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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 accounting principles generally accepted 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 and York, Inc. (Strand, Atkinson), and Umpqua Statutory Trust I, Umpqua Statutory Trust II and Umpqua Statutory Trust III. 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 2002 annual report to shareholders. The results of operations for the 2003 interim periods shown in this report are not necessarily indicative of the results for any future interim periods 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 was as follows:

Dollars in thousands, except per		Three months ended June 30,				Six months ended June 30,
share amounts		2003		2002		2003		2002
Net Income	$	8,132	$	5,282	$	16,512	$	9,243
Average outstanding shares		28,283,843		20,041,973		28,221,008		20,001,545
Basic earnings per share	$	0.29	$	0.26	$	0.59	$	0.46
Common Stock Equivalents		384,083		276,731		379,471		249,500
Fully diluted shares		28,667,926		20,318,704		28,600,479		20,251,045
Fully diluted EPS	$	0.28	$	0.26	$	0.58	$	0.46

(c) Allowance for credit losses

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.

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        Activity in the allowance for credit losses was as follows for the six-month periods ending June 30:

(d)    Mortgage servicing rights

Mortgages serviced for others are not included in the accompanying balance sheets. Loans serviced for others totaled $1.2 billion and $985 million at June 30, 2003 and December 31, 2002, respectively. Mortgage servicing rights ("MSRs") retained are initially measured by allocating the carrying value of the loans between the assets sold and the interest retained, based on the relative fair values at the date of the sale. MSRs are subsequently measured for impairment by comparing the amortized basis to the fair value. The key assumptions used to estimate the fair value of the MSRs recorded at June 30, 2003 included a weighted average constant prepayment rate ("CPR") of 20.4% and a discount rate of 8.625%.

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 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. 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 and York, Inc. The following table presents summary income statements and reconciliation to the Company's consolidated totals for the three and six months ended June 30, 2003 and 2002.

	Six months ended June 30, 2003
	Community	Retail Brokerage	Mortgage	Administration
Dollars in thousands	Banking	Services	Banking	and eliminations	Consolidated
Interest Income	$ 64,802	$ 30	$ 4,752	$ 14	$ 69,598
Interest Expense	11,293	-	2,073	1,852	15,218
Net Interest Income	53,509	30	2,679	(1,838)	54,380
Provision for Credit Losses	2,271	-	154	-	2,425
Noninterest Income	10,494	4,398	7,238	(50)	22,080
Noninterest Expense	36,052	4,399	6,060	200	46,711
Merger related expenses	1,600	88	-	-	1,688
Income (Loss) before Income Taxes	24,080	(59)	3,703	(2,088)	25,636
Income Tax Expense (Benefit)	8,662	(29)	1,332	(841)	9,124
Net Income (Loss)	$ 15,418	$ (30)	$ 2,371	$ (1,247)	$ 16,512

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	Six months ended June 30, 2002
	Community	Retail Brokerage	Mortgage	Administration
Dollars in thousands	Banking	Services	Banking	and eliminations	Consolidated
Interest Income	$ 43,227	$ 33	$ 2,955	$ (1)	$ 46,214
Interest Expense	9,647	58	1,467	(49)	11,123
Net Interest Income	33,580	(25)	1,488	48	35,091
Provision for Credit Losses	1,604	-	-	-	1,604
Noninterest Income	3,897	4,570	4,108	(94)	12,481
Noninterest Expense	22,546	4,153	2,741	366	29,806
Merger related expenses	1,407	101	-	12	1,520
Income (Loss) before Income Taxes	11,920	291	2,855	(424)	14,642
Income Tax Expense (Benefit)	4,379	100	1,086	(166)	5,399
Net Income (Loss)	$ 7,541	$ 191	$ 1,769	$ (258)	$ 9,243

