Wintrust Financial Corp (WTFC) 2018 Q4 法說會逐字稿

Welcome to Wintrust Financial Corporation's Fourth 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 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 fourth 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 will now turn the conference call over to Mr. Edward Wehmer.

Good morning, everybody.

Welcome to a snowy, wintery mix Chicago for our fourth quarter earnings call.

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

We will conduct the call under the same format as usual.

I'm going to give some general comments regarding our results.

I'll turn over to Dave Dykstra for more detailed analysis of other income and other expenses and taxes, back to me for some summary comments and thoughts about the future, then we'll have time for some questions.

On the earnings front, net income was $79.657 million for the quarter, down from the previous quarter but up from last year's $68 million -- almost $69 million, so up 16% -- about 16% from last year, down 13% from the year before.

On a year-to-date basis, our $343 million, our eighth consecutive year of record earnings, up from $258 million, up 33%.

Earnings per share were $1.35 in the quarter, down from $1.57 but up from $1.17 the previous year and $5.86 for the year, up from $4.40 or again 33%.

On an apples-to-apples basis, which is the way we like to look at it, pretax income for the quarter was up close to 12%, $108 million versus $96 million.

For the year, it was up 18%, so notwithstanding if we hadn't had a tax break, we'd still be reporting record year-end numbers.

Well, if it wasn't for the last few weeks of December, we would have been able to report our 12th consecutive record quarter of earnings.

Market volatility took a toll on our results for the quarter.

Notwithstanding these events, our core business performed extremely well and we were very well positioned for 2019.

As indicated in the press release, our fourth quarter results were negatively affected by -- on a pretax basis by $8.5 million charge of mortgage servicing rights, unrealized loss on equity securities of $2.6 million, $1.1 million loss on Canadian foreign exchange, $1.6 million of acquisition expenses, so approximately $14 million of negative adjustments pretax affected the earnings.

This, coupled with other factors in the mortgage business, including seasonal reductions in volumes and market-driven margin issues, account for the majority of reduction, fourth quarter income versus third quarter income.

Dave will talk to you all about this in detail.

If you look at the income statement, you'll see the most difference in the quarter took place in the other income section.

This had negative effect on our net overhead ratio for the quarter, as you can imagine, taking it to an unacceptable 1.79% backing out the quarter's extraordinary items, brings it closer to our goals.

On the positive front, our FTE margin increased 2 basis points in the quarter to 3.63%, which, coupled with an increase in average earning assets of $581 million, resulted in net interest income increasing $6.5 million during the quarter.

A little more on the margin.

Earning asset yields were up 13 basis points to 4.58%, while net cost of funds, including the free funds contribution, was up 11 basis points.

It should be noted that our acquisition of CDEC, Chicago Deferred Exchange Corporation, had minimal effect on fourth quarter margin.

CDEC was acquired in mid-month December.

By year-end, we had transferred $1.1 billion of CDEC low-cost deposits onto the balance sheet.

With those deposits, we've paid close to $700 million of much higher-priced institutional money, $75 million of much higher-priced brokered deposits and $200 million of Federal Home Loan Bank advances.

As mentioned, this had minimal effect in Q4, though it can be expected to help our cost of funds in a meaningful way in the future.

The CDEC business and related deposits, which we believe we can grow in the future, coupled with mid-December's rate increases other than the notorious 10-year rate and our continued loan growth, bodes well for increasing margins in the immediate future.

It should be noted that period-end loans exceeded fourth quarter averages by over $650 million.

It gives us a nice head start and boding -- it's a head start for 2019 and bodes well for the net interest margin and net interest income.

Prior to the 10-year collapsing, we were able to make a bit of headway on our laddering program.

We've talked about our laddering program earlier.

That's a program where we'll be extending our investment portfolio to start a balanced way to lower our interest rate sensitivity.

The effects of these minor gains is hidden to some extent by our growth.

However, we did invest close to $400 million in the longer end of the market.

We'll continue to work in the future to reduce our interest rate sensitivity by the previous mentioned laddering program and by other means.

We'll continue to monitor the rate environment and to continue our investment duration laddering program.

Wealth management continues its slow and steady growth.

Happy with our results year-over-year.

Other expenses are pretty well in line and will be discussed in detail by David.

On the annual earnings front, 2018 was a record year for us, eighth in a row, as I mentioned.

Net income and EPS were 33% and the pretax was up 18%.

Our margin increased 17 basis points to 3.61%, and the overhead ratio was 1.62% for the year, up from 1.56%.

We would have been closer to the 2017 number had the fourth quarter not turned out like it did.

ROA increased 20 basis points to 1.18%.

ROE and ROTE for 2018 were 11.26% and 13.95%, up from 9.26% and 11.63% the previous year.

All in all, it's a great year which we're very proud in spite of the unlucky fourth quarter.

On the credit side, credit metrics remained very strong.

Nonperforming assets decreased $18 million in the quarter or 0.44% of assets, down from 0.52% at the end of the Q3 and 0.47% at the end of 2017.

Net charge-offs for the fourth quarter was $7.1 million or 12 basis points.

The year net charge-offs totaled almost $20 million or 9 basis points, up from 7 basis points a year ago.

Reserve coverage stood at 134%, up from the 118% we recorded in the third quarter but down from the 153% we experienced a year earlier.

3 large loans, which were nonaccrual, are being resolved as anticipated.

