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First Midwest Bancorp Inc (NASDAQ:FMBI)
Q1 2021 Earnings Call
Apr 21, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the First Midwest Bancorp 2021 First Quarter Earnings Conference Call. Following the close of the market yesterday, First Midwest released its earnings results for the first quarter of 2021 and issued presentation materials that will be referred to during the call today.

During the course of the discussion, management's comments and the presentation materials may include forward-looking statements and non-GAAP financial information. The Company refers you to the forward-looking statement, non-GAAP and other legends included in its earnings release and presentation materials, which should be considered for the call today. [Operator Instructions]

Following the presentation by Mike Scudder, Chairman and Chief Executive Officer; Mark Sander, President and Chief Operating Officer; and Pat Barrett, Executive Vice President and Chief Financial Officer, the call will be opened for question and answers for analysts only.

I will now turn the call over to Mr. Scudder.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Great, thank you. Good morning, everybody. Thanks again for joining us today. It's great to be with you. I hope this finds everyone on the call and your families doing well, staying healthy and ready to rock and roll as we go into 2021. So let me start with some perspective on the quarter. We really had pretty solid start to the year. Overall performance improvement -- we've seen nicely as the economy continues to gain traction here.

Operating performance certainly benefited from stronger production this quarter from our fee businesses, which has frankly been ongoing for some time now and continued focus on our end of managing our costs. Unfortunately in the world today, quarterly comparisons to a large degree get distorted -- distorted particularly in the first quarter of the year by normal seasonality, but also the impact and the magnitude of just what's going on with the very stimulus programs and how those are impacting liquidity and transactional volumes. So I'll leave that to Mark and Pat to help you walk through some of those nuances.

Importantly, underneath all of that, our underlying business momentum is strengthening as both production volumes and sales pipelines normalize, and as we see operating and credit conditions continue to improve. So quickly, here is a walk through of the highlights.

EPS came in at $0.36, that's up about 9% and 100% from the fourth and first quarters of last year respectively. If you allow for adjustments, EPS was $0.37, now about $0.06 of that drop in the fourth quarter was mostly due to the timing of PPP revenue, which was also partly offset by some of the lower provisioning for credit losses. Obviously if you -- kind of comparing year-over-year, the increase and the improvement this year largely reflects the initial increase in provisioning that we saw responsive to the pandemic. So as I said it in my earlier remarks, fee-based revenues were up 5% and 17% from the fourth and first quarters of 2020, and market expand on this. We saw record wealth management and mortgage banking income again this quarter.

Noninterest expense adjusted was only up about 2% from last quarter. And when you think about the typical inflation that you see in the first quarter as well as the fact that it was a heavy snow year here across our markets, we feel pretty good about that. So we continue to closely control our costs and obviously align that with the Company's growth.

Net interest income was $141 million, net margin was 3.03%, with the change from the fourth quarter largely exaggerated by lower PPP loan income and the elevated level of liquidity that's out there and the typical normal fewer days commentary that you see this time of year.

Total loans were up almost 3% annualized from year-end and Mark can speak to this in greater depth. I think it's -- they were up over 3% -- it was almost 4%. We'll see pipelines returning to pre-pandemic levels, which is important for us and he can expand on that.As I said earlier, credit conditions are also improving. And as they do so, our credit capital reserves remain robust as the economy continues to gain traction here. Our allowances at 1.73% of total loans. If you exclude PPP as a part of that, which is basically in line down a little bit from where it was in the prior quarter, and up from 1.62% a year ago. Our net loan charge-offs, away [Phonetic] from loans that we acquired were -- came in at $8 million, but about $4 million of that or more than half of it was related to an election we made just to do a note sale and had incurred some losses in charges as part of that. So we simply brought forward some activity there.

Overall that remains at very, very low historical levels. Non-performing assets relative to loans stayed within normal ranges, while loans classified, we call those generally substandard or special mentioned, dropped by almost 10% linked-quarter and our loans past due 30 days to 89 days declined by 24%, again on a linked-quarter comparison. Tier 1 capital grew to 11.7%, that's about 200 basis points higher than a year ago. And I would also note that as we announced, we started our repurchase program back up again, and again, Pat, can expand on that, but we think we brought about 715,000 shares as a part of that restart last quarter. So with that let me turn it over to Mark and Pat and they can expand on some of the details as we walk through today.

