Wintrust Financial Corp (WTFC) 2015 Q2 法說會逐字稿

Welcome to Wintrust Financial Corporation's 2015 second quarter and year-to-date earnings conference call.

(Operator Instructions)

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, Wintrust 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 actual results to differ materially from the information discussed during this call are detailed in the second quarter and year-to-date earnings Press Release and in the Company's most recent form 10K and any subsequent filings on file with the SEC.

As a reminder this conference call is being recorded. I would now like to turn the conference over to Edward Wehmer. You may begin.

Thank you and good afternoon, everybody. Welcome to our second quarter earnings call. Dave Dykstra and Dave Stoehr are with me here. We will have the same format as we always do.

I'll give you some general discussion about the quarter. Dave Dykstra will jump in to give you detail of other income and other expense, and then I'll come back with a summary and thoughts about the future, and then time for some questions.

As stated in our release the second quarter was really solid in all aspects of our business. Net income of $43.8 million was up 14% over the same quarter last year, $0.85 per share, was up 11% over the same quarter last year. On a year-to-date basis we're up 12% in overall earnings and 11% on earnings per share.

If you look at asset growth, over last year, we're up $1.9 billion, or 10%. Deposits up 10%, and loans up 13% to $15.5 billion. If you look at first quarter versus the second quarter, assets were up $400 million; deposits, $144 million; and loans up 15%, $561 million. So good loan growth.

That loan growth as we said in the statement itself was really balanced across all categories. Our pipelines remain consistently strong. We have very good momentum on the earnings and the loan generation front as our brand awareness continues to permeate the market that we want to deal in, and we're doing the deals on our terms.

We have not, as always, we do not really go off of our loan policy and our pricing parameters that don't change to fit the times. You will notice that our loan-to-deposit ratio was higher than our 85% to 90% stated goal. And we did that to accommodate the acquisitions that are taking place in the second quarter. So we will hit the ground running with those acquisitions fully optimized on the balance sheet.

On the deposit front, demand now makes up 23% of our total deposits. Every quarter we seem to raise 1% or 2% in that as our commercial initiative continues to move forward. And that bodes well for the future as our deposit base -- those demand deposits are worth a lot of money if, the Feds, if and when they ever decide to move rates.

Our mortgage results were strong, and projections show this continuing into the near future. We know when want rates to go up there will be a little bit of a drop off. During the quarter, 36% of our volume was refi in normal times.

That's about 15%, but we do believe that rates -- that there's a lot of pent-up demand for housing, and that that should offset some of this. But we do stand ready to cut costs in according very quickly when rates go up. We expect volumes to stay high for the immediate future, and when rates move up it will fall off a bit and then come back to a consistent sort of level.

We're prepared for that, and when that does occur, obviously, we are very well positioned for rising rates. And any offset in mortgages should be -- any mortgage drop off should be offset by increases in the net interest income. We continue to look at expansion opportunities in the mortgage area.

We think that when rates do go up there will be opportunities to pick up both producers and maybe additional platforms at very reasonable prices. So it's a good opportunity for us, and we continue to look in that.

Wealth management also had a good steady quarter. Assets under administration are now $20.9 billion at quarter end. And we consistently grow and build that into really an important part of our strategic emphasis.

I'll let Dave take you through the details of other income and other expense in a minute, but I will point out that the net-overhead ratio -- the measure that we really look at to look at how efficient we are -- fell to 1.52% for the quarter. As I stated in the past, we want to be 1.5% or better, as we believe that's the mark of a well-run bank.

We constantly work on this through expense control, through growing into the infrastructure where we know we do have capacity due to our flurry of acquisitions and opportunities that took place during the cycle and the like. We know that those are not fully optimized, and the acquisitions that we are bringing on this quarter are really strong cost-out acquisitions. And I'll talk about that a little bit later.

Credit quality continues to get better. The reserve coverage is very good. Net charge-offs are at pre-crisis levels, and NPAs continue to drop in total dollars to pre-crisis levels or below. Our goal is to continue to work on that to identify deals that might be going a little bit sour and pushing them out the door as quickly as we can. We've always done that; we will continue to do that.

