Q3 2020 Umpqua Holdings Corp Earnings Call
[music].
Good morning, and welcome to the I'm quite Holdings Corporation's third quarter earnings call to ask a question you will need to press star one on your telephone I will now turn the call over to Ron Farnsworth Chief Financial Officer.
Okay. Thank you Corey and good morning, and thank you for joining us today on our third quarter 2020 are in school.
With me. This morning are court waiver, the president and CEO of Uncle Holdings Corporation, Tory Nixon President of Umpqua Bank, and frightened and our our Chief credit Officer.
After our prepared remarks, we will then take questions.
Yesterday afternoon, we issued a press release discussing our third quarter 2020 results. We have also prepared a slide presentation, which we will refer to during our remarks. This morning by.
Both of these materials can be found on our website. It uncool bank dot 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 two of earnings conference call presentation as well as the disclosures contained within our SEC filings now I'll now turn the call over to Cort Ohaver.
Okay. Thanks, Ron very much I'm going to focus my comments on Quanex, Jim, but let me first summarize the quarter and a little bit of detail Ron will talk about financials and then we'll take your questions later in the call for the third quarter. We reported earnings of 57 cents per share an increase of 37 cents per share in the 24 cents per share earned in the prior quarter.
It is worth noting that in terms of both earnings per share and net income reported for the quarter. The third results third quarter results represent a company record. These earnings were driven by.
Hi, incredible production in our home lending Division a continued decline in our cost of interest bearing deposits and a reduced provision for credit losses charge as our credit quality remains strong.
Turning to balance sheet items for deferred third straight quarter, our robust deposit growth in non interest bearing DDA, specifically $303 million or 3% this quarter afforded us the opportunity to once again reduce higher cost time deposits, which brought which we brought down by $613 million for 16.
Percent on a net basis deposits were down $175 million per 0.7% our cost of interest bearing deposits went from 67 basis points to 49 basis points in improvement of 18 basis points from the prior quarter.
Loan balances were down $245 million or 1% during the quarter due to payoffs in commercial real estate, specifically in the multifamily and non owner occupied categories as well as credit line pay downs.
Regarding capital we are pleased to announce to our shareholders. We were pleased to announce to our shareholders in August a dividend of 21 cents per share remaining consistent with historical payments. We will continue to work collaboratively with our regulators on obtaining the approvals for future dividend payments as I stated last quarter.
We feel confident in our capital levels, our liquidity position our forward looking earnings projections and the credit quality of our loan book, we plan to issue a press release discussing our next dividend timing very soon.
Now I would like to spend a moment discussing nexgen.
Three years ago, we announced an ambitious corporate program on quanex Gen to provide shareholders a clear view of our plans to transform the company's operations and build a more efficient nimble and modern organization to create both short and long term value.
Our priorities were to streamline operations to improve efficiency and fund strategic growth initiatives.
To invest in banking talent and products as well as technology infrastructure that would accelerate growth and to introduce our first human digital customer experiences for consumers.
Across all areas pump on Nexgen was a tremendous success specifically since announcing the program we've grown the company by increasing loans $3.8 billion and deposits by $4.8 billion introduced.
Introducing the company's first human digital banking platform on Quad go too.
Which now has more than 70000 unique users.
Increasing our non mortgage fee income annually by $20 million through the end of last year.
Reducing our store count by 69, which represents roughly 25% of our total stores.
And last but not least achieving more than $25 million and recurring non interest expense savings.
In addition, we also made significant investments in technology as a part of Nexgen, which we are now which are now serving as key building blocks for both new revenue and operational efficiency initiatives. These.
These technology investments include implementation of a cloud first strategy in coordination with Microsoft a strategic partner as.
As a proof point of the effectiveness of our cloud first strategy. We're currently consolidating our back up physical data center from 1600 square feet to 60 square foot space utilizing the very best data security tools.
The transformation of our development processes to file agile principles that allows the Lao us to integrate and respond to customer feedback very quickly. This shift was a key reason behind our success in launching PPP, so early and effectively.
Rollout of a paperless initiative that through additional strategic partnerships with Fi Aesynt Docusign means one out of every two deposit accounts. This year has been opened electronically saving significant processing time for our frontline and operations associates.
We have built our technology architecture to be scalable at will a key reason why encore was able to switch to remote working environment overnight and not Miss It beat this past March.
So now let me turn to next Gen. Two dato like its predecessor, our next Gen. Two Dot O program will also include initiatives to grow revenue.
Invest in strategic areas for future growth, including technology, and digital enhancements and continued to advance operational excellence items to reduce operating costs and invest in strategic growth opportunities.
We're building we're building on the strong foundation established over the past few years to continue streamlining the companys operations in order to accelerate the development of a highly differentiated cumin digital customer experience.
Among our growth initiatives weve, allowing aligned resources internally to take advantage of the great opportunity, we see for additional customer growth with businesses large and small for small businesses will continue to serve this important customer segment through our retail teams combining their in store expertise with automated assistance from.
Digital tools, such as mobile banking and has enhancements the pilot of go to for business and automated credit requests for.
For our business and commercial banking sector segments, which we integrated earlier. This fall, we're focusing on delivering a personalized experience that leverages technology to empower and scale. Our banking teams were appropriate with such items as business online banking upgrades, scoring model enhancements and product.
