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spk05: Good morning and welcome to Umpqua Holdings Corporation fourth quarter earnings call. I will now turn the call over to Ron Farnsworth, Chief Financial Officer.
spk09: Okay, thank you, Chris. Good morning and thank you for joining us today on our fourth quarter 2020 earnings call. With me this morning are Colt O'Haver, the President and CEO of Umpqua Holdings Corporation, Tori Nixon, President of Umpqua Bank, and Frank Mandar, our Chief Credit Officer. After our prepared remarks, we will then take questions. Yesterday afternoon, we issued an earnings release discussing our fourth quarter and full year 2020 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 omcobank.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 our earnings conference call presentation, as well as the disclosures contained within our SEC filings. May I now turn the call over to court?
spk08: Okay, thanks, Ron. I will provide a brief recap of our performance, and then pass to Ron to discuss financials. Frank Namdar will discuss credit, and then we'll take your questions. For Q4, we reported earnings per share of 68 cents, setting a company record for the second consecutive quarter. This was an increase of 11 cents, or 19%, from the 57 cents we earned in the prior quarter, and an increase of 32 cents, or 89%, from the 36 cents we reported in the fourth quarter of 2019. These earnings were driven by another quarter of incredible production in our home lending division, PPP fee accretion, as nearly 15 percent of PPP loans were forgiven by the SBA during the quarter, and for the fourth consecutive quarter, a healthy decline in the cost of our interest-bearing deposits. Turning to the balance sheet items, loan balances in Q4 were down 647 million, or 3 percent, due largely to process PPP loan forgiveness. The transfer of $78 million in indirect auto loans to loans held for sale and anticipated payoffs in the residential real estate portfolio. Regarding deposits, we generated strong growth in non-interest-bearing DDA this quarter of 158 million or 2 percent, which once again afforded us the opportunity to reduce higher-cost time deposits, which reduced by 402 million or 12 percent. On a net basis, deposits were down 46 million and essentially flat with the totals from the prior quarter. In addition, our cost of interest-bearing deposits improved from 49 basis points to 38 basis points, a reduction of 11 basis points from the prior quarter amount. For the year, loan balances increased $584 million, or 3%, driven by PPP production, which is partially offset by line of credit paydowns. Year over year, commercial line of credit outstanding balances were down 29%, not as a result of customer attrition, but due to customers using available liquidity to pay down lines. Also for the annual period, deposit balances increased significantly by $2.1 billion or 10%. This was attributable to growth of $2.7 billion in non-interest-bearing DDA, $500 million in interest-bearing DDA, $240 million in money market, and $440 million in savings. The planned runoff of $1.8 billion in higher cost time deposits was primarily a driver in the substantial reduction in interest expense year over year. Regarding capital, we are pleased to announce to our shareholders in November a dividend of $0.21 per share remaining consistent with historical payments. We'll announce the timing of our next dividend soon. Before passing to Ron, I want to give a quick update on NextGen 2.0 initiatives. With Imbalanced Growth, we have a unique opportunity to take advantage of the positive brand awareness of our PPP work and the results generated to attract both customers and talent. UMQA's high-touch, client-centric approach is highly attractive to customers, as we're seeing in the robust new relationships we're attracting. In addition, as I said many times before, because of this approach, Umpqua provides a unique opportunity for bankers to be supported by a platform with all the products and services of much larger institutions while being supported by our relationship-focused culture. As a result, we've initiated an ambitious talent acquisition plan to attract top talent in key markets across our footprint and look forward to augmenting the terrific bench we've built over the last several years. We're also seeing positive trends emerge in our fee income products including a growing pipeline, strong price optimization, and this past month, the highest amount of customer spend transacted through our commercial card product in the company's history. Finally, on balanced growth, we feel optimistic regarding loan growth in 2021. Economic activity within our footprint is picking up, and recent prospecting efforts has resulted in significant increases to our pipelines, which has returned us to pre-pandemic levels. Our human digital technology initiatives continue at full steam ahead. In Q1, we will be leveraging the Encino platform to execute the new round of PPP that was just introduced. And in fact, we started taking applications just this week. It's early, but our technology platform is already allowing us to meet PPP demands with less human involvement compared to last year. This is important. as it allows our bankers more time to continue their focus on organic customer growth. Also worth noting, we're preparing to launch our integrated receivables product for commercial customers. We're working with our FinTech partners to add additional APIs to our catalog. And finally, we'll be upgrading our online banking user experience for commercial customers later this quarter. With regards to operational excellence, We remain on track to meet the cost save guidance that was provided last quarter. Specifically, the sale of UMQA investments is scheduled to close late this quarter, and I'm excited to formally begin the strategic partnership with Stewart Partners. We also completed the sale of three store locations in December, in addition to the four store sale that was completed earlier in the fall, bringing the total store rationalizations in the second half of 2020 to seven. On January 12th of this year, we announced plans to consolidate another 12 locations by the end of Q2 of 2021. We remain on track to hit our goal of 30 to 50 store rationalizations by the end of 2022. As previously mentioned, we are addressing the consolidation of back office space to fit both the new working habits of our associates and reduce non-interest expenses. This past quarter, We reduced back office real estate footprint by four properties totaling 45,000 square feet and 1.8 million in savings that started on January 1st of this year. Each quarter we will provide updates on all NextGen 2.0 strategic levers as we continue to modernize the bank, advance customer experience and technology initiatives, and improve operating leverage. In summary, and as I mentioned in our earnings release yesterday, UMQA's results in 2020 are a testament to the tremendous strength of this company. Despite significant disruption and numerous challenges last year, our associates rose to the occasion time and time again. Their incredible adaptability, resilience, and passion has made a profound difference for our customers and communities, and I couldn't be more proud of each and every one of them. I believe reputations are built in times like these, and I am confident the work we did this past year will set us up for future success. And now, Ron, take it away to the financials.
