Wintrust Financial Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 18, 2024

There are 12 speakers on the call.

Operator

Welcome to WimbTrust Financial Corporation's 4th Quarter and Full Year 2023 Earnings Conference Call. 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 that constitute projections, expectations, beliefs or similar forward looking statements.

Operator

Actual results could differ materially from the results anticipated or projected in any such forward looking statements. The company's forward looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10 ks and any subsequent filings 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.

Operator

I will now turn the conference over to Mr. Tim Crane.

Speaker 1

Good morning, and thank you for joining us for the Q4 and full year call. For those we haven't spoken to recently, Happy New Year. In addition to Dave Dykstra and Rich Murphy, who the host introduced Dave Starr, our Chief Financial Officer and Kate Bogie, our General Counsel are with me. In terms of an agenda, I'll 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.

Speaker 1

I'll wrap up with some summary thoughts on 2024 and as always, we'll do our best to answer some questions. For the year, we reported record net income of just over $622,000,000 up 22% over 2023. The results reflect our conservative approach to managing and growing our franchise. Specifically, we target steady growth in both loans and deposits, Sound and conservative liquidity and risk management and an unwavering commitment to taking care of our clients. In our materials as we do at every year end, we have also included a series of 10 year historical charts that show solid progress on key metrics, Evidence that our approach not only works, but differentiates us from many of our peers.

Speaker 1

While this is not new information, we think these charts are meaningful evidence of our strong and consistent performance. And if you haven't already, I would encourage you to look at and review these materials. For the Q4, net income was just over $123,000,000 a solid result given the recognition of a $34,400,000 We reported record net interest income of $470,000,000 up approximately $8,000,000 from the 3rd quarter as a result of both an increase in the net interest margin of 2 basis points to 3.64 and continued good loan growth. Deposits were also up in the quarter. Non interest bearing deposits increased slightly and were steady as a percentage of total deposits.

Speaker 1

While we continue to expect credit performance to normalize from the very low levels experienced over the last few years, Our losses and NPLs remain low. Despite these low credit losses, we've continued to build the allowance. And as you'll hear from Rich, we continue to proactively address challenged credits in our portfolio. I would highlight that our allowance coverage for core loans, This detail is in Table 12 of our press release. The market rate decreases during the quarter that caused the adjustment to the value of the mortgage assets also led to a material improvement in AOCI driving up our book value and capital levels.

Speaker 1

The tangible book value by $385,000,000 to over $70 a share during the quarter. You'll see in one of the charts that I mentioned that our book value has increased every year during the 10 year period shown. And in fact, if you were to go further back, our tangible book value has increased every year since the company went public in 1996. Our liquidity position remains strong. Overall, a solid quarter, which we believe will compare well and may differentiate us relative to many of our competitors.

Speaker 1

With that, I'll turn this over to Dave and Rich. And as I mentioned, I'll come back and wrap up with some thoughts on the 2024 outlook.

Speaker 2

Great. Thanks, Tim. First, with respect to the balance sheet growth, we were again pleased to see loans for the quarter grow by approximately 6.86 $1,000,000 or 7% on an annualized basis, consistent with our prior guidance of mid to high single digit loan growth. The increase in loans was across many of the loan categories, but was primarily related to commercial real estate and commercial premium finance And Rich Murphy will talk about that in just a little bit. The company also recorded deposit growth $404,000,000 during the quarter, which is a 4% increase over the prior quarter on an annualized basis.

Speaker 2

And as to deposit composition, The non interest bearing deposits at end of the 3rd quarter and 4th quarter both represented 23% of total deposits, evidencing the stabilization of the non interest bearing balances during the latter half of twenty twenty three. Other balance sheet results were that total assets grew by approximately We had slightly increased ending loan to deposit ratio and our capital ratios were relatively stable with most of those ratios increasing slightly. Overall, a very successful quarter for the growth of the franchise, Our differentiated business model exceptional team and service and the unique position in Chicago and Milwaukee markets continues to serve us very well in that regard. Turning to the income statement categories, starting with net interest income. For the Q4 of 2023, net interest income totaled $470,000,000 The increase of $7,600,000 as compared to the prior quarter and an increase of $13,200,000 as compared to the Q4 of 2022.

Speaker 2

I should note that the 4th quarter net interest income represents the highest quarterly amount ever recorded by the company. The increase in net interest income as compared to the prior quarter was primarily due to an increase in average earning assets of approximately $509,000,000 An increase in the company's net interest margin also contributed to the Increase in net interest income. The net interest margin was 3.64% in the 4th quarter, which was 2 basis points higher than the prior quarter level. Accordingly, as we discussed on prior calls, our balance sheet composition, structure and repricing characteristics provided for relatively stable net interest margin during the quarter. And based on the current interest rate environment, we believe we can maintain our net interest margin within a narrow range around the current levels During the Q1 of 2024 and beyond in 2024 assuming the rates stay roughly the same.

