Umpqua Holdings Reports Third Quarter 2012 Results

Umpqua Holdings Corporation (NASDAQ: 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)
 

Allowance for
   
    non-covered Non-covered Non-covered,
Provision for Non-covered credit losses loans non-performing
non-covered net to non-covered 30-89 days assets to
loan losses     charge-offs   loans %   past due %   total assets %
Q2 2007 $ 3,413

$

31
1.17% 0.56 % 0.59 %
Q3 2007 20,420 865 1.47% 0.99 % 0.96 %
Q4 2007 17,814 21,188 1.42% 0.64 % 1.18 %
Q1 2008 15,132 13,476 1.45% 1.13 % 1.06 %
Q2 2008 25,137 37,976 1.22% 0.31 % 1.25 %
Q3 2008 35,454 15,193 1.54% 1.16 % 1.66 %
Q4 2008 31,955 30,072 1.58% 0.96 % 1.88 %
Q1 2009 59,092 59,871 1.58% 1.47 % 1.82 %
Q2 2009 29,331 26,047 1.63% 0.80 % 1.73 %
Q3 2009 52,108 47,342 1.71% 0.76 % 1.70 %
Q4 2009 68,593 64,072 1.81% 0.69 % 2.38 %
Q1 2010 42,106 38,979 1.91% 0.93 % 1.99 %
Q2 2010 29,767 26,637 2.00% 0.70 % 1.90 %
Q3 2010 24,228 30,044 1.91% 1.41 % 1.59 %
Q4 2010 17,567 23,744 1.82% 0.85 % 1.53 %
Q1 2011 15,030 19,118 1.75% 1.25 % 1.53 %
Q2 2011 15,459 15,497 1.72% 0.76 % 1.37 %
Q3 2011 9,089 13,952 1.61% 0.84 % 1.24 %
Q4 2011 6,642 6,606 1.59% 0.60 % 1.09 %
Q1 2012 3,167 9,465 1.48% 0.35 % 1.05 %
Q2 2012 6,638 9,690 1.39% 0.40 % 1.01 %
Q3 2012   7,078     5,937 1.40% 0.46 % 0.86 %
Total $ 535,220  

$

515,802
 

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.

Non-interest expense

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.

Income taxes

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.

Balance sheet

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.

Capital

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:
   
Sequential Year over
Quarter ended: Quarter Year
(Dollars in thousands, except per share data) Sep 30, 2012     Jun 30, 2012   Sep 30, 2011     % Change     % Change  
   
Net earnings available to common shareholders $24,983 $23,115 $21,757 8 % 15 %
Adjustments:
Net loss on junior subordinated debentures

carried at fair value, net of tax (1)
332 328 332 1 % 0 %
Merger related expenses, net of tax (1) 51     92   31 (45 )% 65 %
Operating earnings $25,366     $23,535   $22,120 8 % 15 %
 

Earnings per diluted share:
Earnings available to common shareholders $0.22 $0.21 $0.19 5 % 16 %
Operating earnings $0.23 $0.21 $0.19 10 % 21 %
 
Year over
Nine Months Ended: Year
(Dollars in thousands, except per share data) Sep 30, 2012   Sep 30, 2011   % Change
 
Net earnings available to common shareholders $73,434 $52,861 39

%

 
Adjustments:
Net loss on junior subordinated debentures

carried at fair value, net of tax (1)
989 986 0

%

 
Merger related expenses, net of tax (1) 203   186 12

%

 
Operating earnings $74,626   $54,029 38

%

 
 
Earnings per diluted share:
Earnings available to common shareholders $0.66 $0.46 43

%

 
Operating earnings $0.67 $0.47 43

%

 
 

(1) Income tax effect of pro forma operating earnings adjustments at 40%.
 

Management believes pre-tax, pre-credit cost operating income is a useful financial measure because it enables investors to assess the Company’s ability to generate income and capital to cover credit losses through a credit cycle. Management uses this measure to evaluate core operating results exclusive of credit costs, which are often market driven or outside of the Company’s control, and to monitor how we are growing core pre-tax income of the Company over time, through organic growth and acquisitions. Pre-tax, pre-credit cost operating income is calculated starting with operating earnings (as defined above) and adding back operating provision for income taxes, earnings allocated to participating securities, provision for loan and lease losses, net gains or losses on other real estate owned and credit related external workout costs. For covered losses and expenses that are subject to loss-share, we have also deducted the associated gain recognized on the FDIC indemnification asset.

The following table provides the reconciliation of operating earnings (non-GAAP) to pre-tax, pre-credit cost operating income (non-GAAP) for the periods presented (the reconciliation of earnings available to common shareholders (GAAP) to operating earnings (non-GAAP) is provided in the preceding tables):
     
Sequential Year over
Quarter ended: Quarter Year
(Dollars in thousands, except per share data) Sep 30, 2012   Jun 30, 2012   Sep 30, 2011 % Change   % Change
   
Operating earnings $25,366 $23,535 $22,120 8% 15%
Adjustments:
Provision for non-covered loan and lease losses 7,078 6,638 9,089 7% (22)%
Provision for covered loan and lease losses 2,927 1,406 4,420 108% (34)%
Net loss on non-covered other real estate owned 2,168 889 2,289 144% (5)%
Net loss on covered other real estate owned 461 169 4,755 173% (90)%
Non-covered loan & OREO workout costs 974 1,138 1,725 (14)% (44)%
Covered loan & OREO workout costs 1,303 1,369 1,974 (5)% (34)%
Covered losses & expenses impact on FDIC

indemnification asset
(3,753) (2,355) (8,919) 59% (58)%
Operating provision for income taxes 13,843 11,961 10,959 16% 26%
Dividends and undistributed earnings allocated to

participating securities
170   162   105 5% 62%
Pre-tax, pre-credit cost operating income $50,537   $44,912   $48,517 13% 4%
 
   
Year over
Nine Months Ended: Year
(Dollars in thousands, except per share data) Sep 30, 2012   Sep 30, 2011   % Change
 
