Wintrust Financial Corp
NASDAQ:WTFC
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Wintrust Financial Corp
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Welcome to Wintrust Financial Corporation Second Quarter and Year-To-Date 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions] Following a review of the results by Ed Wehmer, Chief Executive Officer and President; and David Dykstra, Senior Executive Vice President 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 at any such forward-looking statements. The Company's forward-looking statement -- 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 the Company's most recent Form 10-K and any subsequent filings on file with the SEC.
Also, our remarks will reference certain non-GAAP financial measures. Our earnings press release and slide presentation included reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded.
I will now turn the conference over to Edward Wehmer.
Thank you very much. Welcome to our second quarter earnings call. With me, as always, are Dave Dykstra, Kate Boege, our General Counsel, and David Stoehr, our CFO. Now the same format, as usual, I'll give some general comments regarding our results, turn over to Dave Dykstra for more detail analysis of other income, other expenses and taxes, back to me for summary comments and thoughts about future, and we'll have time for questions.
You know, we've changed and streamlined the format and content of our earnings release. It's been reduced by 12 pages. Hopefully we'll find it more informative. If you have any ideas or as to additional improvements or information, you'd like to see, please feel free to give us a call or a note with your thoughts.
Now onto our results for the quarter. The quarter can be basically summarized as follows. Strong balance sheet growth, though again back-end loaded, reasonable core earnings, higher credit costs primarily related to three specific credits, an additional MSR write-down to the rate environment. And notwithstanding the two negatives, I think it was a pretty reasonable quarter. How was the play, Mrs. Lincoln, I guess, we could say based on where the stock is going today.
On the earning side. Net income was $81.4 million, down 9% from the second quarter '19 in the second quarter of -- first quarter of '19, second quarter of '18. Year-to-date earnings of $170 million, basically even with what we had last year. Diluted EPS standpoint, basically the same numbers. If you could take net income out of pre MSR adjustment basis, year-to-date we're up 8% to $180 million from a $167 million. Diluted EPS the same, up 8% from -- to $3.08 from $2.84, notwithstanding the MSR adjustments.
Net interest margin dropped 8 basis points during the quarter, I'll talk about that and rest of the statistics are there for your review. As mentioned, the quarter was negatively impacted by additional provision, almost $14 million, additional MSR and negative valuation adjustments of $3.1 million after netting out a hedging -- a small hedging game. I'll discuss the provision a little later when talking about overall credit.
As the MSR adjustment year-to-date, we recorded negative pre-tax fair market value adjustments net of hedging gains of $12.1 million as opposed to positive adjustments of $6.23 million the previous year. Disregarding these would result year-to-date net income and diluted EPS as I said earlier to be up over 8%.
On recent calls we discussed our hedging strategy on this asset. All this -- although this quarter we did have a small income statement hedge in place that partially mitigated the negative adjustment. We actually rely more on internal balance sheet hedge to protect the equity of the enterprise. The market with our mortgage-backed securities on the investment portfolio covers your income statement loss by over four times. The problem is that one goes through the equity -- while the other hits the income statement.
To that point, since September 30, 2018, when rates started to fall, negative MSR valuation adjustments have impacted tangible book value per share by negative $0.28. However changes in the fair market value of our securities portfolio which are run through -- which are run through other comprehensive income and the equity sides of the balance sheet have added a $1.21 to book value per share.
We'll continue to look at income statement hedges when appropriate and cost effective, but you can see we are well served by our current strategy as it relates to overall enterprise value. You could ask what we do when rates rise and the fair market value securities falls, and fair market value of MSRs raises in the same percentage relationship at 4 times. Our positive GAAP position which we increase in low interest rate periods more than covers this decrement. Hope this makes sense as it relates to how we deal with MSRs.
Net interest income and net interest margin. Net interest income increased $4.2 million over quarter one due to one extra day in the quarter and volume growth $797 million in average earning asset growth versus quarter one. Pardon me. FTE -- the FTE then decreased 8 basis points from 3.72% to 3.64%. Earning asset yields holds constant at 4.74%, where our cost of funds increased eight basis points.
Our recently completed $300 million sub debt offering added approximately 1 basis point to this class, the rest due to market competition and special rate -- special rates offered to markets. If the Fed goes ahead and lowers this month or thereafter, you can be assured that we'll be aggressive -- as aggressive as possible and as quickly as possible lowering our costs. The new -- the new sub debt offering will have an additional two basis point increase in cost of funds in Q3 and beyond as it will include a full quarter of this expense. No doubt that the decreasing rate environment is not good for the margin or we believe we should be able to continue to roll net interest income nicely because of our good balance sheet growth.
We're starting the third quarter with nice head start, presenting earning assets and loans as -- sorry, we are starting the third quarter with nice head start as ending in asset loans exceeded average balances in quarter two by $1.16 billion and $751 million respectively. Our loan pipelines remain consistently strong across the Board. Pipeline full-through rates in Q2 remain constant with prior periods, giving us confidence that high single-digit loan growth can be achieved going forward.
The other income and other expense side, Dave will go through this in detail, but I want to give some high level remarks in these categories. Wealth management revenues increased $162,000 to $24.14 million, continuing their slow and steady climb as the assets at our administration increased $800 million from $25.1 billion to approximately $25.9 billion. The big increase in total income in the quarter related to our mortgage business as I mentioned, Dave will go through these numbers in detail, but I want to give you a quick report on our efficiency efforts in this area as Phase 1 of our ongoing project concluded on June 30th.
Today, we've cut our overall cost of produce as a percent of volume by approximately 10 basis points or around 10%. Further, the cost decreases are expected as we will be seeing full quarter benefits of what has been accomplished to date and execute additional cost saving measures in Phase 2 of the project as we continue to emphasize our consumer direct channel in production where commissions are lower. It should be noted, we're not de-emphasizing the old broker model, but rather attempting to add additional marginal revenue and volume through our consumer direct channel. For example, in the month of June, 32% of our volume is through the consumer direct channel as opposed to 22% a year earlier.
