Umpqua Holdings Reports Third Quarter 2012 Results
Third quarter 2012 operating earnings(1)of $0.23 per diluted share, a 21% increase over same period prior year
Total revenue increased 4% over prior quarter
Non-covered loans and leases grew $144 million, or 2%, over prior quarter
Non-covered, non-performing assets decreased 32% year-over-year to 0.86% of total assets
Record third quarter 2012 mortgage banking revenue of $24.3 million, up 56% from prior quarter
PORTLAND, Ore.--(BUSINESS WIRE)-- Umpqua Holdings Corporation (NAS: UMPQ) , parent company of Umpqua Bank and Umpqua Investments Inc., today announced third quarter 2012 net earnings available to common shareholders of $25.0 million, or $0.22 per diluted common share, compared to net earnings available to common shareholders of $23.1 million, or $0.21 per diluted common share for the second quarter of 2012, and $21.8 million, or $0.19 per diluted common share, for the same period in the prior year.
Operating earnings, defined as earnings available to common shareholders before gains or losses on junior subordinated debentures carried at fair value, net of tax; bargain purchase gains on acquisitions, net of tax; merger related expenses, net of tax; and goodwill impairment, were $25.4 million, or $0.23 per diluted common share for the third quarter of 2012, compared to operating earnings of $23.5 million, or $0.21 per diluted common share for the second quarter of 2012, and $22.1 million, or $0.19 per diluted common share, for the same period in the prior year.
Significant financial statement items for the third quarter of 2012 include:
Non-covered loans and leases grew $144 million and total non-covered loan commitments increased $154 million;
Record mortgage banking revenue of $24.3 million on closed loan volume of $621 million;
Adjusted net interest margin(1) of 3.76% in the third quarter reflecting lower yields on non-covered loans and investment securities, and an increase in average interest bearing cash;
Non-covered, non-performing assets continue to decline, down to 0.86% of total assets, the lowest level since the second quarter of 2007;
Provision for non-covered loan and lease losses of $7.1 million and non-covered net charge-offs of $5.9 million, the difference resulting from growth in non-covered loans during the period;
The allowance for non-covered credit losses ended the quarter at 1.40% of total non-covered loans and leases, reflecting the stabilized credit quality of the loan portfolio and unfunded loan commitments;
The cost of interest bearing deposits declined 4 basis points on a sequential quarter basis to 0.43%;
Debt Capital Markets revenue of $1.6 million;
Tangible common equity ratio of 9.59%; and
Total risk-based capital of 16.94%, and Tier 1 common to risk weighted asset ratio of 12.86%.
(1) Operating earnings and adjusted net interest margin are considered "non-GAAP" financial measures. More information regarding these measurements and a reconciliation to the comparable GAAP measurements are provided under the heading Non-GAAP Financial Measures below. In previous earnings releases and periodic reports, we referred to adjusted net interest margin as core net interest margin.
"Continued solid loan growth, improving credit quality metrics and strong mortgage production highlight this quarter's performance," said Ray Davis, president and CEO of Umpqua Holdings Corporation. "We are pleased to see that our growth initiatives continue to offset any pressure our margin is experiencing, protecting our earnings per share."
Asset quality - Non-covered loan portfolio
Non-covered, non-performing assets were $99.6 million, or 0.86% of total assets, as of September 30, 2012, compared to $116.9 million, or 1.01% of total assets as of June 30, 2012, and $146.4 million, or 1.24% of total assets as of September 30, 2011. Of this amount, as of September 30, 2012, $73.7 million represented non-accrual loans, $6.6 million represented loans past due greater than 90 days and still accruing interest, and $19.3 million was other real estate owned ("OREO").
Non-covered, classified assets were $348.8 million as of September 30, 2012, compared to $351.7 million as of June 30, 2012, and $457.6 million as of September 30, 2011. Total non-covered, classified assets have declined 1% since the prior quarter and have declined 24% since the same period of the prior year. Classified assets include non-performing assets, as well as performing assets rated substandard or worse.
The Company has aggressively charged-down impaired assets to their disposition values, and the assets are expected to be resolved at those levels, absent further declines in market prices. As of September 30, 2012, the non-covered, non-performing assets of $99.6 million have been written down by 35%, or $52.9 million, from their current par balance of $152.5 million.
