Wintrust Financial Corporation

Welcome to Wintrust Financial Corporation's first quarter 2025 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.

Tim Crane Latif, thank you. Good morning, everyone, and thank you for joining us for the Wintrust Financial first quarter earnings call. In addition to the introductions Lateef made, I'm joined by Dave Starr, our Chief Financial Officer, and Kate Bogey, our Chief Legal Officer. 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 on credit performance and loan activity. I'll be back to wrap up with some summary thoughts, and of course, we'll do our best to answer some questions at the end. Let me start with this was a very clean and straightforward quarter. We reported quarterly net income of $189 million and record net interest income of $526 million despite two fewer business days in the first quarter compared to the prior period. These results were in line with our expectations with several positive encouraging underlying elements. For the quarter, we grew loans by over $650 million and deposits by over $1.1 billion. We continue to gain share in the market, adding meaningful new client and household relationships. The net interest margin of 356 was five basis points higher than the fourth quarter result, reflecting disciplined loan and deposit pricing. We remain very neutral from a rate sensitivity standpoint and should continue to show a relatively stable margin in the coming quarters. That relatively stable margin combined with what we expect to be a solid second quarter from the standpoint of loan growth should yield continued good growth in net interest income. Charge-offs for the quarter were down to 11 basis points. The provision of $24 million was in line with the prior several quarters and resulted in slightly improved coverage ratios. Non-performing loans were stable. Overall, we continue to deliver consistent results in line with both our own expectations and those shared with you on prior calls. I'll turn this over to Dave, and I'll be back to offer some additional thoughts in a few minutes.

Great. Thanks, Tim. First, with respect to the balance sheet growth, Tim mentioned another strong quarter of loan and deposit growth. The loan growth was 6% on an annualized basis, which was in line with our prior guidance of being in the mid to high single-digit growth range. and deposit growth for the quarter was approximately 8% on an annualized basis. This resulted in a period end loan to deposit ratio which remained consistent with the prior quarter at roughly 91%. Non-interest bearing deposits remained relatively stable during the first quarter and represented 21% of total deposits at the end of the quarter. Total non-interest bearing balances have stayed in a tight range of approximately 21 to 22% of total deposits for each of the last five quarters. Turning to the income statement results, another solid operating quarter producing a record level of net income and just a few moving pieces. To that end, I'll start off by highlighting what we consider the uncommon items to be for the quarter. From our perspective, the quarter included acquisition-related costs of $2.7 million and net security gains of $3.2 million. Those items essentially net each other out for minimal impacted net income and are discussed on the first page of the earnings release if you'd like to refer to them later. With those items in mind, I'll touch on each of the major income statement categories. As Tim mentioned, our net interest income increased slightly compared to the fourth quarter of 2024 to a record quarterly level. An increase of $496 million in average earning assets and a five basis point increase in net interest margin more than offset the two fewer days in the quarter. Our first quarter net interest margin was 3.56% compared to 3.51% in the prior quarter. Yields and rates on the major balance sheet categories were lower because of the recent market declines in short-term interest rates, with the loan yields moving down 15 basis points to 6.53%, and interest-bearing deposit costs declining 23 basis points from the fourth quarter to 3.16%. Given the current interest rate environment and even with a few rate changes in either direction, we remain confident that our net interest margin can continue to be relatively stable throughout the remainder of 2025. The slightly higher provision for credit losses recognized in the first quarter as compared to the prior quarter is primarily attributable to the uncertain economic environment and the potential impact of higher credit spreads and lower financial market valuations. Although I would note that our credit metrics remain low and stable during the first quarter. And the first quarter provision is near the average of the provision for credit losses that we recorded during the last five quarters. Rich Murphy will talk about credit and the loan portfolio characteristics in just a bit. Regarding other non-interest income and non-interest expenses, total non-interest income was relatively consistent with the prior quarter, increasing approximately $3.2 million relative to the fourth quarter of 2024. and totaled $116.6 million. Increases in net security gains and fees from covered call options were somewhat offset by lower wealth management revenue. Mortgage banking activity continued to be subdued and was essentially unchanged from the prior quarter. Turning to non-interest expense categories, non-interest expenses totaled $366.1 million in the first quarter and were well controlled and down approximately $2.4 million from the prior quarter. The primary reasons for the decrease were, one, salary and employee benefit expenses were down approximately $607,000. The slight decrease in this expense category was primarily due to annual merit increases that were effective February 1st, which were more than offset by lower commissions on reduced levels of mortgage and wealth management activity and lower health insurance claims. Relative to the prior quarter, the company experienced a seasonal decline in travel and entertainment expenses, as well as lower levels of professional fees due to a reduced level of project-related consulting fees and slightly lower marketing costs. Offsetting those expenses were approximately $2.7 million of acquisition-related costs during the quarter. The remaining variations in non-interest expenses during the quarter were a combination of other relatively non-noteworthy fluctuations. I would like to talk about second quarter expectations on non-interest expenses. We would expect them to increase slightly based upon the second quarter having a full effect of annual merit increases. So the first quarter had two-thirds of the impact. The second quarter will have the full impact of the merit increases. We expect to experience slightly higher employee benefit expense due to increased level of health insurance claims during the quarter compared to a seasonally low first quarter. And as we've discussed on many previous calls, marketing expenses tend to be higher in the second and third quarter of the year due to expenditures related to various major and minor league baseball sponsorships and other summertime sponsorship events held in the communities we serve. I think we can look at last year's trends and get a feel for roughly how the marketing expenses increase in the middle two quarters of the year relative to the first and the fourth quarters. Additionally, to the extent we see growth in the mortgage and or wealth management revenues, we'd have a corresponding increase in incentive compensation, but that would obviously be an overall beneficial situation. We also continue to build tangible book value per common share, ending the quarter at 78.83 cents per share compared to 75.39 cents per share in the prior quarter, and 70.4 cents per share in the year ago quarter. So with that, I'll conclude my comments and turn it over to Rich to discuss credit.

