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(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 & 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 2002 annual rep ort to shareholders. The results of operations for the 2003 interim period shown in this report are not necessarily indicative of the results for any future interim period or the entire fiscal year.

(b) Earnings per share

Basic and diluted earnings per share are based on the weighted average number of common shares outstanding during each period, with diluted including the effect of potentially dilutive common shares. The weighted average number of common shares outstanding for basic and diluted earnings per share computations were as follows:

(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 three-month periods ending March 31:

Mortgages serviced for others are not included in the accompanying balance sheets. Loans serviced for others totaled $1.1 billion and $985 million at March 31, 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 determined using a discounted cash flow model, which incorporates the expected life of the loans, estimated costs to service the loans, servicing fees to be received, and other factors. The key assumptions used to initially value the MSR recorded in 2003 included a weighted average constant prepayment rate ("CPR") of 17.6% 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 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. 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. 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 reconciliation to the Company's consolidated totals for the three months ended March 31, 2003 and 2002.

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

At March 31, 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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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 March 31, 2003 and the operating results for the three months then ended. When warranted, comparisons are made to the same period 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.

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, ch anges in legal or regulatory requirements, competition in the retail brokerage industry and 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 the risk factors set forth in Exhibit 99.1, 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.

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The "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as disclosures included elsewhere in this Annual 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, 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 readily 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 and related off-balance sheet commitments. 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.

At March 31, 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 completed impairment testing for the Company's intangibles with indefinite lives during 2003 and determined that there was no impairment.

Periodically, and in the ordinary course of business, various claims and lawsuits are brought by and against the Company. At the end of the period covered by this Report, the Company was not a party to any legal proceedings management believes are material. There can be no assurance that all unasserted potential claims are known to us at any point in time.

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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 $8.38 million for the quarter ended March 31, 2003, up $4.42 million, or 112% from the comparable period in the prior year. Diluted earnings per share improved to $0.29 for the first quarter of 2003, up from $0.20 for the same period in 2002. Return on average equity and return on average assets were 1.32% and 11.61% for the quarter compared with 1.14% and 11.60% in 2002.

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

The Company reported merger-related expenses of $638,000 for the first quarter of 2003 and completed the operational integration of Centennial Bancorp (Centennial), which was acquired by Umpqua Holdings Corporation in November 2002. In the first quarter of 2002, the Company reported merger-related expenses of $1.5 million related to the acquisitions of Independent Financial Network and Linn Benton Bank, both of which were acquired in December 2001.

Total assets reached $2.646 billion at March 31, 2003.

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.

Net interest income on a taxable equivalent basis was $28.0 million for the quarter ended March 31, 2003 compared with $17.7 million for the same period in 2002 (Tables 1 and 2). The difference between net interest income on a taxable equivalent basis and 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 is comparable to income on a taxable investment. The amount of such adjustment was $392,000 and $349,000 for the quarters ended March 31, 2003 and 2002, respectively.

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The increase in taxable net interest income of $10.3 million was primarily attributable to an increase in the volume of earning assets, offset by a decrease in the net interest margin. Average earning assets increased $955 million or 75% compared with the prior year period due primarily to the acquisition of Centennial. On November 15, 2002, the date of the Centennial acquisition, Centennial had earning assets of approximately $730 million.

Loans, the largest component of earning assets, increased $798 million on average compared with the prior year period while investment securities increased $131 million over the same period. Overall, the yield on earning assets decreased to 6.51% for the quarter compared with 7.48% for the same period in the prior year. This decline was primarily attributable to the 0.87% decrease in the yield on loans and a decrease in the yield on investment securities. The decline in the yield on loans was due to variable loan repricings as well as new loan production occurring at lower rates. Average prime rate for the first quarter of 2003 was 4.25% compared with 4.75% for the first quarter of 2002.

The decrease in the yield on investment securities was due to maturities and payments on higher yielding securities that were reinvested in lower yielding securities during the year. Average noninterest earning assets were $214 million higher in the first quarter of 2003 compared with the first quarter of 2002. The increase was primarily attributable to intangibles and other assets related to the Centennial acquisition. Average interest bearing liabilities increased $766 million compared with the prior year period. The increase was primarily attributable to the Centennial acquisition. On the date of the acquisition, Centennial had interest bearing liabilities of approximately $591 million.

Average trust preferred securities increased $75 million compared with the same quarter in 2002. These securities were issued in late 2002 primarily to fund the acquisition of Centennial. The interest rate on these securities is based on LIBOR plus a spread and resets quarterly. Average shareholders' equity increased $154 million primarily as a result of additional shares issued in connection with the Centennial acquisition. As a result of the preceding changes, the interest spread decreased 0.43% to 4.73% for the quarter ended March 31, 2003 compared with the same period in the prior year. The net interest margin for the quarter ended March 31, 2003 was 5.10%, a decrease of 0.56% from the same period in the prior year.

