Wintrust Financial Corp (WTFC) 2018 Q1 法說會逐字稿

Welcome to the Wintrust Financial Corporation's First Quarter 2018 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 statement.

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 first quarter 2018 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 would now like to turn the conference over to Mr. Edward Wehmer.

Thank you.

Welcome, everybody, to our first quarter earnings call.

With me, as always, are Dave Dykstra; Kate Boege, our Legal Counsel; and Dave Stoehr, our Chief Financial Officer.

We'll have the same format as usual.

I'll give some general comments regarding our results; turn it over to Dave Dykstra for more detailed analysis of other income, other expenses and taxes; back to me for some summary comments and thoughts about the future; then on to questions.

We're pleased to report on an earnings front that we recorded record earnings for the ninth consecutive quarter in a row.

David Long, if you're out there, you should know Nick Papagiorgio will be very proud of us.

Net income totaled $82 million, up 19% over fourth quarter of '17 and 40% over the first quarter of 2017.

Earnings per share were $1.40 compared to $1 in the first quarter '17 and $1.17, 40% up over last year, almost 20% up over the fourth quarter.

Just to note, pretax income was $108 million, which is almost 13% over the fourth quarter and 23% over the first quarter of last year.

So even without taxes, we had good operating results.

Our return on the assets was 1.20% compared to 1% at the end of the fourth quarter of last year.

Return on equity was 11.3%, and return on tangible equity is 14%.

And as is readily apparent, our operating trends remain consistently positive.

On the net interest margin front and net interest income front, the net interest margin increased 9 basis points over the fourth quarter '17 and 18 basis points over the first quarter '17 to 3.54%.

Net interest income grew $6 million over the fourth quarter 2017 despite 2 days -- 2 less days quarter versus quarter.

Both increases were driven by the higher rate environment and a large earning asset base.

The average earning asset base grew $586 million in the quarter.

Earning asset yields increased 13 basis points versus the fourth quarter, while interest expense increased 8 basis points over the fourth quarter of 2017.

Our loan-to-deposit ratio for the quarter rose to 95.2%, obviously higher than our desired range of 85% to 90%.

Some of this was caused by our back-end-loading of loans in the quarter.

That is ending loans exceeded our average loans by $365 million.

This bodes well for -- as a head start for Q2 earnings of this year.

The deposit marketing is just kicking in, so we'd expect this number to begin receding towards our targeted ratio.

Accordingly, we expect our deposit rates to increase going forward.

Our historical beta to date has been in the 20, low-20 range.

We expect this number to be in the 40% range going forward.

As we are still very asset-sensitive, additional rate increases, including the one announced in mid-March, should still add materially to our bottom line despite this increased deposit beta.

Every 0.25 point increase in Fed funds should continue to add north of $20 million to net interest income on an annual basis.

You might note that this number has not changed from past discussions due to the increasing size of our balance sheet.

In other words, we expect our rates to increase -- our deposit rates to increase a little bit faster, but our balance sheet has grown, and that should cover that.

We've been in no rush to build our balance sheet heftily as the yield curve -- as the long end of the yield curve has yet to move in concert with the short end, thereby, forestalling the liquidity play we have discussed in the past.

This initiative is still in the cards for us.

I expect our loan-to-deposit ratio to stay in the low 90s until such time as spread for the long end gets better.

More on this later.

As such, with future rate increases, we anticipate our net interest margin to continue to grow.

Remember that it takes a full year for these increases to work their way through our balance sheet.

So some of the benefits of some of the past increases are still being realized.

On the credit front, credit remains historically great.

Both NPAs and NPLs were down from an already low numbers, a $3.5 million decrease in total.

OREO balances were down $10.3 million as we continue to push out old assets.

Valuation charges were up as we reduced the number of older properties to fire sale values just to get them out of here.

Times are good, let's clear the deck, I think, is the idea.

So we really reduced the number to, really, liquidation value.

As we had some lowball offers, why not push them out now?

NPLs were down a touch versus Q4.

We will see there's a change in the mix of the NPL -- of that NPL portfolio.

Commercial premium finance loan nonperformers increased by $4.5 million in the quarter, while all other categories decreased by a like amount.

This increase was due to 3 unrelated yet onetime events.

These events also resulted in net charge-offs in this category, increasing $2.6 million from Q4 and rising to 68 basis points versus our normal historical rate, which resides in the mid-120 -- or mid-20 basis point range.

The first of these was an agency fraud of about $1.5 million.

We get one of these about every 10 years.

This one, we usually get 4 or 5 a year.

We catch them early.

This one was not caught due to human error, but we expect [minimal] recovery.

As you know, this is one of the risks of the business.

We are very diligent in this area, but this is one that was not caught as early as it should have been.

Full review of the portfolio ensued our discovery of this incident, with no indication of similar occurrences.

Controls have been modified accordingly.

The 2 other onetime events related to the bankruptcies of 2 small casualty insurance companies.

We expect to recover majority of these funds through a liquidation process, but these can take time, and I mean time in years.

Refunds confirm the data that they are carried in NPLs, while others were charged off, so we'll look at a recovery.

As said, we consider the timing of these events to be anomalies.

The core business remains a very good one for us.

We expect net charge-offs in the normal range going forward.

So in summary, credit remains very good.

NPAs as a percent of assets decreased to 0.44% from 0.47% on the charge-offs.

Reserves as a percent of NPLs was at 1.56% -- or 156%, up from 153% at year-end.

Net charge-offs as a percentage of loans increased 5 basis points to 12 basis points for the quarter.

We continue to cull our portfolio for cracks and will expeditiously move assets out when said -- any said cracks are found.

We will also aggressively work our OREO portfolio to clear the decks.

On the other income and expense side, Dave is going to go through these in detail momentarily, but just some general comments.

