Q4 2019 Earnings Call
And we'll come to the I'll call Holdings Corporation fourth quarter 2019 earnings call, Oh, I'm, sorry, they listen only mode. However, we will be conducting acuity session at the end of the coal.
A reminder, this conference is being recorded at this time I would like to turn the conference over to Mr., One Farnsworth Chief Financial Officer. Please go ahead Sir.
Great. Thank you Sheryl good morning, Thank you for joining us today on our fourth quarter and full year 2019 earnings call with me. This morning are Cort Ohaver, the president and CEO of Umpqua Holdings Corporation.
Turing Nixon, our chief banking officer.
The Laurie or Chief strategy Officer.
Dave Shotwell, or chief risk Officer, and Frank Mandara, Chief Credit Officer.
After our prepared remarks, we will then take questions.
Yesterday afternoon, we issued an earnings release discussion or fourth quarter 2019 results.
Also prepared a slide presentation, which we will refer to during my remarks. This morning.
Both of these materials can be found on our website at 'em for bank Dot 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.
Our lives the factors that may cause actual results to differ materially from expectations.
Please refer to page two of earnings conference call presentation.
As well as the disclosures contained within or if you see filings.
I'll now turn the call over to Cort Ohaver.
Okay. Thanks, Ron let me begin by providing a recap of our fourth quarter and for your 2019 performance and accomplishments.
Rob will discuss the financials in more detail and then we'll take your questions.
2019 was another solid year for employee highlighted by strong financial performance continued loan to deposit growth and tremendous progress implementing the initiatives within our own corn Nexgen strategy.
We had a strong fourth quarter with earnings per share of 38 cents. This matches. The 38 cents. We earned in the prior quarter. There's an increase from 36 cents reported in the fourth quarter 2018.
For the year the company earned $1.60 per share, which represents a 17% improvement over the 2018 earnings of $1.43 for sure.
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% well 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 like 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 pay offs and paydown activity compared with prior quarter and that can be summarized in the third related to business transactions, including customer M&A.
A third due to competitive pricing and terms any third and specific risk management decisions.
For the fiscal year 2019 loan and lease balances grew $773 million were 4% highlighted by growth in both the residential real estate in CNR categories.
During the fourth quarter deposits grew $47 million I mean that 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 exit, but higher cost broker deposits totaling $325 million.
For the year deposit growth was $1.3 billion or 6% with strong growth noninterest bearing demand balances money market and time deposits.
I'm, especially pleased with the growth we achieved in D.A. balances, including the net increase of more than 17000 deposit accounts, we acquired during 2019.
And now for an update on the <unk> Nexgen initiative.
As evidenced by the loan to 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.
Recurring 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 or human digital Strategics initiative I think we'll go to continues to serve as an important differentiator for the company and I'm pleased to report we surpassed more than 45000 customers a world where 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 retention rate.
Well the commercial side of course smart leads our predictive analytics tool assisting banker serving commercial corporate customers is now fully implemented throughout our footprint.
Our operational excellence initiatives have proven that we and can and will continue to find ways for the company to operate more efficiently and effectively.
We leveraged go to strong market appeal and adoption it continued 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 2017 future store consolidations are included our plans. This year, 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.
Well I 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 in store consolidation efforts.
Now back to Ron to cover the financials in more detail.
Okay. Thank you Gordon and for those on the called waterfall, along I'm, referring to certain page numbers from earnings presentation.
Turning to page nine of the slide presentation, which contains our quarterly pinedale.
GAAP earnings per share were 38 cents this quarter flat with the third quarter and up from 36 cents in the same quarter a year ago.
Notable items impacting earnings this quarter, where the 10 million dollar negative fair value adjustment on the MSR asset.
And $2 million of extra disposal costs.
Offset by 5 million dollar fair valued gain on the swap derivative asset as long term interest rates increased this quarter.
Ex these items adjusted earnings were 40 cents 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 the $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 see Imos was $5.9 million decrease of 600000 quarter over quarter.