There's one being cleared totally, one expected to clear in late Q1 or Q2 and one on its way to becoming a performing loan.

All in all, credit remains extremely good.

In the balance sheet front, ending assets grew $1.1 billion in the quarter and $3.3 billion for the year to $31.24 billion.

These are increases of 14% and 11%, respectively.

The acquisition of American Enterprise Bank in early December contributed $164 million to these totals.

American Enterprise Bank is an interesting transaction for us as we did not acquire any branches in the deal given the proximity of their branches to Wintrust branches.

We acquired certain assets and assumed certain liabilities of the bank but basically no operating expenses.

So pretty much the total cost of that deal which will be a profitable transaction for us going forward.

Total loans net of loans held for sale were up approximately $700 million quarter-versus-quarter and $2.2 billion year-over-year or 11.7% and 9.2%, respectively.

American Enterprise Bank contributed $119 million of this growth.

As mentioned, most of the growth occurred in December.

We start quarter 1 2019 with a great head start of over $650 million.

Deposits grew $1.18 billion in the quarter and $2.91 billion for the year, translates into deposit growth of 18%, an 11% growth.

American Enterprise contributed $151 million to this growth.

We were excited about our prospects of growing our deferred exchange business with our CDEC transaction as these provide a diverse and steady flow of very low-cost deposits.

At year-end, CDEC managed $2.4 billion of deposits for customers.

$1.1 billion of that was on our balance sheet, the remainder placed at other third-party banks for a fee.

These deposits by nature are short term in duration as the customer needs to get their funds reinvested in 3 to 6 months.

As such, there can be volatility in aggregate balances.

We're largely conservative in our reliance on these core deposits.

And as I said earlier, we do think we can grow this business nicely.

Our loan-to-deposit ratio returned closer to the desired range of 85% to 90%, closing 2018 at a little over 91%.

Our goal was still to get in with that desired range.

Now I'm going to turn the call over to Dave, take you through other income, other expense and taxes.

Thanks, Ed.

As Ed noted, the fourth quarter had some unusual volatility with the majority of the impact flowing through the noninterest income section.

So I'll focus on those areas and then provide a bit of background on the noninterest expense category that experienced an overall decline in total expenses relative to the third quarter of 2018.

Turning to the noninterest income section.

Our wealth management revenue held relatively steady at $22.7 million in the fourth quarter compared to $22.6 million in the third quarter of last year and up 4% from the $21.9 million recorded in the year ago quarter.

Brokered revenue was down approximately $582,000, while our trust and asset management revenue offset that decline by increasing $674,000.

Overall, as Ed indicated, we believe the fourth quarter of 2018 was another solid quarter for our wealth management segment despite the volatility experienced in the equity markets late in the fourth quarter.

Mortgage banking revenue decreased approximately 42% or $17.8 million to $24.2 million in the fourth quarter from $42.0 million recorded in the prior quarter and was also down slightly from the $27.4 million recorded in the fourth quarter of last year.

Now the decrease in this category's revenue from the prior quarter resulted primarily from lower levels of loans originated and sold during the quarter.

And correspondingly, we also had lower production margin on those volumes.

The company originated approximately $928 million of mortgage loans in the fourth quarter.

This compares to $1.2 million of originations in the prior quarter.

Billion.

Or $1.2 billion of originations in the prior quarter and $879 million of mortgage loans originated in the fourth quarter of last year.

The mix of the loan volume that we originated during the quarter was approximately 71% related to home purchase activity compared to 76% in the prior quarter.

So purchased home activity continues to be the majority of the new origination activity.

On Page 22 of our earnings release, we provided detail compiling the components of the origination volumes by delivery channel and also the mortgage banking revenue, including production revenue, MSR capitalization, MSR fair value and other adjustments and then also the servicing income.

So you can look there for further detail on the mortgage banking segment.

Given the existing pipelines, we currently expect originations in the first quarter of 2019 to be similar to the fourth quarter of 2018.

The company recorded losses on investment securities of approximately $2.6 million during the fourth quarter, primarily related to unrealized losses associated with a large-cap equity fund that the holding company has an investment in, which was used for seed money for a proprietary mutual fund.

As you know, many large-cap stocks experienced significant drops in value near the end of the year, and our holdings, which we're required to record at market value, were similarly impacted.

Thus far, in 2019, the funds recouped some of its value as the stock market has rebounded a bit in early 2019.

The revenue in the fourth quarter of 2018 for operating leases totaled $10.9 million compared to $9.1 million in the prior quarter, increasing 19% during the quarter.

The increase in this revenue item compared to the prior quarter is primarily related to growth on the operating lease portfolio as the period-end balances of operating leases increased to $233.2 million at December 31, 2018, from $199.2 million at the end of the third quarter.

These amounts relate only to operating leases as capital leases are carried in the loans section of the balance sheet.

Other noninterest income totaled $10.6 million in the fourth quarter, down approximately $5.5 million from the $16.2 million recorded in the third quarter of last year.

There are 2 primary reasons for the decline in this category of revenue, including a negative swing of $1.5 million of foreign exchange valuation adjustments associated with U.S.-Canadian dollar exchange rate.

The current quarter had a negative valuation adjustment of approximately $1.15 million, whereas the third quarter of 2018 had a positive adjustment of approximately $350,000, so a swing of $1.5 million.