Other expenses are generally in line with our expectations taking into consideration the seasonality of certain line items. The net overhead ratio in the quarter after disregarding the effects of MSR adjustments was in the 160 area -- was in the low 160s. If we were to compute the net overhead ratio on ending balance as opposed to average balances, numbers would have been 1.53% in Q2, 1.5% in Q1 of this year. Very close to our desired goals.
We are a growth company. It takes money to invest to grow the company. We've always taken advantage of what the market gives us, what the market giving us now is very good core growth and we have to invest to get that core growth. The balance sheet side, total assets increased $1.3 billion or 15.9% from the first quarter, and 14% or $4.177 billion from a year ago.
Loans increased $1 billion or 18% in the quarter, not including loans held for sale, and almost $2.7 billion from a year ago. As I said, ending assets grew $1.3 billion in the quarter, an increase of 16% over the year, 14.2% a year ago. Oak Bank acquisition which we closed during in the quarter is responsible for $220 million of that growth. Core loans net of loans held for sale were $1.1 billion quarter versus quarter and $2.7 billion over a year ago, approximately 18% and 12% respectively. Oak Bank accounted for $114 million of this growth. As mentioned, most of the growth was back end loaded when we started Q3 '19 with a head start of closer to $751 million of -- as average -- as year-end balances or quarter-end balances exceeded average balances for the first quarter.
As mentioned, loan pipeline has remained consistently strong. Deposits grew $714 million and $3.15 billion quarter versus quarter and year-over-year respectively. That translates into a percentage growth of 11% and 13%. Our loan-to-deposit ratio return to above the high end of our desired range of 85% to 90%, closing the quarter a little over 92%. Our acquisition of Chicago Deferred Exchange Corporation last December continues to perform better than anticipated.
Deposit balances at 6/30 were approximately $700 million as opposed to $1.1 billion at year end, but equal to 6/30 million of last year when we didn't own them back then. The number of transaction process for this year was a tiny bit above the same period last year. We have said this is a seasonal business as the year end always being the bellwether period. Working diligently to expand this national business we recently hired two new salespeople to the squad.
Now onto the elephant in the room, credit. Provision increased approximately $14 million in the quarter to $24.6 million as net charge-offs increased to $22.3 million. $18.4 million of the charge-offs and $15.3 million of provision related to three credits, provide a little color on these three credits as well as lessons learned if applicable. The largest credit represent $8 million charge-off versus $2.66 million reserve -- specific reserve for a $10.66 million provision effect. The loan is a participation we had with local bank on a private equity owned construction company.
The loan has been scheduled -- this loan has been -- should clear this week, should be off the books and cleared. If we had our lesson learned, our deals were not the lead, especially those of PE sponsors need to have real business reasons to be on our books. Excess leverage deals are not acceptable -- acceptable if they fit this criteria. And PE deals where we have no relationship with the private equity firm are not acceptable, where we do not control the process info was late to us, we're not in control of the collection process.
Fortunately, we do -- we do have an immaterial amount of these on our books and we'll be looking to exit these relationships at first opportunity. By an immaterial amount, I mean, two or three credits, all of which are performing well but if we can't control it, it really doesn't -- with their loan volumes being where they are, we really have no reason to be in there.
Second largest credit was a franchise deal that we previously commented on in other calls. Charge on this loan was approximately $7.6 million. The $2.9 million provision affected the existence of specific reserves placed in this account. The franchises in our contract is scheduled to close in Q3. The remainder of our franchise portfolio continues to perform well. So there's really no lesson learned here.
Third credit resulted in a $3 million charge-off provision increase related to a commercial premium financed workman's compensation loan. Our policies that charge-off any unconfirmed return premium and to look good on recovery. In this instance, the return premiums is held by a capital insurance company for potential future claims. Therefore, the return amount cannot be confirmed. They anticipate receiving coverage on this loan to return premiums and payments from the insured, which is a viable company-assumed business. They've been making payments of between $50,000 and $100,000 per month. So materially -- sorry, a material recovery is expected over the next 18 months out on this credit.
Utility charge-offs were 22 basis points up from our recent low historical numbers, but still respectable. NPLs are down $4 million to $113.5 million or 0.45% of loans as compared to 0.49% at quarter one, and NPAs are down $6 million to $133.5 million or 0.4% -- 0.40% as compared to 0.43% of total assets in quarter one. So from this perspective, we remain in very good shape.
You're probably asking yourselves where these increased credit losses represent a trend. Although we never know what has not appeared this quarter represents a trend. However, we are recognizing a credit cannot be this good as it has been forever. We always try to identify that and recognize problem assets early, take our lumps under the axiom that your first loss is your best loss. As of now, we think we recognize our problems and accounted for them correctly. We'll continue to monitor portfolio diligently to identify and clear any problem assets as expeditiously as possible.
Now I'm going to turn over to Dave, who will then provide some color on other income, other expense and taxes.
Thanks Ed. As normal, I'll briefly touch on the other non-interest income and non-interest expense sections. In the non-interest income section, our wealth management revenue increased to $24.1 million in the second quarter compared to $24 million in the first quarter of this year and up 7% from the $22.6 million recorded in the year ago quarter. Brokerage revenue was up slightly by $248,000, while trust and asset management revenue was relatively flat with the slight decline of $86,000. Overall, we believe the first quarter of 2019 -- our second quarter of 2019 was another solid quarter for wealth management segment with record gross revenues.
Mortgage banking revenue increased by 106% or $19.3 million to $37.4 million in the second quarter of 2019 from the $18.2 million recorded in the prior quarter and was down slightly from the $39.8 million recorded in the second quarter of last year. The increase in this quarter's revenue from the prior quarter resulted primarily from higher levels of loans originated and sold during the quarter and lower negative fair value adjustments recognized in mortgage servicing rights. The mix of originations weighted more heavily to the higher margin business this quarter versus the prior quarter and that aided with a higher average production margin.
The Company originated approximately $1.2 billion of mortgage loans for sale in the second quarter of 2019, this compares to $678 million of originations in the first quarter and $1.1 billion of mortgage loans originated in the second quarter of last year. The mix of loan volume originated for sale was 63% for home purchase activity and the remainder was refinancing. This compares to 67% for home purchase activity last year, so refinances have increased a little bit, but the home purchase activity is still the predominant piece of our business. Although we do see strong refinance application continuing into the third quarter.
