Wintrust Financial Corp (WTFC) 2019 Q3 法說會逐字稿

Welcome to Wintrust Financial Corporation's Third Quarter and Year-to-Date 2019 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 the today's call, Wintrust's management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements.

Actual results could differ materially from the results anticipated or projected in any such forward-looking statements.

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

Also, our remarks may reference certain non-GAAP financial measures.

Our earnings press release and slide presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure.

As a reminder, this conference call is being recorded.

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

Thank you.

Good afternoon, everybody.

Welcome to our third quarter earnings call.

With me, as always, are Dave Dykstra, our Chief Operating Officer; Kate Boege, our -- what are you, Kate, are you our General Counsel; and David Stoehr, CFO.

What we'll do, we'll have the same format as usual.

I'll give some general comments regarding our results, turn 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 have some time for questions.

On to the financial results for the quarter and year-to-date.

In general, the quarter could be summarized as follows: Record quarterly earnings, nice to be able to say that again; very strong organic balance sheet growth; margin and net interest income pressures due to rate environment, effectively offset by strong mortgage results and balance sheet growth; credit metrics returned to historically low numbers; onetimers being the MSR valuation adjustment; the FDIC refund were $4 million each and basically offset each other; and we had about $1.3 million pretax and acquisition-related expenses.

Net income was $99.1 million for the quarter, up to -- close to $270 million for the year, that's up 2%.

Same could be said for the earnings per share on a year-to-date basis of $4.60 compared to $4.50, $1.69 compared to $1.38 for the quarter.

We were up 22% from last quarter but that last quarter generally included some extra charges on the credit side.

If you look at net income pre-MSR valuation adjustments, for the quarter, we're up 21%, and the year, we're up 9%; same for earnings per share.

So close to the double-digit earnings growth that we projected and that we always look for.

Return on assets was up by 1.16%; return on equity, 11.42%; return on tangible equity, 14.36%; and our net overhead ratio dropped to 1.40% due to balance sheet growth and fee income on the mortgage side.

That 24 basis point drop basically offset the drop in the net interest margins.

All in all, a pretty good quarter considering the rate environment and the headwinds that we had.

The NIM as has been frequently pointed out today, fell 25 basis points as earning asset yields fell 21 basis points, interest expense rose 2 basis points and the net free funds ratio was positive to the margin 1 basis point.

Loan yields fell 14 basis points; loans held for sale fell 79 basis points; while liquidity management yields fell 30 basis points.

The drop in liquidity management yields was due to the $812 million increase in average liquidity management assets during the quarter.

This increase at the end of the quarter had yet to be invested into longer-term security -- securities as evidenced by the drop in the liquidity management portfolio duration from 4.1 years to 3.4 years.

Investing these assets into longer-term securities will assist this part of the margin contribution going forward.

We're well underway doing that as we speak.

Our goal is to maintain an approximate 6-year duration in liquidity management assets, so we have some opportunity there.

This also resulted in our loan-to-deposit ratio falling into our desired 85% to 90% range, but just barely at 89.6%, down from 92% in the prior quarter.

On the interest expense front, deposits expense increased 6 basis points in the quarter but flat from our month of June run rate.

As you know, it takes time to decrease deposit rates.

We are actively and aggressively working to do this and decrease the cost of funds on our deposit base, so there's a lot of opportunity here also.

Consumers don't know what LIBOR is.

LIBOR can fall but until you get moves in prime, it's hard to move your deposit rates into this competitive environment, but we feel pretty good about where we are.

Our overall cost of funds and interest-bearing liabilities was up 5 basis points.

Deposit increased, plus a full quarter of our $300 million in sub-debt which was 2 basis points, was offset by lower funding and other funding cost decreases.

On the net interest income front, the quarter decrease of only $1.3 million.

I was telling somebody today, I can't eat net interest margin, I could eat net interest income.

And by $1.3 million, we believe that that's easily made up through the investments that we made in liquidity management, and as we lower the cost of -- lower our cost of funds, we feel very good about -- and continue to grow, by the way, we feel very good about where we are right now.

Going forward, depending on the rate environment, further rate cuts would not be appreciated by the way.

We expect the margin to be under decreased pressure due to our ability to deploy liquidity management assets to higher-yielding securities, aggressive deposit cost cutting where we can.

We're closing the STC deal and the Countryside Bank deals, which will add approximately $800 million of total assets and additional organic loan growth, more on this later.

Net interest income should grow as a result of the above and additional organic franchise growth.

The other income and other expense side, Dave will be reviewing these areas in detail a bit later.

I'd like to provide some high-level remarks.

Obviously, the quarter is greatly influenced by mortgage banking results.

If you know our business model, you know that we have a very diversified model with internal hedges in the businesses that we have.

When rates fall, our mortgages take off and cover, while we get the margin squared away and go from there, and it's working in that regard.

I know a lot of people think that mortgages -- the mortgage business is too volatile to be considered core, but this is an integral part of what we do and a part of our overall management and is working as we anticipated.

We expect strong growth and strong results in the fourth quarter, and hopefully, in the first quarter, rates remain where they are.

Being very aggressive on the mortgage side, our new product, a person can apply for a mortgage and basically, a little over an hour online with -- and have it in, and we were able to turn around relatively quickly.

So we are advertising, and we believe that this is a -- it's a good thing for us and it's working just as we anticipated.

Other expenses were in line and consistent with prior quarter when one considers the increased commissions on the increased mortgage business.

Other than that, I think we're in a pretty good shape.

The net overhead ratio fell to 1.40%, the 25 basis points increase basically offset, as I said earlier, the drop in the margin.

This, coupled with a return to historical norms in credit costs, resulted in the record quarter we experienced.

Onetimers included offsetting MSR valuation adjustments and FDI (sic) [FDIC] insurance refunds as well as $1.3 million acquisition-related expenses.

If one were to add back the after-tax of those -- net of those onetimers, we would have experienced our first quarter where we exceeded $100 million.

We look forward to achieving that milestone very, very soon.

