Wintrust Financial Q2 2024 Earnings Report

Wintrust Financial EPS Results

• Actual EPS: $2.32
• Consensus EPS: $2.42
• Beat/Miss: Missed by -$0.10
• One Year Ago EPS: $2.38

Wintrust Financial Revenue Results

• Actual Revenue: $591.76 million
• Expected Revenue: $587.33 million
• Beat/Miss: Beat by +$4.43 million
• YoY Revenue Growth: +5.60%

Wintrust Financial Announcement Details

• Quarter: Q2 2024
• Date: 7/17/2024
• Time: After Market Closes
• Conference Call Date: Thursday, July 18, 2024
• Conference Call Time: 11:00AM ET

Wintrust Financial (NASDAQ:WTFC) is a Chicago‐area bank holding company headquartered in Rosemont, Illinois. Through its primary subsidiary, Wintrust Bank, the company operates a network of community banks serving metropolitan Chicago and select markets in southeastern Wisconsin. These locally branded banks provide personalized commercial and consumer banking solutions tailored to small and mid‐size businesses, professionals, and individual clients.

The firm’s core offerings include deposit products, commercial and residential lending, treasury management, and mortgage banking services. In addition to traditional banking, Wintrust Financial delivers wealth management, trust, and investment advisory services through its Wintrust Wealth division. Specialized business units also provide equipment finance, foreign exchange, and risk management solutions to corporate clients.

Founded in 1991, Wintrust Financial has grown organically and through targeted acquisitions of community banks and specialty finance firms. This acquisition strategy has expanded its geographic footprint while preserving the local decision‐making culture that underpins its relationship‐driven business model. The company maintains a strong focus on community engagement and tailored lending within its core markets.

Wintrust Financial’s management team emphasizes experienced leadership and disciplined risk management. By combining the scale of a publicly traded holding company with the local expertise of community banks, the company seeks to deliver consistent service and sustainable growth across its diverse financial services platform.

Wintrust Financial Q2 2024 Earnings Call Transcript

Key Takeaways

• Record net interest income of $471 million driven by balanced $1.4 billion loan growth and $1.6 billion deposit growth, illustrating continued market share gains.
• Net interest margin remained stable at 3.52% in Q2, with management expecting margins to stay near 3.5% and net interest income to rise further in H2.
• Provision for credit losses rose to $40.1 million from Q1 as loan growth normalizes, but nonperforming loans stayed low at 0.39%, reflecting strong overall credit quality.
• Noninterest income declined by $19.4 million due to the absence of a one-time sale gain, while noninterest expenses increased on higher employee costs, marketing outlays, and branch optimization charges.
• Acquisition of Macatawa Bank received Fed approval and is expected to close soon, adding valuable low-cost deposits and access to the Greater Grand Rapids, Michigan market.

Presentation

[Operator]

Welcome to Wintrust Financial Corporation's second quarter and year-to-date 2024 earnings conference call. A review of the results will be made by Tim Crane, 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. Actual results could differ materially from the results anticipated or projected in any such forward-looking statements.

[Operator]

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

[Timothy Crane, CEO at Wintrust Financial Corporation]

Good morning, and thank you. In addition to the introductions that Latif made, we're joined by Dave Stoehr, our Chief Financial Officer, and Kate Boege, 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 two topics: a high-level outlook going forward and an update on our pending acquisition of Macatawa Bank. And of course, we'll do our best to answer some questions. For the quarter, we reported net income of just over $152 million and reported record net income of just under $340 million for the first half of the year.

[Timothy Crane, CEO at Wintrust Financial Corporation]

The results were in line with our expectations, with several positive and encouraging underlying elements. For the quarter, we grew loans by $1.4 billion and deposits by slightly over $1.6 billion. The loan growth was balanced across all material product categories and would have been higher had we not elected to sell approximately $700 million 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. 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.

[Timothy Crane, CEO at Wintrust Financial Corporation]

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 -- $471 million dollars, up almost $7 million dollars from the first quarter. 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. 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.

[Timothy Crane, CEO at Wintrust Financial Corporation]

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.

[David Stoehr, CFO at Wintrust Financial Corporation]

Great. Thanks, Tim. First, with respect to the balance sheet growth in the first quarter of this compared to the first quarter of this year, we again reported strong loan and deposit growth. The deposit growth of $1.6 billion 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 million in the second quarter relative to the first 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.

[David Stoehr, CFO at Wintrust Financial Corporation]

Solid deposit growth helped to fund strong second quarter loan growth of $1.4 billion or 13% on an annualized basis. Adjusting for the impact of the sale of certain premium finance loans during the second quarter, total loans would have increased $2.1 billion or 20% on an annualized basis, and it's 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 a loan sale transaction that reduced outstanding premium finance balances by $698 million at the end of the second quarter, the commercial premium finance portfolio would have been up $161 million.

