Umpqua Holdings Corporation
Q1 2013 Earnings Call Transcript

Published: 18 Apr 2013

[Operator:]

Good day, and welcome to the Umpqua Holdings First Quarter Earnings Conference Call. As a reminder today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Ron Farnsworth, Chief Financial Officer. Please go ahead.

[Ron Farnsworth:]

Okay. Thank you, Robert. Good morning, and thank you for joining us today as we discuss the results of operation for the first 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.

[Ray Davis:]

Okay. Thanks, and good morning everybody. The company reported first quarter operating earnings of $0.22 per diluted share, compared to $0.26 for the fourth quarter of 2012 and $0.23 for the first quarter a year ago. This quarter’s performance highlights were, a 13% decrease in noninterest expenses compared to the fourth quarter of 2012, our mortgage banking unit even with some decrease in loan volume and $8 million decrease in revenues from the prior quarter, posted another strong gain on sale margin of over 4.5%. Our net interest margin lost 3 basis points for the quarter and I believe that reinforces our pricing discipline. Non-performing assets continue to decrease and now stand at 0.69% of total assets and finally we completed the data processing conversion of our Circle Bank acquisition. Our non-covered loan totals were down slightly for this quarter due to the high pay downs and seasonal fluctuations. Our commercial loan production for the quarter however was strong at $319 million. The company’s loan pipeline also grew during the quarter and is now at a record high of $1.9 billion. Therefore, we remain bullish regarding overall loan growth for the remaining months of the year. As I commented last quarter, we also strongly believe that we have the balance sheet, the resources, and strategies in place to continue to profitably grow the company. This economic environment is difficult for all banks, however, our financial strength presents us with opportunities. These range from entering new markets, incremental growth, and deploying our excess capital through acquisition possibilities and other capital strategies. I’ll now pass the call back to Ron to report on the details of our financial aspects and performance of the company.

[Ron Farnsworth:]

