As Filed with the Securities and Exchange Commission on September 21, 2001
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q/A
| [X] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended: June 30, 2001 |
| [_] | 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) | (IRS Employer Identification Number) |
200 SW Market Street, Suite 1900
Portland, Oregon 97201
(address of Principal Executive Offices)(Zip Code)
(503) 546-2491
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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.
X Yes NoIndicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practical date:
Common stock, no par value, outstanding as of July 31, 2001: 14,435,412
UMPQUA HOLDINGS CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
| PART I | FINANCIAL INFORMATION | PAGE |
| Item 1. | Financial Statements (unaudited) | |
| Condensed Consolidated Balance Sheets: June 30, 2001 and December 31, 2000 | 3 | |
| Condensed Consolidated Statements of Income: Three and six months ended June 30, 2001 and 2000 | 4 | |
| Condensed Consolidated Statements of Comprehensive Income: Three and six months ended June, 2001 and 2000 | 5 | |
| Condensed Consolidated Statements of Cash Flows: Six months ended June 30, 2001 and 2000 | 6 | |
| Notes to Condensed Consolidated Financial Statements | 7-9 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 9-18 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 18-19 |
| PART II | OTHER INFORMATION | |
| Item 1. | Legal Proceedings | none |
| Item 2. | Changes in Securities | none |
| Item 3. | Defaults Upon Senior Securities | none |
| Item 4. | Submission of Matters to a Vote of Security Holders | 19 |
| Item 5. | Other Information | none |
| Item 6. | Exhibits and Reports on Form 8-K | 19 |
| SIGNATURES | 20 |
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
UMPQUA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| June 30, 2001 | December 31, 2000 | |||
| ASSETS Cash and due from banks | $ 44,052,589 | $ 43,998,452 | ||
| Interest bearing deposits in other banks | 68,784,085 | 32,953,982 | ||
| Total Cash and Cash Equivalents | 112,836,674 | 76,952,434 | ||
| Trading account assets | 4,477,964 | 1,105,868 | ||
| Investment securities available for sale | 67,848,434 | 123,649,847 | ||
| Investment securities held to maturity | 16,373,147 | 17,060,488 | ||
| Mortgage loans held for sale | 6,196,790 | 1,534,060 | ||
| Loans receivable | 584,469,565 | 530,143,203 | ||
| Less: Allowance for loan losses | (7,655,559 | ) | (7,096,499 | ) |
| Loans, net | 576,814,006 | 523,046,704 | ||
| Federal Home Loan Bank stock at cost | 4,680,000 | 4,527,300 | ||
| Property and equipment, net of depreciation | 20,241,278 | 18,678,617 | ||
| Intangibles | 10,964,279 | 11,113,258 | ||
| Other assets | 6,130,602 | 7,979,686 | ||
| Total Assets | $ 826,563,174 ========== | $ 785,648,262 ========== | ||
LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing | $ 176,686,532 | $ 161,351,466 | ||
| Savings and interest-bearing checking | 282,569,999 | 289,264,421 | ||
| Time deposits | 253,936,250 | 230,689,407 | ||
| Total Deposits | 713,192,781 | 681,305,294 | ||
| Securities sold under agreements to repurchase | 6,982,825 | 4,513,924 | ||
| Term debt to Federal Home Loan Bank | 14,598,000 | 14,618,000 | ||
| Other liabilities | 7,976,376 | 6,410,511 | ||
| Total Liabilities | 742,749,982 | 706,847,729 | ||
Commitments and contingencies SHAREHOLDERS' EQUITY Deposits Common stock (20,000,000 shares authorized; 14,435,412 and 14,378,784 shares outstanding at June 30, 2001 and December 31, 2000, respectively) | 44,915,413 | 44,618,852 | ||
| Retained earnings | 38,509,578 | 34,523,533 | ||
| Cumulative other comprehensive income (loss) | 388,201 | (341,852 | ) | |
| Total Shareholders' Equity | 83,813,192 | 78,800,533 | ||
| Total Liabilities and Shareholders' Equity | $ 826,563,174 ========== | $ 785,648,262 ========== |
See accompanying notes to condensed consolidated financial statements
3
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
UMPQUA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
| Three months ended June 30, | Six months ended June 30, | |||
| 2001 | 2000 | 2001 | 2000 | |
| Interest Income Interest and fees on loans | $ 12,576,572 | $ 10,955,848 | $ 24,846,728 | $ 21,191,365 |
| Interest on taxable securities | 865,402 | 1,745,552 | 2,267,044 | 3,544,535 |
| Interest on non-taxable securities | 466,629 | 477,159 | 930,898 | 958,471 |
| Interest on temporary investments | 527,232 | 174,696 | 1,043,440 | 307,948 |
| Interest on trading account assets | 19,567 | 25,039 | 39,624 | 31,299 |
| Total interest income | 14,455,402 | 13,378,294 | 29,127,734 | 26,033,618 |
Interest Expense Interest on deposits | 5,031,672 | 4,161,030 | 10,522,176 | 7,885,877 |
| Interest on borrowings and repurchase agreements | 230,670 | 452,203 | 475,941 | 1,028,583 |
| Total interest expense | 5,262,342 | 4,613,233 | 10,998,117 | 8,914,460 |
| Net Interest Income | 9,193,060 | 8,765,061 | 18,129,617 | 17,119,158 |
| Provision for loan losses | 420,000 | 584,500 | 680,000 | 1,034,500 |
Net interest income after provision for loan losses | 8,773,060 | 8,180,561 | 17,449,617 | 16,084,658 |
Noninterest Income Service charges | 1,571,581 | 1,242,686 | 2,977,296 | 2,385,913 |
| Commissions | 2,032,638 | 1,260,204 | 3,962,972 | 2,740,293 |
| Other noninterest income | 551,098 | 332,742 | 1,016,155 | 697,127 |
| Total noninterest income | 4,155,317 | 2,835,632 | 7,956,423 | 5,823,333 |