Bundle enhancements.
Within our corporate banking segment, which we've expanded by more than 30 ft. In the past two years, we'll continue to attract and deepen full middle market relationships that come with associated deposit and Treasury management opportunities.
As businesses work to navigate the extraordinary ongoing disruption from the pandemic they need a bank thats able to scale personalized solutions and expertise and that's where we'll continue to focus on wind.
These initiatives are supported by the technology investments, we've made and are easy to overlook but are in fact critically important in enhancing on clothes ability ability to differentiate and.
And take advantage of strategic opportunities and navigate disruption.
We're able to partner seamlessly with companies that offer best in class products that improve our customer experience and streamline our back office operations.
Looking forward, we'll be focusing our continued technology investments on implementing an industry, leading commercial loan origination rejuvenation system and Treasury management Onboarding system in 2021.
Continuing to execute our cloud first strategy, which as previously mentioned gives us the ability to scale it will.
Leveraging data and analytics to provide our bankers with nest next best product offers for their customers through Onquest smart leads as well as proactively manage risk through our credit insight analytics and.
And expanding our current offering of go to to our business customers by evolving the platform to serve businesses and a platform uniquely matched to current and evolving human digital preferences.
From an operational excellence perspective, we're implementing additional initiatives to not only reduce our recurring non interest expense, but also provide us with additional funds to reinvest and here are a few examples first the COVID-19 global pandemic has clearly accelerated customer adoption of online mobile.
The banking and go to.
At the same time, it has dramatically less than customers traditional dependency on physical locations.
While we have seen in store transactions rebound a bit from their lows in April and May store transactions are down 27% compared to a year ago. However.
However, mobile banking daily usage is up 9% year over year, indicating accelerated adoption.
In addition utilization of go to is up 38%.
In response to these changing preferences, we will be continuing to store rationalization efforts, we've already accomplished which includes a 130 consolidations since 2014 our.
Our plan is to reduce another 30 to 50 locations over the next two years, our target is to get to a total store count between 180 to 200 stores by the end of 2022.
Second late last month, we announced the sale of encore investments to Steward partners Global advisory very much a strategic partner for us going forward.
The deal will close in the first quarter next year and reflects our commitment to leverage strategic alliances, where they enhance the customer experience and complement our broader business strategy Kurt.
Currently unquote investments customers.
Current umpqua investments customers will transition to the steward and Raymond James Technology platform and have enhanced access to the very highest level of expertise and service.
We are currently finalizing a future referral agreement, which will be mutually beneficial to both parties going forward.
Third no stone is left unturned and we have made a variety of changes to the company than a combination come to a material number specifically, we have eliminated our specialty deposit group, which focused on higher cost institutional type deposits, we have aligned our marketing and communication teams under.
A single leader and we have outsourced our merchant sales teams and a partnership with world pay.
Which we have identified and we have identified procurement additional procurement savings together. These changes will result in $10 million to $15 million in annualized expense rate reductions.
Last but not least the transformation and how business across all industries work day to day is true here at Umpqua Bank.
Based on their strategic Tech investments, we've made over the past few years, we were able to wrap to pivot rapidly and move the vast majority of our back office teams to remote work and a matter of days without losing productivity as a.
As a result, we're kicking off a transformation of the unquote back office workplace Separative reflect go forward were working preferences and create new work life balance combined with in person collaboration spaces that are attracted top talent and most importantly that continues to support best in class customer.
Yes, Thats our top priority after.
After reviewing our facilities footprint and how non store locations will be utilized in the future. We believe this will have the added benefit of allowing us to reduce back office square footage by 50%, resulting in non interest expense savings of 5% to $7 million annually.
In aggregate as.
As shown on slide six of the presentation. These and operational excellence initiatives reduce our efficiency ratio by 4.5% to 7% when fully implemented by the beginning of 2023.
Even as mortgage mortgage revenues begin to normalize in future periods periods. We will operate this company with a sub 60 efficiency ratio.
In summary, before passing to Ron to review the financials in detail I Hope my enthusiasm for the future of this company is evident I want to.
I want to communicate to all of our associates, how incredibly proud I am of our resiliency and operating successfully in this ever changing environment.
Associates have supported each other and our customers through an ongoing global pandemic.
Through important social justice conversations.
Most recently through the wildfires impacting the west coast.
To that end I want to reiterate the exceptional contributions encore has made to the strength of our local economies because.
Because of our associates extraordinary hard work, we have helped more than 17000 businesses save more than 250000 jobs.
Okay.
And we're continuing that essential work every day, so now run on those financials.
Alright, Thank you court and for those on the call I want to follow along as we refer to certain page numbers from our earnings presentation.
Page 14 of the slide presentation contains our summary quarterly PNM.
Our GAAP earnings per share for Q3 was a record 57 cents.
And then secondly, higher than the 24 cents in the second quarter driven by continued strength in home lending and no provision for loan loss offset partially by 21% tax rate.
Excluding MSR and CV, a fair value adjustments, our adjusted earnings were 60 cents per share this quarter.
On the PPNR front, excluding fair value charges for both quarters or PPNR was $170 million in Q3, an increase of 11% from 153 million in Q2.
