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Hilltop Holdings Inc (NYSE:HTH)
Q1 2021 Earnings Call
Apr 23, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the Hilltop Holdings First Quarter 2021 Earnings Conference Call and Webcast. [Operator Instructions] At this time, I'd like to turn the conference call over to Erik Yohe. Sir, please go ahead.

Erik Yohe -- Executive Vice President-Corporate Development

Thank you, operator. Before we get started, please note that certain statements during today's presentation that are not statements of historical fact, including statements concerning such items as our outlook, business strategy, future plans, financial condition, allowance for credit losses, the impact and potential impacts of COVID-19, stock repurchases and dividends as well as such other items referenced in the preface of our presentation are forward-looking statements. These statements are based on management's current expectations concerning future events that, by their nature, are subject to risks and uncertainties.

Our actual results, capital, liquidity and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our presentation and those included in our most recent annual report and quarterly report filed with the SEC. Please note that the information presented is preliminary and based upon data available at this time. Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.

Additionally, this presentation includes certain non-GAAP measures, including tangible common equity and tangible book value per share. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix to this presentation, which is posted on our website at ir.hilltop-holdings.com.

With that, I would like to turn the presentation over to President and CEO, Jeremy Ford.

Jeremy B. Ford -- President & Chief Executive Officer

Thank you, Erik, and good morning. For the first quarter, Hilltop reported net income of $120 million or $1.46 per diluted share, representing an increase from the first quarter 2020 of $71 million or $0.91 per diluted share. Return on average assets for the period was 2.9% and return on average equity was 20.6%. These results do include a $5.1 million reversal of provision compared to the first quarter of last year when we had a provision expense of $34.5 million as we introduced CECL and the outlook for credit and the economy look to be deteriorating.

Much of the momentum around mortgages from 2020 continued into this first quarter. Notwithstanding higher long-term interest rates and refinance volumes slowing, the overall mortgage market remains strong, and our origination business was able to deliver $6.2 billion in volume, a 71% increase from Q1 2020. Driven by PPP loan balances, the bank's average loans for the first quarter increased 7% from prior year. And average deposits grew by $2.4 billion or 26% from prior year as well. While pre-tax margin at the broker-dealer was down slightly from Q1 2020, we did see growth in the structured finance business, which also benefited from a strong mortgage market.

In the public finance business, efforts to improve productivity and growth are showing positive returns as net revenue increased 8% from the first quarter 2020. During the period, Hilltop returned $50 million to shareholders through dividends and share repurchases. The $5 million of shares repurchased are part of the $75 million share authorization the Board granted in January. Liquidity and capital remained very strong, with a Tier 1 leverage ratio of 13% and a common equity Tier 1 capital ratio of 19.6% at quarter end.

We continue to see improvement in economic trends. And during the quarter, we had payoffs and a return to contractual payments for a large portion of the modified loan portfolio. This portfolio, which at the end of June 2020 was $968 million, is now down to $130 million as of March 31. Notably, all COVID-19 modified retail and restaurant loans are now off deferral program.

Our allowance for credit losses as of March 31 totaled $144.5 million or 1.98% of the bank's loan portfolio. This reflects a reduction in the reserve balance of $4.5 million from the fourth quarter, which was driven primarily by positive shifts in the economic outlook. While the general economic outlook for the Texas economy has improved, the bank remains cautious and in constant communication with borrowers and certain higher risk segments of our hotel and office portfolios. These segments were more severely impacted by the pandemic and will take longer to recover.

Moving to Slide 4. PlainsCapital Bank had a solid quarter with a pre-tax income of $65 million, which includes the aforementioned provision recapture of $5.1 million, also contributing to the increased pre-tax income from Q1 2020 was higher net interest income from lower deposit costs and PPP loan fees and interest income. Our bankers continue to work with small business customers on PPP program. and as of March 31, had funded approximately 1,100 loans totaling $178 million as part of the second round, bringing the total PPP loan balance to $492 million at period end.

PrimeLending had another outstanding quarter and generated pre-tax income of $93 million, an increase of $53 million from Q1 2020. That was driven by both a $2.6 billion increase in origination volume and a gain on sale margin of 388 basis points. While rates increased toward the end of the quarter and margins tightened, we remain encouraged by the demand for mortgages across the country and by the PrimeLending team that continues to perform exceptionally while actively recruiting quality loan originators.

