Wintrust Financial Corporation (NASDAQ:WTFC) Q2 2025 Earnings Call Transcript

Wintrust Financial Corporation (NASDAQ:WTFC) Q2 2025 Earnings Call Transcript July 22, 2025

Operator: Welcome to Wintrust Financial Corporation’s Second Quarter and Year-to-Date 2025 [Technical Difficulty] 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 presentation, 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 call over to Mr. Tim Crane.

Timothy S. Crane: Good morning, everyone. Thank you for joining us for the Wintrust Financial Second Quarter Earnings Call. In addition to the introductions Latif made, I’m joined by our Chief Financial Officer, David Stoehr; and our Chief Legal Officer, Kate Boege. I’ll begin this morning with some high-level highlights. Dave Dykstra will speak to the financial results, and Rich will add some additional information on loan activity and credit performance. As always, following our remarks, we’ll be happy to take your questions. Our differentiated approach focused on understanding and meeting our client needs continues to deliver consistently strong financial results. We reported record quarterly net income of $195.5 million, up from $189 million last quarter.

Net interest income, also a quarterly record, was $547 million [Technical Difficulty] driving the higher net interest income with second quarter loan growth of $2.3 billion. The growth was broad-based and clearly reflects the seasonally strong second quarter in our attractive premium finance business. We saw good deposit growth during the quarter of over $2 billion and assets grew to $69 billion. Going forward, our pipelines are strong, and we expect continued mid- to high single-digit loan growth for the second half of the year. We also expect continued deposit growth that will fund our loan growth. What’s particularly important about the deposit growth is that it represents new commercial and consumer households to allow us to continue to grow our franchise.

Given the strong growth in the quarter, it’s important to highlight that we continue to be disciplined in our growth. We can and do pass on credit opportunities where we cannot get comfortable with the pricing or proposed credit structure. This approach has served us well and will not change. Net interest margin for the quarter remained comfortably within our target range of 3.54%. Dave will talk a little bit more about the margin in just a minute. Residential mortgage activity, while up somewhat this quarter remains muted in the current rate environment. We continue to manage expenses in that business to protect our current financial results while ensuring that we’re positioned to capture business when rates go down and mortgage activity increases.

We continue to believe the mortgage business is a core offering and provides a nice financial hedge against margin pressure in a lower rate environment. Credit quality remains very good. We continue to stay close to the small number of clients experiencing uncertainty in the current economic environment so that we can help get ahead of any challenges they may face. Overall, another strong quarter, consistent results in line with our expectations. Let me turn it over to Dave.

David Alan Dykstra: Great. Thanks, Tim. As Tim said, we had a strong deposit and loan growth quarter. The deposit growth was $2.2 billion, representing a 17% increase over the prior quarter on an annualized basis. The solid loan — or the solid deposit growth helped to fund seasonally strong second quarter loan growth of $2.3 billion or 19% on an annualized basis. For the first half of the year, loan growth was $3 billion or 12% on an annualized basis. As to other aspects of the balance sheet results, total assets grew by $3.1 billion to $69 billion, including the impact of the $425 million preferred stock offering, which I will discuss later in my comments. Turning to the income statement results. This was a very solid operating quarter producing a record level of quarterly net income and with just a few moving pieces.

I’ll start off by highlighting what we consider the uncommon items to be for the quarter, which included $2.9 million of acquisition-related costs that were substantially concluded related to the conversion of the Macatawa Bank acquisition and net security gains of $650,000. Those items are discussed on the first page of the earnings release, if you’d like to refer to them later. Our net interest income increased $20.2 million from the prior quarter as a result of a $1.9 billion increase in average earning assets and a relatively stable net interest margin. This quarter represented a record high amount of quarterly net interest income. Given the current interest rate environment and even with a few rate changes in either direction, we remain confident that our net interest margin will continue to be relatively stable throughout the remainder of 2025.

With that stable net interest margin outlook and the projected future growth in average earning assets, we would again expect to increase net interest income in the third quarter. I would note that period-end loans were approximately $1.5 billion higher than the average loans for the second quarter, giving us a good start on achieving the higher average earning assets for the third quarter. The slightly lower provision for credit losses recognized in the second quarter as compared to the prior quarter is primarily attributable to a slightly better set of macroeconomic factors, offset somewhat by the aforementioned strong loan growth. Regarding other noninterest income and noninterest expense sections. Total noninterest income totaled $124.1 million in the second quarter, which was up approximately $7.5 million when compared with the prior quarter.

