Wintrust Financial Corp (WTFC) Q2 2026 Earnings Call Transcript

Welcome to WinTrust Financial Corporation's second quarter and year-to-date 2026 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, 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, everybody, and welcome to WinTrust's second quarter 2026 earnings call. In addition to those that Lateef introduced, I'm joined by our Chief Financial Officer Dave Starr and Chief Legal Officer, Kate Bogie. As we do every quarter, I'll provide a brief overview of the quarter. Dave Dykstra will discuss key financial results. Rich will review loan activity and credit quality. And I'll be back to share some final thoughts before we open up to your questions. As a reminder, we're focused on three key strategic priorities to drive financial results and build shareholder value. Delivering an exceptional and differentiated customer experience. generating strategic and disciplined growth, and continuing to build on our foundation by investing for the future. Delivering on these priorities, we reported very strong loan and deposit growth, a net interest margin in line with expectations, well-managed expenses, and stable credit quality. All of this produced our sixth consecutive record quarter of net income. second quarter net income was 233.7 million dollars up from just over 227 million in the first quarter year to date net income was 461 million dollars up 20 percent from the same period last year net interest income the biggest driver of our revenue growth was up 13 percent quarter over quarter on an annualized basis. Our growth this quarter was all organic, one client, one relationship at a time. We continue to deliver our differentiated value proposition to gain market share by adding new households and deepening relationships with existing clients. I'm particularly pleased with the strong operating leverage we delivered in the first two quarters of the year. Not only are we growing revenue nicely, we are also managing expenses to ensure we can continue to invest in the tools, capabilities, and the people that lead to stronger client relationships. On our last call, we shared plans to open branches between now and the end of the year. Our newest location, Chicago's Lakeview neighborhood, and in the Illinois towns of Montgomery and Elk Grove Village will open in the coming weeks, with several others to follow later in the quarter, including three in northwest Indiana. In all cases, we look to open branches either as fill-ins within an existing footprint or in new communities that are a strategic fit for our community banking model. Additionally, on July 6th, we announced an important investment in our wealth management business with the intent to purchase the guardianship services business from Northern Trust. This is a good bolt-on acquisition to a business we know well and will cement our position as a leading provider of guardianship services in the Chicago area. We expect that transaction will close later this year. Finally, we continue to make enhancements to our digital banking experience with new features and functionality coming in the third quarter that will make it easier for consumers and businesses alike to manage their relationship online. These investments are part of our effort to build for our future so that we can continue to deliver the exceptional experience our customers and the market expect from us. All in all, a very strong, straightforward quarter with the consistent performance you have seen from us for many quarters. Now let me return things over to Dave to give a little bit more detail on the results.