	Three months ended June 30, 2003
	Community	Retail Brokerage	Mortgage	Administration
Dollars in thousands	Banking	Services	Banking	and eliminations	Consolidated
Interest Income	$    31,484	$       16	$ 2,774	$                 7	$    34,281
Interest Expense	5,470	-	1,095	915	7,480
Net Interest Income	26,014	16	1,679	(908)	26,801
Provision for Credit Losses	891	-	59	-	950
Noninterest Income	6,513	2,422	2,877	(22)	11,790
Noninterest Expense	18,481	2,295	3,115	139	24,030
Merger related expenses	962	88	-	-	1,050
Income (Loss) before Income Taxes	12,193	55	1,382	(1,069)	12,561
Income Tax Expense (Benefit)	4,345	19	489	(424)	4,429
Net Income (Loss)	$      7,848	$       36	$ 893	$         (645)	$     8,132
	Three months ended June 30, 2002
	Community	Retail Brokerage	Mortgage	Administration
Dollars in thousands	Banking	Services	Banking	and eliminations	Consolidated
Interest Income	$    21,755	$      18	$  1,377	$          (1)	$   23,149
Interest Expense	4,718	29	709	(28)	5,428
Net Interest Income	17,037	(11)	668	27	17,721
Provision for Credit Losses	667	-	(67)	-	600
Noninterest Income	1,363	2,389	2,294	(45)	6,001
Noninterest Expense	11,083	2,177	1,335	294	14,889
Merger related expenses	-	-	-	-	-
Income (Loss) before Income Taxes	6,650	201	1,694	(312)	8,233
Income Tax Expense (Benefit)	2,370	69	644	(132)	2,951
Net Income (Loss)	$     4,280	$    132	$ 1,050	$       (180)	$    5,282

Total assets by segment have not changed materially since December 31, 2002.

At June 30, 2003, the Company had a stock option plan that was accounted for under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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4.       RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities. FIN 46 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 this Interpretation become effective for the Company's existing variable interest entities for the quarter ending September 30, 2003.  The Company is still evaluating the impact that adoption of FIN 46 will have on the Company's consolidated financial statements.

On May 31, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The adoption of SFAS No. 150 has not had a material impact on the Company's financial statements.

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 (the Company) financial condition at June 30, 2003 and the operating results for the three and six months then ended. When warranted, comparisons are made to the same periods in 2002 and to December 31, 2002. This discussion should be read in conjunction with the financial statements (unaudited) contained elsewhere in this report. All amounts, except per share data, are expressed in thousands of dollars.

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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 prior 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 Company reports and statements. Readers are encouraged to review the notes that accompany this report and are cautioned not to place undue reliance on forward-looking statements. The Company does not intend to update these forward-looking statements. All written and oral forward-looking statements attributable to the Company and/or persons acting on its behalf are expressly qualified by this disclosure.

The "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as disclosures included elsewhere in this report, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used, including the adequacy of the allowance for credit losses, the value of retained mortgage servicing rights, impairment of intangible assets, other contingencies and litigation. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances. These estimates result in judgments regarding the carrying values of assets and liabilities when these values are not re adily available from other sources as well as assessing and identifying the accounting treatments of commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. The following critical accounting policies identify the more significant judgments and assumptions used in the preparation of the consolidated financial statements.

The allowance for credit losses is established to absorb known and inherent losses attributable to loans and leases outstanding. The adequacy of the allowance is monitored on an ongoing basis and is 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 66 percent of the Company's loan portfolio is secured by real estate and a significant depreciation in real estate values in Oregon would cause management to increase the allowance for credit losses.

Retained mortgage servicing rights are measured by allocating the carrying value of the loans between the assets sold and the interest retained, based on the relative fair value at the date of the sale. The fair market values are determined using a discounted cash flow model. Mortgage servicing 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. 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 negatively impact the value of mortgage servicing rights.

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At June 30, 2003 the Company had approximately $161 million in goodwill and other intangible assets as a result of business combinations. The Company adopted Financial Accounting Standard No. 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 on an annual basis or more frequently if impairment indicators arise. Management performs an impairment analysis for the Company's intangibles with indefinite lives on a quarterly basis and determined that there was no impairment as of June 30, 2003.

Periodically, and in the ordinary course of business, various claims and lawsuits are brought by and against the Company. Known claims and litigation that the Company considers material are described in Part II, Item I of this Report. There can be no assurance that all unasserted potential claims are known to us at any point in time.