Speaker 2

I'd also like to note that total loans as of December 31 were $770,000,000 higher than the average total loans in the 4th quarter, which obviously provides us with some momentum into the Q1 of 2024. The combination of the expected balance sheet growth and relatively stable net interest margin Should allow for further growth of our net interest income in the Q1 of this year. Turning to provision for credit losses, Wintrust recorded a provision for credit losses of $42,900,000 in the 4th quarter. This was up from a provision of $19,900,000 in the prior quarter, It's actually down from the $47,600,000 of provision recorded in the year ago quarter. The higher provision Expense in the Q4 relative to the Q3 was primarily a result of higher net loan growth during the quarter, a slightly higher level of net charge offs And some deterioration in the forecasted macroeconomic conditions, primarily wider forecasted BAA credit spreads and forecasted depreciation Rich will talk about the credit and loan characteristics in just a bit.

Speaker 2

Regarding other non interest income and non interest expense, total non interest income totaled $100,800,000 in the 4th quarter, which was down approximately $11,600,000 when compared to the prior quarter. The primary reason for the decline was related to $20,000,000 less of mortgage Banking revenue. Relative to the Q3, mortgage revenue had a $9,700,000 unfavorable change in net valuation adjustments from our mortgage servicing rights assets and certain other mortgage related assets that we hold at fair value. Those declines are really due to We also experienced $7,000,000 decline in production revenue due to seasonally lower volume and compressed gain on sale margins. But I think it's interesting to note that although our production revenue was lower than the prior quarter, it's actually higher than the Q4 of the prior year, which is encouraging for us.

Speaker 2

We are also encouraged that with the lower rate environment that our application volume is ticking up early in 2024 thus far. Albeit still at low levels, we are seeing increases over application volumes that we were receiving in January of last year. And application volumes that are slightly up from December of 'twenty three. There was a variety of relatively smaller changes to the other non interest income categories as shown in the tables in the earnings release, but those changes were not unusual and in the aggregate Turning to non interest expenses. Non interest expenses totaled $362,700,000 in the 4th quarter and We're up approximately $32,600,000 from the prior quarter.

Speaker 2

The primary reason for the increase was the negative impact of the $34,400,000 special Assessment by the FDIC to pay for the 2 of the bank failures that occurred earlier in 2023. The remaining variances in non interest both positive and negative offset to a relatively small reduction in non interest expenses from the prior quarter of just under $2,000,000 In summary, it was a very good solid quarter in our view with good loan and deposit growth, a stable net interest margin with a steady outlook, A record level of net interest income and a continued level of low level of nonperforming assets. We We feel like we've managed well through a somewhat turbulent period in 2023, delivering net income that was a record for any full fiscal year in the company's history. And we have a positive outlook for continued growth in assets, revenue and earnings. And although it's easy to get caught up in looking at the quarterly results, I think it's also instructive to occasionally look back over time.

Speaker 2

As Tim referred to, we included some 10 year charts in the earnings release That I think provides some impressive evidence that our approach to running the business has provided for consistent growth in loans, deposits, earnings and tangible book value per share over an extended period of time, all while managing credit risk very well. We'll work hard to continue those trends in 2024 and beyond and increase So with that, I'll conclude my comments and turn it over to Rich Murphy to discuss credit.

Speaker 3

Thanks, Dave. As Tim and Dave noted earlier, credit performance continued to be very solid in the 4th quarter from a number of perspectives. As detailed on slide 7 of the deck, loan growth for the quarter was $686,000,000 and similar to the Q3, this growth was driven by a number of factors. We continue to see a harder market for insurance premiums, particularly for commercial properties, resulting in higher average loan sizes in our commercial premium finance portfolio. And consolidation within the premium finance industry has provided us with a number of new opportunities.

Speaker 3

We saw good growth in the commercial real estate portfolio Resulting largely from draws on existing construction loans. And finally, our leasing group had another very solid quarter. Total loan growth for all of 2023 was $2,900,000,000 or 7%. We believe that loan growth for 2024 will continue to be within our guidance for the following reasons. The commercial premium finance team should continue to show solid growth as premiums continue to be elevated.

Speaker 3

Our various pipelines have stayed very solid And our leasing team continues to see significant demand in the market. And as we have noted in prior calls, we continue to benefit from disruptions in the banking landscape. We've seen numerous quality opportunities in our core C and I and CRE business. In addition, we continue to look at a number of lending teams and niche lending opportunities that from dislocation of the regional banks. Offsetting this growth will be continued pressure on C and I line utilization, which dropped from 37 We'll continue to cause borrowers to reconsider the economics of new projects, business expansion and equipment purchases.

Speaker 3

In summary, we continue to be optimistic about our ability to grow loans in 2024 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 14, We continue to see strong credit performance across the portfolio. This can be seen in a number of metrics. Non performing loans increased by $6,000,000 during the quarter from 32 to 33 basis points. While NPLs have increased from 26 basis points to 33 basis points during 2023, They continue to be at historically low levels and we are confident about the solid credit performance of the portfolio.

