News Column

Umpqua Holdings Releases Full Year and 4Q 2013 Results

January 31, 2014

Umpqua Holdings Corp. , parent company of Umpqua Bank and Umpqua Investments Inc. , announced full year 2013 net earnings available to common shareholders of $97.6 million , or $0.87 per diluted common share, compared to net earnings available to common shareholders of $101.2 million , or $0.90 per diluted common share, for 2012. In a release dated Jan. 22 , the Company said for the fourth quarter 2013, the Company is reporting net earnings available to common shareholders of $25.1 million , or $0.22 per diluted common share, compared to net earnings available to common shareholders of $23.3 million , or $0.21 per diluted common share, for the third quarter of 2013, and $27.8 million , or $0.25 per diluted common share, for the same period in the prior year. Operating earnings, defined 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, were $105.7 million , or $0.94 per diluted common share, for 2013, compared to operating earnings of $103.9 million , or $0.93 per diluted common share, for 2012. For the fourth quarter of 2013, the Company is reporting operating earnings of $27.9 million , or $0.25 per diluted common share, compared to operating earnings of $26.5 million , or $0.24 per diluted common share, for the third quarter of 2013, and $29.3 million , or $0.26 per diluted common share, for the same period in the prior year. Significant financial statement items for the fourth quarter of 2013 include: -Non-covered loans and leases grew $125 million and non-covered loan commitments increased $164 million during the quarter; - Financial Pacific Leasing contributed $5.2 million to operating earnings for the quarter; -Net interest margin of 4.29 percent, representing a 7 basis points increase over the prior quarter; -Adjusted net interest margin of 4.12 percent, a decrease of 4 basis points from the prior quarter, based in part to higher average interest bearing cash balances; -Mortgage banking revenue of $16.0 million on closed loan volume of $360 million ; -Non-covered, non-performing assets declined 5 basis points down to 0.49 percent of total assets; -Provision for non-covered loan and lease losses of $3.8 million and non-covered net charge-offs of $3.2 million , the difference resulting from growth in non-covered loans during the period; -Cost of interest bearing deposits of 0.25 percent and cost of total interest bearing liabilities of 0.46 percent; -Tangible common equity ratio of 8.75 percent; -Total risk-based capital of 14.61 percent, and Tier 1 common to risk weighted asset ratio of 10.95 percent; and, -Declared a dividend of $0.15 per common share in the fourth quarter, representing a 68 percent payout ratio for the quarter. Highlights for the full year of 2013 include: -Organic non-covered loans and leases growth of $422 million , or 6 percent, and total organic non-covered loan commitments increased $528 million ; -Commercial Banking loan production of $1.46 billion ; -Provision for non-covered loan losses declined 23 percent year over year to $16.8 million ; -Net non-covered charge-offs declined 42 percent year over year to $16.9 million ; -Non-covered, non-performing assets declined 35 percent, to 0.49 percent of total assets; -Mortgage banking revenue of $78.9 million on closed loan volume of $1.9 billion ; -Adjusted net interest margin of 3.89 percent, representing a 3 basis point increase over the prior year; and, -Completed the acquisition of Financial Pacific Leasing and announced a merger agreement with Sterling Financial Corp. "2013 was a strong year for Umpqua, as demonstrated by the company's total shareholder return, which exceeded 65 percent. In addition to generating 10 percent loan and lease growth, the company completed the strategic purchase of Financial Pacific Leasing to diversify revenues and offset the reduction in home lending volumes, and in September, announced a transformational merger with Sterling Financial Corp. ," said Ray Davis , president and CEO of Umpqua Holdings Corp. "Together, these actions have created significant momentum for the company, accelerating Umpqua's ability to continue building the largest community bank in the western United States ." Total consolidated assets as of Dec. 31, 2013 were $11.6 billion , compared to $11.6 billion on Sept. 30, 2013 and $11.8 billion a year ago. Total gross loans and leases (covered and non-covered), and deposits, were $7.7 billion and $9.1 billion , respectively, as of Dec. 31, 2013 , as compared to $7.6 billion and $9.1 billion , respectively, as of Sept. 30, 2013 , and $7.2 billion and $9.4 billion , respectively, as of Dec. 31, 2012 . Total non-covered loans and leases held for investment increased $125.5 million during the fourth quarter of 2013. The growth in the current quarter was spread relatively evenly across several segments of our portfolio, including residential mortgage, commercial lines of credit, owner occupied commercial real estate, lease financing and multifamily loan products. Covered loans declined $33.1 million during the fourth quarter of 2013. The covered loan portfolio will continue to decline over time as loan payments are received, covered loans are refinanced or modified out of loss sharing, and as we work out and resolve troubled credits. Total deposits increased $50.4 million on a sequential quarter basis, primarily in