Wintrust Financial Corporation

Welcome to Wintrust Financial Corporation's first quarter 2024 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 during this call are detailed in our earnings press release and in the company's most recent form, 10-K. 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.

Thank you, Lateef. Good morning, everybody, and thank you for joining us for the Wintrust Financial first quarter earnings call. With me this morning are Dave Dykstra, our Vice Chairman and Chief Operating Officer, Rich Murphy, our Vice Chairman and Chief Lending Officer, Dave Starr, our Chief Financial Officer, and Kate Bogey, our General Counsel. In terms of an agenda, I'll share some high-level highlights. Dave Dykstra will speak to the financial results, and Rich Murphy will add some additional information and color on credit performance. I'll be back to wrap up with some summary thoughts on two topics, a high-level outlook going forward, followed by a few remarks on the announcement from this past Monday regarding our pending acquisition of Makatawa Bank. For the quarter, we reported record net income of just over $187 million. The results include a one-time gain from the previously announced partnership related to our 401k advisory business, and a further expense related to the replenishment of the FDIC deposit guarantee fund. Dave will speak to the relative amounts for these items and a handful of other items. Overall net of these atypical and mostly positive items, the quarter was strong and in line with our expectations. We grew both loans and deposits by slightly over a billion dollars with a net interest margin of 359. The loan growth was balanced nicely across all of our major businesses. Net interest income of $464 million was down just a bit from the fourth quarter, and if adjusted for the number of days in the quarter, would have been essentially flat. Our strong deposit growth reflects our continued ability to attract deposits and grow our franchise. During the quarter, however, we did see a decline in the average non-interest-bearing deposits of approximately $430 million. We attribute this in part to seasonal deposit flows, but also to clients using their funds to invest in projects and to hire liquid rate options. We continue to expect credit performance to normalize from the very low levels experienced over the last few years. However, our NPLs remain low, and our charge-offs reflect to a large degree the resolution of prior period reserve activity. Despite these modest credit losses, we continue to maintain a healthy allowance, and as you will hear from Rich, we also continue 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 portfolios, is at a healthy 1.51 percent. Market rate increases during the quarter impacted tangible book value, but despite these fluctuations, our tangible book value improved to a record level from the fourth quarter, and the strong earnings resulted in slightly improved capital ratios. Overall, it was 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. Afterward, again, I'll come back to wrap up in terms of what we're seeing and speak to the acquisition announcement.

All right. Thanks, Tim. First, with respect to the balance sheet growth in the first quarter, we're pleased to report solid loan growth at the high end of our guidance. Total loans grew by approximately $1.1 billion, or 10% on an annualized basis. Importantly, the increase in loans was broad-based, and Rich Murphy will discuss this in more detail in just a bit. We recorded corresponding deposit growth of $1.1 billion during the quarter, which is a 9% increase over the prior quarter on an annualized basis. As for the deposit composition, non-interest-bearing deposits declined on average by approximately $434 million in the first quarter relative to the fourth quarter of last year. and as of the end of the first quarter, represented approximately 21% of total deposits. The decline in the non-interest-bearing deposits, as Tim mentioned, was a result of businesses utilizing their cash rather than drawing on outstanding lines, some additional movement to interest-bearing deposit accounts, and some seasonality. And although the decline in average non-interest-bearing accounts follows several stable quarters, we're encouraged that thus far in the second quarter, Non-interest-bearing accounts are averaging a couple hundred million dollars more than they were in March. So we're hopeful that the first quarter dip rebounds a bit in the second quarter. As to other aspects of the balance sheet results, total assets grew by approximately $1.3 billion, and our regulatory capital ratios improved slightly despite this brown growth. Overall, it was another successful quarter for gaining new customers in our market and for the growth of our franchise, which has been the primary objective of WinTrust throughout its history. Our differentiated business model, acceptable team, and service and unique position in Chicago and Milwaukee markets continue to serve us well. As to the income statement categories, first I'm pleased to reiterate the first quarter was a record quarter, not only from the standpoint of quarterly net income, but also from the standpoint of quarterly net revenues. As Tim mentioned, our net interest income remained relatively steady with the fourth quarter of 2023. if adjusted for the number of days in the quarter. An increase in the average earning assets was essentially offset by a five basis point decline in the net interest margin. The slight decline in the net interest margin was primarily the result of a mixed shift in deposits and the pressure caused by a lower level of non-interest bearing deposits and the higher cost of attracting incremental deposits to fund the strong loan growth. These dynamics resulted in an interest margin of 359 for the first quarter and a run rate of approximately 3.5% at the end of the first quarter. Based on the current interest rate environment, the dynamics of the expected stronger loan growth in the second quarter, fluctuating non-interest-bearing deposits, and the incremental cost of funding elevated loan growth, we expect the net interest margin to be within a range around the levels where we ended the first quarter, or approximately 3.5%. As I mentioned, the exceptional Loan growth that we expect in the second quarter will require us to fund that growth in the short term with marginally higher deposit costs, which will likely pressure the margin a bit, but would represent an acceptable trade-off. Said another way, we're happy to take advantage of current market conditions and add high-quality loans and high-quality relationships, even if it means a bit of margin pressure in the short run. These new relationships will provide nice gains in market share and additional net interest income at acceptable returns. Turning to provision for credit losses, Wintrust recorded a provision for credit losses of $21.7 million in the first quarter, down from a provision of $42.9 million in the prior quarter, and down slightly from the $23 million provision expense recorded in the year-ago quarter. The lower provision expense in the first quarter relative to the prior quarter was primarily a result of improvement in forecasted macroeconomic conditions, primarily narrower forecasted BAA credit spreads. Rich will talk about the credit metrics and loan portfolio characteristics in just a bit. Regarding the other non-interest income and non-interest expense sections, total non-interest income totaled $140.6 million in the first quarter, which was up approximately $39.8 million when compared to the prior quarter. The reason for the increase related to two primary factors. First, as we disclosed in a news release during the first quarter, and as Tim mentioned, the company sold its retirement planning advisors division, which generated a net gain on the sale of assets of approximately $19.3 million. The net gain was comprised of a $20 million gross gain, which included another income and offsetting compensation expense of roughly $700,000. Second, the company generated approximately $20.2 million more in mortgage banking revenue, Relative to the fourth quarter of 23, mortgage revenue had $2.3 million of net favorable change in valuation adjustments from our mortgage servicing rates and certain other mortgage-related assets that we hold at fair value, whereas the prior quarter had a $9.7 million net unfavorable valuation adjustment, resulting in a positive swing of approximately $12 million. We also experienced a $6.6 million increase in production revenue due to slightly higher origination volumes and improved gain on sale margins. There are a variety of other smaller changes to non-interest income categories as shown in the tables in our earnings release, but these changes were not unusual and in the aggregate resulted in a decline of less than half a million dollars on a pre-tax basis if you take all the other categories in an aggregate manner. Non-interest income categories, Non-interest expenses totaled $333 million in the first quarter and were down approximately $29.5 million. The primary reason for the decline was the result of $29.2 million less in special assessments imposed by the FDIC to pay for the two bank failures that occurred earlier in 2023. The company recorded approximately $5.2 million of such expense in the first quarter due to the updated loss estimates provided by the FDIC. which was less than the $34.4 million expense recorded in the prior quarter. The remaining variances in non-interest expense, both positive and negative, offset to a small reduction of just under $300,000. A seasonal decline in advertising and marketing expenses and travel and entertainment expenses were offset by higher levels of other real estate-owned expenses and a variety of other relatively small increases from the prior quarter. including the aforementioned additional compensation expense related to the sale of the retirement planning advisor's division. In summary, a very solid quarter, good loan growth, good deposit growth, relatively stable net interest margin, a record level of quarterly net income, a record level of quarterly net revenues, and a continued low level of non-performing assets. So with that, I'll conclude my comments, and I'll turn it over to Rich Murphy to discuss credit.

