This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Welcome to Wintrust Financial Corporation's first quarter 2022 earnings conference call. A review of the results will be made by Edward Wehmer, founder and chief executive officer, Tim Crane, president, 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 presentations. 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. The company's forward-looking assumptions that could cause the actual results to differ materially From the information discussed during the 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 FCC. Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded. I will now turn the conference over to Mr. Edward Wehmer.
spk01: Thank you very much. Welcome, everybody, to our first quarter 22 earnings call. With me, as always, are Dave Dykstra, Dave Starr, Kate Bogey, who is remote, so I don't have the shock collar on, so I'm in great shape for today, Tim Crane, and Rich Murphy. We're going to go with the same format as we always do. I'm going to give some general comments regarding our results. I'm going to turn it over to Tim for more detail on the balance sheet. Dave Dykstra will follow some details on income statement, and Rich Murphy will comment on credit. And then back to me for some summary comments and thoughts about the future and some questions after that. All in all, it was a very good quarter. It went pretty much according to plan. Answer growth may seem muted compared to prior quarters. Last year, we had approximately $1 billion per quarter and $2 billion in the fourth quarter. We know that probably half of that $2 billion of growth is going to be transitory, not like inflation, but really transitory. It's related to the few big customers who experience large liquidity events at the end of the year. Does turnout be a case? So it appears we're back on $1 billion growth level per quarter as we're up just a little over $100 million in total assets. Managers' income and the margin both improved as expected. Ten basis points on the margin sans PPP. and $3 million out of net interest income, despite two fewer days in the quarter, and each stage worth approximately $3 million, plus or minus. The quarter-percent increase occurred late in the quarter, so we expect to receive further benefits going forward. Each quarter-percent increase should provide up to $50 million net interest income on an annualized basis, with the borrower positioned for future rate increases. Loans grew at the upper end of our guidance at around 9%. Because it was very diversified, pipelines remain extremely strong. Keep saying credit can't get any better, but it does. NPAs and NPLs remain extremely low. NPLs fell 17 million, 57.3 million, or 0.16% of total loans. NPAs decreased 15 million to 63.5 million, or 0.13% total assets. These are incredible numbers for a $50 billion bank. If I do say so myself, HARD TO GET MUCH BETTER, BUT WE WILL CONTINUE TO TRY. DAVE WILL DISCUSS OTHER INCOMPETENT DETAIL. I WANTED TO MAKE ONE COMMENT. AND MANY OF YOU DID NOT COUNT MSR VALUATION INCREASES AND DECREASES. THEY'RE A VERY IMPORTANT PART OF OUR PLANNING. INCLUDES SEEING THIS QUARTER BASICALLY OFFSET THE OCI EFFECT HIGHER RATE ON OUR TANGIBLE BOOK VALUE, WORKED ACCORDING TO PLAN. WHILE MANAGEMENT FEES CONTINUE TO GROW, OTHER EXPENSES WERE, OTHER EXPENSE GROWTH WAS PRETTY MUCH BENIGN. THE NUMBERS SIDE OF THINGS, I'M NOT GOING TO REPEAT EVERYTHING, $127.4 million, 29% over the fourth quarter. Blued earnings per share, $2.07. Pre-tax, pre-provision, $134.03. Anyhow, I'm sorry, $177.76 pre-tax, pre-provision. Pre-provision, $130 million. Earnings per share, $213.00. Pre-provision and margin of 261. We feel pretty good about where we are right now. And with that, I'm going to turn it over to Tim, who's going to cover official detail on the balance sheet.
spk05: Go ahead, Tim. Great. Thanks, Ed. In addition to the $800 million and the 9% loan growth, important to note that period end loan balances excluding PPP We're over $500 million ahead of the quarter average, which should help our second quarter results. PPP loans continue to run down as they are forgiven, and at roughly $250 million at quarter end, they're no longer material and will largely be gone by mid-year. Going forward, while encouraged by growing pipelines, we believe that loan growth in the mid to high single digits on an annualized basis remains a reasonable expectation given the uncertainty surrounding the macroeconomic outlook. Ed mentioned deposit growth of approximately 125 million for the quarter. This was influenced by a handful of very large client outflows related in most cases to funds that came to us in the fourth quarter and then left in the first quarter, essentially in and out transactions that crossed year end. Absent those outflows, organic deposit growth continued as expected. Entering the second quarter, we continue to watch deposit levels. and expect some continued volatility from atypically large commercial transactions. Interest-bearing deposit costs of 22 basis points for the quarter was down two basis points from year end and likely represents the low point of the cycle. While competitor deposit pricing remains muted, we are starting to see increases in the most rate-sensitive of the deposit categories. An example would be municipal deposits that track some of the state investment indices. On the investment front, with rates increasing, we deployed some liquidity during the quarter. Total investments were up approximately $1.2 billion. Remaining patient in deploying our excess liquidity continues to benefit the bank as rates continue to rise. At quarter end, liquidity remains strong with an excess of $4 billion yet to be deployed. Of note, our securities book of $6.5 billion is approximately 47% available for sale 53 percent held to maturity. The rapid rise in rates resulted in unrealized losses on the AFS securities that, combined with dividends and net of the bank's earnings, resulted in a small 30-cent reduction in tangible book value. On a percentage basis, this is one-half of one percent of the year-end tangible book. As rising rates and rate sensitivity remain a topic of interest, I want to reiterate some of what we discussed on the last quarter's call. First, we remain very asset sensitive and well positioned to benefit from rising rates. As shown in our presentation materials, 80 percent of our loans reprice or mature within a year. To reinforce Ed's earlier comments, we're early in the rate cycle. We continue to believe each 25 basis point increase in rates will generate approximately $40 to $50 million in pre-tax net interest income on an annualized basis and approximately a 10 basis point improvement in the margin. To be more specific on the margin, for the quarter, the margin improves six basis points on a reported basis, 10 points excluding PPP. On our last call, we suggested that the consensus rate forecast could result in a margin approaching 3% by year end. With more current projections, it's likely we will meet that target much earlier than anticipated and may approach 325 by year end. On the capital front, there was very little change in the bank's capital as earnings supported the quarter's growth. Capital remains appropriate on a risk-adjusted basis. Lastly, we continue to be pleased by our market momentum. In past quarters, we've highlighted the recognition the bank received from Greenwich regarding the satisfaction of our commercial clients. This quarter, we learned the bank was ranked highest in retail customer satisfaction by J.D. Power and Associates for Illinois. For six consecutive years, we've ranked first or second in customer satisfaction, something we're proud of, and it speaks to the strength of our retail banking franchise. With that, I'll hand it over to Dave.
