Q2 2021 Wintrust Financial Corp Earnings Call

Okay.

Welcome to win Trust financial corporations second quarter and year to date 'twenty 'twenty 1 earnings conference call.

And we'd be up the results will be made by <unk>.

And at what Wimmer, founder and Chief Executive Officer.

Jim Green President.

David Dykstra, Vice Chairman and Chief operating Officer.

And Richard Murphy, Vice Chairman and Chief lending Officer.

As part of abuse. The presenters me make reference to both the earnings press release and the earnings release presentation.

Following their presentations and there'll be a formal question and answer session.

During the course of today's call when Trust 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 S. E C.

Also our remarks may reference certain non-GAAP financial measures.

Our earnings press release and earnings release presentation, and good or we can station of its non-GAAP financial measures to the nearest comparable GAAP financial measure.

As a reminder, this conference call is being recorded.

I will now turn the conference call over to Mr. Edward <unk>.

Good morning, everybody and welcome to our second quarter earnings call.

As mentioned with me are Dave Dykstra, our Chief operating Officer day start CFO, Kate Boege, Our general Counsel, Tim Crane, President and Rich Murphy, Vice Chairman and credit.

We're going to stick with the format, we've started and.

First quarter and don't have to listen to me as much you get most of them do.

David's going to talk more and I'm going to give some general comments about our results day.

Dave is going to Dave Dykstra will give us a.

Detailed analysis of the income statement, Tim Crane will talk about the balance sheet Rich Murphy will provide an overview of credit and back to me for some summary comments and thoughts about the future and of course time for questions.

And as April to start of the pandemic and the government massive response to it Dakota and a log in zero interest rate environment.

And I indicated winter supports it would be to try and grow through it day, we accomplish this goal so and so far so good.

Second quarter shows the strategy is working.

The growth today and has been on all our growth to date has been organic since that period of time.

Third quarter was all around $1 billion, a quarter I like to say assets deposits acquired loans that a P. P V loans grew by approximately $1 billion plus or minus.

Our growth prospects remain very good.

Net income for the quarter total 105 million of dollars 70 per common share.

Year to date and income was $258.3 million $4.34 per common share.

Our reported net interest margin grew 90 basis points to 263 per cent.

The net interest income was up $17.7 million from 2.1.

And I got the PPP loan income.

The NIM grew 3 basis points to 49%.

Core loan growth and investment activity was at the end of the quarter.

This bodes well from quarter 3 period and launch exceeded average launch and the quarter by over $800 million. So you start Q3 with a nice.

Is that and our back pocket.

And said loan growth was that was excellent and our pipeline and the pipelines and all our businesses.

And very good.

And it's important to line you should talk to an all time low of about 39%.

Oh normal average is closer to 50%.

So we will go back that we have done a $1 billion of growth built in there.

Credit quality and got even better with net charge offs totaling 2 basis points and Npls and M. P is reached down and.

Npls were fell $11.3 million.

To $87.7 million or 27 basis points.

And I N P. A's fell 111.6 million just standard 22 basis points total assets.

This resulted in a reserve release of about 15, $3.3 million heaps and credit cant get better keeps getting better it's hard to believe.

And the mortgage experience and the inevitable decline and the quarter.

Dave will discuss this in detail.

It should be noted wealth management has not been immune to this growth story.

Assets under administration grew 2 billion from 5.3% or 25 per ton annualized and the quarter.

Well, the overall market and new business.

Our wealth management assets, our total $34.2 billion, it's cleared and $32.2 billion and quarter 130 billion at the end of the prior year.

And in terms of Dave review the income statement.

I'm sorry.

And this is Tim I'll I'll do the balance sheet, maybe just for a second and then turn it over to Dave as Ed mentioned in the quarter assets grew 1 billion, 1% to $46.7 billion a couple of items worth highlighting here first we experienced very strong core loan growth loans, excluding PPP were up $1.2 billion.

And in the quarter growth was spread nicely across loan categories commercial commercial real estate and our niche businesses richelle share a little more detail and a few minutes.

On a percentage basis, this $1.2 billion equates to 15% annualized growth and on.

On a year to date basis, our loan growth, excluding PPP is just over 11% annualized.

As Ed mentioned, we believe these growth numbers are solid and our <unk>.

During the quarter, we continued to see a decline in utilization.

And in the coming quarters, we hope will reverse and will help rather than hurt our loan growth activity.

In addition, the pipelines remained strong as we see evidence of accelerating economic activity and our markets.

