Earnings Call: Q3 2021

Oct 21, 2021

Good day, and welcome to the AMCA Holdings Corporation Third Quarter 2021 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Thank you. I would now like to introduce Jackie Bohlen, Investor Relations Director for Umpqua to begin the conference call. Jackie, the floor is yours. Thank you, Joanna. Good morning and good afternoon, everyone. Thank you for joining us today on our Q3 2021 earnings call. With me this morning are Curt Orhaver, the President and CEO of Umpqua Holdings Corporation Tory Nixon, President of Umpqua Bank Ron Farnsworth, our Chief Financial Officer and Frank Namdar, our Chief Credit Officer. After our prepared remarks, we will take your questions. Yesterday afternoon, we issued an earnings release discussing our Q3 2021 results. We have also prepared a slide presentation, which we will refer to during our remarks this morning. Both these materials can be found on our website at umpquabank.com in the Investor Relations section. During today's call, we will make forward looking statements, which are subject to risks and uncertainties and are intended to be covered by the Safe Harbor provision of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to Slide 2 of our earnings conference call presentation as well as the disclosures contained within our SEC filings. I'll now turn the call over to Court. Okay. Thank you, Jackie. I'll provide a brief recap of our performance and then pass to Ron to discuss financials. Frank will discuss credit and then we'll take your questions. For the Q3, we reported earnings available to shareholders of $108,000,000 This represents EPS of $0.49 per share compared to the $0.53 reported last quarter and $0.57 reported in the Q3 of last year, with the decline due primarily to lower mortgage banking income as volume and margins normalized from historically high levels. The focal point of an all around strong quarter was non PPP organic loan growth, which contributed to increased net interest income from the prior quarter and highlights continued momentum at the bank. The strong growth momentum we experienced in the 2nd quarter continued into the 3rd quarter as non PPP organic loan balances grew $480,000,000 representing a quarterly growth rate of 2.3% and over 9% annualized. The quarter's expansion is all the more noteworthy as it comes on the heels of record quarterly loan growth for the company in the 2nd quarter and continue to be balanced across all categories. We continued to process the forgiveness of PPP loans, which declined $653,000,000 or 47 percent from June 30. While this expected runoff drove a net reduction in loans and leases of $174,000,000 the headwind is winding down as remaining PPP balances only 3% of the loan portfolio. We are very pleased with the growth in our non PPP loan book, which reflects successful talent acquisition, brand momentum in our markets and the resulting healthy customer pipelines. Regarding capital, in August, we paid our shareholders a dividend of $0.21 per share, consistent with historical payments, and we repurchased 4,000,000 shares at an average price of $19.50 in the quarter as part of our previously announced stock repurchase authorization. In total, during the quarter, we returned $124,000,000 to our shareholders through dividends and buybacks. Our capital levels remain very healthy. However, we no longer intend to repurchase shares in the near term given our pending combination with Columbia Banking System, which we announced last week. Now for a quick update on NextGen 2.0. First, balanced growth. We continue to leverage the positive brand awareness of our PPP work and the market disruptions that provided us opportunities to attract both customers and talent, and our results demonstrate the strong momentum we've talked about for the past few quarters. Elevated customer pipelines drove strong balanced growth and the momentum continues into the early days of this quarter as our pipelines remain strong. Recently onboarded bankers and new teams continue to generate new business as they hit their stride and we continue to expand our relationships with PPP customers who are now new to the bank. Our human digital initiatives remain critical to our long term strategy as our customers continue to engage with us through digital channels at an accelerated pace. We experienced increases of 3% more mobile deposit transactions, 39% more Zelle transactions and 10% more daily sessions within our mobile banking app in the Q3 compared to the year ago period. Notably, GO2 enrollments continue to increase and we are getting close to 100,000 mark to the 100,000 mark. Our human digital initiatives also support our commercial customer acquisition efforts. This past quarter, we finalized a partnership with Visa to be the 1st FI in North America to launch Visa Commercial Pay, a mobile app based solution to offer instant issue virtual commercial cards for T and E, point of sale and supplier payments. Additionally, we launched our pilot of consolidated payments. This will allow commercial and business clients to fully outsource their payments to Umpqua in a variety of formats, including checks, ACH, wires and commercial card complete with APIs to over 160 different accounting platforms. With regards to operational excellence, we continue