Wintrust Financial Corp (WTFC) 2021 Q2 法說會逐字稿

Welcome to Wintrust Financial Corporation's Second Quarter and Year-to-date 2021 Earnings Conference Call. A review of the results will be made by Edward Wehmer, Founder and Chief Executive Officer; Tim Crane, President; David Dykstra, Vice Chairman and Chief Operating Officer; and Richard Murphy, Vice Chairman and Chief Lending Officer.

As part of the review, the presenters will be making reference to both the earnings press release and the earnings release presentation. (Operator Instructions) During the course of today's call, Wintrust 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 this call are detailed in our earnings press release and in the company's most recent Form 10-K 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 includes 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 Wehmer.

Good morning, everybody, and welcome to our second quarter earnings call. As mentioned with me are Dave Dykstra, our Chief Operating Officer, David Stoehr, our CFO; Kate Boege, our General Counsel; Tim Crane, President; and Rich Murphy, Vice Chairman of Credit.

We're going to stick with the format we started in first quarter. You don't have to listen to me as much. You can listen to Dave, who 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. Of course, time for questions.

Last April, the start of the pandemic and the government massive response to it included an elongated 0 interest rate environment. I indicated Wintrust's approach would be to try to grow through it. Today, we have accomplished this goal. So far, so good. Second 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. Second quarter was all around $1 billion quarter, I'd like to say. Assets, deposits and core loans out of PPP loans grew by approximately $1 billion, plus or minus. Our growth prospects remain very good. Net income for the quarter totaled $105 million or $1.70 per common share, year-to-date income was $258.3 million or $4.24 per common share.

Our reported net interest margin grew 9 basis points to 2.63% and our net interest income was up $17.7 million in Q1. We're 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. Period-end loans exceeded average loans in the quarter by over $800 million. So we started Q3 with a nice -- with that in our back pocket. As I said, loan growth was excellent. All pipeline -- and the pipelines in all our businesses remain very good. It's important to align (inaudible) all-time low about 39%. Normal average is closer to 50%. So we will go back there. We have another $1 billion 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 $11.3 million to $87.7 million or 27 basis points, while NPAs fell $11.6 million to stand at 22 basis points of total assets. This resulted in a reserve release of about $15.3 million. Keep saying credit can't get better, keeps getting better. It's hard to believe. The mortgage experienced inevitable decline in the quarter, Dave will discuss this in detail. It should be noted, wealth management has not been immune to this growth story. Assets under administration grew $2 billion or 5.3% or 25% annualized in the quarter, through both the overall market and new business. Our wealth management assets now total $34.2 billion as compared to $32.2 billion at the end of quarter 1, $30 billion at the end of the prior year. I'll turn over to Dave for 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 $1.1 billion to $46.7 billion. A couple of items worth highlighting here. First, we experienced very strong core loan growth. Loans, excluding PPP, were up $1.2 billion in the quarter, growth was spread nicely across loan categories, commercial, commercial real estate and our niche businesses. Rich will share a little more detail in a few minutes.

On a percentage basis, this $1.2 billion equates to 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 $1.4 billion as the forgiveness activity accelerated materially during the quarter. Total PPP loans at the end of the quarter were $1.9 billion, down from a peak of $3.3 billion at the end of the first quarter. For the remainder of the year, we remain comfortable with our loan growth target of mid- to high single digits on a percentage basis, but could see upside with either improved line of credit utilization or continued strong market conditions.

Deposit growth for the quarter was $932 million, the majority of the growth in noninterest-bearing DDA. This represents annualized growth of nearly 10%. Deposit costs continue 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 noninterest-bearing DDA deposits now comprise 1/3 of our total deposits.

As we've noted in prior quarters, 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 and 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, 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?

All right. Thanks, Tim. As Ed indicated, I'll cover the noteworthy income statement categories, starting first with the net interest income. For the second quarter of 2021, net interest income totaled $279.6 million. That was an increase of $17.7 million as compared to the first quarter of 2021 and an increase of $16.5 million as compared to the second quarter of last year. The $17.7 million increase in net interest income compared to the first quarter was primarily due to earning asset growth, which was up 9% over the prior quarter, net interest margin expansion and 1 additional day in the second quarter. And for your reference, 1 additional day approximates $3 million of net interest income for Wintrust.

