Umpqua's (UMPQ) CEO Ray Davis on Q2 2016 Results - Earnings Call Transcript

| About: Umpqua Holdings (UMPQ)

Umpqua Holdings Corporation (NASDAQ:UMPQ)

Q2 2016 Earnings Conference Call

July 21, 2016 14:00 ET

Executives

Ron Farnsworth - Chief Financial Officer

Ray Davis - President and Chief Executive Officer

Cort O’Haver - President

Dave Shotwell - Chief Credit Officer

Analysts

Steven Alexopoulos - JPMorgan

Jeff Rulis - D.A. Davidson

Jacquelynne Chimera - KBW Investments

Matthew Clark - Piper Jaffray

Joe Morford - RBC Capital Markets

Aaron Deer - Sandler O’Neill & Partners

Tyler Stafford - Stephens Inc.

Operator

Good day 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 call over to Ron Farnsworth, Chief Financial Officer. Please go ahead.

Ron Farnsworth

Okay. Thank you, Melanie. Good morning and thank you for joining us today on our second 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 second 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 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 law. For a list of factors that may cause actual results to differ materially from expectations, please refer to Page 2 of our earnings release conference call presentation as well as the disclosures contained within our SEC filings.

And I will now turn the call over to Ray Davis.

Ray Davis

Okay. Good morning, everybody. As you are aware this morning, we announced our second quarter operating earnings of $0.31 per fully diluted share. This compares favorably to the $0.29 reported for the first quarter and is line with operating earnings reported for the second quarter of last year. Our operating results for the second quarter reflected strong top line revenue growth benefiting from a robust mortgage banking environment and double-digit loan and lease growth along with continued progress and improving organization-wide efficiency.

A few highlights. Gross loan and lease growth was $545 million or 13% on an annualized basis. Total loan production of $2.9 billion was at record levels and our commercial loan pipeline grew to $3 billion. With the luxury of strong growth and earning assets and as we guided, have guided, we completed the sale of $136 million of residential mortgages during the period and wrapped up the sale of $67 million of multifamily loans placed in held for sale in the previous quarter. Overall, deposit growth for the quarter of $98 million was weaker than we anticipated. However, early third quarter numbers have bounced back strongly.

Umpqua places a high value on core deposit growth and all our teams in retail as well as in commercial banking are focused on improvement in this area. Mortgage banking revenues increased significantly during the quarter driven by higher seasonal purchase activity and stronger refinance volume resulting from the low mortgage interest rate environment. For sale mortgage originations increased by 37% and our home lending margin increased by 30 basis points compared to the prior quarter. The organization-wide efficiency initiatives we have put in place over the past 6 months are beginning to take hold. I am pleased to report that our operating efficiency ratio for the quarter was 59.8%. Our success in lowering our efficiency ratio was due to growth in top line revenues, along with, of course, lower core expenses.

Looking out for the remainder of 2016, we expect to wrap up the remaining system integration activities, which would include the Sterling online banking customer conversion and some remaining back office consolidations as well as some continued minor analysis and scrubbing around our loan level data and classifications. As these activities are completed this year, we should see merger-related expenses wind down.

Before I turn the call back to Ron, let me touch briefly on Pivotus, our subsidiary, to provide some additional color. As we announced last year, our Silicon Valley subsidiary Pivotus Ventures was formed to accomplish several goals. One, to spearhead our efforts to meet the changing preferences in the way customers choose to transact with Umpqua, which means pivoting Umpqua from a transaction oriented-based institution to one that will meet the needs of customers through digital channels. Two, this digital platform must also be capable of delivering incremental accretive revenues to the company. And three and I won’t get into specifics on timelines and expected results. However, I can tell you that our technologists are looking at this project focused on three major areas: service, advisory assistance and orchestration of customers’ current financial situation as well as their future aims and intentions. I can’t tell you that our customer experiments that we have been conducting are going extremely well and the development of Phase 1’s first prototype is on schedule.

When we announced Pivotus, we also talked about the collaborative efforts we hope the company would attract to leverage and scale the combined resources of likeminded institutions. To this end, in early June, we announced that Pivotus had entered into a new collaboration project with the $300 billion United Kingdom’s Nationwide Building Society. We see this as an important step in the overall strategy for Pivotus as it brings in a well-respected partner who shares Umpqua’s passion for the customer experience and using technology to enhance and differentiate that experience.