Although persistently high mortgage rates dampen our optimism for a stronger spring buying season, the company generated approximately $2.6 million more in mortgage banking revenue as we experienced higher production revenue due to somewhat higher origination volumes offset by a bit less [Technical Difficulty] portfolio. Wealth management revenue increased by $2.8 million in the second quarter primarily as a result of asset valuation increases during the quarter. The company recorded a variety of smaller changes to other noninterest income categories as shown in the tables in the earnings release, but the changes relative to the prior quarter were not material or unusual. As far as noninterest expense categories go, noninterest expenses totaled $381.5 million in the second quarter and were up approximately $15.4 million from the prior quarter.

The primary reasons for the increase were all factors that we projected would occur in last quarter’s earnings call. Specifically, salaries and employee benefits expense increased by approximately $8 million as compared to the first quarter due primarily to higher employee benefit expense due to an increased level of health insurance claims, higher mortgage and wealth management commissions because of the corresponding higher revenues in those business lines and the second quarter having a full effect of the annual merit increases that were effective on February 1. Advertising and marketing expenses increased by $6.5 million in the second quarter when compared to the first quarter. As we’ve discussed many times in the past, this category of expenses tends to be higher in the second and the third quarters of the year due to the expenditures related to various Major and Minor League Baseball sponsorships, and other summertime sponsorship events held in the communities that we serve.

The remaining variances in noninterest expense, both positive and negative were relatively normal amount to less than $1 million in the aggregate and don’t warrant any additional special mention on this call. We also continued to build our tangible book value per share during the first half of this year. And as you can see on Slide 10 of the presentation deck, we have grown tangible book value per common share every year since we’ve been a public company, and we are on track to do so again in 2025. As I mentioned earlier, I’d like to take a moment to discuss the $425 million Series F preferred stock issuance that Wintrust closed on May 22. The issuance was to redeem $412.5 million of Series D and Series E preferred stock that was set to reprice on July 15, 2025, and they were set to reprice at rates higher than the existing market rates.

In fact, Wintrust did redeem all the Series D and Series E preferred stock on July 15 and now has only the Series F preferred stock outstanding. Because the redemption of the preferred stock will impact the earnings per share calculation in the third quarter, we’ve included an overview of such impact on Slide 24 of the presentation deck. What you’ll see is that the third quarter Series F preferred dividends when and if declared by the Board at its July meeting, will be more than the normal quarterly dividend since it includes an extended first dividend period from the closing date of May 22 to the first payment date of October 15, 2025, so more than a quarter’s worth of dividends. Dividends are recorded and declared in the third quarter will be larger than the normal Series F dividend declaration, and there will be no dividends for the Series D or Series E.

In addition, accounting rules require that the prior issuance costs on the Series D and Series E issuances need to be reclassified upon redemption from capital surplus and recognized for retained earnings. It’s just a reclass within the capital section. But the accounting rules require that reduction to be recorded through net income available to common shareholders, i.e., below the net income line. Importantly, these amounts will not impact third quarter operating net income, but will impact third quarter earnings per share calculations. Again, Slide 24 in the presentation deck summarizes this information. But the long and the short of it is, the most recent quarters, including the second quarter had roughly $7 million of preferred dividends.

So for the past few quarters and going back 5 years, that number has spent $7 million. In the fourth quarter of this year and going forward for 5 years until they reprice again, that number will be $8.4 million. The third quarter, for all the reasons I just talked about, will have a slightly higher number due to the issuance costs of the Series D and E redemption and the extended quarterly dividend payment period. So with that, again, refer to Slide 24 for all the details. And if anyone has any questions, I’d be happy to take any calls and walk you through the information. So with that, Tim, I’ll conclude my comments and turn it over to Rich.

Richard B. Murphy: Thanks, Dave. As Tim and Dave both noted, credit performance continued to be very solid in the second quarter. As detailed in the [Technical Difficulty] Property & Casualty Premium Finance Group in the second quarter. This past quarter was no exception as we saw just over $1 billion of growth in this portfolio in line with our forecast. While we have seen some moderation in insurance premium rate increases, the overall market remains firm. In addition, we continue to benefit from new opportunities as a result of consolidation and dislocation within the premium finance industry. We also saw good growth from a number of other segments. Commercial real estate grew by $377 million. The mortgage warehouse team continues to build momentum and grew by $213 million as we continue to onboard new relationships, which also come with some meaningful deposit opportunities.

