Welcome to the Wintrust Financial Corporation's third 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 third quarter 2018 earnings press release, and in the company's most recent Form 10-K, and any subsequent filings on file with the SEC. As a reminder, this conference call is being recorded.
I will now turn the conference call over to Mr. Edward Wehmer.
Morning, everybody, and welcome to our third quarter earnings call. With me as always are Mr. Dykstra, Kate Boege, our legal counsel or general counsel, and Dave Stoehr, our CFO. We'll use our usual format with me giving some general comments on our results, turn it over to Dave for more detailed analysis of other income, other expenses, and taxes. Back to me for some summary comments about and thoughts about the future, then turn it over for some questions. We're pleased to report our 11th straight quarter of record earnings. Net income of almost $92 million, or $1.57 a share. We're 40% better than last year on pre-tax earnings, which we look at to take out the effect of the tax cuts were $122 million, up 18% from the same quarter last year.
Year-to-date basis, we're $4.50 a share, up 28%, an annualized basis, and 28% on earnings of $264 million approximately. Pre-tax income up 16.5% to $352 million. Our margin decreased by two basis points. ROA was 124, and all in all, pretty good results. As readily apparent, our growth trends remain consistently positive. Few blips this quarter, which will need some discussion and clarification, specifically the net interest margin dropping two basis points, one-time charges related to the completed acquisition of Delaware Place Bank, and the moderate respective increase in NPLs. These issues will be discussed in detail. As it relates to the margin, the net interest margin decreased two basis points over the second quarter. It increased 18 basis points year-over-year. Net interest income to $9.4 million over the second quarter due to one more day, good earning asset growth, including our loans.
Average earning assets grew to $880 million versus the second quarter. Average loans, net of loans held for sale, grew to $539 million, with the remainder of the growth falling into our liquidity management portfolio. Quarter three period end loan balances exceed average loan balances by approximately $326 million, which bodes well for the fourth quarter. Earning asset yields increased 13 basis points versus second quarter, while interest expense increased 17 basis points. The free funds contribution was a two basis point increase, resulting in that two basis point decrease in margin. Our average loan-to-deposit ratio for the quarter decreased to 92% from 95.5% in the second quarter. This obviously still remains higher than our desired range of 85%-90%, but shows pretty good improvement in accordance with the plans we laid out earlier in earlier calls.
As a direct result of our core growth initiative, represents a start to our liquidity deployment strategy, which we have also discussed in previous calls. With the long end moving higher, we've begun lengthening the duration of our liquidity management portfolio. This will be a measured approach and obviously depend on the rate environment. During Quarter three, we invested approximately $200 million, which equates to about $75 million on average in longer-term assets, and did another $200 million the end of this quarter. On a static basis, i.e., just looking at Quarter three year ending numbers, we'd need an extra $1 billion to get to our loan deposit ratio to the midpoint of our desired loan-to-deposit range. As such, you can expect us to continue to push core deposit growth above and beyond what is needed to support loan growth and deploy those assets in accordance with the aforementioned plan.
Obviously, this all depends on the rate environment that we're moving into. It should be noted that we invested the entire increase in liquidity management, that if we had invested the entire increase in liquidity management assets in the quarter, and not in overnight funds, our margin actually probably would have been up in Q3. As mentioned, Q2 was a good quarter for core growth. Our deposit marketing, coupled with the successful opening of four new branches on top of the five we opened in the second quarter, the acquisition of Delaware Bank contributed to the $552 million of deposit growth. Our deposit marketing should continue to be effective. We truly expect this good growth going forward and continued progress being made getting the loan-to-deposit ratio in our desired range. Our deposit range has remained in the range we previously communicated to you.
As we're still very asset sensitive, additional rate increases, including the one announced in mid-September, should still add to the bottom line despite this increased deposit beta. Every quarter point increase, Fed funds should add north of $200 million to net interest income on an annualized basis. Number hasn't changed from past discussions due to the increasing size of our balance sheet. As such, with future rate increases, we anticipate our net interest margin to grow slowly but surely over the long term. Mitigating factors will be the timing and execution of the liquidity strategy. Also remember, it takes a full year for these rate increases to work their way through our balance sheet. The benefits of some of the past increases are still being realized. On the credit front, credit remains good. Everyone knew it couldn't stay this low forever.
Non-performing loans in the quarter increased approximately $37 million, primarily due to the addition of four relationships totaling $46.6 million. Two of these loans, totaling $29 million, were actually current when we turned them on non-accrual and part of a planned exit strategy. The other two loans are in the process of liquidation and collection. Recorded $7.5 million specific reserves on these loans. Those who have followed us know that it is our culture to be very proactive in the area of credit. We would expect these credits should be cleared by the first quarter of 2019. As of now, we do not see this as a deterioration of overall credit numbers. Our ratios are still well below our peer group. As a matter of fact, if we hadn't been proactive on these, non-performing loans actually would've been down.
