UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

for the quarterly period ended: March 31, 2007

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

for the transition period from                      to                     .

Umpqua Holdings Corporation

(Exact Name of Registrant as Specified in Its Charter)

OREGON		93-1261319
(State or Other Jurisdiction		(I.R.S. Employer Identification Number)
of Incorporation or Organization)

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 Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

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

þ Large accelerated filer    o Accelerated filer    o Non-accelerated filer

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

o Yes þ 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: 57,868,888 shares outstanding as of April 30, 2007

 

 

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			20
Item 3. Quantitative and Qualitative Disclosures about Market Risk			34
Item 4. Controls and Procedures			35
PART II. OTHER INFORMATION			36
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 3. Defaults Upon Senior Securities			36
Item 4. Submissions of Matters to a Vote of Security Holders			36
Item 5. Other Information			36
Item 6. Exhibits			37
SIGNATURES			38
EXHIBIT INDEX			39
EXHIBIT 3.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 31.3
EXHIBIT 32

PART I. FINANCIAL INFORMATION

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(in thousands, except shares)

		March 31,				December 31,
		2007				2006
ASSETS
Cash and due from banks		$	140,986			$	169,769
Temporary investments			87,877				165,879
Total cash and cash equivalents			228,863				335,648
Investment securities
Trading			3,010				4,204
Available for sale, at fair value			786,301				715,187
Held to maturity, at amortized cost			8,698				8,762
Loans held for sale			16,515				16,053
Loans and leases			5,392,137				5,361,862
Allowance for loan and lease losses			(60,263	)			(60,090	)
Net loans and leases			5,331,874				5,301,772
Restricted equity securities			15,510				15,255
Premises and equipment, net			100,189				101,830
Goodwill and other intangible assets, net			677,854				679,493
Mortgage servicing rights, net			9,524				9,952
Other assets			159,700				156,080
Total assets		$	7,338,038			$	7,344,236
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing		$	1,180,536			$	1,222,107
Interest bearing			4,650,369				4,618,187
Total deposits			5,830,905				5,840,294
Securities sold under agreements to repurchase			48,434				47,985
Term debt			7,461				9,513
Junior subordinated debentures, at fair value			100,076				—
Junior subordinated debentures, at amortized cost			105,480				203,688
Other liabilities			77,323				86,545
Total liabilities			6,169,679				6,188,025
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS’ EQUITY
Preferred stock, no par value, 2,000,000 shares authorized; none issued and outstanding			—				—
Common stock, no par value, 100,000,000 shares authorized; issued and outstanding: 58,223,810 in 2007 and 58,080,171 in 2006			933,064				930,867
Retained earnings			242,870				234,783
Accumulated other comprehensive loss			(7,575	)			(9,439	)
Total shareholders’ equity			1,168,359				1,156,211
Total liabilities and shareholders’ equity		$	7,338,038			$	7,344,236

See notes to condensed consolidated financial statements

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

(in thousands, except per share amounts)

		Three months ended
		March 31,
		2007				2006
INTEREST INCOME
Interest and fees on loans		$	103,981			$	73,120
Interest and dividends on investment securities
Taxable			7,519				6,711
Exempt from federal income tax			1,228				744
Dividends			65				44
Interest on temporary investments			894				127
Total interest income			113,687				80,746
INTEREST EXPENSE
Interest on deposits			41,031				21,038
Interest on securities sold under agreements to repurchase and federal funds purchased			403				2,389
Interest on term debt			80				28
Interest on junior subordinated debentures			3,534				3,012
Total interest expense			45,048				26,467
Net interest income			68,639				54,279
PROVISION FOR LOAN AND LEASE LOSSES			83				21
Net interest income after provision for loan and lease losses			68,556				54,258
NON-INTEREST INCOME
Service charges on deposit accounts			7,052				5,484
Brokerage commissions and fees			2,417				2,368
Mortgage banking revenue, net			1,799				1,844
Net gain on sale of investment securities			5				—
Other income			2,363				2,506
Total non-interest income			13,636				12,202
NON-INTEREST EXPENSE
Salaries and employee benefits			28,269				21,801
Net occupancy and equipment			8,826				7,168
Communications			1,803				1,465
Marketing			847				1,325
Services			4,604				3,403
Supplies			780				629
Intangible amortization			1,143				547
Merger related expenses			554				251
Other expenses			3,186				2,391
Total non-interest expense			50,012				38,980
Income before income taxes			32,180				27,480
Provision for income taxes			11,518				10,053
Net income		$	20,662			$	17,427
Basic earnings per share		$	0.36			$	0.39
Diluted earnings per share		$	0.35			$	0.39

See notes to condensed consolidated financial statements

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)

(in thousands, except shares)

														Accumulated
														Other
		Common Stock								Retained				Comprehensive
		Shares				Amount				Earnings				Loss				Total
BALANCE AT JANUARY 1, 2006			44,556,269			$	564,579			$	183,591			$	(9,909	)		$	738,261
Net income											84,447								84,447
Other comprehensive loss, net of tax:
Unrealized gains on securities arising during the year															470				470
Comprehensive income																		$	84,917
Stock-based compensation							1,932												1,932
Stock repurchased and retired			(6,142	)			(179	)											(179	)
Issuances of common stock under stock plans and related tax benefit			784,715				10,814												10,814
Stock issued in connection with acquisitions			12,745,329				353,721												353,721
Cash dividends ($0.60 per share)											(33,255	)							(33,255	)
Balance at December 31, 2006			58,080,171			$	930,867			$	234,783			$	(9,439	)		$	1,156,211
BALANCE AT JANUARY 1, 2007			58,080,171			$	930,867			$	234,783			$	(9,439	)		$	1,156,211
Adoption of fair value option — junior subordinated debentures											(2,064	)							(2,064	)
Net income											20,662								20,662
Other comprehensive loss, net of tax:
Unrealized gains on securities arising during the year															1,864				1,864
Comprehensive income																		$	22,526
Stock-based compensation							567												567
Stock repurchased and retired			(2,154	)			(61	)											(61	)
Issuances of common stock under stock plans and related tax benefit			145,793				1,691												1,691
Cash dividends ($0.18 per share)											(10,511	)							(10,511	)
Balance at March 31, 2007			58,223,810			$	933,064			$	242,870			$	(7,575	)		$	1,168,359

