UMPQ - Umpqua Reports Third Quarter 2019 Results

PORTLAND, Ore., Oct. 16, 2019 /PRNewswire/ -- Umpqua Holdings Corporation (NASDAQ: UMPQ) (the "Company") reported net income of $84.5 million for the third quarter of 2019, compared to $111.8 million for the second quarter of 2019 and $91.0 million for the third quarter of 2018. Earnings per diluted common share were $0.38 for the third quarter of 2019, compared to $0.51 for the second quarter of 2019 and $0.41 for the third quarter of 2018.

"Our balanced growth initiatives continue to produce results as evidenced by our strong deposit growth of 11% annualized, including 21% annualized growth in non-interest bearing balances, and our annualized loan and lease growth of 11%," said Cort O'Haver, president and CEO of Umpqua Holdings Corporation. "I am also pleased to report that we have executed the sale of the first tranche of mortgage servicing rights and will remain diligent on initiatives to reduce volatility specific to that asset. We increased our fee-based revenue during the quarter and are prudently managing our cost of funds to help offset pressure on our net interest margin."

Notable items that impacted the third quarter 2019 financial results included:

• $4.2 million gain on the fair value change of the MSR asset primarily driven by the $7.8 million fair value gain recorded for the portion of mortgage servicing rights held for sale at the end of the quarter, compared to a $24.7 million loss in the prior quarter and a $0.2 million gain in the same period of the prior year.
• $0.3 million gain on equity investment securities, compared to the net $75.4 million gain recorded in the prior quarter that included the gain on equity securities of $82.6 million primarily related to the sale of Visa Class B stock and the $7.2 million loss on debt securities.
• $4.6 million loss related to the fair value of the debt capital market swap derivatives attributable to the decrease in long-term interest rates during the quarter, compared to a loss of $4.0 million in the prior quarter and a gain of $0.2 million in the same period of the prior year.
• $2.0 million of exit and disposal costs, compared to $1.5 million in the prior quarter and $1.0 million in the same period of the prior year.

Third Quarter 2019 Highlights (compared to prior quarter):

• Net interest income increased by $1.8 million on a quarter to quarter basis primarily driven by higher average balances of loans and leases along with a lower level of premium amortization for residential mortgage backed securities and collateralized mortgage obligations, partially offset by lower average yields on loans and leases;
• Provision for loan and lease losses increased by $3.9 million, due to an increase in net charge offs of $4.9 million and growth in the overall loan portfolio;
• Net charge-offs increased by eight basis points to 0.34% of average loans and leases (annualized);
• Non-interest income decreased by $33.3 million, driven primarily by the $75.4 million net gain recorded in the prior quarter from the sale of the Visa Class B stock and other debt securities, partially offset by an increase of $37.5 million in net residential mortgage banking revenue;
• Non-interest expense increased by $3.2 million, driven primarily by higher mortgage banking-related expenses, a $2.2 million year to date reclassification of swap collateral interest to other non-interest income, and higher legal fees, partially offset by seasonally lower payroll taxes and a lower loss on OREO;
• Non-performing assets to total assets improved to 0.25% from 0.28%;
• Estimated total risk-based capital ratio of 13.6% and estimated Tier 1 common to risk weighted assets ratio of 10.9%;
• Declared a quarterly cash dividend of $0.21 per common share.

Balance Sheet
Total consolidated assets were $28.9 billion as of September 30, 2019, compared to $28.0 billion as of June 30, 2019 and $26.6 billion as of September 30, 2018. Including secured off-balance sheet lines of credit, total available liquidity was $10.9 billion as of September 30, 2019, representing 38% of total assets and 49% of total deposits.

Gross loans and leases were $21.5 billion as of September 30, 2019, an increase of $567.4 million relative to June 30, 2019. Strong loan production in commercial real estate as well as seasonally strong residential real estate production contributed to the balance sheet growth.

Total deposits were $22.4 billion as of September 30, 2019, an increase of $615.7 million from $21.8 billion as of June 30, 2019. This increase was attributable to growth in non-interest bearing demand deposits of $352.1 million and certificate of deposit growth of $332.4 million.

Net Interest Income
Net interest income was $229.0 million for the third quarter of 2019, up $1.8 million from the prior quarter. This increase was primarily driven by higher average balances of loans and leases along with a lower level of premium amortization for residential mortgage backed securities and collateralized mortgage obligations, partially offset by lower average yields on loans and leases.