[David Stoehr, CFO at Wintrust Financial Corporation]

The sale of the loans during the quarter was done to maintain appropriate liquidity, capital, and loan-to-deposit ratios. As to other aspects of the balance sheet results, total assets grew by $2.2 billion to $59.8 billion, 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. 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'll do so in the future.

[David Stoehr, CFO at Wintrust Financial Corporation]

As to the income statement categories, our net interest income increased $6.4 million 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 the 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.

[David Stoehr, CFO at Wintrust Financial Corporation]

Our second quarter net interest margin was 3.52% and was up slightly from where we ended the first quarter, which gives us great confidence that our net interest margin can continue to be in a narrow range around 3.5%, in the third quarter and into the fourth quarter 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 third quarter. We recorded a provision for credit losses of $40.1 million in the second quarter, which was up from a provision of $21.7 million in the prior quarter, but down slightly from the $42.9 million recorded in the fourth quarter of last year.

[David Stoehr, CFO at Wintrust Financial Corporation]

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 a buildup of our credit reserves. Again, Rich will talk about credit and the loan portfolio characteristics in just a bit. On to non-interest income and non-interest expense. Total non-interest income totaled $121.1 million in the second quarter, which was down approximately $19.4 million when compared to the prior quarter. As you recall, the primary reason for the decline was related to a $20 million gain on the sale of our retirement planning advisors division that we recognized in the first quarter, and no similar gains were recorded in the current quarter.

[David Stoehr, CFO at Wintrust Financial Corporation]

And although persistently higher mortgage rates dampened our optimism for stronger spring home buying season activity, the company generated approximately $1.5 million more in mortgage banking revenue as we experienced higher production revenue due to slightly higher origination volumes, which was offset somewhat by less favorable market value adjustments on our mortgage servicing rights portfolio. The company recorded a $4.3 million 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 were material and not uncommon.

[David Stoehr, CFO at Wintrust Financial Corporation]

Turning to the non-interest expense categories, the total non-interest expenses were $340.4 million in the second quarter, and were up approximately $7.2 million from the first quarter. You know, the primary reasons for the increase related to salary employee benefits expense increasing by approximately $3.4 million. The slight increase was due to higher mortgage commissions on the increased origination volumes. The second quarter having the full effect of annual merit increases that were effective on February first, and we had slightly higher employee benefits expenses due to an increased level of health insurance claims during the quarter compared to the first quarter, which tends to be seasonally low. Advertising marketing expenses increased by $4.4 million in the second quarter when compared to the first quarter.

[David Stoehr, CFO at Wintrust Financial Corporation]

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. The company also recorded a slight increase in occupancy expense, which was impacted by a $1.9 million 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 a relocation and a downsizing of a branch, which will result in lower expenses going forward, with an estimated payback period of less than two years. Professional fees were slightly elevated due to approximately $532,000 of costs related to the pending acquisition of Macatawa Bank Corporation.

[David Stoehr, CFO at Wintrust Financial Corporation]

These increases were partially offset by a $4.1 million reduction in our FDIC insurance expense, as the company recorded approximately $5.2 million of such expense related to special assessments imposed by the FDIC in the first quarter, 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. In summary, the second quarter exhibited extraordinarily strong loan and deposit growth, a solid net interest margin on 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.

[David Stoehr, CFO at Wintrust Financial Corporation]

Again, I'd like to highlight, as Tim mentioned, that this quarter's results, combined with the first quarter, produced record net income for any first six-month period in the history of the company. We also continued 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. 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.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

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 $1.4 billion, or 13% annualized, net of the impact from the sale of $698 million in premium finance loans. This growth was driven by a number of factors. Commercial premium finance loans grew by $859 million before the impact of the loan sale. As noted in the past, the second 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 and dislocation within the premium finance industry.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

During the second quarter, we also saw a growth in core commercial loans, which were up $350 million, 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. I would also note that we remain highly focused on getting paid appropriately for our risk. As noted on Slide 7, average loan yields continued to increase, up 10 basis points during the quarter. We believe that loan growth for the second half of 2024 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 third quarter volume for commercial premium finance loans was very strong. We believe the hard market for insurance premiums should continue through year-end.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

In addition, our core C&I and leasing pipelines remain very solid. Finally, we saw core C&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, as 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. 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.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

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&I and CRE portfolios. 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 million, or 28 basis points, up from $21.8 million, or 21 basis points, in Q1.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

These charge-offs resulted primarily from loans within our core CRE, C&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 in substandard loans. We 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. 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 one quarter of the total portfolio.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

Our higher borrowing costs and pressure on occupancy and lease rates continue to affect CRE valuations, particularly in the office category. As detailed on Slide 19, we saw a modest increase during the second quarter in CRE NPLs from 0.34% to 0.40%. We also saw an uptick in the level of CRE charge-offs as we continue to proactively address and rightsize our more challenged credits. On Slide 20, we continue to provide enhanced detail in our CRE and office exposure. Currently, this portfolio remains steady at $1.6 billion, or 13.3% of our total CRE portfolio, and only 3.6% of our total loan portfolio. Of the $1.6 billion of office exposure, 42% is medical office or owner-occupied.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

The average size of a loan in the office portfolio is only $1.5 million, and we have only 7 loans above $20 million, and only 4 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 non-owner occupied loan over $2.5 million, which will be renewing between now and the end of the first quarter of 2025. This analysis, which covered 84% of all known non-owner occupied CRE loans maturity during this period, resulted in the following: 51% of the loans reviewed will clearly qualify for renewal at prevailing rates.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

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. We continue to backcheck 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.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

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.

