Welcome to Wintrust Financial Corporation's fourth quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. Following a 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 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 fourth quarter 2018 earnings press release and in the company's most recent Form 10-K and of any subsequent filings on file with the SEC. As a reminder, this conference call is being recorded.
I will now turn the conference call over to Mr. Edward Wehmer.
Morning, everybody. Welcome to snowy, wintry mix Chicago for our fourth quarter earnings call. With me are, as always, Dave Dykstra, Kathleen Boege, our legal counsel, and David Stoehr, our CFO. We will conduct the call under the same format as usual. I'm going to give some general comments regarding our results. I'll turn it over to Dave Dykstra for more detailed analysis of other income and other expenses and taxes. Back to me for some summary comments and thoughts about the future. We'll have time for some questions. On the earnings front, net income was $79.657 million for the quarter, down from the previous quarter, but up from last year's almost $69 million. Up about 16% from last year, down 13% from the year before. On a year-to-date basis, we're at $343 million. Our eighth consecutive year of record earnings, up from $258 million, up 33%.
Earnings per share were $1.35 in the quarter, down from $1.57, but up from $1.17 the previous year. $5.86 for the year, up from $4.40, or again, 33%. On an apples-to-apples basis, which we like to look at it, pretax income for the quarter was up close to 12%, $108 million versus $96 million. For the year, it was up 18%. Notwithstanding if we hadn't had a tax break, we would've been able to report our 12th consecutive record quarter of earnings. Market volatility took a toll on our results for the quarter. Notwithstanding these events, our core business performed extremely well, and we're very well positioned for 2019.
As indicated in the press release, our fourth quarter results were negatively affected on a pretax basis by $8.5 million charge of mortgage servicing rights, an unrealized loss on equity securities of $2.6 million, $1.1 million loss on Canadian foreign exchange, $1.6 million of acquisition expenses. Approximately $14 million of negative adjustments pretax affected the earnings. This coupled with other factors in the mortgage business, including seasonal reductions in volumes and market-driven margin issues, account for the majority of the reduction fourth quarter income versus third quarter income. Dave will talk to you all about this in detail. When you look at the income statement, you'll see that most of the difference in the quarter took place in the other income section. This had a negative effect on our net overhead ratio for the quarter, as you can imagine, taking it to an unacceptable 1.79%.
Backing out the quarter's extraordinary items brings it closer to our goals. On the positive front, our FTE margin increased two basis points in the quarter to 3.63%, which, coupled with an increase in average earning assets of $581 million, resulted in net interest income increasing $6.5 million during the quarter. A little more on the margin. Earning asset yields were up 13 basis points to 4.58%, while net cost of funds, including the free funds contribution, was up 11 basis points. It should be noted that our acquisition of CDEC, Chicago Deferred Exchange Company, had minimal effect on fourth quarter margin. CDEC was acquired in mid-month December. By year-end, we had transferred $1.1 billion of CDEC low-cost deposits onto the balance sheet.
With those deposits, we repaid close to $700 million of much higher priced institutional money, $75 million of much higher priced broker deposits, and $200 million of Federal Home Loan Bank advances. As mentioned, this had minimal effect in Q4, but can be expected to help our cost of funds in a meaningful way in the future. The CDEC business and related deposits, which we believe we can grow in the future, coupled with mid-December's rate increases, other than the notorious 10-year rate, and our continued loan growth, bodes well for increasing margins in the immediate future. It should be noted that period- end loans exceeded fourth quarter averages by over $650 million. It gives us a nice head start for 2019 and bodes well for the net interest margin and net interest income.
Prior to the 10-year collapsing, we were able to make a bit of headway on our laddering program. We talked about our laddering program earlier. That's the program where we'll be extending our investment portfolio to start a balanced way to lower our interest rate sensitivity. The effects of these minor gains is hidden to some extent by our growth. However, we did invest close to $400 million in the longer end of the market. We'll continue to work in the future to reduce our interest rate sensitivity by the previous mentioned laddering program and by other means. We'll continue to monitor the rate environment and to continue our investment duration laddering program. Wealth management continues its slow and steady growth. Happy with our results year-over-year. Other expenses are pretty well in line, will be discussed in detail by Dave.
On the annual earnings front, 2018 was a record year for us. Eighth in a row, as I mentioned. Net income and EPS were up 33%, and pre-tax was up 18%. Our margin increased 17 basis points to 3.61%, and the overhead ratio was 162% for the year, up from 156%. We would've been closer to the 2017 number had the fourth quarter not turned out like it did. ROA increased 20 basis points to 1.18%. ROE and ROTE for 2018 were 11.26% and 13.95%, up from 9.26% to 11.63% the previous year. All in all, it's a great year of which we're very proud, in spite of the unlucky fourth quarter. On the credit side, credit metrics remained very strong. Non-performing assets decreased $18 million in the quarter, or 0.44% of assets, down from 0.52% at the end of Q3, and 0.47% at the end of 2017.
