Ron Farnsworth - Chief Financial Officer Ray Davis - President and Chief Executive Officer Cort O’Haver - President, Commercial Banking Greg Seibly - President, Consumer Banking Dave Shotwell - Chief Credit Officer.

Jared Shaw - Wells Fargo Securities Steven Alexopoulos - JPMorgan Joe Morford - RBC Capital Jeff Rulis - D.A. Davidson Matthew Clark - Piper Jaffray Jacque Chimera - KBW Aaron Deer - Sandler O’Neill Mark Schlecker - Holdco Asset Management.

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..

Alright, thank you, Allen. Good morning and thank you for joining us today on our third quarter 2015 earnings call. With me this morning are Ray Davis, the President and CEO of Umpqua Holdings Corporation; Cort O’Haver, our President of Commercial Banking; Greg Seibly, our President of Consumer Banking; and Dave Shotwell, our Chief Credit Officer.

Cort, Greg 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 2015 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 under the Ask Us, 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..

Okay, thanks. Good morning, everybody. This quarter for Umpqua can be summed up in two areas. First, the company performed – continued to perform well with strong loan and deposit growth, improved credit quality numbers and our acquisition synergy capture on target with expectations.

Second, our performance was impacted by the decrease in long-term interest rates this past quarter. The fair value marks for the quarter on our mortgage servicing rights and our interest rate swap products cost us almost $0.04 per share for the period.

This resulted in operating earnings of $0.28 per share, $0.03 per share lower than our second quarter. So, we don’t repeat ourselves, Ron will provide details on our financial performance as indicated on our slide presentation. As to our projections for the rest of this year and into early 2016, let me give you some color.

Our overall loan growth is expected to remain strong, led by commercial lending, our FinPac leasing subsidiary, as well as the small business and consumer lending programs originated through our store network. The company is operating on all cylinders in each of these areas and will be helped by other initiatives underway, too.

And these will be aimed to significantly increase our FinPac leasing originations and reduce early term payoffs from our existing portfolio. On mortgage banking, we anticipate continued healthy demand within the major metropolitan markets we serve augmented by the rest of our mortgage footprint.

We look for total mortgage revenue to remain within the range reported over the last two quarters. On acquisition synergies, as reported for several quarters, we are on schedule to exceed our original synergy forecast of $87 million and are now on track to do so sometime during the second quarter of 2016.

On deposit growth, as previously reported, this is an area we continue to focus on and our latest results reflect how well Umpqua’s deposit gathering machine is operating. We anticipate continued growth here in line with this past quarter adjusted for seasonal trends.

On credit quality, we anticipate continued improvement within our nonperforming and classified loans. Due to the strength of our overall loan portfolio, this improvement will be slow, yet steady with minor ups and downs given the strong condition it’s in.

And finally on capital, we will continue to raise our dividend when possible and buyback shares when the opportunity presents itself as we have demonstrated. This will not change. Now, I will turn the call back over to Ron..

Okay. Thanks, Ray. As I go through my detailed quarterly review comments, I will be referring to certain slides from our third quarter presentation deck, again which we posted on the Investor Relations section of umpquabank.com yesterday afternoon for you to follow along. With that, please turn to the summary on Slide 3 of the presentation.

We reported $0.28 per share in operating earnings for the third quarter of 2015. This is down $0.03 per share from $0.31 in the second quarter.

As a reminder, operating earnings are defined as earnings available to common shareholders before gains and losses on junior subordinated debentures carried at fair value and merger-related expenses, both net of tax.

The decrease in operating earnings per share from the second quarter resulted primarily from the decline in long-term interest rates, which led to the swing of almost $0.04 from Q2 to Q3 due to a combination of the fair value loss on our mortgage servicing right asset and a smaller amount related to our interest rate swap products.

Neutralizing these adjustments, the company would have reported operating earnings of $0.32 per share. Turning towards the bottom of the P&L summary on Slide 5. We have $3.6 million of merger-related expense this quarter after tax.

In line with our guidance on our last quarterly call, we expected this decline in merger expense this past quarter and anticipate this expense to continue to decline over the next few quarters as we wrap up integration. Turning to Slide 6, net interest income increased by $1.6 million from the prior quarter level.

