Wintrust Financial Corp (WTFC) 2017 Q3 法說會逐字稿

Welcome to Wintrust Financial Corporation's Third Quarter and Year-to-date 2017 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 third quarter and year-to-date 2017 earnings press release, and in the company's most recent Form 10-K and any subsequent filings on file with SEC.

As a reminder, this conference is being recorded.

I would now turn the conference over to Mr. Edward Wehmer.

Thank you very much.

Good afternoon.

Welcome to our third quarter earnings call.

My voice sounds a little rugged.

It's from sitting out of Wrigley Field last night, commenting on the empire's inability to see if a ball was tipped or not.

I was -- it was fun.

Anyhow, with me, as always, are Dave Dykstra, our Chief Operating Officer; and Kate Boege.

They are remote.

They're not in Rosemont right now.

And Dave Stoehr is sitting here with a shot caller, just to make sure I don't say anything stupid or more stupid than usual, I should say.

I'll follow the customary format with -- I will give some general comments on the quarter.

Dave Dykstra will provide detail on other income and other expense categories, back to me for some summary comments and thoughts about the future and then time for questions.

From an earnings standpoint, we're very pleased with our results.

We posted record earnings for the 7th consecutive quarter.

Earnings for the quarter were $65.6 million or $1.12 per diluted common share, and were up 24% and 22%, respectively, from the prior year.

Year-to-date earnings of almost $189 million or $3.23 per share were up 24%, 19%, respectively, over 2016.

The primary driver of earnings increase for the quarter versus 2Q '17 was an $11.6 billion increase in net interest income due to both higher net interest margin, 3.43 versus 3.41 in Q2, and increased average earning assets.

They were up $935 million over the second quarter of 2017.

This increase more than offset the $8.8 million pretax swing, which resulted from the $4.9 million of indemned liability reduction in quarter 2, and the $3 million swing in fair value adjustments for mortgage servicing rights, where we had 825,000 positive in Q2 and 2.2 million negative in Q3.

On the margin front, compared to quarter 2, liquidity management assets stayed relatively constant, 2.26%, down 1 basis point, while average balances grew $344 million in the quarter.

The current duration of our entire liquidity management portfolio was a little over 4 years.

In earlier calls, I had talked about our intention of lathering into any increased rate environment if it were to come along, eventually, bringing our duration to more historical levels, which were about 6 years-plus or minus.

However, the flattening yield curve has precluded us from executing the strategy to date.

We're going to remain disciplined here, as we're not in the business of taking short-term pleasure for long-term pain.

Our loan yields were up 11 basis points due primarily to Fed rate increases.

We're not seeing increased spreads in any area of our lending business.

Competition remains fierce, but we continue to grow our portfolio on our terms, and again, we will remain disciplined here.

Deposit costs were up 10 basis points due to the reaction of the Fed increases and our emphasis on organic growth to both franchise value and support loan growth.

I'll update on this strategy a little bit later.

As for credit, stated in previous calls, can't get much better than we got right now.

Our provision was down $1 million versus quarter 2, as net charge-offs decreased by $787,000 to approximately $4.5 million or 8 basis points versus 10 basis points in Q2.

Allowance, as a percent of loans, was up 1 basis point.

NPLs were up approximately $9 million, 0.37% of loans.

Virtually all of the increase was associated with our premium finance portfolio.

5.6 million of the increase relates to administrative pass through life insurance loan, which is fully secured.

And as a reminder, we really haven't lost a dime in this business over the years, so we're not concerned about that.

It should clear relatively quickly.

The remainder relates to commercial premium finance loans from hurricane-stricken areas.

As is always the case in these situations, state legislators bar cancellation of policies right after the tragedy and during the recovery period.

Historically, these become quick very quickly because businesses want to ensure coverage, especially after going through what they went through.

The remainder of the portfolio showed no signs of deterioration, and we remain diligent in calling the portfolio for any signs of cracks and quickly fixing the creditor -- or credit or exiting the relationship.

Exiting the relationship is still pretty easy to do these days.

other income and other expense.

Dave will cover this area later, so I'm not going to be redundant, but I will note that our net overhead ratio was a few basis points higher than our 1.5%.

We continue to make strides improving this ratio, and believe our organic growth strategy will assist us in beating that goal in the future.

On the balance sheet side, assets grew $429 million in the quarter to $27.358 billion.

