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spk07: Welcome to Wintrust Financial Corporation's second quarter and year-to-date 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, and any subsequent filings with the SEC. Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded. I will now turn the conference over to Mr. Tim Crane.
spk09: Good morning and thank you. In addition to the introductions that Lateef made, we're joined by 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 will add some additional information and color on credit performance and loan activity. I'll be back to wrap up with some summary thoughts on two topics, a high-level outlook going forward and an update on our pending acquisition of Macatawa Bank. And, of course, we'll do our best to answer some questions. For the quarter, we reported net income of just over $152 million and reported record net income of just under $340 million for the first half of the year. The results were in line with our expectations with several positive and encouraging underlying elements. For the quarter, we grew loans by $1.4 billion and deposits by slightly over $1.6 billion. The loan growth was balanced across all material product categories. and would have been higher had we not elected to sell approximately $700 million in loans during the quarter, which Dave will discuss. The deposit growth included absolute growth in our non-interest-bearing deposits, and the percentage of non-interest-bearing deposits relative to total deposits remain stable for the quarter. Both the loan and deposit results are strong and evidence that we continue to gain share in Chicago, the Midwest, and in our niche businesses. The net interest margin of 352 was in line with our expectations, and combined with the growth, produced record net interest income of $471 million, up almost $7 million from the first quarter. We are seeing some of the expected credit normalization from the very low levels of delinquency and loss experienced over the last few years. However, our non-performing loans remain low, and loans classified as substandard or special mention were little changed from the prior quarter. And again, Rich will walk through some additional detail. Overall, a solid quarter. In particular, I think our team is doing a very nice job with respect to pricing and credit discipline, which will continue to show up in our results going forward. We are also adding consumer and commercial clients at a healthy rate, clients that will be with us for years to come. I'll pause here and hand this over to Dave and Rich, and I'll be back to wrap up.
spk11: Great. Thanks, Tim. First, with respect to the balance sheet growth in the first quarter of this ñ compared to the first quarter of this year, we again reported strong loan and deposit growth. The deposit growth of $1.6 billion during the quarter is a 14 percent increase over the prior quarter on an annualized basis. And as to the deposit composition, noninterest-bearing deposits increased by approximately $123 million in the second quarter relative to the first quarter. and again represented 21% of total deposits at the end of both the first and the second quarter, so stabilization and a slight increase in the non-interest-bearing deposits from last quarter. The solid deposit growth helped to fund strong second quarter loan growth of $1.4 billion, or 13% on an annualized basis. Adjusting for the impact of the sale of certain premium finance loans during the second quarter, total loans would have increased $2.1 billion or 20% on an annualized basis. And it's consistent with our prior guidance of being above the mid to high single-digit loan growth for this quarter. Additionally, net of our election to conduct a loan sale transaction that reduced outstanding premium finance balances by $698 million at the end of the second quarter, the commercial premium finance portfolio was up $161 million. The sale of the loans during the quarter was done to maintain appropriate liquidity, capital, and loan-to-deposit ratios. As to other aspects of the balance sheet results, total assets grew by $2.2 billion to $59.8 billion, and our regulatory capital ratios remained relatively stable, even with the strong growth. As Tim mentioned, it was another very successful quarter for gaining new customers and for the growth of our franchise, which has always been a primary objective of Wintrust. Our differentiated business model, the exceptional service that our teams provide, and our unique position in the Chicago and Milwaukee markets continue to serve us well, and we think it will do so in the future. As to the income statement categories, our net interest income increased $6.4 million from the prior quarter and represented a record high amount of quarterly net interest income. An increase in the average earning assets more than offset the modest decline in the net interest margin that we discussed on our last earnings call due to expectations of the strong growth this quarter. It was primarily the result of a mixed shift in deposits and the higher cost of attracting incremental deposits to fund the solid loan growth. We're obviously happy to take advantage of current market conditions and add high-quality loan and deposit relationships, even if it means a bit of margin pressure. Said another way, these new relationships provide nice gains in market share, additional net interest income, and acceptable returns, in long-term franchise value. Our second quarter net interest margin was 3.52% and was up slightly from where we ended the first quarter, which gives us great confidence that our net interest margin can continue to be in a narrow range around 3.5% in the third quarter and into the fourth quarter of this year. Given the relatively stable net interest margin outlook and the growth in earning assets, we would expect again to increase net interest income in the third quarter. We recorded a provision for credit losses of $40.1 million in the second quarter, which was up from a provision of $21.7 million in the prior quarter, but down slightly from the $42.9 million recorded in the fourth quarter of last year. The higher provision expense in the second quarter relative to the first quarter was primarily a result of the aforementioned strong loan growth and a slightly higher level of net charge-offs and resulted in a buildup of our credit reserves. Again, Rich will talk about credit and the loan portfolio characteristics in just a bit. On to non-interest income and non-interest expense, total non-interest income totaled $121.1 million in the second quarter, which was down approximately $19.4 million when compared to the prior quarter. As you recall, the primary reason for the decline was related to a $20 million gain on the sale of our Retirement Planning Advisors Division that we recognized in the first quarter, and no similar gains were recorded in the current quarter. And although persistently higher mortgage rates dampened our optimism for stronger spring home buying season activity, the company generated approximately $1.5 million more in mortgage banking revenue as we experienced higher production revenue due to slightly higher origination volumes, which was offset somewhat by less favorable market value adjustments on our mortgage servicing rights portfolio. The company recorded a $4.3 million of security losses, a modest gain on the sale of our premium finance loans, and a variety of smaller changes to the non-interest income categories as shown in the tables in the press release. But those changes relative to the prior quarter weren't material and not uncommon. Turning to non-interest interest expense categories. The total non-interest expenses were $340.4 million in the second quarter and were up approximately $7.2 million from the first quarter. The primary reasons for the increase related to salary and employee benefits expense increasing by approximately $3.4 million. The slight increase was due to higher mortgage commissions on the increased origination volumes. The second quarter having the full effect of annual merit