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Edited Transcript of UMPQ earnings conference call or presentation 24-Jan-19 6:00pm GMT

Q4 2018 Umpqua Holdings Corp Earnings Call

Portland Apr 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Umpqua Holdings Corp earnings conference call or presentation Thursday, January 24, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cort Lane O’Haver

Umpqua Holdings Corporation - President, CEO & Director

* Ronald L. Farnsworth

Umpqua Holdings Corporation - Executive VP & CFO

* Torran B. Nixon

Umpqua Holdings Corporation - Senior Executive VP & Chief Banking Officer for Umpqua Bank

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Conference Call Participants

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* Aaron James Deer

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst

* Jacquelynne Chimera Bohlen

Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research

* Jeffrey Allen Rulis

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Matthew Timothy Clark

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst

* Steven A. Alexopoulos

JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks

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Presentation

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Operator [1]

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Good day, and welcome to the Umpqua Holdings Corporation Fourth Quarter Call earnings. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Ron Farnsworth, CFO. Please go ahead, sir.

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [2]

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Okay. Thank you, Stephane. Good morning and thank you for joining us today on our fourth quarter and full year 2018 earnings call.

With me this morning are Cort O’Haver, the President and CEO of Umpqua Holdings Corporation; Tory Nixon, our Chief Banking Officer; Rilla Delorier, our Chief Strategy Officer; Dave Shotwell, our Chief Risk Officer; and the Frank Namdar, our Chief Credit Officer. After our prepared remarks we will then take questions.

Yesterday, afternoon we issued an earnings release discussing our fourth quarter 2018 results. We've also prepared a slide presentation which we will refer to during our remarks this morning. Both of these materials can be found on our website at umpquabank.com in the Investor Relations section.

During today's call, we will make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the safe harbor provisions of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to Page 2 of our earnings conference call presentation as well as the disclosures contained within our SEC filings.

And I will now turn the call over to Cort O’Haver.

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Cort Lane O’Haver, Umpqua Holdings Corporation - President, CEO & Director [3]

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Okay. Thanks, Ron. Let me begin by providing a brief recap of our fourth quarter and full year 2018 performance and accomplishments. Ron will discuss the financials in more detail and then we will take your questions. 2018 was a great year for us, highlighted by strong financial performance, continued loan and deposit growth and tremendous progress made implementing the initiatives organized within our Umpqua Next Gen strategy. We had a solid fourth quarter with earnings per share of $0.36. Financial results reflected 11% annualized loan and lease growth, 6% deposit growth, higher net interest margin and lower noninterest expense. This is down from the $0.41 we earned in the prior quarter but up from the $0.34 in the fourth quarter of 2017.

With respect to the decrease in earnings per share from the prior quarter, there were several notable items that impacted the fourth quarter financial results, including a $16.1 million in fair value decrease on the MSR asset and swap derivatives. For the year, we earned $1.43 per share, which represents a 30% improvement over 2017 earnings of $1.10 per share, with 1 year of our Umpqua 3-year Next Gen strategy in the books. I'm extremely pleased with the progress we've made and how it sets us up for continued success in this year and beyond.

Next Gen is an ambitious multifaceted plan to transform Umpqua. And I could not be more proud of the hard work, dedication and resolve of all of the associates last year.

Let me highlight some of our 2018 accomplishments across our 3 Next Gen strategic priority areas, balanced growth, operational excellence, and human-digital.

I'll start with balanced growth. For the year, we grew loans and leases by $1.4 billion or 7% and deposits by 6%. This strong growth shows a success of our balanced growth initiatives which is focused on generating new multifaceted relationships across the banks to deliver more consistent and diversified growth driven by stronger, deeper and more profitable customer relationships.

A larger portion of the overall growth in 2018 came from the commercial loan portfolio, which increased 11% to $4.7 billion. With the composition of this loan portfolio mostly variable, we are able to take advantage of higher rates resulting in an increase in net interest margin.

In addition, we continue to see strong results from our corporate banking group which is driving a significant portion of our overall commercial loan deposit and fee revenue growth. We're building on the success in 2019 by transforming our commercial loan process, expanding commercial and corporate products and services and adding talent in key markets.

