WTFC - NASDAQ

Welcome to Wintrust 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. 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 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 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 are Dave Dykstra, our Chief Operating Officer; Rich Murphy, our Chief Lending Officer; Dave Stoehr, our Chief Financial Officer; and Kate Boege, our General Counsel. 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. 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, 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. Our margin at 3.62% 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 in 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. We expect that in the coming quarters, we will continue to grow loans and deposits. 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. Again, overall, a solid quarter, which we believe will compare well and, in fact, may differentiate us relative to many of our competitors. 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 grew by approximately $1 billion or 9% on an annualized basis. 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. As to deposit composition, non-interest-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 non-interest-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-interest-bearing deposit accounts. We've seen the non-interest-bearing balances stabilize as evidenced by the $10.6 billion of average non-interest-bearing deposit balances in the third quarter, being roughly equal to the $10.6 billion balance at the end of the second quarter. This strong deposit growth helped to fund solid loan growth of $423 million during 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. 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. 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. Overall, it was a very successful quarter in the growth of our franchise, our differentiated business model, exceptional service, and the unique positioning that we have in Chicago and Milwaukee markets continues to serve us well. 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. 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% in the third quarter, which was just 4 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. 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. And 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 in the -- 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. Turning to the provision for credit losses. Wintrust 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. Rich Murphy will talk about the 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 netted to a slight decrease of $552,000 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 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 approximately $9.4 million when compared to the prior quarter total of $320.6 million. Now, 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. 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 earning levels. The remainder of the variances in the non-interest expense categories, 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 3 basis points to 2.41% in the third quarter. 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 1 basis point from the 1.58% recorded in the prior quarter. 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 and 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 in assets, revenues and earnings. 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 Slide 6 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 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. 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 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 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. 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% 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. 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 guidance 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. Non-performing 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. Overall, NPLs continue to be at historically low levels, and we are confident about solid credit performance of the portfolio going forward. Charge-offs for the quarter were $8.1 million or 8 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 composed 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. 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 office or 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. 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 districts. And NPLs 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. As we have noted previously, we are not immune for the macro effects that challenge 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, 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. 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 paydown 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. 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 rising effects -- from the effects of rising rates or the market forces behind lease rates, but we have been diligently 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 weather the challenges ahead. That concludes my comments on credit, and I'll turn it back to Tim.

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

[Operator Instructions] Our first question comes from the line of Jon Arfstrom of RBC Capital Markets.

Good morning, Jon.

Yeah, good morning, guys. Tim, a question for you on topic you just discussed on the kind of 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?

Yeah. I mean I think there's obviously a number of moving pieces to this, Jon. 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.

Okay. 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 first -- or in the third quarter. We've subsequently added another small hedge. And I think we would continue to kind of follow the market up, Jon, 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 performed well with the margin in the mid-3s. We work hard to stay in that range.

Okay. Thank you for that. And then, Rich, a question for you on the premium finance non-performers. Can you -- 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 Slide 13. You can kind of see what the effects are. So I'll take each one individually. In the P&C side, we are seeing a little bit more stress in the transportation area. So those loans are falling more delinquent 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 unearned premium back from the carrier. So it's -- 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 default is 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 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 a orderly fashion. So we are not necessarily automatically sending -- canceling the policy and going back to the carrier. We want to make sure that we work with the client. 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.

Okay. Okay. And on the commercial NPLs, 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 right. But the -- and we do think that loans within our P&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 a pretty good-sized premium on those, and we get reasonable late 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.

Okay. All right. Thank you very much.

Thank you. Stand by for our next question. Our next question comes from the line of Chris McGratty of KBW.

Hi, Chris.

Hey, good morning. Dave, I want to just go at the NII. Again, the -- 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 in Q4, kind of a stable-ish margin in higher for longer. You've got that unique back book. But 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, the Fed kills the economy and loan growth slows quite a bit, that would have an impact. But the benefit of being diversified in our asset classes, as Rich has said many times in the past, is if one area slows down and other area is doing okay. So we do think we can keep growing our loans in that mid to high single-digit range. Again, 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. 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's very positive. 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 is stable. So if that's the case, we think we can have growth.

Okay. Great. Just on the loan sales, can you just remind us -- you talked about it last quarter, kind of testing the plumbing. I mean, should we expect more of that to occur? And was there a -- I assume there's a gain that showed up in the non-interest income. Just trying to get to logistics.

