income From | | | Percentage | | | Income From | | | Percentage | | | Income From | | | Percentage | | | Income From | | | Percentage | | | Income From | | | Percentage | |
| Scenario | | Base Scenario | | | Change | | | Base Scenario | | | Change | | |
| | | | Base Scenario | | | Change | | | Base Scenario | | | Change | | | Base Scenario | | | Change | |
| | | | | |
| Up 200 basis points | | $ | 7,265 | | | 3.3% | | $ | 5,433 | | | 4.2% | | | $ | 2,664 | | | 1.1% | | $ | 7,265 | | | 3.3% | | $ | 5,433 | | | 4.2% | |
| Up 100 basis points | | $ | 6,138 | | | 2.8% | | $ | 3,434 | | | 2.7% | | | $ | 1,482 | | | 0.6% | | $ | 6,138 | | | 2.8% | | $ | 3,434 | | | 2.7% | |
| Down 100 basis points | | $ | (6,503 | ) | | | -3.0% | | $ | (4,199 | ) | | | -3.1% | | | $ | (2,147 | ) | | | -0.9% | | $ | (6,503 | ) | | | -3.0% | | $ | (4,199 | ) | | | -3.1% | |
| Down 200 basis points | | $ | (13,986 | ) | | | -6.4% | | $ | (6,852 | ) | | | -5.3% | | | $ | (5,709 | ) | | | -2.4% | | $ | (13,986 | ) | | | -6.4% | | $ | (6,852 | ) | | | -5.3% | |
As of December 31, 2005, 2004 and 2003, we believe our balance sheet was in an “asset-sensitive” position, as the repricing characteristics were such that an increase in market interest rates would have a positive effect on net interest income and a decrease in market interest rates would have negative effect on net interest income. It should be noted that someThe flattening yield curve in 2005 resulted in decreased asset sensitivity from the previous years. Some of the assumptions made in the simulation model may not materialize and unanticipated events and circumstances will occur. In addition, the simulation model does not take into account any future actions which we could undertake to mitigate an adverse impact due to changes in interest rates from those expected or in the actual level of market interest rates.
A second interest rate sensitivity measure we utilize is the quantification of market value changes for all financial assets and liabilities, given an increase or decrease in market interest rates. This approach provides a longer-term view of interest rate risk, capturing all future expected cash flows. Assets and liabilities with option characteristics are measured based on different interest rate path valuations using statistical rate simulation techniques.
The table below illustrates the effects of various market interest rate changes or “shocks”, on the fair values of financial assets and liabilities (excluding mortgage servicing rights) as compared to the corresponding carrying values and fair values as of December 31, 2004:values:
Interest Rate Simulation Impact on Fair Value of Financial Assets and Liabilities
| | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, | | | | | | | | | |
| (in thousands) | | | | | | | | | | | | |
| | | Increase (Decrease) in Estimated | | | Percentage | | | 2005 | | | 2004 | |
| Scenario | | Economic Value of Equity | | | Change | | |
| | | | | | | | |
| | | | Increase (Decrease) in | | | | | Increase (Decrease) in | | | |
| | | | Estimated Fair | | | Percentage | | | Estimated Fair | | | Percentage | |
| | | | Value of Equity | | | Change | | | Value of Equity | | | Change | |
| | | | | |
| Up 200 basis points | | $ | (131,755 | ) | | | -16.6% | | | $ | (71,891 | ) | | | -8.0% | | $ | (131,755 | ) | | | -16.6% | |
| Up 100 basis points | | $ | (66,321 | ) | | | -8.3% | | | $ | (39,490 | ) | | | -4.4% | | $ | (66,321 | ) | | | -8.3% | |
| Down 100 basis points | | $ | 49,911 | | | 6.3% | | | $ | 9,406 | | | 1.0% | | $ | 49,911 | | | 6.3% | |
| Down 200 basis points | | $ | 116,282 | | | 14.4% | | | $ | 28,848 | | | 3.2% | | $ | 116,282 | | | 14.4% | |
The flattening yield curve in 2005 resulted in decreased fair value sensitivity from 2004.
39
Impact of Inflation and Changing Prices
A financial institution’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature, with relatively little investment in fixed assets or inventories. Inflation has an important impact on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain appropriate capital ratios. We believe that the impact of inflation on financial results depends on management’s ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact on performance. We have an asset/liability management program which attempts to manage interest rate sensitivity. In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.
Our financial statements included in Item 8 below have been prepared in accordance with accounting principles generally accepted in the United States, which requires us to measure financial position and operating results principally in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on our results of operations is through increased operating costs, such as compensation, utilitiesoccupancy and travelbusiness development expenses. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the rate of inflation. Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including U.S. fiscal and monetary policy and general national and global economic conditions.
3740
Umpqua Holdings Corporation
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATADATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Umpqua Holdings Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Umpqua Holdings Corporation and Subsidiaries (the Company) as of December 31, 2005, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income, and cash flows for the year ended December 31, 2005. We also have audited management’s assessment included in the accompanying Report of Management on Internal Control over Financial Reporting that the Company maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits. The financial statements as of and for each of the years in the two year period ended December 31, 2004 were audited by other auditors whose report dated March 31, 2005 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and well as evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Umpqua Holdings Corporation and Subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, management’s assessment that Umpqua Holdings Corporation maintained effective internal control over financial reporting as of December 31, 2005 is fairly stated, in all material respects, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our opinion, Umpqua Holdings Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ Moss Adams LLP
Portland, Oregon
March 14, 2006
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Umpqua Holdings Corporation
Portland, Oregon
We have audited the accompanying consolidated balance sheetssheet of Umpqua Holdings Corporation and subsidiaries (the “Company”) as of December 31, 2004, and 2003, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the threetwo years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in all material respects, the financial position of Umpqua Holdings Corporation and subsidiaries as of December 31, 2004, and 2003, and the results of their operations and their cash flows for each of the threetwo years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 31, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Portland, Oregon
March 31, 2005
3842
Umpqua Holdings Corporation
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | |
| CONSOLIDATED BALANCE SHEETS | CONSOLIDATED BALANCE SHEETS | | | | | CONSOLIDATED BALANCE SHEETS | | | | |
| December 31, 2004 and 2003 | | | | | |
| December 31, 2005 and 2004 | | December 31, 2005 and 2004 | | | | |
| (in thousands, except shares | (in thousands, except shares | | 2004 | | | 2003 | | (in thousands, except shares | | 2005 | | | 2004 | |
| | | | | |
| ASSETS | ASSETS | | | | | | | | ASSETS | | | | | | | |
| Cash and due from banks | Cash and due from banks | | $ | 94,561 | | $ | 103,565 | | Cash and due from banks | | $ | 151,521 | | $ | 94,561 | |
| Temporary investments | Temporary investments | | | 23,646 | | | 30,441 | | Temporary investments | | | 10,233 | | | 23,646 | |
| | | | | | | |
| | Total cash and cash equivalents | | | 118,207 | | | 134,006 | | Total cash and cash equivalents | | | 161,754 | | | 118,207 | |
| Trading account assets | Trading account assets | | | 1,577 | | | 1,265 | | Trading account assets | | | 601 | | | 1,577 | |
| Investment securities available for sale, at fair value | Investment securities available for sale, at fair value | | | 675,984 | | | 501,904 | | Investment securities available for sale, at fair value | | | 671,868 | | | 675,984 | |
| Investment securities held to maturity, at amortized cost | Investment securities held to maturity, at amortized cost | | | 11,807 | | | 14,612 | | Investment securities held to maturity, at amortized cost | | | 8,677 | | | 11,807 | |
| Mortgage loans held for sale | Mortgage loans held for sale | | | 20,791 | | | 37,798 | | Mortgage loans held for sale | | | 9,061 | | | 20,791 | |
| Loans | Loans | | | 3,467,904 | | | 2,003,587 | | Loans | | | 3,921,631 | | | 3,467,904 | |
| | Allowance for loan losses | | | (44,229) | | | (25,352) | | Allowance for loan losses | | | (43,885) | | | (44,229) | |
| | | | | | | |
| | Net loans | | | 3,423,675 | | | 1,978,235 | | Net loans | | | 3,877,746 | | | 3,423,675 | |
| Federal Home Loan Bank stock, at cost | Federal Home Loan Bank stock, at cost | | | 14,218 | | | 7,168 | | Federal Home Loan Bank stock, at cost | | | 14,263 | | | 14,218 | |
| Premises and equipment, net | Premises and equipment, net | | | 85,681 | | | 63,328 | | Premises and equipment, net | | | 88,865 | | | 85,681 | |
| Goodwill and other intangible assets, net | Goodwill and other intangible assets, net | | | 408,460 | | | 159,585 | | Goodwill and other intangible assets, net | | | 408,503 | | | 408,460 | |
| Mortgage servicing rights, net | Mortgage servicing rights, net | | | 11,154 | | | 10,608 | | Mortgage servicing rights, net | | | 10,890 | | | 11,154 | |
| Other assets | Other assets | | | 101,481 | | | 55,306 | | Other assets | | | 108,411 | | | 101,481 | |
| | | | | | | |
| | Total assets | | $ | 4,873,035 | | $ | 2,963,815 | | Total assets | | $ | 5,360,639 | | $ | 4,873,035 | |
| | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
| Deposits | Deposits | | | | | | | | Deposits | | | | | | | |
| | Noninterest bearing | | $ | 891,731 | | $ | 589,901 | | Noninterest bearing | | $ | 987,714 | | $ | 891,731 | |
| | Interest bearing | | | 2,907,376 | | | 1,788,291 | | Interest bearing | | | 3,298,552 | | | 2,907,376 | |
| | | | | | | |
| | | Total deposits | | | 3,799,107 | | | 2,378,192 | | | Total deposits | | | 4,286,266 | | | 3,799,107 | |
| Securities sold under agreements to repurchase and federal funds purchased | Securities sold under agreements to repurchase and federal funds purchased | | | 88,267 | | | 83,531 | | Securities sold under agreements to repurchase and federal funds purchased | | | 113,865 | | | 88,267 | |
| Term debt | Term debt | | | 88,451 | | | 55,000 | | Term debt | | | 3,184 | | | 88,451 | |
| Junior subordinated debentures | Junior subordinated debentures | | | 166,256 | | | 97,941 | | Junior subordinated debentures | | | 165,725 | | | 166,256 | |
| Other liabilities | Other liabilities | | | 43,341 | | | 30,182 | | Other liabilities | | | 53,338 | | | 43,341 | |
| | | | | | | |
| | | Total Liabilities | | | 4,185,422 | | | 2,644,846 | | | Total liabilities | | | 4,622,378 | | | 4,185,422 | |
| | | | | | | |
| COMMITMENTS AND CONTINGENCIES (Note 13) | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES (NOTE 14) | | COMMITMENTS AND CONTINGENCIES (NOTE 14) | | | | | | | |
| SHAREHOLDERS’ EQUITY | SHAREHOLDERS’ EQUITY | | | | | | | | SHAREHOLDERS’ EQUITY | | | | | | | |
| Common stock, no par value, 100,000,000 shares authorized; issued and outstanding: 44,211,075 in 2004 and 28,411,816 in 2003 | | | 560,611 | | | 230,773 | | |
| Preferred stock, no par value, 2,000,000 shares authorized; none issued and outstanding | | Preferred stock, no par value, 2,000,000 shares authorized; none issued and outstanding | | | — | | | — | |
| Common stock, no par value, 100,000,000 shares authorized; issued and outstanding: 44,556,269 in 2005 and 44,211,075 in 2004 | | Common stock, no par value, 100,000,000 shares authorized; issued and outstanding: 44,556,269 in 2005 and 44,211,075 in 2004 | | | 564,579 | | | 560,611 | |
| Retained earnings | Retained earnings | | | 128,112 | | | 89,058 | | Retained earnings | | | 183,591 | | | 128,112 | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | | | (1,110) | | | (862) | | Accumulated other comprehensive loss | | | (9,909) | | | (1,110) | |
| | | | | | | |
| | | Total shareholders’ equity | | | 687,613 | | | 318,969 | | | Total shareholders’ equity | | | 738,261 | | | 687,613 | |
| | | | | | | |
| | | Total liabilities and shareholders’ equity | | $ | 4,873,035 | | $ | 2,963,815 | | | Total liabilities and shareholders’ equity | | $ | 5,360,639 | | $ | 4,873,035 | |
| | | | | | | |
See notes to consolidated financial statements
3943
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF INCOME | CONSOLIDATED STATEMENTS OF INCOME | | | | | | | CONSOLIDATED STATEMENTS OF INCOME | | | | | | |
| For the Years Ended December 31, 2004, 2003 and 2002 | | | | | | | |
| For the Years Ended December 31, 2005, 2004 and 2003 | | For the Years Ended December 31, 2005, 2004 and 2003 | | | | | | |
| (in thousands, except per shre amounts) | (in thousands, except per shre amounts) | | 2004 | | | 2003 | | | 2002 | | (in thousands, except per shre amounts) | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| INTEREST INCOME | INTEREST INCOME | | | | | | | | | | | INTEREST INCOME | | | | | | | | | | |
| Interest and fees on loans | Interest and fees on loans | | $ | 170,791 | | $ | 126,900 | | $ | 86,967 | | Interest and fees on loans | | $ | 251,715 | | $ | 170,791 | | $ | 126,900 | |
| Interest and dividends on investment securities | Interest and dividends on investment securities | | | | | | | | | | | Interest and dividends on investment securities | | | | | | | | | | |
| | Taxable | | | 24,076 | | | 11,948 | | | 8,942 | | Taxable | | | 26,268 | | | 24,076 | | | 11,948 | |
| | Exempt from federal income tax | | | 2,325 | | | 2,443 | | | 3,032 | | Exempt from federal income tax | | | 2,544 | | | 2,325 | | | 2,443 | |
| | Dividends | | | 254 | | | 307 | | | 466 | | Dividends | | | 164 | | | 254 | | | 307 | |
| Other interest income | Other interest income | | | 612 | | | 534 | | | 918 | | Other interest income | | | 1,585 | | | 612 | | | 534 | |
| | | | | | | |
| | Total Interest Income | | | 198,058 | | | 142,132 | | | 100,325 | | Total Interest Income | | | 282,276 | | | 198,058 | | | 142,132 | |
| INTEREST EXPENSE | INTEREST EXPENSE | | | | | | | | | | | INTEREST EXPENSE | | | | | | | | | | |
| Interest on deposits | Interest on deposits | | | 30,999 | | | 23,608 | | | 21,545 | | Interest on deposits | | | 59,578 | | | 30,999 | | | 23,608 | |
| Interest on federal funds purchased and repurchase agreements | Interest on federal funds purchased and repurchase agreements | | | 794 | | | 502 | | | 372 | | Interest on federal funds purchased and repurchase agreements | | | 2,207 | | | 794 | | | 502 | |
| Interest on borrowed funds | | | 2,023 | | | 1,035 | | | 1,024 | | |
| Interest on term debt | | Interest on term debt | | | 659 | | | 2,023 | | | 1,035 | |
| Interest on junior subordinated debentures | Interest on junior subordinated debentures | | | 6,555 | | | 3,715 | | | 856 | | Interest on junior subordinated debentures | | | 10,550 | | | 6,555 | | | 3,715 | |
| | | | | | | |
| | Total interest expense | | | 40,371 | | | 28,860 | | | 23,797 | | Total interest expense | | | 72,994 | | | 40,371 | | | 28,860 | |
| | | | | | | |
| | Net interest income | | | 157,687 | | | 113,272 | | | 76,528 | | Net interest income | | | 209,282 | | | 157,687 | | | 113,272 | |
| Provision for loan losses | Provision for loan losses | | | 7,321 | | | 4,550 | | | 3,888 | | Provision for loan losses | | | 2,468 | | | 7,321 | | | 4,550 | |
| | | | | | | |
| | Net interest income after provision for loan losses | | | 150,366 | | | 108,722 | | | 72,640 | | Net interest income after provision for loan losses | | | 206,814 | | | 150,366 | | | 108,722 | |
| NON-INTEREST INCOME | NON-INTEREST INCOME | | | | | | | | | | | NON-INTEREST INCOME | | | | | | | | | | |
| Service charges on deposit accounts | Service charges on deposit accounts | | | 17,404 | | | 12,556 | | | 8,640 | | Service charges on deposit accounts | | | 21,697 | | | 17,404 | | | 12,556 | |
| Brokerage commissions and fees | Brokerage commissions and fees | | | 11,829 | | | 9,498 | | | 9,012 | | Brokerage commissions and fees | | | 11,317 | | | 11,829 | | | 9,498 | |
| Mortgage banking revenue | | | 7,655 | | | 11,473 | | | 9,075 | | |
| Mortgage banking revenue, net | | Mortgage banking revenue, net | | | 6,426 | | | 7,655 | | | 11,473 | |
| Net gain on sale of investment securities | | Net gain on sale of investment securities | | | 1,439 | | | 19 | | | 2,155 | |
| Other income | Other income | | | 4,466 | | | 2,319 | | | 1,427 | | Other income | | | 6,903 | | | 4,466 | | | 2,319 | |
| Net gain (loss) on sale of investment securities | | | 19 | | | 2,155 | | | (497) | | |
| | | | | | | |
| | Total non-interest income | | | 41,373 | | | 38,001 | | | 27,657 | | Total non-interest income | | | 47,782 | | | 41,373 | | | 38,001 | |
| NON-INTEREST EXPENSE | NON-INTEREST EXPENSE | | | | | | | | | | | NON-INTEREST EXPENSE | | | | | | | | | | |
| Salaries and employee benefits | Salaries and employee benefits | | | 67,351 | | | 53,090 | | | 37,117 | | Salaries and employee benefits | | | 82,467 | | | 67,351 | | | 53,090 | |
| Net occupancy and equipment | Net occupancy and equipment | | | 19,765 | | | 14,833 | | | 9,596 | | Net occupancy and equipment | | | 24,693 | | | 19,765 | | | 14,833 | |
| Communications | Communications | | | 5,752 | | | 4,630 | | | 3,147 | | Communications | | | 5,841 | | | 5,752 | | | 4,630 | |
| Marketing | Marketing | | | 4,228 | | | 3,567 | | | 1,837 | | Marketing | | | 4,564 | | | 4,228 | | | 3,567 | |
| Services | Services | | | 9,414 | | | 7,367 | | | 5,043 | | Services | | | 13,245 | | | 9,414 | | | 7,367 | |
| Supplies | Supplies | | | 1,995 | | | 2,100 | | | 1,591 | | Supplies | | | 2,706 | | | 1,995 | | | 2,100 | |
| Intangible amortization | Intangible amortization | | | 1,512 | | | 404 | | | 405 | | Intangible amortization | | | 2,430 | | | 1,512 | | | 404 | |
| Merger related expenses | Merger related expenses | | | 5,597 | | | 2,082 | | | 2,752 | | Merger related expenses | | | 262 | | | 5,597 | | | 2,082 | |
| Other expenses | Other expenses | | | 9,565 | | | 7,196 | | | 5,226 | | Other expenses | | | 10,848 | | | 9,565 | | | 7,196 | |
| | | | | | | |
| | Total non-interest expenses | | | 125,179 | | | 95,269 | | | 66,714 | | Total non-interest expenses | | | 147,056 | | | 125,179 | | | 95,269 | |
| Income before income taxes and discontinued operations | Income before income taxes and discontinued operations | | | 66,560 | | | 51,454 | | | 33,583 | | Income before income taxes and discontinued operations | | | 107,540 | | | 66,560 | | | 51,454 | |
| Provision for income taxes | Provision for income taxes | | | 23,270 | | | 17,970 | | | 12,032 | | Provision for income taxes | | | 37,805 | | | 23,270 | | | 17,970 | |
| | | | | | | |
| Income from continuing operations | Income from continuing operations | | | 43,290 | | | 33,484 | | | 21,551 | | Income from continuing operations | | | 69,735 | | | 43,290 | | | 33,484 | |
| Gain on sale of discontinued operations, net of tax | Gain on sale of discontinued operations, net of tax | | | 3,375 | | | — | | | — | | Gain on sale of discontinued operations, net of tax | | | — | | | 3,375 | | | — | |
| Income from discontinued operations, net of tax | Income from discontinued operations, net of tax | | | 501 | | | 635 | | | 417 | | Income from discontinued operations, net of tax | | | — | | | 501 | | | 635 | |
| | | | | | | |
| Net income | | $ | 47,166 | | $ | 34,119 | | $ | 21,968 | | |
| | | | Net income | | $ | 69,735 | | $ | 47,166 | | $ | 34,119 | |
| | | | | | | |
| BASIC EARNINGS PER SHARE | BASIC EARNINGS PER SHARE | | | | | | | | | | | BASIC EARNINGS PER SHARE | | | | | | | | | | |
| Continuing operations | Continuing operations | | $ | 1.21 | | $ | 1.18 | | $ | 1.02 | | Continuing operations | | $ | 1.57 | | $ | 1.21 | | $ | 1.18 | |
| Discontinued operations | Discontinued operations | | | 0.11 | | | 0.03 | | | 0.02 | | Discontinued operations | | | — | | | 0.11 | | | 0.03 | |
| | | | | | | |
| | Net income | | $ | 1.32 | | $ | 1.21 | | $ | 1.04 | | | Net income | | $ | 1.57 | | $ | 1.32 | | $ | 1.21 | |
| | | | | | | |
| DILUTED EARNINGS PER SHARE | DILUTED EARNINGS PER SHARE | | | | | | | | | | | DILUTED EARNINGS PER SHARE | | | | | | | | | | |
| Continuing operations | Continuing operations | | $ | 1.19 | | $ | 1.17 | | $ | 1.01 | | Continuing operations | | $ | 1.55 | | $ | 1.19 | | $ | 1.17 | |
| Discontinued operations | Discontinued operations | | | 0.11 | | | 0.02 | | | 0.02 | | Discontinued operations | | | — | | | 0.11 | | | 0.02 | |
| | | | | | | |
| | Net income | | $ | 1.30 | | $ | 1.19 | | $ | 1.03 | | | Net income | | $ | 1.55 | | $ | 1.30 | | $ | 1.19 | |
| | | | | | | |
See notes to consolidated financial statements
4044
Umpqua Holdings Corporation
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | | | | | | | Accumulated | | | |
| CONSOLIDATED STATEMENTS OF CHANGES IN | | | | | | Other | | | | |
| SHAREHOLDERS’ EQUITY | | | Common Stock | | | | | Comprehensive | | | | |
| For the years ended December 31, 2004, 2003 and 2002 | | | | | Retained | | | Income | | | Comprehensive | | |
| (in thousands, except shaes) | | Shares | | | Amount | | | Earnings | | | (Loss) | | | Income | | |
| | | |
| BALANCE AT JANUARY 1, 2002 | | | 19,952,965 | | $ | 92,268 | | $ | 41,041 | | $ | 1,992 | | | | | |
| Net income | | | | | | | | | 21,968 | | | | | $ | 21,968 | | |
| Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | |
| | Unrealized gains on securities arising during the year(1) | | | | | | | | | | | | 1,312 | | | 1,312 | | |
| | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | $ | 23,280 | | |
| | | | | | | | | | | | | |
| Deferred compensation related to acquisitions | | | | | | (356) | | | | | | | | | | | |
| Deferred compensation earned during the year | | | | | | 140 | | | | | | | | | | | |
| Stock repurchased and retired | | | (14,893) | | | (228) | | | | | | | | | | | |
| Stock options exercised and related tax benefit (Note 19) | | | 223,438 | | | 2,285 | | | | | | | | | | | |
| Stock issued in connection with acquisitions (Note 3) | | | 7,819,081 | | | 131,271 | | | | | | | | | | | |
| Cash dividends | | | | | | | | | (3,534) | | | | | | | | |
| | | | | | | |
| Balance at December 31, 2002 | | | 27,980,591 | | $ | 225,380 | | $ | 59,475 | | $ | 3,304 | | | | | |
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ | | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ | | | | | | Other | | | |
| EQUITY | | | | Common Stock | | | | | Comprehensive | | | |
| For the years ended December 31, 2005, 2004 and 2003 | | For the years ended December 31, 2005, 2004 and 2003 | | | | | Retained | | | Income | | | |
| (in thousands, except share) | | (in thousands, except share) | | Shares | | | Amount | | | Earnings | | | (Loss) | | | Total | |
| | | | | | | | | |
| BALANCE AT JANUARY 1, 2003 | BALANCE AT JANUARY 1, 2003 | | | 27,980,591 | | $ | 225,380 | | $ | 59,475 | | $ | 3,304 | | | | | BALANCE AT JANUARY 1, 2003 | | | 27,980,591 | | $ | 225,380 | | $ | 59,475 | | $ | 3,304 | | $ | 288,159 | |
| Net income | Net income | | | | | | | | | 34,119 | | | | | $ | 34,119 | | Net income | | | | | | | | | 34,119 | | | | | | 34,119 | |
| Other comprehensive loss, net of tax: | Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | | Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | |
| | Unrealized losses on securities arising during the year(2) | | | | | | | | | | | | (4,166) | | | (4,166) | | Unrealized losses on securities arising during the year(1) | | | | | | | | | | | | (4,166) | | | (4,166) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | Comprehensive income | | | | | | | | | | | | | | $ | 29,953 | | Comprehensive income | | | | | | | | | | | | | | $ | 29,953 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Deferred compensation earned during the year | Deferred compensation earned during the year | | | | | | 149 | | | | | | | | | | | Deferred compensation earned during the year | | | | | | 149 | | | | | | | | | 149 | |
| Stock repurchased and retired | Stock repurchased and retired | | | (24,000) | | | (409) | | | | | | | | | | | Stock repurchased and retired | | | (24,000) | | | (409) | | | | | | | | | (409) | |
| Stock options exercised and related tax benefit (Note 19) | | | 455,225 | | | 5,653 | | | | | | | | | | | |
| Cash dividends | | | | | | | | | (4,536) | | | | | | | | |
| Issuances of common stock under stock plans and related tax benefit (Note 20) | | Issuances of common stock under stock plans and related tax benefit (Note 20) | | | 455,225 | | | 5,653 | | | | | | | | | 5,653 | |
| Cash dividends ($0.16 per share) | | Cash dividends ($0.16 per share) | | | | | | | | | (4,536) | | | | | | (4,536) | |
| | | | | | | | | | | | | |
| Balance at December 31, 2003 | Balance at December 31, 2003 | | | 28,411,816 | | $ | 230,773 | | $ | 89,058 | | $ | (862) | | | | | Balance at December 31, 2003 | | | 28,411,816 | | $ | 230,773 | | $ | 89,058 | | $ | (862) | | $ | 318,969 | |
| | | | | | | | | | | | | |
| BALANCE AT JANUARY 1, 2004 | BALANCE AT JANUARY 1, 2004 | | | 28,411,816 | | $ | 230,773 | | $ | 89,058 | | $ | (862) | | | | | BALANCE AT JANUARY 1, 2004 | | | 28,411,816 | | $ | 230,773 | | $ | 89,058 | | $ | (862) | | $ | 318,969 | |
| Net income | Net income | | | | | | | | | 47,166 | | | | | $ | 47,166 | | Net income | | | | | | | | | 47,166 | | | | | | 47,166 | |
| Other comprehensive loss, net of tax: | Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | | Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | |
| | Unrealized losses on securities arising during the year(3) | | | | | | | | | | | | (248) | | | (248) | | Unrealized losses on securities arising during the year(2) | | | | | | | | | | | | (248) | | | (248) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | Comprehensive income | | | | | | | | | | | | | | $ | 46,918 | | Comprehensive income | | | | | | | | | | | | | | $ | 46,918 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Deferred compensation earned during the year | Deferred compensation earned during the year | | | | | | 226 | | | | | | | | | | | Deferred compensation earned during the year | | | | | | 226 | | | | | | | | | 226 | |
| Stock repurchased and retired | Stock repurchased and retired | | | (321,729) | | | (6,062) | | | | | | | | | | | Stock repurchased and retired | | | (321,729) | | | (6,062) | | | | | | | | | (6,062) | |
| Stock options exercised and related tax benefit (Note 19) | | | 629,661 | | | 9,018 | | | | | | | | | | | |
| Issuances of common stock under stock plans and related tax benefit (Note 20) | | Issuances of common stock under stock plans and related tax benefit (Note 20) | | | 629,661 | | | 9,018 | | | | | | | | | 9,018 | |
| Stock issued in connection with acquisitions (Note 3) | Stock issued in connection with acquisitions (Note 3) | | | 15,491,327 | | | 326,656 | | | | | | | | | | | Stock issued in connection with acquisitions (Note 3) | | | 15,491,327 | | | 326,656 | | | | | | | | | 326,656 | |
| Cash dividends | | | | | | | | | (8,112) | | | | | | | | |
| Cash dividends ($0.22 per share) | | Cash dividends ($0.22 per share) | | | | | | | | | (8,112) | | | | | | (8,112) | |
| | | | | | | | | | | | | |
| Balance at December 31, 2004 | Balance at December 31, 2004 | | | 44,211,075 | | $ | 560,611 | | $ | 128,112 | | $ | (1,110) | | | | | Balance at December 31, 2004 | | | 44,211,075 | | $ | 560,611 | | $ | 128,112 | | $ | (1,110) | | $ | 687,613 | |
| | | | | | | | | | | | | |
| BALANCE AT JANUARY 1, 2005 | | BALANCE AT JANUARY 1, 2005 | | | 44,211,075 | | $ | 560,611 | | $ | 128,112 | | $ | (1,110) | | $ | 687,613 | |
| Net income | | Net income | | | | | | | | | 69,735 | | | | | | 69,735 | |
| Other comprehensive loss, net of tax: | | Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | |
| | | Unrealized losses on securities arising during the year(3) | | | | | | | | | | | | (8,799) | | | (8,799) | |
| | | | | | | | | | | | | | |
| Comprehensive income | | Comprehensive income | | | | | | | | | | | | | | $ | 60,936 | |
| | | | | | | | | | | | | | |
| Deferred compensation earned during the period | | Deferred compensation earned during the period | | | | | | 693 | | | | | | | | | 693 | |
| Stock repurchased and retired | | Stock repurchased and retired | | | (84,185) | | | (1,904) | | | | | | | | | (1,904) | |
| Issuances of common stock under stock plans and related tax benefit (Note 20) | | Issuances of common stock under stock plans and related tax benefit (Note 20) | | | 429,379 | | | 5,179 | | | | | | | | | 5,179 | |
| Cash dividends ($0.32 per share) | | Cash dividends ($0.32 per share) | | | | | | | | | (14,256) | | | | | | (14,256) | |
