Wintrust Financial Corporation (WTFC) Q4 2017 Earnings Report, Transcript and Summary

Welcome to the Wintrust Financial Corporation’s Fourth Quarter and Full-Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [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 fourth quarter and full-year 2017 earnings press release and in the Company’s most recent Form 10-K and any subsequent filings 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 very much. Welcome everybody to our fourth quarter earnings call. With me as always are Dave Dykstra; Dave Stoehr, our Chief Financial Officer; and Kate Boege, our General Counsel. We will conduct this call the same format as always. I will provide some general comments about the quarter and the full-year. Dave Dykstra will then go into some detail on other income and other expense, then back to me for some summary comments and thoughts about the future then some time for questions. I was telling Dave the other day, I said I must have been a pretty good boy last year because Santa came through. I asked him for an interest rate increase and some tax reform, and I am getting both. So I am going to try to be a really good boy this year, too. For the fourth quarter, reported net income was $68.8 million or $1.17 a share, an increase of 26% over last year. Like other companies, this was somewhat of a noisy quarter due to the tax reform bill. We booked a $7.6 million benefit related to the patches of the bill, and that benefit was partially offset by additional short and long-term comp accruals and increases in number of the discretionary expense categories. The addition to the long-term comp accrual is really kind of a good thing when you think about it. Our long-term comp runs in three-year cycles, we have three outstanding at any point in time and it's based upon the projections in any point in time. With the rate increase and with the tax decrease, those projections obviously looked – made things look pretty good coming forward. So that kind of adjustments are good thing for us and now we were fortunate to have our balance sheet position for the tax benefit which offset this, and ended up with us having another record year for Wintrust. For the full-year, we recorded net income of $248 million or 4.40 a share, increases of 25% and 20% respectively. Return on the average assets for the quarter was 1% and 98 basis points for the full-year. Net interest income for the quarter was up $3.1 million, and the margin increased 2 basis points to 3.45% from the third quarter this year, and up 24 basis points from last year's fourth quarter run rate. The increase was due to, I would say the higher rate environment and good loan growth in Q4. That’s what I will discuss in a moment. The loan growth for the quarter was again backend loaded. This bodes well for the first quarter of 2018. Credit quality for the quarter remains consistently strong. Total charge-offs for the year or for the quarter was 7 basis points as compared to 9 basis points for 2016. I don't think it's going to get any better, I keep saying that, and it does keep getting better. NPLs and total NPAs at the year end stood at 42 basis points and 47 basis points respectively, down from 44 and 50 basis points at year end 2016. Non-accruals were up $12 million from Q3 predominantly due to one real estate credit. That credit is a refugee from the 2008 prices that looks like it's going to go sour with loans current now. So it’s a shopping center where Target has announced they are going to close at the end of March. So we are trying to be very proactive and take care of everything and, as always, be as disciplined as we are about recognizing problem assets and moving them into a resolution very quickly. Based on the coverage, it’s understandable that our reserve remained constant at 64 basis points of total loans, and coverage NPAs was still the strong at 153%. We do continue our practice of scouring the loan portfolio for signs of a crash, to move expeditiously to proactively move these out. David will talk you through the other income and other expenses. But suffice it to say, they are above our target of 150 basis points for this quarter mostly due to the expenses related to the tax law change. The 1.68% net overhead ratio in the fourth quarter skewed our overall performance for the year taking it to 1.58%. Notwithstanding this fourth quarter performance, we are relatively close to our goal for the year-end total. The 1.5% remains our goal for 2018 and beyond. Although, we are making a number of investments in IT and digital products, we believe these costs should be offset by the efficient organic balance sheet growth as we continue to leverage our existing infrastructure, that is balance sheet growth, a commensurate increase in operating expense. Here is a concept that I discussed with all of you previously. Also, we are running at a loan-to-deposits ratio has been higher than the 85% to 90% that we are comfortable with. We felt this to be appropriate now rather than bring on deposits and lay them off into, again the securities without a lot of spread on then. As the rates rise, I think you will see us get back in line on that, and that equates to about $1 billion with the growth in extra liquidity. We're going to bring – if we were to have that $1 billion on the books, we would get well below the 150 basis point target that we looked for as a target. The balance sheet, another solid year of balance sheet growth. Assets in the year totaled almost $28 billion, up $558 million from Q3 and $2.25 billion or 8.8% from the prior year-end, pretty much all organic growth this year. Total loans increased $681 million for the quarter from the previous quarter about 13% on an annualized basis and $1.87 billion or 9.5% for the year-end 2016. We had told you previously, we expected high single-digit growth for the year. That's where we ended up and that's what we expect for 2018 also. Our growth in the fourth quarter was in all categories and we believe that we should be able to achieve high single-digit growth rate going forward on the loan side. For the near-term, loan pipelines remain consistently strong across the board. As previously mentioned earlier, the fourth quarter loan growth was backend loaded. Ending balances exceeded fourth quarter average by $560 million. Coupled with the December increase, these factors should provide rate increase – this factor should provide a nice jump start to 2018. Our liquidity management portfolio ended the year with the duration of 4.6 years, which is pretty much the same as at the end of 2016. In the past, we have maintained the duration of over six years. As rates increase and hopefully the curve steepens, we would ladder our portfolio in the long duration. I have discussed this concept before on calls. Today, we have not been compelled to pull the trigger. As future rate increases – the interest rate increases appear probable, it's a nice earnings lever to pull when the time is right. Deposit growth for the quarter was $208 million, all of which was in demand deposits, which now stand at 29% total deposits. We've been able to control our deposit beta pretty well in 2017, standing around 24%. However, it’s inevitable that beta will increase in 2018 and as we are going to be riding more on organic growth and acquisitive growth, and we believe that beta could move to the – around future rate increase to the 50% to 60% range. We will manage it as well as we can, but we believe that with our – with the organic growth and leveraging our infrastructure, this will be very profitable growth. Fortunately, we don't have a huge MUNI portfolio that it has to be repriced. So that's a good thing right now. I used to talk about our margin in a higher rate environment being beach ball in the water. Now it's more or like a small volleyball. Now every quarter point increase adds materially into our net interest income and we’ve remain well positioned for future rate increases. In the next set, I think Dave is going to cover this. But in the event he doesn't, under the new plan, we project our effective tax rate to be in the 26% to 27% range, not include the impact of tax benefits from equity award exercises by employees. Coming off of 39% effective tax rate, so you can do the math. In January, we completed our previously announced acquisition of Veterans First Mortgage. We are excited about adding this enterprise and their terrific employees to the Wintrust family. Veterans First Mortgage is a consumer direct lender, headquartered in Salt Lake City with a second sales office in San Diego was acquired January 4, the transaction closed January 4. This group originated between $800 million and $1 billion, and residential loan volume in the past few years, focusing almost primarily or exclusively on VA purchase loan transactions. The strategic acquisition improves our current mortgage business and increasing our mix of government loans from 15% previously to over 31% combined, increasing our channel mix of consumer direct originated loans to 3% to 17% combined, and increasing our average monthly revenue per loan by roughly 40 basis points, further improving our overall state funding mix, and further increasing our concentration on our purchase loan transactions. The acquisition also included about $1.4 billion in Ginnie Mae MSRs. As rates rise, that should be a nice lever for earnings also. Now, I’ll turn it over to Dave for his discussion of other income and other expense.

