Wintrust Financial Corp Q1 FY2023 Earnings Call

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.

Thank you very much. Welcome, everyone, to our first quarter of 2023 earnings call. Joining 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; and Kate Boege, our General Counsel, who is offsite and may have a delay, but we're hoping she can join. Also with us is Dave Stoehr, our CFO. This quarter, we took a different approach, and I'll make some general comments before Tim discusses the operating results in detail. Dave Dykstra will cover other income and expenses, Rich will go over credit, and Tim Crane will share his thoughts on the future. I'll wrap up with final thoughts and then open the floor for questions. Now for some general comments. We achieved record results, and while I chose the right time to semi-retire, the industry faced challenges during the quarter, similar to past difficulties. Despite the turmoil in the banking sector, we reported record net income and PPP earnings. Our consistent conservative approach to banking has allowed us to thrive amidst these challenges. You may have heard me emphasize the importance of concentration and scale. We have always taken a traditional approach, and that remains unchanged. I believe the current industry challenges will create new opportunities for us, similar to past industry downturns. For instance, during the Great Recession, our strategy led to record earnings, even as one of the most acquisitive companies in the country. During the pandemic, we saw excellent results, with PPP loans significantly benefiting us and resulting in a large influx of new clients. Reflecting on situations like the Russian ruble crisis, our approach has consistently led to positive outcomes. I expect this trend to continue as we stick to our strategy. Now I'll hand it over to Tim to discuss the results.

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 they'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 with 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. 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.

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 compared to the prior quarter and an increase of $158.7 million compared to the first quarter of 2022. The $1.2 million increase in net interest income 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 of 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 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. The increase in the rate paid on interest-bearing liabilities in the first quarter 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 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 include an $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 rather than 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 increase 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 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 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 kicked off 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.

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. Increases in commercial line utilization, excluding 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 and 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 causes 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 loan size 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 are limited to $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, with no loans currently over 90 days past due. We continue to perform portfolio reviews regularly in this portfolio and have stayed very engaged with our borrowers. We are not immune to macro effects on challenged product types, 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 will 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 agreements on renewal terms with more than half of the borrowers in this final group. Again, our portfolio is not immune to the effects of rising rates or 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.

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 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.

Okay. Thank you, Tim. Well, you know this is my last earnings call. I'm going to miss the banter and relationships I've had with all of you. This being said, I will still be involved in a limited capacity as Chairman in the foreseeable future. Make no mistake about it, though, there's only going to be one CEO, and 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 forward 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 to make money on Wintrust. I can assure you that Wintrust is in great hands, and we'll continue to follow through on the issue and have the best management team and people in the business. As always, you can be assured of the team's best efforts in that regard. Tim, back to you.

Great. Why don't we go ahead and open it up for questions, and I have a quick summary at the end.

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

Thanks. Good morning, everyone.

Hey, Jon.

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.

You're welcome.

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?

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 the 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 are 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.

We included a presentation in the slide deck about the swaps we added during the quarter. Since these were only part of the quarter, there was a partial impact. The figure of 370 million reflects the increase from 7 to 15 basis points on that derivative position. We mentioned this last quarter, and I noted it in my comments, but we still have a significant amount of asset data available to counterbalance some of the deposit pressure we experienced. The main decrease is due to the mix shift, with people moving into interest-bearing deposits from DDA. However, we still have about $13 billion in premium finance loans that will reprice throughout the year. As this repricing happens, it will considerably offset the deposit repricing that we anticipate will continue for a little while. We aim to maintain our position where it was at the end of the quarter, although it's slightly less than we expected because of this deposit mix, but we believe we are in a solid position. As Tim mentioned, our positioning in Chicago is excellent. We are Chicago's bank, recognized for our outstanding customer service, and we earn these accolades because we prioritize good customer service. If we actively market our products in this environment, we believe we can increase deposits and support the loan growth that is present. There are many factors at play, but we have successfully navigated through similar situations in the past. We believe we can maintain that 370 million figure for the rest of the year, barring any significant shifts in the yield curve.

