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spk04: Welcome to Wintrust Financial Corporation's third quarter and year-to-date 2021 earnings conference call. A review of the results will be made by Edward Wehmer, former Founder and Chief Executive Officer, Tim Crane, President, David Dykstra, Vice Chairman and Chief Operating Officer, and Richard Murphy, Vice Chairman and Chief Lending Officer. As part of their reviews, the presenters may make references to both the earnings press release and earnings release review presentation. Following their presentations, there will be a formal question and answer session. During the course of today's call, Wintrust management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Actual results could differ materially from the results 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 10-K and any subsequent filings on file with the SEC. Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Edward Wehmer.
spk10: Thank you very much. Welcome, everybody, to our third quarter earnings call. As mentioned, with me are Dave Dykstra, Dave Starr, Kate Bogey, Tim Crane, and Rich Murphy. We have the same format as we instituted earlier this year. I'm going to give some general comments regarding our results. Go over to Tim Crane for more detail on the balance sheet, and to Dave Dykstra for other intel and other expense. And Rich Murphy will discuss credit. Back to me for some summary comments and thoughts on the future, and then time for questions. On the overview, all in all, very successful quarter. I can almost give the same comments made at the end of Q2. At the end of last April, at the start of the pandemic, the government's massive response to it indicated winter was supposed to be, was going to attempt to grow through it. We've accomplished this goal, and as such, third quarter shows this strategy is working. All our growth to date has been organic. Second quarter is another all-around billion-dollar quarter. Assets, deposits, core loans, not a PPP loans, all grew by over a billion dollars. Both prospects remain very good. A particular note, core loan growth resulted in overall increase in total loans for the quarter, even after PPP runoff. We're able to achieve another billion dollar loan quarter in Q4, which we believe is more than a reasonable assumption given our pipelines, which, by the way, are 13 months high at quarter end. We'll fully replace all the PPP balances. This was our intent before we embarked on this strategy. The income for the quarter was $109 million, or $1.77 for the losing common share. Here today, we stood at $367.4 million, or $6 per share. Ported net interest margin decreased four basis points, 2.59% to 2.59%, primarily due to excess liquidity. Net interest income was up $19.7 million from quarter two, if you back out the PPP loan income. In total, net interest income was up almost $8 million over quarter two. Period on loans exceeded average loans of the quarter by $670 million, which bodes well for Q4. Our liquidity portfolio is up $1.563 billion on average. This portfolio remains very short, over $5.2 billion in overnight money at the Fed, Investing this money as rates rise is a lever we can pull when the time is right. Stone Grove, as I say, was excellent in all areas of our business, as are current pipelines. Line usage remains low, a little over 39%. It's up around 1% from the end of quarter two. It appears we've hopefully hit bottom on this, and line usage started to increase. Normal average is close to 50%, so return on loan would add another billion dollars in outstanding loans. Credit quality got even better, and charge-offs totaling like net zero. We had some charge-offs, but we had recoveries, which should indicate to you our conservatism and writing things off and looking good on recovery. NPLs and NPAs were constant versus Q2. NPLs rose $2.5 million to $90 million for 27 basis points, while NPAs shrunk $2.5 million to 22 basis points. This plus improved portfolio quality and Moody's sunnier view of the overall economy, southern reserve release of $7.9 million. Mortgage increased experience and growth in the quarter. Dave will discuss in detail. Wealth management continued steady improvement, fees up $1 million for a quarter, up $18 million year-to-date. Let's turn the call over to Tim, who's going to provide some additional detail on the balance sheet.
spk11: Tim? Good. Thanks, Ed. I'd like to briefly highlight a few balance sheet items as well as cover two topics that appear to be of interest. First, with respect to the balance sheet, Total assets increased to just under $48 billion as we continue to experience strong growth. As Ed mentioned, loans excluding PPP grew $1.2 billion during the quarter, essentially mirroring last quarter's growth. The growth was spread across virtually all loan categories, as Rich will discuss in a few minutes. On a percentage basis, this is the second straight quarter where annualized loan growth, again excluding PPP, was approximately 15%. With respect to PPP loans, we saw a reduction of approximately $800 million during the quarter. At this point, almost all of the PPP loans originated in 2020 have been forgiven, and approximately half of the loans from 2021 either have been or are in the process of being forgiven. By year end, we project the remaining PPP balances will be down materially and the remaining income impact to be relatively small. For the remainder of the year, we are comfortable with our loan growth target at mid to high single digits on a percentage basis. Again, rich will provide some additional color on loan pipelines and the factors that would drive potential upside to that number. Deposit growth for the quarter was also strong, $1.1 billion, almost all of it either DDA or low-cost deposits. This is an annualized growth rate of approximately 12%. Despite the high levels of PPP forgiveness, we are not seeing unusual volatility in customer deposits. This quarter, the interest-bearing deposit cost fell another nine basis points to 29 basis points. This is largely a function of CD repricing. Deposit costs will continue to decline, but at a slower pace in coming quarters. As we've noted in prior periods, we continue to monitor the deposit growth carefully, given the high levels of liquidity in the market. However, we've used stable, low-cost deposits as a strength of the company and will continue to pursue deposits related to client relationships. On the investment front, we remain very liquid. During the quarter, our securities balances were up slightly as we replaced investments maturing, but generally have not yet moved to deploy the large amounts of excess liquidity as we remain wary of locking in low, long-term yields. As the market continues to trend up, We will evaluate our position and view appropriate deployment of this liquidity as an opportunity in future periods to improve the margin and income. Our capital levels remain appropriate given the conservative risk profile of the bank. You will note that during the quarter we repurchased approximately $9.5 million worth of stock at just over $71 per share. Given where we believe volumes and yields will land, we continue to expect that despite lower PPP accretion, net interest income will increase as it has for four consecutive quarters, and that excluding PPP, the margin will remain roughly stable. I have two other brief comments that relate to new slides in the earnings release presentation. The first has to do with digital adoption. You'll see on page nine of the presentation that our high-touch community banking model also has a high-tech component. and that we are seeing the same increases in digital adoption and usage that some larger banks have reported. We continue to upgrade our digital capabilities to give clients options on how they would like to be served. These capabilities position us to compete successfully and, in some cases, to differentiate ourselves versus our competitors. Currently, you'll see that a full two-thirds of our checking clients regularly use our digital services. Page 10 in the presentation document is also a new slide. It relates to the customer satisfaction of our commercial clients. In this case, the source is Greenwich data. And as you can see, WinTrust is top ranked across a host of important categories. To scale this for you, the 97% overall satisfaction score WinTrust achieves compares generally to scores in the 60s and 70s for many of our competitors. The service we provide increases the depth of our relationships and is the foundation for our strong momentum in the Illinois and Wisconsin markets, as well as nationally in many of our niche businesses. With that, I'll turn it over to Dave.