Okay. Thanks, Rick. I’ll start with the loan-to-deposit ratio, which increased this past quarter to 78%, up from 72% a year ago and the non-covered loans were relatively flat with the prior quarter while deposits declined 3%. Average non-covered loans were up 3% from Q4 and up 12% from the same quarter a year ago. On the deposit side, the decline this quarter was comprised of larger balance, higher rate sensitive deposits in the bank including public funds. Our interest-bearing cash balances increased this quarter to $566 million with the corresponding decline in the investment portfolio of $2.4 billion resulting from net reinvestment cash flows into securities this quarter. Yields on new bonds remain very low and the risk reward profile of purchasing bonds in this environment is poor at best. For example, we could purchase $500 million of bonds with five year average life and limited extension risk yielding 1.5% which would add $0.02 earnings per share this year. While this would increase short-term earnings just slightly, it is very near sided to not use the portfolio on a total return basis and recognize the future price risks. If rates were to be short just 100 basis points higher, the unutilized loss and equity on that purchase would be seven times that of the earnings improvement. Hence we continue to focus on new loan production for those funds that flow into. During the first quarter, our total commercial loan production was $390 million. However, we had pay downs of $225 million on top of normal amortization which was a combination of seasonal agricultural related line pay downs and rate related refinancing. As Ray said, our pipelines had a record $1.9 billion, and even though we didn’t experience period end loan growth this quarter we do expect loan growth throughout the remainder of this year. Within total revenue for the quarter, the adjusted margin declined only 3 basis points from the fourth quarter reflecting the continued impact of the low interest rate environment. Switching to non-covered loan yields, the drop of 8 basis points this quarter related to $1 million in interest reversals on new nonaccrual loans. Absent that, reported non-covered loan yields would have been down only 2 basis points from the fourth quarter. I’m pleased we’ve been able to sustain our loan pricing discipline however that cost us some growth this quarter which Ray will talk about later. The decline in bond yields this quarter related a higher premium amortization with faster prepayments coming off the fourth quarter refinance wave and mortgages. Our bond yield for just the month of March was 1.7%. Adjusting bond yields will increase slightly in the second quarter absent a significant increase in mortgage refinance. And the cost of interest-bearing deposits will continue to decline based primarily on time deposit maturities along with reductions we had made in non-time deposit costs. As per credit quality related costs, the provision for loan loss increased $2 million this quarter related to a small increase in net charge-offs. We view this increase as a small bump in the road as overall our credit quality stats continue to move in the right direction, with the continued decline in our non-performing asset ratio. In the non-interest income area, mortgage banking revenue was $23.6 million on total volume of $509 million up from $403 million a year ago, but down from $685 million in the fourth quarter. Purchase business was 33% in the Q1 production, up from 26% in Q4. Our gain on sale margins remained strong at over 4.5% this quarter and we expect better than peer margins, with our pricing discipline and a lower cost base to sustain our efficiency. Servicing revenue continues to grow, up 12% over the fourth quarter and up 65% from the year ago, while the change in mortgage servicing right value reduced mortgage banking revenue by $1.7 million this quarter. The MSR is valued at 89 basis points of the growing serving portfolio. The ongoing growth in servicing revenue as noted on page 18 of the earnings release along with the MSR valuation continues to provide a partial hedge for lower refinance volumes in future, rising rate environments. While we feel good about our prospects in home lending this year, we realize the refinance side of the business will decline over time, absent after further reductions in interest rates. Given this, we reduced some fixed costs within the group this quarter based on the lower production. Our efficiency ratio on mortgage banking revenue was 43% for the first quarter. Our current locked mortgage pipeline remains strong at $250 million, consistent with December. However, our current application pipeline has increased $324 million, up 65% from $194 million in December. Purchase business is now 50% of the application pipeline, a great trend. We are expanding our presence in the Puget Sound and Bay Area markets to gain further grand in the purchase business, noting this as variable costs. With these actions, we expect mortgage production volumes to increase in the second quarter. Moving down the P&L, there has been some noise this week related to amortization periods for the FDIC indemnification assets, and I want to clearly communicate to all, and we have taken the conservative view from day one. We have been amortizing it over the five-year charge-off covered to period. In other noninterest income, the decline from Q4 was related to nonrecurring items last quarter, as discussed in January. Also within this category, our debt capital markets revenue remain solid at $1.6 million, with a good pipeline for the next quarter. On the expense side, total expenses decreased $12 million or 13% from the fourth quarter. As discussed last quarter, we had some $4 million of non-recurring expense in Q4. Excluding those non-recurring costs, we reduced the expenses $8 million this quarter, which was driven by declines in both fixed and variable compensation, work out costs, legal costs, and OREO losses. The Circle Bank acquisition from Q4 is now wholly converted on time and ahead of budget. Our net non-interest margin, which is non-interest expense minus non-interest income as a percentage of average assets continues to decline now at 1.75% down from 2.10% a year ago and 1.9% for all of 2012. This is a good measure of our efficiency excluding the impact of the net interest margin and compares favorably to the regional peers level of 2.33% for 2012. One of the few things we have control over in this environment is our operating expenses and we will continue to leverage them driving for efficiencies. However, we will spend money to make money as growth opportunities arise. On the capital front, our dividend increased this quarter to $0.10 per share and the payout ratio this quarter was 48% within our target range. We have significant flexibility for capital management and understand we have excess capital. As we commented last quarter our options to deploy excess capital are M&A, dividends, and buybacks, all are still on the table and we are prepared to pull the necessary triggers at that appropriate time. Now, I’ll turn it back to Ray.

[Ray Davis:]

Okay. Just a quick comment before we take your questions. As we all know, this low interest rate environment will continue to put pressure on bank’s net interest margins. This makes it even more important than institution possess value proposition that allows it to compete with more than price. Through the strength of Umpqua’s brand, reputation, and organic growth strategy, our value proposition remained strong and has successfully differentiated us from our peers. We have proved this to be the case over the previous seven quarters on a row as we had reported non-covered commercial loan growth. This will continue to prove viable for Umpqua in future periods. That being said we recognized we have to remain competitive with the low interest environment now expected to last even longer than we had originally anticipated, we will need to do a better job of protecting our loan portfolio from pricing attacks by competitors. As stated, we are confident that by year end we will obtain commercial loan productions numbers consistent with last year’s reported numbers. And with that, we’ll now take your questions.

[Operator:]

(Operator Instructions) We will take our first question from Steven Alexopoulos of JP Morgan.

[Steven Alexopoulos:]

Hey, good afternoon everyone.

[Ray Davis:]

Hey, good afternoon, Steve.

[Ron Farnsworth:]

Hey, Steve.