And the rate assumption of the forward curve, is that right?

Yes. Pretty much, Jon. We're kind of thinking we'll get one more here at some point in the second quarter.

Utilization has remained relatively flat throughout the year. We expected it to increase a bit closer to historical norms, but higher borrowing costs have somewhat dampened that trend. While it's not dramatically down, it hasn't bounced back to the levels we've seen in the past. In terms of overall loan demand, we see a significant advantage with our property and casualty group as we anticipate fundings to come in for the remainder of the year. What’s particularly encouraging is that our core pipeline for commercial and industrial loans and commercial real estate is strong. I’m not entirely sure if the market is expanding, but I suspect we continue to see opportunities arising from larger banks and other regional institutions that are fluctuating in and out of the market. The need for timely responses has been crucial, and our teams have acted swiftly, leading to ongoing opportunities in that area. These are the key factors I would highlight as being the most promising.

All right. Thanks, guys. Appreciate it.

Thank you.

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. 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 sometime, so congratulations.

Thank you, David.

As we consider the quarter regarding interest rate hedges, it appears that you may have added a few in early April, bringing you close to approximately $6 billion in notional value. Will you increase that amount significantly? Do you have a specific limit on how high you intend to go, or is your strategy to take advantage of whatever the market offers?

I think a little bit of the latter, David. We'll kind of see where the curve goes here. But as you can see from the interest sensitivity slides that we included in the deck, we're getting close to the point where we're more neutral than that. So we think these last couple were nice adds. We caught the market at a good time. And if rates start to drift downward, we've got a little bit of insurance that will help us here. So I'm sure, again, opportunistic.

Okay. You mentioned that the mix is getting closer to what it was before the pandemic. For most of the last 15 years, we've been in a zero-interest-rate environment, except for a brief period in 2018 and 2019. Can non-interest-bearing deposits decrease significantly from here and return to pre-GFC levels, where the industry average was nearly half of what it has been since then? Is it possible to reach that low again, or are there structural changes preventing non-interest-bearing deposits from declining to 15% to 16% for the industry? What are your thoughts on this?

Well, I think for us, the structural change has been the growth of our commercial businesses. And so they carry with them DDA deposits related to paying for both treasury services and excess. So I would hope that we don't go back that low and that we've got some very material differences in terms of how we looked pre-2008 or 2010. But clearly, the events of the second half of March have everybody looking at their deposits very carefully. And so those conversations continue around the bank. But our treasury results continue to be good. And so more and more of the balances here are used to pay for treasury and other services.

Got it. Thanks. I’ll jump back in the queue. Thanks, guys.

Thank you. Our next question comes from the line of Chris McGratty of KBW. Your line is open, Chris.

Great. I appreciate the kind words about Ed. Regarding the margin, Tim or Dave, perhaps you could provide insight on the 370 mentioned in the release for the next couple of quarters. This might be more of a medium-term question. If the forward curve unfolds and there is a cut next year, what potential downside do you anticipate from 370?

It really depends on how much you expect the rates to drop. If you assess our hedges, we believe our deposits and loans are fairly balanced. We have managed to reduce both the potential upsides and downsides. We provided that sensitivity information in the press release. In terms of derivatives, we are likely averaging in the high 3% range. If rates were to decrease by 150 basis points, those would contribute positively to the margin. There may be some slight pressure if rates drop by that amount, but we expect to stabilize afterward. In the previous cycle, during the pandemic when rates fell significantly, our margin dropped to the mid-2s. However, we anticipate that this margin will remain in the 3% range this time, as we have minimized some of that downside risk. Ultimately, it will depend on the shape and slope of the curve, but we are hopeful to maintain it significantly with only a bit of pressure from a dramatic drop in rates until the mortgage market can rebound to help offset that.

