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Good day everyone, and welcome to the Umpqua Holdings Corporation First Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Ron Farnsworth, CFO. Please go ahead.
Okay. Thank you, April. Good morning, and thank you for joining us today on our first quarter 2019 earnings call. With me this morning are Cort O’Haver, the President and CEO of Umpqua Holdings Corporation; Tory Nixon, our Chief Banking Officer; Rilla Delorier, our Chief Strategy Officer; Dave Shotwell, our Chief Risk Officer; and Frank Namdar, our Chief Credit Officer.
After our prepared remarks, we will then take questions. Yesterday afternoon, we issued an earnings release discussing our first 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 will now turn the call over to Cort O’Haver.
Thank you, Ron. Let me begin by providing a brief recap of our quarterly financial performance, and then I'll provide an update on Umpqua Next Gen. Ron will discuss the financials in more detailed, and then we'll take your questions.
Our Q1 2019 financial performance resulted in earnings per share of $0.34. This is down slightly from the $0.36 we earned in the prior quarter and a $0.35 reported in the first quarter of 2018. The decrease in earnings per share from the prior quarter is due to 2 items. First, we recorded a $14 million negative adjustment related to the fair value change of the MSR asset. As noted in yesterday's release, we are exploring ways to reduce future income statement volatility of the MSR asset.
It's important to note, however, that as a West Coast regional bank, offering mortgages and related products and services will continue to be one of our core offerings. Second, we recorded a $5.2 million fair value loss on debt capital market swap derivatives. Both items were due to declining long-term interest rates in the period.
As we entered the second year of our Umpqua Next Gen strategy, we continue to focus on maintaining momentum across all parts of the company in generating strong financial results. As depicted on Slide 4 of the earnings presentation, a return on average tangible common equity of 13.17% for the first quarter represents strong improvement in our core business. It's particularly strong when considering that includes a net impact of fair value losses and exit disposal cost for the quarter of 2.29%.
As also shown on Slide 4, we continue to actively manage expenses in Q1 as reflected in our efficiency ratio of 60.44% for the quarter. The company's efficiency ratio continues to improve as we make smart investments to increase our operating leverage.
Again, the core business's cost control is particularly strong when factoring the 3.65% that's the result of the fair value losses and exit disposal cost.
Now I'll turn to loan growth for the first quarter. While sequential quarter loan balances were flat, average loans on a linked quarter-to-quarter basis increased $337 million or 6.7% annualized.
As previously reported, in Q4 2018, we generated loan growth of $586 million or 11% annualized, which is substantially higher than Q4s in previous years, due in part to customer request to pull forward some expected Q1 closings late into the quarter.
Higher-than-normal loan payoffs in our commercial real estate portfolio created some headwinds in the first quarter that offset production. It's important to note that today, our balance sheet is now at $20.4 billion in loans and leases, which reflects a very healthy $1.15 billion or 6% growth year-over-year. As a result, we feel positive about our loan growth over the past 2 quarters and where we will end the year.
Our strong credit quality metrics demonstrate the success of our disciplined approach to growing high-quality assets.
Our nonperforming assets to total assets ratio decreased to just 32 basis points, down from 36 basis points in the prior quarter. Net charge-offs were normal at $13.6 million. Deposit growth on a linked quarter-to-quarter basis was $106 million or 2% annualized and $1.1 million or 5.6% year-over-year. Both our loan and deposit pipelines are strong as we enter Q2.
Now a quick update on Umpqua Next Gen, our 3 strategic priority areas. Let me start with balanced growth. During the quarter, we continued to add experienced bankers in our core metro markets, who were focused on bringing additional middle-market relationships to the bank. In addition, our emphasis on growing multifaceted relationships in the C&I vertical continues to show positive results. I am pleased to see healthy, diversified growth in our C&I loan balances, which increased $60 million or 5% annualized during the quarter.
Human-digital, our approach to creating a differentiated customer experience achieved a big milestone this week as we launched Go-To. The industry's first human-digital banking platform to our existing and prospective customers across our footprint with an integrated marketing campaign. Our pilot clearly demonstrated that customers who have selected their personal Go-To have a higher propensity for additional products and services.
