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Good morning, and welcome to Umpqua Holdings Corporation's First Quarter 2021 Earnings Call. [Operator Instructions] I will now turn the meeting over to Ron Farnsworth, Chief Financial Officer.
Great. Thank you, Laura. Good morning, and thank you for joining us today on our First Quarter 2021 Earnings Call. With me this morning are Cort O’Haver, the President and CEO of Umpqua Holdings Corporation; Tory Nixon, President of Umpqua Bank; 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 2021 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. Now I will now turn the call over to Cort O’Haver.
Okay. Thank you, Ron. I'll provide a brief recap of our performance and then pass to Ron to discuss financials. Frank will discuss credit, and then we'll take your questions.
For the first quarter, we reported earnings available to shareholders of $107.7 million, and this represents EPS of $0.49 per share and reflects a strong start to our year. First quarter earning highlights include both customer and balance sheet growth. Loan balances grew $381 million or 1.8%. The components of loan growth included $84 million of organic non-PPP loan balance growth and a net increase of PPP balances of $297 million. As mentioned on our last earnings call and throughout the investor conferences we participated in the past quarter, we feel very opportunistic about loan growth in 2021. Total deposit balances grew $1.3 billion or 5.1% during the quarter. We generated strong growth in noninterest-bearing DDA of $865 million or 9%, driven by continued customer acquisition and PPP round 2 production. All deposit product categories showed growth during the quarter with the exception of CDs, down $374 million or 13% as we continue to manage down higher cost deposits.
Regarding capital, we announced to our shareholders in February, a dividend of $0.21 per share, consistent with historical payments and expect an announcement on the timing of our second quarter dividend soon. With our healthy levels of capital, we are consistently analyzing the best methods to enhance shareholder returns and have multiple options available to us. It's premature to announce anything today, but we are well positioned to be more active in our capital management. Now for a quick update on Next Gen 2.0 initiatives, which are progressing very nicely. First, balance growth. This is a central part of the Next Gen 2.0, and we are making great progress. PPP and the economic uncertainty associated with the pandemic created significant disruption, particularly for businesses. Following the strategic transformation we implemented through Next Gen 1.0, Umpqua is uniquely positioned to provide the kind of personalized banking experience companies are looking for to help them navigate ongoing change, and we're seeing very, very strong results.
We're already -- we've already been able to leverage the positive brand awareness of our PPP work and market disruption opportunities to attract both customers and new talent. Our proactive PPP outreach programs focused on both companies we helped directly who are brand new to the bank as well as others that had a negative PPP experience elsewhere. There are close to 5,900 customers whose very first product with us was a PPP loan. And to date, we have converted over 2,000 of them or 36% to full relationships consisting of additional loan and deposit products. In addition, we've made nearly a dozen strategic customer-facing hires this year across our middle market, community banking and commercial real estate teams. We're looking to add additional positions this year, and we'll focus on talent acquisition in the Greater Bay Area, Seattle, Portland and Southern California markets.
Our human digital technology initiatives also remain an important piece of our strategy, and our customers are engaging with us through digital channels more and more frequently, including year-over-year increases of 35% more mobile deposit transactions, 76% more Zelle transactions and 16% more daily sessions within our mobile banking app compared to the first quarter of last year. In addition, Go-To enrollments have climbed past 80,000 customer messages within the Go-To platform, and they were up 49% this quarter. Another important aspect of our human digital strategy is how we empower our associates with best-in-class tools to give them an advantage in creating positive and memorable customer experience. One recent example is how we utilized our new loan origination system, nCino, to execute the second round of PPP, both improving the customer experience and operational efficiency. Leveraging this new technology allowed us to process the PPP request with 75% less FTE compared to the first round and deliver funding to operating accounts more quickly and seamlessly. We're looking forward to implementing this new LOS to the rest of the bank later this year.
On the commercial innovation side, we continue to execute on our ambitious road map, launching integrated receivables, adding APIs to our catalog, implementing enhancements to our commercial card solution and upgrading waves of customers to a new and enhanced online banking experience.
In regards to operational excellence, the sale of Umpqua Investments to Steward Partners is scheduled to close officially tomorrow. We consider Steward a strategic partner and are looking forward to partnering with them on referral agreements in the future. Earlier this quarter, we also announced plans to consolidate 12 store locations by the end of Q2. These 12 locations plus the store sales that were completed last fall bring our total Next Gen 2.0 store rationalizations so far to 19. We remain on track to hit our 30 to 50 store rationalizations by the end of 2022 and are confident we will come in at the top end of that range. As we mentioned previously, as part of the reinventing of our go-forward Umpqua workplace of the future, we're working to consolidate back office space to fit both the new working habits of our associates and reduce noninterest expenses. When those plans and the timing of additional expense reductions become official, we'll provide additional updates.
