All right, we're going to go ahead and get started. Good morning, everyone. My name is David Long. I'm one of the five bank analysts here at Raymond James. Welcome, everyone, to the 45th annual Raymond James Institutional Investors Conference. This morning, we are excited to welcome Wintrust Financial, which has become a staple here at Orlando at the event. Wintrust is a $56 billion bank headquartered in the Chicago MSA, has a market cap of just about $6 billion. Joining us for our discussion today is Vice Chairman and Chief Operating Officer Dave Dykstra. He's approaching 30 years with Wintrust, joining the bank as CFO when it was about $1 billion in assets. Today, Wintrust has grown to become the largest commercial bank headquartered in Chicago, continuing to take market share while also maintaining excellent credit quality metrics throughout its history.
With that said, I'm going to turn it over to Dave for some opening comments before we get into an open discussion on what's going on at the bank right now. With that, pass it over to you, Dave.
You keep going. You're nailing it pretty well there. As Dave said, we're a $56 billion company headquartered in Chicago with retail banking operations, generally in the Chicago and Milwaukee market area. Although we have a national footprint for lending, we're one of the largest insurance premium finance companies in North America. Between the property and casualty premium finance and the life insurance premium finance, it makes up a little over a third of our loan portfolios, provides great diversification. And we have some other lending niches, specialty lending niches, leasing, franchise finance, and some other smaller specialized lending niches that help us diversify the portfolio and also help be generators for loan growth for the company. But at heart, we're a community bank based out of Chicago, fund ourselves with deposits. As David says, we're one of the largest financial institutions in Chicago.
And if you measure it based on deposits, we're the largest in Illinois. That's headquartered in Illinois, and obviously then the largest in Chicago. So we're the fourth largest by deposit market share in the Chicago MSA, with only about 7% of the market share. So there's a lot of upside potential yet in our core footprint to grow our franchise. But we also look to expand potentially to contiguous states. And we've done a little bit in Florida. We've followed our customers down to the southwest part of Florida and have a couple of locations down there. Our market position in Chicago is somewhat unique. There used to be a number of midsize banks that we competed with in the Chicago market. They've all been bought up now. So between us at $56 billion, the next largest bank that's headquartered in the Chicago MSA is just under $10 billion.
So we have a very unique position where we compete against the large guys with great products and treasury management services and the like, and excellent service. So we win a lot of business, so from the big guys. And we're pretty competitive, obviously, with the small guys because we've invested more into our systems than our treasury management. So very unique position now. And that being between $10 billion-$50 billion, there's no other competitor that's in the Chicago market area. So wonderful positioning for us. We also have Wealth Management Operations, broker-dealer, asset manager, trust, and a 1031 Exchange business that we do. And we also have a regional mortgage operation, mainly in the Chicago and Twin Cities area as far as retail. But we also have a direct-to-consumer operation that serves the veterans, so VA Lending throughout the country.
A very diversified revenue mix that we can lean on. But with that being said, I'll take any questions you have, David, so.
All right. Anything's on the table. Well, let's look back the last year. So we're approaching the one-year anniversary of the start of the liquidity crisis. During that time, we saw a lot of volatility in the bank stocks, and we saw a lot of volatility in bank deposit flows. Can you talk a little bit about what you experienced at Wintrust and how Wintrust managed through that process?
Yeah. I don't like to call it a crisis. We'll call it turmoil. It probably would be a crisis in many people's minds. But we have a diversified deposit mix and really great relations with our customers. So the term I used during that time frame was it was remarkably unremarkable. We prepared for a lot of deposit outflows, and we just didn't see much of it. We had a couple of customers that had larger balances. So they had a fiduciary duty to spread the deposits around, and we lost a little bit. But we also have a unique structure in our company where we have 15 separate chartered banks. And so we can offer 15x the FDIC insurance coverage in a product we call MaxSafe. So that was very useful to us.
If people were nervous about FDIC insurance, we could say, "Well, we can give you 15x within a fiduciary account that we offer and cover your concerns in that regard." It was also useful to attract deposits during that time frame because people understood that they could get extra FDIC insurance coverage through our unique product that we have. So we actually saw relatively stable deposits and actually, in the second and third quarter, had fairly good deposit growth. And I think it's because of our reputation, the relationships we built. We were in touch with our customers, letting them know that we were safe and we were sound. And if they needed extra insurance coverage, we could help them get that. And then we were also looked at, I think, as a fairly strong bank in the Chicago area that people could put their money into.
