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Umpqua Holdings Corp (NASDAQ:UMPQ)
Q3 2019 Earnings Call
Oct 17, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to the Umpqua Holdings Corporation Third Quarter 2019 Earnings Call. [Operator Instructions] And at this time, I would like to turn the conference over to Mr. Ron Farnsworth, Chief Financial Officer. Please go ahead, sir.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Okay. Thank you, Lisa. Good morning and thank you for joining us today on our third quarter 2019 earnings call.

With me this morning are Cort O'Haver, the President and CEO of Umpqua Holdings Corporation; Tory Nixon, our Chief Banking Officer; Rilla Delorier, our Chief Strategy Officer, Dave Shotwell, our Chief Risk Officer; and Frank Namdar, our Chief Credit Officer. After our prepared remarks, we will then take questions. Yesterday afternoon, we issued an earnings release discussing our third quarter 2019 results. We've also prepared a slide presentation, in 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 I will now turn the call over to Cort O'Haver.

Cort O'Haver -- President and Chief Executive Officer

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

Our Q3 2019 financial performance resulted in earnings per share of $0.38. This is down from the $0.51, we earned in the prior quarter and the $0.41 reported in the third quarter of 2018. The change from last quarter is primarily the result of a one-time $75.4 million net gain that was attributable to the sale of our Visa Class B stock and high premium debt securities that occurred in Q2. This quarter's financial results include a $4.2 million positive adjustment related to the fair value change of our MSR asset. This includes a positive $7.8 million adjustment related to the fair value of mortgage servicing rights held for sale at the end of the quarter. We will continue to execute initiatives as mentioned previously to reduce the volatility of the MSR asset.

I'm pleased to report that we generated strong balance sheet growth for the third quarter. Deposit growth of $615 million represents a very robust annualized growth rate of 11.3%. In addition, the healthy increase of $352 million in non-interest bearing demand balances that we recorded in the quarter represents an annualized growth rate of 21%.

We've made deposit growth initiatives a top priority and these strong early results demonstrate the success of those efforts. In addition, we also generated strong loan and lease growth of $567 million which represents an annualized growth rate of 10.8%. Our commercial real estate, residential real estate groups aided by a lower interest rates and typical seasonality had strong quarters of quality growth. Our corporate banking group grew a $150 million and loan balances are 13% annualized and FinPac our leasing subsidiary grew $36 million in balances during the quarter for an annualized growth rate of 10%.

Now for an update on Umpqua Next Gen initiatives. As evidenced by our strong loan and deposit growth this past quarter, our balance growth initiatives continue to move forward successfully. In addition to the robust growth I just mentioned, I want to highlight that we added more than 4,000 non-interest bearing accounts during the quarter, in addition to the growth of more than 3,000 non-interest bearing accounts we reported in the previous quarter. In addition, we reported annualized growth and treasury management fee revenue of 48% due to the hard work of the bankers across the footprint working alongside the global payments and deposits team as we continue to emphasize banking for relationships.

Our human digital strategic priority continues to be a differentiator for Umpqua. The industry's first human digital banking platform Go-To continues to deliver strong enrolments. I'm very pleased to report that just six months since launching Go-To, nearly 10% of our consumer DDA customers have already enrolled. This is an important metric as customers engage with Go-To have a higher primacy and retention rate. In addition, we've introduced our predictive analytics tool on for smart lead, serving commercial and corporate customers in more than half of our markets, and we're seeing significant opportunity for additional fee based products and services based upon consumer behavior. Our operational excellence initiatives continues to generate results. Collectively they have contributed to $26 million or 5% decline in our total non-interest expenses when comparing year-to-date 2019 to year-to-date 2018.

Phase 2 of our operational excellence initiatives are under way. It will continue to progress made to date on reducing non-interest expense. In addition, recognizing the broader rate environment, management is currently reviewing additional opportunities for a Phase III initiative, currently size and at additional 3% to 5% of our expense base. I look forward to providing detail on those components and timing of those efforts starting on the January call. As Go-To adaption builds momentum, we continue to optimize our physical footprint.

