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.