Columbia Banking System, Inc. (COLB) Q4 2013 Earnings Report, Transcript and Summary

Good day, everyone. Welcome to the Umpqua Holdings' fourth quarter earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Ron Farnsworth. Please go ahead, sir.

Thank you, Melody. Good morning and thank you for joining us today, as we discuss the results of operations for the fourth quarter and full year 2013 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 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. Specific risks in this presentation include whether shareholders approve the merger, whether the companies receive regulatory approvals, the timing of closing, whether the companies have accurately predicted acquisition and consolidation expenses, the timing and amount of savings from consolidation, the expected earnings contributions of both company and management's ability to effectively integrate the company. Also this call maybe deemed to be offering or solicitation materials of Umpqua and Sterling in connection with the proposed merger of Sterling with and into Umpqua. Shareholders of both companies are urged to read the joint proxy statement and prospectus, included in the registration statement on Form S-4, which Umpqua has filed with the SEC in connection with the proposed acquisition, because it will contain important information about Umpqua, Sterling, the acquisition and related matters. The Directors and Executive Officers of Umpqua and Sterling maybe deemed to be participants in the solicitation of proxies from their respective shareholders. Information regarding the participants and their security holdings can be found in each of Umpqua's and Sterling's most recent proxy statements and certain Form 8-Ks filed with the SEC along with the joint proxy statement prospectus filed with the SEC. All documents filed with the SEC are available for free on the SEC, Umpqua and Sterling website or can be obtained by contacting Umpqua or Sterling's Investor Relations department. With me this morning is Ray Davis, President and CEO of Umpqua Holdings Corporation; Cort O'Haver, Senior Executive Vice President; and Mark Wardlow, our Chief Credit Officer. Cort 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. With that, I will now turn the call over to Ray Davis.

Thanks, Ron, and good morning, everybody. For the full year of 2013 Umpqua Holdings reported operating earnings of $0.94 per diluted share. For the quarter, operating earnings were $0.25 per diluted share, up from the $0.24 we reported in the third quarter. The quarter's performance highlights were continued strong loan growth with non-covered loans increasing $125 million or 2% from September. For the year, we had total loan growth of 10%, excluding the FinPac transaction, our organic growth was 6%. FinPac reported very strong growth of 8% during the fourth quarter reflecting traction we are making an A paper space. Our non-performing assets continue to shrink, dropping to 0.49% of total assets or only $57 million. The recovery pool, we've discussed in the last few years, continues to be realized with $8 million of recovery this quarter, resulting in $14 million of recoveries for the year. Our home lending division, in spite of declining refinanced production volumes, reported a $3 million increase in pre-tax contribution from the third quarter. And with this quarter's dividend payment of $0.15 per share, our full year payout ratio and operating earnings exceeded 60%, with the yield currently above 3%, which is very strong for the industry. After Ron runs through the financials, I'll provide some comments and color on the progress we're making on closing the Sterling transaction. Now, to Ron.

Thanks, Ray. Starting with the balance sheet. We intentionally increased our interest bearing cash balances this quarter and we'll continue to do so in the first quarter, and provide us with maximum optionality heading into the Sterling balance sheet restructure. The bond portfolio declined 6% this quarter, all from maturities and monthly MBS cash flows. The gradual increase in treasury interest rates through most of the quarter plus the portfolio price had a small net unrealized loss at quarter end, well within expectations. Our total available liquidity remains very strong at $4.1 billion, which is 35% of total assets and 45% of deposits. During the fourth quarter, our total commercial loan production was $384 million and our pipeline remained strong at $1.8 billion, down slightly from the third quarter, given the strong production we had in Q4. Between our Classic Bank loan growth and opening up the FinPac pipe with the lower funding cost, we expect continued strong loan growth heading into 2014. FinPac generated $53 million in new leases during the quarter, up approximately 15% from the third quarter rate. This reflects the growth initiatives to expand into the A paper channels we discussed last summer. Moving down to balance sheet. Covered loans and the FDIC indemnification asset continue to decline as expected. And the MSR asset increased this quarter, approximately half was from evaluation increase with the other half from new service loan production. On the liability side, deposits increased 1% during the quarter. Total revenue for the quarter was $138.5 million, an increase of 3% from $134.6 million in the third quarter. With inflow of revenue for the quarter, net interest income increased $3 million to $110 million. The non-covered loan interest income totaled $107,000, related mostly to higher early prepayment penalty fees last quarter. Investment income…

