Q3 2021 Wintrust Financial Corp Earnings Call
Ladies and gentlemen, please stand by your conference call will begin momentarily. Once again. Please stand by your conference call will begin momentarily. Thank you for your patience and please continue to hold.
[music].
Welcome to win Trust financial Corporation's third quarter and year to date 2021 earnings Conference call a review of this. A review of the results will be made by Edward Weymer, former founder and Chief Executive Officer, Tim Crane, President and David Dykstra, Vice Chairman and Chief operating Officer.
A review of the results will be made by Edward Weymer, former founder and Chief Executive Officer, Tim Crane, President and David Dykstra, Vice Chairman and Chief operating Officer.
And Richard Murphy, Vice Chairman and Chief lending officer as part of their reviews. The presenters may make references to both the earnings press release and earnings released review presentation. Following their presentations there will be a formal question and answer session. During the course of today's call when Trust management may make.
Statements that constitute projections expectations beliefs or similar forward looking statements actual results could differ materially from the results anticipated or projected in any such forward looking statements. The company's forward looking assumptions that could cause the actual results to differ materially from the information discussed.
Makes during this call are detailed in our earnings press release and in the company's most recent form 10-K and any subsequent filings on file with the SEC also our remarks may reference certain non-GAAP financial measures our earnings press release and earnings release presentation include a reconciliation of each.
As a reminder non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded I would now like to turn the conference call over to Edward Weymer. Thank you very much welcome everybody to our third-quarter earnings call. As mentioned with me are Dave Dykstra, Daystar Kate Bogey. Tim Crane and Rich Murphy.
As a reminder, this conference call is being recorded I would now like to turn the conference call over to Edward Weymer.
Thank you very much welcome everybody to our third quarter earnings call.
As mentioned with me are Dave Dykstra, Daystar Kate bogey.
Tim Crane and rich Murphy.
Parameters we instituted earlier this year I'm going to give some general comments regarding our results. Forward to Tim Crane for more detail on the balance sheet. And then Dave Dykstra. For other info another expense and Rich Murphy will discuss credit. That makes sense for us. Some summary comments. Thoughts on the future. And then time for questions. The overview, all in all very successful quarter. If I could almost give the same comments made at the end of Q2.
4% to tip credit for more detail on the balance sheet.
And then Dave Dykstra.
For other until another expense.
And.
Rich Murphy I'll discuss credit.
That makes sense for us.
Some summary comments.
Thoughts on the future.
And then time for questions.
The overview, a all in all very successful quarter.
If I could almost give the same comments made at the end of Q2.
At the end of last April at the start of the pandemic. And the government's response to it. Indicated winter supposed to be it was going to attempt to grow through it. We've accomplished this goal. And as such third quarter shows the strategy is working. All our growth to date has been organic. Second quarter was that or is it other all of our $1 billion a quarter. Assets deposits loans that are PPP loans, all grew by over $1 billion. Growth prospects remain very good. Of particular note.
And the government's response to it.
Indicated winter supposed to be it was going to attempt to grow through it.
We've accomplished this goal.
Such third quarter shows the strategy is working.
All our growth to date has been organic.
Second quarter was that or is it other all of our $1 billion a quarter.
Assets deposits hormones that are PPP loans, all grew by over $1 billion.
Growth prospects remain very good.
Of particular note.
Loan growth resulted in overall increase in total loans for the quarter, even after PPP run off. We're able to achieve another $1 billion loan quarter in Q4. We believe is more than reasonable assumption given our pipelines. Which by the way a 13 month high at quarter end. We fully replace all the PPE balances because our intent before we embarked on this strategy. The income for the quarter was $109 million or $1,77 per diluted. Here David said.
We're able to achieve another $1 billion loan quarter in Q.
Q4.
We believe is more than reasonable assumption given our pipelines.
Which by the way a 13 month high at quarter end.
Oh fully replace all the PPE balances because our intent before we embarked on this strategy.
The income for the quarter was $109 million or $1 77 per diluted.
Sure David.
$367 4 million or $6 per share. Reported net interest margin decreased four basis points. 2.5 to 2.59%, primarily due to excess liquidity. Interest income was up $19.7 million. From quarter, two if you back out the PPP loan income and total net interest income was up almost $8 million over quarter two. Then loans exceeded average loans in the quarter by $607 million, which bodes well for Q4. Our liquidity portfolios of $1.563 billion on average. Chris. This portfolio is very short remains very short over $5.2 billion overnight money at the fed.
Reported net interest margin decreased four basis.
At this point.
Two five to $2 five 9%, primarily due to excess liquidity.
Interest income was up $19 7 million.
From quarter, two if you back out the PPP loan income and total net interest income was up almost $8 million over quarter two.
Then loans exceeded average loans in the quarter by $607 million, which bodes well for Q4.
Our liquidity portfolios of $1 $5 63 billion on average.
Chris.
This portfolio is very short remains very short over $5 2 billion overnight money at the fed.
Investing this money as rates rise is a lever we can pull when the time is right. Well as I say was excellent all areas of our business as our current pipelines. Line usage remains low a little over 39% is up around 1% from the end of quarter two. Could hopefully hit bottom on this. Line usage increase. Nonetheless, which is closer to 50% to return to normal would add another $1 billion in outstanding loans. Credit quality is even better. Charge offs totalling net zero. We had some charge offs, but we have recoveries would chose should indicate you are.
Well as I say was excellent all areas of our business as our current pipelines.
Line usage remains low a little over 30.
39% is up around 1% from the end of quarter two.
Crazy hopefully hit bottom on this.
Line usage increase.
Nonetheless, which is closer to 50% to return to normal would add another $1 billion in outstanding loans.
Credit quality is even better.
Charge offs totaling net zero.
We had some charge offs, but we have recoveries would chose <unk>.
Should indicate you are.
Conservatives and raising softness and good on recovery. NPLs and NPS or constant purchase Q2. NPLs was $2 5 million. The $90 million for 27 basis points, while NPAs struck $2.5 million standpoint, two basis points. This is supposed to improve portfolio quality and moving some of your view of the overall economy. Sudden reserve release of $7.9 million. Mortgage increased, they experienced some growth in the quarter, Dave will discuss in detail. Wealth management continues its steady improvement fees up $1 million quarter over quarter up $18 million year to date.
