Wintrust Financial Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 11 speakers on the call.

Operator

A review of the results will be made by Tim Crain, 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 constitute projections, expectations, beliefs or similar forward looking statements. Actual results could differ materially the results anticipated or projected in any such forward looking statements.

Operator

The company's forward looking assumptions that could cause the actual results to differ materially from the information discussed in this call are detailed in our earnings press release and in the company's most recent Form 10 ks 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 call over to Mr.

Operator

Tim Crane.

Speaker 1

Thank you, and good morning, everybody. We appreciate you joining us for our Q2 earnings call. In addition to Dave Dykstra and Rich Murphy, who the operator introduced Dave Starr, our Chief Financial Officer and Kate Bogie, our General Counsel are with me in the room today. In terms of an agenda, I'll share some high level highlights, Dave will speak to the financial results and Rich will add some additional information and color on credit performance. I'll wrap up with some summary thoughts and as we always do, we'll do our best to answer some questions.

Speaker 1

On our last call in mid April, we were still in a period of volatility and to a degree uncertainty for the banks. At the time, we talked about several objectives: continuing to focus on our customers, capitalizing on our strength and stability, Once again being opportunistic when there is disruption in the market. We talked about managing the balance sheet in a conservative fashion, growing deposits to fund loan growth and continuing to enhance liquidity, and we talked about continuing to take advantage of higher rates, specifically to demonstrate our ability despite rising deposit costs to stabilize the net interest margin. We feel like our performance on these objectives has been very solid. In addition to reporting record income for the first half of the year, for the second quarter, we had strong and balanced loan and deposit growth, adding clients and building the franchise through the volatile period when others were distracted we improved liquidity, reducing Federal Home Loan Bank borrowings and as you will hear shortly, have demonstrated through the sale of a portfolio of loans that occurred after the quarter end the flexibility to continue to manage our balance sheet effectively.

Speaker 1

And while as expected deposit costs are up, We are originating very high quality loans with attractive both yields and terms and continue to benefit from loan repricing, which we believe Differentiates us from many of our peers. Just to give you some detail, you'll recall our margin was 3.83% for the Q1 and specifically 3.70 at the end of March. Our margin for the 2nd quarter despite the very good growth was 366 and importantly was stable throughout the quarter. Lastly, our credit performance remains strong with no evidence of systemic issues. Rich will discuss this in some detail, including proactive steps that illustrate our ability to address any softening that may occur.

Speaker 1

Again, I'll come back at the end. But with that, I'll turn this over to Dave to provide some additional detail.

Speaker 2

Okay. Thanks, Tim. First, with respect to the balance sheet growth, we're very pleased to see deposits for the quarter grow by $1,300,000,000 or 12 And we did not rely upon additional wholesale deposits during the quarter for that growth. This growth was also despite our wealth management deposits declining by just under $400,000,000 owing in large part to less deposits from our 10/31 exchange business Due to a slowdown in tax free commercial real estate exchanges in the marketplace. As to deposit at the end of the quarter represented 24% of our total deposits compared to 26% at the end of the first quarter.

Speaker 2

These movements do not appear to be unique to us, but they obviously increased the cost of deposits for the quarter. Although I would note that the mix shift out of non interest bearing deposits seems to have subsided thus far this quarter as the percentage is relatively stable now that it was at the end of the second quarter. This strong deposit growth helped fund similarly strong loan growth of $1,500,000,000 during the 2nd quarter. The growth was predominantly fueled by exceptionally strong production from our commercial premium finance operations and to a lesser extent from commercial real estate growth, including draws on previously existing credit lines. Rich Murphy will discuss the loan portfolio growth in more detail in just a bit.

Speaker 2

The investment portfolio declined slightly as we only reinvested about a third of the $940,000,000 of securities that were called away at the end of the prior quarter. The additional liquidity provided by not reinvesting the entire amount of those called securities also helped to fund the quarter's loan growth. The company was able to reduce its non deposit funding primarily Federal Home Loan Bank advances during the quarter by $208,000,000 The result of these balance sheet movements was a growth in total assets of approximately $1,400,000,000 a slightly elevated ending loan to deposit ratio of 93.2% and relatively stable capital ratios. All in all, it was a very successful quarter in growing our franchise, our differentiated business model, exceptional service and unique position in the Chicago and Milwaukee markets continue to serve us well. As Tim mentioned, the exceptionally strong growth in our commercial premium finance portfolio and the outlook for continued loan growth provided us with an opportunity to structure a loan sale transaction of approximately $500,000,000 of our U.

Speaker 2

S. Commercial premium finance portfolio. This loan sale occurred earlier this week and provided multiple benefits to us, including that it demonstrates that our premium finance portfolio is a strong source of additional liquidity if needed, actually provided us with liquidity this quarter to aid in funding anticipated loan growth, reduces our loan to deposit ratio to a desired operating level that is closer to 90%, reduces some of the concentration in the premium finance space as we've had strong over the last quarter and quite frankly over the last year and would provide a small gain in the Q3 from the sale of those loans. As you know, these loans are very short term loans that make monthly payments and they'll likely be replaced substantially by new volume by the end of the year. Next, I'll cover noteworthy income statement categories, starting with the net interest income.

Speaker 2

For the Q2 of 2023, net interest income totaled $447,500,000 That was a decrease of $10,500,000 as compared to the prior quarter and an increase of $109,700,000 compared to the same quarter of 2022. The decrease in net interest income as compared to the prior However, the margin was 17 basis points less than the prior quarter level of 3.83%. Importantly, the net interest margin was stable for each of the months in the Q2 and as I'll discuss later, we expect the margin to continue to remain relatively stable for the remainder of 2023. Yes. So the details of the component changes impacting the margin in the Q2 relative to the Q1, the company saw a beneficial increase of 42 basis points on the yield on earning assets excluding the impact of our interest rate swap positions, a 15 basis point increase in the net free funds contribution And offsetting that was an increase of 66 basis points of an increase on the rate paid on liabilities.