We're up $37 million in non-performing loans of $46 million, but the half of it related to these four credits would've been down. We don't think it's a trend. However, you do know that we do identify loans with cracks in them, identify exit strategies, and it takes some time to execute these sometimes, and that's what we're doing here. OREO balances decreased by approximately $7 million in the quarter as we continue to clear these out. Charge-offs total $4.7 million. Charge-offs of $7 million are offset by recoveries of $2.3 million. Net charge-offs plus the increase in specific reserves and loan growth resulted in a provision of $11 million, up $5 million from the previous quarter. In summary, in spite of a quarter mini blip, credit remains pretty darn good.
Total NPAs as a percent of assets increased to 52 basis points from 40 basis points, which is still pretty respectable. Reserves as a percent of NPLs was at 118%, down from 156% at the end of quarter two. The provision as a percent of loans annualized was only 19 basis points, which is still a really good number. We continue to cull the portfolio for cracks, and we'll expeditiously move assets out when any said cracks are found. We'll also continue to aggressively work our OREO portfolio to clear the decks. As I previously mentioned, we don't see this quarter's mini blip as an increasing trend, we all know that credit couldn't stay as good as it's been forever. On the other income and other expense side, Dave is going to go through this in detail momentarily, just a couple of general comments.
Dave will take you through the specific numbers in the mortgage area. I will say, though, that we are on track in our efficiency moves in this area that I talked about last quarter. The majority of these initiatives will be totally in place in the first quarter of 2019, more efficiency moves will certainly follow. This market is such that we've got to drive costs out, there's beginning to be somewhat of a shakeout in this market. We see there to be reasonable opportunities there, we'll always be subject to the seasonality of the mortgage market. Our wealth management operations continue to improve. Assets under administration grew by approximately $1.4 billion in the quarter to just about $26 billion. Managed money accounted for $670 million of this increase, which bodes well for future revenue growth.
The remainder growth was in brokerage, which relies on trading for revenue. Revenues for the quarter stayed steady at $22.6 million. We expect that to continue to increase as we continue to build our managed money portfolio. One-time items as we view them basically will offset each other in the quarter, and our net overhead ratio for the quarter was at 153, down 4 basis points from quarter two, but above our target of 150 or better. Given our overall growth, we're happy with this number and with the number of branches we've opened, the expansion we're doing, the new initiatives we're doing. Given our overall growth, we're happy with the number. We believe our continued organic asset growth will bring this number in line as we fill out our inefficient branches with good, solid, new relationships. Net overhead ratio is 150. It still remains our goal, and we believe is attainable.
On the balance sheet side, assets grew to over $30 billion for the first time, increasing by $678 million in the quarter. $274 million of this growth can be attributed to the Delaware Bank acquisition. I got to tell you, I still pinch myself, I think, from a card table less than 27 years ago to $30 billion. Pretty amazing. Loan growth, which is aided by the acquisition of Delaware Place this June of $151 million, grew $513 million in the quarter. All categories other than residential mortgages and home equity lines grew in the quarter. We continue to see muted growth in the commercial real estate area as payoffs continue and new opportunities are aggressively priced. Same is true for our sponsored equity or private equity-backed deals.
Most of our private equity firms are selling anything that isn't nailed down right now, given the frothiness of that market. We're getting refinanced out of other deals based on the aggressive nature of non-bank lenders. Loan pipelines remain consistently strong. Deposit growth was discussed previously. Needless to say, we are heartened by the success. Our flipping the switch to concentrate more on organic growth, like we made our bones on originally, through both the opening of new branches and growing underutilized locations, is working. We intend to continue our marketing here and also cross-sell other services and accounts to these new relationships. This will fund our liquidity play and bring our loan-to-deposit ratio back to the desired range. That's not to say we're not interested in acquisitions, though. Expected pricing is relatively high right now.
We continue to take what the market gives us and stay disciplined in our approach to deals. The acquisition of Delaware Place Bank is being assimilated well. We look forward to completing the previously announced transaction, acquiring certain assets and liabilities of American Enterprise Bank, which we expect to close in the fourth quarter. All in all, we're pleased with the quarter. Why not be pleased with a record quarter? Now I'll turn it over to Dave.
Thanks, Ed. As normal, I'll touch briefly on the non-interest income and non-interest expense sections. In the non-interest income section, our wealth management revenue held steady at $22.6 million in both the third and the second quarters of this year, and was up from the $19.8 million recorded in the year-ago quarter. Brokerage revenue was down approximately $205,000, while trust and asset management revenue offset that decline by increasing $222,000. Overall, as Ed mentioned, we believe the third quarter was another solid quarter for our wealth management segment. Mortgage banking revenue increased approximately 5%, or $2.2 million, to $42 million in the third quarter from $39.8 million recorded in the second quarter, and was also up from the $28.2 million recorded in the third quarter of last year.
The increase in this category's revenue from the prior quarter resulted primarily from loans originated and sold during the quarter, offset by slightly lower production margins on slightly higher origination volumes. The company originated approximately $1.2 billion of mortgage loans in the third quarter of 2018. This compares to $1.1 billion of originations in the prior quarter and $1.0 million of mortgage loans originated in the third quarter of last year. The $56 million increase in origination volume was attributable to $187 million increase in our correspondent origination channel, offset by lower volumes in our retail origination channel. Originations related to Veterans First Consumer direct origination channel was essentially flat with the prior quarter. The mix shift contributed to margin compression as margins on correspondent originations are lower than our retail origination business.