On the mortgage front, our acquisition of Veterans First, which is going according to plan, provided a little noise in our expense numbers as we experienced a full quarter of overhead expenses but only one month of revenue.

As part of the deal, they got to keep and close the loans that were in their pipelines as of the closing date.

Dave will explain this a little further.

Our wealth management operation continues to improve, with revenues increasing to almost $23 million for the quarter.

And then overhead ratio for the quarter was 1.58%, above our target of 1.5% but better than -- 11 basis points better than the fourth quarter of 2017.

Some of this was balance sheet-driven because we are delaying our initiative -- delaying pulling the trigger on our liquidity initiatives.

Other factors included the Veterans First acquisition, an historically slow first quarter in the mortgage area, our aggressive approach -- and our aggressive approach to clearing out some old OREO expenses and some other expenses that Dave will discuss.

A net overhead ratio of 1.5% or better remains our goal for the year, and we believe it to be obtainable.

On the balance sheet front, assets totaled $28.457 billion, up 7.6% from the fourth quarter and 10% from the first quarter of '17.

Loans demand was very good across the board with $22.47 billion of loans, up $519 million from the first quarter -- or the fourth quarter and $2.2 billion from the fourth quarter.

Deposits were a little bit slow coming in.

We'll talk about that in a second.

And as I mentioned, we start the quarter $350 million ahead of the game in terms of average versus ending balances going forward.

Loan growth is projected in the high -- as we projected, was in the high single digits, and growth was across the board.

Loan pipelines are consistently strong and actually increased this quarter.

Deposit growth was negligible, and some of our year-end -- some year-end large account balances were moved out.

It should be noted that we started our marketing at the beginning of this year.

And as such, we opened over 3,000 new checking accounts in the first quarter.

We intend to continue our marketing here and also begin cross-selling new relationships to our new customers.

As mentioned, the loan-to-deposit ratio is higher than we want.

The liquidity initiative we discussed is to have deposits growth outpace loan growth over time.

The excess liquidity generated would be invested in a laddered securities portfolio.

This would have the effective increase in earnings and ROA; lowering our net overhead ratio and marginally decreasing our net interest margin; and lessening our positive interest rate sensitivity, which makes sense, as rates increase, we'll be bringing that down.

With the curve flattening, we have yet to pull the trigger here.

Our marketing plans are kicking off.

We expect to begin making some headway on this initiative throughout the rest of the year.

I'm going to turn it over to Dave for his discussion of other income, other expenses and taxes.

Thanks, Ed.

As normal, I'll touch on the noninterest income sections and the noninterest expense sections as well as a brief review of the taxes.

The noninterest income section.

Our wealth management revenue totaled $23 million for the first quarter of '18, which was up 5% from the $21.9 million recorded in the prior quarter and was also up from the $20.1 million recorded in the year-ago quarter.

The trust and asset management component of this revenue category increased to $17 million from the fourth quarter -- from $15.8 million in the prior quarter due to market appreciation at the beginning of the quarter.

The brokerage revenue component remained relatively steady at $6 million in the first quarter, down by only $36,000 from the prior quarter.

Overall, the first quarter of 2018 exhibited strength in revenue generation and represented a record quarter for our wealth management fee income.

Mortgage banking revenue increased 13% or $3.5 million to $31 million in the first quarter from the $27.4 million recorded in the prior quarter and was up substantially from the $21.9 million recorded in the first quarter of last year.

The increase in this category's revenue from the prior quarter resulted primarily from additional revenue of approximately $5.9 million related to the Veterans First acquisition and a $4.1 million positive fair value adjustment related to the mortgage servicing rights asset.

That $4.1 million fair value adjustment on MSRs compared to just $46,000 fair value adjustment in the fourth quarter of last year.

This was partially offset by lower origination volume due to typical seasonality during the winter months in our primary market area.

The company originated and sold approximately $779 million of mortgage loans in the first quarter, including approximately $112.5 million related to the Veterans First acquisition.

This compares to $879 million originations in the prior quarter and $722 million of mortgage loans originated in the first quarter of last year.

Also, the mix of loan volume related to purchased home activity was approximately 73% compared to 67% in the prior quarter.

Now given existing pipelines, a full quarter production for our Veterans First product line and the spring buying season, we expect originations to increase nicely in the second quarter of 2018.

As you know, the acquisition of Veterans First happened in January of this year and began to contribute to mortgage revenue as we built on our pipelines and began to close on those loans primarily in the latter half of the first quarter.

As a reminder, the loans lapped in the pipeline when we closed on that acquisition accrued to the seller, so Wintrust needed to begin to build the pipeline early in the quarter, and that pipeline resulted in majority of the revenue being realized late in the quarter.

We expect to realize the full impact of the acquisition beginning in the second quarter with further increases in loan originations and revenue and corresponding increases in associated variable costs.

Operating lease income increased in the current quarter compared to the fourth quarter of 2017 primarily as a result of an approximate $1.1 million gain realized from the sale of certain equipment held on operating leases.

Other noninterest income totaled $11.8 million in the first quarter, down approximately $728,000 from the $12.6 million recorded in the fourth quarter of last year.

There was a variety of reasons for the decline in this category of revenue, including not having any FDIC accretion related to loss share arrangements as we exited all those loss share arrangements in the fourth quarter of last year.

We had slightly higher losses related to foreign exchange valuation adjustments associated with the U.S.-Canadian dollar exchange rate, the lower level of loan syndication fees and the slightly higher valuation charge on certain assets sold at fair value due to the rise of the interest rates.

Turning to the noninterest expense categories.

Noninterest expense totaled $194.3 million in the first quarter, decreasing approximately $2.2 million from the prior quarter.

The decrease was generally related to approximately $8.8 million of less commissions and incentive compensation, $2.2 million of lower professional fees primarily related to reduced level of consulting expenses, offset by an increase in advertising and marketing of $1.4 million and an increase in OREO losses and valuation adjustments of approximately $2.3 million.

