Oct 17, 2013
Executives
Ron Farnsworth - Chief Financial Officer, Executive Vice President Ray Davis - President and Chief Executive Officer Mark Wardlow - Chief Credit Officer Cort O'Haver - Senior Executive Vice President
Analysts
Jeff Rulis - DA Davidson Matthew Clark - Credit Suisse Brett Rabatin - Sterne, Agee Steve Scinicariello - UBS Joe Morford - RBC Capital Markets Jacque Chimera - KBW Matthew Keating - Barclays
Operator
Good day and welcome to the Umpqua Holdings Third Quarter Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Ron Farnsworth, CFO.
Please go ahead.
Ron Farnsworth
Okay. Thank you, Carrie.
Good morning and thank you for joining us today as we discuss the results of operations for the third quarter of 2013 for Umpqua Holdings Corporation. This presentation includes forward-looking statements, within the meaning of the Safe Harbor provisions of 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 the shareholders approve the merger, whether the companies receive Regulatory approvals.
The timing of closing, whether the companies had accurately predicted acquisition and consolidation expenses, the timing and amount of savings from consolidation, the expected earnings contributions of both companies and management’s ability to effectively integrate the companies. 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 prospectus that will be included in the registration statement on Form S-4, which Umpqua will file with the SEC in connection with the proposed acquisition because it will contain important information about Umpqua, Sterling and 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 and the joint proxy statement prospectus when it is filed with the SEC. All documents filed with the SEC are or will be available for free on the SEC, Umpqua and Sterling websites or can be obtained by contacting Umpqua or Sterling’s Investor Relations department.
With me this morning are 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.
I'll now turn the call over to Ray Davis.
Ray Davis
Okay. Thanks Ron and good morning everybody.
For the third quarter of 2013, Umpqua Holdings reported operating earnings of $0.24 per diluted share compared to $0.23 reported for the same quarter one year ago and $0.24 reported for the second quarter 2013. The quarter’s performance highlights were continued strong loan growth with total production exceeding $543 million excluding the FinPac acquisition non-covered loans grew $191 million or 11% annualized and this of course has been built from the record pipelines we have been discussing over the last few quarters.
We welcome Financial Pacific Leasing to Umpqua on July 1st, which performed well above expectations contributing $0.05 of operating earnings and significant margin accretion hitting the ground running with higher production in the A paper space. Our non-performing assets continue to shrink dropping from 0.6% of assets in June to 0.52% here in September for the Classic Bank.
Adding FinPac’s small amount of non-performing assets brings the total to 0.54% of assets. Our progress here has had a positive effect on this past quarter’s loan loss provision which also continued to benefit from strong recoveries of $2.2 million for the period.
In spite of the significant increase in mortgage interest rates and drop in refinance activity, our home lending division reported a solid quarter and home loan production with total volume of $463 million resulting in mortgage banking revenue of $15.1 million. This is down from the second quarter but reflects the continued expansion we have had into the purchase business over the past year.
Our dividend was $0.15 per share reflecting a 62% payout ratio on operating earnings with the yield of 3.6%, very strong levels for the industry. Our capital was positively leveraged this quarter with the purchase of FinPac, and our overall capital management for the past year has been strong leaving us in a position to seize opportunities as they continue to arise.
Last quarter that opportunity was Financial Pacific Leasing, this quarter we announced a proposed merger of Sterling Financial into Umpqua. As we have discussed, this transaction comes to Umpqua with many positives including creating the West Coast’s largest community bank at approximately $22 billion in assets with just under 400 store locations across a five-state footprint.
Accretion of at least 12% through 2015 operating earnings when cost savings are fully phased in and limited tangible book value dilution at 4.6% with the pro forma earn back period of 2.5 years. We will now ask Ron to provide more details from the financials before we wrap it up.
Ron Farnsworth
Okay. Thanks Ray.