Thank you, Ed. As normal, I will briefly touch on the more significant changes in the non-interest income and non-interest expense sections. Turning to the non-interest income section, our wealth management revenue totaled $21.9 million during the fourth quarter of 2017, which was up about 11% from the $19.8 million recorded in the prior quarter, and also up from the $19.5 million recorded in the year-ago quarter. The trust and asset management component of this revenue category increased to $15.8 million in the fourth quarter from $14.7 million in the prior quarter due to the increased market value of assets under management and growth in new accounts. The brokerage revenue component also increased to approximately $6.1 million in the fourth quarter, compared to $5.1 million in the third quarter due to increased client activity during the quarter. Overall, the fourth quarter of 2017 exhibited strength in revenue generation and represented another record quarter for the wealth management fee income. Mortgage banking revenue decreased approximately 3% or $773,000 to $27.4 million in the fourth quarter, from $28.2 million recorded in the prior quarter and was lower than the $35.5 million recorded in the fourth quarter of last year. The slight decrease in this category’s revenues from the prior quarter was due to lower origination volumes as a result of less home purchasing activity in the fourth quarter. Offsetting the decline in the origination revenue was $46,000 positive fair value adjustment related to mortgage servicing rights, compared to $2.2 million negative fair value adjustment in the third quarter of 2017. The company originated and sold approximately $879 million of mortgage loans in the fourth quarter, compared to $956 million of originations in the prior quarter, and $1.2 billion of mortgages originated in the fourth quarter of last year. Also, the mix of loan volume-related to the purchased home activity was approximately 67% in the fourth quarter compared to 80% in the third quarter The mortgage servicing asset valuation increased by approximately $4.3 million, primarily due to retaining servicing of approximately $307 million more of service mortgage loans net of paydowns and payoffs. Given the existing pipelines in interest rate environment, we expect our originations to remain steady to down slightly in the first quarter of 2018. The acquisitions of Veterans First Mortgage operation in January of 2018 will begin to contribute slightly to the mortgage revenue as we build our pipelines and begin to close on loans with the full impact of that acquisition occurring in subsequent quarters. As Ed mentioned, Veterans First originated in excess of $800 million worth of loans through their Consumer Direct channel there in 2017. We will continue to look for further opportunities to enhance the mortgage banking business both organically and through acquisitions. Other non-interest income totaled $12.6 million in the fourth quarter, down approximately $1 million from the $13.6 million recorded in the third quarter of this year. The primary reason for the decline in this category revenue is related to the foreign currency exchange adjustments. The fourth quarter of 2017 had a slight foreign currency exchange loss, whereas the prior quarter had a foreign currency exchange valuation gain. The net swing was approximately negative $1.1 million and was related to the U.S. Canadian dollar exchange rates and our premium finance business that we do up in Canada. Turning to non-interest expense categories, total non-interest expenses were $196.6 million in the fourth quarter of 2017, increasing approximately $13 million from the prior quarter. The increase was generally related to approximately $8.4 million of additional annual and long-term performance-based incentive compensation, related payroll taxes, a pension valuation charge of approximately $1.2 million and increased level of consulting fees to support our investment and information technology and the digital customer experience of approximately $1.6 million, as well as a slight increase in occupancy-related expenses. I will now talk about these more significant changes in detail. Turning to salaries and employee benefits, this was the main driver of the increased non-interest expense during the quarter. This category expenses increased to $11.8 million in the fourth quarter compared to the third quarter of 2017. The base salary expense component and the commission expense component are relatively consistent in the fourth quarter compared to the third quarter, but expenses related to the Company’s annual long-term performance-based incentive compensation programs were elevated due to the record net income in 2017 and in the fourth quarter of 2017, and the higher forecasted net income for future years through the recent rate hikes balance sheet growth and recently enacted tax cuts. I’ll now speak to each of those components as subcategories. As I mentioned, the base salary expense was relatively consistent with the third quarter and was up only $550,000 during the fourth quarter. Despite the increase can be attributed to normal growth as the Company continues to expand. We would expect the base salary component to increase slightly in the first quarter of 2018 due to the additional staffing associated with the Veterans First Mortgage acquisition that occurred in January, annual base salary increases that take effect on February 1, as well as an increase in our minimum wage to $15 per hour for eligible non-commissioned employees beginning March 1 of 2018. Employee benefit expenses were elevated in the fourth quarter