And finally, this quarter, we're sharing a change in our segment reporting as we've highlighted in both the earnings release and presentation. This change aligns with how we manage the bank and also provide greater transparency into the financial contribution of mortgage banking activities. While our mortgage banking teams had a great year in 2020 and took advantage of favorable market conditions, we did not want their success to cloud the terrific results we're seeing from our core bank. As a brief recap, the core banking segment includes all lines of business except mortgage banking, but includes wholesale, retail, wealth management as well as the operations, technology and administrative functions of the bank and holding company. As a result of Next Gen 1.0 initiatives, managing through the pandemic successfully and opportunistically in the beginning phases of Umpqua Next Gen 2.0, we're reporting solid financial trends within the core bank, including loan portfolio growth, an increase in noninterest income and lower noninterest expense. The core bank was responsible for 81% of our reported earnings this quarter.
The mortgage banking segment includes the revenue earned from the production and sale of residential real estate loans, the servicing income from our service portfolio, the quarterly changes to the MSR asset and specific expenses that are related to those activities, including variable commission expenses. Revenue and related expenses related to residential real estate loans held for investment are included in the core banking segment just discussed.
And as an anchor product for our consumer channels and the origination of those portfolio loans can such -- can vary such as private bank originated mortgages and permanent financing resulting from our construction to prem products. That's a mouthful.
One current comment before passing to Ron, I'm incredibly enthusiastic about growth prospects within our markets, the momentum from our banking teams, our options for capital deployment and all the results still to come from our Next Gen 2.0 initiatives. And with that, Ron, take it away.
Okay. Thank you, Cort. And for those on the call, I want to follow along, I'll refer in to certain page numbers from our earnings presentation. Page 8 of the slide presentation contains our summary quarterly P&L. I'm going to talk at a higher level on the top of the house items, spend more time on our new segment disclosures and then wrap with CECL and capital. Our GAAP earnings per share for Q1 was $0.49, lower than Q4 as expected due to lower PPP fee recognition, lower seasonal mortgage banking activity and a normalized tax rate, offset by the expected reduction in noninterest expense. Excluding MSR input and CVA fair value adjustments, our adjusted earnings were $0.46 per share this quarter.
For the moving parts, net interest income declined due mainly to lower PPP fee recognition, offset partially by lower bond premium amortization and a continued reduction in our cost of funds. We had no provision for loan loss this quarter. And noninterest income reflected a decline in mortgage activity, although not as much as expected a quarter ago. Also, we recorded a fair value gain on the swap derivative as long-term interest rates increased this quarter. Noninterest expense declined to below Q3 2020 levels and our tax rate normalized this quarter as expected, at 24.5%.
As for the balance sheet on Slide 9, we are intentionally holding higher levels of interest-bearing cash given the volatile environment, ending the quarter at $2.9 billion, noting the average balance was up 20%. This higher level of cash cost our NIM 4 basis points, but gives us significant future optionality for funding loan growth or deleveraging certain liabilities. We increased the bond portfolio 8% as longer-term rates increased during the quarter into similar duration agency investments.
And our total available liquidity, including off-balance sheet sources at quarter end was $14 billion, representing 47% of total assets and 55% of total deposits, giving us ample liquidity to fund future loan growth and continue to reduce higher cost deposits and term borrowings. Okay. Now to our refresh segment disclosures on Pages 10 and 11 of the presentation or Pages 15 and 16 of the release. We've simplified our segment disclosures by separating out the core bank from the mortgage banking segment to give investors more transparency on the underlying profitability, trends and some of the more volatile items over the past year, along with reference rates that lead to fair value changes. So now within the core banking segment on Page 10 of the presentation or Page 15 of the release. Net interest income declined sequentially, primarily related to the $9 million decline in PPP fees. Later in the presentation, we have the traditional net interest income and NIM slides, which provide more detail on the moving parts at a consolidated level, but I'll point out, our cost to restrain deposits continue to decline, which we expect will continue over the coming quarters as liabilities reprice lower. I'll talk about CECL and the provision in detail in a few minutes, but you'll see here, we had no provision nor recapture this quarter. 2 lines down is the gain on swap derivatives related to the increase in long-term interest rates this quarter, which is also noted at the bottom of the page. And noninterest income declined sequentially related to a gain on store sales back in Q4. Our focus continues to be on growing commercial fee revenue. And noninterest expense declined $23 million as expected from the fourth quarter. Pretax income for the core banking segment increased 9% this quarter to $115 million, and the tax rate normalized this quarter, resulting in $87 million of net income for the core banking segment. The efficiency ratio on the core is 56%, a few ticks lower than the past few quarters.
