Umpqua Holdings Corporation (UMPQ) Q2 2021 Earnings Call Transcript

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Umpqua Holdings Corporation (UMPQ)
Q2 2021 Earnings Call
Jul 22, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Umpqua Holdings Corporation Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ron Farnsworth, Chief Financial Officer. Thank you. Please go ahead, sir.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Okay. Thank you, Brandy, and good morning and thank you for joining us today on our second 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 second quarter 2021 results. We have also prepared a slide presentation, which we will refer to during our remarks this morning. Both of these materials can be found on our website at umpquabank.com in the Investor Relations section. During today's call, we will make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the Safe Harbor provisions of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to Page 2 of our earnings conference call presentation as well as the disclosures contained within our SEC filings.

And I will now turn the call over to Cort O'Haver.

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

All right. Thanks, 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 second quarter, we reported earnings available to shareholders of $116 million. This represent EPS of $0.53 per share, an increase from both the $0.49 reported last quarter and the $0.24 reported in the second quarter of last year.

The highlights of the quarter were record non-PPP, organic loan growth, increased net interest income from the prior quarter, and our recently announced authorization of a new share repurchase program. Our previously stated optimism on loan growth due to our growing customer pipelines, continued talent acquisition and brand momentum in our markets came to fruition this past quarter as non-PPP organic loan balances grew $650 million, representing a quarterly growth rate of 3.2% or over 12% annualized. This represents record quarterly loan growth for the company and was balanced across all categories including commercial real estate, commercial loans and residential real estate.

In regards to PPP loan balances, the decrease of $667 million was primarily related to forgiveness process during the quarter. PPP forgiveness was accelerated toward the back half of the quarter as the SBA processed approvals for PPP loans over $2 million at a faster pace than in the previous months. On the balance sheet, a robust $650 million in organic loan growth was offset by the $667 million in PPP loan balance forgiveness, resulting in a small net decrease.

We are obviously very pleased to see the non-PPP loan balances grow substantially as we had previously guided. Total deposit balances grew $267 million or 1% during the quarter or 4% annualized. Recent deposit trends continued as interest bearing DDA grew $222 million, non-interest bearing DDA balances grew $218 million and savings balances grew $112 million. And as we continue to manage down higher cost deposits, our time deposits decreased by $291 million.

Regarding capital, in May, we paid our shareholders a dividend of $0.21 per share consistent with historical payments. Yesterday, we announced that our Board of Directors authorized a new program to repurchase up to $400 million of common stock and we intend to execute the program over the coming year through open market repurchases and ASR or potentially other methods. With our healthy levels of capital, we are well positioned to be more active in our capital management.

Now for a quick update on Next Gen 2.0 initiatives. First balanced growth. By leveraging the positive brand awareness of our PPP work and the market disruptions that have provided us opportunities to attract both customers and talent, we've built strong momentum for growth as seen in last quarter's results. As mentioned on previous earnings calls, our customer pipelines were and remain elevated, which resulted in very strong balanced growth across our company this past quarter.

We're excited about the future customer relationships, our recently onboarded bankers and new teams are developing. On average, their new loan book start to show significant momentum a couple of quarters after they joined the bank, which we expect to support already strong pipelines. Our human digital initiatives remain critical to our long-term strategy as our customers continue to engage with us through digital channels at an accelerated pace.

As we compare the first six months of the year compared to the same time period a year ago, we have experienced increases of 18% mobile deposit transactions, 63% more Zelle transactions and 6% more daily sessions within our mobile banking app. Go-To enrollments have climbed past 90,000 and customer messages within the Go-To platform were up 5%. Our human digital initiatives also supported our commercial customer acquisition efforts.

This past quarter, we launched a new small business treasury management package called TM Essentials, which provides key treasury management products and small business services needed in the current operating environment. Additionally, we launched our pilot of consolidated payments. This will allow commercial and business clients to fully outsource their payments to Umpqua in a variety of formats including checks, ACH, wires and commercial card complete with APIs to cover over a 160 different accounting platforms.

In regards to operational excellence, we accomplished quite a few initiatives this past quarter. The sale of Umpqua Investments to Steward Partners closed during the quarter and the reduction of non-interest expenses related to this business started in mid-Q2. The consolidation of 12 store locations announced earlier in the year was completed, which brings the total completed store rationalizations to 19.

