Wintrust Financial Corporation (WTFC) Earnings Call Transcript & Summary

Okay, why don't we go ahead and get started. Good morning, everyone. My name is David Long. I'm one of the senior bank analysts here at Raymond James. Very excited to introduce Wintrust Financial this morning. Wintrust has become a staple here at the conference in Orlando every year. Wintrust is a $37 billion asset bank headquartered in the suburbs of Chicago. Note that a year ago when I introduced them, they had $31 billion in assets. So over the last year, very good organic growth, complemented by a few acquisitions that added about $1 billion in assets. The bank continues to take market share in the Chicago area. And the bank has also made several opportunistic bite-sized acquisitions that supplements that growth, including 2 that closed in the fourth quarter. Presenting on Wintrust's behalf will be Ed Wehmer, President and CEO. Wehmer is a founding member of the bank and has been President and CEO since 1998. Also in attendance is Dave Dykstra, Chief Operating Officer; Richard Murphy, Chief Credit Officer; and Tim Crane, Treasurer and Senior Market Head. With that, I turn it over to Ed.

Thank you, David. This is an update. I'm now Founder and CEO, Tim Crane is President, and Dave and Murph are Vice Chairmen as we move through the -- we're making some room for younger guys to move up. So nothing really changed much, but realize we're all getting kind of old, and we were able to elevate probably 23 people into the senior positions in the organization, half of them were minorities or women. So our diversity is going pretty well, and we're positioning the bank for a long term, and we're throwing these kids in the water and see if they can swim. So with that, again, I'm sorry, my mask broke. I was going to wear it for the whole thing, but broke. The reason I have it is because my -- I had my 6th grandchild Saturday night, going to visit him, and they're handing these things out like candy. So anyhow, don't believe anything I say. Please read the recently filed 10-K. Basically, in the presentation, you've seen a lot in the past, but we'll update it really with what's going on in the markets, which is, I'm surprised that, that many people are even interested in banks right now. I was expecting that there would be only 3 people here in this room. But we're -- who we are, where we've been, where we're going and some summary financial results and time for questions. For those of you who know us know that we've been pretty consistent in our approach throughout our existence of 29 years. We don't change it for the markets really. We don't change our underwriting. We don't change how we do business. We take what the market gives us. And that's how we do it. 29 years old basically focused on the Chicago area where 2 miles -- 2 hours from really O'Hare is where our primary market is, although we do have businesses that are with national and international scope. 15 banks -- we do run a multichartered system that seems to freak some people out, but basically, everything doesn't touch a customer who is consolidated. So we do get that benefit, but we are able to -- because of this, we're able to differentiate the commoditized market of banking. I think that's why we grew last year $4.5 billion organically and $1 billion of acquisitions. Our organic growth, which I'll show in a chart a little bit later, really outpaces everybody in the market. We've done a number of -- we basically had 9 start-up banks and the rest were acquired. We've done 30 acquisitions since the fourth quarter of '03. Basically, the fed's told us that in the last 10 years, we've done more branch purchases -- bank purchases -- failed bank purchases and other nonbank purchases than any other bank in the country. We've been able to supplement that with our organic growth. That's how we're going to be $37 billion. We have 184 locations as we speak in that market. Last year, we bought -- 2 years ago really, we bought Chicago Deferred Exchange Corporation, which is a 1031 exchange company, provides us with anywhere between -- right now, it's about $1 billion -- anywhere between $1 billion and $1.5 billion of very cheap funding. People who do 1031s, somewhat seasonal in the last half of the year they come in, but with a very inexpensive deposits for us. People are very inelastic to the price that they take. And that just helps keep us a very core deposit base. We have about 98% core funded including that. Branding initiative is basically succeeding. Nobody knew Wintrust back 8 years ago and now everybody in the town knows Wintrust. But we're still -- because of our branding and how we do it, we're able to position ourselves as a local alternative to the big banks on the retail side, and that pays off handsomely for us as is seen by our organic growth. We're the largest bank holding company measured by deposits and is headquartered in Chicago. If you look at the pillars of our business, community banking is pillar number one, Chicago and Milwaukee metropolitan areas, again, 184 branches, exactly what you would expect out of our banking. Product-wise, we offer everything the big guys do. And our mortgage company, which we're happy to have right now, is going through the roof. We are very busy on the deposits side, but it's a national platform, but also it's a backbone of our local banking. Our commercial banking have it all, big bank resources. It's a brand on a Wintrust commercial banking throughout the system. We -- I'll put our products and services and loan, et cetera, up to anybody as we compete extremely well in that market. Because of our name recognition, there's not a deal that goes through in Chicago we don't get to look at. But again, we have not changed our underwriting parameters for any reason other than bringing out new product line. But other than that, we never change -- our bank -- lending banking hasn't changed since the Medici 600 years ago. And risks are still the same. They might have different packages on it, but you'll see that we always pride ourselves on being better than market in terms of our own quality. 