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Edited Transcript of WTFC earnings conference call or presentation 19-Apr-17 7:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Wintrust Financial Corp Earnings Call

LAKE FOREST Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Wintrust Financial Corp earnings conference call or presentation Wednesday, April 19, 2017 at 7:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Alan Dykstra

Wintrust Financial Corporation - COO and Senior EVP

* David L. Stoehr

Wintrust Financial Corporation - CFO and EVP

* Edward Joseph Wehmer

Wintrust Financial Corporation - CEO, President and Director

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Conference Call Participants

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* Bradley Jason Milsaps

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Christopher McGratty

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* David Joseph Long

Raymond James & Associates, Inc., Research Division - Senior Analyst

* Jon G. Arfstrom

RBC Capital Markets, LLC, Research Division - Analyst

* Kevin Kennedy Reevey

D.A. Davidson & Co., Research Division - VP and Senior Research Analyst

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Nathan James Race

Piper Jaffray Companies, Research Division - Research Analyst

* Terence James McEvoy

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Welcome to Wintrust Financial Corporation's 2017 First Quarter Earnings Conference Call. Following a review of results by Edward Wehmer, Chief Executive Officer and President; and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session.

During the course of today's call, Wintrust management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in 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's earnings press release and the company's most recent Form 10-K and subsequent filings on file with the SEC. As a reminder, this conference is being recorded.

I would like to turn the call over to Mr. Ed Wehmer. Sir, you may begin.

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [2]

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Thanks very much. Welcome, everybody, and good afternoon. Welcome to our first quarter earnings call. With me as always are Mr. Dykstra, our Chief Operating Officer; Mr. Stoehr, our Chief Financial Officer; and Kate Boege, our General Counsel today, yes.

We will conduct the call based on our usual format. I'll give some general comments on the quarter. Dave will get into some detail and other income and other expense, then back to me for some summary comments and thoughts about the future. And as always, we'll have time for questions.

First quarter results got us off to an excellent start for 2017. Net income of $58.4 million was 19% over the prior year, 7% over the fourth quarter of last year. And $1 per share for the quarter was 11% over the prior year and 6% over the fourth quarter. Earnings were basically driven by a couple of factors. One is the margin increase that are fully taxable, [ giving ] margin up 16 basis points for the fourth quarter to 3.39%. It's a function of a 13-basis-point increase in our earning asset portfolio from the -- really, the Fed rate increases and the like; 6 basis points from -- mixed into higher earning assets of our liquidity and higher loan to deposit ratios, 6 basis points for that; and 3 basis point (inaudible) contribution by less accretion income.

On the credit side of things, last quarter, I lied to you all. Sorry about that. I said credit couldn't get any better, and lo and behold, it did. Net charge-offs fell to $1.6 million or 3 basis points from $2.8 million or 6 basis points, and our fourth quarter provision was -- oh, I'm sorry, and $3.5 million or 8 basis points a year ago. Our first quarter was $5.3 million compared to $7.4 million in the fourth quarter. NPAs fell both in dollar and in percentages, obviously. There are $119 million of total NPAs, down from $128 million or 0.46% compared to 0.50%, respectively. Reserve was constant at 0.64%. The coverage ratio rose to 159% from 140%.

The other income side, Dave obviously will go into some good specific detail on this, but some general comments. As expected the mortgage revenue was soft in the first quarter. Seasonality plus rate increases result in a very slow January and February, pretty much nonexistent. However, we noted a pickup in March and application volumes have increased, boding well for the second quarter and beyond. This is nothing that we -- was not expected by us. The reduction in mortgage volume had some interesting effects on our balance sheet, which I'll talk about in a couple of minutes when I get to the balance sheet analysis.

Wealth management revenues were up $650,000, that -- to $20.15 million, up 10% from a year ago, 12% from the fourth quarter. Fees from covered calls were down 50% to $760,000, and that's to be expected. That's one of our internal hedges that we use in the falling rate environment and the rising rate environment. We keep our balance sheet very positively gapped so that you would not expect us to be recording any sort of large numbers in that area as long as rates are going up. Security gains were nonexistent this quarter. They were $1.6 million in the fourth quarter, so they had no help there. And other income, other expense was in line, and Dave will discuss that.

In the other expense side, again, Dave will take you through these, but I think you'll find that they were in good order. Having the mortgage business' softness in the balance sheet activities that I will discuss in a second raised our net overhead ratio to 1.60%, obviously higher than the 1.50% goal that we have internally. With the prospects for improved mortgage volumes throughout the year and continued growth, we expect this ratio to be better than the goal going forward and obviously better for the entire year.

