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Wintrust Financial Corp
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Welcome to Wintrust Financial Corporation's Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Following review of the results by Edward Wehmer, Chief Executive Officer and President; and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session.
During the course of today's call, Wintrust's management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking statements.
The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in the second quarter 2018 earnings press release and in the company's most recent Form 10-K and any subsequent filings on file with the SEC. As a reminder, this conference call is being recorded.
I would now turn the conference call over to Mr. Edward Wehmer.
Thank you. Welcome everybody to our second quarter earnings call, and a happy summer to you all. With me, as usual, are David Dykstra, our Chief Operating Officer; Kate Boege, our General Council; and Dave Stoehr, our Chief Financial Officer. We will conduct the call under the same format as usual. I will give some general comments regarding our results, and then turn it over to Dave Dykstra for more detailed analysis of other income, other expense, and taxes, back to me for some summary comments and thoughts about the future, and then there's always time for questions.
We're very pleased to report record earnings for the 10th consecutive quarter in a row. David Long, Nick Papagiorgio is still [technical difficulty]. Net income of $89.6 million was a 9.25% increase over the $82 million in the first quarter, and 38% over the $65 million recorded in the same period last year. Year-to-date -- year-over-year, we're up 28% with about $171.6 million to $123.3 million. On earnings per share basis $1.53 going to $1.40 in the first quarter, $1.11 last year, $2.93 year-to-date, and compared to $2.11 for last year, up 28%, 38% almost over the last year's quarter-to-quarter.
Just put in perspective also about [ph] pretax earnings; pretax earnings in the second quarter were $121.6 million, over $108 million and up 12.6%, and up 19.3% over the $102 million we had in the second quarter of 2017. For the year, pretax earnings at $230.7 million, up over -- above $190 million or 17%. So, good results across the board. Our margin increased, as you all know, by seven basis points from the first quarter, and for year-to-date we're up 20 basis points over the last year. ROI of 126 compared to 120 in the first quarter, year-to-date we're at 123 compared to 97 basis points last year. And our return on equity and tangible equity numbers are in the release.
As it is readily appearing, our operating trends remain consistently positive. The net interest margin net interest income, the NIM increased seven basis points over the first quarter, and 20 basis points over 2017 to 3.54%. Net interest income grew $13.1 million over the first quarter due to one more day good earning asset growth including good loan growth and the rising rate environment. So, really both increases were driven to the higher rate environment, a larger level of earning asset base. Our average earning asset base grew $706 million in the quarter, earning asset yield increased 19 basis points, while cost of paying liabilities increased 17 basis points. The free funds ratio or the amount of -- the 28% of demand deposits we had made up the difference as it relates to our margin.
We'll talk about betas a little bit later. It's funny to me, I remember a year ago or two years ago there was pretax pre-provision earnings was the buzzword, now it's deposit betas. Our average lone-to-deposit ratio for the quarter rose slightly to 95.5%, obviously higher than our desired range of 85% to 90%. Some of this was caused by backend-loaded loans in the quarter. Ending loans exceeded average loans by $326 million, which bodes very well for Q3 earnings. At period end, the loan-to-deposit ratio stood at 92.8% due to good deposit growth.
Speaking of deposit, Q2 was a great quarter for core growth. Our deposit marketing coupled with successful opening of five new branches contributed $1.1 billion in growth. Our deposit marketing is just kicking in, so we'd expect this summer to begin receding -- the loan-to-deposit ratio receding towards our targeted ratio. Accordingly, as we expect that our deposit rates increased in this quarter more than prior quarters. Our historical beta, if you look at betas, it's for cycle-to-date, which includes six increases. Main increase does not include the June increase, or interest-bearing deposits were about 0.31%, quarter two was 68%.
If you recall last quarter, we said over time we expect to be in the 40% to 45% range in this. As we catch up close with our turns towards more organic growth than acquisitive growth that would be consistent. It's not going to happen overnight, but I think that that's going to be -- I think we'll still stay well below the 60 basis points which I heard is the industry average these days. But we expect our margin to continue to, as I said last quarter, not be a beach ball underwater but more like ping pong balls underwater. But going forward we'll have good increases. It takes a full year for our rate increase to work its way through our system.
Our models still show ever quarter point adds about $22 million to $23 million of pretax earnings to us. So it just comes in overtime ratably and -- but we expect our margin to continue to increase, maybe so when compared to with bigger betas, but that ending out we think with three or four more interest rates in the 40 to 45 basis point range on that regard. And I know we'll get questions on that so I'll save any other comments to later on that.
We are still very asset sensitive, so additional rate increases should continue to add, excluding the one that happened in June, will add $22 million to our net interest income on an annualized basis. It hasn't changed from our previous discussions for the ever-increasing size of our balance sheet as we work to -- as the rates continue to move up we will continue to -- we will begin bringing our interest rate gap down. It actually went up a little bit at the end of the quarter. We're still waiting for the long end to move, and we will talk about that in a second. Like, right now.
Now the strong end of the curve is yet to move in constant with the short end. We wait for the bank debt liquidity play we have discussed in the past. This initiative is still in the cards, and we expect our loan-to-deposit ratio to stay in the low 90s and till such time as it spreads on the long-term and the long end gets better. Again, a little bit more on this later. As such, the future rate increase that we expect our net interest margin to continue to grow slowly but truly.