spk10: Great. Thanks, Tim. As usual, I'll cover some of the noteworthy income statement categories, starting with the net interest income. For the first quarter of 2022, net interest income totaled $299.3 million. This was an increase of $3.3 million as compared to the prior quarter and an increase of $37.4 million as compared to the first quarter of 2021. The components of the $3.3 million increase in net interest income as compared to the prior quarter are as follows. $16.7 million of the increase related to earning asset growth and an improvement in the net interest margin. with that increase offset by approximately $6.7 million less net interest income due to two fewer days in the quarter and another $6.7 million decrease due to less PPP interest income in the quarter. The margin improved six basis points from the prior quarter to 2.61%. The beneficial decline of three basis points for the rates paid on liabilities combined with a three basis point increase on the yield on earning assets resulted in the improved net interest margin. The increase in the yield on earning assets in the first quarter as compared to the prior quarter was primarily due to the impact of investing a portion of our short-term liquid assets into longer-term higher yielding securities during the quarter, resulting in an overall yield on our liquidity management assets increasing by 26 basis points. The decrease in the rate paid on interest-bearing liabilities in the first quarter of 22 compared to the prior quarters driven by a two basis point decrease in the rate paid on interest bearing deposits primarily due to lower repricing of time deposits. I think it's important again to note that the net interest income expanded despite less interest income from the PPP portfolio and the two fewer days in the quarter and also the net interest margin excluding the impact of the PPP portfolio increased by 10 basis points. Turning to the provision for credit losses, Wintrust recorded a provision for credit losses of $4.1 million compared to a provision of $9.3 million in the prior quarter and a $45.3 million negative provision recorded in the year-ago quarter. Revision expense in the first quarter was driven largely by loan growth, excluding PPP loans, of approximately $796 million, offset by a small decrease in net charge-offs, and an improvement in the loan portfolio characteristics during the quarter, including improving loan risk rating migration. Rich Murphy will cover credit quality in additional detail in just a few minutes. Turning to the other non-interest income and non-interest expense sections, in the non-interest income section, our wealth management revenue declined by $1.1 million to a level of $31.4 million in the first quarter. This compared to $32.5 million in the prior quarter, but was up 7% from the amount recorded in the prior year. The slight decline in revenue source was negatively impacted by lower equity market valuations, which impact the pricing on a portion of our managed asset accounts, along with slightly lower brokerage trading activity and associated revenue. But all in all, it was still a strong quarter for our wealth management division, and we're pleased with the results there. Consistent with overall industry trends and the impact of higher home mortgage rates, our mortgage banking operations saw lower loan origination volumes during the first quarter, with lock-adjusted origination volumes down approximately 24%. This production volume was less than the guidance we provided in the prior quarter earnings release due to the substantial rise in mortgage rates subsequent to that time. However, our mortgage banking revenue actually increased $24.1 million to $77.2 million in the first quarter of 2022. Revenue was higher in the current quarter primarily due to a positive valuation adjustment on our portfolio of mortgage servicing rights. This was offset by lower lock-adjusted origination volume and a compressed production margin. The company recorded a positive $43.4 million valuation adjustment in the first quarter of 2022 related to the mortgage servicing rights compared to a positive valuation adjustment of $6.7 million in the prior quarter. The company purposefully built up its servicing portfolio for the last few years in order to not only maintain the customer relationship, but to provide an economic hedge against the impact of rising rates on loan origination revenue. Although point-in-time MSR valuation changes and fluctuations in quarterly origination volumes rarely work as perfect hedges, The general relationship was effective this quarter and helped the company maintain strong overall mortgage banking revenue as the economy transitions to a higher rate environment. The sharp and rapid increase in interest rates during the quarter that benefited the MSR valuation and other segments of the company introduced headwinds that impacted the mortgage production volume and margins. The impact of the volatility on secondary marketing results as well as competitive pressures were the drivers of the lower production margin reported during the quarter. Looking forward to the second quarter, based on the current pipeline activity and the market conditions, we expect mortgage originations to be very similar to the origination volumes experienced in the first quarter with production margins in the two to two and a quarter percent range. Other non-interest income totaled $18.6 million in the first quarter, which was relatively stable with the $18.2 million recorded in the prior quarter. Turning to non-interest expenses, they totaled $284 million in the first quarter of 2022 and were relatively consistent with the prior quarter total of $283.4 million. In fact, looking back over the last six quarters, total non-interest expenses have remained in a very tight band, ranging from $280.1 million to to $286.9 million, and the current quarter lands well within that range. So the company has been able to control the overall non-interest expenses despite significant growth in the balance sheet over that time horizon. Despite the consistent level of non-interest expenses, there were a handful of categories that showed variance that I'll address. Salaries and employee benefit expense increased by $5.2 million from the first quarter as compared to the fourth quarter of last year. The current quarter increase is primarily related to $1.9 