UMPQ (2019 - Q4)

Hello, and welcome to the Umpqua Holdings Corporation Fourth Quarter 2019 Earnings Call. All lines are in a listen only mode. However, we will be conducting a Q&A session at the end of the call. As a reminder, this conference is being recorded.At this time, I would like to turn the conference over to Mr. Ron Farnsworth, Chief Financial Officer. Please go ahead, sir. Ron Farn

Great, thank you, Sheryl. Good morning. And thank you for joining us today on our fourth quarter and full year 2019 earnings call. With me this morning are Cort O'Haver, 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 fourth quarter 2019 results. We've also prepared a slide presentation, which we will refer to during our remarks this morning. Both of these materials can be found on our Web site 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.

Okay, thanks, Ron. Let me begin by providing a recap of our fourth quarter and full year 2019 performance and accomplishments. Ron will discuss the financials in more detail and then we will take your question.2019 was another solid year for Umpqua, highlighted by strong financial performance, continued loan to deposit growth and tremendous progress implementing the initiatives within our Umpqua NextGen strategy. We had a strong fourth quarter with earnings per share of $0.38. This matches the $0.38 we earned in the prior quarter and an increase from $0.36 we reported in the fourth quarter of 2018. For the year, the company earned $1.60 per share, which represents 17% improvement over the 2018 earnings of $1.43 per share.Turning to the balance sheet. During the quarter, loan and lease balance declined on a point-to-point basis by $325 million or 1.5%, while average loan balances increased $208 million or 1%, both are the result of several notable items. First, we repositioned a portion of the balance sheet later in the quarter by selling $118 million by primarily transactional and lower yielding loans, such as a third of our remaining indirect consumer auto loan portfolio, thereby allowing us to reduce our higher broker deposits.We also experienced an increase in payoffs and pay down activity compared to prior quarter, and that could be summarized as a third related to business transactions, including customer M&A, a third due to competitive pricing in terms and a third in specific risk management decisions. For the fiscal year of 2019, loan and lease balances grew $773 million or 4%, highlighted by growth in both the residential real estate and C&I categories.During the fourth quarter, deposits grew $47 million on a net point to point basis. We achieved healthy core deposit growth of $215 million during the quarter, as we continue to emphasize full banking relationships. This strong core deposit growth was offset by the previously mentioned strategic exit of higher cost broker deposits totaling $325 million. For the year, deposit growth was $1.3 billion or 6% with strong growth in non-interest-bearing demand balances, money market and time deposits. I'm especially pleased with the growth we achieved in DDA balances, including the net increase of more than 17,000 deposit accounts we acquired during 2019.And now for an update on the Umpqua NextGen initiatives. As evidenced by the loan and deposit growth this past year, we continue to implement our balanced growth initiatives with great success. It's also important to highlight the robust growth in fee-based products and services we achieved in 2019. Reoccurring fee revenue categories, such as treasury management revenue, international banking revenue, commercial card and merchant services revenue, increased a collective $6.8 million or 24% over the year, demonstrating the success of our investments we have made in these areas.We also made tremendous progress implementing our human digital strategic initiative. Umpqua Go-To continued to serve as an important differentiator for the company. And I’m pleased to report, we surpassed more than 45,000 customers enrolled with the Go-To banker. As I mentioned last quarter, this is significant as customers engaged with Go-To have a higher primacy and retention rate. On the commercial side, Umpqua Smart Leads, our predictive analytics tool, assisting bankers serving commercial and corporate customers is now fully implemented throughout our footprint. Our operational excellence initiatives have proven that we can and will continue to find ways for the company to operate more efficiently and effectively.We leverage Go-To strong market appeal and adoption, and continued to optimize our physical footprint. Last year, we completed the consolidation of seven locations, bringing our total to 65 store consolidations since Q3 of 2017. Future store consolidations are included in our plans this year, and we will continue to make progress towards our original store rationalization goal.As mentioned on last quarter's call, management is committed to reducing noninterest expense in 2020. Ron will speak to our additional efficiency opportunities in detail. But once fully implemented, we expect total noninterest expense to be in the $670 million to $690 million range, which encompasses all operational excellence phases and store consolidation efforts.Now back to Ron to cover the financials in more detail.

