Umpqua Reports Third Quarter 2018 Results

Net earnings of $91.0 million, or $0.41 per common share
Strong quarterly deposit growth of $398.8 million, offset by $250.6 million of intentional run-off from brokered deposits, for net deposit growth of $148.2 million
Operational excellence initiatives helping drive lower expenses, 3Q efficiency ratio improved to 57.06%

PORTLAND, Ore., Oct. 17, 2018 (GLOBE NEWSWIRE) -- Umpqua Holdings Corporation (NASDAQ: UMPQ) (the “Company”) reported net earnings available to common shareholders of $91.0 million for the third quarter of 2018, compared to $66.0 million for the second quarter of 2018 and $63.8 million for the third quarter of 2017.  Earnings per diluted common share were $0.41 for the third quarter of 2018, compared to $0.30 for the second quarter of 2018 and $0.29 for the third quarter of 2017.

“Our financial performance improved significantly during the third quarter, driven by stronger net interest income and lower core expenses,” said Cort O'Haver, president and CEO of Umpqua Holdings Corporation.  “The benefits from our operational excellence initiatives are starting to take hold, with an 8% reduction in non-interest expense and a 57% quarterly efficiency ratio.  Net interest income was also stronger, benefiting from a very strong core deposit quarter, along with continued growth in the loan and lease portfolio.  As we continue to build on the foundation of Umpqua Next Gen, our focus remains on completing the operational excellence initiatives and continuing to advance our human digital strategy, which will drive enhanced profitability and long-term shareholder value.”

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

• $3.5 million in restructuring charges related to operational excellence initiatives, all in professional fees.  This compares to $8.2 million in the prior quarter, including $4.1 million in severance-related expense and $4.1 million in professional fees.
• $7.0 million increase in interest income on taxable investment securities related to a further refinement of accounting methodology on the interest method for residential mortgage-backed securities and collateralized mortgage obligations.  In the second quarter of 2018, the Company took an out of period adjustment related to an initial change in accounting methodology, resulting in a decrease in interest income on taxable investment securities of $7.2 million.  Excluding the impacts from these adjustments, interest income on taxable investment securities would have increased by $1.7 million over the prior quarter level.
• $0.2 million positive adjustment related to the fair value change of the MSR asset, compared to a $5.4 million negative adjustment in the prior quarter and a $9.2 million negative adjustment 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 gain of $0.3 million in the prior quarter and a loss of $0.2 million in the same period of the prior year.
• $1.0 million of exit or disposal costs, compared to $2.6 million in the prior quarter and $1.6 million in the same period of the prior year.
• $0.5 million unrealized holding loss on equity securities, compared to a loss of $1.4 million in the prior quarter and no gain or loss recorded in the same period of the prior year.

Third Quarter 2018 Highlights (compared to prior quarter):

• Net interest income increased by $16.5 million.  Excluding the impact of the changes in accounting methodology to the interest method for residential mortgage-backed securities and collateralized mortgage obligations (see notable items above), net interest income increased by $2.3 million.  This increase was primarily attributable to a higher average balance of loans and leases;
• Provision for loan and lease losses decreased by $1.6 million, driven primarily by improvement in the loan and lease portfolio, while net charge-offs increased by three basis points to 0.25% of average loans and leases (annualized);
• Non-interest income increased by $0.7 million, reflecting higher gains on portfolio loan sales and a lower unrealized holding loss on equity securities, partially offset by lower residential mortgage banking revenue;
• Non-interest expense decreased by $16.3 million, driven primarily by lower restructuring charges (see notable items above), lower mortgage banking-related expense, lower salaries and benefits related to operational excellence initiatives and lower exit or disposal costs;
• Non-performing assets to total assets was 0.37%;
• Estimated total risk-based capital ratio of 13.7% and estimated Tier 1 common to risk weighted assets ratio of 10.8%; and
• Increased the quarterly cash dividend by 5% to $0.21 per common share.

Balance Sheet
Total consolidated assets were $26.6 billion as of September 30, 2018, compared to $26.5 billion as of June 30, 2018 and $25.6 billion as of September 30, 2017.  Including secured off-balance sheet lines of credit, total available liquidity was $10.8 billion as of September 30, 2018, representing 40% of total assets and 51% of total deposits.

Gross loans and leases were $19.9 billion as of September 30, 2018, an increase of $214.5 million from $19.6 billion as of June 30, 2018.  This increase reflects balanced growth within the commercial term, construction & development, multifamily, and residential mortgage loan portfolios.  This growth was partially offset by a decline in consumer loans attributable to the Company's decision to wind down its indirect auto loan business, along with $41.7 million of portfolio residential mortgage loans sold.

Total deposits were $20.9 billion as of September 30, 2018, an increase of $148.2 million from $20.7 billion as of June 30, 2018.  This increase was attributable to higher balances of non-interest bearing demand, savings and money market deposits, partially offset by lower time deposits related primarily to the intentional run-off of wholesale brokered deposits.