spk03: Great. Thanks, Tim. As Ed mentioned, I'll cover the income statement categories, starting with the net interest income. For the third quarter of 2021, net interest income totaled $287.5 million. That was an increase of $7.9 million compared to the second quarter and an increase of $31.5 million as compared to the third quarter of last year. The $7.9 million increase in net interest income compared to the second quarter was primarily due to average earning asset growth, which was up on an annualized basis by 12.5% over the prior quarter, and one additional day in the third quarter, which was offset somewhat by a slightly compressed net interest margin. Net interest margin declined four basis points to 2.59%. A beneficial decline of eight basis points for the rates paid on liabilities was offset by a 10 basis point decline on the yield on our average earning assets and a two basis point decline in the net pre-funds contribution, which resulted in a slight decline in the net interest margin. The decline in the earning assets in the third quarter as compared to the prior quarter was primarily due to the impact of building short-term liquid assets. The decrease in the rate paid on interest-bearing liabilities as compared to the prior quarter was primarily due to a nine basis point decrease in the rate paid on interest-bearing deposits primarily due to the repricing of time deposits. I think it's important to note that the net interest income expanded despite $11.4 million of less interest income associated with the PPP loan portfolio in the third quarter, which included $7.8 million of lower PPP loan fee accretion. As Ed mentioned, the net interest margin excluding the PPP portfolio was relatively stable as it declined by only one basis point. Turning to the provision for credit losses, like many other banks have done this quarter, WinTrust again recorded a negative provision for credit losses of $7.9 million. That compared to a directionally similar negative provision of $15.3 million in the prior quarter and a $25 million provision expense recorded in the year-ago quarter. The negative provision was driven by a reduction in the allowance for credit losses primarily due to improvements in the loan portfolio characteristics during the quarter. including decreases in net charge-offs and COVID-related loan modifications and improving loan risk rating migration. Rich will cover credit quality in additional detail in just a few minutes. I will now talk about the non-interest income, non-interest expense, and income tax sections. In the non-interest income section, our wealth management revenue increased $841,000 to another record level of $31.5 million in the third quarter. compared to $30.7 million in the second quarter, and that revenue was up 26% from the $25 million recorded in the year-ago quarter. The revenue source has been positively impacted by higher equity valuations, which impact the pricing on a portion of our managed asset accounts. Mortgage banking revenue saw a reasonably solid loan origination volume during the third quarter, with the origination activity fairly consistent with the second quarter of this year. To that end, the company originated $1.6 billion of mortgage loans for sale in the third quarter of 2021, down from the approximately $1.7 billion that we originated in the prior quarter. As we forecasted on our last call, mortgage banking revenue increased to $55.8 million for the third quarter of 2021. That's compared to $50.6 million in the second quarter. Revenue was higher in the current quarter primarily due to less material unfavorable fair value adjustments on our mortgage servicing right portfolio. The company recorded a $5.5 million negative valuation adjustment in the second quarter as compared to a smaller decrease of $888,000 in the current quarter. Looking forward based on market conditions and expected seasonality of home purchasing activity, we anticipate mortgage originations for sale in the fourth quarter of 2021 21 to be down 20% to 30% from the origination volumes we experienced in the third quarter, and mortgage revenue excluding the MSR valuation adjustments to be down similarly. Also, as we saw in the first three quarters of this year, the wildcard as it relates to mortgage banking revenue is the mortgage servicing rate valuation, which is tied closely to mortgage interest rate movements. I'm not going to speculate on where those rates are going to move to, but our previous forecast of a reduction of 20% to 30% excludes any change in the MSR valuation. Other non-interest income totaled $23.4 million in the third quarter of 21, up approximately $3.0 million from the $20.4 million recorded in the prior quarter. The primary reasons for the higher revenue in this category include $2 million of higher SWOT fee revenue, $2.2 million of higher income from investments in partnerships, which are primarily related to CRA purposes, a positive swing of $859,000 in foreign exchange valuation, adjustments associated with the US-Canadian dollar exchange rate, $812,000 of higher BOLI income, And offsetting those increases was the fact that the prior quarter included a $4 million gain on the sale of a few branch locations in southwestern Wisconsin, and there were no such similar gains in the current quarter. Turning to the non-interest expense, non-interest expenses totaled $282.1 million in the third quarter, up approximately $2 million from the $280.1 million recorded in the prior quarter. There are a handful of categories that I'll address that comprise the majority of that net increase. Salaries and employee benefits expenses actually declined by $1.9 million in the third quarter as compared to the second quarter of this year. The $1.9 million decline is primarily related to $6.3 million of lower compensation expenses associated with the mortgage banking operation. offset somewhat by higher incentive compensation expenses for annual bonus and long-term incentive compensation plans. Advertising and marketing expense totaled $13.4 million in the third quarter, an increase of $2.1 million compared to the second quarter of 2021. The increase in the third quarter relates primarily to increased sponsorship activity for the summer months, including our major and minor league baseball sponsorships and more community events occurring. We would expect this expense level to decline in the fourth quarter as many of these sponsorships are geared towards the summer months. Software and equipment expense totaled $22.0 million in the third quarter, an increase of $1.2 million as compared to the second quarter total of $20.9 million. The increase is due to increased expenses associated with upgrading our data centers for increased capacity, scalability, and reliability. Other network upgrades to support our