UMPQ (2020 - Q4)

Good morning and welcome to the Umpqua Holdings Corporation’s Fourth Quarter Earnings Call. I will now turn the call over to Ron Farnsworth, Chief Financial Officer. Ron Farn

Okay. Thank you, Chris. Good morning and thank you for joining us today on our fourth quarter 2020 earnings call. With me this morning are Cort O’Haver, the President and CEO of Umpqua Holdings Corporation; Tory Nixon, President of Umpqua Bank; and Frank Namdar, our Chief Credit Officer. After our prepared remarks, we will then take questions.

Okay. Thanks, Ron. I will provide a brief recap of our performance. And then pass to Ron to discuss financials. Frank Namdar will discuss credit and then we’ll take your questions. For Q4, we reported earnings per share of $0.68, setting a company record for the second consecutive quarter. This was an increase of $0.11 or 19% from the $0.57 we earned in the prior quarter and an increase of $0.32 or 89% from the $0.36 we reported in the fourth quarter of 2019. These earnings were driven by another quarter of incredible production in our home lending division. PPP fee accretion is nearly 15% of PPP loans were forgiven by the SBA during the quarter and for the fourth consecutive quarter, a healthy decline in the cost of our interest-bearing deposits. Turning to the balance sheet items, loan balances in Q4 were down $647 million or 3% due largely to processed PPP loan forgiveness. The transfer of $78 million in indirect auto loans to loans held for sale and anticipated payoffs in the residential real estate portfolio. Regarding deposits, we generated strong growth in noninterest-bearing DDA this quarter of $158 million or 2%, which once again afforded us the opportunity to reduce higher cost time deposits, which reduced by $402 million or 12%. On a net basis, deposits were down $46 million and essentially flat with the totals from the prior quarter. In addition, our cost of interest bearing deposits improved from 49 basis points to 38 basis points, a reduction of 11 basis points from the prior quarter amount. For the year, loan balances increased $584 million or 3%, driven by PPP production, which is partially offset by line of credit pay downs. Year-over-year, commercial line of credit outstanding balances were down 29%, not as a result of customer attrition but due to customers using available liquidity to pay down lines.

Okay. 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 11 of the slide presentation contains our summary quarterly P&L. Our GAAP earnings per share for Q4 was a record $0.68, higher than the prior record $0.57 in the third quarter, driven by PPP fee recognition, continued strength in home lending, no provision for loan loss and a low tax rate. Excluding MSR and CVA fair value adjustments, our adjusted earnings were $0.70 per share this quarter.

Thank you, Ron. I will also be referring to certain page numbers from our earnings presentation for those who want to follow along. We have updated our referral information as of December 31 on Slide 4. Total loan balances that were on deferment at the end of the year represent 2.4% of the loan book. We continue to work with customers within the guidelines of federal programs, such as the CARES Act as well as individual state mandates. We will continue to work with our customers on deferrals when they are needed and are very happy with our cure rate thus far of 87%. On a portfolio basis, we are reporting 0.9% deferrals in commercial, 1.3% in commercial real estate, 1.7% in FinTech; 0.4% in consumer and 6% in residential real estate. On Slides 5 and 6, we again show specific segment totals and relevant characteristics for portfolios that have been impacted by COVID-19. The following segments are highlighted: Hospitality at 2.4% of our portfolio; air transportation at 0.6%; restaurants at 0.6%; and finally, gaming at 1.6% of our portfolio. Deferral information is also highlighted within these segments. Hospitality obviously remains an area that we continue to watch closely. Occupancy levels have increased to the 40-ish percent level, and with our extended stay and limited service properties continuing to perform above this level with occupancies ranging from 68% to 80%. As I’ve stated previously, this portfolio is of low leverage with a very strong overall sponsorship to borrowers we have history with. Slide 23 depicts our loan portfolio its geographic diversification and select underwriting criteria for each major area. The loan book remains granular in nature, and we are confident in our conservative and disciplined underwriting practices. Slide 24 reflects our credit quality statistics. Our nonperforming assets to total assets ratio decreased 3 basis points to 0.24%. Our annualized net charge-off percentage to average loans and leases increased 11 basis points to 0.35%. As Ron mentioned just a minute ago, and as disclosed previously on our third quarter call, this increase was due to approximately $18 million in leases that came out of deferment and were unable to resume regular payments. We have identified another pool of approximately $18 million of leases that will also be charged off in Q1. And then we expect the FinPac portfolio to begin to return to the historical levels of 3% to 3.5% in Q2 of 2021. I’ll now turn the call back over to Cort.

