Wintrust Financial Corporation (NASDAQ:WTFC) Q1 2023 Earnings Call Transcript April 20, 2023
Wintrust Financial Corporation beats earnings expectations. Reported EPS is $2.8, expectations were $2.54.
Operator Welcome to Wintrust Financial Corporation’s First Quarter 2023 Earnings Conference Call. A review of the results will be made by Edward Wehmer, Founder and Chief Executive Officer; Tim Crane, President; 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. Edward Wehmer.Edward Wehmer Thank you very much. Welcome, everybody to our first quarter of 2023 earnings call. You heard, with me are Tim Crane, our President and CEO in waiting; Dave Dykstra, our Vice Chair and Chief Operating Officer; Rich Murphy, our Vice Chair and Chief Lending Officer; Kate Boege, our General Counsel, who’s offsite, by the way [indiscernible] may have a delay on it, but try Kate, I’m not going to say anything bad.
And Dave Stoehr, our CFO.So [indiscernible] different approach this quarter, some general comments from me. Tim will discuss operating results in detail. Dave Dykstra will discuss other income and expense in detail. Rich will discuss credit in detail. Tim Crane will talk — his thoughts about the future, back to me for some final thoughts and time for questions.General comments. Well, we had a record results, I chose the right time to semi-retire, but given the industry challenges arose during the quarter, just like Lloyd Bridges [indiscernible] picked the quarter to put [indiscernible] and glue. Despite the turmoil in the banking industry, we recorded net — record net income and PPP earnings. And the challenges we faced that face the industry, our consistent conservative approach to banking helped to thrive during the times.
How many times you heard me say the concentration in scale. We’ve always been old school in how we went after this, and that’s not changing.I believe the current challenges in the industry will open a lot of doors for us, just like in the past, industry meltdowns. For example, on Great Recession, [indiscernible] strategy resulted in record earnings albeit one of the most acquisitive companies in the country. Pandemic, general results, great results are in pandemic, PPP loans were a real plus for us. There’s only spillover into a ton of new clients. I think back to the Russian ruble thing, and we’ve always laid selling great because of our approach. And I expect this as we will continue to do the same.Now I’m going to turn over to Tim to talk about results.Tim Crane Great.
Thanks, Ed. Obviously, lots to talk about in terms of both the balance sheet and the recent industry developments. It’s important to note that many of my comments, as well as Rich and Dave’s to come are supported by slides that we’ve included in our earnings presentation that may be helpful.First, with respect to deposits. Deposits for the quarter were down 0.4%, $184 million, essentially flat in a period where we often see some seasonal outflows. While we spent a great deal of time communicating with our clients in the days after March 10 and saw a significant shift in our deposit mix, which I’ll discuss in a moment, our overall level of deposits remained very stable. In terms of additional detail, consumer deposits were actually up for the quarter, and the offset was primarily in our CDEC group, deposits related to our 1031 real estate related exchange business, and we’re down in our wealth management area where we continue to see some movement to treasuries and the money market funds, presumably for both rate and insurance reasons.Except for municipal deposits, which are in almost all cases insured or collateralized, we do not have any significant deposit concentrations.
Our average deposit account size is under $70,000. We don’t have any exposure to crypto deposit activity. In addition, both our Federal Home Loan Bank and total overall non-deposit borrowings were unchanged in the quarter. We didn’t borrow from the Fed discount window and have no intent to use the bank term funding facility.During the quarter, again, we saw movement from noninterest-bearing deposits to both our unique Wintrust MaxSafe product, which provides customers up to $3.75 million in insurance per account holder and other reciprocal insured products. MaxSafe deposits increased by about $1 billion during the quarter with another several hundred million dollars, primarily larger deposits moving to other reciprocal insured products.Noninterest bearing deposits at the end of the quarter represented 26% of total deposits, a return to near pre-pandemic levels consistent with a more normal rate environment.
