WTFC - NASDAQ

Welcome to Wintrust Financial Corporation's Fourth Quarter and Full Year 2023 Earnings Conference Call. A review of the results will be made by Tim Crane, President and Chief Executive Officer; David Dykstra, Vice Chairman and Chief Operating Officer; and Richard Murphy, Vice Chairman and Chief Lending Officer. As part of their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentations, there will be a formal question-and-answer session. During the course of today's call, Wintrust management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking statements. The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10-K and any subsequent filings with the SEC. Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded. I will now turn the conference over to Mr. 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. In addition to Dave Dykstra and Rich Murphy who the host introduced, Dave Stoehr, our Chief Financial Officer; and Kate Boege, our General Counsel are with me. In terms of an agenda, I'll share some high level highlights. Dave Dykstra will speak to the financial results, and Rich will add some additional information and color on credit performance. I'll wrap up with some summary thoughts on 2024, and as always, we'll do our best to answer some questions. For the year, we reported record net income of just over $622 million, up 22% over 2023. 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. In our materials, as we do at every year end, we have also included a series of 10 year historical charts that show solid progress on key metrics, evidence that our approach not only works but differentiates us from many of our peers. 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. For the fourth quarter, net income was just over $123 million, a solid result given the recognition of a $34.4 million extraordinary expense related to the replenishment of the FDIC Fund following the March bank failures, and an approximately $10 million expense related to the write-down of certain mortgage related assets due to the falling interest rates during the quarter. We reported record net interest income of $470 million, up approximately $8 million from the third quarter as a result of both an increase in the net interest margin of 2 basis points to 3.64% and continued good loan growth. Deposits were also up in the quarter. Non-interest bearing deposits increased slightly and were steady as a percentage of total deposits. 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. 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. I would highlight that our allowance coverage for core loans, excluding primarily our low loss insurance finance portfolio, is at a healthy 1.55%. This detail is in Table 12 of our press release. 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 AOCI, driving up our book value and capital levels. The tangible book value increased by $385 million to over $70 a share during the quarter. You'll see in one of the charts that I mentioned, that our book value has increased every year during the 10 year period shown. 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. Our liquidity position remains strong. Overall, a solid quarter, which we believe will compare well and may differentiate us relative to many of our competitors. 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 2024 outlook.

Great. Thanks, Tim. 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, consistent with our prior guidance of mid to high-single digit loan growth. 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 will talk about that in just a little bit. 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 to deposit composition, non-interest bearing deposits at end of the third quarter and fourth quarter both represented 23% of total deposits, evidencing the stabilization of the non-interest bearing balances during the latter half of 2023. Other balance sheet results were that, total assets grew by approximately $705 million. We had slightly increased ending loan-to-deposit ratio and our capital ratios were relatively stable, with most of those ratios increasing slightly. Overall, a very successful quarter for the growth of the franchise. Our differentiated business model, exceptional team and service, and the unique position in Chicago and Milwaukee markets continues to serve us very well in that regard. 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 $7.6 million as compared to the prior quarter and an increase of $13.2 million as compared to the fourth quarter of 2022. I should 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. An increase in the company's net interest margin also contributed to the increase in net interest income. The net interest margin was 3.64% in the fourth quarter, which was 2 basis points higher than the prior quarter level. Accordingly, as we 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 during the first quarter of 2024 and beyond, in 2024, assuming the rates stay at roughly the same. I'd also like to note that total loans as of December 31st were $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 relatively stable net interest margin should allow for further growth of our net interest income in the first quarter of this year. Turning to the provision for credit losses. Wintrust recorded a provision for credit losses of $42.9 million in the fourth quarter. This is up from a provision of $19.9 million in the prior quarter, but actually down from the $47.6 million of provision recorded 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 forecasted BAA credit spreads and forecasted depreciation in the commercial real estate price index. Rich will talk about the credit and loan characteristics in just a bit. Regarding the other non-interest income and non-interest expense. Total non-interest income totaled $100.8 million in the fourth quarter, which was down approximately $11.6 million when compared to the prior quarter. The primary reason for the decline was related to $20 million less of mortgage banking revenue. 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. Those declines were really due to a decline late in the fourth quarter in the mortgage rates and accelerated prepayment speeds. We also experienced $7 million decline in production revenue due to seasonally lower volume and compressed gain on sale margins. But I think it's interesting to note that although our production revenue was lower than the prior quarter, it's actually higher than the fourth quarter 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 in 2024 thus far. Albeit still at low levels, we are seeing increases over our application volumes that we were receiving in January of last year, and application volumes that are slightly up from December of '23. There's a variety of relatively smaller changes to other non-interest 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. Turning to non-interest expenses. Non-interest expenses totaled $362.7 million in the fourth quarter and were up approximately $32.6 million from the prior quarter. The primary reason for the increase was the negative impact of the $34.4 million special assessment by the FDIC to pay for the two of the bank failures that occurred earlier in 2023. The remaining variances in non-interest expense both positive and negative, offset to a relatively small reduction in non-interest expenses from the prior quarter of just under $2 million. In summary, it was a very good solid quarter in our view, with good loan and deposit growth, a stable net interest margin with a steady outlook, a record level of net interest income, and a continued level of -- low level of non-performing assets. We feel like we've managed well through a somewhat turbulent period in 2023 delivering net income that was a record for any full fiscal year in the company's history, and we have a positive outlook for continued growth in assets, revenue, and earnings. 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 over time. As Tim referred to, we included some 10-year charts in the earnings release that I think provide some impressive evidence 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 conclude my comments and turn it over to Rich Murphy to discuss credit.

