Following a review of the results by Edward Wehmer, Chief Executive Officer and President, and David Dykstra, 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 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.
Good afternoon, everybody. Welcome to our first-quarter earnings call. A beautiful day in Chicago. It's 73 degrees. Sunday, we got five inches of snow, welcome to our world. With me, as always, are Dave Dykstra, Kate Boege, our general counsel, and Dave Stoehr, our CFO. Again, the same format as we always have. I'll give some general comments regarding the results for the quarter, turn it over to Dave Dykstra for a more detailed analysis of other income, other expenses, and taxes. Back to me for summary comments about the future, thoughts about the future, questions, off we go. Very pleased with the first quarter results. $89 million, up 12% from the fourth quarter of last year and about 8.75% from first quarter of 2018. $1.52 a share, meet consensus, up 13% from fourth quarter and 7% from last year.
If you were to take out the mortgage servicing right adjustments in all three of those comparative periods, Wintrust would have made close to $95.7 million in the first quarter, $1.64 a share, up 12% from the $85 million it would have made in the fourth quarter, $1.46 a share, up 21% from the $78 million we would have earned in first quarter of 2018 at $1.38 a share. All in all, our performance is pretty good. We do get whipsawed by the last 15 days every quarter lately, which seem to show some abnormalities in the rate movements, it is what it is. Our margin increased 9 basis points to 3.72% in the quarter from the fourth quarter. ROA at 116 was up from 105. Return on equity of a little over 11%, return on tangible equity of 14%.
Good growth across the board for us in earnings and in the balance sheet. I'll get into a little bit of it. Results were achieved despite the $8.7 million pre-tax MSR valuation adjustment due to the market volatility experienced in the last two weeks of the first quarter of 2019. Just must be something about the last two weeks of the quarter. Other one-timers are marginally negative to the quarter results and are highlighted as follows. A negative $1 million non-taxable deduction for a fine was basically offset by unrealized gains on equity securities of $1.4 million. We had $464,000 gain on Canadian foreign currency, which was offset by really acquisition expenses and some other smaller items. Saying this out, we had approximately $8.5 million of pre-tax of one-timers, basically all due to the MSR valuation negatively affected our results.
On the positive front, as I mentioned, our FTE margin increased nine basis points in the quarter to 3.72%. That is kind of a high water mark for recent times. This coupled with an increase in average earning assets of $771 million, resulted in net interest income increasing approximately $8 million during the quarter over the fourth quarter. I believe that to be kind of remarkable given that the first quarter had two less days than the fourth quarter, and each day is worth what, Mr. Stoehr? About $2.3 million? Two and a half million. $2.5 million pre-tax. Not bad. Little more on the margin. Earning asset yields were up 16 basis points. Net cost of funds, including free funds contribution, was up seven basis points. CDEC deposits. You all remember CDEC, Chicago Deferred Exchange Company, which we acquired mid-month in December.
They experienced their expected seasonal drop in Q1, were still additive to reducing our cost of funds. As this was the first full quarter of CDEC deposits, and they were only on the books for a couple of days, really maybe half a month in the fourth quarter of last year, comparatives are somewhat meaningless. CDEC deposits were down approximately $200 million quarter end versus quarter end, and a bit more on an average basis through the end of last year. We expect these balances to grow through the year due to both seasonality of the business and our marketing efforts. With rates moderating, significant emphasis will be aimed towards holding down our cost of funds rate increases. The decrease in the overall rate environment has put a halt, at least for the time being, to our liquidity management laddering program. We've talked about this in previous calls.
We'll continue to monitor the rate environment for opportunities to move forward with this plan. In that regard, the duration of our liquidity management portfolio moved down to 4.8 years from 5.85 years at the end of the year. It's almost seven years at 3/31 of last year. You can see we're building up lots of liquidity. It can hurt the margin a bit, but we think it's the right thing to do. Let's see. Period-end loans exceeded fourth quarter average loans by over $334 million, as it has, we've seen the back end, most of our loan growth will give us a head start on Q2, and bodes well for the net interest margin, net interest income. Our pipelines remain consistently strong across the board.
In the first quarter, we saw a number of the pipeline loans where we expect to close in the first quarter on the commercial and commercial real estate side move into the first couple of weeks of April. They have moved through. We've had good loan growth already this quarter, we're feeling pretty good about that. However, we are seeing some additional rate compression and paydowns due to competitive pressures from both banks and non-banks, with the latter being the biggest culprit. That being said, we're set to grow our portfolio on our terms and to continue to expect loan growth in the mid to high single digits. However, as with our peer group, the margin is a bit under assault. At least we're starting at a high point here. We believe that we will do our best to mitigate any compression.
Expected balance sheet growth and lowering deposit rates should offset any small margin compression should it occur. We're not giving in on it. We believe that with rates moderating, we believe we can hold our costs down. There's still some give on the earning asset side, because it does take a full year for any rate increases to work their way through the system. We think we're in pretty good shape on the margin front. If I could predict accurately within the penny, I wouldn't be in this business. I'd be at a sports book someplace. Other income other than mortgage-related items was very good numbers. Mortgage was hurt by the MSR valuation, and by the expected seasonal decline in volume. If you take those away, the mortgage issue area still made money. Wealth management continues its slow and steady growth.
Fees up $1.3 million over the fourth quarter of 2018. We're very happy with their results year-over-year. Assets under administration surpassed $25 billion. Good growth there. Other expenses are pretty well in line and will be discussed in detail by Dave. Our net overhead ratio is high at 1.72 compared to 1.79% in quarter four. If we were to back out the MSR valuation adjustment, these numbers would've been 161-169 respectively. Still higher than what we want. That was acceptable given the slow mortgage production, the overall mortgage business slowness we saw in the first quarter and a little bit in the fourth quarter last year. We're still on track with our operational efficiency initiatives in the mortgage area. Cycle times and production costs are down.