If one were to omit the negative MSR valuation adjustments for the year, we, as I said earlier, would be close to achieving our double-digit earnings growth objective despite the second quarter credit blip that we had.

On the balance sheet side, we continued our strong balance sheet growth in the quarter.

Assets were up $1.2 billion to almost $35 billion.

Average earning assets were 31 from 29, up $1.7 billion.

Loans were up $405 million with a $364 million head start in the fourth -- for the fourth quarter due to the average and ending issues that we always -- we always seem to book things at the end of the quarter but we start with a great -- a good head start going forward.

Deposits were up almost $1.2 billion, that's after returning over $500 million in expense at brokered funds that occurred during the quarter that will help us also in our overall cost of funds.

So on an average, our deposits were up $1.8 billion, loan deposit ratio at 89.6% as I said.

And I talked about the liquidity management yield and the investment of those, that they were down 30 basis points, but we expect to pick some of that up through the investments we're making and have made already this quarter.

On the loan side, loan growth was good across the board.

Pipelines, real estate loans and commercial residential grew $257 million.

Insurance premium finance grew $240 million and basically C&I, our commercial portfolio, is relatively flat, down a little bit.

We still have good pipelines.

We're booking a lot of deals but we're seeing companies sell.

We're not -- we only lost maybe $89 million, $90 million going out to other institutions last quarter; that's consistent with every quarter we've had.

In the past 3 or 4 quarters, most of them go to FINCO companies, where we've retained a deposit relationship but we're seeing a lot of recaps and dividend recaps, people taking money out and more highly leveraged transactions that don't fit into our credit appetite.

So all the numbers -- if you look at the paydowns of what we've had, the numbers are consistent over the last 4 quarters.

We started the fourth quarter close to $350 million head start on the loan front as growth again this quarter was back-end loaded.

Our pipelines remain consistently strong.

We expect to continue growing loans in the single-digit area, single-digit percentage-wise consistent with our prior statements in that regard.

And credit side, as mentioned, credit metrics returned to historical norms.

NPLs decreased in total to 0.38% of outstandings.

This is as low as it's been at any time in the recent past.

Same could be said for nonperforming assets, which stood at 44 basis points of total assets.

Again, as low as they've been in recent past.

The charge-offs of $9 million included $4 million of charges that was -- that related to the 3 credits we discussed last quarter.

They had been reserved for, so -- in that previous quarter and provided for, so they're behind us now.

I declare the issue closed on these particular bad assets and good riddance to them all.

Charge-offs for the quarter in the year were 15 basis points of average total loans.

We expect that to be a number going forward that we're comfortable with.

We continue to cull the portfolio looking for problem credits before they become problems and get them on an expeditious basis as there's still a number of Mikeys out there who will eat anything.

So we -- when we ask somebody to leave, they can find a new home relatively quickly.

With that, I'm going to turn it over to Dave to talk about other income and other expenses and taxes.

Thank you, Ed.

As normal, I will briefly touch on the noninterest income and expense sections that had significant variations and just in general.

So turning first to the noninterest income.

Our wealth management revenues stayed relatively steady at $24 million in the third quarter compared to $24.1 million in the second quarter of this year, and was up 6% from the $22.6 million recorded in the year ago quarter.

Overall, we believe the third quarter of this year was another solid period for us and our wealth management segment.

Mortgage banking revenue increased by 36% or $13.5 million to $50.9 million in the third quarter from $37.4 million recorded in the prior quarter and was also up 21% from the $42 million recorded in the third quarter of last year.

The increase in this category's revenue from the prior quarter resulted primarily from higher levels of loans originated and sold during the quarter.

A mix of originations weighted more heavily to the higher-margin business versus the prior quarter aided the higher average production margins.

So we basically are -- have wound down the correspondent channel of our mortgage business during the quarter.

The company originated approximately $1.42 billion of mortgage loans for sale in the third quarter.

This compares to $1.15 billion of originations in each of the second quarter of this year and the third quarter of last year.

The mix of loan volume originated for sale that was related to purchased home activity was approximately 48% compared to 63% in the prior quarter.

So refinance volumes increased substantially during the quarter and was relatively equal weighted with the purchased home activity.

And we continue to see an elevated level of refinance volume going into the fourth quarter relative to the prior quarters.

Table 16 of our third quarter earnings release provides a detailed compilation of the components of origination volumes by delivery channel and also the mortgage banking revenue, including production revenue, MSR capitalization, MSR fair value and other adjustments and servicing income.

Given the pipelines we have and the increase in refinance business, we expect the fourth quarter to, again, be another strong quarter for the mortgage operation.

Other noninterest income totaled $17.6 million in the third quarter of 2019, up approximately $3.4 million from the $14.1 million recorded in the second quarter of this year.

The primary reasons for the increased revenue in this category include $1.6 million of higher interest rate swap fee revenue and $1.7 million of income from investments and partnerships.

Turning to noninterest expense categories.

Our noninterest expenses totaled $234.6 million in the third quarter, up approximately $4.9 million or 2.2% from the prior quarter.

Commissions associated with the significant increase in the mortgage production and acquisition-related charges of approximately $1.3 million were the primary drivers of the increase.

Turning to the more significant categories.

The salaries and employee benefits expense category increased approximately $7.3 million in the third quarter from the second quarter of this year.

Commissions and incentive compensation expense accounted for approximately $3.8 million of that increase relative to the prior quarter, and that was due to the higher commission expense tied to the appreciably greater mortgage origination production.

Salaries expense accounted for slightly more than $2.7 million of the increase, resulting from a full quarter of the staffing cost related to the Oak Bank acquisition completed in late May of 2019, approximately $1.1 million of severance accruals partially related to the recent acquisitions and normal growth as the company continues to expand, including staffing for the 7 new branch banking locations that we opened this year.

Additionally, employee benefits expense was approximately $782,000 higher in the current quarter than the prior quarter, due primarily to the impact of higher health insurance claims during the quarter.

Turning to equipment expense, it totaled $13.3 million in the third quarter of 2019, an increase of $555,000 as compared to the second quarter of 2019.

