Oct. 15, 2009 (Business Wire) -- Umpqua Holdings Corporation (NASDAQ: UMPQ), parent company of Umpqua Bank and Umpqua Investments, Inc. today announced a third quarter 2009 net loss of $7.1 million. Including preferred stock dividends of $3.2 million, the net loss available to common shareholders was $10.4 million, or $0.14 per diluted share.

Significant financial statement items for the third quarter of 2009 include:

• Provision for loan losses of $52.1 million;
• Total net charge-offs of $47.3 million;
• The allowance for credit losses increased from 1.63% to 1.71% of total loans during the third quarter;
• Non-performing assets to total assets decreased on a sequential quarter basis from 1.73% to 1.70%;
• Non-performing loans to total loans increased on a sequential quarter basis from 1.87% to 2.13%;
• Total deposits increased $401 million, or 6%, on a sequential quarter basis;
• Net interest margin, on a tax equivalent basis, decreased 15 basis points during the quarter to 4.05%, due in part to 6 basis points from interest reversals on new non-accrual loans, and holding a larger interest bearing cash position;
• The cost of interest bearing deposits for the third quarter was 1.50%, a decrease of 10 basis points from the second quarter of 2009;
• Mortgage banking revenue was $4.3 million on closed mortgage loan volume of $159 million;
• Gain on fair value of junior subordinated debentures of $1.0 million;
• Net loss on other real estate owned was $8.6 million;
• Tangible common equity ratio of 8.88% and tangible book value per common share of $8.76, up from 6.37% and $8.47, respectively, as of June 30, 2009, based on a successful underwritten public offering of common stock in August 2009; and
• Total risk based capital of 17.52%, up from 14.27% as of June 30, 2009.

“This past quarter was highlighted by the Company's $259 million capital raise, strong deposit growth of over $400 million and continued progress in resolving credit issues,” said Ray Davis, president and CEO of Umpqua Holdings Corporation. “As we wind down our exposure to residential development loans, management will remain as focused and aggressive on resolving troubled loans throughout other areas of our portfolio as they are identified. Until the national economy is on solid footing, we realize we will still have work to accomplish in leading Umpqua through the end of this recession. The management team here at Umpqua is confident that the company will emerge from this economy strong and ready to take advantage of future opportunities.”

Asset quality

Non-performing assets were $156.0 million, or 1.70% of total assets, as of September 30, 2009, compared to $150.0 million, or 1.73% of total assets as of June 30, 2009. Of this amount, $5.6 million represented loans past due greater than 90 days and still accruing interest, $123.7 million represented non-accrual loans, and $26.7 million was other real estate owned (OREO).

The Company has aggressively charged-down impaired assets to their disposition values, and are expected to be resolved at those levels, absent further declines in market prices. As of September 30, 2009, the non-performing assets of $156.0 million have been written down by 44%, or $121.4 million, from their original balance of $277.4 million.

The provision for loan losses for the third quarter of 2009 was $52.1 million. Total net charge-offs for the third quarter of 2009 were $47.3 million, which represented 3.07% of average loans on an annualized basis. The allowance for credit losses increased to 1.71% of total loans as of September 30, 2009, compared to 1.63% of total loans as of June 30, 2009 and 1.54% of total loans as of September 30, 2008.

Loans past due 30-89 days were $46.1 million, or 0.76% of total loans as of September 30, 2009. This amount declined 6% from June 30, 2009, and declined 36% from September 30, 2008.

Since 2007, the Company has been aggressively resolving problems arising from the current economic downturn. The following is a recap of the Company’s credit quality trends since the start of 2007:

Loan portfolio

Construction loan portfolio

Total construction loans as of September 30, 2009 decreased 6% from June 30, 2009, and decreased 24% from September 30, 2008. Within the construction loan portfolio, the residential development loan segment was $258.5 million, or 4% of the total loan portfolio. Of this amount, $50.8 million represented non-performing loans, and $207.7 million represented performing loans, which were 3% of the total loan portfolio. The residential development loan segment has decreased $197 million, or 43%, from September 30, 2008.

Approximately 36% of the remaining performing residential development portfolio was comprised of loans greater than $5 million, and 53% representing loans with balances less than $3 million.

The remaining $490 million in construction loans as of September 30, 2009 was primarily commercial construction projects. These commercial construction loans are uniquely different from the residential development loans. Total non-performing assets related to commercial construction loans were $17.4 million at September 30, 2009, with $9.4 million, or 1.9% of total commercial construction projects, past due 30-89 days as of September 30, 2009.