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 9 of the slide presentation, which contains our quarterly P&L. GAAP earnings per share were $0.38 this quarter, flat with the third quarter and up from $0.36 from the same quarter a year ago. Notable items impacting earnings this quarter were the $10 million negative fair value adjustment on the MSR asset and $2 million of extra disposal costs, offset by $5 million fair value gain on the swap derivative asset as long term interest rates increased this quarter. Ex these items, adjusted earnings were $0.40 per share.Turning to net interest income on Slide 10. Net interest income decreased 1% from Q3, driven primarily by the two fed funds rate declines over the past four months. Discount accretion on acquired loans tick up modestly to $6.9 million this quarter, and is expected to decline over the coming quarters. For the taxable investment income line item, premium amortization on MBS and CMOs was $5.9 million, a decrease of $600,000 quarter-over-quarter. And our interest expense decreased as expected with the recent drop in short term rates. Our interest bearing deposit costs declined 6 basis points this quarter to 1.13%, and we expect a continued decline of the similar amount in Q1.As reflected on Slide 11, our net interest margin declined to 3.51% this past quarter. And the margin excluding discount accretion was 3.40%. We expect the margin to remain around this Q4 level into 2020 without any additional fed funds rate changes. And for every 25 basis point change in rates, we'd expect about 5 basis point impact to the margin, all else been equal, which it really is.We will continue to make adjustments to optimize the balance sheet for potentially lower interest rate environment, including extending duration in the bond portfolio, while reducing premium amortization optionality, reducing the cost of high beta deposit accounts, as Cort mentioned previously and shortening funding duration. Other moves include reducing more transactional and rate sensitive loan production and reallocating those resources to more profitable balanced commercial relationships.Moving now to noninterest income on Slide 12. We generated total noninterest income of $83.7 million for the quarter. The increase in long-term interest rates created a fair value gain on the swap derivative of $5 million, a flip from Q3. And the MSR fair value change is related primarily to the gain reflected on the prior sale including in Q3 results.Before I get into home lending activity, we're pleased to see continued growth in other noninterest income components. As Cort mentioned, recurring fee revenue and treasury management, international banking, commercial card and merchant service charge revenue, was up 24% year-over-year, which contributed to the increase in overall service charge revenue and certain other income categories reported during 2019.For mortgage banking, as shown on Slide 13 and also in more detail on the last two pages of earnings release, for sale mortgage originations increased 26% from the third quarter, while portfolio originations declined as planned. The gain on sale margin was 3.34%, down from Q3 as expected with the lower lock pipeline at year-end. The change in fair value of the MSR asset was a negative $10.4 million this quarter, which has a combination of the consistent passage of time charge of $5.2 million and the $5.1 million due to changes in valuation inputs and assumptions as reflected in the lower table. Included in the assumptions section was a $1.8 million hit on the portion previously sold related early prepays.As discussed last quarter, we're analyzing another potential sale of a similar amount in the first half of this year, and are positioning the asset and allocated capital to focus on more full 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.Total volume for the year was $4.8 billion in originations, up from $4 billion in 2018. The salable mix was 64%, down from 71% in 2018. We are shifting our target origination volume and capital allocation within the business to increase the mix of held for sale originations to 80% in 2020 to improve profitability and reduce volatility.With this absent further fluctuations in interest rates, we are projecting the total volume baseline assumption of $3 billion in 2020 with some upside to that as rates remain low. Gain on sale margins are project projected to be in the low 3% range, and expense for the group to have around 250 basis points total volume.Turning now to Slide 14. Noninterest expense was $183.4 million, about flat from the third quarter. The bridge on the right size shows the moving parts from the third quarter with quarter-over-quarter decreases from lower state and local business taxes, lower marketing expense and a lower loss on OREO, being offset by lower deferred origination costs and higher charitable contributions.Note the efficiency ratio was 59% on the face of the P&L for Q4, but our internal measure is 57% when adjusting out the MSR and CBA fair value charges discussed earlier. At the higher end of the range and expected a year ago but reflective of the recent fed rate cuts impact on margins.Total noninterest expense was $719 million for the year, down 3% from the $739 million reported for 2018. Within this total, direct home lending expense was $114 million for the year, up 8% from $106 million in 2018 due to the overall 20% increase in mortgage volume.As Cort mentioned previously on our last call, we discussed additional initiatives that would reduce our noninterest expense 3% to 5% in 2020 to help offset continued and expected margin pressure. These initiatives include shifting origination volumes we just discussed in home lending, recent store consolidations, additional facility consolidations, technology enabled efficiencies for customer acquisition, reducing transactional lower yield return lending and additional operational efficiencies, such as reduced professional fees. Actions to achieve each of these are already underway. We are internally targeting more than a 5% overall reduction in total expense year-over-year, bringing it into the $672 million to $690 million range with our efficiency ratios excluding fair value adjustments in the mid 50% level.Turning now to balance sheet, beginning on Slide 15. Our interest bearing cash increased to just under $1 billion dollars with the decline in loans allowing opportunities to reduce higher broker deposits and borrowings. The mix of loans and deposits is shown on Slide 16. Our annual loan growth of 4% was centered in residential real estate, C&I and commercial real estate, with the decline in our consumer portfolio resulted in loan sale in Q4 and the targeted wind down of the indirect dealer auto portfolio.Within deposits during the fourth quarter, we reduced higher cost broker deposits by $325 million or 25%, which will lead to a lower cost of deposits in Q1. Offsetting this reduction were seasonal increases in public deposits and continued customer core deposit acquisitions. Annual deposit growth of 6% was centered in noninterest bearing demand balances, money market and time deposits.Slide 17 reflects the repricing characteristics of our loan and lease portfolio. Noting our floating an adjustable rate loan mix remain consistent over the past few quarters. On Slide 18, we've highlighted the geographic diversification of our loan portfolio across the footprint. We also provide some selected loan and underwriting characteristics for each major area. As mentioned on previous calls, we are happy with the granular nature of our loan book.Slide 19 reflects our credit quality stats and highlights the strength of our portfolio as shown by the continued decline in nonperforming assets now down to a very low 0.23% of total assets, and a consistent low level of overall net charge offs. The provision for loan loss decreased $16 million this quarter. In the bottom right chart, we break out our FinTech leasing group net charge offs from that of the rest of the bank. Noting the leasing component has been fairly consistent around 3% to 3.5% for the past year, and fell under that level in Q4. Keep in mind that the weighted average yield in this portfolio is very healthy 10%.And on Slide 20 for CECL, we still expect the allowance for credit loss to be increase to 1% here in the first quarter of 2020. So no change to the level or mix we disclosed last quarter.Lastly on Slide 21, I want to highlight capital. Noting that all of our regulatory ratios remain in excess of well capitalized levels with our tier one common at 11.2% and total risk based capital at 13.9%. We've broken out the mix of each ratio with regulatory well capitalized minimums, our in house cushions above well capitalized and what we consider excess capital. With our quarterly common stock dividend of $0.21 per share, the total payout ratio was 55% this quarter. In addition, our tangible book value per share is $11.39, which when you also account for the $0.84 and annual dividends to shareholders, increased 20% this past year.Our excess capital was approximately $250 million, and will provide us with several opportunities no matter the economic or rate scenario over the intermediate term horizon. And to conclude, our focus is on executing all aspects of our Umpqua NextGen strategy, improving financial results and generating solid return for shareholders over time, including a healthy dividend.And with that, we will now take your questions.

