Wintrust Financial - Earnings Call - Q3 2018

Transcript

Speaker 0

Welcome to the Wind Trust Financial Corporation's Third Quarter twenty eighteen Earnings Conference Call. At this time, all participants are in a listen only mode. Following a review of the results by Edward Wehmer, Chief Executive Officer and President and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question and answer session. During the course of today's call, Wind Trust management may make statements that constitute projections, expectations, beliefs or similar forward looking statements. Actual results could differ materially from the results anticipated or projected in any such forward looking statements.

The company's forward looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in the third quarter twenty eighteen earnings press release and in the company's most recent Form 10 ks and any subsequent filings on file with the SEC. And as a reminder, this conference call is being recorded. I will now turn the conference call over to Mr. Edward Wehmer.

Speaker 1

Good morning, everybody, and welcome to our third quarter earnings call. With me as always are Mr. Dykstra Kate Bogey, our Legal Counsel or General Counsel and Dave Starr, our CFO. We'll use our usual format with me giving some general comments on our results, turn it over to Dave for more detailed analysis of other income, other expenses and taxes, back to me for some summary comments about and thoughts about the future, and then turn over for some questions. So we're pleased to report our eleventh straight quarter of record earnings.

Net income of almost $92,000,000 or $1.57 a share. We're we're 40% better than last year on pretax earnings, which we look at to take out the effect of the tax cuts. We're $122,000,000 up 18% from last the same quarter last year. Year to date basis were 4.5 a share, up 28% on an annualized basis and 28% on earnings of $264,000,000 approximately. Pretax income up 16.5% to $352,000,000 Our margin decreased by two basis points.

ROA was 124,000,000 and all in all pretty good results. As readily apparent, our growth trends remain consistently positive. Few blips this quarter, which will need some discussion and clarification, specifically net interest margin dropping two basis points, one time charges related to the completed acquisition of Delaware Place Bank and the moderate respective increase in NPLs. These issues will be discussed in detail. As it relates to the margin, the net interest margin decreased two basis points over the second quarter and increased 18 basis points year over year.

Net interest income grew point $4,000,000 over the second quarter due to one more day, good earning asset growth including our loans. Average earning assets grew $880,000,000 versus the second quarter. Average loans net of loans held for sale grew $539,000,000 with the remainder of the growth falling into our liquidity management portfolio. Quarter three period end loan balances exceed average loan balances by approximately $326,000,000 which bodes well for the fourth quarter. Earning asset yields increased 13 basis points versus second quarter, while interest expense increased 17 basis points.

The free funds contribution was a two basis point increase resulting in that two basis point decrease in margin. Our average loan to deposit ratio for the quarter decreased to 92% from 95.5% in the second quarter. This obviously still remains higher than our desired range of 85% to 90%, but shows pretty good improvement in accordance with the plans we laid out earlier in earlier calls. It's a direct result of our core growth initiative, represents a start to our liquidity deployment strategy, which we have also discussed in previous calls. With the long end moving higher, we've begun the lengthening duration of our liquidity management portfolio.

This will be a measured approach and will obviously depend on the rate environment. During quarter three, we invested approximately $200,000,000 which equates to about $75,000,000 on average in longer term assets and did another $200,000,000 beginning of the fourth of this quarter. On a static basis, I. E, just looking at quarter three year ending numbers, we need an extra $1,000,000,000 to get to our loan to deposit ratio to the midpoint of our desired loan to deposit range. As you can expect us as such, you can expect us to continue to push core deposit growth above and beyond what is needed to support loan growth and deploy those assets in accordance with the aforementioned plan.

Obviously, this all depends on the rate environment that we're moving into. It should be noted that we invested the entire increase in liquidity management. That if we had invested the entire increase in liquidity management assets in the quarter and not in overnight funds, margin actually probably would have been up in Q3. As mentioned, Q2 was a good quarter for core growth. Our deposit marketing coupled with the successful opening of four new branches and the acquisition of on top of the five we opened in the second quarter, the acquisition of Delaware Bank contributed to the $552,000,000 of deposit growth.

Our deposit marketing should continue to be effective, so we expect this good growth going forward and continued progress being made in the loan to deposit ratio in our desired range. Our deposit rate has remained in the range we previously communicated to you. As we're still very asset sensitive, additional rate increases including the one announced in mid September should still add to the bottom line despite this increased deposit beta. Every quarter point increase, Fed funds should add north of $200,000,000 to net interest income on an annualized basis. Number hasn't changed from past discussions due to the increasing size of our balance sheet.

As such, with future rate increases, we anticipate our net interest margin to grow slowly but surely over the long term. Mitigating factors will be the timing and execution of the liquidity strategy. Also remember, it takes a full year for these rate increases to work their way through our balance sheet. So the benefits of some of the past increases are still being realized. On the credit front, credit remains good, but everyone knew it couldn't stay this low forever.

Non performing loans in the quarter increased approximately $37,000,000 primarily due to the addition of four relationships totaling $46,600,000 Two of these loans totaling $29,000,000 were actually current when we turned them on nonaccrual and part of a planned exit strategy. The other two loans are in the process of liquidation and collection. Recorded $7,500,000 specific reserves on these loans. Those who have followed us know that it's our culture to be very proactive in the area of credit. We would expect these credits should be cleared by the 2019.

