Wintrust Financial Corp
NASDAQ:WTFC
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Wintrust Financial Corp
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Welcome to Wintrust Financial Corporation's First Quarter 2020 Earnings Conference Call.
Following a review of the results by Edward Wehmer, Founder and Chief Executive Officer and David Dykstra, Vice Chairman and Chief Operating Officer, there will be a formal question-and-answer session.
During the course of today's call, Wintrust's 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 actual results to differ materially from the information discussed during the call are detailed in our earnings press release and in the company's most recent Form 10-K and any subsequent filings on file with the SEC.
Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and slide 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 Mr. Edward Wehmer.
Thank you. Welcome everybody to our first quarter earnings call. Hope you are all isolated and well. With me obviously are Dave Dykstra; Tim Crane, our Wintrust President; Rich Murphy, Vice Chair and Senior Lending Officer; Kate Boege, our General Counsel; and Dave Stoehr, our Chief Financial Officer. Kate Boege is very worried because we're all at different places and our shot-caller doesn’t come that far at me. So, Kate I will behave, I promise.
As you can see, we do have some additional Wintrust Execs on the call; I think it's important to get to know them better. And I think there'll be a lot of questions arising just because of the times and what's going on. So, I thought it's better to have more reinforcements around.
The format will be for the most part as usual. However, I've been going to try not to parrot what's already in the release, which should leave more time for the questions as I said -- as I'm sure you'll have a number of them.
I'm going to give some general comments regarding our results, Dave Dykstra will turn -- will provide a more detailed analysis, other income, other expenses, and taxes; back to me for a summary of comments and thoughts about the future, then we'll have time for questions.
Before I get into the details, I'd like to do a heartfelt shout-out to what I believe is the absolute best crew in the banking business. Case in point -- a couple of cases in point, our crew has moved seamlessly to remote locations, also being able to grow the bank and take care of our clients. It's worked extremely well. Our technology crew has done a wonderful job.
Also in seven days, we stood up for a front end portal for a PPB from scratch. We opened the portal -- one of the only ones opened on the evening of April 3rd, freshly available and actually worked flawlessly. The two weeks thereafter, with all working from remote locations and processed 8,900 applications for $3.3 billion. That put us in the top 15 of banks in the country in terms of total volume.
Medium-sized loans was $85,000, [Indiscernible] fees to Wintrust. Before round two, approximately $85 million. Our debts are cleared for round two. We already have close to 2,000 applications, another $8 million, $9 million in fees in there. The applications, again, are in the lower area -- in the lower end area. So, we know we're taking care of all of our customers across the board.
I couldn't be prouder of the team that's been able to do this. At one point in time we had a need for more quality control people, we had 300 people volunteer, people work tirelessly all night.
We're one long guy they call the [Indiscernible] after there was Paul [Indiscernible], he would get involved and he could screw up other banks messes so quickly, it was unbelievable.
And now on to our first quarter earnings, as you can see, we made close to $63 million, down 27% from the fourth quarter, but for obvious reasons, our earnings per share $1.04. You take our pretax pre-provision pre-MSR valuation income, it's over $150 million, which is almost a record for us. It's pretty darn good in terms of core earnings. And that's before really any recognition of the probably close to $100 million we'll have in PPP income, which will act as a reserve for us -- a cushion for us we believe, for any eventuality may come along.
Net interest margin, they held up pretty well as we were able to drop our deposit costs rapidly. You still have room to go there as indicated on page 18, the press release. The five basis point margin decrease was due to -- really a four basis point drop in the free funds ratio as you would expect as the overall rate environment goes down and one basis point difference between the 12 basis point drop in earnings asset yield, another basis point drop in liabilities.
Net interest income was essentially flat. Really, one less day was offset by $925 million and average earnings asset growth. We expect core NIM that being net interest margin without PPP effect to drops in levels previously disclosed in the past for future quarters.
However, the amortization of PPP terms of which are in question, but no longer than two years and expected to be much shorter will have a material positive effect, both the margin and the net interest income, even in the worst case scenarios.
Under the provision of credit quality adapted CECL. Its early I think as I picked the wrong quarter to quit sniffing glue, FASB certainly picked the wrong quarter to pick -- put CECL in effect. We adapted CECL in the day one adjustment of $47 million, our first quarter provision of $53 million, which exceeded the fourth quarter provision by $45.2 million or any reserves up $95 million from year end to now to 253 million.
I'll leave it from here, as I'm sure you have a number of questions on the CECL calculations, I'll leave that to our CECL experts who are here to answer your questions, but net charge off are eight basis points or $5.3 million in Q1.
Credit quality remained relatively in good shape the same period over a period and apples-to-apples basis. NPLs increased due to the three factors; first, the pool of accounting for acquired loans went away with the adaption of CECL and about $35.5 million the total.
Second, approximately $21 billion of new non-accruals were added to the normal course of business, largely these being an SBA loan, where we should get good recoveries where we start to put non-accrual. These assets have been marked appropriately will be resolved relatively quickly.
Finally, commercial premium finance loans over 90 days delinquent and still recording about $5 million due the state-imposed restrictions on canceling policies during the current crisis. As you know, our commercial premium finance portfolio is regulated individually by all 50 states.
In the case of crisis like we have now, many of them preclude you from canceling policies. However, in the past, we've only seen minor tick-ups because they will go back and honor the actual cancellation date in most states are required to go back and honor that but so really the insurance companies take the hit on that. But we do expect the minor tick-up in charge offs, but not as much as you would imagine. That's least been the case. In the past, we had hurricanes, fires, 911, et cetera.
Yet to see the material effects of the current crisis on our credit quality, PPP loans coupled with interest and principal deferrals have been granted to custom to grant our borrowers and other customers. Regulators are really cooperating on this and we believe that they should be able to weather the storm; at least buy time for our borrowers, coupled with our highly diversified portfolio in history of loan losses in troubled times vis-à-vis the peer group. We're cautiously optimistic; however, at this point, is a tossup as to if and when the stress will appear in the portfolio.
With our expected core earnings augmented by PPP earnings and reserves and capital, we feel adequately situated to take on whatever comes our way. Look forward to your questions in this area.
Dave is going to cover on other income, other expense in detail, but I'd like to suffice it to say that in a great mortgage quarter notwithstanding $10.4 million mortgage servicing valuation expense, I might be jinxing this, but I think they can't go down much more. We have to be close about on mortgage servicing right. And our debt overhead ratio was 1.33%, down 20 basis points from fourth quarter 2019, more than made up for the drop in the net interest margin.