Speaker 3

Charge offs for the quarter were $14,900,000 or 14 basis up from $8,100,000 or 8 basis points in Q3. Finally, as detailed on Slide 14, we saw stable levels in our special mention and substandard loans 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 comprises roughly 1 quarter of our total portfolio. Higher borrowing costs and pressure on occupancy and lease rates are cause for concern particularly in the office category as we've noted before. On our Q2 call earlier this year, we noted that we are very focused on a subset of office loans, which are secured by co working properties.

Speaker 3

At that time, we had sold a portfolio of approximately $17,000,000 which reduced our total co working exposure in half. During the Q4, we saw an increase in CRE NPLs of $17,400,000 which was largely due to a downgrade of a single co working loan to non performing. It is important to note that the underlying loan is current and has been previously identified as a potential non accrual due to cash flow issues. We continue to work with the borrower to determine the most cost effective strategy going forward. On slide 18, we have updated a number of important characteristics of our office Currently, this portfolio remains steady at $1,400,000,000 or 12.8 percent of our total CRE portfolio and only 3.4% of our Total loan portfolio.

Speaker 3

Of the $1,400,000,000 of office exposure, 42% is medical office or owner occupied. The average size of the portfolio and loan in the office Portfolio is only $1,400,000 and we continue to have only 5 loans above $20,000,000 in this category. We continue to perform reviews regularly on this portfolio and we stay very engaged with our borrowers. As mentioned on prior calls, our CRE credit Regularly updates our deep dive analysis of every loan over $2,500,000 which will be renewing between now and the end of Q3 of 2024. This analysis which covered 82% of all CRE loans maturing during this period resulted in the following.

Speaker 3

Approximately 1 half of these loans will clearly qualify 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 14% of these loans will require some additional attention, which could include a pay down or a pledge of additional collateral. It's important to note that the previously mentioned loan secured by co working space had been identified during our prior deep dive analysis. We have back checked the results of these tests conducted during prior quarters and have found that the projected outcomes versus actual outcomes were very tightly correlated and generally speaking Borrowers of loans deemed to require additional attention continue to support their loans by providing enhancements including principal reductions.

Speaker 3

Again, our portfolio is not immune from the effects of rising rates or the market forces behind lease rates, but we continue to proactively identify weaknesses in the portfolio And work 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

Great. Thanks, Rich. Prepared remarks, we continue to believe that we are well positioned, perhaps uniquely well positioned to take advantage of the current environment with our diverse businesses. Over the last several quarters, we've taken steps to achieve an interest sensitivity position much closer to neutral. You can see some specific data on Table 8 in our press release.

Speaker 1

While we don't believe that rapid rate cuts are warranted at this point, we are assuming There'll be 3 25 basis point rate cuts in 2024. With that assumption, as Dave mentioned, our net interest margin will be reasonably stable in a narrow range around the current level for the near term. More interest rate cuts above and beyond the 3 we've assumed would slightly pressure the margin, but would also likely result in more favorable economic activity as an offset. For example, improvements in our mortgage business and growth in commercial line utilization, which Rich mentioned is at currently very low levels. So to reiterate Our target is to continue to grow loans in the mid to high single digit range in terms of a percentage and to fund the loan growth through deposit increases at like levels.

Speaker 1

Our pipelines remain solid. And as Dave mentioned, we experienced strong growth at the end The Q4, which represents good momentum going into the Q1 of 2024. Overall, we're pleased with the 2023 results and we're encouraged about Where we start 2024. I know there'll be some questions. So at this point, I'll pause and we can turn it back to the host.

Operator

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

Speaker 4

Thanks. Good morning, everyone.

Speaker 1

Good morning, Chad.

Speaker 4

Hi. Maybe Tim or Dave, just wanted to ask about Some of the last comments you made, Tim, on your expectations for the margin to remain in the current range, can you talk about what you guys are doing to protect the margin around these levels? I think about your loan growth guidance and the net interest income growth potential, it seems a little better than peers, Particularly your loan growth, but just talk about how you're protecting the margin and your confidence that we can maintain the current range absent greater than 3 cuts.

Speaker 1

Yes. Thanks, John. And Dave can add to this. We've talked about the fact that we've got an Asset sensitive loan book that continues to reprice. And at this point, the repricing in our loan book is closely correlated to what we're seeing in terms of the increase in We expect that for at least a short period going forward here that, that will continue to be the case and that The spread between our loan and deposits will be roughly stable.

Speaker 1

I would characterize stable as Plus or minus some number of basis points around 3.6. So we feel pretty good about that and we've baked in the 3 cuts Starting in June, if those cuts are either deeper or more, then I think we've got Probably some pressure on the margin, but an offset in other parts of our business.

