Wintrust Financial - Earnings Call - Q1 2020

Transcript

Speaker 0

Welcome to the Wind Trust Financial Corporation's First Quarter twenty twenty 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 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 ks and any subsequent filings on file with the SEC.

Also, our remarks may reference certain non GAAP financial measures. Our earnings press release and 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.

Speaker 1

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 new WinTrust President, Rich Murphy, Vice Chair and Senior Lending Officer, Kate Bogie, our General Counsel, and Dave Starr, our Chief Financial Officer. Kate Bogie is very worried because we're all in different places and her shock collar doesn't come that far on 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. I think there'll be a lot of questions arising just because of the times and what's going on. So I thought it better to have more reinforcements around.

The format will be, for the most part, as usual. However, I'm going to try not to parrot what's already in the release. It should leave more time for the questions. And as I said, I'm sure you'll have a number of them. I'm going to give some general comments regarding our results.

Dave Dykstra will provide a more detailed analysis of other income, other expenses and taxes. Back to me for a summary of comments and talks 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, seven days, we stood up a front end portal for a PPB from scratch. We opened the portal, we're the only ones open on the evening of April 3, first day available, and it actually worked flawlessly.

The two weeks thereafter, with all working from remote locations, processed 8,900 applications for $3,300,000,000 That put us in the top 15 of banks in the country in terms of total volume. Median size of these loans was $85,000 Our estimated fees to WinTrust before round two approximated approximately $85,000,000 Our decks are cleared for round two. We already have close to 2,000 applications, another $9,000,000 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. These people worked tirelessly all night. One guy they called a wolf after they saw Pulp Fiction.

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 $63,000,000 down 27% from the fourth quarter, but for obvious reasons. Our earnings per share are $1.4 If you take our pretax, pre provision, pre MSR valuation income, it's over $150,000,000 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 $100,000,000 we'll have in PPP income, which will act as a reserve for us a cushion for us, we believe, for any eventuality that may come along. Net interest margin held up pretty well as we were able to drop our deposit costs rapidly. We 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 earning asset yield, 11 basis point drop in liabilities.

Net interest income was essentially flat. Really, one less day was offset by $925,000,000 in average earning asset growth. We expect the core NIM, that being net interest margin without PPV effect, to drop to the levels previously disclosed in past for future quarters. However, the amortization of PPP, the terms of which are in question, but no longer than two years and expected to be much shorter, will have a material positive effect on both the margin and the net interest income, even in the worst case scenarios. On to the provision of credit quality, adopted CECL.

And so early, I think as I picked the wrong quarter to quit stiffing glue, FASB certainly picked the wrong quarter to put CECL in effect. We adapted CECL with the day one adjustment of $47,000,000 the first quarter provision of $53,000,000 which exceeded the fourth quarter provision by 45,200,000 Our ending reserve was up $95,000,000 from year end to now, to $253,000,000 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 offs were eight basis points or $5,300,000 in Q1. Credit quality remained relatively in good shape of the same period over period.

On an apples to apples basis, NPLs increased due to three factors. First, the pool accounting for acquired loans went away with the adoption of CECL, adding about $35,500,000 to the total. Second, approximately $21,000,000 of new non accruals were added in the normal course of business, largest of these being an SBA loan where we should get good recoveries, but we still have to put it in non accrual. These assets have been marked appropriately and will be resolved relatively quickly. Finally, commercial premium finance loans over ninety days delinquent and still accruing around $5,000,000 due to 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. And 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 a minor tick up in charge offs, but not as much as you would imagine. That's at least been the case in the past. We had hurricanes, fires, nineeleven, etcetera. We have to see a material effect of the current crisis on our credit quality. The PPP loans, coupled with interest and principal deferrals, have been granted to our borrowers and other customers.

Regulators are really cooperating on this, and we believe that this should be able to weather the storm, at least by time for our borrowers, coupled with our highly diversified portfolio and history of loan losses and troubled times vis a vis the peer group, we're cautiously optimistic. However, at this point, as a toss-up as to if and when the stress will appear in the portfolio. With our expected core earnings augmented by PPP earnings, adequate reserves and capital, we feel adequately situated to take on whatever comes our way. Look forward to your questions in this area. Dave's going to cover other income other expense in detail.