For HilltopSecurities, they had a good quarter with pre-tax income of $18 million. The structured finance business had a strong start to the quarter with favorable volumes and spreads, then the sudden rise in interest rates adversely impacted net revenue in March. Net revenue grew in public finance services compared to prior year from a modest increase in national insurance and recruiting efforts. The fixed income services and wealth management businesses generated modestly lower net revenues than Q1 2020 levels.

Overall, for Hilltop, this was an excellent quarter and a great start to the year. We believe our balance sheet is strong and our credit quality is sound. We are excited about the strategic direction and growth potential of our three businesses, and we are grateful for the talented leadership and dedicated teams we have across Hilltop. With that, I will now turn the presentation over to Will to talk about the financials.

William B. Furr -- Chief Financial Officer

Thank you, Jeremy. I'll start on Page 5. As Jeremy discussed, for the first quarter of 2021, Hilltop reported consolidated income attributable to common stockholders of $120 million, equating to $1.46 per diluted share. During the first quarter, revenue related to purchase accounting was $4.9 million and expenses were $1.3 million, resulting in a net purchase accounting pre-tax impact of $3.6 million for the quarter.

In the current period, the purchase accounting expenses largely represent amortization of other intangible assets related to prior acquisitions. During the first quarter, provision for credit losses reflected a net reversal of $5.1 million and included approximately $600,000 of net recoveries of previously written off credits. The improvement in the current macroeconomic environment as well as the outlook for continued improvement in key economic metrics positively impacted allowance for credit losses during the quarter.

Hilltop's quarter-end capital ratios remain strong with common equity Tier 1 of 19.63% and Tier 1 leverage ratio of 13.01%.

I'm moving to Page 6. Net interest income in the first quarter equated to $106 million, including $7.5 million of previously deferred PPP origination fees and purchase accounting accretion. Versus the prior year quarter, net interest income decreased by $4.7 million or 4%. Further, net interest margin declined versus the fourth quarter of 2020 by 2 basis points.

In the current period, net interest margin benefited from the recognition of deferred PPP origination fees, higher yields in stock loan and lower deposit cost. Offsetting these benefits were lower loan HFI and HFS yields, driven by market pricing and absolute yield levels in the mortgage market. Further, PCB's excess cash levels held at the Federal Reserve increased by $365 million from the fourth quarter, putting an additional 5 basis points of pressure on net interest margin.

During the quarter, new loan commitments including credit renewals, maintained an average book yield of 4%. This was stable with the fourth quarter of 2020. Total interest-bearing deposit costs declined by 8 basis points in the quarter as we continue to lower customer deposit rates and returned broker deposits during the first quarter.

We expect continued consumer CD maturities and additional broker deposit declines in the coming quarters, both of which support a continued steady decline in interest-bearing deposit costs. Given the current market conditions, we expect net interest income and net interest margin will remain pressured as overall market rates remain low, putting pressure on held for sale and commercial loan yields and that competition could remain aggressive over the coming quarters as we expect new loan demand will remain below historical levels.

Turning to Page 7. Total noninterest income for the first quarter of 2021 equated to $418 million. First quarter mortgage-related incoming fees increased by $131 million versus the first quarter of 2020. During the first quarter of 2021, the environment in mortgage banking remained strong, and our business outperformed our expectations in terms of origination volumes, principally driven by lower mortgage rates which drove improved demand for both refinance and purchase mortgages. Versus the prior year quarter, purchase mortgage volumes increased by $561 million or 24% and refinance volumes improved substantially, increasing by $2 billion or 156%.

While volumes during the first quarter were strong relative to traditional seasonal trends, gain on sale margins did decline versus the fourth quarter of 2020 as a combination of lower linked-quarter market volumes, principally purchased mortgage volumes, competitive pressures and product mix yielded a gain on sale margin of 388 basis points. We expect pressures on margin to persist throughout 2021, and we continue to expect full year average margins to move within a range of 360 to 385 basis points contingent on market conditions.

Other income increased by $12 million, driven primarily by improvements in the structured finance business as the prior year period included a $16 million negative unrealized mark-to-market on the credit pipeline. As we've noted in the past, the structured finance and capital markets businesses can be volatile from period-to-period as they are impacted by interest rates, origination volume trends and overall market liquidity.