Speaker 2

Yes. Another thing, the focus, I mean, I think that that's true. The structure of the balance sheet also helps too. The premium finance book, which is a third of our portfolio sort of lagged on the way up, but if rates go down, it also lags on the way down. So there's benefit to us there.

Speaker 2

As you know and as we've disclosed in the materials, we've got Over $6,000,000,000 worth of interest rate derivatives that will also assist us if rates fall down. We were patient when rates went up to allow the margin to expand. And as we hit the upper threes, we felt like we should Reduce that asset sensitivity and lock in the rates through balance sheet management and derivatives and we've tried to become relatively neutral on that rate now just By using both the structure and the derivatives to be somewhat neutral here. Competitions out there, so we'll depend on what the competition does with loan and deposit pricing if rates move. But right now, the way we look at the world, we think we can hold it pretty tight.

Speaker 4

Yes. Okay. That's helpful. Just one more revenue question just on mortgage. You touched on it, but Obviously, a tougher revenue quarter for mortgage and I get it.

Speaker 4

But I think what you're saying is originations look good, Spreads were depressed. And if we don't have the same headwinds on the MSR, Maybe we can repeat the kind of quarter that we saw in the Q1 of 2023. Is that fair, Dave? Maybe even potentially a little better?

Speaker 2

Yes. I think that's pretty accurate, John. I mean, our production revenue was Down about $7,000,000 to about $7,000,000 of production revenue. But that was higher than about $3,000,000 of production revenue 2022 and we had $8,000,000 to $9,000,000 of production revenue in 2023. So what we're seeing is Right now, at least for the 1st part of January, applications are ticking up, again, not wildly, But they are up from December November and clearly they're up from where we were in January of 2023.

Speaker 2

So I would expect that revenue would sort of get back to those levels based on what we know right now. Again, it's not going to be a spike up, but I do think we're going to sort of return to where we've been in the previous few quarters. And then hopefully that if the spring buying season hits that mortgage rates are down a little bit and hence one of the reasons some of the MSR values declined a little bit. But hopefully that decline in rate spurs a little bit of additional home buying activity come March

Speaker 4

Yes. That will be interesting to watch. Just a little rebound would be good. So I agree on that. So okay.

Speaker 4

Thanks a lot guys. I appreciate it.

Speaker 1

Thank you,

Operator

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

Speaker 5

Hey, good morning.

Speaker 6

Hi, Chris. Hi, Chris.

Operator

Maybe a question for Rich.

Speaker 5

I mean, you guys have, in the past 4th quarters, I would say proactively built the reserve when things are still good. Given where your reserves sit today, I guess, can you just speak to the potential need or desire to build reserves Additionally in early 2024 or is this just kind of a get ahead of it and build it while you can?

Speaker 3

CECL doesn't necessarily work that way. I mean, so I mean, if you were asking me how The provisioning should work. It would not necessarily result in the same things that we're getting out of the CECL models because As Dave pointed out, I mean, we the BAA spreads that the way they reacted Definitely affected what we had to do in the Q4. There's just the loan growth affected it. It's not necessarily what Rich Murphy thinks about the quality of the portfolio.

Speaker 3

I do think that what we've done as you point out At the end of last year, this year was pretty material. And I think we have put ourselves in a very good position Going forward and if CECL at WorkSight is supposed to work, we're actually prefunding the losses that should accumulate down the road. So I actually I feel really good as to where the allowance is given the shape of our portfolio right now.

Speaker 5

Okay. And Chris, I can maybe chime in little bit. I think if you look at

Speaker 2

it sort of globally without getting too far into the weeds, if you look in the presentation, Our criticized assets that we have a special mention in substandard and good, those percentages held very stable. Charge offs were still low at 14 basis points, a little higher than 2nd quarter, but still pretty low. And we had a little bit more growth in the quarter. But all those things weren't too different quarter to quarter. So as you look at that increase, I think most of that is the macroeconomic factors and the biggest one that impacted us In our models and everybody uses different factors for their modeling, but the BAA credit spread has a high correlation To many of our loan lines that we model for and that Spread over the 8 quarter period that we look at going out Expanded quite a bit, which had a big impact on our provisioning.

Speaker 2

If the soft landing thoughts gain traction and the consensus view amongst the economists out there Are that that those spreads should tighten in, then we should see some benefit going forward. But in the Q4, it was worse than the Q3 And it really generated the extra reserves.

Speaker 3

Thanks for the question.

Speaker 6

That's great. Great color.

Speaker 5

Thanks. Just I know some banks have disclosed which of the Moody's scenarios in the S-four, S-two, What they weigh, can you remind us if you've communicated like what scenario is currently factored or the weightings of the scenarios?

Speaker 2

Yes. I mean, well, we look at all the Moody's packs. We also look at some Blue Chip other sort of consensus forecasts that are out there. But we Are using the baseline scenario of Moody's, but various factors out of that baseline scenario.