The retail bank also had a very busy year, generating strong deposit growth, while we lowered our mix of wholesale funding across 31 locations. Consistent with what I've shared on previous calls, we have yet to see any significant deposit attrition from those consolidations.

During Q1 of 2019, we will consolidate an additional 15 stores and sell 4 more. After the completion of this round of consolidations, we will have exited 56 total locations since the initiative began. Generating deposits is a key area focus in 2019. And we have a number of initiatives in flight. So let me highlight a few: We are realigning all the commercial deposit businesses under a new executive,

Kathryn Albright. Kathryn joined late last year and brings 25 years of big bank experience to Umpqua. Within our retail stores, we will be significantly increasing the time spent on new customers with an emphasis on micro business targets. We will also be elevating lead roles in defined markets to free up store manager time for business development. We will be utilizing new technology and systems to help both, identify new deposit opportunities and to drive higher customer retention and are planning further treasury management product enhancements this year.

Lastly, we are optimizing the digital marketing. And as a part of the operational excellence program, we will be redesigning the deposit customer end-to-end journey, similar to what we did on the commercial loan side.

Turning to noninterest income. Increasing core fee income is a part of our balanced growth initiative. Last year, we increased nonmortgage fee revenues by $15.1 million or 12% over the prior year level. This represents good progress against the 2020 goal of $30 million to $40 million in incremental fee revenue. The importance of this fee income was especially evident in 2018 as it helped to offset a challenging mortgage banking environment.

Overall, mortgage banking revenues decreased by $18 million or 13%, driven by lower volume and a decline in the gain on sale margin. This decrease was offset by higher fees, resulting in a flat noninterest income for 2018.

Turning to operational excellence. We also made significant progress on this initiative in 2018. We streamlined and simplified the bank so that we can add value for our shareholders and customers and create a better associate experience.

We completed the organizational simplification and design efforts in the first half of the year, and we've removed an entire layer of management and delivered on the savings as we originally had identified. From there we quickly moved to procurement and we've made great progress in leveraging the size of our organization to drive further efficiencies.

In addition, we've also begun several of the end-to-end customer journey redesigns beginning with commercial lending, which will improve the customer experience and create tremendous value by increasing the speed to market and decreasing the cost per loan, which now brings me to our human-digital strategic priority, which is how we're creating a differentiated customer experience.

Our human-digital initiatives use technology to empower our people to form deeper, more meaningful and profitable customer relationships. On the consumer front, we launched in 5 markets last year, Go-To, the industry's first human-digital banking platform. We'll be launching it in all stores across our footprint early next month. Early indicators from last year's pilot and limited rollouts suggest that this new channel is deepening customer relationships in meaningful ways and we look forward to sharing more detail later this year.

Human-digital banking is also an important differentiator in wholesale. Here we're using learnings from our commercial end-to-end journey initiative to develop an integrated banking experience. We're using technology to empower our bankers with smart insights at the right time and to help our customers advance their companies through automation and other digital capabilities. Embedded across all of these initiatives is our continued investment in evolving, enhancing Umpqua's culture. I'm pleased to share that Umpqua's associates are excited and energized by this strategy. Their passion and commitment drove our success across all 3 strategic priorities last year which has led to a significant improvement in our financial performance.

And this is highlighted on Slide 3. On the top chart, the efficiency ratio improved to 60.6% for 2018, down from 65.1% for 2017. As you can see highlighted on this slide, we're making great progress towards the 2020 financial goals. As a reminder, impacts from exit and disposal costs and fair value gains or losses were excluded when we laid out those goals in late 2017. We've broken out the financial impact of those items for you below the chart. In each of the last 2 quarters, the efficiency ratio was 58.6% and 57.1%, respectively. This represents remarkable improvements since we kicked off the operational excellence program in early 2018.

Along similar lines, on a bottom chart, return on average tangible common equity increased to 14.45% from 11.49% in the prior year. As always, we remain focused on creating long-term value and generating strong capital returns for our shareholders. The quarterly dividend was increased to $0.21 per share during 2018 and we paid dividends of $0.82 per share for the year, up from the $0.68 in the prior year.