Turning to Page 8. Noninterest expenses increased from the same period in the prior year by $85 million to $367 million. The growth in expenses versus the prior year were driven by an increase in variable compensation of approximately $63 million at HilltopSecurities and PrimeLending. This increase in variable compensation was linked to strong fee revenue growth in the quarter compared to the prior year period. The balance of the increase in compensation and benefits expenses is related to higher payroll taxes, salaries and overtime expenses.

Looking forward, we expect that our revenues will decline from the record levels of 2020, which will put pressure on our efficiency ratio. That said, we remain focused on continuous improvement, leveraging the investments we've made over the last few years to aggressively manage fixed cost while we continue to further streamline our businesses and accelerate our digital transformation.

I'm moving to Page 9. Total average HFI loans grew by 5% versus the first quarter of 2020. Growth versus the same period of the prior year was driven by growth in PPP loans and higher balances in the mortgage warehouse lending business. In the period, banking loans, excluding PPP, and mortgage warehouse lending have declined modestly versus the prior year period as commercial loan demand has remained tepid throughout the pandemic. As we've noted on prior calls, we are planning to retain between $30 million and $50 million per month of consumer mortgage loans originated at PrimeLending to help offset soft demand from our commercial clients.

During the first quarter of 2021, PrimeLending locked approximately $146 million of loans to be retained by PlainsCapital over the coming months. These loans had an average yield of 287 basis points and an average FICO and LTV of 779 and 61%, respectively.

I'm moving to Page 10. First quarter credit trends continue to reflect a slow but steady recovery in the Texas economy as the reopening of businesses continues to provide improved customer cash flows and fewer borrowers on active deferral programs. As of March 31, we have approximately $130 million of loans on active deferral programs, down from $240 million at December 31. Further, the allowance for credit losses to end of period loan ratio for the active deferral loans equates to 13.4% at March 31.

As is shown in the graph at the bottom right of the page, the allowance for credit loss coverage, including both mortgage warehouse lending as well as PPP loans at the bank, ended the first quarter at 1.98%. We continue to believe that both mortgage warehouse lending as well as our PPP loans will maintain lower loss content over time. Excluding mortgage warehouse and PPP loans, the banks' ACL to end-of-period loans held for investment ratio equated to 2.38%.

Turning to Page 11. First quarter average total deposits were approximately $11.4 billion and have increased by $2.4 billion or 26% versus the first quarter of 2020. Throughout the pandemic, we continue to experience abnormally strong deposit flows from our customers, driven by government stimulus efforts and shifting client behaviors as customers remain cautious during these challenging times. Given our strong liquidity position and balance sheet profile, we are expecting to continue to allow broker deposits to mature and run off.

At 3/31, Hilltop maintained $639 million of broker deposits that have a blended yield of 34 basis points. Of these broker deposits, $284 million will mature by 6/30 of 2021. These maturing broker deposits maintain an average yield of 47 basis points. While deposits remain elevated, it should be noted that we remain focused on growing our client base and deepening wallet share through the sales of our commercial treasury products and services, and we remain focused on driving higher client acquisition efforts.

I'm moving to Page 12. During the first quarter of 2021, PlainsCapital Bank generated solid profitability, producing $65 million of pre-tax income during the quarter. The bank benefited from the reversal of credit losses of $5.2 million and the recognition of $7.5 million in previously deferred PPP origination fees. During the quarter, the bank's efficiency ratio dropped below 50% as the focus on managing expenses, improving fee income streams through our treasury management sales efforts and working diligently to protect net interest income is proving to be a successful combination. While we do not expect that the efficiency ratio will remain below 50%, we do expect that the bank's efficiency will operate within a range of 50% to 55% over time.

Moving to Page 13. PrimeLending generated a pre-tax profit of $93 million for the first quarter of 2021, driven by strong origination volumes that increased from the prior year period by $2.6 billion or 71%. Further, the purchase percentage of the origination volume was 47% in the first quarter. While refinance remained above our expectations during the first quarter, we expect that the market will begin to shift toward a more purchase focused marketplace during the last three quarters of 2021. As noted earlier, gain on sales margins contracted during the first quarter, yet we continue to expect the full year average range of 360 to 385 basis points is appropriate given our outlook on production, product mix and competition.

During the first quarter, PrimeLending closed on a bulk sale of $53 million of MSR value. Somewhat offsetting the impact of the bulk sale, the business continued to retain servicing at a rate of approximately 50%, which yielded a net MSR value at 3/31 of $142 million, roughly stable with 12/31 levels. We expect to continue retaining servicing at a rate of 30% to 50% of newly created servicing assets during 2021, subject to market conditions. And we will be looking to potentially execute additional bulk sales throughout the year if market participation remains robust.

