Wintrust Financial Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 18, 2024

There are 13 speakers on the call.

Operator

Welcome to Wintrust Financial Corporation's 2nd 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, Wintrust management may make statements that constitute projections, expectations, beliefs or similar forward looking statements.

Operator

Actual results could differ materially from the results anticipated or projected in any such forward looking statements. The company's forward looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10 ks and any subsequent filings with the SEC. Also, our remarks may reference certain non GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non GAAP financial measure to the nearest As a reminder, this conference call is being recorded. I will now turn the conference over to Mr.

Operator

Tim Crane.

Speaker 1

Good morning, and thank you. In addition to the introductions that Latif made, we're joined by 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 will add some additional information and color on credit performance and loan activity. I'll be back to wrap up with some summary thoughts on 2 topics, a high level outlook going forward and an update on our pending acquisition of Mackatala Bank.

Speaker 1

And of course, we'll do our best to answer some questions. For the quarter, we reported net income of just over $152,000,000 and reported record net income of just under $340,000,000 for the first half of the year. The results were in line with our expectations with several positive and encouraging underlying elements. For the quarter, we grew loans by $1,400,000,000 and deposits by slightly over $1,600,000,000 The loan growth was balanced across all material product categories and would have been higher had we not elected to sell approximately $700,000,000 in loans during the quarter, which Dave will discuss. The deposit growth included absolute growth in our non interest bearing deposits and the percentage of non interest bearing deposits relative to total deposits remained stable for the quarter.

Speaker 1

Both the loan and deposit results are strong and evidence that we continue to gain share in Chicago, the Midwest and in our niche businesses. The net interest margin of $3.52 was in line with our expectations and combined with the growth produced record net interest income of $471,000,000 up almost $7,000,000 from the Q1. We are seeing some of the expected credit normalization from the very low levels of delinquency and loss experienced over the last few years. However, our non performing loans remain low and loans classified as substandard or special mention were little changed from the prior quarter. And again, Rich will walk through some additional detail.

Speaker 1

Overall, a solid quarter. In particular, I think our team is doing a very nice job with respect to pricing and credit discipline, which will continue to show up in our results going forward. We are also adding consumer and commercial clients at a healthy rate, clients that will be with us for years to come. I'll pause here and hand this over to Dave and Rich, and I'll be back to wrap up.

Speaker 2

Great. Thanks, Tim. First, with respect to the balance sheet growth in the Q1 of this compared to the Q1 of this year, we again reported strong loan and deposit growth. The deposit growth of $1,600,000,000 during the quarter is a 14% increase over the prior quarter on an annualized basis. And as to the deposit composition, non interest bearing deposits increased by approximately $123,000,000 in the 2nd quarter relative to the 1st quarter and again represented 21% of total deposits at the end of both the first and the second quarter, so stabilization and a slight increase in the non interest bearing deposits from last quarter.

Speaker 2

The solid loan growth helped to fund strong second solid deposit growth helped to fund strong 2nd quarter loan growth of $1,400,000,000 or 13% on an annualized basis. Adjusting for the impact of the sale of certain premium finance loans during the Q2, total loans would have increased $2,100,000,000 or 20% on an annualized basis, and is consistent with our prior guidance of being above the mid- to high single digit loan growth for this quarter. Additionally, net of our election to conduct loan sale transaction that reduced outstanding premium finance balances by $698,000,000 at the end of the second quarter, the commercial premium finance portfolio was up $161,000,000 The sale of the loans during the quarter was done to maintain appropriate liquidity, capital and loan to deposit ratios. As other aspects of the balance sheet results, total assets grew by $2,200,000,000 to 59,800,000,000 and our regulatory capital ratios remained relatively stable even with the strong growth. As Tim mentioned, it was another very successful quarter for gaining new customers and for the growth of our franchise, which has always been a primary objective of Wintrust.

Speaker 2

Our differentiated business model, the exceptional service that our teams provide and our unique position in the Chicago and Milwaukee markets continue to serve us well and we think it will do so in the future. As to the income statement categories, our net interest income increased $6,400,000 from the prior quarter and represented a record high amount of quarterly net interest income. An increase in the average earning assets more than offset the modest decline in the net interest margin that we discussed on our last earnings call due to expectations of the strong growth this quarter and was primarily the result of a mix shift in deposits and the higher cost of attracting incremental deposits to fund the solid loan growth. We're obviously happy to take advantage of current market conditions and add high quality loan and deposit relationships even if it means a bit of margin pressure. Said another way, these new relationships provide nice gains in market share, additional net interest income at acceptable returns and long term franchise value.

Speaker 2

Our 2nd quarter net interest margin was 3.52% and was up slightly from where we ended the Q1, which gives us great confidence that our net interest margin can continue to be in a narrow range around 3.5% in the Q3 and into the Q4 of this year. Given the relatively stable net interest margin outlook and the growth in earning assets, we would expect again to increase net interest income in the 3rd quarter. We recorded a provision for credit losses of $40,100,000 in the 2nd quarter, which was up from a provision of $21,700,000 in the prior quarter, but down slightly from the $42,900,000 recorded in the Q4 of last year. The higher provision expense in the second quarter relative to the first quarter was primarily a result of the aforementioned strong loan growth and a slightly higher level of net charge offs and resulted in the buildup of our credit reserves. Again, Rich will talk about credit and the loan portfolio characteristics in just a bit.

Speaker 2

On to non interest income and non interest expense. Total non interest income totaled $121,100,000 in the 2nd quarter, which was down approximately $19,400,000 when compared to the prior quarter. As you recall, the primary reason for the decline was related to a $20,000,000 gain on the sale of our Retirement Planning Advisors division that we recognized in the Q1 and no similar gains were recorded in the current quarter. And although persistently higher mortgage rates dampen our optimism for stronger spring home buying season activity, the company generated approximately $1,500,000 more in mortgage banking revenue as we experienced higher production revenue due to slightly higher origination volumes, which was offset somewhat of security losses, a modest gain on the sale of our premium finance loans and a variety of smaller changes to the non interest income categories as shown in the tables in the press release, but those changes relative to the prior quarter work material and not uncommon. Turning to non interest expense categories.