As Ray indicated and this is key for us we were able to grow our loan and lease portfolio, which offset the impact from continued net interest margin pressure as a result of the historically low interest rate environment we are in.

For the third quarter, credit discount accretion from the Sterling deal was $14.3 million, down slightly from $16.1 million in the prior quarter.

Within that total, the PCI accretion was $3.3 million versus $3.8 million in the second quarter and we forecast it to continue to bounce around the $1 million to $3 million level as it has for the last four quarters. As you can see on the chart our total net interest margin declined by 7 basis points from the prior quarter.

This was driven by continued pay-downs on the higher yielding loans, lower average yields on new loans and the lower credit discount accretion. Excluding the credit discount accretion, our pro forma margin was 4.10%, down 5 basis points from Q2. We anticipate continued modest pressure on this percentage over the near-term.

On Slide 7, the provision for loan and lease losses decreased by $3.1 million from the prior quarter level. This decrease was driven by continued improvement in the underlying quality of the portfolio. Now on Slide 8, total non-interest income decreased by $20 million from the second quarter level.

The largest component of this decrease was lower mortgage banking revenue, which is broken out on Slides 9 and 10. We also had lower gain on loan sales this quarter, along with lower other income. Other income in Q3 included a $1.2 million fair value loss from our customer loan level swap program due to the decline in rates.

In Q2, this was the $1.4 million gain. In total, this represented a $2.6 million swing from the second quarter to the third related to the decline in long-term rates. Now, turning to Slide 9, our mortgage banking revenue decreased by $16 million from the prior quarter mostly due to the decline in rates in Q3.

The biggest driver of this was a $10 million loss related to the fair value of the MSR. The balance of the decrease related to lower volume on loans for sale and a 19 basis point decline in our gain on sale margin. The lower gain on sale margin resulted from increased competitive pressure on pricing.

Moving to Slide 10, total mortgage originations decreased by 11% from the prior quarter. Loans originated for sale were down 15%, while portfolio origination, mostly jumbo were flat. The decline in loan volume originated for sale resulted from us keeping our margins steady, while the market was dropping early in the quarter.

Midway through the quarter we dropped our margins slightly to be just above average. Hence, the overall decline in volume in gain on sale. Since quarter end, we have seen stabilization in market pricing and have increased margins slightly heading into Q4.

To recap, with healthy pipelines and slightly higher pricing, we expect fourth quarter mortgage banking revenue to be in the range of the last two quarters.

Also, starting later in Q4, we anticipate selling our jumbo mortgage originations, albeit at slightly lower gain on sale margins than conventional loans to improve our interest rate risk profile by not placing them on the balance sheet. Now please turn to Slide 11.

Excluding merger expense, our operating expense was $176.7 million for the third quarter, down from $180.1 million for the second quarter.

The moving parts for the quarter included reductions for home lending expense, which declined $2.3 million based on lower production volume, a small gain on OREO disposition and incremental synergy realization of $5 million.

Offsetting this was $4.5 million of additional expense, the majority of which was from higher marketing spend, higher compensation in our retail division, due mainly the number of hours worked in the period and some continued severance.

We increased our synergy realization from $71 million annualized back in June to $80 million annualized at the end of September, out of our $87 million target. The remaining $7 million in annualized synergies will come primarily from compensation and occupancy equipment costs, along with mortgage servicing revenue.

We expect roughly half of that $7 million to be in place by December, with the balance to be recognized by the end of the first quarter of 2016. To-date, we have completed six major conversions, with four remaining between the first and second quarters of 2016.

By the second quarter of 2016, we anticipate we will be talking about additional synergies over the original $87 million target with integration complete. Our efficiency ratio was 62% in Q3, up slightly from 60% in Q2. Excluding the negative fair value impacts from the drop in rates, we would be at 60%.

Our objective is to sustain an efficiency ratio of under 60%, which is now within reach due to where we stand and the remaining synergies to be captured.

Turning to the balance sheet on Slide 12, our interest bearing cash decreased this quarter to $674 million, which was the result of strong deposit growth and reductions in other assets, more than funding the strong loan growth.

Our goal is to keep our interest bearing cash up closer to these levels and our investments in the $2.5 billion to $2.6 billion range for the fourth quarter. In addition to the cash balance, we are renewing and extending maturities on existing borrowings as they arise to manage our overall interest rate risk profile.

