Wintrust Financial Corporation

Welcome to Wintrust Financial Corporation's third 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 review, 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, 10K, 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. Tim Kring.

Good morning, everybody. Welcome to Wintrust Wednesday. This is the day of the week we require all of our Wintrust staff to be on site. We're glad that you have joined us, too, for our third quarter earnings call. With me this morning are Dave Dykstra, our Chief Operating Officer, Rich Murphy, our Chief Lending Officer, Dave Starr, our Chief Financial Officer, and Kate Bogey, our General Counsel. In terms of an agenda, I will share some high-level highlights. Dave Dykstra will speak to the financial results. And Rich will add some additional information and color on credit performance. I'll wrap up with just a few summary thoughts. And as always, we'll do our best to answer some questions. Earnings or net income for the quarter were just over $164 million, up from both the second quarter and the paired quarter last year. From our standpoint, a very solid result with good loan and deposit growth and continued good credit performance. As Rich will highlight, we are not seeing any systemic credit issues at this point. Our margin at 362 was within the range we expected, down essentially just for the impact of our hedging activities. We continue to benefit from a loan portfolio that prices relatively quickly. You'll recall that nearly 80% of our loans mature or reprice within a year. The resulting improvement in loan yield allows us to largely offset the increase in deposit costs, which I would add we believe are moderating at this point. Our growth and the relatively stable margin resulted in net interest income growth for the quarter and on a year-over-year basis. From a market standpoint, we continue to see isolated disruption among competitors, and as a result, we continue to add clients and create long-term franchise value. We expect that in the coming quarters, we will continue to grow loans and deposits. Our liquidity position remains strong. The deposit growth not only allowed us to fund good loan growth, but also to reduce the level of brokered deposits during the quarter. Again, overall, a solid quarter, which we believe will compare well and, in fact, may differentiate us relative to many of our competitors. With that, I'll turn this over to Dave to provide some additional financial details.

Great. Thanks, Tim. First, with respect to the balance sheet growth, we were again pleased to see deposits for the quarter grow by approximately $1 billion, or 9% on an annualized basis. This deposit growth was primarily in the form of interest-bearing retail deposits and and that growth allowed us to reduce our level of broker deposits by $392 million. As to deposit composition, non-interest-bearing deposits at the end of the quarter represented 23% of total deposits compared to 24% at the end of the second quarter. The slight reduction in the percentage of non-interest-bearing deposits to total deposits is really more a reflection of deposit growth occurring in the interest-bearing categories rather than any large losses of non-interest-bearing deposits. deposit accounts. We've seen the non-interest bearing balances stabilize as evidenced by the $10.6 billion of average non-interest bearing deposit balances in the third quarter being roughly equal to the $10.6 billion balance at the end of the second quarter. This strong deposit growth helped to fund solid loan growth of $423 million during the third quarter. Adjusting for the impact of the sale of certain commercial insurance premium finance loans during the third quarter Total loans increased $767 million, or 7% on an annualized basis, which is consistent with our prior guidance of mid to high single-digit loan growth. The increase in loans was primarily the result of draws on existing commercial real estate loan facilities, as well as growth in the commercial portfolio. Additionally, despite the loan sale transaction that reduced outstanding balances by $344 million at the end of the third quarter, the commercial insurance premium portfolio ended relatively unchanged, which is a good result. Rich Murphy will discuss the loan portfolio growth in more detail in just a bit. The result of these and other balance sheet movements was growth in total assets of approximately $1.3 billion, a slightly reduced ending loan-to-deposit ratio of 92.1%, and risk-based capital ratios that were relatively stable to up a little. Overall, it was a very successful quarter in the growth of our franchise. Our differentiated business model, exceptional service, and the unique positioning that we have in Chicago and Milwaukee markets continues to serve us well. Turning to the income statement categories, starting with the net interest income, for the third quarter of 2023, net interest income totaled $462.4 million, an increase of approximately $14.8 million as compared to the prior quarter, and an increase of $60.9 million as compared to the third quarter of 2022. I should note that the third quarter net interest income represents the highest quarterly amount ever recorded by the company. The increase in net interest income as compared to the prior quarter was primarily due to the increase in average earning assets of approximately $1.6 billion. The net interest margin was 3.62% in the third quarter, which was just four basis points less than the prior quarter level of 3.66%. Three of the four basis points of the decline was due to the impact of our interest rate hedging strategies, which are designed to protect our net interest income if interest rates decline. Accordingly, as we discussed on prior calls, our balance sheet composition, structure, and repricing characteristics provided for a relatively stable net interest margin during the quarter. Deposit pricing moderated in the third quarter of 2023, and we expect that to continue into the fourth quarter. Based on the current interest rate environment, we believe we can maintain our net interest margin within a narrow range around the current levels for the remainder of 2023. I'd also like to note that total loans as of September 30th, 2023 were $739 million higher than the average total loans in the third quarter of 2023. This provides momentum into the fourth quarter. This growth and the expected growth in the balance sheet and the relatively stable net interest margin should allow for future growth of our net interest income in the fourth quarter. Turning to the provision for credit losses, Wintrust recorded a provision for credit losses of $19.9 million in the third quarter compared to a provision of $28.5 million in the prior quarter and $6.4 million provision expense recorded in the year-ago quarter. The lower provision expense in the third quarter relative to the second quarter was primarily a result of lower net loan growth during the third quarter. Rich Murphy will talk about the credit and loan characteristics in just a bit. Regarding non-interest income and non-interest expense sections, total non-interest income totaled $112.5 million in the third quarter and was relatively stable when compared to the prior quarter total of $113.0 million. As shown in the table in Arnie's release, There are a number of relatively small changes to a variety of non-interest income categories, but in the aggregate, the change is netted to a slight decrease of $552,000 from the prior quarter. This illustrates the importance of having diversified fee businesses that can contribute at various levels over time and the ability of those business lines to maintain a relatively stable level of non-interest income despite what is a challenging mortgage environment. On the non-interest expense categories, non-interest expenses totaled $330 million in the third quarter of 2023, and were up approximately $9.4 million when compared to the prior quarter total of $320.6 million. Now, there are a few primary reasons for the increases, which are related to the negative impacts of, one, occupancy costs of approximately $2.9 million from the impairment of two company-owned buildings that are no longer being used. Two, data processing costs of approximately $1.5 million from a termination of a duplicate service contract related to the acquisition of the wealth management business in 2023. Other salary costs of approximately $1.6 million related to acquisition severance charges, acquisition-related severance charges, and other contractually due compensation costs. And then we also had an increase in our commissions and incentive compensation of $4.3 million primarily because of the adjustments to our incentive compensation accruals due to the strong earning levels. The remainder of the variances in the non-interest expense categories, both positive and negative, generally offset to a relatively small remaining change. So despite the growth in the non-interest expenses and the uncommon nature of some of the items that I just noted, The company's annualized ratio of non-interest expenses as a percent of average quarterly assets actually declined by three basis points to 2.41% in the third quarter. Additionally, our efficiency ratio remained stable at 56.9% in both the second and the third quarters of 2023. And similarly, the company's net overhead ratio was relatively stable at 1.59% in the third quarter and increased just one basis point from the 1.58% recorded in the prior quarter. So in summary, this was a very solid quarter with strong loan and deposit growth, improved liquidity position, stabilized net interest margin with a steady outlook, a record level of net revenues, 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 well through a somewhat turbulent period thus far in 2023, delivering net income that was a record for the first nine-month period of any fiscal year in the history of the company, 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.