WTFC - NASDAQ

Welcome to Wintrust Financial Corporation's Second Quarter and Year-to-Date 2024 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 the 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. In addition to the introductions that Latif made, we're joined by 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 will add some additional information and color on credit performance and loan activity. I'll be back to wrap up with some summary thoughts on two topics, a high-level outlook going forward and an update on our pending acquisition of Macatawa Bank. And of course, we'll do our best to answer some questions. For the quarter, we reported net income of just over $152 million and reported record net income of just under $340 million for the first half of the year. The results were in line with our expectations with several positive and encouraging underlying elements. For the quarter, we grew loans by $1.4 billion and deposits by slightly over $1.6 billion. The loan growth was balanced across all material product categories and would have been higher had we not elected to sell approximately $700 million in loans during the quarter, which Dave will discuss. The deposit growth included absolute growth in our non-interest-bearing deposits and the percentage of non-interest-bearing deposits relative to total deposits remained stable for the quarter. Both the loan and deposit results are strong and evidence that we continue to gain share in Chicago, the Midwest and in our niche businesses. The net interest margin of 3.52% was in line with our expectations, and combined with the growth produced record net interest income of $471 million, up almost $7 million from the first quarter. We are seeing some of the expected credit normalization from the very low levels of delinquency and loss experienced over the last few years. However, our non-performing loans remain low and loans classified as substandard or special mention were little changed from the prior quarter. And again, Rich will walk through some additional detail. Overall, a solid quarter in particular, I think our team is doing a very nice job with respect to pricing and credit discipline, which will continue to show up in our results going forward. We are also adding consumer and commercial clients at a healthy rate, clients that will be with us for years to come. I'll pause here and hand this over to Dave and Rich, and I'll be back to wrap up.

Great. Thanks, Tim. First, with respect to the balance sheet growth in the first quarter of this -- compared to the first quarter of this year, we again reported strong loan and deposit growth. The deposit growth of $1.6 billion during the quarter is a 14% increase over the prior quarter on an annualized basis. And as the deposit composition, non-interest-bearing deposits increased by approximately $123 million in the second quarter relative to the first quarter and again represented 21% of total deposits at the end of both the first and the second quarter, so stabilization and a slight increase in the non-interest-bearing deposits from last quarter. The solid loan growth helped to fund strong second -- solid deposit growth helped to fund strong second quarter loan growth of $1.4 billion or 13% on an annualized basis. Adjusting for the impact of the sale of certain premium finance loans during the second quarter, total loans would have increased 2.1 billion or 20% on an annualized basis and is consistent with our prior guidance of being above the mid to high single digit loan growth for this quarter. Additionally, net of our election to conduct a loan sale transaction that reduced outstanding premium finance balances by 698 million at the end of the second quarter, the commercial premium finance portfolio would have been -- was up $161 million. The saleable loans during the quarter was done to maintain appropriate liquidity, capital and loan to deposit ratios. As to other aspects of the balance sheet results, total assets grew by $2.2 billion to $59.8 billion and our regulatory capital ratios remained relatively stable even with the strong growth. As Tim mentioned, it was another very successful quarter for gaining new customers and for the growth of our franchise, which has always been a primary objective of Wintrust. Our differentiated business model, the exceptional service that our teams provide and our unique position in the Chicago and Milwaukee markets continue to serve us well and we think it will do so in the future. As to the income statement categories, our net interest income increased $6.4 million from the prior quarter and represented a record high amount of quarterly net interest income. An increase in the average earning assets more than offset the modest decline in the net interest margin that we discussed on our last earnings call due to the expectations of the strong growth this quarter and was primarily the result of a mix shift in deposits and the higher cost of attracting incremental deposits to fund the solid loan growth. We're obviously happy to take advantage of current market conditions and add high-quality loan and deposit relationships even if it means a bit of margin pressure. Said another way, these new relationships provide nice gains in market share, additional net interest income at acceptable returns and long-term franchise value. Our second quarter net interest margin was 3.52% and was up slightly from where we ended the first quarter, which gives us great confidence that our net interest margin can continue to be in a narrow range of around 3.5% in the third quarter and into the fourth quarter of this year. Given the relatively stable net interest margin outlook and the growth in earning assets, we would expect again to increase net interest income in the third quarter. We recorded a provision for credit losses of $40.1 million in the second quarter, which was up from a provision of $21.7 million in the prior quarter, but down slightly from the $42.9 million recorded in the fourth quarter of last year. The higher provision expense in the second quarter relative to the first quarter was primarily a result of the aforementioned strong loan growth and a slightly higher level of net charge-offs and resulted in the build-up of our credit reserves. Again, Rich will talk about credit and the loan portfolio characteristics in just a bit. On to non-interest income and non-interest expense, total non-interest income totaled $121.1 million in the second quarter, which was down approximately $19.4 million when compared to the prior quarter. As you recall, the primary reason for the decline was related to a $20 million gain on the sale of our retirement planning advisers division that we recognized in the first quarter and no similar gains were recorded in the current quarter. And although persistently higher mortgage rates dampened our optimism for stronger spring home buying season activity, the company generated approximately $1.5 million more in mortgage banking revenue as we experienced higher production revenue due to slightly higher origination volumes, which was offset somewhat by less favorable market value adjustments on our mortgage servicing rights portfolio. The company recorded a $4.3 million of security losses, a modest gain on the sale of our premium finance loans and a variety of smaller changes to the non-interest income categories, as shown in the tables in the press release. But those changes relative to the prior quarter were material and not uncommon. Turning to non-interest expense categories, the total noninterest expenses were $340.4 million in the second quarter and were up approximately $7.2 million from the first quarter. The primary reasons for the increase related to salary and employee benefits expense increasing by approximately $3.4 million. The slight increase was due to higher mortgage commissions on the increased origination volumes. The second quarter having the full effect of annual merit increases that were effective on February 1st, and we had slightly higher employee benefits expenses due to an increased level of health insurance claims during the quarter compared to the first quarter, which is -- tends to be seasonally low. Advertising and marketing expenses increased by $4.4 million in the second quarter, when compared to the first quarter, as we've discussed on previous calls this category of expenses tends to be higher in the second and third quarters of the year to our expenditures related to various major and minor league baseball sponsorships and other summertime sponsorship events, held in the communities that we serve. The company also recorded a slight increase in occupancy expense, which was impacted by a $1.9 million charge on the pending sale of a bank branch in downtown Chicago, as we work to optimize our branch network. This pending sale is essentially relocation and a downsizing of a branch, which will result in lower expenses going forward with an estimated payback period of less than 2 years. Professional fees were slightly elevated due to approximately $532,000 of costs related to the pending acquisition of Macatawa Bank Corporation. These increases were partially offset by the $4.1 million reduction in our FDIC insurance expense as the company recorded approximately $5.2 million of such expense related to special assessments imposed by the FDIC in the first quarter and no such special assessments in this quarter. The remaining variance is both positive and negative are relatively normal and don't warrant any special mention on this call. In summary, the second quarter exhibited extraordinarily strong loan and deposit growth, a solid net interest margin in our expected range, a record level of quarterly net interest income and excluding the impact of the charge on the pending branch sale, other noninterest expenses and noninterest income were within our expected ranges. Again, I'd like to highlight, as Tim mentioned, that this quarter's results, combined with the first quarter produced record net income for any six month – first six month period in the history of the company. We also continue to build our tangible book value per share during the first half of this year. And as you can see on Slide 10 of our presentation deck, we've grown tangible book value per share every year, since we've been a public company going back to 1996 and we're on track to do so again in 2024. So that's something we're very proud of. We're excited about the future. We have a solid balance sheet, strong pipelines and it sets us up well for future growth in net interest income. And with that, I will turn it over to Rich to talk about credit.