As of now, we do not see this as a deterioration of overall credit numbers. Our ratios are still well below our peer group. As a matter of fact, if we hadn't been proactive on these, non performing loans actually would have been down. We were up $37,000,000 in non performing loans at $46 with a half of it related to these four credits would have been down. So we don't think it's a trend.

However, you do know that we do identify loans with cracks in them, identify exit strategies and it takes some time to execute these sometimes and that's what we're doing here. Net charge offs totaled 40 sorry, balances decreased by approximately $7,000,000 a quarter as we consider to clear these out. Charge offs totaled $4,700,000 charge offs of $7,000,000 were offset by recoveries of $2,300,000 Net charge offs plus the increase in specific reserves and loan growth resulted in a provision of $11,000,000 up $5,000,000 from the previous quarter. So in summary, in spite of the quarter mini blip, credit remains pretty darn good. Total NPAs as a percent of assets increased to 52 basis points from 40 basis points, which is still pretty respectable.

Reserves as a percent of NPLs was at 118%, down from 156% at the end of quarter two. The provision as a percent of loans annualized was only 19 basis points, which is still a really good number. We continue to call the portfolio for cracks. We'll expeditiously move assets out when any said cracks are found. We'll also continue to aggressively work our oil portfolio to clear the decks.

And as I previously mentioned, we don't see this quarter's May blip. It's an increasing trend, but we all know credit couldn't stay as well as it's been as good as it's been forever. On the other income and other expense side, Dave is going to go through this in detail momentarily, but just a couple of general comments. Dave will take you through the specific numbers in the mortgage area. I will say though that we aren't tracking our efficiency moves in this area that I talked about last quarter.

The majority of these initiatives will be totally in place in the 2019 and more efficiency moves will certainly follow. This market is such that we've got to drive costs out and there's beginning to be somewhat of a shakeout in this market. So we see there will be reasonable opportunities there, but it will always be subject to the seasonality of the mortgage market. Our wealth management operations continue to improve. Assets under administration grew by approximately 1,400,000,000 in the quarter to just about $26,000,000,000 Managed money accounted for $670,000,000 of this increase, which bodes well for future revenue growth.

The remainder growth was in brokerage who relies on trading for revenue. Revenues for the quarter stayed steady at 22,600,000 We expect that to continue as we continue to build to continue to increase as we build our continue to build our managed money portfolio. One time items as we view them basically were offset each other in the quarter. Our And net overhead ratio for the quarter was at 1.53%, down four basis points from quarter two, but above our target of 1.5 or better. Given our overall growth, we're happy with this number and with the number of branches we've opened, the expansion we're doing, the new initiatives we're doing.

Given our overall growth, we're happy with the number. We believe our continued organic asset growth will bring this number in line as we fill out our inefficient branches with good solid new relationships. Net over resi ratio is 1.5 still remains our goal and we believe is attainable. On the balance sheet side, assets grew to over $30,000,000,000 for the first time, by $678,000,000 in the quarter. Dollars $274,000,000 of this growth will be attributed to the Delaware Bank acquisition.

I got to tell you, still pinch myself I think from a card table less than twenty seven years ago to $30,000,000,000 Pretty amazing. Loan growth, which is aided by the establishment of Delaware Place's tune of $151,000,000 grew $513,000,000 in the quarter. All categories other than residential mortgages and home equity lines grew in the quarter. We continue to see muted growth in the commercial real estate area as payoffs continue and new opportunities are aggressively priced. Same is true for our sponsored equity or private equity backed deals.

Most of our private equity firms are selling anything that isn't nailed down right now given the frothiness of that market. And we're getting refinanced out of other deals based on the aggressive nature of non bank lenders. Loan pipelines remain consistently strong. Deposit growth was discussed previously and we need to say we are heartened by our success. Our flipping the switch to concentrate more on organic growth like we made our bones on originally through both the opening of new branches and growing underutilized locations is working.

We intend to continue our marketing here and also cross sell other services and accounts to these new relationships. This will fund our liquidity play and bring our loan to deposit ratio back to the desired range. That's not to say we're not interested in acquisitions though. However, expected pricing is relatively high right now. We continue to take what the market gives us and stay disciplined on our approach to deals.

The acquisition of Delaware Place Bank is being assimilated well. We look forward and we look forward to completing the previously announced transaction acquiring certain assets and liabilities of American Enterprise Bank, which we expect to close in the fourth quarter. All in all, we're pleased with the quarter and why not be pleased with the record quarter. Now I'll turn it over to Dave.

Speaker 2

Thanks, Ed. As normal, I'll touch briefly on the noninterest income and noninterest expense sections. In the noninterest income section, our wealth management revenue held steady at $22,600,000 in both the third and the second quarters of this year, and was up from the $19,800,000 recorded in the year ago quarter. Brokerage revenue was down approximately $205,000 while trust and asset management revenue offset that decline by increasing $222,000 Overall, as Ed mentioned, we believe the third quarter was another solid quarter for our Wealth Management segment. Mortgage banking revenue increased approximately 5% or $2,200,000 to $42,000,000 in the third quarter from $39,800,000 recorded in the second quarter and was also up from the $28,200,000 recorded in the third quarter of last year.

