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As Filed with the Securities and Exchange Commission on May 15, 2002 U.S. Securities and Exchange Commission 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: March 31, 2002 [ ] 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 OREGON 93-1261319
Washington, D.C. 20549
(Exact Name of Registrant as Specified in Its Charter)
200 SW Market Street, Suite 1900
Portland, Oregon 97201
(address of Principal Executive Offices)(Zip Code)
(503) 546-2491
(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 April 30, 2002: 19,974,315
UMPQUA HOLDINGS CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
_____________
PART I |
FINANCIAL INFORMATION |
PAGE |
Item 1. |
Financial Statements (unaudited) |
|
Condensed Consolidated Balance Sheets: |
3 |
|
Condensed Consolidated Statements of Income: |
4 |
|
5 |
||
Condensed Consolidated Statements of Cash Flows: |
6 |
|
7-9 |
||
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
10-16 |
Item 3. |
17 |
|
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. |
17 |
|
18 |
PART I: FINANCIAL INFORMATION | |||||
Item 1. Financial Statements | |||||
UMPQUA HOLDINGS CORPORATION | |||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||
(UNAUDITED) | |||||
March 31, | December 31, | ||||
Dollars in thousands | 2002 | 2001 | |||
ASSETS | |||||
Cash and due from banks | $ | 76,038 | $ | 70,155 | |
Federal funds sold | 10,900 | 26,353 | |||
Interest bearing deposits in other banks | 10,273 | 11,480 | |||
Total Cash and Cash Equivalents | 97,211 | 107,988 | |||
Trading account assets | 861 | 3,010 | |||
Investment securities available for sale, at fair value | 172,076 | 193,588 | |||
Investment securities held to maturity, at amortized cost | 19,113 | 19,134 | |||
Mortgage loans held for sale | 29,314 | 11,520 | |||
Loans and leases receivable | 1,041,553 | 1,016,142 | |||
Less: Allowance for credit losses | (14,271) | (13,221) | |||
Loans and leases, net | 1,027,282 | 1,002,921 | |||
Federal Home Loan Bank stock, at cost | 8,291 | 8,170 | |||
Property and equipment, net of depreciation | 39,310 | 38,871 | |||
Intangible assets | 26,169 | 25,841 | |||
Mortgage servicing rights | 5,991 | 4,876 | |||
Other assets | 11,554 | 12,792 | |||
Total Assets | $ |
1,437,172
|
$ |
1,428,711
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||
Deposits | |||||
Noninterest bearing | $ | 268,428 | $ | 270,813 | |
Savings and interest-bearing checking | 521,726 | 514,096 | |||
Time deposits | 417,359 | 419,984 | |||
Total Deposits | 1,207,513 | 1,204,893 | |||
Securities sold under agreements to repurchase | 29,216 | 25,715 | |||
Fed funds purchased | - | 7,500 | |||
Term debt | 35,068 | 31,041 | |||
Other liabilities | 27,461 | 24,261 | |||
Total Liabilities | 1,299,258 | 1,293,410 | |||
SHAREHOLDERS' EQUITY | |||||
Common stock, no par value, 100,000,000 shares authorized; issued and | |||||
outstanding: 19,970,763 at March 31, 2002 and 19,952,965 at December 31, 2001 | 92,469 | 92,268 | |||
Retained earnings | 44,197 | 41,041 | |||
Accumulated other comprehensive income | 1,248 | 1,992 | |||
Total Shareholders' Equity | 137,914 | 135,301 | |||
Total Liabilities and Shareholders' Equity | $ |
1,437,172
|
$ |
1,428,711
|
|
See accompanying notes to condensed consolidated financial statements | |||||
3
UMPQUA HOLDINGS CORPORATION | ||||
CONDENSED CONSOLIDATED STATEMENTS OF INCOME | ||||
(UNAUDITED) | ||||
Three months ended March 31, | ||||
Dollars in thousands | 2002 | 2001 | ||
Interest Income | ||||
Interest and fees on loans | $ | 19,834 | $ | 17,605 |
Interest on direct finance leasing | 97 | 83 | ||
Interest on taxable securities | 2,285 | 2,838 | ||
Interest on non-taxable securities | 729 | 695 | ||
