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, 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 October 31, 1999: 7,614,227
UMPQUA HOLDINGS CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets: September
30, 1999 and December 31,1998 3
Condensed Consolidated Statements of Income: Three
and nine months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive
Income: Three and nine months ended September 30,
1999 and 1998 5
Condensed Consolidated Statements of Cash Flows:
Nine months ended September 30, 1999 and 1998 6
Notes to Condensed 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 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings none
Item 2. Changes in Securities none
Item 3. Defaults Upon Senior Securities none
Item 4. Submission of Matters to a Vote of Security Holders none
Item 5. Other Information none
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
UMPQUA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
------------ ------------
(unaudited)
ASSETS
Cash and due from banks $ 32,580,822 $ 17,765,938
Interest bearing deposits in other banks 4,095,309 19,201,605
------------ ------------
Total Cash and Cash Equivalents 36,676,131 36,967,543
Investment securities available for sale 79,500,224 84,887,992
Mortgage loans held for sale 452,500 1,780,225
Loans receivable 224,538,144 186,166,966
Less: Allowance for loan losses (3,102,665) (2,663,914)
------------ ------------
Loans, net 221,435,479 183,503,052
Federal Home Loan Bank stock at cost 2,059,200 1,949,200
Property and equipment, net of depreciation 8,663,415 7,161,950
Interest receivable 2,461,449 2,131,553
Other assets 1,687,066 505,467
------------ ------------
Total Assets $352,935,464 $318,886,982
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 63,937,652 $ 52,235,927
Savings and interest-bearing checking 142,391,753 131,357,171
Time deposits 83,238,949 72,211,623
------------ ------------
Total Deposits 289,568,354 255,804,721
Term debt to Federal Home Loan Bank 25,168,000 25,198,000
Accrued interest payable 456,793 353,054
Other liabilities 1,350,420 1,385,581
------------ ------------
Total Liabilities 316,543,567 282,741,356
------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock 25,863,929 26,425,200
Retained earnings 11,758,055 9,055,331
Cumulative other comprehensive income (loss) (1,230,087) 665,095
------------ ------------
Total Shareholders' Equity 36,391,897 36,145,626
------------ ------------
Total Liabilities and Shareholders' Equity $352,935,464 $318,886,982
============ ============
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,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Interest Income
Interest and fees on loans $ 4,853,961 $ 3,989,611 $13,800,572 $ 11,616,040
Interest on investment securities
available for sale 1,233,333 1,204,446 3,702,647 3,338,528
Interest bearing deposits with other banks 195,061 194,166 443,957 395,901
----------- ----------- ----------- -----------
Total interest income 6,282,355 5,388,223 17,947,176 15,350,469
----------- ----------- ----------- -----------
Interest Expense
Interest on deposits 1,805,353 1,673,412 5,134,279 4,832,784
Interest on borrowings 325,724 198,971 973,936 605,862
----------- ----------- ----------- -----------
Total interest expense 2,131,077 1,872,383 6,108,215 5,438,646
----------- ----------- ----------- -----------
Net Interest Income 4,151,278 3,515,840 11,838,961 9,911,823
Provision for loan losses 226,000 180,000 881,000 690,650
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 3,925,278 3,335,840 10,957,961 9,221,173
Noninterest Income
Service charges 780,373 605,393 2,159,130 1,611,999
Commissions 64,016 82,515 254,253 416,493
Other noninterest income 128,318 152,582 477,740 506,290
----------- ----------- ----------- -----------
Total noninterest income 972,707 840,490 2,891,123 2,534,782
----------- ----------- ----------- -----------
Noninterest Expense
Salaries and employee benefits 1,463,873 1,201,506 4,076,019 3,446,547
Premises and equipment 449,184 371,323 1,248,825 1,081,164
Other noninterest expense 1,029,899 805,680 2,851,040 2,368,947
----------- ----------- ----------- -----------
Total noninterest expense 2,942,956 2,378,509 8,175,884 6,896,658
----------- ----------- ----------- -----------
Income before income taxes 1,955,029 1,797,821 5,673,200 4,859,297
Provision for income taxes 711,822 660,447 2,053,960 1,799,713
----------- ----------- ----------- -----------
Net Income $ 1,243,207 $ 1,137,374 $ 3,619,240 $ 3,059,584
=========== =========== =========== ===========
Earnings Per Share
Basic $ 0.16 $ 0.15 $ 0.47 $ 0.42
Diluted $ 0.16 $ 0.15 $ 0.46 $ 0.41
See accompanying notes to condensed consolidated financial statements
4
UMPQUA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net income $ 1,243,207 $ 1,137,374 $ 3,619,240 $ 3,059,584
