Umpqua Reports Quarterly and Annual Results

Fourth quarter 2017 net earnings of $82.8 million, or $0.38 per common share
Full-year 2017 net earnings of $246.9 million, or $1.12 per common share
Annual loan and lease growth of $1.6 billion, or 9%, and deposit growth of $927.3 million, or 5%

PORTLAND, Ore., Jan. 23, 2018 (GLOBE NEWSWIRE) -- Umpqua Holdings Corporation (NASDAQ:UMPQ) (the “Company”) reported net earnings available to common shareholders of $82.8 million for the fourth quarter of 2017, compared to $61.3 million for the third quarter of 2017 and $69.2 million for the fourth quarter of 2016.  Earnings per diluted common share were $0.38 for the fourth quarter of 2017, compared to $0.28 for the third quarter of 2017 and $0.31 for the fourth quarter of 2016.

For the twelve months ended December 31, 2017, the Company reported net earnings available to common shareholders of $246.9 million, or $1.12 per diluted common share, up from $232.8 million, or $1.05 per diluted common share, for the twelve months ended December 31, 2016.

“2017 was a pivotal year for Umpqua.  We delivered solid financial performance and strong balance sheet growth, while developing and making good progress on Umpqua Next Gen, our long-term strategic initiative to deliver enhanced profitability while modernizing and evolving the institution to implement our human digital banking strategy,” said Cort O'Haver, president and CEO of Umpqua Holdings Corporation.  “The organization’s discipline and hard work last year has positioned us well for 2018 and beyond.  Building on that foundation, and in light of recent tax reform, Umpqua is planning to accelerate strategic investments in our associates, communities, and digital and technology projects to enhance the customer experience, which we believe will enhance shareholder value.”

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

• $26.9 million net benefit to the provision for income taxes related to a revaluation of the net deferred tax liability and amortization of tax credit investments associated with the passage of the Tax Cuts and Jobs Act ("Tax Act"), partially offset by the non-deductibility of certain executive compensation.
• In light of the Tax Act, the Company took the opportunity to make additional investments, including expenses of $3.2 million related to employee profit sharing and $2.0 million in donations to the Umpqua Bank Charitable Foundation.
• $2.0 million gain related to the fair value change of the MSR asset, compared to a negative adjustment of $9.2 million in the prior quarter and a $16.5 million gain in the same period of the prior year.
• $0.2 million gain related to the fair value change of the debt capital market swap derivatives, compared to a negative adjustment of $0.2 million in the prior quarter and a gain of $4.6 million in the same period of the prior year.
• $3.1 million of exit or disposal costs, related primarily to planned store consolidations, compared to $1.6 million in the prior quarter and $1.2 million in the same period of the prior year.
• $10.0 million net loss on junior subordinated debentures carried at fair value, compared to a loss of $1.6 million in both the prior quarter and the same period of the prior year.  The incremental net loss this quarter, relative to prior quarter levels, reflected the change in fair value for continued tightening of market credit spreads.

Full-Year 2017 Highlights (comparisons are to prior year):

• Gross loan and lease growth of $1.6 billion, or 9%;
• Deposit growth of $927.3 million, or 5%;
• Net interest income increased by $15.3 million, driven primarily by higher average balances of loans and leases, partially offset by lower net interest margin and a lower level of accretion of the credit discount;
• Provision for loan and lease losses increased by $5.6 million primarily due to loan and lease growth, along with a $2.6 million increase in net charge-offs;
• Non-interest income decreased by $21.1 million, driven primarily by lower residential mortgage banking revenue and the higher net loss on junior subordinated debentures carried at fair value (see notable items above), partially offset by higher other income;
• Non-interest expense increased by $10.7 million, driven primarily by higher salaries and benefits expense; and
• Paid dividends of $0.68 per common share, repurchased 325,000 shares of stock, and grew tangible book value¹ by 5%, or $0.48 per share.

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.

Fourth Quarter 2017 Highlights (comparisons are to prior quarter):

• Gross loan and lease growth of $402.4 million, or 9% annualized;
• Deposit growth of $96.4 million, or 2% annualized;
• Net interest income was flat, as the growth in the loan and lease portfolio was offset by lower accretion of the credit discount;
• Provision for loan and lease losses increased by $0.9 million;
• Non-interest income decreased by $3.4 million, driven primarily by the $8.4 million increase in net loss on junior subordinated debentures carried at fair value (see notable items above) and lower gains from portfolio loan sales, partially offset by higher mortgage banking revenue attributable to a linked quarter increase in the fair value change of the MSR asset;
• Non-interest expense increased by $4.4 million, reflecting the additional investments resulting from tax reform (see notable items above), partially offset by lower merger-related expense;
• Non-performing assets to total assets increased to 0.37%, driven primarily by two larger non-performing loans;
• Estimated total risk-based capital ratio of 14.0% and estimated Tier 1 common to risk weighted assets ratio of 11.0%;
• Declared quarterly cash dividend of $0.18 per common share; and
• Repurchased 100,000 shares of common stock for $2.1 million.

Balance Sheet
Total consolidated assets were $25.7 billion as of December 31, 2017, compared to $25.7 billion as of September 30, 2017 and $24.8 billion as of December 31, 2016.  Including secured off-balance sheet lines of credit, total available liquidity was $9.8 billion as of December 31, 2017, representing 38% of total assets and 49% of total deposits.

