Wintrust Financial Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 22, 2024

There are 10 speakers on the call.

Operator

Welcome to Wintrust Financial Corporation's Third Quarter and Year to Date 2024 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, WindTrust 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 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

Thank you, Latif. Good morning, and thank you for those on the phone joining us for the Wintrust 3rd quarter earnings call. In addition to the introductions Latif made, I'm joined by Dave Starr, our Chief Financial Officer and Kate Bogey, our General Counsel. 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 and loan activity.

Speaker 1

I will be back to wrap up with some summary thoughts on what we expect for the remainder of 2024, and of course, we'll do our best to answer some questions at the end. Before we dive in, let me remind you that this quarter has a few more moving pieces than normal as it includes 2 months of the results for Makatawa Bank. We closed on that transaction during the quarter on August 1. For the quarter, we reported net income of just over $170,000,000 and reported record net income of just under $510,000,000 for the 1st 3 quarters of the year. These results were in line with our expectations, and we remain encouraged by underlying activity and pipelines.

Speaker 1

We grew loans by $2,400,000,000 $1,300,000,000 acquired from Makatawa and another $1,100,000,000 organically. We grew deposits by over $3,400,000,000 $2,300,000,000 from Makatawa and $1,100,000,000 organically. Importantly, we reduced higher rate brokered deposits by over $800,000,000 at quarter end, an immediate benefit of the excess deposits from the Makatawa acquisition. The organic loan growth, organic meaning excluding Makatawa, was balanced across all material product categories, which continues to illustrate the benefit of our diverse asset generating businesses. The organic deposit growth included absolute growth in our noninterest bearing deposits and the percentage of noninterest bearing deposits relative to total deposits remained stable for the quarter.

Speaker 1

Both the loan and deposit results are strong evidence that we continue to gain share in Chicago, the surrounding markets and in our niche businesses. In fact, for the Chicago MSA, Wintrust increased deposit share to 7.7%. In contrast, the 2 largest banks in the MSA, Chase and Bank of America, lost deposit share. This is data from the June 30 FDIC reports. The net interest margin of 3.51% was in line with our expectations and combined with organic growth and the Bakatawa acquisition produced record net interest income of $503,000,000 up approximately $32,000,000 from the Q2.

Speaker 1

I know many of you remember Wintrust as asset sensitive and well positioned for the rate increases over the past few years. It's important to note that we are now very currently balanced in terms of interest rate sensitivity and well positioned for an orderly movement of rates downward. We expect our margin to remain near current levels for the coming quarters and accordingly should experience net interest income growth. On the credit front, nonperforming loans remained low, essentially flat from the 2nd quarter and charge offs were down for the quarter. Again, Rich will walk through the credit results and will offer some additional detail on the loan growth in just a moment.

Speaker 1

A quick note on mortgages. Although we tend to get a lot of questions, at current levels, mortgages remain relatively insignificant in terms of the financial impact apart from the MSR valuation. On that front, as you know, it's rate sensitive and there can be some fluctuation. Rates since quarter end are back up and given today's rates versus those from the end of the quarter, it's likely the valuation adjustment has been recovered. In terms of new mortgage activity, there were a few days during the quarter where rates dropped, and it looked like we might see a pickup in mortgage production, which could have been helpful.

Speaker 1

But that has not lasted and mortgage activity remains muted. Our mortgage business, however, remains an effective hedge for us if rates trend lower and a core part of our client offering. Our 2 other major fee based businesses, our treasury management activity and our wealth businesses, continue to exhibit steady growth. Overall, a solid quarter. In particular, our team continues to do a very nice job with respect to pricing and credit discipline, which will continue to show up in our results and specifically in our margin going forward.

Speaker 1

With that, I'll turn this over to Dave and Rich, and I'll be back to wrap up.

Speaker 2

Great. Thank you, Tim. First, with respect to the balance sheet growth, Tim mentioned the strong loan and deposit growth in the Q3, excluding the impact of Makatawa that produced a balanced $1,100,000,000 of growth for both loans and deposits. The loan growth net of the acquisition was nearly 10% on an annualized basis, in line with our prior guidance of being in the upper end of our mid to high single digit loan growth forecast. Also including the impact of Makatau, we ended the 3rd quarter with a slightly reduced loan to deposit ratio of roughly 92% compared to the 93% at the end of the prior quarter.

