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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended: September 30, 2005 |
o | 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 | (I.R.S. Employer Identification Number) | |||||
of Incorporation or Organization) |
One SW Columbia Street, Suite 1200
Portland, Oregon 97258
(Address of Principal Executive Offices)(Zip Code)
Portland, Oregon 97258
(Address of Principal Executive Offices)(Zip Code)
(503) 727-4100
(Registrant’s Telephone Number, Including Area Code)
(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.
þ Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
þ Yes o No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
Indicate 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: 44,510,039 shares outstanding as of October 31, 2005
UMPQUA HOLDINGS CORPORATION
FORM 10-Q
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FORM 10-Q
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EXHIBIT 99.1 |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, | December 31, | |||||||
(in thousands, except shares) | 2005 | 2004 | ||||||
ASSETS | ||||||||
Cash and due from banks | $ | 143,138 | $ | 94,561 | ||||
Temporary investments | 29,027 | 23,646 | ||||||
Total cash and cash equivalents | 172,165 | 118,207 | ||||||
Trading account assets | 830 | 1,577 | ||||||
Investment securities available for sale, at fair value | 697,231 | 675,984 | ||||||
Investment securities held to maturity, at amortized cost | 10,676 | 11,807 | ||||||
Mortgage loans held for sale | 20,202 | 20,791 | ||||||
Loans | 3,696,820 | 3,467,904 | ||||||
Allowance for loan losses | (43,603 | ) | (44,229 | ) | ||||
Net loans | 3,653,217 | 3,423,675 | ||||||
Federal Home Loan Bank stock, at cost | 14,259 | 14,218 | ||||||
Premises and equipment, net | 88,577 | 85,681 | ||||||
Goodwill and other intangible assets, net | 407,059 | 408,460 | ||||||
Mortgage servicing rights, net | 10,729 | 11,154 | ||||||
Other assets | 111,437 | 101,481 | ||||||
Total assets | $ | 5,186,382 | $ | 4,873,035 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Deposits | ||||||||
Noninterest bearing | $ | 1,071,940 | $ | 891,731 | ||||
Interest bearing | 3,021,026 | 2,907,376 | ||||||
Total deposits | 4,092,966 | 3,799,107 | ||||||
Securities sold under agreements to repurchase and federal funds purchased | 145,551 | 88,267 | ||||||
Term debt | 3,236 | 88,451 | ||||||
Junior subordinated debentures | 165,847 | 166,256 | ||||||
Other liabilities | 52,018 | 43,341 | ||||||
Total liabilities | 4,459,618 | 4,185,422 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 10) | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, no par value, 100,000,000 shares authorized; issued and outstanding: 44,476,104 in 2005 and 44,211,075 in 2004 | 563,640 | 560,611 | ||||||
Retained earnings | 170,153 | 128,112 | ||||||
Accumulated other comprehensive loss | (7,029 | ) | (1,110 | ) | ||||
Total shareholders’ equity | 726,764 | 687,613 | ||||||
Total liabilities and shareholders’ equity | $ | 5,186,382 | $ | 4,873,035 | ||||
See accompanying notes to condensed consolidated financial statements
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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
INTEREST INCOME | ||||||||||||||||
Interest and fees on loans | $ | 65,579 | $ | 50,875 | $ | 182,735 | $ | 115,530 | ||||||||
Interest and dividends on investment securities | ||||||||||||||||
Taxable | 6,558 | 7,283 | 19,359 | 17,126 | ||||||||||||
Exempt from federal income tax | 427 | 748 | 1,839 | 1,557 | ||||||||||||
Dividends | 40 | 150 | 121 | 312 | ||||||||||||
Other interest income | 617 | 209 | 1,304 | 293 | ||||||||||||
Total Interest Income | 73,221 | 59,265 | 205,358 | 134,818 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Interest on deposits | 16,101 | 8,941 | 40,910 | 20,616 | ||||||||||||
Interest on federal funds purchased and repurchase agreements | 511 | 206 | 1,419 | 528 | ||||||||||||
Interest on term debt | 89 | 730 | 633 | 1,439 | ||||||||||||
Interest on junior subordinated debentures | 2,719 | 1,979 | 7,663 | 4,222 | ||||||||||||
Total interest expense | 19,420 | 11,856 | 50,625 | 26,805 | ||||||||||||
Net interest income | 53,801 | 47,409 | 154,733 | 108,013 | ||||||||||||
Provision for loan losses | — | 1,479 | 2,400 | 3,654 | ||||||||||||
Net interest income after provision for loan losses | 53,801 | 45,930 | 152,333 | 104,359 | ||||||||||||
NON-INTEREST INCOME | ||||||||||||||||
Service charges on deposit accounts | 5,778 | 5,570 | 16,026 | 11,970 | ||||||||||||
Brokerage commissions and fees | 2,735 | 2,736 | 8,743 | 8,641 | ||||||||||||
Mortgage banking revenue | 3,256 | 1,942 | 4,834 | 5,990 | ||||||||||||
Other income | 1,985 | 1,210 | 5,279 | 2,269 | ||||||||||||
Net gain on sale of investment securities | 28 | 13 | 1,426 | 19 | ||||||||||||
Total non-interest income | 13,782 | 11,471 | 36,308 | 28,889 | ||||||||||||
NON-INTEREST EXPENSE | ||||||||||||||||
Salaries and employee benefits | 20,708 | 19,685 | 61,348 | 47,103 | ||||||||||||
Net occupancy and equipment | 6,291 | 5,688 | 18,533 | 13,956 | ||||||||||||
Merger related expenses | — | 2,176 | 262 | 2,941 | ||||||||||||
Other expenses | 10,084 | 10,150 | 28,796 | 22,646 | ||||||||||||
Total non-interest expenses | 37,083 | 37,699 | 108,939 | 86,646 | ||||||||||||
Income before income taxes and discontinued operations | 30,500 | 19,702 | 79,702 | 46,602 | ||||||||||||
Provision for income taxes | 10,577 | 6,457 | 28,754 | 16,100 | ||||||||||||
Income from continuing operations | 19,923 | 13,245 | 50,948 | 30,502 | ||||||||||||
Income from discontinued operations, net of tax | — | 123 | — | 395 | ||||||||||||
Net income | $ | 19,923 | $ | 13,368 | $ | 50,948 | $ | 30,897 | ||||||||
BASIC EARNINGS PER SHARE | ||||||||||||||||
Continuing operations | $ | 0.45 | $ | 0.31 | $ | 1.15 | $ | 0.92 | ||||||||
Discontinued operations | — | 0.01 | — | 0.02 | ||||||||||||
Net income | $ | 0.45 | $ | 0.32 | $ | 1.15 | $ | 0.94 | ||||||||
DILUTED EARNINGS PER SHARE | ||||||||||||||||
Continuing operations | $ | 0.44 | $ | 0.31 | $ | 1.13 | $ | 0.91 | ||||||||
Discontinued operations | — | — | — | 0.01 | ||||||||||||
Net income | $ | 0.44 | $ | 0.31 | $ | 1.13 | $ | 0.92 | ||||||||
See accompanying notes to condensed consolidated financial statements
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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
Accumulated | ||||||||||||||||||||
Common Stock | Other | |||||||||||||||||||
Retained | Comprehensive | |||||||||||||||||||
Shares | Amount | Earnings | Loss | Total | ||||||||||||||||
(in thousands, except shares) | ||||||||||||||||||||
BALANCE AT JANUARY 1, 2004 | 28,411,816 | $ | 230,773 | $ | 89,058 | $ | (862 | ) | $ | 318,969 | ||||||||||
Net income | 47,166 | 47,166 | ||||||||||||||||||
Other comprehensive loss, net of tax: | ||||||||||||||||||||
Unrealized losses on securities arising during the year (1) | (248 | ) | (248 | ) | ||||||||||||||||
Comprehensive income | $ | 46,918 | ||||||||||||||||||
Deferred compensation earned during the year | 226 | 226 | ||||||||||||||||||
Stock repurchased and retired | (321,729 | ) | (6,062 | ) | (6,062 | ) | ||||||||||||||
Issuances of common stock under stock plans and related tax benefit | 629,661 | 9,018 | 9,018 | |||||||||||||||||
Stock issued in connection with acquisitions (Note 4) | 15,491,327 | 326,656 | 326,656 | |||||||||||||||||
Cash dividends | (8,112 | ) | (8,112 | ) | ||||||||||||||||
Balance at December 31, 2004 | 44,211,075 | $ | 560,611 | $ | 128,112 | $ | (1,110 | ) | $ | 687,613 | ||||||||||
BALANCE AT JANUARY 1, 2005 | 44,211,075 | $ | 560,611 | $ | 128,112 | $ | (1,110 | ) | $ | 687,613 | ||||||||||
Net income | 50,948 | 50,948 | ||||||||||||||||||
Other comprehensive loss, net of tax: | ||||||||||||||||||||
Unrealized losses on securities arising during the period (2) | (5,919 | ) | (5,919 | ) | ||||||||||||||||
Comprehensive income | $ | 45,029 | ||||||||||||||||||
Deferred compensation earned during the period | 732 | 732 | ||||||||||||||||||
Stock repurchased and retired | (83,981 | ) | (1,899 | ) | (1,899 | ) | ||||||||||||||
Issuances of common stock under stock plans and related tax benefit | 349,010 | 4,196 | 4,196 | |||||||||||||||||
Cash dividends | (8,907 | ) | (8,907 | ) | ||||||||||||||||
Balance at September 30, 2005 | 44,476,104 | $ | 563,640 | $ | 170,153 | $ | (7,029 | ) | $ | 726,764 | ||||||||||
(1) | 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). | |
(2) | Net unrealized holding loss on securities of $5.1 million (net of $3.4 million tax benefit), plus reclassification adjustment for net gains included in net income of $856,000 (net of $570,000 tax expense). |
See accompanying notes to condensed consolidated financial statements
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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Net income | $ | 19,923 | $ | 13,368 | $ | 50,948 | $ | 30,897 | ||||||||
Unrealized gains (losses) arising during the period on investment securities available for sale | (7,289 | ) | 15,229 | (8,439 | ) | 2,307 | ||||||||||
Add: Reclassification adjustment for gains realized in net income, net of tax (expense of $11 and $5 for the three months and $570 and $8 for the nine months periods ended September 30, 2005 and September 2004, respectively) | (17 | ) | (8 | ) | (856 | ) | (11 | ) | ||||||||
Less: Income tax expense (benefit) related to unrealized gains (losses) on investment securities, available for sale | (2,916 | ) | 6,244 | (3,376 | ) | 946 | ||||||||||
Net unrealized gains (losses) on investment securities available for sale | (4,390 | ) | 8,977 | (5,919 | ) | 1,350 | ||||||||||
Comprehensive income | $ | 15,533 | $ | 22,345 | $ | 45,029 | $ | 32,247 | ||||||||
See accompanying notes to condensed consolidated financial statements
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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended | ||||||||
(in thousands) | September 30, | |||||||
2005 | 2004 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net cash provided by operating activities of continuing operations | $ | 64,583 | $ | 50,512 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of investment securities available-for-sale | (168,603 | ) | (133,723 | ) | ||||
Sales and maturities of investment securities available-for-sale | 138,629 | 117,637 | ||||||
Redemption (purchases) of Federal Home Loan Bank stock | 120 | (3,037 | ) | |||||
Maturities of investment securities held-to-maturity | 1,156 | 2,291 | ||||||
Net loan and lease originations | (227,354 | ) | (261,860 | ) | ||||
Purchase of loans | (29,271 | ) | — | |||||
Disposals of furniture and equipment | 155 | — | ||||||
Acquisitions | — | 54,180 | ||||||
Proceeds from sales of loans | 25,252 | — | ||||||
Purchases of premises and equipment | (9,509 | ) | (7,211 | ) | ||||
Net cash used by investing activities | (269,425 | ) | (231,723 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net increase in deposit liabilities | 294,301 | 349,406 | ||||||
Net increase (decrease) in Fed funds purchased | 56,000 | (40,000 | ) | |||||
Net increase in securities sold under agreements to repurchase | 1,284 | 4,221 | ||||||
Dividends paid on common stock | (7,999 | ) | (3,969 | ) | ||||
Proceeds from stock options exercised | 2,260 | 3,357 | ||||||
Retirement of common stock | (1,899 | ) | (6,062 | ) | ||||
Repayment of term debt | (85,147 | ) | (14,191 | ) | ||||
Net cash provided by financing activities | 258,800 | 292,762 | ||||||
Net increase in cash and cash equivalents | 53,958 | 111,551 | ||||||
Cash and cash equivalents, beginning of period | 118,207 | 134,006 | ||||||
Cash and cash equivalents, end of period | $ | 172,165 | $ | 245,557 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 47,771 | $ | 24,120 | ||||
Income taxes | $ | 19,418 | $ | 8,947 |
See accompanying notes to consolidated financial statements
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 — Summary of Significant Accounting Policies
The accounting and financial reporting policies of Umpqua Holdings Corporation (referred to in this report as “we”, “our” or “the Company”) conform with accounting principles generally accepted in the United States of America. The accompanying interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Umpqua Bank (“Bank”), and Strand, Atkinson, Williams & York, Inc. (“Strand”). All material inter-company balances and transactions have been eliminated. The consolidated financial statements have not been audited. A more detailed description of our accounting policies is included in the 2004 Annual Report filed on Form 10-K. There have been no significant changes to these policies.
