Wintrust Financial Corp (WTFC) 2021 Q1 法說會逐字稿

Welcome to the Wintrust Financial Corporation's First Quarter 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 their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation.

Following their presentation, there will be a formal question-and-answer session.

During the course of today's call, Wintrust's 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 statement.

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 include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure.

As a reminder, this conference call is being recorded.

I will now turn the conference over to Mr. Edward Wehmer.

You may begin.

Thank you.

Good morning, everybody.

Welcome to our first quarter earnings call.

With me, as usual, are Dave Dykstra; Dave Stoehr, our Chief Financial Officer; Kate Boege, our General Counsel; Tim Crane, President; and Rich Murphy who runs credit.

The new year means a new and different format than we had in the past.

I'm going to give some general comments regarding our results, go to Tim Crane who's going to discuss the balance sheet.

He will then turn it over to Dave Dykstra for more analysis of our income statement.

And Rich Murphy is going to give us an overview on credit.

Then back to me for some summary comments that talk about the future.

We'll have time for questions.

Now for the quarter overview, was assisted by a strong mortgage quarter, good core loan growth in line with previous guidance.

PPP loan production, leg-in into excess liquidity utilization and sizable reserve release, we were able to put up a record quarter.

Net income of $153.1 million or $2.54 per common diluted share, ROA of 1.38%, ROE of 15.8% -- sorry, ROE of 15.8%, (inaudible) than previous quarter.

Our net interest margin was constant at 2.54%.

Our net interest income was up $2.5 million from Q4 despite the fact that we had 2 fewer days in Q1 from Q4.

And by now, each day is worth approximately $3 million of earnings.

Core growth investment activity was done late in the quarter, so this bodes well for Q2 of this year.

Our loan growth was excellent.

PPP round 3 totaled $1.4 billion and helped us with paydowns and forgiveness on PPP rounds 1 and 2 of $667 million.

We stated previously that our strategy was to grow.

The current low rate environment relying on more agent to enhance earnings until net interest income could catch up.

We've been successful on both fronts, the asset growth in the quarter up to $600 million in Q4 and $7 billion over the first quarter to 2020.

This still remains our strategy today.

We accomplish this through organic growth.

Now I'm going to turn it over to Tim Crane, who is going to talk about our balance sheet.

Thanks, Ed.

With respect to the quarter-end balance sheet, several items worth highlighting.

Ed mentioned the asset growth of just over $600 million.

Loans were up $1.1 billion, roughly half related to PPP loan balances, more importantly, the other half or just over $0.5 billion represents core loan growth.

Excluding PPP volumes, this represents approximately 7.1% annualized loan growth in line with the consistent loan growth target of mid- to high single digits on a percentage basis.

It's important to note that the loan growth was strongest at the end of the quarter and that the period-end loan balances were over $500 million higher than the quarterly average loan balance, indicating strong momentum into the second quarter.

Some of this detail is on Page 8 of the earnings release presentation.

The growth was spread nicely across all loan categories and pipelines remain strong for all of our major businesses.

We continue to benefit from the addition of clients from the halo effect of our PPP efforts, and we're starting to see more client activity as the pandemic impacts begin to recede.

Deposit growth for the quarter was $780 million, the majority of the increase in noninterest-bearing deposits.

Deposit costs continue to fall primarily as we reprice term deposits.

For the quarter, the rate paid on interest-bearing deposits fell 6 basis points to 45 basis points.

This is a trend we expect will continue in the coming quarters.

Like many institutions, we've seen very significant deposit growth and are managing the flows 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.

Finally, on deposits, we've been opportunistic about securing some low-cost, longer-term funding for the bank.

With respect to the securities portfolio, we remain very liquid.

We did deploy some liquidity in the first quarter as investment securities increased by approximately $1 billion.

As discussed on prior calls, we have done this on a measured basis, mindful of the possibility of rising rates and wary of locking in low long-term yields.

Approximately half the securities were purchased towards the end of the quarter at a rate above 2% as yields moved up in March from lower levels earlier in the quarter.

To get a sense of the timing and the impact of the securities addition, the period-end securities were $743 million higher than the average balance for the quarter.

And had the securities been on the balance sheet for the entire quarter, the margin would have been approximately 3 basis points higher.

Despite the addition of the $1 billion in securities during the quarter, our duration remains approximately flat from a year ago, and we remain well positioned for rising rates.

Lastly, as a result of the strong earnings, both the Tier 1 capital ratios and the CET1 ratio improved from the prior quarter end and remain appropriate given the conservative risk profile of the bank.

Overall, from the standpoint of the balance sheet, we are watching deposit flows carefully, particularly those related to PPP loans, but the main message is continued good growth, which accelerated into the end of the quarter and will help future periods.

Dave?

All right.

Thanks, Tim.

As Ed mentioned, I will cover the notable changes throughout the entire income statement.

I will start with net interest income.

For the first quarter of 2021, net interest income totaled $261.9 million.

That was an increase of $2.5 million compared to the fourth quarter of last year, and a slight increase of $452,000 as compared to the first quarter of 2020.

The $2.5 million increase in net interest income compared to the prior quarter was primarily due to the earning asset growth and increased PPP accretion.

And as Ed mentioned, that's despite 2 less days in the first quarter, which are worth about $3 million per day.

So earning good NII growth.