Let me start with the balance sheet. Specifically, deposit growth was approximately $2.2 billion of growth during the quarter, representing a 15% increase over the prior quarter on an annualized basis. This strong deposit growth funded continued solid second quarter loan growth of approximately $1.6 billion, representing 12% growth on an annualized basis. Yields and rates in major balance sheet categories were slightly lower, with loan yields moving down seven basis points from the prior quarter to 6.07%. This was primarily due to back book repricing of the commercial insurance premium finance portfolio and slight spread compression due to competitive market pressures. Interest-varying deposits, which were up substantially, were flat to the prior quarter at 2.74%. I would note that the period end loans were approximately $1.2 billion higher than the average loans for the second quarter, giving us a great start to achieving higher level of average earning assets in the third quarter of 2026. Turning to the income statement results, this was, again, a very solid operating quarter producing another record level of quarterly net income. Net interest income improved $18.3 million compared to the first quarter of 2026. The benefit to net interest income from an increase of $2.1 billion in average earning assets was offset by a four basis point decline in the net interest margin. The net interest margin was negatively impacted by one basis point due to one additional day in the quarter, two basis points related to the back book reprice of the premium finance portfolio, and one basis point related to other items, including mix and spread compression. The result was a margin of 3.52% for the second quarter of 2026, and has ranged from 3.50 to 3.59 during the last 10 quarters, showing the sustained stability of this metric. The provision for credit losses continued to remain consistent with prior quarters, staying in the $20 to $30 million range for the sixth consecutive quarter as the overall credit environment under asset quality has remained. Regarding the non-interest income and non-interest expense sections, non-interest income totaled $141.3 million in the second quarter, which was an increase from the $134.1 million recorded in the prior quarter. The roughly $7 million increase was primarily the result of a $4 million improvement in mortgage banking revenue as the spring buying season provided a modest amount of increased purchase volume and related revenues. Another contributing factor to the increase in this category is that the company recorded approximately $2 million of higher BOLI income, which was primarily related to higher earnings on BOLI investments that support certain deferred compensation plan benefits. And I'll note that this $2 million increase in Boley income had a similar offsetting increase in compensation expense during the quarter. So as a result, non-interest income and non-interest expense were both equally elevated for the quarter by almost $2 million. The company also recorded approximately $1.8 million more security gains in the second quarter compared to the first quarter. The impact of the increases just noted, mortgage banking, Boley, and security gain revenue, was about $8 million. These items tend to have some volatility related to market conditions and may or may not occur in the third quarter. In fact, we currently expect mortgage revenues to fall back into the low $20 million range as a home buying seasonality subsides. Non-interest expenses total $397.5 million in the second quarter, up from the $382.6 million recorded in the prior quarter. The primary reasons for the increase, other than to support the exceptional growth, were salary and employee benefits expense increased by approximately $5.6 million as compared to the first quarter, due primarily to the second quarter having a full effect of annual merit increases that were affected February 1st, increased commissions that support the higher mortgage production, and $2 million impact from the BOLI-related deferred comp expense I just discussed. Advertising and marketing expenses increased by $7.2 million in the second quarter when compared to the prior quarter. As we've discussed many times in the past, this category of expenses tends to be higher in the second and the third quarters of the year due to expenditures related to various sports sponsorships and other summertime sponsorships events held in the communities that we serve. Offsetting the aforementioned increases was a reversal of crude FDIC assessment expense of $5.2 million related to the final true of the special assessment previously imposed by the FDIC to pay for the two bank failures. The quarterly net overhead ratio improved slightly over the prior quarter, helping the company produce solid operating leverage during the second quarter and for the first half of 2026. In summary, I'll reiterate that this was a very solid quarter and first half of the year. The company accomplished exceptional loan and deposit growth, a relatively stable net interest margin, another record level of net income, sustained growth in tangible bulk value per share, and the continued low level of non-performing assets. So with that, I'll conclude my comments and turn it over to Rich to discuss...

As detailed on slide seven of the investor presentation, the loan growth during the second quarter was strong and broad-based with total portfolio growth of $1.6 billion or 12% annualized. Every lending segment saw positive growth during the second quarter and year-over-year loan growth was $4.6 billion. Of note, the first insurance funding portfolio grew $722 million. As mentioned during prior calls, the second quarter is typically our largest funding quarter for this business. In addition, commercial loans grew by $518 million, fueled by solid production in our asset-based and leasing groups. Commercial real estate loans grew by $108 million, and the Wintrust Life Finance team continued to build their portfolio by $116 million. From a credit quality perspective, as detailed on slide 15, we continue to see strong credit performance across the port. Non-performing loans decreased from $182.7 million, or 0.34%, to $179.3 million, or 0.32%, and remained at a very manageable level. Charge-offs for the quarter were 10 basis points, down from 14 basis points in the prior quarter. The level of NPLs and charge-offs in the second quarter reflect a stable credit environment performing asset levels on slide 16 and the consistent level of our special mention and substandard loans on slide 15. This quarter is another example of our commitment to identify problems. Our goal is commercial real estate loans, which comprise roughly one quarter of our total loan portfolio. As detailed on slide 19, we continue to deliver solid performance in this portfolio during the second quarter as CRE NPLs remain at a very low level, remaining unchanged from the first quarter at 0.12%. And CRE charge-offs continue to remain at historically low levels. At 25, we continue to provide enhanced detail on our CRE office exposure. Currently, this portfolio remains steady at 1.6 total loan portfolio. We monitor this portfolio very closely and we continue to perform deep dive analysis on the most recent deep dive analysis than previous calls and post contact with our customers. And these conversations continue to reflect a measured optimism around the business climate. That concludes my comments on lending and credit, and now I'll turn it back over to Tim.

