Q1 2024 Wintrust Financial Corporation Earnings Call
Scott.
Welcome to win Trust financial Corporation's first quarter 'twenty 'twenty four earnings conference call. A review of the results will be made by Tim Crane, President and Chief Executive Officer, David Dykstra, Vice Chairman and Chief operating Officer, and Richard Murray.
Vice Chairman and Chief lending officer as part of their reviews. The presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentation, there will be a formal question and answer session.
During the course of today's call 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 also our remarks may reference certain non-GAAP financial measures our earnings press release and earnings.
As released 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.
Now I'll turn the conference over to Mr. Tim Crane.
Thank you Latif good morning, everybody and thank you for joining us for the wind Trust's financial first quarter earnings call.
With me. This morning are Dave Dykstra, our Vice Chairman and Chief operating Officer, Rich Murphy, our Vice Chairman and Chief lending Officer, Dave Stoehr, Our Chief Financial Officer, and Kate Boege, Our General counsel.
In terms of an agenda I'll share some high level highlights, Dave Dykstra will speak to the financial results and rich Murphy will add some additional information and color on credit performance.
I'll be back to wrap up with some summary thoughts on two topics our high level outlook going forward followed by a few remarks on the announcement from this past Monday regarding our pending acquisition of maritime or banks.
For the quarter, we reported record net income of just over $187 million. The results include a onetime gain from the previously announced partnership related to our 401K advisory business.
And a further expense related to the replenishment of the FDIC deposit guarantee fund.
Dave will speak to the relative amounts.
For these items and a handful of other items.
Overall net of these atypical in mostly positive items the quarter was strong and in line with our expectations. We grew both loans and deposits by slightly over $1 billion with a net interest margin of $3 59.
The loan growth was balanced nicely across all of our major businesses.
Net interest income of $464 million was down just a bit from the fourth quarter and if adjusted for the number of days in the quarter would have been essentially flat.
Our strong deposit growth reflects our continued ability to attract deposits and grow our franchise.
During the quarter. However, we did see a decline in the average noninterest bearing deposits of approximately $430 million.
We attribute this in part to seasonal deposit flows, but also to clients using their funds to invest in projects and to higher liquid rate options.
We continue to expect credit performance to normalize from the very low levels experienced over the last few years. However, our npls remain low and our charge offs reflect to a large degree the resolution of prior period reserve activity.
Despite this modest modest credit losses, we continue to maintain a healthy allowance and as Youll hear from rich. We also continue to proactively address challenged credits in our portfolio.
Highlight that our allowance coverage for core loans, excluding primarily our low loss insurance finance portfolios.
At a healthy 151%.
Market rate increases during the quarter impacted tangible book value, but despite these fluctuations our tangible book value improved to a record level from the fourth quarter and the strong earnings resulted in slightly improved capital ratios.
Overall, it was a solid quarter, which we believe will compare well in may differentiate us relative to many of our competitors.
With that I'll turn this over to Dave and Rich afterward, again I'll come back to wrap up in terms of what we're seeing and speak to the acquisition announcement.
Alright, Thanks, Tim first with respect to the balance sheet growth in the first quarter. We're pleased to report solid loan growth at the high end of our guidance total loans grew by approximately $1 1 billion or 10% on an annualized basis importantly, the increase in loans was broad based and rich Murphy, who will discuss.
In more detail in just a minute.
We recorded a corresponding deposit growth of $1 $1 billion during the quarter, which is a 9% increase over the prior quarter on an annualized basis. After the deposit composition on interest bearing non interest bearing deposits declined on average by approximately $434 million in the first quarter relative to the fourth quarter of last year.
And as of the end of the first quarter represented approximately 21% of total deposits the decline in the noninterest bearing deposits as Tim mentioned was a result of business as usual utilizing their cash rather than drawing on outstanding line. Some additional movement.
Interest bearing deposit accounts, and some seasonality and although the decline in average non interest bearing accounts follows several several stable quarters. We're encouraged that thus far in the second quarter noninterest bearing accounts are averaging a couple of hundred million dollars more than they were in March. So we're hopeful that the first quarter dip.
Rebounds, a bit in the second quarter.
That's the other aspects of the balance sheet results total assets grew by approximately $1 3 billion and our regulatory capital ratios improved slightly despite the strong growth.
Overall, it was another successful quarter for gaining new customers in our market and for the growth of our franchise, which has been the primary objective of wind Trust rabbits history, our differentiated business model exceptional team and service and unique position in Chicago, and Milwaukee markets continued to serve us well.
As to the income statement categories first I'm pleased to reiterate the first quarter was a record quarter not only from the standpoint of quarterly net income, but also from the standpoint of quarterly net revenues.