As far as margin goes, it was unchanged from the prior quarter as the rate on interest-bearing liabilities declined 7 basis points in the first quarter as compared to the prior quarter, which was effectively offsetting a 6 basis point decline in the yield on total earning assets.

The 6 basis point decline on the yield on earning assets was primarily due to an 8 basis point decline in the loan yields, which were partially offset by a 3 basis point increase on the yield on liquidity management assets.

The decrease in the rates paid on interest-bearing liabilities in the first quarter as compared to the prior quarter was primarily due to a 6 basis point decline in the interest-bearing deposits due to lower repricing of our time deposits.

And as Tim mentioned, we expect that to continue.

PPP loan fee accretion increased as the company recognized $19.2 million of PPP loan fee accretion in the first quarter, and that compared to $16.8 million in the fourth quarter of 2020.

Additionally, as Tim Crane mentioned, the late quarter deployment of liquidity into investment securities and the back-end loaded loan growth during the quarter resulted in over $1.2 million -- $1.2 billion of period-end investment in loan balances, exceeding the aggregate average balances of those categories, which we expect, again, to favorably impact net interest income in the second quarter.

The margin is impacted still by excess liquidity on the balance sheet, and we'll be cautious about deploying that and prudent as far as that deployment goes, but there certainly is some upside there if we can deploy additional overnight liquidity into loans and longer-term investments.

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 $45.3 million compared to a positive provision of $1.2 million and $53 million in the prior and year ago quarters, respectively.

The negative provision was driven by a reduction in the allowance for credit losses, primarily due to improvements in the macroeconomic forecasts, including improvements in the commercial real estate price index and the BAA corporate credit spreads.

Additionally, the company saw improvement in the loan portfolio characteristics during the quarter, including decreases in the COVID-19-related loan modifications and improving loan risk rating migration.

Slides 13 to 18 of the presentation deck provided on our website provides additional details about the improvement in nonperforming loans, the modified loans and the macroeconomic forecasts that I referred to.

And Rich Murphy will cover that in greater detail as far as specific credit quality metrics.

Turning to the noninterest income, noninterest expense and income tax.

In the noninterest income section, our wealth management revenue increased $2.5 million to a record $29.3 million, compared to $26.8 million in the fourth quarter of 2020, and it was up 13% from the $25.9 million recorded in the year ago quarter.

This revenue source has been positively impacted by the higher equity valuations, which impact a portion of the managed asset accounts.

So another great record quarter for our wealth management team.

Mortgage banking was seasonally strong due to the continuing renewal rate environment and actually increased 31% or $26.7 million to a record level of $113.5 million in the first quarter from $86.8 million posted in the prior quarter and was up a very strong 135% from the first quarter of last year.

The company originated approximately $2.22 billion of mortgage loans for sale in the first quarter, down slightly from the $2.35 billion in the prior quarter and up $1 billion from the mortgages that we originated in the first quarter of last year.

The increase in the revenue -- on the mortgage revenue for the quarter was resulted from an increase in the value of the mortgage servicing rights related to fair value assumptions equal to $18 million in the first quarter as compared to a decrease of $5.2 million in the prior quarter.

We also had a slight increase in production revenues.

Production margin expanded 20 basis points, and we had an increase in the value of the capitalization of retained mortgage servicing rights due primarily to higher valuations on newly originated loans.

The company also retained $322 million of mortgage loan production for investment during the first quarter and earmarked approximately $160 million of the quarter-end pipeline for future investments.

Accordingly, during the first quarter, the company did not record gain on sale revenue associated with slightly over $480 million worth of loans retained or designated for future retention.

Assuming a gain on sale margin of about 3.5%, plus or minus, the foregone production revenue for the first quarter would exceed $15 million.

But we, of course, will recognize the benefit of those loans by retaining them on the balance sheet through improved net interest income in future quarters.

Obviously, mortgage production remained very strong during the current quarter due to the high refi activity.

Looking forward, we expect originations in the second quarter to be another very strong quarter, but we do expect refinance activity to decline a bit.

Somewhat offsetting that anticipated slowdown in refinance activity will be an expected pickup in the mortgage volume related to home purchasing activity.

Net, we believe origination volumes may be down somewhat from the first quarter, but we really need to see how the purchase market activity materializes.

Recently, applications have increased in the purchase market, so we'll have to see how that plays out.

Table 15 of our first quarter earnings press release provides a detailed compilation, pardon me, of the components of origination volumes by delivery channel and also the mortgage banking revenue.

Turning to other noninterest income.

It totaled $15.7 million in the first quarter, down approximately $4 million from the $19.7 million recorded in the prior quarter.

There are 2 primary reasons for the decline.

One was we had $2.4 million of lower swap fee revenue and $1.7 million of lower BOLI income, primarily related to $1 million less of BOLI investment returns supporting deferred compensation benefits and $800,000 of debt benefits that we had in the prior quarter that fortunately did not recur this quarter.

I should note that the $1 million decrease in the BOLI earnings related to deferred compensation benefits resulted in a similar offsetting decrease in salaries expense during the quarter.

Going to noninterest expense categories.

Noninterest expenses totaled $286.9 million in the first quarter, up approximately $5 million or 2% from the $281.9 million recorded in the prior quarter.

There are a handful of categories that accounted for the majority of the change from the prior quarter.

The first being salaries and employee benefits, which increased $9.7 million as compared to the fourth quarter of 2020.