increases that were effective on February 1st. And we had slightly higher employee benefits expenses due to an increased level of health insurance claims during the quarter compared to the first quarter, which tends to be seasonally low. Advertising and marketing expenses increased by $4.4 million in the second quarter when compared to the first quarter. As we've discussed on previous calls, this category of expenses tends to be higher in the second and third quarters of the year. to our expenditures related to various major and minor league baseball sponsorships and other summertime sponsorship events held in the communities that we serve. The company also recorded a slight increase in occupancy expense, which was impacted by a $1.9 million charge on the pending sale of a bank branch in downtown Chicago as we worked to optimize our branch network. This pending sale is essentially relocation and a downsizing of a branch which will result in lower expenses going forward with an estimated payback period of less than two years. Professional fees were slightly elevated due to approximately $532,000 of costs related to the pending acquisition of Macatawa Bank Corporation. These increases were partially offset by a $4.1 million reduction in our FDIC insurance expense as the company recorded approximately $5.2 million such expense related to special assessments imposed by the FDIC in the first quarter and no such special assessments in this quarter. The remaining variances, both positive and negative, were relatively normal and don't warrant any special mention on this call. In summary, the second quarter exhibited extraordinarily strong loan and deposit growth, a solid net interest margin in our expected range, a record level of quarterly net interest income, And excluding the impact of the charge on the pending branch sale, other non-interest expenses and non-interest income were within our expected ranges. Again, I'd like to highlight, as Tim mentioned, that this quarter's results combined with the first quarter produced record net income for any first six-month period in the history of the company. We also continued to build our tangible book value per share during the first half of this year. And as you can see on slide 10 of our presentation deck, We've grown tangible book value per share every year since we've been a public company, going back to 1996, and we're on track to do so again in 2024. So that's something we're very proud of. We're excited about the future. We have a solid balance sheet, strong pipelines, and it sets us up well for future growth in net interest income. And with that, I will turn it over to Rich to talk about credit.
spk12: Thanks, Dave. As Tim and Dave both noted, credit performance continued to be very solid in the quarter. As detailed in the earnings release, loan growth for the quarter was $1.4 billion, or 13% annualized, net of the impact from the sale of $698 million in premium finance loans. This growth was driven by a number of factors. Commercial premium finance loans grew by $859 million before the impact of the loan sale. As noted in the past, the second quarter is historically when we see our highest funding volumes. In addition, we continue to see the effects of a harder market for insurance premiums particularly for commercial properties, resulting in higher average loan size. Finally, we continue to see new opportunities as a result of a consolidation and dislocation within the premium finance industry. During the second quarter, we also saw growth in core commercial loans, which were up $350 million, driven largely by quality opportunities resulting from dislocation within the banking landscape in our primary markets. We also saw good growth in our commercial real estate and leasing portfolios. I would also note that we remain highly focused on getting paid appropriately for our risk. As noted on slide seven, average loan yields continue to increase of 10 basis points during the quarter. We believe that loan growth for the second half of 2024 will continue to be strong and aligned with our previous guidance of mid to high single digits for a number of reasons. Last year's third quarter volume for commercial premium finance loans was very strong. We believe the hard market for insurance premiums should continue through year end. In addition, our core CNI and leasing pipelines remain very solid. Finally, we saw core CNI line utilization rates trending up from 34% to 37% quarter over quarter. Offsetting this growth will be continued pressure on the volume of new CRE opportunities as higher borrowing costs have reduced loan demand in that area. We believe 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, loan growth for the balance of 2024 should continue to be strong and within our guidance of mid to high single digits. From a credit quality perspective, as detailed on slide 15, we continue to see strong credit performance, but with signs of normalization across the portfolio. This can be seen in a number of ways. Non-performing loans as a percentage of total loans was up slightly from 34 basis points to 39 basis points. This modest increase in MPLs was evidenced in both our core CNI and CRE portfolios. And, as noted on last quarter's call, we continue to see slightly lower but elevated levels of non-performing loans in commercial premium finance portfolio, resulting from ongoing stress in the transportation segment of that portfolio. We continue to monitor the situation closely, and we have started to see this trend stabilize 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 30 million, or 28 basis points, up from 21.8 million, or 21 basis points in Q1. These charge-offs resulted primarily from loans within our core CRE, CNI, and commercial premium finance portfolio. Our portfolio continues to be very solid, well diversified, and very granular. Evidence of this could be seen on slide 15, where we saw stable levels in our special mention and substandard loans. We believe that this quarter's level of NPLs and charge-offs reflect a return to a more normalized credit environment, as evidenced by the chart of historical non-performing asset levels on slide 16. Finally, we are firmly committed to identifying problems early and charging them down where appropriate. Our goal, as always, is to stay ahead of any credit challenges. 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 the total portfolio. Our higher borrowing costs and pressure on occupancy and lease rates continue to affect CRE valuations, particularly in the office category. As detailed on slide 19, we saw a modest increase during the second quarter in CRE NPLs from 0.34% to 0.40%. We also saw an uptick in the level of CRE charge-offs as we continue to proactively address and right-size our more challenged credits. On slide 20, we continue to provide enhanced detail in our CRE office exposure. Currently, this portfolio remains steady at $1.6 billion, or 13.3% of our total CRE portfolio, and only 3.6% of our total loan portfolio. Of the $1.6 billion of office exposure, 42% is medical office or owner-occupied. The average size of a loan in the office portfolio is only $1.5 million, and we have only seven loans above $20 million and only four 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 non-owner-occupied loan over $2.5 million which will be renewing between now and the end of the first quarter of 2025. This analysis, which covered 84% of all non-owner-occupied CRE loans maturing during this period, resulted in the following. 51% of the loans reviewed will clearly qualify for renewal at prevailing rates. Roughly 25% of these loans are anticipated to be paid off or will require a short-term extension at prevailing rates, and the remaining loans will require some additional attention, which could include a pay down or pledge of additional collateral. We continue to back check the results of these tests conducted during prior quarters and have found that 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. As we have stated on prior calls, 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.
