Q3 2023 Wintrust Financial Corp Earnings Call

Okay.

Speaker 1: Welcome to Winstress Finance and Corporations Third Quarter and Year-to-Date 2023 earnings conference call. A review of the results will be made by Tim Crane, President and Chief Executive Officer, David Dykstra, Vice Chairman and Chief Operating Officer, and Richard Murphy, Vice Chairman and Chief Lending Off.

Welcome to win Trust financial Corporation's third quarter and year to date 2023 earnings Conference call. A review of the results will be made by Tim Crane, President and Chief Executive Officer, 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 reference to both the earnings press release and the earnings release presentation. Following their presentations there will be a formal question and answer session.

Speaker 1: as part of their review, the presenters may make reference to both the earnings press release and the earnings release presentation.

Speaker 1: Following their presentations, there will be a formal question and answer session.

Speaker 1: during the course of today's call. When trust management may make statements that constitute projections, expectations, beliefs, or similar for looking statement.

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.

Speaker 1: Actual results could differ materially from the results anticipated or projected in any such forward-looking state.

Speaker 1: The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent form, 10-K, and any subsequent filings with the SEC.

So that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10-K and any subsequent filings with the SEC.

Speaker 1: Also, our remarks may refer in to certain non- GAAP financial measures.

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

Speaker 1: Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure.

Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure.

Speaker 1: As a reminder, this conference call is being recorded. I will now turn the conference over to Mr. Tim Crain.

As a reminder, this conference call is being recorded I will now turn the conference over to Mr. Tim Crane.

Speaker 2: Good morning, everybody. Welcome to WindTrust Wednesday. This is the day of the week we require all of our WindTrust staff to be on site. We're glad that you have joined us too for our third quarter earnings call. With me this morning are Dave Dykstra, our Chief Operating Officer, Rich Murphy, our Chief Lending Officer, Dave Starr, our Chief Financial Officer, and Kate Bogie, our General Counsel.

Good morning, everybody welcome to win Trust Wednesday. This is the day of the week, we require all of our wind trust staff to be on site.

We're glad that you have joined us to for our third quarter earnings call.

With me. This morning are Dave Dykstra, our Chief operating Officer, Rich Murphy, our chief lending officer.

Daystar, our Chief Financial Officer, and Kate Bogey, our general counsel.

Speaker 2: In terms of an agenda, I will share some high-level highlights. Dave Dykstra will speak to the financial results, and Rich will add some additional information and color on credit reform.

In terms of an agenda I will share some high level highlights, Dave Dykstra will speak to the financial results and rich will add some additional information and color on credit performance.

Speaker 2: I'll wrap up with just a few summary thoughts and as always, we'll do our best to answer some questions.

I'll wrap up with just a few summary thoughts and as always we will do our best to answer some questions.

Speaker 2: Earnings or net income for the quarter were just over $164 million up from both the second quarter and the paired quarter last year.

Earnings our net income for the quarter with just over $164 million up from both the second quarter and the per quarter last year.

Speaker 2: From our standpoint, a very solid result with good loan and deposit growth and continued good credit performance.

From our standpoint, a very solid result, with good loan and deposit growth and continued good credit performance.

Speaker 2: As Rich will highlight, we are not seeing any systemic credit issues at this point.

As rich will highlight we are not seeing any systemic credit issues at this point.

Speaker 2: Our margin at 362 was within the range we expected, down essentially just for the impact of our hedging activities. We continue to benefit from a loan portfolio that prices relatively quickly. You'll recall that nearly 80% of our loans mature or reprice within a year. The resulting improvement in loan yield allows us to largely offset the increase in deposit costs, which I would add we believe are moderating at this point.

Our margin at 362 was within the range we expected.

Essentially just for the impact of our hedging activities.

We continue to benefit from a loan portfolio that prices relatively quickly.

You'll recall that nearly 80% of our loans mature or reprice within a year.

The resulting improvement in loan yield allows us to largely offset the increase in deposit costs, which I would add we believe are moderating at this point.

Speaker 2: Our growth in the relatively stable margin resulted in net interest income growth for the quarter and on a year-over-year basis.

Our growth in a relatively stable margin resulted in net interest income growth for the quarter and on a year over year basis.

Speaker 2: From a market standpoint, we continue to see isolated disruption among competitors. As a result, we continue to add clients and create long-term franchise value. We expect that in the coming quarters, we will continue to grow loans and deposits.

From a margin from a market standpoint, we continue to see isolated disruption among competitors.

As a result, we continue to add clients and create long term franchise value.

We expect that in the coming quarters, we will continue to grow loans and deposits.

Speaker 2: Our liquidity position remains strong. The deposit growth not only allowed us to fund good loan growth, but also to reduce the level of brokered deposits during the quarter.

Our liquidity position remains strong the deposit growth not only allowed us to fund good loan growth, but also to reduce the level of brokered deposits during.

Speaker 2: Again, overall, a solid quarter, which we believe will compare well and in fact may differentiate us relative to many of our competitors.

During the quarter.

Again overall, a solid quarter, which we believe will compare well and in fact may differentiate us relative to many of our competitors.

Speaker 2: With that, I'll turn this over to Dave to provide some additional financial details.

With that I'll turn this over to Dave to provide some additional financial details.

Speaker 3: Great, thanks, Tim. First, with respect to the balance sheet growth, we were again pleased to see deposits for the quarter grow by approximately $1 billion or 9% on an annualized basis.

Great. Thanks, Tim first with respect to the balance sheet growth. We are again pleased to see deposits for the quarter grow by approximately $1 billion or 9% on an annualized basis.

Speaker 3: This deposit growth was primarily in the form of interest-bearing retail deposits, and that growth allowed us to reduce our level of broker deposits by $392 million.

Deposit growth was primarily in the form of interest bearing retail deposits and that growth allowed us to reduce our level of broker deposits by $392 million.

Speaker 3: as a deposit composition. Nine interest-praying deposits at the end of the quarter represent a 23% of total deposits, 24% at the end of the second quarter.

Yes, the deposit composition non.

Noninterest bearing deposits at the end of the quarter represented 23% of total deposits compared to 24% at the end of the second quarter. The slight reduction in the percentage of noninterest bearing deposits to total deposits is really more a reflection of the positive growth occurring in the interest bearing categories, rather than any large losses of non.

Speaker 3: The slight reduction in the percentage of noninterest bearing deposits, the total deposits, is really more a reflection of the positive growth occurring in the interest bearing categories rather than any large losses of noninterest bearing deposit accounts. We've seen the noninterest bearing balances stabilize as evidenced by the $10.6 billion of average noninterest bearing deposit balances in the third quarter being roughly equal to the $10.6 billion balance at the end of the second quarter.

Interest bearing.

Deposit accounts, we've seen the noninterest bearing balances stabilize as evidenced by the $10 $6 billion of average noninterest bearing deposit balances in the third quarter being roughly equal to the $10 $6 billion balance at the end of the second quarter.

Speaker 3: This strong deposit growth helped the fund solid loan growth of $423 million for the third quarter. Adjusting for the impact of the sale of certain commercial insurance premium finance loans during the third quarter, total loans increase $767 million or 7% on an annualized basis, which is consistent with our prior guidance of mid to high single single-digit loan growth.

This strong deposit growth helped to fund solid loan growth of $423 million for third quarter adjusting for the impact of the sale of certain commercial insurance premium finance loans during the third quarter total loans increased $767 million or 7% on an annualized basis, which is consistent with our prior.

Guidance of mid to high single digit loan growth.

Speaker 3: The increase in loans was primarily the result of draws on existing commercial real estate loan facilities as well as growth in the commercial portfolio.

The increase in loans was primarily the result of draws on existing commercial real estate loan facilities as well as growth in the commercial portfolio.

Speaker 3: Additionally, despite the loan sale transaction that reduced outstanding balances by $344 million at the end of the third quarter, the commercial insurance premium portfolio ended relatively unchanged, which is a good result. Rich Murphy will discuss the loan portfolio growth in more detail in just a bit.

Additionally, despite the loan sale transaction that reduced outstanding balances by $344 million at the end of the third quarter. The commercial insurance premium portfolio ended relatively unchanged, which is a good result rich.

Rich Murphy, who will discuss our loan portfolio growth in more detail in just a bit.

Speaker 3: The result of these and other balance sheet movements was growth and total assets of approximately $1.3 billion, the slightly reduced andy-loaned deposit ratio of 92.1% and risk-based capital ratios that were relatively stable to up a little. Overall, it was a very successful quarter in the growth of our franchise or differentiated business model exceptional service in the unique positioning that we have in Chicago and Milwaukee markets continues to service well.

As a result of these and other balance sheet movements was growth and total assets of approximately $1 3 billion or.

A slightly reduced ending loan to deposit ratio of 92, 1% and risk based capital ratios that were relatively stable to up a little overall it was a very successful quarter in the growth of our franchise, our differentiated business model of exceptional service and a unique positioning that we have in Chicago and Milwaukee markets continues to serve us well.

Speaker 3: Turning to the income statement categories, starting with the net interest income, for the third quarter of 2023, net interest income totaled $462.4 million, an increase of approximately $14.8 million as compared to the prior quarter, and an increase of $60.9 million as compared to the third quarter of 2022. I should note that the third quarter net interest income represents the highest quarterly amount ever recorded by the company.

Turning to <unk>.

The income statement categories, starting with the net interest income for the third quarter of 2023 net interest income totaled $462 $4 million, an increase of approximately $14 $8 million as compared to the prior quarter and an increase of $69 million as compared to the third quarter of 2022.

True.

I should note that the third quarter net interest income represents the highest quarterly amount ever recorded by the company.

Speaker 3: The increase in net interest income as compared to the prior quarter was primarily due to the increase in average earning assets of approximately $1.6 billion.

The increase in net interest income as compared to the prior quarter was primarily due to the increase in average earning assets of approximately $1 6 billion.

Speaker 3: The net interest margin was 3.62% in the third quarter, which was just four basis points less than the prior quarter level of 3.66%. Three of the four basis points of the decline was due to the impact of our interest rate hedging strategies, which are designed to protect our net interest income if interest rates decline. Accordingly, as we discussed on prior calls, our balance sheet composition, structure, and repricing characteristics provided for a relatively stable net interest margin during the quarter.

The net interest margin was 362% in the third quarter, which was just four basis points less than the prior quarter level of 366% three of the four basis points of the decline was due to the impact of our interest rate hedging strategies, which are designed to protect our net interest income if interest rates decline accordingly, as we discussed on prior.

Cause our balance sheet composition structure and repricing characteristics provided for a relatively stable net interest margin during the quarter.

Speaker 3: Deposit pricing moderated in the third quarter of 2023 and we expect that to continue into the fourth quarter. Based on the current interest rate environment, we believe we can maintain our net interest margin within a narrow range around the current levels for the remainder of 2023.

Deposit pricing moderated in the third quarter of 2023, and we expect that to continue into the fourth quarter based on the current interest rate environment. We believe we can maintain our net interest margin within a narrow range around the current levels for the remainder of 2023.

Speaker 3: I'd also like to note that total loans as of September 30th, 2023 were $739 million higher than the average total loans in the third quarter of 2023. This provides momentum into the fourth quarter. This growth and expected growth and the balance sheet and the relatively stable net interest margin should allow for future growth of our net interest income in the fourth quarter.

I'd also like to note that total loans as of September 30 of 2023 were $739 million higher.

Then the average total loans in the third quarter of 2023. This provides momentum into the fourth quarter.

This growth in <unk>.

And the expected growth in the balance sheet and a relatively stable net interest margin should allow for future growth of our net interest income in the fourth quarter.

Speaker 3: Turning to the provision for credit losses, WindTrust recorded a provision for credit losses of $19.9 million in the third quarter compared to a provision of $28.5 million in the prior quarter and $6.4 million provision expense recorded in the year ago quarter.

Turning to the provision for credit losses, when trust recorded a provision for credit losses of $19 $9 million in the third quarter compared to a provision of $28 5 million in the prior quarter and $6 $4 million provision expense recorded in the year ago quarter.

Speaker 3: The lower provision expense in the third quarter relative to the second quarter was primarily a result of lower net loan growth during the third quarter.

The lower provision expense in the third quarter relative to the second quarter was primarily a result of lower net loan growth during the third quarter.

Speaker 3: Rich Murphy will talk about credit and loan characteristics in just a bit.

Hi, Rich Murphy will talk about credit and loan characteristics and just a bit regarding noninterest income and noninterest expense sections total noninterest income totaled $112 $5 million in the third quarter and was relatively stable when compared to the prior quarter total of 113.0 million.

Speaker 3: regarding non-interest income and non-interest expense sections.

Speaker 3: Total non-interest income totaled $112.5 million in the third quarter, and was relatively stable when compared to the prior quarter total of $113.0 million. As shown in the table in our earnings release, there are a number of relatively small changes to a variety of non-interest income categories, but in the aggregate, the changes netted to a slight decrease of $552,000 from the prior quarter.

As shown in the table in our earnings release, there are a number of relatively small changes to a variety of noninterest income categories, but in the aggregate the changes netted to a slight decrease of $552000 from the prior quarter. This illustrates the importance of having a diversified fee businesses that can contribute at various levels over time and the ability.

Speaker 3: This illustrates the importance of having a diversified fee businesses that can contribute at various levels over time and the ability of those business lines to maintain a relatively stable level of non-interest income despite what is a challenging mortgage environment.

Those business lines to maintain a relatively stable level of noninterest income despite what is a challenging mortgage environment.

Speaker 3: On the non-district expense categories, non-district expenses totaled $330 million in the third quarter of 2023 and were up approximately $9.4 million when compared to the prior quarter total of $320.6 million.

On the noninterest expense categories noninterest expenses totaled $330 million in the third quarter of 2023 and are up approximately $9 $4 million when compared to the prior quarter, a total of $326 million.

Speaker 3: There are a few primary reasons for the increases, which are related to the negative impacts of one, occupancy costs of approximately $2.9 million from the impairment of two company-owned buildings that are no longer being used. Two data processing costs of approximately $1.5 million from a termination of a duplicate service contract related to the acquisition of the wealth management business in 2023.

And there are a few primary reasons for the increases.

Which are related to the negative impacts of one occupancy costs of approximately $2 $9 million from the impairment of two company owned buildings that are no longer being used to data processing costs of approximately $1 $5 million from a termination of a duplicate service contract related to the acquisition of the wealth management.

<unk> in 2023.

Speaker 3: Other salary costs of approximately $1.6 million related to acquisition, severance charges, acquisition related, severance charges, and other contractually due compensation costs. And then we also had an increase in our commissions and incentive compensation of $4.3 million, primarily because of the adjustments to our incentive compensation accruals due to the strong marine love.