Just a couple more comments before we take your questions. This was obviously a very good year for Umpqua and was evidenced by a solid operating earnings, strong organic growth, continued improvement in credit quality, smart capital management as Ron said and continued recognition of the strength of our culture. Obviously, 2014 will be another significant year for our company with our continued focused on organic growth, while we integrate Sterling Financial into Umpqua. The countdown to closing is on, and I am pleased to report the following. The final S-4 is on file with the SEC and our special shareholder meeting is now scheduled for February 25. The regulatory application process is proceeding as expected, divestiture marketing is on schedule, our technology conversion and store consolidation plans are nearing completion. Organizational charts have been developed and integration teams are well into the planning phase to successfully integrate the company. We recognize the scope of this transaction and have devoted significant resources to planning every effort of integration process following the close to ensure that we are successful. And with that, we'll now take your questions.

(Operator Instructions) We'll go first to Joe Morford with RBC Capital Markets.

I guess first, Ray, just following-up on your comments on Sterling. Given that you've had a few months now to work with the folks there, how are you feeling about the financial projections you've made for the deal and the opportunity to perhaps realize some revenue synergies as well?

I'm not going to project revenue synergies, but I can tell you that the numbers that we did put out when we announced this transaction, we feel very good about. I might also comment that the cooperation, the spirit between the two companies has been absolutely outstanding, probably better than any other acquisition we've handled before. So things are moving swiftly and are very smooth.

And then the other question is just the commercial lines of credit were up nicely in the quarter, was much of that attributable to increased non-utilization rates?

A little bit of both. The utilization in the last 12 months has gone up. A little bit of both.

We'll go next to Matthew Clark with Credit Suisse.

Can you just confirm I guess the contribution from your home lending group, actually the revenue contribution, I'm not sure if I had all the expenses or not. Just curious what the, I guess pre-tax or after-tax contribution from that group was this quarter?

Yes, pre-tax $13 million compared to pre-tax last quarter of $10 million. That's $3 million increase in pre-tax, as I referenced in the comments earlier, and that's roughly $0.07 per share for the quarter.

And then, just trying to isolate, I guess FinPac a little bit, do you have a sense for what the core margin looks like without FinPac. I think last quarter the thought was, it was probably up 1 basis point without it, but just curious if there was any change there?

That would have been consistent with the change last quarters. We had higher bond yields with the lower premium amortization, so the core margin excluding impact, excluding covered disposal activities would have been flat, if not up 1 bps or 2 bps.

And then lastly, I guess again on FinPac, just trying to isolate the credit cost associated with that sort of production I guess that you did this quarter, I think it was $1.8 million last quarter.

$1.8 million last quarter, $2.5 million this.

We'll go next to Jeff Rulis with D.A. Davidson.

On the salaries or a compensation line down sequentially, a little of that, is that from the mortgage business?

Yes, actually the decline on the reported financials is down $1 million. It was a bit more than that in mortgage, but talking about the overall decline in home lending, it was $1.7 million, roughly three quarters to that would have been in the compensation arena, but yet another seasonal or one-time deals across that, put it back to the million dollar change.

And Jeff just to note, I think all the cost saves that we did, put in the mix, we have not realized all of those. That was a partial quarter, so we should see additional expense reductions bleeding into this quarter.

That was my follow-up. I guess, so at the magnitude of what you saw or I guess, how far complete or it's just not a full run rate in a quarter?

Not a full run rate yet, it will be.

And then on the margin, I guess if you could just sort of remind us kind of the core margin impact as you roll into Sterling, the expectations and as you carry that heavy or the larger cash balance, what are the expectations?

Well, the larger cash balance once we complete the Sterling merger, and the second quarter is going to be reduced because we're going to use some of that cash to restructure the balance sheet. Plus too there will be a smaller percentage to the overall balance sheet, but overall what we talked about last quarter, it was consistent this quarter. Our projection there would be flat to up 85 bps on the adjusted margin.

We'll go next to Jacquelynne Chimera with KBW.

Ron, I wonder, do you have a rate hurdle that you're looking at? And I know that you're saving some of the cash deployments to restructure the balance sheet, like you just said, but is there any sort of a rate hurdle that you're looking at to begin to buy securities again?