Okay. Thank you, Frank and Ron, for your comments, and now we’ll take your questions. Chris?

The first question comes from Jared Shaw of Wells Fargo Securities. Your line is open.

I guess, Ron, maybe just first, I just had a question on the PPP fees. Could you remind us, are you booking those based on the assumed average strife or when you look at that $29.2 million is, is that just the acceleration of what you actually received on forgiveness?

The total includes accretion within the underlying book over the life of the portfolio using the effective interest method. But it’s about, what $16 million top in Q1 for that was related to the acceleration of remaining fees or uncreated fees for the loans that were forgiven. So to the extent that we have more loans forgiven say in Q1, Q2, whatever net remained deferred fee, at that point in time, will also be accelerated.

Okay. But that -- so that $16 million was just what actually was received forgiveness?

The majority of that was, not all of it.

And then can you let us know what your positioning is for round two and what you think we could see for volume out of that?

So Jared, this is Tory Nixon. So we -- obviously, we opened up -- actually, we started really on Monday, we integrated a technology, Encino, to help us with forgiveness and with this newest round of PPP stimulus. As of this morning it is -- we have 3,767 applications for about $570 million, average loan amount is about $37 million, I think -- I think one of the -- I’m sorry, $137,000, sorry. I think it’s important to note that, this time around with our technology, we’re going to use about 80% less people and kind of working through the process and providing that help and support for our customers and our communities than last time.

Okay. That’s good color. Thanks. Ron, I guess, shifting over to the margin and yet look there, loan deals are held up pretty well. How should we expect margin sort of ex-PPP to a trend over the next few quarters with the ability to still, I guess, maybe lower, positive pricing?

Yes. I mean, that’s definitely internally with ex-PPP off that base. Banyule seem to have stabilized. And then you have a mix of our portfolio that impacted so much over the year was higher premium paper that was refi and that was taken on, but I do definitely expect to see, continued to drop in our customer spend and deposits again and service 35 bids for the month of December. So you can do the math on what that could look like in Q1. So near term, we expect to be around this level. And then beyond, say, the next quarter or two, which will include some on top for that level some PPP acceleration and one with continued accretion for not only on round one, but also round two, beyond, we very much look forward to seeing continued organic loan growth, which our loan-to-deposit ratio, touch PPP back up into a 90% a range to help stabilize and grow that margin ideally over time.

That’s great color. And then just finally for me, looking at the excess capital, both the dollars and just the rates, I mean, you’re clearly in a strong position. It seems like you clearly have enough to handle any growth that we should expect over the next year. I guess why not be more aggressive now with capital management taking advantage of opportunity and buybacks or I guess, what’s the other thoughts in terms of looking at M&A and maybe growing non-organically?

Yes, great comments. I mentioned in the prepared remarks. If you look back round about $200 million of that excess capital growth was a result of the non-PPP loan drop, which we expect to come back utilized. But even absent that, you’re right, it’s plenty of opportunities to be aggressive on the capital deployment side and share repurchase is definitely one of the options on that front. I will also just mention that would be a process to we would go through with the regulators for approval just given the NIM retained earnings, but we’ll definitely see that potential over the course of the year.

Your next question comes from Jackie Bohlen of KBW.

