Welcome to Wintrust Financial Corporation's 3rd 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 Crain, 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 an 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 and 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 ks 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.
Thank you very much. Welcome everybody to our Q3 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.
Over to Tim Crane for more detail on the balance sheet and to Dave Dykstra for other infill 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. Then we've accomplished this goal and as such, Q3 shows the strategy is working. All our growth to date has been organic. 2nd quarter was another all around $1,000,000,000 quarter. Assets, deposits, core loans, net of PPP loans, all grew by over $1,000,000,000 Growth prospects remain very good.
Of 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 $1,000,000,000 loan quarter in Q4, which we believe is more than reasonable assumption given our pipelines, which by the way are 13 month high at quarter end, will fully replace all the PPE balances. This was our intent before we embarked on this strategy. The income for the quarter was $109,000,000 or $1.77 per diluted common share. Year to date, we stood at 367,400,000 2.59 percent to 2.59 percent primarily due to excess liquidity.
Net interest income was up $19,700,000 from quarter 2. If you back out the PPP loan income, in total net interest income was up almost $8,000,000 over quarter 2. Period end loans exceeded average loans in the quarter by $670,000,000 which bodes well for Q4. Our liquidity portfolio is up 1 point $563,000,000,000 on average. This portfolio remains very short, over $5,200,000,000 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 stated, was excellent in all areas of our business is our current pipelines. Line usage remains low, a little over 39%, it's up around 1% from the end of quarter 2. Appears to hit hopefully hit bottom on this and line uses had increased. Normal average is closer to 50%, so we turn the number to add another $1,000,000,000 in outstanding loans.
Credit quality is even better and charge offs totaling like net 0. We had some charge offs, but we have recoveries, which shows Should indicate to you are conservatives and writing things off and looking good on recovery. NPLs and NPAs were constant versus Q2. NPLs was $2,500,000 to 90,000,000 27 basis points while NPAs shrunk 2,500,000 instead 22 basis points. This plus improved portfolio quality and Moody's sunnier view of the overall economy, so the reserve release of 7,900,000 Mortgage increased, they experienced some growth in the quarter, Dave will discuss in detail.
Wealth Management continued steady improvement fees up $1,000,000 quarter over quarter, up $18,000,000 year to date. I'll turn the call over to Tim who's going to provide some additional detail on the balance sheet. Tim?
Good. Thanks, Ed. I'd like to briefly highlight a few balance sheet items as well as cover 2 topics that appear to be of interest. First with respect to the balance sheet, total assets increased to just under $48,000,000,000 as we continue to experience strong growth. As Ed mentioned, loans excluding PPP grew $1,200,000,000 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 2nd straight quarter where annualized loan growth, again excluding PPP, was approximately 15%. With respect to PPP loans, we saw a reduction of approximately $800,000,000 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 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 of mid to high single digits 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, dollars 1,100,000,000 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 9 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 view stable low cost deposits as a strength of the company and we'll 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 $9,500,000 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 4 consecutive quarters and that excluding PPP, the margin will remain roughly stable.
I have 2 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 9 of the presentation that our high touch community banking model also has a high-tech component 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 2 thirds of our checking clients regularly use our digital services.
Page 10 in the presentation document is also a new slide, 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 win trust achieves compares generally to scores in the 60s 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.
Great.
Thanks, Tim. As Ed mentioned, I'll cover the income statement categories, Starting with the net interest income. For the Q3 of 2021, net interest income totaled 287,500,000 That was an increase of $7,900,000 compared to the 2nd quarter and an increase of $31,500,000 as compared to the Q3 of last year. The $7,900,000 increase in net interest income compared to the 2nd 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 3rd quarter, which was offset somewhat by a slightly compressed net interest margin. Net interest margin declined 4 basis points to 2.59%, Beneficial decline of 8 basis points for the rates paid on liabilities was offset by a 10 basis point decline yield on our average earning assets and a 2 basis point decline in the net prefunds contribution, which resulted in a slight decline in the net interest margin.