Okay. Great. Maybe just as a two follow-ups. I think in the past, you talked kind of high-single-digit expense growth. I appreciate the color for the next quarter. But just given the changes in the environment, is that still like a reasonable ZIP code for a full year? And then also, can you help us on the covered call trajectory obviously, you're pretty active there. Thanks.

We'll need to see if the regulators make any significant changes. However, aside from that, I don't anticipate a shift in our expense outlook for this year. We're satisfied with this quarter's performance. Unique factors contributed to keeping expenses lower, such as a slight decrease in health insurance claims. Mortgages are currently at a low point, and we hope they will increase, which would raise the expense base but also bring in more revenue, making the rise in expenses justifiable. For the full year, we expect some increase, particularly in the second quarter due to the acquisition and marketing efforts. Insurance claims are likely to normalize as well. Our focus remains on the overall picture—when lending and mortgage revenue go up, expenses increase correspondingly. Pinpointing a specific expense number is challenging. We're targeting the net overhead ratio, which considers the variability in revenue based on market conditions. Currently, I do not foresee any major structural changes. The cost of deposits had some impact this quarter due to a shift in the mix caused by increased awareness of rates paid on deposits. We've already seen a significant part of that adjustment, so I do not expect a similar shift this quarter.

Okay. That's great. And how about the covered call outlook?

It sort of depends on where rates are at, but usually how it’s protected downside rate environment as we invest. The volatility at the beginning of this year, the covered call fee income, if you go back over time, this was a little bit of a higher level than we've seen over the prior four quarters, but there is higher volatility in the fee range is based on the volume of securities that you're writing calls against, but also volatility, and we saw much higher volatility. So I would expect that to be down a little bit in the second quarter because we've just been retaining a lot of those securities as liquidity just to be cautious early in the quarter. So we'll see how it plays out the rest of the quarter. But I imagine that's down a little bit, but there will still be some.

Great. Thanks. Just one follow-up for me. The ramp scenario that you guys highlight if Fed cuts down 1%, just curious what kind of deposit beta you guys anticipate and mix under that kind of scenario, which is obviously pretty good?

I think I might not fully grasp the detail of your question, Casey, but we're estimating that we'll likely reach a range around 50% for the full cycle. It really depends on when those cuts occur. As you can observe from the progression of the numbers, we've significantly reduced our asset sensitivity position over the past four or five quarters. If I'm not addressing your question well, feel free to ask again.

No, that's right. So similar, Dave, is it similar pace on the way down as it was on the way up?

Yeah, the decline would happen a bit faster than the increase. We tend to lag when things go up, but we would be quicker on the decline. You can notice this because on the upside, we would see a 1.7% increase under the ramp scenario, but only a 1.3% decrease on the downside. This indicates that deposit rates would cut a bit faster on the downside. I don't have the exact beta available at the moment, but it would be a little bit quicker.

Got you. Okay. Just one more. I think I know the answer, but I just wanted to check. With loan growth a little slower here, any appetite for share buyback?

We don’t plan on it right now. We certainly have an appetite because we believe we're undervalued. However, we’d like to see how things develop a bit more. As Rich mentioned, loan growth was a bit slower this quarter, but the pipelines at the end of the first quarter were higher than at the end of the fourth quarter. There is strong loan demand currently. So, we will observe how that evolves. We prefer to reinvest in the business to leverage this disruptive market, similar to what we've done previously. Our focus will be on raising deposits, attracting new clients, and expanding the franchise. Therefore, we will first see how that unfolds. Our primary goal has always been to grow the franchise and capitalize on disruption.

Yeah. Hi, guys. Good morning. I also just want to echo everyone else's comments and wishing you well, Ed, as you transition into Chairman, and it's been great working with you over the years.

Thank you, Nate.