[Timothy Crane, CEO at Wintrust Financial Corporation]

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.

[Timothy Crane, CEO at Wintrust Financial Corporation]

With respect to our pending acquisition of Macatawa 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 seventeenth. 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, Macatawa serves the Greater Grand Rapids West Michigan market, which is a top 50 MSA in the United States. 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 $1.1 billion in excess deposits.

[Timothy Crane, CEO at Wintrust Financial Corporation]

Macatawa has scheduled their special shareholder meeting to consider approval of the transaction for July 31st, 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. As a reminder, to ask a question, you will need to press star one one on your telephone. To remove yourself from the queue, you may press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jon Arfstrom of RBC Capital Markets.

[Timothy Crane, CEO at Wintrust Financial Corporation]

Morning, John.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Hey, good morning. Good morning. Question for either Rich or Tim on 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 third quarter? And just if there's anything else you would call out in terms of the second quarter activity.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

Well, you know, as I point out, the second quarter is very affected by what happens in the P&C portfolio. And we knew that was coming. We talked about it at the end of the first quarter. That definitely gets tempered in the third quarter. You know, but as I pointed out, we're still seeing really nice core opportunities in our primary markets. You know, so I would say that, you know, we would probably be at, be at the upper end of our range for the back half of the year. You know, certainly in the fourth quarter, you're gonna see P&C slow down quite a bit. If you look back at our historic funding patterns, you know, fourth quarter is probably one of the lower ones.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

So third quarter will be very strong. As I said, we'll probably be at the upper end of the range.

[Timothy Crane, CEO at Wintrust Financial Corporation]

Yeah, John, the only thing I'd add is you know, the loan growth was broad-based, obviously exaggerated by the P&C business. But really, in all our material categories, we saw growth, and particularly, you know, some strong growth in the C&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.

[Jon Arfstrom, Analyst at RBC Capital Markets]

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 second quarter? 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... It's hard to say a run rate, but is this more normal for you?

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

No, I mean, it's interesting, when I was looking at those, the slides, like that slide on 19, where we have the commercial real estate charge-offs, you know, it does pop up quite a bit. And, you know, I would point out that we had a number of CRE credits that were particularly challenged that, you know, we just got ahead of, and just, you know, they were a number of different stories there, you know. But if you look back to 633, I mean, we were at 31 basis points. And, you know, so it's just in the CRE space, it's just lumpy. You know, 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.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

We would look at that substandard and criticized, you know, page and just, you know, point out that you're really not seeing a lot of movement. So-

[David Stoehr, CFO at Wintrust Financial Corporation]

... you know, it's just, you know, these-- you have, we don't like to use the term episodic, you know, but, sometimes it is, you know, where it's just a primary tenant of a property, you lose it, and it's tough to replace. And, you know, there could be just these types of issues that affect that. But generally speaking, I mean, it's, it doesn't feel like Q2 is all that different other than, you know, 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.

[David Stoehr, CFO at Wintrust Financial Corporation]

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

[Jon Arfstrom, Analyst at RBC Capital Markets]

Yep. Okay, good. And then, I guess the last one, that 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?

[David Stoehr, CFO at Wintrust Financial Corporation]

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

[David Stoehr, CFO at Wintrust Financial Corporation]

I think if you kind of look at the provisioning, you know, we've had some people say, "Well, what should the provision be going forward?" And, you know, 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, you know, future provisioning would really sort of look at loan growth. 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, you know, about $35 million, so probably not a bad place to start. We would think that that would exceed charge-offs again and build reserves.

[David Stoehr, CFO at Wintrust Financial Corporation]

But, you know, one of those quarters was in the $20 million range, and, you know, one was a little bit more than what we had this quarter. So it fluctuates a little bit, you know, sort of based upon the growth and the economic factors. But probably from a provisioning standpoint, you know, $35 million, sort of ±, depending on growth and economic conditions, or if we see any changes in the classified and, you know, 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.

[David Stoehr, CFO at Wintrust Financial Corporation]

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, you know, probably barring macroeconomic changes or something else, if you're sort of in the mid-thirties, 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 reserves would continue to build or stay stable.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Yep. Okay.

