Wintrust Financial Corp
NASDAQ:WTFC
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Wintrust Financial Corp
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Welcome to the Wintrust Financial Corporation’s First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Following the review of the results by Edward Wehmer, Chief Executive Officer and President; and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session.
During the course of today’s call, Wintrust'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 the call are detailed in the first quarter 2018 earnings press release and in the Company’s most recent Form 10-K and any subsequent filings on filed with the SEC. As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Mr. Edward Wehmer. You may begin.
Thank you. And welcome everybody to our first quarter earnings call. With me as always are Dave Dykstra; and Kate Boege, our Legal Counsel; and Dave Stoehr, our Chief Financial Officer. We have same format as always. I will give some general comments regarding our results. Turn over to Dave Dykstra for more detailed analysis of other income, other expenses and taxes, back to me for some summary comments and thoughts about the future then on the questions.
We're pleased to report on the earnings front that we recorded record earnings for the ninth consecutive quarter in a row. David Long, if you're out there, you should know Nick Papagiorgio will be very proud of us. Net income totaled $82 million, up 19% over fourth quarter of '17 and 40% over the first quarter of 2017. Earnings per share were $1.40 compared to $1 in the first quarter of '17 and $1.17, 40% up over the last year almost 20% up over the fourth quarter.
Just to note, pretax income was $108 million, which is almost 13% over the fourth quarter and 23% over the first quarter of last year. So given out taxes, we had good operating results. Our return on assets was 120 compared to 1% at the end of the fourth quarter last. Return on equity was 11.3 and return on tangible equity is 14%. And as it is readily appearing, our operating trends remain consistently positive.
The net interest margin front, the net interest income front, the net interest margin increased 9 basis points over the fourth quarter of '17 and 18 basis points over the first quarter of '17 to 3.54%. Net interest income grew $6 million over the fourth quarter of 2017 despite two days, two less days, quarter versus quarter. Both increases were driven by the higher rate environment and a large earning asset base.
The average earning asset base grew $586 million in the quarter. Earning asset yields increased 13 basis points versus the fourth quarter while interest expense increased to 8 basis points over the fourth quarter of 2017. Our loan-to-deposit ratio of the quarter rose to 95.2% obviously higher than our desired range of 85% to 90%. Some of this was caused by our backend loaded and loans in the quarter that is ending loans exceeded our average loans by $365 million. This bodes well for as a head start for Q2 earnings of this year.
Our deposit marketing is just ticking in, so we'd expect December to begin receding towards our targeted ratio. Accordingly, we'd expect our deposit rates do increase going forward. Our historical beta to-date has been in the 20, low-20 range. We expect this number to be in the 40% range going forward. As we're still very asset sensitive additional rate increases including the one announced in mid-March, should still add materially to our bottom-line despite this increased deposit beta.
Every quarter point increase in fed funds should continue to add north of $20 million net interest income and annual basis. You might note that this number has not changed from past discussions due to the increasing size of our balance. In other words, we expect our rates increased -- our deposit rates increased a little bit faster, but our balance sheet has grown that -- and that should cover that.
We’ve been in no rush to build our balance sheet heftily as the yield curve, as the long end of the yield curve has yet to move in concert with the short end, thereby, forestalling the liquidity play we have discussed in the past. This initiative is still in the cards for us. I expect to our loan-to-deposit ratio to stay in the low 90s until such time as spread for the long end gets better, more on this later. As such, with future rate increases, we anticipate our net interest margin to continue to grow. Remember that it takes a full year for these increases to work their way through balance sheet.
So, some of the benefits or some of the past increases are still being realized. On the credit front, credit remains historically great. Both NPAs and NPLs were down from an already low numbers, a $3.5 million decrease in total. OREO balances were down 10.3 million as we continue to push out old assets. Valuation charges were up as we reduced the number of older properties to fire sales values as just to get them out of here. Times are good, let’s clear the deck, I think is the idea, so we really reduced the number to, really, liquidation value as we had some lowball offers, why not push them out?
NPLs were down a touch versus Q4. We see there is a change in the mix of the NPL, of that NPL portfolio. Commercial premium finance loan non-performers increased by $4.5 million in the quarter, while all other categories decreased by a like amount. This increase was due to 3 unrelated yet one-time events. These events also resulted in net charge-offs in this category increasing 2.6 million from Q4 and rising the 68 basis points, which is our normal historical rate, which resides in the mid-120, or mid-20 basis point range.
The first of these was an agency fraud of about $1.5 million. We get one of these about every 10 years. This one, we usually get 4 or 5 a year. We catch them early. This one was not caught due to human error, but we expect minimal recovery. As you know, this is one of the risks of the business. We are very diligent in this area, but this is one that was not caught as early as it should have been. Full review of the portfolio ensued our discovery of this incident, with no indication of similar occurrences. Controls have been modified accordingly.
To other one-time events related to the bankruptcies of two small casualty insurance companies. We expect to recover majority of these funds through a liquidation process, but these can take time, and I mean time in years. Refunds confirm the data that they are carried in NPLs, while others were charged off, so we’ll look at a recovery. As said, we consider the timing of these events to be anomalies. The core business remains a very good one for us. We expect net charge-offs in the normal range going forward.
So in summary, credit remains very good. NPAs as a percent of assets decreased to 0.44% from 0.47% on the charge offs. Reserve as a percent of NPLs was at 1.56% -- 156%, up from 153% at year end. Net charge offs as a percent of loans increased 5 basis points to 12 basis points for the quarter. We continue to call our portfolio for crash and more expeditiously move assets up when the said credits are tough.
