Wintrust Financial - Earnings Call - Q4 2020

Transcript

Speaker 0

Welcome to WinTrust Financial Corporation's Fourth Quarter and Year to date twenty twenty Earnings Conference Call. Following a review of the results by Edward Wehmer, Founder and Chief Executive Officer and David Dykstra, Vice Chairman and Chief Operating Officer, there will be a formal question and answer session. During the course of today's call, Wind Trust 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 ks and any subsequent filings on file with the SEC.

Also, our remarks may reference certain non GAAP financial measures. Our earnings press release and slide presentations 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 call over to Mr. Edward Wehmer.

Speaker 1

Hi, everybody. Welcome to our fourth quarter earnings call, and thanks for dialing in. With me as always are Dave Dykstra, Desar, our CFO Kate Bogey, our General Counsel Tim Crane, our President and Rich Murphy, our Vice Chairman in charge of, Credit. We have the same format as usual, while I'm going give some general comments regarding our results. I'll turn it over to Dave Dykstra for more detailed analysis of other income and other expenses and taxes.

Back to me for some summary comments and talks about the future. Of course, send time for questions. Given all the twenty twenty brought to the table, I think WinTrust really had a remarkable year. Pretax pre provision earnings increased 13%, which exceeded our ten year CAGR, which stood at 10%, not too shabby. I know that we may not have beat the analyst estimates this quarter for PT, PP income.

We're much closer than you think considering the one timers of $13,000,000 and the $7,000,000 of foregone income when we made the decision to keep 10% of mortgage production on our books. More on this later. CECL required huge provisions, dollars $214,000,000 versus $54,000,000 in 2019, increase of $160,000,000 Meanwhile, net charge offs in 2020 were $40,300,000 $9,200,000 less than the previous year. NPLs and NPAs as a percent of loans and assets respectively reached four basis points lower than last year. Last year in and of itself was an excellent credit year.

They closed here at 40 basis points and 32 basis points respectively. One would think there was even a crisis going on. Then I have to write a nice note to Moody's, FASB and AICPA and thank them for putting CECL in when they did. Asset deposits loan grew about two to ten year averages. Assets grew 23.2% versus a 12% CAGR over ten years, loans grew $0.97 versus a 12% CAGR and deposits 23% during the year, which is a 13% CAGR.

We now have over $45,000,000,000 in assets. Again, area hit the cover off the ball by design. We hope it would do that because when rates go low, we use the mortgages to cover until we can catch up on the margin side. And what's the most amazing is we accomplish this really by working remotely for the most part. Taking 5,300 people and flipping the remote and being able to accomplish what we did, our asset growth, we did with PPP and the like is just incredible to me.

Incredible. It just really is incredible. The entire WinTrust team showed great strategic ability and the can do attitude that is unsurpassed. Couldn't be prouder of them, and I told our board this and truly was, the 2021, and this really continues to be our finest hour. On to some earnings statistics, dollars 101,200,000.0 for the year, down 6% from the fourth quarter, up 18% sorry, from the third quarter, but up 18% from the same time last year.

Earnings per share were 1.63 down 2% from the first quarter or from the third quarter and 13% from the fourth quarter last year. Year to date, we made $293,000,000 at a $4.68 per share, down 22%, mostly because of the huge CECL provision we had to take. And now we're in pretty good shape. Pretax pre provision of $135,000,000 or $6.00 $4,000,000 year to date was down was up over 9% over the same period last year and 13% over the prior year. Net interest margin of $254,000,000 is down three basis points.

However, the net interest income was up $3,000,000, as we had great loan growth, in spite of the fact that, it didn't look like it, but we'll get into that in a second because of the first levels of PPP loans trying to get repaid or forgiven. Say we had loans breakeven, but really core loans were up nicely during the period. I'll talk about that in a second. ROE at 10.3% for the quarter, 12.95 for the year. ROE is 7.5% for the year.

Return on tangible equity for the full year 9.54%. The overhead ratio was 112 basis points as compared to 87 basis points last quarter, 153 basis points year before, 105 basis points year to date. We would have probably been a lot lower had we not had the one timers etcetera. But I think we feel pretty good about where we are in that regard, I'll talk about it in a second.

Again, that's what we go through all the time. That's one of our primary motivators is our drivers is earnings growth, tangible book value growth and asset growth. The margin was again affected by excess liquidity on our balance sheet. We've gotten to do a number of things to improve the NII and NIM. Some of these are listed below.

Note that our goal is to maintain an interest rate sensitive position throughout these efforts. Our goal is to maintain a gap of 12% to 15%. In other words, we have to stay disciplined here and not go along and lock in the margin at these goofy rates. Our loan pipelines remain consistently strong in all facets of the business. We made a decision during the year or during the quarter to keep 10% of mortgage production on our books, really beats buying back buying mortgage backs in this market.