million of higher commissions and incentive compensation program expense due to higher accruals for our long-term and short-term incentive compensation programs associated with the increased earnings level. Additionally, approximately $2.9 million of the increase was related to employee benefit expenses, which were due to higher payroll taxes and 401k match contribution accruals which tend to be elevated in the first quarter of the year. Advertising and marketing expenses decreased by $2.1 million in the first quarter. The decrease relates primarily to reduced level of mass media and digital advertising campaign costs. The misaligned expense category totaled $23.1 million in the first quarter, compared to $24.3 million in the fourth quarter, representing a decrease of $1.2 million. and this decrease was primarily impacted by a lower level of travel and entertainment expenses. Other than those expense categories just discussed, no other expense category had a change of more than $900,000, and all those expense categories in the aggregate were down by approximately $1.1 million compared to the fourth quarter of 2021. The net overhead ratio, a measure of operational efficiency, stood at 1%, which is down 21 basis points from the 1.2 1% recorded in the fourth quarter. The ratio benefited from increased mortgage banking revenue. And I should note the efficiency ratio improved to 61% in the first quarter from 66% in the prior quarter, which was aided by an improving net interest margin and gains on the MSR portfolio during the quarter. In summary, core fundamentals were strong with growth in pre-tax, pre-provision income. an expansion of the net interest income despite PPP loan reductions on the fewer days in the quarter, improved net overhead and efficiency ratio, strong loan pipelines, and very good credit quality metrics. So with that, I'll conclude my comments and turn it over to Rich Murphy to discuss credit.
spk09: Thanks, Dave. As noted earlier by Ed and Dave, credit performance for the first quarter was very solid from a number of perspectives. As detailed on slide 7 of the deck, loan growth for the quarter net of PPP was just under $800 million or 9% annualized. Equally as important and similar to the past few quarters, we saw loan growth across the portfolio. Specifically, life insurance premium finance loans, which were up $311 million, core CRE loans, which were up $245 million, commercial premium finance loans, which were up $82 million, and residential real estate and core C&I loans both showed solid growth. Year over year, we saw total loan growth of 5.1 billion or 17% net of PPP loans. This total included $578 million of agency finance loans acquired from Allstate. That portfolio, by the way, continues to perform very well relative to the initial business case, which we had laid out previously. As noted on our prior earnings call, we continue to see very solid momentum in our core C&I and CRE portfolios. Pipelines have been strong throughout this past four quarters, and we saw that materialize into increased outstandings during the past several quarters. We continue to be optimistic about loan growth for the remainder of 2022 for a number of reasons. Our core pipelines continue to be very strong with solid momentum in Q1. Line utilization, as detailed on slide 19, continues to trend up from 36.7% to 41% when netting out our mortgage warehouse lines. We anticipate that this trend will continue. Also on slide 19, you'll see that business expansion and inflation pressures have resulted in many customers requesting increases to their credit facilities to help finance these costs. And also Wintrust Life Finance had another strong quarter, growing their portfolio by 17% on an annualized basis. This momentum has been strong for several quarters, and we believe it should continue through the better part of 2022. As a result, while macroeconomic conditions may pose a heightened level of uncertainty, we are reaffirming our loan growth guidance of mid to high single-digit growth. From a credit quality perspective, as Ed pointed out, hard to get much better. And as detailed on slide 18, we continue to see that this performance, again, was across the portfolio. And it can be seen in a number of metrics. Non-performing loans decreased from 74.4 million, or 21 basis points, to 57.3 million, or 16 basis points. A meaningful part of this reduction came from the sale of an $11 million portfolio of loans, the majority of which were non-performing. NPLs continue to be at record low levels and roughly half of where we were this time last year. Charge-offs for the quarter were at $2.5 million, approximately $400,000 of which was a result of the loan sale I just mentioned. And we continue to see reductions in our special mention and substandard loans as our customers continue to recover from the pandemic. That concludes my comments on credit, and I'll turn it back to Ed to wrap up.
spk01: Thanks, guys. Suffice it to say, we like where we're positioned. If all the prognosticators are correct on rate increases, we should continue to perform extremely well. I'm looking forward to seeing that beach ball again. It's been a long time. Credit stats are terrific. As Murph said, it's going to be hard to get them better. We're going to continue to try, continue to cull the portfolio for potential problems. Kind of scary that you could have one loan come in and almost double your NPAs right now. But we keep looking deep, and we're going to continue to do that. Loan demand should remain strong through the year. Inflation should increase line usage numbers. Pipelines remain strong across the board. Acquisition opportunities have picked up a bit. Pricing expectations are still a bit of a detriment, though. And you can count on us not doing anything stupid in that regard. Very proud of the entire Wintrust crew, and they're earning the J.D. Power Award yet again. I read somewhere that our numbers would have put us in second place in the entire nation. A couple of them were winning seven Greenwich Awards. Again, Greenwich Awards are for the commercial banking side of the equation. You have to wonder why people bank anywhere but Wintrust. This, with the market disruption, bodes well for continued organic growth. So as you be assured of our best efforts, we appreciate... All your support, and now it's time for some questions. Thank you very much.