The increase in the current quarter relates primarily to the increased software depreciation and licensing.

Professional fees increased to $8 million in the third quarter compared to $6.2 million in the prior quarter.

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

Although up slightly from the prior quarter, this category of expenses remains close to the midrange of the last 5 quarters' expense totals.

The slight increase in this category's expense was due primarily to acquisition-related legal fees and increase in consulting fees, which related primarily to some work that we're having done relative to the CECL projects and the LIBOR replacement projects, and then also a small increase in legal fees for loan documentation and collections.

The FDIC insurance expense was down $4 million in the third quarter compared to the prior quarter.

As you may know, the FDIC insurance assessment regulations provided that after the reserve ratio reached 1.38%, the FDIC would apply small bank credits to reduce small banks' regular deposit insurance assessments up to the full amount of the assessments or the full amount of the credit whichever is less.

The reserve ratio reached 1.40% on June 30 of 2019, therefore, credits were first applied on our September 2019 invoice.

Since each of our subsidiary banks are less than $10 billion in assets, each of them qualified for the credits.

We believe we have up to $3 million of additional assessment credits that could be applied in the future if the insurance reserve ratio remains above the required threshold.

Other than the expense category that I just discussed, all of the other expense categories were down in the aggregate by a little over $700,000 from the prior quarter with no particular items to know.

As Ed mentioned, the company's net overhead ratio for the third quarter improved to 1.40% from 1.64% in the prior quarter and improved to 1.58% for the 9 months ended September 30, 2019.

This 24 basis point decline in net overhead ratio essentially offset the net interest margin compression for the quarter and was primarily driven by growth in total assets and strong mortgage origination quarter.

We expect balance sheet growth and the continuing strong mortgage market will result in the company having another good net overhead ratio in the fourth quarter and should cause our annual net overhead ratio to be less than our previously discussed target of 1.55% for the year.

So with that, I will conclude my comments and turn it back over to Ed.

Thanks, Dave.

It's nice to be back in the record earnings and the record quarterly earnings trend.

That's 12 out of the last 15 quarters that we've had record earnings, and we expect to -- it's our goal to continue that trend going forward.

Although the rate environment provides a plethora of challenges, we believe that we will be able to navigate through the storm.

Overall growth, both organic and acquisition, we've talked in previous quarters about the ability to add organic growth without a commensurate increase of expenses.

If, in fact, we grow faster than loans again, that's okay.

I think we can make a net 1% after-tax or higher on the investments that we make as we ladder out our portfolio.

We want to make sure the numbers are -- that the deposits are sticky enough they stay here so we don't end upside down on anything like that.

But we feel that, that plus adding $800 million in assets from the 2 acquisitions will be important.

Decrease our cost of funds is a priority.

Again, we are actively doing that as we speak.

With the last drop in prime, we're -- customers understand the rate environment is going down, and we're able to execute these.

Loan pipelines still remain very strong.

We're deploying liquidity management assets.

We have every expectation of a continued strong mortgage market.

Credit, though always a big question, looks pretty good right now but you never know.

We're not ones to kick the can down the road as you all know.

When it comes to credit, we're going to continue to grow growth and will be the key.

We also have closed this STC transaction and already expect to close Countryside this quarter.

That's $800 million in total assets as I said earlier.

We expect significant cost outs from these deals but it will take a few quarters to achieve these efficiencies.

We have to get them converted and takes a couple of quarters to do that.

But STC is close to 80% cost out for us and -- by estimate, and the Countryside deal is closer to 35% to 40% cost out.

So those should be very accretive to us when we get that done.

We're not at a loss for future acquisition opportunities.

As our pipelines remain full, we are consistently asserting the value of these opportunities in all areas of our business.

As always, we can be assured of our best efforts.

We appreciate your support and look forward to future record quarters going forward.

Now it's time for questions.

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

The -- I want to ask about just margin and mortgage.

But on deposits, what was different?

What drove that quarter?

That was a big deposit growth number and you kind of alluded to it, but if that continues and you have the acquired deposits come on, it kind of feels like next quarter looks a lot like this quarter with some NIM pressure but maybe some growth in net interest income.

But just maybe touch on what drove it.

And what you guys are thinking for how this might look in Q4.

Well, if you look at the last few quarters, let me pull it up here, deposits have grown in December, $2.6 billion; in March, $1.9 billion; this month, $1.2 billion.

It should be closer to $1.7 billion if you add the brokered we paid back.

So this is just consistent growth for us.

Our marketing is paying off.

The -- we've opened new branches.

The acquisitions, we started marketing heavily into those markets.

The smaller banks are -- never really had the capital to go out and market.

So a lot of it is -- this is consistent with everything we've done in the past.

So I don't think anything is different, it's just same old same old for us.

Okay.

And I guess in terms of thinking about the outlook for the margin, you talked about the plan to put some of the liquidity to work.

And I guess curious how quickly you think you can do that.

And when I kind of go through some assumptions, maybe we get to flat to maybe a little bit down on the margin, but we don't have the insight that you have in terms of how you put some of the liquidity to work, so maybe give us some help there.

The margin could -- might go down a couple of basis points.

But again, we're at a point in time where the margin -- you got to look at net interest income more than the margin.

I think everybody gets hung up on the margin.

I said I can't eat the margin, I can eat net -- I can eat off net interest income, that's real money.

If we have to -- as the loan-to-deposit ratio comes down, if we grow -- and, again, if loans grow slower than deposits, which seems to be the case right now, we're putting those in investments that will give us a great after-tax return, great return on capital, no overhead associated with it and still make, hopefully, 120 on assets, which is accretive to where we've been right now after-tax.

So I think you got to change your focus off the margin to net interest income, which we think -- we love to see the margin go up.

We're working like crazy to hold it steady, but it's kind of like a barometer.

The net interest income is what we're most concerned with and that will flow right to the bottom line and that's earnings per share and that's what we get paid for.

This -- so probably a little bit of pressure on the margin but we believe net interest income should be up nicely this coming quarter.

