Umpqua : Reports Fourth Quarter and Full-Year 2014 Results

Umpqua Holdings Corporation (NASDAQ: UMPQ) (the “Company”) reported net earnings available to common shareholders of $52.4 million for the fourth quarter of 2014, as compared to $58.8 million for the third quarter of 2014 and $25.1 million for the fourth quarter of 2013. Earnings per diluted common share were $0.24 for the fourth quarter of 2014, as compared to $0.27 for the third quarter of 2014 and $0.22 for the fourth quarter of 2013.

Operating earnings, 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 $59.4 million for the fourth quarter of 2014, as compared to $65.1 million for the third quarter of 2014 and $27.9 million for the fourth quarter of 2013. Operating earnings per diluted common share were $0.27 for the fourth quarter of 2014, as compared to $0.30 for the third quarter of 2014 and $0.25 for the fourth quarter of 2013.

For the twelve months ended December 31, 2014, the Company reported net earnings available to common shareholders of $147.0 million, or $0.78 per diluted common share, as compared to $97.6 million, or $0.87 per diluted common share, for the year ended December 31, 2013. For the twelve months ended December 31, 2014, operating earnings¹ were $202.4 million, or $1.08 per diluted common share, as compared to $105.7 million, or $0.94 per diluted common share, for the year ended December 31, 2013.

“2014 was a highly productive year for Umpqua in which the company delivered increased operating earnings and continued the organic growth of our loan and deposit portfolios, while maintaining strong credit quality, capital and liquidity levels to support future growth,” said Ray Davis, president and CEO of Umpqua Holdings Corporation. “Most significantly, we closed on the largest acquisition in the company's history, and expect to complete the integration in the coming months. With the strength of Umpqua’s unique brand and value proposition, I look forward to capitalizing on the momentum we've built as we head into 2015.”

Highlights:

• Full-year 2014 operating earnings¹ of $202.4 million:
  • Operating results reflect the acquisition of Sterling Financial beginning on April 19, 2014;
  • Return on average assets (operating basis)¹ improved to 1.06%, from 0.92% in the prior year;
  • Return on average tangible common equity (operating basis)¹ improved to 12.62%, from 10.60% in the prior year;
  • Efficiency ratio (operating basis)¹ improved to 62.45%, from 66.74% in the prior year;

• Fourth quarter 2014 operating earnings¹ of $59.4 million:
  • Net interest income was up slightly from the prior quarter, while net interest margin decreased by 6 basis points from the prior quarter to 4.69%;
  • Provision for loan and lease losses decreased by $9.1 million from the prior quarter, driven by an improvement in the credit quality of the loan and lease portfolio;
  • Mortgage banking revenue decreased by $9.5 million from the prior quarter, driven by a higher mix of portfolio versus for sale mortgage production, along with lower gain on sale margins, and a larger loss from the change in the fair value of the MSR asset, consistent with the decline in mortgage interest rates;
  • Other income decreased by $2.7 million from the prior quarter, driven by a lower level of portfolio loan sales;
  • Non-interest expense (excluding merger-related expense) increased by $6.8 million from the prior quarter, driven by a $1.9 million increase in marketing expense to support new brand and growth campaigns, and a $3.3 million increase in net loss on other real estate owned;
• Credit quality, capital and liquidity all remained strong:
  • Net charge-offs to average loans and leases (annualized) decreased to 0.12%, from 0.14% in the prior quarter;
  • Tangible book value per common share¹ increased to $8.80, as compared to $8.78 for the prior quarter and $8.49 for the same period in the prior year;
  • Declared a dividend of $0.15 per common share; and
  • Interest bearing cash increased to $1.3 billion, from $1.2 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 $22.6 billion as of December 31, 2014, as compared to $22.5 billion as of September 30, 2014 and $11.6 billion as of December 31, 2013. Including secured off-balance sheet lines of credit, total available liquidity to the Company was $7.7 billion as of December 31, 2014, representing 34% of total assets and 46% of total deposits.

