Wintrust Financial Corp
NASDAQ:WTFC
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Wintrust Financial Corp
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Welcome to Wintrust Financial Corporation's Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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 third 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.
Good morning everybody and welcome to our third quarter earnings call. With me, as always, are Mr. Dykstra, Kate Boege, our Legal Council -- our General Council; and Dave Stoehr, our Chief Financial Officer. We'll use our usual format with me giving some general comments on our results. Turn over to Dave for more detailed analysis of other income, other expenses, and taxes. Back to me for some summary comments about -- and thoughts about the future. And then turn over for some questions.
So, we're pleased to report our 11th straight quarter of record earnings. Net income of almost $92 million or a $1.57 a share. We're almost 40% better than last year. Pretax earnings, which we look at to take out the effect of the tax cuts, were $122 million, up 18% from last -- the same quarter last year.
Year-to-date basis were $4.50 a share, up 28% on annualized basis and 20% on earnings at $264 million approximately. Pretax income up 16.5% to $352 million. Our margin decreased by two basis points, ROA was 1.24%, and all-in-all pretty good results.
As readily apparent our growth trends remain consistently positive. Few blips this quarter which will lead some discussion and clarification, specifically net interest margin dropping two basis points, one-time charges related to completed acquisition of Delaware Place Bank, and the moderate respective increase in NPL. These issues will be discussed in detail.
Turning [ph] to the margin, the net interest margin decreased two basis points over the second quarter and increased 15 basis points year-over-year. Net interest income grew $9.4 million over the second quarter to one more day, good earning asset growth including our loans.
Average earning assets grew $880 million versus the second quarter. Average loans net of loans held for sale grew $539 million, the remainder of the growth falling into our liquidity management portfolio.
Quarter three period ending loan net balances exceed average loan balances by approximately $326 million, which bodes well for the fourth quarter. Earning asset yields increased 13 basis points versus second quarter. Non-interest expense increased 17 basis points.
The free fund's contribution was a two basis point increase resulting in that two basis point decrease in margin. Our average loans to deposit ratio for the quarter decreased to 92% to 95.5% in the second quarter. This obviously still remains higher than our desired range of 85% to 90%, which shows pretty good improvement in accordance with the plans was laid out earlier -- in earlier calls.
As a direct result of our core growth initiative represents a start to our liquidity deployment strategy which we have also discussed in previous calls. With the long end m moving higher, we begun to lengthen the duration of our liquidity management portfolio. This will be a measured approach and the obviously depend on the rate environment.
During quarter three, we invested approximately $200 million, which equates to about $75 million on average and longer term assets and another $200 million being of the fourth -- of this quarter.
On a static basis, i.e., just looking at quarter three year ending numbers, we need an extra $1 billion to get to our loan deposit ratio to the midpoint of our desired loan to deposit ratio.
As you can expect us -- as such you can expect us to continue to push core deposit growth above and beyond what is needed to support loan growth, deploy those assets in accordance to the aforementioned plan. Obviously, this all depends on the rate environment that we're moving into.
It should be noted that we invested the entire increased liquidity management that if we had invested the entire increase in liquidity management assets in the quarter and not an overnight plunge, our margin actually -- probably would have been up in Q3.
As mentioned Q2 was good quarter for core growth, our deposit marketing coupled with the successful opening of four new branches and the acquisition of -- on top of the five we opened in the second quarter, the acquisition of Delaware Bank contributed to the $552 million of deposit growth. Our deposit marketing should continue to be effective, should we expect this good growth going forward and continued progress being made against the loan to deposit ratio in our desired range.
Our deposit rate has remained in the range we previously communicated to you. It was still asset sensitive this rate increases include the one announced in mid-September should still add to the bottom-line despite this increase deposit data. Every quarter point increase fed fund should add north of $20 million to net interest income at an annualized basis. Number hasn’t changed from past discussions due to the increasing size of our balance sheet.
As such future rate increases we anticipate that net interest margin would grow slowly but surely over the long-term. Mitigating factors of this will be the timing the execution of the liquidity strategy.
Also [ph] markets full year to these rate increases to work their way through our balance sheet. So the method of passed increases are still being realized. And the credit -- credit remains good, but everyone knew it couldn’t stay this low forever.
Non-performing loans in the quarter increased approximately $37 million, primarily due to the addition of four relationships totaling $46.6 million. Two of these loans building $29 million were actually current when we turned them on non-accrual and part of our planned exit strategy. These two loans are in a process of liquidation and collection.
We recorded $7.5 million specific reserves on these loans. Those who follow this know this is our culture to be very proactive area of credit. We would expect these credits should be cleared by the first quarter 2019.
As of now, we do not see this as a deterioration of overall credit numbers, our ratios is still well below our peer group. As a matter of fact, if we hadn't been proactive on these, non-performing loans actually would've been down. We were up $37 million in non-performing loans and $46.5 million of it relate to these four credits would have been down. So, we don't think it's a trend. However, you know that we do identify loans with cracks in them and identify exit strategies and it takes some time to execute these sometimes and that's what we're doing here.