to build on the progress achieved since announcing our initiatives a year ago. The Q3 run rate benefited from a mid Q2 sale of Unkla Investments to Stewart Partners. We are on track to consolidate an additional 15 stores by year end, which will bring the total rationalizations under NextGen 2.0 to 34. This moves us into our 30 to 50 store consolidation goal, which we originally laid out a year ago. During the quarter, we also recorded some exit and disposal costs related to the exit of certain leases as we continue to rationalize other office space. On Slide 3 of the earnings presentation, we show the cumulative saves accomplished so far under the NextGen 2.0 program and we expect to accomplish by mid next year. One final comment before passing to Ron. I want to reiterate remarks I made on last quarter's call regarding the growth opportunities ahead for Oumkla, which are further supported by our strong performance in the Q3. I remain highly enthusiastic that our growth prospects within our markets and the momentum from our banking teams will continue to spur growth and will enable us to deliver shareholder value over the long term. While we are clearly focused on fine tuning our integration plans with Columbia, our bankers activities are not impacted and they will remain focused on delivering top notch service as we meet the needs of our current and prospective customers. We expect a strong finish here in 2021, which will carry us into 2022. And with that, I'll turn it over to you, Ron. All right. Thank you, Court. And for those on the call who want to follow along, I'll be referring to certain page numbers from our earnings presentation. Page 8 of the slide presentation contains our summary quarterly P and L. Our GAAP earnings per share for Q3 were $0.49 Excluding MSR input and CVA fair value adjustments along with exit disposal costs, our adjusted earnings were $0.51 per share this quarter. For the moving parts as compared to Q2, net interest income increased 2%, reflecting the combination of higher average non PPP loan balances along with a continued reduction in our cost of funds. We had a recapture of prior provision for loan loss of $19,000,000 with improving economic forecasts slightly lower than the prior period recapture. Non interest income reflected the expected decline in mortgage banking revenue along with a flip in the swap derivative fair value and the gain on sale of HomeCo investments back in Q2. And non interest expense reflected the lower mortgage banking activity. We previously communicated our expectations for an annualized 2022 non interest expense run rate in the range of $690,000,000 to $710,000,000 for Umpqua on a standalone basis. This outlook is unchanged and it was taken into consideration when we designed our cost savings forecast for the pending combination with Columbia Banking System. I want to reiterate this last point. NextGen related cost savings are separate from and before any and all cost savings related to our forthcoming combination with Columbia. As for the balance sheet on Slide 9, interest bearing cash increased to $3,300,000,000 this quarter driven by continued strong deposit growth. This higher level of cash cost to NIM 4 basis points in Q3 as compared to Q2, but gives us significant future optionality for funding ongoing loan growth or deleveraging certain liabilities. We increased the bond portfolio of 7% as longer term yields were higher later in the quarter into similar duration agency investments. Court mentioned previously, our significant non PPP loan growth this quarter was offset by PPP loan forgiveness, while our deposits increased $0.75 billion Our total available liquidity including off balance sheet sources at quarter end increased to $16,200,000,000 representing 52% of total assets and 60% of total deposits giving us ample liquidity to fund future loan growth. Before we get to the segments, let's jump forward to page 14 of the presentation. Our NIM increased 1 basis point to 3.21 percent in Q3, while the NIM excluding the impact of PPP loans and discount accretion was 3.04%, fairly consistent for the last few quarters, which is great to see the impact of continued non PPP loan growth and deposits continuing to reprice lower offsetting the impact of the low rate environment. Our cost of interest bearing deposits was 13 basis points in Q3 and 11 basis points for the month of September, suggesting a continued decline in the overall quarterly costs in Q4. Our non insurance demand mix increased slightly to 41.3%, contributing to our total deposit cost of just 8 basis points in Q3. Okay. Now to our segment disclosures. Starting with the core banking segment on Page 10 of the presentation or Page 19 of the release. Net interest income increased 2% sequentially driven by the strong non PPP loan growth and continued decline in cost of funds. I'll talk about CECL and the provision in detail in a few minutes, but you'll see here we had a $19,000,000 recapture this quarter from improving economic forecasts. Two lines down is the change in fair value on swap derivatives noting there was a gain of $1,400,000 here in Q3 as long term interest rates increased this quarter compared to the loss of $4,500,000 back in Q4 as rates decreased in the 2nd quarter. Non interest income of $38,300,000 was lower