Umpqua Holdings Corp (UMPQ) Q1 2021 Earnings Call Transcript

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Umpqua Holdings Corp (UMPQ)
Q1 2021 Earnings Call
Apr 22, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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.

Ronald L. Farnsworth -- Executive Vice President and 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 different 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. 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 earnings 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 non-interest-bearing DDA of $865 million, or 9%, driven by continued customer acquisition and PPP round two 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 at a 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, balanced 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 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% at 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 requests 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 [Phonetic] to the rest of the Bank later this year.

On the commercial innovation side, we continue to execute on our ambitious roadmap, 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 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 non-interest 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 that 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, it 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 and 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 non-interest income, and lower non-interest 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 it's an anchor product for our consumer channels in the origination of those portfolio loans, can such -- can vary such as private bank originated mortgages and permanent financing resulting from our construction to firm 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.

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. 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 non-interest expense. Excluding the 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 non-interest income reflecting the 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. Non-interest 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 feature 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 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 of interest bearing 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.

Two 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 non-interest income declined sequentially related to a gain on store sales back in Q4. Our focus continues to be on growing commercial fee revenue. And non-interest expense declined $23 million as expected from the fourth quarter.

Pre-tax income for the Core Banking segment increased 9% this quarter to $115 million and the tax rate normalized this quarter resulting in an $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 five 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 two items resulted in the $62.5 million of origination and sale revenue noted toward 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 remained 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.

Non-interest 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 a 1.90% of production volume. In prior calls, I talked about a 225 basis point 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 and basis points for the direct origination component.

Pre-tax 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 pre-tax 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 the next two 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 passenger time should be pretty consistent and the change due to inputs should be relatively low, again, assuming no significant change in interest rates. And direct held for sale expense levels in basis points on production should remain fairly consistent with the five quarter trend.

Okay. I hope the 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 helps get some greater insight into the Company.

Couple of 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 two- to three-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 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's 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 four quarters.

And lastly, on Slide 21, I want to highlight capital. Knowing that all of our regulatory ratios remain in excess or 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.

Frank Namdar -- Executive Vice President and Chief Credit Officer

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 one 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 non-performing 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 that 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 Rural 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.

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

Okay. Thanks, Frank and Ron, for your comments. And Laura, we will now turn over to questions.

Questions and Answers:

Operator

Fantastic. Thank you, sir. [Operator Instructions] Your first question will come from the line of Jackie Bohlen from KBW. Your line is now live. Go ahead, please.

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

Hi, everyone. Good morning.

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

Good morning, Jackie.

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

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 on 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?

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

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.

Torran Nixon -- President for Umpqua Bank

Hey, Jackie. This is Tory. I think there is 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, one 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 one indication we're seeing activity and increases in TM and some other things. So, merchant services. So there is a lot of activity that's starting to happen in our markets. And I think we're just a quarter or two away of having that -- all that activity kind of show up in the Bank's P&L.

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

And, Jackie, one 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 three or four years. And you're seeing that activity in the results coming out of Commercial Banking.

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

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?

Torran Nixon -- President for Umpqua Bank

I think so. I think, I'd say that slightly different way. The commercial C&I customer at Umpqua Bank is different today than it was two to three 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.

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

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?

Torran Nixon -- President for Umpqua Bank

No. 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 two to two and a two years. It's just a different looking customer today than it was a couple of years ago.

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

Okay. And then, I guess, my follow-up question and then I'll step back what you see [Phonetic]. So, what kind of growth are you seeing from the new relationships with PPP? I mean, you got a pretty good conversion rate going there.

Torran Nixon -- President for Umpqua Bank

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 revenue to a 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 that's -- it's really occurred over the last three to four 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 in 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.

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

Okay. Okay. Great. Thanks for all the added color. I appreciate it.

Torran Nixon -- President for Umpqua Bank

Welcome.