The net interest margin improved 9 basis points from the prior quarter to 2.63% as the rate on interest-bearing liabilities declined 7 basis points in the second quarter as compared to the prior quarter, and a 4 basis point increase in 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 increase in the yield on liquidity and management assets due to deployment of a portion of our liquidity into investment securities late in the first quarter.

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 pay accretion, as we noted in the press release, was $25.2 million of recognition in the second quarter compared to $19.2 million in the first quarter of 2021, as forgiveness activity accelerated during the quarter.

And additionally, as Tim noted, the margin was again affected by excess liquidity on the balance sheet. We believe that the deployment of such liquidity when market conditions improve will be a tailwind to our net interest margin.

Turning to the provision for credit losses. Similar to many other banks that have reported this quarter, Wintrust recorded a negative provision for credit losses of $15.3 million compared to a directionally similar negative provision of $45.3 million in the prior quarter, and $135.1 million provision expense recorded in the year-ago quarter. The negative provision was driven by a reduction in the allowance for credit losses primarily due to improvements in macroeconomic forecast 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-19-related loan modifications and improving loan risk rating migration.

Slide 13 through 20 of the presentation deck that we provided on our website will give you additional details about the improvement in the nonperforming loans, the COVID-19 modified loans and the macroeconomic factors impacting the allowance for credit losses. And Rich will cover the credit quality in a lot more detail in just a few minutes.

Turning to noninterest income and -- the noninterest expense and the income tax sections. In the noninterest income portion of the income statement, our wealth management revenue increased $1.4 million to another record level of $30.7 million in the second quarter compared to $29.3 million in the first quarter and net revenue source was up 36% from the $22.6 million 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 a reasonably solid loan origination volume during the second 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 $1.7 billion of mortgage loans for sale in the second quarter of 2021, down 22% from the approximately $2.2 billion in each of the prior quarter and the second quarter of last year.

Mortgage banking revenue decreased to $50.6 million for the second quarter as compared to $113.5 million in the first quarter of 2021, contributing to the $62.9 million reduction in revenue over the following items: a $29 million decline in revenue related to the impact of the MSR valuation and the MSR capitalization net of payoffs and pay downs; the $29 million negative impact of the value of the mortgage servicing rights primarily related to a positive fair value adjustment of $18 million in the first quarter of the year as compared to a decrease of $5.5 million in the current quarter; as well as the decrease in the value of capitalization of retained mortgage servicing rights due to decline in loans sold with servicing retained.

Another $21 million reduction was due to reduced gain on sale, primarily associated with the aforementioned lower production volume and a $13 million decline due to secondary marketing gains and mark-to-market impact of declining interest rate lock commitment pipeline. So our pipeline was smaller at the end of the second quarter than the first quarter.

First quarter of 2021 also benefited from atypical elevated levels of secondary marketing gains related to the market environment in the first quarter, 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. Normalization of that market drove a quarterly swing to a more typical range of secondary gains in the second quarter.

Looking forward, based on the current pipeline activity, we expect mortgage originations for sale in the third quarter to be very similar to slightly less than the origination volumes we experienced in the second quarter. In the mortgage revenue, excluding any MSR valuation adjustments, to be roughly in line with the second quarter or in the mid-$50 million range. However, I should note that although the aforementioned revenue estimate for the third quarter is expected to be in line with the second quarter, the operating expenses should trend lower in the third quarter.

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 lagged 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 first quarter, the expenses associated with processing and closing that pipeline naturally lagged into the second quarter and lagged the drop off in revenue. As the pipeline of loans has decreased during the second quarter, we would expect to see a corresponding decrease in mortgage-related expenses in the third quarter. So currently, assuming the mid-$50 million range of revenue, excluding any MSR valuation, we anticipate mortgage-related noninterest expenses to decline further in the third quarter in the $8 million range. I should note that when you evaluate the mortgage expenses relative to the mortgage revenue decline, you should consider that $29 million of the MSR valuation decline of $13 million related to the secondary marketing in gains and the decline in the pipeline or $42 million 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 million. So our mortgage expense reductions in the first quarter were generally $7 million to $8 million of commission reductions, a couple of million dollars of other expense reductions, and then we expect an additional $8 million of expense reductions in the third quarter. 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 the 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 million of additional profitability on that production decline in revenue that we saw.