Net charge also -- pardon me, order balances decreased by approximately $7 million a quarter as we consider to clear these amount. Charges off were $4.7 million, charge offs of $7 million were offset by recoveries of $2.3 million. Net charge off plus the increase in specific reserves and growth -- loan growth is also provision of $11 million, up $5 million from the previous quarter.
So, in summary, in spite of the quarter with mini-blip, credit remains pretty darn good. Total MPAs as a percent of assets increase to 52 basis points from 40 basis points, which is still pretty respectable. Reserves as a percent of MPLs were 118%, down from 156% at the end of quarter two. The provision as a percent of loans annualized is only 19 basis points, which is still a really good number.
We continue to call the portfolio for cracks. And we will expeditiously move assets out when any said cracks are found. We'll also continue to aggressively our order portfolio to clear the decks. As I previously mentioned, we don't see this quarter's mini-blip. It's an increasing trend, but we all know credit couldn’t stay as well as it has been -- as good as it's been forever.
On the other income and other expense side, Dave is going to go through this in detail momentarily with just a couple of general comments. Dave will take you through these specific numbers in the mortgage area, but I will say though that we are on track in our efficiency moves in this area that I talked about last quarter. The majority of these initiatives will be totally in place in the first quarter of 2019 and more efficiency moves will certainly follow. This market as such as we got to drive costs out and there's beginning to be somewhat of a shakeout in this market, so we see the reasonable opportunities there will always be something for the seasonality in the mortgage market.
Our wealth management operations continue improve; assets under administration grew by approximately 1.4 billion in the quarter to just about $26 billion. Managed money accounted for $670 million of this increase which boded well for future revenue growth. The remainder growth was in brokerage relies on trading for revenue. Revenues for the quarter stayed steady at $22.6 million, but we expect that to continue as we continue to build -- to continue to increase as we build our -- continue to build our managed money portfolio.
One-time items as we do them basically will offset each other in the quarter and our net overhead ratio for the quarter was at 1.53%, down four basis points from quarter two, but above our target of 1.50% or better. Given our overall growth, we're happy with this number and with a number of branches we've opened, the expansion we're doing, the new initiatives we're doing. Given our overall growth, we're happy. We now believe continued organic asset growth will bring this number of lines [ph] as we fill our inefficient branches, the good relationships. Net overhead ratio of 1.50% still remains our goal and we believe this is attainable.
On the balance sheet side, assets grew to over $30 billion for the first time increasing by $678 million in the quarter. $274 million of this growth attributed Delaware Bank acquisition. I got to tell you I still pinch myself, I think from a [Indiscernible] less than 27 news [ph] about $30 billion pretty amazing.
Loan growth which is aided by the acquisition Delaware Place to the tune of $151 million, grew $513 million in the quarter. All categories other than residential mortgages and home equity lines grew in the quarter. We continue to see muted growth in the commercial real estate area as payoffs continue and new opportunities are aggressively priced.
Same is true for our sponsored equity or private equity backed deals. Most of our private equity firms are selling anything that isn't nailed down right now given the frothiness of that market and we're getting refinanced out of other deals based on the aggressive nature of non-bank lenders.
Loan pipelines remain consistently strong. Deposit growth was discussed previously; needless to say we are heartened by our success. Our flipping will switch the concentrated more organic growth like we made our bonds on originally to both the opening of new branches and growing underutilized locations is working.
We intend to continue our marketing here and also across several other services accounts these new relationships. This will fund our liquidity play and bring our loan to deposit ratio back to the desired range.
That's not to say we're having system [ph] acquisitions though. But we're expected pricing is relatively high right now, but couldn’t take what the market because this as a disciplined approach to deals. The acquisition of Delaware Place Bank is being assimilated well. We look forward -- and we look forward to completing the previous -- previously announced transaction acquiring certain assets and liabilities American Enterprise Bank to expect to close in the fourth quarter. All-in-all we're pleased with the quarter and pleased to a record quarter.
Now, turning over to Dave.
Thanks Ed. As normal, I'll touch briefly on the non-interest income and non-interest expense sections. In non-interest income section, our wealth management revenue held steady at $22.6 million in both the third and the second quarters of this year compared -- and was up from the $19.8 million recorded in the year ago quarter.
Brokerage revenue was down approximately $205, while cuts and asset management revenue offset that decline by increasing $220,000. Overall, as Ed mentioned, we believe the third quarter was another solid quarter for our wealth management segment.
Mortgage banking revenue increased approximately 5% or $2.2 million to $42 million in the third quarter from $39.8 million recorded in the second quarter and was also up from the $28.2 million recorded in the third quarter of last year. The increase in this categories revenue from the prior quarter resulted primarily from loans originated and sold during the quarter offset by slightly lower production margins and slightly higher origination volumes.
The company originated approximately $1.2 billion of mortgage loans in the third quarter of 2018. This compares to $1.1 billion of originations on the prior quarter and $1.0 million of mortgage loans originated in the third quarter of last year. The $56 million increase in origination was attributable to $187 million increase in our correspondent origination channel offset by lower volumes in our retail origination channel.