Other salary cost of approximately $1 $6 million related to acquisition.

Severance charges acquisition related severance charges and other contractually due compensation costs and then we also had an increase in our commissions and incentive compensation of $4 $3 million, primarily because of the adjustments to our incentive compensation accruals due to the strong earning levels the remainder of the variances in the non <unk>.

Speaker 3: The remainder of the variances in the non-interest expense category is both positive and negative, and generally offset to a relatively small remaining change.

<unk> expense categories, both positive and negative generally offset to a relatively small remaining change.

Speaker 3: So despite the growth and the non-interest expenses and the uncommon nature of some of the items that I just noted,

So despite the growth in the noninterest expenses in the uncommon nature of some of the items that I just noted.

Speaker 3: Companies annualized ratio of nine interest expenses as a percent of average quarterly assets actually declined by three basis points to 2.41% in the third quarter. Additionally, our efficiency ratio remains stable at 56.9% in both the second and the third quarters of 2023. And similarly, the companies net overhead ratio was relatively stable at 1.59% in the third quarter. It increased just one basis point from the 1.58% recorded in the prior quarter.

Companys annualized ratio of noninterest expenses as a percent of average quarterly assets actually declined by three basis points to 241% in the third quarter <unk>.

Additionally, our efficiency ratio remained stable at 56, 9% in both the second and the third quarters of 2023 and similarly, the company's net overhead ratio was relatively stable at 1.59% in the third quarter and increased just one basis point from the 158% recorded in the prior quarter.

Speaker 3: So in summary, this was a very solid quarter with strong loan into positive growth, improved liquidity position, stabilized net interest margin with a steady outlook. A record level of net revenues continued low levels of non-performing assets, and the second highest quarterly net income result in the company's history.

So in summary, this was a very solid quarter with strong loan and deposit growth improved liquidity position stabilized net interest margin with a steady outlook a record level of net revenues continued low levels of nonperforming assets and the second highest quarterly net income results in the company's history.

Speaker 3: We feel like we've managed well through a somewhat turbulent period thus far in 2023, delivering net income. That was a record for the first nine month period of any fiscal year in the history of the company. And we have a positive outlook for continued growth and assets revenues.

We feel like we've managed well through a somewhat turbulent period, thus far in 2023, delivering net income that was a record for the first nine months period of any fiscal year in the history of the company and we have a positive outlook for continued growth in assets revenues and earnings so with that I will conclude my comments and turn it over to rich Murphy to discuss credit.

Speaker 4: So with that, I will conclude my comments and turn it over to Rich Murphy to discuss credit. Thanks, Dave. As noted earlier, credit performance continued to be very solid in the third quarter from a number of perspectives. As Dave noted, and as detailed on five, six of the deck, loan growth for the quarter was 423 million. If you adjust for the sale of the premium finance loans in July , total loans increased by $767 million or 7% on an annualized basis. This growth is due to a number of facts.

Thanks, Dave as noted earlier credit performance continue to be very solid in the third quarter from a number of perspectives as Dave noted and as detailed on slide six of the deck loan growth for the quarter was $423 million. If you adjust for the sale of the premium finance loans in July total loans increased by $767 million or <unk>.

<unk> percent on an annualized basis. This growth is due to a number of factors commercial premium finance volumes remain strong as we continue to see a significantly harder market for insurance premiums, particularly for commercial properties, resulting in higher average loan sizes.

Speaker 4: Commercial premium finance volumes remain strong as we continue to see a significantly harder market for insurance premiums, particularly for commercial properties, resulting in higher average loan size.

Speaker 4: We also continue to see new opportunities as a result of consolidations within the premium finance industry. Finally, we saw a good growth in commercial real estate largely from draws on existing construction loans, and our leasing group had another solid quarter.

We also continue to see new opportunities as a result of consolidations within the premium finance industry. Finally, we saw good growth in commercial real estate largely from draws on existing construction loans and our leasing group had another solid quarter. This.

Speaker 4: This rate of long growth when adjusted for the sale of loans in the quarter is in line with our guidance of mid to high single digits. We also believe that long growth for the fourth quarter will continue to be within our guidance for the following reasons.

This rate of loan growth when adjusted for the sale of loans in the quarter is in line with our guidance of mid to high single digits. We also believe that loan growth for the fourth quarter, we will continue to be within our guidance for the following reasons.

Speaker 4: Commercial premium finance should continue to show solid growth. Our core C&I pipelines look very good, and our leasing teams continue to see significant demand in the market.

Commercial premium finance should continue to show solid growth our core C&I pipelines look very good and our leasing teams continue to see significant demand in the market.

Speaker 4: And as we have noted on prior calls, we continue to benefit from disruptions in the banking landscape and have seen numerous quality opportunities in our core businesses.

And as we have noted on prior calls we continue to benefit from disruptions in the banking landscape and have seen numerous quality opportunities in our core businesses. In addition, we are looking at a number of lending teams that niche lending opportunities that come from dislocations at other regional banks.

Speaker 4: In addition, we are looking at a number of lending teams and niche lending opportunities that come from dislocations at other regional banks.

Speaker 4: Offsetting this growth will be continued pressure on line utilization, which is down to 37 percent, as higher borrowing costs have negatively affected usage for the past several quarters, and we anticipate that higher borrowing costs will continue to cause borrowers to reconsider the economics of new projects, business expansion, and equipment purchases.

Offsetting this growth will be continued pressure on line utilization, which was down to 37% as higher borrowing costs and negative and have negatively affected usage for the past several quarters and we anticipate that higher borrowing costs will continue to cause borrowers to reconsider the economics of new projects business expansion and equipment purchases and some.

Speaker 4: In summary, we continue to be optimistic about long growth for the balance of 2023, and we believe our diversified portfolio in position within the competitive landscape will allow us to grow within our guides of mid-high single digits and maintain our credit discipline.

We continue to be optimistic about loan growth for the balance of 2023, and we believe our diversified portfolio and position within the competitive landscape will allow us to grow within our guidance of mid to high single digits and maintained our credit discipline.

Speaker 4: From a credit quality perspective, as detailed on slide 13, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics.

From a credit quality perspective as detailed on slide 13, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics.

Speaker 4: And performing loans increased by 24 million in the quarter from 26 basis points to 32 basis.

Nonperforming loans increased by $24 million in the quarter from 26 basis points to 32 basis points. However, $20 million of this increase is in the premium finance portfolio.

These loans are secured by the unearned premiums and we would anticipate no additional losses.

Speaker 4: Overall, NPLs continue to be at historically low levels, and we are confident about solid credit performance of the portfolio going forward. Our adjuster of the quarter were 8.1 million or 8 basis points down from 17 million to the second quarter. And finally, as detailed on slide 13, we saw stable levels in our special mention and substandard loss with no meaningful signs of additional economic stress of the customer level.

Overall npls continue to be at historically low levels and we are confident about solid credit performance of the portfolio going forward.

Just for the quarter were $8 1 million or eight basis points down from $17 million in the second quarter and finally as detailed on slide 13, we saw stable levels in our special mention and substandard loans with no meaningful signs of additional economic stress at the customer level.

As noted in our last few earnings calls we continue to be highly focused on our exposure to commercial real estate loans, which compose roughly one quarter of our total portfolio.

Higher borrowing costs and pressure on occupancy and lease rates are cause for concern, particularly in the office category.

On slide 17, we've updated a number of the important characteristics in our office portfolio.

Speaker 4: Currently, this portfolio remains steady at $1.4 billion or 13% of our total CRE exposure and only 3.4% of our total loan portfolio.

Currently this portfolio remained steady at $1 4 billion or 13% of our total CRE exposure and only three 4% of our total loan portfolio.

Speaker 4: Of the $1.4 billion of office exposure, 42% is medical office or owner-occupied. The average size of a loan in the office portfolio continues to be around $1.3 million. We have only five loans above $20 million.

Of the $1 4 billion of office exposure, 42% as medical office or owner occupied.

The average size of alone in the office portfolio continues to be around $1 3 million and we have only five loans above $20 million we.

Speaker 4: We continue to closely monitor loans secured by office properties located within central business districts. Our CBD exposure is limited to $364 million or approximately one quarter of the office portfolio. Half of this is in Chicago and half of this is in other cities. The bulk of our portfolio is located in suburban areas and areas outside central business.

We continue to closely monitor loans secured by office properties located within central business districts or CBD exposure is limited to $364 million or approximately one quarter of the office portfolio <unk>.

This is in Chicago and half of this as other cities. The bulk of our portfolio is located in suburban areas and areas outside central business districts.

Speaker 4: And MPLs in this category were flat quarter over quarter and continue to be at very nominal level.

And Npls in this category were flat quarter over quarter and continue to be a very nominal levels.

Speaker 4: We continue to perform portfolio reviews regularly on this portfolio and we stay very engaged with our borrowers. As we have noted previously, we are not immune for the macro effects that challenges this product type, but we believe our portfolio is well constructed, very granular and should perform well moving forward.

We continue to perform portfolio reviews regularly on this portfolio and we stay very engaged with our borrowers as we have noted previously we are not immune from the macro effects that challenge this product type, but we believe our portfolio is well constructed very granular and should perform well moving forward.

Speaker 4: To better understand the stresses in our portfolio, our CRA team updated their deep dive analysis on every loan over $2.5 million, which will be renewing between now and the second quarter of 2024. This analysis, which covered 80% of all CRA loans maturing during this period, resulted in the following. Roughly 1.5 of these loans will clearly qualify for a renewal at prevailing rates. Roughly 35% of these loans are anticipated to be paid off or will require a short term extension at prevailing rates.

To better understand the stresses in our portfolio our CRE team updated their deep dive analysis on every loan over $2 $5 million, which will be renewing between now and the second quarter of 2020 for this analysis, which covered 80% of all CRE loans maturing. During this period resulted in the following.

Roughly one half of these loans will clearly qualify for a renewal at prevailing rates roughly 35% of these loans are anticipated to be paid off or will require a short term extension at prevailing rates. The remaining 16% of these loans will require some additional attention which could include a pay down of our pledge additional collateral.

Speaker 4: The remaining 16% of these loans will require some additional attention, which could include a paydown or a pledge of additional collateral.

Speaker 4: We have backchecked the results of these deep dives conducted during prior quarters and have found that the projected outcomes versus actual outcomes were very tightly correlated. And generally speaking, Bauer's whose loans deemed to require additional attention continue to support their loans by providing enhancements, including principal reduction.

We have back check the result of these deep dives conducted during prior quarters and have found that the projected outcomes versus actual outcomes were very tightly correlated and generally speaking borrowers whose loans deemed to require additional attention continue to support their loans by providing enhancements, including principal reductions again, our portfolio is not immune from that.

Speaker 4: Again, our portfolio is not immune from the effects of rising rates or the market forces behind lease rates. But we have indiligently identifying weaknesses in the portfolio and working with our borrowers to identify the best possible outcomes. And we believe that our portfolio is in reasonably good shape and situated to whether the challenge is ahead. That concludes my comments and credit and I'll turn it back to Tim.

Rising effects from the effects of rising rates or the market forces behind lease rates, but we have been diligently identifying weakness isn't the weaknesses in the portfolio and working with our borrowers to identify the best possible outcomes and we believe that our portfolio is in reasonably good shape and situated to weather. The challenges ahead that concludes my comments on credit and I'll turn it back to Tim.

Speaker 2: Thanks, Rich. Just to wrap up our prepared remarks, we continue to believe that we're very well positioned, perhaps uniquely positioned to take advantage of the current environment with our diverse businesses.

Jim.

Thanks, Rich just to wrap up our prepared remarks, we continue to believe that we're <unk>.

Well positioned perhaps uniquely positioned to take advantage of the current environment with our diverse businesses.

Speaker 2: Although the last several quarters we've taken steps to achieve an interest rate sensitivity position much closer to neutral, we will benefit from rates that may be higher for longer and based on current economic conditions and current banking conditions, we expect a margin that will be reasonably stable in a narrow range around the current level for the coming quarters.

Although the last several quarters, we've taken steps to achieve an interest rate sensitivity position much closer to neutral we will benefit from rates that may be higher for longer and based on current economic conditions and current banking conditions. We expect the margin that will be reasonably set reasonably stable in a narrow range.

<unk> around the current level for the coming quarters.

Speaker 2: Rich noted some evidence of slowing economic activity. I can tell you we remain very active but disciplined in what I would call a choppy market.

Rich noted some evidence of slowing economic activity I can tell you we remain very active but disciplined in what I would call a choppy market.

Speaker 2: but as also noted there are clearly opportunities and we will continue to pursue them aggressively in the coming months.

But as I also noted there are clearly opportunities and we will continue to pursue them aggressively in the coming months.

Speaker 2: At this point, I'll pause and let's see if you open it up. We can take some questions.

At this point I will pause and Latif if you open it up we can take some questions.

Speaker 1: As a reminder to ask a question, you will need to press star 1-1 on your telephone to remove yourself from the queue. Press star 1-1 again. Please stand by while we compile the Q&A Ross.

As a reminder to ask a question you will need to press star one one on your telephone to remove yourself from the queue Press Star one again, please standby, while we compile the Q&A roster.

Speaker 1: Thank you for standing by. Our first question comes from the line of John Oxtrum of RBC Capitol Mark.

Thank you for standing by our first question comes from the line of John Armstrong of RBC capital markets.

Speaker 5: Good morning, Tim. Yeah, good morning, guys. Tim, a question for you, a topic you just discussed on the kind of the near-term versus medium-term margin outlook.

Good morning, John Hey, Good morning, guys.

Tim a question for you a topic, you've just discussed on the kind of the near term versus medium term margin outlook.

Are you, saying that.

Speaker 5: Beyond the fourth quarter, based on the asset pricing cadence that you see that the margin can start to march higher in 2024, is that stable in the fourth quarter potentially moving higher in 24? Is that the message?

On the fourth quarter based on the asset pricing.

<unk> that you see that the margin can start to March higher in 2024 is that stable in the fourth quarter potentially moving higher in 'twenty four is that the message.

Speaker 2: Yeah, I mean, I think there's obviously a number of moving pieces to this, John , at the moment, you know, looking out a quarter or two, we think pretty stable. After that, you know, I think there's signs that we would feel optimistic about, but clearly there's a lot that goes into it past the next quarter or two.

Yes, I mean, I think there's obviously a number of moving pieces to this John at the moment looking out a quarter or two we think pretty stable after that I think there is.

Signs that we would feel optimistic about but clearly theres a lot that goes into it past the next quarter or two.

Speaker 5: How about hedging out the tide? Is the plan to continue to hedge more? Do you feel like you've done what you need to do?

Okay.

About hedging appetite is the plan to continue to hedge more or do you feel like you've done what you need to do.