interest bearing demand and money market accounts partially offset by the continued decline in certificate of deposit balances. The continued increase in securities sold under agreements to repurchase results from the FDIC discontinuing banking institutions' ability to collateralize uninsured non-public funds deposits, while various customers still require or prefer some form of collateralization based on their business requirements. Due to the significant amount of liquidity in the banking system and generally unattractive bond market conditions since the second half of 2009, the Company has been holding larger levels of interest bearing cash rather than investing all excess liquidity into the bond market. At Dec. 31, 2013 , the Company had $611 million of interest bearing cash earning 0.25 percent, the target Federal Funds Rate. The Company's available for sale investment portfolio was $1.8 billion as of Dec. 31, 2013 , representing a 6 percent decrease from the prior quarter and a 32 percent decline from the same period of the prior year. During 2013 the Company has not reinvested investment cash flows back into the portfolio given the unattractive market prices and yields. The proceeds from the reduction in the investment portfolio have been utilized to fund non-covered loan growth in the quarter. The Company plans to hold an increased interest bearing cash position relative to historical levels until the investment alternatives in the market improve from both a return and duration standpoint and to fund anticipated future non-covered loan production and acquisition activities. Including secured off-balance sheet lines of credit, total available liquidity to the Company was $4.1 billion as of Dec. 31, 2013 , representing 35 percent of total assets and 44 percent of total deposits. Net interest margin The Company reported a net interest margin of 4.29 percent for the fourth quarter of 2013, as compared to 4.22 percent for the third quarter of 2013, and 3.95 percent for the fourth quarter of 2012. The increase in net interest margin in the current quarter over the prior quarter primarily resulted from the increase in average non-covered loans outstanding, an increase in loan disposal gains from the covered loan portfolio, an increase in investment yields, and the decrease in the cost of interest bearing deposits, partially offset by the decline of non-covered loan yields, the decrease in average covered loan balances, and the increase in average interest bearing cash. The increase in net interest margin in the current quarter over the same period of the prior year primarily resulted from the increase of non-covered loan yields, the increase in average non-covered loans outstanding, the increase in investment yields, the decrease in the cost of interest bearing deposits, and the decline in average interest bearing liabilities, partially offset by the decrease in loan disposal gains from the covered loan portfolio, the decrease in average covered loan balances, and the increase in average interest bearing cash. Loan disposal activities within the covered loan portfolio, either through loans being paid off in full or transferred to OREO, result in gains within covered loan interest income to the extent assets received in satisfaction of debt (such as cash or the net realizable value of OREO received) exceed the allocated carrying value of the loan disposed of from the pool. Loan disposal activities contributed $3.9 million of interest income in the fourth quarter of 2013, as compared to $1.8 million in the third quarter of 2013 and $6.3 million in the fourth quarter of 2012. While dispositions of covered loans positively impact interest income and net interest margin, we recognize a corresponding decrease to the change in the FDIC indemnification asset within non-interest income that partially offsets the impact to net income. Interest and fee recoveries related to non-accrual loans during the fourth quarter of 2013 totaled $400 thousand , reflecting the continued improvement of the non-covered loan portfolio, as compared to reversals of $203 thousand for the third quarter of 2013 and reversals of $361 thousand in the fourth quarter of 2012. Excluding the impact of loan disposal gains and interest and fee reversals on non-accrual loans, our adjusted net interest margin was 4.12 percent for the fourth quarter of 2013, 4.16 percent for the third quarter of 2013 and 3.72 percent for the fourth quarter of 2012. The sequential quarter decline in adjusted net interest margin is primarily attributable to the higher average interest bearing cash balance and the declining yield of the non-covered loan and lease portfolio. The cost of interest bearing deposits was 0.25 percent for the fourth quarter of 2013, 4 basis points lower than the third quarter of 2013, and 12 basis points lower than the fourth quarter of 2012. The decline in the cost of interest bearing deposits in the quarter is primarily driven by the downward repricing or run-off of maturing time deposits. Management closely and continually monitors market deposit rates and develops our pricing strategy to ensure we are competitive in the market and in-line with our liquidity position and funding needs. Mortgage banking revenue The Company generated $16.0 million in total mortgage banking revenue during the fourth quarter of 2013, on closed loan volume of $360 million . This represents