We will also aggressively work our OREO portfolio to clear the decks. The other income expense, Dave is going to go through these in detail momentarily but just some general comments. On the mortgage front, our acquisition of Veterans First, which is going according to plan provided a little noise in our expense numbers as we experience a full order overhead expenses with only month of revenue.
As part of the deal, they got to keep and close the loans that are in their pipeline as of the closing day. Dave will explain this a little further. Our wealth management operation continues to improve with revenues increasing almost $23 million for the quarter. Our net overhead ratio for the quarter was 1.58% above our target of 1.5%, better than -- 11 basis points better than the fourth quarter 2017.
Some of this was balance sheet driven as we are delaying our initiative -- delaying pulling the trigger on our liquidity initiative. Other factors included the Veterans First acquisition, historically slow first quarter in the mortgage area, aggressive approach -- and our aggressive approach to clearing out some old OREO expenses and some other expenses that Dave will discuss. A net overhead of 1.5% or better remains our goal for the year and we believe it to be attainable.
On the balance sheet front, assets totaled $28.457 billion up 7.6% from the fourth quarter and 10% from the first quarter '17. Loan demand was very good across the board with $22.47 billion of loans, $519 million from the first quarter -- or the fourth quarter and $2.2 billion from the fourth quarter. Deposits were a little bit slow coming in. I will talk about that in a second. And as I mentioned, we started the quarter with $350 million net ahead of the game in terms of average versus ending balances going forward.
Loan growth as we projected was in the high middle -- the high single-digits and growth was across the board. Loan pipelines are consistently strong and actually increased this quarter. Deposit growth was negligible and some of our year end -- some year end large account balances were moved out. It should be noted that we started our marketing at the beginning of this year. And as such, we opened over 3,000 new checking accounts in the first quarter. We intend to continue to our marketing here and also began cross-selling new relationships for our new customers.
As mentioned, the loan-to-deposit ratio is higher than we want. The liquidity initiative we discussed is to have deposits growth outpace loan growth over time. The excess liquidity generated would be invested in a laddered securities portfolio. This would have the effective increase in earnings and ROA, lowering our net overhead ratio and marginally decreasing our net interest margin and lessening our positive interest rate sensitivity, which makes sense as rates increase, we’ll be bringing that down.
With the curve flattening, we are yet to pull the trigger here. Our marketing plans are kicking off. We expect to begin taking some headway on this initiative throughout the rest of the year.
I will turn over to Dave for his discussion of other income, other expenses and taxes.
Thanks Ed. As normal, I'll touch on the non-interest income sections and the non-interest expense sections as well as the brief review of the taxes. The non-interest income section, our wealth management revenue totaled $23 million for the first quarter of '18, which is up 5% from the $21.9 million recorded in the prior quarter and was also up from the $20.1 million recorded in the year ago quarter.
The trust and asset management component of this revenue category increased to $17 million from the fourth quarter from $15.8 million in the prior quarter due to market appreciation at the beginning of the quarter. The brokerage revenue component remains relatively steady at $6 million in the first quarter, about only $36,000 in the prior quarter. Overall the first quarter of 2018 exhibited strength in revenue generation and represented a record quarter for our wealth management fee income.
Mortgage banking revenue increased 13% or $3.5 million to $31 million in the first quarter, from the $27.4 million recorded in the prior quarter and was up substantially from $21.9 million recorded in the first quarter of last year. The increase in this category's revenue from the prior quarter resulted primarily from additional revenue of approximately $5.9 million related to Veterans First acquisition and a $4.1 million positive fair value adjustment related to mortgage servicing rates assets. That $4.1 million fair value adjustment on MSRs compared to just $46,000 fair value adjustment in the fourth quarter of last year.
This was partially offset by lower origination volume due to typical seasonality during the winter months in our primary market area. Now, the Company originated and sold approximately $779 million of mortgage loans in the first quarter including approximately $112.5 million related to the Veterans First acquisition. This compares to $879 million originations in the prior quarter and $722 million of mortgage loans originated in the first quarter of last year.
Also the mix of loan volume and related to purchased home activity was approximately 73% compared to 67% in the prior quarter. Given existing pipeline, the full quarter production for our Veterans First product line and the spring buying season, we expect originations to increase nicely in the second quarter of 2018. As you know, the acquisition of Veterans First happened in January of this year and began to contribute to mortgage revenue as we built on our pipeline and began to close on those loans primarily in the latter half of the first quarter.
As a reminder, the loans locked in the pipeline when we closed our net acquisition accrued to the seller, so Wintrust needed to begin to build the pipeline early in the quarter and that pipeline resulted in the majority of the revenue being realized late in the quarter. We expect to realize full impact of the acquisition beginning in the second quarter with further increases on loan originations in revenue and corresponding increases in associated variable costs.
Operating lease income increased in the current quarter compared to the fourth quarter of 2017 primarily as a result of an approximately $1.1 million gain realized from the sale of certain equipment held on operating leases. Other non-interest income totaled $11.8 million in the first quarter down approximately $728,000 from the 12.6 million recorded in the fourth quarter of last year.
There was the variety of reasons for the decline in this category for revenue including not having any FDIC accretion related to loss share arrangements, as we exited all those loss share arrangements in the fourth quarter of last year. We had slightly higher losses related to foreign exchange valuation adjustment associated with U.S.-Canadian dollar exchange rate. The lower level of loan syndication fees and the slightly higher valuation charge on certain assets selling fair value due to the rise of the interest rates.