We still have a ways to go to reach the desired efficiency levels. We're on track for June 30th for total phase 1 completion of this work. On the credit side, credit metrics remain very strong. NPAs increased $1 million in the quarter, from 0.43% of assets down from 0.44% of assets at the year end of Q4. NPLs increased $4.4 million, while OREO decreased $3.3 million. Net charge-offs for the fourth quarter were $5.1 million or 9 basis points, down from the $7.1 million at 12 basis points we achieved in the fourth quarter of last year. Reserve coverage is at a 134%, pretty even with what we showed in the fourth quarter, but down from 156% experienced last March. In all, credit remains very good. Balance sheet growth.
Our ending assets grew $1.1 billion in the quarter, an increase of 14% over the year end, and 12% from a year ago. Total loans net of loans held for sale were approximately $400 million quarter-versus-quarter, and $2.1 billion over the year were 6.5% and 9% growth respectively. As mentioned, most of the growth was back and loaded. We start Q2 with a head start with close to $350 million, plus the carryover from what was expected to close in that quarter, about $150 million. We expected to close in the first quarter and moved over. We feel pretty good about where we are entering this quarter. Loan pipelines, as mentioned, are consistently strong. Maybe the second strongest quarter we've had in the last six or seven. The strongest quarter we've had recently has been the fourth quarter. We saw the momentum continue through the first quarter.
6.5% loan growth experienced in the quarter. Though respectable, shy of our desired growth. If you had added in what we expected to close in the first quarter and was pushed over, that number would have been closer to the number we'd like to get at. We are concerned about payoffs, but we believe new business will cover the payoffs that we're seeing happen. Payoffs have basically been consistent for the last six or eight quarters anyhow. They're higher than we'd like, but we're used to competitive markets here in Chicago. Deposits grew $710 million and $2.2 billion quarter-versus-quarter and year-versus-year respectively. Translates to percentage of 11% and 13%. On the deposit ratio, we turned the high end of our desired range of 85%-90%, closing the quarter just a smidge above 90%. Our goal is to be within our deposit, our desired range.
All in all, good consistent growth quarter for Wintrust. I'm going to turn it over to Dave to discuss other income and other expenses.
All right. Thank you, Ed. As normal, I'll touch on the other non-interest income and non-interest expense sections. In the non-interest income section, our wealth management revenue increased to $24.0 million in the first quarter compared to $22.7 million in the fourth quarter of last year, up 4% from the $23 million recorded in the year-ago quarter. Brokerage revenue was down approximately $481,000, while trust and asset management revenue offset that decline by increasing $1.7 million, with the majority of that $1.7 million increase related to additional revenue generated by CDEC due to a full quarter of activity with CDEC. A number of our assets that we manage are based upon the market value at the beginning of the quarter.
We have a little bit of a good head start for the second quarter as asset valuations are higher at the beginning of the second quarter than they were at the beginning of the first quarter. All in all, we believe first quarter was another solid quarter for our wealth management segment, and we look forward to continuing to grow that. In the mortgage banking revenue side, those revenues decreased 25% or $6 million to $18.2 million from $24.2 million recorded in the prior quarter, and was down from the $31 million recorded in the first quarter of last year. The decrease in this category's revenue from the prior quarter resulted primarily from lower levels of loans originated and sold during the quarter and negative fair value adjustments recognized on Mortgage Servicing Rights related to changes in rates and other valuation assumptions and the effect of payoffs.
That revenue headwinds were offset by higher average production margins on the loans that were sold. The company originated $678 million of mortgage loans for sale in the first quarter of 2019. This compares to $928 million of originations in the prior quarter and $779 million of mortgage loans originated for sale in the first quarter of last year. The mix of the loan volume originated for sale related to purchased home activity was approximately 67% in the first quarter, compared to 71% in the prior quarter. Purchased home activity continues to be the majority of our new origination activity, although we saw a slight uptick in refinancing due to the recent drop in rates.
Page 21 of our first quarter earnings release provides a detailed compilation of the components of the origination volumes by delivery channel, and also of the mortgage banking revenue, including production revenue, MSR capitalization, MSR fair value, and other adjustments and servicing income. Given existing pipelines, we currently expect originations in the second quarter of 2019 to increase nicely and should approximate at least $1 billion. Possibly could be higher than that, but we think it will at least be at $1 billion range right now, given existing pipelines. The company recorded gains on investment securities of approximately $1.4 million during the first quarter, primarily related to the recovery of some of the $2.6 million of unrealized losses we recorded in the prior quarter, associated with an investment in a large cap equity fund that we seed with our asset management company.
Other non-interest income totaled $16.9 million in the first quarter, up approximately $6.3 million from $10.6 million recorded in the fourth quarter of last year. There are two primary reasons for the improvement in this category of revenue, including a positive swing of $1.6 million of foreign exchange valuation adjustments associated with the U.S. Canadian dollar exchange rate. The current quarter has a positive valuation adjustment of approximately CAD 464,000, whereas the fourth quarter of 2018 had a negative adjustment of approximately $1.15 million. The currency rate volatility was abnormally high in the fourth quarter. It generally is half a million dollars or less. That resulted in a $1.6 million swing. For your information, we have begun to disclose a line item for foreign currency valuation gains or losses in the non-interest income tables presented in our earnings release.
BOLI income was up approximately $2.1 million from the fourth quarter, primarily as a result of a $1 million of earnings on BOLI investments supporting deferred compensation plan benefits, which were positively impacted by equity market returns, and this was compared to a $1.1 million loss on such investments in the prior quarter. We have got a $2.1 million swing in BOLI earnings related to the deferred compensation plan benefits. This also results in a similar increase in our compensation expense recorded during the quarter. They are somewhat offsetting. If you look at the remaining $2.6 million of improvement in the other non-interest income section, it primarily relates to an increase from investments that we have in certain partnerships in card-based and merchant service fees. Turning to the non-interest expense sections. Non-interest expenses totaled $214.4 million in the first quarter, up approximately $3 million from the prior quarter.