Operating earnings $74,626 $54,029 38%
Adjustments:
Provision for non-covered loan and lease losses 16,883 39,578 (57)%
Provision for covered loan and lease losses 4,302 15,443 (72)%
Net loss on non-covered other real estate owned 6,244 8,967 (30)%
Net loss on covered other real estate owned 3,084 5,778 (47)%
Non-covered loan & OREO workout costs 4,076 6,760 (40)%
Covered loan & OREO workout costs 4,606 5,962 (23)%
Covered losses & expenses impact on FDIC

indemnification asset
(9,594) (21,746) (56)%
Operating provision for income taxes 39,320 26,798 47%
Dividends and undistributed earnings allocated to

participating securities
499   253 97%
Pre-tax, pre-credit cost operating income $144,046   $141,822 2%
 

Management believes adjusted net interest income and adjusted net interest margin are useful financial measures because they enable investors to evaluate the underlying growth or compression in these values excluding interest income adjustments related to credit quality. Management uses these measures to evaluate adjusted net interest income operating results exclusive of credit costs, in order to monitor our effectiveness in growing higher interest yielding assets and managing our cost of interest bearing liabilities over time. Adjusted net interest income is calculated as net interest income, adjusting tax exempt interest income to its taxable equivalent, adding back interest and fee reversals related to new non-accrual loans during the period, and deducting the interest income gains recognized from loan disposition activities within covered loan pools. Adjusted net interest margin is calculated by dividing annualized adjusted net interest income by a period’s average interest earning assets.

The following table provides the reconciliation of net interest income (GAAP) to adjusted net interest income (non-GAAP), and net interest margin (GAAP) to adjusted net interest margin (non-GAAP) for the periods presented:
     
Sequential Year over
Quarter ended: Quarter Year
(Dollars in thousands, except per share data) Sep 30, 2012   Jun 30, 2012   Sep 30, 2011   % Change   % Change
   
Net interest income $102,040 $101,012 $107,534 1% (5)%
Tax equivalent adjustment (1) 1,164   1,153   1,053 1% 11%
Net interest income (1) 103,204 102,165 108,587 1% (5)%
 
Adjustments:
Interest and fee reversals on non-accrual loans 174 317 149 (45)% 17%
Covered loan disposal gains (5,859)   (2,926)   (4,793) 100% 22%
Adjusted net interest income (1) $97,519   $99,556   $103,943 (2)% (6)%
 
Average interest earning assets $10,313,397 $10,118,420 $10,455,398 2% (1)%
 
Net interest margin – consolidated (1) 3.98% 4.06% 4.12%
Adjusted net interest margin – consolidated (1) 3.76% 3.96% 3.94%
 

 
Nine Months Ended: Year over

Year
(Dollars in thousands, except per share data) Sep 30, 2012   Sep 30, 2011   % Change
 
Net interest income $305,407 $321,797 (5)%
Tax equivalent adjustment (1) 3,468 3,205 8%
Net interest income (1) 308,875 325,002 (5)%
 
Adjustments:
Interest and fee reversals on non-accrual loans 1,137 1,918 (41)%
Covered loan disposal gains (11,572)   (19,667) (41)%
Adjusted net interest income (1) $298,440   $307,253 (3)%
 
Average interest earning assets $10,210,094 $10,326,854 (1)%
 
Net interest margin – consolidated (1) 4.04% 4.21%
Adjusted net interest margin – consolidated (1) 3.90% 3.98%
 

(1) Tax equivalent basis. Tax exempt interest has been adjusted to a taxable equivalent basis using a 35% tax rate.
 

Management believes tangible common equity and the tangible common equity ratio are meaningful measures of capital adequacy. Tangible common equity is calculated as total shareholders' equity less goodwill and other intangible assets, net (excluding MSRs). Tangible assets are total assets less goodwill and other intangible assets, net (excluding MSRs). The tangible common equity ratio is calculated as tangible common shareholders’ equity divided by tangible assets.

The following table provides reconciliations of ending shareholders’ equity (GAAP) to ending tangible common equity (non-GAAP), and ending assets (GAAP) to ending tangible assets (non-GAAP).
     

(Dollars in thousands, except per share data)
Sep 30, 2012   Jun 30, 2012   Sep 30, 2011
 
Total shareholders' equity $1,714,093 $1,696,836 $1,695,120
Subtract:
Goodwill and other intangible assets, net 673,604   674,794   678,448
Tangible common shareholders' equity $1,040,489   $1,022,042   $1,016,672
 
Total assets $11,528,964 $11,521,897 $11,772,883
Subtract:
Goodwill and other intangible assets, net 673,604   674,794   678,448
Tangible assets $10,855,360   $10,847,103   $11,094,435
 
Common shares outstanding at period end 111,915,015 111,891,283 114,538,536
 
Tangible common equity ratio 9.59% 9.42% 9.16%
Tangible book value per common share $9.30 $9.13 $8.88
 

About Umpqua Holdings Corporation

Umpqua Holdings Corporation (NASDAQ: UMPQ) is the parent company of Umpqua Bank, an Oregon-based community bank recognized for its entrepreneurial approach, innovative use of technology, and distinctive banking solutions. Umpqua Bank has locations between San Francisco, California, and Seattle, Washington, along the Oregon and Northern California Coast, Central Oregon and Northern Nevada. Umpqua Holdings also owns a retail brokerage subsidiary, Umpqua Investments, Inc., which has locations in Umpqua Bank stores and in dedicated offices in Oregon. Umpqua Private Bank serves high net worth individuals and non-profits, providing trust and investment services. Umpqua Holdings Corporation is headquartered in Portland, Oregon. For more information, visit www.umpquaholdingscorp.com.

Umpqua Holdings Corporation will conduct a quarterly earnings conference call Thursday, October 18, 2012, at 10:00 a.m. PDT (1:00 p.m. EDT) during which the Company will discuss third quarter 2012 results and provide an update on recent activities. There will be a question-and-answer session following the presentation. Shareholders, analysts and other interested parties are invited to join the call by dialing (888) 218-8176 a few minutes before 10:00 a.m. The conference ID is 9554878. A re-broadcast will be available approximately two hours after the conference call by dialing (888) 203-1112 and entering passcode 9554878 or by visiting www.umpquaholdingscorp.com. Information to be discussed in the teleconference will be available on the company’s website after the market closes on Wednesday, October 17, 2012.

