Wintrust Financial Corporation

Welcome to Wintrust Financial Corporation's third 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 forward-looking statement. The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10-K and any subsequent filings with the SEC. Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable gap 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. And thank you for those on the phone joining us for the Wintrust third quarter earnings call. In addition to the introductions Lateef made, I'm 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 in color on credit performance and loan activity. I will be back to wrap up with some summary thoughts on what we expect for the remainder of 2024. And, of course, we'll do our best to answer some questions at the end. Before we dive in, let me remind you that this quarter has a few more moving pieces than normal, as it includes two months of the results for Makatawa Bank. We closed on that transaction during the quarter on August 1st. For the quarter, we reported net income of just over $170 million and reported record net income of just under $510 million for the first three quarters of the year. These results were in line with our expectations, and we remain encouraged by underlying activity and pipelines. We grew loans by $2.4 billion, $1.3 acquired from Macatawa, and another $1.1 billion organically. We grew deposits by over $3.4 billion, $2.3 billion for Macatawa, and $1.1 billion organically. Importantly, we reduced higher rate broker deposits by over $800 million at quarter end, an immediate benefit of the excess deposits from the Macatawa acquisition. The organic loan growth, organic meaning excluding Macatawa, was balanced across all material product categories, which continues to illustrate the benefit of our diverse asset-generating businesses. The organic deposit growth included absolute growth in our non-interest-bearing deposits, and the percentage of non-interest-bearing deposits relative to total deposits remained stable for the quarter. Both the loan and deposit results are strong evidence that we continue to gain share in Chicago, the surrounding markets, and in our niche businesses. In fact, for the Chicago MSA, Wintrust increased deposit share to 7.7%, In contrast, the two largest banks in the MSA, Chase and Bank of America, lost deposit share. This is data from the June 30th FDIC reports. The net interest margin of 351 was in line with our expectations, and combined with organic growth and the Baccataw acquisition, produced record net interest income of $503 million, up approximately $32 million from the second quarter. I know many of you remember Wintrust as asset sensitive and well positioned for the rate increases over the past few years. It's important to note that we are now very currently balanced in terms of interest rate sensitivity and well positioned for an orderly movement of rates downward. We expect our margin to remain near current levels for the coming quarters and accordingly should experience net interest income growth. On the credit front, non-performing loans remain low essentially flat from the second quarter, and charge-offs were down for the quarter. Again, Rich will walk through the credit results and will offer some additional detail on the loan growth in just a moment. A quick note on mortgages. Although we tend to get a lot of questions, at current levels, mortgages remain relatively insignificant in terms of the financial impact apart from the MSR valuation. On that front, as you know, it's rate-sensitive, and there can be some fluctuation. Rates since quarter end are back up, and given today's rates versus those from the end of the quarter, it's likely the valuation adjustment has been recovered. In terms of new mortgage activity, there were a few days during the quarter where rates dropped, and it looked like we might see a pickup in mortgage production, which could have been helpful, but that has not lasted, and mortgage activity remains muted. Our mortgage business, however, remains an effective hedge for us if rates trend lower and a core part of our client offerings. Our two other major fee-based businesses, our treasury management activity and our wealth businesses, continue to exhibit steady growth. Overall, a solid quarter. In particular, our team continues to do a very nice job with respect to pricing and credit discipline, which will continue to show up in our results and specifically in our margin going forward. With that, I'll turn this over to Dave and Rich, and I'll be back to wrap up.

Great. Thank you, Tim. First, with respect to the balance sheet growth, Tim mentioned the strong loan and deposit growth in the third quarter, excluding the impact of Macatawa. That produced a balanced $1.1 billion of growth for both loans and deposits. The loan growth net of the acquisition was nearly 10% on an annualized basis, in line with our prior guidance of being in the upper end of our mid- to high-single-digit loan growth forecast. Also, including the impact of Macatawa, we ended the third quarter with a slightly reduced loan-to-deposit ratio of roughly 92% compared to the 93% at the end of the prior quarter. I think it's important to note that non-interest-bearing deposits increased by approximately $708 million in the third quarter relative to the second quarter, with that growth driven mainly by the non-interest-bearing accounts associated with the Macatawa Bank acquisition. Total non-interest-bearing balances have remained stable at 21% of total deposits as of the end of each of the first, second, and third quarters of this year. As to other aspects of the balance sheet results, total assets grew by approximately $4 billion to $63.8 billion, and our capital ratios increased slightly due to the strong earnings and the impact of the Macatawa acquisition. Turning to the income statement results, this was a very solid operating quarter for us, but as Tim mentioned, the quarter had a few moving pieces. To that end, I'll start off by highlighting what we consider the uncommon items and what they were for the quarter. From our perspective, the quarter included a non-recurring day one provision for credit losses related to the Macatawa Bank acquisition of $15.5 million, unfavorable mortgage servicing rights activity of $11.4 million, acquisition costs of approximately $1.6 million, with the negative impact of those items offset by security gains of $3.2 million. Each of those items are discussed on the second page of the earnings release if you'd like to refer to them later. The quarter was also impacted by the inclusion of McIntyre's operations for two-thirds of