Q3 2020 Wintrust Financial Corp Earnings Call
Ladies and gentlemen, thank you for standing by your conference call what beginning about one minute. Thank you for your patience. Please continue to standby.
[music].
Financial Corporation's third quarter and year to date Twentytwenty earnings Conference call. Following a review of the results by age like Waner, founder and Chief Executive Officer, and they'd be digestible bites.
Vice Chairman and Chief operating officer, there will 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.
Dissipated or projected in any such forward looking statements 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 FCC.
Also our remarks may reference certain non-GAAP financial measures our earnings press release and slide presentation includes reconciliations of each non-GAAP financial measure to the nearest comparable GAAP financial measure.
As a reminder, this conference call is being recorded I will now turn the conference call over to Mr. Wayne There. Please go ahead.
Thank you very much welcome everybody to our third quarter earnings call with me as always are Dave Dykstra, Our Chief operating officer do start to see a pole people. He our general counsel, Tim Crane, President and Rich Murphy, our credit agreement.
We have the same format as usual I'm going to give some general comments regarding the results.
Ill turn it over to Dave for more detailed analysis of other income other expenses and taxes back to me for a summary, and then.
I have a question so.
First of all twice what it continues to be close surprises are not predictable work for she saw covert and their effect on interest rates basically big screens are pretty much a gang buster here and there.
In that regard so its nice record record as you go.
Earnings were $107 million.
For the period, where dollarssixty seven a share year to date earnings of 191 million to three daughters, and six cents a share.
Pre tax pre provision pre MSR hundred 65 million compared to 173 in Q2.
Then.
Net interest margin was down 17 basis points I'll go through that.
Our way a 0.99.
Our old T. of 13.43%, our net overhead ratio what.
0.87, 87 basis points.
So a pretty good all fronts from that regard.
Net interest income in the margin first.
Net interest margin was down approximately 7 million, primarily due to the reduction of PPP fee recognition of $8 million, resulting was slower than expected forget assessments and the banks elevated liquidity numbers, well know put PPP amortization. The first part of 2021 for the latter part a will be those liquid.
Due to be discussed in a second.
The NIM decreased 17 basis points to 57.
Earning asset yield so decreases 18 basis points were offset by 19 basis point increase and decrease I'm, sorry paying liabilities green.
We kind of free funds contribution decreased by four basis points due to the lower cost of funds.
The major lender decrease related to the aforementioned crunch of the PPPC global it was 14 basis points.
Yield around three to five Ah given is our current number for PPP yields.
He holds going forward. If you look at this in terms of the margin without PPP and that's taking out the PPP money.
Interest income and fees.
Wes our cost of funds are.
Our core net interest margin was relatively constant at $237 million. We believe that we can build off of this going forward. I think this is the low point, we think that through investing and.
Liquidity, our loan demand and alike that we is at least 10 to 25 basis points gets you back to the two point <unk>, the 2.7% to 2.75%, we said we would bottom out at.
I will currently carry over 3.8 billion or dollars overnight money individual yields yield.
The overall duration or entirely pretty natural portfolio is 1.44 years down from 1.7 years.
In Q2, and 4.2 years at the previous year end you referenced four we usually try to keep it in the four to five year range.
Is really the point of these assets into loans. Another he has since been shrinking our deposit base by reducing institutional funding plan to support PPV loans, because it was a relatively healthy the extent of 10 to 25 basis points over time.
Just as I said it brings back why the 275 margin plus or minus we previously told you. We had bought a number it's a very fluid situation sounds like this you can imagine the optimization to take a few quarters, depending on actual P.P. pure.
Cetera, I'm, a little bit more on this later.
Credit quality based on conventional metrics a remarkably good you wouldn't think that there was a pandemic going on NPL sales decreased by 15 million over Q2 hundred 73 million or 54 basis points compared to 60 basis points at the end of Q2.
And periods decreased $16 million 282 million or 42 basis points as compared to 46 P.M. to Q2 core modifications fell to 413 million 1.7 billion at June Thirtyth represented 1.4% of total loans.
The PPP alone.
Our dog's net in the quarter totaled 9.3 million or 12 basis points. The charge offs includes 6.4 million what specific reserves than I do in an individual loans, which were in place at 630.
Provision for the quarter totaled 25 million as compared to 135 million in Q2 majority version, which is more fully to the portfolio growth. The sales for your win rates remain relatively constant with prior quarters. He tells a ratings migration, including the earnings release slide deck you out.
Oh, so sales of 389 million or 1.35% of loans, excluding PPP alone.
Core way to show that is loans at a premium finance loans and PBP logs is.
There's a 1.8%.
Hard to believe that credit is this good given the environment be assured we're not going to let our guard down here, we're not nave enough to think that they will not be bumps in the road going forward today with any case radically reserved right now.
On the one timer front for the quarter negative one time, which include $3.1 million to settle mortgage banking dispute related to 2000, they believe it or not.
Oh $6.3 million or contingent consideration related to a previous acquisition about a 132 million acquisition expenses 6.3 million of additional consideration, but we we believe will cover the fourth quarter and then next year the numbers to negligible in terms of the amount we would owe under that so we think we've got a covered now.
Well, if you have a dividend we need more at least to the mortgage company. The mortgage business is still on fire sales record $3 million decrease in MSR valuations due to continuing falling mortgage rates.
We now have close to $10 billion of Oh service. The MSR service portfolio. So any rise in rates is certainly going to be the beach ball underwater on the positive side. We also recorded a $9 billion pre tax settlement and certain state of an uncertain state tax positions.
As a 3 million dollar MSR MSR valuation onetimers basically washed.
[laughter] quick on other income other expense Dave's going to cover in detail, but a couple of general comments.
As you all know the mortgage business was it was extremely strong.
It appears that this trend will continue at least for another quarter based on pipelines and hopefully longer always depend on interest rates till the mortgage business is integral part of our overall strategy.
When rates go down the mortgage business kicks in at helps while we readjust the balance sheet to optimize earnings in that regard.
We retain a positive gap is pretty much all times and this is an offset to that so you cannot look at the mortgage business separately and try to break it out because when you think about it it's given us the time and the earnings to get the margin going again.
