Umpqua Holdings' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.22.14 | About: Umpqua Holdings (UMPQ)

Umpqua Holdings Corporation (NASDAQ:UMPQ)

Q1 2014 Results Earnings Conference Call

April 22, 2014 1:00 PM ET

Executives

Ron Farnsworth - Chief Financial Officer

Ray Davis - President and CEO

Cort O’Haver - President, Commercial Banking

Greg Seibly - President, Consumer Banking

Mark Wardlow - Chief Credit Officer

Analysts

Steve Scinicariello - UBS

Joe Morford - RBC Capital Markets

Jeff Rulis - D.A. Davidson

Matthew Clark - Credit Suisse

Brett Rabatin - Sterne, Agee

Jacque Chimera - KBW

Operator

Please standby. Good day, and welcome to the Umpqua Holdings First Quarter Earnings Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Ron Farnsworth, Chief Financial Officer. Please go ahead, sir.

Ron Farnsworth

Okay. Thank you, Renee. Good morning, and thank you for joining us today as we discuss the results of operation for the first quarter of 2014 for Umpqua Holdings Corporation.

This presentation includes forward-looking statements, within the meaning of the Safe Harbor provisions for the Private Securities Litigation Reform Act of 1995, which management believes are a benefit to shareholders. These statements are necessarily subject to risk and uncertainty and actual results could differ materially from those that we discussed today due to certain risk factors including those set forth in our filings with the SEC. You should not place undue reliance on forward-looking statements. The company does not intend to correct or update any of the forward-looking statements that we make today.

With me this morning are Ray Davis, President and CEO of Umpqua Holdings Corporation; Cort O’Haver, President of Commercial Banking; Greg Seibly, President of Consumer Banking; and Mark Wardlow, our Chief Credit Officer. Cort, Greg and Mark will join us for the Q&A session.

A two-week rebroadcast of this call will be available two hours after the call by dialing 888-203-1112. This phone number and the access code are also noted in the earnings release we issued yesterday afternoon.

And I will now turn the call over to Ray Davis.

Ray Davis

Okay. Thanks, Ron. Good morning, everybody. As you can imagine, this past quarter has been a busy one for Umpqua as we completed the final steps of our merger with Sterling Financial.

Before we update you on the Umpqua Sterling combination, Ron and I will first talk on Umpqua’s first quarter results. For this past quarter, Umpqua Holdings reported operating earnings of $0.21 per diluted share or $24 million.

As a reminder, operating earnings are defined as earnings available to common shareholders before gains and losses on junior subordinated debentures carried at fair value and merger-related expenses both net of tax. The reduction from $0.25 per diluted share of $27.9 million of operating earnings reported in the fourth quarter related mostly to an unexpected -- to an expected softening of the mortgage market, two fewer days in the quarter, seasonal expenses and strong loan on lease growth which led to a higher provision for loan loss. In a minute, Ron will provide details of each.

Our total assets increased more than $200 million this past quarter mostly the result of strong deposit growth. We utilize those deposits to fund continued loan growth during the quarter as well as to increase our cash position as we prepared for our planned balance sheet restructuring shortly after close of our transaction.

Our organic loan growth was once again healthy with non-covered loans increasing by $97 million from December, offset by $41 million in sales for net growth of $57 million. I also want to note that overall loan pipeline has expanded this past quarter and is now almost $2 billion.

Our overall strategy are focusing on organic growth while making decisions that protect and position our net interest margin for any future changes and the interest rate environment continues to serve us well. As this quarter’s adjusted margin remains stable at 4.12%.

As Ron will discuss, actions we will be taking to rebalance the company’s overall interest rate sensitivity will position the company well through either a stable or rising interest rate scenario. As expected, overall mortgage loan production was down this past quarter. In response, management was quick to reduce companywide operating expense for the quarter which excluding merger-related expense was lower by 3.2% despite our higher seasonal payroll tax increase.

Credit quality remains strong even though we experienced a small increase in non-performing assets during the quarter. We expect this increase to be eliminated quickly in subsequent quarters this year.

The company’s capital position, pre and post close as well as after applying the effect of Basel I and III, remains strong, well capitalized and above our internal policy limits. And with this quarter’s dividend payment of $0.15 per share, our year-to-date payout ratio on operating earnings exceeded 70% with the yield currently above 3%.

Our highlight for the past few months was our completion of this Sterling merger which we’ll talk about in great detail following Ron’s comments on the first quarter. Now to Ron?