Speaker 2

I think it's important to note that non interest bearing deposits increased by approximately $708,000,000 in the 3rd quarter relative to the 2nd quarter with that growth driven mainly by the non interest bearing accounts associated with the Macottawa Bank acquisition. Total non interest bearing balances have remained stable at 21% of total deposits as of the end of each of the first, second and third quarters of this year. As to other aspects of the balance sheet results, total assets grew by approximately $4,000,000,000 to $63,800,000,000 and our capital ratios increased slightly due to the strong earnings and the impact of the Makatawa acquisition. Turning to the income statement results. This was a very solid operating quarter for us, but as Tim mentioned, the quarter had a few moving pieces.

Speaker 2

To that end, I'll start off by highlighting what we consider the uncommon items and what they were for the quarter. From our perspective, the quarter included a non recurring day 1 provision for credit losses related to the Macatau Bank acquisition of $15,500,000 unfavorable mortgage servicing rights activity of $11,400,000 acquisition costs of approximately $1,600,000 with the negative impact of those items offset by security gains of $3,200,000 Each of those items are discussed on the 2nd page of the earnings release if you'd like to refer to them later. The quarter was also impacted by the inclusion of Macatawas operations for 2 thirds of the quarter. So I'll touch on each of these topics during the remainder of my comments, but just wanted to set the table with those items. Our net interest income increased $32,000,000 from the prior quarter and represented a record high level amount of quarterly net interest income.

Speaker 2

A $3,100,000,000 increase in the average earning assets including the addition of the Makatawa franchise for the last 2 months of the quarter and a stable net interest margin contributed to the increase in net interest income. Our 2nd quarter net interest margin was 3.51%, which was stable compared to the 3.52% net interest margin in the prior quarter. Yields and rates on the major balance sheet categories were relatively flat with the loan yields at 6.90 percent for both the 2nd and the 3rd quarter and interest bearing deposit costs were down 1 basis point from the 2nd quarter. Given the current rate environment and the consensus forecast for additional interest rate cuts by the Federal Reserve, remain confident that our net interest margin continued to be in a narrow range around 3.5 percent in the Q4 of 2024 and into 2025. Given our relatively stable net interest margin outlook and the projected continued growth in earning assets, we would expect to again increase net interest income in the 4th quarter.

Speaker 2

We recorded a provision for credit losses of $22,300,000 in the 3rd quarter, which included the one time non recurring day 1 CECL provision of $15,500,000 related to the Mackataw Bank acquisition. Excluding this one time day 1 acquisition related provision, the provision for credit losses would have been approximately $6,800,000 which is down from a provision of $40,100,000 recorded in the prior quarter and the $20,000,000 amount recorded in the Q3 of last year. The lower provision expense in the Q3 relative to the Q2 was primarily attributable to lower specific reserves and non accrual loans, improved forecasted macroeconomic conditions and to a lesser extent portfolio changes related to an improved risk rating mix and an overall shorter life of the loan portfolio. Rich Murphy will talk about credit and loan portfolio characteristics in just a bit. Regarding the other non interest income and non interest expense areas, non interest income totaled $113,100,000 in the 3rd quarter, which was down approximately $8,000,000 when compared to the prior quarter.

Speaker 2

The primary reason for the decline was due to the unfavorable mortgage servicing rights related revenue of $11,400,000 mostly due to negative valuation adjustments as mortgage rates dipped near the end of the quarter. Mortgage production revenue was also down slightly as gain on sale margins narrowed on what was slightly higher originations for sale production volume. Those reductions in mortgage revenues were offset somewhat by a $7,000,000 positive change in gains and losses on securities. I should also note that the prior quarter included an approximately $5,000,000 gain on the sale of certain premium finance loans, which did not reoccur in the 3rd quarter. And although we don't hedge although we do hedge a portion of the MSRs, large movements in interest rates may cause some valuation impacts both positive and negative and the dip in the interest rates at the end of the 3rd quarter was a cause of the current quarter negative valuation adjustment.