Jim mentioned, our net interest income remained relatively steady with the fourth quarter of 2023, if adjusted for the number of days in the quarter an increase in the average earning assets was essentially offset by a five basis point decline in the net interest margin.
The slight decline in the net interest margin was primarily the result of a mix shift in deposits and the pressure caused by a lower level of noninterest bearing deposits.
Higher cost of attracting incremental deposits to fund the strong loan growth and these dynamics resulted in net interest margin of $3 59 for the first quarter and a run rate of approximately three 5% at the end of the first quarter.
Based on the current interest rate environment, the dynamics of the expected stronger loan growth in the second quarter fluctuating noninterest bearing deposits and the incremental cost of funding elevated loan growth. We expect the net interest margin to be within a range around the levels, where we ended the first quarter or approximately three 5% as.
As I mentioned the exceptional loan growth that we expect in the second quarter, we will require us to fund that growth in the short term with marginally higher deposit costs, which will likely pressure the margin a bit.
But what would represent unacceptable trade offs said another way, we're happy to take advantage of current market conditions and add high quality loans and high quality relationships, even if it means a bit of margin pressure in the short run. These new relationships will provide nice gains in market share in additional net interest income had acceptable returns turned.
The provision for credit losses, when trust recorded a provision for credit losses of $21 $7 million in the first quarter down from a provision of $42 9 million from the prior quarter and down slightly from the $23 million provision expense recorded in the year ago quarter, the lower provision expense in the first quarter relative to the <unk>.
Prior quarter was primarily a result of improvement in forecasted macroeconomic conditions, primarily narrower forecast would be double a credit spreads.
Rich will talk about the credit metrics and loan portfolio characteristics in just a bit.
Regarding the other noninterest income and noninterest expense sections.
Noninterest income totaled $146 million in the first quarter, which was up approximately $39 $8 million when compared to the prior quarter.
The reason for the increase were related to two primary factors first as we disclosed in our news release during the first quarter and as Tim mentioned the company sold its retirement planning the virus advisors division, which generated a net gain on the sale of assets of approximately $19 $3 million.
The net gain was comprised of a $20 million gross gain which is included in other income and offsetting compensation expense of roughly $700000.
Second the company generated approximately $22 million more in mortgage banking revenue.
Relative to the fourth quarter of 'twenty, three mortgage revenue had $2 $3 million of net favorable change in valuation adjustments from our mortgage servicing rights and certain other mortgage related assets that we held.
We hold at fair value.
As the prior quarter ahead of prior quarter had a $9 $7 million net unfavorable valuation adjustment, resulting in a positive swing of approximately $12 million. We also experienced a $6 $6 million increase in production revenue due to slightly higher origination volumes and improved gain on sale margins are there.
Variety of other smaller changes the noninterest income categories as shown in the tables in our earnings release, but these changes were not unusual and in the aggregate resulted in a <unk>.
Kind of less than half a million dollars on a pretax basis. If you take all the other categories.
Aggregate manner.
Noninterest income categories.
Noninterest expenses totaled $333 million in the first quarter and were down approximately $29 5 million. The primary reason for the decline was the result of $29 $2 million less in special assessments imposed by the FDIC to pay for the two bank failures that occurred earlier in 2023 the company Rick.
Approximately $5 $2 million of such expense in the first quarter due to the updated loss estimates provided by the FDIC, which was less than the $34 4 million expense recorded in the prior quarter.
The remaining variances in noninterest expense, both positive and negative offset to a small reduction of just under $300000.
Seasonal decline in advertising and marketing expenses and travel and entertainment expenses were offset by higher levels of other real estate owned expenses in a variety of other relatively small increases from the prior quarter, including the aforementioned additional compensation expense related to the sale of the retirement planning and advisors Division.
In summary, a very solid quarter good loan growth good deposit growth relatively stable net interest margin a record level of quarterly net income and a record level of quarterly net revenues and a continued low level of nonperforming assets. So with that I'll conclude my comments and I'll turn it over to rich Murphy to discuss credit.
Thanks, Dave as Tim and Dave Both noted credit performance continue to be very solid in the first quarter from a number of perspectives as detailed on slide six of the deck loan growth for the quarter was $1 1 billion. The growth was driven by a number of factors core commercial loans, excluding leasing were up $267 million driven Laurie.
By quality opportunities, resulting primarily from dislocation within the competitive banking landscape in our markets. In addition, we saw a $170 million and growth from our warehouse line of credit portfolio, resulting from strategic hires made last year, coupled with a recovering mortgage market.
We also 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 loan.
Loan growth for the past four quarters totaled $3 6 billion or 9% annualized.
We believe that loan growth for the second quarter of 2024, we will continue to be strong and potentially greater than Q1 for a number of reasons.
