Wintrust Financial - Q3 2023
October 18, 2023
Transcript
Operator (participant)
Welcome to Wintrust Financial Corporation's Third Quarter and Year-To-Date 2023 Earnings conference call. A review of the results will be made by Tim Crane, President and Chief Executive Officer; David Dykstra, Vice Chairman and Chief Operating Officer; and Richard Murphy, Vice Chairman and Chief Lending Officer. As part of their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentations, 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 the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10-K and any subsequent filings with the SEC. Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded. I will now turn the conference over to Mr. Tim Crane.
Tim Crane (President and CEO)
Good morning, everybody. Welcome to Wintrust Wednesday. This is the day of the week we require all of our Wintrust staff to be on-site. We're glad that you have joined us, too, for our third quarter earnings call. With me this morning are Dave Dykstra, our Chief Operating Officer; Rich Murphy, our Chief Lending Officer; Dave Stoehr, our Chief Financial Officer; and Kate Boege, our General Counsel. In terms of an agenda, I will share some high-level highlights, Dave Dykstra will speak to the financial results, and Rich will add some additional information and color on credit performance. I'll wrap up with just a few summary thoughts, and as always, we'll do our best to answer some questions. Earnings or net income for the quarter were just over $164 million, up from both the second quarter and the prior quarter last year.
From our standpoint, a very solid result with good loan and deposit growth and continued good credit performance. As Rich will highlight, we are not seeing any systemic credit issues at this point. Our margin at 3.62% was within the range we expected, down essentially just for the impact of our hedging activities. We continue to benefit from a loan portfolio that prices relatively quickly. You'll recall that nearly 80% of our loans mature or reprice within a year. The resulting improvement in loan yield allows us to largely offset the increase in deposit costs, which I would add, we believe are moderating at this point. Our growth and the relatively stable margin resulted in net interest income growth for the quarter and on a year-over-year basis.
From a market standpoint, we continue to see isolated disruption among competitors, and as a result, we continue to add clients and create long-term franchise value. We expect that in the coming quarters, we will continue to grow loans and deposits. Our liquidity position remains strong. The deposit growth not only allowed us to fund good loan growth, but also to reduce the level of brokered deposits during the quarter. Again, overall, a solid quarter, which we believe will compare well and in fact, may differentiate us relative to many of our competitors. With that, I'll turn this over to Dave to provide some additional financial details.
David Dykstra (Vice Chairman and COO)
Great. Thanks, Tim. First, with respect to the balance sheet growth, we were again pleased to see deposits for the quarter grow by approximately $1 billion or 9% on an annualized basis. This deposit growth was primarily in the form of interest-bearing retail deposits, and that growth allowed us to reduce our level of broker deposits by $392 million. As to deposit composition, non-interest-bearing deposits at the end of the quarter represented 23% of total deposits, compared to 24% at the end of the second quarter. The slight reduction in the percentage of non-interest-bearing deposits to total deposits is really more a reflection of deposit growth occurring in the interest-bearing categories rather than any large losses of non-interest-bearing deposit accounts.
We've seen the non-interest-bearing balances stabilize, as evidenced by the $10.6 billion of average non-interest-bearing deposit balances in the third quarter, being roughly equal to the $10.6 billion balance at the end of the second quarter. This strong deposit growth helped to fund solid loan growth of $423 million during the third quarter. Adjusting for the impact of the sale of certain commercial insurance premium finance loans during the third quarter, total loans increased $767 million or 7% on an annualized basis, which is consistent with our prior guidance of mid- to high-single-digit loan growth. The increase in loans was primarily the result of draws on existing commercial real estate loan facilities, as well as growth in the commercial portfolio.
Additionally, despite the loan sale transaction that reduced outstanding balances by $344 million at the end of the third quarter, the commercial insurance premium portfolio ended relatively unchanged, which is a good result. Rich Murphy will discuss the loan portfolio growth in more detail in just a bit. The result of these and other balance sheet movements was growth in total assets of approximately $1.3 billion, a slightly reduced ending loan-to-deposit ratio of 92.1%, and risk-based capital ratios that were relatively stable to up a little... Overall, it was a very successful quarter in the growth of our franchise, our differentiated business model, exceptional service, and the unique positioning that we have in Chicago and Milwaukee markets continues to serve us well. Turning to the income statement categories, starting with the net interest income.
For the third quarter of 2023, net interest income totaled $462.4 million, an increase of approximately $14.8 million as compared to the prior quarter, and an increase of $60.9 million as compared to the third quarter of 2022. I should note that the third quarter net interest income represents the highest quarterly amount ever recorded by the company. The increase in net interest income as compared to the prior quarter, was primarily due to the increase in average earning assets of approximately $1.6 billion. The net interest margin was 3.62% in the third quarter, which was just 4 basis points less than the prior quarter level of 3.66%.
3 of the 4 basis points of the decline was due to the impact of our interest rate hedging strategies, which are designed to protect our net interest income if interest rates decline. Accordingly, as we discussed on prior calls, our balance sheet composition, structure, and repricing characteristics provided for a relatively stable net interest margin during the quarter. Deposit pricing moderated in the third quarter of 2023, and we expect that to continue into the fourth quarter. Based on the current interest rate environment, we believe we can maintain our net interest margin within a narrow range around the current levels for the remainder of 2023. I'd also like to note that total loans as of September 30th, 2023, were $739 million higher than the average total loans in the third quarter of 2023.