Additionally, the mix of loan volume related to purchased home activity was approximately 76% compared to 80% in the prior quarter. Page 22 of our third quarter earnings release provides a detailed compilation of the components of the mortgage banking revenue, including production revenue, MSR capitalizations, net of payoffs and paydowns, MSR fair value adjustments, and servicing income. Given the pipelines, we currently expect originations to soften somewhat in the fourth quarter due to increased market interest rates and the seasonality of the business. Other non-interest income totaled $16.2 million in the third quarter of 2018. This was up approximately $2.1 million from the $14.1 million recorded in the second quarter this year. There are a variety of reasons for the increase in this category of revenue, including an increase of $1.1 million related to income from investments in partnerships. Those are primarily CRA SBIC-related partnerships.
An increase of approximately $1.6 million related to settlements on BOLI policies. A positive swing of $0.9 million of foreign exchange valuation adjustments associated with the U.S. Canadian dollar exchange rate. This was offset partially by a lower level of interest rate swap fees of approximately $1.5 million. Turning to the non-interest expense categories. Non-interest expenses totaled $213.6 million in the third quarter, increasing approximately $6.9 million from the prior quarter. The increase was primarily attributable to approximately $2.2 million of higher salary and employee benefit expense, $3.4 million of higher professional fees, including approximately $2.1 million of mostly non-recurring consulting fees associated with the Delaware Place Bank acquisition, which I will address later. $194,000 of severance and conversion-related costs associated with that acquisition, and just other general cost increases as the company grows.
Turning to the specific detail, the base salary expense increased approximately $2.9 million in the third quarter of 2018 over the second quarter of this year. Approximately $500,000 of the increase related to the Delaware Place acquisition. The remaining increase related to the impact of the nine branches added during the second and third quarters of 2018 and normal growth as the company continues to expand, including further build-out of our IT and information security teams to make sure we're keeping up with technological changes and addressing increasing cybersecurity risks in the marketplace. Commissions and incentive compensation expense decreased approximately $1.9 million to $34 million from $35.9 million in the prior quarter. The company experienced a decline in commission expense of approximately $1 million. Primarily due to the mix of mortgage origination volumes being more heavily weighted in distribution channels that carry lower commission rates.
The remaining decreases associated with slightly lower long-term and annual incentive compensation accruals during the quarter. The employee benefits expense was elevated somewhat in the third quarter due primarily to the impact of a few significant health insurance claims in our employee base. We would expect this expense category would retreat from this level, assuming the fourth quarter has more normalized health insurance claims. Data processing expense increased approximately $583,000 in the third quarter relative to the prior quarter. The increase was related to approximately $130,000 of conversion-related expenses associated with the Delaware Place Bank acquisition and the additional account processing associated with bringing that acquisition on board, as well as general growth in the rest of our business during the quarter. Marketing expenses decreased by approximately $662,000 from the second quarter to $11.1 million.
The slight decrease on the third quarter was due to lower levels of direct mail and mass media marketing during the quarter, as the previous quarter had more marketing associated with the opening of the various new branch banking locations and general deposit generation advertising campaigns. Professional fees increased by $3.4 million to $9.9 million in the third quarter from $6.5 million in the prior quarter. The main cause of the increase related to the consulting fees paid to former employees in relation to the acquisition of Delaware Place Bank of approximately $2.1 million. These consulting fees will not continue into the future other than approximately $147,000 scheduled to be paid in the fourth quarter of 2018. Occupancy expenses increased during the third quarter to $14.4 million from $13.7 million in the prior quarter.
The increase was generally related to the lease expense associated with the recent increase in the number of branch banking locations, increases in property tax accruals, and higher utility costs during the quarter. Other than the expense categories just discussed, all other expense categories were up on an aggregate basis by approximately $596,000 from the prior quarter. De minimis increases across the board for the other categories. The company's efficiency ratio on a fully tax-equivalent basis improved to 61.2% in the third quarter from 61.8% in the second quarter. Additionally, as Ed mentioned, the net overhead ratio also improved slightly during the third quarter to 1.53% from 1.57% in the prior quarter, but was still slightly above our goal of 1.50%. Progress made on both those fronts. With that, I will turn the conversation back over to Ed.
Thanks, Dave. Summary and some thoughts about the future. All in all, a very good quarter for Wintrust on all fronts. Momentum continues across the board. Reduced taxes and higher interest rates have been beneficial to us. The core earnings growth and balance sheet growth bode well for the future earnings and growth in franchise value. As I mentioned, we do not see the mini blip in credit as a trend. As stated, credit can't be as good as it's been forever. We continue our habit of reviewing the portfolio for weaknesses and addressing them expeditiously. In some perverted way, I'm kind of happy that we're off the bottom because the only place to go is up a little bit, and this is a very controlled way to go up, and it's fitting and fits our culture very well.