In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim period. Certain reclassifications of prior year amounts have been made to conform to current classifications.
Note 2 — Stock-Based Compensation
At September 30, 2005 the Company had a total of 2.0 million stock options issued under various plans (some assumed in connection with mergers) that were 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 prior acquisitions that were unvested as of the date the acquisitions were completed.
The Company’s stock compensation plan provides for granting of restricted stock awards. The restricted stock awards generally vest ratably over five years and are recognized as expense over that same period of time. For the three and nine months ended September 30, 2005, compensation expense of $63,000 and $179,000, respectively, was recognized in connection with restricted stock grants as compared to $56,000 and $162,000 for the comparable periods in 2004.
The following table presents the effect on net income and earnings per share if the fair value based method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123,Accounting for Stock-Based Compensation,as amended, had been applied to all outstanding and unvested awards in each period:
Stock-Based Compensation
(in thousands, except per share data)
(in thousands, except per share data)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
NET INCOME, AS REPORTED | $ | 19,923 | $ | 13,368 | $ | 50,948 | $ | 30,897 | ||||||||
Deduct: Additional stock-based employee compensation determined under the fair value based method for all awards, net of tax effects | (481 | ) | (368 | ) | (696 | ) | (835 | ) | ||||||||
Pro forma net income | $ | 19,442 | $ | 13,000 | $ | 50,252 | $ | 30,062 | ||||||||
INCOME FROM CONTINUING OPERATIONS, AS REPORTED | $ | 19,923 | $ | 13,245 | $ | 50,948 | $ | 30,502 | ||||||||
Deduct: Additional stock-based employee compensation determined under the fair value based method for all awards, net of tax effects | (481 | ) | (368 | ) | (696 | ) | (835 | ) | ||||||||
Pro forma income from continuing operations | $ | 19,442 | $ | 12,877 | $ | 50,252 | $ | 29,667 | ||||||||
NET INCOME PER SHARE: | ||||||||||||||||
Basic — as reported | $ | 0.45 | $ | 0.32 | $ | 1.15 | $ | 0.94 | ||||||||
Basic — pro forma | $ | 0.44 | $ | 0.31 | $ | 1.13 | $ | 0.91 | ||||||||
Diluted — as reported | $ | 0.44 | $ | 0.31 | $ | 1.13 | $ | 0.92 | ||||||||
Diluted — pro forma | $ | 0.43 | $ | 0.30 | $ | 1.12 | $ | 0.90 | ||||||||
INCOME FROM CONTINUING OPERATIONS PER SHARE: | ||||||||||||||||
Basic — as reported | $ | 0.45 | $ | 0.31 | $ | 1.15 | $ | 0.92 | ||||||||
Basic — pro forma | $ | 0.44 | $ | 0.31 | $ | 1.13 | $ | 0.90 | ||||||||
Diluted — as reported | $ | 0.44 | �� | $ | 0.31 | $ | 1.13 | $ | 0.91 | |||||||
Diluted — pro forma | $ | 0.43 | $ | 0.30 | $ | 1.12 | $ | 0.89 |
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Note 3 — 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. Except for standard representations and warranties, the Bank assumed no liability subsequent to completion of the sale.
The following table presents the contribution components from the Bank’s merchant bankcard operations for the three and nine months ended September 30, 2005 and 2004:
Contribution from Merchant Bankcard
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Other non-interest income | $ | — | $ | 202 | $ | — | $ | 652 | ||||||||
Provision for income taxes | — | (79 | ) | — | (257 | ) | ||||||||||
Income from discontinued operations, net of tax | $ | — | $ | 123 | $ | — | $ | 395 | ||||||||
At September 30, 2005, there was no remaining liability recorded in connection with professional fees and contract termination costs related to the sale of the merchant bankcard portfolio.
In accordance with SFAS No. 144,Impairment of Long-Lived Assets, the financial results related to the merchant bankcard operation have been reclassified asincome from discontinued operations, net of taxin the statements of income.
Note 4 — 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 provided the opportunity to enter growth markets in Northern California with an established franchise of 27 stores at the time of acquisition.
The aggregate purchase price was $328 million and included common stock valued at $310 million, stock options valued at $17 million and direct merger costs of $1 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.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
Fair Value of Humboldt Assets Acquired and Liabilities Assumed
(in thousands)
(in thousands)
Assets acquired: | ||||
Investment securities | $ | 219,430 | ||
Loans, net | 1,042,038 | |||
Premises & equipment, net | 28,252 | |||
Goodwill | 238,205 | |||
Core deposit intangible asset | 11,646 | |||
Other assets | 122,268 | |||
Total assets acquired | $ | 1,661,839 | ||
Liabilities assumed: | ||||
Deposits | $ | 1,192,059 | ||
Term debt | 47,142 | |||
Junior subordinated debentures | 68,561 | |||
Other liabilities | 27,211 | |||
Total liabilities assumed | 1,334,973 | |||
Net assets acquired | $ | 326,866 | ||
Subsequent to the acquisition, certain of these assets were adjusted as part of the allocation of the purchase price. Additional
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adjustments may be made to the purchase price allocation, specifically related to tax adjustments. At September 30, 2005, the goodwill asset recorded in connection with the Humboldt acquisition was $237.8 million.
The following table presents unaudited pro forma results of operations for nine months ended September 30, 2004 as if the acquisition of Humboldt had occurred on January 1, 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. Any revenue enhancements and cost savings as a result of the Humboldt merger have not been reflected in the pro forma consolidated condensed statements of income. No assurance can be given with respect to the ultimate level of such revenue 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, 2004:
Pro Forma Financial Information — Unaudited
(in thousands, except per share data) | Nine Months Ended September 30, 2004 | |||||||||||||||||||||||
Pro Forma | Pro Forma | |||||||||||||||||||||||
Umpqua | Humboldt (d) | CIB (e) | Adjustments | Combined | ||||||||||||||||||||
Net interest income | $ | 108,013 | $ | 32,607 | $ | 165 | $ | 736 | (a | ) | $ | 141,521 | ||||||||||||
Provision for loan losses | 3,654 | 1,243 | — | — | 4,897 | |||||||||||||||||||
Non-interest income | 28,889 | 6,935 | 34 | — | 35,858 | |||||||||||||||||||
Non-interest expense | 86,646 | 26,852 | 18 | 1,198 | (b | ) | 114,714 | |||||||||||||||||
Income from continuing operations, before income taxes | 46,602 | 11,447 | 181 | (462 | ) | 57,768 | ||||||||||||||||||
Provision for income taxes | 16,100 | 3,503 | 65 | (194 | ) | (c | ) | 19,474 | ||||||||||||||||
Income from continuing operations | $ | 30,502 | $ | 7,944 | $ | 116 | $ | (268 | ) | $ | 38,294 | |||||||||||||
Earnings per share from continuing operations: | ||||||||||||||||||||||||
Basic | $ | 0.92 | $ | 0.86 | ||||||||||||||||||||
Diluted | $ | 0.91 | $ | 0.84 | ||||||||||||||||||||
Average shares outstanding: | ||||||||||||||||||||||||
Basic | 33,011 | 44,436 | ||||||||||||||||||||||
Diluted | 33,516 | 45,422 |
(a) | Includes $1.45 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 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. |
The following table summarizes activity in the Company’s accrued restructuring charges related to the Humboldt acquisition as well as prior acquisition of Centennial Bancorp:
(in thousands) | Humboldt and Centennial | |||||||
2005 | 2004 | |||||||
Beginning balance | $ | 1,333 | $ | 377 | ||||
Additions: | ||||||||
Charged to merger expense | — | 304 | ||||||
Charged to goodwill | 153 | 2,113 | ||||||
Charged to deferred tax asset | — | 319 | ||||||
Charged to fixed assets | — | 349 | ||||||
Utilization: | ||||||||
Reductions credited to goodwill | — | (363 | ) | |||||
Reductions credited to merger expense | — | (147 | ) | |||||
Reclassifications | — | (459 | ) | |||||
Payments and write-offs | (1,225 | ) | (1,160 | ) | ||||
Ending Balance | $ | 261 | $ | 1,333 | ||||
No additional merger-related expenses are expected in connection with the Humboldt or any other previous acquisitions.
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Note 5 — Per Share Information
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 and restricted shares 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, basic and diluted earnings per share from continuing operations and discontinued operations (net of tax) are presented.
