Wintrust Financial Corp
NASDAQ:WTFC
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Wintrust Financial Corp
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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 their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentation, there'll be a formal question-and-answer session.
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 include a reconciliation of its 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 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; Dave Stoehr, CFO; Kate Boege, our General Counsel; Tim Crane, President and Rich Murphy, Vice Chairman of Credit.
We'll stick with the format we started in the first quarter [indiscernible] of me as much you can listen to Dave is going to -- David Dykstra will give us detailed analysis of the income statement. Tim Crane will talk about the balance sheet, Rich Murphy will provide an overview of credit and back to me for some summary comments where I'll talk about the future. Of course time for questions.
Last April we started pandemic and the government massive response to the quarter and along general interest rate environment. I indicated Wintrust support will be we'll try to go through it. Today we have capital [ph], so, so far so good.
Second quarter shows the strategy is working. The growth has been -- all our growth today has been organic since the period of time. Second quarter was our million dollar quarter I'd like to say. Assets surpasses the core loans out of PPV loans grew by approximately $1 billion plus or minus. Our growth prospects remain very good.
The income for the quarter totaled $105 million or $1.70 per common share. Year-to-date income was $258.3 million or $4.34 per common share. Our reported net interest margin grew nine basis points to 2.63% and our net interest income was up $17.7 million in Q1. Our back up PPP loan income the NIM grew three basis points 2.49%.
Core loan growth in investment activity was at the end of the quarter grew for quarter three. Period end loans exceeded average loans in the quarter by over $800 million. So we started Q3 with a nice -- in our back pocket. And so loan growth was excellent and our pipeline -- the pipelines in our businesses remain very good. It's an important lining, it's an all-time low about 39% and our normal average is closer to 50%. So we'll go back there we've $1 billion of growth built in there.
Quarter we got even better with net charge-offs two basis points, NPLs and NPAs reached out. NPLs were $1.3 million to $87.7 million or 27 basis points. Our NPAs were $1.6 my and stand at 22 basis points total assets. This resulted in a reserve release about $53.3 million. I keep saying credit can't get better, keeps getting better, time to believe.
Mortgage is experiencing relative decline in the quarter. Dave will discuss this in detail. It should be noted wealth management has been that immune in this growth story. Assets under administration grew $2 billion or 5.3% or 25% annualized in the quarter through world market and new business. Our wealth management assets outflow was $34.2 million, it's grown to $32.2 million in quarter one $30 million at the end of the prior year.
I'll turn to Dave for a review of the income statement. I'll review the balance sheet maybe just for a second and then turn it over to Dave. As Ed mentioned, in the quarter assets grew up $1.1 billion to $46.7 billion. 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 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 were solid and during the quarter we continue to see a decline in utilization, a 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. We could upside with either improved line of credit utilization or continued strong market conditions.
Deposit growth for the quarter was $932 million. Majority of the growth in non-interest-bearing DDA [ph], this represents annualized growth of nearly 10%. Deposit costs continue to fall as we primarily repriced term deposits. For the quarter, the cost of interest-bearing deposits fell an additional seven basis points to 38 basis points, a trend we expect to continue in the coming quarters. Notably the non-interest-bearing DDA deposits now comprise a third of our total deposits.
As we've noted in prior quarters, we're monitoring the significant deposit growth carefully. However, we view stable low cost deposits as a strength of our company and will continue to grow those deposits related to client relationships. Obviously, like many institutions, we also remain very liquid. With rates falling 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, expected 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?
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 the earning asset growth which is up 9% over the prior quarter, net interest margin expansion and one additional day in the second quarter and for your reference, one additional day approximates $3 million of net interest income for Wintrust.
The net interest margin improved nine basis points from the prior quarter to 2.63% as the rate on interest-bearing liabilities declined seven basis points in the second quarter as compared to the prior quarter and a four basis point increase from the yield on earning assets was partially offset by a two basis point decline in our net refunds contribution. The four basis point improvement in the yield on earning assets was comprised of a three basis point increase on the yield on loans and a 13 basis point increase in the yield on liquidity management assets through the appointment of a portion of our liquidity into investments securities late in the first quarter.
The decrease in the rate paid on interest-bearing liabilities was primarily due to a seven basis point decrease in the rate paid on interest-bearing deposits, primarily due to the lower repricing of time deposits. PPP fee 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 and we believe that the deployment of such liquidity when market conditions improved will be a tailwind to our net margin.