spk07: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Long of Raymond James. Your question, please. Good morning, everyone. Hi, David.
spk02: How are you? I am doing well, thank you. I can use a little bit better weather here in Chicago, though. If you can help with that, that would be great. How about this?
spk01: I'll take care of this weekend. How's that?
spk02: That sounds spectacular. Thank you. I'd appreciate it. So the question I wanted to ask about is sort of the topic I wanted to ask about is the expenses. You know, mortgage banking revenue or the volume sounds like it's going to be coming down. And I think, Dave, you discussed sort of the $280 million to $290 million range in expenses. Can you stay there? And does the lower mortgage volume, does that allow you to keep the expenses in that range for a little bit longer period?
spk10: Yeah, well, that's a good question. I do think as the volumes come down, the mortgage expenses will come down some more. You know, we keep working on that. So there is some positive expense numbers that come out of that. YOU KNOW, AS YOU KNOW, IF YOU GO INTO THE SECOND AND THIRD QUARTERS, OUR MARKETING EXPENSES TEND TO GO UP A LITTLE BIT BECAUSE OF THE BASEBALL SEASON SPONSORSHIPS AND JUST THE COMMUNITY SPONSORSHIPS WE DO IN THE SUMMERTIME, AND T&E TENDS TO GO UP. AND WE GAVE RAISES THAT GO INTO EFFECT IN FEBRUARY. SO THERE ARE SOME INCREASES IN EXPENSES THAT WE MIGHT SEE IN THE SECOND QUARTER. WE DO THINK MARGAGE EXPENSES WILL will come down. We're certainly attempting to control the other expenses, so there might be just a tad of overall increase, but it shouldn't be extraordinarily high. Maybe they bump up a little bit, but can we keep them in that range? Possibly, but it might be just a little bit higher.
spk01: I think you have to look at that overhead ratio, which we expect to be right around between, for the whole year, about 125 to 130, somewhere in that. So we start with 1% in the first quarter. It should probably be around 130 to 135, I think, the rest of the year would be a good number.
spk10: Yeah, well, that's what we think. If you took out the MSR, you gain this quarter, and just look at the rest of it, excluding that valuation, we'd be in that 130 to 135 range. So we think that that's reasonable. You have to understand that we do think the revenue in that scenario goes up quite a bit, too, with the margin increase. So we still think that we have good operating leverage, and we'll have growth in the balance sheet.
spk02: Got it, got it. Cool. And then as it relates to the rate hikes, you know, with the beach ball being released here and should see some acceleration in the net interest income, how much of that falls to the bottom line? Will almost all that fall to the bottom line, or does that allow you to take on any additional projects, or are there any other expenses that you'd have to add with, you know, with several rate hikes?
spk01: A bit of a wild card as it relates to wages. inflation raging right now. Um, we will have to wait and see, um, how that plays out. But I would imagine that our mid-year, um, we usually don't like to do a lot of mid-year increases, but I think this year we're going to have to keep everybody happy and in line. I mean, we've got a lot of good things going on here. It's all to our people. We got to keep our people happy because again, there's a lot of poaching going on out there as we speak. But, um, a very deep bench here, and we're able to fill where we do get poached. The disruption of the market is helping a little bit there, too, in terms of being able to bring people in.
spk10: So I guess I would... I mean, the other thing, I mean, people ask us all the time, well, if you make more money, will you just invest a lot more into technology and some of those other initiatives? And I think the answer, our approach on that is we've always sort of had a rolling three-year initiatives plan and technology plan and investments to continue to increase the mobile and digital benefits that our customers see. And, you know, our team's pretty full up from a resource capacity executing on that plan. So are there things at the margin you might spend on it if you have it? Maybe, but nothing significant because, you know, our play is full doing the things we plan to do anyway.
spk02: Got it. Thank you. That's all I have. Appreciate the time, guys.
spk07: Thank you. Thank you. Our next question comes from Chris McGrady of KBW. Please go ahead.
spk03: Hey, good morning. Hey, Ed. Maybe a question on just the overall rate profile. I listened to conference calls this morning about banks, you know, reaping the benefit but also taking down some of the rate sensitivity as we get rates priced in. Any thoughts about adding, you know, some swaps just to mitigate some of it? You mean on the downside? Yeah, just, you know, the futures market's projecting cuts, you know, in a couple years. Like, we're going to raise and then we're going to apparently cut. So I'm just wondering if there's a scenario where you would just mitigate some of the volatility.
spk01: That's the plan. We're finally in a position where we again can make more minor rates go up and down. But they're pretty expensive right now. You know, we were fortunate when Rates were really low. The pandemic first hit to put on some derivatives have been helpful or will be helpful to us as rates continue to go up. But kind of expensive right now, but we continue to look at that. We understand it's a vulnerability for us right now, and we'll continue to evaluate that, try to time the market a little bit. Anybody else want to comment on that?
spk05: Well, no, I think that was right. I mean, it's a little bit odd that we're a month into the first increase and we're already talking about decreases. We've got another eight or so increases planned. The market projects more into 2023. So we look at it every day, Chris.
spk10: Yeah, and I would just say, you can go back and look at our prior 10-K and 10-Q disclosures and We have in the past put on forward starting derivative transactions to address that kind of a situation, looking at the overall interest rate sensitivity of our entire balance sheet. If you see those sort of opportunities, sometimes the cheapest way to address that in the short run is a derivative contract, and we certainly have done those in the past. We are looking at those things, and we'll keep you apprised if we do it.
