Columbia Banking System, Inc. (COLB) Q2 2013 Earnings Report, Transcript and Summary

Good day, and welcome to the Umpqua Holdings Q2 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Ron Farnsworth, Chief Financial Officer of Umpqua. Please go ahead sir.

Excellent. Thank you, Matt. Good morning and thank you for joining us today as we discuss the results of operations for the second quarter of 2013 for Umpqua Holdings Corporation. In reviewing the company's prospects today, we will make forward-looking statements, which are provided under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties, and our actual results may differ materially from those that we anticipate and predict here today. We encourage you to review the Risk Factors stated in the Company's 10-K, 10-Qs and other reports filed with the SEC, and we caution you not to 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; Mark Wardlow, our Chief Credit Officer; and Cort O'Haver, our Head of Commercial Banking. Mark and Cort 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. I'll now turn the call over to Ray Davis.

Good morning. For the second quarter of 2013 Umpqua Holdings reported operating earnings of $0.24 per diluted share, that's compared to $0.21 reported for the same quarter one year ago and $0.22 reported for the first quarter of 2013. The quarter's performance highlights were continued strong loan growth with total production exceeding $320 million, non-covered loans grew $123.9 million. Excluding non-covered charge-off of $4.6 million and the sale of $32.4 million of government guaranteed loans, loan grew over $160 million or 10% on an annualized basis. Our mortgage banking division reported another solid quarter in home loan production with total volume of $599 million resulting in mortgage banking revenue of $24.3 million. We were also pleased to see a higher percentage of purchased loans closed during the quarter, which bodes very well for the rest of 2013. Our non-recurring assets continue to shrink and have a total volume of $68 million or 0.6 of total assets. The progress here has had a cognitive effect on this past quarter's loan loss provision, which also continued to benefit from strong recoveries of $2.8 million for the period. During the quarter, we were pleased to increase our dividend to $0.15 per common share as well as announce a $0.05 special dividend for the period. Our shareholder dividend payout ratio now stands at 68% year-to-date and at quarter-end our dividend yield ended at 4%. Management will continue to use all available options to continue to manage our capital levels that are consistent with new capital requirements and to ensure capital is available for strategic opportunities that may come our way. This past quarter we, in fact, acted on one such opportunity, the acquisition of one of the premier equipment leasing companies in the country, Financial Pacific Leasing. This transaction announced in June officially closed on July 1st, 2013. As we've reported, this transaction comes to Umpqua with many positives, including immediate earnings accretion of at least 14%, an estimated 35 basis point improvement in our total net interest margin, another earning asset channel for Umpqua and a meaningful alternative for Umpqua clients and prospects for significant incremental growth as FinPac moves into more A and B lease paper production. We couldn't be more pleased with this new addition, which is led by an extremely knowledgeable team of professionals. I'll now turn it back to Ron who will give details on our financials.

Okay. Thanks, Ray. Starting with the balance sheet, our interest bearing cash balance has increased 17% as planned rolling out of the bond portfolio as we haven't bought bonds this year given the poor market returns with significant price and extension risk. The bond portfolio declined 13% this quarter all from maturities and monthly MBS cash flows. Even now after the recent bond market selloff, the average life of the portfolio is just three years with minimal price risk and increasing interest rate scenarios. For the recent 100 basis point increase in rates, our portfolio of decline in value was just 1.5% this quarter, reflecting the short structure of the underlying collateral. The portfolio was priced at par at quarter-end as reflected in equity. We expect approximately $70 million a month to roll from bonds to cash in the third quarter and we'll not be buying bonds anytime soon again given the poor risk reward profile, and our ability to redeploy those funds into loans and leases. Bottom-line, Umpqua Holdings can be better positioned for a rising interest rate environment. Again, our cash balances increased as planned during the quarter and then on July 1st, we used $367 million of the cash with the completion of the FinPac acquisition both for the deal value and the payout for borrowings. More to come on the FinPac transaction later. On top of the 2% net growth in non-covered loan balances, we sold $32 million of SBA loans for a small gain pushing gross loan growth to $160 million for the quarter. On the deposit side, the decline this quarter was entirely temporary as normal monthly ACH inflows list on July 1st rather than June 28th. Taking this into consideration, deposits were flat for the quarter. During the second quarter, our total commercial…

