Umpqua Reports Second Quarter 2017 Results

Net earnings of $56.8 million, or $0.26 per common share
Strong quarterly loan and lease growth of $491.5 million, or 11% annualized
Net interest margin of 3.91%, up 6 basis points from the prior quarter

PORTLAND, Ore., July 19, 2017 (GLOBE NEWSWIRE) -- Umpqua Holdings Corporation (NASDAQ:UMPQ) (the “Company”) reported net earnings available to common shareholders of $56.8 million for the second quarter of 2017, increased from $46.0 million for the first quarter of 2017 and from $54.3 million for the second quarter of 2016.  Earnings per diluted common share increased to $0.26 for the second quarter of 2017, compared to $0.21 for the first quarter of 2017 and $0.25 for the second quarter of 2016.

“Our performance during the second quarter reflects the success in executing on the key priorities and strategic initiatives we outlined earlier this year,” said Cort O'Haver, president and CEO of Umpqua Holdings Corporation.  “We delivered another quarter of strong loan and deposit growth, highlighted by 20% annualized growth in our commercial loan portfolio.  This balanced growth, along with a higher net interest margin and seasonally stronger mortgage banking revenues, drove the improvement in our second quarter financial results.  Looking ahead, we’ll continue to focus on initiatives that enhance the customer experience, diversify our revenue and deliver improved financial performance for shareholders.”

Notable items that impacted the second quarter 2017 financial results included:

• $8.3 million negative adjustment related to the fair value change of the MSR asset, compared to negative adjustments of $7.7 million in the prior quarter and $13.9 million in the same period of the prior year.
• $756,000 negative adjustment related to the fair value change of the debt capital market swap derivatives, compared to negative adjustments of $727,000 in the prior quarter and $1.5 million in the same period of the prior year.
• $1.6 million in merger-related expenses, compared to $1.0 million in the prior quarter and $6.6 million in the same period of the prior year.
• $742,000 of exit or disposal costs, compared to $468,000 in the prior quarter and $1.4 million in the same period of the prior year.
• $1.6 million net loss on junior subordinated debentures carried at fair value, consistent with the level in the prior quarter and with the same period of the prior year.

Second Quarter 2017 Highlights (compared to prior quarter):

• Net interest income increased by $5.4 million, driven by growth in interest-earning assets and a 6 basis point increase in net interest margin;
• Provision for loan and lease losses decreased by $1.0 million to $10.7 million, and net charge-offs remained at 0.22% of average loans and leases (annualized);
• Non-interest income increased by $10.9 million, driven primarily by higher revenues from the origination and sale of residential mortgages;
• Non-interest expense increased by $1.3 million, driven primarily by higher salaries and employee benefits expense, reflecting higher mortgage banking-related compensation, consistent with the increase in mortgage originations, and annual merit increases;
• Gross loan and lease growth of $491.5 million, or 11% annualized;
• Deposit growth of $292.7 million, or 6% annualized;
• Non-performing assets to total assets decreased to 0.23%;
• Estimated total risk-based capital ratio of 14.1% and estimated Tier 1 common to risk weighted assets ratio of 11.1%;
• Declared quarterly cash dividend of $0.16 per common share; and
• Repurchased 225,000 shares of common stock for $3.9 million.

Balance Sheet
Total consolidated assets were $25.3 billion as of June 30, 2017, compared to $24.9 billion as of March 31, 2017 and $24.1 billion as of June 30, 2016.  Including secured off-balance sheet lines of credit at the Company, total available liquidity was $9.3 billion as of June 30, 2017, representing 37% of total assets and 48% of total deposits.

Gross loans and leases were $18.3 billion as of June 30, 2017, an increase of $491.5 million, or 11% annualized, from $17.8 billion as of March 31, 2017.  This increase reflects balanced growth across the Company's commercial, multi-family and consumer loan portfolios.  During the second quarter of 2017, the Company sold $14.6 million of leases and equipment finance loans and $28.8 million of portfolio residential mortgage loans. 

Total deposits were $19.5 billion as of June 30, 2017, an increase of $292.7 million, or 6% annualized, from $19.2 billion as of March 31, 2017.  This increase was primarily attributable to growth in demand and time accounts.

Net Interest Income
Net interest income was $212.1 million for the second quarter of 2017, an increase of $5.4 million, or 3%, from the prior quarter.   This increase was primarily attributable to the strong growth in average interest-earning assets, both in loans and leases and investment securities, along with a 6 basis point increase in net interest margin.  Accretion of the credit discount recorded on acquired loans from Sterling Financial Corporation (“Sterling”) decreased by $494,000 from the prior quarter level.

The Company’s net interest margin was 3.91% for the second quarter of 2017, up 6 basis points from 3.85% for the first quarter of 2017.  The linked quarter increase was driven primarily by a lower mix of interest-bearing cash along with higher average yields on loans and leases and interest-bearing cash.

Credit Quality
The allowance for loan and lease losses was $136.9 million, or 0.75% of loans and leases, as of June 30, 2017.  During the second quarter of 2017, the Company recorded $5.9 million of accretion related to the credit discount on acquired loans from Sterling, compared to $6.4 million in the prior quarter.  As of June 30, 2017, the Sterling purchased non-credit impaired loans had approximately $34.1 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 $28.0 million of remaining total discount.