Speaker 2: Well, one, for those of you that are kind of following, there is a description of our hedges in the appendix that we share with everybody.

Well one.

For those of you that are kind of following there is a description of our hedges in the appendix that we share with everybody.

Speaker 2: That shows about $6.3 billion of hedges one added in the third quarter. We've subsequently added another small hedge and I think we would continue to kind of follow the market up, John .

That shows about $6 $3 billion of hedges one added in the first or in the third quarter, which subsequently added another small hedge and I think we would continue to kind of follow the market up John if we have the opportunity to do that.

Unknown Executive: Welcome to Wintrust Financial Corp. 3 and year to date 2023 Earnings Conference Call. A review of the results will be made by Tim Crane, President and Chief Executive Officer, 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 reference to both the earnings press release and the earnings release presentation. Following their presentations, there will be a formal question and answer session.

Speaker 2: We have the opportunity to do that. As we've talked about, our desire is to certainly narrow the downside.

As we've talked about our desire is to certainly narrow the downside.

Speaker 2: exposure on our margin, and we perform well with a margin in the mid-threes, we'd work hard to stay in that range.

Exposure on our margin.

We performed well with a margin in the mid threes, we work hard to stay in that range.

Speaker 5: Okay, thank you for that. And then Rich, question for you on the premium finance.

Okay.

Thank you for that.

And then rich.

Question for you on the premium finance.

Speaker 5: non-performers can you think I understand it uh... but can you explain it and and why is it up and when does this stuff get resolved naturally

Non performers.

Unknown Executive: 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 in any such forward-looking statements. The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent form, 10K, and any subsequent filings with the SEC.

Hey, can I understand it but can you explain it and why is it up and when does this stuff get resolved naturally.

Speaker 4: Yeah, well two different buckets of loans there, Jen. So, and roughly equal to each other, if you look at...

Yeah, well two different buckets of loans are gen. So and.

Roughly equal to each other.

Look at.

Page 13, there is a slide 13, you can kind of see what the effects are so I'll I'll take each one individually in the P&C side.

Speaker 4: In the P and C side, we are seeing a little bit more stress in the transportation area. So those loans are falling to link with more often. We do the analysis on those. And if there is a loss, we will take the loss. And then we'll get the interim premium back from the carrier. So in that situation, there is some economic deterioration that is causing more of those numbers.

We are seeing a little bit more stress in the transportation area.

So those loans are falling more delinquent more often.

Unknown Executive: Also, our remarks may reference certain non-gap financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-gap financial measure to the nearest comparable gap financial measure.

We do do the analysis on those and if there is a loss we will it take a loss and then we will get the unearned premium back from the.

Speaker 4: The carrier so it's a you know in that situation. There is some economic deterioration that is causing more of those numbers To go 90 days past due now. That's again. I the loss given default is you know unchanged there? But you are seeing Incidents of default go up there in that category the life category is a little bit different And it's a similar amount about 10 million and those really result from As rates have come up and people which get to the maturity of their loan And they are looking at renewing that policy

The carrier so it's.

In that situation. There is some economic deterioration that is causing more of those numbers.

Unknown Executive: As a reminder, this conference call is being recorded.

To go 90 days past due now that's again.

Timothy Crane: I will now turn the conference over to Mr. Tim Crane. Good morning, everybody. Welcome to Wintrust Wednesday. This is the day of the week we require all of our Wintrust staff to be on site. We're glad that you have joined us too for our third quarter earnings call. With me this morning, our Dave Dijkstra, our chief operating officer, Rich Murphy, our chief lending officer, Dave Starr, our chief financial officer, and Kate Bogey, our general counsel. In terms of an agenda, I will share some high-level highlights.

The loss given default is unchanged there, but you are seeing in <unk>.

As a default go up there in that category the life category is a little bit different.

David Dykstra: Dave Dijkstra will speak to the financial results, and Rich will add some additional information and color on credit performance.

Larry amount about $10 million and those really result from.

As rates have come up and people.

To get to the maturity of their loan and they are looking at renewing their policy they have to make a decision whether it still makes economic sense for them in those conversations can get elongated and we are one.

Speaker 4: they have to make a decision whether it still makes economic sense for them.

To work with our clients and give them time to make that decision in an orderly fashion. So we are not necessarily automatically sending canceling the policy and going back to the carrier. We wanted to make sure that we work with the clients. So those might extend beyond 90 days past due but generally speaking theyre always going to be fully insured and we wouldn't anticipate.

Timothy Crane: I'll wrap up with just a few summary thoughts, and as always, we'll do our best to answer some questions. Earnings or net income for the quarter were just over 164 million dollars up from both the second quarter and the paired quarter last year. From our standpoint, a very solid result with good loan and deposit growth and continued good credit performance. As Rich will highlight, we are not seeing any systemic credit issues at this point.

The paid that there would be any problems. There those loans that are 90 days past due that we have identified here, we would anticipate that those will be gone by the end of this month okay. Okay.

Speaker 5: And on the commercial NPOs.

And on the commercial Npls.

Speaker 4: If this is a persistent issue, you're thinking that could remain elevated, but this is the nine-month loan on a 12-month insurance contract. Is that the structure? Is that right? Yeah, that's right. We do think that loans within our PNC portfolio that apply to transportation will have a little bit more pressure. You still may see, and going to fall, a couple of important points there, is that we are getting a pretty good size premium on those. And we get reasonable lay charges, so we are getting paid for that risk. So we're not all that concerned about it from that perspective. But we also are taking some measures here to make sure that our underwriting is maybe addressing some of those things. So we are getting a little bit tighter in that space. But generally speaking again, while this is an elevated level, we're not concerned about future losses out of it.

Timothy Crane: Our margin at 362 was within the range we expected, down essentially just for the impact of our hedging activities. We continue to benefit from a loan portfolio that prices relatively quickly. You'll recall that nearly 80% of our loans mature or reprice within a year. The resulting improvement in loan yield allows us to largely offset the increase in deposit costs, which I would add we believe are moderating at this point. Our growth and the relatively stable margin resulted in net interest income growth for the quarter and on a year-over-year basis. From a market standpoint, we continue to see isolated disruption among competitors, and as a result, we continue to add clients and create long-term franchise value.

If this is a persistent issue youre, saying that youre thinking that could remain elevated but this is kind of the nine months alone on a 12 month insurance contract is that the structure is that right yes.

Speaker 4: may be elevated, but this is kind of the nine month alone on a 12 month insurance contract. Is that that's the structure? Is that right? Yeah, that's that's right. But the and we do think that loans within our P and C portfolio that apply to transportation will have a little bit more pressure and you still may see ongoing defaults. A couple of important points there is that we are getting, you know, a pretty good size premium on those and we get reasonable lay charges. So we are getting paid for that risk. So we're not all that concerned about it from that perspective.

But we.

We do think that area alone within our P&C portfolio that apply to transportation will have a little bit more pressure than you still may see ongoing defaults couple of important points there is that.

We are getting a pretty good sized premium on those and we get reasonable lay charges. So we are getting paid for that risk. So we're not all that concerned about it from that perspective.

But we also are taking some measures here to make sure that we are underwriting as maybe addressing some of those things. So we are getting a little bit tighter in that space, but.

Timothy Crane: We expect it in the coming quarters. We will continue to grow loans and deposit. Our liquidity position remains strong, the deposit growth not only allowed us to fund good loan growth, but also to reduce the level of broker deposits during the quarter. Again, overall, a solid quarter, which we believe will compare well and in fact may differentiate us relative to many of our competitors.

Generally speaking again, while this is an elevated level, we're not concerned about future losses out of it.

Speaker 5: All right, thank you very much.

Alright, Thank you very much.

Thank you.

Standby for our next question.

Okay.

Speaker 1: comes from the line of Chris McGready, up KBW.

Our next question.

Comes from the line of Chris Mcgratty up K B W.

David Dykstra: With that, I'll turn this over to Dave to provide some additional financial details. Great, thanks Tim. First, with respect to the balance sheet growth, we were again pleased to see deposits for the quarter grow by approximately $1 billion or 9% on an annualized basis. This deposit growth was primarily in the form of interest fairing retail deposits, and that growth allowed us to reduce our level of broker deposits by $392 million. As a deposit composition, non interest fairing deposits at the end of the quarter represent a 23% of total deposits, 24% at the end of the second quarter.

Speaker 6: Chris? Hey, good morning. Dave, I want to go at the NII again. A lot of your peers are still defending the trough or trying to find the trough for six months out. You gave the guide for continued growth in NII and Q4, kind of a stable-ish margin and hire for longer. You've got that unique back book. But

Hey, Chris Hey, good morning.

Dave I wanted to go at the NII again.

You have a lot of your peers are still defending.

The trough, we're trying to find the trough for six months out.

You gave the guide for continued growth in NII in Q4 kind of a stable ish margin higher for longer you got that unique back book, but.

Speaker 6: It would feel like NII continues to grow throughout 2024. Maybe the pace is not as significant, but is that a fair estimate based on what you see in the world?

It would feel like NII continues to grow throughout 2020 for maybe the pace is not as significant but is that a fair.

Estimate based on what you see the world.

David Dykstra: The slight reduction in the percentage of non interest fairing deposits to total deposits is really more reflection of the deposit growth occurring in the interest fairing categories, rather than any large losses of non interest fairing deposit accounts. We've seen the non interest fairing balances stabilized as evidenced by the $10.6 billion of average non interest fairing deposit balances in the third quarter being roughly equal to the $10.6 billion balance at the end of the second quarter.

Speaker 3: Well, yeah, I think that's how we look at it, Chris. Obviously, you know, the Fed kills the economy and long growth slows quite a bit. That would have an impact. But the benefit of being diversified in our asset classes is richest at many times in the past.

Well, yes, I think thats, how we look at it Chris obviously.

The fed kills the economy and loan growth slows quite a bit that would have an impact of the benefit of being diversified and our asset classes as Richard said in many times in the past is if one area slows down another areas doing okay. So we do think we can keep growing our loans in that mid to high single digit range and as Tim.

Speaker 3: if one area slows down another area is doing okay. So we do think we can keep growing our loans in that mid to high single digit range. And as Tim just talked about on the prior question, we think stable and potentially optimistic in the latter half of the year as far as the margin goes.

<unk> talked about on the prior question, we think stable and potentially optimistic in the latter half of the year as far as the margin goes but again it depends on where the interest rate curve is and all that kind of stuff and how competitive deposit cost is if that picks up right. Now we said we see it moderating so it was very positive.

David Dykstra: This strong deposit growth helped the fund solid loan growth of $423 million in the third quarter, adjusting for the impact of the sale of certain commercial insurance premium finance loans during the third quarter. Total loans increased $767 million or 7% on an annualized basis, which is consistent with our prior guidance of mid to high single digit loan growth. The increase in loans was primarily the result of draws on existing commercial real estate loan facilities as well as growth in the commercial portfolio.

Speaker 3: But again, it depends on where the interest rate curve is and all that kind of stuff and how competitive deposit cost is if that picks up right now, we said we'd see it moderating. So it was very positive.

Speaker 3: You know, I guess a long winded answer to say, yeah, we still think we can grow mid to high single digits and we think the margins stable. So if that's the case, we think we can have growth.

And if so.

I guess, a long winded answer to say yeah. We still think we can grow mid to high single digits and we think the margin stable. So if thats. The case, we think we can have growth.

Speaker 6: Just on the loan sale, can you just remind us, you talked about last quarter to kind of test in the plumbing. Should we expect more of that to occur? And was there a, I assume there's a gain that showed up in the not interesting, I'm just trying to get the lips.

Okay great.

Just on the loan sale can you just remind us.

David Dykstra: Additionally, despite the loan sale transaction that reduced outstanding balances by $344 million at the end of the third quarter, the commercial insurance premium portfolio ended relatively unchanged, which is a good result.

You talked about it last quarter it kind of testing the plumbing should we expect more of that to occur and was there a.

I assume theres a gain that showed up in the noninterest income I'm just trying to get the logistics.

Speaker 3: Yeah, well, we're not planning on any right now. As you said, I mean, if you go back into the second quarter when we started to plan this and we did the sale early in the third quarter.

Yes.

David Dykstra: Rich Murphy will discuss the loan portfolio growth in more detail in just a bit. The result of these and other balance sheet movements was growth in total assets of approximately $1.3 billion, the slightly reduced ending loan to deposit ratio of 92.1% and risk-based capital ratios that were relatively stable to up a little.

Not planning on any right now as you said I mean, we if.

If you go back into the second quarter. When we started to plan. This than we did the sale early in the third quarter.

Speaker 3: As we talked about on the last call, we really did it as a way to demonstrate that that portfolio has liquidity and it pays down very rapidly. We would expect the majority of that impact to be gone by the end of this fiscal year since these are nine-month full payout loans.

As we talked about on the last call.

We really did it as a way to demonstrate that that portfolio has liquidity and it pays down very rapidly. We would expect the majority of that impact to be gone by the end of this fiscal year. Since these are nine month full payout loans will.

David Dykstra: Overall, it was a very successful quarter in the growth of our franchise or differentiated business model, exceptional service, and the unique positioning that we have in Chicago and Milwaukee markets continues to service well. Turning the income statement categories, starting with the net interest income for the third quarter of 2023 net interest income total of $462.4 million and increase of our approximately $14.8 million as compared to the prior quarter and an increase of $60.9 million as compared to the third quarter of 2022.

Speaker 3: And we'll be six months into it, so there'll be very little really left of that.

It will be six months into it so there'll be very little really left.

That impact, but we wanted to be able to demonstrate that we have liquidity, we wanted to be able to.

Speaker 3: But we wanted to be able to demonstrate that we had liquidity. We wanted to be able to make sure we had a tool in case concentration. So the premium finance portfolio has got too high. And we wanted to be able to have the plumbing in place in case there was any future liquidity events that happened in the industry. So we just thought it was prudent.

Make sure we had a tooling case concentrations of those premium finance portfolio is got too high we wanted to be able to have the plumbing in place in case, there was any future liquidity events that happened in the industry. So we just thought it was prudent.

David Dykstra: I should note that the third quarter net interest income represents the highest quarterly amount every recorded by the company. The increase in net interest income as compared to the prior quarter was primarily due to the increase in average earning assets of approximately $1.6 billion. The net interest margin was 3.62 percent in the third quarter, which was just four basis points less than the prior quarter level of 3.66 percent. Three of the four basis points of the decline was due to the impact of our interest rate hedging strategies, which are designed to protect our net interest income with interest rates decline.

Speaker 3: to do the sale, put the plumbing in place, test it out, and move forward. But right now, based upon the good deposit growth that we're having and our funding ability to continue to fund those loans and our loan-to-deposit ratio being in a spot that we like it, we don't have any expectations that we'll do another sale in the near term. But the facilities there, in the event we need them.