Lastly, our balance sheet remains strong, credit quality is stable and we remain a prudent -- and we maintained a prudent level of capital to support growth. With a strong foundation in place, as we kick off into 2019, we're focused on continuing to implement our Next Gen strategy through a smart mix of growth, differentiation and operational excellence.

Now back to Ron to cover the financial results.

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [4]

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Okay. Thank you, Cort. And for those on the call, who want to follow along, I will refer them to certain page numbers from our earnings presentation.

Turning first to Page 7 of the slide presentation and also of the earnings release which contains our quarterly P&L. GAAP earnings were $0.36 per share this quarter, a $0.05 decline from the third quarter, driven primarily by fair value of losses on the MSR and CVA valuations, stemming from the market volatility late in the quarter leading to a decline in treasury yields.

Ex the 2 fair value swings as compared to Q3, we had $0.02 of benefit from higher net interest income and $0.02 of benefit from the gain on sale of Pivotus' assets, offset by a $0.02 drop from the higher provision for loan losses and $0.02 drop from seasonally lower mortgage contribution, ex the MSR.

Turning to the net interest income and margin on Slides 8 and 9 and noted on Page 7 of the release. Net interest income increased $6 million or 2% from Q3. Interest income increased $10.6 million with 3 quarters of that related to loan interest supported by the strong growth this quarter along with another prime rate increase. Discount accretion is becoming a nonevent as that declined again as expected this quarter to $4.2 million. Also, our taxable investment income increased related to lower premium amortization. Our interest expense increased $4.5 million or 10 basis points based on continued average balance growth and rising interest rates. And our accumulative deposit beta, based on the Fed rate increases to date, was 26%, our past quarter beta was 48%. And we expect deposit cost to continue to increase over the coming year with quarterly betas moving closer to historical norms of 60% to 65%.

As reflected on Slide 9, our net interest margin was 4.15% this past quarter. The margin excluding discount accretion was 4.09%, an increase of 20 basis points over the third quarter. The majority of the increase resulted from a recapture of premium amortization on the investment portfolio as MBS prepayments continue to slow. The premium recapture credit this quarter was $5.9 million or 11 basis points of margin. So taking premium am to 0 would have the pro forma margin of 3.98%. If that premium amortizations were back at levels we saw earlier in 2018, the margin ex discount would have been roughly flat this quarter at 3.89%. So assuming prepayments do not fluctuate greatly early in 2019, we expect the margin ex discount accretion to hang around this 3.89% level with anywhere from 2 to 5 basis points of additional margin for discount accretion.

On Slide 10, the provision for loan and lease losses was $17.2 million, up slightly from Q3 based on a $4 million increase in net charge-offs. We continue to characterize this as bouncing along the bottom.

The quality of the loan portfolio is pristine. And by way of context, of the $52 million the net charge-offs for all of 2018, roughly $40 million related to our FinPac leasing portfolio. That leaves $12 million for the year or $4 million for the quarter of net charge-offs on the $19 billion loan portfolio, excluding leasing, which is only 5 basis points. That's pretty good stuff.

Moving now to noninterest income on Slide 11. Total noninterest income declined this quarter related primarily to the negative fair value marks for the MSR and CVA assets resulting from the sharp decline in long-term treasury yields. Included in other noninterest income this quarter was a $6 million gain on sale of Pivotus' assets.

For mortgage banking as shown on Slide 12, and also in more detail on the last page of our earnings release, for-sale mortgage originations decreased 22% this past quarter, in line with seasonal expectations. For the year, for-sale and total originations were up 31% and 19%, respectively. Our gain on sale margin remained below goal at 2.83% this quarter due to the drop in lock pipeline at year-end. Seasonally, in absence of the significant change in mortgage rates, we expect home lending activity will remain lower in Q1, ramping up for Q2 and Q3 and then declining again, in Q4. As always, we're actively monitoring the market and competition here. And if we don't foresee profitability in this unit improving, coming out of the spring, we will act quickly on more structural changes to our delivery model.

On Slide 13, we lay out growth in nonmortgage fee revenue which is defined as noninterest revenue from our wholesale, retail and wealth management divisions, excluding fair value changes and gains from portfolio loan sales. This is the measure we're looking to increase $30 million to $40 million by 2020 over 2017 levels.