Also, you should note that (inaudible) the MSR valuation adjustment and its tight interest rates, and we're not going to speculate on where rates will be at the end of the third quarter. And so those amounts that I just talked about would be exclusive of the MSRs.

Other noninterest income totaled $20.4 million in the second quarter, was up $4.7 million from the $15.7 million recorded in the prior quarter. The primary reason for that increase was a $4 million gain on the sale of a few branch locations in Southwestern Wisconsin. That previously disclosed transaction closed during the second quarter. In the noninterest expense categories, noninterest expenses totaled $280.1 million, down approximately $6.8 million or 2% from the $286.9 million 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 million in the second quarter compared to the first quarter. The $8 million decline is primarily related to $7.6 million 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 $17.7 million in the first quarter, decreasing $2.3 million from the $20 million recorded in the prior quarter. That decrease was primarily the result of the first quarter of the year, including a $1.4 million 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 $2.8 million from the first quarter to $11.3 million. 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 million compared to the first quarter and nothing noteworthy to discuss.

Moving on to the income tax expense. The effective tax rate in the first quarter 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 the quarter was very solid from a number of perspectives. Loan growth net of PPP was $1.2 billion, and this growth was across the portfolio, but a couple of areas really stood out. FIRST Insurance Funding, where we finance commercial insurance premiums, grew by $563 million, 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 million or 16% annualized. As we have seen, this product grow by over $1 billion 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 the product at historically low rates.

From a core loan perspective, commercial loans, excluding PPP, grew by $148 million or 6.3% annualized, most of which closed at the very end of the quarter. And commercial real estate loans grew by $134 million or 6.3% annualized as well. A couple of additional notes on loan growth. Pipeline levels continue to look very strong. The total core pipeline is approximately $1.3 billion 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 this number is muted by the line of -- 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 billion.

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 as the economy continues to recover from the pandemic. This can be seen in a number of metrics. Nonperforming loans were reduced from $99 million at the end of Q1 to $88 million at the end of the second quarter. This is roughly half the level of NPLs we saw at the end of the third quarter of 2020. We recorded $2 million of net charge-offs during the quarter, which was down from $13 million in the previous quarter. This was a very good quarter from a charge-off perspective 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-19 modified loans from $254 million to $146 million 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 migration as our customers continue to recover.

Finally, on PPP, as outlined on slide 14, we funded $4.9 million to more than -- $4.9 billion to more than 15,000 different businesses through the PPP program. We cannot be happier with the results from this program and the positive effects on our customers and community. 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 final forgiveness decision.

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 of low rates. These are structural hedges like mortgages to buffer the loss of net interest income till such time the balance sheet growth can offset the income loss due to the lower rates.

PPP loans were unexpected benefit to add on to this strategy. All of the above was accomplished by enhancing our asset sensitivity position in anticipation of eventual higher rates. Balance sheet growth for the year, asset growth of $1.7 billion and core loan growth of $1.7 billion excluding loans held for sale on PPP. We have experienced all of 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've 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 sensitivity position is where we want it. We continue to leg into our investment of our excess liquidity, taking advantage of market blips as no one should be totally invested as lock-in to lousy long-term rates doesn't make a lot of sense to us. Credit is remarkably good. Thanks to our consistently conservative credit standards, diversified loan portfolio, the work of both our lending line -- our lending line and credit folks. NPAs, NPLs are lower than they were before the start of the pandemic.

Wealth Management area is delivering strong results and assets under administration continue to grow. So I think the plan is working. We need to continue in order to bring this plan to total fulfillment. Organic growth should remain strong. We'll take advantage of the opening of the acquisition market if it actually makes some sense. (inaudible) 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 billion 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're going to continue to take what the market gives us.

And with that, I turn over to some questions.

(Operator Instructions) Our first question coming from the line of Jon Arfstrom with RBC Capital Markets.

Thanks for the help on some of the expectations here (inaudible) and on mortgage and NII and expenses. And I did want to ask on loan growth. Tim, you talked about accelerating economic activity. And then, Rich, you talked about a little bit higher commercial at the end of the quarter. Curious what you guys are seeing outside of the premium finance businesses in terms of some of the growth potential there. Is it starting to broaden out? And then just the sustainability of the premium finance growth as well?