Table 16 of our second quarter earnings press release provide the detail compilation of the components of the origination volumes by delivery channel and also the mortgage banking revenue, including production revenue, MSR capitalization, MSR fair value and other adjustments and servicing income. Given the existing pipelines, we currently expect originations in the third quarter to stay strong and similar to the production level that we experienced in the second quarter. The Company recorded gains on investment securities of approximately $864,000 during the second quarter, this compares to a net gain of $1.4 million in the prior quarter.
Other non-interest income totaled $14.1 million in the second quarter, down approximately $2.8 million from the $16.9 million recorded in the first quarter of this year. The primary reasons for the revenue decline in this category include a negative swing of approximately $351,000 of foreign exchange valuation adjustments associated with US Canadian dollar exchange rate.
The current quarter had a positive valuation adjustment of $113,000, whereas the prior quarter had a positive adjustment of approximately $464,000. We also had $1.7 million of decline related to less investment from investments and partnerships, $442,000 less of BOLI income and those were offset by approximately $393,000 of higher swap fee revenue.
Turning to the non-interest expense categories. Total non-interest expenses were $229.6 million in the second quarter, up approximately $15.2 million from the prior quarter. The majority of the increase related to three categories, including commissions associated with significant increase in the mortgage production and the related revenue; our typically higher marketing expenses in the second quarter relative to the first quarter primarily associated with the sponsorships; and an increase in loan and travel and entertainment costs and the other miscellaneous expense category. I'll talk about a few of these in more detail.
The salary employee benefit expense category increased approximately $8 million in the second quarter from the first quarter of this year. Commissions and incentive compensation expenses accounted for approximately $4.9 million of that increase from the prior quarter, due primarily to higher commissions expense tied to the significantly greater mortgage origination production during the quarter.
Salaries expense accounted for slightly more than $1.3 million of that increase, resulting from a full quarter impact of our annual base salary increases that generally took effect on February 1st, the staffing cost related to the Oak Bank acquisition that closed in May of 2019 and normal growth as the company continues to expand, including staffing for five new branch banking locations that opened during 2019.
Additionally, employee benefit expenses approximately $1.8 million higher in the current quarter than the prior quarter, due primarily to the impact of higher health insurance claims. As I mentioned on the last conference call, the first quarter claims were somewhat low and we would expect the level recorded during the second quarter to be a more normal level for health insurance costs. Similar to last year, marketing expenses increased approximately $3 million from the first quarter to the second quarter and totaled $12.8 million.
As we have discussed on previous calls, this category of expenses increased as our corporate sponsorships tend to be higher in the second and third quarter of the year, due primarily to our marketing efforts related to baseball sponsorships, as well as increased spending related to positive generation and brand awareness to grow our loan and deposit portfolios. We clearly believe these marketing efforts are effective in enhancing the franchise value of the Company.
Equipment expenses totaled $12.8 million in the second quarter, an increase of approximately $1 million compared to the first quarter. The increase in the current quarter relates primarily to increased software depreciation, licensing expenses and maintenance and repairs.
Professional fees increased to $6.2 million in the second quarter compared to $5.6 million in the prior quarter. Professional fees can fluctuate on a quarterly basis based on the level of legal services related to acquisitions, litigation, term loan workout activity as well as the use of any consulting services. Although up slightly from the prior quarter, this category of expenses remained at the lower end of the last five quarters expense total. The slight increase was due primarily to acquisition related legal fees, slightly higher regulatory examination fees and a small increase in consulting fees, but again, at the lower end of the 5 quarter range.
The miscellaneous line item, overall non-interest expense increased by approximately $3.4 million in the second quarter to $21.4 million. The primary reason for the higher expense level, as I mentioned in my opening remarks, is due to a higher level of loan expenses associated with the significant increase in loan origination volumes during the quarter and a greater amount of travel and entertainment expenses as we've gotten out of the winter months and into the entertaining months.
Other than the expense category just discussed, all the other expense categories were up on aggregate basis by approximately $200,000. Ed mentioned this, but I'll repeat it, the Company's net overhead expense ratio for the quarter was 1.64%, which is higher than our goal. However, the Company's asset growth was heavily weighted to the end of the quarter.
If we were to calculate the net overhead ratio based on end of period assets rather than average assets for the quarter and exclude the net MSR valuation adjustment, the ratio would be approximately 1.53%. Accordingly, we believe in the third quarter, excluding the impact of any MSR valuation adjustments, we would expect the net overhead ratio to be less than the 1.55% goal that we have for the year.
So with that, I will conclude my comments and turn it back over to Ed.
Thanks Dave. I'll give some thoughts about the quarter and what are thinking of the future is. 2019 is off to a pretty good start, though somewhat lumpy. We had balance sheet growth over $1 billion in each of the last two quarters is pretty darn good. Reputational momentum coupled with a continued market disruption gives us confidence as these growth trends will continue for this foreseeable future. Strong core earnings despite the onetimers related to MSRs in this quarter's credit point.
Looking at pre-tax pre provision pre MSR, year-to-date income was up -- Ii you're looking at -- if you take out -- I'm sorry, if you look at pre-tax, pre provision, pre MSR adjustments, year-to-date income was up over $40 million or 17% from the prior year. As we previously mentioned, year-to-date after tax net income not including MSRs, was up 8% from the prior year. We start the second quarter with $751 million head start on loans as earning asset exceeded quarterly averages by that amount. Average earning assets are $1.16 billion out of the quarter end numbers. So we are -- we realize that the margin -- so we feel good that way.
So as we realize the margin will be under pressure going forward, net interest income should continue to increase in upcoming quarters. Loan pipelines remain consistently strong and we're booking loans on our terms. Although loan bank competition is becoming more and more aggressive leaving some bank competition becoming more and more aggressive. Our brand and market -- our brand plus market disruption is helping us to continue to gain market share. The situation warrants, that is of our circuit breakers, pricing policies and loan policies trip, we will not be afraid to stop the boat as we have in the past.