Okay, thank you, Rich. Just some final thoughts. With respect to the third quarter and the remainder of the year, our targets remain unchanged. We're working toward loan growth in the mid to high single digits and deposit growth to largely fund that loan growth. The fact this quarter that we generated over $2 billion in core deposits without increasing deposit costs is evidence of our strength in the market and our ability to consistently build long-term franchise value. As Rich mentioned, our clients continue to be cautiously optimistic. They're managing the impact of the war in the Middle East and persistent inflation relatively well. As such, our pipelines are solid across all of our loan categories. We continue to expect our net interest margin to be a few basis points either side of $350. 50. We're very neutral in terms of rates up or down in the market, so where we land will depend on whether the competitive pricing pressures that Dave mentioned continue and to what degree. Independent of the actual margin, we expect solid net interest income growth and good operating leverage. Finally, we expect expenses to remain well managed, solid credit performance, and an increase in CET1 and our other capital ratios in the coming quarters. To sum up, we continue to feel good about our position in the market and our ability to deliver our differentiated customer experience to grow our business. We believe with the continued focus of our dedicated team, along with the sophisticated financial solutions we offer, we are well positioned to continue to deliver strong results for our shareholders for the remainder of 2026. Lateef, with that, we'll open this up to questions, please.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Armstrong of RBC Capital Markets. Your line is open, Joe.

Good morning, everyone. Hi, Joe. Tim, maybe a question for you, just follow up in your prepared comments. You had just really strong deposit growth for the quarter, and I'm curious if there's anything you would call out in terms of what's driving that growth, and then any updates on your outlook for expected deposit pricing from here. Obviously a good quarter, But, you know, how do you see things as we roll forward into Q3 and Q4?

Yeah, you bet, John. Yeah, we were obviously very pleased with the deposit growth in the quarter. We do get a little bit of municipal seasonality that in some ways matches the seasonality of our loan growth business in the second quarter. But very good commercial growth, which will lead to increases over time in our treasury management fees and that activity. and, frankly, good retail growth as well. And that's in advance of opening a number of branches in the second half of the year here that will continue to help with the deposit growth. I believe on the last call we said that both the loan yields and the deposit costs were going to be relatively stable. We were very pleased that even with that growth, the deposit cost was flat. So all in all, a very strong deposit growth quarter. And I think we would look to, you know, not quite the same number, but strong deposit growth in the second half of the year. Pricing remains relatively rational in the market. And if anything, our position continues to improve from a competitive standpoint.

Okay. Good. Thank you. And then on lending, you guys mentioned competitive pressures a couple of times. And I know we kind of went through this a few quarters ago. So, but just curious what you're seeing from the marketplace. The growth number is obviously very strong, but anything at all that concerns you or anything less rational in terms of the competitive environment?

John, this is Dave. I would say, you know, as I said, if you broke the margin down, maybe a basis point relates to sort of mix and competitive pressure. So, it's not dramatic. We're seeing a little bit on the commercial and the commercial real estate side. Right. And but but it's it's not widespread. It's it's a little episodic. So there are deals that we are we are turning down for pricing and we're doing the same thing on the premium finance side. We had really good growth there, $722 million of growth in the quarter, probably could have had a little bit more. But some of the larger deals on the premium finance side were just being priced awfully, awfully thin and we just took passes on them. So we're going to stay disciplined in doing loans at reasonable prices and getting paid for the risk. And even with that, you know, 12% loan growth for the quarter on an annualized basis and strong pipelines are good. So just a little bit of pressure there, but not dramatic. Again, as I said, if you broke the margin down to basis points, what's the back book repricing of premium finance, which, you know, those aren't tied to, but correlate closely to prime. And the last prime change we had was in December of last year. So it takes a full nine months for those to reprice through. So probably, you know, a basis pointer. But other than that, an up or down from there. But nothing dramatic.