Capital ratios remain strong. They were bolstered by the $125 million offering we did earlier this quarter. And those funds will be used to support the acquisitions that we announced and future growth going forward. So we feel very good in, really, all aspects of our operations right now.

Our balance sheet is solid, we continue to be core funded. We're 96%, I believe, core funded in the operation. And we continue to build and grow that franchise. So with that I'm going to turn it over to Dave to take you through other income and other expense.

Thanks, Ed, and, as normal, I'll just touch on the non-interest income and non-interest expense sections. And I'll start with non-interest income. Our wealth management revenue totaled $18.5 million for the second quarter, which was up slightly from the $18.1 million that we recorded in the prior quarter and the $18.2 million that we had in the year-ago quarter.

The trust and asset management component of this revenue category continued its consistently strong growth increasing to $11.7 million from $11.2 million in the prior quarter. Brokerage revenue remained relatively flat at approximately $6.8 million compared to the $6.9 million that we had in the first quarter of the year. Overall this quarter marked another solid quarter for our Company in terms of wealth management revenue, and we look forward to continued growth there.

As Ed mentioned on the mortgage banking side, it was a strong quarter. Mortgage banking revenue increased $8.2 million to $36.0 million in the second quarter of 2015, from $27.8 million recorded in the prior quarter and was substantially higher than the $23.8 million recorded in the second quarter of last year. The Company originated and sold approximately $1.2 billion of mortgage loans in the second quarter, compared to $942 million of loans originated in the first quarter of this year and $912 million of loans originated in the year-ago quarter.

Also during the second quarter, as would be expected in a strong Spring buying season, we experienced a higher level of purchased-home activity relative to the refinance activity. And that mix of loan volume increased to the low-60% range from the mid-40%s in the prior quarter.

Fees from covered-call options increased to $4.6 million in the second quarter, compared to $4.4 million in the previous quarter and $1.2 million recorded in the year-ago quarter. As you know, the Company has consistently utilized these fees from covered-call options to supplement the total return by hedging liquidity and interest rate risk on the related agencies and secured Treasury securities that we hold in that portfolio.

Revenue from bank-owned life insurance assets in the second quarter was $1.4 million higher than the amount recorded in the first quarter this year. And that was due primarily to the recognition of a $1.5 million debt benefit.

Turning to the non-interest expense categories. Non-interest expenses totaled $154.3 million in the second quarter of 2015. This is increasing approximately $7 million compared to the prior quarter.

Now, clearly, the biggest drivers of the increase were elevated commissions and incentive compensation, combined with an increase in advertising and marketing costs which were offset by a reduction in employee benefit expenses. I'll discuss each of those categories next. But I'd like to note that if you exclude these three categories of expenses, the remaining total non-interest expenses actually declined from the second quarter by approximately $42,000.

Focusing now on the individual categories that have notable fluctuations. Salaries and employee benefits expense increased $4.3 million in the second quarter, compared to the first quarter of 2015. The increase in this category was due to an increase in commissions and incentive compensation expense of $7.9 million, offset by a reduction in employee benefit expense of $3.4 million.

The increase in the commissions and incentive compensation expense was driven largely by the additional commissions related to the substantial increase in the mortgage loan originations during the quarter, as well as increases in short-term and long-term incentive compensation accruals due to the Company's growth and elevated earnings level.

Now the reduction in the employee benefit expense was primarily the result of reduced payroll tax expense from the seasonally high level in the first quarter of the year. Additionally, I'd like to note that the base salary expense was actually down slightly during the quarter to $46.6 million from $46.8 million in the prior quarter.

Turning to occupancy expense. Occupancy expense has declined by approximately $1 million in the second quarter to $11.4 million from $12.4 million in the prior quarter. The current quarter saw decreases in utility and maintenance expense and repair charges, which tend to be seasonally higher in the first quarter of the year due to the cold weather and the snow removal costs.

