Wintrust Financial Corp Q1 FY2024 Earnings Call

Welcome to Wintrust Financial Corporation's First Quarter 2024 Earnings Conference Call. A review of the results will be made by Tim Crane, President and Chief Executive Officer; David Dykstra, Vice Chairman and Chief Operating Officer; and Richard Murphy, Vice Chairman and Chief Lending Officer. As part of their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentations, there will be a formal question-and-answer session. During the course of today's call, Wintrust management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking statements. The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10-K. Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded. I will now turn the conference over to Mr. Tim Crane.

Thank you, Latif. Good morning, everybody, and thank you for joining us for the Wintrust Financial first quarter earnings call. With me this morning are Dave Dykstra, our Vice Chairman and Chief Operating Officer; Rich Murphy, our Vice Chairman and Chief Lending Officer; Dave Stoehr, our Chief Financial Officer; and Kate Boege, our General Counsel. In terms of an agenda, I'll share some high-level highlights. Dave Dykstra will speak to the financial results, and Rich Murphy will add some additional information and color on credit performance. I'll be back to wrap up with some summary thoughts on two topics: a high-level outlook going forward followed by a few remarks on the announcement from this past Monday regarding our pending acquisition of Macatawa Bank. For the quarter, we reported record net income of just over $187 million. The results include a one-time gain from the previously announced partnership related to our 401(k) advisory business and a further expense related to the replenishment of the FDIC Deposit Guarantee Fund. Dave will speak to the relative amounts for these items and a handful of other items. Overall, net of these atypical and mostly positive items, the quarter was strong and in line with our expectations. We grew both loans and deposits by slightly over $1 billion with a net interest margin of 3.59%. The loan growth was balanced nicely across all of our major businesses. Net interest income of $464 million was down just a bit from the fourth quarter, and if adjusted for the number of days in the quarter, would have been essentially flat. Our strong deposit growth reflects our continued ability to attract deposits and grow our franchise. During the quarter, however, we did see a decline in the average non-interest-bearing deposits of approximately $430 million. We attribute this in part to seasonal deposit flows but also to clients using their funds to invest in projects and to higher liquid rate options. We continue to expect credit performance to normalize from the very low levels experienced over the last few years. However, our NPLs remain low, and our charge-offs reflect to a large degree the resolution of prior-period reserve activity. Despite these modest credit losses, we continue to maintain a healthy allowance. And as you'll hear from Rich, we also continue to proactively address challenged credits in our portfolio. I would highlight that our allowance coverage for core loans, excluding primarily our low loss insurance finance portfolios, is at a healthy 1.51%. Market rate increases during the quarter impacted tangible book value, but despite these fluctuations, our tangible book value improved to a record level from the fourth quarter, and the strong earnings resulted in slightly improved capital ratios. Overall, it was a solid quarter, which we believe will compare well and may differentiate us relative to many of our competitors. With that, I'll turn this over to Dave and Rich. Afterward, again, I'll come back to wrap up in terms of what we're seeing and speak to the acquisition announcement.