This provides momentum into the fourth quarter. This growth and, and the expected growth in the balance sheet, and the relatively stable net interest margin, should allow for future growth of our net interest income in the fourth quarter. Turning to the provision for credit losses. Wintrust recorded a provision for credit losses of $19.9 million in the third quarter, compared to a provision of $28.5 million in the prior quarter, and $6.4 million provision expense recorded in the year ago quarter. The lower provision expense in the third quarter relative to the second quarter, was primarily a result of lower net loan growth during the third quarter. Now, Rich Murphy will talk about the credit and loan characteristics in just a bit.
Regarding non-interest income and non-interest expense sections, total non-interest income totaled $112.5 million in the third quarter, and was relatively stable when compared to the prior quarter total of $113.0 million. As shown in the table in our earnings release, there are a number of relatively small changes to a variety of non-interest income categories, but in the aggregate, the changes netted to a slight decrease of $552,000 from the prior quarter. This illustrates the importance of having a diversified fee businesses that can contribute at various levels over time, and the ability of those business lines to maintain a relatively stable level of non-interest income, despite what is a challenging mortgage environment.
On the non-interest expense categories, non-interest expenses totaled $330 million in the third quarter of 2023, and were up approximately $9.4 million when compared to the prior quarter total of $320.6 million. Now, there are a few primary reasons for the increases, which are related to the negative impacts of, one, occupancy costs of approximately $2.9 million from the impairment of two company-owned buildings that are no longer being used. Two, data processing costs of approximately $1.5 million from a termination of a duplicate service contract related to the acquisition of the wealth management business in 2023. Other salary costs of approximately $1.6 million related to acquisition-related severance charges, and other contractually due compensation costs.
And then we also had an increase in our commissions and incentive compensation of $4.3 million, primarily because of the adjustments to our incentive compensation accruals due to the strong earning levels. The remainder of the variances in the non-interest expense categories, both positive and negative, generally offset to a relatively small remaining change. So despite the growth in the non-interest expenses and the uncommon nature of some of the items that I just noted, the company's annualized ratio of non-interest expenses as a percent of average quarterly assets, actually declined by 3 basis points to 2.41% in the third quarter. Additionally, our efficiency ratio remained stable at 56.9% in both the second and the third quarters of 2023.
Similarly, the company's net overhead ratio was relatively stable at 1.59% in the third quarter, and increased just 1 basis point from the 1.58% recorded in the prior quarter. In summary, this was a very solid quarter with strong loan and deposit growth, improved liquidity position, stabilized net interest margin with a steady outlook, a record level of net revenues, continued low levels of non-performing assets, and the second highest quarterly net income result in the company's history. We feel like we've managed well through a somewhat turbulent period thus far in 2023, delivering net income that was a record for the first nine-month period of any fiscal year in the history of the company, and we have a positive outlook for continued growth in assets, revenues, and earnings.
With that, I will conclude my comments and turn it over to Rich Murphy to discuss credit.
Richard Murphy (Vice Chairman and Chief Lending Officer)
Thanks, Dave. As noted earlier, credit performance continued to be very solid in the third quarter from a number of perspectives. As Dave noted, and as detailed on slide six of the deck, loan growth for the quarter was $423 million. If you adjust for the sale of the premium finance loans in July, total loans increased by $767 million or 7% on an annualized basis. This growth is due to a number of factors.... Commercial premium finance volumes remain strong as we continue to see a significantly harder market for insurance premiums, particularly for commercial properties, resulting in higher average loan sizes. We also continue to see new opportunities as a result of consolidations within the premium finance industry.
Finally, we saw good growth in commercial real estate, largely from draws on existing construction loans, and our leasing group had another solid quarter. This rate of loan growth, when adjusted for the sale of loans in the quarter, is in line with our guidance of mid- to high single digits. We also believe that loan growth for the fourth quarter will continue to be within our guidance for the following reasons: Commercial premium finance should continue to show solid growth. Our core C&I pipelines look very good, and our leasing teams continue to see significant demand in the market. And as we have noted on prior calls, we continue to benefit from disruptions in the banking landscape and have seen numerous quality opportunities in our core businesses.
In addition, we are looking at a number of lending teams and niche lending opportunities that come from dislocations at other regional banks. Offsetting this growth will be continued pressure on line utilization, which is down to 37%, as higher borrowing costs have negatively affected usage for the past several quarters, and we anticipate that higher borrowing costs will continue to cause borrowers to reconsider the economics of new projects, business expansion, and equipment purchases. In summary, we continue to be optimistic about loan growth for the balance of 2023, and we believe our diversified portfolio and position within the competitive landscape will allow us to grow within our guidance of mid- to high single digits and maintain our credit discipline. From a credit quality perspective, as detailed on slide 13, we continue to see strong credit performance across the portfolio.
This can be seen in a number of metrics. Non-performing loans increased by $24 million in the quarter, from 26 basis points to 32 basis points. However, $20 million of this increase is in the premium finance portfolio. These loans are secured by the unearned premiums, and we would anticipate no additional losses. Overall, NPLs continue to be at historically low levels, and we are confident about solid credit performance of the portfolio going forward. Charge-offs for the quarter were $8.1 million, or 8 basis points, down from $17 million in the second quarter. Finally, as detailed on slide 13, we saw stable levels in our special mention and substandard loans, with no meaningful signs of additional economic stress at the customer level.
