Wintrust Financial Corp (WTFC) 2018 Q3 法說會逐字稿

Welcome to the Wintrust Financial Corporation's Third 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 statements.

The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in the third quarter 2018 earnings press release and in the company's most recent Form 10-K and any subsequent filings on file with the SEC.

And as a reminder, this conference call is being recorded.

I will now turn the conference call over to Mr. Edward Wehmer.

Good morning, everybody, and welcome to our third quarter earnings call.

With me, as always, are Mr. Dykstra; Kate Boege, our legal counsel -- our General Counsel; and Dave Stoehr, our CFO.

We'll use our usual format with me giving some general comments on our results.

Turn it over to Dave for a more detailed analysis of other income, other expenses and taxes; back to me for some summary comments about and thoughts about the future; and then turn over for some questions.

So we're pleased to report our 11th straight quarter of record earnings.

Net income was almost $92 million or $1.57 a share.

We're almost 40% better than last year.

And pretax earnings, which we look at to take out the effect of the tax cuts, were $122 million, up 18% from last -- the same quarter last year.

Year-to-date basis we're $4.50 a share, up 28% on annualized basis, and 28% on our earnings of $264 million approximately.

Pretax income up 16.5% to $352 million.

Our margin decreased by 2 basis points.

ROA was 1.4.

And all in all, pretty good results.

It's readily apparent our growth trends remained consistently positive.

A few blips this quarter, which will need some discussion and clarification, specifically the net interest margin dropping 2 basis points, one-time charges related to the completed acquisition of Delaware Place Bank, and the moderate respective increase in NPLs.

These issues will be discussed in detail.

As it relates to the margin, the net interest margin decreased 2 basis points over the second quarter and increased 18 basis points year-over-year.

Net interest income grew $9.4 million over the second quarter.

Due to 1 more day good earning asset growth including our loans, average earning assets grew [$880 million] versus the second quarter.

Average loans net of loans held-for-sale grew $539 million, with the remainder of the growth falling into our liquidity management portfolio.

Quarter 3 period on loan balances exceed average loan balances by approximately $326 million, which bodes well for the fourth quarter.

Earning asset yields increased 13 basis points versus second quarter, while interest expense increased 17 basis points, with free funds contribution as a 2 basis point increase, resulting in a 2 basis point decrease in margin.

Our average loan-to-deposit ratio for the quarter decreased to 92% from 95.5% in the second quarter.

This obviously still remains higher than our desired range of 85% to 90%, but shows pretty good improvement in accordance with the plans we laid out earlier -- in earlier calls.

It was a direct result of our core growth initiative, represents a start for our liquidity deployment strategy, which we have also discussed in previous calls.

With the long end moving higher, we've begun lengthening the duration of our liquidity management portfolio.

This was a measured approach and obviously dependent on the rate environment.

So in quarter 3, we invested approximately $200 million, which equates to about $75 million on average in longer-term assets, and with another $200 million beginning of the fourth -- of this quarter.

On a static basis, i.e.

just looking at quarter 3, year-ending numbers, we'd need an extra $1 billion to get to a loan deposit ratio to the midpoint of our desired loan-to-deposit range.

As you can expect us -- as such, you can expect us to continue to push core deposit growth above and beyond what is needed to support loan growth and deploy those assets in accordance with the aforementioned plan.

Obviously, this all depends on the rate environment we are moving into.

It should be noted that we invested the entire increase in liquidity management -- that if we had invested the entire increase in liquidity management assets in the quarter and not in overnight funds, our market actually probably would've have been up in Q3.

As mentioned, Q2 was a good quarter for core growth.

Our deposit marketing, coupled with the successful opening of 4 new branches and the acquisition on top of the 5 we opened in the second quarter, the acquisition of Delaware bank contributed to the $552 million of deposit growth.

Our deposit marketing should continue to be effective, so we should expect this good growth going forward and continued progress being made in the loan-to-deposit ratio in our desired range.

Our deposit range has remained in the range we previously communicated to you.

But we're still very asset-sensitive.

These rate increases, including the one announced in mid-September, should still add to the bottom line despite this increased deposit beta.

Every 0.25 point increase, Fed funds should add north of $200 million to net interest income on an annualized basis.

The number hasn't changed from past discussions through the increasing size of our balance sheet.

As such, in future rate increases, we anticipate our net interest margin will grow slowly but surely over the long term.

Mitigating factors of this would be the timing and the execution of the liquidity strategy.

Also note it takes a full year for these rate increases to work their way through our balance sheet, so the benefits of some past increases are still being realized.

On the credit front, credit remains good, but everyone knew it couldn't stay this low forever.

Nonperforming loans in the quarter increased approximately $37 million, primarily due to the addition of 4 relationships totaling $46.6 million.

2 of these loans totaling $29 million were actually current when we turned them on nonaccrual as part of a planned exit strategy.

These 2 loans are in the process of liquidation and collection.

We recorded $7.5 million of specific reserves on these loans.

Those who have followed us know that it is our culture to be very proactive during a credit.

We would expect these credits should be cleared by the first quarter of 2019.

As of now, we do not see this as a deterioration of overall credit numbers, and our ratios are still well below our peer group.

