Q2 2022 Wintrust Financial Corp Earnings Call
Speaker 1: The conference will begin shortly. To raise your hand during Q&A, you can dial Star One.
Speaker 2: It's always on mute.
Speaker 3: Oh yeah?
Speaker 4: Welcome to WinTrust Financial Corporation, 22nd quarter 2022 earnings conference call.
Speaker 4: A review of the results will be made by Edward Wamer, founder and chief executive officer, Tim Crane, president, David Dykstra, vice chairman and chief operating officer and Richard Murphy, vice chairman and chief lending officer.
Speaker 4: As part of their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation.
Speaker 4: Following their presentations, there will be a formal Q&A session. During the course of today's call, Wind Trust Management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements.
Speaker 4: Actual results could differ materially from the results anticipated or projected in any such forward-looking statements.
Speaker 4: The companies for 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 present Form 10-K and any subsequent filings on file with the SEC.
Speaker 4: Also, all remarks may reference certain non- GAAP financial measures.
Speaker 4: Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure.
Speaker 4: As a reminder, this conference call is being recorded.
Speaker 4: I will now turn the conference over to Mr. Edward Wehmer.
Speaker 5: Thank you very much. Hello everybody. Welcome to our second quarter in school. Welcome to our second quarter in school.
Speaker 5: With me again, our Dave Dijkstra, Dave Steyer, Cate Bowie, our General Counsel Tim Crane, and Rich Murphy.
Speaker 5: Same for usual, I'm going to give you some general comments regarding our results.
Speaker 5: Throw to Tim Crane for more detail on the balance sheet in the second quarter. Dave Dyche will provide detail on other income, other expense.
Speaker 5: Richburg will discuss credit. By the way, we need to refer to Murph as Captain Murphy, as he is going to be crewing Wind Trust's first entry into the world-famous Mackinac race that we've been sponsoring to call it a Mackinac.
Speaker 5: So he's got a sales add-on here and uh...
Speaker 5: Go get them, Gilligan. Thank you. And back to me for some comments on the future. I'm going to ask some time for questions. I'm going to ask some time for questions.
Speaker 5: All in all, it was a great quarter for us, but I'd consider it a transitional quarter for WTFC.
Speaker 5: Transitional in a sense we'll be relying less on mortgage income going forward and more on the margin income for net income increases in the coming quarters.
Speaker 5: This has always been our design, by the way. We like to stay very positive gapped so that we can...
Speaker 5: In a higher rate environment, we are able to increase the margin, the more the cover expenses, the more results from the inflationary period. And that's what we're doing right now. All right.
Speaker 5: Course character rights, trivic loan growth across the board, $1.9 billion.
Speaker 5: Period N. Lowell, as you see, the average for the second quarter by 1.2 billion both well for the future quarters.
Speaker 5: Overall interest rates and state position allow the margin increase to 293 up 32 basis points from quarter one.
Speaker 5: Should we know that June's margin was closer than the 310, 3.10%?
Speaker 5: Point four, we expect emergency care to increase. As previous rate increases work their way, the balance sheet will show future rate increases occur.
Speaker 5: That interesting coming. Please donate some 11 million dollars quarterTeam quarter.
Speaker 5: Earning acid rates were up 36 basis points.
Speaker 5: Cost funds is up seven basis points. A free fund contribution increased three basis points.
Speaker 5: The court was negatively updated by security losses of about $8 million.
Speaker 5: Apparently 2.5 million are awesome. So Maxus real estate
Speaker 5: A little data center and a property was from Health for Expansion Use for Storage.
Speaker 5: We decided to get rid of them and be done with them. Also by the increased provision to cover our...
Speaker 5: Our loan growth by the nine to ten million dollars.
Speaker 5: The form of these two items negatively affected on that overhead ratio is about one and a half percent. If you disregard those amounts, you would be closer to 135 target.
Speaker 5: MSRBL HHS is somewhat muted by our work by our hedging process, hedging strategy is the work in process.
Speaker 5: Dave was gonna talk about that a little bit later.
Speaker 5: Great metrics which we'll discuss really remain extremely healthy and terrific.
Speaker 5: 12 management revenue. Told them nicely despite the market's the margins and their own. The market's the margins and their own.
Speaker 5: It mortgages how they're all considering the right environment. They all cover both of you.
Speaker 5: I recently did the capital offering that at $26 million.
Speaker 5: It was a great success for us, our standpoint, but just for additional growth. So in everything's front, as you know, we made $94.5 million, $1.49 a share. Pre-tax pre-provision of 152 million dollars.
Speaker 5: Really a good number considering.
Speaker 5: Where we've been and where we're going and I think there's a smile chart in the
Speaker 5: in the package you could read.