The increase in this category's revenue from the prior quarter resulted primarily from loans originated and sold during the quarter, offset by slightly lower production margins on slightly higher origination volumes. The company originated approximately $1,200,000,000 of mortgage loans in the 2018. This compares to $1,100,000,000 of originations in the prior quarter and 1,000,000 of mortgage loans originated in the third quarter of last year. The $56,000,000 increase in origination volume was attributable to $187,000,000 increase in our correspondent origination channel, offset by lower volumes in our retail origination channel. Originations related to the Veterans First Consumer Direct origination channel was essentially flat with the prior quarter.

The mix shift contributed to margin compression as margins on correspondent originations are lower than our retail origination business. Additionally, the mix of loan volume related to purchased home activity was approximately 76 compared to 80% in the prior quarter. Page 22 of our third quarter earnings release provides a detailed compilation of the components of the mortgage banking revenue, including production revenue, MSR capitalizations, net of payoffs and paydowns, MSR fair value adjustments and servicing income. Given the pipelines, we currently expect originations to soften somewhat in the fourth quarter due to increased market interest rates and the seasonality of the business. Other noninterest income totaled $16,200,000 in the 2018.

This was up approximately $2,100,000 from the $14,100,000 recorded in the second quarter of this year. There are a variety of reasons for the increase in this category of revenue, including an increase of $1,100,000 related to income from investments in partnerships. Those are primarily CRA SBIC related partnerships, an increase of approximately $1,600,000 related to settlements on BOLI policies, a positive swing of $900,000 of foreign exchange valuation adjustments associated with the U. S.-Canadian dollar exchange rate, and this was offset partially by a lower level of interest rate swap fees of approximately $1,500,000 Turning to the noninterest expense categories. Noninterest expenses totaled $213,600,000 in the third quarter, increasing approximately $6,900,000 from the prior quarter.

The increase was primarily attributable to approximately $2,200,000 of higher salary and employee benefit expense, dollars 3,400,000.0 of higher professional fees, including approximately $2,100,000 of mostly nonrecurring consulting fees associated with the Delaware Place Bank acquisition, which I will address later $194,000 of severance and conversion related costs associated with that acquisition and just other general cost increases as the company grows. Turning to the specific detail, the base salary expense increased approximately $2,900,000 in the 2018 over the second quarter of this year. Approximately $05,000,000 of the increase related to the Delaware Place acquisition. And the remaining increase related to the impact of the nine branches added during the 2018 and normal growth as the company continues to expand, including further build out of our IT and information security teams to make sure we're keeping up with technological changes and addressing increasing cyber security risks in the marketplace. Commissions and incentive compensation expense decreased approximately $1,900,000 to $34,000,000 from $35,900,000 in the prior quarter.

The company experienced a decline in commission expense of approximately $1,000,000 primarily due to the mix of mortgage origination volumes being more heavily weighted in distribution channels that carry lower commission rates. The remaining decrease was associated with slightly lower long term and annual incentive compensation accruals during the quarter. The employee benefits expense was elevated somewhat in the third quarter due primarily to the impact of a few significant health insurance claims in our employee base. We would expect this expense category would retreat from this level, assuming the fourth quarter has more normalized health insurance claims. Data processing expense increased approximately $583,000 in the third quarter relative to the prior quarter.

The increase was related to approximately $130,000 of conversion related expenses associated with the Delaware Place Bank acquisition and the additional comp processing associated with bringing that acquisition on board as well as general growth in the rest of our business during the quarter. Marketing expenses decreased by approximately $662,000 from the second quarter to $11,100,000 The slight decrease on the third quarter was due to lower levels of direct mail and mass media marketing during the quarter as the previous quarter had more marketing associated with the opening of the various new branch banking locations and general deposit generation advertising campaigns. Professional fees increased by $3,400,000 to $9,900,000 in the third quarter from $6,500,000 in the prior quarter. The main cause of the increase related to the consulting fees paid to former employees in relation to the acquisition of Delaware Place Bank of approximately $2,100,000 These consulting fees will not continue into the future other than approximately $147,000 scheduled to be paid in the 2018. Occupancy expenses increased during the third quarter to $14,400,000 from $13,700,000 in the prior quarter.

The increase was generally related to the lease expense associated with the recent increase in the number of branch banking locations, increases in property tax accruals and higher utility costs during the quarter. Other than the expense categories just discussed, all other expense categories were up on an aggregate basis by approximately $596,000 from the prior quarter. So de minimis increases across the board for the other categories. The company's efficiency ratio on a fully tax equivalent basis improved to 61.2% in the third quarter from 61.8 in the second quarter. Additionally, as Ed mentioned, the net overhead ratio also improved slightly during the third quarter to 1.53% from 1.57% in the prior quarter.

It was still slightly above our goal of 1.5. So progress made on both those fronts. And with that, I will turn the conversation back over to Ed. Thanks, Dave.

Speaker 1

Summary and some thoughts about the future. All in all, a very good quarter for WinTrust on all fronts. Momentum continues across the board. Reduced taxes and higher interest rates have been beneficial to us. Our core earnings growth and balance sheet growth bode well for the future earnings and growth in franchise value.

As I mentioned, we do not see the mini blip in credit as a trend, But as stated, credit can't be as good as it's been forever. We continue our habit of reviewing the portfolio for weaknesses and addressing them expeditiously. In some perverted way, I'm kind of happy that we're off the bottom because the only place to go is up a little bit and this is a very controlled way to go up and it's fitting and fits our culture very well. But we as said, we don't see this as a trend that you never know. Credit is credit.