That $9.7 million increase is comprised of $9 million in commissions and incentive compensation increases, $3.2 million in employee benefit expense increases, which was partially offset by a $2.5 million decline in salaries expense associated with higher deferred salary costs associated with strong loan originations, including PPP and the aforementioned reduction in deferred compensation related to the BOLI products.

The increase in commissions and incentive compensation is primarily due to the higher expenses associated with the company's long-term incentive program and higher commissions related to its wealth and mortgage management businesses.

The increase in employee benefits is primarily related to higher payroll taxes, which tend to be elevated in the first quarter.

Occupancy expenses totaled $20 million in the fourth quarter, increasing only $0.3 million from the $19.7 million recorded in the prior quarter.

Although this increase is nominal, I wanted to note that the first quarter of 2021 included a $1.4 million impairment charge associated with the planned closure of an additional branch location compared to a similar $1.4 million impairment charge associated with planned closures of branch locations that we discussed last quarter.

Advertising and marketing expenses in the fourth quarter decreased by $1.3 million when compared to the prior quarter.

The decrease relates primarily to a lower level of digital advertising campaigns and printing costs in the first quarter.

Miscellaneous expenses in the first quarter declined by $5 million.

The first quarter of 2021 included a $937,000 reversal of contingent purchase price consideration related to previous acquisition of mortgage operations.

That compared to a $6.6 million of additional expense in the fourth quarter.

We don't expect that to have any significant impact going forward as a time period for that -- those earn-out payments are shortening up and we would expect that to have very little impact going forward.

But there was a big swing from last quarter to this quarter.

And the company also recognized $3.8 million expense related to the impairment of certain capitalized software costs as we evaluated the remaining useful lives of certain software systems that we have been replacing.

Other than expense categories just discussed, no other category had any noteworthy changes from the prior amounts recorded in the fourth quarter.

If we look at the net overhead ratio for the first quarter, it was down marginally to 0.90% from the 1.12% recorded in the fourth quarter and from the full year 2020 net overhead ratio of 1.05%.

The first quarter's net overhead ratio benefited from a strong balance sheet growth and strong mortgage banking results.

Moving on to income tax expense.

The effective tax rate for the quarter was 25.97%, so roughly 26%, which is in the range that we normally would expect of 26%, 27%.

So with that, I will turn it over to Rich Murphy to give some comments on credit.

Thanks, Dave.

As Tim and Dave noted earlier, the first quarter was very solid from a number of perspectives.

First, from a loan growth perspective, net of PPP, we saw core loan growth of $515 million or 7.1% on an annualized basis.

This growth was seen across the portfolio, but we saw very solid performances from Wintrust Life Finance, which grew by $250 million or 18% annualized, and commercial loans, which grew by $175 million or 8% annualized, most of which closed, as Tim pointed out at the very end of the quarter.

A couple of additional notes on loan growth.

Pipelines continue to look very strong.

Total core pipeline of C&I and CRE loans was at $1.4 billion, and the highest level we've seen in 5 months.

The core loan momentum that we have seen has been positively affected by our execution of our PPP program, which has been very strong, including this most recent round, which I'll address in a moment.

Secondly, the granularity of the portfolio.

One of our hallmarks in the credit portfolio has been the diversification across a number of products.

Conceptually, we have always focused on a composition of 1/3 core commercial and industrial loans, 1/3 commercial real estate, 1/3 from our nonbank niche products.

The largest niche category we have is also our oldest, which is premium finance.

This includes FIRST Insurance Funding, which funds commercial insurance premiums and currently totals $4 billion, including our Canadian operations.

Wintrust Life Finance, which funds life insurance premiums currently total $6 billion.

Both of these portfolios have performed very well during the pandemic.

Wintrust Life Finance has grown 17% year-over-year and FIRST Insurance Funding is up 14% year-over-year.

We have also seen solid growth from our leasing, mortgage warehouse and franchise teams.

Finally, we added a new slide, Page 15 of the presentation, which deals the geographic diversification in our portfolio.

We will always have a Chicago, Milwaukee nexus.

However, as this slide illustrates, our various business lines provide us with meaningful amount of credit outside of our primary market.

From a credit quality perspective, improvement was evidenced across the portfolio as the economy continues its post-pandemic growth.

This can be seen in a number of ways.

First, nonperforming loans were reduced from $127 million at year-end to $99 million at quarter end.

Even more striking is a 50% reduction in NPLs from nearly $200 million at June 30, 2020.

We recorded $13 million of net charge-offs during the quarter or 17 basis points, which is up slightly from the fourth quarter, but in line with the previous 4 quarters.

We also saw a 26% reduction in COVID-19 modifying loans from $345 million to $254 million during the quarter, as outlined on Slide 16 of the presentation.

The majority of these remaining modified loans are primarily in our select high-impact industries, which is detailed on Slide 17.

Finally, credit risk ratings continue to show a material positive migration, a trend which has accelerated since the third quarter of last year.

Finally, on PPP, as outlined on Page 12, we have now funded over 20,000 PPP loans to over 14,000 different borrowers totaling $4.8 billion.

This includes over 7,700 PPP loans totaling over $1.3 billion during the first quarter.

Our median loan size through the PPP process was around $60,000, and we continue to focus our efforts on our existing customers, low to moderate income areas, nonprofits and identified prospects.

During this most recent round of PPP, we heard from a number of customers that they could use additional help in the submission process.

As a result, we established 9 PPP resource centers in LMI areas to assist customers with the PPP process.