On the credit side, credit remains historically great. Both NPAs and NPLs were down from their already low numbers. There's a $7.5 million decrease in total NPAs. NPLs were down -- non-performing loans were down $6.4 million, OREO balances are now $1.1 million, so we continue to push out all the assets, valuation charges was down modestly. We continue to actively work to dispose of older properties. Net charge-offs totaled $1.1 million, charge-offs of 6.9 were offset by recoveries of $5.8 million, falling through on our basic operating tenant being conservative on our charge-offs and looking good on recovery.
As is evident in the NPA and charge-offs numbers there is also a couple we had in the commercial premium finance book is behind us, and recoveries are starting to materialize. So in summary, credit remains very good, NPAs as a percent of total assets decreased to 0.40% from 44 basis points. Reserves as a percent of NPLs was at 172%, up from 150% at the end of quarter one, and net charge-offs decreased 10 bips to two basis points in the quarter. We continue to call our portfolio for cracks and we'll expeditiously move assets out when said cracks are found. We'll also continue to aggressive work our OREO portfolio to clear the decks.
On the other income and other expense, Dave is going to go into these in detail momentarily, just some general comments. On the mortgage front revenues and volumes were up from quarter one. However, overall profitability decreased due to decreasing execution spreads without a commensurate decrease in cost of processing. That's more of a supply and demand function as it's got a little bit of a provider inflations here with lots of people out there going after fewer and fewer deals.
That being said, I like where we stood on our valiant umbers. But to that end, I mean, cost side we're just diligently working to reduce our cost to reduce our loan. These are up over 3.5 times due to Dodd-Frank and the like from the good old days, if you will. So to that end, we -- our Zoom mortgage product, that's our version of Rocket Mortgage went live on a test basis this quarter, and soon will be fully implemented in quarter three. Early results show a decrease of almost two days in processing time through the use of this front-end system, and we all know time is money. We're also looking at any other number of cost initiatives in that area. We're not going to comment on that now, but there are all aspects of the business and we expect them to be fully implemented by the end of this year.
Dave will be explaining our quarterly results in the mortgage area in detail in a moment. And as you all know, we know how this is important to all of you. So please note that we're committed to this business for the long-term. Our wealth management operations continue to improve, assets under the administration grew $300 million to $24.6 billion from $24.3 billion at the end of quarter one. Revenues for the quarter fell slightly due to less trading from our broker dealer, and the overall market in general in the second quarter.
Our overhead ratio was 1.57%, down one basis point from quarter one, but little bit above our 1.5% or better. Some of this is balance sheet driven as we are delaying point trigger on the liquidity initiative we previously announced. Other factors include the competitive mortgage revenue as a percent of volume without decrease in expenses. Our full-quarter of Veterans First expense, seasonably higher marketing expenses, additional incentive comp accruals due to better results, and we opened five new branches in accordance with our organic growth initiatives. Again Dave will discuss in detail. Net overhead ratio of 1.5% or better still remains our goal, and we will continue to work on it.
In the balance sheet front, assets grew $1.08 billion, there were no acquisitions included to $29.465 billion, loans grew $548 million in the quarter, that's a 9.7% growth again high single-digit as we anticipated, if you -- average loans grew $572 million. So we're in pretty good shape on the loan side, deposit we talked about up $1.01 or 18% over the previous quarter on an annualized basis. So look, the balance sheet grew nicely. I'll talk about the acquisition market in my final comments.
Loan growth as projected was in high single-digits as in most categories with the exception being commercial real estate, where pay offs and our worryness [ph] about the current competitive market negated good growth there. We will be very choosy about the deals we're going forward making sure they meet our standards and our pricing standards and our underwriting standards. Loan pipelines though are consistently strong and increase this quarter, the second highest level we had in about two years. So momentum is good, lot of that is due to our reputation, some due to changes in the marketplace, and we think that's just start of that.
Deposit growths were hurt by our growth and our success there. We flip the switches as back pricing has moved away from us we're at that inflection point, where organic growth as many of you known us in the past, we made our bones on organic growth and we've been very good at that, it's nice people flip the switch and see that we still have it. But five new branches came out during the quarter and we have a number of more branches planned for the rest of the year. And sad to say we're not interested in the acquisitions however expected pricing is relatively high right now, we continue to look, but we'll continue to take what the market gives us and stay disciplined in our approach to deals.
In any event, I'm going to turn over to Dave now to talk about other income and other expense.
Thank you, Ed. As normal, I'll just touch briefly on the non-interest income and non-interest sections and those areas that had the most significant changes.
In the non-interest income section, our wealth management revenue held fairly steady in the second quarter, totaling $22.6 million compared to $23 million recorded in the prior quarter, and up from the $19.9 million recorded in the year-ago quarter. A modest reduction in the brokerage revenue component due to reduced amount of customer trading was the primary reason for the slight decline in the combined wealth management revenue. Overall, the second quarter of 2018 was another solid quarter in revenue generation.
Mortgage banking revenue, as Ed alluded to, increased approximately 29% or $8.9 million to $39.8 million in the second quarter from $31 million recorded in the prior quarter. And then that's also up from the $35.9 million recorded in the second quarter of last year. The increase in this category's revenue from the prior quarter result was primarily from higher loan origination volumes. The company originated at approximately $1.1 billion of mortgage loans in the second quarter of 2018. This compares to 779 million of originations in the prior quarter, and a similar $1.1 billion of mortgage loans originated in the second quarter of last year.
The $318 million increase in the origination volume was attributable to $229 million increase from our retail origination channel, a $92 million increase from the Veteran's First consumer direct origination channel as we had our first full quarter productions on the acquisition, and this was offset slightly by a $3 million decline in our corresponding originations. The mix of loan volume related purchased home activity was approximately 80% in the second quarter, compared to 73% in the first quarter of this year.
