10-Q 1 0001.txt FORM 10-Q FOR QUARTER ENDING JUNE 30, 2000 As Filed with the Securities and Exchange Commission on August 14, 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: June 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 July 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 Condensed Consolidated Balance Sheets: June 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Income: Three and six months ended June 30, 2000 and 1999 4 Condensed Consolidated Statements of Comprehensive Income: Three and six months ended June 30, 2000 and 1999 5 Condensed Consolidated Statements of Cash Flows: Six months ended June 30, 2000 and 1999 6 Notes to Condensed Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15-16 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 16 Item 5. Other Information none Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 PART I: FINANCIAL INFORMATION Item 1. Financial Statements UMPQUA HOLDINGS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 2000 1999 ------------ ------------ ASSETS Cash and due from banks $ 27,065,839 $ 30,058,897 Interest bearing deposits in other banks 31,127,364 15,630,197 ------------ ------------ Total Cash and Cash Equivalents 58,193,203 45,689,094 Trading account assets 1,065,608 474,782 Investment securities available for sale 71,578,854 76,868,536 Mortgage loans held for sale 3,916,403 - Loans receivable 261,096,726 248,533,933 Less: Allowance for loan losses (3,769,593) (3,469,350) ------------ ------------ Loans, net 257,327,133 245,064,583 Federal Home Loan Bank stock at cost 2,422,600 2,346,200 Property and equipment, net of depreciation 9,549,886 9,419,744 Interest receivable 1,139,420 1,141,308 Other assets 5,884,409 5,732,469 ------------ ------------ Total Assets $411,077,516 $386,736,716 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 69,081,882 $ 59,709,104 Savings and interest-bearing checking 154,271,936 151,199,156 Time deposits 121,246,775 90,765,095 ------------ ------------ Total Deposits 344,600,593 301,673,355 Securities sold under agreements to repurchase 625,271 - Term debt to Federal Home Loan Bank 24,638,000 46,158,000 Accrued interest payable 604,200 543,424 Other liabilities 1,729,072 1,645,715 ------------ ------------ Total Liabilities 372,197,136 350,020,494 ------------ ------------ Commitments and contingencies SHAREHOLDERS' EQUITY Common stock 25,823,869 25,778,259 Retained earnings 14,797,825 12,708,368 Accumulated other comprehensive loss (1,741,314) (1,770,405) ------------ ------------ Total Shareholders' Equity 38,880,380 36,716,222 ------------ ------------ Total Liabilities and Shareholders' Equity $411,077,516 $386,736,716 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 UMPQUA HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended June 30, Six months ended June 30, 2000 1999 2000 1999 ------------ ------------- ------------- ------------- Interest Income Interest and fees on loans $6,101,146 $4,580,956 $ 11,842,406 $8,946,613 Interest on investment securities available for sale 1,126,819 1,233,480 2,302,290 2,478,360 Interest bearing deposits with other banks 180,221 127,005 313,830 239,849 ---------------------------- ------------------------------- Total interest income 7,408,186 5,941,441 14,458,526 11,664,822 ---------------------------- ------------------------------- Interest Expense Interest on deposits 2,387,047 1,710,848 4,506,138 3,328,926 Interest on borrowings and repurchase agreements 373,342 324,794 917,533 648,212 ---------------------------- ------------------------------- Total interest expense 2,760,389 2,035,642 5,423,671 3,977,138 ---------------------------- ------------------------------- Net Interest Income 4,647,797 3,905,799 9,034,855 7,687,684 Provision for loan losses 584,500 327,000 1,034,500 655,000 ---------------------------- ------------------------------- Net interest income after provision for loan losses 4,063,297 3,578,799 8,000,355 7,032,684 Noninterest Income Service charges 801,614 744,211 1,591,220 1,396,203 Commissions 1,260,204 90,137 2,740,293 190,237 Other noninterest income 237,556 123,768 371,451 349,422 ---------------------------- ------------------------------- Total noninterest income 2,299,374 958,116 4,702,964 1,935,862 ---------------------------- ------------------------------- Noninterest Expense Salaries and employee benefits 2,354,346 1,251,121 4,815,668 2,612,146 Premises and Equipment 566,387 434,112 1,139,623 799,641 Other noninterest expense 1,274,687 1,027,911 2,553,920 1,838,587 ---------------------------- ------------------------------- Total noninterest expense 4,195,420 2,713,144 8,509,211 5,250,374 ---------------------------- ------------------------------- Income before income taxes 2,167,251 1,823,771 4,194,108 3,718,172 Provision for income taxes 780,492 650,682 1,495,000 1,342,138 ---------------------------- ------------------------------- Net Income $1,386,759 $1,173,089 $ 2,699,108 $2,376,034 ============================ =============================== Earnings Per Share Basic $ 0.18 $ 0.15 $ 0.35 $ 0.31 Diluted $ 0.18 $ 0.15 $ 0.35 $ 0.30
