Wintrust Financial Corp Q1 FY2022 Earnings Call

Welcome to Wintrust Financial Corporation's First Quarter 2022 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 the call are detailed in our earnings press release and in the company's most recent Form 10-K and any subsequent filings on file with the SEC. Also, all 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.

Thank you very much. Welcome, everybody, to our first quarter '22 earnings call. With me, as always, are Dave Dykstra; Dave Stoehr; Kate Boege, who is remote, so I don't have to shock color on, so I'm in great shape for today; Tim Crane and Rich Murphy. We need to go with the same format as we always do. I'm going to give some general comments regarding our results, going to turn it over to Tim for more detail on the balance sheet. Dave Dykstra will follow with some details on the income statement, and Rich Murphy will comment on credit. Then back to me for some summary comments and talk about the future. I have some questions after that. All in all, it was a very good quarter. It went pretty much according to plan. The growth may seem muted compared to prior quarters. Last year, we had approximately $1 billion per quarter and $2 billion in the fourth quarter. We knew that probably half of the $2 billion of growth was going to be transitory, not like inflation but really transitory. It’s related to the few big customers who experienced large liquidity events at the end of the year. To turn out to be the case, sort of appears we're back on the $1 billion growth level per quarter as we're up just a little over $100 million in total assets. Management's income and the margin both improved as expected, 10 basis points of margin and $3 million on net interest income despite two fewer days in each state with approximately $3 million plus or minus. The quarter point increase occurred late in the quarter, so we expect to see further benefits going forward. This quarter point increase should provide up to $50 million net interest income on an annualized basis, positioned for future rate increases. Loans grew at the upper end of our guidance at around 9%. So this is very diversified. Pipelines have been extremely strong. I keep saying credit can't get any better, but it does. Nonperforming assets (NPAs) and nonperforming loans (NPLs) remain extremely low. NPLs fell $17 million to $57.3 million or 0.16% of total loans. NPAs decreased $15 million to $63.5 million or 0.13% of total assets. These are incredible numbers for a $50 billion bank, if I do say so myself. Hard to get much better, but we will continue to try. Dave will discuss other income in detail. I want to make one comment: we do not count the MSR valuation increases or decreases; they're a very important part of our planning. The increase seen this quarter basically offset the OCI effect. The higher rate on our tangible book value worked according to plan. While management fees continue to grow, our expense growth was pretty much benign. The number side of things, I'm not going to repeat everything, but diluted earnings per share of $2.07, pretax pre-provision income of $134.3 million, pretax preprovision revision of $130 million per share, and pretax margin at $261 million. We feel pretty good about where we are right now. And with that, I’m going to turn it over to Tim, who's going to cover official detail on the balance sheet. Go ahead, Tim.

Great. Thanks, Ed. In addition to the $800 million and the 9% loan growth, it's important to note that period-end loan balances, excluding PPP, were over $500 million ahead of the quarter average, which should help our second-quarter results. PPP loans continue to run down as they are forgiven and stand at roughly $250 million at quarter end; they're no longer material and will largely be gone by midyear. Going forward, while encouraged by growing pipelines, we believe that loan growth in the mid to high single digits on an annualized basis remains a reasonable expectation, given the uncertainty surrounding the macroeconomic outlook. I had mentioned deposit growth of approximately $125 million for the quarter. This was influenced by a handful of very large client outflows related, in most cases, to funds that came to us in the fourth quarter and then left in the first quarter; essentially in-and-out transactions that crossed year-end. Absent those outflows, organic deposit growth continued as expected. Entering the second quarter, we continue to watch deposit levels and expect some continued volatility from atypically large commercial transactions. Interest-bearing deposit costs of 22 basis points for the quarter was down 2 basis points from year-end and likely represents the low point of the cycle. While competitor deposit pricing remains muted, we are starting to see increases in the most rate-sensitive of deposit categories; an example would be municipal deposits that track some of the state investment indices. On the investment front, with rates increasing, we deployed some liquidity during the quarter. Total investments were up approximately $1.2 billion, with remaining patient in deploying our excess liquidity continues to benefit the bank as rates continue to rise. At quarter end, liquidity remained strong with an excess of $4 billion yet to be deployed. Of note, our securities book of $6.5 billion is approximately 47% available for sale and 53% held to maturity. The rapid rise in rates resulted in unrealized losses on the AFS securities that combined with dividends and net of the bank's earnings resulted in a small $0.30 reduction in tangible book value. On a percentage basis, this is one half of 1% of the year-end tangible book. As rising rates and rate sensitivity remain a topic of interest, I want to reiterate some of what we discussed on the last quarter's call. First, we remain very asset-sensitive and well-positioned to benefit from rising rates. As shown in our presentation materials, 80% of our loans reprice or mature within a year. To reinforce Ed's earlier comments, we're early in the rate cycle. We continue to believe each 25 basis point increase in rates will generate approximately $40 million to $50 million in pretax net interest income on an annualized basis, and approximately a 10 basis point improvement in the margin. To be more specific on the margin, for the quarter, the margin improved 6 basis points on a reported basis, 10 points excluding PPP. On our last call, we suggested that the consensus rate forecast could result in a margin approaching 3% by year-end. With more current projections, it's likely we will meet that target much earlier than anticipated and may approach 3.25% by year-end. On the capital front, there was very little change in the bank's capital as earnings supported the quarter's growth. Capital remains appropriate on a risk-adjusted basis. Lastly, we continue to be pleased by our market momentum. In past quarters, we've highlighted the recognition the bank received from Greenwich regarding the satisfaction of our commercial clients. This quarter, we learned the bank was ranked highest in retail customer satisfaction by J.D. Power and Associates for Illinois. For six consecutive years, we've ranked first or second in customer satisfaction, something we're proud of, and it speaks to the strength of our retail banking franchise. With that, I’ll hand it over to Dave.

