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spk03: Good morning and welcome to the UMCRA Holdings Corporation's fourth 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'll need to press star 1-1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. At this time, I would like to introduce Jackie Bolin, Investor Relations Director at Umpqua, to begin the conference call.
spk01: Thank you, Catherine. Good morning and good afternoon, everyone.
spk12: Thank you for joining us today on our fourth quarter 2022 earnings call. With me this morning are Court O'Haver, the President and CEO of Umpqua Holdings Corporation, Tori Nixon, President of Umpqua Bank, Ron Farnsworth, Chief Financial Officer, and Frank Namdar, Chief Credit Officer. After our prepared remarks, we will take questions. Yesterday afternoon, we issued an earnings release discussing our fourth quarter 2022 results. We have also prepared a slide presentation, which we will refer to during our remarks this morning. Both these materials can be found on our website at umquabank.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 slides two and three of our earnings presentation, as well as the disclosures contained within our SEC filing. 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. Turn the call over to court.
spk16: Okay. Thank you Jackie for the fourth quarter We reported earnings available to shareholders of 83 million dollars This represents EPS of 38 cents per share compared to the 39 cents Reported last quarter and 41 cents reported in the fourth quarter of last year on an operating basis which excludes a number of interest rate driven items and merger expenses that Ron will review and EPS of 46 cents compared to 47 cents last quarter and 44 cents in the fourth quarter of last year. While the variance between 2022 and 2021 fourth quarter EPS was minimal, the components shifted dramatically as higher interest rates and 16% loan growth during 2022 drove a 31% increase in net interest income Q4 to Q4, leading to a 25% increase in pre-provision net revenue despite the dramatic decline in mortgage banking revenue. Over the past year, we have made a number of structural changes within the mortgage banking segment intended to reduce expenses, limit the impact of MSR changes to the income statement, and moderate portfolio mortgage growth. Additional actions planned through this quarter will continue this work. Mortgages remain an important product for the bank, and for our customers, and we remain committed to serving our communities throughout the West. However, we are shifting our mortgage operations towards a retail bank model, and we expect a smaller gross and net impact to financial statements than under our prior operating model. Turning now to our pending merger with Columbia Banking System, we announced earlier this month that we received FDIC approval and intend to close at the end of February. Our teams are focused on closing and core system conversion scheduled for this quarter alongside a heightened level of customer outreach. We are laser-focused on execution, and we look forward to providing you with an update on next quarter's call when we are officially one team. As you know, there are a lot of moving parts over the next couple of months, and our near-term focus is on achieving targeted cost savings, providing high-touch service to our customers as we complete the integration process, and giving our teams and our associates the tools to drive the revenue synergy opportunities that we have been discussing for over a year now. Back in October of 2021, we never imagined there would be over 16 months between announcement and close. However, there has also been significant upside to this timeline. We have been waiting, but we have not been idle. The joint culture work, which was originally planned to occur post-closing, has touched the majority of Umpqua associates and Columbia associates, and it has set a framework that enables us to be one team on day one. The planning, prepping, and the brainstorming that has taken place over a year has enabled the development of synergistic products and tools, and we are excited for our combined teams to use them immediately. Further, and perhaps more importantly, the earlier decoupling of our integration planning from legal day one enables us to maintain our originally scheduled core conversion date this quarter despite our targeted February 28th closing date. I want to take this opportunity to thank our dedicated associates for the countless hours and incredible heart that they have put into their work. I'm impressed and humbled by your dedication. I joined Umpqua Bank in 2010 and have been honored to lead this outstanding organization for the past six years. While it may be bittersweet to pass the reins, I know I am placing them in capable hands. And as executive chair, I look forward to watching the combined organization serve its customers and its communities throughout the West while providing enhanced shareholder return. And with that, Ron, take it away.
spk14: Okay, thank you, Court.
spk20: And for those on the call who want to follow along, I'll be referring to certain page numbers from our earnings presentation. Starting on page nine of the slide presentation, which contains our performance ratios both on a gap and operating basis, The adjustments to our internal operating measures include various fair value changes from interest rate volatility, along with merger and exit disposal costs, which are detailed in the appendix on slide 30. Our NIM continues to strengthen up 13 basis points in Q4 to 4.01%. Our GAAP PPNR ROA was 1.82%, while our operating PPNR ROA was 2.1%, and operating RODSI increased to 16.2%. Turning to page 10, which contains our summary quarterly P&L, our gap earnings for Q3 were $83 million or $0.38 per share. On an operating basis, we earned $99 million or $0.46 per share. For the moving parts as compared to Q3, net interest income increased $17.9 million or 6%, representing continued earning asset growth combined with the recent Fed rate increases. We had a provision for credit loss of $34.9 million, with the increase driven primarily by slight deterioration in the consensus economic forecast. Non-interest income increased mainly related to changes in the non-operating fair value marks, as detailed later in the appendix. A non-interest expense increased $17 million, mainly from merger expense and a non-recurring increase in other expense. As for the balance sheet on slide 11, loans were up $650 million and deposits increased $250 million. This difference netted the decrease in interest-bearing cash was funded with short-term borrowings. The lift in investments AFS related primarily to a lower unrealized loss. Our total available liquidity, including off-balance sheet sources, ended the quarter at $12 billion, representing 38% of total assets and 44% of total deposits. And noted on the bottom of slide 11, our tangible book value increased in part due to the lower AOCI rate mark on AFS investments. Slide 13 highlights net interest income, noting the increase to $306 million in Q4 resulted from the recent rate increases along with continued strong loan growth. From a rate volume standpoint, increase in rates led to $16 million of the $18 million increase, with volume and mix making up the $2 million difference. Following that on slide 14 of the presentation are the trends for our net interest margin Noting again, our NIM increased 13 basis points in total to 4.01% in Q4. We present a waterfall in the margin change on the right of the page, noting our loan and cash yields more than offset rising funding costs. And key for me here is following the 125 basis point increase in the federal funds rate during Q4, our NIM for the month of December was 4.02%. The next slide includes information on the repricing and maturity characteristics of our loan portfolio, noting no significant change in the repricing mix this past quarter. And following that on slide 16, on the upper left, we've included our projected net interest income sensitivity for future rate changes in both ramp and shock scenarios over two years. This is a simulation we run in backtest quarterly that assumes a static balance sheet. The upper right shows our sensitivity from last quarter. In comparing the two, you'll note we've taken steps this quarter to reduce sensitivity and will continue to do so in future quarters. The deposit beta used in the current simulation is 53% on interest-bearing deposits for future rate changes. The table on the left shows our deposit betas from the current rising rate cycle, while on the right we show them from the last rising rate cycle for comparison. Our beta then was 42% on interest-bearing deposits. Our cost of interest-bearing deposits increased from 23 