Yesterday, we announced internally, our plans to consolidate another 16 locations by the end of the year, which will bring the total rationalizations under Next Gen 2.0 to 35. Our goal of 30 to 50 locations by the end of 2022 remains a key target and we will continue to work on initiatives to bring us closer to the top end of that range by the end of 2022.

During the quarter, we also recorded some exit disposal costs related to the exit of certain back office leases as we continue to rationalize our office space. The moves made this past quarter are a component of our overall plan to reduce space and save non-interest expense in the future periods. On Slide 3 of the earnings presentation, we show the cumulative saves accomplished so far under Next Gen 2.0 program and what we expect to accomplish by the end of the year.

One final comment before passing back to Ron. I remain highly enthusiastic, the growth prospects within our markets and the momentum from our banking teams will continue to spur growth and will deliver shareholder value over the long term. We are expecting a strong finish here in 2021 and as we head into 2022.

And with that, back to Ron.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

All right. Thank you Cort. And for those on the call, I 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. Our GAAP earnings per share for Q2 were $0.53, up from the prior quarter with the lift in net interest income and recapture on prior provisions for loan loss, more than offsetting the reduction in non-interest income.

Excluding MSR input and CVA fair value adjustments, along with exit disposal costs, our adjusted earnings were $0.56 per share this quarter and pro forma excluding the provision recapture was $0.48 per share. For the moving parts, net interest income increased 4% reflecting the combination of higher average loan balances with the growth, along with the continued reduction in our cost of funds. We had a recapture of prior year provision for loan loss of $23 million with improving economic forecasts compared to no provision in the prior quarter.

And non-interest income reflected a lift in card based fees, the expected decline in mortgage banking revenue, along with a flip in the swap derivative fair value and our gain on sale of Umpqua Investments and non-interest expense reflected the lower mortgage banking activity offset by an increase in exit disposal costs related to continued store consolidation and lease impairments as part of our Next Gen 2.0 future expense reduction programs.

As for the balance sheet, on Slide 9, interest bearing cash ended the quarter at $2.7 billion, noting the average balance was up 14% from the prior quarter. This higher level of cash cost our NIM 4 basis points in Q2, but gives us significant future optionality for funding continued loan growth or deleveraging certain liabilities.

We increased the bond portfolio 10% as longer-term yields were higher early in the quarter into similar duration agency investments. And Cort mentioned previously, our significant non-PPP loan growth this quarter was offset by PPP loan forgiveness, while our deposits increased another $0.25 billion and we used excess liquidity to continue to reduce term debt as advances mature.

Our total available liquidity including off balance sheet sources at quarter end increased to $15.6 billion dollars representing 51% of total assets and 60% 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 segment disclosures on Pages 10 and 11 of the presentation or Pages 19 and 20 of the release. Recall last quarter, 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. In this discussion, we'll provide high-level guidance for the balance of this year and ranges we are estimating currently for fiscal 2022.

So, now within the Core Banking segment, on Page 10 of the presentation or page 19 of the release, net interest income increased 4% sequentially driven by the strong non-PPP loan growth and continued decline in cost of funds. I'll talk about CECL and the provision in detail in a few minutes, but you'll see here we have the $23 million recapture this quarter again from improving economic forecasts. Two lines down is the change in fair value and swap derivatives noting there was a charge of $4.5 million here in Q2 as long-term interest rates decline this quarter compared to a gain of $12 million back in Q1 as rates increased in the first quarter.

And non-interest income increased 57% or $18.5 million, which included the non-recurring $4.5 million gain on sale of Umpqua Investments along with a lift of $3.9 million in gain on SBA loan sales, a $2.9 million increase in card based fees, a $2.3 million increase in swap fees, along with a $2.3 million increase in M&A advisory fees. Our focus continues to be on growing commercial fee revenue.

Below this, we had an increase in exit disposal costs up from $1.7 million last quarter to $4.8 million this quarter. About one-third of this related to lease exits on recent store consolidations and two-thirds of this related to a [Indecipherable] impairment as we execute our return to work plan. Our goal is to significantly reduce back office square footage and shift our workspace around to be closer to where our associates live, utilizing a hybrid workspace from the majority of support groups resulting in efficiencies, both in terms of cost and associate work life balance.