As I said, we don't see this as a trend, but you never know. Credit is credit. We're going to stay on top of it. We're pushing our organic growth agenda because acquisitions, in general, become relatively expensive. That regardless of the number of new branches planned over the next 18 months, the neighborhoods in our designated market area where currently are not present. Our retail and small business marketing programs, which we embarked on in earnest beginning this year, are working and pulling in new accounts and new relationships. As stated earlier, this does not mean we're not investigating potential business combinations in all the areas of our business. Also, as talked about in previous calls, gestation periods of these deals has become a lot longer.
Remain well-positioned for higher interest rates and are prepared to protect the downside as rates rise by gradually decreasing our overall interest rate sensitivity. Loan growth has been good, and pipelines remain strong. We continue to look at opportunities to further diversify our portfolio. We're embarking on our liquidity initiative and should have the desired strategic results. In summary, we're well positioned. We like where we sit. Like I said last quarter, it's times like this when you continue to look around the corner for the boogeyman. Black swans always scare me. We have to worry about in the bipolar political world we live in. Will tax rates stay this low? How can we protect that? Inflation related to trade wars and tariffs and labor costs, we believe is real. New regulations, who knows if they're coming, but they can't help themselves. They probably will be.
We continue to invest heavily in cybersecurity technology as well as our digital product enhancements. Will rates continue to rise? What are we going to do when they're near the top? Whatever that may be. Back to labor costs. It's interesting that two of the non-performers were now basically related to labor. One was a bus company that couldn't find drivers, believe it or not. That was not a planned exit strategy. That actually is a problem. As we liquidate those buses, but they couldn't find drivers. Another was a for-profit school that people didn't have to go to learn the trades. They're in the process of closing schools. They're profitable, they're current, as I said. We'd like to move that out, but because of people can get jobs anywhere, they're not going to get those.
It's kind of interesting the effects of the tight labor markets having on what were very good businesses. I bring this up, we're actually standing still and assuming that this is a new normal. I know old enough to remember how as soon as you think you have it, you don't have it, as it relates to rates. This feels like the late '70s again to me in a lot of respects, with the economy going hard and inflation sneaking up. Maybe not as bad as it was in the '70s, but it feels like that all over again, and we're somewhat preparing for that in that regard. As my father always used to say, "Hope for the best, plan for the worst." That's what we're doing.
You can be assured of our best efforts on the long-term franchise growth and to maintain our consistent approach to conservative management to protect the franchise value of the organization. That being said, we can take some questions.
Ladies and gentlemen on the phone lines, if you'd like to ask a question at this time, please press star and then the number 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Jon Arfstrom of RBC Capital Markets. Your line is now open.
Thanks. Good morning.
Morning, Jon.
Couple questions here. I guess to start on mortgage. How do you want us to think about that for Q4 and also into 2019? Do you view this as a profitability headwind or some of this efficiency potential you talk about, is it not so much of a headwind when we think about Q4 in 2019?
Well, it's always going to be a volume issue, right?
Yep.
If we're able to maintain the volumes which we have. We think that the margins have been squeezed because too many producers chasing not enough loans. The economy stays strong. We believe that housing will continue to pick up. Our efficiency moves should help us in the overall profitability of the products. These efficiency moves are actually relatively material. Our front-end ZūM, call it our Rocket Mortgage, should be fully deployed. We haven't put that out on the internet yet retail-wise, but we will be doing that in the first quarter. We've used it as our own internal front end. It's cut two to three days out of processing there. We also are finding ways to cut other processing costs by almost 50%. Not all of them, but a lot of them, by using different outsourced companies.
We believe that it'll be volume related, but the volumes we get, the margins on that, the overall profitability should be increasing from where they are now.
Okay. Dave, anything on 4Q? How do you want us to think about 4Q?
I think it'll be, again, we'll just have to see where rates go and what the home purchasing is. We've seen the pipelines decrease a little bit here as we get into the fourth quarter seasonality, rates did pop up a little bit. Now they've come down, they've popped up a little bit again today. We'll have to see how that builds. My guess is the volumes will probably decline to something below $1 billion. We close these things relatively quickly now, so you only have a vision out 30, 40 days in reality is how your pipelines are, because we're closing them in that 40-day period of time. We'll have to see how they continue to grow here. Our expectation is that they will be down. We're also cognizant of accordioning the expenses accordingly as those volumes come down.
I don't think it's going to be a major impact to the net earnings because you pay out roughly half of that in compensation type of volume, we have other expenses associated. What falls to the bottom line is not extraordinarily material. We do think the volumes will be down. Whether it's $850 million, $900 million would be my guess right now, but it's possible it could be slightly more than that with me being a little conservative here, I think.
Yep. Okay, good. Just maybe a bigger picture question for you, Ed or Dave. Just the loan growth environment and earnings growth environment. I think we can all maybe set aside mortgage, but do you see any threats to your ability to keep this going, this kind of high single-digit type loan growth and earnings growth pace?
