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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Umpqua Holdings Corporation Third Quarter 2021 Earnings Call. [Operator Instructions]. I would now like to introduce the call -- I would now like to introduce Jacque Bohlen, Investor Relations Director for Umpqua, to begin the conference call Jacque, the floor is yours.
Thank you, Joanna. Good morning, and good afternoon, everyone. Thank you for joining us today on our third quarter 2021 earnings call. With me this morning are Cort O’Haver, the President and CEO of Umpqua Holdings Corporation; Tory Nixon, President of Umpqua Bank; Ron Farnsworth, our Chief Financial Officer; and Frank Namdar, our Chief Credit Officer.
After our prepared remarks, we will take your questions. Yesterday afternoon, we issued an earnings release discussing our third quarter 2021 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 umpquabank.com in the Investor Relations section.
During today's call, we will make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the safe harbor provision of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to Slide 2 of our earnings conference call presentation as well as the disclosures contained within our SEC filings.
We'll now turn the call over to Cort.
Okay. Thank you, Jacque. I'll provide a brief recap of our performance and then pass to Ron to discuss financials. Frank will discuss credit, and then we'll take your questions. For the third quarter, we reported earnings available to shareholders of $108 million. This represents EPS of $0.49 per share compared to the $0.53 reported last quarter and $0.57 reported in the third quarter of last year, with the decline due primarily to lower mortgage banking income as volume and margins normalize from historically high levels.
The focal point of an all-around strong quarter was non-PPP organic loan growth, which contributed to increased net interest income from the prior quarter and highlights continued momentum at the bank. The strong growth momentum we experienced in the second quarter continued into the third quarter as non-PPP organic loan balances grew $480 million, representing a quarterly growth rate of 2.3% and over 9% annualized. The quarter's expansion is all the more noteworthy as it comes on the heels of record quarterly loan growth for the company in the second quarter and continued to be balanced across all categories.
We continued to process the forgiveness of PPP loans, which declined $653 million or 47% from June 30. While this expected runoff drove a net reduction in loans and leases of $174 million, the headwind is winding down as remaining PPP balances, only 3% of the loan portfolio. We are very pleased with the growth in our non-PPP loan book, which reflects successful talent acquisition, brand momentum in our markets and the resulting healthy customer pipelines.
Regarding capital. In August, we paid our shareholders a dividend of $0.21 per share, consistent with historical payments, and we repurchased 4 million shares at an average price of $19.5 in the quarter as part of our previously announced stock repurchase authorization. In total, during the quarter, we returned $124 million to our shareholders through dividends and buybacks. Our capital levels remain very healthy. However, we no longer intend to repurchase shares in the near term, given our pending combination with Columbia Banking System, which we announced last week.
Now for a quick update on Next Gen 2.0. First, balanced growth. We continue to leverage the positive brand awareness of our PPP work and the market disruptions that provided us opportunities to attract both customers and talent, and our results demonstrate the strong momentum we've talked about for the past few quarters. Elevated customer pipelines drove strong balanced growth, and the momentum continues into the early days of this quarter as our pipelines remain strong. Recently onboarded bankers and new teams continue to generate new business as they hit their stride, and we continue to expand our relationships with PPP customers who are now new to the bank.
Our human digital initiatives remain critical to our long-term strategy as our customers continue to engage with us through digital channels at an accelerated pace. We experienced increases of 3% more mobile deposit transactions, 39% more Zelle transactions and 10% more daily sessions within our mobile banking app in the third quarter compared to the year ago period. Notably, Go-To enrollments continued to increase, and we are getting close to 100,000 mark -- to the 100,000 mark.
Our human digital initiatives also support our commercial customer acquisition efforts. This past quarter, we finalized a partnership with Visa to be the first FI in North America to launch Visa Commercial Pay, a mobile app-based solution to offer instant issue virtual commercial cards for T&E, point-of-sale and supplier payments. Additionally, we launched our pilot of consolidated payments. This will allow commercial and business clients to fully outsource their payments to Umpqua in a variety of formats, including checks, ACH, wires and commercial card, complete with APIs to over 160 different accounting platforms.