Thanks, Dave. As Tim and Dave both noted credit performance continued to be very solid in the quarter. As detailed in the earnings release loan growth for the quarter was $1.4 billion or 13% annualized, net of the impact from the sale of $698 million in premium finance loans. This growth was driven by a number of factors. Commercial premium finance loans grew by $859 million before the impact of the loan sale. As noted in the past, the second quarter is historically when we see our highest funding volumes. In addition, we continue to see the effects of a harder market for insurance premiums, particularly for commercial properties, resulting in higher average loan size. Finally, we continue to see new opportunities as a result of a consolidation and dislocation within the premium finance industry. During the second quarter, we also saw growth in core commercial loans, which were up $350 million, driven largely by quality opportunities resulting from dislocation within the banking landscape in our primary markets. We also saw good growth in our commercial real estate and leasing portfolios. I would also note that we remain highly focused on getting paid appropriately for our risk, as noted on Slide 7, average loan yields continue to increase, up 10 basis points during the quarter. We believe that loan growth for the second half of 2024 will continue to be strong and aligned with our previous guidance of mid to high single digits for a number of reasons. Last year's third quarter volume for commercial premium finance loans is very strong. We believe the hard market for insurance premium should continue through year-end. In addition, our core C&I and leasing pipelines remain very solid. Finally, we saw a core C&I line utilization rates trending up from 34% to 37% quarter-over-quarter. Offsetting this growth will be continued pressure on the volume of new CRE opportunities as higher borrowing costs have reduced loan demand in that area. We believe 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, loan growth for the balance of 2024 should continue to be strong and within our guidance of mid to high single digits. From a credit quality perspective, as detailed on Slide 15, we continue to see strong credit performance, but with signs of normalization across the portfolio. This can be seen in a number of ways. Nonperforming loans as a percentage of total loans was up slightly from 34 basis points to 39 basis points. This modest increase in NPLs was evidenced in both our core C&I and CRE portfolios. And as noted on last quarter's call, we continue to see slightly lower but elevated levels of nonperforming loans in commercial premium finance portfolio resulting from on-going stress in the transportation segment of that portfolio. We continue to monitor the situation closely and we have started to see this trend stabilize as a result of tighter loan structures and enhanced underwriting. Higher yields in late charges from this segment of the portfolio continue to offset our credit losses. Charge-offs for the quarter were $30 million or 28 basis points, up from $21.8 million or 21 basis points in Q1. These charge-offs resulted primarily from loans within our core CRE, C&I and commercial premium finance portfolio. Our portfolio continues to be very solid, well diversified and very granular. Evidence of this could be seen on Slide 15, where we saw stable levels in our special mention and substandard loans. We believe that this quarter's level of NPLs and charge-offs reflect a return to a more normalized credit environment as evidenced by the chart of historical nonperforming asset levels on Slide 16. Finally, we are firmly committed to identifying problems early and charging them down where appropriate. Our goal as always, is as they head of any credit challenges. 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-fourth of the total portfolio. Higher borrowing costs and pressure on occupancy and lease rates continue to affect CRE evaluation, particularly in the office category. As detailed on Slide 19, we saw a modest increase during the second quarter in CRE NPLs from 0.34% to 0.40%. We also saw an uptick in the level of CRE charge-offs as we continue to proactively address and right-size our more challenged credits. On Slide 20, we continue to provide enhanced detail in our CRE and CRE office exposure. Currently, this portfolio remains steady at $1.6 billion or 13.3% of our total CRE portfolio and only 3.6% of our total loan portfolio. Of the $1.6 billion of office exposure, 42% is medical office or owner occupied. The average loan size of our – the average sizable loan in the office portfolio is only $1.5 million and we have only 7 loans above $20 million and only 4 which are non-medical or owner occupied. We performed 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 their deep dive analysis of every non-owner occupied loan over $2.5 million, which will be renewing between now and the end of the first quarter of 2025. This analysis which covered 84% of all non-owner occupied CRE loans maturing during this period resulted in the following: 51% of the loans reviewed will clearly qualify for a renewal at prevailing rates, roughly 25% of these loans are anticipated to be paid off or will require a short-term extension at prevailing rates and the remaining loans will require some additional attention, which could include a pay-down or pledge of additional collateral. We continue to back check the results of these tests conducted during prior quarters and have found that projected outcomes versus actual outcomes were very tightly correlated and generally speaking, borrowers of loans deemed to require additional attention continue to support their loans by providing enhancements, including principal reductions. As we have stated on prior calls, 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 credit and now I'll turn it back to Tim.