Thanks, Dave. As Tim and Dave both noted, credit performance continued to be very solid in the first quarter from a number of perspectives. As detailed on slide six of the deck, loan growth for the quarter was $1.1 billion. The growth was driven by a number of factors. Core commercial loans, excluding leasing, were up $267 million, driven largely by quality opportunities resulting primarily from dislocation within the competitive banking landscape in our markets. In addition, we saw $170 million in growth from our warehouse line of credit portfolio resulting from strategic hires made last year, coupled with a recovering mortgage market. We also saw good growth in the commercial real estate portfolio, resulting largely from draws on existing construction loans. And finally, our leasing group had another very solid quarter. Loan growth for the past four quarters totaled $3.6 billion, or 9% annualized. We believe that loan growth for the second quarter of 2024 will continue to be strong and potentially greater than Q1 for a number of reasons. Historically, we experienced our highest growth in our commercial premium finance portfolio in the second quarter. During the second quarter of 2023, we saw these balances grow by just over $1 billion, and we expect similar growth during this coming quarter. We continue to see a hard market for insurance premiums, and we are benefiting from opportunities from consolidation within the premium finance industry. These loans are among the highest yielding in our portfolio. In addition, core C&I pipelines remain very solid, And finally, our leasing teams continue to see significant demand in the market. Offsetting this growth will be continued pressure on C&I line utilization, which dropped from 37% to 34% year over year, as higher borrowing costs have negatively affected usage. In addition, while we continue to see a number of new CRE opportunities, our CRE pipelines have slowed as higher borrowing costs have continued to affect loan demand. We anticipate that higher borrowing costs will continue to cause borrowers to reconsider the economics of new projects, business expansion, and equipment purchases. In summary, we continue to be optimistic about our ability to grow loans at attractive rates and maintain our credit discipline. As noted earlier, Q2 loan growth should be very strong and in excess of the total for Q1. In addition, we would anticipate total 2024 loan growth could be at the upper end of our guidance. From a credit quality perspective, as detailed on slide 13, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics. Non-performing loans as a percentage of total loans was virtually unchanged at 34 basis points, up by $9 million. As an aside, while core MPLs had a slight decrease for the quarter, we saw an uptick in non-performing loans in the commercial premium finance portfolio, resulting from increased cancellations in the transportation segment of that portfolio. We continue to monitor the situation closely and believe this number should stabilize and come down as a result of tighter loan structures and enhanced underwriting. Higher yields and late charges from this segment of the portfolio continue to offset our credit losses. Charge-offs for the quarter were 21.8 million or 21 basis points up from 14.9 million or 14 basis points in Q4. It's important to note the charge-offs for this quarter were largely reserved for in Q4. Finally, as detailed on slide 13, we saw stable levels in our special mention and substandard loans. As noted in our last few earnings calls, we continue to be highly focused on our exposure to commercial real estate loans, which comprise roughly one quarter of our total portfolio. Higher borrowing costs and pressure on occupancy and lease rates continue to affect CRE valuations, particularly in the office category. During the first quarter, we saw a modest increase in CRE NPLs from 0.31% to 0.34% up $4 million. On slide 17, we continue to provide enhanced detail on our CRE office exposure. Currently, this portfolio remains steady at 1.6 billion or 13.5% of our total CRE portfolio and only 3.6% of our total loan portfolio. Of the 1.6 billion of office exposure, 44% is medical office or owner-occupied. The average size of a loan in the office portfolio is only 1.5 million. We have only six loans above $20 million, and only three of which are non-medical or owner-occupied. We perform portfolio reviews regularly on our CRE portfolio, and we stay very engaged with our borrowers. As mentioned on prior calls, our CRE credit team regularly updates their deep dive analysis of every loan over $2.5 million, which will be renewing between now and the end of the fourth quarter of 2024. This analysis, which covered 78% of all CRE loans maturing during this period, resulted in the following. Half of the loans reviewed will clearly qualify for a renewal at prevailing rates. Roughly 30% of these loans are anticipated to be paid off or will require a short-term extension at prevailing rates. The remaining 90% of these loans will require some additional attention, which could include a pay down or a pledge of additional collateral. We continue to back check the results of these tests conducted during prior quarters and have found that the projected outcomes versus actual outcomes were very tightly correlated and, generally speaking, borrowers of loans deemed to require additional attention continue to support their loans by providing enhancements, including principal reductions. Again, our portfolio is not immune from the effects of rising rates or the market forces behind lease rates, but we continue to proactively identify weaknesses in the portfolio and work with our borrowers to identify the best possible outcomes. We believe that our portfolio is in reasonably good shape, appropriately reserved, and situated to weather the challenges ahead. That concludes my comments on credit, and I'll turn it back to Tim.

Well, you can tell we continue to believe that we're well positioned to take advantage of the current environment with our diverse businesses. And as you also heard, we expect to see relatively strong growth in the coming months. To some of the earlier comments from both Dave and Rich, if we experience loan growth at the high end or above the high end of our forecasted range, which we believe is possible, that could pressure the net interest margin from the current levels, particularly in the second quarter. If that were to occur, the tradeoff is solid franchise growth and favorable net interest income performance in future quarters. To add some financial context, our projection is that net interest income for the second half of the year will come in higher than for the first half, and that while there are a lot of moving parts, the current consensus pre-provision net revenue number looks about right to us. With respect to the announcement regarding Macatawa Bank, We've enjoyed speaking to many of you over the past couple of days, and we've also shared the transaction highlights document, so my summary is succinct. We are very excited about this opportunity. As we've mentioned on prior calls, for several reasons, the current population of attractive targets has been quite limited. Macatawa serves the greater Grand Rapids, West Michigan market, which is a top 50 MSA in the United States. They have pristine credit quality, net charge-offs are negative for the past three years, and virtually no non-performing loans. They stayed short with their securities portfolio, have a limited population of fixed-rate loans, and a very attractive low-cost deposit book. Their loan-to-deposit ratio is 55%, which translates to $1.1 billion in excess deposits, which in this environment we would deploy at a substantially higher rate. Lastly, Macatawa has a committed leadership team excited about the transaction. While we have business in Northern Indiana and West Michigan today, we do not have a physical footprint. And I can tell you that there are not many banks, if any at this point, with this good a profile financially and such a good cultural fit. I'm not exaggerating when I say this is an ideal platform for our expansion in West Michigan, and we are very pleased to have this moving forward. At this point, I'll pause and we can take some questions.

As a reminder, to ask a question, you will need to press star 1-1 on your telephone. To remove yourself from the queue, you may press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Armstrong of RBC Capital Markets. Please go ahead, John.

Hey, thanks. Good morning.

Morning, John.

Hey, Kim, thanks for the help on some of the margin and net interest income dynamics. But can you guys touch on those non-interest bearing levels and confidence that those balances can stabilize and then touch on some of the pricing trends you expect in the money markets and savings products? And I understand the second quarter is comments on the margin, but I'm just curious if some of that stuff is burning out and could be, you know, less of an issue in the third quarter.

Yeah, I mean, we're obviously hopeful that the half of the DDA balances that were out on average in the first quarter have more or less come back and that that will stick, John. You know, with market rates up You know, some of the competition that we'd seen subsiding, you know, kind of is back in the market. And so, you know, you're around 5% for some of the promotional or marginal deposit growth. But, you know, we were pleased in the first quarter to match the deposit growth with the loan growth. And, you know, it just came at a little higher cost than we expected.

Okay. All right. Fair enough. Okay. And then, Dave, maybe for you, can you unpack mortgage a bit in terms of your expectations there? You talked about slightly higher origination volumes, but typically you guys see pretty strong Q2 and Q3. What kind of expectations do you have there?

Wow. You know, where we finished the fourth quarter was pretty low, and I guess the color I can give you is January's applications were higher than December, and February was higher than January, and March was higher than February. But it's not been like a hockey stick-up. It's just been a tick-up. And so far in April, the application volumes are somewhat similar to March. But we are sort of expecting the spring buying season to help. And although, you know, the increase in rates here recently hasn't been helpful, but there is a lot of pent-up demand out there. We've got more than our normal share of people asking for, you know, pre-qualification letters and the like, which to us indicates that there's some pent-up demand. So we do sort of expect the spring buying season to pick up, even though there is a shortage of supply. And so we would expect the second quarter to be better than the first quarter, despite the higher rates that we're seeing now. Now, we're only two weeks into the second quarter, but we're optimistic, I guess.

Yeah. Okay. Good. That's helpful. All right, guys, I appreciate it. I'll step back. I'm sure there are others with questions, but numbers look good. Thank you.

Good. Thanks, Chad.

Thank you. Our next question comes from the line of Chris McGrady of KBW. Your line is open, Chris.

All right, great morning. Dave, maybe a question for you. I think in your prepared remarks, you said the consensus PPNR numbers look okay. I guess, what are your expectations for margins? You know, you talked about kind of a little bit of pressure, you know, for growth purposes. But if we do get the forward curve, is the range that you've previously guided on the margins still good or is it going to be kind of maybe trending below that?

No, I think it's still good. I think we're fairly neutral now on any, you know, the consensus is a couple rate cuts. We don't think that that impacts us dramatically. The bigger pressure here is simply do you hold the DDA? And we've seen, like Tim and I have said, we've seen a bounce back so far this quarter. And then just really strong loan growth. We're going to be above the top end of our guidance in the second quarter, we believe. And just to fund that short term is just a little bit more expensive we're seeing in the market than if you were to just grow the deposits in the mid-single-digit sort of range. So just a little bit of pressure there. But as I said, we're sort of thinking around the three-and-a-half range right now. Lots of moving parts, but We wouldn't expect that to change dramatically based upon any moves by the Fed one way or the other if there are 25 or 50 basis points.

Okay. And just the guidance is mid to upper single is kind of the long growth that you're talking about?

Well, for the year, I think, as Rich said, we think we're at the high end of that guidance. We think the second quarter will be above that range. It's a strong quarter for premium finance, and the pipelines are full. So we actually think we'll have a stronger growth quarter for loans in the second quarter than we did in the first quarter.

Okay. Thanks for that. In terms of the deal, I think I get the quality of the bank you're buying and the market extension. Okay. Could you help us with accretion expectations or ranges? It's about 5% of your balance sheet. In terms of size, is that a reasonable range of what you might be able to extract from it? I know the balance sheet probably has some finessing to do given they're underloaned and have a lot of liquidity.

