Q2 2019 Earnings Call

July 16, 2019

The conferencing centre a conference coordinator will be with you momentarily. Thank you.

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The Wintrust financial.

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Thank you.

You're welcome financial Corporation's second quarter and year to date 2019 earnings conference call. At this time all participants are in a listen only mode. Following management's prepared remarks, we will host a question and answer session.

Our instructions will be given at that.

If they're in your conference that you do require operators.

Our Star then zero and operator, we'll be happy to assist you.

Following a review of the results by Ed Weymer, Chief Executive Officer, and President and David Dykstra Senior Executive Vice President and Chief operating Officer, there will be a formal question answer session.

During the course of today's call Wintrust management may make statements that constitute projections expectations beliefs or similar forward looking statements actual results could differ materially from the results anticipated or projected it any such forward looking statements. The company's forward looking statement assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and the company's most recent Form 10-K and any subsequent filings on file with the FCC also our remarks will reference certain non-GAAP financial measures. Our earnings press release and slide presentation included reconciliation of each non-GAAP financial measures to the nearest comparable GAAP financial measure as a reminder, this conference call is being recorded I will now turn the conference over to Edward Wehmer.

Thank you very much welcome to our second quarter earnings call with me as always are Dave Dykstra gave full year General counsel and Davies our CFO .

The same format as usual I'll give some general comments regarding our results turn over to Dave Dykstra for more detailed analysis of other income other expenses and taxes back to me for summary comments and thoughts about future and we'll have time for questions.

You know weve changes in streamlining the form and content of our earnings release.

Has been reduced by 12 pages, hopefully, we'll find it more informative do you have any ideas or or as to additional improvement through information, we'd like to see please feel free to give us a call or a note with your thoughts now on to our results for the quarter to quarter can basically summarized as follows.

Strong balance sheet growth, though again backend loaded.

Reasonable core earnings.

Higher credit costs from primarily related to three specific credits.

An additional MSR write down to the rate environment.

And notwithstanding the two negatives I think it was a it was a pretty reasonable quarter.

How is the play Mrs. Lincoln I guess, we could say.

Based on where the stock's gone today.

On the earnings side, our net income was $81.4 million.

Down 9% from the second COVID-19 in the second quarter of <unk>.

First COVID-19, so in quarter of 18.

Our year to date earnings of $170 million basically even with what we had last year. Good NPS standpoint, basically the same numbers.

Could take net income on a pre MSR adjustment basis year to date were up 8% to $180 million from $167 million.

Diluted EPS, the same up 8% from to three away from 24, notwithstanding the MSR adjustments.

Net interest margin dropped eight basis points during the quarter I will talk about that well rested statistics are there for your review.

As mentioned the quarter was negatively impacted by additional provision of almost 14 million digital MSR negative valuation adjustments of $3.1 million after netting out to hedging a small hedging gain.

I'll discuss the provision a little later when talking about overall credit that's MSR adjustment year to date, we recorded negative pre tax.

Fair market value adjustments net of hedging gains of $12.1 million.

As opposed to positive adjustments of $6.23 million the previous year. This this regarding these would result year to date net income and diluted EPS as I said earlier to be up over 8%.

On recent calls we discussed our hedging strategy on this asset.

While this although this quarter, we did have a small income statement hedge in place at partially mitigated the negative adjustment.

We actually rely more on internal balance sheet hedge to protect the equity the enterprise.

The marketing of our mortgage backed securities on the investment portfolio covers our income statement loss by over four times.

The problem is the one goes through the equity will directly while the other it's the income statement to that point since 930 18 when rates started to fall negative MSR valuation adjustments have impact the tangible book value per share by negative 28 cents. However changes in the fair market value of our securities portfolio, which run through the ever which are run through other comprehensive income and the equity section of the balance sheet and then at a $1.21 the book value per share.

We'll continue to look at income statement hedges when appropriate and cost effective. So you can see where we are well served by our current strategy as it relates to overall enterprise value.

You could ask what we do when rates rise in the fair market value Securities Falls.

The fair market value of MSR as rises in the same percentage relationship that four times.

Our positive GAAP position, which we increase in low interest rate periods more than covers this decrement hope this makes sense as it relates to how we deal with them as ours.

Net interest income and net interest margin that is net interest income increased 4.2 million over quarter, one due to one extra day in the quarter and volume growth was $797 million and average earning asset growth versus quarter one.

Pardon me.

In the NIM decreased eight basis points.

From 372 to 364.

Earning asset yields held constant.

The 4.74%, where our cost of funds increased eight basis points.

Well, our recently completed $300 million sub debt offering added approximately one basis point to this cost the rest due to market competition from Scotia rate job special rates offered new markets.

The fed goes ahead and lower rates. This month or thereafter, you can be assured that we will be aggressive as aggressive as possible and as quickly as possible lowering our costs.

The new said do sub debt offering will have an additional two basis point increase in cost of funds in Q3 and beyond this will include a full quarter. This expense.

No doubt at a decreasing rate Mariner is not good for the margin, where we believe we should be able to continue to grow net interest income nicely because of our good balance sheet growth, which during the third quarter, a nice head start presenting earning assets and loans.

As we then sorry.

We are starting the third quarter with nice head start as ending earning asset loans exceeded average balances in quarter, two by $1.16 billion and $750 million million $751 million respectively.

Our loan pipelines remain consistently strong across the board pipeline pull through rates in Q2 remained constant with prior periods, giving us confidence that high single digit loan growth can be achieved going forward.

The other income and other expense side. They will go through the details I want to give some high level remarks in these categories.

Wealth wealth management revenues increased a 162000 to 24.14 million continuing continuing their slow and steady climb as assets under administration increased $800 million.

From $25.1 billion to approximately $25.9 billion.

