Welcome to Wintrust Financial Corporation's 2nd Quarter and Year to Date 2021 Earnings Conference Call. A review of the results will be made by Edward Wimmer, Founder and Chief Executive Officer Tim Crane, President David Dyckstrapp, Vice Chairman and Chief Operating Officer and Richard Murphy, Vice Chairman and Chief Lending As part of the reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following the presentation, there will be a formal question and answer session. During the course of today's call, Windrush Management may make statements that constitute projections, expectations, beliefs or similar forward looking statements. Actual results could differ materially from the results anticipated or projected in any such forward looking statements.
The company's forward looking assumptions that could cause the actual results to differ materially from the information discussed during call are detailed in our earnings press release and in the company's most recent Form 10 ks and any subsequent filings on file with the SEC. Also, our remarks may reference certain non GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of its non GAAP financial measures to the nearest comparable GAAP financial measure. As a reminder, This conference call is being recorded. I will now turn the conference call over to Mr.
Edward Wimmer.
Good morning, everybody, and welcome to our Q2 earnings call. As mentioned with me are Dave Dykstra, our Chief Operating Officer Dave Starr, CFO Kate Bogie, our General Counsel Tim Crane, President And Rich Murphy, Vice Chairman of Credit. We're going to stick with the format we started in Q1, you don't have to listen to me as much. You can listen to Dave is going to talk more. I'm going to give some general comments about our results.
Dave is going to Dave Dykstra will give us a detailed analysis of the income statement. Tim Crane will talk about the balance sheet. Rich Murphy will provide an overview of credit, then back to me for some summary comments and thoughts about the future, and of course, time for questions. Last April, the start of the pandemic and the government massive response to it, which included an elongated zero interest rate environment, I indicated which of course would be to try to grow through it. Today, we have capital since goal, so far so good.
2nd quarter shows the strategy is working. The growth to date has been all our growth to date has been organic since that period of time. 2nd quarter was all around $1,000,000,000 quarter, I'd like to say. Assets, deposits and core loans, net of PPV loans, grew by approximately $1,000,000,000 plus or minus. Our growth prospects remain very good.
Net income for the quarter totaled $105,000,000 or $1.70 per common share. Year to date income was $258,300,000 or $4.24 per common share. Our reported net interest margin grew 9 basis points to 2.63 percent, while net interest income was up $17,700,000 Q1, we're going to back out the PPP loan income, the NIM grew 3 basis points, 2.49%. Core loan growth and investment activity was at the end of the quarter, so this bodes well for quarter 3. Exceeded average loans in the quarter by over $800,000,000 So we start Q3 with a nice with that in our back pocket.
The sale loan growth was excellent. All pipeline the pipelines in all our businesses remain very good. It's important to align usage, it's up to an all time low about 39%. Normal average is closer to 50%. So we'll go back there.
We have another $1,000,000,000 of growth built in there. Credit quality got even better with net charge offs totaling 2 basis points. NPLs and NPAs reached down. NPLs fell $11,300,000 to $87,700,000 or 27 basis points, Our NPAs fell $11,600,000 to stand at 22 basis points total assets. This resulted in a reserve release of about 15 point $3,000,000 Keeps saying credit can't get better, it keeps getting better.
It's hard to believe. The mortgage experienced an inevitable decline in the quarter. Dave will discuss this in detail. It should be noted Wealth Management has been immune to this growth story. Assets under administration grew $2,000,000,000 or 5.3 percent or 25% annualized in the quarter through both the overall market and new business.
Our wealth management assets now totaled 34,200,000,000 It's clear to $32,200,000,000 at the end of the quarter 1, dollars 30,000,000,000 at the end of the prior year. I will turn it over to Dave for a review of the income statement.
This is Tim. I'll do the balance sheet maybe just for a second and then turn it over to Dave. As Ed mentioned, in the quarter, Assets grew $1,100,000,000 to $46,700,000,000 Couple of items worth highlighting here. First, we experienced very strong core loan growth. Loans excluding PPP were up $1,200,000,000 in the quarter.
Gross was spread nicely across loan categories, Commercial Real Estate and our niche businesses. Rich will share a little more detail in a few minutes. On a percentage basis, this $1,200,000,000 equates 15% annualized growth and on a year to date basis our loan growth excluding PPP is just over 11% annualized. As Ed mentioned, we believe these growth numbers are solid and during the quarter we continued to see a decline in utilization. The trend that in the coming quarters we hope will reverse and will help rather than hurt our loan growth activity.