Ron Farnsworth

Okay. Thanks Ray. As we discussed last quarter, we intentionally increased our interest-bearing cash balances this quarter to provide us with maximum flexibility heading into the Sterling balance sheet restructuring. We did not purchase any securities this past quarter. Now that we closed the deal, we are restructuring the balance sheet as we speak and expect lower interest-bearing cash balances in future quarters as that access on balance sheet liquidity is utilized.

During the first quarter, our total commercial loan production was $257 million and our pipeline remains strong at $2 billion, up slightly from the fourth quarter. Between our classic bank loan growth and continued strong FinPac leasing growth, we expect solid continued organic loan growth moving forward.

FinPac generates $61 million of new leases during the quarter, up 15% quarter-over-quarter or three quarters in a row now. This reflects strategic growth initiative excluding an expansion into the eight paper channels we discussed over the last few quarters and is really starting to pick up momentum.

Total revenues for the quarter was $132.5 million, a decrease of $6 million or 4% from $138.5 million in the fourth quarter. This decline resulted mostly from two fewer days in the quarter, reducing net interest income by $2.4 million and lower home lending revenue driven mostly by the MSR income swing.

In the fourth quarter, we had a net gain of $3.1 million on the MSR while here in Q1, it was a net drop of $1 million or a total $4.1 million swing. Our adjusted margin was flat at 4.12%, noting a 4 basis point decline in non-covered loan yields that was offset by higher taxable investment yield and a continued reduction in our cost of interest-bearing deposit.

As for credit quality related cost, the non-covered provision for loan loss was $5.4 million with net charge-offs at $4 million. The provision was up $1.6 million from the fourth quarter related entirely the strong continued lease growth at FinPac.

Of the $5.4 million provision for the quarter, $4.9 million is related to FinPac with $500,000 for Umpqua Classic. Of the $4 million in net charge-off, $2.1 million related to FinPac with $1.9 million from Umpqua Classic. Within non-interest income, the largest move was in mortgage banking revenue, declining to $10.4 million this quarter.

Our home lending production declined 18% this quarter to $293 million in line with seasonal first quarter decline in years past. The gain on sale margin increased slightly to 2.87% this quarter related to stronger application volume hitting out of the quarter with a larger lock pipeline. That lock pipeline increased from $110 million in December to $180 million here in March.

A change in fair value of the MSR assets in Q4 to Q1 begin with a decline of $4.1 million driven mostly by the drop in long-term interest rates over the past three months. Based on the lower production volume, expenses in the home lending group declined $800,000 this quarter and will continue to make future adjustments as needed. The change in FDIC indemnification assets was a lower cost this quarter mostly on a related change in covered provision for loan losses.

As for expense this quarter, total non-interest expense included $6 million of merger cost related to the Sterling deal. Excluding merger-related cost, our expense level declined 3.4% from the fourth quarter, reflecting disciplined expense control heading into Q2. This decline related mostly from a drop in the other expense category.

The salaries and employee benefit expense increased related entirely to the seasonal payroll tax spike of $1 million, which just not recur for the rest of the year. The $800,000 decline in the home lending expense based on lower volumes discussed previously is reflected in the compensation and other expense categories.

The decline in other expense this quarter related primarily to lower marketing and workout related cost. One other note on merger expenses as it relates to the non-GAAP non-operating disclosure on Page 7 of the earnings release.

The majority of merger expense is not tax deductible until the deal closes, making the risk merger expense of $6 million, $5.1 million net of tax. And last, our capital is strong and in line with our projections when we announced the deal last fall. I’ll talk more about that in a few minutes.

Now, I will turn the call back to Ray to discuss the Sterling integration.

Ray Davis

Okay. Thanks, Ron. Last week, we were pleased to announce the completion of the Sterling merger, a transaction we’ve been working now for well over a year. As you might be aware, Umpqua begins integration planning immediately following announcement, which was September 11th of last year.

Those detailed integration plans span hundreds of pages, covering all facets and areas of the banks and are based on management’s seasoned, historical experience, guiding successful integrations. Due to this planning from pre-announcement to today, we have the following details to share with you.

The go-forward organization and management structure is finalized and in place. We have welcomed four new directors to the Board of Directors. Our near-term, interim and intermediate term conversion plans are finalized. Internally, we developed an innovative cross-bank transaction platform that allows us to serve customers at one another stores prior to system conversion.

System conversion activities are scheduled throughout the remainder of this year concluding with the core system conversion plan for early first quarter of 2015. Signage and branding has been changed out to Umpqua as we speak and is expected to be completed over the next 45 to 60 days.