See notes to condensed consolidated financial statements

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

(in thousands)

		Three months ended
		March 31,
		2007				2006
Net income		$	20,662			$	17,427
Unrealized gains (losses) arising during the period on investment securities available for sale			3,107				(3,603	)
Reclassification adjustment for gains realized in net income, (net of tax expense of $2,000 for the three months ended March 31, 2007)			(3	)			—
Income tax (expense) benefit related to unrealized gains/losses on investment securities, available for sale			(1,240	)			1,286
Net unrealized gains (losses) on investment securities available for sale			1,864				(2,317	)
Comprehensive income		$	22,526			$	15,110

See notes to condensed consolidated financial statements

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

(in thousands)

		Three months ended
		March 31,
		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	20,662			$	17,427
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Restricted equity securities stock dividends			(55	)			(44	)
Amortization of investment premiums, net			319				293
Gain on sale of investment securities available-for-sale			(5	)			—
Provision for loan and lease losses			83				21
Depreciation, amortization and accretion			2,507				3,248
Change in fair value of mortgage servicing rights			566				—
Change in fair value of trust preferred securities			(356	)			—
Stock-based compensation			567				470
Net decrease in trading account assets			1,194				229
Origination of loans held for sale			(71,375	)			(61,655	)
Proceeds from sales of loans held for sale			70,963				58,869
Increase in mortgage servicing rights			(138	)			(667	)
Excess tax benefits from the exercise of stock options			(222	)			(751	)
Net increase in other assets			(5,598	)			(2,684	)
Net (decrease) increase in other liabilities			(6,389	)			1,086
Net cash provided by operating activities			12,723				15,842
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale			(88,623	)			—
Sales and maturities of investment securities available-for-sale			20,109				19,614
Maturities of investment securities held-to-maturity			57				1,045
Redemption of restricted equity securities			—				43
Net loan and lease originations			(35,208	)			(182,141	)
Proceeds from sales of loans			6,393				8,639
Proceeds from disposals of furniture and equipment			8				28
Purchases of premises and equipment			(2,558	)			(2,588	)
Sales of real estate owned			—				1,054
Net cash used by investing activities			(99,822	)			(154,306	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposit liabilities			(9,208	)			(56,610	)
Net increase in Federal funds purchased			—				152,500
Net increase in securities sold under agreements to repurchase			449				6,625
Dividends paid on common stock			(10,476	)			(5,352	)
Excess tax benefits from the exercise of stock options			222				751
Proceeds from stock options exercised			1,427				1,339
Retirement of common stock			(61	)			—
Repayment of term debt			(2,039	)			(73	)
Net cash (used) provided by financing activities			(19,686	)			99,180
Net decrease in cash and cash equivalents			(106,785	)			(39,284	)
Cash and cash equivalents, beginning of period			335,648				161,754
Cash and cash equivalents, end of period		$	228,863			$	122,470
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	46,024			$	26,241
Income taxes		$	14,825			$	4,100

See notes to condensed consolidated financial statements

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 with 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 Strand, Atkinson, Williams & York, Inc. (“Strand”). 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 2006 Annual Report filed on Form 10-K. There have been no significant changes to these policies, except due to adoption of Statement of Financial Accounting Standards (“SFAS”) No. 156, Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, SFAS No. 157, Fair Value Measurements, SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, and FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) during the quarter. The changes to accounting policies under these standards are described in detail in Notes 3, 4, 7 and 10. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the 2006 Annual Report filed on Form 10-K.

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 year amounts have been made to conform with current classifications.

Note 2 – Business Combinations

On June 2, 2006, the Company acquired all of the outstanding common stock of Western Sierra Bancorp (“Western Sierra”) of Cameron Park, California, and its principal operating subsidiaries, Western Sierra Bank, Central California Bank, Lake Community Bank and Auburn Community Bank, in an acquisition accounted for under the purchase method of accounting. The results of Western Sierra’s operations have been included in the consolidated financial statements since that date. This acquisition added Western Sierra’s complete network of 31 Northern California branches, including locations in the Sacramento, Auburn, Lakeport and Sonora areas, to our network of 96 California, Oregon and Washington locations. This merger was consistent with the Company’s community banking expansion strategy and provides further opportunity to enter growth markets in Northern California.

The aggregate purchase price was $353.7 million and included 12.7 million common shares valued at $343.0 million, and 723,000 stock options valued at $10.7 million. Western Sierra shareholders received 1.61 shares of the Company’s common stock for each share of Western Sierra common stock (“exchange ratio of 1.61:1”). The value of the common shares issued was determined as $26.91 per share based on the average closing market price of the Company’s common stock for the two trading days before and after the last trading day before public announcement of the merger. Outstanding Western Sierra stock options were converted (using the exchange ratio of 1.61:1) at a weighted average fair value of $14.80 per option.