I'll talk about a few of the more significant changes. The salaries and employee benefits expenses category increased approximately $3.6 million in the first quarter of 2019 from the prior quarter. The increase was due to a variety of factors, including the $2 million increase in expense related to deferred compensation plans impacted by the positive market returns on the BOLI products that I just discussed. Again, those somewhat offset in the income and the expense section. It was a $2 million increase to the salaries as well as a $2 million increase to the non-interest income. We also had the impact of annual base salary increases that generally took effect on February 1st and were in the 3% range.
We had a lower amount of salary deferrals as the loan originations were down a little bit in the first quarter compared to the fourth quarter, so there was less loan origination costs that were deferred. We had normal growth as the company continues to expand. These increases were offset somewhat by a lower level of health insurance claims. They tend to be lower in the first quarter as a lot of people try to get their health claims in in the fourth quarter before their deductibles reset. Those were a little bit lower in the first quarter. We also had a lower level in incentive compensation and commissions related to mortgage banking production and the wealth management broker revenue. Professional fees decreased to $5.5 million in the first quarter compared to $9.3 million in the prior quarter.
Professional fees can fluctuate on a quarterly basis based on the level of legal services related to acquisitions, litigation, problem loan workout, as well as the use of consulting services. This category expenses came down substantially due to a decline in legal fees associated with litigation collections and acquisitions, and also experienced a lower level of consulting engagements associated with technology enhancements and other initiatives. We had quite a few of those engagements going on in the prior two quarters, which we didn't have this quarter. Amortization of intangibles increased by approximately $1.5 million in the first quarter to $2.9 million. The increase compared to the prior quarter was primarily due to the amortization of certain acquired intangible assets related to the CDEC acquisition in mid-December of 2018.
If you look at all the other expense categories other than the ones I just discussed, they were up on an aggregate basis by only $1.6 million from the fourth quarter, and that included the $1 million settlement payment on a regulatory matter, which was included in miscellaneous non-interest expenses. Barring that, all the other categories were really up by about $600,000. Nothing significant to talk about. With that, I will turn my presentation back over to Ed.
Thanks, Dave. Some thoughts about the future. For those of you who listen to our calls regularly, these summary statements will be beginning to sound like a broken record. We stick to our knitting here, taking what the market gives us, not getting out over our skis. We start the second quarter with very good balance sheet growth, strong earnings in spite the one-timers related to MSRs. We start the second quarter with $350 million head start on loans. Home pipelines are very strong. We're booking loans on our terms. The non-bank competition becoming more and more aggressive. Our brand and the disruption occurring in our market is helping us to continue to gain share. If the situation warrants, that is our circuit breakers, which are our pricing policies and loan policies trip, we won't be afraid to stop the boat as we have in the past.
As of now, we see no reason to do so. Expect the margin could be under a bit of pressure in 2019. We think our expected growth deposit rate moderation, maintaining our strict loan underwriting guidelines and standards and pricing parameters, we expect to hold our own in this regard. Credit metrics remain strong, and we will continue to call the portfolio for any and all cracks and exit relationships where these cracks are found. We always remember your first loss is your best loss, and we never want to kick the can down the road. Takes a full year for short-term rate increases to work their way through our asset portfolio. December increase certainly helped the first quarter margin, but this and the other increases which occurred in 2018 are still working their way through the system. This will help with mitigating any margin pressures we discussed earlier.
Wealth management should continue their slow and steady climb. In 2018, we opened 10 branches. We have the same number on tap pardon me, for 2019. 2018 branches are performing ahead of plan. We expect the same for the ones opening this year. We announced in the quarter our acquisition of Rush-Oak Corporation and its subsidiary, Oak Bank. We expect this transaction to close in Q2. It looks to us like pricing for banks in our desired asset range continue to become more reasonable. As such, our landing patterns are very full, but the gestation periods remain very slow. You can be assured of our consistent, conservative approach to acquisitions and other deals. We also continue to look for other earning asset niches we can jump into, but none yet.
We did open our factoring operation, our vendor finance operation in the quarter, both of which are off to very good starts. We expect those portfolios to bill out over the rest of the year, and they both have very good rates on them. We're very comfortable with them. That should help us. Lower 10-year rates that hurt flow in the fourth quarter of the first quarter of this year should help volumes in the upcoming spring buying season on the mortgage side. We continue with our cost-cutting and efficiency progress in this business, many of which will be operational by mid-year. As a community bank, we have to be committed and are committed to this business. We still want to achieve our net overhead ratio one and a half % or better. Achieving that number in the coming year may be hard.
The number mid-150s is our goal for this year. In short, we're proud of what we've built over the last 27 years, and approach the rest of 2019 with confidence we'll be able to achieve our goals of double-digit earnings growth and continued growth in tangible book value. Always, you can be sure of our best efforts. We appreciate your support. We'll move on to questions.
Ladies and gentlemen, if you have a question at this time, please press the star, then the 1 key on your telephone keypad. 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. Thank you. Our first question comes from the line of David Long with Raymond James. Your line is open.
Good afternoon, gentlemen.
Hello, David.
Regarding your expected IT spending, what are you thinking about with your core operating system and any expenses that you may have to make this year? Then as a follow-up to that, just overall IT spending in 2019, what would we be looking at as a growth rate there versus 2018?
Yeah. We're doing a few things on that front. You can see, if you look at our data processing line, we've had some declines there. We're renegotiating a number of different contracts and trying to streamline some of that stuff. We expect to get some savings out of that, which will be offset by additional expenses that we're doing for digital products and digital enhancements to the system, and some other efficiencies that we're trying to do. We haven't disclosed exactly what that number's going to be, but we've invested a lot over the last few years in the IT infrastructure side. I actually think what you'll see is those investments are already baked into the numbers from last year. They're actually going to moderate some this year as far as increases.
I wouldn't expect a large significant increase in the spending because we've done some other things to save money to offset that.