But I'd like to suffice it to say that we had a great mortgage quarter, notwithstanding the $10,400,000 in mortgage servicing valuation expense. I might be jinxing this, but I think they can't go down much more. We have to be close to the bottom on mortgage servicing rights. Our net overhead ratio was 1.33%, down 20 basis points from fourth quarter twenty nineteen, more than made up for the drop in the net interest margin. On the balance sheet front,

Speaker 2

we

Speaker 1

grew total assets grew $2,200,000,000 Our maturing assets were up $925,000,000 Our loans were up $1,000,000,000 which Murphy will take you through the core of that. But half of that was probably related to line draws, which happened very quickly. We've seen abate. At least the initial fear of everybody's going draw their lines has kind of abated a little with the work of the government and other opportunities. The rest is across the board.

And we're happy to break that out for you a little bit later. We start the quarter with $870,000,000 of loans where the period end exceeded the average. So we're going start with a head start. The second quarter, that does include the PPP loans, which as you know, now with Round two coming on, would be close to three point we funded about $3,300,000,000 and we'll have about $3,700,000,000 up to $4,000,000,000 depending on how quick the window closes in round two. Deposits grew $1,000,000,000 in the quarter.

We feel very good about our liquidity position right now. We will be able to take advantage of you know, we had good liquidity to begin with. We had bulked up in anticipation of what was going on with our MaxSafe loans where we offer 15 times FDIC coverage because of our 15 charters and other wealth management opportunities, including CDEC, which we expect to slow down a little bit, but still have $1,000,000,000 of CDEC, which are deferred 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, remain 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 for new and just the word-of-mouth is spreading that, you know, WinTrust came through and our relationship style of banking really works. So our pipelines are good. We have to remember that good loads 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 turn it over to Dave, who's going to provide some detail on other income, other expenses and taxes. Dave?

Speaker 2

All right. Thanks, Ed. As normal, I'll just briefly touch on the noninterest income and noninterest expense sections. In the noninterest income section, our wealth management revenue increased $942,000 to a record $25,900,000 in the first quarter compared to $25,000,000 in the fourth quarter of last year. And it's up 8% from the $24,000,000 recorded in the year ago quarter.

Overall, we believe that first quarter was another solid quarter for 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 $48,300,000 in the first quarter from the $47,900,000 recorded in the prior quarter and was up a strong 166% from the $18,200,000 recorded in the first quarter of last year. The company originated approximately $1,200,000,000 of mortgage loans for sale in the 2020.

This compares to a similar $1,200,000,000 of originations in the prior quarter and $678,000,000 in the first quarter of last year. The increase in the revenue from the prior quarter results primarily from $17,400,000 of derivative income associated with the mandatory commitments to fund mortgage originations compared to a $1,000,000 derivative loss on 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 $10,400,000 and that compares to a $1,800,000 positive MSR adjustment in the 2019. And we also had $5,100,000 less of capitalized mortgage servicing revenue compared to the prior quarter. 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 $1,400,000,000 of mortgage loans at 03/31/2020. And that's roughly $1,000,000,000 more in mandatory commitments to fund than we have averaged over the past four quarters. So it hasn't really been a big adjustment in the prior quarters because the amount of loans that we had mandatory commitments to fund were always fairly stable around a few $100,000,000 and it just jumped up by about $1,000,000,000 So a positive momentum in the mortgage business and obviously that pipeline bodes well for closings in the future quarters. The mix of the loan volume 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 and the strong pipeline. Table 15 of our earnings release provides a detailed compilation of the components of the origination volumes and the production revenue and MSR capitalizations pay downs and valuation activity. The company recorded losses on investment securities of approximately $4,400,000 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, had big drops at the end of the first quarter so those valuations declined.

Other non interest income totaled $18,200,000 in the first quarter, up approximately $4,200,000 from the $14,000,000 recorded in the prior quarter. The primary reasons for the higher revenue in this category include $3,900,000 of higher swap fee revenue and 2,100,000 of net gains related to sales of certain loans and leases. And this was offset by a $2,700,000 of lower BOLI income with 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 expense totaled $234,600,000 in the first quarter, down approximately $15,000,000 or 6% from the prior quarter. A number of factors contributed to the decrease. Salaries and employee benefits expense were down $9,200,000 from the prior quarter. Lower levels of advertising and marketing expenses of 1,700,000 compared to the prior quarter. We had $1,400,000 less of OREO expenses.

And we had $3,100,000 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 two small pension plans. And then those aforementioned changes I just discussed were offset by $2,800,000 of higher FDIC insurance assessments due to the rebates from the 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 categories, as I said, declined by $9,200,000 from the prior quarter. The majority of the decline in this expense category related to reduced incentive compensation accruals, which were approximately $8,700,000 lower than the prior quarter with that change being driven largely by long term incentive compensation programs, which are forecast to be negatively affected by the impacts of the current economic conditions brought on by the pandemic situation.