The prior quarter also had a pension valuation charge of approximately $1.2 million that did not reoccur in the current quarter.

Also, total noninterest expenses were impacted by approximately $5.9 million of aggregate expense related to the Veterans First acquisition.

So if we were to exclude those expenses, overall noninterest expenses would have declined approximately $8.1 million on a same-store sales type of approach.

I'll talk about the more significant fluctuations from the fourth quarter.

Salaries and employee benefit expenses were the main drivers of the decline in noninterest expense during the quarter.

This category of expenses decreased $5.6 million in the first quarter compared to the fourth quarter of last year.

As to the components of the salary and employee benefit expense, the annual and long-term incentive compensation expense decreased approximately $6.8 million from the prior quarter.

Similar to what we communicated to you during the prior earnings call, we incurred additional annual bonus and long-term incentive performance program accruals during the fourth quarter of last year due to higher forecasted net income for future years due to rate hikes, balance sheet growth and recently enacted tax cuts.

The first quarter of 2018 returned to more normalized levels.

Commission expense was also lower in the first quarter of 2018 by approximately $2 million compared to the prior quarter primarily due to lower mortgage loan originations.

The base salary component increased approximately $3.7 million in the first quarter over the fourth quarter of last year.

The first quarter included the impact of annual base salary increases that generally took effect on February 1 and were generally in the 3% range.

It also included the increase in our minimum wage to $15 per hour for eligible noncommissioned employees, which took effect in early March.

The $2.4 million impact of the Veterans First acquisition also contributed to the growth in that number, and we also had normal growth in our employee base as the company continues to expand.

Employee benefits expense was down approximately $546,000 in the first quarter compared to the prior quarter.

The lower-level employee benefit expenses related to 2 primary causes.

The first was the fourth quarter of 2017 charge of $1.2 million related to the pension obligations that we inherited through 2 prior acquisitions that did not similarly impact the current quarter, and the second reason was a slight decrease in our health insurance cost.

These decreases were offset somewhat by an increase in payroll taxes, which tend to be higher in the first quarter of the year.

Turning to marketing expenses.

These expenses increased by approximately $1.4 million from the fourth quarter of 2017 to $8.8 million.

As we focused on building the franchise, we expended a bit more money on sponsorships and mass media advertising, including mass media branding campaigns tied to the Winter Olympics; the January brand awareness; and additionally, some costs for the deposit promotions that Ed spoke about.

We believe the results of such advertising efforts have been effective, and we look forward to the benefits of those in the future quarters.

Professional fees decreased to $6.6 million in the first quarter compared to $8.9 million in the fourth quarter of last year.

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

This category of expenses came down substantially from the prior quarter, which included relatively substantial costs related to consulting engagements associated with investments in enhancing our digital customer experience and product distribution enhancements using technology and certain other IT initiatives.

The first quarter was not similarly impacted with as much of these consulting costs.

OREO expenses were elevated, as Ed mentioned, in the first quarter as the company's making a concerted effort to sell or position ourselves to reduce the level of OREO properties held.

Accordingly, during the first quarter of 2018, the company recorded approximately $2.4 million of realized losses on the sale of OREO properties and negative valuation adjustments to value certain properties at levels that will hopefully produce quicker sales.

Although we have relatively low amount of OREO properties, we simply would like to reduce the inventory further, especially those properties that have been slow to exit the portfolio.

All the other expense categories other than the ones I just discussed were up approximately $1.8 million on an aggregate basis in the first quarter of 2018 compared to the fourth quarter of 2017.

This increase can be attributed to the expenses related to the Veterans First acquisition.

And without the Veterans First acquisition, these other expense categories would have actually decreased by approximately $700,000.

Turning to taxes.

The impact of the recently enacted tax reform, which reduced the federal income tax rate for corporations from 35% to 21% effective January 1 of this year, aided our net income during the quarter.

Our effective tax rate for the quarter was 24.14%.

But without the impact of the $2.6 million of excess tax benefits associated with share-based compensation, the effective tax rate would have been approximately 26.5%.

If we were to compare these rates to the first quarter of 2017, the company's effective tax rate was 33.67% and was approximately 37.5% excluding the impact of the excess tax benefits associated with the share-based payments.

So the net year-to-year effective tax rate was down approximately 11%.

At this time, we continue to expect our effective income tax rate for the full year of 2018 to be approximately 26% to 27% if you exclude the impact of the excess tax benefits associated with share-based compensation.

So with that, I'll conclude my comments and throw it back over to Ed.

Thank you, Dave.

So in summary, all in all, good quarter for Wintrust on all fronts.

Our momentum continues across the board.

Reduced taxes and higher interest rates have been beneficial to us.

The core earnings growth and balance sheet growth bode well for future earnings growth and growth in franchise value.

We are pushing our organic growth agenda as acquisitions in general become relatively expensive.

In that regard, we have a number of new branches in neighborhoods in our designated market area where we are not currently present.

We have this planned.

Our retail small business marketing programs which we embarked on in earnest at the beginning of the year are working and employing on new accounts and relationships.

However, that doesn't mean that we're not investing in potential business combinations in all areas of our business.

As mentioned in previous calls, gestation periods become a lot longer pretty much in all fields, but we are very busy in that regard.

We remain well positioned for higher interest rates.

Credit is as good as it's going to get.

We continue to review the portfolio for any early warning signs or exiting deals expeditiously when cracks are apparent.

Loan growth has been good, and pipeline has remained strong.

We continue to look at opportunities to further diversify our portfolio and still believe the portfolio will grow in the mid- to high single-digit range for the year.

We are embarking on our liquidity initiatives, which should have the desired strategic results which I talked about earlier.

So in summary, we're very well positioned, and we like where we sit.

That being said, it's a time like this where you get kind of worried.

