As Filed with the Securities and Exchange Commission on August 11, 1999
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: June 30, 1999
[ ] 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 June 30, 1999: 7,627,977
UMPQUA HOLDINGS CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
_____________
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheets:
June 30, 1999 and December 31,1998 3
Consolidated Condensed Statements of Income:
Three and six months ended June 30, 1999 and 1998 4
Consolidated Statements of Comprehensive Income:
Three and six months ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows:
Six months ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-18
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 19
Item 5. Other Information none
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
1
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
UMPQUA HOLDINGS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1999 1998
ASSETS
Cash and due from banks $ 21,233,107 $ 17,765,938
Interest bearing deposits in other banks 8,213,270 19,201,605
------------ ------------
Total Cash and Cash Equivalents 29,446,377 36,967,543
Investment securities available for sale 83,616,300 84,887,992
Mortgage loans held for sale 1,063,078 1,780,225
Loans receivable 208,198,811 186,166,966
Less: Allowance for loan losses (2,942,364) (2,663,914)
------------ ------------
Loans, net 205,256,447 183,503,052
Federal Home Loan Bank stock at cost 2,022,300 1,949,200
Property and equipment, net of depreciation 8,089,205 7,161,950
Interest receivable 2,300,331 2,131,553
Other assets 1,448,002 505,467
------------ ------------
Total Assets $ 333,242,040 $ 318,886,982
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 59,044,285 $ 52,235,927
Savings and interest-bearing checking 135,378,540 131,357,171
Time deposits 76,696,400 72,211,623
------------ ------------
Total Deposits 271,119,225 255,804,721
Term debt to Federal Home Loan Bank 25,178,000 25,198,000
Accrued interest payable 378,173 353,054
Other liabilities 864,969 1,385,581
------------ ------------
Total Liabilities 297,540,367 282,741,356
------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock 25,938,370 26,425,200
Retained earnings 10,819,623 9,055,331
Cumulative other comprehensive income (loss) (1,056,320) 665,095
------------ ------------
Total Shareholders' Equity 35,701,673 36,145,626
Total Liabilities and Shareholders' Equity $333,242,040 $318,886,982
============ ============
See accompanying notes to condensed consolidated financial statements
3
UMPQUA HOLDINGS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
--------------------------- ---------------------------
Interest Income
Interest and fees on loans $ 4,580,954 $ 3,926,623 $ 8,946,611 $ 7,626,429
Interest on investment securities available for sale 1,233,480 1,110,855 2,469,314 2,134,082
Interest bearing deposits with other banks 127,006 102,039 248,896 201,735
----------- ----------- ----------- -----------
Total interest income 5,941,440 5,139,517 11,664,821 9,962,246
----------- ----------- ----------- -----------
Interest Expense
Interest on deposits 1,710,847 1,576,983 3,328,926 3,159,372
Interest on borrowings 324,794 208,206 648,212 406,891
----------- ----------- ----------- -----------
Total interest expense 2,035,641 1,785,189 3,977,138 3,566,263
----------- ----------- ----------- -----------
Net Interest Income 3,905,799 3,354,328 7,687,683 6,395,983
Provision for loan losses 327,000 237,150 655,000 510,650
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 3,578,799 3,117,178 7,032,683 5,885,333
Noninterest Income
Service charges 744,211 517,406 1,378,757 1,006,606
Commissions 90,137 146,287 190,237 333,978
Other noninterest income 123,768 183,765 349,422 353,708
----------- ----------- ----------- -----------
Total noninterest income 958,116 847,458 1,918,416 1,694,292
----------- ----------- ----------- -----------
Noninterest Expense
Salaries and employee benefits 1,251,121 1,128,147 2,612,146 2,245,041
Premises and equipment 434,112 363,703 799,641 709,841
Other noninterest expense 1,027,911 831,969 1,821,141 1,563,267
----------- ----------- ----------- -----------
Total noninterest expense 2,713,144 2,323,819 5,232,928 4,518,149
----------- ----------- ----------- -----------
Income before income taxes 1,823,771 1,640,817 3,718,171 3,061,476
Provision for income taxes 650,682 610,607 1,342,138 1,139,266
----------- ----------- ----------- -----------
Net Income $ 1,173,089 $ 1,030,210 $ 2,376,033 $ 1,922,210
=========== =========== =========== ===========
Earnings Per Share
Basic $ 0.15 $ 0.13 $ 0.31 $ 0.27
Diluted $ 0.15 $ 0.13 $ 0.30 $ 0.27
See accompanying notes to condensed consolidated financial statements.