Starting with the balance sheet, our interest bearing cash balances decreased 24% at quarter end and 29% on average relating to the FinPac acquisition at the start of the quarter and continued non-covered loan growth. The bond portfolio declined 8% this quarter, all from maturities and monthly MBS cash flows.
The gradual increase in treasury interest rates through most of the quarter followed by the sharp rally in mid-September plus the portfolio price of the slight gain at quarter end within expectations. We continue to remain on the sidelines for new bond purchases given the overall and attractive level of interest rates from a total return perspective.
Rather we will use the cash build during the fourth and first quarters to fund continued loan on lease growth and provide additional liquidity to restructure Sterling’s balance sheet when our merger closes early next year. Our total available liquidity remains very strong at $3.9 billion, which is 34% of total assets and 42% of deposits.
As Ray mentioned earlier, non-covered loan growth excluding the acquisition was $191 million, which was 3% for the quarter and 11% annualized. And during the third quarter, our total commercial loan production was $543 million, and our pipeline remains strong at $2 billion consistent with the second quarter even after the strong production we had in Q3.
Between our Classic Bank loan growth and opening up the FinPac pipe with lower funding costs, we expect continued strong loan growth for the balance of this year. FinPac generated $46 million of new leases during the quarter, up approximately 50% from their prior quarterly run rate.
This reflects the growth initiatives to expand into the A paper channels we discussed last quarter. Moving down the balance sheet, the increase in goodwill related to the FinPac acquisition, while the increase in MSRs related to continued strong service loan production.
On the liability side, deposits increased $111 million during the quarter with an additional $39 million flowing into customer repurchase agreements for total growth of $150 million. Total revenue for the quarter was $134.6 million, an increase of 3.5% from the $130.1 million in the second quarter.
With inflow of revenue for the quarter, net interest income increased $13 million to $107 million. The largest component of this was non-covered loan interest income of $94 million, which increased $15.3 million for the quarter.
FinPac contributed $14.5 million of the $15.3 million increase in total non-covered loan interest income. I want to spend a minute with our interest income contribution as there are a few moving parts.
Peer coupon interest income on our leases was $15.8 million with another $1.1 million of fee income to get a total of $16.9 million. This was offset by $5.1 million in fair value rate premium amortization, reducing coupon yields on our financials to get to the $11.8 million.
Then we had the credit mark discount accretion of $2.7 million to bring that back up to the reported interest income of $14.5 million. As of quarter end, the remaining rate premium to amortize over time against coupon interest is $23.5 million, while the remaining credit discounts to accrete over time adding the coupon interest is $14.8 million.
Backing out FinPac, non-covered loan interest income increased just under $1 million reflecting the average Classic Umpqua loan growth for the quarter. Covered loan interest income dropped due primarily the lower accelerated discount accretion, but keep in mind this lower amount is mostly offset by the lower change in FDIC indemnification asset down in non-interest income.
Investment income was relatively flat reflecting higher yields with lower premium amortization offsetting the lower coupon income from not buying new bonds. Net premium amortization was $7.5 million for the quarter, down from $9 million last quarter.
Deposit interest expense declined based on higher cost CD run-offs as we projected last quarter. And on the margin front, non-covered loan yields reflect the FinPac addition, the higher taxable investment yield reflects lower premium amortization and our cost of interest bearing deposits declined another 6 basis points.
All of this leads to our adjusted net interest margin at 4.16% for the third quarter, up 59 basis points from 3.57% in the second quarter and at 47 basis points from 3.69% in the first quarter. This 47 basis point increase compared to the first quarter is higher than our previous guidance of 35 basis points reflecting stronger loan and lease growth and slightly higher credit discount accretion to FinPac.
As for credit quality related costs, the non-covered provision for loan loss was $3 million and $1.8 million of this related to FinPac. Recoveries were $2.2 million or a third of gross charge offs, continued realization on the recovery pool we have been discussing for the last few years.
Our non-covered allowance for credit loss declined to 1.19% this quarter noting 4 basis points of the decline from last quarter related to the additional FinPac loans. This will put the reverse at 1.23% for the Classic Bank compared to last quarter.