The currency rate volatility was abnormally high during the fourth quarter.

We usually don't see that much of a change.

And again, thus far in 2019, that exchange rate has recovered a bit, but we'll have to see where it ends the quarter up at.

Next, BOLI income was down $3.7 million from the third quarter, primarily as a result of a $2.2 million debt benefit recognized in the third quarter with no similar benefit recognized in the fourth quarter and a $1.1 million loss on BOLI investments that support deferred compensation plan benefits that were impacted by equity market returns.

I should note that this $1.1 million BOLI loss resulted in a similar reduction in compensation expense during the quarter.

In summary, the volatile market conditions near the end of the quarter influenced mortgage servicing rights valuation, equity, security valuations and foreign exchange rates that all negatively impacted our noninterest income revenue amounts.

Interestingly, each of these items which are mark-to-market each quarter had positive adjustments in the third quarter but to a much smaller magnitude.

We believe these categories have experienced some recovery in value thus far in the first quarter, but we'll have to see whether the recovery continues and where they end up at the end of the first quarter.

But typically, the swings in value were much smaller.

Turning to the noninterest expense categories.

Noninterest expense totaled $211.3 million in the fourth quarter, down approximately $2.3 million from the prior quarter.

I should note that the current quarter included approximately $1.6 million of acquisition-related expense items compared to a total of $2.6 million in the prior quarter.

I'll talk about a few of the categories with the most significant changes now.

The base salaries and employee benefit expense category decreased approximately $1.7 million in the fourth quarter from the third quarter last year.

The decline was due to a variety of factors, including lower commissions related to the mortgage banking production; a higher amount of salary deferrals related to loan origination cost, which reduces salary expense; and a reduction in cost related to deferred compensation plans impacted by the market returns on the BOLI plans, which I had just discussed earlier in the noninterest income discussion.

These declines were partially offset by additional expense related to normal staffing growth as the company continues to expand and an increase in payroll taxes associated with incentive compensation awards paid during the quarter.

Marketing expenses decreased by approximately $1.7 million from the third quarter of 2018 to $9.4 million.

And as we have discussed on prior calls, this category expense tends to be lower in the fourth and the first quarters of the year as our corporate sponsorship spending is more heavily geared towards the middle 2 quarters of the year.

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

This category of expenses increased $1.1 million in the fourth quarter compared to the prior quarter.

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

This is actually a category you're happy to see grow the expenses because it reflects that we're having increased revenue associated with that.

If we group all the other expense categories together, other than the 3 that I just discussed, the remaining noninterest expenses were essentially flat on an aggregate basis being up approximately $54,000 in the fourth quarter compared to the prior quarter.

So I won't spend much time on those since the pluses and the minuses offset and nothing real significant to discuss there.

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

Thanks, Dave.

As usual, clear as the mud.

Thank you.

I always try to help the cause.

Thank you.

Despite the fourth quarter hiccup, 2018 was an extremely good year for Wintrust, as evidenced by another record year of earnings, EPS and balance sheet growth.

Although aided by reduced taxes, I'll remind you again, the pretax income for the year was up, in and of itself, 18%.

For those of you who have been following us for a long period of time, you should know what our goals are: double-digit earnings growth, exemplary credit metrics and a fortress balance sheet are tops on that list of goals.

To that end, year-end is a kind of nice place to take a look back over the last 5 years and see how we have delivered.

For those last 5 years, net income growth, 5-year CAGR is 20%; asset 5-year -- asset growth, 5-year CAGR, 12%; loan growth, 5-year CAGR, 13%; deposit growth, 5-year CAGR, 12%; NPAs as a percent of assets, the 5-year average is 0.52%; net charge-offs for the 5-year average is 12 basis points a year.

Based on the above, it'd be hard for us to say we're not achieving our goals, not just this year but over a much longer period of time.

Hopefully, this buys us some credibility in the market.

But history is just that, history.

That's why we, at Wintrust, we have a mascot.

It's the Greek god Sisyphus.

Those of you who aren't familiar in your Greek mythology, Sisyphus was condemned by the gods to push a rock up a hill every day.

At the end of the day, the rock would fall down the hill, he'd have to push it back up again.

Just like him, every December 31, that rock rolls back down the hill, and we're fated with having to push it back up again.

And the rock is always bigger and the slope is always steeper.

But we take that -- we relish that challenge.

We're looking forward to 2019 with a great deal of confidence that we can again deliver on our goals.

We're well positioned for the first quarter in particular and beyond.

The CDEC acquisition should aid in keeping our interest cost of funds intact.

Q1 '19 will be the first full quarter in the effects of these low-cost deposits on earnings, and we're embarking on growing that business.

The AEB acquisition should be accretive in year 1, should be accretive in the first quarter.

We started the year with a $650 million head start on loans, as ending balances exceeded quarterly averages by that amount.

Loan pipelines remain consistently strong, we're booking loans on our terms.

Although non-bank competition is becoming more and more aggressive, our brand and market disruption is helping us to continue to gain market share.

The situation warrants, however, that as our circuit breakers, our pricing policies or loan policies, trip, we'll not be afraid to stop [the motors] we have in the past.

As of now, we see no reason to do this.

The exceptions in our portfolio, which we monitor monthly, remained consistent for the last 3 years, both our new deals and in the overall portfolio, and our pricing is holding up as well as can be expected.