Page 23 of our second quarter earnings release provides the detailed calculation of the components of the mortgage banking revenue including production revenue, MSR capitalizations, net of pay offs and pay downs, MSR fair value adjustments and servicing income. And given the existing pipelines, we currently expect origination to soften slightly in the third quarter to approximately $1 billion, but obviously this estimate could ultimately be more or less depending on the market conditions during the remainder of the quarter.
Operating lease income decreased approximately $945,000 in the current quarter compared to the first quarter of this year. This was primarily as a result of a $1.1 million gain realized from the sale of certain equipment on operating leases in the prior quarter of the year.
Other non-interest income totaled $14.1 million in the second quarter of 2018. This was up approximately $2.2 million from the $11.8 million in the first quarter of this year. There are variety of reasons for the increase in this category revenue, including the higher level of interest rate swap fees, higher level of loans indication fees, and increase of $521,000 on gains from early past of capital leases, and $600,000 settlement on a bully policy.
Turning to non-interest expense categories; now non-interest expenses totaled $206.8 million in the second quarter of 2018, increasing approximately $12.4 million from the prior quarter. The increase was primarily attributable to approximately $9.2 million of higher salary and employ benefit expenses, and $3 million of higher advertising and marketing expense. Both of these were related to the growth of the revenue and the balance sheet. I will talk about the more significant changes in detail as well as comment on a few other items of interest.
The base dollar expense increased approximately $5.4 million in the second quarter over the first quarter of this year. Slightly more than $3.1 million of the increase is related to a full quarter impact of the annual base salary increases that generally took effect on February 1, a full quarter of the increase in our minimum wage to $15 per hour for eligible non-commissioned employees, which took effect in early March, and normal growth as the company continues to expand its staffing for the five new branches and other growth at the company. And slightly more than $1.8 million of the remaining portion of the increase was related to the impact of bringing Veterans First team fully on to payroll in the second quarter. Veterans First retained some of their employees to handle the runoff of the volume that they maintained, and those employees fully came on to our payroll in the second quarter. So the second quarter's run rate for them is fully staffed up now.
Commissions and incentive compensation expense increased approximately $4 million to $35.9 million from $31.9 million in the prior quarter. The company experienced increase of approximately $2.4 million, and commission expense tied to the higher mortgage origination volumes, with the remaining increase associated with higher long-term and annual incentive compensation accruals due to the higher earnings experienced by the company.
Marketing expenses increased by approximately $3 million from the first quarter to $11.8 million. As we have discussed on previous calls, this category of expenses increased as our corporate sponsorships tend to be higher in the second and the third quarter of the year, due primarily to our marketing effort with the Chicago Cubs and the Chicago White Sox, as well as increased spending related to our deposit generation activities and brand awareness to grow our loan and deposit portfolios. And we clearly believe these marketing efforts are effective and enhancing the franchise value of the company.
Other than the salary and employee benefits and the marketing expense categories that I just discussed, all the other expense categories were up on an aggregate base by only $223 from the prior quarter. A $1.9 million reduction in OREO expenses was offset by slightly higher levels of expenses and a variety of other expense categories such as equipment expense, data processing expense, postage expense, FDIC insurance, and other miscellaneous expense categories. And as Ed mentioned, the company's had overhead ratio decreased by a basis point to 1.57%. And the company's efficiency ratio on a fully tax equivalent basis declined to 61.8% in the second quarter from 62.2% in the first quarter. So those were the highlights of the other income and other expenses.
And with that, I will turn it back over to Ed.
Thank you, Dave. So, in summary, all in all, pretty good quarter for Wintrust on all fronts. Momentum continues throughout the organization. Reduced taxes and higher interest rates are being very beneficial to us, to core earnings growth, and our balance sheet growth has been good, and that all bodes well for future earnings growth and future growth and franchise value.
We are pushing on our organic growth agendas acquisitions in general become relatively expensive. In that regard, we saw the number of new branches planned over next 18 months in neighborhoods and our designated market area where we are currently at present. Our retial and small business marketing programs, which we embarked on in earnest at the beginning of this year, are working well and pulling new counts in relationships both in the new branches and in the underutilized branches we had picked up during the great acquisition spree that resulted during and immediately after the great recession.
This doesn't mean that we are not investigating future business combinations in all areas of our business. But as we mentioned in previous calls and today, pricing has become unrealistic in some respects in our opinion. And when you do get something going, the gestation periods become very long. We remain well positioned with high interest rates and prepared to protect our downside as rates rise by gradually decreasing overall rate sensitivity.
Credit is as good as it's going to get. We continue to review our portfolio for any early sites and are exiting deals expeditiously when cracks are apparent. As noted in some of your reports at 30 and 60 day past dues. Many of which are for the most part organizational and not credit cracks, have decreased as we continue to push our people and staff to make sure that we can turn things around much quicker and not have past dues due to our ability to get things done on time.
Loan growth is good and pipeline remains very strong. Our niche businesses continue to work very well with us. We continue to look for other niche businesses to diversify our portfolio because as we said in the past and as you all know concentrations kill. We are prepared to embark on our liquidity initiatives should we have the desire -- we should have the desired strategic results. And I keep looking at the short interest in the treasuries and treasury market, and those guys are right, maybe we will get little pop here in the long end at some point in time which would be very good for us.
So in summary, we are well-positioned. We like where we sit. The disruption that's occurring in the market is good for us, very good for us as a matter of fact. As we target customers who may want to be refugees from big banks, and that's why we made our bonds in the past and still continue to do in the future. So we like where we sit right now. We think we feel good about it.