In addition, the pipelines remain strong as we see evidence of accelerating economic activity in our markets. With respect to PPP loans, We saw a reduction of $1,400,000,000 as the forgiveness activity accelerated materially during the quarter. Total PPP loans at the end of the For the remainder of the year, we remain comfortable with our loan growth target of mid to high single digits on a percentage basis, We could see upside with either improved line of credit utilization or continued strong market conditions. Deposit growth for the quarter was $932,000,000 a majority of the growth in non interest bearing DDA. This represents annualized growth of nearly 10%.
Deposit costs continued to fall as we primarily reprice term deposits. For the quarter, the cost of interest bearing deposits fell an additional 7 basis points to 38 basis points, a trend we expect to continue in the coming quarters. Notably, the non interest bearing DDA deposits now comprise a third of our total deposits. As we've noted in prior We're monitoring the significant deposit growth carefully. However, we view stable low cost deposits as a strength of our company and we'll continue to grow those deposits related to client relationships.
Obviously, like many institutions, we also remain very liquid. With rates falling in at low levels for most of the quarter, we held our securities position essentially stable during the quarter. We remain cautious in our deployment of the excess liquidity, wary of locking in low long term yields. We continue to evaluate our options and view the appropriate deployment of this liquidity as an opportunity in future periods. Given where we think volumes will land going forward, we expect generally steady to improving net interest income in the coming quarters Despite lower levels of PPP accretion and excluding PPP, we expect a generally steady net interest margin.
Capital levels essentially held steady during the quarter with strong growth and remain appropriate given the conservative risk profile of the bank. Overall, we remain well positioned to benefit from either stronger economic activity or higher rates or both as we enter the second half of the year.
Dave? Hi. Thanks, Tim. As Ed indicated, I'll cover the noteworthy income statement categories, Starting first with the net interest income. For the Q2 of 2021, net interest income totaled $279,600,000 That was an increase of $17,700,000 as compared to the Q1 of 2021 and an increase of $16,500,000 as compared to the Q2 of last year.
The $17,700,000 increase in net interest income compared to the Q1 was primarily due to the earning asset Growth, which was up 9% over the prior quarter, net interest margin expansion and one additional day in the 2nd quarter. And for your reference, one additional day approximates $3,000,000 of net interest income for Wintrust. The net interest margin improved 9 basis points from the prior quarter 2.63% as the rate on interest bearing liabilities declined 7 basis points in the 2nd quarter as compared to the prior quarter And a 4 basis point increase on the yield on earning assets was partially offset by a 2 basis point decline in our net free funds contribution. The 4 basis point improvement in the yield on earning assets was comprised of a 3 basis point increase on the yield on loans and a 13 basis point The yield on liquidity management assets due to the deployment of a portion of our liquidity into investment securities late in the Q1. The decrease in the rate paid on interest bearing liabilities was primarily due to a 7 basis point decrease in the rate paid on interest bearing deposits, primarily due to the lower repricing of time deposits.
PPP accretion, as we noted in the press release, Was $25,200,000 of recognition in the 2nd quarter compared to $19,200,000 in the Q1 of 20 As forgiveness activity accelerated during the quarter. And additionally, as Tim noted, the margin was again affected by Turning to provision for credit losses, similar to many other banks that have reported this quarter, Wincress recorded a negative provision for credit losses of $15,300,000 compared to a directionally similar negative provision of $45,300,000 in the prior quarter and $135,100,000 provision expense recorded in the year ago quarter. The negative provision was driven by a reduction in the allowance for credit This is primarily due to improvements in macroeconomic forecasts, including improvements in the commercial real estate price index and the Baa corporate credit spreads. Additionally, the company saw improvement in loan portfolio characteristics during the quarter, including decreases in COVID-nineteen related loan modifications And improving loan risk rating migration. Slide 13 through 20 of the presentation deck that we provide on our website We'll give you additional details about the improvement in the non performing loan, the COVID-nineteen modified loans and the macroeconomic Factors impacting the allowance for credit losses.
And Rich will cover credit quality in a lot more detail in just a few minutes. Turning to non interest income, the non interest expense and the income tax sections. In the non interest income portion of the income statement, our wealth management Revenue increased $1,400,000 to another record level of $30,700,000 in the 2nd quarter compared to $29,300,000 in the 1st quarter And net revenue source was up 36% from the $22,600,000 recorded in the year ago quarter. This revenue source has been positively impacted by higher equity valuations, which impact the pricing on our managed asset accounts. Turning to mortgage banking revenue.