Yeah. Yeah, Chris, I mean, it's early, obviously, and we're working those numbers, but I think we're going to stick with what we've said, which is accretive excluding the integration expense in year one. There's lots of opportunity here. This is a great fit for us. The market's terrific. It grows faster than Chicago, for example, on households, and we're really excited about this.

And the excess liquidity they have, given the strong loan growth we're talking about, we think we can really put the, to utilize almost on day one in a higher rate asset class.

Thanks for all that. Just wanted to come back to the prior comment on the PPNR. It feels like you're being a little conservative given how optimistic you are on growth. Is there something I guess we're missing as analysts that wouldn't suggest that there's an upward bias to the numbers?

Chris, I think we're just you know, cautious about what the deposit environment is going to look like if we have to fund a lot of growth. And that's a good news story for us that, you know, we're going to have good growth. We're adding good names. You know, they'll be with us for a long time. But, you know, growth of, you know, we did a billion dollars plus this quarter and have to do it again next quarter, you know, is causing some upward pressure.

Okay. Thanks, Tim.

Yep.

Thank you. Our next question comes from the line of David Long of Raymond James. Please go ahead, David.

Good morning, everyone. So you started the year with record results. Does this impact your appetite for marketing or other investment spending throughout the rest of 2024? And specifically, I'm thinking about You know, you get an increase in revenue. Is that going to lead to incremental investing in projects? And then also with a lot of your peer banks or competing banks on risk-weighted asset diets or just coming off of them, is there an appetite to hire some veteran bankers from other organizations where they may be restricted in their ability to grow their business right now?

Well, I'll comment. I'm sure Tim will chime in, too. But, you know, we have a pretty, we kind of do a three-year plan for our investments in technology and projects, and we'll stick with that. We have so many resources. So, we want to control expenses, too, but continue to invest in the business. I don't think that would change much. marketing is, you know, we want to continue to grow the franchise, and raising those deposits is important, so we'll probably stick with our normal plan, although it probably gets up a little bit, as you know, in the second and the third quarters because of the seasonality of our sponsorships and the like. But, so, you know, I think we're going to attempt to control expenses well. Just because you have record profits doesn't mean you have to spend them, but when it comes to When it comes to people, we're always looking for good people. And we did that with some folks in the mortgage warehouse space recently, and we'd always look for good people. If they can produce good quality franchise value and growth, happy to add people as they become available. But that's always the case.

Yeah, I don't think I'd add much. I mean, we've got great momentum as things stand right now, so I think we're reasonably happy with the forward outlook here.

Got it. Thank you. And then just as a follow-up, I want to go back to the deposits. Any categories right now where you're actually seeing some reductions in deposit prices? Can you start to price anything lower at this point, or is everything still sort of turning north?

Yeah, Dave, it's an interesting question because we're hearing some competitor institutions, you know, really with no rate movement in the market, trying to take some rates down, and we're watching that carefully. We've not been active in that regard, primarily because our intent is to grow pretty aggressively. But we are watching some people trying to kind of trend down in terms of their deposit costs.

Got it. Thanks, guys. Appreciate it.

Thank you. Our next question comes from the line of Casey Hare of Jefferies. Your line is open, Casey.

Yeah, great. Thanks. Good morning, everyone. Another question on the funding strategy. Sorry if I missed this, but how much do you expect CDs to drive funding? deposit growth going forward after a very strong first quarter? And then what is the marginal cost of CDs today?

Well, kind of two answers to that question. I mean, we're running both money market and promotional CD type offers in the market and getting traction on both. I don't have the exact percentage, Casey, in terms of the mix, CDs versus other, but the CD market, most people have kind of shortened up waiting to see what happens to rates and, you know, seven to 12 or 15 month type stuff is in the five or low five range. And, you know, we're in that category too. But, you know, we're having good success there and, you know, we're adding new names, which we like a lot. And so, you know, I'd say marginal money markets are, you know, in the four range, marginal CDs in the five range.

Gotcha. Okay. And then on slide 10, your, your, um, and I simulations, you're actually showing positive, you're, you're showing asset sensitive and liability sensitive. Um, I assume that's tied to the lag in commercial, uh, commercial premium finance. Um, I'm just wondering when does, so what, and which I think that plays out, um, in August, so I'm just wondering, can you just provide some color on that dynamic? Very interesting simulation that you guys are showing there.

Yeah, well, like I said, we think we're relatively neutral, but the main reason it has that dynamic is we think in down-rate scenarios, we'll be able to reduce our deposit rates pretty much basis point for basis point, you know, those that are, you know, not time- time deposits. So, if you had a money market rate, we would expect to reduce those 25 basis points if the Fed goes down 25. On the upside, we just think the beta is a little slower, that we're not going to raise our deposit prices immediately if rates go up. And so, you would have a lesser beta on the up and a greater beta on the downside, and then you'd have the repricing on the assets like you talked about. It's relatively neutral, as you can see, but the betas on the deposit is what's sort of creating that dynamic, the beta assumptions.

Gotcha. Thank you.

Thank you. Thank you. Our next question comes from the line of Terry McEvoy of Stevens, Inc. Your question, please, Terry.

Hi, it's Terry McEvoy. Good morning. Could you maybe provide a bit more color, if you could, on the commercial loan growth in the first quarter, the $670 million? I know you mentioned some of it was mortgage warehouse. The rest was market share gains. Just maybe expand industries of these larger banks, smaller banks, and what's behind that growth?

Yeah, Terry, it's interesting. I think we've talked a little bit in the past about what's happened in the Chicago market. We have seen tremendous consolidation, a number of our meaningful competitors like MB and Private and First Midwest are all gone. And so there's just a lot of dislocation. Things don't happen immediately. They just take time. But we are just seeing a tremendous amount of opportunities as a result of that dislocation. We're also seeing a lot of opportunities out of the much larger banks that have a presence in Chicago where They're just not, customers are not feeling a real good connection and communication with some of those situations right now. So we're just seeing a lot of really nice opportunities, frankly, that five years ago we just never would have thought we would see. They tend to be a little bit bigger. We see a lot more opportunities kind of upmarket. And then within our Timothy Stenzel, Community bank footprint we're just again seeing a lot of really good small and medium sized opportunities, so the competitive dynamics as TIM has pointed out, are very much in our favor right now on the lending side.

Thanks for that and then as a follow up yet we talked about the strong loan production, but but expenses look like they came in below consensus. Timothy Stenzel, If that loan production Q2 picks up and maintain throughout the year. Could you maybe talk about how that will impact the salary and benefit line or expenses overall? Because looking in the past, there tends to be a correlation with big production quarters and an increase in expenses.

A little bit. And our expenses, to Dave's point earlier, tend to trend up a little bit in the second and third quarter generally related to marketing. But in the insurance portfolios, we are very efficient. And so incremental volume, while it has an expense impact, is not a big driver. So I would think you would expect modest changes, not kind of trajectory changes with strong loan growth. Thanks for taking my questions. You bet.

Thank you. Our next question comes from the line of Nathan Race of Piper Sandler. Please go ahead, Nathan.

Yeah. Hi, guys. Good morning. Good morning, Nate. Good morning. Can we kind of talk about credit trajectory for you guys, maybe in terms of charge-offs? I mean, you guys have obviously had excellent credit trends, you know, for several years now. So, just curious how you kind of think about kind of a normalized charge-off range for you guys going forward in a higher, longer environment?

Yeah, go ahead. I'll chime in and then Rich can chime in. But, you know, we're in the 21 basis point range or so this quarter and, you know, in the teens generally before a couple quarters in the singles. But I think we generally think that we write to sort of a 20 to 25 basis point loss. And we haven't been there for a number of years, right? So we keep thinking things will normalize over time, but we think if you're in that 20 basis point or less, or 20, 25 basis point or less, it's sort of a reasonable range to be in and, you know, so I think 2025 is what we think of as normal. And over the course of the year, we haven't seen that recently, but a little trend up in this quarter. We had some larger ones, but as we talked about, we fully reserved for most of those in prior quarters. So, just kind of clearing them out and being proactive.

Yeah, no, I think I would agree with everything Dave said. And the other thing I would just kind of keep in mind is, you know, it's not necessarily linear. You know, as you see with, you know, a lot of other banks, you know, there's one-offs. So, you know, things just happen. So periodically you could have, you know, something higher, but I think you'll see a lot lower too. So, you know, but if you take a look over time, I think what Dave said is exactly true around that 20 to 25 basis point range.

Okay, great. And then I noticed the office CRE portfolio grew a good amount in the quarter. Just curious in terms of what type of opportunities you're seeing both in terms of the type of office and also in what geographies as well.

Yeah, good catch. Right now, as you can imagine, there is very little appetite out there for office, but We have seen, as we've talked about on other calls, we have seen some opportunities out there where they're owner-occupied, well-tenanted. In this case, these were medical office situations, but you can really get very good structure in terms of just overall equity contribution and pricing as well. We look at it, and we don't think that our exposure here is certainly not overweight in that category, and we think we have some room. Not that we're out there trying to actively grow that portfolio, but when you see those opportunities, it's great to be out in that market and still have availability.

