Wintrust Financial Corp Q3 FY2023 Earnings Call

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.

Good morning, everybody. Welcome to Wintrust Wednesday. This is the day of the week we require all of our Wintrust staff to be onsite. 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 paired 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 in 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.

Thank you, Tim. Regarding balance sheet growth, we were pleased to report that deposits for the quarter increased by about $1 billion or 9% on an annualized basis. This growth was mainly in interest-bearing retail deposits, which enabled us to cut broker deposits by $392 million. At the end of the quarter, non-interest-bearing deposits made up 23% of total deposits, down from 24% at the end of the second quarter. This slight decrease reflects growth in the interest-bearing categories rather than significant losses in non-interest-bearing accounts. Non-interest-bearing balances stabilized, with average balances of $10.6 billion in the third quarter, equal to the second quarter. This strong deposit growth supported solid loan growth of $423 million during the third quarter. After accounting for the sale of certain commercial insurance premium finance loans, total loans increased by $767 million or 7% on an annualized basis, aligning with our previous guidance of mid to high single-digit loan growth. The loan increase primarily stemmed from draws on existing commercial real estate facilities and growth in the commercial portfolio. Despite a loan sale that reduced outstanding balances by $344 million, the commercial insurance premium portfolio remained relatively unchanged, which is encouraging. Rich Murphy will provide more details on loan portfolio growth shortly. Overall, we experienced total asset growth of about $1.3 billion, a slightly lower loan-to-deposit ratio of 92.1%, and stable risk-based capital ratios. It has been a successful quarter for our franchise, with our unique business model and exceptional service allowing us to thrive in the Chicago and Milwaukee markets. Now, focusing on the income statement, net interest income for the third quarter of 2023 was $462.4 million, an increase of approximately $14.8 million from the previous quarter and $60.9 million from the third quarter of 2022. This marks the highest quarterly net interest income in the company’s history. The increase over the prior quarter was primarily driven by a rise in average earning assets of around $1.6 billion. The net interest margin stood at 3.62%, just 4 basis points lower than the previous quarter’s 3.66%. The decline was largely due to our interest rate hedging strategies, which are intended to safeguard our net interest income in falling rate environments. Our balance sheet structure supported a relatively stable net interest margin throughout the quarter. Deposit pricing eased in the third quarter, and we anticipate this trend will continue into the fourth quarter. Given the current interest rate climate, we believe we can maintain our net interest margin within a narrow range moving forward. Additionally, total loans as of September 30, 2023, were $739 million higher than the average total in the third quarter, giving us momentum heading into the fourth quarter. This growth, combined with steady net interest margin, should facilitate further growth in net interest income in the next quarter. Turning to the provision for credit losses, we recorded a provision of $19.9 million in the third quarter, down from $28.5 million in the prior quarter and $6.4 million from the same quarter last year. The decrease in this provision compared to the second quarter was mainly due to slower net loan growth. Rich Murphy will elaborate on credit and loan characteristics shortly. In terms of non-interest income and expenses, total non-interest income was $112.5 million in the third quarter, slightly lower than the $113.0 million from the previous quarter. Minor changes across various non-interest income categories resulted in a net decrease of $552,000, highlighting the importance of a diversified fee structure that helps maintain stable non-interest income even in a challenging mortgage market. As for non-interest expenses, they totaled $330 million in the third quarter, an increase of about $9.4 million compared to $320.6 million in the prior quarter. This rise was mainly due to occupancy costs resulting from impairments on two unused buildings, along with increased data processing costs and other salary-related expenses tied to acquisition severance. We also saw a rise in commissions and incentive compensation due to strong earnings. Despite the growth in non-interest expenses, our annualized ratio of non-interest expenses as a percentage of average quarterly assets declined by 3 basis points to 2.41% in the third quarter. Additionally, our efficiency ratio remained stable at 56.9%, and our net overhead ratio saw a slight increase of just 1 basis point. In summary, this quarter was solid with notable loan and deposit growth, improved liquidity, a stabilized net interest margin, record net revenues, low levels of non-performing assets, and the second highest quarterly net income in our history. We believe we've navigated the somewhat turbulent landscape of 2023 effectively, achieving record net income for the first nine months of the fiscal year and projecting continued growth in assets, revenues, and earnings. I will now turn it over to Rich Murphy for his insights on credit.

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 6 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. And 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 composed 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 the 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 paydown or a pledge of additional collateral. We have back-checked the results of these deep dives conducted during prior quarters, and have found that the projected outcomes versus actual outcomes were very tightly correlated. And generally speaking, borrowers whose loans were 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.