Just kind of thinking about the deposit growth outlook from here. It sounds like you guys had some nice inflows year-to-date with the MaxSafe products. So I'm curious how much of that occurred post the bank failures that we saw in early March and just kind of how our deposit flows trending quarter-to-date and just kind of the overall outlook for core deposit growth over the course of this year within the context of maybe kind of what you're seeing in terms of opportunities to add new relationships in the wake of some of the M&A-related disruption that we've seen in Chicago lately?

Yes, there were a few questions in that regard, Nate. Firstly, regarding MaxSafe, we were seeing growth in deposits before March 10, but that activity clearly increased the demand for insurance-related products. MaxSafe and other reciprocal products that can accommodate larger amounts gained significant attention and popularity. Most of the growth in MaxSafe occurred in March. We believe we are very well positioned. Currently, we are managing some tax-related outflows, but we think we are handling those well. So far this quarter, as Rich mentioned, loan growth has been strong, deposits have remained stable, and we have actually reduced some of our home loan borrowings. Overall, we feel we are in a good position and are focusing on enhancing deposits and supporting loan growth.

No. We like where our securities positions are at. We expect our balance sheet to grow. We plan to market our deposit products in the communities and our consumer deposits increased during the quarter, which we anticipate will continue. We are strong in the middle market space, and with a full pipeline, we expect to attract new customers. Therefore, we believe we will grow the balance sheet through deposits, leading to loan growth, rather than reducing the securities portfolio to support that growth.

Total growth is essential for us. We've once again received the J.D. Power award this year, marking three out of the last four years we've achieved this recognition. Additionally, we've secured another eight grant awards this year, affirming that our products outperform the larger competitors. Our local bank status enhances our appeal, and we have innovative ideas to assist customers in transferring their accounts, which is often a hassle. We're planning to implement these ideas soon. Furthermore, our charters allow us to offer competitive teaser rates in our smaller locations without harming our existing business. Overall, I believe we are in an excellent position and must continue to grow, as we always do.

Okay. Great. That's helpful. And if I could just ask one more on the recently closed Rothchild acquisition. Any kind of guide rails that you guys can provide in terms of kind of the fee or expense impact or just kind of what you guys expect to have in terms of the pretax margin from those assets and team joining?

Initially, expenses may be slightly elevated due to the transition process, as there are some overlapping systems until we complete the conversion. Therefore, we anticipate some integration costs. This figure is likely to be around $7 million to $8 million in the second quarter, reflecting the transitional integration expenses. We will also generate a margin from the fees, although we haven't disclosed those yet. I prefer not to reveal our pricing for the assets we've acquired, but you can estimate using the information provided.

Yeah. Is the pretax margin just similar to what you guys currently earn on Great Lakes Advisers? Is that kind of a good proxy, Dave?

I would think that their asset managed business would be very similar to ours.

Again, with the front-end implementation expense, though, so a little bit of time to get there.

Yeah. But we think great leverage of combining the systems. It was a nice add-on to the assets under management and will give us leverage. So it might take us a couple of quarters to squeeze all of the integration stuff out. But we’re very excited about the acquisition. I’m very excited about the team that we’re bringing on, and I look forward to continuing to have that be a growth area for our fee income.

Good morning, everyone. Thank you for taking my questions. I wanted to follow up on Nate's inquiry regarding Rothschild. You mentioned expenses are at 7% to 8%, but some of that is transitional. Could you help us understand what the ongoing run rate will look like for Rothschild once those transitional costs are removed?

4% to 6-ish, something like that. Again, we're a whole two weeks into this in terms of our implementation activities. So...

Yeah. It just depends on how we grow that business. And if we can grow that business more, there's a little bit more expense that will go with it, but 5% plus or minus.

Got it. Okay. And then I just wanted to circle back on the swaps. I appreciate the detail on Slide 22. So I can kind of try to work through that myself. But I just want to ask if you could clarify for us how much of the 370 margin at quarter end is being negatively impacted by the swaps in terms of basis points?