by approximately $2.6 million and totaled $19 million. The elevated level of employee benefit expense related to three primary causes. The first was a $1.2 million charge related to pension obligations for two pension plans that we inherited through prior acquisitions and revaluation of the liability obligation that we have under those pension plans. The second reason is an increase in payroll taxes associated with the incentive compensation awards made in the fourth quarter of 2017, and this category of expenses was also impacted slightly by higher employee insurance costs. As I mentioned, commission expense related to mortgage and wealth management revenue was relatively consistent as aggregate commissionable revenues in those categories were also relatively stable. However, long-term and annual incentive compensation expense increased by approximately $8.4 million from the prior quarter. As I said, the record net income and our higher forecasted profitability due to the rate hikes, balance sheet growth and the tax cuts resulted in higher annual bonus accruals and long-term incentive performance-based compensation program accruals that impacted projected payouts for each of the three multi-year performance cycles that we have open. Accordingly, the primary reason for the increase in this category related to the annual and long-term incentive compensation plans, related to payroll taxes on those current payouts and the adjustment to the pension obligation for the increased pension liability. As the majority of this additional expense was an adjustment for current conditions, we do not expect this expense to continue at this elevated level into 2018. As I mentioned, we expect some additional salary costs due to the base salary increases that go into effect in the middle of the first quarter and Veterans First acquisition. But we also expect, assuming our performances as we project about $7 million less in performance-based annual and long-term incentive compensation during the first quarter of 2018 versus the amount of expense in the fourth quarter of this year, and as always, commission expense will fluctuate based on mortgage volumes realized. Turning to occupancy expenses, they increased $1.1 million during the quarter compared to the third quarter, due primarily to higher utility costs, maintenance costs, as well as slightly higher real estate tax accruals. Our marketing expense decreased by approximately $2.2 million from the third quarter of 2017 to $7.4 million in aggregate. As we have discussed on prior calls, this category of expenses tends to be lower in the fourth and the first quarters of the year as our corporate sponsorship spending is more heavily geared towards the middle two quarters of the year. Professional fees increased to $8.9 million in the fourth quarter compared to $6.8 million in the prior quarter, and our professional fees can fluctuate on a quarterly basis based upon the level of legal services, related acquisitions, litigation, problem loan workout activity, as well as any consulting services. This category expenses remain somewhat elevated from historical perspective as we continue to utilize consulting engagements as we invest in the customer experience, product distribution enhancements, and improvements to our information technology and information security. All of the other expense categories, other than ones I just discussed were up very slightly on an aggregate basis by approximately $269,000 in the fourth quarter compared to the prior quarter with no significant items that are particularly noteworthy on an individual basis. The Company’s net overhead ratio increased during the fourth quarter and was above our goal of 1.5%. This ratio as well as the efficiency ratio were significantly impacted by the performance-based incentive compensation accruals, consulting costs, and the pension adjustments. Without the impact of those fourth quarter items, the net overhead ratio would have been 1.52%. And as Ed says, as we raise deposits and bring our loan to deposit ratio down on invested more securities, the growth in the balance sheet should also help reduce that percentage. So management is still confident that will achieve our goal of a net overhead ratio of 1.5 or less in 2018 and we believe it’s achievable. And to the impact of the recently enacted tax reform, as we noted in the press release, the enactment of such legislation in December, which reduces the federal income tax rate for corporations from 35% to 21% effective January 1 of 2018, required the Company to remeasure its existing tax, net deferred tax liabilities at the end of the year to reflect the new rates. This resulted in a $10.5 million net tax benefit. This net tax benefit was partially offset by $2.9 million tax on deemed repatriation of unremitted earnings on our Canadian subsidiary. Additionally, at this time, we expect our effective tax rate for the full-year of 2018 to be approximately 26% to 27%, excluding the impact of any excess tax benefit associated with share-based compensation compared to effective tax rate including the impact of any of those excess tax benefits of approximately 37.5% at the end of 2017. I have to remember that the state of Illinois that we are headquartered in and we have a fair amount of business and has a state tax rate at 9.5%, so the impact of that also has to be added to the 21% federal tax rate. All-in-all the tax reform was the net benefit to Wintrust in 2017 and we will continue to provide net benefits going forward as a result of the lower effective tax rates. So with that, I will conclude my comments and throw it back over to Ed.