Net charge-offs for the fourth quarter were $7.1 million, or 12 basis points. The year net charge-offs total almost $20 million, or nine basis points, up from seven basis points a year ago. Reserve coverage stood at 134%, up from the 118% we recorded in the third quarter, but down from the 153% experienced a year earlier. Three large loans which went on non-accrual are being resolved as anticipated, with one being cleared totally, one expected to clear in late Q1 or Q2, and one on its way to becoming a performing loan. All in all, credit remains extremely good. On the balance sheet front, ending assets grew $1.1 billion in the quarter, and $3.3 billion for the year to $31.24 billion. These are increases of 14% and 11% respectively. The acquisition of American Enterprise Bank in early December contributed $164 million to these totals.
American Enterprise Bank was an interesting transaction for us, as we did not acquire any branches in the deal, given the proximity of their branches to the Wintrust branches. We acquired certain assets and assumed certain liabilities of the bank with basically no operating expenses. Pretty much a total cost out deal which will be a profitable transaction for us going forward. Total loans, net of loans held for sale were up approximately $700 million quarter versus quarter, and $2.2 billion year-over-year. 11.7% and 9.2% respectively. American Enterprise Bank contributed $119 million of this growth. As mentioned, most of the growth occurred in December. We start quarter one 2019 with a great head start of over $650 million. Deposits grew $1.18 billion in the quarter, and $2.91 billion for the year. Translates into deposit growth of 18% and 11% growth.
American Enterprise contributed $151 million to this growth. We are excited about our prospects of growing our deferred exchange business with our CDEC transaction, as these provide a diverse and steady flow of very low-cost deposits. At year-end, CDEC managed $2.4 billion of deposits for customers. $1.1 billion of that was on our balance sheet. The remainder placed at other third-party banks for a fee. These deposits, by nature, are short-term in duration, as a customer needs to get their funds reinvested in three to six months. As such, there can be volatility in aggregate balances. We will always be conservative in our reliance on these core deposits, and as I said earlier, we do think we can grow this business nicely. Our loan-to-deposit ratio returned closer to the desired range of 85% to 90%, closing 2018 at a little over 91%.
Our goal is still to get into that desired range. I'm now going to turn the call over to Dave to take you through other income, other expense, and taxes.
Thanks, Ed. As Ed noted, the fourth quarter had some unusual volatility, with the majority of the impact flowing through the non-interest income section. I'll focus on those areas, then provide a bit of background on the non-interest expense category that experienced an overall decline in total expenses relative to the third quarter of 2018. Turning to the non-interest income section, our wealth management revenue held relatively steady at $22.7 million in the fourth quarter, compared to $22.6 million in the third quarter of last year. Up 4% from the $21.9 million recorded in the year-ago quarter. Brokerage revenue was down approximately $582,000, while our trust and asset management revenue offset that decline by increasing $674,000.
Overall, as Ed indicated, we believe the fourth quarter of 2018 was another solid quarter for our wealth management segment, despite the volatility experienced in the equity markets late in the fourth quarter. Mortgage banking revenue decreased approximately 42%, or $17.8 million, to $24.2 million in the fourth quarter, from $42.0 million recorded in the prior quarter, and was also down slightly from the $27.4 million recorded in the fourth quarter of last year. The decrease in this category's revenue from the prior quarter resulted primarily from lower levels of loans originated and sold during the quarter. Correspondingly, we also had lower production margin on those volumes. The company originated approximately $928 million of mortgage loans in the fourth quarter. This compares to $1.2 million of originations in the prior quarter.
Billion.
Billion of originations in the prior quarter. $879 million of mortgage loans originated in the fourth quarter of last year. The mix of the loan volume that we originated during the quarter was approximately 71% related to home purchase activity, compared to 76% in the prior quarter. Purchase home activity continues to be the majority of the new origination activity. On page 22 of our earnings release, we provide a detail compiling the components of the origination volumes by delivery channel, also the mortgage banking revenue, including production revenue, MSR capitalization, MSR fair value, and other adjustments, and also the servicing income. You can look there for further detail on the mortgage banking segment. Given the existing pipelines, we currently expect originations in the first quarter of 2019 to be similar to the fourth quarter of 2018.
The company recorded losses on investment securities of approximately $2.6 million during the fourth quarter, primarily related to unrealized losses associated with a large- cap equity fund that the holding company has an investment in, which was used for seed money for a proprietary mutual fund. As you know, many large- cap stocks experienced significant drops in value near the end of the year, and our holdings, which were required to record at market value, were similarly impacted. Thus far in 2019, the fund's recouped some of its value as the stock market has rebounded a bit in early 2019. The revenue in the fourth quarter of 2018 for operating leases totaled $10.9 million, compared to $9.1 million in the prior quarter, increasing 19% during the quarter.
The increase in this revenue item compared to the prior quarter is primarily related to growth in the operating lease portfolio, as the period-end balances of operating leases increased to $233.2 million at December 31st, 2018, from $199.2 million at the end of the third quarter. These amounts relate only to operating leases, as capital leases are carried in the loan section of the balance sheet. Other non-interest income totaled $10.6 million in the fourth quarter, down approximately $5.5 million from the $16.2 million recorded in the third quarter of last year. There were two primary reasons for the decline in this category of revenue, including a negative swing of $1.5 million of foreign exchange valuation adjustments associated with the U.S./Canadian dollar exchange rate. The current quarter had a negative valuation adjustment of approximately $1.15 million, whereas the third quarter of 2018 had a positive adjustment of approximately $350,000.