Commercial real estate loan portfolio

The total term commercial real estate loan portfolio was $3.4 billion as of September 30, 2009. Of this total, $2.4 billion are non-owner occupied, and $1.0 billion are owner occupied as of September 30, 2009. Of the total portfolio, $14.4 million, or 0.4%, are past due 30-89 days as of September 30, 2009, down from $25.7 million, or 0.8% as of June 30, 2009. As shown in table 7 on page 25 of this release, 7% of the total commercial real estate portfolio matures between October 2009 and December 2010, 8% of the portfolio matures in years 2011-2012, and 19% in years 2013-2014. The remaining 66% of the portfolio matures in or after the year 2015.

The portfolio was conservatively underwritten at origination to a minimum debt service coverage ratio of 1.20, and as a result in many cases the loan-to-value was substantially less than our in-house maximum of 75%. This underwriting serves to protect against the low capitalization rate environment of the past several years.

During the past 12 months, the Company has completed several rounds of stress testing on the commercial real estate portfolio, focusing on items such as capitalization rate, interest rate and vacancy factors. The results of the stress testing showed no significant issues, unlike our experience in the residential development construction portfolio. However, given the economic climate, we expect any potential issues that may arise in this portfolio will result from individual loans within distinct geographic areas and not represent a systemic weakness. We are well positioned to manage the exposure and work with our customers until the economic climate improves.

Restructured loans

Restructured loans were $182 million as of September 30, 2009. The Company will consider a loan for restructuring only if it is current on payments. The Company does not enter into restructurings on loans in non-performing status, and requires the customer to pledge additional collateral, maintain a minimum debt service coverage ratio of 1.0, and show substantial external sources of repayment prior to the Company agreeing to restructure.

Additional detail on credit quality, trends, the loan portfolio by segment and non-performing assets

Additional tables are included at the end of this earnings release covering the following aspects of the Company's loan portfolio: residential development loan trends by region, residential development loan stratification by size and by region, non-performing asset detail by type and by region, loans past due 30-89 days by type and by region, loans past due 30-89 days trends, commercial real estate loan portfolio by type and by region, commercial real estate loan portfolio by type and by year of maturity, commercial real estate loan portfolio by type and by year of origination, commercial construction loan portfolio by type and by region, and commercial loan portfolio by type and by region.

Net interest margin

The Company reported a tax equivalent net interest margin of 4.05% for the third quarter of 2009, compared to 4.20% for the second quarter of 2009, and 4.12% for the third quarter of 2008. The decrease in net interest margin resulted primarily from holding higher levels of interest bearing cash, which bear lower interest rates, during the third quarter of 2009, along with interest reversals on new non-accrual loans. Interest reversals on new non-accrual loans during the third quarter of 2009 were $1.2 million, negatively impacting the net interest margin by 6 basis points. Excluding the reversals of interest, the net interest margin would have been 4.11% during the quarter. The cost of interest bearing deposits was 10 basis points lower than the second quarter of 2009.

Mortgage banking revenue

The Company generated $4.3 million in total mortgage banking revenue during the third quarter of 2009, on closed loan volume of $159 million, compared to revenue of $6.3 million for the second quarter of 2009, on closed loan volume of $234 million, and revenue of $1.0 million for the third quarter of 2008, on closed loan volume of $85 million.

Approximately 55% of the third quarter 2009 closed loan volume was from refinance activity, with 45% from new purchase activity. Our application pipeline at September 30, 2009 was $132 million, with 45% of that total for refinances and 55% for new purchases.

Fair value of junior subordinated debentures

The Company recognized a gain from the change in fair value of junior subordinated debentures of $1.0 million during the third quarter of 2009. The Company utilizes a pricing service along with internal models to determine the valuation of this liability. The majority of the gain relates to the $61.8 million of junior subordinated debentures issued in the third quarter of 2007, which carry interest rate spreads of 135 and 275 basis points over the 3 month LIBOR. As of September 30, 2009, the credit adjusted interest spread for potential new issuances was forecasted to be significantly higher. The difference between spreads creates the 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. This fair value adjustment will reverse and be recognized as a reduction in non-interest income over the remaining period to maturity of the related instrument. As of September 30, 2009, the total par value of junior subordinated debentures carried at fair value was $134.0 million, and the fair value was $82.0 million.