The remainder of the decline related to continued improvement in the Classic Umpqua portfolio with classified assets declining another 9% this quarter to $315 million. I will also note the remaining credit mark on the acquired FinPac portfolio was $14.8 million at quarter end yet this is shown as reduction of loans not in the reserve.
With this added in, our allowance for credit loss will be 1.4% but this has to be shown as the discount against the loan portfolio. On the covered side, the covered provision for loan losses as a recapture of $1.9 million this quarter related to improved market values on the covered collaterals and again I need to stress this is not a dollar-to-dollar impact to pretax income.
We had an 80% loss sharing offset of that amount down in non-interest income and combined with other covered items this led to a negligible impact on earnings. In the non-interest income area service charge revenue increased 12% this quarter, on the heels of the 7% increase during the second quarter, this related to our newly expanded business and consumer checking option.
Brokerage fees increased related to improving market conditions. And as Ray mentioned mortgage banking revenue was $15.1 million on a total volume of $463 million down from the second quarter and same period a year ago reflecting the steep increase in mortgage interest rates over the historically low levels they have been at for the better part of the past year.
Our gain on sale margins declined from 3.4% to 2.8% this quarter reflecting increased spread competition with the higher rate environment, a higher mix of purchase business and a drop in the loan pipeline this quarter. Our mix of closed business in the quarter was roughly 2/3rds purchase and 1/3rd refinance.
During the quarter our loan pipeline declined from $224 million to $148 million, while our total application pipeline declined 23% from $295 million to $228 million. We believe mortgage volumes will continue to decline at rates consistent with this past quarter.
Based on the lower production volume and pipeline, we had reduced expenses in this group by $2 million annualized and will continue to make future adjustments as needed. Servicing revenue continues to grow increasing 8% for the quarter and up 61% from a year ago.
This represents the second of three legs of the mortgage story, roaming stream and revenue stream which now stands at $2.7 million per quarter. The final leg, the MSR evaluation provides a natural built-in hedge for rising interest rates as refinancing flows.
The MSR evaluation, it was increasing throughout the quarter which would normally have helped to offset some of the decline in production. But, unfortunately interest rate scaled following the mid-September of further reserve meeting which turned the previously expected MSR increase into a hit of $400,000 down from the benefit of $1.4 million last quarter (inaudible) without providing the benefit to production given the timing.
Moving down the P&L, the lower loss for the change in FDIC indemnification asset in non-interest income relates to the 80% loss sharing for the lower covered provision for loan loss recapture and lower accelerated discount accretion this quarter. Other non-interest income decreased due to gains on sale of SBA loans from the second quarter that did not recur here in the third quarter along with slightly lower debt capital markets revenue.
On the expense side, total expenses increased $7.7 million from the second quarter comprised entirely of $3.5 million related to FinPac operations spread across the compensation, occupancy and other expense categories and $4 million of additional merger related expense for the Sterling announcement. Variable mortgage compensation declined $0.6 million this will decline more in the fourth quarter based on the reductions we noted previously.
So to summarize, we reported $0.24 of operating earnings per share in both the second and third quarters with a few significant moving parts between the two. The home lending contribution declined $0.05 this quarter with the drop in refinance activity and the lower FDIC sale gains in debt capital markets revenue declined $0.02.
The FinPac acquisition added $0.05 this quarter while loan growth, higher service charge revenue and better credit quality added few cents bringing this back to $0.24 to operating earnings for the third quarter. But this should tell you as management, they will just standby and watching never will drop in home lending revenues from record levels.
They are kept proactively looking for ways to deploy excess capital and build stronger returns. Our capital levels were positively leveraged this quarter with the FinPac transaction on July 1st with our September 30th TCE ratio at 8.8%, tangible book value per share at $8.47, Tier-1 common ratio at 11.1% and total risk-based capital ratio at 14.8% all were in lines with guidance we gave last quarter.
