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:     September 30, 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 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.

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: 59,941,599 shares outstanding as of October 31, 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			23
Item 3. Quantitative and Qualitative Disclosures about Market Risk			40
Item 4. Controls and Procedures			40
PART II. OTHER INFORMATION			41
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 3. Defaults Upon Senior Securities			41
Item 4. Submissions of Matters to a Vote of Security Holders			41
Item 5. Other Information			41
Item 6. Exhibits			42
SIGNATURES			43
EXHIBIT INDEX			44
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)

		September 30,				December 31,
		2007				2006
ASSETS
Cash and due from banks		$	148,434			$	169,769
Temporary investments			46,787				165,879
Total cash and cash equivalents			195,221				335,648
Investment securities
Trading			4,144				4,204
Available for sale, at fair value			911,883				715,187
Held to maturity, at amortized cost			7,116				8,762
Loans held for sale			19,964				16,053
Loans and leases			6,079,435				5,361,862
Allowance for loan and lease losses			(88,278	)			(60,090	)
Net loans and leases			5,991,157				5,301,772
Restricted equity securities			15,297				15,255
Premises and equipment, net			107,189				101,830
Goodwill and other intangible assets, net			767,210				679,493
Mortgage servicing rights, net			9,474				9,952
Other assets			197,156				156,080
Total assets		$	8,225,811			$	7,344,236
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing		$	1,294,334			$	1,222,107
Interest bearing			5,223,883				4,618,187
Total deposits			6,518,217				5,840,294
Securities sold under agreements to repurchase			52,883				47,985
Federal funds purchased			20,000				—
Term debt			75,010				9,513
Junior subordinated debentures, at fair value			131,984				—
Junior subordinated debentures, at amortized cost			104,947				203,688
Other liabilities			89,580				86,545
Total liabilities			6,992,621				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: 59,864,335 in 2007 and 58,080,171 in 2006			987,543				930,867
Retained earnings			253,487				234,783
Accumulated other comprehensive loss			(7,840	)			(9,439	)
Total shareholders’ equity			1,233,190				1,156,211
Total liabilities and shareholders’ equity		$	8,225,811			$	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								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
INTEREST INCOME
Interest and fees on loans		$	116,111			$	106,320			$	331,889			$	265,444
Interest and dividends on investment securities
Taxable			9,137				6,797				25,376				20,201
Exempt from federal income tax			1,588				1,142				4,151				2,740
Dividends			96				105				249				205
Interest on temporary investments			929				374				2,439				837
Total interest income			127,861				114,738				364,104				289,427
INTEREST EXPENSE
Interest on deposits			48,138				34,121				133,750				81,112
Interest on securities sold under agreements to repurchase and federal funds purchased			530				2,155				1,757				6,346
Interest on term debt			874				692				1,767				2,775
Interest on junior subordinated debentures			4,444				3,971				12,329				10,359
Total interest expense			53,986				40,939				149,603				100,592
Net interest income			73,875				73,799				214,501				188,835
PROVISION FOR LOAN AND LEASE LOSSES			20,420				2,352				23,916				2,427
Net interest income after provision for loan and lease losses			53,455				71,447				190,585				186,408
NON-INTEREST INCOME
Service charges on deposit accounts			8,448				7,606				23,648				19,540
Brokerage commissions and fees			2,498				2,506				7,594				7,408
Mortgage banking revenue, net			1,366				1,445				5,772				5,792
Net loss on sale of investment securities			(13	)			—				(10	)			(1	)
Other income			6,244				1,919				11,434				6,745
Total non-interest income			18,543				13,476				48,438				39,484
NON-INTEREST EXPENSE
Salaries and employee benefits			28,005				26,387				85,172				71,525
Net occupancy and equipment			9,166				8,540				26,774				22,907
Communications			1,807				1,744				5,293				4,689
Marketing			1,982				1,780				4,405				4,596
Services			4,864				4,199				14,066				11,016
Supplies			984				925				2,572				2,276
Intangible amortization			1,767				1,195				4,400				2,533
Merger related expenses			263				2,451				3,200				4,358
Other expenses			4,055				3,465				10,968				9,009
Total non-interest expense			52,893				50,686				156,850				132,909
Income before income taxes			19,105				34,237				82,173				92,983
Provision for income taxes			5,928				11,381				28,421				33,069
Net income		$	13,177			$	22,856			$	53,752			$	59,914
Basic earnings per share		$	0.22			$	0.40			$	0.90			$	1.19
Diluted earnings per share		$	0.22			$	0.39			$	0.89			$	1.17