The decline in the earning assets in the Q3 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 9 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 $11,400,000 of less interest income associated with PPP loan portfolio in the 3rd quarter, which included $7,800,000 of lower PPP loan fee accretion. And as Ed mentioned, 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 $7,900,000 compared to a directionally similar negative provision of $15,300,000 in the prior quarter and a $25,000,000 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 and additional detail in just a few minutes. I will now talk about the non interest income, expense and income tax sections. In the non interest income section, our wealth management revenue increased $841,000 to another record level of $31,500,000 in the 3rd quarter compared to $30,700,000 in the 2nd quarter And net revenue was up 26% from the $25,000,000 recorded in the year ago quarter. The revenue source has been positively by higher equity valuations, which impact the pricing on a portion of our managed asset accounts.
Mortgage banking revenue, saw a reasonable solid loan origination volume during the Q3 with origination activity fairly consistent with the Q2 of this year. To that end, the company originated $1,600,000,000 of loan mortgage loans for sale on the Q3 of 2021, approximately down from the approximately $1,700,000,000 that we originated in the prior quarter. As we forecasted on our last call, mortgage banking revenue increased to $55,800,000 for the Q3 of 'twenty 1 as compared to $50,600,000 in the 2nd quarter. Revenue was higher in the current quarter, primarily due to a less material unfavorable fair value adjustments on our mortgage servicing right portfolio. The company recorded a $5,500,000 negative valuation adjustment in the 2nd 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 Q4 of 2021 to be down 20% to 30 Similarly, also as we saw in the 1st 3 quarters of this year, the wildcard relates to mortgage banking as it relates to mortgage banking revenue is the mortgage servicing right 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 $23,400,000 in the Q3 of 21, up approximately $3,000,000 from the $20,400,000 recorded in the prior quarter. The primary reasons for the higher revenue in this category include $2,000,000 of higher swap fee revenue, dollars 2,200,000 of higher income from investments in adjustments associated with the U.
S. Canadian dollar exchange rate, dollars 812,000 of higher BOLI income And offsetting those increases was the fact that the prior quarter included a $4,000,000 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 non interest expense. Non interest expenses totaled $282,100,000 in the 3rd quarter, up approximately $2,000,000 from the $280,100,000 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 $1,900,000 in the Q3 as compared to the Q2 of this year. The $1,900,000 decline is primarily related to $6,300,000 of lower compensation expense associated with the mortgage banking operation, was offset somewhat by higher incentive compensation expenses for annual bonus and long term incentive compensation plans. Advertising and marketing expense totaled $13,400,000 in the 3rd quarter, an increase of $2,100,000 compared to the Q2 of 2021. The increase in the Q3 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 4th quarter as many of these sponsorships are geared towards the summer months.
Software and equipment expense totaled $22,000,000 in the 3rd quarter, an increase of $1,200,000 as compared to the 2nd quarter total of 20 point $9,000,000 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 technology to enhance our customer experience and delivery systems and products as well as investment 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 $1,500,000 in the 3rd quarter as the company recorded gains of $1,900,000 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 $23,400,000 in the 3rd quarter compared to $21,300,000 in the 2nd quarter of this year, it's an increase of $2,200,000 The increase was primarily impacted by approximately $1,700,000 of more travel and 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 Higher in recent quarters, they're still lower than the general run rate we had in prior periods before the bank pandemic began. This activity is important to maintaining the strong loan growth we've been achieving in recent quarters. So other than those expense categories I just all other expense categories in the aggregate were up by less than $1,000,000 compared to the 2nd quarter and nothing of significance to discuss there.
The net overhead ratio, a measure of our operational efficiency, improved in the Q3 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 2nd 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 percent 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 Q3 relative to the prior quarter.
The efficiency ratio stood at 66.03% in the 3rd 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 a 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.
Thanks, Dave. As noted earlier, credit performance for the Q2 was very solid from a number of perspectives. As detailed on Slide 4 of the deck, loan growth for the quarter, net of PPP, was $1,200,000,000 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 and I loans were up 543,000,000 CRE loans, which were up $207,000,000 Wintrust Life, which was up $296,000,000 and First Insurance Funding, which was up 95,000,000 Throughout the pandemic, we have seen solid and consistent loan growth.