The following is a computation of basic and diluted earnings per share and basic and diluted earnings per share from continuing operations for the three and nine months ended September 30, 2005 and 2004:
Earnings Per Share
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands, except per share data) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Basic earnings per share: | ||||||||||||||||
Weighted average shares outstanding | 44,468 | 42,149 | 44,412 | 33,011 | ||||||||||||
Net income | $ | 19,923 | $ | 13,368 | $ | 50,948 | $ | 30,897 | ||||||||
Income from continuing operations | $ | 19,923 | $ | 13,245 | $ | 50,948 | $ | 30,502 | ||||||||
Basic earnings per share | $ | 0.45 | $ | 0.32 | $ | 1.15 | $ | 0.94 | ||||||||
Basic earnings per share — continuing operations | $ | 0.45 | $ | 0.31 | $ | 1.15 | $ | 0.92 | ||||||||
Diluted earnings per share: | ||||||||||||||||
Weighted average shares outstanding | 44,468 | 42,149 | 44,412 | 33,011 | ||||||||||||
Net effect of the assumed exercise of stock options, based on the treasury stock method | 554 | 741 | 572 | 505 | ||||||||||||
Total weighted average shares and common stock equivalents outstanding | 45,022 | 42,890 | 44,984 | 33,516 | ||||||||||||
Net income | $ | 19,923 | $ | 13,368 | $ | 50,948 | $ | 30,897 | ||||||||
Income from continuing operations | $ | 19,923 | $ | 13,245 | $ | 50,948 | $ | 30,502 | ||||||||
Diluted earnings per share | $ | 0.44 | $ | 0.31 | $ | 1.13 | $ | 0.92 | ||||||||
Diluted earnings per share — continuing operations | $ | 0.44 | $ | 0.31 | $ | 1.13 | $ | 0.91 |
Note 6 — Segment Information
The Company operates three primary segments: Community Banking, Mortgage Banking and Retail Brokerage. 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 93 stores located throughout Oregon, Northern California and Washington.
The Mortgage Banking segment, which operates as a division of Umpqua Bank (“the Bank”), originates, sells and services residential mortgage loans. During the third quarter of 2004, the Company completed a strategic review of the Mortgage Banking segment and decided to terminate wholesale channel origination. Although this decision resulted 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 the Company’s brokerage subsidiary, 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.
Summarized financial information concerning the Company’s reportable segments and the reconciliation to the consolidated financial results is shown in the following tables:
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Segment Information
Three Months Ended September 30, 2005 | ||||||||||||||||
Community | Retail | Mortgage | ||||||||||||||
(in thousands, except per share data) | Banking | Brokerage | Banking | Consolidated | ||||||||||||
Interest income | $ | 71,660 | $ | 15 | $ | 1,546 | $ | 73,221 | ||||||||
Interest expense | 18,432 | — | 988 | 19,420 | ||||||||||||
Net interest income | 53,228 | 15 | 558 | 53,801 | ||||||||||||
Provision for loan losses | — | — | — | — | ||||||||||||
Non-interest income | 7,475 | 3,011 | 3,296 | 13,782 | ||||||||||||
Non-interest expense | 32,177 | 2,722 | 2,184 | 37,083 | ||||||||||||
Merger-related expense | — | — | — | — | ||||||||||||
Income before income taxes and discontinued operations | 28,526 | 304 | 1,670 | 30,500 | ||||||||||||
Provision for income taxes | 9,801 | 108 | 668 | 10,577 | ||||||||||||
Income from continuing operations | 18,725 | 196 | 1,002 | 19,923 | ||||||||||||
Income from discontinued operations, net of tax | — | — | — | — | ||||||||||||
Net income | $ | 18,725 | $ | 196 | $ | 1,002 | $ | 19,923 | ||||||||
Basic earnings per share: | ||||||||||||||||
Income from continuing operations | $ | 0.42 | $ | 0.01 | $ | 0.02 | $ | 0.45 | ||||||||
Income from discontinued operations, net of tax | $ | — | $ | — | $ | — | — | |||||||||
Net income | $ | 0.42 | $ | 0.01 | $ | 0.02 | $ | 0.45 | ||||||||
Diluted earnings per share: | ||||||||||||||||
Income from continuing operations | $ | 0.42 | $ | — | $ | 0.02 | $ | 0.44 | ||||||||
Income from discontinued operations, net of tax | $ | — | $ | — | $ | — | $ | — | ||||||||
Net income | $ | 0.42 | $ | — | $ | 0.02 | $ | 0.44 | ||||||||
Three Months Ended September 30, 2004 | ||||||||||||||||
Community | Retail | Mortgage | ||||||||||||||
(in thousands, except per share data) | Banking | Brokerage | Banking | Consolidated | ||||||||||||
Interest income | $ | 57,473 | $ | 14 | $ | 1,778 | $ | 59,265 | ||||||||
Interest expense | 10,998 | — | 858 | 11,856 | ||||||||||||
Net interest income | 46,475 | 14 | 920 | 47,409 | ||||||||||||
Provision for loan losses | 1,450 | — | 29 | 1,479 | ||||||||||||
Non-interest income | 6,716 | 2,813 | 1,942 | 11,471 | ||||||||||||
Non-interest expense | 30,518 | 2,834 | 2,171 | 35,523 | ||||||||||||
Merger-related expense | 2,176 | — | — | 2,176 | ||||||||||||
Income before income taxes and discontinued operations | 19,047 | (7 | ) | 662 | 19,702 | |||||||||||
Provision for income taxes | 6,233 | (5 | ) | 229 | 6,457 | |||||||||||
Income from continuing operations | 12,814 | (2 | ) | 433 | 13,245 | |||||||||||
Income from discontinued operations, net of tax | 123 | — | — | 123 | ||||||||||||
Net income | $ | 12,937 | $ | (2 | ) | $ | 433 | $ | 13,368 | |||||||
Basic earnings per share: | ||||||||||||||||
Income from continuing operations | $ | 0.30 | $ | — | $ | 0.01 | $ | 0.31 | ||||||||
Income from discontinued operations, net of tax | $ | 0.01 | $ | — | $ | — | $ | 0.01 | ||||||||
Net income | $ | 0.31 | $ | — | $ | 0.01 | $ | 0.32 | ||||||||
Diluted earnings per share: | ||||||||||||||||
Income from continuing operations | $ | 0.30 | $ | — | $ | 0.01 | $ | 0.31 | ||||||||
Income from discontinued operations, net of tax | $ | — | $ | — | $ | — | $ | — | ||||||||
Net income | $ | 0.30 | $ | — | $ | 0.01 | $ | 0.31 | ||||||||
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Nine Months Ended September 30, 2005 | ||||||||||||||||
Community | Retail | Mortgage | ||||||||||||||
(in thousands, except per share data) | Banking | Brokerage | Banking | Consolidated | ||||||||||||
Interest income | $ | 200,874 | $ | 48 | $ | 4,436 | $ | 205,358 | ||||||||
Interest expense | 47,923 | — | 2,702 | 50,625 | ||||||||||||
Net interest income | 152,951 | 48 | 1,734 | 154,733 | ||||||||||||
Provision for loan losses | 2,400 | — | — | 2,400 | ||||||||||||
Non-interest income | 22,230 | 9,141 | 4,937 | 36,308 | ||||||||||||
Non-interest expense | 94,083 | 8,454 | 6,140 | 108,677 | ||||||||||||
Merger-related expense | 262 | — | — | 262 | ||||||||||||
Income before income taxes and discontinued operations | 78,436 | 735 | 531 | 79,702 | ||||||||||||
Provision for income taxes | 28,279 | 263 | 212 | 28,754 | ||||||||||||
Income from continuing operations | 50,157 | 472 | 319 | 50,948 | ||||||||||||
Income from discontinued operations, net of tax | — | — | — | — | ||||||||||||
Net income | $ | 50,157 | $ | 472 | $ | 319 | $ | 50,948 | ||||||||
Basic earnings per share: | ||||||||||||||||
Income from continuing operations | $ | 1.13 | $ | 0.01 | $ | 0.01 | $ | 1.15 | ||||||||
Income from discontinued operations, net of tax | $ | — | $ | — | $ | — | $ | — | ||||||||
Net income | $ | 1.13 | $ | 0.01 | $ | 0.01 | $ | 1.15 | ||||||||
Diluted earnings per share: | ||||||||||||||||
Income from continuing operations | $ | 1.11 | $ | 0.01 | $ | 0.01 | $ | 1.13 | ||||||||
Income from discontinued operations, net of tax | $ | — | $ | — | $ | — | $ | — | ||||||||
Net income | $ | 1.11 | $ | 0.01 | $ | 0.01 | $ | 1.13 | ||||||||
Nine Months Ended September 30, 2004 | ||||||||||||||||
Community | Retail | Mortgage | ||||||||||||||
(in thousands, except per share data) | Banking | Brokerage | Banking | Consolidated | ||||||||||||
Interest income | $ | 131,252 | $ | 45 | $ | 3,521 | $ | 134,818 | ||||||||
Interest expense | 25,043 | — | 1,762 | 26,805 | ||||||||||||
Net interest income | 106,209 | 45 | 1,759 | 108,013 | ||||||||||||
Provision for loan losses | 3,593 | — | 61 | 3,654 | ||||||||||||
Non-interest income | 13,997 | 8,868 | 6,024 | 28,889 | ||||||||||||
Non-interest expense | 69,755 | 8,265 | 5,685 | 83,705 | ||||||||||||
Merger-related expense | 2,941 | — | — | 2,941 | ||||||||||||
Income before income taxes and discontinued operations | 43,917 | 648 | 2,037 | 46,602 | ||||||||||||
Provision for income taxes | 15,145 | 228 | 727 | 16,100 | ||||||||||||
Income from continuing operations | 28,772 | 420 | 1,310 | 30,502 | ||||||||||||
Income from discontinued operations, net of tax | 395 | — | — | 395 | ||||||||||||
Net income | $ | 29,167 | $ | 420 | $ | 1,310 | $ | 30,897 | ||||||||
Basic earnings per share: | ||||||||||||||||
Income from continuing operations | $ | 0.87 | $ | 0.01 | $ | 0.04 | $ | 0.92 | ||||||||
Income from discontinued operations, net of tax | $ | 0.02 | $ | — | $ | — | $ | 0.02 | ||||||||
Net income | $ | 0.89 | $ | 0.01 | $ | 0.04 | $ | 0.94 | ||||||||
Diluted earnings per share: | ||||||||||||||||
Income from continuing operations | $ | 0.86 | $ | 0.01 | $ | 0.04 | $ | 0.91 | ||||||||
Income from discontinued operations, net of tax | $ | 0.01 | $ | — | $ | — | $ | 0.01 | ||||||||
Net income | $ | 0.87 | $ | 0.01 | $ | 0.04 | $ | 0.92 | ||||||||
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September 30, 2005 | ||||||||||||||||
Community | Retail | Mortgage | ||||||||||||||
(in thousands) | Banking | Brokerage | Banking | Consolidated | ||||||||||||
Total assets | $ | 5,073,282 | $ | 7,897 | $ | 105,203 | $ | 5,186,382 | ||||||||
Total loans | $ | 3,623,132 | $ | — | $ | 73,688 | $ | 3,696,820 | ||||||||
Total deposits | $ | 4,092,528 | $ | — | $ | 438 | $ | 4,092,966 |
December 31, 2004 | ||||||||||||||||
Community | Retail | Mortgage | ||||||||||||||
(in thousands) | Banking | Brokerage | Banking | Consolidated | ||||||||||||
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 |
Note 7 — 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 become effective on January 1, 2006. The Company 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.
Companies may elect one of two methods for adoption of SFAS No. 123R. Under themodified prospectivemethod, 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 retrospectivemethod, 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 fourth quarter of 2005.
In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 which expressed the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations. SAB No. 107 provides guidance related to the valuation of share-based payment arrangements for public companies, including assumptions such as expected volatility and expected term. The Company is assessing the impact SAB No. 107 will have on its consolidated financial statements.
