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Umpqua Holdings Corp (NASDAQ:UMPQ)
Q4 2019 Earnings Call
Jan 23, 2020, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Umpqua Holdings Corporation Fourth Quarter 2019 Earnings Call. [Operator Instructions] 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 Farnsworth -- Executive Vice President and Chief Financial Officer

Great. Thank you, Cheryl. 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 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 fourth quarter 2019 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 I'll now turn the call over to Cort O'Haver

Cort O'Haver -- President & Chief Executive Officer

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'll take your questions.

2019 was another solid year for Umpqua, highlighted by strong financial performance, continued loan and deposit growth, and tremendous progress implementing the initiatives within our Umpqua Next Gen 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 is an increase from the $0.36 we reported in the fourth quarter of 2018. For the year, the Company earned $1.60 per share, which represents a 17% improvement over the 2018 earnings of $1.43 per share.

Turning to the balance sheet, during the quarter, loan and lease balances declined on a point-to-point basis by $325 million or 1.5%, while average balance -- 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 the prior quarter and that can be summarized as a third related to business transactions, including customer M&A a third due to competitive pricing and 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 Next Gen initiative. 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 continues 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 a significant -- 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 leveraged Go-To's strong market appeal and adoption and continue to optimize our physical footprint. Last year, we completed the consolidation of seven -- last quarter, 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 toward our original store rationalization goal.

As mentioned on last quarter's call, management is committed to reducing non-interest expense in 2020. Ron will speak to our additional efficiency opportunities in detail, but once fully implemented, we expect total non-interest 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.

Ron 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 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 in 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 exit/disposal costs offset by a $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 ticked 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 a 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 a 5 basis point impact to the margin, all else being equal, which it rarely is.

We will continue to make adjustments to optimize the balance sheet for a 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 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 to -- is related primarily to the gain reflected on the prior sale included 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 in 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 in the last two pages of our 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 a lower lock pipeline at year-end.

The change in fair value of the MSR asset was a negative $10.4 million this quarter, which is 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 to 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 saleable 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 if rates remain low. Gain on sale margins are projected to be in the low 3% range and expense for the Group to hover around 250 basis points of total volume.

Turning now to Slide 14; non-interest expense was $183.4 million, about flat from the third quarter. The bridge on the right side 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 was 57% when adjusting out the MSR and CVA fair value charges discussed earlier. At the higher end of the range than expected a year-ago, but reflective of the recent fed rate cuts impact on margin.

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 the origination volumes which 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 under way. We are internally targeting more than a 5% overall reduction in total expense year-over-year bringing it into the $670 million to $690 million range with our efficiency ratio excluding fair value adjustments in the mid 50% level.

Turning now to the balance sheet, beginning on Slide 15, our interest bearing cash increased to just under $1 billion with the decline in loans allowing an opportunity to reduce higher cost brokered 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 a 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 brokered 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 acquisition. Annual deposit growth of 6% was centered in non-interest bearing demand balances, money market and time deposits.

Slide 17 reflects the repricing characteristics of our loan and lease portfolio, noting our floating and adjustable-rate loan mix remained 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 non-performing 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 FinPac 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 of this portfolio is a very healthy 10%.

And on Slide 20 for CECL, we still expect the allowance for credit loss to be increased 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 1 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 in annual dividends to shareholders, increased 20% this past year.

Our excess capital is 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 Next Gen 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

Thank you. [Operator Instructions] Our first question comes from Steven Alexopoulos from J.P. Morgan. Your line is open.

Steven Alexopoulos -- J.P. Morgan. -- Analyst

Hi everybody.

Cort O'Haver -- President & Chief Executive Officer

Good morning, Steve.

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning.

Steven Alexopoulos -- J.P. Morgan. -- Analyst

I wanted to start on the fee income side. So if you look at 2019, there were 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?

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

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 and focus on from a growth perspective and it's around this middle market segment, our C&I growth across small business, commercial and corporate banking and the biggest three areas of focus are going to be commercial card income, which is up 28% year-over-year; international banking revenue was up actually 40% year-over-year; and our treasury management business 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 behaviour changes within the Company will allow us to continue to grow in these areas of the Company.