Then we'll talk about that a little bit later, but it is an integral part of the business part of our strategy private internal hedge that somebody's earnings and then the rate environment.
While the reasons, we maintain a positive gap as we know that.
This business can cover for any period of time and falling rate. So we'll consider it outside as separate. This is this is an integral part as I said, an integral part of what we do and as integral part of our strategic plan and how we manage the balance sheet manager earnings so even when they fall off we get another couple of quarters are released.
Hi, mortgages are not going to fall off in total by then we believe that the mark.
The margin will be back at 275 range as we grow we are a growth company. We will grow through this is evidenced by growing almost 10 billion to over $10 billion in the last year alone we've got.
We have a grade halo effect going and we will talk about our deposit growth in the second on another.
On another note wealth management revenue continue to track to be.
To be doing was back on track to a 25 million assets under administration grew 1.2 billion or 4.3% to $20.2 billion well who's in all three business areas Trust the broker dealer add asset management. The majority of the growth occurred in asset management, There's no institute institutional accounts accounted for 5.9.
<unk> billion of that growth that will be good revenue going forward, but again, the net overhead ratio 85, or 87 basis points well below a half percent that certainly helps us mostly from the mortgage business and that's evidenced that makes up for the margin decline, we hope to pick up going forward.
On the balance sheet from we grew $200 million and total assets of $43.7 billion.
Earning assets were up $1 billion average, earning assets from 39 eight to <unk> from 38 seven.
Loans grew $700 million are in a period of time other people have competitors.
Our competitors are not having loan growth.
Our loan growth is very good and we have our pipelines are stronger than ever.
[music].
Currently we have a 500 million dollar head start given the average balanced ending balance and again our loan our loan pipeline is extremely strong we expect very good core growth loan growth in the quarter.
On a positive front, we grew $192 million, that's a little bit misleading kind of the tail of.
Well, let me let me go back a second if I could.
Well I'm, a PPP loans doubts has actually increased in the quarter by 44 million to $3.38 billion current.
Currently 1.25 billion and 4000 loans under forgiveness process, but sort of the portfolios in the hopper for forgiveness.
The deposit story and Weve said, they grew 192 million quarter over quarter, but does.
But it is it's a story within a story as mentioned in the last earnings call deposits as of that date, because we had when they had the last earnings call, but a billion dollars less in the quarter.
That's the end of the second quarter.
Which means we were $1.2 million billion dollars in core work cost deposits as these who put a deposit ran off or higher deposit costs and.
And I'm the 1.2 billion is more core and results of our.
Our business development, the Halo effect on PPP.
And continued general growth throughout the franchise.
[laughter] pardon me in Q4, we the ranks we returned approximately 600 million of institutional institutional deposits. We have brought on to fund PPP loans ever general liquidity at the end of Q1, when the when the world was getting pretty crazy over the core deposit growth remained strong. So we do expect the core deposits.
We'll go to offset that decrease.
Again at lower costs.
[noise], let's turn it over to Dave is going to talk about order and some other expense.
All right. Thank you Ed.
Ed touched on the wealth management revenue a bit but in the noninterest section that wealth management revenue increased $2.3 million to $25.1 million in the third quarter compared to $22.6 million in the second quarter and it was up 4% from the $24.0 million recorded in the year ago quarter.
The revenue source has been positively impacted by higher equity valuations, which impact the pricing on a portion of our managed asset accounts and also due to a higher level of trading in our brokerage accounts from the depressed levels. We saw in the second quarter of this year on the map.
On the mortgage banking revenue front increased by 6% or $6.2 million to $108.5 million in the third quarter.
From $102.3 million recorded in the prior quarter and was up a strong 113% from the $50.9 million recorded in the third quarter of last year.
The company originated $2.2 billion of mortgage loans for sale in the third quarter essentially the same as the originations than we had in the prior quarter and it was up from the $1.4 billion of originations in the third quarter of last year.
The increase in this category is revenue from the prior quarter resulted primarily from an increase in mortgage servicing revenue as a result of the larger servicing portfolio and a higher level of capitalization of MSR sales and a smaller negative MSR valuation adjustment during the third quarter relative to the second quarter.
The production revenue was relatively stable, but up slightly as a production margin on similar volumes stayed level with the prior quarter.
These after mentioned increases in mortgage revenue were offset somewhat by an additional expense accrual of approximately $3.1 million in the third quarter for the settlement of a longstanding recourse obligation dispute.
We know that that puts that dispute to rasta been out there for it.
Related to loans that were basically a decade old and we felt it was appropriate just to put that to speak to Ben.
We currently expect originations in the fourth quarter of 2020 to be a strong.
There may be some seasonality, we'll see how it works out the.
The winter months.
Tend to slow the purchase business, a little bit and there are holidays involved in.
In November and December but the pipeline is very strong we expect it to be a strong fourth quarter margins may come down a little bit depending on that volume, we'll see how it works out but.
For fourth quarter of the year, we expected to be extraordinarily strong.
April 16 of our earnings release provides the detail of all the mortgage banking revenue components, you want to dig into that further other non.
Other noninterest income totaled $13.3 million in the third quarter down approximately $1.4 million from the 14.7 million recorded in the prior quarter.
The largest decline of revenue in this category related to lower swap fee income of approximately $1.7 million.
There were a variety of other smaller positive or negative variances in this category that essentially offset each other.
Turning to the noninterest expense categories non interest expense totaled $264.2 million in the third quarter up approximately $4.9 million or 2% from the 259.4 million recorded in the prior quarter.
Turning to the more significant.
Changes quarter over quarter, the salaries and employee benefit category increased approximately $9.9 million in the third quarter from the second quarter of this year. The biggest portions of that are the employee benefit expense, which accounted for about half of the total increase was up approximately $4.8 million.
From the prior quarter and that was due primarily to some substantial increases in employee insurance claims as employees have begun to return to more normal pattern of seeking health care and they also were catching up on on services, such as discretionary doctors' visits and surgeries, which had been deferred during the early.
Stages of the krona virus pandemic.
Accordingly, the second quarter expense was unusually low in the third quarter expense was unusually high however, the average of the two quarters is generally in line with the prior quarter run rates and our expectations.