Policy integration is complete. We are restructuring the required balance sheet as Ron mentioned in line with our announcement last September. The required Department of Justice related divestiture will be completed in June. Fair value estimates from last fall are being finalized here in Q2 and the estimated tangible book value dilution is expected to be in line with our announcement at 4.5%.

Organic growth will continue. We have the right people in place and have created specific goals by group and region. During our integration period, our focus will remain on organic growth regardless of the upcoming conversions. Store closure planning is underway with completion expected later this year.

We filed the S-3 affiliate share registration statement as a condition of closing the deal. We have been in contact and will continue to coordinate with our private equity shareholders as they assess their ownership options. We fully expect, however, that should they decide to sell shares they would so in a way to cause us little disruption or volatility to the stock as possible.

After six months of detailed review, we are very comfortable that we should exceed our $87 million synergy target following full conversion integration next year and look forward to reporting progress quarter going forward.

Given this, we are comfortable with our operating earnings per share accretion of at least 12% for 2015 following our final conversions. We are confident that we will manage this transformational merger successfully to position Umpqua for growth and increasing shareholder returns.

I’m now going to turn the call back to Ron to cover some deal related numbers then we will take your questions.

Ron Farnsworth

Okay. Thanks, Rick. We will be finalizing the day-one fair value adjustments this quarter but I can provide some high-level estimates this morning. First off, the interest rate environment today is very similar to where it was when we announced the deal last September. So big picture of the adjustments are in the range and will be included in our deal presentation.

The balance sheet restructuring is fairly simple. We are paying off the higher cost repurchase agreement borrowings, funding that through sale of lower yield and securities. This will shrink the balance sheet by approximately $550 million. We’ll have the required divestiture of six branches on the southern Oregon coast completed in June, which will include approximately $100 million in loans and $230 million in deposits or a net drop in cash of $130 million.

The discount on sale will be incorporated into our overall credit market. So there is no expected change to tangible book from this. Our combined loan deposit ratio is estimated at 95% in line with our long-term goals. With this transaction, total theory will exceed our risk followings. Accordingly, we will be focused on rebalancing the total loan portfolio over the next few years.

These strategies included stronger initiatives to lift consumer and small business lending totals, continued focus on our recent subsidiary as well as realization of our C&I concentrated pipeline and continued expansion in the San Francisco Bay area in Southern California.

The finalization of the day-one fair value adjustments, I’ll note a portion of the credit related discount will be considered non-accretable attached to classified assets for projected future potential losses. The balance of the credit discount will be called accretable meaning it will be accretive to interest income undercurrent accounting standards, offset by future provision for loan losses with the projected losses to occur.

This was intentionally excluded from our announced 12% operating earnings per share accretion estimates following integration and achievement of all costs synergies next year. Also given this credit discount netted against loans versus being accounted for in the loan loss reserve, our allowance will decline on the face of the balance sheet to approximately 60 basis points here in Q2.

However, when you gross backup for this credit discount, the combined reserve will really be slightly above 2%. As Ray mentioned, we are comfortable with the cost synergy targets and we’ll report progress on all of these fronts over the next several quarters. We have conversions plan through the remainder this year, including with the core system conversion in the first quarter of 2013.

We truly take the best of the best approach here and we will end with robust and scalable technology solutions to support future growth and regulatory requirements for a bank north of $20 billion in assets. All of the larger conversions will include, first, moving Sterling retail customers to Umpqua’s upcoming digital customer platform later this year.

Second, moving the Umpqua core system to Sterling’s fidelity platform by Q1 of next year. Third, we will implement a very robust commercial loan processing system for both entities by Q1 of next year. And fourth, we will significantly upgrade our combined mortgage loans servicing platforms ranging from late this year to Q1 of next year.

Regarding the overall deal-related costs, we expect the portion to shift from other liability fair value adjustments which goes directly to goodwill into slightly higher merger expense as compared to our original estimate last fall. It is important to note there is no change to the ending tangible book value or overall deal metrics just to change in geography in the financial statement. And we will update you on this over the next two quarters.

The original tangible book value per share dilution estimate of 4.5% is still good. And our pro forma closing capital ratios are all consistent with our announcement last fall. This leads us with excess capital above our internal policy limits, which are generally 150 basis points above well capitalized status.

I need to remind everyone that we structured the deal not with 2014 Basel I capital ratios in mind, but rather looking forward to 2015 when Basel III comes into affect. Under Basel III, we will have three primary changes. First, 75% of our $460 million in combined trust preferred borrowings will shift from Tier 1 to Tier 2 capital in 2015, with 100% transferred in 2016.

