UMPQ (2021 - Q2)

Ladies and gentlemen, thank you for standing by, and welcome to the Umpqua Holdings Corporation Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised, that today's conference is being recorded. I would now like to hand the conference over to your speaker today Ron Farnsworth, Chief Financial Officer. Thank you. Please go ahead sir. Ron Farn

Okay. Thank you, Brandy and good morning and thank you for joining us today on our Second Quarter 2021 Earnings Call. With me this morning are Cort O’Haver, the President and CEO of Umpqua Holdings Corporation; Tory Nixon, President of Umpqua Bank; and Frank Namdar, our Chief Credit Officer. After our prepared remarks, we will then take questions. Yesterday afternoon, we issued an earnings release discussing our second quarter 2021 results. We have also prepared a slide presentation, which we will refer to during our remarks this morning. Both of 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 provisions of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to page 2 of our earnings conference call presentation, as well as the disclosures contained within our SEC filings. And I will now turn the call over to Cort O'Haver.

All right. Thanks, Ron. I'll provide a brief recap of our performance, and then pass to Ron to discuss financial. Frank will discuss credit and then we'll take your questions. For the second quarter, we reported earnings available to shareholders of $116 million. This represent EPS of $0.53 per share, an increase from both the $0.49 reported last quarter and the $0.24 reported in the second quarter of last year. The highlights of the quarter were record non-PPP organic loan growth, increased net interest income from the prior quarter and our recently announced authorization of a new share repurchase program. Our previously stated optimism on loan growth due to our growing customer pipelines, continued talent acquisition and brand momentum in our markets came to fruition this past quarter as non-PPP organic loan balances grew $650 million, representing a quarterly growth rate of 3.2% or over 12% annualized. This represents record quarterly loan growth for the company and was balanced across all categories, including commercial real estate, commercial loans and residential real estate. In regards to PPP loan balances, the decrease of $667 million was primarily related to forgiveness process during the quarter. PPP forgiveness was accelerated towards the back half of the quarter, as the SBA processed approvals for PPP loans over $2 million at a faster pace than in the previous months.

All right. Thank you, Cort. And for those on the call, I want to follow along. I'll be referring to certain page numbers from our earnings presentation. Page eight of the slide presentation contains our summary quarterly P&L. Our GAAP earnings per share for Q2 were $0.53, up from the prior quarter with the lift in net interest income and recapture on prior provisions for loan loss, more than offsetting the reduction in noninterest income. Excluding MSR input and CVA fair value adjustments, along with exit and disposal costs, our adjusted earnings were $0.56 per share this quarter. And pro forma, excluding the provision recapture, was $0.48 per share.

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 decreased two basis points to 0.17% and our classified loans to total loans remain consistent at 0.74%. Our annualized net charge-off percentage to average loans and leases decreased five basis points to 0.28% and as we indicated earlier the FinPac portfolio began to return closer to historical levels of 3% to 3.5% during the quarter. So this equates to $13.3 million attributable to FinPac and $300,000 to the bank. Slide 25 shows the total loan balances that were on deferment at the end of the quarter at 0.7% of the loan book. For deferrals on a portfolio basis, we are reporting less than one basis point deferral in commercial, 0.6% in commercial real estate less than one basis point in FinPac, 0.1% in consumer and other, and 1.9% in residential real estate. Consistent with last quarter, we have excluded $151 million in Ginnie Mae repurchases from the deferral numbers as those loans are guaranteed by the FHA, VA or USDA rural development. So to wrap up we are obviously very pleased with our credit quality metrics this quarter. We remain confident in the quality of our loan book and look forward to future growth. I'll now turn the call back over to Cort.

Okay. Thanks, Frank and Ron for your comments. We'll now take your questions.

Your first question comes from the line of Jeff Rulis with D.A. Davidson.

Yes. Good morning. Hi. Just a question on the pipelines. Do you have the loan pipeline as of kind of quarter end versus the sequential quarter?

Hi, Jeff. This is Tory Nixon. Pipeline -- total pipeline for all lines of business is up about $450 million from the end of Q1 and we sit today at just over $4.5 billion in total loan pipeline.