Note 8 — Allowance for Loan Losses
As of September 30, 2004, we refined the model used for determining certain components of the allowance for loan losses. The model refinement was done principally in connection with the Humboldt acquisition, and did not have a material impact on the recorded allowance for loan losses. Additionally, as of September 30, 2004, we reclassified the reserve for unfunded lending commitments from the allowance for loan losses to other liabilities. The amount reclassified as of September 30, 2004 was approximately $1.2 million, or 3 basis points of total gross loans. The reclassifications had no effect on the provision for credit losses as reported.
Note 9 — Junior Subordinated Debentures
As of September 30, 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 $58.9 million (fair value of approximately $69 million as of the merger date), were assumed in connection with the Humboldt merger. Following is information about the Trusts:
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Junior Subordinated Debentures
(in thousands)
(in thousands)
Issued | Carrying | Effective | ||||||||||||||||||||||||||
Trust Name | 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) | 7.46 | % | September 2032 | September 2007 | ||||||||||||||||||
Umpqua Statutory Trust II | October 2002 | 20,619 | 20,619 | Floating (5) | 7.04 | % | October 2032 | October 2007 | ||||||||||||||||||||
Umpqua Statutory Trust III | October 2002 | 30,928 | 30,928 | Floating (6) | 7.24 | % | November 2032 | November 2007 | ||||||||||||||||||||
Umpqua Statutory Trust IV | December 2003 | 10,310 | 10,310 | Floating (7) | 6.45 | % | January 2034 | January 2009 | ||||||||||||||||||||
Umpqua Statutory Trust V | December 2003 | 10,310 | 10,310 | Floating (7) | 6.74 | % | March 2034 | March 2009 | ||||||||||||||||||||
HB Capital Trust I | March 2000 | 5,310 | 6,673 | 10.875 | % | 7.73 | % | March 2030 | March 2010 | |||||||||||||||||||
Humboldt Bancorp Statutory Trust I | February 2001 | 5,155 | 6,136 | 10.200 | % | 7.91 | % | February 2031 | February 2011 | |||||||||||||||||||
Humboldt Bancorp Statutory Trust II | December 2002 | 10,310 | 11,709 | Floating (8) | 6.10 | % | December 2031 | December 2006 | ||||||||||||||||||||
Humboldt Bancorp Staututory Trust III | September 2003 | 27,836 | 31,899 | 6.75 | %(9) | 4.89 | % | September 2033 | September 2008 | |||||||||||||||||||
CIB Capital Trust | November 2002 | 10,310 | 11,489 | Floating (6) | 6.08 | % | November 2032 | November 2007 | ||||||||||||||||||||
Total | $ | 156,862 | $ | 165,847 | ||||||||||||||||||||||||
(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 September 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 FASB Interpretation No. 46 (“FIN 46”),Consolidation of Variable Interest Entities (revised December 2003), the Trusts have been deconsolidated. The $165.8 million of junior subordinated debentures issued to the Trusts as of September 30, 2005 ($166.3 million as of December 31, 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 at September 30, 2005 and December 31, 2004.
All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of September 30, 2005, under guidance issued by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). Effective April 11, 2005, the Federal Reserve Board adopted a rule that permits the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. Under the rule, after a five-year transition period ending March 31, 2009, the aggregate amount of trust preferred securities and certain other restricted core capital elements is 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. The Company includes all currently issued trust preferred securities in Tier 1 capital. There 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 purposes.
Note 10 — Commitments and Contingencies
Lease Commitments— The Company leases 71 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. Rent expense, net of rental income, for premises and equipment rentals for the three and nine months ended September 30, 2005 was $1.5 million and $4.7 million, respectively, compared to $1.0 and $2.7 million in the comparable periods in 2004.
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 originate residential mortgage loans and standby letters of credit. The following table presents a summary of the Bank’s commitments and contingent liabilities as of September 30, 2005:
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Contractual Amounts
(in thousands)
(in thousands)
September 30, | ||||
2005 | ||||
Commitments to extend credit | $ | 1,005,630 | ||
Commitments to extend overdrafts | $ | 90,203 | ||
Commitments to originate residential loans | $ | 97,974 | ||
Forward sales commitments | $ | 21,000 | ||
Standby letters of credit | $ | 24,456 |
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and financial guarantees. Those instruments involve elements of credit and interest-rate risk similar to the amounts recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the Bank’s involvement in particular classes of financial instruments.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. While most commercial letters of credit are not utilized, a significant portion of such utilization is on an immediate payment basis. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral varies but may include cash, accounts receivable, inventory, premises and equipment and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds cash, marketable securities, or accounts, inventory and equipment 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 the three and nine months ended September 30, 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 September 30, 2005, the reserve for unfunded commitments, which is included in other liabilities on the consolidated balance sheet, was approximately $1.5 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 the three and nine months ended September 30, 2005. 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 a fee to or receiving a fee from the broker/dealer equal to the increase or decrease in the market value of the forward contract. At September 30, 2005, the Bank had commitments to originate residential loans and forward sales commitments outstanding of $98.0 million and $21.0 million, respectively, with net fair values of approximately $(99,000) and $45,000, respectively.
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 are not significant.
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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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Report contains certain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that expressly or implicitly predict future results, performance or events are forward-looking. In addition, the words “expect,” “believe,” “anticipate” and other similar expressions identify forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expected. Factors that could cause or contribute to such differences include, but are not limited to, the risk factors discussed in this and other reports filed with the SEC, including exhibit 99.1 attached hereto, 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 |
Readers of this report should not place undue reliance 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.
Summary of Critical Accounting Policies
Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements for the year ended December 31, 2004 as filed on Form 10-K. Not all of these accounting policies require management to make difficult, subjective or complex judgments or estimates. Management believes that the following policies could be considered critical under the SEC’s definition.
Allowance for Loan Losses and Reserve for Unfunded Commitments
The allowance for loan losses (“ALL”) is maintained at a level that is adequate to absorb probable incurred losses inherent in the loan and deposit overdraft portfolios. The reserve for unfunded commitments (“RUC”) is maintained at a level that is adequate to absorb probable 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. Beginning in September 2005, in accordance with guidance issued by banking regulatory authorities in 2005, we also include an analysis of deposit overdrafts in the calculation of allowance for loan losses. 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.
The allowance for loan losses (“ALL”) is maintained at a level that is adequate to absorb probable incurred losses inherent in the loan and deposit overdraft portfolios. The reserve for unfunded commitments (“RUC”) is maintained at a level that is adequate to absorb probable 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. Beginning in September 2005, in accordance with guidance issued by banking regulatory authorities in 2005, we also include an analysis of deposit overdrafts in the calculation of allowance for loan losses. 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.
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 their relative fair values at the date of the sale. Subsequent measurements are determined based on valuations provided by third parties. MSR 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, which may accelerate when rates fall. Prepayments in excess of management’s estimates would negatively impact the recorded value of the MSR. The value of the MSR 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 MSR.
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 their relative fair values at the date of the sale. Subsequent measurements are determined based on valuations provided by third parties. MSR 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, which may accelerate when rates fall. Prepayments in excess of management’s estimates would negatively impact the recorded value of the MSR. The value of the MSR 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 MSR.
Goodwill and Other Intangibles
At September 30, 2005, we had $407.1 million in goodwill and other intangible assets as a result of business combinations. Intangible assets with definite useful lives are amortized to their estimated residual values over their respective estimated useful lives, and also reviewed for impairment. Goodwill and other intangibles with indefinite lives are not amortized but instead are periodically tested for impairment. Management performs this impairment analysis on a quarterly basis, or 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. No impairment loss was recognized during the three and nine months ended September 30, 2005.
At September 30, 2005, we had $407.1 million in goodwill and other intangible assets as a result of business combinations. Intangible assets with definite useful lives are amortized to their estimated residual values over their respective estimated useful lives, and also reviewed for impairment. Goodwill and other intangibles with indefinite lives are not amortized but instead are periodically tested for impairment. Management performs this impairment analysis on a quarterly basis, or 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. No impairment loss was recognized during the three and nine months ended September 30, 2005.
Results of Operations—Overview
For the three months ended September 30, 2005, net income was $19.9 million, or $0.44 per diluted share, an increase of 42% on a per
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diluted share basis as compared to $13.4 million, or $0.31 per diluted share for the three months ended September 30, 2004. Income from continuing operations for the three months ended September 30, 2005, which excludes the after-tax operating results from our merchant bankcard portfolio, was $19.9 million, or $0.44 per diluted share, as compared to $13.2 million, or $0.31 per diluted share for the three months ended September 30, 2004.
For the nine months ended September 30, 2005, net income was $50.9 million, or $1.13 per diluted share, an increase of 23% on a per diluted share basis as compared to $30.9 million, or $0.92 per diluted share for the nine months ended September 30, 2004. Income from continuing operations for the nine months ended September 30, 2005, which excludes the after-tax operating results from our merchant bankcard portfolio, was $50.9 million, or $1.13 per diluted share, as compared to $30.5 million, or $0.91 per diluted share for the nine months ended September 30, 2004. Additional information on discontinued operations is provided under the headingDiscontinued Operationsbelow.
The improvement in diluted earnings per share from continuing operations for the three and nine months ended September 30, 2005 is principally attributable to improved net interest income, offset by increased operating expenses in the nine months ended September 30, 2005. We completed the acquisition of Humboldt on July 9, 2004, and the results of the acquired operations are included in our financial results starting on July 10, 2004.
Our earnings are impacted by certain non-core items that fluctuate significantly or occur infrequently. These non-core items include merger-related expenses, significant infrequent gains and losses or expenses that are not reflective of continuing operations. We definecore earningsas income before non-core items, net of tax, and we calculatecore earnings per diluted shareby dividing core earnings by the same diluted share total used in determining diluted earnings per share (see Note 5 of theNotes to Condensed Consolidated Financial Statements). Core earnings and core earnings per diluted share are considered “non-GAAP” financial measures. Although we believe the presentation of non-GAAP financial measures provides better visibility of our core performance, readers of this report are urged to review the GAAP results as presented in theCondensed Consolidated Financial Statements.
The following table illustrates improvement in our core earnings per diluted share:
Three months ended | Nine months ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||||||||||
Change | Change | Change | Change | |||||||||||||||||||||||||||||
Core earnings per diluted share: | 2005 | 2004 | Amount | Percent | 2005 | 2004 | Amount | Percent | ||||||||||||||||||||||||
Net income | $ | 0.44 | $ | 0.31 | $ | 0.13 | 42% | $ | 1.13 | $ | 0.92 | $ | 0.21 | 23% | ||||||||||||||||||
Less non-core items, net of tax: | ||||||||||||||||||||||||||||||||
MSR valuation recovery (impairment) | 0.01 | — | 0.01 | (0.02 | ) | 0.02 | (0.04 | ) | ||||||||||||||||||||||||
Securities gains | — | — | — | 0.02 | — | 0.02 | ||||||||||||||||||||||||||
Corporate state tax credit | 0.01 | — | 0.01 | 0.01 | — | 0.01 | ||||||||||||||||||||||||||
Discontinued operations | — | — | — | — | 0.01 | (0.01 | ) | |||||||||||||||||||||||||
Merger related expense | — | (0.03 | ) | 0.03 | — | (0.06 | ) | 0.06 | ||||||||||||||||||||||||
Core earnings | $ | 0.42 | $ | 0.34 | $ | 0.08 | 24% | $ | 1.12 | $ | 0.95 | $ | 0.17 | 18% | ||||||||||||||||||
During the third quarter of 2005, the Company recognized a $1.05 million fair value recovery in our mortgage servicing rights portfolio. This fair value adjustment resulted from an increase in mortgage interest rates, and is included as additional mortgage banking revenue on the Company’s consolidated statement of income. The Company also recognized a $0.6 million reduction to our Oregon state tax provision in the third quarter of 2005. This reduction to the Company’s state income tax expense results from an adjustment to Oregon state income tax rates which was finalized in the third quarter and is retrospectively applied to the 2005 year. During the second quarter of 2005, the Company realized $1.4 million in gains on the sale of securities. Our definition of core earnings excludes these items, along with merger related expense and discontinued operations.