The data processing category increased by $633,000 to $6.1 million from $5.4 million in the prior quarter and from $4.5 million in the second quarter of last year. The current quarter included approximately $653,000 of convergent-related costs associated with the recent acquisition activity, compared to $783,000 of acquisition-related charges in the first quarter of the year.

Professional fees remained relatively constant, but increased by $410,000 to $5.1 million. The current quarter included approximately $417,000 of legal costs associated with the recent acquisition activity. As you know, professional fees can fluctuate on a quarterly basis based upon the level of acquisition activity, problem loan work outs, as well as any consulting services that we may employ.

Advertising and marketing costs totaled $6.4 million in the second quarter, compared to $3.9 million in the prior quarter and $3.6 million in the year-ago quarter. The increase in this category related primarily to our enhanced and successful efforts to increase the Company's brand awareness through increased mass-media marketing, community advertising, and sponsorships.

The remaining categories of non-interest expense that I haven't addressed were essentially flat and were up about $96,000 in the aggregate from the prior quarter or less than 0.1 of 1%. Finally, as noted on the Press Release on page 26, included in the non-interest expense section were acquisition-related charges totaling approximately $1.1 million.

That will not be recurring for specific transaction, for the specific transactions to which they relate. In the second quarter these charges related primarily to legal expenses and data conversion charges.

As we noted last quarter, we'll continue to provide these details on the acquisitions. Because as Ed noted, we have closed one transaction this quarter, and we expect to close two others shortly. Each of which will have convergence, severance and legal costs associated with them.

And as Ed also noted earlier, the net result of the aggregate levels of this non-interest income and non-interest expense is that our net overhead ratio improved from 1.69% in the first quarter to 1.53% in the second quarter, which is approaching our goal to be at a net overhead ratio of 1.5% or better. And with that, I will throw it back over to Ed.

Thanks, Dave. Good segue. A little summary discussion here, but this month, if all goes according to plan, we will close on three acquisitions which will add close to $1 billion in assets to our balance sheets. One of these deals, the North Bank transaction -- the smallest of the three -- has already closed.

As mentioned we've already absorbed the liquidity that these banks will bring over by running our loan-to-deposit ratio higher than our normal 85% to 90% target at June 30. So the banks will be fully optimized from a balance sheet perspective at the outset.

We expect some 60% to 70% cost saves from these transactions, and it's going to take the rest of the year for us to achieve these numbers. But we believe that they're hard numbers, they're identified, and we feel very good about that. We still -- and this will help us as we continue to fill out our infrastructure, obviously, that we have the infrastructure to absorb this activity. And so we can cut those costs.

We're still seeing acquisition opportunities in all areas of our business. Core growth prospects remain very good. Loan pipelines are consistently strong. Mortgage prospects in the near term remain good. But we're prepared for the slowdown if and when rates ever rise. We are well -- very well positioned for rising interest rates if that actually does happen.

Credit quality continues to improve. Capital ratios are very strong, and for those of you who looked at it, our stress test results were pretty darn good. If you study the numbers, you can actually see we took a very conservative approach, if you compare us to the latest completed crisis. And we still are well capitalized in very good position based on the stress test numbers.

In short, I really like where we are positioned right now. Our consistent and steady approach to improve our operating metrics and our goal of increasing earnings on a double-digit basis continues to move along and move along well.

So we're going to continue to, as we always do, to hope for the best and yet plan for the worst on the back side. And we really like where we stand as we continued to work towards our goal of being Chicago's bank and Southern Wisconsin's bank. So with that, I would open it up to questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is open.

Hey, good afternoon, guys.

Hello, Jon.

I had a different lead-off question until you said 60% to 70% cost saves on the three acquisitions--

Okay, well, thanks for your question, Jon, we'll move on.

(Laughter) Hadn't heard you say that before. What is the timing? How long is it going to take to get that type of savings and the run rate on those three deals?