Second, we are picking up the Sterling net operating loss deferred tax assets, which currently is partially including in Tier 1 capital. Yet under Basel III, it’s completely excluded from Tier 1 capital. And third, there will be an expected increase in the risk-weighted asset calculations for the denominator of the regulatory ratios, expected to decrease those regulatory capital ratios, which use risk-weighted assets as the denominator by 40 to 50 basis points.

Our Tier 1 common ratio should be approximately 11% for the remainder of this year, declining to the low 10% range under Basel III next year, then increasing based on net future retained earnings.

Our total risk-based capital ratio should be in the high 14% range for the remainder of this year, declining to the mid 13% range under Basel III next year, then increasing again based on net future retained earnings. These Basel III estimates put our excess capital at approximately $150 million early next year, increasing to north of $200 million by the end of next year. We plan to utilize that excess capital in the future through either dividends, share repurchase, or acquisitions guess as we have done successfully over the last several years.

And with that, we will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Steve Scinicariello. Please go ahead sir.

Steve Scinicariello - UBS

Hi, guys.

Ray Davis

Good morning.

Steve Scinicariello - UBS

Just a couple of quick questions. First up on the Sterling kind of integration, as we think about kind of you exceeding your cost synergy or synergies in general on that front, just kind of curious what the pace of that improvement might look like. Is it going to be more heavily weighted a couple of quarters out, or should we start to see a gradual improvement right out of the gate? Just kind of looking to get some color on that pace of synergy realization.

Ray Davis

You will see some of that right out of the gate, but really the ramp up over the course of the year as I talked about with our conversion schedules of course this year into early next year, our goal will be coming out of the core conversion in Q1 of next year. We will be firing on all cylinders.

Steve Scinicariello - UBS

Beautiful. And then as you look ahead in terms of kind of future loan growth drivers and opportunities that you have, I mean, clearly, you have great opportunities across many lines. Any kind of things you are excited about in terms of future opportunities to even kind of accelerate the loan growth even from here?

Cort O'Haver

Hi, Steve, Cort. Let me tell you what I think are the greatest opportunities, we’ve really got five. Ron will hit on the companies, so great. One is Southern California. So in the combined company, we now have four CBCs in Oxnard, Encino, Glendale, and Newport Beach, which Umpqua Bank presently did not have. Those CBCs have been opened since mid last year. We are staffed and we are growing in those markets. We are additionally looking at San Diego in the South Bay, Long Beach area.

That’s a great opportunity to the combined company too. We are continuing to see great market share gains in our metropolitan markets, so specifically Seattle, Portland and the Bay area which is the East Bay in San Francisco. Good job growth there. Good stable home pricing. And we are growing through our annual cycle with our customer and we are seeing good financial performance with our customers in those markets which we indicate there are no negative trends for the continued success we’ve had. That will be two.

Our Umpqua Bank equipment and lease finance group which call FinPac. Like Ron said, we have great increase in our A-paper market. We do not anticipate that’s going to decline. However, we’ve done something, we made that announcement. We built a core equipment finance, more traditional equipment finance group inside FinPac that will service the combined companies customers.

So both our customers and Sterling customers will not have access to a more traditional bank these products and there is a lot of leasing through our commercials customers throughout the entire combined bank, that will be third agro business. We had a focus. We had our expertise in agribusiness. Out templates in CBC, which has been open just a little over year is our leading growth CBC now in the company in Umpqua today with the addition of Sterling. We are going to have offices now in Boise and Spokane and at least in Washington which is heavily influenced by ag. I think we can really exploit those markets.

And then the last one would be international banking, we have a very robust international banking group at Sterling, or should be Umpqua. Combined at the companies, we are on all the three largest port cities in the West Coast, a lot of our customers, combined customers, the international buy and sell. So whether it’s trade finance, ForEx, all of those great products and services now we can sell through are sterling side. So those are five of the major, probably got 10 more, but those are the five major areas that I think we are going to continue to develop over the next couple of years.

Steve Scinicariello - UBS

Perfect. Thank you so much for that excellent color.

Cort O'Haver

Excellent. Thanks, Steve.

Operator

Thank you. And we will take our next question from Joe Morford with RBC Capital Markets. Please go ahead.

Joe Morford - RBC Capital Markets

Thanks, and good morning everyone.

Ray Davis

Good morning, Joe.

