Umpqua : Reports First Quarter 2015 Results

Umpqua Holdings Corporation (NASDAQ: UMPQ) (the “Company”) reported net earnings available to common shareholders of $47.0 million for the first quarter of 2015, as compared to $52.4 million for the fourth quarter of 2014 and $18.5 million for the first quarter of 2014. Earnings per diluted common share were $0.21 for the first quarter of 2015, as compared to $0.24 for the fourth quarter of 2014 and $0.16 for the first quarter of 2014.

Operating earnings¹, which represent earnings available to common shareholders before gains or losses on junior subordinated debentures carried at fair value, net of tax, and merger related expenses, net of tax, were $56.4 million for the first quarter of 2015, as compared to $59.4 million for the fourth quarter of 2014 and $23.9 million for the first quarter of 2014. Operating earnings per diluted common share were $0.26 for the first quarter of 2015, as compared to $0.27 for the fourth quarter of 2014 and $0.21 for the first quarter of 2014.

“The results of the first quarter of 2015 reflect Umpqua’s continued focus on disciplined growth while we progress in the completion of integrating Sterling,” said Ray Davis, president and CEO of Umpqua Holdings Corporation. “With the core system conversion now behind us, we have turned our attention to the final steps of integration and realizing the remaining expense synergies, which should accelerate over the next two quarters as major obstacles have now been eliminated. We are now able to concentrate more on our growth initiatives, reducing the company's efficiency ratio to below 60%, and continuing to innovate with new technologies and delivery systems.”

Highlights:

• First quarter of 2015 operating earnings¹ of $56.4 million:
  • Net interest income decreased by $11.0 million from the prior quarter, driven by a $6.4 million decrease in interest income related to the Sterling credit discount accretion and two fewer days in the quarter;
  • Provision for loan and lease losses increased by $8.5 million from the prior quarter, driven by higher net charge-offs and stronger loan growth;
  • Mortgage banking revenue increased by $11.7 million from the prior quarter, driven by an improvement in gain on sale margin and higher volume, partially offset by a $1.5 million increase in the loss related to the change in fair value of the mortgage servicing rights (MSR);
  • Non-interest expense (excluding merger-related expense) decreased by $1.7 million from the prior quarter, driven by synergies from reduced store costs, lower services and marketing expenses, and a lower loss on other real estate owned, partially offset by higher variable mortgage banking expense primarily reflected in salaries and benefits;

• Continued growth in loans and deposits:
  • Loans and leases (gross of sales) grew by $294.1 million, or 8% annualized, from the prior quarter. This growth was partially offset by loan sales of $72.8 million, for net growth of $221.2 million, or 6% annualized;
  • Deposits grew by $330.5 million, or 8% annualized, from the prior quarter;

• Capital and liquidity position remained strong:
  • Tangible book value per common share¹ increased to $8.88, from $8.79 in the prior quarter;
  • Under Basel III rules, estimated total risk-based capital ratio of 14.3% and estimated Tier 1 common to risk weighted assets ratio of 10.8%;
  • Declared a dividend of $0.15 per common share, and
  • Interest bearing cash of $1.1 billion, as compared to $1.3 billion in the prior quarter.

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.

Balance Sheet

Total consolidated assets were $23.0 billion as of March 31, 2015, as compared to $22.6 billion as of December 31, 2014 and $11.8 billion as of March 31, 2014. Including secured off-balance sheet lines of credit, total available liquidity to the Company was $7.8 billion as of March 31, 2015, representing 34% of total assets and 45% of total deposits.

Gross loans and leases were $15.5 billion as of March 31, 2015, an increase of $221.2 million, or 6% annualized, from $15.3 billion as of December 31, 2014. During the first quarter of 2015, the Company had loan sales of $72.8 million, primarily comprised of portfolio residential mortgage loans. Excluding the impact of these sales, gross loan growth was $294.1 million, or 8% annualized.

Total deposits were $17.2 billion as of March 31, 2015, an increase of $330.5 million, or 8% annualized, from $16.9 billion as of December 31, 2014. This increase was primarily driven by an increase in non-interest bearing demand, savings and money market accounts, partially offset by a decrease in time deposits.

Net Interest Income

Net interest income was $217.0 million for the first quarter of 2015, down $11.0 million from the prior quarter but up $109.1 million from the same period in the prior year. The decrease from the prior quarter was primarily driven by a $6.4 million decrease in interest income arising from the accretion of the credit discount recorded on the loans acquired from Sterling, along with two fewer days in the quarter. The increase from prior year was primarily driven by the acquisition of Sterling, along with continued organic loan growth. Net interest income for the first quarter of 2015 included $15.2 million in interest income arising from the accretion of the credit discount recorded on the loans acquired from Sterling, as compared to $21.6 million in the prior quarter.