With respect to PPP loans, we saw a reduction of $1.4 billion and <unk>.

Forgiveness activity accelerated materially during the quarter.

Total PPP loans at the end of the quarter were $1.9 billion down from a peak of $3.3 billion at the end of the first quarter.

For the remainder of the year, we remain comfortable with our loan growth target of mid to high single digits on a percentage basis, but could see upside with either improved line of credit utilization, where continued strong market conditions.

Deposit growth for the quarter was $932 million, a majority of the growth and noninterest bearing DDA.

This represents annualized growth of nearly 10%.

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

For the quarter the cost of interest bearing deposits fell and additional 7 basis points to 38 basis points.

And a trend we expect to continue in the coming quarters.

Notably the noninterest 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.

However, we view stable low cost deposits is the 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 and at low levels for most of the quarter, we held our securities position essentially stable during the quarter we.

We remain cautious and 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 is 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 and expect to 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 and.

We entered the second half of the year.

And Dave.

Alright, Thanks, Tim and as Ed indicated I'll cover the noteworthy income statement categories, starting first with the net interest income from the second quarter of 2021 net interest income totaled $279.6 million and 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 and net interest income.

Compared to the quarter was primarily due to earning asset growth, which was up 9% over the prior quarter net interest margin expansion and 1 additional day and the second quarter and for your reference 1 additional day approximate $3 million of net interest income from wind Trust.

The net interest margin improved 9 basis points from the prior quarter to 263% and the rate on interest bearing liabilities declined 7 basis points and the second quarter as compared to the prior quarter and a 4 basis point increase from the yield on earning assets was partially offset by a 2 basis point decline and our net free funds contribution.

The 4 basis point improvement and the yield on earning assets.

And was comprised of a 3 basis point increase from the yield on loans and a 13 basis point increase and the yield on liquidity and <unk>.

Management assets due to the appointment of a portion of our liquidity into investment securities late in the first quarter.

The decrease and the rate paid on interest bearing liabilities.

And was primarily due to a 7 basis point decrease and the rate paid on interest bearing deposits.

Primarily due to lower re pricing of time deposits PDP accretion as we noted in our press release.

Was $25.2 million of recognition and the second quarter.

Baird to $19.2 million and the first quarter of 2021 and.

And as forgiveness activity accelerated during the quarter.

And Additionally, as Tim noted the margin was again affected by excess liquidity and the balance sheet and we believe though that the deployment of such liquidity when market conditions improve.

Oh, it will be a tailwind to our net interest margin.

Turning to the provision for credit losses, similar to many other banks that have reported this quarter 1 Chris recorded a negative provision for credit losses of $15.3 million compared to a directionally similar negative provision of $45.3 million from the prior quarter and $135.1 million provision expense recorded in the year.

Quarter.

The negative provision was driven by a reduction and the allowance for credit losses, primarily due to improvements and macroeconomic forecast.

Including improvements and the commercial real estate price index, and the <unk> corporate credit spreads and.

Additionally, the company saw improvement and loan portfolio characteristics during the quarter, including decrease of them and COVID-19 related loan modifications and improving long risk rating migration.

<unk> 13 through 20 of the presentation deck that we provided on our website will.

And we will give you additional details about the improvement and the nonperforming loan the COVID-19, and modified loans and the macroeconomic factors impacting the allowance for credit losses and.

And rich will cover credit quality and a lot more detail and just a few minutes.

Turning to noninterest income.

The noninterest expense and the income tax sections.

And the noninterest income portion of the income statement, our wealth management revenue increased $1.4 million to another record level of $30.7 million and the second quarter compared to $29.3 million from the first quarter and that revenue source was up 36% from the $22.6 million recorded and the year ago quarter.

This revenue sources 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 levels seen in the past few quarters due to lower refinance activity and the marketplace.

To that and the company originated approximately $1.7 billion of mortgage loans for sale and second quarter of 2021 down 22% from the approximately $2.2 billion and each of the prior quarter and the second quarter of last year.

Mortgage banking revenue decreased to $56 million from the second quarter as compared to $113.5 million from the first quarter of 2021 contributing to the $62.9 million reduction and revenue where the filing items.

And $29 million.

A decline in revenue related to the impact of the MSR valuation and the MSR capitalization and net of payoffs and Paydowns and the.

The $29 million negative impact of the value of the mortgage servicing rights primarily related to a positive fair value adjustment of $18 million and the first quarter of the year as compared to a decrease of $5.5 million and the current quarter as well as the decrease and the value of capitalization of retained mortgage servicing rights due to the client and loans. So.

