UMPQUA HOLDINGS CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
Forward-looking statements
This Report contains certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 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. You can find many of these statements by looking for words such as "anticipates," "expects," "believes," "estimates," "intends" and "forecast," and words or phrases of similar meaning. We make forward-looking statements about the proposed transaction between us and Columbia Banking System, Inc.; LIBOR; derivatives and hedging; the results and performance of models and economic forecasts used in our calculation of the ACL; projected sources of funds and the Company's liquidity position; our securities portfolio; loan sales; adequacy of our ACL, including the reserve for unfunded commitments; provision for credit losses; non-performing loans and future losses; performance of troubled debt restructurings; our commercial real estate portfolio, its collectability and subsequent charge-offs; resolution of non-accrual loans; mortgage volumes and the impact of rate changes; the economic environment; litigation; dividends; junior subordinated debentures; fair values of certain assets and liabilities, including MSR values and sensitivity analyses; tax rates; deposit pricing; and the effect of accounting pronouncements and changes in accounting methodology. Forward-looking statements involve substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. Risks and uncertainties include those set forth in our filings with theSecurities and Exchange Commission and the following factors that might cause actual results to differ materially from those presented: •changes in general economic, political, or industry conditions; the magnitude and duration of the COVID-19 pandemic and its impact on the global economy and financial market conditions andUmpqua's business, results of operations, and financial condition;
•deterioration of economic conditions which could lead to an increase in losses on loans and leases, in particular the risks associated with concentrations of loans linked to real estate;
•uncertainty inU.S. fiscal and monetary policy, including the interest rate policies of theFederal Reserve or the effects of any declines in housing and commercial real estate prices, high or increasing unemployment rates, inflation, or any slowdown in economic growth particularly in the westernUnited States ;
•volatility and disruptions in global capital and credit markets;
•changes in interest rates;
•transition from LIBOR to other indices including SOFR;
•competitive pressures, including on the prices of products and services;
•our ability to successfully, including on time and on budget, implement and sustain information technology product and system enhancements and operational initiatives;
•our ability to attract new deposits, loans and leases;
•our ability to retain deposits, particularly during store consolidations and pending Mergers;
•the demand for financial services in our market areas;
•the stability, cost and continued availability of borrowings and other sources of funding, such as broker and public deposits;
•changes in legal or regulatory requirements or the results of regulatory reviews that may increase expenditures or limit growth;
•our ability to manage concerns related to climate change and associated regulations;
• our ability to recruit and retain key officers and employees;
•our ability to raise capital or incur debt on reasonable terms;
•regulatory limits on the Bank’s ability to pay dividends to the Company which could affect the timing and amount of dividends to shareholders;
• financial services reform and the impact of implementing legislation and regulations on our business operations, including our compliance costs, interest expense and revenues;
44 -------------------------------------------------------------------------------- Table of Contents •a breach or failure of our operational or security systems, or those of our third-party vendors, including as a result of cyber-attacks;
• the success, impact and timing of
•the occurrence of any event, change or other circumstance that may give rise to the right of one or both parties to terminate the Merger Agreement;
•the outcome of legal proceedings;
• delays in completing the proposed transaction with Columbia;
•the failure to obtain necessary regulatory approvals (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the proposed transaction) to complete the Mergers or the Bank Merger;
•failure to meet any of the other conditions of the proposed transaction with Columbia in a timely manner or at all;
•the possibility that the anticipated benefits of the proposed transaction with Columbia are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas whereUmpqua andColumbia do business;
• certain restrictions during the term of the contemplated transaction with
•the possibility that the contemplated transaction with
• diversion of management’s attention from ongoing business operations and opportunities during the term of the mergers;
•any adverse reactions or changes in commercial or social relations, including those resulting from the completion of the transaction and the integration of the two companies and banks;
•economic forecast variables that are either materially worse or better than end of quarter projections and deterioration in the economy that exceeds current consensus estimates;
•our ability to effectively manage problem loans; and
•our ability to successfully negotiate with owners or reconfigure facilities.
There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. Forward-looking statements are made as of the date of this Form 10-Q. 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 The Company is anOregon corporation and the financial holding company of the Bank. The Bank is the largest bank with headquarters in thePacific Northwest and is considered one of the most innovative banks inthe United States , recognized for its company culture and customer experience strategy. The Bank provides a broad range of banking, private banking, mortgage and other financial services to corporate, institutional, and individual customers. FinPac, a commercial equipment leasing company, is a Bank subsidiary. Along with its subsidiaries, the Company is subject to the regulations of state and federal agencies and undergoes regular examinations by these regulatory agencies. OnOctober 12, 2021 , we announced that we andColumbia , the parent company ofColumbia State Bank , entered into a definitive agreement under which the companies will join together in an all-stock combination. Once the transaction is completed, the combined organization will be a leadingWest Coast franchise with more than$50 billion in assets. OnSeptember 17, 2022 , we andColumbia entered into a Letter of Agreement with theDepartment of Justice , which stipulates that in order to obtain regulatory approvals necessary to complete the transaction, tenColumbia State Bank branches will need to be divested. OnOctober 25, 2022 ,Columbia received regulatory approval from theBoard of Governors of theFederal Reserve System to complete the proposed merger withUmpqua . The transaction is expected to close following the satisfaction of customary closing conditions, including receipt of remaining regulatory approvals. Item 303 of Regulation S-K allows registrants to compare the results of the most recently completed quarter to the results of either the immediately preceding quarter or the corresponding quarter of the preceding year.Umpqua has elected to compare our results for the three months endedSeptember 30, 2022 andJune 30, 2022 , where applicable, throughout this Management's Discussion and Analysis. 45 -------------------------------------------------------------------------------- Table of Contents Executive Overview
The following is a discussion of our results for the three and nine months ended
Financial performance
Comparison of the current quarter with the previous quarter
•Earnings per diluted common share was$0.39 for the three months endedSeptember 30, 2022 , as compared to$0.36 for the three months endedJune 30, 2022 . The increase for the three months endedSeptember 30, 2022 , as compared to the prior period, was primarily driven by an increase in net interest income due to the rising interest rate environment. The increase was partially offset by a decrease in non-interest income due to a decline in residential mortgage banking revenue and a decrease in the fair value of certain loans held for investment, with both items also reflective of the rising rate environment. •Net interest margin, on a tax equivalent basis, was 3.88% for the three months endedSeptember 30, 2022 , as compared to 3.41% for the three months endedJune 30, 2022 . The increase for the three months endedSeptember 30, 2022 , was due to a higher mix of loans as a percentage of earning assets as well as an increase in individual category earning asset yields given upward interest rate movements. •Residential mortgage banking revenue was$17.3 million for the three months endedSeptember 30, 2022 , as compared to$30.5 million for the three months endedJune 30, 2022 . The variance for the three months endedSeptember 30, 2022 , as compared to prior period, was primarily attributable to lower revenue from the origination and sale of residential mortgages given lower volumes and a loss on the MSR hedge initiated during the period, which offset the change in fair value of MSR assets during the period. For-sale mortgage closed loan volume decreased by 31% for the three months endedSeptember 30, 2022 , as compared to the three months endedJune 30, 2022 . The gain on sale margin increased to 2.65% for the three months endedSeptember 30, 2022 , as compared to 2.62% for the three months endedJune 30, 2022 .
