Ronald Farnsworth - Executive Vice President and Chief Financial Officer Cort O’Haver - President and Chief Executive Officer.

Jared Shaw - Wells Fargo Securities Jeff Rulis - D.A. Davidson & Co. Matthew Clark - Piper Jaffray & Co. Jacque Bohlen - Keefe, Bruyette & Woods, Inc. Steven Alexopoulos - JPMorgan Aaron Deer - Sandler O'Neill & Partners Tyler Stafford - Stephens Inc..

Good day, everyone. Welcome to the Umpqua Holdings Corporation Fourth 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..

Okay, thank you, Alan. Good morning and thank you for joining us today on our fourth quarter 2016 earnings call. With me this morning are Cort O’Haver, the President and CEO of Umpqua Holdings Corporation; and Dave Shotwell, our Chief Credit Officer. After our prepared remarks, we will then take questions.

Yesterday afternoon, we issued an earnings release discussing our fourth quarter and full-year 2016 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 laws.

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..

Thanks, Ron, and welcome to everyone listening in on the call. Today, I’m going to provide an overview of the Bank’s quarterly and annual results before outlining my top priorities for 2017. Afterwards, Ron will review the company’s financial performance in greater detail.

First, I’d like to thank Ray and the Board of Directors for their confidence, both in me and my executive team, as we continue to move the company forward.

After just about three weeks in the CEO chair, I can tell you it is a great sense of excitement and optimism across the company about the Bank’s future, and I want to take a few moments to share with you why. We have an incredibly experienced and deep executive team and I’m honored to work with them on this next phase of our journey.

I’m also motivated by the extraordinary group of talented associates who take great pride in their work and demonstrate every day the entrepreneurial spirit that Umpqua Bank embodies. I’m energized by the tremendous opportunity we have in front of us.

We worked extremely hard to build a strong foundation for the future, and I believe, we are now well-positioned to take advantage of it. So now turning to our fourth quarter 2016 financial performance. Fourth quarter net earnings per share were $0.31, up from $0.28 in the third quarter.

On an operating basis, we earned $0.27 per share, which compares to $0.32 per share in the prior quarter. During the quarter, we had two significant fair value gains, which drove the difference between our net and operating results.

The decrease in operating earnings was driven primarily by lower revenues from the origination and sale of agency mortgages, a result of the dramatic increase in long-term mortgage rates during the quarter.

Non-interest expense was up slightly from the prior quarter, primarily due to the higher merger-related expenses in addition to smaller items, which will – Ron will cover in a few minutes. Loans and leases grew to $17.5 billion, while deposits grew to $19 billion and a loan to deposit ratio ended the year at 92%.

Credit quality remained excellent, with non-performing assets to total assets of 25 basis points, which was flat from the previous quarter and down 3 basis points in the prior year. Early indicator delinquencies also improved as loans and leases 31 to 90 days decreased to just 17 basis points from 23 basis points in the previous quarter.

For the year, we earned $1.05 per share in net earnings, up from a $1.01 per share in 2015. On an operating basis, we earned a $1.19 per share for 2016 unchanged from 2015. Our financial performance in 2016 was good, and we accomplished a great deal and built up momentum.

Total revenue was flat year-over-year with higher non-interest income, primarily from stronger mortgage banking activity offset by continued pressure on the net interest margin.

That pressure was driven by number one, low interest – the low interest rate environment we experienced during most of 2016, as higher-yielding loans either repriced lower or refinanced away and were replaced with lower-yielding loans.

Two, we made a strategic decision to rebalance the loan portfolio, selling multifamily loans and longer-term fixed rate mortgages that typically carry higher average yields. And three, we had $15.3 million in lower interest income compared to 2015 related to credit discount accretion on acquired loans.

On an operating basis, non-interest expense decreased by just over $1 million from prior year. Excluding the impact of higher home lending expense, which was largely tied to the increase in mortgage originations, our operating non-interest level decreased by closer to $30 million.