So, I will turn the call back to Ron, but I hope that added some color on our Pivotus subsidiary. Thank you, Ron.

Ron Farnsworth

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 second quarter, we reported $0.31 per share on our non-GAAP operating earnings measure at 7% or $0.02 from the $0.29 per share in the first quarter. GAAP earnings per share were $0.25, up from $0.22 in the first quarter.

In addition to the presentation, we also show the reconciliation for our non-GAAP measures on non-interest income and expense on Page 8 of the earnings release. Adjusting out the non-operating items, we saw a $22.3 million increase in non-interest income mostly related to higher mortgage production revenue at higher margins, higher service charge revenue and higher other non-interest income, and flat non-interest expense, included in this was a $6 million increase in home lending expense from the higher production. These were partially offset by an $8.5 million decline in net interest income with $6.5 million of that from Q1 acceleration on sale that did not repeat here in Q2 and an increase in the provision for loan loss is primarily on higher net charge-offs. After tax, these all netted out to $0.31 per share for the quarter.

Turning to net interest income and margin on Slide 6, net interest income decreased by $8.5 million from the prior quarter level. And again, recall last quarter we had the $6.5 million of credit discount accretion accelerated from the sale of purchase credit impaired loans, which did not recur this quarter. The remaining $2 million decline was split between lower bond yields and lower loan yields given continued re-pricing from the declining interest rate environment over the past 6 months. The total net interest margin was 4.08% for the second quarter.

Credit discount accretion from the Sterling portfolio was $10 million in the second quarter. Excluding credit discount, the margin was 3.87%, with a decline of 11 basis points from the first quarter about evenly split between loan and investment yields. We do not expect the margin ex-credit discount to decline in the 10 basis point range quarterly for the remainder of this year, but do expect continued modest pressure on this ratio given the significant drop in market index rates over the past 6 months.

On Slide 11, the provision for loan and lease losses increased this quarter to $10.6 million driven primarily by an increase in net charge-offs to $9.8 million. We stated in past calls we are bouncing along the bottom in terms of credit losses and the increase this quarter was centered in two credits. Barring any significant changes to the overall economy, we expect continued solid credit performance for the balance of the year in line with the last few quarters.

Now, moving to non-interest income on Slide 8, we saw an increase of $22 million from the first quarter level driven by higher mortgage production revenue, higher service charge revenue, gain on loan sales and higher debt capital markets customer loan level swap trading revenue. Recall last quarter we talked about the increase in gain on loan sale revenue per trade that closed in April. These kinds of gains should continue through the rest of 2016 as we continue to manage the portfolio to the mix and size we are targeting. Also, our customer loan level swap trading revenue and other non-interest income was up $3.4 million.

The largest component of our non-interest income is mortgage banking revenue. The total GAAP figure this quarter included a $13.9 million loss on the change in fair value of the MSR. On the heels of the $20.6 million decline in the first quarter resulting directly from the significant decline in long-term interest rates since December where the 10-year treasury yield has declined by about a third. The MSR asset is now valued at 83 basis points out of the service portfolio, down from 101 basis points at year end and 88 basis points last quarter. Excluding the MSR fair value change, mortgage production and servicing revenue was $50.7 million, up $14.7 million or 41% from the first quarter.

On Page 9, you will see for sale mortgage originations increased 37% to just over $1 billion. Our gain on sale margin increased to 4.02%, up from 3.72% last quarter based in part on increased margin added to managed volume and an increase in the log pipeline heading into Q3. Also our servicing revenue increased 13% this quarter to $8.6 million as we completed the conversion of sterling servicing portfolio from an outsource provider. We expect mortgage production to remain strong in the third quarter and expect our gain on sale margin to remain in the mid to upper 3% range.

Turning now to non-interest expense on Slide 10, our operating expense was $180.4 million for the quarter, which includes an additional $6 million in home lending expense related to higher volume this quarter. Said differently, had mortgage originations been at the same level as they were in the first quarter, our operating expenses would have been around $174 million. This is a good trend, which shows we are continuing to capture efficiencies. I am more than happy to see the increased home lending expense, given their gain and servicing revenue increased threefold the expense lift. It’s also important to note our Q2 operating expense did not include the anticipated benefit from the store consolidations we just completed, which should reduce expense further by about $6 million annually starting later here in Q3.