As noted in our last few earnings calls, we continue to be highly focused on our exposure to commercial real estate loans, which compose roughly one quarter of our total portfolio. Higher borrowing costs and pressure on occupancy and lease rates are cause for concern, particularly in the office category. On slide 17, we've updated a number of the important characteristics in our office portfolio. Currently, this portfolio remains steady at $1.4 billion, or 13% of our total CRE exposure, and only 3.4% of our total loan portfolio. Of the $1.4 billion of office exposure, 42% is medical office or owner-occupied. The average size of a loan in our office portfolio continues to be around $1.3 million, and we have only five loans above $20 million.
We continue to closely monitor loans secured by office properties located within central business districts. Our CBD exposure is limited to $364 million, or approximately one quarter of the office portfolio. Half of this is in Chicago, and half of this is in other cities. The bulk of our portfolio is located in suburban areas and areas outside central business districts. And NPLs in this category were flat quarter-over-quarter and continue to be at very nominal levels. We continue to perform portfolio reviews regularly on this portfolio, and we stay very engaged with our borrowers. As we have noted previously, we are not immune from the macro effects that challenge this product type, but we believe our portfolio is well-constructed, very granular, and should perform well moving forward.
To better understand the stresses in our portfolio, our CRE team updated their deep dive analysis on every loan over $2.5 million, which will be renewing between now and the second quarter of 2024. This analysis, which covered 80% of all CRE loans maturing during this period, resulted in the following: Roughly one-half of these loans will clearly qualify for a renewal at prevailing rates. Roughly 35% of these loans are anticipated to be paid off or will require a short-term extension at prevailing rates. The remaining 16% of these loans will require some additional attention, which could include a pay down or a pledge of additional collateral. We have backchecked the results of these deep dives conducted during prior quarters and have found that the projected outcomes versus actual outcomes were very tightly correlated.
Generally speaking, borrowers whose loans deemed to require additional attention continue to support their loans by providing enhancements, including principal reductions. Again, our portfolio is not immune from the effects of rising rates or the market forces behind lease rates, but we have been diligently identifying weaknesses in the portfolio and working with our borrowers to identify the best possible outcomes, and we believe that our portfolio is in reasonably good shape and situated to weather the challenges ahead. That concludes my comments on credit, and I'll turn it back to Tim.
Tim Crane (President and CEO)
Thanks, Rich. Just to wrap up our prepared remarks, we continue to believe that we're very well-positioned, perhaps uniquely positioned, to take advantage of the current environment with our diverse businesses. Although the last several quarters, we've taken steps to achieve an interest rate sensitivity position much closer to neutral, we will benefit from rates that may be higher for longer. Based on current economic conditions and current banking conditions, we expect a margin that will be reasonably set, reasonably stable in a narrow range around the current level for the coming quarters. Rich noted some evidence of slowing economic activity. I can tell you we remain very active, but disciplined in what I would call a choppy market. As also noted, there are clearly opportunities, and we will continue to pursue them aggressively in the coming months.
At this point, I'll pause and, Latif, if you open it up, we can take some questions.
Operator (participant)
... As a reminder, to ask a question, you will need to press star one, one on your telephone. To remove yourself from the queue, press star one, one again. Please stand by while we compile the Q&A roster. Thank you for standing by. Our first question comes from the line of Jon Arfstrom of RBC Capital Markets.
Tim Crane (President and CEO)
Morning, Jon.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
Yeah. Good morning, guys. Tim, a question for you on a topic you just discussed on the kind of the near term versus medium-term margin outlook. Are you saying that beyond the fourth quarter, based on the asset pricing cadence, that you see that the margin can start to march higher in 2024? Is that stable in the fourth quarter, potentially moving higher in 2024? Is that the message?
Tim Crane (President and CEO)
Yeah, I mean, I think there's obviously a number of moving pieces to this, Jon. At the moment, you know, looking out a quarter or two, we think pretty stable. After that, you know, I think there's signs that we would feel optimistic about, but clearly there's a lot that goes into it past the next quarter or two.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
Okay. How about hedging appetite? Is the plan to continue to hedge more? Do you feel like you've done what you need to do?
Tim Crane (President and CEO)
Well, one, for those of you that are kind of following, there is a description of our hedges in the appendix that we share with everybody. That shows about $6.3 billion of hedges, one added in the first or in the third quarter. We've subsequently added another small hedge, and I think we would continue to kind of follow the market up, Jon, if we have the opportunity to do that. As we've talked about, our desire is to certainly narrow the downside exposure on our margin. And, you know, we perform well with a margin in the mid threes. We work hard to stay in that range.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
Mm-hmm. Okay. Thank you for that. And then, Rich, question for you on the premium finance non-performers. Can you-- I think I understand it, but can you explain it and, and why is it up, and when does this stuff get resolved naturally?
Richard Murphy (Vice Chairman and Chief Lending Officer)
Yeah. Well, two different buckets of loans there, Jon. So, roughly equal to each other. If you look at page 13, there is a slide 13, you can kind of see what, you know, the effects are. So I'll take each one individually. In the P&C side, we are seeing a little bit more stress in the transportation area. So those loans are falling more delinquent more often. We do the analysis on those, and, you know, if there is a loss, we will take the loss, and then we'll get the unearned premium back from the carrier. So it's a... You know, in that situation, there is some economic deterioration that is causing more of those numbers to go 90 days past due.
Now, that's, again, the loss given default is, you know, unchanged there, but you are seeing instances of default go up there in that category. The life category is a little bit different, and it's a similar amount, about $10 million, and those really result from, as rates have come up, and people get to the maturity of their loan and they are looking at renewing that policy, they have to make a decision whether it still makes economic sense for them. And those conversations can get elongated, and we want to work with our clients and give them time to make that decision in an orderly fashion. You know, so we are not necessarily automatically sending it, canceling the policy and going back to the carrier.