The provision for non-covered loan losses for the third quarter of 2012 was $7.1 million, representing a 7% increase from the prior quarter, and a 22% decrease from the same period of the prior year. The modest increase in provision expense in the current quarter over the prior quarter largely relates to the non-covered loan growth of $144 million, partially offset by improved quality of the loan portfolio. The decrease in provision and allowance for non-covered loan and lease losses from the same period of the prior year reflects the continued improvement and stabilization of credit quality, including less net charge-offs and the decline of classified and non-performing loans.
The allowance for non-covered credit losses increased to 1.40% of non-covered loans and leases at September 30, 2012, as compared to 1.39% of total non-covered loans and leases as of June 30, 2012 and 1.61% of total non-covered loans and leases as of September 30, 2012. The annualized net charge-off rate for the third quarter of 2012 was 0.38%. The allowance for non-covered credit losses includes the allowance for non-covered loan and lease losses and the allowance for non-covered unfunded loan commitments.
Non-covered loans past due 30 to 89 days were $28.5 million, or 0.46% of non-covered loans and leases as of September 30, 2012, as compared to $24.2 million, or 0.40% of non-covered loans and leases as of June 30, 2012, and $49.2 million, or 0.84% of non-covered loans and leases as of September 30, 2011.
Since 2007, the Company has been aggressively resolving problems arising from the current economic downturn. The following table recaps the Company's credit quality trends since the second quarter of 2007, as it relates to the non-covered loan portfolio:
Credit quality trends - Non-covered loans
(Dollars in thousands)
past due %
total assets %
Non-covered construction loan portfolio
The non-covered residential development loan segment was $64.2 million, or 1% of the total non-covered loan portfolio, as of September 30, 2012. Of this amount, $9.6 million represented non-performing loans and $18.7 million were classified as performing restructured loans. The residential development loan segment has decreased $39.5 million, or 38%, since September 30, 2011.
Non-covered commercial construction loans were $174.6 million as of September 30, 2012, as compared to $172.0 million as of June 30, 2012, and $175.3 million as of September 30, 2011. Of this amount as of September 30, 2012, $5.1 million represented non-performing loans and $14.2 million were classified as performing restructured loans.
Non-covered commercial real estate loan portfolio
The total non-covered term commercial real estate loan portfolio was $3.71 billion as of September 30, 2012. Of this total, $2.47 billion are non-owner occupied and $1.23 billion are owner occupied. Of the total term commercial real estate portfolio, $44.3 million were on non-accrual status, $0.7 million were past due 90 days or more and accruing interest, and $20.0 million were past due 30-89 days as of September 30, 2012. Of the total non-covered commercial real estate portfolio, 3% matures in 2012, 6% in 2013, 16% in years 2014-2015, and 20% in years 2016-2017. The remaining 55% of the portfolio matures in or after the year 2018.
Non-covered restructured loans
Non-covered restructured loans on accrual status were $70.0 million as of September 30, 2012, as compared to $54.8 million as of June 30, 2012, and $80.6 million as of September 30, 2011. The increase in restructured loans on accrual status is primarily due to one new non-owner occupied commercial real estate loan in the Washington region that was restructured in the current quarter.
Additional information related to asset quality
Additional tables can be found at the end of this earnings release covering the following aspects of the Company's non-covered loan portfolio: non-performing assets by type and by region, non-performing assets by type trends, loans past due 30 to 89 days by type and by region, loans past due 30 to 89 days by type trends, and restructured loans on accrual status by type and by region.
Asset quality - Covered loan portfolio
Covered non-performing assets were $8.1 million, or 0.07% of total assets, as of September 30, 2012, as compared to $9.2 million, or 0.08% of total assets, as of June 30, 2012, and $23.0 million, or 0.20% of total assets, as of September 30, 2011. The total covered non-performing assets balance for all periods presented represents covered OREO.
In accordance with the guidance governing the accounting for purchased loan portfolios with evidence of credit deterioration subsequent to origination, the covered loans acquired have been assembled into pools of loans. As a result, individual loans underlying the loan pools are not reported as non-performing. Rather, accretable yield of the pool is recognized to the extent pool level expected future cash flows discounted at the effective rate exceed the carrying value of the pool. To the extent discounted expected future cash flows are less than the carrying value of the pool, provisions for covered credit losses are recognized as a charge to earnings, but the adjusted carrying value of the loan pool continues to accrete into income at the effective rate.