spk03: Okay. Maybe one more. Your growth outlook has been, I would say, consistently strong above peers. You run the capital structure more optimized than some of your peers. I'm just interested, given the outlook for growth and the remix of the balance sheet and also the concerns in the economy, is there a scenario where you would just proactively come to market and – and just shore up the balance sheet even further just to make the capital position give you more flexibility?
spk10: Well, we've always talked about this in the past. The way we look at this, we like to be very efficient on our capital structure, and we actually like leverage in our capital structure. We like having preferred and sub-debt, and we even still have some old trust preferreds that are very, you know, efficient for us. And so for us, it's sort of where do you think growth is going to go. If you look at this quarter, you know, we supported the growth. And if you look going forward, if these rate increases come through and your profitability goes up, if you stay in this mid to high single-digit long growth area, we can support that long growth. I think what we need to just do is look and see what's the outlook for growth. If it becomes sort of supersized, then, yeah, to be opportunistic and raise capital to support that growth. We've always been a growth company, so we would look to do that. But currently, the earnings are supporting the growth, and we'll just continue to monitor it.
spk03: Thank you.
spk07: Thank you. Our next question comes from john Arfstrom of RBC Capital Markets. Your line is open. Hey, thanks. What's up, Johnny?
spk00: Hey, good morning, guys. Maybe start with with Tim, your comment. I hate to ask the question, but your comment on the 325 margin by year end, what kind of rate assumptions are baked in to that commentary?
spk05: Yeah, John, we've got 200 basis points from this point forward in 2022. So roughly 100 in the second quarter and 50 in the two ensuing quarters. Your guess is as good as ours as to what it actually turns out to be. Right.
spk00: Okay. And then I guess the flip side of that question is, in that kind of an environment, how do you guys think about deposit pricing and deposit growth? Can deposit growth match loan growth in that kind of an environment without you guys having to really take up deposit rates?
spk01: Well, we probably will have to bring up deposit rates to attract some stuff, but that's built into our overall plan here and then built into Tim's when Tim gave his margin numbers. Well, men are still pretty good on the deposit side here and the growth side. We haven't had a market product in a long time because – Stuff just came to us, basically. We just did a lot of name recognition stuff. In the past, we always would market products. And now we're getting back into marketing products again and see how that goes. But it will cost a little bit more to grow. We always say that. But I think we're far away. It's far away by the asset sensitivity on the asset side. Yeah, that makes sense.
spk05: And, John, we haven't seen much market reaction. So other than deposits that are sort of attached to indices at this point, everybody seems to have been pretty disciplined. Okay.
spk00: Got it. And I guess more of the elephant in the room is just on mortgage. And, you know, Tim, to your point, whether or not 200 basis points comes through. But how would you guys think through – that kind of a rate hike impact on production volumes at the mortgage company and kind of what's the strategy to deal with higher mortgage rates?
spk10: Well, there's a disconnect a little bit between 200 on the short end.
spk00: Yeah, I know, different parts of the curve, yeah.
spk10: Right, so we consistently have been bringing in, you know, 300 million or so or 400 million of applications per month. And we expect refinances will fall off. They were still kind of close to 50-50 in the second quarter, but my guess is that's going to be more 60-70% purchase. We position ourselves really well and try to service the purchase market and and do that out of our retail locations and, and with our local people being involved in the communities and the realtors and the like. And so we, we, we still think that rates are, you know, for us old guys that got our first mortgage at nine or 10%, we'd still think, you know, 5% mortgage is not going to stop the purchase activity. And so we think we'll gain more than our fair share of the purchase market. So, um, We still think that we can maintain the volumes that we have right now, and we'll see. There's a supply inventory of houses is hurting that a little bit, too. I think you could have more volume if there was more supply out there. But we believe we'll pick up on the purchase side, lose on the refinance side. But I think right now, based on what we know, even with these sort of 5% level mortgages, that we can maintain the production volumes.
spk01: And even if it, you know, John, even if it doesn't, when rates fall again, people will be back. They're trying to market home equity loans again because the cycle is, the values go up, people take home equity loans, rates go down, and they refinance again. So we expect lower rates, and that's why we're positioned like we are for our margin goes up substantially to cover the mortgage side of the equation. So I think that... it's working according to plan. It won't always be perfect, but the margin should cover a lot of the other problems in the drop in mortgage business. We'll make it up another week. I think what the market gives you, like I always say, rates go down, it gives you mortgages, and rates go up, it gives you other opportunities. That's how we're structured like we are.
spk10: I think you have to think about you know, that interplay that Ed talked about, about the margin and the mortgage. But, you know, we have built into the revenue right now, you know, $10, $11 million of servicing income. And then if you look at those projections, the production income is, what, say, $20, $25 million a quarter. But, you know, that's not falling to the bottom line because you have commissions and other expenses. So the impact of the mortgage business now from a volatility perspective should be rather low going forward and should be sort of dwarfed by the changes in the overall rate environment and the earning asset base related improvements there.
spk00: Okay, that's a good point. Yeah, it's clearly the balance pulled through this quarter, but I think addressing the mortgage thing helps. So I appreciate it, guys. Thanks.
spk07: Thank you. Thank you. Our next question comes from Terry McEvoy of Stevens. Your line is open.
spk11: Good morning, everyone. Hi, Terry.
spk07: Hi, Terry.
spk11: Maybe a follow-up on John's question. What are your thoughts about holding more mortgages on the balance sheet now that rates are higher? And then while I'm kind of on the balance sheet, just maybe talk about future deployment of excess liquidity into this investment securities portfolio.