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

(In thousands)

		June 2, 2006
Assets Acquired:
Cash and equivalents		$	36,978
Investment securities			76,229
Loans, net			1,009,860
Premises and equipment, net			10,109
Core deposit intangible asset			27,624
Goodwill			247,799
Other assets			83,519
Total assets acquired		$	1,492,118
Liabilities Assumed:
Deposits		$	1,016,053
Term debt			59,030
Junior subordinated debentures			38,746
Other liabilities			24,540
Total liabilities assumed			1,138,369
Net Assets Acquired		$	353,749

Additional adjustments to the purchase price allocation may be required, specifically related to other assets, taxes and compensation adjustments. At March 31, 2007, goodwill recorded in connection with the Western Sierra acquisition was $246.6 million. The $1.2 million decrease from June 2, 2006 is related primarily to the tax benefit of fully vested acquired options of $1.5 million, partially offset by asset write-offs and the recognition of unrecorded liabilities.

The core deposit intangible asset represents the value ascribed to the long-term deposit relationships acquired. This intangible asset is being amortized on a straight-line basis over a weighted average estimated useful life of ten years. The core deposit intangible asset is not estimated to have a significant residual value. Goodwill represents the excess of the total purchase price paid for Western Sierra over the fair values of the assets acquired, net of the fair values of liabilities assumed. Goodwill has been assigned to the Community Banking segment. Goodwill is not amortized, but is evaluated for possible impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. No impairment losses were recognized in connection with core deposit intangible or goodwill assets during the period from acquisition to March 31, 2007.

The following table presents unaudited pro forma results of operations for the three months ended March 31, 2006 as if the acquisition of Western Sierra had occurred on January 1, 2006. Any cost savings realized as a result of the Western Sierra merger are not reflected in the pro forma consolidated condensed statements of income. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisitions actually occurred on January 1, 2006:

Pro Forma Financial information — Unaudited

(in thousands, except per share data)

		Three Months Ended March 31, 2006
						Western				Pro Forma				Pro Forma
		Umpqua				Sierra				Adjustments				Combined
Net interest income		$	54,279			$	15,444			$	1,937	(a)		$	71,660
Provision for loan and lease losses			21				—				—				21
Non-interest income			12,202				3,151				—				15,353
Non-interest expense			38,980				11,216				(186	)(b)			50,010
Income before income taxes			27,480				7,379				2,123				36,982
Provision for income taxes			10,053				2,923				849	(c)			13,825
Net income		$	17,427			$	4,456			$	1,274			$	23,157
Earnings per share:
Basic		$	0.39											$	0.40
Diluted		$	0.39											$	0.40
Average shares outstanding:
Basic			44,658				7,808				4,763	(d)			57,229
Diluted			45,029				8,022				4,893	(d)			57,944

The following table summarizes activity in the Company’s accrued restructuring charges related to the Western Sierra acquisition which are recorded in other liabilities:

Accrued Restructuring Charges

(in thousands)

		Three Months Ended
		March 31, 2007
Beginning balance		$	4,369
Additions:
Severance, retention and other compensation			141
Utilization:
Cash payments			(1,113	)
Ending Balance		$	3,397

No additional merger-related expenses are expected in connection with the Western Sierra or any other previous acquisition.

Note 3 – Mortgage Servicing Rights

SFAS No. 156, issued in March 2006, requires all separately recognized servicing assets and liabilities to be initially measured at fair value. In addition, entities are permitted to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings, or amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess the rights for impairment. Beginning with the fiscal year in which an entity adopts SFAS No. 156, it may elect to subsequently measure a class of servicing assets and liabilities at fair value. The effect of remeasuring an existing class of servicing assets and liabilities at fair value is to be reported as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. For the Company, this standard became effective on January 1, 2007.

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 subsequent to adoption. As the retrospective application of SFAS No. 156 is not permitted, there was no change to prior period financial statements. Since there was no difference between the carrying amount and fair value of the MSR on the date of adoption, there was also no cumulative effect adjustment to retained earnings.

Upon the change from the lower of cost or fair value accounting method to fair value accounting under SFAS No. 156, the calculation of amortization and the assessment of impairment were discontinued and the MSR valuation allowance was written off against the recorded value of the MSR. Those measurements have been replaced by fair value adjustments that encompass market-driven valuation changes and the runoff in value that occurs from the passage of time, which are each 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. Changes in the balance of the MSR were as follows:

Mortgage Servicing Rights

(in thousands)

		Three months ended
		March 31,
		2007				2006
Balance, beginning of period(1)		$	9,952			$	10,890
Additions for new mortgage servicing rights capitalized			138				667
Changes in fair value:
Due to changes in model inputs or assumptions(2)			(10	)			—
Other(3)			(556	)			—
Amortization of servicing rights			—				(321	)
Impairment charge			—				(33	)
Balance, end of period		$	9,524			$	11,203
Balance of loans serviced for others		$	925,541			$	1,014,680
MSR as a percentage of serviced loans			1.03	%			1.10	%

The amount of contractually specified servicing fees, late fees and ancillary fees earned were $625,000, $8,000 and $5,000, respectively, for the three months ended March 31, 2007 and are recorded in mortgage banking revenue on the consolidated statements of income.

Retained mortgage servicing rights are measured at fair values as of 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 are 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. Key assumptions used in measuring the fair value of MSR as of March 31, 2007 were as follows:

Constant prepayment rate			13.90	%
Discount rate			8.80	%
Weighted average life (years)			5.49

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. A significant increase in the discount rate would reduce the value of mortgage servicing rights.