Comparison of the current year’s total with the period of the previous year
•Earnings per diluted common share was$1.17 for the nine months endedSeptember 30, 2022 , as compared to earnings per diluted common share of$1.51 for the nine months endedSeptember 30, 2021 . The decrease for the nine months endedSeptember 30, 2022 , as compared to the prior period, was primarily driven by a decrease in non-interest income due to a decline in residential mortgage banking revenue and a decrease in the fair value of certain loans held for investment, as well as an increase in the provision for credit losses. The decrease was partially offset by an increase in net interest income due to the rising interest rate environment. •Net interest margin, on a tax equivalent basis, was 3.48% for the nine months endedSeptember 30, 2022 , as compared to 3.20% for the nine months endedSeptember 30, 2021 . The increase in net interest margin for the nine months endedSeptember 30, 2022 , primarily resulted from the rising rate environment and a higher level of loans and securities as a percentage of earning assets. •Residential mortgage banking revenue was$108.7 million for the nine months endedSeptember 30, 2022 , as compared to$143.6 million for the nine months endedSeptember 30, 2021 . The variance for the nine months endedSeptember 30, 2022 , as compared to prior periods, was primarily attributable to lower revenue from the origination and sale of residential mortgages given lower volumes and gain on sale margins. The decrease was partially offset by a net write-up of the MSR asset that significantly offset the loss on the MSR hedge, that was put in place inmid-August 2022 . For-sale mortgage closed loan volume decreased by 58% for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , the gain on sale margin decreased to 2.62%, as compared to 3.46% for the nine months endedSeptember 30, 2021 . The lower gain on sale margin for the nine months endedSeptember 30, 2022 as compared to the prior period reflects the adverse impact from rising rates on the pipeline and competitive pricing pressures. 46 -------------------------------------------------------------------------------- Table of Contents Comparison of current period to prior year end period •Total loans and leases were$25.5 billion as ofSeptember 30, 2022 , an increase of$3.0 billion , as compared toDecember 31, 2021 . The increase in total loans is primarily due to an increase in the commercial real estate balances of$1.5 billion , primarily within multifamily lending, and an increase in residential real estate balances of$1.3 billion . •Total deposits were$26.8 billion as ofSeptember 30, 2022 , an increase of$222.4 million , compared toDecember 31, 2021 . The increase was due to growth in demand deposits and savings deposits, offset partially by decreases in time deposits. •Total consolidated assets were$31.5 billion and$30.6 billion as ofSeptember 30, 2022 andDecember 31, 2021 , with the increase due to growth in loans, offset by decreases in cash and cash equivalents and available for sale securities. Credit Quality •Non-performing assets decreased to$50.8 million , or 0.16% of total assets, as ofSeptember 30, 2022 , compared to$53.1 million , or 0.17% of total assets, as ofDecember 31, 2021 . Non-performing loans and leases were$50.8 million , or 0.20% of total loans and leases, as ofSeptember 30, 2022 , compared to$51.2 million , or 0.23% of total loans and leases, as ofDecember 31, 2021 . •The allowance for credit losses was$294.9 million as ofSeptember 30, 2022 , an increase of$33.7 million compared toDecember 31, 2021 . The increase in the allowance for credit losses is due to the growth of the loan portfolio, as well as changes in the economic forecasts used in the credit models. •The Company had a provision for credit losses of$27.6 million and$51.1 million for the three and nine months endedSeptember 30, 2022 , respectively. This compares to a provision for credit losses of$18.7 million for the three months endedJune 30, 2022 . For the nine months endedSeptember 30, 2021 , there was a recapture of provision for credit losses of$41.9 million . The provision for credit losses in the current periods was due to allowance requirements for new loan generation, loan mix changes, and changes to the economic forecasts used in credit models. Liquidity •Total cash and cash equivalents was$1.6 billion as ofSeptember 30, 2022 , a decrease of$1.2 billion fromDecember 31, 2021 . The decrease in cash and cash equivalents is due to an increase in loan production, which outpaced deposit generation for the period.
Capital and growth initiatives
•InOctober 2021 ,Umpqua andColumbia announced their entering into the Merger Agreement under which the two companies will combine in an all-stock transaction. OnSeptember 17,2022 , a Letter of Agreement was entered into with theDepartment of Justice , which stipulates that in order to obtain regulatory approvals necessary to complete the transaction, tenColumbia State Bank branches will need to be divested. OnOctober 25, 2022 ,Columbia received regulatory approval from theBoard of Governors of theFederal Reserve System to complete the proposed merger withUmpqua . The transaction is expected to close following the satisfaction of customary closing conditions, including receipt of remaining regulatory approvals. •The Company's total risk-based capital ratio was 13.2% and its Tier 1 common to risk-based assets ratio was 10.6% as ofSeptember 30, 2022 . As ofDecember 31, 2021 , the Company's total risk-based capital ratio was 14.3% and its Tier 1 common to risk-based assets ratio was 11.6%. •The Company paid quarterly cash dividends of$0.21 per common share to shareholders onAugust 15, 2022 . In addition, the Company declared a quarterly cash dividend of$0.21 per common share onOctober 3, 2022 , paid onOctober 28, 2022 , to shareholders of record as ofOctober 14, 2022 . 47 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Estimates Our critical accounting estimates are described in detail in the Critical Accounting Estimates section of the Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onFebruary 25, 2022 . The condensed consolidated financial statements are prepared in conformity with GAAP and follow general practices within the financial services industry, in which the Company operates. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain estimates inherently have a greater reliance on the use of assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes that the ACL estimate is important to the portrayal of the Company's financial condition and results of operations and requires difficult, subjective or complex judgments. There have been no material changes in the ACL estimate methodology during the nine months endedSeptember 30, 2022 . Results of Operations
The Company has two segments: Core Banking and Mortgage Banking, which aligns with how we manage the profitability of the Company and also provides greater transparency into the financial contribution of mortgage banking activities.
The Core Banking segment includes all lines of business, except Mortgage Banking, including commercial, retail, private banking, as well as the operations, technology, and administrative functions of the Bank and Holding Company. The Mortgage Banking segment includes the revenue earned from the production and sale of residential real estate loans, the servicing income from our serviced loan portfolio, the quarterly changes in the MSR asset, the quarterly changes in the MSR hedge, and the specific expenses that are related to mortgage banking activities including variable commission expenses. Revenue and related expenses related to residential real estate loans held for investment are included in the Core Banking segment as portfolio loans are primarily originated through the Bank's retail consumer (store) and wealth channels. Management periodically updates the allocation methods and assumptions within the current segment structure
Comparison of the current quarter with the previous quarter
The Core Banking segment had net income of$86.3 million for the three months endedSeptember 30, 2022 , compared to net income of$72.5 million for the three months endedJune 30, 2022 . The increase in net income is mainly attributable to an increase in net interest income, partially offset by a decrease in non-interest income and an increase in provision for credit losses. The increase in net interest income is reflective of the favorable impact of higher interest rates during the quarter, as well as the increase in average loans and leases during the quarter. The decrease in non-interest income was due to a fair value loss of$24.9 million for the third quarter of 2022, driven by an increase in long-term interest rates and their effect on fair value adjustments related to investment securities, swap derivatives, and loans carried at fair value. This compares to a fair value loss of$9.9 million for the three months endedJune 30, 2022 . The Mortgage Banking segment had a net loss of$2.2 million for the three months endedSeptember 30, 2022 , compared to net income of$6.1 million for the three months endedJune 30, 2022 . The decrease in net income for the three months endedSeptember 30, 2022 for the Mortgage Banking segment, compared to the three months endedJune 30, 2022 , is attributable to a decrease in non-interest income due to lower revenue from the origination and sale of residential mortgages as closed loan volume for-sale declined by 31%. The non-interest income decline was also driven by a loss on the MSR hedge, which was put in place during the quarter to reduce net income volatility related to changes in fair value of MSR assets due to valuation inputs or assumptions.
