Good day and welcome to the Umpqua Holdings Corporation Third 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.

Excellent. Okay, thank you, Alan. And good morning, and thank you all for joining us today on our third-quarter 2016 earnings call. With me this morning are Ray Davis, the President and CEO of Umpqua Holdings Corporation; Cort O'Haver, our Bank President; and Dave Shotwell, our Chief Credit Officer. Cort and Dave will join us as we take your questions after our prepared remarks. Yesterday afternoon, we issued an earnings release discussing our third quarter 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 may 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 Ray Davis.

Good morning. For the third quarter, the company reported operating earnings of $0.32 per share. Net earnings per share were $0.28 per share, up from $0.25 in the prior quarter. Here are some takeaways from the quarter. Before the impact of loan sales, gross loan growth for the quarter was $140 million or 3% annualized. This quarter's loan growth, although lower than last quarter, is not an indicator that Umpqua's loan production is slowing down. To the contrary: our production is strong, and we expect stronger growth during the fourth quarter and into 2017. Over this past year, we have benefited from steady growth of over $1.1 billion, accomplished without bending or compromising our loan standards and underwriting, which will bode well for us in the future. During the third quarter, we did experience an increased level of refinance activity and early payoffs, specifically within our owner-occupied and multifamily loan portfolios. A portion of these were multifamily construction projects that did not roll to permanent. These early payoffs softened another good quarter of growth in our commercial real estate portfolio, as loan demand continues to be strong and our pipeline remains robust. Our commercial loan portfolio, which includes both traditional C&I lending and leasing, had another strong growth quarter, with an annualized growth rate of 13%. Our leasing portfolio also continues to perform very well, with loan balances of $927 million, which we expect to cross over $1 billion in the next quarter or two. Once again, we are expecting stronger net loan growth in the fourth quarter. As a reminder, and as stated on previous earnings calls, we continue to make good progress rebalancing our existing loan portfolio, which will provide us with a more diversified portfolio focused on relationship lending while increasing our balance sheet sensitivity. This is…

Okay. Thanks, Ray, and I will be referring to certain page numbers from our earnings presentation. Starting first with the P&L, as noted on Page 5 of the slide deck, for the third quarter we reported $0.32 per share in our non-GAAP operating earnings measure, up from $0.31 in the second quarter. GAAP earnings per share were $0.28, up from $0.25 in the second quarter, driven by lower charge related to the fair value of the MSR and expected lower level of merger-related expenses. In addition to the presentation, we also show the reconciliation for non-GAAP measures on noninterest income and expense on Page 8 of the earnings release. Adjusting out the non-operating items, we saw a $3 million decrease in noninterest expense and a slight increase in net interest income. This was offset by a $1.6 million decline in noninterest income, mostly from lower gain on portfolio loan sales and an increase in the provision for loan loss. Turning to net interest income and margin on Slide 6, net interest income increased by $700,000 from the prior-quarter level. We benefited from higher average interest earning assets, given the strong growth in deposits Ray discussed. The deposit growth was held for the short-term in interest-bearing cash. Higher cash balances were partially offset by lower average yields in both the loan and lease portfolio and our investment portfolio, which is predominantly agency mortgage-backed securities. The decline in taxable investment income this quarter related primarily to increased premium amortization with the decline in long-term interest rates this year. Credit discount accretion from the Sterling portfolio was $9.1 million in the third quarter, down from $10.1 million in the prior quarter. As noted on prior quarterly calls, this accretion is expected to continue to decline modestly on a quarterly basis. The total net…

