Yahoo Finance Wintrust Financial Corporation (NASDAQ:WTFC) Q1 2024 Earnings Call Transcript
Wintrust Financial Corporation (NASDAQ:WTFC) Q1 2024 Earnings Call Transcript April 18, 2024
Wintrust Financial Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to Wintrust Financial Corporation's First Quarter 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. 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: Thank you, Latif. Good morning, everybody, and thank you for joining us for the Wintrust Financial first quarter earnings call. With me this morning are Dave Dykstra, our Vice Chairman and Chief Operating Officer; Rich Murphy, our Vice Chairman and Chief Lending Officer; Dave Stoehr, our Chief Financial Officer; and Kate Boege, 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 Murphy will add some additional information and color on credit performance. I'll be back to wrap up with some summary thoughts on two topics, a high-level outlook going forward followed by a few remarks on the announcement from this past Monday regarding our pending acquisition of Macatawa Bank.
For the quarter, we reported record net income of just over $187 million. The results include a one-time gain from the previously announced partnership related to our 401(k) advisory business and a further expense related to the replenishment of the FDIC Deposit Guarantee Fund. Dave will speak to the relative amounts for these items and a handful of other items. Overall, net of these atypical and mostly positive items, the quarter was strong and in line with our expectations. We grew both loans and deposits by slightly over $1 billion with a net interest margin of 3.59%. The loan growth was balanced nicely across all of our major businesses. Net interest income of $464 million was down just a bit from the fourth quarter, and if adjusted for the number of days in the quarter, would have been essentially flat.
Our strong deposit growth reflects our continued ability to attract deposits and grow our franchise. During the quarter, however, we did see a decline in the average non-interest-bearing deposits of approximately $430 million. We attribute this in part to seasonal deposit flows, but also to clients using their funds to invest in projects and to higher liquid rate options. We continue to expect credit performance to normalize from the very low levels experienced over the last few years. However, our NPLs remain low, and our charge-offs reflect to a large degree the resolution of prior-period reserve activity. Despite these modest credit losses, we continue to maintain a healthy allowance. And as you'll hear from Rich, we also continue to proactively address challenged credits in our portfolio.
I would highlight that our allowance coverage for core loans, excluding primarily our low loss insurance finance portfolios is at a healthy 1.51%. Market rate increases during the quarter impacted tangible book value, but despite these fluctuations, our tangible book value improved to a record level from the fourth quarter and the strong earnings resulted in slightly improved capital ratios. Overall, it was a solid quarter, which we believe will compare well and may differentiate us relative to many of our competitors. With that, I'll turn this over to Dave and Rich. Afterward, again, I'll come back to wrap up in terms of what we're seeing and speak to the acquisition announcement.
David Dykstra: All right. Thanks, Tim. First, with respect to the balance sheet growth in the first quarter, we're pleased to report solid loan growth at the high end of our guidance. Total loans grew by approximately $1.1 billion or 10% on an annualized basis. Importantly, the increase in loans was broad-based, and Rich Murphy will discuss this in more detail in just a bit. We recorded corresponding deposit growth of $1.1 billion during the quarter, which is a 9% increase over the prior quarter on an annualized basis. As to the deposit composition, non-interest-bearing deposits declined on average by approximately $434 million in the first quarter relative to the fourth quarter of last year, and as of the end of the first quarter, represented approximately 21% of total deposits.
The decline in the non-interest-bearing deposits, as Tim mentioned, was a result of businesses utilizing their cash rather than drawing on outstanding lines, some additional movement to interest-bearing deposit accounts and some seasonality. And although the decline in average non-interest-bearing accounts follow several stable quarters, we're encouraged that thus far in the second quarter, non-interest-bearing accounts are averaging a couple of hundred million dollar more than they were in March. So, we're hopeful that the first quarter dip rebounds a bit in the second quarter. As to other aspects of the balance sheet results, total assets grew by approximately $1.3 billion, and our regulatory capital ratios improved slightly despite the strong growth.
Overall, it was another successful quarter for gaining new customers in our market and for the growth of our franchise, which has been the primary objective of Wintrust throughout its history. Our differentiated business model, exceptional team and service, and unique position in Chicago and Milwaukee markets continue to serve us well. As to the income statement categories, first, I'm pleased to reiterate the first quarter was a record quarter not only from the standpoint of quarterly net income, but also from the standpoint of quarterly net revenues. As Tim mentioned, our net interest income remained relatively steady with the fourth quarter of 2023 if adjusted for the number of days in the quarter. An increase in the average earning assets was essentially offset by a 5 basis point decline in the net interest margin.