Additionally, salaries expense was up approximately 2.8 million.
$8 million from the second quarter.
Primary causes of the increase was approximately $1.6 million of lower deferred salary cost relative to the prior quarter, which had higher deferred costs related to the PPP loan volumes that we had into Q.
So less of salary deferrals in the third quarter, because we didnt do the substantial amount of PPP loans in the third quarter.
Additionally, the company incurred a little bit more expense to support the significant mortgage volume being processed through the system.
Missions and incentive comp expense increased approximately $2.3 million in the third quarter.
Net change was driven largely by additional commissions related to wealth management brokerage trading activity as well as higher incentive compensation expense recorded during the third quarter relative to the second quarter.
Data processing expense decreased approximately $4.7 million in the third quarter compared to the second quarter due primarily to approximately $4.5 million of conversion charges incurred related to the countryside acquisition in the second quarter, whereas the third quarter was void of any such acquisition related costs.
Version charges.
Professional fees declined by $1.2 million to $6.5 million in the third quarter compared to the $7.7 million recorded in the prior quarter.
These professional fees can fluctuate on a quarterly basis based upon the level of legal services related to acquisitions litigation problem loan workout.
As well as consulting services.
This category of expenses was down slightly from the prior quarter due to small declines in a variety of expense types, but nothing of any significance related to any particular category, but.
Special fees categories.
Average about $7.3 million over the past five quarters. So the current $6.5 million is.
Little less than that but within what we think is a normal range equipment.
Equipment expense totaled $17.3 million in the third quarter, that's an increase of $1.4 million as compared to the second quarter. The increase was due to increased software licensing expenses, including some increases related to.
Online increased online mortgage usage PPP loan servicing enhancements network upgrades.
Upgrades to support our growth in digital enhancements and various other software upgrades and will continue to invest in software and technology to enhance our customer delivery systems and products as well as invest in systems to support our continued growth.
Other than those expenses that I just discussed all other expense categories were actually down on an aggregate basis by approximately $524000 from the second quarter.
Ed mentioned that overhead ratio stood at 87 basis points, which was down six basis points from the 93 basis points recorded in the second quarter and on a year to date basis. The net overhead ratio was 1.03% the ratio continues to benefit from strong balance sheet growth and strong mortgage banking results.
Moving on to income tax expense the effective tax rate in the third quarter of this year was approximately 21.8%, which is well below the 26% to 27% range that we would normally expect the reason for the lower tax rate in the third quarter related to a $7.1 million net income tax benefit recorded during the third quarter related to the.
The settlement of an uncertain tax position.
With taxing authorities we didn't.
We'd anticipate the effective rate to return to the expected rate of 26% to 27% in the future quarters barring any unanticipated events.
I'd also like to take a few seconds to address the preferred stock dividends.
There seems to be some confusion out there if I look at some of the analyst estimates on what the preferred stock dividends should be on a going forward basis. So the company recorded $10.3 million of preferred stock dividends in the third quarter. However, on a going forward basis, given the existing outstanding issue.
Senses and dividend rates and if declared by the board of directors the amount of preferred dividends recorded should approximately $7.0 million. The reason for the higher amount in the third quarter was that the first dividend period was up five month.
Period, there was really a two month stub period in May and June and then the normal quarterly period for the third quarter. So in the first period, we had the dividend declaration included five months, but then all subsequent periods the dividend should be a three month.
Period, so slightly high in the second and the third quarter here at at $10.3 million, but going forward given the existing issuances rates et cetera that amount should be $7.0 million. So just wanted to clear that up as those seem to be some confusion about that and with that I will turn my.
Yeah.
Comments back over to Ed Thanks, Dave.
Now I've got to say, we're very pleased with the quarter couldn't be prouder of the Wintrust team.
Strategic agility they have displayed throughout these unusual times.
As rich Murphy put a wants he said this is a miracle Lewis.
We're able to operate from home and put up these numbers and like we are key credit where it is it's it's really a hats off to the entire wintrust team.
Our approach going forward is really very simple we need to go through to grow through this part of the cycle by taking what the market gives US right now that means organic growth acquisition market is currently nonexistent through the valuations.
Pardon me that certainty as to credit is to target the targets credit there.
We believe there'll be opportunities as being a closer to the end of the pandemic, but as of now there is a lot going on.
We need to monitor the balance sheet in order to optimize net interest income the NIM as pp and then them as PPP loans continue through the forgiveness pipeline give.
Given our asset sensitive position, we do have room for some fixed rate exposure.
We're looking for opportunities in this area although.
Although I'm not real excited about 1.5% mortgage backs.
There are some opportunities and some things we'll be doing in the future that will.
We will help our earning asset.
Yields and help the margin.
Hi plans are stronger than ever we are ready for PPP too if that occurs.
We continue to monitor credit very very closely as we know there will be some cracks come on our reserves are robust our current.
Our current metrics or are off the charts. Good we're comfortable at the current low our current reserve levels are appropriate.
No that we will not change our conservative consistent underwriting parameters and policies for any reason whatsoever.
I'd like to go back to the core net interest margin tax updates throughout before the $237 million.
June to September.
I believe that's a low point barring lower additional.
Additional lowering of rates.
Overall rate environment going lower.
Our pipeline is strong and we believe that we can add.
We can add a $1 billion of the loans this quarter and half a million dollars in investments and put the spreads out that's that's a $9 million to $10 million quarterly impact for us. That's what we're doing we've got a lot of liquidity. We have to we have the liquidity here, we put a lot of liquidity at the beginning of period.
Of the really the second quarter was because of the unusual ties into early drew on their on their lines within are those going to continue at PPP loans.
We letting some of that expense and liquidity runoff is being replaced by.
Core deposits at cheaper rates.
And.
So that's the plan going forward is to grow without a commensurate increase in expenses and we.
And we've been able to do so as indicated by this quarter. Another 1 billion to a regular deposit growth $700 million with alone.
We expect that to continue going forward, we're going to it's going to take some time to work through this the more.
The mortgage the PPP is found money as far as I'm concerned in the mortgage business is going to continue to support us until such time as we can continue to build the hearing asset base up get a little bit more certainty in the market as to where we're going but our interest rate that interest rate sensitivity position right now is around.