We want to make sure that we work with the client. So those might extend beyond 90 days past due, but generally speaking, they're always going to be fully insured, and we wouldn't anticipate that there would be any problems there. Those loans that are 90 days past due, that we have identified here, we would anticipate that those will be gone by the end of this month.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
Okay. Okay. And on the commercial NPLs, if this is a persistent issue, you're saying that you're thinking that could remain elevated, but this is kind of the nine-month loan on a 12-month insurance contract. Is that, that's the structure? Is that right?
Richard Murphy (Vice Chairman and Chief Lending Officer)
Yeah, that's right. But we do think that loans within our P&C portfolio that apply to transportation will have a little bit more pressure, and you still may see ongoing defaults. A couple of important points there is that we are getting, you know, a pretty good size premium on those, and we get reasonable late charges, so we are getting paid for that risk. So we're not all that concerned about it from that perspective. But we also are taking some measures here to make sure that our underwriting is maybe addressing some of those things, so we are getting a little bit tighter in that space. But generally speaking, again, while this is an elevated level, we're not concerned about future losses out of it.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
Yep. Okay. All right. Thank you very much.
Operator (participant)
Thank you. Stand by for our next question. Our next question comes from the line of Chris McGratty of KBW.
Tim Crane (President and CEO)
Hi, Chris.
Chris McGratty (Managing Director and Head of U.S. Bank Research)
Hey, good morning. Dave, I want to go at the NII again. A lot of your peers are still defending, you know, the trough or trying to find the trough for, you know, six months out. You know, you gave the guide for continued growth in NII in Q4, kind of a stable-ish margin in higher for longer. You've got that unique back book. But it would feel like NII continues to grow throughout 2024. Maybe the pace is not as significant, but is that a fair estimate based on what you see in the world?
David Dykstra (Vice Chairman and COO)
... Well, yeah, I, I think that's how we, we look at it, Chris. Obviously, we, you know, if the Fed kills the economy and loan growth slows quite a bit, that would have an impact. But, but the benefit of being diversified in our asset classes is, as Rich has said in many times in the past, is if one area slows down, another area is doing okay. So we do think we can keep growing our loans in that mid- to high-single-digit range. Again, as Tim just talked about on the prior question, we think stable and, you know, potentially optimistic in the latter half of the year as far as the margin goes. But again, it depends on where the interest rate curve is and, and, and all that kind of stuff, and how competitive deposit cost is.
If that picks up right now, we said we see it moderating, so it's very positive. So, you know, I guess a long-winded answer to say, yeah, we still think we can grow mid- to high single digits, and we think the margin's stable. So if that's the case, we think we can have growth.
Chris McGratty (Managing Director and Head of U.S. Bank Research)
Okay, great. Just on the loan sale, can you just remind us you talked about it last quarter, kind of testing the plumbing. Should we expect more of that to occur? And was there a? I assume there's a gain that showed up in the non-interest income. Just trying to get the logistics.
David Dykstra (Vice Chairman and COO)
Yeah. Well, we're not planning on any right now. As you said, I mean, we you know, if you go back into the second quarter when we started to plan this, and we did the sale early in the third quarter, as we talked about on the last call. We really did it as a way to demonstrate that that portfolio has liquidity, and then it pays down very rapidly. We would expect the majority of that impact to be gone by the end of this fiscal year, since these are nine-month full payout loans, and we'll be six months into it, so there'll be very little really left, of that impact. But we wanted to be able to demonstrate that we had liquidity.
We wanted to be able to make sure we had a tool in case concentrations of those premium finance portfolios got too high. You know, we wanted to be able to have the plumbing in place in case there was any future liquidity events that happened in the industry. So we just thought it was prudent to do the sale, put the plumbing in place, test it out, and move forward. But right now, based upon the good deposit growth that we're having and our funding ability to continue to fund those loans and our loan-to-deposit ratio being in the spot that we like it, we don't have any expectations that we'll do another sale on the near term. But the facility is there in the event we need it for some reason.
Chris McGratty (Managing Director and Head of U.S. Bank Research)
Perfect. And then maybe the last one, you went through all the moving parts of non-interest income, and I think it added to $500,000. How do we think about just the trajectory of your fees, with mortgage obviously pretty depressed, but you've got other offsets from here?
David Dykstra (Vice Chairman and COO)
Yeah, well, mortgage and wealth management are two big areas. The service charges sort of just plug along and maybe grow with the growth of your business and retail accounts. But mortgages, you know, the pipelines are pretty consistent, and, you know, they're in the 80%-85% purchase business. You know, that maybe that slows down a little bit in the winter months, since the majority of our originations come out of the Chicago, Milwaukee, and Minnesota markets. But applications, I think, are about as low as they go. So we would expect steady originations. Gain on sale margins have been holding in a little above 2%.
We think that, you know, will just plug along, and then there might be some fluctuation depending upon movements in rates and the impact on mortgage servicing rates, but we try to hedge that impact pretty well, too. I think our personal opinion is, I think mortgage probably bounces along here for the next couple of quarters. Hopefully, in the spring buying season, we see some green shoots and some improvement in the applications and the production. I don't see anything that would indicate that it would increase rapidly in the near term or decrease rapidly. It's been plugging along at these levels for, you know, four, five, six months now, so we expect that to continue.