Mark G. Sander -- President and Chief Operating Officer

Thanks, Mike, and good morning all. Starting on Slide 3 of our presentation. Loans increased $100 million again this quarter largely due to strong mortgage production. The momentum we had last year has continued thus far in 2021 with production of $400 million in Q1. Additional loan growth has helped drive a strong fee income quarter as well, which I will cover in more detail here shortly.

The mortgage business remains robust and given the improving outlook for consumer credit more generally, we expect to see similar steady increases in consumer loans for the rest of this year. Commercial loan production continued its upward trend this quarter, up 10% from Q4, largely driven by our specialty businesses. Payoff activity remained flat -- it will cost really [Phonetic] robust level though, resulted in a relatively flat quarter for corporate levels.

The excess liquidity our clients continue to maintain somewhat masks the overall strengthening economic outlook, which we see in the expectations our clients have for growth in the businesses. But our overall outlook for commercial growth is favorable despite the pressures. As Mike alluded to, we're encouraged that our commercial pipeline continued to grow nicely this quarter, now at pre-pandemic levels for the first time. And as a result, we anticipate net growth in commercial loans on a quarterly basis going forward. Our outlook in total [Phonetic] for loan growth away from PPP is thus unchanged at mid-single-digits for the full year. At the PPP loans for a second, we have a full page on this in the appendix for now, just to summarize briefly. We ended the quarter with about $1.1 billion of outstanding loans, comprised of half of our first round program that are still in the process of forgiveness and about $525 million from the 2021 program. We were certainly pleased to be able to help our clients yet again, at a high level this year.

We believe most of the balances here will be forgiven and repaid before year-end, which Pat will detail in his margin discussion in a minute.

Looking deeper at the portfolio, beginning on Slide 4, our story relative to higher risk elements remains very similar to last quarter with flat overall balances and generally improving trends. We continue to have a well diversified loan book broadly with very modest exposures to the industries most impacted by the pandemic. At this point, our payment deferrals across all clients are very low as the programs we ran to help our clients accomplished their objectives and of course the economy began to recover.

Slide 5 displays our consumer loan portfolio, a prime book dominated by one to four[Phonetic] residential. We've discussed and highlighted unsecured installment segment several times over the last year. Suffice it to say, we remain very comfortable with our risk exposures in this relatively modest but nicely profitable category. Looking at credit performance and beginning on Slide 6, we came in at or slightly better than our expectations as we started the year. Credits began to move their way through the cycle at a greater pace in Q1 and we saw some nice progress, particularly in special mentioned loans from both payouts as well as upgrades.

Non-accrual loans, as Mike said, remained in line with historical averages. Special mention and substandard loans in total remain elevated from pre-pandemic levels but came down materially, and our reserves to cover them are also elevated. Charge-offs, as shown on Slide 7, are at the low end of our guidance. We expect the credit story play out over the remainder of the year as we articulated in January, specifically charge-offs will likely increase from here and may fluctuate from quarter-to-quarter, but we'll stay within our 25 basis points to 40 basis point range for the full year.

We remain very well reserved to fully absorb any charge-offs and thus we would expect to bring allowance down as the credit migration plays out this year and next. Turning to deposits on Slide 9. Funding of course remains a core strength of our franchise. With the industry flush with liquidity, our historical comparative cost advantage is more muted now, but it's still there. Our cost of deposits came down a little further in the quarter to 9 basis points, levels last seen following the financial crisis. Importantly, we have plenty of dry powder and funding sources to take advantage of market opportunities. So, Pat will pick it up from here.

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Thanks, Mark. Good morning to everyone on the call. Turning to net interest income and margin on Slide 10. Net interest income decreased 5% compared to the prior quarter and 2% from the same period in 2020. The decreased linked-quarter was driven by approximately $6 million in lower PPP Paycheck Protection Program income and fewer days in the quarter, partly offset by loan growth and lower cost of funds. PPP loans forgiven in the quarter decreased from approximately $400 million in the prior quarter to approximately $200 million in the current quarter, driving the decline in income. Compared to the prior year, the decrease in NII was due to lower rates, partly offset by growth in loans, PPP income and the Park Bank acquisition.