As we sit now, we do not see reason to do so. However, we have selectively de-emphasized the number of loan product types as I mentioned earlier.
We expect the margin to be under pressure in 2019, but to our expected growth, deposit rate moderation remaining -- retaining a strict underwriting standards of pricing the parameters, we expect to hold our own in this regard. If rates do drop, we move expeditiously to cut our deposit costs. CDEC transaction is working as anticipated and is providing us with a nice source of low cost funding. Net overhead ratios is performing as expected. We expect that number to approach the desired goals as evidenced by numbers calculated when using period end assets.
Mortgage market remains strong. We believe we experienced the worst of the MSR adjustments, knock on wood. We may even get some upside benefits going forward. We continue to cut our costs related to our mortgage business. Credit metrics overall remain pretty good. We do not believe that the second quarter represents a trend, but as we all know, credit cannot be this good forever. We performed at the percentage of our peers thought. Our charge-offs have been a percentage of our peers. We'll continue to look through the portfolio for any and all cracks and exit relationships where set cracks are found. We always remember that our first losses are best loss if we don't try to kick the can down the road.
Wealth management to continue its slow and steady climb. In the quarter we closed on our acquisition of Rush Oak and its subsidiary, Oak Bank, announced the acquisition of STC Corporation, which has approximately $280 million in assets. We expect this transaction to close in quarter three. This deal contain significant cost out opportunities, both the branch overlap and normal operating efficiencies. We anticipate consolidating three out of the five current STC branches, while absorbing many of their employees in our system filling in through normal turnover.
Acquisition opportunities remain plentiful. Pricing for banks and our asset range remains reasonable. You can be ensured of our consistent conservative approach to deals in all categories of business. In short, we're proud of what we've built over the last 27 years and approach the rest of 2019 with confidence we're able to achieve our goal of double-digit earnings growth and growth in tangible book value. You can be assured our best efforts in that and we appreciate your support.
Now we're open for questions.
Thank you, sir. [Operator Instructions] And our first question will come from Jon Arfstrom with RBC Capital Markets. Your line is now open.
Thanks. Good afternoon.
Hi, Jon.
We talk a little bit about the margin that you referenced, margin pressure more than once. And I understand your comments on the ability to outgrow that pressure with some of the loan growth that you've seen, but curious what kind of magnitude you're thinking. And then the other part of this is just your ability to start to lower deposit costs. Do you have to wait for the Fed or can you start to do some of that now?
The overall competitive costs are moderating a bit and we're seeing that and we're reacting to that, but the consumer understands what the Fed does and that's about it, and many of our index rates like LIBOR and like -- actually react before them. So it's hard to cut rate too much now, especially during the growth mode. We've always taken advantage what the market gives us, Jon. And right now, it's given us very good core growth. Our reputational growth is terrific. All that marketing expense we put out pays very well for us, pays off very well for us as shown by the growth that we have.
If we can leverage our overhead structure and have to pay a little bit more on deposits to cover, we've always been asset-driven to fund the loans, that's a perfect situation for us, because we've always been asset-driven. And we can have assets to cover, we can gain more and more market share and work on our way to be Chicago's bank. But I would say that you can't do any material adjustment until the Fed moves one way or the other, and when they do, we'll move very quickly, because everybody else will too.
So this is a good environment for us as we've been able to take advantage of the disruption in the market plus our reputation. Our marketing going forward as Chicago's bank. We feel that this is an opportunity we should take advantage of, but we're not afraid to cut rates. We always look at them, and -- but any big cut won't happen until the Fed moves, because people wouldn't understand it, the market won't move.
Okay. So is the message, similar level of margin pressure until the Fed does move?
That's a good question. I don't believe if the Fed didn't move and there was no change in markets, I don't think there would be a lot of pressure on the deposit side. On the asset side, we've been able to held pretty steady and we held for 4.74% for the last two quarters, but it all depends on what goes on underneath the Fed, what expectations are on the LIBOR and what have you. Dave, you have a comment on this?
Well, some of it's just going to be, where mix of businesses and really what happens a little bit with one year LIBOR, two out there because we have such a big book of life portfolio that's tied to that. So if you can get that to flatten out a little bit and come back up, that would be fine. But I mean, there's a little bit of CDs repricing. But we also have premium finance loans that are still going on at higher rates than they were in the past on the commercial side.
So there's a little bit of a mixed issue here. Our new loans actually came on higher than our historic portfolio rate this quarter. So you have -- but you have paydowns and other things. So the mix is really an important aspect that's out there. So we'll just have to see what comes to in the mix side of the equation.
But I think there'll be some funding pressure out there in the fourth quarter with a little bit of CD repricings -- third quarter, but it isn't material enough that we don't think we're going to grow our net interest income. We really -- given the average that we have in the pipeline -- that average ahead of -- and the period -- head start we have and the pipeline that we have, we're very comfortable that net interest income is going to grow.
Okay. The tail end of the quarter weighted loan growth, what would you attribute that to? Why did it happen later in the quarter?
It always seems the last three or four quarters have been like that. We've always started with a head start. I don't know, whether we empty the boat at the end of the quarter or we fill it up at the beginning of the quarter, but there was actually some spill over this time, the stuff that we expected to close didn't close. That's closing in the first quarter. So we shall see August is always a slow month due to vacations and then July should be good, August would be kind of slow, September should be very good. It just seems to be in a pattern we've fallen into. There's really no reason other than the fact we're happy to have them.
Yeah, we -- the thing I focus on Jon is the pipelines, and the pipelines have been very consistent and as Ed mentioned in his earlier remarks, our closing rate -- our pull-through rate has been fairly consistent too. So I look at the pipeline over a period of time, you can't always judge -- you can't make a customer close when you want to close, but over time, those pull-through rates have been steady. So as long as the pipeline stays strong, we're pretty -- confident that we're going to continue to have good loan growth.
And the pipeline relate just to our commercial and -- commercial and commercial real estate loans. The premium finance loans always jump at the end of a quarter, especially in December and July. That makes some of it up. But our leasing business is doing well. Our niche businesses are doing very, very well also. So those are considered in the pipeline when we show you a pipeline or talk about pipeline numbers of $1.2 billion sort of gross numbers, that doesn't include our niche businesses, which make about third of the portfolio.
