Wintrust Financial Corp Q2 FY2025 Earnings Call

Welcome to Wintrust Financial Corporation's Second Quarter and Year-to-Date 2025 Earnings Call. I'm Tim Crane, 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 presentation, 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 call over to Mr. Tim Crane.

Good morning, everyone. Thank you for joining us for the Wintrust Financial Second Quarter Earnings Call. In addition to the introductions Latif made, I'm joined by our Chief Financial Officer, David Stoehr; and our Chief Legal Officer, Kate Boege. I'll begin this morning with some high-level highlights. Dave Dykstra will speak to the financial results, and Rich will add some additional information on loan activity and credit performance. As always, following our remarks, we'll be happy to take your questions. Our differentiated approach focused on understanding and meeting our client needs continues to deliver consistently strong financial results. We reported record quarterly net income of $195.5 million, up from $189 million last quarter. Net interest income, also a quarterly record, was $547 million, driving the higher net interest income with second quarter loan growth of $2.3 billion. The growth was broad-based and clearly reflects the seasonally strong second quarter in our attractive premium finance business. We saw good deposit growth during the quarter of over $2 billion and assets grew to $69 billion. Going forward, our pipelines are strong, and we expect continued mid- to high single-digit loan growth for the second half of the year. We also expect continued deposit growth that will fund our loan growth. What's particularly important about the deposit growth is that it represents new commercial and consumer households to allow us to continue to grow our franchise. Given the strong growth in the quarter, it's important to highlight that we continue to be disciplined in our growth. We can and do pass on credit opportunities where we cannot get comfortable with the pricing or proposed credit structure. This approach has served us well and will not change. Net interest margin for the quarter remained comfortably within our target range of 3.54%. Dave will talk a little bit more about the margin in just a minute. Residential mortgage activity, while up somewhat this quarter remains muted in the current rate environment. We continue to manage expenses in that business to protect our current financial results while ensuring that we're positioned to capture business when rates go down and mortgage activity increases. We continue to believe the mortgage business is a core offering and provides a nice financial hedge against margin pressure in a lower rate environment. Credit quality remains very good. We continue to stay close to the small number of clients experiencing uncertainty in the current economic environment so that we can help get ahead of any challenges they may face. Overall, another strong quarter, consistent results in line with our expectations. Let me turn it over to Dave.