Net Interest Income
Net interest income was $241.4 million for the third quarter of 2018, up $16.5 million from the prior quarter.  Excluding the impact of the changes in accounting methodology to the interest method for residential mortgage-backed securities and collateralized mortgage obligations (see notable items above), net interest income would have increased by $2.3 million, which was attributable to higher average balances of loans and leases and interest bearing cash.

The Company’s net interest margin was 4.09% for the third quarter of 2018, up 20 basis points from 3.89% for the second quarter of 2018.  Excluding the impact of the changes in accounting methodology to the interest method for residential mortgage-backed securities and collateralized mortgage obligations (see notable items above), net interest margin would have decreased by 5 basis points on a linked quarter basis.  This decrease was primarily attributable to lower accretion related to acquired loans, which decreased to $4.9 million for the third quarter of 2018, compared to $7.9 million in the prior quarter.  Excluding the impacts from the accounting change and the lower level of accretion, net interest margin increased by one basis point from the prior quarter level.

Credit Quality
The allowance for loan and lease losses was $144.0 million, or 0.73% of loans and leases, as of September 30, 2018, compared to $144.6 million, or 0.74% of loans and leases, as of June 30, 2018.  The provision for loan and lease losses was $11.7 million for the third quarter of 2018, a decrease of $1.6 million from the prior quarter level, driven primarily by an improvement in the loan and lease portfolio.  Net charge-offs increased by three basis points to 0.25% of average loans and leases (annualized).  As of September 30, 2018, non-performing assets were 0.37% of total assets, compared to 0.34% as of June 30, 2018 and 0.30% as of September 30, 2017.

Non-interest Income
Non-interest income was $72.4 million for the third quarter of 2018, up $0.7 million from the prior quarter, reflecting a higher fair value of the MSR asset (see notable items above), higher gains on portfolio loan sales and a lower unrealized holding loss on equity securities, partially offset by lower net revenue from the origination and sale of residential mortgages.

Net revenue from the origination and sale of residential mortgages was $21.0 million for the third quarter of 2018, down $7.2 million from the prior quarter.  This decrease reflects a 10% linked quarter decrease in for-sale mortgage origination volume, and a 58 basis point decrease in the home lending gain on sale margin to 2.77% for the third quarter of 2018.  The decrease in the home lending gain on sale margin was primarily related to a decline in the mortgage rate lock pipeline.  Of the current quarter’s mortgage production, 82% related to purchase activity, compared to 81% for the prior quarter and 74% for the same period of the prior year.

Non-interest Expense
Non-interest expense was $179.3 million for the third quarter of 2018, down $16.3 million from the prior quarter level.  This decrease was driven primarily by lower salaries and benefits expense, resulting from the Company's organizational simplification and design phase of the operational excellence initiatives, along with a $4.7 million decline in restructuring charges, and a $1.8 million decrease in mortgage banking-related expense, consistent with the decrease in mortgage originations.  Exit or disposal costs decreased by $1.6 million from the prior quarter level.

Capital
As of September 30, 2018, the Company’s tangible book value per common share¹ was $9.95, compared to $9.84 in the prior quarter and $9.66 in the same period of the prior year.  During the third quarter of 2018, the Company increased its quarterly cash dividend by 5% to $0.21 per common 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.

The Company’s estimated total risk-based capital ratio was 13.7% and its estimated Tier 1 common to risk weighted assets ratio was 10.8% as of September 30, 2018.  The Company remains above current “well-capitalized” regulatory minimums. The regulatory capital ratios as of September 30, 2018 are estimates, pending completion and filing of the Company’s regulatory reports.

Presentation of Prior Period Financials
Certain prior period amounts in the financial statements presented in this earnings release have been re-stated from prior earnings releases, due to prior period adjustments as disclosed in the notes to the financial statements for the June 30, 2018 Form 10-Q.  Additional explanation will be included in Note 1 to the financial statements for the quarter ended September 30, 2018 as part of the Form 10-Q.

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 enterprise software and innovation company headquartered in Silicon Valley.  Umpqua Holdings Corporation is headquartered in Portland, Oregon. For more information, visit umpquabank.com.

Earnings Conference Call Information
The Company will host its third quarter 2018 earnings conference call on Thursday, October 18, 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 third quarter 2018 financial results.  There will be a live question-and-answer session following the presentation.  To join the call, please dial (888) 220-8474 ten minutes prior to the start time and enter conference ID: 3108656.  A re-broadcast will be available approximately two hours after the call by dialing (888) 203-1112 and entering conference ID 3108656.  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 related profitability and cost savings.  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 and operational excellence initiatives on time and in amounts projected; 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 $8.0 million, $9.2 million, $6.3 million, $12.4 million, and $12.3 million at September 30, 2018, June 30, 2018, March 31, 2018,  December 31, 2017, and September 30, 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⁾ 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).

(1) Non-accrual loans and leases are included in the average balance.   
(2) Tax-exempt income has been adjusted to a tax equivalent basis at a 21% tax rate for 2018 and a 35% tax rate for 2017. The amount of such adjustment was an addition to recorded income of approximately $471,000 for the three months ended September 30, 2018 as compared to $482,000 for June 30, 2018 and $1.1 million for September 30, 2017.