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EX-31.2 - SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - UMPQUA HOLDINGS CORPdex312.htm
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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended:    September 30, 2009

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                     to                     .

Commission File Number: 000-25597

Umpqua Holdings Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

OREGON   93-1261319

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

One SW Columbia Street, Suite 1200

Portland, Oregon 97258

(Address of Principal Executive Offices)(Zip Code)

(503) 727-4100

(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 Securities Exchange Act of 1934 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

x  Large accelerated filer            ¨  Accelerated filer            ¨  Non-accelerated filer            ¨  Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨  Yes    x  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: 86,781,591 shares outstanding as of October 31, 2009

 

 

 


Table of Contents

UMPQUA HOLDINGS CORPORATION

FORM 10-Q

Table of Contents

 

 

 

PART I.    FINANCIAL INFORMATION    3

Item 1.

   Financial Statements (unaudited)    3

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    37

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    77

Item 4.

   Controls and Procedures    77
PART II.    OTHER INFORMATION    78

Item 1.

   Legal Proceedings    78

Item 1A.

   Risk Factors    78

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    85

Item 3.

   Defaults Upon Senior Securities    85

Item 4.

   Submissions of Matters to a Vote of Security Holders    85

Item 5.

   Other Information    86

Item 6.

   Exhibits    86
SIGNATURES    87
EXHIBIT INDEX    88

 

2


Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except shares)

 

     September 30,
2009
   December 31,
2008

ASSETS

     

Cash and due from banks

     $ 108,768        $ 139,909  

Interest bearing deposits

     261,642        8,155  

Temporary investments

     575        56,612  
             

Total cash and cash equivalents

     370,985        204,676  

Investment securities

     

Trading

     1,912        1,987  

Available for sale, at fair value

     1,848,482        1,238,712  

Held to maturity, at amortized cost

     6,211        15,812  

Loans held for sale

     23,614        22,355  

Loans and leases

     6,071,042        6,131,374  

Allowance for loan and lease losses

     (103,136)       (95,865) 
             

Net loans and leases

     5,967,906        6,035,509  

Restricted equity securities

     15,211        16,491  

Premises and equipment, net

     101,883        104,694  

Goodwill and other intangible assets, net

     641,759        757,833  

Mortgage servicing rights, at fair value

     11,552        8,205  

Other real estate owned

     26,705        27,898  

Other assets

     188,126        163,378  
             

Total assets

     $ 9,204,346        $ 8,597,550  
             

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Deposits

     

Noninterest bearing

     $ 1,337,280        $ 1,254,079  

Interest bearing

     5,878,541        5,334,856  
             

Total deposits

     7,215,821        6,588,935  

Securities sold under agreements to repurchase

     50,031        47,588  

Term debt

     76,329        206,531  

Junior subordinated debentures, at fair value

     81,992        92,520  

Junior subordinated debentures, at amortized cost

     103,269        103,655  

Other liabilities

     70,754        71,313  
             

Total liabilities

     7,598,196        7,110,542  
             

COMMITMENTS AND CONTINGENCIES (NOTE 8)

     

SHAREHOLDERS’ EQUITY

     

Preferred stock, no par value, 2,000,000 shares authorized; Series A (liquidation preference $1,000 per share) issued and outstanding: 214,181 in 2009 and 2008

     203,779        202,178  

Common stock, no par value, 100,000,000 shares authorized; issued and outstanding: 86,780,559 in 2009 and 60,146,400 in 2008

     1,252,786        1,005,820  

Retained earnings

     118,204        264,938  

Accumulated other comprehensive income

     31,381        14,072  
             

Total shareholders’ equity

     1,606,150        1,487,008  
             

Total liabilities and shareholders’ equity

     $       9,204,346        $       8,597,550  
             

See notes to condensed consolidated financial statements

 

3


Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)

 

     Three months ended
September 30,
   Nine months ended
September 30,
     2009    2008    2009    2008

INTEREST INCOME

           

Interest and fees on loans

     $ 89,474        $ 98,180        $ 266,587        $       300,295  

Interest and dividends on investment securities

           

Taxable

     15,365        9,725        43,625        29,936  

Exempt from federal income tax

     2,020        1,644        5,755        5,000  

Dividends

     22        104        22        298  

Interest on temporary investments and interest bearing deposits

     207        69        258        359  
                           

Total interest income

     107,088        109,722        316,247        335,888  

INTEREST EXPENSE

           

Interest on deposits

     22,132        30,025        68,552        101,118  

Interest on securities sold under agreements to repurchase and federal funds purchased

     163        714        527        1,958  

Interest on term debt

     917        2,064        3,935        5,200  

Interest on junior subordinated debentures

     2,114        3,211        7,069        10,349  
                           

Total interest expense

     25,326        36,014        80,083        118,625  
                           

Net interest income

     81,762        73,708        236,164        217,263  

PROVISION FOR LOAN AND LEASE LOSSES

     52,108        35,454        140,531        75,723  
                           

Net interest income after provision for loan and lease losses

     29,654        38,254        95,633        141,540  

NON-INTEREST INCOME

           

Service charges on deposit accounts

     8,542        8,911        24,565        26,107  

Brokerage commissions and fees

     1,993        2,319        5,117        6,564  

Mortgage banking revenue, net

     4,288        1,027        14,617        2,844  

Gain on investment securities, net

           

Gain on sale of investment securities

     162        113        8,682        4,012  

Total other-than-temporary impairment losses

     -             (2,590)       (12,492)        (2,590) 

Portion of other-than-temporary impairment losses (transferred from) recognized in other comprehensive income

     (4)       -             2,733        -       
                           

Total gain (loss) on investment securities, net

     158        (2,477)       (1,077)       1,422  

Gain on junior subordinated debentures carried at fair value

     982        25,311        10,173        30,152  

Proceeds from Visa mandatory partial redemption

     -             -             -             12,633  

Other income

     1,962        1,573        7,097        6,515  
                           

Total non-interest income

     17,925        36,664        60,492        86,237  

NON-INTEREST EXPENSE

           

Salaries and employee benefits

     31,583        29,131        94,697        85,043  

Net occupancy and equipment

     9,937        9,340        29,266        27,605  

Communications

     1,806        1,863        5,398        5,251  

Marketing

     1,157        1,394        3,596        3,302  

Services

     5,210        4,753        15,942        13,828  

Supplies

     920        808        2,559        2,203  

FDIC assessments

     3,321        1,318        12,645        3,814  

Net loss on other real estate owned

     8,641        2,193        14,110        5,655  

Intangible amortization

     1,319        1,437        4,043        4,419  

Goodwill impairment

     -             -             111,952        -       

Merger related expenses

     -             -             273        -       

Visa litigation

     -             2,085        -             (3,098) 

Other expenses

     4,455        4,168        12,422        12,244  
                           

Total non-interest expense

     68,349        58,490        306,903        160,266  

(Loss) income before (benefit from) provision for income taxes

           (20,770)       16,428        (150,778)       67,511  

(Benefit from) provision for income taxes

     (13,626)       4,041        (24,094)       20,297  
                           

Net (loss) income

     $ (7,144)       $       12,387        $       (126,684)       $ 47,214  
                           

 

4


Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(UNAUDITED)

(in thousands, except per share amounts)

 

     Three months ended
September 30,
   Nine months ended
September 30,
     2009    2008    2009    2008

Net (loss) income

     $ (7,144)       $       12,387        $       (126,684)       $       47,214  

Preferred stock dividends

     3,225        -             9,632        -       

Dividends and undistributed earnings allocated to participating securities

     7        37        22        149  
                           

Net (loss) earnings available to common shareholders

     $       (10,376)       $ 12,350        $ (136,338)       $ 47,065  
                           

(Loss) earnings per common share:

           

Basic

     $ (0.14)       $ 0.21        $ (2.10)       $ 0.78  

Diluted

     $ (0.14)       $ 0.20        $ (2.10)       $ 0.78  

Weighted average number of common shares outstanding:

           

Basic

     74,085        60,097        64,878        60,067  

Diluted

     74,085        60,429        64,878        60,400  

See notes to condensed consolidated financial statements

 

5


Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except shares)

 

    Preferred
Stock
  Common Stock   Retained
Earnings
  Accumulated
Other
Comprehensive
(Loss) Income
  Total
           
      Shares   Amount      
     

BALANCE AT JANUARY 1, 2008

    $ -            59,980,161       $ 988,780       $ 251,545       $ (387)      $ 1,239,938  

Net income

          51,044         51,044  

Other comprehensive income, net of tax

            14,459       14,459  
               

Comprehensive income

              $ 65,503  
               

Stock-based compensation

        3,893           3,893  

Stock repurchased and retired

    (8,199)      (129)          (129) 

Issuances of common stock under stock plans and related net tax benefits

    174,438       1,022           1,022  

Issuance of preferred stock to U.S. Treasury

    201,927               201,927  

Issuance of warrants to U.S. Treasury

        12,254           12,254  

Amortization of discount on preferred stock

    251           (251)        -       

Cash dividends on common stock ($0.62 per share)

          (37,400)        (37,400) 
                                 

Balance at December 31, 2008

    $ 202,178       60,146,400       $ 1,005,820       $ 264,938       $ 14,072       $ 1,487,008  
                                 

BALANCE AT JANUARY 1, 2009

    $ 202,178       60,146,400       $ 1,005,820       $ 264,938       $       14,072       $ 1,487,008  

Net loss

                (126,684)        (126,684) 

Other comprehensive income, net of tax

            17,309       17,309  
               

Comprehensive loss

              $ (109,375) 
               

Issuance of common stock

      26,538,461       245,697           245,697  

Stock-based compensation

        1,695           1,695  

Stock repurchased and retired

    (19,113)      (170)          (170) 

Issuances of common stock under stock plans and related net tax deficiencies

    114,811       (256)          (256) 

Amortization of discount on preferred stock

    1,601           (1,601)        -       

Dividends declared on preferred stock

          (8,062)        (8,062) 

Cash dividends on common stock ($0.15 per share)

          (10,387)        (10,387) 
                                 

Balance at September 30, 2009

    $       203,779       86,780,559       $       1,252,786       $ 118,204       $ 31,381       $       1,606,150  
                                 

See notes to condensed consolidated financial statements

 

6


Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(in thousands)

 

     Three months ended
September 30,
   Nine months ended
September 30,
 
     2009    2008    2009    2008  

Net (loss) income

     $ (7,144)       $ 12,387        $       (126,684)     $ 47,214     
                             

Available for sale securities:

           

Unrealized gains (losses) arising during the period

     29,579        6,198        35,365        (6,198)    

Reclassification adjustment for (gains), losses or impairments realized in net income (net of tax expense of $65 and benefit of $11 for the three months and net of tax expense of $3,337 and $1,549 for the nine months ended September 30, 2009 and 2008, respectively)

     (97)       16        (5,066)       (2,323)    

Income tax benefit (expense) related to unrealized losses (gains)

           (11,831)       (2,479)       (14,146)       2,479     
                             

Net change in unrealized gains or (losses)

     17,651        3,735        16,153        (6,042)    
                             

Held to maturity securities:

           

Unrealized losses on investment securities available for sale transferred to investment securities held to maturity, (net of tax benefit of $2,988 for the three and nine months ended September 30, 2008)

     -                     (4,482)       -             (4,482 )  

Reclassification adjustment for impairments realized in net income (net of tax benefit of $770 for the three months ended September 30, 2008, and $1,716 and $770 for the nine months ended September 30, 2009 and 2008, respectively)

     -             1,154        2,574        1,154     

Amortization of unrealized losses on investment securities transferred to held to maturity (net of tax benefit of $29 for the three months ended September 30, 2008, and $70 and $29 for the nine months ended September 30, 2009 and 2008, respectively)

     -             44        103        44     
                             

Net change in unrealized losses on investment securities transferred to held to maturity

     -             (3,284)       2,677        (3,284)    
                             

Unrealized gains (losses) related to factors other than credit (net of tax expense of $1 for the three months and tax benefit of $1,094 for the nine months ended September 30, 2009)

     1        -             (1,641)       -          

Reclassification adjustment for impairments realized in net income (net of tax benefit of $2 for the three and nine months ended September 30, 2009)

     2        -             2        -          

Accretion of unrealized losses related to factors other than credit to investment securities held to maturity (net of tax benefit of $78 for the three and nine months ended September 30, 2009)

     118        -             118        -          
                             

Net change in unrealized losses related to factors other than credit

     121        -             (1,521)       -          
                             

Other comprehensive income (loss), net of tax

     17,772        451        17,309        (9,326)    
                             

Comprehensive income (loss)

     $ 10,628        $ 12,838        $       (109,375)       $       37,888     
                             

See notes to condensed consolidated financial statements

 

7


Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

     Nine months ended
September 30,
     2009    2008

CASH FLOWS FROM OPERATING ACTIVITIES:

     

Net (loss) income

     $       (126,684)       $ 47,214  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

     

Restricted equity securities stock dividends

     -             (162) 

Amortization of investment premiums, net

     5,721        1,406  

Gain on sale of investment securities, net

     (8,682)       (4,012) 

Other-than-temporary impairment on investment securities available for sale

     239        139  

Other-than-temporary impairment on investment securities held to maturity

     9,520        2,451  

Loss on sale of other real estate owned

     6,939        3,223  

Valuation adjustment on other real estate owned

     7,171        2,432  

Provision for loan and lease losses

     140,531        75,723  

Depreciation, amortization and accretion

     7,915        5,432  

Goodwill impairment

     111,952        -        

Increase in mortgage servicing rights

     (5,958)       (2,198) 

Change in mortgage servicing rights carried at fair value

     2,611        1,548  

Change in junior subordinated debentures carried at fair value

     (10,528)       (30,440) 

Stock-based compensation

     1,695        2,915  

Net decrease in trading account assets

     75        1,306  

Gain on sale of loans

     (4,943)       (523) 

Origination of loans held for sale

     (520,302)             (194,603) 

Proceeds from sales of loans held for sale

     523,760        193,672  

Excess tax benefits from the exercise of stock options

     -             (5) 

Net (increase) decrease in other assets

     (30,673)       26,539  

Net decrease in other liabilities

     (5,889)       (11,585) 
             

Net cash provided by operating activities

     104,470        120,472  
             

CASH FLOWS FROM INVESTING ACTIVITIES:

     

Purchases of investment securities available for sale

     (980,168)       (404,256) 

Proceeds from investment securities available for sale

     404,166        463,598  

Proceeds from investment securities held to maturity

     2,045        1,500  

Purchases of restricted equity securities

     -             (4,416) 

Redemption of restricted equity securities

     1,280        278  

Net loan and lease originations

     (109,348)       (215,006) 

Proceeds from sales of loans

     7,848        18,371  

Proceeds from disposals of furniture and equipment

     181        290  

Purchases of premises and equipment

     (7,824)       (8,260) 

Proceeds from sales of other real estate owned

     20,759        12,069  

Cash acquired in merger, net of cash consideration paid

     178,905        -       
             

Net cash used by investing activities

     (482,156)       (135,832) 
             

 

8


Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(UNAUDITED)

(in thousands)

 

     Nine months ended
September 30,
     2009    2008

CASH FLOWS FROM FINANCING ACTIVITIES:

     

Net increase (decrease) in deposit liabilities

     443,003        (95,692) 

Net decrease in federal funds purchased

     -             (29,500) 

Net increase in securities sold under agreements to repurchase

     2,443        15,880  

Proceeds from term debt borrowings

     -             345,000  

Repayment of term debt

           (130,140)             (212,142) 

Net proceeds from issuance of common stock

     245,697        -       

Dividends paid on preferred stock

     (8,062)       -       

Dividends paid on common stock

     (9,051)       (34,336) 

Excess tax benefits from stock based compensation

     -             5  

Proceeds from stock options exercised

     275        1,038  

Retirement of common stock

     (170)       (125) 
             

Net cash provided (used) by financing activities

     543,995        (9,872) 
             

Net increase (decrease) in cash and cash equivalents

     166,309        (25,232) 

Cash and cash equivalents, beginning of period

     204,676        192,070  
             

Cash and cash equivalents, end of period

     $ 370,985        $ 166,838  
             

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

     

Cash paid during the period for:

     

Interest

     $ 82,840        $ 122,139  

Income taxes

     $ 44        $ 6,043  

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

     

Change in unrealized gains on investment securities available for sale, net of taxes

     $ 16,153        $ (6,042) 

Change in unrealized losses on investment securities transferred to held to maturity, net of taxes

     $ 2,677        $ (3,284) 

Change in unrealized losses on investment securities held to maturity related to factors other than credit, net of taxes

     $ (1,521)       $ -       

Cash dividend declared on common stock and payable after period-end

     $ 4,346        $ 11,458  

Transfer of investment securities available for sale to held to maturity

     $ -             $ 12,580  

Transfer of loans to other real estate owned

     $ 34,408        $ 30,534  

Acquisitions:

     

Assets acquired

     $ 4,978        $ -       

Liabilities assumed

     $ 183,883        $ -       

See notes to condensed 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 “the Company”) conform to accounting principles generally accepted in the United States of America. The accompanying interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Umpqua Bank (“Bank”), and Umpqua Investments, Inc. (“Umpqua Investments”). Prior to July 2009, Umpqua Investments was known as Strand, Atkinson, Williams & York, Inc. 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 2008 Annual Report filed on Form 10-K. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the 2008 Annual Report filed on Form 10-K.