On the balance sheet front, we grew total assets to $2.2 billion dollars and maturing assets were up $925 million. Our loans were up a $1 billion, which Murphy will take you to the core of that, but half of that was probably related to the line draws which happened very quickly, seeing the bait, the initial fear of everybody's going to draw their lines is kind of abate a little with the work of the government and other opportunities. The rest is across the board and we're happy to break it out for you a little bit later.
We start the quarter with $870 million of loans where the period end exceeded the average, so we're going to start with a head start the second quarter that doesn't include the PPP loans, which is you know, now with round two coming on would be closer to 3. -- we funded about $3.3 billion and we will have about $3.7 billion up to $4 billion depending on how quick the window closes in round two.
Deposits grew $1.03 billion in the quarter. We're very good about our liquidity position right now. We will be able to take advantage of -- we had good liquidity to begin with. We had bulked up in anticipation what was going on with our MaxSafe loans where we offer 50 times FDIC coverage because of our 15 charters and other wealth management opportunities, including CDAC, which we expect to slow down a little bit, but some a billion dollars to CDAC -- difference exchange money at the end of the quarter.
So, we feel very good about where we are. Our loan-to-deposit ratio is 90%. And we'll obviously go up with PPP loans, but between our liquidity and our ability to take advantage of the Fed's lines related to PPP, we feel very good about our liquidity and where we stand right now.
So, all-in-all, we feel comfortable with our balance sheet. Our loan pipelines, believe it or not, remained very strong, a bit of a halo effect coming on because of other banks dropping the ball on PPP; we were able to pick up a number of prospects and customers [Indiscernible] and just the word of mouth is spreading -- Wintrust came through and our relationship style banking really works.
So, our pipelines are good and we have to remember that good loans are made in bad times. So, we feel very good about where we are. Right now, on the balance sheet side, we think we're well-prepared.
I'm going to turn over to Dave who's going to provide some detail on other income, other expenses, and taxes. Dave?
All right. Thanks Ed. As normal, I'll just briefly touch on the non-interest income and non-interest expense sections. In the non-interest income section, our wealth management revenue increased $942,000 to a record $25.9 million in the first quarter compared to $25.0 million in the fourth quarter of last year and it's up to 8% from the $24 million recorded in the year ago quarter.
Overall, we believe first quarter was another solid quarter for our wealth management unit. Asset valuations declining towards the end of the quarter may create some headwinds in the second quarter, but trading volume is also fairly solid right now. So, we'll see how that comes out in the second quarter, but the first quarter was a solid quarter for us.
Mortgage banking revenue increased by 1% or $466,000 to $48.3 million in the first quarter from the $47.9 million recorded in the prior quarter and was up a strong 166% from the $18.2 million recorded in the first quarter of last year.
The company originated approximately $1.2 billion of mortgage loans for sale on the first quarter of 2020. This compares to a similar $1.2 billion of originations in the prior quarter and $678 million in the first quarter of last year.
The increase in revenue from the prior quarter results primarily from $17.4 million of derivative income associated with the mandatory commitments to fund mortgage originations compared to a $1 million derivative loss and similar activity in the prior quarter, that was offset by a negative MSR adjustment net of the hedging contract during the first quarter of approximately $10.4 million and that compares to a $1.8 million positive MSR adjustment in the fourth quarter of 2019.
And we also had $5.1 million less of capitalized mortgage servicing revenue compared to the prior quarter. I think we had one less sale of our loans during the quarter. So, there might be a little bit of a timing difference there.
The derivative income that I talked about earlier is associated with the surge of the refinancing activity, where we had mandatory commitments to fund approximately $1.4 billion of mortgage loans at March 31st of 2020. And that's roughly a $1 billion more in mandatory commitments to fund than we've averaged over the past four quarters, so it hasn't really been a big adjustment in the prior quarters because of the amount of loans that we had mandatory commitments to fund were always fairly stable around a few hundred million dollars and just jumped up by about $1 billion. So, positive momentum in the mortgage business and obviously, that pipeline bodes well for closings in the future quarters.
The mix of loan by originated for sale was -- that was related to the refinance activity was approximately 63% in the first quarter compared to 60% in the prior quarter. So, the refinance volume increased slightly during the quarter and the pipeline is still predominantly filled with refinance applications.
We currently expect second quarter originations to be stronger than the first quarter. And that's a result of the continuation of the refinance activity in the strong pipeline. Table 15 of our earnings release provides the detailed compilation of the components of the origination volumes and the production revenue and MSR capitalizations, pay downs, and valuation activity.
The company record losses on investment securities of approximately $4.4 million during the first quarter, primarily related to unrealized losses associated with equity funds that the holding company has investments in which were initially used to seed money for proprietary mutual funds. And as you all know, equities have big gaps at the end of the first quarter. So, those valuations declined.
Other non-interest income totaled $18.2 million in the first quarter, up approximately $4.2 million from the $14 million recorded in the prior quarter. Primary reasons for the higher revenue in this category include $3.9 million of higher swap fee revenue and $2.1 million of net gains related to sales of certain loans and leases. And this was offset by $2.7 million of lower BOLI income as BOLI investments that supported deferred compensation plans were negatively impacted by equity market returns.
But I should note that the decrease in the BOLI income in the first quarter resulted in a similar decrease in compensation expense during the quarter. So, the net effect of that is washed out in total.
Turning to the non-interest expense categories, non-interest interest expense totaled $234.6 million in the first quarter, down approximately $15 million or 6% from the prior quarter. A number of factors contributed to the decrease; salaries and employee benefits expense were down $9.2 million from the prior quarter, lower levels of advertising and marketing expenses of $1.7 million compared to the prior quarter, we had $1.4 million less of OREO expenses, and we had $3.1 million of charges in the fourth quarter of last year that didn't recur related to legal settlement charges, contingent purchase price payments and costs, and terminating too small pension plans.
And then those aforementioned changes I just discussed were offset by $2.8 million of higher FDIC insurance assessments due to the rebates from FDIC, substantially subsiding in the current quarter compared to the prior quarter.
I'll talk in more detail about the major categories now. The salaries and employee benefit expense category, as I said, declined by $9.2 million from the prior quarter. The majority of the client in net expense category related to reduce incentive compensation accruals, which were approximately $8.7 million lower than the prior quarter, with that change being driven largely by long-term incentive compensation programs which are forecasted to be negatively affected by the impacts of the current economic conditions brought on by the pandemic situation.
Additionally, salaries expense were down by $1.6 million from the fourth quarter. The primary cause of the decline was $2.2 million reduction in deferred compensation costs that were related to the BOLI investments that I previously discussed.
And then offsetting those decreases were employee benefit expenses were up approximately $1.1 million during the quarter due to the higher amounts of payroll taxes, which tend to be elevated in the first quarter of the year.