Yes. I'll take the core 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 anxious. But overall, I think we're feeling pretty good about where our existing customers are, and I think we'll see line utilization increase as we go into the back half of the year. And as we've talked about in the past, Jon, the concept of being coming Chicago's bank has really started to happen.

I mean we really feel like at this point in time, we are a 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 on the P&C side has done a very good job of bringing in new relationships. You've got the hard market. You really have a lot of good, strong momentum there. And the life side, similarly, we had anticipated that 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.

We have to thank Mr. Biden -- President Biden for talking about state planning and the state taxes in that regard. So he is doing something right for us.

That's good. That's good. A 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 into it, 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 $50 million a quarter range. And I'm just wondering if there's anything materially different about your business today than where it was pre-pandemic other than rates and just obviously, what I'm trying to get at is just longer-term expectations for the business. So anything you can do there help us out on that, I'd appreciate.

Yes. 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 at this recent drop, I think that -- it looks like that may be picking up a little bit where people are bouncing 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, as we continue to expand our footprint a little bit into some different areas of our market, we hopefully could pick up some additional customers. But I wouldn't say it's dramatically different, just an improved product, improved service model.

And our next question coming from the line of David Long with Raymond James.

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 is the 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 disclose 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 couple of 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 and the commercial side, your core C&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? And your -- I don't know if it's -- standard 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 there. 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. Murphy, 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 competitive. 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 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 just to make sure that we're all on the same page. And I think we've done a pretty good job so far in that regard.

The 1 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 to as we grow forward is just different areas. We -- we've talked about a leasing -- part of our leasing group to be in aviation finance, and we've 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 attributed to these new relationships yet?

David, it's Tim. We are. I mean there's sort of 2 sides to that. It's obviously been a little bit of a substitution and part of the reason you're seeing the utilization down. But we've also added new relationships. And we track the larger ones and there's over $0.5 billion 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 3/4 of the way through the PPP prospect pipeline.

Okay. 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 getting that loan structure, getting it approved and getting it documented working through the payoffs. So -- but it's definitely coming. We see it on a weekly basis. We see new opportunities that are coming as a result of our work with PPP.

The market disruptions were very helpful. Still with MB, there's still some hangover from that -- of this benefit to us. Private, same thing. 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 -- you 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. We want to have a seat at the table that people are going to change, and we've been very successful at that.

Our next question coming from the line of Terry McEvoy with Stephens.

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 decline down to 2.2% last quarter.

Yes, it's impacted a little bit the way we presented by the declining pipe -- inventory in the pipeline and we also had a little bit of -- there's some volatility in the secondary marketing. Last quarter, we had gains. In this quarter, we had small losses. But I think we're thinking about it more in the sort of 3% plus or minus range, excluding any changes in the pipeline.

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 2 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 2 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 in the company. We have a number of branches opening up in markets we haven't been in yet, both part being one that's coming on board, we should -- that's a great market for us. We've never been there, do very well, but it costs money to get them up and running. We -- contrary to maybe what some may believe, we watch our expenses very closely.

With a net overhead ratio in the mid-130s this quarter, it's about where we think will normalize, but I think it could be up or down depending on some of the other things 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 explained it. There's so many moving parts and the timing is so skewed up. You record the income in 1 quarter, no expenses the next quarter. So it doesn't look right. But all in all, the 135, the overhead ratio and our goal is to be in the mid-130s right now on a normalized basis. I'm comfortable, but it doesn't mean we don't always look at expenses and try to run down. So...

Our next question coming from the line of Brock Vandervliet with UBS.

David, just wanted to follow up on your mortgage commentary. Was there anything to call out regarding Veterans First, that volume dropped by 1/3 or so. It seemed to drop harder than the rest of the business.

Yes. I think their business is more heavily -- generally weighted towards the refinance activity, and that part of the market got hit harder. In our footprint, where 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 the given marketplace.

Okay. And just can -- 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 show it on balance sheet. How should we look at that versus how you may grow the investment securities book in this environment? Or it sounds like you're pretty cautious in growing that securities book, given the rate environment. If you could just kind of unpack that a little bit?