Yeah. Well, we're not planning on any right now. As you said, I mean, we -- if you go back into the second quarter when we started to plan this and we did the sale early in the third quarter 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'll be very little, really left of that impact. But we wanted to be able to demonstrate that we had liquidity. We wanted to be able to have -- make sure we had a tool in case concentrations of those premium finance portfolios 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 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 facility is there in the event we need for some reason.

Perfect. And then maybe the last one, you went through all the moving parts of non-interest income, and I think [it’s at $0.5 million] (ph). How do we think about just the trajectory of your fees with mortgage obviously pretty depressed, but you've got other offsets from here?

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. 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 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%. And so we think that will just plug along and then there might be some fluctuation depending upon movements in rates and the impact on mortgage servicing rates, 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 and some improvement in the applications and the production. But I don't see anything that would indicate that it would increase rapidly in the near term or decrease rapidly. We just -- it's been plugging along at these levels for four, five, six months now. So we expect that to continue. Wealth management, somewhat depends upon on the movement of the underlying assets under management and their valuations because 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 would expect it to grow. So we've got some leasing income in there, et cetera, but the rest is pretty small.

Great. Thanks.

[Operator Instructions] Our next question comes from the line of Terry McEvoy of Stephens Inc.

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 in the opening of the press release. But can 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?

Yeah. Well, you're right, Terry. We call out about $6 million of sort of uncommon expenses that we wouldn't expect to recur in the fourth quarter. So that's $330 million. You take those down, and you are $324 million-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 growth company. And we have lots of opportunities. 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 billion and $50 billion that are headquartered in the Chicago area. So we have a unique position here that we think we can take advantage of. And we also have 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, maybe mid-single digits. And so we can leverage the infrastructure going forward. If for some reason the growth doesn't come, 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, actually, our non-interest expenses, even with that $6 million in there, 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 growing the franchise and taking advantage of opportunities in the marketplace. And that's always been the plan and continues to be the plan.

And then maybe as a follow-up, the $337 million of CRE 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?

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. 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 a -- 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 outstandings.

Great. Thanks for taking my questions.

Thanks, Terry.

Thank you. Our next question comes from the line of David Long of Raymond James.

Hi, David.

Good morning, everyone. Thanks for the update on loan growth expectations. It sounds like the pipeline is still pretty good. My question, 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 Wintrust 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?

As we've talked about in the past, loan growth comes in many different forms for us. So you go back to a point when we are just out of the pandemic or in the middle of the pandemic and rates were very low, life finance was just going crazy. Now that slowed down. But in the meantime, you have the P&C side 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, 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 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, that 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 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 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.

Yeah, that's a great point, Tim. I mean where structures have been, if you go back 18 months ago, 24 months ago, structures were pretty loose. Pricing was pretty tight. And those were times where we were -- there were deals that we just stepped away from. Right now, you can get better structure, you can get better pricing. And we try to be very disciplined in that space.

Got it. Thanks for that color. Go ahead.

Yeah. 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 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% market share in deposits in the Chicago area, opportunities in Milwaukee as well. So even though the 6/30 deposit share results were pretty good for us, we think that's just the beginning.

Yeah. 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 there's a lot of banks that are just maybe unwilling for the deposits and capital reasons. 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. 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 kind of bank M&A are picking up. But we're pretty disciplined and some of these portfolios are challenged from a pricing perspective. And we don't need to do that kind of growth given the opportunities that we have. If some of those look up like good opportunities to us, we may add some people, for example, in areas where we've got good businesses. 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, Dave.

Thank you. Our next question comes from the line of Casey Haire of Jefferies.

Hi, Casey.

Hey, thanks. Good morning, guys. I guess just -- sorry if I missed this, I 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 9/30?

No, we haven't done that. But what we could tell you is that the margin was right near the current level at the end of the period, and we're really focused on the net margin 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 provide that.

Okay. Very good. And then just, I guess, switching to credit. The ACL on the core book at 1.51%, obviously very strong. Just curious, what kind of scenario are you guys baking in, be it slowdown, S3? Or any color on what kind of unemployment rate that which is driving your CECL modeling.