This effort has been very successful and the feedback from the community has been overwhelmingly positive.

Regarding the PPP forgiveness process, we continue to make good progress as we have now processed forgiveness applications on over 60% of our 2020 PPP loans compared to 46% for the rest of the industry.

That concludes my comments, and I'll turn it back to Ed for a wrap-up.

Thanks, Murph.

As I mentioned at the beginning of the call, our strategy has been to grow the balance sheet during this period of low rates and use our structural hedges, the largest of which has been our mortgage area, above the loss of net interest income, until such time as balance sheet growth can offset the income loss due to the lower rates.

PPP loans were unexpected benefit to add to the strategy.

All the above should be accomplished by enhancing our asset sensitivity position in anticipation of eventual higher rates.

The excellent balance sheet growth, asset growth of $7 billion year-over-year and loan growth of $5.3 billion, $2 billion of which was organic and $3.3 billion of PPP year-over-year, were experienced -- we are experienced -- as Tim laid out, this has been done totally on an organic basis.

The acquisition market has been sleepy to date, but it appears to be opening up a bit based on the amount of calls we have received lately.

As always, we'll take what the market gives us.

We hate (inaudible) stupid.

But it appears that other people are getting reality again.

On pipelines, as mentioned, we made strong in all categories.

Our asset sensitivity position is getting close to where we'd like it to be.

We will continue to leg-in new investment in our excess liquidity taking advantage of market blips.

We are knowledged to be totally invested and lock-in to lousy long-term rates is not our plan.

Credit is remarkably good, as Rich said, thanks to our consistently conservative credit underwriting standards, diversified loan portfolio, the work of both our lending line and credit folks, NPAs and NPL dollars are lower than they were at the start of the pandemic.

Wealth management area is delivering strong results for the assets under administration from $2 billion in the quarter to $32.1 billion and fees growing $2.5 million in the quarter.

Assets under administration was obviously helped by strong markets (inaudible) in all distribution channels also aided this growth.

Our treasury area is up $2 million (inaudible), which shows that the halo effect in our PPP has worked very well for us.

We probably have 40% of the -- probably 50% of the halo is in now.

We've got most of the settled deposits and the loans will be coming.

So that aids to our pipeline and doing extremely well with that.

So to date, our plan is working.

We will continue to roll with our agreement plan to fulfillment.

Organic growth should remain strong -- I'm sorry, organic growth should remain strong to take advantage of the opening of the acquisition market where it makes sense.

In short, I'm proud of the group and I like where we stand.

See the capitalized go-to-market is giving us to maintain a laser focus on credit.

As always, you can be assured of our best efforts, and we appreciate your support.

Now I'll answer some questions.

(Operator Instructions) Our first question comes from Jon Arfstrom with RBC Capital Markets.

Question, I don't know, maybe Rich or Tim, on the loan growth pipelines.

Can you talk a little bit about why you think you were so strong at period end?

And excluding PPP, if you could touch on that core C&I and core commercial real estate, if you're starting to see loan demand broaden out?

Yes.

It's interesting.

We -- the timing is one that I don't have a real good answer for it.

We've had a really strong end of quarter in the fourth quarter as well, as people closed on their financing right before year-end.

And so I think there was a little bit of a hangover from that in the first part of the year.

But clearly, we were -- as we saw good pipelines building, and we knew that was coming.

But through January and February, we just kind of -- for whatever reason, there was a little bit of a hangover...

Jon, that's been our modus operandi for probably the last 8 quarters.

We've always built it up at the end of the quarter and then started again to build it up.

I think it's -- we're taking the whip to them.

I'm not sure, but in the last 8 quarters, we've had that phenomenon.

Yes.

So...

I'm curious if this is all pulling through.

I guess that's the question because you guys seem a little bit ahead of your peers in terms of the growth that you put up.

So I guess that's kind of the genesis of the question here.

Yes.

And I think that's a broader answer to that.

I think that we have seen and you've seen this in really over the course of the last year.

The -- we had always talked kind of this aspirational nature of being Chicago's bank.

And I think what the last year through the PPP execution and some of the acquisitions that have gone on in the Chicago market, namely MB, Fifth Third and CIBC have really kind of seen us become the emerging C&I bank, mid-market bank.

And we have just seen a lot of new opportunities come over where customers who are very frustrated by the inability of their existing bank to execute on their PPP, to get answers during the pandemic.

Maybe they were just kind of roughed up a little bit during a downturn, and they were trying to find maybe a different bank that might look at their company a little bit differently.

There's just a host of reasons that we saw.

But the net effect is that we have just really had a much better time being able to get a seat at the table when a company is going out to the market and then our ability to execute both on the treasury side and on the credit side, we have been able to pull through quite a lot of these opportunities.

And finally, your question as it relates to do we see the sort of an uptick in overall levels of funding?

I do think as this -- the economy starts to open up and expand and people start to deploy all the liquidity, we are seeing people starting to look for greater credit availability and expanding outline.

So I think that as we go through the balance of the year here, you'll start to see some greater usage.

So generally speaking, pretty positive.

We think we're going to roll out of this pandemic issue as the economy is -- and everybody thinks it's going to roll out.

We're very well prepared for that.

And I think it's somewhat of a reputational issue for us.

Reputation is wonderful, and people are looking to us to help them grow.

So...

Okay.

And then -- that's helpful.