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through November 3, 2009, the date the financial statements were issued. 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 include 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. Certain reclassifications of prior period amounts have been made to conform to current classifications.

Note 2 – Business Combination

On January 16, 2009, the Washington Department of Financial Institutions closed the Bank of Clark County, Vancouver, Washington, and appointed the Federal Deposit Insurance Corporation (“FDIC”) as its receiver. The FDIC entered into a purchase and assumption agreement with Umpqua Bank to assume the insured non-brokered deposit balances, which totaled $183.9 million, at no premium. The Company recorded the deposit related liabilities at book value. In connection with the assumption, Umpqua Bank acquired certain assets totaling $23.0 million, primarily cash and marketable securities, with the difference of $160.9 million representing funds received directly from the FDIC. Through this agreement, Umpqua Bank now operates two additional store locations in Vancouver, Washington. In addition, the FDIC reimbursed Umpqua Bank for all overhead costs related to the acquired Bank of Clark County operations for 90 days following closing, while Umpqua Bank paid the FDIC a servicing fee on assumed deposit accounts for that same period.

The results of the Bank of Clark County’s operations have been included in the consolidated financial statements beginning January 17, 2009. Since this date, the Bank of Clark County has contributed net income of approximately $507,000 and $1.0 million for the three and nine months ended September 30, 2009, net of tax, and primarily represents interest income earned from the proceeds of the assumption and service income on deposits, partially offset by interest expense on deposits, salaries and employee benefits expense, and the accrued servicing fee paid to the FDIC. Umpqua did not incur the FDIC servicing fee expense during the second or third quarter of 2009, but began incurring overhead expenses such as salaries and employee benefits expense and rent expense. The Company does not expect to incur any significant additional merger-related expenses in connection with the assumption of the Bank of Clark County deposits and assets.

 

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Note 3 – Investment Securities

The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at September 30, 2009 and December 31, 2008:

 

September 30, 2009

           

(in thousands)

           
     Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Fair
Value

AVAILABLE FOR SALE:

           

U.S. Treasury and agencies

     $ 11,604        $ 279        $ (3)       $ 11,880  

Obligations of states and political subdivisions

     197,078        11,874        (27)       208,925  

Residential mortgage-backed securities and collateralized mortgage obligations

     1,582,859        44,553        (1,897)       1,625,515  

Other debt securities

     145        -             -             145  

Investments in mutual funds and other equity securities

     1,959        58        -             2,017  
                           
     $       1,793,645        $       56,764        $       (1,927)       $       1,848,482  
                           

HELD TO MATURITY:

           

Obligations of states and political subdivisions

     $ 3,217        $ 15        $ -             $ 3,232  

Residential mortgage-backed securities and collateralized mortgage obligations

     2,994        176        (177)       2,993  
                           
     $ 6,211        $ 191        $ (177)       $ 6,225  
                           

December 31, 2008

           

(in thousands)

           
     Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Fair
Value

AVAILABLE FOR SALE:

           

U.S. Treasury and agencies

     $ 30,831        $ 401        $ (6)       $ 31,226  

Obligations of states and political subdivisions

     176,966        3,959        (1,340)       179,585  

Residential mortgage-backed securities and collateralized mortgage obligations

     1,000,155        26,726        (1,586)       1,025,295  

Other debt securities

     884        -             (250)       634  

Investments in mutual funds and other equity securities

     1,959        13        -             1,972  
                           
     $ 1,210,795        $ 31,099        $ (3,182)       $ 1,238,712  
                           

HELD TO MATURITY:

           

Obligations of states and political subdivisions

     $ 4,166        $ 8        $ (75)       $ 4,099  

Residential mortgage-backed securities and collateralized mortgage obligations

     11,496        1        (7,367)       4,130  

Other investment securities

     150        -             -             150  
                           
     $ 15,812        $ 9        $ (7,442)       $ 8,379  
                           

Investment securities that were in an unrealized loss position as of September 30, 2009 and December 31, 2008 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.

 

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September 30, 2009

                 

(in thousands)

                 
     Less than 12 Months    12 Months or Longer    Total
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

AVAILABLE FOR SALE:

                 

U.S. Treasury and agencies

     $ -             $ -             $ 139        $ 3        $ 139        $ 3  

Obligations of states and political subdivisions

     -             -             1,996        27        1,996        27  

Residential mortgage-backed securities and collateralized mortgage obligations

     208,117        1,834        7,537        63        215,654        1,897  
                                         

Total temporarily impaired securities

     $       208,117        $       1,834        $       9,672        $ 93        $       217,789        $       1,927  
                                         

HELD TO MATURITY:

                 

Residential mortgage-backed securities and collateralized mortgage obligations

     $ -             $ -             $ 1,127        $       177        $ 1,127        $ 177  
                                         

Total temporarily impaired securities

     $ -             $ -             $ 1,127        $ 177        $ 1,127        $ 177  
                                         

December 31, 2008

                 

(in thousands)

                 
     Less than 12 Months    12 Months or Longer    Total
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

AVAILABLE FOR SALE:

                 

U.S. Treasury and agencies

     $ 93        $ 2        $ 230        $ 4        $ 323        $ 6  

Obligations of states and political subdivisions

     43,341        1,291        5,520        49        48,861        1,340  

Residential mortgage-backed securities and collateralized mortgage obligations

     103,323        1,083        41,262        503        144,585        1,586  

Other debt securities

     -             -             634        250        634        250  
                                         

Total temporarily impaired securities

     $ 146,757        $ 2,376        $ 47,646        $ 806        $ 194,403        $ 3,182  
                                         

HELD TO MATURITY:

                 

Obligations of states and political subdivisions

     $ 4,099        $ 75        $ -             $ -             $ 4,099        $ 75  

Residential mortgage-backed securities and collateralized mortgage obligations

     4,130        7,367        -             -             4,130        7,367  
                                         

Total temporarily impaired securities

     $ 8,229        $ 7,442        $ -             $ -             $ 8,229        $ 7,442  
                                         

The unrealized losses on investments in U.S. Treasury and agencies securities were caused by interest rate increases subsequent to the purchase of these securities. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than par. Because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost bases, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

Of the residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at September 30, 2009, 99.5% are issued or guaranteed by governmental agencies. The unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that Bank will be required to sell these securities before recovery of their amortized cost bases, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

The unrealized losses on obligations of political subdivisions were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities. Management monitors published credit ratings of these securities and no adverse ratings changes have occurred since the date of purchase of obligations of political subdivisions which are in an unrealized loss position as of September 30, 2009. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that Bank will be required to sell these securities before recovery of their amortized cost bases, which may be include holding each security until maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

 

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We review investment securities on an ongoing basis for the presence of other-than-temporary (“OTTI”) or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors. For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the OTTI amount recorded in OCI will increase the carrying value of the investment, and would not affect earnings. If there is an indication of additional credit losses the security is re-evaluated accordingly to the procedures described above.

Prior to the Company’s adoption of the new guidance related to the recognition and presentation of OTTI of debt securities which became effective in the second quarter of 2009, the Company recorded a $2.1 million OTTI charge in the three months ended March 31, 2009. This charge related to three non-agency collateralized mortgage obligations carried as held to maturity for which the default rates and loss severities of the underlying collateral and credit coverage ratios of the security indicated that it was probable that credit losses were expected to occur. In the three and nine months ended September 30, 2008, the Company recorded $2.6 million of OTTI. Charges of $2.2 million related to five non-agency collateralized mortgage obligations carried as held to maturity for which the default rates and loss severities of the underlying collateral and credit coverage ratios of the security indicated that it was probable that credit losses were expected to occur. Upon adoption of the new OTTI guidance in the second quarter of 2009, the Company analyzed these securities as well as other securities where OTTI had been previously recognized, and determined that as of the adoption date such losses were credit related. As such, there was no cumulative effect adjustment to the opening balance of retained earnings or a corresponding adjustment to accumulated OCI.

The following tables present the OTTI losses for the three and nine months ended September 30, 2009 and 2008:

(in thousands)

 

     Three months ended
September 30, 2009
   Three months ended
September 30, 2008
     Held To
Maturity
   Available
For Sale
   Held To
Maturity
   Available
For Sale

Total other-than-temporary impairment losses

     $ -             $ -             $ 2,451        $ 139  

Portion of other-than-temporary impairment losses (transferred from) recognized in other comprehensive income(1)

     (4)       -             -             -       
                           

Net impairment losses recognized in earnings(2)

     $ 4        $       -             $ 2,451        $       139  
                           
     Nine months ended
September 30, 2009
   Nine months ended
September 30, 2008
     Held To
Maturity
   Available
For Sale
   Held To
Maturity
   Available
For Sale

Total other-than-temporary impairment losses

     $       12,253        $ 239        $ 2,451        $ 139  

Portion of other-than-temporary impairment losses recognized in other comprehensive income(1)

     2,733        -             -             -       
                           

Net impairment losses recognized in earnings(2)

     $ 9,520        $ 239        $ 2,451        $ 139  
                           

 

(1) Represents other-than-temporary impairment losses related to all other factors.
(2) Represents other-than-temporary impairment losses related to credit losses.

The OTTI recognized on investment securities held to maturity primarily relates to 29 non-agency collateralized mortgage obligations for all periods presented. Each of these securities holds various levels of credit subordination. The underlying mortgage loans of these securities were originated from 2003 through 2007. At origination, the weighted average loan-to-value of the underlying mortgages was 69%; the underlying borrowers had weighted average FICO scores of 731, and 59% were limited documentation loans. At June 30, 2009, these securities were valued by third-party pricing services using matrix or model pricing methodologies and were

 

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corroborated by broker indicative bids. We estimated the cash flows of the underlying collateral for each security considering credit, interest and prepayment risk models that incorporate management’s estimate of projected key assumptions including prepayment rates, collateral default rates and loss severity. Assumptions utilized vary from security to security, and are influenced by factors such as loan interest rates, geographic location, borrower characteristics and vintage, and historical experience. We then used a third party to obtain information about the structure of each security, including subordination and other credit enhancements, in order to determine how the underlying collateral cash flows will be distributed to each security issued in the structure. These cash flows were then discounted at the interest rate used to recognize interest income on each security. We reviewed the actual collateral performance of these securities as of September 30, 2009 and noted no significant further deterioration of the underlying mortgages that would significantly impact the inputs or cash flow projections we utilized as of June 30, 2009. The following table presents a summary of the significant inputs utilized to measure management’s estimate of the credit loss component on these non-agency collateralized mortgage obligations as of September 30, 2009:

 

     Range          Weighted      
    Average    
         Minimum            Maximum       

Constant prepayment rate

   0.0%    24.5%    13.4%

Collateral default rate

   6.0%    60.0%    15.1%

Loss severity

   20.0%    40.0%    29.0%

In the second quarter of 2009 the Company recorded an OTTI charge of $239,000 related to an available for sale collateralized debt obligation that holds trust preferred securities. Management noted certain deferrals and defaults in the pool and believes the impairment represents credit loss in its entirety.

The revised guidance related to the recognition and presentation of OTTI of debt securities, including recognizing impairment losses related to factors other than credit in OCI, became effective for the Company in the second quarter of 2009. The following table presents a rollforward of the credit loss component of held to maturity debt securities that have been written down for OTTI with the credit loss component recognized in earnings and the remaining impairment loss related to all other factors recognized in OCI for the three and six months ended September 30, 2009:

(in thousands)

 

     Three months ended
September 30, 2009
   Six months ended
September 30, 2009

Balance, beginning of period

     $       11,546        $ 5,952  

Additions:

     

Initial OTTI credit losses

     -             7,211  

Subsequent OTTI credit losses

     4        172  

Reductions:

     

Securities sold, matured or paid-off

     -             (1,785) 
             

Balance, end of period

     $ 11,550        $       11,550  
             

The following table presents the maturities of investment securities at September 30, 2009:

(in thousands)

 

     Available For Sale    Held To Maturity
     Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value

AMOUNTS MATURING IN:

           

Three months or less

     $ 13,694        $ 13,763        $ 145        $ 145  

Over three months through twelve months

     75,086        76,562        1,224        1,230  

After one year through five years

     1,311,733        1,350,334        2,725        2,802  

After five years through ten years

     343,168        357,307        450        430  

After ten years

     48,005        48,499        1,667        1,618  

Other investment securities

     1,959        2,017        -             -       
                           
     $     1,793,645        $     1,848,482        $     6,211        $     6,225  
                           

The amortized cost and fair value of collateralized mortgage obligations and mortgage-backed securities are presented by expected average life, rather than contractual maturity, in the preceding table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay underlying loans without prepayment penalties.

 

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The following table presents the gross realized gains and gross realized losses on the sale of securities available for sale for the three and nine months ended September 30, 2009 and 2008:

(in thousands)

 

         Three months ended    
September 30, 2009
       Three months ended    
September 30, 2008
     Gains    Losses    Gains    Losses

Obligations of states and political subdivisions

     $ -             $ 1        $ 7        $ -       

Residential mortgage-backed securities and collateralized mortgage obligations

     700        537        106        -       
                           
     $       700        $ 538        $ 113        $ -       
                           
     Nine months ended
September 30, 2009
   Nine months ended
September 30, 2008
     Gains    Losses    Gains    Losses

U.S. Treasury and agencies

     $ -             $ -             $ 85        $ -       

Obligations of states and political subdivisions

     -             1        -             2  

Residential mortgage-backed securities and collateralized mortgage obligations

     9,195        591        5,464        -       

Investments in mutual funds and other equity securities

     -             -             -             1,535  
                           
     $ 9,195        $       592        $       5,549        $       1,537  
                           

The following table presents, as of September 30, 2009, investment securities which were pledged to secure borrowings and public deposits as permitted or required by law:

(in thousands)

 

           Amortized      
Cost
         Fair      
Value

To Federal Home Loan Bank to secure borrowings

     $             412,047        $ 427,740  

To state and local governments to secure public deposits

     642,203        664,281  

To U.S. Treasury and Federal Reserve to secure customer tax payments

     7,093        7,341  

Other securities pledged, principally to secure deposits

     256,248        267,595  
             

Total pledged securities

     $             1,317,591        $             1,366,957  
             

Note 4 – Loans, Leases and Allowance for Loan and Lease Losses

The following table presents the major types of loans recorded in the balance sheets as of September 30, 2009 and December 31, 2008. The classification of loan balances presented is reported in accordance with the regulatory reporting requirements.

