Wintrust Financial - Earnings Call - Q2 2019

Transcript

Speaker 0

Following a review of the results by Ed Weimer, 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 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 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 ks 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 include a reconciliation of each non GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded.

I will now turn the conference over to Mr. Edward Wehmer.

Speaker 1

Thank you very much. Welcome to our second quarter earnings call. With me as always are Dave Dykstra Kate Bogie, our General Counsel and Dave Starr, our CFO. We'll have the same format as usual. I'll give some general comments regarding our results, turn it over to Dave Dykstra for more detailed analysis of other income, other expenses and taxes, back to me for summary comments and thoughts about future.

Then we'll have time for questions. You'll note we've changed and streamlined the format and content of our earnings release. It's been reduced by 12 pages. Hopefully, you will 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 on to our results for the quarter. The quarter can basically summarize 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 in Mrs. Lincoln, I guess, could say, based on where the stock's going today. On the earnings side, net income was $81,400,000 down 9% from 2019 and the 2018 or 2019, 2018.

Year to date earnings of $170,000,000 basically even with what we had last year. Diluted EPS standpoint, basically the same numbers. If you take net income on a pre MSR adjustment basis, year to date, we're up 8% to $180,000,000 from $167,000,000 Diluted EPS, the same, up 8% from to $3.08 from $2.84 notwithstanding the MSR adjustments. Net interest margin dropped eight basis points during the quarter. I'll talk about that.

The rest of the statistics are there for you to review. As mentioned, the quarter was negatively impacted by additional provision of almost $14,000,000 additional MSR negative valuation adjustments of 3,100,000 after netting out a hedging a small hedging gain. I'll discuss the provision a little later when talking about overall credit. As the MSR adjustment year to date, we recorded negative pretax fair market value adjustments, net of hedging gains of $12,100,000 as opposed to positive adjustments of $6,230,000 in 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. 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 markup of our mortgage backed securities on the investment portfolio covers our income statement loss by over four times. The problem is that one goes through the equity goes through equity while the other hits the income statement. To that point, since ninethirtyeighteen 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 other comprehensive income in the equity section of the balance sheet have added $1.21 to book value per share.

Continue to look at income statement hedges when appropriate and cost effective, but you can see where 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 of securities falls and fair market value of MSRs rises in the same percentage relationship at four 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 $4,200,000 over quarter one due to one extra day in the quarter and volume growth of $797,000,000 in average earning asset growth versus quarter one. Pardon me. FTE the FTE NIM decreased eight basis points from 3.72% to 3.64%. Earning asset yields held constant at 4.74%, while our cost of funds increased eight basis points. Our recently completed $300,000,000 sub debt offering added approximately one basis point to this cost, the rest due to market competition and special rates offered to markets.

The Fed goes ahead and lowers rates this month or thereafter. You can be assured that we will be as aggressive as possible and as quickly as possible lowering our costs. The new sub debt offering will have an additional two basis point increase cost of funds in Q3 and beyond. This will include the full quarter of this expense. No doubt that a decreasing rate environment is not good for the margin, or we believe we should be able to continue to grow net interest income nicely because of our good balance sheet growth.

We're starting the third quarter with a nice head start as ending earning assets and loans as within sorry. We are starting the third quarter with a nice head start as ending earning and asset loans exceeded average balances in quarter two by $1,160,000,000 and $751,000,000 respectively. Our loan pipelines remain consistently strong across the board. Pipeline pull 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 these in detail, but I want to give some high level remarks in these categories.