You all noted those other -- of our compatriots have experienced, we got a $3.4 million tax benefit related to the adoption of the new accounting rules for share-based compensation. These benefits will continue to occur for us or should continue, but they will fluctuate just based upon quarters and when this type of compensation vests going forward. It drove our effective tax rate to 33.67% from closer to 39.6%. And the balance sheet, you can see, was really kind of an interesting quarter for us, one we haven't experienced in a long time.

Total assets were up around $112 million to -- I'm rounding some of these, to $25,780,000,000. But on average, assets were down $404 million compared to the fourth quarter. Deposits were up $72 million to $21,730,000,000. But on average, we're down $216 million, of which brokered deposits were down $171 million. Again, we only rely on brokered CDs to fund mortgages and to fill our gap situations. Core loans, not including mortgage-related loans, mortgage-related loans are mortgages held for sale and mortgage warehouse lending to third parties plus covered loans, there are not many covered loans where (inaudible), we're up $270 million quarter-versus-quarter but at $539 million on an average basis first quarter versus fourth quarter.

Federal Home Loan Bank advances were up $73 million at the end of the quarter but down on an average basis, $207 million. And mortgage-related loans were down $180 million on period end balances, down $327 million on a quarterly basis. What we do to fund mortgage-related assets, again, mortgages held for sale and mortgage warehouse loans to third parties, is we fund that with short-term brokered CDs and with third party -- or with Federal Home Loan Bank overnight advances. This allows us to accordion the balance sheet, not sit on a lot of extra liquidity these days. So it's obvious that when mortgages fell off for the first 2 quarters, that we had those declines in both Federal Home Loan Bank's advances of $207 million on average and $171 million of brokered that pretty much offset that. But we -- grew back at the end of the year showing strong volumes and mortgages or the pickup of mortgages and our own internal growth.

Our loans grew for the most part towards -- we're back-end loaded. Again, January and February were very interesting months, not a lot going on, believe it or not. I think that some of it was a hangover from the large fourth quarter we had, where we booked a heck of a lot of loans in the fourth quarter. But I think the -- we had good loan growth towards the end, and we see that continuing into the first quarter already. Our pipelines are very strong right now, as we indicated in the press release. They're consistently strong. So as it relates to second quarter prospects period-end loans, at $331 million, we're $228 million higher than the first quarter average. So that gives us a head start for the second quarter, that plus our good loan pipeline, which again is $1.5 billion. And this is -- these are core loans, it doesn't include our niche loans. These are our core commercial real estate, commercial loans and the like. And again, $1.5 billion gross, $934 million on a probability-based -- probability close-based calculation.

So and our other pipelines are strong, too. In our premium finance business, our leasing business and our major niche businesses are all very strong also. So this all bodes well rolling into the second quarter, especially considering that we see mortgage apps up and that business coming back in line.

With that, I'll turn it over to Dave to discuss other income and other expense.

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [3]

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Thanks, Ed.

As normal, I'll briefly walk through the major components of the noninterest income and noninterest expense sections. Turning first to the noninterest income section. Our wealth management revenue totaled $20.1 million for the first quarter of 2017, which was up from the $19.5 million recorded in the prior quarter. And was also up nicely from the $18.3 million recorded in the year ago quarter. The trust and asset management component of this revenue category increased to $13.9 million in the first quarter from $13.1 million in the prior quarter, whereas the brokerage revenue component declined slightly to $6.2 million compared to $6.4 million in the fourth quarter of 2016. Overall, the first quarter of 2017 represented another record high quarter for our wealth management fee revenue.

Mortgage banking revenue decreased approximately 38% or $13.6 million to $21.9 million in the first quarter of 2017 from $35.5 million recorded in the prior quarter, but was slightly higher than the $21.7 million recorded in the first quarter of last year. Now the decrease in this category's revenue from the fourth quarter of last year was due to lower origination volumes as a result of the typical seasonality in the first quarter and a higher rate environment.

Now the first quarter was also partially impacted by a $400,000 negative fair value adjustment related to our mortgage servicing rights compared to $1.2 million positive fair value adjustment in the prior quarter. The company originated and sold approximately $722 million of mortgage loans in the first quarter compared to $1.2 million of originations in the prior quarter and $737 million of mortgage loans originated in the first quarter of last year.

As it relates to the mix of business, our loan volume related to purchase home activity was approximately 66% compared to 52% in the prior quarter. As Ed mentioned, given our existing pipelines and the interest rate environment and the pickup in spring home buying activity, we expect originations to increase in the second quarter of 2017, and we continue to look for opportunities to further enhance our mortgage banking business both organically and through acquisitions.

