Q3 2022 Umpqua Holdings Corp Earnings Call
Okay.
Good day and thank you for standing by welcome to the Umpqua Holdings Corporation third quarter 2022 earnings call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question. During this session you will need to press star one one on your telephone.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Jackie Bohlen Investor Relations Director. Please go ahead.
Thank you Shannon good morning, and good afternoon, everyone. Thank you for joining us today on our third quarter 2022 earnings call with me with me. This morning are Cort O'haver, the president and CEO of Umpqua Holdings Corporation, Tory Nixon President of Umpqua Bank, Ron Farnsworth, Our Chief Financial Officer, and Frank Namdar, Chief Credit Officer.
After our prepared remarks, we will take your questions yesterday afternoon, we issued an earnings release discussing our third quarter 2022 results. We have also prepared a slide presentation, which we will refer to during our remarks. This morning.
These materials can be found on our website at Umpqua 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.
The factors that may cause actual results to differ materially from expectations. Please refer to slides two and three of our earnings presentation as well as the disclosures contained within our SEC filings we.
We will also reference non-GAAP financial measures alongside our discussion of GAAP results. We encourage you to review the GAAP to non-GAAP reconciliation provided in the earnings presentation Appendix I will 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.
Take your questions for the third quarter, we reported earnings available to shareholders of $84 million. This represents EPS of <unk> 39 per share compared to the 36 cents reported last quarter.
49, <unk> reported in the third quarter of last year.
Operating basis, which excludes a number of interest rate driven items and.
Merger expenses that block, what Ron will review EPS of <unk> 47, compared with 37 last quarter and 49 cents in the third quarter of last year.
Return of a provision for credit losses compared to 2020 was recapture was a driver of the annual variance.
Operating pre provision net revenue was up 30% on the quarter at 31 set for the year, 31% for the year as higher interest rates and loan growth have substantially offset declines in mortgage banking revenue.
P P related fees.
Loan balances grew $1 $1 billion in the third quarter, representing a quarterly growth rate of 4.4% is new generation was diversified across portfolio portfolios business lines and geographies.
Balances increased 685 million, representing a quarterly growth rate of two 6% while growth once again outpaced deposit balances.
Increases our growth rates were far more balanced than in the prior quarter and we continue to target a balanced growth profile.
Turning to other initiatives at the bank, we continue to add new digital and payment solutions to meet the evolving needs of our customers.
In the third quarter, our teams implemented enhancements product offerings and service capabilities.
<unk>, a new integrated receivable solution for businesses and commercial clients launched a partnership with a fintech best in class provider as well as a digital health care payments and practice management solution that we will market to doctors dentists hospitals and other health care providers.
We have a robust robust roadmap planned for Q4 and into 2023 for continuous digital innovation in payments technology deployment and just this week, we successfully launched real time payments Umpqua Bank is now registered with the clearinghouse and the real time payments network enables our customers access to funds.
And the ability to review balance information within seconds 24 hours, a day 365 days a year.
Our ongoing advancements to payments technology continue to accelerate revenue growth in our core commercial fee categories, including 43% growth in commercial card revenue during the third quarter.
Paired to the prior year.
Pipelines across all fee based solutions, which includes Treasury management cards merchant and international remained very strong.
As discussed on last quarter's call, we continue to take necessary steps than the mortgage mortgage banking segment to manage our expenses and efficiently deploy capital in light of significant headwinds in the home lending industry.
To that end, we further reduced head count during the quarter and implemented additional business model adjustments to shift production towards salable volume, which is generally more profitable.
We have put on $3 billion in net.
Loan portfolio growth through September and $953 million of it which is one third of the growth is from portfolio mortgages going forward. We expect our recent actions to result in a lower growth in portfolio mortgages as we continue to target balanced growth profile the balance for our balance sheet.
These actions take time to work their way through the financial statements and we will continue to update you on our progress.
We remain committed to serving our customers and we will continue to invest resources in our low to moderate income communities, we are making investments to build and expand relationships and historically underserved markets with products and through services provided by our retail small business and home lending teams.
Regarding capital.