If things are this good, you start looking around the corner for the bogeyman or the monster under the bed.

We continue to evaluate where these risks could possibly be and making plans accordingly.

But we're not sitting on our laurels.

I've been in this business too long.

I can say that now I'm an old man and have been out too long, seen these movies, "Hope for the best, plan for the worst," as my father always used to say.

With that, well, you can be assured of our best efforts to ensure the long-term growth in franchise value of your company.

Now that being said, times are pretty good right now.

We continue to want to make hay while the sun is shining yet buy some umbrellas, just in case.

So with that, I'm going to leave it open for some questions.

(Operator Instructions) Our first question comes from the line of Jon Arfstrom of RBC Capital Markets.

A couple of things here.

The liquidity strategy or deposit marketing was, I guess, what you referenced earlier in the call.

I think we understand why you're doing it, but just give us a little more detail in terms of what you're doing and what you're targeting there.

Well, we -- I don't like running at 95% loan-to-deposit.

We've been running 85% to 90% for a long time.

And we let this move a little bit just because we're comfortable that we have alternate sources in the event that we had a liquidity issue.

We have more of liquidity than we -- available to us than we would need.

But with the long end, where it is right now, and the spreads not there, why bring it in and not make any money on it?

So we expect the long end to continue to grow with inflation up, and we see wage inflation starting to occur.

I think the biggest issue our customers tell us, and you probably hear it from a lot of people, is finding good people and having to pay up for them.

So we expect this to occur.

We expect the long end -- some separation in the long end of the curve.

And as such, we're going to grow deposits faster than loans; get back to our desired range over a period of time of 85% to 90%; and ladder -- bring a laddered security portfolio in, which should, hopefully, after tax, make it a little over 1% is our goal.

We'd like to make it 1.25% if we could and go from there.

So it's just a play, a little bit of a play in interest rates right now.

If you were to bring that number back to 87.5% right now, it's close to $2 billion of deposits.

So we have our work cut out for us.

But running those numbers, you can see how beneficial that would be to the bottom line.

It would hurt our margin a little bit, but our net overhead ratio would drop precipitously.

And also, as rates move up, which we expect them to continue to do, as everybody does, we're well positioned for those higher rates.

As rates continue to move up, we think we should start cutting back on our gap, our overall interest rate sensitivity position to protect the downside.

This will help us do that also.

So it just seems like the right thing to do.

We don't think there's any rush right now.

But we -- as rates continue to move up, it -- you can see all the elements, the strategic elements that, that brings to the table for us.

Does that make sense?

Yes, it does.

So the message on the higher deposit betas, part of it is just about naturally rising deposit costs, and other part of it is reducing the loan-to-deposit ratio.

Just 2 parts, really?

Yes, yes.

We anticipated that, in our budgeting and our planning process, that our beta could -- we have such a retail-based deposit structure that we've been able to lag probably more than others.

But now that you can't lag as much as we have been, we need to bring those numbers up to be competitive in the markets, and we built that in.

Hence, why another 0.25 point rise in rate is only $23 million -- or $23 million 2 years ago, when we started reporting that number.

But we've got a much larger balance sheet.

You can kind of see that we've built in the -- a little bit more deposit cost than you would imagine.

Yes, okay.

That makes sense.

Good.

Maybe Dave Dykstra, for you on mortgage banking.

If you set aside the Veterans First originations, what does the pipeline kind of look like throughout the quarter?

That's pretty good.

Veterans First, on average, we think we had like half of a quarter of revenue production, so we'd expect that to double next quarter.

On the legacy portfolio, we actually think that could be up substantially.

If you took out Veterans First, if you look -- we gave a little bit more detail in the press release this time on our mortgage banking revenue and detailed it out, so you can see all the components.

We also broke out the Veterans First origination and our other sort of legacy, so to speak, originations, which was -- gave us $660-some million.

I would expect that to -- that might be up 50% in the second quarter just simply because of seasonality, of the buying season.

So maybe that goes up a few hundred million dollars, plus the Veterans First is probably up $100 million.

So the pipelines have to develop, and then certainly, in the quarter, but our thoughts are that, that number could be closer to $1 billion of production in the second quarter, plus or minus.

Okay, good, good.

That's what I was getting at.

And then, I guess, the last one on that topic.

The production margin was up.

Is that mix?

Is that Veterans First-driven?

Or is there something else going on?

Yes.

The production margin on our core business was relatively stable.

I think it was down just a few basis points.

Veterans First loans, VA loans have a much higher margin to them, so that's what brought the overall production margin up.

Our next question is from David Long of Raymond James.

As you indicated in your opening comments, yes, Nick Papagiorgio and the rest of the Griswold family, I'm sure, are very proud.

So with that said...

At least you know who that was.

Of course, of course.

Vegas Vacation, a good movie, one of Chevy Chase's, but I prefer Fletch when it comes to Chevy Chase.

So that said, thinking about the expense base for the rest of the year, and you guys -- seemed like the expense-to-asset target of 1.50% is still in your -- on your radar screen for this year.

I'm assuming that, that includes the de novos and branch openings that you have.

But can you maybe walk me through how you think the expenses could progress as we go through the year and still stay at that 1.50% level?

Well, I'll take a little of it, and then Dave will jump in.

The OREO expenses are included in there, and we're going to continue to push those down.

We believe asset growth is going to stay strong, and it's a percent of assets.

And also, January is a slow month for mortgages in general, but then the Veterans First picking up those extra expenses.

If you were to back those things out, you're pretty close to the number right then and there.

So we're not that far off from an operating basis and what we look at.

So we think even with the -- with our planned organic expansion, numbers should be in pretty good shape.

Dave?

Yes, I'd probably echo that.

I mean, if you backed out the $2.7 million change in the OREO, your net overhead ratio would be down around the 1.54% range.

And then, as Ed talked about, the big piece of the net overhead ratio is the denominator, which is your average assets.

