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Wintrust Financial Corp
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Welcome to Wintrust Financial Corporation’s First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Following a review of the results by Edward Wehmer, Chief Executive Officer and President; and David Dykstra, our 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 constitutes projections, expectations, beliefs or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking statement. The company's forward-looking assumptions that could cause actual results to differ materially from the information discussed during this call are detailed in the fourth quarter 2018 earnings press release and in the company's most recent Form 10-K and any subsequent filing on file with the SEC. As a reminder, this conference call is being recorded.
I will now turn the conference call over to Mr. Edward Wehmer.
Good afternoon everybody, welcome to our first quarter earnings call. Beautiful day in Chicago, it's 73 degrees. Sunday, we got five inches of snow. So welcome to our world. With me as always are Dave Dykstra; Kate Boege, our General Counsel and Dave Stoehr, our CFO. Again, I’ll turn it over to Dave Dykstra for more detailed analysis of other income and other expenses and taxes, back to me for some summary comments and thoughts about the future. Thoughts about the future, questions and off we go.
I'm very pleased with the first quarter results. $89 million, up 12% from the fourth quarter of last year and by 8.75%from first quarter of 2018. $1.32 a share made consensus, up 13% from the quarter – from fourth quarter and 7% from last year.
If you were to take out the mortgage servicing right adjustments and all three of those comparative periods, Wintrust would have made close to $95.7 million in the first quarter, $1.64 share of 12% from the $85 million would have made in the fourth quarter, $1.46 a share and up 21% from the $78 billion. We would have earned in the first quarter of 2018, $1.38 a share.
So, all in all, our performance is pretty good. We do get whipsawed by the last 15 days every quarterly We would seem to show some abnormalities in the rate movements, but it is what it is. Our margin increased 9 basis points to 3.72% in the quarter from the fourth quarter. ROA of $1.16 was up from $1.05. Return on equity of a little 11% return on tangible equity of 14%.
So, good growth across the board for us in earnings and in the balance sheet. I'll get into a little bit of it. Results were achieved despite the $8.7 million pretax MSR valuation adjustment during the market volatility experienced in the last two weeks sort of 2,000 of the first quarter of 2019. just must be some, about the last weeks of the quarter.
Other one timers are marginally negative to the quarter results and are highlighted as follows. Negative 1 $1 nontaxable reduction for fine was basically offset by unrealized gains and equity securities of $1.4 million. We have $464,000 gain on Canadian foreign currency, which is offset by the acquisition expenses and some other smaller items, acquisition expenses and some other smaller items. Trying this out, we had approximately $8.5 million of pretax of one-timers. Basically all the MSR valuation negatively affected our results.
On the positive front, as I mentioned, our FTE margin increased 9 basis points. In the quarter, the 3.72%. is kind of a high watermark for recent times. This coupled with an increase in average earning assets is $771 million resulted in net interest income increasing approximately $8 million during the quarter with the fourth quarter. I believe that to be kind of remarkable given that the first quarter had two less days in the fourth quarter. These days were started about $2.3 million -- $2.5 million pretax. So, not bad.
One more in the margin, earning asset yields, we have 16 basis points, net cost of funds including free funds contribution was up 7 basis points. CDEC deposits, you all remember CDEC, Chicago Deferred Exchange Corporation should require mid-month in December. They experienced their expected seasonal drop in Q1 but were still additive to reducing our cost of funds as this was the first whole quarter of CDEC deposits, and they're only on the books for a couple of day, really maybe half a month in the fourth quarter last year. Competitors are somewhat meaningless.
CDEC deposits were down approximately $200 million quarter end versus quarter end and a bit more from a -- on an average basis through the end of the first -- through the end last year. We expect these balances to grow through the year to both seasonality of the business and our marketing efforts which make rates moderating, significant emphasis will be aimed towards pulling down our cost of funds, rate increases.
The decrease in -- the decrease in the overall rate environment has put an end -- a halt at least for the time being to our liquidity management laddering program. We’ve talked about this in previous calls. We'll continue to monitor the rate environment for opportunities to move forward with this plan.
In that regard, the duration of our liquidity management portfolio moved down to 4.8 years from 5.85 years at the end of the year and it's almost seven years at 3/31 of last year. So you can see we're building up lots of liquidity. Can hurt the margin a bit, but we think it's the right thing to do.
Let’s see. Period-end loans exceeded fourth quarter averages by over $334 million. It has and we’ve seen the back-end most of our loan growth, will give us a head start on Q2 and bodes well for the net interest margin and net interest income.
Our pipelines remain consistently strong across the board. In the first quarter, we saw number of the pipeline loans where we expect to close in the first quarter in the commercial and commercial real estate side move into the first couple of weeks of April. They have moved through. We've had good loan growth already this year this quarter and so we're feeling pretty good about that.
However, we are seeing some additional rate compression and pay downs due to competitive pressures from both banks and non-banks with the latter being the biggest culprit. That being said, we said we'll grow our portfolio on our terms and to continue to expect loan growth in the mid to high-single-digits.
However, as with our peer group the margin is a bit under assault. At least we're starting at a high point here. We believe that we will do our best to mitigate any compression, expected balance sheet growth and lowering deposit rates, should have said any small margin compression should it occur. We're not giving in on it.
We believe that with rates moderating, we believe we can hold our cost down and there are still some div and earning asset side because it does take a full year for any rate increases to work their way through the system. So we think we are in pretty good shape on the margin front. But like if I could predict I accurately within the penny, I wouldn't be in this business. I’d be in a sports book someplace.
Other income other than mortgage related items was a very good numbers. Mortgages was hurt by the MSR valuation but – and that's expected seasonal decline and volume. If you take those away the mortgage issues area still made money. Wealth management continues with its slow and steady growth. Fees are up $1.3 million over the fourth quarter of 2018. We’re very happy with the results year-over-year. Assets under administration surpassed $25 billion, so good growth there. All expenses are pretty well aligned, will be discussed in detail by Dave.
And that overhead ratio is high at 1.72% toward 1.79% in the quarter four. Through the back out the MSR valuation adjustment these always would have been 161 and 169 respectively. So still a high what we want. That was acceptable given the slow mortgage production, the overall mortgage business.