All right. Thanks, Tim. First, with respect to the balance sheet growth in the first quarter, we're pleased to report solid loan growth at the high end of our guidance. Total loans grew by approximately $1.1 billion or 10% on an annualized basis. Importantly, the increase in loans was broad-based, and Rich Murphy will discuss this in more detail in just a bit. We recorded corresponding deposit growth of $1.1 billion during the quarter, which is a 9% increase over the prior quarter on an annualized basis. As to the deposit composition, non-interest-bearing deposits declined on average by approximately $434 million in the first quarter relative to the fourth quarter of last year, and as of the end of the first quarter, represented approximately 21% of total deposits. The decline in the non-interest-bearing deposits, as Tim mentioned, was a result of businesses utilizing their cash rather than drawing on outstanding lines, some additional movement to interest-bearing deposit accounts, and some seasonality. And although the decline in average non-interest-bearing accounts follows several stable quarters, we're encouraged that thus far in the second quarter, non-interest-bearing accounts are averaging a couple of hundred million dollars more than they were in March. So, we're hopeful that the first quarter dip rebounds a bit in the second quarter. As to other aspects of the balance sheet results, total assets grew by approximately $1.3 billion, and our regulatory capital ratios improved slightly despite the strong growth. Overall, it was another successful quarter for gaining new customers in our market and for the growth of our franchise, which has been the primary objective of Wintrust throughout its history. Our differentiated business model, exceptional team, and service, and unique position in Chicago and Milwaukee markets continue to serve us well. As to the income statement categories, first, I'm pleased to reiterate the first quarter was a record quarter not only from the standpoint of quarterly net income but also from the standpoint of quarterly net revenues. As Tim mentioned, our net interest income remained relatively steady with the fourth quarter of 2023 if adjusted for the number of days in the quarter. An increase in the average earning assets was essentially offset by a 5 basis point decline in the net interest margin. The slight decline in the net interest margin was primarily the result of a mix shift in deposits and the pressure caused by the lower level of non-interest-bearing deposits and the higher cost of attracting incremental deposits to fund the strong loan growth. These dynamics resulted in a net interest margin of 3.59% for the first quarter and a run rate of approximately 3.5% at the end of the first quarter. Based on the current interest rate environment, the dynamics of the expected stronger loan growth in the second quarter, fluctuating non-interest-bearing deposits, and the incremental cost of funding elevated loan growth, we expect the net interest margin to be within a range around the levels where we ended the first quarter or approximately 3.5%. As I mentioned, the exceptional loan growth that we expect in the second quarter will require us to fund that growth in the short term with marginally higher deposit costs, which will likely pressure the margin a bit but would represent an acceptable trade-off. Said another way, we're happy to take advantage of current market conditions and add high-quality loans and high-quality relationships, even if it means a bit of margin pressure in the short run. These new relationships will provide nice gains in market share and additional net interest income at acceptable returns. Turning to the provision for credit losses, Wintrust recorded a provision for credit losses of $21.7 million in the first quarter, down from a provision of $42.9 million in the prior quarter and down slightly from the $23 million of provision expense recorded in the year-ago quarter. The lower provision expense in the first quarter relative to the prior quarter was primarily a result of improvement in forecasted macroeconomic conditions, primarily narrower forecasted Baa credit spreads. Rich will talk about the credit metrics and loan portfolio characteristics in just a bit.

