Good day, everyone and welcome to the Umpqua Holdings Corporation Second Quarter Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference to Mr. Ron Farnsworth, CFO. Please go ahead.

Okay. Thank you, Augusta. Good morning and thank you for joining us today on our second quarter 2018 earnings call. With me this morning are Cort O'Haver, the President and CEO of Umpqua Holdings Corporation; Tory Nixon, our Chief Banking Officer; Dave Shotwell, our Chief Risk Officer and Rilla Delorier, our Chief Strategy Officer. After our prepared remarks, we will then take questions. Yesterday afternoon, we issued an earnings release discussing our second quarter 2018 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 two 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.

Okay. Thanks, Ron. Let me start with a brief recap of our quarterly financial performance and then I am going to provide an update on our Umpqua NextGen strategy. Ron will discuss the financials in more detail and then we will take your questions. Our financial results in the second quarter were solid and reflect our strength of our business model and footprint in high growth markets along the West Coast. For the quarter, we reported earnings per share of $0.31. That performance was highlighted by strong loan and deposit growth, higher net interest income and stable credit quality. As you saw highlighted in our earnings materials, second quarter results were negatively impacted by two key items. $8.2 million of restructuring charges related to the organization simplification and design and procurement phases of Umpqua NextGen as we guided to last quarter and a $5.4 million negative fair value adjustment to the MSR asset. Ron will cover the financials in more detail in a few minutes. Today, I'm going to focus on three of our most important initiatives for the 2018 operational excellence, balanced growth in human digital initiatives. Let's start with operational excellence. As we discussed last quarter, we need to continue to adapt to customers’ changing preferences. This requires evaluating every part of how we operate and evolve to deliver a highly differentiated and compelling banking experience. Highlighted on slide 4, our operational excellence initiative is about streamlining and simplifying our company, so we add value for our customers and create a better associate experience, while building a more sustainable and profitable company. Phase 1 includes two key elements. The first is an organizational simplification and design exercise, which we completed towards the end of the second quarter. Ron will discuss the financial impact, but we are pleased with…

Okay. 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. Turning to page 6 of the slide presentation, which contains our summary P&L. At a high level, the $0.04 decrease from Q1 to Q2 resulted from a $0.04 swing in the MSR, which was a positive impact of $0.02 in Q1 to a charge of $0.02 here in Q2, a $0.03 drop related to higher expenses as expected, including additional severance and professional fees related to our operational efficiency initiatives. When combined, these two items accounted for a $0.07 decrease in earnings, which was partially offset by $0.03 of positive earnings impact from higher net interest income and higher non-interest income, excluding the MSR change, leading to the overall $0.04 drop in earnings. Turning to net interest income and margin on slide 7, and noted on page 6 of the earnings release, net interest income increased 2% from Q1. Interest income increased $10 million or 4% from the first quarter, reflecting continued solid loan growth and an increasing rate environment. Our interest expense on deposits increased 15 basis points, based in part on the growth this quarter among higher costs and deposit categories, based on the recent Fed funds rate increases. Our deposit beta based on the Fed rate increases to date has increased slightly to 22%, driven primarily by higher cost public funds and broker deposits. Over the trailing two quarters, our beta is now up to 44%, accelerating as expected. For the first quarter, our net interest margin decreased 3 basis points, while the margin ex-credit discount decreased 6 basis points to 3.81%, based in part on the higher average interest bearing cash position this quarter with the strong deposit growth. On…

[Operator Instructions] We’ll go first to Michael Young with SunTrust.

I wanted to start just with the margin and the deposit build this quarter. Obviously, pretty heavy in the CDs, it looked like brokered CDs area that you mentioned, but it sounds like the plan would be in the second half to kind of let those balances dwindle, as season inflows come in and so should we expect kind of margin expansion to recalibrate potentially at that point.