Not that we're looking for office deals, but consistency matters to our clients, and it's important for us to be in the market, and as others sort of sit on the sidelines, we think we're getting terrific opportunities.

Yeah. To your geography question, generally speaking, our portfolio tends to be more Midwest-focused, not exclusively, but in this case, this was a Midwestern-based opportunity.

Okay, great. And then maybe just one last one, if I could, for Tim. In light of the acquisition announcement earlier this week, you guys are – it seems like that should be accretive to your capital ratios going forward. So just curious to hear kind of the appetite for additional acquisitions over the next year or so, particularly as you maybe look to fill in, you know, up towards the Grand Rapids area, essentially.

Sure. You know, number one, we think we're reasonably good at acquisitions. So we're confident that we'll get this integrated and moving the right direction quickly. And we start from a terrific place because this is a really good bank. You know, we're not going to try to do several at the same time, so we're probably on the sidelines for a little bit here. But, you know, we're having conversations and continuing to look at, you know, what makes the most sense for us going forward.

Okay, great. I appreciate the color. Thanks, guys. Congrats.

Thanks, Nate. Appreciate it.

Thank you. Our next question comes from the line of Ben Gerlinger of Citi. Please go ahead, Ben.

Hey, good morning, everyone.

Hey, Ben.

I'm just going to kind of touch base on what Nate just asked. If you could just give us a little bit of background. I know that you guys have a presence. It's just not a branch footprint in the western Michigan area. Why do this deal exist? It seems like you have a good growth this year. I mean, to be honest, I think you're, I think they're just probably going to end up with a conservative. You're probably closer to like 12% growth. Surely it's not just deposits and liquidity, but why did it feel now kind of at the risk of potentially taking your eye off the ball for what could be or likely to be a really healthy year for growth organically?

Well, I don't think we think we're taking our eye off the ball. We think this is part of our, strategy to grow in the Midwest and to take good care of clients. And as you say, we do not have a footprint in the area right now, but we do have material business in both northern Indiana and west Michigan. We just opened a new location in Crown Point less than a month ago. And so great market. And, you know, at this point, if the question was, do you wait for something different to come along, we think McIntyre was a terrific fit for us. the growth opportunities in West Michigan are good. It's a well-run bank. It's a committed leadership team. We just feel like this was the right franchise at the right time.

Gotcha. That's helpful. And then for the accretion perspective, it's a very efficient bank, like you said, to begin with, other than just kind of mixing the two balance sheets. Is there expense synergies to be had in 25, or is it largely just the pro forma, one plus one equals more than two?

Well, Dave can add to this too. I mean, there's likely some overlap type activity, but we think, and I think they think, that we'll bring capabilities to them that will be productive in the market in terms of both existing clients and new opportunities. So whether it's treasury services or digital banking services or expertise in certain lending areas, I think there's a lot of synergy here and a lot of upside.

Yeah, you always get some cost synergies. We should be able to leverage our buying capacity in a fashion where we can probably drive things like insurance costs and DP costs, and those sort of costs are lower, and so there will be some cost savings. But we aren't closing any branches. There's no plan to close branches. We plan to grow in that market area. They're a public company, so some of those public company costs will go away. We won't need a separate audit, et cetera. So there are cost savings there, but this is a get a partnership with a great franchise and a great market and grow like we've done our entire life with banks.

That makes a lot of sense. I appreciate the color. Congrats, Scott. Pretty solid year ahead of you here.

Thank you.

Thank you. Our next question. Our next question comes from the line of Jeff Rulis of DA Davidson. Your question, please, Jeff.

Thanks. Good morning. Just a couple credit follow-up questions. On the pickup in non-performing loans and the P&C segment, anything timing related? We've talked a lot about credit normalization, but just wanted to see if there's anything specific in that segment that drove the increase?

No, as I mentioned, transportation tends to be a little bit of an issue right now. Just obviously, that's no news to anybody. The freight rates are down. Revenue is down in that segment. It causes for more stress on those borrowers, and as a result, cancellations have ticked up. But I don't think ultimately it is a material concern of mine. I think our teams are working to make sure that we're very efficient on collection. They're working as we go forward on structuring those deals a little bit tighter. But again, given the level of late fees and overall rates that we earn on those, it's still a good trade for us.

Yeah, and the other thing, Jeff, I would chime in there with is they're listed as non-performing, but when they go into non-performing status, if we're short on collateral, we've already taken the charge off. So we're generally just waiting for that return premium to come to us from the carrier. So it's not really an indication of larger losses that come down the pike, because if we're short on collateral, we've already taken the loss. We're just waiting for the money to come back from the carriers.

Understood. Thanks. And then just a similar question on the charge-off side, the CNI front. I know you mentioned in Q4 a lot was reserved for, but within the CNI bucket, are you seeing any commonalities, vintage or business category? I don't recall what kind of came on or what you reserved for in Q4, but just looking at the CNI bucket, what was charged off?

Yeah, in the CNI category, we had some exposure in our franchise group that we recognized, but I think that was largely kind of more of a one-off type situation. You know, if there was one area that I would point to, again, it would be transportation. We don't have a huge amount of exposure there, but it definitely is an area where we're just seeing not only in the P&C side, but in the core portfolio, just having more stress. But as it relates to the charge-offs, it was largely focused on some existing CRE exposure that we reserved and a little bit of just miscellaneous CNI and a little bit of franchise exposure.

Thanks, Rich. And housekeeping, on the sale of the retirement advisor business, is there a go-forward impact on fees and expenses? Is that roughly a wash, just trying to see if we need an adjustment there?

It's modest. The fees generally go down a little bit as we have a partner, and we also lose some expenses. But it's very modest, and I don't think it's going to move your numbers.

Okay. And maybe I'll squeeze in just one last one. About a five-month pause here on hedges. You think you're largely in good shape there, I guess, barring running into maturities of those? Do you feel like we hold or – probably an active conversation, but just wanted to see if we got an extended pause here.

Yeah, no, we talk about it a lot and, you know, we just are kind of watching for the time being. I mean, we'll certainly kind of, as we get closer to when some of these roll off, be more active or could be more active, but, you know, the rate environment right now is uncertain and, you know, we're seeing people talk about, you know, either rates higher for longer or rates up as opposed to rates down. So I think we're happy with where we are right now.

Okay, thank you.

Thank you. Our next question comes from the line of Jared Shaw of Barclays. Please go ahead, Jared.

Hi, good morning. Thanks for the questions. I just wanted to circle back on the deal in terms of the timing. That seems like a great timeline for closing. With the commentary coming out of regulators recently, it sounds like deals for banks will be more difficult. Do you feel that there'll be an opportunity for you to do more deals going forward after you integrate this? You seem pretty optimistic in the outlook there.

Well, you know, we hope so. You know, we're a community-oriented, high-quality bank. We think Macatawa is same in terms of their profile. And so, you know, we'll go through the process, but we hope that this gets approved rapidly. And, you know, as we talked about earlier, we'll continue to have conversations and look for other opportunities. But I can tell you again, no hesitation on our part with respect to Macatawa. We think this is exactly the right fit in a very good market right now.

Okay, thanks. And what's the earliest or projected credit mark on the portfolio?

Well, we haven't disclosed that, but they are a public company. You can look at their public filings, and as Tim mentioned earlier, they've had net recoveries for a few years, a very conservative, well-run credit function. I wouldn't expect much from that, and you could tell that just from looking at their public disclosures.

Okay, okay. And then you had highlighted the excess funding coming from the deal. If we do see accelerated loan growth from the core bank, would you look at adding wholesale funding as a short-term fix until those excess funds come on, or should we really be thinking that you're going to match fund all loan growth with full market price deposits?

No, we sometimes use wholesale funding to fund the growth because we can never match it perfectly, right? But our plan long-term is even if you backfill in short-term with wholesale funding, we continue to grow our core consumer and commercial funding in a manner that you don't have to rely on the wholesale funding long-term. But sometimes you have to backfill in if the loan growth is a much, more accelerated than your standard deposit gathering activities. But it's not a long-term plan. It's a short-term gap filler plan.

Yep. Okay. Great. Thanks. And then just finally for me, you talked about the better spread opportunity on commercial lending. Where are you seeing spot rates for new C&I loans now in the market?

It's a pretty broad range. I mean, you can, you know, for really high quality, well-secured, well-structured opportunities where you're getting a lot of treasury, you know, you could be in the 250 range. But we're still seeing, you know, rates that are still very attractive north of that. on smaller deals and deals where there's a little bit more structural issues. But generally speaking, our job, as we talked about, is really bringing these customers in because you don't get these opportunities very often. So our bankers are incredibly eager to win these opportunities when they're out there. I'm not saying that we're going to be the lowest price necessarily, but we're certainly, if it's a deal that we want, we're going to work hard to win it.

Great. Thank you.

Thank you. I would now like to turn the conference back to Tim Crane for closing remarks. Sir?

Thank you, Lateef. And for all of you that have participated this morning, thank you not only for today, but for your feedback and insights over the last couple of days as we've talked about the transaction. I think you can tell we're excited both about the opportunities in Chicago and about the pending acquisition. And as always, we'll work hard to deliver. So thank you for your time this morning. We'll wrap it up.