We're going to stay on top of it. We're pushing our organic growth agenda as acquisitions in general become relatively expensive. That regard, we still have a number of new branches planned over the next eighteen months. The neighborhoods in our designated market area where it currently are not present. Our retail and small business marketing programs which we embarked on in earnest beginning this year are working, employing the new accounts and new relationships.

As stated earlier, this does not mean we're not investigating potential business combinations in all areas of our business, but also as talked about in previous calls, gestation periods of these deals has become a lot longer. We remain well positioned for higher interest rates and are prepared to protect the downside as rates rise by gradually decreasing our overall interest rate sensitivity. Loan growth has been good and pipelines remain strong. We continue to look at opportunities to further diversify our portfolio. We're embarking on our liquidity initiative and should have the desired strategic results.

So in summary, we're well positioned. We like where we sit. And like I said last quarter, it's times like this when you continue to look around the corner for the boogeyman. Black swans always scare me. We have to worry about the bipolar political world we live in.

The tax rate stayed as low. How can we protect that? Inflation related to trade wars and tariffs and labor costs, we believe, real. New regulations, who knows if they're coming, but they can't help themselves. They probably will be.

We continue to invest heavily in cybersecurity and technology as well as our digital product enhancements. Will rates continue to rise? What are we going do when they're near the top, whatever that may be? Back to labor costs, it's interesting that two of the non performers were not basically related to labor. One was a bus company that couldn't find drivers, believe it or not.

That's and that was not a planned exit strategy. Actually is a problem. We liquidate those buses, but they couldn't find drivers. And another was a for profit school that people didn't have to go to learn the trades. So they're in the process of closing schools.

They're profitable. They're current, as I said. We'd like to move that out. But because people can get jobs anywhere, they're not going to get those. So it's kind of interesting, the effects of the tight labor market is having on, but we're very good businesses.

I bring this up to let you know we're actually standing still and assuming that this is a new normal. I know we'll run up to remember as soon as you think you have it, you don't have it. As it relates to rates, this feels like the late '70s again to me in a lot of respects with the economy going hard, inflation sneaking up, maybe not as bad as it was in the '70s, but it feels like that all over again and we're somewhat preparing for that in that regard. As my father always say, hope for the best plan for the worst, that's what we're doing. We can be assured of our best efforts of the long term franchise growth and to maintain our consistent approach to conservative management to protect the franchise value of the organization.

That being said, we can take some questions.

Speaker 0

And our first question comes from Jon Arfstrom of RBC Capital Markets. Your line is now open.

Speaker 3

Thanks. Good morning.

Speaker 1

Good morning, John.

Speaker 4

Couple of questions here. I guess to start on mortgage, how do you want us to think about that for Q4 and also into 2019? Do you view this as is it a profitability headwind or some of the sufficiency potential you talk about? Is it not so much of a headwind when we think about Q4 in 2019?

Speaker 1

Well, it's all going to be a volume issue. I mean, we're able to maintain the volumes, which we have, we think that prices have been the margins have been squeezed because too many producers chasing not enough loans. The economy stays strong. We believe that housing will continue to pick up. And our efficiency moves are should help us in the overall profitability of the product.

So these efficiency moves are actually relatively material. The Zoom our front end Zoom, call it our rocket mortgage is should be fully deployed. We haven't put that out on the Internet yet retail wise, but we will be doing that in the first quarter. We've used it as our own internal front end. It's cut two to three days out of processing there.

We also are finding ways to cut other processing costs by almost 50%, not all of them, but a lot of them by using different outsourced companies. So we believe that it will be volume related, but the volumes we get, the margins on that, the overall profitability should be increasing from where they are now. Okay.

Speaker 4

Dave, anything on 4Q? How do you want us to think about 4Q?

Speaker 2

Well, I think it will be again, we'll just have to see where rates go and what the home purchasing is. We've seen the pipelines decrease a little bit here as we get into the fourth quarter seasonality and rates did pop up a little bit. Now they've come down and they've popped up a little bit again today. So we'll have to see how that builds. But my guess is the volumes will probably decline to something below $1,000,000,000 But we closed these things relatively quickly now.

So you only have a vision out thirty, forty days in reality to how your pipelines are because we're closing them in that about forty day period of time. So we'll have to see how they continue to grow here. But our expectation is that they will be down. And but we're also cognizant of accordingly the expenses accordingly as those volumes come down. So I don't think it's going to be a major impact to the the net earnings because you pay out roughly half of that in compensation type of volume and we have other expenses associated.

So what falls to the bottom line is not extraordinarily material, but we do think the volumes will be down. So whether it's $850,000,900 million dollars would be my guess right now, but it's possible it could be slightly more than that with me being a little conservative here, think.

Speaker 4

Yes. Okay. Okay, good. And then just maybe a bigger picture question for you, Ed or Dave. Just the loan growth environment and earnings growth environment, I think we can all maybe set aside mortgage.

But do you see any threats to your ability to keep this going, this kind of high single digit type loan growth and earnings growth pace?

Speaker 1

There's always trends out there. We are seeing some well, we use a better term, ADSC and pricing on commercial real estate deals in our opinion. We're also seeing insurance companies come back very strongly. We also see a number of the construction projects we were involved with getting paid off and refinanced out. So that'll be an issue.