Comparison of the current year’s total with the period of the previous year
For the nine months endedSeptember 30, 2022 , the Core Banking segment had net income of$221.7 million , a decrease of$76.1 million , as compared to the same period in the prior year, mainly attributable to an increase in the provision for credit losses, a decrease in non-interest income and an increase in non-interest expense, partially offset by an increase in net interest income. The change in the provision is due to allowance requirements for new loan generation, loan mix changes, and changes to the economic forecasts used in credit models. The decrease in non-interest income was due to a fair value loss of$51.5 million for the nine months endedSeptember 30, 2022 , driven by an increase in long-term interest rates and their effect on fair value adjustments related to investment securities, swap derivatives, and loans carried at fair value. This compares to a fair value gain of$13.4 million for the nine months endedSeptember 30, 2021 . The increase in net interest income is reflective of the increase in loans and leases and the favorable impact of higher interest rates during the period. 48 -------------------------------------------------------------------------------- Table of Contents The Mortgage Banking segment had net income of$32.1 million for the nine months endedSeptember 30, 2022 , compared to net income of$34.2 million during the same period of the prior year. The decrease was primarily due to lower revenue from the origination and sale of residential mortgages given lower volumes and gain on sale margins, and a loss on the MSR hedge that was put in place during the third quarter of 2022 to reduce net income volatility related to changes in fair value of MSR assets due to valuation inputs or assumptions. These changes were offset by a net write-up of the MSR asset during the nine months endedSeptember 30, 2022 , compared to a net write-down during the same period of the prior year, and a decrease in non-interest expense, which is due to decreased incentives as originations have slowed due to rising interest rates. The following table presents the return on average assets, average common shareholders' equity and average tangible common shareholders' equity for the three months endedSeptember 30, 2022 andJune 30, 2022 , respectively, as well as the nine months endedSeptember 30, 2022 and 2021. For each period presented, the table includes the calculated ratios based on reported net income. To the extent return on average common shareholders' equity is used to compare our performance with other financial institutions that do not have merger and acquisition-related intangible assets, we believe it is beneficial to also consider the return on average tangible common shareholders' equity. The return on average tangible common shareholders' equity is calculated by dividing net income by average shareholders' common equity less average goodwill and other intangible assets, net (excluding MSR). The return on average tangible common shareholders' equity is considered a non-GAAP financial measure and should be viewed in conjunction with the return on average common shareholders' equity. Return on Average Assets, Common Shareholders' Equity and Tangible Common Shareholders' Equity Three Months Ended Nine Months Ended (dollars in thousands) September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 Return on average assets 1.09 % 1.04 % 1.11 % 1.48 % Return on average common shareholders' equity 12.99 % 12.20 % 12.94 % 16.47 % Return on average tangible common shareholders' equity 13.02 % 12.23 % 12.98 % 16.55 % Calculation of average common tangible shareholders' equity: Average common shareholders' equity$ 2,567,266 $ 2,584,836 $ 2,621,725 $ 2,694,968 Less: average goodwill and other intangible assets, net 6,343 7,379 7,369 12,922 Average tangible common shareholders' equity$ 2,560,923 $ 2,577,457 $ 2,614,356 $ 2,682,046 Additionally, management believes tangible common equity and the tangible common equity ratio are meaningful measures of capital adequacy.Umpqua believes the exclusion of certain intangible assets in the computation of tangible common equity and tangible common equity ratio provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the operating results and capital of the Company. Tangible common equity is calculated as total shareholders' equity less goodwill and other intangible assets, net (excluding MSR). In addition, tangible assets are total assets less goodwill and other intangible assets, net (excluding MSR). The tangible common equity ratio is calculated as tangible common shareholders' equity divided by tangible assets. Tangible common equity and the tangible common equity ratio are considered non-GAAP financial measures and should be viewed in conjunction with total shareholders' equity and the total shareholders' equity ratio. 49 -------------------------------------------------------------------------------- Table of Contents The following table provides a reconciliation of ending shareholders' equity (GAAP) to ending tangible common equity (non-GAAP), and ending assets (GAAP) to ending tangible assets (non-GAAP) as ofSeptember 30, 2022 andDecember 31, 2021 : (dollars in thousands) September 30, 2022 December 31, 2021 Total shareholders' equity$ 2,417,514 $ 2,749,270 Subtract: Other intangible assets, net 5,764 8,840 Tangible common shareholders' equity$ 2,411,750 $ 2,740,430 Total assets$ 31,471,960 $ 30,640,936 Subtract: Other intangible assets, net 5,764 8,840 Tangible assets$ 31,466,196 $ 30,632,096 Total shareholders' equity to total assets ratio 7.68 % 8.97 % Tangible common equity ratio 7.66 % 8.95 % Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not reviewed or audited. Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP. Net Interest Income
Comparison of the current quarter with the previous quarter
Net interest income for the three months endedSeptember 30, 2022 was$287.6 million , an increase of$39.4 million compared to the three months endedJune 30, 2022 . The increase was driven by a$44.2 million increase in the total interest and fees on loans and leases, due to assets repricing higher in the rising rate environment and growth in the loan portfolio, offset by an increase of$7.8 million in interest expense due to the increase in long-term rates in the quarter compared to the prior period. The net interest margin (net interest income as a percentage of average interest-earning assets) on a fully tax equivalent basis was 3.88% for the three months endedSeptember 30, 2022 , as compared to 3.41% for the three months endedJune 30, 2022 . The increase in net interest margin primarily resulted from an increase in the average yields on interest-earning assets, due to a higher mix of loans as a percentage of earning assets as well as an increase in individual category earning asset yields given upward interest rate movements.
The yield on borrowings and leases for the three months ended
increased by 47 basis points compared to the quarter ended
The cost of interest-bearing liabilities for the three months ended
Comparison of the current year’s total with the period of the previous year
Net interest income for the nine months ended
mainly due to higher interest income on loans resulting from higher rates and higher average loan and lease balances.
The net interest margin on a fully tax equivalent basis was 3.48% for the nine months endedSeptember 30, 2022 , as compared to 3.20% for the nine months endedSeptember 30, 2021 . The increase in net interest margin for the nine months endedSeptember 30, 2022 , primarily resulted from an increase in the average yields on interest-earning assets, due to a higher mix of loans as a percentage of earning assets. 50 -------------------------------------------------------------------------------- Table of Contents The yield on loans and leases for the nine months endedSeptember 30, 2022 , increased by 5 basis points as compared to the same period in 2021, primarily attributable to the rising interest rate environment, which favorably impacted the repricing of floating and adjustable rate loans and the coupon rate on new loan generation. The cost of interest-bearing liabilities decreased by 2 basis points for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, due to a higher mix of lower-cost deposits during the current period. Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, as well as changes in the yields earned on interest-earning assets and rates paid on deposits and borrowed funds. The following tables present condensed average balance sheet information, together with interest income and yields on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for the three months endedSeptember 30, 2022 andJune 30, 2022 , as well as the nine months endedSeptember 30, 2022 and 2021, respectively: Three Months Ended September 30, 2022 June 30, 2022 Interest Average Interest Average Income or Yields or Income or Yields or (dollars in thousands) Average Balance Expense Rates Average Balance Expense Rates INTEREST-EARNING ASSETS: Loans held for sale$ 173,397 $ 2,205 5.09 %$ 264,320 $ 2,742 4.15 % Loans and leases (1) 24,886,203 276,625 4.41 % 23,550,796 231,932 3.94 % Taxable securities 3,271,185 18,261 2.23 % 3,410,091 17,340 2.03 % Non-taxable securities (2) 212,847 1,651 3.10 % 220,327 1,721 3.13 % Temporary investments and interest-bearing cash 893,471 5,115 2.27 % 1,663,454 2,919 0.70 % Total interest-earning assets 29,437,103$ 303,857 4.10 % 29,108,988$ 256,654 3.53 % Other assets 1,231,074 1,247,915 Total assets$ 30,668,177 $ 30,356,903 INTEREST-BEARING LIABILITIES: Interest-bearing demand deposits$ 3,829,688 $ 1,705 0.18 %$ 3,896,553 $ 610 0.06 % Money market deposits 7,550,791 5,817 0.31 % 7,366,987 1,717 0.09 % Savings deposits 2,468,187 250 0.04 % 2,426,124 199 0.03 % Time deposits 1,501,724 1,318 0.35 % 1,618,394 1,489 0.37 % Total interest-bearing deposits 15,350,390 9,090 0.23 % 15,308,058 4,015 0.11 % Repurchase agreements and federal funds purchased 509,559 545 0.42 % 512,641 66 0.05 % Borrowings 90,475 798 3.50 % 6,273 50 3.21 % Junior subordinated debentures 409,151 5,491 5.33 % 393,964 4,001 4.07 % Total interest-bearing liabilities 16,359,575$ 15,924 0.39 % 16,220,936$ 8,132 0.20 % Non-interest-bearing deposits 11,250,764 11,086,376 Other liabilities 490,572 464,755 Total liabilities 28,100,911 27,772,067 Common equity 2,567,266 2,584,836 Total liabilities and shareholders' equity$ 30,668,177 $ 30,356,903 NET INTEREST INCOME$ 287,933 $ 248,522 NET INTEREST SPREAD 3.71 % 3.33 % NET INTEREST INCOME TO EARNING ASSETS OR NET INTEREST MARGIN (1), (2) 3.88 % 3.41 %
(1) Unaccrued loans and leases are included in the average balance. (2) Tax-exempt income has been adjusted to tax equivalent at the rate of 21%. The amount of this adjustment was an addition to recognized revenue of approximately
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Nine Months Ended September 30, 2022 September 30, 2021 Interest Average Interest Average Income or Yields or Income or Yields or (dollars in thousands) Average Balance Expense Rates Average Balance Expense Rates INTEREST-EARNING ASSETS: Loans held for sale$ 240,928 $ 7,209 3.99 %$ 545,237 $ 12,242 2.99 % Loans and leases (1) 23,676,201 720,699 4.06 % 21,866,569 656,772 4.01 % Taxable securities 3,445,386 54,412 2.11 % 3,199,653 45,049 1.88 % Non-taxable securities (2) 222,375 5,098 3.06 % 248,617 5,627 3.02 % Temporary investments and interest bearing cash 1,718,832 9,387 0.73 % 2,850,639 2,635 0.12 % Total interest-earning assets 29,303,722$ 796,805 3.62 % 28,710,715$ 722,325 3.36 % Other assets 1,237,305 1,348,054 Total assets$ 30,541,027 $ 30,058,769 INTEREST-BEARING LIABILITIES: Interest-bearing demand deposits$ 3,846,202 $ 2,813 0.10 %$ 3,359,865 $ 1,341 0.05 % Money market deposits 7,519,200 8,942 0.16 % 7,593,320 4,516 0.08 % Savings deposits 2,433,651 654 0.04 % 2,152,667 523 0.03 % Time deposits 1,623,742 4,612 0.38 % 2,336,261 16,414 0.94 % Total interest-bearing deposits 15,422,795 17,021 0.15 % 15,442,113 22,794 0.20 % Repurchase agreements and federal funds purchased 502,998 674 0.18 % 444,919 232 0.07 % Borrowings 34,662 897 3.46 % 259,890 2,787 1.43 % Junior subordinated debentures 394,803 12,641 4.28 % 363,122 9,108 3.35 % Total interest-bearing liabilities 16,355,258$ 31,233 0.26 % 16,510,044$ 34,921 0.28 % Non-interest-bearing deposits 11,115,618 10,484,104 Other liabilities 448,426 369,653 Total liabilities 27,919,302 27,363,801 Common equity 2,621,725 2,694,968 Total liabilities and shareholders' equity$ 30,541,027 $ 30,058,769 NET INTEREST INCOME$ 765,572 $ 687,404 NET INTEREST SPREAD 3.36 % 3.08 % NET INTEREST INCOME TO EARNING ASSETS OR NET INTEREST MARGIN (1), (2) 3.48 %
3.20%
(1) Unaccrued loans and leases are included in the average balance. (2) Tax-exempt income has been adjusted to tax equivalent at the rate of 21%. The amount of this adjustment was an addition to recognized revenue of approximately
52 -------------------------------------------------------------------------------- Table of Contents The following tables set forth a summary of the changes in tax equivalent net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for the three months endedSeptember 30, 2022 as compared to three months endedJune 30, 2022 , as well as the nine months endedSeptember 30, 2022 and 2021, respectively. Changes in tax equivalent interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionately between both variances.