Yeah. As Dave says, we've not disclosed it, but we have gone back and looked at a lot of contracts and have been able to twist some arms and get some things out of them that should cover additional investments we're making, where we continue to make investments in both the digital side and in information security, and other issues. Hopefully, we can keep costs where they've been, maybe one or 2% given inflation. When you read that, don't assume that we're not making the required investments. We still live by our motto, "Selling better products, selling better delivery systems, killing with service." We continually look at our offerings and the offerings of our competitors, try to stay with them or ahead of them.
Got it. One follow-up on the deposit side. Living here in your market, I've noticed over the last six months a real slowdown in the amount of promotional deposit mailings that I've gotten. Have you seen any easing on some of the promotional prices that you've seen out there for deposits?
Absolutely. The third quarter last year, you were getting like eight in the mail every day, and emails and what have you. It's slowed down, which gives us hope that we can continue our growth and moderate our deposit growth. In the last month of the year, the quarter, half our banks showed 0% increase in deposit costs, and another half showed three or four basis points. We had a meeting yesterday, beating up the guys on three or four basis points. I think our goal is to continue to grow our core deposits without an increase in cost of funds from the level it's at. That's our goal. The mix of more CDEC deposits coming on should be helpful in that goal.
Emphasis on getting more demand deposits through the commercial relationships that seems to move a little at the end of the year in the first quarter. Hopefully, we can hold it on. If we can do that, and the rate increases that took place last year continue to work their way through the portfolio, then we believe they can offset any spread compression on newer deals. We think we're okay. There's probably a three basis point spread either way that we're looking at, and we're looking at this really closely all the time. We know the margin is under assault, and our goal is to make sure we win that battle.
Got it. Appreciate the color. Thanks, guys.
Thanks, David.
Thank you. Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is open.
Hey, thanks. Good afternoon.
Hi, Jon.
Hey. Just back to the margin question. Ed, in your prepared comments, you said, I think your quote was, "NIM compression should it occur." And then page one of your release, you talk about expecting pressure on the margin in the upcoming quarter. Help us just understand those two comments.
I think that the issue is we're trying to hold it where we'd like to see it increase. We think we've got some things we can do to do that, but you never know. As I said, if I could predict this stuff, I wouldn't be doing what I'm doing. I'd be at a sportsbook someplace. We think that it could go three to four basis points either way throughout the course of the year. We're working to hold it steady. At least we're starting from a higher point. We know we'll have good asset growth from an NII standpoint. We think that's a good thing, but our goal is to maintain the margin and grow it. We're going to do our damnedest to get there, but it's under pressure right now. We think we can moderate our deposit costs.
As I said when I answered David's question, I think we can moderate our deposit costs. We can hold that steady. The rate increase that took place last year continue to work their way through the balance sheet. Hopefully, they can offset pressure on newer deals, That's our goal.
Maybe a better way to have said that was, we expect some pressure, then we expect some headwinds, which you can maybe offset. Whether it's pressure or headwinds, like the one-year LIBOR rate is down, so the repricing of the life portfolio isn't quite as good as it was maybe three months ago. There's some headwinds there. Is that?
It's up from last year.
It is.
A little bit.
Just barely. It's not quite as good as it was, so there's some headwinds. Maybe headwinds is a better way than to say pressure. As Ed says, we've got a number of different levers we'll pull, and we'll have to see where the growth comes from. We're hoping to offset it if there is some pressure, maybe a few basis points down. It's possible that if everything went well with the cards, you could be up a couple too.
Yeah. Okay. That helps. You read the release, and you think that the margin is really going to step down. That helps. Also, a question on the pipeline. You talked about some of the deals falling into Q2 from Q1.
Curious how significant the size of those loans are. The second part, in terms of the increased pipeline, how much of that is warehouse versus maybe just more broad-based? Thanks.
Well, the first part of your question, we booked probably $160 million of loans already this quarter related to They really should have closed last quarter. That's about the amount that was moved over, I know they booked. When we give you these pipeline numbers, it's really our commercial real estate. It doesn't include our life insurance portfolio, our commercial premium finance portfolio, our leasing group, and the other groups that the niche loans that are out there.
Okay.
Just to give you an idea, in December, we were $1.128 billion. February, it's been the highest. This is gross, not affected by probability of close. We're $1.188 billion at the end of March. Again, up a little bit from the end of the year. I was going to say on a weighted average basis, trying to look at the sheet. Those numbers are relatively the same. Our pull-through rates have been pretty good. That being said, good if true, I guess. We've got good history to back it up. Our leasing portfolio is doing nicely also. What's going on in town here, a bank that was sold here had a very big leasing portfolio, sold to a bank that also had a big leasing portfolio. Some of the vendors they used wanted an additional source. We've been able to pick those up.
Disruption in the market that's taken place over the last two years, we're starting to reap the benefits of that. We feel good about where we are in terms of loan growth. That's not to say that the non-banks aren't making our life tougher.
Jon, just to follow up on Ed's. I've got the detail he didn't have in front of him.
Okay.
The $1.18 billion is sort of the 13-month rolling average of our pipeline. At the end of March, we were $1.3 billion, with the probability of close of $812 million. You compare that to the end of the year when we were $1.1 billion with the probability close to $671 million. It's up over the end of last year and has actually grown a little bit. It's down a little bit from February, but just slightly. We're seeing good growth in that, and the probability close is good. Like Ed said, you can't always make your customer close when they want to close. Sometimes there's a little back and forth between quarters.
Okay. Got it. Big picture message, you're still seeing this high single-digit growth, and you're essentially going to fight the good fight on the margin, but some potential headwinds there. That's what you're trying to say. Is that right?
Yeah, I think that's fair to say. Notwithstanding, net interest income is what you have to look at. Good asset growth will give us more net interest income. That's what we got to look at. We're looking at the bottom line. We'll do our best to control the margin, but what are you going to do?
Yep. Okay. Thanks for the help.