Speaker 5: Asset on the balance sheet side. I'm Rapa.
Speaker 5: Nicely, like Foucaix, what's our $18 million? The increase of the deposits and the capital offering up to that. And up to that. And up to that.
Speaker 5: And with that I'm going to turn it over to Mr. Crane who's going to discuss the balance sheet.
Speaker 5: Great. Thank you, Ed. I'd like to highlight a few balance sheet items as well as expand on a couple of the numbers that you mentioned.
Speaker 5: You'll note that this will be the last quarter we referenced PPP loans as in most cases the balances and related financial impact or reaching levels that are relatively insignificant to our results on a quarter over quarter basis. Obviously the year over year impacts were documented in the financials. PPP loans were documented in the financials.
Speaker 5: The billion nine of loan growth excluding PPP that Ed referenced represents 22% loan growth on an annualized basis and importantly was spread across all categories.
Speaker 5: And also as Ed mentioned, the end of period loans were substantially higher than the quarter average, which will help us going to the third quarter.
Speaker 5: Going forward, we'll encourage by stable pipelines, we believe that long growth in the mid to high single digits on an annualized basis may represent a more reasonable expectation given the current uncertainty around the macroeconomic outlook.
Speaker 5: Deposit growth for the quarter was about $375 million influenced by both seasonal tax-related outflows and the very disciplined approach to pricing in the rising rate environment.
Speaker 5: Interest bearing deposit costs of 28 basis points for the quarter were up six basis points from the end of the first quarter and we'll begin to trend up with the rising rates
Speaker 5: While the competitor deposit pricing remains very muted, we are starting to see increases in the more rate sensitive of the deposit categories. As an example, municipal deposits often track some of the state indices.
Speaker 5: In addition, we believe a large Fed increase at the meeting next week would also accelerate deposit pricing discussions in the market.
Speaker 5: For the quarter, our securities book remained essentially unchanged. We used excess liquidity to fund the strong loan growth.
Speaker 5: Essentially replacing maturing securities, obviously, at a rate that's trending up. And at quarter end, liquidity remains strong with about $4 billion of interest bearing cash on the balance sheet.
Speaker 5: As discussed last quarter, a securities book of six and a half billion dollars is about 47% available for sale, 53% held the maturity.
Speaker 5: During the quarter, the continued rise in rates resulted in an additional tax adjusted, unrealized loss of $122 million on the AFS securities.
Speaker 5: Despite this reduction, tangible book value for the quarter increased to a record level.
Speaker 5: As rising rates and rate sensitivity remain the topic of interest, I want to reiterate some of what was discussed on last quarter's call.
Speaker 5: First, although our gap position is down slightly, we remain as that sensitive and well positioned to the benefit from continued rising interest rates.
Speaker 5: As a reminder, and this is outlined in our presentation materials, approximately 80% of our loans reprice or mature within a year.
Speaker 5: Second, as we experience increasing rates, we continue to believe each 25 basis point increase in rates will generate in excess of $40 million of pre-tax net interest income on an annualized basis.
Speaker 5: which equates to approximately a 10 basis point improvement in margin.
Speaker 5: To be more specific on the margin, Ed mentioned 293 for the quarter, up 32 basis points.
Speaker 5: On our last call, we suggested that the consensus rate forecast could result in a margin approaching 325 by your end.
Speaker 5: With the more current consensus projections, it's likely we'll meet that target earlier than anticipated and may approach 350 by year end.
Speaker 5: On the capital front, despite very strong loan growth, as a result of the common stock offering, capital ratios improved.
Speaker 5: With the higher rates and more typical loan growth, the company's earnings are projected to result in further organic improvement to capital levels in the coming quarters.
Speaker 5: Lastly, on a non-financial note, the pandemic has accelerated the use of and really the importance of digital services at all banks, and we show some statistics in the presentation portion of our documents.
Speaker 5: This past weekend we successfully completed the full replacement of the digital banking system used by our consumer and certain small business clients.
Speaker 5: This was a 15-month effort, a significant investment on the part of the company that's resulted in a very material upgrade to best-in-class feature functionality available to our clients.
Speaker 5: It should differentiate us relative to all but our largest competitors, and we'll only enhance the top-tier service that WinTrust banks are recognized to providing our clients.
Speaker 5: And you'll recall and also document in our presentation some of the recognition we've received by JD Powers, the best bank for customer service in our area.
Speaker 5: With that, I'll turn it over to Dave.