And with servicing retained.

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

<unk> quarter than the first quarter.

First quarter of 2021 also been upfront benefited from atypical.

Elevated levels of secondary marketing gains related to the market environment and the first quarter, where we had strong investor demand and general margin enhancement due to historically strong consumer demand and the timing and associated with recognized gains on hedging trades.

And the prior quarter and normalization of that market drove quarterly swing to a more typical range of secondary gains and.

The second quarter.

Looking forward based on the current pipeline activity, we expect mortgage originations for sale and the third quarter to be very similar to slightly less and the origination volumes, we experienced and the second quarter and the mortgage revenue, excluding any MSR valuation adjustments to be roughly in line with the second quarter.

Or and 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 and the third quarter as.

As many of you and all we essentially record the net mortgage revenue when we locked the interest rate commitment on the majority of loans that we expect to originate and sell accordingly expense reductions lagged the revenue recognition as we still need to underwrite process and close those loans that are and the pipeline as well as pay commissions once the loans close since the mortgage loans and the pipeline were.

Abstention and 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 revenue and.

The pipeline of loans has decreased during the second quarter, we would expect to see a corresponding decrease in mortgage related expenses and the third quarter.

So currently assuming the mid $50 million range of revenue excluding any MSR.

MSR valuation.

We anticipate mortgage related noninterest expenses to decline further in the third quarter and the $8 million range.

I should note that when you evaluate the mortgage expenses relative to the mortgage revenue decline you should consider that $29 million of the MSR valuation decline and $13 million related to the secondary marketing gains and declined.

And the pipeline or $42 million and aggregate of revenue decline will not have any associated expense reductions, but those amounts are simply valuation measurements and so the expense reductions really follow through with the.

Production decline of $21 million, so are our mortgage expense reductions and the first quarter were generally.

$7 million to $8 million of commission reductions a couple of million dollars of other expense reductions and then we expected an additional $8 million of expense reductions and the third quarter.

With that being said I have to caveat that and the last few days the interest rates have dropped considerably and the pipeline of new applications has increased and 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 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.

A decline and revenue that we saw.

Also and you should note that wildcard Lisa the MSR valuation adjustment and and it's tightened 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 msr's.

Other noninterest income totaled $24 million from the second quarter was up $4.7 million from the $15.7 million recorded and the prior quarter. The primary reason for that increase was a $4 million gain on the sale of 2 branch locations and south Western Wisconsin.

That previously disclosed transaction closed during the second quarter.

And the noninterest expense categories noninterest expenses totaled $280.1 million down approximately $6.8 million or 2% from the $286.9 million recorded and the prior quarter.

There are a handful of categories that account for the majority of the change from the prior quarter that I'll focus on first salaries and employee benefits expense decreased by $8 million and the second quarter compared to the first quarter.

Million dollar decline is primarily related to $7.6 million of lower commissions and incentive comp primarily related to the decline and commissions related to the lower mortgage originations and I just talked about.

Occupancy expense totaled $17.7 million from the first quarter decreasing $2.3 million from the $20 million recorded and the prior quarter that decrease was primarily the result of the first quarter of the year, including a $1.4 million impairment charge associated with the planned closure of a branch location.

And the current quarter, having a lower level of maintenance and repairs expense.

Similar to recent years other than 2020, which was impacted by the pandemic marketing expenses increased by approximately $2.8 million from the first quarter to $11.3 million.

And as we've discussed on previous calls this category of expenses increased as our corporate sponsorships tend to be higher and the second and third quarter of the year due primarily to our marketing efforts related to various major and minor League baseball sponsorships and love sponsorship of summertime events held in the communities that we serve.

So other than those expense categories that I discuss all other expense categories and the aggregate were up by less than $1 million compared to the first quarter and nothing noteworthy to discuss.

Moving on and the income tax expense the effective tax rate and the first quarter was approximately 27%, which is and 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 normalized mortgage market and the undesirable swing and 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.

With that I will conclude my comments and turn it over to rich Murphy.

Thanks, Dave.

<unk> noted earlier and credit performance for the quarter was very solid from a number of perspectives loan growth net of PPP was $1.2 billion and this growth was across the portfolio, but a couple of areas really stood out first insurance funding, where we financed commercial insurance premiums grew by $563 million and outstanding quarter, which was the <unk>.