This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Thank you. Thank you. Welcome to Wintrust Financial Corporation's first quarter 2024 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 during this call are detailed in our earnings press release and in the company's most recent form, 10-K. 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.

Thank you, Lateef. Good morning, everybody, and thank you for joining us for the Wintrust Financial first quarter earnings call. With me this morning are Dave Dykstra, our Vice Chairman and Chief Operating Officer, Rich Murphy, our Vice Chairman and Chief Lending Officer, Dave Starr, our Chief Financial Officer, and Kate Bogey, our General Counsel. In terms of an agenda, I'll share some high-level highlights. Dave Dykstra will speak to the financial results, and Rich Murphy will add some additional information and color on credit performance. I'll be back to wrap up with some summary thoughts on two topics, a high-level outlook going forward, followed by a few remarks on the announcement from this past Monday regarding our pending acquisition of Makatawa Bank. For the quarter, we reported record net income of just over $187 million. The results include a one-time gain from the previously announced partnership related to our 401k advisory business, and a further expense related to the replenishment of the FDIC deposit guarantee fund. Dave will speak to the relative amounts for these items and a handful of other items. Overall net of these atypical and mostly positive items, the quarter was strong and in line with our expectations. We grew both loans and deposits by slightly over a billion dollars with a net interest margin of 359. The loan growth was balanced nicely across all of our major businesses. Net interest income of $464 million was down just a bit from the fourth quarter, and if adjusted for the number of days in the quarter, would have been essentially flat. Our strong deposit growth reflects our continued ability to attract deposits and grow our franchise. During the quarter, however, we did see a decline in the average non-interest-bearing deposits of approximately $430 million. We attribute this in part to seasonal deposit flows, but also to clients using their funds to invest in projects and to hire liquid rate options. We continue to expect credit performance to normalize from the very low levels experienced over the last few years. However, our NPLs remain low and our charge-offs reflect to a large degree the resolution of prior period reserve activity. Despite these modest credit losses, we continue to maintain a healthy allowance. And as you'll hear from Rich, we also 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 portfolios, is at a healthy 1.51 percent. Market rate increases during the quarter impacted tangible book value, but despite these fluctuations, our tangible book value improved to a record level from the fourth quarter, and the strong earnings resulted in slightly improved capital ratios. Overall, it was 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. Afterward, again, I'll come back to wrap up in terms of what we're seeing and speak to the acquisition announcement.

All right, thanks, Tim. First, with respect to the balance sheet growth in the first quarter, we're pleased to report solid loan growth at the high end of our guidance. Total loans grew by approximately $1.1 billion last or 10% on an annualized basis. Importantly, the increase in loans was broad-based, and Rich Murphy will discuss this in more detail in just a bit. We recorded corresponding deposit growth of $1.1 billion during the quarter, which is a 9% increase over the prior quarter on an annualized basis. As for the deposit composition, non-interest-bearing deposits declined on average by approximately $434 million in the first quarter relative to the fourth quarter of last year. and as of the end of the first quarter represented approximately 21% of total deposits. The decline in the non-interest-bearing deposits, as Tim mentioned, was a result of businesses utilizing their cash rather than drawing on outstanding lines, some additional movement to interest-bearing deposit accounts, and some seasonality. And although the decline in average non-interest-bearing accounts follows several stable quarters, we're encouraged that thus far in the second quarter, Non-interest-bearing accounts are averaging a couple hundred million dollars more than they were in March. So we're hopeful that the first quarter dip rebounds a bit in the second quarter. As to other aspects of the balance sheet results, total assets grew by approximately $1.3 billion, and our regulatory capital ratios improved slightly despite this brown growth. Overall, it was another successful quarter for gaining new customers in our market and for the growth of our franchise, which has been the primary objective of WinTrust throughout its history. Our differentiated business model, acceptable team, and service and unique position in Chicago and Milwaukee markets continue to serve us well. As to the income statement categories, first I'm pleased to reiterate the first quarter was a record quarter, not only from the standpoint of quarterly net income, but also from the standpoint of quarterly net revenues. As Tim mentioned, our net interest income remained relatively steady with the fourth quarter of 2023. if adjusted for the number of days in the quarter. An increase in the average earning assets was essentially offset by a five basis point decline in the net interest margin. The slight decline in the net interest margin was primarily the result of a mixed shift in deposits and the pressure caused by a lower level of non-interest bearing deposits and the higher cost of attracting incremental deposits to fund the strong loan growth. These dynamics resulted in an interest margin of 359 for the first quarter and a run rate of approximately 3.5% at the end of the first quarter. Based on the current interest rate environment, the dynamics of the expected stronger loan growth in the second quarter, fluctuating non-interest-bearing deposits, and the incremental cost of funding elevated loan growth, we expect the net interest margin to be within a range around the levels where we ended the first quarter, or approximately 3.5%. As I mentioned, the exceptional loan growth that we expect in the second quarter will require us to fund that growth in the short term with marginally higher deposit costs, which will likely pressure the margin a bit, but would represent an acceptable tradeoff. Said another way, we're happy to take advantage of current market conditions and add high quality loans and high quality relationships, even if it means a bit of margin pressure in the short run. These new relationships will provide nice gains in market share and additional net interest income at acceptable returns. Turning to provision for credit losses, Wintrust recorded a provision for credit losses of $21.7 million in the first quarter, down from a provision of $42.9 million in the prior quarter, and down slightly from the $23 million provision expense recorded in the year-ago quarter. The lower provision expense in the first quarter relative to the prior quarter was primarily a result of improvement in forecasted macroeconomic conditions, primarily narrower forecasted BAA credit spreads. Rich will talk about the credit metrics and loan portfolio characteristics in just a bit. Regarding the other non-interest income and non-interest expense sections, total non-interest income totaled $140.6 million in the first quarter, which was up approximately $39.8 million when compared to the prior quarter. The reason for the increase related to two primary factors. First, as we disclosed in a news release during the first quarter, and as Tim mentioned, the company sold its retirement planning advisors division, which generated a net gain on the sale of assets of approximately $19.3 million. The net gain was comprised of a $20 million gross gain, which included another income and offsetting compensation expense of roughly $700,000. Second, the company generated approximately $20.2 million more in mortgage banking revenue, Relative to the fourth quarter of 23, mortgage revenue had $2.3 million of net favorable change in valuation adjustments from our mortgage servicing rights and certain other mortgage-related assets that we hold at fair value, whereas the prior quarter had a $9.7 million net unfavorable valuation adjustment, resulting in a positive swing of approximately $12 million. We also experienced a $6.6 million increase in production revenue due to slightly higher origination volumes and improved gain on sale margins. There are a variety of other smaller changes than non-interest income categories as shown in the tables in our earnings release, but these changes were not unusual and in the aggregate resulted in a decline of less than half a million dollars on a pre-tax basis if you take all the other categories in an aggregate manner. Non-interest income categories, Non-interest expenses totaled $333 million in the first quarter and were down approximately $29.5 million. The primary reason for the decline was the result of $29.2 million less in special assessments imposed by the FDIC to pay for the two bank failures that occurred earlier in 2023. The company recorded approximately $5.2 million of such expense in the first quarter due to the updated loss estimates provided by the FDIC. which was less than the $34.4 million expense recorded in the prior quarter. The remaining variances in non-interest expense, both positive and negative, offset to a small reduction of just under $300,000. The seasonal decline in advertising and marketing expenses and travel and entertainment expenses were offset by higher levels of other real estate-owned expenses and a variety of other relatively small increases from the prior quarter. including the aforementioned additional compensation expense related to the sale of the retirement planning advisor's division. In summary, a very solid quarter, good loan growth, good deposit growth, relatively stable net interest margin, a record level of quarterly net income, a record level of quarterly net revenues, and a continued low level of non-performing assets. So with that, I'll conclude my comments, and I'll turn it over to Rich Murphy to discuss credit.

