Wintrust Financial Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 18, 2024

There are 12 speakers on the call.

Operator

Welcome to Wintrust Financial Corporation's First Quarter 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 presentation, 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. 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, everybody, and thank you for joining us for the Wintrust Financial First Quarter Earnings Call. With me this morning are Dave Dykstra, our Vice Chairman and Chief Operating Officer Rich Murphy, our Vice Chairman and Chief Lending Officer Dave Starr, our Chief Financial Officer and Kate Bogie, 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 Murphy will add some additional information and color on credit performance.

Speaker 1

I'll be back to wrap up with some summary thoughts on 2 topics, a high level outlook going forward, followed by a few remarks on the announcement from this past Monday regarding our pending acquisition of Makatawa Bank. For the quarter, we reported record net income of just over $187,000,000 The results include a onetime gain from the previously announced partnership related to our 401 advisory business and a further expense related to the replenishment of the FDIC Deposit Guarantee Fund. Dave will speak to the relative amounts of for these items and a handful of other items. Overall, net of these atypical and mostly positive items, the quarter was strong and in line with our expectations. We grew both loans and deposits by slightly over $1,000,000,000 with a net interest margin of 3.59.

Speaker 1

Dollars The loan growth was balanced nicely across all of our major businesses. Net interest income of $464,000,000 was down just a bit from the 4th quarter and if adjusted for the number of days in the quarter would have been essentially flat. Our strong deposit growth reflects our continued ability to attract deposits and grow our franchise. During the quarter, however, we did see a decline in the average non interest bearing deposits of approximately $430,000,000 We attribute this in part to seasonal deposit flows, but also to clients using their funds to invest in projects and to higher liquid rate options. We continue to expect credit performance to normalize from the very low levels experienced over the last few years.

Speaker 1

However, our NPLs remain low and our charge offs reflect to a large degree the resolution of prior period reserve activity. Despite these modest credit losses, we continue to maintain a healthy allowance. And as you'll hear from Rich, we also continue to proactively address challenged credits in our portfolio. I would highlight that our allowance coverage for core loans, excluding primarily our low loss insurance finance portfolios, is at a healthy 1.51%. Market rate increases during the quarter impacted tangible book value, but despite these fluctuations, our tangible book value improved to a record level from the Q4 and the strong earnings resulted in slightly improved capital ratios.

Speaker 1

Overall, it was a solid quarter, which we believe will compare well and may differentiate us relative to many of our competitors. With that, I'll turn this over to Dave and Rich. Afterward, again, I'll come back to wrap up in terms of what we're seeing and speak to the acquisition announcement.

Speaker 2

All right. Thanks, Tim. First, with respect to the balance sheet growth in the Q1, we're pleased to report solid loan growth at the high end of our guidance. Total loans grew by approximately $1,100,000,000 or 10% on an annualized basis. Importantly, the increase in loans was broad based and Rich Murphy will discuss this in more detail in just a bit.

Speaker 2

We recorded corresponding deposit growth of $1,100,000,000 during the quarter, which is a 9% increase over the prior quarter on an annualized basis. As for the deposit composition, non interest bearing deposits declined on average by approximately $434,000,000 in the first quarter relative to the Q4 of last year. And as of the end of the Q1 represented approximately 21% of total deposits. The decline in the non interest bearing deposits as Tim mentioned was a result of businesses utilizing their cash rather than drawing on outstanding lines some additional movement to interest bearing deposit accounts in some seasonality. And although the decline in average non interest bearing accounts follows several stable quarters, we're encouraged that thus far in the 2nd quarter, non interest bearing accounts are averaging a couple of $100,000,000 more than they were in March.

Speaker 2

So we're hopeful that the Q1 dip rebounds a bit in the Q2. As other aspects of the balance sheet results, total assets grew by approximately $1,300,000,000 and our regulatory capital ratios improved slightly despite this brown growth. Overall, it was another successful quarter for gaining new customers in our market and for the growth of our franchise, which has been the primary objective of Wintrust Robinson's history. Our differentiated business model, exceptional team and service and unique position in Chicago and Milwaukee markets continue to serve us well. As to the income statement categories, first, I'm pleased to reiterate the Q1 was a record quarter not only from the standpoint of quarterly net income but also from the standpoint of quarterly net revenues.

Speaker 2

As Tim mentioned, our net interest income remained relatively steady with the Q4 of 2023 if adjusted for the number of days in the quarter. An increase in the average earning assets was essentially offset by a 5 basis point decline in the net interest margin. The slight decline in the net interest margin was primarily the result of a mix shift in deposits and the pressure caused by lower level of non interest bearing deposits and the higher cost of attracting incremental deposits to fund the strong loan growth. These dynamics resulted in an interest margin of 3.59% for the 1st quarter and a run rate of approximately 3.5% at the end of the first quarter. Based on the current interest rate environment, the dynamics of the expected stronger loan growth in the 2nd quarter, fluctuating non interest bearing deposits and the incremental cost of funding elevated loan growth, we expect the net interest margin to be within a range around the levels where we ended the Q1 or approximately 3.5%.