Turning now to Page 11 of the presentation or Page 16 of the earnings release, we show the mortgage banking segment 5-quarter trends. To start, we had just over $1.6 billion in total held for sale volume this quarter, a change of 8% from Q4. This was better than the 20% decline we expected a quarter ago. The gain on sale margin was 3.82%, in line with previous guidance. These 2 items resulted in the $62.5 million of origination and sale revenue noted towards the top left of the page. Our servicing revenue was stable but did receive higher-than-expected pay down activity earlier in the quarter. For the change in MSR fair value, the passage of time piece remains stable as expected, while the change due to valuation inputs was a loss of $2 million due mainly to the higher pay down activity earlier in the quarter. Noninterest expense totaled $42 million for the quarter. Again, this represents a direct held-for-sale origination costs, servicing costs, along with administrative and allocated costs. The direct expense component of this was $31.5 million as noted on the right side of the page, and represented 1.90% of production volume. In prior calls, I talked about a 225 to 250 basis point all-in cost for home lending, but that included the entire group, including the categories I just discussed. To project expense here in the future, this is a good trend level of basis points for the direct origination component. Pretax income for the mortgage banking segment was $27 million, and net income was $20 million, both down 34% from the fourth quarter and within the range of our expectations. It's important to note here, the mortgage banking segment represents only 19% of our pretax income compared to 28% in the fourth quarter and 32% in the third quarter as our core banking growth initiatives take hold. For the near-term outlook on our mortgage segment, assuming no significant change in interest rates, we expect held for sale volumes to decline over the course of the year with best estimates of around $1 billion to $1.1 billion for the next 2 quarters and the mid- $4 billion range for the full year.
Gain on sale margins should normalize into the low to mid-3% range later this year. The MSR passage of time should be pretty consistent, and the change due to input should be relatively low, again, assuming no significant change in interest rates. And direct held for sale expense levels and basis points on production should remain fairly consistent with the 5 quarter trend. Okay. I hope this segment discussion was helpful to understanding the moving parts and potential future drivers on profitability. I spent most of my time discussing the segments and note there are several slides later in the presentation on consolidated trends for net interest income margin and expense, but hopefully, this help give some greater insight into the company.
A couple final items before I turn it over to Frank. Let me take your attention forward to Slide 23 on CECL and our allowance for credit loss. As a reminder, our CECL process incorporates a life of loan reasonable and supportable period for the economic forecast for all portfolios with the exception of C&I, which uses a 12-month reasonable and supportable period, reverting gradually to the output mean thereafter. Hence, these forecasts incorporate economic recovery in 2021 and beyond, as most economic forecasts revert to the mean within a 2- to 3-year period.
We use the Moody's baseline economic forecast again this quarter, updated in February, instead of moving back to the consensus as we thought a quarter ago due to a closer approximation of the move in long-term interest rates. Overall, the forecast showed improvement in several key areas as the economy reopens. However, Moody's also updated their investor CRE forecast late in the quarter, which included deteriorating forecast related to several investor CRE portfolios, such as hotel, office and retail as compared to the prior quarter CRE forecast.
With that update, the recaptures expected earlier in the quarter were reduced, and our model has resulted in an approximately $10 million recapture here in Q1. Given the uncertainty and expectations for more clarity as we progress throughout the year, we overlaid the model result ending with no provision for the quarter. Net charge-offs for Q1 remained low at $17.6 million, much lower than the models from last year suggested. And the majority of net charge-offs this quarter related to small ticket leases that were past due following rolling off their deferral period, which we expected and discussed with you last quarter.
The ACL at quarter end was 1.49%, noting this ratio was 1.65%, excluding the government-guaranteed PPP loans. As these are economic forecasts driving the reserve, it will simply take the passage of time to see if net charge-offs follow as modeled. But to date, the models are simply overestimated the actual net charge-offs, given at least a lag of 4 quarters.