So let me finish my updating the progress made within the operational excellence initiative. We reduced our store footprint during the quarter by 15 stores, consolidating 11 locations and selling 4 others. We will be consolidating an additional 5 locations by the end of Q2. This brings our total store rationalization number to 57 since Q3 of 2017. As noted on previous calls, these consolidations have gone very smoothly, and we have yet to see any significant deposit attrition from those consolidations.
I'm also pleased to report that Phase 1 of our back office work is mostly complete with $22 million of savings already in the run rate. We expect an additional $2 million to $3 million of annualized savings to be in the run rate by the end of Q2. Phase 2 of the back office work, which includes a redesign of our commercial lending and consumer deposit journeys as well as real estate optimization is progressing nicely and I look forward to sharing results on our future calls. Now back over to Ron to cover the financial results.
All right. 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 7 of the slide presentation, which contains our quarterly P&L. GAAP earnings per share were $0.34 this quarter, a $0.02 decline from the fourth quarter, driven primarily by fair value losses on the MSR and CVA valuations, stemming from a decline in treasury yields at the end of the period. Ex the 2 fair value swings, as compared to Q4, we had a $0.02 benefit from lower expense and a $0.01 benefit from the lower provision for loan losses, offset by a $0.03 drop in lower net interest income and a $0.03 drop in noninterest income.
Turning to net interest income and margin on Slides 8 and 9. Net interest income decreased $9.7 million or 3.9% from Q4. Interest income decreased $4.5 million. Interest and fees on loans and leases, however, increased $4.7 million, but were offset by a decrease of $7.4 million in taxable investment income. This is primarily driven by increasing bond prepayment [ speeds ] with lower rates, leaving the bond premium amortization of $1.6 million in Q1, as compared to the bond premium recapture of $6 million recorded in the prior quarter.
Discount accretion was $5.2 million and is expected to continue to modestly decline over the coming quarters. Our interest expense increased $5.2 million or 12 basis points based on continued average balance growth. Our cumulative deposit beta based on the Fed increases today was 32%.
As reflected on Slide 9, our net interest margin was 4.03% this past quarter. The margin excluding discount accretion was 3.94%, a decrease of 15 basis points over the fourth quarter. The majority of the decrease resulted from bond premium amortization as compared to the recapture recorded in the prior quarter.
The premium recapture credit in Q4 was 11 basis points of margin compared to the bond premium amortization this quarter of 3 basis points. We expect the margin ex discount accretion over the next quarter to be in the 3.8% to 3.9% range, with anywhere from 2 to 5 basis points of additional margins for discount accretion. On Slide 10, the provision for loan and lease losses was $13.7 million, down from Q4 related to a decrease in net charge-offs.
Moving now to noninterest income on Slide 11. Total noninterest income declined this quarter related primarily to the nonrecurring gain on sale of the Pivotus asset in Q4, plus the negative fair value marks for the MSR and CVA assets resulted from the sharp decline in rates.
We're disappointed with the continuous fair value volatility on the MSR asset and will be looking at ways to reduce that over the coming quarters.
For mortgage banking, as shown on Slide 12, and also in more detail on the last page of our earning release. For-sale mortgage originations decreased 17% from the prior quarter. Our gain on sale margin increased 12 basis points to 2.95% as [ lock ] pipeline increased at the end of the quarter.
I'm turning now to Slide 13. Noninterest expense was $171.6 million, a decrease of 8% from the first quarter a year ago and down 4% from the prior quarter. This was also below our guidance range of $176 million to $181 million. The first quarter amount includes continued operational excellence savings as well as $2.8 million of lower incentives, $2.4 million of lower restructuring-related charges, $2.1 million of lower group insurance and $1.6 million of lower retail expenses. As expected, these decreases were offset by the seasonal payroll tax increase of $2.7 million. Note, the efficiency ratio was 60.4% on the face of the P&L for Q1 and dropped to 56.8% when adjusting out the MSR and CVA fair value charges discussed earlier.
