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Umpqua Holdings Corp  (NASDAQ:UMPQ)
Q3 2018 Earnings Conference Call
Oct. 18, 2018, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Umpqua Holdings Corporation Third Quarter Earnings Call. (Operator Instructions)

And now at this time, I'd like to turn the conference over to Mr. Ron Farnsworth, CFO. Please go ahead, sir.

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

All right. Thank you, Cody. Good morning, and thank you for joining us today on our Third 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; and 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 third 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 law. 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 now, I'll turn the call over to Cort O'Haver.

Cort Lane O'Haver -- President and CEO

Okay. Thanks, Ron. Let me start with a brief recap of our quarterly financial performance, and then I will provide an update on our Umpqua Next Gen strategy. Ron will discuss the financials in more detail and then we'll take your questions.

We'd a great third quarter with earnings per share of $0.41. This represents a significant improvement from the prior quarter level of $0.30, and from the $0.29 we earned in the third quarter of 2017. Our strong results this quarter are a direct result of the success of the initiatives organized under Umpqua Next Gen. We are executing on the strategies we laid out for you and are now starting to reap some of the benefits.

The third quarter return on average tangible common equity was 16.42% and the return on average assets was 1.36%, up significantly over prior quarter's levels and the company's highest quarterly level of profitability in recent history.

Our financial performance this quarter was achieved despite some material headwinds the industry is facing, including softer mortgage banking environment, increasing loan and deposit competition, rising deposit costs and tighter spreads. These headwinds emphasize why our Umpqua Next Gen strategy is so crucial. Our strategy is designed to deliver better long-term financial performance and improved shareholder returns by focusing on achieving balanced growth, operational excellence and human banking digital.

As we continue to execute on key initiatives spanning across the Bank, we decreased our reliance on any one business line or revenue driver and improved our profitability, while creating a highly differentiated customer experience.

As you saw highlighted in our earnings materials, there are several highlights in the third quarter, including; an 8% reduction in non-interest expense, driven by the success of our operational excellence initiatives, this translated to a 57% quarterly efficiency ratio; strong quarterly deposit growth, which gave us the opportunity to run off some higher cost wholesale broker deposits; higher interest income from the continued growth in loans and leases; a slight increase in non-interest income with some increases in other income more than offsetting the tougher mortgage banking environment; and a slightly lower level of provision for loan and lease losses.

Let me now provide a brief update on three of our most important initiatives for 2018; Operational excellence, balanced growth and human digital. So let's start with operational excellence. As we've mentioned on prior calls, a key step in Umpqua Next Gen is streamlining and simplifying the Bank, so we can add value for our customers and create a better associate experience, while building a more sustainable and profitable company. I'm extremely pleased with the success of these initiatives so far, and we remain on target to capture the savings we have previously outlined.

Highlighted on slide 4, our operational excellence initiatives consist of three key areas; store consolidations in phases 1 and 2 of our back office efficiency review. On the store consolidation initiative, we've now rationalized 37 stores and captured $10.8 million in annualized expense savings, as seen in our third quarter run rate. We've also identified 20 to 25 stores that we plan to consolidate early next year.

In addition, I'm pleased to report that the relationship based training we've implemented across our Retail division earlier this year is showing strong results. Our store network profitability has improved across the footprint and we're seeing better customer acquisition with a 50% increase in new consumer accounts opened per store per month. As always, we'll continue to evaluate our store network based on profitability, market opportunity, community need and other factors.

Turning to Phase 1 which, as a reminder, includes organizational simplification and design as well as procurement. We completed the organizational simplification and design efforts during the second quarter, and now have achieved $12 million in annualized savings, which are embedded in the third quarter run rate. With that portion of Phase I complete, we're now focused on procurement, which is about leveraging our spending power, consolidating our supplier base, and aligning ourselves with the right strategic partners.

In addition, as we've talked about last quarter, we've accelerated redesign of our commercial end-to-end journey, which is currently under way. This represents an important endeavor for the bank as it touches many of other initiatives, and will significantly improve both the customer experience and our efficiency.

A cross-functional team from across the footprint is co-located here in Portland, with our goal of increasing our speed to market and decreasing our cost per loan. Ron will cover the timing and remaining savings during his comments.

So let's now turn to balanced growth, which is particularly important in today's competitive loan and deposit environment. Our goal is to continue to grow new multi-faceted banking relationships that are larger, deeper and more profitable. Here too, we've made great progress. During the third quarter of 2018, we generated close to $400 million in deposit growth. As a result of the strong growth, it gave us the opportunity to allow $250 million of higher cost wholesale broker deposits to run-off, resulting in total on balance sheet deposit growth of approximately $150 million for the quarter.

Consistent with what we discussed on last quarter's call, we have yet to see any significant deposit attrition from the 31 store consolidations. In line with the creation of our Corporate Banking division, our move to go upmarket has been working. Over the last two years, we've been able to achieve solid commercial loan growth, along with good growth in deposits and fee income opportunities.

Amid a challenging industry loan origination landscape, we generated loan and lease growth of $215 million during the third quarter of 2018. This reflected balanced growth within the commercial, commercial real estate, and consumer loan portfolios. A few key items on loan growth; overall pipelines were up, reflecting an increase in the commercial and corporate banking pipeline and commercial real estate pipelines remain robust, in line with previous quarters, indicating that fourth quarter loan and lease growth should be in line with the first three quarters of 2018.

We also saw the continued run-off from our wind-down of our indirect dealer auto portfolios. In addition, we completed a portfolio loan sale of $41.7 million of residential first mortgages. And lastly, we exited a couple of shared national credits with very thin pricing and no deposit or fee income opportunities during the quarter.

Here, it's important to reiterate the importance of our Next Gen strategy. By focusing on the key priorities within the plan, we're managing initiatives across the organization with the same goal in mind; to drive better long-term financial performance. As a result, we will remain conservative in our underwriting and credit culture and we will not sacrifice the long-term success of the bank for the sake of a few pennies of EPS growth.

The last key balanced growth driver is fee income. We continue to build out our capabilities in this area and are already experiencing good indicators that the initiatives and investments we're making are working. Year-to-date, 2018 treasury management fees were up 7% over the prior-year level, commercial card spend was up 52% over the same period, and total wealth assets under management were up 6% over the prior-year level.

Let me now turn to the third key strategic pillar, human digital. Last week, we announced that we added Kathe Anchel, as our first Head of Innovation. Reporting to Rilla Delorier, she leads our innovation team, focused on building a network of strategic partnerships to accelerate the development and delivery of Umpqua's human digital banking strategy.

Earlier this year, we announced the launch of Umpqua Go-To, the industry's first human digital banking platform, which gives every customer a personal banker devoted to their financial needs. We now have fully integrated Umpqua Go-To into 60 of our store locations. We are seeing good success so far and initial results are very encouraging. We expect full roll-out to all of our stores by January 2019 and expect by mid next year, we can begin to provide you with meaningful trend information.

Now back to Ron to cover financial results.

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

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 now to page 6 of the slide presentation and also of the earnings release, which contains our quarterly P&L. GAAP earnings increased $0.11 per share this quarter with a few moving parts.

This increase was comprised of $0.05 per share improvement from lower operating expenses representing some of the benefit of operational efficiency initiatives discussed in prior quarters; a $0.04 positive swing in bond premium amortization accounting; a $0.02 positive swing in the MSR evaluation based on the increase in rates; a $0.01 of higher net interest income, excluding the bond premium accounting impact; and a $0.01 benefit from lower exit or disposal costs. Combined, these items account for a $0.13 increase in quarterly earnings, which was partially offset by $0.02 of lower mortgage revenue ex the MSR, leading to the overall $0.11 increase in earnings per share.

Turning to net interest income and margin on Slide 7 and 8, and noted on Page 6 of the earnings release. Net interest income increased $16.5 million, or 7% from Q2. Within this, our bond interest income included a correcting adjustment for $7 million, which was reflected as a reduction in Q2. This related to our movement from prospective to retrospective amortization accounting and was a net push year-to-date. Also within interest income on loans, the purchase accounting accretion declined $3 million this quarter. Excluding the bond swing and even with the lower accretion, loan and investment interest income continued to increase, reflecting the most recent lift in market rates and continued growth. Our interest expense on deposits increased $4 million, or 11 basis points, based on continued growth and rising interest rates. Our cumulative deposit beta, based on the Fed rate increases to date, has increased slightly from 22% to 24%. Our past quarter beta was 44%, and we expect deposit costs to continue to increase over the coming year, with betas moving closer to historical norms. Ex the bond accounting correction, our net interest income increased 1% from the second quarter.

As reflected on Slide 8, our net interest margin was 4.09% this past quarter. The impact of the bond accounting swing was a 12 basis point negative adjustment for Q2 and a similar size with positive adjustment for Q3. I discussed the lower discount accretion just earlier, and the margin excluding discount accretion and adjusted for the bond amortization change was 3.89% for Q3, up 1 basis point on a comparable basis from Q2.

On Slide 9, the provision for loan and lease losses was $11.7 million, down slightly from Q2, based on continued improvement in the quality of the portfolio.

Moving now to non-interest income on Slide 10. Total non-interest income was up slightly from the second quarter.

For mortgage banking, as shown on Slide 11, and also in more detail on the last page of our earnings release, for-sale mortgage originations decreased 10% this past quarter, below our original expectations. The slowdown in a typically seasonally strong Q3 was telling as to fatigue in the market, with continued housing price appreciation and slightly higher interest rates, leading to lower activity and more pricing competition for the volume. Our gain on sale margin decreased to 2.77% this quarter, below our expectations for the low 3% level. The decline from Q2 on the margin related primarily to a decrease in the lock pipeline. As always, we're actively monitoring the market and competition here, and expect further slowing of activity as we head into the seasonally slower fall and winter quarters. We act quickly at changes like this and needless to say, we will continue to look aggressively for efficiencies within the business amid the market fallout that will be coming.

Turning now to Slide 12. Non-interest expense was $179 million, down 8% from $196 million in Q2, and below our guidance range for Q3 of $186 million to $191 million. The Q3 amount includes $3.5 million of restructuring-related charges and $1 million of exit disposal costs. The bridge we provide on the right side details the major moving parts for the quarter, including lower restructuring charges, mainly severance, of $4.7 million; operational excellence savings of $3 million; lower home lending expense, given the decline in volume, of $1.8 million; lower exit disposal costs of $1.6 million; the expected seasonal payroll tax decrease of $1.2 million; lower direct retail store expense of $0.9 million; noting(ph)over the last three quarters, it is down roughly $2.7 million, based on the store consolidations completed; and lower other expenses across the Board of $4 million; slightly offset by higher marketing expense of $0.9 million to support our digital acquisition strategy. We came in under the guidance range we gave a quarter ago, which reflects the store consolidation and other operational efficiency initiatives we've been working on, as well as our adjustments based on lower home lending activity. Note that our efficiency ratio dropped to 57% on the face of the P&L, and dropped to 58% when adjusting out the bond accounting benefit in net interest income.

The overall operational excellence initiatives are summarized on Slide 4. We're almost complete with the Phase I items, and expect savings from the procurement lever to start showing in Q4 and be fully in the run rate by mid-2019. Recall, our target for Phase I savings was $18 million to $24 million on an annual basis. We've already achieved $12 million of annualized savings to date, and expect an additional $4 million to $5 million of annualized savings to be reflected in the Q4 2018 run rate. We expect to achieve the remainder of $18 million to $24 million total by mid-2019, as the procurement lever savings are fully realized. For Phase II, we're in the middle of the commercial end-to-end journey redesign, and we'll provide updates on expected annualized savings from this and other Phase II levers on future quarterly calls. With this work(ph)continuing, we expect to incur another $3 million to $4 million of restructuring costs in Q4.

Incorporating these updates, we expect our overall GAAP expense to be in the range of $178 million to $183 million for the fourth quarter of 2018. There is a chance we'll be under this range, but additional costs will be incurred for exit disposal on the next round of store consolidations.

And just quickly on income taxes. Our tax rate this quarter ticked up slightly to 25.8%, above our 25% expectation. This related to our annual return to provisions were up, related primarily to finalizing the ramifications of tax reform, which was originally reflected in the fourth quarter results from last year. We expect the quarterly tax rate to be 25% going forward.

Turning now to the balance sheet, given on Slide 13. Both loan and deposit growth were good this quarter at 1%. And the decline in loans held for sale led to the increase in interest-bearing cash. The mix of loans and deposits are shown on Slide 14. Loan growth was split pretty evenly between CRE, commercial and residential. Note that the decline in consumer loans was driven by the wind down in our indirect dealer auto portfolio, as discussed last January.

And based on investor feedback, we have added a new Slide 15, reflecting the repricing characteristics of our loan and lease portfolio. As you can see on the left chart on the slide, 26% of the Q3 loan and lease portfolio reprices monthly and 42% carries an adjustable rate, with the balance in fixed rate. On the right side, you can see further breakouts for the adjustable and floating rate buckets.

Lastly, on Slide 16, 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 10.8% and total risk-based capital at 13.7%, we increased our quarterly common stock dividend to $0.21 per share, leading to a total payout ratio of 51% this quarter. Also, our tangible book value per share is $9.95, which, when you also account for the dividend to shareholders, increased 11% over the prior-year level, which is notable, given the increase in rate environment has led to a higher unrealized loss on the investment portfolio. Our excess capital is approximately $200 million. And as discussed earlier, we expect this to decline moderately over the coming few years.

To conclude, our focus is on executing all aspects of our Umpqua NextGen strategy, improving financial results and generating solid returns for shareholders over time, including a healthy dividend.

And with that, we will now take your questions.

Questions and Answers:

Operator

(Operator Instructions) We'll take our first question from Steven Alexopoulos with JPMorgan.

Steven Alexopoulos -- JP Morgan -- Analyst

Hey, everybody.

Cort Lane O'Haver -- President and CEO

Good morning.

Steven Alexopoulos -- JP Morgan -- Analyst

I wanted to start on the expense side. So if third quarter expenses came in well below the guidance, which you mentioned, Ron, and mortgage explains a small portion of that. But I'm trying to understand, compared to the forecast where you guys thought we were going to come out this quarter, how do we do so much better?

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

I think part of that was lower exit disposal, which, of course, we expect that'll tick back up here in Q4. One of the items we show on that bridge is (inaudible) for other expenses. We identified $3 million specific to operational excellence savings, which is $12 million annualized. Some portion of that $4 million and I can't tell you with certainty, is related to indirectly those savings, just lower headcount. So that obviously explained a portion of the other delta to get under the range. But ideally, we're not trying to come in over or under any given guidance range. We're trying to give you what we expect for the coming quarter and things just came in a bit better this quarter.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay. And then, Ron, in terms of you guys reinvesting 35% of the cost saves from the branch closures, is that happening concurrently as you realize the cost saves or is that still to come at a later date?

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

It's happening concurrently and there'll be another additional amount related to the saves for the 2019 consolidations. There's a little bit of timing a quarter before or quarter after, but it's not material.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay, got you. And then just, I want to switch to the deposit side for a minute. Can you just talk about the environment for raising deposits here as you guys fund loan growth and what do you need to pay to attract new deposits?

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

Core retail deposits, the betas are still very low. We started to see the betas pickup on higher balance commercial, but all the strategies around Next Gen are around core retail deposits, and again, those are less than 50 basis points all in, on average, and you know assuming the mix of DDA up through CDs. The higher balance public is real similar to brokered and that's up closer to two on the time side, and money markets probably in the high ones.

But again, we continue to execute on growing core retail and lower middle-market and middle market commercial balances. For those core operating accounts, the cost is much lower than those levels. In this past quarter, we were up $400 million in -- customer deposits with the $250 million drop in brokered. So I like they continue that trend.

Steven Alexopoulos -- JP Morgan -- Analyst

So when you think about the base net interest margin, which has been pretty stable over the last few quarters, do you think that's a reasonable outlook here, at least near term, and we hold them pretty stable?

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

Yeah, I do. I'd say it will be in that range and we're actually pretty close to the bottom end of the higher rate range that we talked about over the three years, that 3.9% to 4%. And I think that also assumes additional rate moves but with betas getting back to historical norms, we're closer today at 44% 45%, I'd expect those bases continue to increase, but I think near-term, yeah we'll be around this range. There's nothing on the horizon that I see distracting that.

Steven Alexopoulos -- JP Morgan -- Analyst

Terrific, thanks for the color.

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

You bet, thanks.

Operator

Thank you. We'll take our next question from Jeff Rulis with D.A. Davidson.

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

Thanks, good morning.

Cort Lane O'Haver -- President and CEO

Good morning.

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

Just circling back on the expense side, Ron, sticking to the guidance of $178 million to $183 million in Q4 with the backdrop of expecting $4 million to $5 million in Phase 1 savings to come in the quarter, does that mean it's offset. I just wanted to clarify why you said some store consolidation costs would kind of offset that since you're already in that range as of Q3?

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

Let me clarify one thing; that $4 million to $5 million is annualized, so that will be about $1 million give or take in the fourth quarter specific to procurement on top of the Q3 amounts. And I do expect there will be some exit or disposal costs ahead of the consolidations in Q1 related to lease exits or if we see any pricing issues on real estate sales. But again, there's chance we're coming under it, I just want to remain conservative and assume there will be another decline in home lending, but that's factored in there as well.

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

Yes, OK. And then, can we confirm that the store consolidation cost saves for 2018 or just call it Q4 of '18, is it effectively done for the year and then the next wave of store consolidation sales would be post the Q1 closures?

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

Correct.

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

Okay. Fair enough. And then maybe just switching gears, a question on the credit quality side, the $10 million increase in non-accruals, any chance that came -- that shifted from restructured because that loan, that balance was down a similar amount, if not any detail on what the new non-accruals were in(ph)by industry?

David F. Shotwell -- Executive Vice President, Chief Risk Officer & Chief Credit Officer

Yeah, this is Dave Shotwell, Chief Risk Officer. To answer your question, yes, that was a TDR and it was one specific credit.

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

Any kind of loan type with that?

David F. Shotwell -- Executive Vice President, Chief Risk Officer & Chief Credit Officer

It was a real-estate loan, associated with healthcare industry.

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

Great, I'll step back. Thanks.

Cort Lane O'Haver -- President and CEO

Thanks. Bye, Jeff.

Operator

Thank you. We'll take our next question from Aaron Deer with Sandler O'Neill.

Aaron James Deer -- Sandler O'Neill -- Analyst

Hey, good morning everyone.

Cort Lane O'Haver -- President and CEO

Good morning.

Aaron James Deer -- Sandler O'Neill -- Analyst

On the mortgage front, you suggested that we should expect further decline in sale volumes which is expected with -- on the margins though, is there any chance we see any sort of a rebound there or is that just really going to depend on what we see in the rate environment through the quarter?

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

There's a good chance it will happen, but again like -- so this past quarter, the amount was bit less than we expected just given the bit more sizable drop in the lock pipeline. Early indications are positive for the first month of fourth quarter. And we price the individual loans still north of 3%, right. So, overtime, that's the economic reality of the pricing but there's a chance for it. I'd expect it will be right around 3%.

Aaron James Deer -- Sandler O'Neill -- Analyst

Okay. And then, with respect to the new slide that you're sharing on that loan repricing; on the average -- I'm sorry, on the bucket that is adjustable rate, what's the average reset rate on those, in terms of -- or reset period, I guess, might be a better way to phrase that.

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

Probably in the range of three years. Generally, those go from six months up to five year reprice. In any given time, you're probably somewhere in that two to three-year range on average remaining.

Aaron James Deer -- Sandler O'Neill -- Analyst

Okay. Alright, thank you.

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

You bet, thanks.

Operator

Thank you. We'll now take the next question from Michael Young with SunTrust.

Michael Masters Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Hey, and thanks for the question. Wanted to follow up on the mortgage business, wasn't sure if you could provide some detail on kind of the expenses associated with the business this quarter maybe as a percentage of volume as you have in the past? And then, maybe just a little more detail on kind of timing and plans to rationalize the expense base there, as volumes look to be lower going forward?

Cort Lane O'Haver -- President and CEO

Yeah, well, I guess, first I'd say, we're down roughly $2 million in fixed cost on an annualized basis within the home lending group, just based from changes we've made to date. This past quarter, the costs were still in that 2.5% range. So still a margin on the business, specific to the for-sale activity. Definitely still profitable, very much profitable business on a fully allocated basis. Return on tangible was 13%, which is down a bit lower than we expected, again, given the drop in lock pipeline. So right around 2.5% on the expense related to the volume and we've got initiatives in place to try to peel off basis points here and there around technology initiatives, which probably more of a 2019 items than a near term item.

Michael Masters Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay. And any outlook on -- I know this question was sort of asked, but any outlook on specifically the gain on sale going into the fourth quarter or volumes, anything that would cause you all to be different from industry trends?

Cort Lane O'Haver -- President and CEO

I wouldn't expect anything different from industry trends on volume, and I think we're shooting for that gain on sale margin right around 3%, which is where the individual loans are priced.

Michael Masters Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay. And one last one, just on capital. You mentioned the excess capital base that you guys have now and I know the thought has been to hold that in anticipation of future loan growth. But just given the pullback in valuations here across the Group, is there any interest at all in looking to buy back shares at any point at an evaluation?

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

No, that's a pretty short-term view. We expect that excess capital to continue to moderately decline over the coming two years. We'll maintain the healthy dividend payout ratios in that 50% to 70% range. You saw us just increase the dividend. But this quarter-to-quarter on that front, I think if I get that excess capital into the low-to-mid $100 million range by 2020, I'm feeling pretty good because that will incorporate seasonal as well.

Operator

Thank you. We'll now move on to our next question from Matthew Clark with Piper Jaffray.

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

Hey, Matt, you there?

Cort Lane O'Haver -- President and CEO

All right, Cody. Maybe take in Jackie.

Operator

Absolutely. We'll take our next question from Jackie Bohlen with KBW.

Jacquelynne Chimera Bohlen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Hi. Good morning, everyone.

Cort Lane O'Haver -- President and CEO

Good morning.

Jacquelynne Chimera Bohlen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

One little nitty-gritty accounting detail. I noticed that the disclosure on accretion income changed in the quarter. Is that just purely now recording -- reporting all acquired loan accretion versus just the Sterling credit discount previously?

Cort Lane O'Haver -- President and CEO

Correct.

Jacquelynne Chimera Bohlen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Thank you.

Cort Lane O'Haver -- President and CEO

You bet.

Jacquelynne Chimera Bohlen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

And then, speaking to the next wave of store closures, just broadly speaking, I wondered if you could provide a little bit more color on how you think about the first round versus the second round. Specifically, what I'm looking for would be my assumption, and please correct me if I'm wrong, is that some of the first closures were perhaps some of the easier decisions to make, whereas this next round is a bit more challenging. So, how these stores might differ in the second round from the first round and also how you're thinking about potential -- performance of depositors, meaning might attrition tick up if these are not quite as easy of a close?

Cort Lane O'Haver -- President and CEO

Jackie, it's Cort. So, I would say, you're essentially correct that the first round were the more obvious consolidations, ones where the locations where in a certain distance. And so, yes, that is true. Going back to a year ago, we did find or attract, if you will, the 100 stores that we thought we needed to consider. So, yes, you're right, the first 30 -- actually 32 or 37 that we've identified were probably the easier ones. The next wave, we are -- which we're making decision on right now. In some cases, when we identify those a year ago are performing better than they were a year ago, a lot to do with Brian Read, our -- head of our retail environment and his, what we're calling, seek and solve training, which is additional training to our associates about how they find opportunities to provide products and services. So, we are looking at reevaluating all of that next 30. So we've identified 20 to 25, and we take them on a case-by-case basis. So we look at, like we indicated, the communities we serve, the opportunities of growth, population growth, deposit growth, market share, all of those attributes are things we look at when we make that final determination. But I will tell you what has changed in the last year is some of the performance in our stores, it's gotten considerably better, once again, primarily because of the executives in charge of the retail environment. And we will make -- we take these decisions very seriously, which you've all asked me before, we don't take this lightly. We also are very aware of the fact we need continual funding to drive the loan growth that Tory Nixon is developing in our commercial and other sides of the bank. So, hopefully, I'm answering your question. A little more difficult than it was the first time, but we've got them on the radar.

Jacquelynne Chimera Bohlen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Is there any noticeable difference and quantifiable noticeable difference between these stores and other stores about maybe common characteristics or anything?

Cort Lane O'Haver -- President and CEO

Not real -- I mean, going back to your question, the first 30 were -- seriously, we had some that were within a quarter-mile or a couple hundred feet of other ones, and it was obvious. These locations, in some cases, still are what we consider a drivable distance in order to serve the community. So now, I mean they're spread out, metro and non-metro markets. They're in four of our -- no, they're in five of our states, and so -- and all across the footprint. So, no, there's not one particular characteristic that's demonstrably different in this way than there is in the other one.

Jacquelynne Chimera Bohlen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. And I guess are there items that you've learned and information you've gathered from the first round of closures that you can apply to the second round to combat any potential attrition?

Cort Lane O'Haver -- President and CEO

Well, I think we did a great job in the first wave of reaching out to customers in our stores, letting know what was going on, providing product solutions. We've also got Go-To, which we rolled out three weeks ago, which we're having great success in 60 of our locations, which we did not have a year ago. So, -- and that is another driver of why we're looking at these stores. We can use this application. And I know I've talked to a lot of you when we've been out on the road about this, and I've actually shown it to you. It really is a banker on your phone, right? You can do everything on this device -- on your digital mobile device that you can do in a store with the exception of getting cash. So that is a leave behind in the community, where we're maybe actually relocating a store, say, it's five to 10 miles away. I don't (inaudible) distance is. But we've got a product solution for a customer. So, it -- we didn't have that. So, it will be, quite honestly for me, interesting to see, because we didn't have any attrition in the first 30. Maybe we do better than we are forecasting. So we've got a completely different opportunity here with the training we provided and application, and then the great success we had with what we did with customers prior to the training and the Go-To application.

Jacquelynne Chimera Bohlen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Thank you. That's great background. And I just have one last clarification question. The $10.8 million in savings that's been realized from the store closures, is that net or gross of the 35% reinvestment?

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

It's probably about half of that reinvestment reflected in retail, the other half was reflected in the other ones that is realized today.