Historically, we experienced our highest growth in our commercial premium finance portfolio in the second quarter.
During the second quarter of 2023, we saw these balances grow by just over $1 billion and we expect similar growth during this coming quarter.
We continue to see a hard market for insurance premiums and we are benefiting from opportunities from consolidation within the premium finance industry.
These loans are among the highest yielding in our portfolio.
In addition, core C&I pipelines remained very solid and finally, our leasing teams continue to see significant demand in the market.
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 negatively affected usage. In addition, while we continue to see a number of new CRE opportunities. Our CRE pipelines have slowed as higher borrowing costs have continued to affect loan demand.
We anticipate that higher borrowing costs will continue to cause borrowers to reconsider the economics of new projects business expansion and equipment purchases.
In summary, we continue to be optimistic about our ability to grow loans at attractive rates and maintain our credit discipline. As noted earlier Q2 loan growth should be very strong and in excess of the total for Q1. In addition, we would anticipate total 2020 for loan growth could be at the upper end of our guidance.
From a credit quality perspective as detailed on slide 13, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics nonperforming.
Nonperforming loans as a percentage of total loans was virtually unchanged at 34 basis points up by $9 million.
As an aside while core Npls had a slight decrease for the quarter, we saw an uptick in nonperforming loans in the commercial premium finance portfolio, resulting from increased cancellations in the transportation segment of that portfolio.
We continue to monitor the situation closely and believe this number should stabilize and come down as a result of tighter loan structures and enhanced underwriting.
Higher yields and late charges from this segment of the portfolio continue to offset our credit losses.
Charge offs for the quarter were 28, $21 8 million or 21 basis points up from $14 9 million or 14 basis points in Q4.
Important to note that charge offs for this quarter were largely reserved for in Q4.
Finally, as detailed on slide 13, when we saw stable levels, our special mention and substandard loans.
As noted in our last few earnings calls we continue to be highly focused on our exposure to commercial real estate loans, which comprise roughly one quarter of our total portfolio higher.
Higher borrowing costs and pressure on occupancy and lease rates continued to affect CRE valuations, particularly in the office category.
During the first quarter, we saw a modest increase in CRE npls from three 1% to three 4% up $4 million.
On slide 17, we continue to provide enhanced detail on our CRE office exposure. Currently this portfolio remained steady at $1 6 billion or 13, 5% of our total CRE portfolio and only three 6% of our total loan portfolio.
Of the $1 6 billion of office exposure at 44% as medical officer owner occupied the average size of alone in the office portfolio is only $1 5 million.
Only six loans above $20 million in only three of which are non medical or owner occupied.
We perform portfolio reviews regularly on our CRE portfolio and we stay very engaged with our borrowers as mentioned on prior calls our CRE credit team regularly updates there deep dive analysis of every loan over $2 5 million, which will be renewing between now and the end of the fourth quarter of 2020 for.
This analysis, which covered 78% of all CRE loans maturing during this period resulted in the following <unk>.
Total loans reviewed where clear will clearly qualify for a renewal at prevailing rates.
30% of these laws are anticipated to be paid off or will require a short term extension at prevailing rates. The remaining 90% of these loans will require some additional attention which could include a pay down of our pledge of additional collateral.
We continue to back check 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 to require additional attention continue to support their loan by providing enhancements, including principal reductions.
Again, our portfolio is not immune from the effects of rising rates or 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 appropriately reserved and situated to weather. The challenges ahead that concludes my comments on <unk>.
And I'll turn it back to Tim.
Tim: Well you can tell we continue to believe that we're well positioned to take advantage of the current environment with our diverse businesses and as you also heard we expect to see relatively strong growth in the coming months.
To some of the earlier comments from both Dave and rich if we experienced loan growth at the high end or above the high end of our forecasted range, which we believe is possible that could pressure the net interest margin from the current levels, particularly in the second quarter.
If that were to occur the tradeoff is solid franchise growth and favorable net interest income performance in future quarters.
To add some financial context, our projection is that net interest income for the second half of the year will come in higher than for the first half.
And that while there are a lot of moving parts. The current consensus pre provision net revenue number looks about right to us.
With respect to the announcement regarding <unk> bank. We've enjoyed speaking to many of you over the past couple of days and we've also shared the transaction highlights document.
So my summary as succinct.
We are very excited about this opportunity.
As we've mentioned on prior calls for several reasons. The current population of attractive attractive targets has been quite limited <unk>.
<unk> serves the greater Grand Rapids, West, Michigan market, which is a top 50 MSA in the United States.
They have pristine credit quality net charge offs were negative for the past three years and virtually no nonperforming loans.