Thanks, Dave. As Tim and Dave both noted, credit performance continued to be very solid in the first quarter from a number of perspectives. As detailed on slide six of the deck, loan growth for the quarter was $1.1 billion. The growth was driven by a number of factors. Core commercial loans, excluding leasing, were up $267 million, driven largely by quality opportunities resulting primarily from dislocation within the competitive banking landscape in our markets. In addition, we saw $170 million in growth from our warehouse line of credit portfolio resulting from strategic hires made last year, coupled with a recovering mortgage market. We also saw good growth in the commercial real estate portfolio, resulting largely from draws on existing construction loans. And finally, our leasing group had another very solid quarter. Loan growth for the past four quarters totaled $3.6 billion, or 9% annualized. We believe that loan growth for the second quarter of 2024 will continue to be strong and potentially greater than Q1 for a number of reasons. Historically, we experienced our highest growth in our commercial premium finance portfolio in the second quarter. During the second quarter of 2023, we saw these balances grow by just over $1 billion, and we expect similar growth during this coming quarter. We continue to see a hard market for insurance premiums, and we are benefiting from opportunities from consolidation within the premium finance industry. These loans are among the highest yielding in our portfolio. In addition, core C&I pipelines remain very solid, And finally, our leasing teams continue to see significant demand in the market. Offsetting this growth will be continued pressure on C&I line utilization, which dropped from 37% to 34% year over year, as higher borrowing costs have negatively affected usage. In addition, while we continue to see a number of new CRE opportunities, our CRE pipelines have slowed as higher borrowing costs have continued to affect loan demand. We anticipate that higher borrowing costs will continue to cause borrowers to reconsider the economics of new projects, business expansion, and equipment purchases. In summary, we continue to be optimistic about our ability to grow loans at attractive rates and maintain our credit discipline. As noted earlier, Q2 loan growth should be very strong and in excess of the total for Q1. In addition, we would anticipate total 2024 loan growth could be at the upper end of our guidance. From a credit quality perspective, as detailed on slide 13, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics. Non-performing loans as a percentage of total loans was virtually unchanged at 34 basis points, up by $9 million. As an aside, while core MPLs had a slight decrease for the quarter, we saw an uptick in non-performing loans in the commercial premium finance portfolio, resulting from increased cancellations in the transportation segment of that portfolio. We continue to monitor the situation closely and believe this number should stabilize and come down as a result of tighter loan structures and enhanced underwriting. Higher yields and late charges from this segment of the portfolio continue to offset our credit losses. Charge-offs for the quarter were 21.8 million or 21 basis points up from 14.9 million or 14 basis points in Q4. It's important to note the charge-offs for this quarter were largely reserved for in Q4. Finally, as detailed on slide 13, we saw stable levels in our special mention and substandard loans. As noted in our last few earnings calls, we continue to be highly focused on our exposure to commercial real estate loans, which comprise roughly one quarter of our total portfolio. Higher borrowing costs and pressure on occupancy and lease rates continue to affect CRE valuations, particularly in the office category. During the first quarter, we saw a modest increase in CRE NPLs from 0.31% to 0.34%, up $4 million. On slide 17, we continue to provide enhanced detail on our CRE office exposure. Currently, this portfolio remains steady at 1.6 billion, or 13.5% of our total CRE portfolio, and only 3.6% of our total loan portfolio. Of the 1.6 billion of office exposure, 44% is medical office or owner-occupied. The average size of a loan in the office portfolio is only 1.5 million, We have only six loans above $20 million, and only three of which are non-medical or owner-occupied. We perform portfolio reviews regularly on our CRE portfolio, and we stay very engaged with our borrowers. As mentioned on prior calls, our CRE credit team regularly updates their deep dive analysis of every loan over $2.5 million, which will be renewing between now and the end of the fourth quarter of 2024. This analysis, which covered 78% of all CRE loans maturing during this period, resulted in the following. Half of the loans reviewed will clearly qualify for renewal at prevailing rates. Roughly 30% of these loans are anticipated to be paid off or will require a short-term extension at prevailing rates. The remaining 90% of these loans will require some additional attention, which could include a pay down or a pledge of additional collateral. We continue to back check the results of these tests conducted during prior quarters and have found that the projected outcomes versus actual outcomes were very tightly correlated and, generally speaking, borrowers of loans deemed to require additional attention continue to support their loans by providing enhancements, including principal reductions. Again, our portfolio is not immune from the effects of rising rates or the market forces behind lease rates, but we continue to proactively identify weaknesses in the portfolio and work with our borrowers to identify the best possible outcomes. We believe that our portfolio is in reasonably good shape, appropriately reserved, and situated to weather the challenges ahead. That concludes my comments on credit, and I'll turn it back to Tim.

Well, you can tell we continue to believe that we're well-positioned to take advantage of the current environment with our diverse businesses, and as you also heard, we expect to see relatively strong growth in the coming months. To some of the earlier comments from both Dave and Rich, if we experience loan growth at the high end or above the high end of our forecasted range, which we believe is possible, that could pressure the net interest margin from the current levels, particularly in the second quarter. If that were to occur, the tradeoff is solid franchise growth and favorable net interest income performance in future quarters. To add some financial context, our projection is that net interest income for the second half of the year will come in higher than for the first half, and that while there are a lot of moving parts, the current consensus pre-provision net revenue number looks about right to us. With respect to the announcement regarding Macatawa Bank, We've enjoyed speaking to many of you over the past couple of days, and we've also shared the transaction highlights document, so my summary is succinct. We are very excited about this opportunity. As we've mentioned on prior calls, for several reasons, the current population of attractive targets has been quite limited. Macatawa serves the greater Grand Rapids, West Michigan market, which is a top 50 MSA in the United States. They have pristine credit quality, net charge-offs are negative for the past three years, and virtually no non-performing loans. They stayed short with their securities portfolio, have a limited population of fixed-rate loans, and a very attractive low-cost deposit book. Their loan-to-deposit ratio is 55%, which translates to $1.1 billion in excess deposits, which in this environment we would deploy at a substantially higher rate. Lastly, Macatawa has a committed leadership team excited about the transaction. While we have business in Northern Indiana and West Michigan today, we do not have a physical footprint. And I can tell you that there are not many banks, if any at this point, with this good a profile financially and such a good cultural fit. I'm not exaggerating when I say this is an ideal platform for our expansion in West Michigan, and we are very pleased to have this moving forward. At this point, I'll pause and we can take some questions.

As a reminder, to ask a question, you will need to press star 1-1 on your telephone. To remove yourself from the queue, you may press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Armstrong of RBC Capital Markets. Please go ahead, John.

Hey, thanks. Good morning.

Morning, John.

Hey, Kim, thanks for the help on some of the margin and net interest income dynamics. But can you guys touch on those non-interest bearing levels and confidence that those balances can stabilize and then touch on some of the pricing trends you expect in the money markets and savings products? And I understand the second quarter is comments on the margin, but I'm just curious if some of that stuff is burning out and could be, you know, less of an issue in the third quarter.

Yeah, I mean, we're obviously hopeful that the half of the DDA balances that were out on average in the first quarter have more or less come back and that that will stick, John. You know, with market rates up You know, some of the competition that we'd seen subsiding, you know, kind of is back in the market. And so, you know, you're around 5% for some of the promotional or marginal deposit growth. But, you know, we were pleased in the first quarter to match the deposit growth with the loan growth. And, you know, it just came at a little higher cost than we expected.

Okay. All right. Fair enough. Okay. And then, Dave, maybe for you, can you unpack mortgage a bit in terms of your expectations there? You talked about slightly higher origination volumes, but typically you guys see pretty strong Q2 and Q3. What kind of expectations do you have there?

Wow. You know, where we finished the fourth quarter was pretty low, and I guess the color I can give you is January's applications were higher than December, and February was higher than January, and March was, you know, higher than February. But it's just, it's not been like a hockey stick-up, it's just been a tick-up. And so far in April, the application volumes are somewhat similar to March. But we are sort of expecting the spring buying season to help. And although, you know, the increase in rates here recently hasn't been helpful, but there is a lot of pent-up demand out there. We've got more than our normal share of people asking for, you know, pre-qualification letters and the like, which to us indicates that there's some pent-up demand. So we do sort of expect the spring buying season to pick up, even though there is a shortage of supply. And so we would expect the second quarter to be better than the first quarter, despite the higher rates that we're seeing now. Now, we're only two weeks into the second quarter, but we're optimistic, I guess.

Yeah. Okay. Good. That's helpful. All right, guys, I appreciate it. I'll step back. I'm sure there are others with questions, but numbers look good. Thank you.

Good. Thanks, John.

Thank you. Our next question comes from the line of Chris McGrady of KBW. Your line is open, Chris.

All right, great morning. Dave, maybe a question for you. I think in your prepared remarks, you said the consensus PPNR numbers look okay. I guess, what are your expectations for margins? You know, you talked about kind of a little bit of pressure, you know, for growth purposes. But if we do get the forward curve, is the range that you've previously guided on the margins still good or is it going to be kind of maybe trending below that?

No, I think it's still good. I think we're fairly neutral now on any, you know, the consensus is a couple rate cuts. We don't think that that impacts us dramatically. The bigger pressure here is simply do you hold the DDA? And we've seen, like Tim and I have said, we've seen a bounce back so far this quarter. And then just really strong loan growth. We're going to be above the top end of our guidance in the second quarter, we believe. And just to fund that short term is just a little bit more expensive we're seeing in the market than if you were to just grow the deposits in the mid single digit sort of range. So just a little bit of pressure there. But as I said, we're sort of thinking around the three and a half range right now. Lots of moving parts, but we wouldn't expect that to change dramatically based upon any moves by the Fed one way or the other if there are 25 or 50 basis points.

Okay. And just the guidance is mid to upper single is kind of the loan growth that you're talking about?

Well, for the year, I think, as Rich said, we think we're at the high end of that guidance. We think the second quarter will be above that range. It's a strong quarter for premium finance and the pipelines are full. So we actually think we'll have a stronger growth quarter for loans in the second quarter than we did in the first quarter.

Okay. Thanks for that. In terms of the deal, I think I get the quality of the bank you're buying and the market extension. Could you help us with accretion expectations or ranges? It's about 5% of your balance sheet. In terms of size, is that a reasonable range of what you might be able to extract from it? I know the balance sheet probably has some finessing to do given they're underloaned and have a lot of liquidity.