Three months completed
Increase (decrease) in interest income and
expense due to changes in (in thousands) Volume Rate Total INTEREST-EARNING ASSETS: Loans held for sale$ (1,070) $ 533 $ (537) Loans and leases 14,318 30,375 44,693 Taxable securities (724) 1,645 921 Non-taxable securities (1) (58) (12) (70) Temporary investments and interest-bearing cash (1,859) 4,055 2,196 Total interest-earning assets (1) 10,607 36,596 47,203 INTEREST-BEARING LIABILITIES: Interest bearing demand deposits (10) 1,105 1,095 Money market deposits 45 4,055 4,100 Savings deposits 4 47 51 Time deposits (96) (75) (171) Repurchase agreements and federal funds purchased 342 137 479 Borrowings 743 5 748 Junior subordinated debentures 166 1,324 1,490 Total interest-bearing liabilities 1,194 6,598 7,792 Net increase in net interest income (1)$ 9,413
(1) Tax-exempt income has been adjusted to tax equivalent at a tax rate of 21%.
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Nine month period ended
September
30 2022 compared to
Increase
(decrease) in interest income and expense
due to changes in (in thousands) Volume Rate Total INTEREST-EARNING ASSETS: Loans held for sale$ (8,242) $ 3,209 $ (5,033) Loans and leases 56,160 7,767 63,927 Taxable securities 3,624 5,739 9,363 Non-taxable securities (1) (600) 71 (529) Temporary investments and interest-bearing cash (1,431) 8,183 6,752 Total interest-earning assets (1) 49,511 24,969 74,480 INTEREST-BEARING LIABILITIES: Interest bearing demand deposits 218 1,254 1,472 Money market deposits (45) 4,471 4,426 Savings deposits 72 59 131 Time deposits (3,996) (7,806) (11,802) Repurchase agreements and federal funds purchased 372 70 442 Borrowings (3,713) 1,823 (1,890) Junior subordinated debentures 847 2,686 3,533 Total interest-bearing liabilities (6,245) 2,557 (3,688) Net increase (decrease) in net interest income (1) $
55,756
(1) Tax-exempt income has been adjusted to tax equivalent at a tax rate of 21%.
Provision for Credit Losses
Comparison of the current quarter with the previous quarter
The Company had a$27.6 million provision for credit losses for the three months endedSeptember 30, 2022 , as compared to a$18.7 million provision for credit losses for the three months endedJune 30, 2022 . TheSeptember 30, 2022 provision reflects allowance requirements for new loan generation and loan mix changes, and changes between economic forecasts used in credit models. As an annualized percentage of average outstanding loans and leases, the provision for credit losses recorded for the three months endedSeptember 30, 2022 was 0.44%, as compared to 0.32% for the three months endedJune 30, 2022 .
For the three months ended
Comparison of the current year’s total with the period of the previous year
The Company had a$51.1 million provision for credit losses for the nine months endedSeptember 30, 2022 , as compared to a recapture of provision for credit losses of$41.9 million for the nine months endedSeptember 30, 2021 . The change in the provision reflects allowance requirements for new loan generation and loan mix changes, and changes between economic forecasts used in credit models. As an annualized percentage of average outstanding loans and leases, the provision (recapture) for credit losses recorded for the nine months endedSeptember 30, 2022 was 0.29%, compared to (0.26)% for the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , net charge-offs were$18.4 million , as compared to$37.5 million for the nine months endedSeptember 30, 2021 . As an annualized percentage of average outstanding loans and leases, net charge-offs for the nine months endedSeptember 30, 2022 were 0.10%, as compared to 0.23% for the nine months endedSeptember 30, 2021 . The majority of net charge-offs relate to leases and equipment finance loans, included within the commercial loan portfolio. 54 -------------------------------------------------------------------------------- Table of Contents Typically, loans in a non-accrual status will not have an allowance for credit loss as they will be written down to their net realizable value or charged-off. However, the net realizable value for homogeneous leases and equipment finance agreements are determined by the loss given default calculated by the CECL model, and therefore homogeneous leases and equipment finance agreements on non-accrual will have an allowance for credit loss amount until they become 181 days past due, at which time they are charged-off. The non-accrual leases and equipment finance agreements of$14.6 million as ofSeptember 30, 2022 have a related allowance for credit losses of$12.5 million , with the remaining loans written-down to the estimated fair value of the collateral, less estimated costs to sell, and are expected to be resolved with no additional material loss, absent further decline in market prices.