<unk>, a number of new larger relationships, a hardening market, which took our average premium up to 39000 from 34000 and the first quarter and the continued popularity of financing insurance premiums due to lower interest rates.

And Windows life finance grew by $248 million or 16% annualized as we are seeing this product grow.

And by over $1 billion over the past year as more people are looking at life insurance is a key part of their estate plan and the market allows them to finance their 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.

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.

And as Ed and Tim pointed out while we are pleased with the overall level of core loan growth. We think that this number is muted by the line and the level of line utilization, which fell to 38% and Q2 compared to pre pandemic levels and the upper 40% range. This lower utilization resulted and funded balances being reduced by approximately $1 billion.

And I would also like to point out the granularity within the portfolio as we have talked about and prior quarters..1 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 projection.

<unk>.

In addition, slide 12 details the geographic diversification and our portfolio as we have stated before wind trust will always have a Chicago Milwaukee Nexus. However, as this slide illustrates our various product lines provides us with a meaningful amount of credit opportunities outside of our primary markets.

From a credit quality perspective as detailed on slide 13, we continue to see meaningful improvement and credit performance across the portfolio as the economy continues to recover from the pandemic. This can be seen and a number of metrics.

Nonperforming loans were reduced from $99 million at the end of Q1 to $88 million at the end of the second quarter.

This is roughly half the level of Npls, we saw at the end of the third quarter of 2020.

We recorded $2 million and net charge off during the quarter, which was down from $13 million and 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% and 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 and our select high risked impact industries.

And credit ratings continue to show a meaningful positive migration and as our customers continued to recover.

Finally on PPP as outlined on slide 14, we funded $4.9 million to more than $4.9 billion to more than 15000 different businesses through the PPP program, we could not be happier with the results from this program and the positive effects on our customers and community. It was an enormous team effort and we are so proud of the employees of wind Trust who made.

And possible.

And are now focused on working with our customers to processor applications for forgiveness. This.

Is proceeding very well as we have now processed forgiving with applications and over 90% of our 2020 PPP loans and over 85% of those loans have received their final forgiveness decision.

That concludes my comments and I'll turn it back to Ed to wrap up thanks rich.

And as I mentioned at the beginning of the call our strategy throughout this has been to grow the balance sheet. During this period of low rates and user.

And the structural hedges.

Like mortgages to buffer the loss and net interest income until such time as the balance sheet growth.

<unk> income was due to lower rates.

And then I expected benefit add onto this strategy.

All of the above was be accomplished well and enhancing our asset sensitivity position anticipation and eventual higher rates.

Balance sheet growth.

For the year asset global $1.7 billion and core loan growth of $1.7 billion, excluding loans held for sale and PPP.

We've experienced all of this is Tim laid out has been done on a totally organic basis.

The acquisition market, which has been sleeping day it appears to be picking up based upon the amount of inbound calls we received lately.

She'll have a rather high expectations. So we're going to see where all this ends up.

As rich said loan pipelines remain extremely strong and all our major categories.

And asset sensitive position is where we want it.

We continue to lag and we continue to leg into our investment of our excess liquidity, taking advantage of market blips cause lower should we totally investors locked and allows you long term rates.

A lot of sense to us.

And it is a remarkably good thanks, we're consistently conservative credit standards and diversified loan portfolio broke and work in both our lending line.

Our lending line and credit folks and periods Npls are lower than they were before the start of the pandemic.

While Virgin area is delivering strong results and assets under administration continue to grow so they play and is working well.

We need to continue and harder to bring this plant and full force.

Total fulfillment.

Organic growth should remain strong we would take advantage of the opening.

If the opening and the acquisition market if it actually makes some sense.

And it won't be as this should have a core growth that would offset any of that.

Auction and.

PPP loans, and we seem to be doing that I think that.

And of the day, if we could and another $1 billion loan growth quarter.

And by the end of the year, we should have made up from the PPP loans.

And should actually.

Help our margin to some extent.

And then interest income so basically we feel very good about where we are right now the plan is achieving what we set out to achieve and when.

And to take what the market gives us.

And with that I turn it over to some questions.

Thank you.

Ladies and gentlemen to ask a question and you will need to price the spa agenda, 1 key on your Touchtone telephone line.

A question press the pound key.

Please standby, while we compile the Q&A roster.

No first question coming from the line of John I was from with RBC capital markets. Your line is open.

Thanks, Good morning.

Alright, John.

And.

Thanks for the help on.

Some of the expectations here and.