Great. Thanks, Tim. As usual, I'll cover some of the noteworthy income statement categories, starting with the net interest income. For the first quarter of 2022, net interest income totaled $299.3 million. This was an increase of $3.3 million as compared to the prior quarter and an increase of $37.4 million as compared to the first quarter of 2021. The components of the $3.3 million increase in net interest income as compared to the prior quarter are as follows: $16.7 million of the increase related to earning asset growth and an improvement in the net interest margin. With that increase offset by approximately $6.7 million less net interest income due to two fewer days in the quarter and another $6.7 million decrease due to less PPP interest income in the quarter. The margin improved 6 basis points from the prior quarter to 2.61%. A beneficial decline of 3 basis points for the rates paid on liabilities combined with a 3 basis point increase on the yield on earning assets resulted in the improved net interest margin. The increase in the yield on earning assets in the first quarter as compared to the prior quarter was primarily due to the impact of investing a portion of our short-term liquid assets into longer-term, higher-yielding securities during the quarter, resulting in an overall yield on our liquidity management assets increasing by 26 basis points. The decrease in the rate paid on interest-bearing liabilities in the first quarter of '22 compared to the prior quarter is driven by a 2 basis point decrease in the rate paid on interest-bearing deposits, primarily due to lower repricing of time deposits. I think it's important again to note that the net interest income expanded despite less interest income from the PPP portfolio and the two fewer days in the quarter, and also the net interest margin, excluding the impact of the PPP portfolio, increased by 10 basis points. Turning to the provision for credit losses, Wintrust recorded a provision for credit losses of $4.1 million compared to a provision of $9.3 million in the prior quarter and a $45.3 million negative provision recorded in the year-ago quarter. Provision expense in the first quarter was driven largely by loan growth, excluding PPP loans of approximately $796 million, offset by a small decrease in net charge-offs and an improvement in the loan portfolio characteristics during the quarter, including improving loan risk rating migration. Rich Murphy will cover credit quality and additional detail in just a few minutes. Turning to the other noninterest income and noninterest expense sections. In the noninterest income section, our wealth management revenue declined by $1.1 million to a level of $31.4 million in the first quarter. This compared to $32.5 million in the prior quarter but was up 7% from the amount recorded in the prior year. The slight decline in revenue source was negatively impacted by lower equity market valuations which impact the pricing on a portion of our managed asset accounts, along with slightly lower brokerage trading activity and associated revenue. But all in all, it was still a strong quarter for our Wealth Management division, and we’re pleased with the results there. Consistent with overall industry trends and the impact of higher home mortgage rates, our mortgage banking operations saw lower loan origination volumes during the first quarter with lock-adjusted origination volumes down approximately 24%. This production volume was less than the guidance we provided in the prior quarter earnings release due to the substantial rise in mortgage rates subsequent to that time. However, our mortgage banking revenue actually increased $24.1 million to $77.2 million in the first quarter of '22. Revenue was higher in the current quarter, primarily due to a positive valuation adjustment on our portfolio of mortgage servicing rights. This is offset by lower lock-adjusted origination volume and a compressed production margin. The company recorded a positive $43.4 million valuation adjustment in the first quarter of 2022 related to the mortgage servicing rights compared to a positive valuation adjustment of $6.7 million in the prior quarter. The company purposefully built up its servicing portfolio for the last few years in order to not only maintain the customer relationship but to provide an economic hedge against the impact of rising rates on loan origination revenue. Although point-in-time MSR valuation changes and fluctuations in quarterly origination volumes rarely work as perfect hedges, the general relationship was effective this quarter and helped the company maintain strong overall mortgage banking revenue as the economy transitions to a higher rate environment. The sharp and rapid increase in interest rates during the quarter that benefited the MSR valuation and other segments of the company introduced headwinds that impacted the mortgage production volumes and margins. The impact of the volatility on secondary marketing results, as well as competitive pressures, were the drivers of the lower production margin reported during the quarter. Looking forward to the second quarter, based on the current pipeline activity and the market conditions, we expect mortgage originations to be very similar to the origination volumes experienced in the first quarter with production margins in the 2% to 2.25% range. Other noninterest income totaled $18.6 million in the first quarter, which was relatively stable with the $18.2 million recorded in the prior quarter. Turning to noninterest expenses, they totaled $284 million in the first quarter of 2022 and were relatively consistent with the prior quarter total of $283.4 million. In fact, looking back over the last six quarters, total noninterest expenses have remained in a very tight band ranging from $280.1 million to $286.9 million, and the current quarter lands well within that range. So the company has been able to control the overall noninterest expenses despite significant growth in the balance sheet over that time horizon. Despite the consistent level, managed expenses were a handful of categories that showed variance that I'll address. Salaries and employee benefit expense increased by $5.2 million from the first quarter as compared to the fourth quarter of last year. The current quarter increase is primarily related to $1.9 million of higher commissions and incentive compensation program expense due to higher accruals for our long-term and short-term incentive compensation programs associated with the increased earnings level. Additionally, approximately $2.9 million of the increase was related to employee benefit expenses, which were due to higher payroll taxes and 401(k) match contribution accruals which tend to be elevated in the first quarter of the year. Advertising and marketing expenses decreased by $2.1 million in the first quarter. The decrease relates primarily to a reduced level of mass media and digital advertising campaign costs. The miscellaneous expense category totaled $23.1 million in the first quarter compared to $24.3 million in the fourth quarter, representing a decrease of $1.2 million, and this decrease was primarily impacted by a lower level of travel and entertainment expenses. Other than those expense categories discussed, no other expense category had a change of more than $900,000, and all those expense categories in the aggregate were down by approximately $1.1 million compared to the fourth quarter of 2021. The net overhead ratio, a measure of operational efficiency, stood at 1%, which is down 21 basis points from the 1.21% recorded in the fourth quarter. The ratio benefited from increased mortgage banking revenue. And I should note, the efficiency ratio improved to 61% in the first quarter from 66% in the prior quarter, which was aided by an improving net interest margin and gains on the MSR portfolio during the quarter. In summary, core fundamentals were strong, with growth in pretax preprovision income, an expansion of the net interest income despite PPP loan reductions and the fewer days in the quarter, improved net overhead and efficiency ratio, strong loan pipelines, and very good credit quality metrics. So with that, I'll conclude my comments and turn it over to Rich Murphy to discuss credit.