Speaker 2

But as Tim noted in his comments, subsequent to the end of the quarter, But as Tim noted in his comments, subsequent to the end of the quarter, mortgage rates have risen, which if the quarter were down at these levels, would cause a positive valuation adjustment in the 4th quarter. Turning to non interest expenses. Non interest expenses totaled $360,700,000 in the 3rd quarter and were up approximately $20,300,000 from the 2nd quarter. The primary reason for the increase were, first, the non interest bearing expenses associated with the we would expect approximately $5,000,000 of additional Macatao related expense in the 4th quarter to account for a full quarter's worth of activity. Non operating acquisition related expenses were approximately 1 point $6,000,000 in the Q3 compared to $500,000 in the prior quarter.

Speaker 2

The remaining increase of approximately $9,000,000 was primarily related to salary costs for increased staffing to support the company's growth, higher incentive compensation expense accruals and increased software expense associated with upgrading and maintaining IT and information security infrastructure and furthering our investments in digital products and services. The non interest expenses we believe are well controlled when considering the impact of the acquisition. Even with that impact of the acquisition, non interest expenses as a percent of average assets declined to 2.36% for the 3rd quarter compared to 2.38% on the prior quarter and 2.41% in the Q3 of last year. This demonstrates improved expense operating leverage and we'll continue to try to bring those numbers down. In summary, the 3rd quarter results included a record level of quarterly net interest income supported by strong loan and deposit growth and a stable and solid net interest margin.

Speaker 2

The quarterly results also had good expense control and stable credit metrics. Said another way, excluding the impact caused by the non recurring Makatawa Day 1 related provision for credit losses and the MSR valuation adjustments, it was a really solid quarter for Wintrust and we're very excited about the prospects for the remainder of the year and throughout 2025. We also continue to build our tangible net our tangible book value per share during the quarter. And as you can see on Slide 12 of the presentation deck, we've grown tangible book value per share every year since we've been a public company and we're certainly on track to do that again in 2024. Additionally, as we've recently attended several investor conferences where the topic of total shareholder returns was discussed on various occasions, we included a new slide, Slide 13 in the presentation deck that provides a graphical illustration of WinTrust total shareholder returns for the last 1, 3, 5 10 year periods compared to the KBW Regional Bank Index total returns.

Speaker 2

As you can see from that slide, Wintrust has consistently outperformed that regional bank index, which I think illustrates the resiliency of our operating model through a variety of economic cycles. So with that, I will conclude my comments and turn it over to Rich to discuss credit.

Speaker 3

Thanks, Dave. As Tim and Dave both noted, credit performance continued to be very solid in the Q3. As detailed in the earnings release, loan growth for the quarter was $1,100,000,000 or 10% annualized, excluding the $1,300,000,000 in loans which we acquired through the purchase of Macatawa Bank. As detailed on Slide 8, we saw strong growth across all major portfolios. A couple of specific areas of note include our asset based portfolio which grew by $243,000,000 as a result of bringing on a number of new customers and higher line utilization.

Speaker 3

The Mortgage Warehouse team had another strong quarter as a result of onboarding a number of new relationships which also come with some great deposit opportunities. We also saw continued growth in core commercial loans, commercial real estate loans and portfolio residential loans. I would also note that we remain highly focused on getting paid appropriately for our risk. As noted on Slide 8, we were able to keep our average loan yields consistent quarter over quarter. We believe that loan growth for the Q4 will continue to be strong and aligned with our previous guidance of mid to high single digits for a number of reasons.

Speaker 3

4th quarter volume for commercial premium finance loans has historically been very strong. We believe the hard market for insurance premium should continue into next year. In addition, our core C and I and leasing pipelines remain very solid. Finally, we saw core C and I line utilization rates continue their upward trend from 37% to 39% quarter over quarter. Offsetting this growth will be pressure on our CRE portfolio as we anticipate higher volumes of payoffs as borrowers seek long term fixed rate refinancing opportunities.

Speaker 3

In summary, we continue to be optimistic about our ability to grow loans at attractive rates and maintain our credit discipline. From a credit quality perspective as detailed on slide 18, we continue to see strong credit performance with signs of stabilization across the portfolio. This can be seen in a number of metrics. Non performing loans as a percentage of total loans was down slightly from 39 basis points to 38 basis points. While NPLs in total were up slightly for the quarter, it's interesting to note that NPLs in our CRE portfolio dropped by $6,000,000 We've also seen 2 straight quarters of lower NPLs in our commercial premium finance portfolio as we continue to manage the stress from the transportation segment of that portfolio and we are pleased to see this trend improve as a result of tighter loan structures and enhanced underwriting.

