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. 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…

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…

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

Hi, good morning.

Hey, good morning. Cort O’Haver: 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. Cort O’Haver: 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. Cort O’Haver: 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? Cort O’Haver: 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. Cort O’Haver: You bet.

Next we’ll go to Jackie Bohlen with KBW.

Hi. Good morning, everyone. Cort O’Haver: 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? Cort O’Haver: 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? Cort O’Haver: 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? Cort O’Haver: 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? Cort O’Haver: 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? Cort O’Haver: 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? Cort O’Haver: Yes, we are not anticipating to do any multifamily sales in 2017.

Okay. Thanks, Cort. That’s helpful. Cort O’Haver: You should expect to see multifamily growth during the year.

Okay. Great. Thank you very much. Cort O’Haver: Thank you.

Thank you.

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

Hey, everybody. Cort O’Haver: 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? Cort O’Haver: 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? Cort O’Haver: I’m optimistic about beating those numbers.

Okay, fair enough. Thanks for the color. Cort O’Haver: 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. Cort O’Haver: 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. Cort O’Haver: 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.