We talked about our significant flexibility to capital management the past several quarters and deploying that excess capital through continued M&A dividends and share repurchase activity, this will continue. We are projecting healthy capital ratios pro forma for the Sterling merger expected in the first half of 2014.
With our pro forma projected capital ratios at the closing of the deal being a TCE ratio of 9%, Tier-1 common ratio of 10.5% and a total risk based capital ratio at 14%. Now, I will turn the call back to Ray.
Ray Davis
Okay. Before we take your questions just a couple of final points.
First, we are pleased with the diversification of revenues and $0.05 of EPS accretion coming from the FinPac acquisition along with the continued loan growth through our commercial and consumer banking groups. This helped to offset the inevitable decline in refinance driven mortgage production.
Second, we are excited to be celebrating a significant anniversary next month, 60 years ago in Canyonville, Oregon a group of local businessmen came together to form South Umpqua State Bank. Today with more than 200 locations nearly $12 billion in assets and on the road to nearly double next year, our core principles are as important as they have ever been.
And our strategy remains constant. To build a community bank at any size, one with a commanding regional presence and the products and expertise of a large institution that chooses to operate with the values and customer experience of a community bank.
This brings me to my last point, which is the Sterling transaction. Our integration planning efforts are highly focused and well on the way.
We recognized the scope of this transaction and have devoted significant resources to planning every effort of the integration process following the close to ensure we are successful. I feel very good about our progress to-date and plans for the coming months.
Where we stand today? The Regulatory application should be completed within the next 7 to 10 days, the S-4 will be filed within the next 45 days.
We formed an integration team, headed by an Executive Vice President from each company very knowledgeable on the inter-workings of each of our financial institutions. The top level organizational chart has been finalized, the required divesture marketing processes will begin with the next day or two.
Assessment of technology and potential branch store, consolidation planning has begun as well as product mapping facility issues and department integrations. Last, the shareholder meeting, we focus, we expect to occur in late February.
And with that we will now take your questions.
Operator
(Operator Instructions) And we will take our first question from Jeff Rulis of DA Davidson.
Jeff Rulis - DA Davidson
Thanks. Good morning.
Ray Davis
Hi, good morning, Jeff.
Ron Farnsworth
Hi, Jeff.
Jeff Rulis - DA Davidson
Yes. Maybe a clarification on Ron’s comments regarding the expenses tied to the mortgage, the 40% dip in mortgage revs and really didn’t see much of a core operating costs declining, I guess, if you exclude the FinPac expenses and other one-time items.
So, is there a sort of a lag on the cost reductions in this division?
Ron Farnsworth
Yes. There is.
Jeff, there is natural and the variable side, they will be – as we talked about in the past, the 70% -- approximately 70% of the revenues both when – in a given loan is locked, the loan is locked, and then you’ve got a lag between then and close and that is when you will see the variable expense hit. So, we’ll see a natural drop in the variable side in Q4.
The additional $2 million we talked about was more within the overall structure of the group that will be over and above the variable piece you see in Q4.
Jeff Rulis - DA Davidson
Got it, okay. So that’s $2 million a quarter or $2 million flat and then variable per quarter?
Ron Farnsworth
$2 million annualized and variable per quarter.
Jeff Rulis - DA Davidson
And then just a follow up on the merger expense that 4.9, is that off impact or you’re starting to recognize some for Sterling?
Ron Farnsworth
Vast majority of that is Sterling related.
Jeff Rulis - DA Davidson
Okay, okay.
Ron Farnsworth
Yes.
Jeff Rulis - DA Davidson
And any sort of rough kind of run rate as to how that -- the next couple of quarters through close?
Ron Farnsworth
Well, I’d say they would be less than that is expected in the fourth quarter, first, second quarter as we close the deal is when we will see the majority of it. Now keep in mind when we showed those pro formas back in September with the announcement, we showed all of that is hitting on day one, but we knew and we discussed it -- that it would be, would be basically phased in over time on the merger expense side.