Turning now to net interest income on slide 15 net.
Net interest income increased $4 million or 2% from Q2.
Driven by a decline in interest expense more than interest income.
Shown here is the quarterly interest and fee recognized from the PPP loan program.
Taking that to slide 16.
Our total net interest margin was relatively flat down just one basis point from Q2 at 3.08%.
The margin excluding discount accretion NPP p. effects was 3% down just three basis points from Q2 related entirely to the higher average interest bearing cash position, we held this quarter.
Which we feel it has improved to have more rather than less on balance sheet liquidity in this environment.
Couple of other notes on margin the bottom of the page shows the impact from the bond premium amortization, which was down slightly from Q2.
And given our NIM was flat X the extra cash we held this quarter.
The highlight within NIM for Q3 was the 18 basis point decline in interest bearing deposit costs and in the quarter and 0.49%.
For the month of September interest bearing deposit cost dropped to 0.45%.
We expect continued reductions in funding costs over the coming quarters.
Moving now to noninterest income on slide 17.
Home lending continued their strong performance this year posting the second quarter ROE of record non interest revenue of $90 million in Q3.
Ex mortgage the other big moving part this quarter was a rebound in service charges and higher other noninterest income.
Service charge revenue increased $2.6 million with 1.1 million of that from TM fees 900000 from ATM and interchange fees and the balance due to higher odcs.
And other noninterest income included the gain on store sale delayed from Q2 due to the pandemic.
For more on mortgage banking as shown on slide 18 and all.
And also in more detail in the last two pages of our earnings release.
For sale mortgage originations increased 5% from a prior record Q2 level and.
And were up 128% from the third quarter a year ago.
This reflects our positioning to capitalize on higher refinancing demand with lower long term interest rates.
To for sale mix increased slightly to 89% this quarter the third.
The third consecutive quarter at or above or 80% target.
And the gain on sale margin increased again this quarter to 5.13% above our long term trends of the low to mid 3% range based on better pricing with constrained industry capacity and rising lock pipelines.
Historically, the second and third quarter represents the high watermark for the year in production volume and pricing with some drop off into the winter quarters.
However, given the nature of this downturn continued low interest rates strong demand for housing across our markets and quite a bit of room to run and refinance opportunities. We expect overall mortgage activity will remain quite good for the next several quarters.
As of quarter end, we service $13 billion of residential mortgage loans in the MSR is valued at 72 basis points.
Turning now to slide 19 now.
Non interest expense was $190 million in Q3 up from $182 million in Q2.
The moving parts are on the right side of this page noted the group insurance increase related to folks simply going back to the Doctor This quarter.
The lower loan origination deferred cost reflects lower demand from our customers for new non PPP lending excel.
Expected given the economic environment.
Other increases related to mortgage commissions on higher volume along with higher other expense offset by lower FDIC insurance.
As Curt mentioned earlier, we will remain focused on future expense reductions with next gen. Two that zero over the coming two years and look.
And look forward to updating you quarterly.
And for a minute I want to take you back to slide 14 and talk tax rate.
Our effective tax rate this quarter was 21%.
Higher than the prior quarter, but under our 25% all else being equal level.
The reason for the increase in tax rate from Q2 to Q3 was our stronger pretax performance realized in Q3 and forecast for Q4.
The year to date GAAP tax rate was negative, 4%, which should be close to the level reported for Q4.
Before getting back to the pre goodwill impairment 20, fiveish percent level next year.
Okay now, let's go to the summary balance sheet beginning on slide 20.
We are intentionally holding higher levels in spring cash given the volatile environment and ended the quarter at $1.9 billion that in the average balance was up 17% as discussed previously.
Loans decreased 1% net for the quarter, but increased 1% on average within this PPP loans were $2 billion of $60 million for the third quarter the Dick.
The decline ex PPP loans related to payoffs and Siri and lower line utilization for commercial lines as expected in this environment.
Deposits decreased just under 1%.
But were up 2% for the quarter on average.
The decline was driven by combination of running off brokered Cds and decreases in public funds for a combined total of $451 million.
Along with the $100 million combined deposits for the store sale.
X. lists total deposits were up 376 million, mostly in the non interest bearing demand category.
Total da ended at $9.5 billion of 3% for the quarter and up 33% year over year.
And of the $2 billion and PPP loans, we funded we estimate about $250 million that remains in deposit accounts at the bank.
Our total available liquidity, including off balance sheet sources at quarter end was $11.2 billion represent.
Represented 38% of total assets and 45% of total deposits.
Frank will cover the loan book in a few minutes, but I want to take your attention back to slide 11 on seasonal and our allowance for credit loss.
Our seasonal process incorporates life alone reasonable and supportable period for the economic forecasts for all portfolios with the exception of Cnine, which uses a 12 month reasonable and supportable period reverting gradually to the applet mean thereafter.
As these forecasts incorporate some level of economic recovery in 2021 and beyond as.
As most economic forecast revert to the mean within a two to three year period.
As noted we use the August Moody's consensus economic forecasts.
There was no provision for credit loss in the third quarter as the economic forecasts have improved from earlier this year.
Net charge offs for Q3 remained very low at $13 million much lower than the models from March and June suggested.
