Good morning, everyone. My name is David Long. I am the research analyst here at Raymond James that covers Wintrust Financial. We are very happy to welcome Wintrust here this morning. Wintrust based in Chicago, $50+ billion in assets, about $5.5 billion in market cap. They've been a staple here at our conference for quite some time. This morning we're very happy to introduce CEO Ed Wehmer, as well as President and future CEO, Tim Crane. We also have Dave Dykstra with us, Chief Operating Officer as well. With that, why don't we go ahead and get started. Just, you know, with the change happening here with the CEO role, maybe can we just talk a little bit about Ed, how you view some of your biggest accomplishments over the years. Maybe talk a little bit about the timing on the transition into passing the CEO role to Tim.
Sure. Biggest accomplishments, not killing Dykstra, number one. Could have happened, Dave, you never know. You know, I'm very proud of the culture we've developed. Culture is everything in an organization. Our culture customer first and take the blame, share the fame, enjoy the fa-- avoid the shame and enjoy the game. We do. I like the structure we set up as Chicago's Bank, and we get a lot of kudos for not selling the bank. I was told early on by our first-time executive chairman, "Anybody can sell, not everybody can build." We built, and we're still building. We're serial builders. I love it. I don't think we're going to miss a beat with Tim coming in. Time was right for me.
It was not my I had back surgery maybe four months ago. Scar is about that long, don't play football, rugby growing up, I guess, is the answer to that. That had nothing really to do with it. We had planned this for a period of time and give Tim 8- 10 years to run at his age. We got a group of young people coming up. The perpetuation of our culture is the most important thing to me going forward. Timing, April 30th, I'll be done. I'll go to chairman and Tim will get my office. Got all the boogers off the bottom already of the desk and stuff like that. Pretty good shape there, but excited about the transition. I'll still be involved, but, you know, one hand on the wheel will be Tim's and here to help him do whatever he needs to do.
Got it. Great. Thank you. Maybe some of the investors here in the room are a little bit newer to the story. Maybe we could take a step back and maybe just talk just for a few minutes about what makes Wintrust different. Why should investors be considering Wintrust? Maybe just talk a little bit about some of the big picture stuff like that.
Sure. I mean, a nice diverse business in a really good market. For those of you that don't know us, 175 or so retail locations in Northeastern Illinois, Southeastern Wisconsin. Our commercial business sort of has three legs to it, if you will. A traditional C&I business, middle market-focused. We're number one share with JPMorgan in Chicago in a period of about 15 years for us. Terrific treasury management business that generates a bunch of fees. CRE, we do about a third of our book, try to limit it to that level, focused on multifamily and distribution, very limited retail, very limited office. Maybe one of the things unique to us, Dave, is the insurance finance businesses.
Premium finance business, two flavors, one Wintrust life business, which is our life insurance finance business, and then property and casualty insurance business, where we finance property and casualty premiums for companies nationwide. Very different businesses. The life business, higher ticket, sort of a affluent estate planning tool. The P&C business, more of your everyday factory financing business policies. The diverse businesses really help us when some businesses slow down or the market slows, others do quite well.
For example, right now, the property and casualty insurance business, everybody looks at their insurance premiums, they're going up. We do the same number of units, we get quite a bit more growth. Nice wealth business, $34 billion in assets under management. You know, and to Ed's point, this is sort of a nice time for us. Margin going up, credit's very good, momentum in the market, very good. We, we feel pretty good right now.
Good. Good. Looking out the next three to five years, if you were to tell us what Wintrust looks like then, how do you envision the bank looking, let's call it 5 years from now?
Yeah. Again, I mean, we're on a little bit of a roll and doing well. You know, largest independent bank in Chicago. We continue to grow on a disciplined basis. Call it $75 billion-$80 billion+. Continue to be entrepreneurial and opportunistic. Hire good employees, take advantage of disruption in the market. We're in a really nice spot, the largest independent bank in Chicago. We're sort of commercial independent bank. Northern Trust does, you know, different kind of business. I think we get a lot of looks. I think we're appreciated in the market. The folks in Chicago that want to work with a local bank, you know, we're their choice. Sophisticated capabilities. We invest on a regular basis, hopefully more of the same with good results.
Yep.
Take what the market gives us.
Yeah.
I was just going to say, Ed is famous for saying, take what the market gives us. Right now today, what is the market giving Wintrust? Where are the near-term opportunities as you see them?