Acquired loan accretion of approximately $7 million was stable compared to both prior periods. Accretion in the first quarter was higher-than-anticipated due to favorable resolution of certain acquired loans. Continuing on the same Slide with net interest margin, tax equivalent NIM for the current quarter of 3.03%, was down 11 basis points linked-quarter, primarily as a result of PPP loan forgiveness and down 51 basis points from the same period a year ago. Excluding accretion, margin was 2.88% for the quarter, down 10 basis points linked-quarter and 49 basis points from the prior year.

Compared to a year ago, net interest margin compression was primarily driven by the impact of lower rates on loan and securities yields as well as the impact of higher customer liquidity, partially offset by lower cost of funds, loan growth and higher income from PPP loans.

Our outlook for 2021 NII is relative stability with core NIM, excluding the impact of accretion and PPP, approximating 3% for the full year. Accretion is expected to be approximately $18 million for the full year with $11 million expected over the remaining three quarters of 2021. Aggregate PPP net interest income is expected to approximate $30 million for the full year with $21 million coming in the remaining three quarters, roughly evenly by quarter. Note that the exact timing and amounts are completely dependent upon the SBA's process for forgiveness of these loans.

Turning to non-interest income on Slide 11. We continue to see solid recovery in overall growth across virtually all of our fee income streams. Fees in total were up 5% linked-quarter and 17% versus a year ago. Mortgage income of $10 million was a record, up 11% linked-quarter and over 400% from a year ago, reflecting continued strong production levels and a modest increase in the value of our mortgage servicing rights.

We also posted a record quarter in wealth management, up 4% from Q4 and 15% from a year ago, reflecting robust markets combined with strong sales, production and client retention. Card income was relatively flat linked-quarter, but up 15% from a year ago, reflective of normalizing transaction volumes. Capital markets income rose linked-quarter, as loan pipelines continue to strengthen. However, these levels remain down from the very elevated levels we saw a year ago. These various product strengths were partially offset by normal seasonal declines in service charges, combined with the impact of ongoing elevated levels -- high levels of customer liquidity.

In total, given our strong first quarter results, we're modestly revising our guidance upward to expect high-single-digit to low-double-digit growth in non-interest income for the full year. I'd emphasize the quarterly total non-interest income is expected to be modestly lower for the remainder of the year as record first quarter mortgage revenues are expected to moderate.

Moving on to expenses on Slide 12. Note that the current quarter includes $2 million of costs associated with our retail optimization strategy we announced in the third quarter of last year, which was fully completed this quarter as well as a final and significant residual amount of acquisition and integration expenses from the Park acquisition. Away from these items, total expenses were up 2% linked-quarter and 4% from the same quarter a year ago. Compared to the prior quarter, the seasonal impact of merit increases, payroll tax timing and weather-related costs, snow removal [Phonetic], in addition to modest valuation cost on equity compensation, loan mitigation costs contributed to the increase. All of these were largely offset by the benefits of lower expenses associated with our branch optimizations.

Compared to a year ago, higher operating costs reflected growth due to the Park Bank acquisition, higher compensation accruals, foreclosed asset valuation costs and mortgage commissions, combined with continued investments in technology. We continued to focus on our expense run rate, and while our efficiency ratio has ticked up during the quarter, overall annualized expenses as a percentage of average assets away from PPP loans was approximately 2.4%, down modestly from a year ago.

Our outlook for 2021 remains unchanged, relatively stable. Total expenses for the full year compared to the full year of 2020, away from approximately $6 million of additional loan servicing costs associated with the larger portfolio. Another way of saying that would be expenses are expected to be up modestly or low-single-digits. As to timing, you should expect relatively stable levels in the second quarter, followed by gradual declines in the second half of the year, reflective of the benefits of ongoing process efficiency efforts.

Last note on taxes before I leave this Slide, our effective tax rate for the quarter was 27.8% compared to our normal 25%, both prior periods, reflective of additional current quarter expense associated with equity compensation investing as well as the impact of lower interest rates on our tax exempt income. We continue to guide to a more normalized 25% effective tax rate for the remainder of the year, but with the potential for some ongoing volatility.