A swing of $1.5 million. The currency rate volatility was abnormally high during the fourth quarter. We usually don't see that much of a change. Thus far in 2019, that exchange rate has recovered a bit, but we'll have to see where it ends the quarter up at. Next, BOLI income was down $3.7 million from the third quarter, primarily as a result of a $2.2 million death benefit recognized in the third quarter, with no similar benefit recognized in the fourth quarter, and a $1.1 million loss on BOLI investments that support deferred compensation plan benefits that were impacted by equity market returns. I should note that this $1.1 million BOLI loss resulted in a similar reduction in compensation expense during the quarter.
In summary, the volatile market conditions near the end of the quarter influenced mortgage servicing rights valuation, equity, security valuations, and foreign exchange rates that all negatively impacted our non-interest income revenue amounts. Interestingly, each of these items, which are marked to market each quarter, had positive adjustments in the third quarter, but to a much smaller magnitude. We believe these categories have experienced some recovery in value thus far in the first quarter, but we'll have to see whether the recovery continues and where they end up at the end of the first quarter. Typically, the swings in value were much smaller. Turning to the non-interest expense categories. Non-interest expense totaled $211.3 million in the fourth quarter, down approximately $2.3 million from the prior quarter.
I should note that the current quarter included approximately $1.6 million of acquisition-related expense items, compared to a total of $2.6 million in the prior quarter. I'll talk about a few of the categories with the most significant changes now. The base salaries and employee benefit expense category decreased approximately $1.7 million in the fourth quarter from the third quarter of last year. The decline was due to a variety of factors, including lower commissions related to the mortgage banking production, a higher amount of salary deferrals related to loan origination costs, which reduced the salary expense, and a reduction in costs related to deferred compensation plans impacted by the market returns on the BOLI plans, which I just discussed earlier in the non-interest income discussion.
These declines were partially offset by additional expense related to normal staffing growth as the company continues to expand, and an increase in payroll taxes associated with incentive compensation awards paid during the quarter. Marketing expenses decreased by approximately $1.7 million from the third quarter of 2018 to $9.4 million. As we have discussed on prior calls, this category expense tends to be lower in the fourth and the first quarters of the year, as our corporate sponsorship spending is more heavily geared towards the middle two quarters of the year. As I discussed in regard to the operating leases in the non-interest income section, the company experienced a corresponding increase in depreciation expense related to operating leases due to growth in that portfolio. This category of expenses increased $1.1 million in the fourth quarter compared to the prior quarter.
Again, we expect this category expense to grow at a similar rate to the revenue side of the portfolio of operating leases, as the portfolio of operating leases continues to expand. This is actually a category you're happy to see grow the expenses because it reflects that we're having increased revenue associated with that. If we group all the other expense categories together, other than the three that I just discussed, the remaining non-interest expenses were essentially flat on an aggregate basis, being up approximately $54,000 in the fourth quarter compared to the prior quarter. I won't spend much time on those since the pluses and the minuses offset and nothing real significant to discuss there. With that, I'll conclude my comments and throw it back over to Ed.
Thanks, Dave. As usual, clear as mud. Thank you.
I always try to help the cause.
Thank you. Despite the fourth quarter hiccup, 2018 was an extremely good year for Wintrust, as evidenced by another record year of earnings EPS and balance sheet growth. Although aided by reduced taxes, remind you again that pre-tax income for the year was up in and of itself 18%. For those of you who've been following us for a long period of time, you should know what our goals are. Double-digit earnings growth, exemplary credit metrics, and a fortress balance sheet are tops on that list of goals. To that end, year-end's a kind of nice place to take a look back over the last five years and see how we have delivered. For those last five years, net income growth, five-year CAGR is 20%. Asset growth, five-year CAGR, 12%. Loan growth, five-year CAGR, 13%. Deposit growth, five-year CAGR, 12%.
NPAs as a percent of assets, the five-year average is 0.52%. Net charge-offs for the five-year average is 12 basis points a year. Based on the above, it'd be hard-pressed to say we're not achieving our goals, not just this year, but over a much longer period of time. Hopefully, this buys us some credibility in the market. History is just that, history. That's why at Wintrust, we have a mascot. It's the Greek god, Sisyphus. For those of you who aren't familiar in your Greek mythology, Sisyphus was condemned by the gods to push a rock up a hill every day. At the end of the day, the rock would fall down the hill, he'd have to push it back up again. Just like him, every December 31st, that rock rolls back down the hill, we're fated with having to push it back up again.
The rock is always bigger, the slope is always steeper. We relish that challenge. We're looking forward to 2019 with a great deal of confidence that we can again deliver on our goals. We're well positioned for the first quarter in particular, and beyond. The CDEC acquisition should aid in keeping our interest costs of funds intact. Q1 '19 will be the first full quarter of the effects of these low-cost deposits on earnings, we're embarking on growing that business. The AEB acquisition should be accretive in year one, should be accretive in the first quarter. We start the year with $650 million head start on loans. ZBA balances exceeded quarterly averages by that amount. Loan pipelines remain consistently strong. We're booking loans on our terms.