spk09: Okay. Thank you, Court. And for those on the call who want to follow along, I'll be referring to certain page numbers from our earnings presentation. Page 11 of the slide presentation contains our summary quarterly P&L. Our gap earnings per share for Q4 was a record 68 cents, higher than the prior record 57 cents in the third quarter, driven by PPP fee recognition, continued strength in home lending, no provision for loan loss, and a low tax rate. Excluding MSR and CVA fair value adjustments, our adjusted earnings were 70 cents per share this quarter. On the PPNR front, excluding fair value charges, our PPNR was $154 million in Q4, or $598 million for the year, up 26 percent from the $476 million in 2019. Turning now to net interest income on slide 12, net interest income increased $18 million, or 8 percent from Q3, driven primarily by a lift in PPP fee recognition and a 24 percent decline in interest-bearing deposit costs. Shown here is the quarterly interest and fee recognized from the PPP loan program. Taking that to slide 13, our total net interest margin increased to 3.35 percent. The margin excluding discount accretion and PPP effects was 3.12 percent. an increase of 12 basis points from Q3, related again to the fee recognition and a continued decline in our cost of funds. A couple other notes on margin. The bottom of the page shows the impact from the bond premium memorization, which was down slightly from Q3, and driving a portion of the NMLF with a continued reduction in our cost from spring deposits, falling another 11 basis points to 0.38%. For the month of December, Our interest rate deposit cost was 0.35 percent. We expect continued reductions in funding costs over the coming quarters. Moving now to non-interest income on slide 14. Home lending finished the year with record results benefiting from enacting as a natural hedge to a lower interest rate environment. Posting non-interest revenue of $79 million in Q4 and $271 million of revenue for the year. Ex-mortgage, the other big moving parts this quarter, was a continued rebound in service charges and higher other SBA and loan sale gains. And miscellaneous income on the bottom of the page included the gain on store sales for Q3 and Q4. For more on mortgage banking, as shown on slide 15, and also in more detail on the last two pages of earnings release, for sale mortgage originations remained robust at $2.1 billion. an increase of 49 percent from the fourth quarter a year ago and just under the Q3 record amount. This reflects our positioning to capitalize on higher refinancing demand with lower long-term interest rates. The for-sale mix was 85 percent above our 80 percent target, and the gain on sale margin remained strong this quarter at 4.71 percent above our long-term trends of the low to mid-3 percent range. based on better pricing with constrained industry capacity and solid log pipelines. Historically, the second and third quarter represented 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 rates and strong demand for housing across our markets, we expect overall mortgage activity to remain quite good for the next several quarters. Specifically, production in Q4 was a 50-50 split on purchase versus refinance compared to the 40-60 split for the full year. We encouraged by the purchase activity as the most recent trends were closer to what we experienced a year ago, pre-dropping rates where purchases accounted for 55% of the production. And as of quarter end, we serviced $13 billion of residential mortgage loans, and the MSR is valued at 71 basis points. Turning now to slide 16, non-interest expense was $211 million in Q4, up from $190 million in Q3. The moving parts are on the right side of this page, noting the increase was non-recurring this quarter. The increases were related to higher variable performance comp with this year's results, deferred compensation liability increases in part due to the drop in rates, some software technology exit costs as we simplified various customer-facing systems, a charitable foundation contribution as we decided as a company to donate 5% of our total expected PPP fees and other expense. Offsetting this was a decline in home lending direct costs with a slight drop in total production volume this quarter. Going forward, we expect first quarter 2021 expense to be below the Q3 2020 level with reductions later in the year as we remain focused on our next gen 2.0 strategy. And for a minute, I want to take you back to slide 11 and talk tax rate. Our effective tax rate this quarter was negative 5% related to the quarterly tax accounting intricacies stemming from the goodwill impairment back in Q1. The effective tax rate will be back at the 25-ish percent level in 2021. Okay, now let's go to the summary balance sheet, beginning on slide 17. We are intentionally holding higher levels of interest-bearing cash, given the volatile environment, ending the quarter at $2.2 billion, noting the average balance was up 13 percent. This higher level of cash cost our NIM three basis points, but gives us significant future optionality for funding loan growth or deleveraging certain liabilities. Loans decreased 3 percent net for the quarter, or 2 percent on average balances. Within this, PPP loan balances ended at $1.75 billion, and forgiveness was received on approximately a quarter billion during Q4, resulting in about 40 percent of the overall decline in loans this quarter. Deposits remained flat, unending, and average. Within deposits, we had continued increases of 2 percent in non-sparing demand and 4 percent in interest-bearing demand, along with a 3% increase in savings deposits. Offsetting this was a 12% decline in higher-cost time deposits. Broker declined $100 million in Q4, leaving us with just $150 million in broker deposits, which we'll leave in the first half of 2021 with the sale of UMCO Investments. Our total available liquidity, including off-balance sheet sources, that quarter end was $11.5 billion. representing 39 percent of total assets and 47 percent of total deposits. Frank will cover the loan book in a few minutes, but I want to take your attention forward to slide 22 on CECL and our allowance for credit loss. Our CECL 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 reverting gradually to the output mean thereafter. Hence, these forecasts incorporate some level of economic recovery in 2021 and beyond, as most economic forecasts revert to the mean within a two- to three-year period. As noted, we used the November Moody's baseline economic forecast versus using the consensus