Wealth management revenues increased $162,000 to $24,140,000 continuing their slow and steady climb as assets under administration increased $800,000,000 from $25,100,000,000 to approximately $25,900,000,000 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 wanted to give you a quick report on our efficiency efforts in this area as Phase one of our ongoing project concluded on June 30. To date, we've cut our overall cost to produce as a percent of volume by approximately 10 basis points or around 10%. Further cost decreases are expected as we will be receiving full quarter benefits for what has been accomplished to date and execute additional cost saving measures in Phase two of the project as we continue to emphasize our consumer direct channel and production where commissions are lower. Should be noted, we're not deemphasizing 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 was through the consumer direct channel as opposed to 22% a year earlier. Other expenses were generally in line with our expectations, taking into consideration the seasonality of certain line items. The net overhead ratio for 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 balances 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 is 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 $1,300,000,000 or 15.9% from the first quarter and 14% or $4,177,000,000 from a year ago. Loans increased $1,000,000,000 or 18% in the quarter, not including loans held for sale, and up almost $2,700,000,000 from a year ago.

As I said, ending assets grew $1,300,000,000 in the quarter, an increase of 16% over the year, 14.2% for a year ago. Oak Bank acquisition, which we closed during the quarter, is responsible for $220,000,000 of that growth. Portal loans, net of loans held for sale, were $1,100,000,000 quarter versus quarter and $2,700,000,000 over a year ago, approximately 1812%, respectively. Oak Bank accounted for $114,000,000 of this growth. As mentioned, most of the growth was back end loaded, we start Q3 twenty nineteen with a head start of close to $751,000,000 of as average as year end balances or quarter end balances exceeded average balances for the first quarter.

As mentioned, loan pipelines remain consistently strong. Deposits grew $714,000,000 and $3,150,000,000 quarter versus quarter and year over year, respectively. That translates into percentage growth of 1113%. Our loan to deposit ratio returned 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 sixthirty were approximately $700,000,000 as opposed to $1,100,000,000 at year end, but equal to sixthirty of last year when we didn't own them back then. The number of transaction processed for this year was a tiny bit above the same period last year. We have said this is a seasonal business with year end always being the bellwether period. Working diligently to expand this national business, we've recently hired two new salespeople to the squad. Now on to the elephant in the room credit.

Provision increased approximately $14,000,000 in the quarter to $24,600,000 as net charge offs increased to $22,300,000 $18,400,000 of the charge offs and $15,300,000 of provision related to three credits. Provide a little color on these three credits as well as lessons learned, if applicable. The largest credit represents an $8,000,000 charge off. It was a $2,660,000 reserve specific reserve for a $10,660,000 provision effect. The loan was a participation we had with a local bank and 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 you had a lesson learned, deals were not deleted, especially those with PE sponsors, to have real business reasons to be on our books. Excess leverage deals are not acceptable if they fit this criteria. And PE deals where we have no relationship with a private equity firm are not acceptable. We do not control the process and if it was late to us, we're not in control of the collection process.

Fortunately, we do have an immaterial amount of these on our books, and we're 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 does with our loan volumes being what they are, we really have no reason to be in there. Second largest credit was a franchise deal we previously commented on in other calls. Charge out on this loan is approximately $7,600,000 with a 2,900,000 provision effect due to the existence of specific reserves placed in this account.

The franchise is in our contract and 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 $3,000,000 charge off provision increase related to a commercial premium finance workman's compensation loan. Our policy is to charge off any unconfirmed return premium and to look good on recovery. In this instance, the return premium is held by a captive insurance company for potential future claims.

Therefore, the return amount cannot be confirmed. We anticipate receiving recoveries on this loan through return premiums and payments from the insured, which is a viable company and still in business. They've been making payments of between 50,000 and $100,000 per month, so material recovery is expected over the next eighteen months on this credit. Year to date charge offs were 22 basis points, up from our recent low historical numbers but still respectable. NPLs were down $4,000,000 to $113,500,000 or 0.45% of loans as compared to 0.49% in quarter one.

And NPAs are down $6,000,000 to $133,500,000 or 0.40.4% 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 whether these increased credit losses represent a trend. Although you never know, it does not appear that this quarter represents a trend. However, we all recognize that credit cannot be this good as it has been forever.