Slide 13 covers the loan portfolio and shows the company’s strong quarterly growth in loans and leases. During the quarter, we sold $54.9 million of portfolio residential mortgage loans. Grossing up for loan sales, our growth rate was solid at 12% annualized. We anticipate one small longer dated portfolio sale in the fourth quarter.

Combined with continued growth in variable rate and a shorter term commercial lending, this will improve our asset sensitivity for potentially increasing short-term rates. On Slide 14, total deposits increased by $322 million from the prior quarter or 8% annualized.

The cost of interest bearing deposits remained low at 24 basis points for the second quarter. Now please just turn to Slide 15. As you can see, all of our credit quality ratios remained strong in the third quarter. The non-performing assets to total asset ratio of 28 basis points is at the lowest level in the last 8 years.

Our provisions the last two quarters have reflected strong loan growth, which we expect to continue for the remainder of the year. Now to Slide 16 which covers our capital ratios, so it all remained in excess of well capitalized levels, with our Tier 1 common at 11.4% and total risk based capital at 14.4%.

Our total payout ratio this quarter was 61% of operating earnings. Our excess capital is approximately $250 million, consistent with last quarter. As we have discussed previously, we will continue to employ excess capital through a combination of strong organic growth, dividends and share repurchases.

Now I will turn the call back to Ray to wrap up our prepared remarks..

Okay. One last comment before we take your questions. There continues to be speculation on when Umpqua might be once again interested in additional acquisitions. So let me try to clear up our position for you now.

First, we still have work to do to complete on our Sterling acquisition, which should be completed as Ron just mentioned, within the next four months to six months. From our view, there appears to be fewer strategic perspective partners than in the past, especially when considering the markets served and loan portfolio mixes.

This is complicated by how customer preferences are changing due to the speed of acceptance of new technologies, making traditional branch networks less attractive than before. These comments do not mean that we would not consider a new acquisition. However, it does mean that strategic rationale hurdle is much tougher to get over than before.

This is and/or should be a serious consideration for all acquiring institutions as well as potential sellers. Umpqua’s focus now is pivoting towards initiatives that will enable us, by the use of new technology platforms and products to continue to differentiate our company from others.

If you believe that, like we do, that financial products are generally viewed as a commodity and that technology due to its accessibility is potentially becoming a commodity as well, then the major differentiator will be and continue to be how companies use technology to enhance the customer experience.

We believe this gives Umpqua an important competitive advantage. To this end, we are focused on strategies that will lead our initiatives in new digital banking technologies in a way that will allow us to uniquely collaborate with others. We will have more announcements on these initiatives in the near future.

So with that, we will now take your questions..

[Operator Instructions] And we will go first to Jared Shaw with Wells Fargo Securities..

Hi, good morning..

Good morning Jared..

I guess just first on the mortgage banking revenue, does that guidance take into account the – is that including or excluding the valuation adjustment this quarter when you are saying looking at the average of the two quarters?.

That’s based off of volume expectations and gain on sale margin expectations. So it’s for total. But really underneath it two-thirds of that is going to be your gain on sale of origination revenue..

Okay. And can you give us an update just more on how the – you have said how the synergies related to the actual P&L are going with Sterling.

But how is the sort of cultural integration gone in the transition, more to the Umpqua platform going?.

This is Ray. That’s a good question. We have had – we have been traveling down two paths on this – in the total integration of the companies, one being what I consider integration, which is people, facilities, some of the tangible aspects of an acquisition and the second path of course the financial and the conversion of the technology issues.

I can tell you that from an integration piece, putting technology aside for a minute, we are virtually completed. I mean we are – everything has gone I consider extremely well.

We have just some minor adjustments to be made that will come from completing the rest of the technology conversions, which we should have completed in the next four months to six months, so things are on track, moving nicely.

And then when you talk about the remaining $7 million of synergies to get to your target and then potentially seeing more beyond that, is that identifying new incremental synergies or is that just getting a little more efficiency out of systems you have already targeted?.

Yes. I think it’s probably a combination of both. I mean we are – as we have come together and we will exceed the $87 million. I think we are very comfortable with that.

But as we have come together, as we completed the conversions, as we go through the integration piece, obviously we will continue to look for more efficiencies, wherever we can find them.