Thanks, Dave. As Tim and Dave both noted, credit performance continued to be very solid in the first quarter. As detailed in the earnings release, the loan growth for the quarter came from a number of areas. Our life premium finance segment, which had another strong quarter, grew by $218 million. The mortgage warehouse team also built on their momentum from last year and grew by $126 million as we continue to fill out new relationships, which also come with meaningful deposit opportunities. And portfolio residential real estate loans grew by $72 million. We believe that loan growth for the second quarter of 2025 will continue to be strong and at the high end of our previous guidance of mid to high single digits for a number of reasons. We have traditionally seen our highest funding volumes for our first insurance funding premium finance business in the second quarter of each year. We would anticipate growth in this segment alone to be close to $1 billion in Q2. In addition, core C&I pipelines remain solid, and we have very strong momentum in our other niche businesses, including leasing and mortgage warehouse. While there is growing uncertainty in economic conditions as a result of potential tariffs, tax law changes, and funding cuts, we continue to remain optimistic about our ability to grow loans for the remainder of this year within our guidance and with appropriate structures and pricing. From a credit quality perspective, as detailed on slide 14, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics. Non-performing loans, as a percentage of total loans, decreased slightly from 36 basis points to 35 basis points. NPLs in total were consistent quarter over quarter from 171 million to 172 million. Charge-offs for the quarter were 12.6 million, or 11 basis points, down from 15.9 million, or 13 basis points, in Q4. And while concerns about the economy continue to mount, we believe that the level of MPLs and charge-offs in the first quarter reflect a stable credit environment, as evidenced by the chart of historical non-performing asset levels on slide 15 and the consistent level in our special mention in substandard loans on slide 14. 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 our total portfolio. As detailed on slide 18, we continue to see signs of stabilization during the first quarter as CRE NPLs remained at a very low level, increasing slightly from 16.16% to .20%. And we saw CRE charge-offs remaining at historically low levels from three basis points to one basis point quarter over quarter. On slide 19, we continue to provide enhanced detail on our CRE office exposure. Currently, this portfolio remains steady at 1.6 billion, or 12.7% of our total CRE portfolio, and only 3.4% of our total loan portfolio. Of the 1.6 billion of office exposure, 45% is medical office or owner-occupied. The average size of a loan in the office portfolio is only 1.5 million. We have only eight loans of 20 million, and only five of which are non-medical or owner-occupied. We continue to 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 maturing between now and the end of this year. This analysis, which covered 79% of all non-owner-occupied CRE loans maturing during this period, showed very consistent results compared to prior quarters. Tim mentioned macro uncertainties as a result of potential tariffs and funding cuts, and while it's too early to determine the full effects that these issues may cause, We believe the impacts on our portfolio will be limited as a result of our strong underwriting standards and disciplined approach to diversification. In addition, our goal is to stay ahead of these specific challenges, and we are conducting detailed reviews of our portfolio to identify clients who may be impacted. As always, our goal is to be proactive and work closely with our clients to help them navigate periods of uncertainty. Times like this really highlight the benefit of having a local bank and an experienced banking team on your side. That concludes my comments on credit, and now I'll turn it back to Tim.