Last quarter we announced that we would be consolidating an additional eight locations. This will bring our store rationalization number to 65 since Q3 of 2017. As always we continue to measure and evaluate performance on all stores and as highlighted previously, we are seeing solid deposit growth across the Board. Our focus for the rest of the year is to continue to deploy Go-To, grow deposits and finish the previously mentioned consolidations. We will provide an update on future store rationalization plans in early 2020.

Now back to Ron to cover the financials in detail.

Ronald Farnsworth -- Executive Vice President 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 to Page 6 of the release or slide presentation which continues our quarterly P&L. GAAP earnings per share were $0.38 this quarter compared to $0.51 in the second quarter and $0.41 in the same quarter year ago. Notable items impacting earnings this quarter were the small positive change in fair value on the MSR asset impacted in part by gain on the portions sold two weeks ago, along with the fair value loss on the swap derivative as interest rate declines this quarter and $2 million of excess disposal cost for recent store consolidations. Ex these items, adjusted earnings were $0.39 per share.

Turning to net interest income on Slide 7, net interest income increased 1% from Q2 driven by combination of strong loan growth and lower premium amortization in the bond book, offset by the two fed funds rate declines this past quarter. This kind of accretion on acquired loans remain flat at $5 million this quarter and is expected to decline modestly over the coming quarters. For the tax loan investment income line item, premium amortization on MBS and CMO's was $6.6 million; a couple of million higher than expected due to the drop in long term yields this quarter, resulted in a higher prepayment speeds on the underlying investments. This is a retrospective adjustment and was about $2 million higher than we would expect moving forward assuming no further change in prepayment speeds.

Our interest expense increased slightly based on continued average balance growth and competition for funding. Recall in the past, we stated an expectation for one to two quarter lag before seeing a drop in interest expense assuming the Fed reduced short-term rates. With that playing out, the cost of restraint deposits increased as expected to 1.19% this quarter and looks to hit a higher-water mark in August and started to fall in September. We're expecting this to decline a few basis points in Q4 assuming no further fed rate cuts.

As reflected on Slide 8, our net interest margin was 3.63% this past quarter. The margin excluding discount accretion was 3.54% with the 7 basis point decline resulting from the two fed funds rate cuts in Q3. Obviously a different environment that most of us were thinking we'd see this year, but with an absence of balance sheet we'd expect the margin to remain under pressure with further rate declines. And rather than speculate as to how many may or may not be on the horizon for every 25 basis point cut and rates we'd expect about 5 basis point reduction in margin, all else being equal, which it rarely is.

We are making adjustments to the balance sheet to perform better in a potentially lower interest rate environment including the extending duration in the bond portfolio while reducing premium organization optionality, reducing the costs of high beta deposit accounts and shortening funding duration. Other moves include reducing more transactional rate sensitive loan production but those resources being reallocated to more profitable balanced commercial relationships.

Moving now to non-interest income on Slide 9, we generate a total non-interest income of $88.5 million for the quarter. The drop in long-term interest rates created a fair value loss on the swap derivative of $4.6 million up slightly from Q2, while we had a like amount of net fair value gain on the MSR asset. Before I get into home lending activity, we're pleased to see continued growth in other non-interest income components, such as treasury management fee revenue.

And for mortgage banking as shown on Slide 10 and also in more detail on the last page of our earnings release, for-sale mortgage originations increased 73% from the second quarter, mostly from a seasonal lift but also boosted by the drop in long-term rates. With this decline in market rates our gain on sale margin increased to 3.7% based mostly on higher pricing. A change in fair value of the MSR asset was a positive $4.2 million this quarter, which is a combination of the passage of time charge and changes in inputs as reflected in the lower table. Included in the $11 million credit for changes to inputs, whereas the $7.8 million gain on sale which closed in early October, but was held for sale as of quarter end.

Excluding the portion sold, the remaining MSR was valued at 94 basis points. As discussed last quarter, we're analyzing another potential sale of a similar amount early next year and are positioning the asset and allocated capital to focus on more forward relationships carrying deposit balances which will improve the overall profitability of the business and reduce potential future volatility to the P&L from these rate related changes.

