Wintrust Financial Corporation

Welcome to WinTrust Financial Corporation's second quarter and year-to-date 2023 earnings conference call. A review of the results will be made by Tim Crane, President and Chief Executive Officer, David Dykstra, Vice Chairman and Chief Operating Officer, and Richard Murphy, Vice Chairman and Chief Lending Officer. As part of their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentations, there will be a formal question and answer session. During the course of today's call, Wintrust management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking statements. The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed in 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 call over to Mr. Tim Crane.

Thank you, and good morning, everybody. We appreciate you joining us for our second quarter earnings call. In addition to Dave Dykstra and Rich Murphy, who the operator introduced, Dave Starr, our chief financial officer, and Kate Bogey, our general counsel, are with me in the room today. In terms of an agenda, I'll share some high-level highlights. Dave will speak to the financial results, and Rich will add some additional information and color on credit performance. I'll wrap up with some summary thoughts, and as we always do, we'll do our best to answer some questions. On our last call in mid-April, we were still in a period of volatility and, to a degree, uncertainty for the banks. At the time, we talked about several objectives, continuing to focus on our customers, capitalizing on our strength and stability, once again being opportunistic when there is disruption in the market. We talked about managing the balance sheet in a conservative fashion, growing deposits to fund loan growth and continuing to enhance liquidity. And we talked about continuing to take advantage of higher rates, specifically to demonstrate our ability despite rising deposit costs to stabilize the net interest margin. We feel like our performance on these objectives has been very solid. In addition to reporting record income for the first half of the year, For the second quarter, we had strong and balanced loan and deposit growth, adding clients and building the franchise through the volatile period when others were distracted. We improved liquidity, reducing federal home loan bank borrowings, and as you will hear shortly, have demonstrated through the sale of a portfolio of loans that occurred after the quarter end, the flexibility to continue to manage our balance sheet effectively. And while, as expected, deposit costs are up, We are originating very high quality loans with attractive both yields and terms, and continue to benefit from loan repricing, which we believe differentiates us from many of our peers. Just to give you some detail, you'll recall our margin was 383 for the first quarter, and specifically 370 at the end of March. Our margin for the second quarter, despite the very good growth, was 366, and importantly was stable throughout the quarter. Lastly, our credit performance remains strong with no evidence of systemic issues. Rich will discuss this in some detail, including proactive steps that illustrate our ability to address any softening that may occur. Again, I'll come back at the end, but with that, I'll turn this over to Dave to provide some additional detail.