than Q2 related primarily to the $4,400,000 gain on sale of HomeCo investments recognized in Q2 along with lower swap and M and A advisory fees in Q3. The exit and disposal cost of $3,800,000 relates to lease exits on recent store consolidations and a right of use lease asset impairment as we execute our return to work plan. The direct non interest expense for the core banking segment was flat for the quarter and pre tax income for the core banking segment was $136,000,000 and represents 95% of the consolidated total. The efficiency ratio on the core was consistent at 57%. Turning now to page 11 of the presentation or page 20 of the earnings release, we show the Mortgage Banking segment 5 quarter trends. To start, we had $1,000,000,000 in total held for sale volume this quarter, down from $1,250,000,000 in Q2. The gain on sale margin was 3.07%, down from Q2 as expected, given a slowing mortgage market and decline in the lock pipeline. These two items resulted in the $30,300,000 of origination and sale revenue noted towards the top left of the page. Our servicing revenue was stable and for the change in MSR fair value, the passenger time piece remained flat as expected, while the change due to valuation inputs was a loss of $600,000 due mainly to higher pay down activity earlier in the quarter. Non interest expense totaled $29,000,000 for the quarter. Again, this represents direct held for sale origination costs, servicing costs, along with administrative and allocated costs. The direct expense component of this was $20,000,000 as noted on the right side of the page, representing 2.02 percent of production volume consistent in basis points with Q2. It's important to note here, the Mortgage Banking segment represents only 5% of our pre tax income. Couple of final items before I turn it over to Frank. Let me take your attention forward to Slide 23 on CECL and our allowance for credit loss. As a reminder, our CECL process incorporates the life alone reasonable and supportable period for the economic forecast for all portfolios with the exception of C and I, which uses a 12 month reasonable and supportable period reverting gradually to the output mean thereafter. Hence, these forecasts incorporate economic recovery through the remainder of 2021 and beyond as most economic forecasts revert to the mean within a 2 to 3 year period. We used the consensus economic forecast this quarter updated in August. Overall, the forecast showed improvement in several key areas as the economy continues to reopen. We included a $14,000,000 overlay for various CRE portfolios to hedge against any potential near term slowdown or negative turns with the pandemic. Net of this overlay, we recognized a $19,000,000 recapture on prior provisions for loan loss. Net charge offs for Q3 declined to $6,000,000 much lower than the models from last year suggested and the majority of net charge offs this quarter related to the small ticket lease portfolio. The ACL at quarter end was 1.23%, noting this ratio was 1.27%, excluding the government guaranteed PPP loans. As these are economic forecasts driving the reserve, it will simply take the passage of time to see if net charge offs follow as modeled. But to date, the models have simply overestimated the actual net charge offs given the lag of at least 5 quarters. Our day 1 CECL level was right at 1% on the ACL, which is about $57,000,000 lower on the ACL for non PPP loans than we are at currently. All else equal, this excess ACL will either be charged off in future periods if the models are eventually proven correct or be recaptured and or used for providing for future loan growth if the economic forecast continue to improve. Time will tell. And lastly, back on slide 21, I want to highlight capital, noting that all of our regulatory ratios remain in excess of well capitalized levels. Our Tier 1 common ratio was 12.1% and our total risk based capital ratio was 14.9%. The bank level total risk based capital ratio was 13.4%. And with that, I will now turn the call over to Frank Namdar to discuss credit. Thank you, Ron. I will also be referring to certain page numbers from our earnings presentation for those who want to follow along. Slide 24 reflects our credit quality statistics. Our non performing assets to total assets ratio held steady at 0.17%. And though our classified loans to total loans ratio ticked up 7 basis points to 0.81%, it remained in its fairly consistent range. Our annualized net charge off percentage to average loans and leases decreased 14 basis points to 0.11%, reflecting continued normalization of credit trends in the overall portfolio. The Finpack portfolios ratio came in at 1.2%, notably below its historical 3% to 3.5% range during the quarter reflective of higher levels of customer liquidity, rising out of stimulus, improving economies and the favorable impact of credit tightening that was put in place last year. Excluding Fintech, annualized net charge offs were just 4 basis points. Slide 25 shows the total loan balances that were on deferment at the end of the quarter at only 0.6% of the loan book continuing to work its way down. To wrap up, we are very pleased with our credit quality metrics this quarter. We remain confident in the quality of our loan book and we look forward to future continued growth. Back