Our net GAAP is about 12 or 13% is covered runs off that was about 18%, which is we like to keep between 10 and 12, we've got cold does that cover it as the PPP loans runoff.
They're out of the two to two and a half two year average life I guess.
In the in the.
GAAP calculations.
So we do have room, there to add some fixed rate assets on both sides of the equation and still maintain a very positive gap again, you have to look at Wintrust. In total you have to look at our margin nickel going up and our mortgage business.
All of these are internal hedges help and various interest rate times sort of pull one out and say that is that going to continue.
Giving credit for the other side of the equation doesn't make a lot of sense.
And I've got a question on stock buybacks.
As you guys go forward in the question and answer period.
We are considering it as we always do.
Right now I think just ran the numbers it.
It might make some sense to do it because it's accretive to both earnings and tangible book value per day acquisition, you can do and we are.
We're sitting on about $400 million to $500 million, where the cash right now it's available we'd like to keep a well.
Well, we'd like to keep the cash at the holding company, but do you have that opportunity of that the board show wants to go that way so with that thank you for your support we really appreciate it.
Have faith and trust we pulled through.
The Wintrust management team.
We have your best interest at heart, because there are your interest or the same as ours, so but that will have turnover questions. Thank you.
On Q NSR reminder, ladies and gentlemen to ask a question you will need to provide guidance.
On your telephone to withdraw your question just press the pound key.
Our first question is from John Armstrong with RBC capital markets. Please go ahead.
Thanks, Good afternoon.
Hi, John Hi, there sorry.
Sorry about your Vikings.
Yeah.
And your tablets wins, and a while but lets keep going.
Keep going.
Yes.
We have some other packer from had a rough game as well.
That's why we like it.
You know I thought was a pretty good quarter, but obviously people are.
Questions about the out what kind I guess, maybe I'll talk about growth and the margin, but in terms of growth. It's unusual to see the kind of growth that you saw and maybe you could touch on Big picture. What you think is different than you do you think you can offset.
The PPP run off and actually show stable to maybe higher loans.
Well I think based on the pipeline.
The commercial commercial real estate pipeline, yes.
It's higher than it's ever been its been in a long time right now our pull through rates are consistent.
Our premium finance business continue the life insurance business continues to grow nicely and the commercial business continues to grow nicely.
The average ticket size is relatively constant around 38 39 million Bucks.
Thousand Bucks I wish it was a million bucks.
On the commercial side so.
We believe that we will.
We will continue to have really good core loan growth at least for the foreseeable future on our terms. So this we're not we're not bend and credit to get there I'm telling you. This is a lot of it is the PPP halo effect pull through and there we're seeing an echo effect of that because.
The people who were pulling through our referring us to other people. These are good accounts were taken from the larger banks in town nobody in particular, it's everybody in total proportionately, but.
But.
It's it seems like we've got very good momentum to carry goodwill reputational momentum.
And our name is out there so.
We feel very good about our growth prospects and that's an integral part of what we have to do here is to is to grow through this that being said if in fact, we saw things turn you couldn't get paid for your risk saw lots of exceptions going through won't be afraid to shut it down right like we did in the past, but really shoe to fall, but we're not seeing.
Now.
As rich you agree.
Yes, no I think John you know our business model, well and one of the things. We always say is we'll take what the market gives us and.
So last year Crs he was a big contributor to growth Cnine less so because of some of the things that talk about we weren't getting paid for the risk and structure.
The structure has got just a little bit crazy so.
One of the things that is really encouraging so far this year is just.
The way that that growth is coming in it's really very balanced theory is still a contributor but we're seeing good see an AD growth as Ed pointed out we're seeing good growth out of the niches. We're seeing good growth out of the premium finance areas. So one of the things that really keeps me confident is just that.
All those engines are running pretty well right now. So if you took the first three quarters and you netted out mortgages held for sale and that netted out PPP loans were on an annualized.
Track of about 8% so.
And that really requires everybody to kind of be getting their work done and based on what we're seeing in the pipelines for all of those were continuing to feel pretty good about loan growth well. The amazing thing to me is and we will talk about this a lot as a.
A lot of the old time really old names in Chicago names you would recognize are now doing business with us they've had long term relationships with the larger banks in town and they are getting kind of set up you'd be amazed at some of the names were dealing with and they tell their friends and they tell their friends so little bit of a pyramid effect going on here, which we're very happy to.
The.
Recipient of.
Okay, all right that's good.
And then.
In terms of the margin getting the margins back.
For the 270, plus type level I understand the strategy, but just talk a little bit about the cadence how long do you think that will take to get back to those levels.
Well.
PPP is going to run off and leave us with liquidity if you will.
If you think again.
And we've got to be able to put that liquidity to work.
Plus we have to take the $3 billion we have.
Overnight money and put that to work. We're currently at 80% loan to deposit a core basis, 90% with the PPP loans included.
We've got to run about 90% and if you figure the growth that will be in here returns of deposits were put then we think it will take two to three quarters barring anything else I'd say around two quarters, if everything stays where it is we manage the funding properly.
That's that's about where we think we'll it'll take about two quarters to get there, but it's all a function of.
What's going on and in the markets and.
And.
If everything holds as it is right now I would say in two quarters, we view that.
But things can change you get a lot more I mean, the deposit growth has been incredible for it absolutely core deposit growth. The incredible we're not going to turn it down because these are really good clients.
Really good businesses, we've got to get Thats, a raw material I will take it all day at the prices will get into that now as we bring in relationships with them because eventually.
Those turn into larger relationships and lending relationships just to give you an idea Tim crane.
Cranes here, Tim much talk about what's going on at the Treasury Department right now at least in the last quarter, what happen sure Ed Ed.
Let's talk about the Halo effect. This is the one of the follow on pieces too.
Both the PPP opportunity in any other credit opportunities to try.
Treasury and services revenue that comes with and so we've had to add staff to handle the implementations that continue to come to us and we'll do that probably through at least the end of the year.
With the Treasury revenue really just starting to show up.
Probably in the beginning of the fourth quarter here, and we think that will be relatively significant for us.