This did affect earnings in the quarter as we held actually $180,000,000 on our books in Q4. There's an eight to twelve month breakeven point on holding versus selling and that we have to take all the expenses related to the production upfront and we'll get it back in the margin, which is probably a good thing. We also pulled $272,000,000 of mortgages from Ginnie Mae who are always on our books but upon which we're receiving no earnings. Earnings were going to the security holders and not us. We retained the guarantee but earned the income.

So earning asset growth was actually when you think of it, earning asset loan growth was actually up over $850,000,000 during the quarter. Most of the growth took place towards the end of the quarter. So we're going to have a really good head start going forward into this year. We commenced investing on some liquidity assets of a longer duration. Currently aggregate duration of our liquidity portfolio is one point three years, so close to five to six year duration we usually operate with.

So we have some room to do some accretive investing without messing up the desired gap goals. We also wanna know we've been taking applications for PPP Part three for over ten days. Currently have applications in the process of over 5,500 to $1,175,000,000 30% have already been submitted to the SBA for approval. Fees related to these loans approximately $44,000,000 They advertise over the life of the loans to at least through December year. Average ticket size of these loans is $214,000 The mean size is $72,000 We really beat everybody in the market by almost ten days and our decks are pretty clear right now.

We've got this down and we hope to add more to this portfolio not just because we need it but to help our clients out there who need this to get through the last draw prongs of this current problem or crisis. Pardon me, not really the margin but on the earning asset front. We did complete one round of branch retail, round one of our branch retail rationalization approach. So three Southwestern Wisconsin branches that are not in our prime footprint and we recorded a small gain, approximately $4,000,000 in quarter two twenty twenty one. We also announced plans to close an additional 10 branches and took a 1,400,000 charge this quarter related to the closings.

These branches were all acquired over the years and were determined to be needed due to proximity to other Winchester locations. So it probably $5,000,000 plus or minus a year. It should also be noted we're down over 100 positions in retail due to attrition. We're now replacing staff that left. We believe there'd be a like amount of additional excess capacity on our existing footprint due to continued use of online services really brought about by the pandemic.

These additional savings will offset the cost of branches currently on the drawing board for 2021 and 'twenty two. I'm just a little bit worried that we're much bigger now and when we do, when life does get back to normal, we really don't want to, we want to keep our service level enhanced. Don't want to bite to the bone right now so we'll see where we go with it. We always continue to look for other additional efficiencies in the market. Also in quarter four, we're able to restart our stock purchase program acquiring almost 925,000 shares in the quarter.

It was due to this at an average price that made the acquisition accretive to both earnings and tangible book value. We'll continue to monitor for additional opportunities. The other income side, not to take a stunner, but the mortgage area hit the cover off the ball all year. Fourth quarter as mentioned indicated at the start of our program, we're booking 10% of production on our books, hurts current earnings but will be profitable over the long run. Wealth management also had a good year, especially a good fourth quarter that we can build on going forward.

Total assets under administration surpassed 30,000,000,000, 30,100,000,000.0 to be exact of growth, growth of $1,190,000,000 in the quarter. Rebounding markets helped but majority of the growth was from accounts, new accounts bodes well for the future. On the balance sheet front, assets grew up $1,000,000,000 $3.5 average earning assets were up $937,000,000 Loans, as we said earlier, without PPP were up $6.00 $6,000,000 in all facets of the business. If you add back the Ginnie Mae's we bought back, they really did head on the books but made earning closer to the $850,000,000 of earning asset growth we had. The majority of which took place as I mentioned the last part of the quarter really by almost six seventy eight million plus the buyback of the Ginnys.

So this really holds $678,000,000 of average versus quarter end and the fourth quarter. So again, that's a number plus the Ginnies that we started earning on this quarter bodes pretty well. Deposits were up $1,000,000,000 that's after the repayment of $600,000,000 of high cost institutional money we returned during the quarter. So again, we continue to grow through the cycle. Loan deposit ratio was 86.5% down from 89 as the first two rounds of PPP continue to pay off.

That's a good thing. Loan to deposits, loans and deposits, as I mentioned, loan growth is good across the board and we feel good But our pipelines are strong. We feel very good about where we are right now. And we expect deposit growth is extraordinary both the quarter and the year and we hope to continue that growth because that really is the franchise value of the company. On the credit side, discussed great at the beginning of the presentation.

Needless to say the numbers which were good to begin with have even gotten even better. The pretty low provision we took of $1,180,000 it's not really reserve release in my opinion based on economic factors, rather indication of overall portfolio improvement. The hard work of our credit team, $275,000,000 of loans were upgraded and $40,000,000 of non accruals paid off. This was accomplished through portfolio sales, use of Fed's main street lending product, successful execution of lending exit strategies. We continue to call the portfolio for cracks.

We understand that your first loss is your best loss. We can always look good on recovery. I'll now turn the call over to Dave, who's going provide some additional detail on other income, expenses and taxes. Dave?