And on mortgage and NII and expenses and I did I did want to ask on loan growth.

Tim you talked about accelerating economic activity and then rich you talked about a little bit higher.

Commercial at the end of the quarter.

I'm curious what you guys are seeing outside of the premium finance businesses.

In terms of some of the growth potential there or is it starting to broaden out.

And then just the sustainability of the premium finance growth as well.

Yeah, I'll take and.

And the course.

Question first so I think that we are seeing our customers feeling much better about.

And the prospects going into the back half of the year.

I think and confidence.

And is really.

Improved dramatically I think there are obviously some headwinds that are making people nervous I think labor availability as an issue and.

Obviously, the uptick and Covid cases, salespeople, a little bit anxious, but overall I think we're we're feeling pretty good about where our existing customers are and I think you'll we'll see line utilization increase as we go into the back half of the year.

And as we've talked about in the past John.

And the concept of being coming Chicago's Bank has really started to happen I mean, we.

Really feel like at this point and time we are.

Go to bank in terms of a.

New opportunities are the pipelines are very good and I think we will continue to bring.

More customers and as a result of the disruption that's been in the market.

The most recent announcements 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 the first insurance I think.

The hard market is not going away anytime soon I think that.

As you see the team and.

And the P&C side has done a very good job, bringing in new relationships you got the hard and market you really have a lot of good strong.

And momentum there.

And the life side Similarly.

We had anticipated that things were going to begin slowing down and the back half of the year, but in talking with that team as recent as recently as yesterday. They are also feeling very good about where the back half of the year could go. So again, we're not changing our guidance, but we're feeling pretty comfortable right now that our momentum will continue at least through.

Year end.

Okay.

Mr Breier president of buying for talking about it.

The state planning and.

The state 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.

Think about the mortgage line and I know Theres 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 and this.

$50 million a quarter range and I'm, just wondering if theres anything materially different about your business today.

And where it was pre pandemic other than rates.

And obviously, what I'm trying to get at it is just a longer term expectations from the business. So maybe if you can do to help us out on that I'd appreciate it.

Well I think on the mix between veterans first and and the retail and it's been fairly stable.

And on the refi volume has obviously dropped off a little bit although although with this recent drop and I think it looks like that may be picking up a little bit where people are boston back in but longer term.

We have better technology and and we have.

Better tools to.

To reach people and just.

Guys hitting the street.

Physically and those tools help those guys under 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 and.

And it's still good old fashion and service.

With improved technology, and just I don't see anything substantially different between that mix of business or our ability to serve the customer and obviously, we continue to expand our footprint a little bit and.

From different areas of the market.

You can pick up pick up some additional.

Customers, but I wouldn't say I wouldn't say, it's dramatically different just and improved product and improved service.

Model.

Alright, thanks for the help.

Thank you.

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

Hi, David Good morning, everyone.

Just as it relates to deposits we've had some very good deposit growth a lot of liquidity created.

Is your sense that these deposits are sticky are these new relationships. So they can and remain on your balance sheet for quite some time review as things improve and customers start to spend again do you see a drop off and those deposits.

Well judging by the activity and our and our <unk>.

Treasury area. These are all the relationships and.

And the most part.

A lot of it said the leftover from the <unk>.

PPP loans, we picked up close to 500, new customers and.

As we bring them in.

Those are pretty sticky those are all full relationship so Tim your thoughts, yes, and David we're watching it carefully but.

We feel pretty good I mean, we're continuing to add households, we don't disclose numbers here, but we get the digital lift that everybody else is reporting on their calls and.

Folks have good tools. So we've added a couple of branches, which will.

And to bring a few more online between now and and the year. So.

Again, we will watch it carefully, but but so far it's pretty sticky.

Got it and then on the lending side.

Commercial side did your core C&I stuff.

As far as the competitive backdrop, we talked a little bit about that but internally are you guys doing anything differently are you.

Able to loosen anything any ear and markets.

Standards is the right word but.

How have you changed in.

Internally your willingness to lend on the commercial side over the last few quarters.

Well, David as you know.

And this often we do not change our loan policy for our pricing decisions right away and those are sacrosanct.

So we're not seeing any more exceptions are.

Deviations from our profitability models.

So to say were doing anything differently I would say no we're not changing our credit stance at all we'd never do that Mercury. Your thoughts, yes, no I would agree with that I mean, it's something we talk about it on a regular basis and our credit meetings, just where the market's at because the market is very competitive I am sure you hear that through.

As you talk to other banks.

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.