Earlier this month, we declared a <unk> 21 per share dividend payable payable October 28 to our shareholders of record as of October 14th.
We once again accelerated our dividend declaration timing compared to our usual post earnings cadence as we continue to plan for our pending combination with Columbia banking system.
As we detail on slides six and seven of our deck, we continue to make headway with our integration planning and are scheduled for Q1 of 2023 core system conversion date remains achievable at this point given our ability to separate conversion planning activities from legal close date.
Since we last spoke in July we have signed a letter of agreement with the Department of Justice and we have received required regulatory approval from the state of Oregon.
We are pleased to have passed two additional milestones we are prepared to close the transaction after obtaining the remaining regulatory approvals and after Colombia executes purchase agreements to divest the <unk> Columbia State Bank branches identified by the Doj.
Before I pass to Ron.
We'd like to commend our teams on acquired loan portfolio is up 13% through September and while favorable market conditions contributed to that growth. It is primarily reflective of the diligent focus of our associates and our ongoing investments in talent.
Talent that has joined the bank since we announced our pending combination with Columbia.
Our operating markets markets pipelines at top tier banking teams support my expectations for continued net portfolio growth into 2023 outside significant economic deterioration, which we have not seen today.
We remain acutely focused on the health of our new and existing borrowers and our new loan production mirrors, the high quality metrics exhibited by our overall loan portfolio.
I am excited about the activity at Umpqua and I am excited about our forthcoming combination with Columbia.
With that Ron take it away.
Thank you Cort and for those on the call I want to follow along it will be referring to certain page numbers from our earnings presentation.
Starting on page 11 of the slide presentation, which contains our performance ratios both on a GAAP and operating basis.
The adjustments for our internal operating measures include various fair value changes from interest rate volatility.
With merger and exit disposal costs, which are detailed in the appendix on slide 32.
Our NIM continuing to strengthen up 47 basis points in Q3 to $3 88%.
This drove improvement in our efficiency ratio and a continued increase in our PNR and return metrics, both on a GAAP and operating basis.
Our GAAP <unk> and our ROA increased to one 8%, while our operating people and our ROA increased to two 1%.
And operating ROE increased to 15, 9%.
Turning now to page 12, which contains our summary quarterly P&L.
Our GAAP earnings for Q3 were $84 million 39 per share.
On an operating basis, we earned $103 million 47 per share.
Are there moving parts as compared to Q2.
Net interest income increased $39 4 million or 16%, representing the power of our interest bearing cash skipping bonds and water falling down to the lowest of the last few quarters.
Combined with the recent fed rate increases.
We had a provision for credit loss of $27 6 million driven primarily by the continued strong loan growth and a slight deterioration of the consensus economic forecasts.
Noninterest income declined $25 8 million.
Reflecting lower home lending gain on sale revenue along with the fair value adjustments driven by the significant bond market selloff and higher yields name.
Namely rate driven fair value losses on bonds and loans held at fair value parsed.
Partially offset by net MSR and swap CVA gains.
As detailed later on the right side of slide 32.
And noticed expense declined $1 6 million or 1%, mainly from lower mortgage banking and payroll tax expense.
Yeah.
And so the balance sheet on slide 13 loans were up $1 1 billion and deposits increased <unk> 7 billion.
This difference along with a targeted increase in interest bearing cash was funded with short term borrowings that mature by year end.
The decline in investments Iff's related primarily to the unrealized loss, resulting from higher market yields this quarter.
Our total available liquidity, including off balance sheet sources ended the quarter at $14 4 billion.
Representing 46% to total assets.
54% of total deposits.
And noted on the bottom of slide 13, our tangible book value decline due to the OCI right Mark on NFS investments.
But we also present measures for this and the TCE ratio, both including and excluding OCI.
For reference.
Slide 15 highlights net interest income.
The increase of $288 million in Q3 resulted from the recent rate increases along with continued strong loan growth.
From a rate volume standpoint, increasing rates for the $29 million of the $39 million increase.
Volume and mix, making up to $10 million efforts.
Following that on slide 16.
