Edgar Filing: UMPQUA HOLDINGS CORP

e10vq

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: June 30, 2006


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

for the transition period from to .

Commission File Number: 000-25597

Umpqua Holdings Corporation

(Exact Name of Registrant as Specified in Its Charter)


OREGON		93-1261319

(State or Other Jurisdiction		(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: 57,777,868 shares outstanding as of July 31, 2006

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			35

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 Securities Holders			36

Item 5. Other Information			37

Item 6. Exhibits			37

SIGNATURES			38

EXHIBIT INDEX			39
EXHIBIT 3.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 31.3
EXHIBIT 32

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

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

(in thousands, except shares)


	June 30,			December 31,
	2006			2005
ASSETS
Cash and due from banks	$	176,983		$	151,521
Temporary investments		61,981			10,233

Total cash and cash equivalents		238,964			161,754
Trading account assets		376			601
Investment securities available for sale, at fair value		692,910			671,868
Investment securities held to maturity, at amortized cost		9,676			8,677
Mortgage loans held for sale		31,118			9,061
Loans		5,296,720			3,921,631
Allowance for loan losses		(58,516	)		(43,885	)

Net loans		5,238,204			3,877,746

Restricted equity securities		20,538			14,263
Premises and equipment, net		100,040			88,865
Goodwill and other intangible assets, net		682,789			408,503
Mortgage servicing rights, net		11,550			10,890
Other assets		153,778			108,411

Total assets	$	7,179,943		$	5,360,639


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing	$	1,264,249		$	987,714
Interest bearing		4,200,521			3,298,552

Total deposits		5,464,770			4,286,266
Securities sold under agreements to repurchase and federal funds purchased		261,720			113,865
Term debt		57,081			3,184
Junior subordinated debentures		204,222			165,725
Other liabilities		79,050			53,338

Total liabilities		6,066,843			4,622,378


COMMITMENTS AND CONTINGENCIES (NOTE 8)

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: 57,651,533 in 2006 and 44,556,269 in 2005		923,309			564,579
Retained earnings		208,335			183,591
Accumulated other comprehensive loss		(18,544	)		(9,909	)

Total shareholders’ equity		1,113,100			738,261

Total liabilities and shareholders’ equity	$	7,179,943		$	5,360,639

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					Six months ended
	June 30,					June 30,
	2006			2005		2006			2005
INTEREST INCOME
Interest and fees on loans	$	86,004		$	60,220	$	159,124		$	117,156
Interest and dividends on investment securities
Taxable		6,693			6,252		13,404			12,801
Exempt from federal income tax		836			699		1,558			1,412
Dividends		56			38		100			81
Other interest income		354			454		503			687

Total Interest Income		93,943			67,663		174,689			132,137

INTEREST EXPENSE
Interest on deposits		25,953			13,485		46,991			24,809
Interest on securities sold under agreements to repurchase and federal funds purchased		1,802			407		4,191			908
Interest on term debt		2,055			139		2,083			544
Interest on junior subordinated debentures		3,376			2,550		6,388			4,944

Total interest expense		33,186			16,581		59,653			31,205

Net interest income		60,757			51,082		115,036			100,932
Provision for loan losses		54			1,400		75			2,400

Net interest income after provision for loan losses		60,703			49,682		114,961			98,532

NON-INTEREST INCOME
Service charges on deposit accounts		6,450			5,426		11,934			10,248
Brokerage commissions and fees		2,534			2,879		4,902			6,008
Mortgage banking revenue, net		2,503			228		4,347			1,578
Net (loss) gain on sale of investment securities		(1	)		1,398		(1	)		1,398
Other income		2,320			1,993		4,826			3,294

Total non-interest income		13,806			11,924		26,008			22,526

NON-INTEREST EXPENSE
Salaries and employee benefits		23,337			20,361		45,138			40,640
Net occupancy and equipment		7,199			6,109		14,367			12,242
Communications		1,480			1,578		2,945			2,823
Marketing		1,491			1,310		2,816			2,067
Services		3,414			2,835		6,817			6,347
Supplies		722			710		1,351			1,237
Intangible amortization		791			660		1,338			1,320
Merger related expenses		1,656			161		1,907			262
Other expenses		3,153			2,697		5,544			4,918

Total non-interest expenses		43,243			36,421		82,223			71,856

Income before income taxes		31,266			25,185		58,746			49,202
Provision for income taxes		11,635			9,179		21,688			18,177

Net income	$	19,631		$	16,006	$	37,058		$	31,025


Basic earnings per share	$	0.40		$	0.36	$	0.80		$	0.70
Diluted earnings per share	$	0.40		$	0.36	$	0.79		$	0.69

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, 2005		44,211,075		$	560,611		$	128,112		$	(1,110	)	$	687,613
Net income								69,735						69,735
Other comprehensive loss, net of tax:
Unrealized losses on securities arising during the year (1)											(8,799	)		(8,799	)

Comprehensive income													$	60,936

Stock-based compensation					693									693
Stock repurchased and retired		(84,185	)		(1,904	)								(1,904	)
Issuances of common stock under stock plans and related tax benefit		429,379			5,179									5,179
Cash dividends ($0.32 per share)								(14,256	)					(14,256	)

Balance at December 31, 2005		44,556,269		$	564,579		$	183,591		$	(9,909	)	$	738,261


BALANCE AT JANUARY 1, 2006		44,556,269		$	564,579		$	183,591		$	(9,909	)	$	738,261
Net income								37,058						37,058
Other comprehensive loss, net of tax:
Unrealized losses on securities arising during the year (2)											(8,635	)		(8,635	)

Comprehensive income													$	28,423

Stock-based compensation					1,019									1,019
Stock repurchased and retired		(48	)		(1	)								(1	)
Issuances of common stock under stock plans and related tax benefit		349,983			3,991									3,991
Stock issued in connection with acquisitions		12,745,329			353,721									353,721
Cash dividends ($0.24 per share)								(12,314	)					(12,314	)

Balance at June 30, 2006		57,651,533		$	923,309		$	208,335		$	(18,544	)	$	1,113,100


(1)		Net unrealized holding loss on securities of $7.9 million (net of $5.3 million tax benefit), plus reclassification adjustment for net gains included in net income of $863,000 (net of $576,000 tax expense).

(2)		Net unrealized holding loss on securities of $8.6 million (net of $5.4 million tax benefit), plus reclassification adjustment for net gains included in net income of $1,000.

See notes to condensed consolidated financial statements

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

(in thousands)


	Three months ended						Six months ended
	June 30,						June 30,
	2006			2005			2006			2005
Net income	$	19,631		$	16,006		$	37,058		$	31,025


Unrealized (losses) gains arising during the period on investment securities available for sale		(10,407	)		8,390			(14,010	)		(1,150	)

Reclassification adjustment for losses (gains) realized in net income, net of tax (expense of $559 for the three and six months ended June 30, 2005)		1			(839	)		1			(839	)

Income tax benefit (expense) related to unrealized losses/gains on investment securities, available for sale		4,088			(3,356	)		5,374			460


Net unrealized (losses) gains on investment securities available for sale		(6,318	)		4,195			(8,635	)		(1,529	)

Comprehensive income	$	13,313		$	20,201		$	28,423		$	29,496

See notes to condensed consolidated financial statements

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

(in thousands)


	Six months ended
	June 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	37,058		$	31,025
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Federal Home Loan Bank stock dividends		(100	)		(81	)
Deferred income tax benefit		(264	)		—
Amortization of investment premiums, net		572			518
Origination of loans held for sale		(133,339	)		(146,221	)
Proceeds from sales of loans held for sale		112,889			147,207
Net decrease in trading account assets		270			174
Provision for loan losses		75			2,400
Gain on sales of loans		(388	)		(496	)
Loss (gain) on sale of investment securities available-for-sale		1			(1,398	)
(Increase) decrease in mortgage servicing rights		(1,301	)		917
Depreciation and amortization		5,719			5,607
Tax benefits of stock options exercised		187			1,592
Net decrease (increase) in other assets		37,518			(47,323	)
Net decrease in other liabilities		(610	)		(177	)
Other, net		484			271

Net cash provided by operating activities		58,771			(5,985	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale		—			(634	)
Sales and maturities of investment securities available-for-sale		37,998			103,779
Redemption of Federal Home Loan Bank stock		87			41
Maturities of investment securities held-to-maturity		1,850			75
Net loan and lease originations		(386,523	)		(157,006	)
Purchase of loans		(15,245	)		(3,904	)
Disposals of furniture and equipment		37			40
Cash acquired in merger, net of cash consideration paid		36,950			—
Proceeds from sales of loans		50,437			15,052
Purchases of premises and equipment		(5,677	)		(6,966	)

Net cash used by investing activities		(280,086	)		(49,523	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit liabilities		162,704			174,242
Net increase in Fed funds purchased		145,000			47,000
Net increase (decrease) in securities sold under agreements to repurchase		2,855			(7,818	)
Dividends paid on common stock		(10,732	)		(2,672	)
Excess tax benefits from the exercise of stock options		752			—
Proceeds from stock options exercised		3,052			3,601
Retirement of common stock		(1	)		(1,149	)
Repayment of term debt		(5,105	)		(75,155	)

Net cash provided by financing activities		298,525			138,049

Net increase in cash and cash equivalents		77,210			82,541
Cash and cash equivalents, beginning of period		161,754			118,207

Cash and cash equivalents, end of period	$	238,964		$	200,748


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	58,345		$	28,170
Income taxes	$	19,458		$	12,674

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 2005 Annual Report filed on Form 10-K. There have been no significant changes to these policies. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the 2005 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 – Stock-Based Compensation

The Company adopted the 2003 Stock Incentive Plan (“2003 Plan”) in April 2003 that provides for grants of up to 2 million shares. The plan further provides that no grants may be issued if existing options and subsequent grants under the 2003 Plan exceed 10% of the Company’s outstanding shares on a diluted basis. Generally, options vest ratably over a period of five years. Under the terms of the 2003 Plan, the exercise price of each option equals the market price of the Company’s stock on the date of the grant, and the maximum term is ten years.