Additionally, salaries expense were down by $1,600,000 from the fourth quarter. The primary cause of the decline was the $2,200,000 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 $1,100,000 during the quarter due to 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 2019. This was due primarily to approximately 1,400,000 of deconversion charges related to the Countryside acquisition versus only $558,000 of conversion charges related to the SCC Capital Bank system conversion that happened in the prior quarter.

The additional operating cost of data processing related to the franchise also contributed to the increase. For your information, we also expect to incur slightly more than $3,000,000 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, etcetera. So our first virtual conversion went off well. FDIC insurance expense, as I mentioned, was up $2,800,000 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 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 $6,700,000 in the first quarter compared to $7,600,000 in 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 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, it's averaged $6,800,000 So the 6,700,000.0 we incurred this quarter is relatively in line with our typical amount. Advertising and marketing expenses in the first quarter decreased by $1,700,000 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 due to the 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 $1,300,000 on the sale of a piece of OREO property. And that gain was an amount that exceeded the aggregate cost of OREO expenses and negative valuation charges on other pieces of OREO. And the miscellaneous expense category totaled $21,300,000 in the first quarter compared to $26,700,000 in the 2019, a decrease of approximately $5,300,000 The decrease was impacted by approximately $2,700,000 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 2019.

And so they were essentially flat. The net overhead ratio, as Ed mentioned, stood at 1.33%, which is down 20 basis points from the 1.53% recorded in the prior quarter. The ratio benefited from strong balance sheet growth, strong mortgage banking results and lower non interest expenses. And we would expect that net overhead ratio to stay above below with a 1.4 in the near term due to 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.

Speaker 1

Thank you, Dave. 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 in Groundhog's Day.

In fact, my alarm clock, which is Alexa, will play at least she didn't turn on plays Sunny in chairs. I got UBabe every morning when I get up on purpose. Quarter and all was really it was really a pretty good quarter given the current environment. As I said, the FASB picked all the quarters to adopt CECL. I think that 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 they relate to PPP loans, credit modifications, new credit will hopefully abate credit issues going forward, least the financial effects of those will. We're not naive enough to think that there will not be some credit ramifications to the situation. Past history, however, would say that these should affect us less than our peers due to our portfolio diversification and our conservative underwriting culture. So these losses will be a function of how fast we get back to work.

Earnings from PPP loans will provide a wonderful cushion against these unknowns. Time will tell, but we feel pretty darn good about where we're at. We said before the crisis that we need to grow through 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.

You think about travel entertainment and no baseball season and save a lot of money there. But I again, I can't say enough about the WinTrust crew and our ability to ride this out and do it with our shareholder all our pillars of mine, our shareholders, our customers, our employees, and the communities that we serve. And you can be assured of our best efforts in getting through this crisis and continuing to build WinTrust in the solid way you've known we've always done it. With that, I'll have some turnover for questions.

Speaker 0

Our first question comes from Jon Arfstrom with RBC Capital Markets. Your line is now open.

Speaker 3

Hey, thanks. Good morning, everyone.

Speaker 1

You still stiff of glue, John?

Speaker 3

Hope you have your mask on, Ed,

Speaker 1

when Ed95s, you're doing baby.

Speaker 3

Yeah. I want to talk about credit. But I guess, first, Dave, you guys talked about the revenue line pretax pre provision. And on mortgage, I just want to make sure I understand what you're saying. You had the $17,000,000 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. It's possible those sustain this kind of revenue momentum in mortgage. Is that fair?

Speaker 2

Yes. Well, I think the pipeline is still pretty strong. So I think we're still going to it 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, it's sort of been a relatively stable revenue quarter, first quarter to second quarter.

Speaker 1

Well, driven will wash itself out and then we'll have the regular gains from this quarter, especially with the hangover risk from quarter over booked to from locked to closed.

Speaker 2

Yes. We expect usually, you don't have that much visibility going out, but the locked terms have lengthened out 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 on sale of higher level of production that we sold will be up a little bit.

So probably offsetting to a great degree. Yes.

Speaker 3

Okay. And then, looking at picture credit, at one of your comments, 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 you give us the Ed Wehmer view of kind of the near term, medium term portfolio stress that you expect to see?

Speaker 1

Well, I'll give you the 20,000 foot level, and then 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 stopping for two or three months. I mean, we're giving two or three we're giving three month 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, we've almost $3,800,000,000 of those out there to our clients and not clients alike, but to the majority of our clients, buys them two months of a 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 that if we can get out of this in two 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 if you think about it, if a guy if you have mortgage and you give a three month deferral, that guy's okay. Especially if they've a PPP loan, he's getting paid, it's put on the end, no problem. If you think about a commercial multifamily guy, I need rent abatement. Okay, I need principal abatement. So the whole world's stopping for two or three months.