Speaker 5

Okay. Maybe just one more and I'll hop back. The capital outlook, mid to high single digit balance sheet growth, Your ROE can certainly support more growth. How do we think about perhaps other uses of capital in 2024? Any thought in M and A conversations?

Speaker 5

Is that something you would consider? Any color on capital use would be great. Thanks.

Speaker 1

Yes. Well, the straightforward part is that, as you said, the earnings of the company should support the loan growth. That's been the Case for several quarters now, but isn't a long term trend for Wintrust where typically we've needed to Add capital. To the extent, 1, we continue to build capital, that's good. And on the M and A front, I would say that the conversations are still active, but there's also not a lot of activity.

Speaker 1

And I Don't know that others who might be in a position that it's better to talk about that would think that there's going to be a short term change there. Clearly, the Rates coming down have helped the AOCI situation for a number of people who had impaired either loan books or securities portfolio. But we've been acquisitive in the past. I think we may be in the future, but we're disciplined about it.

Operator

Our next question comes from the line of Casey Haire of Jefferies.

Speaker 7

Yes, thanks. Good morning, everyone.

Operator

Good morning.

Speaker 7

I wanted to touch a little bit on the NIM stability guide. Just along those three cuts, what kind of deposit beta you guys are assuming throughout the year if we

Speaker 6

get those kind of cuts?

Speaker 2

Yes. Well, I think generally we're believing that at this point that if the That cuts $25,000,000 for the non CD term CDs that are fixed That we should be able to reduce the rates fairly quickly by 25 basis points. So we're expecting as we increase rates rapidly as rates went up, we were expecting to be able to follow Fairly closely with cuts in our money markets and savings and the like.

Speaker 1

Casey, the other thing we're seeing, we don't have a Huge book of municipal deposits, but some of those have reference rates, if you will. And we're starting to see As a result of what's happening with rates, those index or reference rates come down. And so we've seen Some minor benefit on a portion of the book already.

Speaker 7

Okay, great. And Just a question on the fixed rate asset repricing benefit. In the release, you guys call out about $8,000,000,000 That matures within or reprices within the next year. Just wondering, do you have the what the yield is on that and what the what it could be priced to?

Speaker 2

Yes. No, we haven't disclosed that, So I don't have it handy here right now, but we'll think about putting that in future releases.

Speaker 7

Okay, great. And just lastly, The loan to deposit ratio ticked up a little bit to 93. I think you guys talked about 85 to 90. I know you're talking about funding loan growth with deposits, but just wondering If there is a hard cap on that loan to deposit ratio.

Speaker 2

No. We think we like it sort of in This range is fine with us. It ticked up a little bit. I would expect it to come down again next quarter. A lot of our loan growth just happened near the end of the quarter.

Speaker 2

And so we were just trying to match deposit loan growth and there's a lot that flowed in towards the latter part of December. So Just a little probably mismatch on the timing of the deposit raising, but probably expect that to drift back down to 90 2, again next quarter or so.

Speaker 7

Okay, great. Thank you.

Operator

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

Speaker 8

Thanks. Good morning. Rich, I wanted to circle back on the co work. You singled out the one credit of, I think $74,000,000 What is the total remaining co work exposure? Negligible.

Speaker 3

I think there might be a certainly under $5,000,000 I think Pretty well below that. There's might be a couple of small pieces, but generally that were largely with this issue being largely addressed, I think we're That largely is behind us.

Speaker 8

Okay. So that was the bulk of it. I guess and then just sort of tracking some of those Tables towards the back, was that credit identified and sliding from kind of past due? No, the loan is current. Yes.

Speaker 8

Got it. Okay. And maybe on the just hopping to expenses, safe to assume that Quarterly FDIC insurance reverts back in the mid $9,000,000 range. In other words, absent the special assessment, That could be a good run rate for 2024. And then kind of the follow on question to that is just overall Expense run rate expectations there would be helpful.

Speaker 8

Thanks.

Speaker 2

Yes. Well, clearly, we've Special assessment is a one time item. I think towards the end of the couple of years out, depending on how those things settle out, they may True it up a little bit for now. Yes, that number goes away and you'd be in that mid $9,000,000 range, but That assessment grows as the company grows. So as much as we don't like to pay the assessment probably that Number goes up because we're going to grow the franchise over the course of the year, but you can see that it trended up So we would only expect it to go up with the growth of the balance sheet though.

Speaker 2

And then overall expenses sort of similar to what we If you sort of look at the non FDIC impacted run rates of the 3rd and the 4th quarter, Those will probably increase slightly in 2024 as we have merit and Raises for the employees and the impact of inflation, the impact of the FDIC insurance coverage increasing as we grow And we continue to invest in our infrastructure, digital and technology wise. But so probably that 5% mid single digit range is what we would expect using the 3rd and the 4th quarter as a base. And If we can grow loans in the franchise in the mid to high single digit range, we can get that operating leverage out of the system.

