Wintrust Financial Corp (WTFC) 2016 Q3 法說會逐字稿

Welcome to Wintrust Financial Corporation's 2016 third-quarter and year-to-date earnings conference call.

(Operator Instructions)

Following a review of the results by Ed 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's management may make statements that constitute projections, expectation, 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 and year-to-date earnings press release, and in the Company's most recent Form 10-K, and any subsequent filings on file with the SEC.

As a reminder, this conference call is being recorded. I will now turn the conference all over to Mr. Edward Wehmer.

Good afternoon, everybody, and thanks for joining us for our third-quarter earnings call. I'm here with Dave Dykstra, our Chief Operating Officer; Dave Stoehr, our Chief Financial Officer; and Kate Boege, our General Counsel.

Our call as usual will take the normal format. I will discuss some general comments about the quarter. Dave Dykstra will go into detail on our other income and other expense categories. He'll turn it back to me, we can summarize the quarter and thoughts about the future, and then we'll take some questions.

In general, we're very pleased with the results this quarter. We showed good progress on all fronts. We continue to grow profitably, and profitably into our overhead base. And prospects for continued growth remain very positive.

Highlights for the quarter, record earnings of $53.1 million or $0.92 a share, up from the second quarter, and up from previous year by 38%. Year-to-date earnings of $152.3 million, or $2.72 per share, were up 26%. If you look at the quarter, oddball items actually in our opinion went against us, just based on the way we look at it.

We had a $3.3 million gain on securities, offset by a $2.5 million mortgage servicing rights valuation adjustment, and $1.8 million in legal dispute accruals. If you add those up, it's $1 million negative pretax. That's the way we look at it. The valuation charge was obviously a factor of market rates and prepayment speeds, and should and could turn around, if rates ever go up.

The $1.5 million legal arbitration award, typically, we do not comment on litigation-related matters. However, in this case, we would note that we are extremely disappointed by, and strongly disagree with the award made by the arbitration panel. We firmly believe we did nothing wrong, and that panel's award was absolutely unwarranted, without basis in law or fact. Contrary to certain erroneous media reports, clients were not contacted about the move, or made aware of the advisor's departure, prior to his resignation.

Our broker-dealer, Wayne Hummer is committed to the highest ethical standards when recruiting new advisors, and would never knowingly allow or condone such actions. Further, we believe that the panel's award was inconsistent with applicable FINRA rules as well as long-standing principles, which indisputably favor client choice over financial advisor. We are evaluating our options in this regard.

On the net interest margin, net interest income front, the margin went down 3 basis points to 3.24%, predominantly due to market yields on our liquidity management portfolio, which was down 24 basis points. Core yields were up 4 basis points, basically due to the rise in LIBOR, and the purchase of our franchise portfolio, we'll talk about a little bit later.

Our cost of paying liabilities was up 2 basis points. Net interest income was up $9.4 million, due to good overall balance sheet growth, and we are extremely well-positioned for higher rates, if and when those ever come about.

On a credit front, provision remained relatively consistent, at a little over $9 million. Net charge-offs were 12 basis points, relatively consistent with prior quarters. Our NPLs were down $2 million.

Our NPAs were down $4 million, and our TDRs were down $4 million. NPAs represent a total of -- as a percent of total assets, down to 44 basis points from 48 basis points. We continue our program of culling the portfolio for early signs of cracks, and I'd have to say that credit is about as good as it's ever going to get.

On the other income, other expense front, as we said, Dave will discuss in detail, but a few general comments. Mortgage recorded record volume for the quarter, of $1.4 billion, our earnings were obviously hurt by the mortgage servicing devaluation. Wealth management had good revenue growth, also.

On the operating expense side, non-variable operating expenses were well contained, and Dave will comment on that. Our net overhead ratio was down to 144 from 146. Again, ahead of our goal of 150.

Long-term, we expect this number to continue to improve, as we continue to grow our infrastructure and look for other efficiency moves we can make. Again, our objective of growth without commensurate increase in costs, is still in play.