Note 4 – Junior Subordinated Debentures

As of March 31, 2007, the Company had 14 wholly-owned trusts (“Trusts”) that were formed to issue trust preferred securities and related common securities of the Trusts and are not consolidated. Five Trusts, representing aggregate total obligations of approximately $58.9 million (fair value of approximately $68.6 million as of the merger date), were assumed in connection with the Humboldt merger. Four Trusts, representing aggregate total obligations of approximately $37.1 million (fair value of approximately $38.7 million as of the merger date), were assumed in connection with the Western Sierra merger. Following is information about the Trusts as of March 31, 2007:

Junior Subordinated Debentures

(in thousands)

						Issued				Carrying								Effective
Trust Name		Issue Date				Amount				Value (1)				Rate (2)				Rate (3)				Maturity Date				Redemption Date
Umpqua Holdings Statutory Trust I		September 2002				$	25,774			$	26,030			Floating (4)					6.92	%		September 2032				September 2007
Umpqua Statutory Trust II		October 2002					20,619				21,117			Floating (5)					6.94	%		October 2032				October 2007
Umpqua Statutory Trust III		October 2002					30,928				31,651			Floating (6)					6.94	%		November 2032				November 2007
Umpqua Statutory Trust IV		December 2003					10,310				10,708			Floating (7)					6.94	%		January 2034				January 2009
Umpqua Statutory Trust V		December 2003					10,310				10,570			Floating (7)					6.93	%		March 2034				March 2009
HB Capital Trust I		March 2000					5,310				6,594				10.875	%			7.91	%		March 2030				March 2010
Humboldt Bancorp Statutory Trust I		February 2001					5,155				6,081				10.200	%			8.01	%		February 2031				February 2011
Humboldt Bancorp Statutory Trust II		December 2001					10,310				11,633			Floating (8)					7.47	%		December 2031				December 2006
Humboldt Bancorp Staututory Trust III		September 2003					27,836				31,476				6.75%	(9)			5.02	%		September 2033				September 2008
CIB Capital Trust		November 2002					10,310				11,427			Floating (6)					7.56	%		November 2032				November 2007
Western Sierra Statutory Trust I		July 2001					6,186				6,421			Floating (10)					6.79	%		July 2031				July 2006
Western Sierra Statutory Trust II		December 2001					10,310				10,700			Floating (8)					6.80	%		December 2031				December 2006
Western Sierra Statutory Trust III		September 2003					10,310				10,574			Floating (11)					6.81	%		September 2033				September 2008
Western Sierra Statutory Trust IV		September 2003					10,310				10,574			Floating (11)					6.81	%		September 2033				September 2008
		Total				$	193,978			$	205,556

The $205.6 million of junior subordinated debentures issued to the Trusts as of March 31, 2007 ($203.7 million as of December 31, 2006) are reflected as junior subordinated debentures in the consolidated balance sheets. The common stock issued by the Trusts is recorded in other assets in the consolidated balance sheets, and totaled $5.8 million at March 31, 2007 and December 31, 2006.

All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of March 31, 2007, 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. Under the Federal Reserve Board rule, after a five-year transition period ending March 31, 2009, the aggregate amount of trust preferred securities and certain other restricted core capital elements is limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. The Company includes all currently issued trust preferred securities in Tier 1 capital. 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.

Effective January 1, 2007, the Company adopted SFAS No. 159 and SFAS No. 157. See Note 10 for additional information on SFAS No. 157. SFAS No. 159 allows companies to measure at fair value most financial assets and liabilities that are currently required to be measured in a different manner, such as at amortized cost. Following the initial fair value measurement date, ongoing unrealized gains and losses on items for which fair value reporting has been elected are reported in earnings at each subsequent reporting date. Under SFAS No. 159, fair value reporting may be elected on an instrument-by-instrument basis, and thus companies may record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principals (“GAAP”).

Umpqua 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 were acquired through business combinations and were measured at fair value at the time of acquisition. Accounting for the selected junior subordinated debentures at fair value enables us to more closely align our financial performance with the economic value of those liabilities. Additionally, we believe our adoption of the standard will have a positive impact on our ability to manage the market and interest rate risks associated with the junior subordinated

debentures, and potentially benefit net interest income, net income and earnings per common share during the remainder of 2007, as well as future periods. The junior subordinated debentures measured at fair value and amortized cost have been presented as separate line items on the balance sheet. We use a discounted cash flow model to determine the fair value of the junior subordinated debentures using market discount rate assumptions.

Retained earnings as of January 1, 2007 were reduced by $2.1 million, net of tax, as a result of the fair value election, as shown below:

(in thousands)

		Balance Sheet				Net Gain/				Balance Sheet
		prior to				(Loss) upon				After
		Adoption				Adoption				Adoption
Other assets (1)		$	1,934			$	(1,934	)		$	—
Junior subordinated debentures			97,941				(2,491	)			100,432
Other liabilities (2)			984				984				—
Pretax cumulative effect of adoption of the fair value option							(3,441	)
Increase in deferred tax asset							1,377
Cumulative effect of adoption of the fair value option (charged to retained earnings)						$	(2,064	)

The gains and losses described in the table above will not be recognized in earnings based upon application of SFAS No. 159. Regulatory capital will be reduced by the adjustment to retained earnings. However, the Company’s capital significantly exceeds the capital levels required to be classified as well-capitalized, and the reduction in retained earnings resulting from the adoption of SFAS No. 159 will have minimal effect on the Company’s current regulatory capital ratios.

