Umpqua Reports Quarterly and Annual Results

PORTLAND, Ore., Jan. 20, 2021 /PRNewswire/ -- Umpqua Holdings Corporation (NASDAQ: UMPQ) (the "Company") reported net income of $150.7 million for the fourth quarter of 2020, compared to $124.9 million for the third quarter of 2020 and $83.8 million for the fourth quarter of 2019.  Earnings per diluted common share were $0.68 for the fourth quarter of 2020, compared to $0.57 for the third quarter of 2020 and $0.38 for the fourth quarter of 2019.

For the twelve months ended December 31, 2020, the Company reported net loss of $1.5 billion, or $6.92 per diluted common share primarily due to the goodwill impairment of $1.8 billion in Q1 2020, compared to net income of $354.1 million, or $1.60 per diluted common share, for the twelve months ended December 31, 2019.

"Umpqua's results in 2020 are a testament to the tremendous strength of this company.  Of the many challenges and opportunities that were presented this past year, our ability to stay agile, resilient, and ultimately deliver for our customers, both existing and new, was extraordinary" said Cort O'Haver, president and CEO of Umpqua Holdings Corporation.  "Our fourth quarter results represent our capacity to generate a return for our shareholders in a low interest rate environment. The company's record level of net income was driven by a number of strategic levers. These included the continued performance of our home lending division, accelerated Paycheck Protection Program (PPP) fee recognition due to borrower forgiveness processing, and careful management of the cost of interest bearing deposits. As outlined in the Next Gen 2.0 initiatives we shared last quarter, the company will continue to balance prioritization of strategic investments to propel balance sheet growth, including key human digital initiatives to advance the customer experience and gain market share, supported by increased operational excellence and efficiency."

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

• $12.1 million increase in compensation and benefits primarily due to the year end true up for performance based variable incentives and deferred compensation calculations compared to the prior quarter.
• $6.5 million in one time software impairment charges primarily due to technology contract exits completed during the quarter.
• $2.9 million in charitable contributions made in the quarter compared to $0.5 million in the prior quarter.
• $9.4 million loss on the fair value of the mortgage servicing rights (MSR) asset due to higher prepayment speeds versus modeled expectations compared to a $12.2 million loss in the prior quarter and a $5.1 million loss in the same period of the prior year.
• $4.0 million gain on the fair value of the debt capital market swap derivatives attributable to the increase in long-term interest rates during the quarter. This compares to the $1.8 million gain in the prior quarter and the $5.0 million gain in the same period of the prior year.

Full-Year 2020 Highlights (compared to prior year):

• Gross loan and lease balance growth of $583.7 million, or 3%;
• Deposit balance growth of $2.1 billion, or 10%;
• Net interest income decreased by $38.1 million, driven primarily by a decrease in short and long-term interest rates during the annual period which led to a decline in net interest margin;
• Provision for credit losses increased by $132.3 million primarily due to the implementation of the Current Expected Credit Loss (CECL) accounting standard which uses credit models to forecast future credit losses and fully reserve for the forecasted losses as soon as weak or deteriorating economic conditions are forecasted;
• Non-interest income increased by $72.2 million, driven primarily by a significant increase in net mortgage banking revenue;
• Non-interest expense increased by $1.8 billion, driven by the $1.8 billion goodwill impairment that was recorded in the first quarter and higher salaries and employee benefits expense due to the significant increase in annual net mortgage banking revenue, partially offset by lower occupancy, communications, marketing, services, and other expenses;
• Paid dividends of $0.84 per common share (equal to the $0.84 per share in the prior year) and repurchased 331,000 shares of common stock; and
• Book value decreased by 37%, or $7.31 per common share due to the aforementioned goodwill impairment, and tangible book value¹ increased by 7%, or $0.82 per common share.

