Umpqua Reports Third Quarter 2020 Results

PORTLAND, Ore., Oct. 21, 2020 /PRNewswire/ -- Umpqua Holdings Corporation (NASDAQ: UMPQ) (the "Company") reported net income of $124.9 million for the third quarter of 2020, compared to $52.9 million for the second quarter of 2020 and $84.5 million for the third quarter of 2019. Earnings per diluted common share were $0.57 for the third quarter of 2020, compared to $0.24 for the second quarter of 2020 and $0.38 for the third quarter of 2019.

"Umpqua's third quarter results represent a record level of net income driven by another outstanding performance by our home lending division who generated production of $2.2 billion this past quarter and by a continued decline in our cost of interest bearing deposits. In addition, we remain confident in the credit quality of our loan portfolio as our current deferral levels decreased to 2.3%." said Cort O'Haver, president and CEO of Umpqua Holdings Corporation. "We launched Next Gen 2.0 this quarter as a continuation of the great progress we have made these past three years modernizing the bank, advancing technology initiatives and improving operating leverage."

Ongoing impact of COVID-19 on our business operations:

• Operations have been modified to comply with multiple state-level proclamations and Center for Disease Control and Prevention (CDC) guidance and best practices; we continue to:
• restrict 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 serve customers in-store by appointment only which has allowed over 94% of stores on any given day to remain open throughout the crisis.
• increased cleaning scope and frequency at our store locations and installed other protective devices for our associates and customers.
• Mobile banking usage trends are up 9% and unique sessions are up 7% year over year in addition to an expected decline in store transactions of over 27%.
• Continue to offer our Umpqua Go-To® application with over 70,000 customers using the application.  Go-To usage increased 38% 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 16,900 PPP loans produced.
• $2.05 billion in total loans were funded.
• average loan size was $121,000.
• 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 third quarter 2020 financial results included:

• Provision for credit losses decreased by $87.4 million as compared to the previous quarter and $23.6 million as compared to the same period of the prior year, due to changes in loan portfolio mix and balances as well as the stabilization of credit quality metrics and economic forecasts used in credit models.
• $12.2 million loss on the fair value change of the mortgage servicing rights (MSR) asset due to changes in model inputs compared to a $6.4 million loss in the prior quarter and a $11.0 million gain in the same period of the prior year.
• $1.8 million gain related to the fair value of the debt capital market swap derivatives, compared to a loss of $0.8 million in the prior quarter and a loss of $4.6 million in the same period of the prior year.

Third Quarter 2020 Highlights (compared to prior quarter):

• Net interest income increased by $4.1 million on a quarter to quarter basis primarily driven by lower costs of interest-bearing deposits;
• Provision for credit losses decreased by $87.4 million due to changes in loan portfolio mix and balances as well as the stabilization of credit quality metrics and economic forecasts used in credit models;
• Net charge-offs decreased by five basis points to 0.24% of average loans and leases (annualized);
• Non-interest income increased by $16.4 million, driven primarily by an increase in net mortgage banking revenue and the sale of three store locations completed during the quarter;
• Non-interest expense increased by $8.3 million, primarily due to an increase in group insurance costs, lower deferred origination costs, higher mortgage commissions due to strong mortgage production, and higher other expenses, partially offset by lower FDIC assessment costs;
• Non-performing assets to total assets increased two basis points to 0.27% from 0.25%;
• Estimated total risk-based capital ratio of 14.9% and estimated Tier 1 common to risk weighted assets ratio of 11.6%;
• Paid a quarterly cash dividend of $0.21 per common share on August 31, 2020 to shareholders of record as of August 20, 2020.

Balance Sheet
Total consolidated assets were $29.4 billion as of September 30, 2020, compared to $29.6 billion as of June 30, 2020 and $28.9 billion as of September 30, 2019.  Including secured off-balance sheet lines of credit, total available liquidity was $11.2 billion as of September 30, 2020, representing 38% of total assets and 45% of total deposits.

Gross loans and leases were $22.4 billion as of September 30, 2020, a decrease of $245.0 million relative to June 30, 2020.  The decrease in gross loans and leases is primarily due to the payoffs in commercial real estate that occurred during the quarter as well as a decrease in utilization rates of commercial lines of credit.  Please refer to the additional loan tables in the Q3 2020 Earnings Presentation for select underwriting characteristics of the loan portfolio and specific industry concentrations impacted by COVID-19.

Total deposits were $24.7 billion as of September 30, 2020, a decrease of $174.6 million from $24.8 billion as of June 30, 2020. This decrease was attributable to a decline in time deposits of $612.5 million partially offset by growth in non-interest bearing demand deposits of $303.0 million.

Net Interest Income
Net interest income was $216.6 million for the third quarter of 2020, up $4.1 million from the prior quarter.  The increase was primarily driven by lower costs of interest bearing deposits compared to the previous quarter.

The Company's net interest margin was 3.08% for the third quarter of 2020, down one basis point from 3.09% for the second quarter of 2020 primarily driven by lower yields on loans held for investment offset by lower costs of interest bearing deposits.

Credit Quality
The allowance for credit losses was $369.4 million, or 1.65% of loans and leases, as of September 30, 2020, which was down from $383.1 million, or 1.69% of loans and leases, as of June 30, 2020.  The provision for credit losses decreased by $87.4 million 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 decreased by five basis points to 0.24% of average loans and leases (annualized) as of September 30, 2020.  The decrease in net charge-offs for the quarter was primarily due to continued, stable credit performance of the loan portfolio in addition to a select amount of borrowers using available deferral options.  As of September 30, 2020, non-performing assets were 0.27% of total assets, compared to 0.25% as of June 30, 2020 and 0.25% as of September 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 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.  As those future economic forecasts have stabilized, we recorded a small recapture of the allowance for credit losses in the current period.

Non-interest Income
Non-interest income was $131.9 million for the third quarter of 2020, up $16.4 million from the prior quarter driven primarily by the increase in net mortgage banking revenue and the sale of three store locations completed during the period.

Revenue from the origination and sale of residential mortgages was $98.7 million for the third quarter of 2020, an increase of $11.9 million from the prior quarter. This increase reflects a sequential quarter increase of $96.7 million or 5% in for-sale mortgage origination volume and an increase of 38 basis points in the home lending gain on sale margin to 5.13% for the third quarter of 2020. Of the current quarter's mortgage production, 46% related to purchase activity, compared to 34% for the prior quarter and 60% for the same period of the prior year.

Non-interest Expense
Non-interest expense was $190.2 million for the third quarter of 2020, up $8.3 million from the prior quarter level. This increase was primarily due to higher group insurance costs, lower deferred origination costs, higher mortgage commissions due to strong mortgage production, and higher other expenses, partially offset by lower FDIC assessment costs.

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 September 30, 2020, the Company's tangible book value per common share¹ was $11.77, compared to $11.44 in the prior quarter and $11.27 in the same period of the prior year.

The Company's estimated total risk-based capital ratio was 14.9% and its estimated Tier 1 common to risk weighted assets ratio was 11.6% as of September 30, 2020. The Company remains above current "well-capitalized" regulatory minimums.  The regulatory capital ratios as of September 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 third quarter 2020 earnings conference call on October 22, 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 third 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: 4653597.  A re-broadcast will be available approximately two hours after the call by dialing (855) 859-2056 and entering conference ID 4653597. 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 Next Gen 2.0 initiatives, 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.