Wintrust Financial - Earnings Call - Q2 2025

Executive Summary

• Record Q2 2025 results: net income $195.5M and diluted EPS $2.78; net interest income rose to $546.7M on strong average earning asset growth, with NIM stable at 3.52%.
• EPS beat S&P Global consensus by roughly $0.17 (2.78 vs 2.615*), and net revenue exceeded internal Q1 trend; management guided to higher NII in Q3 on continued balance sheet growth and stable NIM.
• Loans grew $2.3B QoQ (19% annualized) and deposits grew $2.2B (17% annualized), funding growth with loans-to-deposits at 91.4%.
• Credit quality remained solid: net charge-offs 11 bps annualized, NPLs at 0.37% of loans, ACL $457.5M; provision eased to $22.2M, reflecting macro and portfolio growth dynamics.
• Catalysts: expected NII increase in Q3, consistent deposit gathering, and visibility on preferred redemption mechanics; modest expense seasonality (low $380M run-rate in 2H) supports efficiency.

What Went Well and What Went Wrong

What Went Well

• Broad-based loan and deposit growth with stable margins: “Net Interest Income…a quarterly record…loan growth of $2.3B…Net Interest Margin…3.54%” (CEO).
• Clear outlook for NII: “We remain confident that our Net Interest Margin will continue to be relatively stable…we would again expect to increase Net Interest Income in the third quarter” (CFO).
• Disciplined credit: “Charge-offs…11 basis points, unchanged…NPLs remained at a very low level, increasing slightly from 0.20% to 0.25% (CRE)” (CLO).

What Went Wrong

• Seasonal/non-core expense pressure: Advertising and marketing rose $6.5M QoQ due to sponsorships; salaries/benefits up $8.0M from health claims and commissions.
• Mortgage banking still muted vs year-ago; Q2 up QoQ but down YoY (23.2M vs 29.1M) amid rate environment; MSR fair value marks were unfavorable.
• Slight uptick in NPLs (0.35%→0.37% QoQ) with isolated CRE office and one C&I credit moving to non-performing; management views as granular and manageable.

Transcript

Operator (participant)

Welcome to Wintrust Financial Corporation's second quarter and year-to-date 2025 earnings and results. Present today will be Chief Executive Officer Tim Crane, 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.

Tim Crane (CEO)

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, Dave Stoehr, and our Chief Legal Officer, Kathleen 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. Driving the higher Net Interest Income was 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 that 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 at 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.

Dave Stoehr (CFO)

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 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 other aspects of the balance sheet result, 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 non-interest expense sections, the 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 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 non-interest 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 on 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 non-interest 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 22nd.

The issuance was to redeem $412.5 million of Series D and Series E Preferred Stock that was set to reprice on July 15th, 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 15th 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 22nd to the first payment date of October 15th, 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.

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. Slide 24 in the presentation deck summarizes this information. The long and the short of it is the most recent quarters, including the second quarter, had roughly $7 million of preferred dividends. For the past few quarters and going back five years, that number's been $7 million. In the fourth quarter of this year and going forward for five 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.

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. With that, Tim, I'll conclude my comments and turn it over to Rich.

Richard Murphy (Vice Chairman and Chief Lending Officer)

Thanks, Dave. As Tim and Dave both noted, credit performance continued to be very solid in the second quarter. As detailed in the release of property and 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. 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 Chicagoland, 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. Non-Performing Loans as a % 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 reflects a stable credit environment, as evidenced by the chart of historical non-performing 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 one quarter of our total portfolio. As detailed on slide 19, we continue to see signs of stabilization 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 five loans over $20 million, only two of which are non-medical 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 non-owner-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 non-owner-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.

Tim Crane (CEO)

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. 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 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.

Operator (participant)

Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. To remove yourself from the queue, you may press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jon Arfstrom of RBC. Please go ahead, Jon.

Jon Arfstrom (Associate Director of US Research)

Morning.

Tim Crane (CEO)

Morning, Jon.