Fees from the covered call options were $759,000 in the first quarter compared to $1.5 million in the previous quarter and $1.7 million in the first quarter of last year. Revenue from selling covered call options tend to decline in periods of rising rates, however we would expect improvement, and the net interest income to offset such declines, as Ed indicated in his comments.

The revenue in the first quarter of 2017 for operating leases totaled $5.8 million compared to $5.2 million in the prior quarter, increasing approximately 12% during the quarter. The increase in this revenue item compared to the prior quarters primarily related to growth in the operating lease portfolio during the first quarter to $155.2 million from $129.4 million at year-end 2016. Again, these amounts relate to operating leases only as the capital leases are carried in the loan section of the balance sheet.

In regards to gains and losses on investment, securities and trading gains and losses, the first quarter had a slight combined loss of approximately $375,000, whereas the prior quarter had combined net gains of $2.6 million. So the combined change from the prior quarter is a net reduction in our revenue associated with those 2 line items of approximately $3 million.

Other noninterest income totaled $12.2 million in the first quarter of 2017, down from $13 million in the fourth quarter of last year. And the primary reason for the decrease in this category revenue is related to $1.4 million less the swap fees, offset by the fact that the prior quarter had a $717,000 loss in the extinguishment of some of our Federal Home Loan Bank advances.

Turning to noninterest expenses. Total noninterest expenses were $168.1 million in the first quarter, decreasing approximately $12.3 million or 7% compared to the $180.4 million recorded in the prior quarters. And I'll walk through the more significant fluctuations relative to the fourth quarter for the individual categories.

Salaries and employee benefits expense decreased approximately $5.4 million in the first quarter compared to the fourth quarter of 2016. The base salary component was up approximately $1.9 million or 3.6% in the first quarter compared to the prior quarter. The first quarter included the impact of annual base salary increases that generally took effect on February 1, and those base salary increases were generally in the 3% range. So we had 2 of the 3 months of the quarter at those higher base salary levels.

Additionally, salary deferrals related to loan origination cost, which reduced salary expense, were approximately $1.5 million less in the first quarter of 2017 than the prior quarter due to the slightly lower loan origination volumes this quarter than the fourth quarter of last year.

Employee benefits expense was up approximately $1.8 million in the current quarter compared to the prior quarter. Significantly impacting this category was payroll tax expense, which was approximately $1.4 million higher. Payroll taxes tend to be higher in the first quarter of each year, and I should also note that in the fourth quarter of 2016, the employee benefit category had a $492,000 pension cost adjustment that did not similarly impact the current quarter.

Our commissions and incentive compensation expense decreased approximately $9.1 million to $26.6 million from $35.7 million in the prior quarter. The company experienced a decline in commission expense related to the lower mortgage revenue along with decline in accrued incentive compensation from the higher fourth quarter of 2016 levels.

As I discussed in regard to the operating leases and the noninterest income section, the company experienced a corresponding increase in depreciation expense related to those operating leases of approximately $417,000 due to the growth in that portfolio. Again, we'd expect this category of expenses to grow at a rate similar to the revenue side as the portfolio of operating leases continues to expand.

Occupancy expenses decreased by $1.2 million during the quarter compared to the fourth quarter of last year. This was due primarily to a slightly lower rent expense on leased properties as well as lower maintenance and repair cost, including less snow removal charges during the quarter since Chicago had really no snow in January and February.

Marketing expenses declined by approximately $1.5 million from the fourth quarter of 2016 to $5.15 million. And as we discussed on previous calls, the first quarter of the year tends to be our lowest quarter of marketing spending. We'd expect this category of expenses to increase in the next couple of quarters to levels similar to or slightly higher than the midyear of 2016 amounts as our corporate sponsorships tend to be higher in the second and the third quarters of the fiscal year.

Professional fees decreased to $4.7 million in the first quarter compared to $5.4 million in the prior quarter. Professional fees can fluctuate on a quarterly basis based on the level of legal services related to acquisitions, litigation, problem loan workout activity as well as the use of any consulting services. With that being said, total professional fees were within the range experienced over the past 5 quarters, and were at a level that we think is reasonably expected.

The miscellaneous line item on the overall noninterest expense category declined by approximately $2.2 million in the first quarter to $14.8 million. Now the primary reasons for the lower expense level was due to a lesser amount of travel and entertainment expenses and a decline in loan-related expenses due to the lower level of mortgage loan originations and other loan originations. We would anticipate this expense category would increase in the second quarter with anticipated increases in loans and seasonally higher travel and entertainment expenses.