Thanks, Dave. As Tim and Dave both noted, credit performance continued to be very solid in the first quarter from a number of perspectives. As detailed on Slide 6 of the deck, loan growth for the quarter was $1.1 billion. The growth was driven by a number of factors. Core commercial loans, excluding leasing, were up $267 million, driven largely by quality opportunities resulting primarily from dislocation within the competitive banking landscape in our markets. In addition, we saw $170 million in growth from our warehouse line of credit portfolio, resulting from strategic hires made last year, coupled with a recovering mortgage market. We also saw good growth in the commercial real estate portfolio, resulting largely from draws on existing construction loans. And finally, our leasing group had another very solid quarter. Loan growth for the past four quarters totaled $3.6 billion or 9% annualized. We believe that loan growth for the second quarter of 2024 will continue to be strong and potentially greater than Q1 for a number of reasons. Historically, we experienced our highest growth in our commercial premium finance portfolio in the second quarter. During the second quarter of 2023, we saw these balances grow by just over $1 billion, and we expect similar growth during this coming quarter. We continue to see a hard market for insurance premiums, and we are benefiting from opportunities from consolidation within the premium finance industry. These loans are among the highest yielding in our portfolio. In addition, core C&I pipelines remain very solid. And finally, our leasing teams continue to see significant demand in the market. Offsetting this growth will be continued pressure on C&I line utilization, which dropped from 37% to 34% year-over-year as higher borrowing costs have negatively affected usage. In addition, while we continue to see a number of new CRE opportunities, our CRE pipelines have slowed as higher borrowing costs have continued to affect loan demand. We anticipate that higher borrowing costs will continue to cause borrowers to reconsider the economics of new projects, business expansion, and equipment purchases. In summary, we continue to be optimistic about our ability to grow loans at attractive rates and maintain our credit discipline. As noted earlier, Q2 loan growth should be very strong and in excess of the total for Q1. In addition, we would anticipate total 2024 loan growth could be at the upper end of our guidance. From a credit quality perspective, as detailed on Slide 13, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics. Non-performing loans as a percentage of total loans was virtually unchanged at 34 basis points, up by $9 million. As an aside, while core NPLs had a slight decrease for the quarter, we saw an uptick in non-performing loans in the commercial premium finance portfolio, resulting from increased cancellations in the transportation segment of that portfolio. We continue to monitor the situation closely and believe this number should stabilize and come down as a result of tighter loan structures and enhanced underwriting. Higher yields and late charges from this segment of the portfolio continue to offset our credit losses. Charge-offs for the quarter were $21.8 million or 21 basis points, up from $14.9 million or 14 basis points in Q4. It's important to note that charge-offs for this quarter were largely reserved for in Q4. Finally, as detailed on Slide 13, we saw stable levels in our special mention and substandard loans. As noted in our last few earnings calls, we continue to be highly focused on our exposure to commercial real estate loans, which comprise roughly one quarter of our total portfolio. Higher borrowing costs and pressure on occupancy and lease rates continue to affect CRE valuations, particularly in the office category. During the first quarter, we saw a modest increase in CRE NPLs from 0.31% to 0.34%, up $4 million. On Slide 17, we continue to provide enhanced detail on our CRE office exposure. Currently, this portfolio remains steady at $1.6 billion or 13.5% of our total CRE portfolio and only 3.6% of our total loan portfolio. Of the $1.6 billion of office exposure, 44% is medical office or owner occupied. The average size of a loan in the office portfolio is only $1.5 million. We have only six loans above $20 million and only three of which are non-medical or owner occupied. We perform portfolio reviews regularly on our CRE portfolio and we stay very engaged with our borrowers. As mentioned on prior calls, our CRE credit team regularly updates their deep dive analysis of every loan over $2.5 million, which we'll be renewing between now and the end of the fourth quarter of 2024. This analysis, which covered 78% of all CRE loans maturing during this period, resulted in the following: half of the loans reviewed will clearly qualify for renewal at prevailing rates; roughly 30% of these loans are anticipated to be paid off or will require a short-term extension at prevailing rates; the remaining 19% of these loans will require some additional attention, which could include a paydown or a pledge of additional collateral. We continue to backcheck the results of these tests conducted during prior quarters and have found that the projected outcomes versus actual outcomes were very tightly correlated and, generally speaking, borrowers of loans deemed to require additional attention continue to support their loans by providing enhancements, including principal reductions. Again, our portfolio is not immune from the effects of rising rates or the market forces behind lease rates, but we continue to proactively identify weaknesses in the portfolio and work with our borrowers to identify the best possible outcomes. We believe that our portfolio is in reasonably good shape, appropriately reserved, and situated to weather the challenges ahead. That concludes my comments on credit, and I'll turn it back to Tim.

Well, you can tell we continue to believe that we're well positioned to take advantage of the current environment with our diverse businesses. And as you also heard, we expect to see relatively strong growth in the coming months. To some of the earlier comments from both Dave and Rich, if we experience loan growth at the high end or above the high end of our forecasted range, which we believe is possible, that could pressure the net interest margin from the current levels, particularly in the second quarter. If that were to occur, the trade-off is solid franchise growth and favorable net interest income performance in future quarters. To add some financial context, our projection is that net interest income for the second half of the year will come in higher than for the first half and that while there are a lot of moving parts, the current consensus pre-provision net revenue number looks about right to us. With respect to the announcement regarding Macatawa Bank, we've enjoyed speaking to many of you over the past couple of days and we've also shared the transaction highlights document, so my summary is succinct. We are very excited about this opportunity. As we mentioned on prior calls for several reasons, the current population of attractive targets has been quite limited. Macatawa serves the Greater Grand Rapids West Michigan market, which is a top 50 MSA in the United States. They have pristine credit quality, net charge-offs are negative for the past three years and virtually no non-performing loans. They stayed short with their securities portfolio, have a limited population of fixed-rate loans and a very attractive low-cost deposit book. Their loan-to-deposit ratio is 55%, which translates to $1.1 billion in excess deposits which, in this environment, we would deploy at a substantially higher rate. Lastly, Macatawa has a committed leadership team excited about the transaction. While we have business in Northern Indiana and West Michigan today, we do not have a physical footprint. And I can tell you that there are not many banks, if any, at this point, with this good a profile financially and such a good cultural fit. I'm not exaggerating when I say this is an ideal platform for our expansion in West Michigan, and we are very pleased to have this moving forward. At this point, I'll pause and we can take some questions.