Speaker 2

The total non interest expenses were 340 point $4,000,000 in the 2nd quarter and were up approximately $7,200,000 from the 1st quarter. The primary reasons for the increase related to salary employee benefits expense increasing by approximately $3,400,000 The slight increase was due to higher mortgage commissions on the increased origination volumes. The 2nd quarter having the full effect of annual merit increases that were effective on February 1, and we had slightly higher employee benefits expenses due to an increased level of health insurance claims during the quarter compared to the Q1, which is tends to be seasonally low. Advertising and marketing expenses increased by $4,400,000 in the second quarter when compared to the Q1. As we've discussed on previous calls, this category of expenses tends to be higher in the second and third quarters of the year to our expenditures related to various major and minor league baseball sponsorships and other summertime sponsorship events held in the communities that we serve.

Speaker 2

The company also recorded a slight increase in occupancy expense, which was impacted by a $1,900,000 charge on the pending sale of a bank branch in Downtown Chicago as we work to optimize our branch network. This pending sale is essentially relocation and a downsizing of a branch, which will result in lower expenses going forward with an estimated payback period of less than 2 years. Professional fees were slightly elevated due to approximately $532,000 of costs related to the pending acquisition of Makatawa Bank Corporation. These increases were partially offset by a $4,100,000 reduction in our FDIC insurance expense as the company recorded approximately $5,200,000 of such expense related to special assessments imposed by the FDIC in the Q1 and no such special assessments in this quarter. The remaining variances both positive and negative are relatively normal and don't warrant any special mention on this call.

Speaker 2

In summary, the Q2 exhibited extraordinarily strong loan and deposit growth, a solid net interest margin in our expected range, a record level of quarterly net interest income and excluding the impact of the charge on the pending branch sale, other non interest expenses and non interest income were within our expected ranges. Again, I'd like to highlight, as Tim mentioned, that this quarter's results combined with the Q1 produced record net income for any 6 months 1st 6 month period in the history of the company. We also continue to build our tangible book value per share during the first half of this year. And as you can see on Slide 10 of our presentation deck, we've grown tangible book value per share every year since we've been a public company going back to 1996 and we're on track to do so again in 2024. So that's something we're very proud of.

Speaker 2

We're excited about the future. We have a solid balance sheet, strong pipelines and it sets us up well for future growth in net interest income. And with that, I will turn it over to Rich to talk about credit.

Speaker 3

Thanks, Dave. As Tim and Dave both noted, credit performance continued to be very solid in the quarter. As detailed in the earnings release, loan growth for the quarter was $1,400,000,000 or 13% annualized net of the impact from the sale of $698,000,000 in premium finance loans. This growth was driven by a number of factors. Commercial premium finance loans grew by $859,000,000 before the impact of the loan sale.

Speaker 3

As noted in the past, the 2nd quarter is historically when we see our highest funding volumes. In addition, we continue to see the effects of a harder market for insurance premiums, particularly for commercial properties resulting in higher average loan size. Finally, we continue to see new opportunities as a result of a consolidation dislocation within the premium finance industry. During the Q2, we also saw growth in core commercial loans, which were up 350,000,000 dollars driven largely by quality opportunities resulting from dislocation within the banking landscape in our primary markets. We also saw good growth in our commercial real estate and leasing portfolios.

Speaker 3

I would also note that we remain highly focused on getting paid appropriately for our risk. As noted on Slide 7, average loan yields continue to increase up 10 basis points during the quarter. We believe that loan growth for the second half of twenty twenty four will continue to be strong and aligned with our previous guidance of mid to high single digits for a number of reasons. Last year's Q3 volume for commercial premium finance loans was very strong. We believe the hard market for insurance premium should continue through year end.

Speaker 3

In addition, our core C and I and leasing pipelines remain very solid. Finally, we saw core C and I line utilization rates trending up from 34% to 37% quarter over quarter. Offsetting this growth will be continued pressure on the volume of new CRE opportunities higher borrowing costs have reduced loan demand in that area. We believe 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.

Speaker 3

As noted earlier, loan growth for the balance of 2024 should continue to be strong and within our guidance of mid to high single digits. From a credit quality perspective, as detailed on slide 15, we continue to see strong credit performance but with signs of normalization across the portfolio. This can be seen in a number of ways. Non performing loans as a percentage of total loans was up slightly from 34 basis points to 39 basis points. This modest increase in NPLs was evidenced in both our core C and I and CRE portfolios.

Speaker 3

And as noted on last quarter's call, we continue to see slightly lower, but elevated levels of non performing loans in commercial premium finance portfolio resulting from ongoing stress in the transportation segment of that portfolio. We continue to monitor the situation closely and we have started to see this trend stabilize as a result of tighter loan structures and enhanced underwriting. Higher yields and late charges from this segment of the portfolio continue to offset our credit losses. Charge offs for the quarter were $30,000,000 or 20 8 basis

Speaker 2

points up from $21,800,000 or

Speaker 3

21 basis points in Q1. These charge offs resulted primarily from loans within our core CRE, C and I and commercial premium finance portfolio. Our portfolio continues to be very solid, well diversified and very granular. Evidence of this could be seen on slide 15 where we saw stable levels in our special mention and substandard loans. Believe that this quarter's level of NPLs and charge offs reflect a return to a more normalized credit environment as evidenced by the chart of historical non performing asset levels on slide 16.