Steven Alexopoulos -- J.P. Morgan. -- Analyst

Okay. Alright, that's helpful. And then, appreciate the guidance for expenses in 2020, can you parse out what's the expected benefit from Phase III that you're assuming the expense range?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

The Phase III component will be roughly $3 million to $5 million, but I'll try to simplify and talk about our overall expense range for the year. I also talked about home lending activity. You know if it does hang around that $3 billion level, I expect we are on the lower end of that range. If we do get some lift in home lending, obviously it'll be on the higher end of that expense range, but we'll have a corresponding benefit on non-interest income.

Steven Alexopoulos -- J.P. Morgan. -- Analyst

Okay. What I'm trying to figure out, once we get beyond Next Gen, assuming there's not a Phase IV, maybe there will be. What do you see as the natural organic growth rate of expenses of the Company, particularly with all the digital initiatives?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

I'd say from a pure inflation standpoint, 1% to 2% range. But as a Bank in a low interest rate environment, we're going 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 I -- that question was asked then as well.

I expect we'll see continued technological efficiencies and gains to help us deliver our value proposition for customers and maintain stable if not decreasing expense over time.

Steven Alexopoulos -- J.P. Morgan. -- Analyst

So when you put all this together, how should we think about the efficiency ratio range for 2020, thanks?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

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

Steven Alexopoulos -- J.P. Morgan. -- Analyst

Okay. Thanks for taking my questions.

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

You bet, thank you.

Operator

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

Michael Young -- SunTrust -- Analyst

Hey, thanks for taking the question. Wanted to...

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning.

Michael Young -- SunTrust -- Analyst

Good morning. Wanted to start with just the hiring that you called out in the deck, about 60 associates were hired. 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?

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

Yeah. Hi Michael, it's Tory Nixon again. You know 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 and a third are probably replacements kind of upgrades in talent, and they've been across the RM ranks of commercial corporate banking, small business as well as support functions of underwriting, treasury management folks etc. and that -- the investment there is in our high growth markets from Seattle down to San Diego.

We've been very strategic and thoughtful in where we're putting people with -- and 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.

Michael Young -- SunTrust -- Analyst

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

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

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.

Michael Young -- SunTrust -- Analyst

Okay. 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 have 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?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

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

Michael Young -- SunTrust -- Analyst

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

Cort O'Haver -- President & Chief Executive Officer

Hey Michael, it's Cort. You know clearly as Tory has added bankers to the business, we did see a little bit of a -- kind of an industry slowdown in Q4, like most banks, just based on a myriad of things; trade, economics, pending elections, blah, blah, blah.

But -- and Tory hit on it. We've hired a lot of new bankers who have a lot of room to run. So there probably is more growth. We're being very diligent about where we grow like some of the loan payoffs you saw in Q4 with us being a little more critical of ourselves and how we look at the quality of our portfolio. So I mean 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 and we've got a great reputation in the commercial lending space. Tory and his team has 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. So far it's paid off very, very well as we continue to develop a great reputation in the C&I space.

Michael Young -- SunTrust -- Analyst

Okay, thanks.

Operator

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

Jeff Rulis -- D.A. Davidson Inc. -- Analyst

Thanks, good morning.

Cort O'Haver -- President & Chief Executive Officer

Good morning, Jeff.

Jeff Rulis -- D.A. Davidson Inc. -- Analyst

Question on the expenses, just -- the guidance there, is it true $670 million to $690 million for the full year, not hope to hit the run rate of that by the fourth quarter, correct?

Cort O'Haver -- President & Chief Executive Officer

It is correct $670 million to $690 million for the full year.