Our first question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead, Jon.

Hey, thanks. Good morning.

Good morning, Jon.

Hey, Tim, thanks for the help on some of the margin and net interest income dynamics. But can you guys touch on those non-interest-bearing levels and confidence that those balances can stabilize, and then, touch on some of the pricing trends you expect in the money markets and savings products? And I understand the second quarter comments on the margin, but I'm just curious if some of that stuff is burning out and could be less of an issue in the third quarter.

Yeah. I mean, we're obviously hopeful that half of the DDA balances that were out on average in the first quarter have more or less come back and that will stick, Jon. With market rates up, some of the competition that we've seen subsiding kind of is back in the market. And so, you're around 5% for some of the promotional or marginal deposit growth. But we were pleased in the first quarter to match the deposit growth with the loan growth, and it just came in a little higher cost than we expected.

Okay. All right, fair enough. And then, Dave, maybe for you, can you unpack mortgage a bit in terms of your expectations there? You talked about slightly higher origination volumes, but typically, you guys see a pretty strong Q2 and Q3. What kind of expectations do you have there?

We finished the fourth quarter at a low point. In January, applications increased compared to December, and February saw higher applications than January, followed by March surpassing February. However, the growth hasn’t been dramatic; it’s been a gradual increase. So far in April, application volumes are similar to those in March, but we anticipate that the spring buying season will provide a boost. Although the recent rise in rates hasn’t been helpful, there is significant pent-up demand. We are receiving more requests for pre-qualification letters, which indicates this demand. We expect that the spring buying season will improve performance, despite ongoing supply shortages. Therefore, we anticipate that the second quarter will perform better than the first quarter, even with the current high rates. While we are only two weeks into the second quarter, we remain optimistic.

Yeah. Okay. That's helpful. All right, guys. I appreciate it. I'll step back. I'm sure there are others with questions, but numbers look good. Thank you.

Good. Thanks, Jon.

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

All right, great. Good morning. Dave, maybe a question for you. I think in your prepared remarks, you said the consensus PPNR numbers look okay. I guess, what are your expectations for margins? You talked about kind of a little bit of pressure for growth purposes. But if we do get the forward curve, is the range that you've previously guided on the margin still good or is it going to be kind of maybe trending below that?

No, I think it's still good. I think we're fairly neutral now on any consensus of a couple of rate cuts, and we don't believe that impacts us dramatically. The bigger pressure here is simply, 'Do you hold the DDA?' As Tim and I have mentioned, we’ve seen a bounce back so far this quarter, along with really strong loan growth. We expect to be above the top end of our current guidance in the second quarter. However, funding that short term is a bit more expensive than just growing deposits in the mid-single-digit range. So, there’s a little bit of pressure there. That said, we're currently considering around the 3.5% range—lots of moving parts—but we don't anticipate any dramatic changes based on moves by the Fed, whether they are 25 basis points or 50 basis points.

Okay. And just from the guidance is mid-to-upper single is kind of the loan growth that you're talking about?

Well, for the year, I think as Rich said, we think we're at the high end of that guidance. We think the second quarter will be above that range. It's a strong quarter for premium finance and the pipelines are full. So we actually think we'll have a stronger growth quarter for loans in the second quarter than we did in the first quarter.

Okay. Thanks for that. In terms of the deal, I think I get the quality of the bank you're buying and the market extension. Could you help us with accretion expectations or ranges? It's about 5% of your balance sheet. In terms of size, is that a reasonable range of what you might be able to extract from it? I know that the balance sheet probably has some finessing to do given they're under loaned and have a lot of liquidity?

Yeah, Chris, I mean it's early obviously and we're working those numbers, but I think we're going to stick with what we've said, which is accretive, excluding the integration expense in year one. There's lots of opportunity here. This is a great fit for us. The market is terrific. It grows faster than Chicago, for example, on households and we're really excited about this.