The main non-interest expense category for the Core Banking segment increased 1% this quarter related to several smaller items. And pre-tax for the Core Banking segment increased 25% this quarter to $144 million. Excluding the recapture on prior provisions, the pre-tax income for Core Banking increased by 5% from Q1 and represents 92% of the consolidated total. The efficiency ratio on the Core was consistent at 56%. For the balance of this year, we expect continued non-PPP loan growth with the overall NIM around 3.3% and the NIM ex-PPP in the 3.1% to 3.2% range.

Turning now to Page 11 of the presentation or Page 20 of the earnings release, we show the Mortgage Banking segment five quarter trends. To start, we have $1.25 billion in total held for sale volume this quarter, a bit better than expected drop of 24% from Q1. The gain on sale margin was 3.3%, again down from Q1 as expected given the slowing mortgage market. About 20 basis points of the decline in gain on sale margin resulted from a lower locked pipeline with the balance of decline from market pricing. These two items resulted in the $41.3 million of origination and sale revenue noted toward the top left of the page.

Our service revenue was stable and 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 $1.7 million due mainly to higher pay down activity earlier in the quarter. Non-interest expense totaled $37 million for the quarter. Again, this represents direct held for sale origination costs, servicing costs along with administrative unallocated costs. The direct expense component of this was $25.5 million as noted on the right side of the page, representing 2.03% of production volume.

Pre-tax income for the Mortgage Banking segment was $10.6 million and net income was $8 million, both down 61% from the first quarter and within the range of our expectations. It's important to note here the Mortgage Banking segment represents only 7% of our pre-tax income compared to 19% in the first quarter and 28% in the fourth quarter as our core banking growth initiatives take hold. It's 8% excluding the recapture of prior provision for loan losses.

For the near-term outlook on our Mortgage segment, assuming no significant change in interest rates, we expect to held for sale volumes to decline over the course of the year with best estimates of around $900 million in Q3 and $800 million in Q4 to end the year in the mid $4 billion range. Gain on sale margins should remain in the low 3% range for the balance of the year and the MSR passage of time should be pretty consistent. 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 in the low 2% range given the lower volume for the balance of the year.

Given we are at the midpoint of 2021 and we have several initiatives in flight under Next Gen 2, along with the normalization of the mortgage lending market and uncertainty with CECL, I'm going to give some high level target ranges for fiscal year 2022 that we are currently planning for on select areas of the business.

For the Core Banking segment, we expect non-PPP loan growth to be in the high single-digit range next year. The Next Gen 2.0 cost savings will start to show and reduced overall expense levels later this year and on overall expense, we are targeting $580 to $590 million for the Core Banking segment in 2022. For the Mortgage segment in 2022, based on the current interest rate outlook, we are forecasting a range of conventional for sale volume around $3 billion, with the gain on sale margin of around 3.25% and direct expense in the 2.7% to 2.8% range noting the direct expense is higher based on certain fixed costs with lower volume, which we will work to manage lower.

Fully allocated expense is estimated at $110 million, $120 million for full year 2022. Combined with the Core Banking segment, this would result in total non-interest expense in the $690 million to $710 million range and will reflect realization for many of the Next Gen initiatives, lower mortgage banking activity, continued inflation and additional investments in the business.

Okay. I hope this segment in 2022 update discussion was helpful to understand the moving parts and potential future drivers on profitability. I spent most of my time discussing the segments and note there are several slides later in the presentation on consolidated trends for net interest income, margin and expense, but hopefully this help give some greater insight into the company.

A couple 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 the 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 used the consensus economic forecast this quarter updated in May. Overall, the forecast showed improvement in several key areas as the economy reopens. We included an $18 million overlay for various CRE portfolios to hedge against any potential near-term slowdown or negative turns with the pandemic. Net of this overlay, we recognized a $23 million recapture on our provision for loan loss. Net charge-offs for Q1 remained low at $13.6 million, much lower than the models from last year suggested and the majority of net charge-offs this quarter related to the small ticket lease portfolio.

The ACL at quarter end was 1.33% noting this ratio was 1.42% 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 the lag of at least four quarters.

Our day one CECL level was just over 1% on the ACL, which is about $80 million lower on the ACL for non-PPP loans and we are at currently. All else equal, this excess ACL will either be charged off in future periods if the models are eventually proven incorrect or be recaptured and/or used for future loan growth if the economic forecasts continue to improve, time will tell.