spk09: Thanks, Rich. To wrap up our prepared remarks, and you've heard me say this on prior calls, we continue to believe that we're well-positioned, in some cases uniquely positioned in our markets to take advantage of the current environment with our diverse businesses. The growth this quarter was evidence of that, and while we wouldn't necessarily expect to see this sort of loan growth going forward, we continue to be very encouraged by the solid pipelines. As Dave discussed, we believe the margin will be relatively stable in the second half of the year, given the current rate assumptions. With the growth this quarter in the solid pipelines, we believe that continued net interest income growth is likely in the second half of this year. With respect to our pending acquisition of Macatawa Bank, there have been good conversations and planning regarding the integration and the many benefits, financial and otherwise, associated with the transaction. We remain very impressed with their team and the opportunities that we will have together. We received Fed approval for the transaction on June 17th. That was quick in today's environment, about 50 days from application, which we think reflects the relative strength of both organizations and our strong track record regarding acquisitions. You'll recall Macatawa serves the greater Grand Rapids, West Michigan market, which is a top 50 MSA in the United States. They have solid credit quality, a low loan to deposit ratio, and a very attractive low cost deposit book. The loan to deposit ratio is approximately 55%, which translates to approximately $1.1 billion in excess deposits. Makatawa has scheduled their special shareholder meeting to consider approval of the transaction for July 31st, and we would expect to close the transaction shortly after they receive their final shareholder approval. Of course, after closing, we will provide additional information on the related financial entries with our next quarterly results. At this point, I'll pause and we can take some questions.
spk07: Thank you. 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.
spk14: Good morning, John. Hey, good morning. Good morning. Question for either Rich or Tim on kind of the near-term, I guess, the near-term loan growth expectations. I mean, this quarter was stronger than I thought it would be and obviously drove some of the provisioning as well. But what kind of a pullback do you expect in the third quarter? And just if there's anything else you would call out in terms of the second quarter activity?
spk12: Well, as I point out, the second quarter is very affected by what happens in the P&C portfolio. And we knew that was coming. We talked about it at the end of the first quarter. That definitely gets tempered in the third quarter. But as I pointed out, we're still seeing really nice core opportunities in our primary markets. So I would say that we would... probably be at the upper end of our range for the back half of the year. Certainly in the fourth quarter, you're going to see P&C slow down quite a bit if you look back at our historic funding patterns. Fourth quarter is probably one of the lower ones. So third quarter will be very strong. As I said, we'll probably be at the upper end of the range.
spk09: Yeah, John, the only thing I'd add is the loan growth was broad-based, obviously exaggerated by the PNC business, but really in all our material categories, we saw growth, and particularly some strong growth in the CNI side of things, which I think is a function of strong market position on our part and, to Rich's point, a little bit more utilization. So whether that continues to be a tailwind or not, I don't know.
spk14: Okay. Good. Thank you on that. Rich, on the charge-off levels, I think you used the term normalization. Anything you would call out in the second quarter? It looks like the commercial real estate charge-offs were a bit higher, but anything else unusual rolling around in there? And do you expect this? It's hard to say a run rate, but is this more normal for you?
spk12: No. I mean, it's interesting. When I was looking at the slides, like that slide on 19 where we have the commercial real estate charge-offs, you know, it does pop up quite a bit. And, you know, I would point out that we had a number of CRE credits that were particularly challenged that, you know, we just got ahead of. And just, you know, they were a number of different stories there, you know. But if you look back to 6-30-23, I mean, we were at 31 basis points. And, you know, so it's just in the CRE space, it's just lumpy. You know, we don't necessarily anticipate that we would see a similar third quarter in charge of in CRE, but you just don't necessarily know, we would look at that substandard and criticized page and just point out that you're really not seeing a lot of movement. We don't like to use the term episodic, but sometimes it is where just a primary tenant of a property, you lose it and it's tough to replace, and there could be just these types of issues that affect that. Generally speaking, it doesn't feel like Q2 was all that different other than some of these signs of normalization. When you look at that chart that we point out in terms of historical NPLs, we were at such a low level that these numbers feel a little out of sort. But if you take a look at a broader 10-year history, we're still at a very reasonable level in terms of charge-offs and NPLs.
spk14: Okay, good. And then I guess the last one, your philosophy at this point and based on what you're seeing is to try to hold the reserve percentage relatively stable. Is that fair?