And lastly, on Slide 21, I want to highlight capital. Noting that all of our regulatory ratios remain in excess of well-capitalized levels, our Tier 1 common ratio was 12.6%, and our total risk-based capital ratio was 15.9%. The bank level total risk-based capital ratio was 14.9%, which is the basis for our calculation of $611 million in excess capital. That is excess over our 12% in-house floor.
And with that, I will now turn the call over to Frank Namdar to discuss credit.
Thank you, Ron. I will also be referring to certain page numbers from our earnings presentation for those who want to follow along. We have placed all relevant credit quality information in 1 section of the presentation starting on Page 23, to display our CECL information normal presentation of credit quality ratios, deferrals and portfolios of interest for a comprehensive view of our credit quality.
Slide 24 reflects our credit quality statistics. Our nonperforming assets to total assets decreased 5 basis points to 0.19%. Our annualized net charge-off percentage to average loans and leases decreased 2 basis points to 0.33%. Included in net charge-off number this quarter was $16 million of the previously disclosed pool of FinPac leases with borrowers who elected deferral, but were unable to resume regular payments. We expect the FinPac portfolio to return to more historical levels of 3% to 3.5% in the coming quarters.
Slide 25 shows the total loan balances that were on deferment at the end of the quarter at 1.4% of the loan book. For deferrals on a portfolio basis, we are reporting 0.3% deferrals in commercial, 1.4% in commercial real estate, 1.4% in FinPac, 0.4% in consumer and 2.9% in residential real estate. We have excluded $166 million in Ginnie Mae repurchases from the deferral numbers as those loans are guaranteed by FHA, VA or USDA role development.
On Slides 26 and 27, we continue to highlight the same portfolios of interest, which all continue to perform very well. I would like to again point out that hospitality represents only 2.6% of our portfolio. There are no imminent issues. However, we continue to watch this space very closely. Occupancy levels have increased and are now in excess of 60% on average with our extended stay and limited service properties continuing to perform above this level. As I've stated previously, this portfolio is of low leverage with very strong overall sponsorship to borrowers we have history with. The rest of these portfolios are represented with air transportation at 0.6% with no deferrals, restaurants at 0.5% with only limited deferrals and finally, gaming at 1.8% of our portfolio with no current deferrals. We remain confident in the quality of our loan book and look forward to future growth.
I'll now turn the call back over to Cort.
Okay. Thanks, Frank and Ron, for your comments. And Laura, we will now turn over to questions.
[Operator Instructions] Your first question will come from the line of Jackie Bohlen from KBW.
Cort, I wanted to talk about fees, just to kick us off. Obviously, there's a lot of moving parts there, and thank you for splitting out service charges versus the card revenue, that was helpful. Just as I think about and I'm specifically looking at the composition of other income, commercial product revenue, I know you've got a lot of moving pieces in there and some of it includes swaps. What needs to happen to rebound to pre-pandemic levels?
Jackie, let me have Tory answer that since it's near and dear to his heart, and then I'll backfill on Tory's comments.
Jackie, this is Tory. I think there's a -- certainly, the pandemic kind of put a halt on just general activity in some of the transaction space. And we're seeing a rebound in that today. As an example, 1 thing that we watch very closely in our middle market and community banking segments is commercial card spend. And March was the single largest commercial card spend in the history of the company, it's up 17% year-over-year. And that is really without any travel and entertainment that historically had been a big part of commercial card spend.
So it's 1 indication. We're seeing activity and increases in TM and some other things, so merchant services. So there's a lot of activity that's starting to starting to happen in our markets. And I think we're just a quarter or 2 away of having that -- all that activity kind of show up in the bank's P&L.
And Jackie, 1 last thing. As you've heard us talk about balanced growth in the past, we're not just looking for single vertical growth items. In other words, we're looking for customers who borrow deposit and have an opportunity for us to create fee revenue opportunities for the company. And that's been a big mission around here for the last 3 or 4 years, and you're seeing that activity in the results coming out of commercial banking.
So that 17% growth, is that reflective of customer development that's been taking place over the past year and prior, but maybe we didn't see it because of the pandemic. And now as we normalize, the initial pop could be higher than it otherwise would have because you've got some run rate to make up for. Is that a fair assessment?
I think so. I think I'd say it a slightly different way. The commercial C&I customer at Umpqua Bank is different today than it was 2 to 3 years ago. It's much higher, much bigger, a lot more activity. And so just the idea of transactions and the economy kind of moving again is -- will absolutely create some opportunity for us in our fee income space, certainly in commercial and community banking.
Okay. And those customers, are any of them part of that 36% that you referenced in terms of converting PPP customers over? Or are these separate customer acquisition efforts?