With the operational excellence we're continuing, we expect to incur another $2 million to $3 million of restructuring cost in Q2. And for the program to date, we've now reached $22 million in annualized savings through Q1. And with the additional procurement savings expected in Q2, we'll be at $24 million to $25 million of annualized savings at the high end of the Phase 1 range we laid out with our operational excellence initiatives. With this, Phase 1 is now complete, and we're working on remaining Phase 2 initiatives, expecting additional savings later this year. As we look ahead to the second quarter, we expect our overall GAAP expense to be in the range of $174 million to $179 million, with our efficiency ratio of excluding any fair value changes in the mid- to high 50% range. This reflects primarily higher seasonal mortgage production in the second quarter along with annual inflation increases, offset by a seasonal reduction in payroll tax and the remaining procurement saves just discussed.
Turning now to the balance sheet, beginning on Slide 14. We increased our interest-bearing cash this quarter to $600 million simply to increase our on balance sheet liquidity through both the net deposit growth of our loan along with a small increase in term borrowings.
Our total available liquidity remains strong at $11 billion, including off-balance sheet sources. Also included in other assets was a new $109 million right-of-use asset for the new lease accounting change. The mix of loans and deposits are shown on Slide 15.
Commercial and residential real estate loans grew in the period, offset by the higher than usual payoffs in our commercial real estate portfolio. The decline in consumer loans continues to be the target of wind down of the indirect dealer auto portfolio. And within deposits, we had a seasonal outflow of public deposits mostly in the money market category, offset by a similar increase in broker time deposits, along with a net $100 million of core customer deposit growth.
Slide 16 reflects repricing characteristics of our loan and lease portfolio, knowing our floating rate loan mix continues to increase the C&I growth. On Slide 17, we've highlighted the geographic diversification of our loan portfolio across the footprint. We'll also provide some selected loan and underwriting characteristics for each of our major portfolios.
Slide 18 reflects our credit quality stats, knowing the strength of our portfolio is supported by the continued decline in classified loans shown on the upper-right chart, now down to 0.66% of total loans or 7.4% of capital. In the bottom-right chart, we break out our FinPac leasing group net charge-offs from that of the rest of the bank, knowing the leasing component has been fairly consistent around 3% for the last year. Keep in mind, the weighted average yield of this portfolio is 10%.
Lastly, on Slide 19, 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 13.5%.
With our quarterly common stock dividend of $0.21 per share, the total payout ratio was 63% this quarter. Also, our tangible book value per share is $10.44, which when you also account for the $0.21 in dividends to shareholders last quarter, increased 4.5% over the prior period or 18% on an annualized basis.
Our excess capital declined slightly to approximately $162 million as a result of balance sheet 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.
[Operator Instructions] And we'll first hear from Jeff Rulis of D.A. Davidson.
So you guys outlined the Phase 1, $2 million to $3 million run rate cost saves by Q2 end. Do you have a number for the Phase 2 remaining?
Phase 2, we're estimating at $6 million to $8 million, and we'll have more details on that over the coming quarters. Granted that gets to be a smaller amount on a quarterly basis, but Phase 1 is complete, we're really excited before we're out of that.
And the expectations that are captured by year-end, I think? I can't remember that.
For -- in the run rate, in the fourth quarter, looking into 2020.
4Q run rate, okay. Got it. And then, Ron, I guess included in kind of your guide on expenses to increase next quarter with seasonal mortgage activity. If -- can we bake in a seasonal uptick in the mortgage banking volume and gain on sale? Or I guess more plainly, the fee income line there, or really just the balance of the year, your expectations updated on mortgage?
Yes. No, we expect the seasonal bell curve on that. So yes, I would expect an increase in volume and revenue for mortgage activity in the second quarter.
And the second half?
It'll be strong again in Q3. And then assuming no change in rates, all else being equal, generally, I see a seasonal drop-off in Q4.
And then on your margin guide, does that include -- is the assumption that what you saw last quarter -- excuse me, last year in the second quarter with -- you accessed higher cost borrowings and some margin compressions. Does that bake in dig in similarly that, that phenomenon happens again in the second quarter of this year?