That make sense?

That makes sense.

I understand it.

I guess, unfortunately, people do look at that number but I understand what you're saying.

Well I know.

They look at it because that's how they model.

But I think we've been able, in the past, to manage and maneuver through times like this and put up record good quarters.

The margin itself, sure we will, we -- as I said, we'd love it to go up, we're working like crazy to go up.

But if your loan-to-deposit ratio does come down, which we expect it to come down a little bit more, back in the 85% to 90% range, your margins are going to get hurt a little bit but your net interest income is going to be just fine.

So we'd love to have loans keep up with it.

But we're not going to do anything stupid right now, and we continue -- our loan portfolio is growing nicely at -- for the year, it's up over the single -- high single digits that we talked about, it's up 11.18%, just deposits were up a little bit more.

So we hope to be able to control the margin and really grow net interest income.

That's our plan.

Yes, yes.

No, I've got it.

And plus the acquired loans, I understand that, that's coming on.

So Dave, just a quick one for you.

We ask about it every quarter, but mortgage banking typically see a bit of a tail-off in Q4 but it sounds like maybe you're a little more optimistic.

Is that fair?

And any thoughts on volumes?

Yes.

I think we're seeing a higher percentage of our applications recently be in the refinance area, so I do think you'll see some seasonality like we typically do on the purchase side.

We're hoping that's offset on the refinance side right now.

So maybe down just a tad but I wouldn't expect it to be down dramatically.

And it could hold in there, we're just going to have to see how the refi volumes are.

They've been fairly strong recently.

And so we expect it to be strong, a strong quarter, certainly, probably more than what we had in the second quarter but maybe just a tad off from the third quarter.

But crystal ball there, Jon, as you know, as we hook these things now in a fairly short period of time.

And so until you start to November and see what those applications are, you don't really have visibility for the full quarter.

But right now, we -- it looks like another really pretty consistently strong.

We're advertising a lot, Jon.

I mean now that we've been able to get that application time close to a little bit over an hour if you do it online, we're able to -- our front end has tested better than Rocket Mortgage's front end, and we believe that we -- if we advertise properly, we can bring in a lot of new customers because it is easy to work with, and we are local.

And the local aspect of it is that if you do have an issue, a guy jumps on and can walk you through and take care of you locally.

So we hope to be -- my goal is to beat up the seasonality aspect of this in the fourth and the first quarters.

We'll see how good we are at it.

Our next question comes from David Long with Raymond James.

On the deposit costs, when you look at the total deposit costs in the quarter, we were up about -- you guys were up about 5 basis points, and you talked about needing prime to change.

We've gotten that now.

As we're looking at just the deposit side of the equation here, what can we see in the fourth quarter into early 2020 and the total cost there?

We'll give that to Mr. Dykstra.

Well, some of this depends on mix, and we've had specials in the CDs and the money market areas and so it just -- a lot of it will depend on where the money comes in.

I mean, if you look at our CD portfolio, the cost of that in the third quarter was 2 18.

The new money coming on, rates paid in the last month was closer to, sort of, more like the 1 40 range.

So we've put in the repricing of the CDs in the press release.

So if all things stay equal, that portfolio over time should be repricing down nicely and we'll just have to see whether people are placing their money there or in money markets, et cetera.

But we haven't given a specific number but we certainly are working on -- hard to get those numbers down.

There was a lot of specials that we ran when we were opening branch in the early quarters that kind of carried through the second quarter into early part of the third quarter.

So as you climb up that ramp, you have to come down the same amount to, sort of, offset it, and we're starting to bring that down.

So we're optimistic that the rates are going to come down.

I'm hesitant to give you exact basis point number.

David, the -- interestingly, in the last 15 months, we've opened 15 branches, almost $850 million in new deposits, new customers.

Those come in, I'd say, probably 70% -- 60%, 70% of that money comes in, in the first 6 months subject to teasers and then the teasers run off.

So we're seeing that happen, as the rates they reprice, we bring them down.

But that's not bad for 15 months, and we still think the right-hand side of the balance sheet's a franchise, and we get these people in, we got to give them a reason to come over, they come over.

Our retention rates are extremely good on that.

But now, as those teasers are running off and we're repricing, you have to slowly bring them down.

You don't want to give them the bends.

So we bring them down and -- so we're doing that and there's -- there are a number of customers that had specials.

In other words, a guy with a big deposit who's sold his business or whatever comes in, you gave him 2%.

We're bringing those down to 1.5% or 1.25% on almost every cases but it's going to take a year to -- or not a year, probably 3 or 4 months to get all that done.

And the core rates come down right when the -- when it happens, but we can't come down 25 basis points, we're only paying 15 or 20 on something, it can only come down a little bit.

So it's hard to give you that number because I don't really know how the -- I know that through the specials, that we can cut those by 75% -- or 75 basis points, that would be very helpful.

So all in all, it should be very positive for us in that regard.

And then the flipside is investing those assets, which we've done.

So we're already pretty much done with that.

So I think we'll be okay.

And I think there's a little -- it's just a little lag, right?

I think we think of this holistically.

As Ed said early on, we have a fairly diversified business model here.

So as rates have come down, the mortgage market reacts better, we've gotten good growth and growing the franchise and taking advantage of this market disruption.

It's great to bring in those deposits and garner those households, we'll put that -- those funds to work down the road.

We've worked in a low-interest flat environment for a number of years over the last decade.

And so we know how to deal with it.

There's just a little lag here because we were really ramping up and giving good deposit growth to fund the good loan growth and the market turned quickly.

So just a little bit of lag here, but the pieces are working together, as Ed said up on the front end of the call, and the deposit pricing maybe lagged a little bit because of the specials we were running and the growth we were having.

But it'll catch up here, and we're working hard at it.

It's not rocket science that when rates come down, you got to lower your deposit rates and we're doing that now.

Got it.

No, I appreciate the color.

I know that's sort of the core to your franchise value is the deposit side of the equation here.

So the other question that I had relates to the liquidity management assets.

And I think you said it was up $812 million in the quarter.