To do the sale put the plumbing in place test that out and move forward, but right now based upon the good deposit growth that we're having.

And our our our funding ability to continue to fund those loans and our loan to deposit ratio being in a spot that we like it we don't have any expectations that we will do another sale on the near term, but the fill facilities there in the event we need it for some reason.

Speaker 6: Perfect. And then maybe the last one, you went through all the moving parts of non interest income, and I think it added to a half million bucks. How do we think about just the trajectory of your fees with mortgage obviously pretty depressed, but you've got other offsets from here.

Perfect and then maybe the last one went through all the moving parts of noninterest income in any given that the two 5 million Bucks.

David Dykstra: Accordingly, as we discussed on prior calls, our balance sheet composition structure and repricing characteristics provided for relatively stable net interest margin during the quarter. Deposit pricing moderated in the third quarter of 2023, and we expect that to continue into the fourth quarter. Based on the current interest rate environment, we believe we can maintain our net interest margin within a narrow range around the current levels for the remainder of 2023. I'd also like to note that total loans as of September 30, 2023 were $739 million higher than the average total loans in the third quarter of 2023. This provides momentum into the fourth quarter. This growth and expected growth in the balance sheet and the relatively stable net interest margin should allow for future growth of our net interest income in the fourth quarter.

Do we think about just the trajectory of your fees, but mortgage obviously pretty depressed, but you've got other offsets from here.

Speaker 3: Yeah, well, mortgage and wealth management are two big areas. Service charges sort of just plug along and maybe grow with the growth of your business and retail accounts. But mortgages, the pipelines are pretty consistent. And they're in the 80%, 85% purchase business.

Yes.

Yes, well mortgage and wealth management are two big areas of service charges.

<unk>, a plug along and maybe grow with the growth of <unk>.

Your business in retail accounts, but.

Mortgages.

The pipelines are pretty consistent in their in the <unk>.

80%, 85% purchase business.

Speaker 3: You know, maybe that's closed down a little bit in the winter months since the majority of our originations come out of the Chicago, Milwaukee, and Minnesota markets, but.

Maybe that slows down a little bit in the winter months since the majority of our originations come out of the Chicago.

Milwaukee, and Minnesota markets, but.

Speaker 3: Applications, I think, are about as low as they go. So we would expect steady originations. Gain on sale margins have been holding in a little above 2 percent. So we think that we'll just plug along and then there might be some fluctuation depending upon.

Applications I think are about as low as they go. So we would expect steady originations gain on sale margins have been holding in.

David Dykstra: Turning to the provision for credit losses, when interest recorded a provision for credit losses of $19.9 million in the third quarter compared to a provision of $28.5 million in the prior quarter and $6.4 million provision expense recorded in the year ago quarter. The lower provision expense in the third quarter relative to the second quarter was primarily a result of lower net loan growth during the third quarter.

Little above 2% and so we think that we'll just plug along and then there might be some fluctuation depending upon.

Speaker 3: movements in rates and the impact on market servicing rights, but we try to hedge that impact pretty well too. So I think our personal opinion is I think mortgage probably bounces along here for the next couple quarters. Hopefully in the spring, buying season, we see some green shoots and some improvement in the applications and the production. But I don't see anything that would indicate that it would...

Movements in rates and the impact on mortgage servicing rights, but we try to hedge that impact pretty well too. So I think our personal opinion is I think mortgage probably bounces along here for the next couple of quarters hopefully in the spring buying season, we see some green shoots in and some improvement.

David Dykstra: Rich Murphy will talk about credit and loan characteristics in just a bit. Regarding non-interest income and non-interest expense sections, total non-interest income totaled $112.5 million in the third quarter and was relatively stable when compared to the prior quarter total of $113.0 million. As shown in the table in our earnings release, there are a number of relatively small changes to a variety of non-interest income categories but in the aggregate, the changes neted to a slight decrease of $522,000 from the prior quarter.

And in the applications on the production, but I don't see any I don't see anything that would indicate that it would.

Speaker 3: increase rapidly in the near term or decrease rapidly. It's been plugging along at these levels for four, five, six months now. So we expect that to continue.

Increased rapidly in the near term or decrease rapidly. We just it's been plugging along at these levels for 456 months now so we expect that to continue wealth management.

Speaker 3: you know, the movement of the underlying assets under management and their valuations, because although the fees are based upon a lot of the values, but we continue to try to hire people and grow that business, but it's a little bit slower trajectory forward, but we've expected to grow, so.

Somewhat depends upon on.

The movement of the underlying assets under management and their valuations here. So the fees are based upon a lot of the values but.

David Dykstra: This illustrates the importance of having a diversified fee businesses that can contribute at various levels over time and the ability of those business lines to maintain a relatively stable level of non-interest income despite what is a challenging mortgage environment. On the non-interest expense categories, non-interest expenses totaled $330 million in the third quarter of 2023 and were up for approximately $9.4 million compared to the prior quarter total of $320.6 million. There are a few primary reasons for the increases which are related to the negative impacts of one occupancy cost of approximately $2.9 million from the impairment of two company-owned buildings that are no longer being used.

We continue to try to hire people and grow that business, but it's a little bit slower.

<unk> forward, but we would expect it to grow.

Speaker 3: We've got some leasing income in there, etc. But the rest is pretty small.

We've got some leasing income in there et cetera, but the rest is pretty small.

Great. Thanks.

Speaker 1: Thank you once again to ask a question please press star 11 on your touch tone telephone again that's star 11 to queue up for a question.

Thank you once again to ask a question. Please press star one one on your Touchtone telephone again Thats Star one wanted to queue up for question.

Okay.

Our next question.

Speaker 1: comes from the line of Terry McAvoy of Stephen's

Comes from the line of.

David Dykstra: Two data processing costs of approximately $1.5 million from a termination of a duplicate service contract related to the acquisition of the wealth management business in 2023. Other salary costs of approximately $1.6 million related to acquisition, severance charges, acquisition related, severance charges, and other contractually due compensation costs. And then we also had an increase in our commissions and incentive compensation of $4.3 million primarily because of the adjustments to our incentive compensation accruals due to the strong marine wealth.

Terry Mcevoy.

Stephens Inc.

Speaker 7: Hi, thanks. Good morning, everyone. Maybe start with a question. The expense outlook for the fourth quarter, there were a couple items called out on the expense line right in the opening of the press release. But you share some thoughts on 4Q and maybe while I'm on any initial thoughts on 2024 expenses, whether that will track kind of historical growth rates, or we are hearing from some other banks that they're looking at expenses with some internal plans to kind of control that growth rate.

Hi, Thanks, Good morning, everyone, maybe start with the question the expense outlook for the fourth quarter. There were a couple items called out on the expense line right and the opening of the press release, but you share some thoughts on <unk> and maybe while I'm on any initial thoughts on 2024 expenses, whether that will track kind of historical growth rates or.

We are hearing from some other banks out there looking at expenses with some internal plans to control that growth rate.

Speaker 3: Yeah, well, you know, you're right, Terry, we call about out about $6 million of, sort of, uncommon expenses that we wouldn't expect to recur in the fourth quarter. So, you know, that's 330, you know, I, yeah.

Yes.

You are right, sorry, we call about out about $6 million of sort of uncommon expenses.

David Dykstra: The remainder of the variances in the non-interest defense category is both positive and negative, generally offset to a relatively small remaining change. So despite the growth in the non-interest expenses and the uncommon nature of some of the items that I just noted, the company's annualized ratio of non-interest expenses as a percent of average quarterly assets actually declined by three basis points to 2.41 percent in the third quarter. Additionally, our efficiency ratio remains stable at 56.9 percent in both the second and the third quarters of 2023, and similarly the company's net overhead ratio was relatively stable at 1.59 percent in the third quarter, an increased just one basis point from the 1.58 percent recorded in the prior quarter.

That we wouldn't expect to recur in the fourth quarter. So.

Thats $3 30.

Speaker 3: It takes us out near 324 ish or something like that. So probably somewhere plus or minus in that area for the fourth quarter. We haven't really given guidance for 24 yet, but generally speaking, our thought is that we're a gross company. And we have lots of opportunities where uniquely positioned here in Chicago right now with our size. And...

<unk>.

It takes us out here and 324 ish or something like that so probably somewhere plus or minus in that area for the fourth quarter, we havent really given guidance.

And for 'twenty for you, but generally speaking.

Our thought is that we're a growth company and we have lots of opportunities. We're uniquely positioned here in Chicago right now with our size and.

Speaker 3: and how we stack up against the competition. Basically, we're going against big banks and small community banks. There just aren't a lot of banks between.

And how we stack up against the competition.

Sickly, we're going against the big banks and small community banks are just aren't a lot of banks between 10% and $50 billion at our headquarters in Chicago area. So we have a unique position here that we think we can take advantage of and we also have.

Speaker 3: $10 and $50 billion that are headquartered in Chicago area. So we have a unique position here that we think we can take advantage of. And we also have...

David Dykstra: So in summary, this was a very solid quarter with strong loan and deposit growth, improved liquidity position, stabilized net interest margin with a steady outlook, a record level of net revenues continued low levels of non-performing assets in the second highest quarterly net income result in the company's history. We feel like we've managed well through a somewhat turbulent period thus far in 2023, delivering net income that was a record for the first nine month period of any fiscal year in the history of the company, and we have a positive outlook for continued growth and assets revenues and earnings.

Speaker 3: you know, our niche businesses that can help out. So we've always thought of ourselves as a growth company. We still think we can grow deposits are out there and having good growth. And so we'd rather grow into this. And if we grow mid to high single digits, we would expect that our non-interest expenses would grow at a rate less than that. You know, maybe mid-single digits. And so we can leverage the infrastructure going forward.

Our niche businesses that can help out so we've always thought of ourselves of the growth company. We still think we can grow deposits are out there.

And having good growth and so we'd rather grow into this and if we grow mid to high single digits. We would expect that our in our noninterest expenses would grow at a rate less than that.

Maybe mid single digits, and so we can leverage the infrastructure going forward.

Richard Murphy: So with that, I will conclude my comments and turn it over to Rich Murphy to discuss credit. Thanks, Dave. As noted earlier, credit performance continued to be very solid in the third quarter from a number of perspectives. As Dave noted, and as detailed on five, six of the debt, loan growth for the quarter was 423 million. If you adjust for the sale of the premium financed loans in July, total loans increased by 67 million or 7 percent on an annualized basis.

Speaker 3: You know, if for some reason the growth doesn't come, there's certainly levers we can pull to try to reduce expenses. But the plan is to grow into it and leverage the infrastructure. And as I said, actually our non-interest expenses, even with that six million in there.

If for some reason that growth doesn't come in there are certainly levers we can pull to try to reduce expenses, but the plan is to grow into it and leverage the infrastructure and as I said I actually our noninterest expenses, even with that $6 million in there.

Speaker 3: as a percent of average assets was down a little bit this quarter. So, you know, we're going to watch them, we're going to control them, but we're still expecting to be growing the franchise and taking advantage of opportunities in the marketplace. And that's always been the plan.

As a percent of average assets was down a little bit this quarter. So.

We're going to watch them, we're going to control them, but we're still expecting to be.

Richard Murphy: This growth is due to a number of factors. Commercial premium financed volumes are main strong as we continue to see a significantly harder market for insurance premiums, particularly for commercial properties resulting in higher average loan sizes. We also continue to see new opportunities as a result of consolidations within the premium financed industry. Finally, we saw a good growth in commercial real estate, largely from draws on existing construction loans, and our leasing group had another solid quarter.

Growing the franchise and taking advantage of opportunities in the marketplace.

That's always been the plan and continues to be the plan.

Speaker 7: And then maybe as a follow up, the 337 million of CRE.

And then maybe as a follow up the $337 million of CRE grew.

Speaker 7: growth in the third quarter, can you help us understand how much of that came from kind of market opportunities, new customers versus current customers, and how successful have you been in having them bring over their deposit relationships and business as well?

Growth in the third quarter help us can you help us understand how much of that came from kind of market opportunities new customers versus current customers and how successful have you been in bringing having them bring over their deposit relationships and business as well.

Richard Murphy: This rate of loan growth, when adjusted for the sale of loans in the quarter, is in line with our guidance of mid to high single digits. We also believe that loan growth for the fourth quarter will continue to be within our guidance for the following reasons. Commercial premium financed should continue to show solid growth. Our core C&I pipelines look very good, and our leasing teams continue to see significant demand in the market.

Speaker 4: Yeah, I'll answer that sort of in reverse order. Pretty much any new opportunity that we're looking at, it's assumed that we're gonna be getting meaningful deposits. That's number one. As it relates to the growth, as I said in my comments, the majority of what we're seeing there are draws on existing facilities that we have with existing customers. But there's probably about 40% of that total comes from opportunities that we're seeing in the marketplace. As you know, a lot of other banks are really out of that space right now, and there are good opportunities out there for us to bring over clients. So it's a little bit of a mix, but the majority is still with existing clients and existing...

Yes, I'll answer that sort of in reverse order.

Pretty much any new opportunity that we're looking at.

It's assumed that we're going to be getting meaningful deposits.

That's number one.

As it relates to the growth.

Richard Murphy: And as we have noted on prior calls, we continue to benefit from disruptions in the banking landscape and have seen numerous quality opportunities in our core businesses. In addition, we are looking at a number of lending teams and niche lending opportunities that come from dislocations at other regional banks. Offsetting this growth will be continued pressure on line utilization, which is down to 37%, is higher borrowing costs at negative and have negatively affected usage for the past several quarters, and we anticipate that higher borrowing costs will continue to cause borrowers to reconsider the economics of new projects, business expansion, and equipment purchases.

As I said in my comments.

The majority of what we're seeing there are draws on existing facilities that we have with existing customers.

But.

There is.

Probably about 40% of that total comes from.

Opportunities that we're seeing in the marketplace as you know a lot of other banks that really.

Out of that space right now and there are good opportunities out there for us to bring over clients. So.

It's a little bit of a mix, but the majority is still with existing clients and existing.

Speaker 8: Outstanding. Great. Thanks for taking my time.

Richard Murphy: In summary, we continue to be optimistic about loan growth for the balance of 2023, and we believe our diversified portfolio and position within the competitive landscape will allow us to grow within our guides of mid to high single digits, and maintain our credit discipline. From a credit quality perspective, as detailed on slide 13, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics.

Outstandings.

Great. Thanks for taking my questions.

Sure.

Thank you.

Our next question.

Speaker 1: That comes from the line of David Long of Raymond James.

It comes from the line of David long of Raymond James.