Our premium finance business overall has -- since we've been able to get out of competitive edge and not have to collect TIN numbers anymore, is growing very, very nicely on the commercial side. And on the life side, we had a pretty good quarter this quarter and the pipelines are pretty good there too. So all in all, not just the pipeline we report too, but our niche businesses are also growing nicely.
Okay. And I know other people have questions, but just two confirmations, you're saying that construction credit and the franchise credit are both gone or will be gone shortly out of the bank?
Yeah, construction was supposed to close today, tomorrow or the next day, and the other one is scheduled to the close in the third quarter. The additional charge we had on franchise loan is that the first deal walked from us. We had it all closed up and had reserve for our property at the end of the first quarter, and they ran into some issues, and so the second round came in a little bit less. So lumps moved on, it is what it is.
Yeah. Okay. All right. Thank you.
Thank you. And our next question will come from the line of David Long with Raymond James. Your line is now open.
Good afternoon guys.
How you are doing?
Good. Just want to make sure we're clear on the two credits that Jon just mentioned. When you say, you'll be out this week and the other one later in the quarter, that's at the current markets that you currently have. So you're not saying there's going to be a recovery, we're just done with them as they are now?
Yes.
Okay. Got it. Thank you. And then I want to talk a little bit more about the asset yields and almost a year ago, back in September of last year, and you talked about trying to protect your asset yields while rates were still high. Have you guys moved on that and have you over the last 10 months added some swaps and floors to try to protect yourself on the downside if we do get the Fed to cut rates a couple of times?
Well, we did have our -- lengthening of our investment portfolio that we were doing and that's worked well for us on the liquidity management side. But as you know, we've experienced so much growth in the last two quarters that liquidity has gone shorter. So we have not -- when the long end came back down, there really isn't a lot of reason to go out and buyback more mortgage backs right now. We had lowered our GAAP -- our interest rate sensitivity position in accordance with our plan. But now if rates go down again, we're going to start increasing it and will actually go a little bit shorter. It is to other swaps and other issues.
Yeah, what we really did David was, we just allocated more fixed rate loan pools out into nowhere of the product lines and began to build those fixed rate products out. So some progress on that. We did not do some major holistic balance sheet hedge, but we began to devote more of the new loan volume to fixed rate loans than the variable rate loans.
Got it. Okay. And then just a follow-up question -- a separate question here. Regarding the deposits that are related to the 1031 exchange, I think you said you hired a couple of people to the business you brought from CDEC back late last year.
Yeah.
What is the average cost or how should we think about the cost of deposits in that part of the business?
That's right. The average is -- some of that business comes and we maintain what the average balances of going a 12 month kind of rolling average, the rest we sell into the market, make fee income on. So on the interest expense, it's around 70 basis points or 75 basis points right now for that money. If rates drop, we'll obviously lower that too.
So it's good cheap money for us and by adding two salesmen, we raised from eight people to ten people, so it's pretty inexpensive, and we've got the best crew in the world, most knowledgeable value added crew in the world doing this business. So it's a very low overhead business. It provides us with very -- if you take overall cost of opening a branch, the rate is $700 million in deposits or having eight people at CDEC doing it at pretty low cost for us.
Got it. That's all I had. Thanks guys.
Thank you.
Thank you. And our next question will come from the line of Nathan Race with Piper Jaffray. Your line is now open.
Hey guys, good afternoon.
How are you?
I want to start on the balance sheet growth dynamics in the quarter. I'm obviously really impressed with the growth this quarter, and I'm just curious, you know, how much of that is related to that M&A related disruption that you alluded to earlier in the call? And I guess I'm just curious, what inning we are in terms of some of the M&A related disruption that could continue to provide a good runway for these high single to low double digit growth going forward?
Well, I mean, there's two aspects. I mean, as far as the actual acquisition M&A, we have the Oak Bank acquisition and that was about $114 [ph] million at the end of the quarter, that was on the balance sheet, in loans. I guess, we really haven't talked about and probably aren't going to disclose the amount of business we got from the other disruption in the marketplace, but it is -- I don't have a firm number in front of me, but we are getting our fair share of looks at deals and closing on deals in the middle market space.
And so we see that continuing and we see that disruption just continue to be good for us. But we haven't -- we haven't quantified a number that we've disclosed on that. But it's not just one or two deals, obviously it's -- we're seeing deals every week that we're getting shots at.
Okay. Understood. And if I could just change gears real quick and think about expenses. I understand you guys have been through a couple of phases of what you're doing on the residential side of things, but just curious if you guys are looking at any other kind of cost cutting or expense initiatives in other areas of your franchise at this point?
Well, we always look at expenses obviously. On the mortgage side, this is a longer term play. We -- because of the nature of the change in the business with all the regulatory stuff that came through with that trend, we have to bring down our cost of doing business. The largest cost we have is our commission structure.
By changing our -- and we don't want to deemphasize the old way of doing it with the mortgage broker type guys out there, our mortgage originating type guys would get commissions who -- but our new front-end in marketing, our -- the new front-end to all of our market area here in Chicago should help change the channel to more and more consumer direct as marginal volume and that we would expect the volume from our traditional approach to continue and the consumer direct to continue that marginal value to us where commissions are in half.
We also have gone off shore with some non-customer facing concepts in the mortgage side, which has helped. We also evaluate robotics on that side. We were also looking at number of proof of concepts on the robotics side in all of our business to cut costs and work that is just routine, non-customer facing where it's just filing and directing and that sort of stuff. So where our new Director of IT who came out almost a year ago has really done a wonderful job for us in terms of identifying opportunities to save costs and bring efficiencies and so many related to processes that we have, and robotics will be a big part of what we do.
But we are in a growth mode and we are opening a number of branches and we feel that we have to take advantage of the momentum -- with the brand momentum that we built where our branches that we've opened are all doing as well as can be expected, some are doing much better than expected. We opened one in Evanston that's over approaching $500 million in deposits and little over a year.