As a result of the fair value measurement election for the above financial instruments, we recorded gains of $329,000 for the three months ended March 31, 2007 resulting from the change in fair value of the junior subordinated debentures recorded at fair value from the election date of January 1, 2007 to March 31, 2007. These gains were recorded as an offset to interest expense on junior subordinated debentures, which is recorded on an accrual basis. The junior subordinated debentures recorded at fair value of $100.1 million had contractual unpaid principal amounts of $97.9 million outstanding as of March 31, 2007.

Note 5 – Commitments and Contingencies

Lease Commitments — The Company leases 110 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 upon expiration.

Rent expense for the three months ended March 31, 2007 and 2006 was $2.8 million and $2.0 million, respectively. Rent expense was offset by rent income of $143,000 and $55,000 for the three months ended March 31, 2007 and 2006, respectively.

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 as of March 31, 2007:

(in thousands)

		As of March 31, 2007
Commitments to extend credit		$	1,427,583
Commitments to extend overdrafts		$	170,183
Commitments to originate loans held-for-sale		$	40,980
Forward sales commitments		$	18,000
Standby letters of credit		$	44,673

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 and standby letters of credit and financial guarantees. Those instruments involve elements of credit and interest-rate risk similar to the amounts recognized in the 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 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.

The Bank enters into forward delivery contracts to sell residential mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates 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 months ended March 31, 2007 and 2006. 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 March 31, 2007, the Bank had commitments to originate mortgage loans held for sale totaling $41.0 million with a net fair value liability of approximately $24,000. As of that date, it also had forward sales commitments of $18.0 million with a net fair value liability of $19,000. The Bank recorded a loss of $10,000 and a gain of $27,000 related to its commitments to originate mortgage loans and related forward sales commitments in the three months ended March 31, 2007 and 2006, respectively.

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 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 and did not incur any losses in connection with standby letters of credit during the three months ended March 31, 2007 and 2006. At March 31, 2007, approximately $22.9 million of standby letters of credit expire within one year, and $21.8 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 fair value of guarantees associated with standby letters of credit was $318,000 as of March 31, 2007.

At March 31, 2007, the reserve for unfunded commitments, which is included in other liabilities on the consolidated balance sheet, was approximately $1.2 million. The adequacy of the reserve for unfunded commitments is reviewed on a quarterly basis, based upon changes in the amounts 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 the ordinary course of business, various claims and lawsuits are brought by and against the Company, the Bank and Strand. 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.

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 81% of the Company’s loan and lease portfolio at March 31, 2007, and December 31, 2006, respectively. 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, or a decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the repayment of these loans. Personal and business income represent the primary source 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 per issuer.

Note 6 – Stock-Based Compensation

The compensation cost related to stock options, including costs related to unvested options assumed in connection with acquisitions, (included in salaries and employee benefits) was $337,000 and $367,000 for the three months ended March 31, 2007 and 2006, respectively. The total income tax benefit recognized in the income statement related to stock options was $135,000 and $146,000 for the three months ended March 31, 2007 and 2006, respectively.

The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model using assumptions noted in the following table:

		Three months ended March 31,
		2007				2006
Dividend yield			3.29	%			2.68	%
Expected life (years)			6.2				6.4
Expected volatility			34	%			35	%
Risk-free rate			4.46	%			4.30	%
Weighted average grant date fair value of options granted		$	7.49			$	9.18

The following table summarizes information about stock option activity for the three months ended March 31, 2007:

(In thousands, except per share data)

		Three months ended March 31, 2007
										Weighted-Avg
		Options				Weighted-Avg				Remaining Contractual				Aggregate
		Outstanding				Exercise Price				Term (Years)				Intrinsic Value
Balance, beginning of period			1,807			$	14.78
Granted			50			$	26.12
Exercised			(129	)		$	11.04
Forfeited/expired			(1	)		$	14.25
Balance, end of period			1,727			$	15.39				5.52			$	19,698
Options exercisable at end of period			1,264			$	12.75				4.74			$	17,727

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 months ended March 31, 2007 and 2006 was $2.3 million and $3.3 million, respectively. During the three months ended March 31, 2007 and 2006, the amount of cash received from the exercise of stock options was $1.4 million and $1.3 million, respectively. As of March 31, 2007, there was $2.8 million of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of 2.7 years.

The compensation cost related to restricted stock that has been charged against income (included in salaries and employee benefits) was $230,000 and $103,000 for the three months ended March 31, 2007 and 2006, respectively. The total income tax benefit recognized in the income statement related to restricted stock was $92,000 and $41,000 for the three months ended March 31, 2007 and 2006, respectively. The following table summarizes information about non-vested restricted shares as of March 31, 2007 and changes for the three months ended March 31, 2007:

(In thousands, except per share data)

		Three months ended March 31, 2007
		Restricted
		Shares				Average Grant
		Outstanding				Date Fair Value
Balance, beginning of period			122			$	26.36
Granted			72			$	28.09
Vested			(16	)		$	28.03
Forfeited/expired			(6	)		$	26.73
Balance, end of period			172			$	26.91

The total fair value of shares vested during the three months ended March 31, 2007 was $469,000. No shares vested in the three months ended March 31, 2006. As of March 31, 2007, there was $3.9 million of total unrecognized compensation cost related to non-vested restricted stock which is expected to be recognized over a weighted-average period of 3.9 years.

For the three months ended March 31, 2007 and 2006, the Company received income tax benefits of $1.0 million and $1.2 million, respectively, related to the exercise of non-qualified employee stock options, disqualifying dispositions in the exercise of incentive stock options and the vesting of restricted shares. In the three months ended March 31, 2007 and 2006, the cash flows from excess tax benefits (tax benefits resulting from tax deductions in excess of the compensation cost recognized) classified as financing cash flows were $222,000 and $751,000, respectively. The remaining cash flows from tax benefits were recognized as operating cash flows.

Note 7 – 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. The company is no longer subject to U.S. federal or state and local tax examinations by tax authorities for years before 2003. 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. The results of the examination had no significant impact on the financial statements.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized tax benefits. Accrued interest related to unrecognized tax benefits is recognized in tax expense.

Note 8 – Per Share Information

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed in a similar manner, except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method. For all periods presented, stock options and unvested restricted shares are the only potentially dilutive instruments issued by the Company.

The following is a computation of basic and diluted earnings per share for the three months ended March 31, 2007 and 2006:

Earnings Per Share

(in thousands, except per share data)

		Three months ended
		March 31,
		2007				2006
Basic earnings per share:
Weighted average shares outstanding			58,176				44,658
Net income		$	20,662			$	17,427
Basic earnings per share		$	0.36			$	0.39
Diluted earnings per share:
Weighted average shares outstanding			58,176				44,658
Net effect of the assumed exercise of stock options and vesting of restricted shares, based on the treasury stock method			654				371
Total weighted average shares and common stock equivalents outstanding			58,830				45,029
Net income		$	20,662			$	17,427
Diluted earnings per share		$	0.35			$	0.39

Note 9 – 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 its business and retail customers in its primary market areas. As of March 31, 2007, the Community Banking segment operated 134 stores located principally 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 Strand, 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 Strand and the Bank at an estimated fair value according to regulatory requirements for services provided. Intercompany items relate primarily to management services and interest on intercompany borrowings.

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 March 31, 2007
		Community				Retail				Mortgage
		Banking				Brokerage				Banking				Consolidated
Interest income		$	109,469			$	15			$	4,203				113,687
Interest expense			42,129				—				2,919				45,048
Net interest income			67,340				15				1,284				68,639
Provision for loan and lease losses			83				—				—				83
Non-interest income			9,207				2,540				1,889				13,636
Non-interest expense			44,621				2,455				2,382				49,458
Merger-related expense			554				—				—				554
Income before income taxes			31,289				100				791				32,180
Provision for income taxes			11,166				36				316				11,518
Net income		$	20,123			$	64			$	475			$	20,662

(in thousands)

		Three Months Ended March 31, 2006
		Community				Retail				Mortgage
		Banking				Brokerage				Banking				Consolidated
Interest income		$	79,270			$	22			$	1,454			$	80,746
Interest expense			25,396				—				1,071				26,467
Net interest income			53,874				22				383				54,279
Provision for loan and lease losses			21				—				—				21
Non-interest income			7,950				2,477				1,775				12,202
Non-interest expense			34,170				2,576				1,983				38,729
Merger-related expense			251				—				—				251
Income before income taxes			27,382				(77	)			175				27,480
Provision for income taxes			9,981				—				72				10,053
Net income		$	17,401			$	(77	)		$	103			$	17,427

(in thousands)

		March 31, 2007
		Community				Retail				Mortgage
		Banking				Brokerage				Banking				Consolidated
Total assets		$	7,097,191			$	7,460			$	233,387			$	7,338,038
Total loans		$	5,185,882			$	—			$	206,255			$	5,392,137
Total deposits		$	5,822,086			$	—			$	8,819			$	5,830,905

(in thousands)

		December 31, 2006
		Community				Retail				Mortgage
		Banking				Brokerage				Banking				Consolidated
Total assets		$	7,087,227			$	7,656			$	249,353			$	7,344,236
Total loans		$	5,139,818			$	—			$	222,044			$	5,361,862
Total deposits		$	5,834,835			$	—			$	5,459			$	5,840,294

Note 10 – Fair Value Measurement

SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurement. Upon adoption of SFAS No. 157, there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial statements in the first quarter of 2007.

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2007, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

(in thousands)

						Fair Value Measurements
						at March 31, 2007, Using
						Quoted Prices in				Other				Significant
						Active Markets for				Observable				Unobservable
		Fair Value				Identical Assets				Inputs				Inputs
Description		March 31, 2007				(Level 1)				(Level 2)				(Level 3)
Trading securities		$	3,010			$	3,010
Available-for-sale securities			786,301				786,301
Mortgage Servicing Rights			9,524								9,524
Total assets measured at fair value		$	798,835			$	789,311			$	9,524			$	—
Junior subordinated debentures, at fair value		$	100,076							$	100,076
Total liabilities measured at fair value		$	100,076			$	—			$	100,076			$	—

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

Securities - Fair values for investment securities are based on quoted market prices.

Mortgage Servicing Rights — The fair value of mortgage servicing rights is estimated using a discounted cash flow model.

Junior Subordinated Debentures—The fair value of junior subordinated debentures is estimated using a discounted cash flow model.

Note 11 — Subsequent Events

The Company completed the acquisition of North Bay Bancorp and its principal operating subsidiary, The Vintage Bank, along with its Solano Bank division on April 26, 2007. North Bay Bancorp shareholders received 1.228 shares of the Company’s common stock for each share of North Bay Bancorp common stock, giving the acquisition a total value of approximately $142.8 million.

Upon completion of the acquisition, all the Vintage Bank and Solano Bank branches operate under the Umpqua Bank name. The acquisition has added North Bay Bancorp’s network of 10 Northern California branches, including locations in the Napa area and in the communities of St. Helena, American Canyon, Vacaville, Benicia, Vallejo and Fairfield, to our network of 134 Northern California, Oregon and Washington locations and has resulted in a combined institution with assets of approximately $8.1 billion.

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

Forward-Looking Statements

This Report contains certain forward-looking statements, 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. All 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. 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 filings with the SEC and the following:

	•		The ability to attract new deposits and loans
	•		Competitive market pricing factors
	•		Deterioration in economic conditions that could result in increased loan and lease losses
	•		Market interest rate volatility
	•		Changes in legal or regulatory requirements
	•		The ability to recruit and retain certain key management and staff
	•		Risks associated with merger integration

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 Strand, Atkinson, Williams and York, Inc. (“Strand”).

Our headquarters is 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.

Strand is a registered broker-dealer and investment advisor with offices in Portland, Eugene, and Medford, Oregon, and in 11 Umpqua Bank stores. Strand 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.

Executive Overview

Highlights for the first quarter of 2007 were as follows:

	•		In January, we announced the signing of a definitive agreement to acquire North Bay Bancorp (“North Bay”) and its principal operating subsidiary, the Vintage Bank, along with its Solano Bank division. The acquisition was completed on April 26, 2007, and resulted in a combined institution with assets of approximately $8.1 billion.
	•		Credit quality continued to be strong. With net recoveries of $90,000 during the quarter and strong credit quality, there was no substantial provision for credit losses in the three months ended March 31, 2007.
	•		Total gross loans and leases were $5.4 billion as of March 31, 2007 and December 31, 2006, an increase of $30.3 million or 1%. The pace of loan growth slowed from prior periods primarily due to pay-downs of construction loans in California as projects closed, and an overall downturn in the Northern California market.
	•		Total deposits were $5.8 billion as of March 31, 2007 and December 31, 2006, a decrease of $9.4 million. This is consistent with seasonal declines and the competitive deposit environment.

	•		Total consolidated assets were $7.3 billion as of March 31, 2007 and December 31, 2006.
	•		Net interest margin decreased to 4.49% for the three months ended March 31, 2007, compared to 4.69% for the same period a year ago. The decrease in net interest margin resulted from increases in short-term market interest rates and the competitive climate, with the cost of deposits increasing more than the yield on interest-earning assets.
	•		Net income per diluted share was $0.35 for the three months ended March 31, 2007, as compared to $0.39 per diluted share earned in the three months ended March 31, 2006.
	•		Cash dividends declared in the first quarter of 2007 were $0.18 per share which was comparable to the fourth quarter of 2006 but an increase of 50% from the $0.12 declared in the first quarter of 2006.

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, 2006 included in the Form 10-K filed with the Securities and Exchange Commission (‘SEC”) on March 1, 2007. 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 of the portfolio and the adherence to underwriting standards. When loans and leases are originated, they are assigned a risk rating from 1 to 10 that is assessed periodically during the term of the loan through the credit review process. 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, regular review of 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 loans that have been placed on non-accrual status and approves placing loans on impaired status. The ALLL Committee also approves removing loans that are no longer impaired from impairment and non-accrual 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 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 recognize this impairment reserve as a specific component to be provided for in the allowance for loan and lease losses. 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 also maintains an unallocated allowance amount to provide for other credit losses inherent in the loan portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less than 5% of the allowance. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends.

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 March 31, 2007. 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 81% 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.

Mortgage Servicing Rights

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

Upon adoption of Statement of Financial Accounting Standards (“SFAS”) No. 156, Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 156”) on January 1, 2007, the Company has elected to measure its residential mortgage servicing assets at fair value. Upon the change from the lower of cost or fair value accounting method to fair value accounting under SFAS No. 156, the calculation of amortization and the assessment of impairment were discontinued. Additional information is included in Note 3 of the Notes to Condensed Consolidated Financial Statements.

Valuation of Goodwill and Intangible Assets

At March 31, 2007, we had $677.9 million in goodwill and other intangible assets as a result of business combinations. Goodwill and other intangibles 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 a quarterly basis and determined that there was no impairment as of March 31, 2007. The valuation is based on discounted cash flows or observable market prices on a segment basis. A 10% or 20% decrease in market price is not expected to result in an impairment. If impairment was deemed to exist, a write down of the asset would occur with a charge to earnings.

Stock-based Compensation

Effective January 1, 2006, we adopted the provisions of SFAS No. 123R, Share Based Payment, a revision to the previously issued guidance on accounting for stock options and other forms of equity-based compensation. SFAS No. 123R requires companies to recognize in the income statement 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 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 6 of the Notes to Condensed Consolidated Financial Statements.

Fair Value

Effective January 1, 2007, we adopted SFAS No. 157, Fair Value Measurements, which among other things, requires enhanced disclosures about financial instruments carried at fair value. SFAS No. 157 establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. See Note 10 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.

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.

RESULTS OF OPERATIONS

OVERVIEW

For the three months ended March 31, 2007, net income was $20.7 million, or $0.35 per diluted share, as compared to $17.4 million, or $0.39 per diluted share for the three months ended March 31, 2006. The improvement in net income for the three months ended

March 31, 2007 is principally attributable to improved net interest income, partially offset by increased operating expenses. We completed the acquisition of Western Sierra Bancorp on June 2, 2006 and the results of the acquired operations are only included in our financial results starting on June 3, 2006.