Yeah. Yeah, Chris, I mean, it's early, obviously, and we're working those numbers, but I think we're going to stick with what we've said, which is accretive, excluding the integration expense in year one. There's lots of opportunity here. This is a great fit for us. The market's terrific. It grows faster than Chicago, for example, on households, and we're really excited about this.

And the excess liquidity they have, given the strong loan growth we're talking about, we think we can really put the – utilize almost on day one in a higher rate asset class.

Okay. Thanks for all the – just wanted to come back to the prior comment on the PPNRs. it feels like you're being a little conservative given how optimistic you are on growth. Is there something, I guess, we're missing as analysts that wouldn't suggest that there's an upward bias to the numbers?

Chris, I think we're just, you know, cautious about what the deposit environment is going to look like if we have to fund a lot of growth. And that's a good news story for us that, you know, we're going to have good growth. We're adding good names. You know, they'll be with us for a long time. But, you know, growth of, you know, we did a billion dollars plus this quarter and have to do it again next quarter, you know, is causing some upward pressure.

Okay. Thanks, Tim.

Yep.

Thank you. Our next question comes from the line of David Long of Raymond James. Please go ahead, David.

Good morning, everyone. Hey, Dave. So we You started the year with record results. Does this impact your appetite for marketing or other investment spending throughout the rest of 2024? And specifically, I'm thinking about, you know, you get an increase in revenue. Is that going to lead to incremental investing in projects? And then also with a lot of your peer banks or competing banks on risk-weighted asset diets are just coming off of them. is there an appetite to hire some veteran bankers from other organizations where they may be restricted in their ability to grow their business right now?

Well, I'll comment. I'm sure Tim will chime in, too. But, you know, we have a pretty – we kind of do a three-year plan for our investments in technology and projects, and we'll stick with that. We have so many resources. So, We want to control expenses, too, but continue to invest in the business. I don't think that would change much. Marketing is, you know, we want to continue to grow the franchise, and raising those deposits is important, so we'll probably stick with our normal plan, although it's up a little bit, as you know, in the second and the third quarters because of the seasonality of our sponsorships and the like. But so, you know, I think we're going to attempt to control expenses well. Just because you have record profits doesn't mean you have to spend them. But when it comes to people, we're always looking for good people. And we did that with some folks in the mortgage warehouse space recently, and we'd always look for good people. If they can produce good quality franchise value and growth, happy to add people as they become available. But that's always the case.

Yeah, I don't think I'd add much. I mean, we've got great momentum as things stand right now. So I think we're reasonably happy with the forward outlook here.

Got it. Thank you. And then just as a follow-up, I want to go back to the deposits. Any categories right now where you're actually seeing some reductions in deposit prices? Can you start to price anything lower at this point, or is everything still sort of turning north?

Yeah, Dave, it's an interesting question because we're hearing some competitor institutions really with no rate movement in the market trying to take some rates down, and we're watching that carefully. We've not been active in that regard, primarily because our intent is to grow pretty aggressively, but we are watching some people trying to kind of trend down in terms of their deposit costs.

Got it. Thanks, guys. Appreciate it.

Thank you. Our next question comes from the line of Casey Hare of Jefferies. Your line is open, Casey.

Yeah, great. Thanks. Good morning, everyone. Another question on the funding strategy. Sorry if I missed this, but how much do you expect CDs to drive – Deposit growth going forward after a very strong first quarter and then what you know, what is the what is the marginal cost of CDs today?

Well kind of two answers that question, I mean we're running both money market and Promotional CD type offers in the market and getting traction on both I don't I don't have the exact percentage Casey in terms of the the mix CDs versus other but the CD market, most people have kind of shortened up waiting to see what happens to rates and, you know, seven to 12 or 15 month type stuff is in the five or low five range. And, you know, we're in that category too. But, you know, we're having good success there and, you know, we're adding new names, which we like a lot. And so, you know, I'd say marginal money markets are, you know, in the four-range, marginal CDs in the five-range.

Gotcha. Okay. And then on slide 10, your NII simulations, you're actually showing positive. You're showing asset-sensitive and liability-sensitive. I assume that's tied to the lag in commercial premium finance. I'm just wondering when does – and which I think that plays out – in August, so I'm just wondering, can you just provide some color on that dynamic? Very interesting simulation that you guys are showing there.

Yeah, well, like I said, we think we're relatively neutral, but the main reason it has that dynamic is we think in down-rate scenarios, we'll be able to reduce our deposit rates pretty much basis point for basis point, you know, those that are, you know, not timeline time deposits. So, if you had a money market rate, we would expect to reduce those 25 basis points if the Fed goes down 25. On the upside, we just think the beta is a little slower, that we're not going to raise our deposit prices immediately if rates go up. And so, you would have a lesser beta on the up and a greater beta on the downside, and then you'd have the repricing on the assets like you talked about. It's relatively neutral, as you can see, but the betas on the deposit is what's sort of creating that dynamic, the beta assumptions.

Gotcha. Thank you.

Thank you. Thank you. Our next question comes from the line of Terry McEvoy of Stevens, Inc. Your question, please, Terry.

Hi, it's Terry McEvoy. Good morning. Could you maybe provide a bit more color, if you could, on the commercial loan growth in the first quarter, the $670 million? I know you mentioned some of it was mortgage warehouse. The rest was market share gains. Just maybe expand industries, these larger banks, smaller banks, and what's behind that growth?

Yeah, Terry, it's interesting. I think we've talked a little bit in the past about what's happened in the Chicago market. We have seen tremendous consolidation, a number of our meaningful competitors like MB and Private and First Midwest are all gone. And so there's just a lot of dislocation. Things don't happen immediately. They just take time. But we are just seeing a tremendous amount of opportunities as a result of that dislocation. We're also seeing a lot of opportunities out of the much larger banks that have a presence in Chicago where customers are not feeling real good connection and communication with some of those situations right now so we're just seeing a lot of really nice opportunities frankly that you know five years ago we just never would have thought we would see they tend to be a little bit bigger we you know we see a lot more opportunities kind of upmarket and then you know within the our community bank footprint, we're just, again, seeing a lot of really good small and medium-sized opportunities. So the competitive dynamics, as Tim has pointed out, are very much in our favor right now on the lending side.

Thanks for that. And then as a follow-up, we talked about the strong loan production, but expenses look like they came in below consensus. If that loan production in Q2 picks up and maintained throughout the year, Could you maybe talk about how that will impact the salary and benefit line or expenses overall? Because looking in the past, there tends to be a correlation with big production quarters and an increase in expenses.

A little bit. And our expenses, to Dave's point earlier, tend to trend up a little bit in the second and third quarter generally related to marketing. But in the insurance portfolios, we are very efficient. And so incremental volume, while it has an expense impact, is not a big driver. So I would think you would expect modest changes, not kind of trajectory changes with strong loan growth.

Thanks for taking my questions.

You bet.

Thank you. Our next question comes from the line of Nathan Race of Piper Sandler. Please go ahead, Nathan.

Yeah. Hi, guys. Good morning. Good morning, Nate. Good morning. Can we kind of talk about credit trajectory for you guys, maybe in terms of charge-offs? I mean, you guys have obviously had excellent credit trends, you know, for several years now. So, just curious how you kind of think about kind of a normalized charge-off range for you guys going forward in a higher, longer environment?

Yeah, go ahead. I'll chime in and Rich can chime in. But, you know, we're in the 21 basis point range or so this quarter and, you know, in the teens generally before a couple quarters in the singles. But I think we generally think that we write to sort of a 20 to 25 basis point loss. Right? And we haven't been there for a number of years, right? So we keep thinking things will normalize over time. But, you know, we think if you're in that 20 basis point or less, or 20-25 basis point or less, it's sort of a reasonable range to be in. So I think 2025 is what we think of as normal. And over the course of the year, we haven't seen that recently. But a little trend up in this quarter, we had some larger ones. But as we talked about, we fully reserved for most of those in prior quarters. So just kind of clearing them out and being proactive.

Yeah, no, I think I would agree with everything Dave said. And the other thing I would just kind of keep in mind is, You know, it's not necessarily linear. You know, as you see with, you know, a lot of other banks, you know, there's one-offs. So, you know, things just happen. So periodically you could have, you know, something higher, but I think you'll see a lot lower too. So, you know, but if you take a look over time, I think what Dave said is exactly true around that 20 to 25 basis point range.

Okay, great. And then I noticed the office CRE portfolio grew a good amount in the quarter. Just curious in terms of what type of opportunities you're seeing both in terms of the type of office and also in what geographies as well.

Yeah, good catch. Right now, as you can imagine, there is very little appetite out there for office, but We have seen, as we've talked about on other calls, we have seen some opportunities out there where they're owner-occupied, well-tenanted. In this case, these were medical office situations. But you can really get very good structure in terms of just overall equity contribution and pricing as well. We look at it, and we don't think that our exposure here is certainly not overweight in that category, and we think we have some room. Not that we're out there trying to actively grow that portfolio, but when you see those opportunities, it's great to be out in that market and still have availability.

Not that we're looking for office deals, but consistency matters to our clients, and it's important for us to be in the market, and as others sort of sit on the sidelines, we think we're getting terrific opportunities.