Not expected in any additional borrowings over the balance of this year. Loan to deposit pipelines are strong, the key there is deposit pipelines are also very strong going in the Q2. I think what that reflects is a more normalized look at the bond premium amortization. So in that 3.8% to 3.9% range ex discount accretion is our near-term guidance. And that's with the more normalized, again, bond premium amortization level, similar to maybe early back in 2018, from the bond side specifically.
We'll go next to Steven Alexopoulos from JPMorgan.
I'd like to start on expenses. So first, looking at the bridge, Ron, you referenced there's $2.8 million reduction in incentives. What was that?
Partly because we had a very strong late 2018, and so there was an incentive catch up in Q4 of '18. I wouldn't say there was a market change in the incentive structure for 2019 compared to 2018, just reflects lesser activity early in the year.
Got you. Okay. And then on the store closures. I know you mentioned this, but you guys went too fast, at least exceeded my ability to write. How many stores closed in the current quarter? And what's still in the pipeline to be closed?
Yes. We have 15 in the first quarter, 11 were consolidations, 4 were on the sale, and we have 5 additional occurring here in the month of April.
You have additional stores beyond April, don't you, Ron in your pipeline?
Looking out into 2020, those are still under consideration, but not expected for the balance of 2019.
Yes. Okay. And then in terms of exploring options for the MSR asset. Is the sale one of the options you're considering? Or is that off the table?
There's a hand full of options on that, including that or a portion of along with hedging as well.
Okay. And what -- I mean, we could look at the revenue book, what are the actual earnings that you're getting from the asset if you were to sell it, like what would the hit look like?
Well, you can take a look at the last page of the earning release, it shows the gross servicing revenue at $10 million a quarter. There's always a normal [ course of ] time amortization, which will knock that down and there's expenses on it. But we'll have more discussion on that in the next quarter. The key is -- Steve, and again, the key is when I reduce the volatility just given where it's been in the last couple of quarters.
We'll move next to Matthew Clark, Piper Jaffray.
On expenses, the $174 million to $179 million for the upcoming quarter includes that $2 million to $3 million of restructuring charges. I guess how does that third and fourth quarter run rate look as of now? I think you've given guidance on more than one quarter in the past. Just curious what the run rate might look like as we progress the year.
Your question is specific to the fourth quarter of 2019 expense run rate?
Third and fourth.
Third and fourth. Third will probably be similar on the mortgage side, so it will probably be around that range. And then fourth, depending on what happens with the seasonal volumes, it could be down slightly. I'd like to phrase it more in terms of efficiency ratio ex the fair value squarely in the mid-50s now and that's our target.
Okay. Great. And then on loan growth, up 6% year-over-year. It sounds like you feel good about that type of growth for the full year with some catch-up here for the balance. Can you just speak to the pipeline specifically? I know you said it was strong, but how does it compare to a year ago? And then if you could give any color around the payoffs this quarter, the basis for those payoffs, whether or not they were competitive payoffs or businesses selling so forth?
Sure. Matthew, this is Tory Nixon, I'll start with pipeline. So a pipeline -- I think as was mentioned, couple of hundred million in production kind of put -- kind of move from early Q1 into Q4, that's what our customers requested, so we're be able to do that for them. And we've had steady growth in acquiring people in our middle market business. And been able to kind of increase our pipeline in our corporate banking business, about $600 million over the quarter. So a really nice bump that is full relationships that we're looking to bank. So pipeline there looks really strong. And it's stronger in other parts of the bank as well, but just kind of highlighting the corporate banking space. On the payoffs, we had about $200 million in real estate payoffs that were higher than kind of a normal run rate for us. And those are broken into kind of 2 sections. The first half of it being just people selling their buildings and paying off their loans. And then the other half being just matured loans that end up -- go in -- being refinanced to life companies. So kind of a normal, general course of business this time of year.
Okay. And then just on the margin guidance of 3.80% to 3.90%. If you could just offer some color around what your assumptions are that might get you to the lower end of the range. And then, a related question just around the spot rate on interest-bearing deposit cost at the end of March if we had it.