Thanks, Dave. As noted earlier by Dave, 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, net of PPP, was just under $800 million or 9% annualized. Equally as important and similar to the past few quarters, we saw loan growth across the portfolio, specifically life insurance premium finance loans, which were up $311 million; core commercial real estate (CRE) loans, which were up $245 million; commercial premium finance loans, which were up $82 million and residential real estate and core commercial and industrial (C&I) loans both showed solid growth. Year-over-year, we saw total loan growth of $5.1 billion or 17% net of PPP loans. This total included $578 million of agency finance loans acquired from Allstate. That portfolio, by the way, continues to perform very well relative to the initial business case which we have laid out previously. As noted on our prior earnings call, we continue to see very solid momentum in our core C&I and CRE portfolios. Pipelines have been strong throughout this past four quarters, and we saw that materialize into increased outstandings during the past several quarters. We continue to be optimistic about loan growth for the remainder of 2022 for a number of reasons. Our core pipelines continue to be very strong with solid momentum in Q1. Line utilization, as detailed on Slide 19, continues to trend up from 36.7% to 41% when netting out our mortgage warehouse lines, and we anticipate that this trend will continue. Also on Slide 19, you'll see a business expansion, and inflation pressures have resulted in many customers requesting increases to their credit facilities to help finance these costs. And also, Wintrust Life Finance had another strong quarter, growing their portfolio by 17% on an annualized basis. This momentum has been strong for several quarters, and we believe it should continue through the better part of 2022. As a result, while macroeconomic conditions may pose a heightened level of uncertainty, we are reaffirming our loan growth guidance of mid to high single-digit growth. From a credit quality perspective, as Ed pointed out, it's hard to get much better, and as detailed on Slide 18, we continue to see that this performance again was across the portfolio, and it can be seen in a number of metrics. Nonperforming loans decreased from $74.4 million or 21 basis points to $57.3 million or 16 basis points. A meaningful part of this reduction came from the sale of an $11 million portfolio of loans, the majority of which were nonperforming. NPLs continue to be at record low levels and are roughly half of where we were this time last year. Charge-offs for the quarter were at $2.5 million, approximately $400,000 of which was a result of the loan sale I just mentioned. We continue to see reductions in our special mention and substandard loans as our customers continue to recover from the pandemic. That concludes my comments on credit and I'll turn it back to Ed to wrap up.