Probably by the end of the year. Conversions are scheduled. We've got the North Bank conversion scheduled for, I think, next month, and then every month or month and a half afterwards, we'll be converting the others. The conversions, there are a number of branches that we're picking up that we're going to be closing because of the proximity to our existing branches. And that's all been laid out. The staffing has been laid out.

But it really will all occur -- kind of when those conversions occur is when you're going to see most of it come through and the divestiture of those branches. So I think you'll see it will gradually come in throughout this quarter, but by year end, we should have them totally absorbed and ready to rock and roll for 2016.

Okay, good. That's bigger than I thought it was going to be. Okay, and then on mortgage, you touched on it a little bit, but maybe talk about the near-term pipeline. And then a little more color, you talked about the potential for rising rates and the impact. Is this something where you think you can -- the variable expenses will come out fast enough, so it will be a net neutral? Or do you feel like you have to cut aggressively if rates go up? Or how do you think through that? Help us understand it.

You know, our data is pretty good, and we do projections based upon everything. There's a lot of good data we're getting through, and we understand our pull through rates. There's many phenomena that could take place that we build into this.

But we have all sorts of plans laid out for various contingencies in terms of the drop off in volume that I think we should be able to have enough lead time to really not have it hurt our overall profit margin on this business when it does go down. There is a lot of pent-up demand for acquisition -- for property purchases, as opposed to the refis. Refis in a normal environment are about 15%,16% of our overall volume. As I said, they were about 36%, so you might lose 15% of your volume if the refis fall off and, obviously, some seasonality to the purchase market. But we think we're in a very good position to maintain our margins.

And when rates do go up, I think if you look at our net interest income sensitivity, you'll see that that is -- as I always say -- the beach ball under water. So really the only hedge left you can ever do on a full balance sheet hedge is your mortgage business versus rising rates. And so I think that any decrement we would experience in overall net income from the mortgage business would be more than made up by the increase in the margin that would come through.

So I think we're well prepared for it. I think we're much better -- we were well prepared for this in the past. Remember the first quarter last year we did see a downturn in mortgage volumes, but in that situation, we kind of knew it was going to come back up, so we just bit the bullet. We didn't do any sort of massive cuts. We just carried the overhead rather than having to staff down and staff up. It just didn't make a lot of sense.

So like I said, we have a number of scenarios that we can play out based upon what we see and what we're able to project when the rates go up, when that eventuality actually happens. So I think we're much better prepared. We have a number of scenarios that we run. And we're ready to execute depending on the variables that accompany any rise in rates.

Okay, and the pipeline? Kind of the near-term pipeline?

Near-term pipeline is relatively consistent with what we experienced in the second quarter.

Okay, good, and then Dave Dykstra, just maybe one for you on expenses. Other than the acquisitions coming on, any other expense pressure? Anything out there we should be aware of?

No, I don't think so. The variable comp changed a lot this quarter, and a lot of that was based upon the mortgage market. But I don't see any substantial changes other than the acquisition-related costs and the variable comp depending upon commission-based businesses.

And if you look at -- Dave did a nice job when you back out those categories with those reasonable explanations for all of them. We've been relatively constant on expenses. So that sign out in left field at Wrigley wasn't cheap. Nor would it be at Sox Park, but I'll tell you, it's paying off in spades. You can never put a value on something like that, but in terms of brand recognition, it's just -- with everything else that we've been doing over the past few years and what we continue to do, our brand recognition is picking up. We picked up a number of new households as a result.

And there will be a time when acquisition market moves away from us and core growth is going to be very important for us. And there's no reason not to jump start that now with the loan volumes that we're experiencing.

Okay, all right. Thanks, guys.

Thank you. Our next question comes from the line of Christopher McGratty with KBW. Your line is open.

Hey, good afternoon, everybody.

Hello, Chris.

Ed, in your comments on the overhead ratio, you're a shade over 150 today. I think you've talked in the past about getting it to 150 or possibly below. Where do you think it's possible in this environment and maybe longer term as you optimize some of your acquisitions?

That's a good question, and if you look at our mature banks, some of them are operating below 1%. Now, when you add everything up, because of the mortgage business, it's hard to get to those numbers.