The Company has options outstanding under two prior plans adopted in 1995 and 2000, respectively. With the adoption of the 2003 Plan, no additional grants can be issued under the previous plans. The Company also assumed various plans in connection with mergers and acquisitions but does not make grants under those plans.

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share Based Payments, 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). Prior to January 1, 2006, we accounted for share-based compensation to employees under the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. Under the intrinsic value method, compensation expense is recognized only to the extent an option’s exercise price is less than the market value of the underlying stock on the date of grant. We also followed the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. We adopted SFAS No. 123R under the modified prospective method which means that the unvested portion of previously granted awards and any awards that are granted or modified after the date of adoption will be measured and accounted for under the provisions of SFAS No. 123R. Accordingly, financial statement amounts for prior periods presented have not been restated to reflect the fair value method of recognizing compensation cost relating to stock options. The Company will continue to use straight-line recognition of expenses for awards with graded vesting.

As a result of adopting SFAS No. 123R on January 1, 2006, the Company’s results for the three and six months ended June 30, 2006 reflected the following changes:

(in thousands, except per share data)


	Three months ended			Six months ended
	June 30, 2006			June 30, 2006
	Increase/(Decrease)
Salaries and employee benefits	$	344		$	698
Income before income taxes	$	(344	)	$	(698	)
Provision for income taxes	$	(138	)	$	(279	)
Net income	$	(206	)	$	(419	)
Basic earnings per share	$	0.00		$	0.00
Diluted earnings per share	$	0.00		$	(0.01	)

The compensation cost related to stock options that has been charged against income (included in salaries and employee benefits) was $355,000 and $721,000 for the three and six months ended June 30, 2006, respectively, as compared to $14,000 and $30,000 for the

same periods in 2005, respectively. This cost includes incremental expense resulting under SFAS No. 123R as well as costs related to unvested options assumed in connection with acquisitions as described below. The total income tax benefit recognized in the income statement related to stock options was $142,000 and $288,000 for the three and six months ended June 30, 2006, respectively, as compared to $6,000 and $12,000 for the same periods in 2005, 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. Expected volatility is based on the historical volatility of the price of the Company’s stock. The Company uses historical data to estimate option exercise and stock option forfeiture rates within the valuation model. The expected term of options granted is derived from the vesting period and contractual term using an allowed “short-cut method” and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no stock option grants in the three months ended June 30, 2006.


	Six months ended
	June 30, 2006
Dividend yield		2.68	%
Expected life (years)		6.4
Expected volatility		35	%
Risk-free rate		4.30	%
Weighted average grant date fair value of options granted	$	9.18

Under APB No. 25, for all options originally granted by the Company, no compensation cost was recognized related to stock options in the three and six months ended June 30, 2005. Compensation cost, net of tax, of $8,000 and $18,000, was recognized as salaries and benefits expense for the three and six months ended June 30, 2005, respectively, for certain unvested options that were assumed in connection with the acquisitions of Centennial Bancorp and Humboldt Bancorp that continued to vest after acquisition. The following table presents the effect on net income and earnings per share if the fair value based method prescribed by SFAS No. 123, using straight-line expense recognition, had been applied to all outstanding and unvested awards in the three and six months ended June 30, 2005:

(in thousands, except per share data)


	Three months ended			Six months ended
	June 30, 2005			June 30, 2005
NET INCOME, AS REPORTED	$	16,006		$	31,025
Deduct: Additional stock-based employee compensation determined under the fair value based method for all awards, net of tax effects		(113	)		(215	)


Pro forma net income	$	15,893		$	30,810


NET INCOME PER SHARE:
Basic — as reported	$	0.36		$	0.70
Basic — pro forma	$	0.36		$	0.69
Diluted — as reported	$	0.36		$	0.69
Diluted — pro forma	$	0.35		$	0.69

The following weighted-average assumptions were used to determine the fair value of option grants as of the grant date to determine compensation cost under SFAS No. 123:


	Three months ended			Six months ended
	June 30, 2005			June 30, 2005
Dividend yield		1.66	%			1.66	%
Expected life (years)		7.5				7.5
Expected volatility		38	%			38	%
Risk-free rate		4.04	%			4.20	%
Weighted average grant date fair value of options granted	$	8.90			$	9.41

The following table summarizes information about stock option activity for the six months ended June 30, 2006:

(In thousands, except per share data)


	Six months ended June 30, 2006
						Weighted-Avg
	Options			Weighted-Avg		Remaining Contractual		Aggregate
	Outstanding			Exercise Price		Term (Years)		Intrinsic Value
Balance, beginning of period		1,846		$	13.75
Granted		25		$	28.43
Acquisitions		723		$	14.32
Exercised		(348	)	$	8.78
Forfeited/expired		(18	)	$	17.87


Balance, end of period		2,228		$	14.85		6.32	$	24,178


Options exercisable at end of period		1,666		$	12.62		5.80	$	21,718

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 six months ended June 30, 2006 was $3.0 million and $6.3 million, respectively. This compared to the total intrinsic value of options exercised during the three and six months ended June 30, 2005 of $946,000 and $4.6 million, respectively. During the three and six months ended June 30, 2006, the amount of cash received from the exercise of stock options was $1.8 million and $3.1 million, respectively. As of June 30, 2006, there was $3.8 million of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of 3.1 years.

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. Recipients of restricted stock do not pay any cash consideration to the Company for the shares, and receive all dividends with respect to such shares, whether or not the shares have vested. Restrictions are based on continuous service.

The following table summarizes information about non-vested restricted shares as of June 30, 2006 and changes for the six months ended June 30, 2006:

(In thousands, except per share data)


	Six months ended June 30, 2006
	Restricted
	Shares			Average Grant
	Outstanding			Date Fair Value
Balance, beginning of period		47		$	20.77
Granted		91		$	27.98
Vested		—			—
Forfeited/expired		(4	)	$	22.20


Balance, end of period		134		$	25.62

The compensation cost related to restricted stock that has been charged against income (included in salaries and employee benefits) was $195,000 and $298,000 for the three and six months ended June 30, 2006, respectively, as compared to $55,000 and $120,000 for the same periods in 2005, respectively. The total income tax benefit recognized in the income statement related to restricted stock was $78,000 and $119,000 for the three and six months ended June 30, 2006, respectively as compared to $22,000 and $48,000 for the same periods in 2005, respectively. The total fair value of shares vested during the three and six months ended June 30, 2006 was $8,000. This compared to total fair value of shares vested during the three and six months ended June 30, 2005 of $5,000 and $18,000, respectively. As of June 30, 2006, there was $3.1 million of total unrecognized compensation cost related to non-vested restricted stock which is expected to be recognized over a weighted-average period of 4.0 years.

For the three months ended June 30, 2006 and 2005, the Company received income tax benefits of $749,000 and $259,000, 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. For the six months ended June 30, 2006 and 2005, the Company received income tax benefits of $1.9 million and $1.6 million, respectively. Prior to the adoption of SFAS No. 123R, the Company presented all tax

benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. SFAS No. 123R requires the cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The amount of excess tax benefit classified as a financing cash flow in the current period was $752,000.

Note 3 – 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 has 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 $14.32 per option.

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


	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		27,625
Goodwill		247,799
Other assets		82,866

Total assets acquired	$	1,491,466


Liabilities Assumed:
Deposits	$	1,016,053
Term debt		59,030
Junior subordinated debentures		38,094
Other liabilities		24,540

Total liabilities assumed		1,137,717

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 June 30, 2006, the goodwill asset recorded in connection with the Western Sierra acquisition was $247.8 million.

The core deposit intangible asset shown in the table above 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 three and six-month month periods ended June 30, 2006 and 2005.

The following tables present unaudited pro forma results of operations for the three and six months ended June 30, 2006 and 2005 as if the acquisition of Western Sierra had occurred on January 1, 2005. The Company expects to realize significant cost savings as a result of the Western Sierra merger that are not reflected in the pro forma consolidated condensed statements of income. No assurance can be given with respect to the ultimate level of such revenue enhancements or cost savings. 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, 2005:

Pro Forma Financial Information — Unaudited

(in thousands, except per share data)


	Three Months Ended June 30, 2006
			Western		Pro Forma			Pro Forma
	Umpqua		Sierra		Adjustments			Combined
Net interest income	$	60,757	$	10,390	$	1,729	(a)	$	72,876
Provision for loan losses		54		350		—			404
Non-interest income		13,806		1,889		—			15,695
Non-interest expense		43,243		7,619		(968	)(b)		49,894

Income before income taxes		31,266		4,310		2,697			38,273
Provision for income taxes		11,635		1,708		1,079	(c)		14,422

Net income	$	19,631	$	2,602	$	1,618		$	23,851


Earnings per share:
Basic	$	0.40						$	0.42
Diluted	$	0.40						$	0.41

Average shares outstanding:
Basic		48,529		5,466		3,334	(d)		57,329
Diluted		48,994		5,584		3,406	(d)		57,984


(a)		Consists of net accretion of fair value adjustments related to the Western Sierra acquisition.

(b)		Consists of merger related expenses of $1.7 million, partially offset by core deposit intangible amortization of $688,000.

(c)		Income tax effect of pro forma adjustments at 40%.

(d)		Additional shares issued at an exchange ratio of 1.61:1.

