As Filed with the Securities and Exchange Commission on November 13, 2000 U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended: September 30, 2000 [_] 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 of Incorporation or Organization) Identification Number) 445 SE Main St Roseburg, Oregon 97470 -------------------------------------------------- (address of Principal Executive Offices)(Zip Code) (541) 440-3963 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. __X__ Yes _____ 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, outstanding as of October 31, 2000: 7,625,627 UMPQUA HOLDINGS CORPORATION FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets: September 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Income: Three and nine months ended September 30, 2000 and 1999 4 Condensed Consolidated Statements of Comprehensive Income: Three and nine months ended September 30, 2000 and 1999 5 Condensed Consolidated Statements of Cash Flows: Nine months ended September 30, 2000 and 1999 6 Notes to Condensed Consolidated Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 PART II OTHER INFORMATION Item 1. Legal Proceedings none Item 2. Changes in Securities none Item 3. Defaults Upon Senior Securities none Item 4. Submission of Matters to a Vote of Security Holders none Item 5. Other Information none Item 6. Exhibits and Reports on Form 8-K 18-19 SIGNATURES 19 PART I: FINANCIAL INFORMATION Item 1. Financial Statements UMPQUA HOLDINGS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, December 31, 2000 1999 ------------ ------------ ASSETS Cash and due from banks $ 22,511,016 $ 30,058,897 Interest bearing deposits in other banks 30,431,820 15,630,197 ------------ ------------ Total Cash and Cash Equivalents 52,942,836 45,689,094 Trading account assets 1,477,753 474,782 Investment securities available for sale 71,153,768 76,868,536 Mortgage loans held for sale 2,207,281 - Loans receivable 274,205,819 248,533,933 Less: Allowance for loan losses (4,118,589) (3,469,350) ------------ ------------ Loans, net 270,087,230 245,064,583 Federal Home Loan Bank stock at cost 2,462,100 2,346,200 Property and equipment, net of depreciation 10,287,494 9,419,744 Intangibles 3,435,359 2,284,415 Interest receivable 2,720,008 2,422,829 Other assets 2,083,047 2,166,533 ------------ ------------ Total Assets $418,856,876 $386,736,716 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 71,197,916 $ 59,709,104 Savings and interest-bearing checking 149,708,909 151,199,156 Time deposits 134,176,990 90,765,095 ------------ ------------ Total Deposits 355,083,815 301,673,355 Securities sold under agreements to repurchase 5,107,215 - Term debt to Federal Home Loan Bank 14,628,000 46,158,000 Accrued interest payable 758,397 543,424 Other liabilities 2,635,449 1,645,715 ------------ ------------ Total Liabilities 378,212,876 350,020,494 ------------ ------------ Commitments and contingencies SHAREHOLDERS' EQUITY Common stock 25,823,869 25,778,259 Retained earnings 15,903,362 12,708,368 Accumulated other comprehensive loss (1,083,231) (1,770,405) ------------ ------------ Total Shareholders' Equity 40,644,000 36,716,222 ------------ ------------ Total Liabilities and Shareholders' Equity $418,856,876 $386,736,716 ============ ============ See accompanying notes to condensed consolidated financial statements 3 UMPQUA HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months ended September 30, Nine months ended September 30, 2000 1999 2000 1999 ------------ ---------------- ------------- ------------ Interest Income Interest and fees on loans $ 6,363,230 $ 4,853,961 $18,205,636 $13,800,572 Interest on taxable investment securities 848,904 971,121 2,652,770 3,034,981 Interest on tax-exempt investment securities 274,095 253,165 803,817 658,620 Interest bearing deposits with other banks 429,455 204,108 711,987 453,003 ------------------------------- ------------------------------ Total interest income 7,915,684 6,282,355 22,374,210 17,947,176 ------------------------------- ------------------------------ Interest Expense Interest on deposits 2,820,295 1,805,353 7,326,432 5,134,279 Interest on borrowings and repurchase agreements 250,808 325,724 1,168,340 973,936 ------------------------------- ------------------------------ Total interest expense 3,071,103 2,131,077 8,494,772 6,108,215 ------------------------------- ------------------------------ Net Interest Income 4,844,581 4,151,278 13,879,438 11,838,961 Provision for loan losses 375,000 226,000 1,409,500 881,000 ------------------------------- ------------------------------ Net interest income after provision for loan loss 4,469,581 3,925,278 12,469,938 10,957,961 Noninterest Income Service charges 832,884 780,373 2,424,104 2,159,130 Commissions 