Thank you, Dave. Needless to say we are excited about where we stand in our prospects going forward. We have retained very good momentum in all of our business lines, loan pipelines remain consistently strong. We’ve yet to see the market on the whole turn to past idiocies, but we will remain diligent in our net front. We will continue our conservative credit policies and pricing parameters. We are well positioned for rising rates and as the experts are right, we could be reaping additional benefits in 2018. We still have a great deal of operating leverage in our system. Organic growth continued to be our focus as the acquisition market has moved away a bit due to pricing expectations. As not to say, we will not do any deals. Just we believe our assets growth would outstrip by a long shot, any liquidity that may come to us with some acquisitions given our preference to look at smaller deals. New tax rates will obviously be a windfall for us. We continue our goal of achieving double-digit earnings growth before the effect of the tax we change, growing tangible book value per share and maintaining a pristine credit book. We will continue to be opportunistic and disciplined on the acquisition front. In short again, we like where we stand right now. Now, we can turn over for questions.

Thank you. [Operator Instructions] The first question is from Jon Arfstrom of RBC Capital Markets. Your line is open.

Thanks. Good afternoon.

Hello, Jon.

Couple questions here. The loan growth, the period end loan growth, Ed you touched on that, but just curious if that – it sounds like that growth is sticking around and you're seeing that pull through to Q1. Just curious if that's true or not and is there anything you would attribute that to? It seems just much higher than the average.

It’s kind of interesting. We have to say that I think in the second quarter this year seems to be feast or famine. That loan growth is sticking around and it was interesting at year end a lot of people pushed to get deals done by year end, a lot of people put deals off until the next year. So January has been an active month also, so we see our pipelines being consistently strong and I’m not seeing any denigration of our balances at this point.

Okay. And nothing specific you would attribute it to or it's just continuation of what you've been seeing?

It’s across the boards Jon.

Okay.

It is continuation of what we've been seeing. We’ve had a number of questions or heard a number of questions about, will your competition be lowering their spread requirements on loans because of the tax breaks? We haven't seen that yet. We did change our profitability model. We go to a pre-tax basis. So we just interpolated it. So that we are still – our model still demands the same profitability going forward. It will be interesting to see if other banks – we think you got to pay it through your risk. We think our model does that. So it will be interesting to see if pricing moves away from us going forward. So far we haven't seen that yet. We’ve seen consistent pressure on spreads as you – in this competitive environment, but now we’ve been living there for 26 years. But no, our pipelines are good. We have great momentum in the market. Our name still stands for a lot out here, our relationship, our reputation is good, and people want to bank with us. So we're going to help them with it.