We saw reasonably solid loan origination volume during the 2nd quarter, But that origination volume was off the record high levels seen in the past few quarters due to lower refinance activity in the marketplace. To that end, the company originated approximately $1,700,000,000 of mortgage loans for sale in the Q2 of 2021, down 22% from the approximately $2,200,000,000 in each of the prior quarter in the Q2 of last year. Mortgage banking revenue decreased to $50,600,000 in the 2nd quarter as compared to $113,500,000 in the Q1 of 2021, Contributing to the $62,900,000 reduction in revenue were the following items: A $29,000,000 decline in revenue related to the impact of the MSR valuation and the MSR capitalization net of payoffs and paydowns The $29,000,000 negative impact of the value of the mortgage servicing rights primarily related to a positive fair value adjustment of $18,000,000 in the Q1 of the year as compared to a decrease of $5,500,000 in the current quarter as well as a decrease in the value of capitalization of retained mortgage servicing rights due to a decline in loans sold with servicing retained. Another $21,000,000 reduction was due to reduced gain on sale primarily Associated with the aforementioned lower production volume and a $13,000,000 decline due to secondary marketing gains and mark to market impact The declining interest rate lock commitment pipeline.
So our pipeline was smaller at the end of the Q2 than the Q1. Q1 of 2021 also benefited from atypical elevated levels of secondary marketing gains Related to the market environment in the Q1, where we had strong investor demand, general margin enhancement due to historically strong consumer demand and the timing associated with recognized gains on hedging trades in the prior quarter. The normalization of that market drove a quarterly swing to a more typical range The secondary gains in the second quarter. Looking forward, based on the current pipeline activity, we expect mortgage originations for sale in the 3rd quarter to However, I should note that although the aforementioned revenue estimate for the Q3 is expected to be in line with the Q2, the operating expenses should trend lower in the Q3. As many of you know, we essentially record the net mortgage revenue when we lock the interest rate commitment on the majority of loans that we expect to originate and sell.
Accordingly, expense reductions lag the revenue recognition as we still need to underwrite process and close those loans that are in the pipeline, as well as pay commissions once the loans close. Since the mortgage loans in the pipeline were substantially higher at the end of the Q1, the expenses Associated with processing and closing that pipeline naturally lagged into the Q2 and lagged the drop off in revenue. As the pipeline of loans has decreased during the Q2, we would expect to see a corresponding decrease in mortgage related expenses in the Q3. So currently assuming the mid-fifty million dollars range of revenue, excluding any MSR valuation, We anticipate mortgage related non interest expenses to decline further in the Q3 in the $8,000,000 range. I should note that when you evaluate the mortgage expenses relative to the mortgage revenue decline, you should consider that $29,000,000 of the MSR our valuation decline of $13,000,000 related to the secondary marketing gains and decline in the pipeline or $42,000,000 in aggregate of revenue decline would not have any associated expense reductions as those amounts are simply valuation measurements.
So the expense reductions really follow through with the production decline of 21,000,000 So our mortgage expense reductions in the Q1 were generally $7,000,000 to $8,000,000 of commission reductions, a couple of $1,000,000 of other expense reductions, and then we expected an additional $8,000,000 of expense reductions in the Q3. With that being said, I have to caveat that in the last few days, the interest rates have dropped considerably And the pipeline of new applications has increased. If that continues, we would expect the mortgage revenue To be higher than what I just guided and expenses associated with that revenue would also guide a little higher than what I just said. But we should be able to lock in that net $8,000,000 of additional profitability on that production decline in revenue that we saw. Also, I should note that Wildcard releases the MSR valuation adjustment and it's tied to interest rates, And we're not going to speculate on where rates will be at the end of the Q3.
And so those amounts that I just talked about would be Other non interest income totaled $20,400,000 in the 2nd quarter and was up $4,700,000 from the 15,700,000 The primary reason for that increase was a $4,000,000 gain on the sale of a few branch locations in southwestern Wisconsin. That previously disclosed transaction closed during the Q2. In the non interest expense categories, non interest expenses totaled $280,100,000 down approximately $6,800,000 or 2% from the $286,900,000 recorded in the prior quarter. There are a handful of categories that account for the majority of the change from the prior quarter that I'll focus on. First, salaries and employee benefits expense decreased by $8,000,000 in the second Compared to the Q1, the $8,000,000 decline is primarily related to $7,600,000 of lower commissions and incentive comp, primarily related to the decline in commissions related to the lower mortgage originations that I just talked about.