Although non-bank competition is becoming more and more aggressive, our brand and market disruption is helping us to continue to gain market share. If the situation warrants, however, that is our circuit breakers, our pricing policies and loan policies trip. We'll not be afraid to stop the boat as we have in the past. As of now, we see no reason to do this. Exceptions in our portfolio, which we monitor monthly, have remained consistent for the last three years, both on new deals and in the overall portfolio. Our pricing is holding up as well as can be expected. We expect the margin to grow modestly in 2019, assuming a consistent rate environment, but nicely. Credit metrics remain strong. We'll continue to cull the portfolio for any and all cracks in exit relationships where said cracks are found.
We always remember the old adage, your first loss is your best loss. Let's not try to kick the can down the road. It takes a full year for short-term interest rates to work their way through our asset base. December increases is really yet to be seen in our numbers. Other increases that we experienced in 2018 are still working their way through the system. This bodes well for the margin. Wealth management should continue at a slow and steady climb. In 2018, we opened 10 branches. We have the same number on tap for 2019. Pretty much all of the 2018 branches are performing ahead of plan. We expect the same for the ones opening this year. One of the ones we're opening this year will be in Naples, Florida, believe it or not.
That is going to open in the first part of February as a small convenience branch. When you look at the numbers of Illinois refugees in Florida now and our name recognition, we're not expecting much out of this, but I think it's going to be a lot better than we anticipated. We completed two bank acquisitions in 2018 as well as CDEC. It looks to us like pricing for banks in our desired asset range are becoming more reasonable. As such, our landing patterns have remained full, but gestation periods remain slow. You can be assured of our consistent conservative approach to deals. The lower 10 rate, although hurtful in Q4, should help volumes in the upcoming spring buying season in the mortgage business. We continue with our cost-cutting and efficiency moves in this business. Many of which will be operational by mid-year.
As a community bank, we remain committed to the mortgage business. We are committed to achieving a net overhead ratio of 1.5% or better. As we are mandated to prepare our platform to become a $50 billion asset bank. You can all wonder who. You don't have to wonder who that mandate came from. Achieving that number at year-end may be hard. Number in the mid-150s is our short-term goal. Wintrust was, by the way, probably built over the last 27 years and approach 2019 with a great deal of confidence. As always, you can be sure to our best efforts. We appreciate your support. Now I can turn it over for some questions.
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Jon Arfstrom with RBC Capital Markets. Your line is open.
Thanks. Good morning.
Morning, Jon.
A couple of questions here. The CDEC deposits, you talked about $1 billion on your balance sheet and maybe, I think $1.3 billion or $1.4 billion off the balance sheet.
Yes.
What's the plan with the off-balance sheet piece of that?
Well, we get a nice fee on that that'll run through fee income.
Sure.
We don't want to get overly reliant on this. You'll probably see what we're going to do is look at the 12-month rolling average of this because it does go up and down. Somewhat seasonal for people too to get things done in calendar years or quarters. We'll probably maintain the one year, either the max that they have on their books or the one-year rolling average. The rest, we will place with other banks and receive the fee on it. Does that make sense?
Yep, that makes sense. The general message on loan yields, it sounds like based on your very last comments there, that your expectation is loan yields can continue to rise modestly?
Well, because of the structure of the balance sheet, yes.
Yep.
The rate rises continue to work their way through. We would expect that to occur. We would hope that it's kind of a weird environment now, but we would hope to be able to mute our deposit costs, our core deposit costs, notwithstanding the effect of CDEC's replacement of higher cost funds, but to maintain those relatively low. We'll see. That's the plan at least.
Yep. Okay. Just on mortgage, I know this is tougher. Maybe it's for you, Dave. You talked about pipelines, being consistent, maybe margins being down last quarter. You're also talking about some seasonality. I guess we didn't touch on efficiency opportunities. Just can you unpack mortgage for us a little bit in terms of how we should be thinking about Q1 and then headed into Q2 on mortgage?
Well, heading into 2Q, we would expect it to increase as the seasonality factors go away. We certainly don't have those pipelines in place yet because from the application to closing is generally in the 40-day or less range.
Yep
We're not getting applications yet for the second quarter. We would expect that to pick up in strength. First quarter, we would expect that the Veterans First consumer direct platform, let's say, relatively stable. They don't have quite as much seasonality because they're not focused in Midwest like our retail channel is. We would expect there to continue to be a little bit of pressure on the retail channel in the first quarter. That would be relatively stable, maybe down a little bit. Correspondent business would be relatively stable, and Veterans First would be relatively stable. That would be our thoughts there. Veterans First tends to have a little bit higher gain on sale margin because it's government products than the other two channels.
When volumes go down, margins tend to get compressed because you have so many people competing for a much smaller pie. That's where the compression is coming, just the competition out there right now.
Interestingly enough, Jon, on the competition side, we're seeing a great deal of stress in our competition. We believe that the long-awaited consolidation will be taking place. We know some firms are merging, some are going out of business, in the markets now, which should bode well for us, both in terms of recruitment and less competition in the area. On the efficiency front, we're doing a number of things, one of which could be pretty interesting by mid-year. While goes to plan our Zuum Mortgage, which is our Rocket Mortgage platform, we should be able to start marketing that online, so people can kind of like Rocket Mortgage. You still will have a person available to work with you. Through that distribution, we can cut commissions probably by in half or more if applications come in that way. That's the secret to this.