There are a number of good markets we're not in that we need to get in, there we have plans to open in, but we are a growth company. We just have to maintain that -- try to get down to that 150 number and hold it there and balance everything off of that. If we do better, we'll do better. But we're always looking at that. We're concentrating now on the IT and robotic side of things and hopefully that will -- and procedures and processes that we've gone. We did a full study of many of our procedures and processes and have identified any number of items where we can improve those. So we're always looking at that.
Okay. That's helpful. I appreciate guys for taking the questions.
Thank you. And our next question will come from the line of Michael Young with SunTrust. Your line is now open.
Hey, good afternoon.
Hey, Mike.
I wanted to go back to maybe the NII question just based on your most recent disclosure. You kind of disclose a 10% reduction in net interest income from 100 basis point immediate reduction in rates. So should we kind of look at that on a pro-rata basis and assume each rate cut is roughly a $28 million headwind or 10 basis points to NIM or is that too severe?
Well, that's -- yeah, I think that would be a little bit too severe. I think you probably need to look at the rapid scenarios more likely.
Okay. And then maybe just back on the deposit side, can you just talk about any actions that you've already taken to reduce deposit costs? I know you talked about what you would do potentially if the Fed does cut rates, but have you already kind of shortened CD links or pricing? Could you just talk a little bit about that?
A little bit. Well, you know, the market has gone down a little bit where we are doing that. But again, it's -- we're in a growth mode and we open a new part of our prices when we open a new location is to offer a bundled package of accounts with a teaser account in there. And we pay a little bit of a higher rate on the teaser account and -- but that's becoming less and less of an issue because of our overall size and marginally it's not that big but we just -- we follow the market. Whatever the market does, we will follow. We don't overpay for the market for most part other than the -- where we have a promotion going on in a new location. Fair enough, Dave?
Yeah, I think I mean some of the -- we do have new locations. We have cut the promotional rates that we're offering out there on some of these products. So promotions that we're offering five, six months ago, we're certainly less than that. The brokered market has come down and the -- a lot of municipalities follow that broker market. And so as those rates have come down, the CD rates at some of our municipalities require has come down also.
So there has been some reduction in the CD rates that are offering just because of the market pressures out there. So backing off a little bit, but as Ed said, until the Fed moves, we haven't seen people cutting dramatically. So competitively that we haven't seen that happen other than sort of the wholesale CD municipal market and the like.
One of the things that we're emphasizing now is demand -- obviously free demand deposits. We are instituting a new -- I'm going to be technical here, but a new piece of software which should open up a lot of doors for us in terms of larger demand deposits and payment processing. And we know of a number of clients that are waiting for that to go live in the third quarter. When it does, we -- and from my understanding, from our folks, us in the big -- and the big guys are the only guys who have it. So as it relates to the competition, we will have to go all against. We have a number of clients waiting for that to come on line and that could help on the demand deposit side.
So if we can get free money and that's the best way to go and that has slipped as a percentage of overall deposits lately as rates were higher, rates get a little lower, people won't be as elastic to that and we can -- we're really working on building demand deposits. So that should help mitigate some of it too and we have a number in the pipeline that we think it will be very helpful to us.
Okay. And if I could sneak in one last follow-up just on the asset quality piece. The commercial premium finance workers comp loan. Can you just talk -- say how big that total book of business is and then what was sort of idiosyncratic about that loan that we should not extrapolate that to broader issues?
That loan was a big loan. It was a -- it was one of the larger ones, it was to a large staffing company. The interesting thing about this one or why it turned a little bit sideways was, it was the workman's comp. It was a -- over $20 million dollar loan, everything but 70 -- everything but three was returned to us -- or five was returned to us. We've paid down a number -- a number that already gets to the number we charged-off.
So what happened was the -- and this is the only time I've really ever seen this happen in the 20 something years we've been in existence is that the captive, it was canceled, but they stayed with the captive when they can cancel it. Their problem was that the staffing company and the timing of staffing companies you bill and you get your money later with rises in minimum wages they had a cash shortage, they missed the payments, we cancel that, they stayed with it, they redid it with the captive. The captive gets to hang on to it. It doesn't run by the same rules as the other guys.
So there's still -- we believe a large amount of return premium to come, but we can't confirm it. And we know there'll be some shortage in the company is a viable. I mean, it's $21 million revenue company, they have been making $50 -- they may be $100,000 payments. They're going to cut to $50,000 for the next couple of months and back to $100,000 in October to cut that short. So we think we'll get it back. First time we've seen one with this captive. The captive sort of issue where we can't confirm the premium because we can't confirm the return premium, we write it off. That's just our rule.
And that's the reason you can't confirm it. And it's just a pool of loan -- pool of funds that are sitting there that are available to cover workers comp claim over a period of time. So if the claims are higher, there's less of a pool, if claims are lower, there's more of a pool. So, again, as I said, we've -- it's unique because it was larger, it was with the staffing company. Staffing companies have a much higher level of workers comp.
It was an insurance company who asked to go through audit and give you a return premium.
Right, because it's in this captive pool. So it's very unique. This is not our main business. It is a very unique situation. We don't have another one like that in our portfolio and we do expect to get recoveries on this going forward. So again, it's a very unique asset. It is not a common asset in the premium finance book. And there's not another one that has the same characteristics.
Never seen it in the 27 years we've been in business. So it's just the timing of that size. It's just -- we do -- we have that happen a lot where we can't get it confirmed premium, we charge it off, look good on recovery. This is the big one, not with captives but with others, that's just our policy is a big one that we did it.
Okay. Thanks for all the color.
Thank you. And our next question will come from the line of Brad Milsaps with Sandler O'Neill. Your line is now open.
Hey, good afternoon guys.
Hi, Brad.
Hey, Ed, you've addressed almost everything. Just curious the -- any further thoughts on capital management? Obviously, it sounds like your organic growth is off the charts, but any further thoughts on a buyback given the pressure on the stock or just any other further color on M&A as you kind of think -- through the back half of the year and how you balance all that together?
Well, we raised a $300 million, which should hold us for a little while. The acquisition market remains active. They're lined up again like planes overall here, gestation periods are long, pricing seems reasonable. By the time you get in and take a look at them, some of the opportunities that we're seeing, their portfolios although appear current would not take a downturn very well if you follow me and we'll walk away from those.