Speaker 3

Finally, we are firmly committed to identifying problems early and charging them down where appropriate. 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 1 quarter of the total portfolio. Our higher borrowing costs and pressure on occupancy and lease rates continue to affect payer evaluations, particularly in the office category. As detailed on Slide 19, we saw a modest increase during the Q2 in CRE NPLs from 0.34% to 0.40%.

Speaker 3

We also saw an uptick in the level of CRE charge offs as we continue to proactively address and right size our more challenged credits. On Slide 20, we continue to provide enhanced detail in our CRE office exposure. Currently, this portfolio remains steady at $1,600,000,000 or 13.3 percent of our total CRE portfolio and only $3,600,000 of our total loan portfolio. Of the $1,600,000,000 of office exposure, 42% is medical office or owner occupied. The average loan size of our the average size of a loan in the office portfolio is only $1,500,000 and we have only 7 loans above $20,000,000 and only 4 which are non medical or owner occupied.

Speaker 3

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 non owner occupied loan over $2,500,000 which would be renewing between now and the end of Q1 of 2025. This analysis which covered 84% of all non owner occupied CRE loans maturing during this period resulted in the following. 51% of the loans reviewed will clearly qualify for renewal at prevailing rates. Roughly 25% of these loans are anticipated to be paid off or will require a short term extension at prevailing rates and the remaining loans will require some additional attention which could include a pay down or pledge of additional collateral.

Speaker 3

We continue to back check the results of these tests conducted during prior quarters and have found that 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. As we have stated on prior calls, 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. That concludes my comments on credit and now I'll turn it back to Tim.

Speaker 1

Thanks Rich. To wrap up our prepared remarks and you've heard me say this on prior calls, we continue to believe that we're well positioned, in some cases, uniquely positioned in our markets to take advantage of the current environment with our diverse businesses. The growth this quarter was evidence of that and while we wouldn't necessarily expect to see this sort of loan growth going forward, we continue to be very encouraged by the solid pipelines. As Dave discussed, we believe the margin will be relatively stable in the second half of the year given the current rate assumptions. With the growth this quarter and the solid pipelines, we believe that continued net interest income growth is likely in the second half of this year.

Speaker 1

With respect to our pending acquisition of Magatawa Bank, there have been good conversations and planning regarding the integration and the many benefits, financial and otherwise, associated with the transaction. We remain very impressed with their team and the opportunities that we will have together. We received Fed approval for the transaction on June 17. That was quick in today's environment, about 50 days from application, which we think reflects the relative strength of both organizations and our strong track record regarding acquisitions. You'll recall, McAtawba serves the Greater Grand Rapids, West Michigan market, which is a top 50 MSA in the United States.

Speaker 1

They have solid credit quality, a low loan to deposit ratio and a very attractive low cost deposit book. The loan to deposit ratio is approximately 55%, which translates to approximately $1,100,000,000 in excess deposits. Makatawa has scheduled their special shareholder meeting to consider approval of the transaction for July 31, and we would expect to close the transaction shortly after they receive their final shareholder approval. Of course, after closing, we will provide additional information on the related financial entries with our next quarterly results. At this point, I'll pause and we can take some questions.

Operator

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

Speaker 4

Good morning, Jon. Hey, good morning.

Speaker 5

Question for either Rich or Tim on the kind of the near term, I guess, the near term loan growth expectations. I mean, this quarter was stronger than I thought it would be and obviously drove some of the provisioning as well. But what kind of a pullback do you expect in the Q3? And just if there's anything else you would call out in terms of the 2nd quarter activity?

Speaker 3

Well, as I point out, the 2nd quarter is very affected by what happens in the P and C portfolio. And we knew that was coming. We talked about it at the end of the Q1. That definitely gets tempered in the Q3. But as I pointed out, we're still seeing really nice core opportunities in our primary markets.

Speaker 3

So I would say that we would probably be at the upper end of our range for the back half of the year. Certainly in the Q4, you're going to see P and C slowdown quite a bit. If you look back at our historic funding patterns, Q4 is probably one of the lower ones. So Q3 will be very strong. As I said, we'll probably be at the upper end of the range.

Speaker 1

Yes. And John, the only thing I'd add is, the loan growth was broad based, obviously exaggerated by the P and C business. But really in all our material categories, we saw growth and particularly some strong growth in the C and I side of things, which I think is a function of strong market position on our part and to Rich's point a little bit more utilization. So whether that continues to be a tailwind or not, I don't know.

Speaker 5

Okay. Good. Thank you on that. Rich, on the charge off levels, I think you used the term normalization. Anything you would call out in the Q2?

Speaker 5

It looks like the commercial real estate charge offs were a bit higher, but anything else unusual rolling around in there? And do you expect this is hard to say a run rate, but is this more normal for you?

Speaker 3

No. I mean, it's interesting when I was looking at those slides, like that slide on 2019 where we have the commercial real estate charge offs, it does pop up quite a bit. And I would point out that we had a number of CRE credits that were particularly challenged that we just got ahead of and just there were a number of different stories there. But if you look back to sixthirtytwenty 3, I mean we are at 31 basis points. So it's just in the CRE space, it's just lumpy.

Speaker 3

We don't necessarily anticipate that we would see a similar third quarter in charge offs in CRE, but you just don't necessarily know. We would look at that substandard and criticized page and just point out that you're really not seeing a lot of movement. So it's just these we don't like to use the term episodic, but sometimes it is we're just a primary tenant of a property, you lose it and it's tough to replace and there could be just these types of issues that affect that. But generally speaking, I mean, it doesn't feel like Q2 was all that different other than some of these signs of normalization. When you look at that chart that we point out in terms of historical NPLs, we were at such a low level that it's just these numbers feel a little out of sort.

Speaker 3

But if you take a look at a broader 10 year history, I mean, we're still at a very reasonable level in terms of charge offs than NPLs.

Speaker 5

Okay, good. And then I guess last one, your philosophy at this point and based on what you're seeing is to try to hold the reserve percentage relatively stable. Is that fair?