growth and ongoing digital enhancements and various other software upgrades. As we've done over the last few years, we continue to invest in software and technology to enhance our customer experience and delivery systems and products, as well as to invest in systems to support our growth. And as Tim mentioned, our customer satisfaction results are great, and so I think the investment in those systems is paying dividends. OREO expenses were actually negative by approximately $1.5 million in the third quarter as the company recorded gains of approximately $1.9 million on the sale of OREO properties. These gains were an amount that exceeded the aggregate cost of OREO expenses and valuation charges on other OREO properties. The miscellaneous expense category totaled $23.4 million in the third quarter compared to $21.3 million in the second quarter of this year. an increase of $2.2 million. The increase was primarily impacted by approximately $1.7 million of more travel and entertainment expenses and a variety of other smaller fluctuations. The increase in the travel and entertainment expense category was due to increased costs associated with in-person client relationship meetings and conferences, as well as some additional expense associated with an all-employee event to celebrate Wintrust's 30th anniversary and to thank our employees for performing so well during the pandemic. Although this expense category is higher in recent quarters, they're still lower than the general run rate we had in prior periods before the pandemic began, and we're encouraged to see our team returning to more normal in-person events to build and maintain solid customer relationships. This activity is important in maintaining the strong loan growth we've been achieving in recent quarters. So other than those expense categories I just discussed, all other expense categories in the aggregate were up by less than $1 million compared to the second quarter, and nothing of significance to discuss there. The net overhead ratio measure of our operational efficiency improved in the third quarter relative to the prior quarter. The net overhead ratio stood at 1.22%, which is down 10 basis points from the 1.32% recorded in the second quarter. The ratio continues to benefit from strong balance sheet growth and good mortgage banking results. Our current target, assuming relatively normal mortgage activity, is for the net overhead ratio to stay below 1.35% due to the strong balance sheet growth and the focus on expense control relative to revenue growth. I should note that the efficiency ratio also improved in the third quarter relative to the prior quarter. The efficiency ratio stood at 66.03% in the third quarter, a decline of 253 basis points from the prior quarter. Moving on to the income tax expense, the effective tax rate was relatively stable at approximately 27%, which is in the range that we would consider normal. In summary, core fundamentals were strong with robust loan and deposit growth, increased net interest income despite significant PPP loan reductions, Record wealth management revenues, strong mortgage revenues, improved net overhead and efficiency ratios, strong pipelines, and very good credit quality. So with that summary, I'll conclude my comments and turn it over to Rich.
spk02: Thanks, Dave. As noted earlier, credit performance for the second quarter was very solid from a number of perspectives. As detailed on slide four of the deck, loan growth for the quarter, net of PPP, was $1.2 billion, or 15% annualized, well above our guidance. Equally as important was the nature of this growth, which was spread across our loan portfolio. Specifically, C&I loans were up $543 million, CRE loans, which were up $207 million, Wintrust Life, which was up $296 million, and First Insurance Funding, which was up $95 million. Throughout the pandemic, we have seen solid and consistent loan growth. If you look at Q320 compared to Q321, we have seen total loans net of PPP grow by 3.4 billion or 12%. On our last earnings call, we expressed confidence in our ability to continue to meet or exceed our loan growth guidance because of the strength of our core loan pipeline. We believe this momentum is attributable to a number of factors. The PPP halo effect, which is really taking hold on the level of commercial loans. We have seen substantial expansion in the numbers and amounts of Treasury management relationships over the past several quarters, but it takes time to move the entirety of the credit relationship out of the incumbent bank. We are now seeing those effects result in outstandings. Markets disruption has been pronounced throughout this year and throughout the pandemic, and we have seen customers and bankers look to WinTrust as a consistent and preferred banking partner in Chicago and southern Wisconsin. As a result, pipelines continue to look very strong and at the highest levels we've seen in several years. Finally, as detailed on slide 17, after five quarters of decreased CNI line utilization, the trend is beginning to reverse. As noted in earlier calls, this utilization has been historically close to 50%. We saw this level bottom out in Q2 at 38.4%, and we ended Q3 at 39.3%. We believe this trend of increased usage will continue in the fourth quarter. As discussed in prior quarters, one of the keys to the performance and growth of our credit portfolio has been diversification across a number of product lines. This quarter was another great example of that strategy. Our niche products, particularly premium finance and leasing, grew substantially during the pandemic. Now we are beginning to see very strong growth coming from our core banking customers. In addition, slide 15 details the geographic diversification in our portfolio. As we have stated before, Wintrust has a Chicago-Milwaukee nexus However, as this slide illustrates, our various business lines provide us with meaningful amount of credit opportunities outside of these primary markets. From a credit quality perspective, as detailed on slide 16, we continue to see solid credit performance across the portfolio as the economy stabilizes. This can be seen in a number of metrics. Non-performing loans remain flat at approximately 90 million or 27 basis points. NPLs continue to be at record low levels, and roughly half of where those were at this time last year. Charge-offs for the quarter were essentially zero, an amazing result, especially when looking at total charge-offs of approximately 2 million for the past two quarters combined. And as noted in the bottom right quadrant of page 16, credit risk ratings continue to show meaningful positive migration as our customers continue to recover from the pandemic. That concludes my comments on credit, and I'll turn it back to Ed to wrap up. Thanks, Murph.