Within our Hcl as of September Thirtyth, we had a qualitative overlay of $41 million above and beyond the model results.
The majority of this overlay resulted from $22 million of small ticket leases that are past due greater than 60 days following rolling off their deferral period. These.
These will most likely result in an increase in charge offs for Q4 and Q1, but.
That have already been fully reserved for enterprise scale.
The sale at quarter end was 1.65% move this ratio is 1.81% excluding the government guaranteed PPP lows.
As these are economic forecasts driving the reserve it will simply take the passage of time the sea of net charge offs follows model, but today.
But to date the models of simply overestimated the actual net charge offs.
Two final comments on Cecil first future provisions or Recaptures unexpected credit loss will be based on changing economic forecasts, which could worsen or improved from the quarter end forecast used and second we have elected the full five year regulatory capital transition option for Cecil.
Lastly, on slide 25, I want to highlight capital.
Putting that all of our regulatory ratios remain in excess of well capitalized levels and.
And all the regulatory ratios also increased again over the prior quarter.
Our tier one common ratio was 11.6% and our total risk based capital ratio was 14.9%.
The bank level total risk based capital ratio was 13.9%, which is the basis for our calculation of $423 million in excess capital.
That is excess over a 12% in house floor.
Which in itself is excess over the well capitalized 10.5% level.
This excess capital increased $100 million over the past quarter with our strong results net of the dividend.
We constantly forecast and stress excess capital.
Both in base and severe scenarios it with what.
And with what we know today based on the economic forecasts, we are very comfortable with our capital and liquidity position.
And uncertainties over the near to intermediate term horizon.
The key items I want to reiterate as I wrap up my prepared remarks include first the significant available liquidity, we have just over $11 billion.
Second our allowance for credit loss stands at 1.81% of non PPP loans and.
And lastly, our significant level of excess capital again with the tier one common ratio of 11.6% and total risk based capital ratio at 14.9%.
And with that I'll now turn the call over to Frank Nambiar to discuss credit.
Thank you Ron and I will also be referring to certain page numbers from our earnings presentation for those who want to follow along.
First a quick update on the wildfires that have impacted the west coast. This past quarter as we have been actively engaged with all impacted communities.
Regarding our customers. We are aware of a very limited number of service residential properties that were damaged or lost and all of our covered by insurance and thankfully no commercial properties were impacted.
As a company ourselves, we did lose our Phoenix, Oregon store.
And are working collaboratively with that community on providing a central banking services, where needed along with community grants mentioned in slide 28 of the presentation.
Most importantly, we are extremely grateful that all of our associates are safe.
Now onto credit quality highlights.
We have updated our deferral information as of October 15th on Slide eight total.
Total loan balances that are currently on deferment represent 2.3% of the loan book, which is a decline from the 5.7% we reported on last quarter's call.
We have experienced a total of $1.7 billion to have come off their round, one deferrals and just $271 million or 15% have been extended to a second deferment over.
Overall, we are very pleased with the 85% cure rate of total deferrals, thus far.
On a portfolio basis, we are reporting less than 1% deferral and commercial one.
1.4% in commercial real estate, 4.4% in Finpac.
1.1% in consumer and other and 4.2% in residential real estate.
On slides eight and nine we again show specific segment totals and relevant characteristics for portfolios that have been impacted by COVID-19 the.
The following five specific segments are highlighted.
Hospitality, a 2.4% of our portfolio air transportation at 0.5%.
Oil and gas with essentially no exposure right.
Restaurants at 0.6% and finally gaming at 1.6% of our portfolio applicant.
Applicable deferral information is also highlighted within these segments.
Hospitality remains an area that we are watching closely.
Occupancy levels are currently in the 30 ish percent range and extended stay and limited service properties continue to perform well.
As I've stated previously this portfolio is a low leverage with very strong overall sponsorship to borrowers we have established history Wes.
Slide 23 depicts our loan portfolio, its geographic diversification and select underwriting criteria for each major area.
The loan book remains granular in nature, and we are confident in our conservative and disciplined on underwriting practices.
Slide 24 reflects our credit quality statistics are not.
Our nonperforming assets to total assets ratio increased two basis points to point to 7% and.
And our annualized net charge off percentage to average loans and leases decreased five basis points to 0.24%.
Within our Finpac portfolio, specifically, our annualized charge off percentage was within our historical range at 3.28%.
I will now turn the call back over to court okay.
Okay. Thanks, so much Frank and Ron for your comments, we will now take your questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Jackie following.
Ma'am your line is open.
Hi, good morning, everyone.
And rejected starting.
Starting with the Big news in the quarter on your next Gen. You point out and quick clarification question, and then I'll hop into something more theoretical but at this site you mentioned, 8% to 12% growth by year end 2000 Q.
Hi Tech growth do you expect or is that an annualized number.
Jackie This is Tory next and Thats, a cumulative growth number in the CNS space over the next couple of years.
Okay, and when you came up with it.
Yes understanding that you are operating in a very unique time period right now how would you characterize the growth.
Between now and year end 2002, and I'm, assuming that by that point in time, it's a completely different environment than the one that we have right now, but just curious Latin.
How you determine that.
Yes, So I think the story again I think there are a couple of things to think about in answering that first is our best guess Cort mentioned that we have a very robust organized strategic plan around.