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. And based on current economic conditions and current banking conditions, we expect a margin that will be 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. But 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.

Our first question comes from Jon Arfstrom of RBC Capital Markets.

Good morning, Jon.

Yeah, good morning, guys. Tim, a question for you on the 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 '24? Is that the message?

Yeah. I mean I think there's obviously a number of moving pieces to this, Jon. At the moment, looking out a quarter or two, we think, pretty stable. After that, I think there are signs that we would feel optimistic about. But clearly, there's a lot that goes into it past the next quarter or two.

Okay. How about the hedging appetite? Is the plan to continue to hedge more? Do you feel like you've done what you need to do?

For those of you who are following, we have included a description of our hedges in the appendix that shows approximately $6.3 billion in hedges, with one added in the third quarter. We have also added another small hedge since then. We intend to follow the market if the opportunity arises. Our goal is to reduce downside exposure on our margin, and we have managed to maintain a margin in the mid-3s, which we are committed to sustaining.

Thank you for that. Rich, I have a question for you about the premium finance non-performers. Can you explain what this is and why it has increased? When do you anticipate this issue will naturally get resolved?

We have two different categories of loans that are roughly equal in size. On Slide 13, you can see the effects of each category. I'll address them one at a time. In the property and casualty segment, we're seeing increased stress in the transportation sector, leading to more loans becoming delinquent. We analyze these loans, and in the event of a loss, we will account for it and recover the unearned premium from the insurer. There's economic deterioration causing more loans to go 90 days past due, although the loss given default remains unchanged. However, the incidence of defaults in this area is rising. In the life insurance category, which is also around $10 million, the situation is somewhat different. With rising interest rates, people reaching the end of their loan term are reconsidering whether it makes financial sense to renew their policy. These discussions can take time, and we prefer to assist our clients by allowing them space to make informed decisions instead of immediately canceling their policies. Therefore, some of these may extend beyond 90 days past due. Generally, we ensure that they remain fully insured, and we don't foresee any issues. We expect that the loans identified as 90 days past due will be resolved by the end of this month.

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 the structure? Is that right?

Yeah, that's correct. We believe that loans in our P&C portfolio related to transportation might experience some additional pressure, and we may continue to see defaults. However, we are obtaining a substantial premium on these loans, along with reasonable late charges, which compensates us for the associated risks. Therefore, we are not overly concerned from that angle. We are also implementing measures to ensure that our underwriting is addressing these issues, which means we are tightening our approach in that area. Overall, despite the current elevated levels, we do not have concerns about future losses from this segment.

Okay. All right. Thank you very much.

Thank you. Stand by for our next question. Our next question comes from the line of Chris McGratty of KBW.

Hi, Chris.

Hey, good morning. Dave, I want to just go at the NII. Again, a lot of your peers are still defending the trough or trying to find the trough for six months out. 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?

Well, yeah, I think that's how we look at it, Chris. Obviously, if the Fed kills the economy and loan growth slows quite a bit, that would have an impact. But the benefit of being diversified in our asset classes, as Rich has said 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 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 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 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 is stable. So if that's the case, we think we can have growth.

Okay, great. Regarding the loan sales, could you remind us about the testing process you mentioned last quarter? Should we anticipate more activity in that area? Also, was there a gain reflected in the non-interest income? I'm just trying to understand the logistics.

We are not planning any loan sales right now. If you recall, we initiated planning in the second quarter and executed a sale early in the third quarter, which we mentioned in the last call. This sale was intended to show that our portfolio has liquidity and pays down quickly. We expect most of that impact to diminish by the end of this fiscal year, as these are nine-month full payout loans, and we will be halfway through that period. Therefore, there will be very little impact remaining. Our goal was to demonstrate liquidity, ensure we have tools available in case the concentrations in those premium finance portfolios become too high, and to have a system ready in case any future liquidity events arise in the industry. It seemed wise to conduct the sale, establish the system, test it, and move forward. Currently, due to our strong deposit growth and our ability to continue funding those loans while maintaining a favorable loan-to-deposit ratio, we don't anticipate needing to conduct another sale in the near future. However, the option remains available if needed.

Perfect. And then maybe the last one, you went through all the moving parts of non-interest income, and I think it's at $0.5 million. How do we think about just the trajectory of your fees with mortgage obviously pretty depressed, but you've got other offsets from here?