The organizational-wide efficiencies initiative we put in place last year are working, and we will continue to make expense discipline a top focus for this year, while opportunistically investing in key growth areas.

We grew loans and leases by over 4% over the prior year, and our teams generated this growth as we were also taking steps to reposition the balance sheet. As a part of that effort, we sold $670 million in loans during 2016. So our total loan and lease growth was actually closer to 8% for the year, which is just above the 7% deposit growth we achieved.

Our pipeline remains very strong and we are very optimistic about loan and deposit growth for 2017. Now, let me make a few other points on growth. Consistent with our focus on a balanced portfolio, our loan growth over the past year was more heavily weighted towards traditional C&I loans.

For 2016, overall, C&I loans grew by 7% over their 2015 levels and includes very strong growth in our lease and equipment finance businesses, which grew by 30% over the prior year.

Over the past couple of years, we’ve opened offices in new markets and hired additional bankers in strong growth areas like San Diego, Santa Fe Springs, San Francisco, San Jose, and Las Vegas.

These offices have been performing exceptionally so far with our five newest locations contributing nearly $300 million in loan growth over the past year and they’re just getting started. In the last six months, we’ve also added a corporate banking division that will focus on bringing in full banking relationships with larger companies.

Like any new division, it will take sometime to get up and running at full capacity, but they’re already making great progress and I expect to see some good lift during the next year. We feel, there’s a tremendous opportunity to provide Umpqua’s unique value proposition to middle-market companies within our larger markets.

In the California market alone, there are over 16,000 middle-market companies spread throughout diverse industries, such as manufacturing, healthcare and professional services. These businesses together generate over 20% of all California business revenue, while representing less than 1% of the total number of companies.

Given our size, our talented bankers and the preferences of these companies to bank local, we are in a great position to grow this vertical. With all these initiatives underway, I believe, there’s a significant opportunity to more fully utilize the Bank’s $25 billion balance sheet by moving up tier in terms of the companies we do business with.

This will allow us to generate higher loan and deposit balances in a more efficient manner, while also bringing in valuable fee and treasury management revenues. Now, this leads me to capital. Many of you have asked me about my thoughts on capital. Let me say this.

We are focused on creating long-term value and generating strong capital returns for our shareholders. And I believe, the best way for us to accomplish this is to focus on strong organic growth, while continuing to return capital through our healthy dividend. So before I turn the call back over to Ron, I want to outline my top priorities for 2017.

Our vision remains the same and it is to be the world’s greatest bank. For every associate at Umpqua that’s an unwavering commitment we aspire to everyday.

For our customers, that means we aim to provide personalized banking for all anytime, anywhere, whether it’s a corporate client, a small business, or a first-time homebuyer, we provide a smart, simple human experience every single time. To accomplish this, there are six priorities that I want to highlight for you for 2017. Number one, balanced growth.

We have an incredible base of customers spanning across some of the strongest growth markets in the United States. For 2017, we are focused on growing balanced, multifaceted relationships, and this means loans, deposits, and fee-based products.

We are refining our account opening process to shorten the time it takes and to ask smart questions of all of our customers. We are also going to take a closer look at profitability on a segment, product, and customer level. Number two, the customer experience. We’re going to continue to redefine and enhance our customer experience.

We’ve invested significantly in building a strong technological foundation and now it’s time to leverage that. Number three, culture. You’ve heard us say this a lot. Culture is our most important asset, and to that end, we will continue to empower and invest in our associates. Number four, operational excellence.

We will heighten our focus on streamlining operations and improving processes and functions, which I believe can be a competitive advantage for us. Number five, digital strategy and execution. We’re in the process of building up the Bank’s long-term digital strategy. How our customers bank is evolving and will continue to evolve everyday.