Okay, good. And then question on the margin, just a few things going on, but you touched on your loan-to-deposit ratio up a bit and you touched on deposit betas rising, and you're also optimistic on the margin. I'm just curious how you think about margin behavior if we get two or three rate increases in 2018? Can you continue to see that go up or do you reach a tipping point at some level where you've reached a peak margin?

No, I believe that margin can continue to go up. We expect it – we still are very positively rate sensitive right now, positive [GAAP]. We would expect our margins to continue to rise if given rising rates. So maybe that price is much. We had said around $22 million, $23 million per quarter increase and we expected that to go down $1 million or $2 million for every subsequent quarterly increase. So the fourth quarter increase should be worth $22 million, $23 million to us based on our projections in 2018, but subsequent rate increases should be progressively less, but always worth something, and that all falls through to the margins. So the effect of the tax change will hurt our margin by about 2 basis points we figure right now, but we should – that should – that will be made by the rising rate environment.

Okay, all right. Thanks. Good year.

Thank you.

Thank you. The next question is from Terry McEvoy of Stephens. Your line is open.

Hi. Good afternoon, guys.

Hi, Terry.

Dave thanks for the help on the fourth quarter expenses. I guess my question relates to the first quarter. Should we think about that $7 million coming out plus the $1.2 million for pension to look at a run rate entering 2018? Where do you foresee some of the other areas that flipped up like on the consulting side coming down as well into the first quarter?

Yes. So you're right. The pension expense shouldn't recur either. So you've got both at $7 million plus or $1.2 million, and assuming our projections on our profitability, you’re right. Consulting, I think we continue to invest in some real technical issues as far as the improvements in our digital customer experience and some of our other IT projects that we have going on. So I think on the short run given the projects we have on the board, consulting cost will probably stay a little elevated. So I wouldn’t expect them to come down dramatically in the first quarter, and then the offsets as I said is Veterans First will come on, so the costs of that will add a little bit plus the normal pay increases that we do in the middle part of the first quarter.

And then just as a follow-up sticking with expenses, as I look out to the fourth quarter of 2018, will there be another step up like you saw this quarter that $7 million or did you capture that three-year comp cycle all within the step up here in Q4?

Well, that’s based upon whatever the projections are. If you have rising interest rates and our projection shows us making more money that those projections would call for higher expense. However, I think we kept out on two of them already, no?

No. So, we reevaluated those on a quarterly basis. Now the fact that we had a rate hike at the end of December and the tax cut significantly impacted that. So we covered that for all three long-term performance cycles that were out there. So assuming that we don't get another big tax cut, which would be nice, but with none of us fully expect, we shouldn’t have that sort of impact next year. If they raise rates again and profitability goes up and there's no give backs on that with competing away or things like that in the marketplace, and then that it might edge up on a quarterly basis that it's not going to be nearly as significant. We factored all that into the forward projections already and we would be part of that number that I gave you. So it could inch up if we had further rate increases, but that would be good because we've been making a lot more money based on what Ed told you if we think the impact would be to our margin. So it could inch up as time goes on, but I don't expect anything of that magnitude. The tax was impacted quite a bit.

I think we kind of said the same thing, did we?

We just said…

You said it better.

I said it better.

I appreciated. Thank you very much.

Thank you. The next question is from Nathan Race of Piper Jaffray. Your line is open.

Hey, guys. Good afternoon. Going back to Terry’s question, Dave on salary line, can you just kind of help us quantify how much of an increase you are going to have here in the first quarter with Veterans coming out and also the annual salary increase that you guys had as well? And could you just remind us as it relates to Veterans, what we can expect in terms of volumes this year?

Well, okay. So on the salary side, Veterans has probably had a few million dollars in the first quarter to the expense line. We bought the assets of that company, not the company and so the pipeline starts from zero at the being of January and we bought them. So they need to build up the pipeline before they can start closing. So we won’t have a tremendous amount of impact in the first quarter revenues, but as I said in my notes in the subsequent quarters, it should be fully baked in and last year, there will be barometer I gave you and it was about $800 million of revenue. My crystal ball is not good enough to tell you where interest rates are going to go, but assuming they had a similar year to the last few years that's probably not a bad volume level to think about. And then raises, we usually are in the two and three quarters or 3% sort of raise and we put those into effect on February 1. And then we did raise the minimum wage for non-commissioned eligible employees and that's not going to be real significant, but it could be slightly less and/or maybe $500,000 to $750,000 a quarter pre-tax.

