Wintrust Financial Corporation (WTFC) Earnings Call Transcript & Summary

Good morning, everyone. My name is David Long. I'm the research analyst here at Raymond James that covers Wintrust Financial. We are very happy to welcome Wintrust here this morning. Wintrust based in Chicago, $50-plus billion in assets, about $5.5 billion in market cap. They've been a staple here at our conference for quite some time. This morning, we're very happy to introduce CEO, Ed Wehmer, as well as President and Future CEO, Tim Crane, and we also have Dave Dykstra with us, Chief Operating Officer as well.

So with that, why don't we go ahead and get started. Just with the change happening here, with the CEO role. Maybe can we just talk a little bit about Ed, some of your -- how you view some of your biggest accomplishments over the years. And then maybe talk a little bit about the timing and the transition into passing the CEO role to Tim.

Sure. [ Previous ] accomplishments. Not killing Dykstra, number one. Could have happened, Dave, you never know. But I'm very proud of the culture we've developed, culture is everything in the organization, our culture customer first and take the blame, share the fame, avoid the shame and enjoy the game. So we do. I like the structure we set up at Chicago's Bank and we get a lot of kudos for not selling the bank, but -- and I was told early on by our first non-Executive Chairman, anybody can sell, everybody can build. And we built, and we're still building. We're serial builders, I love it. I don't think we're going to miss a beat with Tim coming in. Time was right for me. It was not my -- I had back surgery maybe 4 months ago. Scars about that long and hopefully football Rugby growing up, I guess, is the answer to that. But that had nothing really to do with it. We had planned this for a period of time and give Tim 8 to 10 years to run at his age and then we got a group of young people coming up. So the perpetuation of our culture is the most important thing to me going forward. Timing, April 30, I'll be done. I'll go to Chairman, and Tim will get my office. So all the buggers off the bottom already at a desk and stuff like that. So I'm in pretty good shape there, but excited about the transition. I'll still be involved, but there's going to be one hand on the wheel be Tim's and peer to help him do what he needs to do.

Got it. Great. Maybe some of our -- some of the investors here in the room are a little bit newer to the story. So maybe we could take a step back and maybe just talk just for a few minutes about what makes Wintrust different why should investors be considering Wintrust? And maybe just talk a little bit about some of the big picture stuff.

Sure. I mean, a nice diverse business and a really good market. So for those of you that don't know us, 175 or so retail locations in Northeastern Illinois, Southeastern Wisconsin. Our commercial business sort of has 3 legs to it, if you will, a traditional C&I business. middle market focused. We're #1 share with JP Market in Chicago in a period of about 15 years for us. Terrific treasury management business that generates a bunch of fees. CRE, we do about 1/3 of our book, try to limit it to that level, focused on multifamily and distribution, very limited retail, very limited office. And then maybe one of the things unique to us, Dave, is the insurance finance businesses. So premium finance business, 2 flavors, 1 Wintrust Life business, which is our life insurance finance business and then property and casualty insurance business where we finance property and casualty premiums for companies nationwide. Very different businesses. The life business, higher ticket, sort of affluent estate planning tool. The P&C business, more of your everyday factory financing business policies. And so the diverse businesses really help us when some business has slowed down or the market slows, others do quite well. And for example, right now, the property and casualty insurance business, everybody looks at their insurance premiums they're going up. We do the same number of units we get quite a bit more growth. Nice wealth business, $34 billion. And assets under management. And to Ed's point, this is sort of a nice time for us. Margin going up. Credit is very good, momentum in the market, very good. So we feel pretty good right now.

Good. Good. Looking out the next 3 to 5 years, if you were to tell us what interest looks like then, how do you envision the bank looking, let's call it, 5 years from now?

Yes. Again, I mean, we're on a little bit of a roll and doing well. So largest independent bank in Chicago, we continue to grow on a disciplined basis, so call it $75 billion, $80 billion plus, continue to be entrepreneurial and opportunistic, hire good employees, take advantage of disruption in the market. We're in a really nice spot, the largest independent bank in Chicago where sort of commercial independent bank, [ Northern ] Trust us. different kind of business. But I think we get a lot of looks. I think we're appreciated in the market, the folks in Chicago that want to work with a local bank were their choice, sophisticated capabilities. We invest on a regular basis. So hopefully, more of the same with good results.