Jeff Rulis -- D.A. Davidson Inc. -- Analyst

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, $4.8 billion, that would align with the $690 million, is that -- so in other words, you hit that level of production, you're that much more efficient relative to '19?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Actually within the commentary, what we're really working on there is adjusting the mix to where we have approximately 80% of the total volume for the year in the for sale category, so you have instant 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 million to $690 million expense range. Conversely, if we've something [Phonetic] to see volume for the year in the high $3 billion range to $4 billion, we'll be on the upper end of that expense guidance range.

Jeff Rulis -- D.A. Davidson Inc. -- Analyst

Okay. So high $3-billion, low-$4 billion would be a $690 million, got it. On the -- you mentioned the slide of the excess capital. I guess per CECL, looking at minimum TCE levels, I would think that, I guess 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%?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

It could be, I'd say this past quarter the excess capital did lift a bit, just given what happened within the loan book, and again, some of the targeted sales and payoffs we saw. First and foremost so on capital return, we want to focus on dividend, very healthy dividend return, yielding today high number, right in the high 4% range.

So with our growth plans over the balance of 2020 I don't expect to pursue anything significant else -- other than maintain that dividend and look to increase in the future. But buybacks will continue to be targeted toward 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 [Phonetic] knows the environment will change in the future.

Jeff Rulis -- D.A. Davidson Inc. -- Analyst

Okay and last one. Not sure if this was alluded to or if I missed it. Was there a growth target on maybe say loans for '20? You put up 4% this year and think it was kind of characterized as less -- maybe less headwinds. Have you put a number out there on what you think you could meet that or beat for '20?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

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

Jeff Rulis -- D.A. Davidson Inc. -- Analyst

Great, thank you.

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

You bet, thanks.

Operator

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

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi, good afternoon everybody.

Cort O'Haver -- President & Chief Executive Officer

Good morning [Phonetic] Jared.

Jared Shaw -- Wells Fargo Securities -- Analyst

Just sticking with the expense discussion because that's pretty amazing. It's a 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, sort of keeping everything else equal and then starting 2021 at a better base?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Well, I'd say again, we laid our guidance for the full year, the $670 million to $690 million. Through the year, there are some moving parts. You get higher payroll related taxes in the first half of the year, less in the second half. Home lending is coming out of the gates, still 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 -- Q1 [Phonetic] 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.

Jared Shaw -- Wells Fargo Securities -- Analyst

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

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

You know I think the bigger moving part on that front is going to be -- again, going back to mortgage lending, home lending and we're able to, you know, and we have seen the pipeline is changed to where we get a higher, you know closer to 80% mix on the conventional or the for sale component of that. You will see a revenue benefit to it, whereas you know in past years, a higher percentage this past year, about 36% was on the portfolio side. That doesn't have a direct revenue benefit in that quarter, right.

Jared Shaw -- Wells Fargo Securities -- Analyst

But apart from like the mortgage, the dynamics with mortgage banking on other fee income, we shouldn't expect to see a big change in the components there?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

No, not change in components, but as 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.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. And then on the margin, I guess I'm a little surprised that there is not a little more optimism for expanding margin given the opportunities on the -- on the funding side as well as some of the run-off of the lower yielding loans. Is that just more conservatism in how you're looking at it or are there some other dynamics there?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Well, there is other dynamics in terms of like bond prepays influencing the premium amortization on the MBS CMO, and we've been making moves to reduce that volatility just with a lot of the mix. But I'd say we're able to maintain that mid-single-digit loan growth, you'll 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 a 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.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great, thanks. And then just finally from 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 some other franchise?

Cort O'Haver -- President & Chief Executive Officer

Yeah. So 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 that charge.

But clearly, taking advantage of opportunities whether it's today or in the future, it 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 may be have raised our level of awareness on opportunities.

I think we've got good momentum on 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 of the day to pay attention to things that come across transcend. 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 the shareholder, we'll certainly take a shot at it or at least are considered here.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great, thanks for the color.

Operator

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

Tyler Stafford -- Stephens Inc. -- Analyst

Hey, good afternoon guys.

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Hey, Tyler.

Tyler Stafford -- Stephens Inc. -- Analyst

Hey, 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 the low point. And then Ron, I think you said, obviously there is going to be kind of the normal bellwether 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?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

That is. And in future years it will be flat if not down.