Wealth management, you know, somewhat depends upon you know, the movement of the underlying assets under management and their valuations, because the fees are based upon a lot of the values. But we continue to try to hire people and grow that business, but it's a little bit slower trajectory forward, but we would expect it to grow. So, we've got some leasing income in there, et cetera, but the rest is pretty small.
Chris McGratty (Managing Director and Head of U.S. Bank Research)
Great. Thanks, David.
Operator (participant)
Thank you. Once again, to ask a question, please press star one one on your touchtone telephone. Again, that's star one one to queue up for a question. Our next question comes from the line of Terry McEvoy of Stephens Inc.
Terry McEvoy (Managing Director)
Hi, thanks. Good morning, everyone. Maybe start with a question, the expense outlook for the fourth quarter. There were a couple items called out on the expense line right in the opening of the press release, but can you share some thoughts on 4Q? And maybe while I'm on, any initial thoughts on 2024 expenses, whether that will track kind of historical growth rates or, we are hearing from some, some other banks that they're looking at expenses with some internal plans to kind of control that growth rate.
David Dykstra (Vice Chairman and COO)
Yeah, well, you know. You're right, Terry. We call out about $6 million of sort of uncommon expenses that we wouldn't expect to recur in the fourth quarter. So, you know, that's 3.30%. You know, I yeah-
... You take those out, and you're in 3.24%-ish or something like that. So probably, you know, somewhere plus or minus in that area for the fourth quarter. We haven't really given guidance for 2024 yet, but generally speaking, you know, our, our thought is that, you know, we're a growth company, and, and we have lots of opportunities. We're uniquely positioned here in Chicago right now with our size and, and, and how we stack up against the, the, the competition. Basically, we're going against big banks and small community banks. There just aren't a lot of banks between $10 billion and $50 billion that are headquartered in the Chicago area. So we, we have a unique position here that we think we can take advantage of, and we also have, you know, our niche businesses that, that can help out.
So, we've always thought of ourselves as a growth company. We still think we can grow. Deposits are out there, and having good growth, and so we'd rather grow into this, and if we grow mid to high single digits, we would expect that our, you know, our non-interest expenses would grow at a rate less than that. You know, maybe mid-single digits, and so we can leverage the infrastructure going forward. You know, if for some reason, the growth doesn't come, there's certainly levers we can pull to try to reduce expenses. But the plan is to grow into it and leverage the infrastructure. And as I said, actually, our non-interest expenses, even with that $6 million in there, as a percent of average assets, was down a little bit this quarter.
You know, we're going to watch them, we're going to control them, but we're still expecting to be growing the franchise and taking advantage of opportunities in the marketplace. And that's always been the plan and continues to be the plan.
Terry McEvoy (Managing Director)
And then maybe as a follow-up, the $337 million of CRE growth in the third quarter, you know, can you help us understand how much of that came from kind of market opportunities, new customers versus current customers? And how successful have you been in having them bring over their deposit relationships and business as well?
Richard Murphy (Vice Chairman and Chief Lending Officer)
Yeah, I'll, I'll answer that sort of in reverse order. Pretty much any new opportunity that we're looking at, it's assumed that we're going to be getting meaningful deposits. That's number one. As it relates to the growth, as I said in my comments, the majority of what we're seeing there are draws on existing facilities that we have with existing customers. But there's probably about 40% of that total comes from opportunities that we're seeing in the marketplace. As you know, a lot of other banks are really, you know, out of that space right now, and there are good opportunities out there for us to bring over clients. So, it's a little bit of a mix, but the majority is still with existing clients and existing outstandings.
Terry McEvoy (Managing Director)
Great. Thanks for taking my questions.
Richard Murphy (Vice Chairman and Chief Lending Officer)
Thanks, Terry.
Operator (participant)
Thank you. Our next question comes from the line of David Long of Raymond James.
Richard Murphy (Vice Chairman and Chief Lending Officer)
Hi, David.
David Long (Managing Director)
Good morning, everyone. Thanks for the update on loan growth expectations. It sounds like the pipeline is still pretty good. My question, you know, when I'm looking at the surveys of lenders, there's not a-- there does not seem to be a big appetite to lend, nor much of a demand for loans as there has been. What's making Wintrust different here? How are you guys able to grow the portfolio when the market may be expecting more of a flattish outlook for loan growth?
Richard Murphy (Vice Chairman and Chief Lending Officer)
You know, as we've talked about in the past, you know, loan growth, you know, comes in many different forms for us. So, you know, you go back to a point when we were just out of the pandemic or in the middle of the pandemic, and rates were very low, you know, life finance was just going crazy. You know, now that's slowed down. But in the meantime, you have the P&C side, you know, kind of filling in that gap. So, you know, having a, a multi-pronged approach to lending really does make a difference for us in terms of, you know, when you have growth in certain areas. But more specifically, as it relates to, you know, maybe the core businesses, I would say that, we've been pretty disciplined about the way our portfolio is constructed.
A lot of banks right now would look at their CRE bucket and say, "It's probably more than ideal." You know, we would say that, you know, right now we still have an appetite for CRE loans, and so we're able to take advantage of that dislocation in the market. Similarly, that with a lot of the... David, as you know, in Chicago, we've had a tremendous amount of disruption with the players in Chicago, and we're seeing lots of opportunities on the C&I side for companies that, you know, we've been actively trying to bring over for some time, and they just, for whatever reason, stuck with the incumbent until they just couldn't take it any longer. And so, as a result, we've been able to bring over a lot of those.