We incur significant expenses related to the completion and integration of mergers. Accordingly, we believe that our operating results are best measured on a comparative basis excluding the impact of merger-related expenses, net of tax. We define operating income as income before merger related expenses, net of tax, and we calculate operating income per diluted share by dividing operating income by the same diluted share total used in determining diluted earnings per share over the prior year (see Note 8 of the Notes to Condensed 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 income and operating income per share to net income and net income per share for the three months ended March 31, 2007 and 2006:

(in thousands, except per share data)

		Three months ended
		March 31,
		2007				2006
Net income		$	20,662			$	17,427
Merger-related expenses, net of tax			332				151
Operating income		$	20,994			$	17,578
Per diluted share:
Net income		$	0.35			$	0.39
Merger-related expenses, net of tax			0.01				—
Operating income		$	0.36			$	0.39

The following table presents the returns on average assets, average shareholders’ equity and average tangible shareholders’ equity for the three months ended March 31, 2007 and 2006. For each of the periods presented, the table includes the calculated ratios based on reported net income and operating income as shown in the Table above. Our return on average 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 shareholders’ equity. The return on average tangible shareholders’ equity is calculated by dividing net income by average shareholders’ equity less average intangible assets. The return on average tangible shareholders’ equity is considered a non-GAAP financial measure and should be viewed in conjunction with the return on average shareholders’ equity.

Returns on Average Assets, Shareholders’ Equity and Tangible Shareholders’ Equity

(dollars in thousands)

		Three months ended
		March 31,
		2007				2006
Returns on average assets:
Net income			1.15	%			1.31	%
Operating income			1.17	%			1.32	%
Returns on average shareholders’ equity:
Net income			7.22	%			9.50	%
Operating income			7.33	%			9.58	%
Returns on average tangible shareholders’ equity:
Net income			17.36	%			21.04	%
Operating income			17.64	%			21.22	%
Calculation of average tangible shareholders’ equity:
Average shareholders’ equity		$	1,161,185			$	744,190
Less: average intangible assets			(678,577	)			(408,212	)
Average tangible shareholders’ equity		$	482,608			$	335,978

NET INTEREST INCOME

Net interest income is the largest source of our operating income. Net interest income for the three months ended March 31, 2007 was $68.6 million, an increase of $14.4 million, or 26% over the same period in 2006. This increase over the same period in 2006 is attributable to growth in outstanding average interest-earning assets, primarily loans and leases, partially offset by both growth in interest-bearing liabilities, primarily money-market and time deposits, and a decrease in net interest margin. The Western Sierra merger, which was completed on June 2, 2006, contributed to the increase in interest-earning assets and interest-bearing liabilities. The fair value of interest-earning assets acquired on that date totaled $1.1 billion, and interest-bearing liabilities totaled $1.1 billion.

The net interest margin (net interest income as a percentage of average interest-earning assets) on a fully tax-equivalent basis was 4.49% for the three months ended March 31, 2007, a decrease of 20 basis points as compared to the same period in 2006. This decrease is primarily due to increases in short-term market rates which led to an increase in deposit and borrowing costs. The increased yield on interest-earning assets of 46 basis points in the three months ended March 31, 2007 was more than offset by the increase in our interest expense to earning assets which increased by 66 basis points in the three months ended March 31, 2007.

Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, as well as changes in the yields earned on interest-earning assets and rates paid on deposits and borrowed funds. The following table presents condensed average balance sheet information, together with interest income and yields on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for the three months ended March 31, 2007 and 2006:

Average Rates and Balances

(dollars in thousands)

		Three months ended												Three months ended
		March 31, 2007												March 31, 2006
						Interest				Average								Interest				Average
		Average				Income or				Yields				Average				Income or				Yields
		Balance				Expense				or Rates				Balance				Expense				or Rates
INTEREST-EARNING ASSETS:
Loans and leases (1)		$	5,398,962			$	103,981				7.81	%		$	4,025,130			$	73,120				7.37	%
Taxable securities			658,694				7,584				4.61	%			608,211				6,755				4.44	%
Non-taxable securities (2)			118,808				1,749				5.89	%			76,525				1,070				5.59	%
Temporary investments (3)			68,706				894				5.28	%			12,038				127				4.28	%
Total interest earning assets			6,245,170				114,208				7.42	%			4,721,904				81,072				6.96	%
Allowance for credit losses			(60,180	)											(43,842	)
Other assets			1,071,798												733,357
Total assets		$	7,256,788											$	5,411,419
INTEREST-BEARING LIABILITIES:
Interest-bearing checking and savings accounts		$	2,849,762			$	20,783				2.96	%		$	2,108,789			$	10,829				2.08	%
Time deposits			1,745,615				20,248				4.70	%			1,134,994				10,209				3.65	%
Securities sold under agreements to repurchase and federal funds purchased			54,489				403				3.00	%			233,860				2,389				4.14	%
Term debt			8,639				80				3.76	%			3,138				28				3.62	%
Junior subordinated debentures			206,039				3,534				6.96	%			165,703				3,012				7.37	%
Total interest-bearing liabilities			4,864,544				45,048				3.76	%			3,646,484				26,467				2.94	%
Non-interest-bearing deposits			1,158,203												968,506
Other liabilities			72,856												52,239
Total liabilities			6,095,603												4,667,229
Shareholders’ equity			1,161,185												744,190
Total liabilities and shareholders’ equity		$	7,256,788											$	5,411,419
NET INTEREST INCOME (2)						$	69,160											$	54,605
NET INTEREST SPREAD											3.66	%											4.02	%
AVERAGE YIELD ON EARNING ASSETS (1), (2)											7.42	%											6.96	%
INTEREST EXPENSE TO EARNING ASSETS											2.93	%											2.27	%
NET INTEREST INCOME TO EARNING ASSETS OR NET INTEREST MARGIN (1), (2)											4.49	%											4.69	%