Wintrust Financial Corporation

Welcome to Wintrust Financial Corporation's fourth quarter and year-to-date 2020 earnings conference call. Following a review of the results by Edward Wehmer, Founder and Chief Executive Officer, and David Dykstra, Vice Chairman and Chief Operating Officer, there will be a formal question and answer session. During the course of today's call, Wintrust Management may make statements that consistent 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 statement. 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 on file with the SEC. Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and slide presentations 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 call over to Mr. Edward Wehmer.

Hi, everybody. Welcome to our fourth quarter earnings call, and thanks for dialing in. With me, as always, are Dave Dykstra, our CFO, Kate Bogie, our general counsel, Tim Crane, our president, and Rich Murphy, our vice chairman in charge of credit. In the same format as usual, I'm going to give some general comments regarding our results. Turn it over to Dave Dykstra for more detailed analysis of other income and other expenses and taxes. Back to me for some summary comments and thoughts about the future. Of course, then time for questions. Given all that 2020 brought to the table, I think WinTrust really had a remarkable year. Pre-tax, pre-provision earnings increased 13%, which exceeded our 10-year CAGR, which stood at 10%, not too shabby. I know that we may not have beat the analyst estimates this quarter for PP income, but we're much closer than you think, considering the one-timers of $13 million and the $7 million of foregone income when we made the decision to keep 10% of mortgage production on our books. We're on this later. CISO required huge provisions. $214 million versus $54 million in 2019 increased $160 million. Meanwhile, net charge-offs in 2020 were $40.3 million, $9.2 million less in the previous year. NPLs and NPAs as percent of loans and assets respectively reach four basis points lower than last year. You know, last year, in and of itself, was an excellent credit year. They closed the year at 40 basis points and 32 basis points, respectively. One would think there wasn't even a crisis going on. Going to have to write a nice note to Moody's, FASB, and AICPA and thank them for putting CECL in when they did. Asset deposits and loan growth exceeded 10-year averages. Assets grew 23.2% versus a 12% Tager over 10 years. Loans grew 19.7% versus a 12% CAGR and deposits 23% during the year. There's a 13% CAGR. We now have over $45 billion in assets. Again, mortgage area hit the cover off the ball by design. We hope it would do that because when rates go low, we use the mortgages to cover so we can catch up on the margin side. And what's the most amazing is we accomplish this really by working remotely for the most part. Taking 5,300 people and flipping the remotes and being able to accomplish what we did, our asset growth, what we did with PPP and the like is just incredible to me. Incredible. It just really is incredible. The entire WinTrust team showed great strategic ability and the can-do attitude that is unsurpassed. Couldn't be prouder of them. And I told our board this and truly was. 2021, and this really continues to be our finest hour. On to some earnings statistics. In 101.2 million dollars for the year, down 6% from the fourth quarter, but up 18%, sorry, from the third quarter, but up 18% from the same time last year. Earnings per share of $1.63, down 2% from the first quarter, or from the third quarter, and 13% from the fourth quarter last year. Year to date, we made 293 million bucks and a $4.68 per share. down 22%, mostly because of the huge CECL provision we had to take. Other than that, we're in pretty good shape. Pre-tax pre-provision of $135 million or $604 million year-to-date was up over 9% over the same period last year and 13% over the prior year. The interest margin of 254 was down three basis points However, the net interest income was up $3 million. We had great loan growth in spite of the fact that it didn't look like it, but we'll get into that in a second because of the first levels of PPP loans trying to get repaid or forgiven. I'd say we had loans break even, but really core loans were up nicely during the period. We'll talk about that in a second. ROE at 10.3% for the quarter, 12.2%. 95% for the year. ROE is 7.5% for the year. Return on tangible equity for the full year, 9.54%. The overhead ratio is 112 basis points as compared to 87 basis points last quarter, 153 basis points the year before, 105 basis points the year to date. We would have probably been a lot lower had we not had the one-timers, et cetera. But I think we feel pretty good about where we are in that regard. I'll talk about it in a second. Tangible book value, again, grew nicely during the year. Again, that's what we go through all the time. That's one of our primary motivators is – or drivers is earnings growth, tangible book value growth, and asset growth. The margin was, again, affected by excess liquidity on our balance sheet. We began to do a number of things to improve the NII and NIMM. Some