Speaker 3

Charge offs for the quarter were $26,700,000 or 23 basis points, down from $30,000,000 or 28 basis points in Q2. This reduction in charge offs is a result of improved performance in our commercial premium finance portfolio and our core CRE portfolio. Our portfolio continues to be very solid, well diversified and very granular. Additional evidence of this could be seen in Slide 18 where we saw stable levels in our special mentioned and substandard loans. We believe that this quarter's level of NPLs and charge offs reflect a return to a more stabilized credit environment as evidenced by the chart of historical non performing asset levels on Slide 19.

Speaker 3

Finally, we are firmly committed to identifying problems early and charging them down where appropriate, as evidenced by $18,000,000 of this quarter's charge offs, which have been previously reserved. Our goal as always is to stay ahead of any credit challenges. As noted in our last few earnings calls, we continue to be highly focused on our exposure to commercial real estate loans which comprise roughly a quarter of our total portfolio. Higher borrowing costs and pressure on occupancy and lease rates continue to affect CRE valuations, particularly in the office category. As detailed on Slide 22, we saw promising signs of stabilization during the Q3 as CRE NPLs decreased from 0.40 percent to 0.33 percent.

Speaker 3

And as noted earlier, we also saw CRE charge offs reduced from 53 basis points to essentially 0 for the Q3. On Slide 23, we continue to provide enhanced detail in our CRE office exposure. Currently, this portfolio remains steady at $1,700,000,000 or 13.1 percent of our total CRE portfolio and only 3.6% of our total loan portfolio. Of the $1,700,000,000 of office exposure, 44 percent is medical office or owner occupied. The average size of a loan in this office portfolio is only $1,500,000 We have only 8 loans above $20,000,000 and only 5 of which are non medical or owner occupied.

Speaker 3

We continue to perform portfolio reviews on our CRE portfolio and we stay very engaged with our borrowers. As mentioned on prior calls, our CRE credit team regularly updates their deep dive analysis of every non owner occupied loan over $2,500,000 which will be renewing between now and the end of Q2 of 2025. This analysis which covered 84% of all non owner occupied CRE loans maturing this period resulted in the following. Roughly half the loans reviewed will clearly qualify for a renewal at prevailing rates. Roughly 28% of the loans are anticipated to be paid off or will require a short term extension at prevailing rates.

Speaker 3

The remaining loans will require some additional attention, which could include a pay down or pledge of additional collateral. We continue to back check the results of the portfolio reviews 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 the loans by providing enhancements including principal reductions. As we have stated on prior calls, our portfolio is not immune from the effects of higher rates and 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. In summary, we are encouraged by the trends we saw in the Q3 and we believe that our portfolio is in good shape and appropriately reserved. That concludes my comments on credit, and I'll turn it back to Tim.

Speaker 1

Okay. Thank you. That was a lot. I hope helpful. To wrap up our prepared remarks, I'll be very brief.

Speaker 1

I would just emphasize Dave's reference to the historical charts that we've included in our presentation materials. We have performed well over various time periods and in different economic environments. We would expect that to continue. Our pipelines remain strong. Our credit approach is disciplined.

Speaker 1

We remain well positioned to build share in our Midwest markets and within our niche businesses. And with respect to Makatao, it's still early, but our integration activities are on target and we remain very encouraged and bullish on the opportunities that we have in West Michigan. Overall, we like our position going into the last quarter of the year and into 2025 and certainly appreciate the support of all of our shareholders. At this point, I'll pause and we'll take some questions. Latif?

Operator

Thank you. Our first question comes

Speaker 2

from the

Operator

line of Jon Arfstrom of RBC Capital Markets. Please go ahead, Jon.

Speaker 4

Thanks. Good morning, everyone.

Speaker 1

Hi, John.

Speaker 4

Hey. Tim or Rich, can you you've touched on it, but can you talk a little bit more about the loan growth outlook and the drivers? Just jotting down notes, Rich, in your comments, you talked about both new customers and higher line utilization. And I think the line utilization is maybe a little bit different than what some of the peer banks are talking about. So can you break that down a little bit more and talk a little bit more about the mix and the expected drivers of loan growth?