Take what the market gives us.

Yes. I was just going to say, and as famous were saying, take what the market gives us. Right now, today, what is the market giving Wintrust? What are the near-term opportunities as you see them?

Yes. Well, disruption has been kind of a staple for the last several years. That continues as some of our peer banks, our competitor banks have merged with others. They disappeared from the market. They lose focus. So that continues to be an opportunity. The bigger banks don't know the market as well as we do when they get distracted. We win when their bankers can't take care of their clients, they come to Wintrust, we win. So lots of opportunities. We've also been very patient from a rate standpoint. So interest rate sensitive continues to pay benefit for us. Smaller banks or folks that kind of panicked and invested earlier, made a lot of long-term fixed loans are kind of toughening out right now. And we've been pretty cautious about that. And so the balance sheet is in good shape. The interest rate positioning is very good.

Tim, I never used to say how big we're going to be. Take what the market gives us, that's it. I advise, you got to do what you want to do, but.

The -- one of the biggest questions I get from investors is deposits, both deposit flows, deposit betas. Can you talk about some of the deposit competition as you see it in the Chicago MSA, and what you're seeing within your own balance sheet on the deposit side and your expectations there?

Sure. Yes, a lot there. 9 months ago, I would have said pretty disciplined in Chicago. Everybody was kind of trying to hold rates a little bit and maybe a quarter ago, it sort of broke. And so the rate environment is accelerating 4%, 4.5% type promotional rates in the market -- different competitors, obviously, in different areas, taking Wisconsin, for example, has more credit union activity than there is in Illinois, but getting more aggressive. From our standpoint, we've tried to be disciplined. Many of you have heard us on the calls where we've actually talked about helping customers actually get into treasuries. So instead of letting them go somewhere else as we've been disciplined, they've moved into our wealth management business where we purchased treasuries for them over time when the treasury and the deposit market gets back together, we'll rewin some of those deposits. But we're holding our own right now. It's tougher, probably pretty flat. Others are down in the market, and we're seeing more and more competitive rate.

One of the beauties of our structure is the -- your marginal cost of funds. So we offer a product. We can go to our smallest branch, it might say Wintrust now but it doesn't have to sell every place, be Schaumburg Bank or something or one of the banks out in...

Yes, for Rockford or somewhere. The test point, the structure allows us to price as if for 15 different entities as opposed to one. So we can limit the cannibalization by offering promotional rates in a specific market and not all of our markets [indiscernible] very helpful.

We're in 170 really. All the brands we sell can go out and might be a branch of 1 of the 15 charter banks, but on offer a nice product and build that branch up and not have to pay everybody that number.

How about the lending side of the market in Chicago. Let's not talk about the premium finance yet, but maybe just the commercial real estate markets. What are you seeing there? And how aggressive are you seeing some of your competitors?

Yes. It's -- we always have aggressive competitors, sometimes undisciplined competitors. We try to make sure that we're not playing that game. Even though we're a Chicago-based both from a real estate and C&I standpoint, many of our loans are outside of Illinois. For many folks, that's a positive as Illinois has tax issues and kind of growth issues that some of the other states don't. But very disciplined underwriting, stressing for interest rates, stressing for taxes, stressing for supply chain type activities. Credit quality, very good. When we have deals that get a little bit tougher and we're not comfortable anymore. Our competitors are taking them right now. We view that as a good sign. So I'd say normal, maybe a little tightening some competitors out of the real estate market right now or certainly much more selective on the real estate market.

Are there any lines where Wintrust is pulling back? maybe your appetite has changed over the last 6 months to a year.

Well, we try to be consistent. The market doesn't like it, clients don't like it when you're not consistent. So that -- we're not trying for that outcome. But we've been very cautious, for example, on retail and office on the real estate side for a period of time.

Hospitality.

Hospitality, almost no hospitality, yes. And so even in those areas where we make loans to customers, they tend to be very strong sponsors, very granular, very thought out from a concentration standpoint. And so we would be underweight those 2 areas as an example. But not throw the baby out with the bathwater type thing either. So -- and I think the customers appreciate that.