But I think that we are a growth Company. We continue to invest in growth, so if we ever just said, stop and optimize, you could probably get that number down to about 130, 135, but I don't see us doing that. I see the opportunity -- we're a growth Company, is what we set out. And we're not afraid to invest in the future, and sometimes those investments have longer-term pay outs.

I think if we can hit consistently around 150 and go 5 to 10 basis points off of that either way, depending on transactions we're doing or investments that we're making, I think that would be very good in this environment. Again, our goal is to continue to build and grow the franchise and continue to increase our operating metrics and to put up double-digit earnings growth.

If you're familiar with our past history maybe before 2006 when we went under (inaudible), that's the game we played before. And we did it very well, and I think that we were kind of returning to that sort of approach. I guess there will be a time when we think we fulfilled our goal of being Chicago's bank, which is probably a long way off, where we would maybe shutdown on the investment in future business. If I'm around, I doubt we'll do that. We'll probably think of something else to do. But we'll continue to push that number. I think 150 is the goal for the way we operated. If we can get below that, to 140, all the better.

That's helpful. Thank you. On the preferred offering, I think in your opening remarks you said part of it was backward looking for the deals and forward looking as well. Interested in maybe some commentary about deal activity in the market. You've done three that are going to close. What should we be expecting over the next several quarters from an M&A perspective? Thank you.

Well the acquisition pipelines in all areas of our business are relatively full. As I stated in previous ones, gestation periods on these deals are taking a lot longer for whatever reason. And some of them don't come to fruition. We're very disciplined in how we do these transactions.

So it would be okay with me if we took a little time to absorb what we're picking in right now for the next month or so or two. And then -- but we'll continue to be very opportunistic in this. We've done, this will be four for the year in terms of banks, by pretty much mid year. That's a lot. But our structure allows us to accommodate that type of volume. And as you know, we on the banking side of things we do concentrate on the banks $1 billion and less. I think that that is a market where cultures fit with us. These are mostly community banks that either give us good new geography to work into or good cost-out opportunities. Because our geography, as it gets bigger and bigger, allows us to get more cost-outs because we have overlapping branches.

So I think that this market is going to stay hot until rates move up a couple points. And then I think as some of these banks start, these target banks start making spreads in their investment portfolios, their earnings are going to go up and their prices are going to go higher than maybe we would be willing to go after, if you look at that vis-a-vis organic growth. So we're going to take advantage of this while it's here.

We aren't going to do anything stupid, but -- we hope we won't do anything stupid. But on the banking side, I think that in the second half of the year you could expect us to be relatively active. On the mortgage side, same sort of thing. I think as the prospect of rates are moving up, we're seeing a bit more chatter from some of the people we've been talking to, a little bit of accelerated chatter. As you know on those deals, those are basically all earn-out deals. So it's not too much risk you take in those transactions. So you can't help but win if you do an earn-out deal for the most part, unless you -- we do asset purchases so we don't get any cancer transplants from any historical bad deals that somebody made that may pop-up. So we're very careful on our due diligence.

On the wealth-management side, we do see, although that market is a bit frothy right now in terms of price, we do see opportunities to pick up producers and pick up without sort of an asset management type of situations, where it may not involve a Company acquisition. But we will continue to grow and expand.

And in the niche businesses, we're seeing opportunities there, but mostly on the lift-out side where there's a little bit of turmoil in the market right now and in different areas with some things that other people have announced. And we're seeing opportunities, like we did with our leasing operation that we opened up down in Texas, seeing opportunities to do lift outs. And that's very helpful for us because they will bring a different type of asset class or different type of asset to us, and that helps us with our strategic goal of remaining diversified.

Thanks a lot. That's great.

Thank you. Our next question comes from the line of Brad Milsaps with Sandler O'Neill. Your line is open.

Hey, good afternoon.

Good afternoon, Brad.

Dave, just wanted to follow up on the expense question, specifically as it relates to mortgage banking. It looked like the incentive comp was up almost equal to what the mortgage banking revenue was up. And I know you've got other parts of the bank that are earning incentive as well.