Sure. interest-bearing deposit cost for the month of March were up a couple of bps from the full quarter run rates, so that's obviously affecting the Q2 estimate. I'd say the bigger piece, though, was going to be on the bond side. I expect that taxable bond yield to be in that 2.5% range for the balance of the quarter. So that will put the premiumization probably somewhere closer to $5 million, give or take compared to $1.5 million we had here in the second quarter, and that take you into that 3.8% to 3.9% range. Could very well be on the upper end of that range just given discount accretion will be there for, like I said, anywhere from 2 to 5 bps on top of that.
We'll move next to Aaron Deer, Sandler O'Neill.
You mentioned the normal MSR amortization level, what was the level of that in the first quarter ex the valuation adjustment?
Roughly $7 million. I don't know the exact number off the top of my head but it was in that -- right around that level.
Okay. And then the reserve ratio ticked up, just to touch, in the quarter the first time that's happened in a while. Is that reflective of just -- is the portfolio transitions more to commercial? And what might we expect for any sort of reserve build ahead of CECL implementation?
I don't know if I'd call that a reserve build ahead of CECL. We'll have -- again, we'll have a more formal SAB 74 Disclosure later this year specific to CECL. But I think what you see what the reserve specifically over the last 2 years is exactly what we show in that top-right chart on Page 18 of the slide presentation, classified to capital under the incurred loss methodology continues to decrease, the portfolio continues to get stronger. So it's been -- the reserve's been hanging in this 70 to 75 bp range, and I expect it'll be somewhere in that range through the balance of the year assuming a significant downturn in the economy over the next 9 months.
Okay. And then with the growth that you have been putting and the C&I book, can you talk about the -- what kind of rates those are currently coming on at? And to the extent that you are getting floors on those, where are the floors are relative to the stated rate?
Yes. Tory Nixon again. No real floors in the -- on the rate side with these, but they're -- they kind of range very typical, kind of traditional C&I pricing on the marketplace. So we're seeing everything, LIBOR adjusted from about 175 to 225 over somewhere in that range, so yes. So kind of in that space.
From KBW, we'll go to Jackie Bohlen.
In terms of deposits, movements in the quarter, if I'm recalling correctly, that's a pretty typical seasonal flow in terms of brokered maybe coming up a bit in the first half of the year and then down in the second half. Was there anything unusual in that? Or any smaller or larger flows than you would have anticipated?
Nothing unusual. Again, expected seasonal public funds drop off that we balance with the brokered for total. So that would be the goal over the balance of the year. Again, with the stronger deposit pipeline heading into Q2 to see a reduction in brokered over the course of the year.
Okay. And I realize that we're only on April 18, so it's not very far from actual tax day. But were there any change in trends in terms of outflows you may have seen as a result of some of the new tax laws?
Again, early to see, but so far nothing significant.
Okay. And then quick question on expenses. The $24 million to $25 million that you gave in terms of the Phase 1 savings that you expect by the end of Q2. That's comparable to the original $18 million to $24 million guidance, correct?
Correct.
Okay. And then just lastly. From the sale of the 4 store closures, was there any significant financial impact from those?
Small gain, roughly $1 million. Good premium, again, small [ band of ] deposits but reflected in other income.
Next we'll hear from David Long of Raymond James.
Wanted to ask about deposit betas and what you're seeing. Now with the Fed likely on hold, has deposit pricing eased some in your markets? I've been hearing about fewer promotional deposit opportunities. And just curious what you're seeing in your markets on that end.
Yes. It has started to ease. I would expect we'll see a continued -- just slight increase next quarter or 2. Of course, that will feed off of any further Fed announcements later in the summer.
Got it. And then switching gears. Second question I have is for Tory. In regard to the pipeline that you have for hiring veteran bankers from other institutions. Is -- do you expect more along the midmarket or the large corporate side? And are you seeing more opportunities to attract people from some of the larger banks or more of the smaller community type banks?