Okay, just a couple of more comments. First on our subsidiary, Pivotus. As a quick reminder, Pivotus was formed to provide the product, tools, and roadmap to pivot Umpqua into digital banking with a differentiated digital banking platform. Our progress to date, considering we've been fully operational for only eight months, is impressive. So much so that we are scheduled to be in pilot with phase 1 of our digital program by the end of January. As previously announced, one aspect of our strategy was to introduce a collaborative effort to help leverage the capital and brand of Umpqua with other like-minded institutions. Our collaboration with Nationwide Bank, headquartered in the United Kingdom, has proven this concept can and does work very well. We are extremely pleased to work alongside Nationwide's talented professionals, as we together are building a very unique digital banking strategy. We are now convinced this new technology will work. Accordingly, as we head to pilot, we are diligently working on the work paths for integration into our institutions. Both companies have each established integration teams from within our institutions, working together to accomplish this. Finally, over the next several quarters, we will be considering adding new collaborating companies to our structure that embrace the digital direction we have embarked on. As previously announced, on January 1, 2017, I will be stepping down from my position as CEO of Umpqua Holdings, Umpqua Bank, and become the Executive Chairman of the Board, and will remain CEO of Pivotus. Cort O'Haver, who many of you have had a chance to meet, will step into the CEO position at that time for the Bank and the holding company. I have had the privilege to hold the CEO title here at Umpqua for over 22 years. And as I look back over my career here, I can tell you that I'm most proud of the strength of our company culture, the strength of recognition of our brand throughout our industry, and having worked with some of the finest people within the industry, my fellow associates. Thanks to all of you on the call for the years of support. Now, we will take your questions.

Thank you, sir. [Operator Instructions] We’ll take our first question from Steven Alexopoulos with JPMorgan.

Good morning, everybody.

Hey, good morning.

I wanted to start first on loan growth. So, if we look at the low-single-digit loan growth in the quarter adjusting for the loan sales, and you guys consider the headwinds from remixing the loan book, do you think given Ray's comments you could do better than the low-single-digit growth moving forward?

Yes, absolutely. We do feel that way. One comment on that. I might as well make this because I know it will probably come up and let me make the comment. I don't think it's any great secret that a lot of these institutions have been reporting these unsustainable growth rates, in our opinion, are going to unfortunately – and we certainly hope not, but it's obviously there's some trends out there that they are going to unfortunately suffer probably some consequences for growth, too fast of growth, unsustainable growth rates and perhaps in some areas where they don't have the expertise to handle it. And I think, Steve, you know Umpqua, have followed us long enough to know, we're not going to do that. We are not going to sacrifice our underwriting standards. We are not going to sacrifice a general policy here that we've established within the credit culture of this company for the sake of growth or for posting a 10% versus a 7.5% loan growth. We're not going to do it. It's steady as she goes with us. This rebalance of the portfolio, let's face it, that's going to take a long time. That's not a one-year, two-year, three-year project. That's an ongoing process. As soon as we get portions of it balanced, it will probably fall out of balance again, depending on what's going on within the market. But we are, I believe, being very diligent and thoughtful on the loans that we are making, obviously. And I think obviously everybody else says that as well. But I think you can see by the results and as well as the – Steve as well as the loan sales we've had in the past, that we are not growing just for the sake of growth. If we were, we wouldn't have sold loans at all. So, the answer to your question is yes but we're going to be very thoughtful.

That's helpful. And maybe following up on that, when you think about, Ron, the margin guidance you gave which is calling for some modest pressure, you had 6 basis points of pressure this quarter from holding excess liquidity. How come you are not expecting to get some of that back at least near term, following up on Ray's comments that loan growth should be a little bit better here? I would think you would use some of that excess liquidity.

There is a potential for that. It obviously depends on how much of that is utilized and we are obviously focused on balanced loan and deposit growth, but over the last two quarters we have talked about net new businesses coming on in the mid-3s. And here's the margin, ex- the credit discount accretion in the high 3.7 range. So, if net new is coming on, let's call it, 3.6 to 3.7 and rates don't change, chances are over time it's just mathematically going to drift to that level. But yes, we put some of that cash to work over the coming quarters and we will see a little bounce related to that. I do expect the premium amortization to slow down as we head into the winter months. This is really more of a tail off of the Q2 movement in rates.

Steve, this is Ray. One other comment on that. I do also believe – first of all, Ron is absolutely correct on his comments. The other aspect of it is we're going to continue to grow deposits. We believe with rate environment changing here, it appears that deposits which we all know is the blood that runs through the veins of every financial institution are going to become even more critical, even more critical. So, we're beefing up a little bit on our deposit base intentionally to make sure that we can have the liquidity or sustain the liquidity we need to continue with that loan growth.

Got you. Okay. Maybe if I could just ask one final one. Thank you for that. Given the upward bias in provision this quarter, is there anything unusual driving that? Or is this just what you consider normalization of credit? Thanks.

I don't think there's anything – no, there's nothing normal – nothing abnormal in it whatsoever. Our leasing portfolio, the provision was a little bit higher this quarter over last quarter. But other than that, I think, as Ron I think I mentioned in his comments, our provision is going to run in the last two or three quarters on average.