We always try to identify 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've recognized our problems and accounted for them correctly. We continue to monitor the portfolio diligently to identify and clear any problem assets as expeditiously as possible. Now I'm going to turn it over to Dave, who will add some color on other income, other expense and taxes.

Speaker 2

Thanks, Ed. As normal, I'll briefly touch on the other noninterest income and noninterest expense sections. In the noninterest income section, our wealth management revenue increased to $24,100,000 in the second quarter compared to $24,000,000 in the first quarter of this year and up 7% from the $22,600,000 recorded in the year ago quarter. Brokerage revenue was up slightly by $248,000 while trust and asset management revenue was relatively flat with a slight decline of $86,000 Overall, we believe the 2019 or 2019 was another solid quarter for our wealth management segment with record gross revenues. Mortgage banking revenue increased by 106% or $19,300,000 to $37,400,000 in the 2019 from the $18,200,000 recorded in the prior quarter and was down slightly from the $39,800,000 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 $1,200,000,000 of mortgage loans for sale in the 2019. This compares to $678,000,000 of originations in the first quarter $100,000,000 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's earnings press release provides a detailed 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 $1,400,000 in the prior quarter. Other noninterest income totaled $14,100,000 in the second quarter, down approximately $2,800,000 from the $16,900,000 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 in foreign exchange valuation adjustments associated with U. S.-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 $1,700,000 of decline related to less investment from investments in partnerships, dollars 4 and 42,000 less of BOLI income, and those were offset by approximately $393,000 of higher swap fee revenue.

Turning to the noninterest expense categories. Total noninterest expenses were $229,600,000 in the second quarter, up approximately $15,200,000 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 sponsorships and an increase in loan and travel and entertainment costs in the other miscellaneous expense category. I'll talk about a few of these in more detail. The salary and employee benefit expense category increased approximately $8,000,000 in the second quarter from the first quarter of this year.

Commissions and incentive compensation expense accounted for approximately $4,900,000 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 $1,300,000 of that increase, resulting from a full quarter impact of our annual base salary increases that generally took effect on February 1. The staffing costs related to the Oakbank acquisition that closed in May 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 expense was approximately $1,800,000 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 expense increased approximately $3,000,000 from the first quarter to the second quarter and totaled $12,800,000 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 deposit 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 expense totaled $12,800,000 in the second quarter, an increase of approximately $1,000,000 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 $6,200,000 in the second quarter compared to $5,600,000 in the prior quarter.

Professional fees can fluctuate on a quarterly basis based on the level of legal services related to acquisitions, litigation, problem loan workout activity as well as use of any consulting services. Although up slightly from the prior quarter, this 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 five quarter range. The miscellaneous line item, overall noninterest expense increased by approximately

Speaker 3

$2,400,000

Speaker 2

in the second quarter to $21,400,000 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 an 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.

Speaker 4

Thank you, Dave.

Speaker 1

I'll give you some thoughts about the quarter and what our thinking of the future is. 2019 is off to a pretty good start, though somewhat lumpy. Good balance sheet growth of over $1,000,000,000 in each of the last two quarters is pretty darn good. Our reputational momentum, coupled with the continued market disruption, gives us confidence that these growth trends will continue for the foreseeable future. Strong core earnings despite the one timers related MSRs in this quarter's credit split.

Looking at pretax, pre provision, pre MSR, year to date income was up if you and looking at if you take out I'm sorry, if you look at pretax, pre provision, pre MSR adjustments, year to date income was up over $40,000,000 or 17% from the prior year. As we previously mentioned, year to date after tax net income, not including MSRs, was 8% from the prior year. We started the second quarter with $751,000,000,000 head start on loans as ending assets exceeded quarterly averages by that amount. Average earning assets are $1,160,000,000 ahead 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 non bank competition is becoming more and more aggressive, even some bank competition is 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'll not be afraid to stop the boat as we have in the past.