Occupancy expense totaled $17,700,000 in the 1st quarter, decreasing $2,300,000 from the $20,000,000 recorded in the prior quarter. That decrease was primarily the result of the Q1 of the year, including a $1,400,000 impairment charge associated with the planned closure of a branch location and the current quarter having a lower level of maintenance and repairs expense. Similar to recent years, other than 2020, which was impacted By the pandemic, marketing expenses increased by approximately $2,800,000 from the Q1 to $11,300,000 As we've discussed on previous calls, this category of expenses increased as our corporate sponsorships tend to be higher in the second and third quarter of the year, due primarily to our marketing efforts related to various major and minor league baseball sponsorships as well as sponsorship of summertime events held in the communities that we serve. So other than those expense categories that I discussed, all other expense categories in the aggregate were up by less than $1,000,000 Moving on to the income tax expense, the expected tax rate in the Q1 was approximately 27 Which is in the 26% to 27% range that we would normally expect. So nothing significant there to talk about.
So in summary, other than the nuance associated with the normalizing mortgage market and the undesirable swing in the MSR valuation, The core fundamentals were strong with robust loan and deposit growth, increased net interest margin, improved credit quality, record wealth management revenue and lower expenses. So with that, I will conclude my comments and turn it over to Rich Murphy.
Thanks, Dave. As noted earlier, credit performance for It was very solid from a number of perspectives. Loan growth net of PPP was $1,200,000,000 and this growth is across the portfolio, but a couple of areas really stood out. First Insurance Funding, where we finance commercial insurance premiums, grew by $563,000,000 an outstanding quarter, which was the result of A number of new larger relationships, a hardening market which took our average premium up to 39,000 from 34,000 in the first quarter and the continued popularity of financing insurance premiums due to lower interest rates. And WinTrust Life Finance grew by $248,000,000 or 16% annualized.
As we have seen, this product grow by over $1,000,000,000 over the past year as more people are looking at life insurance as a key part of their estate plan and the market allows them to finance From a core loan perspective, commercial loans excluding PPP grew by $148,000,000 or 6.3 percent annualized, most of which closed at the very end of the quarter. And commercial real estate loans grew by $134,000,000 or 6.3 percent annualized as well. A couple of additional notes on loan growth. Pipeline levels continue to look very strong. The total core pipeline is approximately $1,300,000,000 and consistent with what we saw in Q1.
And as Ed and Tim pointed out, while we are pleased with the overall level of core loan growth, we think that December is muted by The level of line utilization, which fell to 38% in Q2 compared to pre pandemic levels in the upper 40% range. This lower utilization resulted in funded balances being reduced by approximately $1,000,000,000 I'd also like to point out the granularity within the portfolio. As we have talked about in prior quarters, one of the keys to our credit portfolio has been diversification across a number of product lines. This quarter was a great example of that strategy. While we continue to have good consistent growth from our core portfolio, our niche products have allowed us to grow the overall portfolio well ahead of projections.
In addition, Slide 12 details the geographic diversification in our portfolio. As we have stated before, Wintrust will always have a Chicago Milwaukee nexus. However, as this Slide illustrates, our various product lines provides us with a meaningful amount of credit opportunities outside of our primary markets. From a credit quality perspective as detailed on Slide 13, we continue to see meaningful improvement in credit performance across the portfolio the economy continues to recover from
the pandemic, this can be
seen in a number of metrics. Non performing loans were reduced from $99,000,000 at the end of Q1 We recorded $2,000,000 of net charge offs during the quarter, which was down from $13,000,000 in the previous quarter. This is a very good quarter from a charge off And helped by a number of recoveries primarily out of the First Insurance funding portfolio. We also saw a reduction of Over 40% in COVID-nineteen modified loans from $254,000,000 to $146,000,000 during the quarter as outlined on Slide 19. The majority of these remaining modified loans are primarily in our select high risk impact industries.
And credit ratings continue to show meaningful positive Congratulations as our customers continue to recover. Finally, on PPP, as outlined on Slide 14, we funded $4,900,000 to more than It was an enormous team effort and we are so proud of the employees of Wintrust who made it possible. We are now focused on working with our customers to process their applications for forgiveness. This is proceeding very well as we have now processed forgiveness applications on over 90% of our 2020 PPP loans and over 85% of those loans have received their That concludes my comments, and I'll turn it back to Ed to wrap up.
Thanks, Rich. As I mentioned at the beginning of the call, our strategy Throughout this has been to grow the balance sheet during this period at low rates, use our structural hedges, like mortgages to buffer the loss in Net interest income still sits at the balance sheet growth that offset the income loss due to the lower rates. PPP loans are our expected benefit add on to this strategy. All of the above was to be accomplished while enhancing our asset sensitivity position anticipation eventual higher rates. Balance sheet growth for the year, asset growth of $1,700,000,000 and core loan growth of $1,700,000,000 We have experienced all this as Tim laid out has been done on a totally organic basis.