spk10: Those of you who examined transcripts of our earnings clause will notice a lot of similarities between this quarter and the last. Hope you're fans of consistency. As I mentioned at the beginning of the call, our strategy has been to grow the balance sheet during this period of low rates, use our structural hedges like mortgages to buffer the loss in NII until such time as balance sheet growth can offset the income loss through the lower rates. PPP loans with unexpected benefits add on to this strategy. All of the above was to be accomplished by enhancing our asset sensitivity position in anticipation of higher, eventual higher interest rates. That's some balance sheet growth, asset deposit growth of 4.1 billion year-to-date and loan growth of 3.4 billion, excluding loans held for sale and PPP. We have experienced, Tim laid out, it has been done totally on an organic basis. The acquisition market remains somewhat consistent with quarter two, based on the amount of inbound calls we continue to receive. Sellers still have very high expectations, so we'll see where this ends up. Moan pipelines remain strong in all major categories, and I said at the beginning, at a 13-month high. This is aided by not only our reputation, but also market disruption and our diversified portfolio. Our asset sensitivity position is right where we want it. It appears with the folly that inflation is transitory, it's coming to an end, and rate increases are inevitable. The underwater beach ball will rise, and hopefully soon. We continue to lag into investments with our excess liquidity, take advantage of market flips. Where nowhere to be totally invested is locking in the lousy long-term rates doesn't make a lot of sense to us. Credit is remarkably good. Thanks for consistently conservative underwriting standards and diversified loan portfolio. Work with both our lending line and credit folks. NPAs and NPOs are lower than they were before the start of the pandemic. Wealth management area is delivering strong results with assets under administration continuing to grow. So to date, the plan is working. We need to continue to grow in order to bring this plan to fulfillment. Organic loan growth should remain strong. We take advantage of the opening of the acquisition market. It makes sense. Troy, I like where we stand. As mentioned or referred to, in December we will celebrate our 30th anniversary. Getting close to a $50 billion bank with $35 billion in assets under administration and our wealth management group is beyond any thought of where we'd be at this point in time. So a couple of guys in here with that original card table. I think you could pinch us if you knew how excited we were about where we are and what our prospects are going forward for the next 30 years. You can be assured of our best efforts going forward. We appreciate your continued support. Now we have time for some questions. So thank you very much. We'll find the questions.
spk04: Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of John Armstrong from RBC Capital Markets. Your question, please.
spk00: Thanks. Good morning, everyone, or afternoon, everyone. Morning, I guess. Yeah, I'm good. I'm good. A little confused on the time. But anyway, I want to talk about loan growth. I know that you guys... Well, it's Eastern, Central, I don't know. But... Just the loan growth numbers, I appreciate the guidance for the fourth quarter, but to Murph's comments on the PPP halo, market disruption, line utilization, I think I would throw in premium finance bull market in there as well. But what slows this down and what would cause you to pull back on saying you can put up this kind of growth into 2022?
spk10: I think if you see a rationale, if rates stay low and a rationality kicks in and we're starting to see some of the bigger banks going and just giving it away because of the dearth of earning assets out there, that could cause us to back off a little bit because, as you know, our policy and our profitability model are inviolate and we're not going to be changing those for anything. But right now we don't see it. We see people... coming from other banks who appreciate our long-term approach, appreciate our approach to doing business. I like to say that a lot of them, they just thought they were having a good time where they were banking before. As Tim mentioned, we spent a lot of money. We'll do a better job of telling you how much money we spent on our technology. Going into the fourth quarter, I expect we'll give you a real detail of how much of our expenses relates to our technology bill. And winning those Greenwich Awards is really heartening to us because the numbers we're seeing at 95% and the like of people who would recommend us, that builds on itself. So I don't think you can see the premium finance market change that much. In turn, I think it's going to get harder even next year. The market continues to get harder. People are thinking maybe 20%, 30% increase there. Additional increase in premiums on the commercial side. On the life side, we see some pricing irrationality, but we stay away from those. And with what's going on with the tax laws and the like, it's going to make life insurance a reasonable way to plan your estate and not have to pay the exorbitant state taxes that are being proposed. The commercial side, Murph, I don't know.
spk02: Yeah, no, you hit the nail on the head. I think that generally speaking, we like where we sit. We think that our positioning in the marketplace is very good. And as we alluded to, we're seeing not only customers, but also bankers look at us as a real attractive alternative. So really good core momentum there. I think to your question, what wrinkles are out there, as Ed said, the challenge is that you look at every one of our competitors and they have a lot of cash to deploy. You are seeing pricing being very aggressive and you're seeing structures also pretty aggressive. Right now, we don't anticipate any type of rope it over or anything like that, but it's something that we are very aware of. The other thing is on the life side, it is because rates were so low, it really was a great opportunity for people to use that product. And if rates were to go up dramatically here, that's probably going to have an impact on that. But for right now, we see ourselves being, as we go into budget season, we're pretty optimistic about where we see- What about leasing, Rich? Leasing's had a really good time during the pandemic. You know, anything where leasing tends to be a little bit more of a transactional business, and so people are very focused on structure and pricing, and so we're very mindful of that, you know, so we're not going to go out there and chase deals. But, you know, as you've seen, John, over the course of the last three years and the way we've grown that portfolio, you know, we're pretty optimistic aware of that, but it's probably the one area where we're really focused on you know, pricing because we're, you know, if we're going to lean in on pricing, it's going to be for, you know, complete relationship where you get the full share of wallet.