As sit now, we do not see reason to do so. However, we have selectively deemphasized a 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 our strict underwriting standards and pricing parameters, we expect to hold our own in this regard. If rates do drop, we'll move expeditiously to cut our deposit costs. CDAC transaction is working as anticipated and is providing us with a nice source of low cost funding.

The net overhead ratio is performing as expected. We expect that number to approach our 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 can't get cannot be this good forever. We performed at a percentage of our peers, though. 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 said cracks are found. We always remember that our first loss is our best loss, and we don't try to kick the can down the road. Wealth Management should continue its slow and steady climb. In the quarter, we closed on our acquisition of Rush Oak and its subsidiary, Oak Bank, and announced the acquisition of SPC Corporation, which has approximately $280,000,000 in assets. We expect this transaction to close in quarter three.

This deal contains significant cost out opportunities, both the branch overlap and normal operating efficiencies. We anticipate consolidating three out of their five current three out of the five current STC branches while absorbing many of their employees in our system through drilling into 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 twenty seven 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.

Speaker 0

Thank you, sir. And our first question will come from the line of Jon Arfstrom with RBC Capital Markets. Your line is now open.

Speaker 3

Thanks. Good afternoon.

Speaker 1

Hi, John.

Speaker 3

We talked 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're seeing. 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?

Speaker 1

Overall, competitive costs are moderating a bit, and we're seeing that and we're reacting to that. But the consumer doesn't the consumer understands what the Fed does, and that's about it. And many of our index rates like LIBOR and the like actually react before then. So it's hard to cut rates too much now, especially during the growth mode. We've always taken advantage of what the market gives us, John.

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. You have to 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. If 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 to 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 won't understand it and the market won't move.

Speaker 4

Okay.

Speaker 3

So is the message similar level of margin pressure until the Fed does move?

Speaker 1

That's a good question. I don't believe if the Fed didn't move and there was no change in markets, don't think there would be a lot of pressure on the deposit side. On the asset side, we've been able to help pretty steady. We held 4.74% for the last two quarters, but it all depends on what goes on underneath the Fed, what expectations LIBOR and what have you. Dave, do have a comment on that?

Speaker 2

Well, some of it's just going to be where our 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 the life portfolio that's tied to that. So if you could get that to flatten out a little bit and come back up, that'd 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 mix issue here. Our new loans actually came on higher than our historic portfolio rate this quarter.

So you have but you have pay downs and other things. So the mix is really an important aspect that's out there. So we'll just have to see what comes through 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 repricing for the third quarter. Third quarter.

Isn't material enough that we don't think we're going to grow our net interest income. Really given the average that we have in the pipeline, that average ahead of end of period head start we have and the pipeline that we have, we're very comfortable that net interest income is going to grow.

Speaker 3

Okay. The tail end of the quarter weighted loan growth, what would you guys attribute that to? Why did it happen later in the quarter?

Speaker 1

Always seems the last three or four quarters have been like that. We've always started with a head start. I don't know, maybe we empty the boat at the end of the quarter and we fill it up at the beginning of the quarter. But there was actually some spillover this time that 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 will be kind of slow. September should be very good. Just it just seems to be a pattern we've fallen into with really no reason other than the fact we're happy to have them.

Speaker 2

Yes. I mean, we the thing I focus on, John, 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 when you can't make a customer close when you want them 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.

Speaker 1

And the pipeline relates just to our 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 aren't considered in the pipeline when we show you pipeline or talk about pipeline numbers of $1,000,000,000 sort of gross numbers. It's that doesn't include our niche businesses, which make up onethree 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 look pretty good there, too. So all in all, not just the pipeline we report to you, but our niche businesses are also growing nicely.

Speaker 3

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?

Speaker 1

Yes. The construction one is supposed to close today tomorrow the next day, and the other one is supposed to be scheduled to close in the third quarter. The additional charge we had on the franchise one is that the first deal walked from us. We had it all closed up and had reserved for it properly at the end of the first quarter, and they ran into some issues. And so the second run came in a little bit less.

So took our lumps, moved on. It is what it is.