Forward-Looking Statements

This press release includes forward-looking statements within the meaning of the “Safe-Harbor” provisions of the Private Securities Litigation Reform Act of 1995, which management believes are a benefit to shareholders. These statements are necessarily subject to risk and uncertainty and actual results could differ materially due to various risk factors, including those set forth from time to time in our filings with the SEC. You should not place undue reliance on forward-looking statements and we undertake no obligation to update any such statements. In this press release we make forward-looking statements about growth initiatives offsetting margin compression, our success in resolving remaining credits at the estimated disposition value of related collateral, the mitigating effect of FDIC loss sharing agreements on the covered loan portfolio, deposit pricing strategies and their effect on interest rates, liquidity requirements and funding needs, the effect of proposed Basel III capital regulations on the valuations of junior subordinated debentures, and our plans to hold a large interest bearing cash position, relative to historical levels. Specific risks that could cause results to differ from the forward-looking statements are set forth in our filings with the SEC and include, without limitation, inability to grow assets sufficiently to offset margin compression, unanticipated weakness in loan demand or loan pricing, deterioration in the economy, material reductions in revenue or material increases in expenses, lack of strategic growth opportunities or our failure to execute on those opportunities, our inability to effectively manage problem credits, certain loan assets becoming ineligible for loss sharing, unanticipated deterioration in the commercial real estate loan portfolio, unanticipated increases in the cost of deposits, and continued negative pressure on interest income associated with our large cash position.
 
Umpqua Holdings Corporation
Consolidated Statements of Income
(Unaudited)
    Sequential   Year over
Quarter Ended: Quarter Year
(Dollars in thousands, except per share data) Sep 30, 2012   Jun 30, 2012   Sep 30, 2011   % Change   % Change
Interest income    
Non-covered loans and leases $78,090 $77,637 $81,041 1% (4)%
Covered loans and leases 20,325 16,935 20,950 20% (3)%
Interest and dividends on investments:
Taxable 13,057 16,535 21,932 (21)% (40)%
Exempt from federal income tax 2,302 2,291 2,136 0% 8%
Dividends 3 28 2 (89)% 50%
Temporary investments & interest bearing deposits 331   168   466 97% (29)%
Total interest income 114,108 113,594 126,527 0% (10)%
Interest expense
Deposits 7,623 8,169 14,579 (7)% (48)%
Repurchase agreements and fed funds purchased 73 79 152 (8)% (52)%
Term debt 2,335 2,305 2,332 1% 0%
Junior subordinated debentures 2,037   2,029   1,930 0% 6%
Total interest expense 12,068 12,582 18,993 (4)% (36)%
Net interest income 102,040 101,012 107,534 1% (5)%
Provision for non-covered loan and lease losses 7,078 6,638 9,089 7% (22)%
Provision for covered loan and lease losses 2,927 1,406 4,420 108% (34)%
Non-interest income
Service charges 7,122 7,190 8,849 (1)% (20)%
Brokerage fees 3,186 3,532 3,115 (10)% 2%
Mortgage banking revenue, net 24,346 15,641 7,084 56% 244%
Net gain on investment securities 21 1,030 1,813 (98)% (99)%
Loss on junior subordinated debentures
carried at fair value (554) (547) (554) 1% 0%
Change in FDIC indemnification asset (4,759) (4,040) 1,611 18% (395)%
Other income 4,317   6,120   2,860 (29)% 51%
Total non-interest income 33,679 28,926 24,778 16% 36%
Non-interest expense
Salaries and employee benefits 49,543 49,979 45,023 (1)% 10%
Net occupancy and equipment 13,441 13,580 12,803 (1)% 5%
Intangible amortization 1,189 1,211 1,222 (2)% (3)%
FDIC assessments 1,699 1,886 1,867 (10)% (9)%
Net loss on non-covered other real estate owned 2,168 889 2,289 144% (5)%
Net loss on covered other real estate owned 461 169 4,755 173% (90)%
Merger related expenses 85 153 51 (44)% 67%
Other expense 18,388   19,069   18,214 (4)% 1%
Total non-interest expense 86,974 86,936 86,224 0% 1%
Income before provision for income taxes 38,740 34,958 32,579 11% 19%
Provision for income taxes 13,587   11,681   10,717 16% 27%
Net income 25,153 23,277 21,862 8% 15%
Dividends and undistributed earnings
allocated to participating securities 170   162   105 5% 62%
Net earnings available to common shareholders $24,983   $23,115   $21,757 8% 15%
 
Weighted average basic shares outstanding 111,899,086 111,897,099 114,540,500 0% (2)%
Weighted average diluted shares outstanding 112,150,866 112,077,593 114,691,063 0% (2)%
Earnings per common share – basic $0.22 $0.21 $0.19 5% 16%
Earnings per common share – diluted $0.22 $0.21 $0.19 5% 16%
 
 

Umpqua Holdings Corporation
Consolidated Statements of Income
(Unaudited)
     
Nine Months Ended:
(Dollars in thousands, except per share data) Sep 30, 2012   Sep 30, 2011   % Change
Interest income  
Loans and leases $233,386 $239,095 (2)%
Covered loans and leases 54,603 64,723 (16)%
Interest and dividends on investments:
Taxable 47,712 68,323 (30)%
Exempt from federal income tax 6,870 6,479 6%
Dividends 37 9 311%
Temporary investments & interest bearing cash 736   1,207 (39)%
Total interest income 343,344 379,836 (10)%
Interest expense
Deposits 24,637 44,943 (45)%
Repurchase agreements and fed funds purchased 232 405 (43)%
Term debt 6,944 6,922 0%
Junior subordinated debentures 6,124   5,769 6%
Total interest expense 37,937 58,039 (35)%
Net interest income 305,407 321,797 (5)%
Provision for non-covered loan and lease losses 16,883 39,578 (57)%
Provision for covered loan and lease losses 4,302 15,443 (72)%
Non-interest income
Service charges 20,978 25,210 (17)%
Brokerage fees 9,662 9,768 (1)%
Mortgage banking revenue, net 53,069 17,166 209%
Net gain on investment securities 1,199 7,419 (84)%
Loss on junior subordinated debentures
carried at fair value (1,649) (1,643) 0%
Change in FDIC indemnification asset (10,644) (1,035) 928%
Other income 17,227   9,105 89%
Total non-interest income 89,842 65,990 36%
Non-interest expense
Salaries and employee benefits 146,615 133,441 10%
Net occupancy and equipment 40,519 37,867 7%
Intangible amortization 3,612 3,724 (3)%
FDIC assessments 5,553 8,561 (35)%
Net loss on non-covered other real estate owned 6,244 8,967 (30)%
Net loss on covered other real estate owned 3,084 5,778 (47)%
Merger related expenses 338 303 12%
Other expense 55,641   54,991 1%
Total non-interest expense 261,606 253,632 3%
Income before provision for income taxes 112,458 79,134 42%
Provision for income taxes 38,525   26,020 48%
Net income 73,933 53,114 39%
Dividends and undistributed earnings
allocated to participating securities 499   253 97%
Net earnings available to common shareholders $73,434   $52,861 39%
 