We need to stay ahead of that, so we can continue to serve our customers. And as I said earlier, we will do that anytime, anywhere. That being said, a key part of our digital strategy will be through our subsidiary, Pivotus Ventures. You should be watching for additional announcements from Pivotus over the next several months.

And number six, financial performance. I believe that by successfully delivering on the priorities that I have just outlined, our financial performance will naturally follow. Now, back to Ron..

Okay. Thank you, Cort. And for those on the call who want to follow on, I’ll be referring to certain page numbers from our earnings presentation. Page 6 of the slide deck contains our detailed P&L, which contains both reported, as well as our non-GAAP operating earnings for the quarter and year.

Also, as noted on Slide 6, our fourth quarter effective tax rate was 36.9%, up from 35.8% in the previous quarter. This increase was related primarily to a true-up from filing of our 2015 federal returns and state apportionment changes and the impact was $1.2 million. For the full-year, our effective tax rate was 36.3%, up from 35.9% in 2015.

Our fourth quarter GAAP earnings included a gain of $16.5 million related to the fair value of the MSR and the gain of $4.6 million related to the fair value of debt capital market swap derivatives. Each of these gains was attributable to the increase in long-term interest rates, which occurred in the back-half of the fourth quarter.

In addition to the presentation, we also show the reconciliation for non-GAAP measures on non-interest income and expense on pages six and seven of the earnings release.

Adjusting out the non-operating items in the quarter, the linked quarter decrease in operating earnings was driven by a $13.2 million decrease in revenues from the origination and sale of residential mortgage loans, along with a $2.1 million decrease in net interest income and a $1.6 million increase in non-interest expense.

Turning to net interest income and margin on Slide 7. Net interest income decreased by $2.1 million from the prior quarter level. Interest income was lower by $1.7 million, compared to the prior quarter due to a lower level of credit discount recorded on acquired loans.

Credit discount accretion from the acquired loans was $7.7 million in the fourth quarter, down from $9.1 million in the previous quarter. As noted on prior quarterly calls, this accretion is expected to continue to decline modestly on a quarterly basis.

In addition, we saw lower average yields on the loan and lease portfolio, as well as our investment portfolio, which is predominantly agency mortgage-backed securities. Taxable investment income was impacted by $1.1 million of increased bond premium amortization from faster prepayment speeds during much of the quarter.

That trend, however, reversed in December, given the increase in mortgage rates. And assuming rates remain around their current level, we expect to see higher income in yields on taxable investment in 2017.

Towards the end of the quarter, we employed some excess liquidity in the mortgage-backed securities, which is reflected in the higher period-end balance for the investment portfolio, which stands now at $2.7 billion. As Cort stated, we are focused on balanced loan and deposit growth in 2017.

And with that may purchase additional bonds utilizing some of the excess interest bearing cash. As such, we expect our cash to decline to under a $1 billion by the end of the first quarter. We’ll monitor this based on the trajectory of interest rates with the overall goal to maintain our slightly asset-sensitive balance sheet.

For the fourth quarter, reported net interest margin was 3.83%. Excluding the credit discount accretion on acquired loans, adjusted margin was 3.65%, a decline of 12 basis points from the third quarter.

This decrease was attributable to the higher level of bond premium amortization, as well as higher cash balances and a decrease in average yields on loans and leases. This margin, excluding credit discount was steady for each month in the fourth quarter.

And with the tailwind from higher short-term interest rates, lower bond premium amortization and our expected organic growth, we believe we’ve hit a floor in the 3.6% to 3.7% range here. If we see further short-term interest rate increases in 2017, we would expect slight expansion in the margin, excluding credit discount accretion.

On Slide 8, the provision for loan and lease losses was $13.2 million consistent with the prior quarter level. Our fourth quarter provision reflected continued strong growth in the lease and equipment finance portfolio, as well as an increase in net charge-offs, driven in part by some acquired national credits.