Picked up almost 140 accounts hundred 60, just already implemented with a number in the pipeline waiting to get set up.
And revenue on that could be that over 2 million bucks annualized so.
So it's there's a lot of things going on here and Thats Weve got to grow through this.
And keep our expenses under control that's that's got to be the secret here to get earnings back and be prepared for higher rates because.
You know the beach ball underwater, we talked about that 10 years ago, John I think that one of the fleet and they've got to get another one now there but is bigger than it's ever been.
Okay, Alright, thanks will help guys.
Thank you. Our next question is from Chris.
Grading with KBW. Please go ahead.
Hey, guys. Thanks for the question.
Dave on the mortgage business, you talked I think about the bid.
The potential for margins to come in a bit.
Maybe you could elaborate on on how how meaningful given how much they've expanded year on year.
Well a lot of it really just depends on where the pipelines are going I mean, right now they look pretty full but if they they decline on the margins generally decline as the head of the pipeline comes down because people raise the margins as they are trying to.
Governor Governor on the amount of flow coming in so.
No I think you could be in you think you could potentially have a three handle on on the margins next next quarter.
I said that Chris I said that last quarter too I thought volumes would come in a little bit and margins would come down and the application flow was just astounding set at that and stayed where it was and the purchase activity really bumped up in the third quarter generally second quarter is bigger so.
And there's still a lot of purchase activity going on out there in the marketplace I could be surprised again, but the fourth quarter also has holiday.
Has holidays, where some people.
The further actions are just don't don't do it and they're they're more holiday days in the quarter, so that could impact the two but.
I'm not going to give a specific number because.
I tried to give that guidance last quarter and was wrong, so, but I think of it tails off a little bit in the winter months, they could come down to the threes.
Got it thanks, and just one more with the price.
With the prospects of taxes going up.
Can you remind me if anything.
Structurally different than when.
You got to get the benefit in 16 in terms of just sensitivity each point.
Yeah, well no well we were we were liability a deferred tax liability at the time. So there was some benefit but we still have a deferred tax liability. There are some tax planning strategies, we could do so.
There is a change.
In Congress and the administration and it looks like there could be some increases in taxes. You know there are some elections, we can take on depreciation and the timing of certain expenses that we think we can mitigate some of the increased cost of that tax law change, but we are in a deferred tax liability. So when we benefit.
And then last time when weights went down we will be a negative to us but.
It could be it could be if you look at our current deferred tax liability like that $20 million number, but I think we can mitigate that substantially so there may be some impact, but I don't expect it to be material another gift from Cecil.
Thanks appreciate it.
This will raise in June exit.
Thank you. Our next question comes from David Long with Raymond James. Please go ahead.
Good afternoon, everyone Hi, David.
Hi, David how are you.
Im doing well I'm sure you guys are doing well after a great report like you put up last night.
With with regard to the balance sheet and the size of the balance sheet do you your clients seem pretty quick where do you have some nice deposit growth.
Do you expect deposit balances to come down at some point and does that hinder your ability to invest some of that some of the cash you have.
Well, we're kind of float at it right now and the reason we're one of the reasons. We haven't won long yet is exactly that is the money going to stay we usually.
We don't know how much of it as PPP mind, it hasn't been bad and will that go out if it does go out where local hopefully it will go into personal accounts and then to Westwood Trust wealth management, but.
We do believe that deposit growth and market share globally remains strong just by virtue of the number of clients were picking up on a commercial side and on the retail side as a result of the Halo effect of the echo the Halo effect. So.
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I think we're okay in terms of deposits.
I worry about that if it happens because I know everybody having too much.
Got it okay.
And then in your reserve today, what assumption are you using for future stimulus.
Yeah, that's a good question.
Yeah.
Yeah, we don't have anything substantial in there for.
Yes, and while there is going to be 3 billion trillion or.
Trillion or our 500 million and also.
If there is more stimulus we think.
That that will help us.
Yes, I think I think Moodys assumes some continued stimulus. So will you know what Moody's has in there is it.
What our models would have because we use moody's economic scenarios, but we aren't putting any qualitative impacts into the assumption to say boy, we think that theres going to be a ton of stimulus. So Moody's Scott Scott in for additional stimulus was from what our models runway.
What scares me about the next PPP round, David is if you do have a change in administrations.
What happens the TARP when the administration change last then to change all the rules.
And.
Will you we were going to have to offer it but it's going to it may not be as simple as this really is right. Now is the first PPP was but you know as you as I said before the government is not the best counterparty. They have we do have to take care of our clients. There is a need out there and I'm thinking inside our projections, what I'm thinking of it came from.
Was reasonable and it'll be a $1 billion for us.
Third of what we had before to our existing customers and open the lines for additional customers coming in so not all be a good thing, but I expect it to be kind of bumpier than this one.
Got it and then just the last thing if I can.
On the mortgage side of things the Fannie Freddie 50 basis point charge expected to start here in December has that had any impact on volumes or spreads at this point or do you expect that to.
Well, we built it in last time the game, yes, we've got it we've got it built into our model our pricing models right now so we don't expect that to the fact.
The fact that they know and they had not delayed it probably wouldn't be our margins a little bit.
In fact, they delayed it weve pretty much built that into our pricing schedules now.
Got it answered thanks for taking my questions I appreciate it thanks.
Thanks, David.
Thank you. Our next question comes from Brock Vandervliet with the App lets go ahead.
Hi, Brock.
How are you.
Limited frame.
Exactly.
We talk about funding costs.
It would seem like you may have some room.
We continue to move those down.
Finally on the on the CD side what.
Should we be thinking about there.
Mr. Craig you want to answer that Yes America is you guys saw the interest bearing deposit cost split from 81 to 61 and you are correct. We believe we continue to have some room.
About.
More than half of the CD book will reprice in the next year Thats.
Thats moving from the one seventys to about 60 basis points 65 basis points and.
And so.
You are correct I think you will see continued progress in moving our funding cost down in the next couple of quarters, what Oh, it's a low point to the.
If you if you took the low for each category you get into the mid Thirtys. So I think.
I think.
An early look now would get us fortyish or slightly below given what we see in terms of a normal run rate on.
