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Umpqua Reports Second Quarter 2018 Results

Net earnings of $67.8 million, or $0.31 per common share
Quarterly loan and lease growth of $379.4 million, or 8% annualized, and deposit growth of $637.7 million, or 13% annualized
Organization simplification and design complete, results include pre-tax restructuring charges of $8.2 million

PORTLAND, Ore., July 18, 2018 (GLOBE NEWSWIRE) — Umpqua Holdings Corporation (NASDAQ:UMPQ) (the “Company”) reported net earnings available to common shareholders of $67.8 million for the second quarter of 2018, compared to $77.7 million for the first quarter of 2018 and $56.8 million for the second quarter of 2017.  Earnings per diluted common share were $0.31 for the second quarter of 2018, compared to $0.35 for the first quarter of 2018 and $0.26 for the second quarter of 2017.

“Our second quarter results were highlighted by strong growth in loans and deposits, higher net interest income and stable credit quality,” said Cort O’Haver, president and CEO of Umpqua Holdings Corporation.  “Building on the foundation of Umpqua Next Gen, during the second quarter we completed important elements of our operational excellence initiative, including organizational simplification and design phases, while advancing our human digital strategy.  We are starting to see good traction from these Phase I levers, and remain on pace to deliver on the previously announced $18 to $24 million in annual savings.”

Notable items that impacted the second quarter 2018 financial results included:

  • $8.2 million in restructuring charges related to the organization simplification and design and procurement phases of Umpqua Next Gen, including $4.1 million in severance-related expense and $4.1 million in professional fees.  This compares to $0.8 million in severance-related expense and $2.7 in professional fees in the prior quarter.
  • $5.4 million negative adjustment related to the fair value change of the MSR asset, compared to $5.1 million gain in the prior quarter and $8.3 million negative adjustment in the same period of the prior year.
  • $0.3 million gain related to the fair value change of the debt capital market swap derivatives, compared to a gain of $1.1 million in the prior quarter and a loss of $0.8 million in the same period of the prior year.
  • $2.6 million of exit or disposal costs, compared to $2.5 million in the prior quarter and $0.7 million in the same period of the prior year.
  • $1.4 million unrealized holding loss on equity securities, compared to no gain or loss recorded in the prior quarters.

Second Quarter 2018 Highlights (compared to prior quarter):

  • Net interest income increased by $4.1 million, or 2%, attributable to the strong growth in loans and leases and the benefit from increases in short-term interest rates.
  • Provision for loan and lease losses decreased by $0.3 million, driven primarily by lower net charge-offs, which decreased by four basis points to 0.22% of average loans and leases (annualized).
  • Non-interest income decreased by $6.9 million, reflecting the $10.5 million linked quarter change in fair value of the MSR asset (see notable items above), partially offset by higher net revenue from the origination and sale of residential mortgages.
  • Non-interest expense increased by $9.5 million, driven primarily by higher restructuring charges (see notable items above) and higher mortgage banking-related expense, consistent with the increase in mortgage originations.
  • Non-performing assets to total assets increased by one basis point to 0.34%.
  • Estimated total risk-based capital ratio of 13.7% and estimated Tier 1 common to risk weighted assets ratio of 10.8%.
  • Declared quarterly cash dividend of $0.20 per common share.
  • Repurchased 327,000 shares of common stock for $8.0 million.

Balance Sheet
Total consolidated assets were $26.5 billion as of June 30, 2018, compared to $25.9 billion as of March 31, 2018 and $25.3 billion as of June 30, 2017.  Including secured off-balance sheet lines of credit, total available liquidity was $10.4 billion as of June 30, 2018, representing 39% of total assets and 50% of total deposits.

Gross loans and leases were $19.7 billion as of June 30, 2018, an increase of $379.4 million, or 8% annualized, from $19.3 billion as of March 31, 2018.  This increase reflects balanced growth within the commercial term, leasing, multifamily, and residential mortgage loan portfolios, partially offset by a decline in consumer loans attributable to the Company’s decision to wind down its indirect auto loan business.