Weighted average basic shares outstanding 111,928,299 114,575,526 (2)%
Weighted average diluted shares outstanding 112,159,107 114,768,784 (2)%
Earnings per common share – basic $0.66 $0.46 43%
Earnings per common share – diluted $0.65 $0.46 41%
 
 

Umpqua Holdings Corporation

Consolidated Balance Sheets
(Unaudited)
        Sequential   Year over
Quarter Year
(Dollars in thousands, except per share data) Sep 30, 2012   Jun 30, 2012   Sep 30, 2011   % Change   % Change
Assets:
Cash and due from banks $159,290 $159,694 $151,548 0% 5%
Interest bearing deposits 336,780 503,552 767,617 (33)% (56)%
Temporary investments 536 530 552 1% (3)%
Investment securities:
Trading, at fair value 3,053 3,301 2,481 (8)% 23%
Available for sale, at fair value 2,899,361 2,834,076 3,090,064 2% (6)%
Held to maturity, at amortized cost 5,359 4,506 4,877 19% 10%
Loans held for sale 225,882 209,607 94,295 8% 140%
Non-covered loans and leases 6,248,425 6,104,432 5,828,114 2% 7%
Allowance for non-covered loan and lease losses (84,759)   (83,618)   (92,932) 1% (9)%
Non-covered loans and leases, net 6,163,666 6,020,814 5,735,182 2% 7%
Covered loans and leases, net 515,045 553,963 672,130 (7)% (23)%
Restricted equity securities 31,365 31,712 32,709 (1)% (4)%
Premises and equipment, net 154,288 154,956 146,887 0% 5%
Goodwill and other intangibles, net 673,604 674,794 678,448 0% (1)%
Mortgage servicing rights, at fair value 24,489 22,513 16,612 9% 47%
Non-covered other real estate owned 19,264 26,884 34,787 (28)% (45)%
Covered other real estate owned 8,111 9,191 23,039 (12)% (65)%
FDIC indemnification asset 60,506 68,805 106,378 (12)% (43)%
Other assets 248,365   242,999   215,277 2% 15%
Total assets $11,528,964   $11,521,897   $11,772,883 0% (2)%
 
Liabilities:
Deposits $9,099,929 $9,132,181 $9,404,410 0% (3)%
Securities sold under agreements to repurchase 161,051 149,341 146,361 8% 10%
Term debt 254,123 254,641 256,198 0% (1)%
Junior subordinated debentures, at fair value 84,538 83,993 82,324 1% 3%
Junior subordinated debentures, at amortized cost 102,302 102,382 102,624 0% 0%
Other liabilities 112,928   102,523   85,846 10% 32%
Total liabilities 9,814,871 9,825,061 10,077,763 0% (3)%
 
Shareholders' equity:
Common stock 1,512,744 1,511,633 1,541,753 0% (2)%
Retained earnings 169,480 154,474 110,237 10% 54%
Accumulated other comprehensive income 31,869   30,729   43,130 4% (26)%
Total shareholders' equity 1,714,093   1,696,836   1,695,120 1% 1%
Total liabilities and shareholders' equity $11,528,964   $11,521,897   $11,772,883 0% (2)%
 
Common shares outstanding at period end 111,915,015 111,891,283 114,538,536 0% (2)%
Book value per common share $15.32 $15.17 $14.80 1% 3%
Tangible book value per common share $9.30 $9.13 $8.88 2% 5%
Tangible equity - common $1,040,489 $1,022,042 $1,016,672 2% 2%
Tangible common equity to tangible assets 9.59% 9.42% 9.16%
 
         
Sequential Year over
(Dollars in thousands) Sep 30, 2012 Jun 30, 2012 Sep 30, 2011 Quarter Year
Amount   Mix Amount   Mix Amount   Mix % Change   % Change
Non-covered loans & leases:      
Commercial real estate:
Non-owner occupied term $2,472,156 40% $2,473,529 41% $2,393,732 41% 0% 3%
Owner occupied term 1,234,928 20% 1,186,542 19% 1,149,242 20% 4% 7%
Commercial construction 174,554 3% 171,982 3% 175,278 3% 1% 0%
Residential development 64,158 1% 70,066 1% 103,668 2% (8)% (38)%
Commercial:
Term 755,255 12% 707,784 12% 613,571 11% 7% 23%
Lines of credit & other 865,851 14% 835,147 14% 815,568 14% 4% 6%
Residential real estate:
Mortgage 391,370 6% 375,302 6% 281,131 5% 4% 39%
Home equity lines & loans 264,379 4% 263,941 4% 275,041 5% 0% (4)%
Consumer & other 37,874 1% 32,437 1% 32,133 1% 17% 18%
Deferred loan fees, net (12,100) 0% (12,298) 0% (11,250) 0% (2)% 8%
Total $6,248,425 100% $6,104,432 100% $5,828,114 100% 2% 7%
 
