Earnings Call: Q1 2021

Apr 22, 2021

Good morning, and welcome to AMCOLA Holdings Corporation's First Quarter 2021 Earnings Call. After the speakers' remarks, there will be a question and answer session. I will now turn the meeting over to Ron Farnsworth, Chief Financial Officer. Great. Thank you, Lara. Good morning and thank you for joining us today on our Q1 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 Q1 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. And I will now turn the call over to Cordo Haber. Okay. Thank you, Ron. Excuse me. 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 Q1, we've reported earnings available to shareholders of $107,700,000 and this represents EPS of $0.49 per share and reflects a strong start to our year. 1st quarter earnings highlights include both customer and balance sheet growth. Loan balances grew $381,000,000 or 1.8%. The components of loan growth included $84,000,000 of organic non PPP loan balance growth and a net increase of PPP balances of $297,000,000 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 $1,300,000,000 or 5.1 percent during the quarter. We generated strong growth in non interest bearing DDA of $865,000,000 or 9 percent driven by continued customer acquisition and PPP Round 2 production. All deposit product categories show growth during the quarter with the exception of CDs down $374,000,000 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 2nd 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 NextGen 2.0 initiatives, which are progressing very nicely. First, balanced growth. This is a central part of the NextGen 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 NextGen 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 were 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 Q1 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, Encino, to execute the 2nd 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 1st 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 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 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 NextGen 2.0 store rationalizations so far to 2019. 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 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 NextGen 1.0 initiatives, managing through the pandemic successfully and opportunistically and the beginning phases of Umpqua NextGen 2.0, we're reporting solid financial trends within the core bank, including loan portfolio growth and 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 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 and the origination of those portfolio loans 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. Okay. Thank you, Court. 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 and 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 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 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. 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 and in the quarter at $2,900,000,000 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 $14,000,000,000 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 refreshed segment disclosures on Pages 1011 of the presentation or Pages 1516 of the release. We've simplified our segment disclosures by separating out the Core Banking 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 $9,000,000 decline in PPP fees. Later in the presentation, we have the traditional net interest income in NIM slides, which provide more detail on the moving parts at a consolidated level. But I'll point out our cost of interest rate 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 $23,000,000 as expected from the Q4. Pretax income for the core banking segment increased 9% this quarter to 115,000,000 dollars and the tax rate normalized this quarter resulting in $87,000,000 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 $1,600,000,000 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 $62,500,000 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 timepiece remains stable as expected, while the change due to valuation inputs was a loss of $2,000,000 due mainly to the higher pay down activity earlier in the quarter. Non interest expense totaled $42,000,000 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 $31,500,000 as noted on the right side of the page and represented 1.90 percent of production volume. In prior calls, I talked about a 2 25 basis points to 2 50 basis points all in costs 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. Pre tax income for the mortgage banking segment was $27,000,000 and net income was $20,000,000 both down 34% from the 4th 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 4th quarter and 32% in the 3rd 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 $1,000,000,000 to $1,100,000,000 in the next two quarters and the mid-four $1,000,000,000 range for the full year. Gain on sale margins should normalize into the low to mid-three percent 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 in basis points on production should remain fairly consistent with the 5 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 will give 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 and 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 $10,000,000 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 $17,600,000 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 percent, noting this ratio was 1.65 percent 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 have 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. Knowing that all of our regulatory ratios remain in excess of all capitalized levels, our Tier 1 common ratio is 12.6% and our total risk based capital ratio is 15.9%. The bank level total risk based capital ratio was 14.9%, which is the basis for our calculation of $611,000,000 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 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, the 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 $16,000,000 of the previously disclosed pool of Finpack leases with borrowers who elected deferral, but were unable to resume regular payments. We expect the Finpack 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 Finpack, 0.4% in consumer and 2.9% in residential real estate. We have excluded $166,000,000 in Ginnie Mae repurchases from the deferral numbers as those loans are guaranteed by FHA, VA or USDA Rural Development. On Slides 2627, 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 have 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 point 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 Cord. Okay. Thanks Frank and Ron for your comments. And Lara, we will now turn over to questions. Fantastic. Thank you, sir. Your first question will come from the line of Jackie Bohlen from KBW. Your line is now live. Go ahead please. Hi, everyone. Good morning. Good morning, Jackie. Of course, 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 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 Torrey answer that since it's near and dear to his heart and then I'll backfill on Torrey's comments. Hey Jackie, this is Torrey. 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, 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's a lot of activity that's 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 and L. 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 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 in a slightly different way. The commercial C and 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 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? 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 2 to 2.5 years. It's a different looking customer today than it was a couple of years ago. Okay. And then I guess my follow-up question and then I'll step back, which is the, 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. Maintain 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 $100,000,000 or $200,000,000 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 that'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 Cord 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. Okay, great. Thanks for all the added color. I appreciate it. You're welcome. Thank you, ma'am. Your next question will come from the line of Jared Shaw from Wells Fargo Securities. Looking at the loan growth outlook, but specifically C and 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 sheets 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 Torrey Nixon again. I think there's a couple of ways that I would answer that. You're absolutely right. Obviously, there's businesses have a ton of liquidity as does the bank and the use of that liquidity is kind of 1st 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 $3,000,000,000 and today we've actually grown that this quarter to $3,500,000,000 So our loan pipeline is mostly for prospects, 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 5 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. Okay. And then, is there any plan in sort of conjunction with the NextGen 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 years, 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 will 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, 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? 