Speaker 2

All right. Thanks, Ed. As usual, I'll briefly touch on the significant non interest income and non interest expense sections that had changes from the prior quarter. Starting with the non interest income section, our wealth management revenue increased $1,800,000 to $26,800,000 in the fourth quarter compared to $25,000,000 in the 2020 and up 7% from $25,000,000 recorded in the year ago quarter. This revenue source has been positively impacted by higher equity valuations, which impact the pricing on portion of our managed asset accounts.

Mortgage banking revenue, Ed referred to, was seasonally strong due to the continuing low interest rate environment, but declined 20% or 21,700,000 to $86,800,000 in the fourth quarter from the record level of $108,500,000 posted in the prior quarter and was up a strong 81% from the $47,900,000 recorded in the fourth quarter of last year. The company originated approximately $2,400,000,000 of mortgage loans for sale in the fourth quarter, a record, up from approximately $2,200,000,000 in the prior quarter and up from substantially from the $1,200,000,000 of loans that we originated for sale in the fourth quarter of last year. The decline in the category's revenue from the prior quarter resulted from, first, a decrease in the value of the mortgage servicing rights related to the fair value model assumptions of $5,200,000 in the fourth quarter as compared to a decrease of $3,000,000 in the prior quarter and a drop of approximately $500,000,000 in the pipeline of mortgages being originated for sale, including a reduction of approximately $200,000,000 that the company has earmarked to be originated and held for investment during the 2021. The company is required to record the value of the mortgage related derivatives related to loans in the pipeline at quarter end that are estimated to be to close and to be sold.

As such, when the pipeline of the loans declines, the revenue declines accordingly. Similarly, if the pipelines of loans for sale increases, then we would see associated increases in that revenue. So the reduction of the pipelines by $500,000,000 sacrifices revenue in the current quarter. And as Ed mentioned, that revenue should be recognized for net interest income going forward. Likewise, we retained $192,000,000 of mortgage loans on our balance sheet in the fourth quarter and we also sacrificed the revenue on those loans in the current quarter.

But again, should recognize the revenue through the margin going forward. So approximately

Speaker 3

192,000,000

Speaker 2

that we kept on the books and 200,000,000 that was in the pipeline that we sacrificed the revenue on the current quarter for the benefit of future quarters. While the mortgage revenue decline, it remains a very strong quarter for our mortgage banking business. We currently expect originations in the first quarter to be very strong again due to the continuation of the refinance activity and a strong committed pipeline. Table 16 of our earnings release provides a detailed compilation of all the components of the origination volumes, the mortgage servicing right capitalization, servicing costs, etcetera. But again, a record quarter in total, we recorded or originated $2,500,000,000 of loans that closed either for sale or that we kept on our balance sheet.

Other non interest income totaled $19,700,000 in the fourth quarter, up approximately $6,400,000 from the $13,300,000 recorded in the prior quarter. The primary reasons for the higher revenue in this category included $901,000 of higher swap fee revenue and $2,600,000 of higher income investments in partnerships, which are primarily related to SBIC investments to support CRA purposes. Additionally, BOLI income was up approximately $1,600,000 from the third quarter, primarily as a result of $900,000 of higher earnings on BOLI investments that support deferred compensation benefit plans, which were positively impacted by the equity market returns and also a $900,000 death benefit that we recorded during the quarter. I should note that the $900,000 of increase related to the deferred compensation plan would show a similar increase in expenses. So the amounts in essence offset each other between the other income and the compensation expense by $900,000 Turning to the noninterest expense categories.

Noninterest expenses totaled $281,900,000 for the fourth quarter, up approximately $17,600,000 or 7% from the $264,200,000 recorded in the prior quarter. There are a handful of categories that account for the increase that I will focus on. First, the salary employee benefits expense category increased approximately $7,100,000 in the fourth quarter from the prior quarter. The salary expense component of that category was up approximately $3,700,000 The primary cause was of the increase related to increased staffing to support the overall increase in mortgage originations and technology related staffing to support our ongoing development of enhanced digital products and capabilities. The reported amounts also saw the increase in the deferred compensation expense of a net $700,000 that was impacted by the BOLI returns that I previously discussed.

Turning to commissions and incentive comp, that category is up $3,900,000 in the fourth quarter relative to the third quarter with that change being driven largely by the additional commissions related to the higher amount of closed mortgages and slightly higher wealth management brokerage trading activity as well as a little bit of higher incentive compensation expense recorded in the fourth quarter. You have to remember that the commission's expense on mortgages are paid when the mortgage loans close. And we had record closings in the current quarter that exceeded the prior quarter, whereas revenue is also recorded on the pipelines. So a little bit of a disconnect there, but higher commissions due to higher closings. Offsetting the aforementioned increases in employee benefits was a decrease in employee benefits of approximately $520,000 from the prior quarter due to a slight decrease in employee insurance claims and a slightly lower level of payroll taxes.