The balance sheet side, we had 15% growth on an annualized basis, and total assets to above $25 billion. Our loan growth, boosted by our mid-quarter acquisition of $555 million of franchise loans from General Electric, total loans net of covered, and mortgages held for sale grew 20% on an annualized basis, or $927 million to $19.1 billion.

This growth was spread across the sectors and on the core side, of $352 million, which is not bad in a seasonably slow quarter. Our pipelines continue to remain consistently strong. On a positive front, total deposits grew $1.1 billion, or 22% on an annualized basis, to $21.1 billion.

Our DD&A growth kept pace with this, and still comprises prices 27% of our deposit base. We're heartened by the fact that all this was pretty much core organic growth, thereby adding to our franchise value.

We often talk about us taking advantage of what the market gives us. As you know, over the last few years and during the downturn, we materially expanded our operating base in terms of number of branches and operations that we have. Our goal has been to grow into those branches, and to get more efficient in doing so. Again, growth without a commensurate increase in expenses.

So our growth going forward is growth of -- blend of organic and acquisitions. This quarter we didn't have any acquisitions, was all organic growth. Our acquisition pipelines in all of the areas of our business remain strong.

This quarter, the fourth quarter I'm saying, we should close on our previously-announced acquisition of First Community Bank, adding $180 million of costs, and this is another high cost out transaction for us, where we their two branches overlap with ours, so we could over the quarter, and certainly into the beginning of next year realize material savings there. Now I'll turn it over to Dave to talk about other income and other expenses.

Thanks, Ed. In the non-interest income section, our wealth management revenue totaled $19.3 million for the third quarter of 2016, which was up from $18.9 million recorded in the prior quarter, and also up from the $18.2 million recorded in the year-ago quarter.

The trust and asset management component of this revenue category remained stable at $12.6 million, in both the current quarter and the prior quarter. Brokerage revenue component increased approximately $6.75 million in the third quarter, compared to $6.3 million in the prior quarter. Overall, the third quarter of 2016 represented the highest wealth management fee level in our Company's history.

Mortgage banking revenue declined $2.1 million or 6% to $34.7 million in the third quarter, from the $36.8 million recorded in the prior quarter, and was 24% higher than the $27.9 million recorded in the third quarter of last year. As Ed mentioned, the decrease in this category's revenue from the second quarter was the result of $2.5 million negative fair value adjustment related to our mortgage servicing rights. This was primarily resulting from actual prepayments during the quarter, and higher projected prepayment fees. Although we can't predict future interest rate movements and customers' behavior, we certainly don't expect a similarly size negative fair value adjustment in the near term.

Going on about mortgages, the Company originated and sold approximately $1.3 billion and $1.2 billion of mortgage loans in the third and second quarters of 2016 respectively, and that compared to $974 million of mortgage loans originated in the third quarter of last year. And the mix of loan volume related to the purchase home activity was approximately 57% in this quarter, compared to 65% last quarter.

Similar to our wealth management revenues, the third quarter of 2016 represented the highest mortgage banking origination and production revenue levels in our Company's history, if we exclude the MSR valuation adjustment. We would expect to see some seasonal slowdown in the mortgage production revenue in the fourth quarter, but still expect it to be relatively a strong quarter to finish the year out.

Fees from covered call options were $3.6 million in the third quarter, compared to $4.6 million in the prior quarter, and $2.8 million in the third quarter of last year. Again, as we have discussed previously, the Company has consistently utilized these fees from covered call options to supplement the total return on our Treasury and agency securities held in our portfolio, in an effort to hedge margin compressions that occurred during the low rate environment.

The revenue in the second quarter of 2016 for operating leases totaled $4.5 million, compared to $4.0 million in the prior quarter, increasing 11% during the quarter. Correspondingly, the outstanding balances of the operating leases grew 12% during the third quarter to $116.4 million. These amounts relate to operating leases only, as the capital leases are carried in the loan section of the balance sheet.

Other non-interest income increased by $1.9 million to $13.6 million in the third quarter of 2016, from $11.6 million in the second quarter of the year. The primary reason for the increase in this category of revenue is related to higher swap fees, gains recognized on the purchase and sale of certain assets, and this was partially offset by slightly lower income on our bank-owned life insurance assets.