Mortgage and wealth management are two significant areas for us. Service charges tend to grow gradually alongside the expansion of our business and retail accounts. The mortgage pipelines remain relatively stable, primarily consisting of 80% to 85% purchase transactions. We might see a slight slowdown during the winter months since most of our originations are from the Chicago, Milwaukee, and Minnesota markets. However, I believe application levels are at a low point. Therefore, we anticipate steady originations. Gain on sale margins have been stable just above 2%, and we expect this to continue, although there may be some fluctuations due to rate movements and effects on mortgage servicing rates, which we manage well through hedging. Personally, I believe mortgage activity will remain steady over the next couple of quarters. We hope to see some improvement in applications and production during the spring buying season, but I don't foresee any rapid increases or decreases in the near term. It has been stable at these levels for several months, and we expect that to persist. Wealth management growth is somewhat dependent on the performance of underlying assets and their valuations, as fees are linked to those values. We are actively trying to hire and grow this segment, albeit at a slower pace, but we do expect it to expand. Additionally, we have some leasing income, but most of the other components are relatively minor.

Hi, thanks. Good morning, everyone. Maybe start with the question, the expense outlook for the fourth quarter. There were a couple of 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 other banks that they're looking at expenses with some internal plans to kind of control that growth rate?

Yeah. Well, 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 that's $330 million. You take those down, and you are $324 million-ish or something like that. So probably somewhere plus or minus in that area for the fourth quarter. We haven't really given guidance for '24 yet, but generally speaking, our thought is that we're a growth company. And we have lots of opportunities. We're uniquely positioned here in Chicago right now with our size and how we stack up against 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 have a unique position here that we think we can take advantage of. And we also have our niche businesses 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 non-interest expenses would grow at a rate less than that, maybe mid-single digits. And so we can leverage the infrastructure going forward. If for some reason the growth doesn't come, there are 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. So 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.

As a follow-up, can you explain how much of the $337 million in CRE growth during the third quarter came from market opportunities and new customers compared to existing customers? Additionally, how successful have you been in encouraging them to transfer their deposit relationships and business?

I’ll answer that by reversing the order of the question. For any new opportunity we pursue, we assume we will secure meaningful deposits first. Regarding growth, most of what we are seeing consists of draws on existing facilities with current customers. However, around 40% of that total is generated from new opportunities in the marketplace. Many other banks have stepped back from this area, creating good prospects for us to attract new clients. It's a mix, but the majority still comes from our existing clients and their outstanding balances.

Great. Thanks for taking my questions.

Thanks, Terry.

Good morning, everyone. Thank you for the update on loan growth expectations. It seems the pipeline remains strong. My question is regarding the lender surveys, which suggest there isn't a significant appetite to lend or much demand for loans compared to the past. What sets Wintrust apart in this situation? How are you able to grow the portfolio while the market appears to anticipate a more stable outlook for loan growth?

As we've mentioned before, loan growth takes many forms for us. Looking back to when we were emerging from the pandemic, with rates being very low, our life finance sector was thriving. That has since slowed down, but the property and casualty side has stepped in to fill that void. This diverse approach to lending really benefits us, especially when some areas are experiencing growth. More specifically regarding our core businesses, we've been quite disciplined in how we've built our portfolio. Many banks may find their commercial real estate investments to be larger than ideal, but we are still interested in CRE loans and can capitalize on the current market dislocation. Additionally, in Chicago, there has been significant disruption among key players, leading to numerous opportunities in the commercial and industrial lending sector. We've actively sought to convert these businesses that remained loyal to their previous lenders until it became untenable for them. Consequently, we have successfully brought many of these clients on board. We remain optimistic about expanding that portfolio, particularly within our core offerings, as we see many promising opportunities at this time.

And, David, we've been disciplined on pricing, but there is loan demand. You just have to pick your spots, and we're getting a lot of interest.

That's a valid point, Tim. Looking back 18 to 24 months, the market was quite loose, and pricing was competitive. During that period, we turned down some deals. Currently, we have the opportunity for improved structures and pricing, and we remain disciplined in that area.

Got it. Thanks for that color. Go ahead.

Yeah. Well, I'd just say we can continue to grow deposits. We've proven for a couple of quarters that we can fund the loan growth, and 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 we're 6%, 7%, 8% market share in deposits in the Chicago area, opportunities in Milwaukee as well. So even though the 6/30 deposit share results were pretty good for us, we think that's just the beginning.

I would say that there are plenty of opportunities to lend money right now. However, many banks may be hesitant due to deposit and capital concerns. Our objective is to make the most of this situation.

So it sounds like the strategy is still focused on organic growth because that's what the market is giving you. 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?

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 kind of bank M&A are picking up. But we're pretty disciplined and 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 like good opportunities to us, we may add some people, for example, in areas where we've got good businesses. There are some folks available in the market right now, but I think we'll stay pretty disciplined.