Equipment expense totaled $20,600,000 in the fourth quarter, an increase of $3,300,000 as compared to the prior quarter total of $17,300,000 The increase is due to increased software licensing expenses, including some increases related to online mortgage usage, PPP loan servicing enhancements, network upgrades to support our growth and digital enhancements and various other software upgrades as well as the write off of certain software systems that had been retired early as a result of our implementation of certain new systems. We continue to invest in software and technology to enhance our customer delivery systems and products as well as invest in our systems to support our continued growth. Occupancy expense totaled $19,700,000 in the fourth quarter, increasing $3,900,000 The increase was due to the $1,400,000 impairment charge associated with the planned closures of the 10 branches that Ed referred to, increased real estate tax assessments from the prior quarter and higher level of utility charges. Advertising and marketing expenses increased by $2,000,000 in the fourth quarter compared to the prior quarter. This was primarily related to increased digital advertising campaigns and community impact and sports sponsorship spending as various community based and sports venues have begun to increase their events again.

In summary, if you look at this and add up the components, there was roughly $11,000,000 of the increase relates to mortgage activity, including $6,600,000 of an additional earn out on the mortgage acquisitions we had and roughly $4,500,000 of increased salary and benefit costs for the record level of mortgage closings during the quarter. So we would expect that to decrease in the future quarters as the pipelines are down and we believe we won't have any significant additional contingent consideration going forward. And we have the $1,400,000 of branch closures. So between those items, that's roughly $12 plus million of expenses that were related to mortgage and or branch closures that we would expect to decline in the future quarters. So other than those expense categories, no other expense categories had any significant change from the amounts recorded in the third quarter.

Ed mentioned that our net overhead ratio was 1.12%, was up slightly from the third quarter. But on a year to date basis, the net overhead ratio was 1.05% and down 52 basis points from the 1.57% recorded in 2019. And with that, I will throw the discussion back over to Ed.

Speaker 1

Thank you, Dave. 2020 was a pretty interesting and challenging year to say the least. Some respect though is a very, some respects is a very rewarding year. That being said, it'll be nice to return to some degree of normalcy. We always in company, our mascot is Sisyphus and, I remember what Sisyphus, I think I said this before in earlier calls, had to push a rock up the hill every day and every night it would fall down and they had to push it up the next day.

On twelvethirty one every year, I told everybody listen for the rock falling down, we got to push it back up. We're well on our way to push it up this year. I think we're very well positioned. We started 2021 in a very good place. We have to take what the market gives us and we need to grow through this low interest rate period and invest in a way that maintains an above normal interest rate sensitivity position, maintains our always conservative credit standards.

Earlier we discussed all the levers we're pulling to increase earnings in the margin. Loan pipelines remain strong and PPP round three give us an unexpected lift for the year. We continue to call the portfolio for problem credits to improve on our already stellar credit statistics. We will also continue to find other cost saving ideas. However, we're always going to invest in the business.

Not to do so it would be absolutely fatal. Capital levels remain at more than adequate levels. The expansion front, number of new branches planned for the next twenty four months in the areas we do not currently serve. On the acquisition front, we continue to search out deals in all areas of our business. The recent rebound in our stock price, we would now have currency to use in deals.

Remember how much we abhor dilution. So it's nice to get a little bit of currency back. You can be assured of our consistent conservative approach on potential deals. I'll say, I wanted to end by saying, '21 marks our thirtieth year in business. On 12/27/2021, we will hit the thirty year anniversary opening our first bank.

Come a long way from the card tables and beer, 1,100 square feet and 11 employees. But we've never lost sight of our basic operating principles. This has served us well. It's kind of funny, think there's a reasonable chance that we could hit $50,000,000,000 in thirty years. I can assure you that thirty years ago this was never in our wildest dreams.

But it's kind of cool if you think about it. As always, you can be assured of our best efforts. We appreciate your support. Now we can go over to questions if there are any out there.

Speaker 0

Our first question comes from the line of Jon Arfstrom from RBC Capital. Your line is now open.

Speaker 4

Thanks. Good morning, guys.

Speaker 1

Hi, Arv. How are doing?

Speaker 5

Hey, good. Doing well. Doing well. Question on the decision to put some mortgages on the balance sheet. Can you just not critical of it, but talk a little bit about that decision strategically, why you did it, what you're putting on the balance sheet and how far you want to take that?

Speaker 1

Well, we're going to stay within that 10% to 15% gap position that we we always desire, but I don't wanna go out and buy a bunch of mortgage backs at $1.40 when I can get the keep jumbo loans on the books at 3 to three and a quarter. I know it's got a payback of, you know, call it a year, but, you know, why not? We have to put this liquidity to work. These are very good deals. The returns are pretty good on them.