Next Gen 2.0, and and an element of that in executing this strategy is the expense reduction as well as some investments into technology into people and continuous process improvement that help us take advantage of the momentum that weve built over the last couple of years, especially in the middle markets.
Based but across all business segments and the growth trajectory is really more of a hockey stick I mean, certainly we're still in a.
And it's somewhat of an unknown environment from the pandemic, but I think the pandemic has created some real disruption in the industry and it is unique by geography and by an institution and certainly we feel we're very very well positioned to leverage that disruption to come.
Revenue to build on the momentum that we have and to continue to grow market share in small business in our business community markets and certainly in middle market banking.
Okay. Okay. Thanks Troy.
And then sticking with the revenue theme.
Hi.
How does that that balance sheet growth play into the adoption of that I am assuming some new customers into some of the revenue producing products that you have and then also.
Just broadly how are you thinking about revenue with next Gen key point now I understand.
I understand different plan than what you had last time, you had some pretty tangible numbers associated with the first version of next sat in front, just curious about how you're thinking of revenue.
Particular plan.
Yes, so ill I can let Ron talk a little bit on the revenue side, but we certainly see this as an opportunity to grow market share grow net new customers.
Grow loan balances grow non interest bearing DDA.
Balances growth core fee income all the same things that we have been working on for a year I think we're.
We're in a unique position, where I think that a lot of that is accelerating right now because of this.
Disruption in the marketplace and that will give us an opportunity to grow revenue in the call and with what I think very prudent expense management.
We are very optimistic about what we can accomplish next couple of years.
Jackie Cort, let me just throw some on at all and dealt with all candor, it's a little different economic environment today than it was in 17, we rolled out I appreciate your question and.
We feel good through our prior.
Efforts that we will grow market share we attract good quality people. It's just that we I think we all would agree on this call. We have an uncertain economy and until some of that works its way through and into the balance sheet in the PNM now it's a little harder to give you guys that type of guidance that we Didnt next gen. One one dato.
And it's just it's just a little different so I. Appreciate your question and I assure you as we've exhibited we will grow this company.
Okay, No I mean I didn't fully understand.
Environment, sorry, sorry, I just cut you off.
That's okay. One just one last thing to add on to that is it as just as a as at one small example, we look at our fee based business in.
In the in the commercial and corporate banking spacing, we've seen a V shape recovery in Treasury management and commercial card activity for us and so we've had the two best months in the history of the bank in so in September for both of those products and and it's just a sign of of some more robust activity in some of the comps.
Monies that we have brought into the bank and they are kind of usage of the product and service that were providing.
Okay and.
And were there any revenue assumptions related to the efficiency improvements on slide six.
This is Ron Jackie Good morning, no. There were not if we were just basically looking at the expense levels that were focused on and what that impact would have on the efficiency ratio.
Okay Perfect and then just one last one can you have a number behind the accessories store sale that occurred in the quarter.
At dollar a grim.
Oh dollar caveat was just under $6 million in other noninterest income and again that was about $100 million of deposit outflow in the third quarter.
Okay, and I know you have another one coming up this quarter I believe it was for us to work on.
Do you anticipate any income related to that.
A similar number may be a bit under but similar good premium.
Okay, great. Thank you ill step back thanks.
Okay.
Your next question comes from the line of Michael Young.
Well I guess a question.
Hey, Thanks for taking the question.
Court.
Really appreciate all the color and I think some of the strategic elements. You mentioned that are going on behind the scenes that don't necessarily have a number tied to Denmark are important for the story.
But I did want to focus in on the comment around operating below 60% efficiency ratio I just wanted to kind of understand big picture, how you're thinking about that and in potentially challenging revenue environment and with the big mortgage business is that kind of from here, we should not really press above that or is there some reinvestment need on the front end.
Out of that.
To achieve kind of this lower.
In the upper Fiftys efficiency ratio in out years.
So hey, Michael.
Yes, I mean, I think we have made the announcements it as a part of next Gen. One that we are going to operate the company sub 60.
And so we just want to recommit do you all are intent on doing that I. Appreciate your question. We've taken a couple of different different steps one is with the with the announced in the deck expense opportunities we have.
So we feel that the 5% to 7% reduction in our interest.
Efficiency ratio it puts up a big chunk of where we're at today on a more normalized basis less any mortgage activity. I mean, we have a lot of wind in our sales like Ron mentioned with mortgage over the next couple of three quarters, which gives us an opportunity to.
To look at some reinvestment, which is where you're going with this question I think.
And it obviously will take some level of investment.
And people as story mentioned, primarily and some technology, what we wanted to get across to you all with my opening remarks, as we've made significant investments over the last three years and our technology architecture and technology stack. My bet is for a bank. Our size were well ahead of the game, what it takes to digitize and mobilize and use data to attract customers.
Summers when we buy a team of people that just left wells Fargo and they need data and they need.
Mobile and digital tools for commercial banking, we've got the basic infrastructure to get there. So I'm probably not exactly answering your question. We are highly keen on making sure. We continue to operate this company in the most efficient manner. We can we do understand it will take some reinvestment as we continue to grow selling.
Technology, but also our people so hopefully on I'm answering your question.