As of acquisition date, covered non-performing assets were written-down to their estimated fair value, incorporating our estimate of future expected cash flows until the ultimate resolution of these credits. The estimated credit losses embedded in these acquired non-performing loan portfolios were based on management's and third-party consultants' credit reviews of the portfolios performed during due diligence. To the extent actual or projected cash flows are less than originally estimated, additional provisions for loan losses on the covered loan portfolio will be recognized; however, these provisions would be mostly offset by a corresponding increase in the FDIC indemnification (loss sharing) asset recognized within non-interest income. To the extent actual or projected cash flows are more than originally estimated, the increase in cash flows is prospectively recognized in interest income; however, the increase in interest income would be mostly offset by a corresponding prospective decrease in the FDIC indemnification (loss sharing) asset recognized within non-interest income.
Net interest margin
The Company reported a tax equivalent net interest margin of 3.98% for the third quarter of 2012, as compared to 4.06% for the second quarter of 2012, and 4.12% for the third quarter of 2011. The decrease in net interest margin in the current quarter over the prior quarter resulted primarily from the decline in non-covered loan yields, the decline in investment yields, the decrease in average investment balances and the decrease in average covered loan balances, partially offset by an increase in average loans held for sale, the increase in average non-covered loans outstanding, an increase in loan disposal gains from the covered loan portfolio and the decrease in the cost of interest bearing deposits. The decrease in net interest margin in the current quarter over the same period of the prior year resulted from the same items as noted above, partially offset by the decrease in interest bearing liabilities.
Loan disposal activities within the covered loan portfolio, either through loans being paid off in full or transferred to OREO, result in gains within covered loan interest income to the extent assets received in satisfaction of debt (such as cash or the net realizable value of OREO received) exceed the allocated carrying value of the loan disposed of from the pool. Loan disposal activities contributed $5.9 million of interest income in the third quarter of 2012, as compared to $2.9 million in the second quarter of 2012 and $4.8 million in the third quarter of 2011. While dispositions of covered loans positively impact net interest margin, we recognize a corresponding decrease to the change in FDIC indemnification asset at the incremental loss-sharing rate within other non-interest income. Excluding the impact of covered loan disposal gains, consolidated net interest margin would have been 3.75% for the current quarter, 3.94% for the prior quarter, and 3.94% in the same quarter of the prior year.
Interest and fee reversals on non-accrual loans during the third quarter of 2012 were $0.2 million, negatively impacting the net interest margin by 1 basis point, as compared to reversals of $0.3 million for the second quarter of 2012 and reversals of $0.1 million in the third quarter of 2011. Excluding the impact of loan disposal gains and interest and fee reversals or recoveries on non-accrual loans, our adjusted net interest margin was 3.76% for the third quarter of 2012, 3.96% for the second quarter of 2012 and 3.94% for the third quarter of 2011. Adjusted net interest margin is considered a "non-GAAP" financial measure. More information regarding this measurement and reconciliation to the comparable GAAP measurement is provided under the heading Non-GAAP Financial Measures below.
For the twentieth consecutive quarter, the Company has reduced the cost of interest bearing deposits. As a result of these efforts, the cost of interest bearing deposits was 0.43% for the third quarter of 2012, 4 basis points lower than the second quarter of 2012 and 34 basis points lower than the third quarter of 2011. Management closely and continually monitors market deposit rates and develops our pricing strategy to ensure we are competitive in the market and in-line with our liquidity position and funding needs.
Mortgage banking revenue
The Company generated a record $24.3 million in total mortgage banking revenue during the third quarter of 2012, on record closed loan volume of $621 million. This represents a 56% increase in revenue over the second quarter of 2012 and a 244% increase in revenue over the same period of the prior year. In the third quarter of 2012, the Company recognized a decrease in the fair value of the mortgage servicing right assets in the income statement of $3.7 million. The decline is primarily due to the further reductions to the historically low mortgage interest rate levels during the quarter that have led to elevated levels of refinancing activity. Despite the elevated levels of refinance activity in the current environment, 32% of the current quarter's production related to purchase activity. Income from the origination and sale of mortgage loans was $26.3 million in the third quarter, representing a 74% increase over the prior quarter, and a 260% increase as compared to the same quarter of the prior year. As of September 30, 2012, the Company serviced $2.8 billion of mortgage loans for others, and the related mortgage servicing right asset is valued at $24.5 million, or 0.87% of the total serviced portfolio principal balance.
Fair value of junior subordinated debentures
The Company recognized a $0.6 million loss from the change in fair value of junior subordinated debentures during the third quarter of 2012. The majority of the fair value difference over par value relates to the $61.8 million of junior subordinated debentures issued in the third quarter of 2007, which carry interest rate spreads of 135 and 275 basis points over the 3 month LIBOR. As of September 30, 2012, the credit risk adjusted interest spread for potential new issuances was estimated to be significantly higher than the contractual spread. The difference between these spreads has created a cumulative gain in fair value of the Company's junior subordinated debentures, which results from their carrying amount compared to the estimated amount that would be paid to transfer the liability in an orderly transaction among market participants.
