I'm Jon Arfstrom from RBC Capital Markets, and I want to thank everybody for being here. Kicking off the conference today, we have Tim Crane and Rich Murphy from Wintrust Financial, a bank out of Chicago that I've covered for a long, long, long time and watched the company really grow up. I think most of you know a few things about the company, but we have attendance that's up, and there's a lot more generalist interests. So maybe Tim, start us off with a 30,000 ft view of what is Wintrust.
Sure. Happy to do it, Jon, and thanks for having us. 34 years old, founded in Chicago, $65 billion in assets, retail footprint of about 200 locations, almost all of those within two hours of Chicago. A diverse commercial lending business with a number of what we believe to be very attractive niches. We think we've differentiated ourselves, Jon, with fairly consistent performance in terms of both earnings and particularly loan growth over time. We think very well positioned in the Midwest relative to some of our larger competitors, service being kind of our hallmark and taking good care of clients, and an environment that we think is coming our way a little bit. We're in a size spot that gives us the ability to provide attractive services to larger companies and on the wealth front, and many of our smaller competitors not equipped to do that.
So we feel really good, Jon, and happy to be here.
Okay, good. Thank you. Maybe for you, Rich or Tim, but there's a lot of debate, and it seems to change every day, every week about the economy, the state of the economy. Can you just give us your thoughts on how you think the economy is tracking and what you're seeing?
Yeah, I would say on a macro level, things still look good. I always kind of look at unemployment as being sort of the biggest macro thing that you can look at right now, and that seems to be holding up pretty well. I would say commercial sentiment still is pretty good. I think people are, I think the animal spirits that came post-election are sort of getting muted out a little bit by some of the noise coming out of Washington right now. But generally speaking, still feel pretty good, and I would say our customers feel okay right now.
Anything to add?
Yeah, I think that's right. I just maybe turn off the volume on the news once in a while. I think kind of point to point, this is going to be okay, but any given morning is an adventure.
Okay. Pipelines, can you talk a little bit about pipelines and what you've seen in some of the trends there?
Again, our business is a little, as Tim pointed out. There's a lot of different verticals that we have. So pipelines can kind of go across each of those. But in the core business, our core CRE, core C&I, both feel pretty good right now. Generally, first quarter is one of our slower quarters, but just what we've been able to build up in terms of momentum here for the last couple of years feels like it's going to continue on. Tim talked a little bit about it, but there's been so much dislocation in Chicago and Wisconsin that it really favors us right now. So banks that have serviced their customers for a long time that no longer have such a priority in Chicago, I would point out Chase and BMO in particular.
We're seeing a lot of customers come out of those places where they just don't feel like they're getting serviced properly anymore. Plus the opportunities that we're having in Michigan right now with Macatawa, where they were somewhat constrained in terms of their opportunities just from a size and expertise. Now we bring that expertise, we bring some of that size, and so we're seeing a lot of really nice opportunities out of Michigan, so right now we feel pretty good.
Okay. And with all these sessions, we're open for questions. So if anybody has questions, just put your hand up and we'll show up with a microphone. On the topic of competition, last quarter, I think I probably asked the question and I didn't expect it to get quite the reaction it did from investors, but there's this concept of bigger banks becoming more competitive, risk-weighted asset diets going away, non-bank financials being more competitive. You mentioned some competitive pressures. Can you talk a little bit more about that? Has it changed at all? Do you expect it to change more in the coming year?
Yeah, I think on the call, Jon, we maybe inadvertently spooked some people. What we were trying to say is that we've differentiated ourselves on a loan growth standpoint in spite of people now getting more competitive with respect to pricing in some cases, and if you look at how rational competitors are and what's happening now, we've gone a lot of quarters where some people haven't had loan growth, and so as they try to figure out where they're going to get loan growth, we expect to see some pressure in the market on two fronts. If the pressure's on a credit front, we won't play. If the pressure's on a pricing front, we feel like we've got diversified asset businesses that will allow us to select where we play, and so we feel good about our growth. The niche businesses are a big help to us.
And we weren't trying to spook anybody and still feel comfortable with our kind of mid to high single-digit loan growth. But we expect others that haven't had the loan growth will kind of ramp up their presence.