Total deposits were $20.7 billion as of June 30, 2018, an increase of $637.7 million, or 13% annualized, from $20.1 billion as of March 31, 2018.  This increase was attributable to higher balances of time and non-interest bearing deposits, partially offset by lower money market deposits.

Net Interest Income
Net interest income was $227.3 million for the second quarter of 2018, up $4.1 million from the prior quarter.  This increase reflects higher average loans and leases, driven by strong growth during the quarter, as well as higher average yields on earning assets from the short-term rate increases.  Accretion of the credit discount recorded on acquired loans from Sterling Financial Corporation (“Sterling”) increased by $1.7 million from the prior quarter level, driven by a higher level of accretion on credit impaired loans associated with higher pay-offs.

The Company’s net interest margin was 3.93% for the second quarter of 2018, down 3 basis points from 3.96% for the first quarter of 2018, reflecting an increase in the cost of interest bearing liabilities and a higher average balance of interest-bearing cash, partially offset by higher average yields on interest-earning assets.  The increase in the cost of interest-bearing liabilities was attributable to an increase in average rates paid on interest-bearing deposits, as well as a higher percentage mix of time deposits, relative to the prior quarter.

Credit Quality
The allowance for loan and lease losses was $144.6 million, or 0.73% of loans and leases, as of June 30, 2018.  During the second quarter of 2018, the Company recorded $6.0 million of accretion related to the credit discount on acquired loans from Sterling, compared to $4.3 million in the prior quarter.  As of June 30, 2018, the Sterling purchased non-credit impaired loans had approximately $19.3 million of remaining credit discount that will accrete into interest income over the life of the loans, and the Sterling purchased credit impaired loan pools had approximately $21.6 million of remaining total discount.

The provision for loan and lease losses was $13.3 million for the second quarter of 2018, a decrease of $0.3 million from the prior quarter level, driven primarily by lower net charge-offs, which decreased by four basis points to 0.22% of average loans and leases (annualized).  As of June 30, 2018, non-performing assets were 0.34% of total assets, compared to 0.33% as of March 31, 2018 and 0.23% as of June 30, 2017.

Non-interest Income
Non-interest income was $71.7 million for the second quarter of 2018, down $6.9 million from the prior quarter, reflecting the negative linked quarter fair value change on the MSR asset (see notable items above), partially offset by an increase in net revenue from the origination and sale of residential mortgages.

Net revenue from the origination and sale of residential mortgages was $28.2 million for the second quarter of 2018, up $5.3 million from the prior quarter, reflecting stronger seasonal purchase activity.  For-sale mortgage origination volume increased by 22% from the prior quarter, and the home lending gain on sale margin increased by 3 basis points to 3.35% for the second quarter of 2018.  Of the current quarter’s mortgage production, 81% related to purchase activity, compared to 68% for the prior quarter and 77% for the same period of the prior year.

Non-interest Expense
Non-interest expense was $195.6 million for the second quarter of 2018, and included $8.2 million in restructuring charges related to the organization simplification and design and procurement phases of Umpqua Next Gen.  Excluding the impact of restructuring charges, non-interest expense increased by $4.7 million from the prior quarter.  This increase included $2.6 million in higher mortgage banking-related expense, reflecting the increase in mortgage originations, and $1.3 million in higher marketing expense.

Capital
As of June 30, 2018, the Company’s tangible book value per common share1 was $10.02, compared to $9.97 in the prior quarter and $9.71 in the same period of the prior year.  During the second quarter of 2018, the Company repurchased 327,000 shares of common stock for $8.0 million.

1 “Non-GAAP” financial measure. More information regarding this measurement and a reconciliation to the comparable GAAP measurement is provided under the heading Non-GAAP Financial Measures below.

The Company’s estimated total risk-based capital ratio was 13.7% and its estimated Tier 1 common to risk weighted assets ratio was 10.8% as of June 30, 2018.  The Company remains above current “well-capitalized” regulatory minimums.  The regulatory capital ratios as of June 30, 2018 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).