forecast the prior two quarters. We changed the baseline in Q4, given the market and outlook volatility post-election, and viewed it as more up-to-date versus a lagged consensus forecast. We expect to move back to the consensus forecast in early 2021, given updated economic projections. As a result of using the baseline, there was no provision for credit loss in the fourth quarter. With NRACL as of year-end, we had no net qualitative overlays above or below the model results. Net charge-offs for Q4 remained low at $20 million, much lower than the models from earlier last year suggested, and the majority of net charge-offs this quarter related to small ticket leases that were past due following rolling off their deferral period, which we expected and discussed with you last quarter. We do expect a similar amount of small ticket leases to charge off coming up in Q1, and these have already been fully reserved for in our ACL. The ACL at quarter end was 1.60%. noting this ratio is 1.74 percent, excluding the government-guaranteed PPP loans. As these are economic forecasts driving the reserve, it will simply take the passage of time to see if net charge-offs follow as modeled. But to date, the models have simply overestimated the actual net charge-offs, given at least a lag of three-quarters. Two final comments on CECL. First, future provisions or recaptures on expected credit loss will be based on changing economic forecasts which could worsen or improve from the quarter-end forecast used. And second, we have elected the full five-year regulatory transition option for CECL. Lastly, on slide 23, I want to highlight capital, knowing that all of our regulatory ratios remain in excess of well-capitalized levels, and all of the regulatory ratios increased again over the prior quarter. Our Tier 1 common ratio is 12.3 percent, and our total risk-based capital ratio is 15.6 percent. The bank-level total risk-based capital ratio is 14.6 percent, which is the basis for a calculation of $558 million in excess capital. This excess capital increased $115 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. And with what we know today based on the economic forecast, we are very comfortable with our capital and liquidity position given uncertainties over the near to intermediate term horizon. This level of capital gives us several opportunities to enhance returns for shareholders in the future, be it stronger organic loan growth or even the potential for share repurchases to improve future EPS. The key items I want to reiterate as I wrap up my prepared remarks include, first, the significant available liquidity we have of $11.5 billion. Second, our allowance for credit loss stands at 1.74% of non-PPP loans. And lastly, our significant level of excess capital with our Tier 1 common ratio at 12.3% and total risk-based capital ratio at 15.6%. And I will now turn the call over to Frank Nambar to discuss credit.
spk03: Thank you, Ron. I will also be referring to certain page numbers from our earnings presentation for those who want to follow along. We have updated our referral information as of December 31st on slide four. Total loan balances that were on deferment at the end of the year represent 2.4% of the loan book. We continue to work with customers within the guidelines of federal programs, such as the CARES Act, as well as individual state mandates. We will continue to work with our customers on deferrals when they are needed and are very happy with our cure rate thus far of 87%. On a portfolio basis, we are reporting 0.9% deferrals in commercial, 1.3% in commercial real estate, 1.7% in FinPAC, 0.4% in consumer, and 6% in residential real estate. On slides five and six, we again show specific segment totals and relevant characteristics for portfolios that have been impacted by COVID-19. The following segments are highlighted. Hospitality at 2.4% of our portfolio, air transportation at 0.6%, restaurants at 0.6%, and finally gaming at 1.6% of our portfolio. Deferral information is also highlighted within these segments. Hospitality obviously remains an area that we continue to watch closely. Occupancy levels have increased to the 40-ish percent level and with our extended stay and limited service properties continuing to perform above this level with occupancies ranging from 68 to 80%. As I've stated previously, this portfolio is of low leverage with a very strong overall sponsorship to borrowers we have history with. Slide 23 depicts our loan portfolio. It's 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 underwriting practices. Slide 24 reflects our credit quality statistics. Our nonperforming assets to total assets ratio decreased three basis points to 0.24 percent. Our annualized net charge-off percentage to average loans and leases increased 11 basis points to 0.35 percent. As Ron mentioned just a minute ago, And as disclosed previously on our third quarter call, this increase was due to approximately $18 million in leases that came out of deferment and were unable to resume regular payments. We have identified another pool of approximately $18 million of leases that will also be charged off in Q1. And then we expect the FinPAC portfolio to begin to return to the historical levels of three to three and a half percent in Q2, 2021. I'll now turn the call back over to Court.
spk08: Okay, thank you, Frank and Ron, for your comments, and now we'll take your questions. Chris?
spk05: Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. The first question comes from Jared Shaw of Wells Fargo Securities. Your line is open.
spk12: Hey, guys. Good afternoon. Hey, Jared. I guess, Ron, maybe just first, I just had a question on the PPP fees. Can you remind us, are you booking those based on the assumed average life, or when we look at that $29.2 million, is that just the acceleration of what you actually received on forgiveness?
spk09: The total includes accretion within the underlying book over the life of the portfolio using the effective interest method, but There's about a $16 million pop in Q4. A good chunk of that was related to the acceleration of remaining fees or remaining unaccreted fees for the loans that were forgiven. So to the extent we have more loans forgiven, say in Q1, Q2, whatever net remaining deferred fee at that point in time will also be accelerated.
spk12: Okay, so that $16 million was just what actually was received for forgiveness?
spk09: The majority of that was.
spk12: And then can you let us know what your positioning is for round two and what you think we could see for volume out of that?