And the excess liquidity they have given the strong loan growth we're talking about, we think we can really put to utilize almost on day one and in a higher rate asset class.

Thanks a lot. Just wanted to come back to the prior comment on the PPNR. It feels like you're being a little conservative given how optimistic you are on growth. Is there something I guess we're missing as analysts that wouldn't suggest that there's an upward bias to the numbers?

Chris, we're cautious about the deposit environment as we prepare to fund significant growth. It's a positive development for us that we're experiencing good growth and attracting strong clients who will stay with us long-term. However, the need to repeat our performance of over $1 billion this quarter next quarter is putting some upward pressure on us.

Okay. Thanks, Tim.

Yeah.

Thank you. Our next question comes from the line of David Long of Raymond James. Please go ahead, David.

Good morning, everyone.

Hi, Dave.

You started the year with record results. Does this affect your willingness to spend on marketing or other investments for the remainder of 2024? Specifically, will an increase in revenue lead to additional investment in projects? Additionally, with many of your competitor banks reducing their risk-weighted assets, are you considering hiring experienced bankers from other organizations that might be currently limited in their growth potential?

I'll comment and I'm sure Tim will join in as well. We have a three-year plan for our investments in technology and projects, and we intend to stick with that. We have ample resources, so while we want to manage expenses, we also plan to continue investing in the business. I don’t anticipate significant changes in that approach. For marketing, our goal is to keep growing the franchise, and increasing those deposits is crucial. We will likely maintain our usual plan, even though it sees a slight increase in the second and third quarters due to the seasonal nature of our sponsorships and related activities. We aim to manage expenses effectively; just because we're experiencing record profits doesn't mean we need to spend more. Regarding hiring, we are always on the lookout for talented individuals. Recently, we brought in some people in the mortgage warehouse sector, and we are consistently seeking good talent. If individuals can contribute to strong franchise value and growth, we are willing to expand our team as opportunities arise.

Yeah. I don't think I'd add much. I mean, we've got great momentum as things stand right now. So I think we're reasonably happy with the forward outlook here.

Thank you. As a follow-up, I'd like to revisit the topic of deposits. Are there any areas where you are currently noticing reductions in deposit pricing? Can you start to set lower prices at this time, or is everything still on the rise?

Yeah, Dave, it's an interesting question because we're hearing some competitor institutions really with no rate movement in the market trying to take some rates down, and we're watching that carefully. We've not been active in that regard, primarily because our intent is to grow pretty aggressively, but we are watching some people trying to kind of trend down in terms of their deposit costs.

Got it. Thanks guys. Appreciate it.

Thank you. Our next question comes from the line of Casey Haire of Jefferies. Your line is open, Casey.

Yeah, great. Thanks. Good morning, everyone. I have another question regarding the funding strategy. Sorry if I missed this, but how much do you expect CDs to contribute to deposit growth going forward after a very strong first quarter? And what is the current marginal cost of CDs?

Well, kind of two answers to that question. I mean, we're running both money market and promotional CD type offers in the market and getting traction on both. I don't have the exact percentage, Casey, in terms of the mix CDs versus other, but the CD market, most people have kind of shortened up waiting to see what happens to rates, and seven to 12 or 15 months type stuff is in the 5 or low-5 range. And we're in that category too. But we're having good success there and we're adding new names, which we like a lot. And so, I'd say marginal money markets are in the 4 range, marginal CDs in the 5 range.

Got you. Okay. On Slide 10, your net interest income simulations show positive results, indicating both asset sensitivity and liability sensitivity. I assume this is related to the lag in commercial premium finance. I'm curious about when this will play out, which I think will be in August. Could you provide some insight into that dynamic? The simulation you’re presenting is very interesting.

Yeah. Well, like I said, we think we're relatively neutral. But the main reason it has that dynamic is we think in down rate scenarios, we'll be able to reduce our deposit rates pretty much basis point for basis point, those that are not time deposits. So if we had a money market rate, we would expect to reduce those 25 basis points if the Fed was on 25. On the upside, we just think the beta is a little slower that we're not going to raise our deposit prices immediately if rates go up. And so, you would have a lesser beta on the up and a greater beta on the downside. And then you'd have the repricing on the assets like you talked about. So, relatively neutral as you can see, but the betas on the deposit is what's sort of creating that dynamic, the beta assumptions, so.