Slowness we saw in the first quarter and within the fourth quarter last year. We're still track with our operational efficiency initiatives in the mortgage area. Cycle times and production costs are down with several ways to go to reach the desired efficiency levels. We're on track for the June 30 with a total Phase 1 of completion of this work.
On the credit side, credit metrics remain very strong. NPA increased $1 million in the quarter, 1.43% of the assets down from 0.44% of assets to the yearend of Q4. NPL is increased $4.4 million while ROA decreased $3.3 million. Net charge-offs for the fourth quarter of $5.1 million, a 9 basis points, down from the $7.1 million to 12 basis points to achieve in the fourth quarter of last year. Insurance coverage stood at 134%, pretty even with what we showed in the fourth quarter but down from 156% experienced the last March. The all credit remains very good.
On balance sheet growth. Our ending assets grew $1.1 billion in a quarter, an increase of 14% over year end and 12% from year ago. Total loans, net loans held for sale were approximately $400 million quarter versus quarter and $2.1 billion over the year and 6.5% and 9% growth respectively. As mentioned most of the growth is back and loaded. It was our Q2 with a head start of course the $350 million plus the carryover from what was expected to close in that quarter $150 million we expected to close in the first quarter moved over. So we feel pretty good about where we are entering this quarter.
And on pipeline just mentioned are consistently strong where the second strongest quarter we've had in the last six or seven, the strongest quarter we've had recently has been the fourth quarter. We saw the momentum continue through the first quarter 6.5% loan growth experience in the quarter, so we expect a little shy of our desired growth.
But if you'd added in what would we expect to close in the first quarter and was pushed over, the number would have been closer to the number we like to get at. We are concerned about payoffs, but new business will recover the payoffs that we're seeing happen. Payoffs have basically been consistent for the last six or eight quarters, anyhow there. They’re higher than we’d like that we’ll use to compare their marketing in Chicago.
Deposits grew $710 million and $2.2 million quarter versus quarter and year versus year, respectively. Translated to percentage of 11% and 13%. On the deposit ratio which is the high end of our desired range of 85% to 90%, causing the quarter just a smidge above 90. Our goal is to even our deposit with our desire range. On all good consistent growth quarter for Wintrust.
I’m going to turn over to Dave, discuss other income and other expenses.
All right. Thank you, Ed. As normal, I'll touch on the other noninterest income and noninterest expense sections. In the non-interest income section, our wealth management revenue increased to $24.5 million in the first quarter, compared to $22.7 million in the fourth quarter of last year and up 4% from the $23 million recorded in the year-ago quarter.
Brokerage revenue was down approximately $481,000 while trust and asset management revenue offset that declined by increasing $1.7 million. With a majority of that $1.7 million increase related to additional revenue generated by CDEC due to a full quarter of activity with CDEC.
A number of our assets that we manage are based upon the market value at the beginning of the quarter. And so, we have a little bit of a good head start for the second quarter as asset valuations are higher at the beginning of the second quarter than they were at the beginning of the first quarter. So all in all, we believe first quarter was another solid quarter for our wealth management segment and we look forward to continuing to grow them.
In the mortgage banking revenue side, those revenues decreased 25% or $6 million to $18.2 million from $24.2 million recorded in the prior quarter and was down from the $31 million recorded in the first quarter of last year. The decrease in this category of revenue from the prior quarter resulted primarily from lower levels of loans originated and sold during the quarter and they get a fair value adjustment recognized in mortgage servicing rates related to changes in rates and other valuation assumptions and the effect of pay-offs. And that revenue headwinds were offset by higher average production margins on the loans that were sold.
The company originated $678 million of mortgage loans for sale in the first quarter of 2019. That's compared to $928 million of originations in the prior quarter and $779 million dollars of mortgage loans originated for sale in the first quarter of last year. The mix of the loan volume originated for sale related to purchased home activity was approximately 67% in the first quarter compared to 71% in the prior quarter. So purchased home activity continues to be the majority of our new origination activity, although we saw a slight uptick in refinancing so that due to the recent drop in rates.
Page 21 of our first quarter earnings release provides a detailed compilation of the components of the origination volumes by delivery channel, and also of the mortgage banking revenue including production revenue, MSR capitalization, and MSR fair value, and other adjustments and servicing income. Given the existing pipelines we currently expect originations in the second quarter of 2019 to increase nicely and should approximate at least $1 billion, possibly could be higher than that, but we think it will at least be a $1 billion range right now given existing pipelines.
Moving on, the company recorded gains on investment securities of approximately $1.4 million during the first quarter primarily related to the recovery of some of the $2.6 million of unrealized losses we recorded in the prior quarter, associated with an investment in a large cap equity fund that we see with our asset management company.
Other non-interest income totaled $16.9 million in the first quarter, up from $6.3, up approximately $6.3 million from $10.6 million recorded in the fourth quarter of last year. There are two primary reasons for the improvement in this category of revenue including a positive swing of $1.6 million of foreign exchange valuation adjustments associated with the U.S. Canadian dollar exchange rate. The current quarter has a positive valuation adjustment of approximately $464,000 whereas the fourth quarter of 2018 had a negative adjustment of approximately $1.15 million.
The currency rate volatility was abnormally high in the fourth quarter, generally its $0.5 million or less so that resulted in a $1.6 million swing. And for your information, we begun to disclose a line item for foreign currency valuation gains or losses in the non-interest income tables presented in our earnings release.
Next, BOLI income was up approximately $2.1 million from the fourth quarter, primarily as a result of a $1 million of earnings on BOLI investments supporting deferred compensation plan benefits which are positively impacted by equity market returns and this is compared to $1.1 million loss in such investments in the prior quarter. So we got a $2.1 million swing in BOLI earnings related to the deferred compensation plan benefits. And this also results in a similar increase in our compensation expense recorded during the quarter, they’re somewhat offsetting.
If you look at the remaining $2.6 million in the non-interest income section and primarily relates to an increase from investments that we have in certain partnerships and card base and merchant service base.