Yeah. So generally, seasonally, we’re weaker in Q1 and Q2, stronger in Q3 and Q4. That is our expectation that we'll have stronger growth on the customer side in Q3. And that were to occur, we would run down the brokered with maturities scheduled in Q3 and would see a positive impact on the margin. I'll also point out, if you go back to Q3 last year, total deposit growth was in the range of 350 million to 400 million. We were actually down about 200 million in brokered and public, back in Q3 where we were up a little over 500 million on the customer side in Q3 last year. I look for that to be a bit higher than that here this third quarter.

And can you kind of frame up the magnitude of the public funds that you all have and maybe what you're seeing in just deposit pricing there specifically?

Yeah. I mean. Really, the pressure has been more on the higher balance investment money. I mean, given our five state footprint, we are a main bank, regional bank for our public funds customers with that includes operating accounts plus their investment accounts. So the public funds and the brokered have been really leading the beta for us on that front. This past quarter actually, we saw a small drop in public funds, which we offset with some brokered flows, including movement out of money market in the time. So I would say, in total, public fund deposits are just under 10% of total deposits and brokered is in the range of 6% to 7%, about consistent with where it was now four years ago when we closed the [indiscernible] deal.

And one last one for me, just on the small share buyback this quarter. That's not really indicative of something larger you plan to do going forward. That was just opportunistic or was that to offset dilution, can you maybe just walk me through kind of how you're thinking about capital deployment.

Yeah. And I appreciate. A different one to focus on, a strong healthy dividend in terms of the majority of our return to shareholders, but this was repurchasing net share issuance under equity comp plans. Generally, that’s stronger in the first half of the year, expect smaller amounts over Q3 and Q4, but if you look back over the last couple of years, there is that surge in Q1 and Q2, nothing different here this time.

Our next question will come from Jeff Rulis with D.A. Davidson.

Ron, I wanted to follow up on the expense. I just wanted to confirm that your -- the 178 to 183 expense run rate in Q4, that does include the restructuring charges.

It does include restructuring charges. It doesn't include anything yet on exit/disposal costs. We will see. If there are not, if we have to recognize any losses on sale or lease disposal, we’re not thinking of any right now. So ideally, that'll hit in Q1, but we might see some of that pull forward from Q1 to Q4. It would be one time of course in relation to the consolidation. So as of right now though, the 170 to 183 does include the 3 million to 4 million of restructuring charges and that's really the change from what we talked about a quarter ago.

That triggered another question. I guess the exit/disposal costs, there's a kind of one-off and I keep sort of trickling in. This is just legacy business that can pop up from time to time. Is there any range on potential exit or disposal costs that come up, just any guidance on that number?

You bet. Yeah. Appreciate it. So with the store consolidations, what's going to represent is going to be everything from severance to lease exit to if we have any loss on disposition of buildings. I'm not expecting much of that, if any on owned real estate, but at the times, these are lease and exit costs in there and of course we have severance. This past quarter, there was around 2.5 million of exit costs. I mentioned earlier about 1.5 million of that was not related to store consolidations. It was just a legacy property through an acquisition that we had the ability to hit the bid and opportunistically did hit that bid and exited the property versus continue to carry it from that standpoint this quarter. So I'd expect very little in Q3. If we have any in Q4, I’ll talk about in October. It would be a function of pulling forward any lease charges out of the Q1 consolidations. And in total, I'd expect roughly 5 million connection with the consolidations annually. If you look back at Q1 and Q2, Q1 and Q2 this year and late Q4 last year would be in that range, for the stores, we did not expect similar amount for the Q1 ’19 consolidations.

And then if I could circle back to that run rate then on, if you were in that range in Q4, took a midpoint of 180, I guess annualized that 720 for the year, just wanted to make sure I have this right. The delayed phase 1 savings and your anticipated range in phase 2 savings would suggest about 20 million combined. That would be a base of 700 million for the full year and then we could just assign a run rate of cost growth. Is that in the ballpark of your thinking?

So actually, we expect to have 12 million in annualized saves in Q4 this year and so the incremental component we pick up by mid-19 would be in that, what, $6 million to $12 million range around procurement. To give you the total 18 million to 24 million range. So by mid-19, we’re targeting to having that incremental piece in place, but the base layer, that first half will be in place in Q4.