We expect the margin to grow modestly in 2019, assuming a consistent rate environment but nicely.

Credit metrics remained strong.

However, we'll continue the cull the portfolio for any and all cracks and active relationships where said cracks are found.

We'll always remember the old adage, "Your first loss is your best loss." Let's not try to kick the can down the road.

It takes a full year for short-term interest rates to work their way through our asset base.

December increases is really yet to be seen in our numbers, and other increases in 2018 -- that we experienced in 2018 are still working their way through the system.

This bodes well for the margin.

Wealth management should continue their slow and steady climb.

In 2018, we opened 10 branches, and we have the same number on tap for 2019.

Pretty much all of the 2018 branches are performing ahead of plan where we expect the same for the ones opening this year.

A lot of the ones opening this year will be in Naples, Florida, believe it or not, that it's going to open in the first part of February as a small convenience branch.

But when you look at the numbers of our -- of Illinois refugees in Florida now and our name recognition -- and we're not expecting much out of this, but I think it's going to be a lot better than we anticipated.

We completed 2 [more] bank acquisitions in 2018 as well as CDEC.

Those [trust-like] pricing for banks and our asset -- and our desired asset range are becoming more reasonable.

As such, our lending patterns have remained full, but gestation periods remained slow.

You can be assured of our consistent conservative approach to deals.

The lower 10 rate, although hurtful in Q4, should have volumes in the upcoming spring buying season in the mortgage business.

We continue with our cost cutting and efficiency moves in this business, many of which will be operational by midyear.

As a community bank, we remain committed to the mortgage business.

We are committed to achieving a net overhead ratio of 1.5% or better.

However, as we are mandated to prepare our platform to become a $50 billion asset bank, you can all wonder who -- you don't have to wonder who that mandate came from.

Achieving that number at year-end may be hard, a number in the mid-150s is our short-term goal.

In short, we're proud of what we have built over the last 27 years and approach 2019 with a great deal of confidence.

As always, you can be assured of our best efforts, and we appreciate your support.

And now we can turn it over for some questions.

(Operator Instructions) Our first question comes from Jon Arfstrom with RBC Capital Markets.

A couple of questions here.

The CDEC deposits, you talked about $1 billion on your balance sheet and maybe, I think, $1.3 billion or $1.4 billion off the balance sheet.

What's the plan with the off balance sheet piece of that?

Well, we've got a nice fee on that, that will run through fee income.

We don't want to get overly reliant on this.

You'll probably see what -- what we're going to do is look at the 12-month rolling averages because it does go up and down, somewhat seasonal for people too to get things done in calendar years or quarters.

We'll probably maintain the 1 year, either the max that they have on their books or the 1 year rolling average.

And the rest, we will place with other banks and receive the fee on it.

Does that make sense?

Yes, yes, that makes sense.

And the general message on loan yields, it sounds like, based on your very last comment there, that your expectation is loan yields can continue to rise modestly?

Well, because of the structure of the balance sheet, yes, and the rate rises continue to work their way through.

So we would expect that to occur.

We would hope that -- it's kind of a weird environment now that we hope to be able to mute our deposit cost -- our core deposit cost, notwithstanding the effect of CDEC's replacement of higher cost funds but to maintain those relatively low.

So we'll see.

That's the plan at least.

Yes, okay.

And then just on mortgage.

I know this is tougher.

Maybe it's for you, Dave.

But you talked about pipelines being consistent, maybe margins being down last quarter.

You're also talking about some seasonality.

And I guess, we didn't touch on efficiency opportunities.

So just kind of can you unpack mortgage for us a little bit in terms of how we should be thinking about Q1 and then headed into Q2 on mortgage?

Well, heading into 2Q, we would expect it to increase as the seasonality factors go away.

We certainly don't have those pipelines in place yet because we -- from the application to closing is generally the 40 day or less range.

So we're not getting applications yet for the second quarter, but we would expect that to be to the pick up in strength.

First quarter, we would expect that the Veterans First consumer direct platform would stay relatively stable.

They don't have quite as much seasonality because they're not focused in Midwest like our retail channel is.

So we would expect there to continue to be a little bit of pressure on the retail channel in the first quarter.

And so that would be relatively stable, maybe down a little bit.

Correspondent business would be relatively stable and Veterans First would be relatively stable.

So that would be our thoughts.

Our Veterans First tends to have a little bit higher gain on sale margin because it's government products than the other 2 channels.

But when volumes go down, margins tend to get compressed because you have so many people competing for a much smaller pie.

Yes, and so that's where the compression is coming, just the competition out there right now.

Interesting, right now, Jon, on the competition side, we're seeing a great deal of stress in our competition.

We believe that the long-awaited consolidation will be taking place.

I mean, those -- some firms are emerging, some are going out of business, some -- in the markets now, which should bode well for us both in terms of recruitment and less competition in the area.

On the efficiency front, we're doing a number of things, one of which could be pretty interesting by midyear if all goes to plan.

Our Zoom mortgage, which is our Rocket Mortgage platform, that should be -- we should be able to start marketing that online so people can -- kind of like Rocket Mortgage.

You still will have a person available to work with you.

But through that distribution, we can cut commissions probably by -- in half or more if they come in -- if applications come in that way.

That's the secret to this.

We're still going to rely on our personal service.

We're still going to rely on the mortgage reps.

We'd like to tilt the balance to be more consumer direct, and we're in the process of proving out that concept.