Speaker 3

Yes. Okay.

Speaker 5

All right. Thank you.

Speaker 0

Thank you. And our next question will

Speaker 6

come from the line of David Long with Raymond James. Your line is now open.

Speaker 5

Good afternoon, guys. Good

Speaker 0

afternoon, David.

Speaker 1

How are you doing?

Speaker 5

Good. Just want to make sure we're clear on the two credits that John just mentioned. When you say you'll be out this week and the other one later in the quarter, that's at the current marks that you currently have. So there's you're not saying there's going to be a recovery, we're just done with them as they are now?

Speaker 1

Yes, sir.

Speaker 5

Okay, got it. Thank you. And then I wanted to talk a little bit more about the asset yields. And almost a year ago, back in September, Ed, 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 ten 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?

Speaker 1

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 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 buy a lot 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 we'll actually go a little bit shorter.

As to other swaps and other issues?

Speaker 2

Yes. What we really did, David, was we just allocated more fixed rate loan pools out into a number 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.

Speaker 5

Got it. Okay. And then just a follow-up. There's maybe a separate question here. Regarding the deposits that are related to the ten thirty one exchange, where I think you said you hired a couple of people, business you brought from CDEC back late last year.

Yes. What is the average cost? Or how should we think about the cost of deposits in that part of the business?

Speaker 1

That's right. It averages some of that business comes and we maintain what the average balance is of going a twelve month kind of rolling average. The rest we sell into the market and make fee income on. So on the interest expense, it's around 70 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 10 people. So it's pretty inexpensive. And we've got the best crew in the world, the 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 to raise $700,000,000 in deposits or having eight people at CDEC do it, it's pretty low cost for us.

Speaker 5

Got it. That's all I had. Thanks guys.

Speaker 1

Thank you.

Speaker 0

Thank you. And our next question will come from

Speaker 6

the line of Nathan Race with Piper Jaffray. Your line is now open.

Speaker 4

Hey guys. Good afternoon.

Speaker 1

How are you?

Speaker 4

I wanted to start on the balance sheet growth dynamics in the quarter. Obviously, really impressive growth this quarter. And I'm just curious how much of that is related to that M and 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 that M and A related disruption that could continue to provide a good runway for at least high single to low double digit growth going forward?

Speaker 2

Well, I mean, there's two aspects. I mean, as far as the actual acquisition M and A, we had the Oak Bank acquisition, and that was about $114,000,000 at the end of the quarter that was on the balance sheet, so I in guess we're 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 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 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.

Speaker 4

Okay, understood. And if I could just change gears real quick and think about expenses. I understand you guys are 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?

Speaker 1

Well, we always look at expenses, obviously. On the mortgage side, it's we 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 Dodd Frank, 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 will get commissions.

But our new front end and marketing our the new front end to all of our market area here in Chicago should help change the channel and into more consumer direct as marginal volume that we expect our the volume from our traditional approach to continue and the consumer direct to continue to add marginal value to us where commissions are in half. We also have gone offshore with some non customer facing concepts in the mortgage side, which has helped. We also are evaluating robotics on that side. We're also looking at number of proof of concepts on the robotics side in all of our business to cut costs on 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 in.

So money 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 that we the brand momentum that we've 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 at Evanston that's over approaching $500,000,000 in deposits in a little over a year.

There are a number of good markets we're not in that we need to get in, that we have plans to open in. But we are a growth company. We just have to maintain that one try to get down to that 150,000,000 number and hold it there and balance everything off of that. If we can do better, we'll do better. But we're always looking at that.

We're concentrating now on the IT and the robotics 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.

Speaker 4

Okay. That's helpful. I appreciate you guys taking the questions.

Speaker 0

Thank you. And our next question will come from the line of Michael Young with SunTrust. Your line is now open.

Speaker 7

Hey, good afternoon.

Speaker 5

Hey, Mike.