Deposits grew $289 million in the quarter.

But as highlighted in the release, this is net of a reduction of $272 million of wholesale funds, which we did not renew.

Accordingly, total core deposits grew $562 million.

Demand deposits, as a percent, went up to 28.4% of total deposits.

The growth indicates that our organic growth competency is still intact, being put on mothballs for some time.

As you know, we are a company that doesn't try to get too cute, but rather takes advantage of what the market gives us.

We're also an asset-driven company.

That is we look to loan growth first, then fill deposits accordingly, while always trying to maintain our loan-to-deposit ratio between 85% and 90%.

We also consider our core deposit base to be the franchise value of the company.

26 years ago when we started this enterprise, we relied strictly on organic growth, eventually relying on a mix of organic growth and acquisition.

During and since the crisis, we've been able to grow through accretive acquisitions on what we refer to as organic momentum growth.

But now acquisition pricing has moved away, that's not to say we're not interested in deals, but they'll probably be fewer and farther between.

We have flipped the switch back to organic growth.

This allows us to build out our franchise at very low all-in cost, given the capacity and operating leverage we have in the system.

We will moderate deposit growth to follow loan growth until such time, and if what -- the yield curve begins to steepen and we can make adequate returns on our liquidity and as well as maintaining our loan to deposit ratio of 85% to 90%.

Loan growth.

Net loan growth moderated a bit in the quarter, as net loan -- loans net of mortgages held-for-sale, covered loans and mortgage warehouse loans grew $210 million.

New loan production, however, was consistent.

It's just around $1 billion.

It was $100 million lower than average, but that's probably due to the huge quarter we had in Q2.

But payouts were about $150 million over that experienced in the recent past.

Approximately 2/3 of this increase was due to loans leaving the bag for better rates and terms, while the other 1/3 related to normal courses of business.

Businesses being slowed by our private equity clients and the like.

All that being said, total loan growth for the year stands just under 10%, which is a very good number.

Our pipelines remain consistently strong, and we're watching carefully to see if this accelerated payout trend continues due to rates and terms, and see if it's just a pattern, or it's just an anomaly.

We continue to maintain our historically credit -- conservative credit standards.

We have no interest in chasing the market if the former is, in fact, the case.

To date, in October, our loan growth to pull-through has been pretty good.

We don't see any -- we seem to be going back to normal.

But all that being said, we still believe that we can grow at the high-single-digits growth rates for the rest of this year and for next year.

That's what we're looking at anyhow.

Speaking of covered loans, which we were earlier, earlier this week, we consummated our agreement with the FDIC to end loss share in our remaining covered asset portfolio.

We didn't have a lot left.

But this will result in us recording a small gain, approximately $400,000 in saving, $400,000 in Q4, and saving approximately $800,000 here in the next few years, as we will no longer need to amortize the discount related to the indemnification asset, which will disappear from our balance sheet.

The actual numbers are highlighted in the earnings release.

All in all, our acquisition of 9 sale banks from the FDIC resulted us -- resulted in us benefiting financially and strategically, as we expanded our franchise geography for a nice profit, while making the banking world safer for everybody.

Now I'll turn it over to Dave for his review of other income and expense.

Thanks, Ed.

As normal, I'll briefly touch on the noninterest income and noninterest expense sections.

In the noninterest income section, our wealth management revenue totaled $19.8 million for the third quarter of 2017, which was down just slightly from the $19.9 million recorded in the prior quarter, but was up from the $19.3 million recorded in the year-ago quarter.

The trust and asset management component of this revenue category increased to $14.7 million from $14.5 million in the second quarter of the year, whereas the brokerage revenue component declined slightly to $5.1 million in the third quarter compared to $5.4 million in the second quarter of last year.

Overall, the third quarter of 2017 exhibited relatively stable revenues and represented another good quarter for our wealth management fee income.

On the mortgage banking revenue side, it decreased approximately 22% or $7.8 million to $28.2 million in the third quarter from $35.9 million recorded in the prior quarter, and $34.7 million recorded in the third quarter of last year.

The decline in this category's revenues from the second quarter of this year was due to lower origination volumes, as a result of stronger seasonal home purchasing activity in the second quarter, and a $3 million negative quarter-over-quarter swing in the fair value of mortgage servicing rights.

The company originated and sold approximately $956 million of mortgage loans in the third quarter compared to $1.1 billion of originations in the prior quarter, and $1.3 million of mortgage loans originated in the third quarter of last year.