Speaker 9: Good morning, everyone. Thanks for the update on loan growth expectations. It sounds like the pipeline is still pretty good. Mike, my question, you know, when I'm looking at the.

Hi, David.

Good morning, everyone.

Thanks for the update on loan growth expectations. It sounds like the pipeline is still pretty good Mike My question when I'm looking at the.

Speaker 9: surveys of of lenders there's not a that does not seem to be a big appetite to land or much of a demand for for loans if there has been what's making win trust different here what how are you guys able to grow the portfolio when when the market maybe expecting more of a flattish uh... outlook for longer

Surveys of lenders there is not it does.

It does not seem to be a big appetite to lend nor much of a demand for for loans is there has been.

Whats, making the interest different here how are you guys able to grow the portfolio when the market may be expecting more of a flattish outlook for loan growth.

Richard Murphy: We are confident about solid credit performance of the portfolio going forward. Our jobs for the quarter were 8.1 million or 8 basis points down from 17 million to the second quarter. And finally, as detailed on slide 13, we saw stable levels in our special mention and substandard loans with no meaningful signs of additional economic stress of the customer level. As noted in our last few earnings calls, we continue to be highly focused on our exposure to commercial real estate loans, which composed roughly 1 quarter of our total portfolio.

Speaker 4: You know, as we've talked about in the past, you know, loan growth, you know, comes in many different forms for us. So, you know, we go back to a point when we were just out of the pandemic or in the middle of the pandemic and rates were very low, you know, life finance was just going crazy, you know, now that's slowed down. But in the meantime, you have the PNC side, you know, kind of filling in that gap.

As we've talked about in the past that loan growth.

It comes in many different forms for us so.

We go back to a point when we're just out of the pandemic in the middle of a pandemic and rates were very low life finance was just going crazy now that's slowed down but in the meantime, you have the P&C side.

Richard Murphy: Higher bar one costs and pressure on occupancy and lease rates are caused for concern, particularly in the office category. On slide 17, we've updated a number of the important characteristics in our office portfolio. Currently, this portfolio remains steady at 1.4 billion or 13% of our total CRE exposure and only 3.4% of our total loan portfolio. Of the 1.4 billion of office exposure, 42% is medical officer owner occupied. The average size of a loan in the office portfolio continues to be around 1.3 million and we have only five loans above 20 million.

Kind of filling in that gap, so having a multi pronged approach to lending really does make a difference for us in terms of when you have growth in certain areas, but more specifically as it relates to maybe the core businesses.

Speaker 4: So having a multi-pronged approach to lending really does make a difference for us in terms of when you have growth in certain areas. But more specifically as it relates to maybe the core businesses, I would

Speaker 4: We've been pretty disciplined about the way our portfolio is constructed. A lot of banks right now would look at their CRE bucket and say, it's probably more than ideal. We would say that right now we still have an appetite for CRE loans, and so we're able to take advantage of that dislocation in the market. Similarly, with a lot of the...

I would say that.

We've been pretty disciplined about the way our portfolio is constructed a lot of banks right now would look at their CRE bucket and say, that's probably more than ideal we would say that right now we still have an appetite for CRE loans and so we're able to take advantage of that dislocation in the market.

Richard Murphy: We continue to closely monitor loans secured by office properties located within central business districts. Our CBD exposure is limited to 364 million or approximately 1 quarter of the office portfolio. Half of this is in Chicago and half of this is in other cities. The bulk of our portfolio is located in suburban areas and areas outside central business districts. And MPLs in this category were flat quarter over quarter and continue to be at very nominal levels. We continue to perform portfolio reviews regularly on this portfolio and we stay very engaged with our borrowers.

Similarly that with a lot of the David as you know in Chicago, we've had tremendous amount of.

Speaker 4: David, as you know, in Chicago, we've had a tremendous amount of disruption with the players in Chicago. And we're seeing lots of opportunities on the C&I side for companies that we've been actively trying to bring over for some time. And they just, for whatever reason, stuck with the incumbent until they just couldn't take it any longer. And so as a result, we've been able to bring over a lot of those. So we continue to be pretty...

Disruption with the players in Chicago, and we're seeing lots of opportunities on the C&I side for companies that we've been actively trying to bring over for some time and they just for whatever reason stuck with the incumbent until they just couldnt take it any longer and so as a result, we've been able to bring over a lot of those so we.

Speaker 4: bullish about growing that portfolio, particularly on the core side, we really see a lot of nice opportunities right now.

Continue to be pretty bullish about.

Richard Murphy: As we have noted previously, we are not immune for the macro effects that challenges this product type, but we believe our portfolio is well constructed, very granular and should perform well moving forward. To better understand the stresses in our portfolio, our CRE team updated their deep dive analysis on every loan over 2.5 million dollars which will be renewing between now and the second quarter of 2024. This analysis which covered 80% of all CRE loans maturing during this period resulted in the following.

Growing that portfolio, particularly on the core side, we really see a lot of nice opportunities right now.

Speaker 2: And David, we've been disciplined on pricing, but there's loan demand is there. It's you just have to pick your spots and we're getting a lot of looks.

Richard Murphy: Roughly 1.5 of these loans will clearly qualify for a renewal at prevailing rates. Roughly 35% of these loans are anticipated to be paid off or will require a short term extension at prevailing rates. The remaining 16% of these loans will require some additional attention which could include a pay down or a pledge of additional collateral. We have back checked the results of these deep dives conducted during prior quarters and have found that the projected outcomes versus actual outcomes were very tightly correlated.

David we've been disciplined on pricing, but there is loan demand is there. It's you just have to pick your spots and we're getting a lot of looks okay. That's a great point Tim.

Speaker 4: Yeah, that's a great point, Tim. I mean, where where structures had been, you know, if you go back, you know, 18 months ago, 24 months ago, structures were, were pretty loose pricing was pretty tight. And, you know, there were there were those were times where we were, you know, we, there were deals that we just

Sure.

We're structures had been if you go back 18 months ago 24 months ago structures, where we're pretty Louis pricing was pretty tight and there were there were those were times, where we were.

There were deals that we just stepped away from.

Speaker 4: stepped away from. You know, right now you can you can get better structure, you can get better pricing, and we try to be very disciplined in that space.

Right now you can you can get better structure, you can get better pricing.

We try to be very disciplined in that space.

Yes.

Got it.

Speaker 2: Yeah, well, I just say we can continue to grow deposits. We've proven for a couple of quarters that we can fund.

Thanks for that color, Yes go ahead, yes.

Well I'd just say, we can continue to grow deposits. We've proven for a couple of quarters that we can fund the loan growth and.

Speaker 2: the loan growth and our desire would be to continue to grow the deposit base. It's kind of the core of our franchise and we've talked several times about the fact that we're 6, 7, 8 percent.

Richard Murphy: And generally speaking, borrowers whose loans deemed to require additional attention continue to support their loans by providing enhancements including principal reductions. Again, our portfolio is not immune from the effect of rising rates or the market forces behind lease rates. But we have indiligently identified weaknesses in the portfolio and working with our borrowers to identify the best possible outcomes.

Our desire would be to continue to grow the deposit base, it's kind of the core of our franchise and we've talked several times about the fact that we're 678%.

Richard Murphy: And we believe that our portfolio is in reasonably good shape and situated to whether the challenge is ahead.

Speaker 2: market share and deposits in the Chicago area, opportunities in Milwaukee as well.

<unk> market share in deposits in the Chicago area.

<unk> and Milwaukee as well, so even though the 630 deposit share results were pretty good for US we think that's just the beginning.

Speaker 2: Even though the, you know, 630 deposit share results were pretty good for us, we think that's just the beginning.

Speaker 4: Yeah, I would say, you know, sort of the macro summary on your question is that there is no shortage of opportunities to lend money out there right now. I think there's a lot of banks that are just maybe unwilling for the deposit and capital reasons, so our job is to take advantage of this moment.

Yes, I would say sort of the macro summary on the your question is that there is no shortage of opportunities to lend money out there right now and I think theres a lot of banks that are just maybe unwilling for the deposit and capital reasons.

Richard Murphy: That concludes my comments and credit and I'll turn it back to Tim.

Timothy Crane: Thanks, Rich.

Timothy Crane: Just to wrap up our prepared remarks, we continue to believe that we're very well positioned, perhaps uniquely positioned to take advantage of the current environment with our diverse businesses. Although the last several quarters we've taken steps to achieve an interest rate sensitivity position much closer to neutral, we will benefit from rates that may be higher for longer. And based on current economic conditions and current banking conditions, we expect a margin that will be reasonably stable in a narrow range around the current level for the coming quarters.

So our job is to take advantage of this moment.

Speaker 9: So it sounds like the strategy is still focused on organic growth because that's what the market is giving you. Um, you know, what is the appetite for M and a at this point and what does the backdrop or what needs to change in the backdrop maybe for you guys to be more opportunistic, uh, on that front to accelerate growth?

So it sounds like the strategy is still focused on organic growth because that's what the market is giving you.

What is the appetite for M&A at this point and what does the backdrop or what needs to change in the backdrop, maybe for you guys to be more opportunistic on that front to accelerate growth.

Well.

Speaker 2: acquisition-type opportunities, so whether that's a portfolio of loans or whether it's a piece of a business or, in some cases, the conversations around, you know, kind of bank M&A are picking up, but we're pretty disciplined, and, you know, some of these portfolios are challenged from a pricing perspective.

There are acquisition type opportunities, so whether thats a portfolio of loans or whether its a piece of our business or in some cases, the conversations around kind of bank M&A are picking up but.

Timothy Crane: Rich noted some evidence of slowing economic activity. I can tell you, we remain very active but disciplined in what I would call a choppy market. But as also noted, there are clearly opportunities and we will continue to pursue them aggressively in the coming months.

We're pretty disciplined in some of these portfolios are challenged from a pricing perspective and.

Unknown Executive: At this point, I'll pause and Latif, if you open it up, we can take some questions. As a reminder to ask a question, you will need to press star 1-1 on your telephone to remove yourself from the queue, press star 1-1 again. Please stand by while we compile the Q&A roster. Thank you for standing by.

Speaker 2: We don't need to do that kind of growth given the opportunities that we have.

We don't need to do that kind of growth given the opportunities that we have if if some of those look like.

Speaker 2: If some of those look up, you know, like good opportunities to us, we may add some people, for example, in areas where we've got good businesses, you know, there are some folks available in the market right now, but I think we'll stay pretty disciplined.

Good opportunities to us we may add some people for example in areas, where we've got good businesses there.

Or some folks available in the market right now but.

I think we'll stay pretty disciplined.

Speaker 10: Got it. Thanks, guys. I appreciate the color there. Yeah, thanks, David. Thank you.

John Oxtrum: Our first question comes from the line of John Oxtrum of RBC capital markets. Good morning, John. Good morning, guys.

Got it thanks, guys I appreciate the color there.

Yes, Thanks Davis.

Thank you.

Our next question.

Timothy Crane: Tim, a question for you, a topic you just discussed on the near term versus medium term margin outlook. Are you saying that beyond the fourth quarter based on the asset pricing cadence that you see that the margin can start to march higher in 2024? Is that stable in the fourth quarter potentially moving higher in 24? Is that the message? I mean, I think there's obviously a number of moving pieces to this.

Comes from the line of Casey Haire of Jefferies.

Speaker 7: Casey, hey, thanks. Good morning guys.

Hi, Casey Hey, Thanks, Good morning, guys.

Speaker 7: I guess just, sorry if I missed this, wanted to follow up a little bit more on the NIM discussion, but did you guys disclose what spot loan yields were and deposit costs at 930?

I guess, just sorry, if I missed this I wanted to follow up a little bit more on the on the NIM discussion, but did you guys disclose what spot loan yields were in deposit costs at 930.

Speaker 3: No, we haven't we haven't done that. But what we could tell you is that the margin was, you know, right near the current level at the end at the end of the period, and we're really focused on the net margin going going forward. But we deposit pricing has moderated, as you can see, and we expect that to continue into the fourth quarter. But no, we didn't we didn't provide that.

No. We haven't we haven't done that but we can tell you is of the margin was right near the current level at the end at the end of the period and we're really focused on the net margin golar going forward, but.

Timothy Crane: John, at the moment, looking out a quarter or two, we think pretty stable. After that, I think there's signs that we would feel optimistic about, but clearly there's a lot that goes into it past the next quarter or two.

We the deposit pricing.

Pricing has moderated as you can see and we expect that to continue into the fourth quarter, but no. We didn't we didn't provide that.

Timothy Crane: How about hedging appetite? Is the plan to continue to hedge more? Do you feel like you've done what you need to do? Well, one, for those of you that are kind of following, there is a description of our hedges in the appendix that we share with everybody. That shows about $6.3 billion of hedges one added in the third quarter. We've subsequently added another small hedge, and I think we would continue to kind of follow the market up, John, if we have the opportunity to do that. As we've talked about, our desire is to certainly narrow the downside exposure on our margin, and we perform well with a margin in the mid threes. We work hard to stay in that range.

Speaker 7: Okay, very good. And then just, I guess, switching to credit.

Okay very good and then just I guess switching to credit.

Timothy Crane: Okay. Thank you for that.

Speaker 7: The ACL on the core book at 151, obviously very strong. Just curious, what kind of scenario are you guys baking in? You know, be it, you know, a slowdown, S3, or any color on what kind of unemployment rate?

The ACL on the core book it at $1 51, obviously very strong.

Just curious what kind of scenario or are you guys baking in.

Be it.

Slowdown as three or four.

Any color on what kind of unemployment rate.

Speaker 7: that, you know, which is driving your CECL model.

Pat.

Which is driving your see some modeling.

Speaker 3: Yeah, well, I mean, we use a number, we look at a number of different ways. I mean, we use as a base, we use a Moody's base case scenario, but we do also look at other economic scenarios too.

Yes.

We use a number we look at a number of different ways.

Use.

As a base we use Moody's.

<unk> case scenario, but we do also look at other economic scenarios too.

Speaker 3: build our case. We don't have a big consumer portfolio, so unemployment is generally not a big impact in our models with correlation.

Bill build our case.

We don't have a big consumer portfolio.

Unemployment is generally not a big impact in our models with correlation.

John Oxtrum: And then Rich, a question for you on the premium finance, non-performers.

Speaker 3: We use a consumer real estate price index, the BAA credit spreads, and a few other factors.

We use our consumer real estate price index the.

<unk> credit spreads and a few other <unk>.

Richard Murphy: I think I understand it, but can you explain it and why is it up and when does this stuff get resolved naturally? Yeah, well, two different buckets of loans there, Jon. So, and roughly equal to each other. If you look at page 13, there is a slide 13. You can kind of see what, you know, the effects are. So, I'll take each one individually in the P and C side. We are seeing a little bit more stress in the transportation area.