But that being said, as I said last quarter, we keep looking under the table for the boogeyman. We continue to prepare and maintain a fortress type balance keeping our credit clear -- clean. Not reaching for to do new loans, hardened by the fact that we have such good loan growth and our critical exception number continues to come down in these deals. So we are not chasing deals and our profitability models are still holding strong. And we are getting pricing for relationships we are bringing in to meet those profitability goals.
But with that being said, we keep looking around and making sure that we are prepared in the event of any number of things and we bring this is -- I let you know all this just to know that we're standing on our laurels assuming this is the new normal. We're all -- many of us are seasoned enough to know that just when you think you got it something comes up and bites you. We want to be prepared when that happens and I think way we've built this organization with core funding, good diversification in the balance sheet we're in very good shape to handle whatever gets thrown at us. So that being said, you can be assured of our best efforts to ensure the long-term growth of the franchise value of your company through both -- by maintaining that fortress balance sheet, maintaining double-digit earnings rates, earnings increases, good asset growth and protecting the net book value per share of the company.
So right now we feel pretty good but who knows. But now we have time for questions, and let's go.
[Operator Instructions] Our first question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is now open.
Thanks. Good morning, guys.
Hi, Jon.
Hi. Just start with big picture, Ed, you touched on it towards the end of your prepared comments, but just the lending environment, I think what you're saying is everything seems pretty healthy, but you are a little bit more cautious on commercial real estate, maybe a little bit more bullish on C&I. But give us your best guess as where you see the best opportunities and where things are a bit irrational for you?
Well, commercial real estate is -- you're just seeing some irrational pricing coming in from some of the smaller banks billing five and 10-year fixed rate deals in the fours. You're seeing development kind of popping up a bit. We're having a number of payoffs in the development of those loans we did do early on in the cycle, those are all done with really good sponsors. That's not to say we wont look at those, but it's just we have to slow down in that area as it's not meeting our loan policy criteria, apparently nor our pricing criteria, but the commercial loan pipeline is very strong. The Nicks businesses also are doing very well, our leasing business, our franchise business, commercial premium finance, all grew nicely. And the Life and Premium insurance continues its steady growth again. And we had [technical difficulty] that portfolio.
So we continue, as I said, we continue to look for other types of businesses. But the market here is in a bit of turmoil with the recent acquisitions, both of -- we have our two smaller then us yet largest competitor, the local competitors in the market. We are seeing opportunities there. We also are spending money up in Wisconsin where we have a beautiful franchise up there where we're hitting the market hard on middle market blending up there, something we hadn't really done.
We concentrated on Chicago here, and that's running like a top. Now we're taking that same model up to Wisconsin where there's a lot of big bank competition but nobody really does it our way. So we're seeing good results up there already, booking the deals that these guys never thought they'd never get a shot at. So our reputation is good, the momentum is good across the board. But we worry a bit about commercial real estate, but again, pipelines are as strong as they've been across the board. So knock on wood, we'll get deals done on our terms and our pricing, so we feel pretty good about that low single-digit number for the rest of the year.
High single-digit, right?
Yes, sorry, high single-digit -- for the rest of the year.
We're not at rope-a-dope yet?
No. That's kind of interesting. You talk about rope-a-dope,. I was using a double negative, I meant to say high. I'm like the president. But you hear a lot about -- we were always big proponents of the inverted yield curve and what that meant. And I'm hearing a lot of pundits on TV talk about the yield curve flattening and how that means a recession is coming soon. We looked at this very closely and did a lot research, we had our clubs lock in [ph] and we had -- we verified it, we read the Goldman's work and the like. It's a little bit different this time.
The yield curve flattening is somewhat technical in that with the Volcker Rule the big banks have taken their alternative investments down from 10% or 11%, and the big banks are a lot of doughs, the top five or six banks have from 11% down to a 4% or 5%, which means they're all buying anything long deal, any Ginnies or any treasuries that come out that are long-term to get their yield because the Fed has said, if the Fed were to go faster and get rid of the $4.5 trillion that they're sitting on that's worth about a point to the yield curve right now. Our guys did it, but interestingly enough Goldman came out with something out of two. So I'm not that concerned about that asset. We don't see -- our clients are all doing very well. The only issue they're having right now is with the labor. And some really good clients are having trouble getting labor, and that's an issue. But other than that they're all doing really well. So I don't see the problems -- I don't see storm clouds yet on the horizon, so we're not thinking about rope-a-dope, we're thinking just about dopes in the real estate area, I guess. No ropes, just dope.
Okay. Just one more on the deposit cost step-up, like my sense is you want to address it. But it's a little bigger than I thought it would be. I understand it, but just maybe give us an idea of where you feel like you need to defend yourself, and is this something that can maybe flatten out later in the year in terms of the cost increase. Thanks.
Well, we lagged more than most for a long time, and it does catch up with you, with our growth this quarter and the like it did pop a little, but in a quarter rise, if you take that quarter rise it wasn't as high as at the end of the -- if you take the rate increase that took effect June 15th it wasn't as much as you think. We look at this over time and we are at 31 basis points for the cycle, 31% for the cycle, we were 68% for, and this is just on interest-bearing deposits, for this quarter. But that only brought us to 31% for the cycle. You'll get total including demand deposits, we're at 22 basis points for the cycle, and 52 basis points for the quarter. We expect those numbers to get up, the total cycle after two or three more rates, that 31 is going to go to 40.