That's helpful.

Thanks, John.

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

Yeah. Hi, guys. Good morning. Thanks for taking the questions. Dave, I was wondering if you could kind of unpack the expense outlook a bit more for the back half of the year. You mentioned some of the adjustments around the Foley that have the impact in both other fees and expenses, but, you know, just any thoughts on how you see kind of the run rate turning the back half of the year to get to that kind of mid-seal digit guidance that we've talked about in the past?

Well, if you adjust for the FDIC credit that we took for the assessment true-up, our expenses for the quarter would probably have been about $403 million roughly. If you factor in the good growth that we had in the second quarter, it has substantial growth. And then, again, expecting to grow nicely in the third quarter, including some of the branches Tim talked about, you'd probably expect that number to go from 403 up just a little bit. So, say, 405 plus or minus is probably a good range. Again, you can't always predict what's going to happen with some of the market things with So, that would just sort of assume, you know, that BOLI was flat. But so, I think if you look at that and then project that out, we're still on track to be mid-single-digit expense growth, 26 over 25. And so, I think that that target is still...

Gotcha. That's really helpful. And then just going back to the trajectory for loan yields going forward, I appreciate the comments around some of the pricing pressures on the P&C side of things that impacted the 2Q loan yields. But just generally, maybe outside of P&C, which can be seasonal in 2Q, any thoughts in just terms of the blended rate on new loan production these days when you strip out insurance premium finance?

I would say we probably still expect, you know, one or two basis point impact of the margin from the premium finance back book in the third quarter, and then we're done with that. If you take that into account and there's one day impact that we had this quarter, which is a basis point, we'll have that again next quarter. So if you take that and put everything else aside, you're probably right at a $350 margin, roughly. And then it'll just depend on competitive pricing up or down. But we still think the incremental difference between what the incremental deposit pricing and loan pricing is in total is roughly a $350 margin. So we think we can hold that with incremental pricing on both the less or minus a few basis points. And really, that will depend on mix and competitive pressures. But right now, we've been talking about it.

Okay, great. If I could just sneak one last one in for Tim, just on M&A. There's some increased chatter these days in the market. We've seen some continued trickle of small bank deals across the region. So just curious kind of what you're seeing in terms of some additional bite-sized acquisition opportunities consistent with what we've seen in the past from you guys. And, you know, just any thoughts on, you know, anything more transformational or larger in terms of, you know, what those conversations may or may not be trending along these days?

Yeah, Nate, I think your summary was was sort of right. I mean, the deals that we've seen so far have been sort of smaller, including in our market. We continue to stay in touch with with people, as you would expect. And, again, in addition to the wealth-related deal we did this quarter, you know, we would look for opportunities, but we would continue to be very disciplined and, as you know, good strategic fit, good cultural fit. And, you know, I would still characterize the M&A conversations as exploratory at this point.

Okay, great. I appreciate all the color. Thanks, guys.

Thank you. Our next question comes from the line of Jeff Rulis of DA Davidson. Please go ahead, Jeff.

Good morning. Just checking back in on the loan growth. It sounded like you ended the first quarter with some momentum, and it sounds like that's sort of the period end in the second quarter kind of surged as well. I guess looking into the second half, you know, kind of sticking to that guidance, I guess, is it simply visibility to kind of stay within the mid to high single-digit range or anything? I guess what takes place for you to kind of exceed or be at the high end for the full year from what you see?

I think, you know, we've been pretty consistent recently and probably over the last few years saying mid to high single digits is generally the diversified nature of the portfolio, excluding the second quarter for premium finance. So we still feel comfortable with the pipelines where they're at. And it really is, it will just sort of depend on customer preferences. You could potentially see if the mortgage market got better, that mortgage warehouse could go up. You know, you could have less paydowns on CRE, you know, portfolios. Those fluctuate a couple hundred million either direction per quarter. You know, just very nuanced changes. But, yeah, I would say this was a broad-based, as Rich said, this was a broad-based growth quarter. You know, every major category was up a little bit. And the customers are feeling pretty good. So we still think that mid to high single digits is a really good target. And, you know, we'll see how, you know, how it flows from, you know, just customer timing as far as closing on these deals. But we expect both that would change it other than if the mortgage market heated up, we'd probably get a little bit more in the mortgage warehouse. But blocking and tackling and taking advantage of our market position in Chicago and West Michigan and Southeast Wisconsin, which is fantastic. And we'll just keep doing what we're doing.

