Q1 2023 Wintrust Financial Corporation Earnings Call
Okay.
Welcome to win Trust financial Corporation's first quarter 2023 earnings Conference call.
Review of the results will be made by Edward Weymer, founder and Chief Executive Officer, Jim Craig President, David Dykstra, Vice Chairman and Chief operating Officer, and Richard Murphy, Vice Chairman and Chief lending officer as part of their reviews. The presenters may make reference to both the earnings press release and the earnings release.
Following the presentation, there will be a formal question and answer session. During the course of today's call. When trust 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 FCC 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 would now.
Now I'll turn the conference over to Mr. Edward Weymer.
We very much welcome everybody to our first quarter 2023 earnings call.
You heard with me are Jim Graner.
President and CEO and waiting.
Dave Dykstra, Vice chair and Chief operating Officer, Rich Murphy, our Vice chair and Chief lending Officer Kate.
Okay bogey, our general counsel.
I will say by the way so the shaft collar.
They have a delay on it but.
Try it came in like I say anything bad.
Davis our CFO .
Some of them have different approaches quarter. Some general comments from me timber to discuss operating results in detail, Dave Dykstra and to discuss other income or expense detail Herb will discuss credit in detail.
Tim.
His thoughts about the future back to me for some final thoughts.
Time for questions.
General comments, well beyond our record results I chose the right.
Turning to semi retire, but given the industry challenges.
During the quarter.
Just like Lloyd bridges, the movie airplane, I picked the wrong quarter, which different group.
Despite the turmoil in the banking industry required.
We recorded net record net income and P. P. P P earnings.
As the challenges, we face that face the industry.
Our consistent conservative approach to banking us to thrive during the times alright.
As you heard me say that concentration skill.
We've always been old school in Hollywood at Us.
So that's not changing.
We believe the current challenges in the industry open a lot of doors for us just like in the past industry Meltdowns for example, great recession. Our overall strategy resulted in record earnings of being one of the most acquisitive companies in the country.
Eric General results.
Also in Pandora, PPP loans or a real plus for us.
Spillover and then do a ton of new clients.
Back to the Russian ruble thing, we've always grab it smelling great because of our approach.
I expect we will continue to do the same.
Now ill turn over to Tim to talk about results.
Great. Thanks, Ed.
Obviously lots to talk about in terms of both the balance sheet in a recent industry developments.
It's important to note that many of my comments as well as rich in days to come are supported by slides that we've included in our earnings presentation that may be helpful.
First with respect to deposits deposits for the quarter were down four tenths of a percent of $184 million essentially flat in a period, where we often see some seasonal outflows while.
While we spent a great deal of time communicating with our clients in the days after March 10th.
And saw a significant shift in our deposit mix, which I'll discuss in a moment our overall level of deposits remained very stable.
In terms of additional detail.
<unk> deposits were actually up for the quarter and the offset was primarily in our SEDAR group deposits related to our 10 31 real estate related exchange business.
And we're down in our wealth management area, where we continue to see some movement to treasuries into money market funds, presumably for both rate and insurance reasons.
Except for municipal deposits, which are in almost all cases ensured our collateralized. We do not have any significant deposit concentrations are average deposit account size is under $70000. We don't have any exposure to crypto deposit activity.
In addition, both our federal home loan bank in total overall non deposit borrowings were unchanged in the quarter, we didnt borrow from the fed discount window and have no intent to use the bank term funding facility.
During the quarter again, we saw movement from noninterest bearing deposits to both our unique when trust Max safe product, which provides customers up to $3 $75 million in insurance per account holder and other reciprocal insured products.
Max safe deposits increased by about $1 billion during the quarter with another several hundred million dollars, primarily larger deposits moving to other reciprocal insured products.
Noninterest bearing deposits at the end of the quarter represented 26% of total deposits are returned to near pre pandemic levels consistent with a more normal rate environment.
These movements do not appear to be unique to us.
But they obviously increased the cost of deposits for the quarter interest bearing deposit costs were $1 97 up 67 basis points.
Our interest bearing deposit beta through the first quarter was 36%. We expect the activities post March 10th will result in interest bearing deposit beta over the full cycle in excess of the 45% that we had previously projected currently we are assuming a full cycle cycle number of approximately 50%.
At quarter end fully insured or collateralized deposits totaled about 70% of total deposits.
A number that continues to trend higher.
Loan growth for the quarter was about $370 million on the low end of our range Rich will talk about loan growth loan composition and continued strong credit performance in just a few minutes.
With respect to the net interest margin it was up 10 basis points to 383.
We're pleased with this result in light of the late quarter pressure on deposit costs and the negative impact of our hedging activities.
While we expect deposit cost increases and incremental mix change may continue we believe given the current rate environment and the continued benefit associated with the favorable repricing of our premium finance loans.
As a reminder, those are about a third of our loan book.
That will maintain a margin of approximately $3 70 for the next several quarters.
Given the assumptions around our balance sheet, we remain slightly asset sensitive and additional 25 basis point increase in rates if that were to occur would all else equal will provide approximately $20 million in benefit in terms of net interest income on an annualized basis.
The strong earnings for the quarter produced a material increase in our capital ratios total risk based capital increased to 12, 1% CET one to nine 2%. Both we believe are appropriate on a risk adjusted basis and should continue to expand.
<unk> book value in the quarter increased materially to nine to $64 22 per share.
Just a quick note on securities and capital.
Combined unrealized pretax securities losses, both a available for sale and held to maturity at.
At the end of the quarter totaled approximately $1 $1 billion.
If a regulatory rule change occurred and we were forced to mark our entire securities portfolio. The bank would remain well capitalized.