See accompanying notes to condensed consolidated financial statements. 4 UMPQUA HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three months ended June 30, Six months ended June 30, 2000 1999 2000 1999 ------------------------------ ------------------------------ Net income $ 1,386,759 $ 1,173,089 $ 2,699,108 $ 2,376,034 ----------- ----------- ----------- ----------- Unrealized gains (losses) arising during the period on investment securities available for sale (1,932,792) (2,736,804) 165,670 47,192 ----------- ----------- ----------- ----------- Income tax expense (benefit) related to unrealized gains (losses) on investment securities available for sale (1,015,389) 63,544 (741,341) 18,101 ----------- ----------- ----------- ----------- Net unrealized gains (losses) on investment securities available for sale (1,191,451) (1,721,415) 102,126 29,091 ----------- ----------- ----------- ----------- Comprehensive Income (Loss) $ 1,488,885 $ (18,362) $ 2,728,199 $ 654,619 =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. 5 UMPQUA HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
Six months ended June 30, 2000 1999 --------------------- ------------------ Cash flows from operating activities: Net income $ 2,699,108 $ 2,376,034 Adjustments to reconcile net income to net cash provided (used) by operating activities: Federal Home Loan Bank stock dividends (76,400) (73,100) Net increase in trading account assets (590,826) - Amortization of investment premiums, net 75,230 91,447 Origination of loans held for sale (9,913,409) (9,045,400) Proceeds from sales of loans held for sale 6,043,139 9,878,969 Amortization of intangibles 112,130 - Provision for loan losses 1,034,500 655,000 Gain on sales of loans (133,436) (122,085) Depreciation of premises and equipment 469,931 341,548 Net increase in other assets (280,283) (95,925) Net increase (decrease) in other liabilities 189,761 (398,124) --------------------- ------------------ Net cash provided (used) by operating activities (370,555) 3,608,364 --------------------- ------------------ Cash flows from investing activities: Purchases of investment securities - (11,442,038) Maturities of investment securities 3,196,473 4,774,244 Principal repayments received on mortgage-backed and related securities 2,065,171 5,111,235 Net loan originations (22,684,208) (22,676,669) Purchase of loans (5,362) (1,001,927) Proceeds from sales of loans 9,479,823 1,275,864 Purchases of premises and equipment (600,073) (1,268,803) --------------------- ------------------ Net cash used in investing activities (8,548,176) (25,228,094) --------------------- ------------------ Cash flows from financing activities: Net increase in deposit liabilities 42,927,238 15,314,504 Net increase in securities sold under agreements to repurchase 625,271 - Dividends paid on common stock (609,651) (611,741) Repurchase of common stock (67,408) (689,210) Proceeds from stock options exercised 67,390 105,011 Repayments of Federal Home Loan Bank borrowings (21,520,000) (20,000) --------------------- ------------------ Net cash provided by financing activities 21,422,840 14,098,564 --------------------- ------------------ Net increase (decrease) in cash and cash equivalents 12,504,109 (7,521,166) Cash and cash equivalents, beginning of period 45,689,094 36,967,543 --------------------- ------------------ Cash and cash equivalents, end of period $ 58,193,203 $ 29,446,377 ===================== ================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 5,362,895 $ 3,952,019 Income taxes $ 1,540,000 $ 1,410,000
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), South Umpqua Bank (the Bank) and Strand, Atkinson, Williams & York, Inc. 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 period 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 earnings per share computations were 7,625,132 and 7,637,527 for the three months ended June 30, 2000 and 1999, respectively. For diluted earnings per share 108,762 and 134,414 were added to weighted average shares outstanding for the three months ended June 30, 2000 and 1999, respectively, representing potential dilution for stock options outstanding, calculated using the treasury stock method. The weighted average number of common shares outstanding for basic earnings per share computations were 7,617,430 and 7,652,156 for the six months ended June 30, 2000 and 1999, respectively. For diluted earnings per share 114,462 and 136,148 were added to weighted average shares outstanding for the six months ended June 30, 2000 and 1999, respectively, representing potential dilution for stock options outstanding Options to purchase 340,374 shares of common stock for prices ranging from $8.375 to $12.00 per share were outstanding during the quarter ended June 30, 2000 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares during the period. (2) SEGMENT INFORMATION For purposes of measuring and reporting the financial results, the Company is divided into two business segments; Community Banking and Retail Brokerage Services. The Community Banking segment consists of the operations conducted by the Company's subsidiary South Umpqua Bank. The Bank provides a full array of credit and deposit products to meet the banking needs of its market area and targeted customers. At June 30, 2000, the Bank had 13 full service stores. The Retail Brokerage Service segment consists of the operations of the Company's subsidiary Strand, Atkinson, Williams & York, Inc. which was 7 acquired in December 1999. Strand, Atkinson, Williams & York, Inc. provides a full range of retail brokerage services to its clients through its two principal offices in Portland and Medford, Oregon as well as sales counters at most of the Bank's stores. At June 30, 2000, Strand, Atkinson, Williams & York, Inc. had 17 full time brokers. The following table presents summary income statements and a reconciliation to the Company's consolidated totals for the six months ended June 30, 2000.