Tyler Stafford -- Stephens Inc. -- Analyst

Okay, great. And then the mid-50s efficiency ratio for 2020 implies also some stronger revenue as well. If I'm reading the fee income Slide 3 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?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

From that standpoint I'd expect just to see continued F-slope [Phonetic] on that level. I don't believe we'll be in that mid $30 million range just given where we ended '19 and we talked about that three years, two years ago, as we laid out the Next Gen initiatives. But we do fully expect continued growth in those noninterest income category. So I look at that slope and project that into '20.

Tyler Stafford -- Stephens Inc. -- Analyst

Okay, great. And then just to clarify, the mid-single digit growth expectation for this year, are you guys including anymore indirect run-offs?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

We are, yeah. [Speech Overlap]

Tyler Stafford -- Stephens Inc. -- Analyst

And did you quantify how much?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

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

Tyler Stafford -- Stephens Inc. -- Analyst

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?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

They're pretty close, right. I mean the yield on the loan book on the indirect book was in that 2.6%, 2.7% range and the cost of the broker deposits put on a couple of quarters ago was probably just a hair under it, maybe a quarter to three-eight's under that.

Tyler Stafford -- Stephens Inc. -- Analyst

Okay, great, that's it from me. Thanks Ron.

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Yeah, thanks.

Operator

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

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

Hi, good morning.

Cort O'Haver -- President & Chief Executive Officer

Good morning, Jackie

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Hi Jackie.

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

Wanted to touch on the production, just to make sure I understand that properly in terms of mortgage banking. The $3 billion, that's 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?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Correct. Total production goal for the year will be $3 billion of which we're targeting 80% of that being for sale.

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

Okay, OK.

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

And there is 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 upper -- up the range on the expense side.

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

Okay, OK. No, understood about that. And then in terms of MSR. I know that you had the impact of the sale in the quarter. The next piece that you're looking to sell, correct me if I'm wrong, but you said it would be at similar level. Is that a 1Q event or a 2Q event?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

It most likely will be a 2Q execution with Q1 recognition.

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

Okay. So would there be any servicing income outside of MSR marks? Will there be any servicing impact in 1Q or would it all be realized in 2Q?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

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

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

Okay. And then as I -- as I understand what you said in your prepared remarks was $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?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

That is correct. Yeah there is many detail on early prepays plus sale, 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 year, so the earning credit on the escrow deposit balances was lower.

Tyler Stafford -- Stephens Inc. -- Analyst

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

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Correct. Yeah, we feel really good about it.

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

Okay. Sorry for so many technical questions.

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

That's OK, that's good.

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

And then, most everything else has already been asked, but I just wanted to touch base on the impact on state and local business taxes, was that a one-time event in the quarter.

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

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

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

Okay, so nothing -- nothing that would swing EPS one way or the other, really.

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

No. no, it's less than a third.

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

Okay. Okay, great. Everything else already asked. Thank you.

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Great, thank you, Jackie.

Operator

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

David Chiaverini -- Wedbush Securities Inc. -- Analyst

Hi, thanks. A couple of questions for you. 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 reduced professional fees. Now, I am assuming since you listed 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 are expected to come from mortgage banking, assuming the midpoint of that $680 million level.

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Yeah, good point. Roughly -- so on the volume in mortgage, it's 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 is a handful of other fast followers including professional fees and some other items we've had here over the past year which we don't expect to recur in 2020 and in a large part, I didn't list that out in that order, just from a standpoint -- from a size standpoint it's more so, just because we had just talked about it prior to the expense discussion.

David Chiaverini -- Wedbush Securities Inc. -- Analyst

Got it. And then shifting to the store consolidations with you hitting the last sort of slug of closings here. Well, I guess first, is the target is still a 100 store consolidations. I guess is the first question. Assuming that is the case, that implies 35 more stores to be closed. I imagine the low hanging fruit has clearly been kind of picked over and the final kind of 35 are going to be more difficult to come by.

