Wintrust Financial Corporation

Welcome to Wintrust Financial Corporation's first quarter 2023 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 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 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. Welcome, everybody, to our first quarter 2023 earnings call. If you heard with me, Tim Crane, our president, CEO, and waiting. Dave Dikes, our vice chair and chief operating officer. Rich Murphy, our vice chair and chief planning officer. Kate Bogey, our general counsel, who's off-site, by the way, so the shock collar on MAY HAVE A DELAY ON IT, BUT TRY IT, KATE. I'M NOT GOING TO SAY ANYTHING BAD. AND DAVE CYRUS, CFO. SOME OF THE DIFFERENT APPROACHES THIS QUARTER. SOME GENERAL COMMENTS FROM ME. TIM WILL DISCUSS OPERATING RESULTS IN DETAIL. DAVE DYKSTON IS GOING TO DISCUSS OTHER INCOME, OTHER EXPENSE IN DETAIL. PERF WILL DISCUSS CREDIT IN DETAIL. TIM CRANE WILL TALK HIS THOUGHTS ABOUT THE FUTURE. BACK TO ME FOR SOME FINAL THOUGHTS AND TIME FOR QUESTIONS. General comments. Well, given our record results, I chose the right time to semi-retire, but given the industry challenges arose during the quarter, just like Lloyd Bridges and the Moby Airplane, I picked the wrong quarter to quit sniffing glue. Despite the turmoil in the banking industry, we recorded net, record net income and PPPP earnings. And the challenges we faced that faced the industry, Our consistent, conservative approach to banking allows us to thrive during the times. How many times have you heard me say the concentration scale? We've always been old school in how we went after this, and that's not changing. I believe the current challenges in the industry open a lot of doors for us, just like in the past, industry meltdowns. For example, great recession, our open-door strategy resulted in record earnings, being one of the most acquisitive companies in the country. Pandemic, general results. Great results during the pandemic. PPP loans were a real plus for us. Resilience fell over into a ton of new clients. I think back to the Russian ruble thing. We've always come out with it smelling great because of our approach. And I expect we will continue to do the same. Now I'm going to turn it over to Tim to talk about results.

Great. Thanks, Ed. Obviously, lots to talk about in terms of both the balance sheet and the recent industry developments. It's important to note that many of my comments, as well as Rich and Dave's to come, are supported by slides that we've included in our earnings presentation that may be helpful. First, with respect to deposits, deposits for the quarter were down four-tenths of a percent, $184 million, essentially flat in a period where we often see some seasonal outflows. While we spent a great deal of time communicating with our clients in the days after March 10th and saw a significant shift in our deposit mix, which I'll discuss in a moment, our overall level of deposits remained very stable. In terms of additional detail, consumer deposits were actually up for the quarter, and the offset was primarily in our CDEC group, deposits related to our 1031 real estate related exchange business, and we're down in our wealth management area where we continue to see some movement to treasuries and the money market funds, presumably for both rate and insurance reasons. Except for municipal deposits, which are in almost all cases insured or collateralized, we do not have any significant deposit concentrations. Our average deposit account size is under $70,000. We don't have any exposure to crypto deposit activity. In addition, both our federal home loan bank and total overall non-deposit borrowings were unchanged in the quarter. We didn't borrow from the Fed discount window and have no intent to use the bank term funding facility. During the quarter, again, we saw movement from non-interest-bearing deposits to both our unique Wintrust MaxSafe product, which provides customers up to $3.75 million in insurance per account holder and other reciprocal insured products. MaxSafe deposits increased by about $1 billion during the quarter, with another several hundred million dollars, primarily larger deposits, moving to other reciprocal insured products. Non-interest-bearing deposits at the end of the quarter represented 26% of total deposits, a return to near pre-pandemic levels consistent with a more normal rate environment. These movements do not appear to be unique to us, but they obviously increased the cost of deposits. For the quarter, interest-bearing deposit costs were 197, up 67 basis points. Our interest-bearing deposit data through the first quarter was 36%. We expect the activities post-March 10th will result in interest-bearing deposit data over the full cycle in excess of the 45% that we had previously projected. Currently, we're assuming a full cycle number of approximately 50%. At quarter end, fully insured or collateralized deposits totaled about 70% of total deposits, a number that continues to trend higher. Loan growth for the quarter was about $370 million. On the low end of our range, Rich will talk about loan growth, loan composition, and continued strong credit performance in just a few minutes. With respect to the net interest margin, it was up 10 basis points to 383. We're pleased with this result in light of the late quarter pressure on deposit costs and the negative impact of our hedging activities. While we expect deposit cost increases and incremental mix change may continue, we believe given the current rate environment and the continued benefit associated with the favorable repricing of our premium finance loans, as a reminder, those are about a third of our loan book, that we'll maintain a margin of approximately 370 for the next several quarters. Given the assumptions around our balance sheet, we remain slightly asset sensitive. An additional 25 basis point increase in rates, if that were to occur, would all else equal provide approximately $20 million in benefit in terms of net interest income on an annualized basis. The strong earnings for the quarter produced a material increase in our capital ratios. Total risk-based capital increased to 12.1 percent, CET1 to 9.2 percent. Both, we believe, are appropriate on a risk-adjusted basis and should continue to expand. Tangible book value in the quarter increased materially to 64.22 per share. Just a quick note on securities and capital. The combined unrealized pre-tax security losses, both available for sale and held to maturity, at the end of the quarter totaled approximately $1.1 billion. If a regulatory rule change occurred and we were forced to mark our entire securities portfolio, the bank would remain well capitalized. So despite the external volatility in the latter part of March and the prospect for evolving deposit-related behavior change, we continue to see very good pipelines, opportunities in the market, and typical client activity. Dave?