If you combine all the other expense categories other than the ones I just discussed, they were down on an aggregate basis by approximately $1.6 million in the first quarter compared to the fourth quarter of last year with really no significant items that are particularly noteworthy on an individual basis.

So in summary, the first quarter generally represented a solid quarter on expense control. As Ed mentioned, our net overhead ratio did end up being above our goal of 1.5%. However, that was mostly due to a slightly lower level of total average assets for the quarter and the significant decline in the mortgage banking revenue and related expenses. Lower mortgage origination business is detrimental to the net overhead ratio but tends to help the efficiency ratio a bit. So we'll continue to work hard to effectively lever our expense base and update you on our quarterly calls.

So with that, I will turn it back over to Ed.

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [4]

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Thank you, Dave.

So in summary, all in all, it's a pretty strong start to the year for us. We're well positioned for not just the second quarter, but really, for the rest of the year. The 2 rate increases, the one in December and the one in March that have occurred, are working their way through our income statement, which will continue to show positive results. We -- additional positive results. Any additional raises will also -- interest rate raises will also -- should also materially affect our margin. Loan pipelines are strong. We start the quarter $228 million ahead of the game, given the fact I talked about earlier, that ending loans were that much higher than the average loans for the quarter. We also like the fact that it's becoming a material number, but one more day in the quarter is very helpful to us. It increases our net interest income Mr. Stoehr?

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David L. Stoehr, Wintrust Financial Corporation - CFO and EVP [5]

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$2.5 million.

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [6]

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$2.5 million. That's nothing to sneeze at.

Mortgage business appears to be returning to good levels, and -- if March results are any indication. The application volumes are continuing upward, and we expect to have a good mortgage quarter in the second and third quarters. Organic growth, that is being emphasized. All of our sector pipelines for acquisitions are full, and they're very active. But we see good organic growth both on the deposit side and the loan side going forward. Credit is good. We see no -- nothing that would make us think otherwise right now. We continue to cull the portfolio for any cracks. So I had mentioned on previous calls, it's easy to push a piece of business out right now. There'll be 5 other banks with term sheets there within a day. So we're able to really dig deep and make sure that we can maintain the pristine nature of our loan portfolio, the one that you have become accustomed to seeing as it relates to Wintrust.

So we continue on our whole approach here. And that's, again, we guard shareholders' equity very carefully. Dilution is a 4-letter word around here. Our goal is to put up double-digit earnings increases to continue to grow smartly, grow without diluting our shareholders. It takes a lot to make a year's worth of earnings, and I don't want to give it up out the door to do a deal. We would -- we have a number of initiatives organically that will be starting. They are planned to be started later in the year that the cost of those will -- will run through the balance sheet -- I'm sorry, through the income statement, but it's better than buying a line of business at 2.5x book and taking it out the back door.

So it's more of the same for us. We haven't really changed what our goals or directions are, but we're off to a very good start for 2017. And we expect, God willing, that, that will continue, and you can be sure there are best efforts in that regards. So onto questions, if we could, please.

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Questions and Answers

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Operator [1]

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

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Jon G. Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [2]

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Couple of questions I wanted to ask on mortgage. You mentioned January and February were slow, and March was much better. How different was it? Give us an idea of maybe some of the production numbers in the first 2 months versus March.

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [3]

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Yes. Well, maybe I can talk quarterly. The full first quarter, as you know, was about $722 million in production. My guess is it will be awfully close to that in the first 2 months of the second quarter, so my guess is that we should top $1 billion of production in the second quarter. We obviously got to get the pull-throughs. So based on applications, that would be my guess.

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [4]

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Jon, the issue with that is we can't -- you know it's coming back. You can't accordion the expenses. So the volume that comes in then, a lot of it is just -- that incremental volume that's -- the over the $700 million that Dave talked about will -- that'll hopefully just fall to the bottom line.

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Jon G. Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [5]

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Okay. Yes, that's what I was getting at in terms of what you're thinking for the second quarter, so that helps. And then on the loan yields, they were up about 4 basis points sequentially, and I know there's other things happening there. But you provide that table about loans that reprice in 1 year or less, and I'm just curious if you had to guess how much of that December rate increase do you think has flowed through into loan yields. And is there more to come just from December alone?

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [6]

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Oh, yes. I think the LIBOR rates, the life insurance portfolio is 1/12. The -- and those -- that $3.5 billion, plus or minus, replaces 1/12 every -- so that's got to move through the system. The premium -- the commercial premium finance business, that's every 9 to 10 months that reprices. That's got to flow through the system. So we expect continued improvement on the margin. Remember too, we had 3 basis point headwinds on the accretion falling off. We're not one of those banks that chases -- that has to take another shot of dope to keep our accretion up, and so we let it run off. And it is what it is, we have an opportunity to pick some road. It'll be what it'll be, but we're not chasing that. That's a fool's errand.