One of the core tenets we've always had is we don't jerk the wheel. So our job is to pick a true north course in terms of pricing and structure and stick with it and never get too far in either direction so that this will pass. And when it does, we're going to be right where we've always been. And that's worked for us for years. It's just making sure that the market and the customers know where we're going to be. And guys will pulse in and pulse out, but we're always going to be there.
Okay. Commercial real estate has been a topic. It was maybe more of a topic a year ago, especially at our conference. We're hoping for a drama-free conference. We'll see. But what are you seeing in commercial real estate? What are renewals like? What kind of demand is there?
Yeah, it's an interesting time right now in commercial real estate. I would agree with you. I think the pressure that we felt a year ago is definitely a lot less these days. We do a lot of work in terms of looking at pending maturities a year out and trying to understand what dynamics are going on. Feel pretty good right now that as a credit guy, you always never want to say this, but feels like the worst is behind us a little bit, but feels like there's some stabilization. One of the things we are seeing is that for the construction end of the portfolio, you're seeing some of those construction deals that we did two, three years ago now looking for permanent financing. We were doing some mini-perm work, but now I think some of that's moving on into permanent financing.
So prepayments are ticking up a little bit. But I would say overall, the portfolio feels pretty good right now.
Okay. Tim, you mentioned niche businesses. Premium finance is a business that I understand. I think you understand it, but sometimes it confuses people. Just quick tutorial on premium finance. Why is it unique for you and what kind of demand do you see?
Sure. Yeah, you bet, and I think you're right, Jon. It's a little bit underappreciated part of our story. A third of our loan book is related to premium finance, split roughly equally between property and casualty for commercial entities and a life finance business. The life business is mostly a state tax planning type business. Tends to do a little bit better when rates are low. A little tougher year last year as rates were going up. Coming back now with stable rates as kind of people adjust to where we are. Essentially a zero loss business as we work with the carriers. The other property and casualty finance business we like a lot, Jon. I mean, it's a business with very few competitors. Average loan size is about $50,000, very automated. Premiums have been trending up with natural disasters and other types of activity.
And we're one of the larger players there. It's a very predictable business in terms of loss. And it's very defensible in terms of the technology and the knowledge that you need to be in play. And in both cases, as we've gone through some upsets in the insurance business, I think the carriers appreciate our expertise. And we're looking forward to a good year in terms of our insurance businesses in 2025.
Variable rate tied to the short end.
Yeah, very short. Particularly the property casualty loans, typically nine months or so, give us all sorts of flexibility in terms of pricing and liquidity, and it's really a nice balance sheet tool for the company.
Okay, so loan growth in general, sticking with your guidance.
Sticking with our guidance.
Any color on higher end versus lower end, what it would take to get you to either end of the range?
No, I think generally first quarter is probably our slowest quarter, so we might be at the lower end of the range. But second quarter is usually one of our biggest quarters. P&C always has a pretty solid second quarter, and you know what the maturities are going to look like. So that happens pretty much every year. So first half of the year, I think we'll be right in the middle of the guidance. Second half of the year, we would anticipate probably something similar, but it gets a little murky when you get out there.
Okay. Quick update on how Macatawa was doing. Maybe a quick description of that and how's that performing?
Number one, it's doing terrific. Macatawa is about a $2.5 billion-$3 billion bank in West Michigan. We closed on last summer, essentially. Really a terrific acquisition for us and good culture, good credit, good market, excess deposits, excess capital, and so from our standpoint, it was sort of a unicorn in terms of an opportunity, but it's really a terrific bank that needed a bigger toolbox. And so our ability to provide the opportunity to do slightly larger deals and then also to provide some expertise on the commercial side is really important. And I'll give you an example. They worked with a construction firm, really nice relationship. They were part of a deal.
That firm subsequently came back and said, "Given the expertise that Wintrust now brings to the party, we'd like you to lead this deal," and so we'll go up in terms of our exposure, but we'll bring the expertise that the Macatawa team needed. It'll stay a deal in the market. The Macatawa team will manage it day to day, and we see lots of those opportunities coming, so very excited about West Michigan. It's a good growth market. Looks actually a lot more like the Southeast in terms of growth rates.
Interesting. Okay. The first IPO I worked on.
Oh, is that right?
Yeah. I was a young guy at the time.
Yeah.
I won't go into it, but some good stories around that. On the margin, you guys have done a nice job keeping the margin in a range, in a band. There's a lot of debate over how you do that and how you get there. But talk a little bit about your margin expectations. You'd expect to be able to hold it in this range, around 350.