Turning to 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 forecasts including improvements in the commercial real estate price index and the BAA corporate credit spreads.
Additionally, the company saw improvement in loan portfolio characteristics during the quarter including decreases in COVID-19 related loan modifications and improving loan risk rating migration. Slide 13 for presentation deck that we provide on our website will give you additional details about the improvement in the nonperforming loan, the COVID19 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 in 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 sources of 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 reasonably solid loan origination volume during the second quarter, but that origination volume was off the record high level 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 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 in the second quarter as compared to $113.5 million in the first quarter of 2021 contributing to the $62.9 million reduction in revenue for 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 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 a decrease in the value of the capitalization of retained mortgage servicing rights due to a decline in loans sold for 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 pipelines. 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 through the historically strong consumer demand and the timing associated with recognized gains on hedging trades in the prior quarter. The normalization of that market drove a quarterly assigned to a more typical range of secondary gains in the second quarter.
Looking forward based on the current pipeline activity, we expect mortgage origination for some in the third quarter to be very similar to the slightly less than the origination volumes we experienced in the second quarter and 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 originate. Accordingly, expense reductions lag the revenue recognition as we still need to underwrite process and close those loans that are in the pipeline as well pay commissions once the loans close. Since the mortgage loans in the pipeline were substantially higher at the end of the first quarter and the expenses associated with processing and closing that pipeline naturally lagged into the second quarter and lagged the drop off in that.
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 know that when you evaluate the mortgage expenses relative to the mortgage revenue decline, you should consider that $29 million at the MSR valuation decline of $13 million related to the secondary marketing gains and declined in the, in the pipeline or $42 million in aggregate of revenue decline.
We've not have any associated expense reduction, that's those amounts are simply valuation measurements. So the expense reductions really fall through with the production decline of $21 million. So our, our mortgage expense reductions in the first quarter were generally $7 million to $8 million of commission reductions, a couple million dollars of other expense reductions. And then we expected 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 have 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 a 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, I should note that wildcard always at the MSR valuation adjustment and it's tied to interest rates, and we're not going to speculate on where rates will be at the end of the third quarter. And so those, those amounts that I just talked about would be exclusive of the MSRs other non-interest income total $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. And the non-interest expense categories, non-interest 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'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 this client and 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 charges, associated with the plant 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 increase as a 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 the income tax expense, 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 with $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 a billion dollars 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 is adding, Tim pointed out, while we are pleased with the overall level of core loan growth. We think that the number is needed 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. And 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 number 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 Windtrust 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 continued 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. Non-performing, long-term reduce 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 MPLs, 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 is 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 a meaningful, positive migration. And as our customers continue to recover finally, on PPP, as outlined on slide 14, we, we funded $4.9 million to more than $44.9 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 that 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 and over 90% of our 2020 PPP loans and over 85% of those loans have received their final forgiveness decision. That includes my comments and I'll turn it back to Ed to wrap up.
Thanks Rich. As I mentioned to me, the color strategy throughout this has been to grow the bouncy turn is pretty low rates. These are structural hedges, like mortgages to buffer the loss of net interest income until such time as the balance sheet growth can offset the income loss too.
Due to the lower rates, PPP Wells, we went to expected benefit add onto this strategy. All the above was be accomplished by enhancing our asset sensitivity position anticipation essential higher rates now achieve growth.
For the year I asked her to go, the $1.7 billion, the core loan was $1.7 billion, swing loans held for sale on PPP. We've experienced all this as Tim laid out, it has been done on a totally organic basis. The acquisition market, which has been sleeping today, it appears to be picking up based upon the amount of inbound calls we've received lately.
So still having a high expectation, so we're going to see where all this ends up, as Rich said, long pipe was you man, extremely strong and all our major categories. I have said since the position is where we want it, we could take it away.
We continue to leg into our investment. Our excess liquidity takes advantage of market flips. There's no rush to be totally invested is locking into lousy long-term rates. It was making a lot of sense. Plus credit is remarkably good. Thanks to our consistently conservative credit standards. I wish our loan portfolio both with our lending line and credit folks and pH MPLs are lower than they were before the start of the Pandemic.
Well, this area is delivering strong results in assets that our administration continue to grow. So to date, the plan is working. We need to continue in order to bring this plan to full -- to total fulfillment.