As Ray mentioned on the January earnings call, we hit our operating efficiency ratio goal to decline to just under 60% this quarter, ending at 59.8%. Aside from the store consolidations just completed, additional initiatives include excess back office facility consolidation, streamlining our front and back office operations and this is fair to say, our store network will continually be reviewed for optimization given customer utilization changes. However, we also recognize headwinds will persist from the lower forward interest rate curves and potential future market volatility.

As for the non-GAAP expense adjustments, merger expense was slightly higher than anticipated in this quarter, but that was more than offset by a lower than anticipated exit disposal costs here in Q2. We expect lower merger expense in Q3 and Q4 as we work to complete our integration, but do expect slightly higher exit disposal costs for the second half of the year, as we just completed the store consolidations and expect additional back office facility consolidation through year end.

With that, I am now going to turn to Slide 11 on the balance sheet. Interest bearing cash ended the quarter just over $0.5 billion, down slightly this quarter given the continued strong loan growth. Our goal is to keep our interest bearing cash in the $0.5 billion to $1 billion range and our investments in the $2.5 billion to $2.6 billion range for the foreseeable future.

On Slide 12, you will see the mix of the loan portfolio. Grossing up for the sales and transferred into held for sale, our total loan growth this quarter was $545 million or 13% annualized. On Slide 13, total deposits increased by $95 million from the prior quarter. For the year-to-date, our deposits were up $551 million, while net loans were up $488 million, balanced growth we are focused on continuing with core deposits funding loans. Our loan to deposit ratio ended the quarter at 95% and the cost of interest bearing deposits remained stable at 27 basis points for the quarter.

Lastly on Slide 15, I want to highlight capital. Knowing that all of our regulatory ratios remain in excess of well-capitalized levels, with our Tier 1 common at 10.9% and total risk based capital at 14.1%. Our total payout ratio was strong at 51% of operating earnings. We are focused on creating long-term value for our shareholders and we recognize that tangible book value per share plus dividend growth is a metric that some investors use to measure that. Umpqua’s tangible book value per common share increased to $9.41 in the second quarter, compared to $8.92 per share in the same period of prior year. Factoring in the $0.64 of dividends paid over that time, our yearly growth in tangible book value per share plus dividends was 12.7%. Our excess capital is approximately $200 million, down slightly from last quarter, based on the strong loan growth we continue to see. As we have discussed for the last few years, we plan to continue to employ excess capital in a prudent and thoughtful manner.

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

Ray Davis

Okay. Before we take your questions, let me comment on our June announcement regarding our CEO succession plans. As reported on January 1, 2017, I will be stepping down as President and CEO of the company, turning over the reins of the company to Cort O’Haver, our current Bank President. My role with the company will change, as I assume the role of Executive Chairman of the Board. My duties will include normal chair duties of course, as well as to assist in the transition process where needed to assure a smooth transition to Cort. I will also remain responsible and oversee our Pivotus subsidiary. And during the period I am Executive Chair, Peggy Fowler, our current Chairperson, will assume the responsibilities of Lead Director. As mentioned, I have the utmost confidence in Cort and his ability to lead the company. We both are in sync on the strategy, value proposition and business model of the company and I look forward to both of our new roles within the company.

But now, let’s – we will take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will go first to Steven Alexopoulos with JPMorgan.

Steven Alexopoulos

Hi everybody.

Ray Davis

Hi. Good morning.

Steven Alexopoulos

I would like to start on the margin, it was under obviously quite a bit of pressure this quarter, but if you look, you are pointing out on Slide 6, it’s been under a lot of pressure over the past year, both reported and core, now maybe for Ron, all things considered, considering where the yield curve sits today, at what level should you expect to see the margins start to find the bottom here?

Ron Farnsworth

Well, again, part of the noise from Q1 to Q2 was the acceleration of the credit discount accretion, but that is in amortizing asset over time. And we have talked about the last quarter or two, net new business is coming on in the mid to upper-3s in terms of margin, incremental margin. But also here over the last what, six months, we have seen roughly a third of the 10-year part of the curve drop and maybe close to 40 bps to 50 bps on the value of the curve. So that’s significant volatility when it comes to re-pricing for loans that were made in the years past. Given that net incrementals coming on in the mid to upper 3s, you can do the math and look out over the coming 1 year or 2 years, assuming no change in rates, but I expect the margin will ultimately rest at that level, basically take a bit. And also I have made the point earlier I don’t expect to see another 10 basis point decline here in the third quarter and that’s more based on the trend of the activity during Q2.