Moving to capital, Slide 13. Capital levels continue to be strong, reflecting earnings growth and the volume and mix of risk-weighted assets. These levels along with our quarterly earnings contribution continue to support our quarterly dividend of $0.14 per share. In addition, during the quarter, as Mike mentioned, we did announce the resumption of our two-year stock repurchase program that was suspended a year ago at the onset of the pandemic and repurchased 715,000 shares at a cost of around $15 million.

Consistent with our usual practice, we've summarized our outlook for the year on Slide 14, which is largely unchanged from the prior quarter. I'd emphasize that our commentary on outlook this quarter is dependent on the persistence and impact of the pandemic, customer behaviors and the ongoing impact of the government stimulus activities. Also included for convenience, a summary of financial results for the quarter and year on Slide 15. Mike, back over to you.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Great, thanks Pat. Just a couple of quick remarks before we open it up for questions. We talk about this all the time. You talk about recovery and the world, it doesn't always move in a linear fashion. I will tell you, where we stand today -- we like where we stand as recovery continues to build, and as I said, gains traction. Just a couple of points to emphasize before we open up, our balance sheet is extremely strong, we have tremendous liquidity, our credit is stable and improving, and our reserves are robust. So, as conditions improve, and continue to improve, our capital just gives us a lot of flexibility to take advantage of the opportunities that are in front of us. Volumes are recovering. Our core deposit base remains an undervalued strength that will differentiate. We believe as rates move higher and we like our sensitivity positioning there. And as I said, revenues will rebuild over the course of the years as since fully open back up. So as we said before, our pipelines, which are back to pre-pandemic levels, will ultimately see those convert to a stronger footing.

From an efficiency and an optimization standpoint in activities, those efforts are also continuing to move forward. And as always, those are weighted to how our clients are choosing to use us and how we can continue to deliver a superior service experience for those clients.

And then lastly, not to be underweighted, as well as we have a great culture and we are a great place to work. The opportunity for us to add talent and teams to help drive that is something that we're actively looking for at all times, both in our existing markets and the target markets where we'd like to grow. So again, we're very excited about where we stand. So with that, let's open it up for your questions.

Questions and Answers:

Operator

Thank you, sir. The question-and-answer session will begin at this time. [Operator Instructions] The first question comes from Chris McGratty with KBW. Please state your question.

Chris McGratty -- KBW -- Analyst

Hi, good morning, Mike.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Good morning.

Chris McGratty -- KBW -- Analyst

Pat, maybe a question for you. The liquidity build that the industry is seeing is nothing short of amazing, and various banks have had different strategies of deploying the excess cash. Some are doing in the investment portfolio, some are buying mortgages out of warehouses. I'm interested in kind of your -- your kind of thought process around just sopping up the excess liquidity, but also kind of managing the rate profile of the company?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Sure, sure. Surprise, surprise, a margin and liquidity question. So yes, we're facing the same challenges, you guys will recall that over the years we've had a pretty good discipline about thinking of alternative investments to our securities book, which is largely agency paper with underlying mortgage assets. And so we are very much -- think of -- hold on mortgages as an alternative investment and if we have purchase loans periodically over the years. So that continues to be -- I think that we evaluate, a lot of it depends on the availability, supply, credit quality and importantly the price. So we won't overpay for something like that, but as long as we can get a spread on mortgage pools that's at least 50 basis points or 75 basis points better than a similar duration of securities' agency paper after adjusting for expected credit costs, then we would like that trade, and we've continued to use that.

The flip side of that is, when you pay a premium for anything that you buy and refinancing occurs, you will have an offsetting headwind to net interest margin because that premium will come shooting back in as a negative. So we've experienced some of that as well. But net-net, we kind of like to trade off.

Chris McGratty -- KBW -- Analyst

Okay. Okay. Maybe in terms of a capital question. You started to buyback again -- I'm interested in kind of -- based on current levels of the stock, similar pace and maybe a comment about inorganic growth? Thanks.

Mark G. Sander -- President and Chief Operating Officer

So I'll take the capital and share repurchase. Just remind everyone that we initiated a two-year program $200 million in total last year at the beginning of the year, which was really designed to programmatically just consume the excess earnings that we expected to create each quarter over and above the needs for dividend and debt service. So call it $20 million-ish a quarter and that's only in the absence of more robust growth opportunities or other capital deployment opportunities like M&A, etc. We suspended it as soon as the crisis hit as all the larger banks did and have kept that in suspension untapped for a year. And so we're simply resuming that with the exact same philosophy. It's really only designed in the absence of better capital deployment priorities to keep our capital levels from increasing further going forward. So I wouldn't expect that to be anything more than that kind of quarterly run rate of around $20 million and we're going to evaluate it every quarter. Yeah. Your last part of your question was something else -- did you say something about inorganic growth?

