Wintrust Financial Corporation (WTFC) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. We're in session with a company I've covered for 25 years, I believe, 25 years this fall. And I have Tim Crane, the new CEO; and Rich Murphy, who I think you do a little bit of everything, but Vice Chairman of Lending, Chief Lending Officer, and we'll just kind of talk through some of the trends that you, guys, are seeing and then get into some of the Q&A. And as always, if the audience has any questions, go ahead and fire away. So, Tim, maybe we'll start with you, 30,000-foot view of Wintrust. Most of us are familiar with the company, but why don't you go ahead and give us your description of the company.

Yes, Jon, thank you for having us here. Wintrust $56 billion, a 33-year-old company. Our retail footprint is 175 or so locations in Southeastern Wisconsin and primarily Northeastern Illinois. We creep a little bit into Northwest Indiana from a commercial standpoint in 16 states, primarily Midwestern for traditional commercial mid-market business. And then we've got several niche businesses that are both nationwide and in 1 case in Canada. Kind of focus on blocking and tackling, relatively conservative risk profile, growth steady in terms of both loan growth and deposit growth and just try to win in the market. And Jon, I think the interesting thing is we've -- Chicago has been a pretty dynamic market in terms of acquisitions over the past 4 or 5 years. And we're entrepreneurial, and I think have done a good job taking advantage of the disruption in the market as some of our independent competitors have combined forces with large organizations.

Yes. Okay. Great. So -- and then it's your first year as CEO. You're following a lion. I guess, you could say the founder. And -- but the company has done well and you've done a nice job, just give us some impressions on what the first year looks like. Some of the successes and some of the challenges that you found as the new leader.

Yes. I mean you bet and I'd be remiss if I didn't mention my predecessor. So many of you probably met Edward Wehmer at one point or another, just a terrific banker, and he and our board were instrumental in trying to engineer a relatively smooth transition. And I'm fortunate that this has occurred at a time when the bank has performed pretty well and credit is pretty benign. So my impressions have been, one, smooth transition, great opportunities for the bank going forward. Spent a fair amount of time on talent. So not only is this a transition for me. And as you noted a little bit earlier, we don't have a lot of heir here. So there are others in the company that are really just doing a nice job, reenergized about running parts of our company, taking advantage of opportunities. So I feel pretty blessed in terms of the scenario we started here, and I think we're in a pretty good place.

Okay. I joke that we go to the St. Barbara and the same ophthalmologist. Yes, speak for yourself, okay. Rich, maybe to you a little bit or Tim, I guess, but -- we hear mixed reviews on the Chicago economy. Obviously, it really hasn't impacted your credit or growth, but give us an idea of what the footprint is like, the health of the footprint and what you're generally seeing in your markets?

It's -- I think the [ obituaries ] in Chicago are a little premature. I think Chicago is a very good market. I'm born and raise there. So I'm obviously biased, but it's -- you look at from Milwaukee down into Northwest Indiana. It's an incredibly vibrant market. A lot of things going on. Obviously, the pandemic wasn't kind of in Chicago or really any major city, but one of the things that kind of goes along with the other side of that is that you look at some of the multifamily vacancy rates in the South and Southeast, you're really starting to see some challenges there. Chicago never really runs that hot or that cold. And as a result, we're still seeing incredibly good signs in terms of multifamily rent growth. Unemployment is pretty good everywhere. But I mean we're still seeing Chicago in terms of having good wage growth. Downtown is coming back. Hospitality is seeing a resurgence. So generally speaking, we're feeling pretty good about Chicago right now. As Tim points out, the competitive dynamics for winters are really good right now because you just don't see a lot of those banks that we used to go and compete with day in and day out, they're all gone. So it does leave us with A really good opportunity in what we think is a really good market.

Okay. Similar in Milwaukee. What are the other parts of your footprint?

Milwaukee is kind of an interesting thing. I mean, I think Milwaukee is a great market, and it's doing very well. But one of the challenges is it's a fraction of the Chicago size, and you still have all the same competitors. So it is a pretty competitive market. I think pricing up there is probably a little tighter than it is in Chicago.

Okay.

But Jon, good health care, good education. We've got water, transportation. I mean again, to Rich's point, for all the headlines, it's still a good place with 10 million or 11 million people.

Yes. Okay. Yes. Makes sense. You touched on the competitive environment a bit. It feels like you've grown up into a much bigger bank, and I know that, that's maybe changed some of the opportunities that you've had. You touched on it, Rich. I don't know if one of you, guys, want to tackle that? What kind of opportunities you're seeing to compete, against the bigger guys?

Yes. It's interesting. I mean, you've been around us a long time and having been with Wintrust from the start. We couldn't have dreamed of the opportunities that we'd be seeing. I mean we have cultural icons like museum, a science industry, it's a customer that we now have is. It's -- those are things that we could have only dreamed of 10 years ago, 5 years ago, large manufacturing companies. It's -- as these other banks that we talked about have exited, that has given us a lot of opportunity. Probably the best opportunity we've had is just Chase in our footprint has dominated for years and they have just moved up market so much that it really gives us the opportunity to see customers that really are wonderful opportunities for us. So it's a good spot to be in.

It seems like it's [ hauled out ].

Yes, it really has and one of the challenges to stay entrepreneurial and stay true to our culture, which has been to be hungry and to take better care of clients than any of our competitors do and so we reinforce that every day.

One of the things, too, is, I mean, you're, again, familiar with the story, but Wintrust is a known local name now. And you just don't see a lot of the very large banks, really involved in local not-for-profits and a lot of the civic causes. And so our name is everywhere. So that resonates with people in Chicago quite a bit.

And you've altered the branding a bit for that?

Yes, we have. I mean, we still use local branding for retail purposes but for most of our commercial and national purposes, you would see Wintrust. You see Wintrust Mortgage, you'd see Wintrust Wealth Management. You'd see Wintrust Commercial. So -- but local in Chicago, you may not see that name.

Okay. Got it. And as always, in any of these sessions, if you have questions, just put your hand up and we'll get your questions answered. Comfortable pace of loan growth for the company. You, guys, have given some guidance on it. Give us your thoughts on that? And how long is the runway ahead for you?

Yes. I think it's okay. I mean we've talked about broad-based loan growth. We've got a number of niche businesses plus sort of traditional businesses. The niche businesses have been terrific. And having a number of different businesses helps. So the P&C premium finance business is going well right now. Leasing business is good. Our middle market business is good. So I think we still feel pretty comfortable we said mid- to high single digits, and we're pretty comfortable that's going to be the number.

Rich, have You seen any change in the demand from clients recently?

Yes. Again, it's just kind of you have all these different pillars that make up the loan portfolio. So they all kind of operate a little bit differently. So like in C&I, we're seeing line utilization really getting a little bit reduced as people are paying down with their cash. But again we're seeing a lot of opportunities coming out of other banks. So that offsets that quite a bit. CRE is another interesting story. A lot of banks are completely out of the CRE space. And we have not exited because we think we have a reasonably good portfolio, and we've been pretty smart about where we've -- how we've managed that portfolio. So we're still open for business, but we tell our bankers all the time, there are deals that we want to do and there's a lot of deals that we don't want to do. So right now, you can get good structure, good pricing, really good clients where you can probably get a much bigger share of wallet from them. So that's a good story. Life Finance is probably a little bit tougher right now because with rates higher, that's a little bit less attractive. But then the P&C side, as Tim talked about, it's a great story. The hard market brings higher loan sizes and you can really kind of get a lot of growth there. So some up, some down, but on balance it usually works out.

Can you spend a minute explaining the business, the premium finance business, for those that might not be familiar with it?

Sure. There are 2, one, is life insurance related, the other is commercial, property and casualty, finance related. On the Life Insurance side, it's primarily in a state planning tool. The loan advance is covered by the cash value -- surrender value of the policy. And so losses in the history of our operations have been 0 in that business. As Rich mentioned, when rates move up, it gets a little bit tougher because the arbitrage between what a business owner might want to pay for financing their insurance and whether they would want to invest in their own business gets a little bit tougher. But very attractive when rates were low. The other side is any given business financing a $50,000 property and casualty policy, they want to pay for that insurance over a period of time. And so we finance over a 9 -- generally over a 9-month period, the full insurance premium. And then our collateral is the unpaid, unearned premium. So that if business doesn't make their loan payment to us, we basically surrender the policy and receive back the unearned premium from the carrier. So in many cases, we're dealing with primarily the insurance agents and the carriers in terms of our risk profile as opposed to the end customers.

Market share -- approximate market share in that business?

We're about bigger than 1/3 in the P&C side and probably 40-plus percent on the Life side.

Let's move to deposits a bit. It was a hot topic a day after this conference a year ago. But touch a little bit on what you've seen over the last year, and then we'll get into some of the recent trends, but give us an idea of what it was like managing through it as a new CEO and kind of where you are today?

I mean our focus, one, we were in a very good shape. We have a really nice deposit franchise. We've got terrific clients. We focused heavily on communication. We just said here are the facts. We went out and talked to as many of our clients as we could. And with the exception of a handful of clients that I would say in almost all instances had fiduciary responsibility. So think of a fund business or something that took deposits to too big to fail bank. We retain those deposits. And so it was a 12-week period where you really didn't want to be on CNBC. And so we tried to keep our head down, talk to our customers. And end up growing deposits as we have very regularly. And Chicago remains one of the most fragmented deposit markets in the country. And for us, an opportunity to continue to grow. So we've always said we'd like to fund our loan growth with deposits, and that's our objective.

And you feel like a mid- to high single-digit-type growth in deposits is...

Yes, probably mid. We've got a couple of nice deposit -- niche businesses that kind of ebb and flow a little bit. But first quarter for most banks, Wintrust included is kind of the slowest deposit growth period. But we're -- yes, we're optimistic that we've got opportunities in Chicago and grow deposits.

Okay. Anything on the price environment. It's changed recently? Have you seen a cresting in pricing?

Well, it's subsided. I mean the -- I don't want to say panic, but the urgency that was present last summer has kind of gone. People -- many banks seem to be going a little bit shorter with their promotional activity. So where we were promoting 15 months deposits last summer, we're 9 months right now, 8 or 9 months, we're doing more money market type specials to basically get money in the bank. So in that regard, we're just trying to be a little bit more careful with our interest rate sensitivity, which for us has gone from being very asset sensitive to being near neutral at this point.

Okay. Where is the competition coming from on deposits? Is it everywhere?

Yes, it's everywhere, but it's really more wealthy clients and commercial clients just managing their money differently. When rates were 0, they didn't -- not a great incentive to kind of watch that. Now corporate treasurers and wealthy individuals are paying quite a bit more attention.

Yes. Okay. Okay. About the noninterest-bearing trends. It's been a focus that investors are looking at, and we've had differing answers here from people, but what are you seeing in terms of noninterest-bearing trend?

Yes. I mean our noninterest-bearing has stayed pretty steady for the last 3 or 4 quarters in terms of absolute dollars. Obviously, the percentage is going down as the denominator changes. But we think the challenges there have been offset by new business that we continue to bring in. So I think there still could be a little bit of pressure there, but I think we've seen most of the outflow or most of the change there already occurred.

Okay. Okay. Good. On the margin, you've talked about a margin within the range over time. For years, we talked about the beach ball.

Yes.

And I don't know where the beach -- is the beach ball, above water? Is it bouncing along or?

Ed should be here. We said in meetings like this 2 years ago, and our margin was [ $260 million ], and we had [ $6 billion ] at the Fed earning 8 basis points. And people were beating us up. You got to invest this money, you got to do something, you got to invest this money. And we kept trying to figure out why [ 150 or 175 ] for 10 years was a good solution. And at that time, our margin was [ $260 million ] and we were like, we just can't do this. And so we ended up having pretty good years as a result of primarily PPP fees and mortgage, and we were patient in terms of investing those excess funds and at a loan book that repriced very quickly. And so our margin first quarter of '23 went to 3.80%. And had it not been for the activities really in the second half of March, probably would have been 4%. So we're [ 3.60s ] now. We've said plus or minus rates a couple either way. We think we can stay in that range, and we're very comfortable there. We think we ought to be improving our results by winning new business, not by betting on interest rates. And so we'd like not to see a 2 handle on a margin ever again, and we're doing everything we can to make sure that never happens.

Do you feel like it's a comfortable range?

I think so. Yes.

Yes. Is there an ideal interest rate environment for the company?

It would have been, for a number of years, it was rates up. I think, again, we're pretty neutral right now. And so we're comfortable with IR for longer. We're not going to get hurt if we get a cut or two, but we would get pressure at 150 down, 200 down. The offset would be our mortgage business would pick up and some other businesses, commercial business would pick up. But we're pretty comfortable where we are.

Higher for longer, doesn't bother you?

No. I mean if you had a couple of cuts and then the long end came down and you had some opportunity to get some mortgage volume. I mean that's probably the perfect spot for us.

Right, right. Okay. Okay. Any -- just out of curiosity, any differences between the charters in terms of how you price deposits. Is there an ability to do that?

Yes, there is. We didn't talk about at the beginning. We're somewhat unique in that we maintained 15 independent charters. There are actual legal entities with boards. All of the back office that's not customer-facing is combined. And so from an efficiency standpoint, while there are some expenses related to the 15 charters the marketing benefit far outweighs that. And one of those is a good understanding of what happens in the market. So whether it's loan pricing or deposit pricing, we have standards and we have profitability models, but we also give each of these charters the flexibility to address business needs in their communities. And Hinsdale is different than [ Winnetka ] and different than Joliet and different than Milwaukee. And so we see our local leaders exploiting those opportunities that we think others miss with just a broad-brush approach.

Yes. Okay. Good. You touched on mortgage, and you guys have a nice array of fee businesses. I remember a lot of these acquisitions over time, and you made a couple recently. But let's cover mortgage first. We'll say it's the big one, but sometimes it's the big business, sometimes it's not the big business, and it's not so much now. But what are you seeing? What does it look like this spring? Give us an idea of how you see it and what kind of outlook you have there?

You're coming off a low base. So -- but we are seeing, January was a decent month off in December, and it was better than the year prior. February looked a little better than January. The first couple of days in March look good, lots of pre-qual activity. There's a tremendous amount of interest in the purchase side of the business. The inventory is the problem. I mean there's just a lot of people out looking right now, but they're having a hard time finding something. So we're optimistic that things are going to shake loose. But it's, again, it's off a very little base and it's going to be better, but it's going to take a while. I think or it comes really back to where -- anywhere close to where I had been in the past.

Would a couple of cuts help? Or is it just more of an inventory issue?

I think it's -- right now, it's more of an inventory issue. I think there's people out there willing to buy, but there's just not a whole lot to buy.

The one thing though is this market has certainly chased out a lot of the independent mortgage providers. And so when the refinance business went, there are many, many fewer providers than they used to be. So whatever pool of business is left, we're getting a much bigger share of and we'll try to defend that over time.

Sort of where to size it for us?

There probably is. I'm not sure I have that with me here. But a lot are gone, a lot.

Yes. Okay. Other fee opportunities for your company, maybe touch on the acquisitions and what you're doing there in wealth?

Yes. I mean, the wealth business is another fee income business, pretty steady for us, $33 million -- $35 million a quarter. We've done some acquisitions there. They're fully integrated at this point. We're starting to get some momentum. Probably 2/3 institutional, 1/3 kind of private wealth, personal wealth. Those should grow steadily for us over time. We did announce 2 changes over the last 3 weeks or so, One was a partnership related to our 401(k) advisory business. The other was basically a partnership or a platform change with LPL in terms of our brokerage business. Both, we think, steps to get us better capabilities and tools where we weren't going to be able to invest the amount of money we needed to on our own. And probably some modest efficiency gains. And so it's a nice complement to our commercial businesses where we just bolt-on the wealth and fortunately, we have many successful clients, and we just help them along the way. The other would be a treasury management business, or a fee-based business around service charges growing nicely, probably 2 to 3x the market rate. We have relatively sophisticated services that sell well against the bigger banks and certainly out class the smaller banks in our market. The 2 things that we talked a little bit about today, Jon, one, we eliminated all consumer NSF fees about a year ago. And so the risk there that other banks face in terms of those revenues either getting compressed or eliminated doesn't exist. And our debit interchange fees are relatively modest. And so if those were to get cut by 1/3, plus or minus, which is kind of out there for discussion, there's relatively little impact on us. So from that standpoint, I think we're a little bit regulatory defensive in terms of our positioning.

Okay. Good. And Rich the treasury management product, your lenders don't come back and say, we don't have what we need, they're robust enough?

No. I think actually the opposite. I think people are surprised when they stack us. Well, certainly, looking at the smaller competitors, I think, we have pretty much everything that they would have and then more. But when you look at like the chases of the world, I think we stack up very closely and we're priced just way better than they are. So I think most people are surprised when they move their business out of Chase and come over to us. And they see the -- it's a very robust product, but there -- the CFO is usually saying, this is way cheaper, too.

Right? Anything to know on expenses in terms of what you're expecting?

No. I mean we'll make sure they stay relative to each other appropriate. So if our revenue growth slows, we'll spend more time focusing on expenses. But we've been steadily investing in our technology. And the reason we do that is we think if you stop doing that, you really get stuck. And then you can't spend enough to catch up and your results kind of get poor and all the sorts of bad things happen. So in the last couple of years, I mean, we worked on loan origination system. We've replaced essentially all of the digital capabilities for our consumer platform. On the P&C side of our insurance finance business, we're looking at all sorts of efficiencies and robotics. We just -- we don't make a big deal out of it, but we're always looking for efficiencies. And we've got a business process improvement team that every day is meeting with our folks. So I would expect that the expense growth will be in line with the revenue growth. And if it's not, we'll act very quickly to address it.

Yes. It seems like you've had a higher variable component in your expenses.

Yes. I think that's right. And mortgage is a little bit of a swing. Obviously, if the mortgage business heats up, the expenses will go up quite a bit, but that will be good news in terms of income.

Okay. Rich, we can't let you go without credit, okay, give us a big picture view on what you see on credit. And do you want to talk about...

I don't see any wood, I can knock it like that. Again, I think, we've been pretty overt about where we try to position ourselves, we would say that we would anticipate normalization would continue. We would think that CRE is probably the area that we're probably most concerned with as everybody else. But we do a lot of work to try to understand what the pending maturities are looking like and where the holes are in the portfolio. And so far, we feel pretty good about what we see. Nobody is going to be immune. I mean there's going to be bumps in the road. But that normalization, I think, won't be surprising to anybody. I think it's going to be pretty much in line with kind of where we have been historically. So CRE, I think, is a story that we've got our arms around. The C&I side, generally speaking, feels pretty good right now. I mean most of our customers are saying that overall business volumes are good. A lot of pressure is off now as it relates to staffing costs. So that's good. So we're feeling okay right now, but I never like to jinx myself. So we're working hard to make sure things land in the right spot.

Okay. How far ahead can you look and work on potential issues in commercial real estate?

We work -- we disclosed 3 quarters, but we try to go out a little bit -- almost double that to try to have conversations. But you certainly want to get ahead of big problems where there are meaningful challenges in terms of vacancies or any type of pending lease issues and having conversations. We constantly preach with our bankers and our workout teams. Time is your friend. Just have those conversations early. You don't want to be caught right at the maturity date with no options. So we spend a lot of time and we disclosed on the quarterly calls, exactly how that process works. Fortunately, the problem areas that we've identified, we've worked our way through them. I mean, where customers have said, we can pay down the loan. We can give you some additional collateral, we can do other things that will allow them to buy time. Most of these customers have said, we think the long end of the curve is going to come down or I think cap rates are going to come down and we can sell the building at that time, but we just really need time. So that's our job is to figure out a way to kind of give them that.

Okay. Okay. So nothing new or new stresses in the portfolio that are...

No, I think. Generally speaking, everything is behaving pretty much as we had anticipated.

Okay. Okay. Good.

Historically, you've been a pretty active acquirer in the market. Can you talk a little bit about your priorities around inorganic growth, whether they be the regular banking business or any of your specialty fee income businesses.

Yes, the question was around M&A and your appetite.

Yes. I mean we've -- it's been tough to do kind of a regular traditional bank-type acquisition for a number of years. So our last couple have been the acquisition of the Allstate Finance business and then part of the wealth business. The [ math is ] tough on bank acquisitions right now if there are kind of loan marks and/or securities marks. And so there's a handful of people, we call it a limited population where we think we can get something done. But we'll be opportunistic, I think. We've been good at acquisitions. We integrate them relatively quickly and smoothly. So we're hoping we get some opportunities. We've been building capital. So even with loan growth in the mid-single digits. We've been building capital over the last several quarters. And so I think we'll be well positioned to look at stuff when it gets a little more active. A lot of conversations, but [ math is ] tough.

How do you balance that capital build and potentially returning to shareholders versus harboring in for opportunities you may see in the company?

Yes. The question was about capital build. It's really for a number of years, our growth has outpaced our capital formation, and it's really only the last year or so when we've been in a position where we're building this capital. So I think it's probably premature to talk about return to shareholders in ways other than loan growth, intelligent acquisitions. We've got some preferred shares that reset next year. We can redeem those, some of those shares if we choose to. And then you get to the dividend and/or share repurchases, but probably in that order or something like that.

So that's all we have today for time on Wintrust. We won't ask about Justin Fields versus Caleb Williams. I'm sure it's...

That's great.

Tom, and it's everything.

Thank you for having us.

Thanks. Appreciate your support.