Focus groups have told us that our product is better than some of the major competition out there.

Time will tell.

Hopefully, by midyear, we can get that -- sometime in the middle of the year, we'll get that up and running and start marketing that, which could -- that Zoom also will cut -- is cutting a couple of days off the front end by doing a number of other efficiency moves and that -- we're going to talk about now, that should bring down our cost and our time to get loans done.

So I know that some people say, "Why should you be in mortgage?" Well, we're a community bank, we got to be in mortgage.

Mortgage is notwithstanding -- even including the fourth quarter, it was profitable for us for the year in a nice way.

And it's something we believe that you got to take the good with the bad, ride it out.

Interestingly enough, the -- we were having discussions about hedging our mortgage service pipeline in the fourth quarter.

Greedy Ed thought rates for the long end was going to continue to go up and schedule it for the first quarter.

So that one's on me.

I screwed that one up.

Hard to believe, I screwed something up.

Right, Dave?

Very hard to believe, Ed.

Yes.

Thank you, Dave.

But we are looking at that board.

But we're refining this business, and we think it's going to be a good steady business for us going forward.

We'd like to take the volatility out, but -- and we'll work to do that when the time is right.

Obviously, it was right and I screwed it up.

But other than that, we're okay.

Our next question comes from Brad Milsaps with Sandler O'Neill.

I just wanted to follow up on the NIM discussion and maybe the size of the balance sheet as it relates to the CDEC deposits.

I guess, maybe initially, I thought that you would use that funding to sort of grow the overall size of the balance sheet.

But smartly so, you guys opted to pay off some higher cost deposits.

As you think about funding, your $2 billion-ish of loan growth this year, I assume you want to do that with core.

Do you bring back some of the more wholesale sources to lever up into the bond book if rates behave the way you want them to?

Just kind of want to get a sense of kind of what you're thinking in terms of size of the balance sheet and how best to deploy that liquidity going forward.

Well, our prospects for loan growth are consistent with prior years.

So we need to be able to bring deposits in to do that.

We work very hard to develop a diverse deposit base.

But for the most part, core.

We only use the brokered stuff when we have to or to control our asset liability management, so our interest rate sensitivity.

The $700 million that we paid off was brought on, was longer-term deposits.

When we took on about approximately the same amount of franchise loans when we bought those from...

GE.

GE, we had to fund that right away.

Now we consider this CDEC to be core, and we really don't want to have a lot of reliance on institutional funds.

Now it's nice to have them there.

We basically have brought those numbers down significantly to hardly -- to almost 3% or 4% of our total deposits.

But we had that available should the market so warrant.

So it's nice having that capacity available to grow if rates get [goofy] or we find it hard to, for some reason, to grow organically.

If you looked at Wintrust over the years, we grew organically for a long period of time.

We got into acquisitions.

And now we're back to filling out the franchise and growing organically.

Most of the growth this year was organic, and we feel pretty good about our ability to do that.

Our branches are performing better than we experienced.

But we think that the deposit side of our balance sheet is really our franchise value, those core deposits, and we're going to stick to trying to grow those, not lever up unless there's some situation where we can plan arbitrage some place and make us a lot of money.

We don't see that happening with a flat yield curve.

But it's nice to have that in our back pocket in the event that it would occur.

So in short, we like core deposits.

We're going to continue to grow core deposits, continue to fill out the franchise where we can grow without the commensurate increase in expenses and be very, very flexible.

It's hard to believe -- I like being flexible, I wish I could be personally, but we will certainly be on the business side.

So in summary, basically adding the excess $1 billion above the $2 billion that you need for loan growth is -- you just want to be flexible.

It's really going to depend on kind of what the yield curve gives you?

Yes, and we want to be conservative.

We make -- we obviously don't make as much as we make on -- in the margin on taking all the CDEC money in.

But you don't want to rely on it too much and then you find yourself get whipsawed and what do you do.

So we're going to be conservative and we make good money.

It was a great deal for us.

They're wonderful people.

They have a great market presence that we think we can enhance.

So we're excited about those prospects, and we just don't -- we want to get to know the business better before we get out over our skis and have a funding issue that we have to deal with later.

And Dave, I don't know if you can look at it this way, but I know you mentioned there was a huge impact to the CDEC money in the fourth quarter.

But would the December margin be appreciably higher than, say, the October margin?

Yes.

The December margin was higher than the October margin.

It was actually higher than our ending margin.

That's why we believe that the margin will increase in the first quarter and we gave that guidance.

Our next question comes from Kevin Reevey with D.A. Davidson.

So my question relates to core operating expenses.

I'm coming up, for the fourth quarter, roughly with a number around $210 million.

Is that kind of a good number to use going forward, assuming a modest rate of inflation?

And obviously, you've got some other things going on.

Is that kind of a good start?

Kevin, we never really give guidance on the expense side because it moves around quite a bit, depending on what happens with the mortgage business.

And as I mentioned, the marketing and advertising costs spiked up a little bit in the second and third quarters.

But the things that could impact that again would be the commissions on the mortgages.

We tend to give salary increases in the first quarter, starting in February.

So roughly 3% is a plus or minus number that you could use on average starting in February, so that generally kicks in.

The rest of it, operating lease depreciation, again, you could see on that category, it went up $1.1 million this quarter, but that's good because we have a more corresponding revenue come on with those balances.