The acquisition market, which has been sleeping today, appears to be picking up based upon the amount of inbound calls we have received lately. Sellers still have rather high expectations, so we're going to see where all this ends up. As Rich said, loan pipelines remain extremely strong in all our major categories. Our asset sensitive position is where we want it. We continue to lag into our investment in our excess liquidity, take advantage of market blips.
There No one should be totally invested as lock in the lousy long term rates. This makes a lot of sense to us. Credit is remarkably good. Thanks for our consistently conservative credit standards, diversified loan portfolio, the work of both our lending line and credit folks, NPH NPLs are lower than they were before the start of the pandemic. Both Vazir area is delivering strong results and assets our administration continue to grow.
So, today, the plan is working. We need to continue in order to bring this plan to total fulfillment. Again, it will sure remain strong. We'll take advantage of the opening at the opening of the acquisition market if it actually makes some sense. Our goal to be is to have core growth that would offset any reduction in PPP loans, and we seem to be doing that.
I think that at the End of the day, if we get another $1,000,000,000 loan growth quarter and by the end of the year, we should have made up the PPP loans, Which should actually help our margin to some extent, our net interest income. So basically, we feel very good about where we are right now. The plan is achieving what we've set out to achieve And we'll continue to take what the market gives us. And with that, I turn over some questions. Thank you.
Our first question coming from the line of Jon Arfstrom with RBC Capital Markets. Your line is open.
Thanks. Good morning.
How are you, John?
Thanks for the help on some of the expectations here and On mortgage and NII and expenses, and I did want to ask on loan growth. Tim, you talked about accelerating economic And then Rich, you talked about a little bit higher commercial at the end of the quarter. Curious what you guys are seeing side of the premium finance businesses in terms of some of the growth potential there? Is it starting to broaden out? And then just
Question first. So I think that we are seeing our customers feeling much better about the prospects Going into the back half of the year, I think confidence has really improved dramatically. I think there are obviously some headwinds that are making people nervous. I think labor availability is an issue and obviously the uptick in COVID cases has people a little bit But overall, I think we're feeling pretty good about where our existing customers are. And I think you will Line utilization increase as we go into the back half of the year.
And as we've talked about in the past, John, the Concept of becoming Chicago's Bank has really started to happen. I mean, we really feel like at this point in time, we are Go to bank in terms of new opportunities. The pipelines are very good and I think we'll continue to bring More customers on as a result of the disruption that's been in the market. The most recent announcement as it relates to First Midwest helps us as well. So We're pretty confident about where core loan growth might be going into the back half of the year.
As it relates to First Insurance, I think the hard market is not going away anytime soon. I think that as you see the team and The P and C side has done a very good job of bringing in new relationships. You got the hard market. You really have a lot A good strong momentum there. And the life side, similarly, we had anticipated Things were going to begin slowing down in the back half of the year, but in talking with that team as recently as yesterday, They're also feeling very good about where the back half of the year could go.
So again, we're not changing our guidance, but we're feeling pretty comfortable right now that Momentum will continue at least through year end.
Okay.
We have to thank Mr. Biden, President Biden for talking about estate planning and Estate taxes in that regard. So, this is doing something right for us.
That's good. That's good. Question for you, Dave. This is a more difficult question, but when you think about the mortgage line, and I know there's a lot that goes But the business really took off when the pandemic hit. And when you look at some of the numbers prior to the pandemic, it was in this It was in this $50,000,000 a quarter range.
And I'm just wondering if there's anything materially different about your So anything you can do to help us out on that, I'd appreciate it.
Well, I think the mix between Veterans First, and the retail has been fairly stable. The refi volume has obviously dropped off a little bit, Although, with this recent crop, I think that it looks like that may be picking up a little bit where people are I'll pass it back in. But longer term, I think we have better technology and we have Better tools to reach people than just guys hitting the street Physically and those tools help those guys that are hitting the street physically to serve their customers better and do more deals. So I think our technology is better, but at the end of the day, it's still good old fashioned service With improved technology, I just I don't see anything substantially different Between that mix of business or our ability to serve the customers, obviously, we continue to expand our footprint a little bit into some different Areas of our market, we hopefully can pick up some additional Customers, but I wouldn't say grammatically different, just an improved product, improved service
All right. Thanks for the help.
Thank you.
And our next question coming from the line of David Long with Raymond James. Your line is open.
Hi, David. Good morning, everyone.
Just as it relates to deposits, you've had some very good deposit growth, a lot of liquidity created. Is your sense that these deposits are sticky? Are these new relationships, are they going to remain on your balance sheet for quite some time or do As things improve and customers start to spend again, do you see a drop off in those deposits?
Well, judging by the activity in our treasury area, these are all new relationships for the most part. A lot of it's left over from the PPP loans. We picked up close to 500 new customers. As we bring them in, those are pretty sticky. Those are all full relationships.
