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| UMPQ > SEC Filings for UMPQ > Form 10-Q on 3-Nov-2009 | All Recent SEC Filings |
3-Nov-2009
Quarterly Report
Forward-Looking Statements
This Report contains certain forward-looking statements, within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, which are intended to be covered by the safe harbor for
"forward-looking statements" provided by the Private Securities Litigation
Reform Act of 1995. These statements may include statements that expressly or
implicitly predict future results, performance or events. Statements other than
statements of historical fact are forward-looking statements. In addition, the
words "anticipates," "expects," believes," "estimates" and "intends" and words
or phrases of similar meaning identify forward-looking statements. We make
forward-looking statements regarding projected sources of funds, adequacy of our
allowance for loan and lease losses and provision for loan and lease losses,
dividends, the commercial real estate portfolio and subsequent charge-offs.
Forward-looking statements involve substantial risks and uncertainties, many of
which are difficult to predict and are generally beyond the control of Umpqua.
Risks and uncertainties include those set forth in our filings with the SEC and
the following factors that might cause actual results to differ materially from
those presented:
• Our ability to attract new deposits and loans
• Demand for financial services in our market areas
• Competitive market pricing factors
• Deterioration in economic conditions that could result in increased loan and lease losses
• Risks associated with concentrations in real estate related loans
• Market interest rate volatility
• Stability of funding sources and continued availability of borrowings
• Changes in legal or regulatory requirements or the results of regulatory examinations that could restrict growth
• Our ability to recruit and retain certain key management and staff
• Risks associated with merger and acquisition integration
• Significant decline in the market value of the Company that could result in an impairment of goodwill
• Our ability to raise capital or incur debt on reasonable terms
• Regulatory limits on the Bank's ability to pay dividends to the Company
• Effectiveness of the Emergency Economic Stabilization Act of 2008 (the "EESA") and other legislative and regulatory efforts to help stabilize the U.S. financial markets
• Future legislative or administrative changes to the TARP Capital Purchase Program enacted under the EESA
• The impact of the EESA and the American Recovery and Reinvestment Act ("ARRA") and related rules and regulations on the Company's business operations and competitiveness, including the impact of executive compensation restrictions, which may affect the Company's ability to retain and recruit executives in competition with other firms who do not operate under those restrictions.
There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. We do not intend to update these forward-looking statements. Readers should consider any forward-looking statements in light of this explanation, and we caution readers about relying on forward-looking statements.
General
Umpqua Holdings Corporation (referred to in this report as "we," "our," "Umpqua," and "the Company"), an Oregon corporation, is a financial holding company with two principal operating subsidiaries, Umpqua Bank (the "Bank") and Umpqua Investments, Inc. ("Umpqua Investments"). Prior to July 2009, Umpqua Investments was known as Strand, Atkinson, Williams & York, Inc.
Our headquarters are located in Portland, Oregon, and we engage primarily in the business of commercial and retail banking and the delivery of retail brokerage services. The Bank provides a wide range of banking, mortgage banking and other financial services to corporate, institutional and individual customers. Along with our subsidiaries, we are subject to the regulations of state and federal agencies and undergo periodic examinations by these regulatory agencies.
We are considered one of the most innovative community banks in the United States, combining a retail product delivery approach with an emphasis on quality-assured personal service. The Bank has evolved from a traditional community bank into a community-oriented financial services retailer by implementing a variety of retail marketing strategies to increase revenue and differentiate ourselves from our competition.
Umpqua Investments is a registered broker-dealer and investment advisor with offices in Portland, Eugene, and Medford, Oregon, and in many Umpqua Bank stores. The firm is one of the oldest investment companies in the Northwest and is active in many community events. Umpqua Investments offers a full range of investment products and services including: stocks, fixed income securities (municipal, corporate, and government bonds, CDs, and money market instruments), mutual funds, annuities, options, retirement planning, money management services, life insurance, disability insurance and medical supplement policies.
Executive Overview
Significant items for the third quarter of 2009 were as follows:
• In August 2009, the Company raised $258.7 million through a public offering by issuing 26,538,461 shares of common stock. After deducting underwriting discounts and commissions and offering expenses, net proceeds to the Company were $245.7 million. The proceeds from the offering qualify as Tier 1 capital and will be used for general corporate purposes.