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These movements do not appear to be unique to us, but they obviously increased the cost of deposits for the quarter. Interest bearing deposit costs were $1.97, up 67 basis points.Our interest bearing deposit beta through the first quarter was 36%. We expect the activities post March 10 will result in interest bearing deposit beta over the full cycle in excess of the 45% that we had previously projected. Currently, we’re assuming a full cycle number of approximately 50%. At quarter end, fully insured or collateralized deposits totaled about 70% of total deposits, a number that continues to trend higher.Loan growth for the quarter was about $370 million on the low end of our range. Rich will talk about loan growth, loan composition and continued strong credit performance in just a few minutes.
With respect to the net interest margin, it was up 10 basis points to 3.83%. We’re pleased with this result in light of the late quarter pressure on deposit costs and the negative impact of our hedging activities.While we expect deposit cost increases and incremental mix change may continue, we believe, given the current rate environment and the continued benefit associated with the favorable repricing of our premium finance loans, as a reminder, those are about one-third of our loan book, that we’ll maintain a margin of approximately 370 for the next several quarters.Given the assumptions around our balance sheet, we remain slightly asset sensitive. An additional 25 basis point increase in rates, if that were to occur, would all else equal, provide approximately $20 million in benefit in terms of net interest income on an annualized basis.
The strong earnings for the quarter produced a material increase in our capital ratios, total risk-based capital increased to 12.1%, CET1 to 9.2%. Both, we believe are appropriate on a risk-adjusted basis and should continue to expand.Tangible book value in the quarter increased materially to $64.22 per share. Just a quick note on securities and capital, the combined unrealized pretax security losses, both available for sale and held to maturity at the end of the quarter totaled approximately $1.1 billion. If a regulatory rule change occurred, we were forced to mark our entire securities portfolio, the bank would remain well capitalized. So despite the external volatility in the latter part of March and the prospect for evolving deposit related behavior change, we continue to see very good pipelines, opportunities in the market and typical client activity.
Dave?David Dykstra Right. Thanks, Tim. I’ll cover some of the noteworthy income statement categories, starting with net interest income. For the first quarter of 2023 net interest income totaled $458 million. That was an increase of $1.2 million as compared to the prior quarter and an increase of $158.7 million as compared to the first quarter of 2022. The $1.2 million increase in net interest income as compared to the prior quarter was primarily due to the improvement in the net interest margin that Tim talked about, partially offset by the impact of having two fewer days in the quarter.The impact of having two fewer days relative to the fourth quarter was approximately $10 million. So in other words, one day is worth about $5 million of net interest income to us.
The net interest margin improved 10 basis points from the prior quarter to 3.83%, a beneficial increase of 61 basis points on the yield on earning assets and a 17 basis point increase in the net brief funds contribution combined with a 68 basis point increase for the rate paid on the liabilities resulted in the improved margin.The increase in the yield on the earning assets as compared to the prior quarter was primarily due to a 67 basis point improvement in loan yields and a higher liquidity management asset yield as the company earned higher short-term yields on the interest-bearing deposits held at banks and its investment securities. And the increase in the rate paid on interest-bearing liabilities in the first quarter as compared to the prior quarter, was driven by a 67 basis point increase in the rate paid on the interest-bearing deposits.
Now it’s interesting to note that both the loan yield increase and the deposit costs increase were both 67 basis points changes during the quarter.We continue to believe that our relatively short term and asset-sensitive balance sheet structure can provide for margin stability as our premium finance portfolios, which comprise roughly one-third of our loan portfolio should continue to reprice upwards over the course of this year, which should substantially mitigate the rise in deposit pricing.Also, as we discussed on prior calls, the company has been entered into interest rate derivative transaction, specifically swap and collar contracts to protect the net interest margin in a falling rate environment. Our earnings presentation deck has the details of those derivative positions, including terms and rates for your information.