And due to the size, the new size of the organization, we have discovered additional synergies and/or processes that we can live without or we can streamline that are going to add to that synergy total..

Okay, great.

And then finally, if you could just comment a little bit on the commercial pipeline and what you are seeing as you are going into the fourth quarter?.

Hi, Jared, it’s Cort. So the pipeline right now today is $2.6 billion, which is up 1% from the end of the second quarter. Actually I am particularly happy with the size of the pipeline because our pull through in the third quarter was fairly strong.

We did 1.3 – excuse me, $1.32 billion in new loan production, which was the best quarter we have ever had..

Great, thank you very much..

Thank you..

We will move next to Steven Alexopoulos with JPMorgan..

Hey, everybody. Good morning.

Just to follow up first on Jared’s question about the – exceeding the $87 million in cost saves, from a 30,000 foot view, could you help us think about maybe magnitude, how material this is going to be? And will it actually hit the bottom line given all of Ray’s comments, which imply some reinvestment needed back into the company?.

I think you just answered that question, Steve. This is Ray. I think it’s going to be considerable. I mean, the bottom line of this, is if you, again from 30,000, in fact I will go to 31,000 feet, is the efficiency ratio of the company right now sits at 60% and we will be under 60% when this is all over with, which we are quickly approaching.

So, I think an institution our size, with an efficiency ratio of under 60%, is a pretty good strong position and running pretty efficiently..

So, Ray, you are saying that these cost saves will be material, but you will need to reinvest them back into the company, is that what you are saying?.

I think it’s a – yes, I think it’s a combination of that. I think – I mean, I don’t know what your definition of material is, but a few million bucks to me, is nice to have. That does not mean – or you should, I guess, consider the fact that the organization is not standing still. I mean, we are continuing to grow.

We are continuing to initiate new areas, new ideas, new marketing campaigns, etcetera to continue to operate the company and that does cost money.

So, I think between the synergies that we have yet to capture and those that we believe we will capture that are above our forecast, netted against whatever reinvestments we need to make to continue to grow the company and advance it in the markets that we serve, I think it will – we will still retain the efficiency ratio under 60%..

Okay, that’s helpful.

To switch gears to the loan side for a minute, can we talk about the commercial real estate balances and maybe can you give, maybe Cort, some color on the decline and really persistent weakness in the non-owner occupied crate?.

So, yes, great question. So, we have been emphasizing actually over the last couple of years, more traditional C&I lending, which I am happy that in the third quarter we grew commercial lines. We have – not that we are deemphasizing commercial real estate, but we are putting more of an emphasis on leasing and traditional C&I.

Our commercial real estate department that we started a couple, three years ago is where we do the majority of our real estate now, with a higher, more professional type lender with a different customer base is contributing to that, but not at the clip that we were four, five years ago.

And we are expressing some early term payoffs with overly competitive quotes from competitors. That’s a little bit in there. And if the deal doesn’t make sense financially or on a credit quality basis, we are just not going to pitch it.

So, we are comfortable with that, because we are kind of retooling it back into commercial and leasing and on Greg’s side, the consumer portfolio..

Okay.

So, we should expect that portfolio to continue to be flat to down, is that a reasonable assumption?.

I would say flat..

Flat, okay.

And then maybe one last one for Ron, regarding the strategy you talked about at the start selling jumbos in the fourth quarter to improve your rate profile, what exactly do you mean by improve your rate profile? Are you guys trying to become more asset sensitive here?.

Well, yes. Overall sensitivity, we are fairly neutral give or take, but putting on 30-year jumbo can turn that pretty quick. And so the growth we are seeking is what Cort just talked about and I talked about earlier, continued growth in commercial lending, including leasing, which has a better rate profile, rate risk profile..

Okay, good color. Thanks for taking my questions..

Thank you..

We will go next to Joe Morford with RBC Capital..

Thanks. Good morning, everyone..

Good morning, Joe..

I guess first I just wanted to – wondered if you could expand on your comments at the outset on the initiatives to increase the FinPac business and also cut down on some of the pay-down activity you are seeing, just what exactly are you doing there?.

Okay, Joe. It’s Cort. So, let me start by saying year-over-year in FinPac, we have grown that book little under 40%. So, we have had great success in that business. And that business today is our TPO model, which is the model that FinPac had when we acquired them. We have got our traditional lease – a bank lease product.