In each of the past three quarters, we’ve had a few million of these one-off charge-offs. After scrubbing the rest of the acquired national portfolio, we expect net charge-offs to decline slightly in early 2017.

Again, we do not see this as indicative of a trend within the overall portfolio as ourcredit quality is at very good levels with past dues under 20 basis points of loans and our NPA ratio at 0.25% of assets. Moving to non-interest income on Slide 9.

We saw an increase of $17.9 million from the third quarter level, which was driven primarily by the two fair value gains, I mentioned earlier, as well as higher gains from some portfolio loan sales we completed during the quarter.

We sold $26.9 million of equipment and leased financing loans during the fourth quarter, which drove the increase in the gain on sale line item. The largest component of our non-interest income is mortgage banking revenue.

Total GAAP figure this quarter included the gain on the change in fair value of the MSR, which compares to a charge of $7.8 million in the third quarter. This asset is not hedged and the gain was driven by the linked-quarter increase in long-term interest rates.

The MSR asset is now valued at 100 basis points of the service portfolio, up from 82 basis points in the third quarter. Excluding the MSR fair value change, mortgage origination revenue was $32 million, down $13 million from the prior quarter.

Servicing revenue continues to grow, now at $9.6 million for the quarter, up 2% from Q3 and 27% from the same period a year ago.

On Page 10, you will see for sale mortgage originations decreased 5% to $1.1 billion, driven by the typical seasonal bell curve on purchase activity, partially offset by higher refinance activity from a higher pull-through rate.

For 2017, industry mortgage origination estimates are calling for lower levels of refinance activity, partially offset by stronger purchase business, netting out to a decline of 10% to 15%. I would expect our originations would follow similar trends with the caveat that all of this depends on the rate environment.

Our gain on sale margin decreased to 3.05% from 4.08% last quarter, related to lower pricing from the rapid increase and longer-term rates in the second-half of the quarter, along with a decline in the overall lock pipeline. We are pricing loans for again on sale margin in the low to mid-3% range.

And with that, we expect the gain on sale margin to be in the low-3% range for the first quarter of 2017, absent any significant increase or decrease in future lock pipelines. This quarter was an example of why I’m glad we have a simple home lending model with direct production, a growing servicing revenue base, and no hedging on the MSR asset.

if longer-term interest rates continue to increase, we have strategies in place to reduce costs here and manage the business to the new expected level of production, which will help mitigate the impact while continue to focus on stronger overall loan and deposit growth. Now, turning to non-interest expense on Slide 11.

Our operating expense was $179 million, an increase of $1.6 million from the prior quarter. Home lending expense was down $2.9 million, driven by the decline in residential volume. The remaining increase in operating expense was driven by higher expenses across several categories.

We provide a bridge on the right side of the slide to help explain these. As you can see, we experienced higher group insurance and other benefit, as well as increased technology and marketing spend this quarter.

Loan cost deferrals were lower by $900,000 and we had $400,000 severance, which was related to an operation that we closed due to a lack of profitability in scale.

As for near-term guidance on operating expense, recall, in Q1, we’ll see the recurring seasonal payroll tax increase of approximately $3.4 million, which we expect to decline during the rest of the year.

Our operating efficiency ratio increased slightly this past quarter to 62%, related mostly to the decline in mortgage banking revenue by delivering on the priorities that Cort outlined for 2017. We believe we can operate within the efficiency ratio in the high 50s.

For the non-GAAP adjustment items, merger expense increased slightly in the fourth quarter, related mostly to additional post-conversion cleanup and the costs of winding down legacy acquired operations. Turning now to the balance sheet beginning on Slide 12. Our tangible book value per share ended the year at $9.50.

This past quarter was influenced by the increase in longer-term investment yield with our bond portfolio flipping from a small unrealized gain to a small unrealized loss of 1%, impacting tangible book by $0.17 per share this quarter.