The big increase in total income the quarter related to our mortgage business.

As I mentioned, Dave will go through these numbers in detail, but I wanted to give you a quick report on our efficiency efforts in this area as phase one of our ongoing project concluded on June Thirtyth.

To date, we've cut over our overall cost to produce as a percent of volume by approximately 10 basis points or around 10% further cost decreases are expected as we will be receiving full quarter benefits what has been accomplished to date.

And execute additional cost saving measures and phase two of the project.

And as we continue to emphasize our consumer direct channel in production, where commissions are lower should we noted were not deemphasizing the old broker model, but rather attempting to add additional marginal revenue and volume through our through our consumer direct channel. For example in the month of June 30, 132% of our volume was through the consumer direct channel as opposed to 22% a year earlier.

Other expenses were generally in line with our expectations taking into consideration the seasonality of certain certain line items. The net overhead ratio for the quarter. After this regarding the effects of MSR adjustments was in the 160 area was in the low 100, Sixtys. If we were to compute the net overhead ratio on ending balances oppose the average balances numbers would have been 101.53% in Q2, 1.5% in Q1 of this in Q1 of this year.

Very close stores, our globe goals, we are a growth company. It takes money to invest to grow the company. We've always taken advantage of what the market gives us what the market gives is giving US now is very good core growth and we have to invest to get that core growth the balance sheet side total assets increased $1.3 billion or 15.9% from.

The first quarter, and 14% or $4.177 billion from a year ago.

Loans increased a $1 billion.

Or 18% in the quarter, not including loans held for sale.

And up almost $2.7 billion from a year ago.

Thanks.

As I said that the assets grew 1.3 billion in the quarter, an increase of 16% over the year 14 to present for a year ago Oak Bank acquisition, which we closed during the quarter is responsible for $220 million of their growth.

Total loans net of loans held for sale were $1.1 billion quarter versus quarter and $2.7 billion over year ago, approximately 18, and 12% respectively.

Book Bank accounted for $114 million. This growth as mentioned most of the growth was back end loaded and we start Q3 19 with a headstart of close to $751 million.

Of as average is a year end balances at quarter end balances.

Exceeded average balances for the first quarter as mentioned loan pipelines remain consistently strong deposits grew $714 million.

And $3.15 billion quarter versus quarter and year over year, respectively.

That translates into percentage grow for 11 percentage growth of 11% and 13% our loan to deposit ratio return to above the high end of our desired range of 85% to 90% closing quarter low closing the quarter little over 92%.

Our acquisition of Chicago, The Foreign Exchange Corporation last December continues to perform better than anticipated.

Positive balances at 630 were approximately 700 million supposed to 1.1 billion at year end, but equal to 630 of last year.

Well, we didnt own them back then TRID the number of transaction process for this year is a tiny bit above the same period last year.

We have said this is a seasonal business as year end always being the bellwether period working diligently to expand his national business. We recently hired two new sales people to the squad.

Now onto the elephant in the room credit.

Provision increase approximately $14 million in the quarter to $24.6 billion as net charge offs increased to $22.3 million.

18.4 million of the charge offs and $15.3 million of provision related to three credits provide a little color on these three credits as well as the lessons learned if applicable.

The largest credit represent $8 million charge off for the $2.66 million our reserve specific reserve.

For $10.66 million provision effect loaners or participation, we have a local back on a private equity owned construction company.

The loan has been scheduled this loan has been is should clear this week.

Should be off the books and clear as we enter a lesson learned.

Deals were not the lead, especially those that PE sponsors need to have real business reasons to be on our books excess leverage deals are not acceptable acceptable they fit this criteria.

And PE deals, where we have no relationship with a private equity firm are not acceptable.

Well, we do not control the process Enfolds late to US we're not in control of the collection process. Fortunately, we do we do have an immaterial amount of these on our books and we're looking to exit these relationships. The first opportunity by an immaterial amount I mean, two or three credits all of which are performing well but.

If we can't control it.

Really though that with our loan volume as being what they are we really have no reason to be in there.

The second largest credit was a franchise deal. We previously comment on in other calls charge on this loan was approximately $7.6 million for the $2.9 million provision effect to the existence of specific reserves placed on this account.

The franchise is under contract and scheduled to close in Q3 meter our franchise portfolio continues to perform well. So there's really no lesson learned here third credit resulted in a $3 million charge off provision increase related to a commercial premium finance workmens compensation loan.

Our policies the charge off any unconfirmed return premium and to look good on recovery.

That ends in this instance to return premiums held by a captive insurance company for potential future claims. Therefore, the return amount cannot be confirmed we anticipate receiving coverage on this loan the return premiums and payments from the insured which is a viable company has shown business they've been making payments of between 50 and $100000 per month.

So material recovery of our material sorry material recovery is expected over the next 18 months on this credit.

Year to date charge offs were 22 basis basis points up from our recent low historical numbers, but still respectable.

Npls were down $4 million to $113.5 million or <unk>, 0.45% of loans as compared to <unk>, 0.49% quarter one.

In Npls are down $6 million to $133.5 million or 0.4%, 0.40%.

As compared to <unk>, 0.43% of total assets in quarter. One. So then so from this perspective remain in very good shape, you're probably asking ourselves whether these increased credit losses represent a trend. Although you never know it does not appear this quarter represents a trend.

However, we all recognize a credit can happy there is good as it has been forever, we always try to identify that and recognize problem assets early take our lumps under the axiom to your first loss is your best loss as of now we think we recognized our problems and accounted for them correctly, we'll continue to monitor portfolio diligently to identify and clear any problem assets is actually a bit expeditiously as possible.

Now going to turn it over to Dave we will add.

Some color on how that other income other expense and taxes.