Turning to non-interest expense categories, non-interest expense totaled $194.3 million in the first quarter, decreasing approximately $2.2 million from the prior quarter. The decrease was generally related to approximately $8.8 million of less commissions and incentive compensation, $2.2 million of lower professional fees, primarily related to reduce level of consulting expenses, offset by an increase in advertising and marketing of 1.4 million and an increase in OREO losses and valuation adjustments of approximately 2.3 million.
The prior quarter also had a pension valuation charge of approximately $1.2 million that did not reoccur in the current quarter. Also, total non-interest expenses were impacted by approximately $5.9 million of aggregate expense related to the Veterans First acquisition. So, if we were to exclude those expenses, overall non-interest expenses would have declined approximately $8.1 million on the same-store sales type of approach. I’ll talk about more significant fluctuations from the fourth quarter.
Salaries and employee benefit expenses were the main driver of the decline in non-interest expense during the quarter. This category expenses decreased $5.6.8 million in the first quarter compared to the fourth quarter of last year. As of the components of the salary employee benefit expense, the annual on long-term incentive compensation expense increased approximately $6.8 million in the prior quarter.
Similar to what we communicated to you during the prior earnings call, we incurred additional annual bonus and long-term incentive performance program accruals during the fourth quarter of last year, due to higher forecasted net income for future years due to rate hikes, balance sheet growth and recently enacted tax cuts. The first quarter of 2018 returned more normalize levels. Commission expenses also lower in the first quarter of 2018 by approximately $2 million compared to the prior year. Primarily due to lower mortgage loan originations.
The base salary component increased approximately $3.7 million in the first quarter over the fourth quarter of last year. The first quarter included the impact of annual based salary increases that generally took effect on February 1st and were generally in the 3% range. It was also included the increase in our minimum wage to $15 per hour for eligible non-commissioned employees, which took effective in early March. The $2.4 million impact of the Veterans First acquisition also contributed to the growth in that number, and we also have normal growth and employee basis as the Company continues to expand.
Employee benefits expense was down approximately $547,000 in the first quarter compared to the prior quarter. The lower level employee benefit expenses related to primary costs, the first was the fourth quarter of 2017 charge of $1.2 million related to the pension obligations that we inherited through two prior acquisitions that did not similarly impact the current quarter, and the second reason was a slight decrease in our health insurance cost. These decreases were offset somewhat by an increase in payroll taxes, which tend to be higher in the first quarter of the year.
Turning to marketing expenses, these expenses increased by approximately $1.4 million for the fourth quarter of 2017 to $8.8 million; as we focused on building the franchise, we expended a bit more money on sponsorships and mass media advertising including mass media branding campaigns tied to the Winter Olympics, the January brand awareness, and additionally, some costs for the deposit promotions that I spoke about. We believe the results of such advertising efforts have been effective and look forward to the benefits of those in the future quarters.
Professional fees decreased to $6.6 million from the first quarter compared to $8.9 million in the fourth quarter of last year. Professional fees can fluctuate on quarterly basis based on the level of legal services related to acquisitions, litigation, problem loan workout activity as well as use of any consulting services. This category expenses came down substantially from the prior quarter, which included relatively substantial costs related to consulting engagements associated with investments in enhancing our digital customer experience and product distribution enhancement using technology and certain other IT initiatives. The first quarter was similarly impacted with as much of these consulting costs.
OREO expenses were elevated as I mentioned in the first quarter, as the Company is making a concerted effort to sell or position ourselves to reduce the level of OREO properties held. Accordingly during the first quarter of 2018, the Company recorded approximately $2.4 million of realized losses on the sale of OREO properties and negative valuation adjustments to value certain properties at levels that will hopefully produce quicker sales. Although, we have relatively low amount of OREO properties, we simply would like to reduce the inventory further especially those properties that have been slowed to exit the portfolio.
All the other expense categories other than ones I just discussed were up approximately $1.8 million on an aggregate basis in the first quarter of 2018 compared to the fourth quarter of 2017. This increase can be attributed to the expenses related to the Veterans First acquisition. And without the Veterans First acquisition, these other expense categories would have actually decreased by approximately $700,000.
Turning to taxes, the impact of recently enacted tax reform which reduced the federal income tax rate for corporation from 35% to 21% effective January 1st of this year, aided our net income during the quarter. Our effective tax rate for the quarter was 24.14% but without the impact of the $2.6 million of excess tax benefits associated with share based compensation, the effective tax rate would have been approximately 26.5%. If we were to compare these rates of the first quarter of 2017, the Company’s effective tax rate was 33.67% and was approximately 37.5% excluding the impact of the excess tax benefits associated with the share based payments.
So, the net year-to-year effective tax rate was down approximately 11%. At this time, we continue to expect our effective income tax rate for the full year of 2018 to be approximately 26% to 27%, if you exclude the impact of the excess tax benefits associated with share based compensation.
So with that, I will conclude my comments and throw it back over to Ed.
Thank you, Dave. So, in summary, all-in all good quarter for Wintrust on all fronts. Our momentum continues across the board. Reduced taxes and higher interest rates have been beneficial to us. Our core earnings growth and balance sheet growth bode well for future earnings growth as well as the franchise value. We are pushing our organic growth agenda as acquisitions in general become relatively expensive. In that regard, we have a number of new branches in neighborhoods in our day-to-day market area where we are not currently present. We have this planned.
Our retail and small business marketing programs which we embarked on in earnest at the beginning of the year are working and employing on new accounts and relationships. However, that doesn't mean that we are not investing in potential business combinations in all areas of our business. As mentioned in previous calls, gestation periods become a lot longer, pretty much in all fields, but we are very busy in that regard. We remain well positioned for higher interest rates.