With regards to operational excellence, we continue to build on the progress achieved since announcing our initiatives a year ago. The third quarter run rate benefited from a mid-Q2 sale of Umpqua Investments to Steward Partners. We are on track to consolidate an additional 15 stores by year-end, which will bring the total rationalizations under Next Gen 2.0 to 34. This moves us into our 30 to 50 store consolidation goal, which we originally laid out a year ago. During the quarter, we also recorded some exit and disposal costs related to the exit of certain leases as we continue to rationalize other office space.
On Slide 3 of the earnings presentation, we show that cumulative saves accomplished so far under Next Gen -- under the Next Gen 2.0 program, and we expect to accomplish by mid next year. One final comment before passing to Ron, I want to reiterate remarks I made on last quarter's call regarding the growth opportunities ahead for Umpqua, which are further supported by our strong performance in the third quarter. I remain highly enthusiastic that our growth prospects within our markets and the momentum from our banking teams will continue to spur growth and will enable us to deliver shareholder value over the long term. While we are clearly focused on fine-tuning our integration plans with Columbia, our bankers' activities are not impacted, and they will remain focused on delivering top-notch service as we meet the needs of our current and prospective customers. We expect a strong finish here in '21, which will carry us into 2022. And with that, I'll turn it over to you, Ron.
All right. Thank you, Cort. And for those on the call who want to follow along, I'll be referring to certain page numbers from our earnings presentation. Page 8 of the slide presentation contains our summary quarterly P&L. Our GAAP earnings per share for Q3 were $0.49. Excluding MSR input and CVA fair value adjustments, along with exit disposal costs, our adjusted earnings were $0.51 per share this quarter.
For the moving parts as compared to Q2, net interest income increased 2%, reflecting the combination of higher average non-PPP loan balances along with the continued reduction in our cost of funds. We had a recapture of prior provision for loan loss of $19 million with improving economic forecast, slightly lower than the prior period recapture. Noninterest income reflected the expected decline in mortgage banking revenue, along with a flip in the swap derivative fair value and the gain on sale of Umpqua Investments back in Q2. And non-interest expense reflected the lower mortgage banking activity.
We previously communicated our expectations for an annualized 2022 noninterest expense run rate in the range of $690 million to $710 million for Umpqua on a stand-alone basis. This outlook is unchanged, and it was taken into consideration when we designed our cost savings forecast for the pending combination with Columbia Banking System. I want to reiterate this last point. Next Gen-related cost savings are separate from and before any and all cost savings related to our forthcoming combination with Columbia.
As for the balance sheet on Slide 9. Interest-bearing cash increased to $3.3 billion this quarter, driven by continued strong deposit growth. This higher level of cash cost our NIM 4 basis points in Q3 as compared to Q2 but gives us significant future optionality for funding ongoing loan growth or deleveraging certain liabilities. We increased the bond portfolio 7% as longer-term yields were higher later in the quarter into similar duration agency investments. Cort mentioned previously, our significant non-PPP loan growth this quarter was offset by PPP loan forgiveness, while our deposits increased $0.75 billion. Our total available liquidity, including off-balance sheet sources at quarter end increased to $16.2 billion, representing 52% of total assets and 60% of total deposits, giving us ample liquidity to fund future loan growth.
Before we get to the segments, let's jump forward to Page 14 of the presentation. Our NIM increased 1 basis point to 3.21% in Q3, while the NIM, excluding the impact of PPP loans and discount accretion, was 3.04%, fairly consistent for the last few quarters, which is great to see the impact of continued non-PPP loan growth and deposits continuing to reprice lower, offsetting the impact of the low rate environment.
Our cost of interest-bearing deposits was 13 basis points in Q3 and 11 basis points for the month of September, suggesting a continued decline in the overall quarterly costs in Q4. Our non-interest bearing demand mix increased slightly to 41.3%, contributing to our total deposit cost of just 8 basis points in Q3.
Okay, now to our segment disclosures. Starting with the core banking segment on Page 10 of the presentation or Page 19 of the release. Net interest income increased 2% sequentially driven by the strong non-PPP loan growth and continued decline in cost of funds. I'll talk about CECL and the provision in detail in a few minutes, but you'll see here we had a $19 million recapture this quarter from improving economic forecasts.