Turning to noninterest expense sections, noninterest expense totaled $214.4 million in the first quarter, up approximately $3 million from the prior quarter. I’ll talk about a few of the more significant changes, salaries and employee benefits expenses, category increased approximately $3.6 million in the first quarter of 2019 from the prior quarter.
The increase was due to a variety of factors including the $2 million increase in expense related to deferred compensation plans impacted by that positive market returns on the products that I just discussed. So, those again was somewhat offset in the income and expense section, but it was a $2 million increase to the salaries as well as the $2 million increase to the noninterest income.
We also have the impact of annual base salary increases that generally took effect on February 1 and we're in the 3% range. We had a lower amount of salary deferrals as our loan originations were down a little bit in the first quarter compared to the fourth quarter. So there is less loan origination costs that were deferred. And then we had normal growth as the company continues to expand.
This increases were offset somewhat by a lower level of insurance claims. It tend to be lower in the first quarter as a lot of people try to get their health claims in the fourth quarter before their deductibles reset, and so those are a little bit low in the first quarter. And we also had lower level in incentive compensation and commissions related to the mortgage banking production in the wealth management brokerage level.
Professional fees decreased to $5.5 million in the first quarter, compared to $9.3 million on the prior quarter. Professional fees can fluctuate on a quarterly basis based on the level of legal services, related acquisitions, litigation, Prime loan workout, as well as the use of consulting services. This category expenses came down substantially due to client and legal fees associated with litigation collections and acquisitions, and also experienced a lower level of consulting engagement associated with technology enhancements and other initiatives. We had quite a few of those engagements going on in the prior two quarters, which we didn’t have this quarter.
Amortization of intangibles increased by approximately $1.5 million in the first quarter to $2.9 million. The increase compared to the prior quarter was primarily due to the amortization of certain acquired intangible assets related to the CDEC acquisition in mid-December of 2018.
And if you look at all the other expense categories other than the ones I just discussed, they were up on an aggregate basis by only $1.6 million from the fourth quarter, and that included the $1 million settlement payment on a regulatory matter, which was included in miscellaneous non-interest expenses, so I meant all the other categories were really up about $600,000. So nothing significant to talk about.
And with that, I will turn my presentation back over to Ed.
Thanks, Dave. Some thoughts about the future. For those of you who listen to our calls regularly, at least some restatements are beginning to sound like a broken record. We stick to our knitting here, taking what the market gives us, knocking out over our skis. And so we start the second quarter with very good balance sheet growth, stellar earnings in spite the long time MSRs. We start the second quarter with $350 million head start on loans. Home pipelines are very strong. We’re booking loans
on our terms. The non-bank competition becoming more and more aggressive, our brand and the disruption occurring in our market is enabling us to continue to gain share. The situation warrants that is our circuit breakers which are a pricing policies and loan policies trip, we won’t be afraid to stop the bonus we have in the stop. As of now we see no reason to do so.
We expect the margin that it could be under a bit of pressure in 2019 and we take our expected growth, deposit grade rate moderation, maintaining our strict loan underwritings guideline and standards and pricing parameters. We expect to hold our own on this regard. Credit metrics strong however we will continue to cull the portfolio for any and all cracks and active relationships where they lose cracks are field.
We always remember your first loss is your best loss we never want to keep the can down the road. It takes a full year for short-term rate increases to work their way through their asset portfolio. December increased certainly helped the first quarter margin but this and the other increases which occurred in 2018 are still working their way through the system. This will help in mitigating any margin pressure we discussed earlier. Wealth management should continue at a slow and steady climb.
In 2018, we opened 10 branches. We have the same number on tap – pardon me, for 2019. 2018 branches are performing ahead of plan. We expect the same for the ones opening this year. We’re announcing the quarter – in the quarter, our acquisition of Rush-Oak and its subsidiary Oak Bank. We expect this transaction to close in Q2.
Looks to us like pricing for banks and our asset, and our desired asset range continue to become more reasonable such our landing patterns are very full but the gestation periods remained very slow. You can make sure – you can be assured of our consistent contributive approach to the acquisitions and other deals. We also continue to look for other earning asset business we can jump into but none yet. We did open us a factoring operation, a vendor finance operation in the quarter, both which are off to very good starts. We expect those portfolios to go out over the rest of the year and they both have very good rates on them, so we’re very comfortable with them, that should help us.
Lower 10-year rate though hurtful in 2000, in the fourth quarter four, the first quarter of this year should help volumes in the upcoming spring buying season in the mortgage side. We continue with our cost cutting and efficiency progress in this business, many of which will be operational by midyear. As a community bank, we have to be committed and are committed to this business.
We still want to achieve a net overhead ratio of 1.5% or better. Achieving that number will in the coming year maybe higher. The number of mid150s is our goal for this year. In short, we’re proud of what we build over the last 27 years and approach the rest of 2019, confident we’re able to achieve our goals of double-digit earnings growth and continued growth of tangible book value. So as you can be ensured to our best efforts, we appreciate your support.
We’ll move on to questions.
[Operator Instructions] Thank you. And our first question comes from the line of David Long with Raymond James. Your line is open.
Good afternoon, gentlemen.
Hello, David.
Regarding your expected IT spending, what do you thinking about what your cooperating system in any expenses that you may have to make this year. And then as a follow-up today, just overall IT spending in 2019. What we’re looking at be looking as a growth rate there versus 2018?
Yeah. We’re doing a few things on that, but you can see and if you look at our data processing line we repay some declines and we’re negotiating some number of different contracts and trying to streamline some of that stuffs. So we expect to get some savings out of that and which should be also by additional expenses that order doing for digital products and digital enhancements to the system and some other efficiencies that we’re trying to do.
So we haven’t disclosed exactly what that number is going to be, but we’ve invested a lot over the last few years in the IT infrastructure side. I actually think what you'll see is those investments are already baked into the numbers from last year. Actually going to moderate some this year as far as increases., so I won’t expect a large significant increase in the spending because we’ve done some other things to save money to offset that.
Yeah. As they says, we’ll not disclose it but going back and lot of contracts and that they’ll be to, twist some arms and get some things out of them that should cover additional investments we’re making. We continue to make investments in both the digital side and then the information security and the other issues but hopefully, we can keep costs where they’ve been maybe 1% or 2% given inflation, but when you read that, don’t’ assume that we’re not making the investment, the required investments.