                     
(In thousands, except per share data)   Jun 30, 2018   Mar 31, 2018   Dec 31, 2017   Sep 30, 2017   Jun 30, 2017
Total shareholders’ equity   $ 4,021,643     $ 4,013,882     $ 4,014,786     $ 3,985,260     $ 3,958,845  
Subtract:                    
Goodwill   1,787,651     1,787,651     1,787,651     1,787,651     1,787,651  
Other intangible assets, net   27,047     28,589     30,130     31,819     33,508  
Tangible common shareholders’ equity   $ 2,206,945     $ 2,197,642     $ 2,197,005     $ 2,165,790     $ 2,137,686  
Total assets   $ 26,533,230     $ 25,875,643     $ 25,741,439     $ 25,695,663     $ 25,257,784  
Subtract:                    
Goodwill   1,787,651     1,787,651     1,787,651     1,787,651     1,787,651  
Other intangible assets, net   27,047     28,589     30,130     31,819     33,508  
Tangible assets   $ 24,718,532     $ 24,059,403     $ 23,923,658     $ 23,876,193     $ 23,436,625  
Common shares outstanding at period end   220,205     220,461     220,149     220,225     220,205  
                     
Total shareholders’ equity to total assets ratio   15.16 %   15.51 %   15.60 %   15.51 %   15.67 %
Tangible common equity ratio   8.93 %   9.13 %   9.18 %   9.07 %   9.12 %
Book value per common share   $ 18.26     $ 18.21     $ 18.24     $ 18.10     $ 17.98  
Tangible book value per common share   $ 10.02     $ 9.97     $ 9.98     $ 9.83     $ 9.71  
                                         

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, and Pivotus Ventures, an enterprise software and innovation company headquartered in Silicon Valley.  Umpqua Holdings Corporation is headquartered in Portland, Oregon. For more information, visit umpquabank.com.

Earnings Conference Call Information

The Company will host its second quarter 2018 earnings conference call on Thursday, July 19, 2018, at 10:00 a.m. PDT (1:00 p.m. EDT).  During the call, the Company will provide an update on recent activities and discuss its second quarter 2018 financial results.  There will be a live question-and-answer session following the presentation.  To join the call, please dial (888) 505-4378 ten minutes prior to the start time and enter conference ID: 5308253.  A re-broadcast will be available approximately two hours after the call by dialing (888) 203-1112 and entering conference ID 5308253.  The earnings conference call will also be available as an audiocast, 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 corporate initiatives and related cost savings.  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.

 
Umpqua Holdings Corporation
Consolidated Statements of Income
(Unaudited)
    Quarter Ended   % Change
(In thousands, except per share data)   Jun 30,
2018
  Mar 31,
2018
  Dec 31,
2017
  Sep 30,
2017
  Jun 30,
2017
  Seq.
Quarter
  Year
over
Year
Interest income:                            
Loans and leases   $ 237,343     $ 227,738     $ 223,206     $ 223,321     $ 212,998     4 %   11 %
Interest and dividends on investments:                            
Taxable   15,678     15,699     14,857     13,979     15,220     0 %   3 %
Exempt from federal income tax   2,057     2,128     2,121     2,125     2,237     (3 )%   (8 )%
Dividends   433     468     386     357     360     (7 )%   20 %
Temporary investments and interest bearing deposits   2,080     1,164     1,565     934     324     79 %   542 %
Total interest income   257,591     247,197     242,135     240,716     231,139     4 %   11 %
Interest expense:                            
Deposits   21,259     15,610     13,241     12,052     10,641     36 %   100 %
Securities sold under agreement to repurchase and federal funds purchased   155     63     43     81     321     146 %   (52 )%
Term debt   3,478     3,361     3,496     3,491     3,662     3 %   (5 )%
Junior subordinated debentures   5,400     4,932     4,734     4,628     4,437     9 %   22 %
Total interest expense   30,292     23,966     21,514     20,252     19,061     26 %   59 %
Net interest income   227,299     223,231     220,621     220,464     212,078     2 %   7 %
Provision for loan and lease losses   13,319     13,656     12,928     11,997     10,657     (2 )%   25 %
Non-interest income:                            
Service charges on deposits   15,520     14,995     15,413     15,849     15,478     4 %   0 %
Brokerage revenue   4,161     4,194     4,226     3,832     3,903     (1 )%   7 %
Residential mortgage banking revenue, net   33,163     38,438