Okay. Just a couple of quick updates. Our new San Francisco bank store is now scheduled to open in late August, which has been augmented with additions to our work management team, commercial vendors, as well as our store team in San Francisco, which is currently engaged with Umpqua's unique training program. We will also be opening our new Novato, California store and commercial banking center later this month. And finally, we have opened our Templeton, California bank store and agricultural commercial banking center, which has already started to pose good numbers. Needless to say we remained positive on our earning asset growth prospects and new bank store expansion. To summarize, we have and we will continue to effectively manage our capital on which you've seen us pull two significant leverage over this past quarter benefiting shareholders. The balance sheet has never been better positioned for raising rising interest rate environment and as Ron said, expense control is still well in hand. We will now take your questions.

(Operator Instructions) And at this time, we will take a question from Steven Alexopoulos with JP Morgan.

I wanted to follow-up first regarding 14% accretion assumption. Ron, I was hoping if you could give us may be the balance of the loans you're going to get at fair value, may be any incremental fee revenue or expenses tied to the transaction?

Sure, you bet. So, fair value of the loan portfolio on July 1st is approximately $260 million. We're expecting very near-term that will kick off about $12 million in interest income, roughly $3.5 million of provision, about $1 million non-interest income, and then $3.5 million to $4 million expense I referenced earlier that all boils down to 14% earnings per share accretion, which is roughly a little over $0.02 so in the third quarter.

Excellent, very good color. Thank you. On capital, given the pro forma levels you spoke of any change to your thoughts around buybacks and are there many of the deals out there like of impact that will be good for you guys?

Steven, its Ray. We continue to look. We continue to take advantage of opportunities that come our way. We're constantly exploring opportunities that we uncover ourselves as well as entertain enquires from others. So, we don't rule anything out at this stage.

Ray, do really a hold off on the buyback just given this seems to be a better use of capital at the time if you could find more deal like this?

I think that goes without saying. The buyback is certainly an option, but that's one we would be cautious on using especially as we see what is potentially available to us in the future.

Okay. And then just on the loan growth, with period end loans up a lot more than the average balance, did you see a lot of the growth in the back half of the quarter and should we expect to see more of a follow through in 3Q?

Hi. This is Cort. We saw actually loan growth started we have the last call; we started to see loan growth mid to late April and is pretty consistent throughout the quarter. The mid ones grew by 5% more than outstanding. So, we got some tail win there and we're still continuing to see the loan demand, pipeline is at $2 billion, over $2 billion, which is fairly robust and based on the sales cycle we look for a very good strong third quarter.

Cort, maybe I could follow-up, growth has been pretty flat in the largest loan segment, which is non-owner occupied CRE. Could talk about what you're seeing there and do you expect any improvement in the second half?

Yeah, that was flat in the quarter and that's a fairly aggressively priced segment of our business. We actually declined slightly in the first quarter. We got a little more aggressive on rates in the third quarter. We're still trying to be as aggressive as we can in floating rates, which you will see in the commercial loans and lines of credit to be up pretty good and continue to show real good growth in commercial loans. If we got a strong relationship with the customer, because we are a relationship one we will get aggressive on the owner-occupied real estate and it's an aggressive piece of business as I'm sure you know and yields the margins are getting pressed there. And where we can divert that attention to commercial loans, floating rate we get a relationship that's we're going to turn our attention.

And I think it's a continuation of the mix changes we've been working through over the last few years. So, better position in that portfolio away from investor series, which is not typically a relationship product.

At this time we will take a question from Joe Morford with RBC Capital Markets.

I guess, first, a clarification on the 35 basis point bump up in the margin from FinPac is that just with the loans the interest income added or does the include that the drag we've seen this past quarter from the higher cash balances?

The higher cash balance drag will go away. So, the guidance we gave in June that would be off to Q1 levels.

Okay. And in discount thinking about the margin beyond later this year and then the next year, as this portfolio of grows with the higher yielding products and funding it with low-cost deposits, is that enough to continue to push the margin up or do you see the holding stable just based on other compression new pricing going on?