As a matter of fact, if we hadn't been proactive on these, nonperforming loans actually would have been down.

We're up $37 million in nonperforming loans, with $46.5 million of it related to these 4 credits, we would've been down.

So we don't think it's a trend.

However, you do know that we do identify [loans with] cracks in them, identify exit strategies, and it takes some time to execute these sometimes, and that's what we're doing here.

Net charge-offs still -- pardon me, OREO balances decreased by approximately $7 million in the quarter as we considered to clear these amounts.

Charge-offs still at $4.7 million.

Charge-offs of $7 million were offset by recoveries of $2.3 million.

Net charge-offs plus the increase in specific reserves and loan growth resulted in a provision of $11 million, up $5 million from the previous quarter.

So in summary, in spite of the quarter mini blip, credit remains pretty darn good.

Total NPAs as a percent of assets increased to 52 basis points from 40 basis points, which is still pretty respectable.

The reserves as a percent of NPLs was at 118%, down from 156% at the end of quarter 2. The provision as a percent of loans annualized is only 19 basis points, which is still a really good number.

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

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

And as I previously mentioned, we don't see this quarter's mini blip as an increasing trend, but we all know credit couldn't stay as well as it's been -- as good as it's been forever.

On the other end, on the expense side, Dave is going to go through this in detail momentarily, but just a couple of general comments.

Dave will take you through the specific numbers in the mortgage area.

I will say though that we are on track in our efficiency moves in this area that I talked about last quarter.

The majority of these initiatives will be totally in place in the first quarter of 2019, and more efficiency moves will certainly follow.

This market is such that we got to drive cost out and there's beginning to be somewhat of a shakeout in this market.

So we see the reasonable opportunities there, but it will always be subject to seasonality in the mortgage market.

Our wealth management operations continue to improve.

Assets under administration grew by approximately $1.4 billion in the quarter to just about $26 billion.

Managed money accounted for $670 million of this increase, which bodes well for future revenue growth.

The remainder of growth was in brokerage that relies on trading for revenue.

Revenues for the quarter stayed steady at $22.6 million, but we expect that to continue as we continue to build -- to continue to increase as we build our -- we continue to build our managed money portfolio.

One-time items as we do them basically will offset each other in the quarter.

And our net overhead ratio for the quarter was at 1.53%, down 4 basis points from quarter 2, but above our target of 1.50% or better.

Given our overall growth, we're happy with this number.

And with the number of branches we've opened, the expansion we're doing, the new initiatives we're doing, given our overall growth, we're happy with the number.

I believe our continued organic asset growth will bring this number in line as we fill out our inefficient branches with good, solid relationships.

Net overhead ratio is 1.50%.

It still remains our goal and we believe it's obtainable.

On the balance sheet side, assets grew to over $30 billion for the first time, increasing by $678 million in the quarter.

$274 million of this growth can be attributed to the Delaware bank acquisition.

I got to tell you, I still pinch myself, I think, from a current table less than 27 years ago to $30 billion, pretty amazing.

Loan growth, which is aided by the acquisition of Delaware Place to the tune of $151 million, grew $513 million in the quarter.

All categories other than residential mortgage and -- mortgages and home equity lines grew in the quarter.

We continue to see muted growth in the commercial real estate area as payoffs continue and new opportunities are aggressively priced.

Same is true for our sponsored equity or private equity-backed deals.

Most of our private equity firms are selling anything that isn't nailed down right now, given the frothiness of that market and we're getting refinanced out of other deals based on the aggressive nature of nonbank lenders.

Loan pipelines remain consistently strong.

Deposit growth was discussed previously.

Needless to say, we are heartened by the success, are flipping the switch to concentrate more on organic growth, like we made our bones on originally, to both the opening of new branches and growing underutilized locations is working.

We intend to continue our marketing here and also cross-sell other services and accounts to new relationships.

This will fund our liquidity play and bring our loan-to-deposit ratio back to the desired range.

That's not to say we're not interested in acquisitions, though.

Although expected pricing is relatively high right now, we need to take what the market gives us and stay disciplined on our approach to deals.

The acquisition of Delaware Place Bank is being assimilated well.

We look forward -- and we look forward to completing the previously-announced transaction acquiring certain assets and liabilities of American Enterprise Bank, which we expect to close in the fourth quarter.

All in all, we're pleased with the quarter and why not be pleased with a record quarter.

Now I'll turn it over to Dave.

Thanks, Ed.

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

In the noninterest income section, our wealth management revenue held steady at $22.6 million on both the third and the second quarters of this year and was up from the $19.8 million recorded in the year ago quarter.

Our brokerage revenue was down approximately $205,000 while trust and asset management revenue offset that decline by increasing $222,000.

Overall, as I've mentioned, we believe the third quarter was another solid quarter for our wealth management segment.

Mortgage banking revenue increased approximately 5% or $2.2 million to $42 million in the third quarter from $39.8 million recorded in the second quarter, and was also up from the $28.2 million recorded in the third quarter of last year.

The increase in this category's revenue from the prior quarter resulted primarily from loans originated and sold during the quarter, offset by slightly lower production margins on slightly higher origination volumes.

The company originated approximately $1.2 billion of mortgage loans in the third quarter of 2018.