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 income by the same diluted share total used in determining diluted earnings per share (see Note 5 of theNotes to Condensed Consolidated Financial Statements). 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 theCondensed Consolidated Financial Statements.
The following table presents a reconciliation of operating income and operating income per share to net income and net income per share for the three and nine months ended September 30, 2005 and 2004:
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Reconciliation of Operating Income to Net Income
Three months ended | Nine months ended | |||||||||||||||
(in thousands, except per share data) | September 30, | September 30, | ||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income | $ | 19,923 | $ | 13,368 | $ | 50,948 | $ | 30,897 | ||||||||
Merger-related expenses, net of tax | — | 1,411 | 157 | 1,888 | ||||||||||||
Operating income | $ | 19,923 | $ | 14,779 | $ | 51,105 | $ | 32,785 | ||||||||
Per diluted share: | ||||||||||||||||
Net income | $ | 0.44 | $ | 0.31 | $ | 1.13 | $ | 0.92 | ||||||||
Merger-related expenses, net of tax | — | 0.03 | 0.01 | 0.06 | ||||||||||||
Operating income | $ | 0.44 | $ | 0.34 | $ | 1.14 | $ | 0.98 | ||||||||
The following table presents the returns on average assets, average shareholders’ equity and average tangible shareholders’ equity for the three and nine months ended September 30, 2005 and 2004. It includes the calculated ratios based on reported net income and income from continuing operations, and operating income as shown in the table above. To the extent return on average shareholders’ equity 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
Three months ended | Nine months ended | |||||||||||||||
(in thousands) | September 30, | September 30, | ||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Returns on average assets: | ||||||||||||||||
Net income | 1.55 | % | 1.13 | % | 1.36 | % | 1.15 | % | ||||||||
Income from continuing operations | 1.55 | % | 1.12 | % | 1.36 | % | 1.14 | % | ||||||||
Operating income | 1.55 | % | 1.25 | % | 1.37 | % | 1.22 | % | ||||||||
Returns on average shareholders’ equity: | ||||||||||||||||
Net income | 11.01 | % | 8.46 | % | 9.66 | % | 9.66 | % | ||||||||
Income from continuing operations | 11.01 | % | 8.38 | % | 9.66 | % | 9.53 | % | ||||||||
Operating income | 11.01 | % | 9.35 | % | 9.69 | % | 10.25 | % | ||||||||
Returns on average tangible shareholders’ equity: | ||||||||||||||||
Net income | 25.43 | % | 21.81 | % | 22.87 | % | 21.48 | % | ||||||||
Income from continuing operations | 25.43 | % | 21.61 | % | 22.87 | % | 21.20 | % | ||||||||
Operating income | 25.43 | % | 24.11 | % | 22.94 | % | 22.79 | % | ||||||||
Calculation of average tangible shareholders’ equity: | ||||||||||||||||
Average shareholders’ equity | $ | 717,827 | $ | 628,667 | $ | 705,371 | $ | 427,378 | ||||||||
Less: average intangible assets | (406,955 | ) | (384,833 | ) | (407,489 | ) | (235,213 | ) | ||||||||
Average tangible shareholders’ equity | $ | 310,872 | $ | 243,834 | $ | 297,882 | $ | 192,165 | ||||||||
Discontinued Operations
During the fourth quarter of 2004, we completed a strategic review of our merchant bankcard portfolio. We 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. The operating results related to the merchant bankcard portfolio (including the gain on sale) have been reclassified asincome from discontinued operations, net of taxfor 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
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agreement. We do not expect the referral revenue will have a material impact on our non-interest income.
For the three and nine months ended September 30, 2005, we recognized no income related to the merchant bankcard portfolio. In the three and nine months ended September 30, 2004, we recognized $123,000 and $395,000, net of tax. 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 will have a material impact on our results of operations in 2005.
Additional information on discontinued operations is provided in Note 3 of theNotes to Condensed Consolidated Financial Statements.
Net Interest Income
Net interest income is the largest source of our operating income. Net interest income for the three months ended September 30, 2005, was $53.8 million, an increase of $6.4 million, or 13% over the comparable period in 2004. Net interest income for the nine months ended September 30, 2005, was $154.7 million, an increase of $46.7 million, or 43% over the comparable period in 2004. This increase for the nine month period is attributable to growth in outstanding average interest-earning assets offset by growth in interest-bearing liabilities over the comparable prior year period, 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.
For the three months ended September 30, 2005, the net interest margin (net interest income as a percentage of average interest earning assets) on a fully tax-equivalent basis was 4.89%, an increase of 16 basis points as compared to the same period in 2004. The net interest margin on a fully tax-equivalent basis for the nine months ended September 30, 2005 was 4.84%, an increase of 18 basis points as compared to the same period in 2004. This increase is due to growth in non-interest bearing deposits as well as increased yield on earning assets. The increased yield on earning assets, primarily from short term interest rate increases, was somewhat offset by a corresponding increase in our cost of interest bearing liabilities. The third quarter 2005 margin of 4.89% expanded by 8 basis points over second quarter 2005 margin of 4.81%.
The following tables present the 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 three and nine months ended September 30, 2005 and 2004:
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Average Rates and Balances (Quarterly)
(in thousands)
(in thousands)
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, 2005 | September 30, 2004 | |||||||||||||||||||||||
Interest | Average | Interest | Average | |||||||||||||||||||||
Average | Income or | Yields | Average | Income or | Yields | |||||||||||||||||||
Balance | Expense | or Rates | Balance | Expense | or Rates | |||||||||||||||||||
INTEREST-EARNING ASSETS: | ||||||||||||||||||||||||
Loans and leases (1) | $ | 3,658,639 | $ | 65,579 | 7.11 | % | $ | 3,188,278 | $ | 50,875 | 6.35 | % | ||||||||||||
Taxable securities | 608,752 | 6,598 | 4.34 | % | 709,998 | 7,433 | 4.19 | % | ||||||||||||||||
Non-taxable securities (2) | 44,130 | 644 | 5.84 | % | 67,211 | 1,140 | 6.78 | % | ||||||||||||||||
Temporary investments (3) | 70,978 | 604 | 3.38 | % | 50,117 | 195 | 1.55 | % | ||||||||||||||||
Total interest earning assets | 4,382,499 | 73,425 | 6.65 | % | 4,015,604 | 59,643 | 5.91 | % | ||||||||||||||||
Allowance for credit losses | (43,772 | ) | (43,522 | ) | ||||||||||||||||||||
Other assets | 750,011 | 721,643 | ||||||||||||||||||||||
Total assets | $ | 5,088,738 | $ | 4,693,725 | ||||||||||||||||||||
INTEREST-BEARING LIABILITIES: | ||||||||||||||||||||||||
Interest-bearing checking and savings accounts | $ | 2,053,113 | $ | 8,325 | 1.61 | % | $ | 1,847,886 | $ | 4,077 | 0.88 | % | ||||||||||||
Time deposits | 996,661 | 7,776 | 3.10 | % | 913,495 | 4,864 | 2.12 | % | ||||||||||||||||
Federal funds purchased and repurchase agreements | 80,471 | 511 | 2.52 | % | 59,918 | 206 | 1.37 | % | ||||||||||||||||
Term debt | 12,825 | 89 | 2.75 | % | 162,900 | 730 | 1.78 | % | ||||||||||||||||
Notes payable on junior subordinated debentures and trust preferred securities | 165,892 | 2,719 | 6.50 | % | 159,740 | 1,979 | 4.93 | % | ||||||||||||||||
Total interest-bearing liabilities | 3,308,962 | 19,420 | 2.33 | % | 3,143,939 | 11,856 | 1.50 | % | ||||||||||||||||
Non-interest-bearing deposits | 1,007,113 | 875,741 | ||||||||||||||||||||||
Other liabilities | 54,836 | 45,378 | ||||||||||||||||||||||
Total liabilities | 4,370,911 | 4,065,058 | ||||||||||||||||||||||
Shareholders’ equity | 717,827 | 628,667 | ||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 5,088,738 | $ | 4,693,725 | ||||||||||||||||||||
NET INTEREST INCOME (2) | $ | 54,005 | $ | 47,787 | ||||||||||||||||||||
NET INTEREST SPREAD | 4.32 | % | 4.41 | % | ||||||||||||||||||||
AVERAGE YIELD ON EARNING ASSETS (1), (2) | 6.65 | % | 5.91 | % | ||||||||||||||||||||
INTEREST EXPENSE TO EARNING ASSETS | 1.76 | % | 1.18 | % | ||||||||||||||||||||
NET INTEREST INCOME TO EARNING ASSETS (1), (2) | 4.89 | % | 4.73 | % | ||||||||||||||||||||
(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 $204,000 and $378,000 for the three months ended September 30, 2005 and 2004, respectively. | ||
(3) | Temporary investments include federal funds sold and interest-bearing deposits at other banks. |
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Average Rates and Balances (Year-to-date)
(in thousands)
(in thousands)
Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2005 | September 30, 2004 | |||||||||||||||||||||||
Interest | Average | Interest | Average | |||||||||||||||||||||
Average | Income or | Yields | Average | Income or | Yields | |||||||||||||||||||
Balance | Expense | or Rates | Balance | Expense | or Rates | |||||||||||||||||||
INTEREST-EARNING ASSETS: | ||||||||||||||||||||||||
Loans and leases (1) | $ | 3,573,403 | $ | 182,735 | 6.84 | % | $ | 2,469,636 | $ | 115,530 | 6.25 | % | ||||||||||||
Taxable securities | 607,211 | 19,480 | 4.28 | % | 578,143 | 17,438 | 4.02 | % | ||||||||||||||||
Non-taxable securities (2) | 58,403 | 2,788 | 6.37 | % | 47,168 | 2,370 | 6.70 | % | ||||||||||||||||
Temporary investments (3) | 56,728 | 1,256 | 2.96 | % | 24,476 | 248 | 1.35 | % | ||||||||||||||||
Total interest earning assets | 4,295,745 | 206,259 | 6.42 | % | 3,119,423 | 135,586 | 5.81 | % | ||||||||||||||||
Allowance for credit losses | (45,253 | ) | (32,282 | ) | ||||||||||||||||||||
Other assets | 742,670 | 497,615 | ||||||||||||||||||||||
Total assets | $ | 4,993,162 | $ | 3,584,756 | ||||||||||||||||||||
INTEREST-BEARING LIABILITIES: | ||||||||||||||||||||||||
Interest-bearing checking and savings accounts | $ | 2,014,768 | $ | 20,370 | 1.35 | % | $ | 1,440,697 | $ | 9,148 | 0.85 | % | ||||||||||||
Time deposits | 981,043 | 20,540 | 2.80 | % | 707,083 | 11,468 | 2.17 | % | ||||||||||||||||
Federal funds purchased and repurchase agreements | 80,014 | 1,419 | 2.37 | % | 67,243 | 528 | 1.05 | % | ||||||||||||||||
Term debt | 40,581 | 633 | 2.09 | % | 105,632 | 1,439 | 1.82 | % | ||||||||||||||||
Notes payable on junior subordinated debentures and trust preferred securities | 166,045 | 7,663 | 6.17 | % | 118,691 | 4,222 | 4.75 | % | ||||||||||||||||
Total interest-bearing liabilities | 3,282,451 | 50,625 | 2.06 | % | 2,439,346 | 26,805 | 1.47 | % | ||||||||||||||||
Non-interest-bearing deposits | 950,957 | 685,502 | ||||||||||||||||||||||
Other liabilities | 54,383 | 32,530 | ||||||||||||||||||||||
Total liabilities | 4,287,791 | 3,157,378 | ||||||||||||||||||||||
Shareholders’ equity | 705,371 | 427,378 | ||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 4,993,162 | $ | 3,584,756 | ||||||||||||||||||||
NET INTEREST INCOME (2) | $ | 155,634 | $ | 108,781 | ||||||||||||||||||||
NET INTEREST SPREAD | 4.36 | % | 4.34 | % | ||||||||||||||||||||
AVERAGE YIELD ON EARNING ASSETS (1), (2) | 6.42 | % | 5.81 | % | ||||||||||||||||||||
INTEREST EXPENSE TO EARNING ASSETS | 1.58 | % | 1.15 | % | ||||||||||||||||||||
NET INTEREST INCOME TO EARNING ASSETS (1), (2) | 4.84 | % | 4.66 | % | ||||||||||||||||||||
(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 $901,000 and $768,000 for the nine months ended September 30, 2005 and 2004, respectively. | ||
(3) | Temporary investments include federal funds sold and interest-bearing deposits at other banks. |
The following tables set 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 the three and nine months ended September 30, 2005 as compared to the same period in 2004. Changes in interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionately between both variances.
