Umpqua Holdings (NASDAQ:UMPQ) has a challenge. That challenge is to leverage a rare service-oriented banking philosophy, a good balance sheet, and excellent margins into better returns on equity. If management can somehow lift returns to just an "average" level, there could be a lot of power in both the earnings and share price.

In the meantime, this Oregon-based community bank continues to confound this Fool in some respects. Net income jumped more than 22%, and operating earnings (defined in this case as earnings without the burden of merger-related expenses) were up about 28%. Looking at returns, though, the levels were once again low, though up from last year, as return on assets was about 1.4% and return on equity about 9.6%.

Other positive aspects of this bank continue as before. Net interest income rose 19% this quarter, and net interest margin fell, but it fell from 5.05% to 4.93%. Looking at just the bank, on a companywide basis it dropped from 4.81% to 4.68%. There are more than a few bank presidents out there who'd sell their granny to you for that sort of interest margin. Though non-interest income rose 16%, I'd still like to see a better ratio between this figure and interest income, though that won't happen overnight.

The balance sheet is also looking pretty good. Average loan balances were up 27% and deposit balances up 16%. The company provided a year-to-date organic growth analysis that showed loans up 19% and deposits up about 8%. And while the interest spread continues to shrink, the company's cost of funds isn't bad compared with other banks.

I don't want to leave Fools with the impression that return on equity is an end-all, be-all for a bank, nor that Umpqua is somehow mismanaged. It's important to remember that the company has decided to grow in part through acquisitions and has done six deals since 2000 -- and those deals expand the equity base immediately while the income benefits come later on down the road. So, as it is for Zion Bancorporation (NASDAQ:ZION), it's not entirely fair to just stack these numbers against U.S. Bancorp's (NYSE:USB), Citigroup's (NYSE:C), or Bank of America's (NYSE:BAC) without keeping that in mind.

For more financial follies:

Bank of America and U.S. Bancorp are Motley Fool Income Investor recommendations.Take the newsletter for a 30-day free trial.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).