We still live by our motto, we standing by the products, we're standing by the early [indiscernible] service. And we continually look at our offerings and the offerings of our competitors closely with them or ahead of them.
Got it. And then one follow up on the deposit side, living here in your market, I have known sort of over last six months a real slowdown in the amount of promotional deposit mailings that I've gotten. Have you seen any easing in some of the promotional prices that you've seen out there in – for deposits?
Absolutely. The third quarter last year, you were getting like eight in the mail every day and e-mails and what have you. It's slowed down, which gives us hope that we can continue our growth and moderate our deposit growth in the last month of the year. Half our banks showed in the quarter – half our banks showed 0% increase in deposit costs and another half showed three or four basis points.
We had a meeting yesterday, beating up the guys on 3 or 4 basis points. I think our growth – our goal is to grow – continue to grow our core deposits, without an increase in the cost of funds from the level it's at. That's our goal. The mix of more CDEC deposits coming on should be helpful in that goal, emphasis on – to getting more demand deposits through the commercial relationships that seasonally move a little at the end of the year in the first quarter.
Hopefully we can hold it off. We can do that and the rate – and the rate increases that took place last year continue to work their way through the portfolio, and we believe they can offset any spread compression on newer deals. But we think we're okay. I mean, there's probably a 3-basis-point spread either way that we're looking at and you know we’re looking at this really closely all the time. So we know the margin is under assault and our goal is to make sure we win that battle.
Got it. I appreciate the color. Thanks, guys.
Thanks, David.
Thank you. And our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is open.
Thanks. Good afternoon.
Hi, Jon.
Hey, just back to the margin question. I had in your prepared comments you said I think your quote was NIM compression should it occur. And then page 1 of your release you talked about expecting pressure on the margin in the upcoming quarter. Just help us understand, help us just understand those two comments.
I think that the issue is where we're trying to hold it where we like to see it increase. I think we've got some things we can do to do that but you never know. I mean, as I said if I could predict this stuff I wouldn't be doing what I'm doing. I'd be in a sports book someplace. We think that it could go to 4 basis points either way throughout the course of the year. We're working to hold it steady. At least we’re starting from a higher point. We know we'll have good asset growth from an NII standpoint. We think that that's a good thing.
But our goal is to maintain the margin and grow it, we’re going to do our [indiscernible] to get there. But it's under pressure right now. And we think we can moderate our deposit costs. And as I said in the last, when I answered David's question I think we can moderate our deposit but we can hold that steady. And the increase in the rate increase took place last year, it continue to work our way through the balance sheet. Hopefully, they can offset pressure on newer deals, but that’s our goal.
Maybe a better way to said that was and we expect some pressure than we expect some headwinds, which you can maybe offset. But whether there's pressure or headwinds like the one you're LIBOR rate is down, so the repricing life portfolio wasn't quite as good as it was maybe three months ago. So there are some headwinds, but it’s that…
…from last year.
It was a little bit.
Just barely. So there, – it's not quite as good as it was, so there's some headwinds. Maybe headwinds is a better way to undertake pressure, but as Ed said, we've got a number of different levers. We will pull and we'll have to see where the growth comes from, but we're hoping to offset it. If there is some pressure maybe a few basis points down, but it's possible that if everything went well with the courage, you could applicable too.
Sure. Okay. That helps. I just – you read the release and you think that the margin is really going to step down, so that helps. Also a question on the pipeline, you talked about some of the deals falling into Q2 from Q1, curious how significant those – the size of those loans are. And then the second part, in terms of that increase pipeline, how much of that is warehouse versus maybe just more broad based? Thanks.
Well, the first part of your question, we bought probably $160 million of loans already this quarter related to – they really should've closed last quarter. That's not the amount that was moved over, I know they brought. We give you this pipeline number. It's really a commercial-commercial real estate, doesn't include our life insurance portfolio, a premium finance, commercial premium finance portfolio, that leasing group and the other groups and it’s loans that are out there.
So, just to give you an idea, in December we are $1.128 billion. February, that’s been the highest. This is gross not affected by probability at close, we’re a $1.1 billion, close to $1.188 billion at the end of March. So, again, up a little bit from the end of the year on a -- I was going to say on a weighted average basis. Those numbers are relatively the same. And our pull-through rates went pretty good. So, that being said, true I guess, but we’ve got good history to back it up.
Our leasing portfolio is doing nicely also. We – the – let’s go on in town here, a bank that was sold here had a very big leasing portfolio. Sold to a bank that also had a big leasing portfolio and some of the vendors they used wanted additional source. So, we’ve been able to pick those up where also disruption in the market that’s taking place for the last two years. We’re starting to reap the benefits of that. So, we feel good about where we are in terms of loan growth. But that’s not to say that the non-banks aren’t making our life tougher.
And Jon, just to follow-up on Ed’s, I got the detail he didn’t have in front of him.
Okay.
The $1.18 million and sort of the 13 month rolling average of our pipeline at the end of March we were at $1.3 million with the probability close of $812 million when you compare that to the end of the year when we were $1.1 billion with the probability close to $671 million. So it’s up over the end of last year and has actually grown a little bit. It’s down a little bit from February but just slightly.
So we’re seeing good growth in that and the probability close is good but like I’d said you can’t always make your customer close. Only one closes. Sometimes there’s a little back and forth between quarters.
Okay. Got it. So a big picture message, you’re still seeing this high-single digit growth and you’re essentially going to fight to get fight on the margin but some potential headwinds there. That’s what you’re trying to say? Is that right?
Yeah. I think that’s fair to say but not where we stand. I mean, net interest income are cheap to look at and good asset growth will give us more net interest income and so we got to look at it. I mean we’re looking at the bottom line. We’ll do our best to control the margin but what are you going to do?
Yeah. Yeah. Okay. Thanks for the help.
Thank you. Our next question comes from the line of Casey Haire with Jefferies. Your line is open.
Thanks. Good afternoon, guys.
Good afternoon.