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Rate/Volume Analysis (Quarterly)
(in thousands)
(in thousands)
THREE MONTHS ENDED SEPTEMBER 30, | ||||||||||||
2005 COMPARED TO 2004 | ||||||||||||
INCREASE (DECREASE) IN INTEREST | ||||||||||||
INCOME AND EXPENSE DUE TO | ||||||||||||
CHANGES IN | ||||||||||||
VOLUME | RATE | TOTAL | ||||||||||
INTEREST-EARNING ASSETS: | ||||||||||||
Loans | $ | 8,010 | $ | 6,694 | $ | 14,704 | ||||||
Taxable securities | (1,090 | ) | 255 | (835 | ) | |||||||
Non-taxable securities (1) | (353 | ) | (143 | ) | (496 | ) | ||||||
Temporary investments | 107 | 302 | 409 | |||||||||
Total (1) | 6,674 | 7,108 | 13,782 | |||||||||
INTEREST-BEARING LIABILITIES: | ||||||||||||
Interest-bearing checking and savings accounts | 497 | 3,751 | 4,248 | |||||||||
Time deposits | 477 | 2,435 | 2,912 | |||||||||
Repurchase agreements and federal funds | 88 | 217 | 305 | |||||||||
Term debt | (903 | ) | 262 | (641 | ) | |||||||
Junior subordinated debentures | 79 | 661 | 740 | |||||||||
Total | 238 | 7,326 | 7,564 | |||||||||
Net increase in net interest income (1) | $ | 6,436 | $ | (218 | ) | $ | 6,218 | |||||
(1) | Tax exempt income has been adjusted to a tax equivalent basis at a 35% tax rate. |
Rate/Volume Analysis (Year-to-date)
(in thousands)
(in thousands)
NINE MONTHS ENDED SEPTEMBER 30, | ||||||||||||
2005 COMPARED TO 2004 | ||||||||||||
INCREASE (DECREASE) IN INTEREST | ||||||||||||
INCOME AND EXPENSE DUE TO | ||||||||||||
CHANGES IN | ||||||||||||
VOLUME | RATE | TOTAL | ||||||||||
INTEREST-EARNING ASSETS: | ||||||||||||
Loans | $ | 55,614 | $ | 11,591 | $ | 67,205 | ||||||
Taxable securities | 902 | 1,140 | 2,042 | |||||||||
Non-taxable securities (1) | 541 | (123 | ) | 418 | ||||||||
Temporary investments | 531 | 477 | 1,008 | |||||||||
Total (1) | 57,588 | 13,085 | 70,673 | |||||||||
INTEREST-BEARING LIABILITIES: | ||||||||||||
Interest-bearing checking and savings accounts | 4,513 | 6,709 | 11,222 | |||||||||
Time deposits | 5,182 | 3,890 | 9,072 | |||||||||
Repurchase agreements and federal funds | 116 | 775 | 891 | |||||||||
Term debt | (990 | ) | 184 | (806 | ) | |||||||
Junior subordinated debentures | 1,971 | 1,470 | 3,441 | |||||||||
Total | 10,792 | 13,028 | 23,820 | |||||||||
Net increase in net interest income (1) | $ | 46,796 | $ | 57 | $ | 46,853 | ||||||
(1) | Tax exempt income has been adjusted to a tax equivalent basis at a 35% tax rate. |
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Provision for Loan Losses
There was no provision for loan losses for the three months ended September 30, 2005 while the provision for loan losses was $2.4 million for the nine months ended September 30, 2005. This compared with the provision for loan losses of $1.5 million and $3.7 million for the same periods in 2004. As a percentage of average outstanding loans, the provision for loan losses for the three months ended September 30, 2005 decreased by 19 basis points from the same period in 2004. The provision for loan losses as a percentage of average outstanding loans for the nine months ended September 30, 2005 was 0.09%, a decrease of 11 basis points from the same period in 2004. The decrease in the provision for loan losses in the three and nine months ended September 30, 2005 is principally attributable to improved asset quality trends.
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. Additional discussion on loan quality and the allowance for loan losses is provided under the headingAsset Quality and Non-Performing Assetsbelow.
Non-Interest Income
Non-interest income for the three months ended September 30, 2005 was $13.8 million, an increase of $2.3 million, or 20%, over the same period in 2004. Non-interest income for the nine months ended September 30, 2005 was $36.3 million, an increase of $7.4 million, or 26%, over the same period in 2004. The following table presents the key components of non-interest income for the three and nine months ended September 30, 2005 and 2004:
Non-Interest Income
Three months ended | Nine months ended | |||||||||||||||||||||||||||||||
(in thousands) | September 30, | September 30, | ||||||||||||||||||||||||||||||
Change | Change | Change | Change | |||||||||||||||||||||||||||||
2005 | 2004 | Amount | Percent | 2005 | 2004 | Amount | Percent | |||||||||||||||||||||||||
Deposit service charges | $ | 5,778 | $ | 5,570 | $ | 208 | 4% | $ | 16,026 | $ | 11,970 | $ | 4,056 | 34% | ||||||||||||||||||
Brokerage fees | 2,735 | 2,736 | (1 | ) | 0% | 8,743 | 8,641 | 102 | 1% | |||||||||||||||||||||||
Mortgage banking revenue | 3,256 | 1,942 | 1,314 | 68% | 4,834 | 5,990 | (1,156 | ) | -19% | |||||||||||||||||||||||
Other | 1,985 | 1,210 | 775 | 64% | 5,279 | 2,269 | 3,010 | 133% | ||||||||||||||||||||||||
Net gain on sale of investment securities | 28 | 13 | 15 | 115% | 1,426 | 19 | 1,407 | NM | ||||||||||||||||||||||||
Total | $ | 13,782 | $ | 11,471 | $ | 2,311 | 20% | $ | 36,308 | $ | 28,889 | $ | 7,419 | 26% | ||||||||||||||||||
NM — Not meaningful
Deposit service charges for the three months ended September 30, 2005 were comparable to the three months ended September 30, 2004. The increase in deposit service charges for the nine month period is principally attributable to the Humboldt acquisition. The increase in mortgage banking revenue in the three months ended September 30, 2005 compared to the same period in 2004 is primarily due to a $1.05 million positive fair value adjustment to our mortgage servicing rights portfolio. The fair value adjustment resulted from an increase in mortgage interest rates in the quarter. The decrease in mortgage banking revenue for the nine months ended September 30, 2005 relates to a $1.4 million net year-to-date impairment charge to the value of mortgage servicing right portfolio. This impairment resulted from a decline in mortgage interest rates during the nine months. There were $1.4 million in gains on the sale of securities in the nine months ending September 30, 2005. The remaining increase in other non-interest income results primarily from increased revenue related to the Humboldt acquisition.
Non-Interest Expense
Non-interest expense for the three months ended September 30, 2005 was $37.1 million, a decrease of 2% compared to three months ended September 30, 2004. Non-interest expense for the nine months ended September 30, 2005 was $108.9 million, an increase of $22.3 million or 26% over the nine months ended September 30, 2004. The following table presents the key elements of non-interest expense for the three and nine months ended September 30, 2005 and 2004.
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Non-Interest Expense
Three months ended | Nine months ended | |||||||||||||||||||||||||||||||
(in thousands) | September 30, | September 30, | ||||||||||||||||||||||||||||||
Change | Change | Change | Change | |||||||||||||||||||||||||||||
2005 | 2004 | Amount | Percent | 2005 | 2004 | Amount | Percent | |||||||||||||||||||||||||
Salaries and employee benefits | $ | 20,708 | $ | 19,685 | $ | 1,023 | 5% | $ | 61,348 | $ | 47,103 | $ | 14,245 | 30% | ||||||||||||||||||
Net occupancy and equipment | 6,291 | 5,688 | 603 | 11% | 18,533 | 13,956 | 4,577 | 33% | ||||||||||||||||||||||||
Communications | 1,511 | 1,560 | (49 | ) | -3% | 4,334 | 4,101 | 233 | 6% | |||||||||||||||||||||||
Marketing | 1,151 | 1,755 | (604 | ) | -34% | 3,218 | 3,416 | (198 | ) | -6% | ||||||||||||||||||||||
Services | 3,245 | 2,824 | 421 | 15% | 9,592 | 6,093 | 3,499 | 57% | ||||||||||||||||||||||||
Supplies | 793 | 535 | 258 | 48% | 2,030 | 1,386 | 644 | 46% | ||||||||||||||||||||||||
Intangible amortization | 555 | 669 | (114 | ) | -17% | 1,875 | 843 | 1,032 | 122% | |||||||||||||||||||||||
Merger-related expenses | — | 2,176 | (2,176 | ) | -100% | 262 | 2,941 | (2,679 | ) | -91% | ||||||||||||||||||||||
Other | 2,829 | 2,807 | 22 | 1% | 7,747 | 6,807 | 940 | 14% | ||||||||||||||||||||||||
Total | $ | 37,083 | $ | 37,699 | $ | (616 | ) | -2% | $ | 108,939 | $ | 86,646 | $ | 22,293 | 26% | |||||||||||||||||
The increase in non-interest expense for the nine-months ended September 30, 2005 is primarily attributable to the inclusion of expenses from California operations 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. Substantially all merger-related expense incurred in the nine months ended September 30, 2005 related to the Humboldt acquisition. We do not expect to incur any additional merger-related expenses in connection with the Humboldt or any other previous merger.