basis points in Q3 to 77 basis points for Q4. And our cumulative data for this cycle to date is now 18% on interest-bearing deposits. The spot rate at year end was 107 basis points. We expect in spring deposit costs to increase again in Q1, but stay well below our model level. Next on slide 17, we detail out consolidated non-interest income trends, noting continued weakness within our mortgage banking segment was mostly offset by a positive fair value change on loans carried at fair value. Turning to slide 18 on expense, The majority of the increase this quarter related to merger expense for our upcoming combination with Columbia. In addition, we had an increase in state and local taxes along with other expense, which I do not view as recurring. The next two pages include the segment disclosures on a GAAP basis, with the core banking segment on slide 19 and the mortgage banking segment on slide 20. The operating non-GAAP stats by segment are later on slides 32 and 33. Suffice it to say, the core banking segment continues to benefit from rising rates and continued loan growth, while mortgage banking reported a second consecutive quarterly loss. Court mentioned plans underway earlier within mortgage banking. And a couple final items before I turn it over to Frank. On slide 22, we've included the quarterly loan balance rule forward. Quarterly loan growth was driven by $1.3 billion in new originations and net advances, offset by $0.6 billion in payoffs and maturities. We've intentionally slowed down non-relationship lending production, giving continued pressure with industry-wide deposit outflows, following continued tightening by the Fed. Slides 23 and 24 provide additional statistics and composition on the portfolio, noting no significant changes in the quarter. Next, let me take your attention to slide 25 on CECL and her allowance for credit loss. As a reminder, our ceaseful process incorporates a life-alone, reasonable, and supportable period for the economic forecast for all portfolios, with the exception of CNI, which uses a 12-month reasonable and supportable period, reverting gradually to the output mean thereafter. We used the consensus economic forecast this quarter, updated in November. Overall, the forecast reflected continued high expected inflation and interest rates, with a slight uptick in peak unemployment rates. With this, we recognize a $32.9 million provision for credit loss, with $7 million of that for the quarter's loan growth and $26 million for the slightly deteriorating economic variables. This page shows the commercial and leasing portfolios driving the majority of the increase, but they are most sensitive to the unemployment rate forecast, which again increased slightly on peak from 4.1% to 4.5% over the horizon. The ACL increased to 1.21% at quarter end, up from 1.16% in Q3. And lastly, I want to highlight capital on page 27, knowing that all of our regulatory ratios remain in excess of well-capitalized levels. Our Tier 1 common ratio is 11%, and our total risk-based capital ratio is 13.7%. The bank level total risk-based capital ratio is 12.9%. We declared a 21 cent per share dividend on January 11th, payable February 6th to holders of record as of January 23rd, and equivalent to the fourth quarter's level. Given our targeted February 28th closing date for our merger with Columbia, we expect the next dividend action to be determined by the combined board. And with that, I will now turn the call over to Frank Namdar to discuss credit.
spk13: Thank you, Ron. Turning back to slide 26, our non-performing assets, total assets ratio of 0.18%. was relatively steady with past quarters levels. And our classified loans to total loans ratio of .73% was similarly stable. Our annualized net charge off percentage to average loans and leases was 19 basis points in the quarter, up eight basis points from the third quarters level, as net charge off activity within the FinPAC portfolio increased as expected. Following elevated charge-offs and strategic credit tightening implemented during the pandemic, charge-offs in the FinPAC portfolio were notably below the historic 3 to 3.5% range for several quarters. As we have discussed on past calls, we have anticipated a gradual migration to historical norms within the portfolio. And accordingly, FinPAC net charge-offs increased to 2.84% in the fourth quarter. The uptick from 1.36% in the third quarter reflects an increase in net charge-offs, primarily within FinPAC's transportation portfolio. On a risk-adjusted basis, the FinPAC portfolio, which is 6% of our consolidated loan portfolio, remains the most profitable segment of our loan book, with an average risk-adjusted yield in the 10% range. IT CAN ALSO SERVE AS AN EARLY WARNING INDICATOR OF TRENDS THAT MAY SHIFT TO THE OVERALL PORTFOLIO. HOWEVER, WE DO NOT SEE ANY ASSOCIATED WEAKNESS IN THE BANK PORTFOLIO, WHICH HAD A CHARGE-OFF LEVEL OF JUST ONE BASIS POINT IN THE FOURTH QUARTER. FOR CONTACTS, BANK CHARGE-OFFS OF 550,000 FOR THE FOURTH QUARTER AND ONLY 2.7 MILLION FOR ALL OF 2022 IS A NEAR TO MINIMUS LEVEL OF ACTIVITY ON A PORTFOLIO NEARING $25 BILLION. We continue to be very pleased with our credit quality metrics. We remain confident in the quality of our loan book as we continue to pursue high-quality loan growth, balanced with effective and active risk management practices. Back to you, Court.
spk16: Thanks, Frank and Ron, for your comments. And now we will take your questions.
spk03: Thank you. As a reminder, to ask a question, please just press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Please stand by while we compile the Q&A roster.
spk02: Our first question comes from Jared Shaw with Wells Fargo.
spk03: Your line is open.
spk05: Hey, guys. Good morning.
spk16: Good morning.
spk05: Looking at the jumping off point here for margin as we go into the year, you have great yields on loans. Looks like maybe you've benefited from some spread widening and beta is performing better than earlier expected. Do we think that that starts to revert to a more normalized level, both spreads and maybe data quickly at the beginning of 23, or are you optimistic that those benefits could stay with us a little longer?
spk20: Hey, Jared. This is Ron. Good morning. I talked about the spot rate in spring deposits being 107 bps at the end of the year, so we do expect to see an increase in spring deposit costs in the Q1. We'll also get the benefit, though, of almost an extra 100 bps on or in asset yields if you take the quarter amount versus the December amount looking forward. So, you know, I feel good about the margin staying around current levels. You know, end of the next quarter, definitely not dropping back to where it was pre. So from that standpoint, let me turn it over to Torrey to talk about the spreads.
spk26: Yeah. Hey, Jared, it's Torrey Nixon. You know, on a spread front, I think we've been pretty fortunate in spreads have kind of, state level for us for the most part in our CNI business, in our real estate business. The one difference is we've got spread increases in some of the construction business. So we feel pretty good about that. I know that there are other places where that's contracting, but for us, we seem to be holding pretty steady. I think it's kind of a mix of our customer base. Okay. All right.
spk05: That's a good point. So then this is a follow-up. When we look at the mortgage banking business and some of the restructuring that you're going to do there, What should we be thinking? Uh, you know, mortgage banking revenues look like as a percentage of, of fee revenue. Once that, that model sort of fully reflected in and integrated across the broader franchise.
spk20: Hey Jared, it's Ron. I'd say obviously lower from that standpoint, but also volumes and expense and profitability or contribution to the bottom line will also be lower. So the key on that is much less volatility. And we've got the hedging on the MSRS at this point, but hard to say what a specific percentage will be. We'll definitely update you as we get through the balance of the changes, you know, over the coming quarter and talk about, you know, in April and July as we look out for the balance of the year on a combined basis.
spk05: Okay, great. Thank you.
spk03: Take you one moment. We have a question from Jeff Rulis with DA Davidson. Your line is open.
spk11: Thanks. Good morning. Just a question on the expense side. I think you got operating expenses at 181. Wanted to get a sense for any further cost saves versus, you know, I don't know if it's sold next gen stuff or versus growth and kind of as you meld the banks, you know, Just thinking about that 181 number, is there any give to go lower than that? Or is that a pretty, if we're modeling UMQA side into the combination, that's a pretty good number to use?