Do you expect that to be up to the same extent here in the fourth quarter?

Or do you see that number coming down?

And did you disclose what maybe that impact was on the margin, just having that $812 million that you pointed out?

Well, I think the excess liquidity will cost us probably 7, 8 basis points.

So had we put that to work with probably 7, 8 basis points at least, and then some of the cash that we did invest short term probably was another 3 basis points.

So probably 7 to 10 for keeping it short.

And we're placing it in, what, 2.5% to 3% investment securities.

So again, 6 years is our -- a little over 6 years is our standard duration.

But we're down to 4 years because of all this liquidity piling up.

And so now that we know that it's good and it's sturdy liquidity, we even returned $0.5 billion of brokered funds as a result, which would help the deposit costs.

And then we'll get the deposits in from these 2 acquisitions, which are good, sticky, low-cost consumer bases, which is going to be helpful, and we're not running as many new branch specials going forward.

So this will flow through the system and the rates will come down and we'll put the liquidity to work.

And in the meantime, the mortgage business is our internal hedge to that and it worked fine.

I mean we've had record earnings this quarter, it worked fine.

We expect it to work in the future.

Life's not linear and -- but we have a plan and we will be -- we are lowering rates and we expect to generate good net interest income as Ed said.

And our next question comes from Kevin Reevey with D.A. Davidson.

Hello, Kevin.

So I'm going to ask about the left side of the balance sheet.

To what extent are you using floors as a way to protect your loan yields?

And if you can give us some color on how you're structuring them?

On new deals, we try to get a floor all the time but it's just -- it's competitively hard to do, so we're living with that right now.

On the life insurance funding, we usually get floors.

Property and casualty is a 9-month full payout, so who cares.

Leasing is usually fixed rate.

Mortgages are what they are.

And the commercial side is what's left.

And we get floors where we can but none of our competitors are doing it, so we live with that risk for the most part.

Okay.

And then as far as what we're seeing and what we're hearing on manufacturing, are your clients feeling the negative impact given what's happening from a geopolitical standpoint?

Well, line usage is down about 1.5 points.

So you can see a little bit of it taking place.

It's interesting, though, if you think about the geopolitical side of things.

Trade -- total trade, you take total exports and imports, is actually up if you add them both together.

It's pretty interesting that China might be down 30% or 25%, but Vietnam's up 30% and India's up 10% and Taiwan's up like 20%.

Trade is still doing -- is going okay.

So we -- our manufacturers are doing pretty well.

What we're seeing though is people -- everybody thinks if there's going to be recession -- I find it hard to believe, unless we talk ourselves into it, that there will be one.

We -- I don't think recessions and full employment go -- flow together very well.

But you never know.

I'm not an economist.

But our clients, we have pretty well fortress balance sheets.

We are lowering -- as I said, we got out of about $100 million of exit loans, the ones we wanted out this quarter, mostly in the HLT side of things.

We are doing that.

And we're trying to keep our customers, our clients in -- and I said we lost about 198 -- between $90 million and $100 million to other companies, usually FINCOs who allow much higher leverage.

So we don't see that as the problem with our commercial C&I loans being flat.

It's not the business side of things.

Maybe 1.5 points in terms of the draws, but all in all, our clients are doing pretty well.

And then, Ed, you mentioned HLT.

That's an area you're shying away from.

Are there any other areas in lending, given where we are in the cycle, that you're deemphasizing and then staying away from?

Private equity firms where we don't have a general relationship with the PE guys.

That's where we got in trouble last quarter.

We learned our lesson there.

We're getting out of as many of those as we can.

But that being said, we had a lot of businesses sold.

The good PE guys are harvesting right now.

They're not buying, they're harvesting.

So staying away from those and participations in those.

And HLTs are -- bring them down a little bit.

We never had that many to begin with.

But your lenders go out there, they're like seek the level of least resistance.

They'll bring in HLT, going, "No, we really don't want to do that." So we're trying to shy away from those in general.

But really, we got out of retail commercial real estate over the last 2 years.

We're basically have brought that almost down by 60%, but that's been a 2-year project.

But still, commercial real estate is doing very well here with great sponsors, and our growth there has been very nice, so.

But just in very -- in just sectors where great sponsors, great equity, great and that sort of thing.

So we're diverse enough that if something's not working, something else is.

So we feel good about where we're going with our loan portfolio.

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

Just wanted to follow up on the loan yield discussion.

Loan yield's down 14 basis points linked quarter.

do you think that will be pretty consistent with subsequent reduction in fed funds and LIBOR?

Or anything else going on this quarter that maybe made that compression better or worse than you thought it should have been?

And then secondly, just kind of curious.

The new loans that you brought on this quarter, kind of what types of rates are you seeing on those as they come on the books compared to the back book?

Well, I think part of the issue, Brad, was, I mean, if you look at 1-month LIBOR, and we disclosed in our press release how much is tied to 1-month LIBOR, and we've got about $8.4 billion of our variable rate loans tied to that.

So we got $25.7 billion of total loans and $8.4 billion tied to 1-month LIBOR.

But 1-month LIBOR during the quarter dropped quite a bit.

I mean it ended June up at 2.40% and ended up at 2.02%, so it's down 38 basis points.

So that's one of the reasons you saw the decline in the loan yields is a variable piece of that.

And 1-year LIBOR, if you -- was down 15 basis and third quarter was down 53 basis points than the prior quarter.

So it's dropped a lot and our life portfolio is tied to that, although only about 1/12th of that portfolio reprices every month.

So we're starting to see a little bit of that impact on the repricing.

So really, it was that the 1-month LIBOR just dropped much more precipitously than other rates, and that caused a little bit of pressure.

So if you can tell me where 1-month LIBOR is going to go the rest of this quarter, I can probably give you a better viewpoint on that.

I think just people can look at the math on that and look at where LIBOR rates are going and make some conclusions of their own.

I would be broke if I bet on interest rates, so we try not to.

On the -- what's coming on the books, our premium -- commercial premium finance business is going very well.