Two lines down is the change in fair value on swap derivatives, noting there was a gain of $1.4 million here in Q3 as long-term interest rates increased this quarter compared to the loss of $4.5 million back in Q4 as rates decreased in the second quarter. Noninterest income of $38.3 million was lower than Q2 related primarily to the $4.4 million gain on sale of Umpqua Investments recognized in Q2 along with lower swap and M&A advisory fees in Q3.
The exit and disposal costs of $3.8 million relate to lease exits from recent store consolidations and a right-of-use lease asset impairment as we execute our return-to-work plan. The direct noninterest expense for the core banking segment was flat for the quarter, and pretax income for the core banking segment was $136 million and represents 95% of the consolidated total. The efficiency ratio on the core was consistent at 57%.
Turning now to Page 11 of the presentation or Page 20 of the earnings release. We show the mortgage banking segment's 5 quarter trends. To start, we had $1 billion in total held-for-sale volume this quarter, down from $1.25 billion in Q2. The gain on sale margin was 3.07%, down from Q2 as expected given a slowing mortgage market and decline in the lock pipeline.
These 2 items resulted in the $30.3 million of origination and sale revenue noted towards the top left of the page. Our servicing revenue was stable. And for the change in MSR fair value, the passage of time piece remained flat as expected, while the change due to valuation inputs was a loss of $0.6 million due mainly to higher paydown activity earlier in the quarter.
Noninterest expense totaled $29 million for the quarter. Again, this represents direct held-for-sale origination costs, servicing costs, along with administrative and allocated cost. The direct expense component of this was $20 million, as noted on the right side of the page, representing 2.02% of production volume, consistent in basis points with Q2. It's important to note here the mortgage banking segment represents only 5% of our pretax income.
A couple of final items before I turn it over to Frank. Let me take your attention forward to Slide 23 on CECL and our allowance for credit loss. As a reminder, our CECL process incorporates the life of loan, 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 economic recovery through the remainder of 2021 and beyond as most economic forecasts revert to the mean within a 2- to 3-year period.
We used the consensus economic forecast this quarter updated in August. Overall, the forecast showed improvement in several key areas as the economy continues to reopen. We included a $14 million overlay for various CRE portfolios to hedge against any potential near-term slowdown or negative turns with the pandemic. Net of this overlay, we recognized a $19 million recapture on prior provisions for loan loss. Net charge-offs for Q3 declined to $6 million, much lower than the models from last year suggested and the majority of net charge-offs this quarter related to the small ticket lease portfolio.
The ACL at quarter end was 1.23%, noting this ratio was 1.27%, 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 the lag of at least 5 quarters.
Our day 1 CECL level was right at 1% on the ACL, which is about $57 million lower on the ACLs for non-PPP loans than we are at currently. All else equal, this excess ACL will either be charged off in future periods if the models are eventually proven correct or be recaptured and/or used for providing for future loan growth if the economic forecast continued to improve, time will tell.
And lastly, back on Slide 21, I want to highlight capital. Knowing that all of our regulatory ratios remain in excess of well-capitalized levels, our Tier 1 capital ratio was 12.1%, and our total risk-based capital ratio was 14.9%. The bank level total risk-based capital ratio was 13.4%.
And with that, I will now turn the call over to Frank Namdar to discuss credit.
Thank you, Ron. I will also be referring to certain page numbers from our earnings presentation for those who want to follow along. Slide 24 reflects our credit quality statistics. Our nonperforming assets to total assets ratio held steady at 0.17%. And though our classified loans to total loans ratio ticked up 7 basis points to 0.81%, it remained in its fairly consistent range. Our annualized net charge-off percentage to average loan release has decreased 14 basis points to 0.11%, reflecting continued normalization of credit trends in the overall portfolio.
The FinPac portfolio's ratio came in at 1.2%, notably below its historical 3% to 3.5% range during the quarter, reflective of higher levels of customer liquidity, rising out of stimulus, improving economies and the favorable impact of credit tightening that was put in place last year. Excluding FinPac, annualized net charge-offs were just 4 basis points.