And then staying on Veterans for a second, could you just help us kind of think through how much improvement we could see, if any, to your organic sales margin as a result of that platform coming on line?

The government loans have a better spread to them. So just it depends on really what our mix was going to be given what we have out there and what they have out there, but government loans are better. I think you could possibly see once it's fully baked in 30 basis points to 40 basis points better margins.

Also, what's interesting about Veterans First is their consumer direct platform, one that we’ve had, but we haven't had enough lot of success with it. They’ve had a great deal of success with it, something we really want to roll out to all of our markets. That was one of the strategic attributes of that particular enterprise that attracted us to it. And that cost of doing business is a lot less than the historical cost of the old way. So as we really over the year we want to be able to really leverage that, marketing that platform to offer more products to people. So take a little while to get that in place, but we think all-in-all it will add to our overall margins substantially years down the road.

Got it. I appreciate all the color guys.

Thank you.

Thank you. The next question is from Brad Milsaps of Sandler O'Neill. Your line is open.

Hey. Good afternoon, guys.

Hi, Brad.

Hi.

It looks like you guys had a nice surge in the yield on the liquidity management assets. I know – Ed, you mentioned the duration was about the same as year-ago. But is that just a function of the variable rate stuff you have in there pricing up or anything differently you're doing? And just in the same vein, how quickly you may – do you think you’re going to lever back up in terms of adding more bonds? You talked about bringing more deposits. How does that kind of lay into your capital plans?

I’ll let Dave to handle the investments and I’ll talk about the other.

Yes, so investments and it’s a little bit of few things. But we had a little bit more of mortgage-backed securities out there, which were higher yield. So there's a little bit of mix going on and as many paydowns in the mortgage-backed portfolio, so the amortization was less in the current quarter as well as a slightly higher yields on that. And then a little bit across the board on other categories, but primarily it was a mix with a little bit more heavy towards mortgage backs and less amortization due to slower paydowns, and with rates raise and I would think that those paydowns would stay low and the amortization level would stay low going forward.

On the extension front, we will be through the course of the year, probably take the full-year. A lot will depend on loan volumes to get our loan-to-deposit ratio back and we’re embarking on a number of deposit gathering initiatives as we speak. So probably take the course of the year will be – if the yield curve stays flat, we're not going to be any rush to do it. But we see opportunities there. We know we need to get there and it will keep us from knowing that we have $1 billion cushion in there to grow. In others words, taken from the 93 to 87.5, which is where we ran forever, right in the middle of our desired range. We wanted to stop and go on the marketing. So we will embarking on this throughout the course of the year, and from a capital standpoint, if given where we think or as you’re going to be, we can – our capital ratios went up this quarter, and we would expect them to be able to support capital internally even if we had our normal couple billion dollars with the growth and added some on additionally to get our loan-to-deposit line. So earnings look – as you can – as you will project, looks pretty good. And we think that we will be self-sufficient, notwithstanding any big deals or any real – any big acquisitions or any splurges in abnormalities and growth opportunities that would make us grow faster than we anticipate.

Thanks, and then that's helpful. And just one follow-up Ed, on the life and P&C lending, that the P&C growth – life growth continues to run along kind of the mid-teen type pace really good growth to commercial piece, maybe low single and mid single-digit type growth. There's some evidence or talk out there a little bit more of a hardening market. Can you just talk about the commercial piece as there opportunities to accelerate that? Are you seeing any evidence of pricing going up to where you can kind of get some growth without having to add accounts there, just kind of any color on kind of the pace of growth in the commercial piece?

Yes. No we're hearing some of the same things about some of the reinsurers raising their rates and if that happens, it should work its way down to the primary carriers. We haven't seen that impact dramatically yet, but we're all crossing our fingers and saying a little prayer every night that it does float down because that will increase the outstandings because people continue to borrow and if their premiums are up, there is just going to borrow more and it doesn't cost us any more for example to fund a $30,000 loan and it doesn't fund $23,000, $24,000 loan. So we’re seeing some of that in the marketplace. We haven't seen it way through completely. There was one of the larger premium finance companies that sold. Recently SunTrust sold its unit to another player in the market, the largest independent player in the market. As we say with bank acquisitions, when there's destruction hopefully that that's helpful to other players in the market including us. So we're hopeful and maybe get a little bit of benefit out of that destruction because some agents have exclusives with one premium finance company, some have multiple relationships. So if somebody had two relationships and it happened to be with those two companies that are now one they're going to look for another provider and hopefully we can win that spot. So we're hopeful that that helps us out a little bit on the volume and hopefully [that’s] our market higher. So plus we're out there trying to gather new agents all the time and hire people that can help us bring a new business, so we're optimistic on that front.