So Tim, your thoughts?
Yes. I mean, David, we're watching it carefully, but we feel pretty good. I mean, we're continuing to add households. We don't Disclosed numbers here, but we get the digital lift that everybody else is reporting on their calls and folks have good tools. So we've added a branches, which will continue to bring a few more online between now and end of the year.
So, again, we'll watch it carefully, but So far, it's pretty sticky.
Got it. And then on the lending side, the commercial Syed, your core C and I stuff. As far as the competitive backdrop, we talked a little bit about that. But internally, are you guys doing anything differently? Are you Able to loosen anything in your
I don't know if it's
standards is the right word, but how have you changed Internally, your willingness to lend on the commercial side over the last few quarters.
Well, David, I said this often, we do not change our loan policy or our pricing decisions, right? Those are sacrosanct. So we're not seeing any more exceptions or deviations from our profitability models. So To say we're doing anything differently, I would say no. We're not changing our credit stance at all.
We never do that. Murph, your thoughts?
Yes. No, I would agree with that. I mean, it's something we talk about on a regular basis in our credit meetings, just where the market is at, because the market is very I'm sure you hear that through as you talk to other banks that price competition is very hot, structural competition is also pretty aggressive. So we're is also pretty aggressive. So we're very mindful of that topic and we just have to know where the lines are.
And I think we have really good communication between the lines and our credit people there just to make sure that we're all on the same page. And I think that we've done Pretty good job so far in that regard. The one maybe note to that is just as we continue to grow, we look at Different niches all the time and we want to be able to continue to broaden out our product suite. So that would probably be the only sort of thing that we would maybe look As we go forward, it's just different areas. We've talked about leasing part of our leasing group to be an aviation finance and talked about the Money Services Group and those are the things that we want to continue to evolve as the opportunities start to present themselves.
Got it. And then just a final follow-up. With the PPP and the additional relationships that you talked about, maybe you're seeing on the deposit side, Are you seeing that in your loan numbers today? Are your former PPP customers out of PPP and borrowing yet? Are you seeing any loan growth
David, it's Tim. We are. I mean, there's sort of two sides to that. It's obviously been a little bit of a substitution and Part of the reason you're seeing utilization down, but we've also added new relationships and we track the larger ones and There's over $500,000,000 in commitments that are already on the books with more to come and the utilization there is better than our utilization overall. So we still feel good about that.
We've got more activity, but we're probably half to 3 quarters of the way through The PPP prospect pipeline.
Yes. Unfortunately, it just takes longer to bring the lending side of the relationship over. There's just a lot of work that needs to get done in terms of Yes, getting that loan structure, getting it approved and getting it documented, working through the payoffs. So But it's definitely common. We see it on a weekly basis.
We see new opportunities that are coming as a result of our work with PPP.
The market disruption has been very helpful. Still with MB, there's still some hangover from that. That's a benefit to us. The private, same thing. Now we're starting to see more of that now as Canada gets more involved down there and they're changing some of the things that they do.
We're seeing opportunities you never saw out of there. And obviously, First Midwest move is, we have to see what happens. But Any sort of market disruption is good for us when it comes to a decision point. We want to be there and we want to have a seat at the table The people are going to change and we've been very successful at that.
Got it. Thanks for the color guys. Appreciate
Our next question coming from the line of Terry McEvoy with Stephens. Your line is open.
Hi, good morning everyone. Good morning.
Maybe Dave, a question for you on your mortgage outlook. What type of Production margins are you thinking about over the near term? That top left graph on page 10 shows a pretty steep declined down to 2.2% last quarter.
Yes. It's impacted a little bit the way we presented by the In the secondary marketing, last quarter we had gains and this quarter we had some small losses. But I think we're thinking about it more in the sort of 3% plus
And then as a follow-up question, I'm not sure, Ed, maybe you're just not as creative as You typically are each quarter or maybe you're trying to tell us something, but the last two press releases, your final quote has been the exact same, Something along the lines of evaluate expenses on an ongoing basis to enhance profitability. So should we read into that same statement Two quarters in a row and is there some sort of expense plan coming or is it more of a kind of a big picture view that you're consciously or always aware of expenses?
The latter. We're always looking at expenses and working them through. At the same time, we still are a growth company and we're going to invest We have a number of branches opening up in markets we haven't been in yet, both Park being one that's coming on board. We should that's a great market for us. We've never been there.