And then kind of the margin calculus, I think the message you're sending to us is that you have a little bit more room on funding costs to have a bit of a step up because of the quarter-end securities purchases.

You've got some loan growth.

And I guess the question is with the growth that you're expecting, are you sending the message that the margin erosion is really over for you and we should see some margin expansion as the loan growth comes in (inaudible) adjusted?

All things considered, yes, but who knows where rates are going or what's going to happen.

I mean rates go up, we're ready -- we get that beach ball ready to (inaudible).

But if rates go down, we still have some -- we still have some vulnerabilities there.

But I think -- I saw a projection that the national debt is going to double GDP over the next 5 years.

Just crazy.

If all the cash is out, then the rates have got to go up.

I don't care what everybody says, it just doesn't work any other way.

So we're very well positioned in that regard as we continue to build and deploy.

I mean the plan has always been to grow through this, to use the mortgages and other means, so derivatives we put on early on in the pandemic, which are really low, to get us through this.

And as I said, to get the net interest income to make up the difference on margins fall off, you know they will fall off.

I think we're well positioned to do that.

PPP loans were a godsend in terms of additional revenue, but that's just more we have to make up.

So as we continue to grow through this, Jon, I think the margins basically in this environment has bottomed out, has good upside to it.

We're able to execute on closing the loans, getting good pricing on the loans and continue to grow through it.

So it won't be perfect.

I'm sure we're not going to land on margins and the other things fall off and rates go up.

But at least it won't be perfect -- it won't be a perfect analysis, but won't line up perfectly, I mean, but I think it'll be -- I think we'll get there as long as mortgages can stay high.

You agree, Dave?

Yes.

I think that's right.

I think we said last time, we thought it sort of bottomed out, and we thought we'd put some more liquidity to work and grow, and grow through it.

As Ed said, the key is to grow through it.

And Rich and Ed indicated why they think it's up as far as our loan growth, which I agree with.

I also think we have a very diversified loan mix.

So I think that, that helps with some areas of support when others aren't.

But I would think that the thoughts are that the margin is sort of stable to slightly up in the next quarter.

A lot of it depends on how much liquidity buys in the door.

But we've got that $1.2 billion of period-end balances greater than average balance and that just has to help.

And we do have some repricing assets on the life's premium finance side that those are tied to 1-year LIBOR, but we also have the CD book really repricing now.

So those kind of offset.

So I do think we've bottomed out, and I think that all things equal, that the margin should tick up just a bit.

It's like a ping pong ball on water so far.

We want to wait for the beach ball, Jon.

Our next question comes from Terry McEvoy with Stephens.

Maybe first question, as we build out our mortgage projections and loan growth, should we think about, call it, $200 million, $300 million of mortgages staying on the balance sheet?

Is that the right way to think about that?

Will that continue?

And then what's the earn back on that?

Is it roughly a year?

Is my memory correct from the last call that you sacrificed the revenue this quarter and it takes about a year to make that up?

Yes.

I mean on the earn back, Terry, if you look at our margins being right now 3% to 3.5%, the loans are yielding sort of low 3% of the jumbo mortgages that we've kept.

So you give up the upfront gain on sale and 3% you earn it back over a year basically.

So 4, 5 quarters sort of earn-back period on loans.

But then they keep -- obviously, if the loans stay out there, they keep paying dividends going forward.

So it's a little bit of a sacrifice of the current earnings for future earnings, which we think is prudent.

So we've sort of done 10% or so, retention on the balance sheet are a little bit more.

But -- so we've done a couple of hundred million in the -- on average in the last couple of quarters, probably a little less than that if volumes go down, $100 million or so going forward.

I think the 10% number is going to be -- actually, where we get up to close to $700 million to $800 million, we'd probably pull it back a little bit from interest rate sensitivity standpoint.

I would imagine $100 million would be a number to use going forward, would be a good one.

The 10% was originally to get going and great yields on those.

So it should help the margin and be help us long term.

I think that we can have maybe $100 million going forward, at least next quarter, and we'll judge it after that where the market is, but -- I think that's the plan.

There are some -- that $100 million is sort of the jumbo loans that we've kept on our books.

I mean we do have some that we originate for the portfolio that are variable rate, et cetera, that are just normal course of business.

So it may be just slightly more than that, but the extra $100 million is sort of what Ed's referring to as far as the jumbo so going forward.

Okay.

And then as a follow-up question, Ed, last quarter, at an industry event, you talked about M&A and interest for potentially larger deals and maybe moving out of your core markets.

I was hoping you could just update us on your thoughts there and maybe any feedback you heard since making those comments?

It was funny.

We always take what the market gives us, and I fear that the market was giving people these no premium deals out there.

We've held our stock price going back.

It was appropriate to kind of throw our hat in the ring and just basically chum the water, if you will, so like everybody else.

It resulted in a couple of heres and theres conversations with nothing really.

Market has moved away from that, and it really doesn't make any sense right now to even consider it given the premiums people want to pay.

So how do we want to say we want to do a market deal, we'll talk to them both.

But it appears that, that opportunity may have come and gone, at least for now.

But we're still willing to do it if it makes sense, but we're going to continue to fill in here in Chicago, both organically and through acquisitions, as you've seen it like you just do in the past, give and take don't make sense.

So I would discount the -- my chumming exercise didn't really come up with any fish.

I -- and -- but we're still available if anyone wants to talk, but our market share in Chicago, we're playing on the build to grow, same from Milwaukee.