• Net loss per diluted common share was $0.14 and $2.10 for the three and nine months ended September 30, 2009, as compared to earnings per diluted common share of $0.20 and $0.78 for the three and nine months ended September 30, 2008. Operating loss per diluted common share, defined as earnings available to common shareholders before merger related expenses, net of tax, and goodwill impairment divided by the same diluted share total used in determining diluted earnings per common share, was $0.14 and $0.37 for the three and nine months ended September 30, 2009, as compared to operating income per diluted common share of $0.20 and $0.78 for the three and nine months ended September 30, 2008. Operating income per diluted share is considered a "non-GAAP" financial measure. More information regarding this measurement and reconciliation to the comparable GAAP measurement is provided under the heading Results of Operations-Overview below.
• Non-performing assets decreased to $156.0 million, or 1.70% of total assets, as of September 30, 2009, as compared to $161.3 million, or 1.88% of total assets as of December 31, 2008. Non-performing loans decreased to $129.3 million, or 2.13% of total loans, as of September 30, 2009, as compared to $133.4 million, or 2.18% of total loans, as of December 31, 2008. Non-accrual loans have been written-down to their estimated net realizable values.
• Net charge-offs were $47.3 million for the three months ended September 30, 2009, or 3.07% of average loans and leases (annualized), as compared to net charge-offs of $15.2 million, or 0.98% of average loans and leases (annualized), for the three months ended September 30, 2008. Net charge-offs were $133.3 million for the nine months ended September 30, 2009, or 2.91% of average loans and leases (annualized), as compared to net charge-offs of $66.6 million, or 1.46% of average loans and leases (annualized), for the nine months ended September 30, 2008.
• The provision for loan and lease losses was $52.1 million and $140.5 million for the three and nine months ended September 30, 2009, respectively, as compared to the $35.5 million and $75.7 million recognized for the three and nine months ended September 30, 2008, respectively. This resulted from the increase in net charge-offs and non-performing loans, and downgrades within the portfolio between the two periods.
• We recorded gains of $982,000 and $10.2 million representing the change in fair value on our junior subordinated debentures measured at fair value in the three and nine months ended September 30, 2009, respectively, compared to gains of $25.3 million and $30.2 million in the three and nine months ended September 30, 2008, respectively. The gains recognized during these periods primarily resulted from the widening of the credit risk adjusted rate spread above the Company's contractual spreads.
• Mortgage banking revenue was $4.3 million and $14.6 million for the three and nine months ended September 30, 2009, respectively, compared to $1.0 million and $2.8 million for the three and nine months ended September 30, 2008. Closed mortgage volume increased 127% in the current year-to-date over the prior year same period due to a significant increase in purchase and refinancing activity, resulting from historically low mortgage interest rates. Additionally, the prior period's revenue includes a $2.4 million charge on an ineffective mortgage servicing right ("MSR") hedge, which has been suspended, due to widening spreads and price declines that were not offset by a corresponding gain in the related MSR asset.
• Net loss on investment securities of $1.1 million for the nine months ended September 30, 2009 includes other-than-temporary impairment ("OTTI") charges of $9.8 million, which primarily relate to non-agency collateralized mortgage obligations. The impairment charge was offset by gains on the sale of securities of $8.7 million.
• FDIC assessments increased to $3.3 million and $12.6 million for the three and nine months ended September 30, 2009, respectively, compared to $1.3 million and $3.8 million for the three and nine months ended September 30, 2008, respectively. These increases result from an industry-wide increase in assessment rates and a $4.0 million special assessment incurred in the second quarter of 2009 imposed by the FDIC in efforts to rebuild the Deposit Insurance Fund.
• Net interest margin, on a tax equivalent basis, decreased to 4.05% and 4.11% for the three and nine months ended September 30, 2009, respectively, compared to 4.12% and 4.08% for the same periods a year ago. The decrease in net interest margin resulted from holding higher levels of interest bearing cash, which bear lower yields than other interest earning assets, and interest reversals resulting from new non-accrual loans. Excluding interest reversals on loans of $1.2 million and $3.0 million for the three and nine months ended September 30, 2009, net interest margin would have increased 6 basis points to 4.11% and increased 5 basis points to 4.16%, respectively.
• Total gross loans and leases were $6.1 billion as of September 30, 2009, a decrease of $60.3 million, or 1.3% annualized, as compared to December 31, 2008. This decrease is principally attributable to charge-offs of $135.4 million and transfers to other real estate owned of $34.4 million, offset by net loan originations of $101.5 million during the period.