Speaker 2

And it's important to note that roughly half of the margin decline during the quarter was associated with an additional 8 basis points of margin drag From a full quarter impact of the interest rate swap positions that we have in place. Those swaps were generally put on in the Q1 and the Q1 only had a portion of the impact. So this quarter was fully baked and was accounted for about half of the margin decline. We continue to believe that our balance sheet structure can provide for margin stability as our premium finance portfolios, which comprise roughly a third of our loan portfolio, Should continue to reprice upward over the course of this year and that should substantially mitigate the rise in deposit pricing. Accordingly, based on the current interest rate environment, which includes an expected 25 basis point increase by the Fed later this month, we expect our margin to remain relatively steady in the 3.60 to 3.70 range during the remainder of 2023.

Speaker 2

Turning to the provision for credit losses. The company recorded a provision for credit losses of $28,500,000 in the 2nd quarter. This compared to provision of $23,000,000 in the prior quarter and $20,400,000 of provision expense recorded in the year ago quarter. The higher provision expense in the Q2 relative to the prior quarter was primarily a result of a higher loan growth, changes in macroeconomic outlooks, including projected credit spreads and projected commercial real estate price index and slightly higher net charge offs. Again, Rich Murphy will talk about credit and the loan portfolio characteristics in just a bit.

Speaker 2

As to other non interest income and other non interest expense, Total non interest income totaled $113,000,000 in the 2nd quarter and was up approximately $5,200,000 compared to the prior quarter of Total of $107,800,000 The primary reason for the increase were due to an $11,000,000 increase in mortgage banking revenue. The mortgage banking operations saw a slight increase in volume of loans originated during the second quarter with relatively stable margin production margins. Roughly 84% of the application volume is still related to purchased home activity, Loan activity application activity continues to be subdued due to lack of housing inventory and higher rates, but we would expect Right now, similar to slightly elevated production, but nothing dramatic in the 3rd quarter. Wealth management revenues improved by $3,900,000 in the 2nd quarter relative to the Q1 and this was bolstered by revenue the acquisition that we closed at the beginning of the quarter and offset somewhat by continued headwinds relative to the slowdown in the commercial real estate transactions and the resulting impact on the 10/31 exchange business revenue. However, these increases were offset by $1,400,000 reduction on gains and losses related to the company's securities portfolio.

Speaker 2

The company recorded a $1,400,000 gain in the Q1 on securities sales And really nothing in the Q2 of this year. A $7,800,000 decrease in covered call options also Impacted this revenue category. As I discussed earlier, we did not reinvest much of our securities that were called And this created less opportunity to write covered call transactions during the quarter. Turning to non interest expense categories. The non interest expenses totaled $320,600,000 in the 2nd quarter And we're up approximately $21,400,000 when compared to the prior year quarter total of $299,200,000 the primary reasons for the increase is related to a few general areas.

Speaker 2

First, the acquisition of the Wealth Management Companies at beginning of the quarter added roughly $4,000,000 of additional expense sprinkled throughout the various expense categories. But excluding that impact, salaries and employee benefits expense increased by approximately $8,100,000 in the Q2 of 2022 Compared to the Q1 and relative to

Speaker 3

the prior quarter,

Speaker 2

there was $4,700,000 increase largely related To higher mortgage commissions and to a lesser extent incentive compensation accruals. Most of that was commissions related to the increased mortgage operations. So this category fluctuates depending upon the mortgage volume. The category also saw approximately $4,100,000 of higher employee benefit expenses due to an increased level of health insurance claims during the quarter. Health insurance claims can fluctuate on a monthly basis as we're self insured.

Speaker 2

The Q1 was a little low, the second quarter was a little high, can fluctuate. But The change between quarters was really more probably a timing of when employees took advantage of our health insurance program. Next, advertising and marketing expenses increased by $5,800,000 in the 2nd quarter when compared to the prior quarter. As we have discussed on previous calls, this category of expense tends to be higher in the 2nd and third quarters of the year due to expenditures related to various major Minor League Baseball sponsorships, other summertime sponsorship events that we hold in the communities that we serve and marketing of our brand and deposit products. Also in the 2nd quarter, lending expenses increased approximately $4,800,000 Through the strong and higher overall loan origination activity in the 2nd quarter.

Speaker 2

And other than that, the expense categories just discussed Other than the expense categories just discussed above, all the other expense categories were relatively consistent. The efficiency ratio increased to 57% for the 2nd quarter from 53% in the Q1 of the year. And this was primarily due to the impact of lower net interest margins, the reduced level of covered call income and the slightly elevated expenses. Net overhead ratio was 1 point 8% in the 2nd quarter, an increase from 1.49% in the prior quarter due to the slightly higher expenses. In summary, we think this was a very solid quarter.

Speaker 2

We had strong loan and deposit growth, improved liquidity position, stabilized net interest margin with a steady outlook, net revenues are worth in 1% of the prior quarter's record level despite funding cost pressures, continued low levels of nonperforming assets The 2nd highest quarterly net income result in the company's history. We feel like we've managed through a turbulent first half of twenty twenty three delivering net income that was a record for So with that, I will conclude my comments and turn it over to Rich Murphy to discuss credit.

Speaker 4

Thanks, Dave. As noted Earlier, credit performance continued to be very solid in the 2nd quarter from a number of perspectives. As detailed on Slide 6 of the deck, loan growth for the quarter was 1,500,000,000 The loan growth was largely attributable to over $1,000,000,000 of growth in the commercial premium finance category. This growth is due to a number of factors. The 2nd quarter is historically when we see our highest funding volume.