spk11: Well, certainly we'd like that to happen, but John, this is Dave. You know, CISO sort of drives that result. Now, we show in our deck, you know, provisioning is always – sort of been higher than our charge-offs over the last year or so. So we've been building reserves, and I think that that's what the CECL model said, was that it potentially could have more problematic economic times going forward to a slight extent, and so we've built more reserves. Now, whether that happens or not, some of those economic factors recently have been getting a little bit better and not as problematic. So we have built the reserves. I think if you kind of look at the provisioning, you know, we've had some people say, well, what should the provision be going forward? And, you know, CECL sort of says you've got to book your reserves based upon the fact pattern at that point in time for the life of the loan going forward. So, you know, future provisioning would really sort of look at loan growth and obviously this quarter we had really strong loan growth so that added to the provision and then just sort of the normal charge off levels and I mean if you look at the last three quarters our provisioning has averaged you know about 35 million dollars so probably not a bad place to start we would think that that would exceed charge offs again and build reserves but you know one of those quarters was in the 20 million dollar range and you know one was a little bit more than what we had this quarter, so it fluctuates a little bit you know sort of based upon the growth and the economic factors. But probably from a provisioning standpoint you know 35 million sort of plus or minus depending on growth and economic conditions or if we see any changes in the classified and you know, other characteristics of the portfolio, which we aren't, as Rich said. It's very encouraging to us that classified loans, substandard or special mention, those percentages are holding stable. And actually, if you look at the near-term delinquencies that we show in the earnings release, those are actually down this quarter from last quarter. So we're not seeing anything systemic out there. So as Rich said, the episodic nature of a couple smaller deals added to it. but probably, you know, probably barring macroeconomic changes or something else, if you're sort of in the mid-30s plus or minus, that's probably a decent estimate of what provisioning would be going forward, and obviously we've been higher and lower than that based on economic factors, but I think that would mean that research would continue to build or stay stable. Okay. Very helpful.
spk14: What was that, Dave? Sorry. Unwinded answer, so I apologize for that. Yeah, okay. All right. Thank you, guys. I appreciate it.
spk09: Thanks, Seth.
spk07: Thank you. Our next question comes from the line of Casey Hare of Jefferies.
spk04: Great. Thanks. Good morning, everyone. Good morning. A couple questions on the NIM. I guess first on the funding strategy, your CDs, obviously drove a lot of the growth this quarter. I was just wondering, you guys, you're at 19% of the deposit stack. Is there a limit that you don't, you know, is there a limit as to how high you want that to go? And then what are your CD offer rates today?
spk09: Well, obviously to the extent that CDs are your more expensive funding source, you'd prefer to have fewer, but, you know, it's, not too recent history when those could have made up 30% of somebody's book. I don't think we have a specific number, but we've shortened most of our promotional CD offerings, CD offerings, and they're plus or minus 5%. What I can tell you is the offerings from approximately a year ago that are now renewing are renewing at lower levels. We think there is some rationalization of the pricing to clients that we acquire with these promotional rates. But, you know, we were committed to funding the loan growth with core deposit growth this quarter, and we've done that. And we've acquired a lot of new customers, which we expect will be with us for a long time.
spk04: Okay. And on the loan side of things, so loan yields up 10 bips to 6.92. Is the premium finance sort of the lag on that repricing? Is that now digested? And I'm just wondering, you know, what kind of cadence we can expect in terms of loan yield lift going forward?
spk11: Yeah, I think it pretty well, as you said, digested, Casey. I mean, if you look at both of those portfolios, within a year, they generally turn over. And prime is... No hasn't risen in about a year now, I think I think we're pretty much through with those rate increases, we do have back book other fixed rate loans in the commercial real estate area and some leasing loans etc that will reprice up, but we still think there'll be slight lift in the loan yields and. Even on the deposit side, both of those I would say, we probably think probably single digit basis point increases in loans and deposits next quarter. So we again expect the margin to stay around 350. So we're managing that. And even if there's a rate cut of 25 basis points or two the rest of this year, we still think we can hold the 350 margin.
spk04: Okay. All right. Great. And just last one. Sorry if I missed this, but did you guys provide a spot NIM at 630?
spk11: We didn't, but, you know, as you know, we ended last quarter at, you know, the 350 range, and this whole quarter averaged 352. So, you know, low 350s is where we're at.
spk04: Gotcha.
spk11: Thank you.
spk07: You bet. Thank you. Our next question comes from the line of Terry McEvoy of Stevens.
spk03: Good morning, Terry. Hi, thanks for taking my question. Hi, good morning. Just a quick one here to start. Was there a gain at all recorded on the $700 million loan sale?
spk11: Yeah, I mentioned that a little bit in my comments, but didn't get the number. So we sold roughly $700 million of those loans. and had a gain of a little over $4.5 million. You recall last year when we sold the loans, it was a little over a million. The pricing, the funding costs of those have really come in, and the spreads are tighter. So about a little over a $4.5 million gain on that sale. But you have to remember, Terry, that that's really just President, valuing back the cash flows on those loans and recording the gain, had we kept them on our balance sheet, we obviously, over the next two quarters, would have recorded more net interest income. But we thought it was prudent to sell them from, like I said, liquidity, loan to deposit, and capital purposes. And those loans come back on the book pretty quickly. That sale of that $700 million, we would have earned money on those from an interest income perspective in the third and the fourth quarters. But by the end of the year, that portfolio will have substantially been replaced.
spk03: Thanks for that, Dave. And then within your margin outlook, could you help us maybe understand what you're assuming for interest-bearing deposit costs in the second half of the year? And essentially, what's the cost to fund that loan growth? And maybe just as a follow-up there, you've got $5 billion of CDs maturing in the back half of this year. I think it was a $4.75 rate. What are you seeing when those CDs mature? Are they rolling into market rate products or somewhere else?