Operator

Thank you, ma'am. Your next question will come from the line of Jared Shaw from Wells Fargo Securities. Your line is now live. Sir, go ahead, please.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi. Good morning, everybody.

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

Hey, Jared.

Jared Shaw -- Wells Fargo Securities -- Analyst

Yes. 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 had to burn through all that liquidity on the balance sheets before they come back into a net borrower position or start seeing growth? Or, I guess, how should we be thinking about the dynamic stream needing to see a higher loan to deposit ratio before loans start really increasing?

Torran Nixon -- President for Umpqua Bank

Jared, this is Tory Nixon again. I think there's a couple of ways that I would answer that. You're absolutely right, obviously, there is 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. It's going to have to change over the next three to six to nine 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 to the Company -- at the Company in five years. So, feel very good about the activity from our folks on the line and our kind of view for the future on the loan front.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. And then, is there any planned -- in sure conjunction with the Next Gen 2.0 and some of the closures of branch base. What's the hiring plans to go out? And is there a plan to target new relationship managers or grow the commercial lending personnel base?

Torran Nixon -- President for Umpqua Bank

Absolutely. I mean, we have -- we started on that I think two and a half, three 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 the 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. We're very optimistic about our major metropolitan markets as it relates to really core middle market business that 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.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay, thanks. And then just finally for me. Maybe, Ron, you were 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?

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

Yeah. The majority of the time deposits will have a tail within 12 months and then borrowings the same. So, I think, there would be quite a good opportunity for continued reduction in those two helping to support the NIM.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. Thank you.

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

You bet.

Operator

Thank you, sir. Your next question will come from the line of Matthew Clark from Piper Sandler. Your line is now live, sir. Go ahead, please.

Matthew Clark -- Piper Sandler -- Analyst

Hey. Good morning.

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

Good morning, Matt.

Matthew Clark -- Piper Sandler -- Analyst

Maybe just start on the margin outlook and trying to get a sense for maybe we're in 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?

Torran Nixon -- President for Umpqua Bank

Yeah, Matt, this is Tory again. The interest rates on new originations are depending on the line of business are between low-3 to 4 -- low-4s really. So, it's been fairly consistent actually over the last couple of quarters. So, I really haven't seen any change there on new originations.

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

And Matt, this is Ron. On the bond side of the upper-1s, maybe to 2 depending on the day and where the generations in the tenure [Phonetic]. 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 the loan deposit ratio, but for near-term, pretty stable.

Matthew Clark -- Piper Sandler -- Analyst

Okay, great. And maybe just shifting gears to capital. I think you guys were revisiting the buyback last quarter and we're 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?

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

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 or second, including is there an opportunity to -- I call plug and play some small opportunity where we have, an adjacent opportunity to increase into a fee category or into a loan expertise that we've got. So that would be always the number one 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.

Matthew Clark -- Piper Sandler -- Analyst

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?

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

Yeah. I mean, we're always been opportunistic. Obviously, we've messaged you all that operating the Company like we have for the last three or four years, producing better profitability has been the number one and we've proven that. We've been opportunistic 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 slanting toward a plug-and-play-type -- and I call it, plug-and-play. Nothing is plug-and-play, guys. But a plug-and-play-type opportunity where we can execute very quickly and integrating and going down the road. But that's how we look at it.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And last one, just a housekeeping one. Ron, do you happen to have the remaining net PPP fees left with round two?

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

Yeah, I do. It's approximately in total PPP fees roughly $44.5 million to be recognized. Round one of that would be just around $12.7 million. Round two would be around $31-7 million. So, the majority for round two, but we do expect forgiveness to continue throughout the year.

Matthew Clark -- Piper Sandler -- Analyst

Okay. Thank you.

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

You bet.

Operator

Thank you, sir. Your next question will come from the line of Michael Young from Truist Securities. Your line is now live, sir. Go ahead, please.