There's always threats out there. We are seeing some idiocy in pricing on commercial real estate deals.
Sure.
In our opinion. We're also seeing insurance companies come back very strongly. We also see a number of the construction projects we were involved with getting paid off and refinanced out. That'll be an issue. On the private equity side, as I said earlier, we're seeing huge prices in private equity deals, and the Ares and Antares of the world are supporting this with loan terms that we wouldn't even come close to in terms of air balls, etcetera, and pricing. They have the ability to withstand time, not being regulated.
Right.
After 90 days, they can stay in it. They don't have to turn it on non-accrual. Maybe they're smarter than most, I don't know. It seems to me that that's a very frothy market. That being said, we're diversified enough that we're seeing growth in the leasing portfolio. We're seeing growth in the life insurance portfolio, premium finance. We're also seeing good growth in the commercial premium finance. One thing that occurred there was, for the last two or three years, we've been subjected to an uneven playing field there, where we were, as a bank, were required to go out and get TIN numbers on commercial borrowers. For the first couple of years of this, we were required to do it. It was by the Fed, but the different Fed officers weren't even applying it across the board.
We were at a competitive disadvantage there to the non-banks and to some of the other banks. We were losing probably. We had to fight to keep where we are right now. We lost a lot of smaller agents in that process that had better yields and better late fees because they don't want to collect TIN numbers. Through the work of David Dykstra, Kate Boege, a little bit of me and Frank Burke and Mark Steenberg at the premium finance company, over the last two years, we initiated. Then we worked with the industry itself. We brought in congressmen, senators. Mr. Dykstra went to Washington. He's a fine lobbyist, by the way. Met with Hensarling and Shelby. As of the beginning of October or September?
End of September.
September, that law was changed. We are not required to get TIN numbers anymore. We are coming back with a vengeance to regain those lost share. We're blitzkrieging right now, as we like to call it. We're trying to get all our old clients back. We had some successes already doing that. We believe that program should do very well for us, making up for some of the losses we're seeing in some of the other areas. The commercial side, we still see that there's good growth out there. We continue to get a lot of advance and are winning our share of deals. That market it's been, for a long time, priced about as low as it's ever going to be priced. We don't see that getting stupid right now. Actually, that seems like the new norm. That growth has been pretty good.
When you think about it, some things work, some things don't. That's the beauty of being as diversified as we are. On the deposit side, we are having good success. We have good momentum there. Do we pay up a little bit to bring in new accounts? Yes. We do use teaser rates to bring people in on the retail side or bring their deposit relationships in. We're able to rifle shoot that and not shotgun it because of our structure and how we brand, that we can rifle shoot it into a specific inefficient branch or a new branch. That has caused our rates to go up there. At the same time, if you look at it, our margin may have gone out two basis points, but our overhead ratio went down four basis points.
That's kind of a win-win as we grow into our overhead with that. It also will fund the liquidity play. We're looking at about $200 million a quarter, depending on rates. Could be more, could be less. Again, I said it's going to be another $1 billion to get to the 87.5 on a static basis. We continue to grow and be more. That's a lot of liquidity to play with. If we're able to put that off at a positive spread, that should be very beneficial to our earnings going forward. That's the plan in a nutshell. We'll balance this with our investments, too. We're also doing some fixed rate loan programs in the homeowner association area, in the premium finance life insurance area, and commercial real estate area to name three.
We've got buckets set aside to actually get fixed rates on some deals. Our goal over the next 10 months or 10 quarters, I would say 8 to 10 quarters, is to get, and again, this is subject to the rate environment. We think that's when rates are going to kind of get close to peaking. Take our gap down to about 20%-25% of where it is right now, still leaving upside potential for us, but covering the downside. We're going to do it through those. Every one of those should make us more money. It's a multi-pronged strategy. I'm rambling on here. We believe it's appropriate for the time. Will there be headwinds? Yeah, there'll always be headwinds. I think that we should be able to continue to build the franchise out consistently what we've done in the past.
Okay. Continuation of the current trends, maybe some modest lift on the margin over time is basically the message?
Yeah. Over time, yeah. Because this quarter was a timing issue. We lost a couple basis points because we picked up, if you look on average, a billion and a half dollars in deposits over the quarter. We're not going to do that all at once. We're going to time it, get in, and if we had invested it all, our margin would've been up, and we wouldn't be having this conversation. We're going to just be gentle on this and take our time. Again, we've put up a nice record quarter. It's all about balance in that regard.
Yeah. Okay. Thanks a lot.
Thank you. Our next question comes from Brad Milsaps of Sandler O'Neill. Your line is now open.
Hey, good morning, guys.
Hi, Brad. How are you?
Good. Dave, just wanted to follow up on the mortgage, kind of some of the servicing line items that you guys disclosed on page 22. Some of those numbers maybe had a bigger increase maybe than I thought. Anything in there that, in your mind, that you would call out that wouldn't be run rate? Just kind of curious on how best to sort of think about the go forward on some of those other line items. I kind of feel pretty good about the origination side, but just wanted to get your sense on some of those other items.