The Company's net interest margin was 3.63% for the third quarter of 2019, down seven basis points from 3.70% for the second quarter of 2019 primarily driven by the decrease in short-term interest rates during the quarter.

Credit Quality
The allowance for loan and lease losses was $156.3 million, or 0.73% of loans and leases, as of September 30, 2019, which was up from $151.1 million, or 0.72% of loans and leases, as of June 30, 2019. The provision for loan and lease losses was $23.2 million for the third quarter of 2019, an increase of $3.9 million from the prior quarter level, driven primarily by an increase in net charge-offs and growth in the loan portfolio.

Net charge-offs as a percentage of average loans and leases increased by eight basis points to 0.34% of average loans and leases (annualized). As of September 30, 2019, non-performing assets were 0.25% of total assets, compared to 0.28% as of June 30, 2019 and 0.37% as of September 30, 2018.

Non-interest Income
Non-interest income was $88.5 million for the third quarter of 2019, down $33.3 million from the prior quarter driven primarily by the $75.4 million net gain recorded in the prior quarter from the sale of the Visa Class B stock and certain debt securities, partially offset by an increase of $37.5 million in net residential mortgage banking revenue.

Revenue from the origination and sale of residential mortgages was $31.4 million for the third quarter of 2019, an increase of $8.3 million from the prior quarter. This increase reflects a sequential quarter increase of 21% in for-sale mortgage origination volume and an increase of 40 basis points in the home lending gain on sale margin to 3.72% for the third quarter of 2019. Of the current quarter's mortgage production, 60% related to purchase activity, compared to 70% for the prior quarter and 82% for the same period of the prior year.

Non-interest Expense
Non-interest expense was $183.6 million for the third quarter of 2019, up $3.2 million from the prior quarter level. This increase was driven primarily by higher mortgage banking-related expenses, a $2.2 million reclassification of swap collateral interest to other non-interest income, and higher legal fees, partially offset by seasonally lower payroll taxes and a lower loss on OREO.

Capital
As of September 30, 2019, the Company's tangible book value per common share¹ was $11.27, compared to $10.97 in the prior quarter and $9.95 in the same period of the prior year. During the third quarter of 2019, the Company declared a dividend of $0.21 per common share.

The Company's estimated total risk-based capital ratio was 13.6% and its estimated Tier 1 common to risk weighted assets ratio was 10.9% as of September 30, 2019. The Company remains above current "well-capitalized" regulatory minimums. The regulatory capital ratios as of September 30, 2019 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. The Company believes that these non-GAAP financial measures provide investors with information useful in understanding the Company's financial performance; however, readers of this document are urged to review these non-GAAP financial measures in conjunction with the GAAP results as reported.

Management believes tangible common equity and the tangible common equity ratio are useful measures of capital adequacy because they provide a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in assessing the capital of the Company and the ability to absorb potential losses. 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).

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 customer experience, and distinctive banking solutions. Umpqua Bank has locations across Oregon, Washington, California, Idaho and 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 Holdings Corporation is headquartered in Portland, Oregon. For more information, visit umpquabank.com.

Earnings Conference Call Information
The Company will host its third quarter 2019 earnings conference call on October 17, 2019, at 10:00 a.m. PT (1:00 p.m. ET). During the call, the Company will provide an update on recent activities and discuss its third quarter 2019 financial results. There will be a live question-and-answer session following the presentation. To join the call, please dial (888) 378-4398 ten minutes prior to the start time and enter conference ID: 607538. A re-broadcast will be available approximately two hours after the call by dialing (888) 203-1112 and entering conference ID 1772015. The earnings conference call will also be available as an audio cast, which can be accessed on the Company's investor relations page at umpquabank.com.

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 strategic investments, fee income initiatives, MSR sales and strategic initiatives. Risks that could cause results to differ from forward-looking statements we make are set forth in our filings with the SEC and include, without limitation, prolonged low interest rate environment; the effect of interest rate increases on the cost of deposits; unanticipated weakness in loan demand or loan pricing; deterioration in the economy; lack of strategic growth opportunities or our failure to execute on those opportunities; our ability to effectively manage problem credits; our ability to successfully implement efficiency and operational excellence initiatives on time and in amounts projected; our ability to successfully develop and market new products and technology; and changes in laws or regulations.