To get that you're going to have a little bit higher in the quarters going forward, however you're still catching up on two or now three rate increases that are working their way through the system. So it's balanced. We look at this very closely. And a lot of it is the lag that we had in the past, but we will catch up. And then by the end of this year, with two or first quarter of next year we'll probably be at that 40 basis point number for the cycle up from 31 or 40 or 45. So you will see that earning asset should continue to increase greater than that. Does that make sense?
Yes, makes sense. Okay, thank you.
Hoping to catch up, but we're giving you where we're going to be at the end of the deal.
Yes, okay, that makes sense. Thanks.
Our next question comes from the line of David Long with Raymond James. Your line is now open.
Good morning, gentlemen.
David, how are you?
Good. How are you guys doing?
Living the dream every day.
Good. Thinking about the deposit growth and the pace of the liquidity build, in your mind, where are you today on the liquidity build and between now and, call it, to the end of next year, where do you think that you will be with that? And then how much does the failure of the yield curve to fully cooperate impact that pace or ultimate size?
Well, we'd like to get to 90% loan-to-deposit in the maximum, so that should tell you what the type of growth we would like to achieve by the end of the year to get to that number, which -- the rest of it takes it -- we'd love to run in the middle of the 90s, so we'd love to be at 87.5. We're not going to rush to 87. If we're 91 too that's fine, but we're not going to rush to the 87.5 unless that we can get something on it. Does that make sense? So it's kind of a variable answer. If the rates, we want to get to 90% loan-to-deposit, the high end of our range by the end of this year, that's what we're trying to do. If rates were to -- if the long end were to move we'd like to get to 87.5 long-term, right in the middle of our desired range. I still think liquidity is important. I don't sleep well knowing that we're at 94 or 95, but that's the plan. Dave, do you want to comment on that?
No, I think that's right. I mean we brought it down a little this quarter with our branch opening and our targeted marketing. And we'll continue to plug away with that. I think we had hoped that the long end of the curve would've been up that we could've been a little bit more aggressive with those deposits and put them to work with longer investments, but net-net that hasn't happened. And so as Ed says, if the curve would pop up, which there's no indication that that's going to happen, it could happen quicker. Otherwise we'll plug away at it and increase it gradually and get down to that 90% range. And if the long end pops up we'll probably get it below 90%. But it'll be a gradual thing, we won't just go out and add another $1 billion or $1.5 billion of deposits and put it to work like we would if there was steepness to the yield curve.
Got it. And with the liquidity building that you're doing today, what are you investing in? What types of securities and what types of yields are you looking at right now?
Well, we've just increased a little bit with Ginnies and Fannies, but we haven't gone dramatically into that. So the liquidity is either sitting in cash and we've been legging in slightly with Ginnies and Fannies but not dramatically yet.
In a perfect we would love to see muni rates move up a little bit more to kind of hedge against the -- we've never had a large muni portfolio. If they were to move up closer to 80% of the number on the long end number, the taxable number, inside 80% or 85% of that number it'd be a great move for us to hedge against a different administration coming in down the road and raising taxes. So might be a good time to think about that, and we watch that very closely too. We've never really had a large municipal portfolio, which has served us well. But now might be the time to get in there and hedge a little bit, so that could be an area for growth too.
We watch those rates very carefully; watch the overall environment very carefully. If it appears that things are slowing and rates make go backwards you may see us move faster into that, because one of the things still doing -- we expected the long on the liquidity side to bring our gap down and probably not right calls on a lot of it, as we have in the past. As the rates get higher we don't want to have that huge gap and have that downside vulnerability. So we're looking at a lot of different strategies. We have a lot of quantitative mathematicians and economists left over from the stress test days, the foreign days, they're still doing stress tests but they have a little extra time on their hands so we have them running lots of these. So we're all over this thing, we'll watch it very carefully.
But just one other thing there, David, is if you look at our investments at the end of the quarter, they were up just slightly. We used some of those deposits really to fund the long portfolio, and you'll see that our federal home loan bank advances actually came down from the first quarter a little bit. So rather than borrowing the federal home loan banks as much to fund the mortgage portfolio, we just used those deposits since we have them. So part of it was to just borrow less in the first quarter, so we're still waiting for that long end to move before we invest heavily in securities.
Got it. And the last thing I wanted to ask just quickly was, the deposits quarter period end were much higher, about $1 billion ahead of the average. So am I right in assuming that a lot of the deposit growth in the quarter came at the end of the quarter?
Yes.
Okay.
Well, we opened two very successful branches right around the first part of June, one was in Evanston, an area we've never been in which is a fairly large parochial suburb in Chicago with First Bank Evanston selling to Byline that'll open up an opportunity for us to come pick that positioning. And the branch at Wrigley we opened right at the beginning of -- of middle of May, and that's off to a great start too. So many of the branches opened in the last part of the quarter, and they really did well taking off. So it's nice to see when we open that people still want to come.
Got it. Thanks a lot, guys. Appreciate it.
Our next question comes from the line of Chris McGratty with KBW. Your line is now open.
Hey good morning, thanks for the question. Ed or Dave, the obviously the guidance on the overhead has been 150 over time, I guess given what you're doing with the balance sheet how should we be thinking about whether a point in time or maybe not a full-year basis, but what's a realistic time to get there? Could you get there by the end of next year, early next or is it kind of a longer aspirational target?