($ in thousands) Community Retail Brokerage Banking Services Administration Eliminations Consolidated ------------------------------------------------------------------------------- Interest Income $ 14,427 $ 31 $ - $ - $ 14,458 Interest Expense 5,424 - - - 5,424 ------------------------------------------------------------------------------- Net Interest Income 9,003 31 - - 9,034 Provision for Loan Losses 1,034 - - - 1,034 Noninterest Income 2,026 2,724 - (47) 4,703 Noninterest Expense 6,155 2,319 82 (47) 8,509 ------------------------------------------------------------------------------- Income (Loss) before Taxes 3,840 436 (82) - 4,194 Income Tax Expense (Benefit) 1,342 182 (29) - 1,495 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Net Income (Loss) $ 2,498 $ 254 $ (53) $ - $ 2,699 ===============================================================================
Total assets by segment have not changed materially since December 31, 1999. (2) IMPAIRED LOANS The Company had loans totaling $1,389,000 and $1,052,000 at June 30, 2000 and December 31, 1999, respectively, that were considered impaired. At June 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 $1,998,000 for the six months ended June 30, 2000. All payments received on the loans were applied to principal and consequently no income has been recognized during the six months ended June 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 June 30, 2000 and the operating results for the three 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, 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; 8 customer acceptance of new products and services; 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 $1,387 for the quarter ended June 30, 2000, an 18.2% improvement over the same period in the previous year. Diluted earnings per share also improved to $0.18 for the second quarter of 2000 compared with $0.15 for the comparable in 1999. Return on equity was 14.7% and return on assets was 1.44% for the quarter ended June 30, 2000. For the six months ended June 30, 2000 the Company earned $2,699 compared with $2,376 for the comparable period in 1999, a 13.6% increase. Diluted earnings per share were $0.35 for the first six months of 2000, up from $0.30 during the same period in 1999. Return on equity was 14.4% and return on assets was 1.42% for the six months ended June 30, 2000 compared with a return on equity of 13.26% and a return on assets of 1.50% for the same period in 1999. Loans and deposits grew to record highs at June 30, 2000. Loans have increased from $248.5 million at December 31, 1999 to $261.1 million at June 30, 2000. Deposits have increased $42.9 million, or 14.2% since December 31, 1999 to $344.6 million at June 30, 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 "rate". Volume refers to the dollar level of interest earning assets and interest bearing liabilities. Rate refers to the underlying earnings yields on assets and costs of liabilities. Taxable equivalent net interest income for second quarter of 2000 was $4,762 compared with $4,008 for the second quarter of 1999, a $754 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 8.53% during the period compared with 8.09% in 1999, reflecting the increased yield on the Company's loan portfolio and a shift in the mix of earning assets. The yield on the Company's loan portfolio increased to 9.16% during the second quarter of 2000 compared with 8.96% during the same period in 1999. The increase was primarily due to repricing of the Company's variable rate loans. Additionally, there was a shift in the mix of earning assets towards loans and out of investments securities. Loans generally earn a higher rate of interest than investment securities. In 1999 the ratio of loans to total earning assets was 68% compared with 75% in 2000. The cost of interest bearing liabilities increased to 3.90% during the period compared with 3.48% in 1999 due primarily to higher rates paid on time deposits. The net interest margin improved to 5.40% for the second quarter of 2000 compared with 5.36% in for the same period in 1999. 