We probably gave up between the 200 that we we booked this quarter, 200 next quarter, gave up probably $8,000,000 in revenue. If you give a 4% production margin or 400 would be more than that be, A lot more, 16,000,000, maybe $13,000,000 $14,000,000 we would add additional revenue this quarter. Certainly, we would have kept everybody happy on the PTPP front. But it just makes sense that rather than go out and do it that way, we can book them and put them in the margin and make some money as opposed to buying mortgage backs at half the price.

Speaker 5

Okay, got it.

Speaker 2

John, as Ed mentioned, we're targeting maybe 10% of our production. So it hurts a little bit, but we're not doing like half of our production. But it still provides a long term benefit and an earning lever to use going forward, although it sacrifices current quarter revenue.

Speaker 5

Right. Okay. And then Dave, just sticking on mortgage, I know this kind of comes up every quarter, but talk a little bit about maybe your near term expectations for volumes. And maybe this matters more than ever, but just remind us of your ability to accordion some of the mortgage expenses if volumes do really continue to come down in 2021? And is that something we should be concerned about for the bottom line?

Thanks.

Speaker 1

Yes. So we'll have to

Speaker 2

see where applications come in. We the pipelines are down $05,000,000,000 So if you look at that and say between investments and closings, we did $2,500,000,000 We'll probably be $2,000,000,000 plus or minus as far as production in the first quarter. And then quite frankly, we'll have to see what the spring buying season is like. Second quarter could be more than that. But I think all in, including investments and for sale, 2,000,000,000 plus or minus is reasonable.

So we still think it's going to be a strong quarter. A lot of the increase in the salaries expense related to temporary contract workers. So that goes to your accordion. Those can go up and down rather quickly. And so I think we can accordion the expenses well and we manage for that.

We're focused on that. Unfortunately, pipeline and the production has been strong recently, so we haven't had to do this. It's more of an issue of do you have enough people to process record volumes of production. And so we added this quarter to it because we did have record production volume in the quarter and record closing. So we do think we can accordingly, we do think the volume will be strong in the first quarter, not quite as strong as $2,500,000,000 all in closings we did this quarter, but still historically a very strong quarter.

Speaker 0

Our next question comes from the line of Terry McEvoy from Stephens. Terry?

Speaker 2

Yes, can you hear me?

Speaker 1

Now we can hear you.

Speaker 6

Okay. Sorry about that. The old mute button. My apologies. Maybe start with the net interest margin.

Could you just talk about the outlook for the margin with and without kind of PPP fees? And then a couple of times you've mentioned that 15 to 30 basis point margin expansion as you kind of redeploy that excess liquidity and just over the next twelve months, the opportunity to achieve that NIM expansion through that event?

Speaker 1

Well, it will depend really on loan growth and deposit deposit costs will have room to come down, that's going to happen. Loan growth is going to happen. But what it really depends on is you know, we figure we could put a billion to a billion and a half dollars worth of work in the investment portfolio. We're gonna lag that in though because rates could seem like they're going up. And why put it all on now when I hedge your bet a little?

I mean, think they'll go up before they go down. So I think you gotta deal with those numbers we gave you. It's gonna it might be a little bit more staccato than you'd like, but, we'll take advantage of what the market gives us. And I think that next quarter, you should start seeing some benefit of it depending on where LIBOR goes. We think we'll be in pretty good shape.

But, I can't give you more than that just because I gave you all the tools, the levers we're pulling, just a timing issue, and we gave you the the ranges of where it's gonna come. But, I don't wanna be don't wanna be totally specific because it's all a function of where market rates are, where we think they're going, and we don't wanna lock in this margin, but we do wanna leave room for expansion. So like today, I think we've put about $600,000,000 to work and that's a fair number in the first quarter and will go to work in the first quarter of the 1,000,000,000 point dollars we think we have to play within the investment portfolio, and we'll see where it goes from there. Dave, you got any other comment on that?

Speaker 2

Yes. Well, the thing I would say, Terry, is that I think the margin basically bottomed out though. It went down a few basis points this quarter, but we had significant liquidity come in again. So that you're earning 12 or 13 basis points on. So the barring additional significant liquidity coming in, which I think you might have a little pressure if that happens.

But we think the margins really bottomed out and the margin goes up from here as we do the investments that Ed talked about. And PPP loans will the new PPP loans will come in to help offset the runoff of the old PPP loans. And we're I think we're in pretty good shape. And I think the margin has really bottomed out here barring and some big swing in the curve environment that would be negative to us if the curve flattened even more and inverted. But we don't expect that.

We think the margins bottomed out and we have lots of leverage. I think that's one of the great stories that we have here is we have a lot of liquidity that we put to use and there's an earnings lever there. And we believe we bottomed out and now it's just trying to time how and when to put liquidity to work.