Steven Alexopoulos

Okay, that’s actually a helpful color. Looking at your core earnings, which were up nicely from the linked quarter, but still basically flat where you were a year ago and this is even with mortgage up very sharply, can you give more color on the efforts, initiatives that you are pursuing to help drive positive operating leverage from here, particularly now that you are at your efficiency objective?

Ray Davis

Yes. And also just recognize, flat earnings from a year ago, but also from the year ago quarter, we also had a pretty sizable drop in the discount accretion, the credit discount accretion from Q2 of ‘15 to Q2 of ’16. But overall efficiency initiatives we talked about for the balance of the year are going to be centered around the additional store consolidations we just completed, some additional back office facility consolidation and we will see those savings start to drop in. So, I feel really good about where we are in terms of initiatives we put in place on top of the deal related synergies.

Steven Alexopoulos

Okay, that’s helpful, Ron. And just one final one, I am surprised to see you grew time deposits here up about $60 million in the quarter. Can you just talk about your thoughts around deposit funding? I think Ray said that you are expecting a bounce back in 3Q on deposits, is that essentially time deposits again? Thanks.

Ron Farnsworth

It’s not time deposits. We are seasonally stronger in Q3. It’s generally the strongest quarter of the year. I think in time deposits, I would like to think that in terms of the time deposits customer, we potentially have hit a bottom in terms of the mix. Today, that’s around, what, 15% to 16% of the portfolio. Back pre-recession in a different rate environment, that was closer to 30. So, that was a good trend to see, but we are not doing anything on especially on the pricing side for the time deposits to generate that. And we are looking to Q3 for deposit growth I expect to rebalance across the board.

Steven Alexopoulos

Okay, great. Thanks for all the color.

Ron Farnsworth

Yes, thank you.

Operator

We will go next to Jeff Rulis with D.A. Davidson.

Jeff Rulis

Thanks. Good morning.

Ron Farnsworth

Hi, Jeff.

Jeff Rulis

Ron, do you have the average loan yield of the loans that you sold or transferred compared to the loans, the loan yields on loans that you kept in portfolio this quarter?

Ron Farnsworth

So this quarter, the loan yield ex the credit discount was 4.5%, 4.6%. In terms of the loans that were sold during the quarter, they were right around that level, maybe a 1 bp or 2 higher.

Jeff Rulis

Okay. So close, but maybe a bit above that, alright. And then you mentioned that the two credits on the net charge-offs predominantly what were the loan categories of those or any other color there?

Ray Davis

These were commercial loans. They were shared national credits that we have been in an extended workout group on. And one of those, it was concentrated with one of those two credits, which also resulted in a payoff of that credit, which helped us with our NPAs in classified numbers.

Jeff Rulis

Got it. Thanks, Dave. And then I guess just on the loan outlook you guys signaled in late in Q1 that you had anticipated to pickup in Q2 and Q3, given where we are at in the pipeline that Ray referenced is expectations for the back half of the year on loan growth?

Cort O’Haver

Hey, Jeff, it’s Cort. So, all of our pipelines are as robust as they were 90 days ago when we talked. So, we feel really good about production.

Jeff Rulis

I will step back. Thank you.

Ray Davis

Thanks, Jeff.

Operator

We will go next to Jacquelynne Chimera with KBW Investments.

Jacquelynne Chimera

Hi. Good morning, everyone.

Ray Davis

Good morning.

Jacquelynne Chimera

I wondered if maybe Cort you could give some color on FinPac and what you are seeing there, you had really nice piece growth in the quarter and kind of provide an update on I know in the past we have talked about a three-legged stool that you have looked to there and just kind of where those three separate entities are sitting and how you see the growth moving forward?

Cort O’Haver

Yes, happy to, Jacque. So I think we really hit our stride with FinPac in this last quarter and I anticipate that to continue. So, in the three legs of the stool, our traditional leg, which is CPO, the third-party origination channel, we had $94 million in the second quarter, which was very, very strong. What we call UBELF, which is our Umpqua Bank equipment lease finance leg of the steel, we did $30 million, almost $40 million. And that’s really our traditional bank lease product with existing customers. And then the third leg, which we started late October of last year, November, we did $28 million in the quarter, which I think is very, very strong with the fact we have already been in that here for a little over two quarters. So, they had a nice, nice quarter. We are still getting a very, very attractive overall blended yield in that group and we look for some good solid growth with FinPac going forward.

Jacquelynne Chimera

How much has that particular portfolio and I mean all three groupings of loans, how much has that been impacted by the movement of rates?