So we actually saw, in the second and third quarters, fairly good deposit growth at the end of the day. But certainly a tumultuous time. But we spent a lot of time talking to our customers, and that's where relationships matter. And our structure helped also.
Great. And then more recently, just over the last six weeks and again, last week, there's been some noise with one of the New York-based banks. Has that had any impact on Wintrust, or have you received any client calls asking about any risks that may be similar to what that bank may be going through?
Yeah. No, it's been very, very quiet. I think that's sort of an idiosyncratic type of situation. The few questions we had were really, do we have any rent-controlled borrowers that have rent-controlled multifamily housing? And we don't have any of that. And so I think Chicago is far enough removed, and the product and nature of that instance is much different than us or many other banks. So it's really been pretty quiet.
One of the unique items about Wintrust is the premium finance business. Can you talk a little bit about that business, why Wintrust is in it, the competitive backdrop, and sort of your outlook for that business?
Yeah. So we've been in the premium finance business really since the beginning of Wintrust. And we have two divisions. One that finances insurance premiums for commercial entities, small businesses generally, and helps with the cash flow. And the other is life insurance premium finance that finances generally high-net-worth individuals' life insurance needs. And together, they make up about 35% of our loan book. Very low losses. The life insurance portfolio, since we've been in it, where we started in 2007, I think, is when we initially started that. And we've grown that to about $8 billion. The losses on that have been zero basis points over the life because we secure ourselves with the cash surrender value, cash, or security. So it's a very safe form of lending with very good borrowers.
The commercial premium finance business is financing the business's insurance, whether it be liability insurance, workers' comp insurance, property insurance, whatever type of insurance they have. We finance that. And again, our collateral is the unearned premiums that reside with the carriers that issue those policies. So if the borrower defaults, we go to the carrier, and we get the returned premiums back to pay off the loan. So both are very safe forms of lending. We've got about $6.5 billion of the commercial premium finance. We do that in all 50 states. In Canada, we're the largest provider in Canada. If you put both of the divisions together, we think we're the largest premium finance provider in North America. It is. It's a low-loss business for us. It helps diversify our portfolio.
So we're not just relying on commercial or commercial real estate. And initially, we got into these niche businesses thinking that generally, in the Chicago area, when you were a community bank growing up and we started as a de novo bank in 1991, one storefront location in the northern suburbs of Chicago. And then we've continued to build it out over time. But as you're growing up, you could generally only get about two-thirds of your loan capacity in the markets you served without stretching for credit quality. And so we always thought if we could optimize the balance sheet with low-risk, niche sort of lending businesses, we wouldn't have to have our commercial lenders stretch for loans that maybe they shouldn't be doing to make that extra profit. So we've always thought of having niche businesses comprise about a third of our balance sheet.
And the biggest one, obviously, is premium finance. That business has consolidated over the years. So some competitors have gotten out of the business and sold to other competitors. So it's shrunk the number of providers in the market. And disruption is always good for us. If you're there and you're steady and you offer good service and good products, and you're just a steady provider in the market, the agents that are our source of those loans stick with you because they can rely upon you. So as companies continue to sell, it helps us. And it also helps us because most of the agents out there want two or three or four different providers of premium financing for their customers. So if one of their providers sells to another competitor, that's one less provider they have.
So they have to find somebody new to give them another source of financing. And so as the industry shrinks, we just naturally get more business from the entire pie out there of premium financing. So it's been a wonderful business for us. And low-loss business, it is sort of a factory. If you get your systems down and you stick to your knitting on credit quality and underwriting, you can keep the losses very low. On the life, I said it's zero basis points. Premium finance tends to be anywhere from the high single digits to 20 basis points of loss in normal markets. But that line of business generally prices at prime or above. And so that level of loss is acceptable to us. And it's just a great business for us to diversify the asset mix and keep our losses generally low through the various cycles.
It's not very susceptible to economic downturns because insurance is a product that most companies, they need, right? It's not, "I'd like to have insurance. I need to have insurance." So they generally have to buy insurance. And in economic downturns, a lot of them need to finance the insurance. And so it's one of the last products that they wouldn't pay on, right, because they need to keep their insurance in place. They need to keep their building insured. They need to get certificates of insurance. If you're a trucker, you need to demonstrate that you have insurance, etc. And so it's a very solid business from going through various different economic cycles.