Thanks, guys. Suffice it to say, we like where we're positioned. If all the prognosticators are correct on rate increases, which continue to perform extremely well, I'm looking forward to seeing that beach ball again. It's been a long time. Credit stats are terrific. As Murphy said, it's going to be hard to get them better. We're going to continue to try, continue to cull the portfolio for potential problems. It's kind of scary that you could have one loan coming to us double your NPAs right now, but we keep looking deep, and we're going to continue to do that. Loan demand should remain strong through the year. Inflation should increase line usage numbers. Pipelines remain strong across the board. Acquisition opportunities have picked up a bit. Pricing expectations are still a bit of a detriment, though, and you can count on us not doing anything foolish in that regard. Very proud of the entire Wintrust crew, and we're learning the J.D. Power award yet again. I read somewhere that our numbers would have put us in second place in the entire niche. Winning seven Greenwich awards again, the Granite Awards for the commercial banking side of the equation. You have to question why people bank anywhere but Wintrust. This, with the market disruption, bodes well for continued organic growth. All of you share our best efforts. We appreciate all your support, and it's time for some questions. Thank you very much.

Our first question comes from the line of David Long of Raymond James. Your question, please.

Good morning, everyone.

Hi, David. How are you?

I am doing well. Thank you. I could use a little bit better weather here in Chicago, though, if you can help with that, that would be great.

How about this weekend? I'll take care of it. How's that?

That sounds spectacular. Thank you. I'd appreciate it. So a question I wanted to ask about sort of the topic on the expenses. Mortgage banking revenue or the volume sounds like it's going to be coming down, and I think, Dave, you discussed sort of the $280 million to $290 million range in expenses. Can you stay there? And does the lower volume allow you to keep the expenses in that range for a little bit longer period?

Yes. Well, it's a good question. I do think as the volumes come down, the mortgage expenses will come down some more. We keep working on that. So there are some positive expense numbers that come out of that. As you know, as you go into the second and third quarters, our marketing expenses tend to go up a little bit because of the baseball season sponsorships and just the community sponsorships we do in the summertime, and travel and entertainment tends to go up, and we get raises that go into effect in February. So there are some increases in expenses that we might see in the second quarter. We do think mortgage expenses will come down. We're certainly attempting to control the other expenses, so there might be just a tad of overall increase, but it shouldn't be extraordinarily high. It just maybe they bump up a little bit. But can we keep them in that range? Possibly but might be just a little out there.

I think you have to look at the net overhead ratio, which we expect to be right around between 125 and 130 for the whole year, about 130 to 135, I think the rest of the year would be a good number.

Yes, that's what we think. If you took out the MSR gains this quarter and just looked at the rest of the operations, we’d be in that 130 to 135 range. So we think that's reasonable. You have to understand that we do think the revenue in that scenario goes up quite a bit too with the margin increase. So we still think that we have good operating leverage, and we'll have growth in the balance sheet.

And then as it relates to rate hikes, with the beach ball being released here and you should see some acceleration in net interest income, how much of that falls to the bottom line? Will almost all of that fall to the bottom line? Or does that allow you to take on any additional projects? Or are there any other expenses that you'd have to add with several rate hikes?

As it relates to wages, inflation is a concern right now. We will have to wait and see how that plays out but I would imagine that by midyear... we usually don't like to do a lot of midyear increases, but I think this year we're going to have to. Everybody's got to be happy and in line. I mean, we've got a lot of good things going on here. That's all to our people. We got to keep our people happy because, again, there’s a lot of poaching going on out there as we speak. But we have a very deep bench and we're able to fill in where we could get poached. The market disruption is helping a little bit there too in terms of being able to bring people in. So I guess I would...

I mean, the other thing, I mean people ask us all the time, 'Well, if you make more money, will you invest a lot more into technology and some of those other initiatives?' And I think our approach is, we've always sort of had a rolling three-year initiatives plan and technology plan and investments to continue to increase the mobile and digital benefits that our customers see. And our team is pretty full from a resource capacity executing on that plan. So the things at the margin you might spend on if you have it may happen, but nothing significant because we're doing the things we plan to do anyway.

Got it, thank you. That's all I had. Appreciate your time, guys.

Thank you.

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

Hey, good morning. Hey, Ed. Maybe a question on just the overall rate profile. I listened to a conference call this morning about banks reaping the benefit but also taking down some of the rate sensitivity as we get rates priced in, any thoughts about adding some swaps to just to mitigate some of it?