And our interest expense decreased as expected with the recent drop in short term rates.
Our interest bearing deposit costs declined six basis points this quarter to 1.13% and.
And we expect to continue 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 five basis point impact to the margin all else equal which really is.
We will continue to make adjustments optimize the balance sheet for potentially lower interest rate environment, including extending duration bond portfolio, while reducing premium amortization optionality.
Reducing the cost of high beta deposit accounts. This court mentioned previously and shortening funding duration.
Other moves include reducing more transactional rate sensitive loan production.
And reallocating those resources to more profitable balance commercial relationships.
Moving now to non interest income on slide 12.
We generated total non interest income of $83.7 million for the quarter.
The increase in long term interest rates created a fair valued gain on the swap derivative of $5 million a slip from Q3.
And the MSR fair value changes related to its related primarily to the gain reflected on the prior sales increase including in Q3 results.
Before getting to home lending activity, we're pleased to see continued growth in other noninterest income components.
As court 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 in 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 a lower lock pipeline at year end.
The change in fair value 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 assumption section was a 1.8 million dollar hit on the portion previously sold related to early Prepays.
As discussed last quarter ran wasn't another potential sale of a similar amount and the first half of this year.
And our position in the asset and allocated capital to focus on more for relationships carrying deposit balances, which will improve the overall profitability the business.
And reduce potential future volatility to the pinedale from these rate related changes.
Total volume for the year was $4.8 billion in originations.
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 and 2020 with some upside to that if rates remain low.
Gain on sale margins or predict projected to be in the low 3% range and expense for the group to hover around 250 basis points total volume.
Turning now to slide 14.
Non interest expense was wondering $83.4 million about flat from the third quarter.
The bridge on the Rightside 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 an oreo.
Being offset by lower deferred origination costs and higher charitable contributions.
No the efficiency ratio was 59% on the face of the Pinedale for Q4.
At our internal measure is 57% when adjusting out the MSR in CV 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 non interest 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 2018.
Due to the overall, 20% increase in mortgage volume.
As Curt 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 to just discussed in home lending.
Recent store consolidations additional facility consolidations.
Technology enabled efficiencies for customer acquisition.
Reducing transactional lower yield return lending.
In 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 $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.
Slide 15.
Our interest bearing cash increase 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 as shown on slide 16.
Our annual loan growth of 4% was centered in residential real estate Cnine commercial real estate with the decline in our consumer portfolio resulted one sale in Q4, and the targeted wind down of 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 noninterest bearing demand balances money market and time deposits.
Slide 17 reflects the repricing characteristics of our loan and lease portfolio.
Noted, 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 previous calls, we're 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 zero point to 3% and total assets.
And a consistent low level of overall net charge offs.
The provision for loan loss decreased to $16 million this quarter.
In the bottom right chart, we breakout our Finpac leasing group net charge offs from that of the rest of the bank.
Nothing leasing component has been fairly consistent around 3% to 300% for the past year and fell under that level in Q4.
Keep in mind that the weighted average yield this portfolio is a very healthy 10%.
And on slide 20 for Cecil.
We still expect the allowance for credit loss to be increased to 1% here in the first quarter 2020, So no change to the level or mix, we disclosed last quarter.
Lastly, on slide 21, I want to highlight capital knowing that all of a 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 21 cents per share. The total payout ratio was 55% this quarter.
In addition, our tangible book value per shares $11.39, which when you also accounts for the 84 cents an 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 o'quinn next Gen strategy.
Improving financial results in generating solid returns for shareholders overtime, including a healthy dividends.
And with that we will now take your questions.
Thank you at this time, if you would like to ask a question. Please press Star then the number one on your telephone handset.
Next question comes from Steven Alex.
Plus from JP Morgan Your line is open.
Hi, everybody.
Bernstein morning, I wanted to start on the fee income side. So if you look at 2019, there quite a few moving parts of the fee income story. How are you guys thinking about that the ability to grow off these levels in 2020.
So Steven Hi, This is Tori next and I think that you can 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 the middle market segment, our cnine growth across small business commercial and corporate banking.
