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Umpqua Holdings Corp (NASDAQ: UMPQ)
Q4 2018 Earnings Conference Call
Jan. 24, 2019 , 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Umpqua Holdings Corporation Fourth Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Ron Farnsworth, CFO. Please go ahead sir.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Okay. Thank you, Stephanie. Good morning, and thank you for joining us today on our fourth quarter and full year 2018 earnings call .

With me this morning are Cort O'Haver, the President and CEO of Umpqua Holdings Corporation; Tory Nixon, our Chief Banking Officer; 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 2018 results. We've also prepared a slide presentation, which we will refer to during our remarks this morning. Both of these materials can be found on our 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 laws. For a list of factors that may cause actual results to differ materially from expectations, please refer to Page 2 of our earnings conference call presentation, as well as the disclosures contained within our SEC filings.

And I will now turn the call over to Cort O'Haver.

Cort L. O'Haver -- President and Chief Executive Officer

Okay. Thanks, Ron. Let me begin by providing a brief recap of our fourth quarter and full year 2018 performance and accomplishments. Ron will discuss the financials in more detail and then we'll take your questions.

2018 was a great year for us, highlighted by strong financial performance, continued loan and deposit growth and tremendous progress made implementing the initiatives organized within our Umpqua Next Gen strategy. We have a solid fourth quarter with earnings per share of $0.36. Financial results reflected 11% annualized loan and lease growth, 6% deposit growth, higher net interest margin and lower non-interest expense. This is down from the $0.41 we earned in the prior quarter, but up from the $0.34 in the fourth quarter of 2017.

With respect to the decrease in earnings per share from the prior quarter, there were several notable items that impacted the fourth quarter financial result, including a $16.1 million in -- a $16.1 million in fair value decrease on the MSR asset and swap derivatives. For the year, we earned $1.43 per share, which represents a 30% improvement over 2017 earnings of $1.10 per share. With one year of our Umpqua, three year Next Gen strategy in the books, I'm extremely pleased with the progress we've made and how it sets us up for continued success in this year and beyond. Next Gen is an ambitious, multifaceted plan to transform Umpqua, and I could not be more proud of the hard work, dedication and resolve of all of the associates last year.

Let me highlight some of our 2018 accomplishments across our three Next Gen strategic priority areas, balanced growth, operational excellence and human digital. I'll start with balanced growth.

For the year, we grew loans and leases by $1.4 billion or 7% and deposits by 6%. This strong growth shows the success of our balanced growth initiatives, which is focused on generating new multifaceted relationships across the banks to deliver more consistent and diversified growth, driven by stronger, deeper and more profitable customer relationships. A larger portion of the overall growth in 2018 came from the commercial loan portfolio, which increased 11% to $4.7 billion.

With the composition of this loan portfolio mostly variable, we are able to take advantage of higher rates, resulting in an increase in net interest margin. In addition, we continue to see strong results from our Corporate Banking Group, which is driving a significant portion of our overall commercial loan, deposit and fee revenue growth. We are building on this success in 2019 by transforming our commercial loan process, expanding commercial and corporate products and services and adding talent in key markets.

The retail bank also had a very busy year, generating strong deposit growth, while we lowered our mix of wholesale funding across 31 locations. Consistent with what I've shared on previous calls, we have yet to see any significant deposit attrition from those consolidations. During Q1 of 2019, we will consolidate an additional 15 stores and sell four more. After the completion of this round of consolidations, we will have exited 56 total locations, since the initiative began.

Generating deposits, is a key area of focus in 2019, and we have a number of initiatives in flight. So let me highlight a few. We are realigning all the commercial deposit businesses under a new executive, Kathryn Albright. Kathryn joined late last year and brings 25 years of big bank experience to Umpqua. Within our retail stores, we will be significantly increasing the time spent on new customers, with an emphasis on micro business targets. We will also be elevating lead roles in defined markets to free up store manager time for business development.

We will be utilizing new technology and systems to help both identify new deposit opportunities and to drive higher customer retention, and are planning further treasury management product enhancements this year. Lastly, we are optimizing the digital marketing and as a part of the operational excellence program, we will be redesigning the deposit customer end-to-end journey similar -- similar to what we did on the commercial loan side.