a 22 percent decrease in production volume compared to the third quarter of 2013 and a 47 percent decrease in production compared to the same period of the prior year. The fourth quarter's sequential quarter decrease in production is primarily related to lower refinancing activity attributable to the increase in mortgage rates not fully offset by higher purchase activity driven by the continued improvement of the housing sector. In the fourth quarter of 2013, the Company recognized an increase in the fair value of the mortgage servicing right assets in the income statement of $3.1 million . Of the current quarter's production 70 percent related to purchase activity, as compared to 66 percent in the third quarter of 2013 and 26 percent in the fourth quarter of 2012. Income from the origination and sale of mortgage loans was $9.9 million in the fourth quarter of 2013, representing a 22 percent decrease from the prior quarter, and a 69 percent decrease compared to the same quarter of the prior year. Servicing revenue was $2.9 million in the fourth quarter of 2013, representing a 7 percent increase from the prior quarter, and a 45 percent increase compared to the same quarter of the prior year, due to the growth in the total serviced portfolio principal balance. As of Dec. 31, 2013 , the Company serviced $4.4 billion of mortgage loans for others, and the related mortgage servicing right asset is valued at $47.8 million , or 1.09 percent of the total serviced portfolio principal balance. The Company recognized a $0.6 million loss from the change in fair value of junior subordinated debentures during the fourth quarter of 2013. The majority of the fair value difference under par value relates to the $61.8 million of junior subordinated debentures issued in the fourth quarter of 2007, which carry interest rate spreads of 135 and 275 basis points over the 3 month LIBOR . As of Dec. 31, 2013 , the credit risk adjusted interest spread for potential new issuances was estimated to be significantly higher than the contractual spread. The difference between these spreads has created a cumulative gain in fair value of the Company's junior subordinated debentures, which results from their carrying amount compared to the estimated amount that would be paid to transfer the liability in an orderly transaction among market participants. As these instruments are no longer being originated or actively traded in the primary or secondary markets, the quarterly fair value adjustments are difficult to estimate. We utilize an income approach valuation technique to determine the fair value of these liabilities using our estimation of market discount rate assumptions. The Company monitors activity in the trust preferred and related markets, to the extent available, changes related to the current and anticipated future interest rate environment, and considers our entity-specific creditworthiness, to validate the reasonableness of the credit risk adjusted spread and effective yield utilized in our discounted cash flow model. Absent changes to the significant inputs utilized in the discounted cash flow model used to measure the fair value of these instruments at each reporting period, the cumulative discount for each junior subordinated debenture will reverse over time, ultimately returning the carrying values of these instruments to their notional values at their expected redemption dates. On July 2, 2013 , the 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 the final rule, consistent with Section 171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, bank holding companies with less than $15 billion assets as of Dec. 31, 2009 will be grandfathered and may continue to include these instruments in Tier 1 capital, subject to certain restrictions. However, if an institution grows above $15 billion as a result of an acquisition (as would result from the proposed merger with Sterling Financial Corp. ), or organically grows above $15 billion and then makes an acquisition, the combined trust preferred issuances would be phased out of Tier 1 and into Tier 2 capital (75 percent in 2015 and 100 percent in 2016). If the Company exceeds $15 billion in consolidated assets other than in an organic manner and these instruments no longer qualify as Tier 1 capital, it is possible the Company may accelerate redemption of the existing junior subordinated debentures. This could result in adjustments to the fair value of these instruments including the acceleration of losses on junior subordinated debentures carried at fair value within non-interest income. Umpqua currently does not intend to redeem outstanding trust preferred securities following the proposed merger in order to support regulatory total capital levels. As of Dec. 31, 2013 , the total par value of junior subordinated debentures carried at fair value was $134.0 million , and the fair value was $87.3 million . Other non-interest income Total other non-interest income for the fourth quarter of 2013 was $5.2 million , compared to $5.9 million for the third quarter of 2013 and $7.7 million for the fourth quarter of 2012. The largest recurring component of other income is Debt Capital Markets revenue, which was $1.2 million for the fourth quarter of 2013, compared to $1.9 million in the prior quarter and $2.9 million for the same quarter of the prior year. FinPac contributed $0.9 million of other non-interest