That would be -- it would be minimal in that. So that's not really represented at all. This is just traditional growth in our middle market segment over the last 2 to 2.5 years. It's just a different looking customer today than it was a couple years ago.
Okay. And then I guess my follow-up question, and then I'll step back, which is what kind of growth are you seeing from the new relationships with PPP? I mean you've got a pretty good conversion rate going there?
Yes. So this is Tory again. So I think as Cort mentioned, we had about 6,000-or-so loans, PPP loans, that we made to non-Umpqua bank customers, roughly 2,000 of those. We have since turned them into full-fledged relationships with the bank. They vary in size from companies that have $100 million or $200 million of revenue to a small, small company in our community, so kind of across the spectrum.
To date, most of our activity to bring them into the bank has been deposit generation and certainly getting them set up on TM and commercial card and integrated payments and all those things that we talk about. And it's really occurred over the last 3 to 4 months. The way I look at it is we have another 4,000 to go. So there's a lot of opportunity for us just in that book.
But I think Cort also mentioned that we're taking a very aggressive stance on prospecting and kind of highlighting and promoting the brand of Umpqua Bank and what we've done, what we continue to do in our communities to attract talent, new bankers and attract new customers.
Your next question will come from the line of Jared Shaw from Wells Fargo Securities.
I guess looking at the loan growth outlook, but specifically, C&I, how much do you really have to burn or how much do the customers really have to burn through all that liquidity on the balance sheet before they come back into a net borrower position or start seeing growth? Or I guess, how should we be thinking about that, the dynamic between needing to see a higher loan-to-deposit ratio before loans start really increasing?
Jared, this is Tory Nixon again. I think there's a couple of ways that I would answer that. You're absolutely right. Obviously, a -- businesses have a ton of liquidity as does the bank. And the use of that liquidity is kind of first and foremost for them. One of the things we watch is utilization rates in lines of credit for our middle market and community banking segments. And year-over-year, those have gone from the low 40s to the low 30s in terms of utilization. So companies just aren't leveraging their debt to fund their company.
So that's just a process that's going to have to change over the next 3 to 6 to 9 months. I would say on the loan growth front and the pipeline for us, I think I said at our last call that we had reached a pipeline that was pre-pandemic in size, and that was about $3 billion. And today, we've actually grown that this quarter to $3.5 billion. So our loan pipeline is mostly for our prospects new -- would be new to the bank and quite honestly, it's the highest pipeline, loan pipeline I've seen since I've been at the company in 5 years. So we feel very good about the activity from our folks on the line and kind of view for the future on the loan front.
Okay. And then is there any plan in sort of conjunction with the Next Gen 2.0 and some of the closures of branch space? What's the hiring plan to go out? And is there a plan to target new relationship managers or grow the commercial lending personnel base?
Absolutely. I mean we have -- we started on that, I think, 2.5, 3 years ago in earnest, and we continue to do it. And we've added quite a few folks in our middle market space. Some of them have just been replacements of people that we wanted to upgrade talent as we kind of moved up in terms of size of company and complexity of company that we wanted to bank. And then many of them are just net new adds to the company that are in markets that we feel we have a lot of growth opportunity. I think we're very optimistic about our major metropolitan markets as it relates to really core middle market business. So we constantly and consistently have -- we're looking for talent, and we have a pipeline that we are trying to bring into the company. So we will continue to do that.
Okay. And then just finally for me. Maybe, Ron, you're talking about the opportunity to roll off some higher cost funds and maturities. What's the maturity schedule for time deposits and potentially, I guess, borrowings look like over the next 12 months?
Yes. The majority of the time deposits will have a tail within 12 months and then borrowing is the same. So I think there'll be quite a bit opportunity for continued reduction in those 2 helping support the NIM.
Your next question will come from the line of Matthew Clark from Piper Sandler.
Maybe just start on the margin outlook and trying to get a sense for maybe we're near a trough level, just given the opportunity to remix some excess liquidity. Can you just give us the kind of weighted average rate on new loans and securities, so we can try to get a sense for where that margin is headed?
Yes. Matt, this is Tory again. Interest rates on new originations are -- depending on the line of business, are between low 3s to 4, low 4s, really. So it's been fairly consistent, actually, over the last couple quarters. So really haven't seen any change there on new originations.
And Matt, this is Ron. On the bond side, the upper 1s, maybe to 2, depending on the day and/or the generations in the 10-year. And I'd say, overall, for near-term outlook, we expect the margin to be relatively stable at this level and then longer term would be benefiting from deploying that excess liquidity back into loans, increasing that loan-to-deposit ratio. But for near term, pretty stable.