You mean on the downside?

Yes. Just the futures market is projecting cuts in a couple of years. We're going to raise and then we're going to apparently cut. So I'm just wondering if you... if there's a scenario where you would just mitigate some of the volatility.

That's the plan. We're finding ourselves in a position where we, again, can maybe more rates go up and down, but they're pretty expensive right now. We were fortunate when rates were really low, during the pandemic, to put on some derivatives that have been helpful or will be helpful to us as rates continue to go up, but they're kind of expensive right now. But we continue to look at that and understand that it's a vulnerability for us right now, and we'll continue to evaluate that time the market a little bit. And does anybody else want to comment on that?

Well, no, I think that was right. I mean, it's a little bit odd that we're a month into the first increase and we're already talking about decreases. We've got another eight or so increases planned. The market projects more into 2023. So we look at it every day, Chris.

Yes. And I would just say, I mean you can go back and look at our prior 10-K and 10-Q disclosures, and we have in the past put on forward-starting derivative transactions to address that kind of a situation when looking at the overall interest rate sensitivity of our entire balance sheet. If you see those sort of opportunities, sometimes the cheapest way to address that in the short run is through a derivative contract, and we certainly have done those in the past. So we are looking at those things and we'll keep you updated if we do.

Okay. Maybe one more. Your growth outlook has been, I would say, consistently strong above peers. You run the capital structure more optimized than some of your peers. I'm just interested, given the outlook for growth and the remix of the balance sheet and also the concerns in the economy, is there a scenario where you would just proactively come to market and just shore up the balance sheet even further just to make the capital position give you more flexibility?

Well, we've always talked about this in the past. The way we look at it, we like to be very efficient on our capital structure, and we actually like leverage in our capital structure. We like having preferred and subordinated debt, and we even still have some old trust preferreds that are very efficient for us. And so for us, it's sort of where do you think growth is going to go. If you look at this quarter, we supported the growth. And if you look going forward as these rate increases come through and your profitability goes up, if you stay in this mid to high single-digit loan growth area, we can support that loan growth. So I think what we need to just do is look and see what the outlook for growth is. If it becomes sort of supersized then, yes, to be opportunistic and raise capital to support that growth. We've always been a growth company, so we would look to do that. But currently, the earnings are supporting the growth, and we'll just continue to monitor it.

Thanks.

Thank you. Next question comes from Jon Arfstrom of RBC Capital Markets. Your line is open.

Hey, thanks. Good morning, everyone. Tim, I have to ask about your comment regarding the 325 margin by year-end. What rate assumptions are factored into that statement?

Yes, Jon. We've got 200 basis points from this point forward in 2022. So roughly 100 in the second quarter and 50 in the two ensuing quarters. Your guess is as good as ours as to what it actually turns out to be.

And then I guess the flip side of that question is in that kind of an environment, how do you guys think about deposit pricing and deposit growth? Can deposit growth match loan growth in that kind of an environment without you guys having to really take up deposit rates?

We will likely need to increase deposit rates to attract funds, which is part of our overall plan and aligns with the margin numbers Tim provided. The momentum for deposit growth is still strong, even though we haven't offered a market product in a while since we've had sufficient inflows. Previously, we always had market products, and now we are reintroducing them to see how they perform. However, it will require a bit more investment to achieve growth, which we always acknowledge. Nonetheless, I think we still have some distance to cover on the asset side.

We haven't seen much market reaction. So other than deposits that are sort of attached to indices at this point, everybody seems to have been pretty disciplined.

And I guess, more of the elephant in the room is just on mortgage. And Tim, to your point, whether or not 200 basis points come through, how would you guys think through that kind of a rate hike impact on production volumes at the mortgage company, and what's the strategy to deal with higher mortgage rates?

Well, there's a disconnect a little bit between 200 on the...

Yes, I know different parts of the curve, yes.

Right. So we consistently have been bringing in $300 million or so, or $400 million of applications per month, and we expect to refinance as the fall off. They were still kind of close to 50-50 in the second quarter, but my guess is that's going to be more 60%, 70% purchase. We positioned ourselves really well and tried to service the purchase market and do that out of our retail locations and with our local people being involved in the communities and the realtors and the like. So we still think that rates are... for us old guys that got our first mortgage at 9% or 10%, we still think 5% mortgages are going to stop the purchase activity. And so we think we'll gain more than our fair share of the purchase market. So we still think that we can maintain the volumes that we have right now, and we'll see. There's a supply inventory of houses that is hurting that a little bit too. I think you could have more volume if there was more supply out there. But we believe we'll pick up on the purchase side, and who’s on the refinance side. But I think right now, based on what we know, even with the sort of 5% level of mortgages that we can maintain the production volume.