Speaker 8

Sounds good. Thank you. And then the last one, just you kind of touched on it a little bit, but in that mid to high Single digit loan growth outlook for 2024, do you have anything kind of layered in there on a is it sort of a soft landing type assumption or That's a crystal ball type question, but for the bulk of 2024, do you have a recessionary or slowdown macro wise Embedded.

Speaker 1

Well, my answer to that would be, we've fortunately got diversified and pretty granular loan book. As we've talked about in the past, the transportation business and some of our customers are already experiencing challenging conditions And others are doing terrific. So I don't know that a technical recession is much going to change the environment. And we think Across our loan book, we'll get a pretty balanced level of growth over the year.

Speaker 3

Yes. It's a great point, Tim, because the We have all these different engines that just fire at different times. If you kind of look at where the growth is coming from over this last year, Our Life Premium Finance Group essentially had 0 or actually negative growth largely because in a higher rate environment It doesn't work if you got into a recessionary type situation and they bring rates down that product suddenly looks much more attractive And a lot of the loan growth that we had 2 years ago was out of that product. So as different as the right rate cycles move through, They definitely affect different things right now. As we talked about line utilization in a higher rate environment, it really gets impacted.

Speaker 3

As rates come down, you're going to see the opposite effect. So I think there is some there's going to be some cyclicality, but it's just going to affect different products at different Time. So we stay pretty committed to that mid to high single digit growth forecast.

Speaker 8

Okay. Appreciate it.

Operator

Thank you. Please stand by for our next question.

Speaker 6

Our next question comes from the

Operator

line of Brandon King of Stuwist.

Speaker 8

Hey, good morning.

Speaker 6

Good morning.

Speaker 9

So I had a question on deposits. I noticed most of the growth in the quarter came from money market Savings accounts. And I'm wondering if or is that the expectation going forward where we'll see most of the deposit growth?

Speaker 1

Well, we think the mix is somewhat stabilized, but with these higher Rates than we had a year or 18 months ago, clearly the interest bearing products are more attractive to our clients. And so I think you're going to see money market and CD growth that you wouldn't have seen a couple of years ago. And we're working hard and hopeful that the Non interest bearing portion continues to stay reasonably stable around 23%.

Speaker 9

Okay. And is part of that strategy also sort of anticipating a Fed easing cycle as maybe Those money market accounts may be easier to lower those rates, I guess, faster than if we did more of a CD CD Funding.

Speaker 1

Well, I think what you said is correct that the money market accounts would probably move more quickly than some of the other interest bearing products. But we offer a wide set of options to our customers and they select what they believe to be the best fit for them. We are seeing more CD related activity as you can get rates in the 5% range. Whether that will continue as rates come You may get people trying to kind of lock in those levels.

Speaker 9

Okay. And then another question, I know I appreciate the commentary on the reserve increase. But I did notice the reserve increase was primarily driven in the C and I category. So I Just wondering if you could speak to just the health of your C and I customers and credit trends there as opposed to a lot of attention on CRE space.

Speaker 3

Yes. I think a couple of things that I would point to. 1 is, as we noted earlier that The level of classified assets remains pretty consistent. So we try to be very proactive on our risk ratings. And if you start to see Special mentioned classified assets start to move up.

Speaker 3

I think that would be a pretty direct reflection. But more anecdotally, we spend a lot of time talking to our about where their business is at. And I would say generally speaking people still feel like that top line revenue number It's holding together pretty well and that solves a lot of problems. Obviously, higher borrowing costs can affect them. Clearly, the economy I think has slowed a little bit and so that's affected them.

Speaker 3

But while it may not be as rosy when you had 0 I think that they still feel pretty optimistic about where their overall revenues Are coming from and where those levels will be. I think labor has probably become less of a concern for them and just Overall input costs have stabilized. So, I would say just net net, I think they feel still pretty good.

Speaker 9

Great. Thanks for taking my questions.

Operator

Thank you. Please stand by for our next question, which comes from the line of Ben Gerlinger of Citi.

Speaker 6

Hey, good morning guys.

Speaker 3

Hey, Ben.

Operator

So I'm going to ask a question.

Speaker 6

I know you're probably going to be a little annoyed, but I'm going to ask it anyway. So when you think about 2024, What I'm getting at is kind of mid single digit, maybe upper middle single digit loan growth, deposit growth, It's called a flat margin at the like what you said, 3 cuts, kind of the 3.60 range. If the market has a little bit more, Probably see a little bit pressure on that. That's largely just because of back book repricing on Some CRE and then Premium Finance still has a little bit of tail left in it. But as we get towards the end of the year and possibly into 25, If there is a forecast amount rate cut environment, do you think is there any incremental pressure because I mean, I get that the premium finance probably rolls over and starts to work against you, but you also have indexed deposit costs.

Speaker 6

I'm just trying to think,

Speaker 5

It's a moving target obviously, but just any incremental thoughts on

Speaker 6

how you might exit the year into 'twenty five? And I get you have a good 'twenty 5 guidance at all, so just kind of finger in the air, that would be really helpful.