So we -- because all of the moving parts, we really haven't given a ton of guidance on that.

But if you can look at the $1.6 million of acquisition-related expenses we had for the quarter, those were unusual.

But the rest was sort of standard as far as variability goes.

Okay.

And then how should we think about the gap in the FTE tax rate for 2019?

Well, I think you -- well, we -- the guidance we gave you before, and I think sort of the 26.5% plus or minus would be sort of where we would think it would fall other than the credit you get for when you have stock equity award grants, and you -- sometimes you get credits for that with the stock prices higher than what the award price was.

And so we give those numbers in the press release and in our Qs as to what they were in the year.

So you can look at that and make an estimate, I guess, depending where you think the stock price is going to be.

But it'll be somewhat lower than that with those equity award credits that come through.

But barring that, I would still think it would be in sort of the 26.5% range.

Our next question comes from Chris McGratty with KBW.

Dave, on the margins, just want to come back to it for a minute.

The first quarter, it seems like a set-up -- a pretty good set-up from the deal in kind of the back-ended loan growth in the quarter.

If the Fed doesn't move anymore, can you speak to the kind of the trajectory of the margin?

Your comments on moderating deposit betas was interesting, but it's interesting -- once you get that lift in Q1, what's the outlook if the Fed doesn't move anymore?

Well, I mean, we show what our variable in the fixed rate loans are in the press release.

You can kind of look at that.

But there's some tailwinds with the life portfolio that we have, the premium finance life portfolio we have.

There's approximately $4.5 billion of those loans that are tied to 12 month -- generally tied to the 12-month LIBOR rate and those reprice once a year.

So theoretically, about 1/12 of those reprice a year.

So if the 12-month LIBOR doesn't change, then we've got some tailwinds in that regard, and we put a graph on Page 20 of our press release that short of shows where that rate was a year ago and where it is now.

So you get some benefit from that.

Similarly, our $2.5 billion of property and casualty premium finance loans are fixed rate and generally have a 9-month life.

So about 1/9 of that portfolio was repricing as they come due at a higher rate.

So those 2 things have a little bit of tailwind.

Deposit pricing, you still get a little bit of CD repricing out there as upward pressure.

But if rates don't move, then -- as Ed said it, we think we can sort of hold the increases on the deposits elsewhere pretty well, and then the mix change with the CDEC versus some of the wholesale funding should help.

But what we've sort of seen in the marketplace is, and I think it's probably perception, that people now believe that maybe the Fed may not raise.

And so you're seeing people get less aggressive on the deposit pricing than you're actually seeing in the longer-end wholesale brokered fund pricing back off a little bit.

So it just seems like the marketplace is sort of taking a pause here, waiting to see what's going to happen, and we'll certainly pause along with it on the deposit side.

Great.

And if I could sneak one more in on capital.

You guys have historically been pretty shareholder-friendly.

Given the move in the stock in the group, can you speak to thoughts on the buyback, whether it be standalone or kind of funded with some sort of alternative instrument?

Well, we always look at that, but we are a growth company, we've got to concentrate on our TCE ratios and the like.

But it's something we review all the time.

And maybe where the market goes, we'll see where we end up.

If we saw a period of rope-a-dope 2 coming on board, we'd probably go out and raise a bunch of capital and buy -- and wait to buy some stock back, I would imagine.

But right now, we're still experiencing good growth and the acquisition market is strong.

So it doesn't seem to make a lot of sense now but something we always look at and will continue to look at.

Dave?

Yes.

And well, the other thing is, I mean, if you look at our total capital ratio, which tends to be our limiting one, we're doing 11.6% at the end of the quarter, and that fell really because of the acquisitions and the associated goodwill that goes along with that.

But generally, our earnings are supporting our growth.

But we generally wouldn't want to fall into the low 11s or high 10s.

And so we don't have that much excess capital.

So to the extent that we thought that we wanted to enter into a stock buyback, we would probably have to raise sub debt or preferred or something like that in order to accommodate the repurchase of it just because we generally don't like our total capital ratio to fall much lower than that.

Our next question comes from Terry McEvoy with Stephens.

Just -- Ed, your closing remarks, you finished with Wintrust crossing $50 billion and making some comments about the expenses this year, reflecting -- crossing that threshold, which caught me a little bit off guard given your $31 billion today.

That's a, what, 50%, 60% increase from where we are.

So maybe could you just expand a little bit on why, '19, you expect to start building up those expenses?

Do you have any thoughts organically with the deal pipeline?

When that actually will happen?

And just to help us gauge the build-up those specific expenses and put some sort of time frame around it as well.

Sure.

Well, this expectation was put on -- it was probably 1.5 years ago.

And we've added 110 people in IT, for God's sakes.

We're a growth company, and I like to say we're kind of like in puberty right now at quarter end.

We have to grow into our -- in the overhead we've put on.

There's still some [more] coming.

The regulators are pushing us because of it.

They say, "You got to be ready, and we'd like you to have a $50 billion platform." We don't -- you say one of the expenses are coming.

We've experienced probably more of them than we'd like already and some more coming.

But we don't -- I can't tell you we're going to hit $50 billion.

I'm just telling you what the expectations are.

We have to have this platform ready.

The referees -- the regulators are the referees and only I'm allowed to bump the ref.

The other guys can yell at them, only I can bump them.

But we want to have good relationships with them.

