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 second quarter 2018 earnings press release and in the company's most recent Form 10-K and any subsequent filings on file with the SEC. As a reminder, this conference call is being recorded. I will now turn the conference call over to Mr. Edward Wehmer.
Thank you. Welcome everybody to our second-quarter earnings call, and happy summer to you all. With me, as usual, are Dave Dykstra, our Chief Operating Officer; Kate Boege, our General Counsel; and David Stoehr, our Chief Financial Officer. We will conduct the call under the same format as usual. I will give some general comments regarding our results, then turn it over to Dave Dykstra for more detailed analysis of other income, other expense, and taxes. Back to me for some summary comments and thoughts about the future. Then there's always time for questions. We're very pleased to report record earnings for the 10th consecutive quarter in a row. David Long, Nick Papageorgiou is still on our board there. Net income of $89.6 million.
It was a 9.25% increase over the $82 million in the first quarter and 38% over the $65 million we recorded in the same period last year. Year-over-year, we're up 28%, about $171.6 million to $123.3 million. On earnings per share basis, $1.53 compared to $1.40 in the first quarter, $1.11 last year. $2.93 year-to-date compared to $2.11 for last year, up 28%, 38% almost over last year's quarter-to-quarter. Just put in perspective also about pre-tax earnings. Pre-tax earnings in the second quarter were $121.6 million, over $108 million, up 12.6%, and up 19.3% over the $102 million we were in the second quarter of 2017. For the year, pre-tax earnings are $230.7, up over $190 million, or 17%. Good results across the board. Our margin increased, as you all know, by seven basis points from the first quarter.
For year-to-date, we're up 20 basis points over last year. ROA of 126 compared to 120 in the first quarter. Year-to-date, we're 123 compared to 97 basis points last year. The return on equity and tangible equity numbers are in the release. As readily apparent, our operating trends remain consistently positive. The net interest margin, net interest income, the NIM increased seven basis points over the first quarter and 20 basis points over 2017 to 3.54%. Net interest income grew $13.1 million over the first quarter due to one more day, good earning asset growth, including good loan growth, and the rising rate environment. Really both increases were driven to the higher rate environment and a larger level of earning asset base. Our average earning asset base grew to $706 million in the quarter.
Earning asset yields increased 19 basis points by cost of paying liabilities increased 17 basis points. The free funds ratio or the amount of the 28% of demand deposits we had made up the difference as it relates to our margin. We will talk about betas a little bit later. It is funny to me. I remember a year ago or two years ago, it was pre-tax, pre-provision earnings was the buzzword. Now it is deposit betas. Our average loan-to-deposit ratio for the quarter rose slightly to 95.5%, obviously higher than our desired range of 85%-90%. Some of this was caused by our back-end loading of the loans in the quarter. Ending loans exceeded average loans by $326 million, which bodes very well for Q3 earnings. At period end, our loan-to-deposit ratio stood at 92.8% due to good deposit growth. Speaking of deposit, Q2 is a great quarter for core growth.
Our deposit marketing, coupled with successful opening of five new branches, contributed to $1.1 billion in growth. Our deposit marketing is just kicking in, we would expect this number to begin receding, loan-to-deposit ratio receding towards our targeted ratio. Accordingly, as we expected, our deposit rates increased in this quarter more than prior quarters. Our historical beta, if you look at betas, it is for cycle to date, which includes six rate increases, does not include the June increase, where on interest-bearing deposits were about 0.31%. Quarter two was 68%. If you recall, last quarter we said, over time we expect to be in the 40%-45% range in this as we catch up, plus with our turn towards more organic growth than acquisitive growth. That would be consistent.
It is not going to happen overnight, I think we will still stay well below the 60 basis points, which I heard is the industry average these days. We expect our margin to continue to, as I said last quarter, not be a beach ball underwater, but more like ping pong balls underwater because going forward, we will have in good increases. It takes a full year for a rate increase to work its way through our system. Our models still show every quarter point adds about $22 million-$23 million in pre-tax earnings to us. It just comes in over time ratably. We expect our margin to continue to increase, maybe some comparatively bigger betas. Ending out, we think with three or four more interest rates in the 40-45 basis point range on, or % range in that regard.
I know we will get questions on that, I will save any other comments to later on that. We are still very asset sensitive, additional rate increases should continue to add, excluding the one that happened in June, will add $22 million to our net interest income on an annualized basis. It has not changed from our previous discussions to the ever-increasing size of our balance sheet. As rates continue to move up, we will begin bringing our interest rate gap down. It actually went up a little bit at the end of the quarter. We are still waiting for the long end to move. We will talk about that in a second, like right now. As the long end of the curve is yet to move in concert with the short end, we wait for the bank that liquidity play we have discussed in the past.
This initiative is still in the cards, and I expect our loan deposit ratio to stay in the low 90s until such time as the spreads on the long end get better. Again, a little bit more on this later. As such, the future rate increase, we expect our net interest margin to continue to grow slowly but surely. On the credit side, credit remains historically great. Both NPAs and NPLs were down from their already low numbers. We had a $7.5 million decrease in total NPAs. NPLs, non-performing loans, were down $6.4 million. Our OREO balances were down $1.1 million. We continue to push out old assets. Valuation charges were down modestly. We continue to actively work to dispose of older properties. Net charge-offs total $1.1 million.