Yeah. Well, exactly. We've said steady 350. Wintrust, for those of you that don't know us, had been asset sensitive for a number of years from zero. You expected rates to go up. As that happened, we just wanted to be in a situation where we could be much more consistent from a margin standpoint. And so we've basically managed the balance sheet to the point where we think 350 is probably the right number, even up or down a couple of cuts here. The upside would be a little bit steeper yield curve. The downside would be a little bit of competitive pressure. But even with both of those, we're pretty comfortable with the 350-ish range.
Preference is a little steeper.
I think so. Yeah. I mean, but if it's not, our mortgage business will pick up a little bit. And you may ask about that, but it's pretty slow. Obviously, a lot of our mortgage business is in an area where the spring buying season starts now. And so we would hope that we'll get a little bit of a lift, but activity is still pretty slow. If the 10-year rate comes down and/or you get a compression in the 10-year to mortgage rate spread, that would just be kind of a tailwind for us. And we've always thought of the mortgage business as sort of a natural hedge. If rates end up going down, our fee income will improve. But as we've talked about on the calls, we think that the inflection point's probably around 6% in terms of a mortgage rate.
Whereas if you got to that level, you would start to see activity pick up in a much more material way.
Okay. What do you see on deposit pricing? You have a pretty granular base in general, but.
It's been pretty steady. Chicago is still a pretty fragmented deposit market. We're fourth behind a couple of folks. We've managed to grow deposits to match our loan growth. That's sort of the target. At the margin, CD pricing is four-ish. Money market pricing is three-ish at the margin. Kind of all in. We think we're adding deposits in the low threes. And loans are closer to high sixes, which is consistent with the 350 margin. We've got about 7%-8% share of deposits in Chicago, four-ish in Milwaukee, and seven or eight in West Michigan. Those all feel like opportunities for us to continue to grow our deposits. And particularly in the Chicago area, 10% deposit share in Chicago would feel pretty good. It's a huge market, huge market.
You feel like deposit growth can match your loan growth aspirations?
Yeah, I think so. Again, I mean, these markets are very fragmented. And our charter model, some of you may know, we actually operate 16 individual charters, allows us to be a little bit more flexible in terms of how we price deposits and where we go after deposits. And so, for example, we've expanded materially in Rockford, which is the fourth largest city in Illinois. We opened an LPO. We did very well in terms of growing commercial activity. We followed with a nice location, and we subsequently added a couple of more. We can run specials in Rockford that we don't have to run in other markets that allows us to basically grow deposits at a reasonable rate without compromising some of the other markets. So we still feel good about deposit growth.
Okay. Good. So steady message on the margin, steeper curve, a little bit better.
Yep.
Rates start to come in, mortgage helps.
Yep.
You feel good about it. Okay. You did touch on mortgage, and those are some of the questions I wanted to ask, but 10-year is low fours at this point.
Yeah.
Are you seeing any signs of life or any hope in terms of volumes?
January, February are better than January and February of the year before. Not huge, but up. Inventory levels are up, so that's probably a good sign. It all, as Tim pointed out, we saw back in October of last year when the 10-year kind of went down to its low point, recent low point. It was an opportunity for people to refi or buy homes, and it just took off. But then as soon as the 10-year went up, that window closed. So we do think that if we can see the 10-year continue to come down here a little bit and get down to around four or less, things will really take off. But for right now, we're not anticipating a dramatic change right now unless that happens.
Okay. Okay. Good. On your other fee businesses, you have a few that are standouts, but I wanted to maybe touch on wealth a little bit. I know it's been very consistent leadership there. You've done well. Talk about some of your expectations.
The other two, other than mortgage, the other two businesses are the wealth business number one and then sort of our treasury management and commercial-related services primarily. The wealth business has been steady for us. We've had a couple of acquisitions along the way that were good for us that we've continued to build on. Macatawa had a nice wealth business. West Michigan looks like a wealth opportunity for us. We continue to invest in the business. Moving on to the LPL platform, which we've talked about, will give us some better capabilities, and so it's not something that where the trajectory changes quickly, but we're going to be steadily improving our wealth business, and it's a nice fit with our commercial business. The treasury management business is growing double-digit for us.