[David Stoehr, CFO at Wintrust Financial Corporation]

Well, it's a long-winded answer-

[Jon Arfstrom, Analyst at RBC Capital Markets]

Very helpful. What, what was that, Dave? Sorry.

[David Stoehr, CFO at Wintrust Financial Corporation]

Long-winded answer, so I apologize for that.

[Jon Arfstrom, Analyst at RBC Capital Markets]

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

[Timothy Crane, CEO at Wintrust Financial Corporation]

Yeah. Thanks, Todd.

[Operator]

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

[Casey Haire, Analyst at Jefferies]

Great. Thanks. Good morning, everyone.

[Timothy Crane, CEO at Wintrust Financial Corporation]

Good morning.

[Casey Haire, Analyst at Jefferies]

A couple of quick questions on the NIM. I guess first on the funding strategy. Your CDs obviously drove a lot of the growth this quarter. I'm just wondering, do you guys—is there a—you're at 19% of the deposit stack. Is there a limit that you don't, you know... Is there a limit as to how high you want that to go? And then what are your CD rates today?

[Timothy Crane, CEO at Wintrust Financial Corporation]

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

[Timothy Crane, CEO at Wintrust Financial Corporation]

But, you know, we were committed to funding the loan growth with core deposit growth this quarter, and we've done that, and we've acquired a lot of new customers with which we expect will be with us for a long time.

[Casey Haire, Analyst at Jefferies]

Okay. Then on the loan side of things, so loan yield's up 10 bps to 6.90%. Is the premium finance sort of the lag on that repricing? Is that now digested? Just wondering, you know, what kind of cadence we can expect in terms of loan yield lift going forward?

[David Stoehr, CFO at Wintrust Financial Corporation]

Yeah, I think it pretty well, as you said, digested, Casey. I mean, if you look at both of those portfolios, they, within a year, generally turn over, and prime, you know, hasn't risen in about a year now. 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, et cetera, that will reprice up. 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, you know, we probably think probably single digit in basis point increases in loans and deposits next quarter. So, we again expect the margin to stay around 350.

[David Stoehr, CFO at Wintrust Financial Corporation]

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.

[Casey Haire, Analyst at Jefferies]

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

[David Stoehr, CFO at Wintrust Financial Corporation]

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

[Casey Haire, Analyst at Jefferies]

Gotcha. Thank you.

[David Stoehr, CFO at Wintrust Financial Corporation]

You bet.

[Operator]

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

[Terry McAvoy, Analyst at Stephens]

Hi.

[David Stoehr, CFO at Wintrust Financial Corporation]

Morning, Terry.

[Terry McAvoy, Analyst at Stephens]

Thanks for taking my question. Hi, good morning. Just a quick one here to start. Was there a gain at all recorded on the $700 million loan sale?

[David Stoehr, CFO at Wintrust Financial Corporation]

Yeah. I mentioned that a little bit in my comments, but I didn't get the numbers. So we sold roughly $700 million of those loans and had a gain of a little over $4.5 million. You recall last quarter or last year, when we sold the loans, it was a little over $1 million. The pricing, the funding costs of those have really just, they've really come in, and the spreads are tighter. So, about a four and a half million, a little over a four and a half million dollar gain on that sale. But you have to remember, Terry, that that's really just present valuing back the cash flows on those loans and recording the gain.

[David Stoehr, CFO at Wintrust Financial Corporation]

Had we kept them on our balance sheet, we obviously, over the next two 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 book pretty quickly. You know, that sale of that $700 million, we would've, you know, earned money on those from an interest income perspective in the third and the fourth quarters. But by the end of the year, that portfolio will have substantially been replaced, so.

[Terry McAvoy, Analyst at Stephens]

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, maybe just as a follow-up there, you've got $5 billion of CDs maturing in the back half of this year. I think it was a 4.75% rate. What are you seeing when those CDs mature? Are they rolling into market rate products or somewhere else?

[Timothy Crane, CEO at Wintrust Financial Corporation]

Both is the answer to your last question. You know, 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, you know, closer to 4% than 5%. And so, you know, we'll have to work hard to retain this CD volume, and that would, you know, 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.

[Terry McAvoy, Analyst at Stephens]

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 over the next two quarters?

[Timothy Crane, CEO at Wintrust Financial Corporation]

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

[David Stoehr, CFO at Wintrust Financial Corporation]

Again, we think it'll be single digit-

[Timothy Crane, CEO at Wintrust Financial Corporation]

Yeah

[David Stoehr, CFO at Wintrust Financial Corporation]

- basis point raises in both those categories.

[Terry McAvoy, Analyst at Stephens]

Perfect. Thanks for taking my questions.

[Timothy Crane, CEO at Wintrust Financial Corporation]

You bet.

[Operator]

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

[Christopher McGratty, Analyst at KBW]

Oh, great. Morning. Dave, just coming back to the NII guide, the, you know, linked quarter is about 1.5%. Is there, is there an acceleration in the NII growth in the back half of 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?