Yep. Sounds encouraging. One last one just on expenses again, but within the advertising marketing, understanding the seasonality, the leg up, is there any more that you're leaning into that line or would that for the full year growth for the advertising marketing still align with the overall expense growth? Is that kind of mid-single digit for that line or is it something a little heavier than that and maybe you've got other leverage in other lines?

Well, usually the second of the major league teams. So unless they all go to the World Series this year, you know, and it leaks into, you know, the fourth quarter, we would expect that to trend down a little bit in the fourth quarter. You can look at 2025 and probably get the sort of the magnitude of the.

Right. I guess I'm trying to exclude that seasonality for the full year. Are you looking for that line item to be kind of mid or high single-digit growth? knowing that you're going to back down at the end of the year?

Yeah, this is Tim, sorry. Probably, but we do have a number of new branch openings, and we've been very successful in growing the new branches. And so we'll support, with marketing dollars, the entry into those markets, but the overall expense guidelines that Dave gave include those branch expenses. um so um you know we're having a lot of success in the market right now and we're going to press that advantage and if we need to spend marketing dollars to do that we will um but we're we're adding clients right now we're winning business we believe we're adding share and so um there's no reason not to continue to be aggressive on that front okay thanks for the color thank you

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

Hi, good morning. I guess maybe going back to the deposits, could you give us an update on what the end of period cost of deposits was going into third quarter? yeah you know the cost of deposits was was flat as we said with the first quarter and end of period was roughly flat too so we're we're steady as she goes even with that you know 15 percent growth during the quote end of period was basically where they and then how should we think about the um you know the the dda uh growth in in third quarter off of um you know sort of looking at that delta between average and end of period, anything to call out there? Was that some of the impact from the muni trends that you were talking about?

No, I don't think too much related to the municipal deposits. As you suggested, I think looking at the averages makes sense. I think on an average basis, we were up $300 million in DDA deposits for the quarter. And if you look at The past year, the mix has stayed, you know, kind of 19, 3, 4, 5 in terms of percentage of total deposits as we've grown total deposits, you know, pretty significantly. So we're pretty happy with that. And it's just kind of steady growth as we move forward. And obviously, we're trying to win checking accounts and households every day. So the average is the right way to look at it.

Okay. All right. Thanks. And then on the Northern Trust deal, any color you can share with us on how we should think about modeling the fee and expenses going forward from that?

Yeah, Jared, I mean, you can appreciate we're between announcement and closing here. And so there really isn't much more we can say other than what was in the press release. So I would sort of aim you back there. It's a modest size, nice bolt on for us.

Great. Thank you.

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

Oh, great. Good morning. Dave or Tim, you mentioned in your prepared remarks, just the expectation for CET1 to continue to grow, even with the balance sheet expectations to grow. Does that at all open you up, especially with Basel III reform, to consider layering in buybacks into the narrative?

Yeah, Chris, I mean, I think it may. You know, just to give everybody background, the CET1 was 10-4 this quarter, and that's flat given, obviously, the very substantial growth in the balance sheet. We feel very comfortable with that capital level given our risk profile, and as I suggested, we think that ratio will go up in the third and fourth quarters, and then we'll see what happens with respect to any rule changes. But, you know, I think we're closer to the point where we'll be discussing what we do with excess capital. And maybe just to head off the, you know, kind of part B of that question, you know, our preference would be to continue to use that capital to invest in our business and grow loans. We certainly would look at appropriate acquisitions if they were a good fit. And, you know, further down the chain, you get, you know, buybacks and or, you know, kind of repayment of some debt and followed by dividends. So the good news is I think we're going to have some flexibility on that front going forward.

