WTFC (2025 - Q1)

Welcome to Wintrust Financial Corporation's first quarter 2025 earnings conference call. A review of the results will be made by Timothy 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's 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. Timothy Crane. Timothy

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 David Stoehr, Chief Financial Officer, and Kate Bogie, our Chief Legal Officer. In terms of an agenda, I'll share some high-level highlights, David Dykstra will speak to the financial results, and Richard Murphy 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 and 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 clients and households. The net interest margin of 3.56% 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 David Dykstra, and I'll be back to offer some additional thoughts in a few minutes. 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 represent 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 in 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 impact to 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 balance sheet or 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. Richard 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, in total of $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, were well controlled, and down approximately $2.4 million from the prior quarter. The primary reasons for the decrease were one, salary employee benefit expenses were down slight decrease in this expense category was primarily due to annual merit increases that were effective February first 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 and slightly lower marketing costs. Offsetting those expenses were approximately $2.7 million of acquisition-related costs during the quarter. 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 the expenditures related to various major and minor league baseball sponsorships and other summertime sponsorship events held in the communities we serve. You 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 per share compared to $75.39 per share in the prior quarter, and $74.04 per share in the year-ago quarter. So with that, I'll conclude my comments and turn it over to Richard Murphy to discuss credit.

Thanks, David. As Tim and David 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 with 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 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, 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 fourteen, 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 NPLs 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 fifteen, the consistent level in our special mention and substandard loans on Slide fourteen. 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 eighteen, 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 nineteen, 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 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 above $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 would be maturing between now and the end of this year. This analysis, which covered 79% of all known 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. 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. 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 CET1 ratio, which ended the quarter, is slightly over 10%. During the quarter, we also received several forms of recognition. We received fourteen 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, and we were also 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 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 is 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.

Star one one in your telephone. Our first question comes from the line of Jon Arfstrom of RBC Capital Markets. Please go ahead, Jon.

Hey. Thanks. Good morning.

Morning, Jon.

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 your growth outlook, like, despite the fact you basically reiterated it? Is there an impact right now?

Sure, Jon. And that Rich and I can take this together. But, you know, 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, you know, 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.

You know, Jon, I would also point out, we do 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. And generally, I think, you know, people are cautious, but they still seem to be playing this as, you know, it's business as usual until they hear different. So, you know, I wouldn't say there's a dramatic amount of pessimism. I'd say people are just kinda waiting and seeing, but you know, we wanna make sure that, you know, 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 as relating to settlement. But people still need to ensure their properties. People still need to plan their estates. The mortgage warehouse business, you know, is gonna continue to do what it does. So you know, those topics that we're addressing right now really focus more on our core C&I and CRE portfolios. But there's a significant segment of our portfolio that we think will be largely unaffected by, you know, those tariffs. You know, depending on what happens there. So you know, 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 fourteen, you break out your reserve cadence and it looks like a better baseline but some macro uncertainty factors. Can you just kinda walk us through the thought process on that in terms of what you did on the reserve changes?

Yeah, Jon. This is David Dykstra. You're right. The baseline economic scenario that we used out of Moody's, the factors out of Moody's that we use or number of factors in that baseline scenario. The ones we use generally got better during the quarter. And so you'll see on that chart you referred to on slide fourteen, that 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 the $35.9 million number that shows on slide fourteen. That's that overlay result in that amount of additional provision. But as I said in my comments, it's still roughly on the 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. Alright. 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 checking on. Good morning, Nate. Yep. On the margin front, you know, just curious in terms of how much additional kinda 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.

Well, I think there's a little bit there. It seems like the competition in the market is again, in Chicago, is very rational, and we've seen a little bit of the decline by some of our competitors in those categories. So we think there's a little bit that we can do there. You know, 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 that we from our core customers to support that loan growth. But generally speaking, I think the trend is a slight decline in rates in the marketplace.

Okay. And have you noticed any changes in competitive pricing on new room 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, pre and finance, expect to have strong 2Q, but just kinda 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 on the portfolio at these days? Yeah. I'd say generally, you know, things remain pretty consistent. You know,

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 you know, 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, that'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, you know, as of this point, you know, 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 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 slip 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, you know, went last quarter you know, it was the other way. We actually had, you know, net upgrade. So our risk ratings are meant to be dynamic, you know, depending on, you know, as 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 nothing real no real common denominators there. So you know, 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. Yeah. Thanks, Nate.

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

Hey. Good morning, everybody. Questions. Maybe starting just to follow-up on on Jon's credit question. When we look at the slide fourteen 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. We think that if the Moody's scenario, the baseline scenario continues to stay weaker, 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, you know, maybe we see that pullback a little bit if we see, broader deterioration in the baseline.

Yeah. Yeah. I don't necessarily think the baseline changes that that much. It's more of a couple of the factors that we focus on that impact our portfolio, the BAA credit spreads and some of the equity market factors, They just not inside the Moody's forecast. But they did in the you know, in reality, we saw them to deteriorate a little bit at the end of the quarter. So given that spike at the end of quarter and the uncertainty with that went into the first quarter, we did the overlay. So we'll have to see how, you know, the April and May and June Moody's forecasts come out and how they apply. But we think that that you know, that $35.9 million overlay that we had you know, 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, etcetera. Okay.

Alright. Thanks. And then on management, can you just comment a little bit about how how sort of new client acquisition is going there and how sort of, you know, that level of organic growth is versus the moves we've seen just from market market rates. On AUM.

Yeah. This is Tim. I think I mean, there's a couple of things going on. We're in kind of the eleventh 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 team's well positioned to continue to grow our wealth business.

Okay. Thanks. And just about it for me, can you share your updated thoughts on on M&A and growth through acquisition going forward once Bremer's closed. 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 Bill National folks about Bremer. But I understand they're scheduled to close in a couple of months.

Oh, sorry, man.

No. That's okay. I know we've got some overlap in our call here too. So it's okay. I totally understand. You know, 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. We think Macatawa is in a terrific place and will be growing as we kinda get second half of the year going. So we'll be disciplined, but certainly think we have the financial resources to move forward on M&A that would be attractive to us.

Great. Thank you.

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

Hey. How's it going? This is Angelo Escher on for Chris McGratty.

Hey, Andrew. Please go ahead.

Hey. So the 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. As Rich mentioned a little bit earlier, and David Dykstra did too, I think we will 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, you know, principally commercial relationships and nice growth in terms of households on the consumer side. But we 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. And so I don't think you should you'd see a mix change that would be very material.

No. And I also point out that you know, our deposit growth was stronger than our loan growth this quarter. And we then passed 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'll serve us well into the second quarter. But the market's still rational. We are positioned as fantastic. Chicago is on a competitive position. So we think we can keep growing them as we have.

Okay. Great. Thank you. That's it for me.

Yeah. You bet.

Now I'd like to turn the conference back to Timothy Crane for closing remarks.

Yeah. Let's Lateef, thank you. And for those of you who've 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 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.