Also, the mix of loan volume related to the purchased home activity was approximately 80% compared to 84% in the prior quarter.

Given our existing pipelines and the interest rate environment, we expect originations to decline slightly in the fourth quarter, but the pipelines do remain relatively strong.

The mortgage servicing asset valuation decreased by approximately $2.2 million, primarily due to retaining our -- sorry, increased by approximately $2.1 million, primarily due to the retaining servicing of approximately $319 million more of service mortgage loans net of paydowns and payoffs, but it was negatively impacted by an estimated fair value adjustment of approximately $2.2 million during the quarter Additionally, we continue to look for other opportunities to enhance the mortgage banking business, both organically and through acquisitions.

The revenue in the third quarter of 2017 for operating leases totaled $8.5 million compared to $6.8 million in the prior quarter, increasing 24% during the quarter.

The increase in this revenue item compared to the prior quarter is primarily related to the recent growth in the operating lease portfolio.

And again, this relates just to the operating leases, as the capital leases are carried in the loan section of the balance sheet.

Other noninterest income totaled $13.6 million in the third quarter of this year, down from approximately $4.5 million to -- from $18.1 million in the second quarter of this year.

The primary reason for the decline in this category revenue is related to the second quarter reduction of approximately $4.9 million of the estimated liability related to the clawback provisions with the certain loss share agreements we had with the FDIC, whereas the third quarter had no similar adjustment recorded.

And the category was also impacted by slightly lower interest rate swap fees of approximately $459,000, and those declines were offset by slight increases in incomes from letter of credit fees and foreign exchange fees and valuation adjustments.

Turning to the noninterest expense categories.

Noninterest expenses totaled $183.6 million in the third quarter of this year, remaining essentially flat with the prior quarter.

I'll talk about the more notable changes from the second quarter by category now.

Salaries unemployed benefit expenses remain relatively flat, but actually decreased to approximately $251,000 in the third quarter compared to the second quarter of this year.

As to the components of this expense category, the base salary expense and employee benefit components were up approximately $1.7 million in the third quarter compared to the second quarter.

The primary cause of the increased expense in these categories was due to lower amount of salary deferrals related to loan origination cost, which reduced salary expense, with such deferrals being approximately $1.3 million less in the third quarter of 2017 than the prior quarter due to lower net loan growth.

Accordingly, the primary reason for the decrease in this category relates to commissions and incentive compensation expense, which decreased approximately $2.0 million to $32.1 million from $34.1 million in the prior quarter.

The company experienced a decrease in commission expense related to lower mortgage revenue, which was the main reason for the decline.

As I discussed in regard to operating leases in the noninterest income section, the company experienced a corresponding increase in depreciation expense related to the operating leases due to the growth in that portfolio.

Again, we expect this category of expense to grow at a similar rate to the revenue side, as the portfolio of operating leases continues to expand.

Marketing expenses increased by approximately $846,000 from the second quarter to $9.6 million.

This category of expense increased as our corporate sponsorships tend to be higher in the third and the second quarters of the year due to our marketing efforts with the Chicago Cubs and the Chicago White Sox, as well as increased spending related to deposit and branding marketing to grow our deposit base to support the growth in our loan portfolio and to enhance the franchise value of the company.

Professional fees decreased to $6.8 million in the third quarter compared to $7.5 million in the prior quarter.

Professional fees can fluctuate on a quarterly basis based upon the level of legal services related to acquisitions, litigation, problem loan workout activity, as well as the use of consulting services.

Now this category of expense remains somewhat elevated from a historical perspective, as we continue to utilize consulting agreements, as we invest in customer experience and product distribution enhancements using technology and other IT initiatives.

The miscellaneous line item on the overall noninterest expense category decreased by approximately $1 million in the third quarter to $15 million.

The lower expense level is due to a variety of relatively small expense savings spread across a number of expense categories.

All other expense categories other than the ones I just discussed were up very slightly on an aggregate basis by approximately $50,000 compared to the prior year quarter, and there were no significant items that were particularly noteworthy on an individual basis.

As Ed mentioned, the company's net overhead ratio stood at 1.53% in the third quarter, and was slightly above our goal of 1.50%.

Additionally, the company's efficiency ratio improved to 61.7% in the third quarter from 62.0% in the second quarter of this year.