Chris McGratty -- KBW -- Analyst

Yes, just a comment about what you're seeing in terms of M&A, maybe a question for Mike?

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Yes, happy to answer the question. I wish I -- I was telling somebody earlier today, Chris, I think this is my 76th consecutive earnings call as I go through. I think I've answered the M&A question in all 76. Yes, the environment remains -- there's a lot of dialog, there's a lot of challenges that are out there. I think consolidation in the space is likely to continue. So to the extent that we see those opportunities that align with strategically where we want to go and what we think it's in the best interest of the franchise and the shareholders, we'll certainly look to take advantage of those. But there is always a bid-ask spread as you go through that you're managing. But I would suggest at least the dialog around that would seem to be growing as confidence in the economy and the outlook continues to grow along with it.

And just to add to Pat's question, I think we're always interested in how to deploy our capital for those efforts and actions that generates the greatest long-term shareholder value for us. So to the extent we can find those opportunities, all things being equal, we'll prioritize those [Phonetic].

Chris McGratty -- KBW -- Analyst

Great and just one point of clarification, Pat. The noninterest income guide, was there MSR mark-up in the quarter and if so, is that included?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

There was, it was a little over $1 million [Phonetic] that brings our assets to maybe $7 million, it's pretty modest.

Chris McGratty -- KBW -- Analyst

Got it. Awesome. Thank you.

Operator

The next question will be from Terry McEvoy of Stephens.

Terry McEvoy -- Stephens -- Analyst

Good morning, everyone.

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Hi, Terry.

Terry McEvoy -- Stephens -- Analyst

Maybe a question for Mark. Could you just remind us the specialty businesses that you highlighted that were behind the growth, just expand on those businesses, and maybe if you have some comments on commercial pipelines overall at the end of the first quarter versus where you started the year?

Mark G. Sander -- President and Chief Operating Officer

Sure, sure. Our specialty businesses that have given us outsized growth for a couple of years, quarter-to-quarter, it might be one versus another are -- certainly healthcare would be the primary driver, but structured finance, asset-based lending, leasing is where most of those four business units are -- where most of the specialty growth is coming from. With all those specialties, ag has been kind of flat these last few years, but those are the ones that are hired [Phonetic]. Pipelines, as I said, the return to pre-pandemic levels, I'm pleased that it's more widely distributed than just specialty now. That's where we saw the growth of specialties pipeline has maintained and the other business units, our core business banking and middle market and CRE markets also saw the pipelines increase the last couple of quarters but more significantly this quarter. So it was nice to see. [Speech Overlap] why we think loans will grow mid-single-digits in total. Sorry.

Terry McEvoy -- Stephens -- Analyst

Perfect. No, no. Thanks, Mark. Sorry to interrupt. And then Pat, maybe as a follow-up, just on the expenses, they came in above what we are modeling and you said they're going to go up from here. I guess just to push a little bit. I'm having a tough time kind of getting to your full-year guidance of stable on an adjusted basis, and I guess to keep it stable, do you need to identify further process efficiencies just to kind of quote your slide here, or do you think you can get there without an additional round of efficiency moves?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Yes, so, we were up $2 million linked-quarter in expenses which is 1.5% or so. And I would call that fairly typical depending on how compensation shakes out with the first quarter where we do see higher levels of expenses associated with payouts, FICA taxes, etc. And Mike stole my thunder, I said it before and I'll say it one more time, snow removal, which doesn't seem like a big deal, but it's a 1% increase in our expenses when we have a lot of snow, and we had lot of snow in February. So those were kind of the tick-ups. We expect that to be pretty flat linked-quarter in the second quarter and then decline modestly back down to call it Q4 of 2020 levels by the time we reach Q4 of next year. So all of this is also in the face of about $6 million of higher servicing costs that we pay away to others. We don't service all the loans that we purchase which was an increase. Away from that I think expenses would have been up $2 million or 0.5% for the year -- year-on-year.