I wanted to follow up on your – you mentioned the leasing opportunity with all the disruption in your market. What else – what are the products and then are you seeing any opportunities from deposit side just given all the disruption in your market and are we in the early innings there or the other examples similar to the leasing one you cited?
Well, the commercial side disruption is always good. One is – our two biggest competitors in the last two years is sold. One to a Canadian bank and one to a Cincinnati Bank. We're trying to see more opportunities out of the Canadian Bank that was acquired, their acquired local bank, because they're getting more and more entrenched there. We're seeing more opportunities from there.
First couple of months of the year, we didn’t see much. From the other bank, we are seeing opportunities. I know we booked a number of them already and more coming. So, I think any disruptions is always good, especially in the commercial side. We think there's good opportunities for us. And I think we want a bank locally and to us in Midwest in town and we're triple the size of Midwest and we think we do it better. We know we do it better. So, we think on the deposit side, the deposit side which we move with the commercial business.
And then the retail side, we continue to stick to our tried and true method. Retail gets stickier with all the digital stuff that's out there. We’ll find a better way to do that. But with that being said, we've grown nicely in our new branches and our – the – our new opportunities of – well, we've opened new branches and we bought banks, so it's moving very well for us. So, it's hard to pinpoint where they come from because we take as many from Chase and Bank of America and Harris as we do for anybody else.
So, retail deposits are tough. We've always taken -- take share from people. But on the loan side, we're taking -- it seems the opportunities are -- more than they did lately. They're okay? Did that answer your question?
Yeah, no, that's great. And just a follow-up I guess on the – on the M&A outlook. You guys have Oak Bank I believe closing this quarter. Is that -- does that opportunity set still a pretty good active one? I would think it would be in the wake of the just all the headwinds on the subscale bank group.
You hit the subscale – I like that, subscale bank group. Never heard of it put that way. Yes, we’re into the subscale bank group, and that’s not underwater banks. We don’t want those unless we get somebody to support that price at the FDIC.
But yeah, prices have come back to be attractive again. I think that many of these people thought after the Trump bump and some of the prices that were paid for banks immediately after that thought that they could command those prices. But now they see the Democrats are already going to have tax – they’ve got tax issues. The taxes could go back. You could – they’re having earning asset issues. They seem – regulation may have – they may not have as much new regulation, but the old stuff continues to filter down to them. And looking at it, I don’t think they want to go through another cycle again.
So as I said, our landing patterns are very, very full to the extent that we actually have to kind of sit in a room and decide which ones we’re going to line up first and second and third. So – but the gestation periods remain longer than they should be. It’s just internally, we’re finding when you go through due diligence, and we go through very deep due diligence, we seem to find some issues that require more work on the tax side – on the lending side. So they’re taking a little longer to get done than they used to.
Thank you.
Thank you. Our next question comes from the line of Brad Milsaps with Sandler O’Neill. Your line is open.
Hey, good afternoon, guys.
Hey, Brad.
Dave where I just backed to the NIM discussion, I just want to talk a little bit more at deposits. I was curious of the $7 or so $100 million that you brought on this quarter, looks like it was a mix between a lot of areas categories. But kind of curious what the average cost of those deposits where sort of relative to where you were for the rest of the quarter?
I’ll let David answer that.
Brad, actually I don’t actually have a weighted average cost on the NIM deposits. And obviously, our prices up a little bit, but a lot of that is CDEs maturing. We had a decent growth in the wealth management area, though some of those come from some of our customers but we also have some third party on affiliated brokerage companies that place money with us and so we had a little bit of that.
But we’re having good success on sort of the money market and the savings accounts by marketing into our existent – existing customers. And we’re really not outrunning the hide priced ads that someone else referred to. It’s just blocking and tackling and we get in front them and provide them a sort of standard promotion. So, I don’t have – I’m dancing around your question because I don’t have the number in front of me, Brad. But we’re not running the absorb -- unabsorbed and that special rate of that procured.
We’ll tell you half and as we put is the curve flatten more in the month of March, half the bank showed no deposits, cost increase and the other half showed 3-basis point or 4-basis point increase. Those are the launch that get beat up, it shows a three basis points or four basis points. Is that helps you any and show three or four basis points.
Is that helps you any in the growth across these banks was ratherly consistent, so we are moderating those costs now, as David Long had asked , the competition is in his bed – I mean, the smaller banks and the like are out there offering goofy rates, so there is – for the shoppers, there's no reason to match anything. So we're very, very cognizant of what we need to do on the deposit rate side to maintain our margin and work our asses off to make sure it happens.
Now that's helpful. And just to follow if I heard correctly, it sounds like you once again brought down the duration of the liquidity book. Is there some thought to you that the reason we're doing that, is that -- are you looking to focus a little more on mix change and maybe that that helps them a little bit. And you can hold on to a little bit more easily that way or am I thinking about that incorrectly that you're holding more cash in that book now?
We are holding more short-term securities in that book. That's correct. We would have thought we would like to be laddering out. We started doing it. Now, we had a stock, So as still rates get higher and it makes no sense to latter a few levels in our opinion.
Okay. And then just final question on the on your guidance around a billion and mortgage or so for the quarter Dave, how much do you siphon on and off the corresponding network? Is most of that billion coming through your retail channel that carries the higher sale margin or how do I think about that mix kind of going forward. I know what you prefer, but just kind of curious how to think about it?
Out of our $678 million that we originated for sale in the first quarter is about $148 million. Our thoughts is that it's probably very similar number in the second quarter. So out of that billion plus or minus number, maybe $150 billion would be correspondent. We’re actually seeing good origination in our legacy retail origination and some increases in the Veterans First too. So, I think the big jump will be in our retail origination platform, some in Veterans First and I expect correspondent to be relatively flat.
Great. Thank you, guys.
Thank you.
Thank you. And our next question comes from the line of Michael Young with SunTrust. Your line is open.
Hey, good afternoon.
Hello, Michael.
Just a quick follow-up, kind of danced around the margin question like a bit. But in the press release it was stated that you expected the margin to be down next quarter. It sounds like you may be backing off that a little bit depending on what you can do on the deposit side. So just in terms of pretty near term, should we still think down in 2Q but then we hope to defend it for the rest of the year?