On the private equity side, as I said earlier, we're seeing huge prices in private equity deals. And the Ares and Antares of the world are supporting this with loan terms that we wouldn't even come close to in terms of air balls, etcetera, and pricing. They have the ability to withstand time not being regulated. After ninety days, they can stand it, they don't have to turn it on non accrual. So they maybe they're smarter than most, I don't know.

But it seems to me that that's a very frothy market. That being said, we're diversified enough that we're seeing growth in the leasing portfolio. We're seeing growth in the life insurance portfolio premium finance. We're also seeing good growth in the commercial premium finance. One thing that occurred there was for the last two or three years, we've been subjected to an uneven playing field there, where we were as a bank were required to go out and get TIN numbers on commercial borrowers.

And for the first couple of years of this, we were required to do it, but it was by the Fed, But the Fed was the different Fed officers weren't even applying it across the board. So we were at a competitive disadvantage there to the non banks and to some of the other banks. We were losing probably we had a fight to keep where we are right now. We lost a lot of smaller agents in that process that had better yields and better late fees because they don't want to collect TIN numbers. So through the work of Dave Dykstra, Kate Bogie, a little bit of me and Frank Burke and Mark Steenberg at the premium finance company, over the last two years, we initiated and then we worked with the industry itself with the we brought in congressmen, senators.

Mr. Dykstra went to Washington. He's a final lobbyist, by the way, met with Henserling and Shelby. And as of the October or September? September.

September, that law was changed. We don't we are not required to get TID numbers anymore. So we are coming back with a vengeance to regain those lost share. And we're blitzkrieging right now, as we like to call it. We're getting all trying to get all our old clients back.

We had some successes already doing that. So we believe that, that program should do very well for us making up for some of the losses we're seeing in some of the other areas. The commercial side, we still see that there's good growth out there. We continue to get a lot of advance and winning our share of deals. That market was kind of private.

It's been for a long time priced about as low as it's ever going to be priced. So we don't see that getting stupid right now. Actually, it's we're kind of getting that seems like the new norm. But so that growth has been pretty good. When you think about it, it's some things work, some things don't.

That's the beauty of being as diversified as we are. So and on the deposit side, we are having good success. We have good momentum there. Do we pay up a little bit for to bring in new accounts? Yes, we do use teaser rates to bring people in on the retail side or bring their deposit relationships in.

We're able to rifle shoot that and not shotgun it because of our structure and how we brand that we can rifle shoot it into a specific inefficient branch or a new branch. And that will that has caused our rates to go up there. But at the same time, if you look at we might our margin value went down two basis points, but our net overhead ratio went down four basis points. So that's kind of a win win as we go into our overhead with that. But and it also will fund the liquidity play.

And we're looking at about $200,000,000 a quarter depending on rates, could be more, could be less. Again, I'd say it's going be another $1,000,000,000 to get to the 87.5 on a static basis. We continue to grow and be more. That's a lot of liquidity to play with. And if we're able to put that off at a positive spread, that should be very beneficial to our earnings going forward.

So that's the plan in a nutshell. We're also doing and we'll balance this with our investments to we're also doing some fixed rate loan programs in the homeowner association area, in the premium finance life insurance area and commercial real estate area, to name three, where we've got buckets set aside to actually get fixed rates on some deals. Our goal over the next ten months or ten quarters, I would say, eight to ten quarters is to get our we think that's when and again, this is subject to the rate environment. That's we think that's when rates are going to kind of get close to peaking. So take our gap down to about 20% to 25% of where it is right now, still leaving upside potential for us, but covering the downside.

So we're going to do it through those and every one of those should make us money, more money. So it's a multipronged strategy. I'm rambling on here, but we believe it's appropriate for the time. Will there headwinds? Yes, there'll always be headwinds.

But I think that we should be able to continue to build the franchise out consistently what we've done in the past.

Speaker 4

Okay. So continuation of the current trends, maybe some modest lift in the margin over time is basically the message?

Speaker 1

Yes. It's just over time, yes, because like this quarter was a timing issue. We lost a couple of basis points because we picked up, if you look on average, 1,000,000,000 in deposits the quarter over quarter. So we're not going to do that all at once. We're going to time it, get in.

And if we had invested at all, our margin would have been up and we wouldn't be having this conversation. But we're going to just be gentle on this and take our time. And again, we put up a nice record quarter. So it's all about balance in that regard.

Speaker 4

Okay. Thanks a lot.

Speaker 0

Thank you. And our next question comes from Brad Mislaps of Sandler O'Neill. Your line is now open.

Speaker 5

Hey, good morning, guys.

Speaker 1

Hi, Brad. How are you?

Speaker 5

Good, good. Dave, just wanted to follow-up on the mortgage, kind of some of the servicing line items that you guys disclosed on Page 22. Some of those numbers were maybe had a bigger increase maybe than I thought. Anything in there that in your mind that you kind of call out that that wouldn't be run rate? Just kind of curious on how best to sort of think about the go forward on some of those other line items.

I kind of feel pretty good about the origination side, but just wanted to get your sense on some of those other items.

