December 15, 2017 / 9:00 PM / a year ago

Fitch Affirms Umpqua Holdings Corp at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, December 15 (Fitch) Fitch Ratings has affirmed Umpqua Holdings Corporation's (UMPQ) long- and short-term Issuer Default Ratings (IDRs) at 'BBB+'/'F2'. The Rating Outlook remains Stable. The affirmation reflects the company's strong asset quality, good capital levels, and solid deposit franchise in its core markets. A full list of rating actions follows at the end of this press release. The rating action follows a periodic review of the mid-tier regional banking group, which includes BankUnited, Inc. (BKU), BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp, Inc. (EWBC), First Horizon National Corporation (FHN), First National of Nebraska, Inc. (FNNI), Fulton Financial Corporation (FULT), Hilltop Holdings Inc. (HTH), Synovus Financial Corp. (SNV), Trustmark Corporation (TMRK), UMB Financial Corp. (UMBF), Umpqua Holdings Corporation (UMPQ) and Wintrust Financial Corporation (WTFC). Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Mid-tier Regional Bank Periodic Review,' to be published shortly. KEY RATING DRIVERS IDRs and VR UMPQ's ratings are supported by the company's solid franchise in its core markets, sound capital metrics, good liquidity and funding profile, and strong asset quality metrics. Asset quality is supported by the company's sound underwriting standards and management's focus on diversification and balanced growth in the loan portfolio. UMPQ's ratings remain constrained by its earnings profile, which remains somewhat volatile relative to peers due to the company's relatively limited non-interest income businesses and its higher proportion of mortgage banking income, which is a seasonal and cyclical business. The company's core profitability, as measured by return on average assets (ROA), continues to fall slightly short of 1% and the peer median. Positively, Fitch believes management has laid out credible plans to address these earnings issues by focusing on efficiency gains, digital initiatives, exiting indirect auto lending, and increasing its non-interest income, primarily through growth in its larger commercial client segment. Management is targeting at least 1.1% ROA by 2020 in a flat rate environment, which Fitch views as reasonable and achievable. UMPQ's asset quality metrics remains amongst the best in the mid-tier regional bank peer group. Fitch views this as a product of the company's solid underwriting practices in its core lending segments, proactive resolution of problem credits, sound risk controls framework, and the benign credit environment. As of the third quarter of 2017 (3Q17), non-performing loans (including accruing troubled debt restructurings) stood at 0.65%, a modest uptick from a year ago, while net charge-offs in 2017 have been 21 bps of average loans, in line with peer averages and quite stable from prior periods. Today's rating action incorporates the view that asset quality will deteriorate moderately from current levels, given Fitch's view that asset quality at U.S. banks is at unsustainably good levels. Over time, Fitch believes UMPQ's credit metrics will perform somewhat better than peer averages due to the company's strong underwriting track record in its residential mortgage, multifamily and commercial real estate portfolios. Fitch continues to view the company's outsized growth in construction, home equity, and leasing somewhat cautiously, though the overall level of loan growth is slightly below the peer median at a reasonable 6% year-over-year at 3Q17. Fitch views favorably the company's decision to exit the indirect auto lending business given the highly competitive environment in this segment, though credit performance for UMPQ's indirect auto portfolio remains strong. While the exit of indirect auto will be a modest growth headwind, Fitch continues to expect mid-to-high single digit overall loan growth at UMPQ, driven by its commercial, construction, leasing, and home equity segments. UMPQ's capital position remains solid for its risk appetite and is supportive of the company's rating level. UMPQ's common equity tier 1 ratio (CET1) of 11.1% is roughly in line with the peer group median and has been relatively stable over the past year. Fitch notes the company's management of capital has been conservative over a long period of time and expects capital levels to remain at or modestly below current levels. While the company's dividend payout ratio at 60% or more is high, Fitch views this as manageable in the context of the lack of stock buybacks and UMPQ's overall solid financial profile. Fitch views UMPQ's funding and liquidity profile as a strength, supported by its strong deposit franchise in Oregon, where it has 10.2% market share, along with solid positions in parts of Washington and northern California. This position and the company's sizable retail deposit base have allowed the company to maintain below peer average deposit costs over time, along with a low reliance on wholesale funding sources. This should position the bank well for a rising rate environment, especially given its solid position in more isolated, rural markets. Fitch believes this advantageous funding position is largely a product of management's successful implementation of a customer-oriented corporate culture and its unique branch strategy. 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. 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 and have thus been affirmed due to the affirmation of the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The uninsured deposit ratings of Umpqua Bank are rated one notch higher than the bank'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. HOLDING COMPANY UMPQ's VR is equalized with those of its operating companies and banks, 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. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR UMPQ has a Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF'. In Fitch's view, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES IDRs, VRs, AND SENIOR DEBT Fitch believes UMPQ's ratings are currently at the higher end of their potential range 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 builds a more diverse fee income base and achieves a level of earnings more in line with higher rated peers while maintaining capital levels and credit metrics ahead of the peer group average. UMPQ's ratings are supported by its strong asset quality metrics and good capital levels relative to peers. If asset quality metrics were to decline below peer averages or if Fitch observes weakening underwriting standards in pursuit of growth targets, negative rating pressure would likely occur. 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. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings for UMPQ and its operating companies' trust preferred securities are sensitive to any change to the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The long- and short-term deposit ratings are sensitive to any change to UMPQ's long- and short-term IDR. 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 potential that Fitch could notch the holding company VR from the ratings of the operating companies. 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. Fitch has affirmed the following ratings: Umpqua Holdings Corporation --Long-term IDR 'BBB+'; Outlook Stable --Short-term IDR 'F2'; --Viability Rating 'bbb+'; --Support '5'; --Support Rating Floor 'NF'. Umpqua Bank --Long-term IDR 'BBB+'; Outlook Stable --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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