[David Stoehr, CFO at Wintrust Financial Corporation]

No, I think—we think the NIM's gonna 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'll be growth in the loans. So we had a great growth quarter, so that's gonna carry over into the second half of the year. And as Rich said, you know, 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.

[Christopher McGratty, Analyst at KBW]

Okay. Okay. And then, I guess, looking out, I mean, the market's fairly fickle, but right now the market's thinking we're gonna get four or five cuts over the next year.

[Christopher McGratty, Analyst at KBW]

... Relative to that 3.50 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?

[David Stoehr, CFO at Wintrust Financial Corporation]

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

[David Stoehr, CFO at Wintrust Financial Corporation]

So I mean, if we have 10 or 12 cuts, there's probably gonna be some stress because, you know, you're gonna lose on the spread on your free money, ex et cetera. So I think there'll be some pressure there, but we think we can hold it in that 3.25-3.50 range based on the current consensus estimate, and

[Christopher McGratty, Analyst at KBW]

Yep

[David Stoehr, CFO at Wintrust Financial Corporation]

just how to manage it.

[Christopher McGratty, Analyst at KBW]

That's perfect. The tax rate looks a little high this quarter. Is this a true-up, or is this rate?

[David Stoehr, CFO at Wintrust Financial Corporation]

Well, you guys are all pretty sharp on picking out things. Yeah, it, it's up a little bit this quarter. It's kind of nuanced, but the state of Illinois, you know, 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 law. 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. We think that's probably closer now to 26%. So we should pick up, you know, close to 0.5% in our tax rate going forward.

[David Stoehr, CFO at Wintrust Financial Corporation]

So, one of the few times that the tax law changes in the state of Illinois have benefited us. But we had to revalue our deferred tax inventory, which increased the tax rate a little bit.

[Christopher McGratty, Analyst at KBW]

Okay. Thanks, Dave.

[Operator]

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

[Brendan Nosal, Analyst at Hovde Group]

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

[David Stoehr, CFO at Wintrust Financial Corporation]

Good morning.

[Brendan Nosal, Analyst at Hovde Group]

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—if it was to happen, it would probably be in a seasonally strong quarter like this one for the premium finance business.

[David Stoehr, CFO at Wintrust Financial Corporation]

Yeah. Well, I think that's right. I mean, I touched on it generally, but, you know, we've been running at 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. You know, we had $1.6 billion of deposit growth, and we just would rather not have that loan-to-deposit ratio go up, and we want to keep the appropriate levels of liquidity and capital. So 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.

[David Stoehr, CFO at Wintrust Financial Corporation]

We need to, we need to be disciplined on the liquidity, capital, planning, and follow our playbook.

[Christopher McGratty, Analyst at KBW]

Yeah, and I'd just add, we, it's a 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.

[David Stoehr, CFO at Wintrust Financial Corporation]

Yeah. So you have to, to Tim's point, I mean, we sold about $700 million 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 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.

[Brendan Nosal, Analyst at Hovde Group]

Yep, yep.

[David Stoehr, CFO at Wintrust Financial Corporation]

Yep.

[Brendan Nosal, Analyst at Hovde Group]

Maybe 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 second quarter. Just kind of curious, you know, what trends you're seeing in that business and what underlying momentum looks like.

[David Stoehr, CFO at Wintrust Financial Corporation]

Yeah, you know, it wasn't anything unusual, per se. A couple of clients moved money around to different options, but we would expect that to grow in the third quarter, so it wasn't substantial change, but...

[Brendan Nosal, Analyst at Hovde Group]

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.

[Jeff Rulis, Analyst at D.A. Davidson]

Thanks. Good morning. Maybe just-

[David Stoehr, CFO at Wintrust Financial Corporation]

Hey, Jeff.

[Jeff Rulis, Analyst at D.A. Davidson]

I, I think you mentioned last quarter you saw some really some targeted opportunities in office still, despite sort of the national rhetoric, and I think you mentioned sort of where, you know, higher tenanted it or were medical. 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.

[David Stoehr, CFO at Wintrust Financial Corporation]

Yeah, it's. You know, obviously, we're very careful in that space, you know, because of all the dynamics that we talk about. But, you know, we did another office deal this quarter, of, you know, some reasonable size, not huge, but, where you have a investment-grade, 100%, tenant building.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

... and, you know, we got really good pricing, we got great structure, and because no one else, everybody else has got a, you know, probably over-allocated towards that space, we're not. So, we're again wanna be very thoughtful, wanna be very careful, but, you know, there are still really good deals out there. And, you know, our job, as always, we've talked about this in the past, is never to have to jerk the wheel, never to overreact. And, you know, if there are opportunities out there, you know, we wanna be taking advantage of those. But, you know, we're not looking to bulk up on them. You know, we tell our people all the time, it's like, you know, if there's a there, 'cause there's almost limitless numbers of opportunities that you could do here.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

Our job is to really just pick and choose between those that are just, you know, 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.