So we continue to be pretty bullish about growing that portfolio, particularly on the core side. We really see a lot of nice opportunities right now.
Tim Crane (President and CEO)
David, we've, we've been disciplined on pricing, but there's-- loan demand is there. It's-- you just have to pick your spots, and we're getting a lot of looks.
Richard Murphy (Vice Chairman and Chief Lending Officer)
Yeah, that's a great point, Tim. I mean, where structures had been, you know, if you go back, you know, 18 months ago, 24 months ago, structures were pretty loose, pricing was pretty tight, and, you know, there were those were times where we were, you know, we, we there were deals that we just stepped away from. You know, right now, you can get better structure, you can get better pricing, and, you know, we try to be very disciplined in that space.
David Long (Managing Director)
... Got it. No, thanks, thanks, thanks for that color.
Tim Crane (President and CEO)
Yeah.
David Long (Managing Director)
Go ahead.
Tim Crane (President and CEO)
Yeah, well, I just say we can continue to grow deposits. We've proven for a couple of quarters that we can fund the loan growth. And, you know, our desire would be to continue to grow the deposit base. It's kind of the core of our franchise, and we've talked several times about the fact that, you know, we're 6%, 7%, 8% market share in deposits in the Chicago area, you know, opportunities in Milwaukee as well. So even though the, you know, 6/30 deposit share results were pretty good for us, we think that's just the beginning.
Richard Murphy (Vice Chairman and Chief Lending Officer)
Yeah, I would say, you know, sort of, you know, the macro summary on your question is that there is no shortage of opportunities to lend money out there right now. I think there's a lot of banks that are just maybe unwilling for the deposit and capital reasons. You know, so our job is to take advantage of this moment.
David Long (Managing Director)
It sounds like the strategy is still focused on organic growth because that's what the market is giving you. You know, what is the appetite for M&A at this point? And what does the backdrop, or what needs to change in the backdrop, maybe for you guys to be more opportunistic on that front to accelerate growth?
Tim Crane (President and CEO)
Well, there are acquisition-type opportunities, so whether that's a portfolio of loans or whether it's a piece of a business, or in some cases, the conversations around, you know, kind of bank M&A are picking up. But we're pretty disciplined and, you know, some of these portfolios are challenged from a pricing perspective, and we don't need to do that kind of growth given the opportunities that we have. If some of those look up, you know, like good opportunities to us, we may add some people, for example, in areas where we've got good businesses. You know, there are some folks available in the market right now, but I think we'll stay pretty disciplined.
David Long (Managing Director)
Got it. Thanks, guys. Appreciate the, the color there.
Tim Crane (President and CEO)
Yeah, thanks, David.
Operator (participant)
Thank you. Our next question comes from the line of Casey Haire of Jefferies.
Tim Crane (President and CEO)
Hi, Casey.
Casey Haire (Managing Director of Equity Research)
Hey, thanks. Good morning, guys. I guess just, sorry, if I missed this. Wanted to follow up a little bit more on the, on the NIM discussion, but, did you guys disclose, what spot loan yields were and deposit costs at 9/30?
David Dykstra (Vice Chairman and COO)
No, we haven't done that. But what we could tell you is that the margin was, you know, right near the current level at the end of the period, and we're really focused on the net margin going forward. But the deposit pricing has moderated, as you can see, and we expect that to continue into the fourth quarter. But, no, we didn't provide that.
Casey Haire (Managing Director of Equity Research)
Okay, very good. And then just, I guess, switching to credit. The ACL on the core book at 151, obviously very strong. Just curious, what kind of scenario are you guys baking in, you know, be it a slowdown, S3, or any color on what kind of unemployment rate that you know which is driving your CECL modeling?
David Dykstra (Vice Chairman and COO)
Yeah. Well, I mean, we look at it a number of different ways. I mean, we use as a base we use Moody's base case scenario, but we do also look at other economic scenarios to build our case. We don't have a big consumer portfolio, so you know, unemployment is generally not a big impact in our models with correlation. We use a consumer real estate price index, you know, the Baa credit spreads and a few other factors. Those didn't have a major impact, quarter-over-quarter change. The real reason the provision was less this quarter was we just had less loan growth this quarter.
All the other factors sort of washed out, but you know, roughly $10 million of that reduction was just due to less loan growth in the third quarter relative to the second quarter. But to answer your question generally is, we use the Moody's model, and we supplement that with a couple other economic sources.
Casey Haire (Managing Director of Equity Research)
Great. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Jeff Rulis of D.A. Davidson.
Jeff Rulis (Managing Director and Senior Research Analyst)
Thanks. Good morning. Just a couple housekeeping items. Just wanted to follow up. The co-work office credits you pushed out last quarter, is that largely done? Is there anything else you're trying to kind of manage out within the office side?
Richard Murphy (Vice Chairman and Chief Lending Officer)
As we disclosed last quarter, that sale took up a roughly half of that portfolio. You know, we will continue to explore options related to the rest of that exposure. And my guess is we'll hopefully get something done here relatively soon, but, you know, it just depends on what that market looks like. We are always looking at assets within the portfolio and determining kind of the best course of action, but nothing pending right now.
Jeff Rulis (Managing Director and Senior Research Analyst)
Okay. And then on the, you know, back to the premium finance sales, kind of the testing, the plumbing, you know, I imagine some of that is just, you know, kind of mix management, but was there a credit portion to that? I mean, it now that it sounds as if you're going to slow some of those sales, despite a little pickup near term in, you know, non-performers, or non-accruals? Anything else on the premium finance that you might that's got a credit pinch to it that you want to kind of - Like you said, you're always looking at exiting riskier portfolios. Is there some concern in that book, I suppose?