Speaker 2

As I mentioned, the exceptional loan growth that we expect in the Q2 will require us to fund that growth in the short term with marginally higher deposit costs, which will likely pressure the margin a bit, but would represent an acceptable trade off. Said another way, we're happy to take advantage of current market conditions and add high quality loans and high quality relationships even if it means a bit of margin pressure in the short run. These new relationships will provide nice gains in market share and additional net interest income at acceptable returns. Turning to provision for credit losses. Wintrust recorded a provision for credit losses of $21,700,000 in the 1st quarter, down from a provision of $42,900,000 in the prior quarter and down slightly from the 23,000,000 dollars provision expense recorded in the year ago quarter.

Speaker 2

The lower provision expense in the Q1 relative to the prior quarter was primarily a result of improvement in forecasted macroeconomic conditions, primarily narrower forecasted BAA credit spreads. Rich will talk about the credit metrics and loan portfolio characteristics in just a bit. Regarding the other non interest income and non interest expense sections, total non interest income totaled $140,600,000 in the first quarter, which was up approximately $39,800,000 when compared to the prior quarter. The reason for the increase related to 2 primary factors. First, as we disclosed in the news release during the Q1 and as Tim mentioned, the company sold its Retirement Planning Advisors division, which generated a net gain on the sale of assets of approximately 19 $300,000 The net gain was comprised of a $20,000,000 gross gain, which is included in another income and offsetting compensation expense of roughly $700,000 2nd, the company generated approximately $20,200,000 more in mortgage banking Relative to the Q4 of 'twenty three, mortgage revenue had $2,300,000 of net favorable change in valuation adjustments from our mortgage servicing rates and certain other mortgage related assets that we held that we hold at fair value.

Speaker 2

Whereas the prior quarter had a $9,700,000 net unfavorable valuation adjustment resulting in a positive swing of approximately $12,000,000 We also experienced a $6,600,000 increase in production revenue due to slightly higher origination volumes and improved gain on sale margins. Now there are a variety of other smaller changes to non interest income categories as shown in the tables in our earnings release, but these changes were not unusual and in the aggregate resulted in a decline of less than $500,000 on a pretax basis, if you take all the other categories in an aggregate manner. Non interest income categories. Non interest expenses totaled $333,000,000 in the Q1 and were down approximately $29,500,000 The primary reason for the decline was the result of $29,200,000 less than special assessments imposed by the FDIC to pay for the 2 bank failures that occurred earlier in 2023. The company recorded approximately $5,200,000 of such expense in the Q1 due to the updated loss estimates provided by the FDIC, which was less than the $34,400,000 expense recorded in the prior quarter.

Speaker 2

The remaining variances in non interest expense both positive and negative offset to a small reduction of just under $300,000 The seasonal decline in advertising and marketing expenses and prevalent entertainment expenses were offset by higher levels of other real estate owned expenses in a variety of other relatively small increases from the prior quarter, including the aforementioned additional expense related to the sale of the Retirement Planning Advisors division. In summary, a very solid quarter, good loan growth, good deposit growth, relatively stable net interest margin, a record level of quarterly net income, a record level of quarterly net revenues and a continued low level of non performing assets. So with that, I'll conclude my comments and I'll turn it over to Rich Murphy to discuss credit.

Speaker 3

Thanks, Dave. As Tim and Dave both noted, credit performance continued to be very solid in the Q1 from a number of perspectives. As detailed on slide 6 of the deck, loan growth for the quarter was $1,100,000,000 The growth was driven by a number of factors. Core commercial loans excluding leasing were up $267,000,000 driven largely by quality opportunities resulting primarily from dislocation within the competitive banking landscape in our markets. In addition, we saw $170,000,000 in growth from our warehouse line of credit portfolio resulting from strategic hires made last year coupled with a recovering mortgage market.

Speaker 3

We also 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. Loan growth for the past 4 quarters totaled $3,600,000,000 or 9% annualized. We believe that loan growth for the Q2 of 2024 will continue to be strong and potentially greater than Q1 for a number of reasons. Historically, we experienced our highest growth in our commercial premium finance portfolio in the Q2.

Speaker 3

During the Q2 of 2023, we saw these balances grow by just over $1,000,000,000 and we expect similar growth during this coming quarter. We continue to see a hard market for insurance premiums and we are benefiting from opportunities from consolidation within the premium finance industry. These loans are among the highest yielding in our portfolio. In addition, core C and I pipelines remain very solid. And finally, our leasing teams continue to see significant demand in the market.