Speaker 3

Yes. I mean, John, as you know, I think one of the keys for us is just having this really diversified asset portfolio because when some things are working, some things may not be working. A good example is during the period of very low interest rates, we saw Life Finance having very solid growth and that as rates came up, their growth was more muted. Similarly, over the course of the last year and a half, we saw very strong performance out of our P and C Premium Finance Group. And so that has been a huge driver.

Speaker 3

So if you start with that for the course of this year, they were up a meaningful part of the increases we saw in the overall loan portfolio. But then getting back to your specific question, you add on some of these other areas. So we have seen in just the core C and I and core CRE portfolios, some incredibly good opportunities just as the competitive landscape in Chicago has changed so much. And so we are seeing our pipeline right now is probably as full as I've ever seen it in terms of really quality mid market companies in particular. Our asset based team has seen a fairly substantial pickup in new opportunities.

Speaker 3

And then coupled with that, we've also seen we talked about it in previous calls, we picked up a warehouse line of credit group out of Comerica that we brought on about just over a year ago and they've been able to bring over a fairly substantial number of clients that they had and that's added as I pointed out in my comments a fairly substantial increase in those balances as well. Leasing has also been a good part of the story for this year. And so again it's just it's not one thing that I would point to, but it's a number of these different things that all kind of contribute to the total. So the utilization number, we're encouraged by that. We think that as rates went up, we saw that utilization coming down.

Speaker 3

So it's possible that that may not be longstanding, but I we would anticipate that utilization rates are probably at a level where we would anticipate them continuing for a while here. So hopefully that gets at what you were asking.

Speaker 4

Yes, it does. Okay. So this feels like a comfortable pace of growth for the company what you just put up from an organic perspective?

Speaker 3

Yes. No, I think that's right. I mean, we're not changing our guidance. We haven't changed our guidance in many years just because again when something's working something else may not. But when collectively you add them all up it kind of hits in that spot.

Speaker 4

Okay. Good. That's helpful. And then Richie, it's either you or Dave on this one, but I appreciate the carve out of that the day one CECL provision, the $15,500,000 and we would carve that out. It suggests a higher run rate for EPS.

Speaker 4

But the $6,800,000 for call it legacy Wintrust, the core seemed a little bit lower than we were expecting. So I don't know if you can help us think through what the provision might look like in the Q4. I know that's a little bit granular, but that might help us set expectations a little bit. Is this a new lower core run rate for provision? Or is there should we think about maybe a reversion to a higher number?

Speaker 4

Thanks.

Speaker 2

Well, we gave some detail on the Slide 18 for the changes for the allowance. But from the provision, there was some benefit, the macroeconomic conditions got better. And so, some of the forecast for commercial real estate pricing and some of the other factors that go into the model improved. So that was helpful to keep the provision lower this quarter. Prior quarter, we also had $9,700,000 net more specific reserves and those relate to some of the charge offs that we took this quarter.

Speaker 2

So you got ahead of those and then blew them out. So that was beneficial that we didn't have similar specific reserves and actually released some of them this quarter. So I'm not really sure, John, depending on where macroeconomic conditions go, but we would expect to have that mid to high single digits growth that Rich talked about and have to provide for that. And then you look at portfolio mix, our criticized classified numbers have stayed very consistent and we don't expect those to necessarily get worse and they're pretty good right now. So there are not a lot of change there.

Speaker 2

So I think it's probably just growth that we would provide for going forward adjusted for whatever the economists do out there. But I don't know if the election will impact a positive or negative for the Q4. But if you would provide growth for mid to high single digits and the standard provision for that, that's probably my best guess because I just don't know which way the economic factors are going to go.

Speaker 4

Yeah. Yes. Okay. I think that gets us there. And I think you saw Moody's upgraded the banking sector last night.

Speaker 4

So maybe that helps. But thank you guys. I appreciate it.

Speaker 1

Yes. Thanks, John.

Operator

Thank you. Our next question comes from the line of David Long of Raymond James. Your question please, David.

Speaker 5

Good morning, David.

Speaker 2

Good

Speaker 6

morning, everyone. Good morning. Now that we've got a rate cut in out there, How has your deposit cost trended? I mean, what has been your deposit beta since then? And how has how have you seen the competition react to this first rate cut, both on the commercial side and then maybe on the consumer side too?