And maybe one last one, just on the auto portfolio. Could you remind us of the current size and then the number that, I mean, is it a total running to zero or the pace of that, I guess, is it -- could potentially cannibalize net growth going forward. So the size in that – just the expected –

Yeah. You bet. It’s about $400 million within the consumer portfolio and it's running down around 45 million to 60 million on a quarterly basis the last couple of quarters.

And no change in that pace expected?

None expected.

We'll go next to Aaron Deer with Sandler O'Neill.

A question on the – you guys continue to see pretty good commercial loan growth. I’m curious where the pricing is on that currently and are the yields that you're getting on that accretive to the current margin? And then I also have a question on the relationships that you're picking up with that and the fees tied to those?

This is Tory Nixon. Yeah. I mean, the market is -- the C&I market continues to be competitive, but we're seeing margins and we're seeing all-in yields that are accretive to our overall bank margin, well over 80% of what we're bringing in is full banking relationships. So there's a deposit. That deposit treasury business in addition to core fee income. And so we're seeing that and it's kind of a win through this acquisition of people that we've done over the last year and a half.

And then I guess, tied to that then, Cort, you'd mentioned the growth that you’ve seen in the treasury cash management and card fees and merchant sales and such that’s up year over year. Is that in the -- are those categories spread both in the deposit service charges and the other line in your published income statements, because the deposit service charges year over year are down and I'm sure that there's an element of analysis, credits and that sort of thing affecting that. But maybe you can give us some color on just what kind of fundamental growth you're seeing in those sorts of service charges?

This is Ron. I'll point out that yeah, that those amounts are split between service charges and other income and better chunk of those are in other income. Tory, you want to go over what you’re seeing in terms of trends.

Yeah. So I think as Cort mentioned, this is Tori again. As Cort mentioned, we've got gross TM 17% year-over-year, commercial card spend 41% up year over year and merchant 13%. I mean, we're seeing some nice activity levels across the bank. We're seeing net new commercial households and just full banking relationships from either expansion of the existing relationships or net new relationships to corporate banking.

So I guess if – okay, all right. That’s fair enough. Thanks. I’ll step back.

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

First one, just on the third quarter non-interest expense guidance about 186 to 191. I know you talked about the fourth quarter around disposal cost, but are there any disposal costs, including that 186 to 191?

No.

Okay. And then just on the NIM outlook, I think in the past or at least last quarter, you talked about relatively rangebound. Want to get your updated thoughts there, maybe over the second half.

Yeah. We’re definitely talking about NIM, ex credit of course. I’d probably say plus or minus 5. We're successful growing core deposits in Q3, as we expect. We could be on the upper end of that range. If we have to maintain the broker to bring any others in and be on the lower end of the range, but probably plus or minus 5 over the course of the third quarter and fourth quarter.

And then just on the accretion, a little higher this quarter, some earlier payoffs, should we assume that normalizes back to the kind of low-5s.

Yeah. I'd say anywhere from 2 to 5 at this point. That was just a function of a loan or two from a payoff standpoint. I think that 1.7 million increase in credit accretion was [indiscernible]

Okay. And then just on the CD promotional side and you talked about the brokered CD, maybe just give us a sense for where that pricing was in the quarter and maybe currently and then what your -- whether or not you're looking to extend a promotion in the third quarter, if you are already, what kind of rate duration?

Yeah. You bet. It’s roughly right around 2% on the brokered side and that spread between, call it, 3 out to 18 months, pretty even across the tenors. We have been testing some larger balance consumer and commercial CD [indiscernible]. Still the majority of customers are short on CDs or keeping the money market, but starting to take peaks at the 12 to 18 month range to see if we can lock in some money as ranges continue to increase.

We'll go next to Jackie Bohlen with KBW.

Cort, earlier, in your prepared remarks, you had mentioned competitive pressures on the loan front. I guess how are that changed if at all from the first quarter and maybe if you can provide just some added color on whether it's pricing or underwriting or what you're seeing.

Jackie, let me have Tory update you on that. Tory?