Speaker 4

And as we have noted in past several quarters, we have seen a significantly harder market for insurance premiums, particularly for commercial properties. As a result, we have seen the average loan size increase. Finally, we continue to see new opportunities as a result of consolidation within the premium finance industry. We also saw good growth in commercial real estate largely resulting from draws on existing construction loans and portfolio residential real estate loans. This rate of loan growth is significantly higher than the Q1 and well above our guidance of mid to high single digits.

Speaker 4

We believe that loan growth for the second half of the year will be more in line with our guidance as we anticipate the premium finance loan growth will moderate and be more in line with historic norms. We also anticipate that higher borrowing costs will continue to affect borrowers to reconsider the economics of new projects, business expansion and equipment purchases. However, we continue to see solid momentum in our core C and I and CRE pipelines. Disruptions in the banking landscape continue to work to our benefit and we have seen numerous 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 14, we continue to see strong credit performance across the portfolio.

Speaker 4

This can be seen in a number of metrics. Non performing loans remain stable at 26 basis points or $109,000,000 up slightly from what we saw in the Q1. Overall, NPLs continue to be at historically low levels and we are still confident about the solid credit performance of the portfolio. Charge offs for the quarter were $17,000,000 or 17 basis points, which was up from the prior quarter, but still at a relatively low level. This higher level was primarily attributable to a charge of $8,000,000 which resulted from the sale of a portfolio to co working office loans totaling $17,000,000 As we have noted in previous calls, we are constantly looking for signs of stress in our portfolios and are very focused on our non owner occupied office portfolio.

Speaker 4

The common denominator of the loans we sold was the co working nature of the tenants. We believe that this sub segment of the market will continue to experience significant stress from weak tenant demand And rising cost of debt, and we took this opportunity to meaningfully reduce our exposure. This sale made up close to half of our exposure into this subcategory. We have always looked at strategic options to reduce exposures to areas of concern within our portfolio and we will continue to do so. Finally, as detailed on Slide 14, we saw stable levels in our special mention and substandard loans with no meaningful signs of additional economic stress at the customer level.

Speaker 4

As noted in our last earnings call, we continue to be highly focused on our exposure to commercial real estate loans, which compose roughly 1 quarter of our total loan portfolio. Higher borrowing costs and pressure on occupancy and lease rates are cause for concern, particularly in the office category. On Page 18, we've updated a number of important characteristics of our office portfolio. Currently, this portfolio remains steady at $1,400,000,000 or 13.2 over 40% is medical office or owner occupied. The average size of a loan in the office portfolio is only 1,300,000 We only have 5 loans above $20,000,000 There has been significant concern about office properties located within central business districts.

Speaker 4

Our CBD exposure is limited to $350,000,000 or approximately 1 quarter of the office portfolio. Half of this is in Chicago and half is in other cities. The bulk of the portfolio is located in suburban areas and areas outside CBDs. And portfolio performance to date has been very good with no loans currently over 90 We continue to perform portfolio reviews regularly on this portfolio and we stay very engaged with our borrowers. We are not immune from the macro effects that challenge this product type, but we believe that our portfolio is well constructed, very granular and should perform well moving forward.

Speaker 4

As noted earlier, higher borrowing costs and pressure on lease renewals are cause for concern across the CRE space. To better understand how these issues could impact our portfolio, our CRE team updated their deep dive analysis on every loan over $2,500,000 which will be renewing between now and through the Q1 of 2024. This analysis which covered 79% of all CRE loans maturing during this period resulted in the following: more than 52% of the loans will clearly qualify for renewal at the prevailing rates. Roughly 32% of these loans are anticipated to be paid off or will require short term extension prevailing rates and approximately 16% of the loans will require some additional attention, which could include a pay down or pledge of additional collateral. We have tentative agreement on renewal terms with many of the borrowers in this final group.

Speaker 4

Again, our overall CRE 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 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.

Speaker 1

Thanks, Rich. To wrap up, for the last several months, we've had the opportunity, and in Some cases, I would say the responsibility to explain to our customers why WindTrust continues to be a better alternative than the larger too big to fail banks. Not only have we successfully done that with almost no attrition, but we continue to win business and as you can see, grow deposits and build our franchise. We continue to think we're uniquely positioned to take advantage of the current environment with our diverse businesses That limit the potential impact of economic softness in any individual area, and we remain positioned to benefit from higher rates. As Dave noted and we noted in the press release, we expect that our margin will be relatively stable for the remainder of the year And our net interest income will increase in the coming quarters.

Speaker 1

I would say that the current market is a little bit choppy, and we remain incredibly focused To pursue opportunities that we see and we'll do that aggressively in the coming months. At this point, I'll pause and we can take some questions. Elizabeth, back to you.

Operator

Question comes from the line of Jon Arfstrom with RBC Capital Markets.

Speaker 5

Good morning.

Speaker 1

Hi, John.

Speaker 5

Hey. I'm going to start out with the first question, I guess. You used the word choppy, Tim, And you guys talked about a little bit slower loan growth in the second half of the year, but you put up a pretty good quarter. And I guess My question is what are the pipelines look like? What's the quality of what you're seeing?

Speaker 5

And very early, Tim, you alluded to like pricing and structure being better, but Yes, touch a little bit on that in terms of how that may have changed.

Speaker 1

Yes. I'll take the first part and Rich can add to that. With respect to choppy, Companies are obviously reacting to higher rates and certainly real estate projects in some cases are on hold and There's folks still wrestling with labor issues, which we think are generally better, but not universally better. And then obviously, there are some competitors that are pulling back in terms of credit and their participation in the market. And so we're seeing Opportunities.

Speaker 1

I think a lot of people are seeing opportunities and we just have to be selective and disciplined. And I think our team is doing a nice job In that regard, which is driving both higher yields and better terms, in some cases, more equity in real estate deal. Rich, why don't you please add to that?