Data processing expense increased by $804,000 in the first quarter, compared to the fourth quarter of 2019. This was due primarily to approximately $1.4 million of de-conversion charges related to the Countryside acquisition, versus only $558,000 of conversion charges related to the STC Capital Bank system conversion that happened in the prior quarter.
The additional operating costs of data processing related to the franchise also contributed to the increase. For your information, we also expect to incur slightly more than $3 million of additional conversion related charges in the second quarter related to the just completed conversion of the Countryside Bank transaction.
And by the way, our teams did a terrific job of completing that this past weekend, given they were working in a remote work environment and social distancing requirements, et cetera. So, our first virtual conversion went off well.
FDIC insurance expense, as I mentioned, was up $2.8 million in the first quarter as a result of the assessment credits substantially going away. We had roughly $200,000 of assessment credits yet in the first quarter of 2020, but we are essentially done with those. I think we have a little less than $100,000 that could still be credited.
Professional fees decreased to $6.7 million in the first quarter compared to $7.6 million on the prior quarter. Professional fees, as you know, can fluctuate on a quarterly basis based on the level of legal services for acquisitions, litigation, problem loan workouts, as well as any consulting services. This category of expenses came down from the prior quarter to -- due to a decline in legal fees associated with litigation collections and acquisitions.
The category also experienced a slightly lower level of consulting engagement costs. And if you look at the professional fees over the past five quarters, that's average $6.8 million. So, the $6.7 million we incurred this quarter is relatively in line with our typical amount.
Advertising and marketing expenses on the first quarter decreased by $1.7 million when compared to the prior quarter. The decline was primarily related to lower mass media advertising costs, which tend to be lower in the first quarter of the year. We also had some media spending that was associated with various sporting events that did not occur to the cancellation events -- cancellation of those events later in the quarter.
OREO expenses were actually negative by approximately $876,000 in the first quarter as the company recorded a gain of $1.3 million on the sale of a piece of OREO property and that game was an amount that exceeded the aggregate costs of OREO expenses and negative valuation charges on the other pieces of OREO.
And the miscellaneous expense category totaled $21.3 million in the first quarter compared to $26.7 million in the fourth quarter of 2019, the decrease of approximately $5.3 million. The decrease was impacted by approximately $2.7 million of charges in the prior quarter for legal settlement charges, additional expense accrued with contingent purchase price payments that did not occur in the current quarter.
And the current quarter also had a lower level of travel and entertainment expenses, as you can imagine and a variety of other smaller fluctuations. So, other than those categories I just discussed, all other categories of non-interest expense were down on an aggregate basis by $19,000 from the fourth quarter of 2019. And so they were essentially flat.
The net overhead ratio as I had mentioned sit at 1.33%, which is down 20 basis points from the 1.53% recorded in the prior quarter. The ratio benefited from current balance sheet growth, strong mortgage banking results, and lower non-interest expenses. And we would expect that net overhead ratio to stay well below the 1.4 in the near-term due to the continuing strong mortgage market, the strong balance sheet growth including the lending related to the PPP, and focus on expense control.
So, with that, I will turn it back over to Ed.
Thank you, Dave. You remind me of the guy at the end of a mortgage commercial who talks really fast. Anyhow back to me for some summary thoughts and thinking about the future. These are really crazy times. I kind of feel like Bill Murray at Groundhog's Day, in fact, my alarm clock which is Alexa will play. I shouldn’t turned on, play Sonny and Cher's, I Got You Babe, every morning when I get out by purpose.
Quarter and all was really -- it was really a pretty good quarter given the current environment. As I said the FASB picked out a quarter to adopt CECL. I think that our -- we've adapted well to the current environment as well as can be. I think our crew is working extremely well. Our ability to service our clients' needs as it relates to PPP loans, credit modifications, new credit will hopefully abate credit issues going forward, at least the financial effects of those will. We're not naïve enough to think that there will not be some credit ramifications to this situation.
Past century over would say these should affect us less than our peers due to our portfolio diversification and our conservative underwriting culture. Surely these losses will be a function of how fast we get back to work. Our earnings from PPP loans will write a wonderful cushion against these unknowns. Time will tell that we feel pretty darn good about where we're at.
We said before the crisis we need to grow through this, this low rate environment, which is exactly what we're doing. Some of it we didn't anticipate, but our core growth we anticipate to be very good. We think our expenses will be in check, the same about entertainment, and no baseball season and save a lot of money there.
But, again, I can't say enough about the Wintrust crew and our ability to ride this out and do it -- our shareholder all our pillars combined, our shareholders, our customers, our employees, and the communities that we serve. And you can be assured our best efforts in getting through this crisis and continue to grow Wintrust in the solid way you've normally always done it.
With that, I'll have someone turnover to questions.
[Operator Instructions]
Our first question comes from Jon Arfstrom with RBC Capital Markets. Your line is now open.
Hey thanks. Good morning everyone.
You're still stiff and blue Jon?
I hope you have your mask on Ed, you're doing that.
10-95 baby.
I want to talk about credit. But I guess first Dave; you have talked about the revenue line pretax, pre-provision and on mortgage I just want to make sure I understand what you're saying. You have $17 million commitment, I guess, gain and because of the big pipeline, and I think you're saying that may or may not recur in Q2, but likely may not have the MSR headwind as well in Q2. So, it's possible to sustain those kind of revenue momentum and mortgage, is that fair?
Yes, well, I think the pipeline is still pretty strong. So, I think we're still going to -- looks like we still are building the pipeline. Purchase activity is going to fall off a little bit, but we're going to probably close more loans in the second quarter, so we'll have production gain there, but that will be offset by -- probably that derivative going down a little bit.
So, I think we're sort of looking at ex-MSRs at sort of being a relatively stable revenue quarter -- first quarter to second quarter.
They are going to wash itself out and then we'll have the regular gains from this quarter, especially with the hangovers over quarter from book to -- from lock to closed.
Yes, we expect -- usually don't have that much visibility going out. But the lock terms have lengthened now because there's so much volume, so we think we'll still have a fairly decent pipeline on those loans that they have mandatory commitments. At the end of the quarter, we'll have to see, but -- so I expect that will be down a little bit, but then the actual gain -- gain on sale of higher level of production that we sold will be up a little bit, so probably offsetting to a great degree.
Okay. And then bigger picture credit. Ed, one of your comments, I don't know if this is for you or Rich, but if and when stress shows up in the portfolio, was the comment that you made, and I can give us -- the Ed Wehmer review of kind of the near-term, medium term portfolio stress that you expect to see.