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				Income (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 income, 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 acquisition			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											53,752								53,752
Other comprehensive income, net of tax:
Unrealized gains on securities arising during the period															1,599				1,599
Comprehensive income																		$	55,351
Stock-based compensation							2,596												2,596
Stock repurchased and retired			(4,048,387	)			(96,075	)											(96,075	)
Issuances of common stock under stock plans and related tax benefit			668,978				8,043												8,043
Stock issued in connection with acquisition			5,163,573				142,112												142,112
Cash dividends ($0.55 per share)											(32,984	)							(32,984	)
Balance at September 30, 2007			59,864,335			$	987,543			$	253,487			$	(7,840	)		$	1,233,190

See notes to condensed consolidated financial statements

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

(in thousands)

		Three months ended								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Net income		$	13,177			$	22,856			$	53,752			$	59,914
Unrealized gains arising during the period on investment securities available for sale			12,425				16,008				2,665				1,617
Reclassification adjustment for losses realized in net income, (net of tax benefit of $5,000 and $4,000 for the three and nine months ended September 30, 2007, respectively)			8				—				6				1
Income tax expense related to unrealized gains/losses on investment securities, available for sale			(4,978	)			(6,403	)			(1,072	)			(648	)
Net unrealized gains on investment securities available for sale			7,455				9,605				1,599				970
Comprehensive income		$	20,632			$	32,461			$	55,351			$	60,884

See notes to condensed consolidated financial statements

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

(in thousands)

		Nine months ended
		September 30,
		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	53,752			$	59,914
Adjustments to reconcile net income to net cash provided by operating activities:
Restricted equity securities stock dividends			(180	)			(205	)
Amortization of investment premiums, net			152				907
Loss on sale of investment securities available-for-sale			10				1
Provision for loan and lease losses			23,916				2,427
Depreciation, amortization and accretion			9,295				8,503
Change in fair value of mortgage servicing rights			977				—
Change in fair value of junior subordinated debentures			(4,531	)			—
Stock-based compensation			2,596				1,563
Net decrease (increase) in trading account assets			60				(36	)
Origination of loans held for sale			(200,179	)			(194,856	)
Proceeds from sales of loans held for sale			196,521				186,873
Increase in mortgage servicing rights			(499	)			(1,337	)
Excess tax benefits from the exercise of stock options			(243	)			(855	)
Net (increase) decrease in other assets			(17,021	)			23,665
Net decrease in other liabilities			(7,914	)			(2,068	)
Net cash provided by operating activities			56,712				84,496
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale			(219,303	)			—
Sales and maturities of investment securities available-for-sale			110,517				56,303
Maturities of investment securities held-to-maturity			1,628				2,237
Redemption of restricted equity securities			5,525				9,242
Net loan and lease originations			(300,243	)			(457,625	)
Proceeds from sales of loans			18,442				19,129
Proceeds from disposals of furniture and equipment			4,314				193
Purchases of premises and equipment			(6,997	)			(8,196	)
Sales of real estate owned			—				93
Cash acquired in merger, net of cash consideration paid			78,729				36,950
Net cash used by investing activities			(307,388	)			(341,674	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit liabilities			215,245				348,851
Net increase (decrease) in Federal funds purchased			20,000				(55,000	)
Net increase in securities sold under agreements to repurchase			4,898				6,606
Term debt borrowings			—				600,000
Proceeds from the issuance of junior subordinated debentures			60,000				—
Repayment of junior subordinated debentures			(36,084	)			—
Repayment of term debt			(33,637	)			(605,087	)
Dividends paid on common stock			(32,055	)			(17,664	)
Excess tax benefits from the exercise of stock options			243				855
Proceeds from stock options exercised			7,714				8,936
Retirement of common stock			(96,075	)			(39	)
Net cash provided by financing activities			110,249				287,458
Net (decrease) increase in cash and cash equivalents			(140,427	)			30,280
Cash and cash equivalents, beginning of period			335,648				161,754
Cash and cash equivalents, end of period		$	195,221			$	192,034
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	148,143			$	95,172
Income taxes		$	37,931			$	38,808

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 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 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”). 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 period amounts have been made to conform to current classifications.