Hi, Jackie. It’s Tory Nixon. I don't think that the competitive landscape on C&I has changed much in the last two quarters actually. I think the CRE side, so it's been consistent for us over the last two or three quarters, the CRE side has the pricing and margins have thinned a little bit. There's a lot of capital still chasing the market from an underwriting standpoint or a credit quality standpoint and we are holding very firm on the quality of our asset acquisition. So we're staying within the Umpqua Bank guidelines on underwriting and pulling in good solid assets for the bank.

And are you saying releasing of underwriting standards from others?

From time to time, yes. More so I think on the real estate side than the C&I side.

Okay. And is that at all impacting volume for you?

Not to this point. No. Pipelines for us look good. They're healthy. They're up a tick from last quarter. There's a lot of activity. So, no, it seems that that's not really impacting us at this point.

Okay. And then just one last one on mortgage. I was looking at my notes correctly from last quarter and it looked like that 10% decline was changed to a 5% to 10% decline. So I would guess and correct me if I’m wrong on that, the volume may have been a little bit stronger than when you were looking at it a quarter ago for the second quarter. And if that’s the case, if you could just provide an update on that and also purchase volume was really strong in the quarter. So kind of what you're seeing throughout your markets?

This is Ron. I’d say, I'd expect Q3 volume to be pretty similar to Q2, again that seasonal bell curve, when you take a step back and look at the whole year by quarters, in total, we think we will be down 5% to 10% year over year. And then that really – that hasn't changed over the last couple of quarters. We’re down 8% this quarter from Q2 a year ago. Purchase was definitely the driver in Q2 and Q3 every year, just seasonally. I think those gain on sale margins, we -- with higher competition, could be closer to where they are now versus 3.5 in Q3, but it’s going to be somewhere in that range of 3.25 to 3.5. And also just recognize on the expenses side, as we talk about our overall direct costs on home lending was roughly 250 bps this past quarter down from 280 in Q1. I expect that to drop in basis points over the year to end in that 250 range in total for the year.

And just broadly speaking on 2019, given that -- assuming that the 81% purchase volume hold their sticks around there, is it fair to say that you could see an increase in volume in 2019, now that most of their refinance activity has been weeded out.

I think that's maybe a bigger picture story about new supply additions into the market. Right now, we're thinking, it's going to be rangebound around current year levels to potentially down to slightly, but that's what we had incorporated within our three or four as we did. We gave you all a couple of quarters back.

We'll go next to Tyler Stafford with Stephens.

Ron, just maybe to clear the air on the expenses. There's lots of numbers being thrown out for phase 1 and phase 2 at the back office to branch closures. Just for 2019, can you just give us the total cost savings number that you'd expect to realize for 2019?

In the year 2019, if we continue with the roughly 30 store consolidations, that's probably going to be around 7 million to 8 million for the year, given those consolidations will occur between January and March of 2019. If you go back to page 4 then on our slide deck here, we talk about 18 million to 24 million in annual run rate saves coming out of 2018, we'll have 12, working our way up to that 18 to 24. So let's take half of that dealt of 18 to 24, off of the 12 that you’re looking at, probably another 4. So that's 16 million off for the full ’19. And then just in terms of the end to end journeys, I’m going to have to defer that commentary probably for our October and January call just because we have yet to dive into it specifically. We do believe it's in the range -- that component is a component of the Phase 2 saves, but we don't have the specific amount isolated.

Okay. So but beyond that, it would be 16 total, at the midpoint coming off ’19?

Correct. I’d say absent anything else moving, including mortgage and merit and all those other things.

What is the average deposit cost of the 1 billion of deposits associated with the 31 branches that have been closed so far? Are you having to pay out more to keep those deposits or are those betas staying roughly the same as the rest of the core deposits.

The betas are the same as the rest of the core, very low, again, the driver this past quarter of our overall cost deposits was on the brokered side. I will say that of the 33 stores we consolidated earlier this year, our deposits are actually up north of 16 million year-over-year within the combined stores. So we're not seeing any change in terms of attrition as we've been very pleased with the initiatives we've had to retain and where those deposits obviously building that initiatives ahead of next year's consolidations, including the go to launch that Cort talked about. So nothing with what we did here on the brokered or public side here in Q2 as related to the store consolidations.