Thank you, Tim. As Tim mentioned, we experienced significant growth in both deposits and loans this quarter. Our deposits increased by $2.2 billion, which equates to a 17% rise compared to the previous quarter on an annualized basis. This robust deposit growth supported a strong loan growth in the second quarter, which reached $2.3 billion or a 19% annualized increase. For the first six months of the year, our loan growth totaled $3 billion, representing a 12% annual growth rate. In terms of our balance sheet, total assets increased by $3.1 billion to $69 billion, partly due to the $425 million preferred stock offering that I will discuss in more detail later. Moving to our income statement, this quarter marks a very strong operating performance, yielding a record net income for the quarter despite a few variables at play. I want to highlight some uncommon items from this quarter, which include $2.9 million in acquisition-related costs, mainly linked to the Macatawa Bank acquisition's conversion, and net security gains amounting to $650,000. You can find further details about these items on the first page of the earnings release. Our net interest income rose by $20.2 million compared to the prior quarter, driven by a $1.9 billion increase in average earning assets and a relatively stable net interest margin. This quarter set a new record for quarterly net interest income. Given the current interest rate conditions, we are confident that our net interest margin will remain stable throughout the rest of 2025. With this stability and anticipated future growth in average earning assets, we expect to see an increase in net interest income for the third quarter. I would also note that end-of-period loans were about $1.5 billion higher than the average loans for the second quarter, positioning us well for achieving higher average earning assets in the next quarter. The slightly lower provision for credit losses recorded in the second quarter compared to the previous quarter can be attributed primarily to improved macroeconomic conditions, somewhat offset by the strong loan growth we experienced. Regarding noninterest income and expenses, total noninterest income reached $124.1 million in the second quarter, up about $7.5 million from the previous quarter. Although high mortgage rates somewhat dampen expectations for a strong spring buying season, we generated around $2.6 million more in mortgage banking revenue due to higher production revenue driven by increased origination volumes. Wealth management revenue grew by $2.8 million in the second quarter, mainly due to asset valuation increases during this time. We recorded a variety of minor adjustments in other noninterest income categories as detailed in the earnings release, but these changes were not significant. As for noninterest expenses, they totaled $381.5 million in the second quarter, increasing by approximately $15.4 million from the prior quarter. This rise was expected and largely driven by factors we had previously discussed. Specifically, salaries and employee benefits expenses grew by about $8 million due to higher health insurance claims, increased commissions from mortgage and wealth management driven by higher revenues, and the full effect of annual merit increases effective February 1. Advertising and marketing expenses rose by $6.5 million in the second quarter compared to the first quarter, as expenditures in this category typically increase in the second and third quarters due to various sponsorships and events during the summer. Other variations in noninterest expenses were relatively normal, totaling less than $1 million, and do not require further discussion. We also continued to build our tangible book value per share in the first half of this year. As shown on Slide 10 of our presentation, we've increased tangible book value per common share every year since becoming a public company, and we are on track to do so again in 2025. Now, I want to discuss the $425 million Series F preferred stock issuance that Wintrust completed on May 22. This issuance was used to redeem $412.5 million of Series D and Series E preferred stock, which were set to reprice on July 15, 2025, at rates higher than current market rates. Wintrust successfully redeemed all Series D and Series E preferred stock on July 15, leaving us with only the Series F preferred stock outstanding. Because of the preferred stock redemption, there will be an impact on earnings per share in the third quarter, which we summarize on Slide 24 of the presentation. The Series F preferred dividends, when declared by the Board in July, will be higher than the normal quarterly dividend as it covers an extended first dividend period from May 22 to October 15, 2025. This means dividends recorded in the third quarter will exceed the typical Series F declaration, and there will be no dividends for the Series D or Series E. Additionally, accounting regulations require reclassified prior issuance costs from the Series D and Series E upon redemption, which will reduce net income available to common shareholders but will not affect our operating net income for the third quarter. It's worth noting that preferred dividends have remained around $7 million for the past several quarters, but starting in the fourth quarter and continuing for five years until the next repricing, this figure will rise to $8.4 million. In the third quarter, dividends will be slightly higher due to costs associated with the redemptions and the extended payment period. For further details, please refer to Slide 24. If anyone has questions, I would be glad to discuss this information. Now, Tim, I will conclude my comments and hand it over to Rich.

Thanks, Dave. As Tim and Dave mentioned, credit performance remained strong in the second quarter. As outlined in the Property & Casualty Premium Finance Group, we experienced over $1 billion growth in this portfolio, consistent with our expectations. Although we have noticed a slight easing in insurance premium rate increases, the overall market remains stable. Additionally, we are capitalizing on new opportunities stemming from consolidation and dislocation within the premium finance industry. We also witnessed significant growth in various segments, with commercial real estate increasing by $377 million and the mortgage warehouse team gaining momentum with a $213 million rise, as we engage with new partnerships that present substantial deposit opportunities. Our leasing team, life premium finance, and residential mortgage groups also reported a strong quarter. As Tim indicated, we expect loan growth for the second half of 2025 to remain robust, aligning with our mid- to high single-digit guidance, due to several factors. Our core C&I and CRE pipelines are solid, and our strategic positioning in key markets such as Chicago, Wisconsin, West Michigan, and Northwest Indiana continues to benefit us. Moreover, our niche businesses, including leasing and mortgage warehouse, are showing strong momentum. In the previous quarter, we acknowledged growing uncertainty in economic conditions due to potential tariffs, tax law changes, and funding cuts. However, upon reviewing our portfolio, we have a limited number of credits with the highest risks, and we maintain close oversight of these. Overall, we believe there is increasing clarity on many uncertainties, which will likely have minimal impacts on our portfolio due to our strong underwriting standards and disciplined diversification approach. We are cautiously optimistic about the business environment as we move into the second half of the year. From a credit quality perspective, as illustrated on Slide 15, we continue to experience strong credit performance across our portfolio, reflected in various metrics. Nonperforming loans as a percentage of total loans remained stable, and charge-offs for the quarter were 11 basis points, consistent with Q1. We believe the levels of NPLs and charge-offs indicate a stable credit environment, supported by historical nonperforming asset levels depicted on Slide 16 and the consistent metrics of our special mention and substandard loans on Slide 15. We are committed to identifying issues early and addressing them as needed, aiming to stay ahead of any credit challenges. As we have mentioned in recent earnings calls, we are closely monitoring our exposure to commercial real estate loans, which account for about a quarter of our total portfolio. According to Slide 19, we are observing signs of stabilization in the second quarter, with CRE NPLs remaining low, rising slightly from 0.20% to 0.25%. CRE charge-offs are also at historically low levels. On Slide 20, we provide detailed information about our CRE and office exposure, which currently stands at $1.6 billion, representing 12.1% of our total CRE portfolio and only 3.1% of our total loan portfolio. Of the $1.6 billion in office exposure, 48% is related to medical office or owner-occupied properties. The average loan size in this office portfolio is around $1.5 million, with five loans exceeding $20 million, two of which are non-medical or non-owner-occupied. We regularly conduct portfolio reviews in our CRE segment and maintain strong engagement with our borrowers. Our CRE credit team updates their in-depth analysis of every non-owner-occupied loan over $2.5 million set to mature by year-end, covering 84% of all such loans and showing consistency compared to previous quarters. In conclusion, we are encouraged by our credit performance in the second quarter and believe our portfolio is well-positioned and adequately reserved. That wraps up my comments on credit, and I'll hand it back to Tim.