Well, I'll give you the 20,000 foot level and Murph can kind of jump in I'm sure on some of the areas that you want to cover. It's kind of like time is of stopping for two or three months. I mean we're giving two or three -- we're given three months deferrals of principal and interest to a lot of clients, regulators are okay with that, tacking it on to the end. It's not -- they don't become TDRs really until after two of those really, six months.
The PPP loans that we've -- almost $3.8 billion of those out there to our clients and our clients alike, but the majority to our clients, buys them two months of -- little over two months of breathing room. The stimulus comes in and provides people a couple months.
So, if you figure it, I don't think you're going to see the stress until -- if we can get out of this into months, the stress will be mitigated. If we don't get out of it in two months, you're going to have delayed stress that will come into the portfolio. We're fortunate we don't have a lot of credit cards or consumer debt on the books where things could get a little dicey. But you think about of a guy, you have a mortgage and you give a three-month deferral, that guy is okay. And especially they got a PPP loan, he is getting paid. It's put on the end, no problem.
You think about a commercial multifamily guy, I need rent abatement, okay, I need principal abatement. So, whole world is stopping for two or three months, I think that any stress that comes through is going to be a hangover at the end in an event that we can't get out, it's going to take six months to get out of where we're at, then I think you'd have issues unless the government comes in and provides more money in the situation -- into the system, which I think they'll do and say really caused a lot of respects by the shutdown.
I think that they're committed to keeping this going. Then you got to worry about rates increase, but worry about higher rates down the road, and QE is going to take the whole economy. Murph you want to get into some of the specifics on the hairier parts of the portfolio what are considered the more vulnerable parts of the portfolio by the community?
Yes, I would echo Ed's comments to begin with, I think that if we can bounce out of this pretty quickly, we have programs in place here that have helped our customers, and I think they'll respond accordingly. But obviously, the longer it takes to get out of this and for customer behavior and the consumer behavior to really go back to normal, I think that's the big question that everybody's asking.
One of the examples I use is for -- we have a long time movie theater operator in Chicago that we have a reasonably sized not a big loan to, but for him, you just have to question how long will it be before people want to go back into a movie theater and that's a good example of where the uncertainty is pretty big.
But as it relates to our high impact industries, we brought -- we gave you a lot of detail there. And obviously the one that jumps out at you is the franchise portfolio. Generally speaking, we think the franchise portfolio is in pretty good shape for a couple of reasons. One is that we have mostly quick-service restaurants that are 85% of that portfolio. Most of those are still open; most of those are two really strong operators with good franchisors. So, we feel pretty good.
We also have seen a lot of those customers take advantage of some of the deferment and PPP opportunities. So, generally speaking, those are holding in pretty well. But clearly that is a large segment in the portfolio of just about $1 billion and it's obviously a very impacted industry as well.
As it relates to hospitality and oil and gas and some of the other areas that are -- areas for concern, those are relatively small for us. We have not typically played in those spaces all that much. The oil and gas is really a function of some of the leasing work we've done over the last couple of years.
But I would just really go back to Ed's comments that right now, the diversity in the portfolio gives us a lot of comfort. We generally pick very strong operators that we want to finance, but the ripple effects and the length of those ripples, we just don't know right now. So, time will tell.
And then just one small one, premium finance on non-performer just kind of keep creeping up, is that the administrator or is there anything new there?
Yes, that's what's I was saying earlier. What you have when you have these crises. And again, you're governed by state, the regulation. So, in Florida, whenever there's a hurricane, they -- you cannot cancel policy. So, what you've got is policies that are -- people haven't made their payments will normally be canceled, you're not allowed to cancel. Most of them allow you to go back and cancel them as of that date, the date -- that would have been cancelled retroactively, you can't take their -- you can't lose your business' insurance.
So, you're going to see those creep up, as I said earlier, you see a minor tick up in losses, really from maybe 20 basis points to 23 basis points or something. You go back and look whenever we've had those types of issues.
Now, this is a -- not every state's done it I think maybe 20 states have done it so far in terms of not allowing cancellations during this period of time. But they always let you go back, so you get your principal back -- maybe not all your interests or late fees, but you get a lot of that back anyhow. So, you're going to see those keep popping up little bit until the crisis is over. But again, it's not usually a well situation for us.
Okay. Okay, good. Thank you. Appreciate it.
You bet.
Thank you. Our next question comes from David Long with Raymond James. Your line is now open.
Hi Dave.
Good morning everyone.
How are you doing?
Ed, as a fellow fan of airplane, I do have to commend you on your choice of remarks, The Lloyd Bridges quote from the sniffing glue, so I get a prize for calling it out.
I kind of like the wolf one better though. I mean you ever see Pulp Fiction, The Wolf is awesome. Harvey Keitel.
Indeed. So, anyways, I wanted to follow-up on that -- on the premium finance business. I know we just talked a little bit about the seeing a bit of an uptick there, but the reserve levels in general are always fairly low for that business life. I think you had a basis point -- maybe 20 basis points of reserves.
On the commercial side, maybe just remind us why you can carry such a low reserve in that business and maybe give us an example of a situation absent COVID-19 that you may or could lose money in that business?
Well, life insurance, knock on wood, we never lost a dime. So, in the commercial business, I'll let Dave and Murph take you through that.
So, Dave, on the commercial business, generally, you're financing commercial insurance policies for workers' comp, building coverage, liability coverage, whatever it is, and they're generally annual policies.
So, we finance those policies by generally taking a percent down so 15%, 20% down as sort of a standard down payment and you financials over generally nine to 10 months, I think our average is just slightly over nine months. So, your collateral is the unearned premium held by the insurance carriers which are generally high rated insurance carriers that we do business with.
So, if that premium which is your collateral amortizes one 365th or one 366 in a leap year, per day and amortizes away in earns out, that collateral is deteriorating on a daily basis. But since you took 10%, 15%, 20% down on that policy, that's your initial cushion, and since we pay that -- have that loan pay off monthly, over nine to 10 months, our loan pays off faster than the collateral deteriorates. So, that's generally why you don't have losses in that industry.
Sometimes you could have losses if you take a lesser down payment and you don't have as much collateral cushion. And then if they don't make their payment, the states will require you to generally give them a notice of time that to tell them that they've been delayed or defaulted on their loan. And then you can cancel the policy. So, that may be 20 or 30 days depending on the state and so then your collateral continues to deteriorate during that notice period.
So, if you cut your collateral position too short, then because you took less down payment, it may eat into your collateral enough when they default on their payment that you'd have some small losses. And then there are losses, sometimes from auditable policies, workers' comp, pleat auto, some of those policies are auditable, and to the extent that the estimated premium the front end was off a little bit from what the actual premium was when they audit the payrolls or the fleet size, and you can have some losses. Those are the general reasons for it.