Okay. Great. And maybe just shifting gears to capital. I think you guys were revisiting the buyback last quarter were in the process of looking at it and seeking maybe approval. I guess can you give us an update on where that stands and what your appetite looks like?
So with the amount of excess capital we've got, we're looking at all of our capital opportunities, and I'll get to your direct question in a second, including, is there an opportunity to -- I call it plug-and-play some small opportunity where we have an adjacent opportunity to increase a fee category or into a loan expertise that we've got. So that would be always the #1 objective with the amount of excess capital we've got. And we are being very opportunistic there. And then relative to a buyback, it does take regulatory approval after our impairment of last year, and there will be more to come on that fairly shortly.
Okay. And then your commentary around small fee generators or asset generators, any desire to do whole bank M&A to the extent your multiple can afford it?
Yes. I mean we're always -- I mean, we've always been opportunistic. Obviously, we've messaged to you all that operating the company like we have for the last 3 or 4 years, producing better profitability has been the #1, and we've proven that. We've been opportunistic at looking at all the deals that are out there. I think right now today where we can accelerate our success against our core strategy of becoming a business bank of choice is more towards a plug-and-play type, and I call it plug-and-play, nothing is plug-and-play guys. A plug-and-play type opportunity where we can execute very quickly and integrate and go on down the road. But that's how we look at it.
Okay. And last one, just a housekeeping one. Ron, do you happen to have the remaining net PPP fees left with round 2?
Yes. I do. It's approximately -- in total PPP fees roughly $44.5 million to be recognized. Round 1 of that would be just around $12.7 million, round 2 would be around $31.7 million. So the majority for round 2, but we do expect forgiveness to continue throughout the year.
Your next question will come from the line of Michael Young from Truist Securities.
I wanted to start with the segment breakout. I appreciate the extra disclosure and color there. I think it's helpful. I just wanted to make sure I kind of got the message though. It seems like if we sort of normalize for PPP fees and provision, the bank is kind of representative of the value of the stock and maybe the mortgage business is relatively free or inexpensive to investors. But is there anything in the -- if we kind of rewound it back into prior years where maybe mortgage volume wasn't as strong where the mortgage business was losing money frequently?
Michael, this is Ron. I wouldn't say the mortgage business is losing money. Anytime that occurred might have been related to a significant downdraft in interest rates and so you had an MSR fair value charge that wasn't quickly followed by increase in volume. We actually didn't experience that last year. Q1 of last year, you'll see in the mortgage segment did show that MSR hit, but then obviously, record earnings over the following 2, 3 quarters. But absent MSR fluctuations now, the profitability remains just at lower levels.
Okay. And then, I guess, the valuation on the bank is pretty reasonable. It seems like the plan is to kind of march that forward. I didn't know if there was any additional color you could give, maybe Ron, at this point, now that there are some more defined, I guess, portions of the expense savings and timing around kind of an expense guide, maybe into 2Q or at the end of the year, as you've done in the past with Next Gen 1?
Yes. Great question. And you're right. I mean the goal with the segment change and we talked about these moving parts every quarter for the last several years, but actually seeing them on paper helps just from a transparency standpoint. So that was most definitely the goal to see the underlying profitability and value trends of the core bank versus that of mortgage.
On Page 3 of the presentation that we do lay out on the right side, those Next Gen 2.0 initiatives. And I'll point out here in Q2, we'll see reduction in expense related to the sale of Umpqua Investments. We've got additional store consolidations here in Q2. We might also see some excess disposal costs related to lease exits, Q2, Q3, but then that facility side save will start kicking in later in Q4. That's really the more back office type stuff. So we'll start seeing here pretty quick.
Okay. And then maybe one last one, if I can. I don't know if this is for Cort or Tory. But just sort of curious about the reopening in your markets more broadly in customer activity. Saw some loan growth this quarter, but just the outlook as we move through kind of the summer and reopening and just thoughts high level there.
Michael, it's Tory. As I said earlier, I think that we're certainly impressed by our ability to continue to prospect and continue to work with our customers virtually over the past year. Obviously, as the world starts and begins to open up, there is some kind of pent-up demand for activity. And our folks are just chomping at the bit to get out and visit with customers and meet with prospects and to get back into the growth part for the company. I mean we're really excited about the momentum that we've built over the past year, how we kind of stood up for our communities and what our real potential and opportunity in the company is. So our loan pipeline is significant. Our activity throughout the company, I think, is very significant, and we're excited to to see what we can accomplish over the next several quarters.
Michael, it's Cort. So let me also add on. We operate in 5 states, the majority of our business is in 3 states, and they took a fairly aggressive approach to the pandemic and closed early in a lot of communities that we serve, specifically we're sitting here in Portland, are still operating at a very modest level of normal operations pre-COVID. And we're showing, like Tory has mentioned, quite a high level of exuberance from customers, both consumer and commercial at getting back to business. We did show some loan growth, and it kind of goes back to even Jared's question on when is that cash going to be redeployed into their businesses and when are they going to borrow. We're starting to see activity. And in some communities, we're oven 50% open.
So I guess the reason for it to comment is that we've done a good job in the economies we serve and they haven't even begun to hit their full stride. So we are very enthusiastic about -- to Tory's point, with the pipelines we're seeing of bringing new customers and then you -- and seeing some of that cash come off the balance sheet in the businesses and watching those commercial loans earn-out back into low 40s to 50% utilization.
So I think we're in just a great spot relative to unless there's a pandemic COVID-27 or something, which I wouldn't wish on anybody, and I don't think it's going to happen, we feel very enthusiastic.
Our next question will come from the line of Steven Alexopoulos from JPMorgan.
Wanted to start on the mortgage side and appreciate the new disclosures are actually very helpful. First, on the gain on sale margin, maybe for Ron, just given the recent dip in the 10-year so far we've seen this quarter, have gain on sale margins held in there? I hear the longer-term guidance, but I'm just wondering if near term, they might hold in pretty steady with where they were in 1Q.
It has. And that's more related to the fair value change on lock pipeline over time with the pull throughs. But yes, I'd say so here near term. Over the longer term, later this year, we do expect it to continue to glide lower as we discussed previously, but it was good to see that high 3 range still in Q1.
Okay. And then if we look at the efficiency ratio on the new disclosures, too, it's crept up every quarter, at least what you're calling out. Ron, how do you think about a normalized efficiency ratio for the segment?
For the mortgage segment specifically?
Yes.
Yes. Yes. I'd say probably in the upper 60% to 70% range, again, based on -- the main drivers being that gain on sale margin in the low to mid-3s and the direct cost of originations being in the 1.9% to 2% range. But at the end of the day too, you recognize that's also a much smaller percentage of our overall pretax income when that does occur.
Yes. Yes. Okay. That's helpful. And then on all of the store consolidations that you've had, can you talk about deposit retention trends? Number one. And number two, I know digital transactions are up a ton. But what feedback are you getting from your customers on all of the branches that you've closed? Do they even care about branches anymore?
Yes. It's a good -- it's Cort. First of all, our transactions and traffic is down over the last year, over 30%. So to your last question, do they not care or they just retrain themselves not to care? We're not seeing the traffic. So with the consolidations that we've had this year, I would say, not as much noise. There's always going to be noise. Our normal runoff has been negligible to actually 0 runoff, and we take 1 store and combine it with another 1 and do the outreach that we do that we're so good at. We've actually seen aggregate combined balances go up.
We may lose some customers, Steve. Let's just be honest. We're not going to make everybody happy, but because of what we do in kind of prepositioning these consolidations, if I reach out, the customers have been fairly, I'll use the word, satisfied. I don't know whether anybody is always completely thrilled with closing your retail store operations.
But yes, we can clearly see now that the store experience, which we're famous for, is not as important as a robust digital. Hence, the reasons we've made the investments we have over the last 3 years, and we'll continue to consolidate, and we are looking to be more aggressive on the announced 30 to 50 between now and the end of the year. We see there's opportunity that we didn't even see 2 quarters ago.
Steve, this is Tory. I'll just add 1 piece into that, which was -- which would be our Go-To platform. And we -- our customer base that's on Go-To is now over 84,000, and it continues to grow. That's a big part of store consolidation for us. These customers still have a connection to the company through Go-To, and it's serving us very well, as Cort mentioned.
Tory, I'm curious on Umpqua Bank to go, are you finding that customers are engaging more frequently with the bank given that feature? Or is it the same frequency, just a different format?
It is -- it depends on -- it's more frequent in general. And the use of the app is changing a little over time. A lot of it is servicing related that it kind of makes sense. I need to do something. And either I don't want to go to a store physically or there is no store around the corner for me. I can accomplish what I need to have done for my consumer banking need through the app. And that's probably the -- really the vast majority of how it's used and leveraged.
