United States
Securities and Exchange Commission

FORM 10-Q

Commission File Number: 000-25597

Umpqua Holdings Corporation

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

[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: 44,037,096 shares outstanding as of October 29, 2004:

FORM 10-Q CROSS-REFERENCE INDEX

UMPQUA HOLDINGS CORPORATION

See accompanying notes to condensed consolidated financial statements

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UMPQUA HOLDINGS CORPORATION

See accompanying notes to condensed consolidated financial statements

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UMPQUA HOLDINGS CORPORATION

See accompanying notes to condensed consolidated financial statements

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UMPQUA HOLDINGS CORPORATION

See accompanying notes to the consolidated financial statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Summary of Significant Accounting Policies

The accounting and financial reporting policies of Umpqua Holdings Corporation (referred to in this report as “we”, “our” or “Umpqua Holdings”) conform with accounting principles generally accepted in the United States of America. All material inter-company balances and transactions have been eliminated. The consolidated financial statements have not been audited. A more detailed description of our accounting policies is included in the 2003 Annual Report filed on Form 10-K. There have been no significant changes to these policies.

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim period.

Note 2 – Mergers

On July 9, 2004, we acquired all of the outstanding common stock of Humboldt Bancorp (“Humboldt”) of Roseville, California, the parent company of Humboldt Bank, in an acquisition accounted for under the purchase method of accounting. The results of Humboldt’s operations have been included in the consolidated financial statements since that date. This merger was consistent with our community banking expansion strategy and provides the opportunity to enter growth markets in Northern California with an established franchise with 27 stores.

The aggregate purchase price was $329 million, consisting of common stock valued at $310 million, stock options valued at $17 million and direct merger costs of $2 million. The value of the 15.5 million common shares issued was determined based on the $19.98 average closing market price for our common stock for the two days before and after announcement of the merger agreement on March 15, 2004. Outstanding Humboldt stock options were converted (using the same 1:1 exchange ratio applied to the share conversion) into approximately 1.1 million Umpqua Holdings stock options, at a weighted average fair value of $15.58 per option.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

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Fair Value of Humboldt Assets Acquired and Liabilities Assumed

(In thousands)

The core deposit intangible asset shown in the table above represents the value ascribed to the long-term deposit relationships acquired. This intangible asset is being amortized on a double declining balance basis over a term of ten years. Amortization of the Humboldt core deposit intangible asset for the third quarter of 2004 totaled $582,000. Goodwill represents the excess of the total purchase price paid for Humboldt over the fair values of the assets acquired, net of liabilities assumed. Goodwill is not amortized, but is evaluated for possible impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. No impairment losses were recognized in connection with core deposit intangible or goodwill assets during the three and nine-month month periods ended September 30, 2004 and 2003.

The table below presents the forecasted amortization expense for 2005 through 2009 for core deposit intangible assets acquired in all mergers:

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Expected Core Deposit Intangible Amortization

dollars in thousands

Following is pro forma presentation of the results for the combined companies for the three and nine-month periods ended September 30, 2003 as if the merger had occurred on January 1, 2003. Since Humboldt completed its merger with California Independent Bancorp (“CIB”) on January 6, 2004, the pro forma results for that transaction are presented separately in the tables.

Pro Forma Financial Information
(In thousands, except per share data)

(a)		Amortization and accretion of purchase accounting adjustments.
(b)		Reflects cost of subordinated debentures issued to fund cash portion of consideration.
(c)		Income tax effect of pro forma adjustments.

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Note 3 – Per Share Information

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Included in the denominator is the dilutive effect of stock options and unvested (“restricted”) stock, computed under the treasury stock method. The following table provides a reconciliation of the basic and diluted earnings per share computations for the three and nine-month periods ended September 30, 2004 and 2003.

Earnings Per Share
(In thousands, except per share data)

Note 4 – 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 operations conducted by Umpqua Bank (“the Bank”), which is our largest subsidiary. The Bank provides a full array of credit and deposit products to meet the banking needs of its market area and targeted customers. The Mortgage Banking segment, which operates as a division of the Bank, originates, sells and services residential mortgage loans. The Retail Brokerage Services segment consists of the operations of our brokerage subsidiary, Strand, Atkinson Williams and York (“Strand Atkinson”). The following table presents summary income statements and reconciliation to the consolidated totals for the three and nine-month periods ended September 30, 2004 and 2003.