Jacquelynne Chimera Bohlen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. So that -- so when looking at future expected cost savings, I can take the $26 million less the $10.8 million?

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

For additional saves, correct. The additional store consolidations in the future, yes.

Jacquelynne Chimera Bohlen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Thank you.

Cort Lane O'Haver -- President and CEO

You bet. Thank you.

Operator

Thank you. We'll try again from Matthew Clark with Piper Jaffray.

Matthew Timothy Clark -- Piper Jaffray -- Analyst

Sorry about that.

Cort Lane O'Haver -- President and CEO

Good morning(ph), Matt.

Matthew Timothy Clark -- Piper Jaffray -- Analyst

Yes. Your deposit growth seasonally strong this quarter. I think it tends to be seasonally stronger in the second half relative to the first half. I guess, how much of this brokered CD decline is -- you think is somewhat permanent versus kind of reupping in the first half of next year?

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

Good question, Mike, because that is something we use as a collateral based on just timing for loan and deposit flows. At this point, we're not planning on replacing those. We'll have additional brokered CDs maturing over the coming year that ideally we're going to replace with customer deposit growth. And if that doesn't occur, then that means customer deposit growth was lagging our plans over the year. So, my expectation is to continue to wind that down over the coming two years.

Matthew Timothy Clark -- Piper Jaffray -- Analyst

Okay. And then on the loan growth guidance being somewhat similar to the first three quarters, the pace of growth has slowed year-over-year, call it, 9%, 8%, 7.5%, 6%. We -- should we assume kind of an average of the first three, or kind of annualized first nine months, maybe it's 6% or so, but is that how you're thinking about the fourth quarter?

Torran B. Nixon -- Senior EVP and Chief Banking Officer

Hey, Matt, this is Tory Nixon. I think that's fairly accurate. The -- I kind of think as -- of Q3 as there were some business that kind of moved from Q3 to Q4, kind of a natural evolution of this business, and I tend to think of the loan production and the growth through the pipeline, and our pipeline is pretty robust. It grew a couple hundred million dollars in Q -- over the quarter in commercial and corporate banking. So, the outlook is still -- I think is still good and strong for us.

Matthew Timothy Clark -- Piper Jaffray -- Analyst

And then as it relates to that, is there -- are there any sub-segments that you all are tapping the brakes on. It sounds like speaking to the commercial real estate pipeline being robust, but kind of obviously valuations are high and just curious about your thoughts on kind of the -- some of the sub- segments of the business?

Torran B. Nixon -- Senior EVP and Chief Banking Officer

No, I think that -- we -- consistent to how this bank has operated for a long time is a very strict and conservative credit culture and that's not changing. And our -- we're looking for a balanced production and balanced growth across the C&I world and the real estate world, including multi-family. So, we're looking at business that makes sense to us from a credit culture standpoint. We're being very restricted on the price that we will demand from the marketplace and choosing what makes sense for us and what doesn't. So, that will continue.

Matthew Timothy Clark -- Piper Jaffray -- Analyst

Okay. And then just wanted to clarify the $3 million to $4 million of restructuring cost that you expect in the four quarter run. What about disposal costs? Are they embedded in that number, or is there some additional amount on top of that?

Torran B. Nixon -- Senior EVP and Chief Banking Officer

More than that. I would expect it to be a bit more than what we had here this past first quarter. You can probably look back to Q4 last year to get a proxy.

Matthew Timothy Clark -- Piper Jaffray -- Analyst

Okay, great.

Operator

And is that all your questions, sir?

Cort Lane O'Haver -- President and CEO

Yeah. We're good. Thanks.

Operator

We'll take our next question from Brian Zabora with Hovde Group.

Brian Zabora -- Hovde Group, LLC -- Analyst

Thanks. Good morning.

Cort Lane O'Haver -- President and CEO

Hey, good morning, Brian.

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

Good morning.

Brian Zabora -- Hovde Group, LLC -- Analyst

A question on following up on the loan growth side. How is -- how are pay downs this quarter? How they compare to, say, second quarter?

Torran B. Nixon -- Senior EVP and Chief Banking Officer

Brain, it's Tory again. Pay downs are actually fairly, fairly close to Q2 and up slightly, slightly more to Q1, but nothing really significant.

Brian Zabora -- Hovde Group, LLC -- Analyst

Okay. And then, on the construction side, you had a nice quarter of growth there. Was that of line utilizations or was it kind of outsized or how do you think about construction going forward?