spk20: I'd say probably less than that, especially with what's happening on the home lending side, right? So, sorry, I don't have the 181s on an operating basis. We also talked about there's about $5 million of, I'd call it non-recurring state tax adjustments that actually show up in expense, other expense, not an income tax expense. So you can easily knock it down by that plus another three, three and a half million to get to the rent. So that'd be in the low 170 range. And that's before continuing reductions in home lending looking forward.
spk11: Okay. So that tax threw up or whatever that figure was, that was included in your 181 operating, meaning that should back out?
spk04: Correct. Correct.
spk11: Yeah, correct. Fair enough. Gotcha. And then on, you know, loan growth, you know, heard the comments from Frank and Court in terms of, you know, sort of looking at risk out there and it doesn't appear to be spreading outside of the FinPAC portfolio. Just kind of thinking about loan growth for 23. I think just high level and where you see a growth rate, what seems doable.
spk26: Hi Jeff, this is Tory Nixon. You know, I think, um, we, we remain very active in the prospecting side of the house on the sales side of the house. Um, you know, the, the, the customer base of the companies shifted quite significantly over the last several years. And we will continue, um, to look for, um, full banking relationships in the CNI space in particular. So I see growth there continuing for the company. And, you know, we continue to hire folks and we continue to kind of work on the product side. And I feel good about loan growth for us over the coming year. I think demand is certainly down from 2022. Pipelines are down a little bit, but there's still really good activity, especially in the CNI space. And I feel comfortable in the low to mid single digits. and I'm excited to see a current set of bankers, you know, continuing to work with our customers and continuing to find prospects that we want to bank.
spk02: Okay, thank you.
spk03: Thank you. And our next question comes from Brandon King. Watuis, your line is open.
spk07: Hey, good morning. Morning.
spk08: Yeah, so I wanted to get a sense of what your assumptions are for a deposit mix shift. I saw in the quarter there were outflows from DDAs into interest bearing. I saw there was uptick in CD deposits. So I just want to get a sense of what your assumptions are there and your current CD strategies.
spk20: Brandon, this is Ron. You say assumptions you're talking about just in terms of our interest rate sensitivity analysis?
spk08: No, just like where do you see, do you see continued further remixing of DDA accounts into interest-bearing accounts going forward?
spk20: Got it. Yeah, I would. It's hard to say a specific percentage from that standpoint. What we saw here in the fourth quarter is like on the consumer, about two-thirds of the decline in DDA was on the consumer side, about a third on the business side, and With the consumer side, it was simply through ACH trends. Incomes were relatively flat, but outflows were up 10-ish percent, and so you see that decline. So it's hard to say if that's going to continue at that level. I think there will still be pressure on deposits in the industry as the Fed's tightening. On the commercial side, it's probably a little bit of a mix and despairing. I would expect we have used some exception pricing, promo pricing, just to hold on to larger balance more cost-sensitive deposits. I would expect that would continue here into Q1 as well. So net-net, you probably should see an increase in more interest-bearing, and if the trends on the HCH side continue in the industry, that's specific just to us, but you probably would see continued pressure on the DDA mix.
spk08: Got you. And is the current CD strategy to kind of term out these time deposits, or are you looking for more shorter-duration funding?
spk20: On the city side, it'd be generally between six and 12 months. In that standpoint, on the borrowing side, we've been in the two to four month range, just given LCR considerations.
spk08: Okay. And then I wanted to dig a little deeper into loan growth. Multifamily has been a key contributor for a while now. Just curious what the outlook there is for multifamily growth and as far as how demand is looking And then also in consideration of other banks, it seems like they might be pulling back from that space given concentration concerns.
spk26: Yeah, Brandon, this is Torrey. I think the multifamily business for us is pretty complicated in this regard. We do a lot of multifamily lending in our real estate group, and then we have a specific multifamily division. And that specific multifamily division is where we've seen a lot of growth over in 2022. That's really demand for that. It's very interest rate sensitive. So demand for that product is much less than it was historically in 2021 and 2022. So it's relatively flat for us. We continue to be active in the space where we can, and we continue to be active in the multifamily space in our real estate division, so larger projects. And I see the outlook there to be relatively flat over the coming six to nine months.
spk06: Okay. Very helpful. Thanks for taking my questions. Thank you.
spk03: Thank you. And we have a question from Andrew Terrell with Stevens. Your line is open.
spk28: Hey, good morning. We can maybe go back to just the DDA balances, specifically on kind of the consumer side. I would be curious, as you look at kind of consumer accounts at your bank, if balances today still remain elevated compared to pre-COVID levels, just trying to get a sense of if there are still kind of any surge deposits remaining at the bank or any type of analysis you've done there.
spk20: Andrew, this is Ron. It's difficult to get a specific beat on it, just given the trends and outflows, but obviously they're lower. It's just hard to identify, you know, just given cash is fungible, right, what's still considered surge versus not. I would say this, though, when you think back to, you know, where the bank was five years ago, 10 years ago, pre-grade recession, obviously a much lower DD8 mix, but one of the key items here to keep in mind and what I don't expect that makes to revert back to those levels over time is just a significant, you know, business mix shift and changes that, you know, court and Tory have made over the last decade. So, you know, much higher level of commercial balances within the deposit book today, which will give us some stability. I think right now what you're seeing is, you know, just real instantaneous reactions just with the Fed tightening and inflation on the consumer side. So that continues. I expect that will still continue in terms of outflows on DDA, but Overall, nowhere near where it was a decade plus back, just given the makeshift of the customers.
spk28: That's a good point. I appreciate that. If I could maybe go back to just the mortgage commentary for a moment. I realize it's probably tough to think about the go-forward kind of mortgage contribution as a percentage of fees or revenue, but can you just maybe talk about specifically post some of the actions that you're going to take and maybe shifting this towards the more retail mortgage business. I guess just structurally, how does it change the profitability within your mortgage business going forward?
spk16: Andrew, it's Court. So, you know, traditionally until, you know, 2022, we had operated our mortgage group, home lending, as we call it. It's more of a traditional first mortgage firm. operation company, if you will. Obviously, with rates doing what they did and with the movement we saw, we're going to transition it to more of a retail model. What we mean by that are in-place mortgage lenders and retail locations operating in support of their local communities and the branches. That's what that generally has traditionally meant, which is a change for the way that we have served our local markets. To your point, it's hard at this point to give any, you know, any indication of where we think volumes are going to be. And it has a lot to do just with just volumes in the communities under themselves, let alone where we get with staffing. You know, staff, I'll let Tori comment a little bit on where we think staffing will settle out when this is all done. We're making these moves right now, actually, since the beginning of the year. We'll make them during the quarter. So, Tori, some guidance on FTE guidelines.
spk26: Yeah, thanks, Court. Certainly, the industry itself is contracting and demand is significantly less than what it was, and we're responding to that. I think at the height of our home lending business which was phenomenal during the pandemic we were at about 650 or so associates i think that today is in the high 300s and you know we are actively moving that down south and i think we'll land somewhere in the 2 to 250 range in terms of people but making sure that as we as we pivot to this new and different model We continue to serve our customers and our retail customers, our private bank customers and our commercial customers, and we continue to serve our communities. And so that's the direction that we're headed and over a little bit of time and we'll get there.
