Wintrust Financial - Earnings Call - Q1 2019
April 16, 2019
Transcript
Speaker 0
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, Wind Trust management may make statements that constitute projections, expectations, beliefs, or similar forward looking statements. Actual results could differ materially from the results anticipated or projected in any such forward looking statements.
The company's forward looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in the fourth quarter twenty eighteen earnings press release and in the company's most recent Form 10 ks 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.
Speaker 1
Good afternoon, everybody. Welcome to our first quarter earnings call. Beautiful day in Chicago at 73 degrees. Sunday, we got five inches of snow. So welcome to our world.
With me as always are Dave Dykstra Kate Bogey, our General Counsel and Dave Starr, CFO. Again, the same format as we always have, I'll give some general comments regarding the results for the quarter. Turn over to Dave Dykstra for a more detailed analysis of other income, other expenses and taxes. Back to me for sort of a summary comments about the future, thoughts about the future, questions and off we go. Very pleased with the first quarter results, dollars 89,000,000, up 12% from the fourth quarter of last year and about three quarters percent from 2018.
Dollars 1.52 a share meet consensus, up 13% from the quarter from fourth quarter and 7% from last year. If you were to take out the mortgage servicing right adjustments in all three of those comparative periods, WinTrust would have made close to $95,700,000 in the first quarter, 1.64 a share of 12% from the $85,000,000 it would have made in the fourth quarter, 1.46 a share and up 21% from the $78,000,000 we would have earned in 2018 or $1.38 a share. So all in all, our performance is pretty good. We do get whipsawed by the last fifteen days every quarter lately, which seem to show some abnormalities in the rate movements, but it is what it is. Our margin increased nine basis points to 3.72% in the quarter from the fourth quarter.
ROA of 116 was up from 105%. Return on equity of a little over 11%, return on tangible equity of 14%. So good growth across the board for us in earnings and in the balance sheet, I'll get into a little bit of it. Results were achieved despite the $8,700,000 pretax MSR valuation adjustment due to the market volatility spreads in the last two weeks of the 2019. Just must be some about the last two weeks of the quarter.
Other one timers are marginally negative to the quarter results and are highlighted as follows. Negative $1,000,000 non taxable deduction for a fine was basically offset by unrealized gains on equity securities of $1,400,000 We had $464,000 gain on Canadian foreign currency, which was offset by really acquisition expenses and some other smaller items. So in this out, we had approximately $8,500,000 of pretax one timers, basically all due to the MSR valuation negatively affected our results. On the positive front, as I mentioned, our FTE margin increased nine basis points in the corner to 3.72% as kind of a high watermark for recent times. This coupled with an increase in average earning assets of $771,000,000 resulted in net interest income increasing approximately $8,000,000 during the quarter over the fourth quarter.
I believe that to be kind of remarkable given that the first quarter had two less days in the fourth quarter and each day is worth what Mr. Starr about $2300000.02500000.0 dollars pretax, so not bad. A little more on the margin, earning asset yields were up 16 basis points. While net cost of funds including free funds contribution was up seven basis points. CDEC deposits, all remember CDEC, Chicago Deferred Exchange Corporation, which we acquired mid month in December.
They experienced their expected seasonal drop in Q1, but we're still additive to reducing our cost of funds. As this was the first full quarter of CDEC deposits and they're only on the books for a couple of day really maybe half a month in the fourth quarter of last year, comparatives are somewhat meaningless. CDAC deposits were down approximately $200,000,000 quarter end versus quarter end and a bit more from on an average basis through the end of the first to the end of last year. We expect these balances to grow through the year due to both seasonality of the business and our marketing efforts with rates moderating, significant emphasis will be aimed towards holding down our cost of funds rate increases. The decrease in the overall rate environment has put an end a halt at least for the time being to our liquidity management laddering program.
We've talked about this in previous calls. We'll continue to monitor rate environment for opportunities to move forward with this plan. In that regard, the duration of our liquidity management portfolio moved down to 4.8 from five point eight five years at the end of the year, and it's almost seven years at threethirty one of last year. So you can see we're building up lots of liquidity. It can hurt the margin a bit, but we think it's the right thing to do.
Let's see. Period end loans exceeded fourth quarter average loans by over $334,000,000 as it has and we've seen the back end most of our loan growth will give us a head start on Q2 and bodes well for the net interest margin, net interest income. Our pipelines remain consistently strong across the board. In the first quarter, we saw a number of the pipeline loans where we expect to close in the first quarter in the commercial and commercial real estate side move into the first couple of weeks of April. They have moved through.