Turning to the non-interest expense categories, total non-interest expenses were $176.6 million in the third quarter, increasing approximately $5.6 million compared to the $171 million recorded in the prior quarter. As Ed mentioned, despite the increase in expenses during the quarter, the net overhead ratio declined 2 basis points to 1.44%, indicating we were able to leverage the expense base relative to a larger balance sheet and revenue levels, in an efficient manner.

I'll talk about the more significant changes in detail now, as well as comment on a few other notable fluctuations from the second quarter. I'll start with salaries and employee benefits expense increased approximately $2.8 million, or 2.8% in the third quarter, compared to the second quarter of this year. The increase was comprised of approximately $1.2 million in additional commissions on incentive compensation expense, $1.4 million in salaries, and $230,000 in benefit expense.

The Company experienced an increase in the commission expense related to slightly higher mortgage revenue production, and the higher wealth management revenue that I spoke about earlier, along with the slight increase in accrued incentive compensation from the prior quarter, due to increased earnings.

The higher salary amount was primarily due to general growth in staffing, as the Company grows. Although I will note that the salary expense line item declined as a percent of average assets in the quarter, indicating that we continue to generate positive operating leverage out of our infrastructure.

As I discussed, in regard to operating leases in the non-interest income section, the Company experienced a corresponding increase in depreciation expense, relating to operating leases, as that portfolio has grown. Again, we would expect this category of expenses to grow at a similar rate to the revenue side, as the portfolio of operating leases continues to expand. Occupancy expenses increased by $824,000 during the quarter compared to the second quarter, due primarily to the slightly higher utility costs and slightly higher property tax accruals.

Marketing expenses increased by approximately $424,000 from the second quarter to $7.4 million, and was also higher than the third quarter 2015 marketing cost of [$6.2] million. As we focus on building out the franchise, we expended a little more on our mass media advertising during the third quarter, to generate internal deposit growth and brand awareness, and believe the results of such advertising have been effective.

Also, as we discussed on our last call, this category of expenses tends to be higher in the second and the third quarters of our fiscal year, as our marketing spending for our corporate sponsorship costs are higher in those quarters. Accordingly, we expect to see a modest reduction in this expense category during the fourth quarter of this year.

Other miscellaneous non-interest expenses increased by $1.4 million in the third quarter of this year, as compared to the second quarter. This increase was generally associated with the legal settlement accrual that Ed talked about of $1.8 million, including the adverse arbitration award in the amount of $1.5 million. All other expense categories, other than the ones I just discussed, were essentially flat, and on an aggregate basis, were down $15,000 in the third quarter compared to the second quarter.

So in summary, the increases in expenses were less than the relative growth in the balance sheet and revenue levels, resulting in a lower net overhead ratio, indicating improved leverage of those expenses on an overall Company-wide basis. In fact, the third quarter of 2016 represented the third consecutive quarter of a reduction of our net overhead ratio, and each of the quarters of 2016 have been below the net overhead ratio goal of 1.5%.

We will continue to work hard to effectively lever our expense base, and keep you posted on our efforts. With that, I'll turn it back over to Ed.

Thanks, Dave. So a bit of summary here. First, what I'm sure is a preemptive strike, I'm sure you're all wondering how the Wells Fargo issue will affect Wintrust.

As a result of the situation, the regulators will be looking closely at this type of activity at all banks. In fact, this has already started. For the record, Wintrust does not have, and never has had a system-wide and center-based retail banking cross sales program.

Our culture is more relationship, and know your customer base. Exactly what you would expect from a community banking organization like ours. However, a few of our banks have periodically and occasionally used incentive based cross-sell plans. These were very modest in design, and certainly not egregious.

Each of these plans was well controlled, and the results were reviewed. And again, incentive payments were extremely modest. We have never experienced any problem with these plans.

In anticipation of regulatory scrutiny, we are taking a closer look at all these plans and their results, over which any of these plans were conducted over the past few years. Based upon our culture, our internal controls and the nature of these plans, we do not expect to have any findings related to that.