Michael Young -- Truist Securities -- Analyst

Hey. Good morning. Thank you for the question. Wanted to start with the segment breakout. I appreciate the extra disclosure 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 may be mortgage volume wasn't that strong, where the mortgage business was losing money frequently?

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

Hey, Michael, this is Ron. I wouldn't say the mortgage business is losing money. Anytime that occurred might have been related to significant downdraft in interest rates until we 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 it did show that MSR hit, but then obviously record earnings over the following two, three quarters. But absent MSR fluctuations, no, the profitability remains at lower levels.

Michael Young -- Truist Securities -- Analyst

Okay. And then, I guess, so the valuation of the Bank is pretty reasonable. It seems like the plan is to kind of march that forward. I didn't know if there is 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.

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

Yeah. 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 past several years, but actually seen on paper and 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 Mortgage. On Page 3 of the presentation that we do layout on the right side there's 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 exit 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, you'll start seeing here pretty quick.

Michael Young -- Truist Securities -- Analyst

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 and 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.

Torran Nixon -- President for Umpqua Bank

Michael, it's Tory. I -- as I said earlier, I think that we're certainly impressed by the -- 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 and 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 are real potential 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 see what we can accomplish over the next several quarters.

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

And Michael, it's Cort. So let me also add on. We operate in five states. The majority of our business is in three 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 getting back to business, we did show some loan growth and it kind of goes back to even Jared's question of when does 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 running 50% open.

So, I guess, my reason for the comment is, we've done a good job in the economies we serve when they haven't even begun to hit their full stride. So we are very enthusiastic about, to Tory's point, the pipelines we're seeing, of bringing new customers, and then seeing some of that cash come off the balance sheet in the businesses and watching those commercial loans are now back into low-40s or 50% utilization. So, I think we're at just a great spot relative to -- unless there is a pandemic, COVID-27 or something, which I wouldn't wish on anybody, I don't think it's going to happen. We feel very enthusiastic.

Michael Young -- Truist Securities -- Analyst

Okay. Thank you.

Operator

Thank you, sir. Your next question will come from the line of Steven Alexopoulos from J.P. Morgan. Sir, your line is now live. Go ahead, please.

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

Hi, everybody.

Torran Nixon -- President for Umpqua Bank

Hi, Steve.

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

I want 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 and the tenure so far we've seen this quarter, have gain on sale margins held in there? Look, I heard the longer-term guidance, but I'm just wondering if near-term they might holding pretty steady with where they were in 1Q.

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

It has, and that's more related to the fair value change on log [Phonetic] pipeline over time with the pull-throughs [Phonetic]. But yeah, I'd say, so here near-term. Over the longer-term, later this year we do expect it to continue to go like lower -- flat, lower as we discussed previously, but it's good to see that high-3 range still in Q1.

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

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 the normalized efficiency ratio for the segment?

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

For the Mortgage segment, specifically?

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

Yeah.

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

Yeah. Yeah. I'd say, probably in the upper 60s or 70% range. Again, based on -- and the main drivers being that gain on sale margin in the low- to mid-3s and the direct cost of origination being in the 1.9 to 2 range. But at the end of day, too, you recognize that's also a much smaller percentage of our overall pre-tax income when that does occur.

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

Yeah, yeah. 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 were up a ton, but what feedback that you're getting from your customers on all of the branches that you've closed? Did they've been care about branches anymore?

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

Yeah. It's a good --. Hey, 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 are they just retrain themselves, not the 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 is always going to be noise. Our normal run-off has been negligible to actually zero run-off and we take one store and combine it with another one 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, and let's just be honest, we're not going to make everybody happy but because of what we do in kind of pre-positioning these consolidations by reach out, the customers have been fairly, I'll use the word satisfied. I don't know that anybody is always completely thrilled with closing your retail store operations. But yes, we can clearly see now that the store experience in which we're famous for is not as important as robust digital. Hence, the reason is we've made the investments we have over the last three 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 two quarters ago.