Noninterest Expense Salaries and employee benefits | 4,304,312 | 4,042,301 | 8,566,983 | 8,109,032 |
| Premises and equipment | 1,210,555 | 969,010 | 2,322,311 | 2,011,768 |
| Other noninterest expense | 2,715,130 | 1,912,602 | 5,091,414 | 3,770,907 |
| Merger expenses | 181,052 | -- | 968,670 | -- |
| Total noninterest expense | 8,411,049 | 6,923,913 | 16,949,378 | 13,891,707 |
Income before income taxes | 4,517,328 | 4,092,280 | 8,456,662 | 8,016,284 |
| Provision for income taxes | 1,712,546 | 1,543,492 | 3,316,620 | 2,938,001 |
| Net Income | $ 2,804,782 ============= | $ 2,548,788 ============= | $ 5,140,042 ============= | $ 5,078,283 ============= |
Earnings Per Share Basic | $ 0.19 | $ 0.18 | $ 0.36 | $ 0.35 |
| Diluted | $ 0.19 | $ 0.18 | $ 0.35 | $ 0.35 |
See accompanying notes to condensed consolidated financial statements
4
UMPQUA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| Three months ended June 30, | Six months ended June 30, | |||||
| 2001 | 2000 | 2001 | 2000 | |||
| Net Income | $ 2,804,782 | $ 2,548,788 | $ 5,140,042 | $ 5,078,283 | ||
Unrealized gains (losses) arising during the period on investment securities available for sale | (96,567 | ) | 232,365 | 1,185,247 | (156,753 | ) |
Income tax expense (benefit) related to unrealized gains (losses) on investment securities | (28,133 | ) | 94,572 | 455,194 | (53,280 | ) |
Net unrealized gains (losses) on investment securities available for sale | (68,434 | ) | 137,793 | 730,053 | (103,473 | ) |
| Comprehensive income | $ 2,736,348 ============= | $ 2,686,581 ============= | $ 5,870,095 ============= | $ 4,974,810 ============= |
See accompanying notes to condensed consolidated financial statements
5
UMPQUA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six months ended June 30, | ||||
| 2001 | 2000 | |||
| Cash flows from operating activities: Net income | $ 5,140,042 | $ 5,078,283 | ||
| Adjustments to reconcile net income to net cash provided by operating activities: Federal Home Loan Bank stock dividends | (152,700 | ) | (138,100 | ) |
| Net increase in trading account assets | (3,372,096 | ) | (590,826 | ) |
| Amortization of investment premiums, net | 45,353 | 68,841 | ||
| Origination of loans held for sale | (33,760,444 | ) | (9,913,409 | ) |
| Proceeds from sales of loans held for sale | 29,619,239 | 5,812,801 | ||
| Amortization of intangibles | 482,313 | 437,254 | ||
| Provision for loan losses | 680,000 | 1,034,500 | ||
| Gain on sales of loans | (521,525 | ) | (275,844 | ) |
| Depreciation of premises and equipment | 810,948 | 723,164 | ||
| Net decrease (increase) in other assets | 1,060,556 | (393,216 | ) | |
| Net increase in other liabilities | 1,588,020 | 107,182 | ||
Net cash provided by operating activities | 1,619,706 | 1,950,630 | ||
Cash flows from operating activities: Purchases of investment securities | (6,035,625 | ) | -- | |
| Maturities of investment securities | 61,658,403 | 3,696,473 | ||
| Principal repayments received on mortgage-backed and related securities | 1,315,870 | 2,267,143 | ||
| Maturities of investment securities held to maturity | 690,000 | 770,000 | ||
| Net loan originations | (54,447,302 | ) | (30,283,237 | ) |
| Purchase of loans Proceeds from sales of loans Purchases of premises and equipment | (2,373,609 | ) | (909,561 | ) |
Net cash provided by (used in) investing activities | 807,737 | (24,459,182 | ) | |
Cash flows from financing activities: Net increase in deposit liabilities | 31,887,487 | 45,896,682 | ||
| Net increase in securities sold under agreements to repurchase | 2,468,901 | 625,271 | ||
| Dividends paid on common stock | (1,153,996 | ) | (1,612,928 | ) |
| Repurchase of common stock | -- | (116,665 | ) | |
| Proceeds from stock options exercised | 274,405 | 103,888 | ||
| Repayments of Federal Home Loan Bank borrowings | (20,000 | ) | (10,520,000 | ) |
Net cash provided by financing activities | 33,456,797 | 34,376,248 | ||
Net increase in cash and cash equivalents | 35,884,240 | 11,867,696 | ||
Cash and cash equivalents, beginning of period | 76,952,434 | 63,510,056 | ||
Cash and cash equivalents, end of period | $ 112,836,674 ============ | $ 75,377,752 ============ | ||
Supplemental disclosures of cash flow information: Cash paid during the period for: Interest | $ 11,117,339 | $ 8,855,725 | ||
| Income taxes | $ 3,030,000 | $ 2,746,000 | ||
See accompanying notes to condensed consolidated financial statements
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of financial statement preparation
The accompanying condensed consolidated financial statements have been prepared by the Company without audit and in conformity with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, certain financial information and footnotes have been omitted or condensed. The condensed consolidated financial statements include the accounts of Umpqua Holdings Corporation (the Company), and its wholly-owned subsidiaries Umpqua Bank (the Bank) and Strand, Atkinson, Williams & York, Inc. (Strand, Atkinson). All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the condensed consolidated financial statements include all necessary adjustments (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These financial statements should be read in conjunction with the Company’s 2000 annual report to shareholders. The results of operations for the 2001 interim periods shown in this report are not necessarily indicative of the results for any future interim period or the entire fiscal year.