Speaker 2

Well, the MSR fair value adjustment is just really going to be tied to rates. I mean, if rates if the longer rates go up, then I think you'll continue to see that portfolio price up. And we sort of look at that as a hedge to the production volume to a certain extent. As rates go up, we generally lose some production volume, but you gain on the MSR valuation side. So that will be tied to rates.

So if rates do go up and stay up in the fourth quarter, and you value them at the end of the quarter, so it really depends on where they are at the end of the quarter, then I would expect that, that number would continue to trend up. MSR capitalization, just how many loans do we retain the servicing on, and we retain a little bit more of those loans this quarter than the prior quarter. But we continue to retain that servicing. So I think that, that number would stay up. There's a little bit of trade off there that if you retain the servicing, you have a little bit less on the gain on sale, but you have more on the servicing side.

So if you didn't retain it, the geography would just flip back to the production revenue line a little bit more. But I think all in all, those servicing should continue to trend up as we retain more of that servicing as far as servicing income per se. So I think it's just volume driven here as to where those numbers are going to be. So pretty consistent as far as overall revenue relative to volumes, I think.

Speaker 5

Okay, great. That's helpful. And Ed, just to kind of follow-up on loan growth. Do you guys do you consider yourself, based on the market that's out there, still kind of in that kind of high single digit type loan growth kind of looking out as far as you can see anyway?

Speaker 1

Well, I don't try to see very far when it comes to that because we don't want to set goals out there that would make people be squishy on their underwriting. But yes, for the next quarter at least and probably the next two quarters, we feel pretty good about where loan growth is. We don't know about its payoffs because our loan growth really, if you look at net new loan growth and new relationships coming in the quarter is actually very good. We're getting a lot of payoffs. So if payoffs continue to accelerate due to people just doing dumb things, then we'll bear that burden.

But I can't control that. I'm not going to chase those deals. We're not going to chase those deals If they leave and they don't fit our underwriting or profitability parameters, we're not going to do them. But in terms of new loan growth, yes, I think we're doing just fine. And I'm really kind of excited about what we're doing on that premium finance side.

We're getting our mojo back there going and out being offensive and not playing defense all the time. As you know, I'd like to be offensive as people will tell you. So

Speaker 2

And Brad, pipelines are consistently strong. Third quarter tends to be a little softer because of the just people on vacation and the like, customers and the like, fourth quarter tends to pick back up. But we're really not seeing any major degrade degradation of our pipeline. So we're optimistic that, that can still continue forward. Thank you.

Speaker 0

And our next question comes from Chris McGratty of KBW. Your line is now open.

Speaker 3

Morning. Thanks for the question. Dave, if I could just start on the margin go back to the margin So this quarter was 3.61% and there was you called out two basis points from liquidity. Is the right way to think about given where LIBOR is now versus last quarter, a 3.63% start and then maybe a couple of basis points per quarter based on your balance sheet set up because I think most banks are enjoying less incremental benefit from each hike.

Mean, last few quarters you were getting five, six basis points per quarter of expansion. Is that the right message you're trying to tell on the like low $360,000,000 is probably heading to $370,000,000 over the course of 2019?

Speaker 2

That's probably generally right. Like I said, we've taken our interest bearing cash, just the incremental piece that we put on this quarter that if we would have invested that, the margin would have been basically flat, the two basis points. Had we taken some of that even more liquidity that we have there that we've been waiting to invest, the margin actually would have been up. So as we continue to leg into this, and as Ed said, it sort of depends on rates where rates are at, how fast we do it. But if we continue to do a couple of $100,000,000 of that liquidity a quarter And then we get the tailwinds on some

Speaker 1

of the

Speaker 2

repricing, like on the life portfolio life insurance premium finance portfolio, those are tied to 12 LIBOR and they reprice once a year. And the premium finance loans on the commercial side are fixed rate and nine month full payout type of loans. So it really takes almost a year for those to fully reprice also. So we do have some tailwinds there. We were fairly aggressive with our new branch openings.

And as I said, on average, about $1,000,000,000 in deposits in the quarter. So some of that special pricing that we had on those deposits, that's not going to continue at that same rate going forward most likely. You also There's lot of new ones. New ones, but we had $1,000,000,000 in the second quarter just itself. So that might moderate a little bit.

But the other thing with those specials that as rates continue to go up, those specials, we they're not as higher rates anymore. So we gave a CD rate back then and rates go up 75 basis points, those special rates are more like normal rates now. So yes, I think you block those in for a little bit of time on those specials. So as rates go up, you'll benefit on those deposits. So I think we look at it that way.

If we can get a couple of basis points a quarter increase, two or three or depending on rates, obviously, that would be our goal is just as I said, gradually grind the margin up.

Speaker 1

Hey, maybe you can tell us where is the tenure going to be at the end of this year and at the end of next year. What do you think?

Speaker 3

I'll follow-up with you on that one.

Speaker 1

Yes, you can ask tough questions.

Speaker 3

It's a one way street here. If I could sneak one more in on the mortgage comments, the expenses that you said will be kind of the rightsizing by the first quarter. Is that is the

Speaker 1

goal with that

Speaker 3

process improvement to get that one to get to a 150 overhead ratio in 2019, is that something maybe on a quarterly basis you can get to with the changes that you're making in the business?

Speaker 1

Well, that's part of it. But there's obviously a lot of growth, a lot of expenses related to opening up these branches that we're putting in the network. So it's a balance of that. That will help obviously, but there's other growth. Filling out our inefficient branches with the deposits and building these new ones will help us get that.