| | | | | | | | |
| Balance at December 31, 2005 | | Balance at December 31, 2005 | | | 44,556,269 | | $ | 564,579 | | $ | 183,591 | | $ | (9,909) | | $ | 738,261 | |
| | | | | | | | |
| |
| (1) | Net unrealized holding gain on securities of $1,010 (net of $705 tax expense), plus reclassification adjustment for net losses included in net income of $302 (net of $195 tax benefit). |
(2) | Net unrealized holding loss on securities of $2,858$2.9 million (net of $1,849$1.8 million tax benefit), plus reclassification adjustment for net gains included in net income of $1,308$1.3 million (net of $847$847,000 tax expense). |
| (2) | Net unrealized holding loss on securities of $237,000 (net of $101,000 tax benefit), plus reclassification adjustment for net gains included in net income of $11,000 (net of $8,000 tax expense). |
| (3) | Net unrealized holding loss on securities of $237$7.9 million (net of $101$5.3 million tax benefit), plus reclassification adjustment for net gains included in net income of $11$863,000 (net of $8$576,000 tax expense). |
See notes to consolidated financial statements
4145
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | |
| Years Ended December 31, 2004, 2003 and 2002 | | | | | | |
| ($000’s) | | 2004 | | | 2003 | | | 2002 | |
| | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
| Net income | | $ | 47,166 | | | $ | 34,119 | | | $ | 21,968 | |
| Gain on sale of discontinued operations, net of tax | | | (3,375) | | | | — | | | | — | |
| Income from discontinued operations, net of tax | | | (501) | | | | (635) | | | | (417) | |
| | | | | | | | | | |
| Income from continuing operations | | | 43,290 | | | | 33,484 | | | | 21,551 | |
| Adjustments to reconcile income from continuing operations to net cash provided by (used by) operating activities: | | | | | | | | | | | | |
| | Federal Home Loan Bank stock dividends | | | (254) | | | | (307) | | | | (466) | |
| | Deferred income tax expense (benefit) | | | 6,910 | | | | 4,074 | | | | (2,304) | |
| | Amortization of investment premiums, net | | | 945 | | | | 3,618 | | | | 808 | |
| | Origination of loans held for sale | | | (438,565) | | | | (863,351) | | | | (777,727) | |
| | Proceeds from sales of loans held for sale | | | 456,548 | | | | 901,386 | | | | 745,824 | |
| | Net decrease (increase) in trading account assets | | | (312) | | | | 640 | | | | 1,105 | |
| | Provision for loan losses | | | 7,321 | | | | 4,550 | | | | 3,888 | |
| | Gain on sales of loans | | | (976) | | | | (13,484) | | | | (10,577) | |
| | (Gain) loss on sale of investment securities available-for-sale | | | (19) | | | | (2,155) | | | | 497 | |
| | Increase (decrease) in mortgage servicing rights | | | 569 | | | | (982) | | | | (5,424) | |
| | Depreciation and amortization | | | 7,769 | | | | 5,961 | | | | 3,768 | |
| | Tax benefit of stock options exercised | | | (3,079) | | | | (911) | | | | (781) | |
| | Net decrease (increase) in other assets | | | 14,866 | | | | (18,765) | | | | (5,503) | |
| | Net (decrease) increase in other liabilities | | | (10,974) | | | | 4,552 | | | | (2,651) | |
| | Other, net | | | 1,873 | | | | (415) | | | | 1,919 | |
| | | |
| | | Net cash provided by (used by) operating activities of continuing operations | | | 85,912 | | | | 57,895 | | | | (26,073) | |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
| Purchases of investment securities available-for-sale | | | (133,763) | | | | (399,235) | | | | (158,987) | |
| Purchases of Federal Home Loan Bank stock | | | (3,027) | | | | (2,115) | | | | — | |
| Sales and maturities of investment securities available-for-sale | | | 177,886 | | | | 220,157 | | | | 119,236 | |
| Redemption of Federal Home Loan Bank stock | | | 663 | | | | 1,843 | | | | 3,747 | |
| Maturities of investment securities held-to-maturity | | | 2,846 | | | | 3,833 | | | | 1,011 | |
| Net loan and lease originations | | | (418,059) | | | | (226,554) | | | | (148,737) | |
| Purchase of loans | | | (20,352) | | | | (11,000) | | | | — | |
| Disposals of furniture and equipment | | | 17,312 | | | | 3,277 | | | | 1,423 | |
| Acquisitions | | | 50,894 | | | | — | | | | (15,074) | |
| Investment in subsidiary | | | — | | | | — | | | | (638) | |
| Proceeds from sales of loans | | | 27,631 | | | | 4,449 | | | | 16,176 | |
| Purchases of premises and equipment | | | (20,141) | | | | (13,911) | | | | (8,767) | |
| | | |
| | | Net cash used by investing activities | | | (318,110) | | | | (419,256) | | | | (190,610) | |
| | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
| Net increase in deposit liabilities | | | 229,889 | | | | 275,856 | | | | 176,948 | |
| Net (decrease) increase in Fed funds purchased | | | (12,000) | | | | 35,000 | | | | (2,500) | |
| Net increase (decrease) in securities sold under agreements to repurchase | | | 16,736 | | | | 12,299 | | | | (1,764) | |
| Dividends paid on common stock | | | (8,112) | | | | (4,536) | | | | (3,534) | |
| Proceeds from the issuance of Trust preferred securities | | | — | | | | 20,000 | | | | 75,000 | |
| Proceeds from stock options exercised | | | 9,018 | | | | 5,653 | | | | 2,285 | |
| Retirement of common stock | | | (6,062) | | | | (409) | | | | (228) | |
| Term debt borrowings | | | 270 | | | | 50,000 | | | | 30,000 | |
| Repayments of term debt | | | (13,340) | | | | (19,038) | | | | (46,970) | |
| | | |
| | | Net cash provided by financing activities | | | 216,399 | | | | 374,825 | | | | 229,237 | |
| | | |
| Net (decrease) increase in cash and cash equivalents | | | (15,799) | | | | 13,464 | | | | 12,554 | |
| Cash and cash equivalents, beginning of year | | | 134,006 | | | | 120,542 | | | | 107,988 | |
| | | |
| Cash and cash equivalents, end of year | | $ | 118,207 | | | $ | 134,006 | | | $ | 120,542 | |
| | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | | | | | | | | |
| Cash paid during the year for: | | | | | | | | | | | | |
| | Interest | | $ | 37,862 | | | $ | 29,022 | | | $ | 22,561 | |
| | Income taxes | | $ | 16,257 | | | $ | 15,230 | | | $ | 14,045 | |
| | | | | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | | | | |
| For the Years Ended December 31, 2005, 2004 and 2003 | | | | | | |
| (in thousands) | | 2005 | | | 2004 | | | 2003 | |
| | |
| Net income | | $ | 69,735 | | | $ | 47,166 | | | $ | 34,119 | |
| | Unrealized losses arising during the period on investment securities available for sale | | | (13,226) | | | | (338) | | | | (4,707) | |
| | Add: Reclassification adjustment for gains realized in net income, net of tax (expense of $576, $8 and $847 in 2005, 2004 and 2003, respectively) | | | (863) | | | | (11) | | | | (1,308) | |
| | Less: Income tax benefit related to unrealized losses on investment securities, available for sale | | | (5,290) | | | | (101) | | | | (1,849) | |
| | | |
| | Net unrealized losses on investment securities available for sale | | | (8,799) | | | | (248) | | | | (4,166) | |
| | | |
| Comprehensive income | | $ | 60,936 | | | $ | 46,918 | | | $ | 29,953 | |
| | | |
See notes to consolidated financial statements
4246
Umpqua Holdings Corporation
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | | Revised— see Note 1 | |
| For the Years Ended December 31, 2005, 2004 and 2003 | | | | | |
| (in thousands) | | 2005 | | | 2004 | | | 2003 | |
| | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
| | Net income | | $ | 69,735 | | | $ | 47,166 | | | $ | 34,119 | |
| | Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: | | | | | | | | | | | | |
| | | Gain on sale of discontinued operations, net of tax | | | — | | | | (3,375) | | | | — | |
| | | Income from discontinued operations net of tax | | | — | | | | (501) | | | | (635) | |
| | | Federal Home Loan Bank stock dividends | | | (164) | | | | (254) | | | | (307) | |
| | | Deferred income tax expense | | | 7,575 | | | | 6,910 | | | | 4,074 | |
| | | Amortization of investment premiums, net | | | 1,150 | | | | 945 | | | | 3,618 | |
| | | Origination of loans held for sale | | | (289,277) | | | | (438,565) | | | | (863,351) | |
| | | Proceeds from sales of loans held for sale | | | 299,868 | | | | 456,548 | | | | 901,386 | |
| | | Net decrease (increase) in trading account assets | | | 976 | | | | (312) | | | | 640 | |
| | | Provision for loan losses | | | 2,468 | | | | 7,321 | | | | 4,550 | |
| | | Gain on sales of loans | | | (214) | | | | (976) | | | | (13,484) | |
| | | Gain on sale of investment securities available-for-sale | | | (1,439) | | | | (19) | | | | (2,155) | |
| | | (Decrease) increase in mortgage servicing rights | | | (1,736) | | | | 569 | | | | (982) | |
| | | Depreciation and amortization | | | 10,992 | | | | 7,769 | | | | 5,961 | |
| | | Tax benefits of stock options exercised | | | 2,425 | | | | 3,079 | | | | 911 | |
| | | Net (increase) decrease in other assets | | | (10,096) | | | | 10,990 | | | | (19,400) | |
| | | Net increase (decrease) in other liabilities | | | 7,298 | | | | (14,053) | | | | 3,641 | |
| | | Other, net | | | 630 | | | | 1,873 | | | | (415) | |
| | | |
| | | | Net cash provided by operating activities of continuing operations | | $ | 100,191 | | | $ | 85,115 | | | $ | 58,171 | |
| | | | Net cash provided by operating activities of discontinued operations | | | — | | | | 3,876 | | | | 635 | |
| | | |
| | | | | Net cash provided by operating activities | | | 100,191 | | | | 88,991 | | | | 58,806 | |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
| | Purchases of investment securities available-for-sale | | | (175,546) | | | | (133,763) | | | | (399,235) | |
| | Purchases of Federal Home Loan Bank stock | | | — | | | | (3,027) | | | | (2,115) | |
| | Sales and maturities of investment securities available-for-sale | | | 166,012 | | | | 177,886 | | | | 220,157 | |
| | Redemption of Federal Home Loan Bank stock | | | 119 | | | | 663 | | | | 1,843 | |
| | Maturities of investment securities held-to-maturity | | | 3,169 | | | | 2,846 | | | | 3,833 | |
| | Net loan and lease originations | | | (455,227) | | | | (418,059) | | | | (226,554) | |
| | Purchase of loans | | | (40,410) | | | | (20,352) | | | | (11,000) | |
| | Disposals of furniture and equipment | | | 89 | | | | 17,312 | | | | 3,277 | |
| | Acquisitions | | | — | | | | 50,894 | | | | — | |
| | Proceeds from sales of loans | | | 39,888 | | | | 27,631 | | | | 4,449 | |
| | Purchases of premises and equipment | | | (12,051) | | | | (20,141) | | | | (13,911) | |
| | | |
| | | | | Net cash used by investing activities | | | (473,957) | | | | (318,110) | | | | (419,256) | |
| | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
| | Net increase in deposit liabilities | | | 487,610 | | | | 229,889 | | | | 275,856 | |
| | Net increase (decrease) in Fed funds purchased | | | 27,000 | | | | (12,000) | | | | 35,000 | |
| | Net (decrease) increase in securities sold under agreements to repurchase | | | (1,402) | | | | 16,736 | | | | 12,299 | |
| | Dividends paid on common stock | | | (11,557) | | | | (8,112) | | | | (4,536) | |
| | Proceeds from the issuance of Trust preferred securities | | | — | | | | — | | | | 20,000 | |
| | Proceeds from stock options exercised | | | 2,754 | | | | 5,939 | | | | 4,742 | |
| | Retirement of common stock | | | (1,904) | | | | (6,062) | | | | (409) | |
| | Term debt borrowings | | | — | | | | 270 | | | | 50,000 | |
| | Repayment of term debt | | | (85,188) | | | | (13,340) | | | | (19,038) | |
| | | |
| | | | | Net cash provided by financing activities | | | 417,313 | | | | 213,320 | | | | 373,914 | |
| | | |
| Net increase (decrease) in cash and cash equivalents | | | 43,547 | | | | (15,799) | | | | 13,464 | |
| | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | | | | | | | | |
| | Cash paid during the year for: | | | | | | | | | | | | |
| | | Interest | | $ | 68,821 | | | $ | 37,862 | | | $ | 29,022 | |
| | | Income taxes | | $ | 19,418 | | | $ | 16,257 | | | $ | 15,230 | |
See notes to consolidated financial statements
47
Umpqua Holdings Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 2003 and 20022003
NOTE 1–1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations—Umpqua Holdings Corporation (the “Company”) is a financial holding company headquartered in Portland, Oregon, that is engaged 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 Umpqua Bank (the “Bank”). The Company engages in the retail brokerage business through its wholly-owned subsidiary Strand, Atkinson, Williams & York, Inc. (“Strand”). The Company and its subsidiaries are subject to regulation by certain federal and state agencies and undergo periodic examination 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, and the valuation of mortgage servicing rights.rights and the valuation of goodwill and other intangible assets.
Consolidation—The accompanying consolidated financial statements include the accounts of the Company, the Bank and Strand. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents—Cash and cash equivalents include cash and due from banks, and temporary investments which are federal funds sold and interest bearinginterest-bearing balances due from other banks. Cash and cash equivalents generally have a maturity of 90 days or less at the time of purchase.
Trading Account Securities—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. For all periods presented, the only securities classified as trading were held by Strand.
Investment Securities—Debt securities are classified asheld-to-maturityif the Company has both the intent and ability to hold those securities to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the effective interest method over their contractual lives.
Securities are classified asavailable-for-saleif the Company intends and has the ability to hold those securities for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available-for-sale are carried at fair value. Unrealized holding gains or losses are included in other comprehensive income as a separate component of shareholders’ equity, net of tax. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.
Unrealized losses due to fluctuations in the fair value of securities held to maturity or available for sale are recognized through earnings when it is determined that an other than temporary decline in value has occurred. The Company assesses other-than-temporary impairment based on the nature of the decline and whether the Company has the ability and intent to hold the investments until a market price recovery. No other than temporary impairment losses were recognized in the years ended December 31, 2005, 2004 2003 or 2002.2003. Additional information on recent developments in the accounting for securities that are considered impaired is included under the headingRecently Issued Accounting Pronouncementsbelow. Additional information on investment securities is included in Note 5.
Loans Held For Sale—Loans held for sale includes mortgage loans and are reported at the lower of cost or market value. Cost approximates market value, given the short duration of these assets. Gains or losses on the sale of loans that are held for sale are recognized at the time of the sale and determined by the difference between net sale proceeds and the net book value of the loans less the estimated fair value of any retained mortgage servicing rights.
48
Umpqua Holdings Corporation and Subsidiaries
Loans—Loans are stated at the amount of unpaid principal, net of unearned income and any deferred fees or costs. All discounts and premiums are recognized over the estimated life of the loan as yield adjustments. This estimated life is adjusted for prepayments.
43
Loans are classified asimpairedwhen, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows (discounted at the loan’s effective interest rate) or, for collateral dependent loans, at fair value of the collateral. If the measurement of the impaired loans’ value is less than the recorded investment in the loan, an impairment allowance is created by either charging the provision for loan losses or allocating an existing component of the allowance for loan losses. Additional information on loans is included in Note 6.
Income Recognition on Non-Accrual and Impaired Loans—Loans, including impaired loans, are classified as non-accrual if the collection of principal and interest is doubtful. Generally, this occurs when a loan is past due as to maturity or payment of principal or interest by 90 days or more, unless such loans are well-secured and in the process of collection. If a loan or portion thereof is partially charged-off, the loan is considered impaired and classified as non-accrual. Loans that are less than 90 days past due may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt.
When a loan is classified as non-accrual, all uncollected accrued interest is reversed to interest income and the accrual of interest income is terminated. Generally, any cash payments are applied as a reduction of principal outstanding. In cases where the future collectibility of the principal balance in full is expected, interest income may be recognized on a cash basis. A loan may be restored to accrual status when the borrower’s financial condition improves so that full collection of principal is considered likely. For those loans placed on non-accrual status due to payment delinquency, this will generally not occur until the borrower demonstrates repayment ability over a period of not less than six months.
The decision to place a loan on non-accrual status or to classify a loan as impaired is made by the Bank’s Allowance for Loan Losses Committee. This Committee meets regularly to review the status of all problem and potential problem loans. If the Committee concludes a loan is impaired but recovery of the full principal and interest is expected, an impaired loan may remain on accrual status.
Allowance for Loan Losses—The Bank performs regular credit reviews of the loan portfolio to determine the credit quality of the portfolio and the adherence to underwriting standards. When loans are originated, they are assigned a risk rating that is maintained atassessed periodically during the term of the loan through the credit review process. The risk ratings are a levelprimary factor in determining an appropriate amount for the allowance for loan losses. During 2004, the Bank formed a management ALL Committee, which is responsible for, among other things, regular review of the ALL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALL Committee reviews loans that have been placed on non-accrual status and approves placing loans on impaired status. The ALL Committee also approves removing loans that are impaired from impairment and non-accrual status. The Bank’s Audit and Compliance Committee provides board oversight of the ALL process and reviews and approves the ALL methodology on a quarterly basis.
Each risk rating is assessed an inherent credit loss factor that determines the amount of the allowance for loan losses provided for that group of loans with similar risk rating. Credit loss factors may vary by region based on management’s belief that there may ultimately be different credit loss rates experienced in each region.
The regular credit reviews of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALL Committee which reviews and approves designating loans as impaired. A loan is considered impaired when based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments.
When we identify a loan as impaired, we measure the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows.
If we determine that the value of the impaired loan is less than the recorded investment in the opinionloan, we recognize this impairment reserve as a specific component to be provided for in the allowance for loan losses.
The combination of management, is adequatethe risk rating based allowance component and the impairment reserve allowance component lead to absorb probable incurredan allocated allowance for loan losses. The Bank also maintains an unallocated allowance amount to provide for other credit losses inherent in a loan portfolio that may not have been contemplated in the loan portfolio. Management determinescredit loss factors.
49
This unallocated amount generally comprises less than 5% of the allowance. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends.
The reserve for unfunded commitments (“RUC”) is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line of credit. The adequacy of the allowance based upon reviews of individual loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loansALL and other relevant factors. The allowance is based on estimates, and ultimate losses may vary from the current estimates. These estimatesRUC are evaluatedmonitored on a regular basis and are based on management’s evaluation of numerous factors. These factors include the quality of the current loan portfolio; the trend in the loan portfolio’s risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent information.
Management believes that the ALL was adequate as of December 31, 2005. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALL and could possibly result in additional charges to the provision for loan losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan losses in future periods if the results of their review warrant. Approximately 78% of our loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the allowance for loan losses.
As adjustments become necessary, they are reported in earnings in the periods in which they become known. Loans or portions thereof deemed uncollectible are charged to the allowance. Provisions for losses, and recoveries on loans previously charged off, are added to the allowance. Additional information on the allowance for loan losses is included in Note 6.
Reserve for Unfunded Commitments—A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is adequate to absorb probable losses associated with the Bank’s commitment to lend funds under existing agreements such as letters or lines of credit. Management determines the adequacy of the reserve for unfunded commitments based upon reviews of individual credit facilities, current economic conditions, the risk characteristics of the various categories of commitments and other relevant factors. The reserve is based on estimates, and ultimate losses may vary from the current estimates. These estimates are evaluated on a regular basis and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. Draws on unfunded commitments that are considered uncollectible at the time funds are advanced are charged to the allowance. Provisions for unfunded commitment losses, and recoveries on loans previously charged off, are added to the reserve for unfunded commitments, which is included in theOther Liabilities section of the consolidated balance sheets.
Prior to September 30, 2004, the reserve for unfunded commitments was recognized in the allowance for loan losses. During the third quarter of 2004, approximately $1.2 million of the allowance was reclassified to establish the reserve for unfunded commitments. Prior to January 1, 2004, there was not any specific component of the allowance for loan losses ascribed to unfunded commitments, therefore this reclassification was not applied to periods prior to 2004.
Loan Fees and Direct Loan Origination Costs—Loan origination and commitment fees and direct loan origination costs are deferred and recognized as an adjustment to the yield over the life of the related loans.
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
44
Umpqua Holdings Corporation and Subsidiaries
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 Rights—Mortgage servicing rights (“MSR”) retained are measured by allocating the carrying value of the loans between the assets sold and the interest retained, based on the relative fair value at the date of the securitization. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,MSR are capitalized at their allocated carrying value and amortized in proportion to, and over the period of, estimated future net servicing income.
The Company assesses impairment of the MSR based on the fair value of those rights. For purposes of measuring impairment, the MSR are stratified based on interest rate characteristics (fixed-rate and adjustable-rate), as well as by coupon rate. In order to determine the fair value of the MSR, the present value of expected future cash flows are estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.
50
Umpqua Holdings Corporation and Subsidiaries
The carrying value of MSR is evaluated for possible impairment on a quarterly basis in accordance with SFAS No. 140. If an impairment condition exists for a particular valuation tranche, a valuation allowance is established for the excess of amortized cost over the estimated fair value through a charge to mortgage servicing fee revenue. If, in subsequent periods, the estimated fair value is determined to be in excess of the amortized cost net of the related valuation allowance, the valuation allowance is reduced through a credit to mortgage servicing revenue. Additional information on MSR is provided in Note 8.
SBA/USDA Loans Sold—The Bank, on a regular basis, sells or transfers loans, including the guaranteed portion of Small Business Administration (“SBA”) and Department of Agriculture (“USDA”) loans (with servicing retained) for cash proceeds equal to the principal amount of loans, as adjusted to yield interest to the investor based upon the current market rates. The Bank records an asset representing the right to service loans for others when it sells a loan and retains the servicing rights. The carrying value of loans is allocated between the loan and the servicing rights, based on their relative fair values. The fair value of servicing rights is estimated by discounting estimated future cash flows from servicing using discount rates that approximate current market rates and using estimated prepayment rates. The servicing rights are carried at the lower of cost or market and are amortized in proportion to, and over the period of, the estimated net servicing income, assuming prepayments.
For purposes of evaluating and measuring impairment, servicing rights are based on a discounted cash flow methodology, current prepayment speeds and market discount rate. Any impairment is measured as the amount by which the carrying value of servicing rights for a stratum exceeds its fair value. The carrying value of SBA/ USDA servicing rights at December 31, 2005 and 2004 were $657,000 and 2003 were $685,000, and $137,000, respectively. No impairment charges were recorded for the years ended December 31, 2005, 2004 2003 or 20022003 related to SBA/ USDA servicing assets.
A premium over the adjusted carrying value is received upon the sale of the guaranteed portion of an SBA or USDA loan. The Bank’s investment in an SBA or USDA loan is allocated among the sold and retained portions of the loan based on the relative fair value of each portion at the time of loan origination, adjusted for payments and other activities. Because the portion retained does not carry an SBA or USDA guarantee, part of the gain recognized on the sold portion of the loan may be deferred and amortized as a yield enhancement on the retained portion in order to obtain a market equivalent yield.
Premises and Equipment—Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided over the estimated useful life of equipment, generally three to ten years, on a straight-line or accelerated basis. Depreciation is provided over the estimated useful life of premises, up to 39 years, on a straight-line or accelerated basis. Leasehold improvements are amortized over the life of the related lease, or the life of the related asset, whichever is shorter. Expenditures for major renovations and betterments of the Company’s premises and equipment are capitalized.
In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets,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.
Additional information on premises and equipment is provided in Note 7.
Goodwill and Other Intangibles—Intangible assets are comprised of goodwill and core deposit intangibles acquired in business combinations. Goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with definite useful lives are amortized to their estimated residual values over their respective estimated useful lives, and also reviewed for impairment.
45
Amortization of core deposit intangibles is included in other non-interest expense in the consolidated statements of income. Goodwill is tested for impairment on a quarterly basis and more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount of the asset exceeds its fair value. Additional information on goodwill and intangible assets is included in Note 9.
Other Real Estate Owned—Other real estate owned represents real estate which the Bank has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically performs valuations andsuch that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to
51
sell. Revenue and expenses from operations and subsequent adjustments to the carrying amount of the property are included in other non-interest expense in the consolidated statements of income.