Charge-offs of $6.9 million were offset by recoveries of $5.8 million, following through on our basic operating tenet of being conservative on charge-offs and looking good on recovery. As is evident in the NPA and charge-offs numbers, the little hiccup we had in the commercial premium finance book is behind us, and recoveries are starting to materialize. In summary, credit remains very good. NPAs as a percent of total assets decreased to 0.40% from 44 basis points. Reserves as a percent of NPLs was at 172%, up from 150% at the end of Quarter One. Net charge-offs decreased 10 basis points to 2 basis points in the quarter. We continue to cull our portfolio for cracks, and we will expeditiously move assets out when said cracks are found. We'll also continue to aggressively work our OREO portfolio to clear the decks.
On the other income and other expense side, David is going to go into these in detail momentarily. Just some general comments. On the mortgage front, revenues and volumes were up from Quarter One. However, overall profitability decreased due to decreasing execution spreads without a commensurate decrease in cost of processing. That's more of a supply and demand function. It's got a little bit of a provider inflation here with lots of people out there going after fewer and fewer deals. That being said, I like where we stood on our volume numbers. To that end, on the cost side, we're diligently working to reduce our cost to produce a loan. These are up over three and a half times due to Dodd-Frank and the like from the good old days, if you will.
To that end, our Zuum mortgage product, it's our version of Rocket Mortgage, went live on a test basis this quarter and soon will be fully implemented in Quarter Three. Early results show a decrease of almost two days in processing time through the use of this front-end system, and we all know time is money. We're also looking at any other number of cost initiatives in that area. We're not going to comment on them now, but they're in all aspects of the business, and we expect them to be fully implemented by the end of this year. David will be explaining our quarterly results in the mortgage area in detail in a moment. As you all know, we know this is important to all of you. Please know, though, that we are committed to this business for the long term.
Our wealth management operations continue to improve. Assets under administration grew $300 million to $24.6 billion from $24.3 billion at the end of Quarter One. Revenues for the quarter fell slightly due to less trading from our broker-dealer and the overall market in general in the second quarter. Our net overhead ratio was 1.57%, down one basis point from Quarter One, but a little bit above our 1.5 or better. Some of this is balance sheet driven as we're delaying pulling the trigger on the liquidity initiative we previously announced. Other factors include the comparatively low mortgage revenues as a percent of volume without a commensurate decrease in expenses. A full quarter of Veterans First expense, seasonably higher marketing expenses, additional incentive comp accruals due to better results, and we opened five new branches in accordance with our organic growth initiative. Again, Dave will discuss in detail.
A net overhead ratio of 1.5% or better still remains our goal. We'll continue to work on it. On the balance sheet front, assets grew $1.8 billion, with no acquisitions included, to $29.465 billion. Loans grew $548 million in the quarter. That's a 9.7% growth. Again, high single digits as we anticipated. Average loans grew $572 million. We're in pretty good shape on the loans side. Deposits, we talked about, up $1.1 billion or 18% over the previous quarter on an annualized basis. The balance sheet grew nicely. I'll talk about the acquisition market in my final comments. Loan growth is projected in high single digits as in most categories, with the exception being commercial real estate, where payoffs and our wariness about the current competitive market negated the growth there.
We'll be very choosy about the deals we're going forward, making sure they meet our pricing standards and our underwriting standards. Loan pipelines, though, are consistently strong. It increased this quarter to the second-highest level we've had in about two years. Momentum is good. A lot of that is due to our reputation, some due to changes in the marketplace, and we think that's just the start of that. Deposit growth. We're heartened by our growth and our success there. We flipped the switch as bank pricing has moved away from us. We're at that inflection point where organic growth, as many of you have noticed in the past, we made our bones on organic growth, and we've been very good at it. It's nice to be able to flip the switch and see that we still have it.
Five new branches came on during the quarter, and we have a number of more branches planned for the rest of the year. That's not to say we're not interested in acquisitions. However, expected pricing is relatively high right now. We continue to look, but we will continue to take what the market gives us and stay disciplined in our approach to deals. In any event, I'm going to turn it over to Dave now to talk about other income and other expense.
All right. Thank you, Ed. As normal, I'll just touch briefly on the non-interest income and non-interest expense sections and those areas that had the most significant changes. In the non-interest income section, our wealth management revenue held fairly steady in the second quarter, totaling $22.6 million, compared to $23 million recorded in the prior quarter, and up from the $19.9 million recorded in the year-ago quarter. A modest reduction in the brokerage revenue component due to the reduced amount of customer trading was the primary reason for the slight decline in the combined wealth management revenue. Overall, the second quarter of 2018 was another solid quarter in revenue generation.
Mortgage banking revenue, as Ed alluded to, increased approximately 29% or $8.9 million to $39.8 million in the second quarter, from $31 million recorded in the prior quarter, and it's also up from the $35.9 million recorded in the second quarter of last year. The increase in this category's revenue from the prior quarter resulted primarily from higher loan origination volumes. The company originated approximately $1.1 billion in mortgage loans in the second quarter of 2018. This compares to $779 million of originations in the prior quarter, and a similar $1.1 billion of mortgage loans originated in the second quarter of last year. The $318 million increase in the origination volume was attributable to $229 million increase from our retail origination channel. A $92 million increase from the Veterans First consumer direct origination channel, as we had our first full quarter of production since the acquisition.