Okay, great. And then I guess a follow-up, just more of a modeling, true-up, any reason why earning assets won't grow at the same rate as loans? And then second, Dave, any outlook on the tax rate?

Yeah, well, the tax rate, first quarter is usually a little bit lower. Second quarter was 26.5%. And, you know, I'd expect earning loan growth. We usually try to match. I would think earning asset growth would follow suit there. This quarter, we outperformed a little bit on the deposit. Tim said we're really happy to grow the franchise and bring in those new clients. So that's a good thing. But I would expect loans, deposits, earning assets, all to be very similar growth rates.

Perfect.

Thank you. Our next question comes from the line of Casey Hare of Autonomous. Please go ahead, Casey.

Great. Thanks. Good morning, guys. Sorry to beat a dead horse, but another question. Apologies if I missed this, but the spot loan yields at June 30th and then new money bond yields. That's been a very nice story for you guys over the last year. I'm just wondering if that can continue on where new money is coming in on the bond book.

Well, again, we expect loan and deposit rates to be relatively flat other than a basis point or two compression from the premium finance commercial back book repricing. And then it'll just depend, as we said, on competitive pressure. So spot rates on everything are pretty close to where we're – and the mix could change, obviously depending on which asset class comes in but again we're very neutral we think on the margin and you know plus or minus a few basis points from 350 and if you have mid to high single digit single digit so we think that's a really good story very consistent story okay great and on the bond side of things new money loan yields on the bond book we don't have that much runoff we do a lot of we invest from the growth but those are around Okay.

Very good. Um, and just last one for me. So, um, look, the deposit costs have been great. Um, obviously you're taking advantage of your, your, um, your position as kind of the last, last bank standing in Chicago. Um, just wondering with chase as the number one in your market and their, their smart cash product. Um, yeah, obviously we're not seeing any impact today, But are your are your clients asking for this? Like what sort of what sort of dynamics are you seeing playing out in the Chicago market?

Yeah, I mean, as you all know, we're third and share in the Chicago market and over the last couple of years have continued to grow that nicely. I think we expect that to continue, and the cash sorting, AI, new product introductions are something we deal with every day. And the impact so far has been modest. We're certainly watching those types of developments, and we'll react accordingly, but nothing significant yet.

Great. Thank you.

Thank you. Our next question comes from the line of David Chivarini of Jeffries. Please go ahead, David.

Hi, thanks for taking the questions. I had a follow-up on the competitive environment. Would you say that – is your sense that the competitive pressure in premium finance and CRE is transitory, or could it be more lasting? And then as a follow-up to that, how would you rate the intensity of the competitive environment? Is this an 8 out of 10 on the intensity scale?

This is Rich Murphy. I don't know how you would rate it on the intensity scale. I think, you know, we've always been in an asset, so I don't think things are all that different. But, you know, there is definitely CRE, fully funded CRE deals of good quality. There is definitely a lot of competition out there, obviously, in the C&I space. Those of us are very, very competitive. We feel, though, that we're going to be aggressive because we want to win market share, but I think we also have historically shown a lot of discipline to get things priced right. We think we offer a good value proposition, and we are going to compete hard, But when things get a little too aggressive, whether that's on your scale of eight or nine or ten, you know, we will step away. But as of this point, we still see a lot of deals. Our pipelines are full. You know, it is different from a year ago. It's still, you know, I think we compete very effectively in the space we're in right now. So, you know, sharp elbows, sure, but we're winning more than we're losing.

Very helpful caller. And then shifting over to the branch openings, can you remind us of the plans there, the number of branches per year for the next couple years, and any early read as to how those new branches are performing?

Sure, at least to a degree. We don't, you know, kind of forecast out several years on the branch activity, but obviously the three that I mentioned in my comments plus several more this year, including the three in northwest Indiana. And I would tell you, frankly, we're pretty good at this. We recently purchased a branch in a community that we weren't in from an organization that elected to close it, and in just a little bit over 90 days, we've got $70 million in deposits. And the communities that we're going into are largely attractive communities to us, and so I feel very comfortable we're going to be growing nicely in terms of those new But, you know, we haven't done really other than Makatawa now two years ago any acquisitions. So this organic growth opportunity is what the market's given us right now.