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Jon G. Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [7]

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Yes. Okay. And just overall margin, it feels like you can maybe shoot to the higher end of the range of expectations. The beach ball is rising, I guess to use a very old analogy. But how do you feel about just overall margin potential for the company, just from the 2 hikes we've had?

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [8]

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Well, I think that the -- to put it in perspective, our model says to every quarter point, the first one started around $23 million pretax on an annual basis, and then it drops about $1 million, $1.5 million on the second one. And then it drops like that as you go forward because of the way we -- how long it takes to get it fully absorbed, plus lagging the deposit cost going forward. So it's down about $23 million, $23.5 million, drop $1.5 million, drop $1.5 million. You haven't seen a lot of that come through yet. Also, I will tell you that we haven't seen a lot of pressure on the rates to come up on the deposit side. I think that, that's changing a little bit, and that -- those numbers I just gave you include those rates. So we've actually had a little bit more benefit than you would anticipate in -- on the first 2 rises because we haven't really gone to our model numbers, our model rate numbers yet. But we're seeing a little bit more pressure there and -- but just we're talking a couple basis points here and there. So again, I think we're ahead of the game right now. That $23.5 million, that $23 million, it should come through on the first 2 rates yield increases because we have not raised deposits as fast as we have in our plan. However, that won't be the case going forward. I believe that there will be pressure, and there is some pressure on raising deposits 5 or 6 basis points. So we'll be back on plan, but I think we're a little bit ahead of plan right now.

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Operator [9]

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And our next question comes from David Long from Raymond James.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [10]

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Just to follow up on Jon's question regarding the net interest margin. I think you said in the quarter that the December rate hike added about 8 basis points when you look at it from a basis point perspective. Looking out to the second quarter, will the March hike have a similar impact in the first quarter afterwards? Or will it be more so or less so, do you think?

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [11]

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Well, I think you can assume on a -- on our balance sheet, that we'd have about the same effect. The first one was $23.5 million, a little bit ahead of plan on that. Second one should be relatively the same. So -- but we also expect that first one to continue -- that first hike to continue to push through the income statement, too. You see what I mean? That's going to take a year to fully absorb -- it'll take a year to fully absorb. So there might be a fair assessment what you laid out there. Not quite sure. I don't have it in front of me, but I think we expect the margin to continue to grow based on these rate increases and how we position the balance sheet.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [12]

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Okay. And then the second question I had regarding the American Homestead acquisition that closed in the first quarter. You said the volume was about $722 million in total. Well, how much did they contribute in the first quarter?

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [13]

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I don't -- David, I don't have the number. But their production last year in total was $55 million, so it's not a significant piece of the mortgage banking business. It would be a small contribution, but one that we like because it helps us diversify geographically and product mix-wise, and helps us to supplement our existing business out in the Rocky Mountain region. So we like it, but it's not a significant contributor on the overall mortgage banking business.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [14]

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Got it. And then last thing regarding the tax rate, obviously, the change with the benefit from the stock compensation. And you guys did -- make the comment that that would be somewhat volatile on a quarter-to-quarter basis, but you had been running at about 38.7%, 38.8% on a fully tax-equivalent basis. Do you have any sense of what that tax rate should look like over the course of a year?

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [15]

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Well, without those share-based benefits, you're right. It's probably somewhere in the 37.5% to 38% effective rate. Now the first quarter, as we said in the press release, is higher because a lot of our LTIP share-based awards vest on the first quarter so...

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [16]

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LTIP being long-term incentive.

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [17]

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Yes, our long-term incentive plan, and there was a fair number of options that were exercised. Maybe because with the quick and high increase in the stock price, there were some more options that were exercised. So it's really a function of when people exercise their options, when share-based plans vest and what the stock price is. And so we would expect the first quarter to be outsized relative to the other quarters, and I just -- I can't tell you when the employees are going to exercise their options and what the stock price is. So it's hard for me to put an exact number on there. It'll be a little bit volatile, but it should be much less of an impact in the second, third and fourth quarters.

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Operator [18]

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And our next question comes from Michael Young from SunTrust.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - Associate [19]

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Just wanted to dig a little deeper. You, Ed, said that the M&A pipelines were looking pretty strong across the board on fee income and whole bank side. Could you just maybe elaborate a little more on what you're seeing and maybe the magnitude of what you're looking at there?