And I think that any stress that comes through is going be a hangover at the end. In the event that we can't get out, you know, if it's going to take six months to get out of where we're at, then I think you're going have issues. Unless the government comes in and provides more money into the system. Which I think they'll do, and say really have caused it in a lot of respects by a shutdown. I think that they're committed to keeping this going.

Then you've got to worry about rates increase. But we'll worry about higher rates down the road and where 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?

Speaker 4

Yeah. 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 ask the question, how long will it be before people want to go back into a movie theater, you know. And that's a good example of where the uncertainty is pretty big. But as it relates to our high impact industries, we brought you know, and we gave you a lot of detail there. And obviously the one that jumps out at you is the franchise portfolio. Generally speaking, you know, 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 to 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 deferments and PPP opportunities.

So, generally speaking, those are holding in pretty well. But clearly, that is a large segment in the portfolio at just about $1,000,000,000 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, you know, we just don't know right now. So time will tell.

Speaker 3

And then just one small one. The premium finance non performers just kind of keep creeping up. Is that administrative or is there anything new there?

Speaker 1

Yes. That's what I was saying earlier. You have when you have these crises, and again, you're governed by each state, the regulation. Know, in Florida, whenever there's a hurricane, they you cannot cancel policies. So what you've got is policies that are, you know, people haven't made their payments that would 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 it would have been canceled retroactively. You can't take their you can't lose your gut 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, you know, 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 in. So you get your principal back, maybe not all your interest or late fees, but you get a lot of that back anyhow. So you're going to see those keep popping up a little bit until the crisis is over.

But again, it's not usually a loss situation for us.

Speaker 3

Okay. Good.

Speaker 2

Thanks, David. Appreciate it.

Speaker 1

You bet.

Speaker 0

Thank you. Our next question comes from David Long with Raymond James. Your line is now open.

Speaker 2

David. Good morning, everyone.

Speaker 5

How are doing? As a fellow fan of Airplane, I do have to commend you on your choice of remarks, the Lloyd Bridges quote from the Sniffing Loops. So get a prize for calling it out.

Speaker 1

I kinda like the wolf one better, though. I mean, you ever see Pulp Fiction? The wolf is awesome. Harvey Kankal? Indeed.

Yep. Indeed. So, anyways, the you know,

Speaker 5

I wanted to follow-up on that, on the premium finance business. I know you just talked a little bit about the seeing a bit of an uptick there, but the reserve levels in general are always very low for that business. Life, I think you're at one 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 the situation, absent COVID-nineteen, that you may or could lose money in that business?

Speaker 1

Well, the life insurance business, knock on wood, we've never lost a dime. So on the commercial business, I'll let Dave and Murph take you through that.

Speaker 2

So Dave, on the commercial business, generally, we're financing commercial insurance policies for workers' comp, you know, 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 is sort of a standard down payment. And you finance those over generally nine to ten months.

I think our average is just slightly over nine months. So your collateral is the unearned premium held by the insurance carriers, are generally high rated insurance carriers that we do business with. So if that premium, which is your collateral, amortizes onethree 65 or onethree 66 in a leap year, you know, per day and amortizes away and 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 ten 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 to tell them that they've been delayed or defaulted on their loan. And then you can cancel the policy. So that may be twenty or thirty 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, you know, fleet auto. Some of those policies are auditable. And to the extent that the estimated premium on the front end was off a little bit from what the actual premium was when they audit the payrolls or the fleet size, then you can have some losses.

Those are the general reasons for it.

Speaker 1

Since you'd have a potential fraud or insurance company going bankrupt, in case of a bankruptcy, we monitor the M VEST reports and have credit limits for each insurance company. With nine month full payout, it usually takes more than nine months for an insurance company to go down. So we can stop doing business and 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, you know, for a time, maybe $6.07, $8,000,000.

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're allowing you to backdate. Once we get through it, they always allow you to backdate to when it would have been. The insurance company is the one who really kind of loses on that situation, but not so much because claims usually aren't that high. So especially in something like this, in terms of a hurricane and the like, maybe a little bit different where they have higher claims.

But that's how it usually happens. And we've averaged around 20 to anywhere between fifteen, twenty five basis points normally on that. And that's how we come up with that number. And again, knock on wood, dollars 7,000,000,000, we haven't lost a dime. So I think we're okay.

Speaker 5

Excellent. I really appreciate the color there. That's helpful.

Speaker 6

And then when it raise as it

Speaker 5

relates to the franchise finance side of things, you you indicated that about 85% are quick service. Are there any other of the remaining exposures, that you consider much riskier or, you know, anything that you can point there, there with the remaining part of that portfolio?