So we've had kind of the same strategy for the last couple of years. And that has been to add a talent base in the company that we just historically have not had and that's more in the true middle market space, defined -- when we did define it, the we've defined it is revenues of $50 million to $500 million. And to date, through the last couple of years, we've hired about 35 people, most of them are RMs, are bankers, a handful are support staff, underwriters and others. And they are -- they predominantly have come from larger institutions across the -- our footprint.
And how is that pipeline today versus maybe 3 and 6 months ago?
Yes. So as I mentioned earlier, the pipeline, as we look at it, is seeing a lot of growth. We've got strong loan opportunities, strong deposit opportunities and some good core fee income as a result of it. I mean the plan here is to absolutely go after the market in a way that we're doing full relationship banking. So this is not a SNC player, anything like that, it's a full relationship banking process. So it looks very good.
Next we'll hear from Michael Young of SunTrust.
Wanted to start actually on some of the reinvestment that you've been doing on the technology front as you been bringing down the branch network. You had initially guided to, I think, about 1/3 of that cost save reinvested. I'm just curious kind of where we are on that front. And as that's gained kind of more attention in the industry as a whole, I mean, can you just maybe describe a little bit more in terms of where those dollars have been reinvested into within the organization?
Sure. This is Ron. And overall, reinvestments to date through the saves have been pretty much right in line with plans. It was a little bit of give or take on a quarter-over-quarter basis but we're in that range of roughly 1/3. I'd say those reinvestments have been around digital initiatives, product strategies, marketing, additional commercial products and services in line with what you've heard Tory talk about it over the past year, 1.5 years. Just as we've worked more and more into that lower middle market and middle market space. So pretty much right in line with where we expect.
Okay. A follow-up just on sort of market share take opportunity. I've heard more commentary potentially out on the West Coast in particular in terms of an acceleration in client attrition from some of the larger or largest institution out there. Have you guys seen that either in the consumer or commercial space or even on the hiring side, I mean, on a more meaningful fashion lately?
Michael, this is Tory again. I don't know that it's changed dramatically over the last 6 to 9 months. I think it's been fairly consistent. You know that you're finding bankers across all lines of business at the end of any year or the beginning of the year much more open to the idea of switching institutions and moving to other companies. And I -- there's generally -- there is definitely a flow from larger banks into more regional banks that I've seen. And we've got a good story to tell, so we've been very successful, I think, in telling that story and getting really solid talent into the company.
Michael, it's Cort. We provide a great opportunity for bankers that Tory has brought in to bring customers to Umpqua Bank. We now understand upper, middle market to small corporate-type borrowing. And because of that reputation that Tory has been building over the last 3 to 4 years, the pipeline for talent has increased, Tory's being somewhat modest. And so we are a great opportunity for people to come and bring their customers with them.
Okay. And last one maybe just on capital. I know -- I'm sorry to ask the question again, but I know in the past, you've been sort of against share repurchase, but just given more valuations are kind of at the lowest level we've seen for you all in about 10 years. I mean is there any more interest in at least having something out there available just in case things get volatile and shares are trading at big discounts?
We have it available, we will be opportunistic historically. And I expect, for the near term, it will be continued just to repurchase shares. Share increase is under equity comp plans, all the share count is flat. Keep in mind too, we have a very healthy dividend with now a roughly 5% plus yield with the stock price where it is. And $160 million of excess capital is not an egregious amount of excess. It's something that we plan on utilizing to help fund continued organic growth.
Okay. And if I could sneak just one last one in the bond premium amortization. Is there something -- I mean other than just watching kind of 10-year yields and refis that we should watch for that would telling in terms of where we're going to end a quarter, a year, in terms of that dynamic going forward?
That's great. You can totally do a correlation. Going back the last several years by quarter and it tracks pretty well on the 10 year. There'll always be a little bit of play in terms of the spread. But generally, I use the 10 years proxy internally.
[Operator Instructions] Next, we'll hear from Tyler Stafford of Stephens.
I wanted to follow-up on the last 1/3 of the store consolidations in 2020. Ron, I think you said those are still under consideration. So is there a potential you may not close that last round of stores that were originally laid out?