Originations related to Veterans First consumer direct origination channel was essentially flat with the prior quarter. The mix shift contributed the margin compression as margins on correspondent originations are lower than our retail origination business.
Additionally, the mix of loan volume related to purchased home activity was approximately 76% compared to 80% in the prior quarter. Page 22 of our third quarter earnings release provides a detailed compilation of the components of the mortgage banking revenue including production revenue, MSR, capitalizations, net of payoffs and pay downs, MSR fair value adjustments, and servicing income. Given the pipelines, we currently expect originations to soften somewhat in the fourth quarter due to increased market interest rates and the seasonality of the business.
Other non-interest income totaled $16.2 million in the third quarter of 2018. This was up approximately $2.1 million from the $14.1 million recorded in the second quarter of this year. There are a variety of reasons for the increase in this category of revenue including an increase of $1.1 million related to income from investments and partnerships. Those are primary CRA, SBIC-related partnerships, an increase of approximately $1.6 million related to settlements on bully policies, a positive swing of $0.9 million of foreign exchange valuation adjustments associated with the U.S. Canadian dollar exchange rate, and this was offset partially by a lower level of interest rate swap fees of approximately $1.5 million.
Turning to the non-interest expense categories, non-interest expenses totaled of $213.6 million in the third quarter, increasing approximately $6.9 million from the prior quarter. The increase was primarily attributable to approximately $2.2 million of higher salary and employee benefit expense, $3.4 million of higher professional fee including approximately $2.1 million of mostly non-recurring consulting fees associated with the Delaware Place Bank acquisition, which I will address later, $194,000 of severance and conversion related costs associated with that acquisition, and just other general cost increases as the company grows.
Turning to the specific detail, the base salary expense increased approximately $2.9 million in the third quarter of 2018 over the second quarter this year. Approximately $0.5 million of the increase related to the Delaware Place acquisition and the remaining increase related to the impact of the nine branches added during the second and third quarters of 2018 and normal growth as the company continues to expand including further buildout of our IT and information security teams to make sure we're keeping up with technological changes and addressing increasing cyber security risk in the marketplace.
Commissions on incentive compensation expense decreased approximately $1.9 million to $34 million from $35.9 million in the prior quarter. The company experience the declining commission expense of approximately $1 million, primarily due to the mix of mortgage origination volumes being more heavily weighted in distribution channels that carry lower commission rates. The remaining decreases associated with slightly lower long-term and annual incentive compensation accruals during the quarter.
The employee benefits expenses elevated somewhat in the third quarter due primarily to the impact of a few significant health insurance claims in our employee base. We will expect this expense category would retreat from this level assuming the fourth quarter has more normalized health insurance claims.
Data processing expense increased approximately $583,000 in the third quarter relative to the prior quarter. The increase was related to approximately $130,000 of conversion related expenses associated with the Delaware Place Bank acquisition and the additional account processing associated with bringing that acquisition on Board as well as general growth on the rest of our business during the quarter.
Marketing expenses decreased by approximately $662,000 from the second quarter to $11.1 million. The slight decrease in third quarter was due to lower levels of direct mail and mass media and marketing during the quarter as the previous quarter had more marketing associated with the opening of various new branch banking locations and general deposit generation advertising campaigns.
Professional fees increased by $3.4 million to $9.9 million in the third quarter from $6.5 million in the prior quarter. The main cause of the increase related to the consulting fees paid to former employees in relation to the acquisition of Delaware Place Bank of approximately $2.1 million. These consulting fees will not continue into the future other than approximately $147,000 scheduled to be paid in the fourth quarter of 2018.
Occupancy expenses increased during the third quarter to $14.4 million from $13.7 million in the prior quarter. The increase was generally related to the lease expense associated with the recent increase in the number of branch banking locations, increases in property tax accruals, and higher utility costs during the quarter.
Other than the expense categories just discussed, all other expense categories were up on an aggregate basis by approximately $596,000 from the prior quarter. So, de minimis increases across the Board for the other categories.
Company's efficiency ratio on a fully tax equivalent basis improved to 61.2% in the third quarter from 61.8% in the second quarter. Additionally, as Ed mentioned, the net overhead ratio also improved slightly during the third quarter to 1.53% from 1.57% in the prior quarter, it was still slightly above our goal of 1.50%. So, progress made on both those fronts.
And with that, I will turn my conversations back over to Ed.
Thanks Dave. Summary and some thoughts about the future. All-in-all, a very good quarter for Wintrust on all fronts. Momentum continues across the Board. Reduced taxes and higher interest rates have been beneficial to us. According to the [Indiscernible] growth well for the future earnings and growth in franchise value.
As I mentioned, we do not see the mini-blip in credit as a trend, but as stated credit can't be as good as it's been forever. We continue our habit of reviewing the portfolio for weaknesses and addressing them expeditiously. In some perverted way I'm kind of happy that we're off the bottom because the only place to go is up a little bit and this is a very controlled way to go up and it's fitting and fits our culture very well. But we -- certainly we don't see this as a trend that you never know credit is credit, we're going to stay on top of it.
