Umpqua Reports First Quarter 2018 Results

Net earnings of $77.7 million, or $0.35 per common share
Quarterly loan and lease growth of $234.4 million, or 5% annualized
Quarterly deposit growth of $158.6 million, or 3% annualized

PORTLAND, Ore., April 18, 2018 (GLOBE NEWSWIRE) -- Umpqua Holdings Corporation (NASDAQ:UMPQ) (the “Company”) reported net earnings available to common shareholders of $77.7 million for the first quarter of 2018, compared to $81.9 million for the fourth quarter of 2017 and $46.0 million for the first quarter of 2017.  Earnings per diluted common share were $0.35 for the first quarter of 2018, compared to $0.37 for the fourth quarter of 2017 and $0.21 for the first quarter of 2017.

“Umpqua’s strong financial performance in the first quarter reflects the success of key initiatives we’ve put in place over the past 12 months,” said Cort O'Haver, president and CEO of Umpqua Holdings Corporation.  “As we’ve begun activating our Umpqua Next Gen strategy, we’ve demonstrated our ability to grow in a more consistent and profitable manner, while tightly managing core expenses and building digital and technology capabilities for the future.”

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

• $5.1 million gain related to the fair value change of the MSR asset, compared to $2.0 million gain in the prior quarter and $7.7 million negative adjustment in the same period of the prior year.
• $1.1 million gain related to the fair value change of the debt capital market swap derivatives, compared to a gain of $0.2 million in the prior quarter and a negative adjustment of $0.7 million in the same period of the prior year.
• $2.5 million of exit or disposal costs, compared to $3.1 million in the prior quarter and $0.5 million in the same period of the prior year.
• No loss related to junior subordinated debentures carried at fair value was included in earnings in the first quarter of 2018, as the related fair value adjustments are now included in accumulated other comprehensive income (loss).  Net loss on junior subordinated debentures carried at fair value included in earnings was $10.0 million for the prior quarter and $1.6 million for the same period of the prior year.

First Quarter 2018 Highlights (compared to prior quarter):

• Net interest income increased by $2.6 million, or 1%, driven primarily by growth in loans and leases and an 8 basis point increase in net interest margin;
• Provision for loan and lease losses increased by $0.7 million, driven primarily by continued loan growth and higher net charge-offs, which increased by one basis point to 0.26% of average loans and leases (annualized);
• Non-interest income increased by $8.1 million, driven primarily by the change in accounting principle for the junior subordinated debentures carried at fair value (see notable items above), partially offset by lower mortgage banking revenue and lower gains on portfolio loan sales;
• Non-interest expense decreased by $6.7 million, driven primarily by lower salaries and benefits expense, partially offset by a linked quarter increase in FDIC assessment expense related to one-time credits recorded in the prior quarter;
• Provision for income taxes increased by $20.9 million, reflecting the net benefit received in the fourth quarter of 2017 related to the revaluation of the net deferred tax liability, partially offset by a lower corporate tax rate, both attributable to the Tax Cuts and Jobs Act (“Tax Act”);
• Non-performing assets to total assets decreased by four basis points to 0.33%;
• Estimated total risk-based capital ratio of 14.0% and estimated Tier 1 common to risk weighted assets ratio of 11.0%; and
• Increased the quarterly cash dividend by 11.1% to $0.20 per common share.

Balance Sheet
Total consolidated assets were $25.9 billion as of March 31, 2018, compared to $25.7 billion as of December 31, 2017 and $24.9 billion as of March 31, 2017.  Including secured off-balance sheet lines of credit, total available liquidity was $10.0 billion as of March 31, 2018, representing 39% of total assets and 50% of total deposits.

Gross loans and leases were $19.3 billion as of March 31, 2018, an increase of $234.4 million, or 5% annualized, from $19.1 billion as of December 31, 2017.  This increase reflects balanced growth within the commercial term, leasing, multifamily, and residential mortgage loan portfolios.  These were 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 $20.1 billion as of March 31, 2018, an increase of $158.6 million, or 3% annualized, from $19.9 billion as of December 31, 2017.  This increase was primarily driven by growth in non-interest bearing demand and time deposits, partially offset by lower money market balances attributable to planned public funds run-off.

Net Interest Income
Net interest income was $223.2 million for the first quarter of 2018, up $2.6 million from the prior quarter.  This increase reflects an 8 basis point increase in net interest margin, along with the growth in average loans and leases and a lower level of premium amortization on investment securities.  Accretion of the credit discount recorded on acquired loans from Sterling Financial Corporation (“Sterling”) increased by $0.2 million from the prior quarter level.