Speaker 4

Yes. No, I think you said it well. Every week that goes by, we see new opportunities really across The portfolio in terms of customers who aren't getting their existing banks To work with them in a productive way and we're also seeing tremendous amount of opportunities on large capital market type where there's multiple banks involved. And there's almost more than you could possibly want frankly because there's just so much That's out there right now. So it does give us the opportunity to pick and choose price accordingly, structure accordingly.

Speaker 4

We've always had a history of being pretty disciplined in this space and that's not going to change. But It is it's a great opportunity for us. Disruption always has worked to our benefit. Post pandemic, post PPP, we saw a very similar kind of environment where a lot of banks Kind of struggling getting their footing. We're seeing that right now as well.

Speaker 4

And so we're pretty optimistic, but most importantly, we just want to stay disciplined.

Speaker 5

Okay, fair enough. Premium finance size limits on your balance sheet, we expect to see more of these sales. And I'm just curious if you guys

Speaker 2

Yes. So the 500 we sold is an off balance sheet transaction, so that will come off the books in the 3rd quarter. John, as you know and probably most people on this call know is that those loans make monthly payments and Have an average life of 9 to 10 months. So by the end of the year, they'll substantially have been paid off anyway. So We if you recall, we did a securitization of premium finance loans a decade ago or so.

Speaker 2

I think it's about a $300,000,000 or $600,000,000 Get the plumbing in place. We had a $1,000,000,000 quarter, a great growth quarter. The market is still hard. The disruptions helped us. The outlook is good there.

Speaker 2

And so we thought getting the plumbing in place, sort of testing it out, having another source of liquidity was Good thing to do. We have the opportunity to do it in the future, but right now we don't have any plans to do another loan sale, but if we were to have outside loan growth going forward, we might be able to pull the trigger and do it quickly. And now that we've demonstrated that, We can do it again.

Speaker 1

And John, yes, we continue to service those loans, I think was part of

Speaker 2

your question. Yes.

Speaker 5

Yes. Okay. Just last one, mortgage, Obviously, it was a decent quarter for you. But David, you said slightly elevated production in the 3rd quarter. Is that what you mean?

Speaker 5

And just give us an idea of what you're seeing there. Yes. And we're $30,000,000 type quarter.

Speaker 2

Yes. I mean, we're just a few weeks into the Q3, but application volumes have ticked up just slightly. So I would expect it to be Up a little bit, but as part of it depends on what happens to the valuations of your MSRs too. But from a production perspective, I would expect it to be up just a little bit. We'll just have to see how the production flows through, but Nothing substantial.

Speaker 2

If it's up a couple of $1,000,000 that might be in the right neighborhood, but We'll have to just see how it plays through.

Speaker 5

Okay. All right. Fair enough. Thanks a lot guys. I appreciate it.

Speaker 3

Yes. Thanks, John.

Operator

Our next question comes from the line of David Long with Raymond James.

Speaker 1

Good morning, David.

Speaker 6

Good morning. I was kind of blanked out, so I didn't hear if there was my name or not. But good morning, everyone. Thanks for taking my questions. A couple of things.

Speaker 6

On the funding side, you seem to still have good growth. Obviously, you've got vehicle now where you can reduce or securitize or sell some of those loans. But on the funding side going forward, how are you thinking about incremental FHLB advances versus deposits, whether it's CDs or brokered CDs. What's the most attractive source on the funding side right now? And How do the costs compare right now?

Speaker 1

Sure, David. I mean, generally, we'd like to grow deposits to match any loan growth and we think deposits are the core of our franchise. Obviously, the MAX Safe product suite was very helpful to us in the quarter. Clients didn't have to go elsewhere even at competitors where they're reciprocal products. We don't have to pay the additional fee that might be involved with that.

Speaker 1

So that worked out very, very well. The MAX Safe product in general is in total a little less than 4% in terms of the deposit cost and we're putting loans on it 7.5 to 8 at this point. So the spread is good. We continue to add business. Everybody is asking for deposits.

Speaker 1

It's a focus. So we're going to try to grow deposits before we use other liquidity sources.

Speaker 6

Got it. Thanks, Tim. And then for the competitive dynamics for deposits right now, are you seeing More pressure from the larger regional banks? Are you seeing more pressure from the community banks? Where is the competition more intense on the Deposit Finance.

Speaker 1

Well, all over would be my blanket answer, but certainly the regional banks. And Rich mentioned that some companies are finding it more difficult to get what I would call transactional type work done. And For folks that just don't have a relationship with their bank, the relationship can be either uncertain or strained at this point. And We're very focused on having relationships and taking good care of our clients. And so, one, it hasn't been difficult for us our existing base and 2, it's created an opportunity in certain places to see new clients that frankly we're very happy to be doing business with.

Operator

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

Speaker 7

Hi, Terry. Good morning, everyone. Hi, good morning. Maybe a question on expenses. Some other banks are facing some NII pressure and prospects of rising credit costs.

Speaker 7

Could you just talk about maybe expense management plans and your thoughts on expenses over the next 2 to 4 quarters?

Speaker 2

Sure. I mean, we're always looking out for expenses. Our approach It's generally been to grow the balance sheet and try to grow the revenues at quicker pace than the expenses. And Like we've talked, we're pretty optimistic about balance sheet growth and pretty optimistic about maintaining the margin, which would Translate into increased NII. So from that perspective, we're very optimistic.

Speaker 2

On the expense side, this quarter had, as I said, a few increases in the seasonal marketing, the addition of the expenses from the acquisitions And slightly elevated lending expenses due to the double digit loan growth and increased mortgage production. So those were the primary reasons for the increase this quarter. But we're always looking at expenses. We're very focused on them right now To keep them in check and try to keep them less than the revenue growth going forward. But we don't want to cut to the bone here and not take advantage of the growth opportunities in the marketplace.