 
Umpqua Holdings Corporation
Covered Loan & Lease Portfolio, Net
(Unaudited)
        Sequential   Year over
(Dollars in thousands) Sep 30, 2012 Jun 30, 2012 Sep 30, 2011 Quarter Year
Amount   Mix Amount   Mix Amount   Mix % Change % Change
Covered loans & leases:      
Commercial real estate:
Non-owner occupied term $323,116 63% $334,843 60% $402,500 60% (4)% (20)%
Owner occupied term 74,914 15% 86,693 16% 97,976 15% (14)% (24)%
Commercial construction 11,217 2% 12,301 2% 16,793 2% (9)% (33)%
Residential development 9,005 2% 11,391 2% 15,372 2% (21)% (41)%
Commercial:
Term 21,899 4% 27,200 5% 32,928 5% (19)% (33)%
Lines of credit & other 16,037 3% 19,602 4% 29,351 4% (18)% (45)%
Residential real estate:
Mortgage 29,033 6% 30,057 5% 38,890 6% (3)% (25)%
Home equity lines & loans 23,659 5% 25,407 5% 30,189 4% (7)% (22)%
Consumer & other 6,165 1% 6,469 1% 8,131 1% (5)% (24)%
Total $515,045 100% $553,963 100% $672,130 100% (7)% (23)%
 

Covered loan & lease portfolio balances represent the loan portfolios acquired through the assumption of EvergreenBank on January 22, 2010, Rainier Pacific Bank on February 26, 2010, and Nevada Security Bank on June 18, 2010, from the FDIC through whole bank purchase and assumption agreements with loss sharing.
 
Umpqua Holdings Corporation
Deposits by Type/Core Deposits
(Unaudited)
        Sequential   Year over
(Dollars in thousands) Sep 30, 2012 Jun 30, 2012 Sep 30, 2011 Quarter Year
Amount   Mix Amount   Mix Amount   Mix % Change   % Change

Deposits:
     
Demand, non-interest bearing $2,113,842 23% $2,021,303 22% $1,940,865 21% 5% 9%
Demand, interest bearing 1,140,988 13% 1,114,196 12% 889,643 9% 2% 28%
Money market 3,378,625 37% 3,413,385 37% 3,676,265 39% (1)% (8)%
Savings 442,406 5% 425,912 5% 384,540 4% 4% 15%
Time 2,024,068 22% 2,157,385 24% 2,513,097 27% (6)% (19)%
Total $9,099,929 100% $9,132,181 100% $9,404,410 100% 0% (3)%
 
Total core deposits-ending (1) $7,624,240 84% $7,579,893 83% $7,591,561 81% 1% 0%
 

Number of open accounts:
Demand, non-interest bearing 178,623 177,997 182,207 0% (2)%
Demand, interest bearing 50,077 49,503 45,845 1% 9%
Money market 37,476 38,192 41,524 (2)% (10)%
Savings 83,018 83,553 84,404 (1)% (2)%
Time 29,153 30,194 34,336 (3)% (15)%
Total 378,347 379,439 388,317 0% (3)%
 

Average balance per account:
Demand, non-interest bearing $11.8 $11.4 $10.7
Demand, interest bearing 22.8 22.5 19.4
Money market 90.2 89.4 88.5
Savings 5.3 5.1 4.6
Time 69.4 71.5 73.2
Total $24.1 $24.1 $24.2
 

(1) Core deposits are defined as total deposits less time deposits greater than $100,000.
 
 

Umpqua Holdings Corporation
Credit Quality – Non-performing Assets
(Unaudited)
        Sequential   Year over
Quarter Ended Quarter Year
(Dollars in thousands) Sep 30, 2012   Jun 30, 2012   Sep 30, 2011   % Change   % Change
 

Non-covered, non-performing assets:
Non-covered loans on non-accrual status $73,748 $81,897 $99,856 (10)% (26)%
Non-covered loans past due 90+ days & accruing 6,585   8,073   11,716 (18)% (44)%
Total non-performing loans 80,333 89,970 111,572 (11)% (28)%
Non-covered other real estate owned 19,264   26,884   34,787 (28)% (45)%
Total $99,597   $116,854   $146,359 (15)% (32)%
 
Non-covered performing restructured loans $70,015 $54,842 $80,590 28% (13)%
 
Non-covered loans past due 30-89 days $28,495 $24,222 $49,205 18% (42)%
Non-covered loans past due 30-89 days to

non-covered loans and leases
0.46% 0.40% 0.84%
 
Non-covered, non-performing loans to
non-covered loans and leases 1.29% 1.47% 1.91%
Non-covered, non-performing assets to total assets 0.86% 1.01% 1.24%
 

Covered non-performing assets:
Covered loans on non-accrual status $--   $--   $-- nm nm
Total non-performing loans -- -- -- nm nm
Covered other real estate owned 8,111   9,191   23,039 (12)% (65)%
Total $8,111   $9,191   $23,039 (12)% (65)%
 
Covered non-performing loans to
covered loans and leases --% --% --%
Covered non-performing assets to total assets 0.07% 0.08% 0.20%
 

Total non-performing assets:
Loans on non-accrual status $73,748 $81,897 $99,856 (10)% (26)%
Loans past due 90+ days & accruing 6,585   8,073   11,716 (18)% (44)%
Total non-performing loans 80,333 89,970 111,572 (11)% (28)%
Other real estate owned 27,375   36,075   57,826 (24)% (53)%
Total $107,708   $126,045   $169,398 (15)% (36)%
 
Non-performing loans to loans and leases 1.19% 1.35% 1.72%
Non-performing assets to total assets 0.93% 1.09% 1.44%
 
 
Umpqua Holdings Corporation
Credit Quality – Allowance for Non-covered Credit Losses
(Unaudited)
      Sequential   Year over
Quarter Ended Quarter Year
(Dollars in thousands) Sep 30, 2012   Jun 30, 2012   Sep 30, 2011   % Change   % Change
Allowance for non-covered credit losses:
Balance beginning of period $83,618 $86,670 $97,795
Provision for non-covered loan and

lease losses
7,078 6,638 9,089 7% (22)%
 
Charge-offs (7,644) (11,602) (16,453) (34)% (54)%
Recoveries 1,707   1,912   2,501 (11)% (32)%
Net charge-offs (5,937) (9,690) (13,952) (39)% (57)%
         