The biggest three areas of focus are going to be commercial card income, which is up 28% year over year International banking revenue is 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 behavior changes within the company will allow us to continue to to grow in these these areas of the company.
Okay. All right. That's helpful. And then I appreciate the guidance for expenses in 2020 can you parse out what's the expected benefit from these three that you're assuming the expense range.
The phase three component B.
Roughly $3 million to $5 million, but I tried to simplify and talk about our overall expense range for the year I also talked about homeland activity and if it does hanging around a 3 billion dollar level I quickly on the lower into 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.
Okay.
I'm trying to figure out once we get beyond next gen. Assuming there's not a phase four maybe there will be.
What do you see is that 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 and a low interest rate environment, where you have to continually find ways to operate the company and grow.
In 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 are deposits were lower today than we were 10 years ago and AG.
My question is asset as well I expect we'll see continued technological.
Efficiencies and gain so help us.
Deliver.
Our value proposition for customers and maintain.
Stable if not decrease in expense over time.
So we put all this together how should we think about the efficiency ratio range for 2020.
Yeah, I, just I expect efficiency ratio would be in that mid 50% range, excluding the fair value adjustments for as rates change, let's say on MSR and CBVA those would be our internal targets within that range. Okay. Thanks for taking my questions you bet. Thank you.
Thank you. Our next question comes from Michael Young from Suntrust. Your line is open.
Hey, Thanks for taking the question.
Born wanted to good morning wanted to start with just the hiring that you called out in the.
Rick.
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.
A lot of what's contributing to the efficiency gains this year.
Yeah, Michael Tori next and again.
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 had net adds in a third are probably.
Replacements kind of upgrades and talented and they've been across the RM ranks of commercial corporate banking small business as well support functions of underwriting Treasury management folks et cetera, and that the investment there is in our our high growth markets from Seattle downtown.
San Diego, and we've been very strategic and thoughtful and and where we're putting people with in kind of lining that up with opportunity that we we feel that the company has and.
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 higher they still kind of building their books or have they really built up to kind of a full level at this point.
No I think theres still there definitely still building their books.
There's initial Ics success that that happens for many right out of the gate and then.
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.
Okay, and maybe just go into the indirect auto book run off I think that was maybe an area where some balloon sales must come from this quarter just looking at the numbers could you talk about what size that's out now and how much of a headwind that will be in 2020.
Yeah, it's down to about under $100 million in that 70 $580 million range and I expect that will continue to decline, but keep in mind. The wind energy on that is in the mid 2% range. So.
That continues to run down as expected that'll help on them.
Okay. So overall I mean that 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 we have upside to this growth target.
Michael a score.
Clearly as Tories added bankers to to the business, we did see a little bit about kind of a industry slowdown in Q4 like most banks just based on a myriad of things trade economics.
Pending elections Bubba block.
But.
Yes, and Tory hit on it we've hired a lot of new bankers, who have a lot of room to run through 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 or critical of ourselves and how we look at the quality of our portfolio should read very direct and very deliberate.
But 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 has done a great job.
So if we need to make future investments to continue to exhibit good quality growth will continue to do that so far as paid out very very well as weve continued continue develop a great reputation cnine space.
Okay. Thanks.
Thank you. Our next question comes from Jeff Rulis from D.A. Davidson Your line is open.
Thanks, Good morning.
Weren't jeffs question on the.
Expenses just to give the guidance there is a true 670 690 for the full year Dot had hoped to hit to the run rate of that by the fourth quarter correct.
It is correct 690, 670 690 for the full year.
And then Ron you mentioned the mortgage production tied to the high end of that is it's safe to say that is that a mortgage production year like like 19 of.
4.8 billion.
That would align with the 690 is that.
In other words you.
At that level production, you that much more efficient relative to 19.
Actually within that 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 and they.
For sale categories. So.
Since improvement in the profitability of units. So if we're at the $3 billion range of total volume for the year with at 8% makes a conventional for sale.