spk16: Let me just one follow up just to make sure, because other people listen to this call and just the analyst community, you know, this does not mean like I mentioned, our opening comments, we are not committed to first mortgage finance. We are, we've made a strong commitment and our CBA agreement, um, for our work on our merger to provide low to moderate income finance, low to moderate income communities, which we are firmly committed to. And we've created a group inside mortgage lending to serve that community. So I just want to make sure it goes on the record. This does not mean we are pulling out of mortgage. It has been a big part of this bank for as long as I've been here and longer than that. And it will continue to be a key part of our business as we continue to serve when we, you know, double in size here in about six weeks.
spk20: And, Andrew, this is Ron. I'm just going to add in on Court and Tori's comments. Obviously, the goal is going to be to have a profitable mortgage business within the redesign we talked about earlier. But it's hard to get a beat on specifically the metrics, you know, sale margin minus expense, just nonetheless positive compared to the last couple quarters. The other thing I'll also add is going forward, given the size we expect it to move to, it will no longer be a separate segment. So we'll talk about it just in terms of fee income changes and expense level changes.
spk27: Okay.
spk28: Very good. I appreciate all the color. If I could sneak one more in, just maybe now that there's a closing date set for the acquisition, which was good to see, any thoughts on kind of pro forma capital levels or updates to the fair value marks or just kind of wait until deal close?
spk20: Andrew, yeah, this is Ron again. I'd say let's wait until the deal closes. Just given the volatility, right, changes so much. But that's also one of the reasons why we have excess capital going into this to be able to utilize that. And I guess I'll also point out that wherever that ends up, that'll also turn into additional capital accretion over time pretty quickly from that standpoint. So you'll hear us obviously talk more about that in April.
spk27: Okay, very good. Thanks for the time today.
spk20: Yep, thanks.
spk03: Our next question comes from one moment. Matthew Clark from Piper Sandler. Your line is open.
spk22: Good morning. Thanks for the questions. Just first one to clarify on the non-interest expense run rate, standalone, low 170s, stripping out the tax accruals, unusual tax accruals this quarter, lower mortgage expense. I guess, does that low 170s run rate consider your typical non-mortgage comp kind of merit increases for the year or not?
spk20: Okay, Matthew, this is Ron. Merit increases generally hit towards the end of Q1, very early part of Q2, so it's in the run for this past year. If you look ahead over the first couple quarters of 23, you'll see a an increase in, you know, comp tax rates, right, FICA, et cetera. That's generally in the first quarter you see that, and then it tails off over the balance of the year. Then the merit comes on in Q2. We'll also have the added benefit, though, with the combination on a combined basis, you know, the cost saves by Q4 next year. And that, too, I guess something we'll provide much more updates on as we, you know, get to close and, for assurance call post close with outlooks on that front.
spk22: Okay. Just to clarify, though, for the first quarter, low 170s does include any seasonality you might have?
spk20: Correct. Also noting home lending expense would be lower as well in that number.
spk22: Got it. Okay, great. And then just circling back to the margin, I'm not sure if you mentioned it in your earlier comments but the average monthly name in december if you have it and i think you mentioned 4.02 4.02 great yeah 4.02 for the month of december okay great and then just on um the pro forma capital and kind of assuming it you know maybe shakes out to a level where you you know have some nice excess capital can you just remind us um around the process to be able to repurchase stock given your negative retained earnings and whether or not you still be constrained by that on a pro forma basis?
spk20: Sure. Yeah, we will. That will carry forward just given with this combination of the accounting acquirer. So our balance sheet will continue forward as is and will fair value the Columbia balance sheet. The process, though, is pretty straightforward. It's a quarterly non-objection process with the state and the FDIC based on legacy banking laws from, you know, decades ago, which were driven by credit losses. And this is goodwill, which is excluded from capital. So we have to go through the process, work well with both the state and the FDIC. We do that today on the dividends from the bank to the whole co, which support the dividends from the whole co at the shareholders. The same process we'd follow on share repurchase with an outlook on, you know, base forecasts and distress forecasts and what's the capital, excess capital doing. And I will point out that what, a year and a half back, we did repurchase stock from that standpoint, which we tabled, of course, as the combination came together, but nonetheless, pretty straightforward process, and I expect no change to that in the future, other than we'll be a much quicker runway to get to positive retained earnings on the outlook, just based on where rates are today, where the marks will be, and that accretion over time.
spk21: Yep, great. Thank you. Yep.
spk03: Thank you. And we also have a question from Chris McGrady with KBW. Your line is open.
spk09: Great. Thanks for the question. In terms of just, Ron, maybe just for you, the balance sheet, you've obviously got this opportunity to make some tweaks if you need to. So I guess I'm interested in just getting your head a little bit about what you might be thinking about, perhaps from the securities portfolio, also from lending concentrations. I think you talked about FinPAC being about 6%. Obviously, that'll get diluted down. But any broad, high-level comments on any tweaks to how we should think about the balance sheet?
spk20: Yeah, we'll talk more about it in April. But pretty consistently in this environment, it's a function of reducing sensitivity. So within the bond portfolio, we'll be looking to extend duration, plant some flags longer out, and then fund it with two- to four-month advances to help reduce sensitivity. depending on where rates go in the future. That's probably the primary one from that standpoint, and then it'll just be a matter of managing the borrowings to the extent the Fed continues tightening. Okay.
spk10: And then I guess, Mark.
spk20: Let me add on to that, too. Sorry, let me add on to that, too. The second part of your question was around loan concentrations. No plan, no need to adjust anything on the lending side. We've got a great mix. We've got the capacity to continue full tilt on any given vertical from that standpoint, including FinPAC. Got it.
spk09: Okay. Thanks, Ron. And on credit, I guess I totally get the distinction between FinPAC and the rest of the book. If you're sitting down for the 23 outlook and the economy is pretty uncertain, where besides FinPAC are you spending most of your time in terms of looking for problems?
spk13: Hey, Frank Namdar. I would say in the CRE space, probably centered around office, just because that remains an area that's still a big unknown as to where that's all going to shake out into the future and risk people like me don't like unknowns and don't like surprises. So we try to figure it out ahead of time. But as we sit here today, I mean, we do not have one office property that is a a special mention or classified asset remains very stable and strong at this point, but that would be the one space that we're keeping a close eye on.
spk23: Okay, thanks.
spk03: Thank you, and there are no other questions in the queue. I'd like to turn the call back to management for any closing remarks.
spk12: This is Jackie Bolin, and we would like to thank you for your interest in Umpel Holdings Corporation and participation on our fourth quarter 2022 earnings call. Please contact me if you would like clarification on any of the items discussed today or provided in our presentation materials. This will conclude our call. Goodbye.
spk03: This concludes today's conference call. Thank you for participating. You may now disconnect.
spk08: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. Thank you. Thank you. Thank you.
spk03: Good morning and welcome to the Umpqua Holdings Corporation's fourth 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'll need to press star 1-1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. At this time, I would like to introduce Jackie Bolin, Investor Relations Director at UMQA, to begin the conference call.
spk01: Thank you, Catherine. Good morning and good afternoon, everyone.