of these are listed below. Note that our goal is to maintain an interest rate sensitive position throughout these efforts. Our goal is to maintain a gap of 12 to 15%. In other words, we have to stay disciplined here and not go along and lock in the margin at these goofy rates. Our loan pipelines remain consistently strong in all facets of the business. We made a decision during the year, or during the quarter, keep 10% of mortgage production on our books. It really beats buying mortgage back to this market. It did our factor earnings in a quarter as we held $180 million on our books in Q4. There's an 8- to 12-month break-even point on holding versus selling in that we have to take all the expenses related to the production up front and we'll get it back in the margin, which is probably a good thing. We also pulled back $272 million of mortgages from Ginnie Mae, who are always on our books, but upon which we're receiving the earnings. Earnings were going to the security holders and not us. We retained the guarantee but earned the income. Earning asset growth is actually, when you think of it, earning asset loan growth is actually up over $850 million during the quarter. Most of the growth took place towards the end of the quarter, so we're going to have a really good head start going forward into this year. We commenced investing on some liquidity assets of a longer duration. Currently, the aggregate duration of our liquidity portfolio is 1.3 years, as opposed to a five- to six-year duration we usually operate with. So we have some room to do some equity investing without messing up the desired gap goals. We also want to note we've been taking applications for PPP Part III for over 10 days. Currently we have applications in the process of over $5,500 to $1.175 billion. Thirty percent have already been submitted to the SBA for approval. Fees related to these loans approximate $44 million. They advertise over the life of the loans, so at least through December of this year. Average ticket size of these loans is $214,000. The mean size is $72,000. We really beat everybody in the market by almost 10 days, and our decks are pretty clear right now. We've got this down, and we hope to add more to this portfolio, not just because we need it, but to help our clients out there who need this to get through the last draw of prongs of this current problem or crisis. Pardon me, not related to margin, but on the earning asset trend, we did complete one round of our branch retail, round one of our branch retail rationalization approach. So three southwestern Wisconsin branches, but they're not in our prime footprint, and we recorded a small gain, approximately $4 million in quarter two, 2021. We also announced plans to close an initial 10 branches in and took a $1.4 million charge this quarter related to the closings. These branches were all acquired over the years and were determined to be needed due to proximity, not to be needed, due to proximity to other Wintrust locations. So it's probably $5 million plus or minus a year. It should also be noted that we're down over 100 positions in retail due to attrition. We've now replaced the staff that left. We believe there to be a like amount of additional excess capacity on existing footprint due to continued use of online services really brought about by the pandemic. These additional savings will offset the cost of branches currently on the drawing board for 2021 and 22. I'm just a little bit worried that we're much bigger now, and when we do, when life does get back to normal, we really don't want to keep our service level enhanced. We don't want to bite to the bone right now, so we'll see where we go with it. We always continue to look for other additional efficiencies in the market. Also in quarter four, we were able to restart our stock purchase program, acquiring almost 925,000 shares in the quarter. It was due to this and the average price that made the acquisition agree to both earnings and tangible book value. We'll continue to monitor for additional opportunities. The other income side, not to take a stunder, but the mortgage area hit the cover off the ball all year. Fourth quarter's mention indicated the start of our program We're booking 10% of production on our books. Hurts current earnings, but we're profitable over the long run. Wealth management also had a good year, especially a good fourth quarter that we can build on going forward. Total assets under administration surpassed $30 billion, $30.1 to be exact, of growth. Growth of $1.19 billion in the quarter. Rebounding markets helped, but the majority of the growth was from new accounts, both well for the future. On the balance sheet front, Assets grew up $1.3 billion, $3.50. The average earning assets were up $937 million. Loans, as we said earlier, without PP, were up $606 million in all facets of the business. To add back, the Ginnie Mays we bought back, we really had on the books, but made earnings closer to $850 million of earning asset growth we had. the majority of which took place, as I mentioned, the last part of the quarter, really by almost $678 million plus the buyback of the Ginnies. So this really holds $678 million