Total allowance for non-covered loan

and lease losses
84,759 83,618 92,932 1% (9)%
 
Reserve for unfunded commitments 2,757   1,126   971 145% 184%
Total allowance for non-covered

credit losses
$87,516   $84,744   $93,903 3% (7)%
 
Net charge-offs to average non-covered
loans and leases (annualized) 0.38% 0.64% 0.96%
Recoveries to gross charge-offs 22.33% 16.48% 15.20%
Allowance for non-covered loan losses to
non-covered loans and leases 1.36% 1.37% 1.59%
Allowance for non-covered credit losses to
non-covered loans and leases 1.40% 1.39% 1.61%

 
Nine Months Ended:
(Dollars in thousands) Sep 30, 2012   Sep 30, 2011   % Change  
Allowance for non-covered credit losses:
Balance beginning of period $92,968 $101,921
Provision for non-covered loan and

lease losses
16,883 39,578 (57)%
 
Charge-offs (31,937) (55,939) (43)%
Recoveries 6,845   7,372 (7)%
Net charge-offs (25,092) (48,567) (48)%
     
Total allowance for non-covered loan

and lease losses
84,759 92,932 (9)%
 
Reserve for unfunded commitments 2,757   971 184%
Total allowance for non-covered

credit losses
$87,516   $93,903 (7)%
 
Net charge-offs to average non-covered
loans and leases 0.55% 1.14%
Recoveries to gross charge-offs 21.43% 13.18%
 
 
Umpqua Holdings Corporation
Selected Ratios
(Unaudited)
    Sequential   Year over
Quarter Ended: Quarter Year
Sep 30, 2012   Jun 30, 2012   Sep 30, 2011   Change   Change

Average Rates:
   
Yield on non-covered loans and leases 4.87% 5.05% 5.51% (0.18) (0.64)
Yield on covered loans and leases 15.09% 11.93% 12.04% 3.16 3.05
Yield on taxable investments 1.99% 2.34% 2.96% (0.35) (0.97)
Yield on tax-exempt investments (1) 5.28% 5.41% 5.77% (0.13) (0.49)
Yield on temporary investments & interest bearing cash 0.26% 0.25% 0.25% 0.01 0.01
Total yield on earning assets (1) 4.45% 4.56% 4.84% (0.11) (0.39)
 
Cost of interest bearing deposits 0.43% 0.47% 0.77% (0.04) (0.34)
Cost of securities sold under agreements
to repurchase and fed funds purchased 0.19% 0.23% 0.49% (0.04) (0.30)
Cost of term debt 3.65% 3.64% 3.61% 0.01 0.04
Cost of junior subordinated debentures 4.35% 4.39% 4.15% (0.04) 0.20
Total cost of interest bearing liabilities 0.63% 0.66% 0.93% (0.03) (0.30)
 
Net interest spread (1) 3.82% 3.90% 3.91% (0.08) (0.09)
Net interest margin – Consolidated (1) 3.98% 4.06% 4.12% (0.08) (0.14)
 
Net interest margin – Bank (1) 4.05% 4.14% 4.19% (0.09) (0.14)
 

As reported (GAAP):
Return on average assets 0.86% 0.82% 0.74% 0.04 0.12
Return on average tangible assets 0.91% 0.87% 0.78% 0.04 0.13
Return on average common equity 5.81% 5.48% 5.11% 0.33 0.70
Return on average tangible common equity 9.60% 9.12% 8.55% 0.48 1.05
Efficiency ratio – Consolidated 63.54% 66.32% 64.65% (2.78) (1.11)
Efficiency ratio – Bank 61.36% 64.02% 62.41% (2.66) (1.05)
 

Operating basis (non-GAAP): (2)
Return on average assets 0.87% 0.83% 0.75% 0.04 0.12
Return on average tangible assets 0.93% 0.89% 0.80% 0.04 0.13
Return on average common equity 5.90% 5.58% 5.20% 0.32 0.70
Return on average tangible common equity 9.75% 9.28% 8.70% 0.47 1.05
Efficiency ratio – Consolidated 63.22% 65.93% 64.35% (2.71) (1.13)
Efficiency ratio – Bank 61.30% 63.90% 62.37% (2.60) (1.07)
 

 

(1) Tax exempt interest has been adjusted to a taxable equivalent basis using a 35% tax rate.

(2) Operating earnings is calculated as earnings available to common shareholders excluding gain (loss) on junior subordinated debentures carried at fair value, net of tax, bargain purchase gain on acquisitions, net of tax, goodwill impairment, and merger related expenses, net of tax.

 

Umpqua Holdings Corporation
Selected Ratios
(Unaudited)
 
Nine Months Ended:  
Sep 30, 2012   Sep 30, 2011   Change

Average Rates:
 
Yield on non-covered loans and leases 5.03% 5.57% (0.54)
Yield on covered loans and leases 12.74% 11.92% 0.82
Yield on taxable investments 2.28% 3.04% (0.76)
Yield on tax-exempt investments (1) 5.37% 5.83% (0.46)
Yield on temporary investments & interest bearing cash 0.25% 0.25% 0.00
Total yield on earning assets (1) 4.54% 4.96% (0.42)
 
Cost of interest bearing deposits 0.46% 0.79% (0.33)
Cost of securities sold under agreements
to repurchase and fed funds purchased 0.23% 0.52% (0.29)
Cost of term debt 3.64% 3.59% 0.05
Cost of junior subordinated debentures 4.40% 4.19% 0.21
Total cost of interest bearing liabilities 0.66% 0.96% (0.30)
 
Net interest spread (1) 3.88% 4.00% (0.12)
Net interest margin – Consolidated (1) 4.04% 4.21% (0.17)
 
Net interest margin – Bank (1) 4.12% 4.28% (0.16)
 

As reported (GAAP):
Return on average assets 0.86% 0.61% 0.25
Return on average tangible assets 0.91% 0.65% 0.26
Return on average common equity 5.79% 4.23% 1.56
Return on average tangible common equity 9.62% 7.14% 2.48
Efficiency ratio – Consolidated 65.61% 64.87% 0.74
Efficiency ratio – Bank 63.32% 62.52% 0.80
 

Operating basis (non-GAAP): (2)
Return on average assets 0.87% 0.62% 0.25
Return on average tangible assets 0.92% 0.66% 0.26
Return on average common equity 5.88% 4.33% 1.55
Return on average tangible common equity 9.78% 7.30% 2.48
Efficiency ratio – Consolidated 65.26% 64.52% 0.74
Efficiency ratio – Bank 63.24% 62.44% 0.80
 

 

(1) Tax exempt interest has been adjusted to a taxable equivalent basis using a 35% tax rate.