This compares to $1.1 billion of originations in the prior quarter and $1.0 million of mortgage loans originated in the third quarter of last year.

The $56 million increase in origination volume was attributable to $187 million increase in our correspondent origination channel, offset by lower volumes in our retail origination channel.

Originations related to the Veterans First consumer direct origination channel was essentially flat with the prior quarter.

The mix shift contributed to margin compression as margins on correspondent originations are lower than our retail origination business.

Additionally, the mix of loan volume related to purchased home activity was approximately 76% compared to 80% in the prior quarter.

Page 22 of our third quarter earnings release provides a detailed compilation of the components of the mortgage banking revenue, including production revenue, MSR capitalizations, net of payoffs and paydowns, MSR fair value adjustments and servicing income.

Given the pipelines, we currently expect originations to soften somewhat in the fourth quarter due to increased market interest rates and the seasonality of the business.

Other noninterest income totaled $16.2 million in the third quarter of 2018.

This was up approximately $2.1 million from the $14.1 million recorded in the second quarter this year.

There are a variety of reasons for the increase in this category of revenue, including an increase of $1.1 million related to income from investments and partnerships -- those are primarily CRA-SBIC-related partnerships; an increase of approximately $1.6 million related to settlements on BOLI policies; a positive swing of $0.9 million of foreign exchange valuation adjustments associated with the U.S.-Canadian dollar exchange rate; and this was offset partially by a lower level of interest rate swap fees of approximately $1.5 million.

Turning to the noninterest expense categories.

Noninterest expenses totaled $213.6 million in the third quarter, increasing approximately $6.9 million from the prior quarter.

The increase was primarily attributable to approximately $2.2 million of higher salary and employee benefit expense, $3.4 million of higher professional fees, including approximately $2.1 million of mostly nonrecurring consulting fees associated with the Delaware Place Bank acquisition, which I will address later; $194,000 of severance and conversion-related costs associated with that acquisition; and just other general cost increases as the company grows.

Turning to the specific detail.

The base salary expense increased approximately $2.9 million in the third quarter of 2018 over the second quarter this year.

Approximately $0.5 million of the increase related to the Delaware Place acquisition, and the remaining increase related to the impact of the 9 branches added during the second and third quarters of 2018 and normal growth as a company continues to expand, including further build-out of our IT and information security teams to make sure we're keeping up with technological changes and addressing increasing cybersecurity risks in the marketplace.

Commissions and incentive compensation expense decreased approximately $1.9 million to $34 million from $35.9 million in the prior quarter.

The company experienced a decline in commission expense of approximately $1 million, primarily due to the mix of mortgage origination volumes being more heavily weighted in distribution channels that carry lower commission rates.

The remaining decrease is associated with slightly lower long-term and annual incentive compensation accruals during the quarter.

The employee benefits expense is elevated somewhat in the third quarter due primarily to the impact of a few significant health insurance claims in our employee base.

We would expect this expense category would retreat from this level assuming the fourth quarter has more normalized health insurance claims.

Data processing expense increased approximately $583,000 in the third quarter relative to the prior quarter.

The increase was related to approximately $130,000 of conversion-related expenses associated with the Delaware Place Bank acquisition and the additional account processing associated with bringing that acquisition onboard as well as general growth on the rest of our business during the quarter.

Marketing expenses decreased by approximately $662,000 from the second quarter to $11.1 million.

The slight decrease on third quarter was due to lower levels of direct-mail and mass media marketing during the quarter as the previous quarter had more marketing associated with the opening of the various new branch banking locations and general deposit-generation advertising campaigns.

Professional fees increased by $3.4 million to $9.9 million from the third quarter, from $6.5 million in the prior quarter.

The main cause of the increase related to the consulting fees paid to former employees in relation to the acquisition of Delaware Place Bank of approximately $2.1 million.

These consulting fees will not continue into the future other than approximately $147,000 scheduled to be paid in the fourth quarter of 2018.

Occupancy expenses increased during the third quarter to $14.4 million from $13.7 million in the prior quarter.

The increase was generally related to the lease expense associated with the recent increase in the number of branch banking locations, increases in property tax accruals and higher utility costs during the quarter.

Other than the expense categories just discussed, all other expense categories were up on an aggregate basis by approximately $596,000 from the prior quarter.

So de minimis increases across the board for the other categories.

Company's efficiency ratio on a fully tax equivalent basis improved to 61.2% in the third quarter from 61.8% in the second quarter.

Additionally, as Ed mentioned, the net overhead ratio also improved slightly during the third quarter to 1.53% from 1.57% in the prior quarter, was still slightly above our goal of 1.50%.

So progress made on both those fronts.

And with that, I will turn the conversation back over to Ed.

Thanks, Dave.

Summary and some talks about the future.

All in all, a very good quarter for Wintrust on all fronts.

Momentum continues across the board.

Reduced taxes and higher interest rates have been beneficial to us and [as a quorum] feel that, that should bode well for the future earnings and growth in franchise value.

As I mentioned, we do not see the mini blip in credit as a trend, but as stated, credit can't be as good as it's been forever.

We continue on our habit of reviewing the portfolio for weaknesses and addressing them expeditiously.