Thanks, Rich. Just a few quick final thoughts. Midway through the year, we feel very good about our business and the momentum going into the second half of the year. We continue to deliver sophisticated financial solutions across all our businesses with a differentiated client-first focus. And what's important to note is that our approach is driving consistent, meaningful financial results. Over the last year, we've produced steady quarterly increases in loans, deposits, and net income. We manage our expenses thoughtfully while continuing to invest in our business to support our future growth. As Dave mentioned, the expenses trend higher in the second and third quarters and reflect both investments in our business and some of these seasonal fluctuations. As always, we work with our clients to help them address their needs, focused on delivering a differentiated experience, and our disciplined approach continues to drive real value for our shareholders. With that, I thank you for your time, and we'll open the line to questions, Latif.

Our first question comes from Jon Arfstrom of RBC.

Question for you on the loan growth numbers. Obviously, very strong this quarter. You mentioned seasonality in expenses. And I guess I'm curious about third quarter expectations. You have a higher period-end balance, but I think the growth is typically a little slower in the third quarter. Is it fair to look at maybe prior third quarter trends from the second quarter as a benchmark for what you might expect in Q3 in terms of growth?

Expense growth or loan growth, Jon?

Loan growth, sorry, sorry.

Loan growth, if you look at the third quarter, excluding Macatawa and then fourth quarter, I think that would be pretty much in line with what we would anticipate for this year. So again, in the range, but at the higher end of the range.

I think if we just think mid- to high single digits based off of the June 30 balance going forward for the second half of the year, that's sort of our view right now.

Okay. Got it. Tim, could you provide some insight on deposits? Where are you seeing the best opportunities for gathering deposits? It seems like money markets were strong, but you've also mentioned commercial, consumer, and warehouse. Can you elaborate on where you're experiencing deposit growth and whether that can keep up with loan growth?

Okay. Jon, I'm sorry, we had a little bit of a technical glitch on our end. I think your question was about deposits and where we're finding them. It's fairly broad-based, and we continue to believe that in our markets where we have kind of a sub-10% share in all of them, we can continue to grow. The commercial growth in deposits is particularly helpful because obviously, we get treasury management revenues and other activities related to that. But this was a very solid deposit growth quarter for us funding the seasonal loan growth. Continue to think we'll have opportunities, but $2 billion of deposit growth should not be kind of the norm going forward.

Okay. And then just one small one. Anything on the wealth management outsourcing. Can you just talk about a longer-term goal there and how that's gone?

Yes, that conversion to the LPL platform, which as we've described in prior calls, was really an upgrade for the tools and technology for our financial advisers and our wealth employees is largely behind us. And we've migrated out of conversion mode into serving our clients. And obviously, the markets have been pretty terrific for the last month or so here. We continue to look at the wealth business as an attractive opportunity for us, and we look to continue to grow it.

Our next question comes from the line of Chris McGratty of KBW.

In terms of the NII growth, the 4% linked quarter, 16% year-on-year is great numbers. I guess the question, if we put the pieces together with earning asset growth, loan growth, margin stability, does that become a little bit more challenging given the deposit competition that's increasing? Or is this degree of NII growth, I guess, over the near term still reasonable?