Great. And I think Cort alluded to the hires, and I guess as you bring folks on and when you get the follow through of actual net production just trying to track, if you can point us to where hires were made if it's been a pretty steady hire rate and then trying to also track the follow through of when that shows through in growth. Is there a figure you could throw at us on that?

I don't know if I could give you a figure. I would say that hiring for us has been ongoing for actually the last several years. Obviously we're choosy in who we want in terms of the talent and to be accretive to the company and the culture of Umpqua Bank. Our hires in Q2 have been spread out throughout our footprint and our businesses. So we've got some in real estate. We continue to hire in middle market. We've hired probably more in middle market in the Pacific Northwest this quarter than in previous quarters. We've hired quite a few in our community banking business throughout the Pacific Northwest. So we continue to look for talent, continue to bring them into the company. And as Cort mentioned, it takes a quarter or two for them to start to really build the pipeline and get that across the finish line. But feel really good about our hires, our ability to continue to hire and continue to bring in new customers and build pipeline.

Got it. And so last one for me Tory or maybe Cort, just to -- trying to peg the impact of the reopening of businesses in Oregon and Washington particularly. But given the numbers would suggest a pretty good pickup in net growth. If you would care to color what you saw and if you're seeing that impact on the ground level of those economies reopening?

Jeff, it’s Cort. Relative to Oregon specifically or our footprint, just want to make sure I answer your question.

Sure. I mean Oregon, Washington and those restrictions being lifted on a delayed standpoint California a bit different. But just – yeah, I mean is it becoming -- I guess would you peg Q2 growth tied to that, or is it broader reopening? I guess has it impacted specifically growth prospects as you've seen it from your lenders?

I would say generally our businesses and borrowers don't necessarily just do business in Pacific Northwest or the Pacific Rim, which includes all the states we operate. There's no question that the West Coast is probably trailed, the Eastern Seaboard in parts of the Midwest and opening and in some cases places are moderately taken a step back. It's a slow and steady progression as people get their heads around their business as stores reopen and businesses continue to manufacture if they can hire, all the things you hear about certainly are affecting our customers but we're very optimistic. We talk to customers, they're enthusiastic. They're happy to be open again. They're happy to be selling goods and services. So we continue to feel very, very good about the pipeline and our ability to grow outstanding book of business and new businesses.

Okay, fair enough. Thanks. I’ll get back.

Your next question comes from the line of Matthew Clark with Piper Sandler.

Hey, good morning guys. First, just on the buyback. The prior one that you had out there for a long time just hung out there. It sounds like you're looking to get this fully completed within the next 12 months. I'm just trying to get a sense for the cadence that we might see in terms of activity, how price sensitive you might be or not?

Good morning, Matt, this is Ron. Yeah, I mean, our base case is we're laying this in over the course of the next 12 months, but we will be opportunistic through ASR and other means if possible just based on volatility. The real key with this is the buildup of excess capital really over the last year, strong mortgage results as rates decline pushed our excess capital from the $150 million to $200 million range up close to $600 million over the last quarter. So the key on that is to return that capital to shareholders and thereby increasing our return on equity by roughly 150 basis points which from that standpoint it's price agnostic.

Got it. And then, I don't think this is in your segment disclosures or in your disclosures anymore. But how much single-family resi did you portfolio this quarter? Just trying to get the overall in terms of what you portfolioed? We can see what you sold, but I'm just curious what you did on top of that?

Matt, this is Tory. About $200 million is what we portfolioed. Some of that came from home lending and some of that came from our private banking segment.

Okay. And then, Ron, can you just remind us, how much you have in the way of net fees left in for round one and round two PPP?

You bet. $38 million would be the balance currently deferred.

Okay. Great. And then, last one for me, just on the reserve. I think in prior calls you talked about three to four years of coverage on normalized net charge-offs. Correct me, if I'm wrong, but 25, 30 basis points. Is that still -- I assume, that's still the view, but I mean do you feel like, 1% is kind of the bottom in terms of your reserve and kind of normalized environment?