Okay, got you. Okay. I appreciate all the color. Thanks, guys.

Thank you.

Next, we’ll go to Jeff Rulis with D.A. Davidson.

Thanks. Good morning. Just following up a little bit on the credit side, those net charge-offs have been elevated the last couple of quarters. I thought you had mentioned in the past maybe just confirming this is that working through some legacy Sterling credits. Is that correct?

This is Ron. No, I'd say the legacy Sterling, at least the impaired loans, were all in the 3-, 10-, 30- space. That hasn't been what we've seen here over the past two quarters. But I'd characterize the past two quarters as bouncing along the bottom, just like the previous two quarters were. We don't see any noticeable trends in that space.

All right. But in terms of net charge-off rate, it has kind of doubled where you had been the previous two quarters.

Right, but it's doubled off of 8 basis points to 16 basis points still relatively low by historical standards.

So a 10 basis point to 30 basis point range on net charge-off to average loans is bouncing along the bottom I guess.

Versus long-term historical averages? Yes.

Okay. And then on the expenses, last quarter you broke out the variable mortgage cost quarter-to-quarter, but didn't do it this quarter. Is that because the production was similar on the mortgage side?

I want to break out the moving parts for you every quarter, so I think we've shown that historically on a quarterly basis. Obviously it moves up and down with mortgage volumes. This quarter, though, it was nice to see that the expense was down $0.5 million even with the slight uptick in production.

Got you. And Ron, you talked about maybe some room for further improvement on the operating cost base of $177 million. Any additional color as to where that gets to or put it in a different way of improvement?

Yes, this is Ray. Well, first, one of the biggest things, obviously is we are as of the weekend of November 4 or 5 whatever day that weekend is, that will be the final conversion that we'll have on technology with the – from the Sterling acquisition. And that puts all of that to bed, which enables us to take advantage of some additional cost saves obviously in a go-forward basis. So I think you will see, we should realize some of that and we'd like to see some more of our expense in consulting and services to help us get through integration and conversions start to ramp down.

So, Ray, just to make sure I got you that would be – through that final conversion, you expect the end of merger costs and then additional cost savings on the core run rate.

Yes, we're going to have – we will probably have some merger costs in fourth quarter. But as we go into 2017, that's when it will go to zero. Yes.

Okay. Thank you.

Yes. You’re right.

Next, we’ll go to Jacque Bohlen with KBW.

Hi, good morning guys.

Hi, Jacque.

I wondered if you could give some added color on the payoffs in the quarter, the payoffs and refinances that you spoke about. How much did they impact the organic growth that was booked in the quarter? And I guess assuming that – since you think loan growth will be more, I'm assuming that you expect them to slow next quarter. And so what drives that view?

Jacque, it's Cort. The largest category of paths [ph] we took in the quarter was multifamily. It was a little under $175 million. And the real reason that that was higher than normal primarily is just the aggressive underwriting terms being offered by both – yes, both non-banks and banks. And we've chosen that stick to Ray's point in the opening comments – to stick to our knitting. So we saw some higher payoffs than we had seen in prior quarters in that particular category. And then investor real estate, same thing, just very aggressive terms being offered by competitive banks. And as you noticed in the detail, all our other loan categories have grown in double digits. It's those two particular categories, where we have a higher concentration, where we're a lot more selective about what types of assets we'll put on the books.

Okay. Was there any geographic skew to the payoffs or to the aggression that you're seeing in the market?

No. We've got commercial real estate and multifamily all up and down the West Coast, and it's pretty much spread out.

Okay. Maybe just some color on the pipelines that you're seeing, where they stood last quarter, where they are now. Do you expect continue similar growth in the leasing buckets to continue through the next several quarters?

So, pipelines haven't moved an iota, to be quite honest, since the beginning of the year. We've been sitting in a commercial bank about $3 billion to $3.1 billion since the beginning of the year. So it's not a production; it's more of a payoff, more of a payoff issue that we've got. On the leasing side, that pipeline is still robust, and we're still on a pretty good growth tangent there. And we are approaching that $1 billion mark, which we could hit by the end of the year, but it will probably happen after the first of the year.

Okay. And then just one last quick housekeeping one. The disposal costs that were mentioned, I'm guessing, Ron, those are related to store closures.

That's correct.