So summarizing the quarter, we're very pleased with the quarter. Hopefully, we can fly the W flag just like the Cubs are flying it recently, and hopefully continue to do so. Dave talked about marketing expenses. I hope they continue through the end of October, and don't end prematurely, as they relate to our sponsorship with the Cubbies.

We're going to continue to execute our growth plans and capitalize on our excess operating leverage through balanced, profitable growth in all areas of our business. Growth will occur both organically, and through acquisition. As mentioned, our acquisition pipelines remain active in all areas of our business, and you can be assured we will maintain our historic discipline in evaluating these opportunities.

We have good momentum in all fronts in all markets. Loan pipelines are consistently strong, credit remains solid, though we continue to cull the portfolio for any cracks, and we'll move quickly to resolve those. We have always been well positioned for higher rates and that position even proved more so this quarter.

As always, we'll be nimble and take advantage of what the markets give us, so you can be assured of our best efforts to deliver shareholder value, and our drive to become Chicago's bank and Milwaukee's bank. Now, we'll take some questions.

(Operator Instructions)

Our first question is from Jon Arfstrom with RBC Capital Markets. You may begin.

I was waiting for the Cubs reference, and we got it. So that's good.

Question for you on the margin, Ed. It seems like there's, obviously it was down a little bit, but it seems explainable, and maybe some of it has to do with the liquidity management growth. But give us an idea of how you're feeling about the margin, absent any rate hikes, and then maybe touch on what you think a 25-basis point hike could do for you?

Well, we always said 320 plus or minus 10 this year. We didn't expect the money market rates to go as low as they are. We have cut back.

We're thinking rates are as low as they're going to go. We've cut back on the duration of our liquidity management portfolio, as is evidenced through part of -- by how our interest rate sensitivity grew this quarter.

The rise in LIBOR has helped us nicely, so far. It should continue to help us. We do have a portion of our portfolio that is tied to LIBOR, and that should continue to help on the loan side.

Cost of funds should creep up a little. But we're doing more organically now, which costs a little bit more money to do. But again, if you've got the loan demand to cover, and the loans, you're getting more yield on loans, that should overall more than -- the increase in loan yields should more than offset any increase in our funding costs.

A 25 basis point rise in the prime rate, and if it's a parallel shift in the curve, should be very beneficial to us. You can basically interpolate the numbers there, but I think you've got to concentrate now on net interest income, and maintaining and trying to improve the margin. But we can't -- this low rate environment's killing everybody. We're making the bet that rates are going to start going up, and should be very beneficial to us, and help raise our margin even more.

So a 25 basis point rise would probably mean on an annualized, if it happened in December, based on a stagnant, based on the portfolio as it stands, would be $10 million, $11 million for us over the course of the year, pretax in the margin. Right Dave?

Yes.

Thank you. Dave Stoehr, first time he's ever talked on one of these.

$10 million, $11 million on a quarter. Even that, the LIBOR increases will help that also. That comes in all the time in our portfolio.

So in general, a rising rate environment is extremely good for us. That is now a bigger control under water, that hopefully won't come popping up soon. Who knows with the election what's going on.

We're just trying -- we have to keep our loan yields up. We need to continue to get more efficient with our growth and bring our overhead ratios down, and we're well prepared for higher rates, and it can only help.

Okay. That helps.

And then just the other big line item, the mortgage banking business. Dave, you signaled a bit of a slowdown. I think most of us would expect that.

But maybe give us an idea what you're seeing so far in the fourth quarter? And Ed or Dave, do you still -- do you see growth potential for this business in 2017, or are there some headwinds you think we need to be aware of?

It stacks up now, October and November look pretty strong. December is usually seasonally slower. But a rise in rates will probably stall it a little bit. We are well positioned to accordion our expenses, which is really the most important thing to do timely, in an environment where your volumes are going down.

But we've got a good reputation. We've got a good Company. We see opportunities for when things slow down. We still believe that a number of independents will want to align with somebody.