The impact of those derivative transactions during the quarter was to limit the net interest margin expansion by 7 basis points. In other words, the net interest margin would have expanded by 17 basis points during the quarter, rather than 10 basis points if we had not entered into those contracts. We believe it is prudent in the current environment to sacrifice some current margin expansion to mitigate the downside risk if interest rates were to decline materially in the future.Turning to the provision for credit losses. Wintrust recorded a provision for credit losses of $23 million in the first quarter compared to a provision of $47.6 million in the prior quarter and a $4.1 million 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 less loan growth during the quarter and changes to the macroeconomic outlook related to projected credit spreads and commercial real estate price index data.
Rich Murphy will talk about credit in just a bit, but I should note that the current quarter net charge-offs and the mix of classified loans remained relatively stable and very good and did not have a significant impact on the level of the first quarter’s provision for credit losses.Turning to the noninterest income and noninterest expense sections. Total noninterest income totaled $107.8 million in the first quarter and was up nearly $14 million when compared to the prior quarter total of $93.8 million. The primary reasons for the increase were due to an $8 million — $8.1 million improvement in the gains and losses related to the company’s securities portfolio. The company recorded a gain of $1.4 million in the first quarter of 2023 compared to a loss of $6.7 million recorded in the fourth quarter of 2022.The quarterly fluctuation was primarily related to changes in equity valuations that affect a portion of our securities portfolio and not from sales of securities.
A $2.4 million increase in fees on covered call options in the first quarter of 2023 relative to the prior quarter also contributed to the increase and a $0.9 million increase in mortgage banking revenue as production margins improved, which more than offset a slight decline in the volume of loans originated during the first quarter of the year.We saw mortgage application volume increased slightly during each month of the first quarter and are seeing continued increases in loan application volume early in the second quarter, albeit still relatively small increases. But this should provide support to the mortgage banking revenue in the second quarter. Additionally, for your information, roughly 80% of the application volume is related to purchased home activity.On the non-interest expense categories.
Noninterest expenses totaled $299.2 million in the first quarter and were down approximately $8.7 million when compared to the prior quarter, total of $307.8 million. The primary reasons for the decrease were due to salaries and employee benefit expenses decreasing by approximately $3.6 million in the first quarter as compared to the fourth quarter of last year.Relative to the prior quarter, the current quarter decline is primarily due to lower commissions and incentive compensation of approximately $9.7 million, largely related to lower incentive compensation accruals. The category also saw approximately $1.9 million of lower employee benefits expense due to fewer health insurance claims during the quarter. These declines were partially offset by approximately $8.1 million of increased salary expense primarily due to the impact of annual merit increases that took effect in the first quarter.Our advertising and marketing expenses decreased by $2.3 million in the first quarter of 2023 when compared to the prior quarter.
As we have discussed on previous calls, this category of expenses tends to be lower in the fourth and the first quarters of the year. Advertising and marketing expense is expected to increase in the second quarter due to our marketing and sponsorship expenditures related to various major and minor league baseball sponsorships, other summertime sponsorship events held in the communities that we serve and marketing of our brand and deposit products.Lending expenses also declined approximately $3.2 million due to lower overall loan origination activity experienced in the first quarter. Offsetting these expense declines noted was a $1.9 million increase in FDIC insurance expense, which was primarily related to the 2 basis point increase in the assessed premiums that the FDIC began imposing on financial institutions in 2023.
Other than those expense categories that I just discussed, all other expense categories in the aggregate were down by approximately $1.5 million compared to the fourth quarter of 2022.Our efficiency ratio declined to 53% for the first quarter from 55% in the fourth quarter of 2022 as expenses did not increase at a rate commensurate with the increase in revenues. And our net overhead ratio was 1.49% in the first quarter and lower than the 1.63% in the prior quarter due to slightly higher fee income and well-controlled expenses. Looking forward, we expect fee income and noninterest expenses to increase somewhat as a result of the wealth management acquisition, which was completed at the beginning of April. We would also expect mortgage revenues and related expenses to increase slightly as springtime has since the home buying season.Additionally, as I noted earlier, the seasonal increase in marketing sponsorships will add to that expense category.