(b) Earnings per share
Basic and diluted earnings per share are based on the weighted average number of common shares outstanding during each period, with diluted including the effect of potentially dilutive common shares. The weighted average number of common shares outstanding for basic and diluted earnings per share computations were as follows:
| Three months ended | Six months ended | |||
| June 30, 2001 | June 30, 2000 | June 30, 2001 | June 30, 2000 | |
| Net Income | $2,804,782 =========== | $2,548,788 =========== | $5,140,042 =========== | $5,078,283 =========== |
Average O/S shares | 14,424,583 | 14,377,182 | 14,413,543 | 14,368,259 |
Basic EPS | $0.19 =========== | $0.18 =========== | $0.36 =========== | $0.35 =========== |
| Common Stock Equivalents | 177,602 | 148,047 | 168,058 | 152,147 |
Fully diluted shares | 14,602,185 | 14,525,229 | 14,581,601 | 14,520,406 |
Fully diluted EPS | $0.19 =========== | $0.18 =========== | $0.35 =========== | $0.35 =========== |
Options to purchase 142,690 shares of common stock for prices ranging from $11.68 to $13.59 per share were outstanding during the quarter ended June 30, 2001 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares during the period.
7
(2) SEGMENT INFORMATION
For purposes of measuring and reporting the financial results, the Company is divided into two business segments; Community Banking and Retail Brokerage Services. The Community Banking segment consists of the operations conducted by the Company’s subsidiary Umpqua Bank. The Bank provides a full array of credit and deposit products to meet the banking needs of its market area and targeted customers. At June 30, 2001, the Bank had 28 full service stores. The Retail Brokerage Services segment consists of the operations of the Company’s subsidiary Strand, Atkinson, Williams & York, Inc. which was acquired in December 1999. Strand, Atkinson provides a full range of retail brokerage services to its clients and has sales counters at most of the Bank’s stores. At June 30, 2001, Strand, Atkinson, Williams & York, Inc. had 40 full time brokers. The following table presents summary income statements and a reconciliation to the Company’s consolidated totals for the six months ended June 30, 2001 and 2000 (in thousands).
| Six months ended June 30, 2001 | ||||||
| Community Banking | Retail Brokerage Services | Administration and Eliminations | Consolidated | |||
| Interest Income | $ 29,088 | $ 40 | $ -- | $ 29,128 | ||
| Interest Expense | 10,998 | 59 | (59 | ) | 10,998 | |
| Net Interest Income | 18,090 | (19 | ) | 59 | 18,130 | |
| Provision for Loan Losses | 680 | -- | -- | 680 | ||
| Noninterest Income | 4,046 | 3,963 | (53 | ) | 7,956 | |
| Noninterest Expense | 12,991 | 3,876 | 83 | 16,950 | ||
| Income before Taxes | 8,465 | 68 | (77 | ) | 8,456 | |
| Income Tax Expense (Benefit) | 3,275 | 72 | (31 | ) | 3,316 | |
| Net Income | $ 5,190 ============== | $ (4 ============== | ) | $ (46 ============== | ) | $ 5,140 ============== |
Six months ended June 30, 2000 | ||||||
| Community Banking | Retail Brokerage Services | Administration and Eliminations | Consolidated | |||
| Interest Income | $ 26,003 | $ 31 | $ -- | $ 26,034 | ||
| Interest Expense | 8,914 | -- | -- | 8,914 | ||
| Net Interest Income | 17,089 | 31 | -- | 17,120 | ||
| Provision for Loan Losses | 1,035 | -- | -- | 1,035 | ||
| Noninterest Income | 3,146 | 2,724 | (47 | ) | 5,823 | |
| Noninterest Expense | 11,620 | 2,319 | (47 | ) | 13,892 | |
| Income before Taxes | 7,580 | 436 | -- | 8,016 | ||
| Income Tax Expense (Benefit) | 2,785 | 182 | (29 | ) | 2,938 | |
| Net Income | $ 4,795 ============== | $ 254 ============== | $ 29 ============== | $ 5,078 ============== | ||
Total assets by segment have not changed materially since December 31, 2000.
8
(3) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations”. The statement discontinues the use of the pooling of interest method of accounting for business combinations. The statement is effective for all business combinations initiated after June 30, 2001. Management has completed an evaluation of the effects of this statement and does not believe that it will have a material effect on the Company’s consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. The statement will require discontinuing the amortization of goodwill and other intangible assets with indefinite useful lives. Instead, these assets will be tested periodically for impairment and written down to their fair market value as necessary. This statement is effective for fiscal years beginning after December 15, 2001, however, early adoption is allowed for companies that have not issued first quarter financial statements as of July 1, 2001. The Company plans to adopt the provisions of this statement on January 1, 2002, and is currently evaluating the effect on the Company’s consolidated financial statements.