Great. Thanks, Rich. To wrap up our prepared remarks, a reminder and a few thoughts. During the quarter, we announced an increase in our dividend to $2 per share on an annualized basis. We continue to grow our capital ratio steadily, our CET run ratio, which ended the quarter at slightly over 10%. During the quarter, we also received several forms of recognition. We received 14 Coalition Greenwich Awards, which measure performance with commercial clients on both a regional and national basis. We won the J.D. Power Award for Best Customer Service in Illinois for the fourth consecutive year. We also were recognized as a top employer in all of our material markets in a separate rating. While we always appreciate the recognition from these organizations, what's really important is the feedback we receive around our differentiated client service. We use that feedback to better our relationships and service levels with the goal of continuing to win and retain business. Our net promoter scores, one recognized measure of client service, continue to improve and materially, and I would add very materially in some cases, exceed those of our competitors. In just a moment, it's likely you'll ask questions about the economic environment tariffs and what clients are telling us, and we'll do our best to answer those questions, particularly what we're hearing from clients. But at a high level, there's a fair amount of uncertainty in the market. At a minimum, the uncertainty causes clients to pause and make sure they understand the environment and, for lack of a better word, the rules before making major investments. To sum up, we had a solid first quarter. The important thing for us, regardless of economic conditions, is that we continue to care for our clients by delivering differentiated service that others do not and, in some cases, cannot offer. We will be mindful of and prudent around the risks we take. Over time, independent of the economic conditions, this approach will continue to make us the bank of choice where we compete and will result in a more valuable franchise for our shareholders. At this point, I'll pause and we can take some questions.

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

Hey, thanks. Good morning.

Morning, John.

Tim, I'll probably start with where you thought we would, but you obviously have a very solid message on loan growth, but can you give us a little bit more on how prevalent some of the uncertainty is from borrowers and are they actually pausing and is it having an impact on on your growth outlook, despite the fact you basically reiterated it? Is there an impact right now?

Sure, John. And Rich and I can take this together. But we do hear of people pausing. And obviously, people are concerned about uncertainty, but generally remain pretty encouraged about the local economy and their ability to perform kind of on a normal basis. And so As you suggested, we're not changing our expectations around loan growth at this point and think we'll have a particularly good second quarter in part due to the P&C business.

John, I would also point out we do a pretty deep analysis on our customer sentiment by going out there and talking to customers, particularly those that we feel might be more affected by any tariffs or funding cuts. Generally, I think people are cautious, but they still seem to be playing this as business as usual until they hear difference. So I wouldn't say there's a dramatic amount of pessimism. I'd say people are just kind of waiting and seeing. But we want to make sure that we're actively talking with them and making sure that they know that we're there for them. The second piece that I would point out is a number of pieces to our portfolio really wouldn't be affected by that. So the premium finance side, you get some issues there relating to sediment, but people still need to insure their properties. People still need to plan their estates. The mortgage warehouse business is going to continue to do what it does. So those topics that we're addressing right now really focus more on our core CNI and CRE portfolios But there's a significant segment of our portfolio that we think will be largely unaffected by those tariffs, depending on what happens there. So I think there's more that we don't know than we know. But right now, we still feel pretty good, certainly through the first half of the year. And from there, it gets a little bit more difficult to see.