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, 2000 June 30, INCREASE (DECREASE) AVERAGE INCOME/ AVERAGE INCOME/ DUE TO CHANGE IN BALANCE EXPENSE RATE BALANCE EXPENSE RATE VOLUME RATE NET CHANGE ------------------------------------------------------------------------------------------------------------------------- (in thousands) INTEREST-EARNING ASSETS: Loans (1)(2) $267,299 $ 6,085 9.16% $204,207 $ 4,564 8.96% $ 1,406 115 $ 1,521 Loans held for sale 663 17 10.31% 388 16 16.54% 11 (10) 1 Trading account assets 932 25 10.79% 25 - 25 Investment securities Taxable securities 53,685 878 6.54% 63,761 1,001 6.28% (158) 35 (123) Nontaxable securities (1) 21,230 355 6.69% 20,590 335 6.51% 10 10 20 Temporary investments 10,703 162 6.09% 10,844 127 4.70% (2) 37 35 -------------------- ------------------- ---------------------- Total interest earning assets 354,512 7,522 8.53% 299,790 6,043 8.09% 1,292 187 1,479 Cash and due from banks 19,986 17,839 Allowance for loan losses (3,789) (2,921) Other assets 16,738 10,600 ----------- ----------- Total assets $387,447 $325,308 =========== =========== INTEREST-BEARING LIABILITIES: Interest-bearing checking and savings accounts $145,378 $ 805 2.23% $135,789 $ 855 2.53% 60 (110) (50) Time deposits 111,986 1,582 5.68% 73,378 855 4.67% 449 279 727 Term debt and Repurchase . agreements 27,443 373 5.47% 25,522 325 5.11% 24 23 48 -------------------- ------------------- ---------------------- Total interest-bearing liabiliti284,807 2,760 3.90% 234,689 2,035 3.48% 533 192 725 Non interest bearing deposits 62,248 52,938 Other liabilities 2,336 1,668 ----------- ----------- Total liabilities 349,391 289,295 Shareholders' equity 38,056 36,013 ----------- ----------- Total liabilities and shareholders' equity $387,447 $325,308 =========== =========== NET INTEREST INCOME (1) $ 4,762 $ 4,008 $ 759 $ (5) $ 754 ========== ========= =========================== NET INTEREST SPREAD 4.64% 4.61% AVERAGE YIELD ON EARNING ASSETS (1),(2) 8.53% 8.09% INTEREST EXPENSE TO EARNING ASSETS 3.13% 2.72% -------- --------- NET INTEREST INCOME TO EARNING ASSETS (1),(2) 5.40% 5.36% ======== =========
(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 $114 and $101 for the three months ended June 30, 2000 and 1999 respectively. (2) Non-accrual loans are included in average balance. Taxable equivalent net interest income for the six months ended June 30, 2000 improved $1,389 over the same period in 1999 to $9,252 (see Table 2). The improvement was due almost entirely to increases in the volume of earning assets. Average earning assets increased $53.8 million in 2000 compared with 1999. Average loans, the largest component of average interest earning assets increased $61.9 million for the six month ended June 30, 2000 compared with 10 the same period in 1999. The yield on earning assets improved 0.43% and the cost of interest bearing deposits also increased 0.43% while the net interest margin decreased slightly for the six months ended June 30, 2000 to 5.36% from 5.39% for the same period in 1999. Table 2
Six Months ended Six Months ended June 30, 2000 June 30, INCREASE (DECREASE) AVERAGE INCOME/ AVERAGE INCOME/ DUE TO CHANGE IN BALANCE EXPENSE RATE BALANCE EXPENSE RATE VOLUME RATE NET CHANGE ------------------------------------------------------------------------------------------------------------------------- (in thousands) INTEREST-EARNING ASSETS: Loans (1)(2) $260,406 $11,819 9.13% $198,530 $ 8,913 9.05% $ 2,785 121 $ 2,907 Loans held for sale 438 24 11.02% 509 34 13.47% (5) (5) (10) Trading account assets 729 35 9.65% - - 35 - 35 Investment securities Taxable securities 55,329 1,803 6.52% 66,756 2,063 6.18% (353) 93 (260) Nontaxable securities (1) 21,275 712 6.69% 17,862 581 6.51% 111 20 131 Temporary investments 9,734 283 5.85% 10,453 249 4.80% (17) 51 34 -------------------- ------------------- ---------------------- Total interest earning assets 347,911 14,676 8.51% 294,110 11,840 8.12% 2,556 280 2,837 Cash and due from banks 19,944 17,151 Allowance for loan losses (3,718) (2,825) Other assets 17,160 10,410 ----------- ----------- Total assets $381,297 $318,846 =========== =========== INTEREST-BEARING LIABILITIES: Interest-bearing checking and savings accounts $143,992 $1,666 2.33% $131,230 $1,628 2.50% 159 (121) 38 Time deposits 104,402 2,840 5.47% 72,448 1,701 4.73% 752 387 1,139 Term debt and Repurchase agreements 33,259 917 5.54% 25,474 648 5.13% 199 70 269 -------------------- ------------------- ---------------------- Total interest-bearing liabilities 281,653 5,423 3.87% 229,152 3,977 3.50% 1,110 336 1,446 Non interest bearing deposits 59,552 51,626 Other liabilities 2,529 1,927 ----------- ----------- Total liabilities 343,734 282,705 Shareholders' equity 37,563 36,141 ----------- ----------- Total liabilities and shareholders' equity $381,297 $318,846 =========== =========== NET INTEREST INCOME (1) $ 9,253 $ 7,863 $ 1,446 $ (56) $1,390 ========== ========= =========================== NET INTEREST SPREAD 4.63% 4.62% AVERAGE YIELD ON EARNING ASSETS (1),(2) 8.51% 8.12% INTEREST EXPENSE TO EARNING ASSETS 3.14% 2.73% -------- --------- NET INTEREST INCOME TO EARNING ASSETS (1),(2) 5.36% 5.39% ======== =========