Non-interest income
The following table presents the key components of non-interest income for the three months endedSeptember 30, 2022 , compared to the three months endedJune 30, 2022 , as well as the comparison of the nine months endedSeptember 30, 2022 and 2021: Three Months Ended Nine Months Ended September 30, September 30, September 30, Change (in thousands) 2022 June 30, 2022 Change Amount Change Percent 2022 2021
Change Amount Percent Service charges on deposits$ 12,632 $ 12,011 $ 621 5 %$ 36,226 $ 30,898 $ 5,328 17 % Card-based fees 9,115 10,530 (1,415) (13) % 28,353 26,759 1,594 6 % Brokerage revenue 27 27 - - % 65 5,081 (5,016) (99) % Residential mortgage banking revenue, net 17,341 30,544 (13,203) (43) % 108,671 143,626 (34,955) (24) % Gain on sale of debt securities, net - - - nm 2 4 (2) (50) % Loss on equity securities, net (2,647) (2,075) (572) 28 % (7,383) (1,045) (6,338) nm Gain on loan and lease sales, net 1,525 1,303 222 17 % 5,165 10,899 (5,734) (53) % Bank owned life insurance income 2,023 2,110 (87) (4) % 6,220 6,201 19 - % Other (losses) income (10,571) 785 (11,356) nm (12,670) 51,157 (63,827) (125) % Total non-interest income$ 29,445 $ 55,235 $ (25,790) (47) %$ 164,649 $ 273,580 $ (108,931) (40) %
Comparison of the current quarter with the previous quarter
Residential mortgage banking revenue, which is the primary source of income for the Mortgage Banking segment, decreased as compared to three months endedJune 30, 2022 . The variance for the three months endedSeptember 30, 2022 , as compared to the three months endedJune 30, 2022 , was driven by rising long-term interest rates and attributable to lower origination and sales revenue, favorable changes in the fair value of the MSR asset, and a loss on the MSR hedge that was put in place during the quarter. The gain on the fair value of the MSR asset due to valuation inputs or assumptions was$16.4 million , which was offset by the MSR hedge loss of$14.1 million , for the three months endedSeptember 30, 2022 , compared to a fair value gain due to valuation inputs of$10.9 million for the three months endedJune 30, 2022 . Revenue related to the origination and sale of residential mortgages decreased by$4.6 million for the three months endedSeptember 30, 2022 , as compared to the three months endedJune 30, 2022 . For-sale mortgage closed loan volume for the three months endedSeptember 30, 2022 , decreased 31%, as compared to the three months endedJune 30, 2022 . However, the gain on sale margin increased to 2.65% for the three months endedSeptember 30, 2022 , as compared to 2.62% for the three months endedJune 30, 2022 . Other (losses) income for the three months endedSeptember 30, 2022 decreased by$11.4 million , as compared to the three months endedJune 30, 2022 , primarily due to an increase in fair value loss on certain loans held for investment to$26.4 million from$15.2 million , which reduced other income by$11.2 million . A$3.1 million decline in the gain on swap derivatives was partially offset by a$1.7 million increase in customer swap fee revenue, as compared to the prior quarter. 55 -------------------------------------------------------------------------------- Table of Contents Comparison of current year-to-date to prior year period
Service charges on deposits increased over the nine months ended
Brokerage revenue decreased for the nine months ended
The decrease in gain on loan and lease sales income for the nine months endedSeptember 30, 2022 , as compared to prior period, was driven by a decrease in SBA loan sales during the period. For the nine months endedSeptember 30, 2022 , the decrease in other (losses) income was primarily attributable to a loss on the fair value on certain loans held for investment of$62.7 million , as compared to a gain of$5.7 million for the nine months endedSeptember 30, 2021 . Additionally, a one-time gain on the sale ofUmpqua Investments, Inc. of$4.4 million was recorded for the nine months endedSeptember 30, 2021 . This was partially offset by a$9.9 million increase in the gain on swap derivatives and a$5.0 million increase in customer swap fee revenue, as compared to the prior period. Residential mortgage banking revenue, which is the primary source of income for the Mortgage Banking segment, decreased as compared to the nine months endedSeptember 30, 2021 . The variance for the nine months endedSeptember 30, 2022 , as compared to prior periods, was driven by rising long-term interest rates and attributable to lower revenue from the origination and sale of residential mortgages, favorable changes in the fair value of the MSR asset, and a loss taken on the MSR hedge that was put in place during the third quarter of 2022. The gain on the fair value of the MSR asset due to valuation inputs and assumptions was$67.5 million , which was partially offset by the MSR hedge loss of$14.1 million , for the nine months endedSeptember 30, 2022 , compared to a fair value loss of the MSR asset due to valuation inputs of$4.3 million for the nine months endedSeptember 30, 2021 . Revenue related to origination and sale of residential mortgages decreased by$91.7 million for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 .
For the nine months ended
Origination volume is generally linked to the level of interest rates. When rates fall, origination volume would be expected to be elevated relative to historical levels. When rates rise, origination volume would be expected to decline. The MSR asset value is also sensitive to interest rates, and generally falls with lower rates and rises with higher rates, resulting in fair value losses and gains, respectively, due to changes in valuation inputs or assumptions, where applicable. InAugust 2022 , a MSR hedge was put in place as we work to minimize the interest rate risk of mortgage servicing rights and reduce net income volatility related to changes in fair value of MSR assets due to valuation inputs or assumptions. 56 -------------------------------------------------------------------------------- Table of Contents The following table presents our residential mortgage banking revenue for the three months endedSeptember 30, 2022 andJune 30, 2022 , as well as the nine months endedSeptember 30, 2022 and 2021: Three Months Ended Nine Months Ended September 30, (in thousands) 2022 June 30, 2022 September 30, 2022 September 30, 2021 Origination and sale$ 10,515 $ 15,101 $ 42,460 $ 134,165 Servicing 9,529 9,505 28,174 27,379 Change in fair value of MSR asset: Changes due to collection/realization of expected cash flows over time (4,978) (4,961) (15,286) (13,592) Changes in valuation inputs or assumptions (1) 16,403 10,899 67,451 (4,326) MSR hedge loss (14,128) - (14,128) -
Net income from residential mortgages
30,544 $ 108,671 $ 143,626 Loans Held for Sale Production Statistics: Closed loan volume for-sale$ 396,979 $ 576,532 $ 1,622,633 $ 3,875,836 Gain on sale margin 2.65 % 2.62 % 2.62 % 3.46 % (1)The changes in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates. Non-Interest Expense The following table presents the key elements of non-interest expense for the three months endedSeptember 30, 2022 andJune 30, 2022 , as well as the nine months endedSeptember 30, 2022 and 2021. Three Months Ended Nine Months Ended September 30, September 30, September 30, Change (in thousands) 2022 June 30, 2022 Change Amount Change Percent 2022 2021 Change Amount Percent Salaries and employee benefits$ 109,164 $ 110,942 $ (1,778) (2) %$ 333,244 $ 363,343 $ (30,099) (8) % Occupancy and equipment, net 35,042 34,559 483 1 % 104,430 103,236 1,194 1 % Communications 2,542 2,585 (43) (2) % 7,881 8,633 (752) (9) % Marketing 1,505 1,649 (144) (9) % 5,552 5,077 475 9 % Services 13,355 14,402 (1,047) (7) % 39,094 36,279 2,815 8 %FDIC assessments 3,007 2,954 53 2 % 10,477 6,342 4,135 65 % Intangible amortization 1,025 1,026 (1) - % 3,076 3,390 (314) (9) % Merger related expenses 769 2,672 (1,903) (71) % 5,719 - 5,719 nm Other expenses 11,555 8,785 2,770 32 % 30,495 34,445 (3,950) (11) % Total non-interest expense$ 177,964 $ 179,574 $ (1,610) (1) %$ 539,968 $ 560,745 $ (20,777) (4) % nm = Not meaningful
Comparison of the current quarter with the previous quarter
Merger related expenses, related to the proposed merger withColumbia decreased$1.9 million during the three months endedSeptember 30, 2022 as compared to the three months endedJune 30, 2022 , due to reduced consulting and legal costs incurred.
Other expenses for the three months ended
57 -------------------------------------------------------------------------------- Table of Contents Comparison of current year-to-date to prior year period Salaries and employee benefits decreased for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 , primarily due to a decrease in mortgage banking production related incentive pay during the period, due to increasing rates suppressing demand for mortgage products.
Merger-related expenses, related to the proposed merger with
Other expenses decreased, as compared to prior periods, due to a decrease in exit and disposal costs of$4.9 million for the nine months endedSeptember 30, 2022 . The prior elevated levels of exit and disposal costs was due to store consolidations and back-office lease exits as part ofUmpqua's Next Gen 2.0 strategy. 58
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Table of Contents FINANCIAL CONDITION Cash and Cash Equivalents Cash and cash equivalents were$1.6 billion as ofSeptember 30, 2022 , compared to$2.8 billion as ofDecember 31, 2021 . The decrease of interest-bearing cash and temporary investments reflects strong loan portfolio growth of$3.0 billion , offset by increases in borrowings of$750.0 million and deposits of$222.4 million , respectively, in the period.
Investment debt securities available for sale were$3.1 billion as ofSeptember 30, 2022 , compared to$3.9 billion atDecember 31, 2021 . The decrease was due to a decrease of$575.8 million in fair value of investment securities available for sale, due to the increase in rates during the period, as well as sales and paydowns of$328.7 million , offset partially by purchases of$175.7 million of investment securities.