4
UMPQUA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended June 30, Six months ended June 30,
---------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net income $ 1,173,089 $ 1,030,210 $ 2,376,032 $ 1,922,210
----------- ----------- ----------- -----------
Unrealized gains (losses) arising during the period on
investment securities available for sale (1,932,792) 250,171 (2,736,804) 238,365
----------- ----------- ----------- -----------
Income tax (benefit) expense related to unrealized gains
on investment securities (741,341) 87,560 (1,015,389) 83,429
----------- ----------- ----------- -----------
Net unrealized gains (losses) on investment
securities available for sale (1,191,451) 162,611 (1,721,415) 154,936
----------- ----------- ----------- -----------
Comprehensive Income (Loss) $ (18,362) $ 1,192,821 $ 654,617 $ 2,077,146
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
UMPQUA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
(UNAUDITED)
Six months ended June 30,
----------------------------
1999 1998
----------- ------------
Cash flows from operating activities:
Net income $ 2,376,033 $ 1,922,210
Adjustments to reconcile net income to net cash provided by
operating activities:
Federal Home Loan Bank stock dividends (73,100) (70,000)
Amortization of investment premiums, net 91,447 146,383
Origination of loans held for sale (9,045,400) (16,108,125)
Proceeds from sales of loans held for sale 9,878,969 16,166,644
Provision for loan losses 655,000 510,650
Gain on sales of loans (122,085) (195,794)
Depreciation of premises and equipment 341,548 332,518
Net increase in other assets (95,924) (385,700)
Net increase in other liabilities (398,124) (1,072,145)
---------- ----------
Net cash provided by operating activities 3,608,364 1,246,641
Cash flows from investing activities:
Purchases of investment securities (11,442,038) (19,139,377)
Maturities of investment securities 4,774,244 4,175,009
Principal repayments received on mortgage-backed and related securities 5,111,235 5,185,649
Net loan originations (22,676,669) (13,187,528)
Purchase of loans (1,001,927) (187,758)
Proceeds from sales of loans 1,275,864 238,553
Purchases of premises and equipment (1,268,803) (193,249)
---------- ----------
Net cash used in investing activities (25,228,094) (23,108,701)
---------- ----------
Cash flows from financing activities:
Net increase in deposit liabilities 15,314,504 12,892,870
Dividends paid on common stock (611,741) (354,494)
Proceeds from stock offering -- 12,384,000
Common stock retired (689,210) --
Proceeds from stock options exercised 105,011 24,728
Repayments of Federal Home Loan Bank borrowings, net (20,000) (20,000)
---------- ----------
Net cash provided by financing activities 14,098,564 24,927,104
---------- ----------
Net (decrease) increase in cash and cash equivalents (7,521,166) 3,065,044
Cash and cash equivalents, beginning of year 36,967,543 24,114,566
---------- ----------
Cash and cash equivalents, end of year 29,446,377 27,179,610
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,952,019 $ 3,617,644
Income taxes $ 1,410,000 $ 1,155,000
Non-cash financing activities
Tax benefit of stock options exercised $ 97,369 $ --
See accompanying notes to consolidated financial statements.
6
NOTES TO 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. 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 1998 annual
report to shareholders. The results of operations for the interim period
shown in this report are not necessarily indicative of results for any
future interim period or the entire fiscal year.
(b) EARNINGS PER SHARE
Basic and diluted net income 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 net income per
share computations were 7,652,156 and 7,075,173 for the six months ended
June 30, 1999 and 1998 respectively. For diluted net income per share
141,785 and 175,864 were added to weighted average shares outstanding
for the six months ended June 30, 1999 and 1998 respectively,
representing potential dilution for stock options outstanding,
calculated using the treasury stock method. The weighted average number
of common shares outstanding for basic net income per share computations
were 7,637,527 and 7,631,336 for the three months ended June 30, 1999
and 1998 respectively. For diluted net income per share 139,965 and
191,750 were added to weighted average shares outstanding for the three
months ended June 30, 1999 and 1998 respectively, representing potential
dilution for stock options outstanding, calculated using the treasury
stock method.