This was offset slightly by a $3 million decline in our correspondent originations. The mix of loan volume related to purchased home activity was approximately 80% in the second quarter, compared to 73% in the first quarter of this year. Page 23 of our second quarter earnings release provides 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 existing pipelines, we currently expect originations to soften slightly in the third quarter to approximately $1 billion, but obviously, this estimate could ultimately be more or less, depending on the market conditions during the remainder of the quarter. Operating lease income decreased approximately $945,000 in the current quarter compared to the first quarter of this year.
This was primarily as a result of a $1.1 million gain realized from the sale of certain equipment on operating leases in the prior quarter of the year. Other non-interest income totaled $14.1 million in the second quarter of 2018. This is up approximately $2.2 million from the $11.8 million in the first quarter of this year. There are a variety of reasons for the increase in this category revenue, including a higher level of interest rate swap fees, a higher level of loan syndication fees, an increase of $521,000 on gains from early payoffs of capital leases, and a $600,000 settlement on a BOLI policy. Turning to non-interest expense categories. Non-interest expenses totaled $206.8 million in the second quarter of 2018, increasing approximately $12.4 million from the prior quarter.
The increase was primarily attributable to approximately $9.2 million of higher salary and employee benefit expenses and $3 million of higher advertising and marketing expenses. Both of these were related to the growth of the revenue and the balance sheet. I'll talk about the more significant changes in detail, as well as comment on a few other items of interest. The base salary expense increased approximately $5.0 million in the second quarter over the first quarter of this year.
Slightly more than $3.1 million of the increase is related to a full quarter impact of the annual base salary increases that generally took effect on February 1st, a full quarter of the increase in our minimum wage to $15 per hour for eligible non-commissioned employees, which took effect in early March, and normal growth as the company continues to expand its staffing for the five new branches and other growth at the company. Slightly more than $1.8 million of the remaining portion of the increase was related to the impact of bringing Veterans First team fully under our payroll in the second quarter. Veterans First retained some of their employees to handle the runoff of the volume that they maintained, and those employees fully came onto our payroll in the second quarter. The second quarter's run rate for them is fully staffed up now.
Commissions and incentive compensation expense increased approximately $4 million to $35.9 million from $31.9 million in the prior quarter. The company experienced an increase of approximately $2.4 million in commission expense tied to the higher mortgage origination volumes, with the remaining increase associated with higher long-term and annual incentive compensation accruals due to the higher earnings experienced by the company. Marketing expenses increased by approximately $3 million from the first quarter to $11.8 million. As we've discussed on previous calls, this category of expenses increased as our corporate sponsorships tend to be higher in the second and the third quarter of the year, due primarily to our marketing efforts with the Chicago Cubs and the Chicago White Sox, as well as increased spending related to our deposit generation activities and brand awareness to grow our loan and deposit portfolios.
We clearly believe these marketing efforts are effective in enhancing the franchise value of the company. Other than the salary and employee benefits and the marketing expense categories that I just discussed, all the other expense categories were up on an aggregate basis by only $223,000 from the prior quarter. A $1.9 million reduction in OREO expenses was offset by slightly higher levels of expenses in a variety of other expense categories such as equipment expense, data processing expense, postage expense, FDIC insurance, and other miscellaneous expense categories. As Ed mentioned, the company's net overhead ratio decreased by a basis point to 1.57%, and the company's efficiency ratio on a fully tax-equivalent basis declined to 61.8% in the second quarter from 62.2% in the first quarter. Those are the highlights of the other income and other expenses.
With that, I will turn it back over to Ed.
Thank you, Dave. Summary, all in all, a pretty good quarter for Wintrust on all fronts. Momentum continues throughout the organization. Reduced taxes and higher interest rates have been very beneficial to us to our core earnings growth. Our balance sheet growth has been good, and that all bodes well for future earnings growth and future growth in franchise value. We are pushing our organic growth agenda as acquisitions in general become relatively expensive. In that regard, we still have a number of new branches planned over the next 18 months in neighborhoods in our designated market area where we currently are not present.
Our retail and small business marketing programs, which we embarked on in earnest at the beginning of this year, are working well and pulling in new accounts and relationships, both in the new branches and in the underutilized branches we had picked up during the Great Acquisition Spree that resulted during and immediately after the Great Recession. This doesn't mean that we're not investigating future business combinations in all areas of our business. As we mentioned in previous calls and today, pricing has become unrealistic in some respects, in our opinion. When you do get something going, the gestation periods become very long. We remain well positioned for higher interest rates and are prepared to protect our downside as rates rise by gradually decreasing overall rate sensitivity. Credit is as good as it's going to get.
We continue to review our portfolio for any early warning signs and are exiting deals expeditiously when cracks are apparent. As noted in some of your reports, our 30- and 60-day past dues, many of which are, for the most part, organizational and not credit cracks, have decreased as we continue to push our people and staff to make sure that we can turn things around much quicker and not have past dues that are due to our inability to get things done on time. Loan growth is good, pipelines remain very strong. Our niche businesses continue to work very well with us. We continue to look for other niche businesses to diversify our portfolio because, as we said in the past and as you all know, concentrations kill. We are prepared to embark on our liquidity initiative, which should have the desired strategic results.
I keep looking at the short interest in the Treasury market. If those guys are right, maybe we'll get a little pop here in the long end at some point in time, which would be very good for us. In summary, we're well positioned. We like where we sit. The disruption that's occurring in the market is good for us. Very good for us, as a matter of fact, as we target customers who may want to be refugees from big banks. That's where we made our bones in the past. That's how we'll continue to do it in the future. We like where we sit right now. We think we feel good about it. That being said, as I said last quarter, we keep looking under the table for the boogeyman.