We anticipate mid- to high single-digit loan growth going forward, with margins remaining relatively stable. Recently, we have averaged around 3.52% to 3.53%. Staying within the mid- to low 3% or 3.50% range, our focus will be on average asset growth. With mid- to high single-digit average asset growth, we expect to see corresponding net interest income growth. Our deposit pricing may have been slightly high this quarter due to our growth, but as Tim noted, the markets remain strong, and we hold a solid position within them. Therefore, we believe we can support this growth with deposits. It's always a challenge, but we have consistently managed to achieve this.

And Chris, even with this quarter's $2 billion worth of growth, our deposit costs were down slightly. And so our hope, as long as the kind of markets remain rational, we'll continue to add clients and importantly, add deposits as well.

Okay. Dave, you discussed the earning assets. There isn't anything significant you plan to change regarding the earning assets to support growth. There are no major adjustments to the earning asset mix, correct?

No. I mean the only odd thing is second quarter is always really strong on commercial premium finance. Recall, last couple of years, we sold some in the middle of the year. And this year, we had more liquidity and more capital and we had good deposit growth. So we kept those assets on our balance sheet and funded them internally versus the sale like we did a couple of years ago. But going forward, we're not going to have $1 billion P&C premium finance growth quarter in the third quarter. The second quarter is seasonally high. But other than that, our commercial, commercial real estate pipelines are very consistently strong. So we would expect to have sort of the normal growth absent the outsized premium finance seasonality in the second quarter.

Great. And for my follow-up, I’d like to ask Tim about the deregulatory narrative and its implications for Wintrust. Are there any changes you might consider? Given the growth you're experiencing, is pursuing deals becoming a greater possibility? Could you elaborate on how deregulation plays into this?

Yes, Chris, I mean we're obviously hopeful that there's some sort of tailoring or inflation adjustment, whatever you want to call it, to relax the rules for growth. And we continue to build the foundation for a bigger and better bank. A lot of that is acquiring good talent in the market, and we continue to do that. We'll continue to look at acquisition opportunities. It looks like that activity has picked up a little bit. We think we have a strong track record there. Macatawa for example, is terrific. So we'll be disciplined but opportunistic.

Our next question comes from the line of David Long of Raymond James.

On the core C&I side, sentiment across the industry seemed much lower when you held your call back in April. As you looked at the growth throughout the quarter, did it accelerate throughout the quarter? Or was it pretty steady throughout the quarter? And how are your core commercial clients? How is their sentiment now?

It's interesting, David. I wouldn't say there was a significant difference in production during the quarter, but I would note that sentiment has changed, as I mentioned earlier. Back in April, there was a lot of noise surrounding regulatory changes and tariffs. We're still facing challenges, but I sense a greater confidence that the economy is improving. Most customers seem to be cautiously optimistic about the current situation. Coupled with the market dynamics in the Chicago area and our other key markets, it appears that things are positioned well. You can see this reflected in our pipelines.

Got it. I have a follow-up question regarding the CRE office portfolio on Slide 20. You mentioned that the nonperformers within that portfolio have increased slightly. Could you provide more details on what led to this situation? I'm not looking for specific building names, just some additional insight into the nonperformers in the office segment.

Yes. The numbers are quite small, so it only takes a few deals to make an impact, which is what we experienced. None of these deals were particularly large, but when we look at them in relation to the total, it creates a noticeable effect. However, we are not overly worried. We believe we have assessed our position correctly and will navigate through this fairly quickly. I refer to that portfolio as small enough that each new loan significantly influences the overall picture, but we are managing the portfolio as we do every day.

Our next question comes from the line of Nathan Race of Piper Sandler.

One of your Midwest peers this morning kind of tempered loan growth expectations, citing some increased competition. So just curious what you guys are seeing from a competitive pricing perspective. Obviously, loan yields came down a little bit this quarter. So curious if that's driving some of that loan yield compression that we saw in the quarter. And if you could just comment in particular on the commercial insurance premium finance portfolio in terms of what new rates on production look like they're relative to the roll-off yield?