(in thousands, except per share data)


	Six Months Ended June 30, 2006
			Western		Pro Forma			Pro Forma
	Umpqua		Sierra		Adjustments			Combined
Net interest income	$	115,036	$	25,834	$	3,510	(a)	$	144,380
Provision for loan losses		75		350		—			425
Non-interest income		26,008		5,040		—			31,048
Non-interest expense		82,223		18,168		(531	)(b)		99,860

Income before income taxes		58,746		12,356		4,041			75,143
Provision for income taxes		21,688		4,898		1,616	(c)		28,202

Net income	$	37,058	$	7,458	$	2,425		$	46,941


Earnings per share:
Basic	$	0.80						$	0.82
Diluted	$	0.79						$	0.81

Average shares outstanding:
Basic		46,604		6,638		4,049	(d)		57,291
Diluted		47,112		6,812		4,155	(d)		58,079


(a)		Consists of net accretion of fair value adjustments related to the Western Sierra acquisition.

(b)		Consists of merger related expenses of $1.9 million, partially offset by core deposit intangible amortization of $1.4 million.

(c)		Income tax effect of pro forma adjustments at 40%.

(d)		Additional shares issued at an exchange ratio of 1.61:1.

(in thousands, except per share data)


	Three Months Ended June 30, 2005
			Western		Pro Forma			Pro Forma
	Umpqua		Sierra		Adjustments			Combined
Net interest income	$	51,082	$	14,355	$	1,427	(a)	$	66,864
Provision for loan losses		1,400		460		—			1,860
Non-interest income		11,924		3,531		—			15,455
Non-interest expense		36,421		11,066		732	(b)		48,219

Income before income taxes		25,185		6,360		695			32,240
Provision for income taxes		9,179		2,269		278	(c)		11,726

Net income	$	16,006	$	4,091	$	417		$	20,514


Earnings per share:
Basic	$	0.36						$	0.36
Diluted	$	0.36						$	0.35

Average shares outstanding:
Basic		44,436		7,713		4,705	(d)		56,854
Diluted		44,988		7,982		4,869	(d)		57,839


(a)		Consists of net accretion of fair value adjustments related to the Western Sierra acquisition.

(b)		Consists of amortization of core deposit intangible asset related to the Western Sierra acquisition.

(c)		Income tax effect of pro forma adjustments at 40%.

(d)		Additional shares issued at an exchange ratio of 1.61:1.

(in thousands, except per share data)


	Six Months Ended June 30, 2005
			Western		Pro Forma			Pro Forma
	Umpqua		Sierra		Adjustments			Combined
Net interest income	$	100,932	$	28,200	$	3,441	(a)	$	132,573
Provision for loan losses		2,400		910		—			3,310
Non-interest income		22,526		6,140		—			28,666
Non-interest expense		71,856		20,881		1,464	(b)		94,201

Income before income taxes		49,202		12,549		1,977			63,728
Provision for income taxes		18,177		4,435		791	(c)		23,403

Net income	$	31,025	$	8,114	$	1,186		$	40,325


Earnings per share:
Basic	$	0.70						$	0.71
Diluted	$	0.69						$	0.70

Average shares outstanding:
Basic		44,384		7,679		4,684	(d)		56,747
Diluted		44,972		7,972		4,863	(d)		57,807


(a)		Consists of net accretion of fair value adjustments related to the Western Sierra acquisition.

(b)		Consists of amortization of core deposit intangible asset related to the Western Sierra acquisition.

(c)		Income tax effect of pro forma adjustments at 40%.

(d)		Additional shares issued at an exchange ratio of 1.61:1.

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

(in thousands)


	Western Sierra
	2006
Beginning balance	$	—
Additions:
Severance, retention and other compensation		5,285
Other		22
Utilization:
Cash payments		(130	)
Non-cash write-downs and other adjustments		(72	)

Ending Balance	$	5,105

The Company expects to incur approximately $1.4 million of additional merger-related expenses, generally consisting of professional fees and compensation costs, in connection with the Western Sierra merger.

Note 4 – 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 and six months ended June 30, 2006 and 2005:

Earnings Per Share

(in thousands, except per share data)


	Three months ended				Six months ended
	June 30,				June 30,
	2006		2005		2006		2005
Basic earnings per share:
Weighted average shares outstanding		48,529		44,436		46,604		44,384
Net income	$	19,631	$	16,006	$	37,058	$	31,025
Basic earnings per share	$	0.40	$	0.36	$	0.80	$	0.70

Diluted earnings per share:
Weighted average shares outstanding		48,529		44,436		46,604		44,384
Net effect of the assumed exercise of stock options and vesting of restricted shares, based on the treasury stock method		465		552		508		588

Total weighted average shares and common stock equivalents outstanding		48,994		44,988		47,112		44,972

Net income	$	19,631	$	16,006	$	37,058	$	31,025
Diluted earnings per share	$	0.40	$	0.36	$	0.79	$	0.69

Note 5 – 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. The Community Banking segment operates 127 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


	Three Months Ended June 30, 2006
(in thousands)	Community		Retail		Mortgage
	Banking		Brokerage		Banking		Consolidated

Interest income	$	91,704	$	18	$	2,221	$	93,943
Interest expense		31,598		—		1,588		33,186

Net interest income		60,106		18		633		60,757
Provision for loan losses		54		—		—		54
Non-interest income		8,668		2,617		2,521		13,806
Non-interest expense		36,916		2,469		2,202		41,587
Merger-related expense		1,656		—		—		1,656

Income before income taxes		30,148		166		952		31,266
Provision for income taxes		11,185		60		390		11,635

Net income	$	18,963	$	106	$	562	$	19,631


	Six Months Ended June 30, 2006
(in thousands)	Community		Retail		Mortgage
	Banking		Brokerage		Banking		Consolidated

Interest income	$	170,974	$	40	$	3,675	$	174,689
Interest expense		56,994		—		2,659		59,653

Net interest income		113,980		40		1,016		115,036
Provision for loan losses		75		—		—		75
Non-interest income		16,618		5,094		4,296		26,008
Non-interest expense		71,086		5,045		4,185		80,316
Merger-related expense		1,907		—		—		1,907

Income before income taxes		57,530		89		1,127		58,746
Provision for income taxes		21,166		60		462		21,688

Net income	$	36,364	$	29	$	665	$	37,058


	Three Months Ended June 30, 2005
(in thousands)	Community		Retail		Mortgage
	Banking		Brokerage		Banking			Consolidated

Interest income	$	66,213	$	20	$	1,430		$	67,663
Interest expense		15,721		—		860			16,581

Net interest income		50,492		20		570			51,082
Provision for loan losses		1,400		—		—			1,400
Non-interest income		8,697		2,953		274			11,924
Non-interest expense		31,290		2,860		2,110			36,260
Merger-related expense		161		—		—			161

Income before income taxes		26,338		113		(1,266	)		25,185
Provision for income taxes		9,649		37		(507	)		9,179

Net income	$	16,689	$	76	$	(759	)	$	16,006


	Six Months Ended June 30, 2005
(in thousands)	Community		Retail		Mortgage
	Banking		Brokerage		Banking			Consolidated

Interest income	$	129,214	$	33	$	2,890		$	132,137
Interest expense		29,491		—		1,714			31,205

Net interest income		99,723		33		1,176			100,932
Provision for loan losses		2,400		—		—			2,400
Non-interest income		14,755		6,130		1,641			22,526
Non-interest expense		61,906		5,732		3,956			71,594
Merger-related expense		262		—		—			262

Income before income taxes		49,910		431		(1,139	)		49,202
Provision for income taxes		18,478		155		(456	)		18,177

Net income	$	31,432	$	276	$	(683	)	$	31,025


	June 30, 2006
(in thousands)	Community		Retail		Mortgage
	Banking		Brokerage		Banking		Consolidated

Total assets	$	6,980,419	$	7,040	$	192,484	$	7,179,943
Total loans	$	5,133,777	$	—	$	162,943	$	5,296,720
Total deposits	$	5,464,702	$	—	$	68	$	5,464,770


	December 31, 2005
(in thousands)	Community		Retail		Mortgage
	Banking		Brokerage		Banking		Consolidated

Total assets	$	5,257,333	$	7,925	$	95,381	$	5,360,639
Total loans	$	3,846,507	$	—	$	75,124	$	3,921,631
Total deposits	$	4,286,227	$	—	$	39	$	4,286,266

Note 6 – Recently Issued Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement of Financial Accounting Standards No. (“SFAS”) 109, Accounting for Income Taxes. This Interpretation defines the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of the adoption of FIN 48.

In March 2006, the FASB issued 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”). SFAS No. 156 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. Post adoption, an entity may make this election as of the beginning of any fiscal year. An entity that elects to subsequently measure a class of servicing assets and liabilities at fair value should apply that election to all new and existing recognized servicing assets and liabilities within that class. 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. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is currently evaluating the impact of the adoption of SFAS No. 156.

In March 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force regarding Issue 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-1”). The consensus provided guidance for determining when an investment is other-than-temporarily impaired and established disclosure requirements for investments with unrealized losses. The guidance was effective for periods beginning after June 15, 2004. On September 30, 2004, the FASB deferred the implementation of the recognition criteria of EITF 03-1. In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP nullifies certain requirements of EITF 03-1. Based on the clarification provided in FSP FAS 115-1 and FAS 124-1, the amount of any other-than-temporary impairment that needs to be recognized will continue to be dependent on market conditions, the occurrence of certain events or changes in circumstances relative to an investee and an entity’s intent and ability to hold the impaired investment at the time of the valuation. The Company adopted FSP FAS 115-1 and FAS 124-1 effective January 1, 2006. Adoption of this FSP did not have a material effect on our financial condition or results of operations.

In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-3, Accounting for Certain Loans and Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for acquired loans that show evidence of having deteriorated in terms of credit quality since their origination and for which a loss is deemed probable of occurring. SOP 03-3 requires acquired loans to be recorded at their fair value, defined as the present value of future cash flows including interest income, to be recognized over the life of the loan. SOP 03-3 prohibits the carryover of an allowance for loan loss on certain acquired loans within its scope considered in the future cash flow assessments. SOP 03-3 was effective for loans acquired in fiscal years beginning after December 15, 2004 and has not had a material effect on our financial condition or results of operations.