Credit is as good as it's going to get. We continue to review the portfolio for any early sites and resonating deals expeditiously and cracks are apparent. Loan wealth has been good and pipelines remain strong. We continue to look at opportunities for further diversify our portfolio. We still believe the portfolio will grow in the mid to high-single digit range for the year. We are embarking our liquidity initiatives which should have the desire strategic results I just talked about earlier.
So in summary, we're very well positioned and we like where we sit. That being said, it's time like this where you get kind of worried. If things are this good, you start look around the corner for the bogeyman or the monster under the bed. We continue to evaluate where these risks could possibly be and making plans accordingly, but we're not sitting on our laurels. I've been in this business too long. I can say that now I'm old man. And there out too long, seen these movies, "Hope for the best, plan for the worst," as my father always used to say.
With that, we're going to assured our best efforts to ensure the long term growth in franchise value and we are confident. Now that being said, time is pretty good right now. We continue to want to maintain while the sun is shining, yet buy some umbrellas just in case.
So with that, I'm going to leave it open for some questions.
[Operator Instructions] Our first question comes from the line of Jon Arfstrom of RBC Capital Markets. Your line is open.
A couple of things here. The liquidity strategy or deposit marketing was, I guess, what you referenced earlier in the call. I think we understand why you're doing it, but just give us a little more detail in terms of what you're doing and what you're targeting there.
Well, I don't like running at 95% loan-to-deposit. We've been running 85 to 90 for a long time. And we like this, we'd like this move a little bit just because we're comfortable that we have open sources in the event, if we have a liquidity issue we have a more liquidity than we available for us than we would need. But with the long end, where it is right now and the spreads are not there, why bring it in and not make any money on it. So, we expect the long end of it, the long end to continue to grow with inflation up, and we see wage inflation starting to occur. I think the biggest issue our customers tells us and you probably hear from a lot of people is, finding good people and be able to pay up for them.
So, we expect this to occur, we expect in the long end then with some separation in the long end of the curve. And as such, we're going to grow deposits faster than loans, get back to our desired range over a period of time of 85% to 90%, and latter bring a laddered security portfolio in which should hopefully after-tax make you little over 1% is our goal like to make a one a quarter, if we could and grow from there. So it's just a play, a little bit of a play in interest rates right now. If you were to bring that number back to 87.5% right now, it's close to $2 billion in deposits, so we have work on out force.
But running those numbers you can see, our beneficial that would be to the bottom line. It would hurt our margin a little bit, but our net overhead ratio would drop precipitously. And also as rates move up, which we expect to continue to do as everybody does, we’re well positioned for those higher rates. As rates continue to move up, we think we should start cutting back on our gap, our overall interest rate sensitivity position to predict the downside. This will help us do that also. So it just seems like the right thing to do. We don’t think there is any rush right now. But we, as rates continue to move up, you can see all the elements, the strategic elements that, that brings to the table for us. Does that make sense?
Yes. It does. So the message on the higher deposit paid as part of it is just about naturally rising deposit costs, and other part of it is producing the loan-to-deposit ratio, it’s two parts really?
Yes. We anticipated that in our budgeting and our planning process that our beta could get on. We have such a retail base deposit structure that we’ve been able to lag probably more than others. But now that you can lag as much as we have been, we need to bring those numbers up to be competitive in the markets, and we built that in. Hence, why another quarter point rise in rate is only 23 million, it was 23 million two years ago when we were started reporting that number, but we've got a much larger sheet. You can kind of see that we built in the a little bit more deposit costs that you would imagine.
Maybe, Dave Dykstra, for you on mortgage banking. If you set aside the Veterans First originations, what does the pipeline kind of look like throughout the quarter?
That’s pretty good. Veterans First, on average, we probable, we think we had like half of a quarter of revenue production. So we’d expect that to double next quarter. On the legacy portfolio, we actually think that could be up substantially. If you took up Veterans First, if you look at, to gave a little bit more detail in the press release this time on our mortgage banking revenue and detailed it out you can see all the components. We also broke out the better in first origination in our other sort of legacy so to speak, originations, which was any of us $667 million.
I would expect that to, that might be up 50% in the second quarter just simply because of seasonality of the buying season, so maybe that goes up a few hundred million dollars, plus the Veterans First is probably up 100 million. So, the pipelines have to develop and internally in the quarter, but our thoughts are that, that number could be closer to $1 billion of production in the second quarter, plus or minus.
And then I guess, the last one that topic. The production margin was up. Is that mix is that Veterans First driven or there is something else going on?
Yes, the production margin on our core business was relatively stable. I think it was down just a few basis points. Veterans First loans, VA loans have a much higher margin to them, so that’s what brought the overall production margin up.
Thank you. Our next question is from David Long of Raymond James. Your line is open.
Hey, guys. As you indicated in your opening comments, yes, Nick Papagiorgio and the rest of the Griswold family I am sure are very proud so.
Go over to that one.
With that said, of course, of course. Vegas Vacation, a good movie, one of Chevy Chase's, but I prefer Fletch when it comes to Chevy Chase so. That said, thinking about the expense base for the rest of the year and you guys seem like the expense to asset target of 150 is still in your -- on your radar screen for this year, I am assuming that that includes the de novos and branch openings that you have. But can you maybe walk me through how you think the expenses could progress as we go through the year and still stay at that 150 level?
Well, I will take a little of it and then Dave will jump in. The OREO expenses are included in there. We are going to continue to push those down where the asset growth is going to stay strong and as a percent of assets, and also the January is a slow month for mortgages in general but then the Veterans First picking up those extra expenses. If you were to back those things out, you're pretty close to the number right then and there. So we’re not that far off from an operating basis at what we look at. So we think even with the -- with our planned organic expansion numbers should be in pretty good shape. Dave?