Okay, thanks, Tim. First, with respect to the balance sheet growth, We're very pleased to see deposits for the quarter grow by $1.3 billion, or 12.4% on an annualized basis. This deposit growth was aided by the popularity of our suite of MaxSafe products that provide enhanced FDIC coverage, and we did not rely upon additional wholesale deposits during the quarter for that growth. This growth was also, despite our wealth management deposits declining by just under $400 million, owing in large part to less deposits from our 1031 exchange business due to a slowdown in tax-free commercial real estate exchanges in the marketplace. As to the deposit composition, we again saw some additional movement from non-interest-bearing deposits to interest-bearing accounts. The non-interest-bearing deposits at the end of the quarter represented 24% of our total deposits compared to 26% at the end of the first quarter. These movements do not appear to be unique to us, but they obviously increase the cost of deposits for the quarter. Although I would note that the mixed shift out of non-interest-bearing deposits seems to have subsided thus far this quarter as the percentage is relatively stable now that it was at the end of the second quarter. This strong deposit growth helped fund similarly strong loan growth of $1.5 billion during the second quarter, The growth was predominantly fueled by exceptionally strong production from our commercial premium finance operations and to a lesser extent from commercial real estate growth, including draws on previously existing credit lines. Rich Murphy will discuss the loan portfolio growth in more detail in just a bit. The investment portfolio declined slightly as we only reinvested about a third of the $940 million of securities that were called away at the end of the prior quarter. The additional liquidity provided by not reinvesting the entire amount of those called securities also helped to fund the quarter's loan growth. The company was able to reduce its non-deposit funding, primarily federal home loan bank advances, during the quarter by $208 million. The result of these balance sheet movements was a growth in total assets of approximately $1.4 billion, a slightly elevated ending loan-to-deposit ratio of 93.2%, and relatively stable capital ratios. All in all, it was a very successful quarter in growing our franchise. Our differentiated business model, exceptional service, and unique position in the Chicago and Milwaukee markets continue to serve us well. As Tim mentioned, the exceptionally strong growth in our commercial premium finance portfolio and the outlook for continued loan growth provided us with an opportunity to structure a loan sale transaction of approximately $500 million of our U.S. commercial premium finance portfolio. This loan sale occurred earlier this week and provided multiple benefits to us, including that it demonstrates that our premium finance portfolio is a strong source of additional liquidity if needed, actually provided us with liquidity this quarter to aid in funding anticipated loan growth, reduces our loan to deposit ratio to a desired operating level that is closer to 90%, reduces some of the concentration in the premium finance space as we've had strong growth over the last quarter and, quite frankly, over the last year, and would provide a small gain in the third quarter from the sale of those loans. As you know, these loans are very short-term loans that make monthly payments, and they'll likely be replaced substantially by new volume by the end of the year. Next, I'll cover noteworthy income statement categories, starting with the net interest income. For the second quarter of 2023, net interest income totaled $447.5 million. That was a decrease of $10.5 million as compared to the prior quarter. and an increase of $109.7 million compared to the same quarter of 2022. The decrease in net interest income as compared to the prior quarter was primarily due to compression in the net interest margin influenced by the higher funding cost. The net interest margin was 3.66% in the second quarter, which was just slightly less than the 3.7% margin that we discussed on our first quarter earnings call, and which was the approximate run rate at the end of March. However, the margin was 17 basis points less than the prior quarter level of 3.83%. Importantly, the net interest margin was stable for each of the months in the second quarter, and as I'll discuss later, we expect the margin to continue to remain relatively stable for the remainder of 2023. As to the details of the component changes impacting the margin in the second quarter, Relative to the first quarter, the company saw a beneficial increase of 42 basis points on the yield on earning assets excluding the impact over interest rate swap positions, a 15 basis point increase in the net free funds contribution, and offsetting that was an increase of 66 basis points of an increase on the rate paid on liabilities. And it's important to note that roughly half of the margin decline during the quarter was associated with an additional eight basis points of margin drag from a full quarter impact of the interest rate swap positions that we have in place. Those swaps were generally put on in the first quarter, and the first quarter only had a portion of the impact. So this quarter was fully banked and was accounted for about half of the margin decline. We continue to believe that our balance sheet structure can provide for margin stability as our premium finance portfolios, which comprise roughly a third of our loan portfolio, should continue to reprice upward over the course of this year, and that should substantially mitigate the rise in deposit pricing. Accordingly, based on the current interest rate environment, which includes an expected 25 basis point increase by the Fed later this month, we expect our margin to to remain relatively steady in the 3.60 to 3.70 range during the remainder of 2023. Turning to the provision for credit losses, the company recorded a provision for credit losses of $28.5 million in the second quarter. This compared to a provision of $23 million in the prior quarter and $20.4 million of provision expense recorded in the year-ago quarter. The higher provision expense in the second quarter relative to the prior quarter was primarily a result of a higher loan growth, changes in macroeconomic outlooks, including projected credit spreads and projected commercial real estate price index, and slightly higher net charge-offs. Again, Rich Murphy will talk about credit and the loan portfolio characteristics in just a bit. As to other non-interest income and other non-interest expense, Total non-interest income totaled $113 million in the second quarter, and it was up approximately $5.2 million compared to the prior quarter, a total of $107.8 million. The primary reasons for the increase were due to an $11 million increase in mortgage banking revenue. The mortgage banking operation saw a slight increase in volume of loans originated during the second quarter with relatively stable production margins. Roughly 84% of the application volume is still related to purchased home activity. Loan application activity continues to be subdued due to lack of housing inventory and higher rates, but we would expect right now similar to slightly elevated production, but nothing dramatic in the third quarter. Wealth management revenues improved by $3.9 million in the second quarter relative to the first quarter, and this was bolstered by revenue from the acquisition that we closed at the beginning of the quarter and offset somewhat by continued headwinds relative to the slowdown in the commercial real estate transactions and the resulting impact on the 1031 exchange business revenue. However, these increases were offset by a $1.4 million reduction on gains and losses related to the company's securities portfolio. The company recorded a $1.4 million gain in the first quarter on security sales and really nothing in the second quarter of this year. A $7.8 million decrease in covered call options also impacted this revenue category. As I discussed earlier, we did not reinvest much of our securities that were called in this quarter. created less opportunity to write covered call transactions during the quarter. Turning to non-interest expense categories, the non-interest expenses totaled $320.6 million in the second quarter and were up approximately $21.4 million when compared to the prior quarter total of $299.2 million. The primary reasons for the increase is related to a few general areas. First, the acquisition of the wealth management companies at the beginning of the quarter added roughly $4 million of additional expense sprinkled throughout the various expense categories. But excluding that impact, salaries and employee benefits expense increased by approximately $8.1 million in the second quarter of 2022 compared to the first quarter. And relative to the prior quarter, there was $4.7 million increase largely related to higher mortgage commissions and to a lesser extent incentive compensation accruals. So most of that was commissions related to the increased mortgage operation. So this category fluctuates depending upon the mortgage volume. The category also saw approximately $4.1 million of higher employee benefit expenses due to an increased level of health insurance claims during the quarter. Health insurance claims can fluctuate on a monthly basis as we're self-insured. The first quarter was a little low. The second quarter was a little high. It can fluctuate, but the change between quarters was really more probably a timing of when employees took advantage of our health insurance program. Next, advertising and marketing expenses increased by $5.8 million in the second quarter when compared to the prior quarter. As we've discussed on previous calls, this category of expenses tends to be higher in the second and third quarters of the year due to expenditures related to various major and minor league baseball sponsorships, other summertime sponsorship events that we hold in the communities that we serve, and marketing of our brand and deposit products. Also in the second quarter, lending expenses increased to approximately $4.8 million due to the strong and higher overall loan origination activity in the second quarter. And other than that, the expense categories just discussed above, all the other expense categories were relatively consistent. The efficiency ratio increased to 57% for the second quarter from 53% in the first quarter of the year, and this was primarily due to the impact of lower net interest margins, the reduced level of covered call income, and the slightly elevated expenses. The net overhead ratio was 1.58% in the second quarter, an increase from 1.49% in the prior quarter due to the slightly higher expenses. In summary, we think this was a very solid quarter. We had strong loan and deposit growth, improved liquidity position, stabilized net interest margin with a steady outlook, net revenues at within 1% of the prior quarter's record level despite funding cost pressures, continued low levels of non-performing assets, and the second highest quarterly net income result in the company's history. We feel like we've managed through a turbulent first half of 2023 delivering net income that was a record for the first half of any fiscal year in the company's history, and we have a positive outlook for continued growth in assets, revenues, and earnings. So with that, I will conclude my comments and turn it over to Rich Murphy to discuss credit.