Yeah, No that's helpful and.
Ron maybe to get a little bit more into the specifics on just kind of expense trajectory. We we've had a record blow out mortgage year. This year. So expenses related to that are pretty elevated. So I guess, we got sort of the tailwind of next Gen 2.0, which looks like it should generally offset expense inflation and then.
Should we assume that same 2.5% gearing ratio on mortgage expenses going forward or will that shift at all.
Yes, we expect a similar may be down a couple of basis points, but assuming urinate arrangement. It is going to stay strong, though through the winter quarters, maybe not quite to the level Q3, because nothing seemed to drop off you saw prior Q fours in Q1, so I expect the elevated level business continues and like so I think theres some more room to run on mortgage well into next year.
And is there any.
Hi, I want you to.
Q2, due to finer point on it but.
To find a point on it but just as we think about next year. I mean is there a level that we should kind of be thinking about in terms of expenses, maybe either either starting year or.
Throughout the year for next year as a run rate.
Well pre next Gen. Two that zero you take a look at the level. We're at now recognizing large cuts.
Attributed to that being homeland in higher volume of $2 billion a quarter and then based on your home winning forecasts you can adjust to that but I think it's going to stay pretty robust going into at least Q1 on that level. So this probably a pretty good proxy to start working on.
Okay and.
And then I guess, just a follow up maybe core to what you mentioned in terms of potential lender hires out there. It seems like you guys are in a sweet spot from a size scale product availability perspective, I mean do you see a robot on.
Opportunities for higher whether its teams or individuals over the next year.
Maybe if you could talk about that or the opportunity.
Ahead, Mike, let me bumped out over to Torry, I think you'd be a better person to answer.
Yes, sure Mike So.
What we how we have always kind of position. This is we are very opportunistic. So we have continued to look for.
Exceptional talent to bring into the company and we have done that on a I think a fairly regular basis.
As I mentioned, just look just a few minutes ago, just the disruption in the marketplace on the West coast. In particular, there is just providing opportunity for us. So we will we will continue to look for that talent continue to bring it into the bank we feel.
We feel that the folks that we bring our very accretive to the organization.
We talked before a lot about certainly in the middle market side of the house Companys Bank with bankers and as those bankers moved to a different institution. They tend to want to follow and two chords pointed to.
We have put a lot of infrastructure.
Into the company that allows us to compete.
On a day in and day out and that will provide us the opportunity to continue to bring good solid people into the company.
One other thing I mean, it's always done a great job with the size of the institution that we operate in the experience level Tories brought in Franks and.
Asus on credit management, we are a great alternative for a banker at a large institution and we talk to you guys about this for years, who is looking for a different customer experience. They want access to Tory EMEA and Ron Macon habit Yada Yada yada. So we are always the benefactor of good talent when there is disruption on the bigger banks base.
How can that Weve never had it never had a problem attracting people when we decide we want to invest in a certain geography or in a certain market.
Okay, Great I'll step back.
Your next question comes from.
Steven Alexopoulos.
Hi, everybody.
It's Dave So maybe to start to follow up on Jackie's question about the 8% to 12% growth and.
Thank God Tory responded that was cumulative over two years.
Not materially different than what you would have expected without next gen 2.0.
It seems like the growth rate you've been doing before at least before the pandemic.
Well I. This is this is Tory again, I think it's important to recognize kind of the environment that we have been in the past six months in the environment. We are still in and if you look at it.
From what we can see in the next six months were.
It's not a really robust economy, so theres in commercial lending.
Commercial lending is relatively flat if not down I mean, we I look at our utilization rate for our our line of credit borrowers were down year over year, 9%.
And in terms of utilization so good.
Getting getting real significant growth for the company and see an eye is somewhat of a.
An unknown in the very near term.
We we feel that we can we can definitely hit the 8% to 12% growth in some of that will be based on what how the economy rebounds in next six months, but.
That's why we put a two year plan together. So I think it's a I think it's a good plan and I think it's it will stretch the company.
Revenue to grow market share do it the right way add full banking relationships into the organization.
Okay.
Helpful and then.
And then on the ultimate expense saves of $39 million to $56 million is that would you expect to hit the bottom line or do you expect to reinvest a portion of that.
Ron I expect that will be hitting the bottom line for the full year 2023, and in terms of reinvestment it'll be it'll be consistent what we've done over the last couple of years. So in the run I would not expect a large chunk of that to be called reinvestment, but thats what were targeting for reduction of those categories in 2023, okay.
Okay. So if that.
So if thats. The case I guess is just following up a little bit on the last question. So the efficiency ratio is 55% this quarter.
Telling us you're going to take four and a half to seven points off that you're committing to staying under 60, what am I missing like this does it seem to add up.
Well I think you'd be hard pressed to say over the next three years every quarter, we're going to do $2 billion of home lending volume at a 513 margin.
So if that starts to normalize maybe second half of 21 and 22, you could see some lift all else being equal in the efficiency ratio.
Additionally, I think on net interest income obviously every banks can be challenged when it comes to NIM net interest income I think we've got a good shot at the holding that relatively flat over the next year inclusive of PPP effects in a given year, so trying to take all that into account.
But probably in.
In isolation for Q3 home lending expecting that might look a bit different two years from now.