7
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) and the Company's principal subsidiary, South Umpqua Bank's (Bank)
financial condition at June 30, 1999 and the operating results for the three
and six months then ended. When warranted, comparisons are made to the same
periods in 1998 and to December 31, 1998. 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 in the text of this filing, but not in the financial statements or
"Table 1" or "Table 2".
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 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 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.
HIGHLIGHTS
The Company earned $1,173 during the three months ended June 30, 1999, a 13.9%
increase over the comparable period in 1998. For the six month period ended
June 30, 1999 the Company earned $2,376, a 23.6% increase over the comparable
1998 period. Diluted earnings per share were $0.15 and $0.30 for the three and
six month periods ended June 30, 1999, respectively compared with $0.13 and
$0.27 for the comparable periods in 1998 respectively. Annualized return on
average assets was 1.45% and 1.50% for the three and six month periods ended
June 30, 1999, respectively and the annualized return on average equity was
13.07% and 13.26% for the same periods, respectively. Total assets were $333.2
million, up $14.3 million from December 31, 1998. Total loans outstanding have
increased $22.0 million since December 31, 1998 to $208.2 million at quarter
end and total deposits have increased $15.3 million to $271.1 million during
the same period.
On May 11, 1999 the Company announced the pending acquisition of Strand,
Atkinson, Williams and York, Inc., a full service investment firm
headquartered in Portland, Oregon. The acquisition is subject to regulatory
approval, which is expected in the third quarter of 1999. At June 30, 1999
Strand, Atkinson, Williams and York, Inc. had total assets of $1.0 million and
total revenues of $2.1 million for the six months then ended. The Bank
continued its expansion by opening a new store in Portland, Oregon in July and
announcing plans for a new store in Salem opening in late 1999.
8
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 earned from loans
and investment securities, and interest expense paid on customer deposits and
debt. Changes in net interest income result from changes in "volume" and
changes in "rate". Volume refers to the dollar level of interest earning
assets and interest bearing liabilities. Rate refers to the underlying yields
on assets and costs of liabilities.
Net interest income on a tax-equivalent basis was $4,008 for the second
quarter ended June 30, 1999 compared with $3,392 for the same period in 1998
(see Table 1). The $616 increase was primarily the result of an increase in
the average volume of earning assets which were up $49.4 million over the 1998
level. The increase in the average volume of earning assets was due to loans
outstanding which were up $38.9 million compared with the same period in 1998
and nontaxable securities which grew $13.7 million compared with the same
period. The net interest spread, which is the difference between the yield of
interest earning assets less the cost of interest bearing liabilities,
increased 0.01% during the second quarter of 1999 compared with the second
quarter of 1998. The net interest margin, which is annualized net interest
income divided by interest earning assets, decreased 0.07% during the second
quarter of 1999 compared with the second quarter of 1998. This decrease was
the result of increased funding requirements due to the growth in earning
assets. Average interest bearing liabilities were 78.3% of interest earning
assets during the second quarter of 1999 compared with 77.6% of interest
earning assets in 1998.