We're going to concentrate on that.

And it appears the market is still giving us organic growth, we will concentrate on that, and we'll do opportunistic deals as they come along.

Makes sense?

Our next question comes from David Long with Raymond James.

Looking at the expense side of the equation, revenue growth seems to be going pretty well and is -- isn't usually an issue with you guys.

But looking at the expense side, just curious, what type of growth rate we should expect on your expenses, especially in a revenue environment where you guys still have some headwinds on the net interest margin?

And is there -- are there any plans to try to rationalize any expenses given maybe some of the margin pressures?

Just want to get a little bit of color on how you're thinking about operating expense growth here.

We always look at rationalizing expenses, but that's constant (inaudible) growth company.

We have to spend money to grow.

And Dave, do you want to...

Yes, we had -- now 10 branch closures and 3 sales of branches last quarter and another branch closure this quarter.

So we're constantly looking at that where there might be overlap or underutilization of facilities.

It's kind of an interesting question as far as doing the expense growth because with the mortgage business as large as ours, as revenues go up and down there, so goes the expenses sometimes.

And so you almost have to look at it ex mortgages.

But ex mortgages, we would expect the expense growth to stay relatively contained.

And we are looking at the branch network all the time and places where we can save money.

We would -- as we had in prior quarters, we have some of these contingent purchase price payments that we had to expense.

As I said on my comments, those should be subsiding and not material going forward.

So that should help.

We're watching our head count and those types of things.

So I would think it would stay relatively contained.

As you know, though, in the second and third quarters, the expenses tick up a little bit because of our sponsorships of Major League Baseball and some -- what has, in the past, been general alterative outdoor festivals and community events that we sponsor as a community bank.

So I expect them to tick up a little bit in the second quarter, but payroll taxes will be less in the second and the third and the fourth quarter than they were in the first quarter, and there are some other offsets that go either way.

So I would expect that we can contain the expenses.

If we have really good growth, I would expect them to go up and not nearly as fast as the revenue side of the equation.

So maintaining the net overhead ratio at the levels that we think are appropriate is what we focus on.

And so from then, you got to spend money to make money, but we'd expect the revenue growth to be faster than the expense growth.

One other things that we expense for before the pandemic is we have made an investment in what we call Big Blue, which is our enhancement of our digital products.

Ed had mentioned this in the last call.

We always had related digital products that we sold going forward with the overall base that we can build off of what we enable to support it going forward.

We took it away from our core processor and now have spent a lot of money, and there's still more money to be spent on that to make sure that base is correct, that we can build and always give -- share better products and share better delivery systems.

We are -- we always had great products, and we always do have great products and great delivery systems as indicated by the number of Greenwich awards we walked away with last year; 7, I think, the number of awards, national.

We're proud of that.

But we've got to be -- we've got to invest for the future and to have a platform that's going to keep up with, I think it's going to continue to be New York's acceleration of digital availability and products out there, payment systems and things like that.

We have to be there at the top of our game.

And although it's not -- the timing (expletive), but we did it anyhow.

And we're half pregnant.

We're going to follow through, and that's part of it.

But I think you remember (inaudible) 1.5% was pretty good, probably lower that number to 1.30% to 1.35% on a regular basis and the margin hopefully will come back.

And in the meantime, the net overhead ratio has dropped about as much as the margin which helps.

So we're always looking, but it's not linear.

That's why the issues for you guys.

It's -- we know what we do or what we're going up with.

But It's not linear for you in many ways.

I know it's hard, but just saying, you go off and that overhead ratio and compare that to where the margin is in mortgage and our -- and I think you're probably the right number for us.

Right.

Right.

No, I do appreciate the color and understand as a growth company you do have to spend there.

As a follow-up, just Dave, you mentioned the mortgage business and you just kind of separate that out from your core.

But if you're looking at your mortgage and you say the production revenue comes down by $20 million in a given quarter, how would that immediately impact the expenses in that same quarter?

Well, we -- I'm not going to give a number per se because it depends on how much production you got to close.

You've got some production in the pipeline, and you've got to close that.

So it just -- and it also sort of depends on the outlook.

If you really think rates are going up and staying there, and it's not just a seasonal thing, then you've got to adjust.

But we do have contract labor.

We do have some overseas contracts out there that are variable.

We do have over time.

And so all those things can go away immediately.

And so you will get some benefit immediately, and then it may take another month or 2 to let that production work its way through the pipeline before you get the full benefits.

But we sort of look at it in today's environment, your efficiency ratio in that business may be in the 60% range because you're going in all cylinders.

But if that volume falls, those efficiency and margins come in a little bit, those efficiency ratios are probably more in the 75% to 80% range.

So I think if you think about the mortgage business sort of between 60% and 80%, depending on high volumes and low volumes, that's maybe how to think of the business.

Our next question comes from Nathan Race with Piper Sandler.

Thinking about the overall balance sheet size going forward, with PPP forgiveness ongoing, are you guys expecting any downdrift with this excess liquidity that's been building over the last several quarters?

Or are you guys kind of planning to -- or playing around these balances pretty much sticking for the foreseeable future?

Well, that's a kind of $64,000 question.

What's going to happen to liquidity?

Is the money going to run out, as you saw PPP go or to stay in the bank?

Tim, do you want to respond to that?

Yes.

I think what clients are telling us, Nathan, is that those balances are going to sort of stick until they get clarity on forgiveness, which is both at Wintrust and other banks has been slow and coming, but we're getting good core growth from the halo effect with new clients.

But clearly, some of that PPP money may be moving out of the bank as clients get more interested in investing it.

But if that happens, it should be followed by loan opportunities for us as well as that liquidity gets depleted.

So it's a little bit bad news, good news story if it happens.

Our funds were run off already, Nathan, but doesn't seem to be as indicated, we're making it up with the halo effect and the treasury numbers.

Tim, do you have the treasury numbers here?

Yes.

I mean one of the things when we've been asked about the halo effect is how do you know it's real and where does it manifest itself?

And just looking at gross treasury revenues over the last 4 months, we're up 15%, 16%, and we know our people are challenged to keep up with the new installations and new additions.

So we're very encouraged that not only are we getting these deposit balances, hopefully on a permanent basis, but that we're getting treasury business that will last and ultimately credit opportunities that will last.

So we feel pretty good about it.

Got it.

Understood.

And just changing gears, thinking about provisioning over the next quarter or 2. I know it's difficult under a CECL framework to predict.

But just given the loan growth outlook still in that mid- to high single-digit range, how should we think about providing for growth, if at all, over the next quarter or 2 from a provisioning standpoint?

Well, for growth, I think if you kind of went back to more small non-CECL times where the charge-offs were fairly stable, our provision was probably in the $10 million to $12 million to $15 million range.

And I would think in normal times, if the macroeconomic scenarios and credit quality stayed stable, you'd probably be in that $10 million, $12 million range for the normal times.

But I can't predict what the macroeconomic scenarios are going to be.

If they continue to improve, then obviously, the allowance goes down a little bit more.

But right now, we think it's appropriate based upon what Moody's has, but we'll just have to see what those macroeconomic forecasts do.

But as far as growth goes, I mean you can sort of look at our allowance to loan ratio and apply it to what you think the net growth is, and that should probably get you pretty close.

Yes.

The portfolio peers, and I know that in April to date, the upgrade parade has continued, where when pandemic started, a lot of downgrades and that enters into the CECL calculation and the number of upgrades in the fourth -- in the first quarter -- second quarter, we expect that trend to continue.

So if you look at that and you look at a better macroeconomic environment, you think that we may have another negative provision here.

I would always hope that we could have grown through it and not have to play the negative provision game, but just for the -- because it's like a (inaudible).

You get sick of up down where it's going.

But I think credit overall is pretty good.

It looks like it's going to be -- the environment is getting better.

So if you think about provisioning going forward, I would tell you, you are going to have another release.

But you never know, anything can happen.

And really (inaudible) goes into the big black box, it comes out.

I think if you look at our level of nonperformers and if you see our long credit quality and understand the portfolio is actually even getting better.

I think we have to take that in consideration.

So hard to predict with CECL, where we're going to end up.

And it's not like in the old days where I could say where we will end up, but I can't do that anymore.

Got it.

Makes sense.

If I could just ask 1 more on capital.

I apologize if it was in the release, I didn't catch it, but any share repurchases in the quarter?

And how you guys think about buybacks over the next few quarters this year?

Yes.

No, we haven't been doing the buybacks with the stock price increase to where it's at.

So if the stock price stays in this range, we would not anticipate probably doing the buybacks.

Now we'll use that capital to support the loan growth and the like.

Our next question comes from Chris McGratty with KBW.

I think I know the answer to the question, but I'm going to ask anyway, Ed and Dave, the pace of securities buying, obviously, yields have popped a bit.

We've seen some peers be more aggressive in just deploying some of this.

And I apologize if I missed it, but any sense in terms of magnitude of whether $1 billion is the right purchase rate a quarter or you would perhaps step it up?

It really depends on the rates.

I think that we like to -- we were -- I don't want to lock in the lousy rates.

That's really the end of it.

We can pulse into it as rates -- I think rate is going to continue to go up, and we'll take advantage of when they do.

I think we would lock them probably after tax 1.5 on the deals we've done to date (inaudible) assets after tax.

I mean when the rates popped up down the quarter, the jumbo mortgage backs were yielding over 2%, and we thought that was an appropriate time to jump in.

We did a little bit earlier in the quarter to replace runoff and add a little bit.

But rates have kind of fallen back off a little bit.

So we're just -- we're being cautious.

And as Ed says, at the lower rates, we probably aren't going to jump in.

But if we start to see the jumbos go north of 2, again, we may add to this more.

We don't have a specific number, Chris, that we're saying we're going to do X. It really sort of depends on the rate environment.

So a little worried too about when we talked about it with a lot of previous questions is will the liquidity actually stay.

And kind of have to (inaudible) decision making has to be tempered by that.

But we continue to grow every quarter and -- which gives us more ammo to deal with, and we'll deal with it as we go along and (inaudible), et cetera.

But we expect this to be opportunistic going forward and not be just programmatic and put it to work at any rate.

And then longer term, your cash is roughly 10% of your earning assets.

I mean where do you think that needs to be kind of 12, 24 months out proportionately?

Well, we've always sort of said 85% to 90% loan to deposit and then liquidity sort of falls out of the equation there.

But I think if you go back to the first quarter of 2020, we were at 4%.

And then we went and loaded up on liquidity, and it was like 8%.

Because we just didn't know what the heck was going to happen with the pandemic.

So I'd sort of say, if you were in the 4%, 5%, 6% range, that's probably more normal, so to speak, if we can effectively lend out at that 85% to 90% loan to deposit ratio.