And how much total core deposit growth would you expect to see in 2018?

When we talked about -- again over those three year goals, we were targeting mid to upper single digits total deposit growth. So that's still in the range of overshooting four.

We’ll go next to David Long with Raymond James.

Cort, in the past, you've talked about the number of lenders that you've hired since you’ve really established the middle market C&I growth path that you guys are taking. I have the number, about 22 or 23. Where does that stand now? What does the pipeline look like?

Yeah. Let me bump that over to Tory, because he’s closer to it. So Tory?

Tory Nixon. Yeah. We've kind of held steady the last two quarters. So we're still around 23 or 24 in corporate banking that are new hires. We will continue to be opportunistic. So, we're always looking -- we're recruiting and having discussions with folks and when we find the right person that fits what we're looking for and fits the bank’s culture, we will do our best to kind of bring them on board. The pipeline for the corporate banking business continues to grow. And as I said earlier, feel good about where we are today with that and I think there is not really much more to say about it. It's a business that continues to expand for us and do well.

Kind of jumping around here. Ron, the excess capital, I think, you pegged that about 200 million and I think you said that that will likely build over the next couple of years. Is that accurate? And then I was under the impression that you may be running down some of your excess capital over the next couple of years? Maybe just comment on the thoughts there and if there was a change, what drove that?

Yeah. Actually, this was mentioned a couple of minutes ago in the prepared remarks. Again, consistently, we expect that to decline slightly over the next few years. I think when season comes into play, that that is the way our excess capital is calculated is based off the lowest regulatory capital ratio, competitor, in house floors, happens to be their bank level total risk based capital above 12% in house floor. So loan loss reserve is baked into there. I think if we see a pop on the reserve related to seasonal, you might see an uptake in the excess capital at that point, but between now and then, that should continue to run down slightly.

And then the last question that I had is related to your assumed deposit beta, what do you guys expect over the cycle? And I think in the past, I've heard the number 65%. Did anything in the quarter change your outlook for where you think your deposit beta will go over time?

No.

We’ll go next to Jared Shaw with Wells Fargo Securities.

Just a couple of quick follow-ups. You said that there was not going to be any exit/disposals costs in Q3, but what about any planned restructuring expenses. Anything like that included in your guidance on expenses?

Oh, yeah. Apologies. I mentioned them in the prepared remarks. I expect it to be in the range of 3 million to 4 million for Q3 and Q4 and that's incorporated in those estimates we gave.

And then on the loan side, where are current origination yields compared to where we saw portfolio yields for the quarter?

For the quarter, they're pretty close. Pretty much right on top of them.

And next we'll take a follow-up question from Tyler Stafford with Stephens.

Just two more for me. Ron, if you realize the level of core deposit growth that you'd expect to see and DSO should run off of the public and brokered runoff, what percentage of total deposits would just be public and as brokerage be at the end of the year roughly?

That's of course going to be dependent upon what we see with loan growth, which we expect to be strong in the second half of the year. We might hold on to them and we might end up still with that, call it, 10% public and 6% to 7% brokered with core – customer deposit growth accelerating. So then, we would be on the upper end of that -- mid to upper single digit range. So stay tuned, but that’s -- I'd be perfectly fine with over the course of the year, we're still in that 6% to 7% range on brokered, because that would be roughly flat with where we were four years ago and we've got cash on balance sheet in that call it 0.5 billion to 0.75 billion range.

And then excluding the brokered and the public, what's the incremental deposit cost for the rest of the core deposits right now?

You bet. With the overall increase of 5 million, it’s going to be right around $1 million, ex the brokered and public.

We have no other questions at this time. I'd like to turn it back to Mr. Farnsworth for any additional or closing remarks.

All right. I want to thank everyone for their attendance in Umpqua Holdings and being on the call today. This will conclude the call. Good bye.