I think it was always the consensus before, in the market, until this drop in rates brought upon this bulge in volumes for the industry. But I think when they fall off a little bit, we will have opportunity to expand our footprint and our capabilities over the next year. But we're having record quarters now. I think if rates go up a little bit, those will fall off.

I still think it can be a very profitable business for us long term. And it's an internal balance sheet hedge. When rates go up, our margin is positioned to go up higher to make up the difference in the mortgage loans.

So, we're committed to that business. People are always going to need mortgages. We're very good at what we do and we will continue to look for opportunities there.

All right. Thanks for the help.

Thank you. Our next question is from David Long with Raymond James. You may begin.

Regarding the franchise finance portfolio, how did the yields -- you mentioned they positively impacted. Can you give us any numbers around what the positive impact may have been in the quarter from that? Also, regarding the franchise finance business, have you had -- did you have any expenses that came in this year, maybe with some hires that would have been on either -- came on either this quarter or earlier this year related to that business?

It came on earlier in the year. We have added some, but we had the plumbing in place before we flushed. We worked on that transaction a long time, and had hired a number of people from GE, and a few more people have come on, but nothing really material that did come on over time.

The portfolio itself now has outstanding about $855 million in the overall franchise portfolio on over $1 billion in commitments. Our pipelines are very -- are pretty strong here as we -- this is a new niche business for us, and something that we get into a niche, we want to grow it and dominate it.

So the weighted average yield on that portfolio is about 4.33% at the end of the quarter, and so it's a pretty good yield for us. It's an area we understand and know. We've got the expertise in hand, and we intend to grow it.

Got it, and then the second question regarding M&A, it sounded in early September when we spoke that you were still getting a lot of phone calls, and just want to see what you're thinking about the backdrop for M&A here.

I don't think the market has changed that much. I think we're spacing them out a little bit more than we had in the past. But we still see opportunities out there. We're still concentrating on banks under $1 billion who have that community bank culture that assimilates so well with ours.

So this quarter was all organic growth. We're very good at organic growth, and we're also very good at acquisitions. I think you can expect without a major increase in price expectations for banks of that size. You probably can see us still being relatively active in that market.

Cool. Thanks, Ed. Let's hope we can wave that W flag this evening.

We sure will.

Thank you. Our next question is from Kevin Fitzsimmons with Hovde Group. You may begin.

Was just wondering what you have observed or heard about related to commercial -- the regulatory commercial real estate thresholds, and specifically, is it an opportunity and a bit of a threat at the same time? By that I mean you, I don't believe, are close to the limits for your sub banks. And we've heard from commercial real estate heavy banks that are retrenching, that maybe there's some improved pricing and structure on some of those loans, so it's an opportunity.

On the other hand, we've also heard that a lot of traditionally heavy commercial real estate banks, since they're pulling back from that are diving into C&I, and that's affecting the pricing there. So are you seeing either of those, that phenomenon, related to your business? Thanks.

On the commercial real estate side, yes, you are right on all fronts. We are nowhere near the regulatory limits in that asset classification. We do have capacity there.

But again, it's commercial real estate. So we're being very, very selective. We are seeing more opportunities and we're turning down a lot more opportunities, not just pricing expectations. People are still interesting, borrower pricing expectations are interesting and we're holding the line.

We've seen a lot of volume, and I tell our guys not because you're good looking, it's because nobody else can do it. They're up against the limits, and they have other concentration issues. So we see it as an opportunity. We're being very selective in the areas we do get into. We're not doing land development, or any of those crazy things.

But we also see it as an opportunity, as you pointed out, to take on selective transactions that are very profitable to us to maintain, and we are getting increased pricing on those, relatively speaking, for the most part. The only bubble area we see in the market is the apartments. That's the only one we're afraid of here. Our opinion is that pretty soon all of the Millennials who want to live downtown are eventually going to start having babies, and decide they don't want to live in 1,000 square feet at $5 a foot. They're going to want green space and will be moving out to the suburbs.

We think that there is an apartment glut. We do in terms of development in Chicago. So we do have a couple going up, but they're with very, very attractive sponsors, names you would all know, and very, very low advance rates. So we're very comfortable with that.