Thank you. Our next question comes from the line of Casey Haire with Jefferies. Your line is open.
Thanks. Good afternoon, guys.
Okay.
Ed, wanted to follow up on, you mentioned the leasing opportunity with all the disruption in your market. What other products, are you seeing any opportunities on the deposit side? Given all the disruption in your market, are we in the early innings there, or are there other examples similar to the leasing one you cited?
Well, on the commercial side, disruption's always good. One is that our 2 biggest competitors in the last 2 years have sold, one to a Canadian bank and one to a Cincinnati bank. We're starting to see more opportunities out of the Canadian bank. They acquired a local bank. As they're getting more and more entrenched there, we're seeing more opportunities from there. First couple months, years, we didn't see much. From the other bank, we are seeing opportunities. I know we booked a number of them already, and more coming. I think any disruptions is always good, especially on the commercial side. We think there's good opportunities for us. A lot of people want to bank locally, with us and Midwest, the only games in town, we're triple the size of Midwest, we think we do it better. We know we do it better.
We think on the deposit side, deposits obviously move with the commercial business. On the retail side, we continue to stick to our tried and true method. Retail gets stickier with all the digital stuff that's out there. We ought to find a better way to do that. With that being said, we've grown nicely in our new branches. Where we've opened new branches and we bought banks, those are moving very well for us. It's hard to pinpoint where they come from because we take as many from Chase and Bank of America and Harris as we do from anybody else. Retail deposits are tough. We've always taken shake a share from people, on the loan side, it seems the opportunities are more than they've been lately. That okay? That answer your question?
Yeah. No, that's great. Just to follow up, I guess, on the M&A outlook. You guys have Oak Bank, I believe, closing this quarter. Is that opportunity set still a pretty good active one? I would think it would be in the wake of just all the headwinds on the subscale bank group.
You hit the subscale bank. I like that. Subscale bank group. I've never heard that put that way. Yes, we are into the subscale bank group, and it's not underwater banks. We don't want those unless we get somebody to support the price, like the FDIC. Yeah. Prices have come back to be attractive again. I think that many of these people thought after the Trump bump and some of the prices that were paid for banks immediately after that, thought that they could command those prices. Now they see the Democrats are going to have tax issues. The taxes could go back. They have earn asset issues. They've seen regulation may not have as much new regulation, but the old stuff continues to filter down to them. Looking today, I don't think they want to go through another cycle again.
As I said, our landing patterns are very, very full, to the extent that we actually have to kind of sit in a room and decide which ones we want to line up first and second and third. The gestation periods remain longer than they should be. It's just internally, we're finding when you go through due diligence, and we go through very deep due diligence, we seem to find some issues that require more work and on the tax side, and then on the lending side. They take a little longer to get done than they used to.
All right. Thank you.
Thank you. Our next question comes from the line of Brad Milsaps with Sandler O'Neill. Your line is open.
Hey, good afternoon, guys.
Hi, Brad.
Dave, Ed, just back to the NIM discussion. I just wanted to talk a little bit more about deposits. I was curious, of the $700 million or so that you brought on this quarter, looks like it was a mix between a lot of various categories, but kind of curious what the average cost of those deposits were sort of relative to where you were for the rest of the quarter.
I'll let Dave handle that.
Yeah. Brad, actually, I don't actually have a weighted average cost on the new deposits. Obviously, our price is up a little bit, but a lot of that is CDs maturing. We had pretty decent growth in the wealth management area. Some of those come from some of our customers, but we also have some third-party unaffiliated brokerage companies that place money with us, and so we got a little bit of that. We're having good success on sort of the money market and the savings accounts by marketing to our existing customers. We're really not outrunning the high-priced ads that someone else referred to. It's just blocking and tackling and getting in front of them and providing them sort of standard promotions.
I'm dancing around your question because I don't have the number in front of me, Brad, but we're not running an exorbitant special rate, if that's what you're driving at.
I will tell you that In the month of March, half the banks showed no deposit cost increase, and the other half showed three or four basis point increase. Those are the ones that got beat up yesterday, showed the three or four basis points. If that helps you any. The growth across those banks was relatively consistent. We are moderating those costs now. As David Long had asked, the competition isn't as bad. The smaller banks and the like aren't out there offering goofy rates. For the shoppers, there's no reason to match anything. We're very cognizant of what we need to do on the deposit rate side to maintain our margin. We're going to work our asses off to make sure it happens.
No, that's helpful. Just to follow, if I heard correctly, it sounds like you once again brought down the duration of the liquidity book. Is there some thought, too, that the reason you're doing that is that, are you looking to focus a little more on mix change and maybe that helps them in a little bit and you can hold on to a little bit more easily that way? Or am I thinking about that incorrectly, that you're holding more cash in that book now?
We are holding more short-term securities in that book. That's correct. We would have thought we would like to be laddering out. We had started doing it, and then we had to stop. Just till rates get higher, it makes no sense to ladder at these levels, in our opinion.
Just final question on your guidance around $1 billion in mortgage or so for the quarter, Dave. How much do you siphon on and off the correspondent network? Is most of that $1 billion coming through your retail channel that carries a higher gain on loan sale margin or-
Yeah.
How do I think about that mix kind of going forward? I know what you'd prefer, but just kind of curious how to think about it.
Out of our $678 million that we originated for sale in the first quarter is about $148 million. Our thoughts is that it's probably very similar number in the second quarter. Out of that $1 billion plus or minus number, maybe $150 million would be correspondent. We're actually seeing good origination in our legacy retail origination and some increases in the Veterans First, too. I think the big jump will be in our retail origination platform, some in Veterans First, and I expect correspondent to be relatively flat.
Great. Thank you guys.
Thank you.
Thank you. Our next question comes from the line of Michael Young with SunTrust. Your line is open.
Hey, good afternoon.
Hello, Michael.