[Steven Alexopoulos:]

I wanted to start with the total employee comp down about $2.8 million quarter-over-quarter and the release say $2.5 million of that is mortgage related. What was the quarterly seasonal increase in FICA taxes and what offset that?

[Ron Farnsworth:]

Actually, the quarterly seasonal increase in FICA taxes was rather small with a couple of hundred thousand dollars, but the $2.5 million in the release was not specific to compensational mortgage. About half of that was compensational mortgage, the other half was other costs within the mortgage group. So it’s not on that line item. And so in compensation specifically, we had decreases in other areas….

[Steven Alexopoulos:]

Okay. I got you. And then Ron, the loss on OREO which ran around $3 million a quarter in 2012, do you see that headwind is now behind you to expect the costs to stay very low now this year?

[Ray Davis:]

Yeah, this is Ray, Steve. It’s not going to be very much, I mean now it’s going to go up and down, up and down, but it’s not going to be very much. We think most of that is behind us, yeah.

[Steven Alexopoulos:]

Okay. And then, just on capital, you’re already very strong with the amount of capital you have and you continue to grow further here in the quarter. Why not get a little more active on the buyback, what’s the thought there?

[Ray Davis:]

Steve, this is Ray. There is no question about it. The timing for pulling that trigger is getting closer and closer depending on what other activities, capital options we have, which as we said in previous quarters we’re exploring all of them, but I would not be surprised in the second half of the year, if we don’t get pretty active.

[Steven Alexopoulos:]

Okay. Okay. Thanks for taking my questions.

[Ray Davis:]

You bet. Thanks.

[Operator:]

And we will take our next question from Jeff Rulis of D. A. Davidson.

[Jeff Rulis:]

Good morning.

[Ray Davis:]

Hi.

[Jeff Rulis:]

Ron, you’ve mentioned sort of your expectations for mortgage volume and Ray stated, I think, a gain on sale running in the mid 4s. Any expectation for that rate holding going forward, I guess, relative to the mix you book?

[Ray Davis:]

Well, definitely expect higher purchase business and I guess the guidance we’ll give you on that would be, we still very much expect better than peer margins.

[Jeff Rulis:]

Okay, but relative to 3%, gain on sale the last year at this time and at mid 4% the comfortability there is that – that’s how you’ll say I guess, in terms of other.. yeah.

[Ray Davis:]

Yeah, I’d assume, when you look at gain on sale margins, it can also look like manager’s margin environment. Over long period of time, yeah, potentially they’re going to come down. But we feel pretty confident that we’re going to maintain a pretty good spread over peer margins on that one.

[Jeff Rulis:]

Got it. And then, just a follow-up on the expense line, looking at the other expense, I don’t know if that included in the -your prior comments, but that $5 million decline in other expense. Was that just a reduction in local taxes and professional fees, as you had alluded to?

[Ron Farnsworth:]

Yeah. Talking – the overall expenses declined like $13 million.

[Jeff Rulis:]

Sure...

[Ron Farnsworth:]

$12 million for the quarter, but in the other expense line item. Last quarter, we had $4 million of pure non-recurring expense that was mostly in that line a little bit up in compensation. So yeah, this quarter you’re going to see a decline in workout costs affecting that, which are not non-recurring or recurring. Kind of workout cost, also decline in local taxes is in that line as well.

[Jeff Rulis:]

Okay. Thanks. I’ll step back.

[Ron Farnsworth:]

Yeah.

[Operator:]

And we will take our next question from Joe Morford of RBC Capital Markets.

[Ray Davis:]

Hi, Joe.

[Joe Morford:]

Thanks. Good morning, everyone.

[Ron Farnsworth:]

Good morning.

[Joe Morford:]

I guess first just on the margin, should we just – on the core margin at least, continue to expect a slow and steady grind lower from here, or should this maybe pick up a bit now that your cash balances arising? And also how much did premium amortization impact the margin this quarter versus last?

[Ron Farnsworth:]

It was about the same. It is actually about the same amount on the margin this quarter versus the last. You just had a smaller loan portfolio. So it’s percentage of loan portfolio it was a bit higher. But keep in mind I talked about in my comments, we had a spike in prepayments in the first half of the quarter related to the Q4 mortgage refinancings in the marketplace. And that led – that really led to the higher amortization, which give us the 1.5% yield on taxable for Q1. I did though talk about in the month of March, just the month by itself absent the quarter, we did see that increase back at 1.7%. So that does pertain well for the second quarter bond yields ended up itself. I think in terms of margins overall, I would not expect to see the cash bill to have a negative impact because it’s going to be offset with the loan growth. And overall for the industry it’s just math, over time margins are going to be inching down lower in this environment. So we feel pretty good about in the near term.