9
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:
Three Months ended Three Months ended
June 30, 1999 June 30, 1998 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) $204,207 $ 4,564 8.96% $165,351 $ 3,889 9.43% $ 914 $ (239) $ 675
Loans held for sale 388 16 16.54% 2,315 41 7.10% (34) 9 (25)
Investment securities
Taxable securities 63,761 1,001 6.28% 68,627 1,027 5.99% (73) 47 (26)
Nontaxable securities (1) 20,590 335 6.51% 6,916 118 6.82% 233 (16) 217
Temporary investments 10,844 127 4.70% 7,207 102 5.68% 51 (26) 25
-------- ------- -------- ------- ------ ------ ------
Total interest earning assets 299,790 6,043 8.09% 250,416 5,177 8.29% 1,091 (225) 866
Cash and due from banks 17,839 14,103
Allowance for loan losses (2,921) (2,460)
Other assets 10,600 9,764
-------- --------
Total assets $325,308 $271,823
======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing checking and
savings accounts $135,789 $ 855 2.53% $118,752 $ 799 2.70% $ 115 $ (59) $ 56
Time deposits 73,378 855 4.67% 61,415 778 5.08% 152 (75) 77
Term debt 25,522 325 5.11% 14,086 208 5.92% 169 (52) 117
-------- ------- -------- ------- ------ ------ ------
Total interest-bearing liabilities 234,689 2,035 3.48% 194,253 1,785 3.69% 436 (186) 250
------ ------ ------
Non interest bearing deposits 52,938 43,501
Other liabilities 1,668 1,289
-------- --------
Total liabilities 289,295 239,043
Shareholders' equity 36,013 32,780
-------- --------
Total liabilities and
shareholders' equity $325,308 $271,823
======== ========
NET INTEREST INCOME (1) $ 4,008 $ 3,392 $ 655 $ (39) $ 616
======= ======= ===== ===== =====
NET INTEREST SPREAD 4.61% 4.60%
AVERAGE YIELD ON EARNING ASSETS (1),(2) 8.09% 8.29%
INTEREST EXPENSE TO EARNING ASSETS 2.73% 2.86%
----- -----
NET INTEREST INCOME TO EARNING ASSETS (1),(2) 5.36% 5.43%
===== =====
(1) Tax exempt income ha been adjusted to a tax equivalent basis at a 34%
effective rate. The amount of such adjustment was an addition to
recorded income of $101 and $37 for the three months ended June 30, 1999
and 1998 respectively.
(2) Non-accrual loans are included in average balance.
Tax-equivalent net interest income for the six months ended June 30, 1999 was
$7,863, a $1,399 increase over the same period of 1998 (see Table 2). The
primary reason for the increase was the increase of average earning assets.
Average earning assets increased 21.2% for the six months ended June 30, 1999
compared with the same period in 1998. The yield on interest earning assets
decreased 0.22% as did the cost of interest bearing liabilities, leaving the
net interest spread unchanged at 4.62%. The net interest margin was 5.39% for
the six months ended June 30, 1999 compared with 5.38% for the same period in
1998.
10
Table 2
Six Months ended Six Months ended
June 30, 1999 June 30, 1998 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) $198,530 $ 8,913 9.05% $161,075 $ 7,562 9.47% $1,758 $ (407) $1,351
Loans held for sale 509 34 13.47% 1,615 70 8.74% (48) 12 (36)
Investment securities
Taxable securities 66,756 2,063 6.18% 66,804 1,996 5.98% (1) 68 67
Nontaxable securities (1) 17,862 581 6.51% 5,792 201 6.94% 419 (39) 380
Temporary investments 10,453 249 4.80% 7,325 202 5.56% 86 (39) 47
-------- ------- -------- ------- ------ ------ ------
Total interest earning assets 294,110 11,840 8.12% 242,611 10,031 8.34% 2,214 (405) 1,809
Cash and due from banks 17,151 13,982
Allowance for loan losses (2,825) (2,343)
Other assets 10,410 9,781
-------- --------
Total assets $318,846 $264,031
======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing checking and
savings accounts $131,230 $1,628 2.50% $116,286 $1,556 2.70% $ 200 $(128) $ 72
Time deposits 72,448 1,701 4.73% 62,916 1,604 5.14% 243 (146) 97
Term debt 25,474 648 5.13% 14,057 407 5.84% 331 ( 90) 241
-------- ------- -------- ------- ------ ------ ------
Total interest-bearing liabilities 229,152 3,977 3.50% 193,259 3,567 3.72% 774 (364) 410
------ ------ ------
Non interest bearing deposits 51,626 42,640
Other liabilities 1,927 1,151
-------- --------
Total liabilities 282,705 237,050
Shareholders' equity 36,141 26,981
-------- --------
Total liabilities and
shareholders' equity $318,846 $264,031
======== ========
NET INTEREST INCOME (1) $ 7,863 $ 6,464 $1,440 $ (41) $1,399
======= ======= ====== ===== ======
NET INTEREST SPREAD 4.62% 4.62%
AVERAGE YIELD ON EARNING ASSETS (1),(2) 8.12% 8.34%
INTEREST EXPENSE TO EARNING ASSETS 2.73% 2.96%
----- -----
NET INTEREST INCOME TO EARNING ASSETS (1),(2) 5.39% 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 $175 and $69 for the six months ended June 30, 1999
and 1998 respectively.