Probably the biggest mover of that question you had.
Okay.
Front end further like on.
Brokers with a further like on you know on the net interest income side, we've got significant room still on our cost declines right. So we were down 18, Bips this quarter to 49 basis points of interest bearing deposit cost theres still within our express deposits or maturity deposits in three and a half billion of Cds that are.
Close to a 1.8% cost there's quite a bit of room to run on that as well.
So do you think you are close to a bottom on NIM at this point.
I think with our ability to reprice lower yes, we are close to that now absent.
Significant fluctuations in balance sheet volume year off having long haul, but all things equal yes, okay.
Okay.
Finally, so if we think about trying to put this together for at least 2021 to expense initiatives will help but is there enough gas in the tank to punch through.
Maybe a mortgage banking headwind and drive total pre tax pre provision growth next.
Next year.
Thanks.
So if it's a definitely within the realm of possibility, especially as we start implementing next Gen 2000 zero again, we expect will have.
Roughly half of that in 2021, and again I think.
I think mortgage May surprise, you over the next couple of quarters and into the first half of 21 as well to the upside.
Okay. Thanks for taking all my questions you bet.
You bet. Thank you.
Your next question comes from Brett Robinson.
Hey, good morning, everyone.
Hi, Brett.
I wanted just to talk about mortgage for a second and Ron you've made several comments around it still being pretty robust and so maybe it doesn't go back to levels you had in prior years what.
I assume that has the environment swings lower that gain on sale margin. Thus decline what are you assuming the gain on sale margins do as we get into the next few quarters.
I think yield from a long term standpoint, our gain on sale margins usually in that low to mid 3% range.
I think we are going to be above that.
Over the next couple of quarters, but when you look out 123 years, you get assume there's going to be some reversion to the mean overtime, but I think just given.
Constrained industry capacity and a significant pipeline of ours.
Opportunities, you're probably going to see elevated gain on sale margins, maybe not in the 5.13%. We had this quarter, but I think it will be north of the historical 3% to 3.5% over the next couple of quarters.
Okay.
And then the other thing I wanted to ask was strong reserve and thinking about the comments that you made about.
Some of the credits that you're going to have to address in the fourth quarter and just think.
Thinking about the environment, assuming we.
We kind of stay baseline here with the current run rate from an economic perspective.
It doesn't really seem like you're going to need to add anything meaningful supervision. So I don't I don't know that provisioning will be negative, but I was hoping to get maybe some color around is thinking about provisioning levels.
Relative to new production and how you guys are concerned about the reserve.
Yes. Good question again on the on the Finpac side, we will have that serves in charge.
That serves in charge offs in Q4, but again fully reserved for so.
On seasonal it's going to be dependent upon the economic forecasts. So.
No ability to do a lot more intelligently in January off the December forecast, but my gut tells me.
We're going to stay relatively low on provision for the next couple of quarters.
It's just it's just hard to say when either you're going to see an industry credit event start to take hold or we are going.
We're going to keep kicking the can and realize we don't need as much reserves as we have as again I feel very good about where we're at on it but.
Given a couple of more quarters with economic forecasts changing.
Okay.
Maybe one last one if I could you talked about the dividend briefly and working with regulators is there anything you could share in relation to the conversation with them about the dividend.
It's been it's been great I mean, obviously, we work very closely with the regulators look at forecasts and actual results in recurring quarterly process now with the negative retained earnings driven by the goodwill impairment. So.
Look forward to.
And our next dividend here within the next couple of weeks.
Okay, great. Thanks for all the color.
Thank you.
Your next question comes from the line of Jared Shaw.
Hi, good morning, good afternoon.
Good morning, good afternoon.
Good.
Hey, just circling back again on the next Gentwo and the 60% efficiency target. So if we look at that in the last 30% of the benefit hits 2023 quarter are you, saying that you think that you'll be able to stay below 60%. As this is all being implemented so I think right now when you look at.
Full year 2002 consensus.
Efficiency ratio at 62%, So you think that Paul.
Paul you only get 70% of this benefit in 2002 that could still stay low 60%.
Yes, that's the plan.
Okay.
That is great and then just circling again on capital here, what you said on the dividends I guess, what as you look at 2021 do you think that there can be additional capital management tools employed.
Managed down some of that that excess capital or is your plan. At this point you want to you want to sit with with high levels of excess capital until were more.
More and more clarity.
We have more clarity on on the broader economic impacts.
Yes, definitely there is theres more opportunities on that front I would say you know historically our focus on that has been around organic growth and supporting our overall strategy, which will continue to be the focus but definitely opportunities use elsewhere. It just gives us a lot of optionality within in the future, but again subject to changing forecast which is pretty.
Amazing how fast have changed over the last couple of quarters.
But that that could include potentially evaluating a buyback at some point in the next year.
Could also just recognizing that that would also.
Wireless discussing that with our regulators, but could be it could be also this outsized growth as you've heard the Horton story talk about again execute on our strategy.
Okay. Thanks, and then I guess sort of tying in with that looking at the excess liquidity.
In in hearing that you want to run with with some higher levels for that for the near term.
At what point I guess, you know should we.
Should we should we start thinking that that can be.
Deployed is that really like year end 21 or.