We continue to prepare and maintain a fortress-type balance sheet, keeping our credit clear, clean, not reaching to do new loans. I'm heartened by the fact that we had such good loan growth, and our critical exception number continues to come down in these deals. We're not chasing deals, and our profitability models are still holding strong, but they're getting pricing for relationships we're bringing in to meet those profitability goals. That being said, we keep looking around and making sure that we are prepared in the event of any number of things. I let you know all this just to know that we're not standing on our laurels, assuming this is the new normal. Many of us are seasoned enough to know that just when you think you got it, something comes up and bites you.
We want to be prepared when that happens. I think the way we built this organization, with core funding, good diversification in the balance sheet, we're in very good shape to handle whatever gets thrown at us. That being said, you can be assured of our best efforts to ensure the long-term growth of the franchise value of your company through both by maintaining that fortress balance sheet, maintaining double-digit earnings rates, earnings increases, good asset growth, and protecting net book value per share of the company. Right now, we feel pretty good. Who knows? Now we have time for questions. Let's go.
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 touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may do so by pressing the pound key. Again, if you'd like to ask a question at this time, that's star, then 1. Our first question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is now open.
Thanks. Morning, guys.
Hi, Jon.
Hey. Just start with big picture, Ed. You touched on it towards the end of your prepared comments, but just the lending environment. I think what you're saying is everything seems pretty healthy, but you are a little bit more cautious on commercial real estate, maybe a little bit more bullish on C&I. Give us your best guesses where you see the best opportunities and where things are a bit irrational for you.
Well, commercial real estate is, you're just seeing some irrational pricing coming in from some of the smaller banks, doing five- and 10-year fixed rate deals in the fours. You're seeing development kind of popping up a bit. We're having a number of payoffs in the development loans we did do early on in this cycle. Those are all done with really good sponsors. That's not to say we won't look at those, but we just have to slow down in that area as it's not meeting our loan policy criteria, certainly nor our pricing criteria. The commercial loan pipeline is very strong. The niche businesses also are doing very well. Our leasing business, our franchise business, commercial premium finance all grew nicely, and the life premium insurance continues its steady growth. Again, haven't had a loss to date in that portfolio.
As I said, we continue to look for other types of businesses. The market here is in a bit of turmoil with the recent acquisitions, both of our two smaller, less local competitors in the market. We are seeing opportunities there. We also are spending money up in Wisconsin, where we have a beautiful franchise up there, where we're hitting the market hard on middle market lending up there. Something we hadn't really done. We concentrated on Chicago here, and that's running like a top. We're taking that same model up to Wisconsin, where there's a lot of big bank competition, but nobody really does it our way. We're seeing good results up there already, looking at deals that these guys never thought they'd ever get a shot at. Our reputation is good. The momentum is good across the board.
We worry a bit about commercial real estate. Again, pipelines are as strong as they've been across the board. Knock on wood, we'll get deals done on our terms and our pricing. We feel pretty good about that low single-digit number for the rest of the year.
High single digit, right?
Yeah, sorry. High single digit number for the rest of the year.
We're not at rope-a-dope yet.
No. That's kind of interesting. You talk about rope-a-dope. I was using a double negative. I meant to say high. I'm like the president. You hear a lot about, we were always big proponents of the inverted yield curve and what that meant. I'm hearing a lot of pundits on TV talk about the yield curve flattening and how that means a recession's coming soon. We looked at this very closely and did a lot of research. We had our quants look, and we verified it. We read Goldman's work and the like. It's a little bit different this time. The yield curve flattening is somewhat technical in that with the Volcker Rule, the big banks have taken their alternative investments down from 10% or 11%. The big banks are a lot of those, the top five or six banks.
From 11% down to 4% or 5%, which means they're out buying anything long, any Ginnies or any treasuries that come out that are long term to get that yield. If the Fed were to go faster and get rid of the $4.5 trillion that they're sitting on, that's worth about a point to the yield curve right now. Our guys did it, and interestingly enough, Goldman came out with something on it, too. I'm not that concerned about that asset. Our clients are all doing very well. The only issue they're having right now is with labor. Really good clients are having trouble getting labor, and that's an issue. Other than that, they're all doing really well. I don't see storm clouds yet on the horizon. We're not thinking about rope-a-dope. We're thinking just about dopes in the real estate area, I guess.
No rope-a-dope.
Just one more on the deposit cost step up. My sense is you want to address it. It's a little bigger than I thought it would be. I understand it. Just maybe give us an idea of where you feel like you need to defend yourself, and is this something that can maybe flatten out later in the year in terms of the cost increase? Thanks.
We lagged more than most for a long time, and it does catch up with you. With our growth this quarter and the like, it popped a little, but you had a quarter rise. If you take that quarter rise, it wasn't as high. If you take the rate increase that took effect June 15th, it wasn't as much as you think. We look at this over time, and we are at 31 basis points for the cycle, 31% for the cycle. We were 68% for, and this is just on interest-bearing deposits for this quarter. That only brought us to 31% for the cycle. If you look at total, including demand deposits, we are at 22 basis points for the cycle and 52 basis points for the quarter. We expect those numbers to get up the total cycle after two or three more rates.