We're pushing our organic growth agenda as acquisitions, in general, become relatively expensive, yet regardless of number of new branches planned over the next 18 months, the neighborhoods and our designated marketer were currently not present.
Our retail and small business marketing programs which we embarked on in earnest beginning this year are working, employing new accounts and new relationships. As stated earlier, this does not mean we're not investigating potential business combinations in all the areas around business, but also as talked about previous calls, gestation periods of these deals has become a lot longer.
We remain well-positioned interest rates and are prepared to protect the downside as rates rise by gradually decreasing our overall interest rate sensitivity. Loan growth has been good and pipelines remain strong. We continue to look at opportunities to further diversify our portfolio. We are embarking on a liquidity initiative; we should have the design and strategic results.
So, in summary, we're well-positioned. We like where we sit. And like I said last quarter, it's times like this when you continue to look around the corner for the boogeyman. [Indiscernible] always scare me. We have to worry about a bipolar political world we live in, a tax-free state is low and how we protect that. Inflation related to trade wars and tariffs and labor costs we believe is real. New regulations, who knows if they're coming, but they can't help themselves. They rather will be.
We continue to invest heavily in cybersecurity technology as well as our digital product enhancements where rates continue to rise. What we can do when they are near the top, whatever that may be.
Back to labor cost. It's interesting that two of the non-performing were now basically related to labor. One was a bus company that couldn't find drivers. And that was not planned exit strategy that actually is a problem that we look -- we take those buses, but they could find drivers. And another was a fore profit school that people didn't have to go to learn the trades. So, they are in the process of closing schools. They are profitable. Their current, as I said, we'd like to move that out but because of that people can get jobs anywhere, they're not going to get those. So, it's kind of interesting. The effects of the tight labor markets having, but were very good businesses.
I bring this up like we're actually standing still and assuming that this is a new normal and although enough to remember how -- as soon as you think you have it, you don't have it, as relates to rates, this feels like the late 1970s again to me in a lot of respect, the economy going higher and inflation seeking up, maybe not as bad as it was in the 1970s, but it feels like that all over again and we're somewhat preparing for that in that regard.
As my final, we always say, hope for the best, plan for the worst, that's what we're doing. You can be sure our best efforts for the long-term franchise growth and to maintain our consistent approach to conservative management to protect this franchise value organization.
That being said, we can take some questions.
[Operator Instructions]
And our first question comes from Jon Arfstrom of RBC Capital Markets. Your line is now open.
Thanks. Good morning.
Good morning Jon.
Couple of questions here. I guess to start on mortgage, how do you want us to think about that for Q4? And also into 2019, do you view this as a profitability headwind or some of this efficiency potential you talk about is it not so much of a headwind when we think about Q4 in 2019?
If we're able to maintain the volumes, which we have, we think that prices have been -- the margins have been squeezed because too many producers chasing not enough loans, the economy stays strong. We believe that housing will continue to pick-up. And our efficiency moves are -- should help us in the overall profitability of the product.
So, these efficiency moves are actually relatively material. The zoom -- our front-end zoom, call it, our Rocket Mortgage, is should be fully deployed. We haven’t put that out in that retail wise, but we will be doing that in the first quarter. We've used it as our own internal front-end. Its two to three days out of processing there. We also are finding ways to cut other processing costs by almost 50%. Not all of them, but a lot of them, by using different outsourced companies.
So, we believe that it will be volume-related but the volumes we get, the margins on that, the overall profitability should be increasing from where they are now.
Okay. Dave anything on 4Q? How do you want us to think about 4Q?
Well, I think it will be -- again, we'll just have to see where rates go and what the home purchasing as we've seen the pipelines decrease a little bit here as we get into the fourth quarter seasonality and rates did pop-up a little bit. Now they have come down and they've popped up a little bit again today. So, we'll have to see how that builds. But my guess is the volumes will probably did decline to something below $1 billion. But we close these things relatively quickly now, so you only have a vision out 30, 40 days in reality is that's how your pipelines are because we're closing them and that about 40 day period of time. So, love to see how they continue to grow here. But our expectation is that they will be down. But we're also cognizant of accordion -- and expenses accordingly as those volumes come down.
So, I don't think it's going to be a major impact to the net earnings because if you pay out roughly half of that in compensation type of volume and we have other expenses associated. So what falls to the bottom-line is not extraordinarily material, but we do think the volumes will be down.
So, whether it's $850 million, $900 million would be my guess right now, but it's possible it could be slightly more than that with me being a little conservative here I think.
Okay. Okay, good. And then just maybe a bigger picture question for you or Dave. Just the loan growth environment and earnings growth environment, I think we can all maybe set aside mortgage, but do you see any threats to your ability to keep this going this kind of high single-digit type loan growth and earnings growth pace?
It’s always threats out there. We are seeing some -- well, we use a better term idiocy and pricing on commercial real estate deals. In our opinion, we're all saying insurance companies come back strongly. We also see a number of the construction projects we were involved with getting paid off and refinanced out. So, that will be an issue.
