Fourth quarter 2010 net income of $0.07 per diluted share, operating income of $0.08 per diluted share

Full year 2010 net income of $0.15 per diluted share, operating income of $0.12 per diluted share

Non-covered, non-performing assets declined to 1.53% of total assets

Fourth quarter 2010 net charge-offs of $23.7 million, lowest level since the third quarter of 2008

PORTLAND, Ore.--(BUSINESS WIRE)-- Umpqua Holdings Corporation (NASDAQ:UMPQ), parent company of Umpqua Bank and Umpqua Investments Inc., today announced fourth quarter 2010 net earnings available to common shareholders of $8.1 million, or $0.07 per diluted common share, compared to a net loss available to common shareholders of $29.9 million, or $0.34 per diluted common share, for the same period in the prior year. For the full year 2010, the Company reported net earnings available to common shareholders of $16.1 million, or $0.15 per diluted common share, compared to a net loss available to common shareholders of $166.3 million, or $2.36 per diluted common share for the prior year.

Operating income, 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, was $9.0 million, or $0.08 per diluted common share for the fourth quarter of 2010, compared to an operating loss of $27.7 million, or $0.32 per diluted common share, for the same period in the prior year. For the full year 2010, the Company reported operating income of $13.2 million, or $0.12 per diluted common share, compared to an operating loss of $58.0 million, or $0.82 per diluted common share, for the prior year. Operating income or loss is considered a “non-GAAP” financial measure. More information regarding this measurement and reconciliation to the comparable GAAP measurement is provided under the heading Non-GAAP Financial Measures below.

Significant financial statement items for the fourth quarter of 2010 include:

• Non-covered, non-performing assets ended the quarter at 1.53% of total assets, the lowest level since the second quarter of 2008;
• Provision for non-covered loan losses of $17.6 million, a 27% decrease, and total net charge-offs of $23.7 million, a 21% decrease, on a sequential quarter basis. Net charge-offs exceeded the provision for non-covered loan losses during the quarter due to improving credit quality of the loan portfolio;
• The allowance for credit losses ended the quarter at 1.82% of non-covered total loans and leases;
• Loss on other real estate owned of $4.9 million, compared to gain of $0.3 million for the third quarter of 2010;
• Non-covered loans ended the quarter at $5.66 billion, a decline of $39.3 million, or 0.7%, on a sequential quarter basis;
• Core deposits, which are total deposits less time deposits greater than $100,000, increased $187 million, or 2.7%, on a sequential quarter basis, due to continued organic growth initiatives;
• Total deposits increased $132 million, or 1%, on a sequential quarter basis;
• The cost of interest bearing deposits for the fourth quarter of 2010 was 0.97%, a decrease of 11 basis points on a sequential quarter basis;
• Tangible common equity ratio of 8.74%; and
• Total risk-based capital of 17.46%, and tier 1 common to risk weighted asset ratio of 13.1%.

“As we close out 2010 it is good to see loan quality trends continue to move in the right direction and loan production strengthen. Umpqua is emerging from this credit cycle with a much stronger balance sheet than when we entered, and anticipates improved operating results as we head into 2011,” said Ray Davis CEO of Umpqua Holdings Corporation. “We are indebted to the hard work of our credit professionals over the past few years, and the continual efforts of the entire Umpqua team in positioning us for future growth.”

FDIC-assisted acquisitions

In the first quarter of 2010, Umpqua Bank assumed the banking operations of EvergreenBank (“Evergreen”) and Rainier Pacific Bank (“Rainier”), both located in the greater Seattle-Tacoma area of Washington. In the second quarter of 2010, Umpqua Bank assumed the banking operations of Nevada Security Bank (“Nevada Security”), Reno, Nevada. The operations of Evergreen and Rainier (combined), and Nevada Security, have contributed operating earnings of $9.7 million and $2.3 million, respectively, since their assumptions.The operating systems of all three institutions have been converted onto Umpqua’s platform.

Asset quality – Non-covered loan portfolio

Non-performing assets were $178.0 million, or 1.53% of total assets, as of December 31, 2010, compared to $183.6 million, or 1.59% of total assets as of September 30, 2010, and $223.6 million, or 2.38% of total assets as of December 31, 2009. Of this amount, as of December 31, 2010, $138.2 million represented non-accrual loans, $7.1 million represented loans past due greater than 90 days and still accruing interest, and $32.8 million was other real estate owned (“OREO”).