In some perverted way, I'm kind of happy that we're off the bottom because the only place to go is up a little bit, and this is a very controlled way to go up, and it's fitting and it fits our culture very well.

But we -- as I said, we don't see this as a trend, but you never know.

Credit is credit.

We're going to stay on top of it.

We're pushing our organic growth agenda, as acquisitions in general become relatively expensive, regardless of the number of new branches planned over the next 18 months to neighborhoods in our designated market area where we currently are not present.

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

As stated earlier, this does not mean we're not investigating potential business combinations in all other areas of our business, but also, as we talked about in previous calls, gestation periods of these deals have become a lot longer.

We remain well-positioned for higher interest rates, and are prepared to protect the downside as rates rise by gradually decreasing our overall interest rate sensitivity.

Loan growth has been good and pipelines remain strong.

We continue to look at opportunities to further diversify our portfolio.

We're embarking on our liquidity initiatives and should have the desired strategic results.

So in summary, we're well-positioned.

We like where we sit.

And like I said last quarter, it's times like this when you continue to look around the corner for the bogeyman.

[Black swans] always scare me.

We have to worry about the bipolar political world we live in.

Will tax rates stay this low, and how can we protect that?

Inflation related to trade wars and tariffs and labor costs, we believe is real.

New regulations, who knows if they're coming, but they can't help themselves, they probably will be.

We continue to invest heavily in cybersecurity technology as well as our digital product enhancements.

Will rates continue to rise?

What are we going to do when they're near the top, whatever that may be?

Back to labor cost.

It's interesting, the 2 of the nonperformings were now basically related to labor.

One was a bus company that couldn't find drivers, believe it or not.

That's -- and that was not a planned exit strategy.

That actually is a -- problem was we liquidate those buses, but they couldn't find drivers.

And another was a for-profit school that people have been happy to go to learn the trades, so they're in the process of closing schools.

They're profitable.

They're current, as I said, and we'd like to move that out.

But because of that, people can get jobs anywhere, they're not going to get those.

So it's kind of interesting the effects that the tight labor market's having on what were very good businesses.

I bring this up, but we're not just standing still and assuming that this is a new normal.

I don't know if you remember how -- as soon as you think you have it, you don't have it.

As it relates to rates, this feels like the late '70s again to me in a lot of respects with the economy going hard and inflation sneaking up.

Maybe not as bad as it was in the '70s, but it feels like that all over again and we're somewhat preparing for that in that regard.

As my family always used to say, hope for the best, plan for the worst.

That's what we're doing.

You can be assured of our best efforts in the long-term franchise growth and to maintain our consistent approach to conservative management to protect this franchise value of the organization.

That being said, we can take some questions.

(Operator Instructions) And our first question comes from Jon Arfstrom of RBC Capital Markets.

A couple of questions here.

I guess to start on mortgage, how do you want us to think about that for Q4 and also into 2019?

Do you view this as -- is it a profitability headwind?

Or some of this efficiency potential you talk about, is it not so much of a headwind when we think about Q4 and 2019?

Well, it's [not going to] be a volume issue.

I mean, if we're able to maintain the volumes which we have, we think that prices have been -- the margins have been squeezed because too many producers chasing not enough loans.

If the economy stays strong, we believe that housing will continue to pick up.

And our efficiency moves are -- should help us in the overall profitability of the product.

So these efficiency moves are actually relatively material.

The Zoom -- our front-end Zoom, call it our rocket mortgage, is -- should be fully deployed.

We haven't put that out on the Internet yet retail-wise, but we will be doing that in the first quarter.

We've used it as our own internal program.

It's cut 2 to 3 days out of processing there.

We also are finding ways to cut other processing costs by almost 50%, not all of them, but a lot of them, by using different outsourced companies.

So we believe that it'll be volume-related, but the volumes we get, the margins on that, the overall profitability should be increasing from where they are now.

Dave, anything on 4Q?

How do you want us to think about 4Q?

Well, I think it will be -- again, we'll just have to see where rates go and what the home purchasing is.

We've seen the pipelines decrease a little bit here as we get into the fourth quarter seasonality and rates did pop up a little bit.

Now they've come down and they've popped up a little bit again today.

So we'll have to see how that builds.

But my guess is the volumes will probably decline to something below $1 billion.

But we close these things relatively quickly now, so you only have a vision out 30 days, 40 days in reality as to how your pipelines are, because we're closing them in that about -- in that 40-day period of time.

So we'll have to see how they continue to grow here.

But our expectation is that they will be down and -- but we're also cognizant of accordingly the expenses, accordingly, as those volumes come down.

So I don't think it's going to be a major impact to the net earnings because you pay out roughly half of that in compensation type of volume, and we have other expenses associated.

So what falls to the bottom line is not extraordinarily material, but we do think the volumes will be down.

So -- whether it's $850 million, $900 million, would be my guess right now, but it's possible it could be slightly more than that with me being a little conservative here, I think.

Yes, okay.

Okay, good.

Then just maybe a bigger picture question for you, Ed or Dave.

Just the loan growth environment and earnings growth environment, I think we can all maybe set aside mortgage.

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

Well, there's always threats out there.

We are seeing some -- well, to use a better term, idiocy in pricing on commercial real estate deals, in our opinion.