Note 2 – Business Combinations

On April 26, 2007, the Company acquired all of the outstanding common stock of North Bay Bancorp (“North Bay”) and its principal operating subsidiary, The Vintage Bank, along with its Solano Bank division. The results of North Bay’s operations have been included in the consolidated financial statements since that date. This acquisition added North Bay’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 Northern California, Oregon and Washington locations. This merger was consistent with the Company’s community banking expansion strategy and provided further opportunity to enter growth markets in Northern California.

The aggregate purchase price was $143.4 million and included 5.2 million common shares valued at $135.2 million, options to purchase 542,000 shares of common stock valued at $6.9 million and $1.1 million of direct merger costs. North Bay shareholders received 1.228 shares of the Company’s common stock for each share of North Bay common stock (“exchange ratio of 1.228:1”). The value of the common shares issued was $26.18 per share based on the average closing market price of the Company’s common stock for the fifteen trading days before the last five trading days before the merger. Outstanding North Bay stock options were converted (using the exchange ratio of 1.228:1) at a weighted average fair value of $12.78 per option.

The following table summarizes the purchase price allocation, including the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. Additional adjustments to the purchase price allocation may be required, specifically related to other assets, taxes and compensation adjustments.

(in thousands)

		April 26, 2007
Assets Acquired:
Cash and equivalents		$	78,729
Investment securities			85,589
Loans, net			437,863
Premises and equipment, net			12,940
Intangible assets			14,210
Goodwill			78,794
Other assets			19,481
Total assets acquired		$	727,606
Liabilities Assumed:
Deposits		$	462,624
Term debt			99,227
Junior subordinated debentures			10,342
Other liabilities			13,301
Total liabilities assumed			585,494
Net Assets Acquired		$	142,112

The intangible assets represent the value ascribed to the long-term deposit relationships and merchant services portfolio income stream acquired. These intangible assets are being amortized on an accelerated basis over a weighted average estimated useful life of ten to fifteen years. The intangible assets are estimated not to have a significant residual value. Goodwill represents the excess of the total purchase price paid for North Bay over the fair values of the assets acquired, net of the fair values of liabilities assumed. Goodwill has been assigned to our 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 intangible or goodwill assets during the period from acquisition to September 30, 2007. At September 30, 2007, goodwill recorded in connection with the North Bay acquisition was $77.2 million. The $1.6 million decrease from April 26, 2007 is primarily due to the recognition of a tax benefit upon exercise of fully vested acquired options.

The following table presents unaudited pro forma results of operations for the nine months ended September 30, 2007, and three and nine months ended September 30, 2006 as if the acquisition of North Bay had occurred on January 1, 2006. Any cost savings realized as a result of the North Bay 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 acquisition actually occurred on January 1, 2006:

Pro Forma Financial Information — Unaudited

(in thousands, except per share data)

		Nine Months Ended September 30, 2007
						North				Pro Forma				Pro Forma
		Umpqua				Bay (a)				Adjustments				Combined
Net interest income		$	214,501			$	8,732			$	462	(b)		$	223,695
Provision for loan and lease losses			23,916				—				—				23,916
Non-interest income			48,438				1,434				—				49,872
Non-interest expense			156,850				6,985				(2,932	)(c)			160,903
Income before income taxes			82,173				3,181				3,394				88,748
Provision for income taxes			28,421				1,054				1,358	(d)			30,833
Net income		$	53,752			$	2,127			$	2,036			$	57,915
Earnings per share:
Basic		$	0.90											$	0.93
Diluted		$	0.89											$	0.92
Average shares outstanding:
Basic			59,790				1,772				404	(e)			61,966
Diluted			60,450				1,839				419	(e)			62,708

(in thousands, except per share data)

		Three Months Ended September 30, 2006
						North				Pro Forma				Pro Forma
		Umpqua				Bay				Adjustments				Combined
Net interest income		$	73,799			$	6,956			$	2	(a)		$	80,757
Provision for loan and lease losses			2,352				—				—				2,352
Non-interest income			13,476				1,239				—				14,715
Non-interest expense			50,686				5,388				600	(b)			56,674
Income before income taxes			34,237				2,807				(598	)			36,446
Provision for income taxes			11,381				931				(239	) (c)			12,073
Net income		$	22,856			$	1,876			$	(359	)		$	24,373
Earnings per share:
Basic		$	0.40											$	0.39
Diluted		$	0.39											$	0.38
Average shares outstanding:
Basic			57,802				4,134				943	(d)			62,879
Diluted			58,452				4,296				979	(d)			63,727