The Company has aggressively charged-down impaired assets to their disposition values, and the assets are expected to be resolved at those levels, absent further declines in market prices. As of December 31, 2010, the non-performing assets of $178.0 million have been written down by 39%, or $111.8 million, from their original balance of $289.8 million.

The provision for loan losses for the fourth quarter of 2010 was $17.6 million, the lowest level of provision since the second quarter of 2008, due to improving credit quality of the loan portfolio. Total net charge-offs for the fourth quarter of 2010 were $23.7 million, reducing the allowance for credit losses to 1.82% of non-covered loans and leases at December 31, 2010, as compared to 1.91% of total non-covered loans as of September 30, 2010 and 1.81% of total non-covered loans as of December 31, 2009. The annualized net charge-off rate for the fourth quarter of 2010 was 1.66%.

Non-covered loans past due 30 to 89 days were $48.2 million, or 0.85% of non-covered loans and leases as of December 31, 2010, as compared to $80.2 million, or 1.41% as of September 30, 2010, and $41.5 million, or 0.69% as of December 31, 2009.

Since 2007, the Company has been aggressively resolving problems arising from the current economic downturn. The following table recaps the Company’s credit quality trends since the second quarter of 2007 as it relates to the non-covered loan portfolio:

Non-covered construction loan portfolio

Total non-covered construction loans as of December 31, 2010 were $413 million, representing a decrease of 11% since September 30, 2010, and a decrease of 33% from December 31, 2009. Within this portfolio, the residential development loan segment was $148 million, or 3% of the total non-covered loan portfolio. Of this amount, $35 million represented non-performing loans, and $113 million represented performing loans. The residential development loan segment has decreased $78 million, or 35%, since December 31, 2009.

The remaining $248 million in non-covered construction loans as of December 31, 2010 primarily represents commercial construction projects. Total non-covered, non-performing commercial construction loans were $20.1 million at December 31, 2010, and $8.9 million were past due 30 to 89 days as of December 31, 2010.

Non-covered commercial real estate loan portfolio

The total non-covered term commercial real estate loan portfolio was $3.5 billion as of December 31, 2010. Of this total, $2.3 billion are non-owner occupied and $1.2 billion are owner occupied. Of the total term commercial real estate portfolio, $22.9 million, or 0.66%, are past due 30-89 days as of December 31, 2010. Of the total non-covered commercial real estate portfolio, 9% matures in 2011-2012, 18% in years 2013-2014, and 24% in years 2015-2016. The remaining 49% of the portfolio matures in or after the year 2017.

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 two years, the Company has completed several rounds of stress testing on the commercial real estate portfolio, focusing on items such as capitalization rates, interest rates and vacancy factors. The results of the stress testing showed no significant unidentified risks, unlike our experience in the residential development construction portfolio. As we remain in a difficult economic environment, we anticipate that some borrowers will struggle, but that potential issues within the commercial real estate portfolio will result from individual loans within distinct geographic areas and not represent a systemic weakness in the portfolio. We believe we are well positioned to manage the exposure and work with our customers until the economic climate improves.

Non-covered restructured loans

Restructured loans on accrual status were $84.4 million as of December 31, 2010, up 12% from $75.6 million as of September 30, 2010, and down 37% from $134.4 million as of December 31, 2009. The increase during the fourth quarter resulted from certain commercial real estate relationships being restructured in the quarter, and the decrease from the same period in the prior year primarily resulted from payments received and reclassifications of loans previously restructured to non-accrual status. The Company does not enter into restructurings on loans in non-performing status, and generally 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 information related to asset quality

Additional tables can be found at the end of this earnings release covering the following aspects of the Company's non-covered 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 to 89 days by type and by region, loans past due 30 to 89 days trends, restructured loans on accrual status by type and by region, commercial real estate by type and region, maturity and year of origination, along with the commercial construction and commercial loan portfolio by type and by region.