Loan Concentrations

(in thousands)

 

           September 30,      
2009
         December 31,      
2008

Real estate - construction and land development

     $ 748,849        $ 931,090  

Real estate - commercial and agricultural

     3,402,236        3,236,645  

Real estate - single and multi-family residential

     704,252        661,723  

Commercial, industrial and agricultural

     1,133,389        1,211,167  

Leases

     36,720        40,155  

Installment and other

     56,530        62,044  
             
     6,081,976        6,142,824  

Deferred loan fees, net

     (10,934)       (11,450) 
             

Total loans and leases

     $             6,071,042        $             6,131,374  
             

 

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The following table summarizes activity related to the allowance for loan and lease losses (“ALLL”) for the three and nine months ended September 30, 2009 and 2008:

Allowance for Loan and Lease Losses

(in thousands)

 

           Three months ended      
September 30,
         Nine months ended      
September 30,
     2009    2008    2009    2008

Balance, beginning of period

     $ 98,370        $ 73,721        $ 95,865        $ 84,904  

Provision for loan and lease losses

     52,108        35,454        140,531        75,723  

Charge-offs

     (48,443)       (17,108)       (135,365)       (69,830) 

Recoveries

     1,101        1,915        2,105        3,185  
                           

Balance, end of period

     $             103,136        $             93,982        $             103,136        $             93,982  
                           

At September 30, 2009, the recorded investment in loans classified as impaired totaled $305.9 million, with a corresponding valuation allowance (included in the allowance for loan and lease losses) of $3.0 million. Due to declining real estate values in our markets, it is increasingly likely that an impairment reserve on collateral dependent real estate loans represents a confirmed loss. As a result, the Company recognizes the charge-off of impairment reserves on impaired loans in the period it arises for collateral dependent loans. Therefore, the non-accrual loans as of September 30, 2009 have already been written-down to their estimated net realizable value, based on disposition value, and are expected to be resolved with no additional material loss, absent further decline in market prices. The valuation allowance on impaired loans represents the impairment reserves on performing restructured loans, and is measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. At December 31, 2008, the total recorded investment in impaired loans was $151.5 million, with no corresponding valuation allowance. The average recorded investment in impaired loans was approximately $211.1 million during the nine months ended September 30, 2009 and $116.6 million for the year ended December 31, 2008.

At September 30, 2009 and December 31, 2008, impaired loans of $182.2 million and $23.5 million were classified as performing restructured loans, respectively. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. The performing restructured loans on accrual status represent the only impaired loans accruing interest at each respective date. In order for a restructured loan to be considered performing and on accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. The Company has obligations to lend $1.3 million of additional funds on the restructured loans as of September 30, 2009, which primarily relate to three residential development projects. Non-accrual loans totaled $123.7 million at September 30, 2009, and $127.9 million at December 31, 2008.

Note 5 – Mortgage Servicing Rights

The following table presents the changes in the Company’s mortgage servicing rights (“MSR”) for the three and nine months ended September 30, 2009 and 2008:

Mortgage Servicing Rights

(in thousands)

 

           Three months ended      
September 30,
         Nine months ended      
September 30,
     2009    2008    2009    2008

Balance, beginning of period

     $ 10,631        $ 11,576        $ 8,205        $ 10,088  

Additions for new mortgage servicing rights capitalized

     1,723        587        5,958        2,198  

Changes in fair value:

           

Due to changes in model inputs or assumptions(1)

     (2,580)       (1,646)       (3,155)       (1,029) 

Other(2)

     1,778        221        544        (519) 
                           

Balance, end of period

     $             11,552        $             10,738        $             11,552        $             10,738  
                           

 

(1) Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates.
(2) Represents changes due to collection/realization of expected cash flows over time.

 

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Information related to our serviced loan portfolio as of September 30, 2009 and December 31, 2008 was as follows:

(dollars in thousands)

 

     September 30,
2009
   December 31,
2008

Balance of loans serviced for others

     $       1,205,528      $       955,494

MSR as a percentage of serviced loans

     0.96%      0.86%

The amount of contractually specified servicing fees, late fees and ancillary fees earned, recorded in mortgage banking revenue on the Condensed Consolidated Statements of Operations, was $796,000 and $2.2 million for the three and nine months ended September 30, 2009, as compared to $636,000 and $1.8 million for the three and nine months ended September 30, 2008.

Key assumptions used in measuring the fair value of MSR as of September 30, 2009 and December 31, 2008 were as follows:

 

     September 30,
2009
   December 31,
2008

Constant prepayment rate

   17.84%    13.69%

Discount rate

   8.72%    8.85%

Weighted average life (years)

   4.6    5.0

Note 6 – Other Real Estate Owned

The following table presents the changes in other real estate owned for the three and nine months ended September 30, 2009 and 2008:

(in thousands)

 

           Three months ended      
September 30,
         Nine months ended      
September 30,
     2009    2008    2009    2008

Balance, beginning of period

     $ 36,030        $ 5,826        $ 27,898        $ 6,943  

Additions to OREO

     9,049        16,988        34,408        30,534  

Dispositions of OREO

     (13,779)       (2,261)       (28,430)       (14,648) 

Valuation adjustments in the period

     (4,595)       (800)       (7,171)       (3,076) 
                           

Balance, end of period

     $             26,705        $             19,753        $             26,705        $             19,753  
                           

Note 7 – Junior Subordinated Debentures

As of September 30, 2009, the Company had 14 wholly-owned trusts (“Trusts”), including a Master Trust formed in 2007 to issue two separate series of trust preferred securities, that were formed to issue trust preferred securities and related common securities of the Trusts and are not consolidated. Nine Trusts, representing aggregate total obligations of approximately $96.0 million (fair value of approximately $107.3 million as of the merger dates), were assumed in connection with previous mergers.

 

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Following is information about the Trusts as of September 30, 2009:

Junior Subordinated Debentures

(dollars in thousands)

 

Trust Name

  Issue Date   Issued Amount   Carrying
Value(1)
  Rate(2)   Effective
Rate(3)
  Maturity Date   Redemption Date

AT FAIR VALUE:

             

Umpqua Statutory Trust II

  October 2002   $ 20,619       $ 14,162     Floating(4)   10.70%   October 2032   October 2007

Umpqua Statutory Trust III

  October 2002     30,928         21,512     Floating(5)   10.70%   November 2032   November 2007

Umpqua Statutory Trust IV

  December 2003     10,310         6,589     Floating(6)   10.70%   January 2034   January 2009

Umpqua Statutory Trust V

  December 2003     10,310         6,581     Floating(6)   10.70%   March 2034   March 2009

Umpqua Master Trust I

  August 2007     41,238         20,358     Floating(7)   10.70%   September 2037   September 2012

Umpqua Master Trust IB

  September 2007     20,619         12,790     Floating(8)   10.70%   December 2037   December 2012
               
      134,024         81,992          
               

AT AMORTIZED COST:

             

HB Capital Trust I

  March 2000     5,310         6,455     10.875%   8.08%   March 2030   March 2010

Humboldt Bancorp Statutory Trust I

  February 2001     5,155         5,984     10.200%   8.14%   February 2031   February 2011

Humboldt Bancorp Statutory Trust II

  December 2001     10,310         11,499     Floating(9)   3.02%   December 2031   December 2006

Humboldt Bancorp Staututory Trust III

  September 2003     27,836         30,898     Floating(10)   2.50%   September 2033   September 2008

CIB Capital Trust

  November 2002     10,310         11,317     Floating(5)   3.16%   November 2032   November 2007

Western Sierra Statutory Trust I

  July 2001     6,186         6,186     Floating(11)   4.07%   July 2031   July 2006

Western Sierra Statutory Trust II

  December 2001     10,310         10,310     Floating(9)   3.89%   December 2031   December 2006

Western Sierra Statutory Trust III

  September 2003     10,310         10,310     Floating(12)   3.41%   September 2033   September 2008

Western Sierra Statutory Trust IV

  September 2003     10,310         10,310     Floating(12)   3.41%   September 2033   September 2008
               
      96,037         103,269          
               
             
               
  Total   $       230,061       $       185,261          
               

 

(1) Includes purchase accounting adjustments, net of accumulated amortization, for junior subordinated debentures assumed in connection with previous mergers as well as fair value adjustments related to trusts recorded at fair value.
(2) Contractual interest rate of junior subordinated debentures.
(3) Effective interest rate based upon the carrying value as of September 2009.
(4) Rate based on LIBOR plus 3.35%, adjusted quarterly.
(5) Rate based on LIBOR plus 3.45%, adjusted quarterly.
(6) Rate based on LIBOR plus 2.85%, adjusted quarterly.
(7) Rate based on LIBOR plus 1.35%, adjusted quarterly.
(8) Rate based on LIBOR plus 2.75%, adjusted quarterly.
(9) Rate based on LIBOR plus 3.60%, adjusted quarterly.
(10) Rate based on LIBOR plus 2.95%, adjusted quarterly.
(11) Rate based on LIBOR plus 3.58%, adjusted quarterly.
(12) Rate based on LIBOR plus 2.90%, adjusted quarterly.

The $230.1 million of trust preferred securities issued to the Trusts as of September 30, 2009 and December 31, 2008, with carrying values of $185.3 million and $196.2 million, respectively, are reflected as junior subordinated debentures in the Condensed Consolidated Balance Sheets. The common stock issued by the Trusts is recorded in other assets in the Condensed Consolidated Balance Sheets, and totaled $6.9 million at September 30, 2009 and December 31, 2008.

All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of September 30, 2009, under guidance issued by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). Effective April 11, 2005, the Federal Reserve Board adopted a rule that permits the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. The Federal Reserve Board rule, with a five-year transition period set to end on March 31, 2009, would have limited the aggregate amount of trust preferred securities and certain other restricted core capital elements to 25% of Tier 1 capital, net of goodwill and any associated deferred tax liability. The rule allowed the amount of trust preferred securities and certain other elements in excess of the limit to be included in Tier 2 capital, subject to restrictions. In response to the stressed conditions in the financial markets and in order to promote stability in the financial markets and the banking industry, on March 17, 2009, the Federal Reserved adopted a new rule that delayed the effective date of the new limits on the inclusion of trust preferred securities and other restricted core capital elements in Tier 1 capital until March 31, 2011. At September 30, 2009, the Company’s restricted core capital elements were 19% of total core capital, net of goodwill and any associated deferred tax liability. 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.

On January 1, 2007 the Company selected the fair value measurement option for certain pre-existing junior subordinated debentures of $97.9 million (the Umpqua Statutory Trusts). The remaining junior subordinated debentures as of the adoption date were acquired

 

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through business combinations and were measured at fair value at the time of acquisition. In 2007 the Company issued two series of trust preferred securities and elected to measure each instrument at fair value. Accounting for the junior subordinated debentures originally issued by the Company at fair value enables us to more closely align our financial performance with the economic value of those liabilities. Additionally, we believe it improves our ability to manage the market and interest rate risks associated with the junior subordinated debentures. The junior subordinated debentures measured at fair value and amortized cost have been presented as separate line items on the balance sheet.

Due to inactivity in the junior subordinated debenture market and the inability to obtain observable quotes of our, or similar, junior subordinated debenture liabilities or the related trust preferred securities when traded as assets, we utilize an income approach valuation technique to determine the fair value of these liabilities using our estimation of market discount rate assumptions. Prior to the second quarter of 2009, we estimated the fair value of junior subordinated debentures using an internal discounted cash flow model. The future cash flows of these instruments were extended to the next available redemption date or maturity date as appropriate based upon the estimated credit risk adjusted spreads of recent issuances or quotes from brokers for comparable bank holding companies, as available, compared to the contractual spread of each junior subordinated debenture measured at fair value. The ending carrying (fair) value of the junior subordinated debentures measured at fair value represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants. For additional assurance, we obtain a valuation from a third-party pricing service to validate the results of our model. In the second quarter of 2009, due to continued inactivity in the junior subordinated debenture and related markets and clarified guidance relating to the determination of fair value when the volume and level of activity for an asset or liability have significantly decreased or where transactions are not orderly, management has evaluated and determined to rely on a third-party pricing service to estimate the fair value of these liabilities. The pricing service utilizes an income approach valuation technique, specifically an option-adjusted spread (“OAS”) valuation model. This OAS model values the cash flows over multiple interest rate scenarios and discounts these cash flows using a credit risk adjustment spread over the three month LIBOR swap curve. The OAS model currently being utilized is more sophisticated and computationally intensive than the model previously used; however, the models react similarly to changes in the underlying inputs, and the results are considered comparable.

For the three and nine months ended September 30, 2009, we recorded gains of $982,000 and $10.2 million, respectively, as compared to gains of $25.3 million and $30.2 million for the three and nine months ended September 30, 2008, respectively, resulting from the change in fair value of the junior subordinated debentures recorded at fair value. The change in fair value of the junior subordinated debentures carried at fair value in the current year primarily results from the widening of the credit risk adjusted spread over the contractual rate of each junior subordinated debenture measured at fair value. Management believes that the credit risk adjusted spread being utilized is indicative of the nonperformance risk premium a willing market participant would require under current market conditions, that is, the inactive market. In management’s estimation, the change in fair value of the junior subordinated debentures during the current period represents changes in the market’s nonperformance risk expectations and pricing of this type of debt, and not as a result of changes to our entity-specific credit risk. These gains were recorded in gain on junior subordinated debentures carried at fair value within non-interest income. The contractual interest expense on junior subordinated debentures continues to be recorded on an accrual basis and is reported in interest expense. The junior subordinated debentures recorded at fair value of $82.0 million had contractual unpaid principal amounts of $134.0 million outstanding as of September 30, 2009. The junior subordinated debentures recorded at fair value of $92.5 million had contractual unpaid principal amounts of $134.0 million outstanding as of December 31, 2008.

Note 8 – Commitments and Contingencies

Lease Commitments—The Company leases 109 sites under non-cancelable operating leases. The leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term.

Rent expense for the three and nine months ended September 30, 2009 was $3.2 million and $9.5 million, respectively, compared to $3.2 million and $9.5 million in the comparable periods in 2008, respectively. Rent expense was offset by rent income for the three and nine months ended September 30, 2009 of $146,000 and $426,000, respectively, compared to $144,000 and $512,000 in the comparable periods in 2008, respectively.

 

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Financial Instruments with Off-Balance-Sheet Risk—The Company’s financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of the Bank’s business and involve elements of credit, liquidity and interest rate risk. The following table presents a summary of the Bank’s commitments and contingent liabilities:

(in thousands)

 

          As of September 30, 2009      

Commitments to extend credit

    $ 1,071,409  

Commitments to extend overdrafts

    $ 188,220  

Commitments to originate loans held for sale

    $ 84,284  

Forward sales commitments

    $ 72,500  

Standby letters of credit

    $ 56,039  

The Bank is a party to financial instruments with off-balance-sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve elements of credit and interest-rate risk similar to the amounts recognized in the Condensed Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of the Bank’s involvement in particular classes of financial instruments.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any covenant or condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. While most standby letters of credit are not utilized, a significant portion of such utilization is on an immediate payment basis. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral varies but may include cash, accounts receivable, inventory, premises and equipment and income-producing commercial properties.

Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including international trade finance, commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary. The Bank has not been required to perform on any financial guarantees but incurred losses of $23,000 in connection with standby letters of credit during the three and nine months ended September 30, 2009. The Bank has not been required to perform on any financial guarantees and did not incur any losses in connection with standby letters of credit during the three and nine months ended September 30, 2008. At September 30, 2009, approximately $34.3 million of standby letters of credit expire within one year, and $21.7 million expire thereafter. Upon issuance, the Company recognizes a liability equivalent to the amount of fees received from the customer for these standby letter of credit commitments. Fees are recognized ratably over the term of the standby letter of credit. The estimated fair value of guarantees associated with standby letters of credit was $131,000 as of September 30, 2009.

At September 30, 2009 and December 31, 2008, the reserve for unfunded commitments, which is included in other liabilities on the Condensed Consolidated Balance Sheets, was $841,000 and $1.0 million, respectively. The adequacy of the reserve for unfunded commitments is reviewed on a quarterly basis, based upon changes in the amount of commitments, loss experience, and economic conditions.

Mortgage loans sold to investors may be sold with servicing rights retained, with only the standard legal representations and warranties regarding recourse to the Bank. Management believes that any liabilities that may result from such recourse provisions are not significant.