But is there a better way to think about it in terms of an overhead ratio or an efficiency ratio with the mortgage piece? Just trying to get at a better way to model that going forward and how it might drop to the bottom line?

Yes, I guess my rule of thumb would be -- and it's not an exact science, but -- probably about half of what the revenue is, you could take that and apply it to the compensation section. So there was some -- our earnings were up and our growth was up. And as you know, some of our LTIP, our long term incentive plans, are based upon earnings and growth. And as those go up, we've got three different cycles going, and that elevates some of the accruals in that. So part of that was also short-term bonuses and the impact on our long-term incentive plan from the elevated earnings and growth. But I'd sort of think about it, if mortgages go up or down, you can increase or decrease the compensation by about 50% of the revenue.

Okay, great. And Ed, just maybe a couple questions on loan growth, particularly as it relates to some of the insurance premium finance, life businesses. The life growth looks like it has accelerated maybe quite a bit the last couple quarters, and now has actually overtaken the commercial side and overall size.

What are you seeing there? Are there larger loans? Or have you picked up additional people? And just kind of your outlook maybe for that specific line would be great.

Actually, no, maybe one or two clerks, but we have not had to pick up any additional people. That market is a very interesting market. I mean it's one where we, through the AIG acquisition, really acquired the guys who invented this market and this business.

And I think that the competition will pulse in and pulse out of this market. So you'll see, especially the foreign banks will pop in, and they will try to steal business. And then something happens, and then they get out of the business. And they really don't have the expertise that we have. We actually have a value-add approach because some of these deals are pretty complicated as they relate to estate planning or corporate succession issues and the like. And there's lots of many trip wires in there. Fortunately, we have the expertise to say that we've got value add there. And I think that's why it's growing so much is that reputation is out there.

We have been able to -- it's not like the commercial side where our business comes in through 3,000, 3,500 agents around the country, independent agents around the country. This comes in through probably 150 people, where a lot of it, that's really the sourcing of a lot of this business. Now, the ticket sizes are, obviously, much bigger than the commercial side. The commercial side are $23,000, $24,000 full pay-out loans. These are $1 million to $2 million loans that we're putting on the books.

So I think it's a function of the reputation. I think it's a function of our service. But we have -- really there's been nothing that has happened that would change the market that much other than better marketing and our reputation.

Yes, and Brad, this is Dave. The other thing to remember there is we do significantly more volume on the property and casualty side. But it's nine month full pay out, so it's turning pretty fast. And on the life side, those are generally four or five year loans.

So if you're picking up your production on the back end, not as much is paying off on the -- or on the front end, not as much is paying off on the back end. So when you put one of those loans on there, they're generally out there for four or five years. And so it adds up a little faster on smaller volume too.

And what we've seen on the commercial side, Brad, is that we've often talked about, first of all, what is normal these days. But normally our average ticket size is about $27,000. In a hard market it could be up into the $40,000, $44,000 range. It got as low as $19,000 in the soft market, and it worked its way back up to $24,000. It was kind of a steady growth little by little up to $24,000. We've seen that fall back now to around $23,000. So the competition, I guess, and there's a lot of capacity out in the commercial insurance world, and we're seeing premiums actually drop a bit again.

And we would love a hard market because that's -- we can almost double our average ticket size with no increase in expenses. But I think that that's been a little bit negated by -- our growth on the commercial side has been negated by the drop in premiums and the drop in average ticket sizes. We still continue to pick up market share in terms of number of tickets processed, so both businesses are going very well.

Great, thank you, guys.

Thank you.

(Operator Instructions)

Our next question comes from the line of David Long with Raymond James. Your line is open.

Good afternoon, guys.

Hi, David.

Wanted to talk about the premium finance business. Some of the questions were just answered, but thinking about the asset sensitivity of those loans -- and I think you said the commercial has about a nine month term -- does that re-price monthly? And then as far as the life side, how quickly do those loans re-price on your books?