Joe Morford - RBC Capital Markets

I guess on the cost savings comments again, I would be curious kind of what -- in what areas do you see that you could be exceeding your targets, or what gives you confidence that certain opportunities could be greater than what you initially targeted?

Ray Davis

Joe, it’s Ray. I think it has to do, it’s in all areas. Quite frankly, I would say the biggest chunk of it obviously has to do with some of the back -- our back room operations being buildings, facilities. Once you announce the deal, once you get into it, you start to uncover potential opportunities and that’s exactly why this is taking place. So everything that we have worked on to-date take advantage of the scale and to leverage up what we have in the case that we’re in very good position.

Joe Morford - RBC Capital Markets

Okay. And then the other question was just get a little better understanding about how you are going to manage this concentration of CRE going forward. You talked about being over your targets. I mean, how do you go about taking that down? Are you going to be actively selling loans? Are you ceasing originations or deemphasizing? And is Sterling's multi-family originations included as part of that CRE concentration?

Ray Davis

To answer the last part of that question, absolutely it’s included in the commercial real estate concentration, but I will tell you something, Joe, I think it’s a combination of everything. Yes, we are going to multi-family, we .look forward to that becoming a lower percentage of the total portfolio over a period of time. There is not going to be a light switch as you can image. We are not going to through this which and all of a sudden everything in balance. It’s going to take us time. Dave DePillo, our Executive Vice President who runs multi-family in our Southern California region does an excellent job on this. We have got great credit quality coming out of multi-family and great yields. And yet, we do want to balance that little bit more.

So there will be some as we have done over the last or has Sterling has done over the last few quarters been selling some loans I think somewhere in the north of $125 million, somewhere $125 million. We probably will continue with that as we continue to grow first under Greg’s leadership, our consumer and small business lending and this is an area that quite frankly that Umpqua believe or not has not been an all star performer in our consumer and small business lending, and this is an area that Greg now taking over the consumer banking aspect of our company. We have a real focus on it. I would add this to one of the areas, five areas that Cort brought up is another area for us to help rebalance this balance sheet.

And then of course, our move and our focus and everything that Cort just mentioned to you Joe is we have been focused on C&I as everybody else has been. However, I will caution you that we can make 50 C&I loans and two CRE loans and we would add a balance again. So I don’t think this is going to be a straight line gradual down, I think it’s going to be a little up, two steps back, one step forward, two steps back, but the game plan over a period of time is to continue to roll that back to a more manageable number while C&I consumer small business equitably seeing pick it up.

Joe Morford - RBC Capital Markets

Okay. That’s really helpful, Ray. I appreciate the insight.

Ray Davis

You bet.

Operator

And we will take our next question from Jeff Rulis with D.A. Davidson. Please go ahead.

Jeff Rulis - D.A. Davidson

Thanks. Good morning.

Ray Davis

Good morning, Jeff.

Jeff Rulis - D.A. Davidson

A question on maybe for Greg, just interested in the performance of Sterling in Q1, perhaps if you could touch on loans growth in the quarter, how credit quality trended, any other key factors there?

Ron Farnsworth

Jeff, this is Ron. Certainly Q1 results were in line with our expectations and really the key on that is the balance sheet. That’s right in line with what we expected last fall and talked earlier about fair value adjustments being pretty much in line with what we expected and no change in our tangible book dilution. So I think from that standpoint, you have seen -- we expected to see a drop in mortgage, a seasonal job in mortgage. You have seen that for several banks including us, same with Sterling, but overall the key is the balance sheet we acquired last Friday night and that's right in line with what we expected and we will be reporting on those results going forward next quarter.

Jeff Rulis - D.A. Davidson

Ron, maybe you could give me just the totals then, and if you’re not going to talk about growth specifically, what exactly point to point are you bringing over as a Friday backing out the adjustments that you talked about in terms of shrinking the balance sheet?

Ron Farnsworth

I think, Jeff, you can look at the 8-K we filed on Friday night included an updated pro forma balance sheet as of 12/31, and again right in line with what we had expected it to be. So total assets is $22 billion on the combined basis, total loans of a little over $15 billion, total deposits of a little over $16 billion. And nothing is changing on the balance sheet we've required other than we are reducing it as we deleverage off the repurchase agreements and fund that deleverage with the sell of low yielding, lower coupon investment securities.

Jeff Rulis - D.A. Davidson

Okay, thanks. And maybe moving on to the loan sale gains, how does that compare with Q4, and maybe you could touch on going forward, is this a practice that you intend to increase or reduce?

Ron Farnsworth

Are you referring to mortgage or gain on sale?