spk12: Thank you for joining us today on our fourth quarter 2022 earnings call. With me this morning are Court O'Haver, the President and CEO of Umpqua Holdings Corporation, Tori Nixon, President of Umpqua Bank, Ron Farnsworth, Chief Financial Officer, and Frank Namdar, Chief Credit Officer. After our prepared remarks, we will take questions. Yesterday afternoon, we issued an earnings release discussing our fourth quarter 2022 results. We have also prepared a slide presentation, which we will refer to during our remarks this morning. Both these materials can be found on our website at umquabank.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 slides two and three of our earnings presentation, as well as the disclosures contained within our SEC filing. We will also reference non-GAAP financial measures alongside our discussion of GAAP results. We encourage you to review the gap to non-gap reconciliation provided in the earnings presentation appendix. We will turn the call over to Court.
spk16: Okay. Thank you, Jackie. For the fourth quarter, we reported earnings available to shareholders of $83 million. This represents EPS of 38 cents per share compared to the 39 cents reported last quarter and 41 cents reported in the fourth quarter of last year. On an operating basis, which excludes a number of interest rate driven items and merger expenses that Ron will review, EPS of $0.46 compared to $0.47 last quarter and $0.44 in the fourth quarter of last year. While the variance between 2022 and 2021 fourth quarter EPS was minimal, the components shifted dramatically as higher interest rates and 16% loan growth during 2022 drove a 31% increase in net interest income Q4 to Q4 leading to a 25% increase in pre-provision net revenue despite the dramatic decline in mortgage banking revenue. Over the past year, we have made a number of structural changes within the mortgage banking segment intended to reduce expenses, limit the impact of MSR changes to the income statement, and moderate portfolio mortgage growth. Additional actions planned through this quarter will continue this work. Mortgages remain an important product for the bank, and for our customers, and we remain committed to serving our communities throughout the West. However, we are shifting our mortgage operations towards a retail bank model, and we expect a smaller gross and net impact to financial statements than under our prior operating model. Turning now to our pending merger with Columbia Banking System, we announced earlier this month that we received FDIC approval and intend to close at the end of February. Our teams are focused on closing and core system conversion scheduled for this quarter alongside a heightened level of customer outreach. We are laser focused on execution, and we look forward to providing you with an update on next quarter's call when we are officially one team. As you know, there are a lot of moving parts over the next couple of months, and our near-term focus is on achieving targeted cost savings, providing high-touch service to our customers as we complete the integration process, giving our teams and our associates the tools to drive the revenue synergy opportunities that we have been discussing for over a year now back in october of 2021 we never imagined there would be over 16 months between announcement and close however there has also been significant upside to this timeline we have been waiting but we have not been idle the joint culture work which was originally planned to occur post-closing has touched the majority of Umpqua associates and Columbia associates, and it has a framework that enables us to be one team on day one. The planning, prepping, and the brainstorming that has taken place over a year has enabled the development of synergistic products and tools, and we are excited for our combined teams to use them immediately. Further, and perhaps more importantly, the earlier decoupling of our integration planning from legal day one enables us to maintain our originally scheduled core conversion date this quarter despite our targeted February 28th closing date. I want to take this opportunity to thank our dedicated associates for the countless hours and incredible heart that they have put into their work. I'm impressed and humbled by your dedication. I joined Umpqua Bank in 2010 and have been honored to lead this outstanding organization for the past six years. While it may be bittersweet to pass the reins, I know I am placing them in capable hands. And as executive chair, I look forward to watching the combined organization serve its customers and its communities throughout the West while providing enhanced shareholder return. And with that, Ron, take it away.
spk14: Okay, thank you, Court.
spk20: And for those on the call who want to follow along, I'll be referring to certain page numbers from our earnings presentation. Starting on page nine of the slide presentation, which contains our performance ratios both on a gap and operating basis, The adjustments to our internal operating measures include various fair value changes from interest rate volatility, along with merger and exit disposal costs, which are detailed in the appendix on slide 30. Our NIM continues to strengthen, up 13 basis points in Q4 to 4.01%. Our GAAP PPNR ROA was 1.82%, while our operating PPNR ROA was 2.1%, and operating RODSI increased to 16.2%. Turning to page 10, which contains our summary quarterly P&L, our gap earnings for Q3 were $83 million or $0.38 per share. On an operating basis, we earned $99 million or $0.46 per share. For the moving parts as compared to Q3, net interest income increased $17.9 million or 6%, representing continued earning asset growth combined with the recent Fed rate increases. We had a provision for credit loss of $34.9 million, with the increase driven primarily by slight deterioration in the consensus economic forecast. Non-interest income increased mainly related to changes in the non-operating fair value marks, as detailed later in the appendix. A non-interest expense increased $17 million, mainly from merger expense and a non-recurring increase in other expense. As for the balance sheet on slide 11, loans were up $650 million and deposits increased $250 million. This difference netted the decrease in interest-bearing cash was funded with short-term borrowings. The lift in investments AFS related primarily to a lower unrealized loss. Our total available liquidity, including off-balance sheet sources, ended the quarter at $12 billion, representing 38% of total assets and 44% of total deposits. And noted on the bottom of slide 11, our tangible book value increased in part due to the lower AOCI rate mark on AFS investments. Slide 13 highlights net interest income, noting the increase to $306 million in Q4 resulted from the recent rate increases along with continued strong loan growth. From a rate volume standpoint, increase in rates led to $16 million of the $18 million increase, with volume and mix making up a $2 million difference. Following that on slide 14 of the presentation are the trends for our net interest margins Noting again, our NIM increased 13 basis points in total to 4.01% in Q4. We present a waterfall in the margin change on the right of the page, noting our loan and cash yields more than offset rising funding costs. And key for me here is following the 125 basis point increase in the federal funds rate during Q4, our NIM for the month of December was 4.02%. The next slide includes information on the repricing and maturity characteristics of our loan portfolio, noting no significant change in the repricing mix THIS PAST QUARTER. AND FOLLOWING THAT ON SLIDE 16, ON THE UPPER LEFT, WE'VE INCLUDED OUR PROJECTED NET INTEREST INCOME SENSITIVITY FOR FUTURE RATE CHANGES IN BOTH RAMP AND SHOCK SCENARIOS OVER TWO YEARS. THIS IS A SIMULATION WE RUN AND BACKTEST QUARTERLY THAT ASSUMES THE STATIC BALANCE SHEET. THE UPPER RIGHT SHOWS OUR SENSITIVITY FROM LAST QUARTER, AND COMPARING THE TWO, YOU'LL NOTE WE'VE TAKEN STEPS THIS QUARTER TO REDUCE SENSITIVITY AND WILL CONTINUE TO DO SO IN FUTURE QUARTERS. The deposit beta used in the current simulation is 53% on interest-bearing deposits for future rate changes. The table on the left shows our deposit betas from the current rising rate cycle, while