spk11: So, hey, Jared, this is Torrey Nixon. So we obviously we opened up, actually we started really on Monday. We integrated a technology in CINO to help us with forgiveness and with this newest round of of PPP stimulus. As of this morning, we have 3,767 applications for about $517 million. Average loan amount is about $37 million. I think it's important to note that this time around with our technology, we're going to use about 80% less people in kind of working through the process and providing the help and support for our customers and our communities than last time. Okay.
spk12: All right. That's a good color. Thanks. You know, Ron, I guess shifting over to the margin and the outlook there, you know, loan yields have held up pretty well. How should we, you know, how should we expect margin sort of XPPP to trend over the next few quarters with the ability to still, I guess, maybe lower positive pricing.
spk09: Yeah, I mean, that's definitely our goals internally with ex-PPP off that 312 base. Bond yields seem to have stabilized the mix of a lot of our portfolio. What impacted so much of it last year was higher premium paper that you know, as it was refined, we were taking the heads on. But I do definitely expect to see continued drop in our cost of spare deposits. Again, I said it's 35 bits for the month of December, so you can do the math on, you know, what that can look like in Q1. So near term, we expect to be around this level. And then beyond, say, the next quarter or two, which will include, you know, some on top of that level, some PPP fee acceleration along with continued accretion. for not only round one, but also round two. Beyond that, we very much look forward to seeing continued organic loan growth, push our loan deposit ratio, patch PPP back up into the 90% range to help stabilize and grow that margin ideally over time.
spk12: That's a good call. Thanks. And then just finally for me, looking at the excess capital, both the dollars and just the rates, you're clearly in a strong position. You know, it seems like you clearly have enough to handle any growth that we should expect over the next year. I guess why not be more aggressive now with capital management, you know, taking advantage of maybe an opportunity in buybacks or, you know, I guess what's the other thoughts in terms of looking at M&A and maybe going on organically?
spk09: Yeah, great comments. Mentioned the prepared remarks. If you look back at 2020, About $200 million of that excess capital growth was the result of the non-PPP loan drop, which we expect to come back and utilize. But even absent that, you're right, there's plenty of opportunities to be aggressive on the capital performance side, and share repurchase is definitely one of the options on that front. I will also just mention that would be a process, too, we would go through with the regulators for approval just given the negative retained earnings, but definitely see that as potential over the course of the year.
spk12: Okay, thanks. I'll step back.
spk05: Your next question comes from Jackie Bolin of KBW. Your line is open.
spk00: Hi, good morning.
spk04: Good morning, Jackie.
spk00: I just wanted to touch on the broader points of growth. You know, looking at some of the disclosures and the prepared remarks and thinking about the presentation we had last quarter that gave the 8% to 12% growth, and I apologize that this is a little bit multilayered, but You know, the quarter had its movements with indirect transfers and some SFR pay down, but then you talked about the talent acquisition that you're looking to do. So just the pushes and pulls that you see and how you're feeling about the growth outlook that you laid out last quarter.
spk11: Jackie, this is Tori again. I think as you kind of positioned in the question, it's multifaceted. There's a couple things happening. Certainly I think that We have some general uptick in the economy over the course of 21, and we feel good and confident about that. We've been very successful over the last couple of years in acquiring some significant talent in the bank, and we will continue to do that through the course of 21 and 22 in all of our major metropolitan markets, but also in some of our more rural legacy Umpqua bank markets. And, you know, we spent quite a bit of time on the prospecting front, built the pipeline up quite significantly, both our middle market and our community banking lines of business. So feel really good about the activity level that we've seen by the field and the and the pipeline that we've built over the course of certainly in Q4. And, you know, I think we've demonstrated previously we've been able to grow the company on the lending side, and we will continue to do that and bring new relationships into the bank.
spk08: Hey, Jackie, it's Court. You know, like Tori just mentioned, we've always grown the company, and I get the optics and the pressure that you all see with the balance sheet. You know, I think we all would agree 2020 – It's an interesting year for commercial customers. And like I mentioned in Tori, I don't know if you mentioned it, you know, commercial loans kind of retrading, if you will, are coming down during the year, mostly because of the liquidity that borrowers had and yada, yada, yada. And those customers still remain here today. And we have traditionally grown this company. We feel very, very good about what we see in our pipelines. And just a quick story, and I'm not going to use names. We were talking right before the call. And I think, It's worth noting the power of PPP, even this round. We picked up a significant relationship here in the Portland market from a bank you all cover, making a half a million dollar PPP loan and picking up a $20 million loan relationship. So as we continue to work that series of new customers of the bank and as companies continue to see a greater outlook, the elections behind us, you clearly can see the end of the pandemic sometime this year, and as enthusiasm builds, you will see commercial loan draws, you will see the pipeline that Torrey's built, and you will see the conversion of these PPP customers, new customers to the bank that we got in round one, let alone round two, convert to on-balance sheet, both depositors and borrowers. And we feel extremely pleased of all the effort that this bank put into PPP round one, and it won't take as much effort in PPP round two, But we still think that there is a significant lift in this bank's growth potential in 21 and going into 22.
spk00: And, Court, would you say that some of the single-family runoff is tied to selling a larger portion of production, meaning that there's not as much flowing into the portfolio?
spk08: I'm sorry to interrupt you. We made a strategic decision in 19. It's been a while now. to go more into agency sale and get out of portfolio for a lot of reasons. And it was the right decision, albeit we're suffering a little bit on the balance sheet. And I know you guys don't like necessarily the revenue generation off the secondary market activities, but it's driving significant revenue gains. Now, albeit we're giving up something on the balance sheet, but we see a lot of opportunities, more relationship opportunities on the balance sheet. And it was a planned strategy in 19. And it just came a little quicker. So it was expected in Q4, and we feel very strongly, like Ron mentioned, that the for sale volume is going up, which is a good indication. As long as volumes, or excuse me, housing stock stays out there for sale. But we're coming into the strong part of the season. So, yes, it was a planned event. We made plans for that in 19, and it just was a little bit more than we expected in Q4, but it doesn't worry me.