Turning now to Slide 11, non-interest expense was $183.6 million, up slightly from the prior quarter but in line with expectations. The bridge on the right side shows the moving parts from the second quarter with the expected home lending seasonal increase being the largest component. We had an increase related to our reclass to other non-interest income and an increase in group insurance costs offset by reductions in OREO, marketing, restructuring and payroll taxes. Note the efficiency ratio was 57.8% on the face of the P&L for Q3, but our internal measure was 57% when adjusting out the security gains in MSR and CVA fair value charges discussed earlier. Higher than expected but reflective of the recent fed rate cuts impact on margin. Also point out the year-to-date 5% drop in expense from the Phase I initiatives is holding which provides us more opportunity as we look in the 2020. Regarding the operational excellence program as Cort mentioned, our Phase 2 initiatives will result in an annualized savings of $6 million to $10 million next year, and we are currently aggregating Phase 3 initiatives expected to be 3% to 5% of our expense base.

Turning now to the balance sheet beginning on Slide 12, we increased our interest bearing cash this quarter to just under three quarters of $1 billion, along with the slight increase in investment securities, targeting longer duration assets funded with the increase in shorter duration borrowings.

The mix of loans and deposits is shown on Slide 13. Our strong loan balance growth this quarter was centered in commercial and owner-occupied real estate, along with multifamily and residential. The decline in consumer loans continues as a result of our targeted line down of the indirect dealer auto portfolio. Within deposits we had strong growth and non-interest bearing demand balances supported by over 4,000 new customer checking accounts, along with an increase in time deposits. Broker deposits were down $40 million and public deposits also declined $40 million during the quarter.

Slide 14 reflects the repricing characteristics of our loan and lease portfolio, knowing our floating and adjustable rate loan mix remain consistent over the past few quarters.

And on Slide 15, we have highlighted the geographic diversification of our loan portfolio across the footprint. We also provided some selected loan and underwriting characteristics for each major area. As mentioned on previous calls, we are happy with the granular nature of the loan book.

Slide 16 reflects our credit quality stats and highlights the strength of our portfolio as shown by the continued decline in non-performing assets, now down to 0.25% of total assets and a consistent low level of overall net charge offs. The provision for loan loss increased to $23 million this quarter, in part by funding the stronger loan growth along with a small uptick in net charge-offs. The upper right chart shows the level of classified loans in the range of 7.5% to 8.5% of total capital. The slight uptick this past quarter was driven by the Ag book reflective of market stresses. And in the bottom right chart, we break out our FinPac leasing group net charge-offs from that of the rest of the bank, knowing the leasing component has been fairly consistent around 3% to 3.5% for the past year. Keep in mind that the weighted average yield of this portfolio is a very healthy 10%.

Slide 17 introduces our expectations for the upcoming change to the current expected credit loss or CECL model to account for loan loss reserves. While this takes effect at the start of 2020, we've been prepping for the change for the last few years and have now performed eight parallel realms of the new models. Granted these estimates are based on our views of the economic environment today and these could change by the first quarter of 2020, but for now we're estimating overall increase in our allowance for loan loss to be around 1% of gross loans and leases compared to the 0.73% we have today. The estimated changes by portfolio are noted in the upper right table with the reduction in commercial reserves offset by increases in the other categories. The largest projected increase relates to our lease and equipment finance portfolio which carries higher losses but also has a much higher yield to compensate for it.

Noting we typically carried just over two years of charge-offs in the reserve historically for this portfolio and this increase reflects the approximate five-year life of these assets. The remaining changes are reflected primarily of the duration on loans. We will continue to refine and update ahead of adoption in Q1 2020, absent a significant change in the economic outlook this should be a fair estimation of the overall impact.

Lastly on Slide 17, I want to highlight capital, knowing that all of our regulatory ratios remain in excess of all capitalized levels with our Tier 1 common at 10.9% and total risk-based capital at 13.6%. We've broken out the mix of each ratio with regulatory well capitalized minimums, our in-house cushions above well capitalized and will be considered excess capital. With our quarterly common stock dividend of $0.21 per share the total payout ratio was 55% this quarter. Also our tangible book value per share is $11.27 which when you also account for the $0.21 in dividends to shareholders last quarter increased 5%. Our excess capital was approximately $200 million and will provide us with several opportunities no matter the economic or rate scenario over the intermediate term horizon.

To conclude, our focus is on executing all aspects of our Umpqua Next Gen strategy, improving financial results and generating solid returns to shareholders overtime, including a healthy dividend.