Well, if we put $2 billion -- 87.5% loan-to-deposit we'd be there right now, the ultimate goal. So a lot of it has to do with the balance sheet not being where we are in the yield curve. Some of his quarters he said was due to the mortgage profits and the expenses being too high, but we are investing in organic growth. And that's putting costs of growth to the income statement as opposed to buying for the big number and not having the cost go through the income statement taking it intangible book value per share. So the argument we used to have when we were really doing organic growth before we got into the whole splurge of acquisitions.
But it is aspirational. We think we can get -- we'd be there now. If you had any slop to the yield curve we'd probably be there now, but we continue to work at it. You're going to bounce, I think, between that 150 and 160 number every quarter until we really, you see us get the liquidity play underway.
Great. And maybe if I could follow it up, some of your peers look at just the spread between revenue growth and expense, the operating leverage, which for you guys is kind of in the 300 to 400 basis point range for recent years. Is that about a fair way to look at the company given the investments you're making, and the revenue growth -- the double-digit revenue growth is kind of a 300 to 400 basis when operating leverage kind of still realistic given where we are?
Chris, I really haven't run the numbers the way you're talking about them, but clearly operating leverage is something we think we have as we grow up these small banks. So I don't want to talk off the top of my head without running the numbers, and we don't look at it that way. We look at sort of at the net overhead ratio because there's lots of moving parts, like some people said in their reports so far that expenses were a surprise this quarter. But the expenses were really up because the revenue generation was up, the mortgages were up. And the advertising was up to generate the deposits and the sponsorships we had, but it was -- a lot of it is to generate the deposits and the loans is the endgame, obviously. And so you spend the money to make the money, and so we really look at that relationship as far as are we leveraging that well from a net overhead ratio, but I'd have to go back and study the numbers you're looking at because we just don't present it that way.
Okay, fair enough. Thanks a lot Dave. Thanks Ed.
Our next question comes from Brock Vanderbilt with UBS. Your line is now open.
Thanks for taking the question. So I guess on the mortgage business or businesses, could you review what product verticals you now have and are you kind of where you want to be in mortgage generally or are there more plug-ins that you find attractive?
Well, we have -- you want to talk about the verticals and I can talk about where we're going?
Well, the three that we show is we just have our standard retail origination channel. And obviously if we can bring on more originators there that would be fine as long as we can make the office as profitable. The Veterans First is a consumer direct channel, and as soon as we get that fully under our belt and comfortable with it we could expand that consumer direct channel to other product lines besides just the VA type of loans. As Ed mentioned early on, we put in what we call our Zoom product, which is more of a consumer direct type of product although we haven't used it that way, we're just using it to be more efficient on our own processing right now. But we could expand that out. We would certainly like to expand the government loans a little bit more as the pricing on those tends to be better than the others, but other than maybe moving more towards the consumer -- more of our product line towards the consumer direct channel, I think we have really what we want for the short-term here right now.
We're really -- we're not looking right now other than organic growth of producers, and we've done a number of mortgage acquisitions in the past and on an earn-out basis which leaves us without a lot of stress on these deals as we've been working out or not. But we're going to concentrate now at least for the rest of this year on getting efficiencies out of our process. We have a number of interests. I'm not going to talk to detail about, but a number of interesting concepts and proven concepts that we are beginning now that we can take advantage of that will hopefully drop our cost of processing in total in about half; processing, now to mention whole different story, the Commission Structure and Veterans First is different than the retail commissions, there has to be Dodd-Frank kind of screw that thing up, but you cannot pick, you take commissions on volume and not profitability. And the profits go down to commissions. We got to find a way to figure that out. So everybody is on the same theme here. But we think we can cut our costs of actual backroom processing and have, we're going to be working on that very hard over the next three to six months, hope them all implemented by that point in time. The Commission Structure is the biggest cost we have, something we're not going to tamper with now, but there are ideas. And I think the whole industry has to deal with that issue in general if rates stay down, if the spreads stay down where they are people without our volumes smaller than us can have hell of time dealing with that issue on the cost side.
Okay, great. And just housekeeping, Dave, were any of those deposits that came in toward quarter-end considered wholesale?
No, our brokerage deposits were relatively flat. They changed just marginally, I mean somewhere it ran off and we did bring some on to replacement, but the wholesale broker deposit number was relatively flat.
Okay, great. Thank you.
Our next question comes from the line of Kevin Reevey with D.A. Davidson. Your line is now open.
Good morning, gentlemen.
Hello, Kevin.
How are you?
Long time no see.
Yes, yes, congrats on a great quarter.
Thank you.
So my first question is loan utilization, it was around 52% or 53% when we talked in the last quarter has it moved up or is it stayed pretty much the same?
The phenomena is still the same, Dave has got the number here, but…
Yes, it is trending pretty much the same as we have in the last few months. So utilization rates are about the same.
But people are taking big alliance, they still have -- there is still anticipatory line increase going on. So borrowing is up, but the lines are increasing proportionally.
But that's a good thing, absolutely.
We think so.
Yes. And then Ed, at the end of your prepared remarks you talked about that you continue to look for other niche businesses, can you kind of give us some color on what those businesses are?
If I knew I'd be doing them. A lot of things we run across are things we haven't -- the things we never thought of before. There are different interesting little businesses where -- that we think we can go to scale, we like to think that any one of these niche businesses should be able to go to $400 million to $500 million. Many of them we've never heard of. Before we read about them, we look at them. We're not bigger volume because they're pretty expensive right now while we run into them, but we are pretty big on standard room stress like we did leasing, our leasing portfolio is a 1.1 billion started two-and-a-half years ago. We see good growth there. It's interestingly the moves that have been made in Chicago banking are opening up some opportunities on a leasing front too.