Note 7 — Junior Subordinated Debentures

As of June 30, 2006, 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:

Junior Subordinated Debentures
(in thousands)


		Issued		Carrying			Effective
Trust Name	Issue Date	Amount		Value (1)		Rate (2)	Rate (3)			Maturity Date	Call Date
Umpqua Holdings Statutory Trust I	September 2002	$	25,774	$	25,774	Floating (4)		8.96	%	September 2032	September 2007
Umpqua Statutory Trust II	October 2002		20,619		20,619	Floating (5)		8.50	%	October 2032	October 2007
Umpqua Statutory Trust III	October 2002		30,928		30,928	Floating (6)		8.62	%	November 2032	November 2007
Umpqua Statutory Trust IV	December 2003		10,310		10,310	Floating (7)		7.92	%	January 2034	January 2009
Umpqua Statutory Trust V	December 2003		10,310		10,310	Floating (7)		8.25	%	March 2034	March 2009
HB Capital Trust I	March 2000		5,310		6,636	10.875%		7.73	%	March 2030	March 2010
Humboldt Bancorp Statutory Trust I	February 2001		5,155		6,110	10.200%		7.87	%	February 2031	February 2011
Humboldt Bancorp Statutory Trust II	December 2001		10,310		11,673	Floating (8)		7.42	%	December 2031	December 2006
Humboldt Bancorp Staututory Trust III	September 2003		27,836		31,700	6.75% (9)		4.89	%	September 2033	September 2008
CIB Capital Trust	November 2002		10,310		11,460	Floating (6)		7.32	%	November 2032	November 2007
Western Sierra Statutory Trust I	July 2001		6,196		6,519	Floating (10)		6.49	%	July 2031	July 2006
Western Sierra Statutory Trust II	December 2001		10,300		10,837	Floating (8)		6.73	%	December 2031	December 2006
Western Sierra Statutory Trust III	September 2003		10,310		10,673	Floating (11)		6.45	%	September 2033	September 2008
Western Sierra Statutory Trust IV	September 2003		10,310		10,673	Floating (11)		6.45	%	September 2033	September 2008

	Total	$	193,978	$	204,222


(1)		Includes purchase accounting adjustments, net of accumulated amortization, for junior subordinated debentures assumed in connection with the Humboldt and Western Sierra mergers.

(2)		Contractual interest rate of junior subordinated debentures.

(3)		Effective interest rate as of June 2006, including impact of purchase accounting amortization.

(4)		Rate based on LIBOR plus 3.50%, adjusted quarterly.

(5)		Rate based on LIBOR plus 3.35%, adjusted quarterly.

(6)		Rate based on LIBOR plus 3.45%, adjusted quarterly.

(7)		Rate based on LIBOR plus 2.85%, adjusted quarterly.

(8)		Rate based on LIBOR plus 3.60%, adjusted quarterly.

(9)		Rate fixed for 5 years from issuance, then adjusted quarterly thereafter based on LIBOR plus 2.95%.

(10)		Rate based on LIBOR plus 3.58%, adjusted quarterly.

(11)		Rate based on LIBOR plus 2.90%, adjusted quarterly.

The $204.2 million of junior subordinated debentures issued to the Trusts as of June 30, 2006 ($165.7 million as of December 31, 2005) 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 June 30, 2006 as compared to $4.7 million at December 31, 2005.

All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of June 30, 2006, 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.

Note 8 – 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 and six months ended June 30, 2006 was $2.0 million and $4.0 million, respectively, compared to $1.5 million and $3.0 million in the comparable periods in 2005. Rent expense was offset by rent income for the three and six months

ended June 30, 2006 of $68,000 and $123,000, respectively, compared to $82,000 and $153,000 in the comparable periods in 2005.

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 June 30, 2006:

(in thousands)


	As of June 30, 2006
Commitments to extend credit	$	1,384,670
Commitments to extend overdrafts	$	90,413
Commitments to originate loans held-for-sale	$	61,835
Forward sales commitments	$	12,983
Standby letters of credit	$	45,047

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 and six months ended June 30, 2006 and 2005. 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 June 30, 2006, the Bank had commitments to originate mortgage loans totaling $61.8 million with a net fair value liability of approximately $44,000. As of that date, it also had forward sales commitments of $13.0 million with a net fair value asset of $66,000. The Bank recorded gains related to its commitments to originate mortgage loans and related forward sales commitments of $205,000 and $232,000 in the three and six months ended June 30, 2006 as compared to losses of $176,000 and $165,000 in the comparable periods in 2005, 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 and six months ended June 30, 2006 and 2005. At June 30, 2006, approximately $14.9 million of standby letters of credit expire within one year, and $30.1 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 $176,000 as of June 30, 2006.

At June 30, 2006, the reserve for unfunded commitments, which is included in other liabilities on the consolidated balance sheet, was approximately $2.1 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% and 78% of the Company’s loan portfolio at June 30, 2006 and December 31, 2005, respectively. Commercial real estate concentrations are managed to assure wide geographic and business diversity. Although management believes such concentrations to 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 collectibility 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.

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. In addition, the words “expect,” believe,” “anticipate” and other similar expressions identify forward-looking statements. All statements other than statements of historical fact are 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 the following:

	•		The ability to attract new deposits and loans

	•		Competitive market pricing factors

	•		Deterioration in economic conditions that could result in increased loan 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. Specific risks in this report include the ability of the Company to realize significant cost savings as a result of the Western Sierra merger. 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,” 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. Beginning in 1995, we have transformed the Bank 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 offers a full range of investment products and services including: stocks, fixed income securities (municipal, corporate, and government bonds, CDs, money market instruments), mutual funds, annuities, options, retirement planning, money management services, life insurance, disability insurance and medical supplement policies.

Executive Summary and Highlights

Highlights for the second quarter of 2006 were as follows:

	•		Net income per diluted share was $0.40 for the second quarter of 2006, an increase of 11% over the $0.36 per diluted share earned in the second quarter of 2005.

	•		On June 2, 2006, we completed the acquisition of Western Sierra Bancorp (“Western Sierra”) and its principal operating subsidiaries, Western Sierra National Bank, Central California Bank, Lake Community Bank and Auburn Community Bank in an all stock exchange valued at $353.7 million with 12.7 million shares of common stock issued in connection with the acquisition.

	•		The Western Sierra acquisition was accretive to operating earnings (which exclude merger expenses, net of tax) by $0.01 per diluted share during the second quarter, based mainly on accelerated synergy realization.

	•		Total consolidated assets as of June 30, 2006 were $7.2 billion, compared to $5.4 billion at December 31, 2005, an increase of $1.8 billion or 34%. The Western Sierra acquisition accounted for $1.5 billion of the growth. Annualized organic growth (which excludes growth from acquisition as of the merger date) was 12% in the six months ended June 30, 2006.

	•		Total gross loans and leases were $5.3 billion as of June 30, 2006, compared to $3.9 billion at December 31, 2005, an increase of $1.4 billion or 35%. The Western Sierra acquisition accounted for $1.0 billion of the growth. Annualized organic growth (which excludes growth from acquisition as of the merger date) was 18% in the six months ended June 30, 2006.

	•		Total deposits were $5.5 billion as of June 30, 2006, compared to $4.3 billion at December 31, 2005, an increase of $1.2 billion or 27%. The Western Sierra acquisition accounted for $1.0 billion of the growth. Annualized organic growth (which excludes growth from acquisition as of the merger date) was 8% in the six months ended June 30, 2006.

	•		Credit quality continued to improve. Non-performing assets were $7.4 million at June 30, 2006 or 0.10% of total assets, a decrease compared to $7.6 million or 0.14% of total assets at December 31, 2005.

	•		With net recoveries of $513,000 in the six months ended June 30, 2006 and credit quality improvement, there was no substantial provision for credit losses during the three and six months ended June 30, 2006. This compared to a provision of $1.4 million and $2.4 million for the same periods a year ago.

	•		Net interest margin decreased to 4.68% and 4.69% for the three and six months ended June 30, 2006, compared to 4.81% and 4.82% for the same periods a year ago, due to increases in short-term market interest rates which led to an increase in deposit and borrowing costs.

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, 2005 included in the Form 10-K filed with the Securities and Exchange Commission (‘SEC”) on March 14, 2006. 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 Losses and Reserve for Unfunded Commitments

The Bank performs regular credit reviews of the loan portfolio to determine the credit quality of the portfolio and the adherence to underwriting standards. When loans are originated, they are assigned a risk rating that is assessed periodically during the term of the loan through the credit review process. The risk ratings are a primary factor in determining an appropriate amount for the allowance for loan losses. Management’s Allowance for Loan Losses (“ALL”) Committee is responsible for regular review of the ALL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALL Committee reviews loans that have been placed on non-accrual status and approves placing loans on impaired status. The ALL Committee also approves removing loans that are impaired from impairment and non-accrual status.

Each risk rating is assessed an inherent credit loss factor that determines the amount of the allowance for loan 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 ALL Committee which reviews and approves designating 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 this case, 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 losses. The combination of the risk rating-based allowance component and the impairment reserve allowance component lead to an allocated allowance for loan 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 ALL 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.

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 measurements are determined using a discounted cash flow model. Mortgage servicing rights are amortized over the expected life of the loan and are evaluated periodically for impairment. The expected life of the loan can vary from management’s estimates due to prepayments by borrowers, 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.

Valuation of Goodwill and Intangible Assets

At June 30, 2006, we had $682.8 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 June 30, 2006. 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 Statement of Financial Accounting Standards (“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. Additional information is included in Note 2 of the Notes to Condensed Consolidated Financial Statements.