the quarter. So I'll touch on each of these topics during the remainder of my comments, but just wanted to set the table with those items. Our net interest income increased $32 million from the prior quarter and represented a record high level amount of quarterly net interest income. A $3.1 billion increase in the average earning assets, including the addition of the Macatawa franchise for the last two months of the quarter, and a stable net interest margin contributed to the increase in net interest income. Our second quarter net interest margin was 3.51%, which was stable compared to the 3.52% net interest margin in the prior quarter. Yields and rates on the major balance sheet categories were relatively flat, with loan yields at 6.90% for both the second and the third quarter, and interest-bearing deposit costs were down one basis point from the second quarter. Given the current rate environment and the consensus forecast for additional interest rate cuts by the Federal Reserve, remain confident that our net interest margin continued to be in a narrow range around 3.5% in the fourth quarter of 2024 and into 2025. Given our relatively stable net interest margin outlook and the projected continued growth in earning assets, we would expect to, again, increase net interest income in the fourth quarter. We recorded a provision for credit losses of $22.3 million in the third quarter, which included the one-time non-recurring day one CECL provision of $15.5 million related to the McIntyre Bank acquisition. Excluding this one-time day one acquisition-related provision, the provision for credit losses would have been approximately $6.8 million, which is down from a provision of $40.1 million recorded in the prior quarter and the $20 million amount recorded in the third quarter of last year. The lower provision expense in the third quarter relative to the second quarter was primarily attributable to lower specific reserves on non-accrual loans, improved forecasted macroeconomic conditions, and to a lesser extent, portfolio changes related to an improved risk rating mix and an overall shorter life of the loan portfolio. Rich Murphy will talk about credit and loan portfolio characteristics in just a bit. Regarding the other non-interest income and non-interest expense areas, Non-interest income totaled $113.1 million in the third quarter, which was down approximately $8 million when compared to the prior quarter. The primary reason for the decline was due to the unfavorable mortgage servicing rights-related revenue of $11.4 million, mostly due to negative valuation adjustments as mortgage rates dipped near the end of the quarter. Mortgage production revenue was also down slightly as gain-on-sale margins narrowed on what was slightly higher originations for sale production volumes. Those reductions in mortgage revenues were offset somewhat by a $7 million positive change in gains and losses on securities. I should also note that the prior quarter included an approximately $5 million gain on the sale of certain premium finance loans, which did not reoccur in the third quarter. And although we do hedge a portion of the MSRs, large movements in interest rates may cause some valuation impacts, both positive and negative, and the dip in the interest rates at the end of the third quarter was the cause of the current quarter negative valuation adjustment. But as Tim noted in his comments, subsequent to the end of the quarter, mortgage rates have risen, which if the quarter were to end at these levels, would cause a positive valuation adjustment in the fourth quarter. Turning to non-interest expenses, non-interest expenses totaled $360.7 million in the third quarter and were up approximately $20.3 million from the second quarter. The primary reasons for the increase were, first, the non-interest-bearing expenses associated with the Macatawa Bank acquisition were approximately $10.1 million, including a $3 million core deposit intangible amortization expense. As this additional $10 million is only for two months of the quarter, we would expect approximately $5 million of additional Macatawa-related expense in the fourth quarter to account for a full quarter's worth of activity. Non-operating acquisition-related expenses were approximately $1.6 million in the third quarter compared to half a million dollars in the prior quarter. The remaining increase of approximately $9 million was primarily related to salary costs for increased staffing to support the company's growth, higher incentive compensation expense accruals, and increased software expense associated with upgrading and maintaining IT and information security infrastructure and furthering our investments in digital products and services. The non-interest expenses we believe are well controlled when considering the impact of the acquisition. Even with that impact of the acquisition, non-interest expenses as a percent of average assets declined to 2.36% for the third quarter compared to 2.38% in the prior quarter and 2.41% in the third quarter of last year. This demonstrates improved expense operating leverage and we'll continue to try to bring those numbers down. In summary, the third quarter results included a record level of quarterly net interest income supported by strong loan and deposit growth and a stable and solid net interest margin. The quarterly results also had good expense control and stable credit metrics. Said another way, excluding the impact caused by the non-recurring Macatawa day one related provision for credit losses and the MSR valuation adjustments, it was a really solid quarter for WinTrust and we're very excited about the prospects for the remainder of the year and throughout 2025. We also continued to build our tangible book value per share during the quarter, and as you can see in slide 12 of the presentation deck, we've grown tangible book value per share every year since we've been a public company, and we're certainly on track to do that again in 2024. Additionally, as we've recently attended several investor conferences where the topic of total shareholder returns was discussed on various occasions, we included a new slide, slide 13, in the presentation deck, that provides a graphical illustration of Wintrust's total shareholder returns for the last 1, 3, 5, and 10-year periods compared to the KBW Regional Bank Index total returns. As you can see from that slide, Wintrust has consistently outperformed that Regional Bank Index, which I think illustrates the resiliency of our operating model through a variety of economic cycles. So with that, I will conclude my comments and turn it over to Rich to discuss credits.