on the right we show them from the last rising rate cycle for comparison. Our beta then was 42% on interest-bearing deposits. Our cost on interest-bearing deposits increased from 23 basis points in Q3 to 77 basis points for Q4. DATA FOR THIS CYCLE TO DATE IS NOW 18% ON INTEREST SPARING DEPOSITS. THE SPOT RATE AT YEAR END WAS 107 BASIS POINTS. WE EXPECT INTEREST SPARING DEPOSIT COSTS TO INCREASE AGAIN IN Q1, BUT STAY WELL BELOW OUR MODEL LEVEL. NEXT ON SLIDE 17, WE DETAIL OUT CONSOLIDATED NON-INTEREST INCOME TRANS, NOTING CONTINUED WEAKNESS WITHIN OUR MORTGAGE BANKING SEGMENT WAS MOSTLY OFFSET BY A POSITIVE FAIR VALUE CHANGE ON LOANS CARRIED AT FAIR VALUE. Turning to slide 18 on expense, the majority of the increase this quarter related to merger expense for our upcoming combination with Columbia. In addition, we had an increase in state and local taxes along with other expense, which I do not view as recurring. The next two pages include the segment disclosures on a GAAP basis with the core banking segment on slide 19 and the mortgage banking segment on slide 20. The operating non-GAAP stats by segment are later on slides 32 and 33. Suffice it to say, the core banking segment continues to benefit from rising rates and continued loan growth, while mortgage banking reported a second consecutive quarterly loss. Court mentioned plans underway earlier within mortgage banking. And a couple final items before I turn it over to Frank. On slide 22, we've included the quarterly loan balance rule forward. Quarterly loan growth was driven by 1.3 billion in new originations and net advances, offset by 0.6 billion in payoffs and maturities. We've intentionally slowed down non-relationship lending production, giving continued pressure with industry-wide deposit outflows, following continued tightening by the Fed. Slides 23 and 24 provide additional statistics and composition on the portfolio, noting no significant changes in the quarter. Next, let me take your attention to slide 25 on CECL and our allowance for credit loss. As a reminder, 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. We use the consensus economic forecast this quarter, updated in November, Overall, the forecast reflected continued high expected inflation and interest rates with a slight uptick in peak unemployment rates. With this, we recognize a $32.9 million provision for credit loss, with $7 million of that for the quarter's loan growth and $26 million for the slightly deteriorating economic variables. This page shows the commercial and leasing portfolios driving the majority of the increase, but they are most sensitive to the unemployment rate forecast, which again increased slightly on peak. from 4.1 to 4.5% over the horizon. The ACL increased to 1.21% at quarter end, up from 1.16% in Q3. And lastly, I want to highlight capital on page 27, knowing that all of our regulatory ratios remain in excess of well-capitalized levels. Our Tier 1 common ratio is 11%, and our total risk-based capital ratio is 13.7%. The bank level total risk-based capital ratio is 12.9%. We declared a 21 cent per share dividend on January 11th, payable February 6th to holders of record as of January 23rd, and equivalent to the fourth quarter's level. Given our targeted February 28th closing date for our merger with Columbia, we expect the next dividend action to be determined by the Combined Board. And with that, I will now turn the call over to Frank Namdar to discuss credit.
spk13: Thank you, Ron. Turning back to slide 26, Our nonperforming assets total assets ratio of 0.18% was relatively steady with past quarters levels. And our classified loans to total loans ratio of 0.73% was similarly stable. Our annualized net charge off percentage to average loans and leases was 19 basis points in the quarter, up eight basis points from the third quarters level as net charge of activity within the FinPAC portfolio increased as expected. Following elevated charge-offs and strategic credit tightening implemented during the pandemic, charge-offs in the FinPAC portfolio were notably below the historic 3 to 3.5% range for several quarters. As we have discussed on past calls, we have anticipated a gradual migration to historical norms within the portfolio. And accordingly, FinPAC net charge-offs increased to 2.84% in the fourth quarter. The uptick from 1.36% in the third quarter reflects an increase in net charge-offs, primarily within FinPAC's transportation portfolio. On a risk-adjusted basis, the FinPAC portfolio, which is 6% of our consolidated loan portfolio, remains the most profitable segment of our loan book, with an average risk-adjusted yield in the 10% range. IT CAN ALSO SERVE AS AN EARLY WARNING INDICATOR OF TRENDS THAT MAY SHIFT TO THE OVERALL PORTFOLIO. HOWEVER, WE DO NOT SEE ANY ASSOCIATED WEAKNESS IN THE BANK PORTFOLIO, WHICH HAD A CHARGE-OFF LEVEL OF JUST ONE BASIS POINT IN THE FOURTH QUARTER. FOR CONTACTS, BANK CHARGE-OFFS OF 550,000 FOR THE FOURTH QUARTER AND ONLY 2.7 MILLION FOR ALL OF 2022 IS A NEAR TO MINIMUS LEVEL OF ACTIVITY ON A PORTFOLIO NEARING $25 BILLION. We continue to be very pleased with our credit quality metrics. We remain confident in the quality of our loan book as we continue to continue to pursue high-quality loan growth, balanced with effective and active risk management practices. Back to you, Court.
spk16: Thanks, Frank and Ron, for your comments. And now we will take your questions.
spk03: Thank you. As a reminder, to ask a question, please just press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Please stand by while we compile the Q&A roster.
spk02: Our first question comes from Jared Shaw with Wells Fargo.
spk03: Your line is open.
spk05: Hey, guys. Good morning.
spk16: Good morning.
spk05: Looking at the jumping off point here for margin as you go into the year, you have great yields on loans. Looks like maybe you've benefited from some spread widening and beta is performing better than earlier expected. Do we think that that starts to revert to a more normalized level, both spreads and maybe data quickly at the beginning of 23, or are you optimistic that those benefits could stay with us a little longer?
spk20: Hey, Jared. This is Ron. Good morning. I talked about the spot rate in spring deposits being 107 bps at the end of the year, so we do expect to see an increase in spring deposit costs in the Q1. We'll also get the benefit, though, of almost an extra 100 bps or in asset yields if you take the quarter amount versus the December amount looking forward. So, you know, I feel good about the margin staying around current levels, you know, into the next quarter, definitely not dropping back to where it was pre. So from that standpoint, let me turn it over to Torrey to talk about the spreads.
spk26: Yeah. Hey, Jared, it's Torrey Nixon. You know, on a spread front, I think we've been pretty fortunate in spreads have kind of, state level for us for the most part in our CNI business, in our real estate business. The one difference is we've got spread increases in some of the construction business. So we feel pretty good about that. I know that there are other places where that's contracting, but for us, we seem to be holding pretty steady. I think it's kind of a mix of our customer base. Okay. All right. That's good, Clark.
spk05: Thanks. So then this is a follow-up. When we look at the mortgage banking business and some of the restructuring that you're going to do there, What should we be thinking mortgage banking revenues look like as a percentage of fee revenue once that model is sort of fully reflected and integrated across the broader franchise?
spk20: Hey, Jared, it's Ron. I'd say obviously lower from that standpoint, but also volumes and expense and profitability or contribution to the bottom line will also be lower. So the key on that is much less volatility there. And we've got the hedging on the MSRS at this point, but hard to say what a specific percentage will be. We'll definitely update you as we get through the balance of the changes, you know, over the coming quarter and talk about, you know, in April and July as we look out for the balance of the year on a combined basis.
spk02: Okay, great. Thank you.
spk03: Thank you. One moment. We have a question from Jeff Rulis with DA Davidson. Your line is open.