income for the fourth quarter of 2013 and $0.8 million for the third quarter of 2013. Non-interest expense Total non-interest expense for the fourth quarter of 2013 was $95.4 million , compared to $95.6 million for the third quarter of 2013 and $98.0 million for the fourth quarter of 2012. Merger activities related to the proposed merger with Sterling Financial Corp. announced in the third quarter of 2013, the acquisition of FinPac in the third quarter of 2013 and the acquisition of Circle Bancorp in the fourth quarter of 2012, resulted in $1.6 million of merger expense in the fourth quarter of 2013, as compared to $4.9 million in the third quarter of 2013, and $2.0 million recognized in the same period of the prior year. Marketing expense was $2.3 million for the fourth quarter of 2013, representing a $0.7 million increase over the prior quarter, and a $1.1 million increase over the same period of the prior year. Losses on non-covered OREO were $1.4 million in the fourth quarter of 2013, compared to none in the third quarter of 2013 and $3.0 million in the fourth quarter of 2013. Mortgage production related expense was $8.0 million in the fourth quarter of 2013, compared to $9.7 million in the third quarter of 2013, and $11.2 million for the fourth quarter of 2012. Additionally, the operations of FinPac contributed additional non- interest operating expense of $3.6 million in the fourth quarter of 2013 and $3.5 million in the third quarter of 2013. Income taxes The Company recorded a provision for income taxes of $13.8 million in the fourth quarter of 2013, representing an effective tax rate of 35.2 percent for the quarter, and 34.9 percent for the year. Capital As of Dec. 31, 2013 , total shareholders' equity was $1.73 billion , comprised entirely of common equity. Book value per common share was $15.43 , tangible book value per common share was $8.49 and the ratio of tangible common equity to tangible assets was 8.75 percent. The Company made no open market purchases of common stock under the Company's previously announced share repurchase plan during the fourth quarter of 2013. The Company may repurchase up to 12.0 million of additional shares under this plan. The Company's estimated total risk-based capital ratio as of Dec. 31, 2013 is 14.61 percent. This represents a decrease from the 14.74 percent at Sept. 30, 2013 , as a result of increased risk weighted assets primarily due to organic non-covered loan growth. Our total risk-based capital level is substantially in excess of the regulatory definition of "well-capitalized" of 10.00 percent. The Company's estimated Tier 1 common to risk weighted assets ratio is 10.95 percent as of Dec. 31, 2013 . These capital ratios as of Dec. 31, 2013 are estimates pending completion and filing of the Company's regulatory reports. Asset quality - Non-covered loan portfolio Non-covered, non-performing assets were $57.2 million , or 0.49 percent of total assets, as of Dec. 31, 2013 , compared to $63.0 million , or 0.54 percent of total assets as of Sept. 30, 2013 , and $88.1 million , or 0.75 percent of total assets as of Dec. 31, 2012 . Of this amount, as of Dec. 31, 2013 , $31.9 million represented non- accrual loans, $3.4 million represented loans past due greater than 90 days and still accruing interest, and $21.8 million was other real estate owned. FinPac contributed $3.3 million of non- performing assets to our Dec. 31, 2013 totals and $2.6 million of non-performing assets to our Sept. 30, 2013 totals, adding 3 and 2 basis points, respectively, to our non-covered, non-performing assets as a percentage of total assets ratio for each period. Non-covered, classified assets are approximately $306.9 million as of Dec. 31, 2013 , representing a 4 percent decline from the prior quarter and a 15 percent decline since the same period of the prior year. Classified assets include non-performing assets, as well as performing assets rated substandard or worse. The Company has aggressively charged-down impaired assets. As of Dec. 31, 2013 , the non-covered, non-performing assets of $57.2 million have been written down by 29 percent, or $22.9 million , from their current par balance of $80.1 million . The provision for non-covered loan losses for the fourth quarter of 2013 was $3.8 million , as compared to $3.0 million from the prior quarter, and $4.9 million from the same period of the prior year. The allowance for non-covered credit losses, which includes the allowance for non-covered loan and lease losses and the allowance for non-covered unfunded loan commitments, decreased to 1.18 percent of non-covered loans and leases at Dec. 31, 2013 , as compared to 1.19 percent of total non-covered loans and leases as of Sept. 30, 2013 and 1.30 percent of total non-covered loans and leases as of Dec. 31, 2012 . The decline in the allowance for credit loss ratio in the current period reflects the continued reduction of non- performing and classified loans in the current period, associated with the improving economic conditions and increasing real estate values. The annualized net charge-off rate for the fourth quarter of 2013 was 0.18 percent, as compared to 0.23 percent in the prior quarter and 0.26 percent in the same period of the prior year. Non-covered loans past due 30 to 89 days were $15.3 million , or 0.21 percent of non-covered loans and leases as of Dec. 31, 2013 , as compared to $22.1 million , or 0.31 