The provision for loan and lease losses was $10.7 million for the second quarter of 2017, a $1.0 million decrease from the prior quarter level, and net charge-offs remained at 0.22% of average loans and leases (annualized).  As of June 30, 2017, non-performing assets represented 0.23% of total assets, down from 0.24% as of March 31, 2017 and from 0.27% as of June 30, 2016.

Non-interest Income
Non-interest income was $71.1 million for the second quarter of 2017, up $10.9 million from the prior quarter.  The current quarter's non-interest income included negative adjustments of $8.3 million and $756,000 related to fair value changes of the MSR asset and the debt capital market swap derivatives, respectively, both primarily attributable to the decrease in long-term interest rates during the quarter.  This compares to fair value losses of $7.7 million and $727,000 for the MSR asset and debt capital market swap derivatives, respectively, during the first quarter of 2017. 

Net revenue from the origination and sale of residential mortgages was $32.4 million for the second quarter of 2017, up $7.7 million from the prior quarter.  This increase was driven primarily by a 22% linked quarter increase in for-sale mortgage origination volume, along with a 26 basis point increase in home lending gain on sale margin to 3.53% for the second quarter of 2017.  Of the current quarter’s mortgage production, 77% related to purchase activity, as compared to 67% for the prior quarter and 70% for the same period in the prior year.

Other income increased by $1.7 million from the prior quarter, reflecting stronger debt capital markets swap activity, and gain on loan sales increased by $1.6 million from the prior quarter, driven by a higher level of portfolio loans sales compared to the prior quarter.

Non-interest Expense

Non-interest expense was $184.0 million for the second quarter of 2017, up $1.3 million from the prior quarter level.  This increase was driven primarily by higher salaries and employee benefits, reflecting higher mortgage banking-related compensation, consistent with the increase in mortgage originations, and annual merit increases which took effect in April.  These were partially offset by a decrease in seasonal payroll taxes and lower occupancy and equipment expense. 

Capital
As of June 30, 2017, the Company’s book value per share increased to $17.98, from $17.84 in the prior quarter, and its tangible book value per common share¹ increased to $9.71, from $9.57 in the prior quarter.  During the second quarter of 2017, the Company repurchased 225,000 shares of common stock for $3.9 million.

The Company’s estimated total risk-based capital ratio was 14.1% and its estimated Tier 1 common to risk weighted assets ratio was 11.1% as of June 30, 2017.  The Company remains above current “well-capitalized” regulatory minimums.  The regulatory capital ratios as of June 30, 2017 are estimates, pending completion and filing of the Company’s regulatory reports.

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.

Non-GAAP Financial Measures
In addition to results presented in accordance with generally accepted accounting principles in the United States of America (GAAP), this press release contains certain non-GAAP financial measures.  The Company believes that these non-GAAP financial measures provide investors with information useful in understanding the Company’s financial performance; however, readers of this document are urged to review these non-GAAP financial measures in conjunction with the GAAP results as reported.

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

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

About Umpqua Holdings Corporation

Umpqua Holdings Corporation (NASDAQ:UMPQ) is the parent company of Umpqua Bank, an Oregon-based community bank recognized for its entrepreneurial approach, innovative customer experience, and distinctive banking solutions. Umpqua Bank has locations across Oregon, Washington, California, Idaho and Nevada.  Umpqua Holdings also owns a retail brokerage subsidiary, Umpqua Investments, Inc., which has locations in Umpqua Bank stores and in dedicated offices in Oregon, and Pivotus Ventures, an innovation studio headquartered in Silicon Valley focused on creating key technologies and business models that transform finance and commerce.  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 2017 earnings conference call on Thursday, July 20, 2017, 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 2017 financial results.  There will be a live question-and-answer session following the presentation.  To join the call, please dial (877) 440-5784 ten minutes prior to the start time and enter conference ID: 5028748.  A re-broadcast will be available approximately two hours after the call by dialing (888) 203-1112 and entering conference ID 5028748.  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 fee revenue and operating efficiency initiatives and the credit discount accretion related to loans acquired from Sterling.  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 inability to effectively manage problem credits; our inability to successfully implement efficiency initiatives; our ability to successfully develop and market new products and technology; and changes in laws or regulations.

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

(1) Excludes non-performing mortgage loans guaranteed by Ginnie Mae, which Umpqua has the unilateral right to repurchase but has not done so, totaling $16.3 million, $5.3 million, $10.9 million, $7.3 million, and $11.3 million at June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016, and June 30, 2016, respectively.

(1) Tax exempt interest has been adjusted to a taxable equivalent basis using a 35% tax rate.

                               
(1) Tax exempt interest has been adjusted to a taxable equivalent basis using a 35% tax rate.

(1) Average tangible common equity is a non-GAAP financial measure. Average tangible common equity is calculated as average common shareholders’ equity less average goodwill and other intangible assets, net (excluding MSRs).

Contacts:

Ron Farnsworth
EVP/Chief Financial Officer
Umpqua Holdings Corporation
503-727-4108
ronfarnsworth@umpquabank.com

Bradley Howes
SVP/Director of Investor Relations
Umpqua Holdings Corporation
503-727-4226
bradhowes@umpquabank.com