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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 ended March 31, 2003 was $1,475 compared with $1,004 during the first quarter of 2002. Net credit losses were $1,668 for the three months ended March 31, 2003 compared with net recoveries of $46 for the same period in 2002. Nonperforming loans at March 31, 2003 decreased to $17.8 million from $18.4 million at December 31, 2002. Changes in the balance of nonperforming loans were as follows:

The allowance for credit losses totaled $24,538, or 1.35% of total loans at March 31, 2003 compared with $24,731, or 1.39% of total loans at December 31, 2002.

Noninterest Income

Noninterest income for the quarter ended March 31, 2003 was $10.3 million, a $3.8 million increase over the same period in 2002. Service charges, another major component of noninterest income increased $0.9 million over the prior year due to the Centennial acquisition and growth in the number of accounts. Brokerage fees, the second largest component of noninterest income decreased $0.2 million compared with the same quarter in the prior year. Mortgage banking revenue was $4.3 million during the first quarter of 2003 compared with $1.7 million for the first quarter of 2002. The increase was due to higher mortgage banking activity related to lower interest rates in 2003. The Company originated $246 million in residential mortgages during the first quarter of 2003 compared with $153 million in 2002. The Company does not expect this level of activity to continue throughout 2003. Other income was $1.1 million for the current quarter compared with $0.5 million in 2002. Other income consists of gains/losses on sales of assets, miscellaneous service fees, merchant bankcard processing and other miscellaneous income.

Noninterest Expense

Noninterest expense for the quarter ended March 31, 2003 was $23.3 million compared with $16.4 million for the same period in 2002. Salaries and employee benefits increased $4.2 million to $12.9 million in the first quarter of 2003. The increase was due to increased mortgage banking activity and salaries and benefits associated with the acquisition of Centennial. Premises and equipment expense increased $1.5 million compared with the prior year due to expenses associated with the stores acquired in the Centennial acquisition and expanded backroom facilities and equipment. Other noninterest expense increased $2.1 million to $6.2 million for the first quarter of 2003. Other expense increased due to the Centennial acquisition. Merger expenses for the first quarter of 2003 and 2002 were as follows:

Accrued merger expenses at March 31, 2003 were $3.6 million and consisted primarily of accrued severance and related expenses and contract termination costs.

Income taxes

The effective tax rate for the Company was 35.9% during the first quarter of 2003 compared with 38.2 % during the first quarter of 2002. The decrease was partially attributable to the Company's investment in certain tax-advantaged low-income housing projects.

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

Investment securities available for sale

Investment securities have increased $24 million since year-end 2002 due to the purchase of $50 million of investment securities, primarily CMOs, offset by principal payments and maturities. The Company increased its investment portfolio during the first quarter to improve the net interest margin and as an alternative to fed funds. The weighted average life of the Company's available-for-sale securities portfolio was 2.96 years at March 31, 2003.

Loans and leases

Loans and leases have increased $45 million since year-end. Details of the loan and lease portfolio at March 31, 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 credit review and risk grading system
• Regulatory examination results
• Monitoring of charge-off, past due and non-performing activity and trends
• Assessment of economic and business conditions in our market areas

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

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

The Company also tests the adequacy of the allowance for credit losses using the following methodologies:

• Loss allocation by internally assigned risk rating
• Loss allocation by portfolio type based on historic loan and lease loss experience
• The allowance as a percentage of total loans and leases

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 three-month periods ended March 31:

Deposits

Details of deposits at March 31, 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 March 31, 2003 the Company had overnight investments of $48.6 million and available lines of credit of approximately $394 million with various financial institutions.

Total shareholders' equity increased $10.3 million to $298.5 million at March 31, 2003. The increase was the result of earnings of $8.4 million, a $0.5 million decrease in accumulated other comprehensive income and $3.9 million from the exercise of stock options, offset by dividends paid of $1.1 million and stock repurchased of $0.4 million. At March 31, 2003 the Company's Tier 1 and total risk-based capital ratios were approximately 9.95% and 11.12%, 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.

In February and March 2003, the Company carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15b of the Securities Exchange Act of 1934. Based on that evaluation, the Company created a Disclosure Committee and adopted a charter for that committee that was approved by our Audit and Compliance Committee. Our management, including our Chief Executive Officer and Chief Financial Officer, 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.

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.

/s/ Raymond P. Davis
Raymond P. Davis
President and Chief Executive Officer
Umpqua Holdings Corporation

/s/ Daniel A. Sullivan
Daniel A. Sullivan
Executive Vice President and
Chief Financial Officer
Umpqua Holdings Corporation