Just a quick follow-up. We kind of danced around the margin question a good bit. In the press release, it was stated that you expected the margin to be down next quarter. It sounds like you may be backing off that a little bit depending on what you can do on the deposit side. Just in terms of pretty near term, should we still think down in 2Q, but then we hope to defend it for the rest of the year?
I think when we were answering the prior question, maybe the answer to that is that we should have said there'll be some headwinds to the margin versus pressure on the margin. There are headwinds, so we're going to have to fight to keep it there. As Ed said on the prior call, it could be down a few, it could be up a few, but it just depends on the mix and how we do on CDEC deposits and some other things. We're not guiding that it absolutely will be down. We're just indicating there might be some headwinds.
Okay. On the growth, just curious how much of that is kind of new production that you're putting on versus are you seeing any increases in utilization levels on C&I lines or even in the dollar volume in the premium finance business?
We're not seeing big increases in line utilization. They're fairly standard. Property casualty, as you'd see, we had fairly good growth in that this quarter. There's a little bit of firmness in the market where premiums are going up a little bit. We're getting a little bit of the business back from the regulatory issue we had where we don't have to do certain TIN collections anymore. We're getting some of that business back. Just our team's out there selling good service. We're seeing some good growth there.
The regulatory issue, for those of you who knew, wasn't particular to us. It was a regulation that the Fed was following that said we had to get TIN numbers on all our commercial premium finance contracts. Our major competitor is a non-bank and sold against us. For the three years that was going on, we probably lost 10% of our book and had to fight like heck to keep our overall outstandings constant. Through the work of Mr. Dykstra and a number of people, we've been able to get that all reversed. FinCEN reversed it. The regulatory issue had nothing to do specifically with us. It was to do with getting a law changed, which Mr. Dykstra went to Washington and met with Hensarling and Shelby and all the Quarles and all the powers that be, got them to change a law, which is pretty remarkable.
I just want to make sure you knew that had nothing to do with us. We are fighting to get that business back that we had lost. Unfortunately, the business we lost was our more profitable business. Kind of a smaller ticket trucking business, things like that.
Get a lot of higher late fees and what have you. We are working to get that back. Little by little, we expect that to occur, we'll go from there.
Thank you. Our next question comes from the line of Chris McGratty with KBW. Your line is open.
Hey, good afternoon. Dave or Ed, maybe a kind of a high level question on capital. I know you don't have the authorization for a buyback, but just kind of interested in your thoughts philosophically, where your stock's trading given the fall in rates. You guys, I think, talked about potentially doing one with some sort of a debt component. Any kind of thoughts on buying your stock where it is today?
Well, we don't have a buyback in place. It's something that the board can look at. It's probably a good practice to have a buyback in place at any time in case you find yourself in a position where you want to do it. That's something we will look at and the board will look at, but we don't have one in place right now. From a capital side, we understand rates are low. If a lot of these acquisitions that we've talked about actually come to fruition, we'll need some cash and probably some capital to support that growth. If that's the case, like you said, interest rates are pretty low, so we'd probably look at sub-debt or our preferred, although I think sub-debt as a tax-deductible method is probably a little bit more attractive at this point of the interest rate cycle.
If it's just cash you need to get the deals done, if they're cash deals that we're doing, then that would suffice. We would just have to look at the time that the buyback's in place and if you had capital and excess cash, where the stock price was at, and we'd make a decision. I'm not going to say on the call we're going to do one thing or the other, but we will look at putting a buyback authorization in place. Yeah, I think it makes sense to have one. The other thing is, most of the acquisitions we do are probably half stock, half cash. That helps us from a tangible book value's point of view and works across the board. Most of the deals we do are half and half.
Some are a little bit more stock, depending on the ownership of the target, who want to get more tax-free treatment and like the value of our stock where it sits. We'll be raising capital that way, too, if in fact these come to pass. As you know, our track record has always been we are very good stewards of our shareholders' money. If we do do an offering, usually that means there's something coming behind it.
Understood. Yeah, totally understand. Maybe one more on the margin from a different angle. Some of your peers have been a little bit more aggressive in taking down rate exposure, asset sensitivity, if you will, given kind of the rate shift that we've seen in the last six months. How should we be thinking about any tweaks to the structure of the balance sheet, maybe over the next six months to maybe protect against downside risk? Thanks.
If you look, I forget what page it's on. If you have a look, we have taken our position down to probably about a third. I got to look it up. No, we're moderating our asset sensitivity right now, Chris. If you look in the press release, we've gone from 9% on a ramp scenario for a 200 basis point increase, down to 6.7%. On a downside, we've reduced it from 4.8% to 3.3% on the downside. We're trying to narrow that gap, and we're doing that by doing some additional fixed-rate lending and extending out which we didn't do much fixed-rate lending before. We're doing a little bit more of that and just working with the liability and the asset side gradually to moderate that asset sensitivity.
Great. Maybe one more on the.
We're seeing the need to do more fixed-rate assets. Given the way the rate environment is right now, you can do a fixed-rate asset and buy a cap on it for not a lot of money. We're looking at that to get our upside squared away, but protect our downside also. We never really did a lot of fixed-rate loans, but we're seeing some Like in the life insurance market, we're seeing more fixed rate. People coming out with fixed rates that we want to be able to match, and we want to protect our upside. If the upside protects our downside, I'm all for it. The market's kind of accommodating for us in that regard.
Great. Thanks. Dave, maybe quick on the tax rate. Just a good rate for the rest of the year?
No, actually, the first quarter tends to be our lowest tax rate because we have the benefits of the excess tax benefits from stock option and restricted stock exercises. Our effective tax rate in the first quarter was 24.86%, compared to last year in the first quarter was 24.14%. Generally, I think it's probably closer to the 26% range.
Got it. Thanks.
Thank you. Our next question comes from the line of Kevin Reevey with D.A. Davidson. Your line is open.
Good afternoon.
Hi, Kevin.
Ed, I just wanted to make sure I understood your commentary with respect to your net overhead ratio. You're committed to a 150. Is that for the full year of 2019, or is that to get to that level at the end of 2019?