spk09: Yeah, I can talk a little bit about the arms. We are seeing more arm production in the marketplace right now. We do have some opportunity to hold more. This last quarter, as I kind of pointed out in my remarks, we did hold a little more resi. Going forward, I think you'd probably see a very similar amount that we would hold. probably for the second quarter, we typically will do that in footprint as opposed to more of the national products. But generally speaking, I think that there is an opportunity there, and we really like the space. I mean, in our earlier years, we had a lot of resi on our books. Over the past number of years, we've had substantial loan growth in other areas, and We really didn't. Most people wanted a 30-year fix, and so we didn't. So to Ed's point, we take what the market gives us, and right now it's more arm production gives us that opportunity.
spk10: Yeah, and then I guess on the securities portfolio, we ended up a billion two in securities more at the end of the first quarter versus the fourth quarter. So we did put some of those securities to work, and you could see that that impacted the margin positively. But these rate increases will also help on the short-term liquidity earning there. So for the time being, we're still going to be cautious and opportunistic and replace the runoff, maybe invest a little bit more, but we're not going to dive into the deep end and put all $3 or $4 billion of excess liquidity to work right now. Hopefully, we'll suck some of that up with loan production, and then we'll continue to slowly leg into it, I think.
spk11: And then as a follow-up question, Ed, in the press release you talked about gaining new market share. I was wondering if you could expand on that. Is that kind of Chicago, Milwaukee? Is that some of your national businesses? And what's behind that statement?
spk01: All of the above. I think there's plenty of room for us to continue to grow in Chicago in our defined market area. We have a number of branches being prepared for opening right now. You know, we're only what? 6%, 7% of the market as it stands. So, you know, Chase and B of A and BMO have to look out because we're coming for them. I'm sure they're all shaking in their boots right now, but probably hiding in the basement or something. But plenty of room for us to grow here. I think we can capitalize on the awards we continue to get in terms of service. Like I said, why would you bank anyplace else? We give the best service bar none. Our approach works in that regard. The high-touch, high-tech stuff works really well. But across the board, we expect to have continued growth in all of our products and services, get continued market share. We expect that every year anyhow. Does that make any sense?
spk11: It did, yeah. I appreciate the color, and it's nice to hear. It's broad-based market share gains. Thank you.
spk07: Thank you. Our next question comes from Nathan Race of Piper Sandler. Please go ahead.
spk08: Yep. Hi, guys. Hi, Nathan. Question on some balance sheet dynamics. You know, I appreciate some of the non-interest bearing deposit outflows with some of transitory in the quarter, but also curious if that's a function of some of your commercial clients kind of sifting through elevated excess liquidity levels that were accumulated over the last couple of years. And as they work through those liquidity levels, can we maybe perhaps expect more of a meaningful increase in line utilization? I appreciate it was only up maybe half a percent or so in the first quarter. So just trying to think about, you know, what the increase in line utilization potential maybe factors into that high single-digit loan growth outlook for this year. Rich, do you want to handle that?
spk09: Yeah. As I pointed out in my comments, I do think it's a nice tailwind that we have. I think, as we pointed out in the last several calls, land utilization through the pandemic and over the last several quarters was definitely muted. But now we are seeing, if you just look at our asset-based lending group, and as they work through the requests from our customers in terms of rising supply costs, rising raw material costs. You're definitely seeing utilization start trending up. We're also seeing expansion of the lines that are out there, and you can see that in what we included in our release showing that there are more and more customers coming in looking for expanded line facilities. it's a good story for us. And I think that over the course of the rest of the year, it is going to be a real nice tailwind.
spk05: Nate, so the first part of your question, the deposit run out was really related more to a handful of large businesses that sold as opposed to a drawdown of liquidity. Although clearly there was a lot of liquidity in the system and we continue to watch how some of our commercial clients manage their deposits. But the fourth quarter was was more an isolated incident type situation.
spk08: Understood. I appreciate that color. And choosing gears and thinking about mortgage expenses, Dave, when I think about kind of what you described about a year or so ago when we saw a pretty decent decline in volumes in the second quarter of last year, you spoke to, you know, the potential for the commission line related mortgage to step down by about $8 million or so. Is that a fair kind of starting point as well to think about the commission line into the second quarter within the context of what you spoke to in terms of just the overall expense run rate starting in 2Q?
spk10: Well, if origination volumes stay the same in the second quarter as the first quarter and the fourth quarter origination volumes stay IF YOU KIND OF LOOK AT THOSE RELATIVE TO WHERE THEY WERE, YOU KNOW, IN THE PRIOR QUARTERS, THEY CAME DOWN A LITTLE BIT. BUT I WOULD EXPECT THAT BECAUSE THE FIRST QUARTER WAS DOWN FROM THE FOURTH QUARTER, THE WAY IT WENT THROUGH, THAT YOU'LL SEE A LITTLE BIT OF A REDUCTION IN COMMISSIONS. BUT THEN IF IT FLATTENS OUT AND WE STAY STABLE, I DON'T THINK YOU'RE GOING TO SEE A DRAMATIC DECLINE BECAUSE THE PRODUCTION WILL BE THE SAME. I think you see a slight decline in the second quarter in the commission's line just because of the production dynamics, but then should level out, and we'll have to see where production goes into the third and the fourth quarters.
spk08: Understood. But just generally speaking, there is a lag in your mortgage-related expenses compared to revenue?
spk10: Yeah, because we book the revenue based upon locked production and the probability of close, and that includes the net revenue number, so it sort of includes the discounted cash flow of the net revenue. We do that on a locked basis, but the commission expense doesn't flow through until the loan is actually closed.