The private equity side, as I said earlier, we're seeing huge prices in private equity deals and the areas and the cherries of the world are supporting this with loan terms that we won't even come close to in terms of air balls, et cetera, and pricing.
They have the ability to withstand time not being regulated. After 90 days, they can stay if they not turn it on that accrual. So, they -- maybe they're smarter than most, I don't know, but seems to me that that's a very frothy market.
That being said we're diversifying now that we're seeing growth in the leasing portfolio. We're seeing growth in the life insurance portfolio, premium finance. We're also seeing good growth in the commercial premium finance.
One thing that occurred there was for the last two or three years, we've been subjected to an even playing field there where we were, as a bank, were required to go out and get TIN numbers on commercial borrowers and for the first couple of years of this, we were required to do, but by the Fed, but the Fed was -- different Fed offices weren't even applying it across the Board. So, we were at a competitive disadvantage there to the non-banks and to some of the other banks. We were losing probably -- we had a fight to keep where we are right now. We lost a lot of smaller agents in that process that had better yields and better late fees because they don't want to collect TIN numbers. So, to the work of Dave Dykstra, Kate Boege and a little bit of me and Frank Burke, and Mark Steenberg of the Premium Finance Company, over the two years, we initiated and then we worked with the industry itself with -- as we brought in Congressman, Senators, Mr. Dykstra went to Washington. He's a fine lobbyist by the way. Met with sterling [ph] and Shelby and as the beginning of October or September?
September.
September, that law was changed. We know we are not required to get TIN numbers anymore. So, we are coming back with a vengeance to regain those lost share and we're blitzkrieging right now as we like to call it. We're getting all -- trying to get all our clients back. We had some successes already doing that. So, we believe that that program should do very well for us making up for some of the losses we're seeing in some of the other areas.
On the commercial side, we still see there's good growth out there. We continue to get a lot of advance and winning our share of deals. That market was kind of primed; it's been for a long time priced about as low as it's ever going to be priced. So, we don't see that getting stupid right now. Actually, it's kind of -- I guess that seems like the new norm, but -- so that growth has been pretty good.
So, when you think about it it's something's work, somethings don't. That's the beauty of being as diversified as we are. So, -- and on the deposit side, we are having good success, we have good momentum there. Do we pay up a little bit for to bring in new accounts? Yes, we do use teaser rates to bring people in.
On the retail side, bring their deposit relationships in. We're able to rifle shoot that and shotgun it because of our structure and how we brand that we can rifle shoot it into a specific inefficient branch or a new branch and that will -- that has caused our rates to go up there. But at the same time, if you look at -- we might -- our margin about two basis points, but then overhead ratio went down four basis points, so that's kind of a win-win as we go into our overhead with that.
But -- and it also will fund the liquidity play and we're looking at about $200 million a quarter depending on rates could be more could be less. Again I said it could be another $1 billion to get to the 87.5% on a static basis, we continue to grow -- be more. That's a lot of liquidity to play with and we're able to put that off at a positive spread that should be very beneficial to earnings going forward.
So, that's the plan in a nutshell. We're also doing -- and we'll balance this with our investments too. We're also doing some fixed rate loan programs in the homeowners association area, in the premium finance life insurance area, and commercial real estate area to name three buckets set aside to actually get fixed rates on some deals.
Our goal over the next 10 months or 10 quarters I would say -- eight to 10 quarters is to get our -- we think that's when -- and again this is subject to the rate divest, we think that's when the rates are going to kind of get close to peeking. So, take our gap down to about 20% to 25% of where it is right now, still leaving upside potential for us for covering the downside. So, we're going to do it through those and every one of those should make us money -- more money.
So, it's a multipronged strategy I'm rambling on here, but we believe it's appropriate for the time. Will there be headwinds? Yes, there always be headwinds, but I think that we should be able to continue to build the franchise out consistently what we've done in the past.
Okay. So, continuation of the current trends maybe some modest lift in the margin over time is basically the message.
Yes, it's just overtime because like this quarter was a timing issue. We lost a couple of basis points. We picked up -- if you look at on average of $1.5 billion in deposits quarter-over-quarter. So, we’re not going to do that all at once, we're going to time it and get in and if we had invested all, our margin would have been up and we won't be having this conversation, but we're going to just be gentle on this and take our time. And again we've put up a nice record quarter, so it's all about balance in that regard.
Okay. Okay. Thanks a lot.
Thank you. And our next question comes from Brad Milsaps of Sandler O'Neill. Your line is now open.
Hey good morning guys.
Hey Brad, how are you?
Good. Good. Dave just wanted to follow-up on the mortgage, kind of, some of the servicing line items that you guys disclose on page 22. Some of those numbers or maybe had a bigger increase maybe than I thought, anything in there in your mind that you kind of call out that that wouldn't be run rate? Just kind of curious on how best to sort of think about that the go-forward on some of those other line items. I kind of feel pretty good about the origination side, but I just want to get your sense on some of those other items?
Well, the MSR fair value adjustment is really going to be tied to rates. I mean if rates -- if the longer rates go up, I think you'll continue to see that portfolio price up. And we sort of look at that as a hedged to the production volumes to a certain extent, as rates go up, we generally lose some production volume, but you gain on the MSR valuation side. So, that will be tied to the rate.