Yes. I'll discuss the core portfolio and our observations regarding some niche portfolios. We mentioned at the end of last year that we expected banks to become more aggressive as they increased their loan production, and we have observed this trend. However, as Tim noted in his opening remarks, we maintain a disciplined approach to pricing. Yes, there has been margin compression in specific categories, particularly in fully funded commercial real estate deals of high credit quality. Our responsibility is to navigate through this. Historically, with our multipronged asset strategy, some areas may experience compression while others present opportunities, and that's what we are currently witnessing. In the core commercial and industrial space, we are holding our pricing steady, and the same applies to leasing. Regarding your question about commercial insurance premium finance, we are in a solid position. Although prices are slightly tighter on larger credit-oriented deals, we have a diverse portfolio that allows us to maintain good pricing.

And Nate, for the second quarter, I think a number in the mid-7s would be about the right range for the P&C loan yield.

Okay. And Tim, that's pretty close to the roll-off yield, if I heard?

Yes, not too far off.

Okay. Great. And then you mentioned on deposit costs, it looks like they were kind of stable in the quarter all in. But if I strip out CDs, it looks like your interest-bearing deposit costs were up 6 basis points quarter-over-quarter. So just curious as long as the Fed remains on hold, do you think deposit costs kind of hold in there? Or do you think we see kind of a little grind higher from here?

I think pretty stable to where we were in the second quarter. I mean, again, we had to raise $2 billion worth of deposits, which we were thrilled to do because it's new customers to us. I think we'll be in the same range. And if we get a cut, obviously, we feel reasonably good that we can handle that without much impact on the margin.

Okay. Great. Maybe one last one for Dave on expenses. Going back a couple of quarters, I think you guided to kind of a mid-single-digit increase this year off the 4Q level last year. Just curious if you still think that holds true, which I think translates to about $1.5 billion to $1.6 billion in expenses for this year?

Yes. I believe the level we're seeing in the second quarter, give or take a couple of million dollars, is likely what we expect in the third and fourth quarters. The low 380s seems like a reasonable target. We experienced some growth as we had anticipated last quarter, and we've also increased the balance sheet by $3 billion. We expect continued growth from this point. If we can maintain stability in the low 380s for the last two quarters, that would be our goal moving forward.

Okay. Perfect. I appreciate all the color. Congrats on the great quarter guys.

Thanks, Nate.

Our next question comes from the line of Terry McEvoy of Stephens Inc.

Maybe just a question on Western Michigan. Could you just talk about banker and client retention? And is the broader product offering? Is it driving some growth in that market?

Yes. Thanks, Terry. Yes, I still feel very good about West Michigan. I actually spent a couple of days over there with clients. The conversion is behind us. We're excited to have that part of the equation done. And number of clients are looking for us to provide more services to them and the prospecting opportunities are very good. So I feel actually like we're in the right spot to begin accelerating the results in West Michigan.

As a follow-up, regarding the $456 million in commercial growth, Rich, did about half of that come from the mortgage finance portfolio? What is the size of that portfolio today, and what level of volatility do you anticipate throughout the year?

Yes. There is a significant amount of volatility in our mortgage book overall. However, we have seen substantial onboarding of new opportunities, which is driving growth in a somewhat muted market. We are gaining market share in that portfolio, which currently sits at $1.2 billion.

Our next question comes from the line of Ben Gerlinger of Citi.

I know we talked through the rate paid across the different deposit silos. And then, I get that you grew like a weed this quarter, which is good. But when you think about like if there is a cut or 2 in the back half of the year, the next 6-plus months, do you think you can have the immediate impact of kind of the same deposit beta we've seen, given that you just increased it? Could you kind of lower it pretty quickly thereafter? I'm just trying to think about the behavioral finance relative to what we just saw in kind of the growth aspects?

Yes. I believe Tim mentioned this earlier. If the Fed were to cut by 25%, we would be able to reduce our discretionary accounts by the same amount. It would take time to adjust our CDs, but many of our offerings are currently under a year, with terms of seven months and eleven months. Therefore, I expect we could implement a similar reduction in deposits as we experienced during previous cuts, allowing us to achieve the full 25% decrease on most of our discretionary accounts.

Got you. That's helpful. And then you just answered the question on the expense front. So that is everything I have. I appreciate it.

Our next question comes from the line of Casey Haire of Autonomous.