Organic growth should remain strong. We'll take advantage of the open -- the opening of the acquisition market, if it actually makes some sense, as well as this core wealth would offset any reduction in PPP loans. And we seem to be doing that. I think that the end of the day, if we get another $1billion loan growth quarter and by the end of the year, we should have made up the PPP loans would, 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, is, is achieving what we set out to achieve and I'm going to continue to take what the market gives us.
And with that, I turn over some questions. Thank you,
[Operator Instructions] Now, first question, coming from the lineup, John Austin with RBC capital markets is open.
Thanks for the help on some of the expectations here on mortgage and NII and expenses. And I did, I did want to ask on the 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. I'm 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?
Yeah, I'll take the course question first. So I, I think that, you know, we are seeing our customers feeling much better about the prospects going into the back half of the year. I think competence is 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, we're feeling pretty good about where our existing are. And I think you will see line utilization increase as we go into the back half of the year.
And as we've talked about in the past, John, the concept of being coming Chicago's bank has really started to happen. I mean, we really feel like at this point in time, we are, you know a go-to bank in terms of new opportunities are, 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, you know, 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 you know, the hard market is not going away anytime soon
I think that as you see the, the team on the PNC 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, you know, things were going to begin slowing down in the back half of the year.
But in talking with that team as recent, 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 you know, we're feeling pretty comfortable right now that momentum will continue at least through year end.
Okay. Talking about estate planning and estate taxes in that regard. So he's doing something right for us.
That's good. That's good. Question for you, Dave, this is a more difficult question, but when you think about the mortgage line, and I know there's a lot that goes 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 prêt-pandemic other than rates and we just obviously what I'm trying to get at is just longer term expectations of the business. So anything you can do that help us out on that, I'd appreciate.
Well, I think, the mix between veterans first and the retail has been fairly stable. The refi volume has obviously dropped off a little bit. Although with this recent crop, I think that it looks like that may be picking up a little bit where people are 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 and just, I don't see anything substantially different between that mix of business or ability to serve the customers. Obviously as we continue to expand our footprint a little bit in some different areas of our market, we hopefully can pick up some additional customers, but I wouldn't say it's dramatically different just on improved product, improved service model.
All right. Thanks for the help.
Your next question coming from the line of David Long with Raymond James. Your line is open.
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 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 tertiary area, these are all new relationships for the most part. A lot of it says the leftover from the PPP loans, we picked up close to 500 new customers as we bring them in. Those are pretty sticky. Those are all fully relationships. So Tim, your thoughts?
Yeah. David we're watching it carefully, but we feel pretty good. 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 in the year. So again, we'll watch it carefully, but so far it's pretty sticky.
Got it. And then on the lending side, the, the commercial side your core CNI stuff, as far as the competitive backdrop, we talked a little bit about that, but internally, are you guys doing anything differently? Are you able to loosen anything in your, I don't know if it's sub-standards, it's 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 away. Those are sacrosanct. So we're not seeing any more exceptions or deviations from our profitability models. So to say we would do anything differently, I would say, no, we're not changing our credit stance at all. We never do that. Murphy your thoughts.
Yeah, no, I would agree with that. It's something we talk about on a regular basis in our credit meetings just where the market's at, because the market is very competitive. I'm sure you guys 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 do 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.
Then one, maybe note to that is just as we continue to grow, we look at, different niches all the time and we want to be able to continue to broaden out our product suite. So that would probably be the only, sort of thing that we would, maybe look to, as we grow forward is just, different areas. We've, talked about leasing part of our leasing group to be an 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.
And then, 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, are your former PPP customers out of PPP in borrowing yet? Are you seeing any, any loan growth attributed to these new relationships yet?
Yeah, David's see we, we are, I mean, there's, there's sort of two sides to that. It's obviously been a little bit of a substitution and part of the reason you're seeing utilization down, but we've also added new relationships and we track the larger ones and there's over $0.5 billion in commitments that are already on the books with, 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 three quarters of the way through the PPP prospect pipeline.
Yeah. 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, that loan structure, getting it approved and getting, and getting it documented, working through the payoff. So but it's, 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 been very helpful. Still with MB there's still some hangover from that of benefit to us. Private, same thing, now, we're starting to see more of that now is. Canada gets more involved down there and they're changing some of the things that they do. We're seeing opportunities that you never saw out there.
And obviously first Midwest move is you have to see what happens, but any sort of market disruption is good for us. And it comes to a decision point. We want to be there and we want to have a seat at the table if 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.
Hi. Good Morning, everyone. Maybe Dave, a question for you on, on your mortgage outlook what type of production margins are you thinking about over the near term that, that top left graph on page 10, shows a pretty steep decline down to a 2.2% last quarter?