We've been able to hold our yields up there in the 5s.

I think they may have been down, what, 5, 6, 7 basis points, something like that over the last 2 quarters.

But the interesting there is that the average ticket size from a year ago is up from $22,000 almost to $30,000.

Again, so we're seeing pretty good growth there without the commensurate increase in expenses.

Thank God for hard markets.

On the life side, the spreads have remained relatively consistent.

The spreads have, but again, it's off a 1-year LIBOR.

So it's always been a competitive market.

We have big banks pulse in and pulse out of that market.

And they come and try to buy some, then they figure out that they don't know what they're doing and they get out.

And so we have to maintain our business there, but the spreads have been relatively consistent there, like 2 over 1 year, something like that on average.

The other things really, the commercial real estate is holding up well.

And we put close to $100 million of residential mortgages on the books.

Fifty of those were variable rate waiting for conditions to clear.

It's our hybrid product where if somebody had just went into business for themselves, they got a loan, they can't sell that loan, put them in a variable rate product that's in the 4s and then we book $50 million of fixed-rate stuff to kind of help us to bring the gap down.

I think you'll probably see that going forward on the real estate side, on the residential real estate side.

Probably $50 million net of new growth on the hybrid product and $50 million coming over on the longer-term product that help us on our GAAP position and to -- it's nice to have.

You do $1.4 billion, pulling $50 million out of good stuff is okay.

They have good rates.

And our GAAP position jumped up a little bit because of all the liquidity we had.

We still want to maintain a positive GAAP just because as rates go down, the propensity for them to go up is higher than it is to go down further.

But we want to mitigate that to some extent by bringing it down from the 11% it is now down to -- back to where it was 6% -- 5%, 6%.

So does that make sense on that?

Yes.

I think so.

And then Dave, just the 1 follow-up on the mortgage business.

I was writing quickly, but I think I heard you say you hope to hang on to the gain on loan sale margin.

I think I also heard you say that you had basically discontinued sort of your correspondent network.

Just kind of curious the difference between kind of what you make on a loan sold out of the correspondent network versus out of your retail channel, which obviously is more profitable?

Well, the correspondent channel is probably 20-, 30-basis point margin.

So you can -- and in the past, maybe we did $100 million, $150 million, $200 million of that and supplemented it.

And there was reasons to do that.

But we've just decided we don't do wholesale now.

We've decided not to.

We would just get out of the correspondent business based on those margins.

So part of the reason for the aggregate increase in our gross margins was because we reduced the amount of correspondents, so next quarter it should be next to 0. There might be -- just be a tab that carried over from some relationships that we had, but not much at all.

It should be very close to 0. So the margins on the Veterans First stuff is high 3s to 4%, depending on the products that they do and then the retail is generally in the upper 2s or so.

Our next question comes from Chris McGratty with KBW.

Dave or Ed, given the success you guys have been having with deposit growth in particular the last couple of quarters, how are you thinking about kind of the debt that's on the balance sheet?

You got about $1 billion of higher cost debt.

I was wondering if there's any thought to pulling one of those levers to support earnings on the margin in this environment given the momentum on the deposits?

Well, I'm not sure if I understand your question.

Whether we would...?

Just pay off some of the borrowings or reduce the borrowings given the high rate?

Well, the borrowings are at the holding company level, Chris.

So to pay those off, I'd had to dividend up a bunch of money from the banks or issue new debt.

It's not debt at the bank level.

It's debt at the holding company level.

So I don't have...

That's -- it's cheap capital is what it is for us.

It's cheap.

If we're making 12% on ROE and 14% ROT, they have 5% debt, after tax, that's 3.5%, 3.70% something.

It's just cheap capital for us.

So unless we make a ton of money, we're going to keep using cheaper capital.

Yes.

Right.

As we make a ton of money, I'd rather buy my stock back as you pointed out to me many times.

I know some people issue that debt at the bank level and I understand the question.

But this is at the holding company level.

So I'd have -- I don't have that much dividend capacity from the banks of $0.5 billion, plus, as I said, we look at it as cheaper capital than doing common or whatever.

Got it.

That's great clarity.

Given the top line pressures that the group's facing, given lower rates, can you speak about protecting profitability through, kind of, expenses?

I know you guys have been opening branches.

You've obviously made the mortgage business more efficient.

But just any steps as you kind of enter budget season that you might be looking at to kind of reduce the rate of growth on expenses?

Well, I think one of the things we tried to point out in the release is even when the margin came down 25 and as we said, we think it's certainly not going to decrease at that same rate because of this lag effect that we're going to be able to hopefully get on investing the liquidity and reducing the deposits, but the net overhead ratio came down by almost the same amount.

So if you can get the growth and get the operational efficiencies out of it, that's one way to offset lower margins, is to grow into your clothes a little bit more and just grow and invest that money as Ed talked about.

So there, could you sit down and start slowing the boat down and not invest in the company and cut expenses?

You could, but there's a lot of opportunities in Chicago right now and a lot of disruption, and we'd like to take advantage of that market disruption and take advantage of the growth.

And so we think -- as Ed has said a number of times, we can grow through this and build the franchise at the same time.

We'd rather grow into it and absorb that operational capacity versus start to cut and not grow, so.

Got it.

The acquisitions we're doing, they should have relatively great cost-outs which will help our overhead ratio.

And when you go into budget season, the things you could probably leverage, you could pull your marketing lever back a little bit, but nothing that would move the dial that much.

But we are telling everybody to try to get by on what they've got for a year.

We'll see how that goes through the budget process.

But I said, you're going to add somebody, they got to -- it's either got to be a critical piece or somebody who's going to make me money.

We'll see.

The budget processes are ongoing, and they're always arm wrestling, but our goal, as always, is to give you double-digit earnings growth.

And we'll pull every lever we can to get there.

At the same time, it just seems you've got to grow through this thing right now.

And if we stop the boat and had to restart it again, it costs a lot more, so.

Got it.

Okay.

And just one clarifying comment.

The NII comment for Q4, I think you said it was going to be up nicely.