As we win commercial business in our markets, we win low-cost deposits, and we win treasury services, and that's just a great annuity business, growing very, very nicely. It won't jump in any given quarter, but we continue to make really steady progress.
Okay. You have everything you need in treasury, fully competitive with.
Yeah, I think so. In fact, I think, Jon, when people move to us, we hire bankers all the time. I mean, I know some of our competitors talk about hiring teams, and they're going to do it in Texas or they're going to do it in Atlanta or wherever they're going to do it. We hire people all the time. Bankers come to us because they want to take better care of their customers, and they get frustrated at some of the larger institutions doing that, and they're always pleasantly surprised by the breadth of the services that we offer, and I think that's been a big win as we win commercial business. Sometimes it's not even on the lending front. We're just winning business because we provide a level of service and a product suite that people below us, frankly, can't.
And if you look at the Chicago market, we're $65 billion, save Northern Trust, the largest headquartered bank in Chicago. If you drop down, the next banks are in the $10 billion range, entirely different level of sophistication in terms of services and capabilities. So really well positioned, we think, and it's been a bright spot.
Sweet spot.
Yeah, really good.
Okay. I wanted to ask a little on expenses.
Sure.
Talk about your expectations for expenses. What are the pressure points? What kind of operating leverage aspirations do you have as a company?
The technical answer is we said mid-single-digit expense growth off of the fourth quarter run rate. We expect to grow loans and net interest income at a rate higher than our expense growth, so we expect some operating leverage. Our theory is to continue to invest in the business. We compete with many of the big banks. We do that successfully. We try not to skimp on making the investments. We feel if you get behind, it's really a tough journey to recover from that. And so whether it's digital capabilities or it's people, we think it's important to continue to do that.
What I will say is if out of Washington we get relief on things like 1031 and 1071 and CRA and some of the other regulation, that will free up resources either that will result in lower expenses or in more investment in terms of our capabilities for the market. So there may be a little bit of a bright spot there. There's just a lot of work in those areas that doesn't produce a lot of revenue.
Okay. Interesting. I wanted to ask about this later, but regulation.
Yeah.
Do you think about $100 billion in assets? Number one, do you have any other investments that you feel you're making that might potentially get eased if the regulatory environment continues to ease like it has been recently?
Yeah, we think about it a little bit. We certainly have a lot of runway, so we never felt like we were pressured or that we were going to do anything specifically related to a cap that existed in the market, but I look at it in two ways. Building the foundation for a bigger bank, whether it's compliance resources or treasury resources or risk management or any of the technical skills that the bank needs, we're investing in today, and that's part of that expense growth, and fortunately, we're in Chicago. There's a lot of talent in all of those areas that we have added, and we will continue to add, so I feel like we're building a foundation for a bigger bank. The more punitive financial issues around getting to $100 billion appear to be going away or certainly being tailored.
And so long-term debt is typically not a big holding for regional banks. And if you got to $100 billion and had those requirements, that's a material financial issue. Assuming we get there or when we get there, if that's tailored, that's terrific. But we do feel like we're building a foundation for a bigger bank, and we have the talent to do that.
It's not a switch that suddenly goes on at 100. And our job is to constantly talk to the regulators and understand exactly where we are relative to their expectations. And they have been coming in for a number of years now doing fairly intense examinations of what we're doing, what the risk management practice is, how we go about doing things. And knock on wood, those conversations are generally pretty positive that they were keeping pace with their expectations. Okay. I think Ed would call it like being at a teaching hospital. Everybody's taking a look.
Yeah.
Right. Asset quality. It was a topic a year ago. It was a heavy topic. You touched on CRE a little bit, but just there's a lot of concern about the consumer. There's concern about whether or not this is going to result in an eventual recession. What's the Rich Murphy, Tim Crane view on credit and the outlook?
Yeah, you know I think we're certainly never the most aggressive guys out there. We try to stay pretty conservative. We underwrite with a fair amount of stress for any of the loans to be able to absorb that stress. So I think that we'll handle whatever is in front of us is better or certainly as well as anybody else. But this past year, we saw fairly significant effects to commercial real estate through obviously the office things we talked about, but higher rates, which stresses out a lot of that. And we've gotten through most of that in reasonably good shape, but a lot of that is episodic in nature. So all of a sudden, if you have a building with two tenants and one of them decides to pull out, you've got a problem.