Well, the MSR fair value adjustment is just really going to be tied to rates. If the longer rates go up, then I think you'll continue to see that portfolio price up. We sort of look at that as a hedge to the production volume to a certain extent. As rates go up, we generally lose some production volume, but you gain on the MSR valuation side. That'll be tied to rates. If rates do go up and stay up in the fourth quarter, and you value them at the end of the quarter, so it really depends on where they are at the end of the quarter, then I would expect that that number would continue to trend up.
The MSR capitalization, it's just how many loans do we retain the servicing on, we retain a little bit more of those loans this quarter than the prior quarter. We continue to retain that servicing, I think that that number would stay up. There's a little bit of trade-off there that if you retain the servicing, you have a little bit less on the gain on sale, but you have more on the servicing side. If you didn't retain it, the geography would just flip back to the production revenue line a little bit more. I think all in all, those kind of servicing should continue to trend up as we retain more of that servicing as far as servicing income per se. I think it's just volume driven here as to where those numbers are going to be.
Pretty consistent as far as overall revenue relative to volumes, I think.
Okay, great. That's helpful. Ed, just to kind of follow up on loan growth. Do you consider yourself, based on the market that's out there, still kind of in that high single digit type loan growth, kind of looking out as far as you can see anyway?
Well, I don't try to see very far when it comes to that because we don't want to set goals out there that would make people be squishy on their underwriting. Yeah, for the next quarter at least, and probably the next two quarters, we feel pretty good about where loan growth is. What we don't know about is payoffs because our loan growth, really, if you look at net new loan growth and new relationships coming into the quarter, is actually very good. We get a lot of payoffs. If payoffs continue to accelerate due to people just doing dumb things, then we'll bear that burden. I can't control that. I'm not going to chase those deals. We're not going to chase those deals. If they leave and they don't fit our underwriting or profitability parameters, we're not going to do them.
In terms of new loan growth, yeah, I think we're doing just fine. I'm really kind of excited about what we're doing on that premium finance side. We're getting our mojo back there and going out and being offensive and not playing defense all the time. Because you know I like to be offensive, as people will tell you.
Brad, the pipelines are consistently strong. The third quarter tends to be a little softer because of the people on vacation and the like, customers and the like. Fourth quarter tends to pick back up. We're really not seeing any major degradation of our pipeline. We're optimistic that that can still continue forward.
Great. Thank you.
Thank you. Our next question comes from Chris McGratty of KBW. Your line is now open.
Morning. Thanks for the question. Dave, if I could just go back to the margin for a second. This quarter was 361, and you called out 2 basis points from liquidity. Is the right way to think about, given where LIBOR is now versus last quarter, a 363 start and then maybe a couple basis points per quarter based on your balance sheet set up? I think most banks are enjoying less incremental benefit from each hike. The last few quarters you were getting 5, 6 basis points per quarter of expansion. Is that the right message you're trying to tell on the margin? Low 360s probably heading to 370 over the course of 2019?
I think that's probably generally right. Like I said, we've taken our interest-bearing cash, just the incremental piece that we put on this quarter, that if we would have invested that. The margin would have been basically flat, the 2 basis points. Had we taken some of that even more liquidity that we have there that we've been waiting to invest, the margin actually would have been up. As we continue to leg into this, and as Ed said, it sort of depends on where rates are at, how fast we do it. If we continue to do a couple hundred million dollars of that liquidity a quarter, and then we get the tailwinds on some of the repricing, like on the life insurance premium finance portfolio. Those are tied to 12-month LIBOR, and they reprice once a year.
The premium finance loans on the commercial side are fixed rate and a nine-month full payout type of loan. It really takes almost a year for those to fully reprice also. We do have some tailwinds there. We were fairly aggressive with our new branch openings, and as Ed said, on average, up about a billion and a half in deposits on the quarter. Some of that, the special pricing that we had on those deposits, that's not going to continue at that same rate going forward, most likely.
There are a lot of new ones coming.
A lot of new ones. We had $1 billion in the second quarter just itself. That might moderate a little bit. The other thing with those specials, that as rates continue to go up, those specials, they're not as high rates anymore. If you gave a CD rate back then and rates go up 75 basis points, those special rates are more like normal rates now. Yeah, I think you block those in for a little bit of time on those specials. As rates go up, you'll benefit on those deposits. I think we look at it that way. If we can get a couple basis points a quarter increase, two or three, depending on rates, obviously, that would be our goal is just, as Ed said, gradually grind the margin up.
Dave, maybe you can tell us where's the 10-year going to be at the end of this year and at the end of next year. What do you think?
I'll follow up with you on that one.
Oh, yeah, you can ask us questions.
It's a one-way street here.
Yeah.
If I could sneak one more in on the mortgage comments, the expenses that you said would be kind of the right-sizing by the first quarter. Is the goal with that process improvement to get to a 150 overhead ratio in 2019? Is that something maybe on a quarterly basis you can get to with the changes that you're making to the business?