With the various Next Gen initiatives we've laid out, we're happy to report good progress on the first of the 3-year plan, increasing this fee revenue by $15 million or 12% over the prior year.

Turning now to Slide 14. Noninterest expense was $178 million. At the bottom of our guidance range of $178 million to $183 million from last quarter, the fourth quarter amount includes $4 million of higher incentive and restructuring-related charges, $1.5 million of higher group insurance costs and $1 million for a loss on OREO. These increases were offset by continued reductions in home lending direct expense, lower FDIC assessments, lower marketing and continued operational excellent savings.

Note, the efficiency ratio was 58% on the face of the P&L for Q4 and dropped to 55% when adjusting out the MSR and CVA fair value charges discussed earlier. We're making great progress already in year 1 of our 3-year plan.

The overall operational excellence initiatives are summarized on Slide 15. We've completed the Phase 1 back-office items with $16 million annualized expense savings reflected in our fourth quarter results. The additional $6 million to $8 million of procurement savings will be reflected by mid-2019 based on upcoming contract renewals. With this, we've hit the high end of our Phase 1 target at $22 million to $24 million in annualized expense savings, amazing work by our team to achieve these results.

For Phase 2, we're about to complete the commercial loan end-to-end journey redesign and start the consumer deposit origination end-to-end journey. From these, we expect both financial and nonfinancial benefits, including opportunity to book loans faster along with better customer and associate experience. We will provide updates on expected annualized savings from this and other Phase 2 levers on future quarterly calls.

With this work continuing, we expect to incur another $2 million to $3 million of restructuring costs in Q1. And as we look forward to Q1 2019, we expect a few moving parts on overall expense, including seasonally higher payroll taxes of $3 million to $4 million every Q1. Noting this runs down over the course of the year. The remaining procurement savings will be realized in Q1 and Q2. Additional minor exit costs related to store consolidations offset by a slightly lower home lending production expense based on seasonally lower volume. Incorporating these updates for the first quarter of 2019, we expect our overall GAAP expense to be in the range of $176 million to $181 million with our efficiency ratio of excluding any fair value changes in the high 50% range.

Turning now to the balance sheet, beginning on Slide 16. A higher loan growth exceeded deposit growth resulting in the decline for interest-bearing cash.

The mix of loans and deposits are shown on Slide 17. Loan growth was split pretty evenly between CRE, commercial and residential. Note that the decline in consumer loans was driven by the wind down in our indirect dealer auto portfolio as discussed last January.

Slide 18 reflects the repricing characteristics of our loan and lease portfolio, noting our floating rate loan mix continues to increase with commercial loan growth.

On Slide 19, we've highlighted the geographic diversification of our loan portfolio across the footprint. We also provide some select loan and underwriting characteristics for each of our major portfolios.

And Slide 20 reflects our credit quality stats. Noting the strength of our portfolio is supported by the continued decline in classified loans, now down to 0.75% of total loans or only 8% of capital.

Lastly, on Slide 21, I want to highlight capital. Knowing that all of our regulatory ratios remain in excess of well-capitalized levels with our Tier 1 common at 10.7% and total risk-based capital at 13.4%. With our quarterly common stock dividend of $0.21 per share, the total payout ratio was 58% this quarter.

Also, our tangible book value per share is $10.19, which when you also account for the $0.82 in dividends to shareholders over the past year, increased 13% over the prior year level. Our excess capital declined to approximately $155 million with the strong loan growth. And as discussed earlier, we expect this to continue to decline moderately over the coming few years.