If you look at Q3 'twenty compared to Q3 'twenty one, we have seen total loans net of PPP growth by $3,400,000,000 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 resulting in outstandings. Market 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 5 quarters of decreased C and I line utilization, The trend is beginning to reverse. As noted in earlier calls, this utilization has been historically close to 50%.
We saw this level 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 4th 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, 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. Nonperforming loans remained flat and at approximately $90,000,000 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 0, an amazing result, especially when looking at total charge offs of approximately $2,000,000 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
Our earnings call is 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 due to lower rates. PPP loans were our expected benefit add on to the strategy. All the above was to be accomplished while enhancing our asset Based on balance sheet growth, asset deposit growth of $4,100,000,000 year to date and loan growth of 3,400,000,000 excluding loans held for sale in PPP, we have experienced TIM laid out has been done totally on an organic basis.
The acquisition market remains somewhat consistent with quarter 2 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. Loan pipeline remains strong in all major categories, and I said in the beginning, 13 month high. This is aided by not only our reputation, but also market disruption and our diversified portfolio. Our asset sensitive position is right where we want it.
It appears that the following that inflation is transitory is 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, For knowledge of the total investors is locking in the lousy long term rates doesn't make a lot of sense to us. Clear is remarkably good. Thanks for our consistently conservative underwriting standards and diversified loan portfolio, working both our lending line and credit folks.
NPAs and PLOs are lower than they were before the start of the pandemic. Wealth Management Area is delivering strong results with assets under administration So today, the plan is working. We need to continue to grow in order to spring this plan to fulfillment. Organic logo should remain strong with the advance of the opening of the acquisition market that makes sense. In short, I like where we stand.
Is mentioned or referred to in December, we will celebrate our 30th anniversary, Getting close to a $50,000,000,000 bank with $35,000,000,000 in assets under administration and our wealth management group is beyond So I've got a couple of guys in here with that original card table and 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 our best efforts going forward. We appreciate your continued support. Now we have time for some questions. So thank you very much.
Will
be on 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 Jon Arfstrom, RBC Capital Markets. Your question please.
Thanks. Good morning everyone or afternoon everyone. Morning I guess.
Good morning, Howard.
Yes, I'm good. I'm good. A little confused, but on the time. But anyway, I want to talk about loan growth. I know that you
guys I'm very confused.
So what else is there?
What's Eastern, Central? I don't know. But the just the loan growth numbers, appreciate the guidance for the Q4, 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.
I think if you see a rationale, if rates stay low Our rationality kicks in and we're starting to see some of it. 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 violent 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 Appreciate our long term approach, appreciate our approach to doing business. I like to say that a lot of them just Just thought they're having a good time where they're banking before. As Tim mentioned, we spent a lot of money and we do a better job of telling you how much money we spent on Our technology, going into the Q4, I expect we'll give you a real detail of how much of our expenses relates to our technology build.
And winning the 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 and 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 rationale, 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 state and not have to pay the exorbitant state taxes that are being proposed. The commercial side, Burf, I don't know. Yes.
No, you hit the
nail on the head. I think that generally speaking, we like where we We think that our positioning in the marketplace is very good. And as we alluded to, we're seeing not only customers, but 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 challenges that you look at every one of our competitors and they are also they have a lot of cash So 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 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 Right now, we see ourselves being as we go into budget season, we're pretty optimistic about where we see Leasing is good. Leasing has had a really good time during the pandemic. 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.
So We're not going to go out there and chase deals, but as you've seen, John, over the course of the last 3 years and the way we've grown that portfolio, we're pretty optimistic of where it's at, but it's probably the one area where we're really focused on pricing because If we're going to lean in on pricing, it's going to be for complete relationship where you get the full share of wallet. Yes.
Okay. Okay, good color on that. Thank you. And then I guess just one on the margin. 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 any threats to the margin? I mean,
I think
that's what they are.
Yes. No, I've heard it a lot 20 years ago, but we're waiting. We're still waiting. 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 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?
Well, additional liquidity would cause the margin to have additional pressure. 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 Sure, Leland. Yes, 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 if we get rising rates here, the 10 years up to 165, we watch that closely And we deploy some more liquidity will help both our margin and our income. We're patient there. So I hesitate forecast when that might happen, but we feel pretty good.