Tyler, it's Cort. So I think when we announced the store closures some 18 months ago, we are exactly on track with what we told you all when we started the initiative. Like I think we've mentioned on prior calls, we do rank all of our stores and look at particular attributes. We have seen some of the stores 1.5 years ago perform better than they were originally. So that's been actually good to see as we've -- as we continue to assess these stores. Like Ron said, we have nothing scheduled between now and the end of the year. That does not mean though, we wouldn't consolidate or potentially entertain a sale, if so, approach based on what we see are the opportunities. So what I'm saying is, Ron tracked what we told you all. We continually assess all of our stores, but nothing planned between now and the end of this year.
Okay. I apologize if I missed this earlier, but just on the potential that we discussed last quarter to rationalize the home lending expenses. Last call, you said that the gain on sale margins out of the mortgage business were in the high 2s, you'd be biased to rationalize the expense based. You guys were at 2.95% gain on sale margin this quarter. So just curious of getting updated thoughts or comments related to that.
Nothing new on that front. Again, we're heading into Q2, seasonally stronger. I do expect an increase in that gain on sale margin on the face of the P&L and the overall cost of the production is roughly 250 bps. So you get a sense of the spread and the return on the bottom line. But we'll talk about that more over the course of the coming couple of quarters as we see things change and ideally continue to see improvement like we saw in Q1.
Okay. On the revenue synergy side under Next Gen, the original $30 million to $40 million. Ron, can you just remind us if you've recognized any of those synergies so far? And just remind us the expectations for the timing of those some over the next, I guess, 2 years.
You bet. And again, I'll probably call your attention to last quarter's presentation. We had a chart in there showing the impacts in 2018, the lift we saw, which was a little over 1/3 of the target of $30 million to $40 million incremental by 2020. Looking at Q1 here we had a drop in more transactional swap activity. I think that was just more a function of rates, but we'll see that movement from quarter-to-quarter. Obviously, back to what Tory mentioned earlier in terms of continued customer growth in the lower-middle market and middle market space, we do expect those core fee income items, or revenue items to continue to increase over the balance of the year and ideally will be in that range of plus $30 million to $40 million for 2020 compared back to 2017. But obviously, we'll talk about that quarterly going forward.
Got it. Okay. And then just last one for me. You originally set the Next Gen targets under both a flat-rate outlook and then the moderating -- moderately increasing rate outlook. So since you guys originally set the targets, we've gotten 4, 5 rate increases. So I'm just curious how we should be thinking about the go-forward longer-term kind of margin and efficiency and profitability targets you laid out at this point that the Fed now is on pause. Should we be thinking about it kind of somewhere in between that? Or what are your thoughts there?
Great question. And also, remember that those targets we laid out ex any fair value changes, right? On the MSR and swap as the long bond continues to move around. And in here, in the first quarter, we're at 15.5% return on tangible if you back out, again, the swap and CVA. So I'd best characterize that it's probably between the two if the Fed stops here at this point. Still that's a big if, looking out over the next year, 1.5 years, but if that were to occur, probably between the two on many numbers those measure we laid out, which we're obviously very happy with our progress 1.5 years or so in.
Next, we'll hear from Jeff Rulis of D.A. Davidson.
I just had follow-up on that. The service charges on deposits down linked quarter, you had less days in the quarter, but wanted to see if there's any correlation during quarters of these branch closures that, I don't know, if some charges are waived for customers that are impacted by closed branches or is there any -- if there's not, could you speak to any expectations on the service charge line item?
Yes, nothing material. I think the start of your question nailed it on the head, less days in the quarter.
Seasonally, again, expectation to pick up?
Correct. If you look at year-over-year Q1, we're up 2% in the service charge area. So that's -- obviously there's been some good traction underneath the covers there and a lot of initiatives Tory talked about. Granted the revenue initiatives are across several of those line items, but certainly the service charges 2% up year-over-year will probably be the better corollary for that specific line item versus Q4 to Q1, just getting through the number of the days.
And it appears there are no further questions at this time.
Okay. I want to thank everyone for their interest in Umpqua Holdings and attendance on the call today. This will conclude the call. Goodbye.
Again, that does conclude today's conference. Thank you all for your participation. You may all disconnect.