Jon Arfstrom (Associate Director of US Research)

Hey, thanks for having us. Yeah, good morning. Question for you on the loan growth numbers. Obviously, very strong this quarter. You mentioned seasonality and expenses, and I guess I'm curious about third quarter expectations. You have a higher period end balance, but I think that 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?

Dave Stoehr (CFO)

Expense growth or loan growth, Jon?

Jon Arfstrom (Associate Director of US Research)

Loan growth, sorry.

Dave Stoehr (CFO)

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

Jon Arfstrom (Associate Director of US Research)

Okay.

Dave Stoehr (CFO)

I think if you just think mid-to-high single digits based off of the June 30th balance going forward for the second half of the year, that's sort of our view right now.

Jon Arfstrom (Associate Director of US Research)

Yeah. Okay. Got it. 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. Can you just talk a little bit more about where you're finding that kind of deposit growth and can that keep pace with loan growth?

Operator (participant)

Ladies and gentlemen, please stand by. Please remain in your line. Please stand by.

Tim Crane (CEO)

Latif?

Operator (participant)

Yes, please proceed.

Tim Crane (CEO)

Okay, Jon, I'm sorry. We had a little bit of a technical glitch on our end.

Jon Arfstrom (Associate Director of US Research)

Okay.

Tim Crane (CEO)

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, you know, 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. 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 Arfstrom (Associate Director of US Research)

Okay. Anything on the wealth management outsourcing? Can you just talk about the longer-term goal there and how that's gone?

Tim Crane (CEO)

Yeah. 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 advisors and our wealth employees, is largely behind us. 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 would look to continue to grow it.

Jon Arfstrom (Associate Director of US Research)

Okay, thank you very much.

Operator (participant)

Thank you. Our next question comes from the line of Christopher McGratty of KBW. Your line is open, Chris.

Christopher McGratty (Head of U.S. Bank Research)

Oh, great. Morning. Hi, Chris. How are you doing? In terms of the NII growth, the 4% link quarter, 16% year on year, 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? Thanks.

Dave Stoehr (CFO)

As we said, we expect mid-to-high single-digit loan growth from here on out and a relatively stable margin. In the three, we've been roughly in the 3.52, 3.53 range on average over the last few quarters. If we stay in that in the mid to low three range, our 3.50 range, then I think it's just what is your average asset growth? That's what we're looking at. 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 simple math, I think, from our perspective.

Christopher McGratty (Head of U.S. Bank Research)

Okay.

Dave Stoehr (CFO)

Our deposit pricing, you know, if you're growing, you know, 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. We think we can fund the growth with deposits right now. It's never easy, but we've always been able to do that.

Tim Crane (CEO)

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

Christopher McGratty (Head of U.S. Bank Research)

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?

Dave Stoehr (CFO)

No, I mean, the only odd thing is the second quarter is always really strong on commercial Premium Finance. Recall, the 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. We kept those assets on our balance sheet and funded them internally versus the sale like we did a couple of years ago. Going forward, we're not going to have a $1 billion P&C Premium Finance growth quarter in the third quarter. The second quarter is seasonally high. Other than that, our Commercial Real Estate pipelines are very consistently strong. We would expect to have sort of the normal growth absent the outsized Premium Finance seasonality in the second quarter.

Christopher McGratty (Head of U.S. Bank Research)

Great. My follow-up maybe for Tim is, you know, the deregulatory narrative, what does it mean for Wintrust? Anything you might be doing differently? Do deals become, you know, you don't need to do a deal given the growth you're putting up? Does that become more of a possibility? Anything you can unpack there on deregulation? Thanks.

Tim Crane (CEO)

Yeah, Chris, I mean, we're obviously hopeful that there's, you know, some sort of tailoring or inflation adjustment, whatever you want to call it, to relax the rules for growth. 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. We'll be disciplined but opportunistic.

Christopher McGratty (Head of U.S. Bank Research)

Great, thank you.

Operator (participant)

Thank you. Our next question comes from the line of David Long of Raymond James. Please go ahead, David.