Turning to non-interest income. Increasing core fee income is a part of our balanced growth initiative. Last year, we increased non-mortgage fee revenues by $15.1 million or 12% over the prior year level. This represents good progress against the 2020 goal of $30 million to $40 million in incremental fee revenue. The importance of this fee income was especially evident in 2018 that it helped to offset a challenging mortgage banking environment. Overall mortgage banking revenues decreased by $18 million or 13% driven by lower volume and a decline in the gain on sale margin. This decrease was offset by higher fees, resulting in a flat non-interest income for 2018.

Turning to operational excellence, we also made significant progress on this initiative in 2018. We've streamlined and simplified the bank, so that we can add value for our shareholders and customers and create a better associate experience. We completed the organizational simplification and design efforts in the first half of the year, and we've removed an entire layer of management and delivered on the savings, as we originally had identified. From there, we quickly moved to procurement, and we have made great progress in leveraging the size of our organization to drive further efficiencies.

In addition, we have also begun several of the end-to-end customer journey redesigns, beginning with commercial lending, which will improve the customer experience and create tremendous value by increasing the speed-to-market and decreasing the cost per loan, which now brings me to our human digital strategic priority, which is how we're creating a differentiated customer experience.

Our human digital initiatives use technology to empower our people to form deeper more meaningful and profitable customer relationships. On the consumer front, we launched in five markets last year, Go-To the industry's first human digital banking platform. We'll be like -- launching it in all stores across our footprint early next month. Early indicators from last year's pilot and limited rollout suggest that this new channel is deepening customer relationships in meaningful ways and we look forward to sharing more detail later this year.

Human digital banking is also an important differentiator in wholesale. Here we're using learnings from our commercial end-to-end journey initiative to develop an integrated banking experience. We're using technology to empower our bankers, with smart insights at the right time and to help our customers advance their companies through automation and other digital capabilities. Embedded across all of these initiatives is our continued investment in evolving, enhancing Umpqua's culture. I'm pleased to share that Umpqua associates are excited and energized by this strategy. Their passion and commitment drove our success, across all three strategic priorities last year, which has led to a significant improvement in our financial performance and this is highlighted on Slide 3.

On the top chart, the efficiency ratio improved to 60.6% for 2018, down from 65.1% for 2017. As you can see highlighted on this slide, we are making great progress toward the 2020 financial goals. As a reminder, impacts from exit and disposal costs and fair value gains or losses were excluded, when we laid out those goals in late 2017. We have broken out the financial impact of those items for you below the chart.

In each of the last two quarters, the efficiency ratio was 58.6% and 57.1% respectively. This represents remarkable improvement, since we kicked off the operational excellence program in early 2018. Along similar lines, on the bottom chart, return on average tangible common equity increased to 14.45% from 11.49% in the prior year. As always, we remain focused on creating long term value and generating strong capital returns for our shareholders. The quarterly dividend was increased to $0.21 per share during 2018, and we paid dividends of $0.82 per share for the year, up from the $0.68 in the prior year.

Lastly, our balance sheet remains strong. Credit quality is stable, and we remain a prudent and we maintain a prudent level of capital to support growth. With a strong foundation in place, as we kick off into 2019, we're focused on continuing to implement our Next Gen strategy through a smart mix of growth, differentiation and operational excellence.

Now, back to Ron to cover the financial results.

Ronald L. 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 first to Page 7 of the slide presentation and also in the earnings release, which contains our quarterly P&L. GAAP earnings were $0.36 per share this quarter, a $0.05 decline from the third quarter, driven primarily by fair value losses on the MSR and CVA evaluations, stemming from the market volatility late in the quarter, leading to a decline in treasury yields.

Ex the two fair value swings, as compared to Q3, we had $0.02 of benefit from higher net interest income and $0.02 of benefit from the gain on sale of Pivotus assets, offset by a $0.02 drop from the higher provision for loan losses and $0.02 drop from seasonally lower mortgage contribution, ex the MSR.

Turning to net interest income and margin on Slides 8 and 9, and noted on Page 7 of the release, net interest income increased $6 million or 2% from Q3. Interest income increased $10.6 million, with three quarters of that related to loan interest supported by the strong growth this quarter, along with another prime rate increase. Discount accretion is becoming a non-event as that declined again as expected this quarter to $4.2 million. Also our taxable investment income increased related to lower premium amortization.