1,778,758 64,016 4,519,051 254,253 Other noninterest income 216,147 128,318 587,597 477,740 ------------------------------- ------------------------------ Total noninterest income 2,827,789 972,707 7,530,752 2,891,123 ------------------------------- ------------------------------ Noninterest Expense Salaries and employee benefits 2,827,732 1,463,873 7,643,399 4,076,019 Premises and Equipment 612,597 449,184 1,752,220 1,248,825 Other noninterest expense 1,619,480 1,029,899 4,173,406 2,851,040 ------------------------------- ------------------------------ Total noninterest expense 5,059,809 2,942,956 13,569,025 8,175,884 ------------------------------- ------------------------------ Income before income taxes 2,237,561 1,955,029 6,431,665 5,673,200 Provision for income taxes 827,000 711,822 2,322,000 2,053,960 ------------------------------- ------------------------------ Net Income $ 1,410,561 $ 1,243,207 $4,109,665 $3,619,240 =============================== ============================== Earnings Per Share Basic $ 0.18 $ 0.16 $ 0.54 $ 0.47 Diluted $ 0.18 $ 0.16 $ 0.53 $ 0.46 See accompanying notes to condensed consolidated financial statements 4 UMPQUA HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three months ended September 30, Nine months ended September 30, 2000 1999 2000 1999 ------------------ ---------------- ---------------- ---------------- Net income $ 1,410,561 $ 1,243,207 $ 4,109,665 $ 3,619,240 ------------------ ---------------- ---------------- ---------------- Unrealized gains (losses) arising during the period on investment securities available for sale 1,067,555 (281,888) 1,114,747 (3,018,692) ------------------ ---------------- ---------------- ---------------- Income tax expense (benefit) related to unrealized gains (losses) on investment securities 409,472 (108,121) 427,573 (1,123,510) ------------------ ---------------- ---------------- ---------------- Net unrealized gains (losses) on investment securities available for sale 658,083 (173,767) 687,174 (1,895,182) ------------------ ---------------- ---------------- ---------------- Comprehensive Income (Loss) $ 2,068,644 $ 1,069,440 $ 4,796,839 $ 1,724,058 ================== ================ ================ ================ See accompanying notes to condensed consolidated financial statements 5 UMPQUA HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine months ended September 30, 2000 1999 ------------------ --------------- Cash flows from operating activities: Net income $ 4,109,665 $ 3,619,240 Adjustments to reconcile net income to net cash provided by operating activities: Federal Home Loan Bank stock dividends (115,900) (110,000) Net increase in trading account assets (1,002,971) - Amortization of investment premiums, net 108,209 150,356 Origination of loans held for sale (12,419,823) (12,645,495) Proceeds from sales of loans held for sale 10,292,069 14,141,005 Amortization of intangibles 188,502 - Provision for loan losses 1,409,500 881,000 Gain on sales of loans (222,579) (220,651) Depreciation of premises and equipment 688,785 522,556 Net increase in other assets (1,980,712) (387,985) Net increase in other liabilities 1,250,335 167,695 ------------------ --------------- Net cash provided by operating activities 2,305,080 6,117,721 ------------------ --------------- Cash flows from investing activities: Purchases of investment securities - (11,442,038) Maturities of investment securities 3,196,473 6,454,479 Principal repayments received on mortgage-backed and related securities 3,524,833 7,206,279 Net loan originations (37,473,248) (39,701,459) Purchase of loans (5,362) (1,334,966) Proceeds from sales of loans 11,189,515 2,275,864 Purchases of premises and equipment (1,556,535) (2,024,022) ------------------ --------------- Net cash used in investing activities (21,124,324) (38,565,863) ------------------ --------------- Cash flows from financing activities: Net increase in deposit liabilities 53,410,460 33,763,633 Net increase in securities sold under agreements to repurchase 5,107,215 - Dividends paid on common stock (914,671) (916,516) Repurchase of common stock (67,408) (771,400) Proceeds from stock options exercised 67,390 105,011 Repayments of Federal Home Loan Bank borrowings (31,530,000) (30,000) ------------------ --------------- Net cash provided by financing activities 26,072,986 32,150,728 ------------------ --------------- Net increase (decrease) in cash and cash equivalents 7,253,742 (297,414) Cash and cash equivalents, beginning of year 45,689,094 36,967,543 ------------------ --------------- Cash and cash equivalents, end of period $ 52,942,836 $ 36,670,129 ================== =============== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 8,279,799 $ 6,004,476 Income taxes $ 1,920,500 $ 1,875,000 See accompanying notes to condensed consolidated financial statements 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of financial statement preparation The accompanying condensed consolidated financial statements have been prepared by the Company without audit and in conformity with generally accepted accounting principles for interim financial information. Accordingly, certain financial information and footnotes have been omitted or condensed. The condensed consolidated financial statements include the accounts of Umpqua Holdings Corporation (the Company), and its wholly-owned subsidiaries South Umpqua Bank (the Bank) and Strand, Atkinson, Williams & York, Inc (Strand, Atkinson). All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the condensed consolidated financial statements include all necessary adjustments (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These financial statements should be read in conjunction with the Company's 1999 annual report to shareholders. The results of operations for the 2000 interim periods shown in this report are not necessarily indicative of the results for any future interim period or the entire fiscal year. (b) Earnings per share Basic and diluted earnings per share are based on the weighted average number of common shares outstanding during each period, with diluted including the effect of potentially dilutive common shares. The weighted average number of common shares outstanding for basic and diluted earnings per share computations were as follows: Three months ended Three months ended September 30, 2000 September 30, 1999 ------------------ ------------------ Weighted Average Shares Outstanding 7,625,627 7,625,830 Common Stock Equivalents 105,977 139,803 ------------------ ------------------ Diluted Shares Outstanding 7,731,604 7,765,633 ================== ================== Nine months ended Nine months ended September 30, 2000 September 30, 1999 ------------------ ------------------ Weighted Average Shares Outstanding 7,620,182 7,643,284 Common Stock Equivalents 111,634 141,125 ------------------ ------------------ Diluted Shares Outstanding 7,731,816 7,784,409 ================== ================== Options to purchase 371,500 shares of common stock for prices ranging from $8.375 to $12.00 per share were outstanding during the quarter ended September 30, 2000 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares during the period. 7 (2) ACQUISITION OF ADAMS, HESS, MOORE & CO. On August 4, 2000, the Company acquired the retail brokerage firm of Adams, Hess, Moore & Co. (Adams, Hess). Adams, Hess has offices in Portland, Eugene and Salem and 18 investment representatives. The operations of Strand, Atkinson and Adams, Hess have been combined and the combined company is operating under the Strand, Atkinson name. The acquisition was accounted for using the purchase method of accounting and accordingly, the assets and liabilities of Adams, Hess were recorded at their respective fair values on the balance sheet of the Company on the date of the acquisition. Intangible assets acquired are being amortized over the lives of such assets. Goodwill is being amortized over 15 years. Revenues and expenses since the acquisition date have been included in the results of operations for the Company. (3) SEGMENT INFORMATION For purposes of measuring and reporting the financial results, the Company is divided into two business segments; Community Banking and Retail Brokerage Services. The Community Banking segment consists of the operations conducted by the Company's subsidiary South Umpqua Bank. The Bank provides a full array of credit and deposit products to meet the banking needs of its market area and targeted customers. At September 30, 2000, the Bank had 13 full service stores. The Retail Brokerage Service segment consists of the operations of the Company's subsidiary Strand, Atkinson, Williams & York, Inc. which was acquired in December 1999. Strand, Atkinson provides a full range of retail brokerage services to its clients through its two principal offices in Portland and Medford, Oregon as well as sales counters at most of the Bank's stores. At September 30, 2000, Strand, Atkinson, Williams & York, Inc. had 37 full time brokers. The following table presents summary income statements and a reconciliation to the Company's consolidated totals for the nine months ended September 30, 2000. ($ in thousands) Community Retail Brokerage Banking Services Administration Eliminations Consolidated --------------------------------------------------------------------------- Interest Income $ 22,317 $ 57 $ - $ - $ 22,374 Interest Expense 8,495 21 - (21) 8,495 --------------------------------------------------------------------------- Net Interest