Speaker 3

Offsetting this growth will be continued pressure on C and I line utilization which dropped from 37% to 34% year over year as higher borrowing costs have negatively affected usage. In addition, while we continue to see a number of new CRE opportunities, our CRE pipelines have slowed as higher borrowing costs have continued to affect loan demand. We anticipate that higher borrowing costs will continue to cause borrowers to reconsider the economics of new projects, business expansion and equipment purchases. In summary, we continue to be optimistic about our ability to grow loans at attractive rates and maintain our credit discipline. As noted earlier, Q2 loan growth should be very strong and in excess of the total for Q1.

Speaker 3

In addition, we would anticipate total 2024 loan growth could be at the upper end of our guidance. From a credit quality perspective, as detailed on slide 13, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics. Non performing loans as a percentage of total loans was virtually unchanged at 34 basis points, up by $9,000,000 As an aside, while core NPLs had a slight decrease for the quarter, we saw an uptick in non performing loans in the commercial premium finance portfolio resulting from increased cancellations in the transportation segment of that portfolio. We continue to monitor credit losses.

Speaker 3

Charge offs for the quarter were 28 credit losses. Charge offs for the quarter were $21,800,000 or 20 1 basis points, up from $14,900,000 or 14 basis points in Q4. It's important to note the charge offs for this quarter have were largely reserved for in Q4. Finally, as detailed on Slide 13, we saw stable levels in our special mention and substandard loans. 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 1 quarter of our total portfolio.

Speaker 3

Higher borrowing costs and pressure on occupancy and lease rates continue to affect CRE valuations, particularly in the office category. During the Q1, we saw a modest increase in CRE NPLs from 0.31 percent to 0.34 percent, up $4,000,000 On slide 17, we continue to provide enhanced detail on our CRE office exposure. Currently this portfolio remains steady at $1,600,000,000 or 13.5 percent of our total CRE portfolio and only 3.6 percent of our total loan portfolio. Of the 1,600,000,000 of office exposure, 44% is medical

Speaker 4

office or owner occupied.

Speaker 3

The average size of a loan in the office portfolio is only $1,500,000 We have only 6 loans above $20,000,000 and only 3 of which are non medical or owner occupied. We perform portfolio reviews regularly 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 loan over $2,500,000 which will be renewing between now and the end of the Q4 of 24. This analysis which covered 78% of all CRE loans maturing during this period resulted in the following. Half of the loans reviewed will clearly qualify for our renewal at prevailing rates.

Speaker 3

Roughly 30% of these loans are anticipated to be paid off or will require short term extension at prevailing rates. The remaining 19% of these loans will require some additional attention, which could include a pay down or a pledge of additional collateral. We continue to back check the results of these tests conducted during prior quarters and 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. 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, appropriately reserved and situated to weather the challenges ahead.

Speaker 3

That concludes my comments on credit and I'll turn it back to Tim.

Speaker 1

Well, you can tell we continue to believe that we're well positioned to take advantage of the current environment with our diverse businesses. And as you also heard, we expect to see relatively strong growth in the coming months. To some of the earlier comments from both Dave and Rich, if we experienced loan growth at the high end or above the high end of our forecasted range, which we believe is possible, that could pressure the net interest margin from the current levels, particularly in the Q2. If that were to occur, the trade off is solid franchise growth and favorable net interest income performance in future quarters. To add some financial context, our projection is that net interest income for the second half of the year will come in higher than for the first half And that while there are a lot of moving parts, the current consensus pre provision net revenue number looks about right to us.

Speaker 1

With respect to the announcement regarding Makatawa Bank, we've enjoyed speaking to many of you over the past couple of days and we've also shared the transaction highlights document, so my summary is succinct. We are very excited about this opportunity. As we've mentioned on prior calls for several reasons, the current population of attractive targets has been quite limited. Makatawa serves the Greater Grand Rapids West Michigan market, which is a top 50 MSA in the United States. They have pristine credit quality, net charge offs are negative for the past 3 years and virtually no non performing loans.

Speaker 1

They stayed short with their securities portfolio, have a limited population of fixed rate loans and a very attractive low cost deposit book. Their loan to deposit ratio is 55%, which translates to $1,100,000,000 in excess deposits, which in this environment we would deploy at a substantially higher rate. Lastly, Makatawa has a committed leadership team excited about the transaction. While we have business in Northern Indiana and West Michigan today, we do not have a physical footprint. And I can tell you that there are not many banks, if any at this point, with this good a profile financially and such a good cultural fit.

Speaker 1

I'm not exaggerating when I say this is an ideal platform for our expansion in West Michigan, and we are very pleased to have this moving forward. At this point, I'll pause and we can take some questions.

Operator

Our first question comes from the line of Jon Arfstrom of RBC Capital Markets. Please go ahead, Jon.

Speaker 5

Hey, thanks. Good morning.

Speaker 1

Good morning, John.