CD repricing children.
Overtime, I think 35 basis points was so low we had the last time, we had one of these rate environment.
Rate environments and we.
We would expect to get there probably mid next year.
Got it somewhere around that great and.
Most competitors are flat by flat in terms of loan growth.
I hear you in terms of talking about.
Picking up new clients clearly that's driving some of it what's what was your loan utilization in the quarter I believe it was 49 last quarter has that picked up.
State Route 50, yes, very normal is around 50, and Thats, where well end up to 56 or 57, beginning of the crisis came right back down to 50 now seems to be normal for the growth really wasn't.
The increase in line utilization it stayed relatively flat.
Okay. It's it's new clients, Okay got it thank you.
Thank you.
Thank you our next question.
Terry Mcevoy. Please go ahead.
Good afternoon, everyone today.
Jerry I first of all I think everybody on the phone should recognize that you had a hole in one.
Hi, I appreciate that my wish my golf game had gotten a little better during Kobe, but that hasn't been the case outside of that one shot. So bring it actually is wallet you always solid direct out [laughter] whenever we can get together drinks are on me.
And it doesn't sound like anytime soon given the mayor of Chicago and the curfew. So we'll have to go out early.
But my question.
Yes, and I guess exactly.
And Ed you mentioned a couple times in your prepared remarks, you're starting to see some cracks and theres. Some losses coming I think was the expression I was wondering if you could expand on that is that the hotel portfolio, which still has higher deferrals or are there. Some other kind of segments within the portfolio that was behind that statement no.
No. It wasn't a specific statement is we don't see them now or not but we're on look out for that we you know we've always been our first losses, our best loss. So we got an issue will will will take care of it right out of the box, but my point was we're not nave enough to think that we'll get through this unscathed I can't tell you where or how but something's got to hit.
And.
Somewhere somehow the.
Surprisingly the franchise portfolio is doing pretty well and our hotel exposure is basically nothing.
Well if you are talking about that yeah, I know I think you answered the question exactly right I mean, we we look at all the materials classified assets all the time.
Something is really problematic, we're going to market accordingly, and.
Move on but.
But things generally speaking are holding together pretty well.
As Ed said you know the.
Hi risk portfolio as we laid up in last couple of quarters have performed amazingly well the the French.
The franchise portfolio is largely made up of QSR is and ill ask the question to that group. This morning about are we back to pre pandemic levels in the in that space and pretty much at or above because they have modified their business model. So much.
Again hotels are.
I can count our hotel deals on one hand, you know, there's just not that many.
Neil Energy again, we're not a big energy lender. So I don't know, where we're going to see some of these these things pop as we've talked about in prior quarters, you have some colgate related industries that we have borrowers in those that are really highly affected.
Things that are in a tourism things that are in.
More of the restaurant that is maybe non franchise I mean, it's hard to say exactly where but if this pandemic continues the throughout better part of next year I mean, there's going to be real challenges and those types of credits, but for right now we're feeling okay.
And you know I think it's really there's all been accounted for in the build up of the reserve that we have right now so I just go.
I just go back to Satchel Paige, saying, just because just because I am not asking us when you should look over your shoulder.
Got to be we've got to be very vigilant and stay on this so anybody get complacent, but we don't see it right now at some said at the beginning of that my comments you wouldn't think there was a pandemic ray crisis going out and looking to get our credit book right now.
And then just as a follow up maybe maybe for Dave I was hoping to get your initial thoughts on expenses in 2021.
It looks like maybe advertising and marketing are down 5 million year over year. So that's going to normalize we hope so thats about a $20 million increase but what else anything else stands out as you think about next year.
No.
You know, we're going to obviously, you always have a little bit of.
Salary increase for merit paid but we're going to try to hold the line as much as we can on the.
Staffing.
Front.
If you if you look at what.
We did on the we had some one timers as even in this quarter I mean, we had.
$6 million of contingent consideration on their earn out this quarter and that seven last quarter. So there's 13, there and we had the settlement of some of these recourse obligations with it from there.
Have been going on for years that.
There's probably a few.
A few million dollars there are different from what you would have that we think we've put behind us acquisitions and acquisition costs were in there last quarter. We just had four and a half million dollars alone just on the conversion charges. So I mean, I think there are some numbers in there that just aren't going to happen again next year, but you know we we.
We would hope that we could as Ed said Gen on prior to grow the deposit and the loan side of equation on hold the line on expenses. You know there will be you know there will be some increase like you saw this quarter just on the technology and software sides as we build out our digital platform and in customer facing so.
But hopefully that helps.
On efficiencies in other areas of the businesses as far as the branches and the people we have et cetera.
That theres offsets out there so.
Don't have a specific number for you Terry but.
Trained.
Hold the line on expense growth, where we are we are going through and looking at.
Our branch network, we're looking at the number of people who.
We have not laid anybody off more furloughed anyone during this period of time, we've been able to re purpose. Some in the PPP and what have you, but I think.
I think that we have developed.
I'll have some efficiencies through this process would be carrying through.
And just.
So do normal attrition, we should be able to bring our head count right.
Relatively speaking down a bit because of this.
Once we get through the PPV forgiveness switches.
Becoming somewhat labor some and we're growing at the same time. So a lot of you know we had a re purpose people to do that so I think we're I think we're going to be okay. In that regard we will see.
We'll see though.
Who knows what actually is going to bring in terms of opportunities in terms of growth. So.
Thank you.
Okay Fair enough, sorry, Mike, ladies and gentlemen to ask a question you will need to press star one on your telephone. Our next question is from Milton Ray Hi, Fotis.
Hi crush sand.
Sandler. Please go ahead.
Yes, hi, good afternoon.
Hi, Thanks, just follow up on your comments.
Just no way that round out office location.
So for US we've seen some we've seen from some competitors in Chicago that they've closed some locations just given that branch traffic.
Traffic has slowed considerably with economies closing down and so forth I'm just curious what you're seeing in terms of that magnitude up to is if you guys do go down it branch consolidation path like you were just Oh.
Talking to.
Tim Yeah.
As we mentioned on the last call were worse number one we're seeing the change the increase in the use of electronic services that the other banks are and that's encouraging to us and.