RESULTS OF OPERATIONS

OVERVIEW

For the three months ended June 30, 2006, net income was $19.6 million, or $0.40 per diluted share, an increase of 11% on a per diluted share basis as compared to $16.0 million, or $0.36 per diluted share for the three months ended June 30, 2005. For the six months ended June 30, 2006, net income was $37.1 million, or $0.79 per diluted share, an increase of 14% on a per diluted share basis as compared to $31.0 million, or $0.69 per diluted share for the six months ended June 30, 2005. The improvement in diluted earnings per share for the six months ended June 30, 2006 is principally attributable to improved net interest income, partially offset by increased operating expenses.

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 earnings by the same diluted share total used in determining diluted earnings per share (see Note 4 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 and six months ended June 30, 2006 and 2005:

Reconciliation of Operating Income to Net Income
(in thousands, except per share data)


	Three months ended				Six months ended
	June 30,				June 30,
	2006		2005		2006		2005
Net income	$	19,631	$	16,006	$	37,058	$	31,025
Merger-related expenses, net of tax		994		97		1,144		157

Operating income	$	20,625	$	16,103	$	38,202	$	31,182


Per diluted share:
Net income	$	0.40	$	0.36	$	0.79	$	0.69
Merger-related expenses, net of tax		0.02		—		0.02		—

Operating income	$	0.42	$	0.36	$	0.81	$	0.69

The following table presents the returns on average assets, average shareholders’ equity and average tangible shareholders’ equity for the three and six months ended June 30, 2006 and 2005. 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						Six months ended
	June 30,						June 30,
	2006			2005			2006			2005
Returns on average assets:
Net income		1.31	%		1.29	%		1.31	%		1.27	%
Operating income		1.37	%		1.30	%		1.35	%		1.27	%

Returns on average shareholders’ equity:
Net income		9.18	%		9.11	%		9.32	%		8.95	%
Operating income		9.64	%		9.17	%		9.61	%		9.00	%

Returns on average tangible shareholders’ equity:
Net income		21.17	%		21.61	%		21.10	%		21.48	%
Operating income		22.24	%		21.74	%		21.76	%		21.59	%

Calculation of average tangible shareholders’ equity:
Average shareholders’ equity	$	858,168		$	704,466		$	801,494		$	699,039
Less: average intangible assets		(486,167	)		(407,364	)		(447,405	)		(407,760	)

Average tangible shareholders’ equity	$	372,001		$	297,102		$	354,089		$	291,279

NET INTEREST INCOME

Net interest income is the largest source of our operating income. Net interest income for the three months ended June 30, 2006 was $60.8 million, an increase of $9.7 million, or 19% over the same period in 2005. Net interest income for the six months ended June 30, 2006 was $115.0 million, an increase of $14.1 million, or 14% over the same period in 2005. This increase is attributable to growth in outstanding average interest-earning assets, primarily loans, offset by growth in interest-bearing liabilities, primarily money-market and time deposits, over the same period in 2005.

The net interest margin (net interest income as a percentage of average interest-earning assets) on a fully tax-equivalent basis was 4.68% for the three months ended June 30, 2006, a decrease of 13 basis points as compared to the same period in 2005. The net interest margin on a fully tax-equivalent basis for the six months ended June 30, 2006 was 4.69%, a decrease of 13 basis points as compared to the same period in 2005. 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 86 and 80 basis points in the three and six months ended June 30, 2006 was more than offset by a corresponding increase in our cost of interest-bearing liabilities which increased by 124

and 120 basis points in the three and six months ended June 30, 2006.

Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, changes in volume, as well as changes in the yields earned on interest-earning assets and rates paid on deposits and borrowed funds, or rates. 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 and six months ended June 30, 2006 and 2005:

Average Rates and Balances (Quarterly)
(dollars in thousands)


	Three months ended								Three months ended
	June 30, 2006								June 30, 2005
				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)	$	4,519,866		$	86,004		7.63	%	$	3,570,800		$	60,220		6.76	%
Taxable securities		595,993			6,749		4.53	%		588,806			6,290		4.27	%
Non-taxable securities (2)		88,360			1,228		5.56	%		64,575			1,062		6.59	%
Temporary investments (3)		32,541			336		4.13	%		62,792			434		2.76	%

Total interest earning assets		5,236,760			94,317		7.22	%		4,286,973			68,006		6.36	%
Allowance for credit losses		(49,251	)							(46,372	)
Other assets		843,243								739,766

Total assets	$	6,030,752							$	4,980,367


INTEREST-BEARING LIABILITIES:
Interest-bearing checking and savings accounts	$	2,280,089		$	13,711		2.41	%	$	2,027,536		$	6,582		1.30	%
Time deposits		1,267,003			12,242		3.88	%		980,870			6,903		2.82	%
Federal funds purchased and repurchase agreements		176,868			1,802		4.09	%		72,142			407		2.26	%
Term debt		163,400			2,055		5.04	%		27,061			139		2.06	%
Notes payable on junior subordinated debentures and trust preferred securities		177,510			3,376		7.63	%		166,032			2,550		6.16	%

Total interest-bearing liabilities		4,064,870			33,186		3.27	%		3,273,641			16,581		2.03	%
Non-interest-bearing deposits		1,048,201								949,610
Other liabilities		59,513								52,650

Total liabilities		5,172,584								4,275,901
Shareholders’ equity		858,168								704,466

Total liabilities and shareholders’ equity	$	6,030,752							$	4,980,367


NET INTEREST INCOME (2)				$	61,131							$	51,425


NET INTEREST SPREAD							3.95	%							4.33	%

AVERAGE YIELD ON EARNING ASSETS (1) (2)							7.22	%							6.36	%

INTEREST EXPENSE TO EARNING ASSETS							2.54	%							1.55	%


NET INTEREST INCOME TO EARNING ASSETS (1) (2)							4.68	%							4.81	%


(1)		Non-accrual loans and mortgage loans held for sale are included in the average balance.

(2)		Tax-exempt income has been adjusted to a tax equivalent basis at a 35% tax rate. The amount of such adjustment was an addition to recorded income of approximately $374,000 and $343,000 for the three months ended June 30, 2006 and 2005, respectively.

(3)		Temporary investments include federal funds sold and interest-bearing deposits at other banks.

Average Rates and Balances (Year-to-Date)
(dollars in thousands)


	Six months ended								Six months ended
	June 30, 2006								June 30, 2005
				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)	$	4,273,865		$	159,124		7.51	%	$	3,530,080		$	117,156		6.69	%
Taxable securities		602,068			13,504		4.49	%		606,428			12,882		4.25	%
Non-taxable securities (2)		82,475			2,298		5.57	%		65,658			2,142		6.53	%
Temporary investments (3)		22,346			463		4.17	%		49,485			654		2.66	%

Total interest earning assets		4,980,754			175,389		7.10	%		4,251,651			132,834		6.30	%
Allowance for credit losses		(46,587	)							(46,006	)
Other assets		788,629								738,938

Total assets	$	5,722,796							$	4,944,583


INTEREST-BEARING LIABILITIES:
Interest-bearing checking and savings accounts	$	2,194,913		$	24,540		2.25	%	$	1,995,279		$	12,046		1.22	%
Time deposits		1,201,363			22,451		3.77	%		973,104			12,763		2.64	%
Federal funds purchased and repurchase agreements		205,206			4,191		4.12	%		79,781			908		2.30	%
Term debt		83,712			2,083		5.02	%		54,690			544		2.01	%
Notes payable on junior subordinated debentures and trust preferred securities		171,639			6,388		7.51	%		166,123			4,944		6.00	%

Total interest-bearing liabilities		3,856,833			59,653		3.12	%		3,268,977			31,205		1.92	%
Non-interest-bearing deposits		1,008,573								922,414
Other liabilities		55,896								54,153

Total liabilities		4,921,302								4,245,544
Shareholders’ equity		801,494								699,039

Total liabilities and shareholders’ equity	$	5,722,796							$	4,944,583


NET INTEREST INCOME (2)				$	115,736							$	101,629


NET INTEREST SPREAD							3.98	%							4.38	%

AVERAGE YIELD ON EARNING ASSETS (1) (2)							7.10	%							6.30	%

INTEREST EXPENSE TO EARNING ASSETS							2.41	%							1.48	%


NET INTEREST INCOME TO EARNING ASSETS (1) (2)							4.69	%							4.82	%


(1)		Non-accrual loans and mortgage loans held for sale are included in the average balance.

(2)		Tax-exempt income has been adjusted to a tax equivalent basis at a 35% tax rate. The amount of such adjustment was an addition to recorded income of approximately $700,000 and $697,000 for the six months ended June 30, 2006 and 2005, respectively.

(3)		Temporary investments include federal funds sold and interest-bearing deposits at other banks.

The following table sets forth a summary of the changes in net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for the three and six months ended June 30, 2006 as compared to the same period in 2005. Changes in interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionately between both variances.

Rate/Volume Analysis (Quarterly)
(in thousands)


	THREE MONTHS ENDED JUNE 30,
	2006 COMPARED TO 2005
	INCREASE (DECREASE) IN INTEREST
	INCOME AND EXPENSE DUE TO
	CHANGES IN
	VOLUME			RATE			TOTAL
INTEREST-EARNING ASSETS:
Loans	$	17,391		$	8,393		$	25,784
Taxable securities		77			382			459
Non-taxable securities (1)		349			(183	)		166
Temporary investments		(260	)		162			(98	)

Total (1)		17,557			8,754			26,311

INTEREST-BEARING LIABILITIES:
Interest-bearing checking and savings accounts		909			6,220			7,129
Time deposits		2,344			2,995			5,339
Repurchase agreements and federal funds		897			498			1,395
Term debt		1,489			427			1,916
Junior subordinated debentures		185			641			826

Total		5,824			10,781			16,605


Net increase in net interest income (1)	$	11,733		$	(2,027	)	$	9,706


(1)		Tax exempt income has been adjusted to a tax equivalent basis at a 35% tax rate.