I just wanted to touch on the broader points of growth. Looking at some of the disclosures in the prepared remarks, I’m thinking about the presentation we had last quarter that gave the 8% to 12% growth. And I apologize that this is a little bit multilayered. But the quarter had its movement with indirect transfers and some FFR pay down. . But then you talked about the talent acquisition that you’re looking to do. So just the pushes and pulls that you see and how you’re feeling about the growth outlook that you laid out last quarter?

Jackie, this is Tory, again. I think as you kind of position in the question, it’s multifaceted. We -- there’s a couple of things happening. Certainly, I think that we have some general uptick in the economy over the course of ‘21, and we feel good and confident about that. We’ve got a -- we’ve been very successful over the last couple of years in acquiring some significant talent in the bank. And we will continue to do that through the course of ‘21 and ‘22 in all of our major metropolitan markets, but also in some of our more rural legacy Umpqua bank markets. And we spent quite a bit of time on the prospecting front, built the pipeline up quite significantly, both in our middle market and our community banking lines of business. So we feel really good about the activity level that we’ve seen by the field and the pipeline that we’ve built over the course of -- certainly in Q4. And I think we’ve demonstrated previously, we’ve been able to grow the Company on the lending side, and we will continue to do that and bring new relationships into the bank.

Jackie, it’s Cort. Like Tory just mentioned, we’ve always grown the Company. And I get the optics and the pressure that you all see with the balance sheet. I think we all would agree 2020 is an interesting year for commercial customers. And like I mentioned, Tory, I don’t know if you mentioned it, in commercial loans, kind of re-trading, if you will, coming down during the year, mostly because of liquidity that borrowers had yadi-yadi-yada. And those customers still remain here today. And we have traditionally grown this company. We feel very, very good, but what we see in our pipelines. And just a quick story, and I’m not going to use names, we were talking right before the call. And I think it’s worth noting the power of PPP in this round, we picked up a significant relationship here in the Portland market from a bank you all cover, making $0.5 million PPP loan in picking up a $20 million loan relationship. So as we continue to work that series of new customers of the bank and as companies continue to see a greater outlook, the election behind us, you clearly can see the end of the pandemic sometime this year. And as enthusiasm builds, you will see commercial loan draws, you will see the pipeline that Tory’s built, and you will see the conversion of these PPP customers, new customers of the bank that we got in round one, let alone round two, convert to on balance sheet, both depositors and borrowers. And we feel extremely pleased of all the effort that this bank put into PPP round one. And it won’t take as much effort in PPP round two, but we still think that there is a significant lift in this banks as growth potential in ‘21 and going into ‘22.

And Cort would you say that some of the single family run off is tied to selling a larger portion of production, meaning that they’re going into the portfolio?

I’m sorry to interrupt you. We made a strategic decision in ‘19, it’s been a while now, to go more into agency sale and get out of portfolio for a lot of reasons, and it was the right decision, albeit it’s -- we’re suffering a little bit on the balance sheet. And I know you guys don’t like necessarily the revenue generation off of the secondary market activity is, but it’s driving significant revenue gains. Now, albeit, we’re giving up something on the balance sheet, but we see a lot of opportunities, more relationship opportunities on the balance sheet, it was a planned strategy in ‘19, and it just came a little quicker. So we are -- it was expected in Q4. And we see -- we’re very strongly, like Ron mentioned, that the for-sale volume is going up, which is a good indication. As long as volumes or excuse me, the housing stock stays out there for sale. But we’re coming into a strong part of the season. So yes, it was a planned event. We made plans for that in ‘19, and it just was a little bit more than we expected in Q4, but doesn’t worry me.

Okay. Great. That’s all incredibly helpful. And I just have one quick little housekeeping item for Ron. Just wanted to know how much of the gain on sale from the, was in the quarter of the three stores?

That was approximately $4 million.

Your next question comes from Michael Young of Truist Securities. Your line is open.