They do very well, but it costs money to get them up and running. We Contrary to maybe what some of you believe, we watch our expenses very closely with a net overhead ratio in the mid-130s this quarter. It's about where we think we'll normalize, but I think it could be up or down depending on some of the other initiatives that we do. But I think that mortgages just kind of skews everything up for you guys and we wish we could find a better way to show you How it all works, Dave explains that there are so many moving parts and the timing is so screwed up. We record the income in 1 quarter, No expenses in the next quarter, so it doesn't look right.
But all in all, with the 135%, that overhead ratio and our goal is to be in the mid-130s Right now, on a normalized basis, I'm comfortable, but doesn't mean we don't always look at expenses and try to run them down. So
Great. I'll
change it next time for you.
Appreciate that. Thanks. Thank you, guys.
Our next question coming from the line of Brock Vandervin with UBS. Your line is open.
Thanks. Dave, I just wanted to follow-up on your mortgage commentary. Was there anything to call Veterans First, that volume dropped by a third or so. It seemed to drop harder than The rest of the business?
Yes. I think their business is more heavily generally weighted towards refinance activity and that part of In our footprint, we've got customers just walking into the bank and have a relationship with the bank The purchase activity tends to be a heavier piece of it. So I think it's just more the mix of purchase and refinance in
Okay. And just Combining securities growth and what you may retain from the mortgage bank, I think you've given guidance Around 10% of production, you're going to shunt on balance sheet. And how should we look at that versus how you may grow the investment The book given the rate environment, if you could just kind of unpack that a little bit.
Yes. We've been keeping the thought was to keep about 100 of the sort of jumbled mortgage production on our books, but then we also generally have maybe 100 or So we typically keep on the books out of the bank, so probably which is normal, but keep $100,000,000 of the production that we Normally so, so a couple of 100,000,000 in total that we would add to the balance sheet per quarter, I would say, would be a good rough number. And on the liquidity side, you're right. As we noted earlier, we're based essentially flat quarter end to quarter end because we just The mortgage backed rate sort of backed off a little bit and we're just being cautious On investing that liquidity, as Ed and Ken noted, taking 175 or 180 Folio beat up some of that liquidity and we look at that as an opportunity. It may suppress Earnings in the quarter a little bit by not investing at the long term, we look at that as an opportunity to grow the NII and grow the margin, but we're just
Our next question coming from the line of Nathan Race with Piper Sandler. Your line is open.
Hi, guys. Good morning.
Good morning.
Couple of questions on capital. The stocks Come in a little bit along with the rest of the group, try to round 1, 2, 1, 2, cancel books these days. Just curious to get some updated thoughts on the upside around Returning to buybacks.
We've got money left under our previous Authorization. Authorization. So if the time is right, we will utilize that and Go from there.
So yes, we look at
it all the time vis a vis where do we just where that return on capital, where do we Where we want to invest some money and at certain levels it makes sense to buy the stock back. Yesterday would have been a good day, but we were in a blackout period. We'll see. But
And then we also like compared to acquisition opportunities So just where you're going to invest your capital. So we look at it constantly, but I think we have about $33,000,000 plus or minus Availability under the prior authorization and if market conditions are there, we can look at What we do going forward, but as I said, evaluate it all the time.
Got it. And along those lines in terms of acquisitions, Ed or Dave, just curious, I think in the past that you've spoken to an appetite to do a larger acquisition. I'm not sure in terms of the yes, that range
that you guys would be willing
to go up to, but just curious kind of how that appetite stands today with the currency where it's at. Obviously, your capital levels are stable sequentially in a comfortable level, I would imagine. So along those lines, just curious, can I get your updated thoughts on What you're seeing from an acquisition standpoint, how large of a deal potentially you'd want to do? Historically, you guys have been strong stewards of defending and growing tangible book value. And I imagine that will continue to be the case going forward as you guys entertain potential acquisition So just curious to get some updated thoughts on all those dynamics.
Yes. I always say what the market gives us. For years, it gave us deals under $1,000,000,000 of reasonable prices. You know how much I don't like dilution. So we still have anywhere from $100,000,000,000 to $2,000,000,000 or $3,000,000,000 are out there, but We're not going to do anything stupid.
We don't like giving up years worth of earnings To grow, we can grow organically. Market is still giving us good organic growth. We'll stick with that unless the deal comes along to make strategic sense and what have you. But I think that as to size, the market is kind of limited now when you think of that, I think it's geography. So I said earlier, I did a couple of earnings calls ago throughout the concept that we'd be willing to look out of our traditional market area.
I was chumming the water to see if I get anybody up. It was a bad fishing day, I guess, but haven't seen But we'll look at anything basically that enhances shareholder value, franchise value, earnings And it doesn't we don't give away the house to get it, but we'll always be very disciplined in that regard and we'll see where it goes. Right now, they're across the board between $3,000,000,000 $4,000,000,000 down to $300,000,000 And The inbound calls have been very have picked up a lot. However, price expectations for the first ones we've kind of reviewed are Don't fit that criteria I talked about earlier. So, we if the local guys sell to somebody else, That's good for us.