The Company’s net interest margin was 4.55% for the first quarter of 2015, down from 4.69% for the fourth quarter of 2014, but up from 4.28% for the first quarter of 2014. The decrease from the prior quarter was primarily driven by the lower level of Sterling credit discount accretion in interest income. The increase from the prior year was primarily driven by the acquisition of Sterling, and to a lesser degree, a higher yield on interest-earning assets and a lower cost of funds.

Credit Quality

Under purchase accounting rules, loans (including those considered non-performing) acquired from Sterling were recorded at their estimated fair value, and the related allowance for loan losses was eliminated. As a result, the Company wrote down the value of the loan and lease portfolio acquired from Sterling as of the acquisition date. The credit portion of the fair value mark is not reflected in the reported allowance for loan losses, or its related allowance coverage ratios, but should be considered when comparing the current quarter ratios to similar ratios in periods prior to the acquisition of Sterling.

Loans acquired with deteriorated credit quality are accounted for as purchased credit impaired pools. Accordingly, loans included in the purchased credit impaired pools are not reported as non-performing loans based upon their individual performance status.

During the first quarter of 2015, the Company reported $15.2 million of accretion from the Sterling credit discount in interest income. As of March 31, 2015, the purchased non-credit impaired loans had approximately $107.7 million of remaining credit discount that will accrete into interest income over the life of the loans, and the purchased credit impaired loan pools had approximately $61.1 million of remaining total discount.

The allowance for loan and lease losses was $120.1 million, or 0.77% of loans and leases, as of March 31, 2015. To provide better comparability to prior periods, this pro-forma ratio would have been approximately 1.8% after grossing up the allowance for loan and lease losses and the loans and leases by the amount of the remaining credit mark remaining as of quarter-end. This compares to a ratio of approximately 2.0% as of December 31, 2014.

The provision for loan and lease losses was $13.7 million for the first quarter of 2015, an increase of $8.5 million from the prior quarter. This increase was primarily driven by an increase in net charge-offs and a higher level of loan growth, as compared to the prior quarter. Charge-offs, net of recoveries, increased to $9.8 million for the first quarter of 2015, as compared to $4.7 million in the prior quarter.

Non-performing assets decreased to $82.7 million, or 0.36% of total assets, as of March 31, 2015, as compared to $97.5 million, or 0.43% of total assets, as of December 31, 2014. Loans past due 31 to 89 days were $20.5 million, or 0.13% of loans and leases, as of March 31, 2015, as compared to $24.7 million, or 0.16% of loans and leases, as of December 31, 2014. Restructured loans on accrual status were $60.9 million as of March 31, 2015, as compared to $54.8 million as of December 31, 2014.

Non-interest Income

Total non-interest income was $63.6 million for the first quarter of 2015, up $13.3 million from the prior quarter and $40.4 million from the same period in the prior year. The increase from the prior quarter was primarily driven by higher mortgage banking revenue and other income. The increase from the prior year was primarily driven by the acquisition of Sterling.

Residential mortgage banking revenue, which includes revenue from the origination and sale of residential mortgage loans, revenue from the servicing of residential mortgage loans and changes to the fair value of the residential mortgage servicing rights (“MSR”) asset, increased by $11.7 million from the prior quarter. Revenue from the origination and sale of residential mortgages increased by $13.1 million from the prior quarter, driven by an improvement in gain on sale margin and higher mortgage originations. Loss related to the change in fair value of the MSR increased to $9.7 million for the first quarter of 2015 due to a decline in interest rates, as compared to $8.2 million for the prior quarter.

The Company’s gain on sale margin was 3.65% for the first quarter of 2015, up from 2.95% in the prior quarter. Of the current quarter’s mortgage production, 45% related to purchase activity, as compared to 63% for the prior quarter and 69% for the same period in the prior year.

As of March 31, 2015, the Company serviced $11.9 billion of residential mortgage loans for others, and its related MSR asset was valued at $116.4 million, or 0.98% of the total serviced portfolio principal balance. This compares to $11.6 billion of residential mortgage loans for others as of December 31, 2014, with a related MSR asset of $117.3 million, or 1.01% of the total serviced portfolio principal balance. As of March 31, 2014, the Company serviced $4.5 billion of residential mortgage loans serviced for others, and its related MSR asset was valued at $49.2 million, or 1.09% of the total serviced portfolio principal balance.

Non-interest Expense

Non-interest expense was $193.1 million for the first quarter of 2015, which included $14.1 million of merger-related expenses. This compares to $190.9 million, including $10.2 million of merger-related expenses, for the fourth quarter of 2014 and $96.5 million, including $6.0 million of merger-related expenses, for the first quarter of 2014.

Excluding merger-related expenses, non-interest expense decreased by $1.7 million from the prior quarter. This decrease was primarily driven by synergies related to the store consolidations, lower services and marketing expenses, and a lower loss on other real estate owned property. These were partially offset by a $5.0 million increase in variable mortgage expenses, primarily reflected in salaries and benefits, related to higher production in the quarter.