So -- and
Potential fraud or insurance company going bankrupt. In case of a bankruptcy, we monitor the invest reports and credit limits for each insurance company with nine months will pay out, it usually takes more nine months for an insurance company to go down. So, we can stop doing business with them and that mitigates it. You can't have agent fraud, but we've developed a number of systems -- in the past we've had some large ones, relatively large, for a time, maybe $6 million, $7 million, $8 million.
We have not had one in a long time. I think we're doing a much better job electronically of screening for those, but knock on wood; we haven't had one of those. So, that's where you could lose money. Now, what I was saying is Dave was talking about cancellations. Now, they don't allow cancellations you feel your collateral is going to run off, but the cancellations they allow you to backdate, once we get through it, they always allow you to backdate to when it would have been the insurance companies want to really kind of loses on that situation, but not so much because claims usually aren't that high.
So, especially in something like this and in terms of a hurricane and like maybe a little bit differently have higher claims, but that's how it usually happens. And we've averaged around 20 to anywhere between 15 and 25 basis points normally on that and that's how we come up with that number and again life, knock on wood, $7 billion, we haven't lost the dime, so I think we're okay.
Excellent guys. Really appreciate the color there. That's helpful. And then when it -- as related to the franchise finance side of things, you indicated that about 85% are quick-service. Are there any other of the remaining exposures that you consider much riskier, anything that we did that he can point there, there at the remaining part of that portfolio?
Yes, I mean, the dine-in restaurants is really where I think you're going to be most impacted. For us, that's about $150 million all -- well-known names, but it's just -- obviously, they're the most profoundly impacted by this.
Many of them have taken the PPP loans from us or from other banks, because many of these are syndicated deals. And they've also gone for deferrals. So, again, this is a situation where a couple months it will look fine, and hopefully they get out of this people are going on eating again, they'll be fine. Everything gets pushed off and very logical way to look at it. However, it keeps -- you don't get back to business until September, October, you're going to have some issues.
Got it. And then just as the last one, you kind of hinted on this, but if no one attends Wrigley Field this summer, or the -- those are marketing expenses that I'm assuming you guys would not be spending.
That is correct. Cubs, White Sox, you name it. We would not be spending that money. But I'd rather spend it go to ball games myself, but we actually have something like brewers and some minor league teams around Chicago, would that be -- we would not be paying. That can be a significant amount of money.
Got it. Thanks guys. Appreciate it.
Thank you. Our next question comes from Terry McEvoy with Stevens. Your line is now open.
Hello Terry.
Good morning. Can't believe it took this long to ask that interest margin question. So, I'm going to ask one. Just taking a step back as you think about the second quarter, you have the full impact of the March rate cuts, but then you got multiple work orders just lowering deposit rate. So, under that big picture view, Dave does the net interest margin bottom out here in the second quarter and then likely will potentially move higher in the second half of the year as deposit prices come down?
Well, if you're talking about the core net interest margin, yes, it would go down. But remember, we're going to have almost $100 million of PPP fees we'll be bringing in over two years at the longest. The shortest, it'll be -- people when they go for release for the funds, because these are all -- every one of these can be is for two months, it's been two and a half months, they can apply the to the SBA and have them forgiven. They're forgiven, we take the money upfront. So, in a worst case scenario for two years, if we -- if the whole thing ran out for two years, the margin would be okay right around where it is.
If it comes into people, at the end of this quarter and beginning of the third quarter, get those -- get their funds -- their loans forgiven, we have $100 million coming in during that period of time. So, that's going to positively affect the margin. So, margin -- the core margin is going to end up like I said where you open the 270 and 280 range, somewhere around there, based on where we are right now.
But the PPP loans are going to protect us for two years or one year or in some derivative between two months and two years, you tell me, but they will help the margin and obviously, help net interest income to grow nicely.
So, between that and our growth, I would expect 280 and bounce back from there on the core side, but the PPP loans are going to be very helpful from the income side to help cushion any long term credit issues we have, but also from the margin standpoint. Do you follow what I'm saying there? I kind of drifted a little bit.
Understand your thought process on PPP and how that plays into the margin. I'm just thinking about the revenue related to PPP and what that can be the building capital. I know you have the $85 million in -- that you mentioned in the release. And I just want to make sure that $9 million is just kind of what's in the pipeline. My guess is you assume that grows in increases on PPP, round two.
And then what are the expenses that we should think about related to PPP just so we can calculate a bottom-line impact that obviously will help your capital ratios?
I think the marginal expenses are absolutely zero. I think we set up the system on our own. And these are people we had -- people from all over the at home, but we jumped in and out them. We didn't add much any outside vendor. I don't think there's any issues related. Do you think about it, Dave or Dave Stoehr?
No, I think it's generally just the people issues our staff that we already have on board that the clear up the back end. You have these obviously have some minor data processing coverages because you have more accounts on the FIS system, but it shouldn't be that that much of additional expenses.
If any, really that will be negligible.
And then just on the round two of PPP, you said $9 million that's going to be higher as we move forward.
Right now what we have in the pipeline, we have $350 million, $360 million that will be waiting for eTran, tonight. Once you get your eTran, they're committed. Later, that's about $9 million of fees. That's rough numbers, with some to -- as you go through the process, which we will have done today on the current -- we should have done today and then the stuff that came in we opened the portal last night.
There was some duplicates and alike. So, roughly around $9 million more and $350 million more. So, plus or minus 10% maybe. We'll know better at the end of the day. But -- and then we may open the portal again, once we get through that.
We kind of think that this next round is because many of the banks were not -- we dropped the ball on this. There were a number of customers that are waiting what chase said 26 billion come in, they only funded $14 billion or 12 billion, which means they have $14 billion; they're going to hit the new allotment with. We had 98% of ours all the way through the process in round one, they are fully funded today, the other guys didn’t.
So, this is going to last maybe 48 hours at the most, so it'd be very this -- next allotment, I'd be very careful, we don't overextend it and leave the customers hanging. But we think we can get these through and plus/minus 10%. Whether we get any more on top of it, it will be a function where we sit at the end of the day in terms of our production or where we are in our manufacturing process if you will.
That's great color. Thank you.
Thank you. Our next question comes from Michael Young with SunTrust Robinson Humphrey. Your line is now open.
Hey, thanks. Good morning.
Good morning.
Want to start with the CECL reserve, it’s a little lower than peers and I understand there are some mix benefits from those the premium finance book, but can you just maybe talk about kind of the economic assumptions that are currently underlying the adjustment you made this quarter? And any kind of outlook going forward from here into 2Q on the you need to continue to build this reserve?