In some instances, the Bank makesmay make loans to facilitate the sales of other real estate owned. Management reviews all sales for which it is the lending institution for compliance with sales treatment under provisions established by SFAS No. 66,Accounting for Sales of Real Estate.
Federal Home Loan Bank Stock—Federal Home Loan Bank stock represents the Bank’s investment in the Federal Home Loan Banks of Seattle and of San Francisco (“FHLB”) stock and 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, 2004,2005, the Bank’s minimum required investment was approximately $14$10 million. 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.
ReclassificationsDerivative Loan Commitments—Certain amounts reportedThe Bank enters into forward delivery contracts to sell residential mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates in prior years’ financial statements have been reclassifiedorder to conformhedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage loan commitments. The commitments to originate mortgage loans held for sale and the related forward delivery contracts are considered derivatives. The Company accounts for its derivatives under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The Statement requires recognition of all derivatives as either assets or liabilities in the balance sheet and requires measurement of those instruments at fair value through adjustments to accumulated other comprehensive income and/or current presentation.earnings, as appropriate. The effectsCompany reports changes in fair values in current period net income.
The fair value of the reclassifications are not considered material.derivative loan commitments is estimated using the present value of expected future cash flows. Assumptions used include pull-through rate assumption based on historical information, current mortgage interest rates, the stage of completion of the underlying application and underwriting process, and the time remaining until the expiration of the derivative loan commitment.
Operating 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. Management has identified three primary business segments, Community Banking, Retail Brokerage and Mortgage Banking. Additional information on Operating Segments is provided in Note 21.22.
Stock-Based Compensation—The Company has one active stock-based compensation plan that provides for the granting of stock options and restricted stock awards to eligible employees and directors that are accounted for under the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees. Under the intrinsic value method, compensation expense is recognized only to the extent an option’s exercise price is less than the market value of the underlying stock on the date of grant. For all options originally granted by the Company, no compensation cost has been recognized in the accompanying statement of income. Compensation cost has been recognized for certain options that were assumed in connection with the acquisition of Centennial Bancorp and Humboldt Bancorp that were unvested as of the date the acquisitions were completed.
4652
Umpqua Holdings Corporation and Subsidiaries
The following table presents the effect on net income and earnings per share if the fair value based method prescribed by SFAS No. 123, using straight-line expense recognition, had been applied to all outstanding and unvested awards in each period:
Stock-Based Compensation Disclosure
| | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | Years Ended December 31, | | | | | | | Years Ended December 31, | | | | | | |
| (in thousands, except per share data) | (in thousands, except per share data) | | | | | | | (in thousands, except per share data) | | | | | | |
| | | | 2004 | | | 2003 | | | 2002 | | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| NET INCOME, AS REPORTED | NET INCOME, AS REPORTED | | $ | 47,166 | | $ | 34,119 | | $ | 21,968 | | NET INCOME, AS REPORTED | | $ | 69,735 | | $ | 47,166 | | $ | 34,119 | |
| Add stock-based employee compensation expense included in reported net income, net of tax effects | | | 50 | | | 87 | | | 81 | | |
| Deduct stock-based employee compensation determined under the fair-value-based method for all awards, net of tax effects | | | (667) | | | (858) | | | (325) | | |
| Deduct: Additional stock-based employee compensation determined under the fair value based method for all awards, net of tax effects | | Deduct: Additional stock-based employee compensation determined under the fair value based method for all awards, net of tax effects | | | (813) | | | (617) | | | (771) | |
| | | | | | | |
| | Pro forma net income | | $ | 46,549 | | $ | 33,348 | | $ | 21,724 | | Pro forma net income | | $ | 68,922 | | $ | 46,549 | | $ | 33,348 | |
| | | | | | | |
| INCOME FROM CONTINUING OPERATIONS, AS REPORTED | INCOME FROM CONTINUING OPERATIONS, AS REPORTED | | $ | 43,290 | | $ | 33,484 | | $ | 21,551 | | INCOME FROM CONTINUING OPERATIONS, AS REPORTED | | $ | 69,735 | | $ | 43,290 | | $ | 33,484 | |
| Add stock-based employee compensation expense included in reported income from continuing operations, net of tax effects | | | 50 | | | 87 | | | 81 | | |
| Deduct stock-based employee compensation determined under the fair-value-based method for all awards, net of tax effects | | | (667) | | | (858) | | | (325) | | |
| Deduct: Additional stock-based employee compensation determined under the fair value based method for all awards, net of tax effects | | Deduct: Additional stock-based employee compensation determined under the fair value based method for all awards, net of tax effects | | | (813) | | | (617) | | | (771) | |
| | | | | | | |
| | Pro forma income from continuing operations | | $ | 42,673 | | $ | 32,713 | | $ | 21,307 | | Pro forma income from continuing operations | | $ | 68,922 | | $ | 42,673 | | $ | 32,713 | |
| | | | | | | |
| NET INCOME PER SHARE: | NET INCOME PER SHARE: | | | | | | | | | | | NET INCOME PER SHARE: | | | | | | | | | | |
| Basic—as reported | Basic—as reported | | $ | 1.32 | | $ | 1.21 | | $ | 1.04 | | Basic—as reported | | $ | 1.57 | | $ | 1.32 | | $ | 1.21 | |
| Basic—pro forma | Basic—pro forma | | | 1.30 | | | 1.18 | | | 1.03 | | Basic—pro forma | | $ | 1.55 | | $ | 1.30 | | $ | 1.18 | |
| Diluted—as reported | Diluted—as reported | | | 1.30 | | | 1.19 | | | 1.03 | | Diluted—as reported | | $ | 1.55 | | $ | 1.30 | | $ | 1.19 | |
| Diluted—pro forma | Diluted—pro forma | | | 1.28 | | | 1.16 | | | 1.02 | | Diluted—pro forma | | $ | 1.53 | | $ | 1.28 | | $ | 1.16 | |
| INCOME FROM CONTINUING OPERATIONS PER SHARE: | INCOME FROM CONTINUING OPERATIONS PER SHARE: | | | | | | | | | | | INCOME FROM CONTINUING OPERATIONS PER SHARE: | | | | | | | | | | |
| Basic—as reported | Basic—as reported | | $ | 1.21 | | $ | 1.18 | | $ | 1.02 | | Basic—as reported | | $ | 1.57 | | $ | 1.21 | | $ | 1.18 | |
| Basic—pro forma | Basic—pro forma | | | 1.19 | | | 1.16 | | | 1.01 | | Basic—pro forma | | $ | 1.55 | | $ | 1.19 | | $ | 1.16 | |
| Diluted—as reported | Diluted—as reported | | | 1.19 | | | 1.17 | | | 1.01 | | Diluted—as reported | | $ | 1.55 | | $ | 1.19 | | $ | 1.17 | |
| Diluted—pro forma | Diluted—pro forma | | | 1.17 | | | 1.14 | | | 1.00 | | Diluted—pro forma | | $ | 1.53 | | $ | 1.17 | | $ | 1.14 | |
The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model, as permitted, using the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| Dividend yield | | | 2.00% | | | 1.35% | | | 2.09% | | | | 1.67% | | | 2.00% | | | 1.35% | |
| Expected life (years) | | | 8.2 | | | 6.8 | | | 6.4 | | | | 7.5 | | | 8.2 | | | 6.8 | |
| Expected volatility | | | 39% | | | 45% | | | 46% | | | | 38% | | | 39% | | | 45% | |
| Risk-free rate | | | 4.45% | | | 5.00% | | | 5.00% | | | | 4.21% | | | 4.45% | | | 5.00% | |
| Weighted average grant date fair value of options granted | | $ | 9.27 | | $ | 8.16 | | $ | 6.93 | | | $ | 9.50 | | $ | 9.27 | | $ | 8.16 | |
The Company’s stock compensation plan provides for granting of restricted stock awards. The restricted stock awards generally vest ratably over 5 years and are recognized as expense over that same period of time. For the years ended December 31, 2005, 2004 2003 and 2002,2003, compensation expense of $256,422, $52,468$241,000, $256,000 and $0,$52,000, respectively, was recognized in connection with restricted stock grants.
Additional information on recently issued accounting pronouncements that will impact the accounting for stock options is included below under the headingRecently Issued Accounting Pronouncements.
Earnings per Share—Basic earnings per shareis computed by dividing net income by the weighted average number of common shares outstanding during the period.Diluted earnings per shareis computed in a similar manner, except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method. For all periods presented, stock options are the only potentially dilutive instruments issued by the Company.
During 2004, the Company entered into a transaction that resulted in certain financial results being reported as a discontinued operation. Accordingly, the presentations for all periods include basic and diluted earnings per share from continuing
47
operations and discontinued operations. These are computed in the same manner as described above, except the numerator beingis income from continuing operations or income from discontinued operations (net of tax), respectively (See Note 2).
53
Advertising Expenses—Advertising costs are generally expensed as incurred.
Recently Issued Accounting Pronouncements—In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R,Share Based Payment,, a revision to the previously issued guidance on accounting for stock options and other forms of equity-based compensation. SFAS No. 123R requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based forms of compensation issued to employees. For the Company, this standard will becomebecame effective for the third quarter of 2005.
The method of determining the grant date fair value of stock options under SFAS No. 123R is substantially the same as the method currently used to calculate the pro forma impact on net income and earnings per share as presented in Note 14. Accordingly, theJanuary 1, 2006. The Company does not expect the impact of adoption of SFAS No. 123R on net income and earnings per share will be materially different from the current fair value pro forma disclosure.disclosure described above.
Companies may elect one of two methods for adoption of SFAS No. 123R. UnderWe adopted FAS 123R on January 1, 2006 under themodified prospectivemethod which means any awards that are granted or modified after the date of adoption will be measured and accounted for under the provisions of SFAS No. 123R. The unvested portion of previously granted awards will continue to be accounted for under SFAS No. 123,Accounting for Stock-Based Compensation,, except that the compensation expense associated with the unvested portions will be recognized in the statement of income. Under themodified retrospective method, all amounts previously reported are restated to reflect the amounts in the SFAS No. 123 pro forma disclosure. The Company expects to make a decision with respect to the method of adoption during the second quarter of 2005.
In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 105 (“SAB 105”),Application of Accounting Principles to Loan Commitments. SAB 105 provides guidance on the accounting for loan commitments accounted for as derivative instruments. The Company adopted SAB 105 in March 2004. The adoption did not have a material impact on our financial condition or results of operations.
In March 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force regarding issue 03-1The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“(“EITF 03-01”). The consensus provided guidance for determining when an investment is other-than-temporarily-impaired and established disclosure requirements for investments with unrealized losses. The guidance was effective for periods beginning after June 15, 2004. On September 30, 2004, the FASB deferred the implementation of the recognition criteria of EITF 03-01 pending a review of the guidance in light of comments received. We will evaluate the potential impact this guidance may have on our financial condition and results of operations when it is released in final form.
03-01. In January 2003,November 2005, the FASB issued Interpretation No. 46 (“FIN 46”),ConsolidationFSP FAS 115-1 and FAS 124-1, “The Meaning of Variable Interest Entities (revised December 2003). In December 2003,Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP nullifies certain requirements of Issue 03-1. Based on the FASB made revisionsclarification provided in FSP FAS 115-1 and delayed implementationFAS 124-1, the amount of any other-than-temporary impairment that needs to be recognized will continue to be dependent on market conditions, the occurrence of certain provisionsevents or changes in circumstances relative to an investee and an entity’s intent and ability to hold the impaired investment at the time of FIN 46 with the issuancevaluation. FSP FAS 115-1 and FAS 124-1 are effective for reporting periods beginning after December 15, 2005. Adoption of FIN 46R. FIN 46R provides guidance on howthis FSP is not expected to identify the primary beneficiary of a variable interest entity and determine when the variable interest entity should be consolidated by the primary beneficiary. The recognition and measurement provisions of FIN 46, were adopted for our Trust subsidiaries for the quarter ended September 30, 2003, and for other variable interest entities under Fin 46R for the quarter ended March 31, 2004. The adoption did not have a material impacteffect on our financial condition or results of operations.
In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-3,Accounting for Certain Loans and Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for acquired loans that show evidence of having deteriorated in terms of credit quality since their origination and for which a loss is deemed probable of occurring. SOP 03-3 requires acquired loans to be recorded at their fair value, defined as the present value of future cash flows including interest income, to be recognized over the life of the loan. SOP 03-3 prohibits the carryover of an allowance for loan loss on certain acquired loans within its scope considered in the future cash flows assessment. SOP 03-3 was effective for loans acquired in fiscal years beginning after December 15, 2004 and has not had a material effect on our financial condition or results of operations.
Reclassifications—Certain amounts reported in prior years’ financial statements have been reclassified to conform to the current presentation. The results of the reclassifications are not considered material and have no effect on previously reported net income and earnings per share.
Revisions—In 2005, the Company revised the Consolidated Statements of Cash Flows to separately disclose the operating, investing and financing portions of the cash flows attributable to its discontinued operations, which in prior periods were reported on a combined basis as a single amount.
NOTE 2. DISCONTINUED OPERATIONS
During the fourth quarter of 2004, the Bank sold its merchant bankcard portfolio to an unrelated third party for $5.9 million in cash. The gain on sale, after selling costs and other expenses, was $5.6 million. This gain, net of $2.2 million in related tax expense, is reflected asgain on sale of discontinued operations, net of tax,, in the statement of income for 2004. Except for standard representations and warranties, the Bank assumed no liability subsequent to completion of the sale.
54
Umpqua Holdings Corporation and Subsidiaries
The following table presents the contribution components from the Bank’s merchant bankcard operations for the years ended December 31, 2005, 2004 2003 and 2002:2003:
Contribution from Merchant Bankcard
| | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | | 2005 | | 2004 | | | 2003 | |
| | | | | |
| Other non-interest income | | $ | 827 | | $ | 1,042 | | $ | 686 | | | $ | — | | $ | 827 | | $ | 1,042 | |
| Provision for income taxes | | | (326) | | | (407) | | | (269) | | | | — | | | (326) | | | (407) | |
| | | | | |
| Income from discontinued operations, net of tax | | $ | 501 | | $ | 635 | | $ | 417 | | | $ | — | | $ | 501 | | $ | 635 | |
| | | | | |
48
Umpqua Holdings Corporation and Subsidiaries
At December 31, 2004, a liability of $239,000 was recorded in connection with professional fees and contract termination costs related to the sale of the merchant bankcard portfolio. This liability is expected to be relieved through cash payments byAt December 31, 2005.2005, there was no remaining liability recorded related to the sale.
In accordance with SFAS No. 144,Impairment of Long-Lived Assets,, the financial results related to the merchant bankcard operation (exclusive of the gain on sale) have been reclassified asincome from discontinued operations, net of tax,, in the statements of income for all periods presented. Although thegain on sale of discontinued operations, net of taxandincome from discontinued operations, net of taxare shown separately on the statements of income, they have been combined for all other presentations in this Report. Collectively, they are referred to asincome from discontinued operations, net of taxin theNotes to Consolidated Financial Statements.
NOTE 3. BUSINESS COMBINATIONS
On July 9, 2004, the Company acquired all of the outstanding common stock of Humboldt Bancorp (“Humboldt”) of Roseville, California, the parent company of Humboldt Bank, in an acquisition accounted for under the purchase method of accounting. The results of Humboldt’s operations have been included in the consolidated financial statements since that date. This merger was consistent with the Company’s community banking expansion strategy and providesprovided the opportunity to enter growth markets in Northern California with an established franchise of 27 stores.
The aggregate purchase price was $328$328.1 million and included common stock valued at $310$309.7 million, stock options valued at $17$17.2 million and direct merger costs of $1$1.0 million. The value of the 15.5 million common shares issued was determined based on the $19.98 average closing market price of the Company’s common stock for the two trading days before and after announcement of the merger agreement on March 15, 2004. Outstanding Humboldt stock options were converted (using the same 1:1 exchange ratio applied to the share conversion) into approximately 1.1 million Umpqua Holdings Corporation stock options, at a weighted average fair value of $15.58 per option. Substantially all of the Humboldt options were vested as of the date the merger was completed and the compensation expense associated with the converted options has not been significant.
55
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
Humboldt
| | | | | | | | | | | |
| (in thousands) | (in thousands) | | | (in thousands) | | |
| | | | | |
| ASSETS ACQUIRED: | ASSETS ACQUIRED: | | | | | ASSETS ACQUIRED: | | | | |
| Investment securities | Investment securities | | $ | 219,430 | | Investment securities | | $ | 219,430 | |
| Loans, net | Loans, net | | | 1,042,038 | | Loans, net | | | 1,042,038 | |
| Premises & equipment, net | Premises & equipment, net | | | 28,252 | | Premises & equipment, net | | | 28,252 | |
| Goodwill | Goodwill | | | 238,205 | | Goodwill | | | 238,205 | |
| Core deposit intangible asset | Core deposit intangible asset | | | 11,646 | | Core deposit intangible asset | | | 11,646 | |
| Other assets | Other assets | | | 122,268 | | Other assets | | | 122,268 | |
| | | | | | | | | |
| | Total assets acquired | | | 1,661,839 | | Total assets acquired | | $ | 1,661,839 | |
| | | | | | | | | |
| LIABILITIES ASSUMED: | LIABILITIES ASSUMED: | | | | | LIABILITIES ASSUMED: | | | | |
| Deposits | Deposits | | | 1,192,059 | | Deposits | | $ | 1,192,059 | |
| Term debt | Term debt | | | 47,142 | | Term debt | | | 47,142 | |
| Junior subordinated debentures | Junior subordinated debentures | | | 68,561 | | Junior subordinated debentures | | | 68,561 | |
| Other liabilities | Other liabilities | | | 27,211 | | Other liabilities | | | 27,211 | |
| | | | | | | | | |
| | Total liabilities assumed | | | 1,334,973 | | Total liabilities assumed | | | 1,334,973 | |
| | | | | | | | | |
| | Net assets acquired | | $ | 326,866 | | Net assets acquired | | $ | 326,866 | |
| | | | | | | | | |
Subsequent to the acquisition, certain of these assets were adjusted as part of the allocation of the purchase price. In 2005, the increase in goodwill is attributed to tax adjustments related to the Humboldt acquisition. Additional tax related adjustments may be made to the purchase price allocation, specifically related to other assets, taxes and compensation adjustments.allocation. At December 31, 2004,2005, the goodwill asset recorded in connection with the Humboldt acquisition was approximately $239$239.8 million.
The following tables presenttable presents unaudited pro forma results of operations for the yearsyear ended December 31, 2004 and 2003 as if the acquisitionsacquisition of Humboldt had occurred on January 1, 2003.2004. Since Humboldt completed its merger with California Independent Bancorp (“CIB”) on January 6, 2004, the pro forma results for that transaction are presented separately in the tables. The Company expects to realize significanttable. Any revenue enhancements and cost savings as a result of the Humboldt merger that arehave not been reflected in the pro forma consolidatedcombined condensed statements of income. No assurance can be given with respect to the ultimate level of such revenue
56
Umpqua Holdings Corporation and Subsidiaries
enhancements or cost savings. The pro forma results do not necessarily indicate the results that would have been obtained had the acquisitions actually occurred on January 1, 2003:
49
2004:
Pro Forma Financial Information–Unaudited
| | | | | | | | | | | | | | | | | | | | | | | | |
| 2004 | | | | | | | | | | | | |
| (in thousands, except per share data) | | | | | | | | Pro Forma | | | | | Pro Forma | |
| | | Umpqua | | | Humboldt(d) | | | CIB(e) | | | Adjustments | | | | | Combined | |
| | |
| Net interest income | | $ | 157,687 | | | $ | 32,607 | | | $ | 165 | | | $ | 736 | | | (a) | | $ | 191,195 | |
| Provision for loan losses | | | 7,321 | | | | 1,243 | | | | — | | | | — | | | | | | 8,564 | |
| Non-interest income | | | 41,373 | | | | 6,935 | | | | 34 | | | | — | | | | | | 48,342 | |
| Non-interest expense | | | 125,179 | | | | 26,852 | | | | 18 | | | | 1,198 | | | (b) | | | 153,247 | |
| | | |
| | Income from continuing operations, before income taxes | | | 66,560 | | | | 11,447 | | | | 181 | | | | (462) | | | | | | 77,726 | |
| Provision for income taxes | | | 23,270 | | | | 3,503 | | | | 65 | | | | (194) | | | (c) | | | 26,644 | |
| | | |
| | Income from continuing operations | | $ | 43,290 | | | $ | 7,944 | | | $ | 116 | | | $ | (268) | | | | | $ | 51,082 | |
| | | |
| EARNINGS PER SHARE FROM CONTINUING OPERATIONS: | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 1.21 | | | | | | | | | | | | | | | | | $ | 1.19 | |
| Diluted | | $ | 1.19 | | | | | | | | | | | | | | | | | $ | 1.16 | |
| AVERAGE SHARES OUTSTANDING: | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 35,804 | | | | | | | | | | | | | | | | | | 43,107 | |
| Diluted | | | 36,345 | | | | | | | | | | | | | | | | | | 43,866 | |
| |
| (a) | Includes $1.45$1.5 million of net accretion related to the Humboldt acquisition, less $712,000 of accretion recognized by Humboldt in connection with the CIB merger for the period January 1 through July 9, 2004. |
| |
| (b) | Includes amortization of premises and fixed asset purchase accounting adjustments of $32,000 and core deposit intangible amortization of $1.17$1.2 million. |
| |
| (c) | Income tax effect of pro forma adjustments. |
| |
(d) | Excludes merger-related costs for the Humboldt merger with Umpqua of $3.06 million. |
(e) | Excludes merger-related costs for the CIB merger with Humboldt of $5.27 million and related tax benefit of $1.71 million. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| 2003 | | | | | | | | | | | | |
| (in thousands, except per share data) | | | | | | | | Pro Forma | | | | | Pro Forma | |
| | | Umpqua | | | Humboldt | | | CIB(d) | | | Adjustments | | | | | Combined | |
| | |
| Net interest income | | $ | 113,272 | | | $ | 47,259 | | | $ | 14,658 | | | $ | 1,073 | | | (a) | | $ | 176,262 | |
| Provision for loan losses | | | 4,550 | | | | 1,523 | | | | (690) | | | | — | | | | | | 5,383 | |
| Non-interest income | | | 38,001 | | | | 9,048 | | | | 2,002 | | | | — | | | | | | 49,051 | |
| Non-interest expense | | | 95,269 | | | | 40,560 | | | | 12,163 | | | | 2,396 | | | (b) | | | 150,388 | |
| | | |
| | Income from continuing operations, before income taxes | | | 51,454 | | | | 14,224 | | | | 5,187 | | | | (1,323) | | | | | | 69,542 | |
| Provision for income taxes | | | 17,970 | | | | 3,992 | | | | 1,788 | | | | (556) | | | (c) | | | 23,194 | |
| | | |
| | Income from continuing operations | | $ | 33,484 | | | $ | 10,232 | | | $ | 3,399 | | | $ | (767) | | | | | $ | 46,348 | |
| | | |
| EARNINGS PER SHARE FROM CONTINUING OPERATIONS: | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 1.18 | | | | | | | | | | | | | | | | | $ | 1.06 | |
| Diluted | | $ | 1.17 | | | | | | | | | | | | | | | | | $ | 1.04 | |
| AVERAGE SHARES OUTSTANDING: | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 28,294 | | | | | | | | | | | | | | | | | | 43,527 | |
| Diluted | | | 28,666 | | | | | | | | | | | | | | | | | | 44,540 | |
| |
(a) | Includes $1.82 million of interest expense related to the issuance of $27 million of subordinated debentures in connection with the CIB acquisition and $2.90 million of net accretion related to the Humboldt acquisition |
50
Umpqua Holdings Corporation and Subsidiaries
| |
(b) | Includes amortization of premises and fixed asset purchase accounting adjustments of $64,000 and core deposit intangible amortization of $2.33 million. |
| |
(c) | Income tax effect of pro forma adjustments.at 42%. |
| |
| (d) | Excludes merger related costsexpenses for the Humboldt merger with Umpqua of $3.1 million. |
| (e) | Excludes merger related expenses for the CIB merger with Humboldt of $483,000$5.3 million and related tax benefit of $52,000.$1.7 million. |
On November 15, 2002 the Company completed the acquisition of Centennial Bancorp (“Centennial”), the parent company of Centennial Bank, in an acquisition accounted for under the purchase method of accounting. The results of Centennial’s operations have been included in the Company’s consolidated financial statements since that date. The aggregate purchase price was $146 million; each share of Centennial stock was exchanged for 0.5343 shares of Umpqua Holdings Corporation stock, or $9.35 in cash, or a combination thereof resulting in the issuance of 7.8 million shares.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
Centennial
| | | | | | |
| (in thousands) | | |
| | |
| ASSETS ACQUIRED: | | | | |
| Investment securities | | $ | 96,977 | |
| Loans, net | | | 632,895 | |
| Premises & equipment, net | | | 16,147 | |
| Goodwill | | | 134,515 | |
| Core deposit intangible asset | | | 352 | |
| Other assets | | | 14,787 | |
| | | | | |
| | Total assets acquired | | | 895,673 | |
| | | | | |
| LIABILITIES ASSUMED: | | | | |
| Deposits | | | 722,225 | |
| Securities sold under agreement to repurchase | | | 7,281 | |
| Term debt | | | 10,172 | |
| Other liabilities | | | 9,968 | |
| | | | | |
| | Total liabilities assumed | | | 749,646 | |
| | | | | |
| | Net assets acquired | | $ | 146,027 | |
| | | | | |
Subsequent to the acquisition, certain of these assets were adjusted as part of the allocation of the purchase price. At December 31, 2004, the goodwill asset recorded in connection with the Centennial acquisition was approximately $134 million.
The Company incurs significant expenses related to mergers that cannot be capitalized. Generally, these expenses begin to be recognized while due diligence is being conducted and continue until such time as all systems have been converted and operational functions become fully integrated. Merger-related expenses are included as a line item on the statements of income.
The following table presents the key components of merger-related expense for years ended December 31, 2005, 2004 2003 and 2002.2003. Substantially all of the merger-related expenses incurred during 2005 and 2004 were in connection with the Humboldt acquisition and substantially all of the merger-related expenses incurred during 2003 were in connection with the prior acquisition of Centennial acquisition and merger-related expenses incurred during 2002 were in connection with the Centennial and prior acquisitions.Bancorp (“Centennial”).