Even with that recent rate volatility, our tangible book value per share increased by 4% over the last year, and when including dividends, the increase was very strong at a 11%. On Slide 13, you’ll see details on our loan and deposit portfolios. Our loan and deposit ratio ended the quarter at 92% consistent with the prior quarter level.

As Cort indicated, balanced growth is the top priority for us, and we expect near-term will remain in the low to mid-90% range. Slide 14 shows a snapshot of the overall credit quality of the company, noting non-performing assets remain stable 25 basis points total assets.

And lastly, on Slide 15, 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 11.4% and total risk-based capital at 14.6%. With $1.1 million share repurchase this quarter, our total payout ratio was strong at 61% of operating earnings.

I want to echo Cort’s comments on capital as we remain focused on creating long-term value for our shareholders, noting again the 11% growth in tangible book value plus dividends for 2016. Our excess capital is approximately $300 million.

As we’ve 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 now turn the call back to Cort to wrap up our prepared remarks.

Okay. Thanks, Ron, very much. So I know we’ve covered a lot today. But I think this call was important that you could see, our vision for how we want to lay things out for 2017. In the next few months, I’ll be focused on meeting with our associates, so I can be clear on where we’re going as a company and how we’re going to get there.

I do expect to get on the road more starting in May, and I look forward to get now and meeting with some of you. So with that, now we’ll take your questions..

Thank you, sir. [Operator Instructions] Our first question comes from Jared Shaw with Wells Fargo Securities..

Hi, good morning..

Hey, good morning..

Hi, Jared..

Just starting, I guess, on the lending side, what did you see for new loan production yields on the loan book this quarter? And do you see those starting to get – take full advantage of the higher rate environment as we – as you go through 2017 with being able to move up?.

Yes, definitely, late in the quarter, we started to see them inch higher. So today new loan yields on C&I are going to be probably in the mid-3s on CRE, they’re going to be in the low to mid-4s. Again, leasing, our small ticket leases in the upper single digits, and where resi is.

So those did inch up slightly higher with the front-end rate increase and some of the belly of the curve rate increase late in the quarter and it’s held pretty flat here over the last months since then..

Okay.

And then any change in thoughts on what you would be willing to hold for portfolio on the mortgage business, or it’s sort of the same as we’ve seen in the past?.

It’s going to be similar. When we did obviously over the last year year-and-a-half quite a bit of repositioning in sale activity, we are not a heavy jumbo production lender, it’s very much focused on conventional for sale.

But there’s definitely room to lift up that mix on the balance sheet slightly and we’ll take advantage of that over the course of the year..

Then finally for me on the securities, the discussion around the securities growth, should we expect to see maybe taking a little more duration in the incremental purchases, and would we – should that still be in the – in more of the plain-vanilla pass-throughs and maybe simpler CMOs, but just taking advantage of the higher rate environment, or would you look at doing something a little more different on the structure of the securities portfolio?.

No plans or anything different on the structure and definitely not a credit risk. So it can be your vanilla CMO, front-end sequential CMOs or mortgage-backs on relatively shorter collateral. Our duration today is around 4, and what we’ve seen over the last quarter is the yields are up a good 30, 40 bps in that space.

So I’d expect if we do deploy some of the cash here in the quarter, it’s not going to be a significant amount, but we expect to take our cash down under $1 billion, it will be in that similar type product..

Great. Thank you..

Yep..

Our next question comes from Jeff Rulis with D.A. Davidson..

Thanks. Good morning..

Hi, Jeff..

Just a bit of a housekeeping on the $4.2 million increase in other income line item, is that the swap adjustment, or is that separate?.

Yes, on the face of the P&L that’s inclusive also of the swap adjustment and then we do show that reconciliation of non-interest income to our non-GAAP figures..

Got it.

And then, Ron, just you alluded to the pull-through on expenses should – if we got a 10% to 15% decline in mortgage, I guess dollar for dollar, is there a way to present that relationship between a drop in revenue and drop in expense if that were to occur?.