The first quarter of 2015 non-interest expense run-rate does not reflect the full benefit of the anticipated Sterling merger cost synergies. The Company recently completed the core system conversion, and plans to complete the remaining integration over the next two quarters. Cost synergies remain on track to the previously announced target of $87 million (annualized), which is expected to be realized following integration.

Income taxes

The Company recorded a provision for income taxes of $26.6 million for the first quarter of 2015, representing an effective tax rate of 36.1% for the quarter, as compared to $29.6 million, with an effective tax rate of 36.0%, for the fourth quarter of 2014.

Capital

As of March 31, 2015, the Company’s tangible book value per common share¹ was $8.88 and its ratio of tangible common equity to tangible assets¹ was 9.28%, as compared to $8.79 and 9.31%, respectively, in the prior quarter.

The Company made no open market nor privately negotiated purchases of common stock under the Company’s previously announced share repurchase plan during the first quarter of 2015. The Company may repurchase up to 12.0 million of additional shares under this plan.

Based on Basel III rules, as of March 31, 2015, the Company’s estimated total risk-based capital ratio was 14.3% and its estimated Tier 1 common to risk weighted assets ratio was 10.8%. As of December 31, 2014, which is based on Basel I rules, the Company's total risk-based capital ratio was 15.2% and its Tier 1 common to risk weighted assets ratio was 11.5%. The Company remains well above current “well-capitalized” regulatory minimums. The regulatory capital ratios as of March 31, 2015 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 certain 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.

The Company recognizes gains or losses on its junior subordinated debentures carried at fair value resulting from changes in interest rates and the estimated market credit risk adjusted spread that do not directly correlate with the Company’s operating performance. Also, the Company incurs significant expenses related to the completion and integration of mergers and acquisitions. Additionally, it may recognize goodwill impairment losses that have no direct effect on the Company’s or the Bank’s cash balances, liquidity, or regulatory capital ratios. Lastly, the Company may recognize one-time bargain purchase gains on certain acquisitions that are not reflective of the Company’s on-going earnings power. Accordingly, management believes that our operating results are best measured on a comparative basis excluding the impact of gains or losses on junior subordinated debentures measured at fair value, net of tax, merger-related expenses, net of tax, and other charges related to business combinations such as goodwill impairment charges or bargain purchase gains, net of tax. The Company defines operating earnings as earnings available to common shareholders before gains or losses on junior subordinated debentures carried at fair value, net of tax, bargain purchase gains on acquisitions, net of tax, merger related expenses, net of tax, and goodwill impairment, and we calculate operating earnings per diluted share by dividing operating earnings by the same diluted share total used in determining diluted earnings per common share.

The following table provides the reconciliation of earnings available to common shareholders (GAAP) to operating earnings (non-GAAP), and earnings per diluted common share (GAAP) to operating earnings per diluted share (non-GAAP) for the periods presented:

Management believes tangible common equity and the tangible common equity ratio are meaningful measures of capital adequacy because they provide a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in assessing the capital of the Company and the ability to absorb potential losses. Tangible common equity is calculated as total shareholders' equity less goodwill and other intangible assets, net (excluding MSRs). Tangible assets are total assets less goodwill and other intangible assets, net (excluding MSRs). The tangible common equity ratio is calculated as tangible common shareholders’ equity divided by tangible assets.

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

About Umpqua Holdings Corporation

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

Earnings Conference Call Information

The Company will host its first quarter 2015 earnings conference call on Thursday, April 16, 2015, at 10:00 a.m. PST (1:00 p.m. EST). During the call, the Company will provide an update on recent activities and discuss its first quarter 2015 financial results. There will be a live question-and-answer session following the presentation. To join the call, please dial (888) 503-8171 ten minutes prior to the start time and enter conference ID: 5683622. A re-broadcast will be available approximately two hours after the call by dialing (888) 203-1112 and entering conference ID 5683622. The earnings conference call will also be available as an audiocast, which can be accessed on the Company’s investor relations page at www.umpquaholdingscorp.com. A slide presentation to accompany the call will also be posted on the website before the call.

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 the integration of the merger with Sterling Financial Corporation; timing and amount of merger-related synergies; and credit discount accretion related to the merger. Specific risks that could cause results to differ from forward-looking statements are set forth in our filings with the SEC and include, without limitation, changes in the discounted cash flow model used to determine the fair value of subordinated debentures; prolonged low interest rate environment; unanticipated weakness in loan demand or loan pricing; deterioration in the economy; material reductions in revenue or material increases in expenses; lack of strategic growth opportunities or our failure to execute on those opportunities; our inability to effectively manage problem credits; certain loan assets becoming ineligible for loss sharing; unanticipated increases in the cost of deposits; the consequences of a phase-out of junior subordinated debentures from Tier 1 capital; Umpqua’s ability to achieve the synergies and earnings accretion contemplated by the Sterling merger; Umpqua’s ability to promptly and effectively integrate the businesses of Sterling and Umpqua; the diversion of management time on issues related to merger integration; changes in laws or regulations; and changes in general economic conditions.