Merger-Related Expense
| | | | | | | | | | | | | | | | | |
| (in thousands) | (in thousands) | | | | | | | (in thousands) | | | | | | |
| | | | 2004 | | | 2003 | | | 2002 | | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| Professional fees | Professional fees | | $ | 835 | | $ | 92 | | $ | 224 | | Professional fees | | $ | 211 | | $ | 835 | | $ | 92 | |
| Compensation and relocation | Compensation and relocation | | | 607 | | | 526 | | | 726 | | Compensation and relocation | | | — | | | 607 | | | 526 | |
| Communications | Communications | | | 98 | | | 169 | | | 1,079 | | Communications | | | — | | | 98 | | | 169 | |
| Premises and equipment | Premises and equipment | | | 2,636 | | | 657 | | | — | | Premises and equipment | | | (65) | | | 2,636 | | | 657 | |
| Charitable contributions | Charitable contributions | | | 131 | | | — | | | — | | Charitable contributions | | | — | | | 131 | | | — | |
| Other | Other | | | 1,290 | | | 638 | | | 723 | | Other | | | 116 | | | 1,290 | | | 638 | |
| | | | | | | |
| | Total | | $ | 5,597 | | $ | 2,082 | | $ | 2,752 | | Total | | $ | 262 | | $ | 5,597 | | $ | 2,082 | |
| | | | | | | |
5157
The following table summarizes activity in the Company’s accrued restructuring charges related to the Humboldt and Centennial acquisitions as well as prior acquisitions of Independent Financial Network, Inc. (INFN), Linn-Benton Bank (LBB) and VRB Bancorp (VRB):acquisitions:
| | | | | | |
| | | Humboldt | |
| | | | |
| (in thousands) | | 2004 | |
| | |
| Beginning balance | | $ | — | |
| | ADDITIONS: | | | | |
| | Charged to merger expense | | | 304 | |
| | Charged to goodwill | | | 2,113 | |
| | Charged to deferred tax asset | | | 319 | |
| | Charged to fixed assets | | | 349 | |
| | UTILIZATION: | | | | |
| | Reductions credited to goodwill | | | (363) | |
| | Reductions credited to merger expense | | | (110) | |
| | Reclassifications | | | (472) | |
| | Payments and write-offs | | | (1,006) | |
| | | | |
| Ending Balance | | $ | 1,134 | |
| | | | |
| | | | | | | | | | | | | | |
| | | Centennial | |
| (in thousands) | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | |
| Beginning balance | | $ | 377 | | | $ | 3,905 | | | $ | — | |
| | ADDITIONS: | | | | | | | | | | | | |
| | Charged to merger expense | | | — | | | | 621 | | | | 270 | |
| | Charged to goodwill | | | — | | | | 248 | | | | 3,880 | |
| | UTILIZATION: | | | | | | | | | | | | |
| | Reductions credited to goodwill | | | — | | | | (1,602) | | | | — | |
| | Reductions credited to merger expense | | | (37) | | | | (21) | | | | — | |
| | Reclassifications | | | 13 | | | | (1,118) | | | | — | |
| | Payments and write-offs | | | (154) | | | | (1,656) | | | | (245) | |
| | | |
| Ending Balance | | $ | 199 | | | $ | 377 | | | $ | 3,905 | |
| | | |
| | | | | | | | | | | | | | |
| (in thousands) | | (in thousands) | | | | | | |
| | | | | | | | | | | | | | Humboldt and Centennial | |
| | | | INFN, LBB and VRB | | | | | |
| (in thousands) | | | | |
| | | | 2004 | | | 2003 | | | 2002 | | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| Beginning balance | Beginning balance | | $ | 125 | | $ | 237 | | $ | 4,274 | | Beginning balance | | $ | 1,333 | | $ | 377 | | $ | 3,905 | |
| | ADDITIONS: | | | | | | | | | | | ADDITIONS: | | | | | | | | | | |
| | Charged to merger expense | | | 60 | | | 239 | | | 200 | | Charged to merger expense | | | — | | | 304 | | | 621 | |
| | UTILIZATION: | | | | | | | | | | | Charged to goodwill | | | 92 | | | 2,113 | | | 248 | |
| | Reclassifications | | | — | | | — | | | (184) | | Charged to deferred tax asset | | | 61 | | | 319 | | | — | |
| | Payments and write-offs | | | (185) | | | (351) | | | (4,053) | | Charged to fixed assets | | | — | | | 349 | | | — | |
| | | | | UTILIZATION: | | | | | | | | | | |
| | | Reductions credited to goodwill | | | — | | | (363) | | | (1,602) | |
| | | Reductions credited to merger expense | | | — | | | (147) | | | (21) | |
| | | Reclassifications | | | — | | | (459) | | | (1,118) | |
| | | Payments and write-offs | | | (1,327) | | | (1,160) | | | (1,656) | |
| | | | | |
| Ending Balance | Ending Balance | | $ | — | | $ | 125 | | $ | 237 | | Ending Balance | | $ | 159 | | $ | 1,333 | | $ | 377 | |
| | | | | | | |
The Company expects to incur approximately $1 million of additional merger-related expenses in connection with the Humboldt merger, principally during the first six months of 2005. No additional merger-related expenses are expected in connection with Humboldt, Centennial or any other previous acquisitions.
NOTE 4. CASH AND DUE FROM BANKS
The Bank 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 required reserve balance at December 31, 20042005 and 20032004 was approximately $26.1$29.4 million and $38.1$26.1 million, respectively, and was met by holding cash and maintaining an average balance with the Federal Reserve Bank.
52
Umpqua Holdings Corporation and Subsidiaries
NOTE 5. INVESTMENT SECURITIES
The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at December 31, 20042005 and 2003:2004:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2004 | | | | | | | | | |
| December 31, 2005 | | | | | | | | | |
| (in thousands) | | Amortized | | | Unrealized | | | Unrealized | | | | | Amortized | | | Unrealized | | | Unrealized | | | |
| | | Cost | | | Gains | | | Losses | | | Fair Value | | | Cost | | | Gains | | | Losses | | | Fair Value | |
| | | | | |
| AVAILABLE-FOR-SALE: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and agencies | | $ | 207,802 | | $ | 90 | | $ | (1,263) | | $ | 206,629 | | | $ | 201,550 | | $ | 18 | | $ | (5,030) | | $ | 196,538 | |
| Mortgage-backed securities and collateralized mortgage obligations | | | 366,689 | | | 1,690 | | | (2,911) | | | 365,468 | | | | 367,388 | | | 295 | | | (8,100) | | | 359,583 | |
| Obligations of states and political subdivisions | | | 53,379 | | | 1,837 | | | (280) | | | 54,936 | | | | 69,234 | | | 2 | | | (1,400) | | | 67,836 | |
| Other investment securities | | | 50,117 | | | — | | | (1,166) | | | 48,951 | | | | 50,067 | | | — | | | (2,156) | | | 47,911 | |
| | | | | |
| | | $ | 677,987 | | $ | 3,617 | | $ | (5,620) | | $ | 675,984 | | | $ | 688,239 | | $ | 315 | | $ | (16,686) | | $ | 671,868 | |
| | | | | |
| HELD-TO-MATURITY: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Obligations of states and political subdivisions | | $ | 11,432 | | $ | 396 | | $ | — | | $ | 11,828 | | | $ | 8,302 | | $ | 99 | | $ | — | | $ | 8,401 | |
| Other investment securities | | | 375 | | | — | | | — | | | 375 | | | | 375 | | | — | | | — | | | 375 | |
| | | | | |
| | | $ | 11,807 | | $ | 396 | | $ | — | | $ | 12,203 | | | $ | 8,677 | | $ | 99 | | $ | — | | $ | 8,776 | |
| | | | | |
58
Umpqua Holdings Corporation and Subsidiaries
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | | |
| December 31, 2003 | | Cost | | | Gains | | | Losses | | | Fair Value | | |
| December 31, 2004 | | | Amortized | | | Unrealized | | | Unrealized | | | |
| (in thousands) | | | Cost | | | Gains | | | Losses | | | Fair Value | |
| | | | | |
| AVAILABLE-FOR-SALE: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and agencies | | $ | 172,263 | | $ | 1,165 | | $ | (654) | | $ | 172,774 | | | $ | 207,802 | | $ | 90 | | $ | (1,263) | | $ | 206,629 | |
| Mortgage-backed securities and collateralized mortgage obligations | | | 257,483 | | | 1,008 | | | (3,101) | | | 255,390 | | | | 366,689 | | | 1,690 | | | (2,911) | | | 365,468 | |
| Corporate obligations | | | 23,542 | | | 768 | | | (43) | | | 24,267 | | |
| Obligations of states and political subdivisions | | | | 53,379 | | | 1,837 | | | (280) | | | 54,936 | |
| Other investment securities | | | 50,037 | | | — | | | (564) | | | 49,473 | | | | 50,117 | | | — | | | (1,166) | | | 48,951 | |
| | | | | |
| | | $ | 503,325 | | $ | 2,941 | | $ | (4,362) | | $ | 501,904 | | | $ | 677,987 | | $ | 3,617 | | $ | (5,620) | | $ | 675,984 | |
| | | | | |
| HELD-TO-MATURITY: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Obligations of states and political subdivisions | | $ | 14,237 | | $ | 765 | | $ | (3) | | $ | 14,999 | | | $ | 11,432 | | $ | 396 | | $ | — | | $ | 11,828 | |
| Other investment securities | | | 375 | | | 10 | | | — | | | 385 | | | | 375 | | | — | | | — | | | 375 | |
| | | | | |
| | | $ | 14,612 | | $ | 775 | | $ | (3) | | $ | 15,384 | | | $ | 11,807 | | $ | 396 | | $ | — | | $ | 12,203 | |
| | | | | |
Investment securities that were in an unrealized loss position as of December 31, 20042005 are presented in the following table, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to interest rate differentials:
| | | | | | | | | | | | | | | | | | | | | |
| | | Less than 12 Months | | | 12 Months or Longer | | | Total | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | | | | | | | | | | | |
| | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | | | Less than 12 Months | | | 12 Months or Longer | | | Total | |
| | | | | | | | | | | | |
| | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | |
| | | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
| | | | |
| U.S. Treasury and agencies | | $ | 171,405 | | $ | 541 | | $ | 29,278 | | $ | 722 | | $ | 200,683 | | $ | 1,263 | | | $ | 47,811 | | $ | 1,039 | | $ | 147,710 | | $ | 3,991 | | $ | 195,521 | | $ | 5,030 | |
| Mortgage-backed securities | | | | 134,059 | | | 2,505 | | | 12,162 | | | 504 | | | 146,221 | | | 3,009 | |
| Collateralized mortgage obligations | | | | 133,255 | | | 2,038 | | | 70,223 | | | 3,053 | | | 203,478 | | | 5,091 | |
| Obligations of states and political subdivisions | | | 7,432 | | | 280 | | | — | | | — | | | 7,432 | | | 280 | | | | 65,659 | | | 1,381 | | | 541 | | | 19 | | | 66,200 | | | 1,400 | |
| Collateralized mortgage obligations | | | 98,064 | | | 948 | | | 3,303 | | | 1,261 | | | 101,367 | | | 2,209 | | |
| Mortgage-backed securities | | | 53,582 | | | 385 | | | 14,765 | | | 317 | | | 68,347 | | | 702 | | |
| Other investment securities | | | — | | | — | | | 48,872 | | | 1,166 | | | 48,872 | | | 1,166 | | | | — | | | — | | | 47,882 | | | 2,156 | | | 47,882 | | | 2,156 | |
| | | | | |
| Total temporarily impaired securities | | $ | 330,483 | | $ | 2,154 | | $ | 96,218 | | $ | 3,466 | | $ | 426,701 | | $ | 5,620 | | | $ | 380,784 | | $ | 6,963 | | $ | 278,518 | | $ | 9,723 | | $ | 659,302 | | $ | 16,686 | |
| | | | | |
The unrealized losses on investments in U.S. Treasury and agencies securities were caused by interest rate increases subsequent to the purchase of the securities. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than par. Because the Bank has the ability and intent to hold these investments until a market price recovery or to maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.
53
The unrealized losses on mortgage-backed securities and collateralized mortgage obligations were caused by interest rate increases subsequent to the purchase of the securities. It is expected that the securities will not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Bank has the ability and intent to hold these investments until a market price recovery or to maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.
The unrealized losses on obligations of political subdivisions were caused by interest rate increases subsequent to the purchase of the securities. Management monitors published credit ratings of these securities and no adverse ratings changes have occurred since the date of purchase on obligations of political subdivisions in an unrealized loss position as of December 31, 2004. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Bank has the ability and intent to hold these investments until a market price recovery or to maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.
The unrealized losses on collateralized mortgage obligations and mortgage-backed securities were caused by interest rate increases subsequent to the purchase of the securities. It is expected that the securities would not be settled at a price less than the amortized cost of the investment.2005. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Bank has the ability and intent to hold these investments until a market price recovery or to maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.
Other investment securities consists primarily of investments in two mutual funds comprised largely of mortgage-related securities, although the funds may also invest in U.S. government or agency securities, bank certificates of deposit insured by the FDIC or repurchase agreements. The unrealized loss on other investment securities at December 31, 20042005 is attributed to changes in interest rates and not credit quality. Since the Bank has the ability and intent to hold these investments until a market price recovery, the unrealized losses on these investments are not considered other-than-temporarily impaired.
59
The following table presents the maturities of investment securities at December 31, 2004:2005:
| | | | | | | | | | | | | | | |
| (in thousands) | | | | | | | | | |
| | | | | | | | | | | | | | | | Available-for-Sale | | | Held-To-Maturity | |
| | | Available-for-Sale | | | Held-To-Maturity | | | | | | | |
| | | | | | | | | Amortized | | | Fair | | | Amortized | | | Fair | |
| (in thousands) | | Amortized | | | Fair | | | Amortized | | | Fair | | |
| | | Cost | | | Value | | | Cost | | | Value | | | Cost | | | Value | | | Cost | | | Value | |
| | | | | |
| AMOUNTS MATURING IN: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months or less | | $ | 2,670 | | $ | 2,677 | | $ | — | | $ | — | | | $ | 2,927 | | $ | 2,923 | | $ | — | | $ | — | |
| Over three months through twelve months | | | 34,523 | | | 34,778 | | | 30 | | | 30 | | | | 15,745 | | | 15,521 | | | 285 | | | 287 | |
| After one year through three years | | | 151,549 | | | 151,215 | | | 1,165 | | | 1,203 | | | | 92,999 | | | 90,539 | | | 1,180 | | | 1,187 | |
| After three years through five years | | | 255,610 | | | 252,548 | | | 1,140 | | | 1,176 | | | | 97,185 | | | 94,762 | | | 605 | | | 618 | |
| After five years through fifteen years | | | 178,982 | | | 180,181 | | | 8,142 | | | 8,451 | | | | 255,987 | | | 250,630 | | | 5,307 | | | 5,377 | |
| After fifteen years | | | 4,536 | | | 5,633 | | | 955 | | | 968 | | | | 173,329 | | | 169,582 | | | 925 | | | 932 | |
| Other investment securities | | | 50,117 | | | 48,952 | | | 375 | | | 375 | | | | 50,067 | | | 47,911 | | | 375 | | | 375 | |
| | | | | |
| | | $ | 677,987 | | $ | 675,984 | | $ | 11,807 | | $ | 12,203 | | | $ | 688,239 | | $ | 671,868 | | $ | 8,677 | | $ | 8,776 | |
| | | | | |
The amortized cost and fair value of collateralized mortgage obligations and mortgage-backed securities are presented by expected average life, rather than contractual maturity, in the preceding table. Expected maturities differ from contractual maturities because borrowers may have the right to prepay underlying loans without prepayment penalties.
The following table presents the gross realized gains and gross realized losses on the sale of securities available-for-sale for the years ended December 31, 2005, 2004 2003 and 2002:2003:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | | | | | | | | | | | | | | | | |
| | | Gains | | | Losses | | | Gains | | | Losses | | | Gains | | | Losses | | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | | | |
| | | | Gains | | | Losses | | | Gains | | | Losses | | | Gains | | Losses | |
| | | | |
| U.S. Treasury and agencies | | $ | — | | $ | — | | $ | 5 | | $ | — | | $ | — | | $ | 11 | | | $ | 5 | | $ | — | | $ | — | | $ | — | | $5 | | $ | — | |
| Mortgage-backed securities and collateralized mortgage obligations | | | | — | | | — | | | — | | | — | | 3 | | | 12 | |
| Obligations of states and political subdivisions | | | 22 | | | 3 | | | 2,264 | | | 115 | | | 10 | | | — | | | | 1,654 | | | 220 | | | 22 | | | 3 | | 2,264 | | | 115 | |
| Mortgage-backed securities and collateralized mortgage obligations | | | — | | | — | | | 3 | | | 12 | | | 4 | | | — | | |
| Other investment securities | | | — | | | — | | | 10 | | | — | | | 404 | | | 904 | | | | — | | | — | | | — | | | — | | 10 | | | — | |
| | | | | |
| | | $ | 22 | | $ | 3 | | $ | 2,282 | | $ | 127 | | $ | 418 | | $ | 915 | | | $ | 1,659 | | $ | 220 | | $ | 22 | | $ | 3 | | $2,282 | | $ | 127 | |
| | | | | |
54
Umpqua Holdings Corporation and Subsidiaries
The following table presents, as of December 31, 2004,2005, investment securities which were pledged to secure borrowings and public deposits as permitted or required by law:
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | (in thousands) | | | | | (in thousands) | | | | |
| | | | Amortized Cost | | | Fair Value | | | | Amortized Cost | | | Fair Value | |
| | | | | |
| SECURITIES PLEDGED: | SECURITIES PLEDGED: | | | | | | | | SECURITIES PLEDGED: | | | | | | | |
| To Federal Home Loan Bank to secure borrowings | To Federal Home Loan Bank to secure borrowings | | $ | 39,646 | | $ | 39,357 | | To Federal Home Loan Bank to secure borrowings | | $ | 130,910 | | $ | 127,354 | |
| To state and local governments to secure public deposits | To state and local governments to secure public deposits | | | 103,254 | | | 103,431 | | To state and local governments to secure public deposits | | | 180,624 | | | 176,354 | |
| To U.S. Treasury and Federal Reserve to secure customer tax payments | To U.S. Treasury and Federal Reserve to secure customer tax payments | | | 14 | | | 15 | | To U.S. Treasury and Federal Reserve to secure customer tax payments | | | 4,367 | | | 4,135 | |
| Other securities pledged | Other securities pledged | | | 121,035 | | | 120,280 | | Other securities pledged | | | 152,665 | | | 148,885 | |
| | | | | | | |
| | Total pledged securities | | $ | 263,949 | | $ | 263,083 | | Total pledged securities | | $ | 468,566 | | $ | 456,728 | |
| | | | | | | |
60
Umpqua Holdings Corporation and Subsidiaries
| |
NOTE 6. | LOANS AND ALLOWANCE FOR LOAN LOSSES |
NOTE 6. LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table presents the major types of loans recorded in the balance sheets as of December 31, 20042005 and 2003:2004:
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | (in thousands) | | | | | (in thousands) | | | | |
| | | | 2004 | | | 2003 | | | | 2005 | | | 2004 | |
| | | | | |
| Real estate—construction and land development | Real estate—construction and land development | | $ | 481,836 | | $ | 238,218 | | Real estate—construction and land development | | $ | 638,555 | | $ | 481,836 | |
| Real estate—commercial and agricultural | Real estate—commercial and agricultural | | | 1,700,640 | | | 939,424 | | Real estate—commercial and agricultural | | | 2,019,623 | | | 1,700,634 | |
| Real estate—single and multi-family residential | Real estate—single and multi-family residential | | | 445,976 | | | 264,663 | | Real estate—single and multi-family residential | | | 427,877 | | | 445,976 | |
| Commercial, industrial and agricultural | Commercial, industrial and agricultural | | | 745,733 | | | 515,125 | | Commercial, industrial and agricultural | | | 753,131 | | | 733,876 | |
| Leases | Leases | | | 18,351 | | | 10,918 | | Leases | | | 17,385 | | | 18,351 | |
| Installment and other | Installment and other | | | 86,543 | | | 42,145 | | Installment and other | | | 76,128 | | | 98,406 | |
| | | | | | | |
| | | | | 3,479,079 | | | 2,010,493 | | | | | 3,932,699 | | | 3,479,079 | |
| Deferred loan fees, net | Deferred loan fees, net | | | (11,175) | | | (6,906) | | Deferred loan fees, net | | | (11,068) | | | (11,175) | |
| | | | | | | |
| | Total loans | | $ | 3,467,904 | | $ | 2,003,587 | | Total loans | | $ | 3,921,631 | | $ | 3,467,904 | |
| | | | | | | |
The following table summarizes activity related to the allowance for loan losses for the years ended December 31, 2005, 2004 2003 and 2002:2003:
| | | | | | | | | | | | | | | | | | | |
| (In thousands) | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| Balance, beginning of year | | $ | 25,352 | | $ | 24,731 | | $ | 13,221 | | | $ | 44,229 | | $ | 25,352 | | $ | 24,731 | |
| Provision for loan losses | | | 7,321 | | | 4,550 | | | 3,888 | | | | 2,468 | | | 7,321 | | | 4,550 | |
| Charge-offs | | | (6,429) | | | (6,077) | | | (2,792) | | | | (7,752) | | | (6,429) | | | (6,077) | |
| Recoveries | | | 1,944 | | | 2,148 | | | 558 | | | | 4,940 | | | 1,944 | | | 2,148 | |
| Reclassification(1) | | | (1,216) | | | — | | | — | | | | — | | | (1,216) | | | — | |
| Acquisitions | | | 17,257 | | | — | | | 9,856 | | | | — | | | 17,257 | | | — | |
| | | | | |
| Balance, end of year | | $ | 44,229 | | $ | 25,352 | | $ | 24,731 | | | $ | 43,885 | | $ | 44,229 | | $ | 25,352 | |
| | | | | |
| |
| (1) | Reflects amount of allowance related to unfunded commitments, which was reclassified during the third quarter of 2004. |
At December 31, 2004,2005, the recorded investment in loans classified as impaired in accordance with SFAS No. 114,Accounting for Impaired Loans,, totaled $14.7 million, with a corresponding valuation allowance (included in the allowance for loan losses) of $1.5 million. At December 31, 2004, the total recorded investment in impaired loans was $27.5 million, with a corresponding valuation allowance (included in the allowance for loan losses) of $3.3 million. At December 31, 2003, the total recorded investment in impaired loans was $963,000, with no associated valuation allowances. The average recorded investment in impaired loans was approximately $20.4 million for 2005 and $14.4 million for 2004 and $1.1 million for 2003.2004. For the years ended December 31, 2005, 2004, 2003, and 2002,2003, interest income of $765,000, $784,000, $79,000, and $113,000,$79,000, respectively, was recognized in connection with impaired loans.
Non-accrual loans totaled $6.0 million at December 31, 2005 and $21.8 million at December 31, 2004 and $10.5 million at December 31, 2003.2004. Foregone interest income resulting from loans being placed on non-accrual status totaled approximately $448,000, $1.2 million, $405,000, and $406,000$405,000 for the years ended December 31, 2005, 2004, 2003, and 2002,2003, respectively.
As of December 31, 2005, loans totaling $1.0 billion were pledged to secure borrowings.
55
| |
NOTE 7. | PREMISES AND EQUIPMENT |
NOTE 7. PREMISES AND EQUIPMENT
The following table presents the major components of premises and equipment at December 31, 20042005 and 2003:2004:
| | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | (In thousands) | | | | | | | (In thousands) | | | | |
| | | | 2004 | | | 2003 | | | 2002 | | | | 2005 | | | 2004 | |
| | | | | |
| Land | Land | | $ | 11,880 | | $ | 8,553 | | | 9,171 | | Land | | $ | 11,880 | | $ | 11,880 | |
| Buildings and improvements | Buildings and improvements | | | 64,917 | | | 51,185 | | | 41,455 | | Buildings and improvements | | | 69,276 | | | 64,470 | |
| Furniture, fixtures and equipment | Furniture, fixtures and equipment | | | 52,746 | | | 45,446 | | | 32,078 | | Furniture, fixtures and equipment | | | 56,484 | | | 52,296 | |
| Construction in progress | | Construction in progress | | | 3,079 | | | 930 | |
| | | | | | | |
| | Total premises and equipment | | | 129,543 | | | 105,184 | | | 82,704 | | Total premises and equipment | | | 140,719 | | | 129,576 | |
| Less: Accumulated depreciation and amortization | Less: Accumulated depreciation and amortization | | | (43,862) | | | (41,856) | | | (24,119) | | Less: Accumulated depreciation and amortization | | | (51,854) | | | (43,895) | |
| | | | | | | |
| | Premises and equipment, net | | $ | 85,681 | | $ | 63,328 | | | 58,585 | | Premises and equipment, net | | $ | 88,865 | | $ | 85,681 | |
| | | | | | | |
61
Depreciation expense totaled $7.8$8.5 million, $6.0$6.3 million and $3.6$5.6 million for the years ended December 31, 2005, 2004 2003 and 2002,2003, respectively.
Umpqua’s subsidiaries have entered into a number of non-cancelable lease agreements with respect to premises and equipment. See Note 14 for more information on the rental expense, net of rent income and minimum annual rental commitments under non-cancelable lease agreements.
| |
NOTE 8. | MORTGAGE SERVICING RIGHTS |
NOTE 8. MORTGAGE SERVICING RIGHTS
The portfolio of residential mortgage loans serviced for others at December 31, 2005 and 2004 and 2003 totaled $1.1$1.0 billion and $1.2$1.1 billion, respectively.
The following table summarizes the changes in the MSR asset for the years ended December 31, 2005, 2004 2003 and 2002:2003:
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2004 | | | 2003 | | | 2002 | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| Balance, beginning of year | | $ | 10,608 | | $ | 9,316 | | $ | 4,876 | | | $ | 11,154 | | $ | 10,608 | | $ | 9,316 | |
| Additions for new mortgage servicing rights capitalized | | | 2,643 | | | 6,671 | | | 8,067 | | | | 3,318 | | | 2,643 | | | 6,671 | |
| Amortization of servicing rights | | | (3,212) | | | (5,289) | | | (2,406) | | | | (2,000) | | | (3,212) | | | (5,289) | |
| Impairment recovery/ (charge) | | | 1,115 | | | (90) | | | (1,221) | | |
| Impairment (charge)/recovery | | | | (1,582) | | | 1,115 | | | (90) | |
| | | | | |
| Balance, end of year | | $ | 11,154 | | $ | 10,608 | | $ | 9,316 | | | $ | 10,890 | | $ | 11,154 | | $ | 10,608 | |
| | | | | |
| Balance of loans serviced for others | | $ | 1,064,000 | | $ | 1,170,000 | | $ | 985,000 | | | $ | 1,016,000 | | $ | 1,064,000 | | $ | 1,170,000 | |
| MSR as a percentage of serviced loans | | | 1.05% | | | 0.91% | | | 0.95% | | | | 1.07% | | | 1.05% | | | 0.91% | |
The following table summarizes the changes in the valuation allowance for the years ended December 31, 2005, 2004 2003 and 2002.2003.