Management classifies non-capitalizable costs that are a result of the Company's merger activities as merger related expenses. Merger related expenses included severance and employee relocation expenses, costs of closing duplicate facilities, conversion related expenses, contract termination costs and marketing and communication expenses.

The Company earned $8.13 million for the quarter ended June 30, 2003, up $2.85 million, or 54% from the comparable period in the prior year. Diluted earnings per share improved to $0.28 for the second quarter of 2003, up from $0.26 for the same period in 2002. Return on average assets and return on average equity were 1.24% and 10.83%, respectively, for the quarter compared with 1.48% and 14.82%, respectively, in 2002.

For the six-month period ending June 30, 2003, the Company earned $16.51 million compared with $9.24 million for the comparable period in 2002. Diluted earnings per share was $0.58 for the six months ended June 30, 2003 compared with $0.46 for the same period in 2002.

The Company reported merger-related expenses of $1.05 million for the second quarter of 2003 and completed the operational integration of Centennial Bancorp (Centennial), which was acquired by the Company in November 2002. These charges resulted primarily from store closures and contract termination costs. In the second quarter of 2002, the Company did not record any merger related expenses.

For the six-month period ending June 30, 2003 the Company reported merger-related expenses of $1.69 million compared with $1.52 million for the same period in 2002. The merger-related expenses in 2002 related to the Company's acquisition of Independent Financial Network in December 2001.

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At June 30, 2003 total loans and leases were $1.877 billion, up $98.9 million since December 31, 2002. Total deposits were $2.283 billion at June 30, 2003, up $179.1 million since year-end 2002.

Net Interest Income

The primary component of earnings for financial institutions is net interest income. Net interest income is the difference between interest income, primarily from loans and investments, and interest expense on deposits and borrowings. Changes in net interest income result from changes in "volume," changes in "spread," and change in "margin." Volume refers to the level of average interest-earning assets or interest-bearing liabilities. Spread refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Margin refers to the ratio of net interest income to average earning assets and is influenced by the mix of interest-earning assets and interest-bearing liabilities as well as the relative proportion of interest-bearing liabilities to interest earning assets.

For the quarter ended June 30, 2003 the Company reported net interest income on a taxable equivalent basis of $27.2 million compared with $18.1 million for the same period in 2002 (Tables 1 and 2). The difference between net interest income on a GAAP basis is due to the taxable equivalent adjustment. The taxable equivalent adjustment is an amount added to non-taxable securities interest income so that it is comparable to income on a taxable investment. The amount of such adjustment was $357,000 and $349,000 for the quarters ended June 30, 2003 and 2002, respectively.

The $9.1 million increase in net interest income is primarily attributable to the growth in average earning assets, offset by a decrease in the margin. Average earning assets increased to $2.297 billion for the second quarter of 2003, a $1.01 billion increase over the second quarter of 2002. This growth was primarily due to the acquisition of Centennial and internally generated growth. On November 15, 2002, the date of the Centennial acquisition, Centennial had interest earning assets of approximately $740 million.

Loans, the largest component of earning assets, increased $810.0 million on average compared with the prior year period while taxable securities increase $168.3 million over the same period. Overall, the yield on earning assets declined 1.28% for the second quarter of 2003 compared with the same quarter in 2002. The decline in the yield on earning assets was a result of declines in the yield on loans and investment securities compared with the prior year period. The yield on loans declined 1.03% for the second quarter of 2003 compared with the same period in 2002 while the yield on taxable securities declined 2.90% during the same period. The decline in the yield on loans was a result of repayments of higher-yielding fixed rate loans, variable rate loan repricings, and new loan originations occurring at lower rates. The decline in the yield on investment securities was due to prepayments and calls of investment securities. Payments on mortgage-backed or collateralized mortgage obligation securities that exceed forecasted payments cause an acceleration of the premium amortization. Payments on these investment securities accelerated in the second quarter of 2003 due to the historically low mortgage rates. Accelerated premium amortization for the second quarter of 2003 totaled $677,000. Average noninterest earning assets increased $204.9 million in the second quarter of 2003 compared with the same quarter of 2002 due to intangibles and other assets associated with the Centennial acquisition.