A key element causing the change in both of these ratios is due to the decline in the mortgage banking revenue, including the MSR fair value adjustment, which negatively impacts the net overhead ratio and positively impacts the efficiency ratio.

With that said, we'll continue to be diligent in our efforts to improve upon these ratios in future quarters.

So with that, I will turn it back over to Ed.

Thank you, Dave.

Some summary comments and thoughts about the future.

All in all, I've got to say we're very pleased about our progress and really pleased about how we are positioned going forward, while we remain very well positioned for higher interest rates, and hopefully, a steepening of the yield curve.

As a max tax payer, we will greatly benefit from the tax plan being discussed in D.C. if they can get their act together.

Our loan pipelines remains consistently strong, and we will not waiver from our consistently conservative credit standards going forward.

We will continue to review the portfolio for even the smallest of cracks.

Credit is good.

It's as good as it's going to get with the dual (inaudible) sides of the cycle approaching.

Our organic growth strategy is working to date, and we look forward to leveraging our infrastructure through this low-cost growth approach.

The Wealth Management business continues its slow and steady growth.

The mortgage area is doing better-than-expected, as I expected personally, but we are prepared for any slowdown if it were to occur.

We still like the mortgage business.

We feel it's a nice internal hedge versus falling rates.

We keep our balance sheet structured for rising rates.

So we like that business.

People are always going to need mortgages, and we're investing in that business to get a little bit more online capabilities and the like and to change some of our -- to get better distribution channels in place.

We have a number of new branches out on the drawing board for the next 2 years.

We'll continue to look at acquisition opportunities in all areas of our business, but we'll remain disciplined in our approach.

We've maintained our goal of double-digit earnings growth and protecting our book value -- our tangible book value per share like it was gold.

And with that, hoping the Cubs can pull one off tonight.

Thanks for listening and your interest in Wintrust.

And it's now time for questions, so thank you.

(Operator Instructions) And our first question will come from the line of Jon Arfstrom from RBC Capital Markets.

Question, just 2 things.

On the loan growth and the paydowns, Ed, you talked about a little bit on the paydowns.

But do you feel like that is just an aberration for this quarter?

Do you expect that to subside somewhat?

I know you talked a little bit about expecting this high single-digit growth pace, but it just -- it seems like those numbers are a bit elevated this quarter.

Well, they were a bit elevated, Jon, and I don't know.

I think in our -- we were targeted in one area of our business, the franchise area.

As you know, we, along with a couple of other banks, divided up the GE franchise portfolio.

And I think that there was some pirating going on because some guys got some GE guys.

Some guys got other GE guys, and I think someone took aim at us.

We have responded to that by, as you would expect, by taking aim at some people ourselves.

So I think that was part of it.

I think we're seeing a lot of PE firms sell businesses now with multiples of where they are.

We have a large PE portfolio of their companies that the private equity firms own.

Those are a little bit accelerated.

But the ones we see for refinance outside the bank for better rates and terms, well it was up a bit, about 7%, or the number is 7% of the total pay downs, but I don't know.

Our pipelines are pretty strong.

We're going to monitor that, Jon.

Our overall, when we monitor our exceptions, are down.

We are -- exceptions to our loan policy are down significantly, as we pay a lot of attention to that.

As you know, those are our circuit breakers.

But we're not going to chase deals for that.

But I'm not calling rope-a-dope yet, not by a long shot.

I think -- my gut is it was a bit of an aberration this quarter.

We're going to monitor it.

We're going to continue to do business on our terms, and we believe our pipelines are again consistently strong equal to prior quarters.

So we'll see where that ends up.

But I -- I'm not ready to call it quits.

Yet, I think it was a bit of an aberration, and a bit of being targeted by some folks.

Okay, that helps.

And then, I guess, the other side maybe a little more positive was mortgage.

And I guess I don't know if Dave Dykstra is in a spot to answer the question here.

But I'm a little surprised by the guide for only modestly down in terms of the production volumes in mortgage.

Can you maybe talk to us a little bit about what's going on there?

We did $956 million.

We probably did another $100 million of stuff that we keep on our books, floating rate loans and the like.

And we're -- right now, the pipelines look like we were probably $300 million a month rate, which should get you about $900 million.

Maybe we keep $100 million of that on the balance sheet.

So it might be in the $800 million to $900 million range, but we really don't have good clarity yet on December's pipelines.

So we'll have to see how that comes in.