Maybe wanted to start Ron just on the net interest income outlook. I think NIM it’s kind of hard to predict at this point given the high levels of liquidity and all the noise with PPP, et cetera. But maybe just looking at core, kind of, NII dollars, it seems like we’ve kind of bottomed out with the portfolio growth, loan portfolio growth from here. We should see kind of expansion maybe in both margin and dollars of revenue. Is that kind of the outlook you have as well? And any additional color you’d add to that?

I think you nailed it. I mean, that is definitely the goal of the plan. And I say the only other addition I’d put on there is that excess level of interesting cash gives us a lot of optionality for deleveraging higher cost liabilities, right? Ideally, we’ll turn around and put that into loan growth. But even over and above, recapturing the low balance decline this past year as a growth this year, there still are several high costing liabilities including term debt we can pay down the debt. So those are all debt.

Okay. And maybe switching over to the other side on expenses, I don’t know if it’s better to talk about it from an efficiency ratio perspective or maybe even an absolute dollar target given kind of high levels of mortgage continuing into 2021. But as we move forward, do you feel like it’s still kind of a mid-50s efficiency ratio that we should be expecting on an operating basis with all the technology adaptation and efficiency that’s been gained there and real estate reductions? Or do you have anything tighter in terms of a firm dollar amount that we might exit the year at? Any color there would be helpful, I think, as we think about progression throughout 2021.

Yes. I think you nailed it. I mean, the mid-50s is that’s where the goal over time. And again, I wanted to talk about Q4 change off of Q3. I expect Q1 will be below Q3 levels, and then you’ll see the impacts over the balance of the year from the Next Gen 2.0 eras we talked about. Home lending will be a wildcard depending on how strong on that remains over the course of the year, but this is definitely a long-term goal.

Okay. And then just last one, you’ve touched on kind of capital return and share repurchase. I think historically, you guys have been a little more philosophically opposed to that, but capital levels are pretty high now. It doesn’t seem like M&A is a near-term interest. So, just any other kind of thoughts on, how you’re thinking about kind of discussing that with a Board and/or regulators in terms of magnitude or timing or anything else that is kind of in your thought process there?

Yes. I mean definitely, it’s near term, with the growth in excess capital gives us a lot of options, but share repurchase definitely has the potential we’re looking at. And again, I will have to note that, that will require regulatory approval, which we’d expect would be seamless process we go through, just given the excess amount of capital we generate, we expect to continue to generate. And dividends continuing, obviously, the first priority, but I also want to get back to, on the organic growth side. I’d love nothing more, and we expect to see return of that excess capital will be realized here in ‘21 with return of non PPP loan growth.

Your next question comes from Jeff Rulis of D.A. Davidson. Your line is open.

I just wanted to follow-on the expense front. Just to map the -- what I assume are somewhat onetime, the software impairment and charity, is that in occupancy and other respectively?

Correct.

Okay. And if we could -- I know there’s some lumpiness to the initiatives in the current year with the sale of Umpqua investments and one-third of the branch is coming on -- or to be completed by the end of Q2. Just if we think about 50% of the cost saves over the balance of the year, do you think that’s fairly even over the course of the year, if we’re tracking it? Or is it lumpy, back-end loaded? How would you -- if you characterize those savings throughout the year, how would you put it?

Yes, we’ll definitely see a pickup in Q2, just given the timing of the U.S. sales, store consolidations will be later, really more Q3 items. Underneath the covers, though, there are several other initiatives that we working the way over the course of the year. So really, when we talk about half of the $39 million to $56 million of overall reduction being realized in ‘21, I think that’s a good outlet over the course of the year. Really, key is going to be looking at ‘22 compared to ‘21, having half of that in the bank at the start of ‘22. So there will be some moving parts you guys is probably the biggest one that we’ll kick in Q2.

Okay. That -- Ron, just to clarify that. You’re exiting Q1 at a run rate? Or it will -- Q2 will be a good read on Umpqua investments?

Q2 would be a good read on Umpqua investments course of the year.