It's more of a growth issue. Any deposit any cost we can cut, we'll cut. But when you think about why we flipped the switch from acquisitions to organic, when you do an acquisition, you can overpay it. It goes into goodwill and you'd probably dilute yourself out of so you give away some earnings. We're taking much less of that, but we're taking it's much more cost efficient to do what we're doing right now, but it runs through the income statement.

So we have to balance that. That's what we're trying to do is balance that to get to that $150,000,000 150,000,000 is a goal. It's an aspiration, something we beat up everybody on, but there are certain opportunities we take advantage of where we pop above it and we deal with that. But that's the goal and that's we a number of our banks are operating we've got some banks operating around 1% in net overhead ratio. So as they get larger, they're able to do that.

So it's all about growth and controlling costs. But probably getting it the overall fact will be growth more than the cost cuts. So we're going to do both to get to the one Got 150,000,000

Speaker 3

Got Thanks for the color. And Dave, on the tax rate, Q3 a good run rate perspective?

Speaker 2

Q3 was probably a little bit low. We had some true ups with the final adjustments from the Tax Reform Act. You had about a year to get all those through. And as we get clarity on some issues, we got a little bit of benefit. I would still think that it would I would think it would be more in the low 26% range is more of a normal rate to look at.

Speaker 3

Great. Thanks a lot.

Speaker 0

Thank you. And our next question comes from Terry McEvoy of Stephens. Your line is now open.

Speaker 2

Hi, thanks. Good morning, guys.

Speaker 1

The press release you Terry, called out what do you think the ten year is going to be?

Speaker 6

I'll have to take that offline as well. I was hoping you would. The two basis point impact of just excess cash was called out on the call and in the release. Was the NIM impacted all from just the LIBOR not moving as expected during the third quarter? And if so, any thoughts on what that impact was?

Speaker 2

We haven't calculated the impact. But clearly, the thirty day LIBOR, as everybody knows, and as we've actually shown in the chart on Page 20 of our press release, stayed fairly flat for most of the quarter and then started to bump up a little at the end of the quarter. And we've got in our portfolio, we've got about 7,700,000,000 worth of loans that are tied to that thirty day LIBOR rate. So it did have a little bit of headwind for us, and I assume most banks that have any portfolio of size that's tied to the thirty day LIBOR. But it did pop up a little bit at the end of the quarter, which should be helpful running into the fourth quarter.

But yes, that did create a little bit of a headwind. The depositors don't really look at LIBOR, retail depositors. The flattening on the LIBOR curve really didn't change their expectations, but it certainly did change hold down the pricing on the loans for a good portion of the quarter.

Speaker 6

Okay. Yes, that's what I was getting at. Thank you. And then just as a follow-up, CD balances are up $1,000,000,000 year to date and average balances were up $6.700000000 dollars Could you just talk about where those customers are coming from? Is it within the existing branches?

Are they new customers walking in the door, existing customers? And then Ed, you mentioned kind of cross selling those new customers. How do quantify that? And specific products, where do you see some upside?

Speaker 1

Well, most of it is new customers. As we open the new branches and we target the inefficient branches. We offer a bundled package of accounts, give you your checking account, your safe deposit box, home equity line and you get a teaser account with that, it's usually a CD. So they open all those up. So it's mostly new accounts, I would say.

And then once you get them in, you cross sell them into wealth management and anything else you can think of. So it's consistent with what we did back before 2,006 when we were mostly organically driven, before we went when the market gave us those well priced acquisitions. So it's consistent with what we did in the past, and that's how we grew this thing to be where it is, is gaining deposit market share. So if you go back and you look way back when we had a lot of CDs on the books because of the way we were growing. And then they went down to basically nothing.

Now we're using those as the teaser rates to grow again. Does that make sense?

Speaker 6

Thanks, guys. It does, yes. Definitely makes sense. Thanks, guys.

Speaker 2

Thank you.

Speaker 0

Thank you. And our next question comes from Nathan Race of Piper Jaffray. Your line is now open.

Speaker 7

Hey guys, good morning.

Speaker 1

Good morning Nathan.

Speaker 7

Going back to the last question from Terry in terms of deposit growth strategies and pricing. I'm just curious, as you guys look to get your loan deposit ratio back towards 90%, do you expect the deposit beta that you had in this quarter to kind of persist as the Fed continues to raise short term rates? Or do you think this was kind of more of a one off increase just given some of the promotional activities that you guys took on this quarter?

Speaker 1

Well, the new branch impact well, overall, let me get this right. Cycle to date, our total deposit date is 33%. Not bad. But it's popped up a little. We expect that in aggregate to end up in the 40% to 50% range.

So if you're 33 now, it's going to be higher to get you to that number on a cycle to date basis. So we would expect the our overall beta without new branches this quarter was 62%, without the new branches. So the rest of it was the new branches coming out, the way we look at it. So I think you have to view it in the aggregate and say, as rates continue to rise, we're going to go to closer to 40% to 50% beta, hopefully closer to 40%, which is always it's been our number in the past. But that will mean that it should stay about the same as we go through this growth spurt and rates continue to go up.