Non-interest expense

Total non-interest expense for the third quarter of 2009 was $68.3 million, compared to $178.6 million for the second quarter of 2009. Included in non-interest expense are several categories which are outside of the control of the Company, including FDIC deposit insurance assessments, gain or loss on other real estate owned valuations, VISA litigation and infrequently occurring expenses such as merger costs and goodwill impairments. Excluding the non-controllable or infrequently occurring items, the remaining non-interest expense items totaled $56.4 million for the third quarter of 2009, down slightly from $56.7 million for the second quarter of 2009. This decrease related mainly to decreases in variable expense related to our mortgage operation (on decreased revenue).

Total FDIC deposit insurance assessments during the third quarter of 2009 were $3.3 million, a decrease of 50% from the second quarter of 2009, and an increase of 152% over the third quarter of 2008. The sequential quarter decrease resulted from an industry-wide special assessment in the second quarter of 2009 of $4.0 million. The increase over the prior year resulted from an overall industry-wide increase in assessments as the FDIC is replenishing the deposit insurance fund.

Balance sheet

Total consolidated assets as of September 30, 2009 were $9.2 billion, compared to $8.7 billion on June 30, 2009 and $8.3 billion a year ago. Total gross loans and leases, and deposits, were $6.1 billion and $7.2 billion, respectively, as of September 30, 2009, compared to $6.2 and $6.5 billion, respectively, as of September 30, 2008.

Total loans decreased $23 million during the third quarter of 2009. Total gross loan fundings during the third quarter of 2009 were $410 million, which were offset by payments received on previously funded loans of $385 million, and gross charge-offs of $48 million, resulting in the overall decrease of $23 million in loans during the third quarter.

Total deposits increased $401 million during the third quarter of 2009. Deposits from public entities declined $134 million during the third quarter. Excluding this, deposits from consumers and businesses increased $535 million during the third quarter. Over 4,400 new non-interest bearing demand accounts were opened in the third quarter of 2009, and approximately 10,800 new deposit accounts opened in total. Average non-interest bearing demand deposits increased $21 million over the second quarter of 2009.

At September 30, 2009, the Company had $262 million of interest bearing cash earning 0.25%, the target Federal Funds Rate. This excess balance sheet liquidity has been increased as investment security alternatives in the current market are unattractive given the historically low interest rate environment. The Company plans to hold this extra interest bearing cash position until the investment alternatives in the market improve from a return/duration standpoint. Including secured off-balance sheet lines of credit, total available liquidity to the Company was $3 billion as of September 30, 2009, representing 33% of total assets and 41% of total deposits.

Capital

As of September 30, 2009, total shareholders’ equity was $1.6 billion, comprised of $204 million in preferred stock (par value of $214.2 million issued to the U.S. Treasury on November 14, 2008 and described below), and common equity available to common shareholders of $1.4 billion. Book value per common share was $16.16, tangible book value per common share was $8.76 and the ratio of tangible common equity to tangible assets was 8.88%.

In August 2009, the Company completed an underwritten public offering of common stock raising $258.7 million by issuing 26,538,461 shares of the Company’s common stock, including 3,461,538 shares pursuant to the underwriters’ over-allotment option, at a price of $9.75 per share. The net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were approximately $245.7 million. The net proceeds from the offering qualify as tangible common equity and Tier 1 capital and will be used for general corporate purposes, which may include capital to support growth and acquisition opportunities and to position the Company for eventual redemption of preferred stock issued to the U.S. Treasury under the Capital Purchase Program.

The Company’s estimated total risk-based capital ratio as of September 30, 2009 is 17.52%, and has increased from 11.30% as of September 30, 2008. Our total risk-based capital level is well in excess of the regulatory definition of “well capitalized” of 10.00%. This capital ratio as of September 30, 2009 is an estimate pending completion and filing of the Company’s regulatory reports.

Excluding the sale of preferred stock during the fourth quarter of 2008, the Company’s total risk-based capital ratio as of September 30, 2009 would have been 14.60%, an increase from the 11.30% as of September 30, 2008.

On November 14, 2008, in exchange for an aggregate purchase price of $214.2 million, Umpqua Holdings Corporation issued and sold to the United States Department of the Treasury (U.S. Treasury) pursuant to the TARP Capital Purchase Program the following: (i) 214,181 shares of the Company's newly designated Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value per share, with a liquidation preference of $1,000 per share ($214,181,000 liquidation preference in the aggregate) and (ii) a warrant to purchase up to 2,221,795 shares of the Company's common stock, no par value per share, at an exercise price of $14.46 per share, subject to certain anti-dilution and other adjustments. The warrant may be exercised for up to ten years after it was issued.