[Jeff Rulis, Analyst at D.A. Davidson]

Okay. And Rich, I, I missed the, the CRE review bucket you referenced. Was that a maturing in a certain timeframe? What, could you just—what was that figure again, or that, that you looked at?

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

Yeah. So what we do, and we've done this for a number of quarters, is to, you know, you know, we really wanna focus about what's ahead of us and try to think about, you know, over the next several quarters. So what we do is a three-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, you know, more pronounced or, you know, the higher borrowing costs are really affecting that, and we may have to, you know, ask the borrower to curtail the outstanding balance. So we look at every loan over $2.5 million that's coming due in those the three-quarter period, and we just keep track of it.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

The thing that, as I pointed out in my comments, that's interesting to me is just, you know, those numbers have been pretty consistent in terms of, you know, those loans that are gonna require attention. But I think even more importantly is just, you know, as we move forward, you know, 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, you know, it's just 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.

[Jeff Rulis, Analyst at D.A. Davidson]

Sure. So that, that's a pretty tight timeframe, and, 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, 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, that nothing's upcoming. Is, is that fair?

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

Yeah.

[Jeff Rulis, Analyst at D.A. Davidson]

Okay.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

That's exactly right, and that, that's our way, you know, 'cause our job is to try to, you know, get ahead of stuff before it washes up and, you know, so this is our way of doing that. Not always perfect, you know, but generally, it gives you a pretty good understanding as to what you're gonna look at. The other thing we, you know, a lot of, you know, has been said about, like, maturity walls. You know, we look at the maturities pending over the next, you know, two years, two and a half years, and, you know, we just don't have that. You know, it's a very consistent number that's coming due quarter to quarter.

[Richard Murphy, Vice Chairman and Chief Lending Officer at Wintrust Financial Corporation]

And so, you know, 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.

[Jeff Rulis, Analyst at D.A. Davidson]

Appreciate it. And one quick last one. Tim, you know, it sounds like the Macatawa, in terms of, you know, two pretty good institutions and that timing sounds like a, like a third quarter 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?

[David Stoehr, CFO at Wintrust Financial Corporation]

We received approval on June seventeenth. You know, the primary process includes a comment period prior to approval. So, no, we continue to believe that not only do we serve our community as well, but they do as well.

[Jeff Rulis, Analyst at D.A. Davidson]

Great. I appreciate it. Thanks.

[Operator]

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

[David Stoehr, CFO at Wintrust Financial Corporation]

Hi, Dave.

[Jeff Rulis, Analyst at D.A. Davidson]

Good morning, everyone. How's it going?

[David Stoehr, CFO at Wintrust Financial Corporation]

Good.

[Jeff Rulis, Analyst at D.A. Davidson]

Good. A lot of talk about the net interest margin here and the sticking around the 3.50 range. As you think about Macatawa, adding Macatawa, 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?

[David Stoehr, CFO at Wintrust Financial Corporation]

No, at 3.50, we're talking about right now is our current organization. We're not trying to blend in the Macatawa with it. But, David, if you think about it, Macatawa is about 5% of our asset base. They, you know, they have publicly available data, so they're a publicly traded company, so people can look at the Q's. We'll go through purchase accounting and revalue all those assets and liabilities to current market value. But once, you know, you go through all of that, we think there'll be, you know, a slight lift to the margin, but it, because of the size of it relative to the size of Wintrust, it's not gonna be dramatic. It's gonna be positive.

[David Stoehr, CFO at Wintrust Financial Corporation]

Most things about Macatawa we think are gonna be positive for the organization as far as growth and culture and margins, et cetera. But we haven't disclosed exactly what that number is. One, they've got a shareholder vote coming up, and we just don't wanna 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 a little over 55% loan to deposit, and we can take those funds and put them into higher yielding loans fairly quickly.

[David Stoehr, CFO at Wintrust Financial Corporation]

We think, we think that will be beneficial too.

[David Long, Analyst at Raymond James]

Got it. Thank you for the color. 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 you know, the next six months. You know, what are you seeing on deposit competition, specifically in the Chicago market? And are you seeing a bit of an increase?

[Timothy Crane, CEO at Wintrust Financial Corporation]

You know, I subjectively, I would say it's more or less stable, David. I mean, we've been seeing, you know, call it 6 months to 13, 14-month type rates at around 5%. You know, 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, you know, 5% and down here going forward. But again, our competitors sometimes do strange stuff.

[David Long, Analyst at Raymond James]

Got it. Thanks, guys. I appreciate you taking my questions.

[Timothy Crane, CEO at Wintrust Financial Corporation]

You bet.

[Operator]

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

[Nathan Race, Analyst at Piper Sandler]

Yeah. Hi, guys. Good morning. Thanks for taking the questions.

[Timothy Crane, CEO at Wintrust Financial Corporation]

Morning, Nate. Yep.