Rate/Volume Analysis (Year-to-Date)
(in thousands)


	SIX MONTHS ENDED JUNE 30,
	2006 COMPARED TO 2005
	INCREASE (DECREASE) IN INTEREST
	INCOME AND EXPENSE DUE TO
	CHANGES IN
	VOLUME			RATE			TOTAL
INTEREST-EARNING ASSETS:
Loans	$	26,591		$	15,377		$	41,968
Taxable securities		(94	)		716			622
Non-taxable securities (1)		498			(342	)		156
Temporary investments		(458	)		267			(191	)

Total (1)		26,537			16,018			42,555

INTEREST-BEARING LIABILITIES:
Interest-bearing checking and savings accounts		1,313			11,181			12,494
Time deposits		3,447			6,241			9,688
Repurchase agreements and federal funds		2,181			1,102			3,283
Term debt		402			1,137			1,539
Junior subordinated debentures		169			1,275			1,444

Total		7,512			20,936			28,448


Net increase in net interest income (1)	$	19,025		$	(4,918	)	$	14,107


(1)		Tax exempt income has been adjusted to a tax equivalent basis at a 35% tax rate.

PROVISION FOR LOAN LOSSES

The provision for loan losses was $54,000 and $75,000 for the three and six months ended June 30, 2006. This compared with $1.4 million and $2.4 million of provision for loan losses for the same periods in 2005. As a percentage of average outstanding loans, the provision for loan losses recorded for the three and six months ended June 30, 2006 was insignificant, representing a decrease of 16 basis points and 14 basis points, respectively, from the same periods in 2005. The decrease in the provision for loan losses in the three and six months ended June 30, 2006 is principally attributable to improved asset quality trends and net recoveries of $513,000 in the six months ended June 30, 2006.

The provision for loan losses is based on management’s evaluation of inherent risks in the loan portfolio and a corresponding analysis of the allowance for loan losses. Additional discussion on loan quality and the allowance for loan losses is provided under the heading Asset Quality and Non-Performing Assets below.

NON-INTEREST INCOME

Non-interest income in the three months ended June 30, 2006 was $13.8 million, an increase of $1.9 million, or 16%, over the same period in 2005. Non-interest income for the six months ended June 30, 2006 was $26.0 million, an increase of $3.5 million, or 15% over the same period in 2005. The following table presents the key components of non-interest income for the three and six months ended June 30, 2006 and 2005:

Non-Interest Income
(in thousands)


	Three months ended											Six months ended
	June 30,											June 30,
						Change			Change								Change			Change
	2006			2005		Amount			Percent			2006			2005		Amount			Percent
Service charges on deposit accounts	$	6,450		$	5,426	$	1,024			19	%	$	11,934		$	10,248	$	1,686			16	%
Brokerage commissions and fees		2,534			2,879		(345	)		-12	%		4,902			6,008		(1,106	)		-18	%
Mortgage banking revenue, net		2,503			228		2,275			998	%		4,347			1,578		2,769			175	%
Net (loss) gain on sale of investment securities		(1	)		1,398		(1,399	)		-100	%		(1	)		1,398		(1,399	)		-100	%
Other income		2,320			1,993		327			16	%		4,826			3,294		1,532			47	%

Total	$	13,806		$	11,924	$	1,882			16	%	$	26,008		$	22,526	$	3,482			15	%

The increase in deposit service charges in 2006 over 2005 is principally attributable to the increased volume of deposit accounts. The decrease in brokerage fees resulted from the departure of certain Strand investment advisors. The increase in mortgage banking revenue was a result of increased volume of loans originated and sold during the three and six months ended June 30, 2006 and an impairment recovery of mortgage servicing rights as compared to a valuation write down in the same periods a year ago. The increase in other income for the six months ended June 30, 2006 included an approximate $475,000 legal settlement and $849,000 increase in servicing income and gain on sale of SBA loans in our government-guaranteed lending group.

NON-INTEREST EXPENSE

Non-interest expense for the three months ended June 30, 2006 was $43.2 million, an increase of $6.8 million or 19% compared to the three months ended June 30, 2005. Non-interest expense for the six months ended June 30, 2006 was $82.2 million, an increase of $10.4 million or 14% over the six months ended June 30, 2005. The following table presents the key elements of non-interest expense for the three and six months ended June 30, 2006 and 2005.

Non-Interest Expense
(in thousands)


	Three months ended										Six months ended
	June 30,										June 30,
					Change			Change							Change		Change
	2006		2005		Amount			Percent			2006		2005		Amount		Percent
Salaries and employee benefits	$	23,337	$	20,361	$	2,976			15	%	$	45,138	$	40,640	$	4,498		11	%
Net occupancy and equipment		7,199		6,109		1,090			18	%		14,367		12,242		2,125		17	%
Communications		1,480		1,578		(98	)		-6	%		2,945		2,823		122		4	%
Marketing		1,491		1,310		181			14	%		2,816		2,067		749		36	%
Services		3,414		2,835		579			20	%		6,817		6,347		470		7	%
Supplies		722		710		12			2	%		1,351		1,237		114		9	%
Intangible amortization		791		660		131			20	%		1,338		1,320		18		1	%
Merger-related expenses		1,656		161		1,495			929	%		1,907		262		1,645		628	%
Other		3,153		2,697		456			17	%		5,544		4,918		626		13	%

Total	$	43,243	$	36,421	$	6,822			19	%	$	82,223	$	71,856	$	10,367		14	%

Salaries and employee benefits have continued to increase due to the Western Sierra acquisition, increased incentives, benefit costs, and additional staff. Net occupancy and equipment also continues to increase reflecting the Western Sierra acquisition, increased lease costs and continued infrastructure development to support the Company’s growth and expansion. We also incur significant expenses in connection with the completion and integration of bank acquisitions that are not capitalizable. Classification of expenses as merger-related is done in accordance with the provisions of a Board-approved policy.

INCOME TAXES

Our consolidated effective tax rate as a percentage of pre-tax income for the three and six months ended June 30, 2006 was 37.2% and 36.9%, compared to 36.4% and 36.9% for the three and six months ended June 30, 2005. The effective tax rates were below the federal statutory rate of 35% and the apportioned state rate of 5% (net of the federal tax benefit) principally because of non-taxable income arising from bank-owned life insurance, income on tax-exempt investment securities, tax credits arising from low income housing investments and exemptions related to loans and hiring in certain designated enterprise zones.

FINANCIAL CONDITION

INVESTMENT SECURITIES

Total investment securities as of June 30, 2006 were $702.6 million, as compared to $680.5 million at December 31, 2005. This increase is principally attributable to the Western Sierra acquisition ($76.2 million of investment securities as of the acquisition date), partially offset by maturities of $39.8 million in investment securities and decrease in fair market value of available-for-sale securities of $14.0 million.

The following table presents the investment securities portfolio by major type as of June 30, 2006 and December 31, 2005:

Investment Securities Composition
(in thousands)


	Investment Securities Available for Sale
	June 30, 2006					December 31, 2005
	Fair Value		%			Fair Value		%

U.S. Treasury and agencies	$	207,917		30	%	$	196,538		29	%
Mortgage-backed securities and collateralized mortgage obligations		327,216		47	%		359,583		54	%
Obligations of states and political subdivisions		109,147		16	%		67,836		10	%
Other investment securities		48,630		7	%		47,911		7	%

Total	$	692,910		100	%	$	671,868		100	%


	Investment Securities Held to Maturity
	June 30, 2006					December 31, 2005
	Amortized					Amortized
	Cost		%			Cost		%

Obligations of states and political subdivisions	$	8,879		92	%	$	8,302		96	%
Mortgage-backed securities and collateralized mortgage obligations		430		4	%		—		—
Other investment securities		367		4	%		375		4	%

Total	$	9,676		100	%	$	8,677		100	%

Because the Bank has the ability and intent to hold investments with unrealized losses until a market price recovery or to maturity, none of the investment securities with unrealized losses are considered other than temporarily impaired.

LOANS

Total loans outstanding at June 30, 2006 were $5.3 billion, an increase of $1.4 billion, or 35%, from year-end 2005. The growth in loans was principally due to the Western Sierra acquisition ($1.0 billion of loans as of the acquisition date) and organic loan growth in both the Oregon/Washington and California markets.

The following table presents the concentration distribution of our loan portfolio by major type at June 30, 2006 and December 31, 2005:

Loan Concentrations
(in thousands)


	June 30, 2006					December 31, 2005
Type of Loan	Amount		Percentage			Amount		Percentage
Construction and development	$	1,109,042		20.9	%	$	638,555		16.3	%
Farmland		60,069		1.1	%		54,039		1.4	%
Home equity credit lines		153,760		2.9	%		125,508		3.2	%
Single family first lien mortgage		167,705		3.2	%		121,955		3.1	%
Single family second lien mortgage		27,843		0.5	%		18,570		0.5	%
Multifamily		185,930		3.5	%		161,844		4.1	%
Commercial real estate		2,567,012		48.7	%		1,954,516		49.8	%

Total real estate secured		4,271,361		80.8	%		3,074,987		78.4	%
Commercial and industrial		873,679		16.5	%		711,913		18.2	%
Agricultural production		54,996		1.0	%		41,218		1.1	%
Consumer		49,135		0.9	%		51,702		1.3	%
Leases		18,430		0.3	%		17,385		0.4	%
Other		29,119		0.5	%		24,426		0.6	%

Total loans	$	5,296,720		100.0	%	$	3,921,631		100.0	%

ASSET QUALITY AND NON-PERFORMING ASSETS

Non-performing loans, which include non-accrual loans and accruing loans past due over 90 days, totaled $7.3 million, or 0.14% of total loans, at June 30, 2006, as compared to $6.4 million, or 0.16% of total loans, at December 31, 2005. Non-performing assets,

which include non-performing loans and foreclosed real estate (“other real estate owned”), totaled $7.4 million, or 0.10% of total assets as of June 30, 2006, compared with $7.6 million, or 0.14% of total assets as of December 31, 2005.