If we look back at the – if I like efficiency ratio, if you will, for the mortgage production side of the house, it’s going to be right around that 60% level, which is their expense over the revenue, so that’s a pretty good proxy heading into 2017 something definitely we’re monitoring..

Gotcha.

So again, if you’re tying the 10% or 15% drop in origination volume and you’ve got gain on sale margins in the low 3s, that equates to what on the expense side?.

Well, again, the expense side is going to be driven a lot by the overall level of production, it’s roughly 240 bps of the production. So if you were to pick our quarterly mortgage expense this past quarter $31 million extrapolate that 10% to 15% drop, you’d expect to see it somewhere 10% to 15% drop in that expense.

I was just quoting earlier if you take the expense into just the mortgage banking revenue, excluding MSR, it’s going to be in that 60% range on the efficiency ratio..

Okay. All right. Thank you..

You bet. Thanks..

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

Good morning, Matt..

Good morning.

The first one just on the mortgage comp, I’m just curious how much of that $31.5 million was variable?.

On the variable side, that was roughly $27 million of the $31 million in comp and other services expense that relates to volume..

Okay. And then on the loan growth outlook, I think, coming into the quarter, you all had hoped that it would rebound I think back into the high single digits. Obviously, election changes things to some degree, increases volatility. But just curious what your thoughts are on the outlook there.

And it sounds like, longer-term, you are looking to go up market a little bit in terms of size.

But just curious what you might be thinking with the pipeline and where it is today?.

Hey, Matt, Cort. So I think you should expect that that our loan growth will be pretty robust this year and our pipelines have remained strong. Remember, we did sell $670 million in loans to kind of rebalance some things that we wanted to do on an opportunistic basis.

With our push into upper middle market, we’re calling it corporates really upper middle market, those teams are up and running. They’ve been up and running. We’re looking at lot of great opportunities.

And we did see some sluggishness in November and December pre-election, whether that was utilization or just hesitation on behalf of borrowers, but that seems to have come back really strong..

Okay.

And then just on share repurchase, that the pace of activity there slowed for obvious reasons, but just curious, if your stock kind of hangs in where it is today, can we assume a similar pace of buyback going forward?.

And again, what we’re doing there on that front is just repurchasing net new share issuance. And generally, there’s a higher level of share issuance in the first-half of the year. So if you look back over the past, call it, six to eight quarters, you’ll see pretty good trends extrapolate into 2017..

Okay, thanks..

You bet..

Next we’ll go to Jackie Bohlen with KBW..

Hi. Good morning, everyone..

Good morning, Jackie..

I wondered if you could provide a little bit of clarity on why you chose to sell some leases in the quarter?.

We did it for a couple of reasons. One is, we’re looking for some fee income. We get awfully good returns on that and we wanted to test the market..

So by testing the market, does that mean it’s something you could potentially do in the future?.

Yes. We – and we will probably do some small continued sales on our leasing portfolio if we can get the premiums that we’ve historically gotten, but it’s not going to be a lot..

And how do those premiums compared to, say, a multi-family loan sale? I mean, obviously higher, but do you have kind of a general magnitude?.

Probably 8x we get on a multifamily..

Okay.

And was that the only sale in the quarter, or were there other loan sales in that line item?.

It was the only sale. We had two sales in the quarter in the leasing portfolio..

Okay.

And that’s the net amount that would call that in the press release, that’s a combination of those two sales?.

That’s correct..

Okay. That’s helpful. And as you look into 2017, it sounds like some of the portfolio repositioning had largely already been accomplished.

And outside of the leasing sale possibility that’s there, could we see that line item trend down as multi-family sales become slower?.

Yes, we are not anticipating to do any multifamily sales in 2017..

Okay. Thanks, Cort. That’s helpful..

You should expect to see multifamily growth during the year..

Okay. Great. Thank you very much..

Thank you..

Thank you..