To conclude, our focus is on executing all aspects of our Umpqua Next Gen strategy, improving financial results and generating solid returns for shareholders over time, including a healthy dividend. And with that, we will now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Michael Young with SunTrust.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [2]

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Ron, just wanted to start with the Next Gen and the cost saves. So if I'm going to reading this right, we've got $6 million to $8 million remaining from Phase 1 by midyear and then just taking the midpoint of the range roughly $9 million or so from Phase 2 by year-end. And then I assume that's going to be offset by some normal expense inflation throughout the year. So net-net, do we end up just a little bit lower kind of on a run-rate basis from where we started the year?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [3]

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Year-over-year, that's the goal to have lower expense in '19. I'd characterize it best by talking about the efficiency ratio where we expect that's continue to drift lower, seasonally over the year it will be a bit higher in the first 2 quarters, lower in the second 2. But year-over-year, we're targeting somewhere in that mid- to upper 50% range, which puts us in good shape for the 2020 goals year out. In terms of the cost saves, you will have normal inflation. Recall, we'll have the payroll tax curve over the course of the year, ramping up in Q1 and down for the balance of the year. But then I'd also characterize though too around certain cost saves. We'll continue to reinvest roughly 1/4 to 1/3 of those cost saves in new technologies and initiatives. That's all factored into, of course, the year-over-year expense number I talked about earlier.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [4]

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Okay. And then you kind of mentioned the potential to rationalize, maybe the mortgage kind of fixed cost as we move into the back half of the year depending on the outlook for volumes. Could you maybe just talk about maybe the magnitude of that incremental from where we are today? And then also just maybe pair that against how much production you expect to retain next year versus -- on balance sheet versus sell?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [5]

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Sure. I think on the last question, we'll have a similar mix here over the course of the year just in terms of for-sale versus as a percentage of total originations just given where the markets are. In terms of the bigger question around the profitability of the unit. I want to know -- and I think we'll have a good sense of by late spring if somewhere in the high 2% range is the new normal for gain on sale margins. If that's the case, then I'm going to want to lower -- we're all going to want to lower the 2.5% roughly expense on volume. Part of that's going to be through certain direct or centralized channels that we have, which right now is maybe 20% of our overall volume is flowing through direct channels. We'll be looking to increase that. But I'm going to save further comments on that probably till we get into late spring through the summer just to see how it shakes out on the gain on sale margin.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [6]

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Okay. And one last one if I could just sneak it in. I know you guys did review the MSR and hedging and elected not to do that. Any changes or any changes in the macro that would cause you to reevaluate that?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [7]

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No. I've just seen it over a long period of time that hedging can create more of a problem than just watching the -- as yields move up and down you know what's going to happen to the MSR. So additional cost and doesn't necessarily reduce volatility.

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Operator [8]

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Up next is Jeff Rulis from D.A. Davidson Companies.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [9]

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On the -- just the loan growth. I guess anything notable about the net pickup, maybe the question would be, you have payoff activity quarter-to-quarter, what was the trend this year versus last -- or this quarter versus last?

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Torran B. Nixon, Umpqua Holdings Corporation - Senior Executive VP & Chief Banking Officer for Umpqua Bank [10]

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Jeff, this is Tory Nixon. We had payoffs in Q4, were down slightly from Q3, which were also down slightly from Q2. So they are relatively close in terms of total dollars but we've had a decline over the last 2 to 3 quarters.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [11]

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Got you. And then I guess as we look at into '19, I think you've been running down the auto portfolio. Maybe if you could tell us about what is remaining to go there? And I guess overall expectation, should that headwind negate kind of your growth outlook for '19?

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Cort Lane O’Haver, Umpqua Holdings Corporation - President, CEO & Director [12]

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No, it's in the growth outlook, just given -- we factored that in when we laid out the overall assumptions for the 3 years. And right now that's roughly $450 million. And it's running down a pretty consistent clip on a quarterly basis. So I think that will continue.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [13]

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And then maybe one other one. Ron, I think you mentioned the bulk of the charge-offs have been in the FinPac portfolio. I think you mentioned for the year. But did that accelerate into Q4? I think you mentioned that the FinPac is kind of the leading indicator. But what was the makeup in Q4? Or was it similar with the kind of legacy -- I guess not legacy, but FinPac versus other loans?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [14]

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Yes. So excluding the leasing portfolio, it was roughly $4 million of charge-offs for the quarter, was $10 million for the year. So I guess if you did a simple average on a quarterly basis so it was up a bit but it's bouncing along the bottom. When it comes the leasing portfolio charge-offs have been pretty consistent on that front and again recognize that Page 19 we added in there. Hopefully, gives us some good stats on the overall quality of the portfolio with loan to values and DSCs. I'll reiterate the FinPac leasing portfolio is roughly 10.5% yield. And I know I used the term the canary, it's still flying. So we don't see anything near term on that front to cause the difference in expectations.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [15]