(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 $217 and $175 for the six months ended June 30, 2000 and 1999 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 future losses in the loan portfolio (see additional discussion under Allowance for Loan Losses). The provision for loan losses for the second quarter of 2000 was $592 compared with $327 during the second quarter of 1999. Net charge-offs were $589 for the three months ended June 30, 2000 compared with net charge-offs of $296 for the same period in 1999. Nonperforming assets increased from $1,604 at December 31, 1999 to $1,718 at June 30, 2000. The allowance for loan losses totaled $3,770, or 1.44% of total loans, at June 30, 2000 compared with $3,469, or 1.40% of total loans at December 31, 1999. Noninterest Income Noninterest income totaled $2,299 for the quarter ended June 30, 2000 compared with $958 for the same period in 1999. The primary reason for the increase was revenue generated by the Company's subsidiary Strand, Atkinson, Williams & York, which was acquired in December 1999. The subsidiary generated $1,260 in noninterest income during the quarter. Other noninterest income also increased during the quarter to $238 from $124 for the same period in 1999. The primary reason for this increase was an $87 gain on the sale of approximately $6 million of loans during the quarter. Noninterest income was $4,703 for the six months ended June 30, 2000 compared with $1,936 for the same period in 1999. The increase is primarily attributable to $2,724 of noninterest income generated by Strand, Atkinson, Williams and York. Service charges on deposit also increased $195 for the six month period ending June 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 June 30, 2000 was $4,195 compared with $2,713 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 June 30, 2000 Community Retail Brokerage Banking Services Administration Eliminations Consolidated ----------------------------------------------------------------------------------- Salaries and employee benefits $ 1,529 $ 825 $ - $ - $ 2,354 Premises and Equipment 535 31 - - 566 Other noninterest expense 966 282 63 (36) 1,275 ----------------------------------------------------------------------------------- Total noninterest expense $ 3,030 $ 1,138 $ 63 $ (36) $ 4,195 ===================================================================================
For the quarter ended June 30, 1999 Community Retail Brokerage Banking Services Administration Eliminations Consolidated ----------------------------------------------------------------------------------- Salaries and employee benefits $ 1,251 $ - $ - $ - $ 1,251 Premises and Equipment 434 - - - 434 Other noninterest expense 941 - 92 (5) 1,028 ----------------------------------------------------------------------------------- Total noninterest expense $ 2,626 $ - $ 92 $ (5) $ 2,713 ===================================================================================
12 The increase in salaries and employee benefits in the Community Banking segment was due to the opening of the Salem store in early 2000 and additional lending staff. The increase in premises and equipment expense in the Community Banking segment is also due to the opening of the Salem store. For the six months ended June 30, 2000 noninterest expense was $8,509 compared with $5,250 for the same period in 1999. The primary reason for the increase was due to expenses incurred by Strand, Atkinson, Williams & York. Details of noninterest expense by business segment is detailed below:
NONINTEREST EXPENSE DETAIL For the six months ended June 30, 2000 Community Retail Brokerage Banking Services Administration Eliminations Consolidated ----------------------------------------------------------------------------------- Salaries and employee benefits $ 3,111 $ 1,704 $ - $ - $ 4,815 Premises and Equipment 1,076 64 - - 1,140 Other noninterest expense 1,968 552 82 (48) 2,554 ----------------------------------------------------------------------------------- Total noninterest expense $ 6,155 $ 2,320 $ 82 $ (48) $ 8,509 ===================================================================================