Yeah. I mean the wildcard there is what's normalized, right? But as I think about normalized yeah, our day one CECL was 1.02%. And if you look at the 1.42% today ex-PPP that's a delta of about $80 million that I'd like to think will be in a normalized world here at some point and that ACL should be down around 1%. There's been nothing structural within the portfolio composition that would have shifted compared to our day one balance 1.5 years back.

Okay. Great. Thank you.

You bet. Thank you.

Your next question comes from the line of Jackie Bohlen with KBW.

Hi. Good morning everyone.

Hi, Jackie.

I wanted to dig in a little bit to Slide three with the operational excellence, in terms of the expense reductions that you have. So if I read this slide, I look at it that you're expecting to realize $31 million in cost savings. I know original guidance was roughly 50% realization in 2021. And if I just simply double that it puts me at 62%. And I know there's, other factors at play here. But to me, I read this, as you're going to come in likely at the upper end of your range and possibly even exceed it. And I just wanted to see if I'm properly interpreting that.

Hi. Jackie. Good morning. This is Ron. Yeah, the $35 million would be an annualized go-forward amount. And so we look at the second half of this year roughly 50% of that would be in 2021. But I really think about that from a go-forward annual amount and that was of course also incorporated into the 2022 range guidance, I gave earlier as well.

Okay. So -- sorry I didn't fully understand the explanation.

It's not that there's $35 million…

… So, if the $31 million is...

…yeah, it's not that there's $35 million that's been recognized, as a reduction here in Q2. It's -- we've executed on those saves and here through the end of Q2 that is a go-forward annual amount of saves that we expect…

Okay. And that's…

… specific to those initiatives.

And that's why I'm looking at it. So with that number that fits pretty well into the range if you still have more to recognize in 2022, so that sounds like -- basically I'm trying to say it sounds like you're doing a good job of reaching towards the upper end of the original target range. Is that fair?

That is our goal. That is very fair.

Okay. Thank you.

You bet.

And then, just in terms of the margin guidance that you gave the 3.1% to 3.2% on a core basis. When I look at the mix of that I'm just wondering, how you're looking at the overall balance sheet and its mix assumptions? Because you mentioned that you might also deploy some excess cash into liability pay down. So just trying to pull into how you're thinking about net balance sheet growth.

Yeah. And there's, a couple of other moving parts. Obviously we have assumptions around any potential attrition from continued store consolidations, the balance of the year. We are expecting non-PPP loan growth over the balance of the year. I'd say in total, the balance sheet should be relatively static maybe up slightly in total assets over the course of the year. But really it's more in terms of the mix. I expect more of that coming out of interest-bearing cash into higher yielding non-PPP loans. The PPP balance fluctuations should still -- we should still see continued forgiveness over the balance of the year. But the real juice is going to come from taking the cash out of 10bps of the Fed, 15bps of the Fed into loans north of 3%. So long-winded way of saying, I think, the balance sheet probably stay relatively static in total over the balance of the year, and just continue to work on shifting the deployment of the left side of the balance sheet over the coming year in the loans.

Okay. Okay. Thank you.

You bet. Thank you.

Your next question comes from the line of Brandon King with Truist Securities.

Hey, good morning. And so core deposit growth was strong in the quarter. And I wanted some of the thoughts going forward in expectations of growth in second half of the year? And the source of that growth coming from either new customers or greater wallet share penetration?

Brandon, Tory Nixon. I think that's a great question. I will tell you that, I think, the teams are doing a terrific job in our balanced growth initiative. And we're looking at customer growth, loan growth, deposit growth and fee income growth. And we had really strong deposit growth from our middle market business, from our community banking business, from retail down even from the real estate group. So we continue to pull in good core deposits both from existing customers. Further penetration from PPP loans that we made to non-Umpqua Bank customers, and then just share of new names into the company. So, kind of across the board and across all lines of business.

Okay. And I also noticed card fees were up pretty nicely in the quarter of $3 million sequentially. Is that from more activity, or is that a function of new customers?

Hey, Brandon, this is Ron. That's going to be a combination of new activity and customers part of the reopening component of it as well. There was probably a little over $1 million there that was specific to the merchant in terms of an overall program. It's more of an annual number. I would not expect that component of it to be recurring every quarter, but great to see activity up with reopening.