We've been keeping -- the thought was to keep about $100 million of the sort of jumbo mortgage production on our books, but then we also generally have maybe $100 million or so of other product that we originate in the bank, some nonstandard or variable rate products that we typically keep on the books out of the bank. So -- which is normal, but keep $100 million of the production that we would normally sell. So a couple of hundred million 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 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 -- and as Tim noted, taking 175 or 180 sort of rates for a long-term instrument just doesn't seem that appealing right now. And so we're going to be patient with that, hope to grow off the loan portfolio, eat 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 it, but the long term, we look at that as an opportunity to grow the NII and grow the margin, but we're just trying to be patient and not invest at really low rates right now.

(Operator Instructions) Our next question coming from the line Nathan Race with Piper Sandler.

Couple of questions on capital. The stocks come in a little bit along with the rest of the group, turnaround (inaudible) tangible book these days. Just curious to get some updated thoughts on the upside around returning to buyback.

We've got money left under our previous 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 -- just where that return on capital, where do we want to invest the money, and at certain levels, it makes sense to buy the stock back. Like yesterday would have been a good day, but we were in a blackout period, we'll see. But...

And then we also compare it to acquisition opportunities out there, too, so just where you're going to invest your capital. So we look at it constantly. But I think we have about $33 million, plus or minus availability under the prior authorization. And if market conditions are there, well, 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 (inaudible) 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 -- the asset 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 and a comfortable level, I'd imagine. So along those lines, just curious to kind of get your updated thoughts on what you're seeing from an acquisition standpoint, how large 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 opportunities. So just curious to get some updated thoughts on all those dynamics.

Yes. I always say that the market gives us. For years, it gave us deals under $1 billion at reasonable prices. You know how much I don't like dilution. So we still have anywhere from under $1 billion to $2 billion or $3 billion that are out there, but we're not going to do anything stupid. We don't like giving up a year's worth of earnings to grow when we can grow organically. Market is still giving us good organic growth. We'll stick with that, unless a deal comes on to make strategic sense and what have you.

But I think that as the size -- the market is kind of limited now when you think of that and you think of geography. As I said earlier, I did a couple of earnings calls ago, threw out 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 and it was a bad fishing day, I guess, but I haven't seen. But we'll look at anything basically that enhances shareholder value, franchise value, earnings and 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. But right now, they're across the board between $3 billion, $4 billion down to $300 million.

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 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 billion, $3 billion to stay competitive. Just the amount you have to spend on technology with the additional regulatory things 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 to their margins, their costs. And when it does, bring their 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&A perspective. I imagine acquisitions and net asset rates that you described are probably less of a focus these days just given that organic growth run way 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.

I mean we can do -- we can obviously do both, but organic growth is really good (inaudible) said. But doesn't foreclose out doing an acquisition if market prices strategically work.

Yes. I mean we can -- I kind of think we will be 30 years old in December. We have a good chance of hitting $50 billion just through organic growth. It's not bad from a card table to $50 billion in 30 years. So people always ask how big do you want to be? And I say, well, I don't care. Where you'd 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 shareholders -- give 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, are reaching those goals is everything is available.

Our next question coming from the line of Julian Burch with Truist Securities.

This is Michael Young on for Truist Securities. Just wanted to ask, as the loan growth kind of broadens out maybe out of some of the premium finance categories, would 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, I mean 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 that.

Okay. And maybe just a follow-up on the expense commentary related to mortgage. Obviously, you guys are 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 million potential reduction depending on production levels, is that kind of the right way to think about it, those 2 pieces?

I'm not sure if I follow this. You're just saying, in the past, you think that 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 million reduction that you kind of expect in expenses quarter-over-quarter, assuming the production 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 million, I mean assuming the level is in line -- revenue levels in line with the prior quarter. Now let's say, production revenues go up to $5 million, let's say they're 6 -- they go up $5 million. 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 million profit improvement on the business.

Our next question coming from the line of Chris McGratty with KBW.

Asset quality. You guys have historically been kind of quick to move any problems, and it served you well over cycles. Given the amount of, I guess, for assets across the industry, are there any portfolios that you guys are effectively looking to reduce exposure to given the bid for assets is high today?

Chris, we've done asset sales in the past, and we're always through the portfolio to try to find where weak spots exist 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 sort of a maximum value on the assets 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.

I'm showing no further questions at this time. I would now like to turn the conference call back over to Mr. Edward Wehmer 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 decreases. So with that, thanks very much, and we'll see you -- we'll try to get to you again in a month or 3 months. And any further questions or follow-up questions, please feel free to call anybody who's on the call. Thank you.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.