Income 13,822 36 - (21) 13,879 Provision for Loan Losses 1,410 - - - 1,410 Noninterest Income 3,105 4,503 - (77) 7,531 Noninterest Expense 9,528 3,982 136 (78) 13,568 --------------------------------------------------------------------------- Income before Taxes 5,989 557 (136) (20) 6,432 Income Tax Expense (Benefit) 2,116 244 (38) - 2,322 --------------------------------------------------------------------------- Net Income $ 3,873 $ 313 $ (98) $ (20) $ 4,110 =========================================================================== Total assets by segment have not changed materially since December 31, 1999. (3) IMPAIRED LOANS The Company had loans totaling $763,000 and $1,052,000 at September 30, 2000 and December 31, 1999, respectively, that were considered impaired. At September 30, 2000 the allowance for loan losses dedicated to impaired loans was $450,000 and at December 31, 1999 the allowance for loan losses allocated to impaired loans was $540,000. The average investment in impaired loans was 8 $958,000 for the nine months ended September 30, 2000. All payments received on the loans were applied to principal and consequently no income has been recognized during the nine months ended September 30, 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains a review of Umpqua Holdings Corporation's (Company) financial condition at September 30, 2000 and the operating results for the three and nine months then ended. When warranted, comparisons are made to the same period in 1999 and to December 31, 1999. This discussion should be read in conjunction with the financial statements (unaudited) contained elsewhere in this report. All numbers, except per share data, are expressed in thousands of dollars. This discussion contains certain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated. These risks and uncertainties include the Company's ability to maintain or expand its market share and net interest margins, or to implement its marketing and growth strategies. Further, actual results may be affected by the Company's ability to compete on price and other factors with other financial institutions; customer acceptance of new products and services; and general trends in the banking and the regulatory environment, as they relate to the Company's cost of funds and returns on assets. In addition there are risks inherent in the banking industry relating to the collectability of loans and changes in interest rates. The reader is advised that this list of risks is not exhaustive and should not be construed as any prediction by the Company as to which risks would cause actual results to differ materially from those indicated by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. Financial Highlights The Company earned $1,411 for the quarter ended September 30, 2000 compared with $1,243 for the same period in 1999, a 13.5% increase. Diluted earnings per share improved from $0.16 for the third quarter of 1999 to $0.18 for the third quarter of 2000. Return on average shareholders' equity was 14.1% and return on average assets was 1.39% for the quarter ended September 30, 2000. For the nine months ended September 30, 2000 the Company earned $4,110 compared with $3,619 for the same period in 1999. Diluted earnings per share improved to $0.53 in 2000 from $0.46 in 1999. Return on average equity was 14.3% and return on average assets was 1.41% for the nine months ended September 30, 2000. Total assets have increased $32 million, or 8.3% since December 31, 1999 to $419 million at September 30, 2000. On August 15, 2000 the Company announced the signing of a definitive merger agreement between itself and VRB Bancorp. The transaction will be accounted for using the pooling-of-interests method of accounting. The merger, expected to close in the fourth quarter 2000, is subject to customary regulatory approvals and the shareholder approval of both companies. 9 Results of Operations Net interest income Net interest income is the primary source of the Company's revenue. Net interest income is the difference between interest income generated from earning assets, primarily loans and investment securities, and interest expense paid on customer deposits and debt. Changes in net interest income result from changes in "volume" and "rate". Volume refers to the level of interest earning assets and interest bearing liabilities while rate refers to the underlying yields on assets and costs of liabilities. Taxable equivalent net interest income for third quarter of 2000 was $4,964 compared with $4,263 for the third quarter of 1999, a $701 increase (See Table 1). The increase was due almost entirely to increases in the volume of earning assets. The yield on average earning assets improved to 8.64% during the period compared with 8.03% in 1999, reflecting the increased yield on the Company's loan portfolio. The yield on the Company's loan portfolio increased to 9.45% during the third quarter of 2000 compared with 8.95% during the same period in 1999. The increase was primarily due to repricing of the Company's adjustable rate loans. The cost of interest bearing liabilities increased to 4.15% during the period compared with 3.43% in 1999 due primarily to higher rates paid on time deposits. As a result of these factors, the net interest margin was relatively unchanged during the period, decreasing 0.01% to 5.34% for the third quarter of 2000. 