So we believe that within some of the niches we can get some additional diversification by adding additional products that we haven't had in existing leases, or in existing businesses. So, a lot of it is stuff we never heard of. Different concepts or ideas, we are not afraid to go naturally with our niche businesses either. So we are here, let me know.
I will do. And then, with the recent disruption in Chicago, early you talked about opportunities as far as gaining customers, are you seeing any opportunity just as far as talent acquisition?
Yes, let's leave it at that. Yes, we are. You can imagine this simply the deals that we announced involved cost cuts that would put uncertainty in all areas of the business. And so when we open our position on the operational side in -- or deposit apps or in the BSA or compliance, we are seeing a number of opportunities of various season people wanting to come be here. We were always in the position because our compliance numbers and our serial numbers are still aren't going to be botched. Now it's the other way around. So we like that.
And the lending side, you do see -- I'm not going to comment this particular, but disruption that is taking place and has taken place a year-ago has been -- is good to us, and will continue to be good to us as we add to our staff. So, lots of dislocation is going on in assets and people, and we intend to just be disciplined taking advantage of them.
Great. Thank you.
Our next question comes from the line of Terry McEvoy with Stephens. Your line is now open.
Thanks. Good morning.
Hi, Terry.
Hi. So, how are you thinking about the third quarter margin in terms of getting the benefit at the June rate hike along with the higher deposit betas that we've talked about as well as some of the balance sheet actions that you've discussed on the call?
Well, as Ed mentioned, we still think we have upward potential in the margin. Deposit betas are up over prior quarters, but we are very asset-sensitive. So, our loan pipelines are re-pricing, and some of those more significant initiatives that we have like the premium finance niche, now it takes nine months for the commercial premium finance portfolio to turnover and a wise portfolio re-prices once a year. So, some of those loans that are re-pricing now are taking advantage of a couple of prior re-prices too. So we still expect our asset yields to outpace our deposit costs slightly, and so we would expect that margins could continue to trend upward.
Okay. And then, the $950 million of franchise loans, could you just discuss the underlying health of that portfolio, and are you becoming anymore selective at all within that business?
We've always been selective in that business. The help of the portfolio is very good, grew nicely last quarter. We again look for diversification inside the brands that are in there. McDonalds is still the largest exposure that we have. But it doesn't make very much -- I don't have it in front of me here, next time I'll bring the report with me. But no, we don't have a lot of stress, and any stress really in that portfolio other than every now and then we get a guy and you want to stay with the brands that where they support the franchise and the goodwill of their business, and I'll let them go under if they have an issue. So the portfolio is very healthy, where you have no issues with it, look forward to good growth of it.
And just one last question, will the advertising and and marketing expenses remain seasonal? Will there a decline later this year, or do you think because of the market disruption you will be a little bit more proactive on the advertising and marketing side?
No, as I indicated in my comments. I think the third quarter will stay elevated, and a lot that's again due to the sponsorships of what we do, a lot of them happened in the summertime and clearly our Chicago Cubs and Chicago White Sox sponsorships are heavier during the baseball season which is generally in the second and the third quarter.
We are hoping a bit of the fourth quarter it has heavy sponsorship means Cubs will be in the playoffs in World Series again.
But then we would expect it trail off a bit again in the fourth quarter, and in the first quarter and then pop back up again. So there is seasonality to that in the middle quarters of the year.
Yes, it should grow - the overall basic marketing expense what we are doing - what we have done is pivoted from brand marketing more to product marketing. And so, it's just a pivot of expense. The core expense should grow measured with the overall organization with these little blips in the summer for us for our baseball sponsorships.
Great. Thank you both.
Thank you.
Our next question comes from Nathan Race with Piper Jaffray. Your line is now open.
Hi, guys. Just going back to Terry's first question on loan yields and pricing. I am just curious is there are any prepayment fees that may have impacted loan yields this quarter. I understand obviously you got the full benefit of the last few rate hikes in the loan yields, but I guess the increase in loan yields that we saw this quarter was little higher than we saw in previous quarters following an increase in the - by the Fed?
No, that's not unusual, but most of it comes through the leasing business and we didn't really have anything out of the ordinary there. Prepayments usually are leased at prepays or we had nothing out of the ordinary. And by the way we are still you said the last two rate; those won't be fully implemented for another two quarters. So we still are experiencing the growth of those. It's kind of a snowball rolling down the hill for us.
And we did see a little bit of elevation in payoffs on commercial real estate side, but those are more end of term maturity terms for those, and then some of those went outside to insurance companies or the like, but as planned.
Like the McDonald's deal. We lead McDonald's new head quarters in Chicago as a lead on that with Bank of America. That was a big construction. We see those coming to maturity. And those are rolling off into a permanent financing outside the banking system, so…
But those generally don't come with prepayment penalties because they are at maturity, so nothing unusual in the quarter.
Got you. Then kind of changing gears and perhaps a broader question on deposit growth. I guess is it kind of core deposit growth that we see this quarter sustainable just given the rate increases that you guys implemented across number of products during the quarter, or do you guys see yourself having to spend more on both marketing and so forth and continue to raise rates across the number of products to continue deliver this magnitude of deposit growth over the back half of this year?