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [20]

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Well, if you look at all of our lines of business, I mean, we've -- historically, we've been interested in the mortgage, expanding our mortgage banking presence. We think that people are going to need mortgages, and people are seeing kind of the end of the rainbow there and are being more interested in selling. We'd like to increase -- to expand our national footprint there, so we're active in that regard. We're active on the wealth management side, continuing to look for opportunities there both on the trust and the asset management and the brokerage side, so we're seeing -- we always see opportunities there. Now on the banking side, you are -- I think that pipeline is very strong. We're still interested in the smaller banks. We're not really -- go back to my statement on tangible book value. Our pricing has not moved away on some of these smaller banks yet. Our pricing certainly has helped us in that regard also, so we are seeing activity across the board from all areas of our business and our specialty business. We're -- the specialty asset businesses seem to go at very high multiples compared to book value, and we see more lift-out opportunities there. Again, if your alternative is to buy something at 2.5 to 3x book to get into an asset class or to bring a team in that might cost you -- you might lose $1 million or $1.5 million the first year but make money or say in the middle of your second year going forward, that's a lot better deal for us to do that for our shareholders who build it organically as opposed to, again, create a lot of dilution on it go out the back door. So we are active in all areas of our business right now, and I think if you -- I think -- I would probably, if I had to put a barometer to it, would say, the activity is up probably around 25% across the board in terms of opportunities in all assets and areas of our business from the end of last year. That's a -- that's just kind of a thumb in the wind sort of thing.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - Associate [21]

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That's great color, Ed. And then maybe thinking about the back half of the year or maybe getting into early '18 with the kind of organic growth that you're seeing, positive signs there and then potential first of some M&A. How are you feeling about capital? And where do you think you might have to be active on that space?

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [22]

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Well, it's an interesting question. The first quarter, we're having a little bit lower growth rates and good earnings. Actually, it was kind of nice. We actually created capital that quarter, not -- without our usual growth there. So as always, we will maintain our capital ratios. We will -- if we have a deal or we have something we have to do, we will -- we see an opportunity that will require capital, we will go get it. Or if our organic growth takes off, we'll go get it. But right now, just based on what we think and what we know, what we don't know about deals, we don't put them in. We're pretty self-sufficient right now. You can see our capital ratio has propped up. And our cash balances, which we always look at very closely, propped up also at the holding company. So we actually -- we're in better shape than we were in the fourth quarter as it relates to having to go out and get any, but I think we're pretty self-sufficient notwithstanding abnormal or extraordinary organic growth or deals.

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Operator [23]

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And our next question comes from Chris McGratty from KBW.

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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [24]

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Dave or Ed, the balance sheet, the $600 million decline in the liquidity portfolio, how should we be thinking about the size going forward? Said another way, is loan growth going to match earning asset growth? Or is there any more kind of remixing that you plan to have over the balance of the year?

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [25]

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Again, we try to run at 85% to 90% loan to deposits. We ran higher than that this quarter because of -- just of the dynamics of the quarter itself, which was helpful, but we were going to stand at 85% to 90%. We -- and the rest of that is in our liquidity portfolio, which we've normally barbelled. At the end of last year, our barbell wasn't weighted properly. It probably was short, more short than long. And as we stated, we will continue to ladder out as rates go up to even that out, even out the balance between short term and long term, maybe even push it a little bit more long term depending on how rates -- how high rates go. So you have to look at it in that perspective. It was kind of a goofy quarter on the balance sheet side. So going forward, I think that you will see us continue to slowly extend the portfolio back to -- again, last quarter, I talked about the duration of the portfolio, and we had -- we raised it a little bit in the fourth quarter. We raised it a little bit in the first quarter. We'll continue to do that to possibly -- depending on what we see going on in the world. I'm hearing more and more talks about hyperinflation coming in or something. That would be fun, but that may be on most of the goofy radio stations. But we will probably start -- we will continue that plan to ladder out as the year goes on.

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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [26]

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Okay. So laddering it out and probably a little bit of growth in the dollars of the portfolio, too...

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [27]

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Yes. We grow, right? The 20% of whatever, 15% of whatever we put in will grow.

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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [28]

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That's helpful. Just a couple of housekeeping. Did you -- I think, Dave, you mentioned an MSR adjustment. Could you repeat the number in the quarter?

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [29]

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Yes, it was a -- the valuation adjustment was a $400,000 negative adjustment. The MSR asset grew more than that because we retained more servicing rights and capitalized those servicing rights. But from what went through the income statement from a valuation perspective, it was a relatively small adjustment, $400,000 negative.

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [30]

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What we're doing now, Chris, is in footprint loans, we're actually retaining servicing. We're tired of handing it off to our competitors. So in doing that, when we book those loans, we're adding to that asset class. But the actual overall asset class evaluation adjustment went down, so you have to differentiate between the 2.