Speaker 2

We've always done that. We've always taken advantage of the disruption and we think we're in great position to do that again.

Speaker 7

Thanks, Dave. And then as a follow-up, it sounds like next week we're going to get updated regulation for banks over $100,000,000,000 of assets. What's the risk of that kind of dribbles down into banks maybe $50,000,000,000 and above and how are you thinking about any changes in regulation for a bank that's what $54,000,000,000 $55,000,000,000 of assets today?

Speaker 2

Well, I guess, we'll watch with great interest what they come out with. But I think you're right. I think most of it's focused at $100,000,000,000 We're really not there yet. I think most of the focus will be on Interest rate risk and liquidity management at the supervisory level right now And making sure that the risk management in place there, we think we do a great job at that. So we're not that concerned about it, but We'll watch with interest, what they come up with, but we don't have any plans of hitting $100,000,000,000 In the next year or so here.

Speaker 2

So I think we have some time to plan for it.

Speaker 7

Definitely. Thanks for taking my questions.

Speaker 8

Thanks, Terry.

Operator

Our next question comes from the line of Ben Gurlinger with Hovde Group.

Speaker 3

Hi, good morning guys.

Speaker 1

Good morning. I was curious if

Speaker 3

we could talk Through deposit pricing just a little bit. I know we touched on it in a couple of different ways. But first, I wanted to confirm that the guidance of 3.6% to 3.7% on margin Incorporates any sort of mix shift that might happen?

Speaker 2

Yes.

Speaker 3

Got you. Okay. Just confirming that one. So when you think about The incremental dollar at this point. Without giving away too much of your playbook, how are you guys approaching the new the next dollar.

Speaker 3

Are you looking for relationships that automatically have to bring over deposits from day 1 on the new loan? Are Looking for any different niche avenues of deposit pricing or deposit gathering at a lower price and then kind of juxtapose against that, how has The flows or mix shift changed over the last, call it, 60 days.

Speaker 1

Well, we're always looking to gather deposits at lower costs and with the commercial relationships we win come the treasury businesses and the operating accounts that Generally at the most favorable price. The MAX Safe product for us is mostly interest bearing. There's several flavors of it, some that are for municipalities, for example, and some that are for our corporate customers. At the margin, that's, call it 4%. And then we've been offering some promotional type CD activity that We really used to kind of balance the remainder of the activity.

Speaker 1

So we've got a lot of levers to pull. We're certainly asking For deposits with our customers, but frankly, that's not anything new for us. I mean, we want the relationships and we want the operating accounts from these companies. So we think we can gather deposits at an appropriate level that allow us to operate as we have. We talked about the loan yields and structures being attractive to us.

Speaker 1

And so, we don't think at the moment we're giving up a lot in terms of spread.

Speaker 2

Yes. And we also this is Dave. We also think we have a great position in the Chicago market. We've got the 4th largest deposit market share behind 3 big guys Chase, Bank of America and BMO. And then it really falls off for at least for banks headquartered in Chicago and Illinois.

Speaker 2

We actually have the largest market share and we're less than 10% Some of the regional banks that have presence here are offering higher rates and the community banks are pretty disciplined. So if someone wants to do business with a the larger bank that's located in Illinois. We're sort of the go to bank And we give great service. So we think we're uniquely positioned to take advantage of this, offer good products, give good service and cement in the customer relationship. So We're kind of excited about the opportunities here.

Speaker 3

Got you. That's helpful. And then if we could switch gears a little bit towards credit. I know the guidance here was a little bit softer loan growth in the back half of the year to get more in line with previous guidance. When you think about the provision, I know that CECL is a large component and frankly the first half of this year feels like the first half of the decade.

Speaker 3

So that's a bit unknown economically speaking, but how do you guys think about the provision going forward? If loan growth slows a little, do you think that provision could come down from here or how do you guys approach it?

Speaker 2

Well, CECL is Life of loan concept as far as forecasting out what the losses are in your existing portfolio. So yes, if there's a loan growth That's higher or lower that's going to impact. And obviously, there's a mix issue if we grow a lot in the life or commercial premium finance portfolios, those are less provision than a CRE loan or a commercial loan. But generally speaking, if you have higher growth, you'll have a higher provision. But the things that impact the provision substantially are some of the economic factors.

Speaker 2

If the forecast from the economists that are out there get less Session focused and more soft landing or mild recession focused, then I think some of those economic forecast factors We'll get better and that would have a positive impact on the provision. But, I'm not an economist. I don't make economic predictions, but We follow Moody's. We follow some other economic forecasts as we model out our CECL. So I would suspect unless there's a big change in the economic forecast that growth would be the item that would impact the provision.

Speaker 3

Got it. Okay. That's helpful. Appreciate the color, guys.

Speaker 1

Yes. Thanks, Ben.

Operator

Our next question comes from the line of Chris McGratty with KBW.

Speaker 3

Great. Good morning. Dave, just a question on the kind of a nuance on the capital, the covered call strategy. How do we think about, I guess, Broadly, reinvesting going forward like that line item and obviously it

Speaker 4

will play into the size

Speaker 3

of the overall earning asset base.

Speaker 2

Well, our securities, I mean, generally, we like to run-in the roughly 90% loan to deposit ratio and then the remaining liquidity is either overnight money or securities and our securities have It is either overnight money or securities and our securities have generally been 12%, 13% Of the asset base. So we would expect to sort of keep it in that range and use our liquidity to fund what we expect to be Good loan growth. So the reinvestment of the cash flows off the securities we would put back into some sort of asset class and we've generally done Ginnie Mae's and if you do Ginnys or Fannie's you can write covered calls against them. So Where you generally get higher covered calls is when rates go down and the securities get called away and then you reinvest those securities And then you write calls against them again. So in a or in a flat Rate environment where you can continue to write calls on them quarter after quarter.