1/3 of our portfolio is dedicated especially to finance. It's been like that forever. We're very diversified in terms of our asset base. 1/3 -- the largest is our premium finance company. We have about $3.5 billion of commercial insurance premium finance, great yielding asset, 9-months full payout, $28,000 average ticket size. We have to do close to $8 billion of that paper just to stay and to keep the $3.5 billion there. And the life insurance portfolio has about $5.5 billion in it. Sound like settlement. This is -- these are loans to individuals for succession planning, for state planning purposes. There's a business purpose behind it. We -- knock on wood, we've never had a loss in that business based on 1-year spread -- the 1-year LIBOR. So at prices every year, it gets repricing on it. Again, we haven't had a loss in that business, knock on wood. Got into the business, we bought AIG's portfolio for $1.1 billion worth of assets for $750 million during the downturn. We've been able to grow that again to $5.5 billion. We run that out of New Jersey with the AIG guys still with us, who basically invented the product. $1 million is the average ticket size, again, based on 1-year LIBOR. It's a great business for us. Tricom is very small. It used to be big, but it finances temporary health businesses. We also have a leasing -- leasing portfolio started about 4 years ago from scratch. Has $1.4 billion outstanding. Three prongs to that are big ticket that's run out of Texas and the bank backbone and then a smaller ticket vendor finance business, which is going very well for us also. Homeowners association, mortgage warehouse lending, that's doing very well right now and the like. For wealth management, we've got over about $25 billion. I don't know where it's today, but -- where the market is, but we used to have about $26 billion in assets under administration, brokerage, asset management and Chicago Trust Company. So we're very well diversified. We can offer everybody in the market everything the big guys do, and we just do it better. If you look on our asset growth, the yellow line is our organic growth, red line is acquisitive growth. You can see good growth for us. And then the number of branches we have, how many we've bought, how many we've acquired or how many we rolled from scratch. We see the market now turning to more of a organic growth prospect for us. We've always concentrated on banks under $1 billion to acquire and put in. We see the pricing on that getting a little crazy. Our stock has not been conducive to use lately because of the valuation. So -- and we're seeing banks go 2x book. That's kind of a crazy number. So we're not seeing much there. We are seeing some bigger deals. We are able to look at that are a little bit more reasonably priced, but right now -- we're right now concentrating on buying our stock back, which we've through the -- well, the other day, since we filed the K, we bought $38.5 million back, which is probably $125 million plan. We will continue to do that over the time if the returns on that are much better than buying banks for sure. We figure every -- the old stock price, every $25 million we bought back is worth about a little over $0.04 a share for us. So we'll continue on that prospect also. You can see our market share and where we're at. We've moved up past Fifth Third. We're behind Bank of America. We should be able to pass them relatively soon with a couple of years, at least, but we're excited about where we're. And you can see by the map, there's still plenty of room for us to continue to grow. Northwest Indiana is interesting to us, continuing to fill that up. The Milwaukee area is very interesting also. On a consistent basis, we -- as I said, we don't change what we do very often. We have great markets. We know our markets. We're going to be Chicago's bank, Wisconsin's bank, community-focused by being the alternative by the way we brand. We are the alternative to the big banks. People still look at us as a community bank. And I think that's why we're able to grow. As we grow, we're able to really dive in and serve the needs of those individual communities. Of the 15 banks, I think, 14 of them are all rated outstanding in CRA, which is a primary focus for us. But it shows that we actually walk the walk, we just don't talk about it. And market share growth. We continue to take advantage of big bank consolidation and cost-cutting and the like. We offer them the similar better products and similar better services, delivery services, so we kill them with the service. We have a hybrid because you can get everything electronically and mobilely and digitally that you can in a big bank, but it's interesting our teller transactions are up. People still like going to the bank in the towns that we're in. So we ever able to offer everything. So it's kind of have it all, and that's how we've been able to compete very well. Our assets -- our target loan-to-deposit is 85% to 90%. We've been running above that lately. We're not uncomfortable with that given the short-term nature of our premium finance loans. It's one of the things we could do if we needed to, but 85% to 90%, we all figure you need liquidity, and we're concentrated on that also. Loan volume, 2/3 from our normal business, probably half of that 2/3 is in -- it's really 30% in commercial, 30% commercial real estate, 30% in our niches. That's how we operate. Consistent conservative credit standards. We'll show you a chart later that shows we usually operate a fraction of the -- our competitors. While we're very diversified, something doesn't work and something else is. Last year, you know that it was tough to be in the commercial middle market. We held our own. We are very busy to hold our own, but we see FinCos and private equity firms selling their huge multiples and not numbers where we're willing to underwrite. Well, fortunately, when the FinCos take them, we're able to keep the deposits, keep the customer from that perspective. And we'll see how that all works out, but we're still concerting on that. We're up a little bit this quarter. It's kind of nice. And the funding, we have a strong diversified funding base. I think that deposits are really the franchise value of the organization and we continue to grow deposits and grow market share with 98% core funding. We're very comfortable with that. It gives us room if we ever had to go the other way. How we got here? Kind of a busy chart, which just shows our -- how we've grown over time. We call the crisis and the last one we had in 2006 and '07, we call rope-a-dope, hunker down, raise capital weighted went to hit the fan in '08. We took off in the middle of the battle. We did take TARP back then, paid it back rather quickly, but we did have the TARP, we could have bought the AIG portfolio. So it all worked out well. Off the ropes, we've been growing -- again, we take what the market gives us. It gave us acquisitions for a little while. Now it's given us organic growth. And that's what we're looking at. We continue -- the 2 deals that we did last fourth quarter, we're starting to take those costs out right now. One was an -- STC, was about 85% cost out. The other one countries had to be about 40%, 45% cost out. The conversions take place. We closed the branch as we can go. So then we can start taking out the major costs out of those deals. So anyhow, we're going to continue to grow. The way you get through this type of market with rates where they are, you have to grow through it. Our margin has been under pressure and will continue to be under pressure. And again, we had a record year last year. If you take out the mortgage servicing rights, which are a big part of the volatility, we actually grew by about 8% or 9% last year, not a double digit, but not bad, considering we got whacked by mortgage servicing rights. But at the same time, we've been able to grow nicely. The margin is under pressure. We thought where it ended in the fourth quarter, we'll be able to defend that and actually start to have that margin start going up. But with the recent cut in rates might have a little bit of volatility there. They dropped 50 bps. We've had, by the way, 1/4 already in LIBOR go down. We've got 50 -- it's going to be a little tougher to maintain that margin, but we have close to $2 billion of deposits repricing in the next 5 months. We'll bring those down. We're bringing the core rates down. But again, really, there's not much you can do. You have to go through it, and that's our plan. We'll continue to grow through it. Our loan pipeline. You can see we grow -- will be growing about 13% across the board, diversified. We've been able to hold our credit standards up. Our loan pipeline still remains very good right now. They've been consistently good. We're seeing premium finance grow nicely. Our leasing portfolio is growing nicely. Those are our best rates that we can get. That was holding pretty well for us, but we -- our plan is to grow through this -- grow through it, continue to grow on our expense base. That should drive expenses down, notwithstanding anything else. On a charge-off basis, you can see we operated in a fraction of peer group. We always have and we will continue to do that, hopefully. We have conservative underwriters, and we consider ourselves somewhat of a safe haven in terms of that perspective. We'll all work through the rate -- this rate environment. I mean everybody is in the same boat. We have to do it. We got whacked a little bit last year because of it because we start the year expecting 4 increases, and you get 3 decreases so hard to come back from that, but we've lived through this before, and we will grow through it. Again, our portfolio, you can see deposits, CDs, 25% noninterest bearing. We've got a lot of CDs. So well diversified, mostly all core and then there's 1/3, 1/3, 1/3 on the commercial real estate, commercial, not a lot in terms of the retail side. Home equity loans continue to drop, but a huge mortgage business, which is helpful on the retail side. We are concentrating heavily this year on cross sales. I know it's a dirty word. I think it's customer optimization I think we call it now. Can't say cross sale since Wells Fargo. We've got close to 20,000 customers where we service our mortgages. Don't have any other relationship that are in our market area. We're going to work very hard to bring those in and continue to grow through -- we think that's really low-hanging fruit for us simply to be able to grow through this. On capital, our capital is in pretty good shape. We have lots of room in the capital stack to continue to grow and buy our stock back. Given the arbitrage there, it may make some sense to do more of that. But our capital is well enough to support us. Our tangible common book value continues to grow. We're trading at about where it is right now, which is kind of crazy, but this is what it is and we will work through it. And there's our capital components. You can see a lot of room on the capital stack that continue to build and grow. This is the chart that if you look at it, we look at profitable growth, we look at asset growth, we look at earnings growth, and we look at tangible book value growth. This is us compared to our peer group. For the last 10 years, you can see that our change in total assets, we've grown a lot more than our peer group. We will continue -- our plan is to continue to do that. We will be able to grow earnings per share a lot faster than our peer group, been able to do that. We hope to continue doing that. And our tangible book value has increased a lot more than our peer group. So that's how we run. I think we're doing a pretty good job. We did get a little bit of whipsaw last year as everybody else did, and we will battle through that. Strategy, going forward, basically, we're going to grow through this. There -- as I talked about the acquisition market, it's not as good as it was. It's okay. We've got about 13 branches, de novo branches in line. Markets were not in very lucrative markets in the Chicago area and Milwaukee area that we will grow -- we will open in the next 15 to 16 months. We do very well on those. We -- the last one we opened was 1.5 years ago. The best one was Evanston. We've grown to almost $300 million there in assets. The market continues to consolidate in Chicago, which gives us an opportunity, and our name is very well known in the market. So we will look at acquisitions larger than that. Ours is a $37 billion bank. I think we can afford to look at bigger deals. But then again, they got to be priced right. We're not going to do anything stupid, hopefully. Our goal is to increase core earnings by double digit. That might be a little hard this year. But if we can get high single digits, that would be pretty good. Our margin is going to be under pressure. We think we can grow through that and grow net interest income and keep focusing on growing the bank without increasing the deposit base that if we can grow -- not increasing the expense base, excuse me. We would call our kinetic operating leverage. We can grow, not increasing the expense base, we think we can do very nicely. And again, we're going to have costs coming out related to the 2 deals we closed in December to start seeing those come through. Wealth management continues to be an opportunity for us. Not only do we get the wealth management business because of the 15 charters though, we think that we could sweep the liquidity from wealth management. It's about $2 billion of deposits we bring in from that, that are very inexpensive. They're very helpful to get between that and see that get about $3 billion of very cheap money that's not elastic to the rate environment so we can bring those in. And that's one of the reasons we have the 15 charters, not just from a marketing standpoint, but somebody says, well, you can save money. Actually, we didn't fall off a rhubarb truck. We'd actually lose money if we did it right now, if we were to consolidate because of the ability to raise low-cost deposits, maybe even offer 15x the FDIC insurance. Like right now when the market is panicked, we offer our max safe account to our retail customers. We can offer one account that gives them 15x the coverage and don't have to pay market rates because they don't have to ride around and go to 15 different banks. So we find that it's very helpful for us. And then also the 15 charters helps us, again, on the marketing side and culturally. But that being said, it's not -- we couldn't save that much money we got rid of because every time it touches a customer -- it doesn't touch customer who is already consolidated. Why invest in us? Well, short term, if we're all to live in the short term, you'd say, why would I invest in any bank, really, but long term, I think we've proven we can outperform the market over good times and in bad. That's what our plan is going forward. This is our total assets chart by the growth -- by banks, by the year. They all grow very nicely. Our margin, you can see under some pressure, but we'll continue to work that as best we can and defend that margin. Our revenue growth continues to go up over the last year, but we expect that to go up this year with the mortgage market being as strong as it is. I think we had said we expected about $800 million in the first quarter. We'll actually be close to $1.3 billion, $1.4 billion, something like that. And we -- it's usually the slowest quarter we have, but we expect because of the way the market is now where rates are, our margins will expand on our business also. So it's nice having that in times like this to supplement that. And our capital markets group is feeling well for swaps on a short-term basis, it will help mitigate any pressure we have on the margin. Earnings per share growth, kind of looks like my cardiogram, but continues to -- will continue to go up. Efficiency ratio is stuck right around the 50s. Our net overhead ratio is at 1.5. We don't look at -- the efficiency ratio for us is like a barometer. It's like it doesn't -- your margin goes down, how am I going to get more efficient because my margins are up? We look at the margin, and we look at that overhead ratio. We target our net overhead ratio for under 1.5. We've been able to meet that in the last few quarters. We expect to continue to do that going forward. Loan-to-deposit ratio. We see it's been running close to 90% recently. We will continue to do that and maybe a little bit higher. Our nonperforming assets continue to go down as best as they've been in a long time. You'll see a little pop in at this quarter because of the new change in accounting with CECL, what was still covered about $31 million that was in covered loans. We'll work over and that'll be recorded. But there's really -- on a core basis, we'll be holding relatively steady or down in terms of nonperforming that we were in the fourth quarter. So it stands right now. And charge offs should stay right about where they were. We popped a little bit in '19. We did have 3 loans that kind of popped on us and a little bit of a wake up call. There are PE loans where we weren't the lead basically. And we got out of the rest of those. And we're only -- most of our PE, if there's one area we look at, it's a highly leveraged deals and the PE firms are in that. Most of our good clients are harvesting right now and sitting on money. We're not taking on new loans like that. And we certainly are not going to be in a position where we're not leading if we were to do it. We're certainly not going to play at the leverage that's out there right now. You don't want to see that. You don't want to see that. Questions.

Just a question on [indiscernible] environment [indiscernible].

Well, we have $125 million authorized. And through Friday, we have bought $37 million back. Every $25 million is about $0.04 a share based on the old price. Now on the new price, it would probably be a little more than that.

[indiscernible] prior to that and [indiscernible] does that change your expectations for loan growth this year or does that change...

Most of our clients, when we survey them, are not that concerned just yet, but I don't think it will change our prospects for loan growth that much. Premium finance is continuing to grow nicely. Leasing is growing nicely. Commercial is more driven by the markets and the ability to get bigger leverage and better deals. We're seeing some of the big banks even jumping into it. We looked at a deal where we -- it would have been a big deal for us. It was a reasonable company. We lost it for 0.5 point less. We had a bunch of covenants in there. They had one, and they took the whole thing we were going to syndicate it. So starting to see some of the big banks looking for asset, too. The low rate environment, that scares me more than most anything as you see competition come in and do irregular things. Now we're not ready to call rope-a-dope. We may have called that on PE firms, but we saw a number of -- commercial real estate in Chicago continues to do very well, believe it or not. I mean if you look at the post office that they redid, they added about 2 million square feet or plus-2 million square feet to the market, the old post office that has been sitting there vacant for 20 years. It was all fully absorbed. It's -- commercial real estate in the loop area and in Chicago and especially industrial continues to do very well. Notwithstanding the fiscal situation in Illinois, it still is a great place to work and do business because of the logistics, the ability to generate talent, other than Boston, where we have more schools that are feeding into Chicago. So people are still relocating there, moving their offices and moving to the city. We're able to -- we're doing fine this quarter, and I expect our pipelines will continue to do very well. Murph, do you have anything to say about that?

Yes. I think we've had, unfortunately, struggle market [indiscernible] that be able to grow through this. I mean we've always grown through these [indiscernible]. I'm actually thinking that [indiscernible] grow our market shares.

We have to be able to grow through this. I mean we've always grown through these cycles by our ability to generate good core earning as deposits and lend them out. And I think we'll do fine. I beat the time? I wasn't as long-winded as Randy? Sure. Tony?

Yes. With the average [indiscernible] market [indiscernible]?

Any disruption in the market is always good for us. The upbeat of Fifth Third deal has brought us some talent, and it's brought us opportunities. We hadn't seen good core companies that were loyal as it had been with Cole Taylor or MB for a long time, kind of look around saying, this isn't for me. The service levels were down a bit, in our opinion, but you don't want to speak in front of any competitor, but it does give people an opportunity to look, and we're seeing -- we've got good looks there. Same is true with the old private bank that was acquired by CABC. Taken some time, but Canadians are always a little bit slower as they move in and they put their implementer on, on the organization. We're seeing opportunities from there. We haven't seen people saying, there used to be a big dog there. I don't feel that I had launched for the fellow last week, who is like, I used to feel very good about where it was, I don't know who to call, and we're starting to do some good business with them. So we still have that personal touch, that local flavor, that local feeling these guys seem to lose as they get brought over. And so we feel very good about that, and it's really the reason we can say we feel very optimistic about our ability to continue to grow assets. If you look at our portfolio, a lot of people will say, well, you're all in Chicago. That's got to be a problem. 53% of our loans are not in Chicago. If you look at the premium finance business, that's in all 50 states and $600 million in Canada. Canada is the largest premium finance company in Canada. It's doing very well for us. We went from the smallest to the largest in 3 years. And the opportunities there to grow are continuing to be very good for us. So any time there's disruption in the market, it's a good thing for us and how we deliver service, especially for the old established companies that are used to get there, that really good service, we're able to do it. I don't really do it because of the way we're structured to. As we're flat, not like this, so we can make decisions right away. No long maybes. We never started a customer rub his legs against the wall and not have any room to help him when things get a little tough or when he wants to grow. If you want the most radical deal in the market, the most liberal deal in the market, we're the wrong guys. We want -- in the long term, we want to be there when things get tough. They will work with you to get out of it. We don't want put you in a situation where you're putting your company at risk. That's how we do. So people appreciate that, understand it and the personal relationships we develop are important to the clients. And so when they lose that, it's a big deal for them.

Thank you, Ed. With that, we go down to Cordova 6. So thanks, Ed.