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2004 | | | 2003 | | | 2002 | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| Balance, beginning of year | | $ | 1,907 | | $ | 1,817 | | $ | 596 | | | $ | 792 | | $ | 1,907 | | $ | 1,817 | |
| (Impairment recovery)/charge | | | (1,115 | ) | | | 90 | | | 1,221 | | |
| Impairment charge/(recovery) | | | | 1,582 | | | (1,115 | ) | | | 90 | |
| | | | | |
| Balance, end of year | | $ | 792 | | $ | 1,907 | | $ | 1,817 | | | $ | 2,374 | | $ | 792 | | $ | 1,907 | |
| | | | | |
56
Umpqua Holdings Corporation and Subsidiaries
| |
NOTE 9. | GOODWILL AND CORE DEPOSIT INTANGIBLES |
NOTE 9. GOODWILL AND CORE DEPOSIT INTANGIBLES
The following table summarizes the changes in the Company’s goodwill and core deposit intangible asset for the years ended December 31, 20042005 and 2003.2004. Goodwill is reflected by operating segment; all core deposit intangible isintangibles are related to the Community Banking segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Goodwill | | | | | Goodwill | | | |
| | | | | | Core | | | | | | Core | |
| | | Community | | | Retail | | | | | Deposit | | | Community | | | Retail | | | | | Deposit | |
| (In thousands) | | Banking | | | Brokerage | | | Total | | | Intangible | | |
| | | | | Banking | | | Brokerage | | | Total | | | Intangible | |
| Balance, December 31, 2002 | | $ | 154,911 | | $ | 3,697 | | $ | 158,608 | | $ | 2,359 | | |
| Additions | | | 250 | | | — | | | 250 | | | — | | |
| Amortization | | | — | | | — | | | — | | | (404) | | |
| Adjustments(1) | | | (1,228) | | | — | | | (1,228 | ) | | | — | | |
| | | | | |
| Balance, December 31, 2003 | | | 153,933 | | | 3,697 | | | 157,630 | | | 1,955 | | | $ | 153,933 | | $ | 3,697 | | $ | 157,630 | | $ | 1,955 | |
| Additions | | | 238,741 | | | — | | | 238,741 | | | 11,646 | | | | 238,741 | | | — | | | 238,741 | | | 11,646 | |
| Amortization | | | — | | | — | | | — | | | (1,512) | | | | — | | | — | | | — | | | (1,512) | |
| | | | | |
| Balance, December 31, 2004 | | $ | 392,674 | | $ | 3,697 | | $ | 396,371 | | $ | 12,089 | | | | 392,674 | | | 3,697 | | | 396,371 | | | 12,089 | |
| Additions | | | | 2,473 | | | — | | | 2,473 | | | — | |
| Amortization | | | | — | | | — | | | — | | | (2,430) | |
| | | | | |
| Balance, December 31, 2005 | | | $ | 395,147 | | $ | 3,697 | | $ | 398,844 | | $ | 9,659 | |
| | | | |
| |
(1) | Includes adjustments related to the purchase price allocation for the Centennial acquisition. |
The goodwill additions for 2004 were related to the Humboldt acquisition. Additional information on the purchase price allocation is provided in Note 3.
In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, the Company has not recognized any amortization expense for goodwill for the periods presented in this Report.
Core deposit intangible assets were also recorded in connection with certain acquisitions. During 2004, a core deposit intangible asset in the amount of $11.6 million was recorded in connection with the Humboldt acquisition. Additional information on the purchase price allocation is provided in Note 3.
62
Umpqua Holdings Corporation and Subsidiaries
The table below presents the forecasted amortization expense for 20052006 through 20092010 for core deposit intangible assets acquired in all mergers:
| | | | | |
| (in thousands) | | Expected | |
| Year | | Amortization | |
| | |
| 2006 | | $ | 2,019 | |
| 2007 | | $ | 1,687 | |
| 2008 | | $ | 1,413 | |
| 2009 | | $ | 1,195 | |
| 2010 | | $ | 1,022 | |
Expected Core Deposit Intangible AmortizationNOTE 10. OTHER ASSETS
Other assets consisted of the following at December 31, 2005 and 2004:
| | | | | |
| (in thousands) | | Expected | |
| Year | | Amortization | |
| | |
| 2005 | | $ | 2,430 | |
| 2006 | | $ | 2,019 | |
| 2007 | | $ | 1,687 | |
| 2008 | | $ | 1,413 | |
| 2009 | | $ | 1,195 | |
| | | | | | | | | | |
| | | 2005 | | | 2004 | |
| | |
| Deferred tax assets, net | | $ | 13,377 | | | $ | 15,099 | |
| Accrued interest receivable | | | 20,974 | | | | 17,047 | |
| Cash surrender value of life insurance policies | | | 41,722 | | | | 40,435 | |
| Investment in unconsolidated subsidiary— Homestead | | | 5,765 | | | | 6,299 | |
| Other | | | 26,573 | | | | 22,601 | |
| | | |
| | Total | | $ | 108,411 | | | $ | 101,481 | |
| | | |
The Company invested in Homestead Capital, a limited partnership that operates qualified affordable housing projects to receive tax benefits in the form of tax deductions from operating losses and tax credits. The Company accounts for the investment under the equity method. The Company’s remaining capital commitments to this partnership at December 31, 2005 and 2004 were approximately $6.0 million and $6.6 million respectively. Such amounts are included in other liabilities on the consolidated balance sheet.
| |
NOTE 10. | INTEREST-BEARING DEPOSITS |
NOTE 11. INTEREST-BEARING DEPOSITS
The following table presents the major types of interest-bearing deposits at December 31, 20042005 and 2003:2004:
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | (in thousands) | | 2004 | | | 2003 | | (in thousands) | | | | |
| | | | | 2005 | | | 2004 | |
| | | | | |
| Negotiable order of withdrawal (NOW) | Negotiable order of withdrawal (NOW) | | $ | 578,723 | | $ | 318,214 | | Negotiable order of withdrawal (NOW) | | $ | 576,037 | | $ | 578,723 | |
| Savings and money market | Savings and money market | | | 1,378,358 | | | 876,479 | | Savings and money market | | | 1,597,311 | | | 1,378,358 | |
| Time, $100,000 and over | Time, $100,000 and over | | | 470,685 | | | 288,928 | | Time, $100,000 and over | | | 601,616 | | | 487,344 | |
| Other time less than $100,000 | Other time less than $100,000 | | | 462,951 | | | 304,670 | | Other time less than $100,000 | | | 523,588 | | | 462,951 | |
| Brokered time deposits | | | 16,659 | | | — | | |
| | | | | | | |
| | Total interest-bearing deposits | | $ | 2,907,376 | | $ | 1,788,291 | | Total interest-bearing deposits | | $ | 3,298,552 | | $ | 2,907,376 | |
| | | | | | | |
57
The following table presents interest expense for each deposit type for the years ended December 31, 2005, 2004 2003 and 2002:2003:
| | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | (in thousands) | | 2004 | | | 2003 | | | 2002 | | (in thousands) | | | | | | |
| | | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| NOW | NOW | | $ | 956 | | $ | 819 | | $ | 251 | | NOW | | $ | 5,881 | | $ | 956 | | $ | 819 | |
| Savings and money market | Savings and money market | | | 13,113 | | | 8,451 | | | 5,646 | | Savings and money market | | | 24,462 | | | 13,113 | | | 8,451 | |
| Time, $100,000 and over | Time, $100,000 and over | | | 9,162 | | | 6,315 | | | 5,392 | | Time, $100,000 and over | | | 16,601 | | | 9,559 | | | 6,315 | |
| Other time less than $100,000 | Other time less than $100,000 | | | 7,371 | | | 8,023 | | | 10,256 | | Other time less than $100,000 | | | 12,634 | | | 7,371 | | | 8,023 | |
| Brokered time deposits | | | 397 | | | — | | | — | | |
| | | | | | | |
| | Total interest on deposits | | $ | 30,999 | | $ | 23,608 | | $ | 21,545 | | Total interest on deposits | | $ | 59,578 | | $ | 30,999 | | $ | 23,608 | |
| | | | | | | |
63
The following table presents maturities of time deposits as of December 31, 2004:2005:
| | | | | | | | | | | |
| (in thousands) | (in thousands) | | | (in thousands) | | |
| | | | | |
| Three months or less | Three months or less | | $ | 257,286 | | Three months or less | | $ | 312,550 | |
| Over three months through twelve months | Over three months through twelve months | | | 368,288 | | Over three months through twelve months | | | 506,579 | |
| Over one year through three years | Over one year through three years | | | 244,230 | | Over one year through three years | | | 217,285 | |
| Over three years | Over three years | | | 80,491 | | Over three years | | | 88,790 | |
| | | | | | | | | |
| | Total time deposits | | $ | 950,295 | | Total time deposits | | $ | 1,125,204 | |
| | | | | | | | | |
NOTE 12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS PURCHASED
| |
NOTE 11. | SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE |
The following table presents information regarding securities sold under agreements to repurchase at December 31, 20042005 and 2003:2004:
| | | | | | | | | | | | | | | |
| (in thousands) | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Weighted | | | Carrying | | | Market | |
| | | | | Weighted | | | Carrying | | | Market | | | | | Average | | | Value of | | | Value of | |
| | | | | Average | | | Value of | | | Value of | | | Repurchase | | | Interest | | | Underlying | | | Underlying | |
| | | Repurchase | | | Interest | | | Underlying | | | Underlying | | | Amount | | | Rate | | | Assets | | | Assets | |
| (in thousands) | | Amount | | | Rate | | | Assets | | | Assets | | |
| | | | | |
| December 31, 2005 | | | $ | 58,865 | | | 2.20% | | $ | 60,100 | | $ | 60,100 | |
| December 31, 2004 | | $ | 60,267 | | | 2.14% | | $ | 61,947 | | $ | 61,555 | | | $ | 60,267 | | | 2.14% | | $ | 61,947 | | $ | 61,555 | |
| December 31, 2003 | | $ | 43,531 | | | 1.40% | | $ | 44,422 | | $ | 44,224 | | |
The securities underlying agreements to repurchase entered into by the Bank are for the same securities originally sold, with a one-day maturity. In all cases, the Bank maintains control over the securities. Securities sold under agreements to repurchase averaged approximately $59.6 million, $45.9 million $34.9 million and $25.2$34.9 million for the years ended December 31, 2005, 2004 2003 and 2002,2003, respectively. The maximum amount outstanding at any month end for the year ended December 31, 20042005 was $60.3$65.8 million. For the years ended December 31, 20032004 and 2002,2003, the maximum amount outstanding at any month end was $43.6$60.3 million and $34.7$43.6 million, respectively. Investment securities are pledged as collateral in an amount equal to or greater than the repurchase agreements.
At December 31, 2005, the outstanding balance of federal funds purchased was $55 million at a rate of 4.325%. This compared to an outstanding balance of federal funds purchased at December 31, 2004 of $28 million. The Bank had available lines of credit with the FHLB totaling $158 million at December 31, 2005. The Bank had uncommitted federal funds line of credit agreements with four additional financial institutions totaling $98 million and $83 million at December 31, 2005 and 2004, respectively. Availability of the lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs, and the agreements restrict the consecutive day usage.
58NOTE 13. INCOME TAXES
Umpqua Holdings Corporation and Subsidiaries
The following table presents the components of income tax expense (benefit) attributable to continuing operations included in the consolidated statements of income for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | Current | | | Deferred | | | Total | |
| | | Current | | | Deferred | | | Total | | | |
| | | |
| YEAR ENDED DECEMBER 31, 2004 ($000’s): | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, 2005: | | | | | | | | | | | |
| Federal | | $ | 13,429 | | $ | 5,944 | | $ | 19,373 | | | $ | 26,066 | | $ | 6,220 | | $ | 32,286 | |
| State | | | 2,931 | | | 966 | | | 3,897 | | | | 4,164 | | | 1,355 | | | 5,519 | |
| | | | | |
| | | $ | 16,360 | | $ | 6,910 | | $ | 23,270 | | | $ | 30,230 | | $ | 7,575 | | $ | 37,805 | |
| | | | | |
| YEAR ENDED DECEMBER 31, 2003 ($000’s): | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, 2004: | | | | | | | | | | | |
| Federal | | $ | 11,363 | | $ | 3,390 | | $ | 14,753 | | | $ | 13,429 | | $ | 5,944 | | $ | 19,373 | |
| State | | | 2,533 | | | 684 | | | 3,217 | | | | 2,931 | | | 966 | | | 3,897 | |
| | | | | |
| | | $ | 13,896 | | $ | 4,074 | | $ | 17,970 | | | $ | 16,360 | | $ | 6,910 | | $ | 23,270 | |
| | | | | |
| YEAR ENDED DECEMBER 31, 2002 ($000’s): | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, 2003: | | | | | | | | | | | |
| Federal | | $ | 11,928 | | $ | (1,917) | | $ | 10,011 | | | $ | 11,363 | | $ | 3,390 | | $ | 14,753 | |
| State | | | 2,408 | | | (387) | | | 2,021 | | | | 2,533 | | | 684 | | | 3,217 | |
| | | | | |
| | | $ | 14,336 | | $ | (2,304) | | $ | 12,032 | | | $ | 13,896 | | $ | 4,074 | | $ | 17,970 | |
| | | | | |
64
Umpqua Holdings Corporation and Subsidiaries
The following table presents a reconciliation of income taxes computed at the Federal statutory rate to the actual effective rate attributable to continuing operations for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | |
| | | | 2004 | | | 2003 | | | 2002 | | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| Statutory Federal income tax rate | Statutory Federal income tax rate | | | 35.0% | | | 35.0% | | | 35.0% | | Statutory Federal income tax rate | | | 35.0% | | | 35.0% | | | 35.0% | |
| Tax-exempt income | Tax-exempt income | | | -1.5% | | | -2.0% | | | -3.1% | | Tax-exempt income | | | -1.1% | | | -1.5% | | | -2.0% | |
| State tax, net of Federal income tax benefit | State tax, net of Federal income tax benefit | | | 3.8% | | | 4.0% | | | 4.2% | | State tax, net of Federal income tax benefit | | | 3.4% | | | 3.8% | | | 4.0% | |
| Tax credits | Tax credits | | | -1.5% | | | -1.3% | | | 0.0% | | Tax credits | | | -1.2% | | | -1.5% | | | -1.3% | |
| Other | Other | | | -0.8% | | | -0.8% | | | -0.3% | | Other | | | -0.9% | | | -0.8% | | | -0.8% | |
| | | | | | | |
| | Effective income tax rate | | | 35.0% | | | 34.9% | | | 35.8% | | Effective income tax rate | | | 35.2% | | | 35.0% | | | 34.9% | |
| | | | | | | |
59
The following table reflects the effects of temporary differences that give rise to the components of the net deferred tax asset (recorded in Other Assets on the consolidated balance sheets) as of December 31:
| | | | | | | | | | | | | | | | | | |
| ($000’s) | | 2004 | | | 2003 | | |
| (in thousands) | | (in thousands) | | | | |
| | | | | 2005 | | | 2004 | |
| | | | | |
| DEFERRED TAX ASSETS: | DEFERRED TAX ASSETS: | | | | | | | | DEFERRED TAX ASSETS: | | | | | | | |
| Loans receivable, due to allowance for loan losses | Loans receivable, due to allowance for loan losses | | $ | 17,094 | | $ | 9,572 | | Loans receivable, due to allowance for loan losses | | $ | 17,484 | | $ | 17,094 | |
| Net operating loss carryforward | Net operating loss carryforward | | | 403 | | | — | | Net operating loss carryforward | | | 13 | | | 403 | |
| Deferred compensation | Deferred compensation | | | 5,512 | | | 2,190 | | Deferred compensation | | | 5,915 | | | 5,512 | |
| Loss on residual interests | Loss on residual interests | | | 4,573 | | | — | | Loss on residual interests | | | 4,553 | | | 4,573 | |
| Accrued liabilities | Accrued liabilities | | | 906 | | | 353 | | Accrued liabilities | | | 1,395 | | | 906 | |
| Leased assets | Leased assets | | | 2,509 | | | 815 | | Leased assets | | | 2,398 | | | 2,509 | |
| Unrealized loss on investment securities | Unrealized loss on investment securities | | | 893 | | | 558 | | Unrealized loss on investment securities | | | 6,775 | | | 893 | |
| Discount on trust preferred securities | Discount on trust preferred securities | | | 3,764 | | | — | | Discount on trust preferred securities | | | 3,535 | | | 3,764 | |
| Other | Other | | | 2,557 | | | 224 | | Other | | | 2,093 | | | 2,557 | |
| | | | | | | |
| | Total gross deferred tax assets | | | 38,211 | | | 13,712 | | Total gross deferred tax assets | | | 44,161 | | | 38,211 | |
| DEFERRED TAX LIABILITIES: | DEFERRED TAX LIABILITIES: | | | | | | | | DEFERRED TAX LIABILITIES: | | | | | | | |
| Investment securities, due to accretion of discount | Investment securities, due to accretion of discount | | | 332 | | | 372 | | Investment securities, due to accretion of discount | | | 351 | | | 332 | |
| Premises and equipment, primarily due to depreciation | Premises and equipment, primarily due to depreciation | | | 9,258 | | | 4,404 | | Premises and equipment, primarily due to depreciation | | | 11,704 | | | 9,258 | |
| Investment securities, due to FHLB stock dividends | Investment securities, due to FHLB stock dividends | | | 2,146 | | | 1,621 | | Investment securities, due to FHLB stock dividends | | | 2,248 | | | 2,146 | |
| Deferred loan fees | Deferred loan fees | | | 2,131 | | | 2,258 | | Deferred loan fees | | | 7,220 | | | 2,131 | |
| Mortgage servicing rights | Mortgage servicing rights | | | 2,573 | | | 98 | | Mortgage servicing rights | | | 2,859 | | | 2,573 | |
| Intangibles | Intangibles | | | 4,834 | | | 1,118 | | Intangibles | | | 4,060 | | | 4,834 | |
| Other | Other | | | 1,838 | | | 1,436 | | Other | | | 2,342 | | | 1,838 | |
| | | | | | | |
| | Total gross deferred tax liabilities | | | 23,112 | | | 11,307 | | Total gross deferred tax liabilities | | | 30,784 | | | 23,112 | |
| | | | | | | |
| Net deferred tax assets | Net deferred tax assets | | $ | 15,099 | | $ | 2,405 | | Net deferred tax assets | | $ | 13,377 | | $ | 15,099 | |
| | | | | | | |
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 $38.2$44.2 million and $13.7$38.2 million at December 31, 20042005 and 2003,2004, respectively, will be realized principally through carry-back to taxable income in prior years and future reversals of existing taxable temporary differences, and to a minor extent, future taxable income.differences. Management further believes that future taxable income will be sufficient to realize the benefits of temporary deductible differences that cannot be realized through carry-back to prior years or through the reversal of future temporary taxable differences.
| |
NOTE 13. | COMMITMENTS AND CONTINGENCIES |
NOTE 14. COMMITMENTS AND CONTINGENCIES
Lease Commitments— The Company leases 6470 sites under non-cancelable operating leases. The leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Substantially all of the leases provide the Company with the option to extend the lease term one or more times upon expiration.
65
The following table sets forth, as of December 31, 2004,2005, the future minimum lease payments under non-cancelable operating leases:
| | | | | | | | | | | |
| (in thousands) | (in thousands) | | | (in thousands) | | |
| | | | | |
| 2005 | | $ | 5,128 | | |
| 2006 | 2006 | | | 5,175 | | 2006 | | $ | 6,411 | |
| 2007 | 2007 | | | 4,872 | | 2007 | | | 6,191 | |
| 2008 | 2008 | | | 4,472 | | 2008 | | | 5,759 | |
| 2009 | 2009 | | | 3,150 | | 2009 | | | 4,659 | |
| 2010 | | 2010 | | | 4,154 | |
| Thereafter | Thereafter | | | 17,594 | | Thereafter | | | 26,681 | |
| | | | | | | | | |
| | Total | | $ | 40,391 | | Total | | $ | 53,855 | |
| | | | | | | | | |
Rent expense net of rental income, for the years ended December 31, 2005, 2004 and 2003 and 2002 was $3.8$5.9 million, $2.9$4.2 million and $1.6$3.1 million, respectively.
60
Umpqua Holdings Corporation Rent expense was offset by rent income of $270,000, $394,000 and Subsidiaries$161,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
Financial Instruments with Off-Balance Sheet Risk—The Company’s financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of the Bank’s business and involve elements of credit, liquidity and interest rate risk. These commitments and contingent liabilities include commitments to extend credit, commitments to sell residential mortgage loans and standby letters of credit. The following table presents a summary of the Bank’s commitments and contingent liabilities as of December 31, 2004 and 2003:2005:
| | | | | | | | | | | | | |
| Contractual Amounts | | | | | |
| (in thousands) | | 2004 | | | 2003 | | | |
| | | | | |
| Commitments to extend credit | | $ | 907,000 | | $ | 474,800 | | | $ | 1,050,768 | |
| Commitments to sell residential loans | | $ | 15,935 | | $ | 41,300 | | |
| Commitments to extend overdrafts | | | $ | 92,439 | |
| Commitments to originate residential loans | | | $ | 68,140 | |
| Forward sales commitments | | | $ | 7,500 | |
| Standby letters of credit | | $ | 25,806 | | $ | 10,900 | | | $ | 31,090 | |
The Bank is a party to financial instruments with off-balance-sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and financial guarantees. Those instruments involve elements of credit and interest-rate risk similar to the amounts recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the Bank’s involvement in particular classes of financial instruments.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. While most commercialstandby letters of credit are not utilized, a significant portion of such utilization is on an immediate payment basis. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral varies but may include cash, accounts receivable, inventory, premises and equipment and income-producing commercial properties.
The Bank enters into forward delivery contracts to sell residential mortgage loans or mortgage-backed securities to broker/ dealers at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage loan commitments. Credit risk associated with forward contracts is limited to the replacement cost of those forward contracts in a gain position. There were no counterparty default losses on forward contracts in 2005, 2004 or 2003. Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Bank limits its exposure to market risk by monitoring differences between commitments to customers and forward contracts with broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the Company completes the transaction by either paying or receiving a fee to or from the
66
Umpqua Holdings Corporation and Subsidiaries
broker/dealer equal to the increase or decrease in the market value of the forward contract. At December 31, 2005, the Bank had commitments to originate mortgage loans totaling $68.1 million with a net fair value asset of approximately $28,000. As of that date, it also had forward sales commitments of $7.5 million with a net fair value liability of $39,000. The Bank recorded a gain of $166,000 and $185,000 related to its commitments to originate mortgage loans and related forward sales commitments in 2005 and 2004, respectively.
Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary. The Bank has not been required to perform on any financial guarantees and did not incur any losses in connection with standby letters of credit during 2005, 2004 2003 or 2002.2003. At December 31, 2005, approximately $20.9 million of standby letters of credit expire within one year, and $10.2 million expire thereafter. Upon issuance, the Company recognizes a liability equivalent to the amount of fees received from the customer for these standby letter of credit commitments. Fees are recognized ratably over the term of the standby letter of credit. The fair value of guarantees associated with standby letters of credit were $161,000 as of December 31, 2005.
The Bank established a loss reserve for unfunded commitments, including loan commitments and letters of credit, during 2004 by reclassifying $1.2 million of the allowance for loan losses. At December 31, 2004,2005, the reserve for unfunded commitments, which is included in other liabilities on the consolidated balance sheet, was approximately $1.3$1.6 million. The adequacy of the reserve for unfunded commitments is reviewed on a quarterly basis, based upon changes in the amounts of commitments, loss experience and economic conditions.
The Bank enters into forward delivery contracts to sell residential mortgage loans or mortgage-backed securities to broker/ dealers at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage loan commitments. Credit risk associated with forward contracts is limited to the replacement cost of those forward contracts in a gain position. There were no counterparty default losses on forward contracts in 2004, 2003 or 2002. Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Bank limits its exposure to market risk by monitoring differences between commitments to customers and forward contracts with broker/ dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the Company completes the transaction by either paying or receiving a fee to or from the broker/ dealer equal to the increase or decrease in the market value of the forward contract. At December 31, 2004 and 2003, the Bank had forward contracts outstanding totaling $15.9 million and $41.3 million, respectively.
61
Mortgage loans sold to investors are generally sold with servicing rights retained, with only the standard legal representations and warranties regarding recourse to the Bank. Management believes that any liabilities that may result from such recourse provisions isare not significant.
Legal Proceedings—In the ordinary course of business, various claims and lawsuits are brought by and against the Company, the Bank and Strand. In the opinion of management, there is no pending or threatened proceeding in which an adverse decision could result in a material adverse change in the Company’s consolidated financial condition or results of operations.
Concentrations of Credit Risk—The Company grants real estate mortgage, real estate construction, commercial, agricultural and installment loans and leases to customers throughout Oregon, Washington and California. In management’s judgment, a concentration exists in real estate-related loans, which represented approximately 78% and 76% of the Company’s loan portfolio at December 31, 2005 and 2004, respectively. Commercial real estate concentrations are managed to assure wide geographic and business diversity. Although management believes such concentrations to have no more than the normal risk of collectibility, a substantial decline in the economy in general, or a decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the collectibility of these loans. Personal and business income represent the primary source of repayment for a majority of these loans.
The Bank recognizes the credit risks inherent in dealing with other depository institutions. Accordingly, to prevent excessive exposure to any single correspondent, the Bank has established general standards for selecting correspondents as well as internal limits for allowable exposure to any single correspondent. In addition, the Bank has an investment policy that sets forth limitations that apply to all investments with respect to credit rating and concentrations per issuer.
67
| |
NOTE 14.15. | EARNINGS PER SHARE |
The following is a computation of basic and diluted earnings per share for the years ended December 31, 2005, 2004 2003 and 2002:2003:
| | | | | | | | | | | | | | | | | | | |
| (In thousands, except per share data) | | 2004 | | | 2003 | | | 2002 | | | | | | | |
| | | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| BASIC EARNINGS PER SHARE: | | | | | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 35,804 | | | 28,294 | | | 21,054 | | | | 44,438 | | | 35,804 | | | 28,294 | |
| Net income | | $ | 47,166 | | $ | 34,119 | | $ | 21,968 | | | $ | 69,735 | | $ | 47,166 | | $ | 34,119 | |
| Income from continuing operations | | $ | 43,290 | | $ | 33,484 | | $ | 21,551 | | | $ | 69,735 | | $ | 43,290 | | $ | 33,484 | |
| Basic earnings per share | | $ | 1.32 | | $ | 1.21 | | $ | 1.04 | | | $ | 1.57 | | $ | 1.32 | | $ | 1.21 | |
| Basic earnings per share–continuing operations | | $ | 1.21 | | $ | 1.18 | | $ | 1.02 | | | $ | 1.57 | | $ | 1.21 | | $ | 1.18 | |
| DILUTED EARNINGS PER SHARE: | | | | | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 35,804 | | | 28,294 | | | 21,054 | | | | 44,438 | | | 35,804 | | | 28,294 | |
| Net effect of the assumed exercise of stock options, based on the treasury stock method | | | 541 | | | 372 | | | 252 | | | | 573 | | | 541 | | | 372 | |
| | | | | |
| Total weighted average shares and common stock equivalents outstanding | | | 36,345 | | | 28,666 | | | 21,306 | | | | 45,011 | | | 36,345 | | | 28,666 | |
| | | | | |
| Net income | | $ | 47,166 | | $ | 34,119 | | $ | 21,968 | | | $ | 69,735 | | $ | 47,166 | | $ | 34,119 | |
| Income from continuing operations | | $ | 43,290 | | $ | 33,484 | | $ | 21,551 | | | $ | 69,735 | | $ | 43,290 | | $ | 33,484 | |
| Diluted earnings per share | | $ | 1.30 | | $ | 1.19 | | $ | 1.03 | | | $ | 1.55 | | $ | 1.30 | | $ | 1.19 | |
| Diluted earnings per share–continuing operations | | $ | 1.19 | | $ | 1.17 | | $ | 1.01 | | | $ | 1.55 | | $ | 1.19 | | $ | 1.17 | |
| |
NOTE 15.16. | EMPLOYEE BENEFIT PLANS |
Employee Savings Plan—Substantially all of the Bank’s and Strand’s employees are eligible to participate in the Umpqua Bank 401(k) and Profit Sharing Plan (the “Umpqua 401(k) Plan”), a defined contribution and profit sharing plan sponsored by the Company. Employees may elect to have a portion of their salary contributed to the plan in conformity with Section 401(k) of the Internal Revenue Code. At the discretion of the Company’s Board of Directors, the Company may elect to make matching and/or profit sharing contributions to the Umpqua 401(k) Plan based on profits of the Bank. The provision for profit sharing costsCompany’s contributions under the plan charged to expense amounted to $2.0 million, $1.4 million and $1.0 million in 2005, 2004 and $1.7 million2003, respectively, and are recorded in 2004, 2003 and 2002, respectively.other liabilities.