Speaker 5: Thanks Tim. As Ed mentioned, I'll cover some of the income statement categories that are not worthy. Starting with the net interest income for the second quarter of 2022, net interest income total $337.8 million. That was an increase of $38.5 million as compared to the prior quarter. And an increase of $58.2 million as compared to the second quarter of last year. The $38.5 million increase in net interest income as compared to the prior quarter.
Speaker 5: We'll do primarily to the net interest margin as average earning assets were essentially flat compared to the prior quarter.
Speaker 5: The net interest margin improvement of 32 basis points from the prior quarter brought us to 2.93 percent, a beneficial increase of 36 basis points on the yield on earning assets, and a 3 basis point increase in the net free funds contribution.
Speaker 5: Combined with an offsetting seven basis point increase for the rates paid on liability resulted in the improved net interest margin
Speaker 5: The increase in the yield on earning assets as compared to the prior quarter was primarily due to a 26 basis point improvement on the loan yields and then higher liquidity management asset yields as the company earned higher rates from the interest-bearing cash that we hold at the Fed. The increase in the yield on the interest-bearing cash as compared to the prior quarter was primarily due to a
Speaker 5: The increase in the rate paid on interest bearing liabilities in the second quarter was driven by a six basis point increase on the rate paid on interest bearing deposits.
Speaker 5: Turning to the provision for credit losses, WindTrust recorded provision for credit losses of $20.4 million compared to a provision of $4.1 million in the prior quarter and a $15.3 million negative provision expense recorded in the year ago quarter.
Speaker 5: Although the provision of expense was higher in the second quarter, I want to make clear that the increase was largely a result of providing for this quarter's exceptional loan growth of approximately $1.9 billion excluding the PPP loans. So it wasn't really generated as a result of any widespread deterioration in the credit portfolio. As the credit statistics remained very good and ritual cover that in more detail in just a few seconds. Captain Murphy means Captain Murphy will cover that in a few seconds.
Speaker 5: In the non-interested income section, our wealth management revenue was flat with the prior quarter at $31.4 million, but up slightly from $30.7 million from the year ago quarter, given the volatility in the market, we're pleased with that result.
Speaker 5: and consistent with overall industry trends, the impact of higher home mortgage rates, our mortgage banking operations are slightly lower, loan origination volume during the second quarter. However, production revenue actually increased as the production margins rebounded to the reins that we guided to last quarter.
Speaker 5: However, mortgage banking revenue decreased by $43.9 million from the first quarter. Primarily due to the valuation changes related to the mortgage servicing rights and early buy-out loans, guaranteed by the U.S. government agencies, which are also held at fair value.
Speaker 5: This quarter that net of those two items was a $445 million or $445,000 benefit whereas last quarter that net benefit was $43.4 million.
Speaker 5: The company expects this portfolio of early buy-out loans to continue to serve as a partial economic hedge or the mortgage servicing rights and future periods. They're essentially journey-made loans that are marked to market.
Speaker 5: Looking forward, based on current pipeline activity market conditions, we expect mortgage origination volumes to be lower in the third quarter than we just experienced in the second quarter. However, the impact of such decline on net earnings is expected to be relatively small.
Speaker 5: relative to the anticipated growth in our net interest income. And again, to put that in perspective, in our production revenue, in the second quarter was about $18 million. Servicing revenue was about $11 million. So even if there's a slight decline in the mortgage revenue from $18 million, after you pay out the commissions and the other expenses, the net impact could really only be a few million dollars of ex-witting and the MSR evaluation. So,
Speaker 5: We've sort of bottomed out our bottomy out on the mortgage revenues now and the impact is going to be relatively insignificant relative to the...
Speaker 5: What we expect to be extraordinarily good growth from net interest income. From net interest income.
Speaker 5: Turning to other categories we recorded investment losses as I mentioned of 7.8 million dollars during the second quarter compared to net losses of 2.8 million dollars in the prior quarter Primarily the equity valuations being impacted by market conditions on a portion of our securities portfolio.
Speaker 5: Other non-interest income total $13.9 million in the second quarter, which was down $4.6 million from the amount recorded in the prior quarter. The primary reason for the clientless category is the $2.5 million losses associated with the properties that had referred to. And additionally, the company realized $1.2 million of lower SWATP revenue in the second quarter relative to the first quarter.
Speaker 5: If we turn to nine interest six months, they total $200, $288.7 million in the second quarter, and we're up just 2%, or approximately $4.4 million compared to the prior quarter.
Speaker 5: The primary reason for this is the seasonal increase in our marketing costs, which were up $4.7 million, and a variety of other miscellaneous increases and decreases by categories that essentially offset each other.
Speaker 5: With that being said, I'll just cover a few of the larger changes in the non-interest expense section. First salaries and employee benefits expense decreased by $5 million compared to the first quarter. The current quarter decrease is primarily related to lower croubles associated with our long-term incentive compensation program relative to the prior quarter.
