Umpqua Reports Second Quarter 2020 Results

PORTLAND, Ore., July 22, 2020 /PRNewswire/ -- Umpqua Holdings Corporation (NASDAQ: UMPQ) (the "Company") reported net earnings of $52.9 million for the second quarter of 2020, compared to net loss of $1.9 billion for the first quarter of 2020 and net income of $111.8 million for the second quarter of 2019. Earnings per diluted common share were $0.24 for the second quarter of 2020, compared to a loss of $8.41 for the first quarter of 2020 and earnings of $0.51 for the second quarter of 2019.

"Umpqua's second quarter results, particularly in light of the significant disruption due to the COVID-19 pandemic, are a testament to our associates' extraordinary resilience and commitment to serving our customers and communities. During the quarter, as we ramped up our efforts to support small businesses across our footprint, we rapidly processed and funded more than 15,000 PPP loans with an average loan size of $134,000. In addition, our home lending department had a record-breaking quarter, generating more than $2.1 billion in production," said Cort O'Haver, president and CEO of Umpqua Holdings Corporation. "We continue working with customers who qualify for payment deferrals as a result of COVID-19 impacts with a 5.7% deferral level that reflects the company's strong credit quality practices. I'm especially pleased with the reduction in our cost of interest bearing deposits and lower non-interest expenses, absent increased home lending commissions due to volume, as we operate in a low interest rate environment."

Ongoing impact of COVID-19 on our business operations:

• Operations have been modified 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 on any given day to remain open throughout the crisis.
• increased cleaning scope and frequency to our store locations and installed other protective devices for our associates.
• Mobile banking usage trends are up 21% and unique sessions are up 30% year over year in addition to an expected decline in store transactions of over 31%.
• Continue to offer our Umpqua Go-To® application with over 63,000 customers enrolled. Go-To usage increased 48% from the prior quarter levels as customers used the platform as a safe and effective way of conducting banking.
• 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 PPP, including:
• over 15,000 PPP loans produced.
• $2.0 billion in total loans were funded.
• average loan size was $134,000.
• Addressing other customer needs during pandemic:
• payment deferrals.
• waiving deferral associated fees.
• ATM fee waivers.
• Enhanced community support:
• announced a total of $3.0 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 second quarter 2020 financial results included:

• $87.1 million provision for credit losses reflecting the continued impacts of the COVID-19 global pandemic on economic forecasts, compared to a $118.1 million provision in the prior quarter, and a $19.4 million provision in the same period of the prior year.
• $6.4 million loss on the fair value change of the MSR asset due to accelerated prepayments as a result of the lower interest rate environment compared to a $25.4 million loss in the prior quarter and a $17.8 million loss in the same period of the prior year.
• $0.8 million loss related to the fair value of the debt capital market swap derivatives, compared to a loss of $14.3 million in the prior quarter and a loss of $4.0 million in the same period of the prior year.

Second Quarter 2020 Highlights (compared to prior quarter):

• Net interest income decreased by $6.0 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 decreased by $31.0 million, although still elevated from historical levels reflecting the continued influence of the COVID-19 global pandemic on economic forecasts;
• Net charge-offs decreased by twelve basis points to 0.29% of average loans and leases (annualized);
• Non-interest income increased by $74.8 million, driven primarily by an increase in net mortgage banking revenue;
• Non-interest expense decreased by $1.8 billion, driven by the $1.8 billion goodwill impairment that was recorded in the prior period. Absent the goodwill impairment charge, non-interest expense increased by $4.2 million from the prior quarter primarily due to strong mortgage production;
• Non-performing assets to total assets decreased six basis points to 0.26% from 0.32%;
• Estimated total risk-based capital ratio of 14.4% and estimated Tier 1 common to risk weighted assets ratio of 11.1%;
• Filed a Form 8-K on June 17, 2020, announcing the shift in timing of a dividend declaration date from historical intra-quarter announcements to after quarterly earnings are finalized and applicable regulatory approval processes are complete.