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

Okay.

Torran Nixon -- President for Umpqua Bank

Hey, Steve, this is Tory. I'll just add one piece into that, which was -- which would be our Go-To platform. And we -- our customer base, that's Onco 2 [Phonetic] is now over 84,000 and it continues to grow. That's a big part of store consolidation for us is that, these customers still have a connection to the Company through Go-To. And it's serving us very well as Cort mentioned.

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

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?

Torran Nixon -- President for Umpqua Bank

It is -- it depends on -- it's more frequent in general and the use of the app is, it's changing a little over time. A lot of it is servicing-related that you kind of make 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 by do it and others here do it for sure, it is -- it's a great out. And it's very useful and you kind of get excited about just, I can send a text message and get something done that I need done. So, I think our customers are really enjoy it.

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

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?

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

Hey, it's Cort. Actually it is because even though we get periodic spurges 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 if how many Umpqua Bank associates do you need to do to manage 80,000 texts over a period of time. It's -- you can manage hundreds and thousands of accounts because it kind of goes in spurts [Phonetic].

You may have periods of time when you've got a particular customer who is 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 zero communication. 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, get the cookie and cash in the 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.

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

Okay. Thanks for all the color.

Operator

Thank you, sir. Your next question will come from the line of Jeff Rulis from D.A. Davidson. Your line is now live, sir. Go ahead, please.

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

Thanks. 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 in the consolidation in the second quarter are going to be kind of lumpy. And, I guess, if the midpoint of this year's projected of $23million, $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 is some exit disposal costs that will -- and offset that. But just a little more refined on kind of what we've captured and how you see it captured throughout the year?

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

Yeah. You bet. There is a couple of million dollars in Q1 just based on facility excess we had late in the year. But you're right, we'll see two of the three months in Q2 related to the Umpqua Investments save. A little bit of a tail on store consolidations in Q2. We really see that in Q3. And then I say on the excess total [Phonetic] 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.

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

Sure. Okay. But, I mean, it's -- if you look at for 50% of the $39 million to $56 million, certainly, that target you said on track, that's by the end of the year or still there?

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

Yup.

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

And then just I wanted to clarify the net charge-offs makeup in the -- within the FinPac. I think you guys have done well to identify that pool that -- of leases that you new is 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.

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

You did. Yeah. You did. I do expect the FinPac number to drop down to a 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 extra impact side and again that gets back to the CECL commentary I had earlier. It's been a continuing trend over the last four quarters at least. We haven't seen the charge-offs.

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

Got it. Thanks.

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

You bet.

Operator

Thank you, sir. [Operator Instructions] Your next question will come from the line of Andrew Terrell from Stephens. Your line is now live, sir. Go ahead, please.

Andrew Terrell -- Stephens Inc. -- Analyst

Hey, thanks. Good morning. Ron, I appreciate the guidance on the direct home lending expenses. I did want to ask. So just on the indirect mortgage expense. It's 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?

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

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 of quarters looking out over the balance sheet. There is 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.

Andrew Terrell -- Stephens Inc. -- Analyst

Okay. Thanks. And then, just wanted to ask, 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?

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

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 we have great connection with customers and look to see continued profitability in the Mortgage segment.

Andrew Terrell -- Stephens Inc. -- Analyst

Okay. Thanks for taking my questions.

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

You bet. Thank you.

Operator

Thank you, sir. [Operator Instructions] As I'm not seeing any further questions from the phone line at this time, please continue with your closing remarks.

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

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.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

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

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

Frank Namdar -- Executive Vice President and Chief Credit Officer

Torran Nixon -- President for Umpqua Bank

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

Jared Shaw -- Wells Fargo Securities -- Analyst

Matthew Clark -- Piper Sandler -- Analyst

Michael Young -- Truist Securities -- Analyst

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

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

Andrew Terrell -- Stephens Inc. -- Analyst

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