And then we, in the last 60 days, actually last 30 days, we are now up and running with our vendor program, which we are all happy to have on board. So, a couple of the initiatives we have got going this quarter and will go into next year. One is our vendors open. We did $20 million just in the month of September in vendor.

We are looking for some substantial growth. That is the big leg on the stool and we have got that up and running now and we will be hitting full stride certainly by the end of the quarter, if not before then. So, that is a big opportunity for us and we have talked about that on many calls.

We are looking at our pricing seeing if we can sharpen our pencil a little bit to increase our market share. We have fairly stringent pricing guidelines in the bands that we use to score these leases and we are looking at maybe sharpening those up a little bit. The average weighted in this portfolio is still north of 14%.

So, we think we have got a little bit of the elasticity there. And then thirdly, in the first and second quarters of this year, we did buy a small portfolio twice from a banking entity who was looking to partner.

We did it in a small way in the – I think it was $10 million and $11 million in the second quarter, just to make sure that we could run it through our model and that we could on-board it and then service it. We didn’t do anything in the third quarter, because leasing is a little sensitive to late summer type seasonality.

And we feel like we are now up and able to take on a bigger chunk if we partner up on a portfolio basis. So, those are the three major initiatives we have got going in FinPac..

Okay.

And then anything on the pay-down activity too you alluded to?.

Yes. And I know we are not the only bank that’s dealing with early term payoffs. We are going to have payoffs. Obviously troubled loans, we need to deal with those and there are uncompetitive rates and terms being issued.

But Dave and I, Dave Shotwell, our Chief Credit Officer and I are committed to – we think there is a segment of our early term payoffs that if we got ahead of it with a strategy – because it’s very efficient and it’s better for the customer if they don’t have to go to another lender and pay for title, if it’s a real estate loan and pay for collateral appraisals and all that stuff that’s done on the initial stages of a commercial or commercial real estate loan.

If we could get ahead of it with – and we haven’t fully devised this yet, Joe, we will work on that. We feel like we can put a dent in some of that, which obviously provides greater lift for the bank going forward.

So, we are just in the beginning stages of that, but we feel like we have got a great plan in place and we will get that in place here in the fourth quarter..

Okay, that’s great. That’s helpful. And then Ron I had a question, just with the $4.5 million of incremental spending that you outlined, I understand reinvesting in the business and marketing and what have you.

How much of this is reoccurring? And how – should we, I guess, expect a similar kind of growth rate on a quarterly basis going forward?.

Hey, Joe, this is Ray. Let me take a stab at that one. First of all, a lot of those expense things in the increase are not reoccurring, because it’s – well, I should say that they are – it’s like the tide, they go in, they go out.

On the retail compensation, these are hourly wages depending on the number of hours worked that has an impact, how many days are in the quarter. Everybody goes through the same thing. We are not any different than anybody else. But there is nothing in there that is – that we are going to build on or it’s going to continue.

I fully anticipate our costs, our other operating expenses again in cooperation with the top line revenue numbers as we continue to stay under 60%, I am thrilled. I am very, very happy with that number and I hope you guys are, because it’s going to make – it will make us – I like to think it’s going to make us quite a bit more profitable..

Okay, thanks so much..

Thank you..

We will move now to Jeff Rulis with D.A. Davidson..

Thanks. Good morning..

Good morning, Jeff..

Just a question on the, I guess, timing of loan growth in the quarter in Q3 and then if you could also comment on origination activity so far in October?.

So timing with them going on the books, Jeff?.

Yes.

How did it come on in Q3? Was it pretty steady throughout the quarter?.

Yes. I mean, it’s broken down – I am looking at a sheet that’s broken down. It looks like, I am eyeballing it, it was pretty consistent and either broken down by commercial lending, commercial real estate, income property, which is multifamily experience. In fact it’s pretty evenly tranched over that – over those three months in the quarter..

Got it.

And then just what you have seen so far in Q4 with origination activity?.

The origination has been pretty consistent. It’s always been fairly consistent. Like I said, we are running over $1 billion just in commercial banking. Obviously, Greg’s number including home lending is not a part of that. It’s pretty consistent on any particular quarter. And the pipeline is up, so we feel real good about it..