We remain very interest sensitive and feel like that's still an important part of the equation.
Okay. Thanks guys.
Dave, you got some
on it? No, I was just going to say we can all $5,000,000,000 of that liquidity and then deposits keep coming in. So that's a good lever. But I was going to also say that 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 we're optimistic on that front.
Okay. All right. Thank you.
Thank you. Our next question comes from the line of Michael Young from Truist Securities. Your question please.
Hey, thanks for taking the question. I wanted to do a quick follow-up on just the excess liquidity. That $5,000,000,000 or so and just kind of cash basically on the balance sheet. It seems like at current rates, you could deploy that maybe for 150 basis point kind of pickup over cash yields, so by my math, that's maybe $0.75 or so of earnings to $1 of earnings. Is that kind of the right way to think about it?
But Maybe if you could deploy that into loans instead, maybe it's $1.50 or so?
Yes. I think, Mike, I think the concept is right. I mean, at the Fed, you're earning roughly 15 basis points and Yes, mortgage backs are plus or minus 2% right now. So there's your spread differential for investing. The biggest 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 the loan would probably be closer to 3%. We think that
We were showing solid growth in NII by the growth that we're having. I think that we're kidding ourselves, we believe we're not at the start or in the even In the Q1 of an inflationary cycle, wages are rising. I sit on a couple of boards and we talked to them on 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, we'll hurt us down the road.
So we look at we take a long term view And there's also a 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. And this you can't fight the economics of it all. You can try to say it's new economics, what are you going to do? We're old school guys and we believe that, I'd rather lock in at 5% or 6% And the way up than a 2% right now because of our deposit base being very retail and Well, just retail nature of the deposit base and all 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 that down the road make a lot more money for the company and for the shareholders.
Okay. Thanks for all that color. And just kind of my follow-up question, you segued it nicely into 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?
Well, I think the government wants inflation. They got all The money they're borrowing, they want to pay back in cheaper dollars. So 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 of the or not out of pandemic yet. Supply chain issues are causing some of this. I think they'll be over by 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, everything else going on, it's tough out there for our clients and labor is tough.
They have to pay a lot more money to get people in the house. Transportation stuff out there right now, you could be a trucker and make $150 a year and some of the offerings that are out there now. So I think inflation is here and it's going to stay and we have to be ready for it. And when you have inflation, you have to make more money than you did before just to stay even, 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 it's going to end any differently.
And Dave, maybe any thoughts on your expense base specifically and how that will affect kind of our outlook for 20 2022 or 2023 kind of expense growth?
I think how I'd look at it, Michael, is If inflation really kicks into the expense base and rates rise, the increase in the margin is going to More than offset the expenses and our efficiency ratio will get better and our net overhead ratios, etcetera, will actually probably get better because of the growth in the assets and the growth in the margin. So yes, our biggest cost is labor cost. So we just If you see increases in labor costs, then we'll have that go up. The rest of should be able to control reasonably well, but I just think the margin will expand dramatically more than the expenses if inflation does kick in. Okay.
Thanks.
Thank you. Our next question comes from the line of Terry McEvoy from Stephens. Your question please.
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 past and when I look at the 83 percent loan to deposit ratio and that includes PPP, how much are you assuming you can lag on deposit rates when rates rise.
Well, I mean, we're pleased that a third of the deposits are DDA and obviously 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 Back to deposit volatility, I think it will 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.
Yes. 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 3rd 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 system right now and people aren't as anxious to bring the deposits in. So I think if history 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 and deposit costs.
Yes. And Terry, if it helps, virtually none of our deposits are linked to an index.
That's helpful. Thank you. And then as a follow-up, 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.
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, 4 or 5 years before we started Being an outflow.
So, you can guess which one that is, but You cannot really get anybody out of the old place and now we're getting people and assets that we never thought we'd get that were very loyal to the old place. So will be relentless side and we'll see. Murph, any thoughts? 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 They immediately changed the credit culture and just the overall tone of the organization. But as Ed points out, we've seen the other side where It takes a while, but eventually things change and people both customers and bankers Since that change and look to find something a little more in keeping with the way they like to be treated. So I don't think there's 1 set answer to the question, but it is inevitable.