December tends to be a little bit slower.

So if those pipelines drop off from the sort of the $300 million-ish range, it might be a little bit less.

But we still think that they're decent pipelines for this time of the year.

So I think they'll be down, like I said, slightly.

But it's not like the entire mortgage business is dropping off the face of the earth and going away.

There's still decent flow going through the pipelines.

Remember, Jon, I mean, the numbers are big, right?

We talk about $1 billion of production and all of that.

But the fact is what falls to the bottom line is very helpful.

Don't get me wrong, but it isn't -- it's not as material to -- you drop by $100 million, t's maybe $1.5 billion pretax or something.

I mean, it's -- we're concentrating more on the margin and building that up and growing the leverage of the -- using the leverage of the company to keep our -- to drive our net overhead ratio down.

If the Fed raises rates again, that could affect mortgages, but again, that will help the net interest margin going forward.

So we all get -- seem to get fixated on mortgages, but maybe we don't do a good enough job of explaining what actually falls to the bottom line in our disclosures.

And we're going to talk about that prospectively, that maybe we can do a better job.

So you all can understand the materiality of that business.

The other thing, too, Jon, is that if rates do go up, and you'd expect to not have a significant of mortgage servicing rights valuation adjustment, which was a couple of million dollars pretax this quarter.

Yes, I think that would definitely help with a little more mortgage disclosure because it's a big revenue number but, I think, we all understand inherently it's not a big efficiency ratio.

There is a bigger efficiency ratio there so that would help definitely.

And our next question will come from the line of Chris McGratty with KBW.

Ed, just a question on the margin.

You built cash quite a bit because of the dynamics of the balance sheet.

And you finally got the beta catch-up that you were -- had been talking about for 1.5 years and which is going to -- and what's kind of change with deposit pricing in Chicago?

Is this -- would you kind of test this as a catch-up or kind of -- is the 40% kind of a beta about where we are at if we get more hikes?

I think it's a little bit of both.

I think it's a little bit of catch-up.

And I think some of it is associated with -- we did grow by over $500 million of core deposits, and we do pay up a little for those.

But all in all, the cost of bringing those things in our -- are a little low.

Or I mean, they are lower.

I mean, it's a very low cost because we have the capacity to bring those on without a lot of -- without a commensurate increase in expenses.

So I think it's a little bit of both.

There is some catch up there.

We have been able to lag a lot longer than we thought we were -- than we would.

I still believe that we'll be able to lag if there are any future increases, where you would see a bigger beta pickup, I think, is the long end moved a bit.

But if that's the case, we're sitting on the strategy as laddering out and getting our duration of our liquidity management portfolio back to 6-plus years.

So I think that would more than offset that.

So for the -- in the interim, we're going to have a -- it's not a beach ball underwater, rises in rates will be more of a ping pong ball underwater until you see a little steepening in the curve.

Okay.

That's helpful.

And given where rates are and kind of investment opportunities in the bond portfolio, how should we be thinking about the near-term margin?

Obviously, this quarter benefited from June.

We won't have that benefit next quarter, but you've also got the elevated cash that likely gets put to work.

How do we think, Dave, about the margin in the next couple of quarters?

Well, I will say that if they raise in December that will obviously be helpful.

But I think as long as we can hold our deposit pricing here, we should be able to -- we don't give guidance on the margin per se too much.

But I think we should stay relatively flat.

You might be able to get just a little bit of up depending on the mix of the balance sheet but not a substantial change either way.

And our next question will come from the line of Brad Milsaps with Sandler O'Neill.

Ed, appreciate all the color around the pay downs that occurred this quarter.

And I think you said, we should kind of think about high single-digit loan growth.

I guess, I've always kind of thought about you guys as maybe double digit plus or minus.

Obviously, you always have great growth.

Do you think it's more kind of just the large numbers sort of catching up with you?

Or is it more -- and you answer this a little bit.

But you're sort of view the market just maybe the opportunities aren't there because of pricing or terms or anything else that we should may be read into that?

I think it's a lot of large numbers they're basically taking over.

We're getting bigger, and it's -- we -- unless we bring on another line of business or the like and started it up from scratch, I mean, that's what we're looking at.

Or if we brought on broader portfolio or jumped into a lot of business that way.

Right now, that's what we look given the lines of businesses we have and where we think our pipelines are and where we can go.