Speaker 6

Wanted to go back to maybe the NII question. Just based on your most recent disclosure, you kind of disclosed 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 $28,000,000 headwind or 10 basis points to NIM? Or is that too severe?

Speaker 2

That's a yes, I think that would be a little bit too severe. I think you probably need to look at the ramping scenarios more likely.

Speaker 6

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?

Speaker 1

A little bit. The market has moved down a little bit. We are doing that. But again, it's we're in a growth mode and we open a new part of our process 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 that 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'll follow. We don't overpay for the market for the most part other than the where we have a promotion going on in a new location.

Fair enough, Dave? Yes. I think mean, some of

Speaker 2

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, were certainly less than that. The brokered market has come down and the a lot of the municipalities follow that brokered market. And so as those rates have come down, the CD rates that 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 says, until the Fed moves, we haven't seen people cutting dramatically yet. So competitively that we haven't seen that happen other than sort of the wholesale CD municipal market and the like.

Speaker 1

Yes. One of the things that we're emphasizing now is demand, obviously, free demand deposits. We are instituting a new I won't get me 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 and the big guys are the only guys who have it.

So as it relates to the competition, we will have to go against. We have a number of clients waiting for that to come online and 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 percent of the 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 will be very helpful to us.

Speaker 0

Okay. And if I could

Speaker 6

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?

Speaker 1

Well, that loan was a big loan. It was one of the larger ones. It was through a large staffing company. The interesting thing about this one and why it turned a little bit sideways was it was the workman's comp, it was a 20,000,000 over $20,000,000 loan, everything but million everything but 3,000,000 was returned to us or $5 was returned to us. They paid down a number of that already to get 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 twenty something years we've been in existence, is that the captive, it was canceled, but they stayed with the captive when they uncanceled it. Their problem was it's a 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 canceled it.

They stayed with 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 and the company isn't viable.

I mean, it's a $21,000,000 revenue company. They have been making 50 they may make $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 shortage. So we think we'll get it back. First time we've seen one with this captive to captive sort of issue where we can't confirm the premium because we can't confirm the return premium, we write it off.

Speaker 2

That's just our rule. And the reason you can't confirm it is it's just a pool of loans, a 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 the claims are lower, there's more of a pool. So again, as Ed said, we it's unique because it was larger.

It was with the staffing companies. Staffing companies have a much higher level of workers' comp. This was And it wasn't

Speaker 1

an insurance company where we asked to go through audit and give you a return premium.

Speaker 2

Right. Because it's in this captive pool. So it's very unique. This is not our main business. 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 twenty seven years we've

Speaker 1

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 a confirmed rate, we charge off liquid under recovery. This is just a big one, not with captives but with others. That's just our policy.

It was a big one that we did it.

Speaker 6

Okay. Thanks for all the color.

Speaker 0

Thank you. And our next question will come from the line of Brad Milsaps with Sandler O'Neill. Your line is now open.

Speaker 8

Hey, good afternoon guys.

Speaker 4

Hi, Brad.

Speaker 8

Ed, you've addressed most 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 and

Speaker 7

A as you kind of

Speaker 8

think out through the back half of the year, kind of how you balance all that together?

Speaker 1

Well, we raised the $300,000,000 which should hold us for a little while. The acquisition market remains active. They're lined up again like planes over O'Hare, 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,

Speaker 5

their

Speaker 1

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 are still a number of smaller strategics that move us into areas that we're not in. We'll continue to look at them, but we're at no loss of things to do in that regard. But we've always been very circumspect about how we approach that.

As to stock buybacks, we consider them all the time, and we'll leave it at that.

Speaker 8

Okay. That's helpful. And then 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 the last few years.

Do you attribute most of that to the tax ID number situation that you've worked through? Or is there something else kind of more structural going on with that business that's driving a little bit better growth?

Speaker 1

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 competition's.

And when we're on a level playing field, we can beat anybody. So we're aggressively going to get back to business we lost. During that period of time, we had 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're going back and getting 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 hoping to be the number one premium advanced company in Canada over the next year or so. 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.