Yeah. Well, I mean we use a number -- we look at it a number of different ways. 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 unemployment is generally not a big impact in our models with correlation. We use a consumer real estate price index, the BAA credit spreads and a few other factors. 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. But to answer your question generally is we use the Moody's model and we supplement that with a couple of other economic sources.

Great. Thank you.

Thank you. Our next question comes from the line of Jeff Rulis of D.A. Davidson.

Thanks. Good morning. Just a couple of housekeeping items on the -- I 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 side?

As we disclosed last quarter, that sale took up a 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 kind of the best course of action, but nothing pending right now.

Okay. And then on the -- back to the premium finance sales, kind of the testing the plumbing. I imagine some of that is just 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 pickup near-term in non-performers or non-accruals, anything else on the premium finance that you might -- that's got a credit tinge 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?

No. We didn't -- that sale really wasn't at all for credit. It was all a liquidity play and testing that for liquidity reasons. We -- as Rich said, we really think those portfolios are low cost portfolio, so we don't worry about them from that perspective. And even on the life side, like Rich talked about, I mean you'll notice that the $10 million that was non-performing, it's still accruing. We generally -- we'll allow some of these to go past due. But if for some reason, we are no longer 100% collateralized and we'll unwind the policy. So we just don't feel like and you can see historical loss rates of 0 basis points over the history of that portfolio would indicate that, that's how we manage that portfolio. On the P&C side, 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 pretty short duration stuff, anyway. I guess one last one on the -- just back on the margin. Sorry to kind of beat up on this, but the -- it sound like pretty back-end loaded loan growth in the quarter, talking about deposit pricing moderating. I guess is the -- in the short term, that kind of margin stability, is that conservatism kind of 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.

Yeah. I would think I would say it's fairly balanced. I mean we still have a 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. 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, cost us 18 basis points in the quarter, but it's good risk management for a down rate 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. So we think the margin will stay relatively stable. 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. But -- so the timing may go 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 balance sheet. That's all.

Maybe just the last one then. Just the ideal environment that -- for the rate environment. If you think about margin a little further out, I mean, maybe that's the point of the hedges 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? And I guess, what would be the -- if we look at the balance of '24, the way you're positioned, 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. 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.

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 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.

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

Hi, good morning, everyone. How are you?

Good morning, Brody. We’re good.

Hey, I just want to ask a couple of quick questions on the composition of the loan portfolio. Do you happen to have what the percent of the portfolio is that are shared national credits? And of that, what you happen to be to lead on?

Yeah. So total SNCs in our portfolio are just over $1 billion. We're the lead on about 6% of that.

Okay.

I would also kind of point out that of our SNC portfolio, much of that is really tied to the businesses that we're in. Franchise Finance has a significant number of SNCs, where other banks are buying into our credits, we're buying into their credits. 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 to facilitate the growth of individual business lines and making sure that we see how other banks are managing those credits. And so it's -- we believe it's a sound approach, but it also gives us some intel into how other competitors are working in that market.

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?

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 or people are getting loans reappraised, we think it's a little bit of a misrepresentative number. I would say that our general loan policy were typically going to be sub-70% at time of origination.

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, Brody.

Okay. Okay. Got it. And I know you talked a little bit about the analysis that you guys continue to do about the office loans that are coming due over 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?

Yeah, I don't. We -- I would say that this -- 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 pretty evenly through '24 and '25. But I don't have the number that was in that population.

We don't have it handy. Yeah, I don't have it handy. We just don't have it handy here.

Yeah. 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 disclose -- do you happen to have what the debt service coverage ratio looks like?

Again, we don't disclose that. But generally, we're -- we want to -- on a stress basis, we're looking for a 1.2 coverage on deals that we do.

Okay. Okay. Got it. Dave, 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 million. What was the rationale behind selling less than the $500 million?

No. Well, 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 paid 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.

Got it. Okay. Thanks for the clarification. And to follow up on Chris' 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?

The gain was roughly $1 million for the quarter.

Okay. And that would be another income then?

Yes, sir.

Okay. And then the last one was just on the NIM trajectory. I know there's been a lot of discussion on it. I just wanted to ask how you're 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 rate cuts at all? How will that impact 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?

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, 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 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, 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-2s. I mean, 50% to 60%. 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%. 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-2 range based on this hedging position that we have in place.

Got it. Thank you very much.

Thank you. 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. 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'll work very hard to deliver good results. So thank you very much.