And I think once you do it, which I do it and others here do it for sure, it's a great app. And it's very useful and you kind of get excited about just I can send a text message and get something done, and I need done. So I think our customers really enjoy it.
I could say that customers would like it. Is it more cost-effective for you to actually engage with customers that way to solve these service issues?
It's Cort. Actually it is because even though we get periodic splurges of people who are having an issue, maybe a reset or something like that. Normally, you don't engage with your Go-To application every day. So even though it may appear as if, well, how many Umpqua Bank associates do you need to do to manage 80,000 text over a period of time. It's -- you can manage hundreds and thousands of accounts because it kind of goes in spurts. You may have periods of time when you've got a particular customer was having an issue and their usage may go -- spike in a particular day or a quarter, but most of the time, it abates back down to negligible to 0 communications. So it is highly scalable. In fact, we find it to be more scalable than our store experience because people only use it when they really need it as opposed to walking into a store, getting a cookie and cash-in a check, and yada, yada, yada. So we're still kind of looking at that data, and maybe we'll provide it on a future call, but we find it to be a lot more scalable.
Our next question will come from the line of Jeff Rulis from D.A. Davidson.
Just wanted to circle back on the expenses just to fine tune where we are on sort of the progress on Next Gen. Ron, I think you mentioned, obviously, the sale of Umpqua Investments and the consolidation in the second quarter are going to be kind of lumpy. And I guess at the midpoint of this year's projected of $23 million, $24 million, call it, kind of how much was in the 1Q run rate?
And if you could kind of give us a progress of that throughout the year, it sounds like there's some exit disposal costs that will offset that. But just a little more refined than kind of what we've captured and how you see it captured throughout the year?
Yes. You bet. There was a couple million dollars in Q1 just based off of the facility exits we had late in the year, but you're right. We'll see 2 of the 3 months in Q2 related to the Umpqua Investment save, a little bit of a tail on store consolidations in Q2. We really see that in Q3. And then I say on the exit disposal cost, we would see those costs probably Q2, Q3, followed by -- in Q4, start to see some saves on the lease side for additional back office as laid out on, again, Page 3 of the presentation.
Sure. Okay. But I mean, it's -- if you look at for 50% of the 39 to 56, certainly that target, you say on track, that's by the end of the year, we're still there.
Yes.
And then just I wanted to clarify the net charge-off makeup and -- within the FinPac, I think you guys have done well to identify that pool of leases that you knew was coming, but the return to historical level can we expect that in the second quarter? I mean that's largely cleaned up now and it looks like the rest of the portfolio isn't driving much loss either, but I just wanted to make sure I heard that correctly.
You did. Yes, you did. I do expect the FinPac number to drop down to more long-term averages here in the second half of this year. And at least at this point, we don't see it on the bank impact side. And again, that gets back to the CECL commentary I had earlier. It's been a continuing trend over the last 4 quarters at least. We haven't seen the charge offs.
[Operator Instructions] Your next question will come from the line of Andrew Terrell from Stephens.
Ron, I appreciate the guidance on the direct home lending expenses. I did want to ask, though, just on the indirect mortgage expense. It generally averaged about $5 million a quarter, but it stepped up to about $10 million this quarter. Was there something unusual in that number? And should the $10 million kind of step back down to the $5 million run rate or so?
I'd say it was probably more a function of allocations internally around portfolio production. But I'd say it should be pretty stable with the last couple quarters, looking out over the balance of the year. There's nothing within the servicing or administrative areas of our mortgage segment that we expect to see significant increase or decrease. Majority of the Next Gen 2.0 saves are related to the core banking segment.
Okay. And then I just wanted to ask you, we've seen a couple of bigger MSR sales across the industry this quarter. I know there might have been some for Umpqua on the table pre-pandemic. Is there any appetite to exit any of the MSR moving forward?
At this point, no. We're pretty comfortable with where we're at with it. Obviously, the valuations are much reduced from where we were a year plus back and a great connection with customers and look to see continued profitability within the mortgage segment.
[Operator Instructions] As I'm not seeing any further questions from the phone line at this time, please continue with your closing remarks.
Okay. Thank you, Laura, and I want to thank everyone for their interest in Umpqua Holdings and attendance on the call today. This will conclude the call. Goodbye.
Thank you, sir. Thank you so much for presenters. And again, thank you, everyone, for participating. This concludes today's conference. You may now disconnect. Stay safe, and have a lovely day.