Jeff Rulis - DA Davidson
Got it. Okay.
And then maybe just the last one on the margin, kind of looking at it by month trying to gauge the impact of FinPac, how did those monthly margin averages play out, I mean in terms of the core -- that 416 for the quarter, but what are those by month?
Ron Farnsworth
That was a fairly core throughout, fairly consistent throughout. So our average cash also led to a portion of that, the drop in our average cash I talked about, and that occurred right on July 1.
We saw that over the course of the quarter, plus FinPac added on July 1.
Jeff Rulis - DA Davidson
Okay. That’s it for me.
Thanks.
Ron Farnsworth
Thank you.
Operator
Our next question comes from Matthew Clark with Credit Suisse.
Matthew Clark - Credit Suisse
Hi. Good morning guys.
Ray Davis
Good morning.
Matthew Clark - Credit Suisse
I guess, sticking with the margin I think previously heading into the quarter, we obviously expected the pop from FinPac, but I guess even beyond that, I think there was an expectation as you guys deployed cash and remixed the earning assets that we might see some continued relief. I guess can you give us, I know there is a lot of ins and outs particularly in the reported margin, but can you give us a sense for how -- whether or not we might see that core margin, maybe continue to pick up a little bit or you’re going to -- I will just leave it there.
Ray Davis
I think in terms of the core margin, we saw incredible benefit in the third quarter as we just talked about with the FinPac acquisition with the drop in average interest bearing cash, feel pretty good about that over the near term. Longer term, I mean longer term, it’s now predicated upon a lift in rates, but we have been able to offset that with continued loan growth.
Now, we’re not buying bonds, right. We haven’t been buying bonds this year.
We could add a couple of bps to the margin by doing so, but I don’t think that makes much sense. So we try to look at everything from a balanced standpoint.
We feel pretty good about the adjusted margin going forward. And just focused on the adjusted margin, not the reported one, again the majority of difference there is on the covered side that’s going to start to dwindle over time -- that differential led impact.
Matthew Clark - Credit Suisse
All right. Okay.
And then on the mortgage front and gain-on-sale margins and production, I guess, how do you guys foresee this all normalizing in terms of both pricing and volume?
Ron Farnsworth
I think what you saw for us in the quarter was the 3.4% drop to 2.8% in the gain-on-sale margin. A good chunk of that was driven by the drop in lock pipeline and period in Q2, the period in Q3, we continue to price for a gain on sale margin of approximately 3%, but we did talk about over the next quarter on mortgage, we expect to see a continued decline in production consistent with what we saw this quarter, so that’s the guidance we gave there.
Matthew Clark - Credit Suisse
Okay. Okay.
I’ll leave it there. Thanks.
Operator
We will move now to Brett Rabatin with Sterne, Agee.
Brett Rabatin – Sterne, Agee
Hi, guys. Good afternoon or good morning.
Ray Davis
Hey, good morning Brett.
Brett Rabatin – Sterne, Agee
Wanted to get a little more color, if I could, around the FinPac deal and just maybe – we are on some thoughts around the credit discount accretion progression going forward and then maybe some updated thoughts on just the bifurcation of that portfolio in terms of your opportunities to grow the A and B piece versus the C, how much growth now seems realistic kind of given where you are today?
Ron Farnsworth
Okay. Well, in terms of a credit discount accretion, also keep in mind there is -- in addition to -- the credit discount accretion adds to their coupon interest income, but then you have a rate premium amortization taken away, and that’s a net drop from the coupon versus what we report.
So --
Brett Rabatin – Sterne, Agee
Right.
Ron Farnsworth
Both of those amounts though were done on an effective yield method which means they decline over time. The impact is bigger in the first quarter and a little bit smaller in the second; a little bit smaller in the third.
But net-net that’s how that’s going to play out in terms of growth, and I’ll turn it over to Cort.
Cort O'Haver
Yes. Let me talk a little bit about what’s going on in the quarter.