I think what I said was, long-term, our goal is to be 150 or better. If you took away the MSRs, we were 161 this quarter compared to 169 in the fourth quarter, taking away the MSR hits. What I said was, it'd be hard for us to hit that goal this year. We're looking at the mid to high 150s as our goal for 2019. Okay?
Great. Yep, got that. Then your comment on the factoring business that you just started, could you give us some color as to where that's located, staffing, et cetera, and the type of deals that you've been doing?
Well, the vendor finance is off to a great start. They're up to $20 million-$25 million in outstandings. The deal's in the 7%-8% area. They're out in California. We have three businesses out in Orange County now, where some of our leasing business is out there, this guy. We're off to a very good start. On the factoring side, this is a logical adjunct to our asset-based lending side to move down into the factoring side. That's just fledgling now, but the pipelines look very good there. Our goal would be on both of those new businesses to get them up over the next 3 years into the $300 million-$400 million range. Their rates are very good. Interestingly, when we studied the factoring business, as we're going to be doing it, is really the lower end of our asset-based lending, our ABL business.
It gets really good when things get tighter.
Yep.
It's better when things are bad. It's kind of like our franchise business is better when things are bad. A lot of people eat more at Applebee's or McDonald's than they do when things are good. It's a nice hedge in there. They're both off to good starts. I hope that answers your question, Kevin.
That did. Thank you very much. Appreciate the color.
Thank you.
Thank you. Our next question comes from the line of Terry McEvoy with Stephens. Your line is open.
Good afternoon.
Hello, Terry.
Hi. Just one question. I was hoping to get your thoughts on your $800 million-$900 million commercial finance portfolio. How much of that is QSRs? I did notice a little bit reserve building in the quarter, but that maybe just reflected growth. Just some overall big picture view there.
Well, we've got about $880 million of franchise loans, if that's what you're referring to. Most of those franchise loans are franchisors similar to McDonald's, Taco Bell, Dunkin', et cetera. Arby's, Wendy's, those sorts of franchises.
As you recall, if you remember the third quarter, was it third quarter last year where we added three problem loans that we're trying to exit out of to the non-accrual list, and everybody kind of had a hurry, "Oh, your non-accruals are up higher." They went from nothing to next to nothing. One of them was a franchise deal. It's a franchise that covered the entire state of Wisconsin. The franchise itself is doing very well every place else except in that market, and that had to do with the franchisee not following through on things he should have followed through on. That loan will be paid off through the sale of that franchise in mid-May, is the plan. All losses have been taken on that.
I think our reserves grew up a little bit because the loss we took there and the experience we had there, plus a specific reserve.
For growth.
Yeah. It's for the growth. You take a charge on something, you expect that a reserve factor would move up a little. That's what it did. The rest of the portfolio is operating just fine. That was kind of a one-off.
I know there was some noise in the industry over the last week or so about another deal, we're not seeing any specific stress in our portfolio other than that deal that Ed talked about that we referred to in the third quarter of last year.
That's what I wanted to hear. Thank you.
Thank you.
Thank you. Our next question comes from the line of Nathan Race with Piper Jaffray. Your line is open.
Hey, guys. Good afternoon.
Hi.
I don't mean to beat a dead horse on the NIM, just kind of thinking about the trajectory of loan yields from here, it sounds like you still have some positive repricing going on from previous rate hikes. I guess I'm just curious what the weighted average rate on new loan production is today relative to the portfolio yield at 5.06%.
Well, it really depends on the mix, Nathan. The premium finance loans on the commercial side are higher than that. Commercial real estate that's fixed rate would potentially be higher than that. If you did just a straight commercial loan or the life loans, they tend to be lower than that. It's really sort of a mix, and you've really got to break it down. We could tell you what it is, if premium finance is a lot better or a lot worse next quarter, it's going to go up or down. I think generally, on average, we're doing well there, and we have some tailwinds with the premium finance portfolio.
Okay. Got it. Then just lastly, any updated thoughts on perhaps hedging out your MSR going forward?
Yeah. Second quarter, we will have some downside protection there and do some hedging. It won't be a full hedging program, we are taking some actions to limit the downside without really stripping away the entire upside. Yeah. We found hedges, you get all sorts of different thoughts and plans on how to hedge MSRs, many of them could go the wrong way on you quickly. We found one where we think it is protect the downside and keep the upside alive. Given the shape of the yield curve, some of those options are more affordable now than they have been in the past. Yeah.
Okay, got you. If I could just ask one more on expenses. Assuming mortgage volumes are kind of flat year-over-year, can you kind of give us some parameters of what we can expect in terms of all in expense growth in 2019?
It depends on deals done, it's a hard thing to do because we have the leasing number out there. If you grow that business, those expenses go up, and we have acquisitions in there and the like. Certainly, you want that growth. As I said in my comments earlier, the salaries are going to be up 3%, we try to keep the same store sales number down to sort of low single digits. If you have the growth through the branches and you have acquisitions, that number can change. Clearly, we want to grow that number where we can get leverage out of it. Low to mid single digits on same store sales is probably the answer.
Okay, got it. I appreciate all the color. Thank you.
Thank you. Our next question comes from the line of Brock Vandervliet with UBS. Your line is open.
Great. Thanks for the question. Dave, the CDEC deposits have flowed out. I'm assuming that's seasonal. I would think they would come back in pretty heavily in the second or third quarter. Is that correct?
That's been their history, yeah.
Okay.
We never really marketed a lot, and we actually are putting a marketing team together. There's only eight people who work in CDEC generating these numbers. It's a wonderful business for us, and we've never marketed it. We're going out to do that. Hopefully we can build on the seasonality also.
Would that allow you to then pay down the FHLB a little bit?
FHLB, I like to use it to cover the mortgages held for sale.
Got it.