And lastly back on Slide 21. I want to highlight capital. Noting that all of our regulatory ratios remain in excess of well-capitalized levels, our Tier 1 common ratio is 12.4% and our total risk-based capital ratio is 15.4%. The bank level total risk based capital ratio was 14.5%, which is the basis for our calculation of $548 million in excess capital that is excess over our 12% in-house floor.

The share repurchase we announced yesterday to be executed over the coming year represents approximately 180 basis points of risk-weighted assets, 10% of our current market cap and when completed is expected to add approximately 150 basis points to our return on equity.

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 for Umpqua Bank

Thank you Ron. I will also be referring to certain page numbers from our earnings presentation for those who want to follow along. Slide 24 reflects our credit quality statistics. Our nonperforming assets to total assets ratio decreased 2 basis points to 0.17% and our classified loans to total loans remained consistent at 0.74%. Our annualized net charge-off percentage to average loans and leases decreased 5 basis points to 0.28% and as we indicated earlier the FinPac portfolio began to return closer to historical levels of 3% to 3.5% during the quarter. So, this equates to $13.3 million attributable to FinPac and $300,000 to the bank.

Slide 25 shows the total loan balances that were on deferment at the end of the quarter at 0.7% of the loan book. For deferrals on a portfolio basis, we are reporting less than 1 basis point deferral in commercial, 0.6% in commercial real estate, less than 1 basis point in FinPac, 0.1% in consumer and other, and 1.9% in residential real estate.

Consistent with last quarter, we have excluded $151 million in Ginnie Mae repurchases from the deferral numbers as those loans are guaranteed by the FHA, VA or USDA Rural Development. So to wrap up, we are obviously very pleased with our credit quality metrics this quarter. 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 -- Director, President and Chief Executive Officer

Okay. Thanks Frank and Ron for your comments. We will now take your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Jeff Rulis with DA Davidson.

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

Jeff, good morning.

Jeff Rulis -- DA Davidson -- Analyst

Hi. Just a question on the pipelines. Do you have the loan pipeline as of kind of quarter end versus the sequential quarter.

Torran Nixon -- President for Umpqua Bank

Hi, Jeff. This is Tory Nixon. Pipeline -- total pipeline for all lines of business is up about $450 million from the end of Q1 and we sit today at just over $4.5 billion in total loan pipeline.

Jeff Rulis -- DA Davidson -- Analyst

Great. And I think Cort alluded to the hires and I guess as you bring folks on and when you get kind of the follow through of actual net production. Just trying to track, if you can kind of point us to where hires were made, if it's been a pretty steady higher rate and then trying to also track the follow through of when that shows through in growth. Is there a figure you could throw at us on that?

Torran Nixon -- President for Umpqua Bank

I don't know if I could give you a figure, I would say that hiring for us has been ongoing for actually the last several years. We're relatively -- obviously we're choosy in who we want in terms of the talent and to be accretive to the company and the culture of Umpqua Bank. Our hires in Q2 have been spread out throughout our footprint in our businesses. So, we've got some in real estate. We continue to hire middle market. We've hired probably more in middle market in the Pacific Northwest this quarter than in previous quarters. We've hired quite a few in our community banking business throughout the Pacific Northwest.

So, we continue to look for talent, continue to bring them into the company and as Cort mentioned, it takes a quarter or two for them to start to really build a pipeline and get that across the finish line, but feel really good about our hires, our ability to continue to hire and continue to bring in new customers and build pipeline.

Jeff Rulis -- DA Davidson -- Analyst

Got it. So last one for me. Torry or maybe Cort, just trying to peg the impact of the reopening of businesses in Oregon and Washington, particularly, but given the numbers would suggest a pretty good pickup in net growth, if you would care to kind of color, what you saw and if you're seeing that impact on the ground level of those economies reopening.

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

Hey Jeff, Cort. So, relative to Oregon specifically or our footprint, just want to make sure I answer your question.

Jeff Rulis -- DA Davidson -- Analyst

Sure. I mean, Oregon, Washington and those restrictions being lifted kind of on a delayed standpoint, California, a bit different, but just. Yes, I mean, is it becoming. I guess would you peg Q2 growth tied to that or is a broader kind of reopening, I guess, has it impacted specifically growth prospects as you've seen it from your lenders?