Speaker 4

Yeah. I mean, the dine in restaurants is really where I think you're gonna be most impacted. You know, for us, that's about 150,000,000, you know, all well known names. But it's just, you know, obviously, they're the most profoundly impacted by this.

Speaker 1

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 for a couple months they'll look fine. And hopefully, they get out of this and people start going out eating again. They'll be fine.

Maybe that gets pushed off and very logical way to look at it. However, it keeps you're into, you know, you don't get back to business until, you know, September, October, you're gonna have some issues.

Speaker 5

Got it. And then just the the last one. You kinda hinted on this. But, you know, if if no one attends Wrigley Field this summer or the South, those are marketing expenses that I'm assuming you guys would not be spending?

Speaker 1

That is that is correct. Cubs, White Sox, you name it. We would not be spending that money. But I'd I'd rather spend and go to ball games myself. But we actually Cubs, White Sox, Brewers, and some minor league teams around Chicago would not be we would not be paying.

That's can be a significant amount of money.

Speaker 5

Got it. Thanks, guys. Appreciate it.

Speaker 0

Thank you. Our next question comes from Terry McEvoy with Stephens. Your line is now open.

Speaker 7

Morning. Terry. Hi, good morning. I can't believe it took this long to ask a net 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've got multiple more quarters of just lowering deposit rates. So under that big picture view, Dave, does the net interest margin bottom out here in the second quarter and then likely or potentially move higher in the second half of the year as deposit prices come down?

Speaker 1

Well, if you're talking about the core net interest margin, yes, it would go down. But remember, we're going to have almost $100,000,000 of PPP fees we'll be bringing in over two years at the longest. With the shortest, it'll be people when they go for relief of the funds. Because these are all, you know, every one of these can be for two months, it can be two and a half months, they can apply to the SBA and have them forgiven. They're forgiven, we take the money up front.

So in a worst case scenario, for two years, if the whole thing ran out for two years, the margin would be okay, right around where it is. If it comes in and people at the end of this quarter and beginning of the third quarter get those get their funds their loans forgiven, we have $100,000,000 coming in during that period of time. So that's going to positively affect the margin. So the margin the core margin is going end up, like I said, we're in the $270,000,000 to $280,000,000 range, somewhere around that based on where we are right now. But the PPP loans are going to protect us for two years or one year or 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 $2.80 and start bouncing 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.

Speaker 6

Yes. I

Speaker 7

understand your thought process on PPE and how that plays into the margin. Just thinking about the revenue related to PPP and what that can be to building capital. I know you have the $85,000,000 in that you mentioned in the release. And I just want to make sure that $9,000,000 is just kind of what's in the pipeline. My guess is you assume that grows and 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?

Speaker 1

I think the marginal expenses are absolutely zero. I think we set up the system on our own. And these are people we had some people from all over at home, but we jumped in and helped them. We didn't add much any outside vendor. I don't think there's any issues related to that.

You think of any, Dave? Or Dave Stark?

Speaker 2

No, I think it's generally just the people issue, our staff that we already have on board that need to clear out the back end. You obviously have some minor data processing charges because you have more accounts out on the FIS system, but it shouldn't be that much of additional expenses.

Speaker 1

If any, really, it would be negligible.

Speaker 7

And then just on the round two of PPP, you said $9,000,000 that's going to be

Speaker 2

we move forward.

Speaker 1

Now, what we have in the pipeline, have $350,000,060 million dollars that we'll be waiting for E Tran tonight. Once you get through E Tran, they're committed. Related to that, it's about $9,000,000 of fees. That's rough numbers because something we know as you go through the process, which we will have done today on the current we should have done today on the stuff that came in. We opened the portal last night.

There were some duplicates and the like. So roughly around $9,000,000 more and $350 more. Plus or minus 10% maybe. We'll know better at the end of the day. 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 were dropped the ball on this. They have a number of customers that are waiting. Chase had 26,000,000,000 and then they only funded $14,000,000,000 or $12,000,000,000 which means they have $14,000,000,000 they're going to hit the new allotment with. We had 98% of ours all the way through the process in round one They're funded today. The other guys didn't.

So is going to last maybe forty eight hours at the most. Have to be very this next allotment, you have to be very careful. We don't overextend it and tell you leave customers hanging. But we think we can get these through and plus or minus 10%. Whether we get any more on top of it will be a function of where we sit at the end of the day in terms of our production and where we are in our manufacturing process, if you will.

That's great color. Thank you.

Speaker 0

Thank you. Our next question comes from Michael Young with SunTrust Robinson Humphrey. Your line is now open.