We're also seeing insurance companies come back very strongly.

We also see a number of the construction projects we were involved with getting paid off and refinanced out.

So that will be an issue.

On the private equity side, as I said earlier, we're seeing huge prices in private equity deals and the [Ares] and [Antares] of the world are supporting this with loan terms that we wouldn't even come close to in terms of airballs, et cetera, and pricing.

They have the ability to withstand time not being regulated.

After 90 days, they can stay in, they don't have to turn it on nonaccrual.

So maybe they're smarter than most, I don't know.

But it seems to me that, that's a very frothy market.

That being said, we're diversified enough that we're seeing growth in the leasing portfolio.

We're seeing growth in the life insurance portfolio, premium finance.

We're also seeing good growth in the commercial premium finance.

One thing that occurred there was, for the last 2 years or 3 years, we've been subjected to an uneven playing field there, where we were, as a bank, were acquired to go out and get TIN numbers on commercial borrowers.

And for the first couple of years of this, we were required to do it, but -- by the Fed.

But the Fed was -- the different Fed officers weren't even applying it across the board.

So we were at a competitive disadvantage there to the nonbanks and to some of the other banks.

Now we were losing probably -- we had to fight to keep where we are right now.

We lost a lot of smaller agents in that process that had better yields and better late fees because they don't want to collect TIN numbers.

So through the work of Dave Dykstra, Kate Boege, a little bit of me, and Frank Burke, and [Mark Steenberg] at the [Premier Finance Company], the last 2 years, we initiated and then we worked with the industry itself with -- and we brought in congressmen, senators.

Mr. Dykstra went to Washington -- he's a fine lobbyist, by the way -- met with [Enserling] and Shelby.

And as of the beginning of October, or September?

End of September.

September, that law was changed.

We don't -- we are not required to get TIN numbers anymore.

So we are coming back with a vengeance to regain those lost share.

And we're blitzkrieging right now, as we like to call it.

We're getting all -- trying to get all of our old clients back.

We had some successes already doing that.

So we believe that, that program should do very well for us, making up for some of the losses we're seeing in some of the other areas.

The commercial side, we still see that there's good growth out there.

We continue to get a lot of at bats and winning our share of deals.

That market was kind of -- it's been, for a long time, priced about as low as it's ever going to be priced.

So we don't see that getting stupid right now.

Actually, it's -- we kind of get -- that seems like the new norm.

But -- so that growth has been pretty good.

So when you think about it, it's -- some things work, some things don't.

And that's the beauty of being as diversified as we are.

So -- and on the deposit side, we are having good success.

We have good momentum there.

Do we pay up a little bit for -- to bring in new accounts?

Yes.

We do use teaser rates to bring people in on the retail side, to bring their deposit relationships in.

We're able to rifle-shoot that and not shotgun it because of our structure and how we brand.

So we can rifle-shoot it into a specific inefficient branch or a new branch, and that will -- that has caused our rates to go up there.

But at the same time, if you look at it, we might -- our margin might go down 2 basis points, but our overhead ratio went down 4 basis points.

So that's kind of a win-win as we go into our overhead with that.

But -- and it also will fund a liquidity play, and we're looking at about $200 million a quarter depending on rates, could be more, could be less.

Again, I've said this could be another $1 billion to get to the 87.5 on a static basis.

We continue to grow, it'll be more.

That's a lot of liquidity to play with.

And if we're able to put that off at a positive spread, then it should be very beneficial to our earnings going forward.

So that's the plan in a nutshell.

We're also doing -- and we'll balance this with our investments to -- we're also doing some fixed rate loan programs in the homeowners association area, in the premium finance life insurance area, in commercial real estate area, to name 3, where we've got buckets set aside to actually get fixed rates on some deals.

Our goal over the next 10 months or 10 quarters, I would say, 8 to 10 quarters, is to get a -- we think that's when -- and again, this is subject to the rate environment.

That's -- we think that's when rates are going to kind of get close to peaking.

So take our gap down to about 20% to 25% of where it is right now, still leaving upside potential for us but covering the downside.

So we're going to do it through those, and every one of those should make us money, more money.

So it's a multi-pronged strategy.

I'm rambling on here.

But we believe it's appropriate for the time.

Will there be headwinds?

Yes, there'll always be headwinds.

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

Okay.

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

Yes.

I mean, it's just -- over time, yes.

Because like, this quarter was a timing issue.

We lost a couple of basis points because we picked up, if you look on average, $1.5 billion in deposits quarter-over-quarter.

So we're not going to do that all at once.

We're going to time it, get in.

And if we had invested it all, our margin would've been up and we wouldn't be having this conversation.

But we're going to just be gentle on this and take our time.

And again, we put up a nice record quarter.

So it's all about balance in that regard.

And our next question comes from Brad Milsaps of Sandler O'Neill.

Dave, just wanted to follow up on the mortgage, kind of some of the servicing line items that you guys disclosed on Page 22.

Some of those numbers were maybe -- had a bigger increase maybe than I thought.

Anything in there in your mind that you would kind of call out that wouldn't be run rate?

Just kind of curious on how best to sort of think about the go forward on some of those other line items.