• Total deposits were $7.2 billion as of September 30, 2009, an increase of $626.9 million, or 12.7% annualized, as compared to December 31, 2008. Excluding the deposits acquired through the FDIC-assisted purchase and assumption of the Bank of Clark County, the organic deposit growth rate was 9.3% annualized. Deposits increased $401.1 million in the third quarter of 2009 as a result of successful summer season deposit promotions.
• Total consolidated assets were $9.2 billion as of September 30, 2009, representing an increase of $606.8 million compared to December 31, 2008. The increase is primarily attributable to the increase in deposits and the proceeds received from the public offering of common stock in the third quarter of 2009.
• Cash dividends declared in the third quarter of 2009 were $0.05 per common share, consistent with the amounts declared since the fourth quarter of 2008.
Summary of Critical Accounting Policies
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements for the year ended December 31, 2008 included in the Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 26, 2009. Not all of these critical accounting policies require management to make difficult, subjective or complex judgments or estimates. Management believes that the following policies would be considered critical under the SEC's definition.
Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments
The Bank performs regular credit reviews of the loan and lease portfolio to determine the credit quality and adherence to underwriting standards. When loans and leases are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the credit review process. The Company's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the allowance for loan and lease losses. The Bank has a management Allowance for Loan and Lease Losses ("ALLL") Committee, which is responsible for, among other things, regularly reviewing the ALLL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status. The ALLL Committee also approves removing loans and leases from impaired status. The Bank's Audit and Compliance Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology on a quarterly basis.
Each risk rating is assessed an inherent credit loss factor that determines the amount of the allowance for loan and lease losses provided for that group of loans and leases with similar risk rating. Credit loss factors may vary by region based on management's belief that there may ultimately be different credit loss rates experienced in each region.
Regular credit reviews of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired when based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we either recognize an impairment reserve as a specific component to be provided for in the allowance for loan and lease losses or charge-off the impaired balance on collateral dependent loans if it is determined that such amount represents a confirmed loss. The combination of the risk rating-based allowance component and the impairment reserve allowance component lead to an allocated allowance for loan and lease losses.
The Bank may also maintain an unallocated allowance amount to provide for other credit losses inherent in a loan and lease portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less than 5% of the allowance, but may be maintained at higher levels during times of deteriorating economic conditions characterized by falling real estate values. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends.
The reserve for unfunded commitments ("RUC") is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line of credit. The adequacy of the ALLL and RUC are monitored on a regular basis and are based on management's evaluation of numerous factors. These factors include the quality of the current loan portfolio; the trend in the loan portfolio's risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent information.
Management believes that the ALLL was adequate as of September 30, 2009. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review. Approximately 80% of our loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the allowance for loan and lease losses. Over the last two years, there has been deterioration in the residential development market which has led to an increase in non-performing loans and the allowance for loan and lease losses. A continued deterioration in this market or deterioration in other segments of our loan portfolio, such as commercial real estate or commercial construction, may lead to additional charges to the provision for loan and lease losses.
Mortgage Servicing Rights ("MSR")
In accordance with Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") 860, Transfers and Servicing, the Company determines its classes of servicing assets based on the asset type being serviced along with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value the servicing assets. The Company elected to measure its residential mortgage servicing assets at fair value and to report changes in fair value through earnings. Fair value adjustments encompass market-driven valuation changes and the runoff in value that occurs from the passage of time, which are separately reported. Under the fair value method, the MSR, net, is carried in the balance sheet at fair value and the changes in fair value are reported in earnings under the caption mortgage banking revenue in the period in which the change occurs.
Retained mortgage servicing rights are measured at fair values on the date of sale. We use quoted market prices when available. Subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of the MSR, the present value of expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income. This model is periodically validated by an independent external model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys.
The expected life of the loan can vary from management's estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of management's estimates would negatively impact the recorded value of the mortgage servicing rights. The value of the mortgage servicing rights is also dependent upon the discount rate used in the model, which we base on current market rates. Management reviews this rate on an ongoing basis based on current market rates. A significant increase in the discount rate would reduce the value of mortgage servicing rights. Additional information is included in Note 5 of the Notes to Consolidated Financial Statements.