Yes, I would probably echo that. I mean if you backed out the $2.7 million change in the OREO, your net overhead ratio would be down around the 1.54% range. And then, as Ed talked about, the big piece of the net overhead ratio was the denominator which is our average assets. So with this deposit initiative that we have kicks in a little bit and that pretty much gets you there. And then as Ed mentioned, mortgages are -- increased mortgage activity is beneficial to the net overhead ratio.
So as we get into the second and third quarters, when mortgage activity is typically higher for us, that should help also. So I think if you look at better mortgage business and a bigger balance sheet and just typical cost controls and back out this OREO charge we took this quarter, you can easily draw roadmap that would get you there. But the big thing would be just -- the asset growth is a big driver of that.
Okay, got it. And then on the loan growth side, I think you mentioned mid to high single-digit expectations for the year. Is that coming from an increase in your mind of use or utilization rates or is it -- are you still bringing in new customers to the bank?
Interestingly, it still is bringing in new customers and growing the franchise through new relationships. An interesting phenomena and I -- something I -- usage still is around 52%, 53% on our lines but we’ve seen is lines increasing. We’ve seen a lot of our clients coming in and they’re increasing their overall lines by 10% or 20% because of increased business they want to keep dry powder. So that number is a little bit misleading because we’re 42% of the higher base right now. So in other words, I think you can say that there’s some real economic expansion finally taking place. Does it make sense?
Yes, thanks for the color that's all that had. Thank you, guys.
Thank you. Our next question is from Brad Milsaps of Sander O'Neill. Your line is open.
Dave, just a follow-up on Jon's mortgage question, the $5.9 million in revenue related to your Veterans acquisition. Is that all origination revenue? Was that mix of servicing as well?
Origination and servicing.
Also just kind a draw your attention really what their gain on loan sale margin was given that seem to be you're quite bit higher than yours?
Yes, it's between, it's close -- it's 4.5% to 5% margins right now, so quite a bit higher than where we were in the business.
Perfect. Great that's very helpful. And then…
Brad, that's why we partnered with them, that and there are higher margins, so it gives us a better mix of distribution, but also their expense model is different than the historical expense model in terms of not having the payout 55% of the commission. So it's a put probable business for us, a nice blended than what we are doing. So strategically that acquisition we're create, we're excited to have with us.
And maybe a little bit more color for those people out there that try to model this out. If you increase revenue out there, you, although we had a full quarter of expenses, there are variable costs that will go out so the good pay commissions as part of a consumer direct model. They also buy leads out there that helps to drive the business. So I would say for every dollar in the second quarter of revenue that goes that. There still maybe an incremental 35% or so of expenses that coming along with that would commissions and the lead generation and just the variable cost that go along with it.
So if you're trying to model growth into the second quarter, even though we had a full quarter of expenses this time, those expenses will probably go up in the second quarter because of commissions additional, some additional regeneration and just variable cost that go along with the quality and the law. So it was close to breakeven this quarter simply because we have to build the pipeline before we could close it because it should certainly be profitable for us in the second quarter.
And would you expect that business to be we kind a talked about it doubling in the next question. But would you expected to be about 20% of the overall mortgage business point forward. And do you think you can now get a bigger part. And just what the overall one just mortgage price so to speak?
Yes, it's probably close to 20% into what we've expect right now and probably a good range. I mean obviously we'll have to see how interest rates play out and how the mix plays out. But right now, I think high-teens or 20% is probably not a bad range.
Okay. And then just kind a switching gears your piece of balance sheet, which was kind of small all with the overall picture. But I think is that borrowings, FHLB borrowings are up quite a bit linked quarter, but the rate was down. Just kind of curious does that something that's kind of temporary that will reverse out? And we will kind of the positive this year quarter. Can you kind a give us a sense that and kind of that what was the thinking was there? Is that preparing for something else as you kind of implement this deposit strategy?
Well, that’s always been, the color around here Ed’s equilibrium, where when you take mortgages held for sale plus the assets in our mortgage warehouse lending. A perfect royalty finance that with Federal Home Loan Bank overnight money, great spread there. It’s variable. You don’t have to worry about the, you can give it back and those numbers go up and down and we can manage our liquidity that way. In the past, we’ve always had excess deposits to cover that. So we were never really at Ed’s equilibrium.
So right now you’re there, I would imagine, as we do raise, we’re successful and considering our organic growth, that, that number would come down. But if you weren’t, that number would stay pretty much even, it’s a perfect match for us both from a duration standpoint and a rate spreads standpoint. So again we have excess deposits like we did throughout the years, we didn’t bother grossing up the balance sheet at that point in time. Does that make sense?
Our next question is from Chris McGratty of KBW. Your line is open.
Dave, maybe a question for you. Just want to make sure on the leverage strategy. Is it about the absolute level of long rates or is it the shape of the curve? I guess, what should we be looking at specifically to see when you guys might pick-up the pace of securities purchase?
No, the shape of the curve, if we want to get spread between what you’re going to raise the deposits there and what to invest in. And we would probably invest some of that, ladder at all. But our good portion of that would probably be Ginnies and Fannies. So if you were sort of looking at where the positive rates could come in and where you could lay them off in Ginnies and Fannies, possibly some munis or something like that. But it’s a spread that we’re looking at. So with relatively flat yield curve now that doesn't work out to the numbers that Ed was talking about. So, we need some steepening of the curve. So, it’s not the absolute rate, it’s the spread.