We're still going to rely on that personal service. We still will rely on the mortgage reps. We'd like to tilt the balance to be more consumer direct, and we're in the process of proving out that concept. Focus groups have told us that our product is better than some of the major competition out there. Time will tell. Hopefully, by mid-year, we can get that sometime in the middle of the year, we'll get that up and running and start marketing that. Zoom also is cutting a couple of days off the front end. We're doing a number of other efficiency moves I'm not going to talk about now, that should bring down our cost and our time to get loans done. I know some people say, "Why should you be in mortgage?" We're a community bank, we got to be in mortgage.
Mortgage, notwithstanding, even including the fourth quarter, was profitable for us for the year in a nice way. It's something we believe that you got to take the good with the bad, ride it out. Interestingly enough, we were having discussions about hedging our mortgage service pipeline in the fourth quarter. Greedy Ed thought the rates for the long end was going to continue to go up and scheduled it for the first quarter. That one's on me. I screwed that one up. Hard to believe I screwed something up, right, Dave?
Very hard to believe, Ed.
Yeah. Thank you, Dave. We are looking at that. We're refining this business, and we think it's going to be a good, steady business for us going forward. We'd like to take the volatility out, and we'll work to do that when the time is right. Obviously, it was right and I screwed it up. Other than that, we're okay.
Yeah. Okay. All right. Thanks for the help, guys.
Thank you. Our next question comes from Brad Milsaps with Sandler O'Neill. Your line is open.
Hey, good morning, guys.
Hi, Brad.
Hey. I just wanted to follow up on the NIM discussion and maybe the size of the balance sheet as it relates to the CDEC deposits. I guess maybe initially I thought that you would use that funding to sort of grow the overall size of the balance sheet, but smartly so, you guys opted to pay off some higher cost deposits. As you think about funding your $2 billion-ish of loan growth this year, I assume you want to do that with core. Do you bring back some of the more wholesale sources to lever up into the bond book if rates behave the way you want them to? Just kind of want to get a sense of kind of what you're thinking in terms of size of the balance sheet and how best to deploy that liquidity going forward.
Well, our prospects for loan growth are consistent with prior years. We need to be able to bring deposits in to do that. We worked very hard to develop a diverse deposit base, but for the most part, core. We only use the brokerage stuff when we have to or to control our asset liability management, so our interest rate sensitivity. The $700 million that we paid off was brought on, was longer term deposits. When we took on about approximately the same amount of franchise loans, when we bought those from
GE
GE. We had to fund that right away. We consider these CDEC to be core. We really don't want to have a lot of reliance on institutional funds. Now, it's nice to have them there. We basically have brought those numbers down significantly to almost 3% or 4% for total deposits. We have that available should the market so warrant. It's nice having that capacity available to grow if rates get goofier or we find it hard, for some reason, to grow organically. If you look at Wintrust over the years, we grew organically for a long period of time. We got into acquisitions, and now we're back to filling out the franchise and growing organically. Most of the growth this year was organic. We feel pretty good about our ability to do that. Our branches are performing better than we experienced.
We think that the deposit side of our balance sheet is really our franchise value, those core deposits, and we're going to stick to trying to grow those. Not lever up unless there's some situation where we can play an arbitrage someplace and make us a lot of money. We don't see that happening with the flat yield curve. It's nice to have that in our back pocket in the event it were to occur. In short, we like core deposits. We're going to continue to grow core deposits. We'll continue to fill out the franchise, where we can grow without the commensurate increase in expenses and be very flexible. It's hard to believe. I like being flexible. I wish I could be personally, but we will certainly be on a business side.
In summary, basically adding the excess $1 billion above the $2 billion that you need for loan growth is, you just want to be flexible. It's really going to depend on kind of what the yield curve gives you.
Yeah. We want to be conservative. We obviously don't make as much as we'd make in the margin on taking all the CDEC money in. You don't want to rely on it too much. Then you find yourself getting whipsawed and what do you do? We're going to be conservative. We make good money. It was a great deal for us. They're wonderful people. They have a great market presence that we think we can enhance. We're excited about those prospects and we want to get to know the business better before we get out over our skis and have a funding issue that we have to deal with later.
Dave, I don't know if you can look at it this way, but I know you mentioned there wasn't a huge impact of the CDEC money in the fourth quarter. Would the December margin be appreciably higher than, say, the October margin?
Yes. The December margin was higher than the October margin, and was actually higher than our ending margin. That's why we believe that the margin will increase in the first quarter, and we gave that guidance.
I got it. Okay, great. Thank you very much.
Thank you. Our next question comes from Kevin Reevey with D.A. Davidson. Your line is open.
Good morning.
Hello, Kevin.
How are you?
Living the dream every day, my friend, every day. Looking forward-
Same here
to pictures and textures reporting.
Yep. My question relates to core operating expenses. I'm coming up for the fourth quarter, roughly with a number around $210 million. Is that kind of a good number to use going forward? You're assuming a modest rate of inflation, obviously you've got some other things going on. Is that kind of a good start?
Kevin, we never really give guidance on the expense side because it moves around quite a bit, depending on what happens with the mortgage business. As I mentioned, the marketing and advertising costs spike up a little bit in the second and third quarters. The things that could impact that again would be the commissions on the mortgages. We tend to give salary increases in the first quarter, starting in February. Roughly 3% is a ± number that you could use on average starting in February. That generally kicks in. The rest of it, operating lease depreciation, again, you could see on that category, it went up, $1.1 million this quarter, but that's good because we had more corresponding revenue come on with those balances. Because of all the moving parts, we really haven't given a ton of guidance on that.