All in all, we're making investments in the business that allow us to get there.

So we need to grow into our clothes.

We intend to grow consistently like we have in previous years.

We don't intend to look at very large acquisitions.

We never know what comes along.

It's business as usual for us, which would get us there, feel good that way and nothing would have changed.

We'll get to there in 5 years probably.

But that's what's expected of us, and we need to grow into it from -- to get that overhead ratio where we want it.

So I was just being open with you that the [$150 million] is kind of hard-to-reach when we have to go to a committee on committees now to figure out what else is going on.

But we put the infrastructure in place.

We're very happy with it.

Everybody is happy with it, and there'll be some more additions we want to bring -- we'll need to bring on over the next 1.5 years or 2 years to make everybody happy with it, if you follow my drift.

Great, I appreciate that.

And then just as a follow-up.

The premium finance commercial business was up 8% last year.

The life side was up 13%.

Is that a reasonable growth outlook, kind of 8% to 10% for 2019 for those 2 specific lines of business?

Yes.

I mean, generally, we think of our loan portfolio growing in the high single digits.

And generally, we like those to sort of grow in concert with the total balance sheet.

P&C could get a little bit better boost.

I mean, the market is hardening just slightly in certain areas.

But the fact that some -- there were some regulatory relief on collecting tax ID numbers and certain sort of know-your-customer rules out there for the premium finance business that were implemented late last year.

We lost a fair amount of business over the last couple of years because we had to collect those TIN numbers whereas some of our competitors didn't.

We hope to gain some of that back, and we already are starting to gain some of that back, but it takes time because these customers buy annual policies and they the only come up once a year.

So there could be a little bit of tailwind in that regard.

And of course, we always want to grow it.

But I would think that those would be reasonable expectations.

Maybe the P&C could be a little bit higher depending on market hardening aspects that may occur during the year and how well we do on regaining some of that lost business we have because of the unleveled regulatory playing field.

On the life side, I think the law of large numbers will catch up with us eventually.

You might -- if I had to guess, probability-wise, it's probably -- more probably that the P&C business will be up more on a percentage basis than the life business.

Our next question comes from David Long with Raymond James.

Following up on Terry's comments about the premium finance business, my sense has always been that those -- there are -- more repricings happened early in the year on both the life and the commercial side.

Is that the right way to think about it?

No, we -- the business fluctuates a little bit as far as volumes go because a lot of people have policies that renew in December and generally, the loans flow through in January.

So January tends to be a large month and July does because the other high quarter-end month is June.

So quarter-ends tends to be a little bit higher but not so dramatically that it would change the landscape as far as the rate environment too much.

Got it.

And then you talked a little bit about deposit competition maybe easing to some extent.

And I have not seen as many teaser rates, if you will, or the 2.5%, 3% rates on deposits on some of the mailers going out.

Where do you guys stand on some of these promotional deposit yields that you have previously focused on?

Well, we opened a new branch.

We still use them.

We opened 10 last year.

We'll open 10 -- scheduled to open 10 this year.

We will be using them at those locations.

Those have -- but again, those then -- we'd tape -- those taper off when the -- as time goes by and most -- half the ones we did last year are tapered already.

So I would expect there to be some hiccup there or increase there, but as percentage of our total deposits it becomes less and less.

But we agree with you.

We don't -- there's not as many silly things going on in the market right now.

I think people are taking a breath.

We had great loan growth because of our diversification in the quarter.

I don't think you're seeing that in the smaller banks and other places right now.

And if they get off of the fund, they're not going to pay that kind of money.

So yes, I believe the competitive environment for deposits is taking a breather, as Dave said.

(Operator Instructions) And our next question comes from Nathan Race with Piper Jaffray.

Going back to the discussion around CDEC.

Dave, just wondering if you could paint a little more color around what the specific fee income and noninterest expense impact we should expect in 1Q as you guys get the full quarter impact of that deal?

Yes, we haven't disclosed that yet, and it sort of depends on the volume of deposits in that so they can just go up and down.

So I think we'll take a pass on giving you that information until we let first quarter go.

Okay, sounds good.

And then just maybe a broader question for Ed.

There's been a lot of M&A in Chicago not only in the last year but in the last few years.

So just curious, as you kind of sit here today, how you kind of -- if you're more or less optimistic on loan and deposit growth opportunities into 2019 than maybe you would have thought 8, 12 months ago.

On the acquisition front, I think I said in my comments that it's actually -- pricing expectations are coming down a bit.

I think, especially in the under $1 billion banks, which is what we focus on, I think they're all getting a little worried that they want to get out now before their next wave hits if -- and we don't see that next wave yet, but there always is one.

And their expectations have come back a little bit.

So we believe that the acquisition front could be very interesting this year.

On the organic loan-to-deposit growth, we talked a little bit about premium finance, where we think that's going.

But again, our loan pipelines are as strong as they've ever been, and our ability to book these loans on our terms is holding up.

As I mentioned, our critical exceptions is both a percent of new deals and in the portfolio.

Just exceptions in general and the portfolio in total has been relatively consistent and a little bit trending down over the last 2 quarters.

So we are able to get deals on our terms.

And again, we've always been an asset-driven company.

If the assets dry up, we're not going to go out and raise a bunch of deposits.

We'll honker down and wait for the -- for everything to hit the fan and hopefully clean up again.