[Joe Morford:]

Okay. And then the other question was just on loan volumes, kind of bigger picture and now you have been investing and penetrating some of your new markets like here in the Bay area and up in Peter Sand area. Are you starting to starting to see meaningful loan volumes materialize in these markets as well? And how that – what are your expectations there as the year unfolds?

[Ron Farnsworth:]

That was core. The pipeline has grown this quarter at all major metropolitan markets that will be the Bay area, actually Sacramento was growth Portland and Puget Sound specifically with some of the initiatives that we did late last year and one I’ll talk about those – hold over group, we put in place in January in the Puget Sound which generally serves regional homebuilders in the Portland and Seattle markets. As already booked or closed $75 million in new loans just in the last month and a half, that pipeline is very, very robust, same thing relative to the Bay area with our commercial banking activity. San Jose store opened up 30, 60 days ago. We’re seeing some good opportunity down there. So we’re really excited about those initiatives. Our ag team down in Templeton also is now fully staffed, in the last four weeks we had a very robust pipeline, we’ve got a great team down there, and already got loans and we’re looking for some good things out of them in the next couple of quarters.

[Joe Morford:]

Okay. That’s encouraging. Thanks.

[Ron Farnsworth:]

Thanks, Jeff

[Operator:]

We will take our next question from Matthew Clark of Credit Suisse.

[Matthew Clark:]

Hey. Good morning.

[Ron Farnsworth:]

Good morning.

[Ray Davis:]

Hi, Matt.

[Matthew Clark:]

On the gain on sale, can you just talk a little bit about what’s holding those margins up? Is it the way you guys book that business, maybe at rate lock or fund. I am not sure how you do it whether if it is rate locker at funding, but just trying to get a sense for when you look elsewhere among most of the industry saw those margins come down a lot more and I am just curious why they are holding in. Is there may be a quarter lag or something?

[Ray Davis:]

Well, there is a quite a bit of apples and oranges in the industry when you look at these. First, keep in mind we did not purchase the loans from others, so there is no wholesale channel here. So in some cases with larger banks you’ve got to include that purchase cost of the loan in that margin, which gives you a lower margin. I’ll tell you from our standpoint, all retail and it really gets back down to the discipline in pricing. We’ve maintained pricing discipline for as long as I have been here on the mortgage side and it’s has paid off well. Now, when we book the revenue, the majority of the revenue is booked when the loan is locked. I mean the rate is locked. So at that lock day, about 70% of the revenue is recorded. That’s our typical pull-through rate to closing. As the loan gets closer to closing and then ultimately closes, we recognize the differential, but from day one the loan is hedged. And so we’ve had very good expected hedge performance too over the last two quarters, which has held in this volatile environment.

[Matthew Clark:]

Okay. And on the expense front, your expectation for expense fund as it relates to mortgage, if assuming your stronger pipeline and you expect higher production, can we assume that those expenses might tick up a little bit here in the second quarter?

[Ray Davis:]

Yeah. I am sure for the variable cost, they would, but keep in mind over time we continue to try and make more and more efficient and we are running at pretty good efficient ratio. I feel good about holding that.

[Matthew Clark:]

Okay. And then lastly on M&A, can you just give us an update as to what you might be seeing just conversations you’re having whether or not anything has changed much in the last say three months.

[Ron Farnsworth:]

Obviously, we wouldn’t comment if there was anything going on. But the only thing I can say to you Matt is that, we still get calls every now then, but actually the activity hasn’t been that great. I think I’ve been reading about that throughout the United States. It’s just sort of sluggish and at some point, the dam has got to break.

[Matthew Clark:]

Okay. Thanks.

[Ray Davis:]

Thank you.

[Operator:]

And we’ll take our next question from Brett Rabatin with Sterne Agee.

[Brett Rabatin:]

Hi. Good afternoon or good morning.

[Ron Farnsworth:]

Good morning, Brett.

[Ray Davis:]

Good morning, Brett.