So despite the external volatility in the latter part of March and the prospect for evolving deposit related behavior change, we continue to see very good pipelines opportunities in the market and typical client activities.
Dave.
Alright, Thanks, Tim.
Ill cover some of the noteworthy income statement categories, starting with net interest income for the first quarter of 2023 net interest income totaled $458 million that was an increase of $1 2 million as compared to the prior quarter and an increase of $158 7 million as compared to the first quarter of 2022.
The $1 $2 million increase in net interest income as compared to the prior quarter was primarily due to the improvement in the net interest margin that Tim talked about partially offset by the impact of having two fewer days in the quarter.
The impact.
Having two fewer days relative to the fourth quarter was approximately $10 million. So in other words, one day is worth about $5 million of net interest income to us.
The net interest margin improved 10 basis points from the prior quarter to 383% of.
Beneficial increase of 61 basis points on the yield on earning assets and a 17 basis point increase in the net free funds contribution combined.
Combined with the 68 basis point increase for the rate paid on the liabilities resulted in the improved margin.
The increase in the yield on the earning assets as compared to the prior quarter was primarily due to a 67 basis point improvement in loan yields.
Higher liquidity management asset yield as a company.
Earned higher short term yields on the interest bearing deposits held at banks and its investment securities.
The increase in the rate paid on interest bearing liabilities in the first quarter as compared to the prior quarter was driven by 67 basis point increase in the rate paid on interest bearing deposits.
Interesting to note that both the loan yield increase on the deposit costs increase were about 67 basis points.
Changes during the quarter.
We continue to believe that our relatively short term an asset sensitive balance sheet structure can provide for margin stability as our premium finance portfolios, which comprise roughly a third of our loan portfolio should continue to re price upwards over the course of this year, which should substantially mitigate the rise in deposit pricing.
Also as we discussed on prior calls the company has been entered into interest rate derivative transaction, specifically swap and collar contracts to protect our net interest margin in a falling rate environment.
Our earnings presentation deck has the details of those derivative positions, including terms and rates for your information the.
The impact of those derivative transactions during the quarter was to limit the net interest margin expansion by seven basis points in other words in and its margin would have expanded by 17 basis points during the quarter, rather than 10 basis points. If we had not entered into those contracts. We believe it is prudent in the current environment to sacrifice some current margin expansion to <unk>.
Again, a downside risk if interest rates were to decline materially in the future.
Turning to the provision for credit losses, when trust recorded a provision for credit losses of $23 million in the first quarter compared to a provision of $47 6 million in the prior quarter.
And a $4 1 million provision expense recorded in the year ago quarter, a lower provision expense in the first quarter relative to the prior quarter was primarily a result of less loan growth during the quarter and changes to the macroeconomic outlook related to projected credit spreads in commercial real estate price index data rich.
Rich Murphy, who will talk about credit in just a bit but I should note that the current quarter net charge offs in the mix of classified loans remained relatively stable and very good and did not have a significant impact on the level of the first quarter's provision for credit losses.
Turning to the noninterest income and noninterest expense sections total noninterest income totaled $107 8 million in the first quarter and was up nearly $14 million when compared to the prior quarter total of $93 8 million.
The primary reasons for the increase were due to an 8 million $8 $1 million improvement in the gains and losses related to the company's securities portfolio. The.
The company recorded a gain of one 4 million in the first quarter of 2023 compared to a loss of $6 $7 million recorded in the fourth quarter of 2022.
The quarterly fluctuation was primarily related to changes in equity valuations that affect a portion of our securities portfolio and not from sales of securities.
A $2 $4 million increase in fees on covered call options in the first quarter of 2023 relative to the prior quarter also contributed to the increase.
And a <unk> $9 million increase in mortgage banking revenue as production margins improved which more than offset a slight decline in the volume of loans originated during the first quarter of the year.
We saw mortgage application volume increased slightly during each month of the first quarter and are seeing continued increases in loan application volume early in the second quarter, albeit still relatively small increases, but this should provide support to the mortgage banking revenue in the second quarter. Additionally for your information.
80% of the application volume is related to purchased home activity.
On the noninterest expense categories noninterest expenses totaled $299 $2 million in the first quarter and were down approximately $8 $7 million when compared to the prior quarter total of $307 8 million.
The primary reasons for the decrease were due to salaries and employee benefit expenses decreasing by approximately $3 6 million in the first quarter as compared to the fourth quarter of last year.
Relative to the prior quarter. The current quarter decline is primarily due to lower commissions and incentive compensation of approximately $9 7 million largely related to lower incentive compensation accruals. The category also saw approximately $1 9 million of lower employee benefits expense due to fewer health insurance claims.
During the quarter.
These declines were partially offset by approximately $8 1 million of increased salary expense, primarily due to the impact of annual merit increases that took effect in the first quarter.
Our advertising and marketing expenses decreased by $2 $3 million in the first quarter of 2023, when compared to the prior quarter as we have discussed on previous calls this category of expenses tends to be lower in the fourth and the first quarters of the year.
Advertising and marketing expense is expected to increase in the second quarter two are due to our marketing and sponsorship expenditures related to various major and minor League baseball sponsorships other summertime sponsorship events held in the communities that we serve.
And marketing of our brand and deposit products lending.
Lending expenses also declined approximately $3 $2 million due to lower overall loan origination activity experienced in the first quarter.
Offsetting these expense declines noted was a $1 $9 million increase in FDIC insurance expense, which was primarily related to the two basis point increase in the assess premiums at the FDIC began imposing on financial institutions in 2023.
Other than those expense categories that I just discussed all other expense categories in the aggregate were down by approximately $1 $5 million compared to the fourth quarter of 2022.