The transfer of net interest margin, noting again, our NIM increased 47 basis points in total to 388% in Q3.
We present, a waterfall on the margin change on the right side of the page.
Loan and cash yields more than offset rising deposit costs Keith.
Key for me here is following the 150 basis point increase to the federal funds rate during Q3 our.
Our NIM for the month of September was 394% another six basis points higher than the full Q3 amount, which bodes well for the remainder of the year.
The next two slides include information, which investors may find helpful and continued rate sensitivity.
First on slide 17, we provide the repricing and maturity characteristics of our loan portfolio.
The first table on the upper left breaks down the pricing drivers on loans.
As of quarter end, 34% of the portfolio is fixed.
30% is in floating rate and 36% our ingestible rates over time.
The lower left table shows the maturity schedule by category.
The upper right table shows the loan rate floor buckets for floating and adjustable rate loans. During this has declined to less than 1% of the book.
The lower right table breaks down the balances by rate change band along with the weighted average rate change required for these loans to move above their floor.
Hopefully investors and analyst find this information useful in assessing the beneficial impact on net interest income of future potential rate hikes.
And next on Slide 18 on the left we've included a projected net interest income sensitivity for future rate changes.
<unk> ramp and shock scenarios over two years.
This is a simulation we run them back this quarterly and assumes a static balance sheet.
The deposit beta use in this simulation is 51% on interest bearing deposits and it applies to future repricing assuming future rate changes.
The table on the right shows our deposit beta from the last rising rate cycle.
Already in Q3, 2015, and running through Q3 2019 to catch the lag effects.
Our beta them was 42% on interest bearing deposits.
Our cost of interest rate deposits increased from 11 basis points in Q2 to 23 basis points in Q theory for a net increase of 12 basis points and an implied repricing beta of 8% based on quarterly averages.
The spot rate at September 30 was 38 basis points versus 10 basis points at June 30 for a net increase of 28 basis points during the quarter.
We use the spot rates to help gauge movement and potential trajectory heading into the next quarter.
This 20 basis points of spot rate increase as a deposit beta of 19%.
On the 150 basis points fed funds rate increases during Q3.
And on accumulative basis, we were at 9%.
For comparison, the loan coupon, though increased by 59 basis points between June 30, and September 30.
Tying everything together, we expect our interest bearing deposit costs to increase again in Q4, but to stay well below our model level, which will bode well for our NIM, assuming additional offenders in November and potentially December .
Okay now to our segment disclosures.
Starting with the core banking segment on slide 21 of the presentation.
Net interest income increased $39 5 million over Q2, given the higher rates and loan growth discussed previously.
I'll talk about seasonal in the provision in detail here in a few minutes, but youll see here, we had a $27 $6 million provision this quarter again related to continued loan growth and slight deterioration in economic forecast variables.
The next few rows show the fair value changes due to rising interest rates.
As a group were $25 million loss in Q3 compared to a $10 million fair value loss in Q2.
Noninterest income of $36 8 million increase from Q2 due to continued growth in commercial fees.
And then the non interest expense section, you'll see the merger expense recognized to date on the combination.
Along with exit and disposal costs related to lease exits on recent store consolidations.
The direct non interest expense for the core banking segment was up slightly this quarter, primarily related to higher deferred loan costs back in Q2, not repeating in Q3.
The efficiency ratio for the segment improved to 52%.
This would be 48% extra nonoperating fair value changes in merger exit costs.
And the operating disclosure for the core banking segment back on page 34 in the appendix and also on page 24 of the release.
It's great to see the operating PNR increased 45% year over year and 31% from Q2.
Which is good to see the beneficial benefit of continued loan growth and rate increases.
This is significant and again bodes well for future core banking revenue with additional forecasted fed funds rate increases.
Yeah.
Turning now to slide 22 of the presentation, we show the mortgage banking segment five quarter trends.
To start the continued increase in longer term yields further depressed volumes and pipelines.
We had $397 million in total held for sale volume this quarter down 31% from Q2.
Due entirely to lower activity with higher rates.
The gain on sale margin was 265% up slightly from Q2.