spk09: Both is the answer to your last question. Some clients are rolling into CDs. But as I mentioned, we're shortening the term of the promotional CDs. And so you're also seeing clients roll into the money market offerings, which are closer to 4% than 5%. And so we'll have to work hard to retain this CD volume. And that would, again, continue to allow us to roughly match deposit and loan growth going forward. Sorry, give me the first part of your question again.
spk03: Just interest-bearing deposit costs in the second half of this year. They were up, obviously, in Q2 to fund the loan growth. What do you think they will do over the next two quarters?
spk09: I think this was the big quarter in terms of movement on the interest-bearing deposit costs. We had some larger deposits from when rates were substantially lower roll-off, and so To Dave's point, I think we're going to see a much more muted change in the interest-bearing deposit costs, you know, something that kind of should be similar to what happens to loan yields.
spk11: Again, we think there'll be single-digit basis point raises in both those categories. Perfect.
spk03: Thanks for taking my questions.
spk07: You bet. Thank you. Our next question comes from the line of Chris McGrady.
spk05: of kvw oh great morning um dave just going back to the nii guide the uh you know link quarter is about a percent and a half is there is there an acceleration in the nii growth in the back half of the year relative to this quarter's change given the growth that you got this quarter or is it mitigated by a little bit of nim pressure no i i i
spk11: I think we think the NIM's going to hold fairly stable, Chris. So I think that the drive will be the earning asset growth. And really why we believe we can grow NII is that we do think the margin can be held stable here. And it'll be growth in the loan. So we had a great growth quarter. So that's going to carry over into the second half of the year. And as Rich said, you know, we're at the high end of our mid to high single digit range. And so if we're at the high end, end of that, it should accelerate more, I would think. Okay.
spk05: And then I guess looking out, I mean, the market's fairly fickle, but right now the market's thinking we're going to get four or five cuts over the next year. Relative to that 350 you've talked about, I know you're a lot less asset sensitive than you've been, but how much downside to margin do you see if the curve plays out?
spk11: Well, I think we're looking at this year that maybe we have one to two cuts and, you know, next year, you know, whether it's five cuts or whatever, whichever forecast you think is out there of 25. I mean, if we look at that, you know, we still feel pretty confident that we can keep our margin in low to mid threes. So say three and a quarter to three and a half to just sort of You know, it depends on the speed of those and the magnitude of those. But, you know, we've done a lot of hedging to protect that downside. And, you know, I think we'd probably be in that range. So, I mean, if we have 10 or 12 cuts, there's probably going to be some stress because, you know, you're going to lose on the spread on your free money, et cetera. So I think there'll be some pressure there. But we think we can hold it. in that 325 to 350 range based on the current consensus estimate. And we'll just see how to manage it. Perfect.
spk05: And then the tax rate looked a little high this quarter. Is this a true-up or is this a true-up rate?
spk11: Well, you guys are all pretty sharp on picking out things. It's up a little bit this quarter. It's kind of nuanced, but the state of Illinois passed a law that changed... the way the apportionment is treated for investment securities, and that will benefit us going forward in future quarters, but we had to revalue our deferred tax inventory because of the change in the law, so that bumped the rate up a little bit. In the past, we thought generally our tax rate was more in the 26.5% range, barring any unusual items in the quarter. we think that's probably closer now to 26%. So we should pick up, you know, close to half a percent in our tax rate going forward. So one of the few times that tax law changes in the state of Illinois have benefited us. But we had to revalue our deferred tax inventory, which increased the tax rate a little bit. Okay. Thanks, Dave.
spk07: Thank you. Our next question comes from the line of Brendan Nossel of Hubdy Group.
spk06: Hey, good morning, folks. Hope you're doing well. Maybe just to start off here, could you maybe unpack the trigger points for any additional loan sales in the future? I'm guessing if there was to happen, it would probably be in a seasonally strong quarter like this one for the premium finance business.
spk11: Yeah, well, I think that's right. I mean, I touched on it generally, but You know, we've been running that 93% loan-to-deposit. We really don't care to run much higher than that, and we'd like to fund the loans with core deposits. And we obviously had an extraordinarily strong quarter here. You know, we had, you know, $1.6 billion of deposit growth, and we just would rather not have that loan-to-deposit ratio go up. And we want to keep the appropriate levels of liquidity and capital, so It's a nice relief bell for us when we have that strong a growth. And we'll use it judiciously because we'd rather have the assets on our books, but we've got to keep those other three metrics in mind, I think. And we need to be disciplined on the liquidity capital planning and follow our playbook.
spk09: Yeah, and I'd just add, it's a relatively attractive asset to do this with because they turn very quickly, as Dave described a few minutes ago. And again, after roughly year-end, those loans could be back on our books.
spk11: Yeah, so you have to, to Tim's point, I mean, we've sold about $700 million of that, but the average balance is substantially less than that because they pay off so fast. So the rule of thumb is you divide it roughly by 2.4, and that would be your average balance, because they pay off so quickly. So it's a great asset class, as Tim says, to sell and get back on your books quickly.
spk06: Yeah, yeah, yeah. Maybe one more for me. Within the wealth business, I guess I was a little surprised to see AUM just tick down a little bit quarter over quarter, given how strong markets were in the second quarter. I'm just kind of curious, you know, what trends you're seeing in that business and what underlying momentum looks like.