Speaker 3: Those didn't have a major impact, quarter-over-quarter change. The real reason the provision was less this quarter was we just had less loan growth this quarter. All the other factors sort of washed out, but roughly $10 million of that reduction was just due to less loan growth in the third quarter relative to the second quarter.

Factors.

Certainly have a major impact quarter over quarter change the real reason the provision was less this quarter was we just had less loan growth this quarter all the other factors sort of washed out but.

Roughly a $10 million of that reduction was just due to less loan growth in the third quarter relative to the second quarter, but.

Speaker 3: The answer to your question generally is we use the Moody's model and we supplement that with a couple other economic sources.

But to answer your question generally is we use the Moody's model and we supplement that with a couple of other economic.

Richard Murphy: So, those loans are falling more, to link with more often. We do the analysis on those. And, you know, if there is a loss, we will take the loss. And then we'll get the unearned premium back from the carrier. So, it's a, you know, in that situation, there is some economic deterioration that is causing more of those numbers to go 90 days past due. Now, that's, again, the loss given to the default is, you know, unchanged there, but you are seeing instances of default go up there in that category.

Sources.

Great. Thank you.

Thank you.

Our next question.

Speaker 1: That comes from the line of Jeff Rulis of DADay.

It comes from the line of Jeff <unk> of D. A Davidson.

Speaker 11: Thanks. Good morning. Just a couple of housekeeping items on the, just wanted to follow up the, the core office credits you pushed out last course that largely done. Is there anything else you're trying to kind of manage out within the office side?

Thanks, Good morning.

Just a couple of housekeeping items.

Just wanted to follow up.

The co work office credits you pushed out last quarter is that largely done is there anything else you're trying to kind of manage out within the office.

Speaker 4: As we disclosed last quarter that that failed took up a

All right.

Richard Murphy: The life category is a little bit different. And it's a similar amount about 10 million. And those really resolved from, as race has come up, and people get to the maturity of their loan, and they are looking at renewing that policy. They have to make a decision whether it still makes economic sense for them. And those conversations can get elongated. And we are, want to work with our clients and give them time to make that decision in an orderly fashion.

As we disclosed last quarter that sales took off.

Speaker 4: roughly half of that portfolio, we will continue to explore options related to the rest of that exposure. My guess is we'll hopefully get something done here relatively soon, but it just depends on what that market looks like. We are always looking at assets within the portfolio and determining the best course of action, but nothing is pending right now.

Roughly half of that portfolio, we will continue to explore options related to the rest of that exposure.

And my guess is we'll.

Hopefully get something done here relatively soon but it just depends on what that market looks like we are always looking at assets within the portfolio and determining the best course of action, but.

Nothing pending right now.

Richard Murphy: You know, so we are not necessarily automatically sending it, cancelling the policy and going back to the carrier. We want to make sure that we work with the clients. So, those might extend beyond 90 days past due. But generally speaking, they're always going to be fully insured. And we wouldn't anticipate that there would be any problems there. Those loans that are 90 days past due, that we have identified here, we would anticipate that those will be gone by the end of this month.

Speaker 11: OK, and then on the, you know, back to the premium finance sales, kind of the testing, the plumbing, you know, I imagine some of that is.

Okay and then on the.

Back to the premium finance sales kind of testing the plumbing.

I imagine some of that is just.

Speaker 11: you know, kind of mix management, but was there a credit portion of that? I mean, now that it sounds as if you're going to slow some of those sales, despite a little pickup near term in.

Kind of mix management, but.

Was there a credit portion to that I mean now that.

It sounds as if you're going to slow some of those sales despite a little pick up near term.

Speaker 11: you know, non performers or non-acruals, anything else on the premium finance that you might, that's got a credit, pinch to it that you want to kind of, like you said, you're always looking at exiting riskier portfolios. Is there some concern in that book, I suppose?

Richard Murphy: Okay. And on the commercial NPOs, if this is a persistent issue, you're saying that you're thinking that could remain elevated, but this is kind of the nine-month loan on a 12-month insurance contract. Is that, that's the structure? Is that right? Yeah. That's, that's right. But the, and we do think that loans within our P and C portfolio that apply to transportation will have a little bit more pressure. And you still may see.

Non performers or non accruals.

Anything else on the premium finance it might.

That's got a credit.

Hinge to it that you want to kind of like you said Youre always looking at.

Exiting.

Riskier portfolios is there some concern in that book I suppose.

Speaker 3: No, that sale really wasn't at all for credit. It was all a liquidity play and testing that for liquidity reasons. As Rich said, we really think that those portfolios are low-cost portfolios, so we don't worry about them from that perspective.

No okay.

We didn't know that.

<unk> really wasn't at all for credit it was all liquidity.

Richard Murphy: And going to fall a couple of important points there is that we are getting, you know, a pretty good size premium on those and we get reasonable lay charges. So we are getting paid for that risk. So we're not all that concerned about it from that perspective. But we also are taking some measures here to make sure that we are, our underwriting is maybe addressing some of those things. So we are getting a little bit tighter in that space. But generally speaking again while this is an elevated level, we're not concerned about future losses out of it.

Play in testing that for liquidity.

Reasons.

As rich said, we really think those portfolios are low cost portfolio. So we don't worry about them from that perspective.

Unknown Executive: Okay.

Unknown Executive: All right.

Speaker 3: And even on the life side, like Rich talked about, I mean, you'll notice that that $10 million that was non-performing is still accruing. We generally...

And even on the life side like like Rich talked about I mean, you will now notice at that $10 million that was nonperforming is still accruing we generally.

Speaker 3: You know, we'll allow some of these to go past too, but.

We'll allow some of these to go past due but if for some reason we are no longer a 100% collateralized central unwind. The policy. So we just don't feel like and you can see our historical loss rates of zero basis points over the history of that portfolio would indicate that that's how we manage that portfolio on the P&C side.

Speaker 11: If for some reason we are no longer 100% collateralized, then we'll unwind the policy. So we just don't feel like, and you can see a historical lost rates of zero basis points over the history of that portfolio would indicate that that's how we manage that portfolio. On the P&C side, you know, we're not worried about the economics over the credit side of the equation. So the sale had nothing to do with credit. It had everything to do with liquidity. Okay. Appreciate the clarification. Yeah, it sounds.

Unknown Executive: Thank you very much. Thank you.

Unknown Executive: Stand by for our next question.

Christopher McGratty: Our next question comes from the line of Chris McGratty, up KBW. Hey Chris. Hey, good morning. Dave, I want to go at the NII. Again, the, a lot of your peers are still defending the, you know, the, the trough or trying to find the trough for, you know, six months out. You gave the guy for, for continued growth in an IQ for kind of a stable-ish margin in a higher for longer.

Okay.

We're not worried about the economics of the credit side of the equation. So the sale had nothing to do with credit it had everything to do with liquidity. Okay. I appreciate the clarification yeah.

Speaker 11: pretty, pretty short duration stuff anyway. Yeah, I guess. One last one on the, just back to the margin, started kind of beat up on this, but the, it sounded like pretty back-end loaded long growth in the quarter, talking about the positive pricing moderating. I guess it's the, in the short term that,

Pretty pretty short duration stuff anyway.

Yes, I guess one last one.

Just back to the margin sorry to kind of beat up on this but.

Christopher McGratty: You've got that unique backbook. It would feel like NII continues to grow throughout 2024. Maybe the pace is not as significant, but is that a fair estimate based on what you see in the world? Well, yeah, I think that's how we look at it, Chris. Obviously, you know, if the Fed kills the economy and long growth slows quite a bit, that would have an impact. But the benefit of being diversified in our asset classes is richest set of many times in the past.

It sounds like pretty backend loaded loan growth in the quarter talking about deposit pricing moderating I guess is that in the short term debt.

Speaker 11: kind of margin stability, is that conservatism?

Margin stability is that conservatism.

Speaker 11: kind of the expectation of maybe more hedging headwinds or just being again, conservative overall, because it sounds fairly positive given those factors as you lead into the fourth quarter.

Kind of.

Expectation of maybe more hedging headwinds or.

We're just being again conservative overall, because it sounds fairly positive given those factors as you alluded to the fourth quarter.

Speaker 2: Yeah, I would think I would say it's fairly balanced. I mean, we still have the CD book that reprices upward. I mean, there will be movement in deposit costs. We just also believe that there's continued asset repricing, particularly in the two premium finance portfolios, which will continue to offset that.

I would think I would say, it's fairly balanced I mean, we still have the CD book that re prices upward I mean, there will be movement in deposit costs. We just also believe that there is continued asset repricing, particularly in the two premium finance portfolios, which will continue to offset that so.

Christopher McGratty: If one area slows down, another area is doing okay. So we do think we can keep growing our loans and that mid the high single digit range. Again, as Tim just talked about on the on the prior question, we think stable and, you know, potentially optimistic in the latter half of the year as far as the margin goes. But again, it depends on where the interest rate curve is and all that kind of stuff and how competitive deposit costs is if that picks up right now.

Speaker 3: I think it's a pretty balanced look. We're working hard to move the margin up as much as we can, but it's pretty balanced at this point. I mean, the hedging cost costs us 18 basis points in the quarter, but it's good risk management for a downrate scenario. But I'm not sure I'd use the word conservatism. We try to be realistic, and we just think we have a balanced book right now.

I think it's a pretty balanced look we're working hard to move the margin up as much as we can but it's pretty balanced at this point.

The hedging cost caused us 18 basis points in the quarter, but it's a good risk management for a downrate scenario, but.

Christopher McGratty: We said we see it moderating. So it was very positive. So, you know, I guess a long-winded answer to say, yeah, we still think we can grow mid to high single digits and we think the margins stable. So if that's the case, we think we can have growth.

Christopher McGratty: Okay, great.

Im not sure I'd use the word conservatism, we try to be realistic.

We just think we have a balanced book right now so.

Speaker 3: We think that the marginal say relatively stable, you know?

David Dykstra: Just on the loan sale, can you just remind us, you talked about last quarter contests in the plumbing. Should we expect more of that to occur and was there a, I assume there's a gain that showed up in the, in the not interesting, trying to get the logistics. Yeah, well, we're not planning on any right now. As you said, I mean, we, you know, if you go back into the second quarter when we started to plan this and we did the sale early in the third quarter.

We think the margin will stay relatively stable.

Speaker 3: You could have a lot more deposit growth than you thought, and maybe that puts some pressure on the margin, but that's okay because you bring in good deposits that adds to the franchise and allows you to fund good loan growth. So the timing may go, as I said, it goes up a couple of basis points or down a couple of basis points, but we think it will be in a relatively tight band going forward just because of the structure and the repricing nature of both the sides of the bank.

You could have a lot more deposit growth than you thought and maybe that puts some pressure on the margin, but that's okay, because you're bringing in good deposits that adds to the franchise and allows you to fund good loan growth but.

So the timing May go go so I've said it goes up a couple of basis points or down a couple of basis points, but but we think it will be in a relatively tight band going forward, just because of the structure and the repricing nature of both sides of the balance sheet.

David Dykstra: As we talked about on the last call, we really did it as a way to demonstrate that that portfolio has liquidity and it pays down very rapidly. We would expect the majority of that impact to be gone by the end of this fiscal year since these are nine month full payout loans. And we'll be six months into it so there'd be very little really left of that impact. But we wanted to be able to demonstrate that we had liquidity.

Speaker 11: Maybe just the last one, then, just the ideal environment for the rate environment, if you think about margin, a little further out. I mean, maybe that's the point of the hedge is to keep it somewhat stable, but I guess if we spoke to it specifically, if the Fed does nothing, if we hike or we get cuts over time,

Okay.

Maybe just the last one that just the ideal environment.

For the rate environment. If you think about margin a little further out I mean, maybe that's the point of the hedge is to keep it somewhat stable, but I guess, if we spoke to it specifically.

The fed does nothing if we hike or we get.

Cuts over time.

I guess Steve.

Speaker 11: what would be the, if we look at the balance of 24, the way you're positioned.

David Dykstra: We wanted to be able to have make sure we had a tool in case concentrations of the premium finance portfolio has got too high. We wanted to be able to have the plumbing in place in case there was any future liquidity events that happened in the industry. So we just thought it was prudent to do the sale, put the plumbing in place, test it out and move forward. But right now, based upon the good deposit growth that we're having and our funding ability to continue to fund those loans and our loan to deposit ratio being in a spot that we like it. We don't have any expectations that will do another sale on the near term, but the facilities there in the event we needed for some reason.

What would be that if we look at the balance of 'twenty four.

The way you position.

Speaker 11: what, from a Fed standpoint, is ideal.

From a fed standpoint is is ideal.

Speaker 2: Well, as we talked about, we're much more neutral than we had been, and you can see that on, I think it's Table 12, Table 8, sorry.

As we talked about were much more neutral than we had been and you can see that on I think it's table 12 table eight sorry.

Speaker 2: We still are as that sensitive. We benefit a little bit if rates continue to stay high or move up. Who knows, we may get something in December or January here if the political kind of issues quiet down. But we're pretty square at this point. So we're going to grow net interest income primarily through growth at this point. And that's what we're focused on doing.

We still are asset sensitive we benefit a little bit if rates continue to stay high or move up.

Who knows we may get something in December or January here, if the political kind of issues quiet down.

But we're pretty square at this point and so we're going to grow net interest income primarily through growth at this point.

And that's what we're focused on doing.

David Dykstra: Perfect. And then in the last one, we went through all the moving parts of not interesting coming any event to a half million bucks. How do we think about just the trajectory of your fees, but mortgage obviously pretty depressed, but you got other offsets from here? Yeah, well mortgage and wealth management are two big areas. The service charges sort of just a plug along and maybe grow with the growth of your business and retail accounts.

Yes.

Appreciate it thanks.

Yes.

Yes.

Speaker 2: I guess the other thing I would add is, obviously, not only is the hedging program helpful, but if rates turn down, the mortgage business will pick up relatively quickly, we think. There's just a lot of, you know, refinance opportunity, even with a moderate move there. So, again, we like the diversity of our businesses as an element in helping to kind of stabilize the performance going forward.

Thanks, I guess the other thing I would add is obviously not only is the hedging program helpful. But if rates turned down the mortgage business will pick up relatively quickly we think theres just a lot of.

Refinance opportunity, even with a moderate move there so.

David Dykstra: But mortgages, you know, the pipelines are pretty consistent. And, you know, they're in the 80, 85% purchase business. You know, that maybe that's closed down a little bit in the winter months since the majority of our, our originations come out of the Chicago Milwaukee and Minnesota markets. But applications, I think are about as low as they go. So we would expect steady originations, gain until margins have been holding in a little above 2%.