Our interest expense increased $4.5 million or 10 basis points, based on continued average balanced growth and rising interest rates. And our cumulative deposit beta based on the Fed rate increases to-date was 26%. Our past quarter beta was 48% and we expect deposit costs to continue to increase over the coming year with quarterly betas moving closer to historical norms of 60% to 65%. As reflected on Slide 9, our net interest margin was 4.15% this past quarter. The margin excluding discount accretion was 4.09%, an increase of 20 basis points over the third quarter. The majority of the increase resulted from a recapture of premium amortization on the investment portfolio, as MBS prepayments continued to slow. The premium recapture credit this quarter was $5.9 million or 11 basis points of margin.

So taking premium amort to 0 (ph) would have the proforma margin at 3.98%. If that premium amortization were back at levels we saw earlier in 2018, the margin ex discount would have been roughly flat this quarter at 3.89%. So assuming prepayments do not fluctuate greatly early in 2019, we expect the margin ex discount accretion to hang around this 3.89% level with anywhere from 2 basis points to 5 basis points of additional margin for discount accretion.

On Slide 10, the provision for loan and lease losses was $17.2 million, up slightly from Q3 based on a $4 million increase in net charge-offs. We continue to characterize this as bouncing along the bottom. The quality of the loan portfolio is pristine. And by way of context, of the $52 million in net charge-offs for all of 2018, roughly $40 million related to our FinPac leasing portfolio. That leaves $12 million for the year or $4 million for the quarter of net charge-offs on the $19 billion loan portfolio excluding leasing, which is only 5 basis points. That's pretty good stuff.

Moving now to non-interest income on Slide 11, total non-interest income declined this quarter related primarily to the negative fair value marks for the MSR and CVA assets resulting from the sharp decline in long term treasury yields. Included in other non-interest income this quarter was a $6 million gain on sale of Pivotus assets.

For mortgage banking, as shown on Slide 12, and also in more detail in the last page of our earnings release. For sale mortgage originations decreased 22% this past quarter in line with seasonal expectations .For the year, for sale and total originations were up 31% and 19% respectively. Our gain on sale margin remain below goal at 2.83% this quarter due to the drop in lock pipeline at year end. Seasonally and absent the significant change in mortgage rates, we expect home lending activity will remain lower in Q1, ramping up for Q2 and Q3 and then declining again in Q4. As always, we're actively monitoring the market and competition here, and if we don't foresee profitability in this unit improving coming out of the spring, we will act quickly on more structural changes to our delivery model.

On Slide 13, we laid out growth in non-mortgage fee revenue, which is defined as non-interest revenue from our wholesale, retail and wealth management divisions, excluding fair value changes and gains from portfolio loan sales. This is the measure, we are looking to increase $30 million to $40 million by 2020 over 2017 levels. With the various Next Gen initiatives we've laid out, we're happy to report good progress on the first of the three year plan, increasing this fee revenue by $15 million or 12% over the prior year.

Turning now to Slide 14. Non-interest expense was $178 million, at the bottom of our guidance range of $178 million to $183 million from last quarter. The fourth quarter amount includes $4 million of higher incentive and restructuring related charges, $1.5 million of higher group insurance costs and $1 million for a loss on OREO. These increases were offset by continued reductions in home lending direct expense, lower FDIC assessments, lower marketing and continued operational excellence savings.

Note, the efficiency ratio was 58% on the face of the P&L for Q4 and dropped to 55% when adjusting out the MSR and CVA fair value charges discussed earlier. We're making great progress already in year one of our three year plan.

The overall operational excellence initiatives are summarized on Slide 15. We've completed the Phase I back office items with $16 million annualized expense savings reflected in our fourth quarter results. The additional $6 million to $8 million of procurement savings, will be reflected by mid 2019, based on upcoming contract renewals. With this, we've hit the high end of our Phase I target at $22 million to $24 million in annualized expense savings. Amazing work by our team to achieve these results.

For Phase II, we're about to complete the commercial loan end-to-end journey redesign and start the consumer deposit origination end-to-end Journey. From these, we expect both financial and non-financial benefits, including an opportunity to book loans faster along with better customer and associate experience. We will provide updates on expected annualized savings from this and other Phase II levers on future quarterly calls.