spk11: Yeah, you know, it wasn't anything unusual. Per se, a couple of clients moved money around to different options, but we would expect that to grow in the third quarter. So it wasn't substantial change.
spk06: All right, fantastic. Thanks for taking the questions.
spk07: Thank you. Our next question comes from the line of Jeff Rollis of DA Davidson.
spk02: Thanks. Good morning. Um, maybe just, I, um, I think you mentioned last quarter, you saw some really some targeted opportunities in office still, despite sort of the national rhetoric. And I think you mentioned sort of where, you know, higher tenanted or, or medical wanted to kind of check to see if that's still the case. You still see opportunities. I mean, the, the non, the non-performing loan ticked up a little bit there, but, um,
spk12: appetite for office just wanted to check in on how you're feeling yeah it's you know obviously we're very careful in that space you know because of all the the dynamics that we talk about but um we did another uh office deal this quarter um of you know some reasonable size not huge but um where you have a investment grade 100 percent uh tenant building um And, you know, we got really good pricing. We got great structure. And because no one else, everybody else has got a, you know, probably over allocated towards that space. We're not. So, again, want to be very thoughtful, want to be very careful. But, you know, there are still really good deals out there. And You know, our job is always, we've talked about this in the past, is never to have to jerk the wheel, never to overreact. And, you know, if there are opportunities out there, you know, we want to be taking advantage of those. But, you know, we're not looking to bulk up on them. You know, we tell our people all the time, it's like, you know, if there's a, because there's almost limitless numbers of opportunities that you could do here. Our job is to really just pick and choose between those that are just you know, can't find a home in those that are really, really great opportunities. So, yes, we continue to be open for business, but very, very picky. Okay.
spk02: And Rich, I missed the CRE review bucket you referenced. Was that a maturing in a certain timeframe? What was that figure again or that?
spk12: Yeah, so what we do, and we've done this for a number of quarters, is to, you know, we really want to focus about what's ahead of us and try to think about, you know, over the next several quarters. So what we do is a three-quarter rolling review of what we're expecting, and what we try to do is identify where we may have some challenges, where there's just least pressures have been, you know, more pronounced or the higher borrowing costs are really affecting that and we may have to ask the borrower to curtail the outstanding balance. So we look at every loan over two and a half million that's coming due in the three quarter period and we just keep track of it. And the thing that, as I pointed out in my comments, that's interesting to me is just those numbers have been pretty consistent in terms of those loans that are gonna require attention. But I think even more importantly is just as we move forward that we have not seen a huge amount of really any materiality in terms of those borrowers who haven't supported their properties. So it's a way for us to kind of look ahead and make sure that we understand what's coming down the pike and address it as prudently as we can. Sure.
spk02: So that's a pretty tight timeframe. I would imagine as you've undergone that analysis in past quarters, that's reflective of the current rate environment. So, I mean, not to get, I guess the confidence in that as you've rolled that, the fact that the statistics have stayed similar, that gives you a pretty good read on credit that nothing's upcoming.
spk12: Yeah, that's exactly right. And that's our way, you know, because our job is to try to, you know, get ahead of stuff before it washes up and, You know, so this is our way of doing that. Not always perfect, you know, but generally it gives you a pretty good understanding as to what you're going to look at. The other thing we, you know, a lot of, you know, has been said about like maturity walls. You know, we look at the maturities pending over the next, you know, two years, two and a half years, and, you know, we just don't have that. You know, it's a very consistent process. a number that's coming due quarter to quarter. And so, you know, again, our job is just to try to look forward as much as we can and try to get in front of those borrowers and make sure that we're all aligned in terms of what the outcome is.
spk02: Appreciate it. And one quick last one, Tim, you know, it sounds like the Makatawa in terms of, you know, two pretty good institutions and, and that timing sounds like a, like a third quarter close, any, I always could come in late, but there's no sort of community issues cropping up with that transaction, as you've heard?
spk09: We received approval on June 17th. The primary process includes a comment period prior to approval. So, no, we continue to believe that not only do we serve our community as well, but they do as well.
spk02: Great. I appreciate it. Thanks.
spk07: Thank you. Our next question comes from the line of David Long of Raymond James. Hi, Dave.
spk01: Good morning, everyone. How's it going?
spk00: Good.
spk01: Good. A lot of talk about the net interest margin here and then sticking around the 350 range. As you think about Macatawa, adding Macatawa, how will that impact the net interest margin? And is that part of that sort of 350 outlook for the next couple of quarters and maintaining that?
spk11: No, 350 we're talking about right now is our current organization. We're not trying to blend in the Macatawa with it. But, David, if you think about it, Macatawa is about 5% of our asset base. You know, they have publicly available data. They're a publicly traded company, so people can look at the cues. We'll go through purchase accounting and revalue all those assets and liabilities to current market value. But once, you know, you go through all of that, we think there'll be, you know, a slight lift to the margin. But because of the size of it relative to the size of Wintrust, it's not going to be dramatic. It's going to be positive. Most things about McIntyre we think are going to be positive for the organization as far as growth and culture and margins, etc. But we haven't disclosed exactly what that number is. One, they've got a shareholder vote coming up and we just don't want to try to get out in front of that and tout this thing ahead of their shareholder vote. But we think it should be marginally beneficial but not materially just because the size aspect of it. But as you know, they've got a fair amount of excess liquidity that we can use since they're a little over 55% loan to deposit. We can take those funds and put them into higher yielding loans fairly quickly. So we think that will be beneficial too.