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.

1 maybe note to that is just feel as we.

Continue to grow and we look at.

Different niches all the time and we want to be able to continue to broaden out our product suite. So that 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 our leasing part of our leasing group to be and aviation finance and we've talked about the money services group and <unk>.

These are the things that we want to continue to evolve as the opportunity to start to present themselves.

Got it and then and just a final follow up with the PPP and the additional relationships that you talked about maybe youre seeing and the deposit side are you seeing that and your loan numbers today or are your former PPP customers average.

TPP and borrowing yet are you seeing any any loan growth attributed to these new relationships yet.

David It's Tim.

I mean, there's there's sort of 2 sides to that it's obviously been a little bit of a substitution and part of the reason youre seeing the utilization down, but we've also added new relationships and we track the larger ones and and there is over a $5 billion and commitments that are already on the books with more to come and the utilization.

<unk> and there is better than our utilization overall so we.

We still feel good about that.

Got it.

More activity, but we're probably half to 3 quarters and the way through the.

PPP prospect pipeline.

And unfortunately, it just takes longer to bring the lending side of the relationship over and Theres just a lot of work that needs to get done in terms of.

Getting that loan structure and getting it approved and getting the and they're.

Getting a documented working through the payoffs so.

But its definitely come in and we see it and <unk>.

Weekly basis, we see new opportunities that are coming as a result of our work with PPP the market disruptions with very helpful.

Still with MB, there's still some hangover from that.

There's a benefit to us.

<unk>.

With private <unk>.

Same thing.

And we're starting to see more of that now is.

And <unk>.

Canada gets more involved down there and they are there.

Changing some of the things that they do we are seeing opportunities you never saw there and I would say first Midwest move is.

You have to see what happens.

Sort of market disruptions 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 and people are going to change and we've been very successful at that.

Got it thanks for the color guys I appreciate it.

Our next question coming from the line of Terry Mcevoy with Stephens. Your line is open.

Hi, good morning, everyone.

Good morning, maybe.

And maybe Dave a question for you on your mortgage outlook what type of production margins are you thinking about over the near term that top left graph on page 10 shows a pretty steep decline down to 2.

2.2% last quarter.

Yes, it's impacted a little bit the way, we presented by the declining pipe inventory and the pipeline and and we also had.

A little bit of there is some volatility and the secondary marketing and last quarter, we had gains and this quarter, we had and some small losses, but I think we're thinking about it more and the sort of 3% plus or minus range.

Excluding any changes and the pipeline.

Something along the lines of evaluate expenses on an ongoing basis to enhance profitability. So should we read into that that same statement 2 quarters in a row and is there some sort of expense plan coming or is it more of a kind of a big picture view that you're consciously are always aware of expenses.

And we're all.

Looking at expenses and.

And working them through the same time, we still are a growth company and we're going to investing the company.

And a number of branches opening up and markets, we haven't been and yet.

Both parked being 1 and that's coming onboard we should do that's a great market for us we've never been there and it would be.

Very well, but it costs money to get them up and running.

And contrary to maybe what so we believe we watch our expenses very closely.

And the net overhead ratio and the mid 100 <unk> this quarter.

It's about where we think we'll normalize.

And I think it could be up or down depending on some of the other things that we do but I.

I think that.

Mortgages, just kind of skews everything up for you guys and.

And we wish we could find a better way to show you how it all works Dave explains it.

There are so many moving parts and the timing and so screwed up.

And record the income and 1 quarter expenses and next quarter. So it doesn't look right, but all in all with a $1.35.

Ratio and our goal and should be in the mid 1 <unk> right now and then.

<unk> basis.

We're comfortable but doesn't mean, we don't always look at expenses and and try to run them down so.

Great.

Thank you and expense lawyer.

I appreciate that thanks, and thank you guys.

Our next question coming from the line of broadband and <unk> with UBS. Your line is open.

Thanks, David just wanted to follow up on your on your mortgage commentary was there anything to call out regarding.

Veterans first that that.

Volume dropped.

And by a third or so it seemed to drop harder than the rest of the.

The rest of the business.

Yes, I think their business is more heavily generally weighted towards the refinance activity and thats part of the market got hit harder.

And our footprint.

We've got customers just walking into the bank and have a relationship with the bank purchase activity tends to be a heavier and piece of it. So I think it's just more of the mix of purchase and refinance and then get them marketplace.

Okay and.

And just Kevin.