(2) Operating earnings is calculated as earnings available to common shareholders excluding gain (loss) on junior subordinated debentures carried at fair value, net of tax, bargain purchase gain on acquisitions, net of tax, goodwill impairment, and merger related expenses, net of tax.

 
Umpqua Holdings Corporation
Average Balances
(Unaudited)
    Sequential   Year over
Quarter Ended: Quarter Year
(Dollars in thousands) Sep 30, 2012   Jun 30, 2012   Sep 30, 2011 % Change % Change
 
Temporary investments & interest bearing cash $509,242 $272,495 $741,030 87% (31)%
Investment securities, taxable 2,630,018 2,834,188 2,964,361 (7)% (11)%
Investment securities, tax-exempt 262,323 254,511 221,218 3% 19%
Loans held for sale 215,408 143,676 71,527 50% 201%
Non-covered loans and leases 6,160,590 6,042,439 5,767,172 2% 7%
Covered loans and leases 535,816 571,111 690,090 (6)% (22)%
Total interest earning assets 10,313,397 10,118,420 10,455,398 2% (1)%
Goodwill & other intangible assets, net 674,122 675,312 678,967 0% (1)%
Total assets 11,558,901 11,351,087 11,708,079 2% (1)%
 
Non-interest bearing demand deposits 2,075,097 1,946,574 1,829,245 7% 13%
Interest bearing deposits 7,086,622 7,048,938 7,558,357 1% (6)%
Total deposits 9,161,719 8,995,512 9,387,602 2% (2)%
Interest bearing liabilities 7,676,539 7,626,032 8,121,323 1% (5)%
 
Shareholders’ equity - common 1,709,270 1,695,157 1,688,082 1% 1%
Tangible common equity (1) 1,035,148 1,019,845 1,009,115 2% 3%
  Nine Months Ended:
(Dollars in thousands) Sep 30, 2012   Sep 30, 2011   % Change
   
Temporary investments & interest bearing cash $388,862 $647,861 (40)%
Investment securities, taxable 2,791,915 2,996,292 (7)%
Investment securities, tax-exempt 256,510 221,439 16%
Loans held for sale 154,225 56,230 174%
Non-covered loans and leases 6,046,101 5,679,295 6%
Covered loans and leases 572,481 725,737 (21)%
Total interest earning assets 10,210,094 10,326,854 (1)%
Goodwill & other intangible assets, net 675,311 680,212 (1)%
Total assets 11,453,844 11,598,377 (1)%
 
Non-interest bearing demand deposits 1,968,153 1,735,767 13%
Interest bearing deposits 7,128,709 7,576,868 (6)%
Total deposits 9,096,862 9,312,635 (2)%
Interest bearing liabilities 7,705,983 8,122,313 (5)%
 
Shareholders’ equity - common 1,694,706 1,669,373 2%
Tangible common equity (1) 1,019,395 989,161 3%

(1) Average tangible common equity is a non-GAAP financial measure. Average tangible common equity is calculated as average common shareholders’ equity less average goodwill and other intangible assets, net (excluding MSRs).
 

Umpqua Holdings Corporation
Mortgage Banking Activity
(unaudited)
Sequential   Year over
Quarter Ended: Quarter Year
(Dollars in thousands) Sep 30, 2012   Jun 30, 2012   Sep 30, 2011   % Change   % Change
   

Mortgage Servicing Rights (MSR):
Mortgage loans serviced for others $2,814,102 $2,423,572 $1,848,220 16% 52%
MSR asset, at fair value 24,489 22,513 16,612 9% 47%
MSR as % of serviced portfolio 0.87% 0.93% 0.90%
 

Mortgage Banking Revenue:
Origination and sale $26,319 $15,166 $7,309 74% 260%
Servicing 1,692 1,506 1,205 12% 40%
Change in fair value of MSR asset (3,665)   (1,031)   (1,430) 255% 156%
Total $24,346   $15,641   $7,084 56% 244%
 
 
Closed loan volume $621,276 $488,714 $279,578 27% 122%

 
Nine Months Ended:
(Dollars in thousands) Sep 30, 2012   Sep 30, 2011   % Change
 

Mortgage Banking Revenue:
Origination and sale $54,126 $15,643 246%
Servicing 4,561 3,464 32%
Change in fair value of MSR asset (5,618)   (1,941) 189%
Total $53,069   $17,166 209%
 
Closed loan volume $1,512,624 $631,328 140%
 

Additional Tables

The following tables present additional detail covering the following aspects of the Company's non-covered loan portfolio.
  • Table 1 – Non-covered, non-performing assets by type and by region
  • Table 2 – Non-covered, non-performing assets by type trends
  • Table 3 – Non-covered loans past due 30-89 days by type and by region
  • Table 4 – Non-covered loans past due 30-89 days by type trends
  • Table 5 – Non-covered restructured loans on accrual status by type and by region

The following is a distribution of non-covered, non-performing assets by type and by region as of September 30, 2012:
 
Table 1 - Non-covered, non-performing assets by type and by region
(Dollars in thousands)      
    Northwest   Southern Northern Central Greater Bay  
Washington   Oregon   Oregon   California   California   California   Total

Non-accrual loans:
Commercial real estate:
Non-owner occupied term $139 $22,162 $718 $2,274 $6,420 $4,564 $36,277
Owner occupied term -- 2,600 -- 1,163 4,307 -- 8,070
Commercial construction 662 -- 91 -- 4,376 -- 5,129
Residential development 2,585 6,213 697 72 -- -- 9,567
Commercial 284 5,074 413 3,239 3,842 1,187 14,039
Other -- 666 -- -- -- -- 666
Total $3,670 $36,715 $1,919 $6,748 $18,945 $5,751 $73,748
 