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And without substantial change on a lot of fronts, the provisioning level kind of the range we saw in '18 is comparable to '19? Or any kind of change structurally that you see that ramping?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [16]

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Yes. No, no structural change. It's been pretty consistent trends. Provisions will exceed charge-offs. And in terms of the overall quality of the portfolio, again that page of the end shows just the drop in classified down now to 8%. I'm not saying that's going to continue into '19. But I will expect provisions to continue to exceed charge-offs and the reserve just to ramp up slightly over the course of the year, prior to CECL.

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Operator [17]

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Up next we have Steven Alexopoulos from JPMorgan.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [18]

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Ron, let me follow up on credit before I get to my questions. Because you did see a modest pickup in net charge-offs in the quarter. I know the credit metrics are stable. Was that -- what exactly drove that this quarter?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [19]

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Two loans within the bank portfolio. Nothing significant. Nothing out of the ordinary for $4 million.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [20]

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Okay. Got you. And then on margin, the guidance you gave us helpful in terms of starting point. But given the comments and thoughts around deposit betas continuing to normalize, if we get no additional hikes out of the Fed, how do you see the NIM progressing from here?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [21]

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Sure. So if you -- if we think about the 2020 target, we had a 3.9% to 4% and that assume there were additional rate hikes. Coming into '19 if I'm in the high 3.8s and there's no additional rate hikes, we'll continue to see pressure, probably in the low 3.8% range by the end of the year. That just seems we continually -- and I'll call it, 45% to 50% then 55% on the beta side just with those costs increasing. But that's all -- all gets back down to then all the initiatives. Cort and the team talked about earlier in terms of the deposit growth initiatives. And our target is not to bring in high-rate money, it's continue to grow the core consumer base.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [22]

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And along those lines, final question. So looking there to decline in noninterest bearing deposits in the quarter, was that customer just moving cash into higher-yielding alternatives or is something else driving that?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [23]

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Little over half of that is simply timing on ACH between 12/31 and January 2.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [24]

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So it's a timing issue not seeing customers move cash, noninterest bearing out, is that what you're saying?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [25]

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Not in the large way.

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Operator [26]

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Jackie Bohlen from KBW.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [27]

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So, Ron, I want to make sure that I understand the premium am movement that happened in the quarter. So rather than a reduction it was actually a positive benefit of $5.9 million to the margin, right?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [28]

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Correct.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [29]

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Okay. So if we move back to the historical level that gives you that 3.89% that you were talking about, what rate movements would you need to see in order to get to that point?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [30]

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Probably a decline in longer-term yields, which would cause an increase in mortgage refinance activity and then hence, MBS prepayments would increase. In reality, in the short term what I guess is that will be similar between the 2 but I do not expect another recapture in Q1, if anything, just a smaller amount of amortization. Might not be back all the way to the levels we had in early 2018 but just want to lay out the range there.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [31]

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No. That's helpful. And in last quarter, you talked about the margin being in a range of 3.85% to 3.90%. Understanding that there is this premium am that's moving and it was a big benefit in the quarter. How does where you stand today compare to where you stood a quarter ago when you gave that range?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [32]

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Well, again, that was a function of recapture just based off of a continued decline in MBS prepayments. So as I look into early '19, I expect we'll still be in that range of 3.85% to 3.9%, probably over the better part of the year. But if prepayments continue to slow, we'd probably on the high end of that. If not above, it's just -- given, again, lower amortization on that front.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [33]

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Okay. And then did I hear you right, where you said if rates stop increasing then the margin would trend down and get towards the low 3%?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [34]

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I would assume that is the case -- not the low 3% range, no. I said, we would continue to see pressure on deposit costs. I think that'd be the case not only for Umpqua but for everybody in the industry. Just given there's going to be some tail on that, right? So I expect I'd be probably on the lower end of that range, if not somewhere in the 3.8% to 3.9% range. Not low 3s.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [35]

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Okay. I knew I misheard it. I just wanted to clarify it.

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [36]

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I'm glad you get that corrected.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [37]

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Yes, that would be a big jump. And then I'm -- here's 1 last question. Historically, you've said that the normalized level of amortization on the MSR portfolio is around $3 million to $5 million. Does that still hold outside of rate movements?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [38]

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I'd say it's probably closer to $5 million to $7 million here over the last couple of quarters.

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Operator [39]

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Aaron Deer with Sandler O'Neill and Partners.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [40]

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The -- I just want to go back to the mortgage outlook. The couple of things there. One is, in terms of your expectations for production volumes as you look out to the year. At this point, you're effectively using kind of the MBA forecast for that? Or does your outlook differ from that?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [41]

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Does not differ from it. We outperformed it this past year compared to what we thought. But that's what we're using for planning for '19.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [42]

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And I don't know if you've done any sales this quarter in terms to the secondary market, but as you -- but what are your expectations just kind of -- as you look at the -- at that market and today where gain on sale premiums are likely to be? What is your expectation there?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [43]

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Yes. Interesting because you have -- at a loan level, they are still being priced right around 3% or in the low 3% range. It was 2.83% for the fourth quarter just because we have to fair value the change in lock pipeline. So part of the answer to your question, I mean, what do I expect the lock pipeline to be in March compared to in December? And ideally that's going to be roughly flat just with an overall lower level of volume through the quarter. So ideally we'll be closer to 3%. If we're below, it is going to be because of a drop in lock pipeline. I think, bigger picture though, if we get into late spring and competitive standpoint, you haven't seen some players exit the market would be talking about different items on just in terms of the structure of our delivery just given that spread's pretty tight.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [44]

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And can you give us a sense of the size. Is there -- if you do look to restructure that business, what kind of cost savings do you think are possible to be pull out of it?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [45]

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Well, right now, it's roughly 250 basis points for the overall cost on the volume. It's too early to talk about detailed plans there, that's something where we'll save comments on probably till late spring, summer if we do not see a recovery in the gain on sale margin. Of that 250 bps, roughly 2/3 of it's variable.

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Operator [46]

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(Operator Instructions) We'll move on to Matthew Clark from Piper Jaffray.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [47]

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Just on the NIM statement. Should we assume that, that's largely done here, should we expect any additional adjustments going forward?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [48]

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Well, again, this quarter was related to premium recapture under retrospective bond accounting because MBS prepayments is slowed. If they slow further, we might have either lower amortization or some more recapture. But that gets back to the comments I had earlier where if I were -- if premium am were normalized back to the level they were at in early 2018 will be similar around 3.89% for that core NIM.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [49]

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Okay. That's very retroactive. Okay. And then just on capital, any update on your M&A appetite desire to maybe buyback some stock with where your shares are trading?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [50]

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Let me start on the buyback side. We'll continue to focus on the dividend, the healthy payout ratio. I think the buyback is pretty short term focused. And I expect that excess capital to decline slightly over the coming years. It's a good amount of excess not an egregious amount. And keep in mind we also have lease accounting which will probably use that $12 million to $13 million of that capital this quarter. And then we'll be running parallel on CECL, talk about that over the course of the year. So no plans to do anything the ordinary and buybacks just repurchase shares issued under comp plans.

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Cort Lane O’Haver, Umpqua Holdings Corporation - President, CEO & Director [51]

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Matt, Cort on M&A. Like we've talked about the last couple of years, we're still going to continue to stay focused on operating the company. And I think we shown you all that we're continuing to decrease the efficiency -- increase the efficiency and continue to run a more profitable organization. We've always been opportunistic on potential acquisitions. We will continue to be opportunistic and we do track a couple of markets where we think additional density would be good or adjacent markets where we'd like to get into those markets. But we look out at on opportunistic basis and if a deal makes sense both financially and strategic, we're not opposed to looking.

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Operator [52]

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[Operators Instructions) And there are no further questions in the queue. I'd like to turn the call back over to Mr. Ron Farnsworth.

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Ronald L. Farnsworth, Umpqua Holdings Corporation - Executive VP & CFO [53]

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Okay. Thank you, Stephanie. And well, thank you everyone for their interest in Umpqua Holdings and attendance on the call today. This will conclude the call, goodbye.