Speaker 1

Well, a couple of things. To be clear, we have very few actual index deposit Products. So while the municipal rates, for example, that I mentioned earlier are tied to some reference rates, they're not contractual. So other than our CD book, we're largely pricing at our discretion. As we talked about, if you get More rate cuts or faster rate cuts or you get 50, there slightly would pressure our margin beyond the assumed 3 cuts.

Speaker 1

But Our mortgage business would likely perform better and to Rich's point, we're at very low levels in terms of utilization on lines right now and we would expect to see Some rebound there as rates come down. So while there might be some pressure on the margin, as rates continue to drop, We have other aspects of our business that we think will perform well. So that's kind of the best way we're looking at that and why we value the Diversified businesses as an important part of our model.

Speaker 6

Yes. That's great color. It's great point too that the fee income aspect We'll definitely kind of pick up some of the slack or it's not all the slack goes, the softer spread revenue. Can you just remind us Any sort of kind of efficiency ratio on mortgage? I guess that we haven't seen a robust mortgage market.

Speaker 6

I'm just trying to think like if that does start to turn back on,

Speaker 2

Yes. It sort of depends How hot the market gets and how wide gross margin gain on sale margins are. But I generally think of the

Speaker 6

Got you. That's really helpful. Appreciate the color. It looks like you guys have a pure growth horsepower year. It's good that the margin should stay roughly flat.

Speaker 6

So I'm looking forward to it. Thanks guys. Yes, thanks.

Operator

Thank you. Our next question comes from the line of Terry McEvoy of Stephens Inc.

Speaker 10

Hi, good morning. Dave, and I'm pretty sure it's in the appendix, but what are the hedges costing you each quarter? I'd like $24,000,000 comes to mind, but do you have that number handy? And what is that what would that be if we get 3 rate cuts and when does that Turn from a headwind to a tailwind.

Speaker 2

Yes. Well, so it's I think it was about 19 basis points of impact to the margin and it's about $8,000,000 a month, so $24,000,000 a quarter. Right now, if sulfur moves one way or the other that would change that. But We put a slide in our presentation deck that gives all the details of what the particular strike rates are. But we're receiving fixed and paying variable.

Speaker 2

So if sulfur goes down at all, even though we may not hit strike rate will get benefit because we'll pay less. So that $24,000,000 a quarter if SOFR comes down We'll decline by what we pay by 25 basis points. So it's effectively locking in $6,000,000,000 worth of our variable rate Portfolio into more of a fixed rate scenario that are sulfur based.

Speaker 10

Thanks And then, are you or how are you using loan modifications within commercial real estate? And how are you defining a market rate if you are using modifications?

Speaker 3

Yes. I mean, Modifications are part of the business. So but we don't if a loan is Seriously affected by lease rates or vacancy or rising rates. I mean, and you can't just hide a problem with a So similar to the one that we just identified, that loan is current. But at some point, You have to look at that and say, is there really going to be the opportunity to change the income stream or change the cash flow With the modification, generally speaking, you really have to be honest and the borrower and the bank have to be honest about Whether that's going to solve the problem.

Speaker 3

In a case like that, it's so challenging, it's not. So We do use modifications, but it's really got to be a situation where it's the difference between the targeted policy driven Cash flow coverage and the actual cash flow coverage are relatively close and you're just working with them to Maybe extend the amortization a little bit or something like that to give them a little bit of relief to bridge the gap. But generally speaking, I mean, we don't use modifications all that And when we do, we're pretty much the interest rate is pretty much at market rate.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Brody Preston of UBS.

Speaker 6

Good morning.

Speaker 11

Hey, good morning, everyone.

Speaker 6

I was trying to get a little bit more granular, Dave, on

Speaker 11

the loan yields. I understand the margin commentary that you gave, but wanted to kind of ask you, just given the premium finance books, how you'd expect the loan yields to trend in the middle part Of the year, just given the moves in the 1 year CMT that have

Speaker 6

already occurred?

Speaker 2

Yes. Well, The book that's tied to the 1 year CMT is the life insurance premium finance book. And so As you're alluding to the rate now is very similar to the rate a year ago. So the benefit from that book It's pretty baked in right now. So the repricings on those should Stay relatively the same.

Speaker 2

The commercial premium finance book, however, is still is re Pricing over time and although those are not indexed to the prime rate that they Have pretty good correlation to the prime rate because we generally are adjusting our rates when the Fed is adjusting and therefore most people are adjusting prime. And if you go back a year, prime was 7.5% at the end of 2022 and 8.5% at the end of this year. So there There's another 100 basis points of repricing on that portion of the book. And then we have The fixed rate commercial real estate loan book that we have out there, some of that will reprice too.

Speaker 11

Got it. And the stuff that is the stuff that's fixed rate, that's not the like premium finance related at all, How much of that do you expect to reprice on a quarterly basis over the next year?