Thank you.

Thank you. Our next question comes from the line of Timur Bresler of UBS. Your line is open, Timur.

Hi, good morning. Thanks for the question. I guess as you're thinking about funding future loan growth, in terms of that deposit mix for future funding, is that expectation to change at all going forward, or are you still expecting kind of broader deposit growth?

I guess I'm trying to get at the ability to continue growing DDAs in this environment, or maybe we're going to see more of that growth being funded by higher-costing funding products. well as you know as Dave said we we expect to continue to grow deposits and you know with respect to mix the challenge for us is we tend to outperform the market in terms of our deposit growth and so if that happens you know we'd like to keep DDA at you know 19 to 20 percent in terms of the mix just hard to say how much we're going to have to grow but we like growing deposits we like adding clients, we think that grows the value of the franchise. And so we're happy to take that deposit growth. And we'll see what the market gives us. But again, $2 billion plus worth of deposit growth with no change in deposit cost, in our minds, was very good performance in the quarter.

Yeah. No, absolutely. And I guess to that point, the fact that deposit costs were flat in this environment. It sounds like that $350 margin expectation kind of furthers that flat deposit trajectory from a cost standpoint. Is that the way we should be thinking about it, is margin is $350 as long as those deposit costs can be kept flat?

Yes, plus or minus a couple of basis points, but yes.

Okay, great. And then just last for me, it looks like you added a couple fixed rate swaps here that started in June with some higher swap rates. I guess has this gone to offset some of the lower yielding swaps that are already in place for this year and next? And I guess as you look at the current contribution from the derivatives book here, is it still pretty neutral or is it leaning maybe one direction or another?

It's a one basis point. We did add some swap, where we're trying to add on to the swap position to cover those that are going to. But if you notice those swaps during the quarter, the strike rights were the month's SOFR rate was. So, you know, for example, one of them, that was in the money. We typically did a one-year forward start and then went four or five years. But since these were in the money, we decided to put them at. We're just really, we're not trying to add to the swap. We're just trying and probably keep around.

Great. Thank you.

Thank you. Question comes to the line of Janet Lee. The line is open. Janet.

Hello. For premium finance, since the property insurance premiums industry-wide seems to be flattening out a bit, and you mentioned some competitive pressure, does that change your outlook on the growth trajectory of premium finance business? Like what kind of growth should we forecast for 2026 or seven?

Yeah, well, this is Dave. There are pressures on the property side. That's the softest part of the market, and we are seeing those rates down, and particularly condo rates in Florida. There's a lot of softening there. Those ran up really high, and now they've sort of come back down. But you're also seeing, you know, other professional coverages besides property that are up a little bit. So we sort of think to be rougher. So we would expect premium finance year over year, taking the season to grow low.

Got it. All other questions have been asked and answered.

Thank you. Our next question comes from the line of Ben Gerlinger of Citi. Your line is open, Ben.

Hi, good morning. Great deposit growth quarter, especially the pace all pretty much in one major city. I get that you guys have the branches that you're expecting to build northwest Indiana to front run the bears. When you think about just like kind of commercial deposits or silos of deposits that really aren't associated like the bricks and sticks branches, is there anything on that? Because, I mean, I get building branches is good. It was just kind of here and there. I don't know how much that's going to really impact the broader balance sheet because you're considerably larger than you were a decade ago.

Yeah, I mean, it's a good question, Brandon. And I guess what I would point to is if you look at the loan growth, you know, particularly C&I loan growth and some of the other verticals, when we win business in those categories, we expect those customers to bring us deposits. And so as you see commercial loan growth and you see loan growth in some of our niches like the ESOP business and our construction business, we're winning treasury management service, you know, fee income. We're asking for deposits. And so, as you say, we're bigger, and so to show good deposit growth, as we have done regularly, we need deposit growth across the board, including the commercial sectors. And so that's built in. The branches, as you say, will be more retail and small business, but they do increase our presence in northwest Indiana, and that makes a difference with some of the commercial entities as well.

