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Fitch Rates Umpqua Holdings Corp's IDRs 'BBB+'/'F2'; Outlook Stable
April 11, 2017 / 8:28 PM / 7 months ago

Fitch Rates Umpqua Holdings Corp's IDRs 'BBB+'/'F2'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, April 11 (Fitch) Fitch Ratings has assigned a Long-term Issuer Default Rating (IDR) of 'BBB+' and a Short-term IDR of 'F2' to Umpqua Holdings Corporation (UMPQ). The Rating Outlook is Stable. A full list of rating actions follows at the end of this rating action commentary. KEY RATING DRIVERS IDRs and VR UMPQ's ratings are supported by its solid franchise in its core markets, which Fitch views as a product of management's innovative branch and digital strategies. Strong asset quality metrics and solid capital and liquidity levels also support UMPQ's ratings. Offsetting these strengths is UMPQ's limited non-interest income versus rating peers with a high reliance on mortgage banking and earnings performance that has fallen short of the company's goals at the time of the Sterling Financial Corporation (Sterling) merger in 2014. Additionally, Fitch views cautiously UMPQ's growth in its commercial and industrial (C&I), leasing, and construction portfolios. These areas have produced higher loss content for the bank than its other commercial real estate (CRE) and consumer portfolios, which have performed well through the cycle. Fitch views UMPQ's management team as a key credit strength. Fitch believes management has successfully implemented its customer experience-oriented culture at the company along with an innovative branch model, which have resulted in a strong franchise position in the company's core markets; UMPQ's solid deposit market share in its core markets support this view, along with the company's low funding costs relative to its peer group. Additionally, Fitch believes the company is ahead of many peers in developing its digital platforms, which will continue to benefit UMPQ's franchise moving forward. UMPQ has a solid 10.5% deposit market share in its home state of Oregon, along with strong market positions in certain areas of Washington, northern California, and Idaho. This has provided the bank with a stable, low cost deposit base that allows the bank to benefit from a high net interest margin relative to peers due to funding costs below the mid-tier and large regional bank peer group averages. This should position the bank well for a rising rate environment, especially given its solid position in more isolated, rural markets and its sound liquidity position. UMPQ has solid underwriting standards, particularly in its residential mortgage, multifamily, and non-owner and owner occupied CRE portfolio, evidenced by the low net charge-off (NCO) rates in these portfolios through the past credit cycle. Fitch notes that over the past 40 quarters, UMPQ's NCO rate has been slightly above the mid-Tier median with somewhat higher volatility, as measured by standard deviation. UMPQ has exited its land development lending business, which was a significant driver of its weaker than peer performance during the crisis. Moving forward, Fitch expects UMPQ's NCOs to be roughly in line with the peer group median. This has been the case over the past 20 quarters. UMPQ's asset quality metrics are currently among the best in the mid-tier peer group and for Fitch-rated U.S. banks. Fitch views this as a product of the company's solid underwriting practices in its core lending segments, sound risk controls framework, and the benign credit environment. While UMPQ's overall loan growth (excluding acquisitions) has been moderate, Fitch views cautiously its growth in certain asset classes, particularly construction (44% growth in 2016) and leasing (33% growth in 2016). These asset classes have historically had higher loss content than in other portfolios for UMPQ. Additionally, the bank has recently indicated it expects to expand more in its C&I lending business, which Fitch also views cautiously given that this has been a very competitive asset class since the financial crisis. Since the Sterling merger in 2014, UMPQ's earnings, excluding merger costs and accretion gains, have lagged slightly below its peer group average as measured by ROA despite the company's solid net interest margin. Fitch also views UMPQ's non-interest income as relatively weak given its lower percentage of revenue relative to peers and a high level of mortgage banking income, which can be more volatile over time than other fee businesses. Overall, UMPQ's earnings profile serves as a constraint on the ratings. Over time, Fitch does expect modest earnings improvement