And even, Jon, even if it doesn't. When rates fall again, you'll be back. We're trying to market home equity once again because as the cycle goes... the values go up as they come equity all rates go down, and they refinance again. So we expect lower rates, that's why we're positioned on our margin to go up substantially to cover the mortgage side of the equation. So I think that it's working according to plan. It won't always be perfect, but the margin should cover a lot of the other problems in the drop in mortgage business and we'll make it up another. We've got to take what the market gives you like I always say: in rates go down, it gives you mortgages, and rates go up, it gives you other opportunities. So that’s how we're structured.

But, and I think you have to think about that interplay that Ed talked about, about the margin and the mortgage business. But we have built into the revenue right now, $10 million, $11 million of servicing income. And then if you look at those projections, the production income is, what, say, $20 million, $25 million a quarter. But that's not falling to the bottom line because you have commissions and other expenses. So the impact of the mortgage business now, from a volatility perspective, should be rather low going forward and should be sort of dwarfed by the changes in the overall rate environment and the earning asset base related improvements there.

Yes, okay. That's a good point. It’s clearly the balance pulled through this quarter, but I think addressing the mortgage thing helps. So I appreciate it, guys. Thanks.

Thank you.

Thank you. Our next question comes from Terry McEvoy of Stephens. Your line is open.

Good morning, everyone. Maybe a follow-up on Jon's question. What are your thoughts about holding more mortgages on the balance sheet now that rates are higher? And then while I'm kind of on the balance sheet, just maybe talk about future deployment of excess liquidity into this investment securities portfolio?

I can discuss the ARM. We are currently observing an increase in ARM production in the market. In the last quarter, we were able to hold a bit more residential. Looking ahead, you can expect a similar amount for the second quarter. We usually do this within our footprint rather than focusing on national products. Generally, I see opportunity in this space, and we are optimistic about it. In the past, we had a significant amount of residential on our books, but in recent years, we have experienced substantial low growth in other areas, as most people prefer a 30-year fixed mortgage. Therefore, we take what the market offers us, and currently, that is more ARM production, which provides us with new opportunities.

Yes. And then I guess on the securities portfolio, we ended up $1.2 billion in securities more at the end of the first quarter versus the fourth quarter. So we did put some of those securities to work, and you can see that impacted the margin positively. But the rate increases will also help on the short-term liquidity earning there. So for the time being, we're still going to be cautious and opportunistic and replace the runoff, maybe invest a little bit more, but we're not going to dive into the deep end and put all $3 billion or $4 billion of excess liquidity we have right now. Hopefully, we'll soak some of that up with loan production, and then we'll continue to slowly leg into what I think.

And then as a follow-up question, Ed, in the press release, you talked about gaining new market share. I was wondering if you could expand on that? Is that kind of Chicago, Milwaukee? Is that some of your national businesses? And what's behind that statement?

I believe there is significant potential for growth in Chicago within our targeted market area. We currently have only about 6% to 7% market share. Competitors like Chase, BofA, and BMO should be aware that we are making strides to change that. I’m confident they are feeling the pressure as we continue to expand. Our recent service awards can help us capitalize on this growth, and we consistently provide the best service available. Our strategy, which combines high-touch and high-tech solutions, is effective. Overall, we anticipate ongoing growth across all our products and services, along with an increase in market share, which we expect to achieve every year. Does that make sense?

It did. Yes, I appreciate the color and it's nice to hear. It's broad-based market share gains. Thank you.

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

Yes. Hi, guys. A question on some balance sheet dynamics. I appreciate some of the noninterest-bearing deposit outflows were somewhat transitory in the quarter, but also curious if that's a function of some of your commercial clients kind of sifting through elevated excess liquidity levels that were accumulated over the last couple of years. And as they work through those liquidity levels, can we perhaps expect a meaningful increase in line utilization? I appreciate it was only up maybe 0.5% or so in the first quarter. So just trying to think about what the increase in line utilization potential may factor into that high single-digit loan growth outlook for this year?

Rich, do you want to handle that?

Yes. As I mentioned earlier, I believe we have a favorable trend on our side. As we've indicated in previous calls, line utilization during the pandemic and in recent quarters has been quite limited. However, we are now observing a positive shift, particularly within our asset-based lending group, as they address customer requests concerning increased supply and raw material costs, leading to a rise in utilization. There is also an expansion in the available lines, which is evident from our release indicating that more customers are seeking larger line facilities. This is encouraging for us, and I believe that as we progress through the year, this trend will continue to benefit us significantly.

Nathan, so the first part of your question, the deposit run out was really related more to a handful of large businesses that sold as opposed to a drawdown of it. Although, clearly, there was a lot of liquidity in the system and we continue to watch how some of our commercial clients manage their deposits, the fourth quarter was more an isolated incident type situation.