So we anticipate slightly higher wealth management mortgage revenues and slightly higher expenses in the future quarters. But depending on the mortgage volumes and balance sheet growth, we would still expect to maintain a net overhead ratio in the 1.5% to 1.6% range that we have generally experienced in the last two quarters.So with that, I’ll conclude my comments and turn it over to Rich Murphy to discuss credit.Richard Murphy Thanks, Dave. As noted earlier, credit performance for the first quarter was very solid from a number of perspectives. As detailed on Slide 7 of the deck, loan growth for the quarter was $369 million or 3.8% annualized. Loan growth was largely concentrated in two portfolios. Commercial real estate, which grew by $288 million, which was primarily draws on existing loans; and residential real estate, which was up $133 million.This rate of loan growth is slower than what we have seen for some time and below our guidance of mid-to high single digits.
We believe this slower growth is attributable to several factors. The first quarter is generally the slowest quarter for core loan production and is a seasonally slow quarter for the commercial premium finance portfolio. Higher borrowing costs have forced borrowers to reconsider the economics of new projects, business expansion, equipment purchases and premium finance costs and overall business sentiment, which has dropped during the past few months.However, we continue to see solid momentum in our core C&I and CRE pipelines. Disruptions in the banking landscape continue to work to our benefit as we have seen numerous quality opportunities from other regional banks. Also, while commercial premium finance loans were down by $111 million in the first quarter, based on historic seasonality, we would anticipate that this portfolio will show solid growth in Q2.
As noted in prior earnings calls, we continue to be optimistic about loan growth in 2023, but would anticipate the pace of growth may trend closer to the lower end of the guidance for a number of reasons.The Wintrust Life Finance portfolio grew by $35 million during the first quarter of 2023 compared to a $300 million in the first quarter of 2022. The rapid increases in rates during the past year have significantly affected the pace of growth. We would anticipate the slower rate of growth will continue in this higher rate environment. And increases in commercial line utilization, excluded leases and mortgage warehouse lines continue to flatten during the first quarter, reflecting a more cautious business sentiment and higher borrowing costs.As a result, while we continue to be diligent about and preparing for the possibility of a business recession, we believe our diversified portfolio and position within the competitive banking landscape will allow us to grow within our guidance of mid- to high single digits and maintain our credit discipline.
From a credit quality perspective, as detailed on Slide 15, we continue to see strong credit performance across the portfolio. This can be seen in a number of ways. Nonperforming loans remained stable at 25 basis points or $101 million, equal to the total we saw in Q4.Overall, NPLs continue to be at historically low levels, and we are still confident about the solid credit metrics of the portfolio. Charge-offs for the quarter were only $5.5 million or 6 basis points. And as detailed on Slide 15, we saw a stable level in our special mention in substandard loans with no meaningful signs of additional economic stress at the customer level.Finally, as Ed mentioned, the granularity of our loan portfolio has always been a critical pillar of the Wintrust story.
This can be seen clearly on Slide 7 where the portfolio has been built around commercial, CRE, premium finance and niche lending. Currently, commercial real estate loans comprise roughly a quarter of our portfolio. While we closely monitor all elements of our loan portfolio, we are paying particular attention to this segment.Higher borrowing costs and pressure on lease rates are caused for concern, particularly in the office category. On Slide 18, we have highlighted a number of important elements of our office portfolio. Currently, this portfolio totals $1.4 billion or 13.6% of our total CRE portfolio and only 3.5% of our total loan portfolio. Of the $1.4 billion of office exposure, close to 40% is medical office or owner occupied. The average sizable loan in the office portfolio was only $1.3 million.We have only five loans in the portfolio above $20 million.