Speaker 6

Thank you. And then just as a follow-up question, the advertising and marketing costs lower this year because of just the pandemic. And I believe earlier you mentioned stadium sporting events starting to open up again. You just talk about kind of your thoughts for 2021 on that line? I don't want to be surprised, assuming they go back to more normal levels, which a year ago in the fourth quarter was $12,500,000

Speaker 1

Yes. Well, it just all depends on what people are allowed back in stadiums. We cut deals that nobody's in the stadium. We shouldn't have to pay as much as we paid in the past. We don't have tickets and ticket issues and the like.

But with the onset of the of the you know, being able to go get the shots, I think by June or July, you're gonna have people in there. So I don't know if it's gonna be as high as it was, in our highest years. We are still obligated to to pay it if it is, but I just don't think you're gonna have fans in the stands for half the year, in which case it'll be less. What can I say? You know?

I mean, just follow the baseball. Baseball is our biggest cost. And if they don't have fans in the stands, they don't have to pay as much. And basketball, same thing. We still we have Northwestern, Marquette, and DePaul.

And with no fans in the stands, we don't have to pay as much. So it'll because they're playing, it'll be more than last year, but less at our high points. Does that make sense?

Speaker 6

Understood. Yes, appreciate that. Thanks guys.

Speaker 2

Thanks, Jerry.

Speaker 0

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

Speaker 4

Hey, good morning. Chris. David, want I to go back on the question on the mortgages you're putting on the balance sheet. I've seen some of your broader peers do similar strategies, buying they bought loans out of the warehouse. I'm wondering if you could speak to the credit characteristics of these loans that

Speaker 1

are being put on?

Speaker 2

Chris,

Speaker 7

it's as you probably have seen from other banks, right now, credit quality through our bank and also through our warehouse customers has really never been better. I mean, if you look at average empirical scores, I mean, the box obviously got tighter over the last number of years. But, what we're seeing right now is just outstanding credit quality. So, I feel very good about holding these on our balance sheet.

Speaker 4

And these are are these conforming? Are these some sort you said they're jumbo. Are they prime? Are there something alternate characteristics of them?

Speaker 7

No, these are all prime jumbos. Okay.

Speaker 4

Okay, cool. And then just another question tying growth into capital. I guess I was positively surprised you bought back stock in the quarter. Maybe you could speak to expectations going forward. I've always kind of viewed yourselves as more optimized capital versus massive excess, but interested in your thoughts with the pandemic easing a bit.

Thanks.

Speaker 1

Well, really like we don't like dilution at all. We love the accretive aspects of what we've done to date. I mean, being able to buy below tangible book value and in terms of helping earnings, it all worked. Right now, the stock price up is a little tougher, but, you know, you never know with with what's going on in the world. It go down again.

We're we're prepared to buy it back. We we hate dilution. We abhor dilution. We want to be accretive. So as long as it makes good sense, we'll buy some.

We still have some capacity to buy now on the existing authority. Dave, how much do we have?

Speaker 2

Yes. So our initial authority was $125,000,000 and we bought back $92,000,000 to date. In the 2018, we did $37,000,000 And then in the 2020, we did $54,900,000 So a total of $92,000,000 out of that program. So we have $32,900,000 left that we could do. But as Ed said, we try to be opportunistic and buy it.

Generally, our average price on this in the fourth quarter was $56 a share. So we'll monitor the price. We'll look at what other opportunities are out there for capital deployment as far as the growth and the like and play it by ear.

Speaker 4

And then maybe one more if I could. Obviously, there's a big merger in the Midwest with Huntington and TCF. Obviously, TCF Chicago is a little bit different, but interested in any potential opportunities from dislocation either from that or from Fifth Third Seal a couple of years back?

Speaker 1

Dislocated, we love it when that happens. Dislocation is our middle name. With the Huntington deal, TCF was not that really that strong in Chicago with most of their locations being in grocery stores, not really our cup of tea. Recall TCF was a years ago was the fee king of the world, and we we don't play that game. So, really, those customers are welcome in our in our our place, but I don't think they'll care just to be a product sort of thing, and we'll see where that goes.

The other side, you know, the disruption caused by Fifth Third buying MB is still ongoing, and we we've hired a number of their bankers, and we're getting good business from them. We actually started a new currency division that's coming from them. It's a business indirectly, very directly in our previous group, Dave and Murph and I were all involved with. We were the largest in the in the Chicago Fed District in terms of handling these guys. When MB bought the old Chorus, it was not they they they took it.

Now Fifth Third didn't want it. So that business is up for grabs. We hired good people from them, very profitable business. So it's not just the business you pick up. It's the lines of business you can pick up too, is kind of interesting.

So disruption's good. There's recently announced a a 1,000,000,000 point dollars local bank where in a market we compete being bought by a downstate Illinois bank. That'll be an opportunity for us. So we love the disruption. We love to take advantage of it.