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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [31]

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Got it. Got it. Okay. And then the conversion announcement you guys announced early in the week, can you just remind us...

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [32]

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Dave is becoming a Lutheran.

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [33]

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Welcome to my world, Chris.

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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [34]

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I don't know how to follow that up.

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [35]

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Don't try.

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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [36]

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In terms of the P&L adjustments, the preferred dividend line and the share count, can you just remind us the impact, if any?

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [37]

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Yes. So the last dividend was paid as of Monday, and so the 5% dividend on those preferred dollars will cease. And then the shares will convert to common, which is already in our common stock equivalent calculation, and so you'll pay out at the common dividend rate now versus the 5% preferred dividend rate. So the shares will convert from common shares equivalent to actual common shares outstanding.

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Christopher McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [38]

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But the $56.4 million (sic) [ $58.4 million ] diluted is -- that's still a good number?

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [39]

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That's still a good number, yes.

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Operator [40]

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

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [41]

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Ed, you guys have addressed most everything, but I just wanted to follow up on some comments you made at the end of your prepared remarks about thinking about maybe some bigger initiatives or some initiatives in the back half of the year. Just kind of curious, maybe on order of magnitude, kind of what you're thinking about there. You guys have done a great job driving a net overhead ratio lower in terms of managing expenses well over the last 5 or 6 quarters. Just maybe, if I'm thinking about it incorrectly, maybe you take one step back in terms of expense management in order to take maybe 2 steps forward next year with some new revenue initiatives. Or am I reading too much into that?

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [42]

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Well, I think you've got it partially right, yes. Again, we would rather do that and take our dilution to the income statement than take it through -- giving up a lot out of the back door. So -- but that being said, I did couch it all saying, we will be -- we should be ahead of our 1.50% net overhead ratio goals for the year. So a lot of these initiatives we're taking will cost some money, but they're not going to be -- I don't believe material enough to make us blow through and put up big numbers. So really, that would make a -- we did a deal that was 100% cost out deal, like we did a couple -- last year. It was last year? Last year.

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [43]

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'15.

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [44]

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'15, 2 years, like we did 2 years ago. We -- that could blow us up a little bit. But in terms of organically, no, I don't think it -- any of them will be material. I made that comment more to say we continue to look at other opportunities to stay diversified, but couch it by the fact, we expected an overhead ratio to be below our peer -- our targeted goal for the goal going forward and for the year.

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Operator [45]

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

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Nathan James Race, Piper Jaffray Companies, Research Division - Research Analyst [46]

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Just going back to your comments about deposit pricing and environment that we sit in, in Chicago land area. Obviously, core deposits growth was a little slower this quarter, and it doesn't look like you guys changed your pricing much. Just curious what the outlook for deposit growth (inaudible) kind of the -- an update on the competitive environment you guys are seeing.

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [47]

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Well, we are seeing -- again, we are ahead of our own model in terms of where our pricing is, where our pricing should be. We haven't had to move just based on the asset -- just the fluctuations took place in the first quarter. We haven't had to do much. Going forward, however, we are seeing some pressure, and I think we'll have to go up to bring rates up a bit. But then we'll only bring it up to the levels that were in our plan. Our plan resulted in that $23 million, plus or minus, increase per -- annual increase per a .25 point rise at the Fed. So you're talking 6 -- 5, 6 basis points over time that will come in right now on a blended basis. So yes, I think price -- it is getting a little bit more competitive out here, and everything will depend on our asset growth, which seems to be pretty good. We are -- we've always been very good on organic growth, and we're rekindling a lot of those ideas again and going out and getting it in anticipation of some really good loan growth, but we shall see. But I think that you're talking. what do you think, 5 or 6 basis points?

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [48]

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Close enough for government worth, I guess.

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Nathan James Race, Piper Jaffray Companies, Research Division - Research Analyst [49]

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Got it. And then just kind of thinking about the growth within the life insurance peer finance portfolio, obviously, it's been a nice growth driver over the last several years. And I appreciate the ad disclosures in terms of the breakout between variable and fix within that book. Just curious kind of what the growth outlook for that portfolio looks like going forward, particularly as we see the Fed continue to tighten. In other words, how elastic is that book to additional rate hikes?

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David L. Stoehr, Wintrust Financial Corporation - CFO and EVP [50]

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Well, it's -- the majority of the book is based on 1 year LIBOR, and we're obviously not -- have not seen a flight yet out of there.