Speaker 1

Yes, David, it's Tim. So on the way up, our beta was in mid-60s, and we would anticipate that it would be similar on the way down. And that, in fact, has been our experience with the first cut, which obviously we're not very far into. But what we can tell you is that since the end of the quarter and as we start to see more of the cut work through the portfolio, the reduction in deposit costs and the reduction in loan yields have been about the same, which gives us confidence that the spread and ultimately the margin should be in the same level going forward here. With respect to competitors, we've seen rates come down promotional type rates from the low fives and 5% level to the 4.25%, 4.5% level.

Speaker 1

And we believe just given the kind of tepid loan growth that many competitors have had that as rates trend down that they'll continue to try and move down. But obviously, that's the risk is that if we get some strange competitive behavior with respect to loan or deposit pricing that we'll have to respond. We have not seen that.

Speaker 6

Got it. Thank you, Tim. And then closing the acquisition of Makatawa and Grand Rapids, know that's still going through the integration process. But as you look forward there, what are your plans for potentially adding veteran bankers and really leveraging that franchise?

Speaker 1

Yes. Well, they have a terrific team. So number 1, we like a lot where we start from. And over time, as we identify opportunities in the market, we'll certainly add the resources that they believe are necessary to fully penetrate the market. We are seeing inbound inquiries on ESOP loans and construction loans and other kind of specialty areas that they might not have pursued organically.

Speaker 1

And so we're very encouraged by the early feedback from the market.

Speaker 6

Great. Thanks, Tim.

Speaker 1

You bet.

Operator

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

Speaker 7

Thanks. Good morning. Good morning, Jeff. A couple of questions on the credit side. I think you said the majority of the charge offs came in that C and I segment and particularly one relationship.

Speaker 7

Could you just remind us again the industry there and is that fully exited?

Speaker 3

It was more than just one. But where I would say the most if I were categorizing the bulk of the losses that we saw in the quarter were transportation related.

Speaker 7

Got it. And Rich, hopping over to the office slide, it was an increase in that $30,000,000 to $89,000,000 bucket. Your commentary was pretty positive. I just want to see if that increase was largely administrative. Any kind of concerns with that early delinquency number?

Speaker 3

No. It's interesting and it kind of touches on something that kind of how the sausage is made. When you're sitting here, we're having these conversations with customers as it relates to rightsizing a loan or thinking through how you go about renewing it appropriately. Those conversations don't happen overnight. And so occasionally you will see things go past majority as we work through those.

Speaker 3

But ultimately it's time well spent because we believe strongly that it's in everyone's best interest to get those repositioned appropriately. So I'm not overly concerned about that. I think that periodically that will happen as we work with customers to try to make sure we get a good outcome there.

Speaker 7

Okay. Sounds like the overriding thread was more positive. It's the front end, just some mechanics. Maybe just one last one, maybe for Dave, just on the expense run rate. Trying to figure out, we've got full quarter of Makatawa, maybe some cost saves in there, ex out some merger costs.

Speaker 7

So any type of discussion about where that settles in? And if you could hazard a guess on maybe 25 growth rate, that'd be great. Thanks.

Speaker 2

Well, as I said in my comments, we had 2 thirds of the quarter with Mackataw at roughly $10,000,000 So for the Q4, because we have not gotten through the full integration and conversion yet, I would expect that to add another $5,000,000 just as a run rate it gets in there. I don't suspect there's much change in the other line items too much, but plus or minus a couple of $1,000,000 I mean, a pretty big company, so you can have some fluctuations here and there. But I would expect sort of adding $5,000,000 plus or minus to the run rate. And then going forward, we've always sort of in the last few years sort of been in the sort of the mid single digit expense growth rate, but that's under the assumption more sort of high single digit deposit loan growth rate, so you get some operating leverage. But not necessarily ready to make a call on that yet.

Speaker 2

We need to see how the mortgage business goes and the like because that could certainly add some additional commissions and costs if that picks up. But we don't have great visibility into that right now.

Speaker 7

Okay. That's helpful. Thank you.

Speaker 1

Thanks, Jeff.

Operator

Thank you. Our next question comes from the line of Chris McGratty of KBW. Please go ahead, Chris.

Speaker 5

Good morning. Dave or team, the capital improvement from the deal that was, I think telegraphed, but a nice bump up for the growth. As you go into the next few quarters, can you just remind us where you'd like that CET1 ratio? Dave, I believe you have some preferred to get reset and maybe there's a swap opportunity, but just capital philosophy going into next year?