We're also seeing obviously a different pattern in terms of how clients use our facilities were nearing the end of analysis that I would guess will result in the.
Closure of some number of branches.
I don't think it will be trajectory changing but it will be.
Roughly comparable to what you're seeing with some others.
The important piece, though I think is that we still think there are markets, we'd like to be and so.
Whether those are underserved markets are there markets that we find particularly attractive we will also continue to selectively add some locations but.
Both jets points about how.
How efficiently we can run the locations that are opened and then ultimately the the number of locations. We need we think there will be opportunities.
Okay.
Very helpful and just changing gears, a little bit about the commercial real estate growth in the quarter.
When I missed out to me in some of the tables you can take that one in particular was the the growth out of state.
In other parts of the country that you guys don't outline specifically within that table. So I guess is that just a function of you guys. Following some existing developers and clients to other parts of the country or is it just like you guys really just no new client adds that are occurring.
Occurring.
Geography, so little more attractive underlying perspective than whats happening in Illinois and other surrounding states.
Are we going to handle that sure yeah. So I think you anticipated my answer to that question we.
We have a really good client base that we've dealt with for a long time that you know as we've become.
As we've become gay.
Gained expertise over the years and started looking at.
Really expanding our wintrust presence in the commercial real estate area, we've built up a very nice stable of.
Good sponsors as time has gone on they've asked us to follow them out to some of the opportunities they've seen in in different markets you know from Texas.
Texas or Colorado to add on the East Coast, Florida.
And.
Were generally happy to follow them on those we don't do a small but.
Generally speaking we.
We'd like to professionals, and we are doing business with and lending money to and so.
We try to understand those markets.
We get a good handle on it but it truly is a function of following that people that Weve bank for a long time general rule around here is our core portfolio has that was Chicago Nexus Nexus our niche portfolio could go anywhere in the country leasing for premium finance and alike, but the core portfolio has to have a nexus to Chicago.
Go Milwaukee our market area.
That makes sense I appreciate taking the questions and all the color.
Welcome.
Our next question is from David Chiaverini with Wedbush Securities. Please go ahead.
Hi, Thanks, a couple of questions for you starting with me.
Mortgage banking clearly this year, it's a it's a blowout year double the revenue of the prior year and I was curious if we were to go back if we look out to 2021 and of course 2021 is probably going to be a strong year also but hypothetically if mortgage banking revenue were to go back to.
29 teens level.
How much of an expense reduction would come with that so if we were to take 2020 and kind of divide that revenue and half looking out to either next year or the following year, how much of an expense reduction would be related to that.
Pretty much the same percentage.
We are using a lot of contracted labor now our ability to contract as of our expense base as the market contracts.
Might lose a month, there, but basically on our as a run rate basis, you should be.
We designed it so you'd have accordion that down relatively quickly Murphy on no I'd say that that's exactly right. I mean, we have become much more nimble in terms of our ability to staff up and correspondingly step down.
The volumes dictate.
It won't be a I'd say exactly one for one at any given point in time, but it will be close yeah. We think generally you know the efficiency ratio in that business has been around 80% or so one of the reasons our efficiency ratio is higher than our peers as we have higher.
Percent of our revenues in the mortgage banking area. So.
There's a substantial amount of excess expenses that would would come out of that equation.
The difference between that 20.
19, 2021 will be one that use our use of contract labor and too.
Our use of the front end that it's that is working wonderfully now the old days. The front end was manual it's all now because it's all a digitalized taking costs out of the business. The third is a lot of the work that doesn't touch the customer is being done offshore on a per barrel basis.
So those will fall off also so I think compared to.
I think I, we've talked about this a 19, those where our initiatives and now they are in full swing right now and so.
So I think that the case.
The costs are now more per unit than they were fixed book.
Fixed before I can tell.
I can tell you that every time Ed talks with our senior leadership team in the mortgage and permitting says congratulations on a great month, how are you going to get your costs down when the revenue goes up [laughter]. So it's done.
It's definitely a focus on becoming predictable I don't like that.
Great. Thanks for that color and then shifting to the provision outlook.
25 million this quarter is and clearly down substantially from the second quarter, how should we think about.
You know the go forward provision I know, it's a very uncertain environment, but is 25 kind of a good baseline going forward.
Well you know I mean as you know.
Theoretically David that is if you think about c. So it's a life of loan concept. So if the portfolio didn't grow and the credit quality stayed the same and the economic outlook was the same you you'd have zero right. So the drivers for that are going to be if we have growth will have to provide for that growth.
If the portfolio would deteriorate and better or you don't get better it would go.
Go up or down.
And then it really depends on the economic scenarios, which which drives is gradually quite a bit so.
I think I think you kind of look at this.
And and have to just think about where you think the quality credit quality and growth is going to come and go in the portfolio and then if they add stimulus and the economy gets better mean theoretically you could you could say banks could start releasing reserves and I don't think were in that position yet because we're not.
Oh, you you're not seeing the economic scenario changed dramatically, but I think what's going to drive our provision going forward right now as I look at it would just be is the portfolio going to grow and that was a this quarter you could you could see that.
We had some growth in the portfolio that that helped drive that number up a little a little bit so and and credit quality is knock on wood whole holding in there right now so cecil's off awfully complicated from that perspective, but I think the issue really is this group is grow.
Sure so.
That makes sense and last one for me is right where you just left off there on loan growth you mentioned about how pipelines are stronger than ever.
What what type of borrowers are you seeing the most demand from Intel in terms of loan growth or and I guess related questions that are distressed investors sweeping in purchasing CRT.
This time.
I couldn't handle the first part and then I'll get into the second part so.
Where we're seeing activity is really you know in Chicago in the Chicago market. The pie I don't think is growing all that much. We just continue to grow our share of that pie. So we've talked.
We've talked for the last couple of quarters and on this call about the Halo effect of BPP in it. It is very real I mean, a on that a good one of our credit approval meetings goes by where we're not seeing a deal come out of pick your big Bank.
Because they're they're just frustrated with the.
In a way that they handle PBP the way that they have sort of evolved which has a much less banker focused model.
More call center oriented.
And as a result, you were just getting it.
Looks more often.