Slide 25 shows the total loan balances that were on deferment at the end of the quarter at only 0.6% of the loan book continuing to work its way down. To wrap up, we are very pleased with our credit quality metrics this quarter. We remain confident in the quality of our loan book, and we look forward to future continued growth.
Back to you, Cort.
Okay. Thanks, Frank and Ron, for your comments. We'll now take your questions.
[Operator Instructions] Your first question is from Jeff Rulis of D.A. Davidson.
Cort, you mentioned the focus of the team through the deal announcement. And I just want to kind of dig into that loan growth. It's been pretty consistent in the high single-digit range. And the pace of new hires has been -- as you look at that into '22 and along with the deal news, expectations on loan growth, I guess, simply put, is just to get a handle all of that given the moving pieces.
Let me just make a comment, and then I'll kick it over to Tory, he can give you some greater details on the pipeline. So we've hired some great people, as we've talked about over the last 3, 4 years or 5 years, and they are to the point in the comments beginning to hit their stride. And Tory will talk about the robust pipelines that we've got. We just see continued momentum or the bank is going to operate at -- as our bank for until we close this deal and there's significant momentum with people we've hired and with our customers. And so we don't see that stopping even though we've got a pending combination with Columbia. But let me have Tory give you some greater details around the pipeline.
Sure. Hey, thanks, Cort. Jeff, as Cort mentioned, I mean, we've obviously hired a bunch of folks in various markets as they kind of hit their stride. Pipelines are growing very nicely. I mean our pipelines today are about $4.5 billion in total, which is consistent with last quarter.
About $2 billion of that is C&I and about $2 billion of that is real estate and the rest is consumer and some other parts of the company. So we feel really good about the pipeline. I mean that's a significant growth kind of year-over-year, especially in the C&I space for us. So got a lot of focus, lot of good activity, feel very good about the high single digit loan growth as we move forward.
Tory, the additional hires is that business as usual or do you -- how do you approach into the close of the transaction. Is there a moratorium on hires? How do you treat that in the first half of the year?
Yes, it's just business as usual. We're continuing to move forward. In fact, we just hired a middle market executive in Phoenix, Arizona, as we look to expand outside of our traditional footprint. So there's a lot of infill in a variety of places whether it's from in the state of Washington to Oregon and all throughout California. So now we're actively looking and finding the right key talent that fits what we're looking for and the culture and the values of Umpqua Bank and can help us continue grow the business.
Okay. And maybe the last one for Cort and kind of fluffy, but the -- part of the hires also kind of involves retention of the team, and I guess, just any overall thoughts of morale with the news and how you think that current team is -- has viewed the transaction?
We'll give you great details as we move forward. It's only been a week since we made the announcement. I'll just tell you that historically, this bank is rallied around things like this, whether it's just recruiting people from banks that were -- are -- bankers and store associates just want a different experience, the opportunities to create a real regional West Coast player. So we feel great momentum. I know that Tory and I and the team are greatly lifted by the enthusiasm of all these associates here at the bank.
Your next question is from Jared Shaw of Wells Fargo Securities.
Cort, your enthusiasm is pretty high. You're seeing good growth this quarter. We're hearing from some other banks are seeing good growth, looking more towards low single -- I'm sorry, low double-digit growth on the loan book. Looking out low further, what would have to happen for that to be triggered at Umpqua? Is that continued customer acquisition, but then you also need to see utilization rates go higher or I guess what could drive additional optimism around loan growth?
Let me have Tory comment on that, Jared, and I'll follow up.
Yes, Jared. I think you've kind of touched on a couple that certainly continue to help the cause. I mean we -- obviously, we continue to acquire customers and provide debt capital for those customers as we move forward. As we hire people, we'll continue to do more and more business. I think line utilization is something that's kind of interesting to look at.
I mean, our C&I line utilization is about 27%, which has been relatively flat for a few quarters. And if that were to even move up to historical levels at around 40%, that's about a $270 million lift right there, kind of the same in our HELOC portfolio. We continue to grow the commitment side of our HELOC business, but we're at about 30% -- 36% utilization there. And if we got to historic kind of pre-pandemic levels of 45%, that's about $300 million.