On the C&I side, the rates on C&I haven't really moved that much to begin with. There couldn't be that much more pressure on them. That being said, we lost a deal, a very nice deal on a contractor, somebody paid 100 over LIBOR to a contract or two. That's a little crazy in our book, but we were nowhere near that pricing.

So you are seeing a little bit of it, as people still scrounge for earning assets. Many of the banks who are trying to get into C&I really don't have the plumbing in place, the capabilities in place, the international capabilities, the syndication capabilities, the expertise, the Treasury management capabilities, to play in that market, so we're not seeing too much.

Of the deals we want, we're not seeing too much competition in that regard. You're right on all fronts. We are navigating those waters well.

Okay. Great, Ed.

Just a quick follow-up. I've noticed the net overhead ratio is something that definitely is on an improving trend.

The ROA, I'm just wondering -- I know there's a lot of moving parts there. When does the -- what keeps the improvement in the net overhead ratio from translating into improvement, or more measurable improvement in the ROA? Is it a matter of waiting for rates to increase, or is it a matter of that you guys are not holding back from making investments quarter to quarter, and it's a timing thing? Or is it a bit of both?

Well, if we see an investment we want to make, we'll make it. We don't time things like that. It's the margin.

The margin, just the margin keeps coming down, because of the rate environment, we can keep up with it through our growth, and continue to position for higher rates. But we've had this discussion, I think with you, and with a lot of folks about how much we don't like dilution. And we are more than willing to rather than pay a big price and let three years worth of earnings go out the back door, to start something from scratch and invest in a business and grow it. We can continue to increase earnings at double-digit rates.

I don't know any bank stocks that trade on ROA. They trade on earnings growth and tangible book value growth, and those are two items that we run our business on. So of course, we'd like to get a higher ROA but we're -- we would like to -- we're a growth Company. We're more interested in increasing tangible book value, increasing our earnings, and continuing to grow the ROA, the best we can.

But again, I haven't seen anybody trading on ROA. We should be between 90 and 90-something basis points going forward. Just depends on where the margin goes and we're going to continue to grow earnings and invest with the old Grand Dotted Pedal Book in mind of increasing tangible book value, and increasing earnings at a double-digit rate, and growing assets.

Great. Thanks, Ed.

Thank you. Our next question is from Chris McGratty with KBW. You may begin.

Dave, on the fee income, I may have missed it in the prepared remarks. You had a decent ramp in the other miscellaneous income, around $4 million last year, a little over $8 million now. Can you just remind me what's in that, and what sustainability might be?

The big number that we include in the total net interest income is the swap; the swap fees are in there. They have increased over time, a little volatile, depending where the market rates are at. Our Tricom subsidiary's in there, that's relatively stable.

The other things in there, we do have letter of credit fees that we generate for our clients. Lots of miscellaneous stuff in there, foreign currency translation fees, if we sell any property, gains or losses go through there. Our interchange revenue on our debit cards and credit cards go through there.

Just it's a lot of miscellaneous stuff. So I just think, as the business is growing, we're just generating more fees from our customers on all those variety of products.

Okay. Great. Maybe Ed, for you, on the capital question. You're obviously optimistic about growth. I think obviously you talked about potentially some tier two down the road. How should we be thinking about timing of maybe additional capital, based on pipeline comments?

Well, we always look at it, and it's capital and cash are the things at the holding company are things we look at. We've probably got $600 million, $700 million worth of growth or assets now tied up in the mortgage business, that could fall off far more than it has, which gives you a little more capacity.

So really, we'll play it by ear, but as of right now our earnings are pretty good. We're supporting everything internally, but if opportunities present themselves or growth -- continues to grow at the levels experienced last quarter, and which we had really pre-funded with that last capital offering. We're not afraid to go back to the market and raise additional capital, as long as we can keep it accretive to our shareholders.

Understood. Thanks. Maybe one last one.

The comments on LIBOR, I was wondering if you could specify, number one, the exposure to the one-month LIBOR, and also the three-month, fee ballpark figures would be helpful.