Interest on temporary investments | 105 | 580 | ||
Interest on trading account assets | 15 | 20 | ||
Total interest income | 23,065 | 21,821 | ||
Interest Expense | ||||
Interest on deposits | 5,284 | 8,438 | ||
Interest on repurchase agreements | 81 | 181 | ||
Interest on borrowings | 330 | 413 | ||
Total interest expense | 5,695 | 9,032 | ||
Net Interest Income | 17,370 | 12,789 | ||
Provision for credit losses | 1,004 | 327 | ||
Net interest income after provision for credit losses | 16,366 | 12,462 | ||
Noninterest Income | ||||
Service charges | 2,084 | 1,820 | ||
Brokerage fees and commissions | 2,174 | 1,930 | ||
Mortgage banking revenue, net | 1,679 | 675 | ||
Other noninterest income | 543 | 533 | ||
Total noninterest income | 6,480 | 4,958 | ||
Noninterest Expense | ||||
Salaries and employee benefits | 8,709 | 7,017 | ||
Premises and Equipment | 2,099 | 1,914 | ||
Other noninterest expense | 4,109 | 3,428 | ||
Merger expenses | 1,520 | 787 | ||
Total noninterest expense | 16,437 | 13,146 | ||
Income before income taxes and minority interest | 6,409 | 4,274 | ||
Provision for income taxes | 2,448 | 1,688 | ||
3,961 | 2,586 | |||
Loss attributable to minority interest | - | 3 | ||
Net Income | $ |
3,961
|
$ |
2,589
|
Earnings Per Share | ||||
Basic | $ 0.20 | $ 0.14 | ||
Diluted | $ 0.20 | $ 0.14 | ||
See accompanying notes to condensed consolidated financial statements | ||||
4
UMPQUA HOLDINGS CORPORATION | ||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||
(UNAUDITED) | ||||
Three months ended March 31, | ||||
Dollars in thousands | 2002 | 2001 | ||
Net income | $ | 3,961 | $ | 2,589 |
Unrealized gains (losses) arising during the period on | ||||
investment securities available for sale | (1,191) | 2,406 | ||
Income tax (benefit) expense related to unrealized gains | ||||
(losses) on investment securities, available for sale | (447) | 918 | ||
Net unrealized gains (losses) on investment | ||||
securities available for sale | (744) | 1,488 | ||
Comprehensive Income | $ |
3,217
|
$ |
4,077
|
See accompanying notes to condensed consolidated financial statements |
5
UMPQUA HOLDINGS CORPORATION | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS | ||||||||
(UNAUDITED) | ||||||||
Three months ended March 31, | ||||||||
Dollars in thousands | 2002 | 2001 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 3,961 | $ | 2,589 | ||||
Adjustments to reconcile net income to net cash used in | ||||||||
operating activities: | ||||||||
Federal Home Loan Bank stock dividends | (121) | (111) | ||||||
Net decrease (increase) in trading account assets | 2,149 | (388) | ||||||
Amortization of investment premiums and discounts, net | 43 | (101) | ||||||
Origination of loans held for sale | (152,800) | (65,490) | ||||||
Proceeds from sales of loans held for sale | 136,653 | 59,344 | ||||||
Provision for credit losses | 1,004 | 327 | ||||||
(Increase) decrease in mortgage servicing rights | (1,115) | 100 | ||||||
Gain on sales of loans | (1,647) | (189) | ||||||
Depreciation of premises and equipment | 832 | 762 | ||||||
Amortization of intangibles | 120 | 238 | ||||||
Net loss attributable to minority interest | - | (3) | ||||||
Net decrease (increase) in other assets | 1,685 | (1,643) | ||||||
Net increase in other liabilities | 3,200 | 932 | ||||||
Net cash used by operating activities | (6,036) | (3,633) | ||||||
Cash flows from investing activities: | ||||||||
Purchases of investment securities | - | (16,872) | ||||||
Maturities/calls of investment securities available for sale | 20,299 | 47,877 | ||||||
Investment in subsidiaries | (448) | (333) | ||||||
Sales of investment securities available for sale | - | 7,046 | ||||||
Maturities of investment securities held to maturity | - | 100 | ||||||