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Average interest bearing liabilities were $1.773 billion in the second quarter of 2003 compared with $991.6 million in the second quarter of 2002. The increase was due to the Centennial acquisition and the issuance of $75 million of Trust Preferred securities during the third and fourth quarters of 2002. The average cost of interest bearing liabilities declined to 1.69% during the second quarter of 2003 compared with 2.20% for the same period in the prior year. The decline was due to reductions in the rates paid on deposits and maturities of time deposits that were replaced at lower rates. Additionally, average noninterest bearing sources of funds increased from $440.2 million to $863.7 million. As a result of the preceding changes, the spread decreased 0.77% and the margin declined 0.89% for the second quarter of 2003 compared with the second quarter of 2002.

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Analysis of Changes in Interest Differential

The following table sets forth, on a tax-equivalent basis, a summary of the changes in net interest income resulting from changes in volumes and rates. Changes not due solely to volume or rate changes are allocated to rate.

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Net interest income on a taxable-equivalent basis was $55.1 million for the first six months of 2003 compared with $35.8 million for the same period in 2002 (Tables 3 and 4). The increase was primarily due to an increase in the volume of earning assets, offset by a decrease in the margin. Average earning assets for the first half of 2003 were $2.260 billion compared with $1.278 billion for the same period in 2002, a $982 million increase. The primary reason for the increase was the earning assets acquired in the Centennial acquisition in late 2002 that added approximately $740 million in interest earning assets. The remaining increase was due to growth in the loan and investment portfolios.

Loans, the largest component of earning assets averaged $1.850 billion for the first half of 2003 compared with $1.046 billion for the same period in 2002. This growth was due the Centennial acquisition and new loans booked during 2003. Centennial had approximately $643 million in loans on November 15, 2002, the date of the acquisition. Investments for the first six months of 2003 average $352.7 million compared with $200.4 million for the comparable period in 2002. The yield on average earning assets declined for the first six months of 2003 to 6.28% from 7.40% during the comparable period in 2002. The decline was primarily a result of the decline in the yield on loans and investments. The decline in the yield on loans was a result of repayments of higher-yielding fixed rate loans, variable rate loan repricings, renegotiation of fixed rate loans and new loan originations occurring at lower rates compared with the prior year. The decline in the yield on investment securities was due to prepayments a nd calls of investment securities. Payments on mortgage-backed or collateralized mortgage obligation securities that exceed forecasted payments cause an acceleration of the premium amortization. Payments on these investment securities accelerated in the second quarter of 2003 due to the historically low mortgage rates. Average noninterest earning assets increased to $372.7 for the first six months of 2003 compared with $157.4 million due to intangibles and other assets associated with the Centennial acquisition.

Average interest bearing liabilities were $1.767 billion for the first six months of 2003 compared with $993.5 million for the same period in 2002. The increase was primarily due to interest bearing liabilities acquired in the Centennial acquisition and the issuance of $75 million of Trust Preferred securities during the third and fourth quarters of 2002. The cost of interest bearing liabilities declined during the first half of 2003 to 1.74% compared with 2.26% in 2002. The decline was due to the replacement of higher rate maturing time deposits at lower rates during 2003 as well as a decrease in the rates paid on interest bearing checking and savings accounts. Noninterest bearing funds averaged $841 million for the first six months of 2003 compared with $427.6 million in 2002. Of this increase, $236.4 million was in noninterest bearing checking accounts. As a result of the preceding changes, the spread decreased 0.60% and the margin declined 0.73% for the six months ended June 30, 2003 compared wi th the same period in 2002.

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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 and six months ended June 30, 2003 was $950 and $2,425, respectively compared with $600 and $1,604, respectively for the comparable periods in 2002. Net credit losses were $172 for the second quarter of 2003 and $1,840 for the six-month period ending June 30, 2003. For the same periods in 2002, net charge-offs were $173 and $127, respectively. Nonperforming loans at June 30, 2003 were $21.9 million, up from $18.4 million at December 31, 2002. Changes in the balance of nonperforming loans were as follows:

The allowance for credit losses totaled $25,316, or 1.35% of total loans at June 30, 2003 compared with $24,731, or 1.39% of total loans at December 31, 2002.