Speaker 5

Hey, Tim, thanks for the help on some of the margin and net interest income dynamics. But can you guys touch on those non interest bearing levels and confidence that those balances can stabilize? And then touch on some of the pricing trends you expect in the money markets and savings products? And I understand the second quarter comments on the margin, but I'm just curious if some of that stuff is burning out and could be less of an issue in the Q3.

Speaker 1

Yes. I mean, we're obviously hopeful that the half of the DDA balances that were out on average in the first quarter have more or less come back and that, that will stick, John. With market rates up, some of the competition that we'd seen subsiding kind of is back in the market. And so you're around 5% for some of the promotional or marginal deposit growth. But we were pleased in the Q1 to match the deposit growth with the loan growth and it just came at a little higher cost than we expected.

Speaker 5

Okay. All right. Fair enough. And then Dave, maybe for you. Can you unpack mortgage a bit in terms of your expectations there?

Speaker 5

You talked about slightly higher origination volumes, but typically you guys see pretty strong Q2 and Q3. What kind of expectations do you have there?

Speaker 4

Well,

Speaker 2

where we finished the Q4 was pretty low and I guess the color I can give you is January's applications were higher than December and February was higher than January and March was higher than February. But it's just it's not been like a hockey stick up. It's just been a tick up. And so far in April, the application volumes are somewhat similar to March. But we are sort of expecting the spring buying season to help.

Speaker 2

And although the increase in rates here recently hasn't been helpful, but there is a lot of pent up demand out there. We've got more than our normal share of people asking for prequalification letters and the like, which to us indicates that there's some pent up demand. So we do sort of expect the spring buying season to pick up even though there is a shortage of supply. And so we would expect the second quarter to be better than the first better than the Q1 despite this higher rates that we're seeing now. Now we're only 2 weeks into the Q2, but we're optimistic, I guess.

Speaker 5

Yes. Okay. Good. That's helpful. All right, guys.

Speaker 5

I appreciate it. I'll step back. I'm sure there are others with questions, but numbers look good. Thank you.

Speaker 1

Good. Thanks, John.

Operator

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

Speaker 4

All right, great. Good morning. Dave, maybe a question for you. I think in your prepared remarks, you said the consensus TPNR numbers look okay. I guess, what are your expectations for margins?

Speaker 4

You talked about kind of a little bit of pressure for growth purposes. But if we do get the forward curve, is the range that you've previously guided on the margin still good or is it going to be kind of maybe trending below that?

Speaker 2

No, I think it's still good. I think we're fairly neutral now on any the consensus is a couple of rate cuts. We don't think that that impacts us dramatically. The bigger pressure here is simply, do you hold the DDA and we've seen like Tim and I have said, we've seen a bounce back so far this quarter. And then just really strong loan growth.

Speaker 2

We're going to be above the top end of our guidance in the Q2 we believe. And just to fund that short term, this is a little bit more expensive we're seeing in the market than if you were to just grow the deposits in the mid single digit sort of range. So just a little bit of pressure there. But as I said, we're sort of thinking around the 3.5 range right now, lots of moving parts, but we wouldn't expect that to change dramatically based upon any moves by the Fed one way or the other if they're 25 or 50 basis points.

Speaker 6

Okay.

Speaker 4

And just from the guidance is mid to upper singles kind of the loan growth that you're talking about?

Speaker 2

Well, for the year, I think as Rich said, we think we're at the high end of that guidance. We think the Q2 will be above that range. It's a strong quarter for premium finance and the pipelines are full. So we actually think we'll have a stronger growth quarter for loans in the Q2 than we did in the Q1.

Speaker 4

Okay. Thanks for that. In terms of the deal, I think I get the quality of the bank you're buying and the market extension. Could you help us with accretion expectations or ranges? It's about 5% of your balance sheet.

Speaker 4

In terms of size, is that a reasonable range of what you might be able to extract from it? I know that the balance sheet probably has some financing to do given they're under loaned and have a lot of liquidity.

Speaker 1

Yes. Chris, I mean, it's early obviously and we're working those numbers. But I think we're going to stick with what we've said, which is accretive excluding the integration expense in year 1. There's lots of opportunity here. This is a great fit for us.

Speaker 1

The market's terrific. It grows faster than Chicago, for example, on households. And we're really excited about this.

Speaker 2

And the excess liquidity they have given the strong loan growth we're talking about, we think we can really put to utilize almost on day 1 and in a higher rate asset class.

Speaker 4

Thanks, Rolby. Just wanted to come back to the prior comment on the PPNR. It feels like you're being a little conservative given how optimistic you are on growth. Is there something, I guess, we're missing as analysts that wouldn't suggest that there's an upward bias to the numbers?

Speaker 1

Chris, I think we're just cautious about what the deposit environment is going to look like if we have to fund a lot of growth. And that's a good news story for us that we're going to have good growth, we're adding good names. They'll be with us for a long time. But growth of we did $1,000,000,000 plus this quarter and have to do it again next quarter is causing some upward pressure.