If you can look at the $1.6 million of acquisition related expenses we had for the quarter, those were unusual. The rest was sort of standard as far as variability goes.
Okay. How should we think about the GAAP and the FTE tax rate for 2019?
Well, the guidance we gave before, I think, sort of the 26.5% ±, would be sort of, where we would think it would fall other than the credit you get for when you have stock equity award grants, and you sometimes get credits for that with the stock prices higher than what the award price was. We give those numbers in the press release and in our Qs as to what they were in the year. You can look at that and make an estimate, I guess, depending on where you think the stock price is going to be. It'd be somewhat lower than that with those equity award credits that come through. Barring that, I would still think it'd be in sort of the 26.5% range.
That's helpful. Thank you.
Thank you. Our next question comes from Chris McGratty with KBW. Your line is open.
Good morning. Thanks for the question. Dave, on the margin, just want to come back to it for a minute. The first quarter, it seems like a pretty good setup from the deal and kind of the backhanded loan growth in the quarter. If the Fed doesn't move anymore, can you speak to the kind of the trajectory of the margin? Your comments on moderating deposit betas was interesting, but it's interesting once we get that lift in Q1, what's the outlook if the Fed doesn't move anymore?
We show what our variable and fixed rate loans are in the press release. You can kind of look at that, but there are some tailwinds with the life portfolio that we have, the premium finance life portfolio we have. There's approximately $4.5 billion of those loans that are generally tied to the 12-month LIBOR rate, and those reprice once a year. Theoretically, about one twelfth of those reprice a year. If the 12-month LIBOR doesn't change, then we've got some tailwinds in that regard. We put a graph on page 20 of our press release that sort of shows where that rate was a year ago and where it is now. You get some benefit from that. Similarly, our $2.5 billion of property and casualty premium finance loans are fixed rate and generally have a nine-month life.
About one ninth of that portfolio is repricing as they come due at a higher rate. Those two things have a little bit of tailwind. Deposit pricing, you'll still get a little bit of CD repricing out there as upward pressure, but if rates don't move, then, as Ed said, we think we can sort of hold the increases on the deposits elsewhere pretty well. The mix change with the CDEC versus some of the wholesale funding should help. What we've sort of seen in the marketplace is, and I think it's probably perception, that people now believe that maybe the Fed may not raise, and so you're seeing people get less aggressive on deposit pricing. You're actually seeing the longer end wholesale brokered fund pricing back off a little bit.
It just seems like the marketplace has sort of taken a pause here, waiting to see what's going to happen, and we'll certainly pause along with it on the deposit side.
Great. If I could sneak one more in on capital. You guys have historically been pretty shareholder friendly. Given the move in the stock and the group. Can you speak to thoughts on a buyback, whether it be standalone or kind of funded with some sort of alternative instrument? Thanks.
Well, we always look at that, but we are a growth company. We've got to concentrate on our TC ratios and the like. It's something we review all the time, and depending on where the market goes, we'll see where we end up. If we saw a period of rope-a-dope 2 coming on board, we'd probably go out and raise a bunch of capital and wait to buy some stock back, I would imagine. Right now, we're still experiencing good growth, and the acquisition market's strong. It doesn't seem to make a lot of sense now, but something we always look at and will continue to look at. Dave?
Well, the other thing is, if you look at our total capital ratio, which tends to be our limiting one, we're 11.6% at the end of the quarter. That fell really because of the acquisitions and the associated goodwill that goes along with that. Generally, our earnings are supporting our growth. We generally wouldn't want to fall into the low 11s or high 10s. We don't have that much excess capital. To the extent that we thought that we wanted to enter into a stock buyback, we would probably have to raise sub-debt or preferred or something like that in order to accommodate the repurchase of it, just because we generally don't like our total capital ratio to fall much lower than that.
Got it. Thanks a lot.
Thank you. Our next question comes from Terry McEvoy with Stephens. Your line is open.
Good morning.
Hi, Terry.
Hi, Terry.
Ed, your closing remarks, you finished with Wintrust crossing $50 billion and making some comments about the expenses this year reflecting crossing that threshold. Which caught me a little bit off guard given your $31 billion today. That's a what? 50%, 60% increase from where we are. Maybe could you just expand a little bit on why 2019 you expect to start building up those expenses? Do you have any thoughts organically with the deal pipeline when that actually will happen? Just to help us gauge the buildup of those specific expenses and put some sort of timeframe around it as well.
Sure. This expectation was put on, it was probably a year and a half ago. We've added 110 people in IT, for God's sakes. We're a growth company. I like to say we're kind of like in puberty right now, and we have to grow into the overhead we put on. There's still some more coming. The regulators are pushing us because of it. They say you got to be ready, and we'd like you to have a $50 billion platform. You say when the expenses are coming. We've experienced probably more of them than we'd like already. Some more are coming. I can't tell you we're going to hit 50. I'm just telling you what the expectations are. We have to have this platform ready. The regulators are the referees, and only I'm allowed to bump the ref.