Sure. Now, if you just ran a screen looking at the reserve level for Wintrust, the uninformed investor may say, "Hey, you have a relatively low reserve ratio." How does the premium finance play into that?
Yeah. So yeah, we break out in our public disclosure just that. If you just look at our reserves against total loans, since a third of our portfolio is this very low-risk, low-loss component, we don't provide as much for that as we would with commercial real estate. So if you break out the premium finance portfolio from the equation, our reserves are about 155 basis points of loans, so much, much more in line with what people would expect from a bank our size. But if you have $8 billion worth of loans that have never had a loss, GAAP's not going to let me put 150 basis points of lost reserves against those. And the commercial premium finance loans are only 9-10 months average life, and they pay down monthly. So they pay off very quickly.
If you have to make a reserve under CECL for life of loan, you only have nine months of reserving on a deteriorating balance. And so again, you can't provide 155 basis points or so of loss reserves against a product line that historically is 10 basis points-20 basis points of loss. And your visibility into those losses is pretty good because they're such short-term loans. And so that's why we break it out. But you're right. To the uninformed investor that just looks at the gross numbers without breaking the portfolio down, it looks like we're under-reserved. But we actually think we're fairly reserved. And we generally are conservative lenders on the commercial real estate side and think we're very adequately reserved.
Sure. On the commercial real estate, it seems to be in the headlines most days. Can you talk a little bit about Wintrust's commercial real estate portfolio? What do you have in there? Do you have much exposure in the central business districts, or is it more suburban? What type of exposures do you have?
Yeah. Well, we have a variety of asset classes. We have office, and we have multifamily, and we have industrial and the like. But by and large, it's a suburban footprint that we have. Even though we're headquartered in Chicago, we aren't doing a lot of downtown Chicago big office building lending. We've only got 5 office loans that are over $20 million in the portfolio, and each of them are very close to $20 million. So I don't think we have any over $25 million. So it's a very granular portfolio. The average office loan is only $1.04 million, which would demonstrate the granularity of the portfolio. And a fair amount of it is owner-occupied and medical also. And so we look at the office portfolio as one that you examine and follow closely.
When you get into the core of it, it is very suburban, very small, and very diversified. We grew up as community bankers in the suburbs. We support the communities that we're in, and we support the downtowns that they're in. But we never really developed an expertise to do large downtown condominiums or multifamily or office buildings. That's just not what we do or where our expertise is. We generally stay away from that. Very granular in that regard. Multifamily, we have a fair amount of that. But Chicago rents have been pretty good.
And so most of our borrowers that are multifamily borrowers are telling us that although they don't enjoy the higher rates, they're better off now than they were a couple of years ago because rents have risen so much that they've been able to cover not only the higher interest costs but the effects of inflation. So there's some cushion there, we believe, even if rents come down, that they're still in pretty good shape. And I know that's not true in every part of the country. There are some areas that are maybe overbuilt a little bit where the rent pressures are there, and there's maybe some more stress on multifamily. But in the Chicago area, it's still a pretty good market for those borrowers.
Yeah. When you look at your loan portfolio in total, where do you think there's the most risk of seeing an uptick in charge-offs? Where do you think the biggest risk lies, given what we know about the economy?
Yeah. Well, generally, I guess you would have to say it's probably the commercial real estate area because the higher rates have put pressure on valuations. We generally stress our loans for higher rates when we make them, for higher rates, higher taxes, higher operating costs. And our borrowers are generally doing okay. We look out on a consistent basis, three-quarters out, for loans that are coming due and look at every loan, really, over $2.5 million to see which of those loans may have problems when they come up for renewal and wouldn't meet our current underwriting standard. And consistently, it's been about 85% that are still really solid and really don't have a tremendous amount of concern about. And then we have another 15% that if you were to renew them today, they would have some sort of issue with them where they wouldn't meet our underwriting criteria.