Speaker 6

Okay. Thanks, Tim. Yes.

Operator

Thank you. Our next question comes from the line of David Long of Raymond James. Please go ahead, David.

Speaker 4

Good morning, everyone. Hi, David. So we you started the year with record results. Does this impact your appetite for marketing or other investment spending throughout the rest of 2020 4? And specifically, I'm thinking about you get an increase in revenue.

Speaker 4

Is that going to lead to incremental investing in projects? And then also with a lot of your peer banks or competing banks on risk weighted asset diets are just coming off of them, is there an appetite to hire some veteran bankers from other organizations when that where they may be restricted in their ability to grow their business right now?

Speaker 2

Well, I'll comment. I'm sure Tim will chime in too. But we have a pretty we kind of do a 3 year plan for our investments in technology and projects and we'll stick with that. We have so many resources. So we want to control expenses too, but continue to invest in the business.

Speaker 2

I don't think that would change much. Marketing is we want to continue to grow the franchise and raising those deposits is important. So we'll probably stick with our normal plan, although it's up a little bit as you know in the second and the third quarters because of the seasonality of our sponsorships and the like. But so I think we're going to attempt to control expenses well. Just because you have record profits doesn't mean you have to spend them.

Speaker 2

But when it comes to people, we're always looking for good people. So if there are and we did that with some folks in the mortgage warehouse space recently and we'd always look for good people. If they can produce good quality franchise value and growth, happy to add people as they become available. But that's always the case.

Speaker 1

Yes. I don't think I'd add much. I mean, we've got great momentum as things stand right now. So I think we're reasonably happy with the forward outlook here.

Operator

Got it.

Speaker 4

Thank you. And then just as a follow-up, I want to go back to the deposits. Any categories right now where you're actually seeing some reductions in deposit pricings? Are there can you start to price anything lower at this point? Or is everything still sort of turning north?

Speaker 1

Yes, Dave, it's an interesting question because we're hearing some competitor institutions really with no rate movement in the market trying to take some rates down and we're watching that carefully. We've not been active in that regard, primarily because our intent is to grow pretty aggressively. But we are watching some people trying to kind of trend down in terms of their deposit costs.

Operator

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

Speaker 7

Yes, great. Thanks. Good morning, everyone. Another question on the funding strategy. Sorry if I missed this, but how much do you expect CDs to drive deposit growth going forward after a very strong first quarter?

Speaker 7

And then what is the marginal cost of CDs today?

Speaker 1

Well, two answers to that question. I mean, we're running both money market and promotional CD type offers in the market and getting traction on both. I don't have the exact percentage, Casey, in terms of the mix, CDs versus other. But the CD market, most people have kind of shortened up waiting to see what happens to rates. And 7 to 12 or 15 month type stuff is in the 5 or low 5 range.

Speaker 1

And we're in that category, too. But we're having good success there, and we're adding new names, which we like a lot. And so I'd say marginal money markets are in the 4 range, marginal CDs in the 5 range.

Speaker 7

Got you. Okay. And then on Slide 10, your NII simulations, you're actually showing positive. You're showing asset sensitive and liability sensitive. I assume that's tied to the lag in commercial premium finance.

Speaker 7

I'm just wondering when does so what and which I think that plays out in August. So I'm just wondering can you just provide some color on that dynamic very interesting simulation that you guys are showing there?

Speaker 2

Yes. Well, yes, like I said, we think we're relatively neutral. But the main reason it has that dynamic is we think in down rate scenarios we'll be able to reduce our deposit rates pretty much basis point per basis point. Those that are not time deposits. So if we had a money market rate, we would expect to reduce those 25 basis points if the Fed goes on 25 basis points.

Speaker 2

On the upside, we just think the beta is a little slower that we're not going to raise our deposit prices immediately if rates go up. And so you would have a lesser beta on the up and a greater beta on the downside and then you'd have the repricing on the assets like you talked about. So relatively neutral as you can see, but the betas on the deposit is what sort of creating that dynamic, the beta assumptions.

Speaker 7

Got you. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 8

Hi, it's Terry McEvoy. Good morning. Good morning, Terry. Could you maybe provide a bit more color if you could on the commercial loan growth in the Q1, the $670,000,000

Speaker 4

I know

Speaker 8

you mentioned some of it was mortgage warehouse, the rest was market share gains. Just maybe expand industries, are these larger banks, smaller banks and what's behind that growth?

Speaker 3

Yes. Terry, it's interesting. I think you we've talked a little bit in the past about what's happened in the Chicago market. We have seen tremendous consolidation, a number of our meaningful competitors like MB and Private and First Midwest are all gone. And so there just a lot of dislocation.