Thanks, Dave. As Tim and Dave noted earlier, credit performance continued to be very solid in the fourth quarter from a number of perspectives. As detailed on Slide 7 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 has provided us with a number of new opportunities. We saw a 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%. We believe that loan growth for 2024 will continue to be within our guidance for the following reasons. The commercial premium finance team should continue to show solid growth as premiums continue to be elevated. Our various pipelines have stayed very solid and our leasing team continue to see significant demand in the market. And as we've 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 and niche lending opportunities that come from dislocations at other regional banks. 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. 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 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 maintain our credit discipline. From a credit quality perspective, as detailed on Slide 14, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics. Non-performing loans increased by $6 million during the quarter from 32 basis points to 33 basis points. While NPLs have increased from 26 basis points to 33 basis points during 2023, they continue to be at historically low levels and we are confident about the solid credit performance of the portfolio. Charge-offs for the quarter were $14.9 million or 14 basis points, up from $8.1 million or 8 basis points in Q3. 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. 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 borrowing costs and pressure on occupancy and lease rates are cause for concern, particularly in the office category as we've noted before. On our second quarter call, earlier this year, we noted that we are 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 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 non-performing. It 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. On Slide 18, we have updated a number of important characteristics of our office portfolio. Currently, this portfolio remained steady at $1.4 billion or 12.8% of our total CRE portfolio and only 3.4% of our total loan portfolio. Of the $1.4 billion of office exposure, 42% is medical office or owner occupied. The average size of the portfolio loan in the office portfolio is only 1.4 million, and we continue to have only five loans above $20 million in this category. 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 their dive analysis of every loan over 2.5 million, which will be renewing between now and the end of the third quarter of 2024. This analysis, which covered 82% of all CRE loans maturing during this period resulted in the following, approximately one half of these loans will clearly follow by for a renewal at prevailing rates. Roughly 35% of these loans are anticipated to be paid off or will require short-term extension at prevailing rates. The remaining 14% of these loans will require some additional attention, which could include a paydown or a pledge of additional collateral. It's important to note that the previously mentioned loans secured by co-working space had been identified during our prior deep dive analysis. We have back checked 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 deem to require additional attention, continue to support their loans 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 and situated to weather the challenges ahead. That concludes my comments on credit, and I'll turn it back to Tim.

Great. Thanks, Rich. 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. 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 8 in our press release. While we don't believe that rapid rate cuts are warranted at this point, we are assuming that there will be 325 basis point rate cuts in 2024. 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. More interest rate cuts above and beyond the three we've assumed would slightly pressure 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 is at currently very low levels. 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 our percentage and to fund the loan growth through deposit increases at like levels. Our pipelines remain solid. 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. Overall, we're pleased with the 2023 results, and we're encouraged about where we start 2024. I know there'll be some questions. So at this point, I'll pause and we can turn it back to the host.