Npls and NPS or constant purchase Q2.
<unk>.
Better or <unk> $2 5 million.
The $90 million for 27 basis points, while npa's.
Strong.
$2 5 million standpoint, two basis points.
This is this supposed to improve portfolio quality and moving some of your view of the overall economy.
Although.
<unk> release of $7 9 million.
Mortgage increased.
Experienced some growth in the quarter, Dave will discuss in detail.
Wealth management continues its steady improvement fees up $1 million quarter over quarter up $18 million year to date.
Let's turn the call over to temperature impacts versus the detail on the balance sheet Tim good. Thanks, Ed. I would like to briefly highlight a few balance sheet items as well as cover two topics that appear to be of interest. First with respect to the balance sheet total assets increased to just under $48 billion as we continue to experience strong growth. As Ed mentioned loans, excluding PPP grew $1.2 billion during the quarter essentially mirroring last quarter's growth. The growth was spread across virtually all loan categories as Rich will discuss in a few minutes. On a percentage basis. This is the second straight quarter.
Thanks, Ed.
I would like to briefly highlight a few balance sheet items as well as cover two topics that appear to be of interest first.
First with respect to the balance sheet total assets increased to just under $48 billion.
And as we continue to experience strong growth.
As Ed mentioned loans, excluding PPP grew $1 $2 billion during the quarter essentially mirroring last quarter's growth.
The growth was spread across virtually all loan categories as rich will discuss in a few minutes.
On a percentage basis. This is the second straight quarter.
Annualized loan growth again, excluding PPP was approximately 15%.
With respect to PPP loans, we saw a reduction of approximately $800 million during the quarter at this point almost all of the PPP loans originated in 2020 have been forgiven and approximate.
Order, where half of the loans from 2021, either have been or in the process of being forgiven by.
By year end, we project the remaining PPP balances will be down materially in the remaining income impact to be relatively small.
For the remainder of the year, we are comfortable with our loan growth target of mid to high single.
<unk> on a percentage basis again rich will provide some additional color on loan pipelines and the factors that would drive potential upside to that number.
Deposit growth for the quarter was also strong $1 1 billion almost all of it either DDA or low cost deposits.
This is an annualized growth rate of approximate.
<unk> <unk>, 12%.
Despite the high levels of PPP forgiveness, we are not seeing unusual volatility in customer deposits.
This quarter the interest bearing deposit cost fell another nine basis points to 29 basis points.
This was largely a function of CD repricing.
Deposit.
<unk> will continue to decline, but at a slower pace in coming quarters.
As we've noted in prior periods, we continue to monitor the deposit growth carefully given the high levels of liquidity in the market. However, we view stable low cost deposits is the strength of the company and we will continue to pursue deposits related to client relationships.
Costs.
On the investment front, we remained very liquid during.
During the quarter, our securities balances were up slightly as we replaced investments maturing, but generally have not yet moved to deploy large amounts of excess liquidity as we remain wary of locking in low long term yields as.
As the market continues.
<unk> the trend up we will evaluate our position and view appropriate deployment of this liquidity is an opportunity in future periods to improve the margin and income.
Our capital levels remain appropriate given the conservative risk profile of the bank you will note that during the quarter, we repurchased approximately $9 $5 million.
<unk> worth of stock at just over $71 per share.
Given where we believe volumes and yields will land, we continue to expect that despite lower PPP accretion net interest income will increase as it has for four consecutive quarters.
And that excluding PPP the margin will remain.
Stable.
I have two other brief comments that relate to new slides in the earnings release presentation.
The first has to do with digital adoption.
You'll see on page nine of the presentation that our high touch community banking model also has a high tech component and that we are seeing.
Main same increases in digital adoption and usage that some larger banks have reported.
We continue to upgrade our digital capabilities to give clients options on how they would like to be served.
These capabilities position us to compete successfully and in some cases to differentiate ourselves versus our competitors.
Currently youll see.
With a full two thirds of our checking clients regularly use our digital services.
Page 10 of the presentation document that is also a new slide relates to the customer satisfaction of our commercial clients.
In this case the sources Greenwich data and as you can see when trust was top ranked across the hall.
See that are important categories to.
To scale. This for you the 97% overall satisfaction score winter US achieved compares generally to scores in the <unk> and <unk> for many of our competitors.
The service, we provide increases the depth of our relationships and is the foundation for our strong momentum in.
Host of NOI, and Wisconsin markets as well as nationally in many of our niche businesses.
With that I'll turn it over to Dave.
Great. Thanks, Tim as Ed mentioned I will cover the income statement categories, starting with the net interest income for the third quarter of 2021 net interest income totaled 287.
And the $8 million that was an increase of seven 9 million compared to the second quarter and an increase of $31 5 million as compared to the third quarter of last year the.
The $7 $9 million increase in net interest income.
Compared to the second quarter was primarily due to average earning asset growth, which was up on an annualized.
All lines basis by 12, 5% over the prior quarter and one additional day in the third quarter, which was offset somewhat by a slightly compressed net interest margin.
Net interest margin declined four basis points to five 9%.
Beneficial decline of eight basis points for the rates paid.
Paid on liabilities was offset by a 10 basis point decline on the yield on our average earning assets and a two basis point decline in the net free funds contribution which resulted in a slight decline in the net interest margin.
The decline in the earning assets in the third quarter as compared to the prior quarter was primarily due to the impact of.
Building short term liquid assets.
The decrease in the rate paid on interest bearing liabilities as compared to the prior quarter was primarily due to a nine basis point decrease in the rate paid on interest bearing deposits, primarily due to the re pricing.
Time deposits.
I think it's important.
With that the net interest income expanded despite $11 $4 million of less interest income associated with the PPP loan portfolio in the third quarter, which included $7 8 million of lower PPP loan fee accretion.
And as Ed mentioned, the net interest margin excluding the PPP.
And our portfolio was relatively stable as a declined by only one basis point.
Turning to the provision for credit losses like many other banks have done this quarter winter again recorded a negative provision for credit losses of $7 $9 million that compared to a directionally similar negative provision of $15 3 million.
In the prior quarter and a $25 million provision expense recorded in the year ago quarter.
The negative provision was driven by a reduction in the allowance for credit losses, primarily due to improvements in the loan portfolio characteristics during the quarter.
The decreases in net charge offs and COVID-19 related loan modifications.
<unk> and improving loan risk rating migration.
Rich will cover credit quality in additional detail in just a few minutes.
I will now talk about the noninterest income noninterest expense and income tax sections in the noninterest income section our wealth management revenue increased $841000.
To another record level of $31 $5 million in the third quarter compared to $30 7 million in the second quarter and that revenue was up 26% from the $25 million recorded in the year ago quarter.
The new source has been positively impacted by higher equity valuations, which impact the pricing.
On a portion of our managed asset accounts.
Mortgage banking revenue.
So a reasonable solid loan origination volume during the third quarter with origination activity fairly consistent with the second quarter of this year to that end. The company originated $1 6 billion of loans mortgage loans for sale in the third.
Third quarter of 2021 down approximately <unk> down from the approximately $1 7 billion.
We originated in the prior quarter.
As we forecasted on our last call mortgage banking revenue increased $55 $8 million for the third quarter of 2001 as compared to 50.
$6 million in the second quarter.
Revenue was higher in the current quarter, primarily due to a less material unfavorable fair value adjustments on our mortgage servicing right portfolio.
The company recorded a $5 $5 million negative valuation adjustment in the second quarter as compared to a smaller decrease of.
888000 in the current quarter.
Looking forward based on market conditions unexpected seasonality of home purchasing activity, we anticipate mortgage originations for sale in the fourth quarter of 2021 to be down 20% to 30% from the origination volumes, we experienced in the third quarter.
And mortgage revenue excludes.
Excluding the MSR valuation adjustments to be down similarly.
Also as we saw in the first three quarters of this year the wildcard.
Relates to mortgage banking as it relates to mortgage banking revenue.
As the mortgage servicing right valuation, which is tied closely to mortgage interest rate movements.
I'm.
Im not going to speculate on where those rates are going to move to but.
Previous forecast of a reduction of 20%, 30% excludes any change in the MSR valuation.
Other noninterest income totaled $23 4 million in the third quarter of 'twenty, one up approximately 3.0.
Zero million dollars from the $24 million recorded in the prior quarter.
The primary reasons for the higher revenue in this category include $2 million of higher swap fee revenue $2 2 million of higher income from investments and partnerships, which are primarily related to CRA purposes.
A positive swing.
We have $859000 and foreign exchange valuation adjustments associated with the U S. Canadian dollar exchange rate $812000 of higher bully income and offsetting those increases was the fact that the prior quarter included a $4 million gain on the sale of a few branch locations in southwestern.
In Wisconsin, and there were no such similar gains in the current quarter.
Turning to noninterest expense.
Noninterest expenses totaled $282 $1 million in the third quarter up approximately $2 million from the $281 million recorded in the prior quarter.
There are a handful of categories.
I'll address that comprise the majority of that.
Net increase salaries and employee benefits expenses actually.
Declined by $1 $9 million in the third quarter as compared to the second quarter of this year the $1 $9 million decline is primarily related.
Two six.
$6 $3 million of lower compensation expense associated with the mortgage banking operation.
It somewhat by higher incentive compensation expenses for annual bonus and long term incentive compensation plans.
Advertising and marketing expense totaled $13 4 million in the third quarter, an increase of $2 1 million compared to the second quarter.
<unk> 2021, the increase in the third quarter relates primarily to increased sponsorship activity for the summer months, including our major and minor League baseball sponsorships and more community events occurring.
We would expect this expense level to decline in the fourth quarter as many of these sponsorships are geared towards the summer months.
Software.
Software and equipment expense totaled $22.0 million in the third quarter, an increase of $1 $2 million as compared to the second quarter total of $20 9 million. The increase was due to increased expenses associated with upgrading our data centers for increased capacity scalability and reliability other network upgrades to support our growth.
Growth and ongoing digital enhancements and various other software upgrades as we've done over the last few years, we've continued to invest in software and technology to enhance our customer experience and delivery systems and products as well as to invest in systems to support our growth and as Tim mentioned.
Our customer satisfaction results.
Our great insights I think the investment in those systems is paying dividends.
Oreo expenses were actually negative by approximately $1 5 million in the third quarter as the company recorded gains of approximately $1 9 million on the sale of Oreo properties. These gains are an amount that exceeded the aggregate cost of Oreo expenses.
Integration charges on other Oreo properties.
The miscellaneous expense category totaled $23 4 million in the third quarter compared to $21 $3 million in the second quarter of this year.
It's an increase of $2 $2 million.
Increase was primarily impacted by approximately one.
The $7 million of more traveling and entertainment expenses and a variety of other smaller fluctuations the increase in the traveling.
Entertainment expense category was due to <unk>.
Increased costs associated with in person client relationship meetings and conferences as well as some additional expense associated with an all employee event to celebrate interest.
Trust, 30th anniversary and to thank our employees for performing so well during the pandemic.
Although this expense category is higher than recent quarters.
They are still lower than the general run rate, we had in prior periods before the pandemic began and we're encouraged to see our team returning to <unk>.
One more normal in person events to build and maintain solid customer relationships. This activity is important to maintaining the strong loan growth we've been achieving in recent quarters.
So other than those expense categories I just discussed all other expense categories in aggregate were up by less than $1 million.
To the second quarter and.
Our significance to discuss that.
Measure of our operational efficiency improved in the third quarter relative to the prior quarter and net overhead ratio stood at 122%, which is down 10 basis points from the 132% recorded in the second quarter. The ratio continues to benefit from strong balance sheet growth.
Good mortgage banking results, our current target assuming relatively normal mortgage activity is for the net overhead ratio to stay below 135%.
Due to the strong balance sheet growth and the focus on expense control relative to revenue growth.
I should note that the efficiency.
Growth also improved in the third quarter relative to the prior quarter efficiency ratio stood at 66, 3% in the third quarter, a decline of 253 basis points from the prior quarter.
Moving on to income tax expense the effective tax rate was relatively.
Stable at approximately 27%.
<unk> ratio.
Is in the range that we would consider normal.
In summary, core fundamentals were strong with robust loan and deposit growth increased net interest income despite significant PPP loan reductions.
Our record wealth management revenue strong mortgage revenues improved net overhead and efficiency ratios strong pipeline.
<unk> and very good credit quality, so with that summary, I'll conclude my comments and turn it over to rich.
Thanks, Dave as noted earlier credit performance for the second quarter was very solid from a number of perspectives as detailed on slide four of the deck loan growth for the quarter net of PPP was $1 2 billion or 15% annualized.
Realized well above our guidance equally as important was the nature of this growth, which was spread across our loan portfolio.
Specifically C&I loans were up $543 million, CRE loans, which were up $207 million winter us life, which was up $296 million and first insurance funding, which was up $95 million.
Throughout the pandemic, we have seen solid and consistent loan growth. If you look at Q3 'twenty compared to Q3 'twenty. One we are seeing total loans net of PPP grow by $3 4 billion or 12%.
On our last earnings call, we express confidence in our ability to continue to meet or exceed our loan growth guidance because of the strength.
Our loan pipeline.
We believe this momentum is attributable to a number of factors.
The PPP Halo effect, which is really taking hold on the level of commercial loans. We are seeing substantial expansion in the numbers and amounts of treasury management relationships over the past several quarters, but it takes time to move the entirety of the credit relationship out of the incumbent bank.
We are now seeing those effects, resulting outstandings.
Market disruption has been pronounced throughout this year and throughout the pandemic and we have seen customers and bankers look to win trust as a consistent and preferred banking partner in Chicago and Southern Wisconsin.
As a result pipelines continue to look very strong and at the highest levels.
<unk> been in several years.
Finally, as detailed on slide 17, after five quarters of decrease C&I line utilization the trend is beginning to reverse.
As noted in earlier calls this utilization has been historically close to 50%.
We saw this level of bottom out in Q2 at 38, 4% and we.
<unk> Q3 at 39, 3%. We believe this trend of increased usage will continue in the fourth quarter.
As discussed in prior quarters, one of the keys to the performance and growth of our credit portfolio has been diversification across a number of product lines.
This quarter was another great example of that strategy are niche products, particularly premium financing.
We ended Q thing grew substantially during the pandemic now we are beginning to see very strong growth coming from our core banking customers.
In addition, slide 15 details the geographic diversification of our portfolio as we have stated before winter outside of Chicago, Milwaukee Nexus. However, as this slide illustrates our various business lines.
Dancing with a meaningful amount of credit opportunities outside of these primary markets.
From a credit quality perspective as detailed on slide 16, we continue to see solid credit performance across the portfolio as the economy stabilizes.
This can be seen in a number of metrics now.
Nonperforming loans remained flat at approximately.
Provided $90 million or 27 basis points Npls continue to be at record low levels and roughly half of where those were at this time last year.
Charge offs for the quarter were essentially zero and amazing result, especially when looking at total charge offs of approximately $2 million for the past two quarters combined.
And as noted in the bottom right quadrant.
Approximate age 16 credit risk ratings continue to show meaningful positive migration as our customers continue to recover from the pandemic.
That concludes my comments on credit and I will turn it back to Ed to wrap up thanks Mark.
Okay.
Those of you who examine transcripts of our earnings calls I noticed a lot of similar.
And obtain this.
And the last broker.
Broker fans with consistency.
As I mentioned at the beginning of the call. Our strategy has been to grow the balance sheet. During this period of low rates use our structural hedges like mortgages to Buffalo loss in NII until such time as balance sheet growth can offset the income loss.
Or is it lower rates.
<unk> unexpected benefits add on to this strategy.
All of the above was to be accomplished while enhancing our asset sensitivity position.
Patient of higher eventual higher interest rates.
So balance sheet growth to ask with deposit growth of four 1 billion year to date.
And loan growth of three 4 billion.
Excluding loans held for sale in PPP.
We have experienced Tim laid out.
Has been done totally in our organic base on an organic basis.
The acquisition market remains somewhat consistent with quarter two based upon the amount of inbound calls we continue to receive.
Total sellers still have very high expectations. So we'll see where this ends up.
Loan pipelines remains strong in all major categories and I said at the beginning.
A 13 month high.
This is aided by not only our reputation but also market disruption.
<unk>.
Our diversity.
The portfolio.
Our asset sensitivity position is right, where we want it.
It appears that the FAA that inflation is transitory is coming to an end.
Rate increases are inevitable.
The underwater Beachball will rise or hopefully soon.
We continue to leg into investments with our access.
<unk>.
Your answer marketplace.
The total investment is logging into lousy long term rates doesn't make a lot of sense to us.
<unk> remarkably wood. Thanks, we're consistently conservative underwriting standards and diversified loan portfolio Oracle, both our lending line and credit folks and present the lows are lower than they were before this.
Liquid endemic.
Los Angeles areas delivered strong results with assets under administration continuing to grow.
So today the plan is working we need to continue to grow in order to bring this plan to fulfillment.
Loan growth should remain strong with take advantage of the opening of the acquisition market. It makes sense.
In short I like where we stand as mentioned are we referred to.
In December.
We will celebrate our 30 <unk> anniversary.
Getting close to a $50 billion bank with $35 billion in assets under administration in our own.
Our wealth management group is behind.
To start with auto where we'd be at this point in time.
So I would wait a couple of guys in here with that original card table Hamed.
I think you could purchase.
New.
That said, we were about where we are and what our prospects are going forward for the next 30 years.
You can be assured of our best efforts going forward. We appreciate.
Any continued support now I have time for some questions. So thank you very much.
And the questions.
Certainly ladies and gentlemen, if you have a question.
At this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.
First question comes.
From the line of Jon <unk> from RBC capital markets. Your question. Please.
Thanks, Good morning, everyone for afternoon, everyone. Good morning.
Yes, im good im good little confused but on the time, but anyway I wanted to talk about loan growth I know, there's a few sort off of those eastern central I don't know, but.
Sure.
Just the loan growth numbers I appreciate the guidance for the fourth quarter.
To <unk> comments on the PPP Halo market disruption line utilization.
I think I would throw in premium finance bull market.
And there as well, but what slows this down.
And what would cause you to pull back I'm, saying you can put up this kind of growth.
Into 2022.
I think if you see a rationale if rates stay low.
Valerie kicks in and we're starting to see solid.
The bigger banks go into just given it away because.
The dearth of earning assets out there that could cause us to back off a little bit because as you know, our our policy and our profitability model or violet.
We're not going to be changing those trailing but right now we don't see it we see people.
Coming from other banks.
Yeah.
We appreciate our long term approach appreciate our approach to doing business.
I'd like to say a lot of them just they just thought they are having a good time or their bank and before.
As Tim mentioned, we spent a lot of money and we do a better job of telling you how much money we spend.
Our technology.
Thanks.
In the fourth quarter I expect we'll give you.
Real detail of how much of our expenses relates to our technology build.
Winning the.
Those granite towards is really hard thing to us because.
The numbers, we're seeing in 95% and the like are people who would recommend.
Jason.
That builds on itself.
No.
I don't think you can see the premium finance market changed that much in terms of I think it's going to get harder even next year.
The market continues to get harder.
People are thinking maybe 30% increase there.
Additional increase.
Lease in.
Premiums on the commercial side.
On the life side, we see.
See some pricing rationality, but we stay away from those.
And.
With what's going on with the tax laws and the like it's going to make.
Life insurance.
A reasonable way to play.
<unk> state and not have to pay the exorbitant state taxes.
Being proposed.
<unk> I don't know yes.
You hit the nail on that I think that generally speaking.
Like where we sit we think that our pea.
Positioning in the marketplace is very good and as we alluded to we're seeing not only customers, but also bankers look at us as a <unk>.
Attractive alternatives, so really good core momentum there I think to your question what wrinkles are out there as Ed said that the challenges that you look at.
Every one of our competitors and they are also they have a lot of cash to deploy so you are seeing pricing.
<unk> very aggressive and Youre seeing the structure is also pretty aggressive so right now we don't anticipate.
Any type of rope it over or anything like that but it's something that we are very aware of.
The other thing is on the life side it is.
<unk> rates were so low it really was a great opportunity for people to use that product.
And if rates were to go up dramatically here.
And thats, probably going to have an impact on that but for right now.
The aerosols beam.
As we go.
Into budget season, we're pretty optimistic about where we hold a resale image leasing is good leasing has had a really good time during the pandemic.
Is there anything where.
Leasing tends to be a little bit more of a transactional business and so people are very focused on structure and pricing and so we are very mindful of that.
So we're not going to go out there and chase deals but.
As you've seen John over the course of the last three years and the way we've grown that portfolio.
We're pretty optimistic of where it's at but it's probably the one area, where we're really focused on pricing because we're if we're going to lean in on pricing it's going.
Complete relationship where you get the full share of wallet.
Okay. Okay. Good good color on that thank you.
And then I guess just one on the margin I appreciate the comments, Tim on the margin being relatively stable.
You alluded to the beach ball, we've heard that for a long time, but.
B.
Any threats to the margin I know I've heard it.
20 years ago, but we're waiting we are still waiting but.
What can make your margin lift.
And you alluded to maybe getting a little bit more aggressive on liquidity deployment, but still being careful but as we look forward to the.
It feels like it's bottomed out here and maybe the only way to go was up from here, but talk a little bit about the plan and kind of margin lift.
Well.
Additional liquidity would would cause the margin to have additional pressure, but in terms of net interest income I think.
The margin would see that growing nicely throughout the rest of the year.
Jim you want to comment on the.
Sure alignment.
Tom.
We're watching pricing.
Pricing pretty carefully deposit costs will continue to help a little bit not as much as they have.
In the prior quarters.
And.
If we get rising rates or the 10 years up to 165, we watch that closely and we deploy some more liquidity will help both our margin and our income.
We're patient there so I'd hesitate to.
Forecast when that might happen, but we feel pretty good we remain very interest sensitive.
And feel like that's still an important part of the equation.
Okay. Thanks, guys.
Dave you got some of this noise.
$5 billion of that liquidity in a positive keep coming in so that's a good level, but I would also say that.
New loans are startup.
On the existing portfolio of pricing right now.
You see a little bit of compression from some older loans paying off at higher rates, but but the new loans are coming on I think.
Stabilized on the lower east side substantially.
So ex PPP it should have.
The company that could have roughly bottomed out and we have the upside from an appointment so.
We're optimistic on that front.
Okay. Okay, alright, thank you.
Thank you. Our next question comes from the line of Michael Young from two Securities. Your question. Please.
Thanks for taking the question wanted to do a quick follow up on just the excess liquidity.
$5 billion, or so and just kind of cash basically on the balance sheet. It seems like at current rates you could deploy that maybe for 150 basis point kind of pick up over <unk>.
Cash yields so by my math.
And it would be 75 or so of earnings to $1 of earnings is that the right way to think about it but maybe if you could deploy that into loans instead, maybe it's $1 50 or so.
Yeah.
I think the concept is right at the fed youre, earning roughly 15 basis points.
Yeah.
Mortgage backs are plus or minus 2% right now so theres your spread differential for investing of the question is do you want to invest long term at that rate or do you want to wait for it to go up but it's pretty simple math, it's 15 basis points and the site what asset class you want to invest it and at what.
So that alone would probably be closer to 3%.
We think that.
<unk>.
We were a solid showing solid growth.
NII by the growth that we're having.
I think that.
We're kidding ourselves.
Not really.
As a start or.
Even in the first quarter of an inflationary cycle.
Wages are.
Rising.
I set out a couple of boards and we've talked to them and price increases are flying through they're not going to go backwards.
Supply.
We've been disruption plus lack of labor.
Is going to cause this cycle to start once it starts and get some momentum it's hard to stop.
Established by higher rates the government has to taper eventually in which case because of our deposit base.
At a higher.
<unk> is a lower rates youre, playing like in the Red zone.
You're right you're going to get normal spreads anyhow, so to lock in long term at 2%, although it could make us money now.
Down the road.
So we look at we take a long term view and.
There is also the possibility that at the end of the year people.
You are able with money out.
There is so much money out there.
I'll then move it out there hopefully we'll keep it in the bank, but you never know where it's going to go.
We have to keep a little bit of excess liquidity because of that I think so these are really unprecedented times in terms of the liquidity side of the equation.
But.
They are not unprecedented.
Some of the.
Inflationary cycle with agencies start.
<unk>.
This.
You can't fight the economics of it all you can try to say, it's no economics, whether youre going to do.
The old school, guys and we believe that.
I'd rather lock in it.
In terms of <unk>, 6%.
And the way out than a 2% right now.
Because of our deposit base being very retail and.
Well, just retail nature of that deposit base in all could cut basically.
<unk> 80, some odd percent.
As our core deposits, we can lag on the way up and we can make a lot more money than so.
We've taken a long term measured approach on this.
We could we could drop it in and make another buck of share a couple of Bucks a share over.
Over time, but.
I don't think thats prudent to do.
Given that we think down the road I think a lot more money.
The company for the shareholders.
Okay. Thanks for all that color.
Just kind of my follow up question, you segregate it nicely and to just inflation, it's been a long time since we've seen.
Carol inflation, and just curious kind of your high level thoughts maybe on inflation and then how that could.
Affect the expense space and kind of growth there.
Well I think in place I think the government wants employees here I got all the minor borrowing they want to pay back and cheaper dollars.
So.
I've seen we've seen the movie to kind of think it's not going to have a different ending.
I think it's going to be there for a period of time I think the cycle has started.
It's hard to stop this cycle without raising rates and slowing things down a bit.
<unk>.
Kind of a conundrum because are not out of the pandemic yet.
Supply chain issues are causing some of those.
There'll be over by.
At the end of next year. According to some of the boards that minor we manufacture I'm talking to.
Those in force Majeure is there anything else going on.
It's tough out there for our clients and labor is tough.
To pay.
Somebody to get people in the house.
Transportation is tough out there right now.
It could be a truck there make a 150 grand a year.
And some of the offerings that are out there now so.
I think inflation is here and it's going to stay.
And we have to be ready for it.
And when you have inflation you have to make more money than it did before just to stay even right. So that's what we're that's our plan that's what we're doing we're sticking to it.
And.
I, just think I've seen the movie.
It is going and any differently.
And Dave maybe.
Thoughts on your expense base, specifically and how that will affect you know kind of our outlook for 2022 or 2023 kind of expense growth.
No.
I think I'd look at it.
Michael.
It had been inflation really kicks into the expense base.
Right.
And the size of the increase in the margins going to more than more than offset the expenses on our efficiency ratio will get better in our net operating ratios et cetera will actually probably get better because of the growth in the assets on the growth and the margins. So yes, our biggest cost is labor cost.
Thank.
That's right you see increases.
Labor costs.
We'll have half of that to go up.
We shouldn't be able to control reasonably well, but.
I think the margin will expand dramatically more than the expenses inflation does get them.
Okay. Thanks.
Thank you. Our next question comes from the line of Terry Mcevoy from Stephens. Your question. Please.
Hi, Thanks, good afternoon.
Terry.
Good thank you.
Maybe I'll start with table eight your interest rate sensitivity I'm just wondering how your underlying deposit betas, maybe have changed this cycle.
Does the past and when I look at the 83% loan to deposit ratio and that includes PPP. How much are you assuming you can lag on deposits deposit rates when rates rise.
Well I mean, we're pleased that a third of the deposits or DDA and obviously.
The bulk of the rest of it is very.
So versus low rate at this point.
I think we will lag.
As rates move up.
Hard to predict what will happen kind of with the PPP money again.
Comments earlier, we've not seen anything unusual with respect to deposit volatility.
I think it will continue to help us I think for the next couple of quarters Youll see deposit costs go down almost in spite of what happens to rates and we should be in good shape.
And I think Terry My recollection is right. The last time, we have rising rates from the near zero environment. The.
The first two.
Really there wasn't much of a rise in deposit costs in the second 25 basis point increase versus the same and you only started to see increases with third increase.
And I would think that it would be similar to that if not even a longer lag because they have way more liquidity in the system.
24, right now and people arent as anxious to bring deposits in.
I think if history repeats itself you would have at least 50 basis point increase before.
You'd see much movement by the industry.
And my personal opinion is because of our liquidity.
System system.
But did that.
Go out beyond that before you see much of an increase.
Deposit costs and tariff in house virtually none of our deposits are linked to an index. So.
That's helpful. Thank you and then as a follow up.
We all know Theres, a large acquisition.
So it's been about to close later this year in your market and a new name about to enter your market. So I guess my question is how quickly did you start to see the disruption from the last deal and <unk> and how long did that window remain open for a bank like winter us to capitalize on any opportunities.
Acquisition, while we're starting to see a little of it.
The window stays open for a long time.
A lot of people given the year to see what is going to work or not.
We are relentless on our on our pursuit of these guys.
On our previously announced deal it took about four or five.
First before we.
We started seeing a.
And outflows so.
You can guess, which one that is really the only you can never really get anybody out of the old place an hour.
People and.
Okay.
And the assets that we never thought we'd get there we're very loyal to the.
Five years the old place so.
We will be relentless side.
And we will see Merck any thought no I think thats right.
Kind of the.
Tone that gets sent by the acquiring institution and we've seen it run the gamut from the data.
A deal gets announced and they come in and immediately change the credit culture and just the overall tone of the organization, but as Ed pointed out we've seen the other side, where it takes a while but eventually.
Things change and people Cook more customers and bankers.
Does that change and look to find something a little more.
<unk>.
Keeping with the way they like to be treated so.
I don't think Theres, one set answer to the question, but it is inevitable word of mouth has been great for us I mean, he's awards that we're getting from Greenwich are very very helpful.
Plus we walk the walk.
Send us talk to talk.
People come over and they see our technology and what we have I'll put up against the big banks for the most part.
We're better than them because of the personal service, we give on top of it.
And I get nothing.
But complimentary letters.
Gotcha.
Happy people when they get over here. So I have to say just thought they're having a good time before but now they really are having a good time. So word of mouth is happening a lot two plus I think our advertising is paying off as Chicago's bank in Wisconsin Bank.
We have great momentum there, but we got to back that up we havent backing.
About so.
<unk>.
And the people we are we are seeing people from.
All of the acquired organizations.
Asking us.
Well.
What are plans that we're going to do great.
Great interest on their part.
Another thing is.
With remote working has helped us like on the <unk> side, we were able to pick up a number of people just because of our reputation.
They picked up a couple out in New York, who heard.
We just heard how good we were to our clients and our people.
And they.
They came with us.
So the talent is out.
I think our reputation helps and.
I think our momentum is very good and we don't see anything that will stop it right now.
Thanks again I appreciate it.
Thank you. Our next question comes from the line of David Long from Raymond James Your question. Please.
Out there hey, everyone. Thanks for taking my questions.
David.
Good good Hey, I appreciate all the color on the loan growth and the margin expectations.
The question I want to ask you about now is more about youre hitting $50 billion in assets here very soon.
How.
That change your operating strategies and does that change how you are thinking about regulations and.
The ability to continue to acquire.
Not really because.
So we do the smaller deals.
How does that with Jonathan.
Certainly the smaller deals went.
Don't really get the attention of.
The big guys in D C.
Even though we do when we do.
Sure.
As of now who knows what will happen.
The new OCC cost.
<unk> comes in and.
Maybe I'll just speak Russian or something then but.
Right now we have a great relationship with the regulators.
Our CRA is I mean almost.
14 of the 15 banks are outstanding in the Netherlands.
Hopefully really close.
We always said that the regulators make the rules.
And our play by the rules you can yell at the Rev. Only I can bump the rep.
But.
We'll play it by ear, but I think we.
Have a good reputation.
With them and.
And anything we.
Do just because of how we're structured we still do we still are small I mean, we're wrapping 50 billion in the aggregate but.
Our average bank is what three $2 billion to $3 billion and.
Hmm.
And the branches the commander have their own it I mean, everybody is an owner here, we're able to really.
You'll be close to the customer of our decisions.
I think that model can keep going for a long time.
And we also have any comments on that.
No I don't think there's anything magical about the $50 billion Mark per se I mean, our infrastructure is set that we can have considerable growth.
Yes.
And we.
We just continue to.
Build the infrastructure and the team.
Handle that so.
I don't see anything significant.
Do you hear in the marketplace that the bigger deals are.
A little bit slow to get regulatory approval right now, but as Ed said, we typically have done this.
Smaller tuck in deals.
Those seem to be moving at a quicker pace.
I don't see anything significant.
Got it and then you mentioned the infrastructure to become a larger bank at what point do you have to upgrade as a core deposit system could handle a doubling of your size at this point or is there at some point that.
You would need to add any additional investments.
No.
I think where our investments and we've done that they've done a very good job of telling you how much we've spent on this but.
We have lots of room to grow here, we have really upgraded every system in the joint.
And maybe that that's associated with very flexible.
So.
Being able to work off the base systems that we have and add things on and take them off.
Tim you want to comment on that yes.
Refine from a host system standpoint.
<unk> enhancements and new introduction of services on the digital side is really starting to pay dividends and so.
I think in terms of getting to the point, where we're comfortable at $50 billion, we've been working that for years and so.
I don't see any immediate issues at all in that front, and we're well positioned to continue to grow.
Got it thanks sure thanks for the color and keep.
Keep up the good.
In term.
Thanks, David.
Thank you. Our next question comes from the line of Chris Mcgratty from <unk>. Your question. Please.
Hey, guys.
Yeah.
Question on M&A just to further explore it.
You've got so much momentum.
Organically.
Right now and we've seen some of the reactions for deals and the buyer stocks.
It did.
Well I guess why do you even need to consider a deal at this point is there something that are these are our business you need to build out or.
A market you need to develop a little bit more.
So we've always been opportunistic about it.
It's got to make sense on the pricing side and strategically and we haven't done a deal on a couple of years, because we haven't found one that did that.
And we've always been very very prudent in how we approach it.
I've said before a thousand times.
We're not going to give up a lot of tangible book value to grow Europe.
Five.
Years with earnings to grow 20, a share.
It doesn't make a lot of sense.
We take what the market gives us right now experienced organic growth pricing on deals.
Small is a big deals are.
Pain in the neck.
Not to say that we wouldn't consider it but.
I Wanna philosophies on.
Every big deal we've seen starts with taking care management before they take care of shareholders and that drives me absolutely crazy.
Absolutely nuts.
And guys, who come in and you start with that and the conversation about what about Australia, what about our shareholders.
Network.
Management is lassie cut you deal with it.
So not that we haven't had that we have.
Every investment bank of the Royal calling us about this dealer that fewer big deals are big we could be in.
That's unimportant to us what's important to us is.
Continuing to grow like we grow the market gives us.
Right now of this organic growth is awesome.
Smaller deals still our bread and butter.
The $1 billion is good.
It has to make sense as it makes sense strategically as it makes sense economically and.
Bigger deal it would just be all.
It just doesn't make a lot of sense.
Sensor and offer a lot of reasons, but.
You never know and we have one that does makes sense, but.
I'd tell you it drives me nuts.
Got it.
There has been certainly what about me and then I'll you what about my shareholders.
I hate those conversations and Victor or turn off right out of the box for me I.
I agree with you.
The market has given us great growth lie wide differentiation.
Deviate from that.
And there'll be a time when the acquisitions become more affordable.
It makes more sense and we will jump in them.
David anything on that.
I think that's right I mean, we understand the concept you laid out Chris we.
Can market to them at the same time, if theres a deal that comes up that makes economic and cultural sense, but is uncertain.
And we're not going to overpay or do a deal just to do a deal. So we're enjoying the organic growth now and pipelines are good.
We'll keep marching to that tune for the time.
Okay.
Great Thats great answer thank you.
Thank you. Our next question comes from the line of Nathan race from Piper Sandler Your question. Please.
Hi, guys afternoon.
Going back to Terry's question on some of the loan growth drivers in.
The context of the M&A disruption that's ongoing.
Curious in terms of the commercial real estate and C&I growth that we saw in the quarter. Obviously on the C&I side of things you guys benefit from an uptick in line utilization, but just curious how much of that growth youre seeing in footprint on the commercial side of things is.
Being driven by share gains.
Curious within that context, what inning, we're in in terms of our winter us up.
Benefiting from all.
All the M&A related disruption that occurred in Chicago with in the last few years.
Rich.
I'd say, we're in pretty early innings at this point I mean, we you know as we've talked about a couple of questions ago.
This disruption has really been pretty recent phenomenon.
Over the last four or five years so.
We think that the goodwill they've got established during the pandemic through PPP and we basically told all of our lenders.
When the pandemic hit this is when you really start to differentiate yourself as.
Being a banker that you can count on and.
Customers appreciated the fact that we were out of the box, reaching out and seeing what they needed doing the things that make us different.
I had lunch with one of our.
Bankers that we hired from one of our competitors recently and he said it was.
Was the exact opposite.
But at the bank he was at that they were curtailing lines and they were.
<unk> rates and doing things that.
In the short term, we couldnt enhance the overall return but.
The long run you are just going to really just anchor your customers. So.
I think there's a long way to go here.
The opposite can share is still relatively small in Chicago and.
Milwaukee relative to the competitors. So I think there is.
Real strong opportunity here over the next couple of years to be able to grow that core business.
Got it that's great color and maybe just changing gears a question for Dave.
Mortgage.
I'm curious if you could kind of remind us in terms of the gain on sale margin expansion that we saw this quarter is a little more pronounced than we saw from some others. So just curious if you can remind us in terms of the var what that.
Secondary market premium tends to look like in terms of.
Or at least on a relative basis should be kind of conventional 30 year product generally speaking.
Well okay.
I'm trying to figure out how to answer that.
Just youre wondering about the directionality of the gain on sale margins.
Yeah, and just you.
To Winches, obviously, you guys have to be arm that contributes somewhere around a quarter volumes.
Each quarter. So just curious in terms of what that gain on sale margin benefit from having that production arm in the fold relative to just the typical 30 year.
Eventual product.
While at <unk>.
Certainly, it's higher but as far as the blend of the gain on sale margin, that's pretty much about a quarter of our business for the last.
Over a year. So I don't think that's going to change the directionality of the overall margin.
It may be a little bit higher in the fourth quarter as a purchase business goes down.
In the Chicago area, because veterans first does business all over the country and a lot in the southern states, but.
I don't think it would change dramatically dramatically.
We actually think that as far as our margin goes it increased a little bit this quarter as secondary.
Marketing gains and losses.
We're a little bit better this quarter as far as that.
Hedging activity that we do those in a little bit of product mix change where veterans first was 26% of the volume versus 23 last time, so those two factors.
Helped increase the March.
And a little bit.
Our thoughts for the fourth quarter, right now and again it'll depend on mix of business and some other.
Secondary marketing volatility that could or may.
It may not happen, but.
But we would expect the gain on sale margins to be relatively flat in the fourth quarter.
Relative to the third quarter.
Okay, Great. That's really helpful. I appreciate all the color thanks, guys nice quarter. Thank you.
Sure.
Thank you. Our next question comes from the line of Arthur from D. A Davidson your question. Please.
Hey, good afternoon guys.
At one Big picture question for me at this point and it relates to slide 15 of your deck the highlights the geographic and loan portfolio diversification.
Clearly paying dividends, but the growth you guys are putting up I'm. Just curious are there any geographies you are not in that you'd like to be or low.
<unk> products are niche lending verticals that would fill out this map further.
Well, we're always looking for new niches.
Problem is right now.
If there is one out there they want a lot of money for everyone a buyer and.
Kind of wafer dies down or we use.
Starting from scratch and rather than paying big though and having.
Big TBD dilution.
Rich you want to comment on the other side yes.
I think that's right I mean, we are always looking at opportunities I think the leasing example is a good one we started that three years ago and have built that out.
Because of exactly what youre talking about it gives us a much more geographic spread over to the loan portfolio, but if we were to.
We had bought something of comparable size, we would've paid.
Substantial premium on it so we like to be building these things but.
We're right now I think.
It's not so much about markets that were not necessarily in but really trying to expand the markets I mean, I think that.
Certainly adjacent to the footprint, we would like a bigger presence in Indiana, we'd like to expand our presence in Wisconsin.
Looking around the Midwest you can kind of see some of the other markets that I think would really appreciate.
Kind of what we do and how we run our business.
Does it really isn't a wind trust type alternative.
Some of the meaningful.
A meaningful cities around the Midwest.
We're also looking at opportunities we've been able to through following our CRE sponsors to other markets we've seen some real good.
Opportunities and we've been able to build the wind trust brand in some markets that historically, we haven't been in and haven't had a presence and we're looking at does it make sense to.
Step out a little bit maybe open up <unk>.
See how that would fair, but it's.
Definitely something that is that's why.
Why we put the slide in here, it's front and center for Us to make sure that while we love Chicago and Wisconsin, We want to make sure that we're just.
Having good diversification within the portfolio concentrations kill I always say that.
And you can diversify between product type and geography.
It's a very good thing.
<unk>.
Thank you guys that was it for me I appreciate your thoughts.
Thank you.
Thank you our final question for today comes from the line of Brian <unk> from UBS. Your question. Please.
Thanks.
Dave just.
Following up on the on the <unk>.
Deutsche Bank.
Just wanted to clarify so.
We should look for 20% to 30%.
Origination drop in similar similar Rev drop in Q4 correct.
Yes, that's right.
Is that now now now those applications in October has been very similar to <unk>.
September so far.
A little less in July and August but.
Just based upon seasonality that's that's what we're thinking and I think it's fairly in line with the MBA forecast too so.
Okay. So you just hit on it that's more seasonality than than any rate.
Move Thats already percolated through your pipeline, that's just what youre expecting for things to kind of fall off.
Okay.
Yes.
Hopefully hopefully.
It's a little bit better than that.
That's what our expectations are right now.
I think we generally aren't too.
Much different than the overall market.
Origination trends so.
Okay.
Shifting over to PPP I apologize if I missed this already <unk> got about $25 million left I believe.
Just kind of the cadence of that recognition do you think.
It's probably from a fee standpoint, maybe another 30% to 40% of that comes in the fourth quarter and then it tails off from there depending on kind of what we see in terms of customer seeking forgiveness, but.
As we talked about we think the loans will drop off quite a bit.
<unk>.
Fee as follow.
Got it okay alright, thank you.
Yeah.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Edward <unk> for any further remarks.
Thanks, everybody for listening in.
We.
Fourth quarter, you can be assured of R.
Our best efforts going forward.
Questions.
Come up after you continue reading our.
<unk> thousand page of your press release, please call, Dave Mercer timber I, and we will be happy to.
Discuss it with you. Thank you and we'll talk.
Two.
Nice quarter.
Thanks.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
[music].