These two items resulted in the $10 $5 million 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.
At a time piece of stable.
While the change due to valuation inputs with a gain of $16 4 million.
Due again to the increase in long term rates during the quarter.
We implemented the MSR hedge in August offsetting $14 million of MSR gain in.
In line with expectations.
Non interest expense totaled $21 5 million for the quarter.
This represents held for sale origination costs servicing costs, along with administrative and allocated costs.
The direct expense component of this was $10 5 million.
Note on the right side of the page.
Let's now towards the bottom of the page. The MSR is at a record high valuation of $1 five 1% as of quarter end.
A couple of final items before I turn it over to Frank on Slide 24, we've included the quarterly loan balance roll forward.
Loan growth was driven by $1 9 billion of new originations and net advances.
Offset by 0.8 billion of pay offs.
Slides 25, and 26 provide additional stats and composition of the portfolio.
Next let me take your attention to slide 27 on seasonal and our allowance for credit loss.
As a reminder, our seasonal process incorporates a life alone reasonable and supportable period for the economic forecast for all portfolios with the exception of C&I, which uses a 12 month reasonable and supportable period.
<unk> gradually to the output mean thereafter.
We used the consensus economic forecast this quarter updated in August .
Overall, the forecasts, reflecting higher expected inflation and interest rates and a slight uptick in peak unemployment rates.
With this we recognized $27 $6 million provision for credit loss.
With $12 million of that for the quarters strong loan growth and $15 million or slightly deteriorating economic variables.
This page shows the commercial leasing portfolio is driving the majority of the increase as they are the most sensitive to the unemployment rate forecast, which increased slightly on peak from three seven to four 1% over the horizon.
<unk> sales increased one 6% at quarter end up from one 2% in Q2, and lastly, I want to highlight capital on page 29.
Meaning that all of our regulatory ratios remain in excess of well capitalized levels.
Our tier one common ratio of 10, 7% and our total risk based capital ratio was 13, 2%.
Our bank level total risk based capital ratio was 12, 4%.
And with that I will now turn the call over to Frank Namdar to discuss credit.
Thank you Ron turning back to slide 28, our nonperforming assets total assets ratio of one 6% was relatively steady with the prior quarter's level and our classified loans to total loans ratio of <unk>, 74% was similarly stable.
Our annualized net charge off percentage to average loans and leases.
It was 11 basis points in the quarter reflective of the continued below average net charge off activity and the impact portfolio.
<unk> ratio came in at 136% still well below its historical 3% to three 5% range displaying the resiliency of this customer base and the impact of strategic credit adjustments continually and consistently being applied within that portfolio.
My expectation continues to be for a gradual migration to historical norms over the coming quarters in this space.
As expected essentially all of the quarters charge off activity was in the <unk> portfolio as the bank's activity was again nearly de minimis.
We continue to be very pleased with our credit quality metrics charge offs charge off activity is minimal nonperforming and classified loan ratios are low and delinquency migration is satisfactory we remain confident.
Confident in the quality of our loan book and look forward to high quality growth balanced with effective and active risk management practices.
Back to your court, Okay. Thank you Frank and Ron for your comments and we will now take your questions.
Thank you.
Reminder, to ask a question you will need to press star one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Jared Shaw with Wells Fargo. Your line is now open.
Hi, good morning.
Hi, Jared.
Maybe just more broadly if you could share with us sort of the.
Are you hearing from your customers in terms of broader commercial sentiment with the economic backdrop that we're seeing.
And does that change any of the longer term assumptions with the.
With the <unk> deal.
I guess, how should we be thinking about.
That.
As we look at 'twenty three growth.
Maybe just the umpqua part of growth going into 'twenty three.
Hey, Jared this is Tory Nixon.
I think.
From the customers' perspective.
Today.
We're continuing to see very active.
Customers certainly on the borrowing side.
Our C&I portfolio continues to grow a lot of activity I think changes in interest rates and economic cycle.
Little too early to see anything material from from their perspective yet.
There is.
Somewhat of a slowdown in the pipeline on the real estate side of the house, so multifamily in our or our commercial real estate division, a little more interest rate sensitive and a little bit of a slowdown there, but overall some some really still good activity from our existing.