[Operator Instructions] Our first question comes from Steven Alexopoulos from JP Morgan. Your line is now open.

I want to start on the fee income side. So if we look in 2019, there are quite a few moving parts to the fee income story. How are you guys thinking about that and the ability to grow off these levels in 2020?

So Steven hi, this is Tory Nixon. I think that you can break out the fee income side to some areas that we're paying incredible attention to focus on from a growth perspective. And it's around the middle market segment or C&I growth across small business, commercial and corporate banking. And the biggest three areas of focus are going to commercial card income, which is up 28% year-over-year, international banking revenue is up actually 40% year-over-year and our treasury management businesses is up almost 24% as well year-over-year. So I feel very confident. We feel confident that the investments that we're making in the business and the behavior changes within the company will allow us to continue to grow in these areas of the company.

And then I appreciate the guidance for expenses in 2020. Can you parse out, what's the expected benefit from phase three that you're assuming the expense range?

So phase three would be roughly $3 million to $5 million, but I try to simplify and talk about our overall expense range for the year. I also talked about home lending activity. If does hang around at that $3 billion level, I expect we own lowering that range. If we do get some lift in home lending, obviously, to be on the higher end of that expense range, but we will have a corresponding benefit on noninterest income.

Well, I'm trying to figure out, once we get beyond NextGen assuming there's not a phase four, maybe there will be. What do you see is the natural organic growth rate of expenses of the company, particularly with all the digital initiatives?