[Nathan Race, Analyst at Piper Sandler]

Just going back to the margin discussion. You know, I appreciate the commentary around, you know, still being able to hold around 3.50 even after the Fed cuts begin. I'm just curious within that context, in terms of how much in you guys have it, as it relates to kind of rate sensitive deposits that can kind of reprice one for one following each cut?

[David Stoehr, CFO at Wintrust Financial Corporation]

Well, I mean, if you look at our disclosures, you know, roughly 80% of our deposits are not CDs. So everything other than 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, you know, we've done fairly short maturities on those recently, so it's not gonna take too long for those to work their way through. So, you know, let's say you've got, you know, 60% of them.

[David Stoehr, CFO at Wintrust Financial Corporation]

If you take out non-interest bearings at 21 and you take out CDs, just, you know, under 20, you've got 40% of them that won't price immediately, but you got another 60% that you have the ability to do that with. And we think we would be active in doing so.

[Timothy Crane, CEO at Wintrust Financial Corporation]

Yeah, Nate, 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, you know, prior to the Fed even cutting. So, that's not gonna move the number a ton, but we're watching it carefully.

[Nathan Race, Analyst at Piper Sandler]

Okay, great. Very helpful. You know, changing gears a little bit. We heard from another Chicagoland institution this morning that there's some increase in M&A chatter lately. I'm curious if, you know, I imagine these are likely smaller deals. I imagine if those are of interest 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?

[Timothy Crane, CEO at Wintrust Financial Corporation]

Well, we think we're good in terms of acquisition activity. We think we've demonstrated an ability to do it well. You know, the Macatawa deal is, you know, $2.7 billion or $2.8 billion. You know, 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, you know, 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, you know, $500 million to, you know, pick a number, several billion dollars.

[Timothy Crane, CEO at Wintrust Financial Corporation]

We've just want, you know, good culture, good companies where we can do integration in markets that we can expand. So, you know, I don't know if that helps, Nate, or not, but...

[Nathan Race, Analyst at Piper Sandler]

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

[David Stoehr, CFO at Wintrust Financial Corporation]

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

[Nathan Race, Analyst at Piper Sandler]

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

[Timothy Crane, CEO at Wintrust Financial Corporation]

Yeah, thanks, Nate.

[Operator]

Thank you. As a reminder to ask a question, please press star one one on your touchtone telephone. Again, that's star one one to ask a question. Our next question comes from the line of Jared Shaw of Barclays.

[Jared Shaw, Analyst at Barclays]

Hi, good morning. Morning. Most of my questions were answered, but I guess, you know, as we look at capital, especially CET1, what should we be thinking about as sort of a target level for that for you? Is that something that we should be expecting to sort of be growing higher, closer to peers, or are you comfortable with it here?

[David Stoehr, CFO at Wintrust Financial Corporation]

Well, I think we're comfortable where it's at, obviously. We, you know, a couple things I'd say there, Jared. You know, we also have leverage in our capital stack. You know, we do use preferred securities as capital, which count as Tier 1. They're just not common equity Tier 1. You know, we would expect to continue to grow that number over time here because our earnings generally are outstripping our capital. This quarter is a little unique, given the 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 to that.

[David Stoehr, CFO at Wintrust Financial Corporation]

And if you look in the slide deck on slide 10, you know, that was down a little bit this quarter, but part of that decrease, one, was the extraordinarily strong growth, but two, you know, 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 amortization period of how the capital is. 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% of counting.

[David Stoehr, CFO at Wintrust Financial Corporation]

So that counted for roughly 0.1% decline in the capital ratios, and if you take that out of the equation, capital ratios stayed relatively flat. And going forward, we expect the earnings would outstrip the growth, and we would just continue to grow that number. 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 as Tier 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.

[Jared Shaw, Analyst at Barclays]

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?

[David Stoehr, CFO at Wintrust Financial Corporation]

You know, it's such a small population, you know, that it's really hard to kind of draw a number there, you know. But, you know, it's not insignificant. But every, every deal is just a little bit different, you know, depending on location and existing tenancy and, you know, how effective it is. It's just, I would hate to throw a number out there because it's just the range is so big.

[Jared Shaw, Analyst at Barclays]

But nothing that's causing you concern more broadly?

[David Stoehr, CFO at Wintrust Financial Corporation]

Well, I mean, anytime you have declining valuations, I mean, it's not a good situation, you know, so... But I mean, nothing that's like, you know, massively draconian. I mean, you know, it's something that every... again, every situation's a little bit different, just depending on where it's located, and most importantly, you know, what the existing lease structure looks like. I mean, that's probably the most profound thing that affects it. And generally speaking, we haven't had... You know, again, the nature of our portfolio is a little bit unique there because we're not looking at, you know, super large projects. You know, so you tend to have more granularity in the tenant base as well.