And our leasing team, life premium finance and residential mortgage groups also had a very solid quarter. As Tim said, we believe loan growth for the second half of 2025 will continue to be strong and within our guidance of mid- to high single digits for a number of reasons. Core C&I and CRE pipelines remain very solid, and we continue to benefit from our market positioning in our core markets of Chicago land, Wisconsin, West Michigan and Northwest Indiana. In addition, we have very strong momentum in our niche businesses, including leasing and mortgage warehouse. Last quarter, we spoke of growing uncertainty in economic conditions as a result of potential tariffs, tax law changes and funding cuts. Reviewing our portfolio, we have a relatively small number of credits at risk of greatest impacts, and we continue to stay very close to them.

Overall, we believe there is greater clarity on many of these issues driving that uncertainty, and we believe the impacts on our portfolio will be very limited given our strong underwriting standards and disciplined approach to diversification. We are cautiously optimistic about the overall business environment as we enter the second half of the year. From a credit quality perspective, as detailed on Slide 15, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics. Nonperforming loans as a percentage of total loans were relatively stable. Charge-offs for the quarter were 11 basis points, unchanged from Q1. We continue to believe that the level of NPLs and charge-offs in the second quarter reflect a stable credit environment as evidenced by the chart of historical nonperforming asset levels on Slide 16 and the consistent level in our special mention and substandard loans on Slide 15.

Finally, we are firmly committed to identifying problems early and charging them down where appropriate. Our goal, as always, is to stay ahead 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 1/4 of our total portfolio. As detailed on Slide 19, we continue to see signs of stabilization during the first — during the second quarter as CRE NPLs remained at a very low level, increasing slightly from 0.20% to 0.25%. CRE charge-offs remain at historically low levels. On Slide 20, we continue to provide enhanced detail of our CRE and office exposure. Currently, this portfolio remains steady at $1.6 billion or 12.1% of our total CRE portfolio and only 3.1% of our total loan portfolio.

Of the $1.6 billion of office exposure, 48% is medical office or owner occupied. The average size loan in this office portfolio is relatively small at $1.5 million, and we have 5 loans over $20 million, only 2 of which are nonmedical or owner occupied. We continue to perform portfolio reviews regularly in 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 nonowner-occupied loan over $2.5 million that will be maturing between now and the end of the year. This analysis, which covered 84% of all nonowner occupied CRE loans maturing during this period showed very consistent results compared to prior quarters. In summary, we continue to be encouraged by our credit performance in the second quarter, and we believe that our portfolio is well positioned and appropriately reserved.

That concludes my comments on credit, and I’ll turn it back to Tim.

Timothy S. Crane: Thanks, Rich. Just a few kind of quick final thoughts. Midway through the year, we feel very good about our business and the momentum going into the second half of the year. We continue to deliver sophisticated financial solutions across all our businesses with a differentiated client-first focus. And what’s important to note is that our approach is driving consistent, meaningful financial results. Over the last year, we’ve produced steady quarterly increases in loans, deposits and net income. We manage our expenses thoughtfully while continuing to invest in our business to support our future growth. As Dave mentioned, the expenses trend higher in the second and third quarters and reflect both investments in our business and some of these seasonal fluctuations.

As always, we work with our clients to help them address [Technical Difficulty] focused on delivering a differentiated experience and our disciplined approach continues to drive real value for our shareholders. With that, I thank you for your time, and we’ll open the line to questions, Latif.

Q&A Session

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

Jon Glenn Arfstrom: Question for you on the loan growth numbers. Obviously, very strong this quarter. You mentioned seasonality in expenses. And I guess I’m curious about third quarter expectations. You have a higher period-end balance, but I think the growth is typically a little slower in the third quarter. Is it fair to look at maybe prior third quarter trends from second quarter as a benchmark for what you might expect in Q3 in terms of growth?

David Alan Dykstra: Expense growth or loan growth, Jon?

Jon Glenn Arfstrom: Loan growth, sorry, sorry.

Richard B. Murphy: Loan growth, if you look at the third quarter, excluding Macatawa and then fourth quarter, I think that would be pretty much in line with what we would anticipate for this year. So again, in the range, but at the higher end of the range.

David Alan Dykstra: I think if we just think mid- to high single digits based off of the June 30 balance going forward for the second half of the year, that’s sort of our view right now.

Jon Glenn Arfstrom: Okay. Got it. And then, Tim, a question for you on deposits. You guys — where are you finding the best places to gather deposits? I mean it looks like money markets were strong, but you mentioned commercial, consumer and warehouse. And just talk a little bit more about where you’re finding that kind of deposit growth and can that keep pace with loan growth?