spk11: Thanks. Good morning. Just a question on the expense side. I think you got operating expenses at 181. Wanted to get a sense for any further cost saves versus, you know, I don't know if it's sold next gen stuff or versus growth and kind of as you meld the banks, you know, Just thinking about that 181 number, is there any give to go lower than that? Or is that a pretty, if we're modeling UMQA side into the combination, that's a pretty good number to use?
spk20: I'd say probably less than that, especially with what's happened on the home lending side, right? So, sorry, I don't have the 181s on an operating basis. We also talked about there's about $5 million of, I'd call it non-recurring state tax adjustments that actually show up in expense, other expense, not an income tax expense. So you can easily knock it down by that plus another three, three and a half million to get to the rent. So that'd be in the low 170 range. And that's before continuing reductions in home lending looking forward.
spk11: Okay. So that tax drew up or whatever that figure was, that was included in your 181 operating, meaning that should back out? Correct.
spk04: Correct.
spk11: Yes, correct. Fair enough. Gotcha. And then on, you know, loan growth, you know, heard the comments from Frank and Court in terms of, you know, sort of looking at risk out there and it doesn't appear to be spreading outside of the PIMPAC portfolio. Just kind of thinking about loan growth for 23. I think just high level and where you see a growth rate, what seems doable.
spk26: Hi, Jeff. This is Tory Nixon. You know, I think we remain very active in the prospecting side of the house, on the sales side of the house. You know, the customer base of the company has shifted quite significantly over the last several years, and we will continue to look for full banking relationships in the CNI space in particular. So I see growth there continuing for the company. And we continue to hire folks and we continue to work on the product side. And I feel good about loan growth for us over the coming year. I think demand is certainly down from 2022. Pipelines are down a little bit, but there's still really good activity, especially in the CNI space. And I feel comfortable in the low to mid single digits. loan growth number and I'm excited to see a current set of bankers, you know, continuing to work with our customers and continuing to find prospects that we want to bank.
spk06: Okay, thank you.
spk03: Thank you. And our next question comes from Brandon King. Watuis, your line is open.
spk07: Hey, good morning. Morning.
spk08: Yeah, so I wanted to get a sense of what your assumptions are for deposit mix shift. I saw in the quarter there were outflows from DDAs into interest bearing. I saw there was uptick in CD deposits. So I just want to get a sense of what your assumptions are there and your current CD strategy.
spk20: Brandon, this is Ron. You say assumptions you're talking about just in terms of our interest rate sensitivity analysis?
spk08: No, it's just like where do you see, do you see continued further remixing of DDA accounts into interest-bearing accounts going forward?
spk20: Got it. Yeah, I would. It's hard to say a specific percentage from that standpoint. What we saw here in the fourth quarter is like on the consumer, about two-thirds of the decline in DDA was on the consumer side, about a third on the business side, and With the consumer side, it was simply through ACH trends. Incomes were relatively flat, but outflows were up 10-ish percent, and so you see that decline. So it's hard to say if that's going to continue at that level. I think there will still be pressure on deposits in the industry as the Fed's tightening. On the commercial side, it's probably a little bit of a mix and despairing. I would expect we have used some exception pricing, promo pricing, just to hold on to larger balance more cost-sensitive deposits. I would expect that would continue here into Q1 as well. So net-net, you probably should see an increase in more interest-bearing, and if the trends on the HCH side continue in the industry, that's specific just to us, but you probably would see continued pressure on the DDA mix.
spk08: Got you. And is the current CD strategy to kind of term out these time deposits, or are you looking for more shorter-duration funding?
spk20: On the city side, it'd be generally between six and 12 months. In that standpoint, on the borrowing side, we've been in the two to four month range, just given LCR considerations.
spk29: Okay.
spk08: And then I want to dig a little deeper into loan growth. Multifamily has been a key contributor for a while now. Just curious what the outlook there is for multifamily growth and as far as how demand is looking. And then also in consideration of other banks, it seems like they might be pulling back from that space given concentration concerns.
spk26: Yeah, Brandon, this is Torrey. I think the multifamily business for us is pretty complicated in this regard. We do a lot of multifamily lending in our real estate group, and then we have a specific multifamily division. And that specific multifamily division is where we've seen a lot of growth over in 2022. You know, we have that's really demand for that. It's very interest rate sensitive. So demand for that product is much less than it was historically in 2021 and 2022. So it's relatively flat for us. We continue to be active in the space where we can and we continue to be active in the multifamily space in our real estate division. So larger, larger projects. And I see the outlook there to be relatively flat over the coming six to nine months.
spk06: Okay. Very helpful. Thanks for taking my questions. Thank you.
spk03: Thank you. And we have a question from Andrew Terrell with Stevens. Your line is open.
spk28: Hey, good morning. We can maybe go back to just the DDA balances, specifically on kind of the consumer side. I would be curious, as you look at kind of consumer accounts at your bank, if balances today still remain elevated compared to pre-COVID levels, just trying to get a sense of if there are still kind of any surge deposits remaining at the bank or any type of analysis you've done there.
spk20: Andrew, this is Ron. It's difficult to get a specific beat on it, just given the trends and outflows, but obviously they're lower. It's just hard to identify, you know, just given cash is fungible, right? What's still considered surge, which is not. I would say this, though, when you think back to, you know, where the bank was five years ago, 10 years ago, pre-Great Recession, obviously a much lower DDA mix, but one of the key items here to keep in mind and what I don't expect makes to revert back to those levels over time is just a significant you know business mix shift and changes that you know court and tory have made over the last decade so you know much higher level of commercial balances within the deposit book today which will give us some stability i think right now what you're seeing is you know just real instantaneous reactions just with the fed tightening and inflation on the consumer side so that continues i expect that will still continue in terms of outflows on dda but Overall, nowhere near where it was a decade plus back, just given the makeshift of the customers.
spk28: That's a good point. I appreciate that. If I could maybe go back to just the mortgage commentary for a moment. I realize it's probably tough to think about the go-forward kind of mortgage contribution as a percentage of fees or revenue, but can you just maybe talk about specifically post some of the actions that you're going to take and maybe shifting this towards the more retail mortgage business. I guess just structurally, how does it change the profitability within your mortgage business going forward?
spk16: Andrew, it's Court. So, you know, traditionally until, you know, 2022, we had operated our mortgage group, home lending, as we call it. It's more of a traditional first mortgage business. operation company, if you will. Obviously, with rates doing what they did and with the movement we saw, we're going to transition it to more of a retail model. What we mean by that are in-place mortgage lenders and retail locations operating in support of their local communities and the branches. That's what that generally has traditionally meant, which is a change for the way that we have served our local markets. To your point, it's hard at this point to give any, you know, any indication of where we think volumes are going to be. And it has a lot to do just with just volumes in the communities under themselves, let alone where we get with staffing. You know, staff, I'll let Tori comment a little bit on where we think staffing will settle out when this is all done. We're making these moves right now, actually, since the beginning of the year. We'll make them during the quarter. So, Tori, some guidance on FTE guidelines.