Speaker 2

Well, certainly, we'd like that to happen. But John, this is Dave. CECL sort of drives that result. Now we show in our deck, provisioning has always sort of been higher than our charge offs over the last year or so. So we've been building reserves and I think that that's what the CECL model said was that potentially could have more problematic economic times going forward to a slight extent and so we've built more reserves.

Speaker 2

And whether that happens or not, some of those economic factors recently have been getting a little bit better and not as problematic. So we have built the reserves. I think if you kind of look at the provisioning, if we had some people say, well, what should the provision be going forward? And CECL sort of says you've got to book your reserves based upon the fact pattern at that point in time for the life of the loan going forward. So future provisioning would really sort of look at loan growth.

Speaker 2

And obviously, this quarter, we had really strong loan growth. So that added to the provision. And then just sort of the normal charge off levels. And I mean, if you look at the last three quarters, our provisioning has averaged about $35,000,000 So probably not a bad place to start. We would think that that would exceed charge offs again and build reserves.

Speaker 2

But one of those quarters was in the $20,000,000 range and one was a little bit more than what we had this quarter. So it fluctuates a little bit sort of based upon the growth and the economic factors. But probably from a provisioning standpoint, dollars 35,000,000 sort of plus or minus depending on growth and economic conditions or if we see any changes in the classified and other characteristics of the portfolio, which we aren't as Rich said. It's very encouraging to us that classified loans substandard or special mention, those percentages are holding stable. And actually, if you look at the near term delinquencies that we show in the earnings release, those are actually down this quarter from last quarter.

Speaker 2

So we're not seeing anything systemic out there. So as Rich said, the episodic nature of a couple of smaller deals added to it. But probably barring macroeconomic changes or something else, if you're sort of in the mid-30s plus or minus, that's probably a decent estimate of what provisioning would be going forward. And obviously, we've been higher and lower than that based on economic factors. But I think that would mean that research would continue to build or stay stable.

Speaker 2

Okay. Long winded answer.

Operator

What was that Dave? Sorry.

Speaker 2

A winded answer, so I apologize for that. Yes. Okay.

Speaker 5

All right. Thank you, guys. I appreciate it.

Speaker 1

Yes. Thanks, Chad.

Operator

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

Speaker 6

Great. Thanks. Good morning, everyone. Good morning. Couple of questions on the NIM.

Speaker 6

I guess, first on the funding strategy, your CDs obviously drove a lot of

Speaker 1

the growth this quarter. I was

Speaker 6

just wondering, do you guys is there a you're at 19% of the deposit stack. Is there a limit that you don't is there a limit as to how high you want that to go? And then what are your CDR operates today? Well,

Speaker 1

obviously to the extent that CDs are your more expensive funding source, you'd prefer to have fewer, but it's not too recent history when those could have made up 30% of somebody's book. I don't think we have a specific number, but we've shortened most of our promotional CD offerings, CD offerings in their plus or minus 5%. And what I can tell you is that the offerings from approximately a year ago that are now renewing are renewing at lower levels. And so we think there is some rationalization of the pricing to clients that we acquire with these promotional rates. But we were committed to funding the loan growth with core deposit growth this quarter and we've done that.

Speaker 1

And we've acquired a lot of new customers, which we expect will be with us for a long time.

Speaker 6

Okay. And then on the loan side of things, so loan yields up 10 bps to 6.90. Is the premium finance sort of the lag on that repricing? Is that now digested? And just wondering, can we what kind of cadence we can expect in terms of loan yield lift going forward?

Speaker 2

Yes. I think it pretty well, as you said, digested, Casey. I mean, if you look at both of those portfolios, say, within a year they generally turn over and prime is hasn't risen in about a year now. So I think we're pretty much through with those rate increases. We do have back book other fixed rate loans in the commercial real estate area and some leasing loans etcetera that won't reprice up.

Speaker 2

But we still think there'll be a slight lift in the loan yields. And even on the deposit side, both of those I would say we probably think probably single digit basis point increases in loans and deposits next quarter. So we again expect the margin to stay around 3.50. So we're managing that. And even if there's a rate cut of 25 basis points or 2 the rest of this year, we still think we can hold the 3.50 margin.

Speaker 6

Okay. All right. Great. And just last one. Sorry if I missed this, but did you guys provide a spot NIM at 6:30?

Speaker 2

We didn't. But as you know, we ended last quarter at the 3.50 range and we this whole quarter averaged 3.52. So low 3.50s is where we're at.

Speaker 7

Got you. Thank you.

Speaker 1

You bet.

Operator

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

Speaker 8

Hi, Terry. Hi, good morning. Just a quick one here to start. Was there a gain at all recorded on the $700,000,000 loan sale?

Speaker 2

Yes. I mentioned that a little bit in my comments. I didn't get the numbers. So we sold roughly $700,000,000 of those loans and had a gain of a little over $4,500,000 You recall last quarter or last year when we sold the loans, it was a little over $1,000,000 The pricing, the funding costs of those have really come in and the spreads are tighter. So about a $4,500,000 a little over $4,500,000 gain on that sale.

Speaker 2

But you have to remember, Terry, that that's really just present valuing back the cash flows on those loans and recording the gain. Had we kept them on our balance sheet, we obviously, over the next 2 quarters would have recorded more net interest income, but we thought it was prudent to sell them from like I said liquidity, loan to deposit and capital purposes. And those loans come back on the books pretty quickly. That sale of that $700,000,000 we would have earned money on those from an interest income perspective in the 3rd and the 4th quarters. But by the end of the year, that portfolio will have substantially been replaced.

Speaker 8

Thanks for that, Dave. And then within your margin outlook, could you help us maybe understand what you're assuming for interest bearing deposit costs in the second half of the year? And essentially, what's the cost to fund that loan growth? And just as a follow-up there, you've got $500,000,000,000 of CDs maturing in the back half of this year. I think it was a $4.75 rate.