[Brett Rabatin:]

Wanted to see if you guys might have handy the, or I might wait for the queue but just the mortgage banking net income for the quarter, if you have that number handy?

[Ray Davis:]

I don’t have that one handy right here in front of me. Apologies.

[Brett Rabatin:]

Okay.

[Ray Davis:]

Down slightly from fourth quarter just based on what we’re seeing with the revenue change.

[Brett Rabatin:]

Okay. And then Ray, it’s sounded like if was hearing your body language, in your prepared comments correctly that maybe you’re seeing an uptick in terms of what competition was willing to do either rate or structure on the lending side, especially commercial C&I. Can you give us any additional thoughts on that?

[Ray Davis:]

I like core jumping here as well. I think that most of what we see is rate. There is always going to be some structure stuff every now and then, but don’t think it’s rampant. Some of the smaller institutions, I think, are reaching perhaps a little bit. Cort, you have anything you want to add to that?

[Cort O’Haver:]

I think the biggest area of competition, we’re seeing a lot of small banks. And we expect it’s not bigger banks if you intend you’re fixed at very low rates. We are in a lot of markets where we compete with both big banks and the small banks and they got very, very aggressive and are continuing to be very aggressive and are continuing to be very aggressive on a long-term fixed rate basis. Customers today all it to themselves to fix a low cost capital. And so we’re going to get more aggressive on rates, like Ray mentioned we lost over $200 million in loan pay offs the first quarter which was almost double or a little more than double than it was first quarter last year, but we’re going to get more aggressive on rates. Tenure fixed, we’ll still hand those to our swap if we can. We are looking at doing some tenure, but it’s for customers who have very robust relationships with the company but it’s gotten very, very competitive already, extremely competitive and to raise point not so much on turn.

[Ray Davis:]

And let me add something to that. I think that if you look at overall loan performance for our company this quarter, actually it is very good. The one thing that as I mentioned in my brief comments that we should have done better and this on Ray, not anybody else is protecting the quality assets we had in our books from some of these pricing attacks we got from competitors, and that’s what Cort’s talking about. We’re going to be – we’re not going to let good credits leave the company without significant fight back. So we will remain competitive on credits that we’ve that we obviously think highly are. We’re going to make sure that we don’t – when I say the performance was good, it really was, our commitments were up, our production was terrific, but unfortunately we saw too much growth the backdoor.

[Brett Rabatin:]

Okay. And as a follow-up to that, can – any idea of where your OREO originated loans in the first quarter and how much from a basis point perspective you think that might change in terms of your gain more competitive?

[Ray Davis:]

Well, let me say this to you. We don’t give specific guidance in a lot of things around here. But the one thing that I will say, – here a little bit. I think for – as far as overall loan growth in the second quarter, I think we’re going to approach 2% for the second quarter, another strong quarter of loan growth for us, as we shut the back door I was talking about.

[Operator:]

And we will take our next question from Steve Scinicariello of UBS.

[Steve Scinicariello:]

Good morning, everyone.

[Ray Davis:]

Hi, Steve.

[Ron Farnsworth:]

Hi, Steve.

[Steve Scinicariello:]

Just kind of big picture question for you, Ray. As you kind of look at some of the potential drivers for revenue growth for the balance of this year, where do you see like the greatest opportunities? Is it continuing to ramp up loan-to-deposit ratio? Is it seeing, just in general, – loan growth? Is it penetrating new markets? Is it doing acquisitions? Where do you see kind of that biggest needle mover, as you look out for revenue drivers for this year?

[Ray Davis:]

Steve, I think you answered my question, actually. I answered the question. Let me play back a little bit like this. Growth in this type of market, this type of economy is a wonderful thing. And I’m quite has proven I think for years and certainly even through the downturn that we can grow the portfolio. No question about it. So as we look at our opportunities, and I won’t put these in any particular order, but certainly raising our loan deposit ratio is of high importance task. We look forward to getting back into the mid-90s, that’s going to make a huge difference to the overall profitability of the company. As I have said in previous calls, net interest margin is important, but I am more interested in earnings per share growth. And that’s where my focus is. Even though we do our best as we’ve proven with our pricing discipline to maintain our margin. Other areas of potential to grow, we continue to add new products and services to the company which continue to do well, we continue to even expand them. Our wealth management is now moving into the Puget Sound area, I know we had said that before but there should be an announcement here shortly on some action we’re taking there. So there is a lot of good things happening on the product front non-interest income front. And then last but not least of course is the M&A options and I will say that if there is – one of the questions earlier was when are we going to pull the trigger and why aren’t we more active on buybacks. And I think there is a couple of reasons why we had held back. One is the uncertainty between Basel and FDIC about the new capital requirements are actually going to be, that’s – it’s an issue. Secondly, we wanted to keep how to drive, should the right deal come across our desk, we want to be able to pull the trigger. But we can only wait for so long for those type of things that happen and then we will be very active on the buyback piece as well. What’s good about this for us and this is the part that we feel really good about is because of the strength of the balance sheet, we have a ton of options and we will, as I said, pull the trigger on all of them at the right time.