to you, Gord. Okay. Thanks Frank and Ron for your comments. We'll now take your questions. Thank you. Your first question is from Jeff Rulis of D. A. Davidson. Jeff, your line is open. Thanks. Good morning. Hi, Jeff. Cort, you mentioned the focus of the team through the deal announcement and just want to kind of dig into that loan growth. It's been pretty consistent in the high single digit range. And the pace of new hires has been as you look at that and into 'twenty two and along with the deal news, expectations on loan growth, I guess, simply put is just to get a handle of that given the moving pieces? Let me just make a comment and then I'll kick it over to Tore. He can give you some greater details on the pipelines. So, we've hired some great people as we've talked about over the last 3, 4 years or 5 years and they are to the point in the comments beginning to hit their stride. And Troy will talk about the robust pipelines that we've got. We just see continued momentum. The bank is going to operate as a hard bank for until we close this deal and there's significant momentum with the people we've hired and with our customers. And so we don't see that stopping even though we've got a pending combination with Columbia. But let me have Tory give you some greater details around the pipelines. Sure. Hey, thanks, Court. Jeff, as Court mentioned, I mean, we've obviously hired a bunch of folks in various markets as they kind of hit their stride. Pipelines are growing very nicely. I mean our pipelines today are about $4,500,000,000 total, which is consistent with last quarter, about $2,000,000,000 of that is C and I and about $2,000,000,000 of that is real estate and the rest is consumer and some other parts of the company. So we feel really good about pipeline. I mean that's a significant growth kind of year over year especially in the C and I space for us. So got a lot of focus, lot of good activity, feel very good about that high single digit loan growth as we move forward. And Tore, the additional hires, is that business as usual? Or do you how do you approach into the close of the transaction? Any is there a moratorium on hires? How do you treat that in the first half of the year? Yes. No, it's just business as usual. We're continuing to move forward. In fact, we just hired a middle market executive in Phoenix, Arizona as we look to expand outside of our traditional footprint. So there's a lot of infill in a variety of places whether it's from in the state of Washington to Oregon and all throughout California. So we're actively looking and finding the right key talent that fits what we're looking for in the culture and the values of Uncle Bank can help us continue to grow the business. Okay, thanks. And maybe the last one for Cord and kind of fluffy, but part of the hires also kind of involves retention of the team? And I guess just any overall thoughts of morale with the news and how you think that the current team has viewed the transaction? Thanks. We'll give you greater details as we move forward. It's only been a week since we made the announcement. I'll just tell you that historically this bank has rallied around things like this, whether it's just recruiting people from banks that where our bankers and store associates just want a different experience to opportunities to create a real regional West Coast player. So we feel great momentum. I know that Tory and I and the team are greatly lifted by the enthusiasm of all the associates here at the bank. Okay. Thank you. Thank you. Your next question is from Jared Shaw of Wells Fargo Securities. Your line is open. Hey, everybody. Good morning. Thanks for taking the questions. Court, your enthusiasm is pretty high. You're seeing good growth this quarter. We're hearing from some other banks are seeing good growth looking more towards low single I'm sorry, low double digit growth on the loan book looking out a little further. What would have to happen for that to be triggered at EMCO? Is that continued customer acquisition, but then you also need to see utilization rates go higher? Or I guess what could drive additional optimism around loan growth? Let me have Tore comment on that, Jared, and then I'll follow-up. Yes. Jared, I think you've kind of touched on a couple that certainly continue to help the cause. I mean, we obviously will continue to acquire customers and provide debt capital for those customers as we move forward. As we hire people, we'll continue to do more and more business. I think line utilization is something that's kind of interesting to look at. I mean our C and I line utilization is about 27%, which has been relatively flat for a few quarters. And if that were to even move up to historical levels at around $40,000,000 that's about a $270,000,000 lift right there, kind of the same in our HELOC portfolio. We continue to grow the commitment side of our HELOC business, but we're at about 36% utilization there. And if we got to historic kind of pre pandemic levels of $45,000,000 that's about $300,000,000 So that utilization is something that certainly could help the cause as we move forward as customers continue look to borrow more money than they do today. But as you know, I mean folks are flushed with cash and certainly there will at some point be at a time that they'll start