Wintrust Financial Corporation

Welcome to Wintrust Financial Corporation's fourth quarter and full year 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 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 statement. 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. Tim Crane.

Good morning, and thank you for joining us for the fourth quarter and full year call. For those we haven't spoken to recently, happy new year. In addition to Dave Dykstra and Rich Murphy, who the host introduced, Dave Starr, our Chief Financial Officer, and Kate Bogey, our General Counsel, are with me. In terms of an agenda, I'll 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 some summary thoughts on 2024, and as always, we'll do our best to answer some questions. For the year, we reported record net income of just over $622 million, up 22% over 2023. The results reflect our conservative approach to managing and growing our franchise. Specifically, we target steady growth in both loans and deposits, sound and conservative liquidity and risk management, and an unwavering commitment to taking care of our clients. In our materials, as we do at every year end, We have also included a series of 10-year historical charts that show solid progress on key metrics, evidence that our approach not only works but differentiates us from many of our peers. While this is not new information, we think these charts are meaningful evidence of our strong and consistent performance. And if you haven't already, I would encourage you to look at and review these materials. For the fourth quarter, net income was just over $123 million. a solid result given the recognition of a $34.4 million extraordinary expense related to the replenishment of the FDIC fund following the March bank failures, and an approximately $10 million expense related to the write-down of certain mortgage-related assets due to the falling interest rates during the quarter. We reported record net interest income of $470 million, up approximately $8 million from the third quarter as a result of both an increase in the net interest margin of two basis points to 364 and continued good loan growth. Deposits were also up in the quarter. Non-interest bearing deposits increased slightly and were steady as a percentage of total deposits. While we continue to expect credit performance to normalize from the very low levels experienced over the last few years, our losses and NPLs remain low. Despite these low credit losses, we've continued to build the allowance. And as you'll hear from Rich, we continue to proactively address challenged credits in our portfolio. I would highlight that our allowance coverage for core loans, excluding primarily our low loss insurance finance portfolio, is at a healthy 1.55%. This detail is in Table 12 of our press release. The market rate decreases during the quarter that caused the adjustment to the value of the mortgage assets also led to a material improvement in AOCI driving up our book value and capital levels. The tangible book value increased by $385 million to over $70 a share during the quarter. You'll see in one of the charts that I mentioned that our book value has increased every year during the 10-year period shown. And in fact, if you were to go further back, our tangible book value has increased every year since the company went public in 1996. Our liquidity position remains strong. Overall, a solid quarter, which we believe will compare well and may differentiate us relative to many of our competitors. With that, I'll turn this over to Dave and Rich. And as I mentioned, I'll come back and wrap up with some thoughts on the 2024 outlook. Great, thanks, Tim.

First, with respect to the balance sheet growth, we were again pleased to see loans for the quarter grow by approximately $686 million, or 7% on an annualized basis, consistent with our prior guidance of mid- to high-single-digit loan growth. The increase in loans was across many of the loan categories, but was primarily related to commercial real estate and commercial premium finance portfolio growth, and Rich Murphy will talk about that in just a little bit. The company also recorded deposit growth of $404 million during the quarter, which is a 4% increase over the prior quarter on an annualized basis. And as to deposit composition, non-interest-bearing deposits at the end of the third quarter and fourth quarter both represented 23% of total deposits, evidencing the stabilization of the non-interest-bearing balances during the latter half of 2023. Other balance sheet results were that total assets grew by approximately $705 million. We had slightly increased ending loan to deposit ratio, and our capital ratios were relatively stable, with most of those ratios increasing slightly. Overall, a very successful quarter for the growth of the franchise. Our differentiated business model, exceptional team and service, and the unique position in Chicago and Milwaukee markets continues to serve us very well in that regard. Turning to the income statement categories, starting with net interest income, for the fourth quarter of 2023, net interest income totaled $470 million, an increase of $7.6 million as compared to the prior quarter, and an increase of $13.2 million as compared to the fourth quarter of 2022. I should note that the fourth 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 an increase in average earning assets of approximately $509 million. An increase in the company's net interest margin also contributed to the increase in net interest income. The net interest margin was 3.64% in the fourth quarter, which was two basis points higher than the prior quarter level. 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. And based on the current interest rate environment, we believe we can maintain our net interest margin within a narrow range around the current levels during the first quarter of 2024 and beyond in 2024, assuming the rates stay roughly the same. I'd also like to note that total loans as of December 31st were $770 million higher than the average total loans in the fourth quarter, which obviously provides us with some momentum into the first quarter of 2024. The combination of the expected balance sheet growth and relatively stable net interest margin should allow for further growth of our net interest income in the first quarter of this year. Turning the provision for credit losses, Wintrust recorded a provision for credit losses of $42.9 million in the fourth quarter. This was up from a provision of $19.9 million in the prior quarter, but actually down from the $47.6 million of provision recorded in the year-ago quarter. The higher provision expense in the fourth quarter relative to the third quarter was primarily a result of higher net loan growth during the quarter, a slightly higher level of net charge-offs and some deterioration in the forecasted macroeconomic conditions, primarily wider forecasted BAA credit spreads and forecasted depreciation in the commercial real estate price index. Rich will talk about the credit and loan characteristics in just a bit. Regarding the other non-interest income and non-interest expense, total non-interest income totaled $100.8 million in the fourth quarter, which was down approximately $11.6 million when compared to the prior quarter. The primary reason for the decline was related to $20 million less of mortgage banking revenue. Relative to the third quarter, mortgage revenue had a $9.7 million unfavorable change in net valuation adjustments from our mortgage servicing rights assets and certain other mortgage-related assets that we hold at fair value. Those declines were really due to a decline late in the fourth quarter in the mortgage rates and accelerated prepayment speeds. We also experienced $7 million decline in production revenue due to seasonally lower volume and compressed gain on sale margins. But I think it's interesting to note that although our production revenue was lower than the prior quarter, it's actually higher than the fourth quarter of the prior year, which is encouraging for us. We also encourage that with the lower rate environment that our application volume is ticking up early in 2024 thus far. Albeit still at low levels, we are seeing increases over application volumes that we were receiving in January of last year. And application volumes that are slightly up from December of 23. There was a variety of relatively smaller changes to the other non-interest income categories as shown in the tables in the earnings release, but those changes were not unusual and in the aggregate resulted in an increase in the non-mortgage related categories of approximately $8.3 million from the prior quarter. Turning to non-interest expenses, non-interest expenses totaled $362.7 million in the fourth quarter and were up approximately $32.6 million from the prior quarter. The primary reason for the increase was the negative impact of the $34.4 million special assessment by the FDIC to pay for the two of the bank failures that occurred earlier in 2023. The remaining variances in non-interest expense, both positive and negative, offset to a relatively small reduction in non-interest expenses from the prior quarter, just under $2 million. In summary, it was a very solid quarter in our view, with good loan and deposit growth, a stable non-interest margin with a steady outlook, a record level of net interest income, and a continued low level of non-performing assets. We feel like we've managed well through a somewhat turbulent period in 2023, delivering net income that was a record for any full fiscal year in the company's history, and we have a positive outlook for continued growth in assets, revenue, and earnings. And although it's easy to get caught up in looking at the quarterly results, I think it's also instructive to occasionally look back over time. As Tim referred to, we included some 10-year charts in the earnings release that I think provide some impressive evidence that our approach to running the business has provided for consistent growth in loans, deposits, earnings, and tangible book value per share over an extended period of time, all while managing credit risk very well. We'll work hard to continue those trends in 2024 and beyond and increase shareholder returns. So with that, I'll conclude my comments and turn it over to Rich Murphy to discuss credit.