And with that, we will now take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We will take our first question from Jeff Rulis. Please go ahead.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Good morning.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning Jeff, you're on mute.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Yeah. Can you hear me?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Yeah.

Cort O'Haver -- President and Chief Executive Officer

Yeah.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Okay. Good. So on the expense front, I just wanted to confirm that with Phase I complete, are there I guess Q4 are there any Phase II savings still to come this year? You itemize the six to ten next year but are we relatively flat on savings for the rest of the year?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

There will be a small amount in Q4 for the Phase II component, but the vast majority will be in the 2020 run rate.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Okay. And a comfortable, I guess of a base expense level for this quarter it could be just ex some of the reclass and disposal costs knowing that the mortgage side is going to be variable?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Yeah, that would be around $179 million ballpark ex the reclass and the excess over cost and I expect that number will drop in Q4, partially due to the lower seasonal holding activity. We typically see in Q4 partly due to some of the Phase 2 components you talked about earlier, so should be less than $179 million. You can probably look back at the last handful of Q4 to get a sense of the home lending delta.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Got you. And then the net charge-offs that increase, was it any one category or any trends that you drew from that number?

Frank Namdar -- Executive Vice President and Chief Credit Officer

Jeff this Frank Namdar, no that was really centered in one $3.6 million charge-off that was centered in the CNI space on a credit that we had been working out of which is now completely gone.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Got you.

Frank Namdar -- Executive Vice President and Chief Credit Officer

We still view the trends as quite positive.

Jeffrey Rulis -- D.A. Davidson -- Analyst

It maybe a little lumpy this quarter but -- and Frank on the provisioning levels, you anticipate any -- given the CECL impact at least preliminarily thoughts on provisioning in the next year?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

This is Ron. I will say in terms of, obviously CECL is going to change the game when it comes to economic forecast, and so you could see provision spike assuming an economic forecast. The bank mix includes any kind of a downturn, well ahead of charge-offs coming to fruition. So absent that, I would expect it to be consistent with the way [Indecipherable] quarterly basis you're just going to have this more acceleration in a downturn and then also more of a credit and recovery, on the front end. Very difficult to say today it's going to be 18 or 22, all else being equal, it should be in this range. But again it's going to be predicated upon individual banks view of the economic outlook over the coming year.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Okay. Thanks. I'll step back.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

You bet. Thanks.

Operator

Our next question comes from Matthew Clark. Please go ahead.

Matthew Clark -- Piper Jaffray -- Analyst

Hey, good morning.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning.

Matthew Clark -- Piper Jaffray -- Analyst

For the Phase III expenses, it sounds like we'll get more color in January but any sense for whether or not that may begin next year or will it be more of a 2021 event?

Cort O'Haver -- President and Chief Executive Officer

Hi Matt, it's Cort. So we're working on that right now as we speak and we'll provide that guidance and transparency in January. Let me just say we're working on it real hard right now and obviously we'd like to execute on some of that in 2019 here before we get into the first of the year, but we'll give you more clarity in January. So I'm not exactly giving you the answer you want, but I want you to know we're working on it.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then just on the $179 million clean run rate to consider for the fourth quarter, is that include any disposal costs or any other charges or is that all in?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

That should be all in actually should be lower than that, just given the seasonal decline in home lending activity. But we don't expect any significant exit and disposal cost in Q4.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then just last one for me on the bump up in classified, the 8 basis points I know it's still a relatively low level but just wanted to get a sense for what drew that migration?

Frank Namdar -- Executive Vice President and Chief Credit Officer

Hi this is Frank Namdar again, migration is really driven by the AG space. So the AG space has been really hit with the tariff situation, commodity prices being quite low and also labor and really the increase is centered in that. Again I view the trends as really pretty positive. I mean, if you look back, I mean into 2017 let's not forget our classified numbers were at $345 million versus the $217 that we see today. So I think we made, we're making pretty good progress and I view that as being pretty stable still going forward.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. Thank you.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Yeah.

Operator

[Operator Instructions] We'll take our next question from Tyler Stafford. Please go ahead.

Tyler Stafford -- Stephens -- Analyst

Hey, good morning guys.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning.