David Long (Managing Director)

Good morning, everyone. Thanks for taking my questions. 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? How are your core commercial clients? How's their sentiment now?

Richard Murphy (Vice Chairman and Chief Lending Officer)

Yeah, you know, 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, you know, that we're still not out of the woods, obviously, there. I think there's more confidence here that the economy is not the bottom side coming out. I think most customers are feeling, again, in the term I use, cautiously optimistic about where things are at right now. That, coupled with the market dynamics in the Chicago market in particular, but certainly in our other core markets, feels like things are going to be in a pretty good spot, and you can see that in our pipelines.

David Long (Managing Director)

Got it. Thanks, Rich. The follow-up question as it relates to the CRE office portfolio. On slide 20, you guys highlighted the non-performers within that portfolio increased a bit. Just curious if I can get a little more color on what happened there. Maybe a little with, you know, not looking for the name of the building or anything like that, but just want to get a little more color around the non-performers on the office side.

Richard Murphy (Vice Chairman and Chief Lending Officer)

Yeah. 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 you 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. I kind of refer in that portfolio as kind of, you know, because the denominator is so small that every new loan makes it look like a pop. We're just managing through the portfolio like we do every day.

David Long (Managing Director)

Great. Thanks, Rich. Appreciate it. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Nathan Race of Piper Sandler. Please go ahead, Nathan.

Nathan Race (Managing Director and Senior Research Analyst)

Hey, guys. Good morning. Thanks for taking the questions.

Tim Crane (CEO)

Hey, Nate.

Nathan Race (Managing Director and Senior Research Analyst)

One of your Midwest peers this morning kind of tempered loan growth expectations, citing some increased competition. Just curious, you know, what you guys are seeing from a competitive pricing perspective. Obviously, you know, loan yields came down a little bit this quarter. I'm curious if that's driving some of that loan yield compression that we saw in the quarter. If you could just comment in particular on the commercial insurance Premium Finance portfolio in terms of what new rates on production look like there relative to the roll-off yield.

Richard Murphy (Vice Chairman and Chief Lending Officer)

Yeah. I'll talk a little bit about the core portfolio and what we're seeing and some of the niche portfolios as well. We talked about it at the end of last year that we would anticipate that banks, as they continue to try to ramp up their loan production, would become a little more aggressive. We have seen that. As Tim talked about in his opening remarks, we have a pretty disciplined approach to where we're going to be on pricing. 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. Our job is to manage through that. One of the things, you've known our story for a long time, when you have a multi-pronged asset approach, some things get compressed a little bit while other things give you some opportunity.

That's what we're seeing now. We think that in the Core C&I space, we continue to hold our line pretty well on pricing. In leasing, same thing. Specifically to your property and casualty question, we continue to be in pretty good shape. Prices are coming in a little bit tighter on larger, credit-oriented deals. We have a very, very granular portfolio there that we continue to be able to price pretty well.

Tim Crane (CEO)

Nate, for the second quarter, I think a number in the mid-7% range would be about the right range for the P&C loan yield.

Nathan Race (Managing Director and Senior Research Analyst)

Okay. Tim, that's pretty close to the roll-off yield, if I heard?

Tim Crane (CEO)

Yeah, not too far off.

Nathan Race (Managing Director and Senior Research Analyst)

Okay. Great. You mentioned on deposit costs, it looks like they were kind of stable in the quarter all in. If I strip out CDs, it looks like your interest-bearing deposit costs were up 6 basis points quarter over quarter. 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?

Tim Crane (CEO)

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. If we get a cut, obviously, you know, we feel reasonably good that we can handle that without much impact on the margin.

Nathan Race (Managing Director and Senior Research Analyst)

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 fourth quarter level of last year. Just curious if you still think that holds true, which I think translates to about $1.5 billion to $1.6 billion in expenses for this year.

Dave Stoehr (CFO)

Yeah. 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. The low $380 million, I think, is probably a good thought. 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. I think if we can hold this relatively stable in the low $380 million for the last two quarters, that's probably what we're shooting for right now.

Nathan Race (Managing Director and Senior Research Analyst)

Okay. Perfect. I appreciate all the color. You've had some great quarters, guys. Thank you.

Tim Crane (CEO)

Yeah. Thanks, Nate.

Operator (participant)

Thank you. Our next question comes from the line of Terry McEvoy of Stephens Inc. Please go ahead, Terry.

Terry McEvoy (Managing Director)

Hi. Thanks. Good morning. Maybe just a question on West Michigan. Could you just talk about banker and client retention, and is the broader product offering, is it driving some growth in that market?

Tim Crane (CEO)

Yeah, thanks, Terry. I still feel very good about West Michigan. I actually spent a couple of days over there with clients. The conversion is behind us, you know, we're excited to have that part of the equation done. A number of clients are looking for us to provide more services to them, and the prospecting opportunities are very good. I feel actually, you know, like we're in the right spot to begin accelerating the results in West Michigan.

Terry McEvoy (Managing Director)

As a follow-up, the $456 million of commercial growth, Rich, did about half of that occur in the mortgage finance portfolio? 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 Murphy (Vice Chairman and Chief Lending Officer)

Yeah. There is, I mean, as we talk about in our own mortgage book, there is a fair amount of volatility in that book in total. 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. We are taking share in that portfolio. Right now, that total book sits at.

Dave Stoehr (CFO)

$1.2 billion.

Richard Murphy (Vice Chairman and Chief Lending Officer)

$1.2 billion.

Terry McEvoy (Managing Director)

Great. Thanks for taking my questions.

Richard Murphy (Vice Chairman and Chief Lending Officer)

Sure.

Tim Crane (CEO)

You bet.

Operator (participant)

Thank you. Our next question comes from the line of Benjamin Gerlinger of Citi. Please go ahead, Ben.

Ben Gerlinger (VP of Equity Research)

Hey, good morning, guys.

Tim Crane (CEO)

Ben.

Ben Gerlinger (VP of Equity Research)

I know we talked through the rate paid across the different deposit silos, and I get that you grew like a weed this quarter, which is good. When you think about if there is a cut or two in the back half of the year or the next 6+ 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 and kind of the growth aspects.

Dave Stoehr (CFO)

I think Tim touched on it a little bit earlier, but I think if the Fed cut 25, we would 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-month and 11-month terms. 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.

Ben Gerlinger (VP of Equity Research)

Gotcha. That's helpful. You just answered the question on the expense front. That is everything I have. I appreciate it. Thanks, guys.

Dave Stoehr (CFO)

Thanks, Ben.

Operator (participant)

Thank you. Our next question comes from the line of Casey Hare of Autonomous. Please go ahead, Casey.

Casey Hare (Analyst)

Yeah, thanks. Good morning, guys. Just wanted to follow up on loan growth again. The Premium Finance, it sounds like it's obviously got great momentum, up 17% year-over-year, which I think you said is showing some signs of moderating. Just wondering where that is in terms of that hard market cycle, like in terms of later earnings, just some big-picture thoughts on how that tailwind is going.

Richard Murphy (Vice Chairman and Chief Lending Officer)

Yeah. It's a really good question, something we look a lot at. If you look at that portfolio over the last six years and on a month-to-month comparison, it's a very consistent growth pattern fueled by two things. One is the dislocation of other competitors, some changes in the dynamics of the individual agents, things like that. There's just been a lot of opportunity for us to pick up market share. That year over year continues to drive not only dollars, but numbers of units. The other piece to the puzzle is just a market that we saw hardening pretty consistently over the last four or five years. Those two things have really allowed that portfolio to grow very nicely. Plus, just great execution on the team's part and some investments we've made in technology that really helped drive the product offering. That put us in good shape.

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. We are starting to see some moderation there. We use the term firm, that the unit, the dollar amounts of units continues to stay pretty consistent. 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. I guess the only maybe just slight thought there is maybe not as, the premium rates may be not with the same upward trajectory, but still solid to, I'd say, firm to slightly up.

Casey Hare (Analyst)

Gotcha. Thank you. Tim, 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. It was a little bit bigger than 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?

Tim Crane (CEO)

With respect to the market, I think there's a whole host of reasons. People are dealing with succession issues, people feeling like the market's 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. I think you're getting people.

Operator (participant)

Ladies and gentlemen, please stand by. Ladies and gentlemen, please remain in your line. Thank you for your patience.

Tim Crane (CEO)

Casey, can you hear us?

Casey Hare (Analyst)

Yes, sir. Please proceed.

Tim Crane (CEO)

Casey, I'm sorry. Somehow we've got a line dropping somewhere between Chicago and where all of you are.

Casey Hare (Analyst)

Yeah, no worries, guys.

Tim Crane (CEO)

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. For the reasons I mentioned earlier, I think there is some pickup in kind of market M&A activity.

Casey Hare (Analyst)

Thank you.

Tim Crane (CEO)

You bet.

Operator (participant)

Thank you. Our next question comes from the line of Jeffrey Rulis of D.A. Davidson. Please go ahead, Jeff.

Jeff Rulis (Managing Director and Senior Research Analyst)

Thanks. Good morning. Rich, I wanted to circle back and not to get too granular, but you touched on the CRE non-performers, and we're off a low base. Maybe same question on, it looked like a little pickup in the commercial Non-Performing Loans. If 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 Murphy (Vice Chairman and Chief Lending Officer)

Yeah. Again, very granular. We had one in particular credit that just had, we'd seen performance suffer for a little while here over the last couple of quarters, and, you know, finally decided that, you know, this was a credit that we probably was going to need, you know, more meaningful remediation and just took it to non-performing. We think that we've got it marked. Again, just kind of a one-off situation.

Jeff Rulis (Managing Director and Senior Research Analyst)

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 Murphy (Vice Chairman and Chief Lending Officer)

Yeah. There's nothing that I would necessarily point to specifically. I think it's more a question of leveraging the balance sheet, liquidity on the balance sheet. 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 weathered our way through that. I think we're feeling better in that space. Right now, it's really more, I think, event-driven than industry-driven.

Jeff Rulis (Managing Director and Senior Research Analyst)

Got it. Okay.

Dave Stoehr (CFO)

Yeah. I'd like to maybe add in there, Jeff. If you look at the total non-performing loan ratio, it's right in the middle of the range. We've ranged from 35-39 basis points, and we're at 37, and it's an awfully low number. Just one credit here or there can move it a little bit. Again, it's low and right in the middle of our historical range over the last five quarters.

Jeff Rulis (Managing Director and Senior Research Analyst)

Gotcha. Yeah. Good perspective. Just one other one. I continue to try to model the Covered Call Options, sort of the outlook there, and that's, you know, 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, you know, a lower or higher quarter there?

Dave Stoehr (CFO)

No. It really depends on what happens to, you know, we're writing calls on government agencies like Fannie Mae. It really depends on what that part of the curve does as far as if it comes down, the securities will get called and we'll rewrite. It also depends on what volatility is at the time that we buy the security. My crystal ball isn't good enough to predict what it's going to be at the end of the third quarter. If rates go down a little bit and securities get called, then we'll generally have more, you know, more call option. If rates go up, then it's usually less. You're right. It's generally in the $1 million-$5 million, $6 million range, and it really can fluctuate. It's really sort of a hedge to down rates for us. It supplements revenue if rates go down.

If those rates do go down, call option will go up, which will supplement revenue and offset any pressure you could have on the margin.

Jon Arfstrom (Associate Director of US Research)

Got it. Thanks, Dave.

Operator (participant)

Thank you. Our next question comes from the line of Jared Shaw of Barclays. Please go ahead, Jared.

Jared Shaw (Managing Director)

Hi. Good morning. 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?

Dave Stoehr (CFO)

Yeah. CET1, you know, we had such good growth this quarter. It came down a tenth of a %. 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. The other categories, and we put this in the earnings release, are roughly 60 basis points higher at the end of June because we had both preferred, all preferred issuances outstanding. We had the $425 million Series F outstanding and the $400.5 million of the Series D and E. Somewhat elevated at the end of June, those tier one ratios will come down 60 basis points. Not the CET1 because preferred's not in the common. The total tier ones will come down roughly 60 basis points. We put those numbers in the press release.

From here on out, we would just expect to gradually grow capital, 10 basis points or so, with earnings and mid-to-high single-digit loan growth.

Jared Shaw (Managing Director)

I guess, are you 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?

Dave Stoehr (CFO)

I think it's more of a floor. I think staying at 10% is not a bad level to indicate a floor. We'd like to grow that. If there was a great opportunity and it was down, I would look at 10% as a floor in our minds right now.

Jared Shaw (Managing Director)

Great. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of David Chiaverini of Jefferies. Please go ahead, David.

David Chiaverini (Equity Research Analyst)

Hi. Thanks. Follow-up on loan growth. Curious on non-Premium Finance, so more on the Core C&I and CRE sides. Can you talk about borrower sentiment? Are you seeing more borrowers come off the sidelines here?

Richard Murphy (Vice Chairman and Chief Lending Officer)

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. I think that there is more stability. I don't think it's, you know, there was a talk at the end of last year of animal spirits and just, you know, 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 their business.

I feel, in 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, you know, the tax code changes are going to look like, seeing what rates are going to do. There's still a fair amount of questions that are out there. 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. We think that is a huge part of the growth story for us.

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.

David Chiaverini (Equity Research Analyst)

Very helpful. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Brendan Nosal of Hovde Group. Please go ahead, Brendan.

Brendan Nosal (Director)

Hi. Good morning, everybody. Thanks for taking the question. 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. I'm just kind of curious how that shapes up. Was that a shift from the uncertainty bucket into the baseline forecast, or maybe just help us kind of square that circle? Thanks.

Dave Stoehr (CFO)

Yeah, I think that's right. I mean, last quarter we had about, I think, a $36 million number for macro uncertainty, which BAA Credit Spread factor and market volatility. The stock market volatility actually factors into some of our models. We maintained sort of the BAA Credit Spread overlay, but the market volatility sort of went away this quarter. Probably an overlay in the low $20 million range versus the mid $30 million. That's about that $10 million difference that you're seeing in that slide in the far right. The macroeconomic baseline actually increased a bit, and the overlay decreased a bit, and they generally offset each other.

Brendan Nosal (Director)

Okay. Thanks, David. Thanks for taking the question.

Dave Stoehr (CFO)

Yeah, thanks, Brendan.

Operator (participant)

Thank you. Our next question comes from the line of Nicholas Holowko of UBS. Please go ahead, Nick.

Nicholas Holowko (Analyst)

Hi. Good morning. Thanks for taking my question. Just one for me on the margin. 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. Loan growth is obviously trending very strong. 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? Thank you.

Dave Stoehr (CFO)

Yeah. Nick, I think if you look at the disclosures that we put on slide 25, we list out the collar in place. We feel pretty good for the next year or so. Then some of them start to mature off. We'll look to fill out the buckets in 2027 and 2028. For the next year or so, we feel pretty good about our position. We're just waiting for opportune times in the market to add on to those swap positions. The last few, you can see, we did one-year forward starts, and then we did them out four or five years. Just trying to opportunistically, and not fill them all up at the same time, from a diversification standpoint, add to those as we go along. I think you will see us add on to those later maturities over time.

Nicholas Holowko (Analyst)

Thank you.

Operator (participant)

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

Tim Crane (CEO)

Thank you very much. We certainly appreciate your time and interest in Wintrust. 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. If there's any questions on the accounting for the preferreds, as Dave said, we appreciate your time this morning. Thank you very much.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.