And then just to circle back, sorry if I missed this, the mortgage guidance, that’s simply on revenues, is that correct.

There is – you are not making a statement on any MSR fair value adjustment in the quarter?.

Correct, I am not making a statement on MSR. But we do expect revenues and volumes to be fairly consistent..

Fair enough.

And then one last one, just to Ron merger costs left to come here?.

Small amounts, so we have $3.5 million after tax this quarter. There will be smaller amounts trailing down through the second quarter of next year as we wrap up the final handful of system conversions..

Okay, thanks..

Thank you..

Our next question comes from Matthew Clark with Piper Jaffray..

Hi guys..

Good morning..

Maybe just first on, if we assume that rates are going to stay low through next year, do you sense that you might change the way you manage the securities portfolio, excess cash or even your – how you go to market and compete for – on rate for loans?.

Yes. If rates were to stay flat over the next year, I would expect our cash and our bond book will be relatively consistent with where it is. And we will have continued strong organic growth in both loans and deposits. And that the composition of those loans will keep us neutral if not slightly asset sensitive..

Okay, good.

And then on the loan growth and I guess your expectation for a residential loan sale here in the fourth quarter, can you just give us maybe magnitude, I guess how much 30-year fixed paper did you put in your portfolio, I guess that you might want to unload here in the fourth quarter and whether or not you anticipate a commercial real estate or multifamily loan sale, too?.

Now, let me take that. So in terms of the portfolio sale, we anticipate it will be fairly consistent with what we saw in the last quarter or two in terms of longer term fixed. And then later in the quarter – later in the fourth we will start selling off the jumbo production.

But in terms of overall loan growth, I would expect it will remain very strong net..

Okay.

And then just within C&I, can you just quantify I guess the originations in the quarter, the pay downs and the loan resolution?.

In the C&I book?.

Yes..

In commercial banking we did $1.32 billion. It broke down this way for the quarter, so in commercial lending that’s $479 million. In our commercial real estate department we did $173 million. In our income property group, which is really our multifamily originations, we did $234 million.

Our SBA was $37.9 million and in Financial Pacific Leasing we did $107 million for the quarter..

Okay, that’s great. Thank you..

Thank you..

Our next question comes from Jacque Chimera with KBW..

Hi, good morning everyone..

Good morning Jacque..

Touching back on mortgage banking, given your comments on the jumbo sales that you are going to start working on in the fourth quarter, how does that play into your belief that it will stay within the 2Q, 3Q range, is that – are those sales helping to support it to that level or would they be an addition to those levels?.

It’s an addition..

Okay.

I am looking at the incremental loan yields in the quarter, realizing obviously you have a very vast portfolio, where were you putting those on at versus where the portfolio is at presently?.

You are talking about specifically in the jumbo space?.

No sorry, in the overall loan portfolio, new loans booked versus what’s on the books..

It’s lower than the amortized cost of book yield and that’s – I mean that’s the case for pretty much everybody in the industry. And that’s what you see in terms of the margin – slight margin declines on a regular basis now over the last year or two..

No, I understand....

So new is going to be lower. .

Is it – are you seeing a decline in the variance between what’s on the books, are we getting closer to a parity where margin compression could slow or is there – or there is still a long ways to go for that?.

No, we are getting closer, obviously getting closer on a quarterly basis. But the way to offset that is for continued strong organic growth. That’s what we focus on, would be the dollars hitting the income statement..

Okay.

And then just one last one, for gain on sales loans, not the component tied to mortgage banking, but the separate line item...?.

Correct..

Was that – the decline in that, was that primarily volume driven or are you seeing margin pressure there as well?.

It was mostly volume driven..

Okay, great. Thank you..

Thank you..

We will go next to Aaron Deer with Sandler O’Neill..

Hi, good morning everyone..

Good morning, Aaron..

Just one quick follow-up for you, Ron, the – you gave some color on the expectations for loan sales out of the portfolio for this quarter.

I wondered, to the extent that there is any additional repositioning you guys want to do heading into 2016, can we expect that there is going to be continued sales out of the portfolio through next year?.

It’s hard to say right now, looking into ‘16. I would say it will be game time decisions and we will talk about that on a quarterly basis next year. But for what we have right now, it’s just one small piece in Q4 we are looking at and that’s where we are at..