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [51]

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That business on the life side, we provide a very specific value-add to the providers who funnel that business to us. And you're not seeing the price wars yet there. It is a very competitive business, but we're able to hold our own. We haven't seen a lot of repayments yet as LIBOR, 1 year LIBOR, has basically been ahead of the Fed raises. So these -- those rates have been moving for the last 6 months. We haven't seen an exodus or a lot of pressure there as of yet. So that business continues to build and to grow, and we see no reason that it would change. Dave?

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [52]

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Yes. I mean, rates are still relatively low. These small increases aren't enough to dramatically change the behaviors of those borrowers. So maybe come back and ask that question if we start to see 300, 400 basis point increases. But I don't think 25 basis point increases are going to stop people from taking advantage of that type of product.

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Operator [53]

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And our next question comes from Terry McEvoy from Stephens.

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Terence James McEvoy, Stephens Inc., Research Division - MD [54]

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First question is on the $580 million franchise portfolio you bought last June. How has that performed relative to expectations, and I'm thinking runoff, delinquencies. And then maybe as a follow-up, how has GE exiting that market impacted margins and the market itself?

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [55]

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It's actually been better than we anticipated. The -- that overall portfolio in the fourth quarter last year grew by $90 million. In the first quarter, we picked up some new relationships, but we also continued our pairing down. We had a lot of these relationships that we picked up were over our internal hold limits, so we had already -- we always anticipated selling pieces of them off. So it's actually delinquencies are nonexistent, and the volume has been very good. GE exiting the business has -- because he sold it to 3 of us, the guy -- what -- out in California and Tennessee and us. So the 3 of us are competing now to get the new business, and everybody knows all the players in this. So it's -- we seem to be winning our share of business, and it's working better than anticipated, and no issues on credit have developed or have we seen.

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Terence James McEvoy, Stephens Inc., Research Division - MD [56]

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And then just one other one. The market value of Wintrust is up about 30% since the elections. Sellers' expectations, are they up 20%, 30% or above 40%? And I'm trying to see how the sellers have reacted to your public currency, which you've done well, much like others.

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [57]

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Well, seller expectations are probably up about -- depending on the size of the bank. On the bigger banks, they got comps out there now because some big deals have been done at some pretty high numbers. So there are some comps out there for banks over $1 billion, and those are obviously up from the 1.90 area to the 2.5x book area those guys are looking for. On the smaller banks, it's still a case-by-case basis. But if you're used to getting it at 1.40, you're now looking at 1.55 or 1.60. It's more of an average, so -- and I'm talking about multiples of book. But their earnings have picked up also with our rise in rates. Their liquidity portfolios have moved, so their earnings have moved. So we haven't seen much of a move on PE sort of approach.

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Operator [58]

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(Operator Instructions) And our next question comes from Kevin Reevey from D.A. Davidson.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - VP and Senior Research Analyst [59]

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So I think, Dave, earlier in your comments, if I got the number correctly, you said that your loan pipeline was about $1.5 billion. And that includes your C&I and CRE, and then you're probability was about $934 million. Did I get that correct?

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [60]

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Yes, and that's on Page 12 of our press release, too.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - VP and Senior Research Analyst [61]

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And how does that compare to where it was the same time last year?

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [62]

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Well, I can tell you. I figured you were going to ask me that. Last -- so we're $1,498,000. Now it's $1,519,000 gross. This time last year, March of last year, I don't have the probability number from last year.

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [63]

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So pretty much flat.

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [64]

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Yes, seasonally flat, but still pretty good. We are -- as we gather more data, we have more time and more data than we were able to plot this out, it is -- you can kind of see a rhythm to this volume -- these volumes right now. So the probability was just about the same as it was in March of last year, so it's pretty much even.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - VP and Senior Research Analyst [65]

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Great. And then as far -- and then with the pipeline, is that kind of pretty evenly spread out as far as your footprint goes?

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David Alan Dykstra, Wintrust Financial Corporation - COO and Senior EVP [66]

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Most -- from our footprint perspective, if you're talking geography, generally -- and a little over 90% of our loans are done in Illinois and southern Wisconsin area because that's where our banking business is at. And the remainder of it, if it's out of state, it generally has nexus to our customers here in Chicago, but roughly 90% is in the Illinois, southern Wisconsin area.

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Operator [67]

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And at this time, I'm showing no further questions. I would like to turn the call back to Ed Wehmer for any closing remarks.

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Edward Joseph Wehmer, Wintrust Financial Corporation - CEO, President and Director [68]

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Thanks very much. If anybody has any further questions or something comes to mind, you know you can always call Dave or I. We look forward to hearing from you. We look forward to talking to you this time next quarter, and everybody, have a great spring. Thanks very much.

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Operator [69]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.