So that utilization is something that certainly could help the cause as we move forward, as customers continue -- or look to borrow more money than they do today. But as you know, I mean, folks are flushed with cash. And certainly, there's -- there will, at some point, be a time that they'll start to borrow more on their lines.
And then, Jared, as we've talked about in prior quarters, and we've been able to attract talent at Umpqua Bank at the $30 billion or the $25 billion to $30 billion since I've been CEO mark, because we offer a great -- a different experience for a lender and obviously, lenders bring customers. That's why you hire great people. And that has really spurred our growth, right? We've really been able to kick our growth in the gear and have gotten into new verticals by attracting teams of people.
I've been here 11 years, Tory has been here 7 or 6. And I think we've really turned the corner on making this a fully-integrated commercial bank, and that's at $30 billion. So I'll just leave you with the idea that when we combine with Columbia, I think our ability to track talent will really be astronomical.
That's good color. And then shifting over to the fee -- some of the initiatives you announced on fees this quarter with payments and Visa. What's some of the revenue opportunity around that? And do you view that more as building out services for the existing customer base? Or is this something that could actually drive customer acquisition?
This is Tory, and let me say this. I think it helps support the -- a full-fledged commercial relationship. So as we prospect, whether it's to existing customers or to new customers, the ability to leverage and add-on technology and technological solutions to how they run their companies and how they interact with their customers, which is critically important, it's part of the mix.
And I think as we -- as you saw through our virtual commercial card to the Visa Commercial Pay, just another like really good product that supports that as we're moving forward with nCino, which is a loan origination system in the company. So there's just a lot of things that are happening both inside the company and outside the company from a product perspective that leverages technology to make our customers do their banking with us easier and faster, actually. So it's very supportive as we prospect and as we grow the bank.
Okay. And then just finally for me, looking at the allowance ratio, you -- Ron, you mentioned the $14 million of qualitative overlay still in there. And then the FinPac data looks a lot better. Should we be thinking that qualitative overlay sort of gets bled back into the ratio just with growth, or what's the -- how should we think about, I guess, the timing of approaching back to the day 1 as the broader economic backdrop is improving?
It's a good question, right? Because I mean, what I think about is what was our day 1 CECL in a normalized environment because the question is as we get back to a normalized environment. That was roughly $57 million to get back down to the 1% ACL. The $14 million overlay is part of it.
And it's just strictly going to depend upon economic forecast, and how those forecasts change. If they continue to improve, then we wouldn't see charge-offs for that balance, and that would help support provisions on future loan growth and then recaptures and vice versa, economic forecasts go the other way. So it's just going to take time and which we had to forecast change.
And should we expect the FinPac losses to normalize? Or is this sort of a new good level for that?
No. This is Frank Namdar. I think you'll continue to see them normalize closer to that 3% range, like I alluded to in my comments. I mean this is specifically driven by stimulus dollars that are within the customers' hands right now and some of the tightening that was done pre-pandemic and shortly thereafter. If the nature of the portfolio is in the higher risk, higher yields, and we expect that to trend up, but more closer to that 3%.
Your next question is from Brandon King of Truist Securities.
So multifamily is seeing strong momentum, very strong growth in 3Q and also pretty strong over 2Q. I wonder if you could provide any color on what outlook is there. Was there any, I guess, pull-through from 4Q? Or could we see similar levels of growth in 4Q and potentially in 2022?
Brandon, this is Tory. The -- there's a couple of places where we do multifamily lending in the company. One is through our real estate group, primarily larger projects. A lot of it is construction, but a lot of term facility as well. And then we have a multifamily division that does mostly -- the average deal size is about $2 million.
That part of the business, this multifamily division business, has -- the activity in the pipeline has picked up pretty significantly here in the past couple of quarters. And it looks very strong right now. We feel really good about it. Excited to see the team. We've added some folks in the space, both to kind of underwrite and process, but also to be kind of RMs and customer-facing people. So we're seeing some nice expansion there and think that, that should continue.