Gross loans and leases were $15.3 billion as of December 31, 2014, an increase of $68.5 million from September 30, 2014. During the quarter, the Company experienced a larger than expected level of early pay-offs within the loan portfolio, primarily the result of borrowers selling their business or refinances away to competitors at terms or prices the Company was unwilling to match. During the fourth quarter of 2014, the Company had loan sales of $65.4 million, including $47.3 million in portfolio residential mortgage loans and $16.7 million of government guaranteed loans.

Total deposits were $16.9 billion as of December 31, 2014, an increase of $164.5 million from September 30, 2014. This increase was driven primarily by an increase in interest-bearing demand and money market accounts, partially offset by a decrease in time deposits.

Net Interest Income

Net interest income was $228.0 million for the fourth quarter of 2014, up $2.3 million from the prior quarter and $117.9 million from the same period in the prior year. The increase from prior year was primarily driven by the acquisition of Sterling, along with continued organic loan growth. Net interest income for the fourth quarter of 2014 included $21.6 million in interest income arising from the accretion of the credit discount recorded on the loans acquired from Sterling.

The Company’s net interest margin was 4.69% for the fourth quarter of 2014, down from 4.75% for the third quarter of 2014, but up from 4.29% for the fourth quarter of 2013. The decrease from the prior quarter was primarily driven by a higher balance of interest-bearing cash and a lower yield on interest-earning assets. The increase from the prior year was primarily driven by the acquisition of Sterling, 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 non-covered 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 fourth quarter of 2014, the Company reported $21.6 million of accretion from the Sterling credit discount in interest income. As of December 31, 2014, the purchased non-credit impaired loans had approximately $122.4 million of remaining credit discount that will accrete into interest income over the life of the loans, and the purchased credit impairment loan pools had approximately $66.5 million of remaining total discount.

The allowance for non-covered loan losses was $108.9 million, or 0.72% of non-covered loans and leases, as of December 31, 2014. To provide better comparability to prior periods, this pro-forma ratio would have been approximately 2% after grossing up the allowance for loan losses and the non-covered loans and leases by the amount of the remaining credit mark remaining as of quarter-end. This compares to a ratio of approximately 2.1% as of September 30, 2014.

The provision for loan losses was $5.2 million for the fourth quarter of 2014, down from $14.3 million for the third quarter of 2014. The decrease from the prior quarter was driven by an increase in loan pay-offs during the quarter, as well as upgrades within the non-covered loan and lease portfolio, and an improvement in the performance of the Sterling acquired loan portfolio. For the fourth quarter of 2014, net charge-offs to average loans and leases (annualized) decreased to 0.12%, from 0.14% in the prior quarter.

Non-covered, non-performing assets were $95.5 million, or 0.42% of total assets, as of December 31, 2014, as compared to $81.6 million, or 0.36% of total assets, as of September 30, 2014. Non-covered loans past due 31 to 89 days were $24.7 million, or 0.16% of non-covered loans and leases, as of December 31, 2014, as compared to $34.0 million, or 0.23% of non-covered loans and leases, as of September 30, 2014. Non-covered restructured loans on accrual status were $54.8 million as of December 31, 2014, as compared to $63.5 million as of September 30, 2014.

Non-Interest Income

Total non-interest income was $49.8 million for the fourth quarter of 2014, down $12.1 million from the prior quarter but up $23.0 million from the same period in the prior year. The decrease from the prior quarter was primarily driven by lower mortgage banking revenue and a $2.7 million decline in other income, primarily from a lower level of portfolio loan sales. 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, was down $9.5 million from the prior quarter, but up slightly from the same period in the prior year. Revenue from the origination and sale of residential mortgages decreased by $5.7 million from the prior quarter, driven by a higher mix of portfolio versus for sale mortgage production, along with lower gain on sale margins. Loss related to the change in fair value of the MSR was $8.2 million for the fourth quarter of 2014, a $3.9 million increase from a loss of $4.3 million in the prior quarter. The larger loss was driven by higher prepayment speeds associated with the decline in mortgage interest rates.