Asset quality – Covered loan portfolio

Covered non-performing assets were $29.9 million, or 0.26% of total assets, as of December 31, 2010, as compared to $53.8 million, or 0.47% of total assets, as of September 30, 2010. The amount at December 31, 2010 represents OREO. The reduction in covered non-performing assets in the current quarter primarily resulted from the reclassification of the remainder of the impaired loan pools to accrual status. As cash flows and other assets have been received in excess of original estimates, the carrying value of these impaired loan pools have decreased and the total expected cash flows associated with the pool have increased, resulting in accretable yield. The majority of accretable yield available to be recognized into interest income in the future primarily relates to principal expected to be received in excess of the carrying value of these loan pools. Contractual interest income on the underlying loans is included in our estimation of pool level expected future cash flows to be received only to the extent that is expected to be serviced by the borrower.

As of acquisition date, covered non-performing assets were written-down to their estimated fair value, incorporating our estimate of future expected cash flows until the ultimate resolution of these credits. The estimated credit losses embedded in these acquired non-performing loan portfolios were based on management’s and third-party consultants’ credit reviews of the portfolios performed during the due diligence for the Evergreen, Rainier and Nevada Security transactions. To the extent actual or projected cash flows are less than originally estimated, additional provisions for loan losses on the covered loan portfolio will be recognized; however, these provisions would be mostly offset by a corresponding increase in the FDIC indemnification (loss sharing) asset recognized within non-interest income. To the extent actual or projected cash flows are more than originally estimated, the increase in cash flows is prospectively recognized in interest income; however, the increase in interest income would be offset by a corresponding decrease in the FDIC indemnification (loss sharing) asset recognized within non-interest income.

Net interest margin

The Company reported a tax equivalent net interest margin of 4.14% for the fourth quarter of 2010, compared to 4.42% for the third quarter of 2010, and 4.06% for the fourth quarter of 2009. The decrease in net interest margin on a sequential quarter basis resulted primarily from a decline in the average loan to deposit ratio to 69% in the fourth quarter, compared to 74% in the third quarter, along with increased prepayments and related premium amortization on the investment portfolio during the quarter. The increase in net interest margin over the same period prior year results from the increase in average covered loans outstanding, increased yield on the covered loan portfolio as a result of payoffs ahead of expectations and declining costs of interest bearing deposits, partially offset by interest reversals of new non-accrual loans, a decline in non-covered loans outstanding, the impact of holding much higher levels of interest bearing cash, and the purchase of low-yielding taxable investment securities. The increase in net interest margin related to covered loan yields was offset by a corresponding decrease to the change in FDIC indemnification asset in other non-interest income. Interest reversals on new non-accrual loans during the fourth quarter of 2010 were $0.9 million, negatively impacting the net interest margin by 4 basis points. Excluding the reversals of interest, the net interest margin would have been 4.18% during the quarter. For the thirteenth consecutive quarter, the Company has continued to reduce the cost of interest bearing deposits. As a result of these efforts, the cost of interest bearing deposits was 0.97%, 11 basis points lower than the third quarter of 2010 and 38 basis points lower than the fourth quarter of 2009.

Mortgage banking revenue

The Company generated a record $7.4 million in total mortgage banking revenue during the fourth quarter of 2010, on record closed loan volume of $281 million. In the fourth quarter of 2010, the Company recognized a decrease in the fair value of the mortgage servicing right assets of $1.0 million, resulting from a relatively stable, but historically low, market for mortgage interest rates. Income from the origination and sale of mortgage loans was $7.4 million in the fourth quarter, representing a 3% increase on a sequential quarter basis. As of December 31, 2010, the Company serviced $1.6 billion of mortgage loans for others, and the related mortgage servicing right asset was valued at $14.5 million, or 0.90% of the total serviced portfolio principal balance.

Fair value of junior subordinated debentures

The Company recognized a $0.6 million loss from the change in fair value of junior subordinated debentures during the fourth quarter of 2010. The Company utilizes internal models to determine the valuation of this liability. The majority of the fair value difference over par value 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 December 31, 2010, the credit risk adjusted interest spread for potential new issuances was forecasted 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. Because these instruments are no longer being originated in the market, the quarterly fair value adjustments are difficult to estimate, but are not likely to be volatile in the future, and the cumulative fair value adjustment will continue to reverse and be recognized as a reduction in non-interest income over the remaining period to maturity of each related instrument. As of December 31, 2010, the total par value of junior subordinated debentures carried at fair value was $134.0 million, and the fair value was $80.7 million.