Speaker 2

But I would suspect that given the Demand we have for loan and given that we are sort of at a decent spot, we could investment portfolio go up another $500,000,000 or $1,000,000,000 or something over time as we grow here probably, but that's not going to create tremendous amount of covered calls. So I would probably say in this environment, if you're thinking $2,000,000 to $5,000,000 of covered calls maybe a Normal range given the interest rate environment and our investments right now, that's probably not a bad way to look at it.

Speaker 3

Okay. That's helpful. And then just 2 small ones. The maybe a comment on gain on sale margins for mortgage and then I want to make sure I heard you. The $8,000,000 loss on the was that a $17,000,000 sale or roughly a little under 50% loss rate on the office loans, is that what I heard?

Speaker 2

That's correct.

Speaker 8

Okay.

Speaker 1

And then the gain on sales?

Speaker 2

The gain on sales, for us, it's been around Holding around 2% the last couple of quarters, so pretty stable.

Speaker 9

Great. Thanks, guys.

Operator

Our next question comes from the line of Brody Preston with UBS.

Speaker 8

Hey, good morning everyone. How are you? Great. I just wanted to ask on the fixed loan portfolio, excuse me, it's about $17,500,000,000 I just wanted to make sure that the 7.8 to 7.9 that re prices or matures over the next a year or so. Do you happen to know what the existing yield is on that portfolio?

Speaker 8

And then what the like what new origination rates Looks like right now.

Speaker 3

Well, if you look at

Speaker 2

that $7,800,000,000 $6,600,000 of it is fixed grade commercial premium finance loans. So the vast majority of that is the commercial premium finance portfolio, which 1 9th of that basically turns over every month. So those loans generally are pricing at just net net sort of prime plus one range, plus or minus depending on the mix of large loans versus small loans. So That portfolio will be turning over and you can go back and look. We put in our press release, we sort of show what The indices are you can go back and look at what Prime was 9 months ago and what it is now and that should be roughly the pickup you'd get in the yield on those.

Speaker 8

Got it. Thank you very much. And then I did want to ask just within the available for sale portfolio, You gave the effective duration of 6.5%. I wanted to ask you if you knew what the conditional pre

Speaker 2

I don't have it handy right now. The majority of those are Ginnie Mae's. But I don't know what I don't have it handy with me right now. We can get back to you on that, Brody.

Speaker 8

Okay, great. I do just want to ask just on the CRE deep dive, that

Speaker 1

you talked

Speaker 8

about where I think it was 32% Would need some service type of short term extension, 16%, a little additional attention, 50% or 52% qualifying for a renewal. I guess is that the way it works down? You kind of look at you say you qualify, you might need a short term extension, You probably need some more equity. I guess like what drives the delineation between just needing a short term extension and maybe needing to bring more And then if you could just on the ones that need a short term extension, like what happens after they get the short term extension? Like how long is the extension And do those loans move off the balance sheet and go somewhere else?

Speaker 8

Just trying to understand the moving parts there.

Speaker 4

Yes. The ones for short term extensions generally are we're transitioning out to end financing that's probably going to be off our balance sheet. And Yes, that's pretty typical. The history of payoffs is pretty substantial in terms of what we see every quarter just rolling off. So there's a lot of construction financing that we do that we're not going to be the best scenario for them in the long term.

Speaker 4

So That's kind of how that works and we still see lots of liquidity out in that end market. As it relates to your the other part of the question which is what are we looking for typically what triggers that conversation is really going to be performance of the underlying property, which is really our primary focus. You have at least income that you're matching up against your expenses and your debt service. And if there is a mismatch there, we're going to have a conversation. And generally speaking, I think most of our borrowers We'll still tell you that they believe strongly in their project and property, and they want to support it.

Speaker 4

I mean, generally, those conversations at this point Are still very productive and we do have situations where in this loan sale where we Had conversations and you could see that it probably was not going to get better. And at that point in time, we have to make a decision as to do we Because there's so much liquidity still in the market, this was an opportune time to just say the situation is probably not going to get any better And we need to probably think about some alternatives.

Speaker 8

Got it. Okay. That's helpful. Thank you for that. And you mentioned you did mention that there you still see a lot of liquidity in that end market.

Speaker 8

Is that for a wide range of projects? Or is it more I guess more tailored to specific asset classes within construction where there's available liquidity?

Speaker 4

Yes. That's a good point. If it's multifamily, if it's industrial, there's just there's a lot of appetite still out there for that type product. Obviously, in some of these more distressed areas like CRE and retail, that's a different story altogether. But We don't do a lot of the construction financing in those segments.

Speaker 4

So generally speaking, we're looking to transition loans out to for end financing. Those we've been really focused heavily on more multifamily and industrial over the past 3, 4 years.

Speaker 8

Got it. And I know it was a small it was a smaller amount of loans and it was You would think there was a relatively small charge. But am I did I hear you right and read right, I guess, that the $8,000,000 charge that you took against $17,000,000 of co working office loans. Was that right? It was $8,000,000 charge on a $17,000,000 Loan portfolio?

Speaker 4

That's correct. It was a small group of properties, no one market in particular, but they were all as I said, the common denominator is that co working space, which we think is Probably going to be the last piece to recover in office and probably the hardest to kind of re tenant at this point. We're as we have said in the past, we try to be really strategic in terms of taking advantage of The liquidity and albeit there's probably less liquidity for this type of product out there and that's why the discount, but it's better off just to get the runway clear because We're not sure what's coming down the road, but we want to be prepared.