of average versus quarter end in the fourth quarter. So, again, that's a number plus the Ginnies that we started earning on this quarter. It bodes pretty well. Deposits are up $1.2 billion. That's after the repayment of $600 million of high-cost institutional money we returned during the quarter. So, again, we continue to grow through the cycle. Loan deposit ratio is 86.5%, down from 89% as the first two rounds of PPP continue to pay off. That's a good thing. Loans and deposits. As I mentioned, loan growth is good across the board. And we feel good. Our pipelines are strong. We feel very good about where we are right now. And we mentioned deposit growth is extraordinary for both the quarter and the year. And we hope to continue that growth because that really is the franchise value of the company. On the credit side, we discussed credit at the beginning of the presentation. Needless to say, the numbers, which were good to begin with, have even gotten even better. Compared to the low provision we took of $1.18 million, it's not really a reserve release, in my opinion, based on economic factors. It's rather an indication of overall portfolio improvement. It's the hard work of our credit team. $275 million of loans were upgraded, and $40 million of non-accruals paid off. This was accomplished through portfolio sales, use of Fed's Main Street lending product, successful execution of... lending exit strategies. We continue to call the portfolio for cracks to understand that your first loss is your best loss. We can always look good on recovery. I'll now turn the call over to Dave, who's going to provide some additional detail on other income, expenses, and taxes. Dave?

All right. Thanks, Ed. As usual, I'll briefly touch on the significant non-interest income and non-interest expense sections that had changes from the prior quarter. Starting with the non-interest income section, our wealth management revenue increased $1.8 million to $26.8 million in the fourth quarter, compared to $25 million in the third quarter of 2020, and up 7% from $25 million recorded in the year-ago quarter. This revenue source has been positively impacted by our equity valuations, which impact the pricing of a portion of our managed asset accounts. Mortgage banking revenue, as Ed referred to, was seasonally strong due to the continuing low interest rate environment, but declined 20% or $21.7 million to $86.8 million in the fourth quarter from the record level of $108.5 million posted in the prior quarter and was up a strong 81% from the $47.9 million recorded in the fourth quarter of last year. The company originated approximately $2.4 billion of mortgage loans for sale in the fourth quarter, a record, up from approximately $2.2 billion in the prior quarter and up substantially from the $1.2 billion of loans that we originated for sale in the fourth quarter of last year. The decline in the category's revenue from the prior quarter resulted from First, a decrease in the value of the mortgage servicing rights related to fair value model assumptions of $5.2 million in the fourth quarter as compared to a decrease of $3.0 million in the prior quarter, and a drop of approximately half a billion dollars in the pipeline of mortgages being originated for sale, including a reduction of approximately $200 million that the company has earmarked to be originated and held for investment during the first quarter of 2021. The company is required to record the value of the mortgage-related derivatives related to loans in the pipeline at quarter end that are estimated to close and to be sold. As such, when the pipeline of the loans declines, the revenue declines accordingly. Similarly, if the pipelines of loans per sale increases, then we would see associated increases in that revenue. So the reduction of the pipelines by $500 million sacrifices revenue in the current quarter, and as Ed mentioned, that revenue should be recognized through net interest income going forward. Likewise, we retained $192 million of mortgage loans on our balance sheet in the fourth quarter, and we also sacrificed the revenue on those loans in the current quarter, but again, should recognize the revenue through the margin going forward. Approximately 192 that we kept on the books and 200 that was in the pipeline that we sacrificed the revenue on the current quarter for the benefit of future quarters. While the mortgage revenue declined, it remains a very strong quarter for our mortgage banking business. We currently expect originations in the first quarter to be very strong again due to the continuation of the refinance activity and a strong committed pipeline. Table 16 of our earnings release provides a detailed compilation of all the components of the origination volumes, the mortgage servicing right capitalization, servicing costs, et cetera. But again, a record quarter in total we recorded originated $2.5 billion of loans that closed either for sale or that we kept on our balance sheet. Other non-interest income totaled $19.7 million in the fourth quarter, up approximately $6.4 million from the $13.3 million recorded in the prior quarter. The primary reasons for the higher revenue in this