That 31 is going to go to 40. To get that, you are going to have a little bit higher in the quarters going forward. However, you are still catching up on two and now three rate increases that are working their way through the system. It's balanced. We look at this very closely. A lot of it's the lag that we had in the past, but we will catch up, and then by the end of this year, first quarter of next year, we will probably be at that 40 basis point number for the cycle up from 31 or 40 or 45. You will see it, but earning assets should continue to increase greater than that. Does that make sense?
Yep, makes sense. Okay. Thank you.
We're going to catch up, but we're giving you where we're going to be at the end of the deal.
Yep. Okay. That makes sense. Thanks.
Our next question comes from the line of David Long with Raymond James. Your line is now open.
Good morning, gentlemen.
David, how are you?
Good. How are you guys doing?
Living the dream every day.
Good. Thinking about the deposit growth and the pace of the liquidity build. In your mind, where are you today on the liquidity build? Between now and call it the end of next year, where do you think that you will be with that? How much does the failure of the yield curve to fully cooperate impact that pace or ultimate size?
Well, we'd like to get back to 90% loan to deposit at a max. That should tell you what the type of growth we would like to achieve by the end of the year to get to that number. The rest of it takes is we love to run in the middle of the 90%. We love to be at 87.5%. We're not going to rush to 87%. If we're 91% too, that's fine. We're not going to rush to 87.5% unless we can get something on it. Does that make sense? It's kind of a variable answer. We want to get to 90% loan to deposit, the high end of our range by the end of this year. That's what we're trying to do.
If the long end were to move, we'd like to get to 87.5% long term, right in the middle of our desired range. I still think liquidity is important. I don't sleep well knowing that we're 94%, 95%. That's the plan. Dave, you want to comment on that?
No, I think that's right. We brought it down a little this quarter with our branch openings and our targeted marketing, we'll continue to plug away with that. I think we had hoped that the long end of the curve would have been up, that we could have been a little bit more aggressive with those deposits and put them to work with longer investments. That hasn't happened. As Ed says, if the curve would pop up, which there's no indication that that's going to happen, it could happen quicker. Otherwise, we'll plug away. Add it and increase it gradually and get down to that 90% range. If the long end pops up, we'll probably get it below 90%. It'll be a gradual thing.
We won't just go out and add another $1 billion or $1.5 billion of deposits and put it to work like we would if there was steepness to the yield curve.
Got it. With the liquidity building that you're doing today, what are you investing in? What types of securities and what types of yields are you looking at right now?
Well, we just increased a little bit with Ginnies and Fannies, but we haven't gone dramatically into that. The liquidity is either sitting in cash, and we've been legging in slightly with Ginnies and Fannies, but not dramatically yet.
In a perfect world, we would love to see muni rates move up a little bit more to kind of hedge against. We've never had a large muni portfolio. If they were to move up closer to 80% of the long end number, the taxable number inside 80% or 85% of that number, it'd be a great move for us to hedge against if we saw a different administration coming in down the road and raising taxes. Might be a good time to think about that. We watch that very closely, too. We've never really had a large municipal portfolio, which has served us well. Now might be the time to get in there and hedge a little bit. That could be an area for growth, too. We watch those rates very carefully, watch the overall environment very carefully.
If it appears that things are slowing and rates may go backwards, you may see us move faster into that. Because one of the things we're doing. We expect to go long on the liquidity side to bring our gap down and probably not write calls on a lot of it as we have in the past. Because as rates get higher, we don't want to have that huge gap and have that downside vulnerability. We're looking at a lot of different strategies. We have a lot of quantitative mathematicians and economists left over from the stress test days. They're still doing stress tests, but they have a little extra time on their hands, so we have them running lots of these. We're all over this thing. We'll watch it very carefully.
David, just one other thing, is if you look at our investments at the end of the quarter, they're up just slightly. We used some of those deposits really to fund the loan portfolio. You'll see that our Federal Home Loan Bank advances actually came down from the first quarter a little bit. Rather than borrowing the Federal Home Loan Banks as much to fund the mortgage portfolio, we just used those deposits since we had them. Part of it was to just borrow less in the first quarter. We're still waiting for that long end to move before we invest heavily in securities.
Got it. The last thing I wanted to ask just quickly was the deposits at period end were much higher, about $1 billion ahead of the average. Am I right in assuming that a lot of the deposit growth in the quarter came at the end of the quarter?
Yeah.
Yes.
Okay.
Well, we opened two very successful branches right around the first part of June. One was in Evanston, an area we'd never been in, which is a fairly large parochial suburb of Chicago, with First Bank Evanston selling to-
Byline
Byline. That opened up an opportunity for us to come take that positioning. The branch at Wrigley we opened right at the beginning of middle of May, and that's off to a great start, too. Many of the branches opened in the last part of the quarter, and they really did well taking off. It's nice to see when we open it, people still want to come.
Got it. Thanks a lot, guys. Appreciate it.
Good.
Our next question comes from the line of Christopher McGratty with KBW. Your line is now open.
Hey, good morning. Thanks for the question.
Chris.
Edward or David, obviously, the guide on the overhead has been 150 over time. I guess, given what you're doing with the balance sheet, how should we be thinking about whether a point in time or maybe not a full year basis, but what's a realistic time to get there? Could you get there by the end of next year, early next? Is it kind of a longer aspirational target?
If we put $2 billion on and brought us to the 87.5% loan to deposit, we'd be there right now. The ultimate goal. A lot of it has to do with the balance sheet not being where we are and the yield curve. Some of this quarter, as you said, was due to the mortgage profits and the expenses being too high. We are investing in organic growth, and that's putting your costs of growth through the income statement as opposed to buying for a big number and not having the cost go through the income statement, but taking it to your tangible book value per share. It's an old argument we used to have when we were really doing organic growth before we got into the whole splurge of acquisitions. It is aspirational. We'd be there now.