So if this deposit initiative that we have kicks in a little bit, that pretty much gets you there.

And then as Ed mentioned, mortgages are -- increased mortgage activity is beneficial to the net overhead ratio.

So as we get in the second and third quarters, when mortgage activity is typically higher for us, that should help also.

So I think if you look at the better mortgage business and a bigger balance sheet and just typical cost controls and back out this OREO charge we took this quarter, you can easily draw a road map that would get you there.

But the big thing would be just the asset growth is a big driver of that.

Okay, got it.

And then on the loan growth side, I think you mentioned mid- to high single-digit expectations for the year.

Is that coming from an increase in your lines of use or utilization rates?

Or is it -- are you still bringing in new customers to the bank?

Interestingly, it still is bringing in new customers and growing the franchise through new relationships.

An interesting phenomena that I -- something I -- usage still is around 52%, 53% on our lines.

But what we've seen is lines increasing.

We've seen a lot of our clients coming in, and they're increasing their overall lines by 10% or 20% because of increased business, and they want to keep dry powder.

So that number is a little bit misleading because we're 52% of a higher base right now.

So in other words, I think you can say that there's some real economic expansion finally taking place.

Does that make sense?

Yes.

Our next question is from Brad Milsaps of Sandler O'Neill.

Dave, just to follow-up on Jon's mortgage question.

The $5.9 million in revenue related to your Veterans acquisition, is that all origination revenue?

Or is that a mix of servicing as well?

Origination and servicing.

Okay, got it.

Got it.

I'll follow up, just kind of trying to get a sense of really what their gain on loan sale margin was because it did seem to be quite a bit higher than yours.

Yes, it's between -- it's close -- it's 4.5% to 5% margins right now.

So quite a bit higher than where we are [in the business].

Brad, that's why we partnered with them.

That and their higher margins, so it give us a better mix of distribution.

But also, their expense model is different than the historical expense model in terms of not having to pay out 55% of the commission.

So it's a good, profitable business for us, a nice blend into what we were doing.

So strategically, that acquisition worked great.

We're excited to have them with us.

And maybe a little bit more color for those people out there that try to model this out.

If you increase revenue up there, although we had a full quarter of expenses, there are variable costs that will go up.

So they do pay commissions as part of a consumer direct model.

They also buy leads out there that helps drive the business.

So I would say, for every $1 in the second quarter of revenue that goes up, there's still maybe an incremental 35% or so of expenses that come along with commissions and the lead generation and just the variable costs that go along with it.

So if you're trying to model growth into the second quarter, even though we had a full quarter of expenses this time, those expenses will probably go up in the second quarter because of commissions, additional -- some additional lead generation and just the variable costs that go along with closing a loan.

So it was close to breakeven this quarter simply because we had to build the pipeline before we could close it.

But it should certainly be profitable for us in the second quarter.

That makes sense.

And would you expect that business to be -- you kind of talked about it doubling in the next quarter, but would you expect it to be about 20% of your overall mortgage business going forward?

Or do you think you can make it a bigger part of the -- sort of the overall Wintrust mortgage pie, so to speak?

Yes, it's probably close to 20% is what we'd expect right now.

That's probably a good range.

I mean, it will -- obviously, we'll have to see how interest rates play out and how the mix plays out.

But right now, I think high-teens or 20% is probably not a bad range.

Okay.

And then just kind of switching gears to a piece of the balance sheet.

This is kind of small relative to the overall picture but I did notice that borrowings, FHLB borrowings were up quite a bit, linked quarter but the rate was down.

Just kind of curious, is that something that's kind of temporary that will reverse out?

Is that going -- in lieu of some of the positive movement that you had this quarter, can you kind of give us a sense of kind of what was the thinking was there?

Is that preparing for something else as you kind of implement this deposit strategy?

Well, that is -- well, that's always been our bid, they call it around here Ed's equilibrium, where when you take mortgage held for sale plus the assets in our mortgage warehouse lending, a perfect world we finance that with Federal Home Loan Bank overnight money.

Great spread there.

It's variable.

You don't have to worry about the -- you can give it back, if those numbers go up or down, and we can manage our liquidity that way.

In the past, we've always had excess deposits that cover that.

So we were never really at Ed's equilibrium.

So right now, we were there.

I would imagine if we do raise, we're successful in continuing our organic growth, that, that number would come down.

But if we weren't, that number would stay pretty much even.

It's a perfect match for us, both from a duration standpoint and a rate spread standpoint.

So -- but then we have excess deposits like we did throughout the years, we didn't bother grossing up the balance sheet at that point in time.

Does that make sense?

Yes.

Well, that's a perfect explanation.

Our next question is from Chris McGratty of KBW.

Dave, maybe a question for you.

Just want to make sure on the leverage strategy.

Is it about the absolute level of long rates or is it the shape of the curve?

I guess, what should we be looking at specifically to see when you guys might pick up the pace of securities versus...

No, with the shape of the curve, you want to get the spread between what you're going to raise the deposits at and what you invest in.

And we would probably invest some of that, ladder it out, but a good portion of that would probably be Ginnies and Fannies.

So if you were sort of looking at where the positive rates could come in and where you could lay them off in Ginnies and Fannies, possibly some munis or something like that.

But it's the spread that we're looking at.

So with -- we're relatively flat yield curve now that, that doesn't work out to the numbers that Ed was talking about.

So we need some steepening of the curve.

So it's not the absolute rate, it's the spread.

Okay.

On the loan yields, the nice improvement sequentially, part of that, I would imagine, is the big LIBOR portion.

Was there anything unusual in terms of loan fees, accretion, nonaccruals?

Or is about this level of improvement per rate hike about what we should be expecting?

Yes, there is nothing unusual of the types that you talked about there.

So this is really just the portfolio reacting to the rate environment.

But remember, it takes a full year.