Speaker 2

Well, I think you're right. We picked up some capital with the Makatawa acquisition. They had a lot of excess capital and not a lot of marks in their portfolio. So that was beneficial to our capital ratios. Like we've said in the past, we're in a position now where we think our earnings support our mid- to high single digit loan growth.

Speaker 2

So we should build capital steadily going forward, assuming we don't have outsized growth. And I guess that'd be a good problem to have if you had it. But so we would expect that to continue to just grow. And you probably get it. So your our CET1 is close to 10% now.

Speaker 2

It would get into the 10% range sometime during 2025. And then for the preferreds, we'll just have to see what the market's like at the time. We most likely refinance them out at a lower spread. But there's a lot of time between now and then. So we'll see what happens.

Speaker 2

But we have our eye on that and we can either swap them out, pay some of them down or make it but we'll have to make a decision at the time based upon what market conditions and rates are.

Speaker 5

Okay. Perfect. And then maybe a couple of housekeeping on the average share count for the Q4 and then the tax rate, Dave? Thanks.

Speaker 2

Yes. I think the tax rate this quarter was pretty clean. So you probably do that. Macatao added 4,700,000 shares to the total and we would have had 2 thirds of the quarter for that. So you can just do the math on that.

Speaker 5

Okay. Perfect. Thank you.

Operator

Thank you. Our next question comes from the line of Terry McEvoy of Stephens Inc. Please go ahead, Terry.

Speaker 8

Good morning. This is Brandon Root on for Terry.

Speaker 1

Hi Brandon.

Speaker 2

Most of

Speaker 8

my questions have been asked and answered.

Speaker 2

Maybe a couple

Speaker 8

of modeling questions. Kind of following up on the expense question earlier, I heard the mid single digit comments. Maybe there's more of a medium or longer term target for expenses. I think historically you've looked at the net overhead ratio. And Dave, you mentioned the expenses to average assets.

Speaker 8

Do you have maybe a target you could maybe share for us where you like that either of those ratios to settle out over the medium term?

Speaker 2

Yes. Well, it's hard to do a target on that unless you know what the mortgage business is because when the mortgage business is really strong, that number the net overhead ratio comes down. We certainly would like it less than 150 basis points to grow into there for the net overhead ratio. And then we just sort of expect to get continued operating leverage. But I don't think we have a long term goal that we pointed out there.

Speaker 2

There are certain things in the operating expenses like lease depreciation expense. We hope that goes up because the leasing income goes up on the non interest income side. So I think we tend to focus for the net overhead ratio more than the expense ratio because some of our non interest income categories like wealth management and mortgages bring a lot of commissions with them and we'd like those businesses to grow, but they bring with them operating expenses too. So we sort of like to look at it as the net overhead ratio which incorporates both the non interest income and non interest expense rather than to have a specific non interest expense target. And our growth on the non interest expenses that's sort of what we've said the last 2 years and we would expect just to continue at that pace.

Speaker 2

Okay.

Speaker 8

Thank you for that. And maybe just my last one on the mid to high single digit loan growth. I'm sorry if you said this, but where are those incremental yields coming on at or maybe a spread relative to sulfur or something?

Speaker 3

It really depends on again, we have these different asset categories. So I mean, they can range all over. I mean, the opportunities that are going to be more mid market deposit heavy, spreads will be in the low 200 range. But on the P and C side, we're going to get substantially more than that and everything else is kind of in between. We continue to be as we talked about very, very focused on getting appropriately paid for the risk.

Speaker 3

And so far, we've been able to hold the line pretty well on pricing.

Speaker 8

Got it. Thanks very much.

Operator

Thank you. Our next question comes from the line of Jared Shaw of Barclays. Your line is open, Jared.

Speaker 3

Hi, thanks. Yes, I think just the last thing I had was the impact of the hedges to margin going forward. I think it was 17 basis points in this quarter. What's the ballpark that we should expect going forward?

Speaker 2

I think sort of the rule of thumb generally, Jared, is for every 25 basis points of a reduction in sulfur, we should benefit by about 2.5 basis points, a little bit of timing difference because some of these reset the beginning of the month etcetera versus the daily. But I think we're 17 basis point drag in the Q3 and it should be less than that as sulfur goes down. But if you sort of use it we give all the detail in the slides, but right now the average is about 2.5 basis points per 25 basis point benefit.