Does that assume we get a cut later this month from the Fed?

Or kind of what are your rate expectations built into that?

Well, if we got a cut later this month, it will be -- it won't be as good as we'd like it to be.

I think, Ed, from my perspective, we're not predicting whether it's going to be October or December, even if there's going to be one is sort of as we stand right now because we don't know whether -- they could fix China and the 1-month LIBOR for whatever reason pops a little bit.

Well, that would be helpful, too.

So I just don't know again what's going to happen with that 1-month LIBOR rate.

But if they kept 25, that would be a little bit more problematic because -- but it all depends really on what -- the question there, Chris, is really how does LIBOR react to that.

If LIBOR stays flat, I got $8.5 million that doesn't do anything even if prime comes down 25.

If they reduce prime and LIBOR goes down another 25, well, that's problematic.

But I think the market is kind of ahead of prime, so we're not expecting that LIBOR to go down.

So a roundabout way to say I'm not sure what the market dynamics are going to be between that relationship with LIBOR and prime, but I think the market's already kind of priced in the downward expectations for rate in the 1-month LIBOR already.

Our next question comes from Terry McEvoy with Stephens.

First question.

Dave, you mentioned earlier, you're spending money or you spent money on CECL preparation.

What's your updated thoughts around CECL at the end of the year and the day 1 impact?

Well, we aren't in a position where we think we should disclose that number yet.

We're well along in the process.

We've got the dry runs and the parallel runs and all that kind of stuff going, but we just -- we want to -- we're well along in the process.

We want to just get a little bit further and be a little bit firmer with it before we disclose it.

But -- so I think the answer is, well along in the process.

We think we're in good shape on that but not ready to disclose the number yet.

Okay.

And then just as a follow-up.

Are the retail deposit promotions a function of the market disruption today that you're seeing given particularly the acquisition that occurred earlier in this year?

Or is it more a bigger picture kind of over-strategy to build out the branches and just having to pay out for deposits to support those branches and the expenses?

And I hear you loud and clear, you can't eat the margin, but the investors eat on the stock performance and I just don't know how the margin sensitivity is going to go away anytime soon.

So I think it's important to understand why we saw a 5 basis point increase in deposits when these larger banks all week have been reporting lower deposits.

And what is the core strategy around the deposit growth and the impact on the margin?

Well, we have opened 15 new branches, and we do put teaser accounts out there to get people in the door.

They're bundled packages so they open a checking and savings account, maybe it's safe deposit.

So we got to move our entire relationship.

That's pretty cheap when you think about it, but -- and these -- and you kind of wean them down off of that over a period of a year, so that takes time.

And that's about brought in a couple of billion dollars, that money to build out these branches.

So that's the strategy.

That plus if it's the market disruption -- the branches are doing well because of market disruption, because we have great reputation in town and we won the J.D. Power Award 2 out of the last 3 years for customer service.

We won a lot of Greenwich awards for commercial service, we've got great momentum.

We have to take advantage of that.

And the disruption on the commercial side has caused us to get new clients in the door from other banks in town, and they might come with a lot of liquidity and we might pay them a little bit up on that.

Those are the specials.

There's about $1 billion of that that we're talking about it and going from the 2s down to 1.5, 1.25, et cetera.

So it is about growth.

It is about enticing people to join us.

And that's how we -- I've been doing that since 1991 when we opened the first bank.

Got to give people reason to leave.

Got them happy.

They get in.

They love the service, and you get them for life.

That's what we do.

So we want that -- we believe our cost of funds -- notwithstanding another rate cut that we talked about earlier, our cost of funds should come down nicely this quarter and continue to kind of bottom out after that.

So it's just -- as I said, for the retail, they don't know LIBOR.

It takes time where you can have an excuse to bring it down.

So everybody, it's all hands on deck for that and that's what we're doing, so.

And I think, by the way, investors should be more concerned about net interest income than they should about one number in the margin, isn't it?

You and I can have that discussion offline but I think you want me to make more money, don't you?

I'm not going to push back on that.

Thanks for the insight, Ed.

Our next question comes from Nathan Race with Piper Jaffray.

Just going back to deposit cost questions.

I'm just curious what the timing was in terms of the runoff of the brokered CDs in the quarter and if there's any other opportunities to further optimize the deposit base, just given what you're seeing in terms of core deposit growth recently?

Most of that was earlier in the quarter, so probably the first month of the quarter that some of that went away.

On the margin, there are some other brokered funds that are out there that we're looking to see if we can replace, but some of it is term and you're committed to it, so.

But all in all, our brokered rates are pretty low, Nathan.

We don't rely upon the brokered funding that much.

We're certainly down into the 4 -- probably 4% or 5% range on brokered funds.

So there's not a lot there to play with anymore.

Okay.

Understood.

And then just changing gears a bit.

The C&I growth was fairly soft this quarter for the first time in a while.

So I'm just curious if it was partially related to some of the workouts that you had with some non-performers or if it's just seasonal or just maybe perhaps less of an appetite to put on floating rate assets today?

Well, if we look at the amount of payoffs as we had, it's about $74 million payoff -- actually $87 million paid off by going to another financial institution.

That's about consistent with what we've done every quarter.

We had about $100 million of exit strategies.

That's about double the normal.

And we had about another $100 million where the businesses were sold, and line usage was down 1.5%.

So we still brought in a good deal of business, but we're getting offset with those types of pay downs, so.

I think, Nathan, second quarter was really a strong quarter for us, but the third quarter was new loans was fairly consistent with the first quarter and quarters prior to that.

So the issue really is what Ed talked about, is just an elevated level of pay downs and payoffs.

Understood.

I appreciate it.

Pipelines are still very good.

Pipelines are still very good.

So you can't always know when the customers are going to close a loan and the third quarter tends to be -- we call it sort of the doldrums around here at times because borrowers are on vacation and lenders are on vacation and sometimes things just get pushed back.

So we would expect a pretty decent fourth quarter based upon our pipelines.

Our next question comes from Brock Vandervliet with UBS.

I'm still kind of spun around about the NII.