David Dykstra (Vice Chairman and COO)
No, there's no concern. That sale really wasn't at all for credit. It was all a liquidity play and testing that for liquidity reasons. As Rich said, we really think that, you know, those portfolios are low-cost portfolios, so we don't worry about them from that perspective. And even on the life side, like Rich talked about, I mean, you'll notice that that $10 million that was non-performing, it's still accruing. You know, we generally, you know, we'll allow some of these to go past due, but if for some reason we are no longer 100% collateralized, then we'll unwind the policy. So we just don't feel like...
And you can see a historical loss rates of 0 basis points over the history of that portfolio would indicate that that's how we manage that portfolio. On the P&C side, you know, we're not worried about the economics over the credit side of the equation. So the sale had nothing to do with credit. It had everything to do with liquidity.
Jeff Rulis (Managing Director and Senior Research Analyst)
Okay. Appreciate the clarification. Yeah, it sounds pretty, pretty short-duration stuff anyway.
David Dykstra (Vice Chairman and COO)
Yeah.
Jeff Rulis (Managing Director and Senior Research Analyst)
Just one last one. Just back to the margin, sorry to kind of beat up on this, but it sounds like pretty back-end loaded loan growth in the quarter, talking about deposit pricing moderating. I guess, in the short term, that kind of margin stability, is that conservatism kind of the, you know, expectation of maybe more hedging headwinds, or just being, again, conservative overall? Because it sounds fairly positive given those factors as you lead into the fourth quarter.
Tim Crane (President and CEO)
Yeah, I would think I would say it's fairly balanced. I mean, we still have, you know, CD book that reprices upward. I mean, there will be movement in deposit costs. We just also believe that there's continued asset repricing, particularly in the two premium finance portfolios, which will continue to offset that. So I think it's a pretty balanced look. We're working hard to move the margin up as much as we can, but it's pretty balanced at this point.
David Dykstra (Vice Chairman and COO)
I mean, the hedging cost us 18 basis points in the quarter, but, you know, it's good risk management for a down rate scenario. But I'm not sure I'd use the word conservatism. We try to be realistic, and we just think we have a balanced book right now. So we think the margin will stay relatively stable. You know, you could have a lot more deposit growth than you thought, and maybe that puts some pressure on the margin, but that's okay because you bring in good deposits that adds to the franchise and allows you to fund good loan growth.
But, so the timing may go, as I've said, it goes up a couple of basis points or down a couple of basis points, but we think it'll be in a relatively tight band going forward just because of the structure and the repricing nature of both the sides of the balance sheet. So.
Jeff Rulis (Managing Director and Senior Research Analyst)
Yeah. Maybe just the last one then. Just the ideal environment that you ... For the rate environment, if you think about margin a little further out, I mean, maybe that's the point of the hedge, is to keep it, you know, somewhat stable. But I guess, if we spoke to it specifically, if the Fed does nothing, if we hike or we get, you know, cuts over time, and I guess steepen-
Tim Crane (President and CEO)
Well-
Jeff Rulis (Managing Director and Senior Research Analyst)
What would be the, if we look at the balance of 2024, the way you're positioned, what, from a Fed standpoint, is ideal?
Tim Crane (President and CEO)
Well, as we talked about, we're much more neutral than we had been, and you can see that on, I think it's Table 12, Table eight, sorry. We still are asset sensitive. We benefit, you know, a little bit if rates continue to stay high or move up. You know, who knows? We may get something in December or January here if the political kind of issues quiet down. But, you know, we're pretty square at this point, and so, you know, we're gonna grow net interest income primarily through growth at this point. And, you know, that's what we're focused on doing.
Jeff Rulis (Managing Director and Senior Research Analyst)
Yep. Appreciate it. Thanks.
Tim Crane (President and CEO)
Yep.
Operator (participant)
Thank you.
Tim Crane (President and CEO)
I guess, I guess the other thing I would add is obviously, not only is the hedging program helpful, but if rates turn down, the mortgage business will pick up relatively quickly, we think. There's just a lot of, you know, refinance opportunity, even with a moderate move there. So, again, we like the diversity of our businesses as an element in helping to kind of stabilize the performance going forward.
Operator (participant)
Thank you. Our next question comes from the line of Brody Preston of UBS.
Brody Preston (Equity Research Analyst)
Hey, good morning, everyone. How are you?
Tim Crane (President and CEO)
Good morning, Brody. We're good.
Brody Preston (Equity Research Analyst)
Hey, I just wanted to ask a couple quick questions on the composition of the loan portfolio. Do you happen to have what the percent of the portfolio is that are Shared National Credits, and of that, what you happen to be the lead on?
Richard Murphy (Vice Chairman and Chief Lending Officer)
Yeah. Total SNCs in our portfolio are just over $1 billion. We're the lead on about 6% of that.
Brody Preston (Equity Research Analyst)
Okay.
Richard Murphy (Vice Chairman and Chief Lending Officer)
I would also just kind of point out that, you know, of our SNC portfolio, much of that is really tied to the businesses that we're in. Franchise Finance has a significant number of SNCs where-
... we're other banks are buying into our credits, we're buying into their credits. Similarly, like in the insurance space, similar things. So we're generally not a player in just buying into other people's deals. It really is our approach to this is just to facilitate the growth of individual business lines and making sure that we see, you know, how other banks are managing those credits. And so it's we believe it's a sound approach, but it also gives us some intel into, you know, how other competitors are working in that market.