Noninterest Income

Noninterest income for the quarter ended June 30, 2003 was $11.8 million, a $5.8 million increase over the same period in 2002. Service charges, a major component of noninterest income increased $1.5 million over the prior year due to the Centennial acquisition and growth in the number of deposit accounts. Mortgage banking revenue increased $0.6 million due to a higher volume of mortgages originated and sold, offset by a charge for the impairment of mortgage servicing rights. (See additional discussion under Mortgage Servicing Rights). The Company originated $270 million in residential mortgages during the second quarter of 2003 compared with $110 million in the second quarter of 2002. Brokerage fees, the third largest component of noninterest income was flat compared with the same quarter in the prior year. Gain on the sale of securities was $2.1 million for the second quarter of 2003 compared with a loss of $0.9 million in the second quarter of 2002. The Company sold $29.6 million of available for sale securities during the second quarter of 2003. These securities were sold, in part to offset the mortgage servicing rights impairment charge. In the second quarter of 2002, the Company took an impairment charge for certain corporate securities. These securities have since been sold. Other income was $1.1 million for the current quarter compared with $0.5 million in 2002. The primary reason for the increase was a $0.4 million gain on the sale of the Company's credit card portfolio. The Company will continue to originate and provide credit card products to its customers through a service provider. Other income consists of gains/losses on sales of assets, miscellaneous service fees, merchant bankcard processing and other miscellaneous income.

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Noninterest income for the first six months of 2003 was $22.1 million compared with $12.5 million for the same period in 2002. Mortgage banking revenue increased $3.2 million compared with the prior year six-month period to $7.1 million due to increased mortgage banking activity. For the first six months of 2003, the Company originated $516 million in mortgage loans compared with $263 million for the same period in 2002. Service charges increased $2.4 million to $6.4 million in 2003 due to the Centennial acquisition and growth in the number of accounts. Brokerage commissions and fees declined $0.2 million compared with the prior year period. Gain on the sale of securities was $2.1 million for the first six months of 2003 compared with a loss of $0.9 million for the comparable period in 2002 for the same reasons as described earlier in this section. Other noninterest income was $2.1 million for the first half of 2003 compared with $1.0 million for the first half of 2002. The increase was partially du e to the sale of the Company's credit card portfolio in the second quarter of 2003.

Noninterest Expense

Noninterest expense for the second quarter of 2003 was $25.1 million compared with $14.9 million for the same period in 2002. Salaries and employee benefits increased to $13.2 million in 2003 compared with $8.6 million in 2002 due to increased mortgage banking activity and the acquisition of Centennial. Premises and equipment expense increased to $3.9 million for the quarter compared with $2.2 million in 2002 due to expenses associated with the stores acquired in the Centennial acquisition, new stores opened, and expanded backroom infrastructure equipment and facilities. Other noninterest expense increased to $6.9 million compared with $4.1 million in 2002 due primarily to the acquisition of Centennial. Merger expenses totaled $1.1 million in the second quarter of 2003 compared with $0 in the second quarter of 2002. Merger expenses consisted of the following for the second quarter of 2003:

Accrued merger expenses at June 30, 2003 were $2.5 million and consisted primarily of accrued store closure costs and contract termination costs.

Noninterest expense for the first six months of 2003 totaled $48.4 million compared with $31.3 million for the same period in 2002. Salaries and employee benefits increased $8.8 million over the first six months of 2002 to $26.1 million for the period then ended due to increased mortgage banking activity and staffing increases due to the Centennial acquisition. Premises and equipment expense for the first six months of 2003 was $7.5 million compared with $4.3 million for the same period in 2002. The increase was due to expenses associate with the stores acquired in the Centennial acquisition, new stores opened and expanded backroom infrastructure equipment and facilities. Other expense increased to $13.1 million for the first six months of 2003 from $8.2 million for the first six months of 2002 due primarily to the acquisition of Centennial. Merger expenses were $1.7 million for the first half of 2003 compared with $1.5 million for the same period in 2002. Merger expenses in 2002 were associated wit h the acquisition of Independent Financial Network and Linn-Benton Bank in December 2001.

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Income taxes

The effective tax rate for the Company was 35.3% during the second quarter of 2003 compared with 35.8 % during the second quarter of 2002. For the first six months of 2003, the effective tax rate was 35.6% compared with 36.9% for the same period in 2002.