Well, on the advertising side, I think we answered that question come more of a pivot from the advertising. We brand advertising to product advertising. And that should grow proportionately with our number of branches and with the size of the organization kind of that core pricing. And at the same time, where we are growing new branches, there is growth that's coming across the board. So, a lot of it is growth coming in without higher -- because of how we are structured, we don't have to raise rates everywhere. Not like big bank. That's our model brand. As they raise it, they have to raise it across the board. I can go to one bank and raise rates where I want -- that's inefficient and want to grow there to get those efficient with no cost increase in expenses or to a new bank where I want to, but at the time, I am growing at existing banks at not elevated rates.
So I think you have to look at aggregate. What our aggregate plan is over the next - they have two more raises. Our overall data will be in the 40% range. So that's kind of have to -- gather that and know that we are saying, we believe our earning assets will surpass that. And we will have ping-pong ball increases in the margins. Ping-pong ball under water, not beach ball under water increases in the margins as rates continue to go up. And that will always be in a larger earning asset base, which should materially help that net interest income.
Got it, I appreciate the color guys. Thank you.
Our next question comes from Michael Young with SunTrust. Your line is now open.
Hey, thanks for the question. Ed, I wanted to go back to some of our comments earlier in the call about maybe potential for the long end of the curve to move higher. If you start to see that taking place or things moving in that direction, would you look to term out the CD book while rates are lower now, or you are asset sensitive enough so that just doesn't make sense?
We look at both sides of the balance sheet as it relates to rates going up and rates continue to move up reducing our interest rate sensitivity. So, we would look at both sides of balance sheet. We are doing that. Yes, we want to lock-in longer rates when they are there. We are doing that now to some extent. But we also would look at the assets side -- we would probably look more at the asset side than liability side. But, yes, we want -- we will -- certainly we like to lock in the asset side before the liability side to trying to reduce your gap going forward.
Okay, thanks. And maybe more just a broad comment on credit spreads. Obviously, base rates continue to move up. But how much of that is kind of being given back in just absolute credit spreads and pricing on new production at this point?
That's a good question. We're seeing the market do that. Small banks in particular. Saw large banks in some specific areas are doing it. But fortunately, as I have said in previous calls and really it's been the history for our --how we operate here throughout our life is we don't change our loan policy or pricing model for anything. If it doesn't work, we won't do it. So, we are -- the market is moving a little bit, we are seeing it, but fortunately we have been able to get our business at our terms. And we beat the other guys left and right. We are not going to chase the market. We are not going to chase the down rates. We will let deals go, hence the commercial real estate runoff that we have had. Some of that has been contractual runoff for projects that are completed and into the secondary market. It's always been good, good solid commercial real estate that's going to another bank for a price that doesn't make sense to us, we don't chase it. And we are seeing a little -- we are seeing it there.
On the commercial side, it's as well as it's going to go, I mean the commercial side has been as low as it can be. So the middle market commercial side has been as low as it can be for the last three years. We don't see that occurring that much. In the private equity portfolio, we are seeing our sponsors sell or buy which should tell you something. But we are holding steady in that portfolio. We are seeing non-banks come in to that area like the areas in the anterius of the world with rates that we would not be comfortable with the deals, still they look pretty good, 400 over -- I think 400 or 500 over, but air balls that are way out of control. And that was not our sponsors doing. Our sponsors are playing. Our sponsors are selling. And that means something to us. So we are seeing some rationality in the market on the commercial real estate side, on the private equity side. But private equity side being mostly non-banks throwing money at deals that don't make sense to us so.
Okay. Thanks.
In other words I think spreads are holding in there for us.
Yes.
Thanks, Dave.
That's a good color, man.
[Operator Instructions] Our next question comes from the line of David Chiaverini with Wedbush Securities. Your line is now open.
Hi, thanks. So I wanted to followup on the discussion about loan growth which has been very good. And high single digit guidance was maintained despite the caution on commercial real estate. So I was curious are you seeing enough demand or an acceleration in demand on the C&I side and in premium finance to generate and continue that type of growth?
Yes, on the commercial side, we're just taking business from people. As Dave said, our utilization rates are still in the low 50s and lives we are bringing in. But with the disruption in the market, with our reputation continuing to grow and our abilities continuing to be recognized in this area, we get a lots of deals from other banks because of our good looks and also because of the disruption in the market that's taken place. On the premium finance side, Dave, you want to talk about that?
The premium finance business is just pretty strong. I mean we continue to market and get new clients. SunTrust sold recently which is disruption in the marketplace. They sold to one of our larger competitors. And so that is helpful to us, and we do give great service and a good product. So, we get our feet in the door, and we continue to build the business -- our feet in the door. We continue to build the business there.
So we keeping blocking and tackling. There was some regulatory release that we hope down the road may pop in that would help us compete with a non-regulated entities. Hopefully that's going to come shortly which would be another tailwind to us. And we have lost some business because of regulations that apply to banks and don't apply to non-banks or insurance companies. But we are hopeful that that's going to be resolved soon. So that might be a tailwind for us going forward. But as we mentioned on the front-end, our pipelines are working their way back up and are relatively high levels compared to recent history. So, the business is there and we think we can sustain it.
Thanks for that. And in terms of benefiting from the disruption, are you able to benefit without hiring from these other organizations? Or, is hiring a pre-requisite to benefit from the disruption?
The former, we benefit out of the box, hiring is just we are very selective in that regard. And that's just the additive, but for the most part you really need to hire. We have the capacity to take out additional business across the board, but hiring don't hurt.
Thanks very much.
Thank you.
And I am not showing any further questions in queue at this time. I would like to turn the call back to Mr. Wehmer for closing remarks.
Thanks very much everybody. Have a great rest of summer and hopefully we will back with our eleventh consecutive quarter of earnings when we talk in October. So, talk to you soon. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.