to borrow more on their lines. And then Jared, as we've talked about in prior quarters and we've been able to attract talent at Umpqua Bank at the $30,000,000,000 or the $25,000,000 to $30,000,000 since I've been CEO, Mark, because we offer a great different experience for a lender and obviously lenders bring customers that's why you hire great people. And that has really spurred our growth, right. We've really been able to kick our growth in the gear and have gotten into new verticals by attracting teams of people. I've been here 11 years, Tory has been here 7 or 6. And I think we've really turned the corner on making this a fully integrated commercial bank. And that's at $30,000,000,000 So I'll just leave you with the idea that when we combine with Columbia, I think our ability to track talent will really be astronomical. That's good color. Thanks. And then shifting over to the fee, some of the initiatives you announced on fees this quarter with payments and Visa, What's some of the revenue opportunity around that? And do you view that more as building out services for the existing customer base? Or is this something that could actually drive customer acquisition? This is Tore. Let me say this, I think it helps support a full fledged commercial relationship. So as we prospect, whether it's to existing customers or to new customers, the ability to leverage and add on technology and technological solutions to how they run their companies and how they interact with their customers, which is critically important as part of the mix. And I think as we as you saw through our virtual commercial card through the Visa commercial pay, just another really good product that supports that, as we're moving forward with Ncino, which is a loan origination system in the company. So there's just a lot of things that are happening both inside the company and outside the company from product perspective that leverages technology to make, our customers do their banking with us easier and faster actually. So it's very supportive as we prospect and as we grow the bank. Okay, thanks. And then just finally for me, looking at the allowance ratio, Ron, you mentioned the $14,000,000 of qualitative overlay still in there and then the Finpack data looks a lot better. Should we be thinking that the qualitative overlay sort of gets bled back into the ratio just with growth? Or what's the how should we think about, I guess, the timing of approaching back to the day 1 as the broader economic backdrop is improving? That's a good question, right? Because I mean, what I think about is what was our day 1 CECL in a normalized environment? Because the question is as we get back to normalized environment, that was roughly $57,000,000 to get back to end of the 1% ACL. The $14,000,000 overlay is part of it. And it's just strictly going to depend upon economic forecast and how those forecasts change. If they continue to improve, then we wouldn't see charge offs for that balance, then that would help support provisions on future loan growth and or recaptures and vice versa economic forecast go the other way. So it's just going to take time and which way the forecast change. And should we expect the FinTech losses to normalize? Or is this sort of a new good level for that? No. This is Frank Nandar. I think you'll continue to see them normalize closer to that 3% range. Like I alluded to in my comments, I mean, this is specifically driven by stimulus dollars that are within the customers' hands right now and some of the tightening that was done pre pandemic and shortly thereafter. It's a the nature of the portfolio is of higher risk, higher yield and we expect that to trend up, but more closer to that 3%. Great. Thanks for all the color. Your next question is from Brandon King of Truist Securities. Your line is open. Hey, good morning. Good morning, Brandon. So multifamily has seen strong momentum, very strong growth in 3Q and also pretty strong growth in in 2Q. And I wonder if you could provide any color on what the outlook is there? Was there any, I guess, pull through from 4Q? Or could we see similar levels of growth in 4Q and potentially in 2022? Brandon, this is Tory. There's a couple of places where we do multifamily lending in the company. 1 is through our real estate group, primarily larger projects. A lot of it is construction, but a lot of term facility as well. And then we have a multifamily division that does mostly average deal size about $2,000,000 That part of the business, this multifamily division business has the activity in the pipeline is picked up pretty significantly here in the past couple of quarters. And it looks very strong right now. Feel really good about it. Excited to see the team. We've added some folks in the space both to kind of underwrite and process, but also to be kind of RMs and customer facing people. So we're seeing some nice expansion there and think that that should continue. Okay. Thank you. And then for Ron, if deposit growth continues to be strong and I saw you purchase some securities in the Q3, could you potentially increase the amount of purchases for securities based off the current Fed rate high outlook and interest rate outlook that you currently have? Definitely possibility. I mean, 1st primary focus will be continued core organic loan