Fourth Quarter 2020 Highlights (compared to prior quarter):

• Gross loan and lease balances decreased by $647.1 million, or 3%, partially due to processed PPP loan forgiveness, the transfer of $78.1 million in indirect auto loans to loans held for sale, and payoffs in residential real estate.
• Deposit balances decreased by $47.6 million or 0.2%, partially due to the decline in brokered and personal certificates of deposits, partially offset by balance growth in non-interest bearing demand, interest bearing demand, money market, and savings products;
• Net interest income increased by $18.3 million, attributable to the acceleration of PPP fees due to processed borrower forgiveness and lower costs of interest-bearing deposits;
• Provision for credit losses increased by $0.4 million, driven by the continued stabilization of credit quality metrics and economic forecasts used in credit models;
• Net charge-offs increased by 11 basis points to 0.35% of average loans and leases (annualized) primarily due to the previously disclosed leases within the FinPac portfolio that received applicable CARES Act relief and were not able to resume payments after the deferral period expired;
• Non-interest income decreased by $8.0 million reflecting the linked quarter decline in net mortgage banking revenue, partially offset by an increase in the gain on sale of Small Business Association (SBA) loans during the period;
• Non-interest expense increased by $21.1 million, primarily driven by a $12.1 million increase in compensation and benefits due to the year end true up of performance based variable incentives and deferred compensation calculations, $6.5 million in one time software impairment charges, and a $2.4 million increase in charitable contributions, partially offset by lower service expense;
• Non-performing assets to total assets decreased three basis points to 0.24%;
• Estimated total risk-based capital ratio of 15.6% and estimated Tier 1 common to risk weighted assets ratio of 12.3%; and
• Paid a quarterly cash dividend of $0.21 per common share on November 30, 2020, to shareholders of record as of November 20, 2020.

Balance Sheet
Total consolidated assets were $29.2 billion as of December 31, 2020, compared to $29.4 billion as of September 30, 2020 and $28.8 billion as of December 31, 2019.  Including secured off-balance sheet lines of credit, total available liquidity was $11.5 billion as of December 31, 2020, representing 39% of total assets and 47% of total deposits.

Gross loans and leases were $21.8 billion as of December 31, 2020, a decrease of $647.1 million from $22.4 billion as of September 30, 2020. The decrease in gross loans and leases is primarily due to processed PPP loan forgiveness, the transfer of $78.1 million in indirect auto loans to loans held for sale and payoffs in residential real estate.  Please refer to the additional loan tables in the Q4 2020 Earnings Presentation for select underwriting characteristics of the loan portfolio and specific industry concentrations impacted by COVID-19.

Total deposits were $24.6 billion as of December 31, 2020, a decrease of $47.6 million from $24.7 billion as of September 30, 2020. This decrease was primarily attributable to the decline in brokered and personal certificates of deposit balances, partially offset by deposit balance growth in non-interest bearing demand, interest bearing demand, money market, and savings products.

Net Interest Income
Net interest income was $234.9 million for the fourth quarter of 2020, up $18.3 million from the prior quarter.  This increase was driven primarily by the acceleration of PPP fees due to processed borrower forgiveness applications and by lower costs of interest-bearing deposits.

The Company's net interest margin was 3.35% for the fourth quarter of 2020, up 27 basis points from 3.08% for the third quarter of 2020. This increase was driven primarily by the acceleration of PPP fees due to processed borrower forgiveness and lower funding costs.

Credit Quality
The allowance for credit losses was $348.7 million, or 1.60% of loans and leases, as of December 31, 2020, which was down from $369.4 million, or 1.65% of loans and leases, as of September 30, 2020.  The provision for credit losses was $29,000 for the fourth quarter of 2020, an increase of $367,000 from the prior quarter level primarily due to changes in portfolio mix and balances as well as the stabilization of credit quality metrics and economic forecasts used in credit models.

