Umpqua Holdings Reports Third Quarter 2008 Results

Umpqua Holdings Corporation (NASDAQ: UMPQ), parent company of Umpqua Bank and Strand, Atkinson, Williams & York, Inc., today announced third quarter 2008 net income of $13.6 million, or $0.23 per diluted share, compared to $13.2 million, or $0.22 per diluted share, for the third quarter of 2007, an increase of 5% on a diluted per share basis. For the year to date, the Company reports net income of $48.4 million, or $0.80 per diluted share, compared to $53.8 million, or $0.89 per diluted share a year ago, a decrease of 10% on a diluted per share basis.

Significant financial statement items for the third quarter of 2008 include:

• Deposits increased $134 million during the quarter, an increase of 2%;
• Core deposits increased $168 million, an increase of 3%;
• Provision for loan losses of $35.5 million, represented a reduction of $0.35 per diluted share. This includes a reserve build of $20.3 million, increasing the allowance for credit losses from 1.22% to 1.54% of total loans;
• Total net charge-offs of $15.2 million, or 0.98% of average loans on an annualized basis;
• Non-performing assets ended the quarter at 1.54% of total assets. Non-performing loans ended the quarter at 1.92% of total loans. Non-performing assets have been written-down (reduced) to their estimated net realizable value;
• Gain on fair value of junior subordinated debentures of $25.3 million, based on widening spreads for new issuances, increased earnings per diluted share by $0.25;
• Loss on investment securities of $2.5 million, primarily represented an other than temporary impairment related to non-agency mortgage backed securities which have deteriorated in value during the third quarter, decreased earnings per diluted share by $0.03;
• Loss on other real estate owned of $2.2 million, representing a reduction of $0.02 per diluted share;
• Mortgage banking revenue includes a $1.4 million decline in the value of the mortgage servicing right (MSR) asset, which reduced earnings per diluted share by $0.01;
• Interest income reversals on loans of $0.7 million reduced earnings per diluted share by $0.01 and reduced net interest margin by 4 basis points;
• The cost of interest bearing deposits decreased 13 basis points during the quarter;
• Net interest margin, on a tax equivalent basis, decreased 3 basis points during the quarter to 4.12%. Excluding reversals of interest on loans of 4 basis points, the net interest margin would have increased 1 basis point during the quarter.

"It goes without saying that the current economic situation is truly unprecedented as it relates to the financial markets and financial institutions. Despite the economic environment, Umpqua is in a strong position for the future--we are well-capitalized, with strong liquidity, and continue to make good progress in reducing our loan portfolio risks,” said Ray Davis, president and CEO of Umpqua Holdings Corporation. "We are optimistic that the recently approved economic actions, once implemented, will have a positive impact on the financial services industry as a whole, as well as on the country’s community banks.”

Credit Quality

Non-performing assets were $128.1 million, or 1.54% of total assets, as of September 30, 2008, compared to $104.4 million, or 1.25% of total assets as of June 30, 2008. Of this amount, $6.4 million represented loans past due greater than 90 days and still accruing interest, $111.9 million represent non-accrual loans, and $9.8 million is other real estate owned. Approximately 71% of non-performing assets are from the residential development loan segment of the portfolio.

Total net charge-offs were $15.2 million in the third quarter of 2008, a decrease of 60% from the second quarter of 2008. Prior to the second quarter of 2008, the Company recognized the charge-off of an impairment reserve when the loan was resolved, sold, or foreclosed/transferred to other real estate owned. Starting in the second quarter of 2008, the Company accelerated the charge-off of the impairment reserve to the period when it arises for collateral dependent loans. Therefore, the non-accrual loans of $111.9 million as of September 30, 2008 have already been written-down to their estimated net realizable value, based on disposition value, and are expected to be resolved over the coming quarters with no additional material loss.

The provision for loan losses for the third quarter of 2008 was $35.5 million, which was $20.3 million above the net charge-off level for the quarter. This difference represents a reserve build, increasing the allowance for credit losses from 1.22% of total loans as of June 30, 2008 to 1.54% of total loans as of September 30, 2008. Approximately $8 million of the provision for loan losses, and allowance for credit losses, is unallocated to specific loans, and was provided for in the third quarter of 2008 given the economic environment. There was no unallocated allowance as of June 30, 2008.

For the past six quarters, the Company has been aggressively resolving problems arising from the current economic downturn. The following is a recap of the credit quality trends of the Company since the start of 2007, noting the accelerated charge off of impairment reserves discussed above was implemented in the second quarter of 2008:

Total construction loans decreased 16% from September 30, 2007. Within the construction loan portfolio, the residential development loan segment is $465 million, or 7.5% of the total loan portfolio. This segment has decreased $299 million, or 39%, from September 30, 2007. Oregon/Washington residential development loans total $272 million, a decrease of 36% from a year ago. California residential development loans total $193 million, a decrease of 43% from a year ago. The remaining $535 million in construction loans are commercial construction projects. These commercial construction loans are uniquely different than the residential development loans and are performing with no notable issues.

The following is a geographic distribution of the residential development portfolio at September 30, 2008:

Net Interest Margin

The Company reported a tax equivalent net interest margin of 4.12% for the third quarter of 2008, compared to 4.15% for the second quarter of 2008, and 4.20% for the third quarter of 2007. The decrease in net interest margin from the second quarter of 2008 resulted primarily from interest reversals on loans of 4 basis points. The Company reversed $0.7 million in interest income during the third quarter. The cost of interest bearing deposits was 13 basis points lower than the second quarter of 2008, while the yield on interest earning assets was 12 basis points lower.