Got it. Okay. And then, Cort and Tory you both have referenced the pipeline and the build there. Hopeful or just hoping to get the maybe the specific dollars, where the pipeline sits as it came in end of the year versus year-over-year. And maybe even what that figure was as it bottomed in the pandemic, just to kind of get a relative sense of what that pipeline was.

Yes. Sure, Jeff. So if we think about the -- all different lines of business combined, we were about $3 billion in the loan pipeline at the end of ‘19. And we’ve kind of dipped out on, I think, to a low of probably just a shade under two and are now back up to three. So we kind of and most of that increase has been in the last three months. So, the Q4 was a big lift in that dollar amount. And it was primarily centered or it is primarily centered in our middle-market and community banking business, or kind of C&I customer relationship business up and down the West Coast.

Got it. So I guess another way to put it. I guess if you’re entering the current year, in the engine, if you’ve got some other leads on PPP that maybe you didn’t have year-over-year, maybe the outlook on growth is potentially -- we could have not foreseen the pandemic. But you could say year-over-year, a brighter outlook than when you entered ‘20. Is that correct?

I would say, yes. I felt in -- I think we all did at the end of ‘19, we had a lot of momentum going in the Company on the -- certainly on the C&I side, but really across the Company that certainly pandemic hit kind of took some of the -- obviously wind out of the sale. I feel confident that we are back to where we were at the end of the ‘19 and there are some other things in our favor. I think we spent a lot of time in the last couple of years hiring some very significant talent in the Company that has gotten, had some success and -- but we’ll be more successful in the future. And I think we also have some leads on some additional talent. So I think we’ve mentioned earlier, I think, in the script, that we’re going to look to hire some folks in those two lines of businesses over the course of the year over the course of the year to continue to kind of expand the story of Umpqua Bank and what we do and what we’ve done and continue to build it.

Your next question comes from Steven Alexopoulos of JP Morgan. Your line is open.

I wanted to start on the PPP loan fees. So if I look back to the third quarter, you had around $51 million of unamortized processing fees, right, on PPP loans. And then here in the fourth quarter, PPP loan balances fell by $200 million. So it’s around 10%. But you’re recognizing $24 million of the PPP processing fees. Why was that so high in the quarter? Does that imply that there’s $125 million of unamortized processing fees left from round one?

Why do we run that on the balance sheet, that only create it again over the handful of the next few quarters. And part of that was an effective interest method on the accretion. So it’s not a straight line accretion over the loss of the loans.

Okay. So does that imply a large drop in PPP balances, Ron, coming in 1Q?

Again, that’ll be really dependent upon forgiveness, which, we expect forgiveness to pick up Q1 and Q2 compared to Q4 levels.

There’s about 25 million of remaining unamortized processing fees?

Ballpark, yes.

Ballpark, okay. And then if I shift to mortgage, if I add back the MSR valuation adjustment, the mortgage revenue declined around $14 million quarter-over-quarter. You guys called out in the slide deck, $1.8 million reduction in direct home lending expenses around 13%. Why has home lending cost not come down more in the direction of what’s capital revenue? Is there a more of a lag there?

Well, again, the comparison there would have been Q3 where the gain on sale margin was north of 5%. So it has nothing to do with the expense as expense is based off the volume. So the better comparison from an expense standpoint would be off of the volume, which declined slightly from Q3 to Q4, but still was elated up to $2.1 billion in the first quarter. I’d say that there is the pricing gains were over the top of any volume changes through revenue standpoint or expense that again, tied to the volume.

And then final question. So you guys have been active on store consolidations, clearly, plan is to remain active. Given that the Umpqua stores were such a unique part of the historical story, what’s the customer feedback then from the branches you guys have closed down so far?