Net charge-offs as a percentage of average loans and leases increased by 11 basis points from the prior quarter to 0.35% of average loans and leases for the fourth quarter of 2020 (annualized). The increase in net charge-offs for the quarter was primarily due to the previously disclosed leases within the FinPac portfolio that received applicable CARES Act relief and were not able to resume payments after the deferral period expired.  As of December 31, 2020, non-performing assets was 0.24% of total assets, compared to 0.27% as of September 30, 2020 and 0.23% as of December 31, 2019.

Current Expected Credit Loss (CECL)
As described in our first quarter 2020 quarterly report on Form 10-Q filed on May 7, 2020 ("Q1 2020 10-Q"), 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").  In applying CECL, our financial results are 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. Specifically, we use credit models that factor in economic forecasts, which at the beginning of the COVID-19 pandemic projected significant, negative COVID-19 impacts to the economy; therefore we recorded significant provisions for credit losses in the first and second quarters of 2020.  Due to the lack of significant changes in the credit quality of the loan portfolio and offsetting impacts within the economic forecasts compared to the prior quarter we recorded a minimal provision for credit losses in the fourth quarter.

Non-interest Income
Non-interest income was $124.0 million for the fourth quarter of 2020, down $8.0 million from the prior quarter driven primarily by the decrease in net mortgage banking revenue, partially offset by an increase in the gain on sale of SBA loans during the period.

Revenue from the origination and sale of residential mortgages was $83.4 million for the fourth quarter of 2020, a decrease of $15.3 million from the prior quarter. This decrease reflects a sequential quarter decrease of $153.4 million or 8% in for-sale mortgage origination volume and a decrease of 42 basis points in the home lending gain on sale margin to 4.71% for the fourth quarter of 2020.  Of the current quarter's mortgage production, 48% related to purchase activity, compared to 46% for the prior quarter and 55% for the same period in the prior year.

Non-interest Expense
Non-interest expense was $211.3 million for the fourth quarter of 2020, an increase of $21.1 million from the prior quarter level. This increase was driven by a $12.1 million increase in compensation and benefits due to the year end true up of performance based variable incentives and deferred compensation calculations, $6.5 million in one time software impairment charges due to technology contract exits, and a $2.4 million increase in charitable contributions, partially offset by lower services expense.

Goodwill
As described in our Q1 2020 10-Q, the Company completed the analysis of goodwill prior to filing the Q1 2020 10-Q with the Securities and Exchange Commission.  The Company updated its goodwill assessment for the Wholesale Bank and Retail Bank reporting units as of March 31, 2020, due to events and circumstances indicating potential impairment. Impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value. A goodwill impairment is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.  Upon completing the quantitative impairment analysis, the Company recorded a goodwill impairment of $1.8 billion during the first quarter, which represented the entire amount of goodwill allocated to the Wholesale Bank and Retail Bank reporting units. The remaining goodwill of $2.7 million after the impairment relates to the Wealth Management reporting unit.  The goodwill impairment was material to reported earnings in the first quarter, but was a non-cash charge and had 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 were not impacted by the impairment.

Capital
As of December 31, 2020, the Company's book value per common share increased to $12.28 from $11.85 in the prior quarter, and its tangible book value per common share¹ increased to $12.21 from $11.77 in the prior quarter. 

The Company's estimated total risk-based capital ratio was 15.6% and its estimated Tier 1 common equity to risk weighted assets ratio was 12.3% as of December 31, 2020.  The Company remains above current "well-capitalized" regulatory minimums.  The regulatory capital ratios as of December 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 www.umpquabank.com.

Earnings Conference Call Information
The Company will host its fourth quarter 2020 earnings conference call on Thursday, January 21, 2021, 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 fourth quarter and full year 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: 7096769.  A re-broadcast will be available approximately two hours after the call by dialing (855) 859-2056 and entering conference ID 7096769.  The earnings conference call will also be available as an audiocast, which can be accessed on the Company's investor relations page at www.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 impact of Next Gen 2.0 initiatives, and future credit losses under CECL.  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, deferral programs, 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; 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; whether our human digital initiatives and strategic investments result in improved customer experience, growth and increased market share; 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.