If we have excess liquidity, we won't bring it out. It's a nice book and match for us to use those overnight funds to cover the mortgages held for sale. Depending on overall liquidity position, sometimes it's lower because we don't need it. You don't want to grow something if you got nowhere to put the money. That's how I like to use Federal Home Loan Bank advances.
Got it.
Sometimes we got some term out there for asset liability for matching purposes, but most of it's overnight. Yeah. That's really what we did at the end of the first quarter, was we paid down a lot of the other wholesale funds. To the extent those FHLBs come due, and we have the excess. At the end, as I'd mentioned, CDEC deposits went down a little bit just because of the seasonality. We expect them to come back up. We maybe had a little extra wholesale funds to cover that gap where their deposits went down. We expect that to translate back into CDEC funds in the second quarter here. Our plan with CDEC funds is only to keep on our books whatever the rolling 12-month average is, so we don't become overly dependent if something were to happen.
The good news is we make a nice spread on what we don't keep as they sell that to other banks as funding. We get X, they get X plus a percent or two, percent and a half right now. That's fee income to us. We like that, too.
Got it. Separately, you're kind of scotching the laddering program for now. I'm assuming we should build in less investment securities growth as a result?
Yeah, long term. We'll still have investment securities, but they'll all be shorter. You mostly have to work on your yield, not your. We're not going to keep it all in Fed funds, but we'll go out 60, 90, 180 days, but not seven years or five years or whatever.
Right. Just in terms of the growth of that portfolio, I'm assuming it should grow somewhat more slowly.
Of the longer end of it, yes.
Got it.
Thank you.
Thank you. As a reminder, ladies and gentlemen, if you'd like to ask a question at this time, please press the star then the number 1 key on your telephone keypad. Once again, that's star 1 for questions. Our next question comes from the line of David Chiaverini with Wedbush Securities. Your line is open.
Hi, thanks. Couple questions for you. I just want to clarify the loan growth guidance. I think in the prepared comments, you had mentioned mid to high single-digit growth, and then in response to an earlier question, you had referred to high single digit. I don't want to parse your words too much, but just curious as to what the official message is there.
Mid to high.
Got it. Thank you for that.
It's seven and a half.
Okay. Fair enough. Then a follow-up on the CDEC. When do you expect to reach that sort of 12-month kind of pro forma average that is such that we wouldn't see the volatility of a $200 million per quarter?
Well, you'll always see that volatility because of the seasonality of the business. You'll always see some movement there. You figure $1.1 billion was what their 12-month average was, then it fell off. By the fourth quarter, we expect to be back to $1.1 billion plus our existing, whatever growth we have. Whatever growth we bring in in excess of what they've been doing historically. Does that make sense?
Yeah. I thought that the idea-
First quarter tends to be this. If you're an average, obviously some quarters are going to be below and some are going to be above, and first quarter is a seasonally slow quarter. I would expect this actually. The fourth quarter tends to be very large. The middle quarters are probably right around that average. I would expect to be much closer to that average in the second or third quarter.
Got it. I thought the idea would be that we would see the volatility in the fee income line, but not on the deposits you would actually hold on balance sheet.
I think you'll see them both. Yeah. If you're going to stay at the average, you're going to have a couple quarters that are below and a couple quarters that are above. Hopefully it's not that wall of a swing. Even if there's a couple hundred million for a month or so, we can easily cover that with other sorts of funding in the interim. I'd try to think of it as an overall average for the year and not worry about the exact timing of the months and the quarters.
Okay, got it. Then shifting gears, you had mentioned about, and I missed what you were referring to, but you said by June 30th, phase 1 would be completed related to some work that you have going on. What were you referring to with that?
That was our mortgage business, our mortgage efficiency initiatives, where we put in a totally electronic front end that we're now marketing. Our goal is to get more of the business through this front end than through the historical way of loan brokers, our originators out there. We bring it in through the electronic front end. You can cut your commission expense down to 30% from 50%, 52%. That's a good thing. That should help mitigate that expense. It also has helped us reduce cycle time. We can get things done faster by doing this. Increased cycle time means less expenses associated with it. We're also looking at outsourcing some work that's now done internally, that's on a variable basis under the outsourced approach as opposed to a fixed basis. Like in the first quarter, we had a lot of costs and not the business.
If we move some of this non-customer facing work to a variable basis at about 40%-50% of the cost, that will help us tremendously. It also can be done because of the location of the outsourcer. It can be done at night while we're sleeping. It should help cycle times, too. We're working on a number of those initiatives that should help bring down our overall costs of doing business over the long term. Again, right now we've got maybe 80%-90% of our business coming through the old-fashioned distribution method using the mortgage broker. If we get that down to 50% and can cut the expenses related to commissions down to 30% on that's real money. Those are the things we're working on, is to get more and more efficient in this market area.
We're also testing out some other areas where we can utilize robotics to do monotonous sort of work. We're really moving ahead on this stuff. Phase one doesn't include robotics. It just includes some of the things I just discussed. Breaking costs out of mortgage and making them more variable, therefore making the whole business more profitable on a consistent basis.
I see. June 30th is the completion of phase one. What's the timeframe to complete the project?
Probably forever. We'll always be looking at ways to do this. I think that this is a business that's becoming more commoditized, and it's one that we believe that if we can add personal service to the commoditization of the business, we can have the best of all worlds. People can still go in their bank and get the stuff, and know the person they're dealing with and not somebody on a screen. We think we can serve our clients very well. What's the end? There'll never be an end. We'll always look to be more efficient. This is just some of the low-hanging fruit we can take down. Phase 2 can be the robotics side and some other outsourcing that we can do. Non-customer facing outsourcing. We got to walk before we can run here.
We expect continued improvement in the overall profitability of the mortgage business, notwithstanding what goes on with the actual sale margins themselves, just the production side.
That makes sense. Thanks very much.
Thank you. I'm showing no further questions at this time. I would now like to turn the call back to Ed Wehmer for closing remarks.
Thanks, everybody, for dialing in. If you have any issues or other questions, feel free to call Dave or myself. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.