I'd say from a pure inflation standpoint, 1% to 2% range. But as a bank in the low interest rate environment, we're going to have to continually find ways to operate the company and grow and return for shareholders with more efficient expense base. So if you look back over 10 years, 15 years and you look at our operating expense as a percentage of assets or deposits, we're lower today than we were 10 years ago, and that question was asked then as well. I expect we'll see continued technological efficiencies in gains to help us deliver our value proposition for customers and maintaining stable decrease in expense overtime.

So if we put all this together, how should we think about the efficiency ratio range for 2020? Thanks.

Yes, I expect the efficiency ratio to be in that mid 50% range, excluding the fair value adjustments as rates change, mostly on MSR and CBA, those will be our internal targets within that range.

Our next question comes from Michael Young from SunTrust. Your line is now open.

I wanted to start with just….To start with just the hiring that you called out in the deck, about 60 associates were hired and it sounds like that kind of initiative is complete. Can you talk about any additional hiring or staffing needs going forward? And is that a lot of what's contributing to the efficiency gains this year?

Michael, Tory Nixon again. Of the roughly 60 or so folks we hired, I would say about two thirds of those are new to the -- new positions in the company, kind of net adds in the third or probably replacements kind of upgrades in talent. And they've been across the RM range of commercial corporate banking, small business, as well as support functions of underwriting, treasury management folks, et cetera. And the investment there is in our high growth markets from Seattle down to San Diego. And we've been very strategic and thoughtful in where we're putting people within kind of lining that up with opportunity that we feel that the company has, and feel good about the progress we're making and we will continue to look for talent to add into the company that can support the growth initiatives that we've set out for.

And are most of the lenders that were hired, are they still kind of building their books, or have they really built up the kind of full level at this point?

No, I think they're still -- they're definitely still building their books. There is initial success that happens for many right out of the gate and then you kind of get into a pattern of prospecting and building a pipeline over the course of time and seeing a lot of growth in individual pipelines for most of the bankers.

And maybe just going to the indirect auto book run-off, I think that was maybe an area where some of the loan sales might come from this quarter, just looking at the numbers. Could you talk about what size that's at now and how much of a headwind that will be in 2020?

Yes, under $100 million in that $75 million to $80 million and I expect that will continue to decline. But keep in mind that weighted average yield in that is in the mid 2% range. So that continues to run down as expected that will help on the NIM.

So overall, I mean it seems like the growth outlook has a lot less headwinds than maybe in prior years, and tailwinds from the hiring being a little more steady and consistent from kind of year-over-year basis. Is that the right way to think about it that do we have upside to this growth target?

Michael, it's Cort. Clearly as Tory's added bankers to the business, we did see a little bit of a kind of a industry slowdown in Q4 like most banks just based on myriad of things, trade, economics and the elections. And Tory hit on it, we've hired lot of new bankers who have a lot of room to run, but it probably is more growth. We're being very diligent about where we grow like some of the loan pay-offs or you saw in Q4 with us being a little more critical of ourselves and how we look at the quality of our portfolio assuming very direct and very deliberate about what kind of lending we do.But in addition and Tory talked about it, we also have the great ability to hire people. We've got a great reputation to commercial lending space. Tory and his team done a great job. So if we need to make future investments to continue to exhibit good quality growth, we'll continue to do that. And so far it's paid out very, very well as we've continued to develop the great reputation in CMS space.

Thank you. Our next question comes from Jeff Rulis from D.A. Davidson. Your line is open.

Question on the expenses just to -- the guidance there is, is it true 670 to 690 for the full year, got to hope to hit a run rate of that by the fourth quarter. Correct?

It is correct, 670 to 690 for the full year.

And then Ron, you mentioned the mortgage production tied to the high end of that. Is it safe to say that a mortgage production year like '19 of what $1.8 billion that would align with the 690. Is that -- in other words, you hit that level of production that much more efficient relative to '19?

Actually, within the commentary, what we're really working on there is adjusting the mix to a where we have presently 80% of the total volume for the year in the for sale category, so instant the improvement in the profitability of the unit. So if we're at the $3 billion range of total volume for the year with an 80% mix of conventional for sale, we would be on the lower end of that 670 to 690 expense range, conversely, if we something see volume for the year in the high $3 billion range to $4 billion, will be in the upper end of that expense guidance range.

So high 3 or 4 would be 690, got it. On the -- you mentioned the slide of the excess capital. So looking at minimum TCE levels, I would think that it's the 6% is somewhat unrealistic. But any chance you get any more aggressive with capital deployment kind of you're seeing a little more visibility and any thoughts on lowering that TCE much below 9?