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'd like to say, 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 is Chicago's Bank and Wisconsin's Bank. There's great momentum there. We got to back it up. We have been backing it up. So 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 Great interest on their part.
Another thing is with remote working, it's helped us like on the IT side. We had to pick up a number of people just because of our reputation. We picked up a couple out in New York who heard We just heard how good we were to our clients and our people and they came with us. So the 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
Thanks again. Appreciate it.
Thank you. Our next question comes from the line of David Long from Raymond James. Your question please.
Hey, everyone. Thanks for taking my questions.
How are you doing, David?
Good, good, good. Hey, appreciate all the color on the loan growth and the margin expectations. The question I wanted to ask you about now is more about you're hitting $50,000,000,000 in assets here very soon. How does that change your operating strategy and does that change how you're thinking about regulations and The ability to continue to acquire?
Not really because We do the smaller deals, which aren't going to so historically, we've done smaller deals, which don't really get the attention of The big guys in D. C, when we do our As of now, who knows what will happen if the new OC the new controller comes in and we ought to speak Russian or something then. But Right now, we have great relationship with the regulators. Our CRA is, I mean, almost what 14 of the 15 banks are outstanding. The other one is about hopefully really close.
And we always said that the regulators make the rules. That I play by the rules, you can yell at the ref, only I can bump the ref, but We'll play it by ear, but I think we have a good reputation with them. And it's not going to change anything we do. Just because of how we're structured, we still are small. I mean, we might be $50,000,000,000 in aggregate, but our average bank is what $3,000,000,000 $3,000,000,000 and the branches that come under it have their own I mean, Everybody is 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. Have we also had any comments on that?
No, I don't think there's anything magical about the $50,000,000,000 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. So 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, David.
Got it. And then you mentioned the infrastructure You would need to make any additional investments?
Well, no, we 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?
Yes. 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 I think in terms of getting to the point where we're comfortable at $50,000,000,000 we've been And so, I don't see any immediate issues at all in that front. And we're well positioned to continue to grow.
Got it. Thanks for the color and keep up the good work. Thanks.
Thanks, David.
Thank you. Our next question comes from the line of Chris McGrady from KBW. Your question, please.
Hey, guys. Yes.
Ed, maybe a question on M and 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.
I guess, why do you
even need to consider a deal at this point? Is there something that is there a business you need to build out or A market you need to develop a little bit more?
So we've always been opportunistic about it. It's got to make sense on the pricing side and strategically. We haven't done it beyond a couple of years because we haven't found one that did that. But we've always been very, very prudent in how we approach it. So I've said before a 1000 times, we're not going to give up a lot of tangible book value to grow, give up 5 years with earnings to grow $0.20 a share.
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, is big deals are a pain in the neck. Not to say that we wouldn't consider it, but If I want to philosophize that, every big deal we've seen starts with taking care of masks before they take care of shareholders. That drives me absolutely crazy, absolutely nuts. And guys who come in and you start with that and the conversation about 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, 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. And That's not important to us. What's important to us is continue to grow like we grow.
The market gives us right now this organic growth is awesome. Smaller deal is still our bread and butter, up to $1,000,000,000 is good. It has to make sense, has to make sense strategically, That makes sense economically and bigger deal, it would just be all it just doesn't make a lot of sense right now for a lot of reasons. But you never know. Maybe you have one that does make sense.
But I'll tell you, it drives me nuts when it Management says, what about me and then, oh, yeah, what about my shareholders? I hate those conversations and they're a turn off right out of the box for me. I agree with you. The market has given us great growth. Why differentiate 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?
No, I think that's right. We understand the concept you laid out, Chris, but we can walk and chew gum at the same time if there's a deal that comes 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. We're enjoying the organic growth now and the pipelines are good and we'll keep marching to that tune for the
time being. 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.
Yes. Hi, guys. Afternoon. Going back to Terry's question on some of the loan growth drivers and in the context of the M and A disruption that's ongoing. Curious in terms of the commercial real estate and C and I growth that we saw in the quarter.