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

Well, the MSR fair value adjustment is just really going to be tied to rates.

I mean, if rates, if the longer rates go up, then I think you'll continue to see that portfolio price up.

And we sort of look at that as a hedge to the production volume to a certain extent.

As rates go up, we generally lose some production volume, but you gain on the MSR valuation side.

So that will be tied to rates.

So if rates do go up and stay up in the fourth quarter, and you value them at the end of the quarter -- so it really depends on where they are at the end of the quarter -- then I would expect that, that number would continue to trend up.

MSR capitalization, just how many loans do we retain the servicing on and we retained a little bit more of those loans this quarter than the prior quarter.

But we continue to retain that servicing.

So I think that, that number would stay up.

There's a little bit of trade-off there that if you retain the servicing, you have a little bit less on the gain on sale, but you have more on the servicing side.

So if you didn't retain it, the geography would just flip back to the production revenue line a little bit more.

But I -- I think all in all, those -- and servicing should continue to trend up as we retain more of that servicing as far as servicing income per se.

So I think it's just volume-driven here as to where those numbers are going to be.

So pretty consistent as far as overall revenue relative to volumes, I think.

Okay, great.

That's helpful.

And Ed, just to kind of follow up on loan growth.

Do you guys, you consider yourself, based on the market that's out there, still kind of in that kind of high single-digit type loan growth, kind of looking out as far as you can see anyway?

Well, I don't try to see very far when it comes to that because we don't want to set goals out there that would make people be squishy on their underwriting.

But, yes, for the next quarter at least and probably the next 2 quarters, we feel pretty good about where loan growth is.

What we don't know about is payoffs.

Because our loan growth, really, new loan growth and new relationships coming in, in the quarter is actually very good, we get a lot of payoffs.

So if payoffs continue to accelerate due to people just doing dumb things, then we'll bear that burden.

But I can't control that.

I'm not going to chase those deals.

We're not going to chase those deals.

If they leave and they don't fit our underwriting, our profitability parameters, we're not going to do them.

But in terms of new loan growth, yes, I think we're doing just fine.

And I'm really kind of excited about what we're doing on that premium finance side.

We're getting our mojo back there and going out being offensive and not playing defense all the time.

As you know, I like to be offensive, as people would tell you, so.

And Brad, pipelines are consistently strong.

Third quarter tends to be a little softer because of the -- just people on vacation and the like, customers and the like, and fourth quarter tends to pick back up.

But we're really not seeing any major degradation of our pipeline, so we're optimistic that, that can still continue forward, so.

The next question comes from Chris McGratty of KBW.

Dave, I'm going to start on the margin -- go back to the margin for a second.

So this quarter was 3.61%, and there was, you called out 2 basis point of liquidity.

Is the right way to think about, given where LIBOR is now versus last quarter, a 3.63% start and then maybe a couple of basis points per quarter based on your balance sheet setup?

Because I think most banks are enjoying less incremental benefit from each hike.

I mean, the last few quarters, you were getting 5, 6 basis points per quarter of expansion.

Is that the right message you're trying to tell the margin, like low 3.60s, probably heading into 3.70% over the course of '19?

That's probably generally, right.

Like I said, we take in our interest-bearing cash, just the incremental piece that we put on this quarter, that if we would have invested that, the margin would've been basically flat, the 2 basis points.

Had we taken some of that even more liquidity that we have, that we've been waiting to invest, the margin would've been up.

So as we continue to leg into this, and as Ed said, it sort of depends on rates, where rates are at, how fast we do it.

But if we continue to do a couple of $100 million of that liquidity a quarter, and then we get the tailwinds on some of the repricing like on the life portfolio, life insurance premium finance portfolio, those are tied to 12-month LIBOR and they're repriced once a year.

And the premium finance loan on the commercial side, our fixed rate and 9-month full payout type of loan, so it really takes almost a year for those to fully reprice also.

So we do have some tailwinds there.

We were fairly aggressive with our new branch openings.

And as Ed said, on average, up about $1.5 billion in deposits in the quarter.

So some of that special pricing that we had on those deposits, that's not going to continue at that same rate going forward most likely.

And...

Plus, the new ones.

New ones, but we had $1 billion on the second quarter just itself.

So that might moderate a little bit.

But the other thing with those specials, that as rates continue to go up, those specials, we -- they're not as high a rate anymore.

So if we gave a CD rate back then and rates go up 75 basis points, those special rates are more like normal rates now.

So yes, I think you've locked those in for a little bit of time on those specials, as rates go up, you'll benefit on those deposits.

So I think we look at it that way.

If we can get a couple of basis points a quarter, increase 2 or 3, or depending on rates, obviously, that would be our goal, is just to -- as Ed said, gradually grind the margin up.

Hey, maybe you can tell us, where is the 10-year going to be at the end of this year, and at the end of the next year?

What do you think?

I'll follow up with you on that one.

Oh, yes, you can ask tough questions.

It's a one-way street here.

If I could sneak one more in on the mortgage comments, the expenses that you said would be kind of rightsizing by the first quarter.

Is that -- is the goal with that process improvement to get that one -- to get to a 1.50% overhead ratio in '19, is that something, maybe on a quarterly basis, you can get to with the changes that you're making to the business?