Looking more at 22 for that.
I think with that gives us a lot of Optionality also on the right side of the balance sheet to continue to reprice lower so that'll be kind of the governor we watch when it comes to demand for new loan PPP lending.
No specific timeline on reducing that on balance sheet cash flow.
Similar to Capitol Hill, you got Optionality for us to move as the winds change.
Okay, great. Thanks for that and best wishes to everybody that was impacted by the fires and glad to hear.
Everybody say thanks.
Thank you.
Hi, Corey so if we get the next question.
Yes, you are.
Our next question comes from the line of Jeff.
Jeff Your line is open.
Okay. Thank you.
Posner.
On the.
I'd want to feather in the expense.
Saves like if we just think about 21.
If you are right.
Rationalize the capture 50% of that level.
Do we look at that as as against growth.
Right like a normalized growth rates, if you're growing at 2% to 3%.
Is it just negate call. It 20 something million. So that you are just flat year over year or is it just trying to match.
Match the.
The cost saves versus what could be normalized expense growth for the rest of the platform.
Hey, Jeff Good morning, this is Ron and again ill.
Assuming whatever your assumption is on home lending activity and that volume, which could be ours could be lower.
Our goal and that is going to be the not to see a 2% to 3% lift.
In kind of core expenses before later in the summer and so the goal here would be a reduction again.
Next all has been equal what happens with homeland.
Okay. Okay helpful.
And.
A lot of these other than peppered through the net charge off levels. This quarter 10, and a half who is the makeup of that sounded just obviously with the reserve levels no surprises there and.
Ron I think you mentioned teacher net charge offs in the fourth quarter Q1, if that's finpac heavy also assumed in the reserve, but helpful that to know what that net charge off makeup was this quarter.
Hey, Jeff It's Frank NAND are yes.
Yes.
This quarter similar.
Similar to previous quarters. The makeup was primarily Finpac finpac was roughly.
About $12 million of that and about $1 million of it was at the bank. So it was pretty pretty typical.
Typical levels that we've seen historically.
And Jeff This is Ron yes, and we'll have that elevated surge.
Specific to that that traunch, we talked about fully reserved for in the sale and also just want to reiterate with our leasing area the billion five and leases carry roughly 10% book yield so.
Pretty good still underlying profitability.
Okay. Appreciate it thank you.
You bet. Thanks.
Your next question comes from the line of Matthew Clark.
Hey, good morning.
Format.
Just had a question on the on site.
On slide six about the.
Improvement in the efficiency ratio, particularly along the Umpqua investments savings that 12 to 14 million and that 2% to 3% improvement I think that business generated about $15 million annually and if you just strip out the 15 nine of revenue 14 million at the high end of expenses, that's like a 50 basis point improvement in the efficiency ratio. So just wanted to get us.
Better sense for what you're assuming for that underlying improvement.
Yes, Jeff This is Matt all right. This is Ron.
You I had 12 to 14 of expenses, just a bit above that in terms of revenue, but so thats roughly in isolation of close to 100% efficiency ratio business somewhere in the Ninetys. When you strip that out on a consolidated basis of course, not the two or 3%.
Okay. Okay.
Okay sounds good and then you may have mentioned it on the call and I meant probably missed it but they don't the amount of the gain on sale of the three branches this quarter.
Just under $6 million in other non interest income.
Okay. Thank you.
You bet. Thanks.
Your next question comes from the line of Andrew Carol.
Sorry your line is open.
Hey, good morning.
Good morning.
Slide six on the next Gen 2.0 is extremely helpful. So thanks for that.
I'm. Just wondering is are there any type of one time costs that are going to be associated with any of these initiatives.
This is Ron Andrew Rees, Yeah, there could be a couple a couple of million dollars over the next two quarters, most likely because of the facility side as we look at our planning on that front with lease bonus et cetera.
Okay.
Thank you.
You guys have done an excellent job over the past few years kind of rationalizing the branch count got third.
Got 30 to 50 more store consolidations to calm I'm wondering are you guys, assuming any kind of deposit attrition.
Closing these branches are getting rid of these branches are you do you think it's a potential risk.
No hey, its core Andy when we were.
You know in the active phase could we haven't really close any are consolidated in the last six to nine months there have been sales, but we are in the active process a year or so ago. Our attrition rates were not all that great and in some cases will be consolidated stores. So you took to making this up five miles away and you made one we actually saw in some case.
So as deposit balances go up but the attrition rates using historical perspective is kind of a guidepost when we look at how we're going to manage this we were well in excess or did much much better than any historical attrition rate that we had applied when we were doing the forecasting.
Andrew This is Troy is add one thing into that as this is certainly an opportunity where we leverage go to as as a means to connect with customers kind of prior to an end and closely thereafter on an ongoing basis I think that that the digital element of that serves us really well as we can solve.
Today, our stores and I certainly feel that that will continue to be the case.
Okay, that's very helpful color.
Other questions asked and answered so thanks for taking my question.
Thank you thanks.
Again, if youd like to ask a question. Please press star one on your telephone.
Okay, Corey it looks like a we don't have any more questions. So I want to thank everyone for their interest in Umpqua holdings and their attendance on the call. Today. This will conclude the call goodbye.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect.
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