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

I would say generally our business is is borrowers, don't necessarily just do business in Pacific Northwest or the Pacific Rim, which includes all the states we operate. There's no question that the West Coast is probably trailed, the Eastern Seaboard and parts of the Midwest in opening and in some cases places are kind of moderately taken a step back.

It's a slow and steady kind of progression as people get -- kind of get their heads around their business as stores reopen and businesses continue to manufacture, if they can hire, all the things you hear about certainly are affecting our customers, but we're very optimistic, we talk to customers, they're enthusiastic, they're happy to be open again, they're happy to be selling goods and services. So, we continue to feel very, very good about the pipeline and our ability to grow outstanding book of business and new businesses.

Jeff Rulis -- DA Davidson -- Analyst

Okay. Fair enough, thanks. I'll step back.

Operator

Your next question comes from the line of Matthew Clark with Piper Sandler.

Matthew Clark -- Piper Sandler -- Analyst

Hey, good morning, guys. First, just on the buyback, the prior one that you had out there for a long time, just kind of hung out there. It sounds like you're looking to get this fully completed within the next 12 months. I'm just trying to get a sense for the cadence that we might see in terms of activity. How price sensitive you might be or not?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Good morning. Matt. This is Ron. Yes, I mean our base case [Indecipherable] over the course of the next 12 months, but we will be opportunistic through ASR and other means if possible just based on volatility. The real key with this is the buildup of excess capital really over the last year, strong mortgage results as rates decline, pushed our excess capital from the $150 million to $200 million range, up close to $600 million over the last quarter. So, the key on that is to return that capital to shareholders and thereby increasing our return on equity by roughly 150 basis points, which from that standpoint is price agnostic.

Matthew Clark -- Piper Sandler -- Analyst

Got it. And then, I don't think this is in your segment disclosures or in your disclosures anymore, but how much single family resi did you portfolio this quarter? Just trying to get the overall in terms of what your portfolio -- we can see what you sold? I'm just curious, would you get on top of that?

Torran Nixon -- President for Umpqua Bank

Matt, this is Torry. About $200 million is what we portfolio, some of that came from home lending and some of that came from our private banking segment.

Matthew Clark -- Piper Sandler -- Analyst

Okay and then, Ron, can you just remind us how much you have in the way of net fees left in for round one and round two PPP.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

About $38 million would be the balance currently deferred.

Matthew Clark -- Piper Sandler -- Analyst

Okay, great. And then last one for me. Just on the reserve. I think in prior calls, you talked about three to four years to coverage on normalized net charge-offs of, correct me if I'm wrong, but 25, 30 basis points, is that still -- I assume that's still the view, but I mean do you feel like 1% is kind of the bottom in terms of your reserve in kind of normalized environment?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Yes, I mean the wildcard there is what's normalized. Right? But as I think about normalized, yes, our day one CECL was 1.02% and if you look at the 1.42% today, ex-PPP that's a delta of about $80 million that I'd like to think we'll be in a normalized world here at some point, in that ACL should be down around 1%. There has been nothing structural within the portfolio composition that would have shifted compared to our day one balance [Indecipherable].

Matthew Clark -- Piper Sandler -- Analyst

Okay, great. Thank you.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Jackie Bohlen with KBW.

Jackie Bohlen -- KBW -- Analyst

Hi, good morning, everyone.

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

Hi, Jackie.

Jackie Bohlen -- KBW -- Analyst

I wanted to dig in a little bit to Slide 3 with the operational excellence, in terms of the expense reductions that you have. So, if I read the slide, I look at it that you're expecting to realize $31 million in cost savings. I know original guidance was roughly 50% realization in 2021. And if I just simply double that, it puts me at 62% and I know there's other factors at play here, but to me, I read this, as you're going to come in likely at the upper end of your range and possibly even exceed it and I just wanted to see if I'm probably interpreting that?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Hey, Jackie. Good morning, this is Ron. Yes, the $35 million would be an annualized go forward amount and so we look at the second half of this year, roughly 50% of that would be in 2021, but I really think about that from a go forward annual amount and that was the course also incorporated into the 2022 range guidance I gave earlier as well.