Other Comprehensive Income:
Unrealized (losses) gains arising during the period on
investment securities available for sale (281,888) 1,420,936 (3,018,692) 1,659,301
Unrealized losses on securities transferred from held
to maturity to available for sale -- (94,792) -- (94,792)
----------- ----------- ----------- -----------
(281,888) 1,326,144 (3,018,692) 1,564,509
Income tax (benefit) expense related to unrealized gains
on investment securities (108,121) 464,150 (1,123,510) 547,578
----------- ----------- ----------- -----------
Net unrealized (losses) gains on investment
securities available for sale (173,767) 861,994 (1,895,182) 1,016,931
----------- ----------- ----------- -----------
Comprehensive Income $ 1,069,440 $ 1,999,368 $ 1,724,058 $ 4,076,515
----------- ----------- ----------- -----------
See accompanying notes to condensed consolidated financial statements
5
UMPQUA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
1999 1998
------------ ------------
Cash flows from operating activities:
Net income $ 3,619,240 $ 3,059,584
Adjustments to reconcile net income to net cash provided by
operating activities:
Federal Home Loan Bank stock dividends (110,000) (105,400)
Amortization of investment premiums, net 150,356 205,978
Origination of loans held for sale (12,645,495) (22,953,433)
Proceeds from sales of loans held for sale 14,141,005 22,879,375
Provision for loan losses 881,000 690,650
Gain on sales of loans (220,651) --
Depreciation of premises and equipment 522,556 488,346
Net (increase) in other assets (387,985) (246,405)
Net increase (decrease) in other liabilities 167,695 (862,266)
------------ ------------
Net cash provided by operating activities 6,117,721 3,156,429
------------ ------------
Cash flows from investing activities:
Purchases of investment securities (11,442,038) (28,804,064)
Maturities of investment securities 6,454,479 5,959,798
Principal repayments received on mortgage-backed
and related securities 7,206,279 7,877,072
Net loan originations (39,701,459) (12,628,269)
Purchase of loans (1,334,966) (1,510,081)
Proceeds from sales of loans 2,275,864 238,553
Proceeds from sale of premises and equipment -- --
------------ ------------
Net cash used in investing activities (38,565,863) (29,158,810)
------------ ------------
Cash flows from financing activities:
Net increase in deposit liabilities 33,763,633 23,709,625
Dividends paid on common stock (916,516) (546,114)
Proceeds from stock offering -- 12,384,000
Common stock retired (771,400) --
Proceeds from stock options exercised 105,011 24,728
Repayments of Federal Home Loan Bank borrowings (30,000) (30,000)
------------ ------------
Net cash provided by financing activities 32,150,728 35,542,239
------------ ------------
Net increase (decrease) in cash and cash equivalents (297,414) 9,539,858
Cash and cash equivalents, beginning of period 36,967,543 24,114,566
------------ ------------
Cash and cash equivalents, end of period $ 36,670,129 $ 33,654,424
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 6,004,476 $ 5,555,237
Income taxes $ 1,875,000 $ 1,775,000
Non-cash financing activities
Tax benefit of stock options exercised $ 105,118 $ --
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. 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 1999
interim periods 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
7,643,284 and 7,273,607 for the nine months ended September 30, 1999 and 1998
respectively. For diluted net income per share 141,125 and 171,310 were added
to weighted average shares outstanding for the nine months ended September 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 7,625,830 and 7,664,852 for the three months ended September
30, 1999 and 1998 respectively. For diluted net income per share 139,803 and
155,055 were added to weighted average shares outstanding for the three months
ended September 30, 1999 and 1998 respectively, representing potential
dilution for stock options outstanding, calculated using the treasury stock
method.
Options to purchase 212,500 shares of common stock for prices ranging
from $9.625 to $12.00 per share were outstanding during 1999 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.
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 September 30, 1999 and the operating
results for the three and nine 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.
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 a record $1,243 for the quarter ended September 30,
1999 and a record $3,619 for the nine months then ended. In 1998 the Company
earned $1,137 and $3,060 for the comparable periods, respectively. Fully
diluted earnings per share were $0.16 for the third quarter ended September
30, 1999, and $0.46 for the nine months then ended. Fully diluted earnings per
share were $0.15 and $0.41 for the comparable periods in 1998, respectively.