So things -- there's some disruption in the market with our neighbor over here, expecting to close pretty soon.

That always is good for us.

So we like where we sit right now.

But at the end of the first quarter, I might not like where I sit.

We'll see where it goes.

Most of the competition is not coming from banks.

It's coming from nonbanks, on at least the pricing and the leverage in term side.

And it's getting a little bit goofy out there.

But that being said, our reputation plus the turmoil in the market is okay right now.

It's really -- our pipelines remained strong.

So we feel pretty good about where we are.

Our next question comes from Brock Vandervliet with UBS.

Could -- can we just go back to the mortgage business?

Ed, it sounded like you made the call not to hedge the pipeline going forward.

Is that going to be hedged -- is the pipeline going to be hedged as a matter of course?

Or are you going to reevaluate every quarter?

We'll reevaluate every quarter.

Yes.

And it's the servicing portfolio, not -- we do hedge sort of most of our pipeline.

So it's just the servicing portfolio that we're referring to as a hedge.

Okay.

Well, that was my next question, whether you hedge the MSR.

And your MSR capitalized values basically doubled, more than doubled in the last year.

Is that -- that's not hedged at the moment?

Right.

That's what I was referring to, was that we -- our pipeline, we do hedge and that works fine for us.

But I sometimes made the call that something we would do in the first quarter.

If you recall, the 10-year got up very nicely during the fourth quarter before it tumbled.

And it appeared that was going to be consistent.

And my call was to say that's something we're going to look at it in the first quarter and started legging into it, then it fell off again, so now we're reevaluating.

That makes sense?

It does.

I know MSR marks have bitten many banks over time.

I'm a little -- just a little surprised with it growing you're not just going to hedge out that exposure or a large portion of it?

Well, it is growing over time, and we are looking at it.

So it was something that was a nice run-up for us.

It was my fault.

I should've looked at it and been more conservative, but it's something that we're looking at now and we'll get back to you on.

But I'll fall on the grenade that one.

But I think I made enough money on the other stuff, I think.

Yes.

And in reality, Brock, if you look at it, the MSR valuations were almost flat for the year.

I mean, we had gains on the first 3 quarters and then gave it all back at the end.

So on an annual basis, it was somewhat flat.

But if your viewpoint is that you think rates are going to rise a little bit, you could ride up that value and then hedge it in.

And we just felt that the long end would not tumble like it did.

So -- and it's come back a little bit since the end of the year.

So you could see some pickup in those MSRs.

We're not even near end of the quarter yet, and with the volatility we saw in the fourth quarter, who knows.

But we have a hedging strategy in place and we'll evaluate it.

It's just the timing of when you implement it.

Okay, fair enough.

And just as a quick follow-up.

What would be your general sense of -- can you give us any sense of 2019 volumes assuming, say, no further hikes in your mortgage business?

Is that kind of flat or up small or...

I would say flat.

I'd say generally flat.

Flat, assuming no hikes, okay.

Our next question comes from Michael Young with SunTrust.

Just wanted to touch really quickly on the loan-to-deposit ratio.

You guys have done a nice job of bringing that down from kind of 95% at the beginning of '18.

We're almost to kind of the high-end of the range here headed into '19 of that 85% to 90% that you guys are targeting.

Any color on kind of where you feel like that will trend or what you're watching in terms of being able to bring that lower throughout the year?

Yes.

Well, our goal is still the 85% to 90%.

And you could -- we could have easily been there had we not gotten rid of the brokered funds here in the fourth quarter when we brought CDEC on.

So we could have just grown that.

But with the long end coming down, there really was no place to put those funds, so we elected to use those funds to get rid of some of the higher priced wholesale, brokered and Federal Home Loan Bank funding that we had.

So we still have the goal to just gradually bring that down.

And if the market -- if the long end would go up, you -- as Ed said, you could potentially lever and get there right away.

But in the interim, we hope to just gradually continue to bring that down into the 90% to -- 85% to 90% range in '19.

But we'll just have to see what happens to the yield curve and how fast you do that.

You don't want to raise all the deposits and have no place to go with them.

So we'll monitor the curve and go from there.

And just wanted to follow up on the comments that you guys started to kind of ladder back out sometime this quarter and kind of last quarter.

Any chance that the covered call income is going to tick up here in '19?

Or is that still likely going to be steady at kind of this lower run rate?

No, we write them on some of the securities.

So generally, you get more covered call when rates are going down because people pay you more for those.

With the thought that the rates may be relatively flat to -- at this point on the long end to going up, you don't get that much and you can see that we had some of our securities called away.

We'll reinvest those and -- but that's sort of typical.

So I wouldn't expect too much difference in that.

It just really sort of depends on what the market perception is, where rates are going, what the volatility is -- to be in the quarter when we write those, but probably not dramatically different.

Thank you.

I'm showing no further questions at this time.

I'd like to turn the call back over to Ed Wehmer for closing remarks.

Thanks, everybody, for dialing in.

Put the double doink quarter behind us, and we're going to look forward to a very good first quarter hopefully, knock on wood, and talk to you again in April.

If you have any additional questions or follow-ups, feel free to call Dave Stoehr, Dave Dykstra and myself, happy to talk to you.

Talk to you later when pitchers and catchers are in.

Thanks.

Bye.

Ladies and gentlemen, this concludes today's conference.

Thanks for your participation.

Have a wonderful day.