Speaker 7

Great. Thank you, guys.

Speaker 0

Thank you. And our next question will come from the line

Speaker 6

of Chris McGratty with KBW. Your line is now open.

Speaker 7

Great. Thanks. I'm going go back to Brad's question on the capital management for a sec. Is the lack of a buyback authorization procedural, meaning getting the approval and announcing it? Or is it kind of philosophical at WinTrust that you view yourselves 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.

Speaker 1

I'd rather not comment on any of that, to be honest with you. But we have been a growth company. We've grown very nicely. We needed the capital. We needed the cash this time around to support our growth.

But as I said, we review it all the time. And we you never know. That's we're it would probably depending on the situation at the time, we do review the facts and we would act accordingly.

Speaker 7

Okay. 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 3.3% range, call it, and now we're kind of mid 360s. If I kind of put that together with the fact that 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-340s range. Is that kind of it's a little bit more than the 10 basis points of hike or per cut that you talked about before, but anything structurally different with the balance sheet today that wouldn't confirm or affirm that?

Speaker 2

Well, again, it gets a little bit in the mix and the like. 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 to 3.4. It's really 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 drops to the EPS. But if nothing changes out there and the yield curve sort of stays inverted and lower, then yes, I think given the position of our balance sheet, we're going to see some pressure. Offset that with the growth and the pipelines that we have and grow net interest income and just be prepared for when the yield curve gets more favorable.

Speaker 1

Yes. As I said earlier, Chris, we always when rates get low, we increase our interest rate sensitivity position by design with the probability rates not 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. But 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 of which way rates are going.

And so it would have a little margin hit would probably be more than offset by the earning asset growth we're experiencing.

Speaker 7

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? Is that number one, is that correct? And number two, is that you think you can get double digit earnings growth even with this quarter?

I'm just trying to understand.

Speaker 1

That's the plan. Not giving up.

Speaker 0

Thank you. And our next question will come from the line of Brock Vandervliet with UBS. Your line is now open.

Speaker 9

Great. Thank you. Dave, if you could just circle up on the loan to deposit ratio. I noticed 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?

Speaker 2

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 no there's really no acceptable investment vehicle out there right now from our perspective to plow a lot of money into. So we've got a good pipeline out there right now. We think they're 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 two 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 some place to invest the funds versus just letting them sit at the Fed overnight.

Speaker 1

And the 85% to 90% is just historically from a liquidity standpoint. I mean, the I'm a true believer that the risks of banking haven't changed since the Medicis opened their first bank six hundred years ago. Interest rate risk, liquidity risk, credit risk are what kill you. So liquidity risk is you can always get liquidity until you need it. We know that if we've expanded our liquidity lines in places and just to kind of we haven't sat here 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 to be at 85 to 90%, but we're comfortable and because of the short term nature of 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 it. They make me comfortable on the liquidity side.

I'm happy to be not happy, but I'm okay with being up above our desired range.

Speaker 9

I get the low securities yields and the limited opportunities to redeploy. Is there anything more you could do in terms of retaining your own mortgage production to kind of lessen that asset sensitivity?

Speaker 1

We could, but I don't want to be stuck with a thirty year mortgage at those rates. I don't want to lock in these rates now. I don't think they'll be there for there is a contrarian view out there that the ten year is going to go to 3% in the next twelve months. I tend to agree with that, but what do I know? We don't guess rates.

All I know is I don't want lock in thirty year fixed rates at these low rates. It doesn't make a lot of sense to us. We maintain the servicing on in footprint loans. Loans that we can't sell, we put on the books as an ARM basis, and that helps us a little bit because we get a premium rate on them. And they're not subprime loans, they're just loans that guy might be self employed or with all the new rules.

We're usually able to place them 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 with their base at premium in the market, which will fix the rate for a couple of years, but I'm in no rush to put thirty year loans on now.

Speaker 9

Okay. Thank you.