(2) Non-accrual loans are included in average balance.
Provision for Loan Losses
The provision for loan losses is management's estimate of the amount necessary
to maintain an allowance for loan losses that is considered adequate based on
the risk of losses inherent in the loan portfolio (see additional discussion
under Allowance for Loan Losses). The provision for loan losses was $327 for
the quarter ended June 30, 1999 compared with $237 for the same quarter in
1998. For the six months ended June 30, 1999 the provision for loan losses was
$655 compared with $511 for the same period in 1998.
11
Noninterest Income
Noninterest income for the second quarter of 1999 increased 13.1% over the
same period in 1998 to $958. Service fees on deposit accounts increased 43.8%
due to increases in the number of accounts and increases in service charge
fees. Total deposit accounts on hand at June 30, 1999 were 39,000 compared
with 34,000 at June 30, 1998. ATM fees also increased due to the expansion of
the Company's ATM network. Commissions in the second quarter of 1999 decreased
$56 compared with the second quarter of 1998 due to lower sales volume at the
Company's brokerage subsidiary. Other noninterest income in the second quarter
of 1999 decreased $60 due to decreases in servicing release fees generated
from the origination and sale of residential mortgages. Origination of
residential loans during the second quarter of 1999 declined due to less
refinancing activity compared with 1998.
Noninterest income for the six months ended June 30, 1999 was $1,918 compared
with 1,694 for the comparable period in 1998. Service fees on deposit accounts
were up $372 due to increases in the number of accounts as well as increases
in service charge fees. ATM fees were also up during the period. Commissions
income was $144 lower for the six months ended June 30, 1999 compared with the
same period in 1999 due to lower sales volumes at the Company's brokerage
subsidiary.
Noninterest Expense
Noninterest expense for the quarter ended June 30, 1999 was $2,713, an
increase of $389 over the same period in 1998. Salaries and employee benefits
increased due to additional staffing required to support the growth in loans
and deposits. At June 30, 1999 the Company had 167 full-time equivalent
employees compared with 145 full-time equivalent employees at June 30, 1998.
Premises and equipment increased $70 for the quarter ended June 30, 1999
compared with the same period in 1998. This increase was due to expansion of
the Company's support facilities and the acquisition of a store site in
Portland, Oregon. Other noninterest expense was $1,028 for the quarter ended
June 30, 1999 compared with $832 in the second quarter of 1998. Significant
increases in professional fees due to expansion initiatives including the
Company's pending acquisition of the brokerage firm of Strand, Atkinson,
Williams and York was the primary cause of the increase.
Noninterest expense for the six months ended June 30, 1999 was $5,233 compared
with $4,518 for the same period in 1998. Salaries and benefits increased $367
for the six months ended June 30, 1999 compared with the same period in 1998
due to increase staffing levels to support the growth in loans and deposits.
Premises and Equipment expense for the six months ended June 30, 1999 was
$800, an increase of $90 over the same period in 1998. This increase was due
to the expansion of the Company's support facilities during early 1999 and the
acquisition of a future store site in Portland, Oregon. Other noninterest
expense for the six months ended June 30, 1999 increased $258 over the same
period in 1998 to $1,821. This increase was due primarily to higher
professional fees due to expansion activities.
12
FINANCIAL CONDITION
Significant changes in the Company's financial position from December 31, 1998
to June 30, 1999 are as follows:
Loans
Loans have increased $22 million from December 31, 1998 to $208.2 million at
June 30, 1999. This increase was primarily due to increases in commercial real
estate loans outstanding which have increased $16 million during the period.