Customer base and in our prospect community, we continue to prospect throughout the footprint.
You need to have success in bringing new relationships into the bank.
And Jared Hey, one last thing relative to.
The product sets of both companies like.
You heard Clinton I say a year ago now.
Our respective banks independently are very complementary of one another and we each have products and services potentially the other one does not have and there is a tremendous opportunity to leverage those opportunities.
No.
As it relates to the combination.
I am extremely excited with the momentum that we've created.
But the opportunity to combine products and services portfolios and markets, both and teams together is a huge huge opportunity that.
That we have before us.
Okay. So when we look at like the.
So the $1 billion of.
Of growth this quarter I mean, do you feel that.
That sort of a sustainable rate as we as we go through the next few quarters barring any major.
Major economic change from from these levels.
Yes.
Sorry, just for clarification, Jared you mean relative to just us or the combination of yes, no no just right just just looking at VA bianco side of it.
Okay Tori.
Yes.
No I think that.
Based on pipeline and activity.
Q4, and into Q1 will be less from a loan growth perspective than we saw in Q3.
Pipelines are are still healthy, but theyre down from from their peak about 15% to 20% so and.
And that's mostly in the real estate space as I mentioned, a little more sensitivity on the interest rate side.
So we will just see less growth on the real estate piece here for the next couple of quarters.
And I think good some continued decent growth on the C&I side. So.
<unk> less in Q4 and Q1 at this point, but still healthy.
Healthy okay. Okay thats good color, Thanks, and then.
On the RTP real time payments.
Rollout, how do you see that sort of playing with the broader fed now rollout expected in 'twenty. Three is that is that complementary or do you expect to see more of a shift over to fed now from from that volume as we look out into 'twenty three.
Yes. This is Tory again, I think complementary at this point I mean for us.
The products that Cort mentioned, our integrated receivables, our healthcare product and then real time payment system is.
<unk> is about.
Creating and.
Partnering on the technology front for working capital solutions for our customers and those.
Essentially bringing money into company's suite, a faster easier and more efficiently and I think that it serves the customer well and serve as a bank really well. So I think we're well positioned to be a provider with significant prior on the payment side and excited about that for the company going forward.
Okay, Great and then just finally for me as we look at again, just part of the Umpqua balance sheet, you've done a great job of growing DDA as a percentage of overall deposit funding over.
During COVID-19.
Do you think has that been a systemic.
A structural change in your relationship with those depositors, where we should expect to see that stay.
Hoster to this 40% level or should it start to.
Stepping back and reverting closer to the 30% as we as we move through the cycle.
Well. This is Tory again, I think there absolutely has been a shift over the last.
A couple of years two to three.
In relationship banking within the company and our our desire requirement to make sure that we are.
Getting the deposits and the operating account.
The companies that we think if we're going to make loans to them. So that shift is very purposeful.
And my expectations I think all of our expectation is that absolutely continues into the future that we're a full service company a full service bank and we will continue to pursue noninterest bearing deposits vary.
Very strong a very forceful in the company as we move forward. So I expect it to be similar to what it is today going forward.
Great. Thanks, so much for the color.
Thank you.
Our next question comes from the line of Brandon King with Truest. Your line is now open.
Thank you good morning.
Good morning, Brandon.
Yes, so I wanted to touch on deposit growth is pretty solid and quite a lot of your competitors has seen deposit declines. So I wanted to I wanted to give more color on the deposit growth outlook near term and within the context of any seasonality that youre expecting.
Well this is Tory branded.
Certainly.
Very.
Confident in our ability to generate deposits in the company we've.
As I said earlier big emphasis on relationship banking.
<unk> service banking that will continue into Q4 and beyond.
The market is shifting there is certainly liquidity, leaving the system.
And our customers are.
Some of them are more rate sensitive than others, and we just have to pay really close attention to to the customers, we have and the prospects that we're looking to bank.
We will continue to.
Work hard to bring deposits into the company at the lowest cost possible and I feel very confident in the commercial banking teams at all of the teams in retail and our ability to do that.