So, if rates do go up and stay up in the fourth quarter and your volume at the end of the quarter, so it really depends on where they are at the end of the quarter. And I would expect that that number would continue to trend up.
MSR capitalization just how many loans do we retain the servicing on and we retain a little bit more of those loans this quarter than the prior quarter. But we continue to retain that servicing, so I think that that number would stay up as a little bit a tradeoff there that we retain the servicing if you have a little bit less on the gain on sale but you have more on the servicing side.
So, if you didn't retain it, the geography would just flip back to the production revenue line a little bit more. But I think all-in-all, those -- and servicing should continue to trend up as we retain more of that servicing as far as servicing income per se. So, I think it's just volume-driven here as to where those numbers are going to be. So, I'm pretty consistent as far as overall revenue relative to volumes I think.
Okay, great. That's helpful. And Ed just to kind of follow-up on loan growth. Do you guys -- do you consider yourself based on the market that's out there still kind of in that -- kind of high single-digit type loan growth, kind of, looking out as far as you can see anyway?
Well, I don't try to see very far when it comes to that because we don't want to set goals out there that would make people be squishy on their underwriting. But yes, for the next quarter at least and probably the two quarters, we feel pretty good about where loan growth is.
We don't know about is payoffs because our loan growth really -- you'll get net new loan growth and new relationships coming into the quarter is actually very good. We're getting a lot of payoffs. So, if payoffs continue to accelerate due to people just doing dumb things, then we'll bear that burden. But I can't control that. I'm not going to chase those deals. We're not going to chase those deals. If they leave and they don't fit our underwriting or profitability parameters, we're not going to do them. But in terms of new loan growth, yes, I think we're doing just fine.
And I'm really kind of excited about what we're doing on net premium finance side to get our mojo back there. But I'll be in offensive, we're not playing defense all the time. As you know I'd like to be offensive as people will tell you.
And Brad pipelines are consistently strong and third quarter tends to be a little softer because of the just people on vacation and the like customers and the like and fourth quarter tends to pick back up. But we're really not seen any major degradation of our pipeline. So, we're optimistic that that can still continue forward.
Great. Thank you.
Thank you. And our next question comes from Chris McGratty of KBW. Your line is now open.
Morning. Thanks for the question. Dave if I could just start on the margin -- go back to the margin for a second, so this quarter was 3.61% and there was -- you called out two basis point from liquidity. Is the right way to think about given where LIBOR is now versus last quarter, 3.63% star and then maybe a couple basis points per quarter based on your balance sheet setup because I think most banks are enjoying less incremental benefit from each high, I mean your last few quarters, you were getting you know five, six basis points per quarter of expansion. Is that the right message you're trying to tell on the margin, like low 3.60% is probably heading to 3.70% over the course of 2019?
I think that's probably generally right. Like you said we've taken our interest bearing cash, just an incremental piece that we put on this quarter that if we would have invested there, the margin would have been basically flat, the two basis points.
Have we taken some of that even more liquidity that we have there that we've been waiting to invest, the margin actually would have been up. So, as we continue to leg into this and as Ed said, this really depends on rates where rates are at, how fast we do it. But if we continue to do a couple hundred million dollars of that liquidity a quarter and then we get the tailwinds on some of the repricing like on the life portfolio, life insurance, premium finance portfolio those are tied to 12 month LIBOR and they are repriced once a year and the premium finance loans the commercial side our fixed rate and nine month pay out type of loans. So, it really takes almost a year for those to fully reprice also.
So, we do have some tailwinds there. We were fairly aggressive with our new branch openings and as I said on average up about a $1.5 billion in deposits in the quarter. So, some of that the special pricing that we had on those deposits, that's not going to continue at that same rate going forward most likely. And the new ones -- but we had a $1 billion in the second quarter just itself. So, that that might moderate a little bit.
But the other thing with those specials as rates continued to go up, those specials, we -- they're not as high rates anymore. So, we gave a CD rate back then and rates go up 75 basis points. Those special rates are more like normal rates now.
So, yes, I think you blocked those in for a little bit of time on our specials, so those rates go up, you'll benefit on those deposits. So, I think we look at it that way. If we can get a couple basis points a quarter increase two or three or depending on rates obviously, that would be our goal. It's just -- as that's a gradually grind the margin up.
Hey, maybe you can tell us, where is the tenure going to be at the end of this year and at the end -- the next year, what do you think?
I'll follow-up with you on that one.
You could ask us questions?
The one way street here. If I could sneak one more in on the mortgage comments, the expenses that you said would be kind of the right-sizing by the first quarter. Is that -- is the goal with that process improvement to get that one -- to get to a 1.50% overhead ratio in 90, is that something maybe on a quarterly basis you can get to with the changes that you're making the business?