Net loan originations | (25,365) | (22,094) | ||||||
Purchases of premises and equipment | (1,271) | (1,234) | ||||||
Minority interest | - | (1,178) | ||||||
Net cash (used) provided by investing activities | (6,785) | 13,312 | ||||||
Cash flows from financing activities: | ||||||||
Net increase in deposit liabilities | 2,620 | 16,731 | ||||||
Net increase in securities sold under agreements to repurchase | 3,501 | 4,983 | ||||||
Fed funds repaid, net | (7,500) | - | ||||||
Dividends paid on common stock | (805) | (577) | ||||||
Proceeds from stock options exercised | 201 | 83 | ||||||
Proceeds from term borrowings | 15,000 | 2,351 | ||||||
Repayments of term borrowings | (10,973) | - | ||||||
Net cash provided by financing activities | 2,044 | 23,571 | ||||||
Net (decrease) increase in cash and cash equivalents | (10,777) | 33,250 | ||||||
Cash and cash equivalents, beginning of period | 107,988 | 95,161 | ||||||
Cash and cash equivalents, end of period | $ |
97,211
|
$ |
128,411
|
||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 5,277 | $ | 8,952 | ||||
Income taxes | $ | - | $ | - | ||||
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 in the United States of America for interim financial information. Accordingly, certain financial information and footnotes have been omitted or condensed. The condensed consolidated financial statements include the accounts of Umpqua Holdings Corporation (the Company), and its wholly-owned subsidiaries Umpqua Bank (the Bank) and Strand, Atkinson, Williams & York, Inc. (Strand, Atkinson). All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the condensed consolidated financial statements include all necessary adjustments (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These financial statements should be read in conjunction with the Company's 2001 annual report to shareholders. The results of operations for the 2002 interim periods shown in this report are not necessarily indicative of the results for any future interim period or the entire fiscal year.
(b) Earnings per share
Basic and diluted earnings per share are based on the weighted average number of common shares outstanding during each period, with diluted including the effect of potentially dilutive common shares. The weighted average number of common shares outstanding for basic and diluted earnings per share computations were as follows:
Dollars in thousands, except per | Quarter ended | |||
share amounts | March 31, 2002 | March 31, 2001 | ||
Net Income | $ |
3,961
|
$ |
2,589
|
Average outstanding shares | 19,960,668 | 18,736,884 | ||
Basic earnings per share | $ |
0.20
|
$ |
0.14
|
Common Stock Equivalents | 243,474 | 196,459 | ||
Fully diluted shares | 20,204,142 | 18,933,343 | ||
Fully diluted EPS | $ |
0.20
|
$ |
0.14
|
7
(2) SEGMENT INFORMATION
For purposes of measuring and reporting the financial results, the Company is divided into three business segments; Community Banking, Mortgage Banking and Retail Brokerage Services. The Community Banking segment consists of the operations conducted by the Company's subsidiary 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 March 31, 2002, the Bank had 45 full service stores. The Mortgage Banking segment originates, sells and services residential mortgage loans. The Retail Brokerage Services segment consists of the operations of the Company's subsidiary Strand, Atkinson, Williams & York, Inc. which was acquired in December 1999. Strand, Atkinson provides a full range of retail brokerage services to its clients and has sales counters at most of the Bank's stores. The following table presents summary income statements and a reconciliation to the Company's consolidated totals for the three months end ed March 31, 2002 and 2001 (in thousands).
Three months ended March 31, 2002 | ||||||||||||||
Community | Retail Brokerage | Mortgage | Administration | |||||||||||
Banking | Services | Banking |
and eliminations |
Consolidated | ||||||||||
Interest Income | $ | 21,472 | $ | 15 | $ | 1,578 | $ | - | $ | 23,065 | ||||
Interest Expense | 4,929 | 29 | 758 | (21) | 5,695 | |||||||||
Net Interest Income | 16,543 | (14) | 820 | 21 | 17,370 | |||||||||
Provision for Credit Losses | 937 | - | 67 | - | 1,004 | |||||||||
Noninterest Income | 2,534 | 2,181 | 1,814 | (49) | 6,480 | |||||||||
Noninterest Expense | 11,463 | 1,976 | 1,406 | 72 | 14,917 | |||||||||
Merger expenses | 1,407 | 101 | - | 12 | 1,520 | |||||||||
Income before Income Taxes | 5,270 | 90 | 1,161 | (112) | 6,409 | |||||||||
Income Tax Expense | 2,009 | 31 | 442 | (34) | 2,448 | |||||||||
Net Income | $ |
3,262
|
$ |
59
|
$ |
718
|
$ |
(78)
|
$ |
3,961
|
Three months ended March 31, 2002 | ||||||||||||||
Community | Retail Brokerage | Mortgage | Administration | |||||||||||
Banking | Services | Banking |
and eliminations |
Consolidated | ||||||||||
Interest Income | $ | 21,300 | $ | 20 | $ | 521 | $ | (20) | $ | 21,821 | ||||
Interest Expense | 8,696 | 32 | 275 | 29 | 9,032 | |||||||||
Net Interest Income | 12,604 | (12) | 246 | (49) | 12,789 | |||||||||
Provision for Credit Losses | 327 | - | - | - | 327 | |||||||||
Noninterest Income | 2,817 | 1,931 | 259 | (49) | 4,958 | |||||||||
Noninterest Expense | 9,218 | 1,841 | 573 | 727 | 12,359 | |||||||||
Merger expenses | 787 | - | - | - | 787 | |||||||||
Income before Taxes and Minority Interest | 5,089 | 78 | (68) | (825) | 4,274 | |||||||||
Income Income Tax Expense (Benefit) | 1,972 | 53 | (40) | (297) | 1,688 | |||||||||
Income before Minority Interest | 3,117 | 25 | (28) | (528) | 2,586 | |||||||||
Loss attributable to Minority Interest | - | - | - | 3 | 3 | |||||||||
Net Income (loss) | $ |
3,117
|
$ |
25
|
$ |
(28)
|
$ |
(525)
|
$ |
2,589
|
Total assets by segment have not changed materially since December 31, 2001.
8
(3) RECENTLY ADOPTED ACCOUNTING STANDARDS
The Company adopted Financial Accounting Standard 142, Goodwill and Other Intangible Assets, on January 1, 2002. In accordance with the standard, Goodwill and other intangibles with indefinite lives are no longer being amortized but instead will be tested for impairment at least annually. Management intends to complete impairment testing for the Company's intangibles prior to June 30, 2002. The following table summarizes selected intangible asset information:
Gross Carrying Amount Accumulated Amortization Intangible assets carrying value March 31, 2002 December 31, 2001 March 31, 2002 December 31, 2001 Core deposit intangible $ 2,240 $ 2,240 $ (120) $ - Mortgage servicing rights 5,991 5,872 - - Total $ 8,231 $ 8,112 $ (120) $ - Amortization expense Quarter end March 31, Intangible assets amortization 2002 2001 Core deposit intangible 121 - Mortgage servicing rights 368 249 Total $ 489 $ 249 Estimated amortization expense For year ended 12/31/02 $ 1,432 For year ended 12/31/03 $ 1,384 For year ended 12/31/04 $ 1,335 For year ended 12/31/05 $ 1,266 For year ended 12/31/06 $ 1,178 Community Retail Goodwill Banking Brokerage Balance December 31, 2001 $ 20,542 $ 3,058 Additions 116 333 Balance March 31, 2002 $ 20,658 $ 3,391 Quarter ended March 31, 2002 March 31, 2001 Reported net income $ 3,961 $ 2,589 Add back: Goodwill amortization - 238 Adjusted net income $ 3,961 $ 2,827 Basic earnings per share Reported basic earnings per share $ 0.20 $ 0.14 Add back: Goodwill amortization - 0.01 Adjusted basic earnings per share $ 0.20 $ 0.15 Diluted earnings per share Reported diluted earnings per share $ 0.20 $ 0.14 Add back: Goodwill amortization - 0.01 Adjusted diluted earnings per share $ 0.20 $ 0.15
9
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion contains a review of Umpqua Holdings Corporation's (the Company) financial condition at March 31, 2002 and the operating results for the three months then ended. When warranted, comparisons are made to the same period in 2001 and to December 31, 2001. This discussion should be read in conjunction with the financial statements (unaudited) contained elsewhere in this report. All numbers, except per share data, are expressed in thousands of dollars.
This discussion contains certain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated. These risks and uncertainties include the Company's ability to maintain or expand its market share and net interest margins, or to implement its marketing and growth strategies. Further, actual results may be affected by the Company's ability to compete on price and other factors with other financial institutions; customer acceptance of new products and services; and general trends in the banking and the regulatory environment, as they relate to the Company's cost of funds and returns on assets. In addition there are risks inherent in the banking industry relating to the collectability of loans and changes in interest rates. The reader is advised that this list of risks is not exhaustive and should not be c onstrued 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 $3,961 for the quarter ended March 31, 2002, up $972 from the comparable period in the prior year. Diluted earnings per share improved to $0.20 for the first quarter of 2002, up from $0.14 for the same period in 2001. Return on average equity and return on average assets were 1.14% and 11.60% for the quarter compared with 0.91% and 9.25% in 2001.
Excluding merger related expenses the Company earned $4.9 million for the quarter ended March 31, 2002, a $1.8 million increase over the $3.1 million earned during the first quarter of 2001. Return on equity excluding merger expenses was 14.45% for the first three months of 2002 compared with 10.98% for the same period in 2001 excluding merger expenses. The Company reported merger-related expenses, net of tax, of $973 for the first quarter of 2002 and completed the operational integration of Independent Financial Network (INFN) and Linn-Benton Bank (LBB), both of which were acquired by Umpqua Holdings Corporation in December 2001. In the first quarter of 2001, the Company reported merger related expenses of $486, net of tax, related to the acquisition of Valley of the Rogue Bank.
Total assets reached $1.437 billion at March 31, 2002.
10
Results of Operations
Net interest income
Net interest income is the primary source of the Company's revenue. Net interest income is the difference between interest income generated from earning assets, primarily loans and investment securities, and interest expense paid on customer deposits and debt. Changes in net interest income result from changes in "volume" and "rate". Volume refers to the level of interest earning assets and interest bearing liabilities while rate refers to the underlying yields on assets and costs of liabilities.
Net interest income on a taxable equivalent basis was $17.7 million for the quarter ended March 31, 2002 compared with $13.1 million for the same period in 2001 (Tables 1 and 2). The increase of $4.6 million was primarily attributable to an increase in the volume of earning assets and to a lesser extent improvement in the net interest margin. Average earning assets increased $217 million or 21% compared with the prior year period. Loans, the largest component of earning assets, increased $266 million on average compared with the prior year period. Offsetting this increase were decreases in average taxable investment securities and temporary investments. Overall, the yield on earning assets decreased to 7.48% for the quarter compared with 8.54% for the same period in the prior year. This decline was primarily attributable to the 1.54% decrease in the yield on loans. This decline was due to variable loan repricings as well as new loan production occurring at lower rates. Average prime rate fo r the first quarter of 2002 was 4.75% compared with 8.63% for the first quarter of 2001. Average noninterest earning assets were $38 million higher in the first quarter of 2002 compared with the first quarter of 2001. The increase was primarily attributable to intangibles related to the acquisition of LBB. Average interest bearing liabilities increased $172 million compared with the prior year period. Of this increase, $123 million was in the interest bearing checking and savings accounts deposit category, generally the least expensive deposit product. The overall cost of interest bearing liabilities for the first quarter of 2002 was 2.32% compared with 4.45% for the first quarter of 2001, a 2.13% decrease. The decrease was primarily the result of a decrease in the average cost of time deposits. As time deposits matured during 2001 and 2002 the Company was able to roll them over at lower rates. Average noninterest bearing funding sources increased $79 million compared with the prior year period. As a result of the preceding changes, the interest spread (the difference between the yield on earning assets and the cost of interest bearing liabilities) increased 1.07 % to 5.16% for the quarter ended March 31, 2002 compared with the same period in the prior year. The net interest margin for the quarter ended March 31, 2002 was 5.66%, an increase of 0.60% from the same period in the prior year.
11
Table 1 | QUARTER ENDED MARCH 31, 2002 | QUARTER ENDED MARCH 31, 2001 | ||||
AVERAGE | INTEREST INCOME | AVERAGE YIELDS | AVERAGE | INTEREST INCOME | AVERAGE YIELDS | |
BALANCE | OR EXPENSE | OR RATES | BALANCE | OR EXPENSE | OR RATES | |
INTEREST-EARNING ASSETS: | ||||||
Loans and loans held for sale (2) | $ 1,033,129 | $ 19,931 | 7.82% | $ 766,537 | $ 17,688 | 9.36% |
Taxable securities | 148,158 | 2,290 | 6.18% | 179,200 | 2,838 | 6.33% |
Non-taxable securities(1) | 61,189 | 1,088 | 7.11% | 58,979 | 1,057 | 7.17% |
Temporary investments | 26,822 | 105 | 1.59% | 47,218 | 580 | 4.98% |
Total interest earning assets | 1,269,298 | 23,414 | 7.48% | 1,051,934 | 22,163 | 8.54% |
Allowance for credit losses | (13,772) | (9,976) | ||||
Other assets | 154,720 | 116,822 | ||||
Total assets |
$ 1,410,246
|
$ 1,158,780
|
||||
INTEREST-BEARING LIABILITIES: | ||||||
Interest-bearing checking and | ||||||
savings accounts | $ 518,857 | $ 1,341 | 1.05% | $ 395,770 | $ 2,693 | 2.76% |
Time deposits | 414,294 | 3,943 | 3.86% | 381,921 | 5,745 | 6.10% |
Repurchase agreements | 23,035 | 81 | 1.43% | 16,412 | 181 | 4.47% |
Overnight borrowings | 7,045 | 13 | 0.75% | - | - | NA |
Borrowings | 32,184 | 317 | 3.99% | 28,817 | 413 | 5.81% |
Total interest-bearing liabilities | 995,415 | 5,695 | 2.32% | 822,920 | 9,032 | 4.45% |
Non-interest-bearing deposits | 257,663 | 212,361 | ||||
Other liabilities | 18,695 | 8,189 | ||||
Total liabilities | 1,271,773 | 1,043,470 | ||||
Minority interest | 1,816 | |||||
Shareholders' equity | 138,473 | 113,494 | ||||
Total liabilities and | ||||||
shareholders' equity |
$ 1,410,246
|
$ 1,158,780
|
||||
NET INTEREST INCOME (1) |
$ 17,719
|
$ 13,131
|
||||
NET INTEREST SPREAD | 5.16% | 4.09% | ||||
AVERAGE YIELD ON EARNING ASSETS (1),(2) | 7.48% | 8.54% | ||||
INTEREST EXPENSE TO EARNING ASSETS | 1.82% | 3.48% | ||||
NET INTEREST INCOME TO EARNING ASSETS (1),(2) |
5.66%
|
5.06%
|
||||
(1) Tax exempt income has been adjusted to a tax equivalent basis at a 35% effective rate. | ||||||
The amount of such adjustment was an addition to recorded income of $349 and $342 for 2002 and 2001, respectively. | ||||||
(2) Non-accrual loans are included in average balance. |
12
2002 COMPARED TO 2001 | |||
INCREASE (DECREASE) | |||
DUE TO CHANGE IN | |||
Table 2 | VOLUME | RATE | NET CHANGE |
INTEREST-EARNING ASSETS: | |||
Loans | $ 6,152 | $ (3,909) | $ 2,243 |
Taxable securities | (492) | (56) | (548) |
Non-taxable securities(1) | 40 | (9) | 31 |
Temporary investments | (251) | (224) | (475) |
Total (1) | 5,449 | (4,198) | 1,251 |
INTEREST-BEARING LIABILITIES: | |||
Interest-bearing checking and | |||
savings accounts | 838 | (2,190) | (1,352) |
Time deposits | 487 | (2,289) | (1,802) |
Repurchase agreements | 73 | (173) | (100) |
Overnight borrowings | 13 | NA | 13 |
Term debt | 48 | (144) | (96) |
Total | 1,459 | (4,796) | (3,337) |
Net increase in net interest income | $ 3,990 | $ 598 | $ 4,588 |
(1) Tax-exempt interest income has been adjusted to a tax equivalent basis at a 35% effective tax rate. |
Provision for Credit Losses
The provision for credit losses is management's estimate of the amount necessary to maintain an allowance for credit losses that is considered adequate based on the risk of losses in the loan and lease portfolio (see additional discussion under Allowance for Credit Losses). The provision for credit losses for the quarter ended March 31, 2002 was $1,004 compared with $327 during the first quarter of 2001. Net recoveries were $(46) for the three months ended March 31, 2002 compared with net charge-offs of $72 for the same period in 2001. Nonperforming loans at March 31, 2002 increased to $4.7 million from $3.4 million at December 31, 2001. The allowance for credit losses totaled $14,271, or 1.37% of total loans at March 31, 2002 compared with $13,221, or 1.30% of total loans at December 31, 2001.
Noninterest Income
Noninterest income for the quarter ended March 31, 2002 was $6,480, a $1,522 increase over the same period in 2001. Brokerage commissions and fees, the largest component of noninterest income increased $244 over the prior year. Service charges, the second largest component of noninterest income increased $264 compared with the same quarter in the prior year. Service charges increased as the Company converted to a standard fee schedule in all of its markets. Mortgage banking revenue was $1,679 during the first quarter of 2002 compared with $675 for the first quarter of 2001. The increase was due to increased mortgage banking activity related to lower interest rates in 2002. The Company originated $153 million in residential mortgages during the first quarter of 2002 compared with $65 million in 2001.
13
Noninterest Expense
Noninterest expense for the quarter ended March 31, 2002 was $16,437 compared with $13,146 for the same period in 2001. Salaries and employee benefits increased $1,692 to $8,709 in the first quarter of 2002. The increase was due to increased mortgage banking activity and salaries and benefits associated with the acquisition of LBB. Premises and equipment expense increased $185 compared with the prior year due to expenses associated with new stores and expanded backroom facilities and equipment. Other noninterest expense increased $681 to $4,109 for the first quarter of 2002. Other expense increased due to growth at the Bank and Strand. Merger expenses for the first quarter of 2002 and 2001 were as follows:
Quarter ended | ||
Merger expenses | March 31, 2002 | March 31, 2001 |
Professional fees | $ 409 | $ 46 |
Supplies | 27 | 36 |
Severance and relocation | 218 | 263 |
Premises and equipment write-downs | 97 | 234 |
Computer conversions | 86 | 62 |
New market expenses | 499 | - |
Other | 184 | 146 |
$ 1,520 | $ 787 |
Accrued merger expenses at March 31, 2002 were $3,001 and consisted primarily of accrued severance and related expenses and contract termination costs.
Income taxes
The effective tax rate for the Company was 38.2% during the first quarter of 2002 compared with 39.5 % during the first quarter of 2001. The decrease was partially attributable to certain merger expenses which were not deductible for income tax purposes in 2001.
Financial Condition
Significant changes in the Company's financial position from December 31, 2001 to March 31, 2002 are as follows:
Investment Securities Available for Sale
Investment securities have decreased $21.5 million since year-end 2001 due primarily to payments received on mortgage backed securities. Payments on these securities has been accelerated due to low interest rates.
14
Loans
Loans have increased $25.4 million since year end. Details of the loan portfolio at March 31, 2002 and December 31, 2001:
March 31, 2002 | December 31, 2001 | |
Commercial & Industrial | $ 245,722 | $ 235,809 |
Real Estate: | ||
Construction | 80,455 | 74,372 |
Residential and commercial | 653,961 | 634,031 |
Individuals | 56,829 | 59,988 |
Leases | 3,905 | 4,098 |
Other | 681 | 7,844 |
Total Loans | $ 1,041,553 | $ 1,016,142 |
Allowance for Credit Losses
The allowance for credit 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 and lease portfolio:
On a quarterly basis losses inherent in the portfolio are estimated by reviewing the following key elements of the loan portfolio:
The Company also tests the adequacy of the allowance for credit losses using the following methodologies:
The allowance for credit 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.
15
Activity in the allowance for credit losses was as follows for the three-month periods ending March 31:
Three months ended |
Three months ended |
|||
March 31, 2002 | March 31, 2001 | |||
Beginning Balance | $ | 13,221 | $ | 9,838 |
Provision for Loan Losses | 1,004 | 327 | ||
Charge-offs | (130) | (149) | ||
Recoveries | 176 | 77 | ||
Net charge-offs/recoveries | 46 | (72) | ||
Ending Balance | $ | $ 14,271 | $ | $ 10,093 |
Deposits
Details of deposits at March 31, 2002 and December 31, 2001 were as follows:
March 31, 2002 | December 31, 2001 | |||
Noninterest bearing demand | $ | 268,428 | $ | 270,813 |
Interest bearing demand and | ||||
Money market accounts | 445,726 | 440,739 | ||
Savings | 76,000 | 73,357 | ||
Time deposits | 417,359 | 419,984 | ||
Total Deposits | $ | 1,207,513 | $ | 1,204,893 |
Liquidity
Liquidity enables the Company to meet the borrowing needs of its customers and withdrawals of its depositors. The Company meets its liquidity needs through the maintenance of cash resources, lines of credit with other financial institutions, maturities and sales of investment securities available for sale, and a stable base of core deposits. Having a stable and diversified deposit base is a significant factor in the Company's long-term liquidity structure. At March 31, 2002 the Company had overnight investments of $21.2 million and available lines of credit of approximately $279 million with various financial institutions.
Capital Resources
Total shareholders' equity increased $2.6 million to $137.9 million at March 31, 2002. The increase was the result of earnings of $4.0 million, a $0.7 million decrease in accumulated other comprehensive income and $0.1 million from the exercise of stock options, offset by dividends paid of $0.8 million. At March 31, 2002 the Company's Tier 1 and total risk-based capital ratios were approximately 9.63% and 10.88% respectively. The Federal Reserve Board's minimum risk-based capital ratio guidelines for Tier 1 and total capital are 4% and 8% respectively.
16
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 credit 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, 2001. The Company also has increased its emphasis on noninterest sources of revenue in order to further stabilize future earnings.
Part II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) On January 2, 2002, the registrant filed a report on Form 8-K to report under Item 2 the completion of its merger with Independent Financial Network, Inc.
17
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 May 15, 2002 |
By: /s/ Raymond P. Davis |
Dated May 15, 2002 |
By: /s/ Daniel A. Sullivan |
18
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