Thanks, Rich. To wrap up our prepared remarks and you've heard me say this on prior calls, we continue to believe that we're well positioned in some cases uniquely positioned in our markets to take advantage of the current environment with our diverse businesses. The growth this quarter was evidence of that and while we wouldn't necessarily expect to see this sort of loan growth going forward, we continue to be very encouraged by the solid pipelines. As Dave discussed, we believe the margin will be relatively stable in the second half of the year given the current rate assumptions. With the growth this quarter and the solid pipelines, we believe that continued net interest income growth is likely in the second half of this year. With respect to our pending acquisition of Macatawa Bank, there have been good conversations and planning regarding the integration and the many benefits financial and otherwise associated with the transaction. We remain very impressed with their team and the opportunities that we will have together. We received Fed approval for the transaction on June 17 that was quick in today's environment about 50 days from application, which we think reflects the relative strength of both organizations and our strong track record regarding acquisitions. You'll recall Macatawa serves the greater Grand Rapids West Michigan market, which is a top 50 MSA in the United States. They have solid credit quality, a low loan-to-deposit ratio and a very attractive low-cost deposit book. The loan-to-deposit ratio is approximately 55%, which translates to approximately $1.1 billion in excess deposits. Macatawa has scheduled their special shareholder meeting to consider approval of the transaction for July 31 and we would expect to close the transaction shortly after they receive their final shareholder approval. Of course, after closing, we will provide additional information on the related financial entries with our next quarterly results. At this point, I'll pause and we can take some questions.

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

Good morning, Jon.

Hi good morning. Question for either Rich or Tim on the kind of the near term -- I guess, the near-term loan growth expectations. I mean this quarter was stronger than I thought it would be and obviously drove some of the provisioning as well, but what kind of a pullback do you expect in the third quarter? And just if there's anything else you would call out in terms of the second quarter activity?

Well, as I pointed out, the second quarter is very affected by what happens in the P&C portfolio and we knew that was coming. We talked about it at the end of the first quarter. That definitely gets tempered in the third quarter. But as I pointed out, we're still seeing really nice core opportunities in our primary markets. So I would say that we would probably be at the upper end of our range for the back half of the year. Certainly in the fourth quarter, you're going to see P&C slowed down quite a bit. If you look back at our historic funding patterns, fourth quarter is probably one of the lower ones. So third quarter will be very strong. As I said, we'll probably be at the upper end of the range.

Yes. And Jon the only thing I'd add is the loan growth was broad-based obviously exaggerated by the P&C business. But really in all our material categories, we saw a growth and particularly some strong growth in the C&I side of things which I think is a function of a strong market position on our part and to Richard's point a little bit more utilization. So whether that continues to be a tailwind or not I don't know.

Okay, good. Thank you on that. Rich on the charge-off levels I think you used the term normalization. Anything you would call out in the second quarter. It looks like the commercial real estate charge-offs were a bit higher, but anything else unusual rolling around in there and do you expect this -- it's hard to say a run rate, but is this more normal for you?