Well, that's part of it. But there's obviously a lot of growth, a lot of expenses related opening up these branches that we're putting on them -- we've been putting in the network. So, it's a balance of that that will help obviously. But there's other growth trying out our inefficient branches with the deposits and building these new ones will help us get that, somewhat of a growth issue. Any deposits -- any cost we can cut, we'll cut. But when you think about why we flipped the switch from acquisitions to organic, you do an acquisition, you can overpay and it goes in the goodwill and you probably do it yourself so you give away some earnings.
We're taking much less of that, but we're taking -- it's more cost efficient to do what we're doing right now, but it runs through the income statement. So, we have to balance that and that's what we're trying to do is balance that to get to that 1.50%. 1.50% is a goal, that's an aspiration, something we've beat up everybody on. But there are certain opportunities we take advantage of where we top above it and we deal with that. But that's the goal and that's -- number of our banks are operating. We've got some banks operating on 1% in net overhead ratios. So, as they get larger, they're able to do that.
So, it's all about growth and controlling costs, but probably getting it -- the overall effect will be growth more than the cost cuts. So, we're going to do both to get to the 1.50%
Got it. Got it. Thanks for the color. And Dave on the tax rate Q3 a good run rate for prospective?
Q3 was probably a little bit low, we had some true-ups with the final adjustments from the tax reform in about a year to get all those through and as we get clarity on some issues we got a little bit of benefit. I would still think that it would -- I would think it would be more than 20s -- low 26 range is more of a normal rate to look at.
Great. Thanks a lot.
Thank you. And our next question comes from Terry McEvoy of Stephens. Your line is now open.
Hi, thanks. Good morning guys. In the press you called out --
Terry, what do you think the tenure is going to be?
I'll have to take that offline as well. I was hoping you would ask. The two basis point impact of just excess cash was called out on the call and in the release, was the NIM impacted off from just the LIBOR not moving as expected during the third quarter? And if so, any thoughts on what that impact was?
We haven't calculated the impact, but clearly the 30-day LIBOR as everybody knows as we've actually showing in the chart on page 20 of our press release has stayed fairly flat for most of the quarter and then started to pump up a little at the end of the quarter. And we've got -- in our portfolio; we've got about $7.7 billion worth of loans that are tied to that 30-day LIBOR rate.
So, it did have a little bit of headwind for us and I assume most banks that have any portfolio of size that's tied to the 30-day LIBOR, but it did pop-up a little bit at the end of the quarter which should be helpful running into the fourth quarter. But yes, that did create a little bit of the headwind.
The depositors don't really look at LIBOR, the retail depositors. So, the flattening on the LIBOR curve really didn't change their expectations, but it certainly did change -- hold down the pricing on the loans for a good portion of the quarter.
Okay. Yes, that's what I was getting at. Thank you. And then just as a follow-up, CD balances are up a $1 billion year-to-date and average balances were up $600 million, $700 million. Can you talk about where those customers are coming from? Is it within the existing branches or are they new customers walking in the door -- existing customers?
And then Ed you mentioned kind of cross-selling those new customers, how do you quantify that in specific products where do you see some upside?
Well, most of those are new customers as we -- we opened new branches and we target the inefficient branches, we offer a bundled package of accounts, give you your checking account, the safe deposit backs, home equity line, and you get a teaser account with that, it's usually a CD. So, you open all those up. So, it's mostly new accounts I would say. And then once you get them in your cross-sell into wealth management and anything else you can think of. So, it's consistent to what we did back before 2006 when we were mostly organically driven before we went -- when the market gave us those are well-priced acquisitions.
So, it's consistent what we did in the past and that's how we grew this thing to be where it is gaining deposit market share. So, if you go back and you look way back when we had a lot of CDs on the books because of the way we were growing and then it was down to basically nothing, now we're using those as teaser rates to grow again.
Great.
Does that make sense?
Thanks guys. It does, yes, definitely make sense. Thanks guys.
Thank you.
Thank you. And our next question comes from Nathan Race of Piper Jaffray. Your line is now open.
Hey guys. Good morning.
Good morning Nathan.
Going back to the last question from Terry in terms of deposit, growth strategies, and pricing, just curious as you guys look to get your own loan to deposit ratio back towards 90%, do you expect the deposit beta that you had in this quarter kind of persists as the fight continues very short-term rates or do you think this was kind of more of a one-off increase, just given some of promotional activities that you guys took on this quarter?
Well, the new branch impact -- well, overall, -- let me get this right. Cycle-to-date, our total deposit betas 33%, not bad, but it's popped up a little. We expect that in aggregate to end up in the 40% to 50% range. So, if you're 33% now, it's going to be higher to get to that number on the cycle-to-date basis. So, we would expect the -- our overall beta without new branches this quarter was 62%, without branches, so the rest of it was the new branches coming on, the way we look at it.
So, I think you have to view it in the aggregate and say as rates continue to rise, we're going to go to closer to 40% to 50% beta -- hopefully closer to 40% which is -- always it's been our number in the past. But that will mean that it should stay about the same as we go through this growth spurt and rates continue to go up.