Supplemental Executive Retirement Plan—The Company has established the Umpqua Holdings Corporation Supplemental Retirement Plan (the “SERP”), a nonqualified deferred compensation plan to help supplement the retirement income of certain highly compensated executives selected by resolution of the Company’s Board of Directors. The Company may make discretionary contributions to the SERP. For the years ended December 31, 2005, 2004 2003 and 2002,2003, the Company’s matching contribution charged to expense for these supplemental plans totaled $66,000, $39,000 $26,000 and $24,000,$26,000, respectively. The plan balances at December 31, 2005 and 2004 were $179,000 and 2003 were $113,000, respectively, and $78,000, respectively.are recorded in other liabilities.
Salary Continuation Plans—The Bank sponsors various salary continuation plans for the CEO (and certain key employees (and retired employees). These plans are unfunded, and provide for the payment of a specified amount on a monthly basis for a specified period (generally 10 to 20 years) after retirement. In the event of a participant employee’s death prior to or during retirement, the Bank is obligated to pay to the designated beneficiary the benefits set forth under the plan. At December 31, 20042005 and 2003,2004, liabilities recorded for the estimated present value of future salary continuation plan benefits totaled $7.6 million and $7.0 million, respectively, and $1.4 million, respectively.are recorded in other liabilities.
Deferred Compensation Plans and Rabbi Trusts—The Bank has afrom time to time adopts deferred compensation planplans that providesprovide certain key executives with the option to defer a portion of their compensation. This plan had no participation during 2004 or 2003. In connection with the Humboldt, Centennial and Independent Financial Networkprior acquisitions, the Bank assumed liability for certain deferred compensation plans for key employees, retired employees and directors. Subsequent to the effective date of the acquisitions, no additional contributions were made to these plans. At December 31, 20042005 and 2003,2004, liabilities recorded in connection with deferred compensation plan benefits totaled $5.9 million and $6.3 million, respectively, and $2.8 million, respectively.
62
Umpqua Holdings Corporation and Subsidiariesare recorded in other liabilities.
The Bank has established and sponsors, for some deferred compensation plans assumed in connection with the Humboldt and Centennial mergers, irrevocable trusts commonly referred to as “Rabbi Trusts.” The trust assets are included in other assets in the consolidated balance sheets and the associated liability (which equals the related asset balance) is included in other liabilities. The balances related to these trusts as of December 31, 2005 and 2004 were $2.6 million and 2003 were $2.8 million, respectively.
68
Umpqua Holdings Corporation and $961,000, respectively.Subsidiaries
The Bank has purchased, or acquired through mergers, life insurance policies in connection with the implementation of certain executive supplemental income, salary continuation and deferred compensation retirement plans. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-deferred income to offset expenses associated with the plans. Although the lives of individual current or former management-level employees are insured, the Bank is the owner and beneficiary. At December 31, 20042005 and 2003,2004, the cash surrender value of these policies was $40.4$41.7 million and $15.9$40.4 million, respectively. The Bank is exposed to credit risk to the extent an insurance company is unable to fulfill its financial obligations under a policy. In order to mitigate this risk, the Bank uses a variety of insurance companies and regularly monitors their financial condition.
In connection with the Humboldt acquisition, the Bank became the sponsor of the Humboldt Bancorp Retirement Savings Plan (“Humboldt Plan”) and California Independent Bancorp Employee Stock Ownership Plan (“CIB Plan”). Effective January 1, 2005, the Humboldt Plan was merged into the Bank’s 401(k) plan. The Bank recognized $225,000 of expense related to employer matching contributions for the Humboldt Plan during 2004. Prior to completion of the Humboldt acquisition, Humboldt initiated the process of terminating the CIB Plan. Subject to receipt of approval fromPlan and the Internal Revenue Service, the CIB plan is expected to bewas terminated by December 31, 2005.
| |
NOTE 16. | TERM DEBT AND LINES OF CREDIT |
NOTE 17. TERM DEBT AND LINES OF CREDIT
The Bank had outstanding secured advances from the FHLB and other creditors at December 31, 2005 and 2004 and 2003 of $88.5$3.2 million and $55.0$88.5 million, respectively.
Future maturities of borrowed funds (excluding purchase accounting adjustments) at December 31, 2004:2005 are as follows:
| | | | | | | | | | | |
| (in thousands) | | (in thousands) | | |
| Year | Year | | | Year | | Amount | |
| (dollars in thousands) | | Amount | | |
| | | | | |
| 2005 | | $ | 85,010 | | |
| 2006 | 2006 | | $ | — | | 2006 | | $ | — | |
| 2007 | 2007 | | $ | 1,000 | | 2007 | | $ | 1,000 | |
| 2008 | 2008 | | $ | — | | 2008 | | $ | — | |
| 2009 | 2009 | | $ | — | | 2009 | | $ | — | |
| 2010 | | 2010 | | $ | — | |
| Thereafter | Thereafter | | $ | 2,190 | | Thereafter | | $ | 2,012 | |
| | | | | | | | | |
| | Total borrowed funds | | $ | 88,200 | | Total borrowed funds | | $ | 3,012 | |
| | | | | | | | | |
The maximum amount outstanding from the FHLB under term advances at month end during 2005 and 2004 and 2003 was $188.5$82.6 million and $72.1$188.5 million, respectively. The average balance outstanding on FHLB term advances during 2005 and 2004 and 2003 was $100.7$30.4 million and $41.7$100.7 million, respectively. The average interest ratesrate on the borrowings was 2.43% in 2005 and 2.09% in 20042004. The FHLB requires the Bank to maintain a required level of investment in FHLB and 2.48% in 2003.
sufficient collateral to qualify for notes. 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, 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 available lines of credit totaling $208 million at December 31, 2004. The FHLB requires the Bank to maintain a required level of investment in FHLB and sufficient collateral to qualify for notes.
The Bank has uncommitted federal funds line of credit agreements with four financial institutions totaling $83 million and $63 million at December 31, 2004 and 2003, respectively. Availability of the lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs, and the agreements restrict the consecutive day usage. At December 31, 2004 and December 31, 2003, the outstanding balance of federal funds purchased was $28 million and $40 million, respectively.69
| |
NOTE 17. | JUNIOR SUBORDINATED DEBENTURES |
NOTE 18. JUNIOR SUBORDINATED DEBENTURES
As of December 31, 2004,2005, the Company had ten wholly-owned trusts (“Trusts”) that were formed to issue trust preferred securities and related common securities of the Trusts. Five Trusts, representing aggregate total obligations of approximately
63
$58.9 $58.9 million (fair value of approximately $69$68.6 million as of the merger date), were assumed in connection with the Humboldt merger. Following is information about the Trusts:
Junior Subordinated Debentures
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Issued | | | Carrying | | | | | Effective | | | | | | |
| (in thousands) | | | | | Issued | | | Carrying | | | | | Effective | | | | | |
| Trust Name | | Issue Date | | | Amount | | | Value(1) | | | Rate(2) | | | Rate(3) | | | Maturity Date | | | Call Date | | | Issue Date | | | Amount | | | Value(1) | | | Rate(2) | | | Rate(3) | | | Maturity Date | | | Call Date | |
| | | | | |
| Umpqua Holdings Statutory Trust I | | September 2002 | | $ | 25,774 | | $ | 25,774 | | | Floating(4) | | | 6.04% | | September 2032 | | September 2007 | | | September 2002 | | $ | 25,774 | | $ | 25,774 | | | Floating(4) | | | 8.02% | | September 2032 | | September 2007 | |
| Umpqua Statutory Trust II | | October 2002 | | | 20,619 | | | 20,619 | | | Floating(5) | | | 5.51% | | October 2032 | | October 2007 | | | October 2002 | | | 20,619 | | | 20,619 | | | Floating(5) | | | 7.59% | | October 2032 | | October 2007 | |
| Umpqua Statutory Trust III | | October 2002 | | | 30,928 | | | 30,928 | | | Floating(6) | | | 5.72% | | November 2032 | | November 2007 | | | October 2002 | | | 30,928 | | | 30,928 | | | Floating(6) | | | 7.79% | | November 2032 | | November 2007 | |
| Umpqua Statutory Trust IV | | December 2003 | | | 10,310 | | | 10,310 | | | Floating(7) | | | 4.92% | | January 2034 | | January 2009 | | | December 2003 | | | 10,310 | | | 10,310 | | | Floating(7) | | | 7.00% | | January 2034 | | January 2009 | |
| Umpqua Statutory Trust V | | December 2003 | | | 10,310 | | | 10,310 | | | Floating(7) | | | 5.35% | | March 2034 | | March 2009 | | | December 2003 | | | 10,310 | | | 10,310 | | | Floating(7) | | | 7.35% | | March 2034 | | March 2009 | |
| HB Capital Trust I | | March 2000 | | | 5,310 | | | 6,720 | | | 10.875% | | | 7.73% | | March 2030 | | March 2010 | | | March 2000 | | | 5,310 | | | 6,659 | | | 10.875% | | | 7.73% | | March 2030 | | March 2010 | |
| Humboldt Bancorp Statutory Trust I | | February 2001 | | | 5,155 | | | 6,169 | | | 10.200% | | | 7.91% | | February 2031 | | February 2011 | | | February 2001 | | | 5,155 | | | 6,127 | | | 10.200% | | | 7.91% | | February 2031 | | February 2011 | |
| Humboldt Bancorp Statutory Trust II | | December 2002 | | | 10,310 | | | 11,753 | | | Floating(8) | | | 4.89% | | December 2031 | | December 2006 | | | December 2001 | | | 10,310 | | | 11,695 | | | Floating(8) | | | 6.63% | | December 2031 | | December 2006 | |
| Humboldt Bancorp Statutory Trust III | | September 2003 | | | 27,836 | | | 32,148 | | | 6.75%(9) | | | 4.89% | | September 2033 | | September 2008 | | | September 2003 | | | 27,836 | | | 31,825 | | | 6.75%(9) | | | 4.89% | | September 2033 | | September 2008 | |
| CIB Capital Trust | | November 2002 | | | 10,310 | | | 11,525 | | | Floating(6) | | | 4.75% | | November 2032 | | November 2007 | | | November 2002 | | | 10,310 | | | 11,478 | | | Floating(6) | | | 6.58% | | November 2032 | | November 2007 | |
| | | | | |
| | | | Total | | $ | 156,862 | | $ | 166,256 | | | | | | | | | | | | | | | | Total | | $ | 156,862 | | $ | 165,725 | | | | | | | | | | | | | |
| | | | | |
| |
| (1) | Reflects purchase accounting adjustments, net of accumulated amortization, for junior subordinated debentures assumed in connection with the Humboldt merger. |
| (2) | Contractual interest rate of junior subordinated debentures. |
| (3) | Effective interest rate as of December 2004,2005, including impact of purchase accounting amortization. |
| (4) | Rate based on LIBOR plus 3.50%, adjusted quarterly. |
| (5) | Rate based on LIBOR plus 3.35%, adjusted quarterly. |
| (6) | Rate based on LIBOR plus 3.45%, adjusted quarterly. |
| (7) | Rate based on LIBOR plus 2.85%, adjusted quarterly. |
| (8) | Rate based on LIBOR plus 3.60%, adjusted quarterly. |
| (9) | Rate fixed for 5 years from issuance, then adjusted quarterly thereafter based on LIBOR plus 2.95%. |
As a result of the adoption of FIN 46, the Trusts have been deconsolidated. The $166.3$165.7 million of junior subordinated debentures issued to the Trusts as of December 31, 20042005 ($97.9166.3 million as of December 31, 2003)2004) are reflected as junior subordinated debentures in the consolidated balance sheets. The common stock issued by the Trusts is recorded in other assets in the consolidated balance sheets, and totaled $4.7 million and $2.9 million, respectively, at December 31, 20042005 and December 31, 2003.2004.
All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of December 31, 2004,2005, under guidance issued by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). In May 2004,Effective April 11, 2005, the Federal Reserve Board proposedadopted a rule that would continue to allowpermits the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. Under the proposal, after a three-yearfive-year transition period ending March 31, 2009, the aggregate amount of trust preferred securities and certain other restricted core capital elements would beis limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. Based on the proposed rule, theThe Company expects to includeincludes all currently issued trust preferred securities
70
Umpqua Holdings Corporation and Subsidiaries
in Tier 1 capital. However, the provisions of the final rule could significantly differ from those proposed and thereThere can be no assurance that the Federal Reserve Board will not further limit the amount of trust preferred securities permitted to be included in Tier 1 capital for regulatory capital purposespurposes.
| |
NOTE 18. | REGULATORY MATTERS |
NOTE 19. REGULATORY MATTERS
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
64
Umpqua Holdings Corporation and Subsidiaries
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.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) 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, 20042005, that the Company meets all capital adequacy requirements to which it is subject.
The Company’s capital amounts and ratios as of December 31, 20042005 and 20032004 are presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | To Be Well | | | | | | | For Capital | | | |
| | | | | | | For Capital | | | Capitalized Under | | | | | Adequacy | | | To Be Well | |
| | | | | Adequacy | | | Prompt Corrective | | | Actual | | | purposes | | | Capitalized | |
| | | Actual | | | purposes | | | Action Provisions | | | | | | | | | | |
| | | | | | | | | | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| (in thousands) | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | |
| | | | | |
| AS OF DECEMBER 31, 2005: | | | | | | | | | | | | | | | | | | | | |
Total Capital
(to Risk Weighted Assets) | | | $ | 533,890 | | | 11.58% | | $ | 368,836 | | | 8.00% | | $ | 461,045 | | | 10.00% | |
Tier I Capital
(to Risk Weighted Assets) | | | $ | 488,404 | | | 10.59% | | $ | 184,477 | | | 4.00% | | $ | 276,716 | | | 6.00% | |
Tier I Capital
(to Average Assets) | | | $ | 488,404 | | | 10.09% | | $ | 193,619 | | | 4.00% | | $ | 242,024 | | | 5.00% | |
| AS OF DECEMBER 31, 2004: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Capital
(to Risk Weighted Assets) | | $ | 475,480 | | | 11.59% | | $ | 328,484 | | | 8.00% | | $ | 410,605 | | | 10.00% | | | $ | 475,480 | | | 11.59% | | $ | 328,484 | | | 8.00% | | $ | 410,605 | | | 10.00% | |
Tier I Capital
(to Risk Weighted Assets) | | $ | 431,251 | | | 10.51% | | $ | 164,286 | | | 4.00% | | $ | 246,429 | | | 6.00% | | | $ | 431,251 | | | 10.51% | | $ | 164,286 | | | 4.00% | | $ | 246,429 | | | 6.00% | |
Tier I Capital
(to Average Assets) | | $ | 431,251 | | | 9.55% | | $ | 180,629 | | | 4.00% | | $ | 225,786 | | | 5.00% | | | $ | 431,251 | | | 9.55% | | $ | 180,629 | | | 4.00% | | $ | 225,786 | | | 5.00% | |
| AS OF DECEMBER 31, 2003: | | | | | | | | | | | | | | | | | | | | |
Total Capital
(to Risk Weighted Assets) | | $ | 279,474 | | | 11.73% | | $ | 190,621 | | | 8.00% | | $ | 238,277 | | | 10.00% | | |
Tier I Capital
(to Risk Weighted Assets) | | $ | 254,122 | | | 10.67% | | $ | 95,311 | | | 4.00% | | $ | 142,966 | | | 6.00% | | |
Tier I Capital
(to Average Assets) | | $ | 254,122 | | | 9.40% | | $ | 108,135 | | | 4.00% | | $ | 135,169 | | | 5.00% | | |
The Bank is a state chartered bank with deposits insured by the Federal Deposit Insurance Corporation (“FDIC”), 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 California Department of Financial Institutions, the Washington Department of Financial Institutions and the FDIC. As of December 31, 2004,2005, 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 or events since that notification that management believes have changed the Bank’s regulatory capital category.
NOTE 20. COMMON STOCK
| |
NOTE 19. | STOCK OPTION PLANS |
Stock Plans
The Company adopted the 2003 Stock Incentive Plan (“2003 Plan”) in April 2003 that providedprovides for grants of up to 2 million shares. The plan further provides that no grants may be issued if existing options and subsequent grants under the 2003 Plan exceed 10% of the Company’s outstanding shares on a diluted basis. Generally, options vest ratably over a period of five years. Under the terms of the 2003 Plan, the exercise price of each option equals the market price of the Company’s stock on the date of the grant, and the maximum term is ten years.
The Company has options outstanding under two prior plans adopted in 1995 and 2000, respectively. Subsequent toWith the adoption of the 2003 Plan, no additional grants can be issued under the previous plans. The Company also assumed various plans in
71
connection with mergers and acquisitions. During 2004, in connection with the Humboldt merger, a total of 1.131.1 million options were exchanged for a like amount of Humboldt stock options granted under seven plans. Substantially all of the Humboldt options were vested as of the date the merger was completed. No additional grants may be made under plans assumed in connection with mergers subsequent to the effective date of the acquisitions.
65
The following table summarizes information about stock options outstanding at December 31, 2005, 2004 2003 and 2002:2003:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (shares in thousands) | | (shares in thousands) | | | | | | | | | | | | |
| | | | 2004 | | | 2003 | | | 2002 | | | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | Options | | | Weighted-Avg | | | Options | | | Weighted-Avg | | | Options | | | Weighted-Avg | | | | Options | | | Weighted-Avg | | | Options | | | Weighted-Avg | | | Options | | | Weighted-Avg | |
| | | | Outstanding | | | Exercise Price | | | Outstanding | | | Exercise Price | | | Outstanding | | | Exercise Price | | | | Outstanding | | | Exercise Price | | | Outstanding | | | Exercise Price | | | Outstanding | | | Exercise Price | |
| | | | | |
| Balance, beginning of year | Balance, beginning of year | | | 1,442,311 | | $ | 11.31 | | | 1,730,054 | | $ | 10.20 | | | 990,949 | | $ | 7.52 | | Balance, beginning of year | | | 1,877 | | $ | 9.98 | | | 1,442 | | $ | 11.31 | | | 1,730 | | $ | 10.20 | |
| | |
| Granted | Granted | | | 30,000 | | | 22.15 | | | 225,000 | | | 19.05 | | | 245,000 | | | 14.35 | | Granted | | | 508 | | | 23.60 | | | 30 | | | 22.15 | | | 225 | | | 19.05 | |
| Exercised | Exercised | | | (678,295) | | | 10.75 | | | (455,225) | | | 10.66 | | | (223,438) | | | 6.73 | | Exercised | | | (409) | | | 6.73 | | | (678) | | | 10.75 | | | (455) | | | 10.66 | |
| Acquisitions | Acquisitions | | | 1,125,493 | | | 8.53 | | | — | | | — | | | 800,587 | | | 11.11 | | Acquisitions | | | — | | | — | | | 1,125 | | | 8.53 | | | — | | | — | |
| Forfeited/expired | Forfeited/expired | | | (42,201) | | | 13.35 | | | (57,518) | | | 13.47 | | | (83,044) | | | 8.98 | | Forfeited/expired | | | (130) | | | 19.88 | | | (42) | | | 13.35 | | | (58) | | | 13.47 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance, end of year | | | 1,877,308 | | $ | 9.98 | | | 1,442,311 | | $ | 11.31 | | | 1,730,054 | | $ | 10.20 | | Balance, end of year | | | 1,846 | | $ | 13.75 | | | 1,877 | | $ | 9.98 | | | 1,442 | | $ | 11.31 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options exercisable at end of year | Options exercisable at end of year | | | 1,510,562 | | $ | 8.34 | | | 960,194 | | $ | 9.16 | | | 1,294,530 | | $ | 9.47 | | Options exercisable at end of year | | | 1,164 | | $ | 9.42 | | | 1,511 | | $ | 8.34 | | | 960 | | $ | 9.16 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average fair value of options granted during the year | Weighted average fair value of options granted during the year | | $ | 9.27 | | | | | $ | 8.16 | | | | | $ | 6.93 | | | | | Weighted average fair value of options granted during the year | | $ | 9.50 | | | | | $ | 9.27 | | | | | $ | 8.16 | | | | |
| Number of shares of nonvested stock granted during the year, net of forfeitures | | | 11,000 | | | | | | 55,000 | | | | | | — | | | | | |
| Weighted average fair value of nonvested stock granted during the year | | $ | 25.73 | | | | | $ | 19.02 | | | | | | — | | | | | |
For the years ended December 31, 2004, 2003 and 2002, the Company received income tax benefits of $3.1 million, $911,000 and $781,000, respectively, related to the exercise of non-qualifying employee stock options and disqualifying dispositions for the exercise of incentive stock options. These benefits are included in cash flows from operating activities in the consolidated statements of cash flows.
The following table summarizes information about outstanding stock options issued under all plans as of December 31, 2004:2005:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Weighted Avg. | | | | | | | |
| | | Options | | | Remaining | | | Weighted Avg. | | | Options | | | Weighted Avg. | |
| Range of Exercise Prices | | Outstanding | | | Contractual Life | | | Exercise Price | | | Exercisable | | | Exercise Price | |
| | |
| $1.49 to $4.98 | | | 485,960 | | | | 4.8 | | | $ | 3.85 | | | | 485,696 | | | $ | 3.85 | |
| $4.99 to $8.49 | | | 310,641 | | | | 4.4 | | | | 7.05 | | | | 288,533 | | | | 7.12 | |
| $8.50 to $12.00 | | | 478,493 | | | | 5.0 | | | | 10.18 | | | | 477,993 | | | | 10.17 | |
| $12.01 to $15.51 | | | 312,016 | | | | 7.0 | | | | 13.65 | | | | 197,642 | | | | 13.57 | |
| $15.52 to $19.02 | | | 170,706 | | | | 8.2 | | | | 18.30 | | | | 31,706 | | | | 17.58 | |
| $19.03 to $22.15 | | | 119,492 | | | | 8.5 | | | | 20.20 | | | | 28,992 | | | | 19.63 | |
| | | | | | | | | | | | | | | | |
| | | | 1,877,308 | | | | 5.7 years | | | $ | 9.97 | | | | 1,510,562 | | | $ | 8.34 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| (shares in thousands) | | | | | | | | | | |
| | | | | Weighted Avg. | | | | | | | |
| | | | | Remaining | | | | | | | |
| | | Options | | | Contractual Life | | | Weighted Avg. | | | Options | | | Weighted Avg. | |
| Range of Exercise Prices | | Outstanding | | | (Years) | | | Exercise Price | | | Exercisable | | | Exercise Price | |
| | |
| $0.00 to $4.99 | | | 285 | | | | 6.0 | | | $ | 4.32 | | | | 285 | | | $ | 4.31 | |
| $5.00 to $9.99 | | | 482 | | | | 3.7 | | | | 8.36 | | | | 448 | | | | 8.26 | |
| $10.00 to $14.99 | | | 387 | | | | 4.8 | | | | 12.79 | | | | 338 | | | | 12.65 | |
| $15.00 to $19.99 | | | 229 | | | | 7.1 | | | | 18.67 | | | | 84 | | | | 18.56 | |
| $20.00 to $24.99 | | | 440 | | | | 9.0 | | | | 23.38 | | | | 9 | | | | 20.89 | |
| $25.00 to $29.99 | | | 23 | | | | 9.7 | | | | 26.21 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | 1,846 | | | | 6.0 | | | $ | 13.75 | | | | 1,164 | | | $ | 9.42 | |
| | | | | | | | | | | | | | | | |
The Company grants restricted stock periodically as a part of the 2003 Plan for the benefit of employees and directors. Restricted shares issued currently vest ratably over five years for all grants issued. Recipients of restricted stock do not pay any cash consideration to the Company for the shares, and have the right to vote all shares subject to such grant, and receive all dividends with respect to such shares, whether or not the shares have vested. The restriction is based on continuous service.
The following table summarizes information about restricted shares outstanding at December 31, 2005, 2004 and 2003:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (shares in thousands) | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | |
| | | Restricted | | | Average | | | Restricted | | | Average | | | Restricted | | | Average | |
| | | Shares | | | Market | | | Shares | | | Market | | | Shares | | | Market | |
| | | Outstanding | | | Price at Grant | | | Outstanding | | | Price at Grant | | | Outstanding | | | Price at Grant | |
| | |
| Balance, beginning of year | | | 66 | | | | | | | | 54 | | | | | | | | — | | | | | |
| Granted | | | 8 | | | $ | 25.20 | | | | 12 | | | $ | 25.16 | | | | 55 | | | $ | 19.01 | |
| Vested | | | (15) | | | | | | | | (11) | | | | | | | | — | | | | | |
| Acquisitions | | | — | | | | | | | | 13 | | | | | | | | — | | | | | |
| Forfeited/expired | | | (12) | | | | | | | | (2) | | | | | | | | (1) | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | Balance, end of year | | | 47 | | | | | | | | 66 | | | | | | | | 54 | | | | | |
| | | | | | | | | | | | | | | | | | | |
6672
Umpqua Holdings Corporation and Subsidiaries
The balance of unearned compensation related to these restricted shares as of December 31, 2005 and 2004 was $955,000 and $1.3 million respectively. For the years ended December 31, 2005, 2004 and 2003, compensation expense of $241,000, $256,000 and $52,000, respectively, was recognized in connection with restricted stock grants.
For the years ended December 31, 2005, 2004 and 2003, the Company received income tax benefits of $2.4 million, $3.1 million and $911,000, respectively, related to the exercise of non-qualifying employee stock options, disqualifying dispositions for the exercise of incentive stock options and the vesting of restricted shares. These benefits are recorded as a reduction to taxes payable and included in cash flows from operating activities in the consolidated statements of cash flows.
Share Repurchase Plan
Our share repurchase plan, which was approved by the Board and announced in August 2003, originally authorized the repurchase of up to 1.0 million shares. The authorization was amended to increase the repurchase limit initially to 1.5 million shares. On June 8, 2005, the Company announced an expansion of the repurchase plan by increasing the repurchase limit to 2.5 million shares and extending the plan to expire on June 30, 2007. The Company repurchased 82,179 and 321,729 shares in 2005 and 2004, respectively. As of December 31, 2005, 2.1 million shares were available for repurchase under the plan.