I mean, well, disruption has been kind of a staple for the last several years. That continues as some of our, you know, peer banks or competitor banks have merged with others. They disappear from the market. They lose focus. That continues to be an opportunity. The bigger banks don't know the market as well as we do. When they get distracted, we win. When their bankers can't take care of their clients, they come to Wintrust, we win. You know, lots of opportunities. We've also been very patient from a rate standpoint. Interest rate sensitive continues to pay benefit for us. You know, smaller banks or folks that kind of panicked and invested early or made a lot of long-term fixed loans are kind of toughing it out right now. And we've been pretty cautious about that.
The balance sheet's in good shape. The interest rate positioning is very good, T im and I never used to say how big we're gonna be. Take what the market gives us, that's it. There you go. Good advice. You gotta do what you wanna do. Yeah.
One of the biggest questions I get from investors is deposits, both deposit flows, deposit betas. Can you talk about some of the deposit competition as you see it in the Chicago MSA and what you're seeing within your own balance sheet on the deposit side and your expectations there?
Sure. Yeah, a lot there. You know, nine months ago, I would've said pretty disciplined in Chicago. Everybody was kind of trying to hold rates a little bit and, you know, maybe a quarter ago it sort of broke. The rate environment's accelerating, you know, 4.5% type promotional rates in the market. You know, different competitors obviously in different areas. Take Wisconsin for example, there's more credit union activity than there is in Illinois, but, you know, getting more aggressive.
From our standpoint, we've tried to be disciplined. Many of you have heard us on the calls where we've actually talked about helping customers actually get into Treasuries. Instead of letting them go somewhere else, as we've been disciplined, they've moved into our wealth management business where we purchase Treasuries for them. Over time, when the Treasury and the deposit market gets back together, we'll re-win some of those deposits. You know, we're holding our own right now. It's tougher, you know, probably pretty flat. You know, others are down in the market and, you know, we're seeing more and more competitive rate offers.
One of the beauties of our structure is the, you know, your marginal cost of funds. We offer a product. You can go to our smallest branch. It might say Wintrust on it, but it doesn't have to sell every place. Could be Schaumburg Bank or something or out in you know, one of the banks.
Yeah, Rockford or somewhere. Ed's point, the structure allows us to price as if we're 15 different entities as opposed to one. We can limit the cannibalization by offering promotional rates in a specific market and not all of our markets.
Exactly.
That can be very helpful.
We're in 170 really.
Yep.
All the brands we sell can go out. It might be a branch of one of the 15 charter banks, but go out and offer a nice product and build that branch up and not have to pay everybody that number.
Mm-hmm.
How about the lending side of the market in Chicago? Let's not talk about the premium finance yet, but maybe just.
Sure.
The commercial real estate markets. What are you seeing there, and how aggressive are you seeing some of your competitors?
Yeah, it's, we always have aggressive competitors. You know, sometimes undisciplined competitors. We, we try to make sure that we're not playing that game. Even though we're Chicago-based, both from a real estate and a C&I standpoint, you know, many of our loans are outside of Illinois. You know, for many folks that's a positive as, you know, Illinois has tax issues and kind of growth issues that some of the other states don't. Very disciplined underwriting, stressing for interest rates, stressing for taxes, stressing for supply chain type activities. Credit quality, very good.
When we have, you know, deals that get a little bit tougher and we're not comfortable anymore, our competitors are taking them right now. We view that as a good sign. I'd say normal, maybe a little tightening. Some competitors out of the real estate market right now or certainly much more selective on the real estate market.
Mm-hmm. Are there any lines where Wintrust is pulling back? Has your-
Well-
Where maybe where your appetite has changed over.
Yeah.
Last six months to a year?
We try to be consistent. You know, the market doesn't like it, clients don't like it when you're not consistent, we're not trying for that outcome.
Mm-hmm.
We've been very cautious, for example, on retail and office on the real estate side.
Hospitality.
For a period of time.
Hospitality.
Hospitality. Yeah, almost no hospitality. Yep. You know, even in those areas where we make loans to customers, they tend to be very strong sponsors, very granular, very thought out from a concentration standpoint. We would be underweight those two areas as an example. Not, you know, throw the baby out with the bathwater type thing either, so.
Yeah.
I think the cust omers appreciate that.
The LPO?