Income Taxes
Our consolidated effective tax rate as a percentage of pre-tax income from continuing operations for three and nine months ended September 30, 2005 was 34.7% and 36.1%, compared to 32.8% and 34.5% for the three and nine months ended September 30, 2004. The decrease in the three month effective tax rate results from an adjustment to Oregon state income tax rates which was finalized in the third quarter and is retrospectively applied to the 2005 year. The change in the nine month effective tax rate is primarily attributable to the increased State of California tax rate on income from operations related to the Humboldt acquisition and the reduced proportion of tax exempt income to total income. 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 income arising from bank owned life insurance, income on tax exempt investment securities, tax credits arising from low income housing investments and exemptions related to loans and hiring in certain designated enterprise zones.
FINANCIAL CONDITION
Investment Securities
Total investment securities as of September 30, 2005 were $707.9 million, as compared to $687.8 million at December 31, 2004. This increase is principally attributable to the purchase of $168.6 million in investment securities, offset by maturities and sale of $139.8 million in investment securities in the nine months ended September 30, 2005. Investment securities purchases in the quarter totaled $168.1 million. No securities were sold in the three months ended September 30, 2005.
The following table presents the investment securities portfolio by major type as of September 30, 2005 and December 31, 2004:
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Investment Securities Composition
(in thousands) | Investment Securities Available for Sale | |||||||||||||||
September 30, 2005 | December 31, 2004 | |||||||||||||||
Fair Value | % | Fair Value | % | |||||||||||||
U.S. Treasury and agencies | $ | 197,527 | 28 | % | $ | 206,629 | 31 | % | ||||||||
Mortgage-backed | 164,304 | 24 | % | 150,454 | 22 | % | ||||||||||
Collateralized mortgage obligations | 224,178 | 32 | % | 215,014 | 32 | % | ||||||||||
Obligations of states and political subdivisions | 63,127 | 9 | % | 54,936 | 8 | % | ||||||||||
Other | 48,095 | 7 | % | 48,951 | 7 | % | ||||||||||
Total | $ | 697,231 | 100 | % | $ | 675,984 | 100 | % | ||||||||
Investment Securities Held to Maturity | ||||||||||||||||
September 30, 2005 | December 31, 2004 | |||||||||||||||
Amortized | Amortized | |||||||||||||||
Cost | % | Cost | % | |||||||||||||
Obligations of states and political subdivisions | $ | 10,301 | 96 | % | $ | 11,432 | 97 | % | ||||||||
Other | 375 | 4 | % | 375 | 3 | % | ||||||||||
Total | $ | 10,676 | 100 | % | $ | 11,807 | 100 | % | ||||||||
The investment securities portfolio had net unrealized losses of $4.4 million and $5.9 million for the three and nine months ended September 30, 2005, respectively. These losses are principally attributable to increases in market interest rates from December 31, 2004 to September 30, 2005. Because the Bank has the ability and intent to hold these investments until a market price recovery or to maturity, these investments are not considered other-than-temporarily impaired.
The average duration for the investment securities portfolio at September 30, 2005 was approximately 2.4 years. Information on average investment securities balances and average fully tax-equivalent yields is included under theNet Interest Incomesection of this Report.
Loans
Total loans outstanding as of September 30, 2005 were $3.7 billion, an increase of $228.9 million, or 7% from December 31, 2004. Loan growth in the nine months ended September 30, 2005 occurred in both the Oregon/Washington and California markets, which recorded growth of $80.1 million and $148.8 million, respectively. This growth is consistent with recent periods and is attributed to continued improvement of economic conditions in our markets, the quality of our loan origination staff and the fact that most loan decisions can be made locally.
The following table presents the major components of the loan portfolio at September 30, 2005 and December 31, 2004:
Loan Concentrations
(in thousands) | September 30, 2005 | December 31, 2004 | ||||||||||||||
Type of Loan | Amount | Percentage | Amount | Percentage | ||||||||||||
Construction and development | $ | 562,847 | 15.2 | % | $ | 481,836 | 13.9 | % | ||||||||
Farmland | 48,926 | 1.3 | % | 39,662 | 1.1 | % | ||||||||||
Home equity credit lines | 129,186 | 3.5 | % | 126,264 | 3.6 | % | ||||||||||
Single family first lien mortgage | 116,704 | 3.2 | % | 116,457 | 3.4 | % | ||||||||||
Single family second lien mortgage | 16,969 | 0.5 | % | 20,729 | 0.6 | % | ||||||||||
Multifamily | 137,367 | 3.7 | % | 182,526 | 5.3 | % | ||||||||||
Commercial real estate | 1,873,112 | 50.7 | % | 1,649,797 | 47.6 | % | ||||||||||
Total real estate secured | 2,885,111 | 78.1 | % | 2,617,271 | 75.5 | % | ||||||||||
Commercial and industrial | 674,219 | 18.2 | % | 699,471 | 20.2 | % | ||||||||||
Agricultural production | 42,223 | 1.2 | % | 34,405 | 1.0 | % | ||||||||||
Consumer | 55,747 | 1.5 | % | 77,903 | 2.2 | % | ||||||||||
Leases | 15,800 | 0.4 | % | 18,351 | 0.5 | % | ||||||||||
Other | 23,720 | 0.6 | % | 20,503 | 0.6 | % | ||||||||||
Total loans | $ | 3,696,820 | 100.0 | % | $ | 3,467,904 | 100.0 | % | ||||||||
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Information on average loan balances and average yields is included under theNet Interest Income section of this Report.
Asset Quality and Non-Performing Assets
Non-performing loans, which include non-accrual loans and accruing loans past due over 90 days totaled $8.3 million, or 0.22% of total loans, at September 30, 2005. This represents a significant decline from $20.6 million in non-performing loans and leases at June 30, 2005, and $22.6 million, or 0.65% of total loans, at December 31, 2004. Non-performing assets, which include non-performing loans and foreclosed real estate (“other real estate owned”), totaled $8.5 million, or 0.16% of total assets as of September 30, 2005, compared with $23.6 million, or 0.48% of total assets as of December 31, 2004.
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 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 market value of the property less expected selling costs. Other real estate owned at September 30, 2005 totaled $213,000 and consisted of three small commercial properties.
The following table summarizes our non-performing assets as of September 30, 2005 and December 31, 2004:
Non-Performing Assets
(in thousands) | September 30, | December 31, | ||||||
2005 | 2004 | |||||||
Loans on nonaccrual status | $ | 7,720 | $ | 21,836 | ||||
Loans past due 90 days or more and accruing | 537 | 737 | ||||||
Total nonperforming loans | 8,257 | 22,573 | ||||||
Other real estate owned | 213 | 979 | ||||||
Total nonperforming assets | $ | 8,470 | $ | 23,552 | ||||
Allowance for loan losses | $ | 43,603 | $ | 44,229 | ||||
Reserve for unfunded commitments | 1,489 | 1,338 | ||||||
Allowance for credit losses | $ | 45,092 | $ | 45,567 | ||||
Asset quality ratios: | ||||||||
Non-performing assets to total assets | 0.16 | % | 0.48 | % | ||||
Non-performing loans to total loans | 0.22 | % | 0.65 | % | ||||
Allowance for loan losses to total loans | 1.18 | % | 1.28 | % | ||||
Allowance for credit losses to total loans | 1.22 | % | 1.31 | % | ||||
Allowance for credit losses to total non-performing loans | 546 | % | 202 | % |
At September 30, 2005, approximately $3.2 million of loans were classified as restructured. 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 September 30, 2005 were classified as impaired and $2.1 million were included as non-accrual loans in the table 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.
Allowance for Loan Losses and Reserve for Unfunded Commitments
The process for determining the adequacy of the allowance for loan losses (“ALL”) 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
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information regarding the methodology used in determining the adequacy of the allowance for loan losses is contained in Part I, Item 1 of our Annual Report on Form 10-K under the heading “Allowance for Loan Loss Methodology”.
The ALL totaled $43.6 million at September 30, 2005 which was comparable to $43.4 million at September 30, 2004. Based on the quality of the loan portfolio, there was no provision for loan loss during the third quarter of 2005.
Allowance for Loan Losses
(in thousands) | Three months ended | Nine months ended | ||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Balance, beginning of period | $ | 44,510 | $ | 27,319 | $ | 44,229 | $ | 25,352 | ||||||||
Provision for loan losses | — | 1,479 | 2,400 | 3,654 | ||||||||||||
Loans charged-off | (3,289 | ) | (2,124 | ) | (7,140 | ) | (2,986 | ) | ||||||||
Charge-off recoveries | 2,382 | 659 | 4,114 | 1,313 | ||||||||||||
Net charge-offs | (907 | ) | (1,465 | ) | (3,026 | ) | (1,673 | ) | ||||||||
Reclassification (1) | — | (1,216 | ) | — | (1,216 | ) | ||||||||||
Change incident to merger | — | 17,257 | — | 17,257 | ||||||||||||
Total Allowance for loan losses | 43,603 | 43,374 | 43,603 | 43,374 | ||||||||||||
Reserve for unfunded commitments | 1,489 | 1,216 | 1,489 | 1,216 | ||||||||||||
Allowance for credit losses | $ | 45,092 | $ | 44,590 | $ | 45,092 | $ | 44,590 | ||||||||
As a percentage of average loans (annualized): | ||||||||||||||||
Net charge-offs | 0.10 | % | 0.18 | % | 0.11 | % | 0.09 | % | ||||||||
Provision for loan losses | 0.00 | % | 0.19 | % | 0.09 | % | 0.20 | % |
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. Prior to July 1, 2004, our ALL adequacy model did not allocate any specific component of the ALL to loss exposure for unfunded commitments.
The following table presents a summary of activity in the reserve for unfunded commitments (“RUC”):
Summary of Reserve for Unfunded Commitments Activity
Three months ended | Nine months ended | |||||||||||||||
(in thousands) | September 30, | September 30, | ||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Balance, beginning of period | $ | 1,354 | $ | — | $ | 1,338 | $ | — | ||||||||
Reclassification(1) | — | 1,216 | — | 1,216 | ||||||||||||
Net increase charged to other expenses | 135 | — | 151 | — | ||||||||||||
Balance, end of period | $ | 1,489 | $ | 1,216 | $ | 1,489 | $ | 1,216 | ||||||||
(1) | See Note 8 to condensed consolidated financial statements. |
We believe that the ALL and RUC at September 30, 2005 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 or other expenses in future periods if the results of their review warrant such.