I think when we're answering the prior questions, maybe the answer to that is we should have said there would be some headwinds to the margin versus pressure on the margin. There are headwinds so we can run up the pipe to keep it there but as Ed said on the prior call, it could be down a few, it could be up a few but it just depends on the mix and how we do on CDEC deposits and some other things. So, we're not guiding at it absolutely will be down, we’re just indicating there might be some headwind.
Okay. And the growth, just curious how much of that is kind of a new production that you're putting on versus are you seeing any increases in utilization levels on C&I lines or even in the dollar volume in the premium finance business?
Well, we – we’re not seeing big increases in the line utilization so they’re fairly standard. Property cash as you’d see we have fairly good growth at this quarter.
So there is a little bit of firmness in the market where premiums are going up a little bit. And we're getting a little bit of the business back from the regulatory issue we had where we don't have to do certain 10 collections anymore. So we're getting some of that business back and then just our teams out there you know selling good service. So we're seeing some good growth there.
Yeah. The regulatory issues wasn’t – for those who knew what it particular to us was a it was a regulation that the Fed was following that said we had to get 10 numbers on all our commercial premium finance contracts. Our competitor, our major competitor is a non-bank and sold against us. We, for the three years that was going out we probably lost 10% of our book and had a fight like heck to remain – to keep our overall outstandings constant.
To the work of Mr. Dykstra and a number of people, we've been able to get that all reversed it. So the regulatory issue had nothing to do specifically with us, It’s to do with getting a law changed which Mr. Dykstra went to Washington and met with [indiscernible] and Shelby and all the quarrels and all the powers that be. And got them to change the law which is pretty remarkable.
But I just want to make sure you know they had nothing to do with us. But we are fighting to get that business back that we had lost. And then unfortunately the business we lost was our more profitable business kind of the smaller ticket talking business it seems like that. It might had been higher late fees and what have you. So we are working to get that back little by little we expect that to occur, but we’ll go from there.
Thank you. Our next question comes from the line of Chris McGratty with KBW. Your line is open.
Hi. Good afternoon. Dave or Ed, maybe a kind of a high level question on capital. I know you don't have the authorization for a buyback but just kind of interested in your thoughts philosophically where your stock’s trading given the fall in rates. And you guys I think talked about potentially doing one with some sort of a debt component. Kind of thoughts on buying your stock where it is today.
Well, we don't have a buyback in place. That's something that the board can look at. It's probably a good practice to have a buyback in place at any time in case you're – find yourself in a position where you want to do it. So that's something we will look at and the board will look at. But we don't have one in place right now.
From the capital side, we understand rates are low. It's a lot of these acquisitions that we talked about actually come to fruition. We'll need some cash and probably some capital to support that that growth if that's the case. Like you said, interest rates are pretty low so we'd probably look at sub-debt or our preferred. But I think sub-debt is a tax deductible method is probably a little bit more attractive at this point of the interest rate cycle. And if it's just cash, you need to get the deals done.
If they’re cash deals that we’re doing, then that would suffice. We would just have to look at the time that – the buybacks in place and if you had capital and excess cash where the stock price was at, we’d make a decision. But price is at and we’d make a decision. But I’m not going to say on the call. We’re going to do one thing or other but we will look at putting a buyback authorization in place.
Yeah. We’re pretty – I think it makes sense. They have one. The other thing is most of the acquisitions we do are probably half stock, half cash. So it helps us from a tangible book value’s point of view and works across the board. So I just want to – most of the deals we do are half and half. Some are a little bit more stacked depending on the ownership of the target who want to get more tax free treatment and like the value of our stock where it sits.
So we’ll be raising capital that way too if in fact this come to pass. But as you know our track record is always going to be up. We’re very good stewards of our shareholders’ money and we do what we do to an offering. Some – usually that means there's some come behind it.
Understood. Yeah, totally understand. Maybe one more on the margin from a different angle. Some of your peers have been a little bit more aggressive in taking down rate exposure asset sensitivity if you will given kind of the rate shift that we've seen in the last six months. How should we be thinking about any tweaks to the structure of the balance sheet maybe over the next six months to A, protect against downside risk? Thanks.
Look, we have -- if you look -- I forget what the pages. We have – look, we have taken our position down to probably about a third.
I got to look at that. Now we're moderating our asset sensitivity right now, Chris. And so, if you look in the press release we've gone from 9% on a ramp scenario for 200 basis point increase down to 6.7%. And on the downside, we've reduced the – from 4.8% to 3.3% of the downside. So, we're trying to narrow that gap and we're doing that by doing some additional fixed rate lending and extending up – which we didn’t do much fixed rate lending before, so we're doing a little bit more of that and just working with the liability and the asset side gradually to moderate that assets.
Great. And even more with the…
Now, we're seeing – we're seeing the need to do more fixed rate assets, given the rate or the term – the rate is – the rate environment is right now. You can do a fixed rate asset and buy a cap on it for not a lot of money. So, we're looking at that to get our upside squared away but protect our downside also.
So, we never really did a lot of fixed rate loans, but we're seeing some, I don't know, life insurance market. We're seeing more fixed rate – people can have the fixed rates that we want to be able to match. And what we want is protect our upside, but also the downside protects our upside. I'm all for it. So, the rates are kind of the – the market is kind of accommodating for us in that regard.
Great. Thanks. And, Dave, maybe quick on the tax rate. This is a good rate for the rest of the year?
No. Actually, the first quarter tends to be our lowest tax rate because we have the benefits of the excess ex-benefits from the stock option and restricted tax exercises. So, our effective tax rate in the first quarter is 24.86% compared to last year in the first quarter is 24.14%. But generally I think it's probably closer to the 26% range.
Got it. Thanks.
Thank you. And our next question comes from the line of Kevin Reevey with D.A. Davidson. Your line is open.
Good afternoon.
Hi, Kevin.
So Ed, I just wanted to make sure I understood your commentary with respect to your net overhead ratio. You are committed to a 1.50%. Is that for the full year of 2019 or is that to get to that level at the end of 2019?