The LPO.

Yes, we've got a couple -- as the acquisition market has been a little bit slow and David, maybe you'll ask about that. But we grow organically. And so we've got loan production offices in Northwest Indiana. We've got new loan production office in Appleton, Wisconsin. And so continuing to expand, pardon.

Denver.

Denver. Yes, continuing to expand either in markets in the case of Denver that we like a lot and know some people that are a good start for us and then otherwise in markets that are adjacent to our existing markets where the brand plays pretty well.

Yes. Chicago is not building that much. So many of our clients are outside the state building. We follow them there, and they tell their friends, and it's actually been very good for us.

Yes. How do you staff those non-Chicago area markets, Denver, Appleton?

Yes. Well, Denver, we were fortunate. We ran into some folks that had a Chicago background that we knew that had been in Denver for a period of time. So experienced bankers in Denver knew the market, but also knew Wintrust. And so that's been a terrific expansion for us, both on the loan side and actually deposits, which has been good. The others are more as local competitors either running the problems or the bankers get frustrated in terms of their ability to take care of customers. They come to us. And again, we're very opportunistic about hiring some of those folks. And over time, we don't ask people to bring their clients with them. Over time, the clients will find them and come to us, but it's worked out very, very well for us.

Yes. Maybe we can spend a few minutes on the premium finance business. That's something that really differentiates Wintrust from a lot of your peers. It's about 30% of your loan portfolio. Maybe just from the top, what is the attraction? Why do you focus so much of your time and effort in that business? And then how do you see that competitive landscape [indiscernible]

I'll tell you how we get in the business and Tim can go forward. We got in to business -- when I started this saying 30-something years ago, we figured a 1/3 of the portfolio has to come from these niche businesses. 85% to 90% loan to deposit, 1/3 of portfolio from these alternate niche businesses, banks in my history, got in trouble when they try to take that last 1/3 of the -- that capacity and put in everything. I know what they're doing, just looking at what's tough. So first insurance, we started in '91 we started the bank [ merger ] with us in '96. And then in what year was that, Dave? Life -- 2007, AIG had to dump the life business. That was the greatest deal of my life $1 billion of assets for $700 million. Never lost a dime on it . I like those crisis. Crisis are good. But that's a great business. Tim take it from there.

Yes. I mean -- so again, the 2 businesses, the life business and the property and casualty finance business. Start with the property and casualty finance business, very few providers, number one. So it's a differentiated business for us -- little bit of a factory. These are $40,000 loans, basically, 9-month type terms, if you will, reprice in a favorable way for us from an interest rate standpoint. And we know the brokers, we know the carriers. There are 50 state regulations you have to pay attention to. So it's a defensible business as well. And with the way insurance premiums are going, it just kind of chunks along at a nice rate. We like that business a lot. There's been some disruption in that business, some mergers that are giving us opportunities that will probably play for the next year or 18 months here. The life business, more competitors in the life business, but we've got the dominant position with a team that knows what they're doing. Everybody can make a life insurance loan. The problem is if you don't do it well, you're run into a state planning problems. And so people respect our expertise. They respect our team in terms of putting those deals together and it's a $7 billion business for us. It's grown very rapidly -- little bit more sensitive to higher rates. And so our growth rate will probably slow a little bit in that business. But as this gets a little bit more complicated as the market gets tougher, we'll hold our own and people will look for the expertise that we provide.

Sure. And in that business, what is the credit profile?

Well, for the Life business, knock on wood somewhere here. We've had 0 losses over an extended period of time. You're essentially secured by the cash surrender value of the policy or by other collateral that the client provides.

Cash marketables basically. If you go you would probably get out within a week.

Yes. And our risk in both businesses is really the carrier because if a client doesn't make their loan payments, we essentially cancel the policies and receive the premium return premium back to the bank. So in most cases, it's really a timing issue. There's a little bit on the property and casualty side around either advance rates or workers' comp insurance where you can have some losses, but they tend to be in the 10 to 20 basis point range. And so for us, 1/3 of our loan book is very, very high credit quality, very, very low losses. And so if you look at the bank overall, you might see an allowance ratio or a coverage ratio that looks a little bit low. But when you adjust for the 1/3 of the business that's either 0 or low loss, we're at or above peer levels in terms of our coverage ratios for the rest of the loan book, which we believe to be higher credit quality than most of our peers.

The same as we have nonperformers. We have nonperforming assets. We have to include the premium finance [ underway ] they get the money back. It's all confirmed. I think our -- it inflates them by half, I think. So we look at the numbers, take out the premium finance numbers when you're looking that's just way to get cater 90 days past due and not accruing. So.

Yes. Okay. The overall, on your balance sheet, you tend to focus on keeping a loan-to-deposit ratio near 90%, you're just above that right now at 91%, I believe. How do you see that playing out? And how far -- how would you let that get to 100%?

Well, we wouldn't want to get to 100%. I mean our target is 85% to low 90s. We're comfortable where we are. We're working hard on growing deposits. We think deposit growth is the strength of a franchise. So in a more challenging environment, we certainly don't want that to get away from us, and we want to show efforts and activity on the deposit side, but we're comfortable where we are.

Okay. The noninterest-bearing portion of your deposit base running, I believe, just under 30%. Historically, you've been closer to 24%, 25%. Do you see the bank getting to that level? How do you think deposit flows will move in the -- over the next couple of quarters?

Yes. I mean there's clearly pressure on noninterest-bearing deposits. I mean they built up over the pandemic. People didn't have any reason to put money elsewhere. And so you're seeing those numbers come down not only at our bank but at other banks as well. 15 years ago, we were at 9% noninterest-bearing deposits. And as we grow our commercial business, which we intend to continue to do, that number will stabilize and continue to grow. So I don't know exactly where we'll land, David, but I would expect we won't get back down to 24%, 25% unless there's a lot of growth, and we really have to attract deposits at the margin. So it's more of a denominator issue, I guess, would be my point.

Go see us doing some new marketing. Again, for the second year in a row, we won over 7 Greenwich Awards and no other political competitor got any basically. Greenwich Awards are for the commercial side of the business, who's the best at this or that. Our [ treasury ] management comes across better than everybody's, which is awesome. We also won the J.D. Power Award last year, last 2 years or 3 out of the last 4 years. I think -- so you're going to see us pushing those hard because people just think you have a good time back in someplace else.

David, on the deposit front, maybe just a couple of other things. One, our wealth -- our management business generates a number of low-cost deposits. So they're not interest-bearing deposits, but they're deposits with very attractive rates. As does a sort of niche business we have, it's called the Chicago Deferred Exchange which is a 1031 exchange business. And essentially, what they do is provide qualified tax transition services for real estate transactions. And those tend to be lower-cost deposits. And they move a little bit with the real estate business, but they've been between $1 billion and $2 billion over the last year, and again, very favorable rates. Clients much more interested in the tax treatment of their transaction than they are the actual rate they're getting on the deposit.

Got you. About 6 weeks ago or so on your earnings call, you talked about the net interest margin approaching 4%. Since then, we've seen another leg up in rates and heightened Fed rate hike expectations. Any update to that comment? Or do you think with the higher rates the odds of getting to 4%, maybe a little bit higher?

Yes. I mean we were 3.73% in the fourth quarter. We said we would be up substantially in the first quarter. We will. With rates continuing to tick up, we think there's some more upside for us. It slows a little bit because we've been trying to protect the downside in future periods. And so as we mentioned on the call, fourth quarter, we did some collars. And then beginning in the first quarter, we've done some received fixed swaps to help provide a little bit of safety net for the margin in a down rate environment. Sort of at our worst, we were 2.50%, 2.60% during the pandemic. And fortunately, we had a very strong mortgage business in PPP to help supplement the bank's income. And we ended up doing very well during those periods. But if something were to happen and rates were to go very low again, we'd like to avoid getting to 3% or below in terms of the margin. And so still positioned for rates up. The insurance businesses that we just talked about a minute ago, have very favorable repricing characteristics, which will continue to provide an offset to what will likely be rising deposit costs. And so we think we're okay, and we still want us today a little bit asset sensitive right now.

We worry about the Black Swan, so something -- another pandemic, something hitting federal drop rates like crazy and then we fall right back into it. But -- so we do have the mortgages, it will kick up then, which everybody -- mortgages are doing so well for a year, it was, oh your mortgage, right? No, we're not [indiscernible] It's just one of the things we offer. Now we're not doing many mortgages and it's all the margins. So it's -- the bank is a moving object, I mean -- well, hard to understand, you get it and a couple of other analysts some guys just don't get, try to put us in a bucket with anybody else and I don't like everybody else.

Right. The -- recently, you guys announced a change in overdraft fees and return item fees. Maybe just talk a little bit about that strategy and why you think that's beneficial?

Yes. I mean, number one, it's not a big number for us. We position the bank to be customer-friendly. And given that the number wasn't big and that there's obviously regulatory pressure and kind of public pressure, we just take another barrier away from people doing business with us. And in Chicago, we have -- there's people who can read a safe deposit boxes. There are people that don't count change anymore. There's people with overdraft fees. There are people are cutting their hours. And that's not our brand. And we're winning in our markets because we're friendly to our customers, we're fair to our customers. And this just seemed like an opportunity with a relatively small financial impact to just take away something that's an irritant, both to the examiners and to the market. And so again, for us, it's almost a negligible financial impact. If you go look at many of our peers and some of you do, it would be much more painful for some of our peers to match that step.

It will be tough on the customer though. And we're doing it because the Feds want you to do it. The poor customer who's staying in line of [ JUUL ] now, their debit card, we used to cover that for them, now we don't. Now we're going to have to turn it down. which is going to be a nightmare. But that's what they want, that's what they're going to get. So a lot more overdraft lines, I guess, but...

Sure. Sure. We talked earlier in the discussion about taking what the market gives and right now, it's giving you more organic growth. Bank M&A, you guys have done a lot of it over the years. What is the backdrop right now? How are your conversations going with other banks about bank M&A?

Well, seller expectation is sort of way too high. They hear people in Florida getting 2.5x bulk for banks making 25 basis points and everything they're worth that. And they go with a cancer transplant in their securities portfolio and big [ dow ] and you're not going to do it. I mean, we're not going to do it. We'll wait and go from there. You would ask Tim , what do you see we look like in 5 or 6 years. I think you'll see a broader footprint for us in the Midwest. We'll look at Michigan, Iowa, all downside Illinois. I think that we've got a great base to build out in Chicago, but I think we can now expand that base because of how we operate and how we do it can sell anywhere. So right now, so our expectations are really high. We only did small banks to gain us a little footprint and build them up organically. We've not made too many markets around us in Chicago, we need to get in any more, I mean, a couple but not too many. So expanding is probably the way to go. And we'll be very patient, not doing anything stupid. We've always been very disciplined in our approach. I imagine I will stay the same.

Yes. Now if you look back over the last several years, most of the bank M&A you've done were for banks with less than $1 billion in assets like you've said, could you go bigger than that. And how big would you be willing to go?

Well, it depends on the deal, but I think we go $3 billion to $5 billion pretty easy. [Bank] is good space, you want to go into another state or something who's a good place to build off of in and go that's all that's really left anymore. I mean Indiana, can't get into India -- I love to be in Indiana. I have been with every bank there. Eventually, somebody will come around, but they like their jobs and what they do. And remember, I gave 1 investment banker the job [indiscernible] little guys on your heel always bite me here [indiscernible] you get all Indiana, give me a bank in Indiana buy. So he brings in their big economists. We sit down for a dinner in Chicago, could be sitting next to the 2 guys who are going to be the -- he thinks are the 2 best prospects. So we're having cocktail as going to sit out, guys move their plates away from me. I'm going wait a bit. I use by the order, I'm not eating off their plates, what tells the problem. But they're all very [ proculant], they don't want to lose their jobs. They don't want to talk to you. So help with the shareholders. That's all they want to do is work for themselves. So what can I say?

Yes. Ed, Tim thank you very much for your time this morning. For those of you that would like to join us, we're going to head down to Cordova 6 to continue the discussion. Thank you very much.

Thank you buddy. Terrific.