Umpqua Reports First Quarter 2020 Results

PORTLAND, Ore., April 22, 2020 /PRNewswire/ -- Umpqua Holdings Corporation (NASDAQ: UMPQ) (the "Company") reported net loss of $28.3 million for the first quarter of 2020, compared to net income of $83.8 million for the fourth quarter of 2019 and $74.0 million for the first quarter of 2019. Earnings (loss) per diluted common share were a loss of $(0.13) for the first quarter of 2020, compared to earnings of $0.38 for the fourth quarter of 2019 and earnings of $0.34 for the first quarter of 2019.

"The COVID-19 pandemic is an unprecedented global event that has impacted companies of all sizes across every industry. I'm proud that Umpqua responded to protect the health and safety of our customers and associates while minimizing disruption to the essential service of banking. In addition to adapting our operations, we rolled out relief programs to support our associates, customers, and communities, and I'm extremely proud of our significant efforts to promptly ramp up to accept and approve a significant amount of payroll protection loans through the CARES Act," said Cort O'Haver, president and CEO of Umpqua Holdings Corporation. "Small businesses are the lifeblood of the United States economy, and a top priority is helping them navigate this extraordinary disruption. To-date we've approved and received SBA PLP numbers to be able to fund more than 6,700 loans for $1.4 billion in balances under the Payroll Protection Program." 

O'Haver continued "Like others, Umpqua's financial performance for the quarter reflects the severity and speed of the COVID-19 crisis and the uncertainty facing all businesses. The company adopted CECL during the quarter and due to the COVID-19 influenced economic forecast, it resulted in a significantly higher provision for the quarter. However, the company's ability to pivot quickly and effectively to processing the influx of Payroll Protection Program applications reflects our operating strength and the value of the technological investments made over the past few years. We're confident that as we continue to manage through this crisis, the resilience of our associates and our strong capital and liquidity positions will continue to be a strategic advantage for Umpqua going forward."

Ongoing impact of COVID-19 on our business operations:

• We promptly modified operations to comply with multiple state-level proclamations and CDC guidance and best practice; we continue to:
• restrict all travel.
• maintain a remote work program for associates other than store associates and small groups of other functions that cannot be completed remotely.  About 90% of our non-store associates are operating remotely.
• transitioned store operations to restrict lobby access and instructed customers to bank by appointment only which has allowed over 95% of stores to remain open throughout the crisis.
• increased cleaning scope and frequency to our store locations and installed other protective devices for our associates.
• deployed resources to rapidly adjust to new programs such as the Payroll Protection Program ("PPP").
• Mobile banking usage trends are up 5% and unique sessions are up 12% from pre-COVID 19 levels in addition to an expected decline in store transactions of over 40%.
• Continue to offer our Umpqua Go-To® application which offers customers and associates a safe and effective way of conducting banking.  In March, Go-To customers using the platform increased 2.5x and message volume increased 3x from January.
• We enhanced associate benefits, including:
• supplemental front line associate pay.
• pandemic pay bank for associates needing additional paid time off due to COVID-19 impacts.
• flexible work rotations and remote work for higher-risk associates.
• Active participant in federal relief programs, including:
• CARES Act PPP.
• Economic Injury Disaster Loan (EIDL) Program.
• Addressing other customer needs during pandemic:
• Payment deferrals.
• Waiving deferral associated fees.
• ATM fee waivers.
• Enhanced community support:
• announced $2.0 million in combined grants and investments to organizations providing COVID-19 community relief and small business microloans
• initiated virtual volunteerism program.
• activated an associate 3:1 giving match to donations.

Notable items that impacted the first quarter 2020 financial results included:

• $118.1 million provision for credit losses reflecting a COVID-19 global pandemic influenced economic forecast, compared to a $16.3 million provision expense in the prior quarter, and a $13.7 million provision expense in the same period of the prior year.
• $25.4 million loss on the fair value change of the MSR asset due to changes in valuation inputs or assumptions resulting from the decrease in long term interest rates during the quarter compared to a $5.1 million loss in the prior quarter and a $7.5 million loss in the same period of the prior year.
• $14.3 million loss related to the fair value of the debt capital market swap derivatives attributable to the decrease in long-term interest rates during the quarter, compared to a gain of $5.0 million in the prior quarter and a loss of $2.5 million in the same period of the prior year.