Speaker 8

Yes. No, I understand that. And so you don't think that that level of charge is Indicative of what you might see if you or other banks maybe had to sell what I would call a more regular way kind of normal office

Speaker 4

No, no, not at all. I mean, again, in the co working space, which we have very little of, And this was almost half of that total that we have. It's just it's a much more distressed sub segment of this office category. So we think that you're probably going to see a little more stress in that subcategory. But in general, no, we're still pretty confident about where valuations are.

Speaker 8

Got it. And then just one last one for me, just on the loan sale within the commercial finance, premium finance portfolio. Who are the end buyers of these? You don't need to give a name obviously, but just like a type. Is it private equity?

Speaker 8

Like who are the end buyers Of this type of loan portfolio. And I think you mentioned that this kind of gives you the opportunity to explore other types of these transactions down the road. What would drive you to kind of look to lean into selling more of these loans versus keeping them on balance sheet?

Speaker 2

Yes. So we sold in a special purpose vehicle that then sells it out to asset conduits that are Investing. So yes, we're not going to give the name right now as we have an NDA, but it's your standard Financial Institution Conduit Financing. So, again, we didn't have to do it. We didn't sell it off To some of these firms that are buying distressed assets.

Speaker 2

Obviously, this is not a distressed portfolio. We have no reason to do that. This was more Testing the plumbing and getting it set up to provide a lever to pull for liquidity if we need it. So I think the reason you would do it again is If loan growth was very, very strong and you needed to fund it and deposit growth wasn't as quick, Again, as Tim says, we much prefer to grow our franchise. We've always done that to grow the franchise through deposits, which is The core business that we love, but to the extent that the asset growth without strip deposit growth In any given quarter, we could pull the lever on this either as a distinct sale like we did This time or you could also set up a similar transaction where it's a revolving securitization facility where you Just continue to feed it into.

Speaker 2

We're not as favorable as setting that up because Generally, you'd want to set it up for a 2 or 3 year time period at least. And your crystal ball isn't always so clear as how strong loan demand will be 3 years out. So we'd rather do it discreetly in kind of bespoke sort of Transactions as needed. But right now, we don't anticipate doing it again in the future. But If we did it again, it'd probably be a good thing because that means we're having really, really good loan growth.

Speaker 8

Got it. And I think I heard you right that you're going continue to service these loans for those borrowers, but they are pretty short term. So is there much in the way of servicing income that will come from that?

Speaker 2

No, no, it's a very short term and the servicing costs are pretty low in this portfolio.

Speaker 8

Got it. Thank you very much for taking my questions everyone. I appreciate it.

Speaker 1

You bet.

Operator

Our next question comes from the line of Nathan Race with Piper Sandler.

Speaker 10

Yes. Hi, guys. Good morning.

Speaker 7

Good morning, Nate.

Speaker 10

First one on just the increase in the substandard loans in the quarter, Looks like they're up 16% versus the Q1. Any specific drivers there of note? And to what extent, if any, did that impact the Provision in the quarter.

Speaker 4

No, I don't think there's necessarily any color that I could give you on I mean, it's the levels are still very subdued in terms of overall. But in terms of driving Changes in the CECL, I don't know if it really had a whole lot of Yes. So I'm just going to take a look at it. Yes, we're at 1% still. So I mean as it relates overall levels.

Speaker 4

I think we're still in pretty good shape, kind of looking at my list of additions to it. Not a lot of common denominators here. We try to be incredibly proactive in our portfolio reviews of identifying Any type of loan that might be in the CRE sub segment for instance where you have a decline in debt service coverage gets a little bit closer to 1 to 1 or at 1 to 1, that's going to be something. So we see some of that. There's also as commercial customer is compressed a little bit on cash flow.

Speaker 4

We might make that a substandard and typically we're going to need to anticipate that that's going to turn around. There's no one thing I can point to, but just certainly higher borrowing costs probably would be the primary driver of that As it puts a little more strain on cash flow both in the C and I and CRE segment. But as it relates to CECL, I mean Not a whole. I think as Dave pointed out earlier, I think the bigger drivers on CECL is really going to be some of these economic factors.

Speaker 1

Yes. I think it's more a function of just our very proactive approach to reviewing these credits and making sure we understand where everything is. Again, Rich, they remain at very low level.

Speaker 10

Got it. That's helpful. And just going back to Terry's question around expenses, I think last quarter, Dave, we were talking about kind of a high single Digit outlook for this year. Is that still kind of hold?

Speaker 2

Yes. I think it does. I mean, you got to if you factor out the impact of We've always said that it's excluding acquisitions. But yes, I think that still holds. This quarter, I talked about the reasons for this quarter, but yes, I think we still look at that as being appropriate.

Speaker 10

Okay. And Just one last housekeeping question. With the sale of some MSRs in the quarter, does that impact Mortgage revenue in any way materially in 2Q?

Speaker 2

No. We took an opportunity. We always mark the MSRs to market and Look at this transaction when we actually sold them this quarter were roughly the same, so there wasn't a big impact. That was really just Reducing risk again. MSRs have run up nicely and to take a little bit of that asset off of our books at sort of the top of the MSR valuation as we look at it Seem to be prudent and the servicing rights that we sold were generally those loans that were outside of the Chicago, Milwaukee market area, so they weren't our banking customers.

Speaker 2

They were loans that we made in other regions of the United States.

Speaker 10

Got it. That makes sense. If I could just pass one more on capital. Total risk base dipped down to 11.9%. I know you guys tend to want to stay above 11.5 I imagine with the I'm sorry, the insurance premium finance securitization that's upcoming and just given perhaps higher for longer interest rate environment You guys have plenty of capital to just kind of continue to support the growth opportunities that exist organically in front of you today.

Speaker 10

Is that the right way to think

Speaker 2

about it?