Got it. Thanks guys. Appreciate the color there.

Yeah. Thanks, Dave.

Hey, good morning everyone. I wanted to follow up on the net interest margin discussion. Did you disclose what the spot loan yields and deposit costs were as of September 30?

No, we haven't done that. But we can tell you that the margin was close to the current level at the end of the period, and we are really focused on the net margin moving forward. 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.

Okay. Very good. And then just, I guess, switching to credit. The ACL on the core book at 1.51%, obviously very strong. Just curious, what kind of scenario are you guys baking in, be it slowdown, S3? Or any color on what kind of unemployment rate that which is driving your CECL modeling?

We analyze the situation from various perspectives. Primarily, we rely on Moody's base case scenario, but we also consider other economic scenarios to support our conclusions. Since we do not have a significant consumer portfolio, unemployment typically does not heavily influence our models. We take into account the consumer real estate price index, BAA credit spreads, and several other factors, but these did not significantly change from quarter to quarter. The main reason for the reduced provision this quarter was the lower loan growth we experienced. Most other factors balanced each other out. Approximately $10 million of the decrease was due to this lower loan growth in the third quarter compared to the second quarter. In summary, we use the Moody's model and enhance it with additional economic data.

Great. Thank you.

Thank you. Our next question comes from the line of Jeff Rulis of D.A. Davidson.

Thanks. Good morning.

I just wanted to follow up on the co-work office credits that you implemented last quarter. Is that mostly completed? Is there anything else you are managing within the office segment?

As we disclosed last quarter, that sale took up a roughly half of that portfolio. 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 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.

Okay. Regarding the premium finance sales and testing the plumbing, I believe some of it relates to mix management. Was there a credit aspect to this? It seems like you might be slowing down those sales despite a slight uptick in non-performers or non-accruals. Is there anything else related to premium finance that has a credit aspect you want to mention? As you said, you're always considering exiting riskier portfolios. Is there any concern in that area?

No, that sale was not related to credit at all. It was purely a liquidity decision and an evaluation of liquidity reasons. As Rich mentioned, we believe those portfolios are low cost, so we don’t have any concerns from that standpoint. Regarding the life side, as Rich pointed out, the $10 million that was non-performing is still accruing. Generally, we allow some of these to go past due, but if we are no longer completely collateralized, we will unwind the policy. Our historical loss rates of 0 basis points for that portfolio demonstrate how we manage it. On the property and casualty side, we are not concerned about the economics related to credit. So, the sale had nothing to do with credit and everything to do with liquidity.

Thank you for the clarification. It seems to be primarily short-duration items. I have one more question about the margin. I apologize for bringing this up again, but it seems like there was significant loan growth towards the end of the quarter, especially with deposit pricing beginning to stabilize. In the short term, does this margin stability reflect a cautious outlook regarding potential hedging challenges, or is it simply a general conservative approach? Considering the circumstances, it appears fairly optimistic as we move into the fourth quarter.

Yeah. I would think I would say it's fairly balanced. I mean, we still have a 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.

The hedging cost impacted us by 18 basis points in the quarter, but it's a good approach to managing risk in a declining rate situation. I wouldn’t necessarily call it conservatism. We're aiming to be realistic and currently believe that we have a balanced portfolio. Therefore, we expect that the margin will remain relatively stable. There could be significant deposit growth, which might pressure the margin slightly, but that’s acceptable because it brings in quality deposits that support strong loan growth. The timing may fluctuate by a few basis points up or down, but we anticipate it will stay within a tight range moving forward due to the structure and repricing nature of both sides of the balance sheet. That's all.

Maybe just the last one then. Just the ideal environment for interest rates. If you think about margins further down the line, perhaps that’s the purpose of the hedges, to maintain some stability. But if we were to address it specifically, if the Fed remains unchanged, if we raise rates, or if we experience cuts over time, what would be the optimal situation from a Fed perspective as we look at the balance of 2024, given your positioning?

We are currently in a more neutral position than before, which you can observe in our data. We still have asset sensitivity and could gain if interest rates remain high or increase. There may be developments in December or January depending on the political situation, but at this moment, we are stable. Our focus is on growing net interest income primarily through expansion.

Appreciate it. Thanks.

Yep. 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 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.

Thank you. I would now like to turn the conference back to Tim Crane for closing remarks. Sir?

Yeah. Guys, thank you very much for your time this morning. I hope we did a reasonable job answering your questions. This is a lot about blocking and tackling for us. We think we're uniquely positioned to take advantage of opportunities that we're seeing in the market. And as always, we'll work very hard to deliver good results. So thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.