First Quarter 2020 Highlights (compared to prior quarter):

• Net interest income decreased by $8.3 million on a quarter to quarter basis primarily driven by lower average yields on loans and leases, partially offset by a lower cost of interest bearing deposits;
• Provision for credit losses increased by $101.8 million, reflecting a COVID-19 global pandemic influenced economic forecast;
• Net charge-offs increased by thirteen basis points to 0.41% of average loans and leases (annualized);
• Non-interest income decreased by $43.1 million, driven primarily by the $30.7 million loss related to the fair value of the MSR asset and the $14.3 million dollar loss related to the fair value of the debt capital market swap derivatives;
• Non-interest expense decreased by $5.7 million, driven primarily by lower professional fees and services, lower incentives and commissions, and lower other expenses, partially offset by seasonally higher payroll taxes;
• Non-performing assets to total assets increased to 0.30% from 0.23%;
• Estimated total risk-based capital ratio of 14.0% and estimated Tier 1 common to risk weighted assets ratio of 10.9%;
• Declared a quarterly cash dividend of $0.21 per common share.

Balance Sheet
Total consolidated assets were $29.4 billion as of March 31, 2020, compared to $28.8 billion as of December 31, 2019 and $27.4 billion as of March 31, 2019.  Including secured off-balance sheet lines of credit, total available liquidity was $11.2 billion as of March 31, 2020, representing 38% of total assets and 49% of total deposits.

Gross loans and leases were $21.3 billion as of March 31, 2020, an increase of $55.8 million relative to December 31, 2019.  Please refer to the additional loan tables in the Q1 2020 Earnings Presentation for select underwriting characteristics of the loan portfolio and specific industry concentrations impacted by COVID-19.

Total deposits were $22.7 billion as of March 31, 2020, an increase of $217.9 million from $22.5 billion as of December 31, 2019.  This increase was attributable to growth in non-interest bearing demand deposits of $256.5 million and money market growth of $151.2 million.

Net Interest Income
Net interest income was $218.5 million for the first quarter of 2020, down $8.3 million from the prior quarter.  This decrease was primarily driven by lower average yields on loans and leases, partially offset by a lower cost of interest bearing deposits.

The Company's net interest margin was 3.41% for the first quarter of 2020, down ten basis points from 3.51% for the fourth quarter of 2019 primarily driven by the decrease in short and long term interest rates during the quarter.

Credit Quality
The allowance for credit losses on loans and leases was $291.4 million, or 1.37% of loans and leases, as of March 31, 2020, which was up from $157.6 million, or 0.74% of loans and leases, as of December 31, 2019.  The initial adjustment to the allowance for credit losses to record the adoption of CECL as of January 1, 2020 was $53.2 million.  The provision for credit losses was $118.1 million for the first quarter of 2020, an increase of $101.8 million from the prior quarter level, driven primarily by the COVID-19 global pandemic influenced economic forecast.

Net charge-offs as a percentage of average loans and leases increased by thirteen basis points to 0.41% of average loans and leases (annualized).  The increase in net charge-offs for the quarter was primarily due to a COVID-19 related single charge-off to a regional air transportation lessor.  As of March 31, 2020, non-performing assets were 0.30% of total assets, compared to 0.23% as of December 31, 2019 and 0.32% as of March 31, 2019.

Current Expected Credit Loss (CECL)
As described in our 2019 annual report on Form 10-K ("2019 10-K"), on January 1, 2020, we adopted Accounting Standards Update No. 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL"), which upon adoption resulted in a reduction to our opening retained earnings balance of approximately $40.2 million, net of income tax, and a pre-tax increase to the allowance for credit losses on loans and leases of approximately $53.2 million.  In applying CECL, our financial results will be affected as soon as weak or deteriorating economic conditions are forecasted which alters our expectations for credit losses. In addition, due to the expansion of the time horizon over which we are required to estimate future credit losses under CECL, we may experience increased volatility in our future provisions for credit losses. When utilizing economic forecast models that factor in significant, negative COVID-19 impacts to the economy, we incurred a significant provision expense for credit losses in the first quarter of 2020 and may incur significant provision expense for credit losses in future periods as well as actual or projected economic conditions deteriorate further.

Non-interest Income
Non-interest income was $40.6 million for the first quarter of 2020, down $43.1 million from the prior quarter driven primarily by the difference from the prior period on the loss related to the fair value of the MSR asset of $20.3 million and the difference from the prior period on the loss related to the fair value of the debt capital market swap derivatives of $19.3 million.