Fortunately, when you price like -- when you're funded like we have with retail deposits, you start hitting caps like the spread -- the decompression that takes place in money market and savings and some of those kind of get caps at a point in time. We don't have to raise those anymore at all, especially on the savings side, which believe or not, savings accounts have passbook still sell number of the new neighborhoods we're moving into in Chicago and Milwaukee. That's a good solid core base for us. So, we're going to continue to push those and we expect to end up like where I said, 40% to 50%, hopefully closer to 40%.
Got it, that's helpful. Thanks Ed. And just kind of changed gears a little bit and thinking about capital total capital kind of tick down that ratio in the quarter. I think historically you guys want to stay above 11.5% or 11%. So, Ed just curious to get to kind of your thoughts on capital planning and obviously within the context of potential acquisition opportunities, obviously, we saw one bank acquisition announcement here in Chicago last night. So, just curious to get kind of your updated thoughts on where you guys are seeing more opportunities versus maybe Wisconsin and here in Chicago?
Well, the capital front, I don't know was down just to hear if you're making the $90 plus million that we made this quarter and you extend that out going forward, generally that should support our internal growth fairly well. So, I would expect it to sort of stay in that range barring some acquisitions or outsized growth, but you're right, if that number starts to tick down into 11.5% range -- towards that range, we would look to do more, but currently barring any sizable acquisitions, we think we can be self-sufficient.
Got it. And Ed any thoughts on acquisition opportunities or any current thoughts on what you're seeing?
Well, we -- let me put this way. We tell us this to investment bankers. Our landing pattern is full of opportunities, but I don't know if they're all going to land. Gestation periods are longer, expectations are higher, and it's in all areas of our business. So, we continue to be very busy in that regard, but we're going to be very selective and if that makes sense financially and geographically for us strategically on the banking side and on the wealth management side or on specialty finance side. So, some like in specialty finance and a number of -- we've looked at a number of different companies, it's better to start from scratch really when you look at what the price expectations are right now.
So, we continue to look. We've shown a lot of opportunities, particularly spectating what goes on in our market area; we've taken a look at. But we're very selective in where we want to go what we want to do. So, like I said, don't be surprised if we do something, but don't be surprised if we don't either.
Got it. I appreciate the color guys.
Thank you.
Thank you. [Operator Instructions]
And our next question comes from Brock Vanderbilt of UBS. Your line is now open.
Great. So, are you likely to maintain this pace of branch acquisitions or branch expansions in 2019 or step off the gas somewhat?
We are likely to maintain maybe not -- 10 or 12, but certainly five, six, seven something like that next year. We announced we're gradually opening a branch in Naples, Florida to get everybody who is running away from Chicago these days. That will open the beginning of next year, simply a convenience branch. This is not -- just to make it very clear, this is not a move to Florida by Wintrust, this is to accommodate our Chicago customers who are snow bunnies and live down there, changed residence on their whatever.
We think actually we should do very well down there just with the Chicago transplants and snow bunnies that are there. So, we are -- it's a very small branch for us, but things like that we're doing strategically to maintain those customers. They came really as a response to our customers asking us to do it.
But Milwaukee is going very well for us and we continue to build out up there. We expect a couple of branches up there and we have a number of opportunities here as we fill out our franchise throughout Chicago. So, yes, I would imagine we would open six to eight next year on the plans, but that's the plan at least right now. And again as probably what the market gives us.
We did all of these acquisitions, we didn't have a choice of where they are all strategic, but they left holes in our market that we need to fill. So, that's taking this opportunity to do that right now, especially as we continue to be growing and making more money, we can make that investment and still balance our net overhead ratio accordingly.
Okay. And separately on mortgage, I know you've bolted on a number of parts of the business and servicing origination over time. Is this -- what we see is what we get here or are there missing pieces in your -- from your perspective that still exist? And are most of the efficiency gains already been scored or are we still early in that process?
I think what you see is what you get. I think we've got some like they watched all the pieces are in place here. We've been able to fix our product mix to get more government loans, which obviously have higher margins to the Veterans First acquisition. They also have different distribution model which is something we hope to migrate into our current system over time. But, so I think what you see is what you get as it relates to the infrastructure or the footprint that we have. But you've not seen the results of the efficiency moves, the resume mortgage as we get that out of and take more mortgages as house deals as opposed to coming through a broker.
The efficiencies are that the two to three days you've seen that pop-in, two to three days less processing time by using zoom, but you've not seen the backroom efficiencies that should be coming in January and henceforth that we can cut a lot of the costs related to -- and make them more variable as it by outsourcing. So, you've not seen the majority of the efficiencies in the process in the current infrastructure we have -- haven't seen that yet.
Great, very helpful. Thank you.
Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. Wehmer for any closing remarks.
Thank you everybody. Again another record quarter for Wintrust. The market doesn't seem to like record quarters, but nothing we can do about that other than continue to build our earnings double-digits, continue to build our franchise the way we have in the past which is conservative, and focused on shareholder value. And we intend to continue to do that and we'll talk to you all next quarter. Do you have any other questions, please feel free to call Dave for me. Thanks.
Ladies and gentlemen, thank you for participating in today's conference call. This does conclude the program and you may all disconnect. Everyone, have a great day.