Speaker 8

What are you seeing when those CDs mature? Are they rolling into market rate products or somewhere else?

Speaker 1

Both is the answer to your last question. Some clients are rolling into CDs, but as I mentioned, we're shortening the term of the promotional CDs. And so you're also seeing clients roll into new money market offerings, which are closer to 4% than 5%. And so we'll have to work hard to retain this CD volume and that would again continue to allow us to roughly match deposit and loan growth going forward. And sorry, give me the first part of your question again.

Speaker 8

Just interest bearing deposit costs in the second half of this year, they were up obviously in Q2 to fund the loan growth. What do you think they will do in over the next two quarters?

Speaker 1

Yes. I think this was the big quarter in terms of movement on the interest bearing deposit costs that we had some larger deposits from when rates were substantially lower roll off. And so to Dave's point, I think we're going to see a much more muted change in the interest bearing deposit costs, something that kind of should be similar to what happens

Speaker 2

to loan yields. Again, we think there'll be single digit basis point raises in both those categories.

Speaker 8

Perfect. Thanks for taking my questions.

Speaker 9

You bet.

Operator

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

Speaker 10

Great. Good morning. Dave, just coming back to the NII guide, the linked quarter is about 1.5%. Is there an acceleration in the NII growth

Speaker 7

in the back half of

Speaker 10

the year relative to this quarter's change given the growth that you got this quarter? Or is it mitigated by a little bit of NIM pressure?

Speaker 2

No. I think we think the NIM is going to hold fairly stable, Chris. So I think that the drive will be the earning asset growth. And really why we believe we can grow NII is that we do think the margin can be held stable here. And it will be growth in the loan.

Speaker 2

So we had a great growth quarter. So that's going to carry over into the second half of the year. And as Rich said, we're at the high end of our mid to high single digit range. And so if we're at the high end of that, it should accelerate more, I would think. Okay.

Speaker 10

And then I guess looking out, I mean the market is fairly fickle, but right now the market is thinking we're going to get 4 or 5 cuts over the next year. Relative to that 350 you've talked about, I know you're a lot less asset sensitive than you've been, but how much downside to margin do you see if the curve plays out?

Speaker 2

Well, I think we're looking at this year that maybe we have 1 to 2 cuts and next year whether it's 5 cuts or whatever whichever forecast you think is out there of 25. I mean if we look at that we still feel pretty confident that we can keep our margin in low to mid 3s. So say 3.25 to 3.5. It just sort of depends on the speed of those and the magnitude of those. But we've done a lot of hedging to protect that downside.

Speaker 2

And I think we'd probably be in that range. So I mean, if we have 10 or 12 cuts, there's probably going to be some stress because you're going to lose on the spread on your free money, etcetera. So I think there'll be some pressure there, but we think we can hold it in that 3.25 to 3.50 range based on the current consensus estimate and we'll just see how to manage it.

Speaker 10

Perfect. And then the tax rate looked a little high this quarter.

Speaker 2

Is this a true up or is this a

Speaker 3

high rate?

Speaker 2

Well, you guys are all pretty sharp on picking out things. Yes, it's up a little bit this quarter. It's kind of nuanced, but the State of Illinois passed a law that changed the way the apportionment is treated for investment securities and that will benefit us going forward in future quarters, but we had to revalue our deferred tax inventory because of the change in the loss. So that bumped the rate up a little bit. In the past, we thought generally our tax rate was more in the 26.5% range barring any unusual items in the quarter.

Speaker 2

We think that's probably closer now to 26%. So we should pick up close to 0.5% in our tax rate going forward. So one of the few times that tax law changes in the state of Illinois had benefited us,

Speaker 9

But we

Speaker 2

had to revalue our deferred tax inventory which increased the tax rate a little bit.

Speaker 10

Okay. Thanks, David.

Operator

Thank you. Our next question comes from the line of Brendan Nossel of Hovde Group.

Speaker 10

Hey, good morning folks. Hope you're doing well.

Speaker 1

Good morning.

Speaker 10

Maybe just to start off here, could you maybe unpack the trigger points for any additional loan sales in the future? I'm guessing if there was to happen, it would probably be in a seasonally strong quarter like this one for the premium finance business.

Speaker 2

Yes. Well, I think that's right. I mean, I touched on it generally, but we've been running that 93% loan to deposit. We really don't care to run much higher than that and we'd like to fund the loans with core deposits. And we obviously had an extraordinarily strong quarter here.

Speaker 2

We had $1,600,000,000 of deposit growth and we just would rather not have that loan to deposit ratio go up or and we want to keep the appropriate levels of liquidity and capital. So it would really it's a nice relief valve for us when we have that stronger growth. And we'll use it judiciously because we'd rather have the assets on our books, but we've got to keep those other three metrics in mind, I think. And we need to be disciplined on the

Speaker 1

relatively attractive asset to do this with because they turn very quickly as Dave described a few minutes ago. And again, after roughly year end, those loans could be back on our books.

Speaker 2

Yes. So you have to to Tim's point, I mean we sold about $700,000,000 of that, but the average balance is substantially less than that because they pay off so fast. So the rule of thumb is you divide it roughly by 2.4 and that would be your average balance. And so that because they pay off so quickly. So it's a great asset class, as Tim says, to sell and get back on your books quickly.

Speaker 10

One more from me. Within the wealth business, I guess I was a little surprised to see AUM just tick down a little bit quarter over quarter given how strong markets were in the Q2. Just kind of curious what trends you're seeing in that business and what underlying momentum looks like?

Speaker 2

Yes. It wasn't anything unusual per se with a couple of clients moved money around to different options, but we would expect that to grow in the Q3. So it wasn't substantial change.