[David Stoehr, CFO at Wintrust Financial Corporation]

You know, so we're not seeing, you know, a huge but, you know, if you have one or two tenants in a building, you know, and you lose one of them, I mean, it's, that's where you're seeing the most profound effects.

[Jared Shaw, Analyst at Barclays]

Great. Thank you.

[Operator]

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

[Brandon King, Analyst at Truist]

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 latter part of the quarter?

[David Stoehr, CFO at Wintrust Financial Corporation]

Yeah. Well, as I said, you know, 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 first quarter. You could see the numbers that we provided. We had origination volumes in the second quarter, that for sale, of $722 million versus $475 million in the first quarter. So a tick-up there, but we were, we were hoping it would be a little bit stronger than that. Application volume has been fairly stable the last three or four months, and we would expect it probably to stay relatively stable the rest of the third quarter here, and then probably dip down in the fourth quarter just because of seasonality.

[David Stoehr, CFO at Wintrust Financial Corporation]

It's generally fourth quarter and first quarter, unless there's a big drop in rates, the purchase activity slows down, and our purchase activity is really roughly 80% of our, our activity right now, given the interest rate structure. So, we would expect it probably to be relatively flat in the third quarter and then dip probably dip a little in the fourth quarter, unless we see, you know, the longer-term 30-year mortgage rates come down dramatically, which is-

[Timothy Crane, CEO at Wintrust Financial Corporation]

... not our base case right now.

[David Stoehr, CFO at Wintrust Financial Corporation]

Yeah, you know, as we talked about last quarter, too, you know, it's not for lack of want. There's we have a lot of pre-quals that come in all the time. The issue is really just inventory. So I think people are looking at, you know, the mortgage rates, and they've been able to digest the fact that they're up dramatically over where they were a couple years ago, and people are looking to buy homes. 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, you know, that's probably the biggest challenge right now, is just we are, as Dave said, we're 80%, you know, purchase-oriented.

[David Stoehr, CFO at Wintrust Financial Corporation]

If you can't find a home to buy, you can't take out a mortgage.

[Timothy Crane, CEO at Wintrust Financial Corporation]

Well, and the other thing I'd add, and Brandon, this is Dave again, is, you know, the gross revenue on mortgage banking now is generally, you know, $25 million-$30 million. You know, once you pay out commissions on other expenses, you know, 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 gonna have a dramatic impact on the net income number of the company, just because of the net profit on that.

[Timothy Crane, CEO at Wintrust Financial Corporation]

We just don't see rates moving substantially enough to have a dramatic impact, one way or the other.

[Brandon King, Analyst at Truist]

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

[Timothy Crane, CEO at Wintrust Financial Corporation]

Well, I mean, there's a sort of a dead zone here because you've got, you know, a lot of people with very low rates. And so, you know, the beginning of rate decline may not produce a lot of activity, but at some point, you know, you're certainly progressively gonna 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.

[Brandon King, Analyst at Truist]

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

[Timothy Crane, CEO at Wintrust Financial Corporation]

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

[David Stoehr, CFO at Wintrust Financial Corporation]

Yeah, I mean, just, I don't have a scientific answer to that, Brandon. But, you know, our portfolio that we service, you know, the average rate on that is drifting up and is right around 4% now, where it used to be, you know, 3.5%. So, I mean, to get a lot of refis, it'd have to go down dramatically. But I think that there are people out there that when they had a 3.5%-4% mortgage rate, they weren't gonna go for the 7%-8% rate. But our gut is that if that rate got into the low sixes or high fives, that people would say, "Hey, I really wanna get this new house. I...

[David Stoehr, CFO at Wintrust Financial Corporation]

I'll go from 4 to the high 5s. 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, you know, if you got into the high 5s or low 6s. But again, there's got to be supply out there to buy, too. So, I think that will mute it. But certainly, when rates came down to the 6s 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.

[Brandon King, Analyst at Truist]

That, that is very, very helpful. Thank you for taking my questions.

[Timothy Crane, CEO at Wintrust Financial Corporation]

You bet. Thank you.

[Operator]

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

[Timothy Crane, CEO at Wintrust Financial Corporation]

Yeah, thanks, Latiff, 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 Macatawa acquisition and hope to be able to share more information with you next quarter. 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 Latiff, thank you.

[Operator]

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

Participants

Executives

• David Stoehr, CFO
• Richard Murphy, Vice Chairman and Chief Lending Officer
• Timothy Crane, CEO

Analysts

• Brandon King, Analyst at Truist
• Brendan Nosal, Analyst at Hovde Group
• Casey Haire, Analyst at Jefferies
• Christopher McGratty, Analyst at KBW
• David Long, Analyst at Raymond James
• Jared Shaw, Analyst at Barclays
• Jeff Rulis, Analyst at D.A. Davidson
• Jon Arfstrom, Analyst at RBC Capital Markets
• Nathan Race, Analyst at Piper Sandler
• Terry McAvoy, Analyst at Stephens