Jackie Bohlen -- KBW -- Analyst

Okay. Sorry, I didn't fully under understand the explanation. [Speech Overlap] it's the $31 million.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

It's $35 million. Yes. [Indecipherable] $35 million that's been recognized as a reduction here in Q2. It's -- we've executed on those saves and here through the end of Q2 that is a go-forward annual amount of save that we expect specific to those the initiatives.

Jackie Bohlen -- KBW -- Analyst

So, that's how I'm looking at it. So with that number that fits pretty well into the range if you still have more to recognize in 2022. So, that sounds like -- basically, I'm trying to say, it sounds like you're doing a good job of reaching toward the upper end of the original target range. is that fair?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

That is our goal. That is very fair.

Jackie Bohlen -- KBW -- Analyst

Okay, thank you. And then just in terms of the margin guidance that you gave the 3.1% to 3.2% on a core basis. When I look at the mix of that, I'm just wondering how you're looking at the overall balance sheet and its mix assumptions because you mentioned that you might also deploy some excess cash into liability pay downs. So just trying to [Technical Issues] how you're thinking about net balance sheet growth.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Yes. And there's a couple of other moving parts. Obviously, we have assumptions around new potential attrition from continued store consolidations. The balance of the year we are expecting non-PPP loan growth over the balance sheet, Right? I'd say, in total, the balance sheet should be relatively static, maybe up slightly in total assets over the course of the year. But really it's more in terms of the mix and I expect more of that coming out of and just bring cash into higher yielding non-PPP loans. The PPP balance fluctuations should still -- we should still see continued forgiveness over the balance of the year, but the real juice is going to come from taking the cash out of 10 bps at the Fed -- 15 bps of the Fed and loans north of 3%. So, long-winded way of saying, I think the balance sheet, probably stay relatively static in total over the balance of the year and just continue to work on shifting the deployment of the left side of the balance sheet over the coming year in the loans.

Jackie Bohlen -- KBW -- Analyst

Okay. Okay, thank you.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

You bet. Thank you.

Operator

Your next question comes from the line of Brandon King with Truist Securities.

Brandon King -- Truist Securities -- Analyst

Hey, good morning. So core deposit growth was strong in the quarter and I wanted some of the thoughts going forward in expectations of growth in second half of the year and the source of that growth coming from the new customers or greater wallet share penetration?

Torran Nixon -- President for Umpqua Bank

Brandon, Torry Nixon. I think it's -- that's a great question, I will tell you that I think the teams are doing a terrific job in our balanced growth initiative and we're looking at customer growth, loan growth, deposit growth and fee income growth. And we had really strong deposit growth from our middle market business, from our community banking business, from retail down -- even from real estate group. So, we continue to pull in good core deposits, both from existing customers, further penetration from PPP loans that we made to non-Umpqua Bank customers, and then just share of new names into the company. So, kind of across the board and across all lines of businesses.

Brandon King -- Truist Securities -- Analyst

Okay. And I also notice card fees were up pretty nicely in the quarter of $3 million sequentially. Is that from more activity or is that a function of new customers?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Hey, Brian, this is Ron. That's going to be a combination of new activity and customers, part of the reopening component of it as well. There was probably a little over $1 million there that was specific to the merchant in terms of an overall program that's more of an annual number. I would not expect that component of it being recurring every quarter, but great to see activity up with reopening.

Torran Nixon -- President for Umpqua Bank

Yes. I'll just -- Brandon, this is Torry. I'll just add one thing to that. I mean when I look at our treasury management fee business, our commercial card business, our International banking business, our Elan card business, I mean all of it continues to grow. We had record months, record quarters in TM and in commercial card for us.

Brandon King -- Truist Securities -- Analyst

Okay. And do you see $10 million run rate as a nice base going forward is upside potential there?

Torran Nixon -- President for Umpqua Bank

I'd say ex probably $1 million to $1.5 million I talked about on the merchant side.

Brandon King -- Truist Securities -- Analyst

Okay, thank you very much.

Torran Nixon -- President for Umpqua Bank

Brandon, thank you.

Operator

Your next question comes from the line of Jared Shaw with Wells Fargo.

Jared Shaw -- Wells Fargo -- Analyst

Hey, good morning.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Hey.

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

Hey, Jared.