Like in the life insurance loans that are based on 1-year LIBOR, it takes a full year for those -- that to reset for those portfolios.

So we're still in the process of what, absorbing 3 rate increases in our portfolio, notwithstanding future rate increases going forward.

So it literally takes a full year for us to be in a position, to get to -- to get that $20 million, $23 million we were talking about on every quarter point.

So we would expect that to continue even if you don't get another quarter point of rising rates in the next month or 2, you know what I mean?

Got it, understood, that's great.

And then maybe one, just to make sure I heard you guys right on the loan growth.

I think you've talked about in the past high single digits and I think in your prepared remarks, you said mid to high.

Should -- is that just worth something or is that -- are you tweaking the guidance a little bit softer?

No, I think it's the same.

It's -- what's high single digits, 8 or 9?

I'm thinking 7 or 9, somewhere in there.

I don't know if it's mid to high.

I think -- I mean, I don't know what it is.

It's also semantics, I guess.

Yes.

So I think the short answer is we're not changing our tone.

Our next question is from Nathan Race of Piper Jaffray.

Just going back to the loan growth discussion.

Just curious to get your updated thoughts on the commercial real estate market in Chicago specifically.

Multifamily, looks like you guys had pretty good growth in commercial real estate during the first quarter and looked like Illinois comprised a large chunk of that.

So just curious on your updated thoughts on that asset class.

Well, it's -- you really have to dive down what kind of asset class you're interested in.

The multi-apartment buildings, we're really not interested in doing those right now.

The...

Retail.

Pardon me?

Retail is something we're backing off of, too, a little bit, those 2 asset classes.

Yes.

Well, we -- what we've got is the number on the commercial real estate side, a number of larger construction projects.

McDonald's headquarters there-- we led -- we co-led that deal.

They're moving in, in the next 2 months.

Wrigley Field, McDonald's or the new hotel, the development around Wrigley Field, those are all kind of working their way through.

So industrial real estate is still strong.

Office real estate is still strong around the city and in the suburbs now.

We're comfortable with those.

But again, these are not one-off deals, these are relationship deals.

This isn't like in the past where we were beasts of burden, where we will just take the hunk of the deal and with a borrower we really didn't know that well.

We have to have full relationships with them.

Sponsorships have to be good.

We're not getting out over our skis on this stuff right now.

We're being very cautious on the real estate side, as you would imagine.

So a lot of it also has to do with middle-market business we're picking up, to continue to pick up where there's a building component that comes with it.

Our next question is from Terry McEvoy of Stephens Inc.

Just a follow-up on -- I think it was Brad's question.

The Veterans First expenses of $5.9 million, just $2.4 million that was salaries.

And I just want to make sure I understand correctly that, that $3.5 million or, call it, $14 million annualized you described as paying up for leads, et cetera.

Is that -- that sounds like that run rate is going to increase going forward.

And then where within the expense lines, what will that -- will those expenses show up?

Oh, yes.

So of the $5.9 million, you're right, $2.4 million was in the salaries line.

So in the -- so then we do have commissions that would show up in the commissions line, various other expenses, occupancy, employee benefits and the like.

That the big piece where you get a little bit of offset from the -- our legacy business is the lead generation.

That shows really up in the other noninterest expenses.

That's just loan expenses in our mind.

That's just the cost of acquiring a loan out there.

So it would show up in other noninterest expenses.

Okay.

And then just a separate question.

The, call it, 11% annualized decline in noninterest bearing deposits, anything there beyond what you, I think, called out as seasonal in the press release?

Yes, I think that's right.

There is a lot of inflows in the -- at the end of the fourth quarter and just some of those naturally -- a couple came out in the first quarter.

So we don't see anything systemic there, just sort of natural ebb and flow of seasonality in year-end.

Our next question is from Kevin Reevey of D.A. Davidson.

So first question is on your -- the branch that you just recently opened in Wrigley's ville (sic) [Wrigleyville] . What's your anticipated timing as far as when you think that branch will breakeven and then the other 4 to 5 branches that you anticipate opening this year?

Well, they usually -- they usually breakeven at about 8 months, 8 months to a year.

I think that's a fair number.

It's not a huge branch.

It's a relatively small branch.

And so I think Ed's estimate is right.

So opened your account yet, Kevin?

You're going to get your Cubs debit card.

That's right.

Yes, you put in all your deposits, Kevin, we'll shrink that down to 6 or 7 months.

Okay, deal.

And then, we're hearing from a lot of the other Indiana banks that they're seeing some growth from a lot of migration from Illinois given the state's woes into Indiana.

Are you guys feeling any of that?

Any of your customers feeling any of the -- meaning, outward migration or any other fiscal woes at the state level?

Well, everybody worries about that.

The -- we're up in -- right across the border in Wisconsin, we have a heavy presence.

So we don't really lose any of that business.

Indiana, we still service Northwest Indiana.

We have one branch there now.

We'll continue to build.

Most people don't have so much sunk costs in Illinois, they're not picking up and moving in total.

They might expand there, and they don't change their banking relationship out of expansion.

Be interested to hear who you're talking to that says they're taking all of Illinois' business because we're still right here, the -- if you think about Chicago, Northwest Indiana and Milwaukee, Megapolis.

I think it's the 14th biggest economy in the world.

So there's still plenty of business to go around.

I don't worry about it as much as others do right now because there's still good building going on here, there's still -- I think Chicago was the #1 city in the country for branch -- or for headquarter relocations last year.

There's still a lot of good things going on here in spite of the maelstrom around the economic situation in the state.

So I think we're -- well, hopefully, we'll work through that.

But all in all, there's still a lot of business to be had here in Chicago and in our market area.

So I'm not -- I don't think we're going to see Chicago turning into Detroit any time soon or the old Detroit any time soon.

And then lastly, credit as you say is as good as it's going to get.