If you had any slope to the yield curve, we'd probably be there now. We continue to work at it. You're going to bounce, I think, between that 150 and 160 number every quarter until you see us get the liquidity play underway.
Great. Maybe if I could follow it up. Some of your peers look at just the spread between revenue growth and expense operating leverage, which for you guys has kind of been in the 300-400 basis point range for recent years. Is that about a fair way to look at the company, given the investments you're making and the revenue growth, the double-digit revenue growth? Is kind of a 300-400 basis point operating leverage kind of still realistic, given where we are?
Yeah. Chris, I really haven't run the numbers the way you're talking about them. Clearly, operating leverage is something we think we have as we grow out these small banks. I don't want to talk off the top of my head without running the numbers, and we don't look at it that way. We look sort of at the net overhead ratio because there's lots of moving parts. Some people said in their reports so far that expenses were a surprise this quarter. The expenses were really up because the revenue generation was up. The mortgages were up, and the advertising was up to generate the deposits and the sponsorships we had. A lot of it is to generate the deposits and the loans is the end game, obviously. You spend the money to make the money.
We really look at that relationship as far as are we leveraging that well from a net overhead ratio. I'd have to go back and study the numbers you're looking at because we just don't present it that way.
Okay. Fair enough. Thanks a lot, Dave. Thanks, Ed.
Our next question comes from Brock Vandervliet with UBS. Your line is now open.
Thanks for taking the question. I guess on the mortgage business or businesses, could you review what product verticals you now have? Are you kind of where you want to be in mortgage generally, or are there more plug-ins that you find attractive?
Well, do you want to talk about the verticals, and I can talk about where we're going?
Well, the three that we show is we just have our standard retail origination channel. Obviously, if we can bring on more originators there, that would be fine as long as we can make the offsets profitable. The Veterans First is a consumer direct channel, and as soon as we get that fully under our belt and comfortable with it, we could expand that consumer direct channel to other product lines besides just the VA type of loans. As Ed mentioned early on, we put in what we call our Zuum product, which is more of a consumer direct type of product, although we haven't used it that way yet. We're just using it to be more efficient on our own processing right now. We could expand that out.
We'd certainly like to expand the government loans a little bit more as the pricing on those tends to be better than the others. Other than maybe moving more of our product line towards a consumer direct channel, I think we have really what we want for the short term here right now.
We're not looking right now other than organic growth of producers at any acqui. We've done a number of mortgage acquisitions in the past. They've all been done on an earn-out basis, which leaves us without a lot of stress on these deals as to working out or not. We're going to concentrate now, at least for the rest of this year, on getting efficiencies out of our processing. We have a number of interests that I'm not going to talk in detail about, but a number of interesting concepts and proven concepts that we are big enough now that we can take advantage of that will hopefully drop our costs of processing in total in about half of processing. Commissions are a whole different story. The commission structure in Veterans First is different than the retail commissions.
Dodd-Frank kind of screwed that thing up. You pay commissions on volume and not profitability. When the profits go down, you're still paying commissions. We've got to find a way to figure that out so everybody's on the same team here. We think we can cut our costs of actual backroom processing in half. We're going to be working on that very hard over the next three to six months. Hope to have them all implemented by that point in time. The commission structure is the biggest cost you have, something we're not going to tamper with now, but there are ideas coming. I think the whole industry has to deal with that issue in general.
If rates stay down, if the spreads stay down where they are, people without our volumes smaller than us can have a hell of a time dealing with that issue on the cost side.
Okay, great. Just a housekeeping note, Dave. Were any of those deposits that came in toward quarter end considered wholesale?
No, our brokerage deposits were relatively flat. They changed just marginally. Some ran off, we did bring some on to replace them. The wholesale broker deposit number was relatively flat.
Okay, great. Thank you.
Our next question comes from the line of Kevin Reevey with D.A. Davidson. Your line is now open.
Morning, gentlemen.
Hello, Kevin.
How are you?
Long time no see.
Yes. Congrats on a great quarter.
Thank you.
My first question is line utilization. It was around 52% or 53% when we talked last quarter. Has it moved up, or has it stayed pretty much the same?
For now, it's still the same. Dave's got the number here.
Yeah. It is trending pretty much the same as we have the last few months. Utilization rates are about the same.
And-
People are taking bigger lines. There's still anticipatory line increases going on. Borrowing is up, but the lines are increasing proportionally.
That's a good thing. Absolutely.
We think so.
Ed, at the end of your prepared remarks, you talked about that you continue to look for other niche businesses. Can you kind of give us some color on what those businesses are?
If I knew, I'd be doing them. A lot of things we run across are things we never thought of before. Different, interesting little businesses where we think we can go to scale. We like to think that any one of these niche businesses should be able to go to $400 million-$500 million. Many of them we've never heard of before. We read about them, we look at them. We're not big at buying them because they're pretty expensive right now when we run into them. But we're pretty big on starting from scratch, like we did leasing. Our leasing portfolio is a billion and one. Started two and a half years ago. We see good growth there. Interestingly, the moves that have been made in Chicago banking are opening up some opportunities on the leasing front, too.