Moving to Page 14. HilltopSecurities delivered a pre-tax profit and margin of $18 million and 16.2%, respectively in the first quarter of 2021, driven by structured finance and the public finance services businesses. While activity was strong in the quarter, we have continued to execute on our growth plan, investing in bankers and sales professionals across the business to support additional product delivery, enhance our product offerings and deliver a differentiated solution set to municipalities across the country.

Moving to Page 15. In 2021, we're focused on remaining nimble as the pandemic evolves to ensure the safety of our teammates and our clients. Further, our financial priorities for 2021 remains centered on delivering great customer service to our clients, attracting new customers to our franchise, supporting the communities where we serve, maintaining a moderate risk profile and delivering long-term shareholder value.

Given the current uncertainties in the marketplace, we're not providing specific financial guidance but we are continuing to provide commentary as to our most current outlook for 2021 with the understanding that the business environment, including the impact of the pandemic, could remain volatile throughout the year. That said, we will continue to provide updates during our future quarterly calls.

Operator, that concludes our prepared comments, and we'll turn the call back to you for the Q&A section of the call.

Questions and Answers:

Operator

[Operator Instructions] Our first question today comes from Michael Young from Truist. Please go ahead with your question.

Michael Young -- Truist Securities, Inc. -- Analyst

Hey, good morning. Thanks for taking the question. Wanted to maybe just start on the mortgage business. Obviously, that's going to be a swing factor this year with potentially lower revenue, lower gain on sale. But just on the expense side, I think in the comments you had made mention of sort of the fixed costs across the businesses being stable. But I would assume there's some opportunity there to bring the fixed cost down, and obviously, variable costs will move in accordance with how they have historically. So any color to add there on the expense side for mortgage?

William B. Furr -- Chief Financial Officer

I think the mortgage business, as we sit here, we've made substantial investments in technology through our loan origination system, some of the digital activities we're launching and continue to launch as it relates to customer engagement. So all of those things are going to allow us to streamline and continue to make good progress on reducing the cost to originate loan, specifically as it relates to our middle and back-office functions.

And again, I think to your point, our expectation is that those costs remain stable kind of year-on-year, and that's offsetting the inflationary costs that naturally occur in the business, whether that be increased salaries through merit or escalators in real estate cost or otherwise. So from our perspective, the ongoing benefits of the investments are going to help us offset inflation, and we hope to exceed that. But also again, maintain stable costs as volumes rationalize throughout the year.

Michael Young -- Truist Securities, Inc. -- Analyst

Okay. And then maybe a broader question just on new growth or revenue opportunities. Are you guys looking at any new business opportunities or new lending verticals that could help with revenue growth as we move into 2021 in a softer mortgage year?

Jeremy B. Ford -- President & Chief Executive Officer

Yes. I think as far as our business model and the companies and the things that we have, we're not looking to do anything differently, and we're looking to grow each business. I wouldn't think there's any new vertical or anything different from what we're doing.

Michael Young -- Truist Securities, Inc. -- Analyst

Okay. And maybe just last one just on kind of customer demand and appetite. I think you guys are still expressing a little bit of caution around credit quality in the back half of the year. But are you seeing any potential signs of growth or new demand coming as well? I think a lot of banks have kind of pointed to that. So I just didn't know if you guys are seeing that within your customer base or in your geography?

Jeremy B. Ford -- President & Chief Executive Officer

Well, currently, commercial loan demand, we think, is soft. But we think there is optimism, and we do feel like we have a pretty solid pipeline for where we're at today.

Michael Young -- Truist Securities, Inc. -- Analyst

Okay. I'll step back. Thanks.

Operator

Our next question comes from Michael Rose from Raymond James. Please go ahead with your question.

Michael Rose -- Raymond James -- Analyst

Hey guys, how are you doing?

Jeremy B. Ford -- President & Chief Executive Officer

Hey, how is it going?

Michael Rose -- Raymond James -- Analyst

Alright. Going well. Thanks for asking. Just wanted to get a little color on the buyback. I know this question is kind of asked every quarter, you guys have a ton of capital. Can you just kind of update us on your thoughts there? And maybe, Jeremy, just thoughts on M&A. Just we've seen a fair amount of activity here in recent weeks and just wanted to see what your updated thoughts are? Thanks.