Speaker 8

Hey, thanks. Good morning.

Speaker 2

Good morning. Hey, Michael.

Speaker 8

Hey, wanted to start just with

Speaker 0

the CECL reserve. It's a little lower than peers,

Speaker 8

and I understand there are some mix benefits from 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 need to continue to build this reserve?

Speaker 2

Well, 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, you know, some of the credit spreads, commercial real estate price indexes, the GDP growth, etcetera. So those are the ones that impact our portfolios the most that have the best correlation and work best as you look back through the cycles. So those are the factors that most impact it. 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. I'm not sure that 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 that out quite a bit. So we think we're comfortable with where the CECL reserves are at.

It's substantially more than what our run rate was. You look at the total reserve build. And right now, we're comfortable with where it's at. We've gone through all the business lines. We've done all that heavy lifting.

There's more stimulus that's coming that hopefully should help, etcetera. 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 start getting back to normal. But, you know, our view is probably it's not a V shape, it's, you know, it's not a complete U shape.

It's probably someplace in between there. You know, I've heard like every letter of the alphabet, it's probably like a G shape, you know, some goofy shape out there but that nobody's talked about. But we're monitoring the portfolio well. We're managing it well. 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, could be better, it could be worse. 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 seems like we're sort of in the middle of the pack.

And we certainly didn't try to do that. It just seems to be where we're landing. And I 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 using our modeling and our subject matter experts on the credit side and we think we're okay for now.

Speaker 8

Thanks for all that info. And 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 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?

Speaker 4

Rich? Yes. Mean, CRE is bit of a wild card. I mean, we've spent some time kind of thinking through what it might mean. We're pretty well diversified in the CRE book, multifamily being the largest segment.

And multifamily, generally speaking, it's Chicago Metro. 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 adopted 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. That being said, 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. 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 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 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 gonna 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 gonna see reversion back to what we've seen I think those people's shopping habits are going to change in a pretty meaningful way going forward.

Speaker 1

Yeah. Murph and I talk about that a lot. I say, you're going keep my wife out of shopping? You're crazy. And you're to keep me here or go to the office?

I'm going to the office. She'll kick me out. So there's a lot of schools that now we have to wait and see. But I think, as Murph says, we're diversified enough. Know our borrowers enough.

I think we will know, you know, everybody's bought two, three months with PPP loans, with deferrals and the like, even in offices and what have you. We'll know in two or three months how this is gonna shake out, where it's gonna go, and how it's gonna work. So I think that we're kind of in limbo. We gotta 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.

We're on some of the new stuff that's going to be very cognizant. But we'll be very careful for sure because good loans are made in bad times, but you gotta you have to have a better crystal ball of where you the type of assets that you will take as collateral. Okay, thanks.

Speaker 0

Thank you. Our next question comes from Chris McGratty with KBW. Your line is now open.

Speaker 1

Good morning. Hey,

Speaker 9

Ed. How are doing? Question kind of a 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 this two to three months and we don't get the outcome we're looking for? I'm just interested in your thoughts and what might pivot the bank's strategy more significantly. Thanks.

Speaker 1

Well, the role for the top four was really brought on 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 and pretty much any deal 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 not 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 in with too many exceptions. 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 started seeing 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. We'll see what we got out of this if they revert back to the goofy stuff. Now who knows? Murph?

Speaker 4

Yeah, would absolutely agree with that. I think, you know, while it wasn't roped open, you know, back half of 'nineteen and the first part of 'twenty, you know, we were having trouble, you know, really growing C and 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. You know, I would agree with what Ed said. I mean, you know, the market had gotten goofy and way too aggressive.

And, you know, this crisis certainly has snapped back, you know, those trends pretty dramatically.

Speaker 1

What's pretty interesting for us is the kind of the halo effect that we got from the PPP work where our competitors were unable to service their clients and they'd call us and maybe we knew the owner or whatever had a personal account or what have you or had some relationship with them. We were able to get them on and service them. You know, a large bank in town hardly did any of the oldest largest bank that 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 and at reasonable pricing. So it could be a little bit of a godsend.

So Rovanoke right now, who knows? We see opportunities for growth right now at our pricing, our parameters for good, solid, long term companies that aren't in the higher impact risk areas that I don't think we're doing a lot of hotel loans right about now. There were a lot more restaurant loans. But a lot of really solid other businesses that we're going have shots at we never would have had before. So kind of mixed right now, but we're obviously 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?

Speaker 9

Thanks for that. It's Colleen. Just one more question on the PPP. Obviously, we're all trying to make our assumptions on where the economy is going, but it seems like the banks are going to generate a tremendous, I think you said, almost $100,000,000 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?