[Operator Instructions] We’ll next go to Steven Alexopoulos with JPMorgan..

Hey, everybody..

Good morning..

Good morning..

I wanted to start for Ron. I appreciate the outlook for core NIM to see slight expansion in 2017.

When you look at the accretion schedule, is it feasible that the reported margin will stabilize this year?.

I do expect that, because that accretion level is getting down to a smaller number now at $7 million changes past quarter, I’d expect a just continuing trend over the first three quarters of 2017 and there’s going to be a number that’s not going to be significant on a quarterly basis..

Okay. That’s helpful. And then for Cort, I appreciate all the enthusiasm in the list of strategic priorities. When I look over the list you provided, it seems like, I’ll call it a modest evolution of the company as the way I’ve known it over the last several years.

What should we really expect to change in 2017 with you as the CEO?.

Well, I mean, I think that the number one priority is to stay focused on our customers.

What I mean by that, I think we have opportunities like we talked about using that corporate banking vertical, as an example, that we haven’t really – I’m going to use the word exploited – exploited that segment as much as we probably could just for myriad of reasons and we now have the personnel as you all can tell by our credit metrics, we certainly have the credit chops to really start take advantage of those markets, which we have not traditionally tried to penetrate.

We do have some customers that fall into those verticals, but not to the degree we could. Now that we’ve got people in markets. We’ve got certainly the credit expertise and the capital to do it. We’re going to really go after those particular markets. So you will see some real emphasis on those particular markets.

The other thing quite honestly I think there’s a lot of opportunity as we look inside the organization to find ways to optimize how we serve our customers and how we can more efficiently deliver products and services not just loan products, there’s a lot of things we do.

There’s a lot of opportunity to do things that affect our customers and have significant financial impact to the company. So those are really the two main pushes that you’ll see give me a little bit of a break this is day 26, and so we’ll get to it..

So when you think about – I’m looking at your Slide 3 here, where you did 8% gross loan growth ex-sales and 7% deposit growth.

So should we think about stronger growth than what you had in 2016 with the initiatives you are talking about in 2017?.

I’m optimistic about beating those numbers..

Okay, fair enough. Thanks for the color..

Got it. Thank you..

And we’ll take our last question from Aaron Deer with Sandler O’Neill & Partners..

Hey, good morning, guys.

Ron, I just want to go back to – if I heard you correctly, you said that the you’re looking for the margin to bottom out here in like the 3.60% to 3.70% range, is that right?.

That’s correct..

What can you give – I mean just given the degree of pressure that that margin has been under over the past year or so, what is it that’s now giving you confidence that we’re at that inflection point, obviously, rates are moving higher.

Have we actually seen the gap between new assets, new asset yields, and yields that are maturing? Is that completely closed now and you’re actually seeing that widen out?.

Actually I’ll take you back three years right. So when we completed the Sterling merger very much a term centric portfolio higher longer-term coupons, we’ve had now three years of mix shift with pressure in the overall rate environment lower rates. We are starting to see some uplift in new volume yields market rates.

I’m also very confident at least here very near-term of seeing higher bond yields compared to Q4. And with what we saw during the fourth quarter that call it that mid-3.6 range that was very consistent and all of our planning and modeling for 2017 would suggest, we feel pretty confident that we’ve hit a floor on that.

And again, asset-sensitive balance sheet should give us some lift if we do see the tailwind of higher front-end rates. Now all that relates to a course or subject to the overall economy the overall environment. But what we see right now we think – we’ve talked about last quarter, we were approaching the floor, I think we’re there..

So have you guys done your sensitivity analysis yet for this year? Is that – are we going to see a meaningful increase in the rate sensitivity, given – relative to what was in last year’s K?.

You’ll see a slight increase in that compared to last year’s K, but also I will caution you that a lot of assumptions on there create some apples and oranges, which – when you compare against other banks.