Steven, it’s Cort. Our feedback to and date, obviously, you’re always going to disenfranchise some customers. So I don’t want to minimize that. We have had some customer loss. But quite frankly, I think we have reported this in prior quarters. We’ve actually done a heck of a job well beyond what we forecast when we look at store consolidations impact to deposits. Our retention rate is greatly higher than what we forecasted. And it’s primarily due to the outreach and our go to application, right. So we outreach every customer in a consolidator store or clothes store, we talked to them, we onboard them on go to, to get them digital mobile products that they need it. In some communities, we leave a high function ATM or something that’s pretty darn close to a full-service store plus Go-To. So the feedback has actually been better than you would expect for consolidating stores 5 to 10 miles away. Once again, it’s not to say that we don’t have some disenfranchised customers. As you know, I do have a phone in my office that is in every store, and any customer at any time can dial 8 on that phone and call me. And I’m being very, very transparent and truthful. I’ve had very few calls, I’m going to say, of the 60 or 70 stores we’ve closed since I’ve been sitting in the corner office, I’ve probably had less than 10, seriously less than 10 calls on our stores that are negative, I’ve probably had no while even 30 about the handling of that process, both from the associate experience and the lead back with technology.

This is Tory. Just real quick. I’ll give you a couple of statistics, what’s kind of interesting to support kind of the Go-To pieces. Our teller transactions are down 26% year-over-year, and our Go-To messaging is up 122%. So, there’s just a number of connections through Go-To messaging and it’s occurring. Some of that is just certainly kind of behavior and activity. But a lot of that is, to Cort’s point, us connecting with the Go-To banker as we consolidate a store.

Your next question comes from Brett Rabatin of the Hovde Group. Your line is open.

I wanted to ask a question around the reserve and just thinking about credit. We obviously haven’t had the need to make provisions for two quarters now, so there’s been some reserve release, and part of that’s the loan portfolio obviously hasn’t grown. It seems to me like if some of the more distressed portfolios continue to improve, that there would be a good argument for a solid amount of reserve release over the next few quarters. Can you just talk about maybe the qualitative factors that I use Moody’s, but just qualitative factors in the CECL reserve? And then just kind of thinking about reserve release as we go through the year, assuming things do improve and some of those more impacted portfolios.

Yes. Maybe just in terms of the end of it, yes, we see continued improving the forecast. We do -- we would expect to see the potential for some recapture or decline in the expected loss. Just frankly, the charge-offs haven’t been anywhere near where the model is expected. Now the volatility over the course of the past year has been one thing to try to use it up, this accounting standard in the same year. So we went to a baseline in March just gives consensus with lagged, not useful, move back to consensus. Again, some stability, which I’m sure everybody is very much looking forward to. Yes, there’s a potential for recapture. And again, it’s going to come down to the fact that the charge-offs just anywhere near what the models have predicted. Yes. Now I would say we’d expect as an industry, there should be a credit as an industry. It’s just -- we’re not seeing it. We’ve got the volatility we’ve had within our FinPac leasing portfolio, but that’s been usually covered by the reserves. So we feel good about that looking to that front.

Okay, and just thinking about the remaining deferrals. I mean, do you expect them to be active with a second round of PPP and seeing how are you managing these running deferrals in terms of our liquidity? What’s been the experience in terms of particularly the hotels and restaurant portfolio.

Brett, Frank Namdar. The deferral activity overall has really slowed down dramatically. There is not much going on right now. For -- most of the deferral activity is occurring within the residential space. And yes, I think we have one loan that is currently in process for deferral in third PPP loan, and they will be evaluated in that context. But to date, we’re just very pleased with, I’ll say, the cure rate of the deferral activity we’ve seen thus far.

Okay. And then maybe one last one, I mean, Cort, you were pretty optimistic that as we go through the year that Umpqua’s always been a growth story and that you were going to be able to grow. Would it be fair to assume that you think you’ll be able to replace the PPP loans? I guess I’m just trying to think about the portfolio at the end of ‘20 versus the end of ‘21. I mean, would your presumption be that it would be higher than it was at the end of ‘20, at the end of this year?

So I’m sorry, I said -- I’m sorry, Brett, asked the question. So what our -- I’ll call it, non-PPP portfolio to be bigger than it was going into this year. Is that what you asked?