No. I mean it's interesting when I was looking at the slides like that Slide 19 where we have the commercial real estate charge-offs. It does pop up quite a bit. And I would point out that we had a number of CRE credits that were particularly challenged that we just got ahead of and just they were a number of different stories there, but if you look back to 6/30/'23 I mean we are at 31 basis points and so it's just in the CRE space, it's just lumpy. We don't necessarily anticipate that we would see a similar third quarter in charge-offs in CRE, but you just don't necessarily know. We would look at that substandard and criticized page and just point out that you're really not seeing a lot of movement. So -- it's just the -- we don't like to use the term episodic, but sometimes it is we're just a primary tenant of a property you lose it and it's tough to replace and there could be just these types of issues that affect that. But generally speaking I mean it doesn't feel like Q2 was all that different other than some of these signs of normalization. When you look at that chart that we point out in terms of historical NPLs, we were at such a low level that it's just -- these numbers feel a little out of sort, but if you take a look at a broader tenure history I mean we're still at a very reasonable level in terms of charge-offs and NPLs.

Yes. Okay, good. And then I guess last one your philosophy at this point and based on what you're seeing is to try to hold the reserve percentage relatively stable. Is that fair?

Well, certainly we'd like that to happen. But yes, Jon, this is Dave. CECL sort of drives that result. Now we show in our deck provisioning is always sort of been higher than our charge-offs after the last year or so. So we've been building reserves and I think that with the CECL model said was that potentially could have more problematic economic times going forward to a slight extent and so we've built more reserves. And whether that happens or not, some of those economic factors recently have been getting a little bit better and not as problematic. So we have built the reserves. I think if you kind of look at the provisioning if we had some people say, well, what should the provision be going forward? And CECL sort of says you've got to book your reserves based upon the back pattern at that point in time for the life of the loan going forward. So future provisioning would really sort of look at loan growth and obviously this quarter we had really strong loan growth so that added to the provision. And then just sort of the normal charge-off levels. And I mean if you look at the last 3 quarters our provisioning has averaged about $35 million. So probably not a bad place to start. We would think that, that would exceed charge-offs again and build reserves, but one of those quarters was in the $20 million range and one was a little bit more than what we had this quarter. So it fluctuates a little bit sort of based upon the growth and the economic factors, but probably from a provisioning standpoint 35 million sort of plus or minus depending on growth and economic conditions or if we see any changes in the classified and other characteristics of the portfolio which we aren't as Rich said, it's very encouraging to us that classified loans substandard or special mention those percentages are holding stable. And actually if you look at the near-term delinquencies that we show in the earnings release those are actually down this quarter from last quarter. So we're not seeing anything systemic out there. So as Rich said the episodic nature of a couple of smaller deals added to it, but probably barring macroeconomic changes or something else if you're sort of in the mid-30s plus or minus, that's probably a decent estimate of what provisioning would be going forward. And obviously we've been higher and lower than that based on economic factors, but I think that would mean that research would continue to build or stay stable. A winded answer…

Okay. What was that Dave, sorry?

A winded answer, so I apologize for that.

Yes. Okay. All right. Thank you, guys. I appreciate it.

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

Great. Thanks. Good morning, everyone. Couple of questions on the NIM. I guess first on the funding strategy. Your CDs obviously drove a lot of the growth this quarter. I was just wondering do you guys -- you're at 19% of the deposit stack, is there a limit that you don't -- is there a limit as to how high you want that to go and then what are your CD operates today?

Well, obviously, to the extent that CDs are your more expensive funding source, you'd prefer to have fewer, but it's not too recent history when those could have made up 30% of somebody's book. So I don't think we have a specific number, but -- we've shortened most of our promotional CD offerings and they are plus or minus 5%. And what I can tell you is the offerings from approximately a year ago that are now renewing are renewing at lower levels. And so we think there is some rationalization of the pricing to clients that we acquire with these promotional rates. But we were committed to funding the loan growth with core deposit growth this quarter and we've done that. And we've acquired a lot of new customers which we expect will be with us for a long time.

Okay. And then on the loan side of things, so loan yields up 10 bps to 690, is the premium finance sort of the lag on that repricing. Is that now digested? And just wondering can we -- what kind of cadence we can expect in terms of loan yield lift going forward?

Yes. I think it pretty well as you said digested, Casey. I mean, if you look at both of those portfolios say within a year they generally turn over and Prime hasn't risen in about a year now. I think we're pretty much through with those rate increases. We do have back book other fixed rate loans in the commercial real estate area and some leasing loans et cetera that will reprice up. But -- we still think there'll be a slight lift in the loan yields. And even on the deposit side both of those I would say we probably think probably single-digit basis point increases in loans and deposits next quarter. So we again expect the margin to stay around 350. So we're managing that. And even if there's a rate cut of 25 basis points or 2 the rest of this year, we still think we can hold the 350 margin.

Okay. All right. Great. And just last one. Sorry if I missed this, but did you guys provide a spot NIM at 630?

We didn't. But as you know we ended last quarter at the 350 range and we -- this whole quarter averaged 352. So low 350 is where we're at so.

Got you. Thank you.

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

Thank you for taking my question. Good morning. Just a quick one here to start. Was there a gain in all recorded on the $700 million loan sale?

Yes. I mentioned that a little bit in my comments we then get the numbers. So we sold roughly $700 million of those loans and had a gain of a little over $4.5 million. You recall last quarter -- or last year when we sold the loans, it was a little over 1 million. The pricing, the funding cost of those have really -- they really come in and the spreads are tighter. So about a 4.5 million -- a little over $4.5 million gain on that sale, but you have to remember, Terry, that's really just present valuing back the cash flows on those loans and recording the gain had we kept them on our balance sheet. We obviously over the next two quarters would have recorded more net interest income, but we thought it was prudent to sell them from like I said liquidity loan-to-deposit and capital purposes and those loans come back on the book pretty quickly. That sale of that $700 million we would have earned money on those from an interest income perspective in the third and the fourth quarters. But by the end of the year that portfolio will have substantially been replaced so.

Thanks for that, Dave. And then within your margin outlook, could you help us maybe understand what you're assuming for interest-bearing deposit costs in the second half of the year? And essentially, what's the cost to fund that loan growth and maybe just as a follow-up there, you've got 500 -- you've got 5 billion of CDs maturing in the back half of this year. I think it was a 4.75 rate. What are you seeing when those CDs mature -- are they rolling into market rate products or somewhere else?

Both is the answer to your last question. Some clients are rolling into CDs, but as I mentioned, we're shortening the term of the promotional CDs. And so -- you're also seeing clients roll into the money market offerings, which are closer to 4% than 5%. And so we'll have to work hard to retain the CD volume. And that would, again, continue to allow us to roughly match deposit and loan growth going forward. And sorry, give me the first part of your question again?

Just interest-bearing deposit costs in the second half of this year. They were up obviously in Q2 to fund the loan growth. What do you think they will do over the next two quarters?

Yes. I think this was the big quarter in terms of movement on the interest-bearing deposit costs that we had some larger deposits from when rates were substantially lower roll off. And so to Dave's point, I think we're going to see a much more muted change in the interest-bearing deposit costs, something that kind of should be similar to what happens to loan yields.

Again, it'll be a single digit basis point raises in both those categories.

Perfect. Thanks for taking my questions.

Thank you. Our next question comes from the line of Chris McGratty of KBW.

Dave, just going back to the NII guide. The linked quarter was about 1.5%. Is there an acceleration in the NII growth in the back half of the year relative to this quarter's change given the growth that you got this quarter? Or is it mitigated by a little bit of NIM pressure?

No, I think -- we think the NIM is going to hold fairly stable, Chris. So I think the drive will be the earning asset growth and really why we believe we can grow NII is that we do think the margin can be held stable here. And it will be growth in the loan. So we had a great growth quarter. So that's going to carry over into the second half of the year. And as Rich said, we're at the high end of our mid- to- high-single-digit range. And so if we're at the high end of that, it should accelerate more, I would think.

Okay. And then I guess, looking out, I mean, the market fairly fickle, but right now, the market's thinking we're going to get four or five cuts over the next year. Relative to that 350, you've talked about -- I know you're a lot less asset sensitive than you've been, but how much downside to margin do you see if the curve plays out?

Well, I think we're looking at this year that maybe we have one to two cuts in next year. Whether it's five cuts or whatever -- whichever forecast you think is out there of 25. I mean if we look at that, we still feel pretty confident that we can keep our margin in low to mid-3s. So say, 3.25 to 3.5. So just sort of depends on the speed of those and the magnitude of those. But we've done a lot of hedging to protect that downside. And I think we'd probably end up be in that range. So if we have 10 or 12 cuts, there's probably going to be some stress because you're going to lose on the spread on your free money, et cetera. So I think there will be some pressure there, but we think we can hold it in that 3.25 to 3.50 range based on the current consensus estimate and how to manage them.

That's perfect. And then the tax rate looks a little high this quarter. Is this a true-up or is this a [indiscernible]?

Well, you guys are all pretty sharp on picking out things. It's up a little bit this quarter. It's kind of a nuance, but the state of Illinois past the law that changed the way the apportionment is treated for investment securities and that will benefit us going forward in future quarters, but we had to revalue our deferred tax inventory because of the change in the law. So that bumped the rate up a little bit. In the past, we thought generally, our tax rate was more in the 26.5% range, barring any unusual items in the quarter. We think that's probably closer now to 26%. So we should pick up close to 0.5% in our tax rate going forward. So one of the few times that tax law changes in the state of Illinois had benefited us, but we had to revalue our deferred tax inventory, which increased the tax rate a little bit.

Okay. Thanks, Dave.

Thank you. Our next question comes from the line of Brendan Nosal of Hovde Group.

Hi. Good morning, folks. Hope you are doing well. Maybe just to start off here, could you maybe unpack the trigger points for any additional loan sales in the future? I'm guessing if they repeat was to happen, it would probably be in a seasonally strong quarter like this one for the premium finance business?

Yes. Well, I think that's right. I mean I touched on it generally, but we've been running at 93% loan to deposit. We really don't care to run much higher than that, and we'd like to fund the loans with core deposits. And we obviously had an extraordinarily strong quarter here. We had $1.6 billion of deposit growth, and we just would rather not have that loan-to-deposit ratio go up or -- and we want to keep the appropriate levels of liquidity and capital. So it would really -- it's a nice relief belt for us when we have that stronger growth. And we'll use it judiciously because we'd rather have the assets on our books, but we've got to keep those other three metrics in mind, I think. And we need to be disciplined on the liquidity capital planning and follow our playbook.

Yes. And I'd just add, it's a relatively attractive asset to do this with because they turn very quickly, as Dave described a few minutes ago. And again, after roughly year-end, those loans could be back on our books.

Yes. So you have to -- to Tim's point, I mean, we sold about 700 million of that, but the average balance is substantially less than that because they pay off so fast. So the rule of thumb is you bid it roughly by 2.4, and that would be your average balance. And so -- because they pay off so quickly. So it's a great asset class, as Tim says, to sell and get back on your books quickly.

Maybe one more for me. Within the wealth business, I guess I was a little surprised to see AUM just ticked down a little bit quarter-over-quarter given how strong markets were in the second quarter. Just kind of curious what trends you're seeing in that business and what underlying momentum looks like?

Yes, it wasn't anything unusual per se with a couple of clients move money around to different options, but we would expect that to grow in the third quarter. So it wasn't a substantial change.

All right, fantastic. Thanks for taking the questions.

Thank you. Next question come from the line of Jeff Rulis of D.A. Davidson.

Thanks. Good morning. Maybe just -- I think you mentioned last quarter you saw some -- really some targeted opportunities in office still despite sort of the national rhetoric. And I think you mentioned sort of where higher tenanted or medical wanted to kind of check to see if that's still the case. Do you still see opportunities? I mean the non-performing loans ticked up a little bit there, but appetite for office, just wanted to check in on how you're feeling?

Yes. It's -- obviously, we're very careful in that space because of all the dynamics that we talk about. But -- we did another office deal this quarter, some reasonable size, not huge, but where you have an investment grade 100% tenant building and we got really good pricing. We got great structure and because no one else, everybody else has got a probably over allocated towards that space. We're not. So we're again, want to be very thoughtful, I want to be very careful. But there are still really good deals out there. And our job as always, we've talked about this in the past, doesn't never day have to jerk the wheel never to overreact. And if there are opportunities out there, we want to be taking advantage of those. But we're not looking to bulk up on them. We tell our people all the time. It's like if there's -- because there's almost limitless numbers of opportunities that you could do here. Our job is to really just pick and choose between those that are just can't find a home and those that are really, really great opportunities. So yes we continue to be open for business, but very, very picky.

Okay. And Rich, I missed the CRE review bucket you referenced, was that a maturing in a certain time frame? Could you just -- what was that figure again? Or that you're...

Yes. So what we do, and we've done this for a number of quarters is to -- we really want to focus about what's ahead of us and try to think about over the next several quarters. So what we do is a 3-quarter rolling review of what we're expecting. And what we try to do is identify where we may have some challenges where there's just lease pressures have been more pronounced or the higher borrowing costs are really affecting that. And we may have to ask the borrower to curtail the outstanding balance. So we look at every loan over 2.5 million that comes due in the 3-quarter period and we just keep track of it. And the thing that as I pointed out, in my comment that's interesting to me is just -- those numbers have been pretty consistent in terms of those loans that are going to require attention. But I think even more importantly is just -- as we move forward, we have not seen a huge amount of really any materiality in terms of those borrowers who haven't supported their properties. So it's a way for us to kind of look ahead and make sure that we understand what's coming down the pike and address it as prudently as we can.

Sure. So that's a pretty tight time frame. And I would imagine, as you've undergone that analysis in past quarters, that's reflective of the current rate environment. So I mean, not to get I guess the confidence in that as you've rolled that the fact that the statistics have stayed similar, that gives you a pretty good read on credit that nothing is upcoming. Is that correct?

That's exactly right. And that's our way because our job is to try to get ahead of stuff before it washes up and -- so this is our way of doing that, not always perfect, but generally, it gives you a pretty good understanding as to what you're going to look at. The other thing -- we a lot of -- has been said about like maturity walls. We look at the maturities pending over the next 2 years, 2.5 years. And we just don't have that. It's a very consistent number that's coming due quarter-to-quarter. And so again, our job is just to try to look forward as much as we can and try to get in front of those borrowers and make sure that we're all aligned in terms of what the outcome is.

Appreciate it. And one quick last one, Tim. It sounds like the Macatawa in terms of two pretty good institutions and that timing sounds like a third quarter close. Any -- I always could come in late, but there's no sort of community issues cropping up with that transaction, as you've heard?

We received approval on June 17. The primary process includes a comment period prior to approval. So no, we continue to believe that not only do we serve our communities as well, but they do as well.

Right. I Appreciate it. Thanks.

Thank you. Our next question comes from the line of David Long of Raymond James.

Good morning, everyone. How's it going?

Good.

A lot of talk about the net interest margin here and the sticking around the 350 range. As you think about Macatawa, adding Macatawa, how will that impact the net interest margin? And is that part of that sort of 350 outlook for the next couple of quarters and maintaining that?

No. 350, we're talking about right now is our current organization. We're not trying to blend in the Macatawa with it. But David, if you think about Macatawa was about 5% of our asset base, they have publicly available data set. They are a publicly traded company, so people can look at the queues. We'll go through purchase accounting and revalue all those assets and liabilities to current market value. But once you go through all of that, we think there'll be a slight lift to the margin. But because of the size of it relative to the size of Wintrust, it's not going to be dramatic, it's going to be positive. Most things about Macatawa we think are going to be positive for the organization as far as growth and culture and margins, et cetera. But we haven't disclosed exactly what that number is. One, they've got a shareholder vote coming up and we just don't want to try to get out in front of that and tout this thing ahead of their shareholder vote. But we think it should be marginally beneficial, but not materially just because the size aspect of it. But as you know, they've got a fair amount of excess liquidity that we can use since our 50% -- a little over 55% loan to deposit that we can take those funds and put them into higher-yielding loans fairly quickly. So we think that will be beneficial to them.

Got it. Thank you for the color. And then the follow-up question I have relates to deposits and there seems to be some bit of a resurgence in savings rates in the Chicago MSA, seeing some rates pretty high and guaranteed for the next 6 months. What are you seeing on deposit competition, specifically in the Chicago market? And is -- are you seeing a bit of an increase?

Subjectively, I would say it's more or less stable, David. I mean we've been seeing call it 6 months to 13, 14 month type rates at around 5%. We're -- the only surprise, I guess that I would have personally is that some people have longer terms out there than others. I think we're thinking that those rates should be 5% and down here going forward. But again, our competitors sometimes do strange stuff.

Got it. Thanks guys. I appreciate you taking my questions.

You bet.

Thank you. Our next question comes from the line of Nathan Race of Piper Sandler.

Yes. Hi, guys. Good morning. Thanks for taking the questions.

Morning, Nathan. Yes.

Just going back to the margin discussion, I appreciate the commentary around still being hold around 350 even after the fact cuts begin, I'm just curious within that context in terms of how much you guys have it as it relates to kind of rate-sensitive deposits that can kind of reprice 1 for 1 following each cut?

Well, I mean, if you look at our disclosures roughly 80% of our deposits are not CDs. So everything other than CDs and Non-interest bearing deposits are fair game as far as being able to reduce the rates quickly. And it would be our intention that if the Fed moves on those money market savings accounts and even CDs, we would cut the rates fairly immediately. CDs would take a while to work their way through. But as Tim said, we've done fairly short maturities on those recently. So it's not going to take too long for those to work their way through. So let's say we've got 60% of them if you take out Non-interest bearings at 21% and when you take out CDs just under 20%, you've got 40% of them that won't price immediately. We got another 60% that you have the ability to do that with. And we think we would be active in doing so.

Yes. And as a reminder, we really don't have indexed deposits either. Some of our municipal deposits are sort of tied to a reference rate, which is actually trending down a little bit prior to the Fed even cutting. So that's not going to move the number a ton but we're watching it carefully.

Okay, great. Very helpful. Changing gears a little bit, we heard from another Chicago land institution this morning that there's some increase in M&A chatter lately. Curious if -- I imagine these are likely smaller deals. I imagine if those are interested to you guys just given the size of the company today? Or if you guys would still kind of entertain some smaller scale acquisitions these days?

Well, we think we're good in terms of acquisition activity. We think we've demonstrated our ability to do it well. The Macatawa deal is 2.7 billion or 2.8 billion. We think that's about the right size. We would certainly look at smaller deals if they made sense in terms of branch overlap where you would get more favorable economics from some sort of cost takeout or if there was a strategic market, we felt like we needed to be in. But I think the right range for us is 500 million to pick a number several billion dollars. We just want good culture, good companies where we can do integration in markets that we can expand. So I don't know if that helps Nathan or not but...

Yes. No, that's great color. Thanks, Tim. One last one, the gain on sale margin came down versus the 1Q to a considerable degree. Any thoughts on just how the gain on sale margin may trend in the 3Q and 4Q on mortgage?

Yes. It's down a little bit but still -- I mean, if you look at the range, we've been from the low that's sort of the we've been from 1.7% to 2.6%. I would expect us to be in the 2% to 2.5% range going forward.

Okay, great. I appreciate all the color. Thanks, guys.

Yes, thanks, Nate.

[Operator Instructions]. Our next question comes from the line of Jared Shaw from Barclays.

Hi, Jared.

Good morning. Most of my questions were answered. But I guess, as we look at capital especially CET1, what should we be thinking about as sort of a target level for that for you? Is that something that we should be expecting to sort of be growing higher closer to peers? Or are you comfortable with it here?

Well, I think we're comfortable where it's at us obviously. We -- there are a couple of things I'd say there, Jared. We also have leverage in our capital stack. We do use preferred securities of capital, which count as Tier 1. They're just not common equity Tier 1. We would expect to grow -- continue to grow that number over time here because our earnings generally are outstripping our capital. This quarter was a little unique given the strong, strong growth. But we would expect to grow that and get that over 10% here in a reasonably short period of time. But the limiting factor for us tends to be total risk-based capital in the past and we manage to that. And if you look in the slide deck on Slide 10 that was down a little bit this quarter but part of that decrease, one was the extraordinarily strong growth. But 2, we did pay off some sub debt this quarter, which didn't count us capital but we also had another sub debt issue where we're into the sort of the amortization period of how the capital is so we lost 20% of the remaining sub debt capital treatment. And so that -- but that will stay flat until we get to next June where we lose another 20% of accounting. So that accounted for roughly one-tenth of 1% decline in the capital ratios. And if you take that out of the equation capital ratio stayed relatively flat. And going forward, we expect the earnings without strip the growth and we would just continue to grow that number. But we also have a little bit more -- we acknowledge this. We have a little bit more leverage in our capital stack. Our preferred securities are relatively cheap in this environment and they count a stir 1 capital and permanent until we decide to redeem them. So happy to have that capital structure right now but understanding that we need to get the CET1 probably over 10 sometime in the recently near future.

Okay. That's great color. And then maybe just finally, when you look at the charge-offs on commercial real estate, what's been like the average valuation decline on CRE that you've seen especially on the office?

It's such a small population that, it's really hard to draw a number there but it's not insignificant. But every deal is just a little bit different depending on location and existing tenancy and how effective it is. It's just -- I would hate to throw a number out there because the, it's just the range is so big.

But nothing that's causing you concern more broadly.

Well, I mean, any time you have declining valuations, it's not a good situation. So, nothing that's like massively

Okay. Thank you.

Thank you. Our next question comes from the line of Brandon King of Truist.

Hi. Just a follow-up on mortgage. Could you give us what your outlook is for the back half of the year? And could you also give us some context as far as the trends you saw particularly in the later part of the quarter.

Yes. Well, as I said, we were a little bit more optimistic last quarter that spring buying season would kick in. And the second quarter was a little better than the first quarter. You could see the numbers that we provided. We had origination volumes in second quarter that for sale of 722 million versus 475 million in the first quarter. So a tick up there, but we were hoping it would be a little bit stronger than that. Application volume has been fairly stable the last 3 or 4 months. And we would expect it probably to stay relatively stable the rest of the fourth quarter here and then probably dip down in the fourth quarter just because of seasonality. It generally fourth quarter and first quarter, unless there's a big drop in rates, the purchase activity slows down and our purchase activity is really roughly 80% of our activity right now given the interest rate structure. So we would expect it probably to be relatively flat in the third quarter and then probably dip a little in the fourth quarter unless we see long -- the longer-term 30-year mortgage rates come down dramatically, which is not our base case right now.

Yes. As we talked about last quarter, too, it's not for lack of one. There's we have a lot of prequels that come in all the time. The issue is really just inventory. So I think people are looking at the mortgage rates and they've been able to digest the fact that they're up dramatically over where they were a couple of years ago. And people are looking to buy homes. They're just not a whole lot of inventory out there. And when there is a property that comes online, it's just there are multiple offers right away. So that's probably the biggest challenge right now is just we are -- as David said, we're 80% purchase oriented. So if you can't find a home to buy, you can't take out a mortgage.

And the other thing I'd add, and Brandon, this is David again, is the gross revenue on mortgage banking now is generally $25 million to $30 million. Once you pay out commissions on other expenses, fluctuation in that line item, the net effect after commissions, other expenses, taxes is not that dramatic. And we'd love it to go up, and our teams are doing a good job of managing in this environment, and we think doing a really good job in this environment, but we just don't see it moving enough that it's going to have a dramatic impact on the net income number of the company, just because of the net profit on that. We just don't see rates moving substantially enough to have a dramatic impact one way or the other.

Got it. And so with those thoughts on inventory and the issues there, I mean would you say that mortgage could be less sensitive to a decline in rates moving forward?

Well, there's sort of a dead zone here because you've got a lot of people with very low rates. And so the beginning of rate decline may not produce a lot of activity. But at some point, you're certainly progressively going to pick up some volume. It's just a question of kind of when that happens. And I'm reasonably certain that most mortgage originators know exactly where all of their clients' rates are.

Any sense you can give us as to where that level is or is it kind of to moving target?

Again, I think it's evolutionary. So 50 or 100 points would help. But a lot of people have mortgages with the 3 handle on them. And so you're going to have to get down to much lower levels before you get back to anywhere near what we saw 4 or 5 years ago.

Yes. I mean just -- I don't have a specific answer to that, Brandon. Our portfolio that we service, the average rate on that is drifting up and is right around 4% now or it used to be 3.5%. So I mean, to get a lot of refis, it have to go down dramatically. But I think that there are people out there that when they had a 3.5% to 4% mortgage rate, they weren't going to go for the 7% to 8% rate. But our gut is if that rate got into the low-6s or high-5s that people would say, hey, I really want to get this new house. I'll go from 4 to the high-5s. I just won't go from 4 to 8 or 4 to 7.5, and so our gut is you'd see a pickup if you got into the high-5s or low-6s, but again, there's got to be supply out there to buy, too. So I think that will mute it. But certainly, when rates came down to the 6s before, we started to see a little bit of pickup in activity. So I guess we would think that if you got into the low-6s, that would be quite helpful.

That is very helpful. Thanks for taking my questions.

Thank you.

Thank you. At this time, I'd like to turn the call back over to Tim Crane for closing remarks.

Yes. Thanks, Latif, and everybody on the line, thank you for joining us. Overall, a solid quarter that we think is continued progress in growing the franchise and our presence where we compete. We remain excited about the Macatawa acquisition and hope to be able to share more information with you next quarter. As always, we appreciate your questions and your feedback. Feel free to reach out with any follow-up items, and you can count on our good team to work hard here. So with that, we'll sign off. And Latif, thank you.