Could be, I'd say this past quarter, the excess capital did lift a business, just given what happened within the loan book and again, some of the targeted sales and payoffs we saw. First and foremost though on capital return, we want to focus on dividend, very healthy dividend return yielding say high number right and high 4% range. So with our growth plans though over the balance of 2020, I don’t expect to see anything significant else other than maintain that dividend and look to increase in the future. But buybacks will continue to be targeted towards just keeping the share count flat and repurchasing shares issued under various equity comp plans. And it gives us a great opportunity as things change, because Lord knows, if the environment will change in the future.

And last one, not sure if this is alluded to, if I missed it. Was there a growth target on maybe say loans for '20? You put up 4% this year and I think it was characterized as less, maybe less headwinds. Have you put a number out there? What you think you could meet that or be for 20?

We're targeting mid single digit growth from left and right side of the balance sheet. And again, key is funding good solid commercial lending with core deposits. So that will obviously the goal.

Thank you. Our next question comes from Jared Shaw from Wells Fargo Securities. Your line is open.

Just sticking with the expense discussion, because that's pretty amazing, it's great target. The way you describe it, though, it sounds like it's still going to be layered in as we go through the year. So as you look out at fourth quarter, I mean should we be expecting expense declines or sequentially as we go through the year? So keeping everything else equal and then starting 2021 at a better base.

Well, I'd say, again, we laid our guidance for the full year of the 670 to 690. Through the year, there are some moving parts. You get higher payroll related taxes from the first half of the year less than the second half. Home lending coming out of the gates is strong here in Q1 but generally, that's been a bell curve. So I would expect the Q4 expense level to be a bit less than the Q4 level just based on the traditional moving parts. But no, we're not expecting a significant slope down over the course of the year. So I expect more of a bell curve with home lending activity driving the pieces in the middle of the year.

And then as we look at the expense reductions and potentially pulling back on some business lines. Is there revenue offset that we should think of associated with that as well?

I think the bigger moving part on that front again go back to mortgage lending home lending, and we're able to -- and we have seen the pipelines changed to where we get hiring plus 80% mix on the conventional or for sale component of that, you'll see a revenue benefit too. Whereas you know in past years a higher percentage, this last year was 36% was on the portfolio side, that doesn’t have a direct revenue benefit in that quarter.

Better part from like the mortgage, the dynamics with mortgage banking on other fee income. We shouldn’t expect to see a big change in components there?

No, not change in components. But you heard Tory and Cort talk about a lot of the growth areas. We do expect those to continue to grow incrementally over the course of 2020.

And then on the margin, I guess I'm a little surprised that there is now a little more optimism for expanding margin, given the opportunities on the funding side, as well as some of the runoff of the lower yielding loans, so that's just more conservatism in how you're looking at it or are there some other dynamics there?

There's other dynamics in terms of like bond prepays and influencing the premium amortization on the MBS CMO. I mean we've making moves to reduce that volatility just with a lot of the mix. But I would say we are able to maintain that mid single-digit loan growth. You will see the margin in this range. Now the reported margin of course includes discount accretion. This past quarter, we had a little under $7 million of that, it was a bit higher than what we saw in the third quarter. That will continue to trend down, so lot of moving parts in there. But assuming no further Fed changes we'll be in this 3.4 to 3.5 range ex discount accretion.

And then just finally for me, Cort, maybe you could give an update on your thoughts on M&A here and being able to take some of the improved operational efficiency you have in house and export it to just another franchise?

I would need to say, because this is how we live life here, is that our main core emphasis is what we do, is operating this company organically and continuing to drive better efficiencies and better profitability. And we’ve shown that over the last three years and I'm happy to have been able to lead the charge. But clearly, taking advantage of opportunities today or in the future has always kind of been on our radar, although, it's been second seat to organically growing this company. I would say the need for greater scale, the need for getting potentially into new markets we maybe have raised our level of awareness on opportunities.I think we've got good momentum of what we're doing in the company, good organic growth. We've shown everybody that we can drive efficiencies down and manage expense. So we are taking a little more time today to pay attention to things that come across transcend. And we look at everything that’s out there. And if it doesn’t fit strategically, it's always a pass. But if there is something that we think is strategic and can add to the overall return to shareholder, we'll certainly take shot at or at least we considered here.