spk01: Got it. Thank you for the color. And then the follow-up question I have relates to deposits. And there seems to be some bit of a resurgence in savings rates in the Chicago MSA. seeing some rates pretty high and guaranteed for the next six months. What are you seeing on deposit competition specifically in the Chicago market and are you seeing a bit of an increase?
spk09: Subjectively, I would say it's more or less stable. We've been seeing call it six months to 13, 14 month type rates at around 5%. You know, the only surprise, I guess, that I would have personally is that some people have longer terms out there than others. I think we're thinking that those rates should be, you know, 5% and down here going forward. But, again, our competitors sometimes do strange stuff.
spk01: Scott, thanks, guys. Appreciate you taking my questions.
spk07: You bet. Thank you. Our next question comes from the line of Nathan Race of Piper Sandler. Yeah.
spk08: Hi, guys. Good morning. Thanks for taking the questions.
spk07: Morning, Nathan. Yep.
spk08: Just going back to the margin discussion, you know, I appreciate the commentary around, you know, still being able to hold it around 350 even after the cuts begin. I'm just curious within that context in terms of how much you guys have as it relates to kind of rate-sensitive deposits that can kind of reprice one-for-one following each cut?
spk11: Well, I mean, if you look at our disclosures, you know, roughly 80% of our deposits are not CDs. So everything other than CDs and non-interest-bearing deposits are fair game as far as being able to reduce the rates quickly and it would be our intention that if the Fed moves on those money market savings accounts and even CDs, that we would cut the rates fairly immediately. CDs would take a while to work their way through. But as Tim said, you know, we've done fairly short maturities on those recently. So it's not going to take too long for those to work their way through. So, you know, let's say you've got, you know, 60% of them, if you take out on-interest bearings at 21 and you take out CDs just under 20, you've got 40% of them that won't price immediately, but you've got another 60% that you have the ability to do that with. And we think we would be active in doing so.
spk09: Yeah, and as a reminder, we really don't have indexed deposits either. Some of our municipal deposits are sort of tied to a reference rate, which is actually trending down a little bit prior to the Fed even cutting. So that's not gonna move the number a ton, but we're watching it carefully.
spk08: Okay, great, very helpful. Changing gears a little bit, we heard from another Chicagoland institution this morning that there's some increase in M&A chatter lately. I'm curious if, I imagine these are likely smaller deals. Imagine if those are of interest to you guys, just given the size of the company today, or if you guys would still kind of entertain some smaller scale acquisitions these days.
spk09: Well, we think we're good in terms of acquisition activity. We think we've demonstrated an ability to do it well. the Macatawa deal is 2.7 or 2.8 billion. We think that's about the right size. We would certainly look at smaller deals if they made sense in terms of branch overlap where you would get more favorable economics from some sort of cost takeout or if there was a strategic market we felt like we needed to be in. But I think The right range for us is $500 million to pick a number, several billion dollars. We just want good culture, good companies where we can do integration in markets that we can expand. I don't know if that helps Nate or not, but... Yep, no, that's great, Tyler.
spk08: Thanks, Tim. One last one. The gain on sale margin came down versus the 1Q to a considerable degree. Any thoughts on just how the gain on sale margin may trend in the 3Q and 4Q?
spk11: It's down a little bit, but still, I mean, if you look at the range, we've been from the low. We've been from 1.7% to 2.6%. I would expect us to be in the 2% to 2.5% range going forward. Okay, great.
spk08: I appreciate all the color. Thanks, guys. Yeah, thanks, Nate.
spk07: Thank you. As a reminder, to ask a question, please press star 1-1 on your touchtone telephone. Again, that's star 1-1 to ask a question. Our next question comes from the line of Jared Shaw of Barclays.
spk13: Hi, Jared.
spk07: Morning.
spk13: Most of my questions were answered, but I guess, you know, as we look at capital, especially CET1, what should we be thinking about as sort of a target level for that for you? Is that something that we should be expecting to sort of be growing higher, closer to peers, or are you comfortable with it here?
spk11: Well, I think we're comfortable where it's at, obviously. You know, a couple things I'd say there, Jarrett. We also have leverage in our capital stack. We do use preferred securities as capital, which count as Tier 1. They're just not common equity Tier 1. We would expect to continue to grow that number over time here because our earnings generally are outstripping our capital. this quarter was a little unique given the strong, strong growth. But we would expect to grow that and get that over 10% here in a reasonably short period of time. But the limiting factor for us tends to be total risk-based capital in the past, and we managed to that. And if you look in the slide deck on slide 10, you know, that was down a little bit this quarter, but Part of that decrease, one, was the extraordinarily strong growth, but two, we did pay off some sub-debt this quarter, which didn't count as capital, but we also had another sub-debt issue where we're into sort of the amortization period of how the capital is, so we lost 20% of the remaining sub-debt capital treatment. And so that will stay flat until we get to next June, where we lose another 20% of accounting. So that accounted for roughly 1 tenth of 1% decline in the capital ratios. And if you take that out of the equation, capital ratios stayed relatively flat. And going forward, we expect the earnings would outstrip the growth, and we would just continue to grow that number. But we also have a little bit more, we acknowledge this, we have a little bit more leverage in our capital stack. Our preferred securities are relatively cheap in this environment, and they count us through one capital and permanent until we decide to redeem them. So happy to have that capital structure right now, but understanding that we need to get the CET-1 probably over 10 sometime in the reasonably near future.
spk13: Okay, thanks. That's a great caller. And then maybe just finally, when you look at the charge-offs on commercial real estate, what's been the average valuation decline on CRE that you've seen, especially on the office?