Valuation of Goodwill and Intangible Assets
At September 30, 2009, we had $641.8 million in goodwill and other intangible assets as a result of business combinations. Goodwill and other intangible assets with indefinite lives are not amortized but instead are periodically tested for impairment. Management performs an impairment analysis for the intangible assets with indefinite lives on an annual basis as of December 31. Additionally, goodwill and other intangible assets with indefinite lives are evaluated on an interim basis when events or circumstance indicate impairment potentially exists. As a result of the year-end analysis in 2008, management determined that there was a $1.0 million impairment related to the Retail Brokerage reporting segment as of December 31, 2008, which resulted from the Company's evaluation following the departure of certain Umpqua Investments financial advisors. The valuation of the impairment at the Retail Brokerage operating segment was determined using an income approach by discounting cash flows of forecasted earnings. The remaining balance of goodwill and other intangible assets relate to the Community Banking reporting segment. The Company performed a goodwill impairment analysis of the Community Banking reporting segment as of June 30, 2009, due to a further decline in the Company's market capitalization below the book value of equity and continued weakness in the banking industry. The Company engaged an independent valuation consultant to assist us in determining whether and to what extent our goodwill asset was impaired. The valuation of the reporting unit was determined using discounted cash flows of forecasted earnings, estimated sales price multiples based on recent observable market transactions and market capitalization based on current stock price. The results of the Company's and valuation specialist's step one test indicated that the reporting unit's fair value was less than its carrying value, and therefore the Company performed a step two analysis. In the step two analysis, we calculated the fair value for the reporting unit's assets and liabilities, as well as its unrecognized identifiable intangible assets, such as the core deposit intangible and trade name, in
order to determine the implied fair value of goodwill. Fair value adjustments to items on the balance sheet primarily related to investment securities held to maturity, loans, other real estate owned, Visa Class B common stock, deferred taxes, deposits, term debt, and junior subordinated debentures. Based on the results of the step two analysis, the Company determined that the implied fair value of the goodwill was greater than its carrying amount on the Company's balance sheet, and as a result, recognized a goodwill impairment loss of $112.0 million. This write-down of goodwill is a non-cash charge that does not affect the Company's or the Bank's liquidity or operations. In addition, because goodwill is excluded in the calculation of regulatory capital, the Company's "well-capitalized" capital ratios are not affected by this charge. The Company evaluated the Community Banking reporting segment as of September 30, 2009. Step one of the goodwill impairment test indicated that the reporting unit's fair value continued to be less than its carrying value, therefore the Company performed a step two analysis. In the step two analysis, the implied fair value fair value of goodwill exceeded the carrying value of goodwill, therefore no impairment was recognized in the current quarter. The impairment analysis requires management to make subjective judgments. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount rates and specific industry and market conditions. There can be no assurance that changes in circumstances, estimates or assumption may result in additional impairment of all, or some portion of, goodwill.
Stock-based Compensation
Consistent with the provisions of FASB ASC 718, Stock Compensation, a revision to the previously issued guidance on accounting for stock options and other forms of equity-based compensation, we recognize expense for the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over the employees' requisite service period (generally the vesting period). The requisite service period may be subject to performance conditions. The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. Management assumptions utilized at the time of grant impact the fair value of the option calculated under the Black-Scholes methodology, and ultimately, the expense that will be recognized over the life of the option. Additional information is included in Note 11 of the Notes to Condensed Consolidated Financial Statements.
Fair Value
FASB ASC 820, FairValue Measurements and Disclosures, which among other things, requires enhanced disclosures about financial instruments carried at fair value. FASB ASC 820 establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. See Note 15 of the Notes to Condensed Consolidated Financial Statements for additional information about the level of pricing transparency associated with financial instruments carried at fair value.
Recent Accounting Pronouncements
In December 2007, FASB revised FASB ASC 805, Business Combinations. FASB ASC 805 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquired entity and the goodwill acquired. Furthermore, acquisition-related and other costs will now be expensed rather than treated as cost components of the acquisition. FASB ASC 805 also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. The revision to this guidance applies prospectively to business combinations for which the acquisition date occurs on or after January 1, 2009. We do not expect the adoption of revised FASB ASC 805 will have a material impact on our consolidated financial statements as related to business combinations consummated prior to January 1, 2009. The adoption of these revisions will increase the costs charged to operations for acquisitions consummated on or after January 1, 2009.
In December 2007, FASB amended FASB ASC 810, Consolidation. This amendment establishes accounting and reporting standards for the noncontrolling interest . . .
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