There has been significant concern about office properties located within central business districts. Our CBD exposures limited $358 million or approximately one quarter of the office portfolio. Half of this is in Chicago and half is in other cities. The bulk of the portfolio is located in suburban areas and areas outside CBDs. And portfolio performance to date has been very good, but no loans currently over 90 days is past due.We continue to perform portfolio reviews regularly in this portfolio and have stayed very engaged with our borrowers. We are not immune for macro effects that challenges product type, but we believe our portfolio is well constructed, very granular and should perform well moving forward. As noted earlier, higher borrowing costs and pressure on lease renewals are having a meaningful effect across the CRE space.
To better understand how these issues could impact our portfolio, our CRE credit team has performed a deep dive analysis on every loan over $2.5 million, which we’ll be renewing between now and year-end.This analysis, which covered 77% of all CRE loans maturing this year resulted in the following: more than 60% of these loans will clearly qualify for a renewal at prevailing rates. Roughly 25% of these results are anticipated to be paid off or will require a short-term extension at prevailing rates, and approximately 15% of the loans will require some additional attention, which could include a paydown or a pledge of additional collateral.We have tentative agreement on renewal terms with more than half of the borrowers in this final group.
Again, our portfolio is not immune from the effects of rising rates or the market forces behind lease rates, but we have been diligently identifying any potential weaknesses in the portfolio and working with our borrowers to identify the best possible outcomes.That concludes my comments on credit, and I’ll turn it back to Tim.Tim Crane Thanks, Rich. Before Ed wraps up and we take a few questions, just a couple of comments. First, maybe the events of the last three weeks of March serve as a good reminder that as much as people think of banks as a commodity, we believe that’s absolutely not the case. We continue to be uniquely positioned to take advantage of disruption in the market.We frequently talk about that on these calls. Relative to many of our larger peer banks, we provide a distinctly different experience.
We provide a level of service that our customers value, evidenced by the J.D. Power and Greenwich and other awards we’ve received. And we’ve stayed very disciplined with respect to credit and risk management even when some haven’t.We have a diversified mix of consumer and commercial businesses built on strong relationships. Our model has really been all about being the best alternative to the larger banks. And that opportunity continues to exist today in some ways, more than ever.And so, I’ll pause there, and Ed, I’ve got some wrap-up comments at the end, but that’s what I’ve got.Edward Wehmer Okay. Thank you, Tim. Well, you know this is my last earnings call. I’m going to miss the banter relationships I’ve had with all of you. This being said, I will still be involved in the foreseeable future in limited capacity as Chairman.
Make no know mistake about it, though, there’s only going to be one CEO, that’s going to be Tim. You’ll only have one guy’s hands on the wheel, that will be his. I’m here to help in service. And anything I can do to help to continue to move this organization to go in the great growth it’s had.I thank all of you for your support through the ages. Other than the shorties out there, I hope you continue [indiscernible] money on Wintrust. I can ensure that Wintrust is in great hands, we’ll continue to follow through [indiscernible] the issue and the best management team and people in the business. As always, you can be assured the team’s best efforts in that regard.Tim, back to you.Tim Crane Great. Why don’t we go ahead and open it up for questions, and I have a quick summary at the end.
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Question-and-Answer Session
Operator: Thank you.
[Operator Instructions] Our first question comes from the line of Jon Arfstrom of RBC Capital Markets. Your line is open, Jon.Jon Arfstrom Thanks. Good morning, everyone.Edward Wehmer Hey, Jon.Jon Arfstrom Ed, thanks for everything. Fun earnings calls over the last 25-or-so years. And the Wehmer-isms are priceless. So thank you for all of those.Edward Wehmer You’re welcome.Jon Arfstrom Yes. That was great. Guys, I want to ask you a little bit about the margin of 370 guidance, maybe obvious, but talk a little bit about some of the puts and takes and the factors that would drive it up or down from there? And share with us what kind of interest rate and deposit flow assumptions that you’re building into that outlook?Tim Crane Sure, Jon. This is Tim.