If you had all of a sudden a big increase in insurance rates pretty -- that the commercial insurance rates, you'd blow through high single-digits just because the premium finance business would grow dollar for dollar with that.

And so this is just the way we look at it right now.

I think it's more of the law of large numbers as opposed to -- and what we think we -- our capacity is to pull things in given the infrastructure we have right now.

That's helpful.

And then maybe just kind of one housekeeping item.

Dave, I know there's some change with the Illinois statutory rate, the tax rate barring anything on the federal level, is this rate pretty good going forward, around 37% kind of where it has been historically?

Or do you expect any change there?

Well, I'll tell you the tax rate cost is about $0.5 million this quarter.

So that was the impact from the rate and this was the first quarter we had it.

And so that's baked into this quarterly number.

And so it's a pretty good number with the caveat that the stock-based equity deductions that you get through the tax now and we've disclosed that in our press release was tend to be higher in the first quarter.

Last quarter, we had about $3 million-- or last year in the first quarter we had about $3 million benefit.

And it really just depends upon the timing of when people are exercising option and restricted stock awards and more of the company stock prices at.

So those can ebb and flow a little.

But other than the first quarter, they should be relatively stable.

So yes, I think, it's probably a decent run rate to try to peg.

And our next question will come from the line of Terry McEvoy with Stephens.

First question, you talked about the $800,000 of savings from basically getting rid of the indemnification asset.

It looks like there is about $60 million or $65 million portfolio of corporate loans today.

We have to take any sort of provision to build up the reserve in Q4?

No.

There would be no impact from that.

If there is a provision, we do have -- we do show an allowance out on our balance sheet for the covered loans and that will just carry over into the main portfolio but they are valued appropriately.

Yes, if they turn sour on us, yes, then you'll see more provision coming in.

But these have been here a long time, and we kind of felt very comfortable that they were marked properly and that we're in good shape there.

But now they should act like the rest of the portfolio.

They will be blended in with the rest of the portfolio.

So you really won't see -- won't even see them anymore.

And we've scrubbed that portfolio pretty well.

And like you said, we're down to $46 million at the end of the third quarter.

But you have to remember, just because they're covered, it doesn't mean they're bad loans.

I mean, these loans have been around for quite a while so these are actually more of a seasoned portfolio at this point.

So we think we're in pretty good shape on that.

As a follow-up, last quarter, you talked about just changes in terms of getting more out of your branches on the deposit side.

Did you grow the number of households within those targeted branches?

And did that strategy have any impact as it relates to deposit costs?

I know you addressed it earlier but anything specific you could call out?

I can't call it, yes, we did pick up [bounce holes] in the branches.

We wanted the 500 some-odd million dollars of core growth in a quarter, not bad for just starting out and targeting just our underutilized branches, it's worked very well for us.

So I don't have the numbers per se as to -- we haven't broken them out yet as to how much were related to promotional issues and how much were related to just catching up and having to raise rates in this new environment.

So I just tell, it's working very well.

We'll post that.

I mean, we go in and out.

I mean, based on our -- where we project loan volumes to be.

We've been running higher than the 85% to 90% loan to deposit ratio, which is our stated goal.

We put up with that for a little while.

You can see that we grew -- that number fell a little bit.

I want to get back to the 85% to 90%.

We still believe liquidity is important so that which would add to our liquidity management portfolio.

So who knows where that will go, but we want to bring it back to 85% to 90%, we're probably at the high end of that, maybe 90%, right at 90%, which will add a little bit to the liquidity management portfolio, which may hurt our margin just a bit.

But we think there is enough pull-through from our life insurance loan portfolio, which is approaching $4 billion reprices 1/12 a year.

We're still experiencing great benefit from that on the asset side.

So it's all -- that's where we kind of coming to the point where our margin is like a ping pong ball underwater and so they're long end moves.

With the long end moves, it gets more like a min-sized beach ball underwater.

Did that make sense?

Terry?

(Operator Instructions) Our next question will come from the line of Kevin Reevey with D. A. Davidson.

So first, I think, Ed, you talked about opportunities to enhance your mortgage banking business.

Could you give us some color as to kind of how you plan to go about that?

And would that require any additional investments?

And if so, do we need to adjust our expense numbers for that?

Well, as Dave mentioned earlier, we continually look at our partner acquisition opportunities.

People may have a better distribution than we do to more government that we -- our government numbers are kind of low.