[Steve Scinicariello:]

Great. Thank you so much.

[Ray Davis:]

Thanks, Steve.

[Operator:]

We will take our next question from Jackie Chimera of KBW.

[Jackie Chimera:]

Hi, good morning everyone.

[Ray Davis:]

Hi, Jackie.

[Ron Farnsworth:]

Good morning.

[Jackie Chimera:]

In your prepared remarks, you had spoken of just an improvement in the efficient ratio in mortgage and the reduction in fixed costs, but then you also talked about the expansion in the Puget Sound in the Bay Area, I wonder if you could just provide a little more color on this view. Thanks.

[Ron Farnsworth:]

Okay. Well, in terms of the efficiency ratio on the mortgage operation, actually it was up just very slightly from the fourth quarter, so we...

[Jackie Chimera:]

Okay.

[Ron Farnsworth:]

Because we did try to talk about – we reduced some fixed cost in that area. In terms of the growth, if you just stay on in the Bay area that is variable cost. That is variable cost production in the markets we’re growing in, so I very much look forward to spending that money.

[Jackie Chimera:]

Okay. So that’s all completely variable. There is no, all this – okay, I misunderstood.

[Ron Farnsworth:]

It does have a positive impact on.

[Jackie Chimera:]

Okay.

[Ron Farnsworth:]

That’s right.

[Jackie Chimera:]

Okay. Thank you for the clarification.

[Ron Farnsworth:]

Sure.

[Jackie Chimera:]

And then also I know in past calls, Ray, you talked about your potential recovery pool and just looking at how there’s little bit less than they have been in past quarters. I wondered if you could just give an update on that.

[Ray Davis:]

Yeah. Thanks for asking actually, Jackie. We appreciate that. We did say I think it was, oh gosh, I don’t remember now, but two, two and half, two years maybe that we had determined that the total recovery pool is about $180 million and I think we have been averaging over the last few quarters somewhere between $3 million to $5 million depending on the quarter. This particular quarter I think our total recoveries were a little north of $1 million, but that pool is still there and being actively pursued. Unfortunately, you can’t time them, but our people are incented to go after it and we are as aggressive as we have been in the past quarters.

[Jackie Chimera:]

Okay. So more of a timing issue there rather than a trend?

[Ray Davis:]

That’s all.

[Jackie Chimera:]

Okay. Great. That was all I had. Everything else is answered. Thank you.

[Ray Davis:]

Thank you.

[Ron Farnsworth:]

Thank you.

[Operator:]

And we will take our next question from David Walden of Raymond James.

[David Walden:]

Hey, guys.

[Ray Davis:]

Hi, there.

[David Walden:]

Just to follow up on that recovery pool question and seeing that there are fewer recoveries, you combine that with net charge-offs up a bit, delinquencies were up a bit, and TDRs were up and you guys still seem very confident on the direction of credit. I just wanted to hear from you guys specifically what is that optimism stemming from?

[Mark Wardlow:]

David, this is Mark. I think the optimism stems from the fact that we are about a tenth quarter in a row now, we have been able to reduce our NPAs and our NPA to total asset ratio. That’s been our focus all along. Now we’re down to 0.69% of total assets. To me that’s the parameter. We also had improvement in our overall adversely classified credits for the quarter. Our past-due loans are going to fluctuate quarter to quarter. It’s a point-in-time measurement. You are going to see them bounce around a little bit, but that is not a trend that you saw this quarter. I do not believe. EDR is the same thing. I think one important thing to point out about the TDRs is they’ve been fairly flat. And for this the last quarter, we’re not seeing failure rates on our TDRs like we did a couple of years ago. That tells me that borrowers are starting to get stronger. They are able to perform under the terms of the TDR, as we put together, and really the increase this quarter was one TDR we have been in place.