As these instruments are no longer being originated or actively traded in the primary or secondary markets, the quarterly fair value adjustments are difficult to estimate. We utilize an income approach valuation technique to determine the fair value of these liabilities using our estimation of market discount rate assumptions. The Company monitors activity in the trust preferred and related markets, to the extent available, changes related to the current and anticipated future interest rate environment, and considers our entity-specific creditworthiness, to validate the reasonableness of the credit risk adjusted spread and effective yield utilized in our discounted cash flow model. Absent changes to the significant inputs utilized in the discounted cash flow model used to measure the fair value of these instruments at each reporting period, the cumulative discount for each junior subordinated debenture will reverse over time, ultimately returning the carrying values of these instruments to their notional values at their expected redemption dates.
Under a recently issued notice of proposed rulemaking by federal banking regulators to revise the regulatory capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework (Basel III), the trust preferred security debt issuances would be phased out of Tier 1 capital into Tier 2 capital over a 10 year period. If the proposed rulemaking becomes effective, it is possible the Company may accelerate redemption of the existing junior subordinated debentures. This could result in adjustments to the fair value of these instruments including the acceleration of losses on junior subordinated debentures carried at fair value within non-interest income. As of September 30, 2012, the total par value of junior subordinated debentures carried at fair value was $134.0 million, and the fair value was $84.5 million.
Total non-interest expense for the third quarter of 2012 was $87.0 million, compared to $86.9 million for the second quarter of 2012 and $86.2 million for the third quarter of 2011. Included in non-interest expense are several categories that are outside of the operational control of the Company or depend on changes in market values, including FDIC deposit insurance assessments and gain or loss on other real estate owned, as well as non-operating related expenses such as merger related costs. Excluding these non-controllable, valuation related or non-operating related items, the remaining non-interest expense items totaled $82.6 million for the third quarter of 2012, as compared to $83.8 million for the second quarter of 2012, and $77.3 million for the third quarter of 2011. The slight increase in non-interest expense in the current period over the prior quarter consists primarily of increased salaries and benefits expense related to mortgage loan production, increased losses on non-covered OREO, and a $1.6 million provision for unfunded commitments, partially offset by overall efficiency gains.
During the third quarter of 2012, the Company incurred external loan collection and OREO management expense of $2.3 million, compared to $2.5 million for the second quarter of 2012, and $3.7 million for the third quarter of 2011. Mortgage production related expense was $10.3 million in the third quarter of 2012, compared to $8.7 million in the second quarter of 2012, and $5.3 million for the third quarter of 2011.
The Company recorded a provision for income taxes of $13.6 million in the third quarter of 2012, representing an effective tax rate of 35.1% on an annualized basis. The increase in the effective income tax rate in the third quarter reflects the increased level of pre-tax income and the effects of permanent differences on our taxable income year to date.
Total consolidated assets as of September 30, 2012 were $11.5 billion, compared to $11.5 billion on June 30, 2012 and $11.8 billion a year ago. Total gross loans and leases (covered and non-covered), and deposits, were $6.8 billion and $9.1 billion, respectively, as of September 30, 2012, as compared to $6.7 billion and $9.1 billion, respectively, as of June 30, 2012, and $6.5 billion and $9.4 billion, respectively, as of September 30, 2011.
Total non-covered loans held for investment increased $144.0 million during the third quarter of 2012. This increase is principally due to new loan production in the current period and draws on commercial lines of credit. Excluding non-covered charge-offs of $7.6 million, the non-covered loan portfolio increased $151.6 million in the current quarter. Covered loans declined $38.9 million during the third quarter of 2012. The covered loan portfolio will continue to decline over time as loan payments are received, covered loans are refinanced or modified out of loss sharing, or as we work out and resolve troubled credits.
Total deposits decreased $32.3 million on a sequential quarter basis, and decreased $304.5 million from the same period of the prior year. The decline in deposits over these periods primarily results from the run-off of higher priced time and public funds deposits. The increase in securities sold under agreements to repurchase over the prior periods results from the FDIC discontinuing banking institutions' ability to collateralize uninsured non-public funds deposits, while various customers still require or prefer some form of collateralization based on their business requirements.