The other guys can yell at him. Only I can bump him. We want to have good relationships with them. All in all, we're making investments in the business that allow us to get there. We need to grow into our clothes. We intend to grow consistently like we have in previous years. We don't intend to look at very large acquisitions, but you never know what comes along. It's business as usual for us, which would get us there if you look at it that way, and nothing would have changed. We'll get you there in five years, probably. That's what's expected of us. We need to grow into it to get that overhead ratio where we want it.
I was just being open with you that the 150 is kind of hard to reach when we have to go to a committee on committees now to figure out what the hell's going on. We put the infrastructure in place. We're very happy with it. Everybody's happy with it. There'll be some more additions we'll need to bring on over the next year and a half or two years to make everybody happy with it, if you follow my drift.
Great. I appreciate that. Just as a follow-up, the premium finance commercial business was up 8% last year. The life side was up 13%. Is that a reasonable growth outlook, kind of 8%-10% for 2019 for those two specific lines of business?
Generally, we think of our loan portfolio growing in the high single digits, and generally, we like those to sort of grow in concert with the total balance sheet. P&C could get a little bit better boost. The market is hardening just slightly in certain areas. The fact that there was some regulatory relief on collecting tax ID numbers and certain sort of know your customer rules out there for the premium finance business that were implemented late last year. We lost a fair amount of business over the last couple of years because we had to collect those TIN numbers where some of our competitors didn't. We hope to gain some of that back, and we already are starting to gain some of that back, but it takes time because these customers buy annual policies, and they only come up once a year.
There could be a little bit of tailwind in that regard. Of course, we'll always want to grow it. I would think that those would be reasonable expectations. Maybe the P&C could be a little bit higher depending on the market hardening aspects that may occur during the year, and how well we do on regaining some of that lost business we had because of the unleveled regulatory playing field.
On the life side, I think the law of large numbers will catch up with us eventually. If I had to guess, probability-wise, it's probably more probable that the P&C business will be up more on a percentage basis than the life business.
Great. Thank you both.
Thank you.
Thank you. Our next question comes from David Long with Raymond James. Your line is open.
Good morning, gentlemen.
Hello, David. How did you like our double doink to end the quarter? I can't be The double doink-
Oh, I was hoping for another Vegas vacation comment, which did not happen. Maybe we'll go back to that next quarter.
The double doink, for those of you who don't know, was our Bears kicker hitting the upright and the crossbar to lose the game. It's known as double doink in Chicago. We're calling the fourth quarter-
Yes, it is
our double doink.
Yep. Well, I prefer to get back to another quarter, another record. So.
Do we.
That said, following up on Terry's comments about the premium finance business, my sense has always been that there are more repricings happen early in the year on both the life and the commercial side. Is that the right way to think about it?
No. The business fluctuates a little bit as far as volumes go because a lot of people have policies that renew in December, and generally the loans flow through in January. January tends to be a large month, and July does because the other high quarter end month is June. Quarter ends tend to be a little bit higher but not so dramatically that it would change the landscape as far as the rate environment too much.
Got it. Then you talked a little bit about deposit competition maybe easing to some extent, and I have not seen as many teaser rates, if you will, or the 2.5%, 3% rates on deposits on some of the mailers going out. Where do you guys stand on some of these promotional deposit yields that you have previously focused on?
Well, when we open the new branch, we still use them. We opened 10 last year. We're scheduled to open 10 this year. We will be using them at those locations. Again, those taper off as time goes by, and half the ones we did last year all tapered already. I would expect there to be some hiccup there or increase there. As a % of our total deposits, it becomes less and less. We agree with you. There's not as many silly things going on in the market right now. I think people have taken a breath. We had great loan growth because of our diversification in the quarter. I don't think you're seeing that in the smaller banks and other places right now. If they get out in the fund, they're not going to pay that kind of money.
Yes, I believe the competitive environment for deposits is taking a breather, as Dave said.
Got it. That's all that I had. Thanks, guys.
Thanks.
Thank you. Once again, ladies and gentlemen, if you wish to ask a question at this time, please press star then one on your touchtone telephone. Now our next question comes from Nathan Race with Piper Jaffray. Your line is open.
Hey, guys. Good morning.
Morning, Nathan.
Going back to the discussion around CDEC. Dave, just wondering if you could paint a little more color around what the specific fee income and non-interest expense impact we should expect as you guys get the full quarter impact of that deal.
Yeah. We haven't disclosed that yet. It sort of depends on the volume of deposits and that, they can go up and down. I think we'll take a pass on giving you that information until we let first quarter go.
Okay, sounds good. Just maybe a broader question for Ed. There's been a lot of M&A in Chicago, not only in the last year, but in the last few years. Just curious as you kind of sit here today, if you're more or less optimistic on loan and deposit growth opportunities into 2019 than maybe you would have thought 12 months ago.
On the acquisition front, I think I said in my comments that it's actually pricing expectations are coming down a bit. I think especially in the under billion-dollar banks, which is what we focus on. I think they're all getting a little worried that they want to get out now before the next wave hits. We don't see that next wave yet, but there always is one. Their expectations have come back a little bit. We believe that the acquisition front could be very interesting this year. On the organic loan and deposit growth, we talked a little bit about Premium Financial. We think that's gone. Again, our loan pipelines are as strong as they've ever been, and our ability to book these loans on our terms is holding up.