Speaker 10

All right. Fantastic. Thanks for taking the questions.

Operator

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

Speaker 4

Thanks. Good morning. Maybe just Hi, Jeff. Hi. I think you mentioned last quarter, you saw some really some targeted opportunities in office still despite sort of the national rhetoric.

Speaker 4

And I think you mentioned sort of where higher tenanted or medical. I wanted to kind of check to see if that's still the case. Do you still see opportunities? I mean, the non performing loan ticked up a little bit there, but appetite for office, just wanted to check-in on how you're feeling?

Speaker 2

Yes.

Speaker 3

It's obviously, we're very careful in that space because of all the dynamics that we talk about. But we did another office deal this quarter of some reasonable size not huge, but where you have an investment grade 100% tenant building and we got really good pricing. We got great structure and because no one else everybody else has got a probably over allocated towards that space, we're not. So, we're again, want to be very thoughtful, want to be very careful, but there are still really good deals out there. And our job is always, we've talked about this in the past, is never to have to jerk the wheel, never to overreact.

Speaker 3

And if there are opportunities out there, we want to be taking advantage of those. But we're not looking to bulk up on them. We tell our people all the time, it's like if there's a because there's almost limitless numbers of opportunities that you could do here. Our job is to really just pick and choose between those that are just can't find a home and those that are really, really great opportunities. So yes, we continue to be open for business but very, very picky.

Speaker 3

Okay.

Speaker 4

And Rich, I missed the CRE review bucket you referenced. Was that a maturing in a certain timeframe? Could you just what was that figure again or that that you've Yes.

Speaker 3

So what we do and we've done this for a number of quarters is to we really want to focus about what's ahead of us and try to think about over the next several quarters. So what we do is a 3 quarter rolling review of what we're expecting and what we try to do is identify where we may have some challenges, where there's just lease pressures have been more pronounced or the higher borrowing costs are really affecting that. And we may have to ask the borrower to curtail the outstanding balance. So we look at every loan over $2,500,000 that's coming due in those 3 quarter period and we just keep track of it. And the thing that as I pointed out in my comments that's interesting to me is just those numbers have been pretty consistent in terms of those loans that are going to require attention.

Speaker 3

But I think even more importantly is just as we move forward that we have not seen a huge amount of really of any materiality in terms of those borrowers who haven't supported their properties. So it's just it's a way for us to kind of look ahead and make sure that we understand what's coming down the pike and address it as prudently as we can.

Speaker 4

Sure. So that's a pretty tight timeframe. And I would imagine as you've undergone that analysis in past quarters, that's reflective of the current rate environment. So I mean not to get I guess the confidence in that as you've rolled that the fact that the statistics have stayed similar that gives you a pretty good read on credit that nothing's upcoming. Is that fair?

Speaker 3

Yes. That's exactly right. And that's our way because our job is to try to get ahead of stuff before it washes up. And so this is our way of doing that. Not always perfect, but generally it gives you a pretty good understanding as to what you're going to look at.

Speaker 3

The other thing we a lot of has been said about like maturity walls. We look at the maturities pending over the next 2 years, two and a half years and we just don't have that. It's a very consistent number that's coming due quarter to quarter. And so, again, our job is just to try to look forward as much as we can and try to get in front of those borrowers and make sure that we're all aligned in terms of what the outcome is.

Speaker 4

Appreciate it. And one quick last one, Tim. It sounds like the Makatawa in terms of 2 pretty good institutions and that timing sounds like a Q3 close. Any I always could come in late, but there's no sort of community issues cropping up with that transaction as you've heard?

Speaker 1

We received approval on June 17. The primary process includes a comment period prior to approval. So, no, we continue to believe that not only do we serve our communities well, but they do as well.

Speaker 4

Great. I appreciate it. Thanks.

Operator

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

Speaker 11

Good morning, everyone. How's it going?

Speaker 1

Good.

Speaker 11

Good. A lot of talk about the net interest margin here and then sticking around the 3.50 range.

Operator

As you

Speaker 11

think about Makatawa, adding Makatawa, how will that impact the net interest margin? And is that part of that sort of 3.50% outlook for the next couple of quarters and maintaining that?

Speaker 2

No. Dollars 350,000,000 we're talking about right now is our current organization. We're not trying to blend in the Macatau with it. But David, if you think about it, Macatao is about 5% of our asset base. They have publicly available data.

Speaker 2

They're publicly traded companies, so people can look at the cues. We'll go through purchase accounting and revalue all those assets and liabilities the current market value. But once you go through all of that, we think there'll be a slight lift to the margin, but it because of the size of it relative to the size of WinTrust, it's not going to be dramatic. It's going to be positive. Most things about Mackinac, we think are going to be positive for the organization as far as growth and culture and margins, etcetera.

Speaker 2

But we haven't One, they've got a shareholder vote coming up and we just don't want to try to get out in front of that and tout this thing ahead of their shareholder vote. But we think it should be marginally beneficial, but not materially just because the size aspect of it. But as you know, they've got a fair amount of excess liquidity that we can use since they're our 50 a little over 55% loan to deposit, we can take those funds and put them into higher yielding loans fairly quickly. So we think that will be beneficial too.

Speaker 11

Got it. Thank you for the color. And then the follow-up question I have relates to deposits. And there seems to be some bit of a resurgence in savings rates in the Chicago MSA, seeing some rates pretty high and guaranteed for the next 6 months. What are you seeing on deposit competition specifically in the Chicago market?

Speaker 11

And is are you seeing a bit of an increase?

Speaker 1

I subjectively, I would say it's more or less stable, David. I mean, we've been seeing, call it, 6 months to 13, 14 month type rates at around 5%. The only surprise, I guess, that I would have personally is that some people have longer terms out there than others. I think we're thinking that those rates should be 5% and down here going forward. But again, our competitors sometimes do strange stuff.