(4) ACQUISITION OF INDEPENDENT FINANCIAL NETWORK
On June 22, 2001 the Company announced an agreement to acquire Independent Financial Network (IFN), a multi-bank holding company based in Coos Bay, Oregon with subsidiaries throughout Southwest Oregon. Upon approval of the agreement, IFN shareholders will receive 0.827 shares of Umpqua Holdings Corporation common stock for each share of IFN stock. All of IFN’s subsidiary banks will be consolidated into Umpqua Bank which will have consolidated assets of approximately $1.2 billion. The acquisition will be accounted for using the pooling method of accounting. Completion of the merger is expected by the end of 2001 and is subject to regulatory and shareholder approval.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains a review of Umpqua Holdings Corporation’s (the Company) financial condition at June 30, 2001 and the operating results for the three and six month periods then ended. When warranted, comparisons are made to the same periods in 2000 and to December 31, 2000. This discussion should be read in conjunction with the financial statements (unaudited) contained elsewhere in this report. All numbers, except per share data, are expressed in thousands of dollars.
This discussion contains certain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated. These risks and uncertainties include the Company’s ability to maintain or expand its market share and net interest margins, or to implement its marketing and growth strategies. Further, actual results may be affected by the Company’s ability to compete on price and other factors with other financial institutions; customer acceptance of new products and services; and general trends in the banking and the regulatory environment, as they relate to the Company’s cost of funds and returns on assets. In addition there are risks inherent in the banking industry relating to the collectability of loans and changes in interest rates. The reader is advised that this list of risks is not exhaustive and should not be construed as any prediction by the Company as to which risks would cause actual results to differ materially from those indicated by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.
9
Financial Highlights
On a pre-merger expense basis, the Company earned $2,915 for the quarter ended June 30, 2001 compared with $2,548 for the same period in 2000, a 14.4% increase. Diluted earnings per share excluding merger expenses improved to $0.20 for the quarter ended June 30, 2001 compared with $0.18 for the quarter ended June 30, 2000. Return on average shareholders’ equity was 14.2% and return on average assets was 1.47% for the quarter ended June 30, 2001 before merger related expenses. Including merger expenses of $181 ($110 net of tax) the Company earned $2,805 for the quarter ended June 30, 2001.
Excluding merger-related expenses the Company earned $5,736 for the six months ended June 30, 2001 compared with $5,078 for the comparable period in 2000, a 13.0% increase. Return on average shareholders’ equity was 14.3% and return on average assets was 1.47% for the six months ended June 30, 2001 before merger related expenses. Including merger expenses of $969 ($596 net of tax) the Company earned $5,140 for the six months ended June 30, 2001.
| Six months ended June 30, | Three months ended June 30, | |||||
| 2001 | 2000 | % of change | 2001 | 2000 | % of change | |
| Interest income | $ 29,127,734 | $ 26,033,619 | 11.9% | $ 14,455,402 | $ 13,378,293 | 8.1% |
| Interest expense | 10,998,117 | 8,914,460 | 23.4% | 5,262,342 | 4,613,233 | 14.1% |
| Net interest income | 18,129,617 | 17,119,159 | 5.9% | 9,193,060 | 8,765,060 | 4.9% |
| Provision for loan losses | 680,000 | 1,034,500 | -34.3% | 420,000 | 584,500 | -28.1% |
| Non interest income | 7,956,423 | 5,823,333 | 36.6% | 4,155,317 | 2,835,632 | 46.5% |
| Non interest expense | 15,980,708 | 13,891,708 | 15.0% | 8,229,997 | 6,923,912 | 18.9% |
| Operating income before merger expense | 9,425,332 | 8,016,284 | 17.6% | 4,698,380 | 4,092,280 | 14.8% |
| Income Taxes | 3,689,213 | 2,938,001 | 25.6% | 1,783,682 | 1,543,492 | 15.6% |
| Income before merger expenses | 5,736,119 | 5,078,283 | 13.0% | 2,914,698 | 2,548,788 | 14.4% |
| Merger expenses net of tax benefit (1) | 596,077 | -- | 109,916 | -- | ||
| Net income | $ 5,140,042 =========== | $ 5,078,283 =========== | 1.2% | $ 2,804,782 =========== | $ 2,548,788 =========== | 10.0% |
Total assets reached $826.6 million at June 30, 2001, a $41.0 million increase since December 31, 2001.
Results of Operations
Net interest income
Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income generated from earning assets, primarily loans and investment securities, and interest expense paid on customer deposits and debt. Changes in net interest income result from changes in “volume” and “rate”. Volume refers to the level of interest earning assets and interest bearing liabilities while rate refers to the underlying yields on assets and costs of liabilities.
Net interest income on a taxable equivalent basis was $9,408 for the quarter ended June 30, 2001 compared with $9,007 for the same period in 2000 (Tables 1 and 2). The increase of $402 was primarily attributable to an increase in the volume of earning assets, offset by a compression in the net interest margin. Average earning assets increased $85.9 million or 13.4% compared with the same period in the prior year. Average loans, the largest component of earning assets, increased $101.4 million on average compared with the prior year period. Average investment securities available-for-sale decreased $51.1 million in the current year due to maturities and calls. Partly due to these maturities and calls, the average volume of temporary investments increased $36.1 million compared with the prior year. Overall, the yield on earning assets decreased to 8.11% for the quarter compared with 8.56% for the same period in the prior year. Average interest bearing liabilities increased $56.4 million compared with the prior year period. Of this increase, $70.6 million was in the time deposit category, generally the most expensive deposit product, offset by a $17.4 million decrease in term borrowings. As a result of the mix changes in interest bearing liabilities, the average cost of those liabilities increased 0.08% to 3.90% for the quarter ended June 30, 2001. Somewhat offsetting the increase in interest bearing liability cost was a $19.6 million increase in average noninterest bearing deposits. As a result of the preceding changes, the interest spread (the difference between the yield on earning assets and the cost of interest bearing liabilities) decreased 0.53% to 4.22% for the quarter ended June 30, 2001 compared with the same period in the prior year. The net interest margin for the quarter ended June 30, 2001 was 5.20%, a decrease of 0.46% from the same period in the prior year.