Gross loans and leases were $19.1 billion as of December 31, 2017, an increase of $402.4 million from $18.7 billion as of September 30, 2017.  This increase reflects balanced growth across the Company's commercial, equipment finance, multifamily and residential real estate portfolios.  During the fourth quarter of 2017, the Company sold $29.8 million of leases and equipment finance loans. 

Total deposits were $19.9 billion as of December 31, 2017, an increase of $96.4 million from $19.9 billion as of September 30, 2017.  This increase was primarily attributable to growth in money market accounts, partially offset by a decline in time deposits.

Net Interest Income
Net interest income was $220.6 million for the fourth quarter of 2017, up $0.2 million from the prior quarter.  This increase was driven primarily by higher average interest-earning assets resulting from the strong growth in loans and leases during the quarter.  This was partially offset by a lower level of accretion of the credit discount on loans acquired from Sterling Financial Corporation (“Sterling”), which decreased by $3.9 million from the prior quarter level.

The Company’s net interest margin was 3.88% for the fourth quarter of 2017, down 6 basis points from 3.94% for the third quarter of 2017.  The linked quarter decrease was driven primarily by the lower level of accretion on purchased credit impaired loans.

Credit Quality
The allowance for loan and lease losses was $140.6 million, or 0.74% of loans and leases, as of December 31, 2017.  During the fourth quarter of 2017, the Company recorded $4.1 million of accretion related to the credit discount on acquired loans from Sterling, compared to $8.0 million in the prior quarter.  As of December 31, 2017, the Sterling purchased non-credit impaired loans had approximately $26.2 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 $25.4 million of remaining total discount.

The provision for loan and lease losses was $12.9 million for the fourth quarter of 2017, up $0.9 million from the prior quarter level.  Net charge-offs increased by 5 basis points from the prior quarter to 0.25% of average loans and leases for the fourth quarter of 2017 (annualized).  As of December 31, 2017, non-performing assets increased to 0.37% of total assets, from 0.30% as of September 30, 2017 and from 0.25% as of December 31, 2016.  This increase was driven primarily by two larger loans which moved to non-performing status during the quarter.

Non-interest Income
Non-interest income was $72.0 million for the fourth quarter of 2017, down $3.4 million from the prior quarter. The current quarter's non-interest income included gains of $2.0 million and $0.2 million related to fair value changes of the MSR asset and the debt capital market swap derivatives, respectively.  This compares to fair value losses of $9.2 million and $0.2 million for the MSR asset and debt capital market swap derivatives, respectively, during the third quarter of 2017.  The net loss on junior subordinated debentures carried at fair value was $10.0 million for the fourth quarter of 2017, compared to a net loss of $1.6 million in the prior quarter, reflecting the change in fair value related to the continued tightening of market credit spreads.

Net revenue from the origination and sale of residential mortgages was $29.9 million for the fourth quarter of 2017, down $2.9 million from the prior quarter.  For-sale mortgage origination volume decreased by 5% from the prior quarter, while the home lending gain on sale margin decreased by 17 basis points to 3.51% for the fourth quarter of 2017.  Of the current quarter’s mortgage production, 67% related to purchase activity, compared to 74% for the prior quarter and 63% for the same period in the prior year.

Gain on loan sales decreased by $4.3 million from the prior quarter, reflecting a lower level of portfolio loan sales compared to the prior quarter.

Non-interest Expense
Non-interest expense was $192.8 million for the fourth quarter of 2017, up $4.4 million from the prior quarter level.   This increase over the prior quarter level was primarily driven by additional investments made by the Company as a result of the Tax Act, including a $3.2 million increase in salaries and benefits expense related to employee profit sharing and a $2.0 million increase in other expense related to donations to the Umpqua Bank Charitable Foundation.  These were partially offset by lower merger-related expenses.

Capital
As of December 31, 2017, the Company’s tangible book value per share¹ increased to $9.98 from $9.83 in the prior quarter.  During the fourth quarter of 2017, the Company repurchased 100,000 shares of common stock for $2.1 million.

The Company’s estimated total risk-based capital ratio was 14.0% and its estimated Tier 1 common equity to risk weighted assets ratio was 11.0% as of December 31, 2017.  The Company remains above current “well-capitalized” regulatory minimums.  The regulatory capital ratios as of December 31, 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 fourth quarter 2017 earnings conference call on Wednesday, January 24, 2018, at 10:00 a.m. PT (1:00 p.m. ET).  During the call, the Company will provide an update on recent activities and discuss its fourth quarter and full-year 2017 financial results.  There will be a live question-and-answer session following the presentation.  To join the call, please dial (877) 440-5803 ten minutes prior to the start time and enter conference ID: 8419276.  A re-broadcast will be available approximately two hours after the call by dialing (888) 203-1112 and entering conference ID 8419276.  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 the timing and impact of digital and technology 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 ability to effectively manage problem credits; our ability to successfully implement efficiency initiatives; our ability to successfully develop and market new products and technology; and changes in laws or regulations.

(1) Preliminary. Pending FASB guidance regarding the Financial Reporting Effects of the Tax Cuts and Jobs Act.

(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 $12.4 million, $12.3 million, $16.3 million, $5.3 million, and $10.9 million at December 31, 2017, September 30, 2017, June 30, 2017, March 31, 2017, and December 31, 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).

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