Loans outstanding at June 30, 1999 and December 31, 1998 were as follows:
June 30, 1999 December 31, 1998
------------- -----------------
Commercial & $ 49,994 $ 48,140
Industrial Real Estate:
Construction 18,257 13,766
Residential Mortgage 20,309 19,825
Commercial Real Estate 90,102 73,767
Individuals 29,292 30,309
Other 245 360
--------- ---------
Total Loans $ 208,199 $ 186,167
========= =========
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 the adequacy of the allowance based on a probable loss
rate assigned to an internal risk rating for each loan or pool of loans, by
the Company's historical loan loss rate and management's judgement. As shown
in the preceding table, the loan portfolio has a concentration in real estate
secured loans. Although management believes the location and repayment sources
of these loans are well diversified, the risk of market depreciation in
property values is an inherent risk to this portion of the loan portfolio. The
commercial loan portfolio carries the risks associated with asset based
lending and unsecured loans. The consumer portfolio, while well diversified,
carries risk associated with economic and bankruptcy issues, particularly
unsecured lending. At June 30, 1999 the allowance for loan losses was 1.41% of
total loans compared with 1.43% of total loans at December 31, 1998.
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.
13
Activity in the allowance for loan losses was as follows for the three and six
month periods ending June 30, 1999.
Three months ended Six months ended
June 30, 1999 June 30, 1999
------------------ ----------------
Beginning Balance $2,912 $2,664
Provision for Loan Losses 327 655
Less: Charge-offs
Commercial (243) (292)
Individuals (64) (135)
Recoveries 10 50
------ ------
Ending Balance $2,942 $2,942
====== ======
Non-performing assets, comprised of loans on nonaccrual status, loans past due
90 days or more and other real estate owned were $1,166 or 0.35% of total
assets at June 30, 1999 compared with $616 or 0.19% or total assets at
December 31, 1998. The primary reason for the increase was the addition of two
commercial real estate credits to the non-performing category. The Company
does not currently have any other real estate owned.
Deposits
Deposits have increased $15 million since December 31, 1998 due to successful
sales and marketing efforts. Deposits consisted of the following at June 30,
1999 and December 31, 1998:
June 30, 1999 December 31, 1998
------------------ -----------------
Noninterest bearing demand $ 59,044 $ 52,236
Interest bearing demand and
Money market accounts 112,933 111,389
Savings 22,446 19,968
Time deposits 76,696 72,212
-------- --------
Total Deposits $271,119 $255,805
======== ========
Shareholder's Equity
Shareholder's equity has decreased $0.4 million since December 31, 1998.
Increases due to net income of $2,376 have been offset by dividends of $612
and the change in net unrealized gains/losses on investment securities
available for sale, net of applicable taxes, of $1,721. The change in
unrealized gains/losses on investment securities is due to the generally
increasing interest rate environment that has existed for the first six months
of 1999.
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LIQUIDITY AND CAPITAL RESOURCES
The Company derives liquidity though the growth of core deposits and the
maturity of investment securities and loans. Additional liquidity is provided
by the Company's ability to borrow funds on an overnight or long-term basis.
There has been no erosion in the Company's liquidity position since December
31, 1998.
At June 30, 1999 the Company's Tier 1 and Total Risk-Based capital ratios were
16.41% and 17.66%.
EFFECTS OF THE YEAR 2000
INTRODUCTION. The Year 2000 creates challenges with respect to the automated
systems used by financial institutions and other companies. Many software
programs are not able to recognize the year 2000, since most programs and
systems were designed to store calendar year in the 1900's by assuming the
"19" and storing only the last two digits of the year. For example, these
automated systems would recognize a year stored as "00" as the year "1900",
rather than as the year "2000". If these automated systems are not
appropriately re-coded, updated or replaced before the year 2000, they will
likely confuse data, crash or fail in some manner. In addition, many software
programs and automated systems will fail to recognize the year 2000 as a leap
year. The problem is not limited to computer systems. Year 2000 issues will
potentially affect every system that has an embedded microchip, such as
automated teller machines, elevators and vaults.
The year 2000 challenge is especially problematic for financial institutions,
since many transactions such as interest accruals and payments are date
sensitive. It also may affect the operations of third parties with whom the
Company does business, including the Company's vendors, suppliers, utility
companies and customers.