spk00: Great. Thank you. That's all incredibly helpful. And I just have one quick little housekeeping item for Ron. Just wanted to know how much the gain on sale was in the quarter of the three stores.
spk09: That was approximately $4 million. Okay.
spk00: Thank you.
spk09: Great. Thank you.
spk05: Your next question comes from Michael Young of Truist Securities. Your line is open.
spk01: Hey, thanks for taking the question. Good morning, Michael. Maybe wanted to start, Ron, just on the net interest income outlook. You know, I think NIM's kind of hard to predict at this point, given the high levels of liquidity and all the noise with PPP, et cetera. But maybe just looking at core, you know, kind of NII dollars. It seems like we've kind of bottomed out with portfolio growth, you know, loan portfolio growth from here. We should see kind of expansion here. maybe in both margin and dollars of revenue. Is that kind of the outlook you have as well, and any additional color you'd add to that?
spk09: I think you nailed it. I mean, that is definitely the goal of the plan, and I'd say the only other addition I'd put on there is that excess level of in-spring cash gives us a lot of optionality for deleveraging higher-cost liabilities, right? Ideally, we'll turn around and put that into loan growth, but even over and above, recapturing the loan balance declined this past year as a growth this year, there still are several high-costing liabilities including term debt we can pay down with that. So those are all part of the plan.
spk01: Okay. And maybe switching over to the other side on expenses, I don't know if it's better to talk about it from an efficiency ratio perspective or maybe even an absolute dollar target given kind of high levels of mortgage continuing into 2021. But You know, as we move forward, do you feel like it's still kind of a mid 50s efficiency ratio that we should be expecting on an operating basis with all the technology adaptation and efficiency that's been gained there and real estate reductions? Or, you know, do you have anything tighter in terms of a firm dollar amount that we might exit the year at? You know, any color there would be helpful, I think, as we think about progression throughout 2021.
spk09: Yeah, I think you nailed it. I mean, the mid-50s is definitely the goal over time. And, again, I wanted to talk about, you know, Q4 change off of Q3. I expect Q1 will be below Q3 levels, and then you'll see the impacts over the balance of the year from the next-gen 2.0, which is what we talked about. Home lending will be a wild card depending on how strong that remains over the course of the year, but mid-50s is definitely a long-term goal.
spk01: Okay, and then just last one, you've touched on kind of capital return and share repurchase. You know, I think historically you guys have been a little more philosophically opposed to that, but capital levels are pretty high now. It doesn't seem like M&A is of near-term interest. So, you know, just any other kind of thoughts on how you're thinking about kind of discussing that with the board and or regulators in terms of magnitude or timing or anything else that, you know, is kind of in your thought process? there.
spk09: Yeah, definitely. In the near term, with the growth in excess capital, it gives us a lot of options, but share repurchase definitely is a potential we're looking at. Again, I will have to note that that will require regulatory approval, which we'd expect would be a seamless process we'd go through just given the excess amount of capital we're generating and expect to continue to generate. Dividends continue, obviously, the first priority, but I also want to get back to On the organic growth side, I'd love nothing more than to expect to see a chunk of that excess capital be utilized here in 21 with the return of non-PPP loan growth.
spk01: Okay, thanks. I'll step back.
spk08: You bet. Thank you.
spk05: Our next question comes from Jeff Rulis of D.A. Davids. Your line is open.
spk06: Thanks. Good morning. Just wanted to follow on the expense front. Just to map what I assume are somewhat one-time, the software impairment and charity, is that in occupancy and other, respectively?
spk08: Correct.
spk06: Okay. Great. And if we could, I know there's some lumpiness to the initiatives in the current year with the sale of investments and a third of the branches coming on or to be completed by the end of Q2. Just if we think about, you know, 50% of the cost saves over the balance of the year, you think that's fairly even over the course of the year if we're tracking it? Or is it, you know, lumpy, back-end loaded? How would you, if you characterize those savings throughout the year, How would you put them?
spk09: Yeah, I mean, we'll definitely see a pickup in Q2, just given the timing of the UI sale. Sore consolidations will be later, really more Q3 item. Underneath the covers, though, there are several other initiatives that will be working their way over the course of the year. So really, when we talk about half of the $39 to $56 million of overall reduction being realized in 21, I think that's a good outlet over the course of the year. Really key is going to be you know, looking at 22 compared to 21, having half of that in the bank at the start of 22. So there'll be some moving parts. UI is probably the biggest one that will kick in in Q2.
spk06: Okay. Ron, just to clarify, you're exiting Q1 at a run rate, or Q2 will be a good read on UMCO investments out of those?
spk09: Q2 will be a good read on UMCO investments. The other items will phase in over the course of the year.
spk06: Got it. Okay. And then, Court and Tori, you both have referenced the pipeline and the build there. Just hoping to get maybe the specific dollars, where the pipeline sits as it came into the year versus year over year, and maybe even what that figure was as it bottomed in the pandemic, just to kind of get a relative sense of what that pipeline was.