category included $901,000 of higher swap fee revenue and $2.6 million of higher income investments in partnerships, which are primarily related to SBIC investments to support CRA purposes. Additionally, BOLI income was up approximately $1.6 million from the third quarter, primarily as a result of $0.9 million of higher earnings on BOLI investments that support deferred compensation benefit plans, which were positively impacted by the equity market returns, and also a $0.9 million death benefit that we recorded during the quarter. I should note that the $0.9 million of increase related to the deferred compensation plan would show a similar increase in expenses. So the amounts in essence offset each other between the other income and the compensation expense by $0.9 million. Turning to the non-interest expense categories, non-interest expenses totaled $281.9 million for the fourth quarter. up approximately $17.6 million or 7% from the $264.2 million recorded in the prior quarter. There are a handful of categories that account for the increase that I will focus on. First, the salary and employee benefits expense category increased approximately $7.1 million in the fourth quarter from the prior quarter. The salary expense component of that category is up approximately $3.7 million. The primary cause of the increase related to increased staffing to support the overall increase in mortgage originations and technology-related staffing to support our ongoing development of enhanced digital products and capabilities. The reported amounts also saw the increase in the deferred compensation expense of a net $.7 million that was impacted by the BOLI returns that I previously discussed. Turning commissions and incentive comp. That category is up $3.9 million in the fourth quarter relative to the third quarter, with that change being driven largely by the additional commissions related to higher amount of closed mortgages and slightly higher wealth management brokerage trading activity, as well as a little bit of higher incentive compensation expense recorded in the fourth quarter. You have to remember that the commission's expense on mortgages are paid when the mortgage loans close. And we had record closings in the current quarter that exceeded the prior quarter, whereas revenue is also recorded on the pipelines. So a little bit of a disconnect there, but higher commissions due to higher closings. Offsetting the aforementioned increases in employee benefits was a decrease in employee benefits of approximately $520,000 from the prior quarter. due to a slight decrease in employee insurance claims and a slightly lower level of payroll taxes. Equipment expense totaled $20.6 million in the fourth quarter, an increase of $3.3 million as compared to the prior quarter total of $17.3 million. The increase is due to increased software licensing expenses, including some increases related to online mortgage usage, PPP loan servicing enhancements, network upgrades to support our growth and digital enhancements and various other software upgrades, as well as the write-off of certain software systems that had been retired early as a result of our implementation of certain new systems. We continue to invest in software and technology to enhance our customer delivery system and products, as well as invest in our systems to support our continued growth. Occupancy expense totaled $19.7 million in the fourth quarter, increasing $3.9 million. The increase was due to the $1.4 million impairment charge associated with the planned closures of the 10 branches it had referred to, increased real estate tax assessments from the prior quarter, and a higher level of utility charges. Advertising and marketing expenses increased by $2 million in the fourth quarter compared to the prior quarter. This was primarily related to increased digital advertising campaigns and community impact and sports sponsorship spending, as various community-based and sports venues have begun to increase their events again. In summary, if you look at this and add up the components, there was roughly $11 million of the increase relates to mortgage activity, including $6.6 million of an additional earn out on the mortgage acquisitions we had in roughly $4.5 million of increased salary and benefit costs for the record level of mortgage closings during the quarter. So we would expect that to decrease in the future quarters as the pipelines are down and we believe we won't have any significant additional contingent consideration going forward. And we have the $1.4 million of branch closures. So between those items, that's roughly $12-plus million of expenses that were related to the mortgage and our branch closures that we would expect to decline in the future quarters. So other than those expense categories, no other expense categories had any significant change from the amounts recorded in the third quarter. Ed mentioned that our net overhead ratio was 1.12 percent. It was up slightly from the third quarter, but on a year-to-date basis, the net overhead ratio was 1.05 percent and down 52 basis points from the 1.57 percent recorded in 2019. And with that, I will throw the discussion back over to Ed.