Cort O'Haver -- President and Chief Executive Officer

Good morning.

Tyler Stafford -- Stephens -- Analyst

Hey I just wanted to also start on expenses and maybe I missed this in the opening remarks Cort, but are you guys planning to close that last final round of branch closures in 2020 or is that off the table now?

Cort O'Haver -- President and Chief Executive Officer

So like I said in the opening remarks, first of all we constantly review the performance of our stores. I tell you since we made the announcement of doing 30% or 100% whatever the exact number was, [Indecipherable], obviously and the need for low-cost funding is greater than it was and as interest rates have risen and we've seen greater performance out of our stores. We are a lot more picky in particular about what stores we consolidate. So to answer your question we're a hold through the balance of this year I think we're at 65 or 67, since we made the announcement and we'll evaluate any other consolidations and closures into 2020. I would bet you'd see us do some additional store consolidations in 2020, but we're not planning on doing in the next 90 days.

Tyler Stafford -- Stephens -- Analyst

Okay, thanks for clearing that up. On the MSR sales, how much expense saves do you expect to realize from this first tranche of sales and then the potential second?

Cort O'Haver -- President and Chief Executive Officer

Good point, again the driver that was to shift the capital allocated into more relationship business but there will be some expense reductions mostly variable costs related to the system processing. I'd say that'd be less than $1 million on a quarterly basis.

Tyler Stafford -- Stephens -- Analyst

Okay, got it. So that the Phase III would not include anything related to the MSR exit on expense side?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

No, it would not.

Tyler Stafford -- Stephens -- Analyst

Okay.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

It would not.

Tyler Stafford -- Stephens -- Analyst

Got it. Maybe just some simplistically on the loan yield side, I guess I was surprised the magnitude of the loan yield compression just given that the variable rate loans are just 28% or 29% or so, was there anything unique about that level of compression this quarter prepay fees, etc., that we should think about going forward that was a little bit more unique?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Good question and again discount accretion was relatively flat. It was nothing significant on the fee income side driving that, I mean maybe half a [Indecipherable], but nothing outside beyond that point, I think what it reflects just the rapid decline in LIBOR and the prime based stuff through the quarter. And keep in mind too, there is also the adjustable rate loans that aren't fully floating but have adjust periods that during this quarter would have been impacted along with -- new production would come on at lower yields compared to two, three quarters ago.

Tyler Stafford -- Stephens -- Analyst

Yeah, OK. [Speech Overlap] Ron, just lastly from me, I appreciate the details on the CECL methodology and specifically around the FinPac portfolio, I'm just curious if you guys would expect to slow down the growth rate of that or alter pricing at all just given a more punitive reserving nature of that portfolio? Thanks.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Not at all. Just a great return on allocated capital 10% plus overall portfolio yield, I think what this reflect, the economic reality hasn't changed where we account for it so we'll have some capital allocation for the reserve, then it will be a non-event, specific to that portfolio. Does that cover your question Tyler?

Tyler Stafford -- Stephens -- Analyst

Yeah, I know I did. Thanks. Thanks for that. There is just the footnote on that Slide 17, I said possible changes to pricing. So I didn't know if that was just a general statement or if that was specific to the FinPac portfolio given the increase there.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

It is a general statement around the portfolio in total and/or the industry as we see potential pricing changes will obviously reflect it. Certain categories or products alongside and the marketplace could change just given the nature, you could also see much shortening terms, based off the accounting methodology, but I don't think everything has been hard and fast in the market yet. I'm expecting we won't see any movement on that front until early 2020.

Tyler Stafford -- Stephens -- Analyst

Understood. Thanks so much guys.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Yeah, thanks.

Operator

We'll take our next question from Jackie Bohlen. Please go ahead.

Jackie Bohlen -- Keefe, Bruyette, & Woods -- Analyst

Hi, good morning everybody.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning, Jackie.