Speaker 3

Things don't happen immediately. They just take time. But we are just seeing a tremendous amount of opportunities as a result of that dislocation. We're also seeing a lot of opportunities out of the much larger banks that have a presence in Chicago where they're just not customers are not feeling a real good connection and communication with some of those situations right now. So we're just seeing a lot of really nice opportunities frankly that 5 years ago we just never would have thought we would They tend to be a little bit bigger.

Speaker 3

We see a lot more opportunities kind of up market. And then within our community bank footprint, we're just again seeing a lot of really good small and medium sized opportunities. So the competitive dynamics as Tim has pointed out are very much in our favor right now on the lending side.

Speaker 8

Thanks for that. And then as a follow-up, you had we talked about the strong loan production, but expenses look like they came in below consensus. If that loan production in Q2 picks up and maintain throughout the year, could you maybe talk about how that will impact the salary and benefit line or expenses overall? Because I looking in the past, there tends to be a correlation with big production quarters and an increase in expenses.

Speaker 1

A little bit. And our expenses, to Dave's point earlier, tend to trend up a little bit in the second and third quarter generally related to marketing. But in the insurance portfolios, we are very efficient. And so incremental volume, while it has an expense impact, is not a big driver. So I would think you would expect modest changes, not kind of trajectory changes with strong loan growth.

Speaker 8

Thanks for taking my questions.

Speaker 9

You bet.

Operator

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

Speaker 9

Yes. Hi, guys. Good morning.

Speaker 4

Good morning, Nathan.

Speaker 9

Good morning. Kevin, can you kind of talk about credit trajectory for you guys, maybe in terms

Speaker 2

of charge offs? I mean,

Speaker 9

you guys have obviously had excellent credit trends for several years now. So just curious how you kind of think about kind of a normalized charge off range for you guys going forward in a higher longer environment?

Speaker 4

Yes. Go

Speaker 2

ahead. I'll chime in and then Rich can chime in. But we're in the low 21 basis point range or so this quarter and in the teens generally before a couple of quarters in the singles. But I think we generally think that we write to sort of a 20 to 25 basis point loss rate. And we haven't been there for a number of years, right?

Speaker 2

So we keep thinking things will normalize over time. But we think if you're in that 20 basis point or less 20 basis point or less, 20 basis point or less, it's sort of a reasonable range to be in. And so I think 20 to 25 is what we think of as normal. And over the course of the year, we haven't seen that recently, but a little trend up in this quarter. We had some larger ones, but as we talked about, we fully reserved for most of those in prior quarters.

Speaker 2

So just kind of clearing them out and be proactive. But

Speaker 3

Yes. No, I think I would agree with everything Dave said. And the other thing I would just kind of keep in mind is it's not necessarily linear. As you see with a lot of other banks, there's one offs. So things just happen.

Speaker 3

So periodically, you could have something higher, but I think you'll see a lot lower too. So but if you take a look over time, I think what Dave said is exactly true around that 20 to 25 basis point range.

Speaker 9

Okay, great. And then I noticed the Office CRE portfolio grew a good amount in the quarter. Just curious in terms of what type of opportunities you're seeing both in terms of the type of office and also in what geographies as well?

Speaker 3

Yes, good catch. Right now, as you can imagine, there is very little appetite out there for office. But we have seen as we've talked about on other calls, we have seen some opportunities out there where they're owner occupied, well tenanted. In this case, these were medical office situations. But you can really get very good structure in terms of just overall equity contribution and pricing as well.

Speaker 3

So we look at it and we don't think that our exposure here is we're certainly not overweight in that category and we think we have some room, not that we're out there trying to actively availability.

Speaker 1

And Nate, I mean, not that we're looking for office deals, but consistency matters to our clients and it's important for us to be in the market and as others sort of sit on the sidelines, we think we're getting terrific opportunities.

Speaker 3

Yes. From a to your geography question, generally speaking, our portfolio tends to be more Midwest focused, not exclusively, but in this case, this was a Midwest based opportunity.

Speaker 9

Okay, great. And then maybe just one last one if I could for Tim. In light of the acquisition announcement earlier this week, you guys are it seems like that should be accretive to your capital ratios going forward. So just curious to hear kind of the appetite for additional acquisitions over the next year or so, particularly as you maybe look to fill in up towards the Grand Rapids area potentially?

Speaker 1

Sure. Number 1, we think we're reasonably good at acquisitions. So we're confident that we'll get this integrated and moving the right direction quickly. And we start from a terrific place because this is a really good bank. We're not going to try to do several at the same time.

Speaker 1

So we're probably on the sidelines for a little bit here, but we're having conversations and continuing to look at what makes the most sense for us going forward.

Speaker 9

Okay, great. I appreciate the color. Thanks guys. Congrats on the back quarter.

Speaker 1

Thanks, Nate. Appreciate

Operator

it. Thank you. Our next question comes from the line of Ben Gurlinger of Citi. Please go ahead, Ben.