Loans are classified as non-accrual when collection of principal or interest is doubtful—generally if they are past due as to maturity or payment of principal or interest by 90 days or more—unless such loans are well-secured and in the process of collection. Additionally, all loans that are “impaired” in accordance with SFAS No. 114, Accounting by Creditors for the Impairment of a Loan, are considered for non-accrual status. These loans will typically remain on non-accrual status until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear relatively certain. Foreclosed properties held as other real estate owned are recorded at the lower of the recorded investment in the loan or market value of the property less expected selling costs. Other real estate owned at June 30, 2006 totaled $69,000 and consisted of two commercial properties.

The following table summarizes our non-performing assets as of June 30, 2006 and December 31, 2005.

Non-Performing Assets
(dollars in thousands)


	June 30,			December 31,
	2006			2005

Loans on nonaccrual status	$	6,977		$	5,953
Loans past due 90 days or more and accruing		353			487

Total nonperforming loans		7,330			6,440
Other real estate owned		69			1,123

Total nonperforming assets	$	7,399		$	7,563


Allowance for loan losses	$	58,516		$	43,885
Reserve for unfunded commitments		2,145			1,601

Allowance for credit losses	$	60,661		$	45,486


Asset quality ratios:
Non-performing assets to total assets		0.10	%		0.14	%
Non-performing loans to total loans		0.14	%		0.16	%
Allowance for loan losses to total loans		1.10	%		1.12	%
Allowance for credit losses to total loans		1.15	%		1.16	%
Allowance for credit losses to total non-performing loans		828	%		706	%

At June 30, 2006, approximately $7.9 million of loans were classified as restructured as compared to $4.0 million at December 31, 2005. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. Substantially all of the restructured loans as of June 30, 2006 and December 31, 2005 were classified as impaired and $437,000 and $935,000, respectively, were included as non-accrual loans in the table above.

We have not identified any other potential problem loans that were not classified as non-performing but for which known information about the borrowers’ financial condition caused management to have concern about the ability of the borrower to comply with the repayment terms of their loans. A decline in the economic conditions in our general market areas or other factors could adversely impact individual borrowers or the loan portfolio in general. Accordingly, there can be no assurance that loans will not become 90 days or more past due, become impaired or placed on non-accrual status, restructured or transferred to other real estate owned in the future.

ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED COMMITMENTS

The allowance for loan losses (“ALL”) totaled $58.5 million at June 30, 2006, an increase from the $43.9 million at December 31, 2005.

Allowance for Loan Losses
(in thousands)


	Three months ended						Six months ended
	June 30,						June 30,
	2006			2005			2006			2005
Balance, beginning of period	$	44,546		$	45,360		$	43,885		$	44,229
Acquisitions		14,043			—			14,043			—
Provision for loan losses		54			1,400			75			2,400

Loans charged-off		(947	)		(3,239	)		(1,560	)		(3,851	)
Charge-off recoveries		820			989			2,073			1,732

Net (charge-offs) recoveries		(127	)		(2,250	)		513			(2,119	)

Total allowance for loan losses		58,516			44,510			58,516			44,510
Reserve for unfunded commitments		2,145			1,354			2,145			1,354

Allowance for credit losses	$	60,661		$	45,864		$	60,661		$	45,864


As a percentage of average loans (annualized):
Net (charge-offs) recoveries		-0.01	%		-0.25	%		0.02	%		-0.12	%
Provision for loan losses		0.00	%		0.16	%		0.00	%		0.14	%

The level of actual losses, as indicated by the ratio of net charge-offs to average loans, declined during the three and six months ended June 30, 2006 as compared to the same periods in 2005. These factors combined with improving trends in non-performing assets resulted in a decreased ratio of provision to average loans as compared to the same periods in 2005.

The following table presents a summary of activity in the reserve for unfunded commitments (“RUC”):

Summary of Reserve for Unfunded Commitments Activity
(in thousands)


	Three months ended					Six months ended
	June 30,					June 30,
	2006		2005			2006		2005
Balance, beginning of period	$	1,642	$	1,368		$	1,601	$	1,338
Acquisitions		382		—			382		—
Net increase (decrease) charged to other expenses		121		(14	)		162		16

Balance, end of period	$	2,145	$	1,354		$	2,145	$	1,354

We believe that the ALL and RUC at June 30, 2006 are sufficient to absorb losses inherent in the loan portfolio and credit commitments outstanding as of that date, respectively, based on the best information available. This assessment, based in part on historical levels of net charge-offs, loan growth, and a detailed review of the quality of the loan portfolio, involves uncertainty and judgment. Therefore, the adequacy of the ALL and RUC cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan losses in future periods if the results of their review warrant such additions.

MORTGAGE SERVICING RIGHTS

The following table presents the key elements of our mortgage servicing rights asset as of June 30, 2006 and December 31, 2005:

Summary of Mortgage Servicing Rights
(in thousands)


	Three months ended						Six months ended
	June 30,						June 30,
	2006			2005			2006			2005
Balance, beginning of period	$	11,203		$	11,081		$	10,890		$	11,154
Additions for new mortgage servicing rights capitalized		445			807			1,112			1,478
Amortization of servicing rights		(320	)		(509	)		(641	)		(969	)
Impairment recovery / (charge)		222			(2,111	)		189			(2,395	)

Balance, end of period	$	11,550		$	9,268		$	11,550		$	9,268

Balance of loans serviced for others		1,004,148			1,026,088
MSR as a percentage of serviced loans		1.15	%		0.90	%

As of June 30, 2006, we serviced residential mortgage loans for others with an aggregate outstanding principal balance of approximately $1.0 billion for which servicing assets have been recorded. In accordance with generally accepted accounting principles, the servicing asset recorded at the time of sale is amortized over the term of, and in proportion to, net servicing revenues.

The value of mortgage servicing rights is impacted by market rates for mortgage loans. Historically low market rates can cause prepayments to increase as a result of refinancing activity. To the extent loans are prepaid sooner than estimated at the time servicing assets are originally recorded, it is possible that certain mortgage servicing rights assets may become impaired to the extent that the fair value is less than carrying value (net of any previously recorded amortization or valuation reserves). Generally, the fair value of our mortgage servicing rights will increase as market rates for mortgage loans rise and decrease if market rates fall.

At June 30, 2006, we had a valuation reserve of $2.2 million based on the estimated fair value of the servicing portfolio. The valuation reserve is adjusted on a quarterly basis through adjustments to mortgage banking revenue. For the three and six months ended June 30, 2006, the impairment recovery was $222,000 and $189,000, as compared with impairment charges of $2.1 million and $2.4 million for the same periods in 2005.

GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS

At June 30, 2006, we had goodwill and core deposit intangibles of $646.9 million and $35.9 million, respectively, as compared to $398.8 million and $9.7 million, respectively, at year-end 2005. This increase in goodwill is primarily a result of the Western Sierra acquisition. The goodwill recorded in connection with the Western Sierra acquisition represented the excess of the purchase price over the estimated fair value of the net assets acquired. A portion of the purchase price was allocated to the value of Western Sierra’s core deposits, which included all deposits except certificates of deposit. The value of the core deposits was determined by a third party based on an analysis of the cost differential between the core deposits and alternative funding sources.

Substantially all of the goodwill is associated with our community banking operations. We evaluate goodwill for possible impairment on a quarterly basis and there were no impairments recorded for the three and six months ended June 30, 2006 and 2005.

DEPOSITS

Total deposits were $5.5 billion at June 30, 2006, an increase of $1.2 billion, or 27%, from the prior year-end. The growth in deposits was principally due to the Western Sierra acquisition ($1.0 billion of deposits as of the acquisition date) and organic loan growth. Information on average deposit balances and average rates paid is included under the Net Interest Income section of this report.

The following table presents the deposit balances by major category as of June 30, 2006 and December 31, 2005:

Deposits
(in thousands)


	June 30, 2006					December 31, 2005
	Amount		Percentage			Amount		Percentage
Non-interest bearing	$	1,264,249		23	%	$	987,714		23	%
Interest bearing demand		707,253		13	%		576,037		13	%
Savings and money market		1,912,833		35	%		1,597,311		38	%
Time, $100,000 or greater		769,737		14	%		601,616		14	%
Time, less than $100,000		810,698		15	%		523,588		12	%

Total	$	5,464,770		100	%	$	4,286,266		100	%

BORROWINGS

At June 30, 2006, the Bank had outstanding term debt of $57.1 million. Advances from the Federal Home Loan Bank of San Francisco (“FHLB”) amounted to $56.3 million of the total and are secured by investment securities and residential mortgage loans. The FHLB advances outstanding at June 30, 2006 had fixed interest rates ranging from 3.73% to 7.44%. Approximately $47.5 million, or 84%, of the FHLB advances mature prior to December 31, 2006 and another $4.5 million, or 8%, mature prior to December 31, 2007. Management expects continued use of FHLB advances as a source of short and long-term funding.

JUNIOR SUBORDINATED DEBENTURES

We had junior subordinated debentures with carrying values of $204.2 million and $165.7 million, respectively, at June 30, 2006 and December 31, 2005.

At June 30, 2006, approximately $155.7 million, or 80% of the total issued amount, had interest rates that are adjustable on a quarterly basis based on a spread over LIBOR. Increases in short-term market interest rates during 2005 and through the second quarter of 2006 have resulted in increased interest expense for junior subordinated debentures. Although any additional increases in short-term market interest rates will increase the interest expense for junior subordinated debentures, we believe that other attributes of our balance sheet will serve to mitigate the impact to net interest income on a consolidated basis.