We would be on the lower end of that 670 to 690 expense range. Conversely, if we sense and see volume for the year in the high $3 billion range to 4 billion will be on the upper end of that expense guidance range.
Okay. So high three love for would be a sixninety got it.
On the.
You mentioned that the slide of the excess capital.
I guess pushy, so looking at minimum Tc levels I would think the I guess, the 6% is somewhat optimistic.
Yes, any chance you get any more aggressive with capital deployment kind of you're seeing a little more visibility and.
And.
Any thoughts on lowering that TCV much below nine.
Could be I'd say here 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, though on capital return, we will focus on dividends very healthy dividend return, yielding say hi number right in the high 4% range.
So with our growth plans over the balance of 2020, I don't expect assume anything significant.
And maintain that dividend and look to increase in the future.
Buybacks will continue to be targeted towards just keeping the share count flat in repurchasing shares issued under various equity comp plans and it gives us a great opportunity as things change because.
Lord knows the environment will change in future.
Okay and last one.
Not sure. If this has alluded to if I've missed it was there was there a growth target on on maybe say loans for for 20, you put up 4% this year and make it was.
Characterized as less maybe less headwinds have you have you put a number out there what do you think you could meet that are beat for 20.
But we're targeting mid single digit growth from left and right side of the balance sheet and again.
A key as funding.
Solid commercial.
Lending with core deposits, so that'll obviously the goal.
Great. Thank you.
Thanks.
Thank you. Our next question comes from Jared Shaw from Wells Fargo Securities. Your line is open.
Hi, good afternoon everybody.
Martin return.
Just just sticking with that the expense discussion because that's pretty pretty amazing. It's got 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 you know as you look out at fourth quarter, I mean should we be expecting.
<unk> expense declines sequentially as we go through the year sort of keeping everything else equal and then starting 2021 at a at a better base.
Well I'd say again, we laid out guidance for the full year. The 670 690 through the year there are some moving parts.
You get a higher.
Payroll related taxes in the first half of the year less in the second half home lending.
Coming out of the gates still strong year in Q1, but generally that's been a bell curve. So I would expect Q4 expense level to be a bit less than the Q4, one level just based on this traditional moving parts.
But no we're not expecting significant slowed down over the course of the or so.
I actually like more of a bell curve with home lending activity driving the pieces in the middle here.
Okay, and then as we as we look at the expense reductions and potentially pulling back on some business lines is there a revenue offset that that we should think of associated with that as well.
You know I think the bigger moving part on that front is going to again go back to mortgage lending home lending and were able to them.
No and we have seen the pipelines change to where we get a higher closer to 80% mix on the conventional or the for sale component of that.
You'll see a revenue benefit to whereas you know in past years, a higher percentage is especially with 36% was on the portfolio side that doesn't have a direct revenue benefit in that quarter right.
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.
In the components there.
No not not changed components, but you know territory and core talk about.
A lot of the growth areas that we do expect those who continue to grow incrementally over the course of 2020.
Okay, and then on the margin.
I guess im a little surprised that theres 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 of the lower yielding.
Loans is that just more.
Conservatism and how you're looking at it or other or some other dynamics there.
But there's other dynamics in terms of like bond Prepays and influencing the.
Premium amortization on the MBS CMO and we've been making moves to reduce that volatility just with a lot of a mix, but I'd say you know we are able to maintain that mid single digit loan growth you'll see the margin. This range now another 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.
The third quarter that'll continue to trend down so lot of moving parts in there, but someone no further fed changes will be in this three four to three five range ex discount accretion.
Great. Thanks, and then just finally from me.
Court, maybe you could give an update on your thoughts on on M&A here and and.
Being able to take some of the.
The the the improved operational efficiency you have in house and exported to anticipate other franchise.
So you know I always need to say 'cause. It. This is how we live life here is that our main core emphasis is.
As what we do is operating this company organically and continuing to drive better efficiencies and better profitability in that 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, but today or 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 Guinea pension into new markets. We may be have raised our level of awareness on opportunities.