On the loan yields, the mix improvements sequentially part of that I would imagine is the big LIBOR portion. Was there anything unusual in terms of loan fees accretion non-accruals or is about this level of improvement per rate hike about what we should expect this?
Yes, there is nothing unusual of the types that you talk about. This is really just the portfolio reacting to the rate environment?
But remember, it takes a full year. Like in the life insurance loans that are based on one-year LIBOR, it takes a full year for those, that to reset for those portfolios. So we’re still in the process of what absorbing 3 rate increases in their portfolio. Notwithstanding future rate increases going forward. So it literally takes a full year for us to be in a position to get that 20 million, 23 million bucks we’re talking about on every quarter point. So we would expect that to continue, you don’t get another quarter point of rising rates in the next month or two, you know what are they.
And then maybe one last one, just make sure I heard you guys right on the loan growth. I think you’ve talked about in the past high-single-digit in your prepared remarks you said mid to high. Is that just worth something or is that, are you tweaking the guidance a little bit softer?
No, I think it’s the same, it’s -- what’s high-single-digits 8 or 9? I’m thinking 7 or 9 somewhere in there.
Got it.
I don't whether it's also semantics, I guess.
Yes, I think the short answer is we’re not changing our tone.
Thank you. Our next question is from Nathan Race of Piper Jaffray. Your line is open.
Just going back to the -- on good things. Just going back to the loan growth discussion. Just curious to get your updated thoughts on the commercial real estate market in Chicago specifically multifamily looks like you guys had pretty good growth in commercial real estate during the first quarter and look like Illinois comprised a large chunk of that, so just curious on your updated thoughts on that asset class?
Well, it’s -- you really have to dive down what kind of asset class you’re interested in, multi-apartment buildings we're really not interest in doing those right now.
Retailer.
Pardon me.
Retailers something we're backing off of two a little bit those two asset classes.
Yes, but what you’ve got is the number on the commercial real estate side, a number of larger construction projects. McDonald's headquarters, there-- we led -- we co-led that deal. They’re moving into next few months. Wrigley Field, McDonald's or the new hotel, the development around Wrigley Field, those are all kind of working their way through. So industrial real estate is still strong, office real estate is still strong around the city and in the suburbs now. We are comfortable with those.
But again these are not one-offs, these are just a relationship deals. This isn’t like in the past where we were beasts of burden, where we will just take the hunk of a deal and who the borrower really good know that well. We have that full relationship with them sponsorship has to be good. We're not getting out over our skis on this stuff right now. We're being very cautious on the real estate side as you would imagine.
So a lot of it also has to do with middle-market business we're picking up, to continue to pick up where there's a building component that comes with it.
Thank you. Our next question is from Terry McEvoy of Stephens Inc. Your line is open.
Just a follow-up I think was Brad’s question. The Veterans First expenses are 5.9 million, just 2.4 that was salaries. And I just want to make sure I understand correctly that, that 3.5 million or call it $14 million annualized you described as paying up for leads et cetera. Is that something that run rate is going to increase going forward? And then where within the expense lines, will that -- will those expenses show up?
Yes, so, of the 5.9 million you are right, 2.4 million was the salaries line. So, that we do have commissions that would show up in the commissions line, various other expenses, occupancy, employee benefits and alike. But the big piece where you get a little bit of offset from our legacy business is the lead generation. That shows really up in other non-interest expenses. That's just loan expenses in our mind. That's just the cost of acquiring a loan out there acquiring a low amount there. So it would show up in other non-interest expenses. And then just a separate question the call it 11% annualized decline in non-interest bearing deposits. Anything there beyond what you I called out a seasonal in the press release?
Yes, I think there’s a lot of inflows end of the fourth quarter and just some of those naturally came out in the first quarter. So, we don't think see anything systemic there just sort of natural ebb and flow with seasonality in year-end.
Thank you. Our next question is from Kevin Reevey of D.A. Davidson. Your line is open.
So, first question is on the branch that you've just recently opened in Wrigleyville. What's your anticipated timing as far as when you think that branch will breakeven the other 4 to 5 branches you anticipate opening this year?
So, they usually breakeven at about 8 months, 8 months to a year, and I think that's a fair number.
Okay.
It's not a huge branch. It's a relatively small branch. And so I think Ed's estimate is right.
To open your account, yet Kevin, you're going to get your Cubs debit card.
That's right.
But then all your deposits, Kevin, will think that down to 6 to 7 months.
And then hearing from a lot of the other Indiana banks that they're seeing some growth from a lot of migration from Illinois given the state's woes into Indiana. Are you guys feeling any of that, any of your customers feeling any of the outward migration or any of fiscal woes at the state level?
Well, I hear by everybody worries about that. We're up and it was right across the border. In Wisconsin, we have a heavy presence. So, yes, we don't really lose any of that business. Indiana, we still service Northwest Indiana. We have one branch there. Now, we will continue to build. Most people don't have so much sunk costs in Illinois. They're not picking up and moving in total. They might expand there. So they don't change banking relationship by an expansion. The relationship is here who you're talking to which is the taking all of the Illinois's business because we're still right into if you think about Chicago, Northwest Indiana, and Milwaukee, Megapolis.
I think it's the 14th biggest economies in the world. So, there is so funny business to go around. I don't worry about it as much as others do right now because there is still good building going on here. There is still -- I think Chicago was the number one city in the country for branch relo -- or for headquarter relocations last year. There is still a lot of good things on here in spite of the maelstrom around the economic situation in the state. So, I think hopefully we'll work through that, but all-in-all there is still a lot of business we have in Chicago and in our market areas. So, I'm not -- I don't think we're going to see Chicago turning into Detroit anytime soon, with the old Detroit anytime soon.