For the six months ended June 30, 1999 Community Retail Brokerage Banking Services Administration Eliminations Consolidated ----------------------------------------------------------------------------------- Salaries and employee benefits $ 2,612 $ - $ - $ - $ 2,612 Premises and Equipment 800 - - - 800 Other noninterest expense 1,751 - 92 (5) 1,838 ----------------------------------------------------------------------------------- Total noninterest expense $ 5,163 $ - $ 92 $ (5) $ 5,250 ===================================================================================
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. Income taxes The effective tax rate for the Company was 36.0% during the second quarter of 2000 compared with 35.7% during the second quarter of 1999. For the six months ended June 30, 2000 the Company's effective tax rate was 35.6% compared with 36.1% for the same period in 1999. 13 Financial Condition Significant changes in the Company's financial position from December 31, 1999 to June 30, 2000 are as follows: Loans have increased $12.6 million since December 31, 1999 to $261.1 million at June 30, 2000. Details of the loan portfolio at June 30, 2000 and December 31, 1999 were as follows: June 30, 2000 December 31, 1999 --------------------------------------- Commercial & Industrial $ 59,208 $ 60,137 Real Estate: Construction 32,984 29,962 Residential Mortgage 26,162 23,099 Commercial Real Estate 111,063 104,823 Individuals 30,691 30,309 Other 989 204 --------------------------------------- Total Loans $ 261,097 $ 248,534 ======================================= The Company had no off balance sheet derivative instruments at June 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 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 14 The allowance for loan losses is based upon estimates of losses inherent in the portfolio. The amount of losses actually incurred can vary significantly from these estimates. Assessing the adequacy of the allowance on a quarterly basis allows management to adjust these estimates based upon the most recent information available. Activity in the allowance for loan losses was as follows for the three and six month periods ending June 30, 2000: Three months ended Year to Date June 30, 2000 June 30, 2000 --------------------------------------- Beginning Balance $ 3,777 $ 3,469 Provision for Loan Losses 585 1,035 Charge-offs (606) (763) Recoveries 14 29 --------------------------------------- Net charge-offs/recoveries (592) (734) --------------------------------------- Ending Balance $ 3,770 $ 3,770 ======================================= 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 investments securities available for sale, and a stable base of core deposits. Having a stable and diversified deposit base is a significant factor in the Company's long-term liquidity structure. At June 30, 2000 that Company had a total funding line with the Federal Home Loan Bank of $98.1 million of which $24.6 million was outstanding. The Company also had available lines of $18.4 million from other financial institutions. At June 30, 2000 the Company had approximately $72 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 $2.2 million to $38.9 million at June 30, 2000. The increase was the result of earnings of $2.7 million, offset by dividends paid of $0.6 million. At June 30, 2000 the Company's Tier 1 and total risk-based capital ratios were approximately 13.38% and 14.63%. 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. 15 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. Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual shareholders' meeting on April 26, 2000. At the meeting the following Directors were elected to serve 3-year terms: Votes For Votes Withheld Scott Chambers 6,126,836 32,981 Ron Doan 6,116,972 42,845 Allyn Ford 6,126,206 33,611 The following Directors continued to serve out the remainder of their terms, either 1 or 2 years: Harold L. Ball Raymond P. Davis David B. Frohnmayer Lynn K. Herbert Neil D. Hummel Frances Jean Phelps 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) There were no current reports on Form 8-K filed by the registrant during the quarter ended June 30, 2000 16 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 11, 2000 /s/ Raymond P. Davis -------------------------------------- Raymond P. Davis President and Chief Executive Officer Dated August 11, 2000 /s/ Daniel A. Sullivan -------------------------------------- Daniel A. Sullivan Senior Vice President and Chief Executive Officer 17