Well, that's part of it. There's obviously a lot of growth, a lot of expenses related to opening up these branches that we're putting in the network. It's a balance of that. That will help, obviously. There's other growth. Filling out our inefficient branches with the deposits and building these new ones will help us get that. It's more of a growth issue. Any deposit, any cost we can cut, we'll cut. When you think about why we flipped a switch from acquisitions to organic, when you do an acquisition, you can overpay it. It goes into goodwill, and you probably dilute yourself so you give away some earnings. We're taking much less of that. It's much more cost efficient to do what we're doing right now, but it runs through the income statement.
We have to balance that, and that's what we're trying to do is balance that to get to that 150. 150 is a goal, and it's an aspiration, something we beat up everybody on. There's certain opportunities we take advantage of where we pop above it, and we deal with that. That's the goal. A number of our banks are operating. We've got some banks operating around 1% in net overhead ratio. As they get larger, they're able to do that. It's all about growth and controlling costs, but probably getting it to the overall effect will be growth more than the cost cut. Although we're going to do both to get to the 150.
Got it. Thanks for the color. Dave, on the tax rate, Q3 a good run rate for perspective?
Q3 was probably a little bit low. We had some true-ups with the final adjustments from the tax reform act. You had about a year to get all those through. As we got clarity on some issues, we got a little bit of benefit. I would think it'd be more in the low 26% range is more of a normal rate to look at.
Great. Thanks a lot.
Thank you. Our next question comes from Terry McEvoy of Stephens. Your line is now open.
Hi. Thanks. Good morning, guys.
Terry.
Yeah. In the press release you called out the.
Terry, what do you think the 10-year is going to be?
I'll have to take that offline as well. I was hoping you wouldn't ask that. The two basis point impact of just excess cash was called out on the call and in the release. Was the NIM impacted at all from just the LIBOR not moving as expected during the third quarter? If so, any thoughts on what that impact was?
Clearly the 30-day LIBOR, as everybody knows, and as we've actually shown in a chart on page 20 of our press release, stayed fairly flat for most of the quarter and then started to bump up a little at the end of the quarter. In our portfolio, we've got about $7.7 billion worth of loans that are tied to that 30-day LIBOR rate. That did have a little bit of headwind for us, and I assume most banks that have any portfolio of size that's tied to the 30-day LIBOR. It did pop up a little bit at the end of the quarter, which should be helpful running into the fourth quarter. Yes, that did create a little bit of a headwind. The depositors don't really look at LIBOR, retail depositors.
The flattening of the LIBOR curve really didn't change their expectations, but it certainly did hold down the pricing on the loans for a good portion of the quarter.
Okay. Yeah, that's what I was getting at. Thank you. Just as a follow-up, CD balances are up $1 billion year-to-date, and average balances were up $600 million, $700 million. You just talk about where those customers are coming from? Is it within the existing branches? Are they new customers walking in the door, existing customers? Ed, you mentioned kind of cross-selling those new customers. How do you quantify that in specific products? Where do you see some upside?
Well, most of it is new customers. As we open the new branches and we target the inefficient branches, we offer a bundled package of accounts, give you your checking account, your safe deposit box, home equity line, and you get a teaser account with that. It's usually a CD. They open all those up. It's mostly new accounts, I would say. Once you get them in, you cross-sell them into wealth management and anything else you can think of. It's consistent with what we did back before 2006 when we were mostly organically driven, before we went when the market gave us those well-priced acquisitions. It's consistent with what we did in the past, and that's how we grew this thing to be where it is gaining deposit market share.
If you go back and you look way back when, we had a lot of CDs on the books because of the way we were growing, and then they went down to basically nothing. Now we're using those as teaser rates to grow again.
Great.
Does that make sense?
Thanks, guys. It does. Yep. Definitely makes sense. Thanks, guys.
Thank you.
Thank you. Our next question comes from Nathan Race of Piper Sandler. Your line is now open.
Hey, guys. Good morning.
Morning, Nathan.
Going back to the last question from Terry in terms of deposit growth strategies and pricing. Just curious, as you guys look to get your loan deposit ratio back towards 90%, do you expect the deposit beta that you had in this quarter to kind of persist as the Fed continues to raise short-term rates? Or do you think this was kind of more of a one-off increase just given some of the promotional activities that you guys took on this quarter?
Overall. Let me get this right. Cycle-to-date, our total deposit beta is 33%. Not bad. It's popped up a little. We expect that in aggregate to end up in the 40%-50% range. If you're 33% now, it's going to be higher to get to that number on a cycle-to-date basis. We would expect our overall beta without new branches this quarter was 62%, without the new branches. The rest of it was the new branches coming on, the way we look at it. I think you have to view it in the aggregate and say, as rates continue to rise, we're going to go to closer to 40%-50% beta. Hopefully closer to 40%, which always has been our number in the past.
That'll mean that it should stay about the same as we go through this growth spurt and rates continue to go up. Fortunately, when you're funded like we are with retail deposits, you start hitting caps. Like the spread, the decompression that takes place in money market and savings, and some of those kind of hit caps at a point in time. We don't have to raise those anymore at all. Especially on the savings side, which believe it or not, savings accounts and passbooks still sell in a number of the new neighborhoods we're moving into in Chicago and Milwaukee. That's a good solid core base for us. We're going to continue to push those, and we expect to end up, like what I said, 40%-50%. Hopefully closer to 40%.