Jeff Rulis - D.A. Davidson

On the -- no, the $41 million that was in the quarter that netted total loan growth?

Ron Farnsworth

I think, in general, very small in terms of the gain on sale included in the quarter -- for the quarter results. It’s going to be continual process as you've seen over the last four, five quarters but nothing that's going to move the needle in terms of the bottom line impact.

Jeff Rulis - D.A. Davidson

Okay. And just lastly, I guess as you put these two organizations together or have interested in the mortgage banking outlook for the combined company, and based on what you saw in Q1 sort of some seasonal impact, but maybe some color on what do you expect going forward?

Ron Farnsworth

Yes, definitely seasonal impact in Q1 and we've seen that in Q1 for years past I guess with the exception of Q1 of last year which was heavily influenced by record low interest rates in the finance activity. But I did mention in my comments earlier, our application and lock pipelines increased whether substantially from December to March, that was the case also with Sterling and we definitely expect Q2 to see an uplift in terms of mortgage production and contribution to the bottom line as we see in Q2 in years past.

Jeff Rulis - D.A. Davidson

Okay. Thanks Ron.

Ron Farnsworth

Thanks.

Operator

And we'll take our next question from Matthew Clark with Credit Suisse. Please go ahead.

Matthew Clark - Credit Suisse

Hi, good morning, guys.

Ron Farnsworth

Good morning, Matt.

Matthew Clark - Credit Suisse

You talked about commercial real estate on a combined basis being above your risk tolerance. I assume you're measuring that relative to capital, but maybe also relative to be overall portfolio mix. I'm just trying to get a sense for what your thresholds are in getting to kind of the magnitude in dollars as to what we might be talking about here?

Ron Farnsworth

Again, as Ray talked about earlier, you're not going to see any significant changes. It's not a light switch overnight. This is going to be over the course of a couple of years and it's primarily going to be occurred through growth in other segments of the portfolios. So the mix is naturally declined in terms of percentages. But in terms of commercial real estate and reference to capital, we want that to be a bit under 300%, right now it will be a bit over. Again that will naturally play itself out over the course of the next couple of years, same with the overall real estate concentration as a percentage of the loan portfolio. Today Umpqua classic is around 75 here on a combined basis, we will be up closer to 80 again, that will naturally decline over the coming couple of years with a couple of things. As Cort mentioned earlier, continued growth with our leasing product FinPac and then also continued consumer and small business lending. So that will play over a couple of years but we will get there.

Matthew Clark - Credit Suisse

And then if you look out -- well, I guess maybe within that portfolio and also outside of it, I guess when you overlay the two books of business, is there any -- is there an amount that where you might have some customer overlap or any other kind of concentrations of some vertical in our industry?

Ron Farnsworth

Nothing significant.

Matthew Clark - Credit Suisse

Okay. And then lastly with the mortgage platform, maybe just some additional color there. When you look at the two platforms, I guess can you give us a sense for how efficient staffers is versus yours and what do you think you can do on a combined basis?

Ron Farnsworth

Definitely, we’ve had a bit more technology around our secondary platform in terms of the overall production platform. You are going to see those on a combined basis lead to efficiencies again driven a lot by technology. And some of the secondary execution we've had over the past year.

Matthew Clark - Credit Suisse

Okay. But anything -- I guess is there any material difference between how efficient you might be in operating that business versus them?

Ron Farnsworth

There has been historically, we've had a lower efficiency ratio within that business and that's what we'll be driving towards and again it’s message coming to our platform here in short order.

Matthew Clark - Credit Suisse

Okay, thanks.

Operator

And Brett Rabatin with Sterne, Agee.

Brett Rabatin - Sterne, Agee

Hi. Good morning gentlemen.

Ron Farnsworth

Good morning.

Brett Rabatin - Sterne, Agee

I wanted to go back to mortgage for a second. Can you guys give us any color around what's Sterling did in the first quarter in terms of just so we can think about sort of their seasonality in 1Q, what they did in terms of your production or gain on sale in the first quarter?

Ron Farnsworth

Yeah, it had been consistent. The Q4 to Q1 decline in software, Umpqua Classic here in our Q1 results would have been relative consistent with Sterling.

Brett Rabatin - Sterne, Agee

Okay. And then just going back to the commercial real estate in the risk policy. How much either dollar basis or how do you want to do it does commercial real estate exceed their current risk policy by?

Ron Farnsworth

Total commercial real estate -- and when we define that CRE to capital, that regulatory measure that relates to in the numerator here, investor CRE, multi-family, it excludes C&I and owner occupied series. And that standpoint that's roughly $0.5 billion, which is very manageable over the next couple of years.