Legal Proceedings—In November 2007, Visa Inc. (“Visa”) announced that it had reached a settlement with American Express related to an antitrust lawsuit. Umpqua Bank and other Visa member banks are obligated to fund the settlement and share in losses resulting from this litigation. In the fourth quarter of 2007, the Company recorded a liability and corresponding expense of approximately $3.9 million pre-tax, for its proportionate share of that settlement.

In addition, Visa notified the Company that it had established a contingency reserve related to unsettled litigation with Discover Card. In connection with this contingency, the Company recorded, in the fourth quarter of 2007, a liability and corresponding expense of $1.2 million pre-tax, for its proportionate share of that liability. The Company is not a party to the Visa litigation and its liability arises solely from the Bank’s membership interest in Visa.

 

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During 2007, Visa announced that it completed restructuring transactions in preparation for an initial public offering of its Class A stock, and, as part of those transactions, Umpqua Bank’s membership interest was exchanged for 764,036 shares of Class B common stock in Visa. In March 2008, Visa completed its initial public offering. Following the initial public offering, the Company received $12.6 million proceeds as a mandatory partial redemption of 295,377 shares, reducing the Company’s holdings from 764,036 shares to 468,659 shares of Class B common stock. A conversion ratio of 0.71429 was established for the conversion rate of Class B shares into Class A shares. Using the proceeds from this offering, Visa also established a $3.0 billion escrow account to cover settlements, resolution of pending litigation and related claims (“covered litigation”). In connection with Visa’s establishment of the litigation escrow account, the Company reversed the $5.2 million Visa litigation related reserve in the first quarter of 2008.

In October 2008, Visa announced that it had reached a settlement with Discover Card related to an antitrust lawsuit. Umpqua Bank and other Visa member banks were obligated to fund the settlement and share in losses resulting from this litigation that were not already provided for in the escrow account. Visa notified the Company that it had established an additional reserve related to the settlement with Discover Card that had not already been funded into the escrow account. In connection with this settlement, the Company recorded, in the third quarter of 2008, a liability and corresponding expense of $2.1 million pre-tax, for its proportionate share of that liability. In December 2008, this liability and expense were reversed when Visa deposited additional funds into the escrow account to cover the remaining amount of the settlement. The deposit of funds into the escrow account further reduced the conversion ratio applicable to Class B common stock outstanding from 0.71429 per Class A share to 0.6296 per Class A share.

In July 2009, Visa deposited an additional $700 million into the litigation escrow account. While the outcome of the two remaining litigation cases remains unknown, this addition to the escrow account provides additional reserves to cover potential losses. As a result of the deposit, the conversion ratio applicable to Class B common stock outstanding decreased further from 0.6296 per Class A share to 0.5824 per Class A share.

The remaining unredeemed shares of Visa Class B common stock are restricted and may not be transferred until the later of (1) three years from the date of the initial public offering or (2) the period of time necessary to resolve the covered litigation. If the funds in the escrow account are insufficient to settle all the covered litigation, Visa may sell additional Class A shares, use the proceeds to settle litigation, and further reduce the conversion ratio. If funds remain in the escrow account after all litigation is settled, the Class B conversion ratio will be increased to reflect that surplus.

As of September 30, 2009, the value of the Class A shares was $69.11 per share. Utilizing the new conversion ratio effective in July 2009, the value of unredeemed Class A equivalent shares owned by the Company was $18.9 million as of September 30, 2009, and has not been reflected in the accompanying financial statements.

In the ordinary course of business, various claims and lawsuits are brought by and against the Company, the Bank and Umpqua Investments. In the opinion of management, there is no pending or threatened proceeding in which an adverse decision could result in a material adverse change in the Company’s consolidated financial condition or results of operations. Management has considered the potential impact of one or more adverse decisions in the actions brought by Kevin D. Padrick, Trustee of the Summit Accommodators Liquidating Trust and Danae Miller, et al., as described in Part II, Item 1. Based on the allegations in the complaint and our understanding of the relevant facts and circumstances, we believe that the claim is without merit and the Company is vigorously defending the claim. No loss accrual has been made for either of these claims in the accompanying unaudited consolidated financial statements.

Concentrations of Credit Risk—The Company grants real estate mortgage, real estate construction, commercial, agricultural and installment loans and leases to customers throughout Oregon, Washington and California. In management’s judgment, a concentration exists in real estate-related loans, which represented approximately 80% of the Company’s loan and lease portfolio at September 30, 2009, and December 31, 2008. Commercial real estate concentrations are managed to assure wide geographic and business diversity. Although management believes such concentrations have no more than the normal risk of collectibility, a substantial decline in the economy in general, material increases in interest rates, changes in tax policies, tightening credit or refinancing markets, or a decline in real estate values in the Company’s primary market areas in particular, such as was seen with the deterioration in the residential development market since 2007, could have an adverse impact on the repayment of these loans. Personal and business incomes, proceeds from the sale of real property, or proceeds from refinancing, represent the primary sources of repayment for a majority of these loans.

The Bank recognizes the credit risks inherent in dealing with other depository institutions. Accordingly, to prevent excessive exposure to any single correspondent, the Bank has established general standards for selecting correspondent banks as well as internal limits for allowable exposure to any single correspondent. In addition, the Bank has an investment policy that sets forth limitations that apply to all investments with respect to credit rating and concentrations with an issuer.

 

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Note 9 – Derivatives

The Company may use derivatives to hedge the risk of changes in the fair values of interest rate lock commitments, residential mortgage loans held for sale, and mortgage servicing rights. None of the Company’s derivatives are designated as hedging instruments. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in income. The Company primarily utilizes forward interest rate contracts in its derivative risk management strategy.

The Bank enters into forward delivery contracts to sell residential mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates (“MBS TBAs”) in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage loan commitments. Credit risk associated with forward contracts is limited to the replacement cost of those forward contracts in a gain position. There were no counterparty default losses on forward contracts in the three and nine months ended September 30, 2009 and 2008. Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Bank limits its exposure to market risk by monitoring differences between commitments to customers and forward contracts with broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the Company completes the transaction by either paying or receiving a fee to or from the broker/dealer equal to the increase or decrease in the market value of the forward contract. At September 30, 2009, the Bank had commitments to originate mortgage loans held for sale totaling $84.3 million and forward sales commitments of $72.5 million.

In the fourth quarter of 2007, the Company began using derivative instruments, primarily MBS TBAs, to hedge the risk of changes in the fair value of MSR due to changes in interest rates. Starting in late February 2008 and continuing into March 2008, the bond markets experienced extraordinary volatility. This volatility resulted in widening spreads and price declines on the derivative instruments that were not offset by corresponding gains in the MSR asset. In March of 2008, the Company suspended the MSR hedge, given the continued volatility.

The following tables summarize the types of derivatives, separately by assets and liabilities, their locations on the Condensed Consolidated Balance Sheets, and the fair values of such derivatives as of September 30, 2009 and December 31, 2008:

(in thousands)

 

Underlying
Risk Exposure

 

Description

 

Balance Sheet
Location

  September 30,
2009
  December 31,
2008

Asset Derivatives

       

Interest rate contracts

  Rate lock commitments   Other assets     $ 736       $ 1,170  

Interest rate contracts

  Forward sales commitments   Other assets     -            151  
               

Total asset derivatives

        $ 736       $ 1,321  
               

Liability Derivatives

       

Interest rate contracts

  Rate lock commitments   Other liabilities     $ 3       $ 3  

Interest rate contracts

  Forward sales commitments   Other liabilities     560       583  
               

Total liability derivatives

        $         563       $         586  
               

 

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The following table summarizes the types of derivatives, their locations within the Condensed Consolidated Statements of Operations, and the gains (losses) recorded during the three and nine months ended September 30, 2009 and 2008:

(in thousands)

 

Underlying

Risk Exposure

  

Description

  

Income Statement

Location

   Three months ended
September 30,
         2009    2008

Interest rate contracts

   Rate lock commitments    Mortgage banking revenue      $ 332        $ (182) 

Interest rate contracts

   Forward sales commitments    Mortgage banking revenue      (956)       281  
                   

Total

           $ (624)       $ 99  
                   

Underlying

Risk Exposure

  

Description

  

Income Statement

Location

   Nine months ended
September 30,
         2009    2008

Interest rate contracts

   Rate lock commitments    Mortgage banking revenue      $ (433)       $ (318) 

Interest rate contracts

   Forward sales commitments    Mortgage banking revenue      (649)       583  

Interest rate contracts

   MSR hedge instruments    Mortgage banking revenue      -             (2,398) 
                   

Total

           $       (1,082)       $       (2,133) 
                   

The Company’s derivative instruments do not have specific credit risk-related contingent features. The forward sales commitments do have contingent features that may require transferring collateral to the broker/dealers upon their request. However, this amount would be limited to the net unsecured loss exposure at such point in time and would not materially affect the Company’s liquidity or results of operations.

Note 10 – Shareholders’ Equity

On November 14, 2008, in exchange for an aggregate purchase price of $214.2 million, the Company issued and sold to the United State Department of the Treasury (“U.S. Treasury”) pursuant to the TARP Capital Purchase Program (the “CPP”) the following: (i) 214,181 shares of the Company’s newly designated non-convertible Fixed Rate Cumulative Perpetual Preferred Stock, Series A, (the “preferred stock”) no par value per share and liquidation preference $1,000 per share (and $214.2 million liquidation preference in the aggregate) and (ii) a warrant to purchase up to 2,221,795 shares of the Company’s common stock, no par value per share, at an exercise price of $14.46 per share, subject to certain customary anti-dilution and other adjustments. The warrants issued are immediately exercisable, in whole or in part, and have a ten year term. The U.S. Treasury may only exercise or transfer up to one-half of the warrants prior to the earlier of, the date the Company receives aggregate gross proceeds of not less than 100% of the issue price of the preferred stock from one or more qualified equity offerings, or December 31, 2009.

The preferred stock bears cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter, in each case, applied to the $1,000 per share liquidation preference, but will only be paid when, as and if declared by the Company’s Board of Directors out of funds legally available therefor. Dividend payments are payable quarterly in arrears on the 15th day of February, May, August and November of each year. In October 2009, the Board declared a dividend in the amount of $2.7 million, which is payable in November 2009. As of September 30, 2009, no dividends on the preferred stock were in arrears.

Under the original terms of the CPP, the preferred stock may only be redeemed within the first three years from the date of issuance with the proceeds from a qualified equity offering that results in aggregate gross proceeds to the Company of not less that 25% of the issue price of the preferred stock. A qualified equity offering means the sale of Tier 1 qualifying perpetual preferred stock or common stock for cash. This requirement was removed under the provisions of the American Recovery and Reinvestment Act of 2009. As a result, the preferred stock, plus all accrued and unpaid dividends, may be redeemed by the Company subject to the approval of the Company’s primary federal bank regulator.

On August 13, 2009, the Company raised $258.7 million through a public offering by issuing 26,538,461 shares of the Company’s common stock, including 3,461,538 shares pursuant to the underwriters’ over-allotment option, at a share price of $9.75 per share. The net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were $245.7 million. The net proceeds from the offering will qualify as Tier 1 capital and will be used for general corporate purposes, which may include capital to support growth and acquisition opportunities and to position the Company for eventual redemption of preferred stock issued to the U.S. Treasury under the Capital Purchase Program. In connection with the Company’s public offering in the third quarter of 2009, the number of shares of common stock underlying the warrant held by the U.S. Treasury was reduced by 50%, to 1,110,898 shares.

 

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Note 11 – Stock-Based Compensation

The compensation cost related to stock options, restricted stock and restricted stock units (included in salaries and employee benefits) was $391,000 and $1.7 million for the three and nine months ended September 30, 2009, respectively, as compared to $1.2 million and $2.9 million for the three and nine months ended September 30, 2008. The total income tax benefit recognized related to stock based compensation was $157,000 and $678,000 for the three and nine months ended September 30, 2009, respectively, as compared to $468,000 and $1.2 million for the comparable periods in 2008, respectively.

The following table summarizes information about stock option activity for the nine months ended September 30, 2009:

(in thousands, except per share data)

 

      Nine months ended September 30, 2009
      Options
      Outstanding      
   Weighted-Avg
    Exercise Price    
   Weighted-Avg
  Remaining Contractual  
Term (Years)
   Aggregate
  Intrinsic Value  

Balance, beginning of period

   1,819        $       15.66        

Granted

   229        $ 9.34        

Exercised

   (48)       $ 5.75        

Forfeited/expired

   (226)       $ 16.31        
             

Balance, end of period

   1,774        $ 15.03      5.93        $       1,511  
             

Options exercisable, end of period

   1,068        $ 15.77      4.53        $ 1,221  
             

The total intrinsic value (which is the amount by which the stock price exceeded the exercise price on the date of exercise) of options exercised during the three and nine months ended September 30, 2009 was $4,000 and $209,000, respectively. This compared to the total intrinsic value of options exercised during the three and nine months ended September 30, 2008 of $167,000 and $637,000, respectively. During the three and nine months ended September 30, 2009, the amount of cash received from the exercise of stock options was $44,000 and $276,000, respectively, as compared to $303,000 and $1.0 million for the same periods in 2008, respectively.

The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. The following weighted average assumptions were used for stock options granted in the nine months ended September 30, 2009 and 2008:

 

                  Nine months ended            
September 30,
                  2009                            2008            

Dividend yield

     2.23%       4.47% 

Expected life (years)

     7.3        7.3  

Expected volatility

     46%       33% 

Risk-free rate

     2.18%       3.36% 

Weighted average fair value of options on date of grant

     $       3.65        $       3.25  

The Company grants restricted stock periodically as a part of the 2003 Stock Incentive Plan for the benefit of employees. Restricted shares issued generally vest on an annual basis over five years. A deferred restricted stock award was granted to an executive in the second quarter of 2007. The award vests monthly based on continued service in various increments through July 1, 2011. The Company will issue certificates for the vested award within the seventh month following termination of the executive’s employment. The following table summarizes information about non-vested restricted share activity for the nine months ended September 30, 2009:

(in thousands, except per share data)

 

            Nine months ended September 30, 2009      
      Restricted
Shares
        Outstanding      
   Weighted Average
Grant

        Date Fair Value      

Balance, beginning of period

   216        $       23.42  

Granted

   23        $ 9.77  

Released

   (44)       $ 23.79  

Forfeited/expired

   (9)       $ 22.85  
       

Balance, end of period

   186        $ 21.68  
       

 

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The total fair value of restricted shares vested and released during the three and nine months ended September 30, 2009 was $8,000 and $417,000, respectively. This compares to the total fair value of restricted shares vested and released during the three and nine months ended September 30, 2008 of $134,000 and $628,000, respectively.

The Company grants restricted stock units as a part of the 2007 Long Term Incentive Plan for the benefit of certain executive officers. Restricted stock unit grants are subject to performance-based vesting as well as other approved vesting conditions. In the second quarter of 2007, restricted stock units were granted that cliff vest after three years based on performance and service conditions. In the first quarter of 2008 and 2009, additional restricted stock units were granted to these executives under substantially similar vesting terms. The total number of restricted stock units granted represents the maximum number of restricted stock units eligible to vest based upon the performance and service conditions set forth in the grant agreements. The following table summarizes information about restricted stock unit activity for the nine months ended September 30, 2009:

(in thousands, except per share data)

 

            Nine months ended September 30, 2009      
      Restricted
Stock Units
      Outstanding      
   Weighted Average
Grant
      Date Fair Value      

Balance, beginning of period

   301        $       19.48  

Granted

   114        $ 8.01  

Released

   (23)       $ 21.33  

Forfeited/expired

   (57)       $ 18.98  
       

Balance, end of period

   335        $ 15.54  
       

The total fair value of restricted stock units vested and released during the nine months ended September 30, 2009 was $186,000. No restricted stock units were vested and released during the three month ended September 30, 2009 or the three and nine months ended September 30, 2008.