No, there is not. Again, we look at this on a total return basis, rates are still historically low. Yes, they are up a bit to where they were six months ago, but if you look any time over the last 20 years, they are historically low. And from a total return standpoint, there is nothing, but pressure, and rates up in terms of the impact on equity. So no, I don't have a specific rate hurdle. What we're doing heading into the first quarter and second quarter has again given us maximum optionality on the Sterling restructure, plus too, if you look back at what we've done over the last year and year-and-a-half, we talked about the capital actions, but we've had significant organic growth. And so we've had the cash waterfall down the balance sheet, the bonds and the loans, and that's by design we hope that continues.

And then just a question on the recoveries, is this a function of customers that are looking to rebuild their credit or is it just purely due diligence from your staff?

Jacque, this is Mark. We mentioned before, I think our recovery pool that we identified, these are recoveries coming about because of our workout efforts over the last four, five years. I think I mentioned that when we restructure deals with customers, we took additional collateral, we got payment streams up-ledged and this is just further realization of those cash flows.

So it's not indicative of any sort of change from the consumers just looking to clean up and build up again?

No, it's just purely a result of the collection efforts we've had over last four, five years during the session.

We'll move on to Steve Scinicariello with UBS.

Just a quick one on the potential loan growth drivers for 2014. You had nice benefits from FinPac, this year 2013, I should say, as you look ahead what categories and what areas do you feel should be the main drivers of loan growth in 2014?

Of course, so we opened up few locations last year [technical difficulty] that's a real great opportunity for us. Our home lending group in Seattle is doing very, very well. The metropolitan markets, the Bay Area, Portland and Seattle are starting to show some strength. We'll just continue doing what we do with Umpqua and providing great service, working very well. We're still staying highly focused on C&I, which you'll obviously see in the results. We have seen commercial real estate move up as a total percent slightly, but not dramatic, as real estate values have comeback into the market. And obviously if we can make a good loan on the real estate property to the good customer, we'll do that. So we'll just continue to the emphasis with our initiatives we took place in 2013. We are looking at some new opportunities, and obviously with the combination with Sterling and Umpqua, it opens up all kinds of new doors for the combined company in Southern California, in areas where we are not. So there is just huge opportunity when we combine up with Sterling.

And then in terms of mortgage banking kind of outlook from here, what would you expect? Are we starting to kind of bottom-out here or how do you kind of look at that line item going forward?

This is Ray. I'll tell you what, your guess is good as mine. I don't know, but I can't project rates, but it has been a steady decline. I think one of things that our management team did a very good job on and I am proud of these guys is that we realized earlier on that eventually the refinanced bubble was going burst, we needed to do something. Umpqua, I think has a history of being very proactive. The fact that we're able to reach out to FinPac and bring in a quality company like that and to offset the impact that we've had from a declining refinance market has been terrific. So we will continue to be as proactive on any declines in the production of mortgage lending should that continue. And I think if my crystal ball, which I can tell you is no better than anybody else's on this call, probably we'll continue to gradually rundown until we see some more advanced in the housing market.

We'll go to Brett Rabatin with Sterne, Agee.

I wanted to get a little color on the decline in the non-owner occupied commercial real estate linked-quarter. I don't know if there is anything that affected that or was there any pre-pays or if was there anything that was different this quarter?

Brett this is Mark. Really what that was, was a re-class of some of our assets. We moved $400 million out of that into a multifamily category to more accurately reflect what was really in that total. So it wasn't a rundown, just the reclassification.

And then just thinking about that portfolio and where you're originating or the whole loan portfolio, I should say, and where you're originating production today versus the current yields. With FinPac growing, is it fair to say that the compression on the loan portfolio yield going forward should slow or can you give any color on how you think about sort of loan yields coming on?

Well, for FinPac's impact, there has been a slight decline in Q3, Q4 related to just discount accretion on the credit market, but in terms of loan yields, with that growth, they're going to maintain the consistent C paper space, they've always have. The growth we're seeing on that on the A space is still high single-digits, very strong, very solid, and another good story for writing out investments bonds. In terms of the overall commercial, this is kind of like the classic bank x FinPac commercial loan yields. We're starting to get close to that point where what's on the books is going to close new production. Much closer than it has been.

There is no questions in the queue. I'd like to turn the call back to our speakers for additional or closing remarks.

I appreciate it. I want to thank everybody for their interest in Umpqua Holdings and the attendance on the call today. This will conclude the call. Good bye.