Brody Preston (Equity Research Analyst)
Got it. And on the office portfolio, do you happen to have what the reserve and the reserve level and the average loan-to-value is?
Richard Murphy (Vice Chairman and Chief Lending Officer)
We don't disclose loan-to-value. We think that it's a little bit of a misleading number because, you know, whether it's a loan-to-value based on time of origination or if people are getting loans reappraised, we think it's a little bit of a, you know, misrepresentative number. I would say that our general loan policy, we're typically, you know, going to be sub-70% on our origination at time of origination.
David Dykstra (Vice Chairman and COO)
Yeah, and on the reserve side, it's really sort of included in our overall commercial real estate. We don't disclose a separate one for office, so it would be sort of included in the commercial real estate sector. We do have some qualitative factors that we apply, but we haven't disclosed the specifics for that line item, Brody.
Brody Preston (Equity Research Analyst)
Okay. Okay, got it. And I know you talked a little bit about the analysis that you guys continue to do about, you know, the office loans that are coming due over the next 12 months. Do you happen to have the number, I guess, the actual dollar amount of loans that are coming due over the next 12 months? And how does that look as we go forward through 2025?
Richard Murphy (Vice Chairman and Chief Lending Officer)
Yeah, I don't. You know, we don't. I would say that, you know, this, you know, you hear about the wall of maturities. I mean, as we looked at it and kind of just looked out through all of next year, we really don't see it. I mean, it's really kind of spread out, you know, pretty evenly through 2024 and 2025. But I don't have the number that within that, that population.
David Dykstra (Vice Chairman and COO)
We don't have it handy here.
Richard Murphy (Vice Chairman and Chief Lending Officer)
Yeah, I don't have it handy. I do have it.
David Dykstra (Vice Chairman and COO)
We have it. No, we just don't have it handy here.
Brody Preston (Equity Research Analyst)
Yeah. Yeah, understood. And so you just one last one on the office book. You said you don't disclose the LTV, but do you happen to have what the debt service coverage ratio looks like?
Richard Murphy (Vice Chairman and Chief Lending Officer)
Again, we don't disclose that. But generally, you know, we're, you know, we want to... On a stress basis, we're looking for a 1.2% coverage on deals that we do.
Brody Preston (Equity Research Analyst)
Okay. Okay, got it. Dave, just I wanted to follow up on the sale of the premium finance loans. Did you—I think we had talked about $500 million before, and it looks like it came in at, like, $344 million. What was the rationale behind selling less than the $500 million?
David Dykstra (Vice Chairman and COO)
No, well, the $344 million was the outstanding balance at the end of the quarter, so that would have been the impact. We sold close to $500 million in early July, but because these loans pay down so quickly and on a monthly basis, that $500 million had amortized down to $344 million by the end of the quarter. So that was the end-of-the-quarter impact.
Brody Preston (Equity Research Analyst)
Got it. Okay, thanks for the clarification. And to follow up on Chris's question, did you guys happen to book a gain on that through fee income at all? And if you did, do you know what the dollar amount is?
David Dykstra (Vice Chairman and COO)
Yeah, the gain was roughly $1 million for the quarter.
Brody Preston (Equity Research Analyst)
Okay. And that would be another income then?
David Dykstra (Vice Chairman and COO)
Yes, sir.
Brody Preston (Equity Research Analyst)
Okay. And then the last one was just on the, just on the NIM trajectory. I know there's been a lot, a lot of discussion on it. I just wanted to ask, you know, how are you thinking about, you know... You, I think you're calling for stability maybe as we go forward into 2024, which, you know, feels kind of right. But I, I guess, how are you thinking about rate cuts at all? How will that impact the margin, just given the swaps that you've put in? And, you know, and then specifically on the swaps, the new ones that you've put on, you know, what, what would be the basis point kind of impact on the NIM in terms of drag from the new swaps?
Tim Crane (President and CEO)
Well, the drag right now is 18 basis points for the quarter. And you can see in our disclosure, the individual swaps primarily receive fixed that go out, in some cases, three years, in some cases, five years, with actually a forward start term. But if we start to get rates falling, we think we'll get better loan activity as the economy picks up. We think the mortgage business will pick up. Obviously, that's not a margin-related item, but we think that the offsetting factors to potential NIM compression come in other areas of the business. And so that's how we look at it, and that's when we talk about this being in a narrow band, as you get into some of these other factors, it gets a little bit harder to project exactly.
David Dykstra (Vice Chairman and COO)
Yeah, and I mean, before when rates went to zero, our, you know, our margin was in the mid-2s%. I mean, 2.50%-2.60%, and, you know, we just never wanted to get back there. We think with these hedges we have in place now, if rates went to zero again, we would stay above 3%. I mean, there'd be some compression, and we'd have offsets that Tim talked about, but we would, you know, we wouldn't, we wouldn't go back into that mid-2% range based on this hedging position, that we have in place.
Brody Preston (Equity Research Analyst)
Got it. Thank you very much.
Operator (participant)
Thank you. I would now like to turn the conference back to Timothy Crane for closing remarks. Sir?
Tim Crane (President and CEO)
Yeah, guys, thank you very much for your time this morning. I hope we did a reasonable job answering your questions. You know, this is a lot about blocking and tackling for us. We think we're uniquely positioned to take advantage of opportunities that, you know, we're seeing in the market. And as always, we'll work very hard to deliver good results. So thank you very much.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.