(in thousands, except per share data)

		Nine Months Ended September 30, 2006
						North				Pro Forma				Pro Forma
		Umpqua				Bay				Adjustments				Combined
Net interest income		$	188,835			$	21,651			$	(235	)(a)		$	210,251
Provision for loan and lease losses			2,427				200				—				2,627
Non-interest income			39,484				3,479				—				42,963
Non-interest expense			132,909				16,943				1,917	(b)			151,769
Income before income taxes			92,983				7,987				(2,152	)			98,818
Provision for income taxes			33,069				2,745				(861	)(c)			34,953
Net income		$	59,914			$	5,242			$	(1,291	)		$	63,865
Earnings per share:
Basic		$	1.19											$	1.15
Diluted		$	1.17											$	1.13
Average shares outstanding:
Basic			50,378				4,123				940	(d)			55,441
Diluted			51,010				4,284				977	(d)			56,271

The following table summarizes activity in the Company’s accrued restructuring charges, recorded in other liabilities, related to the North Bay acquisition from acquisition date of April 26, 2007 to September 30, 2007:

Accrued Restructuring Charges

(in thousands)

Beginning balance		$	2,796
Utilization:
Cash payments			(1,267	)
Ending Balance		$	1,529

The Company expects additional merger-related expenses incurred in connection with the North Bay acquisition to be insignificant.

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. 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 California, Oregon and Washington locations. This merger was consistent with the Company’s community banking expansion strategy and provided 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 purchase price allocation, including the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. Additional adjustments to the purchase price allocation may be required, specifically related to taxes.

(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

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 estimated not 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 our 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 September 30, 2007. At September 30, 2007, goodwill recorded in connection with the Western Sierra acquisition was $247.9 million.

The following table presents unaudited pro forma results of operations for the nine months ended September 30, 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 acquisition actually occurred on January 1, 2006:

Pro Forma Financial Information – Unaudited
(in thousands, except per share data)

		Nine Months Ended September 30, 2006
						Western				Pro Forma				Pro Forma
		Umpqua				Sierra (a)				Adjustments				Combined
Net interest income		$	188,835			$	25,834			$	(99	)(b)		$	214,570
Provision for loan and lease losses			2,427				350				—				2,777
Non-interest income			39,484				5,040				—				44,524
Non-interest expense			132,909				18,168				(3,270	)(c)			147,807
Income before income taxes			92,983				12,356				3,171				108,510
Provision for income taxes			33,069				4,898				1,268	(d)			39,235
Net income		$	59,914			$	7,458			$	1,903			$	69,275
Earnings per share:
Basic		$	1.19											$	1.21
Diluted		$	1.17											$	1.19
Average shares outstanding:
Basic			50,378				4,401				2,685	(e)			57,464
Diluted			51,010				4,517				2,755	(e)			58,282

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)

		Nine months ended
		September 30, 2007
Beginning balance		$	4,369
Additions:
Severance, retention and other compensation			217
Premises			1,093
Utilization:
Cash payments			(2,416	)
Ending Balance		$	3,263

These accrued restructuring charges will be utilized by May 2012. No additional merger-related expenses are expected in connection with the Western Sierra or any other acquisition prior to Western Sierra.

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 period of 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 mortgage servicing rights (“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:

(in thousands)

		Three months ended								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Balance, beginning of period(1)		$	9,966			$	11,550			$	9,952			$	10,890
Additions for new mortgage servicing rights capitalized			156				225				499				1,337
Changes in fair value:
Due to changes in model inputs or assumptions(2)			(220	)			—				675				—
Other(3)			(428	)			—				(1,652	)			—
Amortization of servicing rights			—				(292	)			—				(933	)
Impairment charge			—				(1,056	)			—				(867	)
Balance, end of period		$	9,474			$	10,427			$	9,474			$	10,427
Balance of loans serviced for others		$	877,648			$	978,723
MSR as a percentage of serviced loans			1.08	%			1.07	%

The amount of contractually specified servicing fees, late fees and ancillary fees earned, recorded in mortgage banking revenue on the consolidated statements of income, were $546,000 and $1.9 million, respectively, for the three and nine months ended September 30, 2007, as compared to $652,000 and $2.0 million for the same periods in 2006.