Revenue from the origination and sale of residential mortgages was $39.3 million for the first quarter of 2020, an increase of $3.9 million from the prior quarter.  This increase reflects a sequential quarter increase of $88.2 million or 8% in for-sale mortgage origination volume and an increase of nine basis points in the home lending gain on sale margin to 3.43% for the first quarter of 2020.  Of the current quarter's mortgage production, 43% related to purchase activity, compared to 55% for the prior quarter and 71% for the same period of the prior year.

Non-interest Expense
Non-interest expense was $177.7 million for the first quarter of 2020, down $5.7 million from the prior quarter level. This decrease was driven primarily by lower professional fees and services, lower incentives and commissions, and lower other expenses, partially offset by seasonally higher payroll taxes.

Goodwill
Based on continued market volatility, consensus forecasts for a prolonged low interest rate environment, and the drop in price of the Company's common stock during the quarter, the Company is currently analyzing the value of goodwill within its operating segments related to its prior acquisitions, and believes the value of goodwill has been significantly impaired.  Any potential goodwill impairment could be material to reported earnings, but would be a non-cash charge and have no effect on the Company's cash balances, liquidity or tangible equity. In addition, because goodwill and other intangible assets are not included in the calculation of regulatory capital, the Company's well-capitalized regulatory capital ratios would not be affected by this potential non-cash expense. The Company anticipates the analysis will be completed prior to filing the Quarterly Report on Form 10-Q with the Securities and Exchange Commission in May 2020.

Capital
As of March 31, 2020, the Company's tangible book value per common share¹ was $11.48, compared to $11.39 in the prior quarter and $10.44 in the same period of the prior year. During the first quarter of 2020, the Company declared a dividend of $0.21 per common share.

The Company's estimated total risk-based capital ratio was 14.0% and its estimated Tier 1 common to risk weighted assets ratio was 10.9% as of March 31, 2020.  The Company remains above current "well-capitalized" regulatory minimums.  The regulatory capital ratios as of March 31, 2020 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.  The Company believes that these non-GAAP financial measures provide investors with information useful in understanding the Company's financial performance; however, readers of this document are urged to review these non-GAAP financial measures in conjunction with the GAAP results as reported.

Management believes tangible common equity and the tangible common equity ratio are useful measures of capital adequacy because they provide a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in assessing the capital of the Company and the ability to absorb potential losses. Tangible common equity is calculated as total shareholders' equity less goodwill and other intangible assets, net (excluding MSRs). 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 customer experience, and distinctive banking solutions. Umpqua Bank has locations across Oregon, Washington, California, Idaho and 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 Holdings Corporation is headquartered in Portland, Oregon. For more information, visit umpquabank.com.

Earnings Conference Call Information
The Company will host its first quarter 2020 earnings conference call on April 23, 2020, at 10:00 a.m. PT (1:00 p.m. ET).  During the call, the Company will provide an update on recent activities and discuss its first quarter 2020 financial results. There will be a live question-and-answer session following the presentation. To join the call, please dial (866) 440-7407 ten minutes prior to the start time and enter conference ID: 9267202.  A re-broadcast will be available approximately two hours after the call by dialing (855) 859-2056 and entering conference ID 9267202. The earnings conference call will also be available as an audio cast, which can be accessed on the Company's investor relations page at umpquabank.com.

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.  Forward-looking statements can be identified by words such as "anticipates," "intends," "plans," "seeks," "believes," "estimates," "expects," "target," "projects," "outlook," "forecast," "will," "may," "could," "should," "can" and similar references to future periods. In this press release we make forward-looking statements about the projected impact on our business operations of the COVID-19 global pandemic.  Risks that could cause results to differ from forward-looking statements we make are set forth in our filings with the SEC and include, without limitation: current and future economic and market conditions, including the effects of declines in housing and commercial real estate prices, high unemployment rates, and any slowdown in economic growth particularly in the western United States; the effect of the COVID-19 pandemic, including on our credit quality and business operations, as well as its impact on general economic and financial market conditions; economic forecast variables that are either materially worse or better than end of quarter projections and deterioration in the economy that exceeds current consensus estimates; timely completion of the goodwill impairment analysis; our ability to effectively manage problem credits; our ability to successfully implement efficiency and operational excellence initiatives; our ability to successfully develop and market new products and technology; and changes in laws or regulations. We also caution that the amount and timing of any future common stock dividends or repurchases will depend on the earnings, cash requirements and financial condition of the Company, market conditions, capital requirements, applicable law and regulations (including federal securities laws and federal banking regulations), and other factors deemed relevant by the Company's Board of Directors, and may be subject to regulatory approval or conditions.