Got you. Thank you.

Thank you. Our next question comes from the line of Terry McEvoy of Stephens Inc. Your question please, Terry.

Hi, it's Terry McEvoy. Good morning. Could you maybe...

Good morning, Terry.

Hi. Maybe you provide a bit more color, if you could, on the commercial loan growth in the first quarter, the $670 million? I know you mentioned some of it was mortgage warehouse, the rest was market share gains. Just maybe expand industries, these larger banks, smaller banks, and what's behind that growth?

It's interesting, Terry. We've previously discussed the changes in the Chicago market. There's been significant consolidation, with many of our key competitors like MB, Private, and First Midwest no longer in the field. This has created a lot of disruption, and while changes don't occur overnight, we are witnessing substantial opportunities emerging from this situation. Additionally, we observe potential among larger banks in Chicago, as many customers feel disconnected from them at the moment. As a result, we are uncovering many promising opportunities that, frankly, we wouldn’t have anticipated five years ago. These opportunities tend to be somewhat larger, and we are finding an increasing number of prospects in the upper market. Furthermore, within our community bank area, we are seeing very positive small and medium-sized opportunities. The competitive dynamics, as Tim mentioned, are currently very favorable for us in terms of lending.

Thank you for that. As a follow-up, we discussed the strong loan production, but it appears that expenses came in lower than expected. If the loan production in Q2 increases and continues throughout the year, can you discuss how that might affect salary and benefits or overall expenses? Historically, there seems to be a link between significant production quarters and a rise in expenses.

A little bit. And our expenses, to Dave's point earlier, tend to trend up a little bit in the second and third quarter generally related to marketing. But in the insurance portfolios, we are very efficient. And so, incremental volume, while it has an expense impact, is not a big driver. And so, I would think you would expect modest changes, not kind of trajectory changes with strong loan growth.

Great. Thanks for taking my questions.

You bet.

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

Yeah. Hi, guys. Good morning.

Good morning, Nathan.

Good morning.

Can you kind of talk about credit trajectory for you guys maybe in terms of charge-offs? I mean, you guys have obviously had excellent credit trends for several years now. So, just curious how you kind of think about a normalized charge-off rate for you guys going forward in a higher-for-longer environment.

Yeah. Go ahead.

I'll respond first and then Rich can add his thoughts. This quarter, we're in the range of about 21 basis points, generally in the teens prior to a couple of quarters where we were in the single digits. We typically expect a loss rate of around 20 to 25 basis points, which we haven't experienced for several years. We believe that things will normalize over time. If we are in the range of 20 basis points or less, specifically 20 to 25 basis points, that's a reasonable expectation. Although we haven't seen that lately, there has been a slight upward trend this quarter. We experienced some larger charge-offs, but as mentioned, we fully reserved for most of them in previous quarters. Our approach has been to proactively address these issues.

I agree with everything Dave said. It's important to remember that it's not always linear. Similar to other banks, there can be one-off occurrences. So periodically, you might see something higher, but there will also be times when it's much lower. However, over time, what Dave mentioned about the 20 basis point to 25 basis point range holds true.

Okay, great. And then I noticed the office CRE portfolio grew a good amount in the quarter. Just curious in terms of what type of opportunities you're seeing both in terms of the type of office and also in what geographies as well?

Yes, good observation. Currently, there's minimal interest in office spaces. However, we have identified some opportunities, particularly in owner-occupied and well-tenanted properties, including medical offices, where we can achieve favorable equity contributions and pricing. We believe our exposure in this area is not excessive, and while we're not actively looking to expand this portfolio, it's beneficial to remain present in the market when such opportunities arise.

I mean, not that we're looking for office deals, but consistency matters to our clients, and it's important for us to be in the market. And as others sort of sit on the sidelines, we think we're getting terrific opportunities.

Certainly, regarding your question about geography, our portfolio is primarily focused on the Midwest, though it's not limited to that region. In this instance, this opportunity was based in the Midwest.