And then lastly, creditors as you say is as good as it's going to get. How should we think about modeling the provisioning going forward for the rest of the year given the credit this is good this going to get?
Well, if you look at our 60 to 89, those near-term delinquencies were down from last quarter. And if there is a little blip in the 30 to 59, but most of that was administrative, we’ve actually add about 50 million of that already cleared off just because it was administrator. So, we’re not seen any trend where credit metrics look like they’re getting worse.
So until you start to -- unless you change the mix of the business where you’re putting more loans on with higher reserve levels, which our mix has been pretty steady and reserve the loans level has been pretty steady for quite a while now.
So unless you started to see a crack in credit quality increase in delinquencies and the like, then I think you can think our provisioning level would be similar and once you had a larger, an outsized growth quarter where it might increase it. But it really would depend on asset quality and growth, and we see asset quality okay and we've talked about the growth aspects.
Kevin, it’s so low right now that you could have one commercial deal go back and blow your numbers up. I mean, materially or relatively speaking go from where we are as couple of base, 12 basis points of the 25 to 30, which is still remarkably good. We’re calling the portfolio trying to push these things out constantly if we see any crack to avoid that, but eventually, something’s going to happen. I mean is the number are so low that $5 million or $6 million charge-off at one deal is going to be -- would stick out.
So it’s hard, I know, I can empathize with you how hard it is to model. But if I was doing the modeling, I’d probably just add 30% as to what we have in our provisioning and look good after the fact. But something eventually will happen, I mean, we’re not that good or that lucky, but we’re trying to stay ahead of the game and again on a relative basis, you could have one pop through, which would change our provisioning levels accordingly. We don’t see it. We don’t anticipate it. We’re fighting against it, but eventually something’s going to happen.
Our next question is from Michael Young of SunTrust. Your line is open.
I wanted to get a little color maybe just again on customer activity and what you’re seeing in some of these loans come for renewal or re-pricing after extended duration at lower rates? And now with the significant step up we had both one more month and 12 months LIBOR here recently. Are you seeing any give on the absolute credit spread even though the base rates increased?
Well, we are seeing -- we're seeing that’s start to happen in the market. Again, we have our profitability models and our loan policy. We don’t vary from them. So we adjusted our profitability models to do on an after-tax basis and raise all those. We don’t want to get away the benefits of the taxes, because as we all know what Washington giveth, Washington can taketh away very quickly. And you really don’t want to, you still got to get paid for you risk notwithstanding taxes.
So I would say there has always been pressure on spreads. They were -- they had worked their way down on the commercial side, lowering up, but they really can’t go much lower on the commercial middle-market lending. They were low already. So we're not seeing a lot of that. On the real estate side, you see a little bit of it but we'll just pass on it. If it doesn't cut our pricing, we don’t take it. We haven’t seen of giving away -- we haven’t seem a mass effort by the private -- or the bigger banks or our competition to give away the benefits that they have gotten from higher rates or the tax increase as if yet.
I would imagine that will come throughout the course of the year. There will be more pressure but we will stick to our guns.
And just as we look at the deposit portfolio and the efforts to kind of improve the loan-to-deposit ratio, and I guess I am kind of marrying that with the comments, but you think that [Technical Difficulty]. Taking those together, do you plan to extend the duration of the deposit book and term out some funding at this point?
Well, I think it will be offering up to 3 to 5 years to ease out there. People want to jump in. They don't seem -- remember customer always want what you don’t want to given them. The customers are in line to extend right now. But we have such a big interest rate sensitive position right now as rates continue to move up we are going to learn a lesson there. So, we will long a little bit more along and borrow short and that ought to do that.
So, we don’t -- if we see an opportunity to extend on rate basis we certainly will but sometimes rates area almost too high right now to want to extend on the positive side. Now there’s a positive side I mean. So I don't mind going short and lending long because, as I said, as rates go up we are going to lot of shrinking our -- shrink our gap anyhow.
Thank you. Our next question is from David Chiaverini of Wedbush Securities. Your line is open.
Couple of follow-ups. The first on mortgage banking, you mentioned that for each dollar of revenue that you are going to get in the second quarter to expect $0.35 of incremental expense. I was wondering and I am not sure if you are willing to specify but can you provide what the efficiency ratio was for the mortgage banking business in 2017 and then what you expected to be for 2018?
Yes, let me clarify. When I was talking about that every $1.35 it was just really talking about the relationship on Veterans First piece because it’s kind of goofy that we only had half a quarter revenue and then we had a fuller quarter of expenses. I was trying to just give a little guidance on that, and that did relate to the entire portfolio. That was just trying to help on the better and it’s side of the equation.
But the mortgage business has only been in 80%, 85% efficiency ratio, business is the high efficiency ratio business, does use much capital, we would obviously expect that to be a little less with the consumer direct channel but we haven’t given any guidance on that.
And then the other follow up I had, related to the leverage strategy, you mentioned about how you are still going to benefit. Wintrust will still benefit from higher rates with NIM expansion but at the same time with the leverage strategy, it could hurt the NIM. So should we expect that in the quarters in which you deploy the strategy that the NIM should net out to being flat?
No, I don't think that would be the case of -- I think it will be negative. But if you phase into this over the next two years, certainly we'll have a marginally negative effect on the NIM, but not one that's going to knockout our continued growth of the NIM.