Gotcha. That's helpful. Let me just think about the hiring effort. Can you think about LPOs or anything beyond Chicago or kind of touching Lake Michigan? Could you think of the larger MSAs within the quote-unquote Midwest?

Well, we do have a small number of people in other markets that is sort of our way to start to penetrate those markets. West Michigan was an example. We had a lot of business in West Michigan before we made the McAtawa purchase. And I think we're competitive in some of the other Midwestern cities where we don't yet have a footprint. And we'll continue to do that. And when it makes sense, we'll add physical footprint, which, you know, kind of is the next leg of the stool. So we've done that in Rockford. We did that in West Michigan. There are other markets we can do that in coming up. That's helpful.

Thank you. Our next question comes from the line of Brandon Rudd of Stevens, Inc. Your line is open, Brandon.

Morning. So most of my questions have already been answered. Maybe just one more on the expenses. I noticed the step-up in software and equipment in the quarter. Is that related to the digital banking investments that you mentioned, Tim? And is that a good run rate, that $39 million to look at on a go-forward basis?

Yeah, you know, we're investing in technology as all institutions are. And so whether it's cybersecurity or whether it's customer feature functionality, that's a line where you're likely to see more growth than others. And so I think you should expect, you know, some upward trajectory in that expense. But it's really across the board, better data management, the early phases of AI, the customer feature functionality we're delivering, cyber. So it's sort of all sorts of stuff in that bucket.

Okay, perfect. And maybe just one on credit. I noticed on the bottom left of page 18, there was a bit of a step up in the allowance on the commercial portfolio. I'm just wondering, is that a change in macro assumptions, or is there a particular loan category that drove that increase?

I'd be the more macro-less.

Thank you very much.

Thank you. Our next question comes from the line of Daniel Tamayo of Raymond James. Your line is open, Daniel.

Thank you. Good morning, guys. Maybe just taking a step back here, so just kind of looking at your history here, it looks like a long history of efficiency ratio really trending down, and you're at a point now where I'm not sure you've been before in the kind of low to mid-50s. You talked about positive operating leverage this year, but just curious your thoughts with a margin, you know, relatively stable in this range, your ability to continue to drive that operating leverage going forward or where you think it might start to stabilize.

Yeah, I mean, we're targeting continued operating leverage, And as we start to work on 2027, that'll be part of our target as well. And so, you know, we hope there are, you know, scale benefits with some of the investments that we're making. And so kind of built into the expectations for our teams. I, you know, we're going to add clients and we're going to continue to win business in kind of a well-positioned market. And so that would be our expectation.

Thanks, Tim. And then maybe one qualitative one for you also on the just on the M&A environment. I appreciate your commentary on your you're at the exploratory stages, but you guys are kind of well known as a as a buyer in the region. Just curious your view on given the run up we've had in stock prices, what that's done to seller expectations and in conversations you've had.

Well, I can't speak to any specific conversations, but in some way I think it's helped. People are always cautious about exploring alternatives when their stock price is perceived to be low. And so as long as our performance and our securities move up relative to others, there's not a huge change. It's just that somebody feels like they're getting a better price. So, you know, the math is the math, and I know there are a lot of social and emotional factors that go into any transaction, but, you know, I think in general it's probably a little helpful.

Okay, great. Well, thanks for answering my questions.

You bet.

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

Yeah, thanks, Lateef. And for everybody, good questions. We certainly understand why you ask what you do, and we appreciate your interest. I would leave you with this. This was a really strong quarter, once again, creating value for our shareholders. We continue to deliver on our three priorities, which keeps our team focused on delivering strong results. And over the last several quarters, we've consistently outperformed peers without compromising our credit standards or our commitment to clients and our communities. We believe we're well positioned for the second half of the year and quite frankly, well positioned for, you know, time periods beyond that. So I hope everybody's enjoying the summer and thank you for joining us and for your interest today. Have a great day.

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