Well, that's part of it.

But there's obviously -- a lot of growth, a lot of expenses related to open up these branches that we're putting on -- we're putting in the network.

So it's a balance of that.

That will help, obviously.

But there's other growth, filling out our inefficient branches with the deposits and building these new ones will help us get there.

It's more of a growth issue.

Any deposit -- any cost we can cut, we'll cut.

But when you think about why we flipped the switch from acquisitions to organic, we knew in acquisition, you can overpay and it goes into goodwill, and you'd probably dilute yourself of the -- so you can [allay] some earnings.

We're taking much less of that, but we're taking -- it's much more cost-efficient to do what we're doing right now, but it runs to the income statement.

So we have to balance that.

That's what we're trying to do, is balance that to get to that 1.50%.

1.50% is the goal.

It's an aspiration.

Something we beat up everybody on.

But there's certain opportunities we take advantage of when we top above it and we deal with that.

But that's the goal, and that's -- a number of our banks are operating -- we've got some banks operating around 1% in net overhead ratio.

So as they get larger, they're able to do that.

So it's all about growth and controlling cost.

But probably getting it, the overall effect will be growth more than the cost cuts.

So then we're going to do both to get to the 1.50%.

And Dave on the tax rate, Q3, a good run rate for prospective?

Q3 was probably a little bit low.

We had some true-ups with the final adjustments from the Tax Reform Act.

We had about a year to get all those through.

And as we got clarity on some issues, we got a little bit of benefit.

I would still think that it would -- I would think it'd be more in the low-26 range is more of a normal rate to look at.

And our next question comes from Terry McEvoy of Stephens.

In the press release, you called out...

Terry, what do you think the 10 year's going to be?

I'll have to take that off-line as well.

I was hoping you wouldn't -- the 2 basis point impact of just excess cash was called out on the call and in the release.

Was the NIM impacted at all from just the LIBOR not moving as expected during the third quarter?

And if so, any thoughts on what that impact was?

No, we haven't calculated the impact.

But clearly, the 30-day LIBOR, as everybody knows and as we've actually shown in a chart on Page 20 of our press release, stayed fairly flat for most of the quarter and then started to bump up a little at the end of the quarter.

And we've got -- in our portfolio, we've got about $7.7 billion worth of loans that are tied to that 30-day LIBOR rate.

So it did have a little bit of headwind for us.

And I assume most banks that have any portfolio of size, it's tied to the 30-day LIBOR.

But it did pop up a little bit at the end of the quarter, which should be helpful running into the fourth quarter.

But yes, that did create a little bit of a headwind.

The depositors don't really look at LIBOR, retail depositors.

So the flattening of the LIBOR curve really didn't change their expectations, but it certainly did hold down the pricing on the loans for a good portion of the quarter.

Okay.

Yes, that's what I was getting at.

And then just as a follow-up, CD balances are up $1 billion year-to-date, and average balances were up $600 million, $700 million.

Can you just talk about where those customers are coming from?

Is it within the existing branches?

Are they new customers walking in the door?

Existing customers?

And then, Ed, you mentioned kind of cross-selling those new customers, how do you quantify that in specific products?

Where do you see some upside?

Well, most of it is new customers as we open the new branches and we target the inefficient branches, we offer a bundled package of accounts.

It could be your checking account, your safe deposit box, home equity line, and you get a teaser account with that that's usually a CD.

So they open all those up.

So it's mostly new accounts, I would say.

And then once you get them in, you cross-sell them into wealth management and anything else you can think of.

So it's consistent to what we did back before 2006, when we were mostly organically-driven before we went [nutty] when the market gave us those well-priced acquisitions.

So it's consistent to what we did in the past, and that's how we grew this thing to be where it is, is gaining deposit market share.

So if you go back and you look way back when we had a lot of CDs on the books because of the way we were growing, and then they went down to basically nothing.

And now we're using those teaser rates to grow again.

Does that make sense?

Yes, it does.

Yes, definitely makes sense.

And our next question comes from Nathan Race of Piper Jaffray.

Going back to the last question from Terry in terms of deposit growth strategies and pricing.

Just curious, as you guys look to get your loan-to-deposit ratio back towards 90%, do you expect the deposit beta that you have in this quarter to kind of persist as the Fed continues to raise short-term rates?

Or do you think this was kind more of a one-off increase just given the promotional activities that you guys took on this quarter?

Well, the new branch impact -- well, overall -- let me get this right.

Cycle-to-date, our total deposit beta is 33%.

Not bad.

But it's popped up a little.

We expect that, in aggregate, to end up in the 40% to 50% range.

So if you're 33% now, it's going to be higher to get to that number on a cycle-to-date basis.

So we would expect the -- our overall beta without new branches this quarter was 62%, without the new branches.

So the rest of it was the new branches coming on, the way we look at it.

So I think you have to view it in the aggregate and say, as rates continue to rise, we're going to go to closer to 40% to 50% beta; hopefully, closer to 40%, which is always -- it's been our number in the past.

But that'll mean that it should stay about the same as we go through this growth spurt and rates continue to go up.