We also have certain stock option and restricted stock plans which provide for the payment of the option exercise price or withholding taxes by tendering previously owned or recently vested shares. No shares were tendered in connection with option exercises in 2005. Restricted shares cancelled to pay withholding taxes totaled 2,006 and 63,016 shares in 2005 and 2004, respectively.
| |
NOTE 20.21. | FAIR VALUES OF FINANCIAL INSTRUMENTS |
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. The following table presents estimated fair values of the Company’s financial instruments as of December 31, 20042005 and 2003:2004:
| | | | | | | | | | | | | | | | | |
| (in thousands) | | | | | | | | | |
| | | | | | | | | | | | | | | | | | 2005 | | | 2004 | |
| | | December 31, 2004 | | | December 31, 2003 | | | | | | | |
| | | | | | | | | Carrying | | | Fair | | | Carrying | | | Fair | |
| | | Carrying | | | Fair | | | Carrying | | | Fair | | | Value | | | Value | | | Value | | | Value | |
| (in thousands) | | Value | | | Value | | | Value | | | Value | | |
| | | | | |
| FINANCIAL ASSETS: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 118,207 | | $ | 118,207 | | $ | 134,006 | | $ | 134,006 | | | $ | 161,754 | | $ | 161,754 | | $ | 118,207 | | $ | 118,207 | |
| Trading account assets | | | 1,577 | | | 1,577 | | | 1,265 | | | 1,265 | | | | 601 | | | 601 | | | 1,577 | | | 1,577 | |
| Securities available-for-sale | | | 675,984 | | | 675,984 | | | 501,904 | | | 501,904 | | | | 671,868 | | | 671,868 | | | 675,984 | | | 675,984 | |
| Securities held-to-maturity | | | 11,807 | | | 12,203 | | | 14,612 | | | 15,384 | | | | 8,677 | | �� | | 8,776 | | | 11,807 | | | 12,203 | |
| Mortgage loans held for sale | | | 20,791 | | | 20,791 | | | 37,798 | | | 37,798 | | | | 9,061 | | | 9,061 | | | 20,791 | | | 20,791 | |
| Loans and leases, net | | | 3,423,675 | | | 3,485,543 | | | 1,978,235 | | | 1,995,663 | | | | 3,877,746 | | | 3,772,716 | | | 3,423,675 | | | 3,485,543 | |
| FHLB stock | | | 14,218 | | | 14,218 | | | 7,168 | | | 7,168 | | | | 14,263 | | | 14,263 | | | 14,218 | | | 14,218 | |
| FINANCIAL LIABILITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | $ | 3,799,107 | | $ | 3,803,765 | | $ | 2,378,192 | | $ | 2,382,607 | | | $ | 4,286,266 | | $ | 4,277,968 | | $ | 3,799,107 | | $ | 3,803,765 | |
| Securities sold under agreement to repurchase and federal funds purchased | | | 88,267 | | | 88,267 | | | 83,531 | | | 83,531 | | | | 113,865 | | | 113,865 | | | 88,267 | | | 88,267 | |
| Term debt | | | 88,451 | | | 88,407 | | | 55,000 | | | 54,598 | | | | 3,184 | | | 3,115 | | | 88,451 | | | 88,407 | |
| Junior subordinated debentures | | | 166,256 | | | 171,680 | | | 97,941 | | | 97,941 | | | | 165,725 | | | 195,014 | | | 166,256 | | | 171,680 | |
| DERIVATIVE FINANCIAL INSTRUMENTS: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Rate lock commitments | | $ | 43 | | $ | 43 | | $ | 96 | | $ | 96 | | | $ | 28 | | $ | 28 | | $ | 43 | | $ | 43 | |
| Forward sales agreements | | $ | (55 | ) | | $ | (55 | ) | | $ | (172 | ) | | $ | (172 | ) | | $ | (39 | ) | | $ | (39 | ) | | $ | (55 | ) | | $ | (55 | ) |
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:
Cash and Short-Term Investments—For short-term instruments, including cash and due from banks, and interest-bearing deposits with banks, the carrying amount is a reasonable estimate of fair value.
Securities—Fair values for investment securities are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of instruments with comparable characteristics.
73
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 nonperforming categories. For variable rate loans, carrying value approximates fair value. Fair value of fixed rate loans is calculated by discounting contractual cash flows at rates which similar loans are currently being made.
Deposit Liabilities—The fair value of deposits with no stated maturity, such as non-interest-bearing deposits, savings and interest checking accounts, and money market accounts, is equal to the amount payable on demand as of December 31, 20042005 and 2003.2004. 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.
Junior Subordinated Debentures—The fair value of fixed rate issuances is estimated using a discounted cash flow calculation. For variable rate issuances, the carrying amount approximates fair value.
67
Derivative Loan Commitments—The fair value of the derivative loan commitments is estimated using the present value of expected future cash flows. Assumptions used include pull-through rate assumption based on historical information, current mortgage interest rates, the stage of completion of the underlying application and underwriting process, and the time remaining until the expiration of the derivative loan commitment.
| |
NOTE 21. 22. | OPERATING SEGMENTS |
During 2004, theThe Company operatedoperates three primary segments: Community Banking, Mortgage Banking and Retail Brokerage. The Community Banking segment consists of all non-mortgage related operations of the Bank, which operates 92 stores located principally throughout Oregon, Northern California and Southwestern Washington. The Community Banking segment’s principal business focus is the offering of loan and deposit products to its business and retail customers in its primary market areas. The Community Banking segment operates 96 stores located principally throughout Oregon, Northern California and Washington.
The Mortgage Banking segment originates, sells and services residential mortgage loans. During the third quarter of 2004, the Company completed a strategic review of the Mortgage Banking segment was completed and resulted in the termination ofdecided to terminate wholesale channel origination. Although this decision did resultresulted in a reduction in mortgage loan origination volumes, revenue and expense, the segment net income was not adversely impacted in a material manner.
The Retail Brokerage segment consists of the operations of Strand, which offers a full range of retail brokerage services and products to its clients who consist primarily of individual investors. The Company accounts for intercompany fees and services between Strand and the Bank at an estimated fair value according to regulatory requirements for services provided. Intercompany items relate primarily to management services and interest on intercompany borrowings.
68
Umpqua Holdings Corporation and Subsidiaries
Summarized financial information concerning the Company’s reportable segments and the reconciliation to the consolidated financial results is shown in the following tables:
| | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2004 | | Community | | | Retail | | | Mortgage | | | |
| (in thousands, except pershare data) | | Banking | | | Brokerage | | | Banking | | | Consolidated | |
| | |
| Interest income | | $ | 192,822 | | | $ | 68 | | | $ | 5,168 | | | $ | 198,058 | |
| Interest expense | | | 37,682 | | | | — | | | | 2,689 | | | | 40,371 | |
| | | |
| | Net interest income | | | 155,140 | | | | 68 | | | | 2,479 | | | | 157,687 | |
| Provision for loan losses | | | 7,203 | | | | — | | | | 118 | | | | 7,321 | |
| Non-interest income | | | 21,555 | | | | 12,135 | | | | 7,683 | | | | 41,373 | |
| Non-interest expense | | | 100,656 | | | | 11,343 | | | | 7,583 | | | | 119,582 | |
| Merger-related expense | | | 5,597 | | | | — | | | | — | | | | 5,597 | |
| | | |
| | Income before income taxes and discontinued operations | | | 63,239 | | | | 860 | | | | 2,461 | | | | 66,560 | |
| Provision for income taxes | | | 22,077 | | | | 303 | | | | 890 | | | | 23,270 | |
| | | |
| Income from continuing operations | | | 41,162 | | | | 557 | | | | 1,571 | | | | 43,290 | |
| Income from discontinued operations, net of tax | | | 3,876 | | | | — | | | | — | | | | 3,876 | |
| | | |
| Net income | | $ | 45,038 | | | $ | 557 | | | $ | 1,571 | | | $ | 47,166 | |
| | | |
| BASIC EARNINGS PER SHARE: | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 1.15 | | | $ | 0.02 | | | $ | 0.04 | | | $ | 1.21 | |
| Income from discontinued operations, net of tax | | $ | 0.11 | | | $ | — | | | $ | — | | | $ | 0.11 | |
| | | |
| Net income | | $ | 1.26 | | | $ | 0.02 | | | $ | 0.04 | | | $ | 1.32 | |
| | | |
| DILUTED EARNINGS PER SHARE: | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 1.13 | | | $ | 0.02 | | | $ | 0.04 | | | $ | 1.19 | |
| Income from discontinued operations, net of tax | | $ | 0.11 | | | $ | — | | | $ | — | | | $ | 0.11 | |
| | | |
| Net income | | $ | 1.24 | | | $ | 0.02 | | | $ | 0.04 | | | $ | 1.30 | |
| | | |
| Total assets | | $ | 4,789,093 | | | $ | 7,288 | | | $ | 76,654 | | | $ | 4,873,035 | |
| Total loans | | $ | 3,426,362 | | | $ | — | | | $ | 41,542 | | | $ | 3,467,904 | |
| Total deposits | | $ | 3,799,107 | | | $ | — | | | $ | — | | | $ | 3,799,107 | |
69
| | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2003 | | Community | | | Retail | | | Mortgage | | | |
| (in thousands, except pershare data) | | Banking | | | Brokerage | | | Banking | | | Consolidated | |
| | |
| Interest income | | $ | 133,771 | | | $ | 69 | | | $ | 8,292 | | | $ | 142,132 | |
| Interest expense | | | 25,265 | | | | — | | | | 3,595 | | | | 28,860 | |
| | | |
| | Net interest income | | | 108,506 | | | | 69 | | | | 4,697 | | | | 113,272 | |
| Provision for loan losses | | | 4,354 | | | | — | | | | 196 | | | | 4,550 | |
| Non-interest income | | | 16,599 | | | | 9,711 | | | | 11,691 | | | | 38,001 | |
| Non-interest expense | | | 72,456 | | | | 9,665 | | | | 11,066 | | | | 93,187 | |
| Merger-related expense | | | 1,966 | | | | 116 | | | | — | | | | 2,082 | |
| | | |
| | Income before income taxes and discontinued operations | | | 46,329 | | | | (1 | ) | | | 5,126 | | | | 51,454 | |
| Provision for income taxes | | | 16,173 | | | | (16 | ) | | | 1,813 | | | | 17,970 | |
| | | |
| Income from continuing operations | | | 30,156 | | | | 15 | | | | 3,313 | | | | 33,484 | |
| Income from discontinued operations, net of tax | | | 635 | | | | — | | | | — | | | | 635 | |
| | | |
| Net income | | $ | 30,791 | | | $ | 15 | | | $ | 3,313 | | | $ | 34,119 | |
| | | |
| BASIC EARNINGS PER SHARE: | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 1.07 | | | $ | — | | | $ | 0.12 | | | $ | 1.18 | |
| Income from discontinued operations, net of tax | | $ | 0.02 | | | $ | — | | | $ | — | | | $ | 0.03 | |
| | | |
| Net income | | $ | 1.09 | | | $ | — | | | $ | 0.12 | | | $ | 1.21 | |
| | | |
| DILUTED EARNINGS PER SHARE: | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 1.05 | | | $ | — | | | $ | 0.12 | | | $ | 1.17 | |
| Income from discontinued operations, net of tax | | $ | 0.02 | | | $ | — | | | $ | — | | | $ | 0.02 | |
| | | |
| Net income | | $ | 1.07 | | | $ | — | | | $ | 0.12 | | | $ | 1.19 | |
| | | |
| |
| Total assets | | $ | 2,875,138 | | | $ | 7,153 | | | $ | 81,524 | | | $ | 2,963,815 | |
| Total loans | | $ | 1,970,382 | | | $ | — | | | $ | 33,205 | | | $ | 2,003,587 | |
| Total deposits | | $ | 2,378,007 | | | $ | — | | | $ | 185 | | | $ | 2,378,192 | |
7074
Umpqua Holdings Corporation and Subsidiaries
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2002 | | Community | | | Retail | | | Mortgage | | | | |
| (in thousands, except pershare data) | | Banking | | | Brokerage | | | Banking | | | Consolidated | | |
| Year Ended December 31, 2005 | | Year Ended December 31, 2005 | | | | | | | | |
| (in thousands) | | (in thousands) | | Community | | | Retail | | | Mortgage | | | |
| | | | | Banking | | | Brokerage | | | Banking | | | Consolidated | |
| | | | | |
| Interest income | Interest income | | $ | 94,678 | | $ | 82 | | $ | 5,565 | | $ | 100,325 | | Interest income | | $ | 276,224 | | $ | 101 | | $ | 5,951 | | $ | 282,276 | |
| Interest expense | Interest expense | | | 21,220 | | | 116 | | | 2,461 | | | 23,797 | | Interest expense | | | 69,239 | | | — | | | 3,755 | | | 72,994 | |
| | | | | | | |
| | Net interest income | | | 73,458 | | | (34 | ) | | | 3,104 | | | 76,528 | | Net interest income | | | 206,985 | | | 101 | | | 2,196 | | | 209,282 | |
| Provision for loan losses | Provision for loan losses | | | 3,688 | | | — | | | 200 | | | 3,888 | | Provision for loan losses | | | 2,468 | | | — | | | — | | | 2,468 | |
| Non-interest income | Non-interest income | | | 9,175 | | | 9,162 | | | 9,320 | | | 27,657 | | Non-interest income | | | 29,427 | | | 11,816 | | | 6,539 | | | 47,782 | |
| Non-interest expense | Non-interest expense | | | 48,939 | | | 8,703 | | | 6,320 | | | 63,962 | | Non-interest expense | | | 127,329 | | | 11,284 | | | 8,181 | | | 146,794 | |
| Merger-related expense | Merger-related expense | | | 2,651 | | | 101 | | | — | | | 2,752 | | Merger-related expense | | | 262 | | | — | | | — | | | 262 | |
| | | | | | | |
| | Income before income taxes and discontinued operations | | | 27,355 | | | 324 | | | 5,904 | | | 33,583 | | Income before income taxes and discontinued operations | | | 106,353 | | | 633 | | | 554 | | | 107,540 | |
| Provision for income taxes | Provision for income taxes | | | 9,614 | | | 98 | | | 2,320 | | | 12,032 | | Provision for income taxes | | | 37,365 | | | 219 | | | 221 | | | 37,805 | |
| | | | | | | |
| Income from continuing operations | Income from continuing operations | | | 17,741 | | | 226 | | | 3,584 | | | 21,551 | | Income from continuing operations | | | 68,988 | | | 414 | | | 333 | | | 69,735 | |
| Income from discontinued operations, net of tax | Income from discontinued operations, net of tax | | | 417 | | | — | | | — | | | 417 | | Income from discontinued operations, net of tax | | | — | | | — | | | — | | | — | |
| | | | | | | |
| Net income | Net income | | $ | 18,158 | | $ | 226 | | $ | 3,584 | | $ | 21,968 | | Net income | | $ | 68,988 | | $ | 414 | | $ | 333 | | $ | 69,735 | |
| | | | | | | |
| BASIC EARNINGS PER SHARE: | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 0.84 | | $ | 0.01 | | $ | 0.17 | | $ | 1.02 | | |
| Income from discontinued operations, net of tax | | $ | 0.02 | | $ | — | | $ | — | | $ | 0.02 | | |
| | | | |
| Net income | | $ | 0.86 | | $ | 0.01 | | $ | 0.17 | | $ | 1.04 | | |
| | | | |
| DILUTED EARNINGS PER SHARE: | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 0.83 | | $ | 0.01 | | $ | 0.17 | | $ | 1.01 | | |
| Income from discontinued operations, net of tax | | $ | 0.02 | | $ | — | | $ | — | | $ | 0.02 | | |
| | | | |
| Net income | | $ | 0.85 | | $ | 0.01 | | $ | 0.17 | | $ | 1.03 | | |
| | | | |
| | |
| Total assets | Total assets | | $ | 2,429,636 | | $ | 7,678 | | $ | 118,650 | | $ | 2,555,964 | | Total assets | | $ | 5,257,333 | | $ | 7,925 | | $ | 95,381 | | $ | 5,360,639 | |
| Total loans | Total loans | | $ | 1,730,519 | | $ | — | | $ | 47,796 | | $ | 1,778,315 | | Total loans | | $ | 3,846,507 | | $ | — | | $ | 75,124 | | $ | 3,921,631 | |
| Total deposits | Total deposits | | $ | 2,096,443 | | $ | — | | $ | 7,347 | | $ | 2,103,790 | | Total deposits | | $ | 4,286,227 | | $ | — | | $ | 39 | | $ | 4,286,266 | |
| | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2004 | | | | | | | | |
| (in thousands) | | Community | | | Retail | | | Mortgage | | | |
| | | Banking | | | Brokerage | | | Banking | | | Consolidated | |
| | |
| Interest income | | $ | 192,822 | | | $ | 68 | | | $ | 5,168 | | | $ | 198,058 | |
| Interest expense | | | 37,682 | | | | — | | | | 2,689 | | | | 40,371 | |
| | | |
| | Net interest income | | | 155,140 | | | | 68 | | | | 2,479 | | | | 157,687 | |
| Provision for loan losses | | | 7,203 | | | | — | | | | 118 | | | | 7,321 | |
| Non-interest income | | | 21,555 | | | | 12,135 | | | | 7,683 | | | | 41,373 | |
| Non-interest expense | | | 100,656 | | | | 11,343 | | | | 7,583 | | | | 119,582 | |
| Merger-related expense | | | 5,597 | | | | — | | | | — | | | | 5,597 | |
| | | |
| | Income before income taxes and discontinued operations | | | 63,239 | | | | 860 | | | | 2,461 | | | | 66,560 | |
| Provision for income taxes | | | 22,077 | | | | 303 | | | | 890 | | | | 23,270 | |
| | | |
| | Income from continuing operations | | | 41,162 | | | | 557 | | | | 1,571 | | | | 43,290 | |
| Income from discontinued operations, net of tax | | | 3,876 | | | | — | | | | — | | | | 3,876 | |
| | | |
| Net income | | $ | 45,038 | | | $ | 557 | | | $ | 1,571 | | | $ | 47,166 | |
| | | |
| Total assets | | $ | 4,789,093 | | | $ | 7,288 | | | $ | 76,654 | | | $ | 4,873,035 | |
| Total loans | | $ | 3,426,362 | | | $ | — | | | $ | 41,542 | | | $ | 3,467,904 | |
| Total deposits | | $ | 3,799,107 | | | $ | — | | | $ | — | | | $ | 3,799,107 | |
7175
| | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2003 | | | | | | | | |
| (in thousands) | | Community | | | Retail | | | Mortgage | | | |
| | | Banking | | | Brokerage | | | Banking | | | Consolidated | |
| | |
| Interest income | | $ | 133,771 | | | $ | 69 | | | $ | 8,292 | | | $ | 142,132 | |
| Interest expense | | | 25,265 | | | | — | | | | 3,595 | | | | 28,860 | |
| | | |
| | Net interest income | | | 108,506 | | | | 69 | | | | 4,697 | | | | 113,272 | |
| Provision for loan losses | | | 4,354 | | | | — | | | | 196 | | | | 4,550 | |
| Non-interest income | | | 16,599 | | | | 9,711 | | | | 11,691 | | | | 38,001 | |
| Non-interest expense | | | 72,456 | | | | 9,665 | | | | 11,066 | | | | 93,187 | |
| Merger-related expense | | | 1,966 | | | | 116 | | | | — | | | | 2,082 | |
| | | |
| | Income before income taxes and discontinued operations | | | 46,329 | | | | (1 | ) | | | 5,126 | | | | 51,454 | |
| Provision for income taxes | | | 16,173 | | | | (16 | ) | | | 1,813 | | | | 17,970 | |
| | | |
| | Income from continuing operations | | | 30,156 | | | | 15 | | | | 3,313 | | | | 33,484 | |
| Income from discontinued operations, net of tax | | | 635 | | | | — | | | | — | | | | 635 | |
| | | |
| Net income | | $ | 30,791 | | | $ | 15 | | | $ | 3,313 | | | $ | 34,119 | |
| | | |
| Total assets | | $ | 2,875,138 | | | $ | 7,153 | | | $ | 81,524 | | | $ | 2,963,815 | |
| Total loans | | $ | 1,970,382 | | | $ | — | | | $ | 33,205 | | | $ | 2,003,587 | |
| Total deposits | | $ | 2,378,007 | | | $ | — | | | $ | 185 | | | $ | 2,378,192 | |
NOTE 22.23. PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
| | | | | | | | | | |
| December 31, | | | | |
| (in thousands) | | 2004 | | | 2003 | |
| | |
| ASSETS | | | | | | | | |
| Non-interest-bearing deposits with subsidiary banks | | $ | 5,655 | | | $ | 8,742 | |
| Investments in: | | | | | | | | |
| | Bank subsidiary | | | 817,831 | | | | 395,375 | |
| | Nonbank subsidiary | | | 9,493 | | | | 7,139 | |
| Receivable from bank subsidiary | | | 4,842 | | | | — | |
| Receivable from nonbank subsidiary | | | 2,973 | | | | 2,865 | |
| Other assets | | | 14,285 | | | | 3,495 | |
| | | | | | | |
| | Total assets | | $ | 855,079 | | | $ | 417,616 | |
| | | |
| |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| Payable to bank subsidiary | | $ | 38 | | | $ | 11 | |
| Other liabilities | | | 1,172 | | | | 695 | |
| Junior subordinated debentures | | | 166,256 | | | | 97,941 | |
| | | |
| | Total liabilities | | | 167,466 | | | | 98,647 | |
| Shareholders’ equity | | | 687,613 | | | | 318,969 | |
| | | |
| Total liabilities and shareholders’ equity | | $ | 855,079 | | | $ | 417,616 | |
| | | |
Condensed Statements of Income
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| (in thousands) | | 2004 | | | 2003 | | | 2002 | |
| | |
| INCOME | | | | | | | | | | | | |
| Dividends from subsidiaries | | $ | 11,000 | | | $ | 6,100 | | | $ | 25,385 | |
| Other income | | | 158 | | | | 270 | | | | 150 | |
| | | |
| | Total income | | | 11,158 | | | | 6,370 | | | | 25,535 | |
| |
| EXPENSES | | | | | | | | | | | | |
| Management fees paid to subsidiaries | | | 116 | | | | 81 | | | | 157 | |
| Other expenses | | | 7,627 | | | | 4,406 | | | | 1,688 | |
| | | |
| | Total expenses | | | 7,743 | | | | 4,487 | | | | 1,845 | |
| | | |
| Income before income tax and equity in undistributed earnings of subsidiaries | | | 3,415 | | | | 1,883 | | | | 23,690 | |
| Income tax benefit | | | (2,895) | | | | (1,658) | | | | (664) | |
| | | |
| Income before equity in undistributed earnings of subsidiaries | | | 6,310 | | | | 3,541 | | | | 24,354 | |
| Equity (deficit) in undistributed earnings of subsidiaries | | | 40,856 | | | | 30,578 | | | | (2,386) | |
| | | |
| Net income | | $ | 47,166 | | | $ | 34,119 | | | $ | 21,968 | |
| | | |
| | | | | | | | | | | |
| December 31, | | | | |
| (in thousands) | | 2005 | | | 2004 | |
| | |
| ASSETS | | | | | | | | |
| Non-interest-bearing deposits with subsidiary banks | | $ | 8,103 | | | $ | 5,655 | |
| Investments in: | | | | | | | | |
| | Bank subsidiary | | | 867,875 | | | | 817,831 | |
| | Nonbank subsidiary | | | 9,943 | | | | 9,493 | |
| Receivable from bank subsidiary | | | 19 | | | | 4,842 | |
| Receivable from nonbank subsidiary | | | 2,722 | | | | 2,973 | |
| Other assets | | | 22,208 | | | | 17,192 | |
| | | |
| | | Total assets | | $ | 910,870 | | | $ | 857,986 | |
| | | |
| |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| Payable to bank subsidiary | | $ | 7 | | | $ | 38 | |
| Other liabilities | | | 6,877 | | | | 4,079 | |
| Junior subordinated debentures | | | 165,725 | | | | 166,256 | |
| | | |
| | Total liabilities | | | 172,609 | | | | 170,373 | |
| Shareholders’ equity | | | 738,261 | | | | 687,613 | |
| | | |
| Total liabilities and shareholders’ equity | | $ | 910,870 | | | $ | 857,986 | |
| | | |
7276
Umpqua Holdings Corporation and Subsidiaries
Condensed Statements of Income
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| (in thousands) | | 2005 | | | 2004 | | | 2003 | |
| | |
| INCOME | | | | | | | | | | | | |
| Dividends from subsidiaries | | $ | 20,000 | | | $ | 11,000 | | | $ | 6,100 | |
| Other income | | | 251 | | | | 158 | | | | 270 | |
| | | |
| | Total income | | | 20,251 | | | | 11,158 | | | | 6,370 | |
| |
| EXPENSES | | | | | | | | | | | | |
| Management fees paid to subsidiaries | | | 119 | | | | 116 | | | | 81 | |
| Other expenses | | | 11,626 | | | | 7,627 | | | | 4,406 | |
| | | |
| | Total expenses | | | 11,745 | | | | 7,743 | | | | 4,487 | |
| | | |
| Income before income tax and equity in undistributed earnings of subsidiaries | | | 8,506 | | | | 3,415 | | | | 1,883 | |
| Income tax benefit | | | (4,355) | | | | (2,895) | | | | (1,658) | |
| | | |
| Net income before equity in undistributed earnings of subsidiaries | | | 12,861 | | | | 6,310 | | | | 3,541 | |
| Equity in undistributed earnings of subsidiaries | | | 56,874 | | | | 40,856 | | | | 30,578 | |
| | | |
| Net income | | $ | 69,735 | | | $ | 47,166 | | | $ | 34,119 | |
| | | |
Condensed Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | Year Ended December 31, | | | | | | | Year Ended December 31, | | | | | | |
| (in thousands) | (in thousands) | | 2004 | | | 2003 | | | 2002 | | (in thousands) | | 2005 | | | 2004 | | | 2003 | |
| | | | | |
| OPERATING ACTIVITIES: | OPERATING ACTIVITIES: | | | | | | | | | | | OPERATING ACTIVITIES: | | | | | | | | | | |
| Net income | Net income | | $ | 47,166 | | $ | 34,119 | | $ | 21,968 | | Net income | | $ | 69,735 | | $ | 47,166 | | $ | 34,119 | |
| Adjustment to reconcile net income to net cash provided by operating activities: | Adjustment to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | Adjustment to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| | (Equity) deficit in undistributed earnings of subsidiaries | | | (40,856) | | | (30,578) | | | 2,386 | | Equity in undistributed earnings of subsidiaries | | | (56,874) | | | (40,856) | | | (30,578) | |
| | Net amortization and depreciation | | | 8 | | | 149 | | | 140 | | Net amortization and depreciation | | | 3 | | | 8 | | | 149 | |
| | Increase (decrease) in other liabilities | | | 92 | | | (2,658) | | | (6,055) | | Increase (decrease) in other liabilities | | | 99 | | | 92 | | | (2,658) | |
| | Decrease (increase) in other assets | | | (1,144) | | | 2,897 | | | (1,872) | | |
| (Increase) decrease in other assets | | (Increase) decrease in other assets | | | (4,901) | | | 1,935 | | | 3,808 | |
| | | | | | | |
| | | Net cash provided by operating activities | | | 5,266 | | | 3,929 | | | 16,567 | | | Net cash provided by operating activities | | | 8,062 | | | 8,345 | | | 4,840 | |
| INVESTING ACTIVITIES: | INVESTING ACTIVITIES: | | | | | | | | | | | INVESTING ACTIVITIES: | | | | | | | | | | |
| Investment in subsidiary | Investment in subsidiary | | | — | | | (20,435) | | | (94,242) | | Investment in subsidiary | | | — | | | — | | | (20,435) | |
| Acquisitions | Acquisitions | | | 1,233 | | | — | | | 1,365 | | Acquisitions | | | — | | | 1,233 | | | — | |
| Net (increase) decrease in receivables from subsidiaries | | | (4,842) | | | (102) | | | 8,784 | | |
| Sales and maturities of investment securities available for sale | | Sales and maturities of investment securities available for sale | | | 50 | | | — | | | — | |
| Net decrease (increase) in receivables from subsidiaries | | Net decrease (increase) in receivables from subsidiaries | | | 5,074 | | | (4,842) | | | (102) | |
| | | | | | | |
| | | Net cash used by investing activities | | | (3,609) | | | (20,537) | | | (84,093) | | | Net cash provided (used) by investing activities | | | 5,124 | | | (3,609) | | | (20,537) | |
| FINANCING ACTIVITIES: | FINANCING ACTIVITIES: | | | | | | | | | | | FINANCING ACTIVITIES: | | | | | | | | | | |
| Net increase (decrease) in payables to subsidiaries | | | 412 | | | (33) | | | 44 | | |
| Decrease in other borrowings | | | — | | | — | | | (3,763) | | |
| Proceeds from the issuance of intercompany subordinated debentures | | | — | | | 20,000 | | | 75,000 | | |
| Net (decrease) increase in payables to subsidiaries | | Net (decrease) increase in payables to subsidiaries | | | (31) | | | 412 | | | (33) | |
| Proceeds from the issuance of subordinated debentures | | Proceeds from the issuance of subordinated debentures | | | — | | | — | | | 20,000 | |
| Dividends paid | Dividends paid | | | (8,112) | | | (4,536) | | | (3,534) | | Dividends paid | | | (11,557) | | | (8,112) | | | (4,536) | |
| Stock repurchased | Stock repurchased | | | (6,062) | | | (409) | | | (228) | | Stock repurchased | | | (1,904) | | | (6,062) | | | (409) | |
| Proceeds from exercise of stock options | Proceeds from exercise of stock options | | | 9,018 | | | 5,653 | | | 2,285 | | Proceeds from exercise of stock options | | | 2,754 | | | 5,939 | | | 4,742 | |
| | | | | | | |
| | | Net cash (used) provided by financing activities | | | (4,744) | | | 20,675 | | | 69,804 | | | Net cash (used) provided by financing activities | | | (10,738) | | | (7,823) | | | 19,764 | |
| Change in cash and cash equivalents | Change in cash and cash equivalents | | | (3,087) | | | 4,067 | | | 2,278 | | Change in cash and cash equivalents | | | 2,448 | | | (3,087) | | | 4,067 | |
| Cash and cash equivalents, beginning of year | Cash and cash equivalents, beginning of year | | | 8,742 | | | 4,675 | | | 2,397 | | Cash and cash equivalents, beginning of year | | | 5,655 | | | 8,742 | | | 4,675 | |
| | | | | | | |
| Cash and cash equivalents, end of year | Cash and cash equivalents, end of year | | $ | 5,655 | | $ | 8,742 | | $ | 4,675 | | Cash and cash equivalents, end of year | | $ | 8,103 | | $ | 5,655 | | $ | 8,742 | |
| | | | | | | |
77
| |
NOTE 23. | RELATED PARTY TRANSACTIONS |
NOTE 24. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has made loans to its directors and executive officers (and their associated and affiliated companies). All such loans have been made on the same terms as those prevailing at the time of origination to other borrowers.