So, closed the deal in July. We didn’t start to see a real increase in our A paper generation probably midway through July, and then it picked up pretty significantly in August and September.
The majority of the lift that we saw in the quarter was an A but quite candidly we saw a little less than C primary due to marketing efforts and our TPOs. The TPOs of FinPac recognizing a great opportunity to provide some convenience financing with their customers.
So we saw a great lift in the third quarter. We’re continuing to see that today.
A lot of lease finance has a lot to do with numbers of days in a quarter, lot like home lending, and we’re seeing some pretty good numbers come out of FinPac. In addition, we’re going to add bolt-on more traditional banking products -- lease in banking -- lease bank products and services.
We hired a couple of gentlemen in the last couple of weeks, which will provide more direct leasing obligation and then a vendor program which will probably roll out after the first of the year and those three strategies, its an increase in the A paper, the direct into will really -- is the overall strategy for FinPac going forward.
Ron Farnsworth
And Brett, I’m going to just follow up to the earlier comments. In prepared remarks, we covered this but I just want to reiterate.
So, we got $23.5 million of rate premium left to amortize which reduces coupon interest to get to financial statement interest income and that will be offset not entirely by $14.8 million of credit discount that will accrete back over time. So net-net will be a reduction.
Brett Rabatin – Sterne, Agee
Okay.
Ron Farnsworth
On interest to get to the financial synergies.
Brett Rabatin – Sterne, Agee
And then not to ask for specific guidance around the growth but just when you guys talk about potentially doubling the portfolio over the period of time, I mean what’s -- does that still seem realistic over the next few quarters or any thoughts on magnitude of the growth opportunity?
Ray Davis
I think when we announced this we said $1 billion in four years. And we’re doing well again there.
We put a budget together when we close and we’re doing great.
Brett Rabatin – Sterne, Agee
Okay. And then I guess, the other question I was going to ask was just around expenses and you covered mortgage but I was just curious if there was anything else going on in the quarter in the other bucket and anything we should be thinking about in terms of you guys spending money for this big transition with Sterling kind of pre the deal?
Ron Farnsworth
The third quarter related to the Sterling merger announcement, it was the merger related expenses you back that out to get to our operating expenses and the increase is related entirely to FinPac. So no other significant moving parts this quarter.
Brett Rabatin – Sterne, Agee
Okay, great. Thanks for the color.
Ray Davis
You bet. Thanks.
Operator
(Operator Instructions) And we’ll move to Steve Scinicariello from UBS.
Steve Scinicariello - UBS
Good morning everyone.
Ray Davis
Hey, good morning Steve.
Ron Farnsworth
Good morning.
Steve Scinicariello - UBS
Just, I got two questions kind of related to both deals both on the revenue synergy kind of potential, Ron, you’re just mentioning, couple areas where you might be able to cross sell across some of the FinPac platforms kind of curious to hear, how significant that might be for starters?
Cort O'Haver
I think over time it’s going to be very significant. We have an opportunity through our current store network let alone a combined store network with Sterling to offer lease finance.
And this majority -- well, actually almost all of the FinPac does a micro ticket and a lot of that can be delivered to our stores. So that’s an additional strategy that we need to contemplate until we got together with FinPac and certainly talking about that and we’re working on that.
I think actually very shortly we are going to roll that product through our stores. By adding the additional lease professionals and more traditional bank leasing is a real opportunity.
We’ve had a small leasing portfolio over the last couple of years and the gentlemen that we hired, he has done a great job but if you think about bolting that in with FinPac, who have done a great job of creating a national awareness of the brand. There is a huge opportunity there and then vendor finance -- vendor lease finance.
We bank a lot of companies here in the West Coast. We may do their – they are more traditional like the credit for the construction of the equipment but we don't provide the end financing, great opportunity with FinPac than to offer that vendor type leased product through their customer channels.
So there are huge opportunities, synergies with our current store footprint and with our customers.