The Company’s net interest margin was 3.96% for the first quarter of 2018, up 8 basis points from 3.88% for the fourth quarter of 2017.  Relative to the prior quarter, this increase reflects higher average yields on loans and leases, a lower level of premium amortization on investment securities, and a lower percentage mix of interest-bearing cash, partially offset by a higher cost of funds.

Credit Quality
The allowance for loan and lease losses was $141.9 million, or 0.73% of loans and leases, as of March 31, 2018.  During the first quarter of 2018, the Company recorded $4.3 million of accretion related to the credit discount on acquired loans from Sterling, compared to $4.1 million in the prior quarter.  As of March 31, 2018, the Sterling purchased non-credit impaired loans had approximately $23.9 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 $22.9 million of remaining total discount.

The provision for loan and lease losses was $13.7 million for the first quarter of 2018, a $0.7 million increase from the prior quarter level, driven primarily by the loan and lease growth.  Net charge-offs increased by one basis point to 0.26% of average loans and leases (annualized) for the first quarter of 2018.  As of March 31, 2018, non-performing assets were 0.33% of total assets, a decrease from 0.37% as of December 31, 2017, but an increase from 0.24% as of March 31, 2017.

Non-interest Income
Non-interest income was $78.6 million for the first quarter of 2018, up $8.1 million from the prior quarter, which reflects the change in accounting principle for the junior subordinated debentures carried at fair value this quarter (see notable items above).

The current quarter's non-interest income included gains of $5.1 million and $1.1 million related to fair value changes of the MSR asset and the debt capital market swap derivatives, respectively, driven by the increase in long-term interest rates during the quarter.  These compare to fair value gains of $2.0 million and $0.2 million for the MSR asset and debt capital market swap derivatives, respectively, during the fourth quarter of 2017. 

Net revenue from the origination and sale of residential mortgages was $22.8 million for the first quarter of 2018, down $7.0 million from the prior quarter, reflecting both the seasonal decline in mortgage originations and home lending gain on sale margin.  For-sale mortgage origination volume decreased by 19% from the prior quarter, while the home lending gain on sale margin decreased by 19 basis points to 3.32% for the first quarter of 2018.  Of the current quarter’s mortgage production, 68% related to purchase activity, compared to 67% for both the prior quarter and the same period in the prior year.

Gain on loan sales decreased by $2.5 million from the prior quarter, reflecting a lower level of portfolio loan sales compared to the prior quarter. 

Other income increased by $4.6 million from the prior quarter, driven primarily by higher debt capital market swap fee revenue and higher gains related to the fair value change of the debt capital market swap derivatives.

Non-interest Expense
Non-interest expense was $186.1 million for the first quarter of 2018, down $6.7 million from the prior quarter level.  This decrease was driven primarily by lower salaries and benefits expenses, partially offset by higher FDIC assessments.  In addition, fourth quarter 2017 expenses included $3.2 million related to employee profit sharing and $2.0 million for charitable donations, driven by the impact of the Tax Act.

Provision for Income Taxes
Provision for income taxes was $24.4 million for the first quarter of 2018, up $20.9 million compared to $3.5 million in the prior quarter.  This increase was primarily attributable to the inclusion of a $26.9 million net benefit to the provision for income taxes in the fourth quarter of 2017, related to the revaluation of the net deferred tax liability and amortization of tax credit investments associated with the passage of the Tax Act, partially offset by the non-deductibility of certain executive compensation.  The first quarter of 2018 provision for income taxes, relative to other prior periods, benefited from a lower corporate tax rate as a result of the Tax Act.   

Capital
As of March 31, 2018, the Company’s tangible book value per common share¹ was $9.97, compared to $9.98 in the prior quarter.  During the first quarter of 2018, the Company increased its quarterly cash dividend by 11.1% to $0.20 per common share.

The Company’s estimated total risk-based capital ratio was 14.0% and its estimated Tier 1 common to risk weighted assets ratio was 11.0% as of March 31, 2018.  The Company remains above current “well-capitalized” regulatory minimums.  The regulatory capital ratios as of March 31, 2018 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 first quarter 2018 earnings conference call on Thursday, April 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 first quarter 2018 financial results.  There will be a live question-and-answer session following the presentation.  To join the call, please dial (800) 839-7875 ten minutes prior to the start time and enter conference ID: 8312792.  A re-broadcast will be available approximately two hours after the call by dialing (888) 203-1112 and entering conference ID 8312792.  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 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⁾ 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 $6.3 million, $12.4 million, $12.3 million, $16.3 million, and $5.3 million at March 31,2018, December 31, 2017, September 30, 2017, June 30, 2017, and March 31, 2017, respectively.

⁽¹⁾ Tax exempt interest has been adjusted to a taxable equivalent basis using a 21% tax rate for 2018 and a 35% tax rate for 2017.

⁽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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