Yeah, we've got a couple. You know, as the acquisition market has been a little bit slow, and David, maybe you'll ask about that, but, we grow organically. We've got loan production offices in Northwest Indiana. We've got new loan production office in Appleton, Wisconsin. Continuing to expand.
Denver.
Pardon?
Denver.
Denver, yep. Continuing to expand, you know, either in markets, in the case of Denver, that we like a lot, and know some people that are a good start for us. Otherwise in markets that are adjacent to our existing markets where the brand plays pretty well.
Yeah. Chicago is not building that much, so many of our clients are outside the state building.
Yeah.
We follow them there. They tell their friends. It's actually been very good for us.
Yeah.
How do you staff those non-Chicago area markets, Denver, Appleton?
Yeah. Well, Denver, we were fortunate. We ran into some folks that had a Chicago background that we knew that had been in Denver for a period of time. Experienced bankers in Denver, knew the market, but also knew Wintrust. That's been a terrific expansion for us, you know, both on the loan side and actually deposits, which has been good. The others are more as local competitors, you know, either run into problems or the bankers get frustrated in terms of their ability to take care of customers. They come to us and again, we're very opportunistic about hiring some of those folks.
Mm-hmm.
Over time and, you know, we don't ask people to bring their clients with them. Over time, the clients will find them and come to us. It's worked out very, very well for us.
Yeah. Maybe we can spend a few minutes on the premium finance business. That's something that really differentiates Wintrust from a lot of your peers. It's about 30% of your loan portfolio. Maybe just from the top, what is the attraction? You know, why do you focus so much of your time and effort in that business? How do you see that competitive landscape versus-
I'll tell you how we got into the business, then Tim can go forward. We got into the business when I started this thing 30 something years ago. We figured a third of the portfolio has to come from these niche businesses. 85%-90% loan to deposit, a third of the portfolio from these alternate niche businesses. Banks, in my history, got in trouble when they try to take that last third of the capacity and put in everything. They, you know, they don't know what they're doing, just looking for stuff. First insurance, we started in 1991. We started the bank. Martha was with us in 1996. In... What year was that, Dave? Life?
In, yeah, 2007.
2007, AIG had to dump the life business.
Mm-hmm.
That was the greatest deal of my life. $1 billion in one of assets for $700 million. Never lost a dime on it. I like those crises. Crises are good, you know? It's a great business. Tim, take it from there.
Again, the two businesses, the life business and the property and casualty finance business. S tart with the property and casualty finance business. You know, very few providers, number one, it's a differentiated business for us. A little bit of a factory. These are $40,000 loans, you know, basically, nine-month type, you know, terms, if you will. Reprice in a favorable way for us from an interest rate standpoint. You know, we know the brokers. We know the carriers. You know, there are 50 state regulations you have to pay attention to, it's a defensible business as well. With the way insurance premiums are going, it just kind of chunks along, you know, at a nice rate. We like that business a lot. There've been some disruption in that business.
Some mergers that are giving us opportunities, that, you know, we'll probably play for the next, you know, year or 18 months here. The life business, you know, more competitors in the life business, but we've got the dominant position with a team that knows what they're doing. Everybody can make a life insurance, you know, loan. The problem is, if you don't do it well, you run into estate planning problems.
People respect our expertise. They respect our team in terms of putting those deals together, and it's a, you know, $7 billion business for us. It's growing very rapidly. A little bit more sensitive to higher rates, and so our growth rate will probably slow a little bit in that business. As this gets a little bit more complicated and as the market gets tougher, we'll hold our own, and people will look for the expertise that we provide.
Sure. In that business, what is the credit profile?
Well, for the life business, you know, knock on wood somewhere here, we've had zero losses over an extended period of time. You're essentially secured by the cash surrender value of the policy or by other collateral that the client provides.
Cash marketables.
Yeah.
Basically. If you have a problem, you're out in a week.
Our risk in both businesses is really the carrier, because if a client doesn't make their loan payments, we essentially cancel the policies and receive the premium, return premium back to the bank. In most cases, it's really a timing issue. There's a little bit on the property and casualty side around either advanced rates or workers' comp insurance where you can have some losses, but they tend to be in the 10-20 basis point range. For us, a third of our loan book is very, very high credit quality, very, very low losses. If you look at the bank overall, you might see an allowance ratio or a coverage ratio that looks a little bit low.
When you adjust for the third of the business that's either zero or low loss, we're at or above peer levels in terms of our coverage ratios for the rest of the loan book, with we believe to be higher credit quality than most of our peers.