How should we think about modeling the provisioning going forward for the rest of the year given that credit is as good as it's going to get?

Well, if you look at our 60/89, you know, those near-term delinquencies were down from last quarter.

And these are -- there's a little blip in the 30 to 59s, but most of that was administrative.

We've actually had about $50 million of that already cleared off just because it was administrative.

So we're really not seeing any trend where the credit metrics look like they're getting worse.

So until you start to -- unless you change the mix of the business where you're putting more loans on with higher reserve levels, which our mix has been pretty steady in the reserved -- the loan's level has been pretty steady for quite a while now.

So unless you started to see a crack in credit quality, increase and delinquencies and the like, then I think you can think our provisioning level would be similar and -- unless you had a larger -- an outsized growth quarter where it might increase it.

But it really would depend on the asset quality and growth.

And we see asset quality okay, and we've talked about the growth aspects.

Kevin, it's so low right now that you could have one commercial deal go bad and blow your numbers up.

I mean, materially or relatively speaking, go from where we are as a couple of -- or 12 basis points up to 25 or 30, which is still remarkably good.

We're culling the portfolio, trying to push these things out constantly if we see any crack to avoid that, but eventually, something's going to happen.

I mean, if the numbers are so low that a $5 million or $6 million charge-off on one deal is going to be -- would stick out.

So it's hard to -- I know -- I can empathize with you how hard it is to model.

But if I was doing the modeling, I'd probably just add 30% as to what we have in our provisioning and look good after the fact.

But something eventually will happen.

I mean, we -- we're not that good or that lucky, but we're trying to stay ahead of the game.

And again, on a material -- on a relative basis, you can have one pop through, which would change our provisioning levels accordingly.

We don't see it.

We don't anticipate it.

We're fighting against it, but eventually something's going to happen.

Our next question is from Michael Young of SunTrust.

Wanted to get a little color maybe just again on customer activity and what you're seeing as some of these loans come for renewal or repricing after extended duration at lower rates.

And now with a significant step up we've had in both in 1 more month and 12 months LIBOR here recently, are you seeing any give on the absolute credit spread, even though the base rates increase?

Well, we are seeing -- we're seeing that start to happen in the market.

Again, we have our profitability models and our loan policy.

We don't vary from them.

So we adjusted our profitability models to do on an after-tax basis and raised all those where we don't want to give away the benefits of the taxes because, as we all know, what Washington giveth, Washington can taketh away very quickly.

And you really don't want to -- you still got to get paid for your risk notwithstanding taxes.

So I would say there's always been pressure on spreads.

They were -- if they had worked their way down on the commercial side, [load up], but they really can't go much lower on the commercial middle-market lending.

They were low already.

So we're not seeing a lot of that.

On the real estate side, you see a little bit of it, but we'll just pass on it.

If it doesn't cut our pricing, we don't take it.

We haven't seen them giving away -- we haven't seen a mass effort by the private -- or the bigger banks or our competition to give away the benefits that they've gotten from higher rates or the tax increase as of yet.

I would imagine that will come throughout the course of the year.

There'll be more pressure, but we will -- we'll stick to our guns.

Okay, great.

And just as we look at the deposit portfolio and the efforts to kind of improve the loan-to-deposit ratio and I guess, I'm kind of marrying that with the comments that you think that the long term [is going up].

Taking those together, do you plan to extend the duration of the deposit book and term out some funding at this point?

Well, I think that we'll be offering up to 3 and 5-year CDs out there.

People want to jump in.

They don't seem -- remember, customers always want what you don't want to give them.

The customers are in line to extend right now.

But we have such a big, interest-rate-sensitive position right now as rates continue to move up.

We're going to want to lessen that.

So we'll leg a little bit more long and borrow short and that ought to do that.

So we don't -- if we see an opportunity to extend on a rate basis, we certainly will.

But -- and sometimes the rates are almost too high right now to want to extend on the deposit side -- not the deposit side, I mean.

So I don't mind going short and lending long because, as I said, as rates go up, we're going to shrink our gap anyhow.

That makes sense?

Yes, that makes sense.

Our next question is from David Chiaverini of Wedbush Securities.

A couple of follow-ups.

The first on mortgage banking.

You mentioned that for each dollar of revenue that you're going to get in the second quarter to expect $0.35 of incremental expense.

I was wondering, and I'm not sure if you're willing to specify but can you provide what the efficiency ratio was for the mortgage banking business in 2017 and then what you expect it to be for 2018?

Yes, let me clarify.

When I was talking about that every $1.00 and $0.35, it was just really talking about the relationship on the Veterans First piece because it's kind of goofy that we only had half a quarter of revenue and then we had a fuller quarter of expenses.

So I was trying to just -- to give a little guidance on that.

And that didn't relate to the entire portfolio, that was just trying to help on the Veterans First side of the equation.

But the mortgage business has generally been in the 80%, 85% efficiency ratio business, it's a high-efficiency ratio business.

Doesn't use much capital.

And we'd obviously expect that to be a little bit less with the consumer direct channel, but we haven't given any guidance on that.

Got it, got it.

And then the other follow-up I had.

Related to the leverage strategy.

You mentioned about how you're still going to benefit -- Wintrust will still benefit from higher rates with NIM expansion.

But at the same time, with the leverage strategy, it could hurt the NIM.

So should we expect that in the quarters in which you deploy the strategy, that the NIM should net out to being flat?

No, I don't think that would be the case.

I think it will be negative.

But if you phase into this over the next 2 years, and certainly, we'll have a net -- will have a marginally negative effect on the NIM, but not one that's going to knock out our continued growth of the NIM.

And then, although it would -- well, as Ed mentioned earlier, although it would with the NIM, it has a corresponding benefit to the net overhead ratio and positive to earnings.

So you would take a little bit of pressure on that NIM to get a higher EPS, but we just don't want to lock into too small of a spread.