Just wanted to follow up on loan growth again. So the premium finance, it sounds like it's obviously got great momentum, up 17% year-over-year. Rich, I think you said it is showing some signs of moderating. Just wondering where that is in terms of that hard market cycle in terms of later innings, just some big picture thoughts on how that tailwind is going?

Yes, that's a great question and something we pay close attention to. Our portfolio has shown consistent growth over the past six years, driven by two main factors. One is the changes among competitors and the dynamics of individual agents, which have created significant market share opportunities for us. This year-over-year growth is reflected not only in our revenue but also in the number of units sold. The second factor is the strengthening market we've observed over the past four to five years. These elements have enabled our portfolio to grow effectively, alongside strong execution from our team and investments in technology that enhance our product offerings. Overall, we feel confident about the direction of the portfolio and its prospects for the coming year as many of these dynamics continue. However, while we expect the unit dollar amounts to remain stable, the pace of premium rate increases may not continue at the same upward rate, but they should still be solid and firm.

Got you. And then, Tim, I have a follow-up question. You mentioned that M&A activity is increasing a bit. I'm curious if that means, I know Macatawa was a significant deal for you last year, but it was larger than what the market typically expects, and it was outside your main Chicago area. I'm just wondering about the size and location of these opportunities and what is contributing to the increase in M&A activity.

Well, with respect to the market, I think there's a whole host of reasons. I mean people dealing with succession issues, people feeling like the market's a little better than it had been a couple of years ago. Frankly, as we've talked about, it gets tougher and tougher to run a small bank with the expenses attached to compliance and regulatory issues and finance alike. So I think you're getting people feeling urgency now, and there are some opportunities that see the light at the end of the tunnel. So again, I think we feel like we could execute on a wide range of opportunities if they became available to us. It just has to fit from a cultural standpoint, from a market standpoint. But again, for the reasons I mentioned earlier, I think there is some pickup in kind of market M&A activity.

Our next question comes from the line of Jeff Rulis of D.A. Davidson.

Rich, I wanted to follow up on the commercial real estate nonperformers. We're starting from a low point, but I was curious if you noticed any increase in the commercial nonperforming loans. Can you provide any details on that? I suspect the answer might be similar to what you shared about commercial real estate, but I'm interested in specifics by type or geography within commercial and industrial lending.

We had a particular credit that has shown declining performance over the last few quarters, and we concluded that it would need significant remediation, so we classified it as nonperforming. We believe we've assessed it correctly, but it is largely an isolated case.

Rich, if you had to identify any concerns, would you say that the small ticket business sector is the most pressured in this environment, or is there something else in commercial and industrial that stands out?

Yes. I'm not pointing to anything specifically. It’s more about the leverage and liquidity on the balance sheet. Those are some of the operational aspects we monitor. Around this time last year, we were primarily focused on transportation, facing various transportation-related challenges with P&C leasing and core C&I, and I believe we've managed to navigate through those issues. We feel more optimistic in that area now. At this moment, the situation appears to be more event-driven than influenced by the industry.

And then I'd like to maybe add in there, Jeff. I mean, if you look at the total nonperforming loan ratio, it's right in the middle of the range. I mean, we've ranged from 35 to 39 basis points, and we're at 37, and it's an awfully low number. So just one credit here or there can move it a little bit. But again, it's low and right in the middle of our historical range over the last 5 quarters.

Got you. Yes, good perspective. And then just one other one. I just continue to try to model the covered call option, sort of the outlook there, and that's on a quarterly basis between, call it, $1 million to $6 million a quarter. Anything that you could lead us to or drivers of that, plus or minus as what could a lower or higher quarter there?

No. It sort of really depends on what happens to we're writing calls on government agencies like Fannie Mae. So it sort of really depends on what that part of the curve does as far as if it comes down, the securities will be called and we'll rewrite. And then it also depends on what volatility is at the time that we buy the security. So my crystal ball isn't good enough to predict what it's going to be at the end of the third quarter. But if rates go down a little bit and securities get called, then we'll generally have more call options. If rates go up, then it's usually less. But you're right, it's generally in the $1 million to $5 million, $6 million range and it really can fluctuate. But it's really sort of a hedge to down rates for us. It supplements revenue if rates go down. So if those rates do go down, call options will go up, which will supplement revenue and offset any pressure you could have on margin.

Our next question comes from the line of Jared Shaw of Barclays.