Total loans rose to $224.5 million at September 30, 1999, a 20.6% increase
over December 31, 1998. Total deposits have increased $33.8 million, or 13.2%
since year end and were $289.6 million at September 30, 1999.
Annualized return on average assets was 1.44% for the three months ended
September 30, 1999 compared with 1.57% for the comparable period in 1998. For
the nine months ended September 30, 1999, annualized return on average assets
was 1.48% compared with 1.50% for the same period in 1998. Annualized return
on average equity was 13.62% for the quarter ended September 30, 1999 and
13.38% for the nine months then ended. Annualized return on average equity was
12.94% for the third quarter of 1998 and 13.82% for the nine months ended
September 30, 1998.
On May 11, 1998 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. At September 30, 1999 Strand, Atkinson, Williams and York, Inc. had
total assets of $1.1 million and total revenues of $3.2 million for the nine
8
months then ended. The Bank continued its expansion with the opening of a new
store in Portland in July and commencing construction on its new store in
Salem in August. The Salem store, which will be the Company's fourteenth
store, is scheduled for opening in early 2000.
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 level of interest earning assets and
interest bearing liabilities. Rate refers to the underlying yields on assets
and costs of liabilities. Tables 1 and 2 segregate the change in taxable
equivalent net interest income into the portion attributable to changes in
rate and the portion attributable to changes in volume for the three and nine
month periods ended September 30, 1999 compared with the same periods in 1998.
Net interest income on a tax-equivalent basis was $4,263 for the quarter
ended September 30, 1999 compared with $3,568, a $695 increase (Table 1). The
increase in net interest income was due primarily to increases in the volume
of earning assets which were up 19.9% over the third quarter of 1998. The
yield on earning assets declined 0.17% while the cost of interest bearing
liabilities declined 0.22% comparing the third quarter of 1999 with the same
period of 1998. Both of these declines were consistent with changes in market
rates. As a result of these changes, the net interest margin decreased
slightly to 5.35%.
Net interest income on a tax equivalent basis for the nine months ended
September 30, 1999 was $12,125 compared with $10,032 for the same period in
1998 (Table 2). Again, the increase was due primarily to increases in earning
assets which were up 20.8% for nine months ended September 30, 1999 compared
with the same period in 1998. The yield on earning assets decreased 0.21%
while the cost of interest bearing assets decreased 0.22% comparing the nine
months ended September 30, 1999 with the same period of 1999. These decreases
were consistent with general market rate movements during the period. As a
result of these offsetting decreases, the net interest margin was unchanged at
5.38% for the period.
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
September 30, 1999 September 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) $214,618 $ 4,844 8.95% $167,343 $ 3,968 9.41% $ 1,121 $ (245) $ 876
Loans held for sale 322 10 12.32% 900 22 9.70% (14) 2 (12)
Investment securities
Taxable securities 62,697 972 6.15% 71,228 1,076 5.99% (129) 25 (104)
Nontaxable securities (1) 22,037 364 6.55% 10,705 180 6.67% 191 (7) 184
Temporary investments 16,139 204 5.01% 13,180 194 5.84% 44 (34) 10
-------- -------- -------- -------- -------- -------- -------
Total interest earning assets 315,813 6,394 8.03% 263,356 5,440 8.20% 1,213 (259) 954
Cash and due from banks 18,660 17,077
Allowance for loan losses (3,062) (2,541)
Other assets 12,244 9,844
-------- --------
Total assets $343,655 $287,736
======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing checking and
savings accounts $140,584 $ 867 2.45% $125,481 $ 851 2.69% $ 102 $ (86) $ 16
Time deposits 80,382 938 4.63% 64,515 822 5.05% 202 (86) 116
Term debt 25,171 326 5.14% 13,711 199 5.76% 166 (39) 127
-------- -------- -------- -------- -------- -------- -------
Total interest-bearing liab. 246,137 2,131 3.43% 203,707 1,872 3.65% 470 (211) 259
Non interest bearing deposits 59,996 47,922
Other liabilities 1,296 1,344
-------- --------
Total liabilities 307,429 252,973
Shareholders' equity 36,226 34,763
-------- --------
Total liabilities and
shareholders' equity $343,655 $287,736
======== ========
NET INTEREST INCOME (1) $ 4,263 $ 3,568 $ 743 $ (48) $ 695
======== ======== ======== ======== =======
NET INTEREST SPREAD 4.60% 4.55%
AVERAGE YIELD ON EARNING ASSETS (1),(2) 8.03% 8.20%
INTEREST EXPENSE TO EARNING ASSETS 2.68% 2.82%
------ ------
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 $112 and $52 for the three months ended September 30, 1999 and
1998 respectively.