And choosing gears and think about mortgage expenses, Dave, when I think about kind of what you described about a year or so ago when we saw a pretty decent decline in volumes in the second quarter of last year, you spoke to the potential for the commission line related to mortgages step down by about $8 million or so. Is that a fair kind of starting point as well to think about the commission line into the second quarter within the context of what you spoke to in terms of just the overall expense run rate starting in Q2?

Well, if origination volumes stay the same in the second quarter as the first quarter and the fourth quarter origination volumes, if you kind of look at those relative to where they were in the prior quarter, they came down a little bit. But I would expect that because the first quarter was down from the fourth quarter the way it went through that you'll see a little bit of a reduction in commissions. But then if it flattens out and we stay stable, I don't think you're going to see a dramatic decline because the production will be the same. So I think you see a slight decline in the second quarter in the commissions line just because of the production dynamics but then should level out and we'll have to see where production goes into the third and the fourth quarters.

But just generally speaking, there is a lag in your mortgage-related expenses compared to revenue...

Yes, we recognized the revenue based on secured production and the likelihood of closing, which includes a net revenue figure. This reflects the discounted cash flow of that net revenue. We approach this on a locked basis, but the commission expenses are not recorded until the loans are finalized.

Understood. I appreciate all the color. Thank you, guys.

You’re welcome.

Our next question comes from Michael Young of Truist Securities. Your question, please.

Hey, thanks for taking the question. It's great to see the strong growth again in the insurance book, both Life and Property & Casualty. I know some of those areas, particularly Life, will start to reprice into that higher 12-month LIBOR. Does that ever result in some choke-off of demand in either the life book or the Property & Casualty book as rates rise?

From my perspective, it's quite interesting because the crediting rate also increases if they obtain the insurance policies. The credit rate on the insurance policies goes up, while the spread remains constant. So, if someone takes out one of these policies, let's say it's a second policy on themselves, they could have received a credit rate of 5% before, resulting in a net of 2%. Now, they might receive 6% or 7%, which gives a net of 4%. As long as that spread exists—although it has contracted—it may expand a bit over time, making this product more appealing, I believe.

And rates really don't have an impact on the commercial premium finance book at all. So that's more insurance premium than whether you're having catastrophes or whatever is going on in the insurance rate, but interest rates really don't impact the commercial premium side at all.

Yes. When discussing our life insurance customers, they mention that rising rates might have some impact, especially if there isn't a change in the crediting rate and the arbitrage gets somewhat tighter. However, there is a noticeable increase in the product's popularity and awareness in the market. We believe there is a strong market potential that will continue to thrive as rates rise. We will monitor the situation closely. This product has experienced significant growth over the past few years, and its success is not solely tied to current interest rate levels.

Yes, where we might see a problem in terms of competition. Some people jump in, and they try to steal market share. They think it's an easy deal. So it's not an easy business. You have to have real expertise. We've got there. That's the value add we give is that expertise we have in terms of structuring these, and you get them to the IRS a lot of places. And if you do it the wrong way, these guys will jump in and think it's easy. So I would expect that would be a bigger issue than the market itself is competition coming in, fighting over a basis point or two. But most people are pretty happy with the service we give and the knowledge that we're doing it right as opposed to some people we have to jump back in and take it over and fix it. And that's a real pain in the neck. We should get paid for those, and we do. They leave us, and they come back, and they have to fix it. So it's not an easy business. It seems like it is but it’s not.

Just another question just on the deposit side. Is there any interest to term out any deposits kind of earlier in the rate hike cycle to give more benefit later on? Or I know you've got a lot of CDs kind of rolling through at pretty low pricing right now. Will a lot of those just roll off? How are you guys thinking about that book?

Yes, I think there are two aspects to consider. The retail client base tends to be aware of interest rates. Currently, our CD book represents only 9% of our total deposits. We believe clients will begin to invest in CDs again as rates improve, but significantly higher rates will be needed to encourage people to commit their funds at this time. They are aware that rates are expected to rise. Although the futures market indicates much higher rates ahead, we haven't yet seen substantial increases offered by banks. Thus, we have not observed any significant readiness to commit. We will monitor the situation for opportunities and act accordingly. Some institutions are currently offering rates around 1% for one-year terms, but they don't seem to be gaining much traction.

Okay. Thanks very much.

Thank you. Our next question comes from Ben Gerlinger of Hovde Group. Your line is open.

Hey Ed, good morning, guys.

Good morning. How are you?

I am doing well, thank you. David, you always provide excellent insights on the broader economic outlook. When considering the smaller businesses in the lower level commercial and industrial segment, I don’t believe that global geopolitical events or situations like the conflict in Ukraine significantly affect their daily operations, certainly not to the same degree that inflation does. Regarding their operations and loan demands as they deal with inflation, do you see a possibility of them tightening their lending range or perhaps increasing loans to strengthen their balance sheets? I understand that the loan guidance is clearly set in the mid to high single digits, but is there anything that might push that number higher aside from adding more talent to the team?