Our efficiency ratio declined to 53% for the first quarter from 55% in the fourth quarter of 2022 as expenses did not increase at a rate commensurate with the increase in revenues and our net overhead ratio was 149% in the first quarter and lower than the 163% in the prior quarter due to slightly higher fee income and well controlled expenses.
<unk>.
Looking forward, we expect fee income and noninterest expenses to increase somewhat as a result of the wealth management acquisition, which was completed at the beginning of April .
We would also expect mortgage revenues and related expenses to increase slightly as springtime hastens the home buying season. Additionally, as I noted earlier, the seasonal increase in marketing and sponsorships will add to that in the expense category.
We anticipate slightly higher wealth management mortgage revenues and slightly higher <unk> expenses.
<unk> expenses in the future quarters, but depending on the mortgage volumes on balance sheet growth, we would still expect to maintain our net overhead ratio in the one five to one 6% range that we have generally experienced the last two quarters. So with that I'll conclude my comments and turn it over to rich Murphy to discuss credit.
Thanks, Dave as noted earlier credit performance for the first quarter was very solid from a number of perspectives.
As detailed on slide seven of the deck loan growth for the quarter was $369 million or three 8% annualized.
Loan growth was largely concentrated in two portfolios.
Real estate, which grew by $288 million, which was primarily draws on existing loans and residential real estate, which was up $133 million.
This rate of loan growth is slower than what we have seen for some time and below our guidance of mid to high single digits. We.
We believe this slower growth is attributable to several factors.
First quarter is generally the slowest quarter for core loan production and is a seasonally slow quarter for the commercial premium finance portfolio.
Higher borrowing costs of force borrowers to reconsider the economics of new projects business expansion equipment purchases and premium finance costs.
And overall business sentiment, which has dropped during the past few months.
However, we can see continue to see solid momentum in our core C&I and CRE pipelines.
Disruptions in the banking landscape continue to work to our benefit as we have seen numerous quality opportunities from other regional banks.
Also while commercial premium finance loans were down by $111 million in the first quarter based on the historic seasonality, we would anticipate that this portfolio will show solid growth in Q2.
As noted in prior earnings call, we continue to be optimistic about loan growth in 2023, but we would anticipate the pace of growth may try and closer to the lower end of the guidance for a number of reasons.
The winter is life finance portfolio grew by $35 million during the first quarter of 2023 2023 compared to a $300 million in the first quarter of 2022.
The rapid increases in rates during the past year have significantly affected the pace of growth.
We would anticipate the slower rate of growth will continue in this higher rate environment.
And increases in commercial line utilization, excluding leases and mortgage warehouse lines continued to flatten during the first quarter, reflecting a more cautious business sentiment and higher borrowing costs.
As a result, while we continue to be diligent about and preparing for the possibility of a business recession, we believe our diversified portfolio and position within the competitive banking landscape will allow us to grow within our guidance of mid to high single digits and maintained our credit discipline.
From a credit quality perspective as detailed on slide 15, we continue to see strong credit performance across the portfolio.
This can be seen in a number of ways nonperforming loans remained stable at 25 basis points or $101 million equal to the total we saw in Q4.
Overall npls continue to be at historically low levels and we are still confident about the solid credit metrics of the portfolio.
Charge offs for the quarter were only $5 5 million or six basis points and as detailed on slide 15, we saw stable level in our special mentioned substandard loans with no meaningful signs of additional economic stress at the customer level.
Finally, as Ed mentioned the.
The granularity of our loan portfolio has always been a critical pillar of the winter a story.
This can be seen clearly on slide seven where the portfolio has been built around commercial.
Premium finance and niche lending.
Currently commercial real estate loans comprise roughly a quarter of our portfolio. While we closely monitor all elements of our loan portfolio. We are paying particular attention to this segment.
Borrowing costs and pressure on lease rates are cause for concern, particularly in the office category on slide 18, we have highlighted a number of important elements of our office portfolio.
Currently this portfolio totaled $1 4 billion or 13, 6% of our total CRE portfolio and only three 5% of our total loan portfolio.
Of the $1 4 billion of office exposure close to 40% is medical office are owner occupied.
The average size of a loan in the office portfolio was only $1 3 million.
We have only five loans in the portfolio above $20 million.
There has been significant concern about office properties located within the central business districts.
Our CBD exposure is limited to $358 million or approximately.
Excuse me approximately one quarter of the office portfolio.
This is in Chicago and half is in other cities.
Bulk of the portfolio is located in suburban areas and areas outside CBD.
And portfolio performance to date has been very good but no loans currently over 90 days past due.
We continue to perform portfolio reviews regularly in this portfolio and have stayed very engaged with our borrowers.
We are not immune from macro effects that challenges product type, but we believe our portfolio is well constructed very granular and should perform well moving forward.
As noted earlier higher borrowing costs and pressure on lease renewals are having a meaningful effect across the CRE space to better understand how these issues could impact our portfolio. Our CRE credit team has performed a deep dive analysis on every loan over $2 $5 million, which will be renewing between now and year end. This analysis, which covered 77% of all CRE loans maturing this year.
<unk> in the following more.
More than 60% of these loans will clearly qualify for a renewal at prevailing rates.
Roughly 25% of these laws are anticipated anticipated to be paid off or will require a short term extension that prevailing rates.
And approximately 15% of the loans will require some additional attention which could include a pay down or a pledge of additional collateral.
We have tentative agreement on renewal terms with more than half of the borrowers in this final group.
Again, our portfolio is not immune from the effects of rising rates or the market forces behind lease rates, but we have been diligently identifying any potential weaknesses in the portfolio and working with our borrowers to identify the best possible outcomes.
That concludes my comments on credit and I'll turn it back to Tim.
Thanks, Rich before read Ed wraps up and we take a few questions.
Just a couple of comments.