Chris, this is Dave.

If you look at our overall loan portfolio, we've got about roughly 29% of our loans are tied to 1-month LIBOR. Another roughly 15% to 16% are tied to 12-month LIBOR and that's primarily our life insurance premium finance portfolio. They reprice once a year, based upon the 12-month LIBOR predominantly.

Then we've also got about 16%, 17% of our loans that are tied to the prime rate, and about a third of the portfolio is fixed. And then the rest -- a few percent is tied to 3-month LIBOR and that's about it. So if you boil that down, about 29% is 1-month LIBOR and 15%, 16% is 12-month and 16%-ish is prime. So those are --

So a couple basis points helper, is that about fair in the third quarter?

Yes.

Thanks.

Thank you. Our next question is from Brad Milsaps with Sandler O'Neill. You may begin.

Dave, just wanted to follow up on the liquidity management book. Can you talk a little bit more about the mix, maybe how it changed, maybe relative to the second quarter. Are you holding more cash on average, or was it more that you just bought really short-term securities?

Just trying to get a sense of maybe how that could spring back over the back half of the year, with the long end maybe moved up a little bit now, or it may not, if you're just holding more cash. Just curious what the mix is in that book.

We ended June, really with cash and Fed funds about $700 million. In September, we were probably about $820 million or so. So we had a little bit more cash on the books.

Our securities portfolio stayed roughly the same, but there's a fair amount of prepayments on the agency securities, and some of those were at premium. So you're seeing a little bit of headwinds on premium amortization on government agency securities that we hold in the book, and rates have been down, so the reinvestment of those hasn't been real full. Just some headwinds on that portfolio. But we are slightly more liquid, as Ed mentioned earlier, than we were last quarter.

We don't get real excited about 1.5% mortgage-backed securities.

Not at all. Do you happen to have the dollar amount of what the premium amortization was this quarter, maybe relative to last?

Brad, I don't have it handy with me right here. I don't want to misspeak. But I tell you what, we'll make sure we mention it in the Q.

Okay. And then it didn't look like there was a lot of additional accretion income from the GE book that came over in the charts that you include. But was there any significant mark there, or any potential for that bucket to increase?

No, not really.

Okay. Okay. And then just final bigger picture question, and you answered this to some degree with the breakdown of the LIBOR and prime loans, but just looking back over the last year, we've had the move in LIBOR this quarter, we had one Fed increase, yet your loan yields are basically about the same.

Can you talk a little about competition? Is that just more reflective of you having to give a little bit more on spread? Because maybe I would have thought you would have captured a little bit more of some of those increases in the loan yield a year-over-year basis. The competitive environment maybe is such that just hasn't been -- it hasn't been possible. Just trying to get a sense of what the next one will mean, can you capture more of it?

We saw some pick-up in our loan yields this quarter. I think where you saw the pressure over the last year was we still had stuff going out the back door, so to speak, with older deals that were higher priced that matured or got refinanced. So that was a fair amount of our pressure on the margin, over the last year. But we're seeing the rates go up.

We are seeing rates go up. Remember too, we're bleeding off accretion, Brad.

Even if I adjust for that, it looks like you're still flattish. Yes, I certainly understand.

I think -- we will have to go through that, but we -- spreads are relatively the same, what they've been. They're a little bit better. I think a lot of it might be accretion. We'll have to look at that, and again, we'll get back to you on that.

Okay. All right. Thanks. Appreciate it.

(Operator Instructions)

Our next question comes from Terry McEvoy with Stephens. You may begin.

You really cranked up the deposit growth last quarter, and I think Dave, you mentioned some of the expenses and the impact on just the deposit yields last quarter. As you think about the fourth quarter, now that the portfolio purchase is behind you, from our perspective, should we target loan growth as pretty consistent with deposit growth in Q4?

Well, you got to look at, see what happens, goes down with mortgages too and where that goes. Our pipeline is as strong as it's ever been. Notwithstanding niche pipelines, which are all very strong, our commercial real estate pipeline is about $1.5 billion on a weighted basis, a little over $900 million for the next 90 days.