I think inflation is the big deal right now than supply chain still kind of... So we see people again cause small producers even are getting their costs and are able to pass them through. That's inflation. The cycle is here. The spiral is here. We have to be very careful in terms of us getting more of that business, yes, we're always looking at more of that. Small business is very important to us. We're number one in Illinois in SBA loans and very important to us and we're starting to expand that. But Rich, you want to comment?

No, you hit the nail on the head. I think, generally speaking, most of our customers would report that they have been able to take those costs and move them through and pass them along, and they're doing pretty well. I think overall, the consumer is pretty healthy right now. And so demand across the board is in pretty good shape, whether it's housing, auto, or any area that you look at. And so a lot of the customers that we finance are supplying our lower-end suppliers in that space. And so generally speaking, I think they're feeling pretty good. I think as Ed pointed out, where the bigger challenges are just inflation, wage pressure, and having to battle that and trying to find good talented people. That's probably the number one concern that people express to us. I think what you're seeing is in a lot of spaces where people are really focused on efficiencies now. They're looking more at automation. They want to spend the money and just try to make do with less, and that's where we can help a lot. Our leasing group has reported a lot of activity in that area; a lot of this line utilization is for people making the spend to get more efficient. And ultimately, I think it's probably a pretty good thing. But in the meantime, it's hard because people have to get through this period where talent is very expensive and defined.

Talent is a significant issue currently, particularly in the hospitality sector. While there are restaurants open, they are struggling to find staff. For instance, a company I visited has 400 job openings that they can’t fill and they can’t recruit from abroad as easily as they did in peak seasons. This situation is quite chaotic. As a result, employers are having to pay more to attract workers, contributing to the inflation cycle. I mentioned a year ago that inflation seemed temporary, but once it gains momentum, it’s difficult to reverse. Many are worried about inverted yield curves, but I view that as a misleading signal, especially since the government continues to purchase treasuries, which helps maintain lower costs and creates a false sense of stability in rates. We don't perceive this as a current problem, yet it’s something we keep monitoring. There is a lot of available capital and prices are still being accepted. Rising oil costs are also a significant concern affecting commuting expenses, which just adds to living costs. Ultimately, it seems like it’s going to be more expensive to live, and the value of services will be reflected in the prices people pay.

And then kind of speaking on the same vein of talent, I know from an inflation perspective talent and then also Chicago seems to have a noteworthy deal every other year. So that's pretty much the gift that keeps on giving to Wintrust simply because you guys have a great mousetrap. So when you guys think about talent and the people outside of Wintrust kind of shopping their resumes, so to speak, and some of the free agency, are expectations for lender compensation to come over to Wintrust appropriate? Are people looking for too much? And then how are you just approaching the market disruption in terms of additional talent adds?

David, Rich, do you want to handle that?

Well, as we've talked about in the past, the disruption obviously continues to help us. And there's time lag. And to your comment, three or four events that continue to be beneficial to us. I don't think we're seeing anything atypical for commercial lenders and compensation. We do see obviously, the broader inflation related activities. But we think we're a good home for lenders. We think we take very good care of customers. And for a lot of our lenders, that's their primary concern. So I think we'll continue to benefit as the disruption continues to work its way through the market.

We've seen a lot at the lower levels. We run a credit analyst program of 30, 35 people every year that come through. After two years, they offer an awful amount of money, and they go away and half of them want to come back when it's done. But they realize that they left the goose. But Rich, do you want to comment?

No, I would agree with what Tim said regarding the influx of talent from the market disruptions we've witnessed over the past few years. When speaking to those bankers about culture and fit, they often express that their top priority is ensuring customer satisfaction. Our responsibility is to ensure we have the right systems and credit processes in place to deliver on our promises. This has proven challenging in the current market, which has seen numerous acquisitions and cultural shifts. When bankers lack confidence in their ability to deliver, it creates significant motivation to seek alternatives. However, we've managed to keep both our bankers and customers satisfied by maintaining a strong philosophy of consistency, which seems to be lacking in the broader market. Thankfully, we've been able to retain our bankers quite effectively.

All right. That’s great. I appreciate it. Thanks, guys.

Thank you. At this time, I'd like to turn the call back over to Edward Wehmer for closing remarks. Sir?

Thank you, everybody, for listening in, and we appreciate your support. If there are any other questions, please feel free to contact me, or Dave Dykstra, Rich Murphy, or Tim Crane. We'll talk again in a quarter, if not before. Bring on spring, and let's go Cubs! Thank you.

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