growth as you heard Tory and Kare talk about, which we are excited about continued prospects on that front. But definitely you can see a little bit of that going to the bond portfolio. It's going to be give and take just based off the outlook in those deposit flows. And I'd point out too in terms of the NIM impact, so it was down 4 bps this quarter just because of the higher average cash. It was down 4 bps in Q2 because of the higher average cash. It's about 8 bps compared to Q1. And I just want to point out that's like 0 impact or close to 0 impact on the P and L. It's just in terms of NIM and cash is a great thing when we look at the future opportunities for continued growth and funding of the loan book. Okay. And then lastly, this is for Cord. I know it's a different environment now, but there hasn't been a major acquisition or deal for Oncoa since the Sterling acquisition. But I was wondering if there's any lessons learned from the integration process with Sterling and what you could potentially take over and use that with integration with Columbia Baking System? Yes, we had quite a few and we learned some things and we'll certainly incorporate those into our integration planning. There's always something you learn when you do something good and bad to be quite frank. But yes, there's some things we wouldn't do again and there's some things that I think we did very, very well relative to Sterling. Our focus on our customers, making sure that they were well served is always the key. The retention of customers is always very, very important. But yes, and there was probably 27 acquisitions and prior to that, that there's a lot of knowledge within this building that we will lean on heavily as we move forward. Okay. Thanks for answering my questions. Yes. Thank you. Your next question is from Matthew Clark of Piper Sandler. Your line is open. Hey, good morning. Good morning, Matt. First one for me is around mortgage expenses. I guess, first, how much of that mortgage expense was variable? And what I'm trying to get at is the mortgage comp to closed volume, I think, remained relatively steady in the around 2%. I think there's an expectation that that was going to step up pretty materially next year maybe in the 2.7% s. And just want to get your updated thoughts there. Yes, Matt, this is Ron. Actually, $2,700,000,000 to $2,800,000,000 range was around the total expense including allocated as you see on the P and L. But from the standpoint of the direct held for sale expense, the $2,02,000,000 you might see some lift because this annualizes at 4,000,000,000 dollars If we think we're going to be closer to $3,000,000 next year, it might go up slightly, but probably not all the way up to that $2,800,000,000 range. And of that expense, roughly 2 thirds of it is going to be commission based. There is some fixed in there as well, but the majority is still commission based. Okay, got it. And then just thinking about your California based franchise relative to Colby, obviously, just getting into Northern California. What are your thoughts around what might need to change or what might need to be added to kind of go about the way, Columbia also does business going after kind of small middle market relative to what you guys do today? So is your question around in what we've got with our presence in California, what would it take to incorporate what they do in those locations, Matt? Is that where you're going? Yes. I'm just thinking about legacy Colby and the way they go about winning business in their markets relative to how you guys go about winning business on that in that same space that the small middle market business customer. In terms of what kind of capacity you guys have currently and what you might need? Like we said on the investor presentation, we view there's a lot of revenue synergies and we'll provide some additional clarity as we move forward. We're only in the beginning phases of that, Matt, of having the teams work together as we get into our approval process and then the eventual close. But we I think we're planning on having an update call, a joint call later this quarter, and to provide some additional clarity around that. Okay. And then, Ron, any updated thoughts on the core margin outlook, at least in the near term? I may have missed it in your prepared comments. A good point. I think it will be around this level. And again, the subjectivities will be continued deposit flow and loan flow. If we have another quarter of higher cash balance, you'll see the impact. But again, very excited about the non PPP loan growth outlook. And we'll probably have another quarter of PPP forgiveness and have a relatively smaller balance heading into 2022. Yes. And do you have that remaining net fee amount for PPP? $21,000,000 Yes, dollars 21,000,000 Thank you. Got it. Thanks. Thanks, Matt. Thanks, Matt. I am not seeing any more questions. I would like to turn the call over back to the management. Thank you, Joanna. And thank you for your interest in Umpqua Holdings Corporation and participation on our Q3 2021 earnings call. Please feel free to contact me if you would like clarification on any of the items discussed today or provided in our presentation materials. This will conclude our call. Goodbye. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.