That's consistent with back to the second -- the pipeline goes down in the third quarter basically, as guys play golf and use the good weather, and the fourth quarter it basically usually pops up, it's one of our busier quarters. I would expect us to have reasonable loan growth the fourth quarter.

Our loan to deposit ratio could pick up, with mortgages held or sale and covered is right around 89.8%, and it's an area we're comfortable with. So having it grow proportionately now, with deposits and loans, would be fine. I think it's a reasonable expectation.

And then just --

Just a tiny bit of capacity with the acquisition that should close.

And then just as a follow-up, Ed, thanks for running through sales practices and compensation practices within the branch. Wintrust had some unique businesses. Have you looked at all your sales practices across the Company, in terms of compensation motivation, to make sure you're comfortable with how they're conducted?

Oh, yes. I mean, the other ones, there's no cross sale. There's really no ability to do anything. There's commission-based businesses. The premium enhanced P&C business is commission based, but you really -- that would show up pretty quick if anything was going on there. You've got to book the loans and we do due diligence on those. That would be hard.

On the mortgage side, same thing, with all the work you do now on mortgages, it's hard to get anything to fall through those cracks. Yes, this is the nature of those businesses and how they work. We don't have any other cross-sales or any special bonus initiatives for bringing business on the books. It's all commission-based, and after-the-fact commission based, with clawbacks for deals that close too fast, or they reprice too fast, or whatever.

So we are very comfortable with the rest of that. We just don't have a lot of it. It's not our culture.

That's good to hear. Thank you.

Thank you. Our next question is from Kevin Reevey with D.A. Davidson. You may begin.

One question I had is, I notice your commercial and industrial, you had some pretty strong linked-quarter growth there. Was there any -- was that pretty broad-based, or was it a particular industry or area that we saw the bulk of the growth come from?

Well, that commercial and industrial line item has got the franchise loans purchase in it. So that $555 million of loans we bought from GE would be included in that line. If you back that out, the rest of it looks like relatively normal growth.

Okay. Got you. And then have you been -- any of your clients been feeling any effects of the budget stalemate that's been going on for about 18 months, 19 months in Springfield, at all?

It's been going on for 10 years.

It feels like it.

We do have a number of -- in our not for profit area, we do see there's some pain -- there's a lot of pain there, actually. A number of our clients who are not for profit charities, who have had to cut back or just stop in terms of their activities, and what they're doing, because the State isn't paying them. So we've seen the effects for sure. We've managed through those effects, as has the management of those entities.

But other than that, it's a mess. But essentially they have to do something to get through it. In terms of our C&I business, we don't, by design, do much business with governments, other than buying maybe some of their securities, because I just don't trust them.

I don't trust the Federal Government. I don't trust the State government. We don't do a heck of a lot of business with them. For the most part it has just affected charities, and they've been able to navigate through them.

Okay. Great. Thanks a lot.

Thank you. Our next question comes from Nathan Race with Piper Jaffray. You may begin.

A lot of my questions have been asked and answered. Just maybe a quick one on the servicing portfolio. Just curious what the appetite to grow that is from here. I think over the last couple quarters, the mortgage servicing portfolio has grown by roughly 20%. Just curious what the outlook is for that, going forward, in terms of --

It probably will continue to grow. We have the capabilities now. We built up enough bulk in our mortgage servicing area.

One of the unanticipated benefits of the Dodd-Frank movement was to centralize mortgage servicing in one place, which gave us -- and took it out of the 15 banks and put it in one place where we could have that specific required expertise, which then gave us the capacity to start servicing more. I never like taking mortgage loans made in our footprint by Wintrust Mortgage, and selling those to somebody else to service them. Didn't make a lot of sense to me.

So now we can keep them in-house, service them ourselves. So I would expect that it would continue to grow over time, because we like our customers to stay with us and not give them to other people.

Okay. That's all I had. Thank you.

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

Thanks, everybody for dialing in. Thanks for your support of Wintrust, and we look forward to talking to you at the end of what hopefully will be a record year. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.