The following table presents a summary of aggregate activity involving related party borrowers for the years ended December 31, 20042005 and 2003:2004:
| | | | | | | | | | | | | | | | |
| (in thousands) | (in thousands) | | 2004 | | | 2003 | | (in thousands) | | 2005 | | | 2004 | |
| | | | | |
| Loans outstanding at beginning of year | Loans outstanding at beginning of year | | $ | 2,660 | | $ | 3,520 | | Loans outstanding at beginning of year | | $ | 2,685 | | $ | 2,660 | |
| New loans and advances | New loans and advances | | | 89 | | | 356 | | New loans and advances | | | 10,559 | | | 89 | |
| Less loan repayments | Less loan repayments | | | (197) | | | (846) | | Less loan repayments | | | (1,489) | | | (197) | |
| Acquired through merger | Acquired through merger | | | 133 | | | — | | Acquired through merger | | | — | | | 133 | |
| Reclassification(1) | | | — | | | (370) | | |
| Reclassification (1) | | Reclassification (1) | | | (25) | | | — | |
| | | | | | | | | | |
| | Loans outstanding at end of year | | $ | 2,685 | | $ | 2,660 | | Loans outstanding at end of year | | $ | 11,730 | | $ | 2,685 | |
| | | | | | | | | | |
| |
| (1) | Several former directors and executive officers who were considered related parties at December 31, 20022004 were no longer so classified at December 31, 2003.2005. |
At December 31, 2005 and 2004, deposits of related parties amounted to $7.6 million.$1.6 million and $12.9 million, respectively.
NOTE 25. QUARTERLY FINANCIAL INFORMATION (Unaudited)
73
| |
NOTE 24. | QUARTERLY FINANCIAL INFORMATION (Unaudited) |
The following table presentstables present the summary results for the eight quarters ending December 31, 2004:
20042005:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2005 | | 2005 | | | | | | | | | | |
| (in thousands, except per share information) | | (in thousands, except per share information) | | | | | | | | | | |
| | | | March 31, | | | June 30, | | | September 30, | | | December 31, | | | Four | | | | | | | | | | | | Four | |
| | | | 2004 | | | 2004 | | | 2004 | | | 2004 | | | Quarters | | | | December 31 | | | September 30 | | | June 30 | | | March 31 | | | Quarters | |
| | | | | |
| Interest income | Interest income | | $ | 36,907 | | $ | 38,646 | | $ | 59,265 | | $ | 63,240 | | $ | 198,058 | | Interest income | | $ | 76,918 | | $ | 73,221 | | $ | 67,663 | | $ | 64,474 | | $ | 282,276 | |
| Interest expense | Interest expense | | | 7,392 | | | 7,557 | | | 11,856 | | | 13,566 | | | 40,371 | | Interest expense | | | 22,369 | | | 19,420 | | | 16,581 | | | 14,624 | | | 72,994 | |
| | | | | | | |
| | Net interest income | | | 29,515 | | | 31,089 | | | 47,409 | | | 49,674 | | | 157,687 | | Net interest income | | | 54,549 | | | 53,801 | | | 51,082 | | | 49,850 | | | 209,282 | |
| Provision for loan losses | Provision for loan losses | | | 1,075 | | | 1,100 | | | 1,479 | | | 3,667 | | | 7,321 | | Provision for loan losses | | | 68 | | | — | | | 1,400 | | | 1,000 | | | 2,468 | |
| Non-interest income | Non-interest income | | | 8,212 | | | 9,206 | | | 11,471 | | | 12,484 | | | 41,373 | | Non-interest income | | | 11,474 | | | 13,782 | | | 11,924 | | | 10,602 | | | 47,782 | |
| Non-interest expense (including merger expenses) | Non-interest expense (including merger expenses) | | | 23,942 | | | 25,005 | | | 37,699 | | | 38,533 | | | 125,179 | | Non-interest expense (including merger expenses) | | | 38,117 | | | 37,083 | | | 36,421 | | | 35,435 | | | 147,056 | |
| | | | | | | |
| | Income before taxes and discontinued operations | | | 12,710 | | | 14,190 | | | 19,702 | | | 19,958 | | | 66,560 | | Income before income taxes and discontinued operations | | | 27,838 | | | 30,500 | | | 25,185 | | | 24,017 | | | 107,540 | |
| Income taxes | | | 4,463 | | | 5,180 | | | 6,457 | | | 7,170 | | | 23,270 | | |
| Provision for income taxes | | Provision for income taxes | | | 9,051 | | | 10,577 | | | 9,179 | | | 8,998 | | | 37,805 | |
| | | | | | | |
| | Income from continuing operations | | | 8,247 | | | 9,010 | | | 13,245 | | | 12,788 | | | 43,290 | | Income from continuing operations | | | 18,787 | | | 19,923 | | | 16,006 | | | 15,019 | | | 69,735 | |
| Income from discontinued operations, net of tax | Income from discontinued operations, net of tax | | | 151 | | | 121 | | | 123 | | | 3,481 | | | 3,876 | | Income from discontinued operations, net of tax | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | |
| | Net income | | $ | 8,398 | | $ | 9,131 | | $ | 13,368 | | $ | 16,269 | | $ | 47,166 | | Net income | | $ | 18,787 | | $ | 19,923 | | $ | 16,006 | | $ | 15,019 | | $ | 69,735 | |
| | | | | | | |
| Earnings per share—basic: | | | | | | | | | | | | | | | | | |
| BASIC EARNINGS PER SHARE: | | BASIC EARNINGS PER SHARE: | | | | | | | | | | | | | | | | |
| Income from continuing operations | | Income from continuing operations | | $ | 0.42 | | $ | 0.45 | | $ | 0.36 | | $ | 0.34 | | | | |
| Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | | | — | | | — | | | — | | | — | | | | |
| | Continuing operations | | $ | 0.29 | | $ | 0.32 | | $ | 0.31 | | $ | 0.29 | | | | | | | | | | |
| | Discontinued operations | | | 0.01 | | | — | | | 0.01 | | | 0.08 | | | | | Net income | | $ | 0.42 | | $ | 0.45 | | $ | 0.36 | | $ | 0.34 | | | | |
| | Net income | | $ | 0.30 | | $ | 0.32 | | $ | 0.32 | | $ | 0.37 | | | | | | | | | | |
| Earnings per share—diluted: | | | | | | | | | | | | | | | | | |
| DILUTED EARNINGS PER SHARE: | | DILUTED EARNINGS PER SHARE: | | | | | | | | | | | | | | | | |
| Income from continuing operations | | Income from continuing operations | | $ | 0.42 | | $ | 0.44 | | $ | 0.36 | | $ | 0.33 | | | | |
| Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | | | — | | | — | | | — | | | — | | | | |
| | Continuing operations | | $ | 0.29 | | $ | 0.31 | | $ | 0.31 | | $ | 0.28 | | | | | | | | | | |
| | Discontinued operations | | | — | | | 0.01 | | | — | | | 0.08 | | | | | |
| Net income | | Net income | | $ | 0.42 | | $ | 0.44 | | $ | 0.36 | | $ | 0.33 | | | | |
| | Net income | | $ | 0.29 | | $ | 0.32 | | $ | 0.31 | | $ | 0.36 | | | | | | | | | | |
| Cash dividends declared per common share | Cash dividends declared per common share | | $ | 0.04 | | $ | 0.06 | | $ | 0.06 | | $ | 0.06 | | | | | Cash dividends declared per common share | | $ | 0.12 | | $ | 0.08 | | $ | 0.06 | | $ | 0.06 | | | | |
7478
Umpqua Holdings Corporation and Subsidiaries
| | | | | | | | | | | | | | | | | | | | | | |
| 2004 | | | | | | | | | | |
| (in thousands, except per share information) | | | | | | | | | | |
| | | | | | | | | | | Four | |
| | | December 31 | | | September 30 | | | June 30 | | | March 31 | | | Quarters | |
| | |
| Interest income | | $ | 63,240 | | | $ | 59,265 | | | $ | 38,646 | | | $ | 36,907 | | | $ | 198,058 | |
| Interest expense | | | 13,566 | | | | 11,856 | | | | 7,557 | | | | 7,392 | | | | 40,371 | |
| | | |
| | Net interest income | | | 49,674 | | | | 47,409 | | | | 31,089 | | | | 29,515 | | | | 157,687 | |
| Provision for loan losses | | | 3,667 | | | | 1,479 | | | | 1,100 | | | | 1,075 | | | | 7,321 | |
| Non-interest income | | | 12,484 | | | | 11,471 | | | | 9,206 | | | | 8,212 | | | | 41,373 | |
| Non-interest expense (including merger expenses) | | | 38,533 | | | | 37,699 | | | | 25,005 | | | | 23,942 | | | | 125,179 | |
| | | |
| | Income before income taxes and discontinued operations | | | 19,958 | | | | 19,702 | | | | 14,190 | | | | 12,710 | | | | 66,560 | |
| Provision for income taxes | | | 7,170 | | | | 6,457 | | | | 5,180 | | | | 4,463 | | | | 23,270 | |
| | | |
| | Income from continuing operations | | | 12,788 | | | | 13,245 | | | | 9,010 | | | | 8,247 | | | | 43,290 | |
| Income from discontinued operations, net of tax | | | 3,481 | | | | 123 | | | | 121 | | | | 151 | | | | 3,876 | |
| | | |
| | Net income | | $ | 16,269 | | | $ | 13,368 | | | $ | 9,131 | | | $ | 8,398 | | | $ | 47,166 | |
| | | |
| BASIC EARNINGS PER SHARE: | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 0.29 | | | $ | 0.31 | | | $ | 0.32 | | | $ | 0.29 | | | | | |
| Income from discontinued operations, net of tax | | | 0.08 | | | | 0.01 | | | | — | | | | 0.01 | | | | | |
| | | | | | |
| Net income | | $ | 0.37 | | | $ | 0.32 | | | $ | 0.32 | | | $ | 0.30 | | | | | |
| | | | | | |
| DILUTED EARNINGS PER SHARE: | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 0.28 | | | $ | 0.31 | | | $ | 0.31 | | | $ | 0.29 | | | | | |
| Income from discontinued operations, net of tax | | | 0.08 | | | | — | | | | 0.01 | | | | — | | | | | |
| | | | | | |
| Net income | | $ | 0.36 | | | $ | 0.31 | | | $ | 0.32 | | | $ | 0.29 | | | | | |
| | | | | | |
| Cash dividends declared per common share | | $ | 0.06 | | | $ | 0.06 | | | $ | 0.06 | | | $ | 0.04 | | | | | |
2003NOTE 26. SUBSEQUENT EVENTS
| | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, | | | June 30, | | | September 30, | | | December 31, | | | Four | |
| | | 2003 | | | 2003 | | | 2003 | | | 2003 | | | Quarters | |
| | |
| Interest income | | $ | 35,317 | | | $ | 34,281 | | | $ | 35,927 | | | $ | 36,607 | | | $ | 142,132 | |
| Interest expense | | | 7,737 | | | | 7,480 | | | | 6,839 | | | | 6,804 | | | | 28,860 | |
| | | |
| | Net interest income | | | 27,580 | | | | 26,801 | | | | 29,088 | | | | 29,803 | | | | 113,272 | |
| Provision for credit losses | | | 1,475 | | | | 950 | | | | 1,050 | | | | 1,075 | | | | 4,550 | |
| Non-interest income | | | 9,920 | | | | 11,364 | | | | 9,277 | | | | 7,440 | | | | 38,001 | |
| Non-interest expense (including merger expenses) | | | 23,212 | | | | 24,929 | | | | 23,698 | | | | 23,430 | | | | 95,269 | |
| | | |
| | Income before taxes and discontinued operations | | | 12,813 | | | | 12,286 | | | | 13,617 | | | | 12,738 | | | | 51,454 | |
| Income taxes | | | 4,592 | | | | 4,322 | | | | 4,748 | | | | 4,308 | | | | 17,970 | |
| | | |
| | Income from continuing operations | | | 8,221 | | | | 7,964 | | | | 8,869 | | | | 8,430 | | | | 33,484 | |
| Income from discontinued operations, net of tax | | | 161 | | | | 168 | | | | 146 | | | | 160 | | | | 635 | |
| | | |
| | Net income | | $ | 8,382 | | | $ | 8,132 | | | $ | 9,015 | | | $ | 8,590 | | | $ | 34,119 | |
| | | |
| Earnings per share—basic: | | | | | | | | | | | | | | | | | | | | |
| | Continuing operations | | $ | 0.29 | | | $ | 0.28 | | | $ | 0.31 | | | $ | 0.30 | | | | | |
| | Discontinued operations | | | 0.01 | | | | 0.01 | | | | 0.01 | | | | — | | | | | |
| | Net income | | $ | 0.30 | | | $ | 0.29 | | | $ | 0.32 | | | $ | 0.30 | | | | | |
| Earnings per share—diluted: | | | | | | | | | | | | | | | | | | | | |
| | Continuing operations | | $ | 0.29 | | | $ | 0.28 | | | $ | 0.31 | | | $ | 0.29 | | | | | |
| | Discontinued operations | | | — | | | | — | | | | — | | | | 0.01 | | | | | |
| | Net income | | $ | 0.29 | | | $ | 0.28 | | | $ | 0.31 | | | $ | 0.30 | | | | | |
| Cash dividends declared per common share | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.04 | | | | | |
In February 2006, we announced the signing of a definitive agreement for the Company to acquire Western Sierra Bancorp and its principal operating subsidiaries, Western Sierra Bank, Central California Bank, Lake Community Bank and Auburn Community Bank. The agreement provides for Western Sierra shareholders to receive 1.61 shares of the Company’s common stock for each share of Western Sierra common stock, giving the acquisition a total value of approximately $355 million.
Upon completion of the acquisition expected in the second quarter of 2006, all Western Sierra Bancorp branches will operate under the Umpqua Bank name. The acquisition will add Western Sierra’s complete network of 31 Northern California branches, including locations in the Sacramento, Auburn, Lakeport and Sonora areas, to our network of 96 Northern California, Oregon and Washington locations and result in a combined institution with assets of approximately $6.9 billion.
7579
Umpqua Holdings Corporation
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREDISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
| |
| ITEM 9A. | CONTROLS AND PROCEDURES. |
On a quarterly basis, we carry out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15b of the Securities Exchange Act of 1934. Our Disclosure Control Committee operates under a charter that was approved by our Audit and Compliance & Governance Committee. As of December 31, 2004,2005, our management, including our Chief Executive Officer, Chief Financial Officer, and Principal Accounting Officer, concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us, that is required to be included in our periodic SEC filings.
Although we change and improve our internal controls over financial reporting on an ongoing basis, we do not believe that any such changes occurred in the fourth quarter 20042005 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Umpqua Holdings Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and under the Securities Exchange Act of 1934. The company’s internal control system is designed to provide reasonable assurance to our management and boardBoard of directorsDirectors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The company’s internal control over financial reporting includes those policies and procedures that:
| | |
| | • | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the company’s assets; |
| |
| | • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with the authorizations of management and directors of the company; and |
| |
| | • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2004.2005. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Control—Integrated Framework. Based on our assessment and those criteria, we believe that, as of December 31, 2004,2005, the company maintained effective internal control over financial reporting.
The company’s independent registered public accounting firm has audited management’s assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 20042005 and issued their Report of Independent
76
Umpqua Holdings Corporation
Registered Public Accounting Firm, appearing under Item 9A, which expresses unqualified opinions on management’s assessment and on the effectiveness of the company’s internal controls over financial reporting as of December 31, 2004.2005.
March 31, 2005
| | |
|
/s/ Raymond P. Davis
Raymond P. Davis
President and Chief Executive Officer
/s/ Ronald L. Farnsworth
Ronald L. Farnsworth
Senior Vice President
Principal Accounting Officer | | /s/ Daniel A. Sullivan
---------------------------------------------------------
Daniel A. Sullivan
Executive Vice President
Chief Financial Officer
Principal Financial Officer |
14 , 2006
77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMITEM 9B. OTHER INFORMATION.
To the Board of Directors and Shareholders of
Umpqua Holdings Corporation
Portland, Oregon
We have audited management’s assessment, included in the accompanying Report of Management on Internal Control Over Financial Reporting, that Umpqua Holdings Corporation and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because management’s assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of the Company’s internal control over financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Federal Financial Institutions Examination Council Instructions for Consolidated Reports of Condition and Income for Schedules RC, RI, and RI-A. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing, and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of income, cash flows, and changes in shareholders’ equity for the year then ended of the Company and our report dated March 31, 2005 expressed an unqualified opinion on those financial statements.
Portland, Oregon
March 31, 2005None.
7880
Umpqua Holdings Corporation
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTREGISTRANT.
The response to this item is incorporated by reference to Umpqua’s Proxy Statement for the 20052006 annual meeting of shareholders scheduled for May 6, 2005, under the captions “Business of the Meeting”, “Information About Directors and Executive Officers”, “Employee Code of Conduct” and “Compliance with Section 16§16 Filing Requirements.”
ITEM 11. EXECUTIVE COMPENSATIONCOMPENSATION.
The response to this item is incorporated by reference to the Proxy Statement, under the caption “Executive Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The response to this item is incorporated by reference to the Proxy Statement, under the caption “Security Ownership of Management and Others.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSTRANSACTIONS.
The response to this item is incorporated by reference to the Proxy Statement, under the caption “Transactions with Directors and Officers.”
ITEM 14. PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICESSERVICES.
The response to this item is incorporated by reference to the Proxy Statement, under the caption “Registered Independent Public Accounting Firm.”
7981
Umpqua Holdings Corporation
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSCHEDULES.
(a) (1) Financial Statements:
| |
| | The consolidated financial statements are included as Item 8 of this Form 10-K. |
(2) Financial Statement Schedules:
| |
| | All schedules have been omitted because the information is not required, not applicable, not present in amounts sufficient to require submission of the schedule, or is included in the financial statements or notes thereto. |
(3) The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed on the Index of Exhibits to this annual report on Form 10-K on sequential page 83.85.
8082
Umpqua Holdings Corporation
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Umpqua Holdings Corporation has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 2005.14, 2006.
UMPQUA HOLDINGS CORPORATION (Registrant)
| | | |
By: /s/ Raymond P. Davis
Raymond P. Davis, President and Chief Executive Officer | | Date: March 30, 200514, 2006 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
| | | | | |
| Signature | | Title | | Date |
| |
| |
/s/ Raymond P. Davis
Raymond P. Davis | | President, Chief Executive Officer and Director
(Principal Executive Officer) | | March 30, 200514, 2006 |
| |
/s/ Daniel A. Sullivan
Daniel A. Sullivan | | Executive Vice President Chief Financial Officer
(Principal Financial Officer) | | March 30, 200514, 2006 |
| |
/s/ Ronald L. Farnsworth
Ronald L. Farnsworth | | Senior Vice President
(Principal Accounting Officer) | | March 30, 200514, 2006 |
| |
/s/ Ronald F. Angell
Ronald F. Angell | | Director | | March 30, 2005 |
|
/s/ James D. Coleman
James D. Coleman | | Director | | March 30, 200514, 2006 |
| |
/s/ Scott D. Chambers
Scott D. Chambers | | Director | | March 14, 20052006 |
| |
/s/Allyn C. Ford
Allyn C. Ford | | Director | | March 30, 200514, 2006 |
|
/s/ David B. Frohnmayer
David B. Frohnmayer | | Director | | March 14, 2006 |
8183
| | | | | |
| Signature | | Title | | Date |
| |
| |
/s/ David B. Frohnmayer
Stephen GambeeDavid B. Frohnmayer | | Director | | March 14, 2005 |
| 2006 |
/s/ Dan GuistinaGiustina
Dan GuistinaGiustina | | Director | | March 30, 2005 |
| 14, 2006 |
/s/ Lynn K. Herbert
Lynn K. Herbert | | Director | | March 30, 2005 |
| 14, 2006 |
/s/ Diana E. Goldschmidt
Diana E. Goldschmidt | | Director | | March 30, 2005 |
| 14, 2006 |
/s/ William A. Lansing
William A. Lansing | | Director | | March 30, 2005 |
| 14, 2006 |
/s/ Theodore S. Mason
Theodore S. Mason | | Director | | March 14, 2005 |
| 2006 |
/s/ Diane D. Miller
Diane D. Miller | | Director | | March 30, 2005 |
| 14, 2006 |
/s/ Bryan L. Timm
Bryan L. Timm | | Director | | March 30, 2005 |
| 14, 2006 |
/s/ Thomas W. Weborg
Thomas W. Weborg | | Director | | March 15, 2005 |
8284
Umpqua Holdings Corporation
EXHIBIT INDEX
| | | | | |
| Exhibit | | | |
| |
| | 2 | .0 | | (a) Agreement and Plan of Reorganization and accompanying Plan of Merger dated March 13, 2004 by and among Umpqua Holdings Corporation, Umpqua Bank, Humboldt Bancorp and Humboldt Bank |
| | 3 | .1 | | (b) Articles of Incorporation, as amended |
| | 3 | .2 | | (c) Bylaws |
| | 4 | .0 | | (d) Specimen Stock Certificate |
| | 10 | .1 | | (e) Employment Agreement dated effective July 9, 2004 between the Company and Raymond P. Davis |
| | 10 | .2 | | (f) Supplemental Executive Retirement Plan dated effective July 1, 2003 for Raymond P. Davis |
| | 10 | .3 | | (g) Amendment to Supplemental Executive Retirement Plan for Raymond P. Davis |
| | 10 | .4 | | (h) Terms of Employment and Severance Agreements dated effective September 15, 2003 with executive officers Brad F. Copeland, David M. Edson, Daniel A. Sullivan and Barbara Baker |
| | 10 | .5 | | Merchant Asset Purchase Agreement with NOVA Information Systems, Inc. (‘NOVA”), which provided for the sale of the Company’s merchant card services business to NOVA |
| | 10 | .6 | | Lease Agreement between OR-BF Plaza Limited Partnership and Umpqua Bank |
| | 10 | .7 | | (h) Restated Severance Agreement with Steven L. Philpott dated effective August 1, 2003 |
| | 13 | | | 2004 Annual Report to Shareholders |
| | 21 | .1 | | Subsidiaries of the Registrant |
| | 23 | .1 | | Consent of Independent Registered Public Accounting Firm |
| | 31 | .1 | | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
| | 31 | .2 | | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
| | 31 | .3 | | Certification of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
| | 32 | | | Certification of Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | | | |
| Exhibit | | | |
| |
| | 3 | .1 | | (a) Articles of Incorporation, as amended |
| | 3 | .2 | | (b) Bylaws |
| | 4 | .0 | | (c) Specimen Stock Certificate |
| | 10 | .1 | | Restated Supplemental Executive Retirement Plan effective January 1, 2006 between the Company and Raymond P. Davis |
| | 10 | .2 | | (d) Amendment dated effective December 30, 2004 to a Supplemental Executive Retirement Plan dated July 1, 2003, between the Company and Raymond P. Davis (incorporated in Exhibit 10.1) |
| | 10 | .3 | | (e) Employment Agreement for William Fike dated May 12, 2005 |
| | 10 | .4 | | (f) 2005 Executive Deferred Compensation Agreement with William Fike dated effective June 11, 2005 |
| | 10 | .5 | | (g) Umpqua Holdings Corporation 2005 Performance-Based Executive Incentive Plan |
| | 10 | .6 | | (h) Nonqualified Stock Option Agreement dated January 3, 2005 for Raymond P. Davis |
| | 10 | .7 | | (i) Terms of Employment and Severance Agreements dated effective September 15, 2003 with Named Executive Officers Brad F. Copeland, David M. Edson and Daniel A. Sullivan |
| | 21 | .1 | | Subsidiaries of the Registrant |
| | 23 | .1 | | Consent of Independent Registered Public Accounting Firm—Moss Adams LLP |
| | 23 | .2 | | Consent of Independent Registered Public Accounting Firm—Deloitte & Touche LLP |
| | 31 | .1 | | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
| | 31 | .2 | | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
| | 31 | .3 | | Certification of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
| | 32 | | | Certification of Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| (a) | | Incorporated by reference to Appendices A and B of the Joint Proxy Statement/ Prospectus included in the Registration Statement on Form S-4 filed April 19, 2004 (Registration No. 333-114566) |
|
(b) | | Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4 filed September 9, 2002 |
|
| (b) | | Incorporated by reference to Exhibit 3.2 to Form 10-Q filed May 10, 2004 |
| |
| (c) | | Incorporated by reference to Exhibit 3.2 on the Form 10-Q filed May 10, 2004 |
|
(d) | | Incorporated by reference to the Registration Statement on Form S-8 (No. 333-77259) filed with the SEC on April 28, 1999 |
| |
| (d) | | Incorporated by reference to Exhibit 10.1 to Form 10-Q filed May 10, 2005 |
|
| (e) | | Incorporated by reference to Exhibit 10.410.1 to Form 10-Q filed August 14, 20039, 2005 |
| |
| (f) | | Incorporated by reference to Exhibit 10.510.2 to Form 10-Q filed August 14, 20039, 2005 |
| |
| (g) | | Incorporated by reference to Exhibit 10.9Appendix B to Form 10-Kthe DEF 14A filed March 15, 200431, 2005 |
| |
| (h) | | Incorporated by reference to Exhibit 10.1 to the Form 8-K filed January 3, 2005 |
|
| (i) | | Incorporated by reference to Exhibit 10.5 to the Form 10-Q filed November 14, 2003 |
8385