spk08: Understood. I appreciate all the color. Thank you, guys.
spk07: You're welcome. Thank you. Our next question comes from Michael Young of Truist Securities. Your question, please.
spk04: Hey, thanks for taking the question. It was great to see the strong growth again in the insurance book, both life and property and casualty. I know some of those areas, particularly life, will start to reprice into that higher 12-month LIBOR. Does that ever result in some choke-off of demand in either the life book or the property and casualty book as rates rise?
spk01: It's interesting, in my opinion, not really because the crediting rate goes up, too, if they get any insurance policies. If the credit rate goes up on the insurance policies, it spreads still the same and they make out okay. You follow me? So if a guy, if you're going to take one of these policies out on your, let's say, a second-to-die policy on you, you might even get a credit rate of, 5% before and pay 3, so you got net 2 on that. Now you're going to get 6 or 7 and pay 4. So as long as that spread is there, the spread that actually contracted before, they're actually probably going to expand a little bit over time. So it would make this product more attractive, I think.
spk10: And rates really don't have an impact on the commercial premium finance book at all. So that's more insurance premiums and whether you're having catastrophes or whatever is going on in the insurance rate. But interest rates really don't impact the commercial premiums.
spk09: Yeah, and talking to some of our customers in the life side, they will tell you that there could be some effect with rising rates, and particularly, as Ed points out, if you don't have that crediting rate change, that arbitrage gets maybe a little bit squeezed. But you are seeing much more popularity of the product in general, much more awareness out there. We think that it's a very viable market and will continue to do well through this year as rates continue to rise. But obviously, that is something that we're going to keep an eye on. But that product, as you've seen, has seen dramatic uptick here over the course of the last couple of years. And I think it goes beyond just where the rate markets are.
spk01: Yeah, where we might see a problem is in terms of competition. Some people jump in and they try to steal market share. They think it's an easy deal. This is not an easy business. You have to have real expertise. That's the value add we give is that expertise we have in terms of structuring these. You can get in trouble with the IRS a lot of places. If you do it the wrong way, these guys will jump in and think it's easy. It ain't easy. I would expect that would be a bigger issue than the market itself is competition coming in, fighting over a basis point or two, but Most people are pretty happy with the service we give and the knowledge that we're doing it right, as opposed to some people where we have to jump back in and take it over and fix it, and that's a real pain in the neck. We should get paid for those, and we do. They leave us and they come back and they have to fix it. So it's not an easy business. It seems like it is, but it ain't.
spk04: Okay, and thanks for that. Just another question just on the deposit side. Is there any interest to term out any deposits kind of earlier in the rate hike cycle to give more benefit, you know, later on? Or, you know, I know you've got a lot of CDs kind of rolling through at pretty low pricing right now. Will a lot of those just roll off? You know, kind of how are you guys thinking about that?
spk05: Yeah, I mean, I think I guess there's two parts to that. The retail client base is usually pretty, pretty aware of rates. And so our CD book is down to 9% of our deposits, essentially. We think they'll start to wade back into CDs depending on the rates that get offered. But you got to go substantially higher to get people to lock right now. They know rates are going up. And again, we're still pretty, while the futures market and the expectations for a lot higher rates, there really isn't much higher rates yet in the banks. And so We haven't seen anybody say they're ready yet. But we'll watch for it, and as there's opportunities, we'll certainly take those. But you see some people out there now with, for example, 1% rates around a year, and they don't seem to be getting much traction.
spk04: Okay. Thank you very much.
spk07: Thank you. Our next question comes from Ben Gerlinger of Havde Group. Your line is open.
spk12: Hey, good morning, guys. How are you? I'm doing well. Thank you. And Dave, I know you guys always have great color commentary for the broader economic outlook. But when you guys think about kind of the mom and pop at this lower level scene, I don't really think the global geopolitical events or Ukraine or anything to that extent really has a lot of impact on their day-to-day operations or not nearly the extent that inflation does. So when you think about just their operations and their demand for loans and combating inflation, do you think that there's any sense that they might be tightening the reins or potentially increasing loans to shore up the balance sheets or kind of how the lower-level C&I market is operating in today's environment? And I get that the loan guidance for mid-to-high single digits is pretty – clear, but is there anything that could increase that outside of additional talent added to the team?
spk01: I think inflation is the big deal right now. The supply chain is still kind of jazzed. You see people getting costs. Small producers even are getting their costs and are able to pass them through. That's inflation. The cycle is here. The spiral is here. You have to be very careful in terms of us getting more of that business. Yeah, we're always looking at more of that business. Small business is very important to us. We're number one in Illinois in SBA loans and very important to us, and we're starting to expand that. But Rich, you want to comment?
spk09: No, you hit the nail on the head. I think generally speaking, most of our customers would report that they've been able to – take those costs and move them through and pass them along. And they're doing pretty well. I think, you know, overall the consumer is pretty healthy right now. And so demand across the board is in pretty good shape, whether it's housing or auto or, you know, any area that you look at. And so a lot of the customers that we finance are supplying our lower end suppliers in that space. And so generally speaking, I think they're feeling pretty good. I think, as Ed pointed out, where The bigger challenges are just inflation, wage pressure, and having to battle that and trying to find good, talented people. That's probably the number one concern that people express to us. I think what you're seeing is in a lot of spaces where people are really focused on efficiencies now. They're looking more at automation. They want to spend the money and just try to make do with less. And that's where we can help a lot. Our leasing group has reported a lot of activity in that area. A lot of this line utilization is for people making the spend to get more efficient. And ultimately, I think it's probably a pretty good thing. But in the meantime, it's hard because people have to get through this period where talent is very expensive and hard to find.