Fortunately, when you price like -- when you're funded like we are with retail deposits, you start hitting caps, like the spread, the decompression that takes place in money market, in savings, and some of those kind of hit caps at a point in time.

We don't have to raise those anymore at all, especially on the savings side, which believe it or not, savings accounts and passbooks still sell in a number of the new neighborhoods we're moving into in Chicago and Milwaukee.

That's a good, solid core base for us.

So we're going to continue to push those, and we expect to end up, like what I said, 40% to 50%; hopefully closer to 40%.

And just kind of changing gears a little bit and thinking about capital.

Total capital kind of take down that ratio in the quarter.

I think historically, you guys want to stay above 11.5% or 11%.

So I was just curious to get kind of your updated thoughts on capital planning.

And obviously, within the context of potential acquisition opportunities, obviously we saw one bank acquisition announcement here in Chicago last night.

So just curious to get kind of your updated thoughts on where you guys are seeing more opportunities versus maybe Wisconsin and here in Chicago.

Well, on the capital front, it was down just a hair, if you're making the $90-plus-million that we made this quarter and you extend that out going forward, generally that should support our internal growth fairly well.

So I would expect it to sort of stay in that range, barring some acquisitions or outsized growth.

But you're right, if that number starts to tick down into 11.5% range, towards that range, we would look to do more.

But currently, barring any sizable acquisitions, we think we can be self-sufficient.

Got it.

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

Well, we -- let me put it this way, and we tell this to investment bankers.

Our landing pattern is full of opportunities, but I don't know if they're all going to land.

Our gestation periods are longer, expectations are higher, and it's in all areas of our business.

So we continue to be very busy in that regard, but we're going to be very selective.

And if it makes sense financially and geographically for us, strategically, on the banking side and on the wealth management side or on the specialty finance side.

So in some, like in specialty finance in a number of -- we've looked at a number of different companies, it's better to start them from scratch, really, when you look at what their price expectations are right now.

So we continue to look, we're shown a lot of opportunities.

You can expect anything what goes on in our market area, we've taken a look at.

But we're very selective in where we want to go and what we want to do.

So like I said, don't be surprised if we do something, but don't be surprised if we don't either.

(Operator Instructions) And our next question comes from Brock Vandervliet of UBS.

So are you likely to maintain this pace of branch acquisitions or branch expansions in 2019?

Or step off the gas somewhat?

We are likely to maintain maybe not 10 or 12, but certainly 5, 6, 7, something like that, next year.

We announced -- we're actually opening a branch in Naples, Florida to get everybody who's running away from Chicago these days.

That will open beginning of next year.

Simply a convenience branch.

This is not a -- just to make it very clear, this is not a move to Florida by Wintrust.

This is to accommodate our Chicago customers who are snow bunnies and live down there, have changed residence down there or whatever.

We think actually, we should do very well down there just with the Chicago transplants and snow bunnies that are there.

So we are -- it's a very small branch for us.

But things like that, we're doing strategically to maintain those customers.

It came really as a response to our customers asking us to do it.

But Milwaukee is going very well for us and we continue to build out up there.

We expect a couple of branches up there.

And we have a number of opportunities here as we fill out our franchise throughout Chicago.

So yes, I would imagine we would open 6 to 8 next year on the plans.

But that's the plan at least right now.

And again, just probably take what the market gives us.

When we did all these acquisitions, we didn't have a choice of where -- they were all strategic, but they left holes in our market that we needed to fill.

So that's taking this opportunity to do that right now.

Especially as we continue to be growing and making more money, we can make that investment and still balance our net overhead ratio accordingly.

Okay.

And separately on mortgage, I know you've bolted on a number of parts of the business and servicing origination over time.

Is this kind of what we see is what we get here?

Or are there missing pieces in your, from your perspective, that still exist?

And are most of the efficiency gains already been scored?

Or are we still kind of early in that process?

I think what you see is what you get.

I think we've got -- I sound like [Dave Watts] said, all the pieces are in place here.

We've been able to fix our product mix to get more government loans, which obviously have higher margins, through the Veterans First acquisition.

They also have a different distribution model, which is something we hope to migrate into our current system over time.

But no, so I think what you see is what you get as it relates to the infrastructure or the footprint that we have.

But you've not seen the results of the efficiency moves, the Zoom mortgage as we get that out, and take more mortgages as house deals as opposed to coming through a broker.

The efficiencies of that, the 2 days to 3 days, you've seen that pop in, 2 days to 3 days less processing time by using Zoom.

But you've not seen the backroom efficiencies.

It should be coming January and henceforth, but we can cut a lot of the cost related to it and make them more variable is -- by outsourcing.

So you've not seen the majority of the efficiencies in the process, in the current infrastructure we have, you haven't seen that yet.

And that concludes our question-and-answer session for today.

I'd like to turn the conference back over to Mr. Wehmer for any closing remarks.

Thank you, everybody.

Again, another record quarter for Wintrust.

Although the market doesn't seem to like record quarters, but nothing we can do about that other than continue to build our earnings double digits, continue to build our franchise the way we have in the past, which is conservative and focused on shareholder value.

And we intend to continue to do that, and we'll talk to you all next quarter.

If you have other questions, please feel free to call Dave or me.

Thanks.

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

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

Everyone, have a great day.