spk00: Yeah. Okay. Okay. Good, good color on that. Thank you. Um, and then I just, just one on the margin, um, appreciate the comments, Tim, on the margins being relatively stable. You alluded to the beach ball. We've heard that for a long time, but, um, Any threats to the margin? Yeah, no, I've heard it 20 years ago, but we're waiting. We're still waiting. But what can make your margin lift? And you've alluded to maybe getting a little bit more aggressive on liquidity deployment but still being careful. But, you know, as we look forward to the margin, it feels like it's bottomed out here and maybe the only way to go is up from here. But talk a little bit about the plan and can the margin lift?
spk10: Well, additional liquidity would cause the margin to have additional pressure. But in terms of net interest income, I think you're going to see that growing nicely throughout the rest of the year. Tim, you want to comment on the alignment? Sure.
spk11: Yeah, I mean, John, we're watching pricing pretty carefully. Deposit costs will continue to help a little bit, not as much as they have in the prior quarters. And, you know, if we get rising rates here, the 10 years up to 165, we watch that closely and we deploy some more liquidity, you know, we'll help both our margin and our income. We're patient there, so I hesitate to, you know, forecast when that might happen. But we feel pretty good. We remain very interest sensitive and feel like that's still an important part of the equation.
spk00: Okay. Thanks, guys.
spk10: Dave, you got some on this?
spk03: No, I was just going to say, you know, $5 billion of that liquidity and deposits keep coming in, so that's a good lever. But I was going to also say that, you know, the new loans are sort of coming on at the existing portfolio pricing right now. So you see a little bit of compression from some older loans paying off at higher rates, but the new loans are coming on. So I think we've stabilized on the loan side substantially and So, XPPP, it should have, like you said, should have roughly bottomed out, and we have the upside from the deployment. So, you know, we're optimistic on that front.
spk04: Okay. All right. Thank you. Thank you. Our next question comes from the line of Michael Young from Truist Securities. Your question, please.
spk01: Hey, thanks for taking the question. I wanted to do a quick follow-up on just the excess liquidity issue. You know, that $5 billion or so in just kind of cash basically on the balance sheet, it seems like at current rates you could deploy that maybe for a 150 basis point kind of pickup over cash yields. So, you know, by my math, that's, you know, maybe $0.75 or so of earnings to $1 of earnings. Is that kind of the right way to think about it? But then, you know, maybe if you could deploy that into loans instead, you know, maybe it's $1.50 or so.
spk03: Well, yeah, I think the concept is right. I mean, at the Fed, you're earning roughly 15 basis points, and mortgage backs are plus or minus 2% right now. So there's your spread differential for investing. The question is, do you want to invest long-term at that rate, or do you want to wait for it to go up? But it's pretty simple math. It's 15 basis points. and decide what asset class you want to invest it in and at what rate. So a loan would probably be closer to 3%.
spk10: We think that we were showing solid growth in NII by the growth that we're having. I think that we're kidding ourselves that we believe we're not at the start or even in the first quarter of an inflationary cycle. Wages are rising. I sit on a couple boards, and we talk to them, and price increases are flying through. They're not going to go backwards. Supply chain disruption plus lack of labor is going to cause this cycle to start. Once it starts and gets some momentum, it's hard to stop. You stop it by higher rates. The government has to taper eventually, in which case, because of our deposit base at a higher rate, at the lower rates, you're playing like in the red zone. Higher rates, you're going to get normal spreads anyhow. So to lock in long-term at 2%, although it could make us money now, it hurts down the road. So we take a long-term view, and there's also the possibility that at the end of the year, people start moving money out. There's so much money out there. They move it out there. Hopefully, they'll keep it in the bank. We never know where it's going to go. We have to keep a little bit excess liquidity because of that, I think. So these are really unprecedented times in terms of the liquidity side of the equation, but they're not unprecedented in terms of the inflationary cycle we're starting to see start. You can't fight the economics of it all. You can try to say it's new economics, whatever you're going to do. But we're old school guys, and we believe that I'd rather lock in at 5% or 6% on the way up than at 2% right now because of our deposit base being very retail and, well, just Retail nature is a deposit base, and basically 90-some-odd percent is all core deposits. We can lag on the way up, and we can make a lot more money then. So we've taken a long-term measured approach on this. We could drop it in and make another buck a share, a couple bucks a share over time, but we don't think that's prudent to do, given that we think down the road make a lot more money for the company. and for the shareholders.
spk01: Okay. Thanks for all that color. And just, you know, kind of my follow-up question, you segued it nicely into just inflation. It's been a long time since we've seen material inflation. And just curious kind of your high-level thoughts maybe on inflation and then how that could affect the expense base and kind of growth there.
spk10: Well, I think the government wants inflation. I got it. Well, the money they're borrowing, they want to pay back in cheaper dollars. So, you know, we've seen the movie. You kind of think it's not going to have a different ending. I think it's going to be there for a period of time. I think the cycle has started. It's hard to stop the cycle without raising rates and slowing things down a bit. Kind of in a conundrum because we're not out of the pandemic yet. Supply chain issues are causing some of this. I don't think they'll be over by... at the end of next year according to some of the boards I'm on and the manufacturer I'm talking to. Between those and force majeures and everything else going on, it's tough out there for our clients. Labor is tough. They have to pay a lot more money to get people in the house. Transportation is tough out there right now. You can be a trucker and make $150,000 a year on some of the offerings that are out there now. I think inflation is here and it's going to stay. And we have to be ready for it. And when you have inflation, you have to make more money than you did before just to save it, right? So that's our plan. That's what we're doing. We're sticking to it. And I just think I've seen the movie. Can't tell how it's going to end any differently.