percent of non-covered loans and leases as of Sept. 30, 2013 , and $23.8 million , or 0.36 percent of non-covered loans and leases as of Dec. 31, 2012 . Non-covered restructured loans on accrual status were $68.8 million as of Dec. 31, 2013 , as compared to $69.5 million as of Sept. 30, 2013 , and $70.6 million as of Dec. 31, 2012 . Non-covered commercial real estate loan portfolio The total non-covered term commercial real estate loan portfolio, excluding multifamily loans, was $3.59 billion as of Dec. 31, 2013 . Of this total, $2.33 billion are non-owner occupied and $1.26 billion are owner occupied. Of the total term commercial real estate portfolio, $15.4 million were on non-accrual status, $0.6 million were past due 90 days or more and accruing interest, and $5.6 million were past due 30-89 days as of Dec. 31, 2013 . Of the total non-covered commercial real estate portfolio, 14 percent matures in years 2014-2015, 16 percent in years 2016-2017, and 20 percent in years 2018-2019. The remaining 50 percent of the portfolio matures in or after the year 2020. Non-covered construction loan portfolio Total non-covered construction loans, including the residential development and commercial construction loan segments, was $333.6 million , or 4.5 percent of the total non-covered loan portfolio, as of Dec. 31, 2013 . Of this amount, $2.8 million were on non-accrual status and $24.5 million were classified as performing restructured loans. Asset quality - Covered loan portfolio Covered non-performing assets were $2.1 million , or 0.02 percent of total assets, as of Dec. 31, 2013 , as compared to $3.0 million , or 0.03 percent of total assets, as of Sept. 30, 2013 , and $10.4 million , or 0.09 percent of total assets, as of Dec. 31, 2012 . The total covered non-performing assets balance for all periods presented represents covered OREO. Reported merger with Sterling Financial Corp. On Sept. 11, 2013 , Umpqua announced plans to merge with Sterling Financial Corp. , a bank holding company headquartered in Spokane, Washington with $10 billion in assets. The transaction will have a total deal value of approximately $2.0 billion (based on the closing price of Umpqua shares as of the date of announcement). The combined organization will have approximately $22 billion in assets, $15 billion in loans and $16 billion in deposits. Upon completion of the merger, the company will operate under the Umpqua Bank name and brand. Integration planning commenced shortly after the Sept. 11, 2013 announcement, and completion of the merger is expected to occur during the second quarter of 2014, subject to approval by each company's shareholders, regulatory approvals and other customary closing conditions. Umpqua Holdings Corp. is the parent company of Umpqua Bank , a community bank. In connection with the proposed merger, Umpqua Holdings Corp. has filed with the Securities and Exchange Commission a registration statement on Form S-4 and amendments thereto containing a joint proxy statement/prospectus of Sterling Financial Corp. and Umpqua, and Sterling and Umpqua will each file other documents with respect to the proposed merger. A definitive joint proxy statement/ prospectus will be mailed to shareholders of Sterling and Umpqua. Investors and security holders of Sterling and Umpqua are urged to read the joint proxy statement/prospectus and other documents that have been and will be filed with the SEC carefully and in their entirety when they become available because they will contain information. Investors and security holders will be able to obtain free copies of the registration statement and the joint proxy statement/prospectus (when available) and other documents filed with the SEC by Umpqua or Sterling through the website maintained by the SEC at sec.gov . Copies of the documents filed with the SEC by Umpqua will be available free of charge on Umpqua's internet website at umpquaholdingscorp.com or by contacting Umpqua's Investor Relations Department at (503)268-6675. Copies of the documents filed with the SEC by Sterling will be available free of charge on Sterling's internet website at sterlingfinancialcorporation.com or by contacting Sterling's Investor Relations Department at (509) 358- 8097. Umpqua, Sterling, their directors and executive officers and other members of management and employees may be considered participants in the solicitation of proxies in connection with the proposed transaction. Information about the directors and executive officers of Umpqua is set forth in its proxy statement for its 2013 annual meeting of stockholders, which was filed with the SEC on Feb. 25, 2013 , and its Current Report on Form 8-K that was filed with the SEC on April 11, 2013 . Information about the directors and executive officers of Sterling is set forth in its proxy statement for its 2013 annual meeting of stockholders, which was filed with the SEC on March 15, 2013 , and its Current Reports on Form 8-K or 8-K/A that were filed with the SEC on May 10, 2013 , June 20, 2013 and Aug. 9, 2013 . Other information regarding the participants in the proxy solicitations and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the joint proxy statement/prospectus and other relevant materials to be filed with the SEC when they become available. ((Comments on this story may be sent to newsdesk@closeupmedia.com ))


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