THE COMPANY'S STATE OF READINESS. The Company is committed to addressing these
year 2000 challenges in a prompt and responsible manner and has dedicated
resources to do so. Management has completed an assessment of its automated
systems and has implemented a plan to resolve these issues, including
purchasing appropriate computer technology. The Company's year 2000 compliance
plan ("Year 2000 Plan") has five phases. These phases are (1) project
management, (2) awareness, (3) assessment, (4) testing, and (5) renovation and
implementation. The Company has substantially completed all phases of the year
2000 plan. Appropriate follow-up activities are continuing to occur which
include contingency planning, and testing of the contingency plan.
Project Management. The Company has assigned primary responsibility for
year 2000 project management to its Chief Financial Officer. The Company
has also formed a year 2000 compliance committee, consisting of
appropriate representatives from its critical operational areas to
assist in implementing the Year 2000 Plan. In addition, the Company
provides periodic reports to its Board of Directors in order to assist
them in overseeing the Company's year 2000 readiness.
15
Awareness. The Company has completed several projects designed to
promote awareness of year 2000 issues throughout our organization and
our customer base. These projects include communication through local
seminars in each of the communities the Company serves, mailing
information brochures to deposit and loan customers, providing training
for lending officers and other staff, and responding to vendor,
customer, and shareholder inquiries.
Assessment. Assessment is the process of identifying all
mission-critical applications that could potentially be negatively
affected by dates in the year 2000 and beyond. The Company's assessment
phase is complete. Systems examined during this phase included
telecommunication systems, account-processing applications, and other
software and hardware used in connection with customer accounts. The
Company's operations, like those of many other companies, are
intertwined with the operations of certain of its business partners.
Accordingly, the Company's operations could be materially affected if
the operations of those companies who provide the Company with
mission-critical applications, systems, and services are materially
affected. For example, the Company depends upon vendors who provide
equipment, technology, and software to it in connection with its
business operations. Failure of these software vendors to achieve year
2000 readiness could substantially affect the operations of the Company.
In addition, lawsuits and other financial challenges materially
affecting the financial viability of these vendors could materially
affect the Company. In response to this concern, the Company has
identified and contacted those vendors who provide our mission-critical
applications. The Company has assessed their year 2000 compliance
efforts and will continue to monitor their progress as the year 2000
approaches.
Testing. Initial testing of the Company's computer system used to
account for customer accounts has been successful. Management completed
this in the second quarter of 1999.
Renovation and Implementation. This phase involves obtaining and
implementing renovated software applications provided by our vendors. As
these applications are received and implemented, the Company will test
them for year 2000 compliance. This phase also involves upgrading and
replacing automated systems where appropriate and will continue
throughout 1999. Although this phase will be substantially complete
before the end of 1999, additional follow-up activities may take place
in the year 2000 and beyond.
ESTIMATED COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. The total financial
effect of these year 2000 challenges on the Company cannot be predicted with
certainty at this time. In fact, in spite of all efforts being made to rectify
these problems, the success of these efforts cannot be predicted until the
year 2000 actually arrives. The Company will upgrade or replace certain
automated systems before the year 2000; however, some of these systems would
have been replaced before the year 2000 without regard to year 2000 compliance
issues, due to technology updates and Company expansion.
Management does not believe that expenses related to meeting the Company's
year 2000 challenges will have a material effect on the operations or
financial performance of the Company. However, factors beyond the control of
management, such as the effects on vendors of our mission-critical software
and systems, the effects of year 2000 issues on the economy, and the
development of the risks identified below under "The Risks of the Company's
Year 2000 Issues," among other things, could have a material effect on the
operations or financial performance of the Company.
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For 1999, the Company has incurred approximately $15 of external operating
expenses relative to year 2000 compliance issues. In 1999, the Company expects
to incur external additional operating expenses of approximately the $100.
These amounts do not include the significant internal costs associated with
the year 2000 issues, such as compensation costs of the technology staff.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES. The year 2000 presents certain
risks to the Company and its operations. Some of these risks are present
because the Company purchases technology applications from other parties who
face year 2000 challenges. Other of these risks are inherent in the business
of banking or are risks faced by many companies with stock traded on a
national stock exchange. Although it is impossible to identify every possible
risk that the Company may face moving into the new millennium, management has,
to date, identified the following potential risks:
o Commercial banks, such as the Company, may experience a contraction in
their deposit base, if a significant amount of deposited funds are
withdrawn by customers prior the year 2000. This potential deposit
contraction could make it necessary for the Company to change its
sources of funding and could materially impact future earnings.