Jeremy B. Ford -- President & Chief Executive Officer

Sure. With regards to share repurchases, we only repurchased $5 million in the first quarter. That was largely due to a limited open window period. And we have a $75 million repurchase authorization. So we have $70 million left that we utilized before going back to the Board. And that would be our expectation as we sit today. And we'll constantly evaluate where we feel like we are trading versus intrinsic value.

And then on the M&A front, as we've all long stated, we do have a section[Phonetic] of capital that we want to deploy toward M&A. We feel like it's a relatively healthy environment. So I think it's easier to have conversations about deals. There's less distressed deals that we've done kind of historically in the past. So as I said last quarter, our focus is going to be on trying to find the right strategic partner and something that we think will really enhance our collective shareholder value.

Michael Rose -- Raymond James -- Analyst

That's helpful. Just switching to mortgage. So you guys reiterated the origination expectations for the year of '17 to '20 yesterday at the MBA, big upward revision to second quarter refi. And if I annualize what you guys did in the first quarter, it implies much higher than the guide. So I guess the thought is, we know mortgage is going to come off at some point. But any thought as to why you wouldn't be at the upper end of that range? Thanks.

William B. Furr -- Chief Financial Officer

Yes. I think certainly the annualization effort with yield you there. I think our view is the next couple of quarters will start to normalize and become more, I'd say, seasonal in trajectory as they rotate toward a more purchase oriented market. Some of our considerations around how we think about it are the inventory challenges that are in the marketplace and the overall competitive challenges that we believe are going to emerge as volumes do come out of the market and organizations and competition is left to rationalize the outside of operations that they've built over the last 12 to 18 months. So we think the $17 billion to $20 billion is a reasonable range. And again, it's our -- we'd like to be at the top in that range. But again, from our perspective, there are some headwinds going forward, albeit the market remains, certainly on the purchase side, remains constructive. And again, we think demand is reasonably strong but the inventory challenges are real and present today.

Michael Rose -- Raymond James -- Analyst

Understood. And that's good color. Finally for me, Jeremy, if you can just kind of walk us through the different pieces of the fixed income business and how -- what kind of the push and pull would be as rates rise? And then if the Fed actually does increase rates at some point down the road, just trying to get a -- because again, I know there are puts and takes within the business based on where rates are. But just trying to get an outlook for expectations for that business over the next couple of quarters. Thanks.

Jeremy B. Ford -- President & Chief Executive Officer

For HilltopSecurities, you're talking about?

Michael Rose -- Raymond James -- Analyst

Yes, correct.

Jeremy B. Ford -- President & Chief Executive Officer

Okay. Great. Yes, sure. I guess that we have four primary business lines in that business, one is public finance services. And I think that just given kind of the backdrop, we're positive on national issuance and we've also had a lot of really strong recruiting. So we feel good about the growth of that business. What's really been the dominant revenue producer in that, in HilltopSecurities, has been structured finance, which is a mortgage-related business. And just like we mentioned, it followed a similar pattern as Prime did in the first quarter. So I think that will tie to interest rates like the purchase home -- the home purchase market will.

Fixed income services, that's our municipal and taxable fixed income business. And that will -- we're enhancing a lot of capabilities there. I think we've got room to grow. But it is subject to sudden changes in the direction of interest rates. And then wealth management is where we -- when you have any kind of spread in short-term interest rates, that falls straight to the bottom line. So in the first quarter, its revenue was up[Phonetic] $4.5 million, solely because of having 0% short-term rates.

Michael Rose -- Raymond James -- Analyst

Alright. That's great color. Thanks for taking my questions guys.

Jeremy B. Ford -- President & Chief Executive Officer

It's kind of the -- the direction of interest rates has occurred as well. But I think in general, like even if rates increase, we're not seeing rates increase at such a level that would preclude public finance issuance or a lot of these first-time homebuyers in our structured finance business. And if there -- and we don't see a period of time before that the short-term rates will increase and alleviate the wealth business.

Michael Rose -- Raymond James -- Analyst

Great. Thank you.

Operator

Our next question comes from Brad Milsaps from Piper Sandler. Please go ahead with your question.

Bradley Milsaps -- Piper Sandler -- Analyst

Hey, good morning. How are you? You guys have addressed a lot of my questions. I did want to ask about the balance sheet and kind of how you would expect to manage some of the existing excess liquidity you have in the gallon average. Had about $1.5 billion in cash. It didn't look like you grew the bond portfolio a lot in the first quarter. But just kind of curious kind of how you think about managing that cash, particularly with the loan growth dynamics you're talking about and also PPP forgiveness on the horizon?