Speaker 0

Thank you. And our next question will come from David Chavarini with Wedbush Securities. Your line is now open.

Speaker 10

Hi, thanks. A 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?

Speaker 1

Sponsored finance, I don't have that number here. I know that there's probably two or three relationships that bear that no relationship with the PE firm. And we're a participation. We'll be looking to exit a first opportunity. Not that there's anything wrong with them, it's just I don't like the way they set up.

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 that we have fulsome relationships with deposits, and we're not really a beast of burden. I would imagine that portfolio is in the 3 to $400,100,000,000 dollars range, somewhere in there.

Speaker 10

Got it. And for the construction company and the franchise deal, how seasoned were these loans? When were those loans made?

Speaker 1

The franchise deal was part of the GE portfolio we purchased a couple of years ago. We three banks banks had bought when GE got out the business, so we had been in that business. That portfolio is about $1,000,000,000 and this is just a one off. The rest the portfolio is performing very, very well. The construction loan deal, we have 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 when we should 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 of they put like $300,000,000 into the same, tried to keep it alive. And We're being taken out by surety companies because they get screwed if they do it. So it just was it's just when it switched, we shouldn't have jumped in with the new agent. And when it was bought by the private equity firm, we had been twice removed at that point in time.

And so the relationship had been there with our guy for maybe ten years, with Wind Trust for probably two years before. And the private equity, it just 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 raising their hand saying, I screwed up. But live and learn, it could be a very cheap wake up call when you get down to it.

Speaker 10

And what type of construction did this company focus on? Was it residential, commercial?

Speaker 1

Very large general construction company. That's all I'll say.

Speaker 10

General. Got it. And then shifting back to one more net interest margin question, and I'll ask this somewhat different way. I received an emailed question from an investor. For each 25 basis point rate cut how much NIM pressure would be reasonable to expect?

Speaker 4

Dave?

Speaker 2

Don't David, I don't think we've disclosed that. So I we'll think about maybe doing that disclosure going forward. But again, I don't think I'm going to answer that. I think right now, I think there's certainly some pressure, but there are levers 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's excess that we need to fund it with. It's going to be a mix of business issue, competitive pressures 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.

Speaker 1

It all depends on the shape of the yield curve. It's just one thing could move and the long end could go up and then life is better. You never know. The yield curve is just so strange these days. Try to figure out.

Speaker 7

Completely agree. Thanks guys.

Speaker 0

Thank you. And our next question will come from the line of Terry McEvoy with Stephens. Your line is now open.

Speaker 1

Terry?

Speaker 8

Yes, question for Dave Dykstra. I was wondering if you be a bit more specific on the promotional deposit pricing, how much that contributed to the increase in all in deposit costs, maybe just the context around what markets you're really looking to grow deposits? And then maybe as an example that Evanston branch that Ed mentioned, what's the kind of all in cost of funds there, which is a relatively new branch versus a more established location?

Speaker 2

Well, I'm not going to get into specific locations, but the promotions that we've been running recently have generally been a little bit over 2% promotion rates and probably $506,100,000,000 dollars of deposits that we've raised of that during the quarter. So if you're looking at a $30 some billion bank and it's 500 to $600,000,000 of promotional rates that are slightly over 2%, that's sort of the impact. I mean you can run the math. Haven't figured it out to the basis point, but that's sort of what we did this quarter. $506,100,000,000 of promotional accounts, a little over 2%.

Speaker 8

Thanks. That was it on my list. Appreciate it.

Speaker 2

All right. Thank you.

Speaker 0

Thank you. And I'm showing no further questions in the queue at this So now it is my pleasure to hand the conference back over to Sir Edward Wehmer for any closing comments or remarks.

Speaker 1

Thanks everybody for listening. I know it's a lumpy quarter. If you have questions, Dave and I and Dave Star are available to answer them if you have additional questions. And we look forward to talking to you in three months. Thanks so much.

Speaker 0

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.