So if we’re looking at up 100 basis points on the ramp basis, we’d expect that would be somewhere around $20 million to $22 million additional in pre-tax NII on an annual basis.

Now inherent in that, of course, our deposit betas and we like to think we’re pretty conservative granted a bit, our comparison is earlier in the 2000s, when we saw the last increase in rates cycle, but our betas are in the, call it, 60%, 65% range on money market and 90% to 100% on time.

Over the last two Fed funds increases, our beta has been basically zero, I think that’s been the case of the industry. So, you will see an update on that in our K, but just recognize, we’ve also got some pretty conservative betas baked into that. We’ll see how that plays out, of course, over successive front-end rate increases..

Okay. And then last question on the expense side. I mean, I think you said you anticipate the efficiency ratio running back down into the high 50s.

What kind of timeframe can we expect to see that? Is that something we should see right out of the gate, or is it going to take a few quarters until you’re consistently staying in that range?.

I think that will be later half of 2017 to begin with a lot of the growth initiatives Cort outlined. We feel pretty good about our ability to get there..

Okay, great. Thanks for taking my questions, guys..

And we’re going to push real hard on the revenue side. But we do have some initiatives working on on the expense side..

Okay. Thanks, Cort..

And we do have another queue up. We’ll take that from Tyler Stafford with Stephens..

Hi, guys, good afternoon..

Hey, good morning..

Hey, Tyler..

Ron, do you still think there’s room to come down in the reserve plus discount ratio from here?.

Well, the reserve plus discount, yes because right now that’s in the 1.2, 1.3 range. The reserve on the face of the balance sheet is about 25 to 80 basis points. Again, the two should meet probably closer to one in a normalized environment over the past year or two.

We haven’t seen a significant increase in the reserve ratio on the face of the balance sheet just because of the improving quality of the portfolio. But I would expect, the 1.2 will drop down over the next couple of years maybe 2 at or just under 1, because there still will be some remaining credit discount a few years out before we hit Cecil.

And on the face of the balance sheet, the reserve ratio should increase slightly over the course of 2017..

Okay, perfect.

How much of the $7.7 million of accretion this quarter was PCI-related?.

Yes, $1.3 million, down slightly from $2.1 million last quarter..

Okay.

And then how much of the benefit do you think would flow through to the bottom line if we do get a reduction in the corporate tax rate?.

A good question. So again, the federal rate is 35%. We are also obviously in some higher state tax areas with Oregon and California. But on the federal side alone, let’s say, a lot of people are talking about 35% to 25%, so a 10 point reduction, that’s the equivalent of roughly $0.05 on a quarterly basis based off of most recent pre-tax run rate.

And I would expect, probably consistent with our dividend payout ratio, call it, 50% 60%, we would ideally return a good chunk of that back to shareholders..

Okay. Thanks for that. And then maybe just last one, big picture on profitability. Going back a few years when you announced Sterling, you had the 120% to 130% core ROA after cost saves goal. And I know there are some higher rates embedded in that guidance.

But if we do get an additional two or three rate hikes over the next few quarters, has anything changed operationally on the combined company that would prevent you from getting that 120% to 130% ROA goal on a core basis?.

No, there is not. But again, going back three years, there were quite a few more than two to three front-end rate increases baked into those forward estimates. And also, Tyler, just one quick point back on taxes.

So if there’s any reduction in federal tax rates here in 2017, I’d expect from the first quarter of that move, you’d see probably a pretty close to 100% offset just related to DTA revaluation. If it was though in 2018, it would be pretty much neutral, so that would directly flow to the bottom line in the first quarter..

Okay. Thanks, Ron..

Yes, thank you..

[Operator Instructions] And gentlemen, it looks like we have no further questions at this time..

Okay. Well, I’m going to thank everyone for their interest in Umpqua Holdings and your attendance on the call today. This will conclude the call. Goodbye..

That concludes today’s conference. We thank everyone again for their participation..