Right now we're excited about our prospects in the PPP world. We really have the way our system works opening up really before anybody else in the market with flawless execution Really goes from soup to nuts very quickly. Actually, we're seeing a lessened demand from our customers now trying to outreach the prospects and to well, we've always done for low to moderate. The low to moderate side of the equation, we're running local workshops to where people come in and actually do their applications with a proctor kind of there to answer questions and help them get through it. But we think that the halo effect from the previous PPP one and two hopefully will carry over into this one.

And our decks are pretty well cleared because of the efficiency and the hard work of our people getting them cleared. It's been awesome. So we there's a lot of disruption, lot of opportunity in the market. As I said, our pipelines are extremely full. It's coming from some place.

We're not making it up. It's not expansion just about yet, but so we continue to take business from our competitors. Thanks a lot for the color. Appreciate it.

Speaker 0

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

Speaker 3

Yes. Hi, guys.

Speaker 1

Good Just

Speaker 3

going back to that last point, Ed, on PPP. I guess with the third round opening up here recently, what are your expectations in terms of volumes coming out of that over the next quarter or two?

Speaker 1

Well, we're already at, what I say, 1,175,000,000.000. I think that, you know, there's still some room there if it goes to one and a half or two. It gets kinda funky where we don't really wanna open it up in general because of the fraud aspects. I think knowing your customer is important. We have so many on the prospect list so that we do know for one with one shape or form or another that we're now in the outreach.

We're calling people and asking about it or the prospects and existing customers we think are eligible who haven't taken advantage of it. Prospects and certainly the low to mid. We're working very hard on those. So I would think we could be anywhere between $1.5 and $2,000,000,000 if we're 1,100,000,000 now. Say 1,400,000,000.0 1,500,000,000.0 on the low side, dollars 2,000,000,000 on the high side would be a good number.

Just depends how long it goes and if they restock it with money or not. SBA is being kind of funky on deals over $2,000,000 because if you never do on the first one, for the second one you go up to $10,000,000 in this if you want. But they're being kind of strange on the larger deals where they're holding them in advance if it's a second round. Murph, do want talk about that a little?

Speaker 7

Yes. You hit it right on the head. We're just getting some interesting feedback from the SBA as it relates to some of these larger borrowers. I think there's going to be a heightened audit attention placed on these. And with the transition going out of Washington right now, it's a little bit up in the air.

But generally speaking, I mean, think as it relates to volumes, I mean, Ed's right. I mean, we've seen a tremendous amount of growth early on in this latest round by those highly affected customers. And it's obviously good from outstandings and some of the fee recognition. But kind of most importantly, it's just we're seeing these customers who've really been pounded over the course of the last ten months getting some help here. It's just it's really great to see just from just watching them and then watching our own portfolio.

Got

Speaker 3

it. That's helpful. And kind of changing gears along those lines, if you back out PPP, it looks like loans are up 10% year over year in 2020. With onboarding more production, on the residential side in 2021, what are your kind of growth expectations, in 2021, just keeping in mind the hires and so forth

Speaker 1

that Rich or Tim, do want to take that?

Speaker 7

Well, yes, I would just say just in general, we have our guidance has kind of been that mid to high single digit growth over a number of years here. And going into this year, I think we were thinking that it was going to be maybe one of the more challenging years to get that. Fortunately, it's just we have so many different loan engines that we utilize. And if you take a look at this year, we saw every one of them really have a pretty solid year. So the Premium Finance Group had just a spectacular year.

CRE had a good first half of the year. C and I had a great second half of the year. So it's really one of the benefits of having this more granular approach to portfolio growth. So I look at this year coming up and based on the pipelines and based on the feedback that we're getting from the business leaders, we should be pretty much right back at that mid to high single digit growth range. So obviously a lot depends on how the economy continues to rebound, but overall feeling pretty good.

Speaker 3

Okay, got it. If Timmy has one more sorry.

Speaker 1

And anything you want to say about that?

Speaker 2

No, I think Rich covered it. We do believe the PPP process will continue to yield good prospects for us, and that will help us get to those numbers. So nothing that otherwise.

Speaker 1

Great. Also seems that there as these shots start to I'm getting my shot on Monday, by the way. I'm an old guy getting my shot. So as that starts happening, there's so much pent up demand. I think it's gonna explode.

If you ever try to buy a refrigerator or any sort of hard acid right now, it takes forever to get it because inventories are so low. You're gonna see an inventory build coming up. They'll require, we don't even consider what's going on there. They'll require probably more line usage. Our line usage states stay at 4950%, but I think, you may see a little bit more coming with the but I think we're gonna roar out of this thing come June and July when you get the herd immunity if everything works right.

So who knows, I think that notwithstanding that we were gonna be in high single digits this year based on all the information we have right now. But it's just gonna enhance it I think.

Speaker 3

Okay, great. And if I could just ask one more on expenses. Just trying to put together all those items that were discussed earlier. The NBA is forecasting volumes to be down 20%, 22% this year and with advertising spend perhaps not likely to get back to full run rate levels. And then you got the branch consolidations and closures and the contingent consideration perhaps going away entirely.