Yep. Okay. Yeah, fair enough on that. Okay. And this is maybe somewhat related, but on slide 14, you break out your reserve cadence and It looks like a better baseline, but some macro uncertainty factors. Can you just kind of walk us through the thought process on that in terms of what you did on the reserve changes?

Yeah, John, this is Dave Dykstra. You're right. The baseline economic scenario that we used out of Moody's, the factors out of Moody's that we use are a number of factors in that baseline scenario. The ones we used generally got better during the quarter. And so you'll see on that chart you referred to on slide 14, that was actually beneficial. But right near the end of the quarter, a few of those variables like the BAA credit spreads really sort of spiked up and some of the equity market factors that we monitor deteriorated. And so we did do an uncertainty overlay to accommodate the spikes at the end of the quarter. even though the baseline forecast didn't fully incorporate those yet. So just for the uncertain conditions, we provided for a little bit wider credit spreads and a little bit more deteriorated equity market situation than what was in the baseline Moody's scenario. And that's that $35.9 million scenario. number that shows on slide 14. That overlay resulted in that amount of additional provision. But as I said in my comments, it's still roughly on average what we've done the last five quarters. So we think it was prudent to do it given the situation and build the reserves. Okay. All right. Thanks.

Appreciate it.

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

Hey, guys. Good morning. Thanks for taking the question. Morning, Nate. Yep. On the margin front, you know, just curious in terms of how much additional kind of non-maturity deposit cost leverage you have with the Fed presumably on hold at least through the second quarter. You obviously provide great detail on the CD repricing front in the earnings release, but just curious on the non-maturity side.

I think there's a little bit there, Nate. It seems like the competition in the market is, again, in Chicago is very rational, and we've seen a little bit of decline by some of our competitors in those categories. So we think there's a little bit that we can do there. We also expect to have, as Rich said, a very strong second quarter loan growth, so we have to balance that with raising the deposits from our core customers to support that loan growth. But generally speaking, I think the trend is a slight decline in those rates in the marketplace.

Okay. And have you noticed any changes in competitive pricing on new home production lately? You know, I know, you know, the coupon mix can vary depending on production in any given quarter. And obviously you have commercial insurance, premium finance, expect to have a strong 2Q, but just kind of any comments in terms of what you're seeing from a competitive perspective and just kind of maybe on a blended basis where new loans are coming out of the portfolio at these days.

I'd say generally things remain pretty consistent. When you look at premium finance, there's a little bit of a moat there where it's competitive, but I think we offer a product that we have a market share in that, we are the market leader, and I think we can price appropriately. In some of the more transactional areas, it's probably a little bit more pressured. We're seeing a little more pressure in the leasing space. We're seeing a little more pressure in CRE, particularly fully funded CRE. But as of this point, nothing that you know, is overly disconcerting. But I think a lot of banks are, you know, struggling for loan growth. And so they're, you know, probably pricing a little more aggressively, particularly if they can get something that is fully funded from day one. So those are the two areas I would call out.

Okay. And Rich, while I got you, if I could sneak one last one in, just in terms of the rising criticized loans in the quarter, any common threads or kind of any geographic areas or portfolios that drove that increase?

No, you know, it's funny. We were looking at that this morning and went back in the last quarter and It was the other way. We actually had net upgrades. So our risk ratings are meant to be dynamic, depending on certain things. It's a relatively nominal number relative to the entirety of the portfolio. And I went and looked at the few deals that did move, and no real common denominators there. So I don't think it's the beginning of a trend. I think it's really more of a one-off.

Okay, great. I appreciate all the color. Thanks, guys. Nice quarter. Thanks, Nate.