On the commercial side, they do not. They are fixed rate for nine months, so they have a four and a half month full duration. So when you think about it, 1/9 of the portfolio re-prices every month. So it's pretty quick to re-price. On the commercial side or on the life side, those adjust annually, so 1/12 of the portfolio adjusts. They are all floating rate, and they all adjust on an annual basis.

Fixed rate.

They are all fixed rate --

Fixed rate for one year, and they --

Well, they are floating rate with a one year re-price.

Yes.

They fix for a year, and they re-price every year.

Got it. Okay, that's all I --

This is what we do all the time. Dave and I argue like an old husband and wife.

Guess who's who? (laughter)

Be quiet, dear.

Thank you. Our next question comes from the line of Emlen Harmon with Jefferies. Your line is open.

Hey, good afternoon.

Hello, Emlen.

Going back to mortgage, I know there's been a lot of focus on it already. But how do you guys think of the organic growth rate in that business? And obviously, there's a lot of cyclical effects with rates and the purchases, but it is a business you've been investing in, have an interest in kind of consolidating going forward.

So how do you think about what the actual organic growth rate of that business has been historically? And I'd just be curious as to how that compares to the future outlook or your future outlook?

Well as I always try to preface these things, I've got a D plus in economics at Georgetown. So take that into consideration. That probably makes me a genius in this world, but -- I could work for the government -- but we think that the growth potential in this market is actually very good. We think a couple things are going to happen.

In October 4, this new TRID regulation comes into play, which is really going to be -- the focus of TRID is to make sure that you need to expedite the entire process. And I think TRID coupled with the -- and it's probably the biggest change in the whole mortgage process in a long time other than QRM and that stuff from banks, but just in getting a mortgage. And I think a lot of these smaller -- if rates go up and volumes drop off and having to comply with TRID, having to comply with all of these new regulations is going to -- the independents that are out there, many of them are going to fold up shop because they are just riding this last wave right now. So I think that the pie is going to get smaller in terms of actual mortgage producers out there.

I also think that Millenials have been very slow to jump into household formation. And if you look at, if you just look at graphs of number of births and when household formation used to come about, now it's happening a little bit later. You're going to see more household formation come about. And if you look at that, you're 6 million to 7 million housing units short in the United States just to catch up with that. So I think home buying is going to come back into vogue. And even if rates go up a point, it's still going to be relatively low compared to where they've been for the last 15, 20 years before that.

So I think that there is a lot of pent-up demand. I think that the supply is going to go away. I think we're going to get an opportunity to cherry pick good producers and good opportunities and continue to work on strategic alliances on the purchase side of the equation, on the construction side of the equation to provide mortgages. And we're big enough now that we can actually pull that stuff off, so we think that everybody is going to need a mortgage.

People are going to buy houses. Mortgage is going to be here forever, and that this is a market that because of its complexity is going to push out the small volume people. And we think that it's a good natural fit for us. It's one if we can control our expenses and our operations, we can absorb the costs of regulation better than most.

And it's a great hedge to our balance sheet. You can't do any macro hedges anymore. But it's a great hedge of our balance sheet in a falling-rate environment. So we think it fits very nicely. It's strategic for us. We think that there's good future for it, and we're excited about taking advantage of opportunities there.

Got it, thanks, and on the -- just a quick one for Dave. In the fee line item, I just noticed that the miscellaneous fees were a couple million bucks higher than they've traditionally been historically. Is there anything unique in there that you would call out?

There's just a lot of stuff in there. We've got any FX changes that happened as a result of some of our Canadian funding. We've got our investments that we do in limited partnerships with some of the bank funds that are in there. The FDIC amortization of that indemnification asset run through there, and a number of other smaller things. So it's really just an accumulation of a number of different items.

Got it. All right, perfect. Thank you.

I'm showing no further questions at this time. I'd like to turn the call back to Edward Wehmer for closing remarks.

Thanks everybody for listening in, and we look forward to talking to you again next quarter. Enjoy the summer, thanks.

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