Yes. I'll just -- Brandon, it's Tory. I'll just add one thing to that. I mean, when I look at our treasury management fee business, our commercial card business, our international banking business, our Elan card business, I mean, all of it continues to grow. We had record months -- record quarters in TM and in commercial card for us.

Okay. And do you see that $10 million run rate as a nice base going forward saw potentially there?

I'd say ex probably $1 million to $1.5 million I talked about on the merchant side.

Okay. Thank you very much.

You bet. Thank you.

Your next question comes from the line of Jared Shaw with Wells Fargo.

Hey, good morning. I guess, sort of following up on the question about deposit growth and outlook. As we go through the end of the year, are you expecting at all sort of a normalization or a reversion in the loan-to-deposit ratio with customers utilizing some of that cash, or do you -- what you see so far the deposit growth trends will still be strong enough that we could see the loan-to-deposit ratio sort of stay where it is as loan growth picks up?

Hey, Jared, this is Ron. Here too as we talk about loans, we need to incorporate, is it non-PPP or with PPP. What I don't expect here near term is to see us back in the low to mid-90s, but I do expect to see a continued march higher over the coming year as you get the combination of PPP loans declining from continuing forgiveness, but also high single-digit non-PPP growth next year. So a long-winded way of saying, I do expect an eventual march higher in our overall loan-to-deposit ratio, but you're going to have some near-term noise just in terms of the PPP flows.

Okay. And then going back to, I guess, the Next Gen targets that were really more discussed earlier and -- or at the end of last year. With the expectation for high single-digit loan growth this year, and then as you pointed out with Jackie ability to probably coming at the higher end of the expense saving range. Should we expect or could we expect to see an update to maybe call it Next Gen 3.0 or an updated guide overall for expectations maybe being a little better coming out of Next Gen 2.0 with some of the actual results you've been able to put up?

Jared, Cort. Yes I mean we get this is off the top of my head here, we get closer to delivering on the Next Gen 2.0 certainly sooner than we had originally discussed with you all almost a year ago now. Yes, we would probably give you a Next Gen 2.1.0 or 3.0. It's a great question. I'd just tell you this we're very pleased with the progress we're making on 2.0 and I appreciate the question. And as we've done in the past we'll continue to give you good guidance on where we're continuing to kind of manage the bank on the most efficient and profitable way we can.

Okay. Great, thanks.

Your next question comes from the line of Steven Alexopoulos with JPMorgan.

Hi, everyone.

Hey, Steve.

I wanted to start first on C&I. So we're midway through earnings season. We've had quite a few other banks comment that they're seeing commercial customers draw on credit lines despite carrying very elevated deposit balances. I’m Curious what are you guys seeing? And how much of your C&I loan growth is coming from share gains versus existing customers drawing online?

Steve, this is Tory Nixon. I'll give you a couple of answers to that. The first on line utilization. Our middle market business is up about 2% in utilization to 29% in Q2 from Q1. However, that utilization in Q2 2021 is identical to Q2 2020. So really kind of flat year-over-year. So we're not seeing it there in aggregate. Kind of the same thing on our community banking business. So kind of year-over-year relatively flat. At some point, back to the conversation the comment around the economy and the success of businesses in the West, I love to see that kind of grow. So most of our loan growth business is coming from either existing customers with some sort of term debt or new names into the company new relationships that are borrowing either term debt or lines of credit.

Okay. That's helpful, Tory. Okay. That's good. And maybe for Ron, you guys have been pretty active in the first half of the year adding to the securities portfolio. But given the step down in rates here what's your appetite to add to securities book the way you've been doing it?

As much as it was earlier in Q2 or in Q1.

Does that mean it should be pretty flat securities portfolio?

That's where we're modeling, internally, yes.

Okay. Got you. That's helpful. And then maybe for Cort on the TM Essentials rollout is that for small business customers in your markets, or are you targeting fairly broad small business customers with that?

I'll bump that one to Tory.