Thanks, Ed as normal I'll briefly touch on the other noninterest income and noninterest expense sections in the non interest income section our wealth management revenue increased to $24.1 million in the second quarter compared to $24 million in the first quarter of this year and up 7% from the $22.6 million recorded in the year ago quarter.

Brokerage revenue was up slightly by 248000, while trust and asset management revenue was relatively flat with a slight decline of 86000.

Overall, we believe the first quarter of 2019, our second quarter 2019 was another solid quarter for wealth management segment.

With a record gross revenues.

Mortgage banking revenue increased by 106% or $19.3 million to $37.4 million in the second quarter of 2019 from the $18.2 million recorded in the prior quarter and was down slightly from 39.8 million recorded in the second quarter of last year.

The increase in this quarters revenue from the prior quarter resulted primarily from higher levels of loans originated and sold during the quarter and lower negative fair value adjustments recognized in mortgage servicing rights.

The mix of originations weighted more heavily to the higher margin business this quarter versus the prior quarter and that aided with a higher average production margin.

The company originated approximately $1.2 billion of mortgage loans for sale in the second quarter of 2019. This compares to $678 million of originations in the first quarter and $1.1 billion of mortgage loans originated in the second quarter of last year.

The mix of the loan volume originated for sale was.

63%.

For home purchase activity.

And the remainder was refinancing this compares to 67% for home purchase activity last year. So refinances.

Have increased a little bit, but the home purchase activity is still the predominant.

Piece of our business.

Although we do see strong refinance applications continuing into the third quarter.

Table 16 of our second quarter's earnings press release provided the detailed compilation of the components of the origination volumes by delivery channel and also the mortgage banking revenue, including production revenue MSR capitalization, MSR fair value and other adjustments and servicing income.

Given the existing pipelines. We currently expect originations in the third quarter, just a strong and similar to the production level that we experienced in the second quarter.

The company recorded gains on investment securities of approximately $864000. During the second quarter. This compares to a net gain of $1.4 million in the prior quarter.

Other non interest income totaled $14.1 million in the second quarter down approximately $2.8 million from the $16.9 million recorded in the first quarter of this year.

The primary reasons for the revenue decline in this category include a negative swing of approximately 351000 foreign exchange valuation adjustments associated with Us Canadian dollar exchange rates.

The current quarter had a positive valuation adjustment of $113000, whereas the prior quarter had a positive adjustment of approximately $464000. We also had $1.7 million.

Decline related to less investment from investments and partnerships.

$442000 less a bully income.

And those were offset by approximately $393000 of higher swap fee revenue.

Turning to the non interest expense categories.

Total non interest expenses were $229.6 million in the second quarter up approximately $15.2 million from the prior quarter.

The majority of the increase related to three categories, including commissions associated with significant increase in the mortgage production and the related revenue.

Are typically higher marketing expenses in the second quarter.

Relative to the first quarter, primarily associated with sponsorships.

And an increase in loan and travel and entertainment costs in the other miscellaneous expense category.

I'll talk about a few of these in more detail.

The salary and employee benefit expense category increased approximately $8 million in the second quarter from the first quarter of this year commissions and incentive compensation expense accounted for approximately $4.9 million of that increase from the prior quarter due primarily to higher commissions expense tied to the significantly greater mortgage origination production.

During during the quarter.

Salaries expense accounted for slightly more than $1.3 million of that increase resulting from a full quarter impact of our annual base salary increases that generally took effect on February onest.

The staffing costs related to the old Bank acquisition that closed in May of 2018 and normal growth as the company continues to expand including staffing for five new branch banking locations that opened during 2019.

Additionally, employee benefit expense was approximately $1.8 million higher in the current quarter than the prior quarter.

Due primarily to the impact of higher health insurance claims.

As I mentioned on the last conference call. The first quarter claims were somewhat low and we would expect the level recorded during the second quarter to be a more normal level for health insurance costs.

Similar to last year marketing expenses increased approximately $3 million from the first quarter to the second quarter and totaled $12.8 million as we have discussed on previous calls this category of expenses increased as our corporate sponsorships tend to be higher in the second and third quarter of the year due primarily to our marketing efforts related to baseball sponsorships as well as increased spending related to deposit generation and brand awareness to grow our loan and deposit portfolios. We clearly believe these marketing efforts our effective enhancing the franchise value of the company.

Equipment expense totaled $12.8 million in the second quarter, an increase of approximately $1 million compared to the first quarter.

The increase in the current quarter relates primarily to increased software depreciation licensing expenses and maintenance and repairs.

Professional fees increased to $6.2 million in the second quarter compared to $5.6 million in the prior quarter.

Professional fees can fluctuate on a quarterly basis based on the level of legal services related acquisitions litigation problem loan workout activity as well as use of any consulting services, although up slightly from the prior quarter. This category of expenses remained at the lower end of the last five quarters expense totaled.

The slight increase was due primarily to acquisition related legal fees.

Lightly higher regulatory examination fees and a small increase in consulting fees.

But again at the lower end of the five quarter range.

The miscellaneous line item overall non interest expense increased by approximately $2.4 million in the second quarter to $21.4 million.

The primary reason for the higher expense level.

As I mentioned in my opening remarks is due to a higher level of loan expenses associated with the significant increase in loan origination volumes during the quarter.

And a greater amount of travel and entertainment expenses as we've gotten out of the winter months and into the.

Entertainments.

Other than the expense category just discussed all the other expense categories were up on an aggregate basis by approximately $200000.

Ed mentioned, this but I'll repeat it the company's on overhead.

<unk> expense ratio for the quarter was 1.64%, which is higher than our goal.

However, the company's asset growth was heavily weighted to the end of the quarter.

If we were to calculate the net overhead ratio based on end of period assets, rather than average assets for the quarter and exclude the net MSR valuation adjustment the ratio would be approximately 1.53%.