Obviously, the deposit mix has been one of the changes that’s put some pressure on the margin. The other, as Dave mentioned, is kind of the hedging activities that we think will provide good support for the margin in a lower rate environment. We’re getting back to DDA mix that’s similar to pre-pandemic. And so the hope is that, that migration slows.But that’s certainly one of the things that we’re watching pretty carefully. And the other is our opportunity to grow. We think we’ve got really nice loan opportunities in the market right now and working hard to use our 15 charter model to grow deposits and to take advantage of some dislocation in the market. So those would be a couple of the factors. Going forward, the hedge expense is a little bit higher in terms of the 7 basis points goes to something like 15.
But again, we think that’s a prudent investment at this point.David Stoehr We added — we put a deck — in the slide deck we put presentation about the swaps that we added during the quarter. But since they were only [indiscernible] part of the quarter, there was only a partial hit. So that 370 million sort of includes going from 7 to 15 basis points on that derivative position. So that’s part of the equation too. But we noted this last quarter too, and I noted it in my comments, but we still have a fair amount of asset data out there to offset some of this deposit pressure that we saw.I mean the main decrease there is really the sort of the mix shift and people moving into the interest-bearing deposits from DDA. But we do have $13 billion roughly of premium finance loans that’s still reprice over the course of the year.
And as that repricing occurs, that will substantially offset the deposit repricing that we expect to continue a little bit here in the future. So we hope to hold it there. It’s sort of where it was at the end of the quarter, a little less than we thought because of this deposit mix, but we think we’re positioned well.And as Tim said, we really think our positioning in Chicago is wonderful. We are Chicago’s bank. We win all these awards for good customer service. And we get those awards because we give good customer service. And if we go out in this environment and sell our products, we think we can grow deposits and fund this loan growth that’s out there. And there’s a lot of things in the mix, but we’ve always been able to manage through it before.
So we think that 370 number we can hold and hold through the rest of the year, assuming something really dramatic doesn’t happen to the yield curve.Jon Arfstrom And the rate assumption of the forward curve, is that right?Tim Crane Yes. Pretty much, Jon. We’re kind of thinking we’ll get one more here at some point in the second quarter.Jon Arfstrom Okay. Rich, maybe for you on loan growth. Dave alluded to that as one of the keys to holding that. You talked about slower utilization, is it pre or post March 8? And how dramatically have things changed in terms of your pipelines and demand since March 8? Thanks.Richard Murphy Yes. Utilization, I think, really has been almost the entirety of the year. I mean we’ve just seen that utilization kind of just flat.
We anticipated it would come up a little bit more back to more historic norms. But I think the higher borrowing costs really have put a chill on that a little bit. Again, not down dramatically, but just not recovering to the levels that we have seen historically.In terms of overall loan demand, as I talked about, I think we have a big tailwind with the — our property and casualty group because we can already see the fundings that are going to be coming here over the course of the rest of this year. But I think the thing that is most encouraging is our core pipeline C&I and CRE both are at very good levels.And again, I’m not necessarily sure if it’s the pie growing or — but my suspicion is we just continue to see opportunities coming out of large banks, other regionals where they’re just pulsing in and out of the market.
The ability to get a timely answer has really been an issue, and our teams have been very quick to respond, and we’re just seeing continued opportunity in that space. So those are the things that I would point to as being most opportunistic about.Jon Arfstrom All right. Thanks, guys. Appreciate it.Timothy Crane Thank you.Operator Thank you. Our next question comes from the line of David Long of Raymond James. Your question please, David.David Long Good morning, everyone. Thanks for taking my question. Just to start out, Ed, I know you’re not going away, but you will be missed on these calls going forward. Really appreciate your candor over the years. And I want to wish you the best as you hand over the reins to Tim and the rest of the team and do look forward to seeing you again some time, so congratulations.Edward Wehmer Thank you, David.David Long As far as the — thinking about the quarter here, the interest rate hedges, it looks like you maybe added a couple here in early April, puts you close to about $6 billion in notional value.
