Wintrust Financial Corporation

Welcome to Wintrust Financial Corporation's second 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 presentation following their presentations there will be a formal q a session during the course of today's call when trust 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 this call or 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 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.

Thank you very much. Hello, everybody. Welcome to our second quarter earnings call. With me again are Dave Dykstra, Dave Starr, Kate Bogey, our general counsel, Tim Crane, and Rich Murphy. Same form as usual, I'm going to give some general comments regarding our results. Throw to Tim Crane for more detail on the balance sheet in the second quarter. Dave Dyches will provide detail on other income, other expense. And Rich Murray will discuss credit. By the way, we need to refer to Murph as Captain Murphy, as he is going to be crewing Wintrust's first entry into the world-famous Mackinac race, something we've been sponsoring, Chicago to Mackinac. So he's got a sailor's ad on here, and... Go get them, Gilligan. And back to me for some comments on the future. We're going to have some time for questions. All in all, it was a great quarter for us, but I consider it a transitional quarter for WTSC. Transitional in the sense we'll be relying less on mortgage income going forward and more on the margin income for net income increases in the coming quarters. This has always been our design, by the way. We like to stay very positively gapped so that we can In a higher rate environment, we are able to increase the margin to cover more than cover expenses that will result from the inflationary period. And that's what we're doing right now. All in all, the court has characterized terrific loan growth across the board, $1.9 billion. Period-end loans exceeded the average for the second quarter by about $1.2 billion. It goes well for the future quarters. OVERALL INTEREST RATE SENSITIVE POSITION ALLOWS A MARGIN INCREASE TO 293, UP 32 BASIS POINTS FROM QUARTER ONE. SHOULD WE KNOW THAT JUNE'S MARGIN WAS CLOSER THAN THE 310, 3.10%. POINT FOUR, WE EXPECT THE MARGIN TO CREATE AN INCREASE. AS PREVIOUS RATE INCREASES WORK THEIR WAY, THE BALANCE SHEET INITIAL FUTURE RATE INCREASES OCCUR. NET INTEREST INCOME INCREASED $39 MILLION QUARTER OVER QUARTER. Earning asset rates were up 36 basis points. Cost of funds was up seven basis points. The free fund contribution increased three basis points. The court was negatively affected by security losses of approximately $8 million. Pardon me, $2.5 million loss on some excess real estate, our old data center, and a property that's been held for expansion and used for storage. We decided to get rid of them and be done with them. And then... Also, by the increased provision to cover our loan growth, about $9 to $10 million. The form of these two items negatively affect our net overhead ratio. It's down about 1.5%. If you disregard those amounts, we'd be closer to a $135 target. MSR evaluation assessment is somewhat muted by our hedging process, hedging strategies, the working process. David's going to talk about that a little bit later. GRADE METRICS, WHICH WE'LL DISCUSS, REALLY REMAIN EXTREMELY HEALTHY AND TERRIFIC. WEALTH MANAGEMENT REVENUE HOLD UP NICELY DESPITE THE MARKETS AND MORTGAGES AND THEIR OWN... AND MORTGAGES HELD THEIR OWN CONSIDERING THE RIGHT ENVIRONMENT. THEY WILL COVER BOTH THESE. I REACHED INCLUDE THE CAPITAL OFFERING THAT AT $286 MILLION WAS A GREAT SUCCESS FROM OUR STANDPOINT, BUT IT'S JUST FOR ADDITIONAL GROWTH. So on the earnings front, as you know, we made $94.5 million, $1.49 a share. Pre-tax pre-provision of $152 million, really a good number considering where we've been and where we're going. And I think there's a smile chart in the package you can read. Asset on the balance sheet side, we're up nicely. I should say. About $718 million, the increase in deposits and the capital offering helped in that. And with that, I'm going to turn it over to Mr. Crane, who's going to discuss the balance sheet.

Great. Thank you, Ed. I'd like to highlight a few balance sheet items as well as expand on a couple of the numbers that you mentioned. You'll note that this will be the last quarter we reference PPP loans, as in most cases, the balance is and related financial impact are reaching levels that are relatively insignificant to our results on a quarter-over-quarter basis. Obviously, the year-over-year impacts are documented in the financials. The billion nine of loan growth excluding PPP that Ed referenced represents 22% loan growth on an annualized basis and importantly was spread across all categories. And also, as Ed mentioned, the end of period loans were substantially higher than the quarter average, which will help us going into the third quarter. Going forward, while encouraged by stable pipelines, we believe that loan growth in the mid to high single digits on an annualized basis may represent a more reasonable expectation given the current uncertainty around the macroeconomic outlook. Deposit growth for the quarter was about $375 million. influenced by both seasonal tax-related outflows and the very disciplined approach to pricing in the rising rate environment. Interest-bearing deposit costs of 28 basis points for the quarter were up six basis points from the end of the first quarter and will begin to trend up with the rising rates. While the competitor deposit pricing remains very muted, we are starting to see increases in the more rate-sensitive of the deposit categories As an example, municipal deposits often track some of the state indices. In addition, we believe a large Fed increase at the meeting next week would also accelerate deposit pricing discussions in the market. For the quarter, our securities book remained essentially unchanged. We used excess liquidity to fund the strong loan growth, essentially replacing maturing securities, obviously at a rate that's trending up. And at quarter end, liquidity remains strong with about $4 billion of interest-bearing cash on the balance sheet. As discussed last quarter, our securities book of $6.5 billion is about 47% available for sale, 53% held to maturity. During the quarter, the continued rise in rates resulted in an additional tax-adjusted unrealized loss of $122 million on the AFS securities. Despite this reduction, tangible book value for the quarter increased to a record level. As rising rates and rate sensitivity remain a topic of interest, I want to reiterate some of what was discussed on last quarter's call. First, although our gap position is down slightly, we remain asset sensitive and well positioned to benefit from continued rising interest rates. As a reminder, and this is outlined in our presentation materials, approximately 80% of our loans reprice or mature within a year. Second, as we experience increasing rates, we continue to believe each 25 basis point increase in rates will generate in excess of $40 million of pre-tax net interest income on an annualized basis, which equates to approximately a 10 basis point improvement in margin. To be more specific on the margin, Ed mentioned 293 for the quarter, up 32 basis points. On our last call, we suggested that the consensus rate forecast could result in a margin approaching 325 by year end. With the more current consensus projections, it's likely we'll meet that target earlier than anticipated and may approach 350 by year end. On the capital front, despite very strong loan growth, as a result of the common stock offering, capital ratios improved. With the higher rates and more typical loan growth, The company's earnings are projected to result in further organic improvement to capital levels in the coming quarters. Lastly, on a non-financial note, the pandemic has accelerated the use of and really the importance of digital services at all banks, and we show some statistics in the presentation portion of our documents. This past weekend, we successfully completed the full replacement of the digital banking system used by our consumer and certain small business clients. This was a 15-month effort and a significant investment on the part of the company that's resulted in a very material upgrade to best-in-class feature functionality available to our clients. It should differentiate us relative to all but our largest competitors and will only enhance the top-tier service that Wintrust banks are recognized to providing our clients. And you'll recall and also document in our presentation some of the recognition we've received by J.D. Power as the best bank for customer service in our area. With that, I'll turn it over to Dave.