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Edited Transcript of UMPQ earnings conference call or presentation 20-Apr-17 5:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Umpqua Holdings Corp Earnings Call

Portland Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Umpqua Holdings Corp earnings conference call or presentation Thursday, April 20, 2017 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cort L. O’Haver

Umpqua Holdings Corporation - CEO, President, Director, CEO of Umpqua Bank, President of Umpqua Bank and Director of Umpqua Bank

* Ronald L. Farnsworth

Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank

* Torran B. Nixon

Umpqua Holdings Corporation - Head of Commercial & Wealth for Umpqua Bank and EVP of 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

* Brian James Zabora

Hovde Group, LLC, Research Division - Director

* Jacquelynne Chimera Bohlen

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

* Jared David Wesley Shaw

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Matthew Timothy Clark

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

* Riley Manuhoa Stormont

D.A. Davidson & Co., Research Division - Research Associate

* Steven A. Alexopoulos

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

* Tyler Stafford

Stephens Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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

At this time, I would like to turn the conference over to Mr. Ron Farnsworth, Chief Financial Officer. Please go ahead, sir.

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [2]

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All right. Thank you, Dana. Good morning, and thank you for joining us today on our first quarter 2017 earnings call. With me this morning are Cort O’Haver, the President and CEO of Umpqua Holdings Corporation; Dave Shotwell, our Chief Credit Officer; and Tory Nixon, our Head of Commercial and Wealth. After our prepared remarks, we will then take questions.

Yesterday afternoon, we issued an earnings release discussing our first quarter 2017 results. We have 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 L. O’Haver, Umpqua Holdings Corporation - CEO, President, Director, CEO of Umpqua Bank, President of Umpqua Bank and Director of Umpqua Bank [3]

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Okay. Thanks, Ron, and welcome to everyone listening in on the call. First quarter earnings per share were $0.21 compared to $0.31 in the prior quarter. $0.08 of the $0.10 quarter-over-quarter decline was related to the change in fair value adjustment on the MSR and debt capital market swap derivatives.

Our financial results this quarter benefited from much stronger loan growth, although much of that occurred late in the quarter along with a 2 basis point expansion in net interest margin. Consistent with our prior guidance, mortgage banking revenues declined, reflecting the usual seasonality of that business. We also saw higher payroll taxes during Q1. With the encouraging trends in loan growth and net interest margin, and as we head into seasonally stronger mortgage banking periods, I feel very good about how we are positioned for the remainder of 2017.

During last quarter's earnings call, I laid out my top priorities for 2017, starting with achieving balanced growth. This will continue to be our #1 priority as it sets the stage for everything we want to accomplish to drive stronger and more consistent long-term financial performance. Continuing on the momentum we built toward the end of 2016, growth in the first quarter was very strong, especially after you factor in normal seasonality and the challenging growth environment for traditional commercial loans.

Loans and leases increased by $321 million, or 7% annualized. That reflected balanced growth between our C&I, consumer, leasing and commercial real estate portfolios.

Now let me make a few points on loan growth. This quarter, a much larger portion of our overall growth came from commercial loans. This is in contrast to our growth during the first quarter of 2016, which was weighted heavily with commercial real estate and residential mortgage loans. Our strong commercial loan growth last quarter reflects our emphasis on traditional commercial lending and the success of the initiatives we put in place earlier this year to grow that portfolio.

In the first quarter, total commercial loans increased by 18% annualized, driven by strong growth in both C&I lending and in the leasing and equipment finance portfolio. Traditional C&I loans increased by 17% annualized to $2.7 billion. I'm extremely encouraged by this growth even more so given the recent sluggish trends we are seeing for the overall industry. About 50% of our C&I growth this quarter was from larger middle-market customers that we would not have originated a quarter ago. This reflects our new focus on this segment and fully utilizing our $25 billion balance sheet.

Our loan pipelines remain extremely robust with the commercial pipeline up $500 million from the end of the fourth quarter, and our consumer pipeline at the highest level it has ever been.

Although very new, our corporate banking division continues to make great strides. They are bringing in new full-service banking relationships with larger companies without sacrificing the exceptional credit quality and underwriting standards Umpqua is known for.

The early success we are having is directly attributable to the quality of the bankers we've been able to bring on board, virtually all of whom have a significant experience at larger banks.

On the deposit side, we had another strong quarter in growing consumer and commercial deposits. First quarter deposits were up just over 3% annualized, but that included a decrease of $187 million in public funds, which was due to a combination of seasonal fluctuations and targeted runoff. Excluding the impact of that, deposit growth was 7% annualized.

Before I turn the call back over to Ron, let me make a few comments on financial performance. Over the last 5 quarters, our efficiency ratio, when you exclude the impact of merger-related expenses and fair value changes, has been in the low 60s to high 50s. This quarter, that ratio was at 65%. As we said last quarter, our goal is to get that ratio consistently below 60%. As a part of the strategies we laid out this year, we have begun working on initiatives to add revenue and be more efficient across the organization and in our delivery. And quite frankly, we may have to make some tough decisions in order to get our efficiency ratio consistently below 60%.

Now let me share with you a few of the ideas and areas we are looking to help get us there. We need to start adding more consistent streams of nonmortgage-related fee income. This will help lessen some of the quarter-to-quarter volatility in our overall revenues. There's a tremendous opportunity just bringing our fee base in line with peers. It will take some time, and let me emphasize that, it will take some time. We are working to make that happen. Let me give you a few examples.

First, increasing our penetration rate with our existing customer base with core treasury management products, card services, international including FX. Second, we've aligned goals and incentives within the commercial bank to support our balanced growth initiative of loans, deposits and noninterest income. And third, a recently hired executive to help support and build our fee income initiative in the commercial bank.

There's also room to improve operationally from an overall organizational efficiency standpoint. Smart changes to our processes and functions can provide meaningful benefits to the bank. For example, in many instances, closing loans just one day faster. These changes are great for our customers and can have a material financial impact for us.

We're also looking closely at our delivery channels, both on the retail and commercial side. The way consumers bank has dramatically changed, and we will continue to do so. Like other industries, banks need to be able to evolve with the changing consumer habit. This dovetails with the work we are doing around the digital customer experience in our subsidiary Pivotus. By finding ways to maintain the same level of exceptional customer service through a variety of digital channels, we lessen our reliance on the physical channel, which can lead to significant efficiencies and be the differentiator for the bank.

I will talk more about these initiatives in my closing comments. Now back over to Ron to cover the financial results.

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [4]

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Okay. And thank you, Cort. And for those on the call who want to follow along, I'll be referring to certain page numbers from our earnings presentation.

Before I get started, I want to make a comment on our financial presentation. As you can see from our earnings release and slide deck, we have removed the non-GAAP operating earnings metrics this quarter. We will still continue to provide those notable items from our P&L, which are highlighted on the first page of our earnings release.

Turning to Page 5 of the slide presentation, which contains our detailed P&L. First quarter earnings were $46 million, or $0.21 per share, compared to $0.31 per share on the prior quarter and $0.22 per share in the same period of the prior year. As Cort said from Q4 to Q1, $0.08 of the overall $0.10 decline related to the change in fair value adjustment from the MSR and debt capital market swap derivatives from the decline in long-term interest rates this quarter. The MSR fair value loss was $7.7 million in Q1 compared to a gain of $16.5 million in the prior quarter.

Similarly, we had a loss of $700,000 related to the fair value of debt capital market swap derivatives compared to a gain of $4.6 million in the fourth quarter. Factoring out the impact of these 2 items, the remaining $0.02 link quarter -- linked quarter decrease in earnings was driven primarily by lower home lending activity and seasonally higher payroll taxes.

Turning to net interest income and margin on Slide 6. Net interest income decreased by $1.1 million from the prior quarter level. Interest income was lower by $600,000 compared to the previous quarter due to a lower level of credit discount recorded on acquired loans and 2 fewer days on the period. We were hoping this will be overcome by growth, but much of the loan growth we had occurred late in the quarter.

To echo Cort's comments on loan growth, this quarter was very strong, especially given the heavier mix of C&I, which typically has longer lead times and lower draws than commercial real estate loans. The initiatives that we put in place to really grow the C&I portfolio didn't begin in earnest until late last year. Those initiatives are now really starting to gain traction as we see evidenced by the growth this quarter.

Credit discount accretion from acquired loans was $6.4 million in the first quarter, down from $7.7 million in the previous quarter. As we've noted on prior quarterly calls, this accretion is expected to continue to decline modestly on a quarterly basis.

Interest income from our investment portfolio, which is predominantly agency mortgage-backed securities, increased by $3.3 million over the prior quarter level. This was driven by higher average balances as we reinvest in some excess cash in the middle of the quarter, along with higher average yields and a lower level of bond premium amortization, resulting from a reduction in prepayment speeds during the quarter. Our target for interest-bearing cash will be approximately $0.5 billion for the balance of the year with the bond portfolio at about current levels.

For the first quarter, reported net interest margin was 3.85%, up 2 basis points from the prior quarter. Excluding the credit discount accretion on acquired loans, adjusted margin was 3.7%, an increase of 5 basis points from the fourth quarter. Recall that last quarter, we forecasted our net interest margin to have bottomed out and guided to an adjusted margin in the range of 3.6% to 3.7%. Roughly 2 basis points of the linked quarter increase was driven by the redeployment of excess liquidity from interest-bearing cash to investment securities. There was little to no impact from the mid-March Federal Reserve rate increase, and assuming another later this year with continued loan and deposit growth, we expect the margin ex credit discount to increase slightly to the 3.65% to 3.75% range.

Now on Slide 7. The provision for loan and lease losses was $11.7 million, down from $13.2 million in the fourth quarter. Net charge-offs decreased to $9.4 million from $12.9 million in the prior quarter. Our credit quality remained strong with our NPA ratio declining 1 basis point to 0.24% of assets at the end of the first quarter.

Moving to noninterest income on Slide 8. We saw a decrease of $38.4 million from the fourth quarter level, of which $29.4 million was from the 2 fair value gains I mentioned. These items drove the linked quarter declines in mortgage banking revenue and other income. We sold $12.5 million of equipment and lease financing loans during the first quarter. Together with the normal sales of SBA loans, we had a gain of $1.8 million for the quarter. This compares to a gain of $4.1 million for the fourth quarter.

Revenue from the origination and sale of residential mortgages decreased by $7.7 million to $24.6 million for the first quarter. This decrease was primarily driven by lower mortgage origination volume, partially offset by higher gain on sale margin.

On Page 9, you will see for-sale mortgage originations decreased 29% to $755 million, driven by the typical seasonal bell curve on purchase activity and lower overall industry refinance volume. As we guided to last quarter, our gain on sale margin increased to 3.27% from 3.05% last quarter. We continue to price loans for a gain on sale margin in the low- to mid-3% range. And with that, we expect the seasonal bell curve on volume and our gain on sale margin to pick up in Q2 and Q3, then down again in Q4. This is still in line with our guidance last January on a volume drop of about 15% year-over-year, assuming that rates remain relatively constant from here.

Turning to Slide 10. Noninterest expense was $182.7 million, a decrease of $0.8 million from the prior quarter. The bridge we provided on the right side of the slide details the major moving parts. Direct home lending expense was down $2.6 million, consistent with the decline in mortgage originations. Seasonal payroll taxes were higher by $4.3 million, as I guided to on the last quarter's call. And merger-related expenses decreased by $2.2 million from the prior quarter. In addition, we have $1.2 million in legal settlements this quarter.

For the rest of the year, we expect higher home lending expense to match increased volumes and a decline in payroll taxes of $1 million to $1.5 million a quarter. Also, we expect to incur $4 million to $6 million of merger-related expense spread across Q2 and Q3 related to cleanup work needed from a prior noncustomer-facing system conversion. In addition, we'll have a smaller amount of exit/disposal cost related to some additional back office facility consolidation.

Turning now to the balance sheet, beginning on Slide 11. Our tangible book value per share increased $0.07 to $9.57. Including the impact of dividends, our tangible book value per share growth was strong at 10% annualized this quarter.

On Slide 12, you'll see details on our loan and deposit portfolios, noting the strong and balanced first quarter growth Cort discussed. Our loan-to-deposit ratio ended the quarter at 93% and we expect it to remain around this range for most of the year.

Slide 13 shows a snapshot of the overall credit quality of the company, noting nonperforming assets remained stable at 24 basis points of assets. We did see an increase in loans past due 30 to 89 days this quarter, but in reviewing the details, there are no significant individual loans or industry concentrations that concern us, and we attribute this to expected fluctuations.

And lastly, on Slide 14, I want to highlight capital. Noting that all of our regulatory ratios remain in excess of well-capitalized levels, with our Tier 1 common at 11.3% and total risk-based capital at 14.4%. Our excess capital is approximately $275 million. As we have discussed for the last few years, we plan to continue to employ excess capital in a prudent and thoughtful manner.

And with that, I'll turn the call back to Cort to wrap up our prepared remarks.

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Cort L. O’Haver, Umpqua Holdings Corporation - CEO, President, Director, CEO of Umpqua Bank, President of Umpqua Bank and Director of Umpqua Bank [5]

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Okay. Thanks, Ron. Just a few things before we take your questions. I mentioned Pivotus earlier and the part it will play in how we think about the customer experience across all of our delivery channels. Ray has been heavily involved in that effort, and we are currently in pilot. I look forward to sharing more over the coming quarters.

Earlier this week, we announced that Rilla Delorier has joined Umpqua as our new Chief Strategy Officer. In this role, she will work to bring together our creative product and technology teams to develop and implement strategies to move the company forward. As some of you may also recall, when we announced the acquisition of Financial Pacific Leasing, we guided to growing that portfolio to $1 billion in 5 years. I am pleased to report this past quarter, we reached that goal in just under 4 years.

And finally, we engaged Fitch Ratings to provide us with a credit rating. On April 11, Fitch issued a press release announcing that it had assigned to Umpqua a long-term issuer default rating of BBB plus. This will benefit the bank, especially, as we look to grow in the larger middle-market and corporate space.

Now we'll take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Tyler Stafford with Stephens Inc.

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Tyler Stafford, Stephens Inc., Research Division - Research Analyst [2]

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Maybe first to start on expenses, the compensation -- the mortgage compensation expense has been running about 240 bps of closed loan volumes, but that increased to, I think, around 290 this quarter. Can you just talk about the expenses out of the mortgage business? Why that -- those did not decline with the decline in volume.

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [3]

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You bet, Tyler, and you're comparing that to Q4 levels. So there is -- there are some level of costs that as you go up in volume over the course of the year decline in basis points. So when you compare Q4 to Q1, taking into that account, it would be relatively in line with the overall production drop. Probably a better comparison would be Q1 a year ago to Q1 this year, but that was the main driver of it. So we do expect that expense and basis points to decline over the balance of the year, get down in that, call it 230, 240 range by the end of the year.

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Tyler Stafford, Stephens Inc., Research Division - Research Analyst [4]

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Okay, great. And did I hear you correctly earlier in your prepared remarks that the gain on sale margin, you expect to increase in 2Q and 3Q, and then to decline as well as the volumes?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [5]

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Yes, we expect it to be like that seasonal bell curve on production, so 3.25%. And what we talked about last -- last quarter was 3.25%, 3.5%, 3.5%, 3.25%. That's the current thinking on it.

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Tyler Stafford, Stephens Inc., Research Division - Research Analyst [6]

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And then just last one for me back on expenses. I think we're now in year 4 post Sterling and we're still taking some merger charges. Any idea when did -- when those are ending or when that end is in sight?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [7]

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Yes, I can talk about it. We've got some cost related to the cleanup of a conversion from a year back. That will hit mostly in Q3, a little bit in Q2. And I expect, following that, you'll see that drop to 0.

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Operator [8]

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We'll take our next question from Jared Shaw with Wells Fargo Securities.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [9]

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Can you give a little color around on the securities deployment, what you were buying this quarter and in terms of yield and duration and then what the overall portfolio looks like as well?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [10]

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Yes, you bet. So again, the purchases were down about $0.5 billion second half of February, so we didn't get a full quarter benefit of it. But overall, the mix is just consistent with what we have now, very vanilla, you're talking 4- to 5-year average life, mid-2 yields in terms of the mix. So no change in that, just a better price point than where we entered the quarter.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [11]

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Okay. And then on the C&I side, Cort, you had said that you were able to move up customer size and bring on some bigger relationships. Are you also taking on bigger -- are you retaining bigger pieces of loans than you did in the past? And if so, what level are you feeling more comfortable keeping a relationship on the balance sheet?

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Cort L. O’Haver, Umpqua Holdings Corporation - CEO, President, Director, CEO of Umpqua Bank, President of Umpqua Bank and Director of Umpqua Bank [12]

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That's a great question. So yes, both. I mean, we are looking at bigger, middle-market customers that we hadn't traditionally looked at a year ago or actually, most recently, even 4 months ago. And we are looking at holding more of the debt that we've originated for those customers. And one of the things that we had done is sold down larger chunks of the loans we had originated. And we're taking larger pieces of those deals with customers where we feel the credit risk warrants that. And then yes, we will look at buying business. It's not a big piece of the business though, Jared. We really aren't much of a buyer as much as we are a seller. It's really more a function of us just not selling down our better customers' businesses.

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Operator [13]

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We'll go next to Steve Alexopoulos with JPMorgan.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [14]

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I'd like to start first on the loan side. So obviously, you had very strong C&I growth. Did you guys see a change in line utilization from your existing customers? Or was this all pure gains in new customers driving that?

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Torran B. Nixon, Umpqua Holdings Corporation - Head of Commercial & Wealth for Umpqua Bank and EVP of Umpqua Bank [15]

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Yes, this is Tory. We've -- we saw utilization that was -- went from 40 -- roughly 42% to 43% quarter 4 in '16 to Q1 '17.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [16]

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Okay. That's helpful. And then on the consumer pipeline, I think the comment was it's the strongest that it's ever been. Can you talk about what types of loans are in there? And is this stuff you're going to hold on the balance sheet?

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Cort L. O’Haver, Umpqua Holdings Corporation - CEO, President, Director, CEO of Umpqua Bank, President of Umpqua Bank and Director of Umpqua Bank [17]

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Yes, most of them are HELOCs. And yes, we will hold those on the balance sheet. There are some that are consumer loans in there, but majority of it is HELOC.

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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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Okay, majority HELOC. And then to follow up on Ron's comment, to hold the loan-to-deposit ratio flattish around 93%. Seems you're going to have ramp deposit growth, right, with the strong loan pipeline coming through. Help us think about what you need to offer in the markets to drive that and what the impact should be on the deposit cost.

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [19]

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I think we'll continue to offer what we've offered over the last 30 years. And in terms of that loan-to-deposit ratio, we've been anywhere from 92% to 95% over the past year, 1.5 years. That's kind of the range I expect us to be in. But again, on a balanced growth standpoint, this past quarter, absent the seasonal rundown you'd expect with some public along with some targeted rundown, we were balanced at 7% loan to deposit growth. I want to see that balance continue for the rest of the year.

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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, Ron. So no reason for us to see a big increase in deposit cost coming through?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [21]

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That gets back to the betas. And the betas have been very small with the exception -- there's some beta increase on larger public and/or brokered, but really on the vast majority of it, I don't think anybody in the banking has seen betas kick in yet. And your guess is as good as mine. We all speculate at potentially another 2 to 3 moves with the Fed. You might start to see that kick in. So probably, the first part of the question would be if you expect a couple of more moves from the Fed over the balance of the year, I'd expect the industry would see the betas kick in later.

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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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Okay. Maybe a final one just for Cort. Following up on 2 of the priorities you outlined last quarter, the improved customer experience you mentioned, and also the digital strategy. How much are you guys spending on technology right now? And how should we think about that growing from here?

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Cort L. O’Haver, Umpqua Holdings Corporation - CEO, President, Director, CEO of Umpqua Bank, President of Umpqua Bank and Director of Umpqua Bank [23]

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I'll let Ron answer the actual technology spend. We clearly know we have to divert resources in the technology to continue with that experience. I'd say, some of it is both customer facing. Some of it is also internal. Like I mentioned, doing things quicker adds a fairly significant increase into the bank's revenue just by doing these faster. And there's technology spends internally. But I'll let Ron actually answer the question on our technology spend.

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [24]

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Yes. In terms of the overall annual technology spend, right around $110 million. And I would expect that to have a faster growth rate over time than this core inflation of the bank. But the key is back to what Cort talked about earlier. It's getting more efficient in other areas of the bank, to be able to redeploy some of that into -- more on the digital side.

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Operator [25]

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We'll go next to 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 [26]

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The -- following up on the deposit question. I was surprised to see, it looked like your interest-bearing deposit cost ticked higher despite you mentioned some targeted rundown which presumably was in higher cost in accounts. Can you kind of give us some insight -- greater insight in terms of what types of accounts we're seeing the higher pricing on this quarter?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [27]

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Yes. Generally, it's going to be in your larger balance public and/or some of the brokered side, so you have the 1 bp increase from Q4 to Q1. That was not related to the mass market consumer or commercial business. It was really those targeted areas, which are more market-based, so as you see those move. And then in terms of the decline in public, that was really later in the quarter, so that's really what drove the 1 bp increase.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [28]

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Okay. And then on the occupancy costs, I guess -- on the deals that have been closed, the 26 stores last year, I was surprised to see the run rate on occupancy go up. Can you just talk about that? And where we expect -- should expect that to go from here?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [29]

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Yes. It was interesting this past winter, there was about a $700,000 increase in snow removal costs, so that was definitely a piece of it. We had much smaller amounts in Q1 a year ago and very little in Q4. But that's just one of the seasonal timely items. I think, in terms of overall occupancy costs moving forward, of course, that also reflects equipment and certain technology costs. And on that, I'll just refer back to the comment I had earlier. I'd expect, as we look to get more efficient in other areas of the bank including physical, a chunk of that will be redeployed into digital. So you might have a drop in that line, but then also hopefully, a smaller increase in that line. But one of the bigger moving parts there was simply snow removal costs from Q4 to Q1.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [30]

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Okay. And then, Cort, you mentioned that the -- you're [ participating out ] some of your C&I production as well as buying some. What amount of commercial loans were purchased this quarter?

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Cort L. O’Haver, Umpqua Holdings Corporation - CEO, President, Director, CEO of Umpqua Bank, President of Umpqua Bank and Director of Umpqua Bank [31]

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Let me -- actually, I said the opposite. We're actually holding bigger positions of loans that we're originating and not buying much. And I'll let Tory give you the actual numbers on that. But just make sure that you heard me correctly. We're selling less than we used to sell. And we're buying very, very little.

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Torran B. Nixon, Umpqua Holdings Corporation - Head of Commercial & Wealth for Umpqua Bank and EVP of Umpqua Bank [32]

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Yes. So I don't have the exact number on the buy-side for us in front of me today, but I'll get it -- can get it to you, but it is very small. So our growth has been in core C&I middle-market customers, where we're holding the entire prior facility.

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Operator [33]

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

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Riley Manuhoa Stormont, D.A. Davidson & Co., Research Division - Research Associate [34]

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It's actually Riley Stormont on for Jeff. So most of my questions have been asked. Just wanted to get some color on the California market. I know you guys identified it last quarter as a pretty solid opportunity in terms of both loan growth and then fee income, so just any color around that would be appreciated.

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Cort L. O’Haver, Umpqua Holdings Corporation - CEO, President, Director, CEO of Umpqua Bank, President of Umpqua Bank and Director of Umpqua Bank [35]

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So I think the real, real answer to that is we started putting a lot of emphasis earlier in the quarter on taking advantage of new opportunities, specifically our corporate banking initiative, which we started rolling out late last year, really kind of hit its stride in the first quarter. We also have new offices in Southern California, which started to hit their stride. And that's really where that growth is coming from. I think more than half of the commercial loan growth in C&I was from our California side of geography, which is exactly what was intended to do. We are looking at other opportunities, vertical opportunities in specific segments of the business that we think that we can not only manage risk but get a good return. And we've been successful at doing that over the last 5 to 6 years. I think you guys have seen that. And that's how we'll continue to get that balanced growth.

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Operator [36]

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We'll go next to Matthew Clark with Piper Jaffray.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [37]

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First one, just curious what your updated thoughts are on M&A these days.

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Cort L. O’Haver, Umpqua Holdings Corporation - CEO, President, Director, CEO of Umpqua Bank, President of Umpqua Bank and Director of Umpqua Bank [38]

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Matt, I think, based on what you heard in the opening comments, there are so much near-term opportunity for us just to run the bank, do things quicker, more efficiently, take advantage of what we got in front of us, that with Trump, anything out there. So that's what we're going to focus on near term. It's just running a $25 billion retail and commercial bank that's in some of the most robust markets, certainly on the West Coast, if not the United States. And that to me is a much bigger and brighter opportunity for not only customers, associates and shareholders than anything that I'd be interested in.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [39]

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Okay. And then on the middle market -- larger middle-market business that you guys are originating now, can you give us a sense for what the weighted average rate is on that, on those types of loans?

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Torran B. Nixon, Umpqua Holdings Corporation - Head of Commercial & Wealth for Umpqua Bank and EVP of Umpqua Bank [40]

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Yes, sure. So the weighted average kind of C&I business is in the mid 3s for these credits for us.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [41]

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Got it. Okay. And then a couple of housekeeping items. Can you just -- I just want to make sure I have the right mortgage expense number. Can you just quantify that? And how much of that is variable?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [42]

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[ You bet, ] $28.6 million of direct -- this is not allocated, but direct expense on [ GL levels ] were down $2.6 million quarter-to-quarter. And in terms of the variable component, that's roughly 60% of that number.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [43]

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Okay. And then did you buy back any shares this quarter? And if so, how much? And at what price?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [44]

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Yes. No, we didn't. We will in Q2. It's on a lag basis. And again, on that point, Matt, just -- we'll buy back the net share issuance through comp plans over the -- equity comp plans over the course of the year, which the majority of that typically is in Q1, so we'll see the buyback in Q2.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [45]

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Got it. And then if you have it, just the taxable equivalent adjustment in the quarter.

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [46]

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Taxable equivalent adjustment in the quarter, I'm going to say, I don't have that off the top of my head, roughly $4 million.

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Operator [47]

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We'll go next to Jackie Bohlen with KBW.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [48]

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Talking again on loan yields. Just thinking about the change in mix of what you've been generating over the past couple of quarters, according to my calculations, when I strip out to the accretable yield portion, it's been fairly steady for the last few quarters. What kind of an impact does increased commercial generation have on that? And if we do get that extra rate increase that you spoke about with the NIM, at what point do we hit an inflection and we could see loan yields start to tick up?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [49]

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Yes. I think, again, part of that story is going to be what you see in terms of short-term Fed funds rate increases. But as Tory talked about, the middle-market C&Is in the mid-3s. Lower middle market and small businesses is going to be in the upper 3s. CRE is going to be in upper 3s to low 4s. Obviously, you've got leasing. They're in the upper single digits for the incremental growth. And consumers, pretty straight up right around 4%. So we're getting close to it. I think part of the story, too, is going to be continued growth on both sides of the balance sheet. You throw another 1 or 2 more finance rate increases in that and we'll accelerate the delta -- or minimize the delta.

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Cort L. O’Haver, Umpqua Holdings Corporation - CEO, President, Director, CEO of Umpqua Bank, President of Umpqua Bank and Director of Umpqua Bank [50]

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Let me add one thing, Jackie. So -- and understand Ron's answer. The other thing we get, and it's not necessarily yield with the C&I customers, is we get treasury management, products and services at a much higher volume than we do with the lower middle market. And then we also get fairly significant deposit balances. And that is a part of the balanced growth strategy. Our opportunities to really drive noninterest income off these middle-market to small corporate-type customers is fairly significant compared to our -- to the last couple of years. So I understand the question on yield, totally get it. But also, there's a huge opportunity. And Tory's been doing a great job with his teams at gathering some real steam and collecting these customers and getting it in here. And we will get that business.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [51]

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So essentially, looking to these middle-market customers, even if you're booking more loans at a yield that's perhaps at present a little bit lower than the loan book, the overall net positive revenue benefit is there given the increase in fees you're expecting?

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Cort L. O’Haver, Umpqua Holdings Corporation - CEO, President, Director, CEO of Umpqua Bank, President of Umpqua Bank and Director of Umpqua Bank [52]

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Yes. I mean, absolutely. I mean, absolutely. And I probably could speak for every other bank's CEO. That's exactly why to go after it, right? I mean, if you've got a significant noninterest income opportunity, it's pretty sticky business too, to move a corporate or commercial customer from one bank to another can be a painful process. And -- so it's sticky, it's relationship and there's great opportunities in other areas of the -- in revenue that we can build off pretty quickly.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [53]

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Okay, that's helpful. And just one other quick one. Can you just talk about the consumer pipeline being largely HELOC? Is that rate driven? Or is it a conscious effort on your part?

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Cort L. O’Haver, Umpqua Holdings Corporation - CEO, President, Director, CEO of Umpqua Bank, President of Umpqua Bank and Director of Umpqua Bank [54]

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It's a conscious effort on our part. We are not pricing that product anywhere near the top of the market, meaning, at the most aggressive pricing, and we're not even close. It's just a conscious effort to offer the product. We do team up pretty well with a home lending group and where we can offer it as a combined product. We are the largest home first mortgage originator in the state of Oregon. So when we combine up and do a marketing push and make sure that our customers understand we have other related products and services, we've done a great job. So really, it's just a concerted marketing effort.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [55]

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Okay. And as I look at the balances of that portfolio, the growth has been there, but it's been a little bit on the slower side. Is that something where you just haven't seen the drawdowns from all this generation yet and we could see movement in future quarters?

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Cort L. O’Haver, Umpqua Holdings Corporation - CEO, President, Director, CEO of Umpqua Bank, President of Umpqua Bank and Director of Umpqua Bank [56]

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Yes. That's -- I would tell you that's exactly the issue. In fact, I was talking to the head of retail the other day, and that's exactly what he gave me for an answers, so that is exactly right.

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Operator [57]

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(Operator Instructions) We'll go next to Brian Zabora with Hovde Group.

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Brian James Zabora, Hovde Group, LLC, Research Division - Director [58]

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A question on provisioning. With the increase in commercial originations, do we -- could we see a difference in the level of provisioning? Or is it similar to what we saw maybe last year when it was more CRE-based?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [59]

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Actually, in terms of the quality of the customers we're going at, it's probably a bit better than average. So probably a good way to think about that is if you just compare production levels and net growth levels quarter-over-quarter, correlated into the provisions. So ideally, yes, you're going to see higher provisions in the future, but it's driven by much stronger growth, which is what you want to see.

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Brian James Zabora, Hovde Group, LLC, Research Division - Director [60]

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Okay. Just a question on the MSR valuation. Maybe it's just too simplistic, but can we look at the movement of 10-year as the first -- in the first quarter and kind of extrapolate that out as far as maybe MSR changes in value going forward? Or is -- were there any kind of anomalies in the first quarter?

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [61]

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No anomalies. That is a good proxy. The second step of that though, of course, is the par mortgage rates. And so the change there was a bit more than what you saw on the straight up 10-year bond yield. So you've got the 10-year bond yield, plus any spread differential, and there's a bit wider of a gap in terms of the drop on the straight-up mortgage rates during the quarter.

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Operator [62]

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And with no further questions in the queue, I'd like to turn the conference back over to Ron Farnsworth for any additional or closing remarks.

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Ronald L. Farnsworth, Umpqua Holdings Corporation - CFO, EVP, CFO of Umpqua Bank and EVP of Umpqua Bank [63]

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Okay. Thanks, Dana. I want to thank everybody for their interest in Umpqua Holdings and attendance on the call today. This will conclude the call. Goodbye.

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Operator [64]

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Again, that does conclude today's presentation. We thank you for your participation.