10 TABLE 1 AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID The following table shows average balances and interest income or interest expense, with the resulting average yield or rates by category of average earning asset or interest-bearing liability: Nine Months ended Nine Months ended September 30, 2000 September 30, 1999 INCREASE (DECREASE) AVERAGE INCOME/ AVERAGE INCOME/ DUE TO CHANGE IN NET BALANCE EXPENSE RATE BALANCE EXPENSE RATE VOLUME RATE CHANGE ----------------------------- ---------------------------- ------------------------------ (in thousands) INTEREST-EARNING ASSETS: Loans (1)(2) $267,123 $6,342 9.45% $214,618 $4,844 8.95% $1,169 $329 $1,498 Loans held for sale 910 21 9.18% 322 10 12.32% 18 (7) 11 Trading account assets (1) 1,466 39 10.58% - - 39 - 39 Investment securities Taxable securities 52,303 849 6.46% 62,697 972 6.15% (163) 40 (123) Nontaxable securities (1) 21,565 355 6.55% 22,037 364 6.55% (9) (0) (9) Temporary investments 26,400 429 6.46% 16,139 204 5.01% 129 96 225 ----------------- ------------------ --------------------- Total interest earning assets 369,767 8,035 8.64% 315,813 6,394 8.03% 1,183 458 1,641 Cash and due from banks 20,940 18,660 Allowance for loan losses (4,029) (3,062) Other assets 16,952 12,244 --------- -------- Total assets $403,630 $343,655 ========= ======== INTEREST-BEARING LIABILITIES: Interest-bearing checking and savings accounts $147,342 $ 878 2.37% $140,584 $ 867 2.45% 39 (28) 11 Time deposits 128,584 1,942 6.01% 80,382 938 4.63% 558 446 1,004 Term debt and Repurchase agreements 18,755 251 5.32% 25,171 326 5.14% (84) 9 (75) ----------------- ----------------- --------------------- Total interest-bearing liabilities 294,681 3,071 4.15% 246,137 2,131 3.43% 513 427 940 Non interest bearing deposits 66,240 59,996 Other liabilities 2,777 1,296 --------- -------- Total liabilities 363,698 307,429 Shareholders' equity 39,932 36,226 --------- -------- Total liabilities and shareholders' equity $403,630 $343,655 ========= ======== NET INTEREST INCOME (1) $4,964 $4,263 $ 670 $31 $ 701 ======= ======= ==================== NET INTEREST SPREAD 4.50% 4.60% AVERAGE YIELD ON EARNING ASSETS (1),(2) 8.64% 8.03% INTEREST EXPENSE TO EARNING ASSETS 3.30% 2.68% ----- ----- NET INTEREST INCOME TO EARNING ASSETS (1),(2) 5.34% 5.35% ===== ===== (1) Tax exempt income has been adjusted to a tax equivalent basis at a 34% effective rate. The amount of such adjustment was an addition to recorded income of $119,316 and $111,645 for the three months ended September 30, 2000 and 1999 respectively. (2) Non-accrual loans are included in average balance. 11 Taxable equivalent net interest income for the nine months ended September 30, 2000 was $14,216 compared with $12,125 for the same period in 1999. The improvement was due almost entirely to increases in the volume of earning assets. Average earning assets increased $53.7 million in 2000 compared with 1999. Average loans, the largest component of average interest earning assets increased $58.7 million for the nine months ended September 30, 2000 compared with the same period in 1999. The yield on earning assets improved 0.49% and the cost of interest bearing deposits also increased 0.49% while the net interest margin improved slightly for the nine months ended September 30, 2000 to 5.39% from 5.38% for the same period in 2000. 12 TABLE 2 AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID The following table shows average balances and interest income or interest expense, with the resulting average yield or rates by category of average earning asset or interest-bearing liability: Nine Months ended Nine Months ended September 30, 2000 September 30, 1999 INCREASE (DECREASE) AVERAGE INCOME/ AVERAGE INCOME/ DUE TO CHANGE IN NET BALANCE EXPENSE RATE BALANCE EXPENSE RATE VOLUME RATE CHANGE ----------------------------- ---------------------------- ------------------------------ (in thousands) INTEREST-EARNING ASSETS: Loans (1)(2) $ 262,662 $ 18,161 9.24% $ 203,952 $ 13,756 9.02% $ 3,977 $ 428 $ 4,405 Loans held for sale 597 44 9.84% 446 44 13.19% 15 (15) (0) Trading account assets (1) 977 74 10.12% - - NA 