10
| Table 1 | QUARTER ENDED JUNE 30, 2001 | QUARTER ENDED JUNE 30, 2000 | ||||||
| AVERAGE BALANCE | INTEREST INCOME OR EXPENSE | AVERAGE YIELDS OR RATES | AVERAGE BALANCE | INTEREST INCOME OR EXPENSE | AVERAGE YIELDS OR RATES | |||
| (in thousands) INTEREST-EARNING ASSETS: Loans and loans held for sale (2) | $579,643 | $ 12,577 | 8.70% | $478,264 | $10,956 | 9.21% | ||
| Investment securities- Available for sale Taxable securities | 57,855 | 865 | 5.98% | 109,892 | 1,745 | 6.35% | ||
| Non-taxable securities(1) | 22,181 | 370 | 6.68% | 21,230 | 359 | 6.76% | ||
| Investment securities- Held to maturity (1) | 16,399 | 303 | 7.40% | 17,761 | 360 | 8.11% | ||
| Trading account assets | 1,763 | 29 | 6.69% | 932 | 25 | 10.73% | ||
| Temporary investments | 47,664 | 527 | 4.43% | 11,563 | 175 | 6.09% | ||
| Total interest earning assets | 725,505 | 14,671 | 8.11% | 639,642 | 13,620 | 8.56% | ||
| Allowance for loan losses | (7,502 | ) | (7,578 | ) | ||||
| Other assets | 75,044 | 71,836 | ||||||
| Total assets | $793,047 ============ | $ 703,900 ============ | ||||||
INTEREST-BEARING LIABILITIES: Interest-bearing checking and savings accounts | $278,963 | $ 1,537 | 2.21% | $280,695 | $1,725 | 2.47% | ||
| Time deposits | 243,317 | 3,496 | 5.76% | 172,750 | 2,436 | 5.67% | ||
| Repurchase agreements | 4,928 | 45 | 3.66% | -- | -- | -- | ||
| Term debt | 14,602 | 185 | 5.08% | 32,013 | 452 | 5.68% | ||
| Total interest-bearing liabilities | 541,810 | 5,263 | 3.90% | 485,458 | 4,613 | 3.82% | ||
| Non-interest-bearing deposits | 162,711 | 143,112 | ||||||
| Other liabilities | 5,973 | 2,081 | ||||||
| Total liabilities | 710,494 | 630,651 | ||||||
| Shareholders' equity | 82,553 | 73,249 | ||||||
| Total liabilities and shareholders' equity | $793,047 ========== | $703,900 ========== | ||||||
| NET INTEREST INCOME (1) | $9,408 ========== | $9,007 ========== | ||||||
| NET INTEREST SPREAD | 4.21% | 4.74% | ||||||
AVERAGE YIELD ON EARNING ASSETS (1),(2) | 8.11% | 8.56% | ||||||
| INTEREST EXPENSE TO EARNING ASSETS | 2.91% | 2.90% | ||||||
| NET INTEREST INCOME TO EARNING ASSETS(1),(2) | 5.20% ========== | 5.66% ========== | ||||||
| (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 $210 and $164 for 2001 and 2000, respectively. |
| (2) | Non-accrual loans are included in average balance. |
11
Table 2 Analysis of changes in interest differential The following table sets forth, on a tax-equivalent basis, a summary of the changes in net interest income resulting from changes in volumes and rates. Changes not due solely to changes in volume or rate are allocated to rate.
| Table 2 | QTD 6/30/01 COMPARED TO QTD 6/30/00 | |||||
| INCREASE (DECREASE) DUE TO CHANGE IN | ||||||
| VOLUME | RATE | NET CHANGE | ||||
| (in thousands) INTEREST-EARNING ASSETS: Loans(1) | $ 2,329 | $ (708 | ) | $ 1,621 | ||
| Investment securities- Available for sale Taxable securities | (826 | ) | (54 | ) | (880 | ) |
| Non-taxable securities(1) | 16 | (5 | ) | 11 | ||
| Investment securities- Held to maturity (1) | (28 | ) | (29 | ) | (57 | ) |
| Trading account assets | 22 | (18 | ) | 4 | ||
| Temporary investments | 548 | (196 | ) | 352 | ||
| Total (1) | 2,061 | (1,010 | ) | 1,051 | ||
INTEREST-BEARING LIABILITIES: Interest-bearing checking and savings accounts | (11 | ) | (177 | ) | (188 | ) |
| Time deposits | 998 | 63 | 1,061 | |||
| Repurchase agreements | 45 | -- | 45 | |||
| Term Debt | (247 | ) | (21 | ) | (268 | ) |
| Total | 785 | (135 | ) | 650 | ||
| Net increase (decrease) in net interest income | $1,276 ============= | $(875 ============= | ) | $401 ============= | ||
| (1) | Tax-exempt interest income has been adjusted to a tax equivalent basis at a 35% effective tax rate. |
Net interest income on a taxable equivalent basis was $18,576 for the six months ended June 30, 2001 compared with $17,605 for the same period in 2000 (Tables 3 and 4). The increase was due to the increase in average earning assets in 2001 compared with 2000. Average earning assets were $717.8 million in 2001 compared with $630.4 million in 2000. Average loans, the largest component of earning assets, increased $91.3 million for the first six months of 2001 compared with the same period in the prior year. The yield on earning assets decreased from 8.51% for the six months ended June 30, 2000 to 8.31% for the same period in 2001. The decrease was primarily due to decreases in the yield on loans and temporary investments. The cost of interest bearing liabilities increased to 4.10% for the six months ended June 30, 2001 compared with 3.73% for the first six months of 2000. The increase was due partially to increases in the cost of time deposits, as well as a change in the mix of interest-bearing liabilities. Average time deposits were 34% of interest-bearing liabilities for the first six months of 2000 compared with 45% of interest bearing deposits for the first six months of 2001. As a result of the preceding changes, the interest spread (the difference between the yield on earning assets and the cost of interest bearing liabilities) decreased 0.56% to 4.21% for the six months ended June 30, 2001 compared with the same period in the prior year. The net interest margin for the six months ended June 30, 2001 was 5.22%, a decrease of 0.43% from the same period in the prior year.