Great. Thank you.

Thank you. The next question is from Chris McGratty of KBW. Your line is open.

Hey. Good afternoon, everybody.

Hey, Chris.

David, I just want to make sure I understand the balance sheet strategy. The long-term target of the loan to deposit, over the course year you're saying get it back into the midpoint of 85 to 90 from kind of low 90s, that was point one. Did I hear that right?

Yes.

Okay. And then with respect to the securities portfolio didn't do much during 2017, ended the year around $3.7 billion. What's the message on the dollars of growth in 2018 given the rate outlook?

Well, a normal growth for us is a couple billion dollars notwithstanding acquisition. If we have the same growth as we have this year in 2017 as we have in 2018 and stayed at 97.5, we would have another $1 billion. We need to get it back down to the range we want in terms of the loan to deposit rate. So out of $1 billion, you would – out of the normal $2 billion worth of growth, we would expect 20% of that to be 15% to 20% one of this securities bucket for us to another $1 billion to come in. We think that will take place over time. Again, we're really – a lot of that depends on the rate environment, Chris as I explained, but that would add another $1 billion to it, $1 billion short-term would take you down to closer to like three years, 2.5 years duration. Take it up to six you can kind of figure out what the split would be on that. So anywhere between will grow, I think if rates didn’t move and we grew normally you'd add $200 million to $300 million to the securities from the liquidity management portfolio. If things go according to plan, you would add $1.3 billion. So that makes sense?

There could be more balance sheet leverage given the outlook. Okay, great. Thank you for that. And then maybe on M&A, you are seeing a little more competition from some of the smaller banks in Chicago doing deals recently. I'm wondering how the conversations are going to post taxes, whether expectations have been lifted dramatically, which might prevent something or you felt kind of optimistic about getting a small deal done this year. Thanks.

Well, we're always optimistic by nature, but we're always very disciplined. I have not seen any because of the tax – because of the tax change. I have not seen any change in the seller expectations, which were high to begin with. So just about the same, but we just have to be diligent and do deals that are strategic for us. We might pay up a little bit strategic deal if somebody holds our community bank, positioning in a market somewhere and the balance sheet is clean, but there's still some hangovers out there from the great recession, guys, just get their heads up out of water. We believe that we – our culture, how we do business is an attribute for us and talking to these guys because they just fit better with us. So I think that chances are you may see something, but don’t hold into it.

Got it. Thank you very much.

Thank you. The next question is from Kevin Reevey of D.A. Davidson. Your line is open.

Good afternoon, gentlemen.

Kevin, I have a bone to pick with you.

We’ll chat offline.

Well, no, no, in your little comment you said that we fumbled in the fourth quarter. I want to tell you that on further review, it was determined. We recovered the fumble. It was a touchdown, just so you know.

Okay, that sounds good to me. So my questions related to be the uptick in non-performing loans, you'd mentioned, it was related to one relationship. It was a shopping center loan?

Yes.

Do you have a lot of those types of loans in your portfolio specifically with retailers that are having financial difficulties?

No, not that many. I don't have the specifics in front of me. But this was one we worked through in the past. We got situated with a new owner, and target moved out, and outs that they were moving out. It's still current, so we know it’s going to have problems. We're going to move through it. So we move at least things rather rapidly. And we will work to get through that, but we don't see any change in our risk ratings right now. We haven't seen any change really material change in our new deals we're doing with critical exceptions to loan policy coming through. We still maintain that pristine approach and this one just kind of popped up from the old days and oldie, but goodie. But we don't see any trends there and we don't have a lot of loans like that. This is definitely a hangover.

And I’ll just add to that Kevin. We do a pretty deep dive on our retail portfolio because everybody in the country is probably a little concerned about where retail is going. And as I said, we don't have much of that. I think our average loan in the retail portfolio is about $900,000 to $1 million. So it's a fairly granular smaller amount of retail lending type of business that we do.

And then on the new branch opening, should we expect to see more branch openings, and if so kind of how we prioritizing exactly location?

Yes, you will see new branch openings this year, probably five or six maybe are on the agenda. They fill out the – we’re not moving to markets outside of our designated market, which is two hours from here. But we are filling in our – we will continue to filling our footprint. We are lucky to able to do it through acquisition during the downturn, but that the point is that reached where it’s better to do organically. They’re not through acquisition for the most part. So we've proven in the past that we were able to go organically and get good market share relatively quickly. We expect that to continue in the future. But our goal is still to be Chicago and Milwaukee’s banks and as such we do need additional geography to cover. But that's all built into our expectations and built into our expectation of 1.5% net overhead ratio or better. So we don't see lots of huge costs coming through as a result of this. We believe will grow through it and be able to absorb that.