spk11: Yeah, sure, Jeff. So, If you think about the all different lines of business combined, we were about $3 billion in a loan pipeline at the end of 19. And we've kind of dipped down, I think, to a low of probably just a shade under two and are now back up to three. So we've kind of, and most of that increase has been in the last you know three months so the two four was a was a big lift in that in that dollar amount and it it was primarily centered or it is primarily centered in our middle market and community banking business or kind of cni um customer relationship uh business up and down the west coast got it so i guess another way to put it i guess if you're entering in the current year
spk06: You know, in the engine, if you've got some other leads on PPP that maybe you didn't have year over year, maybe the outlook on growth is potentially, you know, we could have not foreseen the pandemic, but you could say year over year, a brighter outlook than when you entered 20. Is that fair?
spk11: You know, I would, I would say yes. Uh, I felt in, uh, I think we all did at the end of 19, we had a lot of momentum going in the company, uh, on the, certainly in the CNI side, but really across the company that certainly pandemic hit kind of took some of the obviously wind out of the sail. I feel confident that we are back to where we were at the end of 19, and there are some other things come in our favor. I think we spent a lot of time the last couple of years hiring some very significant talent in the company that has had some success but will be more successful in the future. And we also have some leads on some additional talent. So as we've mentioned earlier, I think in the script that We're going to look to hire some folks in those two lines of businesses over the course of the year to continue to kind of expand the story of Uncle Bank and what we do and what we've done and continue to build it. Great. Thanks, Torrey.
spk05: Your next question comes from Stephen Alexopoulos of J.P. Morgan. Your line is open.
spk10: Hi, everybody. I wanted to start on the PPP loan fees. So if I look back to the third quarter, you had around $51 million of unamortized processing fees, right, on PPP loans. And then here in the fourth quarter, PPP loan balances fell by $200 million, so that's around 10%. But you're recognizing $24 million of the PPP processing fees. Why was that so high in the quarter? Does that imply that there's around $25 million of unamortized processing fees left from round one?
spk09: Right around that on the balance sheet, that will accrete in again over the next few quarters. And part of that was the effective interest method on the accretion. So it's not a straight line accretion over the life of the loans.
spk10: Okay. So does that imply a large drop in PPP balances, Ron, coming in 1Q? No.
spk09: Again, that'll be really dependent upon forgiveness, which we expect forgiveness to pick up Q1 and Q2 compared to Q4 levels.
spk10: Okay. And is that right? There's about $25 million of remaining unadvertised processing fees?
spk09: Ballpark, yes.
spk10: Ballpark, okay. Thanks. And then if I shift to mortgage, if I add back the MSR valuation adjustment, mortgage revenue declined around $14 million quarter-over-quarter, You guys called out in the slide deck $1.8 million reduction in direct home lending expenses. It's around 13%. Why have home lending costs not come down more in the direction of what's happened with revenue? Is there more of a lag there?
spk09: Well, again, the comparison there would have been Q3, where the gain on sale margin was north of 5%. So it has nothing to do with the expense. The expense is based off the volume. So the better comparison from an expense standpoint would be off of the volume, which declined slightly from Q3 to Q4, but still ran it up to $2.1 billion in the fourth quarter. I'd say that the pricing gains were over the top of any volume changes, right, just from a revenue standpoint. But on the expense side, again, tie it to the volume. Okay.
spk10: Okay, that makes sense. And then final question. So you guys have been active on store consolidations. Clearly your plan is to remain active. Given that You know, the Umpqua stores were such a unique part of the historical story. What's the customer feedback been from the branches you guys have closed down so far?
spk08: Hey, Stephen's Court. You know, our feedback to date, obviously you're always going to disenfranchise some customers, so I don't want to minimize that, you know, we have had some customer loss. But quite frankly... I think we have reported this in prior quarters. We've actually done a heck of a job, well beyond what we forecast when we look at store consolidations impact to deposits. Our retention rate is greatly higher than what we forecast. And it's primarily due to the outreach and our go-to application, right? So we outreach every customer in a consolidated store or closed store. We talk to them. We onboard them on go-to applications. We get them digital mobile products if they need it. In some communities, we leave a high-functioning ATM or something that's pretty darn close to a full-service store plus go-to. So the feedback has actually been better than you would expect for consolidating stores. you know, 5 to 10 miles away. Once again, it's not to say that we don't have some disenfranchised customers. As you know, I do have a phone in my office that is in every store, and any customer at any time can dial 8 on that phone and call me. And I'm being very, very transparent and truthful. I've had very few calls. I'm going to say of the 60 or 70 stores we've closed since I've been sitting in the corner office, I've probably had less than 10, seriously, less than 10 calls today. on our stores that are negative, I've probably had no I, Steven, 30 about the handling of that process, both from the associate experience and the leave back with technology.
spk11: Wow, that's great color. This is Tory real quick. This is Tory real quick. I'll give you a statistic that's kind of interesting to support kind of the go-to pieces. Our teller transactions are down 26% year over year, and our go-to messaging is up 122%. So there's just a number of connections through go-to messaging that's occurring. Some of that is just certainly kind of behavior and activity, but a lot of that is, to Court's point, us connecting with the go-to banker as we consolidate a store.
spk10: Thanks for the call, Eric. I appreciate it.
spk08: Thanks so much.
spk05: Your next question comes from Brett Ravitan of the Habdi Group. Your line is open.
spk02: Hey, good morning, everyone. Hi, Brett. Hi, Brett. Wanted to ask a question around the reserve and just thinking about credit. We obviously haven't had the need to make provisions for two quarters now, so there's been some reserve release, and part of that loan portfolio obviously hasn't grown. It seems to me like you know, if some of the more distressed portfolios continue to improve, that there'd be a good argument for a solid amount of reserve release over the next few quarters. Can you just talk about, you know, maybe the qualitative factors that, you know, I know you use Moody's, but just qualitative factors in the CECL reserve, and then just, you know, kind of thinking about reserve release as we go through the year, assuming things do improve in some of those more impacted portfolios.