spk01: And, Dave, maybe any thoughts on your expense base specifically and how that will affect, you know, kind of our outlook for 2022 or 2023 kind of expense growth?
spk03: You know, I think how I'd look at it, Michael, is if inflation really kicks into the expense base and rates rise, if the increase in the margins is going to more than offset the expenses and our efficiency ratio will get better and our net overhead ratios, et cetera, will actually probably get better because of the growth in the assets and the growth in the margins. So, yeah, our biggest cost is labor costs. So if you see increases in labor costs, then we'll have that go up. The rest of them we should be able to control reasonably well, but I just think the margin will expand dramatically more than the expenses if inflation does get down.
spk01: Okay, thanks.
spk04: Thank you. Our next question comes from the line of Terry McEvoy from Stevens. Your question, please.
spk12: Hi, thanks. Good afternoon. How are you, Terry? Good, thank you. Maybe I'll start with Table 8, your interest rate sensitivity. I'm just wondering how your underlying deposit betas maybe have changed this cycle versus the past. And when I look at the 83% loan-to-deposit ratio, and that includes PPP, You know, how much are you assuming you can lag on deposit rates when rates rise?
spk11: Well, I mean, we're pleased that a third of the deposits are DDA, and obviously, you know, the bulk of the rest of it is very low rate at this point. I think we will lag as rates move up. Hard to predict what will happen kind of with the PPP money, again, To my comments earlier, we've not seen anything unusual with respect to deposit volatility. I think it'll continue to help us. I think for the next couple of quarters, you'll see deposit costs go down almost in spite of what happens to rates, and we should be in good shape.
spk03: Yeah, and I think, Terry, my recollection is right. The last time we had rising rates from the near-zero environment, The first 25, really, there wasn't much of a rise in deposit costs. The second 25 basis point increase was the same, and you only started to see increases with the third increase. And I would think that it would be similar to that, if not even a longer lag, because there's way more liquidity in the system right now, and people aren't as anxious to bring deposits in. So I think if history repeats itself, you'd have at least a 50 basis point increase before you'd see much movement by the industry. And my personal opinion is because of all the liquidity in the system, that might go beyond that before you see much of an increase in deposit costs.
spk11: Yeah, and Terry, if it helps, virtually none of our deposits are linked to an index.
spk12: That's helpful. Thank you. And then as a follow-up, You know, we all know there's a large acquisition about to close later this year in your market and a new name about to enter your market. So I guess my question is, how quickly did you start to see the disruption from the last deal, MBFI, and how long did that window remain open for a bank like Wintrust to capitalize on any opportunities?
spk10: Well, we're starting to see a little of it. The window stays open for a long time. I mean... A lot of people give it a year to see if it's going to work or not. We're relentless on our pursuit of these guys. On a previously announced deal, it took, what, four or five years before we started seeing an outflow. So you can guess which one that is. You can never really get anybody out of the old place, and now we're getting people and and assets that we never thought we'd get that were very loyal to the old place. So we'll be relentless on it, and we'll see. Murph, any thoughts?
spk02: No, I think that's right. It's really kind of the tone that gets set by the acquiring institution, and we've seen it run the gamut from the day that a deal gets announced and they come in and, you know, they immediately change, you know, the credit culture and, you know, just the overall tone of the organization. But as Ed points out, we've seen the other side where, you know, it takes a while, but eventually, you know, things change. And, you know, people, both customers and bankers, you know, sense that change and, you know, look to find something a little more in keeping with the way they like to be treated. So I don't think there's one set answer to the question, but it is inevitable.
spk10: Word of mouth has been great for us. I mean, these awards that we're getting from Greenwich are very, very helpful. Plus, we walk the walk. We don't just talk the talk. People come over and they see our technology and what we have. I'll put up against the big banks for the most part. We're better than them because of the personal service we give on top of it. And I get nothing but complimentary letters about how happy people are when they get over here. So I just thought they were having a good time before, but now they really are having a good time. So word of mouth is happening a lot, too. Plus, I think our advertising is paying off at Chicago's bank and Wisconsin's bank. They have great momentum there, but we've got to back it up. We have been backing it up. And the people, we are seeing people from all the acquired organizations asking us where our plans are, what we're going to do, and they're of great interest on their part. Another thing is with remote working has helped us like on the IT side. We've been able to pick up a number of people just because of our reputation. We picked up a couple out of New York who just heard how good we were to our clients and our people, and they came with us. So talent is out there. I think our reputation helps, and I think our momentum is very good, and we don't see anything that will stop it right now.
spk12: Thanks again. Appreciate it.
spk04: Thank you. Our next question comes from the line of David Long from Raymond James. Your question, please.
spk07: Hey, everyone. Thanks for taking my questions.
spk10: How are you doing, David?
spk07: Good, good, good. Hey, appreciate all the color on the loan growth and the margin expectations. The question I want to ask you about now is more about, you know, you're hitting $50 billion in assets here very soon. How does that change your operating strategies? And does that change how you're thinking about regulations and, you know, the ability to continue to acquire?