(2) Non-accrual loans are included in average balance.
10
Table 2
Nine Months ended Nine Months ended
September 30, 1999 September 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) $203,952 $ 13,756 9.02% $163,190 $ 11,531 9.45% $ 2,880 $ (655) $ 2,225
Loans held for sale 446 44 13.19% 1,374 92 8.95% (62) 14 (48)
Investment securities
Taxable securities 65,495 3,035 6.20% 68,278 3,070 6.01% (125) 90 (35)
Nontaxable securities (1) 19,302 945 6.55% 7,443 382 6.86% 609 (46) 563
Temporary investments 12,369 453 4.90% 9,292 396 5.70% 131 (74) 57
-------- -------- -------- -------- -------- -------- -------
Total interest earning assets 301,564 18,233 8.08% 249,577 15,471 8.29% 3,433 (671) 2,762
Cash and due from banks 17,701 15,026
Allowance for loan losses (2,905) (2,410)
Other assets 10,932 9,804
-------- --------
Total assets $327,292 $271,997
======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing checking and
savings accounts $134,383 $ 2,494 2.48% $119,374 $ 2,408 2.70% $ 303 $ (217) $ 86
Time deposits 75,122 2,640 4.70% 63,451 2,425 5.11% 446 (231) 215
Term debt 25,372 974 5.13% 13,940 606 5.81% 497 (129) 368
-------- -------- -------- -------- -------- -------- -------
Total interest-bearing liab. 234,877 6,108 3.48% 196,765 5,439 3.70% 1,246 (577) 669
Non interest bearing deposits 54,446 44,417
Other liabilities 1,694 1,215
-------- --------
Total liabilities 291,017 242,397
Shareholders' equity 36,175 29,600
-------- --------
Total liabilities and
shareholders' equity $327,192 $271,997
======== ========
NET INTEREST INCOME (1) $ 12,125 $ 10,032 $ 2,187 $ (94) $ 2,093
======== ======== ======== ======== =======
NET INTEREST SPREAD 4.60% 4.59%
AVERAGE YIELD ON EARNING ASSETS (1),(2) 8.08% 8.29%
INTEREST EXPENSE TO EARNING ASSETS 2.70% 2.91%
------ ------
NET INTEREST INCOME TO EARNING ASSETS (1),(2) 5.38% 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 $286 and $120 for the three months ended September 30, 1999 and
1998 respectively.
(2) Non-accrual loans are included in average balance.
11
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
$226 for the quarter ended September 30, 1999 compared with $180 for the same
quarter in 1998. For the nine months ended September 30, 1999 the provision
for loan losses was $881 compared with $691 for the same period in 1998.
Noninterest Income
Noninterest income for the third quarter of 1999 was $973, an increase of
$133 over the same period of 1998. The increase was due to increases in
service charges on deposit accounts offset by decreases in investment
commissions and other noninterest income. Service fees on deposit accounts
increased 28.9% due to increases in the number of accounts and increases in
service charge fees. ATM fees also increased due to the expansion of the
Company's ATM network. Investment commissions decreased $19 compared to the
third quarter of 1998 due to lower sales volume at the Company's brokerage
subsidiary. Other noninterest income decreased compared with the third quarter
of 1998 due to a decline in servicing release premiums generated by the
origination and sale of mortgages in the secondary market.
For the nine months ended September 30, 1999 noninterest income increased
$356 due to increases in service charges on deposit accounts offset by
decreases in investment commissions and other noninterest income. Service
charges have increased 33.9% over the prior year due to increases in service
charge fees and expansion of the Company's ATM network. Investment commissions
for the period decreased $162 due to lower sales volume at the Company's
brokerage subsidiary. Other noninterest income is down slightly from the prior
year due to declines in servicing release premiums.
Noninterest Expense
Noninterest expense for the quarter ended September 30, 1999 was $2,943,
an increase of $564 over the same period in 1998. Salaries and employee
benefits increased due to additional staffing required to generate and support
the growth in loans and deposits. At September 30, 1999 the Company had 168
full-time equivalent employees compared with 149 at September 30, 1998. Of
this increase, 6 full-time equivalent employees were located in the Portland
store and the remainder were in various administrative and support functions
throughout the organization. Premises and equipment expense increased $78 from
the third quarter of 1998 to the third quarter of 1999 due to the opening of a
loan center in January, the relocation of the accounting and support functions
to a new facility in May, the acquisition and relocation of the Sutherlin
store in June, the acquisition of a future store site in Salem, and the
opening of the Portland store in July. Other noninterest expense was $1,030
for the third quarter of 1999 compared with $806 for the third quarter of
1998. Increases in professional fees and marketing expenses were the primary
reasons for the increase.