So we're very active in the market. There is still a number of smaller strategic that move us into areas that we're not in. We'll continue to look at them. But we're loss of things to do in that regard. But we've always been very circumspect about how we approach them. As to stock buybacks, we -- we consider them all the time and we'll leave it at that.
Okay. That's helpful. And then I just wanted to follow-up on the commercial premium finance business, you do typically get a boost in the second quarter, this was maybe a little bigger than it has at the last two years. Do you attribute most of that to the tax ID number situation that you've worked through or there's something else kind of more structural going on at that business that's driving a little bit better growth?
I would say it's mostly the tax ID number. Average ticket sizes have moved a tiny bit not a lot, but I would say it's mostly being able to be aggressive. We were like a punching bag for a little while for the non-bank competition on the TIN number issue, and now we're able to punch back as our levels of service we believe are much better than our competitions and when we're on a level playing field, we can beat anybody.
So we're aggressively going to get back to business we have lost. During that period of time we got to do it, we held our own, but we lost about 10% of our volumes from existing agents and we had to build it other ways during the period where we had to collect TIN numbers. We'd run back and get those agents back. So hopefully that we've had record years here, record months in the United States and Canada is doing very well also.
So we're going to -- we're hoping to be number one premium advanced company in Canada over the next year or so. We're very excited about our opportunities there. So a lot of it is just getting on a level playing field and being able to compete again and our service level is so much better than the others. Nice rise in ticket sizes would be welcome.
Great. Thank you guys.
Thank you. And our next question will come from the line of Chris McGratty with KBW. Your line is now open.
Great, thanks. I'm going to go back to Brad's question on the capital management for a second. Is the lack of a buyback authorization procedural meaning getting the approval and announcing it or the kind of philosophical at Wintrust that you views ourselves as a growth company irrespective of kind of valuation at 135 a book. I'm just kind of interested in judging the probability that we actually get one versus funding growth organically.
I've read about that comment in any event, to be honest with you, but we have been a growth company. We've grown very nicely. We needed the capital. We need the cash to stay around to support our growth, but as I said, we review it all the time and we never know as where it would probably depending on the situation of the time we do review the facts and we would act accordingly.
Okay. And then, Dave, maybe on the margins, one for you. Kind of looking at your margin pre-tightening by the Fed, it was kind of in that 3.30% range, call it and now we're kind of mid 3.60s. If I kind of put that together with the fact we've had nine hikes and the market's pricing in a couple down, is it fair to assume that, if the forward curve plays out that your margin would kind of head to that mid 3.40s range? Is that kind of, it's a little bit more than that 10 basis points a hike or per cut that you talked about before, but anything structurally different with the balance sheet today that wouldn't confirm that?
Well, again, it gets a little bit in the mix and the like. I think given the structure of the balance sheet now, you would see some further compression on the margin whether it would get all the way down the 3.40%, it truly going to depend on the competition and the mix of our business and the shape of the yield curve, but I think there's some pressure. But again, we focus more on the NII.
If we lose a few more basis points in margin, but have this high single digit, low double digit loan growth like we've had the last couple of quarters, then we're going to grow our net interest income, which is what grabs to the EPS. But if nothing changes out there and yield curve sort of stays inverted and lower, then yeah, I think given the position of our balance sheet, we're going to see some pressure, but we're very confident we can offset that with the growth in the pipelines that we have and grow net interest income and just be prepared for when the yield curve gets more favorable.
Yeah, as I said earlier, Chris, we always -- rates get lower, we increase our interest rate sensitivity position by design. With the probability rates, stats staying -- maybe they stay low forever, we're wrong, but as the margin does cut a bit, you'd hate to lock in that spread, you know what I mean. Just to save a little bit of dough now. So we do balance it and we'll do the best we can. Our growth should add to net interest income without -- we want to make money. When rates go up, inflation is up, you need to make more money and we will deal with probabilities on each side, which way rates are going and so -- a little margin hit would probably be more than offset by the earning asset growth we're experiencing.
Okay. And then the overall, if I heard you right earlier, the overall comment is still double digit earnings growth. Is that what you said and is that -- number one, is that correct? Number two is that, you think you can get double digit earnings growth even with this quarter? I'm trying to understand.
That's the plan, not given up.
All right. Thanks.
Thank you. And our next question will come from the line of Brock Vandervliet with UBS. Your line is now open.
Oh, great. Thank you. Dave, if you could just circle up on the loan to deposit ratio. I notice that's 92%, that's above your 85% to 90% guide. I remember a year or so ago, you pulled that down. How do you look at that now versus your -- being in growth mode?
Well, I still think long-term our goal is 85% to 90%. We were at 90% on period end loans last quarter, but there's really just no place to put the liquidity now on the investment side. So as some of those are rolled off, we've opted to take the yield on the loans versus the investments. So in the short run, we'll probably run higher than the 90% range and if we can get some slope back to the yield curve, where we can put some of that liquidity to work on the investment portfolio, then we'll go back to that.
But as Ed mentioned earlier, it just -- there's really no acceptable investment vehicle out there right now from our perspective to plough a lot of money into. So we've got a good pipeline out there right now. We think there are good quality loans, good customers, there's market disruption, take advantage of it, run a little bit higher. I mean, it's not unusual. I mean, we've really been at that range for the last few years. So it's really kind of doing what we had done, but not push. If you're going to push for that 90% mark, you really need someplace to invest the funds versus just let them sit at the Fed overnight.
And the 85% to 90% is just historically from a liquidity standpoint. I mean, the -- I'm a true believer the risks of banking haven't changed since the Medics opened their first bank 600 years ago, interest rate risk, liquidity risk, credit risk or what kill you. So liquidity risk is, you can always get liquidity till you need it. We know that if we've expanded our liquidity lines in places and just to kind of, we haven't sat there and said we can live with this and live with that risk.