The same is true with non-performers. With our non-performing assets, we have to include the premium finance loans. We're waiting to get the money back. It's all confirmed. I think it inflates them by half, I think.
Mm-hmm.
We look at the numbers, take out the premium finance numbers when you're looking at it.
Yeah.
That's, we're just waiting to get paid or 90 days past due and-
Sure
Not accruing, so.
Yep. Okay. The overall on your balance sheet, you tend to focus on keeping a loan to deposit ratio near 90%. You're just above that right now at 91, I believe. How do you see that playing out? You know, how far how would you let that get to a 100%?
Well, we wouldn't want to get to 100%. I mean, our target is 85% to low 90%s.
Mm-hmm.
We're comfortable where we are. We're working hard on growing deposits. We think, you know, deposit growth is the strength of a franchise. In a, in a more challenging environment, you know, we certainly don't want that to get away from us, and we wanna show efforts and activity on the deposit side, but we're comfortable where we are.
Okay. The non-interest bearing portion of your deposit base-
Yep.
... running, I believe just under 30%. Historically, you've been closer to 24%, 25%. Do you see the bank getting to that level? How do you think deposit flows will move in the over the next couple of quarters?
Yeah, I mean, there's clearly pressure on non-interest bearing deposits. I mean, they built up over the pandemic. People didn't have any reason to put money elsewhere. You're seeing those numbers come down not only at our bank, but at other banks as well. You know, 15 years ago, we were at 9%, you know, non-interest bearing deposits. As we grow our commercial business, which we, you know, intend to continue to do, you know, that number will stabilize and continue to grow. You know, I don't know exactly where we'll land, David, but I would expect we won't get back down to 24%, 25% unless there's a lot of growth and we really have to attract deposits at the margin.
Sure.
It's more of a denominator issue, I guess, would be my point.
Yeah. You'll see us doing some new marketing. Again, for the second year in a row, we won over seven Greenwich awards.
Yeah.
No other guy, local competitor got any, basically. The Greenwich awards are for the commercial side of the business.
Right.
Who's the best at this or that. Our treasury management comes across better than everybody's, which is awesome. We also won the J.D. Power Award 3 out of the last four years.
Yeah.
I think. You know, you're gonna see us pushing those hard because-
Sure.
People just think they're having a good time banking someplace else.
Right.
Right.
David, on the deposit front, maybe just a couple other things. One, our wealth management business generates a number of low cost deposits. They're not non-interest bearing deposits, but they're deposits with very attractive rates. As does a sort of niche business we have that's called the Chicago Deferred Exchange, which is a 1031 exchange business. Essentially what they do is provide, you know, qualified tax transition services for real estate transactions, and those tend to be lower cost deposits. They move a little bit with the real estate business, but, you know, they've been between $1 billion and $2 billion over the last year. Again, very favorable rates.
Mm-hmm.
Clients much more interested in the tax treatment of their transaction than they are the actual rate they're getting on the deposit.
Gotcha. About six weeks ago or so on your earnings call, you talked about the net interest margin approaching 4%. Since then, we've seen another leg up in rates and heightened Fed rate hike expectations. Any update to that comment? Just do you think with the higher rates, the odds of getting to 4% may be a little bit higher?
Yeah. I mean, we were 3.73% in the fourth quarter. We said we would be up substantially in the first quarter. We will. With rates continuing to tick up, we think there's some more upside for us. It slows a little bit because we've been trying to protect the downside in future periods. As we mentioned on the call, fourth quarter we did some collars. Beginning of the first quarter, we've done some receive fixed swaps to help provide a little bit of a safety net for the margin in a down rate environment. You know, sort of at our worst, we were 2.50%, 2.60% during the pandemic. Fortunately had a very strong mortgage business in PPP to help supplement the bank's income. We ended up doing very well during those periods.
You know, if something were to happen and rates were to go very low again, we'd like to avoid, you know, getting to 3% or below in terms of the margin. Still positioned for rates up. The insurance businesses that we just talked about a minute ago have very favorable repricing characteristics, which will continue to provide an offset to, you know, what will likely be rising deposit costs.
Mm-hmm.
You know, we think we're okay, and we still want to stay a little bit asset sensitive right now.
Sure.
I worry about the black swan. Seriously, something, you know, another pandemic, something hitting, Federal drop rates like crazy, and then we fall right back into it. We do have the mortgages that'll kick up then.