12
| Table 3 | SIX MONTHS ENDED ENDED JUNE 30, 2001 | SIX MONTHS ENDED JUNE 30, 2000 | ||||||
| AVERAGE BALANCE | INTEREST INCOME OR EXPENSE | AVERAGE YIELDS OR RATES | AVERAGE BALANCE | INTEREST INCOME OR EXPENSE | AVERAGE YIELDS OR RATES | |||
| (in thousands) INTEREST-EARNING ASSETS: Loans and loans held for sale (2) | $559,504 | $24,847 | 8.96% | $468,165 | $21,191 | 9.15% | ||
| Investment securities- Available for sale Taxable securities | 72,963 | 2,267 | 6.21% | 111,825 | 3,544 | 6.34% | ||
| Non-taxable securities(1) | 22,293 | 746 | 6.69% | 21,275 | 716 | 6.73% | ||
| Investment securities- Held to maturity (1) | 16,716 | 615 | 7.36% | 17,886 | 725 | 8.11% | ||
| Trading account assets | 1,503 | 57 | 7.53% | 729 | 35 | 9.60% | ||
| Temporary investments | 44,818 | 1,043 | 4.69% | 10,542 | 308 | 5.91% | ||
| Total interest earning assets | 717,797 | 29,575 | 8.31% | 630,422 | 26,519 | 8.51% | ||
| Allowance for loan losses | (7,349 | ) | (7,480 | ) | ||||
| Other assets | 76,407 | 72,459 | ||||||
| Total assets | $786,854 ======== | $695,401 ======== | ||||||
INTEREST-BEARING LIABILITIES: Interest-bearing checking and savings accounts | $279,231 | $3,376 | 2.44% | $282,016 | $3,556 | 2.55% | ||
| Time deposits | 241,799 | 7,147 | 5,96% | 164,037 | 4,330 | 5.34% | ||
| Repurchase agreements | 5,114 | 108 | 4.26% | -- | -- | |||
| Term debt | 14,608 | 368 | 5.08% | 36,622 | 1,028 | 5.68% | ||
| Total interest-bearing liabilities | 540,750 | 10,999 | 4.10% | 482,675 | 8,914 | 3.73% | ||
| Non-interest-bearing deposits | 159,988 | 137,129 | ||||||
| Other liabilities | 4,622 | 3,430 | ||||||
| Total liabilities | 705,361 | 623,234 | ||||||
| Shareholders' equity | 81,494 | 72,167 | ||||||
| Total liabilities and shareholders' equity | $786,854 ======== | $695,401 ======== | ||||||
| NET INTEREST INCOME (1) | $18,576 ======== | $17,605 ======== | ||||||
| NET INTEREST SPREAD | 4.21% | 4.77% | ||||||
AVERAGE YIELD ON EARNING ASSETS (1),(2) | 8.31% | 8.51% | ||||||
| INTEREST EXPENSE TO EARNING ASSETS | 3.09% | 2.86% | ||||||
| NET INTEREST INCOME TO EARNING ASSETS (1),(2) | 5.22% ======== | 5.65% ======== | ||||||
| (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 $427 and $595 for 2001 and 2000, respectively. |
| (2) | Non-accrual loans are included in average balance. |
13
| Table 4 | 2001 COMPARED TO 2000 | |||||
| INCREASE (DECREASE) DUE TO CHANGE IN | ||||||
| VOLUME | RATE | NET CHANGE | ||||
| (in thousands) INTEREST-EARNING ASSETS: Loans(1) | $ 4,146 | $ (490 | ) | $ 3,656 | ||
| Investment securities- Available for sale Taxable securities | (1,232 | ) | (45 | ) | (1,277 | ) |
| Non-taxable securities(1) | 34 | (4 | ) | 30 | ||
| Investment securities- Held to maturity (1) | (47 | ) | (62 | ) | (109 | ) |
| Trading account assets | 37 | (16 | ) | 21 | ||
| Temporary investments | 1,004 | (269 | ) | 735 | ||
| Total (1) | 3,942 | (886 | ) | 3,056 | ||
INTEREST-BEARING LIABILITIES: Interest-bearing checking and savings accounts | (35 | ) | (145 | ) | (180 | ) |
| Time deposits | 2,058 | 759 | 2,817 | |||
| Repurchase agreements | 108 | -- | 108 | |||
| Term Debt | (620 | ) | (40 | ) | (660 | ) |
| Total | 1,511 | 574 | 2,085 | |||
| Net increase (decrease) in net interest income | $2,431 ============= | $(1,460 ============= | ) | $971 ============= | ||
| (1) | Tax-exempt interest income has been adjusted to a tax equivalent basis at a 35% effective tax rate. |
Provision for Loan Losses
The provision for loan losses is management’s estimate of the amount necessary to maintain an allowance for loan losses that is considered adequate based on the risk of losses in the loan portfolio (see additional discussion under Allowance for Loan Losses). The provision for loan losses for the quarter ended June 30, 2001 was $420 compared with $585 during the second quarter of 2000. Net charge-offs were $63 for the three months ended June 30, 2001 compared with net charge-offs of $743 for the same period in 2000.