The slight decline in the net interest margin was primarily the result of a mix shift in deposits and the pressure caused by the lower level of non-interest-bearing deposits and the higher cost of attracting incremental deposits to fund the strong loan growth. These dynamics resulted in net interest margin of 3.59% for the first quarter and a run rate of approximately 3.5% at the end of the first quarter. Based on the current interest rate environment, the dynamics of the expected stronger loan growth in the second quarter, fluctuating non-interest-bearing deposits and the incremental cost of funding elevated loan growth, we expect the net interest margin to be within a range around the levels where we ended the first quarter or approximately 3.5%.
As I mentioned, the exceptional loan growth that we expect in the second quarter will require us to fund that growth in the short term with marginally higher deposit costs, which will likely pressure the margin a bit, but would represent an acceptable trade-off. Said another way, we're happy to take advantage of current market conditions and add high-quality loans and high-quality relationships, even if it means a bit of margin pressure in the short run. These new relationships will provide nice gains in market share and additional net interest income at acceptable returns. Turning to the provision for credit losses, Wintrust recorded a provision for credit losses of $21.7 million in the first quarter, down from a provision of $42.9 million in the prior quarter and down slightly from the $23 million of provision expense recorded in the year-ago quarter.
The lower provision expense in the first quarter relative to the prior quarter was primarily a result of improvement in forecasted macroeconomic conditions, primarily narrower forecasted Baa credit spreads. Rich will talk about the credit metrics and loan portfolio characteristics in just a bit. Regarding the other non-interest income and non-interest expense sections, total non-interest income totaled $140.6 million in the first quarter, which was up approximately $39.8 million when compared to the prior quarter. The reason for the increase was related to two primary factors: First, as we disclosed in the news release during the first quarter, and as Tim mentioned, the company sold its Retirement [Planning] (ph) Advisors division, which generated a net gain on the sale of assets of approximately $19.3 million.
The net gain was comprised of a $20 million gross gain, which is included in other income and offsetting compensation expense of roughly $700,000. Second, the company generated approximately $20.2 million more in mortgage banking revenue. Relative to the fourth quarter of '23, mortgage revenue had $2.3 million of net favorable change in valuation adjustments from our mortgage servicing rates and certain other mortgage-related assets that we held -- that we hold at fair value, whereas the prior quarter had a $9.7 million net unfavorable valuation adjustment, resulting in a positive swing of approximately $12 million. We also experienced a $6.6 million increase in production revenue due to slightly higher origination volumes and improved gain on sale margins.
Now there are a variety of other smaller changes to non-interest income categories as shown in the tables in our earnings release, but these changes were not unusual and, in the aggregate, resulted in a decline of less than $0.5 million on a pre-tax basis if you take all the other categories in an aggregate manner. Non-interest income categories, non-interest expenses totaled $333 million in the first quarter and were down approximately $29.5 million. The primary reason for the decline was the result of $29.2 million less in special assessments imposed by the FDIC to pay for the two bank failures that occurred earlier in 2023. The company recorded approximately $5.2 million of such expense in the first quarter due to the updated loss estimates provided by the FDIC, which was less than the $34.4 million expense recorded in the prior quarter.
The remaining variances in non-interest expense, both positive and negative, offset to a small reduction of just under $300,000. The seasonal decline in advertising and marketing expenses and travel and entertainment expenses were offset by higher levels of other real estate owned expenses and a variety of other relatively small increases from the prior quarter, including the aforementioned additional compensation expense related to the sale of the Retirement Planning Advisors division. In summary, a very solid quarter, good loan growth, good deposit growth, relatively stable net interest margin, a record level of quarterly net income, a record level of quarterly net revenues and a continued low level of non-performing assets. So with that, I'll conclude my comments, and I'll turn it over to Rich Murphy to discuss credit.
Richard Murphy: Thanks, Dave. As Tim and Dave both noted, credit performance continued to be very solid in the first quarter from a number of perspectives. As detailed on Slide 6 of the deck, loan growth for the quarter was $1.1 billion. The growth was driven by a number of factors. Core commercial loans, excluding leasing, were up $267 million, driven largely by quality opportunities resulting primarily from dislocation within the competitive banking landscape in our markets. In addition, we saw $170 million in growth from our warehouse line of credit portfolio, resulting from strategic hires made last year, coupled with a recovering mortgage market. We also saw a good growth in the commercial real estate portfolio, resulting largely from draws on existing construction loans.