Loans 90 days past due & accruing:
Commercial real estate:
Non-owner occupied term $-- $-- $-- $158 $155 $-- $313
Owner occupied term -- -- 354 -- -- -- 354
Commercial construction -- -- -- -- -- -- --
Residential development -- -- -- -- -- -- --
Commercial -- -- -- -- -- -- --
Other 70 4,537 164 438 116 593 5,918
Total $70 $4,537 $518 $596 $271 $593 $6,585
             
Total non-performing loans $3,740 $41,252 $2,437 $7,344 $19,216 $6,344 $80,333
 

Other real estate owned:
Commercial real estate:
Non-owner occupied term $-- $4,254 $103 $366 $1,663 $-- $6,386
Owner occupied term -- 198 341 -- 4,897 -- 5,436
Commercial construction -- 1,404 -- -- 1,017 -- 2,421
Residential development 589 427 -- 221 1,898 -- 3,135
Commercial 1,132 180 -- -- -- -- 1,312
Other -- 297 -- -- 277 -- 574
Total $1,721 $6,760 $444 $587 $9,752 $-- $19,264
             
Total non-performing assets $5,461 $48,012 $2,881 $7,931 $28,968 $6,344 $99,597
% of total 6% 48% 3% 8% 29% 6% 100%
 

The Company has aggressively charged-down impaired assets to their disposition values. 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 following is a distribution of non-covered, non-performing assets by type as of September 30, 2012, June 30, 2012 and September 30, 2011:

 
Table 2 –Non-covered, non-performing assets by type trends
(Dollars in thousands)          
Sequential Year
Quarter Over Year
Sep 30, 2012   Jun 30, 2012   Sep 30, 2011   % Change   % Change

Non-accrual loans:
Commercial real estate:
Non-owner occupied term $36,277 $40,724 $41,796 (11)% (13)%
Owner occupied term 8,070 6,358 5,194 27% 55%
Commercial construction 5,129 5,636 4,603 (9)% 11%
Residential development 9,567 12,689 23,854 (25)% (60)%
Commercial 14,039 15,699 24,409 (11)% (42)%
Other 666   791   -- (16)% nm
Total $73,748 $81,897 $99,856 (10)% (26)%
 

Loans 90 days past due & accruing:
Commercial real estate:
Non-owner occupied term $313 $620 $2,970 (50)% (89)%
Owner occupied term 354 3,648 2,149 (90)% (84)%
Commercial construction -- -- -- nm nm
Residential development -- -- -- nm nm
Commercial -- -- 357 nm (100)%
Other 5,918   3,805   6,240 56% (5)%
Total $6,585 $8,073 $11,716 (18)% (44)%
         
Total non-performing loans $80,333   $89,970   $111,572 (11)% (28)%
 

Other real estate owned:
Commercial real estate:
Non-owner occupied term $6,386 $7,922 $11,615 (19)% (45)%
Owner occupied term 5,436 5,386 5,840 1% (7)%
Commercial construction 2,421 4,326 9,525 (44)% (75)%
Residential development 3,135 6,145 5,724 (49)% (45)%
Commercial 1,312 1,519 1,244 (14)% 5%
Other 574   1,586   839 (64)% (32)%
Total $19,264 $26,884 $34,787 (28)% (45)%
         
Total non-performing assets $99,597   $116,854   $146,359 (15)% (32)%
 

The following is a distribution of non-covered loans past due 30 to 89 days by loan type by region as of September 30, 2011:
 
Table 3 – Non-covered loans past due 30-89 days by type and by region
(Dollars in thousands)      
    Northwest   Southern Northern Central Greater Bay  
Washington   Oregon   Oregon   California   California   California   Total

Loans 30-89 days past due:
Commercial real estate:
Non-owner occupied term $-- $1,420 $3,353 $-- $1,997 $-- $6,770
Owner occupied term -- 859 -- 2,225 8,727 1,462 13,273
Commercial construction -- -- -- -- -- -- --
Residential development -- -- -- -- -- -- --
Commercial -- 2,411 89 1,002 202 1,835 5,539
Other 3   2,162   439   81   36   192   2,913
Total $3   $6,852   $3,881   $3,308   $10,962   $3,489   $28,495
 

The following is a distribution of non-covered loans past due 30 to 89 days by loan type as of September 30, 2012, June 30, 2012 and September 30, 2011:
 

Table 4 –Non-covered loans past due 30-89 days by type trends
(Dollars in thousands)
      Sequential   Year
Quarter Over Year
Sep 30, 2012   Jun 30, 2012   Sep 30, 2011   % Change   % Change

Loans 30-89 days past due:
Commercial real estate:
Non-owner occupied term $6,770 $8,533 $23,475 (21)% (71)%
Owner occupied term 13,273 3,463 6,684 283% 99%
Commercial construction -- -- 583 nm (100)%
Residential development -- 1,351 1,319 (100)% (100)%
Commercial 5,539 5,956 8,919 (7)% (38)%
Other 2,913   4,919   8,225 (41)% (65)%
Total $28,495   $24,222   $49,205 18% (42)%
 

The following is a distribution of non-covered restructured loans on accrual status by loan type by region as of September 30, 2012:
 
Table 5 – Non-covered restructured loans on accrual status by type and by region
 
(Dollars in thousands)
    Northwest   Southern   Northern   Central   Greater Bay  
Washington   Oregon   Oregon   California   California   California   Total
Restructured loans, accrual basis:
Commercial real estate:
Non-owner occupied term $13,556 $10,105 $3,870 $-- $6,938 $-- $34,469
Owner occupied term -- 674 -- 664 -- -- 1,338
Commercial construction -- 8,797 -- -- 5,404 -- 14,201
Residential development -- 9,803 -- -- 8,893 -- 18,696
Commercial -- -- -- 365 820 -- 1,185
Other -- -- -- -- -- 126 126
Total $13,556 $29,379 $3,870 $1,029 $22,055 $126 $70,015

nm = not meaningful

Copyright Business Wire 2010

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