spk09: Yeah, I mean, maybe, maybe just jump to the end of it. Yeah, we do see continued improvement in the forecast. We do, we would expect to see, you know, the potential for some recapture or decline in that expected loss. Just frankly, the charge-offs haven't been anywhere near where the models have expected. Now, the volatility over the course of the past year has been one thing to try to also adopt, you know, this accounting standard in the same year. So, you know, we went to a baseline in March, just because consensus was, you know, lagged, not useful. move back to consensus Q2, Q3, went back to a baseline at Q4, given the election and some of the other volatility on the outlook. So I do expect, again, moving back to consensus here early in 21, if we do see, again, some stability, which I'm sure everybody's very much looking forward to, yeah, there's potential for recapture. And again, it's going to come down to the fact that the charge-off's just anywhere near what the models had predicted. Yeah. I would say we'd expect as an industry, there should be a credit event as an industry. It's just, you know, we're not seeing it. You know, we've got the volatility we've had within our FinPAC leasing portfolio, but that's been easily covered by the reserve. So, you know, feel good about the outlook on that front for 21.
spk02: Okay. And... Just thinking about the remaining deferrals, do you expect them to be active with the second round of PPP? And just how are you managing these remaining deferrals in terms of their liquidity? What's been the experience in terms of particularly the hotels and restaurant portfolio?
spk03: Hi. Hey, Brett. Frank Amber. The deferral activity overall is really – has really slowed down dramatically. There's not much going on right now. You know, for most of it, most of the deferral activity is occurring, you know, within the residential space. And I think we have one loan that is currently in process for deferral in the CNI and real estate portfolios combined. So that's plateaued, and obviously all of our customers are absolutely welcome to apply for a PPP loan, and they will be evaluated in that context. But to date, we're just very pleased with I'll say the cure rate of the deferral activity we've seen thus far.
spk02: Okay. And then maybe one last one. I mean, Court, you were pretty optimistic that, you know, as you go through the year, that UNCWA has always been a growth story and that you are going to be able to grow. You know, would it be fair to assume that you think you'll be able to replace the PPP loans You know, I guess I'm just trying to think about the portfolio at the end of 20 versus the end of 21. I mean, would your presumption be that it would be higher than it was at the end of 20 at the end of this year?
spk08: So, I'm sorry, Brett, ask the question. Would our organic, I'll call it non-PPP portfolio, be bigger than it was going into this year? Is that what you asked?
spk02: No, I'm sorry. Maybe I didn't ask the question well, Court. I'm just thinking about, like, replacing kind of the earning asset, so to speak. So $21.8 billion at the end of 4Q20 with the organic growth, can that replace essentially the PPP portfolio as that rolls off this year?
spk08: You know, let me answer as best I can. I mean, our intent is to continue to grow the bank financially at the pace prior to pandemic that we used to exhibit on a link quarter basis. We're in some very vibrant community. I'm not going to answer your question totally, Brad. I'm just going to tell you right now, and I'm not trying to, but we've seen a significant lift in our pipelines, like Tori mentioned. You don't convert a $3 billion pipeline to unbalanced sheet footings in 90 days. It just doesn't happen. You know that. I mean, these are commercial loans, and there's some lag behind. And we're going to continue to do what we've always historically done and convert that into a fully integrated customer relationship. Would I love to replace all of the PPP runoff, the new runoff, and grow on top of that? Well, heck, yeah, I would. I'd love to. But we're going to do what we've always done, be diligent on credit and bring in the right customers, work the PPP both first and second round, and we're going to grow it at whatever that pace turns out to be. Sorry, I just, I'd love to tell you what the number is. I can't do it.
spk02: Yeah, no, I didn't mean to put you on the spot there. I just wanted to get a call around that, and that was helpful. Thanks so much for all the color.
spk08: I appreciate being, I appreciate being put on the spot. I love that. I just don't have the answer.
spk05: Your next question comes from Matthew Clark of Piper Sandler. Your line is open.
spk07: Hey, good morning. Maybe getting back to the reserve question, if you think about your reserves on loans, HFI, X PPP and X, you know, unfunded commitments, it's about 1.64%. I mean, in a post-CECL world, I guess, where do you think that or where do you feel comfortable having that reserve bottom out, you know, over... the next year or two and then maybe set another way, you know, what's the, what's kind of the average, um, reserve you're setting aside on new production, you know, depending upon the mix or at least the mix you expect to put on going forward.
spk09: Um, good, good question, Matt. And, and, you know, obviously beginning your probably X pandemic recession, because Cecil will be with us for the balance of our careers. But my gut would tell me it would be back where we thought coming into 20 we'd be at, which is around 1%, which if you think about a long-term horizon or trend on charge-offs, it's probably 4 to 5x net charge-offs on an annual basis, 20, 25 bps, given the size and structure of our portfolio. So that would be my gut for post-return to normal economic utopia, et cetera. We'll see how it plays out.
spk07: Okay. Great. And then maybe I know you guys don't isolate it in your slide deck, and most other banks I don't think do either, but in terms of your office exposure, can you just remind us what that exposure looks like from a regional perspective and size perspective, and then any updated kind of thoughts on the health of that portfolio?