Yeah, it's impacted a little bit the way we presented by the declining type inventory and in the pipeline. And we also had a little bit of there's some volatility in the secondary marketing last quarter we had gained in this quarter.
We had some small losses, but I think we're thinking about it more in the sort of 3% plus or minus range, I think next secluding, any changes in the pipeline.
Thanks. And then as a follow-up question, I'm not sure add, maybe you're just not as creative as you typically are each quarter, or maybe you're trying to tell us something, but the, the last two press releases, your final quote has been the exact same something along the lines of evaluate expenses on an ongoing basis to enhance profitability.
So are, should we read into that, that same statement, two quarters in a row, and is there some sort of expense plan coming or is it more of a, kind of a big picture of you that you're consciously are always aware of expenses?
The ladder we're always looking at expenses and working them through the same time. We, we still are a growth company and we're going to invest with the company. We have a number of branches opening up in markets. We haven't been in yet both parking one, that's coming on board. We should do. That's a great market for us. We've never been there. That'd be very well, but it costs money to get them up and running.
We contrary to maybe what somebody believes. We watch our expenses very closely with a net overhead ratio in the mid one thirties this quarter. That's about where we think we'll 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 there are so many moving parts in the time we so screwed up. We record the income in one quarter, our expenses in the next quarter so those will look great. But all in all, with the 135 their overhead ratio, and our goal is to be in the mid 130s right now, in a normalized basis we're comfortable but doesn't mean we don't always look at expenses and try to run down. So.
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 a veteran's first that that volume dropped by a third or so it seemed to drop harder than the rest of the, the rest of the business?
Yeah. I think their business is more heavily, generally weighted towards the refinance activity in that part of the market got hit harder. in our footprint it we're, we've got customers just walking into the bank and have the relationship with the bank of the purchase activity tends to be a heavier piece of it. So I think it's just more that the mix of purchase and refinance, and again, again on marketplace.
Okay. And it just kind of combining security's growth and what you may retain on the, for the mortgage bank. Yeah. I think you've given guidance around 10% of production. You're going to shunt on balance sheet. And how should we look at that versus how you may grow the investment securities book in this environment, or it sounds like you're pretty cautious and growing that securities book, given the rate environment, if you could just kind of unpack that a little bit?
Yeah. We've been keeping the thought was to keep a lot of hundred million of the, for the jumbo mortgage production on our books, but then we also generally have maybe a hundred or so of, of, of other product that we originate in the bank, some non-standard or a variable rate products that we typically keep on the books out of the bank
So probably in know which is normal, but keep a hundred million on 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 numb number and on the liquidity side you're right. As we noted earlier, we were based essentially flat quarter end a quarter end because we just the more mortgage backed rates sort of backed off a little bit.
And, and, and we're just being cautious on investing that liquidity as, as added 10 noted taking, 1 75 or 180 sort of rates for a long-term inch instrument just doesn't seem that appealing right now. And so we're going to be patient with that hope to grow the loan portfolio, deed up some of that liquidity. And we look at that as an opportunity, it may, it may suppressor earnings in the quarter a little bit by not investing at the long-term. We look at that as an opportunity to grow the NII and grow the margin, but we're just trying to be patient and, and not invest at really low rates right now.
Got it. Okay. Thank you.
[Operator Instructions] Our next question, coming from the line of Nathan Race with Piper Sandler.
I guess good morning. a couple of questions on capital. the stocks come in a little bit along with the rest of the group, turn around 1-2-1 through your cancel books. These days, just curious to get some updated thoughts on the updates around returning to buy back?
We've got money left than our previous offers authorization. So if the time is right, we will utilize that and go from there. So yeah, we looked at it all the time as vis-a-vis where do you know where to turn that capital? Where do we go? Where do we want to invest some money? And it's certain levels that make sense to o buy the stack back, like yesterday would have been a good day, but we were at a blackout period. We'll see. But
And then we also like compared to acquisition opportunities out there too. So just where are you 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, market conditions are there. Well, we can look at what we do going forward, but as I said, I'm evaluated all the time.
Got it. And along those lines, in terms of acquisitions other Dave, I'm just curious, you know 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 range that you guys would be willing to go up to, but just curious, kind of how that appetite stands today with, the currency where it's at.