Speaker 2

Well, we've got $8,000,000,000 in total. But If you look at that, the big portion of that is our premium finance portfolio at $6,800,000,000 So we had another $1,200,000,000 of commercial and commercial real estate type of loans that will reprice over the course of the year. And I'd probably just say it's ratable. I don't think we have Seasonality per se to that portfolio.

Speaker 1

And that these levels will be generally slightly helpful as they reprice.

Speaker 11

Yes, understood. Is there is it fair to assume when I look at that kind of 1 to 5 year bucket As well that it's a similarly ratable repricing there. I'm just trying to make sure

Speaker 6

I get their cadence correct through 2025.

Speaker 2

Yes. We've sort of looked at this. We don't have any maturity walls coming from that you can say, oh my gosh, when we get out 18 months, we're going to have just Boatload repricing or we don't get any repricing for 3 year or 4 years. It's fairly ratable.

Speaker 11

Got it. On the NIBs, you guys kind of

Speaker 6

bucked the trend versus the group this quarter. A lot of other banks have actually seen a reacceleration in NIB outflow. I wanted to ask you specifically if there was anything that drove the strength in the Q4 on a period end basis, like if there's any chunky kind of deposits It came from institutional type money?

Speaker 1

No, not significantly. I mean, We have large flows at the end of the year as people position their balance sheets, but we worked really hard on the deposit side of the equation to continue to grow clients and We are hopeful that the 23% turns into a stable level for us. And our team continues to add commercial clients that have non interest bearing deposits and treasury services and use other Products and services we offer. So it's sort of a function of building the franchise.

Speaker 2

Yes. That's the way I would look at it too. I mean, Rich talked about there's A little less line usage. So some of those people that maybe would have drawn on the line of use some of their deposit non interest bearing deposits. And maybe that's a reason why you're seeing some of that industry wide.

Speaker 2

But as Tim said, if we continue to grow the franchise and add customers that right now is offsetting any of that Additional leakage and we're being able to hold it pretty well. And it's been pretty stable on an average basis for the last couple of quarters. So We're hopeful that we can hold it in there.

Speaker 11

Great. And then just last one for me is just on the wealth business is a pretty Decent pickup in the assets under administration this quarter, after they were flat last quarter. Just wanted to ask, What caused that to occur?

Speaker 2

That's for the revenue to be flattish

Speaker 6

you're saying? Just the growth I

Speaker 11

No, the AUA was up from $44,700,000,000 to $47,100,000,000

Speaker 2

Yes, A couple of things with that. Some of the brokerage accounts grew a little bit. We also our Max Safe Product that we have, the way we operate that is that that works through our trust company as a fiduciary account. So those get included. So a little bit of growth in that area and just a little bit spread out in other places.

Speaker 2

So Nothing significant per se in any one chunky sort of deal. Okay. And we also in that number as we note in the press release, Our investment portfolio was also managed out of our wealth management area and included in those assets under management and those ticked up a little bit.

Speaker 11

Got it. Okay. So that the move higher shouldn't necessarily result And a similar move higher in revenue for next quarter.

Speaker 2

Some of it is based on beginning of quarter Asset valuation, so versus daily or end of quarter. So you might see a little bit of pickup there.

Operator

All right. Great.

Speaker 6

Well, thank you very much for taking my questions, everyone. I appreciate it. You bet. Thanks.

Operator

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

Speaker 1

All right. Great. Thank you, everybody. As you can tell, We're generally pleased with the 2023 results, but we've moved on. We've got an eager team that is Trying to win clients and new business for the bank every day and we appreciate your time and your interest in Wintrust.

Speaker 1

So we'll be working hard and we'll talk to you in a quarter. Thanks everybody.

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Key Takeaways

  • Wintrust delivered record FY23 net income of $622 million (up 22% YoY) and a Q4 net interest income high of $470 million, driven by a 2 bp NIM expansion to 3.64% and continued loan growth.
  • Loans grew approximately 7% annualized in Q4 ($686 million), led by commercial real estate and premium finance, funded by 4% deposit growth with non‐interest‐bearing deposits stable at 23% of total.
  • Credit quality remains strong with nonperforming loans at 33 bps and charge‐offs at 14 bps; the Q4 provision for credit losses rose to $42.9 million to reflect loan growth and more conservative macro forecasts, while the allowance was proactively bolstered.
  • Tangible book value increased to over $70 per share as rate‐related markdowns in mortgage assets drove AOCI gains, and overall capital ratios and liquidity positions remained robust.
  • For 2024 the bank targets mid‐high single‐digit loan growth and assumes three 25 bp rate cuts, expecting to keep NIM around 3.6% through loan repricing and over $6 billion of rate hedges, with diversified businesses poised to offset margin pressure.
A.I. generated. May contain errors.
Earnings Conference Call
Wintrust Financial Q4 2023
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