We put in the slide deck what our macroeconomic scenario factors are the ones that are the key drivers for our models. So, it's -- the some of the credit spreads, commercial real estate price index fees, the GDP growth, et cetera. So, those are the ones that impact our portfolios that have the best correlation and then and work best as you look back through the cycles.
So, those are the factors that most impacted but I got to tell you, I was reading some of the sell-side analysts' reports last night and I thought I was reading like Goldilocks and the Three Bears. Some people thought I had too much some people thought we had too little and some people thought we were just right.
So, I'm not sure that I -- as I look out there, you may have a different view, but it seems like to me we're more towards the top of the bell curve and there's some outliers on either side. But as you said, our mix with premium finance loans, I think helps that out quite a bit and I think our diversity helps out quite a bit.
So, you know, we think we're comfortable with where the CECL reserves are at. You know, it's substantially more than what our run rate was that you look at the total reserve build.
And right now, we were comfortable with where it's at. And we've gone through all the business lines, we've done all that that heavy lifting, there's more stimulus that's coming that hopefully should help, et cetera. So I don't know if you can look into your crystal ball any better than or anybody on this call or us and know how long this pandemic is going to last and what the lasting effects are. So I'm not even going to take a shot at Q2 reserves. They could be higher. They could be lower. But we'll have to see how quickly the economy reopens and how quickly things get -- start getting back to normal.
Our view is probably it's not a V shape; it's not a complete U shape. It's probably someplace in between there. I've heard like every letter of the alphabet it’s probably like a D shape, but some goofy shape out there, but that nobody's talked about. But we're monitoring the portfolio well. We’re managing it.
We had a credit team that put up there with anybody, and we'll see where it goes, but I'm not sure we're going to try to make a prediction on 2Q. I mean, it could be better, it could be worse. It's -- as Ed said, it's just what a time for CECL to come in. It is not transparent.
I think looking company-to-company, but if you look at some of the metrics that I've been looking at it, it seems like we're sort of in the middle of the pack. And we certainly did try to do that. Just seems to be where we're landing and understand people can take a more dark view of where this is going and some people can take a more favorable view, but we took what we thought was the best reasonable view that we could use in our modeling and our subject matter experts and the credit side and we think we're okay for now.
Thanks for all that info. And maybe just following up, I appreciate the breakout on COVID impacted industries specifically, but also just wanted to get some high level thoughts on commercial, real estate and construction, particularly retail and just kind of any mitigating factors that you guys are looking at or any portfolio analysis that you've done thus far.
Go ahead, Rich.
Yes. I mean, CRE is a bit of a wild card. I mean, we've spent some time kind of thinking through what it means what it might mean and we’re pretty well diversified in the CRE book, multi-family being the largest segment. In multi-family, generally speaking, it's Chicago Metro. It's performed very well, very good long time operators. I think that that, I'm feeling pretty comfortable about that. Industrial is a decent sized portfolio for us. I feel pretty good about that. I mean, obviously the overall business impact will determine ultimately how that performs.
The areas that give me the most concern is retail and office. I think office because, I think that this work from home model that we've all adapted is something that we really won't know what it's going to look like a year from now, two years from now, five years from now, but it's going to be different, and how that impacts our portfolio. It remains to be seen.
And again, we tend to be very granular in those deals and we tend to really pick very strong operators. So, again, I'm feeling okay there. Retail is the segment that probably concerns me the most in general. We -- as we've said in the past our approach towards retail has been to really try to reduce that portfolio over the last five years, which we've been pretty successful at. But where we do have exposure, it's none of the big box.
I shouldn't say none, but I mean very little of the big box regional type retail exposure, where our a great majority of our retail exposure exists is in the towns and communities that we have banks. And so these are the downtown suburban type of operators.
And I think that they are still going to be viable operations going forward, but I don't know when, but generally speaking I feel that that's going to rebound better than most, but it is one of those with that I -- people are shopping on Amazon, and the numbers are obvious, but dramatically higher levels, and I don't think that you're going to see reversion back to what we'd seen in the past. I think those people’s shopping habits are going to change in a pretty meaningful way going forward.
Yes. Murph and I talked about that a lot. I’d say, you're going to keep my wife out of shopping, you're crazy. And you're going to keep me here or get to the office, I'm going to the office, she'll kick me out. So there's a lot of schools that don’t have to wait and see, but I think as Murph says, we're diversified enough, know our borrowers enough. I think we will know to whom everybody's bought two or three months with PPP loans, with deferrals and the like even in offices and what have you.
We'll know it two or three months out is going to shake out where it's going to go and how it's going to work. So I think that we're kind of in limbo. We got to get out of this and then we'll see if all this happens, but we'll be very cognizant of it already in any underwriting we're doing or some of the new stuff that's going on very cognizant, but we’ll be very careful for sure, because the loans are made in bad times, but you’ve got to -- you have to have a better crystal ball of where the type of assets that you will take as collateral.
Okay. Thanks.
Thank you. Our next question comes from Chris McGratty with KBW. Your line is now open.
Hey, good morning.
Hello, Chris.
Hey. How are you doing? Question, it kind of high level question. In the past, you've talked about the rope-a-dope and not the need to go there. What would it take for you to pivot? Is it just two to three months and we don't get the outcome we're looking for, I’m just interested in your thoughts and what may pivot the bank strategy more significantly next? Thanks.
Well, the rope-a-dope before was really brought out by two things. One is, we couldn't get paid for the risks we were taking. And so we didn't meet our profitability models at pretty much any deal is out there.
And secondly, we were seeing way too many critical exceptions to loan policy and we just said we're not going to do that. We have that -- the spreads are actually moving up on the lending side, which is a good thing. So we are meeting our profitability models there. And we are very closely monitoring exceptions.
That's something that could slow us down a little bit, if it's in terms of making new loans and the like is if guys are coming with too many exceptions, but I think we're seeing people pull back enough that this may have -- this sounds goofy this may have been a timely crisis, because we had searching people scrounging for yield as rates went down to zero again and taking more risk.
But now this has brought everybody back and now they’re thinking, I think more rationally about pricing and collateral what have you, will see we got to this if they revert back to the goofy stuff, but, no, who knows? Murph?
Yes. I would absolutely agree with that. I think, while it wasn't rope-a-dope in the back half of 2019 and the first part of 2020, we were having trouble really growing C&I opportunities, because there were just a lot of people in that same space fighting at structures and pricing that just made no sense for us.
And the CMBS market was very active in the CRE space. So in -- I would agree with what Ed said, I mean, that the market had gotten goofy and way too aggressive. And this crisis certainly has snapback those trends pretty dramatically.
What's pretty interesting for us as the kind of the halo effect that we got from our -- from the PPP work where our competitors are unable to service their clients. And they call us and maybe we knew the owner whenever I had a personal account or what have you had some relationship with them, we're able to get them on and service them.