Alright. Thanks for the help..

Yes. Thank you..

[Operator Instructions] We will go now to Mark Schlecker with Holdco Asset Management..

Good morning..

Good morning..

Quick question of Umpqua’s $475 million face amount of trust preferred debt that’s outstanding about – looks like $180 million of those paid in the LIBOR plus 3% or above type context, some of which are high fixed rates in the 10% range.

In the last few months some – a number of banks that are definitely smaller and look to be having worse credit quality than Umpqua have been issuing 10-year Tier 2 qualifying sub-debt at implied spreads in the 200 basis point type range over treasuries.

And just since your trust preferreds will be completely phased out of Tier 1 in I guess two months, do you intend to replace the more expensive L+3 and above type paper with cheaper sub-debt that counts as Tier 2?.

Let me clarify one thing, too. You are talking about contractual balances and roughly two-thirds or three quarters of that entire portfolio came to Umpqua through acquisitions which were fair valued at the time of acquisition. So the actual effective yields are lower on the books.

And if you look at our margin table, the all-in cost is in the mid-3s to high-3s. And yes, they are moving, they are transitioning from Tier 1 to Tier 2. There is roughly 25% left in Tier 1 this year, 100% will be in Tier 2 next year. We view that as a very inexpensive form of Tier 2 capital at the holding company under Basel III.

We are very comfortable with our Tier 1, including the Tier 1 common at 11.4%, so no plans at this point in time to replace those with what would be higher costing Tier 1 instruments. We are in a good position on that front..

Well, maybe I don’t follow.

So you are saying – like I understand that the Tier 2 qualifying sub-debt would be tax deductibles, but when you say effective rate, you mean because you carry the trust preferreds at fair value?.

They are at fair value and yields were fair valued on those as well at the date of acquisition. So if there is a 10% coupon in terms of cash coupon, the effective yield on it might be in the 7s right, for example. I don’t have the specific numbers off top of my head. But all-in cost on that is 3.89% here for the third quarter, in terms of the yield.

And we view that as a very low, inexpensive and tax deductible form of Tier 2 capital under Basel III, so no plans to replace it with a higher costing Tier 1. We are in great shape with the common..

Right. I’m sorry, maybe I just misunderstood.

So even if banks that are smaller in comps can issue debt at cheaper rates, you do not view that Umpqua should be refinancing with cheaper sub-debt?.

No need to refinance anything out of Tier 1. We are very strong on the Tier 1 side and actually that would be a higher cost..

Understood, I meant when they are Tier 2 in the beginning of ’16, that’s what I meant..

Correct, no plans to do that whatsoever. It would be diluted earnings per share forecast as you look forward on that front. We are in a good shape..

Okay, thank you..

Thank you..

And we will go to Jared Shaw with Wells Fargo Securities..

Hi, thanks. I just had a quick follow-up – a couple of follow-up questions.

On the margin, you had mentioned that you are expecting continued margin – modest pressure, should we expect that to be in the similar range that we have seen in the last few quarters, that sort of 5 basis points to 7 basis points or are you thinking it’s going to be tapering from here?.

Just as I talked about, I expect they will be just in the range of what you have seen in the last couple of quarters..

Okay.

And then on the credit side, as you are continuing to put on more commercial loans in the – to the mortgage sales, should we expect to see the reserve ratio start to climb above where we are here?.

Yes. So if you looked at it on the face of the balance sheet, of course it reflects the acquisition accounting from second quarter of last year. That’s why we also in our slide deck show that pro forma ratio if you were to include the credit discount.

But – so today, if we are around 80 basis points loan loss reserve, that’s been inching higher over time.

And I would expect over the course of the next, call it 3, 4, 5 years on the face of the balance sheet that will inch up towards somewhere in the low 1s, 1% range for the reserve, while the credit discount comes off assuming no massive downturn in the economy, but that will probably just continue to inch higher as a percentage on the balance sheet..

Great, thank you..

You bet..

That concludes today’s question-and-answer session. Mr. Davis, at this time, I will turn the conference back to you for any additional or closing remarks..

Okay. I appreciate it. This is Ron. I want to thank everyone for their interest in Umpqua Holdings and the attendance on the call today. This will conclude the call. Goodbye..

Ladies and gentlemen, thank you for your participation. You may now disconnect..