Speaker 1

Well, you gotta go in the black box and see where it goes. But I'm just saying that we who knows when that money that money could come in over two years, over one year, over 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, nevertheless, we shall meet. I don't think we have the luxury of playing that game anymore. We've got to really look at the data and be consistent. And we have committees that need that, everything from, you know, everything.

And so you really don't have a lot of heart 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, and you're feeling it turns bad, you can do some qualitative things that would go over the top and match it up nicely. Who knows?

You've to look at them independently, is my point.

Speaker 9

No, I get it. Yep, I got it.

Speaker 2

Gap is gap, Chris.

Speaker 9

You know. So, GAAP is GAAP. Yes. I was looking for the qualitative comment that Ed referred to. So that's helpful.

Dave, while I have you the tax rate going forward, how should we think about it relative to Q1?

Speaker 2

Yes. And I still think you think about it sort of at 26.5% to 27%. The first quarter because the stock price was down so much, the benefit we usually get in the first quarter from stock based compensation was actually negative a little bit. And the BOLI 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%.

Speaker 9

And that's an effective FTE? Yes.

Speaker 1

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 than everybody else in such a discount to peer.

Speaker 9

Yeah. I think I think the think the market is is a lot of the volatility in these stocks lately has been, I think, somewhat less fundamental and somewhat technical. But but I agree. That's why that's why we're constructive.

Speaker 1

Thank you.

Speaker 0

Thank you. Our next question comes from Brock Vandervliet with UBS. Your line is now open.

Speaker 10

Thank you. Can you hear me?

Speaker 1

Yes, Brad. We're good. How are you?

Speaker 10

I'm 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 have talked about how their outlook squared with Moody's as Moody's is working 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.

Speaker 2

I mean, so we look at a lot of different things. Mean, you look at the base case, you look at the severity, you look at the 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 economist models. And we look at the consensus Moody's models.

And so but we have to pick at the end of the quarter, have to pick a scenario and run with it. But then you're informed by those other models that you run and 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 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 changing scenarios, you know, 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 downsides and then you squared that with the business leaders that have their fingers into 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.

Speaker 10

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. Have you released a percentage on commercial and CRE deferrals that you did grant?

Speaker 2

Go ahead, Dave. No, don't know if you have those. Think we noted in the press in the release that we had about $300,000,000 of outstanding balances for commercial and commercial real estate loans that we had some sort of modifications to. And that's what we have right now.

Speaker 4

Yeah. 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 of months, but we don't have the detail on that.

Speaker 2

Okay. 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.

Speaker 1

So But half, are we Dave?

Speaker 2

Well, the numbers are sort of our numbers are a little more current than the NBA numbers. So I haven't seen the most recent NBA ones, but we are better than the NBA average on that.

Speaker 10

Okay. Thanks for the color.

Speaker 0

Thank you. Our next question comes from Nathan Race with Piper Sandler. Your line is now open.

Speaker 6

Thanks. Hi, guys. Good morning. I wanted to ask some questions on just updated thoughts on capital planning and priorities. Obviously, with total risk based capital coming down 30 basis points or so sequentially.

And I understand some certainty kind of project what credit costs are going to look like, but just curious to kind of get some updated thoughts on capital deployment priorities and how you guys kind of see capital levels trajecting to the extent you can kind of predict it just given all the uncertainty that exists today?

Speaker 2

Well, mean, 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, you know, free from a risk based perspective. So that's not going to impact us. It's going to be short term in nature anyway. We still are generating positive earnings this quarter and expect to do so going forward.

And we suspended the share repurchase, but that was prudent to do. Still believe the dividend is appropriate, but we'll let the Board of Directors decide that as they move forward. But you know, we continue to think capital is adequate. Would look, you know, we would look I mean, if we continue to grow or there, we have these opportunities that 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're always watching those markets because we do expect to continue to grow.

Speaker 1

Yeah. We won't be spending a lot of cash on acquisitions where our stock prices can't make any of that make much sense. So I think that Dave laid out nicely. Our growth is really good 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 it depends on our growth prospects other than the the zero based risk rating stuff. So we feel very good about where we are. And we'll that's where we are.

Speaker 6

Understood. That's helpful. And speaking of stress tests, I think when you guys last submitted DFAST in 2017, you guys indicated that you could have, you know, two point eight percent cumulative losses, you know, 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?

Speaker 2

No, we haven't disclosed that, Nathan. So, I mean, people can look at that stress test. But, you know, that was a you know, 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, you know, we haven't disclosed the stress test in a couple of years either. And, you know, 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.