Mortgage Servicing Rights (“MSR”)
The following table presents the key elements of our MSR asset as of September 30, 2005 and December 31, 2004:
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Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Balance, beginning of period | $ | 9,268 | $ | 11,391 | $ | 11,154 | $ | 10,608 | ||||||||
Additions for new mortgage servicing rights capitalized | 990 | 634 | 2,468 | 2,065 | ||||||||||||
Amortization of servicing rights | (574 | ) | (566 | ) | (1,543 | ) | (2,680 | ) | ||||||||
Impairment recovery / (charge) | 1,045 | (319 | ) | (1,350 | ) | 1,147 | ||||||||||
Balance, end of period | $ | 10,729 | $ | 11,140 | $ | 10,729 | $ | 11,140 | ||||||||
Balance of loans serviced for others | 1,015,597 | 1,093,460 | ||||||||||||||
MSR as a percentage of serviced loans | 1.06 | % | 1.02 | % |
As of September 30, 2005, we serviced residential mortgage loans for others with an aggregate outstanding principal balance of approximately $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 three months ended September 30, 2005, total mortgage loan origination volume was $113.6 million, a decrease of $12.3 million, or 10%, as compared to the three months ended September 30, 2004. For the nine months ended September 30, 2005, total mortgage loan origination volume was $278.2 million, a decrease of $83.6 million, or 23%, as compared to the nine months ended September 30, 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.
The value of MSR is impacted by market rates for mortgage loans. Historically low market rates can cause prepayments to increase as a result of refinancing activity. To the extent loans are prepaid sooner than estimated at the time servicing assets are originally recorded, it is possible that certain MSR 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 MSR will increase as market rates for mortgage loans rise and decrease if market rates fall.
At September 30, 2005, we had a valuation reserve of $2.1 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 September 30, 2005, we had goodwill and core deposit intangibles of $396.8 million and $10.2 million, respectively, as compared to $396.4 million and $12.1 million, respectively, at December 31, 2004. 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. There were no impairments recorded for the three and nine months ended September 30, 2005 and 2004.
Deposits
Total deposits were $4.1 billion at September 30, 2005, an increase of $293.9 million, or 8%, from December 31, 2004. This growth is attributed to our unique delivery process, service quality focus, marketing and product design, and not as the result of paying rates in excess of market. Information on average deposit balances and average rates paid is included under theNet Interest Incomesection of this Report.
The following table presents the deposit balances by major category as of September 30, 2005 and December 31, 2004:
Deposits
(in thousands) | September 30, 2005 | December 31, 2004 | ||||||||||||||
Amount | % | Amount | % | |||||||||||||
Non-interest bearing | $ | 1,071,940 | 26 | % | $ | 891,731 | 23 | % | ||||||||
Interest bearing demand | 1,631,039 | 40 | % | 1,504,396 | 40 | % | ||||||||||
Savings and money market | 393,217 | 10 | % | 452,684 | 12 | % | ||||||||||
Time, less than $100,000 | 486,435 | 12 | % | 462,951 | 12 | % | ||||||||||
Time, $100,000 or greater | 510,335 | 12 | % | 487,345 | 13 | % | ||||||||||
Total | $ | 4,092,966 | 100 | % | $ | 3,799,107 | 100 | % | ||||||||
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Borrowings
At September 30, 2005, the Bank had outstanding term debt of $3.3 million. Advances from the Federal Home Loan Banks of San Francisco and Seattle (“FHLB”) amounted to $2.5 million of the total and are secured by investment securities and residential mortgage loans. The FHLB advances outstanding at September 30, 2005 had fixed interest rates ranging from 6.08% to 7.44%. Approximately $1 million, or 41%, mature prior to December 31, 2007. Management expects continued use of FHLB advances as a source of short and long-term funding.
Junior Subordinated Debentures
We had junior subordinated debentures with carrying values of $165.8 million and $166.3 million, respectively, at September 30, 2005 and December 31, 2004, respectively.
At September 30, 2005, approximately $121.1 million, or 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 the three and nine months ended September 30, 2005 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 September 30, 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 9 of theNotes to Condensed Consolidated Financial Statements.
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 its 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.
The Company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of the Company’s revenues are obtained from dividends declared and paid by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Company. We believe that such restrictions will not have an adverse impact on the ability of the Company to meet its ongoing cash obligations, which consist principally of debt service on the $156.9 million (issued amount) of outstanding junior subordinated debentures. As of September 30, 2005, the Company did not have any borrowing arrangements.
As disclosed in theCondensed Consolidated Statements of Cash Flows, net cash provided by operating activities was $64.6 million during the nine months ended September 30, 2005. Net cash of $269.4 million used in investing activities consisted principally of $231.4 million of net loan growth, purchases of $168.6 million of investment securities available for sale and $9.5 million of premises and equipment, offset by sales and maturities of investment securities available for sale of $138.6 million. The $258.8 million of cash provided in financing activities primarily consisted of $294.3 million of net deposit growth, $56.0 million of Fed funds purchased, offset by $85.1 million of financing outflows related to repayment of term loans.
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. The following table presents a summary of the Bank’s commitments and contingent liabilities as of September 30, 2005:
Contractual Amounts
(in thousands) | September 30, | |||
2005 | ||||
Commitments to extend credit | $ | 1,005,630 | ||
Commitments to extend overdrafts | $ | 90,203 | ||
Commitments to originate residential loans | $ | 97,974 | ||
Forward sales commitments | $ | 21,000 | ||
Standby letters of credit | $ | 24,456 |
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Capital Resources
Shareholders’ equity at September 30, 2005 was $726.8 million, an increase of $39.2 million, or 8%, from December 31, 2004. The increase in shareholders’ equity during the nine months ended September 30, 2005 was principally due to the retention of $42.0 million, or approximately 83%, of net income for the nine month period.
Shareholders’ equity at September 30, 2005 was $726.8 million, an increase of $39.2 million, or 8%, from December 31, 2004. The increase in shareholders’ equity during the nine months ended September 30, 2005 was principally due to the retention of $42.0 million, or approximately 83%, of net income for the nine month period.
The following table shows Umpqua Holdings’ consolidated capital adequacy ratios, as calculated under regulatory guidelines, compared to the regulatory minimum capital ratio and the regulatory minimum capital ratio needed to qualify as a “well-capitalized” institution at September 30, 2005 and December 31, 2004:
For Capital | To be Well | |||||||||||||||||||||||
(in thousands) | Actual | Adequacy purposes | Capitalized | |||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of September 30, 2005: | ||||||||||||||||||||||||
Total Capital | ||||||||||||||||||||||||
(to Risk Weighted Assets) | $ | 520,816 | 11.85 | % | $ | 351,903 | 8.00 | % | $ | 439,878 | 10.00 | % | ||||||||||||
Tier I Capital | ||||||||||||||||||||||||
(to Risk Weighted Assets) | $ | 475,724 | 10.82 | % | $ | 176,031 | 4.00 | % | $ | 264,047 | 6.00 | % | ||||||||||||
Tier I Capital | ||||||||||||||||||||||||
(to Average Assets) | $ | 475,724 | 10.12 | % | $ | 187,662 | 4.00 | % | $ | 234,578 | 5.00 | % | ||||||||||||
As of December 31, 2004: | ||||||||||||||||||||||||
Total Capital | ||||||||||||||||||||||||
(to Risk Weighted Assets) | $ | 475,480 | 11.58 | % | $ | 328,484 | 8.00 | % | $ | 410,605 | 10.00 | % | ||||||||||||
Tier I Capital | ||||||||||||||||||||||||
(to Risk Weighted Assets) | $ | 431,251 | 10.50 | % | $ | 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 | % |
The following table presents cash dividends declared and dividend payout ratios (dividends declared per share divided by basic earnings per share) for the three and nine months ended September 30, 2005 and 2004:
Cash Dividends and Payout Ratios
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Dividend declared per share | $ | 0.08 | $ | 0.06 | $ | 0.20 | $ | 0.16 | ||||||||
Dividend payout ratio | 18 | % | 19 | % | 17 | % | 17 | % |
Our board of directors has approved a stock repurchase plan for up to 2.5 million shares of common stock. As of September 30, 2005, a total of 2.1 million shares remain available for repurchase under this authorization, which expires on June 30, 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. Shares repurchased in open market transactions during the three and nine months ended September 30, 2005 totaled 83,981. We 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 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the quantitative and qualitative disclosures about market risk as of September 30, 2005 from those presented in our Annual Report on Form 10-K for the year ended December 31, 2004.
Item 4. Controls and Procedures
Our management, including our Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer, has 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. The disclosure controls and procedures were last evaluated by management as of September 30, 2005.
There have been no significant changes in our internal controls or in other factors that are likely to materially affect our internal controls over financial reporting subsequent to the date of the evaluation.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not Applicable
(b) Not Applicable
(c) The following table provides information about repurchases of common stock by the Company during the quarter ended September 30, 2005:
Total Number of | Maximum Number | |||||||||||||||
Shares | of Remaining | |||||||||||||||
Purchased as | Shares that May | |||||||||||||||
Total number of | Part of Publicly | be Purchased at | ||||||||||||||
Shares | Average Price | Announced Plan | Period End under | |||||||||||||
Period | Purchased (1) | Paid per Share | (2) | the Plan | ||||||||||||
7/1/05 - 7/31/05 | 742 | $ | 24.90 | — | 2,087,566 | |||||||||||
8/1/05 - 8/31/05 | 29,150 | $ | 23.65 | 29,150 | 2,058,416 | |||||||||||
9/1/05 - 9/30/05 | 1,668 | $ | 24.20 | 624 | 2,057,792 | |||||||||||
Total for quarter | 31,560 | $ | 23.71 | 29,774 |
(1) | Shares repurchased by the Company during the quarter include: (a) shares repurchased pursuant to the Company’s publicly announced corporate stock repurchase plan described in (2) below, and (b) cancellation of restricted stock to pay withholding taxes totaling 742 shares, 0 shares and 1,044 shares for July 2005, August 2005 and September 2005, respectively. No shares were tendered in connection with option exercises during the three months ended September 30, 2005. | |
(2) | The 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. |
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submissions of Matters to a Vote of Securities Holders
(a) Not Applicable.
(b) Not Applicable.
(c) Not Applicable.
Item 5. Other Information
(a) Not Applicable.
(b) Not Applicable.
Item 6. Exhibits
The exhibits filed as part of this Report and exhibits incorporated herein by reference to other documents are listed in the Exhibit Index to this Report.
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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 November 7, 2005 | /s/ Raymond P. Davis | |||
Raymond P. Davis | ||||
President and Chief Executive Officer | ||||
Dated November 7, 2005 | /s/ Daniel A. Sullivan | |||
Daniel A. Sullivan | ||||
Executive Vice President and Chief Financial Officer | ||||
Dated November 7, 2005 | /s/ Ronald L. Farnsworth, Jr. | |||
Ronald L. Farnsworth, Jr. | ||||
Senior Vice President/Finance and Principal Accounting Officer | ||||
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EXHIBIT INDEX
Exhibit
3.1(a) | Articles of Incorporation, as amended | |
3.2(b) | Bylaws, as amended | |
4.0(c) | Specimen Stock Certificate | |
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 | |
99.1 | Risk Factors |
(a) | 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 the Form 10-Q filed May 10, 2004. | |
(c) | Incorporated by reference to the Registration Statement on Form S-8 (No. 333-77259) filed with the SEC on April 28, 1999. |
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