Balance Sheet
Total consolidated assets were $29.6 billion as of June 30, 2020, compared to $27.5 billion as of March 31, 2020 and $28.0 billion as of June 30, 2019.  Including secured off-balance sheet lines of credit, total available liquidity was $11.7 billion as of June 30, 2020, representing 39% of total assets and 47% of total deposits.

Gross loans and leases were $22.7 billion as of June 30, 2020, an increase of $1.4 billion relative to March 31, 2020.  The increase in gross loans and leases is primarily due to the production of the PPP loans totaling $2.0 billion in the quarter. Please refer to the additional loan tables in the Q2 2020 Earnings Presentation for select underwriting characteristics of the loan portfolio and specific industry concentrations impacted by COVID-19.

Total deposits were $24.8 billion as of June 30, 2020, an increase of $2.1 billion from $22.7 billion as of March 31, 2020. This increase was attributable to growth in non-interest bearing demand deposits of $2.0 billion partially offset by a decline in time deposits of $612.0 million.

Net Interest Income
Net interest income was $212.5 million for the second quarter of 2020, down $6.0 million from the prior quarter.  The 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 3.09% for the second quarter of 2020, down 32 basis points from 3.41% for the first quarter of 2020 primarily driven by the decrease in short and long term interest rates that occurred in the prior quarter.

Credit Quality
The allowance for credit losses was $383.1 million, or 1.69% of loans and leases, as of June 30, 2020, which was up from $312.3 million, or 1.47% of loans and leases, as of March 31, 2020.  The provision for credit losses was $87.1 million for the second quarter of 2020, a decrease of $31.0 million from the prior quarter level, although still elevated from historical levels reflecting the continued influence of the COVID-19 global pandemic on economic forecasts.

Net charge-offs as a percentage of average loans and leases decreased by twelve basis points to 0.29% of average loans and leases (annualized).  The decrease in net charge-offs for the quarter was primarily due to the COVID-19 related single charge-off to a regional air transportation lessor that occurred in the prior quarter.  As of June 30, 2020, non-performing assets were 0.26% of total assets, compared to 0.32% as of March 31, 2020 and 0.28% as of June 30, 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 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 recorded significant provisions for credit losses in the first and second quarters of 2020 and may incur significant provisions for credit losses in future periods as well as actual or projected economic conditions deteriorate further.

Non-interest Income
Non-interest income was $115.5 million for the second quarter of 2020, up $74.8 million from the prior quarter driven primarily by the increase in net mortgage banking revenue as described below.

Revenue from the origination and sale of residential mortgages was $86.8 million for the second quarter of 2020, an increase of $47.4 million from the prior quarter. This increase reflects a sequential quarter increase of $677.9 million or 59% in for-sale mortgage origination volume and an increase of 132 basis points in the home lending gain on sale margin to 4.75% for the second quarter of 2020. Of the current quarter's mortgage production, 34% related to purchase activity, compared to 43% for the prior quarter and 70% for the same period of the prior year.

Non-interest Expense
Non-interest expense was $181.9 million for the second quarter of 2020, down $1.8 billion from the prior quarter level. This decrease was driven primarily by the $1.8 billion goodwill impairment that was recorded in the prior period.  Due to the aforementioned strong mortgage production, expenses for our Home Lending Division were up $10.4 million compared to the prior quarter.

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 June 30, 2020, the Company's tangible book value per common share¹ was $11.44, compared to $11.30 in the prior quarter and $10.97 in the same period of the prior year.

The Company's estimated total risk-based capital ratio was 14.4% and its estimated Tier 1 common to risk weighted assets ratio was 11.1% as of June 30, 2020.  The Company remains above current "well-capitalized" regulatory minimums.  The regulatory capital ratios as of June 30, 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 second quarter 2020 earnings conference call on July 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 second 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: 8066667.  A re-broadcast will be available approximately two hours after the call by dialing (855) 859-2056 and entering conference ID 8066667. 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 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; 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.