spk10: Not really because, you know, we do the smaller deals which aren't going to – historically we've done smaller deals which don't really get the attention of the big guys in D.C. You know, when we do, you know, our – as of now, who knows what will happen if the new controller comes in and Maybe I'll have to speak Russian or something then. But right now we have a great relationship with the regulators. Our CRA is, I mean, almost, what, 14 of the 15 banks are outstanding. The other one's about hopefully really close. And we always said that the regulators make the rules. They're played by the rules. You can yell at the ref. Only I can bump the ref. You know, we'll play it by ear, but I think, you know, we have a good reputation with them. And the second change we do, just because of how we're structured, we still are small. I mean, we might be $50 billion in the aggregate, but our average bank is, what, $2, $3 billion? And the branches that come under it have their own name. I mean, everybody's an owner here. We're able to really be close to the customer with our decisions. I think that model can keep going for a long time. Anybody else have any comments on that?
spk03: No, I don't think there's anything magical about the $50 billion mark per se. I mean, our infrastructure is set that we can have considerable growth. And we just continue to build the infrastructure and the team to handle that. I don't see anything significant. You hear in the marketplace that the bigger deals are a little bit slow to get regulatory approval right now. But as Ed said, we typically have done the smaller tuck-in deals and those seem to be moving at a quicker pace. So I don't see anything significant even.
spk07: Got it. And then you mentioned the infrastructure to become a larger bank. At what point Do you have to upgrade? Is a core deposit system, could it handle a doubling of your size at this point, or is there at some point that you would need to make any additional investments?
spk10: Well, no. I think our investments, and we've not done a very good job of telling you how much we spent on this, but we have lots of room to grow here. We have really upgraded every system in the joint and made it not just okay, but very flexible in terms of being able to work off the base systems that we have and add things on and take them off. Tim, you want to comment on that?
spk11: Yeah, David, we're fine from a host system standpoint, and the enhancements and new introduction of services on the digital side is really starting to pay dividends. And so, you know, I think in terms of getting to the point where we're comfortable at $50 billion, we've been working that for years. And so I don't see any immediate issues at all in that front. and we're well-positioned to continue to grow.
spk07: Got it. Thanks for the color, and keep up the good work. Thanks.
spk09: Thanks, David.
spk04: Thank you. Our next question comes from the line of Chris McGrady from KBW. Your question, please.
spk06: Hey, guys. Ed, maybe a question on M&A just to further explore it. I mean, you've got so much momentum, organically right now and we've seen some of the reactions for deals in the buyer stocks. Why do you even need to consider a deal at this point? Is there a business you need to build out or a market you need to develop a little bit more?
spk10: We've always been opportunistic about it. It's got to make sense on the pricing side and strategically. We haven't done it in a couple of years because we haven't found one that did that. We've always been very, very prudent in how we approach it. I've said before a thousand times, we're not going to give up a lot of tangible book value to grow, give up five years with earnings to grow 20 cents a share. It doesn't make a lot of sense. We take what the market gives us. Right now it's giving us organic growth, pricing on deals, big or small. Big deals are a pain in the neck. Not to say that we wouldn't consider it, but if I want to philosophize on it, every big deal we've seen starts with taking care of management before they take care of shareholders. That drives me absolutely crazy, absolutely nuts. And guys who come in and you start with that in a conversation about what about us, what about our shareholders, doesn't work. Management is the last. You cut your deal, live with it. So not that we haven't had to, you know, we have every investment bank in the world calling on us about this deal or that deal or big deals and how big we could be. That's not important to us. What's important to us is continuing to grow like we grow. The market gives us right now this organic growth is awesome. Smaller deals still are bread and butter. You know, up to a billion dollars is good. It has to make sense. It has to make sense strategically. It has to make sense economically. And a bigger deal, it just doesn't make a lot of sense right now for a lot of reasons. But you never know if you have one that does make sense. But I'll tell you, it drives me nuts when my husband says, what about me? And then, oh, yeah, what about my shareholders? I hate those conversations, and they're a turnoff right out of the box for me. I agree with you. The market's given us great growth. Why deviate from that? And there'll be a time when acquisitions become more affordable and makes more sense, and we'll jump in then. Dave, you got anything on that?
spk03: No, I think that's right. We understand the concept you laid out, Chris, that we can walk and chew gum at the same time if there's a deal that makes economic and cultural sense. But as Ed said, we're not going to overpay or do a deal just to do a deal. So we're enjoying the organic growth now, and the pipelines are good, and we'll keep marching to that tomb for the time being.
spk04: Great. That's a great answer. Thank you. Thank you. Our next question comes from the line of Nathan Race from Piper Sandler. Your question, please.
spk09: Hi, guys. Afternoon. Going back to Terry's question on some of the loan growth drivers and within the context of the M&A disruption that's ongoing, curious in terms of the commercial real estate and C&I growth that we saw in the quarter. Obviously, on the C&I side of things, you guys benefit from an uptick in line utilization, but just curious how much of that growth you're seeing in footprint on the commercial side of things is being driven by share gains. And I'm curious within that context what ending we're in in terms of Wintrust benefiting from all the M&A-related disruption that's occurred in Chicago within the last few years?
spk02: I would say we're in pretty early innings at this point. As we talked about a couple questions ago, this disruption has really been a pretty recent phenomenon over the last four or five years. We think that the goodwill that got established during the pandemic through PPP and We basically told all of our lenders when the pandemic hit, this is when you really start to differentiate yourself as being a banker that you can count on. And customers appreciated the fact that we were out of the box, reaching out, seeing what they needed, doing the things that make us different. I had lunch with one of our bankers that we hired from one of our competitors recently, and he said, you know, it was the exact opposite at the bank he was at, you know, that they were curtailing lines and they were, you know, bumping rates and doing things that, you know, in the short term, you know, we couldn't enhance the overall return. But in the long run, you're just going to really, you know, just anger your customers. So, you know, I think there's a long way to go here. I mean, our market share is still relatively small in Chicago and Milwaukee relative to the competitors. So, I think there's a real strong opportunity here over the next couple of years to be able to grow that core business.