A large bank in town hardly did any of the oldest largest banks to where our competitor didn't do any hardly and that's opened up an opportunity for us to pick up really solid opportunities going forward at reasonable pricing. So it could be a little bit of a godsend.
So, rope-a-dope right now, who knows? We see opportunities for growth right now and our pricing, our parameters for good solid long-term companies that are in the higher impact risk areas that how that we do a lot of hotel loans right about now. There are a lot of more restaurant loans, but a lot of really solid other businesses that we're going to have shots that we never would have had before. So kind of mixed right now, but we're always very vigilant in terms of what's going on because as Dave pointed out earlier about CECL, who the hell knows where we're going to end up.
Thanks for that. It's just one more question on PPP. Obviously, we’re all may try to make our assumptions on where the economy's going. But it seems like, you know, the banks are going to generate a tremendous I think you said, almost $100 million of fees. I guess the question becomes, I know you're bound by the models, but wouldn't it seem conceptually, the right thing to do to put this back into the reserve and make people feel a little bit better about adequacy for the industry?
Well, we got a, you got to go with the black box and see where it goes. But I'm just saying that we, who knows when that that money, that money could come in over two years or one year or six months, I don't know when it's coming in. I look at them independently. The Reserve will be what it is, and the PPP fees will be what they are. And never the twain shall meet, I don't think we have the -- we have the luxury of playing that game anymore. We've got to -- we've got to really look at the data and be consistent.
And we have committees that need that everything from, everything. And so you really don't have a lot of hurt left in it anymore. It's all going to be out of the box. And, we'll see where it goes. But I would imagine that things turn bad. If you know, you can, and you're feeling it turns bad. You could do some qualitative things that would go over the top and match it up nicely. Who knows? You got to look at him independently is my point.
And I get it. Yep. I got it.
Gap is gap, Chris, so
Yes. Gap is gap; I was looking for the qualitative comment that that I had referred to. So that's helpful. Dave, I have you the trade going forward. How should we think about it relative to Q1?
Yes, yes. And I still think you think about it sort of 26.5% to 27% 27% the first quarter because the stock price was so down so much. So that benefit we usually get in the first quarter from stock based compensation was actually negative a little bit. And the bully adjustment was actually negative a little bit. So I think I still look at sort of a normalized tax rate to be 26.5% to 27%.
That's an effective.
Yes. Chris, I have a question for you. Can I ask you one?
Absolutely.
Why is our stock get so beat up all the time? I don't understand why we trade so much lower and everybody else in such a discount to peer?
Yes, I think, I think the -- I think the market is a lot of the volatility in these stocks lately has been, I think, somewhat less fundamental and somewhat technical, but I agree. That's why that's -- why that's we're constructive.
Thank you.
Thank you. Our next question comes from Brock Vandervliet with UBS. Your line is now open.
Thank you. Can you hear me?
Yes, Brock. We’re good. How are you?
Doing well, I wondered if I'd managed to pop in the queue. So this is great. I was wondering, given your comments about the outlook and a number of banks. I've talked about you know, how their outlook squared with Moody's, Moody's is working on with so much of the industry and whether they use the base case or the adverse outlook could you touch on that and what you consulted outside for kind of a reality check on the outlook?
Yes, I mean, so we look at a lot of different things. I mean, you look at the base case, you looked at serve, you look at -- long end of the pandemic one, we run the models on all of it. We talk to our business people. So we look at blue chip, you know, the blue chip economists, models and we look at the consensus Moody's models and so, but we have to pick at the end of the quarter, you have to pick a scenario and run with it.
But then, you're informed by those other models that you run and look in the consensus blue chips -- the consensus and the blue chip models that we compare and contrast against and then we get the qualitative input from our business leaders.
So, you don't -- you have to pick one to base your model off, but then there are -- there are qualitative factors that you had to layer on, because at some point, you had to pick a scenario and run with it. Because you can't, Moody's was changed in scenarios, weekly almost for this thing.
So, then you took some you ran some other models to find out where the guardrails were on the ups and the downs sides, and then you square that with the business leaders that have their fingers in to the pulse of those scenarios and you run out the process. So, I'd say, we were informed by a number of different Moody's models and other models out there.
Okay. And in terms of forbearance, I saw the reference in the press release; I believe in terms of it tailing off here in April, you released a percentage on commercial and CRE deferrals that you did grant?
Go ahead, Dave.
I would say, I don’t know if you have those, I think we noted on the press in the release that we had about $300 million of outstanding balances for commercial, commercial real estate loans that we had some sort of modifications to. And that's, that's what we have, that's what we have right now.
Yes. So those are ones that are actually booked. There's ones that are going through the process that we're still evaluating and we have not booked yet. That will show up over the course of the next couple months, but we do have the detail on that.
Okay. And on our retail residential real estate mortgages, we sell most of that. So we do, do a servicing portfolio and then we have some in our portfolio we are tracking so far we're tracking better than the MBA averages that they're putting out there on that. The numbers are starting to -- our numbers are a little more current than the MBA numbers. So I haven't seen the most recent MBA ones, but we are -- we are better than the MBA average on that.
Okay. Thanks for the color.
Thank you. Our next question comes from Nathan Race with Piper Sandler. Your line is now open.
Thanks. Hi, guys. Good morning. One last question just updated thoughts on Capital, Planning and Priorities, obviously, with total risk based capital coming down 30 basis points or so sequentially. And I obviously understand some certainty you can’t project, what protocols are going to look like. But I'm just curious to kind of get some updated thoughts on, capital deployment priorities and how you guys kind of see capital levels project in fixed. And you can kind of predict it just given all the uncertainty that exists today.
Well, I mean, we look -- we look at our capital levels all the time and we go through stress analysis on them, you know, the PPP loans are going to be capital free from a risk based perspective. So that's not going to impact on it's going to be short term in nature Anyway, you know, we still are, you know, generating positive earnings this quarter and expect to do so going forward and we'd suspended the share repurchase, but that was prudent to do.
We still believe the dividend is appropriate, but we'll let the Board of Directors decide that as they move forward, but in all, we continue to think capitals adequate. We would look -- if we continue to grow or there you know, we have these opportunities Ed talks about and we have growth opportunities out there, and the equity markets opened up, we could look at some preferred or some sub debt, but it's not critical that we do that right now, but we are always watching those markets because we do expect to continue to grow.
So, yes, we won't be spending melodic cash on acquisitions where stock prices you can't ready to make much sense. So I think that they laid out nicely our growth is really been at zero based risk ratings and we keep a close eye on the whole thing. And we do we run more stress tests, I think, than most people do. And we feel very comfortable where we are right now, but depends on our growth prospects other than the nine, the zero based risk rating stuff. So we feel very good about where we are -- and we will -- that's where we are.