Timothy S. Crane: Okay. Jon, I’m sorry, we had a little bit of a technical glitch on our end. I think your question was about deposits and where we’re finding them. It’s fairly broad-based, and we continue to believe that in our markets where we have kind of a sub-10% share in all of them, we can continue to grow. The commercial growth in deposits is particularly helpful because obviously, we get treasury management revenues and other activities related to that. But this was a very solid deposit growth quarter for us funding the seasonal loan growth. Continue to think we’ll have opportunities, but $2 billion of deposit growth should not be kind of the norm going forward.

Jon Glenn Arfstrom: Okay. And then just one small one. Anything on the wealth management outsourcing. Can you just talk about longer-term goal there and how that’s gone?

Timothy S. Crane: Yes, that conversion to the LPL platform, which as we’ve described in prior calls, was really an upgrade for the tools and technology for our financial advisers and our wealth employees is largely behind us. And we’ve migrated out of conversion mode into serving our clients. And obviously, the markets have been pretty terrific for the last month or so here. We continue to look at the wealth business as an attractive opportunity for us, and we look to continue to grow it.

Operator: Our next question comes from the line of Chris McGratty of KBW.

Christopher Edward McGratty: In terms of the NII growth, the 4% linked quarter, 16% year-on-year is great numbers. I guess the question, if we put the pieces together with earning asset growth, loan growth, margin stability, does that become a little bit more challenging given the deposit competition that’s increasing? Or is this degree of NII growth, I guess, over the near term still reasonable?

David Alan Dykstra: As we said, we expect mid- to high single-digit loan growth from here on out and a relatively stable margin on the — we’ve been roughly in the 3.52%, 3.53% range on average over the last few quarters. If we stay in the mid- to low 3% range or 3.50% range, then I think it’s just what is your average asset growth. And that’s what we’re looking at. So if we have that mid- to high single-digit average asset growth, we should see the mid- to high single-digit net interest income growth. It’s just a simple math, I think, from our perspective. And our deposit pricing, if you’re growing as much as we did this quarter, maybe the pricing was a little high. But as Tim said, the markets are still really good, and we have great position in all those markets. So we think we can fund the growth with deposits right now. It’s never easy, but we’ve always been able to do that.

Timothy S. Crane: And Chris, even with this quarter’s $2 billion worth of growth, our deposit costs were down slightly. And so our hope, as long as the kind of markets remain rational, we’ll continue to add clients and importantly, add deposits as well.

Christopher Edward McGratty: Okay. Dave, you addressed the earning asset. There’s not anything materially you’re going to turn the earning assets to fund the growth. It’s just — right, there’s no material changes you’re doing to the mix of the earning assets?

David Alan Dykstra: No. I mean the only odd thing is second quarter is always really strong on commercial premium finance. Recall, last couple of years, we sold some in the middle of the year. And this year, we had more liquidity and more capital and we had good deposit growth. So we kept those assets on our balance sheet and funded them internally versus the sale like we did a couple of years ago. But going forward, we’re not going to have $1 billion P&C premium finance growth quarter in the third quarter. The second quarter is seasonally high. But other than that, our commercial, commercial real estate pipelines are very consistently strong. So we would expect to have sort of the normal growth absent the outsized premium finance seasonality in the second quarter.

Christopher Edward McGratty: Great. And my follow-up, maybe for Tim, is the deregulatory narrative, what does it mean for Wintrust? Anything you might be doing differently? Do deals become — you don’t need to do a deal given the growth you’re putting up, but does that become more of a possibility? Anything you can unpack there on deregulation?

Timothy S. Crane: Yes, Chris, I mean we’re obviously hopeful that there’s some sort of tailoring or inflation adjustment, whatever you want to call it, to relax the rules for growth. And we continue to build the foundation for a bigger and better bank. A lot of that is acquiring good talent in the market, and we continue to do that. We’ll continue to look at acquisition opportunities. It looks like that activity has picked up a little bit. We think we have a strong track record there. Macatawa for example, is terrific. So we’ll be disciplined, but opportunistic.

Operator: Our next question comes from the line of David Long of Raymond James.

David Joseph Long: On the core C&I side, sentiment across the industry seemed much lower when you held your call back in April. As you looked at the growth throughout the quarter, did it accelerate throughout the quarter? Or was it pretty steady throughout the quarter? And how are your core commercial clients? How is their sentiment now?

Richard B. Murphy: It’s interesting, David. I think that — I wouldn’t say there was a material difference during the quarter in terms of just production, but I would say sentiment and I touched on it in my comments. If we look back in April, there was just so much noise around all these regulatory changes, all the tariffs. We’re still not out of the woods, obviously there. But I think there is more confidence here that the economy is not — the bottom side coming out. I think most customers are feeling, again, the term I use cautiously optimistic about where things are at right now. So that, coupled with the market dynamics in the Chicago market in particular, but certainly in our other core markets, it feels like things are going to be in a pretty good spot. And you can see that in our pipelines.

David Joseph Long: Got it. And then a follow-up question as it relates to the CRE office portfolio on Slide 20. You guys highlighted the nonperformers within that portfolio increased a bit. Just curious if I can get a little more color on what happened there and maybe a little — not looking for the name of the building or anything like that, but just want to get a little bit more color around the nonperformers on the office side?

Richard B. Murphy: Yes. It’s really — I mean the numbers are so small that all it takes is a couple of deals, and that’s what it was here. Nothing — neither of them, particularly large, but combined, when we look at it relative to the total kind of causes a little bit of a blip. Nothing that we’re overly concerned about. We think we’re marked appropriately and we’ll get through those relatively quickly. But I kind of refer in that portfolio as kind of — because the denominator is so small that every new loan makes it look like a pop, but we’re just managing through the portfolio like we do every day.

Operator: Our next question comes from the line of Nathan Race of Piper Sandler.

Nathan James Race: One of your Midwest peers this morning kind of tempered loan growth expectations, citing some increased competition. So just curious what you guys are seeing from a competitive pricing perspective. Obviously, loan yields came down a little bit this quarter. So curious if that’s driving some of that loan yield compression that we saw in the quarter. And if you could just comment in particular on the commercial insurance premium finance portfolio in terms of what new rates on production look like they’re relative to the roll-off yield?

Richard B. Murphy: Yes. I’ll talk a little bit about the core portfolio and what we’re seeing in some of the niche portfolios as well. I mean we — we talked about it at the end of last year that we would anticipate that banks as they continue to ramp up their loan production would become a little more aggressive. And we have seen that. But as Tim talked about in his opening remarks, we have a pretty disciplined approach to where we’re going to be on pricing. But has there been margin compression in certain categories? The answer is yes. Fully funded CRE deals of high credit quality definitely have — we’ve seen some compression there. But our job is to manage through that. One of the things you’ve known our story for a long time, when you have a multipronged asset approach, some things get compressed a little bit, while other things give you some opportunity, and that’s what we’re seeing now.

So we think that in the core C&I space, we continue to hold our line pretty well on pricing. In leasing, same thing. In the — specifically to your P&C question, we continue to be in pretty good shape. I mean, prices are coming in a little bit tighter on larger credit-oriented deals. But we have a very, very granular portfolio there that we continue to be able to price pretty well.

Timothy S. Crane: And Nate, for the second quarter, I think a number in the mid-7s would be about the right range for the P&C loan yield.

Nathan James Race: Okay. And Tim, that’s pretty close to the roll-off yield, if I heard?

Timothy S. Crane: Yes, not too far off.

Nathan James Race: Okay. Great. And then you mentioned on deposit costs, it looks like they were kind of stable in the quarter all in. But if I strip out CDs, it looks like your interest-bearing deposit costs were up 6 basis points quarter-over-quarter. So just curious as long as the Fed remains on hold, do you think deposit costs kind of hold in there? Or do you think we see kind of a little grind higher from here?

Timothy S. Crane: I think pretty stable to where we were in the second quarter. I mean, again, we had to raise $2 billion worth of deposits, which we were thrilled to do because it’s new customers to us. I think we’ll be in the same range. And if we get a cut, obviously, we feel reasonably good that we can handle that without much impact on the margin.

Nathan James Race: Okay. Great. Maybe one last one for Dave on expenses. Going back a couple of quarters, I think you guided to kind of a mid-single- digit increase this year off the 4Q level last year. Just curious if you still think that holds true, which I think translates about $1.5 billion to $1.6 billion in expenses for this year?

David Alan Dykstra: Yes. I think maybe the best way to answer that right now is I think the level we’re at in the second quarter, plus or minus a couple of million dollars is probably what we think will happen in the third and the fourth quarter. So the low [ 380s ], I think, is probably a good thought. But we had some growth here as we projected last quarter, but we also grew the balance sheet $3 billion. We have some growth from here. So I think if we can hold this relatively stable in the low [ 380s ] for the last 2 quarters, that’s probably what we’re shooting for right now.

Nathan James Race: Okay. Perfect. I appreciate all the color. Congrats on the great quarter guys.

Timothy S. Crane: Thanks, Nate.

Operator: Our next question comes from the line of Terry McEvoy of Stephens Inc.

Terence James McEvoy: Maybe just a question on Western Michigan. Could you just talk about banker and client retention? And is the broader product offering? Is it driving some growth in that market?

Timothy S. Crane: Yes. Thanks, Terry. Yes, I still feel very good about West Michigan. I actually spent a couple of days over there with clients. The conversion is behind us. We’re excited to have that part of the equation done. And number of clients are looking for us to provide more services to them and the prospecting opportunities are very good. So I feel actually like we’re in the right spot to begin accelerating the results in West Michigan.

Terence James McEvoy: And then as a follow-up, the $456 million of commercial growth, Rich, did about half of that occur in the mortgage finance portfolio? And how much volatility would you expect — what’s the size of that portfolio today? And how much kind of volatility would you expect during the year?

Richard B. Murphy: Yes. Well, there is — I mean, as we talk about in our own mortgage book, I mean, there is a fair amount of volatility in that book in total. But generally speaking, what we’ve seen is a lot of onboarding of new opportunities, which is driving the growth in a kind of muted market. So we are taking share in that portfolio. So right now, that total book sits at…

David Alan Dykstra: $1.2 billion.

Richard B. Murphy: $1.2 billion.

Operator: Our next question comes from the line of Ben Gerlinger of Citi.

Benjamin Tyson Gerlinger: I know we talked through the rate paid across the different deposit silos. And then, I get that you grew like a weed this quarter, which is good. But when you think about like if there is a cut or 2 in the back half of the year, the next 6-plus months, do you think you can have the immediate impact of kind of the same deposit beta we’ve seen, given that you just increased it? Could you kind of lower it pretty quickly thereafter? I’m just trying to think about the behavioral finance relative to what we just saw in kind of the growth aspects?

David Alan Dykstra: Yes. I think Tim touched on it a little bit earlier. But I think if the Fed cut 25%, we would be — have the ability to cut 25% on our discretionary accounts. CDs would obviously take time to roll. But a lot of our CD offerings now are certainly less than a year, 7 months and 11-month terms. So I think that we would see a similar deposit cut as we saw in the prior cuts that we saw a while back that we could get the full 25% on most of our discretionary accounts.

Benjamin Tyson Gerlinger: Got you. That’s helpful. And then you just answered the question on the expense front. So that is everything I have. I appreciate it.

Operator: Our next question comes from the line of Casey Haire of Autonomous. Casey Haire Just wanted to follow up on loan growth again. So the premium finance, it sounds like it’s obviously got a great momentum, up 17% year-over-year. Rich, I think you said it is showing some signs of moderating. Just wondering where that is in terms of that hard market cycle in terms of later innings, just some big picture thoughts on how that tailwind is going?

Richard B. Murphy: Yes. It’s a really good question, something we look a lot at. If you look at our — that portfolio over the last 6 years and on a month-to- month comparison, it’s a very consistent growth pattern fueled by 2 things. One is the dislocation of other competitors, some changes in the dynamics of the individual agents, things like that. But there’s just been a lot of opportunity for us to pick up market share. So that year-over-year continues to drive not only dollars, but numbers of units. And the other piece to the puzzle is just a market that we saw a hardening pretty consistently over the last 4, 5 years. So those 2 things have really allowed that portfolio to grow very nicely, plus just great execution on the team’s part and some of the investments we’ve made in technology that really helped kind of drive the product offering.

So that put us in good shape. But then with the hardening market, things continue to move up that market, I’d say, still in a lot of product lines continues to be pretty hard, and we see some upward momentum. But we are starting to see some moderation there. So we use the term firm that the unit — the dollar amounts of units continues to stay pretty consistent. So we feel pretty good overall with where that portfolio is going and where it should be for the next year because a lot of those dynamics continue to be the case. So I guess the only maybe just slight thought there is maybe not as the premium rates maybe not with the same upward trajectory, but still solid to, I’d say, firm to slightly up. Casey Haire Got you. And then just, Tim, a follow-up question.

You mentioned M&A is picking up a little bit. Just wondering is that — I know Macatawa was great for you guys last year, but it was a little bit bigger than what I think the market is used to, and it was obviously outside your core Chicago footprint. Just wondering where, size and location wise and what’s driving sort of the uptick in terms of the M&A opportunity?

Timothy S. Crane: Well, with respect to the market, I think there’s a whole host of reasons. I mean people dealing with succession issues, people feeling like the markets a little better than it had been a couple of years ago. Frankly, as we’ve talked about, it gets tougher and tougher to run a small bank with the expenses attached to compliance and regulatory issues and finance and the like. So I think you’re getting people [Technical Difficulty] Casey, I’m sorry, somehow we’ve got a line dropping somewhere between Chicago and where all of you are. So again, I think we feel like we could execute on a wide range of opportunities if they became available to us. It just has to fit from a cultural standpoint, from a market standpoint. But again, for the reasons I mentioned earlier, I think there is some pickup in kind of market M&A activity.

Operator: Our next question comes from the line of Jeff Rulis of D.A. Davidson.

Jeffrey Allen Rulis: Rich, I wanted to circle back and not to get too granular, but you touched on the CRE nonperformers and we’re off a low base. But maybe same question on — looked like a little pickup in the commercial nonperforming loans. Any specifics to that? I’m guessing a similar answer to CRE, it’s pretty granular, but by type or geography on C&I?

Richard B. Murphy: Again, very granular. We had one in particular credit that just had — we’ve seen performance suffer for a little while here over the last couple of quarters and finally decided that this was a credit that probably is going to need more meaningful remediation and just took it to nonperforming. We think that we’ve — we’ve got it marked right, but again, just kind of a one-off situation.

Jeffrey Allen Rulis: And Rich, if you were to flag sort of concern? Or just — is it the small ticket business arena that you’d say maybe in this environment, the most pressured or anywhere in C&I that you’d highlight the most?

Richard B. Murphy: Yes. There’s nothing that I would necessarily point to specifically. I think it’s more a question of leverage in the balance sheet, liquidity on the balance sheet. Just — those are some of the operating things that we kind of take a look at. Last year, about this time, we were really focused on transportation. We had pretty much across the board, a number of transportation-related issues, with P&C leasing, core C&I, I think we’ve weathered our way through that. So I think we’re feeling better in that space. But right now, it’s really more, I think, event-driven than industry-driven.

Jeffrey Allen Rulis: Got it.

David Alan Dykstra: And then I’d like to maybe add in there, Jeff. I mean if you look at the total nonperforming loan ratio, it’s right in the middle of the range. I mean, we’ve ranged from 35 to 39 basis points, and we’re at 37, and it’s an awfully low number. So just one credit here or there can move it a little bit. But again, it’s low and right in the middle of our historical range over the last 5 quarters.

Jeffrey Allen Rulis: Got you. Yes, good perspective. And then just one other one. I just continue to try to model the covered call option, sort of the outlook there, and that’s on a quarterly basis between, call it, $1 million to $6 million a quarter. Anything that you could lead us to or drivers of that, plus or minus as what could a lower or higher quarter there?

David Alan Dykstra: No. It sort of really depends on what happens to we’re writing calls on government agencies like Fannie Mae. So it sort of really depends on what that part of the curve does as far as if it comes down, the securities will be called and we’ll rewrite. And then it also depends on what volatility is at the time that we buy the security. So my crystal ball isn’t good enough to predict what it’s going to be at the end of the third quarter. But if rates go down a little bit and securities get called, then we’ll generally have more, more call option. If rates go up, then it’s usually less. But you’re right, it’s generally in the $1 million to $5 million, $6 million range and it really can fluctuate. But it’s really sort of a hedge to down rate for us. It supplements revenue if rates go down. So if those rates do go down, call option will go up, which will supplement revenue and offset any pressure you could have on margin.

Operator: Our next question comes from the line of Jared Shaw of Barclays.

Jared David Wesley Shaw: Maybe just any thoughts on capital targets as we move through the rest of the year here with what you’ve done on the preferred and just overall in terms of maybe CET1 targets?

David Alan Dykstra: Yes. Well, CET1, we had such good growth this quarter, it came down 0.1%. But we would expect that probably to grow 10 basis points a quarter going forward if we have the mid- to high single-digit loan growth. And the other categories, and we put this in the earnings release, roughly 60 basis points higher at the end of June because we had both preferred — all preferred issuances outstanding, so we had the $425 million Series F outstanding and the $412.5 million of the Series D and E. So somewhat elevated at the end of June. Those Tier 1 ratios will come down 60 basis points, not the CET1 because preferred is not in the common. But the total Tier 1s will come down roughly 60 basis points. But we put those numbers in the press release. From here on out, we would just expect gradually grow capital 10 basis points or so with earnings and mid- to high single-digit loan growth.

Jared David Wesley Shaw: I guess what’s the — would you be comfortable bringing it back down below 10% if there was a good opportunity or a good deal? Or should we think that 10% CET1 is more of a floor for the time being?

David Alan Dykstra: I think it’s more of a floor. I think staying at 10% is not a bad level to indicate a floor. But we’d like to grow that. If there was a great opportunity and it was down just [Technical Difficulty] I would look at 10% as a floor in our minds right now.

Operator: Our next question comes from the line of David Chiaverini of Jefferies.

David John Chiaverini: Follow-up on loan growth. Curious on non-premium finance, so more in the core C&I and CRE side. Can you talk about borrower sentiment? Are you seeing more borrowers come off the sidelines here?

Richard B. Murphy: As I mentioned before, the sentiment, I think, is better than it was at the last earnings call because there was so much disruption in terms of some of the challenges coming out of Washington. So I think that there is more stability. I don’t think it’s — there was a talk at the end of last year of animal spirits and just there’s a tremendous uptick in overall business sentiment. I wouldn’t say that. I would say people continue to be cautiously optimistic. I think that they see that the clouds are parting a little bit on some of these issues that may affect our business. So I feel talking to a lot of these customers directly, that people generally feel better than they did last quarter. But there’s still, I think, a fair amount of wait and see, wait and see on what these — the tax code changes are going to look like, seeing what rates are going to do.

There’s just — there’s still a fair amount of questions that are out there. But we feel pretty good. The other thing we feel good about, and we’ve talked about in prior calls is just the market positioning that we have. There’s just been a huge change in terms of the competitive dynamic in Chicago that’s really allowed us the opportunity to get into a lot more doors. And so we think that, that is a huge part of the growth story for us. So generally, as we talked about, pipelines look good, and that’s probably a function of the market dynamics, but also just general clarity on the overall economic environment.

Operator: Our next question comes from the line of Brendan Nosal of Hovde Group.

Brendan Jeffrey Nosal: If I look at the ACL calculation on Slide 15, it looks like the baseline macro factors drove an increase, but the macro uncertainty drove a decline. Just kind of curious how that shapes up. Is that a shift from the uncertainty bucket into the baseline forecast? Or maybe just help us kind of square that circle?

David Alan Dykstra: Yes, I think that’s right. I mean, last quarter, we had about, I think, a [ 36 ] — we disclosed about, I think, a $36 million number for macro uncertainty, which included the BAA spread factor and market volatility. The stock market volatility actually factors into some of our models. And we maintain sort of the BAA credit spread overlay, but the market volatility sort of went away this quarter. So probably an overlay in the low $20 million range versus the mid-30s. So that’s about that $10 million difference that you’re seeing in that slide on the far right. And so the macroeconomic baseline actually increased a bit and the overlay decreased a bit, and they generally offset each other.

Operator: Our next question comes from the line of Nick Holowko of UBS.

Nicholas Joseph Holowko: Just one for me on the margin. So you’ve had a ton of success stabilizing the margin in this 3.5% range for about a year now with the help of the hedges that you have in place and your deposit gathering efforts. And loan growth is obviously trending very strong. So how do you think about your appetite or your need to grow that hedging portfolio at a faster pace alongside your loan growth to keep a similar degree of margin protection beyond this year?

David L. Stoehr: Yes. Nick, I think if you look at the disclosure that we put on Slide 25, we list up the collar [Technical Difficulty] in place. And we feel pretty good for the next year or so. Then some of them start to mature off. So we’ll look to fill out the buckets in ’27 and ’28. But for the next year or so, we feel pretty good about our position, and we’re just waiting for sort of opportune times in the market to add on to those swap positions. But the last few, you can see, we did 1-year forward starts, and then we did them out 4 or 5 years. So just trying to opportunistically and not fill them all up at the same time from a diversification standpoint to add to those as we go along. But I think you will see us add on to those later maturities over time.

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

Timothy S. Crane: Latif, thank you very much. And guys, I apologize for the technical difficulties. We certainly appreciate your time and interest in Wintrust. And as you can tell, we feel well positioned for the second half of the year and actually enter the third quarter with a lot of momentum. As always, please don’t hesitate to reach out if there’s anything we can do for you or as Dave said, if there’s any questions on the accounting for the preferreds. But we appreciate your time this morning. Thank you very much.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.