spk12: You know, it's such a small population, you know, that it's really hard to kind of draw a number there, you know. But, you know, it's not insignificant. But every deal is just a little bit different, you know, depending on location and existing tenancy and, you know, how effective it is. It's just I would hate to throw a number out there because it's just the range is so big. But nothing that's causing you concern more broadly? Well, I mean, anytime you have declining valuations, I mean, it's not a good situation, you know. So, but, I mean, nothing that's like, you know, massively draconian. I mean, you know, it's something that every, again, every situation is a little bit different just depending on where it's located and most importantly, you know, what the existing lease structure looks like. I mean, that's probably the most profound thing that affects it. And Generally speaking, we haven't had, you know, again, the nature of our portfolio is a little bit unique there because we're not looking at, you know, super large projects. You know, so you tend to have more granularity in the tenant base as well. You know, so we're not seeing, you know, a huge, but, you know, if you have one or two tenants in a building, you know, and you lose one of them, I mean, that's where you're seeing the most profound effects. Great. Thank you.
spk07: Thank you. Our next question comes from the line of Brandon King of Truist.
spk10: Hey, just a follow up on mortgage. Could you give us what your outlook is for the back half of the year? And could you also give us some context as far as the trends you saw, particularly in the later part of the quarter?
spk11: Yeah, well, as I said, we were a little bit more optimistic last quarter that spring buying season would kick in. And the second quarter was a little better than the first quarter. You could see the numbers that we provided. We had origination volumes in the second quarter for sale of $722 million versus $475 million in the first quarter. So a tick up there, but we were hoping it would be a little bit stronger than that. Application volume has been fairly stable the last three or four months, and we would expect it probably to stay relatively stable the rest of the quarter here, and then probably dip down in the fourth quarter just because of seasonality. Generally, fourth quarter and first quarter, unless there's a big drop in rates, the purchase activity slows down, and our purchase activity is really roughly 80% of our activity right now, given the interest rate structure. So we would expect it probably to be relatively flat in the third quarter and then probably dip a little in the fourth quarter, unless we see the longer-term 30-year mortgage rates come down dramatically, which is not our base case right now.
spk12: Yeah. As we talked about last quarter, too, it's It's not for lack of want. We have a lot of prequels that come in all the time. The issue is really just inventory. I think people are looking at the mortgage rates and they've been able to digest the fact that they're up dramatically over where they were a couple years ago. People are looking to buy homes. There's just not a whole lot of inventory out there. When there is a property that comes online, there are multiple offers right away. That's probably the biggest challenge right now is just we are, as Dave said, we're 80% purchase-oriented. So if you can't find a home to buy, you can't take out a mortgage.
spk11: And the other thing I'd add, and Brandon, this is Dave again, is the gross revenue on mortgage banking now is generally $25 to $30 million. You know, once you pay out commissions on other expenses, you know, fluctuation in that line item, the net effect after commissions, other expenses, taxes, is not that dramatic. And we'd love it to go up, and our teams are doing a good job of managing in this environment, and we think doing a really good job in this environment. But we just don't see it moving enough that it's going to have a dramatic impact on the net income number of the company just because of the net profit on that. We just don't see rates moving substantially enough to have a dramatic impact one way or the other.
spk10: Got you. And so with those thoughts on inventory and the issues there, would you say that mortgage could be less sensitive to a decline in rates moving forward?
spk09: Well, I mean, there's sort of a dead zone here because you've got a lot of people with very low rates. And so the beginning of rate decline may not produce a lot of activity. But at some point, you're certainly progressively going to pick up some volume. It's just a question of kind of when that happens. And I'm reasonably certain that most mortgage originators know exactly where all of their clients' rates are.
spk10: Any sense you can give us as to where that level is or is it kind of moving target?
spk09: You know, again, I think it's evolutionary. So, you know, 50 or 100 points would help, you know, but a lot of people have mortgages with a three handle on them. And so, you know, you're going to have to get down to much lower levels before you get back to anywhere near what we saw, you know, four or five years ago.
spk11: Yeah, I mean, I don't have a scientific answer to that, Brandon, but our portfolio that we service, the average rate on that is drifting up and is right around 4% now, where it used to be 3.5%. So, I mean, to get a lot of refis, it'd have to go down dramatically. But I think that there are people out there that when they had a 3.5% to 4% mortgage rate, they weren't going to go for the 7% to 8% rate. But our gut is that if that rate got into the low 6s or high 5s, that people would say, hey, I really want to get this new house. I'll go from 4 to the high 5s. I just wouldn't go from 4 to 8 or 4 to 7.5. And so our gut is you'd see a pickup if you got you know, if you got into the high fives or low sixes. But again, there's got to be supply out there to buy, too. So I think that will mute it. But certainly when rates came down to the sixes before, we started to see a little bit of pickup in activity. So I guess we would think that if you got into the low sixes, that would be quite helpful.
spk10: That is very, very helpful. Thanks for taking my questions.
spk09: You bet. Thank you.
spk07: Thank you. At this time, I'd like to turn the call back over to Tim Crane for closing remarks.
spk09: Thanks, Lateef, and everybody on the line, thank you for joining us. Overall, a solid quarter that we think is continued progress in growing the franchise and our presence where we compete. We remain excited about the Makatawa acquisition and hope to be able to share more information with you next quarter. As always, we appreciate your questions and your feedback. Feel free to reach out with any follow-up items and You can count on our good team to work hard here. So with that, we'll sign off. And Lateef, thank you. Thank you.
spk07: And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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