Terry McEvoy -- Stephens -- Analyst

Okay. Thanks, Pat. Appreciate it.

Operator

The next question comes from Nathan Race of Piper Sandler.

Nathan Race -- Piper Sandler -- Analyst

Hi guys, good morning.

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Good morning.

Nathan Race -- Piper Sandler -- Analyst

Going back to Terry's question on just the loan growth outlook, Mark, I appreciate it, the commercial pipeline is up nicely and that's encouraging to hear. I guess as you look at the more traditional C&I and CRE book, is the confidence that we're going to see growth in that segment of the portfolio stemming from some increased demand recently with existing clients or is it more so weighted toward share gains across cargo [Phonetic] these days?

Mark G. Sander -- President and Chief Operating Officer

I'd say a little bit of both, Nath, thank you for the question. It is -- clients are certainly seeing the recovery and are optimistic about the growth in their businesses. So you're seeing some decent demand there, but we certainly expect to pick up market share in our core businesses of business banking, middle market and CRE. So, yeah, a little bit of both, frankly. And again just, level of activity, the level of optimism and how it's translating into our pipeline just as me -- I think all of our businesses can grow in that 3% to 6% range basically and specialty can grow a little bit more than that. And I should clarify with healthcare, healthcare is actually divided into four segments. So we have a diversified book as we look for this growth.

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

I would also just expand on that, this is Pat, sorry to interject, that within CRE, there is a little bit of a mixed bag, particularly within the office retail industrial category, which is about 15% of our commercial loan book. So the growth that we anticipate from retail is insignificant because that's not an area that we're looking to grow. [Speech Overlap] office also some kind of longer-term concerns about the health and strength of that over the course of the next couple of years. [Speech Overlap].

Mark G. Sander -- President and Chief Operating Officer

A little geographic as well. So.

Nathan Race -- Piper Sandler -- Analyst

Got it. Okay. I appreciate it. That's helpful. And then pass kind of [Phonetic] think about the margin outlook ex-PPP and accretion in terms of getting to that kind of 3% level for the full year. I imagine, here we're going to see some increase in net margin figure from I guess like a 284 [Phonetic] number ex-PPP and accretion in the first quarter. So imagine that's a number where we can see some expansion just given -- I presumably -- a continued downgrades and excess liquidity levels as you guys continue to redeploy and in securities book, loan growth increases to that kind of the right dynamics I think about in terms of marching up toward that 3% number?

Mark G. Sander -- President and Chief Operating Officer

Yes, that's exactly right. It is kind of a slow, steady grind upwards. I mean if you think about it, just in terms of the numerator growth, our rent core revenues were $125 million in the fourth quarter of last year, annualize that it's $500 million. That number is probably going to grow by about $10 million by the time we get to the fourth quarter of this year, $135 million, that annualizes to $540 million [Phonetic] and so there is an 8% numerator growth in core just from that and we also look to be able to deploy liquidity in something that doesn't crush our margin. Hopefully, we'll continue to see higher yielding opportunities on the securities side but we'll continue to look for other asset acquisitions, loan acquisitions to help supplement.

Nathan Race -- Piper Sandler -- Analyst

Okay, understood. I appreciate all the color. Thanks guys.

Operator

The next question is from Daniel Tamayo of Raymond James.

Daniel Tamayo -- Raymond James -- Analyst

Hi, good morning, guys. Maybe just one on the mortgage banking strength in the first quarter. You talked about those numbers likely coming down going forward. If you could talk about what the gain on sale margin was in the first quarter and what you're thinking going forward. And then kind of just thoughts on the refi versus purchase market for the rest of the year? Thanks.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Sure, so, in the quarter, we were about two-thirds refi and one-third purchase. So we keep -- forecasts that's going to come down and yet the pipeline is still robust. So somewhere along the line, yes, the refi has to come down but not seen evidence of that yet I guess I would say. So we think, yes, the mortgage market at least for the next quarter, so you don't have too much visibility past that is going to stay pretty robust. Our margin in the first quarter was right at 3%, thereabouts of what we saw and that's same -- pretty solid these days as well, coming down a little bit as tenure [Phonetic] has gone up.