74 - 74 Investment securities Taxable securities 54,312 2,653 6.51% 65,495 3,035 6.18% (518) 136 (382) Nontaxable securities (1) 21,372 1,067 6.66% 19,302 945 6.53% 101 21 122 Temporary investments 15,330 712 6.20% 12,369 453 4.90% 110 149 259 ----------------------- ---------------------- ------------------------------- Total interest earning assets 355,250 22,711 8.54% 301,564 18,233 8.08% 3,759 719 4,478 Cash and due from banks 20,278 17,701 Allowance for loan losses (3,822) (2,905) Other assets 17,090 10,932 ----------- ----------- Total assets $ 388,796 $ 327,292 =========== =========== INTEREST-BEARING LIABILITIES: Interest-bearing checking and savings accounts $ 145,117 $ 2,544 2.34% $ 134,383 $ 2,494 2.48% 202 (152) 50 Time deposits 112,521 4,783 5.68% 75,122 2,640 4.70% 1,319 824 2,143 Term debt and repurchase agreements 28,389 1,168 5.50% 25,372 974 5.13% 116 78 194 ----------------------- ---------------------- ------------------------------- Total interest-bearing liabilities 286,027 8,495 3.97% 234,877 6,108 3.48% 1,637 750 2,387 ------------------------------- Non interest bearing deposits 61,797 54,446 Other liabilities 2,613 1,694 ----------- ----------- Total liabilities 350,437 291,017 Shareholders' equity 38,359 36,175 ----------- ----------- Total liabilities and shareholders' equity $ 388,796 $ 327,192 =========== =========== NET INTEREST INCOME (1) $ 14,216 $ 12,125 $ 2,122 $ (31) $ 2,091 ============ =========== =============================== NET INTEREST SPREAD 4.57% 4.60% AVERAGE YIELD ON EARNING ASSETS (1),(2) 8.54% 8.08% INTEREST EXPENSE TO EARNING ASSETS 3.19% 2.70% -------- -------- NET INTEREST INCOME TO EARNING ASSETS (1),(2) 5.35% 5.38% ======== ======== (1) Tax exempt income has been adjusted to a tax equivalent basis at a 34% effective rate. The amount of such adjustment was an addition to recorded income of $336,790 and $285,824 for the nine months ended September 30, 2000 and 1999 respectively. (2) Non-accrual loans are included in average balance. 13 Provision for Loan Losses The provision for loan losses is management's estimate of the amount necessary to maintain an allowance for loan losses that is considered adequate based on the risk of future losses in the loan portfolio (see additional discussion under Allowance for Loan Losses). The provision for loan losses for the third quarter of 2000 was $375 compared with $226 during the third quarter of 1999. Net charge-offs were $26 for the three months ended September 30, 2000 compared with net charge-offs of $66 for the same period in 1999. For the nine months ended September 30, 2000 net charge-offs totaled $760 compared with $442 for the same period in 1999. Nonperforming assets decreased from $1,604 at December 31, 1999 to $763 at September 30, 2000. The allowance for loan losses totaled $4,119, or 1.50% of total loans, at September 30, 2000 compared with $3,469, or 1.40% of total loans at December 31, 1999. Noninterest Income Noninterest income totaled $2,828 for the quarter ended September 30, 2000 compared with $973 for the same period in 1999. The primary reason for the increase was revenue generated by the Company's subsidiary Strand, Atkinson which was acquired in December 1999. The subsidiary generated $1,779 in noninterest income during the quarter. Other noninterest income also increased during the quarter to $216 from $128. Noninterest income was $7,531 for the nine months ended September 30, 2000 compared with $2,891 for the same period in 1999. The increase is primarily attributable to $4,519 of noninterest income generated by Strand, Atkinson. Service charges on deposits also increased $265 for the nine month period ending September 30, 2000 compared with the same period in 1999. This increase was due to increases in the number of accounts as well as selected service fee repricing that occurred at the end of the second quarter 1999. Noninterest Expense Noninterest expense for the quarter ended September 30, 2000 was $5,060 compared with $2,943 for the same period in 1999. The primary reason for the increase was expenses incurred by Strand, Atkinson, Williams & York. Details of noninterest expense by business segment for the second quarter of 2000 and 1999 are detailed below: For the quarter ended September 30, 2000 Community Retail Brokerage Banking Services Administration EliminationsConsolidated ----------------------------------------------------------------------- Salaries and employee benefits $ 1,586 $ 1,242 $ - $ - $ 2,828 Premises and Equipment 565 58 - (10) 613 Other noninterest expense 1,224 383 54 (42) 1,619 ----------------------------------------------------------------------- Total noninterest expense $ 3,375 $ 1,683 $ 54 $ (52) $ 5,060 ======================================================================= 14 For the quarter ended September 30, 1999 Community Retail Brokerage Banking Services Administration EliminationsConsolidated ----------------------------------------------------------------------- Salaries and employee benefits $ 1,464 $ - $ - $ - $ 1,464 Premises and Equipment 449 - - - 449 Other noninterest expense 982 - 59 (11) 1,030 ----------------------------------------------------------------------- Total noninterest expense $ 2,895 $ - $ 59 $ (11) $ 2,943 ======================================================================= The increase in expenses in the Community Banking segment was due to the opening of the Salem store in early 2000 and additional lending staff. For the nine months ended September 30, 2000 noninterest expense was $13,569 compared with $8,176 for the same period in 1999. The primary reason for the increase was due to expenses incurred by Strand, Atkinson. Details of noninterest expense by business segment is detailed below: For the nine months ended September 30, 2000 Community Retail Brokerage Banking Services Administration EliminationsConsolidated ----------------------------------------------------------------------- Salaries and employee benefits $ 4,697 $ 2,946 $ - $ $ 7,643 Premises and Equipment 1,642 121 - (11) 1,752 Other noninterest expense 3,189 915 136 (67) 4,173 ----------------------------------------------------------------------- Total noninterest expense $ 9,528 $ 3,982 $ 136 $ (78) $ 13,568 ======================================================================= For the nine months ended September 30, 1999 Community Retail Brokerage Banking Services Administration EliminationsConsolidated ----------------------------------------------------------------------- Salaries and employee benefits $ 4,076 $ - $ - $ $ 4,076 Premises and Equipment 1,249 - - 1,249 Other noninterest expense 2,732 - 151 (32) 2,851 ----------------------------------------------------------------------- Total noninterest expense $ 8,057 $ - $ 151 $ (32) $ 8,176 ======================================================================= The primary reason for the increase in salaries and employee benefits in the community banking segment was staff associated with the opening of the Portland store in July 1999 and the Salem store in January 2000 as well as additional lending staff. Premises and equipment expense also increased as a result of the two new stores. 15 Income taxes The effective tax rate for the Company was 37.0% during the third quarter of 2000 compared with 36.4% during the third quarter of 1999. For the nine months ended September 30, 2000 the Company's effective tax rate was 36.1% compared with 36.2% for the same period in 1999. Financial Condition Significant changes in the Company's financial position from December 31, 1999 to September 30, 2000 are as follows: Loans Loans have increased $25.7 million since December 31, 1999 to $274.2 million at September 30, 2000. Details of the loan portfolio at September 30, 2000 and December 31, 1999 were as follows: 09/30/00 12/31/99 -------- -------- Commercial & Industrial $ 60,792 $ 60,137 Real Estate: Construction 35,402 29,962 Residential Mortgage 27,122 23,099 Commercial Real Estate 118,441 104,823 Individuals 32,253 30,309 Other 196 204 -------- -------- Total Loans $274,206 $248,534 ======== ======== The Company had no off balance sheet derivative instruments at September 30, 2000 or December 31, 1999. Allowance for Loan Losses The allowance for loan losses is maintained at a level considered by management to be adequate to absorb losses inherent in the loan portfolio. Management monitors and evaluates the adequacy of the allowance on an ongoing basis. The following tools are used to manage and evaluate the loan portfolio: o Internal credit review and risk grading system o Regulatory examination results o Monitoring of charge-off, past due and non-performing activity and trends o Assessment of economic and business conditions in our market areas On a quarterly basis losses inherent in the portfolio are estimated by reviewing the following key elements of the loan portfolio: o Portfolio performance measures o Portfolio mix o Portfolio growth rates o Historical loss rates o Portfolio concentrations o Current economic conditions in our market areas 16 The Company also tests the adequacy of the allowance for loan losses using the following methodologies: o Loss allocation by internally assigned risk rating o Loss allocation by portfolio type based on historic loan loss experience o The allowance as a percentage of total loans The allowance for loan losses is based upon estimates of losses inherent in the portfolio. The amount of losses actually incurred can vary significantly from these