Speaker 11

Got it. Thanks guys. Appreciate you taking my questions.

Speaker 1

You

Operator

bet. Thank you. Our next question comes from the line of Nathan Race of Piper Sandler.

Speaker 7

Yes. Hi, guys. Good morning. Thanks for taking the questions. Good morning, Nathan.

Speaker 7

Yes. Just going back to the margin discussion, I appreciate the commentary around still being a hold around $350,000,000 even after the site cuts begin. And just curious within that context, in terms of how much you guys have it, as it relates to kind of rate sensitive deposits that can kind of reprice one for 1 following each cut?

Speaker 2

Well, I mean, if you look at our disclosures, roughly 80% of our deposits are not CDs. So everything other CDs and non interest bearing deposits are fair game as far as being able to reduce the rates quickly. And it would be our intention that if the Fed moves on those money market savings accounts and even CDs that we would cut the rates fairly immediately. CDs would take a while to work their way through. But as Tim said, we've done fairly short maturities on those recently.

Speaker 2

So it's not going to take too long for those to work their way through. So let's say you've got 60% of them, if you take out non interest variance at 21 and you take out CDs just under 20, you've got 40% of them that won't price immediately, but you've got another 60% that you have the ability to do that with. And we think we would be active in doing so.

Speaker 1

Yes, Nate. And as a reminder, we really don't have indexed deposits either. Some of our municipal deposits are sort of tied to a reference rate, which is actually trending down a little bit prior to the Fed even cutting. So that's not going to move the number a ton, but we're watching it carefully.

Speaker 7

Okay, great. Very helpful. Changing gears a little bit, we heard from another Chicagoland institution this morning that there's some increase in M and A chatter lately. I'm curious if I imagine these are look likely smaller deals. I imagine if those are interest of you to you guys, just given the size of the company today or if you guys would still kind of entertain some smaller scale acquisitions these days?

Speaker 1

Well, we think we're good. In terms of acquisition activity, we think we've demonstrated an ability to do it well. The Makatawa deal is $2,700,000,000 or $2,800,000,000 We think that's about the right size. We would certainly look at smaller deals if they made sense in terms of branch overlap, where you would get more favorable economics from some sort of cost takeout or if there was a strategic market we felt like we needed to be in. But I think the right range for us is $500,000,000 to pick a number several $1,000,000,000 We just want good culture, good companies where we can do integration in markets that we can expand.

Speaker 1

So I don't know if that helps Nate or not, but

Speaker 7

Yes. No, that's great color. Thanks, Tim. One last one, the gain on sale margin came down versus the 1Q to a considerable degree. Any thoughts on just how the gain on sale margin may trend in the 3Q and 4Q?

Speaker 2

Yes, it's down a little bit, but still I mean if you look at the range, we've been from the low sort of the we've been from 1.7% to 2.6 percent. I would expect us to be in the 2% to 2.5% range going forward.

Speaker 7

Okay, great. I appreciate all the color. Thanks guys. Yes. Thanks, Nate.

Operator

Thank you. Our next question comes from the line of Jared Shaw of Barclays.

Speaker 1

Good morning, Jared. Good morning.

Speaker 12

Most of my questions were answered, but I guess, as we look at capital, especially CET1, what should we be thinking about is sort of a target level for that

Speaker 3

for you? Is that something

Speaker 12

that we should be expecting to sort of be growing higher closer to peers? Or are you comfortable with it here?

Speaker 2

Well, I think we're comfortable where it's that obvious, obviously. A couple of things I'd say there, Jared. We also have leverage in our capital stack. We do use preferred securities as capital, which count as Tier 1. They're just not common equity Tier 1.

Speaker 2

We would expect to grow continue to grow that number over time here because our earnings generally are outstripping our capital. This quarter was a little unique given the strong, strong growth. But we would expect to grow that and get that over 10% here in a reasonably short period of time. But the limiting factor for us tends to be total risk based capital in the past and we manage that. And if you look in the slide deck on slide 10, that was down a little bit this quarter, but part of that decrease, one was the extraordinarily strong growth, but 2, we did pay off some sub debt this quarter, which didn't count as capital, but we also had another sub debt issue where we're into the sort of the amortization period of how the capital is.

Speaker 2

So we lost 20% of the remaining sub debt capital treatment. And so that will but that will stay flat until we get to next June where we lose another 20% 20% of accounting. So that accounted for roughly 1 10th of 1% decline in the capital ratios. And if you take that out of the equation, capital ratio stayed relatively flat. And going forward, we would expect the earnings would outstrip the growth and we would just continue to grow that number.

Speaker 2

And but we also have a little bit more we acknowledge this. We have a little bit more leverage in our capital stack. Our preferred securities are relatively cheap in this environment and they count us through 1 capital and permanent until we decide to redeem them. So happy to have that capital structure right now, but understanding that we need to get the CET1 probably over 10 sometime in the reasonably near future.

Speaker 12

Okay. Thanks. That's great color. And then maybe just finally, when you look at the charge offs on commercial real estate, what's been like the average valuation decline on CRE that you've seen especially on the office?

Speaker 3

It's such a small population that it's really hard to kind of draw a number there. But it's not insignificant, but every deal is just a little bit different depending on location and existing tenancy and how effective it is. It's just I would hate to throw a number out there because there it's just the range is so big. But nothing that's causing you

Speaker 12

concern more broadly?

Speaker 3

Well, I mean, anytime you have declining valuations, I mean, it's not a good situation. So but I mean, nothing that's like massively draconian. I mean, it's something that every again, every situation is a little bit different just depending on where it's located and most importantly, what the existing generally

Speaker 2

speaking, we haven't had again, as the nature

Speaker 1

of our portfolio, we're not

Speaker 3

going to be able to generally speaking, we haven't had again, the nature of our portfolio is a little bit unique there because we're not looking at super large projects. So you tend to have more granularity in the tenant base as well. So we're not seeing a huge but if you have 1 or 2 tenants in a building and you lose one of them, I mean, that's where you're seeing the most profound effects.