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

Hey, good morning, everybody. Thanks for the questions. Maybe starting just to follow up on John's credit question, when we look at the The slide 14 trends, it feels like I guess what Moody's got a little better in February and then worse in March. Is that right? And then you have your qualitative overlay. Should we think that if the Moody's scenario, the baseline scenario continues to stay weak or gets a little weaker, would that drive provision a little higher from here? Or do you feel like your qualitative overlay covered for that, and maybe we see that pull back a little bit if we see broader deterioration on the baseline.

Yeah, I don't necessarily think the baseline changes that much. It's more a couple of the factors that we focus on that impact our portfolio, the BAA credit spreads and some of the equity market factors. not inside the Moody's forecast, but in reality, we saw them deteriorate a little bit at the end of the quarter. So given that spike at the end of the quarter and the uncertainty with that that went into the first quarter, we did the overlay. So we'll have to see how the April and May and June Moody's forecasts come out and how they apply, but We think that that $35.9 million overlay that we had, in our opinion, would be appropriate to account for that. So unless there's any further deterioration, we would think it should be a fairly normal provision based upon growth, et cetera.

Okay. All right, thanks. And then on wealth management, can you just comment a little bit about how sort of new client acquisition is going there? and how that level of organic growth is versus the moves we've seen just from market rates on AUM.

Yeah, this is Tim. I think, I mean, there's a couple things going on. We're in kind of the 11th hour of switching our platforms, which provide better capabilities for our financial advisors and for our money management professionals. And so that was part of the reason the first quarter was a little softer. we expect improvement in the wealth management business and those better capabilities to give us some momentum going forward. And so obviously the market swings matter, but absent the market swings, we think we have good momentum and the team's well positioned to continue to grow our wealth business.

Okay, thanks. And just finally for me, can you share your updated thoughts on M&A and growth through acquisition going forward once once Bremer's closed, do you feel that you have the capital to do that? And is there, you know, sort of what's the appetite or the market like on M&A now?

Well, you probably should ask the old national folks about Bremer, but I understand they're scheduled to close in a couple months. I'm sorry, I'm in. No, that's okay. I know we've got some overlap in our call here, too. So it's okay. I totally understand. The M&A conversations continue. Obviously, there's been volatility with respect to the market value of financial institutions, but we continue to have good conversations. We think we're good as an acquirer. I think Macatawa is in a terrific place and will be growing as we kind of get the second half of the year going. We'll be disciplined, but, you know, certainly think we have the financial resources to move forward on any M&A that would be attractive to us.

Great. Thank you.

Yep. Thank you. Our next question comes from the line of Chris McGrady of KBW. Please go ahead, Chris.

Hey, how's it going? This is Andrew Lechner on for Chris McGrady.

Hey, Andrew, please go ahead.

Hey, so, you know, deposit growth has been pretty solid recently and, you know, just given economic uncertainty, how should we be thinking about, you know, the source of that deposit growth going forward?

Well, I think pretty consistent in terms of our existing mix in total. You know, as Rich mentioned a little bit earlier, and Dave did too, I think we will continue try to grow deposits to match the loan growth. And that's been kind of our MO for the last several quarters. The non-interest bearing piece has remained stable as we add principally commercial relationships and nice growth in terms of households on the consumer side. But even at increased deposit cost at the margin, we like growing deposits. We add new clients to the franchise. We ultimately will sell those clients other services. I don't think you'd see a mixed change that would be very material.

No, and I also point out that our deposit growth was stronger than our loan growth this quarter, and we then past indicated that we thought they would sort of grow in tandem, but in anticipation of a strong second quarter loan growth, You know, we grew deposits a little bit faster, and that will serve us well going into the second quarter. But the market's so rational. Our position is fantastic. Chicago's competitive position. So we think we can keep growing them as we have recently.

Okay, great. Thank you. That's it for me. Yeah, you bet.

I'd like to turn the conference back to Tim Crane for closing remarks. Sir?

Yeah, Lateef, thank you. And for those of you who joined us this morning, thank you for taking the time. I'd just say a very clean quarter, NII up, margin up, good loan growth that should be better in the second quarter, and solid evidence of differentiated service level versus our peers. You know, we enter the second quarter with good momentum, and as always, you'll get our best efforts. So thank you, and Lateef, with that, we'll sign off.

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