Significant changes in the Company's financial position from December 31, 2002 to June 30, 2003 are as follows:

Investment securities available for sale

Investment securities have increased $20 million since year-end 2002 due primarily to the purchase of $155.6 million of investment securities, primarily CMOs, offset by principal payments and maturities of $103.4 million and the sale of $29.6 million of municipal securities. The Company recorded a $2.1 million gain on the sale of the municipal securities. These securities were sold in order to capture gains and offset the impairment charge on the mortgage servicing rights and the accelerated premium amortization on the Company's CMO and mortgage-backed securities portfolio.

Loans and leases

Loans and leases have increased $98.9 million since year-end. Details of the loan and lease portfolio at June 30, 2003 and December 31, 2002:

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:

• Internal risk grading system
• Internal credit review process
• Regulatory examination results
• Monitoring of charge-off, past due and non-performing activity and collection efforts
• Assessment of economic and business conditions in our market areas

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On a quarterly basis losses inherent in the portfolio are estimated by reviewing the following key elements of the loan portfolio:

• Portfolio performance measures
• Portfolio mix
• Portfolio growth rates
• Historical loss rates
• Portfolio concentrations
• Current economic conditions in our market areas

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.

Activity in the allowance for credit losses was as follows for the six-month periods ended June 30:

Mortgage Servicing Rights

The value of mortgage servicing rights, net of impairment allowance, was $9.3 million at June 30, 2003, approximately equal to the amount at December 31, 2002. Activity in the account was as follows for the first six months of 2003:

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Deposits

Details of deposits at June 30, 2003 and December 31, 2002 were as follows:

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 June 30, 2003 the Company had overnight investments of $60.1 million and available lines of credit of approximately $400 million with various financial institutions.

Total shareholders' equity increased $16.9 million from year-end 2002 to $305.1 million at June 30, 2003. The increase was the result of earnings of $16.5 million, a $1.7 million decrease in accumulated other comprehensive income and $4.8 million from the exercise of stock options, offset by dividends paid of $2.3 million and stock repurchased of $0.4 million. At June 30, 2003 the Company's Tier 1 and total risk-based capital ratios were approximately 9.84% and 10.98%, respectively. The Federal Reserve Board's minimum risk-based capital ratio guidelines for Tier 1 and total capital are 4% and 8% respectively.

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, 2002. The Company also has increased its emphasis on noninterest sources of revenue in order to further stabilize future earnings.

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Our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be included in our periodic SEC filings. The Company's disclosure controls and procedures were last evaluated by management on or about April 11, 2003.

There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation.

Because of the nature of our business, we are involved in legal proceedings in the regular course of business. At this time, we do not believe that there is pending litigation the unfavorable outcome of which would result in a material adverse change to our financial condition, results of operations or cash flows.

None.

None.

The Company conducted its annual meeting of shareholders on April 29, 2003. On March 14, 2003, the record date, there were 28,243,267 shares of common stock outstanding. Holders of 24,767,633 shares were present at the meeting in person or by proxy. The following persons were elected as directors to serve the terms stated below:

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The following directors continue with terms of office that expire after the annual meeting: James D. Coleman (2005), Allyn C. Ford (2005), David B. Frohnmayer (2004) and William Lansing (2004).

At that meeting, the shareholders also approved the 2003 Stock Incentive Plan. The vote on that resolution follows:

On May 14, 2003, Diana Goldschmidt and Gary DeStefano were appointed to the Company's board of directors, to serve until the next annual meeting of shareholders. On June 9, 2003, Richard C. Williams retired from the board of directors.

1. The exhibits filed as part of this Report and exhibits incorporated herein by reference to other documents are listed in the Exhibit Index to this Report.

2. Reports on Form 8-K:

   The Company filed the following reports on Form 8-K during the period covered by this Report:

   1. Report filed April 16, 2003. The information attached as Exhibit 99 was not filed, but was furnished under Item 9, Regulation FD disclosure. The report included a press release announcing the company's operating results for the first quarter of 2003.

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SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

UMPQUA HOLDINGS CORPORATION

(Registrant)

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