Maybe just any thoughts on capital targets as we move through the rest of the year here with what you've done on the preferred and just overall in terms of maybe CET1 targets?

Yes, we experienced strong growth this quarter, which resulted in a slight decrease of 0.1% in CET1. However, we anticipate it will likely increase by 10 basis points each quarter moving forward, assuming we see mid- to high single-digit loan growth. Other categories were approximately 60 basis points higher at the end of June due to outstanding preferred issuances, including the $425 million Series F and $412.5 million Series D and E. As a result, the Tier 1 ratios will decrease by 60 basis points, although CET1 will remain unaffected since preferred is not included in common equity. We provided those figures in the press release. Going forward, we expect a gradual capital growth of around 10 basis points, driven by earnings and continued loan growth in the mid- to high single digits.

Would you be comfortable bringing it back down below 10% if there was a good opportunity or a good deal? Or should we consider 10% CET1 as more of a floor for now?

I believe that 10% serves as a reasonable floor for us at the moment, and we aim to increase that. If a strong opportunity arose, I would still consider 10% as the baseline in our current thinking.

Our next question comes from the line of David Chiaverini of Jefferies.

Follow-up on loan growth. Curious on non-premium finance, so more in the core C&I and CRE side. Can you talk about borrower sentiment? Are you seeing more borrowers come off the sidelines here?

As I mentioned earlier, the sentiment appears to be better than it was during the last earnings call due to the disruptions caused by various challenges from Washington. I believe there is more stability now. I wouldn't characterize the situation at the end of last year as an overall surge in business sentiment. Instead, people seem to be cautiously optimistic, noticing that some obstacles affecting our business may be easing. Conversations with our customers indicate that they generally feel more positive compared to last quarter, but there remains a significant wait-and-see attitude regarding tax code changes and future rates. There are still many unanswered questions. However, we are feeling optimistic. Additionally, as we've discussed in previous calls, our market positioning is strong. There has been a significant shift in the competitive landscape in Chicago, which has opened more doors for us. This change is a significant contributor to our growth. Overall, our pipelines look promising, which I believe is influenced by market dynamics as well as an improved understanding of the economic environment.

Our next question comes from the line of Brendan Nosal of Hovde Group.

If I look at the ACL calculation on Slide 15, it looks like the baseline macro factors drove an increase, but the macro uncertainty drove a decline. Just kind of curious how that shapes up. Is that a shift from the uncertainty bucket into the baseline forecast? Or maybe just help us kind of square that circle?

Yes, I think that's right. I mean, last quarter, we had about, I think, a $36 million number for macro uncertainty, which included the BAA spread factor and market volatility. The stock market volatility actually factors into some of our models. And we maintain sort of the BAA credit spread overlay, but the market volatility sort of went away this quarter. So probably an overlay in the low $20 million range versus the mid-30s. So that's about that $10 million difference that you're seeing in that slide on the far right. And so the macroeconomic baseline actually increased a bit, and the overlay decreased a bit, and they generally offset each other.

Our next question comes from the line of Nick Holowko of UBS.

Just one for me on the margin. So you've had a ton of success stabilizing the margin in this 3.5% range for about a year now with the help of the hedges that you have in place and your deposit-gathering efforts. And loan growth is obviously trending very strong. So how do you think about your appetite or your need to grow that hedging portfolio at a faster pace alongside your loan growth to keep a similar degree of margin protection beyond this year?

Yes. Nick, I think if you look at the disclosure that we put on Slide 25, we list up the collars in place. And we feel pretty good for the next year or so. Then some of them start to mature off. So we'll look to fill out the buckets in '27 and '28. But for the next year or so, we feel pretty good about our position, and we're just waiting for sort of opportune times in the market to add on to those swap positions. But the last few, you can see, we did 1-year forward starts, and then we did them out 4 or 5 years. So just trying to opportunistically and not fill them all up at the same time from a diversification standpoint to add to those as we go along. But I think you will see us add on to those later maturities over time.

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

Latif, thank you very much. And guys, I apologize for the technical difficulties. We certainly appreciate your time and interest in Wintrust. And as you can tell, we feel well positioned for the second half of the year and actually enter the third quarter with a lot of momentum. As always, please don't hesitate to reach out if there's anything we can do for you or as Dave said, if there's any questions on the accounting for the preferreds. But we appreciate your time this morning. Thank you very much.

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