[Operator Instructions] Our first question comes from the line of Jon Arfstrom of RBC Capital Markets.

Thanks. Good morning, everyone.

Good morning, Jon.

Hi. Maybe Tim or Dave just wanted to ask about some of the last comments you made, Tim, on your expectations for the margin to remain in the current range. Can you talk about what you guys are doing to protect the margin around these levels? I think about your loan growth guidance and the net interest income growth potential. It seems a little better than peers, particularly your loan growth, but just talk about how you're protecting the margin and your confidence that we can maintain the current range absent greater than three cuts.

Yeah. Thanks, Jon, and Dave can add to this. We've talked about the fact that we've got an asset sensitive loan book that continues to reprice and 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. We expect that for at least a short period going forward here that, that will continue to be the case and that the spread between our loan and deposits will be roughly stable. I would characterize stable as plus or minus some number of basis points, around 3.6. 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 think we've got probably some pressure on the margin, but an offset in other parts of our business.

Yeah. Another thing to focus, I think that's true, the structure of the balance sheet also helps too. 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's benefit to us there. As you know, and as we've disclosed in the materials, we've got over $6 billion worth of interest rate derivatives that will also assist us if rates fall down. So, we were patient when rates went up to allow the margin to expand and 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 and we've tried to become relatively neutral on that rate, now, just by using both the structure and the derivatives to be somewhat neutral, here. So....

The competition is out there. So we'll depend 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.

Okay. That's helpful. Just one more revenue question just on mortgage. You touched on it, but obviously a tougher revenue quarter for mortgage, and I get it but, I think what you're saying is originations look good, spreads were depressed and if we don't have the same headwinds on the MSR maybe we can repeat the kind of quarter that we saw in the first quarter of '23, is that fair Dave, maybe even potentially a little better.

Yeah. I think that's pretty accurate, Jon. I mean, our production revenue was down about $7 million -- to about $7 million of production revenue. But that was higher than about $3 million of production revenue in 2022 and we had $8 million to $9 million of production revenue in '23, so what we're seeing is right now at least through the first part of January applications are ticking up, again, not wildly. But they are up from December and November and clearly they're up from where we were in January of '23. So, I would expect that, that revenue would sort of get back to those levels based on what we know right now. Again, it's not going to be a spike up, but I do think we're going to sort of return to where we've been in the previous few quarters. And then hopefully that if 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 hopefully that decline in rate spurs a little bit of additional home buying activity come March and April.

Yeah. It will be interesting to watch. Just a little rebound would be good though. I agree on that. Okay. Thanks a lot guys. I appreciate it.

Thank you, Jon.

Thank you. Please standby for our next question. Our next question comes from the line of Chris McGratty of KBW.

Hey. Good morning.

Hi, Chris.

Hi, Chris.

Maybe a question for Rich. I mean you guys have in the past fourth quarters I would say proactively built the reserve, when things are still good. Given where your reserves sit today, I guess, can you just speak to the potential need or desire to build reserves additionally in early 2024 or is this just kind of a, get ahead of it and build it while you can?

CECL doesn't necessarily work that way. I mean, yeah, so, I mean, I -- if you are asking me how the provisioning should work, it wouldn't not necessarily result in the same things that we're getting out of the CECL models. Because as Dave pointed out, I mean, we -- the BAA spreads that, the way they reacted, definitely affected what we had to do in the fourth quarter. There is just -- the loan growth affected it, and not necessarily what Rich Murphy thinks about the quality of the portfolio. I do think that what we've done, as you point out, at the end of last year, this year, was pretty material. And I think we have put ourselves in a very good position going forward. And if CECL works like it's supposed to work, we're actually pre-funding the losses that should accumulate down the road. So, I actually -- I feel really good as to where the allowance is given the shape of our portfolio right now.

Okay.