I mean, is it fair to expect expenses versus 2020 to be up low single digit or flattish? Any thoughts just overall along those lines?

Speaker 2

Well, so a lot of it really depends on where that mortgage number comes out at. But if you follow the MBA forecast, all else sort of being equal, it's probably mid single digit expense growth is sort of where I would expect it to come out because we do, do some salary increases and we are growing and we are investing in the digital improvements, etcetera. So mid single digits is about right.

Speaker 3

Okay, great. That's very helpful.

Speaker 1

One thing to keep in mind is we did double up on the with the mortgage sales by keeping 10% of the books this quarter and taking 10% out of the next quarter. We had all the expenses and all the revenue of that. So a little bit wild there too, but I don't think expenses are as bad as everybody thinks they are. Take the one timer as opposed to that little move we made. It's a timing issue with a lot of it, but we shall see.

Speaker 3

Yes, sounds good. Thanks guys.

Speaker 0

Thank you. Our next question comes from the line of Michael Young from Truist Securities. Your line is now open.

Speaker 2

Hey, thanks for taking my question.

Speaker 1

That's the first truest securities I've heard from anybody.

Speaker 8

Well, to make the introduction.

Speaker 1

What's up, Mike? Everything good?

Speaker 8

Yes, yes, doing well. Just wanted to ask maybe a of a higher level question. You've in the past kind of referred people to the net overhead ratio to kind of balance growth and investment with earnings and profitability. Is that still kind of how you're thinking and managing the business? Obviously coming out of kind of this fog of war, if you will, where do you think we can get to on that ratio if that's still the right ratio to look at?

Speaker 1

Yes, I think it is. We're fortunate to have the more why we have the mortgage business, how we invest in this for times exactly like this when rates go down it can pick it up for us. That certainly helps that overhead ratio if you look at almost equal what the runoff of the margin was. But there'll be a period of time in there where you're gonna get kind of an influx here. There'll be influx where it's gotta go up and the margin won't be moved.

We hope to have the margin moving as fast, we shall see. But we always said less than 1.5 was good. We've lowered that down to one with our size down about 135, 125 to 135 would be a good number for us. In the budget, it's what, Tim? Do you remember?

Speaker 2

Yes. We typically don't give out the budget numbers. But I think in sort of a more normal mortgage market, I think in the 130s is probably where we would think we could be given the current environment. We're better than that right now because mortgage is so strong. But if mortgages fall off, I think you probably our target is 150%.

Before we've grown so much, we think that's probably in the 130s now.

Speaker 1

Yes. And we would hope that if we go up 30 basis points, the margin goes up 30 basis points too. That's kind of how we work it. So you can follow the math there.

Speaker 8

And maybe just as a follow-up, you've kind of mentioned efforts to cut some branches. You still have kind of the multiple bank subsidiaries. Would there be any opportunities to consolidate maybe one or two of those? I know you've used it as part of the wealth strategy in the past and you haven't thought that made sense. But in this environment, have things changed at all there?

Speaker 1

Everything's open. But right now, we're very happy with where we are. I mean, that overhead ratio, if put it this way, it's not just a cost issue because the costs are minimal. As you think about everything behind the scenes is already consolidated and runs that way. It's strictly a morale and marketing issue for us plus the ability to get low cost deposits because of our ability to offer 50 times FDIC coverage.

Would we consider merging some together? Yes. That would come, I think, with geographic expansion. If we're going to move out of the Chicago area, which will probably have to happen in the next two or three or four years, we probably would start collapsing charters here. And I like the number 15.

It's nice to have people who know the markets running shops and feeling good about it. So yeah, we could do it but I think it would be a function of expansion out of our current market area where we'd wanna keep a charter in a different area. And we would it just it'd be a function of growth really to get down to it but nothing horizon on now. I mean, we're growing awfully fast. We're doing pretty well.

Credit's good. Why would you just try to screw it up?

Speaker 4

That makes sense. All right, thanks.

Speaker 0

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Mr. Edward Wehmer for closing remarks.

Speaker 1

Well, thank you. We appreciate you all listening in today. I'll get your shots if you can. I'll let you know how it goes for me. They never bothered me that much but this is gonna be an interesting time, an interesting year.

I think you can see that we kinda have our hands around what we wanna do and let's see if we can get there. But if you look at our history, that 10% PTPP growth and with our growth in loan, our historical ten year growth in loans, You take it back thirty years and see the numbers are even better. But over the last ten years, we've had terrific growth in earnings and net book value and assets and deposits. I put our results up next to everybody, anybody. So keep the faith, we're working on everybody's best behalf and everybody will talk to you soon.

If have any additional questions, feel free to call me or Dave or Murph or Tim or Dave Starr or Kate Bogie. Have a great day everybody and thank you very much.

Speaker 0

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