No, I’m sorry, maybe I didn’t ask the question well, Cort. I’m just thinking about like replacing kind of the earning assets, so to speak. So $21.8 billion at the end of 4Q 2020 with the organic growth, can that replace essentially the PPP portfolio, is that rolls off this year?

Let me answer as best I can, I mean, our intent is to continue to grow the bank at the pace prior to pandemic that we used to exhibit on a link quarter basis seamless and very vibrancy. I’m not going to answer your question totally Brett, I’m going to tell you right now. And I’m not trying to, but we’ve seen a significant lift in our pipelines. Like Tory mentioned, there is, if you don’t convert a $3 billion pipeline to on balance sheet footings in 90 days, which is doesn’t happen, you know that, I mean these are commercial loans, and there’s some lag time. And we’re going to continue to do what we’ve always historically done and convert that into a fully integrated customer relationship. What I’d love to replace all of the PPP run off the new run off and grow, on top of that, well, heck, yeah, I’d love to, but we’re going to do what we’ve always done, due diligence our credit, and bring in the right customers work the PPP both first and second round, and we’re going to grow it at that, whatever that pace turns out to be. Sorry, I just I’d love to tell you what the number is. I can’t do it.

No, let me put you on the spot there. I just wanted to get a color on that. And that that was helpful. Thanks so much for all the color.

I appreciate to put on the spot. I love that.

Your next question comes from Matthew Clark of Piper Sandler. Your line is open.

Maybe getting back to the reserve question, if you think about your reserves on loans, HFI, ex-PPP and ex -- unfunded commitments, it’s about 1.64%. I mean, in a post-CECL world, I guess, where do you think that -- or where do you feel comfortable having that reserve bottom out, over the next year or two? And maybe set another way, what’s kind of the average reserve, you’re setting aside on new production, depending upon the mix, or at least the mix you expect to put on going forward?

Good question, Matt. And obviously, I can give you more probably ex-pandemic recession because CECL will be with us for the balance of our careers. But my guess would tell me I’d be back where we thought coming into ‘20 we’d be at, which was around 1%. Which if you think about a long-term horizon or trend on charge offs, it’s probably four to five times net charge offs on the basis 20 to 25 bps given the size and structure of our portfolio. So that’d be my gut for post returned to normal economic utopia, et cetera. We’ll see how it plays out.

Okay. Great. And then maybe -- I don’t -- I know you guys don’t isolate it in your slide deck and most other bank I don’t think do either but in terms of your office exposure. Can you just remind us what that exposure looks like, from a regional perspective and size perspective? And then, any updated kind of thoughts on the health of that portfolio.

Matt, it’s Frank. Yes, so the total office exposure that we have institutionally here is just under $400 million, the great majority of it -- the great majority of it, Southern California and kind of the Puget Sound region of Washington, so very good, very good markets per se that we are in. Again, no deferral activity arising out of that, what does it look like going forward? That’s a question asked all the time. And all that I can say is it will look different. There’s a school of thought that fewer people in offices but larger offices to accommodate, kind of, these hoteling-type concepts, so more to come on that as we move forward through the pandemic and beyond it. The hospitality portfolio continues to perform quite well. We’ve only got a couple, three or four properties that are on deferral, and at this point, the sponsorship behind those is quite strong and can continue to support those properties. Now with the extension of the CARES Act, I mean that helps us and other financial institutions dramatically in our ability to help these companies and sponsors continue to bridge the gap until the vaccine gets in plan, and we see some recovery there.

Matt, this is Tory. Let me just add one piece to that. I mean, our office portfolio, we’ve got very strong sponsorship, very low leverage, and we’re not looking to build a pipeline with office properties. So it’s -- we have -- as Frank said, we have $4 million but it’s not something we’re trying to increase at all.

Understood. Great. Thank you. And then last one for me, just on the pipeline, can you remind us, what’s the probability of a loan closing for it to be considered in a pipeline? And when you back tested, what’s the success rate of converting within the pipeline?