Thank you. And our next question comes from Tylor Stafford from Stephens. Your line is open.

I just wanted to clarify on the expenses. So 4Q, just thinking about the cadence of the cost savings and cost initiatives throughout 2020, the fourth quarter is expected to be at the low point. And then Ron I think you said obviously there is going to be the normal bell weather seasonality and volatility from the mortgage, but that will be the low point. And then given this revenue environment that's more challenging, you think kind of a flattish expense growth is needed to operate efficiently here. Is that a correct summarization?

That is, and in future years, it'd be flat if not down.

And then the mid-50s efficiency ratio for 2020 implies also some stronger revenue as well. If I'm reading the fee income slide three correctly, you guys have realized around $21 million or so of the $30 million to $40 million of revenue synergies. What are you guys assuming in terms of 2020 revenue synergies with the next gen to hit that efficiency target?

From that standpoint, I'd expect us to see continued up slope on that level. I don't believe we'll be into that mid-$30 million range, just given where we ended '19 and we talked about that two years ago as we laid out the next gen initiatives. But we do fully expect to continue to grow in the noninterest income categories. So I look at that slope and project that into '20.

And then just to clarify, the mid-single digit growth expectation for this year. Are you guys including any more indirect run offs?

We are, yes.

And could you quantify how much?

Yes, right now the portfolio is little less than $100 million. So it's not going to have a significant impact on that growth rate.

And then the yields of the indirect that you ran off this quarter and then the cost of the funding that you ran off as well. Can you provide those?

It's pretty close. Right, I mean, the yield on the loan book, on the indirect book was in that 2.6% to 2.7% range and the cost of the broker deposits that are on a couple of quarters ago is probably just a hair under it, maybe a quarter to 3 it's under that.

Thank you. Our next question comes from Jackie Bohlen from KBW. Your line is open.

I wanted to touch on the production, just to make sure I understand that properly in terms of mortgage banking. The $3 billion that total correct and then the 80% you're targeting is a percentage of the $3 billion. So what you're looking to sell would be lower than $3 billion. Is that accurate?

Correct, total production goal for the year be $3 billion, of which we're targeting 80% of that being for sale. And there are some tailwind on that number just given where rates are to where we could end up higher than that over the course of the year, which would push us in the up -- up the range on the expense side.

And then in terms of MSR, I know you had the impact of the sale in the quarter. Is that the next piece that you're looking to sale? Correct me if I'm wrong, you said it would be similar level. Is that a 1Q event or a 2Q event?

It's most likely 2Q execution with Q1 recognition.

So would there be any servicing income -- outside of MSR mark, so there'd be any servicing impact in 1Q, or would they all be realized in 2Q?

On the servicing income side that'd be 2Q forward. So you look back at the trend this past year, you can project that into 2020.

And then as I understand what you said in your prepared remarks, with $1.8 million of the non-normalized amount of amortization that took place on MSRs in the quarter, that was specifically related to the sale. So if that hadn't occurred, all else equal, that mark would have been lower, right?

That is correct. Yes, there's isn't any detail on early prepays, so let's say hope and that's what that $1.8 million reflected. The balance of the $3 million was really reflected to the fact that fed funds rates dropped over the years, so the earning credit on the escrow deposit balances was lower.

And then once you complete the next piece of the MSR sale. Does that put you in a position where you're pleased with where you stand and most of what's remaining in the servicing portfolio relationship driven?

Correct. Yes, we feel really good about it.

And then most everything else has already been asked. But I just wanted to touch base on the impact from state and local business taxes. Was that a onetime event in the quarter?

It was. I mean it's pretty small. Every once and a while on a quarterly basis through the year, we get swing from that up and down, but pretty small amount just in terms of true ups on filing returns.

So nothing that would swing EPS one way or the other really?

So it's less than a third.

Thank you. And our next question comes from David Chiaverini from Wedbush. Your line is open.

So following up on the expense discussion, you listed a few areas that savings are going to come from, shifting focus in mortgage, store consolidations, facility consolidations, tech efficiencies and reduce professional fees. Now, I'm assuming since you lifted the shifting focus in mortgage first that most of the savings could come from there. So I was wondering, are you able to disclose how much of the cost savings things are expected to come from mortgage banking, assuming the midpoint of that 60 million to 80 million level?