[David Walden:]

Okay, good. And then just one follow-up on the level of reserves and – of some of the difference and how you guys recognize or mark your non-performers there. How should we think about the overall reserve level from here at – I think we’re at 1.27% of non-covered loans right now?

[Mark Wardlow:]

Well, keep in mind that that’s going to be driven over time by risk ratings. So as risk rating of the portfolio continues to improve, that number will continue to decline as it had over the last year. On the non-accrual loans, those charge-offs, those reserves related to those loans have been charged off. It’s not hanging in the reserve. So our non-accrual loans are on the books at net disposition value, and no reserve cash.

[Ray Davis:]

Well, I think it’s fair to say this. Some of the institutions, when they went through the difficulties, piled up on the reserves, sustain their or kept the losses basically in the reserve. And now some of them are actually releasing reserves. Umpqua Bank is not going to do that.

[David Walden:]

Got it. Great. Thanks for the update, guys.

[Ray Davis:]

Thank you.

[Operator:]

And we will take our next question from Chris (inaudible).

[Unidentified Analyst:]

My question is already answered. Thank you.

[Ray Davis:]

Okay. Thanks, Chris.

[Operator:]

And we will go next to Matthew Keating of Barclays.

[Matthew Keating:]

Thank you. I just wanted to clarify some of your points in terms of the loan growth. I think you mentioned that looking forward, you expect the similar performance this year to last year. Was that on a period-end or an average loan basis? Thanks.

[Ron Farnsworth:]

That would be on period-end, on overall production, yes, as we don’t exceed last year’s.

[Matthew Keating:]

Understood. And then I guess, still – you saw linked quarter decline in total mortgage banking revenues is still up on a year-over-year basis pretty substantially. I’m just curious how the application volumes – I think you mentioned there at $324 million this quarter, how do those compare to the first quarter of last year? And is it your expectation that mortgage banking revenues are likely to move positively or negatively for that on a full-year basis this year? Thanks.

[Ron Farnsworth:]

In terms of application volumes March of this year versus March of last year we were up for the application volumes. I don’t have a specific number here, but I know we were up 65% from year end to today. It’s going to be right around that level from March a year ago to where we’re at today. In terms of the full year revenue, we’re not going to give guidance on full year revenue. We just feel comfortable that we’re going to have higher production in the second quarter versus the first.

[Matthew Keating:]

Fair enough. Thank you.

[Operator:]

(Operator Instructions) We will go next to Mathew Clark of Credit Suisse.

[Matthew Clark:]

Hey, thanks. Just a couple of quick follow-ups. On the gain on sale before 25.3%, can you give us a sense for how much of that – how much hedging contributes to that margin?

[Ron Farnsworth:]

In terms of any positive hedge effects thorough this quarter, it would have been minimal probably in the 20 basis point range.

[Matthew Clark:]

Okay. And last quarter, how would that compare would you say?

[Ron Farnsworth:]

Fairly similar.

[Matthew Clark:]

And then just on your commentary around pricing becoming more competitive and you guys wanted to defend you share, is it fair to assume on the non-covered loan yields that we might just start to see they’ll – I guess that the change pick up a little bit and then we saw that hit those yields, the yield decline slow this quarter. Bust just curious about going forward, I think they’ve been in prior quarters down 15 to 20 basis points a quarter, but I think this quarter was only down to 6 basis points. Is it fair to assume that might pick back up on the portion, the higher quality portion you’re looking to defend.

[Ron Farnsworth:]

We don’t expect that, Matt.

[Matthew Clark:]

Okay.

[Ray Davis:]

I mean, with our – with protecting the portfolio that we’ve got, that could even have a positive impact. So no, I don’t expect a significant increase in the margin lowering, I don’t see it, not.

[Matthew Clark:]

Okay. Okay. Thank you.

[Ray Davis:]

Okay. Thanks, Matt.

[Operator:]

And at this time, there are no further questions remaining in the queue.

[Ray Davis:]

Okay. Thanks, Robert. I want to thank everybody for their interest in Umpqua Holdings and the attendance on our call today. Thank you. Good bye.

[Operator:]

And this does conclude today’s conference call. Once again, we would like to thank everyone for your participation and have a wonderful day.