And so those are the types of things that kind of make me lose sleep a little bit. But generally, that's been relatively stable. The other area we talked a lot about this past year was transportation. We saw a lot of stress in the transportation segment, both in our P&C book and in our C&I book. I would say transportation is more stable, but certainly not robust. So I think that there are still some challenges in that space. But you hit the wild card, I mean, which is just consumer sentiment, what that means for unemployment, what those repercussions might be after that. And I just don't know. I mean, right now, we always worry as credit people, we always worry about what we don't know and what's up ahead. But for right now, we would still say that the portfolio feels pretty good.
We do like the granularity in our portfolio. We don't like to hold big numbers. We like to keep these verticals pretty much distinct subunits, and that helps us out considerably. I mean, if there's a tremendous amount of impact in one segment, office was one of those that we've talked about. Office is a very small component in our portfolio. It's probably more than what we would like, but it's really not that big a deal, and we can manage it and manage through it pretty well. Similarly, when the pandemic started, we had a tremendous amount of calls about franchise finance, and it's like, yeah, we have franchise exposure, but relatively speaking, compared to the entirety of the portfolio, it's pretty minor and we can manage through it, so that's our job, is just to kind of keep these concentrations pretty well spread out.
Okay. So nothing that's really changing your reserve expectations and don't feel the need to build at all?
The way CECL works, I mean, you're looking at these macro factors in the economy, and a lot of them still point to a pretty good scenario. I mean, spreads are pretty tight. Unemployment looks good. I mean, so at this point in time, we would not anticipate building.
Got a few minutes left. I just want to make sure that I give people an opportunity to ask questions. Okay. M&A, usually the last topic.
Yeah.
You had a, sounds like a very successful deal in West Michigan. You guys have been prolific over time. How do you feel about M&A? How do you feel about the activity? People calling you, just.
Yeah, we're getting phone calls. And certainly, there's been a sense of more activity and more enthusiasm in the market. I think we're seeing that in terms of conversations. There's still math problems at some banks that make it difficult. You see capital raises going on with many of the transactions that have been announced. We'll be disciplined. We like the Midwest. I think contiguous markets would be our focus. We think we're good at acquisitions. Our track record has been good. I think we get credit for that. So we'll be opportunistic, but we always plan on organic growth being the foundation for what we're doing and hope to win in the markets. And if we need to, Rockford again being the example, if we can't acquire into a market, we can certainly de novo branch into a market. We know bankers in areas we'd like to go.
We've been successful, for example, in Northwest Indiana. So we feel pretty good. And if there's more activity, we'll be at the table, we think.
Okay. Anything on your regulatory wish list for the ease?
Just consistency. Rich uses the "jerk the wheel" term. We'd like to think the regulators would feel the same way. And certainly, when real estate got tough, they were chasing a little bit, catching up with the market. And they're through that process now. I think we showed very well. We have a great relationship with our regulators. So again, we just want consistency, and predictability helps. And to the extent it becomes less, that's great.
Okay. Got a minute and a half, Lori. Question was, describe the link between better regulation and stronger earnings.
Yeah. Well, better regulation and stronger earnings means that we focus on the right things. Less regulation and stronger earnings means we're spending a lot less time enhancing systems and adding people that don't relate to revenue growth. And so it's a little early to declare victory on any of those fronts. I mean, certainly, the market feels encouraging with respect to regulatory focus. I don't think it's going to be trajectory changing for us. And the reason is we're continuing to build the foundation, risk management, compliance, finance for a bigger, better bank. And discipline in those areas matters a lot. And if you take your eye off the ball, regulatory activity or not, you're going to get penalized. And so for us, good risk management, managing concentrations on the credit side, good financial discipline, expenses, and everywhere else is just part of running the bank.
And so it absolutely will be helpful. And at the margin may show up, but it's not trajectory changing.
Okay. Well, that's it, guys. Feel good about loan growth. Typical slower first quarter, but middle of the range feels good. Margin, consistent guide. Higher for longer is okay. If we get some cuts, mortgage picks up the slack. Credit feels fine.
Yeah. And I'd end just by saying, look at our track record. We include it with our end-of-year materials, whether it's loan growth, deposit growth, earnings growth, growth in tangible book value. We're just trying to be consistent. We think we've positioned the bank to continue to do that in the coming years. And appreciate the opportunity to talk about it.
Thanks, guys. Thanks for your support too.