Combining securities growth and what you may retain and from the mortgage bank and I think you've given guidance around 10% of production and youre going to Sean and balance sheet and.

And how should we look at that versus how you may grow the investment Securities book.

Book and this environment or.

It sounds like Youre pretty cautious and growing that securities book, given the rate environment. If you could just kind of unpack that a little bit.

And so we've been keeping the thought was to keep it about $100 million of the.

And sort of jumbo mortgage production on our books, but then we also generally have maybe 100 or so.

Other.

Product that we originated and the bank some non standard or a variable rate products that we typically keep on the books out of the bank. So.

And all that which is normal, but keep a 100 million and the production that we would normally sell so couple hundred million and total that we would add to the balance sheet per quarter I would say it would be a good.

Rough number and on the liquidity side you're right.

As we noted earlier.

We're essentially flat.

Quarter after quarter and because we just.

More mortgage backed rates sort of backed off a little bit and Edward.

And just being cautious on investing and that liquidity.

As.

And Tim noted.

Taking 175 per 180 sort of rates for a long term and 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 to eat up some of that liquidity and we look at that as an opportunity.

It may suppressor.

Earnings in the quarter, a little bit by not investing in that but long term, we look at that as an opportunity.

Growth in NII and grow the margin, but we're just trying to be patient and.

Not investing.

Lower rates right now.

Got it okay. Thank you.

Ladies and gentlemen asked your line is to ask a question. Please press. The Star then the 1 key on your Touchtone Telefon.

Our next question coming from the line of Nathan race with Piper Sandler Your line is open.

Yep.

Hi, guys good morning.

Good morning.

Questions on capital.

And ill come and a little bit along with the rest of the growth turnaround. Once you. Once you tangible book These days just curious.

Some updated thoughts on the assets around.

Returning to buyback.

We.

We've got money left under our previous.

Offers and authorization so.

And if there's time is right, we will utilize that and.

And.

Go from there so.

So yes, we looked at it all the time and vis vis where we're not.

And it turned out cash.

Capital, where do we.

Where do we want to invest the money and that.

And at certain levels and makes sense to buy the stock back.

Yesterday would've been a good day, but we were in a blackout period, we'll see but.

And we also.

<unk> acquisition opportunities out there too. So I'm just wondering are you going to investing new capital. So we.

And 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.

And it all the time.

Got it.

Along those lines in terms of acquisitions and other Dave.

Just curious.

And I think in the past that you've spoken to and appetite to do a larger acquisition I'm not sure in terms of the yes that range that you guys would be willing to go up to you, but just curious kind of how that appetite stand today with the currency where it's at.

Obviously your capital levels are stable sequentially, and a comfortable level I would imagine.

So along those lines just curious to kind of get your updated thoughts on what you're seeing from a acquisition standpoint, how larger deal potentially you'd want to do historically you guys have been strong stewards.

Sending and growing tangible book value and I imagine and I will continue to be the case going forward as you guys.

And her team potential acquisition opportunities and so just curious to get some updated thoughts on.

All of those dynamics.

Yeah.

I will always say that the market gives us for years that gave us deals on your $1 billion and reasonable prices.

How much I don't like dilution.

So we still we still have anywhere from under $1 billion to.

2 or $3 billion are out there but.

And I could do anything stupid.

We don't like we don't like giving up years worth of earnings too.

To grow and we can grow organically marketed Silvio and it's good organic growth.

We'll stick with that and once the deal comes along and to make strategic sense and what have you but I.

I think that.

As to size.

And all the market is kind of limited now and you think of that and you think of geography. So I said earlier I did a couple earnings calls ago. So at the concept that we'd be willing to look out of our traditional market area.

And that was troubling the water to see if I get anybody else.

And what's a bad fishing day, I guess, but I haven't seen but.

We.

We will look at anything basically and enhances shareholder value franchise value earnings and.

And those and.

We don't give away the house and get it but well always be very disciplined in that regard and we will see where it goes book.

Right now there are across the board between.

No.

3.4 billion down to $300 million and.

The inbound calls had been very you have picked up a lot.

However price expectations for.

For the first ones, we've kind of reviewed our.

Don't fit that criteria and talked about earlier.

So.

If the local guys sell and somebody else that's good for us.

And the disruption is good so.

Especially and this whole somebody out of state or.

I think it's harder and harder for banks now $2 billion to $3 billion to stay.

Stay competitive.

<unk>.

Just the amount of gas it spend and technology with the additional rig.

Regulatory.

And as they are coming down the Pike from New administration people and and.