Again, we like the diversity of our businesses as an element in helping to kind of stabilize the performance going forward.

Speaker 1: Thank you. Our next question comes from the line of Brody Preston of UBS.

Thank you. Our next question comes from the line Brody Preston of UBS.

Speaker 6: Hey, good morning, everyone. How are you? Good morning, Brody. We're good.

Hey, good morning, everyone. How are you.

Florida, we're good.

Speaker 6: I just want to ask a couple of quick questions on the composition of loan portfolio. Do you have any have what the what the percent of the portfolio is that are shared national credits and of that what you happen to be to lead on?

Hey, I just wanted to ask a couple of quick questions.

On the composition of the loan portfolio do you happen to have what the what.

David Dykstra: And so we think that, you know, we'll just plug along and then there might be some fluctuation depending upon movements and rates and the impact on mortgage servicing rights. But we try to hedge that impact pretty well too. So I think our personal opinion is I think mortgage probably bounces along here for the next couple quarters. Hopefully in the spring buying season we see some green shoots and and some improvement in the applications and the production.

What the percent of the portfolio is at a shared national credits and all of that what you happen to be the lead on.

Speaker 4: Yeah, so total SNCCs in our portfolio are just over a billion. We're the lead on about 6% of that.

Yes, so total snacks in our portfolio or just over $1 billion.

We're the leader in about 6% of that.

Speaker 4: I would also just kind of point out that, you know, of our SNCC portfolio, much of that is really tied to the businesses that we're in. Franchise Finance has a significant number of SNCCs where other banks are buying into our credits, we're buying into their credits.

Okay, I would also point out that of our <unk>.

Nick portfolio much of that is really tied to the businesses that we're in.

Franchise finance has.

David Dykstra: But I don't see anything that would indicate that it would, and increased rapidly in the near term or decreased rapidly. It's been plugging along at these levels for four by six months now, so we expect that to continue. Well, management somewhat depends upon the movement of the underlying assets under management and their valuations because of the fees are based upon a lot of the values, but we continue to try to hire people and grow that business, but it's a little bit slower, trajectory forward, but we have expected to grow. So we've got some leasing income in there, etc., but the rest is pretty small.

A significant number of snacks, where other other.

Unknown Executive: Great.

Banks are buying into our credits were buying into their credits.

Speaker 4: Similarly, like in the insurance space, similar things. So we're generally not a player in just buying into other people's deals. It really is our approach to this is just.

Unknown Executive: Thank you.

Similarly in the insurance space similar things. So we're generally not a player in just buying into other people's deals. It really is our approach to this is just.

Speaker 4: to facilitate the growth of individual business lines and making sure that we see how other banks are managing those credits.

To facilitate that.

The growth of individual business lines in and making sure that we see.

How other banks are or managing those credits and so.

Speaker 4: We believe it's a sound approach, but it also gives us some intel into how other competitors are working in that market.

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We believe it's a sound approach, but it also gives us some some intel into how other competitors are working in that market.

Speaker 6: Got it. And on the office portfolio, do you happen to have what the reserve and the reserve level and the average loan-to-value is?

Got it and on the office portfolio do you happen to have what the reserve.

Unknown Executive: Once again, to ask a question, please press star 1-1 on your touchtone telephone. Again, that's star 1-1 to queue up for a question.

The reserve level and the average loan to value is.

Speaker 4: We don't disclose loan-to-value. We think that it's a little bit of a misleading number because, you know, whether it's a loan-to-value based on time of origination or people are getting loans reappraised, we think it's a little bit of a, you know, misrepresentative number. I would say that our general loan policy, we're typically, you know, going to be sub-70% at time of origination.

We don't disclose loan to value, we think that is a little bit of a misleading number because whether it's a loan to value add based on time of origination rfps are getting loans reappraised, we think it's a little bit of a.

Terry Mcevoy: Our next question comes from the line of Terry McEvoy of Steven Zane. Hi, thanks.

Misrepresentative number I would say that our general loan policy, where typically.

Terry Mcevoy: Good morning, everyone. Maybe start with a question. The expense outlook for the fourth quarter. There were a couple items called out on the expense line right in the opening of the press release, but you share some thoughts on 4Q and maybe while I'm on any initial thoughts on 2024 expenses, whether that will track kind of historical growth rates or we are hearing from some other banks that they're looking at expenses with some internal plans to kind of control that growth rate.

We're going to be sub 70%.

Our original at time of origination.

Speaker 3: Yeah, and on the reserve side, it's really sort of included in our overall commercial real estate. We don't disclose a separate one for office. So it would be sort of included in the commercial real estate sector. We do have some qualitative factors that we apply, but we haven't disclosed the specifics for that line item.

And on the reserve side, it's really sort of included in our overall commercial real estate, we don't disclose a separate one for office. So it would be it would be sort of included in the commercial real estate sector. We do have some qualitative factors that we fly, but we haven't disclosed the specifics for that line item protein.

Terry Mcevoy: You're right, Terry. We call about out about $6 million of sort of uncommon expenses that we wouldn't expect to recur in the fourth quarter. So, you know, that's $3.30. You know, it takes us out near $3.24 or something like that. So probably, you know, somewhere plus or minus in that area for the fourth quarter. We haven't really given guidance for 24 yet, but generally speaking, you know, our thought is that you know, we're a growth company and we have lots of opportunities.

Speaker 3: Okay, okay, got it. And I know you talked a little bit about the analysis that you guys continue to do about, you know, the office loans that are coming due over the next 12 months.

Okay, Okay got it.

I know you talked a little bit about.

The analysis that you guys continue to do.

Bout.

The office loans that are coming due over the next.

Speaker 6: Do you happen to have the number, I guess the actual dollar amount of loans that are coming due over the next 12 months and how does that look as we go forward through 2025?

The next 12 months.

Do you happen to have the number I guess the actual dollar amount of loans that are coming due over the next.

12 months and how does that look as we go forward through 2025.

Speaker 4: Yeah, I don't you know, we don't I would say that you know this, you know, you hear about the wall of maturities I mean as we looked at it and kind of just looked out through All of next year. We really don't see it. I mean, it's really kind of spread out, you know, pretty pretty evenly through 24 and 25 But I don't have the number that was in that that population

Yes, I don't we don't.

Terry Mcevoy: We're uniquely positioned here in Chicago right now with our size and how we stack up against the competition. Basically, we're going against big banks and small community banks. There just aren't a lot of banks between $10 and $50 billion that are headquartered in Chicago area. So, we have a unique position here that we think we can take advantage of. And we also have, you know, our niche businesses that can help out.

I would say that.

You hear about the wall of maturities I mean, as we looked at it and kind of just looked out through <unk>.

All of next year, we really don't see it I mean, it's really kind of spread out pretty.

Pretty evenly through 'twenty four 'twenty five.

But I don't have the number that was in that population.

Speaker 3: We don't have it handy here. Yeah, I don't have it handy. I do have it. We have it, you know, and we just don't have it handy here. Yeah, understood. And so just one last one on the office book. You said you don't disclose the LTV, but do you happen to have what the debt service coverage ratio looks like?

And we don't have it handy I don't have it handy.

We haven't seen all of it we just don't have it handy here.

Terry Mcevoy: So, we've always thought of ourselves as a growth company. We still think we can grow deposits are out there and having good growth. And so, we'd rather grow into this. And if we grow mid to high single digits, we would expect that our, you know, our non-interest expenses would grow at a rate less than that. You know, you know, maybe mid single digits. And so, we can leverage the infrastructure going forward.

Yes understood.

And just one last one on the office book, You said, you don't disclose the LTV, but do you happen to disclose do you happen to have what the debt service coverage ratio looks like.

Speaker 4: Again, we don't disclose that, but generally, you know, we're, you know, we want to, on a stress basis, we're looking for a 1.2 coverage and deals that we do.

Again, we don't disclose that but generally we're we want to on a stressed basis. We're looking for a one two coverage and deals that we do.

Terry Mcevoy: You know, if for some reason the growth doesn't come, there's certainly levers we can pull to try to reduce expenses, but the plan is to grow into it and leverage the infrastructure. And as I said, I actually are non-interest expenses, even with that 6 million in there, as a percent of average assets was down a little bit this quarter. So, you know, we're going to watch them, we're going to control them, but we're still expecting to be growing the franchise and taking advantage of opportunities in the marketplace, that's always been the plan and continues to be the plan.

Speaker 6: OK, got it. They just I wanted to follow up on the sale of the.

Okay.

Got it.

Dave just I wanted to follow up on the sale of the.

Speaker 6: of the the premium finance loans. Did you, I think we had talked about 500 million before and it looks like it came in at like 344. What was the rationale about I'm selling less than the 500?

Of the the premium finance loans did you.

We had talked about $500 million before and it looks like it came in.

At like $3 44.

What was the rationale behind selling less than the 500.

Speaker 3: No, the $344 million was the outstanding balance at the end of the quarter, so that would have been the impact. We sold close to $500 million in early July , but because these loans pay down so quickly on a monthly basis, that $500 million had amortized down to $344 million by the end of the quarter. So that was the end-of-the-quarter impact.

The $3 44 was the outstanding balance at the end of the quarter. So that would have been the impact we sold close to $500 million in early July but because these loans pay down so quickly on a monthly basis that $500 million. It amortize down to $3 44 by the end of the quarter. So that was the end of the quarter impact.

David Dykstra: Maybe as a follow-up, the $337 million of CRE growth in the third quarter, help us understand how much of that came from kind of market opportunities, new customers versus current customers, and how successful have you been in bringing you, having them bring over their deposit relationships or business as well? Yeah, I'll answer that sort of in reverse order. Pretty much any new opportunity that we're looking at, it's assumed that we're going to be getting meaningful deposits, that's number one.

Speaker 3: Got it. Okay, thanks for the clarification. And to follow up on Chris's question, did you guys happen to book a gain on that through fee income at all? And if you did, do you know what the dollar amount is? Yeah, the gain was roughly $1 million for the quarter. Okay.

Got it okay. Thank for the clarification and a follow up on Chris's question did you guys happen to book a gain on that through fee income at all and if you did do you do you know what the dollar amount is.

The gain was roughly $1 million for the quarter.

Okay and that would be in other income then.

Speaker 6: Okay, and then the last one was just on the just on the NIM trajectory. I know there's been a lot a lot of discussion on it. I just wanted to ask, you know, how are you thinking about, you know, I think you're calling for stability maybe as we go forward into 2024, which you know feels kind of right, but I guess how are you thinking about

Yes, Sir.

Okay.

And then the last one was just on the just on the NIM trajectory I know theres been.

David Dykstra: As it relates to the growth, as I said in my comments, the majority of what we're seeing there are draws on existing facilities that we have with existing customers, but there's probably about 40% of that total comes from opportunities that we're seeing in the marketplace. As you know, a lot of other banks are really out of that space right now, and there are good opportunities out there for us to bring over clients. So it's a little bit of a mix, but the majority is still with existing clients and existing outstanding.

A lot.

A lot of discussion on it I just wanted to add.

How are you thinking about.

I think you're calling for stability, maybe as we go forward into 2024, which.

Feels kind of right, but I guess, how are you thinking about.

Speaker 3: rate cuts at all how will that impact the margin uh... just given the swaps that you put in and you know and then specifically on the swaps the new ones that you put on you know what what will be the basis point on the impact on the name in terms of drag from the new swaps

Terry Mcevoy: Thanks for taking my questions.

Rate cuts at all how will that impact to the margin just given the swaps that you put in and then specifically on the swaps the new ones that you put on what will be the basis point kind of impact on the NIM in terms of drag from the new swaps.

Speaker 2: Well, the drag right now is 18 basis points for the quarter. And you can see in our disclosure, the individual swaps primarily receive fixed that go out, in some cases, three years, in some cases.

Well the drag right now is 18 basis points for the quarter and you can see in our disclosure the.

Unknown Executive: Next, Eric. Thank you.

We'll swaps primarily received fixed that go out in some cases three years in some cases five years with actually a forward start term, but if we start to get rates falling.

Speaker 2: five years with actually a forward start term. But if we start to get rates falling,

David Long: Our next question comes from the line of David Long of Raymond James. Hey, David. Good morning, everyone. Thanks for the update and long growth expectation. It sounds like the pipeline is still pretty good. My question, you know, when I'm looking at the surveys of lenders, there's not a, does not seem to be a big appetite to lend, or much of a demand for loans as there has been. What's making Winchester different here?

Speaker 2: We think we'll get better loan activity as the economy picks up. We think the mortgage business will pick up. Obviously, that's not a margin-related item. But we think that the offsetting factors to potential NIM compression come in other areas of the business. And so that's how we look at it, and that's when we talk about this.

We think we will get better loan activity as the economy picks up we think the mortgage business will pick up obviously, that's not a margin related item but.

We think that the.

<unk>.

Offsetting factors to potential NIM compression come in other areas of the business and so that's how we look at it in that.

Speaker 3: being in a narrow band as you get into some of these other factors, it gets a little bit harder to project exactly. Yeah, and I mean, before when rates went to zero, our margin was in the mid-twos, I mean 50 to 60 percent, and we just never wanted to get back there. We think with these hedges we have in place now, if rates went to zero again, we would stay above 3 percent. I mean, there would be some compression, and we'd have offsets that Tim talked about.

When we talk about this being in a narrow band as you get into some of these other factors it gets a little bit harder to project exactly and I mean before when rates went to zero or our margin was in the mid twos, I mean keep 50% to 60% and we just never wanted to get back there we think with these hedges.

David Long: How are you guys able to grow the portfolio when the market may be expecting more of a flatish outlook for loan growth? You know, as we've talked about in the past, you know, loan growth comes in many different forms for us. So, you know, you go back to a point when we were just out of the pandemic or in the middle of the pandemic and rates were very low. You know, life finance was just going crazy.

David Long: You know, now that's slowed down, but in the meantime, you have the P and C side kind of filling in that gap. So, you know, having a multi-frying approach to lending really does make a difference for us in terms of, you know, when you have growth in certain areas. But more specifically, as it relates to, you know, maybe the core businesses, I would say that we've been pretty disciplined about the way our portfolios constructed.

We have in place now if rates went to zero again, we would stay above 3% and there'll be some compression and we'd have offsets that Tim talked about.

Speaker 4: But we wouldn't go back into that mid-two range based on this hedging position that we have in place.

But we would.

We wouldnt go back into that mid <unk> range based on this hedging position that we have in place.

Got it thank you very much.

Speaker 1: I would now like to turn the conference back to Tim Crane for closing remarks. Sir? Yeah, guys, thank you very much for your time this morning. I hope we did a reasonable job answering your questions. You know, this is a lot about blocking and tackling for us. We think we're uniquely positioned to take advantage of opportunities that, you know, we're seeing in the market. And as always, we'll work very hard to deliver good results. So thank you very much. This concludes today's

Thank you.

I would now like to turn the conference back to Tim Crane for closing remarks, Sir.

Thank you. Thank you very much for your time. This morning, I Hope, we did a reasonable job answering your questions.

David Long: A lot of banks right now would look at their CRE bucket and say it's probably more than ideal. You know, we would say that, you know, right now we we still have an appetite for CRE loans. And so, we're able to take advantage of that dislocation in the market. Similarly, with a lot of the, David, as you know, in Chicago, we've had a tremendous amount of disruption with the players in Chicago and we're seeing lots of opportunities on the C&I side for companies that, you know, we've been actively trying to bring over for some time.

This is a lot about blocking and tackling for us we think we're uniquely positioned to take advantage of opportunities that.

We're seeing in the market and as always we will work very hard to deliver good results. So thank you very much.

Yes.

This concludes today's conference call. Thank you for participating you may now disconnect.

David Long: And they just for whatever reason stuck with the incumbent until they just couldn't take it any longer. And so, as a result, we've been able to bring over a lot of those. So, we continue to be pretty bullish about growing that portfolio, particularly on the core side. We really see a lot of nice opportunities, right? Now. And David, we've been disciplined on pricing, but there's loan demand is there. You just have to pick your spots and we're getting a lot of looks.

Okay.

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David Long: Yeah, that's a great point, Tim. I mean, where where structures had been, you know, if you go back, you know, 18 months ago, 24 months ago, structures were, were pretty loose pricing was pretty tight. And you know, there were those were times where we were, you know, we, there were deals that we just stepped away from. You know, right now, you can, you can get better pricing and, you know, we try to be very disciplined in that space.

David Long: Yeah, well, I just say we can continue to grow deposits. We've proven for a couple of quarters that we can fund the loan growth. And, you know, our desire would be to continue to grow, grow the deposit base. It's kind of the core of our franchise. And we've talked several times about the fact that, you know, we're six, seven, eight percent. Market share and deposits in the Chicago area, you know, opportunities in Milwaukee as well.

David Long: So even though the, you know, six, 30 deposit share results, we're, we're pretty good for us. We, we think that's just the beginning. Yeah, I, I would say, you know, it's sort of, you know, the macro summary on the your question is that there is no shortage of opportunities to lend money out there right now. I think there's a lot of banks that are just maybe unwilling for the deposit and capital reasons. You know, so our job is to take advantage of this moment. So it sounds like the strategy is still focused on organic growth because that's what the market is giving you.

Timothy Crane: You know, what is the appetite for M&A at this point? And what does the backdrop or what needs to change in the backdrop? Maybe for you guys to be more opportunistic on that front to accelerate growth? Well, there are acquisition type opportunities. So whether that's a portfolio of loans or whether it's a piece of a business or in some cases, the conversations around, you know, kind of bank M&A are picking up, but the, we're pretty disciplined and, you know, some of these portfolios are challenged from pricing perspective and.

Timothy Crane: We don't need to do that kind of growth given the opportunities that we have if, if some of those look up, you know, like good opportunities to us, we may add some people, for example, in areas where we've got good businesses, you know, there are some folks available in the market right now, but I think we'll stay pretty disciplined. Got it. Thanks guys appreciate the color there. Yeah, thanks, David. Thank you.

Casey Haire: Our next question comes from the line of Casey here of Jeffries. Hi, Casey. Hey, thanks.

Timothy Crane: Good morning, guys. I guess just sorry if I missed this wanted to follow up a little bit more than on the discussion, but did you guys disclose what spot loan yields were and deposit costs at 930? No, we haven't, we haven't done that, but what we could tell you is that the margin was, you know, right near the current level. At the end of the period and we're really focused on the net margin going forward, but we the deposit pricing has moderated as you can see, and we expect that to continue into the portfolio, but no, we didn't, we didn't provide that.

David Dykstra: Okay, very good. And then just, I guess, switching to credit, the ACL on the core book at 151, obviously very strong. Just curious, what kind of scenario are you guys baking in, you know, be it, you know, slow down, S3 or any color on what kind of unemployment rate that, you know, which is driving your seesaw modeling? Yeah, well, I mean, we use a numbered, we look at a number different ways.

David Dykstra: I mean, we use, as a base, we use Moody's base case scenario, but we do also look at other economic scenarios to build our case. We don't have a big consumer portfolio. So, you know, unemployment is generally not a big impact in our models with correlation. We use a consumer real estate price index, you know, the BWA credit spreads and a few other factors. Those didn't have a major impact, quarter over quarter change.

David Dykstra: The real reason the, the provision was less this quarter was we just had less long growth this quarter. All the other factors sort of washed out, but, you know, roughly 10 million of that reduction was just due to less long growth in the third quarter relative to the second quarter. But to answer your question, generally, is we use the Moody's model and we supplement that with a couple other economic sources.

Unknown Executive: Great.

Unknown Executive: Thank you.

Jeff Rulis: Our next question comes from the line of Jeff Rulis of DA Davidson. Thanks good morning.

Jeff Rulis: Just a couple of housekeeping items on the, just wanted to follow up.

David Dykstra: The co-work office credits you pushed out last quarter, is that largely done? Is there anything else you're trying to kind of manage out within the office side? As we disclosed last quarter that that failed took up a roughly half of that portfolio. You know, we will continue to explore options related to the rest of that exposure and my guess is we'll hopefully get something done here relatively soon, but, you know, it just depends on what that market looks like.

David Dykstra: We are always looking at assets within the portfolio and determining kind of the best course of action, but nothing pending right now. Okay. And then on the, you know, back to the premium finance sales, kind of the testing, the plumbing. You know, I imagine some of that is just you know, kind of mix management, but was there a credit portion of that? I mean, now that it sounds as if you're going to slow some of those sales, despite a little pickup near term in, you know, non performers or non accruals, anything else on the premium finance that you might, that's that's got a credit.

David Dykstra: Pinch to it that you want to kind of, like you said, you're always looking at exiting riskier portfolios. Is there some concern in that book? I said, No, we didn't, that felt really wasn't at all for credit, it was all a liquidity play and testing that for liquidity reasons. As Rich said, we really think that, you know, those portfolios are low cost portfolios so we don't worry about them from that perspective.

David Dykstra: And even on non-performing, it's still accruing, you know, we generally, you know, we'll allow some of these to go past, too, but if for some reason we are no longer 100% collateralized, then we'll unwind the policy. So we just don't feel like, and you can see a historical lost rates of zero basis points over the history of that portfolio would indicate that that's how we manage that portfolio. On the P&C side, you know, we're not worried about the economics over the credit side of the equation.

David Dykstra: So the sale had nothing to do with credit, it had everything to do with liquidity. Okay, appreciate the clarification. Yeah, it sounds pretty, pretty short duration stuff anyway. Yeah, I guess one last one on the just back to the margin started kind of beat up on this, but the, it felt like pretty back-end-loaded loan growth in the quarter, talking about the positive pricing moderating. I guess it's that in the short term, that kind of margin stability, is that conservatism kind of, you know, expectation of maybe more hedging headwinds or just being, again, conservative overall?

David Dykstra: Because it sounds fairly positive given those factors as you lead into the fourth quarter. Yeah, I would think I would say it's fairly balanced. I mean, we still have, you know, CD book that reprices upward. I mean, there will be movement in deposit costs. We just also believe that there's continued asset repricing, particularly in the two premium finance portfolios, which will continue to offset that. So I think it's a pretty balanced look.

David Dykstra: We're working hard to move the margin up as much as we can, but it's pretty balanced at this point. I mean, the fourth quarter, but you know, it's good risk management for a downright scenario, but I'm not sure it uses word conservatism. We try to be realistic in that. And we just think we have a balanced book right now. So we think that the margin will stay relatively stable. You know, you could have a lot more deposit growth than you thought, and maybe that puts some pressure on the margin, but that's okay, because you bring in good deposits that add to the franchise and allows you to fund good loan growth.

David Dykstra: But so the timing may go. I've said it goes up a couple basis points are down a couple basis points, but but we think it'll be in a relatively tight ban going forward just because of the structure and repricing nature of both the sides of the balance. So yeah, maybe just the last one, then just the ideal environment that you for the rate environment. If you think about margin a little further out, I mean, maybe that's the point of the head just to keep it, you know, somewhat stable.

David Dykstra: But I guess if we spoke to it specifically, if the Fed does nothing, if we hike or we get, you know, cuts over time. What would be the, if we look at the balance of 24, the way your position, what from a Fed standpoint is ideal? Well, as we talked about, we're much more neutral than we had been, and you can see that on, I think it's table 12, table 8, sorry.

David Dykstra: We still are asset sensitive, we benefit, you know, a little bit, if rates continue to stay high or move up, you know, who knows, we may get something in December or January here, if the political kind of issues quiet down, but, you know, we're pretty square at this point, and so, you know, we're going to grow net interest income, primarily through growth at this point, and, you know, that's what we're focused on doing.

David Dykstra: Yeah, I appreciate it, thanks, yep, I guess the other thing I would add is obviously not only is the hedging program helpful, but if rates turn down, the mortgage business will pick up relatively quickly, we think there's just a lot of, you know, a brief and anthroportunity, even with a moderate move there, so, again, we like the diversity of our businesses as an element in helping to kind of stabilize the performance going forward.

Broderick Preston: Thank you, our next question comes from the line of Brody Preston of UBS. Hey, good morning everyone, how are you? Good morning, Brody, we're good.

Broderick Preston: Hey, I just want to ask a couple of quick questions on the composition loan portfolio. Do you happen to have what the, what the percent of the portfolio is that are shared national credits and of that, what you happen to be the lead on? Yeah, so total SNICs in our portfolio are just over a billion. We're the lead on about 6% of that. Okay, I would also kind of point out that, you know, of our SNIC portfolio, much of that is really tied to the businesses that we're in.

Broderick Preston: Franchise finance has a significant number of SNICs where other banks are buying into our credits, we're buying into their credits, similar like in the insurance space, similar things. So we're generally not a player and just buying into other people's fields. It really is our approach to this is just to facilitate the growth of individual business lines and making sure that we see, you know, how other banks are managing those credits. And so it's, it's, we believe it's a sound approach, but it also gives us some, some intel into, you know, how other competitors are working in that market.

Broderick Preston: And on the office portfolio, do you happen to have what the reserve and the reserve level and the average loan to value is? We don't disclose loan to value. I think that it's a little bit of a misleading number because, you know, whether it's a loan to value at base on time of origination or if we are getting loans re-appraised, we think it's a little bit of a, you know, misrepresented number.

Broderick Preston: I would say that our general loan policy, we're typically, you know, going to be sub 70% and our, our, at time of origination. And on the reserve side, it's really sort of included in our overall commercial real estate. We don't disclose a separate one for office. So it would be, it would be sort of included in the commercial real estate sector. We do have some qualitative factors that we apply, but we haven't disclosed the specifics for that line item. Okay, okay, got it.

Broderick Preston: And I know you talked a little bit about the analysis that you guys continue to do about, you know, the office loans that are coming due over the next, the next 12 months. Do you have to have the number, I guess the actual dollar amount of loans that are coming due over the next 12 months? And how does that look as we go forward through 2025? Yeah, I don't, you know, we don't, I would say that, you know, this, you know, you hear about the wall of maturities.

Broderick Preston: I mean, as we looked at it and kind of just looked out through all of next year. We really don't see it. I mean, it's really kind of spread out, you know, pretty, pretty evenly through 24 and 25. But I don't have the number that was in that population. And we don't have a handy here. Yeah, I don't have a handy. I do have it. We haven't seen all. We just don't have a handy here. Yeah, yeah, understood.

Broderick Preston: And so you just one last one on the office book. You said you don't disclose the LTV, but do you happen to disclose the, you haven't have what the debt service coverage ratio looks like. Again, don't disclose that. But generally, you know, we're, you know, we want to, on a stress basis, we're looking for a 1.2 coverage and deals that we do. Okay. Okay, got it.

Broderick Preston: They just, I wanted to follow up on the sale of the premium finance loans. Did you, I think we had talked about 500 million before and it looks like it came in. At like 344. What was the rationale up? I'm selling less than the 500. No, well, the 344 was the outstanding bounce at the end of the quarter. So that would have been the impact. We sold close to 500 million in early July, but because these loans pay down so quickly on a monthly basis, that 500 million at amortized down to 344 by the end of the quarter. So that was the end of the quarter impact. Got it. Okay. Thank you for the clarification.

Broderick Preston: And to follow up on Chris's question, did, did you guys happen to book a gain on that through fee income at all? And if you did, do you know what the dollar amount is? Yeah, the game was roughly 1 million dollars for the quarter. Okay. And that would be another income then. Yes, sir. Okay.

David Dykstra: And then the last one was just on the, just on the nymph trajectory. I know there's been a lot. A lot of discussion on it. I just wanted to ask, you know, how are you thinking about, you know, I think you're calling for stability, maybe as we go forward into 2024, which, you know, feels kind of right. But I guess how are you thinking about rate cuts at all? How will that impact the margin?

David Dykstra: And just given the swaps that you put in and, you know, and then specifically on the swaps, the new ones that you put on, you know, what will be the basis point kind of impact on the nymph in terms of drag from the new swaps? Well, the drag right now is 18 basis points for the quarter. And you can see in our disclosure, the individual swaps primarily receive fix that go out in some cases three years.

David Dykstra: In some cases, five years with actually a forward start term, but if we start to get rates falling, we think we'll get better loan activity as the economy picks up. We think the mortgage business will pick up. Obviously, that's not a margin related item. But we think that the offsetting factors to potential nymph compression come in other areas of the business. And so that's how we look at it. And that's when we talk about this being in a narrow band as you get into some of these other factors, it gets a little bit harder to project exactly. Yeah.

David Dykstra: And I mean, before when rates went to zero, you know, our margin was in the mid two. So I mean, 52 60%. And you know, we just number one to get back there. We think with these hedges we have in place now, if rates went to zero again, we would stay above 3%. I mean, there'd be some compression and we'd have offsets that Tim talked about. But we wouldn't go back into that mid two range based on this hedging position that we have in place. Thank you very much.

Unknown Executive: Thank you.

Timothy Crane: I would now like to turn the conference back to Tim Crane for closing remarks, sir. Yeah guys, thank you very much for your time this morning. I hope we did a reasonable job answering your questions. You know, this is a lot about blocking and tackling for us. We think we're uniquely positioned to take advantage of opportunities that, you know, we're seeing in the market and as always, we'll work very hard to deliver good results. So thank you very much.

Unknown Executive: This concludes today's conference call. Thank you for participating. You may now disconnect.

Unknown Executive: Thank you.