With this work continuing, we expect to incur another $2 million to $3 million of restructuring costs in Q1. And as we look forward to Q1, 2019, we expect a few moving parts on overall expense including seasonally higher payroll taxes of $3 million to $4 million every Q1, noting this runs down over the course of the year. The remaining procurement savings will be realized in Q1 and Q2. Additional minor exit costs related to store consolidations, offset by a slightly lower home lending production expense based on seasonally lower volume. Incorporating these updates for the first quarter of 2019, we expect our overall GAAP expense to be in the range of $176 million to $181 million with our efficiency ratio excluding any fair value changes in the high 50% range.

Turning now to the balance sheet, given (ph) on Slide 16. A higher loan growth exceeded deposit growth resulting in the decline for interest bearing cash. The mix of loans and deposits are shown on Slide 17. Loan growth was split pretty evenly between CRE, commercial and residential. Note that the decline in consumer loans was driven by the wind down in our indirect dealer auto portfolio, as discussed last January.

Slide 18 reflects the repricing characteristics of our loan and lease portfolio knowing our floating rate loan mix continues to increase with commercial loan growth. On Slide 19, we have highlighted the geographic diversification of our loan portfolio across the footprint. We also provide some select loan and underwriting characteristics for each of our major portfolios.

And Slide 20 reflects our credit quality stats noting the strength of our portfolio is supported by the continued decline in classified loans. Now down to 0.75% of total loans or only 8% of capital.

Lastly on Slide 21, I want to highlight capital knowing that all of our regulatory ratios remain in excess of well-capitalized levels with our Tier 1 common at 10.7 % and total risk based capital at 13.4%. With our quarterly common stock dividend of $0.21 per share, the total payout ratio is 58% this quarter. Also, our tangible book value per share is $10.19 which when you also account for the $0.82 in dividends to shareholders over the past year increased 13% over the prior year level. Our excess capital declined approximately $155 million with a strong loan growth and as discussed earlier, we expect this to continue to decline moderately over the coming few years.

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

(Operator Instructions) And we'll take our first question from Michael Young with SunTrust.

Michael Young -- SunTrust -- Analyst

Hey, everyone.

Cort L. O'Haver -- President and Chief Executive Officer

Good morning.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning, Michael.

Michael Young -- SunTrust -- Analyst

Ron, just wanted to start with the Next Gen and the cost saves. So if I'm kind of reading this right, we've got $6 million to $8 million remaining from Phase I by midyear and then just taking the midpoint of the range roughly $9 million or so from Phase II by year end. And then, I assume that's going to be offset by some normal expense inflation throughout the year. So net-net do we end up just a little bit lower kind of on a run rate basis from where we started the year?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Year-over-year, that's the goal to have lower expense in '19. I'd characterize it best though by talking about the efficiency ratio, where we expect that to continue to drift lower, seasonally over the year, it'll be a bit higher in the first two quarters, lower in the second two. But year-over-year, we're targeting somewhere in that mid to upper 50% range, which puts us in good shape for the 2020 goals year out.

In terms of the cost saves, you will have normal inflation. Recall, we'll have the payroll tax curve over the course of the year ramping up in Q1 and then down for the balance of the year. But then I'd also characterize it to around certain cost saves, we'll continue to reinvest roughly a quarter to a third of those cost saves in new technologies and initiatives. That's all factored into of course, the year-over-year expense number I talked about earlier.

Michael Young -- SunTrust -- Analyst

Okay. And then you kind of mentioned the potential to rationalize, maybe the mortgage kind of fixed cost, as we move into the back half of the year depending on the outlook for -- for volumes. Could you maybe just talk about maybe the magnitude of that incremental from where we are today? And then also just maybe pair that against how much production you expect to retain next year versus on balance sheet versus sale?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Sure. I -- I think on the last question, we'll have a similar mix here over the course of the year, just in terms of for sale versus as a percentage of total origination, just given where the markets are. In terms of the bigger question around the profitability of the unit, I want to know, and I think we'll have a good sense by late spring if somewhere in the high 2% range is the new normal for gain on sale margins, if that's the case then I'm going to want to lower the -- we're all going to lower the 2.5% roughly expense on volume, part of that's going to be through certain direct or centralized channels that we have, which right now is maybe 20% of our overall volume is flowing through direct channels. We'll be looking to increase that. But -- but I must save further comments on that probably till we get into late spring and through the summer, just to see how it shakes out on the gain on sale margin.