First maybe the events of the last three weeks of March serve as a good reminder, that as much as people think of banks as a commodity.
We believe that's absolutely not the case.
We continue to be uniquely positioned to take advantage of disruption in the market. We frequently talk about that on these calls.
Relative to many of our larger peer banks, we provided distinctly different experience.
We provide a level of service that our customers value evidenced by the J D power in Greenwich in other words, we receive.
We've stayed very disciplined with respect to credit and risk management, even when some haven't.
We have a diversified mix of consumer and commercial businesses built on stock strong relationships.
Our model has really been all about being the best alternative to larger banks and that opportunity continues to exist today in some ways more than ever and.
And so I'll pause there and then I've got some wrap up comments at the end, but that's what I've got.
Okay. Thank you Tim.
Well as you know this is my last earnings call.
Mr Banner relationships they have with all of you.
That being said it will still be involved in the foreseeable future unlimited capacity as chairman.
Make no mistake about it though there's only one CEO SME Tim.
You'll have one guys hands on the wheel there'll be is I'm here to help and service and AG can do to help.
<unk> organization.
Go and the great growth it's had.
<unk>.
I think obviously all of you for your support through the ages.
Other than the shortages out there hope you continue to lose money on with trust.
I can assure the winter grade Haynesville continue to plow through and tried to marry the issue with it.
Best management team people in the business.
As always you can be sure the team's best efforts in that regard.
Tim back to you.
Great why don't we go ahead and open it up for questions and I have a quick summary at the end.
Thank you as a reminder to ask a question you will need to press star one one on your telephone again Thats Star one one on your telephone to ask a question.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of John <unk> of RBC capital markets. Your line is open. Thanks, good morning, everyone.
Hey, Jonathan Thanks.
Thanks for everything.
Fun earnings calls over the last 25 or so years.
The <unk> price list. So thank you for all of those.
Sure.
Youre welcome.
Yes that was great.
Guys I wanted to ask you a little bit about the margin the $3 70 guidance.
Maybe obvious but talk a little bit about some of the puts and takes and the factors that would drive it up or down from there.
Share with us what kind of interest rate and deposit flow assumptions that youre building into that outlook.
Yeah sure John This is Tim.
Obviously, the deposit mix has been one of the changes that's put some pressure on the margin the other as Dave mentioned as to kind of the hedging.
Activities that we think will provide good support for the margin in a lower rate environment.
We're getting back to.
DDA mix, that's similar to pre pandemic and so.
The hope is that that.
<unk> slows but.
That's certainly one of the things that we're watching pretty carefully.
And the other is our opportunity to grow we think we've got really nice loan opportunities in the market right now and working hard to do.
Use our 15 charter model to grow deposits and to take advantage of some dislocation in the market. So.
Those would be a couple of other factors.
Going forward, the hedge expenses, a little bit higher.
In terms of the seven basis points goes to something like 15, but again, we think that's a prudent investment at this point.
Yes.
We added we put it.
In the slide deck, we put us.
Presentation on about the swaps that we added during the quarter, but they were only off a part of the quarter. There was only a partial hedge so that 370 sort of includes going from 715 basis spreads on that on that.
Those derivative positions. So that's part of the equation too, but we noted this last quarter too and I noted in my comments, but we still have a fair amount of asset beta out there to to offset some of this deposit pressure that we saw.
The decrease there is really the sort of the mix shift.
And people moving in.
Interest bearing deposits from DDA, but.
We do have a $13 billion roughly of premium finance loans. It still reprice over the course of the year and is that repricing occurs that will substantially offset the positive pricing.
We expect to continue a little bit here in the future. So we hope to hold it there has sort of where it was at the end of the quarter a little less than we thought because of this deposit mix, but we think we're positioned well and as Tim said.
We really think our positioning in Chicago is wonderful.
We are Chicago's bank, we win all these.
Awards for good customer service.
And we get those awards, because we give good customer service and if we go out in this environment and sell our products. We think we think we can grow deposits and fund this loan growth that's out there and theres a lot of things in the mix, but.
We've always been able to manage through it before so we think we think that $3 70 number we can hold in.
Hold through the rest of the era.
Assuming something really dramatic doesn't happen to the yield curve.
Great assumption of the <unk>.
<unk> curve is that right.
Yes pretty much.
Pretty much John .
Kind of thinking we will get one more here at some point in the second quarter.
Okay. Okay.
Yes.
Rich maybe for you on loan growth, Dave alluded to that.
<unk>.
One of the keys to holding that.
You talked about slower utilization.
Pre or post March 8th.
And how dramatically if things changed in terms of your pipelines in demands since March.
Yes, well utilize utilization I think really.
He has been <unk>.
Most.
The entirety of the year I mean, we've just seen that utilization kind of just flat, we anticipated would come up a little bit more back to more historic norms, but I think the higher borrowing costs really have.
Put a chill on that a little bit.
Not down dramatically, but just not recovering to the levels that we had seen historically.
In terms of overall loan demand.
As I talked about I think we have a big tailwind with.
No.
Property and casualty group because.
We can already see the fundings that are going to be coming here.
Over the course of the rest of this year, but I think the thing that is most encouraging is that our core pipeline.
C&I and CRE, both theyre at very good levels.
And again I'm not necessarily sure if it's the pie growing or.
My suspicion is we just continue to see opportunities coming out of large banks other regionals, where theyre just pulsing in and out of the market.
The ability to get a timely answer has really been an issue in our.
Our teams have been very quick to respond and we're just seeing continued opportunity in that space. So those are the things that I would point to as being most opportunistic about.
Okay.
Alright, Thanks, guys I appreciate it.
Thank you.
Thank you.
Our next question.
Comes from the line of David Long of Raymond James Your question. Please David.
Good morning, everyone and thanks.
My question.
Just to start off I know you are not going away, but you will be missed on these calls going forward really appreciate your candor over the years and you wanted to wish you the best.
Hand over the reins Tim and the rest of the team and do look forward to seeing you again sometime soon.
Congratulations.
Thanks.
Far as as far as the.
Thinking about the quarter here.
The interest rate hedges it looks like it maybe added a couple of here in early April .
Puts you close to about 6 billion in notional value will you go much higher than that is there do you have illumina as to how high you want to go or is this sort of a.
Kind of like your overall strategy take what the market gives you here.
Yes.
I think a little bit of the latter David we'll kind of see where the curve goes here, but as you can see from the interest sensitivity slides that we include in the deck were getting close to the point where.
We're more neutral than not so.
We think we think these last couple were nice ads, we caught the market at a good time.
If rates start to drift downward we've got a little bit of insurance that will help us here.
So I am sure again opportunistic.
Okay.
And then the you talked about the mix getting closer to where you were pre pandemic now most of the last 15 years, we've been in a zero interest rate environment outside of 2018 and 19 Raleigh.
Can deposit or Ken noninterest bearing deposits drop materially from here go back go back to pre GSE.
15 years ago, the average for the industry. It was almost half of what it's been since then.
Can we go back that lowers there or is there structural changes that won't allow noninterest bearing deposits to go down to 15% to 16% for the industry. How do you see that.
Well I think for us the structural change has been the growth of our commercial businesses and so they carry with them.
DDA deposits related to paying for both treasury services in excess so.
I would hope that we don't go back that that low and that we've got some very material differences in terms of how we looked.
Pre 2008 or 2010.
But clearly the events of the second half of March have everybody to looking at their deposits very carefully and so those conversations continue around the bank, but our treasury results continue to be good and so more and more of the balances here are used to pay for treasury and other services.
Got it thanks, I'll jump back in the queue. Thanks, guys.
Okay.
Thank you. Our next question comes from the line.
Chris Mcgratty of <unk>. Your line is open Chris.
Okay great.
Echo.
The nice words towards Ed.
In terms of the.
Of course.
Tim or Dave maybe on the margin of 370, I think in the release that the next couple of quarters.
Maybe more of a medium term question if the forward curve plays out and you get cut next year like how much downside from 370 do you see.
Yes.
Yes.
And then how.
Steve do you think it's going to drop I guess.
You can look like.
Our hedges for it we think we're fairly balanced as far as our deposits on our loan loans goal.
We've really mitigated the upside and the downside so we give that sensitivity.
In the press press release, but like the derivatives. If you look at that we probably average out in.
Tom on the swaps in the high 3% range and so.
If rates came down 150 basis points and those would actually start to contribute.
The margins will probably a little bit of pressure down 150 basis points and then after that we hold on but in the prior cycle.
<unk> and rates dropped dramatically.
As you know our margin fell into the mid twos.
We think this margin would stay in the in the threes.
<unk>.
So we think we've mitigated some of that downside risk but.
I guess it depends on the shape of the curve and the and the slope of it but.
We're hoping to hey, we're hoping to hang onto it.
Fairly substantially with a little bit of pressure if rates dropped dramatically until the mortgage it could could kick back in to offset that.
Okay great.
And maybe just two follow ups I think in the past you've talked kind of high single digit expense growth I. Appreciate the color for next quarter, but just given the changes in the environment is that still.
A reasonable ZIP code for a full year and then also can you help us on the covered call trajectory. Obviously you are pretty active there. Thanks.
Yes.
You have to see whether the regulators do anything dramatic that would change that would change.
Knowing that.
I don't think we have a different outlook for our expense structure. This year.
We're pleased with this quarter.
There is some unique attributes.
<unk> kept at lower leg.
The health insurance claims were down a little bit et cetera, but.
And mortgages are sort of at their low point as far as things go we hope mortgages actually pick up here, which will increase the expense base, but we will have.
We'll have more revenue there too so.
That's not a bad reason for the expenses to increase but we still hold onto that for a full year.
And there will be some increase as I said in the second quarter with the acquisition and the marketing.
We'll probably health insurance claims will probably normalize et cetera, but we sort of focus on the net net because his wife goes up on the revenue side. The expenses go up too and as mortgages goes up on the revenue side expenses go up and so it's hard to peg that expense number specifically, so we're still targeting that net overhead ratio and.
And it sort of takes into account the fluctuations of those revenue streams.
Going up and up and down with market conditions, but I don't see I think dramatically structurally changing here right now.
Really.
The deposit cost side of the equation that had a little bit of impact this quarter with the sort of the structural mix shift there that happened.
This whole situation sort of woke up the sleeping hybrid native bear as far as people looking at their rates paid on deposits I think we've seen a substantial part of that move already so I don't expect it.
They have a similar shift this quarter.
Okay.
Great and how about the covered call.
Outlook.
And then sort of depends on where rates are usually helps protect that down downside rate environment.
As we invest.
The volatility at the beginning of this year.
The covered call fee income if you go back over time this was a little bit of a higher level than we've seen over the prior four quarters, but there was there is higher volatility.
The fee range.
Is based on the volume of Securities that you write calls against but also volatility and we saw much higher volatility. So I would expect that to be down a little bit.
And the <unk>.
Second quarter, because we just have we have been retaining a lot of those securities as liquidity just to be cautious early in the quarter. So we'll see how it plays out the rest of the quarter, but I imagine that's down a little bit, but there'll still be some.
Alright, great. Thanks, Thank you.
Thank you.
Our next question.
Comes from the line of Casey Haire of Jefferies. Please go ahead Casey.
Great. Thanks.
Just one follow up for me.
The ramp scenario that you guys highlight.
<unk>.
Fed cuts down 1%.
Just curious what kind of what kind of deposit beta you guys anticipate in and mix under that kind of scenario, which is which is obviously pretty good.
Yes, I mean I think.
I'm not sure I understand the nuance of your question, maybe Casey, but we're assuming that.
We're going to get probably to a 50% ish range for the full cycle here and so.
Depends on the timing of those cuts, but as you can see in kind of the progression of those numbers and I want to say table seven Dave is that right.
We've narrowed our asset sensitivity position dramatically over the last four or five quarters here. So.
If that's if I'm not doing a good job answering your question.
Try again here.
Right. So just similar is it similar.
Based on the way down as it was on the way up.
Paul.
Now as a down would be a little bit faster than.
We lag on the way up we would we would be quicker on the way down so it would be a little bit accelerated and I think you can see that because on the up.
To make a one 7% on the upside under the ramp scenario, but only one 3% on the downside.
A little bit faster cuts.
Deposit rates on the downside I don't have the exact.
Ada for that.
Fingertips, but a little bit faster.
Got you okay.
Just one more I think I know the answer but just wanted to check it with loan growth a little slower here any any appetite for share buyback.
Okay.
Yes.
We don't plan on it right now we certainly have an appetite because we think we all believe we're undervalued here, but I think.
I think we'd like to see how this plays out a little bit as rich said the loan growth a little slower this quarter, but pipelines are were higher at the end of the first quarter than they were at the end of the fourth quarter. There's good loan demand out there so.
We will play play this out and see how that goes we would rather reinvest in the business and take advantage of this disrupted market like we've done in the past then go raise deposits in and bring in new clients and expand the franchise. So I think we're going to we're going to see how that plays out first.
That's always been our that's always been our goal is to grow the franchise and take advantage of disruption.
Okay, great. Thanks, and best wishes in retirement Hope you spent a lot of time and regularly.
Rob Tonight.
Yes.
Thank you.
Our next question.
Comes from the line of Nathan race Piper Sandler. Please go ahead Nathan.
Yes, Hi, guys. Good morning, I also just want to echo everyone else's comments and wishing you well Ed as he transitions chairman and it's been great working with you over the years.
Okay.
Just kind of thinking about the deposit growth outlook from here. It sounds like you guys had some nice inflows year to date with the Max safe products I'm curious how much of that occurred post the bank failures that we saw in early March and just kind of Howard deposit flows trending quarter to date, and just kind of the overall outlook for.
Core deposit growth.
The course of this year within the context of maybe kind of what youre seeing in terms of opportunities to add new relationships in the wake of some of the M&A related disruption that we've seen in Chicago lately.
Yes, there were a couple of questions in there Nate one with respect to Max Safe, we were growing deposits prior to March 10th, but clearly that activity accelerated.
Demand for sort of insurance related products, and Max safe and the other reciprocal products that can handle even larger amounts got a lot of airtime in a lot of popularity. So.
The majority of the Max safe growth occurred in March.
We continue to think we're really really well positioned though and so.
This is the time of year, where kind of wrestling some tax outflows as well, we think we're kind of weathering those just fine.
Quarter to date is rich kind of inferred the loan growth is pretty good the deposits remained stable and we've actually paid down some of the home loan borrowings so.
We think we're in a pretty good place here and we're very focused on growing deposits and continuing to fund the loan growth.
Okay got it and then just in terms of the balance sheet size from here and specifically the earning asset base is kind of stable quarter over quarter.
Is that kind of a reasonable expectation to assume over the next couple of quarters as you just take securities cash flow runoff and.
Redeploy that into kind of mid to low single digit loan growth or how do you guys kind of think about kind of overall, earning asset growth from here.
We sort of like where are securities positions are at we would expect the balance sheet to grow.
We're going to go out and we're going to go out and market.
Our deposit products in our communities and our consumer deposits grew during the quarter and we expect that to continue to go on.
In the middle market space.
We're strong in with the pipelines full we expect to bring in new customers. So our expectation is that we will grow the balance sheet through deposit Samuel and that translates into loan growth and not run.
Not just run the securities portfolio down to fund that growth.
Growth come in we got to continue to grow.
<unk>.
Look as we won the J D Power Award again this year.
For years, we want it.
Another eight granted towards this year.
Our products are part of the big guys.
Well I have to sell here plus our positioning as local bank.
There are some real neat ideas about helping people.
Move their accounts.
It's a pain.
Your primary account.
Is that accurate.
Again the chart that we have.
Meanwhile, and offer a teaser rate and the <unk>.
Lower.
Smaller locations.
<unk> so.
Great shape in that regard, we've got to grow through it we always do.
Okay, Great that's helpful and if I could just ask one more on the recently closed Rothschild.
Acquisition.
Any kind of guide rails that you guys can provide in terms of kind of the fee or expense impact or just kind of what you guys expect to have in terms of the pre tax margin from those assets and team.
Joining.
Initially.
Expenses might be a little higher because as we transition it into ours or they've got some duplicate systems until we.
Convert and alike.
B some integration expenses, but.
That number is probably in the second quarter somewhere in the.
$7 million to $8 million range with some of the transitional.
Gration costs.
Fees, obviously, we'll make a margin on that we haven't disclosed what the fees are yet.
I don't necessarily want to give away what our pricing is on those assets that we acquired but.
I think you can kind of ballpark it.
Pretty well with that background.
Yes.
Pre tax margin just similar to what you guys. Currently earned on Great Lakes advisors that kind of a good proxy Dave.
I would think that their business was in Florida.
<unk> asset management business would be very.
Very similar to ours.
Then with the front end implementation expense, though so little bit of time to get there.
But we think great we think great leverage combining the systems.
It was a nice add on to the assets under management and it will give us leverage so it might take us a couple of quarters.
Squeeze all all of the integration stuff out but.
Very excited about the acquisition very excited about the team that.
We're bringing on and look forward to.
To continue to have that be a growth area for our fee income.
Got you that's great.
Great color. Thanks again guys. Thank.
Thank you.
Thank you our next question.
Comes from the line of Brody Preston of UBS. Your question. Please Brody.
Hey, good morning, everyone. Thanks for taking my questions.
I wanted to just follow up on on the.
On <unk> line of questioning on the Rothschild just on the expenses, you said, 7% to eight but some of Thats transitional I guess could you help us think about as you once those transitional costs are out of the run rate. What you think the go forward run rate.
Specifically to Rothschild the Rothschild acquisition Ruby.
Four to six ish something like that.
Again.
Our whole two weeks into this in terms of our implementation activities. So it just depends on how we grow that business.
<unk>.
Yes.
If we can grow that business more of that there is a little bit more expense that will go with it but.
<unk> plus or minus.
Got it okay. Thank you for that.
And then I just wanted to circle back on the on the swaps I appreciate the detail on slide 22, so I can kind of.
I'm trying to work through that myself, but I did just wanted to ask if you could clarify for us like how much of the in the $3 70 margin at quarter end.
How much was where the swaps are negatively impacting that just in terms of basis points.
It's about seven basis points, and we would project since we added some in the first quarter that that number would go up yes, but that seven basis points for the full for greater but that 370 probably has.
10% to 15% to 15 basis points on it.
Yes, yes.
Yes, yes that was the number I was looking for thank you for that.
And then I just wanted to ask just one last one well too.
Just on the <unk>.
You guys are unique in this sense that the <unk> have been pressured but I just wanted to ask do you have a good sense for like when the when the tide kind of could stem. There like are you kind of close to what you would think would be level.
Customers needed to keep from an operational account perspective are you expecting to see more.
Headwinds.
Noninterest bearing going forward.
Yes, I mean, I think hard to say I mean again, we're we're growing the amount of DDA deposits that are required at the bank to pay for services.
We're adding commercial relationships so.
Is there going to be more migration I don't know, we clearly think we've talked to most of our largest clients over the last several weeks in some cases more than once.
But.
It's kind of hard to say and I don't think we're an outlier I think we're kind of seeing what everybody else is seeing here.
And our gut would sort of say it's stabilized that there is an initial.
People paid attention to their bank accounts all of a sudden and realize that there is some.
Some interest bearing monies that could move up move away or throw into Max eight or whatever.
Alright.
I think that we've probably seen the bulk of it we actually think it's probably stabilized but.
Your guess is as good a mind as far as what the industry may do but we do think that they do need this base level of accounts there to pay for fees and operate their businesses.
That's our best guess right now is it stabilized but.
Got it okay I understand it's tough and then the last one I had.
Ed was just rich I wanted to just follow.
Follow up on the.
The detail you gave on the CRE analysis, particularly as it relates to the 25% that are anticipated that would be paid off or require a short term extension at prevailing rates. So.
I think the prevailing rates part is the key right like you. Obviously, you think that in the short term these borrowers could support a higher rate, but it sounds like just the way you phrase that you don't necessarily think these are credits that you would want on balance sheet from a longer term extension.
The endpoint so could you help us think through what's going on with that 25% or you say, yes, you can afford it but we don't necessarily think we want to keep you.
No that's not the case that those are really I'd say more construction loans things like that where we have <unk> and have a mini perm and long term fixed rate loans typically are not where we want to put a lot of those assets and there are better alternatives out in the market. So those.
That's just part of where we fit into the spectrum and CRE. So these are that's what we typically see all the time our runoff on CRE is substantial so we would anticipate that that will continue to be the case and those these are loans that are stabilized and ready to go and we anticipate they will move out without a problem.
Got it so it's really that last bucket, the 15% that require additional attention where youre spending more of your time exactly that's our focus right now are those that.
Because of the market dynamics, we've talked about rising rates and pressured.
Leasing activity that they are not at our required debt service coverage and so theyre going to have to figure out how to either through paydowns or additional collateral or something we're going to have to figure out a better starting point to a number of them already have it yet yes, we're already in agreement with those identified loans, we've already identified sort of the path forward for better than that.
Half of them in.
Generally speaking because I think we are very thoughtful about client selection, we should be able to reach agreement.
The great majority of if not all.
Got it. Thank you very much for that color I. Appreciate you taking my questions no problem. Thank you.
Thank you.
Our next question.
Comes from Jeff Lewis.
D a davidson.
Thanks, Good morning.
Just wanted to circle back.
The optimism on that pipeline could you remind us what that actually is as you entered the quarter versus where it was at the start of the year.
Yes.
We havent disclosed that but generally in the past it's been run in the last few quarters, just for commercial and commercial real estate not the premium finance in the niche.
Businesses, there are the residential real estate, but just the commercial and commercial real estate I think our gross pipelines have generally been in the one two to one $3 billion range I think we're more in the one five to $1 6 billion and now that doesn't mean those are all going to close at the pipeline and and timing isn't always linear.
But the fact I look at that more as a barometer as to how is loan demand shaping up so it has.
In the first quarter now whether that all comes through or not.
I'm not saying that that's the case, but generally our pipelines are good indicator of demand and future closings, so up a little bit but still relatively stable. It's not like it went from 1 billion to $2 5 billion, but in step a little bit.
The other thing is that as Dave pointed out Thats, the core CRE and C&I that doesn't include the leasing portfolio, which we've seen really good activity in so far this year and as we also talked about in that.
My comments.
Commercial premium finance group, where we're seeing fairly robust growth through the rest of the year. So.
Earlier on somebody May have said that our guidance has changed and it hasnt changed.
Just had indicated that with a slower first quarter end.
Just where the economy is in general we would anticipate that it's going to be to the mid or bottom end of that range of mid to high single digits. So just a point of clarification there.
Okay, Alright, that's helpful. Those last comments.
You sound optimistic I think.
Kind of maybe hedging that a bit just macro and a slow start but so again the guidance is.
Mid to high and maybe youre going to hug the.
For now but.
Kind of continued update us.
Helpful.
Okay.
And rich rich Rich mentioned, that's one of the Wildcards, obviously is what our competitors are doing and thats.
Then a little bit harder to determine over the last months than it typically is so.
Just another factor.
Yes.
Fair enough.
Just on a related front my other question just.
And it sounds like Youre getting some opportunities organically, but wanted to check back in on that on the M&A side and your thoughts obviously, a volatile environment, but also opportunity potentially so any thoughts on looking at whole bank do you look at more of the like what you've done on the wealth management side any thoughts on.
The acquisition front.
Right.
As you recall the last two have been non bank the wealth management acquisition as well as of about a little over a year ago, the Allstate agent finance.
We've talked about.
Fair amount of sort of exploratory activity that really hasnt turned into much because it's been tough to come to agreement with sellers, but.
We think that.
May be opening up a little bit here, we're getting a few more inbound phone calls and some more exploration will continue to be opportunistic if if they make sense, but we're also disciplined and so.
We'll see what happens, but but probably activity kind of picking up a little bit.
I would expect to continue to pick up is.
This whole cycle hits, those under $5 billion banks.
They have lots of problems and issues.
Throw Apollo.
We have intense as activity has picked up.
Got it.
And congrats Ed and look forward to the future.
Yes. Thanks.
Okay.
Thank you our.
Our next question.
Comes from the line of Ben Garlinger.
Your line is open.
Alright, Thanks, guys. Most of the questions have been asked and answered so I appreciate all the color.
Curious if you can just think like kind of a 10000 foot view here when trust is really never had.
Our long term growth and you guys are in perpetual growth mode, which is good but the pilots have been pretty pretty.
Tight to get across the industry, especially with deposit levels going down and clients. We are tightening our confidence has gone up so just in general do you have any internal red lines in terms of loan to deposit ratio I mean, if growth kind of reaccelerate, so which is.
Kind of alluded to here.
Where would kind of be the internal red line that we need to get more deposits regardless of cost.
Well.
I don't know about the regardless of cost, but we think there is deposit opportunities out there we've tried to be pretty disciplined through this cycle as rates have moved up and.
We've not gotten ahead of what we believe to be the loan growth opportunities but.
We're going to be working pretty hard on deposits.
We've said before we don't we don't want to be 100% loan to deposit, we probably don't want to be 95. So.
I think youll see us working very hard to grow deposits to try and match the loan growth.
Got it Okay and then.
When you just think kind of economically speaking I know you guys were a bit ahead of the curve in terms of kind of thinking that inflation not transitory.
Yes.
Position today, it seems like economically we are slowing down.
And it is likely to probably cut sometime in the next 18 months or so.
Is there any area that you're intentionally.
Break tapping in terms of <unk>.
Growth.
Excuse me your loan growth or any areas or kind of avoiding.
No I don't.
And then rich can chime in here too I don't think categorically. There is anything that we're saying we will or won't do but we're obviously monitoring.
The rate impacts on our clients and for many of them down is good.
I will say, yes, no I agree with what Tim just said.
One of the lines that we use a lot around here with our lenders as we never want to be the bank that jerks. The wheel, we think that ultimately that does a lot of institutional harm by saying, we're not going to do that we're not going to do this because it just makes it that much more difficult to get back into it when you want to.
And our general thought is just be really thoughtful about who your sponsor is who your customer is what the structure of the deal is.
The deals priced at.
Just.
We've been at this for a long time, and we just really want to focus in on that.
Office is a great example, would we do another office deal absolutely if its structured the right way, we've got the right tenant mix and we've got the right.
Borrower and we've got the right collateral structure so.
Just.
We are trying to be very thoughtful I think as we talked about here the granularity of our portfolio and the way it's structured allows us that flexibility.
In our portfolio and it was 50% CRE and <unk>.
Most of that office I feel a lot different but right. Now we are just trying to be opportunistic and also be really thoughtful about.
Keeping dry powder for our customers.
Got it I appreciate the color congratulations okay, great great franchise.
Kim.
Thank you I would now like to turn the conference back to Tim Crane for closing remarks, Sir yes. Thank you very much.
As I hope you can tell we continue to think we're very well positioned coming off sort of atypical March timeframe here.
And we're going be working hard to grow deposits and take advantage of the opportunities available to us.
It's going to get Mad at me, but I do want to take one second just to remind everybody that coming off a record quarter and well positioned for the future is really a function of ed's leadership and many of you on the call know Ed personally and I hope as he transitions into a different role that you'll have a chance to catch up with them but.
In 32 years. He has turned wind trust into Chicago, and Milwaukee's bank with several market, leading national businesses and he's done it in a way that's been fun for employees good for our communities appreciated by our customers.
We hope rewarding for those that have invested in our bank. So ed on behalf of the whole team I just want to say, thank you and wish you well thanks Tim.
I'll be around although your shoulder, yes I.
No.
I'll start off.
So with that.
If there are more questions feel free to reach out to us offline and as that always says we appreciate your support and we'll be working hard to make sure. We're moving forward here. Thanks very much.
Thanks, everybody.
This concludes today's conference call. Thank you for participating you may now disconnect.
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