Fortunately, you're price like when you're funded like we are with retail deposits, you start hitting caps like the spread, the decompression that takes place in money market and savings. And some of those kind of hit caps at a point in time. You don't have to raise those anymore at all, especially on the savings side, which believe it or not, savings accounts at passbooks still sell a number of the new neighborhoods we're moving into in Chicago and Milwaukee. That's a good solid core base for us. So we're going to continue to push those and we expect to end up like where I said 40,000,000 to $50,000,000 hopefully closer to 40,000,000

Speaker 7

Got it. That's helpful. Thanks, Ed. And just kind of changing gears a little bit and thinking about capital. Total capital kind of ticked down that ratio in the quarter.

I think historically, you guys want to stay above 11.5% or 11%. So Ed, just curious to get kind of your updated thoughts on capital planning and obviously within the context of potential acquisition opportunities. Obviously, we saw one bank acquisition announcement here in Chicago last night. So just curious to get kind of your updated thoughts on where you guys are seeing more opportunities versus maybe Wisconsin and here in Chicago.

Speaker 2

Well, the capital front, was down just a hair. If you're making the $90 plus million that we made this quarter and you extend that out going forward, generally that should support our internal growth fairly well. So I would expect it to sort of stay in that range barring some acquisitions or outsized growth. But you're right, if that number starts to tick down into 11.5% or range towards that range, we would look to do more. But currently, barring any sizable acquisitions, we think we can be self sufficient.

Speaker 7

Got it. And then Ed, any thoughts on acquisition opportunities or any current thoughts on what you're seeing?

Speaker 1

Well, we me put it this way. And we tell this to investment bankers, our landing pattern is full of opportunities, but I don't know if they're all going to land. Gestation periods are longer, expectations are higher, and it's in all areas of our business. So we continue to be very busy in that regard, but we're going to be very selective And they have to make sense financially and geographically for us strategically on the banking side and on the wealth management side or on the specialty finance side. So some like in specialty finance and a number of we've looked at a number of different companies, it's better to start them from scratch really when you look at what the price expectations are right now.

So we continue to look. We've shown a lot of opportunities. You can expect anything that goes on in our market area, we've taken a look at. But we're very selective in where we want to go and what we want to do. So like I said, don't be surprised if we do something, but don't be surprised if we don't either.

Speaker 7

Got it. I appreciate all the color, guys. Thank you.

Speaker 0

Thank you. And our next question comes from of UBS. Your line is now open.

Speaker 5

Great. So are you likely to maintain this pace of branch acquisitions or branch expansions in 2019 or step off the gas somewhat?

Speaker 1

We are likely to maintain maybe not 10 or 12, but certainly five, six, seven, something like that next year. We announced we're actually opening a branch in Naples, Florida to get everybody who's running away from Chicago these days. That will open beginning of next year. Simply a convenience branch, this is not a just to make it very clear, this is not a move to Florida by WinTrust. This is to accommodate our Chicago customers who are snow bunnies and live down there, have changed residents down there, whatever.

We think actually, we should do very well down there just with the Chicago transplants and snow bunnies that are there. So we're it's a very small branch for us, but things like that we're doing strategically to maintain those customers. It came really as a response to our customers asking us to do it. But Milwaukee is going very well for us and we continue to build out up there. We expect a couple of branches up there.

And we have a number of opportunities here as we fill out our franchise throughout Chicago. So yes, I would imagine we would open six to eight next year on the plants, but that's the plan at least right now. And again, it's part of taking what the market gives us. When we did all these acquisitions, we didn't have a choice of where they were all strategic, but they left holes in our market that we need to fill. So that's taking this opportunity to do that right now, especially as we continue to be growing and making more money, we can make that investment and still balance our net overhead ratio accordingly.

Speaker 5

Okay. And separately on mortgage, I know you've bolted on a number of parts of the business servicing origination over time. Is this kind of what we see is what we get here? Or are there missing pieces in your from your perspective that still exist? And are most of the efficiency gains already been scored?

Or are we still kind of early in that process?

Speaker 1

I think what you see is what you get. I think we've got it sounds like Dave Watson, all the pieces are in place here. We've been able to fix our product mix to get more government loans, which obviously have higher margins to the Veterans First acquisition. They also have a different distribution model, which is something we hope to migrate into our current system over time. But no, so I think what you see is what you get as it relates to the infrastructure or the footprint that we have.

But you've not seen the results of the efficiency moves. The Zoom mortgage as we get that out and take more mortgages as house deals as opposed to coming through a broker. The efficiencies of that, the two to three days you've seen that pop in two to three days less processing time by using Zoom. But you've not seen the backroom efficiencies that should be coming in January and henceforth, but we can cut a lot of the costs related to and make them more variable by outsourcing. So you've not seen the majority of the efficiencies in the process in the current infrastructure we have.

We haven't seen that yet.

Speaker 7

Great. Very helpful. Thank you.

Speaker 0

Thank you. And that concludes our question and answer session for today. I'd like to turn the conference back over to Mr. Wehmer for any closing remarks.

Speaker 1

Thank you, everybody. Again, another record quarter for WinTrust. Looking at the market doesn't seem to like record quarters, but nothing we can do about that other than continue to build our earnings double digits, continue to build our franchise the way we have in the past, which is conservative and focused on shareholder value. And we intend to continue to do that, and we'll talk to you all next quarter. If you have any other questions, please feel free to call Dave or me.

Thanks.

Speaker 0

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.