Got it. That's helpful. Thanks, Ed. Just kind of changing gears a little bit and thinking about capital. Total capital kind of ticked down that ratio in the quarter. I think historically you guys want to stay above 11.5% or 11%. Ed, just curious to get kind of your updated thoughts on capital planning and obviously within the context of potential acquisition opportunities. Obviously, we saw one bank acquisition announcement here in Chicago last night. Just curious to get kind of your updated thoughts on where you guys are seeing more opportunities versus maybe Wisconsin and here in Chicago.
Well, on the capital front, I was down just a hair. If you're making the $90-plus million that we made this quarter, you extend that out going forward, generally that should support our internal growth fairly well. I would expect it to sort of stay in that range, barring some acquisitions or outsized growth. You're right. If that number starts to tick down into 11.5% or towards that range, we would look to do more. Currently, barring any sizable acquisitions, we think we can be self-sufficient.
Got it. Ed, any thoughts on acquisition opportunities or any current thoughts on what you're seeing?
Well, let me put it this way, we tell this to investment bankers. Our landing pattern is full of opportunities, I don't know if they're all going to land. Our gestation periods are longer, expectations are higher, it's in all areas of our business. We continue to be very busy in that regard, we're going to be very selective. They have to make sense financially and geographically for us strategically on the banking side and on the wealth management side or on the specialty finance side. In some, like in specialty finance, we've looked at a number of different companies. It's better to start them from scratch, really, when you look at what the price expectations are right now. We continue to look. We've shown a lot of opportunities.
You can expect anything that goes on in our market area, we've taken a look at. We're very selective in where we want to go and what we want to do. Like I said, don't be surprised if we do something, but don't be surprised if we don't either.
Got it. I appreciate all the color, guys.
Thank you.
Thank you. Once again, ladies and gentlemen, if you'd like to ask a question at this time, you may press star and then the number 1 key on your touch-tone telephone. Our next question comes from Brock Vandervliet of UBS. Your line is now open.
Great. Are you likely to maintain this pace of branch acquisitions or branch expansions in 2019 or step off the gas somewhat?
We are likely to maintain maybe not 10 or 12, but certainly five, six, seven, something like that next year. We announced we're actually opening a branch in Naples, Florida to get everybody who's running away from Chicago these days. That'll open beginning of next year. Simply a convenience branch. Just to make it very clear, this is not a move to Florida by Wintrust. This is to accommodate our Chicago customers who are snow bunnies and live down there, have changed residence down there, whatever. We think actually, we should do very well down there just with the Chicago transplants and snow bunnies that are there. It's a very small branch for us, but things like that we're doing strategically to maintain those customers. It came really as a response to our customers asking us to do it.
Milwaukee is going very well for us, and we continue to build out up there. We expect a couple branches up there. We have a number of opportunities here as we fill out our franchise throughout Chicago. Yes, I would imagine we would open six to eight next year on the plans. That's the plan at least right now. Again, it's probably taking what the market gives us. When we did all these acquisitions, we didn't have a choice of where. They're all strategic, but they left holes in our market that we need to fill. That's taking this opportunity to do that right now, especially as we continue to be growing and making more money. We can make that investment and still balance on that overhead ratio accordingly.
Okay. Separately on mortgage. I know you've bolted on a number of parts of the business in servicing and origination over time. Is this kind of what we see is what we get here? Are there missing pieces from your perspective that still exist? Are most of the efficiency gains already been scored or are we still kind of early in that process?
It sounds like Dave Starr wants that all the pieces are in place here. We've been able to fix our product mix to get more government loans, which obviously have higher margins through the Veterans First Mortgage acquisition. They also have a different distribution model, which is something we hope to migrate into our current system over time. No, I think what you see is what you get as it relates to the infrastructure or the footprint that we have. You've not seen the results of the efficiency moves. The ZūM mortgage, as we get that out and take more mortgages as house deals as opposed to coming through a broker. The efficiencies of that, the two to three days you've seen that pop in, two to three days less processing time by using ZūM.
You've not seen the back room efficiencies that should be coming in January and henceforth where we can cut a lot of the costs related to and make them more variable by outsourcing. You've not seen the majority of the efficiencies in the process in the current infrastructure we have. You haven't seen that yet.
Great. Very helpful. Thank you.
Thank you. That concludes our question and answer session for today. I'd like to turn the conference back over to Mr. Wehmer for any closing remarks.
Thank you, everybody. Again, another record quarter for Wintrust. Looking at the market doesn't seem to like record quarters, but nothing we can do about that other than continue to build our earnings, double digits. Continue to build our franchise the way we have in the past, which is conservative and focused on shareholder value. We intend to continue to do that, and we'll talk to you all next quarter. If you have any other questions, please feel free to call Dave or me. Thanks.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.