Yes. This is Tory again. That product is essentially a TM solution for small business and business banking. We're just rolling it out. I think it gives us a great opportunity to provide the solutions for smaller companies that we bank today but it also will be a part of the offering for our prospecting efforts. And I think going back even to our PPP non-Umpqua Bank customers that are on the smaller end in business banking or small business this is a perfect product for them. And we have I think our community banking business we have about an 18% penetration rate, of treasury management into those companies. So there's a great upside for us. And I think part of that is just the size of our TM solution for middle market companies compared to this new treasury management solution for smaller companies. So we will use it internally with existing customers as well as for prospecting.

Got you. Okay. And then last question, sorry to ask so many questions but and this one is for you Cort. It's been I don't know seven or eight years since Umpqua has done an M&A deal. Is this still part of the strategy and focus, or are you now purely organic growth focused? Thanks.

Yes. Well we when I took over almost five years ago we were clearly and we were outward with that focused on just operationalizing and doing a better job of running the bank post the Sterling merger. I mean today, with the currency levels we've got we're still going to be focused on continuing to increase the currency to give us that optionality you're talking about. We've always been opportunistic, Steve, to be quite frank. We looked more at I'll say plug and play which I think I've mentioned before at verticals or products and services that could serve our existing customer base. And – but as it relates to FI kind of acquisitions until we get that currency level up to where the financials around a strategic decision like that makes some better sense we're just going to continue to operate. But we're – that does not necessarily mean we're not opportunistic. It just means right now, we've got a little bit of work to do. And I think we're making great progress. We really are. And we are excited to – with our prospects of growth, and the opportunities that we see going forward both internally and externally.

Great. Thanks for the color.

Yeah. Thank you.

Your next question comes from the line of Brett Rabatin with Hovde Group.

I wanted to make sure I understood the guidance clearly. I think Ron the guidance around mortgage banking was $900 million for the third quarter $800 million for 4Q. And I just wanted to understand the dynamics around the expectation levels for the back half of the year on production. Obviously, a lot of people talking about constraints in terms of housing supply. But I know, at one point you guys had mentioned that you felt like if mortgage was down 25%, or if the volumes were down 25% from an NBA perspective you're hoping that your numbers will be down less due to some of the things you thought you could do to gain share. So I was just hoping if you could walk through that dynamic.

Yeah, you bet. Good morning, Brett. And yeah we're – there's obviously internal forecast based off what we see with pipelines and activity and interest rates. Overall, though mortgage activity much decreased from a year back, we do expect around give or take $900 million in Q3 and $800 million in Q4. It's coming off $1.25 billion here in Q2, right? So put the total year in that $4 billion – mid $4 billion range and our best estimate right now assuming no significant change in rates or supply would be in the $3 billion – right around $3 billion for next year.

Okay. Is the dynamic in the back half of the year a function of just lower refi, or what can you talk maybe a little bit about the – what you're seeing from the pipeline?

Yeah. Lower refi just a bit lower activity just given the significant lift in activity here over the last four quarters and generally in Q4, you get a seasonal bell curve and there's some drop off in Q3.

Okay. And then the other question, I had was just wanted to see about current production in terms of the new growth that you're seeing versus existing portfolio yields kind of how does that dynamic look?

So Brett, this is Tory. Are you – I want to make sure I understand the question. You're talking about loan yields compared to previous quarters?

Right. Just – I don't know, it's going to vary between commercial real estate and C&I and various loan components, but just was hoping to get maybe what current production was versus the existing portfolio?

Yeah. So, current production actually over the last two to three quarters has been relatively constant and not a ton of movement down a little bit in our commercial real estate book on new production. But interestingly, enough our community banking business is up a little bit. So I think all-in-all, it's been relatively stable over the last two to three quarters.

Okay. Great. Appreciate the color.

Yeah. Thank you, Brett.

And there are no further questions at this time. I will turn the call back over to the speakers for any closing remarks.

All right. Thanks, Brandy, and I want to thank everyone for their interest in Umpqua Holdings and attendance on the call today. This will conclude the call. Goodbye.

This concludes today's conference call. You may now disconnect.