Noninterest expense for the nine months ended September 30, 1999 was
$8,176 compared with $6,897 for the same period in 1998, an increase of
$1,279. Salaries and benefits increased $629 for the nine months ended
September 30, 1999 compared with the same period in 1998 due to increase
staffing levels to support the growth in loans and deposits as well as the
opening of the Company's thirteenth store in Portland. Premises and Equipment
expense for the nine months ended September 30, 1999 was $1,249, an increase
12
of $168 over the same period in 1998. This increase was due to the expansion
of the Company's support facilities during early 1999, the opening a store in
Portland and the acquisition of a future site in Salem, Oregon. Other
noninterest expense for the nine months ended September 30, 1999 increased
$482 over the same period in 1998 to $2,851. This increase was due primarily
to higher professional and marketing fees due to expansion activities.
FINANCIAL CONDITION
Significant changes in the Company's financial position from December 31,
1998 to September 30, 1999 are as follows:
Loans
Loans have increased $38.4 million from December 31, 1998 to $224.5
million at September 30, 1999. This increase was primarily due to increases in
commercial real estate loans outstanding which have increased $22.2 million
during the period. Loans outstanding at September 30, 1999 and December 31,
1998 were as follows:
September 30, 1999 December 31, 1998
------------------ -----------------
Commercial & Industrial $ 53,404 $ 48,140
Real Estate:
Construction 22,173 13,766
Residential Mortgage 22,615 19,825
Commercial Real Estate 95,973 73,767
Individuals 29,988 30,309
Other 385 360
-------- --------
Total Loans $224,538 $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 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
13
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, 1999 was as follows:
ALLOWANCE ACTIVITY
Three months ended Nine months ended
September 30, 1999 September 30, 1999
------------------ -----------------
Beginning Balance $ 2,942 $ 2,664
Provision for Loan Losses 226 881
Charge-offs (251) (679)
Recoveries 186 237
Net charge-offs/revoveries (65) (442)
-------- --------
Ending Balance $ 3,103 $ 3,103
======== ========
Non-performing assets, comprised of loans on nonaccrual status, loans
past due 90 days or more and other real estate owned were $554 or 0.25% of
total loans at September 30, 1999 compared with $616 or 0.33% or total loans
at December 31, 1998. The Company does not currently have any other real
estate owned.
Deposits
Deposits have increased $33.8 million since December 31, 1998 due to
successful sales and marketing efforts. Deposits consisted of the following at
September 30, 1999 and December 31, 1998:
September 30, 1999 December 31, 1999
------------------ -----------------
Noninterest bearing demand $ 63,937 $ 52,236
Interest bearing demand and
Money market accounts 119,113 111,389
Savings 23,279 19,968
Time deposits 83,239 72,212
-------- --------
Total Deposits $289,568 $255,805
======== ========
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Shareholder's Equity
Shareholder's equity has increased $246 since December 31, 1998.
Increases due to net income of $3,619 have been offset by dividends of $917,
the change in net unrealized gains/losses on investment securities available
for sale, net of applicable taxes, of $1,895 and the repurchase of stock, net
of the proceeds from stock options exercised of $561. The change in unrealized
gains/losses on investment securities is due to the generally increasing
interest rate environment that has existed for the first nine months of 1999.
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 September 30, 1999 the Company's Tier 1 and Total Risk-Based capital
ratios were 15.86% and 17.11%, respectively.
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 information here is designated a "Year 2000 Readiness Disclosure"
pursuant to the Year 2000 Information and Readiness Disclosure Act, Public Law
105-271.
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.
15
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.
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.
16
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.
For 1999, the Company has incurred approximately $22 of external
operating expenses relative to year 2000 compliance issues. In 1999, the
Company expects to incur external additional operating expenses of
approximately $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:
0 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.
0 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.
0 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.
0 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
17
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.
0 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.
18
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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PART II: OTHER INFORMATION
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 November 10, 1999 /s/ Raymond P. Davis
-------------------------------------------
Raymond P. Davis
President and Chief Executive Officer
Dated November 10, 1999 /s/ Daniel A. Sullivan
-------------------------------------------
Daniel A. Sullivan
Senior Vice President and
Chief Financial Officer
21