After completion of the underwritten public offering of common stock in August 2009, the number of shares of common stock underlying the warrant issued to the U.S. Treasury were reduced by 50%, and now total 1,110,898 at the same exercise price of $14.46 per share.

There were no repurchases of common stock during the first nine months of 2009. The total remaining available common shares authorized for repurchase is approximately 1.5 million as of September 30, 2009.

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. Umpqua believes that certain non-GAAP financial measures provide investors with information useful in understanding Umpqua’s financial performance, however, readers of this report are urged to review these non-GAAP financial measures in conjunction with the GAAP results as reported.

Umpqua incurs significant expenses related to the completion and integration of mergers. Additionally, we may recognize goodwill impairment losses that have no direct effect on the Company’s or the Bank’s cash balances, liquidity, or regulatory capital ratios. Accordingly, management believes that our operating results are best measured on a comparative basis excluding the impact of merger-related expenses, net of tax, and other charges related to business combinations such as goodwill impairment charges. We define operating earnings as earnings available to common shareholders before merger related expenses, net of tax, and goodwill impairment, and we calculate operating earnings per diluted share by dividing operating income by the same diluted share total used in determining diluted earnings per common share.

The following table provides the reconciliation of net (loss) earnings available to common shareholders (GAAP) to operating (loss) earnings (non-GAAP), and net (loss) earnings per diluted common share (GAAP) to operating (loss) earnings per diluted share (non-GAAP) for the periods presented:

Management believes "tangible common equity" and the "tangible common equity ratio" are meaningful measures of capital adequacy. Tangible common equity is calculated as total shareholders' equity less preferred stock and less goodwill and other intangible assets, net (excluding MSRs). In addition, 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 use of technology, and distinctive banking solutions. Umpqua Bank has 153 locations between Napa, Calif., and Bellevue, Wash., along the Oregon and Northern California Coast and in Central Oregon. Umpqua Holdings also owns a retail brokerage subsidiary, Umpqua Investments, Inc., which has locations in Umpqua Bank stores and in dedicated offices in Oregon. Umpqua Bank's Private Bank Division provides tailored financial services and products to individual customers. Umpqua Holdings Corporation is headquartered in Portland, Ore. For more information, visit www.umpquaholdingscorp.com.

Umpqua Holdings Corporation will conduct a quarterly earnings conference call Thursday, October 15, 2009, at 10:00 a.m. PT (1:00 p.m. ET) during which the Company will discuss third quarter 2009 results and provide an update on recent activities. There will be a question-and-answer session following the presentation. Shareholders, analysts and other interested parties are invited to join the call by dialing 800-752-8363 a few minutes before 10:00 a.m. The conference ID is “33238668.” Information to be discussed in the teleconference will be available on the Company’s Website prior to the call at www.umpquaholdingscorp.com. A rebroadcast can be found approximately two hours after the conference call by dialing 800-642-1687 with the conference ID noted above, or by visiting the Company’s Website.

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 limitations on exposure in our commercial real estate loan portfolio, our ability to effectively manage that exposure and resolution of non-accrual loans. Specific risks that could cause results to differ from the forward-looking statements are set forth in our filings with the SEC and include, without limitation, unanticipated deterioration in the commercial real estate loan portfolio, and loss of, or inability to recruit, personnel to manage problem credits.

Additional detail on credit quality, trends, the loan portfolio by segment and non-performing assets

The following tables present additional detail covering the following aspects of the Company's loan portfolio:

• Table 1 - Residential development loan trends by region
• Table 2 - Residential development loan stratification by size and by region
• Table 3 - Non-performing asset detail by type and by region
• Table 4 - Loans past due 30-89 days by type and by region
• Table 5 - Loans past due 30-89 days trends
• Table 6 - Commercial real estate loan portfolio by type and by region
• Table 7 - Commercial real estate loan portfolio by type and by year of maturity
• Table 8 - Commercial real estate loan portfolio by type and by year of origination
• Table 9 - Commercial construction loan portfolio by type and by region
• Table 10 - Commercial loan portfolio by type and by region

The following is a geographic distribution of the residential development portfolio as of September 30, 2009, June 30, 2009 and September 30, 2008:

The following is a stratification by size and region of the remaining residential development loans still on accrual status (excludes non-performing loans) as of September 30, 2009: