Wintrust Financial Corporation (WTFC) Earnings Call Transcript & Summary

My name is David Long, I'm one of the 5 banking analysts here at Raymond James. And welcome to the Raymond James' 46th Annual Institutional Investors Conference. This morning, we are excited to welcome Wintrust Financial, which has become a staple at the conference. Wintrust, ticker WTFC is a $65 billion bank headquartered in the Chicago MSA, has a market cap now of just about $9 billion. Joining us for a discussion today will be Vice Chairman and Chief Operating Officer, Dave Dykstra. Also on site is CFO, David Stoehr. Wintrust has grown to become the largest commercial bank headquartered in Chicago, continuing to take market share while also maintaining stringent underwriting standards. With that said, I'm going to turn it over to David Dykstra for some opening comments before we get into a discussion about what's going on the bank today.

Thanks. Thanks for having us again. We always enjoy this conference. So we appreciate being here. So as Dave said, we're a $65 billion bank headquartered in Chicago. Our banking franchise is really mainly centered in Chicago, Milwaukee, West Michigan and the Grand Rapids, Holland area and a few locations down in West Florida, where we sort of followed our customers down there. But besides our retail banking franchise, we have a national footprint in some specialty lending businesses, one of the largest premium finance -- insurance premium finance companies in North America doing business in all 50 states and Canada. We also have a leasing business nationwide, franchise lending business and a few other specialty lending businesses that we do provides diversification to our credit portfolio. But our main advantage right now is our position in Chicago. As Dave said, we're the largest locally headquartered bank in Chicago at $65 billion. The next largest bank is roughly $10 billion that's headquartered in Chicago. So from a competition perspective, we used to compete against other midsized banks, private bank, MB Financial and First Midwest and they've all been acquired by out-of-state or out-of-country banks. And so the runway is sort of clear for us to be Chicago's bank, and that's how we look at ourselves as the bank to handle Chicago's business and that positioning has worked well for us and is one of the reasons that we've had great loan growth over the last couple of years.

Great. Great start to the discussion. Dave, following the election from November, seems to be a lot of optimism in the air. What are you hearing from your commercial clients? And are you seeing any changes in their behavior?

Yes. I think it is optimistic. I think right after the election, a favorite term out there was animal spirits and people thought maybe the lending circuit was just going to turn on full force immediately. Our pipelines were always pretty full. I think there were some people that sort of sat on the sidelines. They were worried that if possibly Harris had won the election, the tax rates might have gone up and that made some of them nervous and just uncertainty made people nervous. I think the prospect of higher taxes went away, and I think some people thought less regulation going forward under the Trump administration. I think that created optimism. And I still think we see that optimism. There's certainly some uncertainty out there with tariffs and the like, although we'll see how that all plays out. But generally speaking, I'd say, it's more optimistic than it was preelection. Again, our pipelines have been pretty good. And so on the margin, we think it's beneficial to us and we'll see how it all plays out. But I think there's more positives and negatives out there right now from our customers' perspective.

Sure, sure. You've recently reiterated your loan guidance of mid- to high single digits. We're a couple of months into the quarter. Any thoughts on loan growth as we're looking out for the rest of the year. I know on your call back in January, you talked about a little bit more competition. Are you seeing such -- are you seeing an increase in the competition?

Yes. Well, I would say, we're still firmly in the camp of mid- to high single-digit loan growth for the year. I think, again, the pipelines are good. Our position is good. Some of our niche businesses, like premium finance are still good. So we're still very optimistic that we can do that. We think West Michigan is a market we just got into through the Macatawa acquisition is going to be beneficial to us. So you put all of our business lines into the mix and you talk to the people on the lines and they're very optimistic about what we can do. And we were double-digit loan growth last year, which was a fantastic result for us. and the pipelines are still strong. So we're pretty optimistic we can get there. Competition, it's always competitive. Again, our position in Chicago is good. You're seeing a little bit of extra competition here and there, it's not widespread. But we're in a competitive industry, right? And so you're going to see that. Our concern on the call wasn't to sort of forecast that, boy, we're seeing a tsunami of competition coming in. We were just sort of saying we're just watching because there are so many banks that haven't had our type of positioning in Chicago and through our niches that they haven't seen as much loan growth. And we were just a little concerned that quarter after quarter after quarter, if they're not seeing loan growth, well, eventually they say, boy, we got to go get some and then try to go bid on loans at smaller spreads. And so we weren't saying we saw that as a widespread problem. We just said it was something we were watching to see if it actually translated into new competition going forward. So we're just being honest about some concerns that we had. And the banking industry goes in way, sometimes it gets competitive and uncompetitive. And we were just saying -- we're seeing -- we're worried about that could evolve over time. We weren't trying to indicate that we saw that, that was a major problem right now. So still very committed to the mid- to high single digits for the year.

And then how does the premium finance side of the portfolio factor into that? Will that be in that same range? What's going on in that business? I know it's been a pretty hard market for the premium finance, is that still holding up?

Yes. So what Dave's referring to is we're in the insurance premium finance business. So we finance insurance premiums mainly for commercial customers. We also do some insurance premium finance on life insurance policies for generally high net worth individuals. And both of those businesses are doing well. The insurance market, premiums went up quite a bit over the last few years, and we call that a hard market when premiums are going up. What we see is that the market is still hard. It's just probably the premiums are going up at a slower pace than they have in the past. So still, I think what will -- what we kind of refer to it now is it's a firm market. So the premiums are not declining really. They're still going up, but going up at a slower pace. So we think that, that's still going to be a very good business for us. The industry has consolidated over the last few years. And there's three really big players in the U.S. right now and in Canada, and we're one of those three. And so as there's been disruption and consolidation, that has really benefited us because most insurance agents, that's where we source our business, want multiple sources of premium finance providers. And so if we're one of the top 3, we usually get a shot at the business of the larger agents.

Sure. Great. As we're thinking about competition, are you seeing any participation or an increase in a participation from nonbank lenders at this point?

Yes. Private credit, there's a lot of money in the system, and it's good and bad. It creates competition. But it also creates opportunities that if you see any credit that starts to have some problems from our view or maybe it's getting a little bit more difficult than we'd like. There's usually sources out in the marketplace that if we get ahead of it early enough, we can we can encourage that borrower to go elsewhere and find financing elsewhere. And there's financing out in the marketplace for that to happen. But private credit has a fair amount of liquidity and -- but we're generally seeing them more in the levered deals where they provide more leverage in the larger deals, they don't want to do all the $1 million deals. They just generally want to stay at the higher end of the range. And so some competition at the high end of the market. But we've seen that in the past. It's maybe a little bit more prevalent, but it's not really impacting us because we really aren't doing deals where we are doing highly levered deals and that's more where they're playing, but you're seeing them participate in the market.

Got it. What's going on in the commercial real estate market within the Chicago MSA?

Everyone is cautious on commercial real estate, right? And the biggest area, I think people generally have concern on is the office space. And in Chicago, if you read the headlines or if you watch some of the news, you'll see a lot of the larger downtown older footprint, sort of buildings, the older buildings, some of them have gone into foreclosure and they turn the keys over to the lenders. Most of those lenders aren't midsized banks and most of them aren't banks at all. They're the nonbank sector. We aren't a downtown big office building lender. So our average office loan is about $1.5 million. And it's very granular, mostly suburban. We just never were large -- high-rise condo or high-rise office building lenders. But -- so Chicago sometimes gets a bad rep and people look at it and say, well, the commercial real estate market is really bad because look at these foreclosures in downtown Chicago. But it's generally -- it's almost a tale of two cities. If you're in the west loop, it's a very good real estate market. It has moved out where there's newer buildings and more restaurants closer to the train station. And that market is very hot and rents are high and stable and vacancies are very low. If you go over to the older part of the downtown area in the loop or it's the older office buildings, that's where there's stress. So you can be a half mile apart and you can have a great market and a bad market. But for us, we watch it because if it has pressure on rents, that may have a ripple effect out into the suburban areas because of just more supply, but it's not impacting us directly as a lender because we're just not doing that type of lending.

Sure. Sure. Okay. overall credit trends still seem to be normalizing. How are you thinking about the long-term net charge-off rate for Wintrust? And how does that impact the spreads that you're willing to underwrite at.

Yes. We've always thought over time that we historically have underwritten to sort of 20 to 30 basis points of credit losses. We have done better than that. I mean, that's just sort of how we think about the credit losses. Last year, we had 21 basis points. So before that, when rates were low and the market was so flushed with liquidity, our charge-off rates were lower. But -- so we sort of thought that credit had normalized, as you said, but we sort of characterized it more as stabilized. It normalized and is now stable. I actually think -- last quarter, I think we had a higher level of actual upgrades of credits and downgrades of credit. And if you were sitting with me last year, I would have been more cautious on credit than I am today. Credit -- the market feels a little bit better today than it did a year ago. So it seems to have normalized and we're hopeful that, that is the case. We're in a risk business, and you have some losses all the time, but we do think that they will be -- we look at the environment as stable right now.

Yes. Yes. We talked a little bit about commercial real estate and office specifically. We talked about the premium finance business. Are there any other segments out there that you think carry higher risk than what the street may be thinking? Or are there any segments that regulators are focusing on in their discussions with you?

Yes. I think -- commercial real estate broadly, I think the regulators are worried about this nationwide, not just Chicago. I think just nationwide, I think they're focused on that because the higher rates put pressure on prices and debt service. But for us, the other -- the area that we saw some stress in last year and we think we're -- we think that stress is generally over that we've worked our way through was the transportation sector. And we -- and sort of the last mile over the road sort of trucking saw some stress. It did really well during the pandemic and built up, but there was stress over the last couple of years. So we saw a little bit of increased charge-offs in our premium finance business where we're financing the transportation sector and a little bit in our leasing area. But we think we've really worked that through the process. Now we've tightened up our credit standards on the premium finance side and dealt with any issues that are out there in the -- and that sector seems to be recovering a little bit. So that was one we're worried about more last year. We're still keeping our eye on, but we think we're generally through that process. The rest, knock on wood, seems to be going okay. We're just -- we're doing deep dives into the portfolio consistently to see if there's any trend. So we just don't see anything systemic out there right now.

Got it. Great. Sticking with the balance sheet, on the deposit side of the equation, how is competition right now? Does it remain rational?

Chicago and Milwaukee and Grand Rapids now, I think they're all rational markets. And our biggest market is Chicago. And if you think about that market, we're -- again, we're 7% to 8% of the market share in Chicago, and we're the largest bank headquartered in the Chicago area with that market share. The 3 that are bigger than us are Chase, BMO and Bank of America. And none of those are really being aggressive with rates are very rational. And generally, the smaller community banks don't have loan growth. And so there's really no need for them to go out and raise deposits if they don't have any place to invest them. So the small banks really don't want to cannibalize their low-cost funding base by going out and being aggressive on deposit rates. So the market is very rational right now. So I don't see that changing either. So our position in it is solid and growing, but through rational pricing.

What about the mix of deposits? How do you see that shifting throughout 2025?

I think it's going to be fairly stable. DDAs, the noninterest-bearing deposits were basically 21% all of last year, first, second, third quarter overall end of the quarter 21%, fourth quarter was 22%, but on average, it was at 21%. And so I look at it, it seems like the businesses have rightsized their cash balances to keeping what they need and investing the rest at higher rates, but keeping their operating accounts very stable. And so we've been growing our deposits, but we've also been growing our noninterest-bearing consistently by bringing in new middle-market customers and bringing in their operating accounts. So it seems like 4 quarters is maybe a trend in a row that keeping that 21% seems like -- that seems to be the bottom. And so we'll work hard to continue to bring in middle market businesses to grow that, but we're also growing the interest-bearing side. So I think the mix will be very similar.

Got it. Got it. Let's shift to the net interest margin. You've talked about a roughly 3.50% NIM, it's where you've been kind of maintaining that outlook here, probably stable NIM throughout the year. What are your assumptions underneath that to get to that stable NIM throughout the year?

Well, we work -- if you look at our disclosures for net interest margin and up and down scenarios, if rates go up 100 or down 100, we're relatively neutral. So when rates rose quickly, we were very patient in investing. So we didn't start investing in securities and the 1% handles long term when rates were 0. It was very tempting to do that because we had $6 billion or $7 billion at the Fed earning 7 basis points. But you just knew rates had to go up some time. And so we're patient, and so when rates did rise rapidly, our margin got into the high 3s. And as it was getting to that position, we said we really need to protect the downside now. And so we've got roughly $7 billion of interest rate swaps on the book to help protect the downside. And our balance sheet is fairly variable. 70% to 80% of our loans mature within a year or reprice within a year. And we only have 20% of that are CDs that are fixed rate on the liability side. And so both sides of the balance sheet are fairly variable. And so we can manage it up and down. And so -- and if rates come down, we're slightly -- have historically been slightly asset sensitive. But by putting the derivatives in place, we've sort of neutralized that now. And so we're happy with the 350 margin over a long period of time. We would be happy with that in a number of different rate environments. So we think if rates go up, 25, 50, 75 basis points or down 25, 50, 75 basis points, we think we can hold the margin stable. We just think we've got the right mix on the balance sheet. Getting out of an inverted curve, I think, is helpful to have the 3- to 5-year end of the curve not being inverted because we do some fixed rate lending off of that part of the curve and getting the spreads off of a higher yield is better for us. So that provides some benefit here even as rates are -- have come down a little bit recently. So I always tell people, we throw in all of our different asset classes and our liabilities, and we have the rates go up and down and twisted. And every time we mix up that pot of chili, each scoop that comes out is around 3.5%. So unless something dramatic happens, if you had another pandemic and rates went to 0, we really think 350 is something we can hold on to for the foreseeable future.

Sure. And as a growth-oriented bank, like you said earlier, loan growth was over 10% last year. On your new business, your new deposits, new loans, what type of spread is coming in on that growth?

It's right around [indiscernible]. If you throw in the incremental deposit costs with special rates and just normal growth, it's coming on in the low 3s and asset yields of all type were coming on in the upper 6s and that's about a 3.5 margin.

Got you. Got you. Let's talk about operating expenses. On your call, you talked about another mid -- another year of mid-single-digit growth. Can you just clarify that -- your outlook for expenses in 2025?

Yes. So you have to put it in context, we're talking about growing the balance sheet mid- to high-single digits and last year double digits. So probably at the higher end of that range for the full year given the current conditions. It seems very doable. So in my view, if you can get high single-digit loan growth, and balance sheet growth, and you can keep your expense growth 4%, 5% mid-single digits, you can get operating leverage out of that. And as a growth company, we've always invested in growth. I mean, we -- if you historically look at us, we started as a de novo bank at 0 in 1991, we're $65 billion now. So we've always had steady, stable but safe loan and deposit growth, and we've invested in the franchise. And you have to invest in the infrastructure to grow that franchise. And so we think if we can get that operating leverage out of the system by growing the revenues faster than that expense growth and build the franchise at the same time, you bring those customers in, you can sell them other products and services and continue to solidify the franchise value. So if we don't get that mid- to high single-digit loan growth, then we don't think we'll have that expense across. So we do think there's leverage we can pull, so we don't have as much expense growth. But investing in the franchise is something we've done for 30 years, and it's paid dividends for us. So we're sticking with the model. The model we've grown our tangible book value every year since we've been a public company, tangible value per share. And over the last 1, 2, 3, 5, 10 years, we've outperformed the KRX with total shareholder return. So we think the model works, and we're builders, so we like to build. But if you build, you have to also spend money.

Sure. Now you mentioned the entry into Western Michigan with Macatawa. That deal has been closed now for a few months. How is that thing progressing?

It's going very well. I mean, the integration, we're sort of kindred spirits. We started as a de novo bank in the early '90s, they started as a de novo bank in the mid-90s. And so we both started up as de novo banks trying to fill a void in our markets. And so we both sort of do banking in the same way. And so it was a perfect cultural fit for us. It's a great market. It's the 49th largest MSA in the country, not as quite as big as our Milwaukee market, but not much smaller. And so it's a growing market. There's wealth in that market. They as a smaller bank didn't have as many tools in their tool belt from a lending perspective. So we have a lot more lending products we can bring to that market, and they were very conservative lenders. When we did due diligence on them, they were a public company, their disclosure in the 10-Q and we can get growth in that market. So again, it's going as planned. They're a fantastic team out there. I think they're excited to grow in that market and get the additional resources that we provide them. So we're very optimistic. So going as planned, I would say.

Got it. And maybe I should ask this first, given the level of interest that we have from investors right now on M&A. But on the M&A side, we're expecting a wave to come through, at least some people are, how do you see Wintrust playing in the next -- in M&A over the coming couple of years?

Well, as you know, I mean, we've been very acquisitive over our -- and we've done dozens and dozens of deals and bank deals and nonbank deals and wealth deals and asset classes. Our first choice is to grow organically. We think we do that well. And M&A is just something we do -- if it fits strategically, culturally and financially, we'll do those. We never plan on them in a budget and say we have to go get a deal. We don't say we have to do this to get growth. We only do them if they make sense to us. So we look all the time, but we only do them if they make sense. We pass on way more deals than we do. So I think we will be active in looking, and we'll have to see what makes sense out there. Chatter is picking up amongst investment bankers calling me and asking us if we have an interest in a bank of this type of geography or size or business makeup. So they're testing the waters to see what interest is out there and a few more of those calls now than we've seen in the past. So I expect '25 to be more active. A lot of these small banks have succession issues where they don't have somebody that can step in. It's really costly to invest in technology and growing the regulatory compliance infrastructure and the information security infrastructure and the digital products that you need to be competitive. And they either need to go big, just stay stable where they're at and not really grow or they got to sell. And I think a lot of them look at it now and say, well, the bank multiples are pretty good, the regulatory approval process seems pretty good, and the economy seems pretty good. So maybe this is the time to at least think about it. So I think we'll see a lot of at bats. I'm not sure how many we'll take a swing at, but I think we'll see a number of at bats this year.

Do you see any holes in your own footprint or any geographies that you really would like to get to? And then on the flip side, any geographies that you just have no interest in?

Well, from a -- as you know, we do business in all 50 states from a lending perspective. So if there's a lending opportunity, I think we would look anywhere if it made sense. From a retail banking perspective, we sort of like to have concentric circles. We like to build out from where we're at. And so we have Chicago, Milwaukee, we went to Grand Rapids. So there's a little hole in Northwest Indiana, which we've been filling in with the Noble branches. But if we could get an acquisition in that Northwest Indiana area that would fill that hole, that would be interesting to us. Other than that, it would just sort of be concentric out. And eventually, I guess, if you drew the line from Indianapolis to St. Louis to Minneapolis, everything in between there we'd eventually get to. But we stay -- we try to stay closer to home initially. We just think we know those markets better. And if you have opportunities for your staff to be promoted, sometimes if it's a concentric market that's close, maybe they have to drive 45 minutes to get to their new location for an opportunity, but they don't have to move their family 3 states over. So I think that creates opportunities for staff too.

Got it. Got it. Excellent. Well, Dave, thank you very much for the discussion today. Those of you that are interested, we're going to continue the discussion downstairs in room Cordova 5. Thank you very much.

Thank you.