Jared Shaw -- Wells Fargo -- Analyst

I guess sort of following up on the question about deposit growth and outlook. As we go through the end of the year, are you expecting at all sort of a normalization or reversion in the loan to deposit ratio with customers utilizing some of that cash or do you -- what you see so far the deposit growth trends will still be strong enough that we could see the loan to deposit ratios stay where it is as loan growth picks up?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Jared. This is Ron. Here too as we talk about loans, we need to incorporate as a non-PPP or [Indecipherable] PPP what I don't expect here near term is to see us back in the low to mid 90s. But I do expect to see a continued march higher over the coming year as you get the commission of PPP loans declining from the continuing forgiveness, but also high-single digit non-PPP growth next year. So a long-winded way of saying, I do expect a eventual march higher in our overall loan to deposit ratio, but you're going have some near term noise just in terms of the PPP flows.

Jared Shaw -- Wells Fargo -- Analyst

Okay. And then going back to, I guess, the Next Gen targets that were really more discussed earlier and -- or at the end of last year with the expectation for high single-digit loan growth this year and then as you pointed out with Jackie, the ability to probably coming at the higher end of the expense saving range. Should we expect or could we expect to see an update to maybe call it Next Gen 3.0 or an updated guide overall for expectations maybe being a little better coming out of Next Gen 2.0 with some of the actual results even you'd be able to put up?

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

Jared, Cort. Yes, I mean, we get -- this is off the top of my head here, we get closer to delivering on the Next Gen 2.0 certainly sooner than we had originally discussed with you all, almost a year ago now. Yes, we would probably give you a Next Gen 2.10 or 2.0 -- or 3.0. It's a great question. We -- I just say that we're very pleased with the progress we're making on 2.0 and I appreciate the question. And yes, as we've done in the past, we'll continue to give you good guidance on where we're continuing to kind of manage the bank in a most efficient and profitable way we can.

Jared Shaw -- Wells Fargo -- Analyst

Okay, great thanks. Rest of my questions are answered.

Operator

Your next question comes from the line of Steven Alexopoulos with J.P. Morgan.

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

Hi, everyone.

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

Hey Steve.

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

I wanted to start first on C&I. So, we're about midway through earnings season. We've had quite a few other banks comment that they're seeing commercial customers draw on credit lines despite carrying very elevated deposit balances. I'm curious, what are you guys seeing and how much of your C&I loan growth is coming from share gains versus existing customers drawing on lines.

Torran Nixon -- President for Umpqua Bank

Steve, this is Tory Nixon, I'll give you a couple of answers to that. The first on line utilization. Our middle market business is up about 2% in utilization to 29% in Q2 from Q1. However that utilization in Q2 2021 is identical to Q2 2020. So, really kind of flat year-over-year. So, we're not seeing there in aggregate, kind of the same thing on our community banking business. So, kind of year-over-year relatively flat. At some point, I -- back to the conversation, the comment around the economy and the success of businesses in the West, love to see that kind of grow.

So, most of our loan growth business is coming from either existing customers with some sort of term debt or new names into the company, new relationships that our borrowing either term debt or lines of credit.

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

Okay. That's helpful, Torry. Okay, that's good. And maybe for Ron. You guys have been pretty active in the first half of the year adding to the securities portfolio, but given the step down in rates here, what's your appetite to add to the securities book the way you've been doing it.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

As much as it was earlier in Q2 or in Q1.

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

Does that mean, it should be pretty flat, securities portfolio?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

That's where we model internally. Yes.

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

Okay. Got you. That's helpful. And then maybe for Cort on the TM essentials rollout. Is that for small business customers in your markets or are you targeting fairly broad small business customers of that?

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

I'd pass that one to Torry.

Torran Nixon -- President for Umpqua Bank

Yes, this is Torry again. That product is essentially a TM solution for small business and business banking. We were just rolling it out, I think it gives us a great opportunity to provide the solutions for smaller companies that we bank today, but it also will be a part of the offering for our prospecting efforts and I think going back even to our PPP non-Umpqua Bank customers that are on the smaller end and business banking or small businesses is a perfect product for them.

And we have a -- I think our community banking business we have about an 18% penetration rate of treasury management into those companies. So, there is a great upside for us and I think part of that is just the size of our TM solution for our middle market companies compared to this new treasury management solution for smaller companies. So, we will use it internally with existing customers as well as for prospecting.

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

Got you. Okay. And then last question, sorry to ask so many questions, but and this one is for you. Cort. It's been, I don't know seven or eight years since Umpqua has done an M&A deal. Is this still part of the strategy and focus or you now purely organic growth focused? Thanks.