And 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, if you look in the presentation, our criticized assets that we have a special mention on substandard and good, those percentages held very stable. Charge-offs were still low at 14 basis points, a little higher than second quarter, but still pretty low. And we had a little bit more growth in the quarter. But all those things weren't too 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 their modeling, but the BAA credit spread has a high correlation to many of our loan lines that we model for and that spread over the eight-quarter period that we look at, going out, expanded quite a bit, which had a big impact on our provisioning. So, if the soft landing thoughts gain traction and the consensus view amongst the economists out there are that those spreads should tighten in, then we should see some benefit going forward. But in the fourth quarter, it was worse than the third quarter and it really generated the extra reserves.

Thanks for that. That's great color. Thanks. Just I know some banks have disclosed which are the Moody's scenarios and S4, S2, what they weigh. Have you -- can you remind us if you've communicated like what scenario is currently factored or the weight into the scenarios?

Yeah. I mean, well, we look at all the Moody's factors. We also look at some blue chip, other sort of consensus forecasts that are out there. But we are using the baseline scenario of Moody's, but various factors out of that baseline scenario.

Okay. Maybe just one more and I'll hop back. The capital outlook mid-to-high single-digit balance sheet growth. Your ROE can certainly support more growth. How do we think about perhaps other uses of capital in 2024? Any thawing in M&A conversations, is that something you would consider? Any color on capital use would be great. Thanks.

Yeah. Well, the straightforward part is that, as you said, the earnings of the company should support the loan growth, that's been the case for several quarters now, but isn't a long-term trend for Wintrust, where, typically we've needed to add capital to the extent: one, we continue to build capital, that's good. And on the M&A front, I would say that the conversations are still active, but there's also not a lot of activity and I don't know that others who might be in a position that -- that's better to talk about that would think that there is going to be a short term change there. Clearly, the rates coming down have helped the AOCI situation for a number of people who had impaired either loan books or securities portfolio. But we've been acquisitive in the past. I think we may be in the future, but we're disciplined about it.

Great. Thank you.

Thank you. Our next question comes from the line of Casey Haire of Jefferies.

Yeah. Thanks. Good morning, everyone.

Good morning.

Wanted to touch a little bit on the NIM stability guide. Just along those three cuts, what kind of deposit beta you guys are assuming throughout the year, if we get those kind of cuts?

Yeah. Well, I think generally we're believing that at this point that if the Fed cuts 25 for the non-CD -- term CDs that are fixed, that we should be able to reduce the rates fairly quickly by 25 basis points. So, we are expecting, as we increase rates rapidly as rates went up, we're expecting to be able to follow fairly closely with cuts in our money markets and savings and the like.

Casey, the other thing we're seeing, we don't have a huge book of municipal deposits, but some of those have reference rates, if you will, and we're starting to see as a result of what's happening with rates, those Index or reference rates come down. And so, we've seen some minor benefit on a portion of the book already.

Okay. Great. And just a question on the fixed rate asset repricing benefit. In the release, you guys call out about $8 billion that matures within or reprices within the next year. Just wondering, do you have the -- what the yield is on that and what the -- what it could reprice to?

Yeah. No, we haven't disclosed that, Casey. I don't have it handy here right now, but we'll think about putting that in future releases.

Okay. Great. And just lastly, the loan-to-deposit ratio ticked up a little bit to 93, I think you guys talked about 85 to 90. I know you're talking about funding loan growth with deposits, but just wondering if there is a hard cap on that loan-to-deposit ratio.

No. We think we like it. Sort of -- 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 just happen near the end of the quarter and so we were just trying to match deposit to loan growth and there is a lot that flowed in towards the latter part of December. So, just a little probably mismatch on the timing of the deposit raising, but probably expect that to drift back down to 92 again next quarter or so.

Okay. Great. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Jeff Rulis of D.A. Davidson.

Hi, thanks. Good morning. Rich, I wanted to circle back on the co-work, you singled out the one credit of, I think $17.4 million. What is the total remaining co-work exposure?

Negligible. I think there might be a -- certainly under $5 million, I think pretty well below that. There's a -- there might be a couple of small pieces, but generally that we're largely -- with this issue being largely addressed, I think we're -- that largely is behind us.

Okay. So, that 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 and sliding from kind of past due?

No. Loan was current. [Multiple Speakers] Yeah.

Got it. Okay. And maybe on the -- just hopping to expenses, safe to assume that quarterly FDIC insurance reverts back to the mid $9 million range? In other words, absent the special assessment, that could be a good run-rate for '24? And then kind of a follow-on question to that is, just overall expense run rate expectations there would be helpful. Thanks.

Yeah. Well, clearly we've -- the special assessment is a one-time item. I think towards the end of the couple of years out, 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 that assessment grows as the company grows. So, 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 it's 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, it's sort of similar to what we've talked about in the past. If you sort of look at the non-FDIC-impacted run rates of the third and the fourth quarter, those will probably increase slightly in 2024 as we have merit and raises for the employees and the impact of inflation, the impact of the FDIC insurance coverage increasing as we grow. And we continue to invest in our infrastructure, digital, and technology-wise, but -- so probably that 5% mid-single digit range is what we would expect, using the third and the fourth quarter as a base. And if we can grow loans and the franchise in the mid to high-single digit range, we can get that operating leverage out of the system.

Sounds good. Thank you. And then the last one just, and you kind of touched on it a little bit. But in that mid-to-high single-digit loan growth outlook for '24, do you have anything kind of layered in there? Is it sort of a soft landing type assumption or that's a crystal ball type question, but for the bulk of '24, do you have a recessionary or slowdown macro-wise embedded?

Well, my answer to that would be, we've fortunately got a diversified and pretty granular loan book. So, as we've talked about in the past, the transportation business and some of our customers are already experiencing challenging conditions and others are doing terrific. So, I don't know that a technical recession is much going to change the environment and we think across our loan book, we'll get a pretty balanced level of growth over the year.

Yeah. It's a great point, Tim, because we have all these different engines that just fire at different times. If you kind of look at where the growth is coming from over this last year, our life premium finance group essentially had zero or actually negative growth, largely because in a higher rate environment, it doesn't work. If you got into a recessionary type situation and they bring rates down, that product suddenly looks much more attractive. And a lot of the loan growth that we had two years ago, was out of that product. So as different -- as the rate cycles move through, they definitely affect different things. Right now, as we talked about, line utilization in a higher-rate environment really gets impacted. As rates come down, you're going to see the opposite effect. So, I think there is some -- there is 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.

Okay. I appreciate it.

Thank you. Please standby for our next question. Our next question comes from the line of Brandon King of Truist.

Hey, good morning.

Good morning.

So, I had a question on deposits. I noticed, most of the growth in the quarter came from money market and savings accounts. And I'm wondering if -- is that the expectation going forward where we'll see most of the deposit growth?

Well, we think the mix has somewhat stabilized, but with these higher rates than we had a year or 18 months ago, clearly the interest bearing products are more attractive to our clients. And so, I think you're going to see money market and CD growth that you wouldn't have seen a couple of years ago. And we're working hard and hopeful that the non-interest bearing portion continues to stay reasonably stable at around 23%.

Okay. And is part of that strategy also sort of anticipating a Fed easing cycle as maybe those money market accounts, maybe easier to lower those rates, I guess, faster than if we did more of the CD funding?

Well, 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 we offer a wide set of options to our customers and they select what they believe to be the best fit for them. So, we are seeing more CD-related activity as you can get rates in the 5% range, whether that'll continue as rates come down, you may get people trying to kind of lock-in those levels.

Okay. And then another question. I know, I appreciate the commentary on the reserve increase, but I did notice the reserve increase was primarily driven in the C&I category. So, I just wonder if you could speak to just the health of your C&I customers and credit trends there as opposed to a lot of attention is on the CRE space?

Yeah. I think, a couple of things that I would point to. One is, as we noted earlier, that the level of classified assets remains pretty consistent. So, we try to be very proactive on our risk ratings. And if you start to see special mention, classified assets start to move up, I think that would be a pretty direct reflection. But more anecdotally, we spend 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. Obviously, higher borrowing costs can affect them. Clearly, the economy I think has slowed a little bit and so that's affected them. But while it may not be as rosy when you had zero interest rates and the economy was just really clicking along, it doesn't feel that bad for most of our C&I customers. I think that they still feel pretty optimistic about where their overall revenues are coming from and where those levels will be. I think labor has probably become less of a concern for them. And just overall, input costs are -- have stabilized. So, I would say just net-net, I think they feel still pretty good.

Great. Thanks for taking my questions.

Thank you. Please standby for our next question. Which comes from the line of Ben Gerlinger of Citi.

Hey. Good morning, guys.

Hey, Ben.

So, I'm going to ask a question, I know you're probably going to be a little annoyed, but I'm going to ask it anyway. So, when you think about 2024, what I'm getting is kind of mid-single-digit, maybe upper middle-single-digit loan growth, deposit growth. It's called a flat margin, like what you said. If three cuts, kind of a 360 range, if the market has a little bit more, probably see a little bit pressure on that. That's largely just because of back book repricing on some CRE, and then premium finance still has a little bit of tail left in it. But as we get towards the end of the year, and possibly into '25, if there is a four cut amount rate cut environment, do you think -- is there 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 deposit costs. I'm just trying to think, it's a moving target, obviously, but Just any incremental thoughts on how you might exit the year and into '25? And I get you haven't given '25 guidance at all. So, just kind of finger in the air, that would be pretty helpful.

Well 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 are not contractual. So, other than our CD book, we're largely pricing at our discretion. As we talked about, if you get more rate cuts or faster rate cuts or you get 50, they slightly would pressure our margin beyond the assumed three cuts, but our mortgage business would likely perform better. And to Rich's point, we're at very low levels in terms of utilization online right now and we would expect to see some rebound there as rates come down. So, while there might be some pressure on the margin as rates continue to drop, we have other aspects of our business that we think will perform well. So, that's kind of the best way we're looking at that and why we value the diversified businesses, as an important part of our model.

Yeah. No, that's great color. It's a great point, too, that the fee income aspect will definitely kind of pick up some of the slack, or if not all the slack goes to the softer spread revenue. Can you just remind us any sort of kind of efficiency ratio on mortgage? I guess that we haven't seen a robust mortgage market. I'm just trying to think, like, if that does start to turn back on, expenses are also obviously going to go up as well. I'm just trying to match the two, if we do see a rebound in mortgage.

Yeah. It sort of depends on how hot the market gets and how wide gross margin gain on-sale margins are, but I generally think of the efficiency ratio in the mortgage business will be in about an 80% efficiency ratio business, so....

Got you. That's really helpful. Appreciate the color, looks like you guys have, kind of a pure growth force power year. It's good that the margin should stay roughly flat. So, I'm looking forward to it. Thanks, guys.

Yeah. Thanks.

Thank you. Our next question comes from the line of Terry McEvoy of Stephens Inc.

Hi. Good morning. Dave and I'm pretty sure it's in the appendix, but what are the hedges costing you each quarter, like $24 million comes to mind. But do you have that number handy. And what is that -- what would that be, if we get three rate cuts. And when does that turn from a headwind to a tailwind?

Yeah. Well, so, I think it was about 19 basis points of impact to the margin, and it's about $8 million a month. So $24 million a quarter. Right now, if SOFR moves one way or the other, that would change that. But we put a slide in our presentation deck that gives all the details of what the particular strike rates are. But we're receiving fixed and paying variables. So if SOFR goes down at all, even though we may not hit the strike rate, we'll get benefit because we'll pay less. So that $24 million a quarter, if SOFR comes down, will decline by what we pay by 25 basis points. So it's effectively locking in $6 billion worth of our variable rate portfolio into more of a fixed rate scenario that are SOFR based.

Thanks for that. And then. Are you or how are you using loan modifications within commercial real estate, and how are you defining a market rate. If you are using modifications?

Yeah. I mean, modifications are part of the business, so -- but we don't -- if a loan is seriously affected by lease rates or vacancy or rising rates, and you can't just hide a problem with a loan modification. So similar to the one that we just identified, that loan is current. But at some point, you have to look at that and say, is there really going to be the opportunity to change the income stream or change the cash flow with a modification? Generally speaking, you really have to be honest, and the borrower and the bank have to be honest about whether that's going to solve the problem. In a case like that, it's so challenged that it's not. So we do use modifications, but it's really got to be a situation where the difference between the targeted policy driven cash flow coverage and the actual cash flow coverage are relatively close and you're just working with them to maybe extend amortization a little bit 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. We're pretty much -- the interest rate is pretty much at market rate.

Great. Thanks for the color there. And thanks for taking my questions.

Thanks, Terry.

Thank you. Please standby for our next question. Our next question comes from the line of Brody Preston of UBS.

Good morning.

Hey. Good morning, everyone. I just wanted to get a little bit more granular Dave, on the loan yields. I understand the margin commentary that you gave, but wanted to kind of ask you, just given the premium finance books. How you expect 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?

Yeah. Well, the book that's tied to the one year CMT is the life insurance premium finance book. And so, as you're alluding to the rate now is very similar to the rate a year ago. So the benefit from that book is pretty baked in right now. So the repricing on those should stay relatively the same. The commercial premium finance book, however, is still is repricing over time. And although, those are not indexed to the Prime rate, they have pretty good correlation to the Prime rate, 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, Prime was 7.5% at the end of 2022 and 8.5% at the end of this year. So there's another 100 basis points of repricing on that portion of the book. And then we have the fixed rate commercial real estate loan book that we have out there, some of that will reprice too.

Got it. And the stuff that is -- the stuff that's fixed rate. That's not the like premium finance related at all. How much of that do you expect to reprice on a quarterly basis over the next year?

Well, we've got $8 billion in total, but if you look at that. The big portion of that is our premium finance portfolio, it's $6.8 million. So, we had another $1.2 billion of commercial and commercial real estate type of loans that will reprice over the course of the year. And I probably just say, it's ratable. I don't think we have any seasonality per se to that portfolio.

And that, these levels generally slightly helpful as they reprice?

Yeah.

Yeah. Understood. Is there -- Is it fair to assume, when. I look at that kind of one to five year bucket as well that it's too similarly ratable repricing there, I'm just trying to make sure I get there cadence correct through 2025.

Yeah. We sort of looked at this, we don't have any maturity walls coming from -- that you can say, oh my gosh, when we get out 18 months we're going to have just boatload repricing or we don't get any repricing for three or four years, it's fairly ratable.

Got it. On the NIBs you guys kind of bucked to the trend versus the group this quarter. A lot of other banks have actually seen a reacceleration in NIB outflow. Wanted to ask you specifically if there was anything that drove the strength in the fourth quarter on a period-end basis, like if there is any chunky kind of deposits that came from institutional type money?

No, not significantly. I mean, 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, and we are hopeful that the 23% turns into a stable level for us. And our team continues to add commercial clients that have non-interest bearing deposits and treasury services and use other products and services we offer. So, it's sort of a function of building the franchise.

Yeah. That's the way, I would look at it, too. I mean, Rich talked about there's a little less line usage. So some of those people that maybe would have drawn on the line have used some of their non-interest bearing deposits, and maybe that's a reason why you're 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 linkage. And we're being able to hold it pretty well and it's been pretty stable on an average basis for the last couple quarters. So we're hopeful that we can hold it in there.

Great. And then just last one from me, is just on the wealth businesses are pretty decent pick up in assets under administration. This quarter after they were flat last quarter. I just wanted to ask. What caused that to occur?

For the revenue to be flattish, you're saying?

Just the growth I think.

No the AUA was up from $44.7 billion to $47.1 billion.

Yeah. Couple of things with that, some of the brokerage accounts grew a little bit. We also -- our max safe product that we have, the way we operate that is, that works through our trust company as a fiduciary account. So those get included shows a little bit of growth in that area and just a little bit spread out in other places. So, nothing significant per se in any one chunky sort of deal. Yeah. And we also in that number as we note in the press release. Our investment portfolio is also managed out of our wealth management area and included in those assets under management and those ticked up a little bit.

Got it. Okay. So the move higher, shouldn't necessarily results in a similar move higher in revenue for next quarter?

Some of it is based on beginning of quarter asset valuations versus daily or end of quarter, you might see a little bit of pickup there.

All right. Great. Well, thank you very much for taking my questions everyone. I appreciate it.

You bet. Thanks.

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

All right. Great. Thank you, everybody. 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 trying to win clients and new business for the bank every day and we appreciate your time and your interest in Wintrust. So we'll be working hard and we'll talk to you in a quarter. Thanks everybody.