That’s it, that’s a very difficult question to answer because it’s unique for each line of business. So, depending on the line of business, there’s a different, really a different success rate and probability of closing. And a time line from beginning to end. It’s much quicker in our small multifamily business, where it can be 30 to 45 days. In the larger real estate space, it can be two to three months. In the C&I space, it could be everything from 30 days to 90 or 120. So just it really varies. When we look at the pipeline, there’s two ways we look at it and we look at it with a probability waiting and then unweighted. And so, kind of use a formula here as much data as we can to forecast growth for each month and each quarter. So this pipeline that I referenced earlier, I mean, there’s been a lot of growth. It’s spread out among -- all of the different lines of business with a heavier concentration in the C&I space. So I think we’ll see certainly some success and growth in Q1, and more so in Q2 and Q3 and Q4. So we’ll have, I think, our trajectory up as we go forward in the year.

And just curious, what’s that probability weighting, on a weighted basis?

I can’t give you an answer that is for across the entire pipeline. Right, I could drill down. I’ll have a front, I can drill down and try and do it by line of business.

That’s okay. I thought you had it. No worries.

No, I don’t have in front of me.

Your final question comes from Michael Young of Truist Securities.

Ron, you’ll have to forgive me, but I’m going to try to put a finer point on the maybe expense dollar amount. I think in the past, you’ve kind of alluded to maybe a 4Q run rate to exit the year. I know a lot of this is going to be variable based on actual mortgage production volume, given that we’re starting at such a high point. But as we think about the moving pieces, maybe to your original guidance, of 190 million or lower kind of in line with 3Q levels to start the year, then we’ve got to think about a $14 million reduction from the sale of Umpqua securities piece, you know, headed into 2Q, and then the bulk of the additional cost saves coming in the second half of the year for branch reductions plus potentially a return to more normalized mortgage volume. Seems like we could, you know, maybe exit the year in the fourth quarter at a much lower dollar run rate, maybe closer to 700 million to 710 million kind of annualized run rate as we exit the year? Is that there? Or are there pieces that I’m missing there?

I think you nailed it.

Okay. Well it was easier than I thought. And then maybe, Cort, just kind of high level, maybe just putting kind of a bow on all the communication and kind of objectives for the year. Could you just kind of really just tell us what you’re focused on what you hope to achieve this year now that kind of the -- hopefully, the fog of war has lifted a little bit and just what you’re focused on?

I actually appreciate it. That’s a great way to end up. I don’t know if they rank in necessarily an order, but first of all, executing on Next Gen 2.0, like we rolled out at the end of third quarter, which we’ve got great momentum on and probably hasn’t caused me a lot of worry, but I worry about everything so continuing to execute it on that, including the consolidations and the sale of UI, all those individual pieces would be probably the first priority. I think supporting Tory and his efforts, and Frank too, bringing that pipeline through and booking that, including the second round of PPP, and all the things we’re doing to support our communities, making sure they’ll be execute on that. I think the question that was asked a couple of times, what do we do with our excess capital? I appreciate Ron’s answers. We understand where your questions are coming from and spending some time, more time than we’ve probably spent in prior years because we’ve been able to actually use that excess capital for our organic growth. I understand where the questions are coming from. So we’re spending some time studying that and with all the answers that Ron gave you in his prepared remarks and answers to questions. And then quite frankly, I’m a big believer in looking out five or six quarters. So I’m already working on next year there. Where are we going to end up this year? Where do we have momentum? What do we need to do to continue? What do we need to get more efficient and more profitable? So I’ve already moved on to 2022, much maybe to some your chagrin, but we have great momentum right now. I feel very, very good. But the Next Gen 2.0 that excess capital and our optionality, but Tory has been able to do. So that’s a -- that’s how we look at it. That’s what I look at.

That was our final question. I will now return the call to Mr. Farnsworth for closing remarks.

Okay, I want to thank everyone for their interest Umpqua Holdings and attendance on the call today. This will conclude the call. Goodbye.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.