spk01: Talent is a big part right now. I mean, especially we don't have a lot of hospitality at all. We do have restaurants and the like, but people, they can't get people to work there. I know I was down at our home in Georgia and the head of the Sea Island Company, he's like, they have 400 positions open right now. They can't fill them. They can't bring people in from out of the country like they used to and in the high seasons and the like. So it's really kind of jazzed right now in terms of that. So we see a lot of that, which means people are going to have to pay more to get people to come, and that's the inflation cycle. Like I said, like a year and a half ago, it ain't transitory. Once it gets going, it's hard to stop. But I think a lot of people are getting freaked out about inverted yield curve right now. I think that's a false positive right now because the government is still buying treasuries to keep their costs down. So I think those rates are artificially not in good shape. It's not really true. So we don't see that right now as an issue. But let me first tell you we do. But people see the price. A lot of money is out there. Prices are being accepted. oil is a big issue in terms of commuting and what have you, but it's just going to cost more to live. Like Ronald Reagan said, places the price you pay for all the stuff the government gives you, they said was free.
spk12: Gotcha. That's great. And then kind of speaking on the same vein of talent, I know from the inflation perspective of talent and then also Chicago seems to have a noteworthy deal every other year. So that's pretty much the gift that keeps on giving to WinTrust simply because you guys have a great mousetrap. So when you guys think about talent and the people outside of WinTrust kind of shopping their resumes, so to speak, in a summer of a free agency, is expectations for lender compensation to come over to WinTrust appropriate? Are people looking for too much? And then kind of how are you just approaching the market disruption in terms of additional talent ads.
spk05: David, Rich, do you want to handle that? Okay. Well, you know, as we've talked about in the past, the disruption obviously continues to help us, and there's a time lag, and to your comment, you know, three or four events that continue to be beneficial to us. I don't think we're seeing anything atypical for commercial lenders in compensation. We do see, obviously, the broader inflation-related activities. But we think we're a good home for lenders. We think we take very good care of customers. And for a lot of our lenders, that's their primary concern. So I think we'll continue to benefit as the disruption continues to work its way through the market.
spk01: We see it a lot at the lower levels. We run a credit analyst program with 30 guys, 30, 35 people every year come through. After two years, they are offered a god-awful amount of money. They go away and Half of them want to come back when it's done, but they realize that they left a golden goose. But, Rich, you want to comment?
spk09: No, I would say exactly what Tim said, where we brought in a lot of people because of the market disruption over the course of the last couple of years. And I think when you talk to those bankers about the culture and the fit, what they would say is this is their number one job is keeping their customers happy. And our, so our job is to make sure that, you know, we have the systems in place, we have the credit process in place and we can deliver what we say, because that's just been a, I think a bit of a trick out there in the marketplaces, there's been acquisitions and different cultures come in. And, um, when a, when a banker feels unsure about ability to deliver, that's way more motivation than anything else. And so we've been able to, I think, keep our bankers and our customers happy by just keeping a very core philosophy of consistency. And that's just not what we've seen in the marketplace at all. So fortunately, we've been able to hold on to our bankers pretty well.
spk12: All right. That's great. I appreciate it. Thanks, guys.
spk07: Thank you. Again, to ask a question, please press star 1 on your touchtone telephone. Again, that's star 1 on your touchtone telephone to ask a question. Our next question comes from Casey Hare of Jefferies. Please go ahead.
spk06: Thanks. Good morning, guys. So I wanted to follow up on the loan growth outlook. The pipelines sound pretty strong. If I heard you correctly, you said they're building. I'm just wondering if you'd quantify what the 331 pipeline looks like versus year-end.
spk09: You know, we took some of the pipeline commentary out of that just because it's just always there's some timing issues and some other things that go into it, and so we just really are focusing on the loan growth guidance. But generally speaking, the term building is the right term. We did see good momentum here in the first quarter and as we go into the second quarter. And that momentum really is, again, pretty broad-based. We're seeing it in CRE. We're seeing it in CNI. We're seeing it in some of these line increases that we're being asked to provide. So generally speaking, I would stick with that. But getting beyond in terms of the specifics, we're trying to get away from that and really focus on the loan growth guidelines specifically.
spk06: Okay, I understand. understood uh and just to just to clarify uh the the the fed hike forecast um i think you said 200 200 basis points is that is that what you expect the fed to be at by year end um versus the the 50 bib level we are at today or are you expecting 200 basis points of hikes incremental hikes between now and your end yeah 200 basis points from here 100 in the second quarter and 250
spk05: basis point changes in quarters three and four. And again, whether that happens or not, who knows?
spk10: Yeah. Right. So our thought on that is $40 to $50 million per 25 basis point increase. And so you pick your scenario and apply the math and go from there.
spk05: And obviously, as we get into future quarters, we will have started to realize some of that benefit. And so the base will change over time. But we're you know, again, still early in the real cycle of rates changing here.
spk07: Edward Wehmer Thank you. At this time, I'd like to turn the call back over to Edward Wehmer for closing remarks.
spk01: Sir? Edward Wehmer Thank you, everybody, for listening in, and we appreciate your support. If you have any other questions, please feel free to contact me or Dave Dykes or Rich Murphy or Tim Crane. Talk to you again in a quarter, if not before. Bring on spring, and let's go Cubs and Sox.
spk00: Thank you.
spk01: Thank you.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer