Q4 2023 Wintrust Financial Corp Earnings Call
Okay.
Okay.
Welcome to win Trust financial Corporation's fourth quarter, and full year 2023 earnings conference call.
Review of the results will be made by Tim Crane, President and Chief Executive Officer.
Speaker Change: David Dykstra, Vice President, Vice Chairman, and Chief operating Officer, and Richard Murphy, Vice Chairman and Chief lending Officer.
Speaker Change: As part of their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentations there will be a formal question and answer session.
Speaker Change: During the course of today's call when Trust management May make statements that constitute projections expectations beliefs or similar forward looking statements.
Speaker Change: Actual results could differ materially from the results anticipated or projected in any such forward looking statements.
The company's forward looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10-K and any subsequent filings with the SEC.
Speaker Change: Also our remarks may reference certain non-GAAP financial measures.
Speaker Change: 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 Change: As a reminder, this conference call is being recorded.
Speaker Change: I will now turn the conference over to Mr. Tim Crane.
Tim Crane: Good morning, and thank you for joining us for the fourth quarter and full year call.
For those we haven't spoken to recently happy new year.
Tim Crane: In addition to Dave Dykstra, and Rich Murphy, who the host introduced Dave Stoehr, Our Chief Financial Officer, and Kate Bogie, Our general counsel are with me.
Tim Crane: Yeah in terms of an agenda I'll share some high level highlights.
Tim Crane: Dave Dykstra will speak to the financial results and rich will add some additional information on color on credit performance.
David A. Dykstra: I'll wrap up with some summary thoughts.
David A. Dykstra: 2024, and as always we'll do our best to answer some questions.
David A. Dykstra: For the year, we reported record net income of just over $622 million up 22% over 2023.
David A. Dykstra: The results reflect our conservative approach to managing and growing our franchise, specifically, we target steady growth in both loans and deposits sound and conservative liquidity and risk management, and an unwavering commitment to taking care of our clients.
David A. Dykstra: In our materials as we do it every year and we have also included a series of 10 year historical charts to show solid progress on key metrics.
David A. Dykstra: Evidenced that our approach not only works, but differentiates us from many of our peers well.
David A. Dykstra: While this is not new information. We think these charts are meaningful evidence of our strong and consistent performance and if you haven't already I would encourage you to look at and review these materials.
David A. Dykstra: For the fourth quarter net income was just over $123 million a solid result, given the recognition of a $34 4 million dollar extraordinary expense related to the replenishment of the FDIC Fund following the March bank failures, and an approximately 10 million dollar expense related to the write down.
David A. Dykstra: Certain mortgage related assets due to the falling interest rates during the quarter.
David A. Dykstra: We reported record net interest income of $470 million up approximately $8 $8 million from the third quarter as a result of both an increase in the net interest margin of two basis points to $3 64 and continued good loan growth.
David A. Dykstra: Deposits were also up in the quarter noninterest bearing deposits increased slightly and were steady as a percentage of total deposits.
David A. Dykstra: While we continue to expect credit performance to normalize from the very low levels experienced over the last few years, our losses and Npls remain low.
David A. Dykstra: Despite these low credit losses, we've continued to build the allowance and as you'll hear from rich we continue to proactively address challenged credits in our portfolio.
Rich Murphy: I would highlight that our allowance coverage for core loans, excluding primarily our low loss insurance finance portfolio.
Rich Murphy: Is it a healthy 155%.
Rich Murphy: This detailed as in table 12 of our press release.
Rich Murphy: The market rate decreases during the quarter that caused the adjustment to the value of the mortgage assets also led to a material improvement in OCI driving up our book value and capital levels.
Rich Murphy: Potential book value increased by $385 million to over $70 million $70 a share during the quarter.
Rich Murphy: You'll see in one of the charts that I mentioned that our book value has increased every year during the 10 year periods shown.
Rich Murphy: And in fact, if you were to go further back our tangible book value has increased every year since the company went public in 1996.
Rich Murphy: Our liquidity position remains strong.
We're all a solid quarter, which we believe will compare well and may differentiate us relative to many of our competitors.
Speaker Change: With that I'll turn this over to Dave and rich and as I mentioned I'll come back and wrap up with some thoughts on the 2020 for outlook.
Dave: Great. Thanks, Tim.
Dave: First with respect to the balance sheet growth. We were again pleased to see loans for the quarter grow by approximately $686 million or 7% on an annualized basis.
Dave: Consistent with our prior guidance of mid to high single digit loan growth the.
Dave: The increase in loans was across many of the loan categories, but was primarily related to commercial real estate and commercial premium finance portfolio growth and rich Murphy, who will talk about that.
Rich Murphy: And just a little bit.
Rich Murphy: The company also recorded deposit growth of $404 million during the quarter, which is a 4% increase over the prior quarter on an annualized basis and as a deposit composition.
Rich Murphy: Noninterest bearing deposits at end of the third quarter and fourth quarter. Both represented 23% of total deposits evidence in the stabilization of the noninterest bearing balances during the latter half of 2023.
Rich Murphy: Other balance sheet results, where that total assets grew by approximately $705 million and we had slightly increased Andy loan to deposit ratio and our capital ratios were relatively stable with most of those ratios increasing slightly.
Rich Murphy: Overall, a very successful quarter for the growth of the franchise, our differentiated business model exceptional team and service in a unique position in Chicago and Milwaukee markets continues to serve us very well in that regard.
Rich Murphy: Turning to the income statement categories, starting with net interest income for the fourth quarter of 2023 net interest income totaled $470 million, an increase of seven 6 million as compared to the prior quarter and an increase of $13 2 million as compared to the fourth quarter of 2022.
Rich Murphy: Note that the fourth quarter net interest income represents the highest quarterly amount ever recorded by the company.
The increase in net interest income as compared to the prior quarter was primarily due to an increase in average earning assets of approximately $509 million.
Rich Murphy: An increase in the company's net interest margin also contributed to the increase in net interest income. The net interest margin was 364% in the fourth quarter, which was two basis points higher than the prior quarter level.
Rich Murphy: Accordingly as discussed on prior calls our balance sheet composition structure and repricing characteristics provided for a relatively stable net interest margin during the quarter and based on the current interest rate environment. We believe we can maintain our net interest margin within a narrow range around the current levels.
Rich Murphy: During the first quarter of 2024 and.
Rich Murphy: And beyond.
Rich Murphy: In 2024, assuming the rates stay at roughly the same.
Rich Murphy: I'd also like to note that total loans as of December 31 for $770 million higher than the average total loans in the fourth quarter, which obviously provides us with some momentum into the first quarter of 2024, the combination of the expected balance sheet growth and a relatively stable net interest margin should allow for further growth of our net adds.
Rich Murphy: Income in the first quarter of this year turning to the provision for credit losses. When trust recorded a provision for credit losses of $42 $9 million in the fourth quarter, which was up from a provision of $19 $9 million in the prior quarter, but actually down from the $47 $6 million of provision recorded.
Rich Murphy: In the year ago quarter, the higher provision expense in the fourth quarter relative to the third quarter was primarily the result of higher net loan growth during the quarter, a slightly higher level of net charge offs and some deterioration in the forecasted macroeconomic conditions, primarily wider forecast at <unk> credit spreads.
Rich Murphy: <unk> and forecast the depreciation on the commercial real estate price index.
Rich Murphy: Rich will talk about the credit and loan characteristics and just the bedroom.
Rich Murphy: Regarding the other noninterest income and noninterest expense total noninterest income totaled $108 million in the fourth quarter, which was down approximately $11 $6 million when compared to the prior quarter.
Rich Murphy: The primary reason for the decline was related to $20 million less of mortgage banking revenue relative.
Rich Murphy: Relative to the third quarter mortgage revenue had a $9 $7 million unfavorable change in net valuation adjustments from our mortgage servicing rights assets and certain other mortgage related assets that we hold at fair value.
Rich Murphy: Those those declines are really due to a decline late in the fourth quarter and the mortgage rates and accelerated prepayments speeds.
Rich Murphy: We also experienced $7 million decline in production revenue due to seasonally lower volume and compressed gain on sale.
Rich Murphy: I think it's interesting to note that although our production revenue was lower than the prior quarter is actually higher than the fourth quarter of the prior year, which is encouraging for US. We are also encouraged that with a lower rate environment that our application volume is ticking up early.
Rich Murphy: In 2024, thus far.
Rich Murphy: But still at low levels, we are seeing increases over application volumes that we were receiving in January of last year.
Rich Murphy: And the application volumes that are slightly up from December of.
Rich Murphy: 23.
Rich Murphy: There is a variety of relatively smaller changes the other noninterest income categories as shown in the tables in the earnings release, but those changes were not unusual and in the aggregate resulted in an increase in the non mortgage related categories of approximately $8 $3 million from the prior quarter.
Rich Murphy: Turning to noninterest expenses noninterest expenses totaled $362 $7 million in the fourth quarter and were up approximately $32 $6 million from the prior quarter.
Rich Murphy: Primary reason for the increase was the negative impact of the $34 $4 million special assessment by the FDIC to pay for the two two of the bank failures that occurred earlier in 2023 <unk>.
Rich Murphy: The remaining variances in noninterest expense, both positive and negative offset to a relatively small reduction in noninterest expenses from the prior quarter, just under $2 million and.
Rich Murphy: In summary, there was a very solid quarter in our view with good loan and deposit growth a stable net interest margin with this steady outlook a record level of net interest income content and a continued level of low level of nonperforming assets, we feel like we've managed well through a somewhat turbulent period in 2023, delivering net income that was a record.
Rich Murphy: For any full fiscal year in the company's history.
Rich Murphy: And we have a positive outlook for continued growth in assets revenue and earnings.
Rich Murphy: And although it's easy to get caught up in looking at the quarterly results. I think it's also instructive to occasionally look back overtime as Tim referred to we included some 10 year charts in the earnings release.
Rich Murphy: That I think provide some impressive evidenced that our approach to running the business has provided for a consistent growth in loans deposits earnings and tangible book value per share over an extended period of time, all while managing credit risk very well, we'll work hard to continue those trends in 2024 and beyond and increase shareholder returns so with that I'll <unk>.
Rich Murphy: Crude my comments and turn it over to rich Murphy to discuss credit.
Rich Murphy: Thanks, Dave.
Rich Murphy: As Tim and Dave noted earlier credit performance continue to be very solid in the fourth quarter from a number of perspective is.
Rich Murphy: As detailed on slide seven of the deck loan growth for the quarter was $686 million and similar to the third quarter. This growth was driven by a number of factors. We continue to see a harder market for insurance premiums, particularly for commercial properties, resulting in higher average loan sizes in our commercial premium finance portfolio and consolidation within the premium finance industry is provided.
Rich Murphy: As with a number of new opportunities we see.
Rich Murphy: Saw good growth in the commercial real estate portfolio, resulting largely from draws on existing construction loans and finally, our leasing group had another very solid quarter.
Total loan growth for all of 2023 was $2 9 billion or 7%.
Rich Murphy: We believe that loan growth for 2024 will continue to be within our guidance for the filing reasons.
Rich Murphy: The commercial premium finance team should continue to show solid growth as premiums continue to be elevated.
Rich Murphy: Our various pipelines have stayed very solid and our leasing team continue to see significant demand in the market.
Rich Murphy: And as we have noted in prior calls we continue to benefit from disruptions in the banking landscape and we've seen numerous quality opportunities in our core C&I and CRE business. In addition, we continue to look at a number of lending teams in niche lending opportunities that come from dislocation and other regional banks.
Rich Murphy: Offsetting this growth will be continued pressure on C&I line utilization, which dropped from 37% to 34% year over year as higher borrowing costs have nevertheless negatively affected usage.
Rich Murphy: We anticipate that higher borrowing costs will continue to cause borrowers to reconsider the economics of new projects business expansion and equipment purchases.
Rich Murphy: In summary, we continue to be optimistic about our ability to grow loans in 2024, and we believe our diversified portfolio and position within the competitive landscape will allow us to grow within our guidance of mid to high single digits and maintained our credit discipline.
Rich Murphy: From a credit quality perspective as detailed on slide 14, we continue to see strong credit performance across the portfolio.
Rich Murphy: This can be seen in a number of metrics nonperforming loans increased by $6 million during the quarter from 32 to 33 basis points.
Rich Murphy: While npls have increased from 26 basis points to 33 basis points. During 2023, they continue to be a historically low levels and we are confident about the solid credit performance of the portfolio.
Rich Murphy: Charge offs for the quarter were $14 9 million or 14 basis points up from $8 1 million or eight basis points in Q3.
Rich Murphy: Finally, as detailed on slide 14, we saw stable levels in our special mention and substandard loans with no meaningful signs of additional economic stress at the customer level.
Rich Murphy: As noted in our last few earnings calls we continue to be highly focused on our exposure to commercial real estate loans, which comprises roughly one quarter of our total portfolio higher higher borrowing costs and pressure on occupancy and lease rates are cause for concern, particularly in the office category as we've noted before.
Rich Murphy: On our second quarter call earlier this year.
Rich Murphy: <unk> noted that were very focused on a subset of office loans, which are secured by co working properties at that time, we had sold a portfolio of approximately $17 million, which reduced our total co working exposure in half during.
Rich Murphy: During the fourth quarter, we saw an increase in CRE npls of $17 4 million, which was largely due to a downgrade of a single co working loan to nonperforming is important to note that the underlying loan is current and has been previously identified as a potential non accrual due to cash flow issues. We continue to work with the borrower to determine the most cost effective strategy going forward.
Rich Murphy: <unk>.
Rich Murphy: On slide 18, we have updated a number of important characteristics of our office portfolio. Currently this perform portfolio remained steady at $1 4 billion or 12, 8% of our total CRE portfolio and only three 4% of our total loan portfolio.
Rich Murphy: Of the $1 4 billion of office exposure, 42% as medical officer owner occupied the average size of the portfolio.
Rich Murphy: Loan in the office portfolio is of only $1 4 million and we continue to have only five loans above $20 million in this category.
Rich Murphy: We continue to perform reviews regularly on this portfolio and we stay very engaged with our borrowers as mentioned on prior calls our CRE credit team regularly updates or deep dive analysis of every loan over $2 5 million, which will be renewing between now and the end of the third quarter of 2020 for this analysis, which covered 82% of all CRE loans maturing during this period.
Rich Murphy: Resulted in the following approximately one half of these loans will clearly qualify for a renewal at prevailing rates roughly 35% of these loans are anticipate anticipated to be paid off or will require a short term extension at prevailing rates. The remaining 14% of these loans will require some additional attention which could include a pay down of our pledge of additional collateral it's.
Rich Murphy: To note that the previously mentioned loan secured by co working space had been identified during our pre a prior deep dive analysis.
Rich Murphy: We are back check that the results of these tests conducted during prior quarters and have found that the projected outcomes versus actual outcomes were very tightly correlated and generally speaking borrowers of loans deemed or acquire additional attention continue to support their loans by providing enhancements, including principal reductions.
Rich Murphy: Again, our portfolio is not immune from the effects of rising rates, where the market forces behind lease rates, but we continue to proactively identify weaknesses in the portfolio and work with our borrowers to identify the best possible outcomes. We believe that our portfolio is in reasonably good shape situated to weather. The challenges ahead that concludes my comments on credit and I'll turn it back to Tim.
Tim Crane: Great. Thanks rich.
Tim Crane: To wrap up our prepared remarks, we continue to believe that we are well positioned perhaps uniquely well positioned to take advantage of the current environment with our diverse businesses.
Tim Crane: Over the last several quarters, we've taken steps to achieve an interest sensitivity position much closer to neutral you can see some specific data on table eight in our press release, while we don't believe that rapid rate cuts are warranted at this point, we are assuming that there'll be 325 basis point rate cuts in 2020.
Tim Crane: For.
Tim Crane: With that assumption as Dave mentioned, our net interest margin will be reasonably stable in a narrow range around the current level for the near term.
Tim Crane: More interest rate cuts above and beyond the three we've assumed with slightly pressured the margin, but would also likely result in more favorable economic activity as an offset for example improvements in our mortgage business and growth in commercial line utilization, which rich mentioned mentioned is currently very low levels.
Tim Crane: So to reiterate our prior comments our target is to continue to grow loans in the mid to high single digit range in terms of a percentage and to fund the loan growth through deposit increases at like levels.
Tim Crane: Our pipelines remain solid.
Tim Crane: And as Dave mentioned, we experienced strong growth at the end of the fourth quarter, which represents good momentum going into the first quarter of 2024.
Tim Crane: Overall, we're pleased with the 2023 results and we're encouraged about where we start 2024.
Speaker Change: I know there'll be some questions. So at this point I'll pause and we can turn it back to the host.
Speaker Change: 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 to remove yourself from the queue. You May press star one again.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: Our first question.
Speaker Change: Comes from the line of John Armstrong of RBC capital markets.
John Armstrong: Thanks, Good morning, everyone.
Chad: Good morning, Chad.
Chad: Maybe Tim or Dave just wanted to ask about some of the last comments you made Tim.
Tim Crane: On your expectations for the margin to remain in the current range.
Tim Crane: Can you talk about what you guys are doing to protect the margin around these levels.
Tim Crane: Thinking about your loan growth guidance.
Tim Crane: And the net interest income growth potential it seems a little better than peers, particularly year loan growth but.
Tim Crane: Just talk about how you are protecting the margin and your confidence that we can maintain the current range absent greater than three cuts.
Speaker Change: Yeah, Thanks, Sean and Dave can add to this week.
Dave: We've talked about the fact that we've got in <unk>.
Dave: Asset sensitive loan book that continues to reprice them at this point the repricing in our loan book is closely correlated to what we're seeing in terms of the increase in deposit costs.
Dave: We expect that for at least a <unk>.
Dave: Short period going forward here that that will continue to be the case and that the.
Dave: The spread between our loan and deposits will be roughly stable.
Dave: I would characterize stable is plus or minus some number of basis points around three six.
Dave: So we feel pretty good about that and we've baked in the three cuts starting in June.
If those cuts are either deeper or more than I.
Dave: I think we've got probably some pressure on the margin, but an offset in other parts of our business.
Dave: Okay.
Dave: The focus I mean, I think thats true the structure of the balance sheet also helps to the premium finance book, which is a third of our portfolio sort of lagged on the way up but if rates go down. It also lags on the way down. So there is benefit to US there as you know and as we've disclosed in the materials, we've got over $6 billion worth of inter.
Dave: First rate derivatives that will also assist us if rates fall fall down so.
Dave: We were we were patient on when rates went up to allow the margin to expand and as we hit the upper threes. We felt like we should reduce that asset sensitivity and lock in the rates through balance sheet management and derivatives.
Dave: We've tried to become relatively neutral on that right now just by by using both the structure and the derivatives.
Dave: To be somewhat neutral here so.
Dave: Our competitions out there so all depending on what the competition does with loan and deposit pricing if rates move but right now the way we look at the World. We think we can hold it pretty tight.
Speaker Change: Okay. That's helpful.
Speaker Change: This one more revenue question just on mortgage.
Speaker Change: You touched on it, but obviously, a tougher revenue quarter for mortgage and I get it but.
Speaker Change: I think what you are saying is originations look good.
Speaker Change: Spreads were depressed and a.
Speaker Change: If we.
Speaker Change: Don't have the same headwinds on the MSR.
Speaker Change: Maybe we can repeat the kind of quarter that.
Speaker Change: That we saw in the first quarter of 'twenty. Three is that is that fair day, maybe even potentially a little better.
Speaker Change: Yes.
Speaker Change: I think that's pretty accurate.
Speaker Change: Our production revenue was down about $7 million eight to about $7 million of production revenue in <unk>, but that was higher than.
Speaker Change: About $3 million of production revenue in 2022, and we had.
Speaker Change: $8 million to $9 million of production revenue in 'twenty three so what were seeing is right now at least through the first part of January applications are ticking up again, not wildly, but they are up from this December and November and clearly they are up from where we were in <unk>.
Speaker Change: <unk> of 23, so I would expect that that revenue would try to get back to those levels.
Speaker Change: And based on what we now know right now again, it's not going to be a spike up but I do think we're going to sort of read returned to.
Speaker Change: Where we've been in the previous few quarters, and then hopefully that.
Speaker Change: If.
Speaker Change: Have the spring buying season hits that mortgage rates are down a little bit and hence one of the reasons some of the MSR values declined a little bit but.
Speaker Change: Hopefully that decline in rate spreads a little bit of additional home buying activity from March and April.
Speaker Change: Yes, yes, it will be interesting to watch just just a little rebound would be good.
Speaker Change: Yes, again that so.
Okay. Thanks, a lot guys I appreciate it thank you.
Speaker Change: Okay.
Speaker Change: Thank you please standby for our next question.
Speaker Change: Our next question comes from the line of Chris Mcgratty of K B W.
Speaker Change: Okay.
Christopher McGratty: Hey, good morning.
Speaker Change: Hi, Chris Hey, Chris.
Speaker Change: Maybe maybe a question for rich I mean, you guys have.
Speaker Change: In the past.
Rich Murphy: Fourth quarters.
Rich Murphy: They proactively built the reserve when things are still good.
Rich Murphy: Given where your reserves today I guess.
Rich Murphy: Can you just speak to the potential need or desire to build reserves. Additionally in early 2024 or is this just kind of get ahead of it.
Rich Murphy: Build it while you can.
Rich Murphy: Seasonal doesn't necessarily work that way.
Rich Murphy: So I mean.
Rich Murphy: If you're asking me how the provisioning should work it would not necessarily result in the same things that we're getting out of the seasonal models.
Speaker Change: As Dave pointed out I mean, we are the <unk>.
Speaker Change: <unk> spreads that with the way they reacted definitely affected what we had to do in the fourth quarter.
Speaker Change: Yes.
Speaker Change: Just on the loan growth affected it.
Speaker Change: And not necessarily what rich Murphy thinks about the quality of the portfolio.
Speaker Change: I do think that what we've done as you point out.
Speaker Change: At the end of last year. This year was a pretty material and I think we have put ourselves in a very good position going forward and a seasonal <unk> works like it's supposed to work we're actually pre funding the losses that we should accumulate down the road. So I actually I feel really good as to where the allowances given the shape of our portfolio.
Speaker Change: So right now.
Speaker Change: Okay, Chris I can maybe chime in a little bit I think if you look at it sort of globally without getting too far into the weeds.
Speaker Change: If you look in the presentation, our criticized assets that we have a special mention and substandard and good those percentages Albert very stable.
Speaker Change: Charge offs are still low at 14 basis points, a little higher than second quarter, but still pretty low.
Speaker Change: Had a little bit more growth in the quarter, but all of those things werent two different quarter to quarter. So as you look at that increase I think most of that is the macroeconomic factors and the biggest one that impacted us in our models and everybody uses different factors for us.
Speaker Change: They're they're modeling, but the <unk> credit spread has a high correlation.
Speaker Change: To many of our.
Speaker Change: Loan mindset that we model for that.
Spread over them.
Speaker Change: Eight quarter period that we look at.
Speaker Change: Going out expanded quite a bit which had a big impact on on our provisioning. So.
Speaker Change: If.
Speaker Change: If the soft landing thought.
Speaker Change: <unk> gained traction in the consensus view amongst economists out there are that that those spreads should tighten in then we should see some benefit going forward, but in the fourth quarter. It was worse in the third quarter and it really generated the extra reserves. Thanks.
Speaker Change: Thanks for the great great Great color. Thanks, just I know some banks have disclosed which of the Moody's scenarios.
Speaker Change: That's for us too.
Speaker Change: What they wake have you can you remind us if you've communicated like what scenario is currently factor the way into the scenarios.
Speaker Change: Well, we look at all of the Moody's Baxter, we also look at some.
Speaker Change: <unk>.
Speaker Change: Blue chip other sort of consensus.
Speaker Change: Our forecasts that are out there but.
Speaker Change: We.
Speaker Change: Are using the base line scenario of Moody's but.
Speaker Change: Various factors out of that baseline scenario.
Speaker Change: Okay.
Speaker Change: Maybe just one more and I'll hop back.
Speaker Change: Capital outlook.
Speaker Change: Mid to high single digit balance sheet growth.
Speaker Change: We can certainly support.
More more growth how do we think about.
Speaker Change: Perhaps other uses of capital in 2024.
Speaker Change: Any any thawing in M&A conversations is that something you would consider.
Speaker Change: Any color on on capital you said would be great. Thanks.
Speaker Change: Yes.
Speaker Change: The straightforward part is that as you said.
Speaker Change: Earnings of the company should support the loan growth Thats been the case for several quarters now, but isn't a long term trend for wind trust, where typically we've needed to add capital.
Speaker Change: To the extent one we continue to build capital Thats, good and on the M&A front.
I would say that the conversations are still.
Active but there is also not a lot of activity in.
Speaker Change: Don't know that.
Speaker Change: Others, who might be in a position that is better to talk about that would think that there is going to be a short term change there clearly the rates coming down and help the.
Speaker Change: LCI situation for a number of people who had impairing their loan books our securities portfolio.
Speaker Change: But.
We've been acquisitive in the past I think we we may be in the future, but we are disciplined about it.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Our next question.
Speaker Change: Comes from the line of Casey Haire of Jefferies.
Yes, thanks, good morning, everyone.
Speaker Change: Good morning.
Casey Haire: I wanted to touch a little bit on the.
Casey Haire: The NIM stability guide.
Casey Haire: Just along those three cuts what kind of what.
Casey Haire: What kind of deposit beta you guys are assuming throughout the year, if we get those kind of cuts.
Casey Haire: Yes.
Speaker Change: We're believing that at this point that if the fed cuts 25 for the non CD.
Speaker Change: Term Cds that are fix that we should be able to reduce the rates fairly quickly by 25 basis points.
Speaker Change: So we're expecting as we increased rates rapidly as rates went up we were expecting to be able to follow fairly closely with cuts in our money markets and savings and the like.
Speaker Change: Okay. So the other thing we're seeing we don't have.
Speaker Change: Huge book of municipal deposits, but.
Speaker Change: Some of those have reference rates, if you will and we're starting to see as it relate as a result of what's happening with rates those.
Speaker Change: Index or reference rates come down and so we've seen some minor benefit on a portion of the book already.
Speaker Change: Okay great.
Speaker Change: Just a question on the fixed rate asset repricing benefit in the release you guys called out about $8 billion.
Speaker Change: It matures within our re prices within the next year.
Speaker Change: I'm just wondering what do you have the.
Speaker Change: What the yield is on that and what the what it could reprice down.
Speaker Change: Yes, no we haven't we haven't disclosed that Casey so I don't have it handy here right now, but we'll think about putting that in future releases.
Speaker Change: Okay, Great and just lastly.
Speaker Change: The loan to deposit ratio ticked up a little bit.
Speaker Change: To 93, I think you guys have talked about 85% to 90%.
Speaker Change: I know youre talking about funding loan growth.
Speaker Change: With deposits, but just wondering if there is a.
Speaker Change: If there is a hard cap on that loan to deposit ratio.
Speaker Change: No I mean, we think we like it.
Speaker Change: This range is fine with us it ticked up a little bit I would expect it to come down again next quarter a lot of our loan growth has happened near the end of the quarter and so we were just trying to match deposit and loan growth and there is a lot of that flowed flowed in towards the latter the.
Speaker Change: The latter part of December so.
Speaker Change: Just a little probably mismatch on the timing of the deposit raising but.
Speaker Change: We expect that to drift back down to 92 again next quarter or so.
Speaker Change: Sure.
Speaker Change: Okay, great. Thank you.
Speaker Change: Thank you again to ask a question. Please press star one one on your Touchtone telephone again Thats Star one one on your Touchtone telephone to queue up for a question.
Speaker Change: Our next question.
Speaker Change: Comes from the line of Jeff <unk> of D. A Davidson.
Jeff: Hi, Thanks, Good morning, Ritch I wanted to circle back on the.
Jeff: Co work.
Jeff: You singled out the one credit it I think 17 4 million.
Jeff: What is that what is the total remaining co work.
Jeff: Exposure.
Jeff: Negligible.
Jeff: There might be.
Jeff: No.
Jeff: Certainly under $5 million.
Jeff: Pretty well below that there is it might be a couple of small pieces, but generally that were largely with this issue being largely addressed I think work that is behind us.
Jeff: Okay.
Jeff: It was the bulk of it I guess and then just sort of tracking some of those cables towards the back was that a was that credit identified in sliding from.
Jeff: On our past due.
Speaker Change: No the loan was current.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Got it.
Speaker Change: Okay.
Speaker Change: And maybe on the just hopping to expenses.
Speaker Change: Safe to assume that quarterly FDIC insurance reverts back to the mid $9 million range in other words.
Speaker Change: Absent the special assessment.
Speaker Change: That could be a good run rate for 'twenty four and then kind of a follow on question to that is just overall expense run rate.
Speaker Change: Expectations, there would be helpful. Thanks.
Speaker Change: Yeah, well clearly we've special assessments of one one time item I think towards the end of the.
Speaker Change: A couple of years out it depending on how those things settle out they may true it up a little bit for now yes.
That number goes away and you'd be in that mid $9 million range, but.
Speaker Change: That assessment grows as a company grow so.
Speaker Change: As much as we don't like to pay the assessment, probably that expense number goes up because we're going to grow the franchise over the course of the year, but you can see that.
Speaker Change: It trended up over time, so we would only expect it to go up with the growth of the balance sheet, though and then overall expenses.
Speaker Change: Similar to what we've talked about fast have you sort of look at the non FDIC impacted run rates of the third and the fourth quarter.
Speaker Change: Yes.
Speaker Change: Those will probably increase slightly in 2024, as we have merit and.
Speaker Change: Raises for the employees and the impact of inflation the impact of the FDIC insurance coverage, increasing as we grow.
Speaker Change: And we continue to invest in our infrastructure.
Speaker Change: Infrastructure, and digital and technology buys but so.
Speaker Change: <unk>.
Speaker Change: That 5% mid mid single digit range as what we would expect that you're using in the third and the fourth quarter as a base and if we can grow loans in the franchise in the mid to high single digit range, where you can get that operating leverage out of the system.
Speaker Change: Sure.
Speaker Change: Okay. Thank you and then the last one just.
Speaker Change: You kind of touched on a little bit but in that mid to high single digit loan growth outlook for 'twenty Board. You have you have anything kind of layered in there on that is it sort of a soft landing type.
Speaker Change: Type of assumption or.
Speaker Change: That's a crystal ball type question, but for the bulk of 24 do you have a <unk>.
Speaker Change: Recessionary or slowdown macro wise embedded.
Speaker Change: Well I.
Speaker Change: Yes that would be we've fortunately got a diversified and pretty granular loan book So.
Speaker Change: As we've talked about in the past the transportation business in some of our customers are already experiencing challenging conditions in and.
Speaker Change: And others are doing terrific. So.
Speaker Change: I don't know that a technical recession is much going to change the environment.
Speaker Change: We think across our loan book, we will get a pretty balanced.
Speaker Change: Level of growth over the year, yes, it's a great point, Tim because the.
Speaker Change: We have all these different engines that just fire at different times.
Speaker Change: You kind of look at the where the growth is coming from over this last year, our life premium Finance group essentially had zero are actually negative growth.
Speaker Change: Largely because in a higher rate environment and it doesn't work if you got into a recessionary type situation and they bring rates down that product suddenly looks much more attractive in a lot of the loan growth that we had two years ago was out of that product so as.
Speaker Change: As different as the right rate cycles move through they definitely affect different things right now as we talked about line utilization and a higher rate environment.
Speaker Change: It really gets impacted as rates come down youre going to see the opposite effect. So I think there is some.
Speaker Change: There's going to be some cyclicality, but it's just going to affect different products at different times. So we stay pretty committed to that mid to high single digit growth forecast.
Speaker Change: Okay I appreciate it.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of Brandon King upstream list.
Brad Milsaps: Hey, good morning.
Speaker Change: Hey.
Brad Milsaps: So I had a question on deposits I noticed most of the growth in the quarter came from money market savings accounts.
Brad Milsaps: I'm wondering is is that the expectation going forward, where we will see most of the deposit growth.
Speaker Change: Well, we think the mix is somewhat stabilized, but with these higher rates than we had a year or 18 months ago.
Clearly the the interest bearing products are more attractive to our clients and so I think youre going to see money market and CD growth that you wouldn't have seen a couple of years ago.
Speaker Change: We're working hard and hopeful that.
Speaker Change: Noninterest bearing portion continues to stay reasonably stable around 23%.
Speaker Change: Okay and is part of our strategy also sort of anticipating a.
Speaker Change: Fed easing cycle as maybe those money market accounts, maybe easier to to lower those rates.
Speaker Change: Yes fascinated.
Speaker Change: To be more of a CD CD funding.
Speaker Change: I think I think what you said is correct that the money market accounts would probably move more quickly than some of the other interest bearing products, but yes.
Speaker Change: And we offer a wide set of options to our customers.
Speaker Change: They select what they believe to be the best fit for them. So.
Speaker Change: We are seeing more CD related activity as you can get rates in the 5% range, whether that will continue as rates come down you may get people trying to kind of lock in those levels.
Speaker Change: Okay.
Speaker Change: And then another question I know.
Speaker Change: Preceded commentary on the reserve increase but I did notice the reserve increase was primarily in the C&I category. So I'm just wondering if you could speak to just the health of your C&I customers credit trends there as opposed to a lot of teachers on CRE space.
Speaker Change: Yes, I think couple.
Speaker Change: Couple of things that I would point to one is as we noted earlier that the.
Speaker Change: The level of classified assets remains pretty consistent so we try to be very proactive on our risk ratings and <unk>.
Start to see special mentioned classified assets start to move up I think that would be a pretty direct reflection, but more anecdotally.
Speaker Change: Spent a lot of time talking to our customers about where their business is at and I would say generally speaking people still feel like that top line revenue number is holding together pretty well and that solves a lot of problems.
Speaker Change: Obviously higher borrowing costs.
Speaker Change: Can affect them.
Speaker Change: Clearly the Academy I think has slowed a little bit and so that affected him but.
Speaker Change: While it may not be as rosy when you had zero interest rates.
Speaker Change: The Academy was just really clicking along.
Speaker Change: It doesn't feel that bad for most of our C&I customers I think that they still feel pretty optimistic about.
Speaker Change: Where the.
Speaker Change: Overall revenues are coming from and where those levels will be.
Speaker Change: I think labor is probably become less of a concern for them and just.
Speaker Change: Overall input costs are have stabilized so I.
I would say net net I think they feel there's still pretty good.
Speaker Change: Great. Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Okay.
Speaker Change: Which comes from the line of Ben Garlinger off city.
Speaker Change: Hey, good morning, guys.
Speaker Change: Hey, Ben.
Brad Milsaps: So I wanted to ask a question I know youre, probably going to be a little boy I'm going to ask it anyway.
Brad Milsaps: So when you when you think about 2024, what im getting at is kind of mid single digit.
Brad Milsaps: Maybe upper middle single digit loan growth deposit growth.
Brad Milsaps: The flat margin.
Brad Milsaps: Like what what you cited three clouds kind of a $3 60 range. If the market has a little bit more probably see a little bit pressure on that.
Brad Milsaps: It's largely just because of.
Brad Milsaps: Back book repricing.
Brad Milsaps: CRE and then premier demand, so it's a little bit of Kols, but as we get towards the end of the year and possibly the 25.
Brad Milsaps: If there is enough for credit amount right.
Brad Milsaps: Rick Cardioversion.
Brad Milsaps: Any incremental pressure because I mean, I get that the premium finance, probably rolls over and starts to work against you, but you also have indexed.
Brad Milsaps: Deposit cost I'm, just trying to think.
Speaker Change: It's a moving target obviously, but.
Speaker Change: Just any incremental thoughts on how you might exit the year near the 25.
Speaker Change: 25 guidance at all so just kind of finger in the air that would be really helpful.
Speaker Change: A couple of things to be clear, we have very few actual index deposit products. So while the municipal rates for example that I mentioned earlier are tied to some reference rates, they're not contractual so other than our CD book.
Speaker Change: Largely pricing at our discretion.
Speaker Change: As we talked about if you get more rate cuts or faster rate cuts are you get 50.
Speaker Change: They're slightly would pressure our margin beyond the assumed three cuts, but our mortgage business will likely perform better and to Rich's point, we are at very low levels in terms of utilization on lines right now and we would expect to see some rebound there as rates come down so.
Speaker Change: While there might be some pressure on the margin.
Speaker Change: As rates continue to drop.
Speaker Change: We have other aspects of our business that we think will perform well so.
Speaker Change: That's kind of the the best way, we're looking at that and why we value. The diversified businesses is an important part of our model.
Speaker Change: Yes, that's great color, great point too that the fee income aspect will definitely pick up some of the slack off all the slack of the soccer spread revenue can you just remind us.
Speaker Change: Any sort of kind of efficiency ratio on mortgage I get that we haven't seen a robust mortgage market I'm just trying to think if that does start to turn back on expenses are also obviously going to go up as well just trying to match the two if.
Speaker Change: If we do see a rebound in mortgage.
Speaker Change: Yes.
Speaker Change: It sort of depends on how hot the market gets on how wide gross margin.
Speaker Change: Gain on sale margins are but I generally think of the efficiency ratio in the mortgage business to be in about an 80% efficiency ratio business. So.
Speaker Change: Got it that's really helpful. I appreciate the color. Thank you guys.
Speaker Change: Pure growth horsepower year, it's good that the margins should stay roughly flat.
Speaker Change: Thanks, guys.
Speaker Change: Thanks.
Speaker Change: Thank you.
Speaker Change: Our next question.
Speaker Change: Comes from the line of Terry Mcevoy of Stephens, Inc.
Terry Mcevoy: Hi, good morning.
Terry Mcevoy: David and I'm pretty sure it's in the appendix, but what are the hedges costing you each quarter.
David A. Dykstra: I'd like $24 million comes to mind, but do you have that number handy and what what is that what would that be if we get three rate cuts and when does that turn from a headwind to a tailwind.
David Dykstra: Yes.
David Dykstra: I think it was about 19 basis points of impact to the margin and its about $8 million a months or $24 million a quarter right now.
David Dykstra: Sulfur and moved one way or the other that would change that but.
David Dykstra: We put a slide in our presentation deck that gives all the details of what the particular strike rates.
David Dykstra: But we're receiving fixed in pain.
David Dykstra: The sulfur goes down at all even though we may not hit the strike rate, we will get benefit because we will pay less so that $24 million a quarter of sulfur comes down.
David Dykstra: Will decline by what we pay by 25 basis points. So it's effectively locking in.
David Dykstra: $6 billion worth of our variable rate portfolio into more of a fixed rate scenario that our software based.
Speaker Change: Thanks for that and then are you.
Speaker Change: Or how are you using loan modifications within.
Speaker Change: Commercial real estate and.
Speaker Change: How are you defining a market rate if you are using modifications.
Speaker Change: Yes, I mean modifications are.
Speaker Change: Part of the business, so, but we don't.
Speaker Change: Yes.
Speaker Change: Loan is seriously affected by lease rates or vacancy of rising rates and.
Speaker Change: You can't just hired a problem with a loan modification so similar to the one that we've just identified that loans current.
Speaker Change: But at some point you have to look at that and say is there really going to be the opportunity to.
Speaker Change: Change the income stream or change the cash flow with a modification generally speaking it you really have to be honest in the borrower and the bank of them be honest about whether thats going to solve the problem.
Speaker Change: In a case like that.
So challenges not so we do use modifications, but it's really going to be a situation where.
Speaker Change: Is the difference between the.
Speaker Change: The targeted policy driven.
Speaker Change: Cash flow coverage and the actual casual coverage are relatively close and youre, just working with them to maybe extend amortization, a little bit or or something like that to give them a little bit of relief to bridge the gap, but generally speaking I mean, we don't use modifications all that often and when we do.
Speaker Change: We're pretty much the interest rate is pretty much a market rate.
Speaker Change: Okay. Thanks for the color there and thanks for taking my questions.
Speaker Change: Thanks, Greg.
Speaker Change: Yes.
Thank you.
Speaker Change: Standby for our next question.
Speaker Change: Our next question comes from the line of Brody Preston of UBS.
Brad Milsaps: Good morning, Hey, good morning, everyone.
I just wanted to get a little bit more granular Dave on the loan yields.
Brad Milsaps: I understand the margin commentary that you gave but wanted to kind of ask you.
Brad Milsaps: Just given the premium finance books.
Brad Milsaps: Spec the loan yields to trend in the middle part of the year just given the moves in the one year CMT that have already occurred.
Brad Milsaps: Yes.
Brad Milsaps: The book, that's tied to the one year CMT is.
Life insurance premium finance book and saw.
Brad Milsaps: As you are alluding to the right now is very similar to the rate a year ago. So the benefit from that book is pretty baked in right now.
Brad Milsaps: So the repricing on though it should stay.
Brad Milsaps: Stay relatively the same.
Brad Milsaps: The commercial premium finance book However.
Brad Milsaps: Phil is re pricing over time and although those are not.
Index to the prime rate that they have pretty good correlation to the primary because we generally are adjusting our rates when the fed is adjusting and therefore, most people are adjusting prime and if you go back a year.
Brad Milsaps: Prime was seven 5% at the end of 2022 and eight 5% at the end of this year. So there is there is another 100 basis points of repricing on that portion of the block and then we have the.
Brad Milsaps: The fixed rate commercial real estate loan book that tool that we have out there some of that will re price too.
Speaker Change: Got it.
Speaker Change: The stuff that is the stuff thats fixed rate.
Speaker Change: Not.
Speaker Change: Like premium finance related at all how much of that do you expect to reprice on a quarterly basis over the next year.
Speaker Change: Well, we've got we've got.
Speaker Change: $8 billion in total or.
Speaker Change: Total but.
Speaker Change: If you look at that.
Speaker Change: The big portion of that is our premium finance portfolio at $6 8 million. So we've got another.
Speaker Change: $1 2 billion of commercial and commercial real estate type of loans that will reprice over the course of the year and I'd, probably just say, it's ratable I don't think we have any seasonality per se to that portfolio.
Speaker Change: And that at these levels generally slightly helpful as they reprice.
Yes understood is there is it.
Speaker Change: Is it fair to assume you know when I look at that kind of one to five year bucket as well.
Speaker Change: Similarly, ratable repricing there I'm just trying to make sure I get their cadence correct through 2025, yeah, we've sort of looked at this we don't have any maturity walls come in.
Speaker Change: From that you can say Oh, my gosh, when we get out 18 months, we're going to have just boatload re re pricing or we don't get any repricing for three or four years, it's fairly ratable.
Speaker Change: Got it.
Speaker Change: On the <unk>, you guys kind of Buck the trend versus the group this quarter a lot of a lot of other banks have actually seen a reacceleration in niv outflow.
Speaker Change: Wanted to ask you specifically, if there was anything that drove the strength.
In the fourth quarter on a period end basis like if theres any chunky kind of deposits that came from institutional type money.
Speaker Change: No not not significantly I mean, we.
Speaker Change: We have large flows at the end of the year as people position their balance sheets, but we've worked really hard on the deposit side of the equation to continue to grow clients.
Speaker Change: We are hopeful that the 23% turns into a stable level for us.
Speaker Change: And our team continues to add commercial clients that have noninterest bearing deposits.
Speaker Change: Treasury services and use other products and services, we offer so it's sort of a function of building the franchise.
Speaker Change: That's the way I would look at it too I mean rich talked about there is a little less line usage. So some of those people that maybe would have drawn on the line of use some of their deposits noninterest bearing deposits.
Speaker Change: And maybe that's a reason why youre seeing some of that industry wide, but as Tim said, if we continue to grow the franchise and add customers that right now is offsetting any of that additional leakage and we're being able to hold it pretty well and it's been pretty stable on an average basis for the last couple.
Speaker Change: <unk> so.
Speaker Change: We're hopeful that we can hold it in there.
Speaker Change: Great and then just last one for me is just on the wealth business is a pretty decent pickup in assets under administration this quarter.
Speaker Change: They were flat last quarter I just wanted to ask.
Speaker Change: What caused that to occur.
Speaker Change: For the revenue to be flattish or saying just the growth I think.
Speaker Change: That was up from 44, 7% to $47 1 billion.
Speaker Change: Yes.
Speaker Change: A couple of things with that.
Speaker Change: Some of the brokerage accounts grew a little bit we also our Max safe product that we have.
Speaker Change: We operate that as that works through our trust company as a fiduciary accounts of those get included so it's a little bit of growth in that area.
Speaker Change: A little bit spread out in other places so nothing nothing significant per se in any any one chunky sort of deal.
Speaker Change: Yes.
Speaker Change: We are also in that number as we note in the press release.
Speaker Change: Our investment portfolio has also managed out of our wealth management area and included in those assets under management now both ticked up a little bit.
Got it okay. So that the move higher shouldn't necessarily result in a similar move higher and revenue for next quarter.
Speaker Change: Some of them some of it is based on beginning of quarter asset valuations so versus.
Speaker Change: Daily or end up in a.
Speaker Change: So you might see a little bit of pickup there.
Speaker Change: Alright, great well. Thank you very much for taking my questions I appreciate it.
Speaker Change: You bet. Thanks.
Speaker Change: Thank you.
Speaker Change: I would now like to turn the conference back to Tim Crane for closing remarks, Sir.
Tim Crane: Alright, great. Thank you everybody.
Tim Crane: As you can tell we're generally pleased with the 2023 results, but we've moved on we've got an eager team that is.
Tim Crane: Trying to win clients and new business for the Bank every day and we appreciate your time and your interest in and winter us. So we'll be working hard and we'll talk to you in a quarter.
Speaker Change: Thanks, everybody.
Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].
[music].
Speaker Change: So.
Speaker Change: Hum.
[music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].