I mean it seems from what you're saying and when I look at, say, 1-month LIBOR average quarter to date, 1-month is down, say, 30 basis points versus where it was in the third quarter.

I know we don't want to talk about NIM, but it seems like NII could be flat to down modestly again in Q4.

It just depends on what happens with the LIBOR rate over the quarter.

We wouldn't have been down nearly this much if LIBOR would have gone down 38 basis points in the third quarter.

And if you can tell me what's going to happen, then we can do that.

I think the point...

Well, it's down 30.

It's down 30 right now in the fourth quarter, the average.

And, say, it just stops right here, we're down 30 at the end of the year.

Well, the point -- then you're going to have pressure on the asset yields, and we're going to have to work hard on the funding side to get that cost down and then we're going to try to grow through it.

We're going to have $800 million of growth come on through the acquisitions.

We'll have other strong growth, we believe, through the lending side of the equation and continue deposit side.

And we're going to -- we'll try to grow through it, as Ed said, so -- and get the NII.

And eventually rates are going to stabilize at some point and you manage through the process.

So we're going to have these short blips up and down in the LIBOR rates, but we're going to grow through it.

And we will get it stabilized.

There's just a little bit of a lag on the funding side.

Okay.

Is deposit pricing set centrally or is that set through the subsidiaries or a mix, a mix of both?

It's approved centrally.

Many of it is set centrally.

Specials are obviously -- are dependent upon -- one of the beauties we have is we've got a branch of a bank of Wintrust Bank let's say, we just opened or Back of the Yards or in Uptown or Wrigleyville, we can price the deposits there on a special but not cannibalize the whole organization.

So one of the beauties of our multiple -- charter multiple brand approach is that we can eliminate -- limit cannibalization on our deposit base and really target our marketing there.

So basically, set centrally, approved centrally, but competitively, they've got -- some guys might have a guy in the market who's coming after them and we have to be flexible there, so.

But generally, it's all approved centrally and usually set centrally for the most part.

Got it.

Okay.

I appreciate the color guys.

But can differ by charter.

Yes.

Our next question comes from Peter Ruiz with Sandler O'Neill.

Peter?

Peter, if your line is muted, please unmute.

I think we go on to the next caller.

Let's go to David.

And our next question comes from David Chiaverini with Wedbush Securities.

A couple of questions for you.

I wanted to follow up on the NII discussion, I guess, and this question might be a bit specific, but what LIBOR level are you assuming for NII to be up in the fourth quarter versus the third quarter?

We're just assuming sort of the current state right now and adding in the growth.

Got it.

And then if we -- with that as a backdrop, looking out to 2020, do you think, and I guess looking at the Fed funds futures, if we do assume a 25 basis point cut at some point in the fourth quarter here and an additional 25 cut in the first quarter of next year, do you think the NII could be up in 2020 despite the NIM headwind?

Yes.

I mean, it depends on growth and we have -- if you build in the $1.5 billion to $2 billion growth we've had every quarter organically plus the occasional acquisition, I think that we -- it could be okay.

But you never know.

As Dave said, it's who knows?

I mean it's -- a lot of it's the relationship of the loans and of the rates themselves, the shape of the curve.

What's working.

What isn't working around here.

That's the plan, and we're working very hard on that.

And that's all I can say.

But, theoretically, you could have something to make it go down and you could have other things that make it go up a lot.

So we want it to go up, and we want to have double-digit earnings growth without MSR valuations and onetimers.

That's what our goal is, and I'll know better when we get through the budget cycle at the end of the -- in the next couple -- 6 or 7 weeks and go from there.

But it's kind of hard to run all these different scenarios.

You had Charlie Evans come out and say he doesn't see the need for another rate drop this year.

So he's the head of the Chicago Fed.

What scares me is if rates keep going down is it forms bubbles, and bubbles don't help the economy.

And then all bets are off if rates keep going down for a lot of different reasons.

People say, "What?

Would you go into rope-a-dope again?" Well, not now, but if rates keep going down and the market gets stupid again, we very well could, which then all bets are off.

But to say with any certainty where you'd be, that's our goal.

That's what we're shooting for.

In the current rate environment, we think we can do it.

If rates move, then it's going to be harder.

But we got through the last one okay.

We'll get through this one okay.

Yes, I can definitely sign up, but it's just hard to -- there are so many -- you've got political issues, for God's sakes.

Those are huge.

There's so many variables right now.

All you can do is control.

We can control.

Do what we can do.

If the market turns against us, we could very well go under rope-a-dope.

But we don't see it now.

We're still getting deals on our terms.

We know we have to cut costs.

We know that the beta going down is the same as the beta going up.

We've got to get more demand deposits in here.

We've been very fortunate to get the CDEC deposits that are back up to over, what, $1.2 billion or $1.3 billion, about $800 million on our books.

So that was a relatively cheap cost for funds for us and continue to grow that.

So a lot of levers to pull, but there's so many variables out there, it's just hard to say where you're going to end up but we feel good.

If the rates stay where they are right now, we have to take out a little bit, we think we can pull this off.

So that's why we get the big bucks.

That's helpful.

I can definitely appreciate all the variables involved.

Now shifting gears back to loan growth, you mentioned about consistently strong pipelines, and I think in your prepared comments, you mentioned single-digit loan growth.

Are we still looking for mid to high single-digit?

Yes.

I don't think -- we haven't changed our -- we didn't put the qualifier off, but we'd still have that same cast.

Yes.

You know we were 11% this year, which is -- we didn't expect that to be.

Single-digit -- mid-single-digit growth rates should be very good for us.

We'd be happy to have it.

Mid to high.

Mid to high, sorry.

All right.

I just wanted to make sure we're clear there.

Sorry, it's been a long call.

This concludes today's question-and-answer session.

I would now like to turn the call back over to Ed Wehmer for any further remarks.

Thanks, everybody.

We hope to talk to you again in January, if not before.

If you have any other questions on the quarter or what we're doing, where we're going, feel free to call me or Dave.

Thanks a lot.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.