We believe that within some of the niches, we can get some additional diversification by adding additional products that we haven't had in existing niches or in existing businesses. A lot of it is stuff we've never heard of. Different concepts or ideas, and we're not afraid to go nationally with our niche businesses either. If you hear of any, let me know.
Will do. With the recent disruption in Chicagoland, earlier you talked about opportunities as far as gaining customers. Are you seeing any opportunities as far as talent acquisition?
Yeah. Just leave it at that. Yes, we are. You can imagine that some of the deals that were announced involve cost cuts that would put uncertainty in all areas of the business. When we open a position on the operational side in deposit ops or in BSA or compliance, we are seeing a number of opportunities of very seasoned people wanting to come be here. We were always in the position because our compliance numbers and our CRA numbers are so darn good at being poached. Now it's the other way around. We like that. On the lending side, I'm not going to comment in particular, but disruption that is taking place and has taken place a year ago is good to us and will continue to be good to us as we add to our staff.
Lots of dislocations going on in assets and people, and we intend to just be disciplined in taking advantage of them.
Great. Thank you.
Our next question comes from the line of Terry McEvoy with Stephens. Your line is now open.
Thanks. Good morning.
Hey, Terry.
Hi. How are you thinking about the third quarter margin in terms of getting the benefit of the June rate hike, along with the higher deposit betas that we've talked about, as well as some of the balance sheet actions that you've discussed on the call?
Well, as Ed mentioned, we still think we have upward potential in the margin. Deposit betas are up over prior quarters, we are very asset sensitive, our loan pipelines are repricing. Some of those more significant niches that we have, like the premium finance niche, it takes nine months for the commercial premium finance portfolio to turn over, and the life portfolio reprices once a year. Some of those loans that are repricing now are taking advantage of a couple of prior reprices, too. We still expect our asset yields to outpace our deposit costs slightly. We would expect that margins could continue to trend upward.
Okay. The $950 million of franchise loans. Could you just discuss the underlying health of that portfolio? Are you becoming any more selective at all within that business?
We've always been selective in that business. The health of the portfolio is very good. Grew nicely last quarter. We again look for diversification inside the brands that are in there. McDonald's is still the largest exposure that we have. It doesn't make up that much. I don't have it in front of me here. Next time I'll bring the report in with me. No, we don't have a lot of stress, any stress really, in that portfolio other than every now and then you get a guy, and you want to stay with the brands where they support the franchisee and the goodwill of their business and not let them go under if they have an issue. The portfolio is very healthy, where you have no issues with it. Look forward to good growth in it.
Just one last question. Will the advertising and marketing expenses remain seasonal? Will there be a decline later this year? Or do you think because of the market disruption, you'll be a little bit more proactive on the advertising and marketing side?
No. As I indicated in my comments, I think the third quarter will stay elevated, and a lot of that's, again, due to the sponsorships that we do. A lot of them happen in the summertime, and clearly our Chicago Cubs and Chicago White Sox sponsorships are heavier during the baseball season, which is generally in the second and the third quarter.
We're hoping a bit of the fourth quarter has heavy sponsorships, which means the Cubs will be in the playoffs and World Series again.
We would expect it to trail off a bit again in the fourth quarter and then the first quarter and then pop back up again. There is seasonality to that in the middle quarters of the year.
Yeah, it should grow. The overall basic marketing expense, what we've done is pivoted from brand marketing more to product marketing. It's just a pivot of expense. The core expense should grow commensurate with the overall organization with these little blips in the summer for our baseball sponsorships.
Great. Thank you both.
Thank you.
Our next question comes from Nathan Race with Piper Sandler. Your line is now open.
Hi, guys. Just going back to Terry's first question on loan yields and pricing. Just curious if there are any prepayment fees that may have impacted loan yields this quarter. I understand, obviously, you got the full benefit of the last few rate hikes that came through loan yields. I guess the increase in loan yields that we saw this quarter was a little higher than we saw in previous quarters following an increase by the Fed.
No. Nothing unusual. Most of it comes through the leasing business, we didn't really have anything out of the ordinary there on prepayments. Usually on a lease that prepays. We have nothing out of the ordinary. By the way, you said the last two rate hikes. Those won't be fully implemented for another two quarters. We still are experiencing the growth of those. It's kind of a snowball rolling down the hill for us.
We did see a little bit of elevation in payoffs on the commercial real estate side, those were more end of maturity term for those, some of those went outside to insurance companies or the like. As planned.
Like the McDonald's deal. We led McDonald's new headquarters in Chicago. We were the lead on that, co-lead with Bank of America. That was a big construction loan. We see those coming to maturity, those are rolling off into permanent financing outside the banking system.
Those generally don't come with prepayment penalties because they're at maturity. Nothing unusual in the quarter.
Got you. Kind of changing gears and perhaps a broader question on deposit growth. Is the kind of core deposit growth that we saw this quarter sustainable, just given the rate increases that you guys implemented across a number of products during the quarter? Do you guys see yourself having to spend more on both marketing and so forth and continue to raise rates across a number of products to continue to deliver this magnitude of deposit growth over the back half of this year?
Well, on the advertising side, I think we answered that question. Kind of more of a pivot from advertising. Brand advertising to product advertising. That should grow proportionally with our number of branches and with the size of the organization, kind of that core pricing. At the same time, we are growing new branches. Growth is coming across the board. A lot of it is growth coming in without because of how we're structured, we don't have to raise rates everywhere. Not like a big bank that has a model brand, and they raise it. They have to raise it across the board. I can go to one bank and raise rates where it's inefficient and want to grow there to get those efficiencies with no commensurate cost increase in expenses, or to a new bank where I want to come out.