William B. Furr -- Chief Financial Officer

Yes. So you're absolutely right. We -- the excess cash is obviously top of mind for us. I think as we've said historically, we're not looking to take on excessive amounts of duration exposure right here. And so given where kind of absolute rates are, although they have backed up since prior quarters. So you saw the investment portfolio at the bank kind of ended the period at about $2 billion. We expect that to continue to drift higher. I don't expect it to take a step function higher, but I do expect it to continue to drift higher as we put some money to work there in places where we feel like we don't have kind of outsized exposure. We are retaining the $30 million to $50 million. I think our expectation is we'll be toward the top end of that retention range of PrimeLending originated mortgages for the balance of the year, notwithstanding stronger commercial demand than we're expecting at this time.

And then we do expect, again during the second quarter and into the third and fourth, we do expect commercial loan demand to pick up. If that doesn't, in fact, occur, then we'll react to that and make some adjustments to the approach. But we're going to continue to be prudent and continue to make, I'd say, marginal steps in terms of overall deployment.

Lastly, I'd say, and we tried to mention in my comments, we do have a series of broker deposits on the balance sheet, we expect those will mature and all expectations are they will run off throughout the balance of this year. So in terms of kind of overall liquidity and access to rationalization of broker deposits as well as mortgage retention on the balance sheet and then I'd say the securities portfolio drifting higher over the $2 billion level quarter-by-quarter.

Bradley Milsaps -- Piper Sandler -- Analyst

Okay, great. That's helpful. And just a follow-up on asset quality. I think you commented in the -- again this quarter in the slide deck that you expect the provision expense to potentially be elevated in the back half of the year. It seems like you guys have a pretty massive reserve at 2% of loans, even higher if I were to maybe make some other adjustments. Just kind of curious kind of how to square that with what's seemingly an improving economic picture and credit environment with all the reserve building you've done in the past. I wonder if you could maybe frame up sort of what you believe would be an elevated provision expense in the back half kind of given all those factors?

William B. Furr -- Chief Financial Officer

Yes. So I think from a credit perspective, as you noted and we noted in our comments, we are seeing some rays of light and opportunity in certain of the portfolios, but then continue to see challenges in others. So as Jeremy mentioned in his comments, loans on active deferral from a retail and restaurant perspective has now kind of moved to zero, so that is a substantial improvement from June of last year. And what we're continuing to see is challenges certainly in the hotel space as it relates to those properties that are principally business-oriented. Those that are a little more destination-oriented, which is we do have some of those, have outperformed, but those business-specific and business kind of targeted properties continue to be challenged. And we've got about -- of the $130 million, the hotel portfolio of those active deferrals makes up about $108 million of that. So I think that's important to note.

On top of that, we're looking at the office portfolio across the state of Texas. I think it's reasonably well known. There are growing trends of vacancy and subletting kind of going on. And so we remain cautious on that portfolio as well. So there's -- while there are clearly reasons to be more optimistic, there's also some places where we continue to have a heightened focus on our credit measurement and evaluation.

As it relates to kind of charge-offs in the second half, again, I think as we look at it, we do -- there's just an expectation currently that some of these loans on active deferral, once they kind of run through this deferral window here, there'll be some tough decisions to have to be made and that likely will yield some charge-offs in the second half of the year. And, again, we continue to be aggressive in working with our clients and trying to help every client get through what has been an unprecedented environment. With that said, our expectation is there will be some charge-offs in the second half.

Bradley Milsaps -- Piper Sandler -- Analyst

Right. Kind of under that framework, I mean, do you think you'd be in a position to sort of move kind of general reserves to maybe some of these specific situations, just trying to think about the P&L impact I suppose?

William B. Furr -- Chief Financial Officer

Yes, I think that's right. I mean as you get more clarity into which properties and kind of which entities, we'll be more specific about that. And I think you'll see that matriculate over time kind of outside from general.

Bradley Milsaps -- Piper Sandler -- Analyst

Okay, great. Thank you, guys.

Operator

Our next question comes from Matt Olney from Stephens. Please go ahead with your question.