from better operating efficiency because of the Sterling merger and from UMPQ's various business initiatives and digital strategy; however, this could be somewhat offset by more normalized provision levels. Additionally, Fitch notes UMPQ's balance sheet is moderately asset sensitive and should benefit from a rising rate environment due to the company's strong deposit base; however, lower origination volumes in its mortgage banking business could offset this. UMPQ's capital position is adequate for the rating level and the company's risk profile. UMPQ's Basel III Common Equity Tier 1 (CET1) ratio is reasonable at 11.46%, which is roughly average for the mid-tier peer group. Fitch expects UMPQ to maintain its capital ratios at or modestly below current levels due to its growth initiatives and a relatively high dividend payout level, which is above average at 60% or more. Fitch views this high payout level as reasonable given the company's conservative management of capital over many years and its overall solid financial profile. LONG- AND SHORT-TERM DEPOSIT RATINGS UMPQ's uninsured deposit ratings at the subsidiary bank are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES UMPQ's trust preferred securities are notched two times below its VR for loss severity and two times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles. SUPPORT RATING AND SUPPORT RATING FLOOR UMPQ has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, UMPQ is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support. HOLDING COMPANY Umpqua Holding Corporation's IDR and VR are equalized with those of its chief operating company, Umpqua Bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. RATING SENSITIVITIES IDRs and VR Fitch believes UMPQ's ratings are currently at the higher end of their potential spectrum and that positive rating momentum is unlikely within the Rating Outlook horizon. Over the longer term, UMPQ's ratings could gain positive momentum if the bank succeeds in building a more diverse fee income base and achieves a higher level of earnings more in line with higher rated peers while maintaining stable or higher capital levels and solid credit metrics ahead of the peer group average. The Stable Rating Outlook reflects Fitch belief that UMPQ will maintain strong asset quality metrics relative to its peer group and good levels of capital as it pursues initiatives to grow and diversify its loan portfolio. Negative rating momentum could develop should Fitch observe underwriting standards weaken in order to achieve growth targets or if asset quality measures decline to below peer averages, particularly if this decline is as a result of adverse outcomes in areas of growth for UMPQ. While not expected, should UMPQ manage capital more aggressively, such that its CET1 Ratio falls towards the bottom of its peer group or if earnings performance over time is materially worse than the peer group average, negative rating momentum could develop. LONG- AND SHORT-TERM DEPOSIT RATINGS The ratings of long- and short-term deposits issued by Umpqua Bank are primarily sensitive to any change in the company's IDR. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings for UMPQ's trust preferred securities are sensitive to any change to UMPQ's VR. SUPPORT RATING AND SUPPORT RATING FLOOR Since UMPQ's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. HOLDING COMPANY Should UMPQ's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. Fitch has assigned the following ratings with a Stable Outlook: Umpqua Holdings Corporation --Long-term IDR 'BBB+'; --Short-term IDR 'F2'; --Viability Rating 'bbb+'; --Support '5'; --Support Rating Floor 'NF'. Umpqua Bank --Long-term IDR 'BBB+'; --Short-term IDR 'F2'; --Viability Rating 'bbb+'; --Long-term deposits 'A-'; --Short-term deposits 'F2'; --Support '5'; --Support Rating Floor 'NF'. Umpqua Statutory Trust II - V --Trust preferred securities 'BB'. Umpqua Master Trust I and IB --Trust preferred securities 'BB'. Sterling Capital Trust III - IV and VI - IX Sterling Capital Statutory Trust V --Trust preferred securities 'BB'. Lynnwood Financial Statutory Trust I and II --Trust preferred securities 'BB'. Klamath First Capital Trust I --Trust preferred securities 'BB'. HB Capital Trust I Humboldt Bancorp Statutory Trust I - III --Trust preferred securities 'BB'. CIB Capital Trust --Trust preferred securities 'BB'. Western Sierra Statutory Trust I - IV --Trust preferred securities 'BB'. Contact: Primary Analyst Christopher Van Bell Associate Director +1-212-908-0777 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Bain K. 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