We've done things to mitigate that on liquidity lines and things like that. So we're comfortable not as comfortable at 85% to 90%, so we're comfortable and because of the short-term nature, the premium finance portfolio, we're comfortable that our liquidity is not an issue. And given the fact we're 95% core funded and have not relied on institutional funds, we believe we can cover that. So as Dave said, there's no reason to go out and push it right now. If we can cover they make me comfortable on the liquidity side, I'm happy to be -- I'm happy, but I'm okay with being up above our desired range.
But I get the low securities yields and limited opportunities to redeploy. Is there anything more you could do in terms of retaining your own mortgage production to lessen that asset sensitivity?
We could, but, I don't want be struck with the 30-year mortgage at those rates. And I want to lock in these rates now There will be there. There is a contemporary view out there that the 10-year is going to go 3% in the next 12-months. I tend to agree with that, but do I know? We don't guess rates. All I know is that I'm going to lock -- I don't want to lock in of 30-year fixed rates at these low rates.
Doesn't make a lot of sense, does, we maintain the servicing on in footprint loans. Loans that we can't sell, we put on the books as an arm basis, so that helps us a little bit, because we get a premium rate on them and they're subprime loans, they're just loans that -- a guy might be self-employed or with all the new rules. We're usually able to place him in one or two years out into the fixed rate market. But we are keeping -- we are doing a number of portfolio based arm loans that are base at premium in the market, which you will fix the rate for a couple of years, I'm in no rush to put 30-year loans on now.
Okay. Thank you.
Thank you. [Operator Instructions] And our next question will come from David Chiaverini with Wedbush Securities. Your line is now open.
Hi, thanks. Couple of questions for you. First, circling back to credit. You mentioned, you didn't have much exposure to non-relationship PE sponsors, but I was curious if you could disclose how much exposure you have to non-relationship PE sponsors, as well as sponsor finance in general?
Sponsored finance. I don't have that number here. I know that there's probably two or three relationships that near that no relationship with the PE firm, and we were in a participation. We'll be looking to exit the first opportunity. Not that there's anything wrong with them, I just -- I don't like the way they setup, I don't like the way it works and your lack of control. So very material, we do have probably a stable of 12 PE firms and we have wholesome relationship with the deposits, and we're not really a beast of burden. I would imagine that portfolios in the $300 million to $400 million range somewhere in there.
Got it. And for those construction company and the franchise deal. How seasoned were these loans? When were those loans made?
The franchise deal was part of the GE portfolio we purchased a couple of years ago. We three banks had bought when GE got out of the business. So we had been in that business. So that portfolio is about a $1 billion and this is just a one-off. The rest of the portfolios is performing very, very well. The construction loan deal we have a contractors, engineers and architects division that handles this. The deal we were in the deal when it had a different lead agent, when it was owned by the guys who started it.
It flipped, it was -- and it was working fine, it sold to the PE firm and the agent flipped. And that's we should read, the mistake we made, we should have jumped out then. We didn't because the guy who runs our architect and engineering division had -- was part of the previous lead bank and knew the client very well. They got comfortable with that, but the problem was we didn't -- the private equity firm lost a ton -- they put like $300 million in the same, tried to keep it alive. And we're being taken out by surety companies because they get screwed, if they don't do it.
So it just was -- it just -- when it switched we shouldn't have jumped in with the new agents. And when it was bought by the private equity firm where we have been twice removed at that point in time. And so the relationship had been there with our guy for maybe 10-years with Wintrust for probably two-years before. And the private equity, it just had kind of moved away and we lost touch. So it made sense at the time, we all take the blame for it. That's one good thing about our organization. When something like that hits, you got 50 guys raise their hands saying they screwed up. But let them learn as it could be a very cheap wakeup call when you get down to it.
And what type of construction did this company focus on? Was it residential, commercial?
A very large general construction company that's all I'll say.
General, got it. And then shifting back to one more net interest margin question and I'll ask this somewhat different way I received the email question from an investor. For each 25 basis point rate cut. How much NIM pressure would be reasonable to expect?
Yes. I don't -- Dave, I don't think we've disclosed that. So I -- we will think about maybe doing that disclosure going forward. But again, I'm -- I don't think I'm going to answer that, I think right now, I think there's certainly some pressure, but there are leverage we can take. We have CD promotions and the like that we can change, it's going to depend on the growth of the balance sheet and how much funding we need to bring in that excess that we need to fund it with, it's going to be a mix of business issue, competitive pressure and the like.
So I think our position here is -- there is going to be some margin pressure going forward based on where we stand right now. But given the growth that we had last quarter and the pipelines we have this quarter, we're very confident we're going to grow our net interest income nicely in the third quarter.
Understood. Thanks very much.
It all depends on the shape of the yield curve. It just -- one thing could move and the long end could go up, and then life is better. You never know. It's -- the yield curve is just so strange these days and trying to figure out.
Completely agree. Thanks, guys.
Thank you. And our next question will come from the line of Terry McEvoy with Stephens. Your line is now open.
Terry?
Hi, yes. Question for Dave Dykstra. I was wondering if you could be a bit more specific on the promotional deposit pricing. How much that contributed to the increase in all-in deposit costs? Maybe just some context of what market you're really looking to grow deposits. And then maybe as an example that is Evanston branch that Ed mentioned. What's the, kind of, all-in cost of funds there, which is relatively new branch versus a more established location?
Well, I'm not going to get into a specific locations, but the promotions that we've been running recently have generally been a little bit over 2% promotion rates and probably $500 million, $600 million of deposits that we've raised of that during the quarter. So if you're looking at a $30 some billion bank and its $500 million to $600 million of promotional rates that are slightly over 2% that's sort of the impact. I mean, you can run the math, I haven't figured that out to the basis point, but that -- that's sort of what we did this quarter, $500 million, $600 million of promotional accounts at a little over 2%.
Thanks. That was in my list. Appreciate it.
Thank you.
Thank you. And I'm showing no further questions in the queue at this time. So now it is my pleasure to hand the conference back over to Sir Edward Wehmer for any closing comments or remarks.
Thanks everybody for listening. I know it’s a lumpy quarter. If you have questions, Dave and I and David Stoehr are available to answer if you have additional questions. And we’d look forward to talking to you in three months. Thanks so much.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody have a wonderful day.