The provision for loan losses was $680 for the six months ended June 30, 2001 compared with $1,035 for the first six months of 2000. Net charge-offs were $121 for the first six months of 2001 compared with $743 for the first six months of 2000.
Nonperforming assets at June 30, 2001 were $1,967, up from $931 at December 31, 2000. The allowance for loan losses totaled $7,656, or 1.31% of total loans, at June 30, 2001 compared with $7,096, or 1.34% of total loans at December 31, 2000.
14
Noninterest Income
Noninterest income for the quarter ended June 30, 2001 was $4,155, a $1,319 increase over the same period in 2000. Brokerage commissions and fees, the largest component of noninterest income increased $773 over the prior year. This increase was due to the acquisition of Adams, Hess, Moore & Co. (Adams, Hess) by Strand, Atkinson in August 2000. Revenue generated by Adams, Hess was $674 in the second quarter of 2001. Service charges, the second largest component of noninterest income increased $329 compared with the same quarter in the prior year. Service charges increased primarily due to deposit fee repricings that occurred during the first quarter of 2001. These repricings were a result of the integration of the deposit products at the Bank.
For the first six months of 2001 noninterest income was $7,956 compared with $5,823 for the same period in the prior year. Brokerage commissions and fees were up $1,223 for the first six months of 2001 due primarily to the acquisition of Adams, Hess. Revenue generated by Adams, Hess was $1,294 for the first six months of 2001. Service charges were $2,977 for the six months ended June 30, 2001 compared with $2,386 for the first six months of 2000, a 25% increase.
Noninterest Expense
Noninterest expense for the quarter ended June 30, 2001 was $8,411 compared with $6,924 for the same period in 2000. Salaries and employee benefits expense was $4,304 for the quarter ended June 30, 2001, up $258 compared with the same period in 2000. Salaries and benefits at Strand, Atkinson increased $548 due primarily to the acquisition of Adams, Hess in August 2000. Premises and equipment expense was $1,211for the quarter ended June 30, 2001, an increase of $242 from the same period in the prior year. The increase was attributable to the acquisition of Adams, Hess as well as the opening of a new store in Central Point in February 2001 and increased data processing expenses. Other noninterest expense which consists of marketing, services, insurance, other fees, communication costs, intangible amortization and other expense increased $802 over the second quarter of 2000 to $2,715. Merger expenses were $181 for the quarter ended June 30, 2001 and were related to the acquisition of Valley of the Rogue Bank in November 2000. No additional charges are anticipated related to this merger.
Noninterest expense for the six months ended June 30, 2001 was $16,949 compared with $13,892 for the same period in the prior year.
Details of merger expenses incurred in 2001 were as follows:
| Professional fees | $ 88 | |
| Supplies | 48 | |
| Severance and relocation | 284 | |
| Premises and equipment write-downs | 212 | |
| Computer conversions | 161 | |
| Other | 176 | |
| Total | $ 969 |
Accrued merger expenses at June 30, 2001 were $206 and consisted of accrued severance and related expenses.
15
Income taxes
The effective tax rate for the Company was 37.9% during the second quarter of 2001 compared with 37.7% during the first quarter of 2000. The effective tax rate for the first six months of 2001 was 39.2% compared with 36.7% during the first six months of 2000.
Financial Condition
Significant changes in the Company's financial position from December 31, 2000 to June 30, 2001 are as follows:
Investment Securities Available for Sale
Investment securities have decreased $55.8 million since year-end 2000 due primarily to early calls of approximately $50 million of U.S. agency securities. The cash flows from these calls has been temporarily invested in federal funds sold and interest bearing balances in other banks, which together have increased $35.8 million since year-end.