Speaker 3

Great. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Nathan Race of Piper Sandler. Please go ahead, Nathan.

Speaker 9

Yes. Hey, guys. Good morning. Thanks for taking the call.

Speaker 1

Good morning, Nathan.

Speaker 9

I apologize I got in a little late, but just in terms of the gain on sale margin compression that we saw this quarter, it was a little bit more so than what we saw from some other larger banks that report last week. So just curious if you have any thoughts on maybe a starting point for 4Q?

Speaker 1

Yes.

Speaker 2

It was a little lower than we'd hoped, but a little volatility when rates were falling and some of the secondary market hedging that we do when we do locks on those. We would expect that the gain on sale margins will be closer to the 2% range in the Q4. Probably volumes are somewhat similar. As Tim said, the rates backed up a little bit. So there's just not a lot of activity there.

Speaker 2

But we would not expect the gain on sale margin to be that low in the Q4. We'd expect it to pop back up in closer to 2.

Speaker 9

Okay, great. Very helpful. Thanks, Dave. And again, I apologize if you already touched on it, but in terms of NII growth expectations, I know it's kind of a fluid environment in terms of thinking about next year, but assuming the margin kind of holds in around 350, even if we get another 100 basis points of Fed cuts next year, just any thoughts on just how much NII can grow assuming balance sheet growth remains at that mid to high single digit range?

Speaker 2

Well, I guess it's just math then, right? If we think the margin is going to be relatively stable and you have mid to high single digit asset growth, you'd have the mid to high single digit NII. So that's the way we look at it. It's relatively stable margin in mid to high single digit earning asset growth, which should produce net NII growth.

Speaker 9

Okay, great. Always helpful just to hear you guys indicate that. And then just lastly, just in terms of the expected growth in capital going forward, I think you mentioned you're just going to kind of remain opportunistic on the M and A front going forward, but just any other thoughts on just how you'd like to manage capital? Are you guys just comfortable kind of building excess capital over the next several quarters here in light of the preferred reset next year?

Speaker 1

Yes. I mean, as Dave said, Nate, we'll look at the preferred options that exist as we get into the summer next year. But otherwise, absent a lot of loan growth, we should be building capital and are comfortable to kind of gradually continue to improve the company's capital ratios.

Speaker 9

Okay, great. Thanks guys.

Speaker 1

Yes. Thank you, Nate.

Operator

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

Speaker 1

Latif, thank you very much and thank you again for everybody that's joined us on the call. Good questions. And again, I would just characterize this quarter as solid growth organically as well as the addition of Makatawa, a stable margin, which we believe we've positioned the bank well for going forward. Good credit at the moment, we're knocking on wood as we say that. And then continued investment in the franchise's future and that's in technology and building share in the markets and hiring the right people.

Speaker 1

So we're actually very optimistic going into the Q4 and into 2025. And we appreciate all of your support and your questions. And if there's anything you didn't get answered on the call, please feel free to call us afterwards. Latif, that's it. Thank you very much, everybody.

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Key Takeaways

  • Wintrust delivered record net interest income of $503 million and reported Q3 net income of $170 million (YTD $510 million), driven by balanced organic loan growth of $1.1 billion and the Makatawa Bank acquisition adding $1.3 billion in loans and $2.3 billion in deposits.
  • The company’s net interest margin remained stable at 3.51%, reflecting a shift from asset sensitivity to a balanced rate position that should sustain margin levels and support further NII growth as rates normalize downward.
  • Credit metrics stayed strong with nonperforming loans stable at 38 bps, charge-offs down to 23 bps, and only a one-time $15.5 million CECL day-one provision tied to the Makatawa deal, underscoring disciplined underwriting across a diverse portfolio.
  • Mortgage production remained muted and MSR valuations incurred an $11.4 million markdown as rates dipped late in the quarter, while treasury management and wealth management fees continued steady, fee-based growth.
  • Non-interest expenses rose modestly due to acquisition and strategic tech investments, yet expense leverage improved with the expense-to-assets ratio falling to 2.36%, highlighting ongoing focus on cost efficiency.
A.I. generated. May contain errors.
Earnings Conference Call
Wintrust Financial Q3 2024
00:00 / 00:00