Got it.
Then.
On the balance sheet side of things I'm curious and I know the merger kind of.
Is pending so I'm not sure. If this can be an actual item as of now, but any thoughts to any sort of hedging against the downside of rates.
Potentially in the future is that kind of a strategy being contemplated.
Hey, Brian This is Ron.
You guys talked about we did implement the hedge on the MSR.
Also got.
Pretty negative debit impact this quarter from the fair value of loans held.
<unk> at fair value.
After that Mark So obviously when you think about down rates in the future, which is always a possibility.
Those two will take care of themselves in terms of the overall balance sheet, though and the name. It's something we do consider would you contemplate I think.
Key on that is going to be opportunities will have as you mentioned on a post combination basis nothing nothing definitive at this point in terms of hedging strategies for NIM, but something we always.
Try to keep ourselves relatively asset sensitive so not overly on the upside and not overly also on the downside so part of that facility.
The.
Natural flow of the balance sheet, but youre right that is the risk long term if rates were to drop for banking industry in general for margins.
Back under pressure.
Got it thanks, and then lastly on loan growth.
I appreciate the comments on having more balanced growth going forward, but.
During the.
Economic slowdown and a lot of people are expecting.
Are there any loan categories that you're kind of shying away from now relative Coco.
Last couple of quarters.
This is Tory again.
I think we have been cautious in places like.
On the CRE side in office and hospitality for a while so that hasnt changed.
Really at this point, we continue to do I think a very.
Respectable job in the way, we underwrite and the way we manage risk in the company and we will be opportunistic and looking at loan opportunities and relationships for the bank.
Shifting customer base and then for prospecting.
And.
Feel that we should and will land throughout the cycle.
Feel good about that so there's really nothing that we are staying away from other than what we've been very.
I think our Lee talked about previously on the on the hospitality in the office and some of the retail space.
Frank do you want to add.
Yes, Brandon this is Frank Namdar.
We have and we will continue to be.
An institution of that that really practices underwriting through the credit cycles are.
Portfolio is kind of built for that.
And we will continue to do that.
So I think that is in support of exactly what I was referencing.
Thanks for taking my questions.
Thanks.
Thank you.
To ask a question at this time, please press star one one.
Our next question comes from Adam Butler with Piper Sandler Your line is now open.
Hey, Good morning, this is Adam calling in for Matthew Clark.
Good morning.
Good morning.
I believe I heard earlier in the call that you plan on reducing head count within.
The mortgage business is that fully reflected in that decrease in the salary line.
Our comments will be reduced we have reduced in the quarter 60 head count in our mortgage group each of the end of the third quarter and year to date, that's 100 in the mortgage group.
Okay, no it's not.
And as Ron no, it's not fully reflected because that occurred throughout the quarter yes.
Okay. Thanks.
Is there any plan.
<unk> for future reduction in head counters.
Is that to be determined.
At a future time.
Yes, we will continue to assess that.
Segment of the business like I've said on previous calls mortgage first finance is an important product for our customer base, but will continue to evaluate it as rates move around.
Great.
And.
With regard to.
Hiring opportunities.
Recall, you guys expanding <unk>.
Some teams in Phoenix, and Denver are are you seeing opportunities there and our.
Are you seeing opportunities in other markets too.
Yes. This is Tory again definitely seeing opportunities.
People that want to work for the bank, we've hired some folks in Phoenix and in the Denver market that you talked about we continue to look at other places.
Our footprint.
Kind of infill if you will throughout the footprint.
Phil still always looking for really strong banker talent.
And we're having a.
A lot of success and feel very confident will continue.
Okay great.
All my questions. Thank you.
Thank you.
And I'm currently showing no further questions at this time I would like to turn the call back over to Jackie Bohlen for closing remarks.
Thank you Shannon, we would like to thank you for your interest in Umpqua Holdings Corporation and participation on our third quarter 2022 earnings call. Please contact me if you would like clarification on any of the items discussed today are provided in our presentation materials. This will conclude our call.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
Fair.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
Yes.
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