Jackie Bohlen -- Keefe, Bruyette, & Woods -- Analyst

I just wanted to clarify the expense base that you discussed for the 3% to 5% that you're looking into savings on for Phase III, should we look at that as a general $179 million or is that something that would include the reduction from Phase II?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

I would factor in the $179 million, well a lot of moving parts right. So you get the $179 million core number in Q3, which seasonally is higher, given the higher mortgage volume will drop off in Q4. I would expect to see the same seasonal play in that over the course of 2020 by quarter. The Phase II would be taken off of that and this 3% to 5% we're talking about is on top of all of that. And basically we are looking at that as -- how do you manage the bank in a lower interest rate environment and it's going to be continue to manage your operating costs and your cost of funding in shortened duration. So we are not -- we're hoping for the best on that front we're going to make sure we plan for the potential of a lower rate environment, so we can do what we can to help improve earnings and provide a good return to shareholders.

Jackie Bohlen -- Keefe, Bruyette, & Woods -- Analyst

Okay. So this, the Phase III, is that in part driven by the environment that we operate within or is that something where if we were still in a higher rate environment you would have naturally progressed to that level?

Cort O'Haver -- President and Chief Executive Officer

Hey, Jackie, it's Cort. So it's both. Like Ron just said in this low rate environment obviously we have to be very strict about how we manage our associated costs and he just nailed it right, are not just sparing deposit growth and all the success we've shown this year we're going to continue those efforts as it does lower our borrowing cost, managing our fixed costs. We have opportunity let's just be honest we do have opportunity to manage down our fixed costs and that will be a part of the Phase III initiatives that someone just asked me. So I'll go to another component, but so we're already working on that. I mean quite honestly earlier this year we started looking at our cost and our productivity prior to the rate declines we saw early summer. So, we feel good about the progress we've made in just identifying these opportunities. So it's a little bit of both Jackie. We were working on it anyway knowing that we think, we have opportunities and here comes, the shorten the curve coming off quicker than we thought. The other thing I'd say just -- another important driver of what we do next year is on the continued work and success on our non-interest income. We've seen substantial improvement over the last two years and what we're doing in treasury management, the commercial and our small business customers and there will be another important piece of how we generate revenue and EPS in the declining rate environment. So those are really the three main drivers of our strategic financial focus in this low rate environment, probably beyond 2020, to be quite frank.

Jackie Bohlen -- Keefe, Bruyette, & Woods -- Analyst

Okay. That's helpful. Thanks, Cort. And then just one last one for me, Ron when you mentioned, understanding that static environment has never winded up being static, and 5 basis points in NIM compression for every 25 basis point decline and my interpretation of other remarks you made is that you're going to be actively managing the balance sheet in what you do in order to potentially reduce that 5 basis points. Is that what you intended to say?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

That is correct and also I'll point out that the yields, we had six fed funds rate increases and then two coming off the table here over the last quarter. I talked about last quarter, we expect to see a lag in terms of the cost of deposits that will start to drop here in Q4 and that's incorporated into the 5 basis points for every 25 bip move ion and fed fund as well. But we are doing everything we can to help manage the balance sheet to negate the negative impacts of margin compression and rate sound world.

Jackie Bohlen -- Keefe, Bruyette, & Woods -- Analyst

Okay. And so, with that in mind and that does include the rate declines that we've already had if we were to have future rate cuts then we have that similar lag but those would also be included in the future as well, correct?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Correct.

Jackie Bohlen -- Keefe, Bruyette, & Woods -- Analyst

Okay. Thank you.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

You bet. Thank you.

Operator

We'll take our next question from Aaron Deer. Please go ahead.

Aaron Deer -- Sandler O'Neill -- Analyst

Hi, good morning everyone.

Cort O'Haver -- President and Chief Executive Officer

Good morning.

Aaron Deer -- Sandler O'Neill -- Analyst

Following up on the expense inquiries, the 3% to 5% that could come through Phase III. And then you mentioned potential additional store closings. Are those additional store closings included as part of that 3% to 5% estimate that could come out of Phase III or is that would that be on top of that?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

No, they would not be included in that 3% to 5%, Aaron.

Aaron Deer -- Sandler O'Neill -- Analyst

Okay. And then, I was a little surprised to hear that the classifieds increased there is largely different by AGs like your markets don't seem like soybean markets or something necessarily, what type of products are in that Ag book that's causing the uptick there?

Frank Namdar -- Executive Vice President and Chief Credit Officer

Hi Aaron, Frank Namdar. Really a lot of dairy, fruits, vegetables specifically apples and cherries, a lot of the apple and cherry markets here, really export out to China and that has been impacted. So they're looking at alternative routes for those apples and cherries, so those would be the primary sectors.