Would you say that there is a bit more risk with this next leg of closings in terms of either deposit attrition or to the extent that you're getting some mortgage banking sales through these -- through these branches. Could you talk about that a little bit?

Cort O'Haver -- President & Chief Executive Officer

Yeah David, it's Cort. So yeah, the original guidance we gave late in 2017 was for 100 stores over a period of time. And as you mentioned we've done 65. Yes and we have done the low hanging fruit, the obvious consolidations. The stores that are a mile away and whatnot. I mean, yes, they become more difficult, primarily the difficult decision is because of their increased performance in the store.

So in other words, the work that the retail store folks have done in generating these 17,000 new customers to the bank, the things that we were doing in the store to increase penetration with products has made it difficult -- has made the assessment more difficult because their performance has increased over the last 2.5 years to two years.

So we will and I -- we will continue to rationalize our stores in 2020. We will do more consolidations this year. Is the number is going to be a 100 this year? That's been our target, and we'll continue to assess it. If we feel like we're not going to hit that 100, we'll come back and talk to you guys. But we still have that target out there.

And Ron has included the store rationalizations in the number that we guided to. And -- but you hit the nail on the head. It's based mostly upon the fact that the stores are doing a better job of generating new customers, and we've seen great increase over the year. So if we have to get expense saves in other areas we'll use that as a way to potentially offset, if we don't do another 35. But we are always rationalizing our store count.

David Chiaverini -- Wedbush Securities Inc. -- Analyst

Thanks very much.

Cort O'Haver -- President & Chief Executive Officer

Yeah.

Operator

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

Michael Young -- SunTrust -- Analyst

Hey, thank you for the follow-up. Ron, just on the margin, the 3.40% to 3.50% kind of core margin, I think you talked about for the year, is that inclusive of the -- I guess higher level of premium amortization or is that exclusive of that?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

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

Michael Young -- SunTrust -- Analyst

Okay. But it's exclusive of the accretable yield, so the reported margin will be a little higher than that 3.40% to 3.50%?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Correct. But that number still will be declining overtime with better accretive deals.

Michael Young -- SunTrust -- Analyst

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

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Not material.

Michael Young -- SunTrust -- Analyst

Okay. And then lastly, just on that bond book that's generating the premium amortization, you'd made a mention of potentially trying to reduce that or reduce the risk of the premium amortization going forward, can you talk any more granularly about what that would look like or when that might occur?

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Sure. I mean you look back here 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 a replacement investment purchases in that area and/or lower coupon MBS so there's less volatility on that premium amortization side. So my goal is to reduce that -- those fluctuations or swings over time.

Michael Young -- SunTrust -- Analyst

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

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Correct, 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 into 2020 and no targeted restructure or divestiture of segments of the portfolio at this time.

Michael Young -- SunTrust -- Analyst

Okay, thank you.

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

You bet, thanks

Operator

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

David Chiaverini -- Wedbush Securities Inc. -- Analyst

Thanks for the follow-up. And I know you've 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 there were wondering about if you're thinking about MOEs or possibly partnering with a bigger bank, any thoughts there?

Cort O'Haver -- President & Chief Executive Officer

Yeah, 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 what have it -- what have it be around just a strategically fit. Does it work to help us achieve success against our strategic plan? That's how we -- 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 -- as the barometer and the number one check. And that would be my answer, if it's -- 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.

David Chiaverini -- Wedbush Securities Inc. -- Analyst

That makes sense. Thanks very much.

Cort O'Haver -- President & Chief Executive Officer

Yeah. Thank you.

Operator

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

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

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.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Ron Farnsworth -- Executive Vice President and Chief Financial Officer

Cort O'Haver -- President & Chief Executive Officer

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

Steven Alexopoulos -- J.P. Morgan. -- Analyst

Michael Young -- SunTrust -- Analyst

Jeff Rulis -- D.A. Davidson Inc. -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Tyler Stafford -- Stephens Inc. -- Analyst

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

David Chiaverini -- Wedbush Securities Inc. -- Analyst

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