estimates. Assessing the adequacy of the allowance on a quarterly basis allows management to adjust these estimates based upon the most recent information available. Activity in the allowance for loan losses was as follows for the three and nine month periods ending September 30, 2000: Three months ended Year to Date September 30, 2000 September 30, 2000 ------------------ ------------------ Beginning Balance $ 3,770 $ 3,469 Provision for Loan Losses 375 1,410 Charge-offs (65) (828) Recoveries 39 68 ------------- ------------- Net charge-offs (26) (760) ------------- ------------- Ending Balance $ 4,119 $ 4,119 ============= ============= Deposits Deposits have grown from $301.7 million at December 31, 1999 to $355.1 million at September 30, 2000. Details of deposits at December 31, 1999 and September 30, 2000 were as follows: September 30, 2000 December 31, 1999 ------------------ ----------------- Noninterest bearing demand $ 71,198 $ 59,709 Interest bearing demand and Money market accounts 127,405 128,321 Savings 22,304 22,878 Time deposits 134,177 90,765 ------------- ------------ Total Deposits $ 355,084 $ 301,673 ============= ============ Liquidity Liquidity enables the Company to meet the borrowing needs of its customers and withdrawals of its depositors. The Company meets its liquidity needs through the maintenance of cash resources, lines of credit with other financial institutions, maturities and sales of investment securities available for sale, and a stable base of core deposits. Having a stable and diversified deposit base is a significant factor in the Company's long-term liquidity structure. At September 30, 2000 that Company had a total funding line with the Federal Home Loan Bank of $101.9 million of which $14.6 million 17 was outstanding. The Company also had available lines of $18.4 million from other financial institutions. At September 30, 2000 the Company had approximately $77.4 million in outstanding commitments to extend credit. The Company anticipates that a portion of these commitments will expire or terminate without funding and that the Company has sufficient available resources to fund these commitments in the normal course of business. Capital Resources Total shareholders' equity increased $3.9 million to $40.6 million at September 30, 2000. The increase was the result of earnings of $4.1 million and a $0.7 million increase in accumulated other comprehensive income offset by dividends paid of $0.9 million. At September 30, 2000 the Company's Tier 1 and total risk-based capital ratios were approximately 12.8% and 14.1%. The Federal Reserve Board's minimum risk-based capital ratio guidelines for Tier 1 and total capital are 4% and 8% respectively. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company considers interest rate, credit and operations risks as the most significant risks impacting the Company. Other types of market risk, such as foreign exchange risk and commodity price risk, do not impact the Company in the normal course of operations. The Company relies on prudent underwriting standards, loan reviews and an adequate allowance for loan losses to mitigate credit risk. Internal controls and periodic internal audits of business operations mitigate operations risk. The Company uses an asset/liability model to measure and monitor interest rate risk. The model projects net interest income for the upcoming twelve months in various interest rate scenarios. The model the Company uses includes assumptions regarding prepayments of assets and early withdrawals of liabilities, the level and mix of interest earning assets and interest bearing liabilities, the level and responsiveness of interest rates on deposit products without stated maturities and the level of nonperforming assets. These assumptions are based on management's judgment and future expected pricing behavior. Actual results could vary significantly from the results derived from the model. The Company's interest rate risk has not changed materially since December 31, 1999. The Company also has increased its emphasis on noninterest sources of revenue in order to further stabilize future earnings. Part II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are being filed herewith and this list constitutes the exhibit index. Exhibit 27 Financial Data Schedule (b) On August 15, 2000 the registrant filed a Form 8-K to report the definitive agreement to merge with VRB Bancorp. 18 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 10, 2000 /s/ Raymond P. Davis ------------------------------------ Raymond P. Davis President and Chief Executive Officer Dated November 10, 2000 /s/ Daniel A. Sullivan ------------------------------------ Daniel A. Sullivan Senior Vice President and Chief Financial Officer