Speaker 5: advertising and marketing expenses as I indicated was up $4.7 million when compared to the prior quarter and as we've discussed on previous calls this category of expenses tends to be higher in the second and the third quarters of the year do primarily to our marketing and sponsorship expenditures related to various major league and minor league baseball sponsorships as well as the sponsorship of summertime events held in the community. We serve including the Mac and Mac race that I've referred to earlier.
Speaker 5: Software and equipment expense told the $24.2 million in the second quarter. This is an increase of $1.4 million as compared to the first quarter. The increase is due to increased expenses associated with upgrading and maintaining our IT and information security infrastructure and further investments in digital products and services such as the upgrade that Tim just referred to. very decreasing terms when required, and 94% of our money in anITYS Herrmann productions require additional support exemptions than payments bird too.
Speaker 5: As we've done over the past few years, we continue to invest in the software and technology to enhance our customer experience and delivery systems. Audience member 00...!
Speaker 5: products as well as invest in other systems to support our continued growth.
Speaker 5: Oreo expenses increased by $1.3 million in the second quarter as the company recorded a gain of approximately $1 million in the sale of Oreo property in the prior quarter and only small Oreo gain in the current quarter. Although this category increased, the total expense for the quarter was only $294,000.
Speaker 5: Lending related expenses were down approximately $2.6 million in the prior quarter primarily as a result of lower mortgage banking related expenses.
Speaker 5: And travel and entertainment expenses increased by $1.2 million over the prior quarter as the work environment continues to revert back to free pandemic business customs and relationship managers are able to engage more routinely with clients and potential clients.
Speaker 5: We consider the travel and entertainment activity is important to maintaining the strong long growth we've been achieving in the recent quarters. We've been achieving in the recent quarters.
Speaker 5: Other than the expense categories I just discussed, all the other categories in the aggregate were up by about $3.3 million compared to the first quarter. The increase was impacted by a variety of other operational fluctuations, including over $1 million of costs related to the conversion of our digital banking platform that Tim went over that just went live this week. The net overhead ratio, as Ed mentioned, stood at 1.51% for the second quarter. It was negatively impacted by the
Speaker 5: $7.8 million of security losses and $2.5 million of the property charges. On a year-to-date basis, however, the net overhead ratio stood at 1.25%.
Speaker 5: So in summary, the quarter actually was a solid quarter from a core fundamentals perspective. It was negatively impacted by the security and property losses and by the higher provision, but the higher provision perversely is good for the company as it related to strong outsize loan growth, exceptional loan growth for the quarter. Other than that, the loan growth and the expanding margin, the strong pipelines and the good credit quality really set us up very well for the future quarters.
Speaker 5: I will say, as I will sort of reiterate one thing Ed said, we are very asset-sensitive. We do that by design, understanding that when rates go up, inflation probably increases, too. So we would expect some increases in the non-interest expenses during the quarter. We would probably expect mortgages, as I said, to be down a little bit, but we also don't expect to have the same security losses and property losses, so non-interest income.
Speaker 5: probably will be relatively stable, but non-interest expenses will probably rise a little bit with wage pressure in the market. But all of that will be insignificant, we think, relative to the increase in net income if the rate environment stays as is projected right now. So with that, I will conclude my lengthy comments here and turn it over to Captain Rich. Thanks, Dave.
Speaker 5: As noted earlier, credit performance for the second quarter was very solid from a number of perspectives.
Speaker 5: As detailed on slide seven of the deck long growth for the quarter net of PPP was 1.9 billion or 22% annualized and just an outstanding result. clicks
Speaker 5: Equally as important and similar to the past few quarters, we continue to see long growth across the portfolio. I'd like to highlight a few key elements of this growth.
Speaker 5: The second quarter is typically very strong for commercial premium finance, and this quarter was no exception with loans up 604 million, up slightly from the 563 million, to the second quarter of 2021.
Speaker 5: Life insurance premium finance continue to grow nicely with loans of $254 million.
Speaker 5: C&I loans, excluding PPP loans, were up $635 million during my SFB's lending and leasing.
Speaker 5: In addition, residential real estate and core CRE loans showed solid growth.
Speaker 5: Year over year, we saw a total on growth of 5.9 billion or 19% net of PPP loans.
Speaker 6: As noted on prior earnings calls, we continue to see very soluble metamine our core C and I and C are report folios. Pipelays have been very strong throughout the year and we saw that materializing due to increase outstanding during the past over quarters. It started to 11,000 deaths and estos
Speaker 6: Looking forward, we continue to be optimistic about the low growth for the remainder of 2022-2022 for a number of reasons.