Roughly, so on the volume and mortgages as ballpark 250 basis points of that volume from an expense standpoint. So that's probably the largest single individual item within the overall year-over-year expense decline. But there's a handful of other path followers, including professional fees and some other items we've had here over the past year, which we don't expect to return in 2020. In large part, I'd have to lift that out in that order just from standpoint, from size standpoint but there's more so just as we had just talked about it prior to the expense discussion.

And then shifting to the store consolidations with -- you’re hitting the last sort of slug of closings here. Well, I guess first, is the target still 100 store consolidations? I guess is the first question, assuming that is the case. It implies 35 more stores to be closed. I imagined the low hanging fruit has clearly been kind of picked over in the final kind of 35, are going to be more difficult to come by. Would you say that there's a bit more risk with this next slug of closings in terms of either deposit attrition or to the extent that you are getting some mortgage banking sales through these branches. Could you talk about that a little bit?

David, it's Cort. So yes, the original guidance we gave late in '17 was for 100 stores over a period of time. And as you mentioned, we've done 65. You asked can we have done the low hanging fruit, the obvious consolidations for stores that are a mile away and what not. So I mean yes, they become more difficult, primarily the difficult decision is because of increased performance in the stores. In other words, the work that the retail store folks have done in generating these 17,000 new customers at the bank, the things that we were doing in the store to increase penetration with products. That's made it difficult but has made the assessment more difficult, because performance has increased over the last two and half to two years.So we will and I -- we will continue to rationalize our stores in 2020, and we will do more consolidations this year. Is the number going to be 100 this year, that's been our target and we will continue to assess it. If we feel like we're not going to hit that hundred, we will come back and talk you guys. But we still have that that target out there.And Ron has include the store rationalizations in the number that we guided to. But you hit the nail on the head. It's based mostly upon the fact that the stores are doing a better job generating new customers, and we've seen great increase over the year. So if we have to get expense saves in other areas, we will use that as a way to potentially offset if we don't do another 35. But we are always rationalizing our store count.

[Operator Instructions] Our next question comes from Michael Young from SunTrust. Your line is now open.

Ron, just on the margin, the 340 to 350 kind of core margin, I think you talked about for the year. Is that inclusive of the higher level of premium amortization, or is that exclusive of that?

That assumes a consistent rate environment that prepays stay around this level and the amortization stays around the level you've seen here this past quarter or two.

But it's exclusive of the accretable yield, so the reported margin will be a little higher than that 340 to 350?

Correct, but that number too will be declining overtime…

Is there any step down in that related to CECL in 1Q that we should be thinking about?

Not material.

And then lastly just on that bond book that’s generating the premium amortization. You mentioned of potentially trying to reduce that or reduce the risk of the premium amortization going forward. Can you talk anymore granularly about what that would look like or when that might occur?

I mean, you look back over the past year, right now we've got roughly 25% to 30% of the book in longer dated bullet agency securities. So it reduces that volatility on the amortization. And we'll continue to target replacement, investment and purchases in that area and/or lower coupon MBS. There is less volatility on the premium amortization side, so my goal is to reduce that -- those fluctuations or swings overtime.

But it's really more on margins or when they come due, you'll look to reposition versus maybe posting a piece of the book for sale, or more aggressive restructuring?

Correct. We did that back in the second quarter of 2019. And since then, it's just been incremental adjustments as you go on a flow basis through the year. I expect that will continue to 2020. And no targeted restructure or divestiture segment for the portfolio at this time.

Thank you. And our next question comes from David Chiaverini from Wedbush. Your line is open.

I know you received an M&A question earlier, so you may have already answered this. But I just received a question through email from an investor, and they are wondering about if you're thinking about MOEs or possibly partnering with a bigger bank. Any thoughts there?

It goes back to the answer I gave before. We always look at everything we do, whether it's investing in teams, or technology, or acquisitions, or mergers or what have it be. This is strategically fit. Does it work to help us achieve success against our strategic plan? That's how we look at every investment we make. So whether it's an MOE or hiring a team, we use that as the barometer and the number one check. And that would be my answer, but we look at everything strategically. Does it continue to help us grow, our commercial banking business, our full relationship banking, our retail stores, all the things that we do. That's how we evaluate any decision we make.

Thank you. And that concludes the questions in the queue at this time. I'll turn the call back to the presenters.

Okay, thank you Cheryl. And I want to thank everyone for their interest in Umpqua Holdings and their attendance on the call today. This will conclude the call. Goodbye.

Thank you very much for joining us today. The call has now concluded. You may disconnect.