spk03: Hey, Matt. It's Frank. So the total office exposure that we have institutionally here is just under $400 million. The great majority of it, Southern California and kind of the Puget Sound region of Washington. So very good markets per se that we are in. Um, again, no, no deferral activity arising out of that. Um, what does it look like going forward? Uh, that's, that's a question I'm asked, uh, all the time. And, uh, you know, all that I can say is it will look different. Uh, uh, you know, there's, there's a school of thought that, uh, fewer people in offices, but larger, but larger offices to accommodate kind of these hoteling type concepts. So, so more, more to come on that as we, as we, as we move forward through this pandemic and beyond it, um, the hospitality portfolio, um, continues to perform, uh, quite well. Uh, we've only got, uh, a couple, three or four, uh, properties that are, that are on deferral and, uh, At this point, the sponsorship behind those is quite strong and can continue to support those properties. Now, with the extension of the CARES Act, that helps us and other financial institutions dramatically. in our ability to help these companies and sponsors continue to bridge the gap until the vaccine gets in play and we see some recovery there.
spk11: Matt, this is Tory. Let me just add one piece to that. Our office portfolio, we've got very strong sponsorship, very low leverage, and we're not looking to build a pipeline with office properties. So we have, as Frank said, we have $4 million, but it's not something we're trying to, increase at all.
spk07: Understood. Great. Thank you. And then last one for me. Just on the pipeline, can you remind us what's the probability of a loan closing for it to be considered in the pipeline? And when you backtest it, what's the success rate of converting what's in the pipeline?
spk11: That's a very difficult question to answer because it's unique for each line of business. So depending on the line of business, there's really a different success rate and probability of closing and a timeline from beginning to end. It's much quicker in our small multifamily business where it can be 30 to 45 days. In the larger real estate space, it can be two to three months. In the C&I space, it could be everything – from 30 days to 90 or 120. So just it really varies. When we look at the pipeline, there's two ways we look at it. We look at it with a probability weighting and then unweighted. And so kind of use a formulaic as much data as we can to forecast growth for each month and each quarter. So this pipeline that I referenced earlier, I mean, there's been a lot of growth. It's spread out among all of the different lines of business with a heavier concentration in CNI space. So I think we'll see certainly some success and growth in Q1 and more so in Q2 and Q3 and Q4. So we'll have, I think, a trajectory up as we go forward in the year.
spk07: And just curious, what's that probability weighting on a weighted basis?
spk11: Again, I can't give you an answer that is for across the entire pipeline. But I could... I could drill down. I don't have it in front of me. I could drill down and try and do it by line of business.
spk07: That's okay. I thought you had it. No worries. Thank you.
spk11: No, I don't have it in front of me.
spk07: No worries. Thanks.
spk05: Your final question comes from Michael Young of Truist Securities. Your line is open.
spk01: Hey, thanks for the follow-up question. Ron, you'll have to forgive me, but I'm going to try to put a finer point on the maybe expense dollar amount. You know, I think in the past you've kind of alluded to maybe a 4Q run rate to exit the year. I know a lot of this is going to be variable based on actual mortgage production volume, given that we're starting at such a high point. But, you know, as we think about the moving pieces, you know, maybe to your original guidance of $190 million or lower, kind of in line with 3Q levels to start the year. Then we've got, I think, about a $14 million reduction from the sale of Umpqua Securities piece, you know, headed into 2Q. And then, you know, the bulk of the additional cost saves coming in the second half of the year for branch reductions, plus potentially a return to more normalized mortgage volume. Seems like we could maybe exit the year in the fourth quarter at a much lower dollar run rate, maybe closer to $700 million, $710 million kind of annualized run rate as we exit the year. Is that there, or are there pieces I'm missing there?
spk09: I think you nailed it. Okay.
spk01: Well, that was easier than I thought. And then maybe, Court, just kind of high level, maybe just putting kind of a bow on all the communication and kind of objectives for the year. Could you just kind of really just tell us what you're focused on, what you hope to achieve this year now that kind of hopefully the fog of war has lifted a little bit and just what you're focused on?
spk08: I actually appreciate it. That's a great way to end up. You know, I don't know if they're ranking necessarily in order, but first of all, executing on NextGen 2.0, like we rolled out at the end of third quarter, which we've got great momentum on and probably hasn't caused me a lot of worry, but I worry about everything. So continuing to execute on that, including the consolidations and the sale of UI, all those individual pieces would be probably the first priority. I think supporting Tori and his efforts, and Frank too, on bringing that pipeline through and booking that, including the second round of PPP and all the things we're doing to support our communities, making sure that we execute on that. I think the question that was asked a couple of times, what do we do with our excess capital? Appreciate Ron's answers. We understand where your questions are coming from and spending some time, more time than we've probably spent. In prior years, because we've been able to actually use that excess capital for organic growth, I understand where the questions are coming from. So we're spending some time studying that with all the answers that Ron gave you, his prepared remarks and answers to questions. And then quite frankly, I'm a big believer in looking out five or six quarters. So I'm already working on next year. Where are we going to end up this year? Where do we have momentum? What do we need to do? to continue where we need to get more efficient, more profitable. So I've already moved on to 2022, much maybe to some of your chagrin, but we have great momentum right now. I feel very, very good about, you know, the next Gen 2.0, the excess capital and our optionality that Torrey's been able to do. So that's how we look at it. That's how I look at it.
spk04: Okay. Thanks.
spk08: You got it.
spk05: That was our final question. I will now return the call to Mr. Farnsworth for closing remarks.
spk09: Okay. I want to thank everyone for their interest in Uncle Holdings and attendance on the call today. This will conclude the call. Goodbye.
spk05: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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