Great, thank you.

Thank you. The next question is from David Long of Raymond James. Your line is open.

Yep. I was on mute. Sorry about that guys. On that same note, talking about organic growth and thinking about the commercial banking market here in Chicago. And then two, Milwaukee, my question is what is the pipeline like for veteran bankers? How strong is your appetite to bring in these bankers and then what’s the character that you guys can show them to join Wintrust? Thanks.

We always look for good bankers, and good bankers across the Board, not just lenders, but good solid bankers. Talent is always number one for in terms of the recipe for success. There's no – there's been some disruption in the market, but we haven't seen any onslaught of resumes coming across our desks. We like to deal with people who are – people who have worked with in the past that's always the best reference you can get is if you work with somebody, what they're like. They fit in culturally. So what security we offer? They get to work with me and Dave. I mean what more do you need. But seriously we have a lot of good momentum out here. The approach we take to relationship banking, old school banking is not one that's fostered by our larger back competitors certainly by some of the mid-tier market ones they still do it, but it's something that a lot of people want to get back to. The entrepreneurial spirit here at Wintrust, the growth at Wintrust. And frankly our people, how we treat our people, it is important to us. And so we think we're good place to work, and obviously other people do too, but we'll see, but there's not been a real deluge of resumes flying around here. The market is pretty stable right now.

Great, appreciate the color. Thank guys.

Thank you.

Thank you. [Operator Instructions] And the next question is from Michael Young of SunTrust. Your line is open.

Hey, good afternoon.

Hey, Michael.

I wanted to ask if you could provide maybe a little color on any second derivative impacts that you may expect as a result of the new tax reform particularly in the national business lines?

The one that comes to mind the people ask about is our life insurance premiums finance business, but the impact of that was really seen last year as people kind of set on their hands wondering whether the tax filed was going to change, so we actually don't think there will be a major shift either way and will be similar to 2017 and we still expect to see good growth. I don't see anything else real significant out there that would impact us too much.

Yes. It would be interesting to see what happens with the housing market. We raised our minimum wage. Most of the banks in town did. A lot of other institutions are raising their minimum wage. We haven't had wage inflation in a large time and I believe that we're going to see some of that that's going to power rates going up. I think we might actually get back to kind of like not maybe as bad as the 70s, but people are going to have a lot more borrowing – buying power. Take that with the fact that family formation has moved from 26 to 32 years old. So we've kind of gone through six, seven years of people not investing in houses and now they are. I think surprisingly, I think even though rates will be up. They're not going to be up to the 12% or 13% they were, when I bought my first house and I actually think that the – what they did with some – not getting rid of total interest expense. Keeping that in as a deduction, I think we've got demographics. We've got economics and keep mortgages pretty strong for the next year, but that's my opinion and I got to be an economics. So we're ready for either way.

Yes, I do think that the tax cut will help businesses, which I think will spur some additional leading out there, but we'll see what happens there. I think it's good for the economy and I think it should be good for lending. So – but other than that, I don’t see anything dramatic on positive or negative on any particular asset class. Home equity will probably fall off. It’s on a big piece of our portfolio, given the tax law changes related to that. But that’s not – it’s a very small piece of our portfolio.

Things are good now, but you always – your worry about the black swan that we already saw, in all the probability of that something like that happening that could stop the economy a little bit. The concept of a midterm election where some of this stuff could be rolled back, two years or four years is like a dog's age in Washington. They get at least a little bit of a break here is good, but we continue to stick to our knitting and take advantage of what the markets giving us, but be prepared for the market may takeaway.

Thanks for that color. Just as a follow-up, I wanted to touch on the consulting expenses a little more. I mean just what inning do you feel like we're in there for Wintrust and in terms of magnitude is this kind of a peak or do you expect it to continue to build a little higher from here?

I think it's kind of a peak. We still will have consulting expenses and especially in the digital side and the cyber side. I’m not smart enough to turn my computer on, much less understand this stuff. But I think last year was a big number for consulting fees for us. So I think last year was a peak and there will be something there, but they’ve not as much as it was previously. Dave, do you agree?

No, I think maybe the first quarter will stay slightly elevated maybe down here were slightly elevated and probably tail off the remainder of the year, but it’s not going to completely go away.

Thanks. End of Q&A

Thank you. There are no further questions in the queue. I’d like to turn the call back over to Ed Wehmer for closing remarks.

Thanks everybody. You can call Dave or I if you have additional questions. Look forward to talking to you in three months and Happy New Year to everybody. So thanks so much.

Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good day everyone.