Daniel Tamayo -- Raymond James -- Analyst

Okay, thanks. That's helpful, Mark. And then, it's my last question, you mentioned the acquisition integration charges should be essentially complete. Are you expecting anything in terms of optimization charges for the rest of 2021?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

No. At this point, we're pretty much all banked on any costs or charges that relate to that or in fact ongoing process efficiency, a lot of that has already been spent and will continue to expect to see improvement in processing times and speed of processing across a number of different larger processes in the bank as we move through the year. But those will be modest and hard to call out because that will be very gradual.

Daniel Tamayo -- Raymond James -- Analyst

All right, that's all I had. Appreciate the color.

Mark G. Sander -- President and Chief Operating Officer

Thank you.

Operator

[Operator Instructions] The next question is from Michael Young of Truist Securities.

Michael Young -- Truist Securities -- Analyst

Hi, thanks for taking the question. You covered a lot on the margin and liquidity already, but I was curious, I think there is a lot more chatter about potential for inflation and rising rates. So, was curious if you guys have kind of discussed or taken any actions to prepare the balance sheet for that in advance or anything strategically with an underwriting and that you're taking action on now to prepare for that?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Yes, maybe I'll take a crack at that. Michael, this is Pat. So, we are hopeful that we will see rising rates and inflation. We are one of the few parts of the economy that actually benefit the most when that happens. Our natural posture, just from a asset sensitivity perspective, puts us in a pretty good position. All we have to do is to stop periodically hedging floating rate loans. And even as we've gone through this pretty significant decline in rates, we've never dropped below 50/50 from [Phonetic] floating versus fixed origination perspective and frankly we gravitate toward a more normal 70/30. And so for us, just stopping fixing those loans and try to maintain neutrality on asset sensitivity is pretty easy thing to do and it does unlock pretty decent upside for that. Having said all of that, we constantly looked at about how prudent we are in our risk management practices and so we have triggers and zones and we try and stay fairly much in the middle and not take significant physicians because we've been wrong before and rates have failed to rise for years and years. So we're not going to be too aggressive in trying to position ourselves ahead of what the market thinks.

Michael Young -- Truist Securities -- Analyst

And similarly, have you shortened maturity at all in terms of what you're willing to underwrite to, maybe in the commercial real estate space in particular?

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

We really haven't modified that Michael, I would say this way, if anything the market pressures would be extending maturities candidly in that space, and so we're more weighing that and we're looking to shorten them right now.

Michael Young -- Truist Securities -- Analyst

Okay. And then the last one, just maybe on tax rate. Any expectations now that it looks like this year will be better than maybe last year and maybe what we had even expected with some reopening that would move higher and any updated analysis relative to sensitivity if the tax rate were to move higher?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Well, I wish we knew and we don't, I think our bias is that generally there is more chance that rates are going to be higher for corporations then [Phonetic] lower. The sensitivity that we have would be roughly $1.5 million of tax expense for each incremental per quarter on each incremental percentage of increase. So you can kind of do the math based on that. I think if you compare our overall tax burden versus where we were before the rate cuts in 2017, our run rate is probably about 35% lower and the conventional wisdom would say that rates may go up by about half of that. So we may see higher taxes to the tune of about half of our run rates three years or four years ago.

Michael Young -- Truist Securities -- Analyst

Okay, thanks.

Operator

[Operator Instructions] If there are no further questions, I will now turn the call back over to Mr. Scudder for any closing remarks.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Thank you. Well before I close just once again -- it's always an opportunity I like to take advantage of because I know a number of our colleagues listen to our calls and that's to publicly acknowledge all their hard work and all their efforts over the course of the year in the quarter that we live in this world that we're in today. Their commitment for living who we are, what our values are and what makes First Midwest, what I like to say special, is really what drives our success. So I'm very proud and behalf of everybody, we want to make sure we acknowledge and thank them for doing the right things every day for our clients, our communities and for each other. So, I would also go on to say, and thank all of you for your interest and your attention to our story, as we share our ongoing belief that First Midwest is a great investment. Well, thank you very much. Have a great day, everybody.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Mark G. Sander -- President and Chief Operating Officer

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Chris McGratty -- KBW -- Analyst

Terry McEvoy -- Stephens -- Analyst

Nathan Race -- Piper Sandler -- Analyst

Daniel Tamayo -- Raymond James -- Analyst

Michael Young -- Truist Securities -- Analyst

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