Mortgage Servicing Rights

Mortgage interest rates decreased in the third quarter of 2008, resulting in the Company recognizing a $1.4 million decline in value of the MSR asset. On September 30, 2008, the MSR asset was valued at 1.14% of the total serviced loan portfolio.

Loss on Investment Securities

During the third quarter of 2008, the Company recognized a net loss of $2.5 million on investment securities. This represented an other than temporary impairment charge related to non-agency mortgage backed securities (impairment of $2.5 million), and trust preferred securities (impairment of $0.1 million), which have deteriorated in value during the third quarter. The Company reclassified the non-agency mortgage backed security portfolio, totaling $12.2 million or 1% of the total investment portfolio, from investment securities available for sale to investment securities held to maturity. Offsetting the $2.6 million total other than temporary impairment charge was a gain on sale of investments of $0.1 million, resulting in the net $2.5 million loss on investment securities in the third quarter of 2008.

Fair Value of Junior Subordinated Debentures

The Company recognized a gain on the fair value of junior subordinated debentures of $25.3 million during the third quarter of 2008. This fair value gain resulted from widening credit spreads for similar issuances in the market. 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 carried spreads of 135 and 275 basis points over the 3 month LIBOR. As of September 30, 2008, the spread for new issuance was significantly higher. The difference between spreads represents the gain in fair value of the Company’s junior subordinated debentures compared to new instruments in the market. 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, 2008, the total par value of junior subordinated debentures carried at fair value was $134.0 million, and the fair value was $101.2 million.

Non-Interest Expense

Total non-interest expense for the third quarter of 2008 was $54.2 million, compared to $51.4 million for the second quarter of 2008. The increase on a sequential quarter basis related primarily to normal increases in compensation, occupancy, professional services and marketing costs.

Balance Sheet

Total consolidated assets as of September 30, 2008 were $8.3 billion, compared to $8.2 billion a year ago. Total gross loans and leases, and deposits, were $6.2 billion and $6.5 billion, respectively, as of September 30, 2008, compared to $6.1 billion and $6.5 billion, respectively, a year ago.

Total loans increased $60 million, or 1%, during the third quarter of 2008, while deposits increased $134 million, or 2%. Core deposits (total deposits excluding time deposits greater than $100,000) increased $168 million, or 3%, during the third quarter of 2008. The total number of deposit accounts and relationships continue to increase, with an increase of 4,300 demand deposit accounts during the quarter.

Based on the increase in deposits during the quarter, short term borrowings were reduced by $108 million.

Capital

The Company’s estimated total risk-based capital as of September 30, 2008 is 11.2%, and has increased from 11.0% as of June 30, 2008, and 10.8% as of September 30, 2007. Our total risk-based capital level is in excess of the regulatory definition of "well capitalized” of 10.0%. The increase during the quarter related to the recognition of net income, and continued management of risk-weighted assets. This capital ratio as of September 30, 2008 is an estimate pending filing of the Company’s regulatory reports.

As of September 30, 2008, total shareholders’ equity was $1.25 billion. Book value per share was $20.76, tangible book value per share was $8.12 and tangible equity to assets was 6.45%. These measures increased slightly during the third quarter of 2008.

There have been no repurchases of common stock during 2008. The total remaining available common shares authorized for repurchase is approximately 1.54 million as of September 30, 2008.

Visa-Related Activity

In March 2008, Visa completed its initial public offering. Umpqua Bank and certain other Visa member banks are shareholders in Visa. Following the initial public offering, the Company received $12.6 million in proceeds from the offering, as a mandatory partial redemption of 295,377 shares, reducing the Company’s holdings from 764,036 shares to 468,659 shares of Class B common stock. Using proceeds from this offering, Visa established a $3.0 billion escrow account to cover the resolution of pending litigation and related claims. The partial redemption proceeds are reflected in non-interest income in the first quarter of 2008.

In connection with Visa’s establishment of the litigation escrow account, the Company reversed a $5.2 million reserve in the first quarter of 2008, reflected as a reduction of non-interest expense. This reserve was created in the fourth quarter of 2007, pending completion of the Visa initial public offering, as a charge to non-interest expense.

The remaining unredeemed shares of Visa Class B common stock are restricted and may not be transferred until the later of (i) three years from the date of the initial public offering, or (ii) the period of time necessary to resolve the covered litigation. A conversion ratio of 0.71429 was established for the conversion rate of Class B shares into Class A shares. If the funds in the escrow account are insufficient to settle all the covered litigation, Visa may sell additional Class A shares, use the proceeds to settle litigation, and further reduce the conversion ratio. If funds remain in the escrow account after all litigation is settled, the Class B conversion ratio will be increased to reflect that surplus.

As of September 30, 2008, the value of the Class A shares was $61.39 per share. The value of unredeemed Class A equivalent shares owned by the Company was $20.6 million as of September 30, 2008, and has not been reflected in the accompanying financial statements.

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 the prospect of improved performance, the impact of government programs under the Emergency Economic Stabilization Act of 2008 and the expected resolution of existing non-accrual loans without further loss. 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, our ability to realize expected recoveries of non-accrual loans, further deterioration in credit quality and our ability to resolve non-accrual loans in a satisfactory manner.

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 148 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 Strand, Atkinson, Williams & York Inc., which has locations in Umpqua Bank stores and in dedicated offices throughout Oregon and Southwest Washington. Umpqua Bank’s Private Client Services 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.