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 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. Key assumptions used in measuring the fair value of MSR as of September 30, 2007 were as follows:

Constant prepayment rate			12.17	%
Discount rate			8.80	%
Weighted average life (years)			5.8

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 September 30, 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. The Company formed a new Trust that issued trust preferred

securities representing an obligation of $61.9 million, and redeemed existing trust preferred securities representing an obligation of $25.8 million in the third quarter. One Trust, representing an obligation of approximately $10.3 million (fair value of approximately $10.3 million as of the merger date), was assumed in connection with the North Bay merger and subsequently redeemed in June 2007. 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. 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 previous mergers.

Following is information about the Trusts as of September 30, 2007:

Junior Subordinated Debentures
(in thousands)

						Issued				Carrying								Effective
Trust Name		Issue Date				Amount				Value (1)				Rate (2)				Rate (3)				Maturity Date				Redemption Date
At Fair Value:
Umpqua Statutory Trust II		October 2002				$	20,619			$	20,945			Floating (4)					8.23	%		October 2032				October 2007
Umpqua Statutory Trust III		October 2002					30,928				31,376			Floating (5)					8.23	%		November 2032				November 2007
Umpqua Statutory Trust IV		December 2003					10,310				10,479			Floating (6)					8.23	%		January 2034				January 2009
Umpqua Statutory Trust V		December 2003					10,310				10,311			Floating (6)					8.23	%		March 2034				March 2009
Umpqua Master Trust IA		August 2007					41,238				38,436			Floating (7)					8.23	%		September 2037				September 2012
Umpqua Master Trust IB		September 2007					20,619				20,437			Floating (8)					8.23	%		December 2037				December 2012
							134,024				131,984
At Amortized Cost:
HB Capital Trust I		March 2000					5,310				6,566				10.875	%			7.94	%		March 2030				March 2010
Humboldt Bancorp Statutory Trust I		February 2001					5,155				6,062				10.200	%			8.03	%		February 2031				February 2011
Humboldt Bancorp Statutory Trust II		December 2001					10,310				11,606			Floating (9)					7.75	%		December 2031				December 2006
Humboldt Bancorp Staututory Trust III		September 2003					27,836				31,327				6.75%	(10)			5.04	%		September 2033				September 2008
CIB Capital Trust		November 2002					10,310				11,405			Floating (5)					7.76	%		November 2032				November 2007
Western Sierra Statutory Trust I		July 2001					6,186				6,362			Floating (11)					6.85	%		July 2031				July 2006
Western Sierra Statutory Trust II		December 2001					10,310				10,603			Floating (9)					7.15	%		December 2031				December 2006
Western Sierra Statutory Trust III		September 2003					10,310				10,508			Floating (12)					6.85	%		September 2033				September 2008
Western Sierra Statutory Trust IV		September 2003					10,310				10,508			Floating (12)					6.85	%		September 2033				September 2008
							96,037				104,947
		Total				$	230,061			$	236,931

The $230.1 million of trust preferred securities issued to the Trusts as of September 30, 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 $6.9 million and $5.8 million at September 30, 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 September 30, 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, 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. At September 30, 2007, the Company’s restricted core capital elements were 32% of total core capital, net of

goodwill. 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 principles (“GAAP”).

Accounting for 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.

Umpqua selected the fair value measurement option for certain pre-existing junior subordinated debentures of $97.9 million (the Umpqua Statutory Trusts) as of the adoption date. The remaining junior subordinated debentures as of the adoption date were acquired through business combinations and were measured at fair value at the time of acquisition.

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 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.

On July 19, 2007, the Company announced plans to issue $130 million of new trust preferred securities over the next four months and to use the proceeds to redeem $75 million of trust preferred securities related to three Trusts during the third and fourth quarters; to fund previously announced share repurchases; and, for other corporate purposes. Of the $61.9 million in new trust preferred securities issued in the third quarter, the Company used $25.8 million of the proceeds to redeem trust preferred securities issued by one Trust and the remainder to repurchase 1.65 million shares of common stock. On October 18, 2007, the Company announced that it intended to put on hold plans to issue additional trust preferred securities for at least another quarter until there is improvement in the credit markets. The Company selected the fair value measurement option for the trust preferred securities issued in the third quarter.