Obviously, on the C and I side of things, 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 inning we're in in terms of Wintrust Benefiting from all the M and A related disruption that's occurred in Chicago within the last few years.
Rich? Yes.
I would say we're in pretty early innings at this point. I mean, we as we talked about a couple of questions this disruption has really been a pretty recent phenomenon over the last 4, 5 years. So 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 1 of our bankers that we hired from one of our competitors recently and he said It was the exact opposite at the bank he was at, that they were curtailing lines and they were bumping rates and doing things that in the short term, we couldn't enhance the overall return, but in the long run, you're just going to really just anger your customers.
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.
Got it. That's great color. And maybe just changing gears, a question to Dave on mortgage. Curious if you could kind of remind us in terms of the gain on sale margin expansion that we saw this quarter is a little more pronounced than we saw from some others. So just curious if you could remind us in terms of the VA arm, 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?
Well, I'm trying to figure out how to answer that. It's just you're wondering about the directionality of The gain on sale margins? Yes.
And just unique to Winchester, obviously, you guys have the VAR that contributes somewhere around a quarter of volumes each quarter. So just curious in terms of what that gain on sale margin benefit from having that production arm in the fold relative To just the typical 30 year conventional product?
Well, certainly it's 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 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 Q4 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 goes in and a little bit of product mix change where Veterans First was 26% The volume versus 23 last time.
So those two factors helped increase the margin a little bit. Our thoughts for the Q4 right now and again 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
Okay, great. That's really helpful. I appreciate all the color. Thanks guys. Nice quarter.
Thank you, Hugh.
Thank you. Our next question comes from the line of Rutherford from D. A. Davidson. Your question please.
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, but the growth you guys are putting up. I'm just curious, are there any geographies you are not in that you'd like to be or loan products or niche lending verticals that would fill out this map further?
We're always looking for new niches. Providence right now, If there is one out there, they want a lot of money for if you want to buy it and kind of wait till it dies down. We usually like starting from scratch and Rather than paying big dough and having big TBV dilution. Rich, you want to comment on the other Yes.
No, I think that that's right. I mean, we are always looking at opportunities. I think the leasing example is a good one. We started that 3 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 were to if we had bought something of comparable size, we would have paid substantial premium on it.
So We like to be building these things. But we're right now, I think it's not so much about markets that we're not necessarily in, but really trying to I mean, I think that certainly adjacent to the footprint, we would like a bigger presence in Indiana. We'd like to expand our presence in Wisconsin. In looking around the Midwest, you can kind of see some of the other markets that I think would really appreciate kind of what we do and how we run our business, because there really isn't a Wintrust type alternative in some of the meaningful cities around the Midwest. And then we're also looking at We've been able to through following our CRE sponsors to other markets.
We've seen some real good opportunities and we've been able to build the Wintrust brand in some markets that historically we haven't had been in and haven't had a presence and we're looking at, does it make sense step out a little bit and maybe open up LPOs or see how that would fare. But It's definitely something that is that's 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.
Concentrations kill. I always say that You can diversify between product type and geography. That's a very good thing.
Thank you guys. That was
it for me. I appreciate your thoughts.
Thank you.
Thank you. Our final question for today comes from the line of Brock Valentely from UBS. Your question, please.
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?
Yes, that's right. Is that Now the applications in October have been very similar to September so far, a little less than July August, but just based upon seasonality, that's is what we're thinking and I think it's fairly in line with the NBA forecast too.
Okay. So that's 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?
Yes.
Okay. 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. And shifting over to PPP, I apologize if I missed this already. You've got about $25,000,000 left, I believe. What's kind of the cadence of that recognition, do you think?
It's probably from the fee standpoint, maybe another 30% to 40% of that comes in the Q4 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 quite a bit and fees follow.
Got it. Okay. All right. Thank you.
Thank you. This does conclude the question and answer session today's program. I'd like to hand the program back to Edward Wehmer for any further remarks.
Thanks everybody for listening in. Good quarter, you could be assured of our best efforts going forward. If you have any other questions that come up after you continue reading our 1,000 page of 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 next quarter. Take care.
Thanks.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.