And finally, our leasing group had another very solid quarter. Loan growth for the past four quarters totaled $3.6 billion or 9% annualized. We believe that loan growth for the second quarter of 2024 will continue to be strong and potentially greater than Q1 for a number of reasons. Historically, we experienced our highest growth in our commercial premium finance portfolio in the second quarter. During the second quarter of 2023, we saw these balances grow by just over $1 billion and we expect similar growth during this coming quarter. We continue to see a hard market for insurance premiums, and we are benefiting from opportunities from consolidation within the premium finance industry. These loans are among the highest yielding in our portfolio.
In addition, core C&I pipelines remain very solid. And finally, our leasing teams continue to see significant demand in the market. Offsetting this growth will be continued pressure on C&I line utilization, which dropped from 37% to 34% year-over-year as higher borrowing costs have negatively affected usage. In addition, while we continue to see a number of new CRE opportunities, our CRE pipelines have slowed as higher borrowing costs have continued to affect loan demand. We anticipate 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, Q2 loan growth should be very strong and in excess of the total for Q1. In addition, we would anticipate total 2024 loan growth could be at the upper end of our guidance. From a credit quality perspective, as detailed on Slide 13, 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 was virtually unchanged at 34 basis points, up by $9 million. As an aside, while core NPLs had a slight decrease for the quarter, we saw an uptick in non-performing loans in the commercial premium finance portfolio, resulting from increased cancellations in the transportation segment of that portfolio. We continue to monitor the situation closely and believe this number should stabilize and come down 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 $21.8 million or 21 basis points, up from $14.9 million or 14 basis points in Q4. It's important to note that charge-offs for this quarter were largely reserved for in Q4. Finally, as detailed on Slide 13, we saw stable levels in our special mention and substandard loans. 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. Higher borrowing costs and pressure on occupancy and lease rates continue to affect CRE valuations, particularly in the office category. During the first quarter, we saw a modest increase in CRE NPLs from 0.31% to 0.34%, up $4 million.
On Slide 17, we continue to provide enhanced detail on our CRE office exposure. Currently, this portfolio remains steady at $1.6 billion or 13.5% of our total CRE portfolio and only 3.6% of our total loan portfolio. Of the $1.6 billion of office exposure, 44% is medical office or owner occupied. The average size of a loan in the office portfolio is only $1.5 million. We have only six loans above $20 million and only three of 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 loan over $2.5 million, which we'll be renewing between now and the end of the fourth quarter of 2024.
This analysis, which covered 78% of all CRE loans maturing during this period, resulted in the following: half of the loans reviewed will clearly qualify for renewal at prevailing rates; roughly 30% of these loans are anticipated to be paid off or will require a short-term extension at prevailing rates; the remaining [19%] (ph) of these loans will require some additional attention, which could include a paydown or a pledge of additional collateral. We continue to backcheck the results of these tests conducted during prior quarters and have found that the 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.
Again, 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.
Tim Crane: Well, you can tell, we continue to believe that we're well positioned to take advantage of the current environment with our diverse businesses. And as you also heard, we expect to see relatively strong growth in the coming months. To some of the earlier comments from both Dave and Rich, if we experience loan growth at the high end or above the high end of our forecasted range, which we believe is possible, that could pressure the net interest margin from the current levels, particularly in the second quarter. If that were to occur, the trade-off is solid franchise growth and favorable net interest income performance in future quarters. To add some financial context, our projection is that net interest income for the second half of the year will come in higher than for the first half and that while there are a lot of moving parts, the current consensus pre-provision net revenue number looks about right to us.
With respect to the announcement regarding Macatawa Bank, we've enjoyed speaking to many of you over the past couple of days and we've also shared the transaction highlights document, so my summary is succinct. We are very excited about this opportunity. As we mentioned on prior calls for several reasons, the current population of attractive targets has been quite limited. Macatawa serves the Greater Grand Rapids West Michigan market, which is a top 50 MSA in the United States. They have pristine credit quality, net charge-offs are negative for the past three years and virtually no non-performing loans. They stayed short with their securities portfolio, have a limited population of fixed rate loans and a very attractive low cost deposit book.
Their loan-to-deposit ratio is 55%, which translates to $1.1 billion in excess deposits which, in this environment, we would deploy at a substantially higher rate. Lastly, Macatawa has a committed leadership team excited about the transaction. While we have business in Northern Indiana and West Michigan today, we do not have a physical footprint. And I can tell you that there are not many banks, if any at this point, with this good a profile financially and such a good cultural fit. I'm not exaggerating when I say this is an ideal platform for our expansion in West Michigan, and we are very pleased to have this moving forward. At this point, I'll pause and we can take some questions.
Operator: [Operator Instructions] Our first question comes from the line of Jon Arfstrom of RBC Capital Markets. Please go ahead, Jon.
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