And we'd have to bring that loan into compliance. But every quarter that goes by, the vast majority of those borrowers are doing something to keep that loan current. They're putting more cash in. They're providing more collateral or whatever needs to be done. And so the borrowers are acting responsibly with these loans. And the feedback we get from some of the borrowers is, "If you believe the yield curve" and I'm not sure whether you should believe it or not. But if you believe the yield curve and rates are going to come down, they believe that'll sort of buoy the values of the property, and they want to just ride it out. And we generally pick good sponsors. And generally, those sponsors, they aren't just one property sort of sponsors. They've got other properties.
They have other resources available to them, and they're making good on the loan so far. The only place that we really had any stress in our portfolio where we saw evolving stress was pre-pandemic. We did do about $40 million-$50 million of co-sourced office space, the WeWork sort of office space. In the second quarter, we sold about half of that portfolio to [NSO] and took a little charge. The loans were generally current. We just didn't see visibility where those loans would stay current. We just thought getting out early is better than riding it out. In the fourth quarter, we took really the remainder of that and put it on non-accrual status, even though the loans actually are still current. We just, again, didn't see visibility.
So that pretty much wipes out that little vertical within the commercial real estate portfolio that we thought had risk. And so other than that, we're watching, but we're fairly comfortable with the credit quality of the portfolio. We're not seeing major risk rating changes, downgrades, etc., in the portfolio. So knock on something here, wood here, that stays true. But if rates stay higher for longer, then I think it does continue to apply some pressure to the commercial real estate portfolio. The majority of the commercial loans we make, whether they be C&I or CRE, are variable rate. And if a borrower wanted a fixed rate, we'll provide them with a swap. But we were never a big 5-year fixed-rate lender where we just locked everything in, which has done well for our margin.
We took advantage of the higher rates and picked up about 100 basis points in margin during this rate rise. But we feel like by having those variable rates out there, that the borrowers have kind of ridden the wave with us a little bit and are well prepared. And the market will adjust to these rates, even if they stay here, I believe. And the good operators will find a way to adapt. But right now, we're cautious and looking, but we don't see any major issues coming down the road.
In the fourth quarter, most banks kept their reserves pretty stable. You guys decided to build your reserves a bit more than others. What was the driver behind that? And what are some of the important variables to Wintrust as far as what your level of reserve will be?
Yeah. So the drivers for us under the CECL model for doing reserves, it's a life of loan, and it's really projecting out what you think the losses will be going forward. And we all have now models, economic models that we've built that we think emulate how our portfolio will perform in various different economic cycles. And the two factors that influence our models the most are the Commercial Real Estate Price Index, which obviously affects the commercial real estate portfolio, and the Baa credit spread. And both of those have high correlation, if you look back in time, to loss generation within the portfolio. And both of those factors deteriorated a little bit on a go-forward basis in the fourth quarter. And that just built into our models that said the forecasted losses then would be more. It wasn't because we had outside charge-offs.
It wasn't because we had outside downgrades in our portfolio. It wasn't the credit quality that is existing today. It was more the forward-looking macroeconomic scenario that the economists have put out there. And we look at various different economic models, Moody's economic models, and some blue-chip other economists that put out models. And we compare those, and we determine what we believe to be a consistent forecast by the economists. And those two factors really drove the loss rates up. Now, those have improved a little bit since year-end. The BAA credit spread has come in, so that should be somewhat helpful. But we didn't build it just to build it. We built it because GAAP and the CECL models said we should build it based on this macroeconomic scenario. And that's okay. I don't have great faith in economists with their forecasts.
But if they're right, then we have the extra reserves. If they're wrong, then we have the extra reserves that give us some cushion and tailwinds going forward.
Got it. Got it. Good. And let's talk about the balance sheet makeup a little bit and the asset sensitivity. If you look back a couple of years ago and we were running screens, Wintrust showed up as one of the most asset-sensitive banks, given the makeup of your balance sheet. However, if you look today with the threat of rates coming down, you're not screening as asset-sensitive. You've come down to more neutral. Can you talk a little bit about the position that the balance sheet is in today and the sensitivity to rates?
Yeah. Well, I think you got that right. I think there's still this perception that we're very asset-sensitive by some that just remember where we were but haven't looked closely recently. But when rates were near zero, we try to manage the risk in any environment. But when rates were near zero, having them go negative, we thought, was probably not a great possibility. And so we positioned the bank to take advantage of rising rates. So we stayed very short. We had a lot of money sitting, billions of dollars sitting at the Fed making 7, 8 basis points. And we resisted the urge to extend because we thought rates would just have to go up. But our margins suffered because we were patient then, and our margin declined to the mid-250s range. And we've picked up now net. At this point, our margin's a 364 margin.