The following tables present the portfolio of available-for-sale and held-to-maturity investment debt securities by major category as at
Marketable securities available for sale
September 30, 2022 December 31, 2021 (dollars in thousands) Fair Value % Fair Value % U.S. Treasury and agencies$ 830,813 26 % $ 918,053 24 % Obligations of states and political subdivisions 269,904 9 % 330,784 8 % Mortgage-backed securities and collateralized mortgage obligations 2,035,674 65 % 2,621,598 68 % Total available for sale securities$ 3,136,391 100 %$ 3,870,435 100 %
Marketable securities held to maturity
September 30, 2022 December 31, 2021 (dollars in thousands) Amortized Cost % Amortized Cost % Mortgage-backed securities and collateralized mortgage obligations$ 2,547 100 % $ 2,744 100 % Total held to maturity securities$ 2,547 100 % $ 2,744 100 %
We continuously review investment securities for the presence of impairment, considering current market conditions, fair value to cost, magnitude and nature of change in fair value , changes and trends in the issuer’s rating, whether we intend to sell a security or whether it is likely that we will have to sell the security before recovering our amortized cost of the investment, which may be l maturity, and other factors.
Gross unrealized losses in the available for sale investment portfolio were$569.8 million as ofSeptember 30, 2022 . This consisted primarily of unrealized losses on mortgage-backed securities and collateralized mortgage obligations of$430.4 million . The unrealized losses were attributable to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities and are not attributable to changes in credit quality. In the opinion of management, no ACL was considered necessary on these debt securities as ofSeptember 30, 2022 . 59 -------------------------------------------------------------------------------- Table of Contents Loans and Leases Total loans and leases outstanding as ofSeptember 30, 2022 were$25.5 billion , an increase of$3.0 billion as compared toDecember 31, 2021 . The increase is attributable to new loan and lease originations, with the majority being in multifamily and residential mortgage loans. The loan to deposit ratio as ofSeptember 30, 2022 is 95%, as compared to 85% as ofDecember 31, 2021 . The following table presents the concentration distribution of the loan and lease portfolio, net of deferred fees and costs, as ofSeptember 30, 2022 andDecember 31, 2021 : September 30, 2022 December 31, 2021 (dollars in thousands) Amount % Amount % Commercial real estate Non-owner occupied term, net$ 3,846,426 15 %$ 3,786,887 17 % Owner occupied term, net 2,549,761 10 % 2,332,422 10 % Multifamily, net 5,090,661 20 % 4,051,202 18 % Construction & development, net 1,036,931 4 % 890,338 4 % Residential development, net 205,935 1 % 206,990 1 %
Commercial
Term, net 3,003,424 12 % 3,008,473 13 % Lines of credit & other, net 914,507 4 % 910,733 4 % Leases & equipment finance, net 1,669,817 6 % 1,467,676 7 %
Residential
Mortgage, net 5,470,624 21 % 4,517,266 20 % Home equity loans & lines, net 1,565,094 6 % 1,197,170 5 % Consumer & other, net 154,771 1 % 184,023 1 % Total, net of deferred fees and costs$ 25,507,951 100 %$ 22,553,180 100 % 60
-------------------------------------------------------------------------------- Table of Contents Asset Quality and Non-Performing Assets
The following table summarizes our non-performing assets, TDR loans, ACL and asset quality ratios at
(dollars in thousands) September 30, 2022 December 31, 2021 Loans and leases on non-accrual status Commercial real estate, net $ 5,403 $ 5,767 Commercial, net 18,652 13,098 Residential, net - - Consumer & other, net - - Total loans and leases on non-accrual status 24,055 18,865
Loans and leases 90 days or more past due and accrued
Commercial real estate, net 1 1 Commercial, net 5,143 4,160 Residential, net (1) 21,411 27,981 Consumer & other, net 152 194
Total loans and leases past due 90 days or more and
accruing (1) 26,707 32,336 Total non-performing loans and leases 50,762 51,201 Other real estate owned - 1,868 Total non-performing assets $ 50,762 $ 53,069 Restructured loans (2) $ 7,076 $ 6,694 Allowance for credit losses on loans and leases $ 283,065$ 248,412 Reserve for unfunded commitments 11,853 12,767 Allowance for credit losses $ 294,918$ 261,179 Asset quality ratios: Non-performing assets to total assets 0.16 % 0.17 % Non-performing loans and leases to total loans and leases 0.20 % 0.23 % Allowance for credit losses on loans and leases to total loans and leases 1.11 % 1.10 % Allowance for credit losses to total loans and leases 1.16 % 1.16 % Allowance for credit losses to total non-performing loans and leases 581 % 510 % (1)Excludes government guaranteed GNMA mortgage loans thatUmpqua has the right but not the obligation to repurchase that are past due 90 days or more totaling$1.0 million atSeptember 30, 2022 . (2)Represents accruing TDR loans performing according to their restructured terms. A decline in the economic conditions and other factors could adversely impact individual borrowers or the loan portfolio in general. Accordingly, there can be no assurance that loans will not become 90 days or more past due, placed on non-accrual status, restructured or transferred to other real estate owned in the future. 61 -------------------------------------------------------------------------------- Table of Contents Allowance for Credit Losses The ACL totaled$294.9 million atSeptember 30, 2022 , an increase of$33.7 million fromDecember 31, 2021 . The following table shows the activity in the ACL for the three months endedSeptember 30, 2022 andJune 30, 2022 , as well as the nine months endedSeptember 30, 2022 and 2021: Three Months Ended Nine Months Ended September 30, September 30, September 30, (dollars in thousands) 2022 June 30, 2022 2022 2021 Allowance for credit losses on loans and leases Balance, beginning of period$ 261,111 $ 248,564 $ 248,412 $ 328,401
Allowance (recovery) for credit losses on loans and leases
28,542 18,787 53,025 (33,381)
Landfills
Commercial real estate, net - (8) (8) (1,086) Commercial, net (9,459) (9,035) (26,352) (44,228) Residential, net (4) - (171) (70) Consumer & other, net (929) (836) (2,650) (2,983) Total charge-offs (10,392) (9,879) (29,181) (48,367)
Collections
Commercial real estate, net 123 73 221 589 Commercial, net 2,842 2,934 8,321 8,118 Residential, net 249 216 638 598 Consumer & other, net 590 416 1,629 1,602 Total recoveries 3,804 3,639 10,809 10,907
Net recoveries (debits)
Commercial real estate, net 123 65 213 (497) Commercial, net (6,617) (6,101) (18,031) (36,110) Residential, net 245 216 467 528 Consumer & other, net (339) (420) (1,021) (1,381) Total net charge-offs (6,588) (6,240) (18,372) (37,460) Balance, end of period$ 283,065 $ 261,111 $ 283,065 $ 257,560 Reserve for unfunded commitments Balance, beginning of period$ 12,823 $ 12,918 $ 12,767 $ 20,286
(Recapture) allowance for credit losses on unfunded commitments
(970) (95) (914) (8,534) Balance, end of period 11,853 12,823 11,853 11,752 Total allowance for credit losses$ 294,918 $ 273,934 $ 294,918 $ 269,312 As a percentage of average loans and leases (annualized): Net charge-offs 0.11 % 0.11 % 0.10 % 0.23 % Provision (recapture) for credit losses 0.44 % 0.32 % 0.29 % (0.26) % Recoveries as a percentage of charge-offs 36.61 % 36.84 % 37.04 % 22.55 % The provision for credit losses includes the provision (recapture) for loan and lease losses and the (recapture) provision for unfunded commitments. The increase in the provision is due to organic loan growth as well as updates to the economic forecasts used in credit models. 62 -------------------------------------------------------------------------------- Table of Contents The following table sets forth the allocation of the allowance for credit losses on loans and leases and percent of loans in each category to total loans and leases as ofSeptember 30, 2022 andDecember 31, 2021 : September 30, 2022 December 31, 2021 % Loans to % Loans to (dollars in thousands) Amount total loans Amount total loans Commercial real estate$ 85,543 50 %$ 99,075 50 % Commercial 151,600 22 % 117,573 24 % Residential 41,138 27 % 29,068 25 % Consumer & other 4,784 1 % 2,696 1 % Allowance for credit losses on loans and leases$ 283,065 $ 248,412
The following table shows the evolution of the provision for credit losses
Q3 2022 net (charge-offs) Reserve September 30, % of Loan and leases (dollars in thousands) June 30, 2022 recoveries build/(release) 2022 outstanding Commercial real estate$ 96,334 $ 123 $ (5,557)$ 90,900 0.71 % Commercial 133,687 (6,617) 27,341 154,411 2.76 % Residential 39,321 245 4,611 44,177 0.63 % Consumer & Other 4,592 (339) 1,177 5,430 3.51 % Total allowance for credit losses$ 273,934 $ (6,588) $ 27,572$ 294,918 1.16 % % of loans and leases outstanding 1.12 % 1.16 % To calculate the ACL, the CECL models use a forecast of future economic conditions and are dependent upon specific macroeconomic variables that are relevant to each of the Bank's loan and lease portfolios. For the third quarter of 2022, the Bank used Moody's Analytics' August consensus economic forecast, which shows a worsening economic situation from the forecast used in the prior quarter. Key components includeU.S. real GDP average annualized growth of 1.7% in 2022, decreasing to 1.3% in 2023, 1.7% in 2024, and 1.9% in 2025, and an average unemployment rate of 3.6% in 2022, 3.9% in 2023, 4.0% in 2024, and 3.9% in 2025. The forecasted average federal funds rate is expected to be 3.2% in Q4 2022, 3.3% in 2023, 2.8% in 2024, and 2.6% in 2025. The models for calculating the ACL are sensitive to changes in these and other economic variables, which could result in volatility as these assumptions change over time. We believe that the ACL as ofSeptember 30, 2022 is sufficient to absorb losses inherent in the loan and lease portfolio and in credit commitments outstanding as of that date based on the information available. If the economic conditions decline, the Bank may need additional provisions for credit losses in future periods.