It will be a nice tailwind.

Okay. Then lastly just maybe for Cort, you all noticed -- noted increased line utilization was an important contributor to the growth and just how much was that this quarter and what exactly do you see transpire there?

Line utilization in the first quarter dropped and that was the issue with the way borrowers were perceiving opportunities. It ticked up only about a half basis points in the quarter. It added $50 million, $55 million in additional footings; I'll take it where I can get it. But it trended down in the first quarter, which was stark difference from all last year when it continued to march up and it started to come back again. So, it wasn't a big part of the footing ground, but it did contribute to footings growth.

Some of that was seasonal too with agricultural stuff, which is pretty normal for us in the first quarter.

This time we will take another question. This will be from Jeff Rulis with DA Davidson.

Yeah, I guess just back on that utilization, what exactly is the I guess percent line utilization currently?

Jeff, for the entire bank at the end of June it was 85.14% and that includes all loans. So, that's not just commercial loans that includes commercial term loans, consumer and it was up slightly. We were as low as about 84.9% earlier. So, it's gone up slightly during the year, during the quarter.

How about just in the C&I segment?

Yeah, commercial loans were hovered right around 40%, 45%, which is up from the loans a couple of years ago in the high 20s. And it's still has a little way to go. Normally you're 50%, 55% on commercial loans. Jeff Rulis – DA Davidson: Sure, okay. And based on sort of trends half a basis point this quarter, but stabilizing and the expectation is that I guess so far in the quarter pretty short timeframe, but the trend suggesting that that will be increasing?

Yeah. I mean we normally see upticks in utilization in the second, third, and fourth quarter, and like Ray noted we come back into the first, and we do have some ag, and then people adjust their balance sheets. But yeah we will continue to see that increase and overall over a three year periods it's continued to march up if the economy gets stronger in some markets.

Are you seeing any regional strength within the footprint anywhere that those are being drawn, whether it done in California or Oregon, Washington?

I would say right now it's marching up in every geographical location we operate in. So, obviously the Seattle market and then the Bay area are stronger and stronger economies, lower unemployment. But in the Portland and even in our southern Oregon markets, Medford, Roseburg, Coos Bay, we're starting to see greater utilization. You can look at our consumer loan portfolio, which was actually flat for the quarter, which is a little bit of borrowings and coming out of consumer portfolio. So, I would say all in all, it's pretty much throughout the entire enterprise, the entire footprint. Jeff Rulis – DA Davidson: Great. Thanks Cort. And then one quick one for Ron, I don't know if I missed this. But in the other expense line item that 17.3% up from 15% the prior quarter, what was the reason for the increase?

We talked about the $400,000 increased marketing cost, the $0.6 million in the FDIC claw back liability; those seem to be the biggest pieces of it. And then also $100,000 loss on sale of property were the three items I mentioned in the remarks.

And that's included in that last line item correct.

Correct.

The 17.3?

Yes.

At this time we will take a question from Matthew Clark with Credit Suisse.

Just on the -- may be first on the curve and how it might be benefiting you guys. I know you guys have -- you mentioned that you -- maybe a little bit more competitive on pricing in the commercial real estate segment. I think in the prior quarter you've mentioned, may be more willing to compete on price to stem runoff. Just curious whether or not you've seen any incremental benefit from the steepening of the curve or not?

On existing portfolio and existing customers, we do experience payoffs and normal amortization payments. On the payoff side, we reduce that number, so out of cycle not near-term payoffs at half during the quarter by being a little more aggressive on a five-year rate. We still try to swap a little over five years, so if we go 7 or 10, which we don't do a lot of them but when we do it, we swap it. And on that five year and less we got a little more aggressive on rates; kind of put a finger in the dike, if you will little bit to help out on that.

Yeah, Matt that was, as we talked about in April that was closing out the back door, but I'm going to stress too, the increasing rates we saw in the quarter was really on the long end of the curve and it occurred late in the quarter. Make sure there's not a -- you're not seeing the overnight the 2 year part of the curve increasing. This is 5 to 10 plus, it's increasing. So it got impacts most directly on the bond portfolio pricing, mortgage refinancing for the industry et cetera, et cetera.