Loans
Loans have increased $54.3 million since year-end. Details of the loan portfolio at June 30, 2001 and December 31, 2000:
| June 30, 2001 | December 31, 2000 | |
| Commercial & Industrial | $100,183 | $104,559 |
| Real Estate: Construction | 76,902 | 67,790 |
| Residential and commercial | 358,419 | 308,423 |
| Individuals | 48,357 | 47,662 |
| Other | 609 | $ 1,709 |
| Total Loans | $584,470 ============= | $530,143 ============= |
Commitments to extend credit were $106 million at June 30, 2001 and $108 million at December 31, 2000.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered by management to be adequate to absorb losses inherent in the loan portfolio. Management monitors and evaluates the adequacy of the allowance on an ongoing basis. The following tools are used to manage and evaluate the loan portfolio:
- Internal credit review and risk grading system
- Regulatory examination results
- Monitoring of charge-off, past due and non-performing activity and trends
- Assessment of economic and business conditions in our market areas
On a quarterly basis losses inherent in the portfolio are estimated by reviewing the following key elements of the loan portfolio:
16
- Portfolio performance measures
- Portfolio mix
- Portfolio growth rates
- Historical loss rates
- Portfolio concentrations
- Current economic conditions in our market areas
The Company also tests the adequacy of the allowance for loan losses using the following methodologies:
- Loss allocation by internally assigned risk rating
- Loss allocation by portfolio type based on historic loan loss experience
- The allowance as a percentage of total loans
The allowance for loan losses is based upon estimates of losses inherent in the portfolio. The amount of losses actually incurred can vary significantly from these estimates. Assessing the adequacy of the allowance on a quarterly basis allows management to adjust these estimates based upon the most recent information available.
Activity in the allowance for loan losses was as follows for the three and six month periods ending June 30, 2001 and 2000:
| Three months ended June 30,2001 | Year to Date June 30,2001 | Three months ended June 30,2000 | Year to Date June 30,2000 | |||||
| Beginning Balance | $7,298 | $7,096 | $7,279 | $6,973 | ||||
| Provision for Loan Losses | 420 | 680 | 585 | 1,035 | ||||
| Charge-offs | (90 | ) | (182 | ) | (616 | ) | (780 | ) |
| Recoveries | 28 | 62 | 16 | 36 | ||||
| Net charge-offs/recoveries | (62 | ) | (120 | ) | (600 | ) | (744 | ) |
| Ending Balance | $7,656 ============ | $7,656 ============ | $7,264 ============ | $7,264 ============ |
17
Deposits
Deposits have grown from $681 million at December 31, 2000 to $713 million at June 30, 2001. Details of deposits at December 31, 2000 and June 30, 2001 were as follows:
| June 30, 2001 | December 31, 2000 | |
| Noninterest bearing demand | $ 176,686 | $ 161,351 |
| Interest Bearing demand and Money market accounts | 237,305 | 246,192 |
| Savings | 45,265 | 43,072 |
| Time deposits | 253,936 | 230,690 |
| Ttotal Deposits | $ 713,192 ============== | $ 681,305 ============== |
Liquidity
Liquidity enables the Company to meet the borrowing needs of its customers and withdrawals of its depositors. The Company meets its liquidity needs through the maintenance of cash resources, lines of credit with other financial institutions, maturities and sales of investment securities available for sale, and a stable base of core deposits. Having a stable and diversified deposit base is a significant factor in the Company’s long-term liquidity structure. At June 30, 2001 the Company had overnight investments of $68.7 million and available lines of credit of approximately $200 million with various financial institutions.
Capital Resources
Total shareholders’ equity increased $5.0 million to $83.8 million at June 30, 2001. The increase was the result of earnings of $5.1 million, a $0.7 million increase in accumulated other comprehensive income and $0.3 million from the exercise of stock options, offset by dividends paid of $1.2 million. At June 30, 2001 the Company’s Tier 1 and total risk-based capital ratios were approximately 10.76% and 13.04%. The Federal Reserve Board’s minimum risk-based capital ratio guidelines for Tier 1 and total capital are 4% and 8% respectively.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company considers interest rate, credit and operations risks as the most significant risks impacting the Company. Other types of market risk, such as foreign exchange risk and commodity price risk, do not impact the Company in the normal course of operations.
The Company relies on prudent underwriting standards, loan reviews and an adequate allowance for loan losses to mitigate credit risk. Internal controls and periodic internal audits of business operations mitigate operations risk.
18
The Company uses an asset/liability model to measure and monitor interest rate risk. The model projects net interest income for the upcoming twelve months in various interest rate scenarios. The model the Company uses includes assumptions regarding prepayments of assets and early withdrawals of liabilities, the level and mix of interest earning assets and interest bearing liabilities, the level and responsiveness of interest rates on deposit products without stated maturities and the level of nonperforming assets. These assumptions are based on management’s judgment and future expected pricing behavior. Actual results could vary significantly from the results derived from the model. The Company’s interest rate risk has not changed materially since December 31, 2000. The Company also has increased its emphasis on noninterest sources of revenue in order to further stabilize future earnings.
Part II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual shareholders' meeting on April 25, 2001. At the meeting the following Directors were elected to serve 3-year terms:
| Votes For | Votes Withheld | |
| Raymond P. Davis | 11,991,679 | 65,322 |
| David B. Frohnmayer | 11,871,495 | 185,506 |
| William A. Haden | 11,926,261 | 130,740 |
The following Directors continued to serve out the remainder of their terms, either 1 or 2 years: Scott Chambers, James Coleman, Ronald Doan, John Dunkin, Allyn Ford, Lynn Herbert, and Larry Parducci.
Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits NONE | |
| (b) | Reports on Form 8-K |
On June 22, 2001, Umpqua filed a report on Form 8-K (Item 5) announcing that Umpqua and Independent Financial Network, Inc. ("IFN") entered into an Agreement and Plan of Reorganization, pursuant to which IFN will merge with and into Umpqua.
19
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UMPQUA HOLDINGS CORPORATION
(Registrant)
| Dated: September 21, 2001 | /s/ Raymond P. Davis Raymond P. Davis President and Chief Executive Officer |
| Dated: September 21, 2001 | /s/ Daniel A. Sullivan Daniel A. Sullivan Executive Vice President and Chief Financial Officer |
20