Mm-hmm.
Mortgages are doing so well for you. They say, "Oh, you're a mortgage bank." No, we're not. It's just one of the things we offer. Now, we're not doing many mortgages, and it's all the margins. The bank is a moving object. I mean, we're hard to understand. Well, you get it and a couple of other analysts get it. Some guys just don't get it.
Yeah.
Try to put us in a bucket with everybody else, and we're not like everybody else.
Yeah.
Right. Recently, you guys announced a change in overdraft fees.
Mm-hmm.
... and returned item fees. Maybe just talk a little bit about that strategy and why you think that's beneficial.
I mean, number one, it's not a big number for us. We position the bank to be customer friendly. Given, you know, that the number wasn't big and that there's obviously regulatory pressure and, you know, kind of public pressure, you know, we just take another barrier away from people doing business with us. You know, in Chicago, you know, there's people getting rid of safe deposit boxes. There are people that don't count change anymore. You know, there's people with overdraft fees. There are people with cutting their hours. That's not our brand. I mean, we're winning in our markets because we're friendly to our customers, we're fair to our customers, and this just seemed like an opportunity with a relatively small f inancial impact to just take away something that's an irritant, both to the examiners and to the market.
Yeah.
Again, for us, it's almost a negligible financial impact. If you go look at many of our peers, as some of you do, you know, it would be much more painful for some of our peers to match that step.
It'd be tough on the customer, though. I mean, we do it because of the Fed want you to do it, you know? The poor customer who's standing in line at Jewel-Osco now, their debit card, we used to cover that for them. Now we don't. Now we're gonna have to turn it down. Which is gonna be a nightmare. You know, if that's what they want, that's what they're gonna get. Sell a lot more overdraft lines, I guess.
Yeah, sure. Sure. We talked early in the discussion about taking what the market gives, and right now it's giving you more organic growth. Bank M&A. You guys have done a lot of it over the years. What is the backdrop right now? How are your conversations going with other banks about bank M&A?
Seller expectations feel way too high. They hear people in Florida getting 2.5x a book for banks making 25 basis points, everybody thinks they're worth that. They go with a cancer transplant in their securities portfolio and want big dough, you're not gonna do it. I mean, we're not gonna do it. We'll wait and go from there. You know, you had asked, Tim, what do you see we look like in five or six years? I think you'll see a broader footprint for us in the Midwest.
Mm-hmm. Yeah.
We'll look at Michigan or, you know, Iowa or down southern Illinois. I think that we've got a great base to build off of Chicago, but I think we can now expand that base 'cause of how we operate and how we do it can sell anywhere. Right now, seller expectations are really high. We always did small banks to get us a footprint and built them up organically. Well, there's not many touring markets around us in Chicago that we need to get in anymore. I mean, a couple, but not too many. Expanding is probably the way to go. We'll be very patient, not doing stupid... We've always been very, very disciplined in our approach, and I imagine we'll stay the same.
Now, if you look back over the last several years, most of the bank M&A you've done were for banks with less than $1 billion in assets.
Mm.
Like you've said. Could you go bigger than that?
Yeah.
How big would you be willing to go?
Well, depends on the deal, but I think we can go three to five pretty easy.
Mm-hmm. Sure.
That gives you a good space. You wanna go into another state or something, gives you a good place to build off of.
Right.
Go from. That's all that's really left anymore. I mean, you know, Indiana, can't get into Indiana. I love to be in Indiana. I met with every bank there. Eventually, somebody will come around, but they like their jobs and what they do and. Remember, I gave one investment banker the job. He's like one of those little guys on your heel, always biting you. I go, "Here, you get all Indiana. Give me a bank in Indiana to buy." He brings in their big economist. We sit down for a dinner in Chicago. Gonna be sitting next to the two guys who are gonna be the he thinks are the two best prospects. We're having cocktails. We go to sit down. The guys had moved their plates away from me. I'm going, "Wait a minute.
I use my deodorant. I'm not gonna eat off their plates. What the hell's the problem?" They're all very parochial, and they don't wanna lose their jobs. They don't wanna talk to you. Hell with the shareholders. That's all they wanna do is work for themselves. What can I say?
Yeah. Ed, Tim, thank you very much for your time-
You're welcome.
This morning. For those of you that would like to join us, we're gonna head down to Cordova 6 to continue the discussion. Thank you very much.
Hey, buddy. Terrific.