Speaker 1

Yes, we think so, Nate. I mean, obviously, this was a big growth quarter and the sale occurred after the quarter end. So We feel comfortable and if loan growth normalizes into the range Rich discussed, we should be adding capital.

Speaker 2

Yes. And the other thing that happened the other capital ratio stayed relatively flat. Total risk base was down a little bit because as you know we had a sub debt offering I'll there that. Sub debt, you lose 20% of it each year as it matured and the last 20% of that sub debt Capital ran off on June 30th. So that impacted the total risk based capital just a little bit.

Speaker 2

But clearly, we expect The capital ratios to grow going forward based upon our projected earnings and balance sheet growth.

Speaker 3

Got it.

Speaker 10

And it The priorities for excess capital deployment are still organic growth first, perhaps buybacks are lower down on the spectrum just given the organic growth Opportunities today.

Speaker 1

Yes. I think that's fair, Nate. I mean, obviously, we look at all the alternatives. But Again, we anticipate good growth. We like where we are in the market.

Speaker 10

Okay, great. I appreciate all the color and taking the questions.

Speaker 1

You bet. Thank you. Have a good day.

Operator

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

Speaker 9

Thanks. Good morning. Good morning, Jeff. Just wanted to check back in on the hedging strategy on margin. Appreciate the guidance of $3.60 to $3.70 for the back half of the year.

Speaker 9

I guess, what's the duration of those hedges? I think Early parts of the year, you talked about maybe taking the top end off of 4% plus, but also protecting much below 3.50. I guess, does that extend into 2024 basically what you've hedged? And I guess, how does that range Get affected further out kind of with another hike, no hikes or kind of a cut. I'm just trying to think of that Duration of those hedges, does that get into 2024 or any early expectations of how Margin behaves into 2024.

Speaker 2

Yes. No, yes. When we did those hedges, they were generally longer term Transaction. So on slide 22 of our earnings deck or you can look in the last 10 Q that we had, the maturity dates range from September of 'twenty five all the way out into 2028. So They're longer term hedges.

Speaker 2

And if you look at that slide, it's got the swap rates in them, which are generally From the mid-3s into the low 4% range as far as where the swap rates are at. So The market given the slope of the curve just hasn't been that favorable from our perspective to enter into more. So we haven't we didn't enter into any in the second quarter. We'll still look at that, but they're there for downside protection. And quite frankly, as I said in my comments, Had it not been for this portfolio, our margin if we didn't put the swaps in, our margin would be 15 basis points higher overall because that's the impact this quarter.

Speaker 2

Last quarter the impact was 7, so the differential this quarter was 8. 1st quarter the impact was 7, this quarter was 15, so the differential was 8. But we think that's a fair price to pay if we can keep the margin relatively stable like we think it is to protect from the downside risk of substantial Rate reduction. So, just the risk mitigation again. Yes, they're not.

Speaker 2

They're longer term.

Speaker 9

All right. So not to sort of extend that guidance range into 24, but you feel pretty good about Kind of maintaining that level even beyond into next year?

Speaker 2

Well, it depends. I mean, everybody's Different. If you take the higher for longer then I think that bodes well for us. If you look at the curve and rates drop precipitously Then we probably would have some pressure on our margin, but that's why we have these hedges in places to help mitigate some of that impact.

Speaker 9

That's helpful, just to see where you lean into that. Just the last one would be just checking in on Wealth Management. I think the acquisition sort of juiced that number a bit, but looking forward to the outlook, would you expect that growth to level off? Wind quarter was strong, but maybe acquisition driven outlook.

Speaker 2

That was acquisition driven. So we would expect to continue to grow it, but It would just be slow steady growth. And some of that is obviously dependent on the market because you earn your fees based on The underlying asset value. So if the market continues to rally then that would be beneficial for us.

Speaker 9

Okay. Thank you.

Speaker 1

Elizabeth, we can do one more if you want.

Operator

We have a question from the line of Brody Preston with UBS.

Speaker 8

Hey, guys. Sorry about that. I just wanted to clarify something on the co working space. Is that like a WeWork? I just wanted to make sure I totally understood what the property was.

Speaker 4

Yes, kind of WeWork light. It's just where I think there was a move for a while there where People thought they could get a significantly higher lease rate by going short term on their leases and that works when the market is hot, but doesn't mean when

Speaker 2

it's cold.

Speaker 1

Yes, you have it right, Roddie. Yes,

Speaker 8

I'm great. Thank you very much guys. I appreciate it.

Operator

That concludes today's question and answer session. I'd like to turn the call back to Tim Crane for closing remarks.

Speaker 1

Thanks, Elizabeth. And for everybody still on the phone, thank you for your interest and support. I think you can tell we remain optimistic about our position and the opportunities As we've always said, we'll work hard. Thanks very much.

Operator

This concludes today's conference call. Thank you for participating.

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Key Takeaways

  • Strong Q2 results and record H1 income with balanced growth—deposits up $1.3 billion (+12%) and loans up $1.5 billion—while reducing FHLB borrowings and building the franchise amid market turbulence.
  • Stable net interest margin of 3.66% in Q2 despite rising funding costs, with guidance to maintain a 3.60–3.70% margin through the rest of 2023.
  • Robust credit performance: nonperforming loans at 26 bps, charge‐offs at 17 bps, and proactive sales of co-working office loans to manage risk and concentration.
  • Post-quarter sale of ~$500 million in premium finance loans highlights liquidity flexibility, reduces sector concentration and moves the loan-to-deposit ratio closer to the ~90% target.
  • Optimistic outlook underpinned by a diverse business model—positioned to benefit from higher rates, maintain margin stability, control expenses and capitalize on competitor pullbacks.
A.I. generated. May contain errors.
Earnings Conference Call
Wintrust Financial Q2 2023
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