Speaker 1

Yes. I think from a general statement though that we do stress the portfolio and that we feel that right now we're in pretty good shape.

Speaker 6

Understood. And if I could just ask one more on PPP. You know, I appreciate all the disclosures in the deck. Looks like you guys have, you know, funded relief through the PPP for, call it, you know, 15% of those select high impact industries. 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?

Speaker 2

Well, most of them were

Speaker 1

done in first round. For our clients, most of were done in round one. So going forward, we're actually we've actually been reaching out into the neighborhoods to low to moderate neighborhoods, to people who say they can't get to the loans, and really reaching out to our customers saying, hey, come on, we'll get you in. Because we really have the system nailed and feel we're in pretty good shape. So, you know, we basically had the portal open from now four and a half hours, maybe, in total.

In total, we've taken in over 10,000 applications. So and we tried and we closed 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 were in our troubled and severely impacted industries were the first guys in. 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 from people that if you think about it, we're going to keep 10,000 businesses from probably bankruptcy in a lot of cases. You think that they each have maybe average thirty, forty employees. That's 400,000 people.

They all have four, on average, have four dependents. That's 1,000,006 people that were affecting and let sleep easier every night. Because they know for two months they're gonna have their salaries, their benefits. And that's what kept our people working until midnight, one, two, three in the morning is doing the good we're doing. And how often do 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 as it relates to the impacted industries, they went right out of the box. Now we got to make sure those who really don't get it are getting it.

So that's what our focus has been in the last rounds.

Speaker 4

I would add that from the release date through fourtwenty, which does not include this Phase two, we're up about another 15% to highly affected industries.

Speaker 6

Understood. That's great to hear. I appreciate all the color. Thanks, guys.

Speaker 1

Thank you.

Speaker 0

Our next question comes from David Kievre with Wedbush. Your line is now open.

Speaker 11

Hi thanks. Wanted to ask you 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 mention that it should be well below 1.4%.

So I was wondering, is that the new bogey now, less than 1.4 percent? Did I hear you right?

Speaker 2

Yes, you heard me.

Speaker 1

Point 5% has always been the sign of a well run bank. I think that with our growth and what's going on with our asset growth and our expense control based, you know, 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, yeah, you should be well below 140. I think you could even make it below 130 if things go right.

But the bogey will always be 150, 150 or better. We're not changing it yet, but I think you expect it for the next few quarters to be below 140, between the 130, 140 range, and hopefully lower than 130 if we're good.

Speaker 2

I what I said in my comments were with the growth of the balance sheet related to PPP and the strong mortgage market and the lack of some of the expenses that are going to flow through just due to the situation we're in, you know, entertainment, some of the sponsorships of some of the summer events, etcetera, we should be below 140 for the time being. But I agree with Ed that the general target in the normal environment is still sort of below the 150. But yes, I did say below 140 because I think in the near term quarters that's still going to be the case.

Speaker 11

Great. And has your de novo outlook changed at all? Previously, you were planning about a dozen branches over the next twelve to eighteen months. Has the backdrop kind of shifted your thinking on that?

Speaker 1

Not really. Slowed it down a little. Again, we're taking basically a couple months off while we're all in this hibernating, if you will. But these are areas we're committed to. We have space.

We're growing. 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's not giving us good price to 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.

Speaker 11

Okay. And then the last one for me on loan growth. And you touched on it a little bit earlier. But to be clear, you're still expecting mid- to high single digit growth. And in the context of line utilization rates and the drawdowns to kind of surge at the end of the first quarter.

Could that be a headwind to loan growth if things start to normalize and these companies start to pay down those drawdowns? Rich?

Speaker 4

Yeah, I think overall economic activity is certainly going to be muted in the remainder of the year. So 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.

Speaker 1

Asset sizes will move up there nicely, I would think.

Speaker 4

Yes. So I going to be some good opportunity there. But clearly, economic growth going forward is going to be a bit of a headwind.

Speaker 1

I think that our line draw is only, what, $405,100,000,000 dollars we figured out, Murph, is that right?

Speaker 4

Yes. But we also have warehouse lines. And 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.

So

Speaker 1

we'll see. So your question about high single digit, it could be affected by those fluctuations. Agree with that?

Speaker 4

Yes.

Speaker 11

That makes sense. Thanks very much.

Speaker 1

Thank you.

Speaker 0

Thank you. I am 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.

Speaker 1

Thanks, everybody. Stay healthy. And if you have any other questions, please feel free to call me or Dave or Jim Crane got off easy. He didn't have to answer anything today, but you might want to call him and pepper with it. But thanks, everybody.

Stay healthy, and until next time. Bye bye.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.