Michael Young -- SunTrust -- Analyst

Okay. And one last one if I could just sneak it in. I know you guys did a review of the MSR and hedging and elected not to do that. Any changes or any changes in the macro that would cause you to reevaluate that?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

No. I've just -- I've just seen it over a long period time that hedging can create more of a problem than just watching, as yields move up and down what's going to happen to the MSR. So additional cost and it doesn't necessarily reduce volatility.

Michael Young -- SunTrust -- Analyst

Okay. Thanks.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

You bet. Thanks.

Operator

Up next is Jeff Rulis from D.A. Davidson & Company. Please go ahead with your question.

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

Sure. Good morning.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning.

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

(multiple speakers) On the -- on the -- just the long growth. I guess, anything notable about that the net pickup. Maybe the question would be, do you have payoff activity quarter-to-quarter what was the trend this year versus last or this quarter versus last?

Torran B. Nixon -- Senior Executive Vice President and Chief Banking Officer

Hey, Jeff, this is Torry Nixon. We had payoffs in Q4. We're down slightly from Q3, which were also down slightly from Q2. So they're relatively close in terms of total dollars, but we've had a decline over the last two quarters to three quarters.

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

Got you. And then, I guess as we look at into '19, I think you've been running down the auto portfolio. Maybe you could tell us about what is remaining to go there. And I guess, overall expectation should that headwind negate kind of your growth outlook for '19?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

No. It's -- it's in the growth outlook, just given we factor that in when we -- when we laid out the overall assumptions for the three years and right now that's roughly $450 million and that's running down at a pretty consistent clip on a quarterly basis, so actually that'll continue.

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

And then maybe one other one. Ron, I think you mentioned the bulk of the charge-offs have been in the FinPac portfolio, I think you mentioned for the year, but did that accelerate into Q4, I think you mentioned that the FinPac is kind of the leading indicator. But what was the makeup in Q4 or was it similar with the kind of legacy, well, I guess not legacy, but FinPac versus other loans?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Yeah. So excluding, the leasing portfolio was roughly $4 million of charge-offs for the quarter, it was $10 million (ph) for the year. So I guess, if you do the simple average on a quarterly basis, it is up a bit, but it's bouncing along the bottom. When it comes to the leasing portfolio, charge-offs have been pretty consistent on that front, and -- and again recognize that -- that Page 19, we added in there hopefully gives us some good stats on the overall quality of the portfolio with loan to values and DSCs. I'll reiterate that FinPac leasing portfolio is roughly 10.5% yield and I know, I've used the term, the (inaudible) is still flying. So we don't see anything near-term on that front to cause a difference in expectations.

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

And without substantial change on a lot of fronts, the -- the provisioning level kind of the range we saw in '18 is comparable to '19 or any -- any kind of change structurally that you'd see that ramping?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Yeah. No, no structural change. It's been pretty consistent trends. Provisions will exceed charge-offs. And in terms of the overall quality of the portfolio again that -- that page at the end shows just the drop in classified down now to 8%. I'm not saying that's going to continue into '19, but I'd expect provisions to continue to exceed charge-offs and the reserve just to ramp up slightly over the course of the year prior to CECL.

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

Great. Thank you.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

You bet. Thanks.

Operator

Up next, we have Steven Alexopoulos from JP Morgan.

Steven Alexopoulos -- JP Morgan -- Analyst

Hi, everybody.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning, Steven.

Cort L. O'Haver -- President and Chief Executive Officer

Good morning.

Steven Alexopoulos -- JP Morgan -- Analyst

Ron, let me follow up on credit (inaudible) into my questions because you did see a modest pickup in net charge-offs in the quarter, I know the credit metrics are stable. Was that -- what exactly drove that this quarter?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Two loans within the bank portfolio. Nothing significant. Nothing out of the ordinary for $4 million.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay. Got it. And then on margin, the guidance you gave is helpful in terms of starting point. But given that the comments and thoughts around deposit betas continuing to normalize, if we get no additional hikes out of the Fed, how do you see the NIM progressing from here?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Sure. So if we think about the 2020 target, we had a 3.9% to 4% and that assumed there were additional rate hikes coming into '19 and some in the high 3.8s (ph) and there's no additional rate hikes. We'll continue to see pressure probably in the low 3.8 range by the end of the year. That just seems continually, you know, call it 45% to 50%, even 55% on the beta side, just with those costs increasing. But that's all -- all gets back down to then all the initiatives Cort and the team talked about earlier in terms of our deposit growth initiatives that our target is not to bring in high rate money, is to continue to grow the core consumer base.