I think we've got good momentum and 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.
A little more time today to pay attention to things that come across tranche and we look at everything that's out there and if it doesnt fit strategically it's always a pass but if theres something that we think is strategic and can add to the overall return of the shareholder we'll certainly take shot admirably considered here.
Great. Thanks for the color.
Mm.
Thank you had her next question comes from Tyler Stafford from Stephens. Your line is open.
Hey, good afternoon guys.
Yeah.
Hey, I just wanted to clarify on the expenses so.
For Q, just thinking about the cadence or the cost savings and cost initiatives throughout 2020, the fourth quarter is expected to be low point and then Ron I think you said, obviously there is going to be you've kind of the normal bellwether.
So the seasonality 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 is needed to to operate efficiently here.
Hi, congratulations.
That isn't in futures to be flat if not down.
Okay.
Great and then the mid Fiftys 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 the 30 to 40 million of revenue synergies. What do you guys. Assuming in terms of 2020 revenue synergies with with the next gen.
To hit that efficiency target.
From that standpoint, I'd expect to see continued have slipped on that level I don't believe will be into that mid $30 million range, just given where we ended 19 and we talked about that three years two to two years ago as we laid out the next initiatives, but we do fully expected continued growth in those nursing come category. So I look at that slope and project that into 20.
Great and then just to clarify the mid single digit growth expectation for this year are you guys, it including any more indirect runoff.
We are.
When did you can you quantify how much.
Yeah, right now the portfolios 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 what can you provide does.
To close right I mean, the yield on the loan book on the indirect but it was in that 2.62, 0.7% 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 it's under that.
Okay, Great. That's it for me Thanks, Ron.
Thanks.
Thank you. Our next question comes from Jackie Bohlen from KBW. Your line is open.
Hi, good morning, Orange hijacking.
Well just touch on the production just make sure I understand that properly in terms of mortgage banking. This 3 billion that total correct and then the 80% you're targeting as a percentage of the 3 billion. So what you're looking to sell would be lower than 3 billion.
Accurate.
Correct total production goal for the year be $3 billion of which we're talking 80% of that being the for sale.
Okay and there is some tailwind on that number just given where rates are 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.
Okay, Okay, no understood about that.
And then in terms of MSR I know that you had the impact of the sale in the quarter on site. The next piece that you're looking to sell.
Correct me if I'm Rami you said it would be similar level is that a one Q event or a twoq you event.
It most likely be it to Q execution with Q1 recognition.
Okay. So what that would there be on me.
Let servicing income outside of MSR, Mark would there be any servicing impact Q1 or winded I'll be realized that QQ on the servicing income side that would be twoq forward. So you look back at the trend. This past year, you can project that into 2020.
Okay.
When I say.
Understand what you said in your prepared remarks, with 1.8 million that the non normalize amount of amortization that took place on MSR is in the quarter.
That was specifically related to the sales lift that hadn't occurred all else equal.
That mark would have been lower right.
That is correct, yes, theres, a 90 day tail on early Prepays for sale.
And that's that's within 20 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.
Okay.
And then once you complete that the next piece of the MSR sale does that puts you in a position where you're you're pleased with where you stand and most of whats remaining in the servicing portfolio relationship driven.
Correct, yes, well feel really good about it.
Okay.
Sorry for so many technical questions. Okay, [laughter] nice everything else has already been asked but I just wanted to touch base on the the impact from state local business taxes was that a onetime events in the quarter.
It wasn't is pretty small with everyone smile on a quarterly basis severe we get swings in that up and down but.
Pretty small amount just in terms of true ups on filing returns.
Okay. So nothing nothing that would swing S. One way or the I don't really no oh, it's it's less than a third.
Okay. Okay.
Okay, Great everything else was already asked thank you great. Thank you Jackie.
Thank you and our next question comes from D., but she is there any from Wedbush. Your line is open.
Hi, Thanks, a couple of questions for you so.
Following up on the expense discussion you listen if a few areas you know that savings are gonna come from shifting focus and mortgage store consolidations facility consolidations tech efficiencies and reduced professional fees and I'm, 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.