And government, as you know, are the higher margined -- is higher margin business.

So we'd like to get into that.

And we also need to enhance our platform for online stuff, which we've already been experiencing a number of those costs where almost 100% converted to a new LOS systems, which will tie into a online platform, which -- most of those costs have been built in.

So we're -- this quarter, next quarter, you'll be seeing us -- most of those costs should be behind us.

So I don't think you have to adjust for anything.

But we are consistently as every other bank is our greater number of earnings calls for the bigger guys spending a lot of money on consultants to enhance the entire customer experience, both through in-person and digital.

So -- but we're trying to maintain those -- maintain that 1.5% net overhead ratio and drop that as we grow.

So I don't know if we have to change anything.

I think a lot of this is already ongoing and we are taking advantage -- we are managing it so there is not any big humps in it.

And then on the branch front, Ed, you talked about, you had a -- you have a couple of new branches on the drawing board.

I know most banks are trying to reduce their brick and mortar and you're going to expand it.

Can you kind of give us some -- walk us through kind of the thinking there in areas you're looking to expand into?

Kevin, I might disagree with you that most banks are trying to cut brick and mortar.

When you look at Chase and if you look at -- a lot of these banks are -- they say they're cutting them, but they're actually [net] expanding their branch networks.

But notwithstanding that, we still have a lot of geography to cover in our target market area, which is 2 hours from where I'm sitting right now.

We have been doing that through acquisition and picking up banks with branch networks, some of which we had closed or we had overlap but providing us with new geographies.

As we believe acquisition will be fewer and farther between than maybe you've seen us accomplish in the last 10 years, we flipped the switch and go back to de novo growth.

So most of it is geographic expansion, some areas where we want to be.

And -- but we're not building the big monsters.

These are more of the smaller-type convenience branches that -- but we do need geographic coverage in these areas in Chicago and there's many we're not in yet.

So we do time them so that there is no -- it's not like we're opening up 50 branches in 1 month.

I mean, over the next 18 months, we probably have 10 or 12 on the drawing board, and we do post them in and out depending on the numbers and where we need to go.

But our goal is to continue to grow earnings double digit every year and to increase tangible book value per share at the same time invest the business, continue to build and grow.

We are a growth company.

We always have been.

And Chicago is a market that is very -- it's like a big quilt.

There's 70-some-odd neighborhoods just in the city of Chicago, notwithstanding the suburbs, where there's a lot more.

And so we need to get there eventually and bring the Wintrust brand to them because as we have hopefully evidenced to you, we're able to provide that positioning as the local alternative to the bigger banks and it's worked very well for us.

So that's how we're going to work our growth going forward.

I don't expect there to be any material changes in our expense structure and we're still, again, shooting for 1 50 or better in our net overhead ratio.

And our next question will come from the line of David Chiaverini with Wedbush Securities.

A question on loan growth.

How much of the loan growth in premium finances is coming from market share gains versus growth in the overall premium finance business?

Well, there's 2 divisions of the premium finance business.

One is the life insurance business, where we're -- where it's actually bigger that our C&I business, our commercial business.

That's all market share gain and new business gain for us.

It's not a premium and issue on the market for the life insurance.

On the commercial, Dave, I'll defer to you on what the average ticket size is last month.

Yes, the average ticket size was -- has stayed relatively constant.

So most of the gains that we get there are really -- are market share gains.

So like Ed mentioned before, if the average ticket size would go up, again, our average ticket size tends to be in the low to mid-$20,000 range.

If insurance premiums were to increase, we've seen those average ticket sizes go up to as high as just over $40,000 in the past.

So if the insurance market hardens and premiums go up, there's a lot of runway there, where we could get more outstandings and do it just from the premium increases.

But right now, we're just working hard to go out and steal market share from other people and that's how we're growing the business.

Now given credit losses in that business is essentially nonexistent, what would prevent you from really putting the pedal to the metal in that business and gain even more share?

Is it tight pricing in that if you were to push too hard, the pricing would come down on those loans?

Or I'm curious on your thoughts there.

Yes.

Well, it's a very competitive industry.

I mean, we're a very large player in the industry.

If you can combine both divisions, I think, we're probably the largest in North America.

But on the P&C side, we're probably the third largest player, but it is very price competitive in the marketplace.

So if you really wanted to drop your rates on the loans and go for big ticket items, you could do that.