So we picked up about 100 basis points. As we picked up that margin, you made the determination that there's risk that rates could keep going up, and there's risk that rates could go down. So we started layering in some derivative products, generally swaps based off one-month SOFR over the course of time. We've got about $6 billion of swaps on the books that protect us if rates go down. We've shifted just a little bit more towards fixed-rate loan products that are longer term. So if rates go down again, you have some protection there. We've shifted the balance sheet a little bit. We've bought some derivatives. We think even if you had 2 or 3 rate cuts this year, we can sort of hold the margin stable right now. We don't have a lot of upside potential in the margin.
We don't have a lot of downside potential in the margin right now. If the rates go down 5, 6, 7 times, then you could potentially see some compression in the margin into the mid- to low-350s or maybe even the high-340s, depending on how much they go down. But the beauty of our balance sheet is that we also have a fairly sizable mortgage operation. And so if rates go down that much, we would expect that mortgage rates would come down somewhat. The long end may not come down as much as the short end. But if it comes down a little bit, or if the spread between the 30-year Treasury and the 30-year mortgage rates and the 10-year Treasury compresses a little bit to get back more to normal, it's about 100 basis points wider than historically. Mortgage rates will come down.
There's a lot of pent-up demand out there for mortgages right now. We're getting more pre-qualifications from our customers right now because they want to buy a house. They want to be ready to buy a house. We think if rates do come down a little bit, and even if the margin gets compressed, we're going to make more money on the mortgage side, which should make up for that compression. We also believe that if rates would come down that much, that loan demand would also pick up, and you would have more earning assets out there, maybe at a slightly smaller margin, but your NII would probably expand because of the extra volume. We think we're positioned pretty well. Even if rates go down, revenue should hold in there pretty well because of the mortgages.
I tell people, "If you go back to when we had a 255 ± margin, we actually had two record quarters because mortgages were so strong. And the refi boom was there. And we certainly don't expect that to happen again to that extent." But it goes to show that you don't just hedge your NII. You hedge your revenues in total. And the balance sheet that we have is somewhat hedged because of our mortgage operation and a slightly asset-sensitive balance sheet. So if rates go up, we make more on the margin, less on mortgages. If rates come down, we make less on the margin but more on mortgages. And we think that that's fairly balanced out right now.
So we're fairly optimistic that as long as we can grow loans, as long as the economy stays fairly healthy here and we can grow loans, we should be able to grow revenues, NII, and probably in the mid to high single-digit range.
Got it. Got it. And then how about the expense side of the income statement? I think you were talking about mid-single-digit growth there. Is that still the right way to think about it? And then do you have levers to pull if revenue doesn't come in to still do your best to get positive operating leverage?
Yeah. Well, we have expenses. Given wage inflation and just general inflation, we do think that mid-single digits is probably the right neighborhood of expense growth this year if you use the third and the fourth quarter as your basis for growth. Third and fourth quarter of last year is your basis for growth. So we think we can hold that. But if we can grow the loans and the NII and the revenue mid to high single digits, obviously, that you get some operating leverage there. So we think that that will happen. We've done it the 30+ years th at we've been in business. We've considered ourselves a growth company. And we have been able to grow through various economic cycles and get that operating leverage. That's still our plan now.
If for some reason the economy tanks and loan demand dries up, then we would have to look at certain things to right-size the lending infrastructure and some of our operational infrastructure. But certainly, it's not something we contemplate doing right now because if you look at our pipelines and you look at the growth prospects that we have, we're fairly confident of this mid- to high single-digit loan growth.
Got it. Got it.
Now, the only caveat I would say, if mortgages really pick up, then because of the commissions and the variable expenses that go with that, you'll have more revenue. But our expenses may go higher than the mid-single digits. But that would be a good thing because you'd be getting the extra mortgage revenue off of it. So could vary a little bit up if mortgages really take off.
Absolutely. Absolutely. Well, I can continue on all day, but we are subject to a 30-minute limit here. So we're going to end with that for our formal discussion. Those of you that are interested, we're going to head down to Cordova 6 to continue the discussion. Thank you very much.