Due to the significant amount of liquidity in the banking system and generally unattractive bond market conditions since the second half of 2009, the Company has been holding larger levels of interest bearing cash rather than investing all excess liquidity into the bond market. At September 30, 2012, the Company had $337 million of interest bearing cash earning 0.25%, the target Federal Funds Rate. For interest bearing cash in excess of our internal target balance range, we have reinvested these funds and purchased short duration government-sponsored investment securities to offset the interest expense associated with our deposit balances. The Company's available for sale investment portfolio was $2.9 billion as of September 30, 2012, representing a 2% increase over the prior quarter and a 6% decline from same period of the prior year. During the third quarter of 2012 the medium and long term treasury rates continued to remain at historically low levels resulting from the continued flight to safety largely due to economic concerns in Europe and sluggish employment growth in the United States. As a result, the Company continued to limit its reinvestment of investment cash flows back into the portfolio given the unattractive market prices and yields. The Company plans to hold an increased interest bearing cash position relative to historical levels until the investment alternatives in the market improve from both a return and duration standpoint and to fund anticipated future loan production. Including secured off-balance sheet lines of credit, total available liquidity to the Company was $4.7 billion as of September 30, 2012, representing 41% of total assets and 51% of total deposits.
As of September 30, 2012, total shareholders' equity was $1.7 billion, comprised entirely of common equity. Book value per common share was $15.32, tangible book value per common share was $9.30 and the ratio of tangible common equity to tangible assets was 9.59% (see explanation and reconciliation of these items in the Non-GAAP Financial Measures section below). During the third quarter of 2012, the Company repurchased 11,304 shares of common stock, for a total of $145 thousand through the previously announced share repurchase plan. The Company may repurchase up to 12.2 million of additional shares under the previously announced share repurchase plan, and will remain opportunistic based on market conditions.
The Company's estimated total risk-based capital ratio as of September 30, 2012 is 16.94%. This represents a decrease from June 30, 2012, as a result of increased risk weighted assets primarily due to non-covered loan growth and an increase in unfunded loan commitments. Our total risk-based capital level is substantially in excess of the regulatory definition of "well-capitalized" of 10.00%. The Company's estimated Tier 1 common to risk weighted assets ratio is 12.86% as of September 30, 2012. These capital ratios as of September 30, 2012 are estimates pending completion and filing of the Company's regulatory reports.
Non-GAAP Financial Measures
In addition to results presented in accordance with generally accepted accounting principles in the United States of America (GAAP), this press release contains certain non-GAAP financial measures. Umpqua believes that certain non-GAAP financial measures provide investors with information useful in understanding Umpqua's financial performance; however, readers of this report are urged to review these non-GAAP financial measures in conjunction with the GAAP results as reported.
Umpqua recognizes gains or losses on our junior subordinated debentures carried at fair value resulting from changes in interest rates and the estimated market credit risk adjusted spread that do not directly correlate with the Company's operating performance. Also, Umpqua incurs significant expenses related to the completion and integration of mergers and acquisitions. Additionally, we may recognize goodwill impairment losses that have no direct effect on the Company's or the Bank's cash balances, liquidity, or regulatory capital ratios. Lastly, the Company may recognize one-time bargain purchase gains on certain acquisitions that are not reflective of Umpqua's on-going earnings power. Accordingly, management believes that our operating results are best measured on a comparative basis excluding the impact of gains or losses on junior subordinated debentures measured at fair value, net of tax, merger-related expenses, net of tax, and other charges related to business combinations such as goodwill impairment charges or bargain purchase gains, net of tax. We define operating earnings as earnings available to common shareholders before gains or losses on junior subordinated debentures carried at fair value, net of tax, bargain purchase gains on acquisitions, net of tax, merger related expenses, net of tax, and goodwill impairment, and we calculate operating earnings per diluted share by dividing operating earnings by the same diluted share total used in determining diluted earnings per common share.
The following table provides the reconciliation of earnings available to common shareholders (GAAP) to operating earnings (non-GAAP), and earnings per diluted common share (GAAP) to operating earnings per diluted share (non-GAAP) for the periods presented:
(Dollars in thousands, except per share data)
Sep 30, 2012
Jun 30, 2012
Sep 30, 2011
Net earnings available to common shareholders
Net loss on junior subordinated debentures
carried at fair value, net of tax (1)
Merger related expenses, net of tax (1)
Earnings per diluted share:
Earnings available to common shareholders
Nine Months Ended:
(Dollars in thousands, except per share data)