Okay. And then for Ron, if deposit growth continues to be strong and I saw you purchase -- I think you purchased some securities in the third quarter. Could you potentially increase the amount of purchases with securities based off the current rate high outlook and interest outlook that you currently have?
Definitely a possibility. I mean first and primary focus will be continued core organic loan growth, as you heard Tory and Cort talk about, which we are excited about continued prospects on that front. But definitely, you can see a little bit of that going to the bond portfolio. It's going to be give and take, just based off the outlook in those deposit flows.
And as I'd point out, too, in terms of the NIM impact. So it was down 4 bps this quarter just because of the higher average cash. So it was down 4 bps in Q2 because of the higher average cash. It's about 8 bps compared to Q1. But I just want to point out that it's like zero impact or close to zero impact on the P&L. It's just in terms of NIM, and cash is a great thing when we look at the future opportunities for continued growth and funding of the loan book.
And then lastly, this is for Cort. I know it's a different environment now, but there hasn't been a major acquisition or deal for Umpqua's Sterling acquisition. But I was wondering if there's any lessons learned from the integration process with Sterling, and whether you could potentially take over and use that with integration with Columbia Banking System?
Yes. We had quite a few, and we learned some things, and we'll certainly incorporate those into our integration planning. There's always something you learn when you do something, good and bad to be quite frank. But yes, there's some things we wouldn't do again, and there are some things that I think we did very, very well relative to Sterling.
Our focus on our customers making sure that they were well served is always the key. The retention of customers is always very, very important. But yes, and there was probably 27 acquisitions and prior to that. But there's a lot of knowledge, but then there's a building that we will lean on heavily as we move forward.
[Operator Instructions] Your next question is from Matthew Clark of Piper Sandler.
First one for me is around mortgage expenses. I guess, first, how much of that mortgage expense was variable. And what I'm trying to get at is the mortgage comp to closed volume, I think, remained relatively steady in the -- around 2%. I think there's an expectation that, that was going to step up pretty materially next year, maybe on the 2.7%. And just want to get your updated thoughts there.
Yes, Matt, this is Ron. Actually, the 2.7% to 2.8% range was around the total expense, including allocated as you see on the P&L. But from the standpoint of the direct held-for-sale expense of 2.02%, you might see some lift because this annualizes at $4 billion. If we think we're going to be closer to $3 billion next year, it might go up slightly, but probably not all the way to that 2.8% range. And of that expense, roughly 2/3 of it is going to be commission-based. There is some fix in there as well, but the majority is still commission based.
Okay. Got it. And then just thinking about your California-based franchise relative to COLB, obviously, just getting into Northern California. What are your thoughts around what might need to change? Or what might need to be added to kind of go about the way Columbia also does business going after kind of small, middle market relative to what you guys do today?
So your question around in what we've got -- with our presence in California, what would it take to incorporate that they do in those locations, Matt. Is that where you're going?
Yes, I'm just thinking about legacy COLB and the way they go about winning business in their markets relative to how you guys go about winning business on that -- in that same space, the small, middle market business customer. In terms of what kind of capacity you guys have currently and what you might need?
Like we said on the investor presentation, we view there's a lot of revenue synergies and would provide some additional clarity as we move forward. We're only in the beginning phases of that, Matt, of having the teams work together as we get into our approval process and then eventual will close. But we -- I think we're planning on having an update call, a joint call later this quarter and -- to provide some additional clarity around that.
Okay. And then, Ron, any updated thoughts on the core margin outlook at least in the near term? I may have missed it in your prepared comments.
A good point. I think it will be around this level. And again, the subjectivities will be continued deposit flow and loan flow. If we have another quarter of our cash balance, you'll see the impact, but again, very excited about the non-PPP loan growth outlook. And we'll probably have another quarter of PPP forgiveness and have a relatively smaller balance heading into 2022.
Yes. And do you have that remaining net fee amount for PPP?
$21 million. Yes, $21 million.
[Operator Instructions] I am not seeing any more questions. I would like to turn the call over back to the management.
Thank you, Joanna, and thank you for your interest in Umpqua Holdings Corporation and participation on our third quarter 2021 earnings call. Please feel free to 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.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.