Steven Alexopoulos -- JP Morgan -- Analyst

Yeah. And along those lines. Final question. So looking at the decline in non-interest bearing deposits in the quarter, was that customers just moving cash into higher yielding alternatives or something else driving that?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Little over half of that was simply timing on ACH between 12/31 and January 2nd.

Steven Alexopoulos -- JP Morgan -- Analyst

So it's a timing issue, you're not seeing customers move cash, non-interest bearing out is what you're saying?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Not -- not in a large way.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay. Okay. Thanks for taking my questions.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

You bet. Thanks.

Operator

Jackie Bohlen from KBW. Please go ahead with your question.

Jacquelynne Bohlen -- KBW -- Analyst

Hi, good morning everyone.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning, Bohlen.

Jacquelynne Bohlen -- KBW -- Analyst

Ron, I want to make sure that I understand the premium amort movement that happened in the quarter, so rather than a reduction, it was actually a positive benefit of $5.9 million to the margin, right?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Correct.

Jacquelynne Bohlen -- KBW -- Analyst

Okay. So if we move back to the historical level that gives you that 3.89% that you were talking about. What rate movements would you need to see in order to get to that point?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Probably a decline in longer term yields, which would cause an increase in mortgage refinance activity and then hence MBS prepayments would increase.

Jacquelynne Bohlen -- KBW -- Analyst

Okay.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

In reality, in the short term, my guess is, they will be somewhere between the two, but I do not expect another recapture in Q1. If anything just the smaller amount of amortization.

Jacquelynne Bohlen -- KBW -- Analyst

Okay.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Might not be back all the way to the lows we had in early 2018, but I just want to lay out the range there.

Jacquelynne Bohlen -- KBW -- Analyst

No, that's helpful. And last quarter you talked about the margin being in a range of 3.85% to 3.90% understanding that there is this premium amort that's moving and it was a big benefit in the quarter. How did where you stand today compared to where you stood a quarter ago when you gave that range?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Well, again that was a function of recapture just based on a continued decline in MBS prepayments. So as I look into early '19, I expect we'll still be in that range of 3.85% to 3.9% probably over the better part of the year. But -- but if prepayments continue to slow, we probably be on the high end of that if not above and just given again lower amortization on that front.

Jacquelynne Bohlen -- KBW -- Analyst

Okay. And then did I hear you right where you said if -- if rates stop increasing then the margin would trend down and get toward the low 3%?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

I would assume that is the case -- not -- not the low 3% range. No, I said we were continuing to see pressure on deposit costs. I think that would be the case not only for Umpqua, but for everybody in the industry, just given there's going be some tail on that, right. So I expect they would be probably on the lower end of that range if not somewhere in the 3,8% to 3.9% range, not -- not low 3s. Sorry

Jacquelynne Bohlen -- KBW -- Analyst

Okay. I knew, I misheard it. I just wanted to clarify it. Okay.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

I'm glad you got that clarified. Thank you.

Jacquelynne Bohlen -- KBW -- Analyst

Yes. That would be a -- that would be a big jump. And then --

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Talking about (inaudible).

Jacquelynne Bohlen -- KBW -- Analyst

Just one last question. Historically you've said that the normalized level of amortization and the MSR portfolio is around $3 million to $5 million. Does that still hold outside of rate movements?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

I'd say it's probably closer to $5 million to $7 million, here over the last couple of quarters.

Jacquelynne Bohlen -- KBW -- Analyst

Okay. Thank you.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

You bet. Thanks.

Operator

Aaron Deer with Sandler O'Neill and Partners. Please go ahead.

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

Hey, good morning everyone.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning, Aaron.

Cort L. O'Haver -- President and Chief Executive Officer

Good morning.

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

The -- I just want to go back to the -- to the mortgage outlook, the -- couple of things there. One is just in terms of your expectations for production volumes, as you look out to the year. At this point in fact we're using kind of the MBA forecast or does your outlook differ from that?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Does not differ from it. We outperformed it this past year compared to what we thought. But that's what we're using for planning for '19.