They stayed short with their securities portfolio have a limited population of fixed rate loans, and a very attractive low cost deposit book.
Their loan to deposit ratio is 55%, which translates to $1 1 billion in excess deposits, which in this environment, we would deploy at a substantially higher rate.
Lastly, <unk> has a committed leadership team excited about the transaction.
While we have business in northern Indiana, and West, Michigan today, we do not have a physical footprint.
And I can tell you that there are not many banks if any at this point with this good a profile financially and such a good cultural fit.
I am not exaggerating when I say this is an ideal platform for our expansion in West Michigan.
And we are very pleased to have this moving forward.
At this point I will pause and we can take some questions.
As a reminder to ask a question you will need to press star one one on your telephone to remove yourself from the queue. You May Press Star one one again, please standby, while we compile the Q&A roster.
Our first question comes from the line of Jon <unk> of RBC.
<unk> capital markets. Please go ahead John.
Hey, Thanks, good morning.
Good morning, John.
Jim Thanks for the help.
Some of the margin and net interest income dynamics, but can you guys touch on those noninterest bearing levels and confidence that those balances can stabilize and then.
Touch on some of the pricing trends you expect in the money markets and savings products.
In the second quarter.
Comments on the margin, but I'm just curious if some of that stuff is burning out and could be less of an issue in the third quarter.
Yes, I mean, we're we're obviously hopeful that the half of the DDA balances that were out on average in the first quarter have more or less come back and that that will stick John.
With with market rates up.
Tim: Some of the competition that we've seen subsiding.
<unk> is back in the market and so you are around 5% for.
Some of the promotional or marginal deposit growth, but.
We were pleased in the first quarter to match the deposit growth with the loan growth.
It just came in a little higher cost than we expected.
Okay, Alright fair enough.
And then.
Dave maybe for you can you unpack mortgage a bit in terms of your expectations. There you talked about slightly higher origination volumes, but typically.
You guys see a pretty strong Q2, and Q3, what kind of expectations do you have there.
Well.
We finished the fourth quarter was pretty low and I guess the color I can give you is January applications were higher than December and February was higher than January and March was higher than February but it's just it's not like a hockey stick up has just been.
Tick up and so far in April the application volumes are somewhat similar to March.
But we are sort of expecting the spring buying season to help and although the increase in rates or recently hasnt been helpful. But there is a lot of pent up demand out there.
Got it.
More than our normal share of people asking for.
<unk>.
Prequalification letters and the language to us indicates that there is some pent up demand. So we do sort of expect the spring buying season to pick up even though there is a shortage of supply and so we would expect the second quarter to be better than the first better than the first quarter the spike.
Higher rates that we're seeing now early.
Two weeks into the second quarter, but we're optimistic I guess.
Yes, Okay thats helpful.
Alright, guys I appreciate it I'll step back I'm sure there are others with questions, but numbers looked at thank you.
Thanks, Chad.
Thank you.
Our next question.
Come from the line of Chris Mcgratty of K VW. Your line is open Chris.
Alright, great good morning.
Dave maybe a question for you I think I think in your prepared remarks, you said the consensus TP in our numbers look okay.
I guess.
What are your expectations for margins, you talked about kind of a little bit of pressure for growth purposes, but if we do get the forward curve is.
Is the range that you've previously guided on the margins still good or is it going to be kind of may be trending below that.
No.
It's so good I think we're fairly neutral now on any.
The consensus is a couple of rate cuts, we don't think that that impacts us dramatically the bigger pressure here is simply.
Do you hold the DDA and we've seen timber 9%, we've seen a bounce back so far this quarter.
And then just really strong loan growth, we're going to be above the top end of our.
The guidance in the second quarter, we believe and just to fund that short term is just a little bit more expensive, we're seeing in the market than if you were to just grow those deposits.
<unk>.
Mid single digit sort of range, so just a little bit of pressure there, but as I said, we're sort of thinking around the three and a half range right now lots of moving parts, but we wouldn't expect that to change dramatically.
Based upon any.
Moves by the fed in one way or the other 25 or 50 basis points.
Okay and just the guidance is mid to upper single as kind of the loan growth that youre talking about.
For the year I think as rich said, we think we're at the high end of that guidance. We think the second quarter will be above that range. It's a strong quarter for premium finance and the pipelines are full so we actually think we will have a stronger growth quarter for loans in the second quarter than we did in the first quarter.
Okay.
Thanks for that and in terms of the deal I think I get the quality of the bank youre buying in the market extension.
Could you help us with accretion expectations of ranges at about 5% of your balance sheet in.
In terms of size is that a reasonable.
The.
Range of what you might be able to extract from it I know the balance sheet probably has some.
So nothing to do given there they are under loaned and have a lot of liquidity.
Yes, Chris I mean, it's early obviously and were working those numbers, but I think we're going to stick with what we've said which is accretive excluding the integration expense in year one.
There's lots of opportunity here. This is a great fit for us the market's terrific. It grows faster than Chicago for example on households.
We're really excited about this.
And the excess liquidity they have given the strong loan growth. We're talking about we think we can really put the bet.
T Utah.
Utilize almost on day, one and a higher rate.
The asset class.
Tim: Okay.
Thanks, Robert just wanted to come back to the prior comment on the PNR.
Feels like you're being a little conservative given how optimistic you are on growth is there something I guess, we are missing.
A list that wouldn't suggest that there's an upward bias.
Yes.
Chris I think we're just.
Cautious about what the deposit environment is going to look like if we have to fund a lot of growth and that's a good news story for us that we're going to have good growth, we're adding good names there'll be with us for a long time, but.
Growth of we did a $1 billion plus this quarter and have to do it again next quarter.
Is causing some upward pressure.
Okay. Thanks, Tim.
Yes.
Thank you.
Our next question.
Comes from the line of David Long of Raymond James. Please go ahead David.
Good morning, everyone.
Hi, Dave.
You started the year with record results does this impact your appetite for marketing or other investments spending throughout the rest of 2024, and specifically I'm thinking about you get an increase in revenue or is that going to lead to incremental investing in projects and.
And then also with a lot of your peer banks are competing banks and risk weighted asset diets are just coming off of them is there.
And appetite to hire.
Some veteran bankers from other organizations win win where they may be restricted in their ability to grow their business right now.
I'll comment I'm sure Tim on China chime in too, but we have a pretty.
Do a three year plan for our investments in technology and projects and we will stick with that we have so many resources. So.
We want to control expenses too, but continue to invest in the business I don't think that would change much.
Marketing.
As we want to continue to grow the franchise and raising those deposits is important so we'll probably stick with our normal plan, although the property, it's up a little bit as you know in the second and third quarters because.
The seasonality of our sponsorships and all.
Mike.
So I think we're going to attempt to control expenses well just because they have record practice doesn't mean, you have to spend them, but when it comes to when it comes to people. We're always looking for good people. So and we did that we did that with some folks in the mortgage warehouse space recently, and we would always look for good people if they can produce.
Good quality franchise value and growth happy to add people as.
They become available.
But that's always the case.
Speaker Change: Yes, I don't think I would add much I mean, we've got great momentum as things stand right now so I think we're reasonably happy with the forward outlook here.
Got it. Thank you and then just as a follow up I want to go back to the deposits any categories right now where you're actually seeing some reductions in deposit pricing is there are there are.
Can you start to price anything lower at this point or is everything still sort of trending turning north.
Speaker Change: Yes, David it's an interesting question because we're hearing some competitor institutions.
Really with no rate movement in the market trying to take some rates down and we're watching that carefully.
We have not been active in that regard primarily because our intent is to grow pretty aggressively.
But we are watching some people trying to kind of.
Trend down in terms of their deposit costs.
Got it thanks, guys I appreciate it.
Yes.
Thank you.
Our next question.
Comes from the line of Casey Haire of Jefferies. Your line is open Casey.
Yeah, great. Thanks, good morning, everyone.
Another question on the funding strategy, sorry, if I missed this but the.
How much do you expect Cds.
To drive.
Deposit growth going forward after a very strong first quarter and then what is the what is the marginal cost of Cds today.
Well kind of two answers that question I mean, we're running both money market and <unk>.
Promotional CD type offers in the market and getting traction on both.
Don't have the exact percentage Casey in terms of the.
The mix of Cds versus other but.
The CD market, most people have kind of shortened up waiting to see what happens to rates.
Sure.
Seven to 12 or 15 months type stuff is in the 5% or low five range.
And we're in that category too.
But we're having good success, there and we're adding new names, which we like a lot and so.
I would say marginal money markets are.
In the four range marginal Cds in the 5% range.
Got you, Okay and then.
On slide 10 your.
NII simulations, youre actually showing positive youre, showing asset sensitive and liability sensitive I assume that's tied to the lag in commercial.
Commercial premium finance.
I'm just wondering when does so what and which I think that plays out.
In August so I'm just wondering can you just provide some color on that dynamic Barry.
Sting stimulation that you guys are showing there.
Yes.
Like I said, we think we're relatively neutral but the main reason.
Has that dynamic as we think in down rate scenario, who will be able to.
Reduce our deposit rates pretty much basis point for basis point.
Our.
Sure.
Not time timing.
Time deposits.
So the out of money market rate, we would expect to reduce those 25 basis points of tobaccos on 25 on the upside we just like the.
The beta is a little slower that we're not going to raise our deposit prices immediately if rates go up and so you would have you would have a lesser meda on the app and a greater beta on the downside and then you'd have the repricing on the asset like you talked about so it's relatively.
Relatively neutral as you can see but the betas on the deposit is what sort of creating that dynamic the beta assumptions.
Got you. Thank you.
Thank you.
Thank you.
Yeah.
Our next question.
It comes from the line of Terry Mcevoy of Stephens, Inc. Your question. Please Terry.
Hi, it's Terry Mcevoy good morning.
Good morning, Terry.
Hi, maybe provide a bit more color if you could on the commercial loan growth in the first quarter the $670 million I know you mentioned some of it was.
Mortgage warehouse the rest was market share gains.
Just maybe expand industries of these larger banks smaller banks and what's behind that growth.
Yes Terry.
It's interesting I think we've talked a little bit in the past about what's happened in the Chicago market.
We have seen tremendous consolidation.
Speaker Change: A number of our meaningful competitors like MB in private in first Midwest. So are all gone and so there's just a lot of dislocation.
Things don't happen immediately and they just take time.
We are just seeing a tremendous amount of opportunities as a result of that dislocation. We're also seeing a lot of opportunities out of the.
The much larger banks that have a presence in Chicago, where.
Theyre just not customers are not feeling a real good connection and communication with some of those <unk>.
Situations right now so we're just seeing a lot of really nice opportunities frankly.
Five years ago, we just never would've thought we would see.
They tend to be a little bit bigger.
We see a lot more opportunities kind of upmarket.
And then within the community bank footprint.
Speaker Change: Again, seeing a lot of really good small and medium size opportunity. So the competitive dynamics as Tim has pointed out are very much in our favor right now on the lending side.
Thanks for that and then as a follow up you had we talked about the strong loan production, but expenses looks like they came in below consensus.
If that loan production in Q2 picks up and maintained throughout the year.
Could you maybe talk about how that will impact the salary and benefit line or expenses overall, because I'm looking in the past there tends to be a correlation with big production quarters and an increase in expenses.
A little bit in our expenses too to Dave's point earlier tend to trend up a little bit in the second and third quarter generally related to marketing but.
And the <unk>.
<unk> portfolios, we are very efficient and so incremental volume while it hasnt expense impact is not a big driver.
So I would think you would expect modest changes not kind of trajectory changes with with strong loan growth.
Thanks for taking my questions.
You bet.
Thank you.
Our next question.
Comes from the line of Nathan race of Piper Sandler. Please go ahead Nathan.
Nathan.
Can you kind of talked.
<unk> talked about.
Credit trajectory for you guys, maybe in terms of charge offs. I mean, you guys have obviously had excellent credit trends.
Several years now so I'm just curious how you're kind of thinking about kind of a normalized charge off range for you guys going higher for.
Longer environment.
Yes.
Ill chime in and then rich can chime in but we are in the.
21 basis point range of sort of this quarter.
And the teams generally before a couple of quarters in the singles, but I think we generally think that we write to sort of a 2025 basis points.
Loss rate and we haven't been there for a number of years right. So we keep thinking things will normalize over time, but.
We think if you're in that 20 basis points less than our 2025 basis point or less that's sort of a reasonable range to be on an and.
So I think 2025 is what we think of them as normal.
And over the course of the year, but we haven't seen that recently, but a little trend up in this quarter, we had some larger ones, but as we talked about we fully reserved for our most of those in prior quarters. So just kind of clearing amount would be proactive.
Yes, no I think I would agree with everything David said and the other thing I would just keep in mind is.
It's not necessarily linear.
You see with a lot of other banks. There is one off so things just happened. So periodically you could have something higher but I think youll see a lot lower too so.
But if you take a look over time I think what Dave said is exactly true around that 20 to 25 basis point range.
Okay, Great and then I noticed the office CRE.
Portfolio grew.
Speaker Change: The amount and the.
Quarter I'm, just curious in terms of what type of opportunities Youre seeing both in terms of.
Speaker Change: The type of office.
Also in <unk>.
What geographies as well.
Yes, good catch.
Right now as you can imagine there is very little appetite out there.
For office, but.
We have seen as we've talked about on other calls we have seen some opportunities out there where they are owner occupied.
Well tenanted.
And in this.
In this case these are medical office.
<unk>.
But you can really get very good structure in terms of just overall equity contribution and pricing as well so.
We look at it and we don't think that our exposure here is where it is.
Certainly not over weighted in that category and we think we have some room night that were out there trying to actively grow that portfolio, but when you see those opportunities.
<unk>.
It's great to be out in that market and still have availability.
I mean, not that we're looking for office deals, but consistency matters to our clients and it's important for us to be in the market and as others sort of sit on the sidelines, we think we're getting terrific opportunities.
From a <unk> add to your geography question.
Generally speaking our portfolio.
<unk> tends to be more Midwest focus.
Not exclusively but in this case this was a midwestern based opportunity.
Okay, Great and then maybe just one last one if I could for Tim.
And later the acquisition announcement earlier this week.
You guys. It seems like it should be accretive to your capital ratios going forward. So I'm just curious to hear kind of the appetite for additional acquisitions over the next year or so, particularly as you maybe look to.
Phil.
Up towards.
The Grand Rapids area potentially.
Sure.
Number one we think we're reasonably good at acquisitions. So we're confident that we will get this integrated and moving the right direction quickly and we start from a terrific place because this is a really good bank.
We're not going to try to do several at the same time, so we're probably on the sidelines for a little bit here, but.
We're having conversations and continuing to look at what makes the most sense for us going forward.
Okay great.
I appreciate the color. Thanks, guys. Congrats on your back order.
I appreciate it.
Thank you.
Our next question.
Comes from the line of Ben Garlinger of Citi. Please go ahead Ben.
Hey, good morning, everyone, Hey, Ben.
I'm, just going to touch base on majors aspect.
Could you just give us a little bit of background.
The habit presence, it's just not a branch footprint in the Western Michigan area like why do this deal now it seems like you're having good growth. This year I mean to be honest I think you are.
High single digits, probably you can imagine.
Conservatively, probably closer to like 12% growth. This surely it's not just deposits and liquidity, but.
Do you feel about kind of at the risk of potentially taking your eye off.
Off the ball for what could be or likely to be a really healthy year for growth organically.
Well I don't think we think we're taking our eye off the ball. We think this is part of our strategy to grow in the Midwest and to take good care of clients.
As you say, we do not have a footprint in the area right now, but we do have material business in both northern Indiana and West, Michigan, We just opened a new location in crown point less than a month ago and so.
Great market and at this point if the question was do you wait for something different to come along we think mercantile is a terrific fit for us.
The growth opportunity is in West Michigan are good it's a well run bank its a committed leadership team.
We just feel like this was the right franchise at the right time.
Gotcha Thats helpful.
The accretion perspective.
It's a very efficient bank decided to begin with like.
Other than just kind of mixing the two balance sheets or expense synergies to be had in 25 or is it largely just the.
Pro forma one plus one equals more than two.
Well.
Dave can add to this too I mean, there is likely some overlap type activity, but we think and I think they think that will bring capabilities to them that'll be productive in the market in terms of both existing clients and new opportunities so whether it's.
Treasury services, our digital banking services or expertise in certain lending areas.
I think theres, a lot of synergy here and a lot of upside.
You always get some cost synergies that we should be able to.
Leverage our buying.
Capacity.
In a fashion, where we can probably drive things like insurance costs, and DP costs and those sort of costs are lower.
And so there will be some cost saves, but we arent closing any branches or some plan to close branches we plan to.
Speaker Change: To grow in that market area. So.
They're a public company. So some of those public company costs will go away, we won't need a separate audit et cetera. So there are cost savings there, but this is not a this is a.
Got it.
Again, a partnership with a great franchise.
A great market and grow like we've done our entire life with with banks.
Yes.
I appreciate the color Congrats Scott pretty solid year ahead of you here.
Thank you.
Thank you.
Our next question.
Our next question comes from the line of Jeff <unk> of D. A Davidson your question. Please Jeff.
Thanks, Good morning, just a couple of credit.
Follow up questions.
The pickup in nonperforming loans in the P&C segment anything timing related that we've talked a lot about credit normalization, but just wanted to see if theres anything.
Specific in that segment that that drove the increase.
No as I mentioned transportation tends to be a little bit of a.
The issue right now just out obviously, that's no news to anybody.
<unk>.
Freight rates are down.
Revenue is down in that segment.
Causes for more stress on those borrowers and as a result cancellations have ticked up.
But I don't think ultimately it is.
Material concern of mine I think our teams are working to make sure that we're very efficient on collection Theyre working as we go forward.
<unk> feels a little bit tighter, but again given that level of late fees and overall rates that we earn on those.
It's still a good trade for us and the other thing Jeff I would chime in there with us.
They are listed as nonperforming, but when they go into nonperforming status. If we're short on collateral we've already taken the charge offs. So we're generally just waiting for that to return premium to come to us from the carrier. So it's not really an indication of larger losses to come down the pike because if we're short on collateral we've already taken the loss were just waiting for the money to come back.
And the carriers.
Understood. Thanks.
And then just a.
A similar question on the on the charge offs side the C&I front.
I know you mentioned in Q4, a lot was reserved for but within the C&I bucket are you seeing any commonalities vintage your business category I don't recall, what kind of came on.
Or what you've reserved for in Q4, but just.
Looking at the C&I bucket.
What what was charged off.
Yes.
In the C&I category, we had some exposure in our franchise group that was that we recognized.
But I think that was largely kind of more of a one off type situation.
If there was one area that I would point to again it would be transportation, we don't have a huge amount of exposure there.
But.
It definitely is an area that where we're just seeing that only in the P&C side, but in the core portfolio, just having more stress so.
But as it relates to the charge offs.
It was largely focused on.
Some existing CRE exposure that we reserved in.
A little bit of just miscellaneous C&I and a little bit of franchise exposure.
Thanks Rich.
Keeping on the sale of the retirement advisory business is there a go forward impact on on fees and expense or is that roughly a wash just trying to see it.
We need an adjustment there.
It's modest.
Fee is generally go down a little bit is we have a partner and we also lose some expenses, but its very modest and I don't I don't think is going to move your numbers.
Okay, and maybe I'll squeeze in just one last one on that about a five month pause here on hedges.
You think youre largely in good shape, there I guess barring running and debt maturities of those do you feel like we holder.
Ill be inactive conversation, but just wanted to see us.
We got an extended pass here.
No we talk about it a lot.
We just kind.
Kind of watching for the time being I mean, we'll certainly kind of as we get closer to win some of these roll off be more active or it could be more active but.
The rate environment right now is uncertain.
Seeing people talk about either rates higher for longer rates up as opposed to rates down. So I think we're happy with where we are right now.
Okay. Thank you.
Yes.
Thank you.
Our next question.
It comes from the line of Jared Shaw of Barclays. Please go ahead Jared.
Hey, good morning, Thanks for the questions.
Just wanted to just circle back on the on the deal.
In terms of the timing that seems like a.
Great timeline for closing.
With the with the commentary coming out of regulators recently, it sounds like deals for banks will be more difficult.
Do you feel that there'll be an opportunity for you to do more deals going forward. After you. After you integrate this you seem pretty optimistic.
The outlook there.
Well, we hope so.
Community oriented high quality Bank, we think Mcintyre was as same in terms of their profile and so.
We will go through the process, but we hope that this gets approved rapidly.
And as we talked about earlier, we will continue to have conversations and look for other opportunities.
But I can tell you again no hesitation on our part with respect to <unk>. We think this is exactly the right fit and a very good market right now.
Okay, Thanks, and what's the.
Early sort of projected credit mark on the portfolio.
Well, we haven't disclosed that but they are a public company you can look at their public filings.
As Tim mentioned earlier, they've had net recoveries for a few years of very conservative a well run credit function.
I wouldn't expect much from that and you could tell that just from looking at their public disclosures.
Okay. Okay, and then you had highlighted the excess funding coming from the deal if we do see.
Accelerated loan growth from the from the core bank.
Would you look at adding wholesale funding as a short term fix until those excess funds come on or should we really be thinking that youre going to match fund our loan growth with them.
With full market price side deposits.
No we sometimes use wholesale.
<unk> funds.
Funding our growth because we can never match it perfectly right, but our plan long term is that even if you backfill in the short term with wholesale funding and we continue to grow our core consumer and commercial funding and.
In a manner that you don't have to rely on the wholesale funding long term, but.
Sometimes you have to backfill and if the loan growth.
As a much.
More accelerated than your standard deposit gathering activities, but it's not it's not a long term plan into short term gap filler plant.
Yeah, Okay, great. Thanks, and then just finally for me what's the.
You talked about the better spread opportunity on commercial lending where are you seeing spot rates for new C&I loans.
Now in the market.
It's a pretty broad.
Group I mean, you can go for really high quality.
Well secured well structured opportunities, where youre getting a lot of treasury.
You could be in the $2 50 range, but were.
But we're still seeing rates that are still very attractive and north of that.
Smaller deals and deals were.
The year, there's a little bit more structural issues, but generally speaking our job as we talked about is really bringing these customers in.
You don't get these opportunities very often so our bankers are incredibly eager to win these opportunities when they are out there.
I'm, not saying that we're going to be the lowest price necessarily but we're certainly if it's a deal that we want we're going to we're going to work hard to win it.
Great. Thank you.
Thank you I would now like to turn the conference back to Tim Crane for closing remarks, Sir.
Thank you Latif and for all of you that participated this morning. Thank you not only for today, but for your feedback and insights over the last couple of days as we've talked about the transaction.
I think you can tell we're excited both about the opportunities in Chicago and about the pending acquisition.
And as always we will work hard to deliver so thank you for your time this morning, and we'll wrap it up.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Yes.
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