Residential Mortgage Service Fees
The following table presents the changes in our residential MSR portfolio for the three months endedSeptember 30, 2022 andJune 30, 2022 , as well as the nine months endedSeptember 30, 2022 and 2021: Three Months Ended Nine Months Ended September 30, September 30, September 30, (in thousands) 2022 June 30, 2022 2022 2021 Balance, beginning of period$ 179,558 $ 165,807 $ 123,615 $ 92,907 Additions for new MSR capitalized 5,194 7,813 20,397 30,845 Changes in fair value: Changes due to collection/realization of expected cash flows over time (4,978) (4,961) (15,286) (13,592) Changes due to valuation inputs or assumptions (1) 16,403 10,899 67,451 (4,326) Balance, end of period$ 196,177 $ 179,558 $ 196,177 $ 105,834 (1)The changes in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates. 63
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Table of Contents Information about our serviced residential loan portfolio
September 30, 2022 December 31, 2021 Balance of loans serviced for others$ 12,997,911 $ 12,755,671 MSR as a percentage of serviced loans 1.51 %
0.97%
Residential MSR are adjusted to fair value quarterly with the change recorded in residential mortgage banking revenue. The value of servicing rights can fluctuate based on changes in interest rates and other factors. Generally, as interest rates decline and borrowers are able to take advantage of a refinance incentive, prepayments increase, and the total value of existing servicing rights declines as expectations of future servicing fee collections decline. Historically, the fair value of our residential MSR will increase as market rates for mortgage loans rise and decrease if market rates fall. Mortgage rates increased during the period and are expected to continue to rise, which has caused prepayment speeds to slow. Due to changes to inputs in the valuation model including changes in discount rates and prepayment speeds, the fair value of the MSR asset increased by$16.4 million and$67.5 million for the three and nine months endedSeptember 30, 2022 , as compared to an increase of$10.9 million for the three months endedJune 30, 2022 and a decrease of$4.3 million for the nine months endedSeptember 30, 2021 . The fair value of the MSR asset decreased by$5.0 million and$15.3 million , due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs during the three and nine months endedSeptember 30, 2022 , as compared to a decrease of$5.0 million for the three months endedJune 30, 2022 and$13.6 million for the nine months endedSeptember 30, 2021 . Deposits Total deposits were$26.8 billion atSeptember 30, 2022 , an increase of$222.4 million , as compared toDecember 31, 2021 . The increase is mainly attributable to growth in non-interest and interest bearing demand and savings accounts, partially offset by decreases in time and money market deposits.
The following table presents the deposit balances by category at
September 30, 2022 December 31, 2021 (dollars in thousands) Amount % Amount % Non-interest bearing demand$ 11,246,358 42 %$ 11,023,724 41 % Interest bearing demand 3,903,746 15 % 3,774,937 14 % Money market 7,601,506 28 % 7,611,718 29 % Savings 2,455,917 9 % 2,375,723 9 % Time, greater than$250,000 410,199 2 % 480,432 2 % Time,$250,000 or less 1,199,381 4 % 1,328,151 5 % Total deposits$ 26,817,107 100 %$ 26,594,685 100 % The Company's total core deposits, which are deposits less time deposits greater than$250,000 and all brokered deposits, were$26.3 billion atSeptember 30, 2022 , compared to$26.0 billion atDecember 31, 2021 . The Company's brokered deposits totaled$114.4 million atSeptember 30, 2022 , compared to$149.9 million atDecember 31, 2021 .
Loans
AtSeptember 30, 2022 , the Bank had outstanding securities sold under agreements to repurchase of$383.6 million , a decrease of$108.7 million fromDecember 31, 2021 . The Bank had outstanding borrowings consisting of advances from the FHLB of$756.2 million atSeptember 30, 2022 and$6.3 million atDecember 31, 2021 . The increase was due to$750.0 million in short-term advances, which have fixed rates ranging from 3.31% to 3.80% and are set to mature before the end of 2022. The remaining advance has a fixed interest rate of 7.10% and matures in 2030. Advances from the FHLB are secured by investment securities and loans secured by real estate. 64 -------------------------------------------------------------------------------- Table of Contents Junior Subordinated Debentures We had junior subordinated debentures with carrying values of$413.6 million and$381.1 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. The increase is mainly due to the$31.8 million change in fair value for the junior subordinated debentures elected to be carried at fair value, which is due to an increase in the implied forward curve resulting in increased cash flows, partially offset by an increase in the discount rate. As ofSeptember 30, 2022 , substantially all of the junior subordinated debentures had interest rates that are adjustable on a quarterly basis based on a spread over three-month LIBOR. These instruments mature afterJune 2023 , and we anticipate they will be covered under pending federal legislation that will allow us to replace the LIBOR index with SOFR under a safe-harbor provision.
Liquidity and cash flow
The principal objective of our liquidity management program is to maintain the Bank's ability to meet the day-to-day cash flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. The Bank's liquidity strategy includes maintaining a sufficient on-balance sheet liquidity position to provide flexibility, to grow deposit balances and fund growth in lending and investment portfolios, as well as to deleverage non-deposit liabilities as economic conditions permit. As a result, the Company believes that it has sufficient cash and access to borrowings to effectively manage through the current economic conditions, as well as meet its working capital and other needs. The Company will continue to prudently evaluate and maintain liquidity sources, including the ability to fund future loan growth and manage our borrowing sources. We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. One source of funds includes public deposits. Individual state laws require banks to collateralize public deposits, typically as a percentage of their public deposit balance in excess ofFDIC insurance. Public deposits represented 6% and 5% of total deposits atSeptember 30, 2022 andDecember 31, 2021 , respectively. The amount of collateral required varies by state and may also vary by institution within each state, depending on the individual state's risk assessment of depository institutions. Changes in the pledging requirements for uninsured public deposits may require pledging additional collateral to secure these deposits, drawing on other sources of funds to finance the purchase of assets that would be available to be pledged to satisfy a pledging requirement, or could lead to the withdrawal of certain public deposits from the Bank. In addition to liquidity from core deposits and the repayments and maturities of loans and investment securities, the Bank can utilize established uncommitted federal funds lines of credit, sell securities under agreements to repurchase, borrow on a secured basis from the FHLB or issue brokered certificates of deposit. The Bank had available lines of credit with the FHLB totaling$9.3 billion atSeptember 30, 2022 , subject to certain collateral requirements, namely the amount of pledged loans and investment securities. The Bank had available lines of credit with theFederal Reserve totaling$1.2 billion , subject to certain collateral requirements, namely the amount of certain pledged loans. The Bank had uncommitted federal funds line of credit agreements with additional financial institutions totaling$460.0 million atSeptember 30, 2022 . Availability of these lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs, and the agreements may restrict consecutive day usage. The Company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of the Company's revenues are obtained from dividends declared and paid by the Bank. There were$144.0 million of dividends paid by the Bank to the Company in the nine months endedSeptember 30, 2022 . There are statutory and regulatory provisions that limit the ability of the Bank to pay dividends to the Company.FDIC andOregon Division of Financial Regulation approval is required for quarterly dividends fromUmpqua Bank to the Company. As disclosed in the Condensed Consolidated Statements of Cash Flows, net cash provided by operating activities was$904.7 million during the nine months endedSeptember 30, 2022 , with the difference between cash provided by operating activities and net income consisting primarily of proceeds from the sale of loans held for sale of$1.8 billion , the increase in other liabilities of$248.4 million , and the decrease in other assets of$203.8 million , offset by originations of loans held for sale of$1.6 billion . This compares to net cash provided by operating activities of$541.5 million during the nine months endedSeptember 30, 2021 , with the difference between cash provided by operating activities and net income consisting primarily of proceeds from the sale of loans held for sale of$4.1 billion , and the decrease in other assets of$161.1 million , offset by originations of loans held for sale of$3.9 billion , the gain on sale of loans of$124.8 million , and the recapture of provision for loan and lease losses of$41.9 million . 65 -------------------------------------------------------------------------------- Table of Contents Net cash of$2.8 billion used in investing activities during the nine months endedSeptember 30, 2022 , consisted principally of net change in loans of$3.1 billion , purchases of available for sale investment securities of$175.7 million and purchases of restricted equity securities of$164.3 million offset by proceeds from available for sale investment securities of$328.7 million , redemption of restricted equity securities of$134.3 million and the proceeds from sales of loans and leases of$111.6 million . This compares to net cash of$764.9 million used in investing activities during the nine months endedSeptember 30, 2021 , consisted principally of purchases of available for sale investment securities of$1.5 billion , and net loan originations of$85.5 million , offset by proceeds from available for sale investment securities of$578.2 million and the proceeds from sales of loans and leases of$182.6 million . Net cash of$723.0 million provided by financing activities during the nine months endedSeptember 30, 2022 , primarily consisted of$750.0 million proceeds from borrowings and$222.4 million net increase in deposit liabilities, partially offset by$136.7 million of dividends paid on common stock and the net decrease in securities sold under agreements to repurchase of$108.7 million . This compares to net cash of$1.4 billion provided by financing activities during the nine months endedSeptember 30, 2021 , primarily consisted of$2.3 billion net increase in deposits and the net increase in securities sold under agreements to repurchase of$92.4 million , offset by$765.0 million repayment of borrowings,$138.2 million of dividends paid on common stock, and the repurchase and retirement of common stock of$80.7 million . Although we expect the Bank's and the Company's liquidity positions to remain satisfactory during 2022, it is possible that our deposit balances may not be maintained at previous levels due to pricing pressure or customers' behavior in the current economic environment. In addition, in order to generate deposit growth, our pricing may need to be adjusted in a manner that results in increased interest expense on deposits. We may utilize borrowings or other funding sources, which are generally more costly than deposit funding, to support our liquidity levels.