Cort O’Haver

Not as much as you think, because we are very, very diligent about pricing for risk in that portfolio. So, we have got a very elaborate model that we run these leases through and looking at all types of data points and then we affix a return based on the relative risk. And with the exception of getting into A paper which is a higher quality lease opportunity for the bank which obviously carries a slightly lower yield to us, because it’s a higher quality, we have been very, very diligent in maintaining those yields based on risk. So, it hasn’t really been impacted greatly by the changes in the yield curve. And the pipeline in that segment is continuing to grow because of the small businesses that are being created in the general economy.

Jacquelynne Chimera

Okay. Where are you seeing loan yields currently for the group, excluding A paper?

Cort O’Haver

I will tell you the blended average weighted coupon for that group for all the second quarter was a smidge over 11%.

Jacquelynne Chimera

Okay.

Ron Farnsworth

And the A paper would be higher single-digits. B, C will be in the upper teens to the 20s.

Jacquelynne Chimera

Okay. And would you say that, that’s running on track to where when you originally purchased FinPac you thought the growth would trend forward?

Ron Farnsworth

Yes. We will exceed what we told you all about 3 years ago. I think, on this call, 3 years ago, we told you it would be to $1 billion. In 4 years, we will exceed that.

Jacquelynne Chimera

Okay, thank you. That’s very helpful. I will step back now.

Ron Farnsworth

Yes, thank you.

Operator

We will go next to Matthew Clark with Piper Jaffray.

Matthew Clark

Yes, good morning. First one just wanted to double check the non-interest expense tied to mortgage, I know it was up about $5.9 million this quarter, just want to double-check that figure?

Ron Farnsworth

Yes, $5.9 million was the increase in home lending expense from Q1 to Q2.

Matthew Clark

Yes. And just the dollar amount in total in 2Q?

Ron Farnsworth

Total was right around 35.

Matthew Clark

Okay. And then did you buyback any stock during the quarter and can you just update us on your priorities and kind of how the stack rank as it relates to your excess capital?

Ron Farnsworth

No, we didn’t buyback stock this past quarter just based off on open window timing. I expect we will repurchase couple of thousand shares here in Q3.

Matthew Clark

And then your strategic priorities, can you just maybe update us on your thoughts about additional M&A and so forth?

Ray Davis

Well, traditional M&A, this is Ray, Matt. Traditional M&A, when it comes to bank, it’s not that attractive right now for us, not that we wouldn’t – not that we don’t look at what comes across our desk. But I mean the question I always ask people is why would I buy a bank in this environment? I think for us to get actively interested in a potential institute bank would have to be strategically over the top, make a lot of sense for us to get excited about it.

Ron Farnsworth

And Matt, this is Ron. To parlay that back into our capital and as we look at allocating capital over time, we see much more upside of it, strong organic growth and that really centers around a lot of what Ray has been talking about with Pivotus in future years.

Matthew Clark

Got it. Okay. And then just on the securities yield, just curious how much of that related to increasing premium amortization?

Ron Farnsworth

Virtually all of it. It’s about $1 million drop in total and it’s about $1 million increase in premium amortization based off of the drop in the curve and the increase in the CPRs.

Matthew Clark

Okay, thank you.

Operator

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

Joe Morford

Thanks. Good morning, everyone.

Ron Farnsworth

Hi, Joe.

Ray Davis

Hi, Joe.

Joe Morford

Just first a follow-up to Steve’s questions on deposits, it sounds like the early read here in Q3 is better, but just kind of looking longer term, what are your expectations for growth through the rest of the year? And do you have any campaigns planned at all given that loan to deposit ratio is now upwards of 95%?

Ray Davis

Yes, this is Ray, Joe. Yes, we have always believed and I think you have followed us long enough to know that Umpqua has been, I think we have been labeled a deposit-making machine when we want to be. And those engines have been turned on. We have all kinds of promotions, campaigns internal to the organization. I would rather incent my people versus raising rates, which we are not going to do. We are not the highest guy in the market, nor will we ever be. But we do look forward to a stronger core deposit growth for the second half of the year.

Joe Morford

Okay, that’s helpful. And then the other question just I think Ron, maybe following up on the mortgage banking, it sounded like you suggest the gain on sale margins would be in the kind of mid to high 3% range, third quarter maybe down a little bit from the second here. I was just kind of curious what’s driving the change there?