But you would really impact the margin and you do kind of get paid for risk.

So the market is competitive.

So to gain that additional market share and put the pedal to the metal, you could do that, but you would have to give up on yield.

The cannibalization on that would kill you.

You bring up all that business, but you have to cut the rates on existing business and then what would you make other than take on more risk for no more money.

And our next question will come from the line of Michael Young with SunTrust.

Ed, just wanted to follow-up on the high single-digit growth outlook.

Is there another piece of that aside from just law of large numbers the fact that deposit costs are increasing so you guys are being a little more careful on your pricing of new loans, trying to keep those higher to maintain margin?

Well, we do -- I've said in previous calls, our loan policy and our profitability models are our circuit breakers in our Bible.

And we abide by that looking at overall relationships and what the returns are.

So if the returns aren't there, we won't do it and that's kind of one of the things that drove us into rope-a-dope last time when we hunkered down.

We're still seeing -- getting the returns we want to get from the markets.

You're not getting any better returns than you were 3 or 6 months ago.

The spreads that -- it's still very competitive and the spreads are tight.

But we're able to garner relationships.

It's just we have a lot of momentum.

We've got a lot of brand momentum.

We've got a lot of local loyalty momentum here in Chicago with some of the changes that have taken place in the competitive market.

We're able to still to put business out on our terms.

So you worry about rate and you want to get paid for your risk and you worry about exceptions to loan policy.

We monitor those every month very closely down to the real reason why there might be an exception, and we don't like those a lot.

So I think that the loan growth itself is a function of being as diversified as we are, with 1/3 of our loan portfolio coming from our niche businesses, where we've seen good growth.

Our leasing business is doing very well in spite of the, what I had talked about earlier on the franchise business, they did grow in the quarter.

We are looking at a lot of opportunities there.

So I think our diversification helps us a lot in that area.

So that's why we feel confident that they're comfortable in saying that right now, it looks like single-digit loan growth would be okay and it all assumes we'd get it on our terms.

Okay, great.

And just maybe as a follow-up on the inorganic side.

Is there anything precluding you from M&A other than just the pricing of the deals you're seeing at this point?

No.

No, nothing at all.

We're opening branches.

We've got -- we're moving ahead just fine.

So it's just -- it's pricing.

It's the gestation periods.

People -- you start talking and the gestation periods are forever.

Well, I can do better.

I'm going to do better next quarter.

I can get more money.

We had one guy say, your stock went up, we want the same number of shares we have before your stock going up.

You're like, you're not worth any more than that.

So -- and there's also -- there's been a pretty well good shakeout here in Chicago in terms of just the overall availability of banks and where we want to be.

So there comes a point in time where the -- you hit that inflection point where it's cheaper to open organically and de novo than it is to buy.

And again, we protect -- we don't like dilution, we protect our book value.

So it's more a function of what's going on in the market than anything else.

And our next question will come from the line of Nathan Race with Piper Jaffray.

Ed, a higher level question for you.

Just given some of the ongoing challenges in Illinois and some recent M&A in Wisconsin, I appreciate your comments earlier about focusing on de novo efforts in the Chicago end area near term.

But can you kind of see Wintrust shifting more towards de novo efforts in Wisconsin adding commercial bankers in that market given some potential disruption that could occur from transactions going on in Wisconsin?

Absolutely.

We love disruption.

We like to be disruptors.

But no, it's always a balanced approach and Wisconsin is very important for us.

We think that's a very fertile market.

We know that market very well.

I say that, but we were somewhat surprised over the last 10 years that there were more failed banks in Wisconsin.

I believe that the Wisconsin bankers where the regulators are more lenient than they were here in Chicago.

So there's still a lot of opportunity up in Wisconsin for both organic and acquisitive growth.

But we're balancing it out.

And we opened a branch up there.

We've got a couple more on the drawing board for up there.

But Wisconsin is an important part of what we're doing.

And we're very happy with the growth up there.

And we are commencing a fairly nice commercial initiative up there also to take advantage of the things you were just talking about so.

Got it.

I appreciate that color.

And can you just remind us what the average earn back period is on some of your recent de novo branches?

They're usually profitable within 1 year.

Got it.

All my other questions have been answered.

Thank you.

It looks like, we're all done.

Everybody, thanks very much for listening, and we'll talk to you next quarter.

Go Cubs.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the program, and you may all disconnect.

Everybody, have a wonderful day.