Accordingly.

We believe in the third quarter, excluding the impact of any MSR valuation adjustments, we would expect the net overhead ratio to be less than the 1.55% goal that we had for the year.

So with that I will conclude my comments and turn it back over to Ed.

Thanks, Dave.

And give us some thoughts about the quarter end.

What are you thinking of the future is.

2000, 2019 is off to a pretty good start those somewhat lumpy good balance sheet growth over $1 billion in each of the last two quarters is pretty darn good reputation among men momentum coupled with the continued market disruption gives us confidence of these growth trends will continue for the foreseeable future.

Strong core earnings despite the Onetimers rid MSR is in this quarter's credit blip looking at pre tax pre provision pre MSR due to date income was up if you in looking at if you take out Im sorry.

If you look at pre tax pre provision pre MSR adjustments due to income was up over $40 million or 17% from the prior year.

We previously as we previously mentioned year to date after tax net income not including MSR is as a percent from the prior year prior year.

We start the second quarter was $751 billion headstart on loans as ending assets and see the quarterly EPS averages by that amount.

Average, earning assets are 1.16 billion ahead of the.

Quarter end numbers.

So we are we realize that the margin.

So we feel good that way.

So as we realize the margin will be under pressure going forward debt interest income should continue to increase in upcoming quarters loan pipelines remain consistently strong and we're booking loans on our terms, although land bank competition is becoming more and more aggressive given some bank competition is becoming more and more aggressive our brand and marketed at our brand plus market disruption is helping us to continue to gain market share.

The situation warrants that is of our circuit breakers pricing policies and loan policies trip will not be afraid to stop the boat as we have in the past.

As we have as we as we sit now we do not see reason to do so however, we have selectively deemphasized a number of loan product types as I mentioned earlier.

We expect the margin to be under pressure in 2019, but through our expense expected growth deposit rate moderation remaining retaining our strict underwriting standards or pricing parameters, we expect to hold our own in this regard if rates do drop we move expeditiously to cut our deposit costs see that transaction is working as anticipated and is providing us with a nice source of low cost funding. The net overhead ratio is performing as expected we expect that number to approach our desired goals as evidenced by the numbers calculated when using period end assets mortgage market remained strong we believe we experienced the worst of the MSR adjustments knock on wood.

We're maven get some upside benefits going forward.

We continue to cut our costs related to our mortgage business credit metrics overall remain pretty good we did not believe that the second quarter represents a trend, but as we all know credit can't get can that be this good forever.

We performed at a percentage of our peers, though.

Our charge offs have been a percentage of our peers.

We will continue to look through the portfolio for any and all cracks and exit relationships were said credits are found we always remember that our first losses are best loss and we don't try to kick the can down the road.

Wealth management to continue its slow and steady crime climb.

In the quarter, we closed on our acquisition of growth Rochelle, and its subsidiary Oak Bank and announced the acquisition of STC Corporation has approximately $280 million in assets. We expect this transaction to close in quarter three to steal contain significant cost out opportunities. Both the branch overlap and normal operating efficiencies, we anticipate consolidating three other five current.

Three of the five current STC branches, both while absorbing many of their employees and our system, so thrilling and through normal turnover.

Acquisition opportunities remain plentiful pricing for banks in our asset range remains reasonable you can be assured of our consistent conservative approach to deals in all categories of business in short we're proud of what we build over the last 27 years and approach the rest of 2019 with confidence we'll be able to achieve our goal of double digit earnings growth and growth in tangible book value.

You can be assured our best efforts in that and we appreciate your support now we are open for questions.

Thank you, Sir ladies and gentlemen at this time, if you would like to ask the question over the phone. Please press star and then one on your telephone keypad and your questions have been answered your question.

Simply press the pound key.

And our first question will come from Jon Arfstrom with RBC capital markets. Your line is now open.

Thanks, Good afternoon.

Hi, John .

We talk a little bit about the margin that you referenced.

Margin pressure more than once.

And I understand your comments on the ability to outgrow that pressure with some of the loan growth that you're seeing but.

Curious what kind of magnitude you're thinking.

And then the other part of this is just your ability to start to lower deposit costs.

Do you have to wait for the fed or can you start to do some of that now.

Overall.

Competitive costs are moderating a bit and we're seeing that and we're reacting to that but.

The consumer doesn't the consumer understands what the fed does and that's about it and many of our index rates like LIBOR and alike actually react before that so.

It's hard to cut rate to watch.

Now, especially.

During the growth while that we've always taken advantage what the market gives us John and.

Right now, it's given us very good core growth our reputation all growth is terrific. All have marketing expense, we put out pay is very well for us pays off very well for us as shown by the growth that we have.

You have to if we can leverage our.

Overhead structure and have to pay a little bit more on deposits.

To cover we've always been asset driven to fund the loans.

Yes, that's a perfect situation for us because we have always been asset driven if we can have assets to cover we can gain more and more market share and work on our way to be Chicago's bank.

But I would say that you can't do any material adjustment until the fed moves one way or the other.

And when they do we'll move very quickly because everybody else will too so.

This is a good environment for US is we've been able to take advantage of.

Of the disruption in the market plus our reputation our marketing going forward to Chicago's bag, we feel that we should this is a this is an opportunity we should take advantage of.

But we're not we're not afraid to cut rates, we always look at them and.

But any big cock won't happen until the fed moves because people want to understand and the market will move.

Okay.

So is the message similar level of margin pressure.

Got until the fed does move.

That's a good question I don't believe if the fed didn't move and there was no change in markets I don't I don't think there would be a lot of pressure.

On the deposit side.

On the asset side.

We've been able to held pretty steady we held 474 for the last two quarters, but.

It all depends on what goes on underneath the fed what expectations are to LIBOR and what have you. Dave you have a comment on that.

Some of it's just going to be where our mix.

The mix of businesses and really what happens a little bit with one year LIBOR two out there and because we have such a big book of life portfolio Thats tied to that so if you could get that to flatten out a little bit and come back up that'd be fine, but I mean, there is a little bit of Cds repricing, but you know.

We also have.

Premium finance loans that are still going on at higher rates than they were in the past on the commercial side. So there's a little bit of a mix issue issue here, our new loans actually came on higher than our historic portfolio rate those this quarter. So.

You have a chip pay downs and other things. So the mix is really an important aspect of it.

That that's out there. So we'll just have to see what comes through in the mix side of the equation, but I think though there will be some funding pressure out out there in the fourth quarter with a little bit a CD repricing third quarter for our third quarter.

But it isn't.

It isn't material enough that we don't think we're going to grow our net interest income we really given the average that we have in the pipeline that average ahead of and the period head start we have in the pipeline that we have we're very comfortable that net interest income is going to grow.

Okay.

The.

The tail end of the quarter weighted loan growth.

Would you guys attribute that to quite it happened later in the quarter.

Always seems for the last three or four quarters have been like that Weve always started with a head start.

I don't know, maybe we empty the vote at the end of the quarter and we fill it up at the beginning of the quarter, but.

There was actually some spill over this this time that stuff that we expected to close in close.

Thats closing in the first quarter. So we shall see August is always a slow month due to vacations and then.

July should be good August will be kind of slow September should be very good.

Just it just seems to be a pattern, we followed it too.

With really no reason.

Other than the fact, we are happy to have them.

Yeah, I mean, we the thing I focus on John is the pipelines and the pipelines have been very consistent and as Ed mentioned in his earlier remarks.

Our closing rate our pull through rate has been fairly consistent too. So I look at the pipeline over a period of time you can't always judge when you can't make a customer close when you want to close but overall over time those pull through rates have been steady so as long as the pipeline stay strong we're pretty calm confident that we're going to continue to have good loan growth and the pipeline relates just to our commercial and consumer.

Commercial and commercial real estate loans are the premium finance loans always jump at the end of a quarter.

Especially in December in July .

That makes some of it up.

But you know our leasing business is doing well our niche businesses are doing very very well also.

So those are considered in the pipeline when we when we show you a pipeline or talking about pipeline numbers of billion too.

Sort of gross.

Gross numbers at some.

That doesn't include our niche businesses, which make up a third of the portfolio our premium finance business overall has since we've been able to.

Get out a competitive edge and not have to collect pin numbers anymore is growing very very nicely on the commercial side and on the life side, we had a pretty good quarter this quarter and the pipelines are pretty good there too. So all in all not just the pipeline. We report to you, but our niche businesses are also growing nicely.

Okay and I know.

A couple of questions, but just to to confirmations, you're saying that construction credit and the franchise credit are both gone or will be gone shortly out of the bank.

Yep.

Construction, one supposed to close today tomorrow or the next day and the other one's flows is scheduled to close in the third quarter. The additional charge. We had on a franchise. One is that the first deal walk from us.

We had it all closed up and.

And reserve for properly them in the first quarter and they ran into some issues and so the second round came in a little bit less so took our lumps moved on.

It is what it is.

Okay alright, thank you.

Thank you and our next question will come from the line of David Long with Raymond James Your line now.

Good afternoon, guys David.

How you doing.

Good just want to make sure we're clear on the the two credits that John just mentioned.

When you say you will be out this week and the other one later in the quarter that's at the current.

Marks that you currently have so so there is you are not saying theres going to be recovery, we're just done with them as as they are now.

Yes, Sir.

Okay got it thank you and then.

I wanted to talk a little bit more about the asset yields and almost a year ago back in September of last year, and you talked about trying to protect your asset yields while rates were still high have you guys moved on that and then have you over the last 10 months added some swaps and floors to try to protect yourself on the downside if we do get the fed to cut rates a couple of times.

Well, we did we did.

Have are lengthening of our investment portfolio.

We were doing and that's worked well for us on the on the liquidity management side, but as you know we've experienced so much growth in the last two quarters that liquidity is gone shorter so.

We have not.

When the when the long end came back down there really isn't a lot of reasons to go out and buy a lot more mortgage backs right now we had lowered our GAAP, but our interest rate sensitivity position in accordance with our plan now if rates go down again, we're going to start increasing it will actually go little bit shorter.

As to other.

Swaps and other issues.

Yes, what we really did David was we just allocated more fixed rate loan pools out into the number of the product lines and began to build those fixed rate products out so.

Some progress on that we did not do some major holistic.

Balance sheet hedge but we.

We began to.

Devote more of the new loan volume to fixed rate loans than the variable rate loans.

Got it Okay, and then just the follow up.

Thanks, and maybe a separate question here regarding the deposit.

That are related to the 10 31 exchange here I think you said you hired a couple of people that.

Business you brought from feedback back late last year.

Yes, what is the average cost or how should we think about the cost of deposits in that part of the business.

Try that averages.

Some of that business comes in we made we maintain what the average balances have gone.

12 month kind of rolling average the rest we sell into the market make fee income on so on the interest expense, it's around 70 or 75 basis points right now for that money.

If rates drop will obviously lower that too so.

It's good cheap money for us.

And by adding to sales than we were we raised from eight people to 10 people. So it's a pretty inexpensive.

And we've got the best crew in the World.

Most knowledgeable value added crew in the world do in this business so.

It's a very low overhead business it provides us.

With very if you take overall cost of opening a branch the raised $700 million in their deposits or having eight people that see that do it it's pretty low cost for us.

Got it that's all I had thanks guys.

Thank you and our next question will come from the line of Nathan race with Piper Jaffray. Your line is now open.

Hey, guys.

Good afternoon.

How are you I wanted to start on the balance sheet.

Growth dynamics in the quarter, obviously really impressive growth this quarter and I'm just curious how much of that is related to that M&A related disruption that you alluded to earlier in the call and I guess I'm just curious what inning. We are in terms of some that M&A related disruption that could continue to.

To provide a good runway for at least high single to low double digit growth going forward.

Take it.

Well I mean, there's two aspects I mean.

As far as the actual acquisition M&A, if we had the open bank acquisition.

That was about 100 and.

$14 million at the end of the quarter that was on the balance sheet. So in loans.

I guess I guess for we really havent talked about and probably aren't going to disclose to the amount of business. We got from the other disruption in the marketplace, but.

It is.

I don't have a firm number in front of me, but we are getting our fair share of looks at deals and closing on deals in the middle market space and so we see that continuing and we see the event disruption does continue to be good for us, but we haven't we haven't quantified a number that over that we've disclosed on that but.

It's not it's not just one or two deals obviously its vince.

We're seeing deals every week.

That they were getting chat so.

Okay understood and if I could just change gears real quick in thinking about expenses.

I understand you guys are through a couple of phases of what you're doing on the.

On the residential side of things, but just curious if you guys are looking at any other kind of cost cutting or expense initiatives in other areas of your franchise at this point.

Well, we always look at expenses, obviously on the mortgage side. It's we this is a longer term play we because of the nature of the change in the business with all the regulatory stuff that came through with that Frank.

We have to bring down our cost of doing business. The largest cost we have is our commission structure.

By changing our when we don't want to de emphasize the.

The old way of doing it with a mortgage.

Broker type guys out there our mortgage originating type guys will get commissions.

Well above our new.

Front end and marketing our.

The new front end to all of our market area here in Chicago should should help change the channel and into more and more.

Consumer direct as marginal volume that we expect our <unk>.

The volume from our traditional approach to continue and the consumer direct and continue to add marginal value to us where commissions are in half. We also have gone off shore with some.

Non customer facing.

Concepts in the mortgage side, which is help we also are evaluating robotics on that side.

We were also looking at number of proof of concepts on the robotics side in all of our business too.

On.

To cut costs.

And.

Work that is just routine non customer facing where its just.

Filing and directing and that sort of stuff, so where our new director right. It came out almost a year ago is really.

Done a wonderful job for us in terms of.

Identifying opportunities to save costs and bring efficiencies and so.

Money related to processes that we have and robot and robotics will be big part of what we do.

But we are in a growth mode and we are opening a number of branches and.

We feel that we have to take advantage of it.

The momentum that we the brand momentum that weve built.

Where our branches that we've opened are all doing it as well as can be expected.

Some are doing much better than expected, we opened one as evidenced and thats over approaching $500 million in deposits in little over a year.

There are a number of good markets, we're not in that we need to get in that we have plans to open then.

But we are a growth company, we just have to maintain that one try to get down to that 150 number and hold it there and.

Balance everything off of that and we can do better we will do better but we're always looking at that we are catching on the IP in the robotics side of things and.

Hopefully that will we're in procedures and processes that.

Weve God, we did a full study of many of our procedures and processes and have identified any number of items, where we can we can improve those so we're always looking at that.

Okay. That's helpful. I appreciate guys taking the questions.

Thank you and our next question will come from the line of Michael Young with Suntrust. Your line is now open.

Hey, good afternoon.

Hey, Mike.

I wanted to go back to maybe the Eni question just based on your most recent disclosure you kind of do disclose that 10% reduction in net interest income from a 100 basis point.

Immediate reduction in rates, so should we kind of look at that on a pro rata basis and assume each rate cut is roughly a 28 million dollar headwind or 10 basis points to NIM or is that too severe.

Well.

Well, that's a yeah I think that would be a little bit too soon to severe.

I think you probably need to look at the ramp in scenarios more more likely.

Okay.

And then maybe just back on the deposit side can you just talk about any actions that you've already taken to reduce deposit costs. I know you talked about what you would do potentially if the fed does cut rates, but have you already kind of shorten CD.

Liens or pricing can you just talk a little bit about that.

A little bit.

The market has moved down a little bit where we are doing that.

But again it's.

We're in a growth mode and.

We opened a new part of our process when we opened a new location.

Is to offer a bundled package of accounts with the teaser account in there.

And we pay a little bit of a higher rate on a teaser account.

And.

But.

That's becoming less and less of an issue because of our overall size and marginally inside that big but.

We just we follow the market whatever the market does will follow we don't overpay for the market for most of our other than the.

Where we have a promotion going on.

In a new location fair enough, Dave Yeah, I think I mean, some of that we do have new locations. We have cut the promotional rates that were offering out there on some of these products. So.

Promotions that were offering five six months ago, we are certainly less than that.

Brokered market has come down.

The in a lot of the municipalities follow that broker market and so as those rates have come down the CD rates that some of our municipalities.

Require has has has come down also so there there has been some reduction in in the CD rates that.

That that are offering just because of the market pressures out there so.

Backing off a little bit, but does that answer them until the fed moves we havent seen people cutting dramatically.

So competitively that we haven't seen that happen other than.

Sort of the wholesale CD municipal market ahead of them and the like one of the things that we're we're emphasizing now is demand obviously free demand deposits.

We are instituting a new all gimmick technical here, but a new piece of software, which should open up a lot of doors for us in terms of larger demand deposits and payment processing.

And we know a number of clients that are waiting for that to go live in the third quarter when it does.

We and from my understanding from our folks us in the big and the Big guys only guys who have it so.

As it relates to the competition, we will have to go against we have a number of clients waiting for that to come on line that could help on the demand deposit side. So.

If we can get free money and Thats, the best way to go and that has slipped as a percent of the overall deposits lately as rates were higher grades going a little lower people won't be as elastic to that and we can.

We were really working on.

Build and demand deposits, so that should help mitigate some of it to and we have a number in the pipeline that we think we will be very helpful to us.

Okay, and if I could sneak in one last follow up just on the asset quality piece, the commercial premium finance workers comp loan.

Yes, just talk say, how big that total book of businesses and then what was sort of idiosyncratic about that loan that we should.

Not extrapolate that to.

Broader issues.

Well that does that loan was was a big loan. It was there was one of the larger ones that was to a large staffing company.

The interesting thing about this one or why it turned a little bit sideways was it was the workmens comp it was a 20 over $20 million alone.

Everything, but 70 everything but three was returned to us.

For five was returned to us.

And they pay down a number that number that are ready to get to that number we charged off so.

What happened was the and this is the only time ever really ever seen this happen in the 20 something years, we've been in existence.

Is that the captive.

It was it was canceled but they stayed with the captive when they on cancel that their problem was it's a staffing company and the timing of staffing companies you Bill.

And you get your money later with rises in.

In minimum wages, they had a cash shortage they miss the payments, we cancel that they stayed with a read that with the with the captive the captive gets to hang onto it it doesn't run by the same rules as the other guys. So.

There is still low.

We believe a large amount of return premium income, but we can't confirm it.

And we know there will be some shortage and the company is a viable I mean, its $21 million revenue company. They have been making 50, they may be a $100000 payments, they're going to cut the 50000 for the next couple of months and back to $100000 in October to cut that shortage. So we think we'll get it back first time, we've seen one with this captive the captive sort of issue, where we can't confirm the premium because we can't confirm the return premium we write it off Thats just a rule.

And that's the reason we can't confirm it is just a pool of loans.

I will have funds that are sitting there that are available to cover workers comp claim over a period of time. So if the claims are higher there is less of a pool of the claims are lower there is more of a pool. So again as Ed said, we it's unique because it was larger it was with a staffing company staffing companies have.

A much higher level of workers comp.

This one was an insurance company, who asked to go through audit and give you a return premium.

Right because it's in this captive pool, so its very unique.

This is not our main business.

It's it is a very unique situation, we don't have another one like that in our our portfolio.

And we do expect to get recoveries on this going forward. So.

Again, it's a very unique asset. It is it is it is not a common asset in the premium finance book and there is not another one that has the same characteristics never seen it in the 27 years, we've been in business. So.

It's just it's just the timing of that size. It is.

We do when we have that happen a lot, where we can't get a confirmatory we charge off a little bit on recovery. There is just a big one that with captives with others. That's just our policy is a big one that we did it.

Okay. Thanks for all the color.

Thank you and our next question will come from Brad Milsaps with Sandler O'neill. Your line is now open.

Hey, good afternoon guys.

Hi, Brad.

Yeah, you've addressed most everything just curious the.

Any further thoughts on.

Capital management, obviously, it sounds like your organic growth is off the charts, but any further thoughts on a buyback given the pressure on the stock or just any other further color on M&A as you kind of think out through the back half of the year can how you balance all that together.

Well, we we raise a $300 million, which should hold us for a little while.

The acquisition market remains active.

Their lines up again like plans overall hair gestation periods, along pricing seems reasonable.

By timing and take a look at him.

Some of the opportunities that we're seeing.

There are portfolios although appear current.

With that take a.

Downturn very well if you follow me and we'll walk away from those so we're very active in the market. There is still a number of smaller strategics and move us into.

Areas that were not in we will continue to look at them, but we're no loss of things to do in that regard, but we've always been very.

Circumspect about how we approach there.

Yes, the stock buybacks, we continue we consider them all the time and we'll leave it at that.

Okay. That's helpful. And then just wanted to follow up on that.

Commercial premium finance business, you do typically get a boost in the second quarter. This was maybe a little bigger than.

It has the last few years do you attribute most of that to the tax I'd number.

Situation that you've worked through or is there something else.

Kind of more structural going on with that business, that's driving a little bit better growth.

I would say, it's mostly the tax I'd number average ticket sizes have moved a tiny bit not a lot.

But I would say, it's mostly being able to be aggressive.

We were we were like a punching bag for a little while for the non bank competition and the 10 number issue.

And now we're able to punch back is our levels of service, we believe are much better than our competitions.

And when we're on a level playing field, we can beat anybody. So we are aggressively going to get back to business. We lost during that period of time, we had to do it we we held our own but we lost about 10% of our own.

Our volumes from existing agents and we had a bill that the other ways.

During the period, where we had a click to numbers.

We're going back and get those agents back so hopefully that we've had record years here record months in the United States and Canada is doing very well also so.

We're hoping to be the number one premium finance company in Canada over the next year or so so.

We're very excited about our opportunities there. So a lot of it is just get on a level playing field and.

And being able to compete again and our service levels, so much better than the others.

Nice rise in.

Ticket sizes would be welcome.

Great. Thank you guys.

Thank you and our next question will come from Chris Mcgratty with KBW. Your line is now open.

Great. Thanks.

I want to go back to Brads question on the on the capital management and for a second.

Is the lack of a buyback authorization procedural meaning getting the approval in announcing it or is it kind of philosophical at Wintrust that you view ourselves as a growth company irrespective of kind of valuation at 135, a book Im just kind of interested in.

In.

Judging the probability that we actually get one versus.

Funding funding growth organically.

I'd, rather not comment on any of that to be honest with you but.

We have been a growth company, we've grown very nicely we needed the capital we need the cash this time around to support our growth.

But.

As I said, we review it all the time.

And.

We.

You never know that's we're on.

It's it would probably.

Depending on the situation at the time, we do review the facts and we would act accordingly.

Okay.

And then Dave maybe on the margin just one for you kind of looking at your margin pre tightening by the fed.

It was kind of in that.

330 range call it.

And now we're kind of mid 360, if I kind of put that together with the fact, we've had nine hikes in the markets pricing in a couple of doubt.

Is it fair to assume that the forward curve played out that your margin what kind of head to that mid three fortys range is that kind of.

Yes, it's a little bit more than that 10 basis points to hike or per cut that you.

Talked about before but anything.

Structurally different with the balance sheet today that wouldnt.

Confirm or or from that.

Why.

Again, it gets it gets a little bit in the mix and the like I think given the structure of the balance sheet now you would see some.

Further compression on on them.

Margin, whether whether would get all the way down to 340, thats really going to depend on.

On the competition and the mix of our our business and I and the shape or the shape of the yield curve.

But but in all I think there is some pressure, but again, we focus more on that and I. If we lose a few more basis points in margin.

But have this high single digit low double digit loan growth.

Like we've had the last couple of quarters, then we're going to grow we're going to grow our net interest income, which is what drops to the EPS, but.

If nothing changes out there and the yield curve sort of stays inverted and lower then yeah I think given the position of our balance sheet, we're going to see some pressure, but we were very confident we can offset that with the growth and the pipelines that we have and grow net interest income and just be prepared for when the yield curve.

It gets more favorable.

Is as I said earlier, Chris we always.

The rates get low we increase our interest rate sensitivity position by design.

With the property rates that staying away they stay low forever wrong, but.

It is the margin does cut a bit view.

You'd have to lock in that spread should order I mean, just to save a little bit of Doe now so we do balance it.

And we'll do the best we can but our growth should add to net interest income without.

We want to make money.

When when rates go up inflation's up we need to make more money and we will deal with probabilities on each side of which way to go on.

And.

So.

It will be a little margin hit would probably be more than offset by the earning asset growth we are experiencing.

Okay and then the overall if I heard you right early right. The overall comment is still double digit earnings growth is that is that what you said is that number one is that correct number. Two is that you think you can get double digit earnings growth, even with this quarter trying to understand.

That's the plan.

Not given out right.

Thanks.

Thank you and our next question will come from the line of Brock Vandervliet with.

Your line is now open.

Okay, great. Thank you.

David If you could just circle up on the.

Loan to deposit ratio I noticed that's 92% that's above your 85 to 90 guide I remember a year or so ago used you pulled that down.

How do you look at that now versus your now being in being in growth mode.

Well I still think long term. Our goal is 85 to 19, we were at 99% on period end loans last quarter, but there's really just no place to put the.

The liquidity now on the investment side. So some of those have rolled off we've opted to take the yield on the loans versus the investment. So in the short run will probably run higher than that.

Of the 90% range and if we can get some slope back to the yield curve, where we can put some of that liquidity to work on the investment portfolio. Then then we'll go back to that but.

As Ed mentioned earlier, and just that Arsenal, there's really no acceptable investment vehicle out there right now from our perspective, the plough a lot of money into so we've got a good pipeline out there right now we think they're good quality loans good customers market disruption take advantage of it ran a little bit higher I mean, it's not unusual I mean, we've really been at that range for the last two years. So it's really kind of doing what we had done but not push you know if you're going to push for that 90% marquee really need some place to invest the funds versus just letting them sitting at the fed overnight.

And.

The night, 85% to 90% is historically from a liquidity standpoint I mean.

The IMO I'm, a true believer the risks of banking haven't changed since the DG is opened their first bank 600 years ago interest rate risk liquidity risk credit risk or what failure. So liquidity risk as you can always get liquidity until you need it.

We know that.

If we have expanded our liquidity the lines in places and.

Just to kind of where we haven't center and said we can live with this and live with that risk, we've done things to mitigate that and liquidity lines and things like that so we're comfortable that is covered by being 85 to 90, but we're comfortable and because of the short term nature of the premium finance portfolio.

We're comfortable that our liquidity is not an issue.

And given the fact, we are 95% core funded that have not relied on institutional funds. We believe we can cover that so.

As Dave said, there is no reason to go out and push it right now if we can cover they may be talk on the liquidity side Im happy to be happy, but I'm, okay with being up above our desired range.

I get the.

This low securities yields and not limited opportunities to redeploy.

Is there anything more you can do in terms of retaining your own mortgage production too.

Lessen that asset sensitivity.

We could.

But.

I don't want to be stuck with a 30 year mortgage at those rates that I don't want to lock in these rates now I don't think.

They will be there for you know there is a contrarian view out there that the tenure is going to go to 3%.

And the next so I tend to agree with that but what do I know, we don't guess rates. All I know is I don't want to lock I don't want to lock in.

Of the 30 year fixed rates at these low rates.

Does it make a lot of sense does we maintain the servicing on in footprint loans.

Modes that we can't sell we put on the books is an arm basis, so that helps us a little bit.

Because we get a premium rate on them.

And thats subprime loans or just loans that guy might be self employed or with all the new rules.

We are usually able to place them in one or two years out into the fixed rate market, but.

We are keeping we are doing a number of portfolio based arm loans with that are based at premier in the market, which you will fix the rate for a couple of years reminisced, Russia put 30 year loans on now.

Okay. Thank you.

Thank you and just as a reminder to ask a question over the phone that is star and then one.

And our next question will come from David Scharf.

Securities. Your line is now open.

Hi, Thanks couple of questions for you first circling back to.

Credit.

You mentioned you didnt have much exposure to non relationship PE sponsors, but I was curious if you could disclose.

How much exposure you have to non relationship PE sponsors as well as sponsor finance in general.

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