(Operator Instructions) Our next question comes from Brock Vandervliet with UBS.

Just tactically in terms of expenses.

Obviously, the last year didn't have the big seasonal ramp in ad spend.

I'm assuming we should expect a lot of that to return here in the middle quarters, Q2, Q3?

Yes.

I think it may not be to the full extent, depending on how many people are in the ballpark, et cetera, and how many of the outdoor community events happen that we historically sponsor, but we would expect the second and third quarters to increase this year, unlike last year.

Got it.

And just going back to the prior question on how you're thinking about securities deployment.

It sounds like that's more cautious given where rates are.

You have this avenue open to you in terms of being able to just retain more on the jumbo resi side.

Would you consider taking that up materially above the several hundred million a quarter if rates stay here just to use up some of that liquidity?

Or you're happy where you're at?

I think we're considering it.

We're actually going to probably drop off a little now.

And clearly, we consider rates went up a bit, we would consider deploying more into that avenue with that asset class.

But I think we need to kind of wean ourselves a little bit off of that.

And just moderate liquidity as well as we can, invest where we can and leave some dry powder because I don't know you guys, I'd just say we will come roaring out of this.

You look at where the economy is expected to go, talk to your customers and all the pent-up demand they have.

Supply chains are -- have been so disruptive.

And if you look what the government is spending, it's just -- you got to have higher rates and maybe not where they should be, but I think -- you can pick up 40, 50 basis points on the tenure pretty quickly, in which case you'd want to do some investing there.

And your margins will fall off a little bit, that will help.

But again, we're trying to land the plane here and have -- get our margin back up at the same time as our other income kind of falls off from mortgages and other issues.

So it won't be perfect.

It might be a little rocky on the way down because of the PPP loans that have been wonderful now, but (inaudible) might be saying stupid PPP for now because we don't have them.

So we have to continue to grow through this, be smart about it, invest where we can and not do anything stupid just to try to -- for the long term, just to make up short-term earnings.

Yes.

And lastly, just in terms of the C&I growth that came in at the end of the quarter, I think that's very important.

Was -- is that all organic, so to speak?

Or is some of that from just share shift from competitors?

Rich?

Well, it's both.

I mean we continue to win business and take share from our competitors as well as seeing sort of existing customers grow.

So the answer would be both.

Our next question comes from Michael Young with Truist Securities.

A lot of my questions have been asked and answered.

But I wanted to just follow up on kind of coming out of the pandemic here and potentially reopening.

Is there any more specific focus on hiring of lenders that we should expect to ramp up headed into kind of later this year or any new business lines that you would have a renewed focus on maybe at this point versus maybe where we were last year?

Yes.

I think there are still lenders out there in the marketplace that we have been.

Last year, we brought in a couple of lenders from some of the acquired banks.

We are looking at a couple of new niche opportunities that are there.

And that's really part of our whole story is just trying to find those lenders who really bring a value add and can really try to continue our diversification of the portfolio.

So I think both of those are pretty important as we go into the rest of this year.

Okay.

Great.

And then maybe just bigger picture.

Ed, you kind of -- as you said, try to chum the water on M&A for the bank side, but that didn't really materialize.

Are you seeing any good opportunities maybe on the fee income side that could be a buffer to kind of a mortgage revenue falling off, maybe in trust or any new business lines?

Well, yes.

We're always looking.

We added a couple last year.

Murphy, you want to talk about the 2 new niches we added?

Yes.

Well, probably the one that gets to your question is the money services group, which is we -- that was a big business for MB prior to the Fifth Third acquisition, working on the treasury side with the currency exchanges in Chicago, also in New York and really gives us a nice opportunity to generate some fee income there, not a lot of credit risk.

I don't know if you'd add to that at all, Dave?

No.

And we're a couple of quarters into that now with both good success and sort of a nice line of people waiting to do business with us is there's a little bit of void in the market.

But we'll come with it, really nice treasury-related revenues that are significant really by any measure.

And we continue to look at a couple of interesting niches in the leasing area and -- which we think are very opportunistic and have a really good opportunity for us to kind of expand that book as well.

So I think generally speaking, we're pretty positive right now.

And the wealth management business is kind of tough because, as you know, in this market, everybody thinks they are the smartest guy in the world, and they want a lot of money.

And they not only want, they want to make what they've made every year, and you pay a lot of money for it.

Doesn't make a lot of sense of doing any of that.

Our organic growth has been great, we have both institutionally and organically.

We have picked up I think almost -- I guess the number is here -- close to 1,000 accounts -- new accounts and both management over the quarter from all streams, from all aspects of our distribution channels.

So I think our name recognition is helping in that regard too.

And a lot of it -- half of it came through the branch networks, the people open their new wealth management accounts.

So truthfully we're getting much better, too, with the hiring of some very seasoned salespeople around the country.

So I would expect that to continue to grow organically, and we'll go from there.

But if you have any good advice, then just give us a call.

We're all ears.

I'm showing no further questions in the queue.

I'd like to turn the call back to Ed Wehmer for closing remarks.

Thank you, everybody, for dialing in today.

Have a great week, a great quarter, and we'll talk to you next quarter.

If you have any other questions, you please call Dave or me or Tim or Murph.

We're happy to field them.

And take care, and we'll talk to you soon.

This concludes today's conference call.

Thank you for participating.

You may now disconnect.