Non-interest expense

Total non-interest expense for the fourth quarter of 2010 was $87.9 million, compared to $85.2 million for the third quarter of 2010 and $72.5 million for the fourth quarter of 2009. Included in non-interest expense are several categories which are outside of the operational control of the Company or depend on changes in market values, including FDIC deposit insurance assessments, gain or loss on other real estate owned, as well as infrequently occurring expenses such as merger related costs and goodwill impairments. Excluding these non-controllable or infrequently occurring items, the remaining non-interest expense items totaled $77.8 million for the fourth quarter of 2010, compared to $79.9 million for the third quarter of 2010 and $60.2 million for the fourth quarter of 2009. The decline from the prior quarter results from non-recurring expenses incurred in the third quarter. The increase over the same period prior year relates to increases in variable expenses related to the mortgage banking division’s production, the assumption of Evergreen’s, Rainier’s and Nevada Security’s banking operations, higher loan collection and OREO management expenses, as well as various other growth initiatives underway. During the fourth quarter of 2010, the Company incurred loan collection and OREO management expense of $5.3 million, compared to $4.0 million for the third quarter of 2010, and $2.0 million for the fourth quarter of 2009. Mortgage production related expense was $4.9 million in the fourth quarter of 2010, compared to $4.2 million in the third quarter of 2010, and $3.5 million for the fourth quarter of 2009.

Total FDIC deposit insurance assessments during the fourth quarter of 2010 were $4.2 million. The increase over the prior quarter’s assessment of $3.9 million is a result of significantly higher average deposit balances in the current quarter.

Income taxes

The Company recorded a provision for income taxes of $4.2 million in the fourth quarter of 2010. The change in the effective income tax rate in the quarter reflects the effects of permanent differences on our taxable income year to date.

Balance sheet

Total consolidated assets as of December 31, 2010 were $11.7 billion, compared to $11.5 billion on September 30, 2010 and $9.4 billion a year ago. Total gross loans and leases (covered and non-covered), and deposits, were $6.4 billion and $9.4 billion, respectively, as of December 31, 2010, compared to $6.0 billion and $7.4 billion, respectively, as of December 31, 2009.

The following table presents the year-to-date 2010 organic growth rates, which excludes the effects of the Evergreen, Rainier and Nevada Security FDIC-assisted acquisitions and the related run-off of assumed brokered time deposits, which the Bank is not renewing upon maturity:

Total loans held for investment (including covered and non-covered) decreased $94 million during the fourth quarter of 2010. This decrease is principally attributable to non-covered charge-offs, paydowns on the covered loans, and transfers to other real estate owned.

Total deposits increased $132 million, or 1%, during the fourth quarter of 2010. Total deposits have increased $2.0 billion, or 27%, since December 31, 2009. The deposits acquired from the Evergreen, Rainier and Nevada Security acquisitions included $135 million of brokered time deposits as of their respective acquisition dates. The Bank is not renewing these brokered deposits as they mature. Excluding the impact of the deposits assumed in acquisitions of and the run-off of brokered time deposits that have matured, total deposits increased $985 million in 2010, representing a 13.3% annualized organic growth rate.

Due to 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 December 31, 2010, the Company had $892 million of interest bearing cash earning 0.25%, the target Federal Funds Rate. This excess balance sheet liquidity has increased since the prior year, as investment security alternatives in the current market are less attractive given the historically low interest rate environment. However, beginning in the third quarter of 2010 we began purchasing short duration government-sponsored investment securities to match and offset the interest expense associated with the growth in deposits. 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. Including secured off-balance sheet lines of credit, total available liquidity to the Company was $4.8 billion as of December 31, 2010, representing 41% of total assets and 50% of total deposits.

Capital

As of December 31, 2010, total shareholders’ equity was $1.64 billion, comprised entirely of common equity. Book value per common share was $14.34, tangible book value per common share was $8.39 and the ratio of tangible common equity to tangible assets was 8.74% (see explanation and reconciliation these items in the Non-GAAP Financial Measures section below).