Matthew Olney -- Stephens Inc. -- Analyst

Thanks for taking my question. Want to circle back on mortgage. And I think in the first quarter typically, each year, we see mortgage volumes build each consecutive month as we move into the spring selling season. But this year, obviously, we have the falling refi volume. So curious if you can provide any commentary on volumes in recent months and what you're seeing more recently? Thanks.

William B. Furr -- Chief Financial Officer

Yes. I'd say through the first quarter, and Jeremy mentioned it in his comments, it was certainly seasonally high with a -- we had a 47% purchase percentage. And so the refinance volume was high. That -- we saw that start to decline, if you will, in March as the 10-year rate backed up toward 160, 170 basis points. I know it's settled back in the 150s. But that portion of the volume is obviously very rate-sensitive, and we saw that pullback in the month of March. And I think that's continued into April. So we continue to believe that this market is going to roll toward and move toward a more purchase-oriented market, which, from our perspective, is a strength of ours and how we've positioned our business over time. But again, we do believe that refinance volume will be more challenged even in the second quarter, but certainly in the second half of the year.

Matthew Olney -- Stephens Inc. -- Analyst

Okay. Thanks for that, Will. And then on the gain on sale margins, I think what we're seeing from the marketplace, a pretty considerable divergence of margins getting hit a lot harder on the wholesale side versus retail. Just remind us of your mix of wholesale versus retail on the mortgage side?

William B. Furr -- Chief Financial Officer

We're 100% retail. We don't have any wholesale or correspondent businesses.

Matthew Olney -- Stephens Inc. -- Analyst

Okay. And then just lastly for me on the MSR, just update us on the strategy. I saw you executed the sale in the first quarter. Was there any material impact on the financials in the first quarter? And then thinking about the outlook there, are you just trying to manage that asset around that $140 million level moving forward?

William B. Furr -- Chief Financial Officer

Yes. So we did have a sale. We had a positive outcome there. So I'll take you back a little to last year. So the strategy last year was to retain that servicing as the market for servicing really deteriorated to the point where there were periods of kind of no bid for servicing assets in the second quarter and early third quarter of last year. That has started to heal.

Obviously, you saw the MSR balance increase during the period of 2020 as a result of that strategy. We were able to do that because of our liquidity and balance sheet strength. So we were able to be opportunistic in doing that. It's not our long-term objective to have $140 million, $150 million MSR asset. That will likely move lower over time. In my comments, I tried to note we do expect to continue to execute additional bulk sales to the extent the market is there for that and the market is robust. And currently, it has been favorable for that.

But again, I think our target historically has been in that $50 million to $75 million range. It may travel a little higher than that for the balance of 2021. But again, objectively, it's not a strategic objective of ours to maintain an outsized MSR. But again, we do believe the strategy that we executed last year and into the first quarter has borne favorable outcomes, both in terms of kind of price recognition and gains through some of these executed sales.

Matthew Olney -- Stephens Inc. -- Analyst

Okay. Thanks for taking my question.

Operator

And our next question comes from N. Woody Lay from KBW. Please go with your question.

Wood Lay -- Keefe, Bruyette, & Woods -- Analyst

Hey, good morning guys. So on the PPP front, do you have the amount of net origination fees thAt are unearned at this point and expect to recognize over the forgiveness process?

William B. Furr -- Chief Financial Officer

As of 3/31, it was about $13.9 million.

Wood Lay -- Keefe, Bruyette, & Woods -- Analyst

Okay. Got it. And then last for me. Could you just remind us the average yield on these consumer mortgage loans that you plan to attain?

William B. Furr -- Chief Financial Officer

Of the loans that were locked during the quarter, they will come on the balance sheet over the coming months, about 287 basis points.

And again, when that will -- as with each period now that mortgage rates are higher, we do expect that will drift over 3% on locks into the future and loans come on the balance sheet. But again, for the first quarter lock, it's about 287 basis points.

Wood Lay -- Keefe, Bruyette, & Woods -- Analyst

Got it. That's helpful. All right. Thanks, guys.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Erik Yohe -- Executive Vice President-Corporate Development

Jeremy B. Ford -- President & Chief Executive Officer

William B. Furr -- Chief Financial Officer

Michael Young -- Truist Securities, Inc. -- Analyst

Michael Rose -- Raymond James -- Analyst

Bradley Milsaps -- Piper Sandler -- Analyst

Matthew Olney -- Stephens Inc. -- Analyst

Wood Lay -- Keefe, Bruyette, & Woods -- Analyst

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