The Company’s gain on sale margin, as a percentage of residential mortgage for sale production, was 2.95% for the fourth quarter of 2014, down from 3.46% in the prior quarter. Of the current quarter’s mortgage production, 63% related to purchase activity, as compared to 71% for the prior quarter and 70% for the same period in the prior year.

As of December 31, 2014, the Company serviced $11.6 billion of residential mortgage loans for others, and its related MSR asset was valued at $117.3 million, or 1.01% of the total serviced portfolio principal balance. This compares to $11.3 billion of residential mortgage loans serviced for others as of September 30, 2014, with a related MSR asset of $118.7 million, or 1.05% of the total serviced portfolio principal balance. As of December 31, 2013, the Company serviced $4.4 billion of residential mortgage loans serviced for others, and its related MSR asset was valued at $47.8 million, or 1.09% of the total serviced portfolio principal balance.

Non-interest Expense

Non-interest expense was $190.9 million for the fourth quarter of 2014, which included $10.2 million of merger-related expenses. This compares to $182.6 million, including $8.6 million of merger-related expenses, for the third quarter of 2014 and $95.4 million, including $1.6 million of merger-related expenses, for the fourth quarter of 2013.

Excluding merger-related expenses, non-interest expense increased by $6.8 million from the prior quarter. This increase was primarily driven by a $3.3 million increase in loss on a real estate owned property and a $1.9 million increase in marketing expense to support new brand and growth campaigns.

The fourth quarter of 2014 non-interest expense run-rate does not reflect the full benefit of the anticipated Sterling merger cost synergies. Integration efforts continue to proceed as planned, with the previously announced 2014 store consolidations completed, and system conversions scheduled through early 2015. Cost synergies also remain on track to the previously announced target of $87 million (annualized), which is expected to be realized following system conversions.

Income taxes

The Company recorded a provision for income taxes of $29.2 million for the fourth quarter of 2014, representing an effective tax rate of 35.7% for the quarter, bringing the full-year effective tax rate for 2014 to 35.5%.

Capital

As of December 31, 2014, the Company’s tangible book value per common share¹ was $8.80 and its ratio of tangible common equity to tangible assets¹ was 9.33%, as compared to $8.78 and 9.24%, 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 fourth quarter of 2014. The Company may repurchase up to 12.0 million of additional shares under this plan.

The Company’s estimated total risk-based capital ratio was 14.9% and its estimated Tier 1 common to risk weighted assets ratio was 11.3% as of December 31, 2014, as compared to 14.9% and 11.2%, respectively, as of September 30. 2014. The Company remains well above current “well-capitalized” regulatory minimums. The regulatory capital ratios as of December 31, 2014 are estimates, pending completion and filing of the Company’s regulatory reports.

On July 2, 2013, federal banking regulators approved the final proposed rules that revise the regulatory capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework (“Basel III”). Under Basel III, the Company's combined trust preferred issuances must be phased out of Tier 1 and into Tier 2 capital (75% in 2015 and 100% in 2016). As of December 31, 2014, the total par value of trust preferred securities was $461.2 million. In addition, the Company is required under Basel III to exclude the entire deferred tax asset related to net operating losses (“NOLs”) from Tier 1 capital. As of December 31, 2014, the Company’s total net deferred tax asset was $229.5 million, and the portion related to NOLs was $196.3 million.

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 fourth quarter 2014 earnings conference call on Thursday, January 29, 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 fourth quarter and full-year 2014 financial results. There will be a live question-and-answer session following the presentation. To join the call, please dial (888) 554-1432 ten minutes prior to the start time and enter conference ID: 5266505. A re-broadcast will be available approximately two hours after the call by dialing (888) 203-1112 and entering conference ID 5266505. 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 growth and efficiency potential from the acquisition of Sterling Financial Corporation; the integration of the merger with Sterling Financial Corporation; timing and amount of merger-related synergies and timing of systems conversions; credit discount accretion related to the merger; and projected effective tax rate. 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 and timely complete system conversions; the diversion of management time on issues related to merger integration; changes in laws or regulations; and changes in general economic conditions.

(1) Core deposits are defined as total deposits less time deposits greater than $100,000.