So that's why we're waiting for the yield curve to get to a point where it makes sense to jump in.

Got it.

No, that makes perfect sense.

And then the last question I had, going back to the loan growth outlook, how you somewhat tweaked the guidance of saying mid to high as opposed to high.

Is this related to the strategy of bringing your loan-to-deposit ratio back down to the 85% to 90% at all?

No, no.

I probably miss -- I mean, my mind wasn't even -- it was just semantics.

It's -- we haven't changed.

It's high single digits, which means 8% or 9%.

It's 7% to 9% is what we're thinking.

So I guess that would be high single digits.

So we're not changing our thoughts at all.

And I just probably misspoke.

We will generate all the good loans that we can and we will find a way to fund those.

So the way you bring the loan-to-deposit rate back into line is with the deposit side of the equation.

We're not going to turn away good loans.

Our next question is from Brock Vanderbilt of UBS.

So Dave, just a question for you on housekeeping.

I think there was a question on this earlier.

The Federal Home Loan Bank advances, the rate has really moved around the last 5 quarters.

I would think that would be linked to some 30-day, 60-day kind of base rate and have been moving up pretty consistently.

Why is that not doing that?

Well, because there's 2 pieces on that Federal Home Loan Bank funding side.

We have a portion of that as longer-term fixed rate funding.

And so if you've got very little overnight, that rate's going to be high.

If you got more overnight at the lower rates, that's going to bring that yield down considerably.

And so if you -- probably a way to look at it is if you go look at our K or our Q, we schedule out in a footnote what the longer-term fixed rate funding is.

That's going to be there regardless.

But then, when you bring on a lot of overnight funding at very low rates, it's going to bring that yield down.

If you back off on that overnight funding during the course of the quarter, the rate is going to gradually go back up to what that longer-term funding that you have in place that's there all the time.

So it moves around based upon how much overnight funding you have throughout the quarter.

Got it.

Okay.

And at this point, is there any reason to expect it to be closer to 1.70 than 2.60?

No, I don't think we'd put that much more on, especially if the [profits] start coming in.

Okay.

And I apologize, I missed the first couple minutes of the call.

What's driving the focus or the renewed focus on driving down that loan-to-deposit ratio?

Is it in the shape of the curve or something else?

No.

I mean, generally, our philosophy has been is, we're sort of old-time bankers.

You've got interest rate risk, you've got credit risk and you've got liquidity risk and we've always thought operating that sort of 85% to 90% loan-to-deposit ratio provided us with the appropriate level of liquidity.

And so as Ed mentioned earlier, we think we have enough liquidity sources that we're not worried about it, but just as one of our basic tenets is to maintain sufficient liquidity out there where you can sleep well at night and it's just the right thing to do.

And we think that range is sort of 85% to 90% loan to deposit.

But that being said, right now, with the shape of the curve, we've got plenty of liquidity sources but we'd rather operate closer to 90%.

And so it's a positive.

I mean all it does is add to the bottom line.

If you figure -- you could make -- you can do pretty well with that.

And the leverage that we're doing, if I could -- like we said, it put -- might put some pressure on the NIM, but it's going to increase your net income.

But you want to protect yourself from a rising rate, too, so you got to get a sufficient spread on that leverage in order to jump into it.

But it doesn't take much capital, either.

So if you get -- if you invest in the Ginnies or the Fannies, those are very low capital instruments.

And so it wouldn't take much capital to do that.

So it would increase your earnings, put a little pressure on your margin, help your net overhead ratio and not eat much capital.

So we think it's a net positive, but you don't want to do it at such a tight spread that for its rise, you're not doing well in the future.

Great.

I'd like to just make sure I'd clarify something on -- you talked about deposit betas earlier.

You talked about moving to a marginal deposit beta.

Closer to 40 basis points.

What we believe -- up from the 24, 25 that we've experienced, what we believe is we're still going to have margin expansion, just it's not the beach ball underwater, it's, I don't know, a tennis ball, a number of tennis balls under water with every quarter point increase.

We still make $20 million to $23 million every quarter point increase on an annualized basis.

We do -- and that includes increasing our deposit beta, our deposit rates accordingly.

We're not going to be able to maintain this 25% beta marginally going forward.

We're still very asset sensitive.

We still expect the rates that -- the increases that have occurred to date are still working their way through the system, that's very positive.

4 more rate increases would be very positive.

We expect the margins to go up every time, every quarter and every month now going forward as we absorb those rate increases that have occurred already and future increases will help us, too.

I don't want anybody to think we're going to jump from 24 to 40 overnight and have our margin go down, that's not the case at all.

Rate increases are very good for us.

We're well positioned as rate as -- and I don't want anybody to think that this is going to hurt our margin or our net interest income going forward.

It's still a very positive outlook for us in that regard, just we're not going to be able to maintain on future increases a 25% beta.

That beta will be higher as rates go on.

We built that into our plans.

And that's included in the quarterly earnings or the annual earnings increase we talked about quarterly increases.

So I wanted to get to that point across.

Maybe I was not clear on that.

But we expect margin expansion throughout the rest of the year.

We expect good asset growth.

We expect even with our liquidity play as we phase into that over the next 2 years, it's not going to happen overnight, that will be very positive for us also.

So we think with -- the outlook for us is very bright for future record earnings quarters to keep Mr. Papagiorgio very happy.

So if you have any questions about that, I didn't mean to confuse you about that, but maybe I did [Raz] as I was thinking about it as the call went on.

So did I miss anything there, Dave?

Dear?

Dear?

Did I miss anything, dear?

No.

I think it's time to end the call, Ed.

Anyhow, with no more questions, thanks, everybody, for calling in.

Call if you have any questions.

And we'll talk to you in a month or in a quarter.

Thanks.

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

This does conclude today's program and you may all disconnect.

Everyone, have a great day.