Understood, that's helpful. And speaking of stress tests, I think when you guys last submitted DFAST in 2017; you guys indicated that he could have 2.8% cumulative losses in a severe adverse scenario. So, I guess I'm just curious as you guys have kind of stress tested the book more recently, I mean, any kind of thoughts or guidance in terms of kind of what you guys could see in that kind of adverse scenario under the current circumstances that exist today?
No, we haven't disclosed that Nathan. And so -- I mean, people can look at that stress test, but that was a -- I'm not sure you can compare that any environment to this. I mean, it may be a good environment as your best one to look at. But we haven't disclosed the stress test a couple years either and to give you something on this call like that, we'd have to give that more thought, because we haven't done a DFAST stress test per se that we've made public so far.
We do them internally, but I don't have the numbers other than to tell you right now that we believe with a tremendous amount of stress as we see it that we're fine.
Yes, I have a general statement though that we do stress the portfolio and we feel that right now we're pretty good shape.
Understood. And if I could just ask one more on PPP. I appreciate all disclosures in the deck notes that you guys have funded relief through the PPP for, call it 15% of those select high impact industry. So, I'm just curious based on the pipeline of PPP loans you have, where do you expect that number moving forward in terms of providing that added cushion for those selectively high impact industries?
Well, most of it were done in the first round -- for our clients, most of them are not in round one. Going forward, we're actually -- we've actually been reaching out into the neighborhoods to, to a low to moderate neighborhoods, the people who say they know they can't get the loans and really reaching out to our customers and hey, come on, we'll get you in. Because we really have the system nailed and feel we're in pretty good shape. So, we basically hit the portal open from now four and a half hours, maybe it total. In total, we've taken in over 10,000 applications.
So, we tried -- we close it for a little while to do some direct work to make sure that we covered people who may not have been as fortunate to be there, but -- or to have their data and understand what it is. We really reached out to do that because -- but really, when you think of it, most of our -- most of the guys who are in our trouble, in severely impacted industries were the first guys, they're not dumb. They're very smart people.
I will say that you might ask what motivates our people to do this and I think we've had a number of great notes for people. If you think about it, we've -- we're going to keep 10,000 businesses from filing bankruptcy in a lot of cases. You think that they are each maybe average 30, 40 employees, that's 400,000 people, they all have, four -- an average, they have four dependents, that's 1.06 million people that we're affecting and let sleep easier every night because for two months they are going to have their salaries, their benefits, and that's what keeps their -- kept their people working until midnight, one, two, three in the morning is doing the good we're doing and how often do you have a chance to touch that many people in your life much less than two weeks.
So, we feel very good about what we're doing here. We think we're doing our contribution and this relates to the impacted industries, they run right out of the box. Now, we got to make sure that those who really don't get it or get it. So, that's what that's what our focus has been in the last rounds.
I would add that from the release date through 4/20, which does not include this Phase 2, we're up about another 15% highly affected industries.
Understood. That's great to hear. I appreciate all the color. Thanks guys.
Thank you. [Operator Instructions]
Our next question comes from David Chiaverini with Wedbush. Your line is now open.
Hi, thanks. I wanted to ask you about -- how's it going? So, I wanted to ask you about expenses. So, in the past, you've mentioned about keeping the net overhead ratio below 1.5%. I think I heard you mentioned that it should be well below 1.4%. So, I was wondering, is that the new bogey now, less than 1.4%, did I hear you right?
Yes, you heard--
But 1.5% has always been the sign we're rough bank. And I think that with our growth and what's going on, with our asset growth and our expense control based, just what's going on here, there's our inability to open branches and do things like we normally do right now to invest in the business, plus the mortgage markets, and how well we're doing there.
I think that yes, you should be well below 1.40%. I think you should be -- could even make about 1.30% if things go right. But the bogey will always be 1.50%, 1.50% or better. We're not changing it yet. But I think you expect it for the next few quarters to be below 1.40% and between 1.30%, 1.40% range and if we lowered 1.30%, we're good.
Yes. I think what I said in my comments were with the growth of the balance sheet related to PPP and the strong mortgage markets and the lack of some of the expenses that are going to flow through just due to the situation we're in travel, entertainment, some of the -- sponsorships of some of the summer events et cetera, we should be below 1.40% for the time being, but I agree with Ed, that's a general target in the normal environment is still sort of below the 1.50%. But yes, I did say below 1.40% because I think in the near-term quarters, that's still going to be the case.
Great, thanks for that. And has your de novo outlook changed at all? Previously, you're planning about a dozen branches over the next 12 to 18 months, has the backdrop kind of shifted your thinking on that?
Not really, slowed it down a little. Again, we're taking the -- basically a couple months off. We're all in this hibernating, if you will, but these are areas we're committed to. We have space, we're rolling and we're -- there are opportunities for us to continue to build and grow and we've always invested in our business. We are a growth company. The acquisitions aren't bonus plan or they're not -- the market has not given us good-priced acquisitions, we will turn to de novo growth. These are basically all in stone, but the timing will be probably more spread out than before.
Okay. And then the last one for me on loan growth and you touched on that a little bit earlier. But to be clear, you're still expecting mid to high single-digit growth in the context of line utilization rates and the draw downs, to kind of, surge at the end of the first quarter, could that be a headwind to loan growth, you know, if things start to normalize and these companies start to pay down those drawdowns?
Rich?
Yes, I think, overall economic activity is certainly going to be muted in the remainder of the year, so that that's going to have an effect. I do think a couple things that are going to be interesting to watch will be -- I do think that this halo effect is real that I think that we will have some real opportunities with customers that in the past, we just haven't had a lot of success with that we would really like to bank. So, I think that'll be a good opportunity.
I think the first insurance groups also will continue to do reasonably well.
… move up there nicely.
Yes. So, I think that there's going to be some good opportunity there. But, clearly the economic growth going forward is going to be a bit of a headwind.
I think that our line draw is only what, $400 million, $500 million; we figured out Murph, is that right?
Yes. We also we also have warehouse lines as the mortgage industry; we're seeing really good usage on those right now. And the second half of the year that probably will be under some pressure, so we'll keep an eye on that too. But we'll see.
So, your question about high single-digit, it could be affected by those fluctuation?
Yes.
That makes sense. Thanks very much.
Thank you.
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Edward Wehmer for any closing remarks.
Thanks everybody. Stay healthy. And if you have any other questions, please feel free to call me or Dave or Tim Crane got off easy, he didn't have to answer anything today, but might want to call him. But thanks, everybody. Stay healthy and until next time. Bye, bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.