Yeah. To your geography question, generally speaking, our portfolio tends to be more Midwest-focused, not exclusively, but in this case, this was a Midwestern-based opportunity.

Okay, great. And then maybe just one last one, if I could, for Tim. In light of the acquisition announcement earlier this week, you guys are – it seems like that should be accretive to your capital ratios going forward. So just curious to hear kind of the appetite for additional acquisitions over the next year or so, particularly as you maybe look to fill in, you know, up towards the Grand Rapids area, potentially.

Sure. You know, number one, we think we're reasonably good at acquisitions. So we're confident that we'll get this integrated and moving the right direction quickly. And we start from a terrific place because this is a really good bank. You know, we're not going to try to do several at the same time, so we're probably on the sidelines for a little bit here. But, you know, we're having conversations and continuing to look at, you know, what makes the most sense for us going forward.

Okay, great. I appreciate the color. Thanks, guys. Congrats.

Thanks, Nate. Appreciate it.

Thank you. Our next question comes from the line of Ben Gerlinger of Citi. Please go ahead, Ben.

Hey, good morning, everyone.

Hey, Ben.

Just going to kind of touch base on what Nate just asked. If you could just give us a little bit of background. I know that you guys have a presence. It's just not a branch footprint in the western Michigan area. Why do this deal exist? It seems like you have a good growth this year. I mean, to be honest, I think you're, I think you're just probably going to end up with a conservative. You're probably closer to like 12% growth. Surely it's not just deposits and liquidity, but why did it feel now kind of at the risk of potentially taking your eye off the ball for what could be or likely to be a really healthy year for growth organically?

Well, I don't think we think we're taking our eye off the ball. We think this is part of our strategy to grow in the Midwest and to take good care of clients. And as you say, we do not have a footprint in the area right now, but we do have material business in both northern Indiana and west Michigan. We just opened a new location in Crown Point less than a month ago. And so great market. And, you know, at this point, if the question was, do you wait for something different to come along, we think McIntyre was a terrific fit for us. the growth opportunities in West Michigan are good. It's a well-run bank. It's a committed leadership team. We just feel like this was the right franchise at the right time.

Gotcha. That's helpful. And then for the accretion perspective, it's a very efficient bank, like you said, to begin with, other than just kind of mixing the two balance sheets. Is there expense synergies to be had in 25, or is it largely just the pro forma, one plus one equals more than two?

Well, Dave can add to this too. I mean, there's likely some overlap type activity, but we think, and I think they think, that we'll bring capabilities to them that will be productive in the market in terms of both existing clients and new opportunities. So whether it's treasury services or digital banking services or expertise in certain lending areas, I think there's a lot of synergy here and a lot of upside.

Yeah, you always get some cost synergies. We should be able to leverage our buying capacity in a fashion where we can probably drive things like insurance costs and DP costs, and those sort of costs are lower, and so there will be some cost savings. But we aren't closing any branches. There's no plan to close branches. We plan to grow in that market area. They're a public company, so some of those public company costs will go away. We won't need a separate audit, et cetera. So there are cost savings there, but this is a get a partnership with a great franchise and a great market and grow like we've done our entire life with banks.

That makes a lot of sense. I appreciate the call. Congrats, Scott. Pretty solid year ahead of you here.

Thank you.

Thank you. Our next question. Our next question comes from the line of Jeff Rulis of DA Davidson. Your question, please, Jeff.

Thanks. Good morning. Just a couple credit follow-up questions. On the pickup in non-performing loans and the P&C segment, anything timing related? We've talked a lot about credit normalization, but just wanted to see if there's anything specific in that segment that drove the increase?

No, as I mentioned, transportation tends to be a little bit of an issue right now. Just obviously, that's no news to anybody. The freight rates are down. Revenue is down in that segment. It causes for more stress on those borrowers, and as a result, cancellations have ticked up. But I don't think ultimately it is a material concern of mine. I think our teams are working to make sure that we're very efficient on collection. They're working as we go forward on structuring those deals a little bit tighter. But again, given the level of late fees and overall rates that we earn on those, it's still a good trade for us.

Yeah, and the other thing, Jeff, I would chime in there with is they're listed as non-performing, but when they go into non-performing status, if we're short on collateral, we've already taken the charge off. So we're generally just waiting for that return premium to come to us from the carrier. So it's not really an indication of larger losses that come down the pike, because if we're short on collateral, we've already taken the loss. We're just waiting for the money to come back from the carriers.

Understood. Thanks. And then just a similar question on the charge-off side, the CNI front. I know you mentioned in Q4 a lot was reserved for, but within the CNI bucket, are you seeing any commonalities, vintage or business category? I don't recall what kind of came on or what you reserved for in Q4, but just looking at the CNI bucket, what was charged off?

Yeah, you know, we, in the CNI category, we had some exposure in our franchise group that was, that we recognized, you know, but I think that was largely kind of more of a one-off type situation. You know, if there was one area that I would point to, again, it would be transportation. We don't have a huge amount of exposure there, but it definitely is an area that we're just seeing not only in the P&C side, but in the core portfolio, just having more stress. So, But as it relates to the charge-offs, it was largely focused on some existing CRE exposure that we reserved and a little bit of just miscellaneous CNI and a little bit of franchise exposure.

Thanks, Rich. And housekeeping, on the sale of the retirement advisor business, Is there a go-forward impact on fees and expenses? Is that roughly a wash, just trying to see if we need an adjustment there?

It's modest. The fees generally go down a little bit as we have a partner, and we also lose some expenses. But it's very modest, and I don't think it's going to move your numbers.

Okay. And maybe I'll squeeze in just one last one on that. About a five-month pause here on hedges. You think you're largely in good shape there, I guess, barring running into maturities of those. Do you feel like we hold or probably an active conversation, but just wanted to see if we got an extended pause here.

Yeah, no, we talk about it a lot and, you know, we just kind of watching for the time being. I mean, we'll certainly kind of, as we get closer to when some of these roll off, be more active or could be more active. But, you know, the rate environment right now is uncertain. And, you know, we're seeing people talk about, you know, either rates higher for longer or rates up as opposed to rates down. So I think we're happy with where we are right now.

Okay. Thank you.

Thank you. Our next question comes from the line of Jared Shaw of Barclays. Please go ahead, Jared.

Hi, good morning. Thanks for the questions. I just wanted to circle back on the deal. In terms of the timing, that seems like a great timeline for closing. With the commentary coming out of regulators recently, it sounds like deals for banks will be more difficult Do you feel that there'll be an opportunity for you to do more deals going forward after you integrate this? You seem pretty optimistic in the outlook there.

Well, you know, we hope so. You know, we're a community-oriented, high-quality bank. We think Macatawa is same in terms of their profile. And so, you know, we'll go through the process, but we hope that this gets approved rapidly. As we talked about earlier, we'll continue to have conversations and look for other opportunities. But I can tell you again, no hesitation on our part with respect to Macatawa. We think this is exactly the right fit and a very good market right now.

Okay, thanks. And what's the earliest projected credit mark on the portfolio?

Well, we haven't disclosed that, but they are a public company. You can look at their public filings, and as Tim mentioned earlier, they've had net recoveries for a few years, a very conservative, well-run credit function. I wouldn't expect much from that, and you could tell that just from looking at their public disclosures.

Okay, okay. And then you had highlighted the excess funding coming from the deal. If we do see accelerated loan growth from the core bank, would you look at adding wholesale funding as a short-term fix until those excess funds come on, or should we really be thinking that you're going to match fund all loan growth with full market price deposits?

No, we sometimes use wholesale funding to fund the growth because we can never match it perfectly, right? But our plan long-term is even if you backfill in short-term with wholesale funding, we continue to grow our core consumer and commercial funding in a manner that you don't have to rely on the wholesale funding long-term. But sometimes you have to backfill in if the loan growth is a much more accelerated than your standard deposit gathering activities. But it's not a long-term plan. It's a short-term gap filler plan.

Yep. Okay. Great. Thanks. And then just finally for me, you talked about the better spread opportunity on commercial lending. Where are you seeing spot rates for new C&I loans now in the market?

It's a pretty broad range. I mean, you can, you know, for really high quality, well-secured, well-structured opportunities where you're getting a lot of treasury, you know, you could be in the 250 range. But we're still seeing, you know, rates that are still very attractive north of that. on smaller deals and deals where there's a little bit more structural issues. But generally speaking, our job, as we talked about, is really bringing these customers in because you don't get these opportunities very often. So our bankers are incredibly eager to win these opportunities when they're out there. I'm not saying that we're going to be the lowest price necessarily, but we're certainly, if it's a deal that we want, we're going to work hard to win it.

Great. Thank you.

Thank you. I would now like to turn the conference back to Tim Crane for closing remarks. Sir?

Thank you, Lateef. And for all of you that have participated this morning, thank you not only for today, but for your feedback and insights over the last couple of days as we've talked about the transaction. I think you can tell we're excited both about the opportunities in Chicago and about the pending acquisition. And as always, we'll work hard to deliver. So thank you for your time this morning. We'll wrap it up.

This concludes today's conference call. Thank you for participating. You may now disconnect.