spk09: Got it. That's great, Tyler. And maybe just changing gears, a question for Dave on mortgage. I'm curious if you could kind of remind us in terms of, you know, the gain on sale margin expansion that we saw this quarter is a little more pronounced than we saw from some others. So just curious if you could remind us in terms of the VAR and what that – secondary market premium tends to look like in terms of, or at least on a relative basis, to the kind of conventional 30-year product, generally speaking.
spk03: Well, I'm trying to figure out how to answer that. You're wondering about the directionality of the gain on sale margins?
spk09: Yeah, and just You need to, Wintrust, obviously you guys have the VAR that, you know, contributes, you know, somewhere around a quarter volumes each quarter. So just curious in terms of, you know, what that gain on sale margin benefit from having that production arm in the fold relative to just, you know, the typical 30-year conventional product.
spk03: Well, it certainly is higher. But as far as the blend of the gain on sale margin, that's pretty much been a quarter of our business for the last, you know, over a year. So I don't think it's going to change the directionality of the overall margin. It may be a little bit higher in the fourth quarter as the purchase business goes down in the Chicago area because Veterans First does business all over the country and a lot in the southern states, but I don't think it would change dramatically. We actually think as far as our margin goes, it increased a little bit this quarter as secondary marketing gains and losses were a little bit better this quarter as far as that hedging activity that we do go. And a little bit of product mix change where Veterans First was 26% of the volume versus 23% last time. So those two factors helped increase the margin a little bit. Our thoughts for the fourth quarter right now, and again, it will depend on mix of business and some other secondary marketing volatility that could or may not happen, but we would expect the gain on sale margins to be relatively flat in the fourth quarter relative to the third quarter.
spk09: Okay, great. That's really helpful. I appreciate all the color. Thanks, guys. Nice quarter. Thank you.
spk04: Thank you. Our next question comes in line. Ruther from DA Davidson. Your question, please.
spk13: Hey, good afternoon, guys. Just one big picture question for me at this point, and it relates to slide 15 of your deck that highlights the geographic and loan portfolio diversification. You're clearly paying dividends with the growth you guys are putting up. I'm just curious, are there any geographies you are not in that you'd like to be or loan products or niche lending verticals that would fill out this map further?
spk10: Well, we're always looking for new niches. Problem is right now, if there is one out there, they want a lot of money for it if you want to buy it. And kind of wait until that dies down. We usually like starting from scratch and rather than paying big dough and having big TBV dilutions. Rich, you want to comment on the other side?
spk02: Yeah, no, I think that's right. I mean, we are always looking at opportunities. I think the leasing example is a good one. We started that three years ago and have built that out. Because of exactly what you're talking about, it gives us a much more geographic spread to the loan portfolio. But if we had bought something of comparable size, we would have paid a substantial premium on it. We like to be building these things. But right now, I think it's not so much about markets that we're not necessarily in, but really trying to expand the markets. I think that certainly adjacent to the footprint, we would like a bigger presence in Indiana. We'd like to expand our presence in Wisconsin. You know, in looking around the Midwest, you can kind of see some of the other markets that I think would really appreciate, you know, kind of what we do and how we run our business, because there really isn't a Wintrust-type alternative in, you know, some of the meaningful cities around the Midwest. And then we're, you know, also looking at opportunities, you know, we've been able to, through following our CRE sponsors to other markets, you know, we've seen some real good opportunities, and we've been able to build the Wintrust brand in some markets that historically we haven't been in and haven't had a presence. And we're looking at does it make sense to step out a little bit and maybe open up LPOs or see how that would fare. But it's definitely something that is why we put this slide in here. It's front and center for us to make sure that while we love Chicago and Wisconsin, we want to make sure that we're just having good diversification within the portfolio.
spk10: Concentrations kill. I always say that. You can diversify between product type and geography. That's a very good thing.
spk13: Thank you, guys. That was it for me. I appreciate your thoughts.
spk04: Thank you. Thank you. Our final question for today comes from the line of Brock from UBS. Your question, please.
spk08: Thanks. Dave, just following up on the mortgage banking, I just wanted to clarify, so we should look for 20% to 30% origination drop and similar rev drop in Q4, correct?
spk03: Yeah, that's right. Now, the applications in October have been very similar to September so far, a little less than July and August, but... Just based upon seasonality, that's what we're thinking, and I think it's fairly in line with the NBA forecast, too.
spk08: Okay, so you just hit on it. That's more seasonality than any rate move that's already percolated through your pipeline. That's just what you're expecting for things to kind of fall off.
spk03: Yeah.
spk08: Okay.
spk03: You know, hopefully... It's a little bit better than that, but that's what our expectations are right now. I don't think we generally are too much different than the overall market on origination trends. Okay.
spk08: And shifting over to PPP, I apologize if I missed this already. You've got about $25 million left, I believe. What's kind of the cadence of that recognition, do you think?
spk11: It's probably, you know, from the fee standpoint, you know, maybe another 30% to 40% of that comes in the fourth quarter, and then it tails off from there, depending on kind of what we see in terms of customers seeking forgiveness. But as we talked about, we think the loans will drop off, you know, quite a bit, and the, you know, fees follow.
spk08: Got it. Okay. All right. Thank you.
spk04: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Edward Wehmer for any further remarks.
spk10: Thanks, everybody, for listening in. Good quarter. You can be assured of our best efforts going forward. If you have any other questions, they come up after you continue reading our 1,000-page press release. Please call Dave, Murph, Tim, or I, and we'll be happy to discuss it with you. Thank you, and we'll talk to you in the next quarter. Take care. Thanks.
spk04: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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