And then I'll go with -- as Ed mentioned earlier, I'll go with put pressure on the NIM. It has corresponding benefit to the net overhead ratio and positive to earnings. So, it would take a little bit pressure on that NIM to get higher EPS, but we just want to walk into too small in the spread, so that's where we're waiting for the yield curve to get to a point where it make sense to jump in.
Got it. Now that makes perfect sense. And then the last question I had, going back to the loan growth outlook, how you somewhat tweak the guidance to say mid-to-highest post to high. Is this related to the strategy of bringing a loan-to-deposit ratio back down that 85 to 90?
No, I probably, thus I mean my analogy of just symmetric. So it's we haven't changed its high single digit. So which means later now 7% to 9% is what we're thinking. So I guess that will be high-single digits. So, we're not changing our thoughts at all. We just probably misspoke.
We will generate all the good loans that we can and we will by the way to fund those. So the way to bring the loan-to-deposit ratio back in the line with the deposit side of the equation. We're not going to turn very good loans.
Thank you. Our next question is from Brock Vanderbilt of UBS. Your line is open.
So, Dave, just a question for you on the housekeeping, I think there was a question on this earlier. The Federal Home Loan Bank advances the rate has really moved around the last 5 quarters. I would think that would be linked to some 30-day, 60-day kind of base rate and have been moving up pretty consistently. Why is that not doing that?
Brock there is two pieces on that Federal Home Loan Bank funding side. We have a portion of that is longer term fixed rate funding. And so, if you got very little overnight that rates going to high. If you got more overnight at the lower rates, that's going to bring that yield down considerably. And so if you -- probably, the way to look at it, as if you go look at our KRQ, we said a lot in the footnote what the longer term fixed rate funding is. That's going to be their regardless, but then when you bring on a lot of overnight funding at very low rates, so it's going to bring yield down. If you back off on that overnight funding during the course of the quarter, the rates going to gradually go back up to what that longer term funding that you have in place that's there all the time. So, it moves around based upon how much overnight funding you have throughout the quarter.
And at this point, is there any reason to expect it to be closer to 170 than 260?
No, I don't think we put that much more on especially if the profits start coming in.
What’s driving the focus or the renewed focus on driving down that loan-to-deposit ratio? Is it shape of the curve or something else?
I mean our philosophy has been as we’re sort of old-time bankers. You got interest rate risk. You got credit risk and you got liquidity risk and we’ve always thought operating that sort of 85% to 90% loan-to-deposit ratio provided us with the appropriate level of liquidity. And so as Ed mentioned earlier, we think we have liquidity resources that we’re not worry about it. But just as one of our basic tenants is to maintain sufficient liquidity out there where, you can see call it night, and it’s just the right thing to do. And we think that range is 85% to 90% loan-to-deposits. But that mean said, right now with shape of the curve, we’ve got plenty of liquidity sources, but we rather operate closer to 90%.
And so it's a positive, I mean all it does is add to the bottom line. You figure -- if you can make, you can do pretty well with that.
And the leverage that we’re doing, if I could, like we said, it put -- might put some pressure on the NIM, but it’s going to be increased your net income. But you want to protect yourself from a rising rate too, so you got to get a sufficient spread on that leverage in order to jump into it. But it doesn’t take much capital either. So, if you get -- if you invest in the Ginnies or the Fannies since very low capital instruments. And so, it wouldn’t take much capital do this. So it would increased earnings put a little pressure on your margin, help your net overhead ratio, and not eat much capital. So, we think it’s a net positive, but you don’t want to do it at such a tight spread that for each price you’re not doing well in the future.
Right. Okay. Thank you.
Great, I'd like to just make sure I clarify to something when you're talking about deposit betas earlier. You talk about moving to marginal deposit beta closer to 40 basis points. What we believe up from the 24, 25 we’ve experienced. What we believe is, we’re still going to have margin expansion, just it’s not the beach ball underwater, it’s, I don’t know, a tennis ball, a number of tennis balls underwater with every quarter point increase. We still make $20 million to $23 million every quarter point increase on an annualized basis.
We do and that includes increasing our deposit beta, our deposit rates accordingly. We’re not going to be able to maintain this 25% data marginally going forward. We still very asset sensitive. We still expect the rates that, increases that have occurred to date are still looking away for the system, that’s very positive. Four more rate increases would be very positive. We expect the margins to go up every time, every quarter and every month are going forward as we absorb those rate increases that have occurred already and future increases will help us too.
So I don't want anybody to think we're going to jump from 24 to 40 overnight and have our margin go down, that’s not the case at all. Rate increases are very good for us. We’re well positioned as rate as -- and I don't want to think about that this is going to hurt our margin or our net interest income going forward is still very positive outlook for us in that regard, just we’re not going to be able to maintain on future increases 25% beta, that beta will be higher as rates go on.
We’ve built that into our plans and that's included in the quarterly earnings or the annual earnings increase, we talked about our quarterly increases. So, I want to get to that point across. Maybe I was unclear on that but we expect margin expansion throughout the rest of the year. We expect good asset growth. We expect even within with our liquidity play, as we phase into that over the next two, it’s not going to happen overnight, that will be very positive for us also.
So, we think with -- the outlook for us is very bright for future record earnings quarters to keep Mr. Papagiorgio very happy. So if you have any questions about that, I didn't mean to confuse you about that but I maybe did as I was thinking about it as the call went on. So, did I miss anything there, Dave?
There?
Here, anything here?
No, I think it’s time to end the call, Ed.
With no more questions, thanks everybody for calling in. Call, if you have any questions. We will talk to you in a month or in a quarter. Thanks.
Ladies and gentlemen, thank you participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone have a great day.