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

When we -- when I took over almost five years ago, we were clearly and we were outward with that, focused on just operationalizing and doing a better job of running the bank post the Sterling merger. I mean, today with the currency levels we've got, we're still going to be focused on continuing to increase the currency to give us that optionality you're talking about. We've always been opportunistic, Steve, in order to be quite frank. We've looked more at, I'll say plug and play, which I think I've mentioned before at verticals or products and services that could serve our existing customer base and -- but as it relates to FI kind of acquisitions, until we get that currency level up to where the financials around a strategic decision like that makes some better sense, we're just going to continue to operate. But we are -- that does not necessarily mean we're not opportunistic. It just means right now we've got a little bit of work to do. I think we're making great progress. We really are and we are excited to -- with our prospects of growth and the opportunities that we see going forward both internally and externally.

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

Okay. Great. Thanks for all the color.

Torran Nixon -- President for Umpqua Bank

Yes, thank you.

Operator

Your next question comes from the line of Brett Rabatin with Hovde Group.

Brett Rabatin -- Hovde Group -- Analyst

I wanted to make sure I understood the guidance clearly. I think, Ron, the guidance around mortgage banking was $900 million for the third quarter, $800 million for 4Q and I just wanted to understand the dynamics around the expectation levels for the back half of the year on production? Obviously, a lot of people talking about constraints in terms of housing supply, but I know at one point, you guys had mentioned that you felt like if mortgage was down 25% or if the volumes were down 25% from an M&A perspective, you're hoping that your numbers will be down less due to some of the things you thought you could do to gain share. So I was just hoping if you walk through that dynamic.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Yes. You bet. Good morning, Brett. And, yes, we obviously internal forecast based off what we see with pipelines and activity and interest rates. Overall, the mortgage activity is much decreased from year back. We do expect around give or take $900 million in Q3 and $800 million in Q4. That's coming off more into quarter here in Q2. Right? So, put the total year in that $4 billion, mid $4 billion range and our best estimate right now, assuming there's significant change in rates or supply, would be in the $3 billion -- right around $3 billion for next year.

Brett Rabatin -- Hovde Group -- Analyst

Okay. Is the dynamic in the back half of the year or function of just lower refi or what, can you talk maybe a little bit about what you're seeing from the pipeline?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Yes. Lower refi. This is a bit lower activity just given the significant lift in activity here over the last four quarters. And generally, in Q4, you get a seasonal bell curve and there's some drop off in Q3.

Brett Rabatin -- Hovde Group -- Analyst

Okay. And then the other question I had was just wanted to see about current production in terms of the new growth that you're seeing versus existing portfolio yields, kind of how does that dynamic look.

Torran Nixon -- President for Umpqua Bank

So, Brett. This is Torry. Are you, I want to make sure I understand the question, you're talking about loan yields compared to previous quarters.

Brett Rabatin -- Hovde Group -- Analyst

Right. Just, I don't know it's going to vary between commercial real estate and C&I and various loan components, but just was hoping to get maybe what churn production was versus the existing portfolio?

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Yes. So current production actually over the last two to three quarters has been relatively constant and not a ton of movement, down a little bit in our commercial real estate book on new production. But interestingly enough our community banking business is up a little bit. So, take all in all, it's been relatively stable over the last two to three quarters.

Brett Rabatin -- Hovde Group -- Analyst

Okay. Great. I appreciate the color.

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

Yes. Thank you, Brett.

Operator

And there are no further questions at this time. I will turn the call back over to the speakers for any closing remarks.

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

All right, thanks, Brandy, and I want to thank everyone for their interest in Umpqua Holdings and attendants on the call today. This will conclude the call. Goodbye.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Ronald Farnsworth -- Executive Vice President and Chief Financial Officer

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

Frank Namdar -- Executive Vice President and Chief Credit Officer for Umpqua Bank

Torran Nixon -- President for Umpqua Bank

Jeff Rulis -- DA Davidson -- Analyst

Matthew Clark -- Piper Sandler -- Analyst

Jackie Bohlen -- KBW -- Analyst

Brandon King -- Truist Securities -- Analyst

Jared Shaw -- Wells Fargo -- Analyst

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

Brett Rabatin -- Hovde Group -- Analyst

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