At the same time, I'm growing in existing banks at not elevated rates. I think you have to look at what our aggregate plan is. If they have two more raises, our overall beta will be in the 40% range. That's kind of, you will gather that and know that we're saying we believe our earning assets will surpass that, and we will have ping pong ball increases in the margins. Ping pong ball underwater. Not beach ball underwater. Increases in the margins as rates continue to go up. That will always be on a larger earning asset base, which should materially help that interest income.
Got it. I appreciate the color, guys. Thank you.
Our next question comes from Michael Young with SunTrust. Your line is now open.
Hey, thanks for the question. Ed, I wanted to go back to some of your comments earlier in the call about maybe potential for the long end of the curve to move higher. If you start to see that taking place or if things move in that direction, would you look to term out the CD book while rates are kind of lower now? Or are you asset sensitive enough that that just doesn't make sense?
We look at both sides of the balance sheet as it relates to rates going up. As rates continue to move up, reducing our interest rate sensitivity. We would look at both sides of the balance sheet in doing that. Yeah, we want to lock in longer rates when they're there. We're doing that now to some extent. We also would look at the asset side. We'd probably look more at the asset side than the liability side. Yeah, certainly we'd like to lock in the asset side before the liability side if you're trying to reduce your gap going forward.
Okay, thanks. Maybe more just a broad comment on credit spreads. Obviously, base rates continue to move up. How much of that is kind of being given back in just absolute credit spreads and pricing on new production at this point?
That's a good question. We're seeing the market do that, smaller banks in particular. We saw large banks in some specific areas are doing it. Fortunately, as I've said in previous calls, it really has been the history for how we operate here throughout our life, is we don't change our loan policy or our pricing model for anything. If it doesn't work, we won't do it. The market is moving a little bit. We are seeing it. Fortunately, we've been able to get our business on our terms. We beat the other guys left and right. We're not going to chase the market. We're not going to chase the down rates. We'll let deals go. Hence, the commercial real estate runoff that we've had. Some of it has been contractual runoff for projects that are completed, going into the secondary market.
Some of it's been good, solid commercial real estate that is going to another bank for a price that doesn't make sense to us. We don't chase it. We're seeing it there. On the commercial side, it's as low as it's going to go. The commercial side's been as low as it can be. The middle market commercial side has been as low as it can be for the last three years. We don't see that occurring that much. In the private equity portfolio, we are seeing our sponsors sell more than buy, which should tell you something. We're holding steady in that portfolio. We are seeing non-banks come into that area, like the Ares and Antares of the world, with rates that we would not be comfortable with on the deals. Still, they look pretty good at 400 over, between 400 and 500 over.
Air balls that are way out of control. Those aren't our sponsors doing. Our sponsors aren't playing. Our sponsors are selling. That means something to us. We are seeing some irrationality in the market on the commercial real estate side, on the private equity side. The private equity side being mostly non-banks throwing money at deals that don't make sense to us.
Okay, thanks.
In other words, I think spreads are holding in there for us.
Yeah. Thanks, Dave. Trying to have a little color, man.
As a reminder, ladies and gentlemen, if you'd like to ask a question at this time, that's star then one. Our next question comes from the line of David Chiaverini with Wedbush Securities. Your line is now open.
Hi, thanks. I wanted to follow up on the discussion about loan growth, which has been very good, and high single-digit guidance was maintained despite the caution on commercial real estate. I was curious, are you seeing enough demand or an acceleration in demand on the C&I side and in premium finance to generate and continue that type of growth?
Yeah. On the commercial side, we're just taking business from people. As Dave said, our utilization rates are still in the low 50s on lines we're bringing in. With the disruption in the market, with our reputation continuing to grow and our abilities continuing to be recognized in this area, we're getting looks at deals from other banks because of our good looks and also because of the disruption in the market that's taken place. On the premium finance side, Dave, you want to talk about that?
The premium finance business is pretty strong. We continue to market and get new clients. SunTrust sold recently, which was disruption in the marketplace. They sold to one of our larger competitors, that is helpful to us. We do give great service and a good product, so we get our feet in the door, and we continue to build the business. Our feet in the door. We continue to build the business there. We keep blocking and tackling. There was some regulatory relief that we hope down the road may pop in that would help us compete with the non-regulated entities. I'm hopeful that's going to come shortly, which would be another tailwind to us. We've lost some business because of regulations that apply to banks that don't apply to non-banks or insurance companies, we're hopeful that that's going to be resolved soon.
That might be a tailwind for us going forward. As we mentioned on the front end, our pipelines are working their way back up and at relatively high levels compared to recent history. The business is there, and we think we can sustain it.
Thanks for that. In terms of benefiting from the disruption, are you able to benefit without hiring from these other organizations? Or is hiring a prerequisite to benefit from the disruption?
The former. We benefit out of the box. Hiring is just, we're very selective in that regard, and that's just additive. For the most part, you really don't need to hire. We have the capacity to take on additional business across the board, but hiring doesn't hurt.
Thanks very much.
Thank you.
I'm not showing any further questions in queue at this time. I'd like to turn the call back to Mr. Wehmer for closing remarks.
Thanks very much, everybody. Have a great rest of the summer, and hopefully we'll be back with our 11th consecutive quarter of earnings when we talk in October. Anyway, talk to you soon. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.