Okay. And then, in terms of a growth for FinPac, it seems like you guys are more than happy to grow this thing. Just curious in terms of how quickly we might see this portfolio, may be double or triple in size?

Yeah. Hi, this is Ray Matt. I -- we believe that we've got a four year timeline that this organization should be over a $1 billion.

(Operator Instructions) At this time we will move to Brett Rabatin with Sterne Agee.

Wanted to ask a few fee income questions. Can you -- I guess first, let's talk about the difference that you see in pricing from a gain on a sale perspective, purchase versus refi. And then, just kind of your efforts to continue to grow that platform to kind of offset what might be happening from a refinance perspective over the next two quarters?

Brett, typically over the last let's say two to three quarters it's probably roughly 100 basis points on the gain on sale margin, between purchase and refinance. And we've had significant -- I mean, we -- as we talked about in April, in January, last October, with a significant increase in refinance we knew at some point that was a slowdown for the industry. We turned our efforts to grow in the mortgage -- the purchase business and fortunately we have been very successful in that over the last couple of quarters. So, Cort, do you want to chime in?

Yeah, let me also say, we started seeing the refinance market certainly had some issues in first quarter. We had 12 new originators inside the quarter; all those originators specialize in purchase, which is really different business than refinance. And we are seeing the -- or excuse me, the purchase percent since beginning they are almost double and we are seeing great trends in the current pipeline as what percentage is purchased relative to refinance. We feel real good about it. We are shipping that mix to the purchase market which is, on the Pacific Rim west coast culture, so they're strong in all these markets.

Yeah. Brett Rabatin – Sterne Agee: And you guys said the pipeline, I think was 295. What was the -- I missed the amount that you had in locked?

2.25. Brett Rabatin – Sterne Agee: Okay. Great. And then, also was just curious about SBA and the debt capital markets, if I guess A, are you going to continue to have SBA loan sales, is that business kind of ramping for you guys and anything commentary on the success you guys had in debt capital markets this quarter as well? Cort O’Haver: This is Cort. We view the opportunity we have in second quarter to sell those seven, eight loans as unique opportunity and so we got around $32 million. We do not have plans to sell any more. A lot of those are for customers, so we're going to reload that portfolio and continue to service it. It's not necessarily a core strategy, but there was an opportunity to get a credit premium on that, relative to the swap business and that has been a little more lackluster, if you will, had a lot to do with in fourth quarter when we saw a lot of cannibalization in the first quarter into last year for a lot of reasons. We are starting to see a good trend in that business again. I think the spike in the 10-year rate sale seen in the residential market and its leading into commercial. We have seen people wanted to go little longer, they're not worried about the long-term rate. And our swap business should be more robust in the second half of the year.

This time we will take a question from Jackie Chimera with KBW. Please go ahead.

Hi, good morning everyone. What are you experience that is based on the Circle Loan deal, I know it's been several months now since the first Circle Bank deal since that deal closed, and just kind of the traction you're getting, is there any customer attritions, any holdups you might be having in the Bay Area? I know San Francisco is no zoning is that an issue in the past?

Circle Bank has, this is Ray, Jackie, it is -- as you can imagine, it has been totally integrated with a company. It's been a great lead in for us in a Greater San Francisco Bay Area and now, supplemented with San Francisco and our San Jose operations. So, it's been good, it's been steady as she goes. No, we have not seen any significant loss of customers. I think anytime you acquire a bankers the ample people that opt out, but I think that is a history that Umpqua has is a very good track record for smooth and non-disruptive integrations and our team was able to do the same thing over with the Circle Bank as well.

Okay. And was there anything unusual with the -- I think it was a delay, I don't -- I cannot find my old notes. That was there anything unusual with the San Francisco branch? With that?

No, just your regular building and contractor and city permits stuff that delayed a little bit, but other than that nothing out of the normal.

(Operator instructions)

Okay. Matt, no more questions?

Nothing in the queue.

All right, excellent, okay. Well, I want to thank everyone for their interest in Umpqua Holdings and their attendance on our call today. This will conclude the call. Good bye.