Brett Rabatin - Sterne, Agee

Okay. And I would assume this would mean that you're going to put the combined franchise and basically sell all of the multi-family production you guys do and can you give us any thoughts on sort of what the pro forma outlook for that might be?

Ron Farnsworth

I think there will be a dangerous assumption but there is no lending that we're going to stop or slow down. We'll have the ability to manage this in the mix overtime just with all the higher growth in certain other areas. So I think from that standpoint again the comments we expect this to play out over the next couple of years and be very achievable.

Brett Rabatin - Sterne, Agee

No, I'm not suggesting your slowdown is certainly production of multi-family, just that you might not keep any on the balance sheet, you would be sellers on it as opposed to putting it in your portfolio?

Ray Davis

Yeah, Brett, it's Ray. That's the possibility, that's an option we have open to us. Those decisions have been finalized but we are assessing the portfolio, all aspects of our portfolio actually not just multi-family of where, when and how is the best way to rebalance. So little pretty mature for us to speculate on just exactly what that means.

Brett Rabatin - Sterne, Agee

Okay. And then just last one around just a loan growth in the first quarter, you gave some color on a couple of things. But I guess I was surprised you didn’t have stronger growth in commercial or some of the other portfolios didn't grow as much as maybe I was thinking. Was there anything that impacted sort of the first quarter was the merger pending was that maybe distraction or maybe anticipated or any thoughts on just the growth in 1Q?

Greg Seibly

On the first quarter -- first of all, we are seasonal. We have some seasonal borrowings in our first quarter and we experience that again in our total, which is what you see. So that was not unexpected. We took the opportunity in the first quarter to sell some SBA and some other agent in deals and we have worked pretty hard in the last couple of years at forming an agent group that will allow us to grow with our customers. So those were all issues that we chose or strategies we chose to exercise in the first quarter.

Relative to production, we have shifted the focus like Ron and Ray have talked about the C&I. So that kind of work its way through but our production is good and strong. Our pipeline grew in the first quarter which is their own, which is traditionally where it's been by the beginning of the second quarter. So we feel very good about that. Its’ a lot more concentrated to the C&I, which is a great think for us to have message to our lenders and who is working its way through the pipelines. We’re very comfortable on that.

We also had very good loan growth in other areas of the bank, which I think is worth noting. We have consumers and small business were up, leasing was up. You saw that private banking had a good very strong first quarter. So all the other loan centers in the bank had some very strong growth. Once again, we had anticipated that and we were very unpleased to see they all hit on all cylinders.

Ray Davis

And -- Brett this is Ray. You are never going to hear us talk about any merger of us taken eye after ball or because of merger integration, No. Our focus, I think we got the talent here that we built up over several years. And of course, with the integration of Sterling, it just gets stronger. So you’ll never hear use conversion or integration as an excuse to anything.

Brett Rabatin - Sterne, Agee

Okay. Great. Thanks for the color.

Ray Davis

Okay. Thanks Brett.

Operator

(Operator Instructions) We’ll take our next question from Jacque Chimera with KBW. Please go ahead.

Jacque Chimera - KBW

Hi, good morning everyone.

Ray Davis

Hi Jacque.

Jacque Chimera - KBW

Turning this impact and its impact that it's having on the provision. If I wrote this down correctly, is it right that $4.9 million of the provision was taken on $61 million generation of new loans?

Ray Davis

It was on -- it's on actually a couple of quarters production for FinPac. So you've seen significant ramp up in growth over the last several quarters. That’s really phase in order the course, two quarter was funding and so yeah, $4.9 million over $5.4 was related to FinPac and we’ve also seen 15% growth in their production for three quarters in a row.

Jacque Chimera - KBW

Okay, so was some of the $4.9 million related to other fundings in other quarters, then?

Ray Davis

Would have been small pay -- small portion of that would have been payout for Q4.

Jacque Chimera - KBW

Okay. And is the majority of that now A paper, or is some of that provisioning on continued B and C generation?

Ray Davis

You have continued B and C generation and those balances are flat to up just slightly from what they were at the date of acquisition last summer. But the vast majority of that is related to A paper.

Jacque Chimera - KBW

Okay. So is it safe to assume, then, that that's a good -- assuming the generation continues at the level that it was or even exceeds it in the future quarters, is that a safe provision assumption to assume?

Ray Davis

Within a range, yeah.