Aaron Deer -- Sandler O'Neill -- Analyst

Okay. And then, any additional color you can give behind just the elevated loss rates here in the third quarter?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

I think we've been and will continue to kind of bounce along the bottom and the elevated loss rate really was centered this quarter in one account that we had been working out of that we took a charge of $3.6 million on and it's now completely out of the bank.

Cort O'Haver -- President and Chief Executive Officer

Hey, Aaron, it's Cort. We've traditionally historically operated with pretty sharp views relative to problem credits and that hasn't changed under my leadership. Our credit folks are instructed if we see an issue just do it as quickly can and run it through and we can collect it at later grade. But we just don't sit on slow-pay, bad type customers we just move. And our portfolio is so granular, and albeit I know it showed up in the numbers, it's just the way we choose to operate this company.

Aaron Deer -- Sandler O'Neill -- Analyst

Okay, great. Thanks very much.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

You bet. Thank you.

Operator

[Operator Instructions] We'll take our next question from Michael Young.

Brandon King -- SunTrust Robinson Humphrey -- Anlayst

Hey, this is Brandon King on for Michael Young.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning, Brandon.

Brandon King -- SunTrust Robinson Humphrey -- Anlayst

Hey I wanted to touch on deposit growth, of course deposit growth was very strong this quarter, matching loan growth and a good chunk of that came from non-interest bearing deposits. And I know you guys are focused on growing operating balances, but I wonder, I'm trying to see if there were any other factors affecting their growth such as expectations for loan growth coming up in the fourth quarter and to see if there were any expectations to pre-fund that growth?

Tory Nixon -- Senior Executive Vice President and Chief Banking Officer

Brandon, this is Tory Nixon. I think the two parts of the question, the first is, as Cort mentioned in his opening remarks and he has mentioned a couple of times actually with Ron was -- there is a very significant kind of bank wide initiative on core deposit growth for the company. And we've been working on that for a few months or actually a couple of quarters now. And I've seen great success with that. Our commercial and corporate banking businesses had their largest deposit growth quarter in a long, long time this past quarter. Our retail bank has doubled the -- one of the metrics we have is consumer account acquisition per store, per month, and over the last 18 months they've doubled their production. So there is a lot of really good efforts that are being done by the bankers in the field in all lines of business to grow core deposits for the company. The second part of your question I think was about loan growth and our pipeline is strong, our lending pipeline is strong, our deposit pipeline is strong and our core fee income pipeline is very, very strong. So we're seeing a lot of really good momentum and I'm excited about where we're going in the future of the company.

Brandon King -- SunTrust Robinson Humphrey -- Anlayst

Thank you very much. And I just chipping over to capital management, as excess capital continue to grow, has strategy changed as far as how to deploy that capital through -- I mean possible dividend increases or change in M&A outlook?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Bran, hey, this is Ron. Good question, I think overall we like to maintain a healthy dividend payout ratio in that call it 50% to 70% range. Buybacks we've intentionally held to just offsetting share issuance over the course of the year. So we've got a neutral change on the share count. So -- and then capital of $200 million right, it's given us great opportunity to continue very strong organic growth. It's been relatively consistent over the past year, so it hasn't increased or decreased significantly. I would expect though over the coming year, similar to many areas that were successful that excess capital number will just continue to modestly decline on a quarterly basis and provide us a great opportunity no matter which way the economy goes.

Brandon King -- SunTrust Robinson Humphrey -- Anlayst

Thank you very much.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

You bet. Thank you.

Operator

[Operator Instructions] We'll take our next question from David Chiaverini. Please go ahead.

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. A couple of questions for you. Starting with premium amortization, I know it's tough to gauge but -- and it's been volatile in a wide range the past four quarters. So what's the expectation, your best guess I should say for premiumization in the fourth quarter if the 10-year yield does remain at the current level?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Could be down a couple of million, certainly in that four to five range, all else being equal, which unfortunately for the last year it hasn't. But again, the way we account for that is under retrospective adjustment method. So as interest rates change significantly in the corresponding prepayment, expectations changed significantly, we'll see these swings regardless, so if you went again get into that low 2% normalized book yield it'd be a $4 million to $5 million a quarter premiumization number.