Off-balance sheet arrangements
Information regarding off-balance sheet arrangements is included in Note 6 of the Notes to the Condensed Consolidated Financial Statements.
Credit risk concentrations
Information regarding credit risk concentrations is included in note 6 of the notes to the condensed consolidated financial statements.
Capital resources
Shareholders' equity atSeptember 30, 2022 was$2.4 billion . The decrease in shareholders' equity during the nine months endedSeptember 30, 2022 was principally due to the other comprehensive loss, net of tax, of$451.3 million and cash dividends paid of$137.4 million offset by net income of$253.8 million during the period. The Company's dividend policy considers, among other things, earnings, regulatory capital levels, the overall payout ratio and expected asset growth to determine the amount of dividends declared, if any, on a quarterly basis. There is no assurance that future cash dividends on common shares will be declared or increased. We cannot predict the extent of the economic decline that could result in inadequate earnings, regulatory restrictions and limitations, changes to our capital requirements, or a decision to increase capital by retention of earnings, that may result in the inability to pay dividends at previous levels, or at all.Umpqua agreed to refrain from paying quarterly cash dividends in excess of the then-current level ($0.21 per share) at the time we entered into the Merger Agreement. OnJuly 20, 2022 , the Company declared a cash dividend in the amount of$0.21 per common share based on second quarter 2022 performance, which was paid onAugust 15, 2022 . The Company also declared a quarterly cash dividend, based on third quarter 2022 performance, of$0.21 per common share, paid onOctober 28, 2022 , to shareholders of record as ofOctober 14, 2022 . 66 -------------------------------------------------------------------------------- Table of Contents The following table presents cash dividends declared and dividend payout ratios (dividends declared per common share divided by basic earnings per common share) for the three months endedSeptember 30, 2022 andJune 30, 2022 , and the nine months endedSeptember 30, 2022 andSeptember 30, 2021 : Three Months Ended Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 Dividend declared per common share $ 0.21$ 0.21 $ 0.63 $ 0.63 Dividend payout ratio 54 % 58 % 54 % 42 % InJuly 2021 , the Company announced that its Board of Directors approved a share repurchase program, which authorized the Company to repurchase up to$400 million of common stock from time to time in open market transactions, accelerated share repurchases, or in privately negotiated transactions as permitted under applicable rules and regulations. As ofSeptember 30, 2022 , the Company repurchased a total of$78.2 million in shares under the program. During the nine months endedSeptember 30, 2022 , no shares were repurchased under the program and the program expiredJuly 31, 2022 . The Company halted repurchases, based on the announced merger withColumbia and in accordance with the Merger Agreement. The timing and amount of future repurchases would depend upon the market price for our common stock, securities laws restricting repurchases, asset growth, earnings, our capital plan, and bank or bank holding company regulatory approvals. In addition, our stock plans provide that award holders may pay for the exercise price and tax withholdings in part or entirely by tendering previously held shares. 67
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Table of contents The following table presents the consolidated capital adequacy ratios of the Company and the Bank in relation to the minimum regulatory capital ratio and the minimum regulatory capital ratio necessary to qualify as a “well capitalized” institution. », as calculated according to the regulatory guidelines of Basel III to
Actual For Capital Adequacy purposes To be Well Capitalized (dollars in thousands) Amount Ratio Amount Ratio Amount RatioSeptember 30, 2022 Total Capital (to Risk Weighted Assets) Consolidated$ 3,589,092 13.18 %$ 2,177,922 8.00 %$ 2,722,403 10.00 % Umpqua Bank$ 3,374,328 12.40 %$ 2,177,601 8.00 %$ 2,722,002 10.00 %Tier I Capital (to Risk Weighted Assets) Consolidated$ 2,895,554 10.64 %$ 1,633,442 6.00 %$ 2,177,922 8.00 % Umpqua Bank$ 3,131,788 11.51 %$ 1,633,201 6.00 %$ 2,177,601 8.00 % Tier I Common (to Risk Weighted Assets) Consolidated$ 2,895,554 10.64 %$ 1,225,081 4.50 %$ 1,769,562 6.50 % Umpqua Bank$ 3,131,788 11.51 %$ 1,224,901 4.50 %$ 1,769,301 6.50 %Tier I Capital (to Average Assets) Consolidated$ 2,895,554 9.35 %$ 1,238,774 4.00 %$ 1,548,467 5.00 % Umpqua Bank$ 3,131,788 10.11 %$ 1,239,024 4.00 %$ 1,548,780 5.00 % December 31, 2021 Total Capital (to Risk Weighted Assets) Consolidated$ 3,429,047 14.26 %$ 1,923,934 8.00 %$ 2,404,917 10.00 % Umpqua Bank$ 3,085,848 12.83 %$ 1,924,015 8.00 %$ 2,405,019 10.00 %Tier I Capital (to Risk Weighted Assets) Consolidated$ 2,785,794 11.58 %$ 1,442,950 6.00 %$ 1,923,934 8.00 % Umpqua Bank$ 2,893,593 12.03 %$ 1,443,011 6.00 %$ 1,924,015 8.00 % Tier I Common (to Risk Weighted Assets) Consolidated$ 2,785,794 11.58 %$ 1,082,213 4.50 %$ 1,563,196 6.50 % Umpqua Bank$ 2,893,593 12.03 %$ 1,082,258 4.50 %$ 1,563,262 6.50 %Tier I Capital (to Average Assets) Consolidated$ 2,785,794 9.01 %$ 1,236,265 4.00 %$ 1,545,331 5.00 % Umpqua Bank$ 2,893,593 9.36 %$ 1,236,518 4.00 %$ 1,545,648 5.00 % In 2020, the federal bank regulatory authorities finalized a rule to provide banking organizations that implemented CECL in 2020 the option to delay the estimated impact on regulatory capital by up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay. The Company elected this capital relief to delay the estimated regulatory capital impact of adopting CECL, relative to the incurred loss methodology's effect on regulatory capital. Currently, the Company is beginning to phase out the cumulative adjustment as calculated at the end of 2021, by adjusting it by 75% through 2022, 50% in 2023, and 25% in 2024.
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