Every time there is a deal that comes to market were sort of the guy sitting at the table. So.
It really has I mean, I as I had said earlier in the call that our our visibility in the market is I think dramatically different than if you go back a couple of years and even if you go back to this time last year, we sit in a different position the quality of the borrower seeing.
Where they're coming from it's just it's a it's a good place to be right now.
As it relates to the distress bar distressed assets and yes, we are seeing.
Every day in my Inbox, there's probably another 10 people sending note thing and you know eight were interested in buying your hospitality portfolio were interested in buying your you know.
Your your CRT portfolio got and I think it's just they send it out to everybody because they're just trying to find as many assets out there as possible. So there are a lot of people out there looking for distressed assets.
Great. Thanks very much.
And our next question from Michael Young with tourists Securities. Please go ahead.
Hey, Thanks for the question.
Maybe just wanted to ask you know kind of big picture, if there was going to be.
You know some some kb eyes or more.
Hi level articulation.
Financial targets, you know kind of on the heels of some this disruption.
I know you guys did some of the management reorganization to free up some some bandwidth to kind of evaluate.
Energy So I just didn't know if there was anything.
Some of that or that we should expect in the future from that.
No I don't think we're going to I don't think we're going to give any sort of different guidance out there right now having on the overall strategy is what we're looking at and so some of those as Ed said you know this is a very diversified business model here that if you said some of those goals in the mortgage market is strong.
Her then.
Then sort of the interest rate environment has been recently or vice versa. If rates go up in the margin expands on mortgages go down some.
Some of those some of those keep you guys would change dramatically. So you know we're trying to manage the overall business and the and the diversified nature of it.
And I think if we start to provide you with very good.
Granular KP eyes out there we're going to.
We're going to be explaining why they're changing all the time because as the business is somewhat fluid and so when we take what the market gives us we try to stay diversified we try to take advantage of the revenue streams, where they're at and that that you have you have to be able to adapt overtime and not not corn yourselves into certain KPN licensees we have.
To meet those could you'll give up on some other aspect of the business, but no rest assured as Ed said earlier you know we you know we are big shareholders of this relative to our net worth than we manage this like shareholders only manage it for the long term and not on for quarterly returns and so we will continue to do that but I'm not so sure.
Not we're going to put out more capesize.
Okay, that's fair.
And then just just on kind of back on the growth question. I guess, you kind of mentioned on your own credit, yes things are good, but you're you're worried something might pop up and Im just curious how you've shifted maybe underwriting in terms of structure on on new loans that you are pursuing to make sure that there is an appropriate.
During the bear safety.
On new loan originations, whether it be CRT you're seeing.
I would be helpful.
Yes.
And that's all we we don't change our loan policy basically free this business hasnt changed much from the DTC in Florida. So we don't try to follow the herd a way shape or form, but we have very conservative underwriting standards as our history would tell you. We don't change a lot of them go ahead, yes, no ads right.
I mean, I think we have been pretty consistent in the way that we underwrite credit in the way we structure deals.
I'd say no to your point, though.
C N I wouldn't say.
We're doing a whole lot of overlays there from an underwriting perspective, I'd say in the in the CRT space, we're trying to be very mindful of what.
Central vacancy rates could look like in different segments. You know you could begin.
We're not doing a whole lot office deals right now, but we're certainly we talk a lot about what's the.
Pro forma vacancy rates that you get applied to those would be sales.
Retail, we don't do any it really right now, but you know.
Certainly what we are doing reviews on those we are we are we kind of put those stress stress them out to a higher level of vacancy but in the deals. The new deals that we are doing we are trying to be very mindful of the things that we are.
Concerned about.
I would say like in Illinois, we are looking at real estate taxes and.
Thinking about okay. We here is where they're at how much stress in those real estate tax expenses can we absorb here. So I think if anything that's probably the the the area of most.
Most focus right now is on that those theory deals and and kind of doing the what if scenarios item to really understand them, but again I think the biggest thing that we really do focus on and one of the things that we are so as we look through our existing portfolio is your sponsor selection is really critical I mean, if you went in.
To this last six months with weaker deals and weaker sponsors you're going to have a rough ride ahead.
But we have seen in a number of instances, where weve seen sponsors step up and re size the deal and support deals where appropriate.
That ultimately that's what's your protection.
Okay. Thanks.
And clearly not last question, but then there will be asked please go ahead.
Actually go back for a rebound.
I just can't get enough.
[laughter] I wondered if you could just briefly walk through the.
The PPP.
Dynamics on the on the NIM.
Change related to change in the term from say two years to five.
Given by an update on the the level of forgiveness that you're seeing.
Well, it's really driven on the timing on the forgiveness that we're seeing it based upon the customer surveys and the customer responses that we did we.
We thought the the forgiveness would happen quicker. So we thought the cash flows would come in quicker than.
Then as there was all this talk about maybe Congress will pass a law that gives a one page form for everything under 150000, and some people have talked about in our 150 150000, some people talked about even higher numbers. So we had a lot of no.
Accountants and lawyers advising our clients the hey, why don't you just sit back no reason for you to fill out this link the forgiveness application, if a simpler easier ones going to come through and so a lot of people have sort of.
Held off with that being said you know about a third of our portfolio has got applications and now some of them have gone all the way through the process and we've got the cash you know others are actually at the SP a weighting.
For the final process. So we have them in different stages, it's just that that that that that.
Hello, backed up on us a little bit because of the anticipation that congress or the ESB may give a more simplified streamlined approach to the borrowers and so if they don't have to make a payment I'm. They just sat back so where we thought we'd have more flowing in.
The third and the fourth quarters, Weve sort of push that back more towards the end of the fourth quarter into the first quarter.
So it's really you just recalculate, what you think your level of yield is going to be and how fast that the accretion is going to come in.
That makes sense.
Got it okay. Thanks, Dave.
Thank you.
Thank you and this concludes Takia nay fashion I would like to turn the call back to Wayne for his closing comments.
Thank you very much for listening if you have other questions feel free to call Dave Me Tim Kaine.
Or anybody else.
Anybody on the call. Thanks, we'll talk to you later have a great holiday season talk to you soon thanks.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.
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