Speaker 6

Hey, good morning, everyone.

Speaker 1

Hi, Ben. Just kind of kind

Speaker 6

of touch base on what Nate has asked, like just if you could just give us a little bit of background. I know that you guys have a presence, it's just not a branch footprint in the Western Michigan area. Like why do this deal now? It seems like you have a good growth this year. I mean to be honest, I think you're high single digits probably going to end up with some conservative, you're probably closer to like 12% growth.

Speaker 6

Surely, it's not just deposits and liquidity, but why do the deal now kind of at the risk of potentially taking your eye off the ball for what could be or likely to be a really healthy year for growth organically?

Speaker 1

Well, I don't think we think we're taking our eye off the ball. We think this is part of our strategy to grow in the Midwest and to take good care of clients. And as you say, we do not have a footprint in the area right now, but we do have material business in both Northern Indiana and West Michigan. We just opened a new location in Crown Point less than a month ago. And so great market.

Speaker 1

And at this point, if the question was do you wait for something different to come along, we think Makatao is a terrific fit for us. The growth opportunities in West Michigan are good. It's a well run bank. It's a committed leadership team. We just feel like this was the right franchise at the right time.

Speaker 6

Got you. That's helpful. And then for the accretion perspective, like it's a very efficient bank, like you said, to begin with like other than just kind of mixing the two balance sheets, is there expense synergies to be had in 2025 or is it larger just the pro form a 1 plus 1 equals more than 2?

Speaker 1

Well, there's Dave can add to this too. I mean, there's likely some overlap type activity, but we think, and I think they think, that we'll bring capabilities to them that will be productive in the market in terms of both existing clients and new opportunities. So whether it's treasury services or digital banking services or expertise in certain lending areas, I think there's a lot of synergy here and a lot of upside.

Speaker 2

You always get some cost synergies, and we should be able to leverage our buying capacity in a fashion where we can probably drive things like insurance costs and DP costs and those sort of costs are lower. And so there will be some cost saves. But we aren't closing any branches. There's no plan to close branches. We plan to grow in that market area.

Speaker 2

So they're public companies. So some of those public company costs will go away. We won't need a separate audit, etcetera. So there are cost savings there, but this is not a this is a get a partnership with a great franchise in a great market and grow like we've done our entire life with banks. So

Speaker 6

That makes all sense. I appreciate the color. Congrats, Scott. Pretty solid year ahead of you here.

Speaker 9

Thank you.

Operator

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

Speaker 10

Thanks. Good morning. Just a couple of credit follow-up questions. On the pickup in non performing loans in the P and C segment, anything timing related? We've talked a lot about credit normalization, but just wanted to see if there's anything specific in that segment that drove the increase?

Speaker 3

No. As I mentioned, transportation tends to be a little bit of an issue right now. Just obviously that's no news to anybody. The freight rates are down, revenues down in that segment, it causes for more stress on those borrowers. And as a result, cancellations have ticked up.

Speaker 3

But I don't think ultimately it is a material concern of mine. I think our teams are working to make sure that we're very efficient on collection. They're working as we go forward on structuring those deals a little bit tighter. But again, given that level of late fees and overall rates that we earn on those, it's still a good trade for us.

Speaker 2

Yeah. And the other thing, Jeff, I would chime in there with is, they're listed as nonperforming. But when they go into nonperforming status, if we're short on collateral, we've already taken the charge off. So we're generally just waiting for that return premium to come to us from the carrier. So it's not really an indication of larger losses that come down the site because if we're short on collateral, we've already taken the loss.

Speaker 2

We're just waiting for the money to come back from the

Speaker 10

carriers. Understood. Thanks. And then just a similar question on the charge off side, the C and I front. I know you mentioned in Q4 a lot was reserved for, but within the C and I bucket, are you seeing any commonalities, vintage or business category?

Speaker 10

I don't recall what kind of came on or what you reserved for in Q4. But just looking at the C and I bucket, what was charged off?

Speaker 3

Yes. We in the C and I category, we had some exposure in our franchise group that was that we recognized. But I think that was largely kind of more of a one off type situation. If there was one area that I would point to again would be transportation. We don't have a huge amount of exposure there, but it definitely is an area that we're just seeing not only in the P and C side, but in the core portfolio just having more stress.

Speaker 3

So but as it relates to the charge offs, it was largely focused on some existing CRE exposure that we reserved and a little bit of just miscellaneous C and I and a little bit of franchise exposure.

Speaker 10

Thanks, Rich. And a housekeeping on the sale of the retirement advisor business. Is there a go forward impact on fees and expenses that roughly awash? Just trying to see if we need an adjustment there.

Speaker 1

It's modest. The fees generally go down a little bit as we have a partner and we also lose some expenses, but it's very modest and I don't think it's going to move your numbers.