Jacque Chimera - KBW

Okay. And then secondly, just looking two of the small business, I feel like you've been focusing on the potential for growth there a little bit on the call. Are you looking to take market share, or are you seeing an increase in demand expectations throughout the California market?

Ray Davis

No, I think it’s a little of both. I think there is no question about it. Umpqua's brand showing up in new markets, Idaho, Eastern Washington, Oregon, Southern California is stronger in the Greater Bay area due to the Sonoma operations that’s going in. The fact that we are new to the market is definitely going to give us opportunity to take market share. But we also count on new additional growth as well.

Jacque Chimera - KBW

Okay, so a little bit of both.

Ray Davis

Yeah. That’s right, Jacque.

Jacque Chimera - KBW

And then just one last one, I wondered if you could give us just kind of a general example of some of the things you're putting into place to -- obviously, you have two very different brands that you are merging into one, and I know that you’ve had a great success in past mergers that you've completed. But just things that you're going to put into place to retrain all of the deposit customers that you're bringing on.

Ray Davis

To retrain the deposit customers?

Jacque Chimera - KBW

I'm sorry, I have a terrible cold. To retain.

Ray Davis

Retain, I’m sorry.

Jacque Chimera - KBW

I'm sorry. I'm so stuffed up.

Ray Davis

Sure. I got it. Well, I think there is number of things. First one is, I think the reputation of both companies is very strong. So, I don’t think there’s anybody making a move to leave. I think we obviously have monitored this, I think in past integrations. In fact, I think we even committed somewhere on the line that we expect 8% runoff, 4% runoff and you didn’t hear us talk about that on this particular transaction. We don’t expect at all. In fact, I can tell you of our first day, we’ve actually seen a ramp up.

So, I don’t -- so that’s one aspect. I mean, the company’s reputations are solid. The fear factor out here is very small. And as I mentioned also, we will be integrating the Umpqua customer into the Sterling systems, core systems, so it will be the Umpqua people that go through that. And we think Umpqua has done a pretty good job of educating our clients on that.

Second thing is under Cort and Greg's leadership, we've created a customer retention group under an Executive Vice President out of the Puget Sound area, Danielle Burd, who has headed up -- keep our eye on, if there’s any smoke for migration out of the bank. We want to know and what we are doing about it. So we have a concentrated focus on that. But I can say right now, we do not expect any significant, if any at all, runoff and deposits or loans due to the conversion.

Jacque Chimera - KBW

Okay. Great. Thank you for the color. That was very helpful.

Ray Davis

Well, thank you.

Operator

Thank you. And we have a follow-up question from Brett Rabatin. Please go ahead.

Brett Rabatin - Sterne, Agee

Yeah. Hi. I just wanted to follow up on the synergies, and you mentioned exceeding the $87 million. Can you maybe, Ron, go through some of the areas where you've found some additional opportunities or maybe give us a little more color around exceeding the synergies you originally laid out when you announced the deal?

Ray Davis

Hey, Brett. I think Ray mentioned that just a couple of minutes to go but it really is across the board. So every major category, if you were to bucketize the overall cost synergies, targets we announced last fall, we are seeing that across the board in terms of higher level potential and we feel comfortable with exceeding that $7 million overall target. It ranges from technology to occupancy, be it back office and/or door stores to back office system, even consolidation of select regulatory back down. The platforms in the back office, so it’s really across the board.

Brett Rabatin - Sterne, Agee

Okay. Sorry, try to repeat the question.

Ray Davis

It’s okay. That’s right. Brett, this is Ray. It’s a good question. The one thing that as we look at this whole integration and the one thing that we’ve talked about extensively here is this is an incredible opportunity for this organization become as efficient s possible, I mean, just incredible. And what we do not want to do and what we will not do is to look back afterwards and say, gee whiz, I wish six months ago we had done this.

We’re going to do what we have to do as we go forward in a very proactive way. And after we started peeling back the onion, so to speak after the announcement on both sides of the balance sheet if you will. Umpqua and Sterling, we did discover or have come across that we believe very stronger, we’re going to see these numbers and we feel good about it.

Brett Rabatin - Sterne, Agee

Okay. Thanks guys.

Ray Davis

Brett, thank you.

Operator

It appears we have no further questions at this time. I'd like to turn the conference back to the speakers for any additional or closing remarks.

Ray Davis

Okay. Thanks, Renee. This will conclude the call. I want to thank everyone and their interest in Umpqua Holdings and attendance today. Again, this will conclude the call. Goodbye.

Operator

That does conclude today's presentation. We thank you for your participation.

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