As a result of the fair value measurement election for the above financial instruments, we recorded gains of $4.1 million and $4.7 million for the three and nine months ended September 30, 2007 resulting from the change in fair value of the junior subordinated debentures recorded at fair value. These gains were recorded as other non-interest income. Interest expense on junior subordinated debentures is recorded on an accrual basis. The junior subordinated debentures recorded at fair value of $132.0 million had contractual unpaid principal amounts of $134.0 million outstanding as of September 30, 2007.

Note 5 – 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 upon expiration.

Rent expense for the three and nine months ended September 30, 2007 was $3.0 million and $8.9 million, respectively, compared to $2.7 million and $6.7 million in the comparable periods in 2006. Rent expense was offset by rent income for the three and nine months ended September 30, 2007 of $183,000 and $459,000, respectively, compared to $143,000 and $271,000 in the comparable periods in 2006.

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, 2007
Commitments to extend credit		$	1,498,690
Commitments to extend overdrafts		$	197,382
Commitments to originate loans held-for-sale		$	35,514
Forward sales commitments		$	22,000
Standby letters of credit		$	56,009

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 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.

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 and nine months ended September 30, 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 September 30, 2007, the Bank had commitments to originate mortgage loans held for sale totaling $35.5 million with a net fair value asset of approximately $34,000. As of that date, it also had forward sales commitments of $22.0 million with a net fair value liability of $52,000. The Bank recorded a loss of $103,000 and a gain of $253,000 related to its commitments to originate mortgage loans and related forward sales commitments in the three and nine months ended September 30, 2007, respectively, as compared to a loss of $152,000 and a gain of $80,000 in the comparable periods in 2006.

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 and nine months ended September 30, 2007 and 2006. At September 30, 2007, approximately $28.5 million of standby letters of credit expire within one year, and $27.5 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 $188,000 as of September 30, 2007.

At September 30, 2007, the reserve for unfunded commitments, which is included in other liabilities on the consolidated balance sheet, was $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 80% and 81% of the Company’s loan and lease portfolio at September 30, 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 incomes represent the primary source of repayment for a majority of these loans. There has been deterioration in the northern California residential development market which has led to an increase in non-performing loans and provision for loan and lease losses this quarter.

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, restricted stock and restricted stock units (included in salaries and employee benefits) was $783,000 and $2.6 million for the three and nine months ended September 30, 2007, respectively, as compared to $545,000 and $1.6 million for the same periods in 2006, respectively. The total income tax benefit recognized in the income statement related to stock based compensation was $313,000 and $1.0 million for the three and nine months ended September 30, 2007, respectively, as compared to $218,000 and $625,000 for the same periods in 2006, respectively.

The following table summarizes information about stock option activity for the nine months ended September 30, 2007:

(in thousands, except per share data)

		Nine months ended September 30, 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
Acquisitions			542			$	13.39
Exercised			(640	)		$	12.04
Forfeited/expired			(42	)		$	21.63
Balance, end of period			1,717			$	15.53				5.21			$	9,789
Options exercisable, end of period			1,309			$	13.27				4.57			$	9,627

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, 2007 was $1.8 million and $7.9 million, respectively. This compared to the total intrinsic value of options exercised during the three and nine months September 30, 2006 of $4.1 million and $10.4 million, respectively. During the three and nine months ended September 30, 2007, the amount of cash received from the exercise of stock options was $2.7 million and $7.7 million, respectively.

The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. There were no stock options granted in the three months ended September 30, 2007 and 2006. The following assumptions were used for stock options granted in the nine months ended September 30, 2007 and 2006:

		Nine months ended
		September 30,
		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 Company grants restricted stock periodically as a part of the 2003 Plan for the benefit of employees. Restricted shares issued currently vest on an annual basis over five years for all grants issued. The following table summarizes information about non-vested restricted shares as of September 30, 2007 and changes for the nine months ended September 30, 2007:

(in thousands, except per share data)

		Nine months ended September 30, 2007
		Restricted				Weighted
		Shares				Average Grant
		Outstanding				Date Fair Value
Balance, beginning of period			122			$	26.36
Granted			86			$	27.70
Released			(29	)		$	24.90
Forfeited/expired			(15	)		$	26.29
Balance, end of period			164			$	27.32