As of June 30, 2006, $188.2 million of junior subordinated debentures ($194.0 million issued amount less common stock issued of $5.8 million) qualified as Tier 1 capital under regulatory capital purposes. Additional information regarding the terms of the junior subordinated debentures, including maturity/call dates and interest rates, is included in Note 7 of the Notes to Condensed Consolidated Financial Statements.

LIQUIDITY AND CASH FLOW

The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs.

We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and the repayments and maturities of loans and investment securities, the Bank can utilize established uncommitted federal funds lines of credit, sell securities under agreements to repurchase, borrow on a secured basis from the FHLB or issue brokered certificates of deposit.

The Company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of the Company’s revenues are obtained from dividends declared and paid by the Bank. In the three and six months ended June 30, 2006, the Bank paid the Company $6.0 million and $12.0 million in dividends. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Company. We believe that such restrictions will not have an adverse impact on the ability of the Company to fund its quarterly cash dividend distributions to shareholders and meet its ongoing cash obligations, which consist principally of debt service on the $194.0 million (issued amount) of outstanding junior subordinated debentures. As of June 30, 2006, the Company did not have any borrowing arrangements of its own.

As disclosed in the Consolidated Statements of Cash Flows, net cash provided by operating activities was $58.8 million during the six months ended June 30, 2006. The principal source of cash provided by operating activities was net income. Net cash of $280.1 million used in investing activities consisted principally of $351.3 million of net loan growth, offset by maturities of investment securities available for sale of $38.0 million and net cash acquired in the Western Sierra merger of $37.0 million. The $298.5 million of cash provided by financing activities primarily consisted of $147.9 million increase in federal funds purchased and securities sold under agreements to repurchase, and $162.7 million of net deposit growth, partly offset by $10.7 million payment of dividends.

Although we expect the Bank’s and the Company’s liquidity positions to remain satisfactory during 2006, increases in market interest rates have resulted in increased competition for bank deposits. It is possible that our deposit growth for 2006 may not be maintained at previous levels due to increased pricing pressure or, in order to generate deposit growth, our pricing may need to be adjusted in a

manner that results in increased interest expense on deposits.

OFF-BALANCE-SHEET ARRANGEMENTS

Information regarding Off-Balance-Sheet Arrangements is included in Note 8 of the Notes to Condensed Consolidated Financial Statements.

CONCENTRATIONS OF CREDIT RISK

Information regarding Concentrations of Credit Risk is included in Note 8 of the Notes to Condensed Consolidated Financial Statements.

CAPITAL RESOURCES

Shareholders’ equity at June 30, 2006 was $1.1 billion, an increase of $374.8 million, or 51%, from December 31, 2005. The increase in shareholders’ equity during the six months ended June 30, 2006 was principally due to the issuance of shares valued at $353.7 million in connection with the Western Sierra acquisition and the retention of $24.7 million, or approximately 67%, of net income for the six month period, partially offset by an increase in accumulated other comprehensive loss as a result of unrealized loss in the investment securities portfolio.

The following table shows Umpqua Holdings’ consolidated and Umpqua Bank capital adequacy ratios, as calculated under regulatory guidelines, compared to the regulatory minimum capital ratio and the regulatory minimum capital ratio needed to qualify as a “well-capitalized” institution at June 30, 2006 and December 31, 2005:


						For Capital					To be Well
	Actual					Adequacy purposes					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2006:
Total Capital (to Risk Weighted Assets)
Consolidated	$	693,725		11.38	%	$	487,680		8.00	%	$	609,600		10.00	%
Umpqua Bank	$	672,713		11.07	%	$	486,152		8.00	%	$	607,690		10.00	%
Tier I Capital (to Risk Weighted Assets)
Consolidated	$	633,064		10.38	%	$	243,955		4.00	%	$	365,933		6.00	%
Umpqua Bank	$	612,052		10.07	%	$	243,119		4.00	%	$	364,678		6.00	%
Tier I Capital (to Average Assets)
Consolidated	$	633,064		11.84	%	$	213,873		4.00	%	$	267,341		5.00	%
Umpqua Bank	$	612,052		11.38	%	$	215,133		4.00	%	$	268,916		5.00	%

As of December 31, 2005:
Total Capital (to Risk Weighted Assets)
Consolidated	$	533,890		11.58	%	$	368,836		8.00	%	$	461,045		10.00	%
Umpqua Bank	$	515,040		11.23	%	$	366,903		8.00	%	$	458,629		10.00	%
Tier I Capital (to Risk Weighted Assets)
Consolidated	$	488,404		10.59	%	$	184,477		4.00	%	$	276,716		6.00	%
Umpqua Bank	$	469,554		10.24	%	$	183,420		4.00	%	$	275,129		6.00	%
Tier I Capital (to Average Assets)
Consolidated	$	488,404		10.09	%	$	193,619		4.00	%	$	242,024		5.00	%
Umpqua Bank	$	469,554		9.78	%	$	192,047		4.00	%	$	240,058		5.00	%

The following table presents cash dividends declared and dividend payout ratios (dividends declared per share divided by basic earnings per share) for the three and six months ended June 30, 2006 and 2005:

Cash Dividends and Payout Ratios


	Three months ended						Six months ended
	June 30,						June 30,
	2006			2005			2006			2005
Dividend declared per share	$	0.12		$	0.06		$	0.24		$	0.12
Dividend payout ratio		30	%		17	%		30	%		17	%

Our Board of Directors has approved a stock repurchase plan for up to 2.5 million shares of common stock. As of June 30, 2006, a total of 2.1 million shares remain available for repurchase under this authorization, which expires on June 30, 2007. In addition, our stock option plans provide that option holders may pay for the exercise price and tax withholdings in part or whole by tendering previously held shares. Although no shares were repurchased in open market transactions during the second quarter of 2006, we expect to continue to repurchase additional shares in the future. The timing and amount of such repurchases will depend upon the market price for our common stock, securities laws restricting repurchases, asset growth, earnings and our capital plan.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our assessment of market risk as of June 30, 2006, which includes the impact of the Western Sierra acquisition, indicates there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2005.

Item 4. Controls and Procedures

Our management, including our Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer, has concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be included in our periodic SEC filings. The disclosure controls and procedures were last evaluated by management as of June 30, 2006.

There have been no significant changes in our internal controls or in other factors that are likely to materially affect our internal controls over financial reporting subsequent to the date of the evaluation.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A.Risk Factors

There have been no material changes to the risk factors as of June 30, 2006 from those presented in our Annual Report on Form 10-K for the year ended December 31, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)		Not Applicable

(b)		Not Applicable

(c)		There were no repurchases of common stock by the Company during the quarter ended June 30, 2006.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Submissions of Matters to a Vote of Securities Holders

(a)		The Company conducted its annual meeting of shareholders on May 30, 2006. On April 7, 2006, the record date, there were 44,723,932 shares of common stock outstanding. Holders of 40,574,347 shares (90.7%) were present at the meeting in person or by proxy.

(b)(c)		The following persons, which is the entire board of directors, were elected as directors to serve a term expiring at the 2007 annual meeting. Each nominee received the votes stated below:


Nominee	Votes For		Votes Withheld
Ronald F. Angell		39,928,855		645,492
Scott D. Chambers		40,202,070		372,277
Raymond P. Davis		40,139,260		435,087
Allyn C. Ford		40,242,236		332,111
David B. Frohnmayer		39,889,550		684,797
Stephen M. Gambee		40,255,838		318,509
Dan Giustina		39,746,618		827,729
Diana E. Goldschmidt		39,758,599		815,748
Lynn K. Herbert		39,943,451		630,896
William A. Lansing		40,229,485		344,862
Theodore S. Mason		40,078,132		496,215
Diane D. Miller		39,905,093		669,254
Bryan L. Timm		39,933,358		640,989
Thomas W. Weborg		40,226,088		348,259

At the annual meeting, shareholders approved the principal terms of the Agreement and Plan of Reorganization by and among Umpqua Holdings Corporation and Western Sierra Bancorp in connection with the proposed merger by the following vote:


For	Against	Abstain	Broker non-votes
35,466,205	309,318	153,185	4,645,639

Shareholders also voted at the annual meeting to approve amendments to Umpqua’s Articles of Incorporation to declassify Umpqua’s board of directors, to provide for the annual election of directors and allow directors to be removed without cause by the following vote:

For	Against	Abstain	Broker non-votes
38,259,807	2,006,375	308,164	—

The Restated Articles of Incorporation are attached as Exhibit 3.1.

(d)

Not Applicable.

Item 5. Other Information

(a)		Not Applicable.

(b)		Not Applicable.

Item 6. Exhibits

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

SIGNATURES

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


	UMPQUA HOLDINGS CORPORATION (Registrant)

Dated August 7, 2006	/s/Raymond P. Davis
	Raymond P. Davis
	President and Chief Executive Officer


Dated August 7, 2006	/s/ Daniel A. Sullivan
	Daniel A. Sullivan
	Executive Vice President and Chief Financial Officer


Dated August 7, 2006	/s/Ronald L. Farnsworth, Jr.
	Ronald L. Farnsworth, Jr.
	Senior Vice President/Finance and Principal Accounting Officer

EXHIBIT INDEX


Exhibit

3.1		Articles of Incorporation, as amended

3.2		(a)Bylaws

4.0		(b)Specimen Stock Certificate

10.1		(c)Employment Agreement signed April 18, 2006, dated effective March 27, 2006 with Steven L. Philpott

31.1		Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

31.3		Certification of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification of Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(a)		Incorporated by reference to Exhibit 3.2 to Form 10-Q filed May 10, 2004

(b)		Incorporated by reference to the Registration Statement on Form S-8 (No. 333-77259) filed April 28, 1999

(c)		Incorporated by reference to Exhibit 10.1 to Form 8-K filed April 18, 2006