Wintrust Financial Corporation

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.

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.

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.