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Segment Information
(in thousands, except per share data)

The only material change to total assets by segment was for the Community Banking segment, which increased by approximately $1.7 billion as a result of the Humboldt merger. Total Community Banking segment assets were approximately $4.8 billion at September 30, 2004, as compared to $2.9 billion at December 31, 2003.

Note 5 – Stock-Based Compensation

At September 30, 2004, we had a total of 2.2 million stock options issued under various plans (some assumed in connection with mergers) that were accounted for under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost related to stock options issued by Umpqua Holdings is reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table presents the effect on net income and earnings per share as if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to outstanding unvested stock options for each period presented.

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Stock-Based Compensation
(in thousands, except per share data)

In connection with the Humboldt merger, we assumed approximately 1.1 million stock options that were granted under various plans. Substantially all of these options were vested prior to the merger date. The fair value of the assumed options was included as a component of the acquisition cost and, accordingly, there is no pro forma impact for converted Humboldt options reflected in the table above.

Note 6 – Recently Issued Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46R”), Consolidation of Variable Interest Entities (revised December 2003). In December 2003, the FASB made revisions and delayed implementation of certain provisions of FIN 46R. FIN 46R provides guidance on how to identify the primary beneficiary of a variable interest entity and determine when the variable interest entity should be consolidated by the primary beneficiary. The recognition and measurement provisions of FIN 46R, as revised, were adopted for our Trust Preferred subsidiaries for the quarter ended September 30, 2003, and for other variable interest entities for the quarter ended March 31, 2004. The adoption did not have a material impact on our financial condition or results of operations.

In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 105 (“SAB 105”), Application of Accounting Principles to Loan Commitments. SAB 105 provides guidance on the accounting for loan commitments accounted for as derivative instruments. We adopted SAB 105 in March 2004. The adoption did not have a material impact on our financial condition or results of operations.

In March 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force regarding issue 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-01”). The consensus provided guidance for determining when an investment is other-than-temporarily-impaired. The guidance was effective for periods beginning after June 15, 2004. On September 30, 2004, the FASB deferred the implementation of the recognition criteria of EITF 03-01 until the fourth quarter of 2004 pending a review of the guidance in light of comments received. We will evaluate the potential impact this guidance may have on our financial condition and results of operations when it is released in final form.

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Note 7 – Allowance for Loan Losses

As of September 30, 2004, we refined the model used for determining certain components of the allowance for loan losses. The model refinement was done principally in connection with the Humboldt acquisition, and did not have a material impact on the recorded allowance for loan losses. Additionally, as of September 30, 2004, we reclassified the reserve for unfunded lending commitments from the allowance for loan losses to other liabilities. The amount reclassified as of September 30, 2004 was approximately $1.2 million, or 3 basis points of total gross loans. The reclassifications had no effect on the provision for credit losses as reported.

Note 8 – Junior Subordinated Debentures

As of September 30, 2004, we had ten wholly-owned trusts (“Trusts”) that were formed to issue trust preferred securities and related common securities of the Trusts. Five Trusts, representing aggregate total obligations of approximately $58.9 million (fair value of approximately $69 million as of the merger date), were assumed in connection with the Humboldt merger. Following is information regarding the Trusts:

Junior Subordinated Debentures
(in thousands)

(1)		Reflects purchase accounting adjustments, net of accumulated amortization, for junior subordiated debentures assumed in connection with the Humboldt merger.
(2)		Contractual interest rate of junior subordinated debentures.
(3)		Effective interest rate as of the third quarter of 2004, including impact of purchase accounting amortization.
(4)		Rate based on LIBOR plus 3.50%, adjusted quarterly.
(5)		Rate based on LIBOR plus 3.35%, adjusted quarterly.
(6)		Rate based on LIBOR plus 3.45%, adjusted quarterly.
(7)		Rate based on LIBOR plus 2.85%, adjusted quarterly.
(8)		Rate based on LIBOR plus 3.60%, adjusted quarterly.
(9)		Rate fixed for 5 years for issuance, then adjusted quarterly thereafter based on LIBOR plus 2.95%.