Significant demand for funds by other banks could reduce the amount of
funds available for the Company to borrow. If insufficient funds are
available from a Federal Home Loan Bank or other correspondents, the
Company may also sell investment securities or other liquid assets to
meet liquidity needs. Despite these efforts, a significant deposit
contraction could materially impact the Company's earnings or future
operations, particularly if funds availability at the Federal Home Loan
Bank is impaired.
o The Company lends significant amounts to businesses in its market area.
If these businesses are adversely affected by year 2000 issues, their
ability to repay loans could be impaired. This increased credit risk
could affect the Company's financial performance. During the assessment
phase of the Company's Year 2000 Plan, significant borrowers were
identified. Management is currently monitoring the year 2000 compliance
efforts of these credit customers.
o The Company's operations, like those of many other companies, can be
affected by the year 2000 triggered failures of other companies upon
whom the Company depends for the functioning of its automated systems.
Accordingly, the Company's operations could be materially affected, if
the operations of those companies who provide the Company with
mission-critical applications, systems, and services are materially
affected. As described previously, the Company has identified its
mission-critical vendors and is monitoring their year 2000 compliance
progress.
o All companies with stock traded on a national stock exchange, including
the Company, could experience a drop in stock price as investors change
their investment portfolios or sell stock prior to the new millennium.
At this time, it is impossible to predict whether or not this will in
fact be the case with respect to the stock of the Company or any other
company.
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o The Company's ability to operate effectively in the year 2000 could be
affected by communications abilities and access to utilities, such as
electricity, water, telephone, and others, to the extent access is
interrupted due to the effects of year 2000 issues on these and other
utilities.
THE COMPANY'S CONTINGENCY PLANS. In addition to renovation and implementation
of software applications, as may be required, the Company has developed
contingency plans in the event of year 2000 developments. These contingency
plans may be triggered if full year 2000 compliance is not achieved for the
Company's mission-critical systems, or if external factors are viewed as
potentially impacting the Company. These contingency plans are focused on
liquidity requirements, funding requirements, credit monitoring, and storage
and retrieval of computer based records, as well as staff availability at
critical dates including the beginning of the year 2000.
REGULATORY AGENCY OVERSIGHT. The Federal Financial Institutions Examination
Council ("FFIEC") has made recommendations and has issued guidelines to the
financial community for preparing for the year 2000. In addition, the FFIEC
monitors the Company's progress towards critical dates for each guideline.
The Company is in full compliance with the recommendations and guidelines, and
is ahead of the schedule established for critical dates.
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 Company's current one-year position is
slightly liability sensitive, meaning that more interest-bearing liabilities
mature or reprice within the next year than interest-earning assets.
Therefore, if market interest rates increased significantly, net interest
income could be adversely affected. In contrast, if market rates decreased
significantly, net interest income could improve. The Company attempts to
mitigate interest rate risk through the management of the maturity and
repricing characteristics of its interest earning assets and interest bearing
liabilities. The Company also has increased its emphasis on non-interest
sources of revenue in order to further stabilize future earnings.
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 judgement
and future expected pricing behavior. Actual results could vary significantly
from the results derived from the model.
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Item 4. Submission of Matters to a Vote of Security Holders
The annual shareholders meeting of Umpqua Holdings Corporation was held
on April 28, 1999 in Roseburg, Oregon. At the meeting the following directors
were elected:
Name Term
- ---------------------------------------------------------------------
Scott Chambers 1 year
Ronald O. Doan 1 year
Allyn C. Ford 1 year
Frances Jean Phelps 2 years
Raymond P. Davis 2 years
Harold L. Ball 2 years
Lynn K. Herbert 2 years
David B. Frohnmayer 3 years
Neil D. Hummel 3 years
No other matters were submitted to a vote of security holders at the meeting.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27 Financial Data Schedule
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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: August 12, 1999 /s/ Raymond P. Davis
------------------------------------------------
Raymond P. Davis
President and Chief Executive Officer
Dated: August 12, 1999 /s/ Daniel A. Sullivan
------------------------------------------------
Daniel A. Sullivan
Senior Vice President and Chief Financial Officer
20