It's about 7 basis points, and we would project since we added some in the first quarter that, that number would go up.

Yeah, but 7 basis points for the full first quarter.

Correct.

Yes. That was the number I was looking for. Thank you for that. And then I just want to ask just one last one about the NIBs. You guys aren't unique in this sense that the NIBs have been pressured. But I do just want to ask, do you have a good sense for like when the tide kind of could stem there? Like are you kind of close to which you would think would be the level that your customers need to keep from an operational account perspective, or are you expecting to see more headwinds on non-interest-bearing going forward?

Yeah. I mean I think it's hard to say. I mean, again, we're growing the amount of DDA deposits that are required at the bank to pay for services, and we're adding commercial relationships. So is there going to be more migration? I don't know. We clearly think we've talked to most of our largest clients over the last several weeks, in some cases more than once. But it's kind of hard to say. And I don't think we're an outlier. I think we're kind of seeing what everybody else is seeing here.

Our sense is that the situation has stabilized. Initially, people started paying more attention to their bank accounts and noticed the interest-bearing funds they could move or invest. It seems we’ve likely seen the majority of that activity. We believe it has probably stabilized, but it's difficult to predict what the industry might do next. However, we do believe there's a necessary baseline of accounts to cover fees and support business operations. That’s our current assessment—it appears stable, but…

Got it. Thank you very much for that color. I appreciate you taking my questions.

No problem.

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 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 increase 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. 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.

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 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.

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 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 to make money on Wintrust. I can ensure that Wintrust is in great hands; we'll continue to follow through on 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.

Great. Why don't we go ahead and open it up for questions, and I have a quick summary at the end.

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

Thanks. Good morning, everyone.

Hey, Jon.

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.

You're welcome.

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?

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 the 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 are 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.

We included a presentation about the swaps we added during the quarter in the slide deck. Since they were only a part of the quarter, we experienced a partial impact. The 370 million figure reflects the change from 7 to 15 basis points on that derivative position. This is also part of the overall equation. We mentioned this last quarter as well, and I noted it earlier, but we still have a significant amount of asset data to counterbalance some of the deposit pressure we observed. The primary decrease is related to the shift in the mix of deposits, with people moving from non-interest-bearing deposits to interest-bearing deposits. However, we still have approximately $13 billion in premium finance loans that will reprice throughout the year. As this repricing occurs, it will significantly offset the deposit repricing we anticipate will continue slightly in the future. We aim to maintain our position near where we ended the quarter, even if it's slightly lower than expected due to this deposit mix. Nonetheless, we believe we are well-positioned. As Tim mentioned, we are enthusiastic about our presence in Chicago. We are recognized as Chicago's bank and receive awards for excellent customer service, which we achieve by providing quality service. We are confident that if we actively sell our products in this environment, we can grow our deposits and support the loan growth on the horizon. There are various factors at play, but we have successfully managed through similar situations in the past. Therefore, we believe we can maintain the 370 million figure through the rest of the year, unless something particularly drastic occurs with the yield curve.

And the rate assumption of the forward curve, is that right?

Yes. Pretty much, Jon. We're kind of thinking we'll get one more here at some point in the second quarter.

Utilization has been fairly steady throughout the year. We expected it to increase a bit more towards historical averages, but higher borrowing costs have dampened that somewhat. While it hasn't dropped significantly, it hasn't rebounded to the levels we've historically seen. Regarding overall loan demand, we have a strong advantage with our property and casualty group, as we can already see the funding expected for the rest of the year. What’s particularly encouraging is that our core pipelines in commercial and industrial, as well as commercial real estate, are strong. I'm not entirely sure if the market is expanding, but I suspect we're simply witnessing opportunities arise from larger banks and other regional institutions that are fluctuating in the market. The ability to provide timely responses has been crucial, and our teams have responded quickly, leading to ongoing opportunities in this area. Those are the key points I find most promising.

All right. Thanks, guys. Appreciate it.