Speaker 10

Okay. And maybe I'll squeeze in just one last one. About a 5 month pause here on hedges, You think you're largely in a good shape there, I guess, barring running into maturities of those? Do you feel like we hold or probably an active conversation, but just wanted to see if we got an extended pause here?

Speaker 1

Yes. No, we talk about it a lot and we just are kind of watching for the time being. I mean, we'll certainly kind of as we get closer to when some of these roll off be more active or could be more active. But the rate environment right now is uncertain and we're seeing people talk about either rates higher for longer or rates up as opposed to rates down. So I think we're happy with where we are right now.

Speaker 1

Okay.

Speaker 11

Thank you.

Operator

Thank you. Our next question comes from the line of Jared Shaw of Barclays. Please go ahead, Jared.

Speaker 11

Hi, good morning. Thanks for the questions. Just wanted to circle back on the deal in terms of the timing that seems like a great timeline for closing. With the commentary sort of coming out of regulators recently, it sounds like deals for banks will be more difficult. Do you feel that there'll be an opportunity for you to do more deals going forward after you integrate this?

Speaker 11

You seem pretty optimistic in the outlook there.

Speaker 1

Well, we hope so. We're a community oriented, high quality bank. We think Makatawa is same in terms of their profile. And so we'll go through the process, but we hope that this gets approved rapidly. And as we talked about earlier, we'll continue to have conversations and look for other opportunities.

Speaker 1

But I can tell you again, no hesitation on our part with respect to McAtala. We think this is exactly the right fit in a very good market right now.

Speaker 11

Okay. Thanks. And what's the earliest projected credit mark on the portfolio?

Speaker 2

Well, we haven't disclosed that, but they are a public company. You can look at their public filings. And as Tim mentioned earlier, they've had net recoveries for a few years, a very conservative well run credit function. I wouldn't expect much from that and you could tell that just from looking at their public disclosures. Okay.

Speaker 11

Okay. And then you had highlighted the excess funding coming from the deal. If we do see accelerated loan growth from the core bank, would you look at adding wholesale funding as a short term fix until those excess funds come on? Or should we really be thinking that you're going to match fund all loan growth with full market price deposits?

Speaker 2

No. We sometimes use wholesale funding to fund the growth because we can never match it perfectly, right? But our plan long term is that even if you backfill in short term with wholesale funding and we continue to grow our core consumer and commercial funding in a manner that you don't have to rely on the wholesale funding long term. But sometimes you have to backfill in if the loan growth is much more accelerated than your standard deposit gathering activities. But it's not a long term plan, it's a short term GAAP pillar plan.

Speaker 11

Yes. Okay, great. Thanks. And then just finally for me, what's the you talked about the better spread opportunity on commercial lending. Where are you seeing spot rates for new C and I loans now in the market?

Speaker 3

It's a pretty broad group. I mean you can for really high quality, well secured, well structured opportunities where you're getting a lot of treasury, you could be in the $250,000,000 range. But we're still seeing rates that are still very attractive north of that on smaller deals and deals where there's a little bit more structural issues. But generally speaking, our job as we talked about is really bringing these customers in because you don't get these opportunities very often. So our bankers are incredibly eager to win these opportunities when they're out there.

Speaker 3

I'm not saying that we're going to be the lowest price necessarily, but we're certainly if it's a deal that we want, we're going to work hard to win it.

Speaker 11

Great. Thank you.

Operator

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

Speaker 1

Thank you, Latif, and for all of you that have participated this morning, thank you not only for today, but for your feedback and insights over the last couple of days as we've talked about the transaction. I think you can tell we're excited both about the opportunities in Chicago and about the pending acquisition. And as always, we'll work hard to deliver. So thank you for your time this morning. We'll wrap it up.

Operator

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

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Key Takeaways

  • Strong Q1 results with record net income of $187 million, balanced growth of loans and deposits by approximately $1.1 billion each, and a net interest margin of 3.59%.
  • Net interest margin faced modest pressure from deposit mix shifts and higher funding costs, but management expects margins to hover around 3.5% in Q2 to support accelerated loan growth.
  • Credit quality remains healthy with non-performing loans at 0.34% of total loans, charge-offs of 21 bps, and core loan allowance coverage of 1.51%, underpinned by proactive portfolio reviews, especially in CRE office.
  • Non-interest income jumped by $39.8 million QoQ, driven by a $19.3 million gain on the sale of the Retirement Planning Advisors business and a $20.2 million increase in mortgage banking revenue.
  • Pending acquisition of Makatawa Bank expands Wintrust into the Grand Rapids MSA, adds $1.1 billion of low-cost “excess” deposits, boasts pristine credit metrics, and is expected to be earnings-accretive excluding integration costs.
A.I. generated. May contain errors.
Earnings Conference Call
Wintrust Financial Q1 2024
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