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 of opportunity for continued reduction in those 2 helping support the NIM. Okay. Thank you. You bet. 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. Hey, good morning. 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? I think that yes, Matt, this is Tory again. The interest rates on new originations are depending on the line of business are between low threes to 4 low fours 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. And Matt, this is Ron. On the bond side, it'd be upper ones, maybe to 2 depending on the day and where the gyrations 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, we'll 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 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? 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 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. Okay. And then your commentary around small kind of fee generators or asset generators, any desire to do whole bank M and 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 you all that operating the company like we have for the last 3 or 4 years, producing better profitability has been the number one 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 slanting towards a plug and play type and I call it plug and play, nothing's plug and play guys. But 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 $44,500,000 to be recognized. Round 1 of that would be just around $12,700,000 Round 2 would be around $31,700,000 So the majority for Round 2, but we do expect the forgiveness to continue throughout the year. Okay. Thank you. You bet. 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. Hey, good morning. Thank you for the question. 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? Hey, Michael, this is Ron. I wouldn't say the mortgage business was losing money. Anytime that occurred might have been related to a significant downdraft in interest rates until you had an MSR fair value charge that wasn't quickly followed by increasing 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 2, 3 quarters. But absent MSR fluctuations now, the profitability remains just at lower levels. Okay. And then I guess, so the valuation on the bank is pretty reasonable. It seems like and 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 NextGen 1? Yes. And Gurkuk, 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 it actually seem 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 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 a reduction in expense related to the sale of uncle Investments. We've got additional store consolidations here in Q2. Might also see some extra disposal costs related to lease exits Q2, Q3, but then that facility size save will start kicking in later in Q4. That's really the more back office type stuff. So we'll start seeing it here pretty quick. Okay. And then maybe one last one, if I can. I don't know if this is for Court 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? Michael, it's Tore. As I said earlier, I think that we're certainly impressed by our ability to continue to prospect and to 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 in 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 see what we can accomplish here over the next several quarters. And Michael, it's Cortez. 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 and 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 is that cash going to be redeployed into their businesses and where are they going to borrow. We're starting to see activity and in some communities we're not even 50% open. So I guess my reason for the 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 Tore's point, that the pipelines we're seeing of bringing new customers and seeing some of that cash come off the balance sheet into businesses and watching those commercial loans earn out back into low 40s to 50% utilization. So I think we're at just a great spot relative to unless there's a pandemic COVID-twenty 7 or something, which I wouldn't wish on anybody. I don't think it's going to happen. We feel very enthusiastic. Okay. Thank you. Thank you, sir. Your next question will come from the line of Steven Alexopoulos from JPMorgan. Sir, your line is now live. Go ahead please. Hi, everybody. Hi, Steve. 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 in the 10 year so far we've seen this quarter, have gain on sale margins held in there? Like 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, I'd say probably in the upper 60s to 70% range. Again, based on the mean 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 the day too, you recognize that's also a much smaller percentage of our overall pretax income when that does occur. And then on all of the store consolidations that you've had, can you talk about deposit retention trends, number 1 and number 2? 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 Kurt. 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. When we take one store and combine it with another one and do the outreach that we do and 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 pre positioning these consolidations by 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. Hey, Steve, this is Torrey. I'll just add one piece into that, 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 is that these customers still have a connection to the company through Go2 and it's serving us very well as Court mentioned. Tore, I'm curious on Ompqua 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 you 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 that 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 Corey. Actually, it is because even though we get periodic sporges 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 texts over a period of time, it's you can manage 100 and 1000 of accounts because it kind of goes in spurts. You may have periods of time when you've got a particular customer who's having an issue and their usage may go spike in a particular day or a quarter. But most of the time, it's because people because people only use it when they really need it as opposed to walking into a store, getting a cookie and cashing 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. Okay. Thanks for all the color. 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. Thanks. Just wanted to circle back on expenses just to fine tune where we are on sort of the progress on NextGen. Ron, I think you mentioned obviously the sale of uncle Investments and the consolidation in the Q2 are going to be kind of lumpy. And I guess if the midpoint of this year's projected of $23,000,000 $24,000,000 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 kind of offset that, but just a little more refined on kind of what we've captured and how you see it captured throughout the year? Yes, you bet. There was a couple of $1,000,000 in Q1 just based off of 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 uncle investment save. A little bit of a tail on store consolidations in Q2, really see that in Q3. And then I'd say on the exit swivel costs, 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 said 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 within the Finpack. I think you guys have done well to identify that pool that of leases that you knew was coming. But the return to historical level, can we expect that in the Q2? I mean, that's largely cleaned up now and looks like the rest of the portfolio isn't driving much loss either, but just wanted to make sure I heard that correctly. You did. Yes, you did. I do expect the Finpack 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 ex Finpac 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. Got it. Thanks. You bet. Thank you, sir. Your next question will come from the line of Andrew Terrell from Stephens. Your line is now live, sir. Go ahead please. Hey, thanks. Good morning. Rod, I appreciate the guidance on the direct home lending expenses. I did want to ask though just on the indirect mortgage expense. It's generally averaged about $5,000,000 a quarter, but it stepped up to about $10,000,000 this quarter. Was there something unusual in that number and should the $10,000,000 kind of step back down to the $5,000,000 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 of quarters looking out over the balance sheet. 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 NextGen 2.0 saves are related to the core banking segment. Okay. Thanks. And then I 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 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 the great connection with customers and look to see continued profitability within the mortgage segment. Okay. Thanks for taking my questions. You bet. Thank you. Thank you, sir. I'm not seeing any further questions from the phone line at this time. Please continue with your closing remarks. Okay. Thank you, Lara. And I want to thank everyone for their interest in Unco Holdings and attendance on the call today. This will conclude the call. Goodbye. Thank you, sir. Thank you so much presenters. And again, thank you everyone for participating. This concludes today's conference. You may now disconnect. Stay safe and have a lovely day.