The disruption is good. So especially if they sold somebody out of state or I think it's harder and harder for banks now $2,000,000,000 $3,000,000,000 to stay competitive. Just the amount you have to spend in technology with the additional regulatory things that are going down the pipe from New administration, people and loans. Just getting good loans, we all dig deeper, we're all in there, Trying to get those deals, it's just harder for those guys to compete.
I think it's going to
take some time for them to Understand the magnitude of that, what it's going to do with their margins, their costs. And When it does, it will bring our price expectations back in line.
Got it. And I suppose along those lines, just given the organic growth trajectory in front of you guys that's likely going to accelerate with some of the Recent disruption that was announced in Chicago from an M and A perspective, I imagine acquisitions in that asset range that you described Probably less of a focus these days, just given that organic growth runway that's in front of you guys today that's only gotten stronger within the last Couple of months
here? Yes. But that doesn't mean that if a good deal came along, we wouldn't do it.
We can obviously do both, but organic growth is really good in But it doesn't foreclose out doing an acquisition if market prices And strategically work.
Yes. I mean, we can I'm trying to think we'll be 30 years old in December. We have a good chance hitting $50,000,000,000 just through organic growth. It's not bad from a card table to $50,000,000 in 30 years. So People always ask how big do you want to be and I say, well, I don't care.
Where are you going to be 5 years from now? I have no idea. We'll take what the market gives us and what makes sense. It makes sense. We'll continue to grow and grow profitably And keep our shareholder keep our returns up and our we operate on Asset growth, profitability and growth in our tangible book value.
So If anything that fits to those lines and advances those that Our reaching those goals is everything is available.
Got it. Not bad to say the least. I appreciate the color.
Our next question coming from the line of Gillian Birch with Truist Securities. Your line is open.
Hey, this is Michael Young. I'm on for Truist Securities. Thanks. Just wanted to ask, as the loan growth kind of broadens out, maybe out of some of the premium finance categories, Do you expect those loan yields to be accretive to the overall loan yield? Would that mix shift or kind of what are you seeing in the pricing environment That would cause that to happen or not?
Yes. I mean, again, as Ed pointed out before, and we have a very Strict pricing model, that we're just not going to go. It's something not really accretive to where we want to be. We're just not going to do it. I mean, so I think overall, yes, we're we monitor that very closely and confident that we can do
Okay. And maybe just a follow-up on the expense commentary related to mortgage. Obviously, you guys Seeing quite strong loan production, so I would assume there's some natural inflation to the expense run rate, but With the offset of that $8,000,000 potential reduction depending on production levels, is that kind of the right way to think about it, those two pieces?
I'm not sure if I follow this. You're just saying that In the past, you think the expenses are inflated a little bit because of the extraordinarily high volume. Is that what you're trying to get to?
I guess, is it more of a net $8,000,000 reduction that you kind of expect in expenses quarter over quarter assuming levels you discussed or are there some core expense inflation factors from strong loan production that would offset that?
No, what I was trying to get at is I think net net $8,000,000 savings assuming that the level is in line revenue levels in line The prior quarter. Now let's say production revenues go up to $5,000,000 let's say they're $6,000,000 they go up $5,000,000 I would expect the expenses to go up a little bit too. So but you should be able to maintain that delta of roughly 8,000,000
Our next Question coming from the line of Chris McGratty with KBW. Your line is open.
Asset quality, you guys have Historically been kind of quick to move any problems, and it served you all over cycles. Given the amount of, I guess, thirst for assets Are there any portfolios that you guys are effectively looking to reduce exposure to given the bid for assets is high today?
Thanks. Chris, we've done asset sales in
the past and we're always calling through the portfolio to try to find where weak And just to go to see the market out there. And so I would say we're open to that concept. We've done pretty well getting Maximum value on the asset that we do work through. So when you in the past when we've looked at some of those prices, We just weren't willing to accept the discount, but if that gap starts to narrow even more going forward, we might take a look at some of The portfolios where maybe we see some distress, but generally speaking, I mean, we just kind of take a deal at a time and work it through. So, No plans as of this point.
Great. Thanks Rich.
I'm showing no further questions at this time. I would now like to turn the conference call back over to Mr. Edward Raymer for closing remarks.
Thanks everybody for listening in. Our goal is to continue to increase all the important things In the right way and not have a decrease. So with that, thanks very much and we'll see you Please feel free to call anybody who is on the call. Thank you.