I think what I said was long-term, our goal is to be 1.50% or better. If you took away the MSRs, we’re 1.61% this quarter compared to 16.9% in the fourth quarter taking away the MSRs, we were 1.61% this quarter compared to 1.69% in the fourth quarter, taking away the MSR hit. If you – what I said what it’d be hard for us to hit that goal this year. We’re looking at the mid to high 1.50s as our goal for 2019. Okay?
Great. Got that. And then your comment on the factoring business that you started Could you give us some color as to where that’s located, staffing, etcetera and the type of deals that you've been doing.
Well, the vendor finance is off to a great start. They're up to $20 million, $25 million in outstandings that yields in the 7% or 8% area. They're out in California. We have like three businesses out in Orange County now where some of our leasing business is out there, those guys. So off to a very good start.
On the factoring side, this is a logical adjunct to our asset base lending side to move down into the factoring side. So, it's not – and that's just fledgling now but the pipelines look very good there. Our goal would be on both of those new businesses to get them up over the next three years in the $300 million to $400 million range. The rates are very good. And interestingly, when we study the factoring, whether the factoring business, is where going to be doing it is that only the lower end of our asset-based widening, our ABL opportunity -- our ABL business. It gets really good when things get tighter.
It's better when things are bad. It's not like our franchise business, it’s better when things are bad. Other people eat more at Applebee's or McDonalds than they do when things are good. So, it's a nice hedge in there, but they're both off to good starts. I hope that answers your question, Kevin.
That did. Thank you very much. Appreciate the color.
Thank you. Our next question comes from the line of Terry McEvoy with Stephens. Your line is open.
Good afternoon.
Hello, Terry.
Hi. Just one quick question. I was hoping to get your thoughts on your $800 million, $900 million commercial finance portfolio. How much of that is QSRs? I did notice a little bit reserved building in the quarter, but that maybe just reflected growth and just more a bit that could be there.
Well, we have -- we've got about $880 million of franchise that we're referring to and most of those franchise loans are -- franchise who are similar to McDonald's [indiscernible] Dunkin, etcetera. So, Arby's, Wendy's, those sorts of franchises. As you recall, as you remember, the third quarter was the third quarter last year where we added three 00:59:09 amounts we try to exit out of the non-accrual is. Everybody kind of have it already, oh, you’re done accruals your up higher. One of them they went from nothing to next to nothing.
One of them was a franchise deal. It’s franchise to cover the entire state of Wisconsin. The franchise itself is doing very well every place else except in that market and that had to do with the franchisee not following through on things he should have followed do on. That loan will be paid off through the sale of that franchise in May, in mid-May is the plan. All losses have been taken on that. So I think our reserves grew up a little bit because – the lost we took care of the experience we had their plus the specifically reserve related to…
For growth.
Yeah. It’s further growth. So to take charge on something we expect the reserve factor move up a little. That's what it did so. The rest of portfolio is operating just fine. That was kind of a one-off. I know there was some noise in the industry over the last week or so about another deal but we're not seeing any, any specific stress in our portfolio other than that deal I’ve talked about that we referred to it in the third quarter of last year.
That's what I wanted to hear. Thank you.
Thank you.
Thank you. Our next question comes from the line of Nathan Race with Piper Jaffray. Your line is open.
Hey, guys, Good afternoon. I don't mean to beat the dead horse, on the NIM but just kind of the thing about the trajectory of loan yields from here. It sounds like you still have some positive repricing going from previous rate hike still. I guess I’m just curious kind of what they weighted average rate on new loan production is today relative to the portfolio yield at 506?
It really depends on the mix, Nathan. I mean premiere finance loans are – on the commercial side are higher than that commercial real estate that's fixed rate would potentially be higher than that but if you did just a straight commercial loan or the life loans they tend to be lower than that so it's really sort of a mix and you’ve – you really got to break it down. So we can tell you what it is but if premium finances a lot better or a lot worse next quarter it's going to go up or down. But I think generally on average we're doing well there and we have some tailwinds with the premium financed portfolio.
Okay. Got it. And then just lastly, any update thoughts on perhaps hedging out your MSR going forward?
We're going to – second quarter will – where you will have some downside protection there and do some hedging. It won’t be a full head hedging program but we are taking some actions still on the downside without really stripping away the entire upside.
Yeah, we finally -- we found, hedges, you get all sorts of different thoughts and plans and how to hedge MRs and many of them could go the wrong way I mean quickly. We found one where we think of it is protect the downside and keep the upside alive so.
And given the shape of the yield curve some of those options are more affordable now than they have been in the past.
Yeah.
Okay, got you. And if I could just ask one more on expenses. Assuming mortgage volumes are kind of flat year-over-year, can you kind of give us some parameters of what we can expect in terms of all in expense growth in 2019?
That deal’s done and so it’s a hard thing to do because we have the leasing number out there and if you grow that business, those expenses go up and we have acquisitions and they like. So certainly, you want that growth. As we said it in my comments earlier, the salaries are going to be up 3% but we try to keep the same store sales number down to sort of low-single-digits. But then if you have the growth through the branches and you have acquisitions, that number can change. But clearly, if we want to grow that number where we can get leverage out of it. So, well this mid-single-digits on same-store sales is probably the good answer.
Okay, got it. Appreciate all the color. Thank you.
Thank you. Our next question comes from the line of Brock Vandervliet with UBS. Your line is open.
Great. Thanks for the question. Dave, so the CDEC deposits have flowed out. I’m assuming that seasonal. I would think they would come back in pretty heavily in the second or third quarter. Is that…
That’s been their history, yeah.
Okay.
We never really marketed a lot of them. We are actually are putting a marketing to get a team together and so we hope to – there’s only eight people worth of CDEC. It’s generating these numbers. It’s a wonderful business for us and we’ve never marketed it and we went out to do that so hopefully we can build down the seasonality also.
And would that allow you to then pay down the FHLB a little bit?
FHLB we use I’d like to use it to cover the mortgages held for sale.
Got it.
Now, with access liquidity we won’t bring it out. But it’s a nice book and that’s for us to use those overnight funds, cover the mortgages held for sale. They got overall liquidity position sometimes it’s lower because we don’t need it. If you want to gross up we can already put the money. But that’s how I like to use Federal Home Loan Bank advances.
Got it.
Sometimes we use – we got some term out there for asset liability for matching purposes but also its overnight.
And that’s fairly what we do at the end of the third quarter was we paid down a lot of the other wholesale fund. So to the extent those FHLB come doing we have the excess but at the end as I’ve mentioned as Ed mentioned see that one -- deposits went down a little bit just because of the seasonality which have been to come back up. So we maybe had a little extra wholesale funds to cover that gap where their deposits went down. But we expect that to translate back and to see that funds in the second quarter here.
And our plan with CDEC funds is only to keep on our books whatever the rolling 12-month averages, we don’t become wholly dependent if something were happen. But the good news is we make a nice spread and what we don’t keep as we sell, the sell that to other bank’s funding. So we get X, they get X plus 1% or 2%, 1.5% right now. That’s the income does so we look that too.
Got it. And separately your kind of scotching the laddering program for now. I'm assuming we should build in West investment securities growth as a result?
Yeah, long term. We still have investment securities that will all be shorter, so you mostly have to work on your yield, not your balance, and I keep all the said funds, but it will go out 60, 90, 120 days, but not seven years or five years or whatever.
Great. But just in terms of the growth of that portfolio, I'm assuming it should grow somewhat more slowly?
Of the longer end of it, yes.
Got it. Okay. Great. Thank you.
Thank you. [Operator Instructions] Our next question comes from the line of David Chiaverini with Wedbush Securities. Your line is open.
Hi. Thanks. A couple of questions for you. So, I just want to clarify the loan growth guidance. So, I think in the prepared comments, you had mentioned mid- to high-single-digit growth. And then in response to an earlier question, you had referred to high-single-digit. I don't want to parse your words too much, but just curious as to what the official message is there.
Mid to high.
Got it. Thank you for that. And then…
So, 7.5.
Okay. Okay. Fair enough. And then a follow-up on the CDEC. So, when do you expect to reach that sort of 12-month kind of pro forma average that – such that we wouldn’t see the volatility of a couple of hundred million per quarter.
Well, you'll always see that volatility because the 12-month there – because the seasonality of the business. So, you'll always see some movement there, but you figure $1.1 billion was what their 12-month average was and then it fell off.
By the fourth quarter, we expect to be back to $1.1 billion plus our existing whatever growth we have. So, whatever growth that we bring in excess of what they’ve been doing historically. Does it make sense?
At first quarter…
Yeah. I thought that the…
First quarter tends to be an average, obviously, some quarter are going to be below and some are going to be above. And first quarter is a seasonally slower quarter. So, I would expect this actually. Now, in the fourth quarter, tends to be very large. And the middle quarters are probably right around that average. So, I would expect to be much closer to that average in the second and third quarter.
And I thought the idea would be that we would see the volatility in the fee income line but not on the deposit you would actually hold on balance sheet.
I'd like to see them both.
If you're going to – if you're going to stay at the average, you're going to have a couple of quarters that are below and a couple of quarters that are above. And hopefully, it's not that bad while at the swing. But even if there's a couple hundred million for a month or so, we can easily cover that with other sorts of funding in the interim. So, I’d cry to think of it as an overall average for the year and not worry about the exact timing of the months and the quarters.
Okay. Got it. And then shifting gears, you had mentioned about and I missed what you were referring to be. You said by June 30, phase 1 would be completed related to some work that you have going on. What were you referring to with that?
That was a mortgage business or mortgage efficiency initiatives where we’re – we put in a totally electronic front-end. But now, we're now marketing. Our goal is to get more of the business through this front end, then through the normal – the historical way of loan brokers, our originators out there. We bring it in through the electronic front end. You can cut your commission expense down to 30% from 52%. That’s a good thing. So that should help mitigate that expense.
It also has added to – has helped us reduce cycle time. We can get things done faster by doing this. Increased cycle time means less expenses associated with it. And we're also looking at outsourcing some work that's now done internally that’s on a – it’s on a variable basis under the outsourced approach which goes to a fixed basis.
So like in the first quarter, we had a lot of cost and not the business. If we move some of this noncustomer-facing work to a variable basis and about 40% to 50% of the cost, it will help us tremendously. It also can be done because of the location of the outsourcer. It can be done at night while we're sleeping; should help cycle times too.
So we're working on a number of those initiatives that should help bring down overall costs of doing business over the long term. So again, if we can if we can get right – now we've got maybe 80%, 90% of our business coming through the old-fashioned distribution method using a mortgage broker. We get that down to 50% and can cut the expenses – the commissions down to 30% of that, that's real money.
So those are the things we're working on, is to get more and more efficient in this market area. We're also testing out to get more and more efficient in this market area. We’re also testing out some other areas where we can utilize robotics to do but not this sort of work. So we’re ready to move ahead on this stuff and that’s that Phase 1 doesn’t include robotics, it’s just includes some of the things I just discussed. So breaking cost out of mortgage and making them more variable therefore making the whole business more profitable on a consistent basis.
Thank you. Okay, so June 30 is the completion of Phase 1. What's the timeframe to complete the project?
Probably forever. We’ll always be looking at ways to do this. I think the – this is a business is becoming more commoditized and it's one that we believe that if we can add personal service to the commoditization of the business, we get the best of all worlds. People still going to their bank and get the stuff and know the person they're dealing with and that somebody on a screen we think we can serve our clients very well.
So, what’s the end? There’ll never be an end. We'll always have to be more efficient. So this is just some of the low hanging fruit we can take down. Phase 2 can be the robotic side and some other outsourcing that we can do. Non-customer facing outsourcing. We got to walk before we can run here. So we expect continued improvement in the overall profitability in the mortgage business notwithstanding what goes on with the actual sale margins themselves just the production side.
That makes sense. Thanks very much.
Thank you. And I'm showing no further questions at this time. I would now like to turn the call back Ed Wehmer for closing remarks.
Thanks everybody for dialing in. And if you have any issues or other questions feel free to call Dave or myself. Thank you very much.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone, have a great day.