Steve Scinicariello - UBS
And then --
Ron Farnsworth
Steve, this is Ron. Just going to reiterate, we didn’t factor any revenue synergies into the deal announcement or metrics.
Steve Scinicariello - UBS
Right. And that leads me to my second question on Sterling.
And I know you haven’t given any numbers or anything but as you kind of started to look at the opportunity there, what might be some of the areas that you see you could kind of export, kind of best practices across their footprint and vice versa on the revenue synergy side of the equation, just kind of general areas.
Ron Farnsworth
It has to do. I think what Cort just mentioned.
I think the potential that we really have is with soon to be almost 400 store network and be able to provide these type of products and services is certainly provides a great deal of wind in our sails that we think we’ll pick up quickly.
Steve Scinicariello - UBS
Got it. Any like particular like fee income areas or commercial banking platform exported across their footprint or anything like that just kind of what you might be thinking about?
Ron Farnsworth
There is going to be -- obviously there are number of other products and services that would get attached to these. I think it’s little early for us to comment on it.
Steve Scinicariello - UBS
Got it. Thanks very much.
Ron Farnsworth
You bet. Thank you, Steve.
Operator
Our next question comes from Joe Morford with RBC Capital Markets.
Joe Morford - RBC Capital Markets
Thanks, good morning.
Ray Davis
Good morning, Joe.
Ron Farnsworth
Hey, Joe.
Joe Morford - RBC Capital Markets
Back on FinPac, I guess that I was curious, what’s the yields are getting on the new loans and new leases, how is that compared the A versus to C and how does that compare with the existing portfolio?
Cort O'Haver
The A paper generally ranges between 8% and 12% to high to low end, everything gets scored to a model, it’s not a FICO score. It’s completely unique model.
But in that band, the best quality we get an 8% and then not quite as good A paper 12% and blends out about 10% with the origination. Comparative to the C paper, those leases generally can be north of 20%, just kind of stands once again on banding insight based on the scoring.
So because you kind have an idea between the A and the C and then the B is all is pretty much between 18% and that 12% for the A category.
Joe Morford - RBC Capital Markets
Okay. And the portfolio you bought was all Cs so the yield --
Ron Farnsworth
Primarily?
Joe Morford - RBC Capital Markets
Yes.
Ron Farnsworth
Primarily I mean, it was actually B and C to be quite honest, there is a little bit of A in there. There is a smattering of A in there but it was primarily B and C.
Joe Morford - RBC Capital Markets
Okay. And then separate question just back on the mortgage, the purchase volume this quarter was about 2/3rds up from half last quarter and where did you see that settling out as the overall volumes continue to decline?
Ron Farnsworth
For the near term, we talked about the app pipeline and the lock pipeline, it’s a pretty consistent if not a bit higher on the purchase side.
Joe Morford - RBC Capital Markets
Okay. That’s it.
Thanks so much.
Ron Farnsworth
Thank you.
Operator
And we will move to Jacque Chimera, KBW.
Jacque Chimera - KBW
Hi, good morning everyone.
Ron Farnsworth
Good morning, Jacque.
Jacque Chimera - KBW
Stepping away from the leasing portfolio and looking toward some of the other loan growth you have in the quarter, can you give a little bit of color on that?
Ron Farnsworth
Yes, this quarter, we shop fairly consistent with prior quarter’s growth in commercial C&I loans and then in commercial real estate, obviously, that started showing up as a greater opportunity probably about this time last year but otherwise almost all the categories with the exception consumer. Consumer was almost flat basically we were down slightly but it’s pretty much flat.
Then all of the categories were up on a consistent basis over the last couple of three quarters. We have seen a little more production in commercial real estate over the last three or fourth quarters.
That’s not really unexpected with asset values having climbed up. On a consumer front basis, we did put into place earlier in the year, a heavier emphasis on production that production had you know basically doubled in the last four or five months, we’re not quite seeing it in footings yet, a lot of these are C lock lines of credit.
So we hope for a future growth in footings because the production has doubled in the last four months.