Yeah, good point, roughly so on the volume and mortgages ballpark 250 basis points, a 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 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 you know in large part I Didnt list set out in that order just from sampling for size standpoint was more so just because we had just talked about it prior to the expense discussion.
Got it and then.
Shifting to the store consolidations with.
You know you you hitting the last sort of slug of closings here.
Well I guess first is the target still 100 store consolidations I guess is the is the first question assuming that is the case.
Implies 35 more more stores to be close.
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'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 through these branches could you talk about that a little bit.
David as court. So yeah. The original guidance. We gave you know late and 17 was 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 mile away and.
Whatnot I mean, yes, they become more difficult primarily the difficult decision. It is because of the increased performance in the stores. So in other words the work that the retail store folks have done in generating the 17000, new customers to the bank. The things that we were doing in the store to increase penetration with products has made.
A difficult I has made that the a assessment were difficult because their performance has increased over the last two and a half two years. So we will and I I, we will continue to rationalize our stores in 2020 I.
We will do more consolidations. This year is the number going to be 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 hundred we'll come back and talk to you guys. What we still have that that target out there in ron's included the store rationalizations in the in the number that we guided to and but you hit the nail them ahead.
It's based mostly upon the fact that the stores are doing a better job generate 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.
Thanks, very much yep.
Thank you and again, if you would like to ask a question. Please press star one on your telephone handset. Our next question comes from Michael Young from Suntrust. Your line is open.
Hey, Thank you for the follow up Ron just a on the margin. The 340 350 kind of core margin I think you talked about for the year is that inclusive of the ER.
I guess higher level of the premium amortization or is that exclusive of that.
That assumes a consistent rate environments of Prepays stay around this level and amortization stays around will have you seen here this past quarter too.
Okay, but its exclusive of the Accretable yield so the reported margin will be a little higher than that 340 to 350.
Correct.
But that number to be declining overtime.
Had a criteria.
Is there any step down in that related to Cecil Q1 that we should be thinking about.
Not material.
Okay.
And then lastly, just on on that bond book, that's generating the premium amortization.
You'd made mention of potentially trying to reduce that or reduce the risk of the premium amortization going forward can you talk anymore granular Lee about what that would look like or when that might occur.
Sure I mean, you look back a here over the past year right now, we've got roughly 25% to 30% of the book and longer dated a bullet agency securities reduces that volatility on the amortization and we'll continue to target a replacement investment purchases.
In that area.
And or lower coupon MBS, there's less volatility on the premium amortization side. So my goal is to reduce that those fluctuations are swings overtime.
Okay, but it's really more on the margins so when they come due you'll look to reposition versus maybe a.
Posting a piece of the book for sale or for a more aggressive restructuring.
Correct correct, we did that back in the second quarter of 2019 and since then has just been a incremental adjustments as you go in a flow base through the your expectation to continue to 2020.
No targeted.
Restructure divesture segments of the portfolio at this time.
Okay. Thank you.
You bet. Thanks.
Thank you.
Our next question comes from deep achieved ferrini from Wedbush. Your line is open.
Thanks for the follow up and I know you received in M&A question earlier. So you may have already answered this but I just received a question through email from an investor and they were wondering about.
If you're thinking about employees or possibly partnering with a bigger bank any thoughts there.
You know it goes back to the answer I gave before you know strict we always look at everything we do whether it's investing in teams or technology or acquisitions emerges what habit, what habit be around just a strategically fit and does it work.
You do help us achieved success against our strategic plan. That's how we'll probably look at every investment we make so whether it's an M or we are hiring a team we use that as the as the Brahma and a number one check.
And that would be my answer if it's you know we look at everything strategically does it continued to help us grow our commercial banking business or full relationship banking or retail stores. All the things that we do that's how we evaluate any decision we make.
That makes sense, thanks very much.
Thank you.
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 Sheryl and I'm going to thank everyone for their interests and uncle holdings in their tenants 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.