Ron Farnsworth

Well, again, this quarter here, with 4%, there was roughly 10, 12 bps of that included increased in lock pipeline from March to June. I am assuming mortgage revenue is going to remain strong well into Q3. Our pipelines would suggest that. So, assuming no significant change in that lock pipeline, I would expect it will be in the upper 3s on the gain on sale margin.

Joe Morford

Okay. Thanks so much.

Ray Davis

Well, thank you.

Operator

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

Aaron Deer

Hi, good morning everyone. I wanted to touch on the reserve level, obviously there is some noise this quarter with the higher – with the bounce in the charge-offs, but I am just – I am surprised to see that there is no rebuilding of the GAAP reserves, the stated reserve with the discounts, I guess is still at 1.3, but that’s been coming down pretty rapidly and will the GAAP reserves just hasn’t been building at all and I am just wondering kind of what your thinking is in terms of that even vis-à-vis having a pretty favorable outlook for credit?

Ron Farnsworth

Yes. It’s been relatively steady, up 1 bps or down 1 bps, here over the past year. And really underlying that is just continued modest improvement in the underlying quality of the portfolio, very much a formulae driven approach to devaluation. We can’t just go in there and say, hey, I am just going to put in to make sure just to show that we are building the reserve, it’s dependent upon the quality of the portfolio and the risk ratings. So what you see here over the last couple of quarters is in essence, with that continued improvement in the underlying quality of the portfolio, the provision has been relatively close to the net charge-offs. I expect that’s going to continue here for the balance of the year. We talked about in the prepared remarks, not expect – you should look at credit for the second half of the year to be in the range of what we have shown here over the past year, bouncing along the bottom.

Aaron Deer

Okay. And then following up on the expense or the efficiency initiatives and the discussion around the efficiency ratio, so I guess at the bank level, you dipped below to 60% on an adjusted basis, might we still get the consolidated efficiency ratio below 60% by year end on a reported basis?

Ron Farnsworth

Well, the consolidated operating ratio was 59.8%, that’s the number we have always talked about getting that 60% with. The GAAP number of course includes the merger expenses, which should be winding down that also includes the wild card with a fair value adjustment. So I think on a GAAP basis, if you were to parlay this forward and use sizable rate increase in rates or maybe just getting back with some of what’s left, you might see MSR gain in the second half of the year. And that can lead the GAAP number, but we are really focused with that number on what we can control and what we can control within these walls and we are at that 60% level.

Aaron Deer

Okay, very good. Thanks for taking my question.

Ron Farnsworth

You bet. Thank you.

Operator

We will go next to Tyler Stafford with Stephens Inc.

Tyler Stafford

Hi guys. Good afternoon.

Ray Davis

Good afternoon.

Tyler Stafford

I hopped on late, so I apologize if you covered this already, but I just wanted to follow-up on the $177 million plus or minus operating expenses that we have talked about in the past, absent kind of the variable puts and takes from mortgage, is that still a number that we should be thinking about even with the branch consolidation and everything else you have going on in the back – back half of the year. And then secondly, just the pace of loan sales we should be expecting, can you hit that one more time?

Ron Farnsworth

Sure. On the expense, we actually beat by three here this past quarter if you back out the volatility up and down with home lending expense. So our operating expense is 180. We saw a $6 million increase from Q1 to Q2 on home lending expense. You back that out, we would be at 174, which would have beat the 177. I expect to be closer to that 174 assuming no change or assuming we are back at Q1 levels on mortgage plus the 180 if we are relatively close here to Q2 levels on mortgage. And what you would see from the store consolidations probably here in Q3 is about $1 million, given they are going to occur somewhere in the middle of the quarter. And then going forward, that’s about $1.5 million a quarter.

Tyler Stafford

Okay, that’s helpful. And can you just – I missed what you said earlier about the pace of loan sales from here?

Ron Farnsworth

Yes. We will continue to monitor the markets on that front. I would say, assume small to modest portfolio loan sales in Q3 and Q4 probably in line with what you have seen in the last couple of quarters.

Tyler Stafford

Okay. Thanks guys.

Ron Farnsworth

You bet. Thank you.

Operator

And that will conclude our Q&A session. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Ray Davis

Okay. Well, appreciate all the questions. And I am going to thank everybody for their interest in Umpqua Holdings and attendance on the call today. This will conclude the call. Goodbye.

Operator

And once again, that does conclude today’s conference. We thank you for your participation. You may now disconnect.

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