As I mentioned, our critical exceptions is both a percent of new deals and in the portfolio, just exceptions in general. The portfolio in total has been relatively consistent and a little bit trending down over the last two quarters. We are able to get deals on our terms. Again, we've always been an asset-driven company. If the assets dry up, we'll hunker down and wait for everything to hit the fan and hopefully clean up again. There's some disruption in the market with our neighbor over here expecting to close pretty soon. That always is good for us. We like where we sit right now, but at the end of first quarter, I might not like where I sit. We'll see where it goes.
Most of the competition is not coming from banks, it's coming from non-banks, on at least the pricing and the leverage and term side. It's getting a little bit goofy out there. That being said, our reputation plus the turmoil in the market is okay right now. Our pipelines remain strong, we feel pretty good about where we are.
Got it. That's great color. I appreciate you guys taking the questions.
Thank you. Our next question comes from Brock Vandervliet with UBS. Your line is open.
Hey, good morning, guys. Could we just go back to the mortgage business? Ed, it sounded like you made the call not to hedge the pipeline. Going forward, is the pipeline going to be hedged as a matter of course, or are you going to reevaluate every quarter?
We'll reevaluate every quarter.
It's the servicing portfolio. We do hedge sort of most of our pipeline, it's just the servicing portfolio that we're referring to as a hedge.
Okay. Well, that was my next question, whether you hedged the MSR, your MSR capitalized values basically more than doubled in the last year. That's not hedged at the moment?
Right.
That's what I was referring to was that. Our pipeline we do hedge, that works fine for us. Dumb Ed made the call that something we would do in the first quarter. If you recall, the 10-year got up very nicely during the fourth quarter before it tumbled, it appeared that was going to be consistent, my call was to say that some are going to look at it the first quarter and started legging into it fell off again, now we're reevaluating. Does that make sense?
It does. I know MSR marks have bitten many banks over time. I'm just a little surprised with it growing, you're not just going to hedge out that exposure or large portion of it.
It is growing over time. We are looking at it. It was something that was a nice run-up for us. It was my fault. I should have looked at it and been more conservative, it's something we're looking at now, and we'll get back to you on it. I'll fall on the grenade for that one. I think I made enough money on the other stuff.
Yeah, in reality, Brock, if you look at it, the MSR valuations were almost flat for the year. We had gains in the first three quarters, it gave it all back at the end. On an annual basis, it was somewhat flat. If your viewpoint is that you think rates are going to rise a little bit, you could ride up that value and then hedge it in, we just felt that the long end would not tumble like it did. It's come back a little bit since the end of the year, so you could see some pickup in those MSRs. We're not even near the end of the quarter yet, with the volatility we saw in the fourth quarter, who knows? We have a hedging strategy in place, and we'll evaluate. It's just the timing of when you implement it.
Okay. Fair enough. Just as a quick follow-up, can you give us any sense of 2019 volumes, assuming, say, no further hikes in your mortgage business? Is that kind of flat or up small?
I would say flat.
Yeah, I'd say generally flat.
Flat, assuming no hikes. Okay. Thank you.
Thank you. Our next question comes from Michael Young with SunTrust. Your line is open.
Hey, good morning. Just wanted to touch really quickly on the loan-to-deposit ratio. You guys have done a nice job of bringing that down from kind of 95% at the beginning of 2018. We're almost to kind of the high end of the range here headed into 2019 of that 85%-90% that you guys are targeting. Any color on kind of where you feel like that will trend or what you're watching in terms of being able to bring that lower throughout the year?
Well, our goal is still the 85-90. We could have easily been there had we not gotten rid of the brokered funds here in the fourth quarter when we brought CDEC on, so we could have just grown that. With the long end coming down, there really was no place to put those funds, so we elected to use those funds to get rid of some of the higher priced wholesale brokered and Federal Home Loan Bank funding that we had. We still have the goal to just gradually bring that down, and if the market, if the long end would go up, you, as Ed said, you could potentially lever and get there right away. In the interim, we hope to just gradually continue to bring that down into the 90%, so that 85%-90% range in 2019.
We'll just have to see what happens to the yield curve and how fast you do that. You don't want to raise all the deposits then have no place to go with them. We'll monitor the curve and go from there.
Just wanted to follow up on the comments that you guys started to kind of ladder back out, sometime this quarter and kind of last quarter. Any chance that the covered call income is going to tick up here in 2019, or is that still likely going to be steady at kind of this lower run rate?
We write them on some of the securities. Generally you get more covered call when rates are going down, because people will pay you more for those. With the thought that the rates may be relatively flat to, at this point on the long end to going up, you don't get that much. You can see that we had some of our securities called away. We'll reinvest those but that's sort of typical, so I wouldn't expect too much difference in that. It just really sort of depends on what the market perception is, where rates are going, and what the volatility is, to be in the quarter when we write those, but probably not dramatically different.
Okay, thanks.
Thank you, I'm showing no further questions at this time. I'll turn the call back over to Ed Wehmer for closing remarks.
Thanks everybody for dialing in. Put the double doink quarter behind us, and we're going to look forward to a very good first quarter, hopefully, knock on wood, and talk to you again in April. If you have any additional questions or follow-ups, feel free to call David Stoehr, Dave Dykstra, or myself. Happy to talk to you. Talk to you later when pitchers and catchers are in. Thanks. Bye.