Speaker 9

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Brandon King of Truist.

Speaker 9

Hey, just a follow-up on mortgage. Could you give us what your outlook is for the back half of the year? And could you also give us some context as far as the trends you saw, particularly in the later part of the quarter?

Speaker 2

Yes. Well, as I said, we were a little bit more optimistic last quarter that spring buying season would kick in and the second quarter was a little better than the Q1. You could see the numbers that we provided. We had origination volumes in the 2nd quarter that for sale of $722,000,000 versus $475,000,000 in the Q1. So a tick up there, but we were hoping it would be a little bit stronger than that.

Speaker 2

Application volume has been fairly stable the last 3 or 4 months and we would expect it probably to stay relatively stable the rest of the Q3 here and then probably dip down in the Q4 just because of seasonality. It's generally Q4 and Q1 unless there's a big drop in rates, the purchase activity slows down and our purchase activity is really roughly 80% of our activity right now given the interest rate structure. So, we would expect it probably to be relatively flat in the Q3 and then probably dip a little on the 4th quarter unless we see long the longer term 30 year mortgage rates come down dramatically, which is not our base case right now.

Speaker 3

Yes. As we talked about last quarter too, it's not for lack of want. There's we have a lot of prequals that come in all the time. The issue is really just inventory. So I think people are looking at the mortgage rates and they've been able to digest the fact that they're up dramatically over where they were a couple of years ago and people are looking to buy homes.

Speaker 3

They just there's just not a whole lot of inventory out there. And when there is a property that comes online, it's just there are multiple offers right away. So that's probably the biggest challenge right now is just we are as Dave said, we're 80% purchase oriented. So if you can't find a home to buy, you can't take out a mortgage.

Speaker 2

And the other thing I'd add and Brandon, this is Dave again is the gross revenue on mortgage banking now is generally $25,000,000 to $30,000,000 Once you pay out commissions and other expenses, fluctuation in that line item, the net effect after commissions, other expenses, taxes is not that dramatic. And we'd love it to go up and our teams are doing a good job of managing in this environment and we think doing a really good job in this environment. But we just don't see it moving enough that it's going to have a dramatic impact on the net income number of the company just because of the net profit on that. We just don't see rates moving substantially enough to have a dramatic impact

Speaker 3

one way or the other.

Speaker 9

Got you. And so with those thoughts on inventory and the issues there, I mean, would you say that mortgage could be less sensitive to decline in rates moving forward?

Speaker 1

Well, I mean, there's a sort of a dead zone here because you've got a lot of people with very low rates. And so, the beginning of rate decline may not produce a lot of activity, but at some point, you certainly progressively going to pick up some volume. It's just a question of kind of when that happens. And I'm reasonably certain that most mortgage originators know exactly where all of their clients' rates are.

Speaker 9

Any sense you can give us as to where that level is? Or is it kind of a moving target?

Speaker 1

Again, I think it's evolutionary. So 50 or 100 points would help. But a lot of people have mortgages with a 3 handle on them. And so you're going to have to get down to much lower levels before you get back to anywhere near what we saw 4 or 5 years ago.

Speaker 2

Yes. I mean just I don't have a specific answer to that, Brandon. But our portfolio that we service, the average rate on that is drifting up and is right around 4% now where it used to be 3.5%. So, I mean to get a lot of refis that have to go down dramatically. But I think that there are people out there that when they had a 3.5% to 4% mortgage rate, they weren't going to go for the 7% to 8% rate.

Speaker 2

But our gut is that if that rate got into the low 6s or high 5s that people would say, hey, I really want to get this new house. I'll go from 4 to the high fives. I just wouldn't go from 4 to 8 or 4 to 7.5. And so our gut is you'd see a pickup if you got into the high fives or low 6s. But again, there's got to be supply out there to buy too.

Speaker 2

So I think that will mute it. But certainly when rates came down to the sixes before we started to see a little bit of pickup in activity. So I guess we would think that if you got into the low 6s that would be quite helpful.

Speaker 9

That is very, very helpful. Thanks for taking my questions.

Speaker 1

You bet. Thank you.

Operator

Thank you. At this time, I'd like to turn the call back over to Tim Crain for closing remarks. Sir?

Speaker 1

Yes. Thanks, Latif. And everybody on the line, thank you for joining us. Overall, a solid quarter that we think is continued progress in growing the franchise and our presence where we compete. We remain excited about the Makatawa acquisition and hope to be able to share more information with you next quarter.

Speaker 1

As always, we appreciate your questions and your feedback. Feel free to reach out with any follow-up items and you can count on our good team to work hard here. So with that, we'll sign off. And Latif, thank you.

Operator

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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Key Takeaways

  • Wintrust reported Q2 net income of $152 million and record first‐half net income of just under $340 million, driven by a net interest margin of 3.52% and record net interest income of $471 million.
  • The balance sheet grew robustly with $1.4 billion in loans and $1.6 billion in deposits (13% and 14% annualized), balanced across product categories while maintaining a stable non‐interest‐bearing deposit ratio.
  • Credit quality remained strong as non‐performing loans edged up to 0.39% of total loans, and management recorded a $40.1 million provision to bolster reserves amid signs of normalization.
  • Looking ahead, the company expects mid‐to‐high single‐digit loan growth and a net interest margin near 3.5% in the second half, supported by healthy pipelines, disciplined pricing and a diversified model.
  • Regulators approved the pending acquisition of Makatawa Bank, representing $2.7 billion in assets and excess deposits, with a shareholder vote set for July 31 and closing expected shortly thereafter.
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Earnings Conference Call
Wintrust Financial Q2 2024
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