Speaker 6: Core pipelines continue to be very strong with solid momentum in Q2.
Speaker 6: Commercial line utilization, excluding leases and mortgage warehouse lines, as detailed on slide 19, continue to trend up from 37% to 41% and we anticipate this trend will continue.
Speaker 6: Also on slide 19, you will see that business expansion and inflation pressures have resulted in many customers requesting increases to their credit facilities to help finance these costs, and as a result, we have seen the level of unused credit facilities increase.
Speaker 6: And both first and sure and quantity in Winstrow's life finance and another strong quarter. And this momentum has been strong for several quarters and we believe it will continue through a major of the year. And we will make it with the year. And we will make it with the year. And we will make it with the year. And we will make it with the year.
Speaker 6: As a result, macroeconomic conditions may pose a heightened level of uncertainty. As Tim noted, we are reaffirming our long-growth guidance of mid-to-high single digit growth. AGE 4. growth.
Speaker 6: From a credit quality perspective as detailed on slide 18, we continue to see solid credit performance across the portfolio. This can be seen in a couple of metrics. This can be seen in a couple of metrics.
Speaker 6: On app performing loans increase from 57 million or 16 basis points to 72 million or 20 basis points, this is still below the NPL totals at year end or at June of 2021, which were 21 basis points and 27 basis points respectively.
Speaker 6: and BLs continue to be at very low levels and we are still capin' about the solid credit metrics of the portfolio.
Speaker 6: Charge-offs for the quarter were 9.5 million or 11 basis points, up slightly from the previous quarter. Year-to-date charge-offs totaled 7 basis points.
Speaker 6: And as detailed on slide 18, we continue to see consistent levels in our special mention in substandard loans with no meaningful signs of economic stress at the customer level.
Speaker 6: That concludes my comments on credit and I'll turn it back to Ed to wrap up. Thank you, Kevin Murphy.
Speaker 7: All in all, it was a pretty good quarter for us, setting up the rest of the year very nicely.
Speaker 7: Great loan growth across the board and consistent pipelines for future growth are in place.
Speaker 7: The murk mentioned credit remains benign. Absolute MPAs are the dial level last seen. It's about 30% of the current size we are current size right now.
Speaker 7: Here the colaport filming for deals with cracks moving about expeditiously.
Speaker 7: Call on the first two quarters and not last quarter, but first quarter and the fourth quarter last year, we did some lone sales, we're gonna do some more of those. We're gonna do some more of those.
Speaker 7: alone demand it's good to this one I could really bad and bring in the good
Speaker 7: Market disruption still exists and we intend to take full advantage of it, both the deposit and the loan side.
Speaker 7: where you read that maybe one of our competitors where...
Speaker 7: Some disruptions taking place.
Speaker 7: and a conversion that didn't go as well as ours did I guess.
Speaker 7: And we were hoping to get some business out of that.
Speaker 7: We're very well positioned for higher rates. Every quarter point still brings in $40 to $50 million over the following 12 months.
Speaker 7: Increased damage to symptoms should dwarf any increase in expenses, but on by inflationary pressures. Increased damage to symptoms should dwarf any increase in expenses,
Speaker 7: We expect the four quarter margin, as Tim said, being 350 to 360 range and to still be growing.
Speaker 7: Great to continue to move up as we anticipate they will.
Speaker 7: We continue to evaluate potential acquisitions, but seller price expectations are still unrealistic in our opinion.
Speaker 7: It's used rate hikes and pressure on expenses brought out by inflation and Tech investments required Some of the banks the smart banks looking at should bring some reasonable These applications in their future
Speaker 7: In general, you know, we don't like to deal with that
Speaker 8: that are...
Speaker 7: So we're not going to change that approach.
Speaker 7: In general, our customers are still seeing good things going on.
Speaker 7: Prices increase, they're being readily accepted by their customers.
Speaker 7: Some supply chain issues still exist, but
Speaker 7: The main issue remains in getting good qualified people.
Speaker 7: So our customers are feeling pretty darn good about where they are right now.
Speaker 7: And it's so a lot of money in the system, so...
Speaker 7: We're going to be very diligent in monitoring this, not afraid to act if things actually do turn for the worse. We just don't see it yet.
Speaker 7: Say, more just to clean it slow and wealth management to keep it in progress.
Speaker 7: Increased in the net of tricycle, far away, they'll all have sub-earnings.
Speaker 7: from the mortgage area.
Speaker 7: to ensure the numbers get goofy, technical term goofy. We like where we stand and we like our prospects for the future.
Speaker 7: With that, we appreciate the...
Speaker 7: your support and you can be sure of our best efforts and time for questions.
Speaker 4: Thank you. As a reminder to ask a question or raise your hand to queue up for a question, press star one on your telephone. Again, that was R1 on your telephone to queue up for a question.
Speaker 4: Our first question comes from the line of Chris McGrady of KBW. Chris McGrady, your line is open.
Speaker 9: Hey, how's it going? This is Andrew Lextron for Chris McGrady.
Speaker 10: Good morning. Good morning.
Speaker 9: On the margin, you can talk about hitting 350 by the end of the year. I just want to invite Ted Fondre and what your updated data function is going to that number and how much incremental transparency should be expected on that. And how much incremental transparency should be expected on that.
Speaker 11: Well, there are a couple of parts to your question there and I'm not even sure I heard all of it, but we're using the consensus forecast that has 75 basis points in July and then equal increases in September and December . Obviously the July increase is most impactful to the margin for the remainder of 2022, the two latter increases meaningful for 2023.
Speaker 5: I think you had an expense question as well and Dave, I'll let you handle that one. Yeah, so the deposit betas, we still are, you know, as we talked, it's lagging right now and Tim talked about with the rate increase next week, there'll probably be more pressure, but we're still looking at, you know, 40 to 50 percent betas ultimately on the deposit portfolio. We'll just have to see how the market reacts as far as.
Speaker 5: competitive rate increases to see how fast that happens, but ultimately that's still where we expect to be at.
Speaker 9: Okay, thank you. And I said one more on loan growth. You mentioned, like you reiterate your mid to high signal digit loan growth guidance. You're currently at about 16% analyzed growth for the year so far. Is that mid to high signal digits, is that for the remainder of the year or for full year 2022?
Speaker 6: For the remainder of the year, I think you look into the next quarter and the fourth quarter as much as we can see that those are kind of the estimates we have for those quarters.
Speaker 9: Okay, and I guess.
Speaker 9: With that, with are there any areas that. You know, within the portfolio that you're expecting pullbacks in.
Speaker 6: I'm pulled back in terms of demand or pull back. We heard voiture people are???ed in terms public response zone.
Speaker 6: Yeah, I would think that with rising interest rates you're going to see more pressure on CRE growth as it's tougher to underwrite in a higher interest rate environment. You know, I also think that WindTrust's life is probably going to be more affected by rising interest rates as that product is much smaller interest rate environment.
Speaker 6: We also may see we've had some decent portfolio growth here in residential mortgages that may be affected as well. Those would be the three areas that I would highlight. But again, I don't think that's going to be material effect or material effect or guidance. Yeah, you know, and next year we'll be adding some products in life insurance side. We're redoing the system on life insurance business and them. We're redoing the system on life insurance business and them.
Speaker 7: We'll be able to offer...
Speaker 7: lines of credit, things like that we can't offer right now. So we expect that business to continue to be vital. We continue to rework it, and we're excited about the future there.
Speaker 9: Okay, great. Thanks for answering my questions.
Speaker 4: Thank you.
Speaker 4: Our next question.
Speaker 4: comes from the line of Terry McAvoy of Stevens.
Speaker 12: Your line is open. Hi Terry. Hi. Hi. Good morning everybody. Hope you're doing well. Maybe let's start with I guess the outlook for fee income. I was a little bit surprised with the resiliency and wealth management kind of flat quarter over quarter and given market conditions and maybe Dave if you could just talk about some of the puts and the takes for for your outlook for fees to be stable in the third quarter.
Speaker 5: Yeah, so wealth management, I mean, there probably was done a little bit as far as some of the assets under management. But we also have other pieces there with our 1031 exchange business, our Chicago deferred exchange, but we refer to as CDAAC had a really strong quarter so that that helped offset some of the pressure on the other areas of the business is some of you know, some of those assets price at the beginning of the quarter, some price at the end of the quarter, so there may still be a little bit of pressure.
Speaker 5: there are losses that, you know, that it can never say never, but we don't expect to have them. So I think if you work your way through all of that, then it should be relatively stable plus or minus. And then it should be relatively stable plus or minus.
Speaker 12: And then as a follow up question, maybe you could just talk about your hiring efforts given some of the market disruption. I'm not going to ask from from what financial institution they may come from, but maybe what areas of the bank. Do you think you can add folks to given that disruption?
Speaker 11: That's area it's been largely on the commercial side as we've talked about in the past when lenders get concerned about their ability to take care of their clients. They begin to explore their options. And so we continue to see disruption. Some of it by announced transactions, some of it by the integration efforts that occur over time. So that tends to be more active during the kind of...
Speaker 11: First two thirds of the year slows down as you get toward the end of the year, but we're excited both by some additions in the Chicago area as well as a couple in Wisconsin.
Speaker 12: Great. Thank you very much.
Speaker 13: Thank you.
Speaker 14: Thank you.
Speaker 4: Again, to ask a question, press star one on your telephone. Again, that's star one to raise your hand and ask a question.
Speaker 4: Our next question.
Speaker 4: comes from the line of David Long of Raymond James. David Long, the line is open.
Speaker 15: Good morning, everyone. David.
Speaker 10: Good, good. Hey, deposit balances overall. You were up a little bit in the quarter, period end to period end. Just curious how you're thinking about overall deposit balances through the second half of the year. Do you think there's still some stimulus-related fluff out there that could leave the bank? Or are you guys growing quick enough with new funds and new clients that you can offset that and grow deposits in the back half of the year?
Speaker 11: Yeah, it's a good question, David. We think consumers remain pretty healthy, which is part of the reason we think economically things feel okay.
Speaker 11: You know, the market's been very disciplined and people haven't been moving rates much. And so I think the second half of the year will depend a little bit on how some of our competitors react. But left to our own devices, we would plan to continue to grow deposits, continue to add relationships. And we'll work hard to fund some of the longer growth that we think will come the second half of the year. You know, they were slightly criminal areas, loans they need to pass, they loans to deposits.
Speaker 11: The market's been very disciplined and people haven't been moving rates much. So I think the second half of the year will depend a little bit on how some of our competitors react. But left to our own devices, we would plan to continue to grow deposits, continue to add relationships, and we'll work hard to fund some of the loan growth that we think will come the second half of the year. David, it's like climbing a ladder. You need loans, you need deposits, you need loans, deposits. We're able to keep the...
Speaker 7: the cost down to date but it will be we're gonna pay some little spits to premium rates to get some people in and some of our younger branches.
Speaker 7: We won't have the cannibalization then. What we've always done is gone out with the younger ones.
Speaker 7: as a new of banks or branches that
Speaker 7: and go out and pay up a little bit to get real a full relationships and it's worth well and now we can do it again with higher rates and kind of out of the red zone if you have use a foot down conditioned
Speaker 7: No more field to play with.
Speaker 7: We're going to continue to grow deposits.
Speaker 16: Hey splurbed his weekend?
Speaker 10: Thanks guys, appreciate that. And then let me switch over to Captain Murphy. Reserves, so pretty healthy here. But as you're, as we're seeing some, you know, increasing risk of a potential recession.
Speaker 10: How are you thinking about the reserve level between now and the end of the year? Do you expect the reserve level as a percentage of loans to be much higher than where we are today?
Speaker 6: No, you know, the reserving is day pointed out. The reserve levels really are more function of the growth as opposed to the as the mood is hemorrhoid. Yeah, the guy mood is hemorrhoids. Right. So, you know, at this point, we're just not seeing risk rate migration, you know, in a negative way. Not saying it wouldn't happen in the back half of the year if things were to change dramatically in terms of economic environment.
Speaker 6: But I think really just based at this point in time, the provisioning levels really would be dictated by growth more than the economic environment, but that could change. Clearly, there's a lot of prognostication as it relates to what the recession might look like and what it might happen. But as of this moment in time, we're just not seeing a lot of effects within our portfolio.
Speaker 5: Yeah, as you know, the allowance is based upon a life alone concept with Cecil. So, you know, it is what it is right now. And unless you see degradation and economic conditions that we think impact our portfolio, like Rich says, the provision should be based on growth.
Speaker 10: Got it, kind of. Thanks guys. And I think another one in here, thinking about the net interest margin talking, you know, 350 range, maybe 360 range. Is there a top on your net interest margin? And is there a point where maybe libor is not moving as quickly as the rate hike since libor's got in the head start here, and your deposit beta catches up. So potentially, do you hit 360 or so and then it starts to level off?
Speaker 7: I don't think so. And by the way, LIBOR is dead. We can't use it anymore.
Speaker 7: But...
Speaker 7: I think that you know you...
Speaker 7: It gets really bad if you see rates going to 16%. I doubt that's going to happen but
Speaker 7: I think that, you know, I would imagine the top, you could top over on four and a quarter paying high rate score. I think that's a very good example of a high rate score. The high rate score. The high rate score.
Speaker 7: four and a quarter, four and a half, go back to the old days.
Speaker 7: The pilot has to with mex and the man and that's where the sub two so
Speaker 7: I think that we're happy where it is right now and we're going to have to think about where we start locking it in because we don't know.
Speaker 7: We don't want the downside going forward and we're gonna have the ability, I think, we haven't had since really 9-11.
Speaker 7: Two, heads both sides of the earnings for period of time.