Torran B. Nixon -- Senior EVP and Chief Banking Officer

Actually, the line utilization is around 50% for us. So that's stayed stable kind of over the last several quarters. The construction, kind of the advanced -- advances in construction has been a nice tailwind for us. We've seen that in the business that we've done, which is kind of we're continuing to advance construction balances, so that's kind of where that sits for us.

Brian Zabora -- Hovde Group, LLC -- Analyst

Great, thanks for taking my questions.

Torran B. Nixon -- Senior EVP and Chief Banking Officer

Yes, thanks, Brain.

Operator

Thank you. And now we'll now take our next question from David Chiaverini with Wedbush Securities.

David John Chiaverini -- Wedbush Securities Inc. -- Analyst

Hi, thanks. So I may have missed it earlier in the call, but did you provide a near-term NIM outlook? I think last quarter you had said plus or minus 5 basis points. I was curious if there is something -- an updated outlook that you provided?

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

The NIM-ex -- again, when I talked about it a bit earlier in the call was ex the discount accretion, right, which we lay out on slide 8 of the deck. So, we expect it to be around this range here near term in that kind of 3.5% to 3.9% range.

David John Chiaverini -- Wedbush Securities Inc. -- Analyst

Got it. My other questions were answered. Thank you.

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

You bet, thank you.

Operator

Thank you. And we'll now take a follow-up from Matthew Clark with Piper Jaffray.

Matthew Timothy Clark -- Piper Jaffray -- Analyst

Hey, I think you mentioned also that you exited a couple of shared national credits. Just want to get an update on how large that portfolio is and what percent of the portfolio you were the lead agent on?

Torran B. Nixon -- Senior EVP and Chief Banking Officer

So Matt, it's Tory again. Our total commitments in the SNC portfolio is about $1.2 billion; outstandings are $765 million. And as, I think, Cort mentioned in his remarks, we consciously exited two participations because of very thin price, no deposit or any ancillary fee business with it. So made a decision that we would invest our capital elsewhere, we're agent in like, I think, three of them, 300.

Matthew Timothy Clark -- Piper Jaffray -- Analyst

Okay, great. Thank you.

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

You bet, Thank you.

Operator

You'll hear now from Jared Shaw with Wells Fargo.

Timur Felixovich Braziler -- Wells Fargo Securities -- Analyst

Hi, good morning. This is actually Timur Braziler filling in for Jared. Just a broad question on the mortgage banking space. Clearly, it looks like the industry is pivoting toward more of a slower growth time. Just as you're looking at this transition, kind of what's being done internally to position the Bank and how are you thinking about this business, if the trains(ph)are long and more self-sustained?

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

Yes, this is Ron. And again, the mortgage is very much a core product on the consumer side we're -- still very profitable for us. I think looking back at the last 10, 15 years, I've seen three to four of these slowdowns and I know on the back-end of a couple of quarters shake out, we've always ended in a much better to execute and show positive results. So, the actions we've taken have been around reducing where we can, fixed costs. The variable cost will fall with the volume albeit somewhat on a lag basis. But on the fixed cost, we'll continue to look to get efficient there and add other technology solutions. But no plans for drastic changes in business, still very profitable, and again it is a three legged type business between interest income, the production, and then the servicing. So that's a nice annuity stream, no significant changes planned (inaudible) just nipping and tucking around the edges.

Timur Felixovich Braziler -- Wells Fargo Securities -- Analyst

Okay, thank you.

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

You bet, thank you.

Operator

Thank you. And that does conclude today's question and answer session. I'd like to turn the conference back over to management for any additional or closing remarks.

Cort Lane O'Haver -- President and CEO

All right. I'm going to thank you for your interest in Umpqua Holdings and your attendance on the call today. This will conclude the call. Goodbye.

Operator

Thank you. That does conclude today's conference. Thank you all for your participation.

Duration: 46 minutes

Call participants:

Ronald L. Farnsworth Jr. -- EVP and Chief Financial Officer

Cort Lane O'Haver -- President and CEO

Steven Alexopoulos -- JP Morgan -- Analyst

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

David F. Shotwell -- Executive Vice President, Chief Risk Officer & Chief Credit Officer

Aaron James Deer -- Sandler O'Neill -- Analyst

Michael Masters Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Jacquelynne Chimera Bohlen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Matthew Timothy Clark -- Piper Jaffray -- Analyst

Torran B. Nixon -- Senior EVP and Chief Banking Officer

Brian Zabora -- Hovde Group, LLC -- Analyst

David John Chiaverini -- Wedbush Securities Inc. -- Analyst

Timur Felixovich Braziler -- Wells Fargo Securities -- Analyst

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