Okay, great. I have one last question for Tim. Given the acquisition announcement earlier this week, it seems that this should improve your capital ratios moving forward. I'm curious about your plans for additional acquisitions over the next year or so, especially as you consider expanding towards the Grand Rapids area.

Sure. Number one, we think we're reasonably good at acquisitions. So, we're confident that we'll get this integrated and moving the right direction quickly. And we start from a terrific bank place because this is a really good bank. We're not going to try to do several at the same time. So, we're probably on the sidelines for a little bit here, but we're having conversations and continuing to look at what makes the most sense for us going forward.

Okay. Great. I appreciate the color. Thanks, guys. Congrats on the great quarter.

You bet. Thanks, Nate. Appreciate it.

Thank you. Our next question comes from the line of Ben Gerlinger of Citi. Please go ahead, Ben.

Hey. Good morning, everyone.

Hey, Ben.

Could you provide some background on why you're pursuing this deal now, especially since you have a presence in Western Michigan without a branch footprint? It seems like you’re experiencing solid growth this year, and honestly, I believe your high-single digit projections may end up being quite conservative, likely closer to 12% growth. It can't just be about deposits and liquidity, so why take this risk now, especially when it could potentially distract from what looks to be a strong year for organic growth?

Well, I don't think we think we're taking our eye off the ball. We think this is part of our strategy to grow in the Midwest and to take good care of clients. And as you say, we do not have a footprint in the area right now, but we do have material business in both Northern Indiana and West Michigan. We just opened a new location in Crown Point less than a month ago. And so, great market. And at this point, if the question was, do you wait for something different to come along? We think Macatawa is a terrific fit for us. The growth opportunities in West Michigan are good. It's a well-run bank. It's a committed leadership team. We just feel like this was the right franchise at the right time.

Got you. That's helpful. And then for the accretion perspective, like it's a very efficient bank, like you said to begin with like other than just kind of mixing the two balance sheets, is there expense synergies to be had in '25, or is it largely just the pro forma one plus one equals more than two?

Well, there's likely some overlapping activity, but we believe that we will provide them with capabilities that will be beneficial in the market for both existing clients and new opportunities. Whether it's treasury services, digital banking services, or expertise in specific lending areas, I see a lot of synergy and potential here.

Yes, there will always be some cost synergies. We expect to take advantage of our purchasing power to reduce expenses like insurance and other operational costs. While there will be savings, we do not have plans to close any branches; instead, we aim to expand in that market area. With the integration of public companies, some associated costs, such as separate audits, will decrease. However, this initiative is primarily about forming a strong partnership with a reputable franchise in a thriving market and continuing to grow, as we have consistently done with banks.

That makes a lot of sense. I appreciate the color. Congrats. You got a pretty solid year ahead of you here.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Jeff Rulis of D.A. Davidson. Your question please, Jeff.

Thanks. Good morning. Just a couple of credit follow-up questions. On the pickup in non-performing loans in the P&C segment, anything timing-related? We've talked a lot about credit normalization, but just wanted to see if there's anything specific in that segment that drove the increase?

No, as I mentioned, transportation tends to be a little bit of an issue right now. Just obviously, that's no news to anybody. Freight rates are down. Revenue is down in that segment and causes for more stress on those borrowers. And as a result, cancellations have ticked up. But I don't think ultimately, it is a material concern of mine. I think our teams are working to make sure that we're very efficient on collection. They're working as we go forward on structuring those deals a little bit tighter. But again, given the level of late fees and overall rates that we earn on those, it's still a good trade for us.

Yeah. And the other thing, Jeff, I would chime in there with is they're listed as non-performing, but when they go into non-performing status, if we're short on collateral, we've already taken the charge-off. So, we're generally just waiting for that return premium to come to us from the carrier. So, it's not really an indication of larger losses that come down the pike because if we're short on collateral, we've already taken the loss. We're just waiting for the money to come back from the carriers.

Understood. Thanks. And then just a similar question on the charge-off side, the C&I front. I know you mentioned in Q4 a lot was reserved for, but within the C&I bucket, are you seeing any commonalities vintage or business category? I don't recall what kind of came on for what you reserved for in Q4, but just looking at the C&I bucket, what was charged off?