Obviously your capital levels are, stable sequentially in a comfortable level, I'd imagine. So along those lines, just curious, can I get your updated thoughts on what you're seeing from a 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 entertained potential acquisition opportunity. So just curious to get some updated thoughts on all those dynamics?
Yeah. well, I would say what the market gives us for years, it gave us deals under a billion dollars of reasonable prices. how much I don't like the solution. So we still have, anywhere from under $1 billion to $2 billion or $3 billion, they're out there, but we're not going do anything stupid.
We don't like we don't like giving up years' worth of earnings to, to grow where we can grow organically market is still giving us good organic growth. We'll stick with that unless a deal comes along to make strategic sense. And what have you. But I think that as to size, the, the market is, is kind of limited.
Now, when you think of that, a geography. So I said earlier, I did a couple of earnings calls, a golf throughout the concept that we'd do on the look out of our traditional market area that was chumming the water to see if I get anybody out there.
It was a bad fishing day, I guess, but I haven't seen, but we we'll, we'll look at anything. Basically the answer is shareholder value, franchise value, earnings, and M and a doesn't do, 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, they're across the board between $3 billion, $4 billion, down to $300 million. The inbound calls had been very, had picked up a lot.
However, price expectations for the first ones we've kind of reviewed are don't fit that criteria it's hard to about earlier. So we, they, if the local guys sell to somebody else, that's good for us. Yeah, the disruption's good. So especially in the assault, 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 that are coming down the pike from new administration, people and loans is getting good loans. We all dig deeper. We're all in there. Trying to get I guess 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, their margins, their costs, and their what it does over in their price expectations back in line.
Yeah. It was along those lines. It's, just given the organic growth trajectory in front of you guys, that's like begin to accelerate with some of the recent disruption that was announced in Chicago from an M&A perspective. I imagine, acquisitions in that asset range that you described are probably less of a focus these days. Just given that organic growth runway that's in front of you guys today, that's only gotten stronger within the last couple of months here?
Yeah. But that doesn't mean that if a good deal came along and wouldn't do it. Yeah. And we can do, we can obviously do both, but organic growth is, is, is really good in the knowledge you said, but it doesn't foreclose out doing acquisition market prices. And, and strategically work.
Yeah. I'm trying to take, it will be 30 years old in December. We have a good chance hitting $50 billion, just through organic growth from a car table, the 50 years and 30 years. So people always ask, 'How big do you want to be?' And I say, 'Well, I don't care where you you'd be five 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, and keep our shareholder people, our returns up and we operate on growth, profitability and growth in our tangible book value. So if any of that fits to those lines in and advances, those are, are reaching those walls is everything's available.
Got it. Not bad to say the least. I appreciate the color. Thanks guys. So welcome. Thank you.
Our next question, coming from the line of Julien Brush with Truist Securities
Hey, this is Michael Young on for Truist Securities. Thanks. just wanted to ask, you know, 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 make shift or you know, kind of what are you seeing in the pricing environment that would cause that to happen or not?
Yeah, I mean, again, you know, Ed pointed out before and we have a very strict pricing model, you know, that we're, we're just not going to go. It's something not really accretive to, you know, where we want to be. We're just not going to do it. I mean, so I, I think overall, yeah, we're, we're, we're, we monitor that very closely and, and competent that we can do that.
Okay. Okay. And maybe just a follow up on the expense commentary related to mortgage. Obviously you guys are seeing, you know, quite strong loan production. So I would assume there's some natural inflation to the expense run rate, but, you know, 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 two pieces?
I'm not sure if I follow, you're just saying that in the past, we 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 in a strong loan production that would offset that?
No, what I was trying to get at is I think net net $8 million savings assuming that the level is in line -- revenue level is in line with the prior quarter. Now, let's say production revenues go up to $5 million, let's say $6 million, and 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.
Okay, perfect. Thanks.
Your next question coming from the line of Chris McGratty with KBW. Your line is open.
Asset quality, you guys have historically been kind of quick to move any problems and it served you well over cycles. Given the amount of I guess there's 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. Thanks.
Chris, we've done asset sales in the past and we're always calling through the portfolio and to try to find where weak spots exist and just to go to see the market out there. So I would say we're open to that concept. We've done pretty well getting sort of a maximum value on the asset that we do work through. So when you -- in the past when we've looked at some of those prices, we just weren't willing to accept a 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 important things in the right way and not have a decreases. So with that, thanks very much. And we'll see you -- we'll talk to you again in a month or three months. And any further questions, follow-up questions, please feel free to call anybody who's on the call. Thank you.