Jacque Chimera - KBW
So just the usage rates remaining pretty flat but you’re adding a lot of new lines?
Ron Farnsworth
Yes, exactly.
Jacque Chimera - KBW
Okay. And then switching to the other side of the balance sheet, you had really nice improvement in the loan to deposit ratio which obviously has been doing a benefit to (NII) but I’m wondering how you think about deposit generation alongside loan generation just given the pending Sterling merger?
Ray Davis
Jacque, this is Ray. I think, here is my position on that.
There is no question about that. Umpqua has, I think we’ve proven over the last couple of years that our earnings asset growth strategy is working very, very nicely.
We are very pleased with it. And it continues to move on under Cort’s leadership in a great positive direction.
That being said, I do believe that not just for Umpqua Bank, I mean industry as a total never get focused on the liability side of the balance sheet. Umpqua has started major initiatives within our company to get a little bit more focus on the liability side or deposit.
You saw a pretty nice pop in our DDA balances this past quarter. So we are very much focused on our deposit gathering machine which we feel comfortable and confident that we can turn on.
Jacque Chimera - KBW
Great. Everything else I had was answered.
Thank you.
Ray Davis
Thank you.
Ron Farnsworth
Thank you.
Operator
(Operator Instructions) And we will take Matthew Keating with Barclays.
Matthew Keating - Barclays
Yes. Thank you.
I think last quarter you guys did the incremental provision from the FinPac acquisition as adding about $3.5 million through provision, obviously, I guess, it was $1.8 million -- ended being $1.8 million this quarter. Looking out, do you still think as you grow the FinPac loans that provision should increase for those originations?
Thanks.
Ron Farnsworth
Well, as the originations continue to increase over this baseline level and fortunately this originations will increase, so it more than covers.
Ray Davis
I say the growth of that provision is a very healthy sign.
Matthew Keating – Barclays
Okay. And then also – maybe you could provide us with the home lending pretax income contribution this quarter, hope you have that available?
Ron Farnsworth
Sure. It was roughly – I don’t want to say – I don’t have it specifically available here in front of me.
We will say overall it was roughly $0.08 to $0.09 out of the mix.
Matthew Keating – Barclays
Okay, great. Thanks.
That’s all I had.
Ron Farnsworth
Thank you.
Operator
Now we have a follow up question from Brett Rabatin with Sterne, Agee.
Brett Rabatin – Sterne, Agee
Hi. I just want to follow up on borrowings and trust preferred and just thinking about going to over $20 billion, actually we are $15 billion and just the press release had a comment about not repaying trust preferred but I’m just curious if that ballpark estimate might change over the next few quarters?
Ron Farnsworth
It is not going to change. It’s a very low cost form of regulatory capital.
It will be slotted into Tier-2 after saving there from Tier-1 in 2015 and 2016.
Brett Rabatin – Sterne, Agee
Okay.
Ron Farnsworth
So roughly 75% of that will face the Tier-2 in 2015 and then all of them will be there in 2016. But when you look at it overall very low cost form of Tier-2 cap.
Brett Rabatin – Sterne, Agee
Okay. I know there is a basis challenge with hedging but any thoughts on the fair value, at least I’m just thinking about trying to hedge that just kind of given where rates are going?
Ron Farnsworth
I think if you look back, the short answer is no. We don’t plan on hedging that fair value.
If you have to look back over the last three to five years I think you could have hedged all sorts of instruments with the volatility in the market. I don’t think you can say with a straight face that you would have been better off or not.
Brett Rabatin – Sterne, Agee
Okay, great. Thanks Ron.
Ron Farnsworth
Thank you.
Operator
We have no further questions in queue at this time.
Ray Davis
Okay, all right. Thanks Carrie.
I want to thank everyone for their interest in Umpqua Holdings and their attendance today. This will conclude the earnings call.
Good bye.
Operator
Once again ladies and gentlemen, this does conclude today’s conference. Thank you for your participation.