And I missed part of the prepared remarks. You said they would trend downward next quarter, or they would remain next quarter?

They will be there next quarter related to some excess back-office facility consolidation, but it will be a lower amount.

Okay. And then mostly gone in 1Q?

Correct.

Okay. Great. Thank you guys for all the color.

You bet. Thanks.

Next we go to Tyler Stafford with Stephens Inc.

Hi, good afternoon guys. Just a question first on the mortgage business. Can you talk about the changes or initiatives you are making behind the scenes to allow for that mortgage compensation expense to actually decline $0.5 million, given it's such a strong origination quarter?

I think – and part of that too, it's a combination of a number of factors, including the product, the geography. Also you have ramp-ups over the course of the year in terms of some of the benefit-related costs. So all that really factored into it. But again, the key with it is we're working to obviously maintain, retain the conventional side. We've had some reductions on the portfolio side, for obvious reasons we've discussed over the past few quarters, so that also is a bit of a mix.

Okay. And then do you have the dollar amount of gain from SBA sales this quarter, and what it was last quarter? And in line with that, the gain on sale income this quarter was clearly down from 2Q. Any outlook on how much you expect to sell and the revenue contribution as we think about next year from that?

Yes. So, in terms of that gain on sale line, that in essence is SBA on a quarterly basis, and it's been around that level here over the last several quarters, ex- the portfolio sales.

So SBA has been essentially flat? Am I understanding that --?

[indiscernible], but off of a small base. So, for example, this quarter the $1.3 million, that's roughly – that's basically SBA.

Okay. And then just lastly, do you have the PCI versus non-PCI breakdown on the accretion, that $9.1 million?

Of the $9.1 million, it was – roughly $2 million was non-PCI.

Okay. Great. Thanks, guys.

And next, we’ll go to Jared Shaw with Wells Fargo Securities.

This is actually Timur Braziler filling in for Jared. I guess my first question is a little bit more of a hypothetical one. Again, strong deposit growth this quarter, which resulted in some build in excess liquidity position. I'm just wondering if loan payoffs remain elevated in Q4, and even into 2017. Deposit growth remains strong; excess liquidity continues to build. Would there be a strategic shift on deposit gathering activities or maybe a strategic shift within the securities book?

I think the bottom line to that would be no. First of all, I don't think – let's not jump off the pier head-first into shallow water over the payoffs this quarter. I wouldn't say that this is not systemic. We had, this past quarter – if it had been, we wouldn't have sold loans this quarter, which we did. So, I think this is just one of those quarters where we had a little bit more payoffs than previous quarters. And that's going to go up and down as we proceed. But no, I don't think we'll see any changes to the overall game plan. Let's put it this way: if something was hypothetically, since you said it was hypothetic – hypothetically, if something happened dramatic in the economy which stopped the credit machines around here, that certainly could have an impact on the way we look at how we go forward with loans, and what that means to the investment portfolio. But that's awful hypothetical.

This is Cort. Let me add one more little piece of detail that might be helpful to you. So, we have a group that does construction finance. They do multifamily construction. And those, obviously, as they come to term, there is a construction period, and those deals come to term in chunks. And as those come to term, and we get bid on by other banks and we choose not to compete, they kind of come in waves. And we hit a wave of that in the third quarter, where we had some multifamily production – construction loan production that was done probably 18 to 24 months ago that hit its term. There is a very aggressive multifamily market out there. And there was a chunk of payoffs out of that construction portfolio. That's not a reocurring event, every quarter. That kind of comes in waves.

Okay. No, that's very good color. Appreciate that, thank you. And then just looking at potential opportunity for additional loan sales here in the fourth quarter, or did you see something special in Q3 that made you pull the trigger on that?

On the Q3 side, it was just a continuation of the long-term fixed residential. We're assessing that now for the fourth quarter, but we're not expecting anything significant.

Okay. And then last one for me, just circling back to the comments that you made about further increasing the asset sensitivity of the balance sheet. Internally speaking, what's the expectation for rate hikes that you guys are budgeting in?

I think the market is factoring in 25 basis points in December, above 50%, in terms of that estimate; and probably 50-50 in terms of another one next year. So that was the one I was referring to. With that first, or the next 25 basis points, we do expect roughly $10 million increase to net interest income on an annualized basis.

Okay, great. Thank you.

You bet. Thank you.

And there are no further questions.

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