spk26: Yeah, thanks, Court. Certainly, the industry itself is contracting and demand is significantly less than what it was, and we're responding to that. I think at the height of our home lending business which was phenomenal during the pandemic we were at about 650 or so associates i think that today is in the high 300s and you know we are actively moving that down south and i think we'll land somewhere in the two to 250 range in terms of people uh but making sure that as we as we pivot to this new and different model We continue to serve our customers and our retail customers, our private bank customers and our commercial customers. And we continue to serve our communities. And so that's the direction that we're headed and over a little bit of time. And we'll get there.
spk16: Let me just one follow up just to make sure, because other people listen to this call and just the analyst community. You know, this does not mean like I mentioned in our opening comments, we are not committed to first mortgage finance. We are. We've made a strong commitment in our CBA agreement. for our work on our merger to provide low to moderate income finance, low to moderate income communities, which we are firmly committed to. And we've created a group inside mortgage lending to serve that community. So I just want to make sure it goes on the record. This does not mean we are pulling out of mortgage. It has been a big part of this bank for as long as I've been here and longer than that. And it will continue to be a key part of our business as we continue to serve when we double in size here in about six weeks.
spk20: And, Andrew, this is Ron. I'm just going to add in on Court and Tori's comments. Obviously, the goal is going to be to have a profitable mortgage business within the redesign we talked about earlier. But it's hard to get a beat on specifically the metrics of sale margin minus expense, just nonetheless positive compared to the last couple quarters. The other thing I'll also add is going forward, given the size we expect it to move to, it will no longer be a separate segment. So we'll talk about it just in terms of fee income changes and expense level changes.
spk28: Okay. Very good. I appreciate all the color. If I could sneak one more in, just maybe now that there's a closing date set for the acquisition, which was good to see, any thoughts on kind of pro forma capital levels or updates to the fair value marks or just kind of wait until deal close?
spk20: Andrew, yeah, this is Ron again. I say let's wait until the deal closes. Just given the volatility, right, changes so much. But that's also one of the reasons why we have excess capital going into this to be able to utilize that. And I guess I'll also point out that wherever that ends up, that will also turn into additional capital accretion over time pretty quickly from that standpoint. So you'll hear us obviously talk more about that in April.
spk27: Okay, very good. Thanks for the time today.
spk02: Yep, thanks.
spk03: Our next question comes from, one moment, Matthew Clark from Piper Sandler. Your line is open.
spk22: Good morning. Thanks for the questions. Just first one to clarify on the non-interest expense run rate, standalone, low 170s, stripping out the tax accruals, the unusual tax accruals this quarter, lower mortgage expense. I guess, does that low 170s run rate consider your typical non-mortgage comp kind of merit increases for the year or not? Hey, Matthew, this is Ron.
spk20: Merit increases generally hit towards the end of Q1, very early part of Q2, so it's in the run for this past year. If you look ahead over the first couple quarters of 23, you'll see a an increase in, you know, comp tax rates, right, FICA, et cetera. Like I said, generally in the first quarter you see that, and then it tails off over the balance of the year. Then the merit comes on in Q2. We'll also have the added benefit, though, with the combination on a combined basis, you know, the cost saves by Q4 next year. And that, too, I guess something we'll provide much more updates on as we, you know, get to close and, for assurance call post close with outlooks on that front.
spk22: Okay. Just to clarify, though, for the first quarter, low 170s does include any seasonality you might have?
spk20: Correct. Also noting home lending expense would be lower as well in that number.
spk22: Got it. Okay, great. And then just circling back to the margin, I'm not sure if you mentioned it in your earlier comments but the average monthly name in december if you have it and i think you mentioned 4.02 4.02 great yeah 4.02 for the month of december okay great and then just on um the pro forma capital and kind of assuming it you know maybe shakes out to a level where you you know have some nice excess capital can you just remind us um around the process to be able to repurchase stock given your negative retained earnings and whether or not you still be constrained by that on a pro forma basis?
spk20: Sure. Yeah, we will. That will carry forward just given with this combination of the accounting and acquirer. So our balance sheet will continue forward as is and we'll fair value the Columbia balance sheet. The process, though, is pretty straightforward. It's a quarterly non-objection process with the state and the FDIC based on legacy banking laws from, you know, decades ago, which were driven by credit losses. And this is goodwill, which is excluded from capital. So we have to go through the process, work well with both the state and the FDIC. We do that today on the dividends from the bank to the whole co, which support the dividends from the whole co at the shareholders. The same process we'd follow on share repurchase with an outlook on, you know, base forecasts and the stress forecasts and what's the capital, excess capital doing. And I will point out that what, a year and a half back, we did repurchase stock from that standpoint, which we tabled, of course, as the combination came together, but nonetheless, pretty straightforward process, and I expect no change to that in the future, other than we'll be a much quicker runway to get to positive retained earnings on the outlook, just based on where rates are today, where the marks will be, and that accretion over time.
spk21: Yep, great. Thank you. Yep.
spk03: Thank you. And we also have a question from Chris McGrady with KBW. Your line is open.
spk09: Great. Thanks for the question. In terms of just, Ron, maybe just for you, the balance sheet, you've obviously got this opportunity to make some tweaks if you need to. So I guess I'm interested in just getting your head a little bit about what you might be thinking about, perhaps from the securities portfolio, also from lending concentrations. I think you talked about FinPAC being about 6%. Obviously, that'll get diluted down. But any broad, high-level comments on any tweaks to how we should think about the balance sheet?
spk20: Yeah, we'll talk more about it in April. But pretty consistently in this environment, it's a function of reducing sensitivity. So within the bond portfolio, we'll be looking to extend duration, plant some flags longer out, and then fund it with two- to four-month advances to help reduce sensitivity. depending on where rates go in the future. That's probably the primary one from that standpoint, and then it'll just be a matter of managing the borrowings to the extent the Fed continues tightening.
spk10: And then I guess, Mark.
spk20: Let me add on to that, too. Sorry, let me add on to that, too. The second part of your question was around loan concentrations. No plan, no need to adjust anything on the lending side. We've got a great mix. We've got the capacity to continue full tilt on any given vertical from that standpoint, including FinPAC. Got it.
spk09: Okay, thanks, Ron. And on credit, I guess I totally get the distinction between FinPAC and the rest of the book. If you're sitting down for the 23 outlook and the economy is pretty uncertain, where besides FinPAC are you spending most of your time in terms of looking for problems?
spk13: Hey, Frank Namdar. I would say in the CRE space, probably centered around office, just because that remains an area that's still a big unknown as to where that's all going to shake out into the future and risk people like me don't like unknowns and don't like surprises. So we try to figure it out ahead of time. But as we sit here today, I mean, we do not have one office property that is a a special mention or classified asset, you know, remains very stable and strong at this point. But that would be the one space that we're keeping a close eye on.
spk23: Okay. Thanks.
spk13: Yep.
spk03: Thank you. And there are no other questions in the queue. I'd like to turn the call back to management for any closing remarks.
spk12: This is Jackie Bolin, and we would like to thank you for your interest in Umpqua Holdings Corporation and participation on our fourth quarter 2022 earnings call. Please contact me if you would like clarification on any of the items discussed today or provided in our presentation materials. This will conclude our call. Goodbye.
spk03: This concludes today's conference call. Thank you for participating. You may now disconnect.
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