David Chiaverini -- Wedbush Securities -- Analyst

Got it. Okay. And in terms of basis points, do you have that?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

That level would be roughly, that book yield would be roughly two in a quarter at that level.

David Chiaverini -- Wedbush Securities -- Analyst

Okay. And then shifting gears to loan growth, you mentioned about how the pipelines look strong, should we still be thinking about mid to high single-digit loan growth over the next few quarters?

Tory Nixon -- Senior Executive Vice President and Chief Banking Officer

Yeah, hi, David, this is Tory Nixon, again. Yes, I would -- I think that's a nice number to think about for us.

David Chiaverini -- Wedbush Securities -- Analyst

Okay. And then similarly on the core fee income you mentioned about how the pipeline there is strong. How does this pipeline compared to last quarter, the past few quarters or maybe even the year ago quarter as well?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

So we launched this initiative on growing core fee income about roughly almost 18 months ago and there is a certainly a lag and the time to build and to grow significantly. And to give you an indication there is a few areas where we track really heavily and I'll give you some stats on, commercial card revenue for us is up 47% in those 18 months. Our international banking revenue and FX is up 31%, our merchant is up 13%, our treasury management fees are up 20%. So there is just nice growth in terms of number of customers, prospects, existing customers and then just the general pipeline across all of the core fee businesses.

David Chiaverini -- Wedbush Securities -- Analyst

Great. Thank you.

Operator

We have a question from Tyler Stafford.

Tyler Stafford -- Stephens -- Analyst

Hey, thanks for taking the follow-up guys. Ron to your point earlier and one of the other responses we have had five or six rate increases since Next Gen was laid out. We've had I guess two cuts now, intimately that the tenure is 50 or 60 basis points lower than I think when you gave that, the international Next Gen profitability goes. So, I'm just curious given where we're at now, how do you feel about the possibility to hit those, this profitability goals either in the flat rate or moderately increasing rate great environments? I guess before we should think about Phase III potential impacts.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

I would say, one of the other big moving parts aside from 10 year is really more the belly of the curve, being much lower as well, just the drastic change over the last year. So obviously NIM today doesn't look like NIM plus for fed Funds moves from two years ago projected. So with that'd be on the lower end of that range but definitely that's why we're also looking at Phase III and continue to operate as efficiently as we can and look at all costs, be it funding costs and/or fixed operating cost as Cort mentioned, they help offset the impact of margin if rates do decline. And if you go back a year and rates were increasing and the [Indecipherable] happened today, we all think rates are going to decline and that could happen, regardless we're going to manage the cost structure of the company to ensure we're in the best position we can be.

Tyler Stafford -- Stephens -- Analyst

Okay, all right. Thanks, Ron.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

You bet. Thanks.

Operator

[Operator Instructions] We'll take our next question from Matthew Clark.

Matthew Clark -- Piper Jaffray -- Analyst

Many thanks. Just wondering how much you had in the way of CDs maturing in the fourth quarter at what rate and what's the way to average rate on new CDs?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Good question, and we need to show the rate volume analysis at the back. I'd say on the CD side probably the biggest delta in terms of rate is going to be some of the brokered deposits from earlier in the year rolling off at 25 to 45 basis points lower dependent on the cadence in the quarter in which they came in. But that also is incorporated in the couple of basis point drop in the overall customer deposits side laid out assuming no more changes from the fed.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. Thank you.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

You bet. Thank you.

Operator

Thank you. And that does conclude today's question-and-answer session. I would like to turn the call back over to Ron Farnsworth for any additional or closing remarks.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

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

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Cort O'Haver -- President and Chief Executive Officer

Frank Namdar -- Executive Vice President and Chief Credit Officer

Tory Nixon -- Senior Executive Vice President and Chief Banking Officer

Jeffrey Rulis -- D.A. Davidson -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

Tyler Stafford -- Stephens -- Analyst

Jackie Bohlen -- Keefe, Bruyette, & Woods -- Analyst

Aaron Deer -- Sandler O'Neill -- Analyst

Brandon King -- SunTrust Robinson Humphrey -- Anlayst

David Chiaverini -- Wedbush Securities -- Analyst

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