As a result of the adoption of FIN 46R, the Trusts have been deconsolidated. The $166.3 million of junior subordinated debentures issued to the Trusts as of September 30, 2004 ($97.9 million as of December 31, 2003) are reflected as junior subordinated debentures in the consolidated balance sheets. The common stock issued by the Trusts is recorded in other assets in the consolidated balance sheets, and totaled $4.7 million and $2.9 million, respectively, at September 30, 2004 and December 31, 2003.

All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of September 30, 2004, under guidance issued by the Board of Governors of the Federal Reserve System (Federal Reserve Board). In May 2004, the Federal Reserve Board proposed a rule that would continue to allow the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. Under the proposal, after a three-year transition period, the aggregate amount

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of trust preferred securities and certain other capital elements would be limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. Based on the proposed rule, we expect to include all currently issued trust preferred securities in Tier 1 capital. However, the provisions of the final rule could significantly differ from those proposed and there can be no assurance that the Federal Reserve Board will not further limit the amount of trust preferred securities permitted to be included in Tier 1 capital for regulatory capital purposes.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Report includes forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that expressly or implicitly predict future results, performance or events are forward-looking statements. The words “anticipate,” “believe,” “expect”, “estimate,” and “intend” and words or phrases of similar meaning, are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. Factors that could cause or contribute to those differences include, but are not limited to, the following: general economic conditions, either nationally or regionally that could result in increased loan losses, interest rate fluctuations, pricing pressure and other competitive factors, potential delays or problems with integrating acquisitions, the ability to attract new deposits and loans, changes in legal or regulatory requirements, competition in the retail brokerage industry, general stock market conditions, changes in technology and other factors described in this and other reports filed with the SEC including exhibit 99.1 attached hereto. Readers are encouraged to review the notes that accompany this report and are cautioned not to place undue reliance on forward-looking statements. We do not intend to update these forward-looking statements. All written and oral forward-looking statements attributable to the Umpqua Holdings and/or persons acting on its behalf are expressly qualified by this disclosure.

Summary of Critical Accounting Policies

The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Our significant accounting policies are described in Note 1 in the Notes to the Consolidated Financial Statements for the year ended December 31, 2003 as filed on Form 10-K (the “Notes to the 2003 Consolidated Financial Statements”). Not all of these critical accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management believes that the following policies and those disclosed in the Notes to the 2003 Consolidated Financial Statements could be considered critical within the SEC definition.

Allowance for Loan Losses and Reserve for Unfunded Commitments

The allowance for loan losses (“ALL”) is established to absorb known and inherent losses attributable to loans and leases outstanding. The reserve for unfunded commitments (“RUC”) is established to absorb inherent losses associated with our commitment the lend funds, such as with a letter or line of credit. The adequacy of the ALL and RUC are monitored on a regular basis and are based on management’s evaluation of numerous factors. These factors include the quality of the current loan portfolio; the trend in the loan portfolio’s risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent information. Approximately 73 percent of our loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the allowance for loan losses.

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Mortgage Servicing Rights

Retained mortgage servicing rights are measured by allocating the carrying value of the loans between the assets sold and the interest retained, based on their relative fair values at the date of the sale. The subsequent measurements are determined using a discounted cash flow model. Mortgage servicing rights assets are amortized over the expected life of the loan and are evaluated periodically for impairment. The expected life of the loan can vary from management’s estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of management’s estimates would negatively impact the recorded value of the mortgage servicing rights. The value of the mortgage servicing rights is also dependent upon the discount rate used in the model. Management reviews this rate on an ongoing basis based on current market rates. A significant increase in the discount rate would reduce the value of mortgage servicing rights.

Goodwill and Intangible Assets

At September 30, 2004, we had approximately $410 million in goodwill and other intangible assets as a result of business combinations. We adopted Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. In accordance with the standard, goodwill and other intangibles with indefinite lives are no longer being amortized but instead are periodically tested for impairment. Management performs an impairment analysis for the intangible assets with indefinite lives on a quarterly basis and determined that there was no impairment as of September 30, 2004.

Financial Overview

Net income was $13.4 million, or $0.31 per diluted share, for the quarter ended September 30, 2004, as compared with $9.0 million, or $0.31 per diluted share, for the same period in 2003. For the nine month period ended September 30, 2004, net income was $30.9 million, or $0.92 per diluted share, as compared with $25.6 million, or $0.89 per diluted share, for the same period in 2003.

We incur expenses related to mergers. Accordingly, we believe that our operating results are best measured on a comparative basis excluding the impact of merger-related expenses, net of tax. Operating Income is defined as net income before merger related expenses, net of tax, and operating income per diluted share is calculated by dividing operating earnings by the same diluted share total used in determining diluted earnings per share (see Note 3 of the Notes to the Condensed Consolidated Financial Statements).

The following table presents a reconciliation of net operating income and net operating income per share to net income and net income per share for the three and nine-month periods ended September 30, 2004 and 2003:

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Table 1 — Reconciliation of Operating Income to Net Income
(in thousands, except per share data)

The return on average assets and return on average shareholders’ equity were 1.13% and 8.5%, respectively, for the third quarter of 2004 compared with 1.30% and 11.7%, respectively, in 2003. For the nine months ended September 30, 2004, the return on average assets and average shareholders’ equity were 1.15% and 9.7%, respectively, compared with 1.28% and 11.4%, respectively, for the same period in 2003.

Our return on equity is negatively impacted as the result of capital required to support goodwill under bank regulatory guidelines. To the extent this performance metric is used to compare our performance with other financial institutions that do not have merger-related intangible assets, we believe it is important to consider the impact of intangible assets. The return on average tangible shareholders’ equity (which is computed by dividing net operating income, as shown above, plus amortization of identifiable intangible assets, net of taxes, by average total shareholders’ equity less average goodwill and average identifiable intangible assets) for the three and nine-month periods ended September 30, 2004 were 24.1% and 22.8%, respectively.

At September 30, 2004 total loans were $3.3 billion, total deposits were $3.9 billion and total shareholders’ equity was $672 million. The increases since year-end 2003 are attributable to the Humboldt acquisition and continued organic growth.

Results of Operations

Net Interest Income

Net interest income is the largest source of our operating income. Net interest income was $47.3 million for the three-month period ended September 30, 2004, an increase of $18.2 million, or 62% over the comparable period in 2003. This increase is attributable to growth in outstanding average interest earning assets and interest-bearing liabilities over the comparable prior year period, primarily due to the Humboldt merger, which was completed on July 9, 2004. The fair value of earning assets acquired on that date totaled $1,287 million, and interest-bearing liabilities totaled $836 million.

For the three-month period ended September 30, 2004, the net interest margin (net interest income as a percentage of average interest earning assets) on a fully tax-equivalent basis was 4.72%, a decrease of 10 basis points as compared to the same period in 2003. This decrease is principally attributable to lower loan yields resulting from continued historically low short-term market interest rates, offset by a higher margin on the earning asset base acquired in the Humboldt merger. The third quarter 2004 margin expanded by 15 basis

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points over second quarter principally due to the Humboldt merger. This is attributed both to the higher historical margin of Humboldt and also to accretion resulting from purchase accounting adjustments.

The following table presents the condensed average balance sheet information, together with interest income and yields on average interest bearing assets and interest expense and rates paid on average interest-bearing liabilities for the three-month periods ended September 30, 2004 and 2003:

Table 2 — Average Rates and Balances (Quarterly)
(in thousands)

(1)		Non-accrual loans are included in average balance.
(2)		Tax exempt income has been adjusted to a tax equivalent basis at a 35% effective rate.

The following table sets forth a summary of the changes in net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for the three-month period ended September 30, 2004 as compared to the same period in 2003. Changes in interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionately between both variances:

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Table 3 — Rate/Volume Analysis (Quarterly)
(in thousands)