Speaker 7: so that we're not going to end up with rates go down to get slammed again. So, I already heard a work on that and use your help and pick in the top. We hit the top, we want to know and you could call and tell us.
Speaker 5: But the 350 is really based upon the consensus forecast right now. So I mean, you could pick all sorts of different interest rate scenarios where rates like Ed said would go up into the teens or something and we don't expect that to happen. We're dealing with what we see right now in front of us. And, but, you know, certainly could go higher and the positive bet is as we talked about our low right now, but we'll catch up at some point. So lots of moving parts, but...
Speaker 5: You know, we wouldn't guide you to where we think we're at if we didn't see a clear pathway to that. Cool. Thanks guys. I appreciate the color. I don't think 360 is the top I think is the issue. Yeah.
Speaker 4: Thank you. Again, to ask a question, press star one at this time. Again, the star one on your telephone to raise your hand in queue for a question. Press star one at this time.
Speaker 4: Our next question.
Speaker 14: comes on the line.
Speaker 4: of John Ashford.
Speaker 4: Your line is open.
Speaker 17: Good morning, guys.
Speaker 17: Okay, the best solace baby. Hey, don't you? Thank you. I'm good. Um, just to it may not matter that much, but I heard a couple of things on the margin guide I heard.
Speaker 17: 350 by the end of the year and then I heard 350 to 360 for the fourth quarter.
Speaker 17: It may not matter that much, but what are you guys really trying to say?
Speaker 11: I think John we're just cautious about what's going to happen with deposit costs a little bit and we just don't know through the end of the year but we again given the consensus forecast we think approaching 350 is.
Speaker 11: Certainly within range and if deposit pricing remains pretty muted, maybe we do a little better.
Speaker 17: Okay, and I guess the message for third quarter is...
Speaker 17: A similar type step up from what we just saw, especially if you get 75 next week. I'm going to start with a special type step up from what we just saw, and we'll see you in the next video. See you in the next video. See you in the next video.
Speaker 18: Yep.
Speaker 19: Pe.
Speaker 17: And then I want to push you guys a little on long growth as well.
Speaker 17: Murphy, you answered this a little bit earlier, but you know you guys did... Captain Murph, please. Captain Murph. I'm sorry, I'm sorry. You did five percent in the quarter and you've got period N that's higher than average by over a billion dollars and is the message don't expect this kind of growth again in Q3.
Speaker 17: And it should materially slow from here or is the message that this can continue at the current range that you're in, you just put up this past quarter.
Speaker 6: I would be surprised if it continued into the third quarter. We were pleasantly surprised in Q2. Part of it, as I said, was Q2 is definitely affected by the P&C portfolio. Being up $600 million there really drove a lot of that growth. We also saw the life portfolio and portfolio mortgages be higher than what we anticipated. The growth in P&C in the third quarter last year, I think...
Speaker 7: So probably 200 already. Just right. Okay.
Speaker 6: Yeah, it sounds like it's clients plus the market share shift that's driving all of us. That's fair. Yeah. Oh, I mean, I think that that's right, John . I mean, one of the things that, you know, I kind of highlighted in my comments is that that core C and I activity has been a real meaningful contributor to the growth and we're seeing a lot of disruption in the marketplace and that's not going away. So that core growth is really an important part of the story. And part of that, John is our pipelines are pretty stable, but our own use commitments.
Speaker 17: I understand that.
Speaker 17: commentary on the strong NII growth. I think you used that we're just outrunning expense growth but Dave any any other color or help?
Speaker 17: in terms of how material you expect the expense pressures to be.
Speaker 5: Well, I think the biggest area sort of is in the labor side of the equation. You know, you may have saw that we just announced that the effective August first will take our minimum wage rate from $15 to $18 per share. And that will have some impact. We saw our filling positions, open positions and making progress there, but that will continue to add. And, you know, if we really do step up earnings as we think based upon the growth and the margin expanses, we'll probably have some more incentive compensation out there. And the margin expanses will probably have some more incentive compensation out there.
Speaker 4: Thank you. At this time, I'd like to turn the call back over to Ed Wehmer for closing remarks. Sir.
Speaker 7: Thank you very much everybody. Thanks for listening in. We appreciate your support. Any questions or follow us on.
Speaker 7: If you want a phone call, they call any of the four of us.
Speaker 7: Dave ME??Mair4
Speaker 7: And Son Tim, but thanks for talking in this score. If not before, appreciate your support. Bye bye.
Speaker 7: and, uh, and some, and some Tim. But thanks for talking to this quarter. If not before, appreciate your support. Bye-bye.
Speaker 4: This concludes today's conference call. Thank you for participating. You may now disconnect.
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