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

And I don't know if you've done any sales this quarter into -- to the secondary market. But as you -- but what are your expectations just kind of as you look at the -- at that market and today where gain on sale premiums are likely to be and what -- what is your expectation there?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Yeah. It's interesting because at a low level, they're still being priced right around 3% or in the low 3% range. It was 2.83% for the fourth quarter just because we have the fair value, the change in lock pipeline. So part of the answer to your question remains (ph) what do I expect the lock pipeline to be in March compared and (ph) December and ideally that's going to be roughly flat just with an overall lower level of volume through the quarter. So ideally we'll be closer to 3%. If we're below it is going to be because of a drop in lock pipeline. I think bigger picture though if we get into late spring and from competitive standpoint, you haven't seen some players exit the market. We'll be talking about different items on just in terms of the -- the structure of our delivery, just given that spread is pretty tight.

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

And if you can give a sense of the size if there -- if you do look to restructure that business, what kind of cost savings do you think they are possibly could be pulled out of it?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Well, right now it's roughly 250 basis points for the overall cost on -- on the volume. It's too early to talk about detail plans there. It's something we'll be -- save comments on probably until late spring summer, if we do not see a recovery in the gain on sale margin.

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

Okay. Good stuff. Thanks for taking my questions.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Of that 250 bps, roughly two thirds of its variable.

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

Got it. Thank you.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

You bet. Thanks.

Operator

(Operator Instructions) We'll move on to Matthew Clark from Piper Jaffray. Please go ahead.

Matthew Clark -- Piper Jaffray -- Analyst

Hi, good morning.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning, Matt.

Matthew Clark -- Piper Jaffray -- Analyst

Just on the -- on the NIM (ph) statements, should we assume if that's largely done here or should we expect any additional adjustments going forward?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Well, again, this quarter was related to premium recapture under retrospective bond accounting because the MBS prepayments have slowed. If they slow further, we might have lower amortization or some more recapture, but that gets back to the kind of they are at (ph) earlier, where if our premium amort would normalize back to the levels they were at in early 2018, we'll be somewhere around 3.89% for the core NIM.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. That's right. it's retroactive. Okay. And then just on capital, any update on your M&A appetite desire to maybe buyback some stocks with where your shares are trading?

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Let me start on the buyback side. We'll continue to focus on the dividend and a healthy payout ratio. I think the buyback is pretty short term focused and I expect that excess capital to decline slightly over the coming year. It's a -- it's a good amount of excess amount and egregious amount. And keep in mind, we also have lease accounting, which we'll probably use that $12 million to $13 million of that capital this quarter, and then we'll be running parallel on CECL talk about that over the course of the year. So no plans to do anything out of the ordinary on buybacks, just repurchase shares issued under -- under comp plans.

Cort L. O'Haver -- President and Chief Executive Officer

And Matt, it's Cort. On M&A like we've talked about the last couple of years, we're still going to continue to stay focused on operating the company. And I think we've shown you all that we're continuing to decrease the efficiency, increase the efficiency and continue to run a more profitable organization. We've always been opportunistic on potential acquisitions. We will continue to be opportunistic. We do track a couple of markets, where we think additional density would be good or adjacent markets, where we'd like to get into those markets. But we'll look at it on an opportunistic basis and if a deal makes sense both financially and strategic, we're not opposed to -- to look at.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. Thank you.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

You bet. Thanks.

Operator

And it appears, there are no further telephone questions. (Operator Instructions) And there are no further questions in the queue. I'd like to turn the call back over to Mr. Ron Farnsworth.

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Okay. Thank you, Stephanie. And well, thank you everyone for their interest in Umpqua Holdings and attendance on the call today. This will conclude the call. Goodbye.

Duration: 44 minutes

Call participants:

Ronald L. Farnsworth -- Executive Vice President and Chief Financial Officer

Cort L. O'Haver -- President and Chief Executive Officer

Michael Young -- SunTrust -- Analyst

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

Torran B. Nixon -- Senior Executive Vice President and Chief Banking Officer

Steven Alexopoulos -- JP Morgan -- Analyst

Jacquelynne Bohlen -- KBW -- Analyst

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

Matthew Clark -- Piper Jaffray -- Analyst

More UMPQ analysis

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