In the C&I category, we had some exposure in our franchise group that we recognized. However, it seems to be more of a one-off situation. If I had to highlight one area, it would be transportation. We don't have significant exposure there, but we're noticing increased stress not only in the P&C side but also within the core portfolio. Regarding the charge-offs, they were primarily related to some existing CRE exposure that we set aside reserves for, along with a bit of miscellaneous C&I and some franchise exposure.

Thanks, Rich. And a housekeeping on the sale of the retirement advisor business, is there a go-forward impact on fees and expense, or is that roughly a wash? Just trying to see if we need an adjustment there.

It's modest. The fees generally go down a little bit as we have a partner and we also lose some expenses, but it's very modest. And I don't think it's going to move your numbers.

Okay. And maybe I'll squeeze in just one last one. On the about a five-month pause here on hedges, you think you're largely in good shape there, I guess, borrowing running into maturities of those? Do you feel like we hold or probably an active conversation, but just wanted to see if we got an extended pause here?

Yeah. No, we talk about it a lot. And we just are kind of watching for the time being. I mean, we'll certainly kind of as we get closer to when some of these roll-off be more active or could be more active. But the rate environment right now is uncertain and we're seeing people talk about either rates higher for longer or rates up as opposed to rates down. So I think we're happy with where we are right now.

Okay. Thank you.

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

Hi, good morning. Thanks for the questions. I just wanted to circle back on the deal in terms of the timing that seems like a great timeline for closing. With the commentary sort of coming out of regulators recently, it sounds like deals for banks will be more difficult. Do you feel that there'll be an opportunity for you to do more deals going forward after you integrate this? You seem pretty optimistic in the outlook there.

Well, we hope so. We're a community-oriented high-quality bank. We think Macatawa is same in terms of their profile. And so, we'll go through the process, but we hope that this gets approved rapidly. And as we talked about earlier, we'll continue to have conversations and look for other opportunities. But I can tell you, again, no hesitation on our part with respect to Macatawa. We think this is exactly the right fit in a very good market right now.

Okay, thanks. And what's the early sort of projected credit mark on the portfolio?

Well, we haven't disclosed that, but they are a public company. You can look at their public filings. And as Tim mentioned earlier, they've had net recoveries for a few years, a very conservative well-run credit function. I wouldn't expect much from that, and you could tell that just from looking at their public disclosures.

Okay. And then you had highlighted the excess funding coming from the deal. If we do see accelerated loan growth from the core bank, would you look at adding wholesale funding as a short-term fix until those excess funds come on, or should we really be thinking that you're going to match fund all loan growth with full market price deposits?

No, we sometimes use wholesale funding to fund the growth because you can never match it perfectly, right? But our plan long-term is even if you backfill in the short term with wholesale funding and we continue to grow our core consumer and commercial funding in a manner that you don't have to rely on the wholesale funding long-term. But sometimes you have to backfill in if the loan growth is much more accelerated than your standard deposit gathering activities. But it's not a long-term plan, it's a short-term gap filler plan.

Thanks for the information. Lastly, can you share your thoughts on the better spread opportunity in commercial lending? What are the current spot rates for new C&I loans in the market?

It's a diverse group. For very high-quality, well-secured, and well-structured opportunities where you're receiving a significant amount of treasury, you could be looking at around the 250 range. However, we're still observing attractive rates above that for smaller deals and those with some structural issues. Overall, as we've mentioned, our focus is on attracting these customers because such opportunities are rare. Our bankers are highly motivated to secure these chances when they arise. While I’m not suggesting we will always have the lowest price, we will certainly put in the effort to win deals that we are interested in.

Great. Thank you.

Thank you. I would now like to turn the conference back to Tim Crane for closing remarks. Sir?

Thank you, Latif, and for all of you that have participated this morning. Thank you, not only for today but for your feedback and insights over the last couple of days as we've talked about the transaction. I think you can tell we're excited both about the opportunities in Chicago and about the pending acquisition. And as always, we'll work hard to deliver. So, thank you for your time this morning. We'll wrap it up.

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