As of September 30, 2009, there was $1.9 million of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of 3.0 years. As of September 30, 2009, there was $2.7 million of total unrecognized compensation cost related to non-vested restricted stock which is expected to be recognized over a weighted-average period of 2.6 years. As of September 30, 2009, there was $533,000 of total unrecognized compensation cost related to non-vested restricted stock units which is expected to be recognized over a weighted-average period of 1.4 years, assuming expected performance conditions are met.

For the three and nine months ended September 30, 2009, the Company received income tax benefits of $5,000 and $311,000, respectively, related to the exercise of non-qualified employee stock options, disqualifying dispositions on the exercise of incentive stock options, the vesting of restricted shares and the vesting of restricted stock units. For the three and nine months ended September 30, 2008, the Company received income tax benefits of $120,000 and $503,000, respectively. In the nine months ended September 30, 2009, the Company had net tax deficiencies (tax deficiency resulting from tax deductions less than the compensation cost recognized) of $354,000, compared to net tax deficiencies of $159,000 for the nine months ended September 30, 2008. Only cash flows from gross excess tax benefits are classified as financing cash flows.

 

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Note 12 – Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, as well as the Oregon and California state jurisdictions. Except for the California amended returns of an acquired institution for the tax years 2001, 2002, and 2003, and only as it relates to the net interest deduction taken on these amended returns, the Company is no longer subject to U.S. federal tax authority examinations for years before 2006, Oregon state tax authority examinations for years before 2005, and California state tax authority examinations for years before 2004. The Internal Revenue Service concluded an examination of the Company’s U.S. income tax returns for 2003 and 2004 in the second quarter of 2006 and concluded an examination of the Company’s U.S. amended income tax return for 2005 in the third quarter of 2009. The results of these examinations had no significant impact on the Company’s financial statements.

Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not, that all or some portion of the potential deferred tax asset will not be realized.

The Company adopted the revised provisions of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 740, Income Taxes, relating to the accounting for uncertainty in income taxes on January 1, 2007. Upon the implementation of the revised provisions, the Company recognized no material adjustment in the form of a liability for unrecognized tax benefits. The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment.

The Company recorded a liability for unrecognized tax benefits relating to California tax incentives and temporary differences in the amount of $641,180 and $895,303 during 2009 and 2008, respectively. The Company had gross unrecognized tax benefits recorded as of September 30, 2009 in the amount of $1,688,576. If recognized, the unrecognized tax benefit would impact the 2009 annual effective tax rate by .25%. During the first three quarters of 2009, the Company also accrued $174,928 of interest related to unrecognized tax benefits, which is reported by the Company as a component of tax expense. As of September 30, 2009, the accrued interest related to unrecognized tax benefits is $338,492.

Note 13 – Earnings Per Common Share

According to the revised provisions of FASB ASC 260, Earning Per Share, which became effective January 1, 2009, nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Certain of the Company’s nonvested restricted stock awards qualify as participating securities.

Net income, less any preferred dividends accumulated for the period (whether or not declared), is allocated between the common stock and participating securities pursuant to the two-class method. Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested restricted shares.

Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares, excluding the participating securities, were issued using the treasury stock method. For all periods presented, warrants, stock options, certain restricted stock awards and restricted stock units are the only potentially dilutive non-participating instruments issued by the Company. Next, we determine and include in diluted earnings per common share calculation the more dilutive effect of the participating securities using the treasury stock method or the two-class method. Undistributed losses are not allocated to the nonvested share-based payment awards (the participating securities) under the two-class method as the holders are not contractually obligated to share in the losses of the Company.

All prior-period earnings per common share amounts have been retrospectively adjusted to conform to the revised provisions of FASB ASC 260. The impact of the revised provisions reduced diluted earnings per common share by $0.01 for the nine months ended September 30, 2008.

 

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The following is a computation of basic and diluted (loss) earnings per common share for the three and nine months ended September 30, 2009 and 2008:

Earnings per Share

(in thousands, except per share data)

 

          Three months ended    
September 30,
       Nine months ended    
September 30,
      2009    2008    2009    2008

NUMERATORS:

           

Net (loss) income

     $       (7,144)       $       12,387        $       (126,684)       $       47,214  

Preferred stock dividends

     3,225        -             9,632        -       

Dividends and undistributed earnings allocated to participating securities(1)

     7        37        22        149  
                           

Net (loss) earnings available to common shareholders

     $ (10,376)       $ 12,350        $ (136,338)       $ 47,065  
                           

DENOMINATORS:

           

Weighted average number of common shares outstanding - basic

     74,085        60,097        64,878        60,067  

Effect of potentially dilutive common shares(2)

     -             332        -             333  
                           

Weighted average number of common shares outstanding - diluted

     74,085        60,429        64,878        60,400  
                           

(LOSS) EARNINGS PER COMMON SHARE:

           

Basic

     $ (0.14)       $ 0.21        $ (2.10)       $ 0.78  

Diluted

     $ (0.14)       $ 0.20        $ (2.10)       $ 0.78  

 

(1) Represents dividends paid and undistributed earnings allocated to nonvested restricted stock awards.
(2) Represents the effect of the assumed exercise of warrants, assumed exercise of stock options, vesting of non-participating restricted shares, and vesting of restricted stock units, based on the treasury stock method.

The following table presents the weighted average outstanding securities that were not included in the computation of diluted earnings per common share because their effect would be anti-dilutive for the three and nine months ended September 30, 2009 and 2008.

(in thousands)

 

         Three months ended    
September 30,
       Nine months ended    
September 30,
     2009    2008    2009    2008

Stock options

   1,778      1,200      1,844      1,133  

CPP warrant

   1,703      -          2,047      -      

Non-participating, nonvested restricted shares

   16      25      18      27  

Restricted stock units

   96      -          111      4  
                   
   3,593      1,225      4,020      1,164  
                   

Note 14 – Segment Information

The Company operates three primary segments: Community Banking, Mortgage Banking and Retail Brokerage. The Community Banking segment’s principal business focus is the offering of loan and deposit products to business and retail customers in its primary market areas. As of September 30, 2009, the Community Banking segment operated 153 locations throughout Oregon, Northern California and Washington.

The Mortgage Banking segment, which operates as a division of the Bank, originates, sells and services residential mortgage loans.

The Retail Brokerage segment consists of the operations of Umpqua Investments, which offers a full range of retail brokerage services and products to its clients who consist primarily of individual investors. The Company accounts for intercompany fees and services between Umpqua Investments and the Bank at estimated fair value according to regulatory requirements for services provided. Intercompany items relate primarily to management services, referral fees and interest on intercompany borrowings.

 

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Summarized financial information concerning the Company’s reportable segments and the reconciliation to the consolidated financial results is shown in the following tables:

Segment Information

(in thousands)

 

     Three Months Ended September 30, 2009
           Community      
Banking
   Retail
    Brokerage    
       Mortgage    
Banking
       Consolidated    
      

Interest income

     $             103,805        $                     46        $             3,237        $             107,088  

Interest expense

     24,463        -             863        25,326  
      

Net interest income

     79,342        46        2,374        81,762  

Provision for loan and lease losses

     52,108        -             -             52,108  

Non-interest income

     11,525        2,090        4,310        17,925  

Non-interest expense

     61,964        3,130        3,255        68,349  
      

(Loss) income before income taxes

     (23,205)       (994)       3,429        (20,770) 

(Benefit from) provision for income taxes

     (14,593)       (405)       1,372        (13,626) 
      

Net (loss) income

     (8,612)       (589)       2,057        (7,144) 

Preferred stock dividends

     3,225        -             -             3,225  

Dividends and undistributed earnings allocated to participating securities

     7        -             -             7  
      

Net (loss) earnings available to common shareholders

     $ (11,844)       $ (589)       $ 2,057        $ (10,376) 
      
     Nine Months Ended September 30, 2009
     Community
Banking
   Retail
Brokerage
   Mortgage
Banking
   Consolidated
      

Interest income

     $ 306,589        $ 76        $ 9,582        $ 316,247  

Interest expense

     77,267        -             2,816        80,083  
      

Net interest income

     229,322        76        6,766        236,164  

Provision for loan and lease losses

     140,531        -             -             140,531  

Non-interest income

     39,117        6,629        14,746        60,492  

Non-interest expense

     287,753        8,423        10,727        306,903  
      

(Loss) income before income taxes

     (159,845)       (1,718)       10,785        (150,778) 

(Benefit from) provision for income taxes

     (27,713)       (695)       4,314        (24,094) 
      

Net (loss) income

     (132,132)       (1,023)       6,471        (126,684) 

Preferred stock dividends

     9,632        -             -             9,632  

Dividends and undistributed earnings allocated to participating securities

     22        -             -             22  
      

Net (loss) earnings available to common shareholders

     $ (141,786)       $ (1,023)       $ 6,471        $ (136,338) 
      
     Three Months Ended September 30, 2008
     Community
Banking
   Retail
Brokerage
   Mortgage
Banking
   Consolidated
      

Interest income

     $ 106,841        $ 9        $ 2,872        $ 109,722  

Interest expense

     34,841        -             1,173        36,014  
      

Net interest income

     72,000        9        1,699        73,708  

Provision for loan and lease losses

     35,454        -             -             35,454  

Non-interest income

     33,157        2,442        1,065        36,664  

Non-interest expense

     54,208        2,195        2,087        58,490  
      

Income before income taxes

     15,495        256        677        16,428  

Provision for income taxes

     3,667        103        271        4,041  
      

Net income

     11,828        153        406        12,387  

Preferred stock dividends

     -             -             -             -       

Dividends and undistributed earnings allocated to participating securities

     37        -             -             37  
      

Net earnings available to common shareholders

     $ 11,791        $ 153        $ 406        $ 12,350  
      

 

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Table of Contents
     Nine Months Ended September 30, 2008
           Community      
Banking
   Retail
    Brokerage    
       Mortgage    
Banking
       Consolidated    
      

Interest income

     $             326,590        $                     26        $             9,272        $             335,888  

Interest expense

     114,561        -             4,064        118,625  
      

Net interest income

     212,029        26        5,208        217,263  

Provision for loan and lease losses

     75,723        -             -             75,723  

Non-interest income

     76,306        6,925        3,006        86,237  

Non-interest expense

     147,614        6,428        6,224        160,266  
      

Income before income taxes

     64,998        523        1,990        67,511  

Provision for income taxes

     19,294        207        796        20,297  
      

Net income

     45,704        316        1,194        47,214  

Preferred stock dividends

     -             -             -             -       

Dividends and undistributed earnings allocated to participating securities

     149        -             -             149
      

Net earnings available to common shareholders

     $ 45,555        $ 316        $ 1,194        $ 47,065  
      

(in thousands)

 

     September 30, 2009
           Community        
Banking
   Retail
    Brokerage    
       Mortgage    
Banking
       Consolidated    
      

Total assets

     $          8,962,270          $          13,660          $         228,416          $         9,204,346    

Total loans

     $         5,880,007          $ -             $ 191,035          $ 6,071,042    

Total deposits

     $         7,198,830          $ -             $ 16,991          $ 7,215,821    
     December 31, 2008
           Community      
Banking
   Retail
    Brokerage    
       Mortgage    
Banking
       Consolidated    
      

Total assets

     $         8,376,734          $ 7,656          $ 213,160          $ 8,597,550    

Total loans

     $         5,951,047          $ -             $ 180,327          $ 6,131,374    

Total deposits

     $         6,582,440          $ -             $ 6,495          $ 6,588,935    

 

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Note 15 – Fair Value Measurement

The following table presents estimated fair values of the Company’s financial instruments as of September 30, 2009 and December 31, 2008, whether or not recognized or recorded at fair value in the consolidated balance sheets:

(in thousands)

 

     September 30, 2009    December 31, 2008
     Carrying
Value
   Fair
Value
   Carrying
Value
   Fair
Value

FINANCIAL ASSETS:

           

Cash and cash equivalents

     $ 370,985        $ 370,985        $ 204,676        $ 204,676  

Trading securities

     1,912        1,912        1,987        1,987  

Securities available for sale

     1,848,482        1,848,482        1,238,712        1,238,712  

Securities held to maturity

     6,211        6,225        15,812        8,379  

Loans held for sale

     23,614        23,614        22,355        22,355  

Loans and leases, net

     5,967,906        5,277,057        6,035,509        5,515,970  

Restricted equity securities

     15,211        15,211        16,491        16,491  

Mortgage servicing rights

     11,552        11,552        8,205        8,205  

Bank owned life insurance assets

     85,984        85,984        83,666        83,666  

Derivatives

     736        736        1,321        1,321  

Visa Class B common stock

     -             15,279        -             12,536  

FINANCIAL LIABILITIES:

           

Deposits

     $       7,215,821        $       7,217,808        $       6,588,935        $       6,605,170  

Securities sold under agreement to repurchase

     50,031        50,031        47,588        47,588  

Term debt

     76,329        77,759        206,531        208,998  

Junior subordinated debentures, at fair value

     81,992        81,992        92,520        92,520  

Junior subordinated debentures, at amortized cost

     103,269        66,431        103,655        77,426  

Derivatives

     563        563        586        586  

 

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Table of Contents

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008:

(in thousands)

 

     Fair Value at September 30, 2009
Description    Total    Level 1    Level 2    Level 3

Trading securities

           

Obligations of states and political subdivisions

     $ 440          $       440        $           -             $           -       

Equity securities

     1,344          1,344        -             -       

Other investments securities(1)

     128          128        -             -       

Available for sale securities

           

U.S. Treasury and agencies

     11,880          -             11,880        -       

Obligations of states and political subdivisions

     208,925          -             208,925        -       

Residential mortgage-backed securities and collateralized mortgage obligations

           1,625,515          -             1,625,515        -       

Other debt securities

     145          -             145        -       

Investments in mutual funds and other equity securities

     2,017          -             2,017        -       

Mortgage servicing rights, at fair value

     11,552          -             -             11,552  

Derivatives

     736          -             736        -       
                           

Total assets measured at fair value

     $ 1,862,682          $ 1,912        $       1,849,218        $ 11,552  
                           

Junior subordinated debentures, at fair value

     $ 81,992          $           -             $           -             $ 81,992  

Derivatives

     563          -             563        -       
                           

Total liabilities measured at fair value

     $ 82,555          $           -             $ 563        $ 81,992  
                           
     Fair Value at December 31, 2008
Description    Total    Level 1    Level 2    Level 3

Trading securities

           

Obligations of states and political subdivisions

     $ 1,054          $ 1,054        $           -             $           -       

Equity securities

     803          803        -             -       

Other investments securities(1)

     130          130        -             -       

Available for sale securities

           

U.S. Treasury and agencies

     31,226          -             31,226        -       

Obligations of states and political subdivisions

     179,585          -             179,585        -       

Residential mortgage-backed securities and collateralized mortgage obligations

     1,025,295          -             1,025,295        -       

Other debt securities

     634          -             634        -       

Investments in mutual funds and other equity securities

     1,972          -             1,972        -       

Mortgage servicing rights, at fair value

     8,205          -             8,205        -       

Derivatives

     1,321          -             1,321        -       
                           

Total assets measured at fair value

     $ 1,250,225          $ 1,987        $ 1,248,238        $ -       
                           

Junior subordinated debentures, at fair value

     $ 92,520          $           -             $           -             $ 92,520  

Derivatives

     586          -             586        -       
                           

Total liabilities measured at fair value

     $ 93,106          $           -             $ 586        $ 92,520  
                           

 

(1) Principally represents U.S. Treasury and agencies or residential mortgage-backed securities issued or guaranteed by governmental agencies.

The following methods were used to estimate the fair value of each class of financial instrument above:

Cash and Cash Equivalents—For short-term instruments, including cash and due from banks, and interest-bearing deposits with banks, the carrying amount is a reasonable estimate of fair value.

 

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Securities—Fair values for investment securities are based on quoted market prices when available or through the use of alternative approaches, such as matrix or model pricing, or broker indicative bids, when market quotes are not readily accessible or available.

Loans Held For Sale—For loans held for sale, carrying value approximates fair value.