And loans.

Loans, we I'll dig deeper Raleigh there.

And <unk>.

Trying to get try and get those deals.

It's harder for those guys to compete and I think it could take some time for them to understand the value.

Magnitude of that and what it's going to do their margins and their costs and.

And.

And when it does that will bring their price expectations back in line.

Okay.

Got it and I suppose along those lines and.

And just given the organic growth trajectory in front of you guys thats likely going to accelerate with some of the recent disruption that was announced and Chicago from an M&A perspective, I Imagine Act.

Acquisitions and that asset range that you described are probably less of a focus. These days just given that organic growth runway that some point are you guys today thats only gotten stronger within the last couple of months here.

Yeah.

That doesn't mean that if a good deal came along and wouldn't do it.

And we can do and obviously do both but.

But.

Organic growth is really good and the knowledge you said, but doesn't port closeout doing act.

Acquisition.

Market prices and.

And strategically.

Work.

And I mean, we can I'm trying to think it will be 30 years old in December.

We have a good chance at $50 billion just through organic growth.

And from a card table that 50, and 30 years or so.

People always ask how big do you want to be and I say well.

Don't care, where you would be 5 years from now and no idea, we'll take what the market gives us and what makes sense.

It makes sense, we will continue to grow and grow profitably and and.

And keep our shareholder returns.

And returns up and are on that.

We operate on.

Asset growth profitability and growth and.

And our tangible book value so.

If anything and it fits the fits and those lines and advances those.

Reaching those roles as everything is available.

Got it fair to say the.

And at least I appreciate the color thanks, guys and welcome. Thank you.

Our next question coming from the line of Julien <unk> with Joy and Securities. Your line is open.

Hey, this is Michael young.

And for true securities. Thanks.

And just wanted to ask as the.

<unk> loan growth kind of broadens out and maybe out of some of the premium finance categories would you expect those loan yields to be accretive.

To the overall loan yield would that mix shift or.

And what are you seeing and the pricing environment that would cause that to happen or not.

Yes.

And as Ed pointed out before and we have a very.

Strict pricing model you know that.

We're just not going to go and something that.

Really accretive to where we want to be we're just not going to do it I mean, so I think overall, yes, we're we monitor that very closely and confident that we can do that.

Okay and.

Maybe just a follow up on the expense commentary related to mortgage obviously you guys are seeing quite strong loan production. So I would assume there is some natural inflation to the expense.

Run rate, but with the offset of that $8 million potential reduction depending on production levels and that kind of the right way to think about it those 2 those 2 pieces.

I'm not sure if I followed you.

And you're just saying that.

And the past few things.

Expenses are inflated a little bit because of the extraordinarily high volume is that what youre trying to get to.

I guess is there.

More of a net $8 million reduction that you kind of expect and expenses quarter over quarter, assuming the production levels you discussed or are there some.

Core expense inflation factors from and a strong loan production that would offset that and all of that.

Trying to get assets, I think net and that $8 million savings assuming.

And the level is in line revenue levels in line with the prior quarter now, let's say production and revenues go up to 5 million, let's say theirs.

And they got $5 million I would expect the expenses to go up and all.

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.

Yes.

And our next question coming from the line of Chris Mcgratty with <unk>. Your line is open.

Asset quality you guys have historically been kind of a quick to move any problems.

And it served you well over cycles, given the amount of like I guess there for assets across the industry are there any portfolios that you guys are.

Effectively looking to reduce exposure to given given the bid for assets is hard to day. Thanks.

Yes, Chris we've done asset sales and the past and were always calling through the portfolio to try to find where weak spots exist and just to go to see the market out there and so I would say we're open to that concept, we've done pretty well getting sort of a maximum value on the after that we do.

Work through so when you.

In the past when we've looked at some of those prices.

We're willing to accept the discount, but if that GAAP starts to narrow even more going forward, we might take a look at some of the portfolios, where maybe we see some distress, but generally speaking I mean, we just kind of take a deal at a time and work it through so.

No plans as of this point.

Great. Thanks rich.

And I'm showing no further questions at this time I would now like to turn the conference call back over to Mr. Edward <unk> for closing remarks.

Thanks, everybody for listening in.

Our goal is to continue to increase all of the important things.

And the right way.

And and.

And and not have the decreases so.

With that thanks, very much and we'll see you will talk to you again in a month and 3 months and.

And any further questions and follow up questions. Please feel free to call anybody who's on the call. Thank you.

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

Okay.

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