In April 2010, the Company’s preferred stock (Common Stock Equivalent Series B) of $198.3 million converted into common stock following the Company's annual shareholder meeting at which shareholders of the Company approved, among other items, an increase in authorized total common shares from 100 million to 200 million.

The Company’s estimated total risk-based capital ratio as of December 31, 2010 is 17.46%. This represents a slight decrease from September 30, 2010, as a result of asset growth during the quarter. Our total risk-based capital level is well in excess of the regulatory definition of “well-capitalized” of 10.00%. The Company’s estimated Tier 1 common to risk weighted assets ratio is 13.1% as of December 31, 2010. These capital ratios as of December 31, 2010 are estimates pending completion and filing of the Company’s regulatory reports.

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 recognizes gains or losses on our junior subordinated debentures carried at fair value resulting from changes in interest rates and the estimated market credit risk adjusted spread that do not directly correlate with the Company’s operating performance. Also, Umpqua incurs significant expenses related to the completion and integration of mergers and acquisitions. 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. Lastly, Umpqua may recognize one-time bargain purchase gains on certain FDIC-assisted acquisitions that are not reflective of Umpqua’s on-going earnings power. Accordingly, management believes that our operating results are best measured on a comparative basis excluding the impact of gains or losses on junior subordinated debentures measured at fair value, net of tax, merger-related expenses, net of tax, and other charges related to business combinations such as goodwill impairment charges or bargain purchase gains, net of tax. We define operating earnings (loss) 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, and we calculate operating earnings (loss) per diluted share by dividing operating earnings by the same diluted share total used in determining diluted earnings per common share.

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

(1) Income tax effect of pro forma operating earnings adjustments at 40%.

Management believes pre-tax, pre-credit cost operating income is a useful financial measure because it enables investors to assess the Company’s ability to generate income and capital to cover credit losses through a credit cycle. Management uses this measure to evaluate core operating results exclusive of credit costs, which are market driven or outside of the Company’s control, to monitor how we are growing core pre-tax income of the Company over time, through organic growth and acquisitions. Pre-tax, pre-credit cost operating income is calculated starting with operating earnings (as defined above) and adding back operating provision for income taxes, preferred stock dividends, earnings allocated to participation securities, provision for loan and lease losses, net gains or losses on other real estate owned and credit related external workout costs. For covered losses and expenses that are subject to loss-share, we have also deducted the associated gain recognized on FDIC indemnification asset.

The following table provides the reconciliation of operating earnings (loss) (non-GAAP) to pre-tax, pre-credit cost operating income (non-GAAP) for the periods presented (the reconciliation of earnings (loss) available to common shareholders (GAAP) to operating earnings (loss) (non-GAAP) is provided in the preceding tables):

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 184 locations between San Francisco, Calif., and Seattle, Wash., along the Oregon and Northern California Coast, Central Oregon and Northern 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. Umpqua Bank’s Private Bank Division serves high net worth individuals and non-profits providing customized financial solutions and offerings. 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, Jan. 27, 2011, at 10:00 a.m. PST (1:00 p.m. EST) during which the company will discuss fourth quarter and 2010 year end 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 “33772757.” 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 improved credit quality trends, loan production and operating results, our success in resolving remaining credits at the estimated disposition value of related collateral, the mitigating effect of FDIC loss sharing agreements, our expectation that any weakness in our CRE portfolio will arise from local market weakness and not a systemic weakness, valuations of junior subordinated debentures and our plans to hold a large interest bearing cash position, relative to historical levels.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 weakness in loan demand, deterioration in the economy, material reductions in revenue or material increases in expenses, our inability to effectively manage problem credits, unanticipated further declines in real estate values, certain loan assets become ineligible for loss sharing, unanticipated deterioration in the commercial real estate loan portfolio, and continued negative pressure on interest income associated with our large cash position.

Covered loan & lease portfolio balances represent the loan portfolios acquired through the assumption of EvergreenBank on January 22, 2010, Rainier Pacific Bank on February 26, 2010, and Nevada Security Bank on June 18, 2010, from the FDIC through whole bank purchase and assumption agreements with loss sharing.

(1) Core deposits are defined as total deposits less time deposits greater than $100,000.