Loans—Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, including commercial, real estate and consumer loans. Each loan category is further segregated by fixed and variable rate, performing and nonperforming categories. The carrying values of variable rate real estate construction and development loans are discounted by a liquidity adjustment related to the current market environment. For the remaining variable rate loans, carrying value approximates fair value. The fair value of fixed rate loans is calculated by discounting contractual cash flows at rates which similar loans are currently being made and a liquidity adjustment related to the current market environment. The fair value of non-accrual loans are discounted further by a liquidity adjustment given the current market conditions.

Restricted Equity Securities—The carrying value of restricted equity securities approximates fair value as the shares can only be redeemed by the issuing institution at par.

Mortgage Servicing Rights—The fair value of mortgage servicing rights is estimated using a discounted cash flow model. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income. This model is periodically validated by an independent external model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. Due to the limited observability of all significant inputs utilized in the valuation model, particularly the discount rate and projected constant prepayment rate, and how changes in these assumptions could potentially impact the ending valuation of this asset, as well as the lack of readily available quotes or observable trades of similar assets in the current period, we have classified this as a Level 3 fair value measure in the third quarter of 2009. The transfer into Level 3 did not result in any changes in the methodology applied or the amount of realized or unrealized gains or losses recognized in the period. Management believes the significant inputs utilized are indicative of those that would be used by market participants.

Bank Owned Life Insurance Assets— Fair values of insurance policies owned are based on the insurance contract’s cash surrender value.

Deposits—The fair value of deposits with no stated maturity, such as non-interest-bearing deposits, savings and interest checking accounts, and money market accounts, is equal to the amount payable on demand as of September 30, 2009 and December 31, 2008. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Securities Sold under Agreements to Repurchase and Federal Funds Purchased—For short-term instruments, including securities sold under agreements to repurchase and federal funds purchased, the carrying amount is a reasonable estimate of fair value.

Term Debt—The fair value of medium term notes is calculated based on the discounted value of the contractual cash flows using current rates at which such borrowings can be obtained.

Junior Subordinated Debentures—The fair value of junior subordinated debentures is estimated using an income approach valuation technique. The ending carrying (fair) value of the junior subordinated debentures measured at fair value represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants. Due to the increasing credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads, we have classified this as a Level 3 fair value measure since the third quarter of 2008. In the second quarter of 2009, due to continued inactivity in the junior subordinated debenture and related markets and clarified guidance relating to the determination of fair value when the volume and level of activity for an asset or liability have significantly decreased or where transactions are not orderly, management evaluated and determined to rely on a third-party pricing service to estimate the fair value of these liabilities. The pricing service utilizes an income approach valuation technique, specifically an option-adjusted spread (“OAS”) valuation model. This OAS model values the cash flows over multiple interest rate scenarios and discounts these cash flows using a credit risk adjustment spread over the three month LIBOR swap curve. Prior to the second quarter of 2009, we estimated the fair value of junior subordinated debentures using an internal discounted cash flow model. The OAS model currently being utilized is more sophisticated and computationally intensive than the model previously used; however, the models react similarly to changes in the underlying inputs, and the results are considered comparable.

Derivative Instruments—The fair value of the derivative instruments is estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate.

 

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Visa Class B Common Stock—The fair value of Visa Class B common stock is estimated by applying a 19% discount to the value of the unredeemed Class A equivalent shares. The discount is determined by a third-party and primarily represents the risk related to the further potential reduction of the conversion ratio between Class B and Class A shares and a liquidity risk premium.

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine months ended September 30, 2009 and 2008. The amount included in the “Transfers into Level 3” column represents the beginning balance of an item in the period for which it is designated as a Level 3 fair value measure.

(in thousands)

 

Three months ended
September 30,                    

   Beginning
Balance
   Change
included in
earnings
   Purchases,
issuances and
settlements
   Transfers
into Level 3
   Ending
Balance
   Net change in
unrealized gains
or losses relating 
to items held at
end of period

2009

                 

Mortgage servicing rights

     $           -             $ (802)       $ 1,723        $ 10,631        $ 11,552        $ (349) 

Junior subordinated debentures

     83,036        109        (1,153)       -             81,992        109  

2008

                 

Junior subordinated debentures

     $           -             $ (23,470)       $ (1,822)       $ 126,539        $ 101,247        $ (23,470) 

(in thousands)

 

Nine months ended
September 30,                    

   Beginning
Balance
   Change
included in
earnings
   Purchases,
issuances and
settlements
   Transfers
into Level 3
   Ending
Balance
   Net change in
unrealized gains
or losses relating 
to items held at
end of period

2009

                 

Mortgage servicing rights

     $           -             $ (802)       $ 1,723        $ 10,631        $ 11,552        $ (349) 

Junior subordinated debentures

     92,520        (6,360)       (4,168)       -             81,992        (6,360) 

2008

                 

Junior subordinated debentures

     $           -             $ (23,470)       $ (1,822)       $ 126,539        $ 101,247        $ (23,470) 

Gains (losses) on mortgage servicing rights carried at fair value are recorded in mortgage banking revenue within other non-interest income. Gains resulting from the widening of the credit risk adjusted spread and changes in the three month LIBOR swap curve are recorded as gains on junior subordinated debentures carried at fair value within other non-interest income. The contractual interest expense on the junior subordinated debentures is recorded on an accrual basis as interest on junior subordinated debentures within interest expense. Settlements represent the payment of accrued interest that is embedded in the fair value of the liability.

Management believes that the credit risk adjusted spread being utilized is indicative of the nonperformance risk premium a willing market participant would require under current market conditions, that is, the inactive market. Management attributes the change in fair value of the junior subordinated debentures during the period to market changes in the nonperformance expectations and pricing of this type of debt, and not as a result of changes to our entity-specific credit risk. The widening of the credit risk adjusted spread above the Company’s contractual spreads has primarily contributed to the positive fair value adjustments. Future contractions in the credit risk adjusted spread relative to the spread currently utilized to measure the Company’s junior subordinated debentures at fair value as of September 30, 2009, or the passage of time, will result in negative fair value adjustments. Generally, an increase in the credit risk adjusted spread and/or a decrease in the three month LIBOR swap curve will result in positive fair value adjustments. Conversely, a decrease in the credit risk adjusted spread and/or an increase in the three month LIBOR swap curve will result in negative fair value adjustments.

Additionally, from time to time, certain assets are measured at fair value on a nonrecurring basis. These adjustments to fair value generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairment. The following table presents information about the Company’s assets and liabilities measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported upon.

 

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(in thousands)

 

     September 30, 2009
Description    Total    Level 1    Level 2    Level 3

Investment securities, held to maturity

           

Residential mortgage-backed securities and collateralized mortgage obligations

     $ 2,937        $             -             $             -             $ 2,937  

Loans and leases

     81,737                    -                         -             81,737  

Goodwill

     607,307                    -                         -             607,307  

Other real estate owned

     6,916                    -                         -             6,916  
                           
     $       698,897        $             -             $             -             $       698,897  
                           
     December 31, 2008
Description    Total    Level 1    Level 2    Level 3

Investment securities, held to maturity

           

Residential mortgage-backed securities and collateralized mortgage obligations

     $ 169        $             -             $             -             $ 169  

Other debt securities

     150                    -                         -             150  

Loans and leases

     65,752                    -                         -             65,752  

Goodwill

     2,715                    -                         -             2,715  

Other real estate owned

     4,251                    -                         -             4,251  
                           
     $       73,037        $             -             $             -             $       73,037  
                           

The following table presents the losses resulting from nonrecurring fair value adjustments for the three and nine months ended September 30, 2009 and 2008:

(in thousands)

 

     Three months ended
September 30,
   Nine months ended
September 30,
     2009    2008    2009    2008

Investment securities, held to maturity

           

Residential mortgage-backed securities and collateralized mortgage obligations

     $ 4        $ 2,226        $ 9,520        $ 2,226  

Other debt securities

                 -             225                    -             225  

Loans and leases

     46,671        16,233        125,981        57,147  

Goodwill

                 -                         -             111,952                    -       

Other real estate owned

     4,595        800        7,171        2,432  
                           

Total loss from nonrecurring measurements

     $       51,270        $       19,484        $       254,624        $       62,030  
                           

The investment securities held to maturity above represent 29 non-agency collateralized mortgage obligations where other-than-temporary impairment (“OTTI”) has been identified and the investments have been adjusted to fair value. The fair value of these investments securities were obtained from third-party pricing services using matrix or model pricing methodologies and were corroborated by broker indicative bids. While we do not expect to recover the entire amortized cost basis of these securities, as we intend to hold these securities to maturity and it is not likely that we will be required to sell these securities before maturity, only the credit loss component of the impairment is recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. The remaining impairment loss related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to a separate component other comprehensive income (“OCI”). We estimate the cash flows of the underlying collateral within each security considering credit, interest and prepayment risk models that incorporate management’s estimate of projected key assumptions including prepayment rates, collateral default rates and loss severity. Assumptions utilized vary from security to security, and are influenced by factors such as loan interest rates, geographic location, borrower characteristics and vintage, and historical experience. We then use a third party to obtain information about the structure of each security, including subordination and other credit enhancements, in order to determine how the underlying collateral cash flows will be distributed to each security issued in the structure. These cash flows are then discounted at the interest rate used to recognize interest income on each security.

The loans and leases amount above represents impaired, collateral dependent loans that have been adjusted to fair value. When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If

 

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we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is zero.

The goodwill amount above represents the Community Banking reporting segment for which goodwill has been adjusted to fair value. The Company engaged an independent valuation consultant to assist the Company estimate the fair value of the Community Banking reporting unit in step one of the goodwill impairment test. We utilized a variety of valuation techniques to analyze and measure the estimated fair value of the reporting unit under both the income and market valuation approach. Under the income approach, the fair value of the reporting unit is determined by projecting future earnings for five years, utilizing a terminal value based on expected future growth rates, and applying a discount rate reflective of current market conditions. The estimation of forecasted earning uses management’s best estimates of economic and market conditions over the projected periods and considers estimated growth rates in loans and deposits and future expected changes in net interest margins. Various market-based valuation approaches are utilized and include applying market price to earnings, core deposit premium, and tangible book value multiples as observed from relevant, comparable peer companies of the reporting unit. We also valued the reporting unit by applying an estimated control premium to the market capitalization. Weightings are assigned to each of the aforementioned model results, judgmentally allocated based on the observability and reliability of the inputs, to arrive at a final fair value estimate of the reporting unit. In step two of the goodwill impairment test, we calculated the fair value for the reporting unit’s assets and liabilities, as well as its unrecognized identifiable intangible assets, such as the core deposit intangible and trade name, in order to determine the implied fair value of goodwill. Fair value adjustments to items on the balance sheet primarily related to investment securities held to maturity, loans, other real estate owned, Visa Class B common stock, deferred taxes, deposits, term debt, and junior subordinated debentures carried at amortized cost. The external valuation specialist assisted management to estimate the fair value of our unrecognized identifiable assets, such as the core deposit intangible and trade name. Information relating to our methodologies for estimating the fair value of financial instruments is described above. Additional discussion relating to the significant assumptions utilized by management to estimate fair value in the second step of our goodwill impairment analysis, including the loans receivable portfolio and non-financial instruments, can be found in Note 16 of the Notes to Condensed Consolidated Financial Statements. Through this process, the Company determined that the implied fair value of the reporting unit’s goodwill was less than its carrying amount, and as a result, we recognized a goodwill impairment charge equal to that deficit.

The other real estate owned amount above represents impaired real estate that has been adjusted to fair value. Other real estate owned represents real estate which the Bank has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on other real estate owned for fair value adjustments based on the fair value of the real estate.

Note 16 – Goodwill

The Company performs a goodwill impairment analysis on an annual basis as of December 31. Additionally, the Company performs a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse action or assessment by a regulator; and unanticipated competition.

The goodwill impairment test involves a two-step process. The first step compares the fair value of a reporting unit to its carrying value. If the reporting unit’s fair value is less than its carrying value, the Company would be required to proceed to the second step. In the second step the Company calculates the implied fair value of the reporting unit’s goodwill. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination. The estimated fair value of the Company is allocated to all of the Company’s assets and liabilities, including any unrecognized identifiable intangible assets, as if the Company had been acquired in a business combination and the estimated fair value of the reporting unit is the price paid to acquire it. The allocation process is performed only for purposes of determining the amount of goodwill impairment. No assets or liabilities are written up or down, nor are any additional unrecognized identifiable intangible assets recorded as a part of this process. Any excess of the estimated purchase price over the fair value of the reporting unit’s net assets represents the implied fair value of goodwill. If the carrying amount of the goodwill is greater than the implied fair value of that goodwill, an impairment loss would be recognized as a charge to earnings in an amount equal to that excess.

The Company performed a goodwill impairment analysis of the Community Banking operating segment as of June 30, 2009, due to a further decline in the Company’s market capitalization below book value of equity and continued weakness in the banking industry.

 

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The Company engaged an independent valuation consultant to assist us in determining whether and to what extent our goodwill asset was impaired. The results of the Company’s and valuation specialist’s step one impairment test indicated that the reporting unit’s fair value was less than its carrying value, and therefore the Company performed a step two analysis.

As part of the second step of the goodwill impairment analysis, we calculated the fair value of the reporting unit’s assets and liabilities, as well as its unrecognized identifiable intangible assets, such as the core deposit intangible and trade name. Fair value adjustments to items on the balance sheet primarily related to investment securities held to maturity, loans, other real estate owned, Visa Class B common stock, deferred taxes, deposits, term debt, and junior subordinated debentures carried at amortized cost. The external valuation specialist assisted management to estimate the fair value of our unrecognized identifiable assets, such as the core deposit intangible and trade name.

The most significant fair value adjustment made in this analysis was to adjust the carrying value of the Company’s loans receivable portfolio to fair value. The fair value of the Company’s loan receivable portfolio at June 30, 2009 was estimated in a manner similar to methodology utilized as part of the December 31, 2008 goodwill impairment evaluation. As part of the December 31, 2008 loan valuation, the loan portfolio was stratified into sixty-eight loan pools that shared common characteristics, namely loan type, payment terms, and whether the loans were performing or non-performing. Each loan pool was discounted at a rate that considers current market interest rates, credit risk, and assumed liquidity premiums required based upon the nature of the underlying pool. Due to the disruption in the financial markets experienced during 2008 and continuing through 2009, the liquidity premium reflects the reduction in demand in the secondary markets for all grades of non-conforming credit, including those that are performing. Liquidity premiums for individual loan categories generally ranged from 4.6% for performing loans to 30% for construction and non-performing loans. At December 31, 2008, the fair value of the overall loan portfolio was calculated to be at a 9% discount relative to its book value. The composition of the loan portfolio at June 30, 2009, including loan type and performance indicators, was substantially similar to the loan portfolio at December 31, 2008. At June 30, 2009, the fair value of the loan portfolio was estimated to be at a 12% discount relative to its carrying value. The additional discount is primarily attributed to the additional liquidity premium required as of the measurement date associated with the Company’s concentration of commercial real estate loans.

Other significant fair value adjustments utilized in this goodwill impairment analysis were as follows. The value of the core deposit intangible asset was calculated as 0.53% of core deposits, which includes all deposits except certificates of deposit. The carrying value of other real estate owned was discounted by 25%, representing a liquidity adjustment given the current market conditions. The fair value of our trade name, which represents the competitive advantage associated with our brand recognition and ability to attract and retain relationships, was estimated to be $19.3 million. The fair value of our junior subordinated debentures carried at amortized cost was determined in a manner and utilized inputs, primarily the credit risk adjusted spread, consistent with our methodology for determining the fair value of junior subordinated debentures recorded at fair value. Information relating to our methodologies for estimating the fair value of financial instruments that were adjusted to fair value as part of this analysis, including the Visa Class B common stock, deposits, term debt, and junior subordinated debentures, is included in Note 15 of the Notes to Condensed Consolidated Financial Statements.

Based on the results of the step two analysis, the Company determined that the implied fair value of the goodwill was less than its carrying amount on the Company’s balance sheet, and as a result, recognized a goodwill impairment loss of $112.0 million in the second quarter of 2009. This write-down of goodwill is a non-cash charge that does not affect the Company’s or the Bank’s liquidity or operations. In addition, because goodwill is excluded in the calculation of regulatory capital, the Company’s “well-capitalized” capital ratios are not affected by this charge.

The Company evaluated goodwill for impairment as of September 30, 2009. The first step of the goodwill impairment test indicated that the reporting unit’s fair value was less than its carrying value. In the second step of the goodwill impairment test, the implied fair value of goodwill exceeded the carrying value of goodwill, therefore no further impairment was recognized in the third quarter of 2009. The significant assumptions and methodology utilized to test for goodwill impairment as of September 30, 2009 were substantially similar to those used in the June 30, 2009 evaluation.

If the Company’s common stock price declines further or continues to trade below book value per common share, or should general economic conditions deteriorate further or remain depressed for a prolonged period of time, particularly in the financial industry, the Company may be required to recognize additional impairment of all, or some portion of, its goodwill. It is possible that changes in circumstances, existing at the measurement date or at other times in the future, or changes in the numerous estimates associated with management’s judgments, assumptions and estimates made in assessing the fair value of our goodwill, such as valuation multiples, discount rates, or projected earnings, could result in an impairment charge in future periods. Additional impairment charges, if any, may be material to the Company’s results of operations and financial position. However, any potential future impairment charge will have no effect on the Company’s or the Bank’s cash balances, liquidity, or regulatory capital ratios.

 

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

Forward-Looking Statements

This Report contains certain forward-looking statements, within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. These statements may include statements that expressly or implicitly predict future results, performance or events. Statements other than statements of historical fact are forward-looking statements. In addition, the words “anticipates,” “expects,” believes,” “estimates” and “intends” and words or phrases of similar meaning identify forward-looking statements. We make forward-looking statements regarding projected sources of funds, adequacy of our allowance for loan and lease losses and provision for loan and lease losses, dividends, the commercial real estate portfolio and subsequent charge-offs. Forward-looking statements involve substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the control of Umpqua. Risks and uncertainties include those set forth in our filings with the SEC and the following factors that might cause actual results to differ materially from those presented:

 

   

Our ability to attract new deposits and loans

   

Demand for financial services in our market areas

   

Competitive market pricing factors

   

Deterioration in economic conditions that could result in increased loan and lease losses

   

Risks associated with concentrations in real estate related loans

   

Market interest rate volatility

   

Stability of funding sources and continued availability of borrowings

   

Changes in legal or regulatory requirements or the results of regulatory examinations that could restrict growth

   

Our ability to recruit and retain certain key management and staff

   

Risks associated with merger and acquisition integration

   

Significant decline in the market value of the Company that could result in an impairment of goodwill

   

Our ability to raise capital or incur debt on reasonable terms

   

Regulatory limits on the Bank’s ability to pay dividends to the Company

   

Effectiveness of the Emergency Economic Stabilization Act of 2008 (the “EESA”) and other legislative and regulatory efforts to help stabilize the U.S. financial markets

   

Future legislative or administrative changes to the TARP Capital Purchase Program enacted under the EESA

   

The impact of the EESA and the American Recovery and Reinvestment Act (“ARRA”) and related rules and regulations on the Company’s business operations and competitiveness, including the impact of executive compensation restrictions, which may affect the Company’s ability to retain and recruit executives in competition with other firms who do not operate under those restrictions.

There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. We do not intend to update these forward-looking statements. Readers should consider any forward-looking statements in light of this explanation, and we caution readers about relying on forward-looking statements.

General

Umpqua Holdings Corporation (referred to in this report as “we,” “our,” “Umpqua,” and “the Company”), an Oregon corporation, is a financial holding company with two principal operating subsidiaries, Umpqua Bank (the “Bank”) and Umpqua Investments, Inc. (“Umpqua Investments”). Prior to July 2009, Umpqua Investments was known as Strand, Atkinson, Williams & York, Inc.

Our headquarters are located in Portland, Oregon, and we engage primarily in the business of commercial and retail banking and the delivery of retail brokerage services. The Bank provides a wide range of banking, mortgage banking and other financial services to corporate, institutional and individual customers. Along with our subsidiaries, we are subject to the regulations of state and federal agencies and undergo periodic examinations by these regulatory agencies.

We are considered one of the most innovative community banks in the United States, combining a retail product delivery approach with an emphasis on quality-assured personal service. The Bank has evolved from a traditional community bank into a community-oriented financial services retailer by implementing a variety of retail marketing strategies to increase revenue and differentiate ourselves from our competition.

Umpqua Investments is a registered broker-dealer and investment advisor with offices in Portland, Eugene, and Medford, Oregon, and in many Umpqua Bank stores. The firm is one of the oldest investment companies in the Northwest and is active in many community events. Umpqua Investments offers a full range of investment products and services including: stocks, fixed income securities (municipal, corporate, and government bonds, CDs, and money market instruments), mutual funds, annuities, options, retirement planning, money management services, life insurance, disability insurance and medical supplement policies.

 

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Executive Overview

Significant items for the third quarter of 2009 were as follows:

 

   

In August 2009, the Company raised $258.7 million through a public offering by issuing 26,538,461 shares of common stock. After deducting underwriting discounts and commissions and offering expenses, net proceeds to the Company were $245.7 million. The proceeds from the offering qualify as Tier 1 capital and will be used for general corporate purposes.

 

   

Net loss per diluted common share was $0.14 and $2.10 for the three and nine months ended September 30, 2009, as compared to earnings per diluted common share of $0.20 and $0.78 for the three and nine months ended September 30, 2008. Operating loss per diluted common share, defined as earnings available to common shareholders before merger related expenses, net of tax, and goodwill impairment divided by the same diluted share total used in determining diluted earnings per common share, was $0.14 and $0.37 for the three and nine months ended September 30, 2009, as compared to operating income per diluted common share of $0.20 and $0.78 for the three and nine months ended September 30, 2008. Operating income per diluted share is considered a “non-GAAP” financial measure. More information regarding this measurement and reconciliation to the comparable GAAP measurement is provided under the heading Results of Operations—Overview below.

 

   

Non-performing assets decreased to $156.0 million, or 1.70% of total assets, as of September 30, 2009, as compared to $161.3 million, or 1.88% of total assets as of December 31, 2008. Non-performing loans decreased to $129.3 million, or 2.13% of total loans, as of September 30, 2009, as compared to $133.4 million, or 2.18% of total loans, as of December 31, 2008. Non-accrual loans have been written-down to their estimated net realizable values.

 

   

Net charge-offs were $47.3 million for the three months ended September 30, 2009, or 3.07% of average loans and leases (annualized), as compared to net charge-offs of $15.2 million, or 0.98% of average loans and leases (annualized), for the three months ended September 30, 2008. Net charge-offs were $133.3 million for the nine months ended September 30, 2009, or 2.91% of average loans and leases (annualized), as compared to net charge-offs of $66.6 million, or 1.46% of average loans and leases (annualized), for the nine months ended September 30, 2008.

 

   

The provision for loan and lease losses was $52.1 million and $140.5 million for the three and nine months ended September 30, 2009, respectively, as compared to the $35.5 million and $75.7 million recognized for the three and nine months ended September 30, 2008, respectively. This resulted from the increase in net charge-offs and non-performing loans, and downgrades within the portfolio between the two periods.

 

   

We recorded gains of $982,000 and $10.2 million representing the change in fair value on our junior subordinated debentures measured at fair value in the three and nine months ended September 30, 2009, respectively, compared to gains of $25.3 million and $30.2 million in the three and nine months ended September 30, 2008, respectively. The gains recognized during these periods primarily resulted from the widening of the credit risk adjusted rate spread above the Company’s contractual spreads.

 

   

Mortgage banking revenue was $4.3 million and $14.6 million for the three and nine months ended September 30, 2009, respectively, compared to $1.0 million and $2.8 million for the three and nine months ended September 30, 2008. Closed mortgage volume increased 127% in the current year-to-date over the prior year same period due to a significant increase in purchase and refinancing activity, resulting from historically low mortgage interest rates. Additionally, the prior period’s revenue includes a $2.4 million charge on an ineffective mortgage servicing right (“MSR”) hedge, which has been suspended, due to widening spreads and price declines that were not offset by a corresponding gain in the related MSR asset.

 

   

Net loss on investment securities of $1.1 million for the nine months ended September 30, 2009 includes other-than-temporary impairment (“OTTI”) charges of $9.8 million, which primarily relate to non-agency collateralized mortgage obligations. The impairment charge was offset by gains on the sale of securities of $8.7 million.

 

   

FDIC assessments increased to $3.3 million and $12.6 million for the three and nine months ended September 30, 2009, respectively, compared to $1.3 million and $3.8 million for the three and nine months ended September 30, 2008, respectively. These increases result from an industry-wide increase in assessment rates and a $4.0 million special assessment incurred in the second quarter of 2009 imposed by the FDIC in efforts to rebuild the Deposit Insurance Fund.

 

   

Net interest margin, on a tax equivalent basis, decreased to 4.05% and 4.11% for the three and nine months ended September 30, 2009, respectively, compared to 4.12% and 4.08% for the same periods a year ago. The decrease in net interest margin resulted from holding higher levels of interest bearing cash, which bear lower yields than other interest earning assets, and interest reversals resulting from new non-accrual loans. Excluding interest reversals on loans of $1.2 million and $3.0 million for the three and nine months ended September 30, 2009, net interest margin would have increased 6 basis points to 4.11% and increased 5 basis points to 4.16%, respectively.

 

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Total risk based capital increased to 17.6% as of September 30, 2009, compared to 14.6% as of December 31, 2008, primarily due to the successful public stock offering completed in August 2009.

 

   

Total gross loans and leases were $6.1 billion as of September 30, 2009, a decrease of $60.3 million, or 1.3% annualized, as compared to December 31, 2008. This decrease is principally attributable to charge-offs of $135.4 million and transfers to other real estate owned of $34.4 million, offset by net loan originations of $101.5 million during the period.

 

   

Total deposits were $7.2 billion as of September 30, 2009, an increase of $626.9 million, or 12.7% annualized, as compared to December 31, 2008. Excluding the deposits acquired through the FDIC-assisted purchase and assumption of the Bank of Clark County, the organic deposit growth rate was 9.3% annualized. Deposits increased $401.1 million in the third quarter of 2009 as a result of successful summer season deposit promotions.

 

   

Total consolidated assets were $9.2 billion as of September 30, 2009, representing an increase of $606.8 million compared to December 31, 2008. The increase is primarily attributable to the increase in deposits and the proceeds received from the public offering of common stock in the third quarter of 2009.

 

   

Cash dividends declared in the third quarter of 2009 were $0.05 per common share, consistent with the amounts declared since the fourth quarter of 2008.

Summary of Critical Accounting Policies

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements for the year ended December 31, 2008 included in the Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 26, 2009. Not all of these critical accounting policies require management to make difficult, subjective or complex judgments or estimates. Management believes that the following policies would be considered critical under the SEC’s definition.

Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments

The Bank performs regular credit reviews of the loan and lease portfolio to determine the credit quality and adherence to underwriting standards. When loans and leases are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the credit review process. The Company’s risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the allowance for loan and lease losses. The Bank has a management Allowance for Loan and Lease Losses (“ALLL”) Committee, which is responsible for, among other things, regularly reviewing the ALLL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status. The ALLL Committee also approves removing loans and leases from impaired status. The Bank’s Audit and Compliance Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology on a quarterly basis.

Each risk rating is assessed an inherent credit loss factor that determines the amount of the allowance for loan and lease losses provided for that group of loans and leases with similar risk rating. Credit loss factors may vary by region based on management’s belief that there may ultimately be different credit loss rates experienced in each region.

Regular credit reviews of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired when based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we either recognize an impairment reserve as a specific component to be provided for in the allowance for loan and lease losses or charge-off the impaired balance on collateral dependent loans if it is determined that such amount represents a confirmed loss. The combination of the risk rating-based allowance component and the impairment reserve allowance component lead to an allocated allowance for loan and lease losses.

The Bank may also maintain an unallocated allowance amount to provide for other credit losses inherent in a loan and lease portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less than 5% of the allowance, but may be maintained at higher levels during times of deteriorating economic conditions characterized by falling real estate values. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends.

 

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The reserve for unfunded commitments (“RUC”) is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line of credit. The adequacy of the ALLL 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.

Management believes that the ALLL was adequate as of September 30, 2009. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review. Approximately 80% 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 and lease losses. Over the last two years, there has been deterioration in the residential development market which has led to an increase in non-performing loans and the allowance for loan and lease losses. A continued deterioration in this market or deterioration in other segments of our loan portfolio, such as commercial real estate or commercial construction, may lead to additional charges to the provision for loan and lease losses.

Mortgage Servicing Rights (“MSR”)

In accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 860, Transfers and Servicing, the Company determines its classes of servicing assets based on the asset type being serviced along with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value the servicing assets. The Company elected to measure its residential mortgage servicing assets at fair value and to report changes in fair value through earnings. Fair value adjustments encompass market-driven valuation changes and the runoff in value that occurs from the passage of time, which are separately reported. Under the fair value method, the MSR, net, is carried in the balance sheet at fair value and the changes in fair value are reported in earnings under the caption mortgage banking revenue in the period in which the change occurs.

Retained mortgage servicing rights are measured at fair values on the date of sale. We use quoted market prices when available. Subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of the MSR, the present value of expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income. This model is periodically validated by an independent external model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys.

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, which we base on current market rates. 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. Additional information is included in Note 5 of the Notes to Consolidated Financial Statements.

Valuation of Goodwill and Intangible Assets

At September 30, 2009, we had $641.8 million in goodwill and other intangible assets as a result of business combinations. Goodwill and other intangible assets with indefinite lives are not amortized but instead are periodically tested for impairment. Management performs an impairment analysis for the intangible assets with indefinite lives on an annual basis as of December 31. Additionally, goodwill and other intangible assets with indefinite lives are evaluated on an interim basis when events or circumstance indicate impairment potentially exists. As a result of the year-end analysis in 2008, management determined that there was a $1.0 million impairment related to the Retail Brokerage reporting segment as of December 31, 2008, which resulted from the Company’s evaluation following the departure of certain Umpqua Investments financial advisors. The valuation of the impairment at the Retail Brokerage operating segment was determined using an income approach by discounting cash flows of forecasted earnings. The remaining balance of goodwill and other intangible assets relate to the Community Banking reporting segment. The Company performed a goodwill impairment analysis of the Community Banking reporting segment as of June 30, 2009, due to a further decline in the Company’s market capitalization below the book value of equity and continued weakness in the banking industry. The Company engaged an independent valuation consultant to assist us in determining whether and to what extent our goodwill asset was impaired. The valuation of the reporting unit was determined using discounted cash flows of forecasted earnings, estimated sales price multiples based on recent observable market transactions and market capitalization based on current stock price. The results of the Company’s and valuation specialist’s step one test indicated that the reporting unit’s fair value was less than its carrying value, and therefore the Company performed a step two analysis. In the step two analysis, we calculated the fair value for the reporting unit’s assets and liabilities, as well as its unrecognized identifiable intangible assets, such as the core deposit intangible and trade name, in

 

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order to determine the implied fair value of goodwill. Fair value adjustments to items on the balance sheet primarily related to investment securities held to maturity, loans, other real estate owned, Visa Class B common stock, deferred taxes, deposits, term debt, and junior subordinated debentures. Based on the results of the step two analysis, the Company determined that the implied fair value of the goodwill was greater than its carrying amount on the Company’s balance sheet, and as a result, recognized a goodwill impairment loss of $112.0 million. This write-down of goodwill is a non-cash charge that does not affect the Company’s or the Bank’s liquidity or operations. In addition, because goodwill is excluded in the calculation of regulatory capital, the Company’s “well-capitalized” capital ratios are not affected by this charge. The Company evaluated the Community Banking reporting segment as of September 30, 2009. Step one of the goodwill impairment test indicated that the reporting unit’s fair value continued to be less than its carrying value, therefore the Company performed a step two analysis. In the step two analysis, the implied fair value fair value of goodwill exceeded the carrying value of goodwill, therefore no impairment was recognized in the current quarter. The impairment analysis requires management to make subjective judgments. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount rates and specific industry and market conditions. There can be no assurance that changes in circumstances, estimates or assumption may result in additional impairment of all, or some portion of, goodwill.

Stock-based Compensation

Consistent with the provisions of FASB ASC 718, Stock Compensation, a revision to the previously issued guidance on accounting for stock options and other forms of equity-based compensation, we recognize expense for the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over the employees’ requisite service period (generally the vesting period). The requisite service period may be subject to performance conditions. The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. Management assumptions utilized at the time of grant impact the fair value of the option calculated under the Black-Scholes methodology, and ultimately, the expense that will be recognized over the life of the option. Additional information is included in Note 11 of the Notes to Condensed Consolidated Financial Statements.

Fair Value

FASB ASC 820, FairValue Measurements and Disclosures, which among other things, requires enhanced disclosures about financial instruments carried at fair value. FASB ASC 820 establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. See Note 15 of the Notes to Condensed Consolidated Financial Statements for additional information about the level of pricing transparency associated with financial instruments carried at fair value.

Recent Accounting Pronouncements

In December 2007, FASB revised FASB ASC 805, Business Combinations. FASB ASC 805 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquired entity and the goodwill acquired. Furthermore, acquisition-related and other costs will now be expensed rather than treated as cost components of the acquisition. FASB ASC 805 also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. The revision to this guidance applies prospectively to business combinations for which the acquisition date occurs on or after January 1, 2009. We do not expect the adoption of revised FASB ASC 805 will have a material impact on our consolidated financial statements as related to business combinations consummated prior to January 1, 2009. The adoption of these revisions will increase the costs charged to operations for acquisitions consummated on or after January 1, 2009.

In December 2007, FASB amended FASB ASC 810, Consolidation. This amendment establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The standard also requires additional disclosures that clearly identify and distinguish between the interest of the parent’s owners and the interest of the noncontrolling owners of the subsidiary. This statement is effective on January 1, 2009 for the Company, to be applied prospectively. The impact of adoption did not have a material impact on the Company’s consolidated financial statements.

In June 2008, FASB amended FASB ASC 260, Earnings per Share. This amendment concluded that nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This amendment is effective for fiscal years beginning after December 15, 2008, to be applied retrospectively. Certain of the Company’s nonvested restricted stock awards qualify as participating securities as described under this amendment. The adoption of this provision reduced both basic and diluted earnings per common share by $0.01 for the year ended December 31, 2007.

 

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In January 2009, FASB amended FASB ASC 325-40, Investments—Other. This amendment addressed certain practice issues related to the recognition of interest income and impairment on purchased beneficial interests and beneficial interests that continue to be held by a transferor in securitized financial assets, by making its other-than-temporary impairment (“OTTI”) assessment guidance consistent with FASB ASC 320, Investments—Debt and Equity Securities. The amendment removes the reference to the consideration of a market participant’s estimates of cash flows and instead requires an assessment of whether it is probable, based on current information and events, that the holder of the security will be unable to collect all amounts due according to the contractual terms. If it is probable that there has been an adverse change in estimated cash flows, an OTTI is deemed to exist, and a corresponding loss shall be recognized in earnings equal to the entire difference between the investment’s carrying value and its fair value at the balance sheet date of the reporting period for which the assessment is made. This amendment became effective for interim and annual reporting periods ending after December 15, 2008, and is applied prospectively. The impact of adoption did not have a material impact on the Company’s consolidated financial statements.

In April 2009, FASB amended FASB ASC 820, Fair Value Measurements and Disclosures, to address issues related to the determination of fair value when the volume and level of activity for an asset or liability has significantly decreased, and identifying transactions that are not orderly. The revisions affirm the objective that fair value is the price that would be received to sell an asset in an orderly transaction (that is not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions, even if the market is inactive. The amendment provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have decreased significantly. It also provides guidance on identifying circumstances that indicate a transaction is not orderly. If determined that a quoted price is distressed (not orderly), and thereby not representative of fair value, the entity may need to make adjustments to the quoted price or utilize an alternative valuation technique (e.g. income approach or multiple valuation techniques) to determine fair value. Additionally, an entity must incorporate appropriate risk premium adjustments, reflective of an orderly transaction under current market conditions, due to uncertainty in cash flows. The revised guidance requires disclosures in interim and annual periods regarding the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. It also requires financial institutions to disclose the fair values of investment securities by major security type. The changes are effective for the interim reporting period ending after June 15, 2009, and are to be applied prospectively. The adoption of these amendments impacted the Company’s determination of fair value related to our junior subordinated debentures measured at fair value. As of March 31, 2009, prior to the adoption of these amendments, we discounted these liabilities by the current three month LIBOR plus a credit risk adjusted spread of 500 basis points. Due to the lack of observable, orderly transactions, of either new issuances or trades, we estimated that a market participant would utilize a credit risk adjusted spread of 500 basis points if an actual market transaction in an active market were to take place for an entity with comparable nonperformance risk. The amendments clarify that a fair value measurement shall assume a risk premium market participants would require at a measurement date under current market conditions, even if the market is inactive. With the assistance of a third-party pricing service, we determined that a credit risk adjusted spread of 675 basis points would be representative of the nonperformance risk premium a market participant would require under current market conditions as of June 30, 2009. In accordance with the guidance, this is accounted for as a change in accounting estimate. This increase in the credit risk adjusted spread is the primary factor resulting in the $8.6 million gain on junior subordinated debentures carried at fair value recognized in the three months ending June 30, 2009. The effect of these amendments did not have a significant impact on the fair value measurement of any other assets or liabilities.

In April 2009, FASB revised FASB ASC 320, Investments—Debt and Equity Securities, to change the OTTI model for debt securities. Previously, an entity was required to assess whether it has the intent and ability to hold a security to recovery in determining whether an impairment of that security is other-than-temporary. If the impairment was deemed other-than-temporarily impaired, the investment was written-down to fair value through earnings. Under the revised guidance, OTTI is triggered if an entity has the intent to sell the security, it is likely that it will be required to sell the security before recovery, or if the entity does not expect to recover the entire amortized cost basis of the security. If the entity intends to sell the security or it is likely it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the entity does not intend to sell the security and it is not likely that the entity will be required to sell the security but the entity does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings as an OTTI. The credit loss is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected of a security. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment loss related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, would be recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are to be presented as a separate category within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the OTTI amount recorded in OCI will increase the carrying value of the investment, and would not affect earnings. If there is an indication of additional credit losses the security is reevaluated accordingly based on the procedures described above. Upon adoption of the revised guidance, the noncredit portion of previously recognized OTTI shall be reclassified to accumulated OCI by a cumulative-effect adjustment to the opening

 

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balance of retained earnings. These revisions became effective in the interim reporting period ending after June 15, 2009. Upon adoption of this guidance the Company analyzed the securities for which OTTI had been previously recognized and determined that as of the adoption date such losses were credit related. As such, there was no cumulative effect adjustment to the opening balance of retained earnings or a corresponding adjustment to accumulated OCI.

In April 2009, FASB revised FASB ASC 825, Financial Instruments, to require fair value disclosures in the notes of an entity’s interim financial statements for all financial instruments, whether or not recognized in the statement of financial position. This revision became effective for the interim reporting period ending after June 15, 2009. The adoption of the revised increased interim financial statement disclosures and did not impact on the Company’s consolidated financial statements.

In May 2009, FASB amended FASB ASC 855, Subsequent Events. The updated guidance established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The revisions should not result in significant changes in the subsequent events that an entity reports, either through recognition or disclosure in its financial statements. It does require disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. We adopted the provisions of this guidance for the interim period ended June 30, 2009, and the impact of adoption did not have a material impact on the Company’s consolidated financial statements.

In June 2009, FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an Amendment of FASB Statement No. 140. This statement has not yet been codified into the FASB ASC. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. This statement is effective for annual reporting periods beginning after November 15, 2009, and for interim periods therein. The Company is currently evaluating the impact of the adoption of SFAS No. 166.

In June 2009, FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). This statement has not yet been codified into the FASB ASC. SFAS No. 167 eliminates FASB Interpretations 46(R) (“FIN 46(R)”) exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. SFAS No. 167 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying FIN 46(R) provisions. The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. This statement requires additional disclosures regarding an entity’s involvement in a variable interest entity. This statement is effective for annual reporting periods beginning after November 15, 2009, and for interim periods therein. The Company is currently evaluating the impact of the adoption of SFAS No. 167.

In June 2009, FASB codified FASB ASC 105, Generally Accepted Accounting Principles, to establish the FASB ASC (the “Codification”). The Codification is not expected to change U.S. GAAP, but combines all authoritative standards into a comprehensive, topically organized online database. Following this guidance, the Financial Accounting Standards Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”) to update the Codification. After the launch of the Codification on July 1, 2009 only one level of authoritative U.S. GAAP for non governmental entities will exist, other than guidance issued by the Securities and Exchange Commission. This statement is effective for interim and annual reporting periods ending after September 15, 2009. The adoption of the FASB ASC 105 did not have any impact on the Company’s consolidated financial statements, and only affects how the Company’s references authoritative accounting guidance going forward.

In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value. This update amends FASB ASC 820, Fair Value Measurements and Disclosure, in regards to the fair value measurement of liabilities. FASB ASC 820 clarifies that in circumstances in which a quoted price for a identical liability in an active market in not available, a reporting entity shall utilize one or more of the following techniques: i) the quoted price of the identical liability when traded as an asset, ii) the quoted price for a similar liability or a similar liability when traded as an asset, or iii) another valuation technique that is consistent with the principles of FASB ASC 820. In all instances a reporting entity shall utilize the approach that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. Also, when measuring the fair value of a liability a reporting entity shall not include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update is effective for the Company in the fourth quarter of 2009. We do not expect the adoption of FASB ASU 2009-05 will have a material impact on the Company’s consolidated financial statements.

 

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RESULTS OF OPERATIONS

OVERVIEW

For the three months ended September 30, 2009, net loss available to common shareholders was $10.4 million, or $0.14 per diluted common share, as compared to net earnings available to common shareholders of $12.4 million, or $0.20 per diluted common share for the three months ended September 30, 2008. For the nine months ended September 30, 2009, net loss available to common shareholders was $136.3 million, or $2.10 per diluted common share, as compared to net income available to common shareholders of $47.1 million, or $0.78 per diluted common share for the nine months ended September 30, 2008. The decrease in net income for the three and nine months ended September 30, 2009 compared to the same periods of the prior year is principally attributable to increased provision for loan losses, decreased non-interest income, increased non-interest expense and increased preferred stock dividends, partially offset by increased net interest income. Non-interest expense in the nine months ended September 30, 2009 includes a goodwill impairment charge recognized in the second quarter of $112.0 million related to the Community Banking operating segment. We assumed the insured non-brokered deposit balances and certain other assets of the Bank of Clark County on January 16, 2009 and the results of the acquired operations are included in our financial results starting on January 17, 2009.

We incur significant expenses related to the completion and integration of mergers. Additionally, we may recognize goodwill impairment losses that have no direct effect on the Company’s or the Bank’s cash balances, liquidity, or regulatory capital ratios. Accordingly, we believe that our operating results are best measured on a comparative basis excluding the impact of merger-related expenses, net of tax, and other charges related to business combinations such as goodwill impairment charges. We define operating income as earnings available to common shareholders before merger related expenses, net of tax, and goodwill impairment, and we calculate operating income per diluted share by dividing operating income by the same diluted share total used in determining diluted earnings per common share (see Note 13 of the Notes to Consolidated Financial Statements). Operating income and operating income per diluted share are considered “non-GAAP” financial measures. Although we believe the presentation of non-GAAP financial measures provides a better indication of our operating performance, readers of this report are urged to review the GAAP results as presented in the Condensed Consolidated Financial Statements.

The following table presents a reconciliation of operating (loss) income and operating (loss) income per diluted share to net (loss) earnings and net (loss) earnings per diluted common share for the three and nine months ended September 30, 2009 and 2008:

Reconciliation of Operating (Loss) Income to Net (Loss) Earnings Available to Common Shareholders

(in thousands, except per share data)

 

     Three months ended
September 30,
   Nine months ended
September 30,
     2009    2008    2009    2008

Net (loss) earnings available to common shareholders

     $     (10,376)       $     12,350        $     (136,338)       $     47,065  

Merger-related expenses, net of tax

     -            -            164        -      

Goodwill impairment

     -            -            111,952        -      
                           

Operating (loss) income

     $ (10,376)       $ 12,350        $ (24,222)       $ 47,065  
                           

Per diluted share:

           

Net (loss) earnings available to common shareholders

     $ (0.14)       $ 0.20        $ (2.10)       $ 0.78  

Merger-related expenses, net of tax

     -            -            -            -      

Goodwill impairment

     -            -            1.73        -      
                           

Operating (loss) income

     $ (0.14)       $ 0.20        $ (0.37)       $ 0.78  
                           

The following table presents the returns on average assets, average common shareholders’ equity and average tangible common shareholders’ equity for the three and nine months ended September 30, 2009 and 2008. For each of the periods presented, the table includes the calculated ratios based on reported net (loss) earnings available to common shareholders and operating (loss) income as shown in the table above. Our return on average common shareholders’ equity is negatively impacted as the result of capital required to support goodwill. 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 beneficial to also consider the return on average tangible common shareholders’ equity. The return on average tangible common shareholders’ equity is calculated by dividing net (loss) earnings available to common shareholders by average shareholders’ common equity less average goodwill and intangible assets, net (excluding MSRs). The return on average tangible common shareholders’ equity is considered a non-GAAP financial measure and should be viewed in conjunction with the return on average common shareholders’ equity.

 

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Table of Contents

Return on Average Assets, Common Shareholders’ Equity and Tangible Common Shareholders’ Equity

(dollars in thousands)

 

    Three months ended
September 30,
  Nine months ended
September 30,
    2009   2008   2009   2008

Returns on average assets:

       

Net (loss) earnings available to common shareholders

    -0.45%      0.59%      -2.06%      0.76% 

Operating (loss) income

    -0.45%      0.59%      -0.37%      0.76% 

Returns on average common shareholders’ equity:

       

Net (loss) earnings available to common shareholders

    -3.19%      3.94%      -14.20%      5.02% 

Operating (loss) income

    -3.19%      3.94%      -2.52%      5.02% 

Returns on average tangible common shareholders’ equity:

       

Net (loss) earnings available to common shareholders

    -6.34%      10.08%      -32.21%      12.84% 

Operating (loss) income

    -6.34%      10.08%      -5.72%      12.84% 

Calculation of average common tangible shareholders’ equity:

       

Average common shareholders’ equity

    $   1,291,218       $   1,248,357       $   1,283,476       $   1,252,099  

Less: average goodwill and other intangible assets, net

    (642,315)      (760,911)      (717,509)      (762,427) 
                       

Average tangible common shareholders’ equity

    $ 648,903       $ 487,446       $ 565,967       $ 489,672  
                       

Additionally, management believes “tangible common equity” and the “tangible common equity ratio” are meaningful measures of capital adequacy. Umpqua believes the exclusion of certain intangible assets in the computation of tangible common equity and tangible common equity ratio provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the operating results and capital of the Company. Tangible common equity is calculated as total shareholders’ equity less preferred stock and less goodwill and other intangible assets, net (excluding MSRs). In addition, tangible assets are total assets less goodwill and other intangible assets, net (excluding MSRs). The tangible common equity ratio is calculated as tangible common shareholders’ equity divided by tangible assets. The tangible common equity and tangible common equity ratio is considered a non-GAAP financial measure and should be viewed in conjunction with the total shareholders’ equity and the total shareholders’ equity ratio.

The following table provides a reconciliation of ending shareholders’ equity (GAAP) to ending tangible common equity (non-GAAP), and ending assets (GAAP) to ending tangible assets (non-GAAP) as of September 30, 2009 and December 31, 2008:

Reconciliations of Total Shareholders’ Equity to Tangible Common Shareholders’ Equity and Total Assets to Tangible Assets

(dollars in thousands)