We've had good loan growth already this year's this quarter. And so we're feeling pretty good about that. However, we are seeing some additional rate compression and pay downs due to competitive pressures from both banks and non banks with the latter being the biggest culprit. That being said, we're still able to grow our portfolio in our terms and to continue to expect loan growth in the mid to high single digits. However, as with our peer group, the margin is a bit under assault, at least we're starting at a high point here.
We believe that we will do our best to mitigate any compression, expected balance sheet growth and lowering deposit rates should offset any small margin compression should it occur. We're not giving in on it. We believe that with rates moderating, we believe we can hold our costs down and we're still some give in the earning asset side because it does take a full year for any rate increases to work their way through the system. So we think we're in pretty good shape on the margin front. But like if I could predict accurately within the penny, I wouldn't be in this business, I'd be at a sports book someplace.
Other income other than mortgage related items was very good numbers. Mortgage was hurt by the MSR valuation, but and by the expected seasonal decline in volume. If you take those away, the mortgage issues area still made money. Wealth management continues its slow and steady growth. Fees up $1,300,000 over the 2018.
We're very happy with the results year over year. Assets under administration surpassed $25,000,000,000 so good growth there. Our expenses are pretty well aligned. We discussed in detail by Dave. Our net overhead ratio was high at 1.72 compared to 1.79% in quarter four.
If you were to back out the MSR valuation adjustment, these numbers would have been 161% to 169% respectively. So higher than what we want, was acceptable given the slow mortgage production, the overall mortgage business slowness we saw in the first quarter and a little bit in the fourth quarter last year. We're still on track with our operational efficiency initiatives in the mortgage area. Cycle times and production costs are down. We still have a ways to go to reach the desired efficiency levels.
We're on track for June 30 for total Phase one of completion of this work. On the credit side, credit metrics remain very strong. NPAs increased $1,000,000 in the quarter, 0.43% of assets down from 0.44% of assets at the year end of Q4. NPLs increased 4,400,000.0 while OREO decreased $3,300,000 Net charge offs for the fourth quarter were $5,100,000 or nine basis points, down from the $7,100,000 or 12 basis points we achieved in the fourth quarter of last year. Reserve coverage to the 134, pretty even with what we showed in the fourth quarter, but down from 150106% experienced at last March.
All credit remains very good. Our balance sheet growth, our ending assets grew $1,100,000,000 in the quarter, an increase of 14% over year end and 12% from year ago. Total loans, net of loans held for sale were approximately 400,000,000 quarter versus quarter and $2,100,000,000 over the year or 6.59% growth respectively. As mentioned, most of the growth was back end loaded. We started Q2 with a head start, we were close to $350,000,000 plus the carryover from what was expected to close in that quarter about $150,000,000 and we expected to close in the first quarter and moved over.
So we feel pretty good about where we are entering this quarter. Loan pipelines, as mentioned, are consistently strong, the second strongest quarter we've had in the last six or seven, the strongest quarter we've had recently has been the fourth quarter. We saw the momentum continue through the first quarter. 6.5% loan growth experience in the quarter, the respectable shy of our desired growth. But if you had added in what we expected to close in the first quarter and was pushed over, the number would have been closer to the number we'd like to get at.
We are concerned about payoffs, but we believe new business will cover the payoffs that we're seeing happen. Payoffs have basically been consistent for the last six or eight quarters anyhow, but they're higher than we'd like, but we're used to competitive markets here in Chicago. Deposits grew $710,000,000 and $2,200,000 quarter versus quarter and year versus year respectively. Translates to percentage of 1113%. On the deposit ratio, we turned the high end of our desired range of 85% to 90%, closing the quarter just a smidge above 90.
Our goal is to be within our deposit this our desired range. All in all, good consistent growth quarter for WinTrust. I'm going to turn it over to Dave to discuss other income and other expenses.
Speaker 2
All right.
Speaker 1
Thank you, Ed.
Speaker 2
As normal, I'll touch on the other non interest income and non interest expense sections. In
Speaker 1
the
Speaker 2
non interest income section, our wealth management revenue increased to $24,000,000 in the first quarter compared to $22,700,000 in the fourth quarter of last year and then up 4% from the $23,000,000 recorded in the year ago quarter. Brokerage revenue was down approximately $481,000 while trust and asset management revenue offset that decline by increasing $1,700,000 with the majority of that $1,700,000 increase related to additional revenue generated by CDAC due to a full quarter of activity with CDAC. A number of our assets that we manage are based upon the market value at the beginning of the quarter. So, we have a little bit of a good head start for the second quarter as asset valuations are higher at the beginning of the second quarter than they were at the beginning of the first quarter. So all in all, we believe first quarter was another solid quarter for our wealth management segment and we look forward to continuing to grow that.
In the mortgage banking revenue side, those revenues decreased 25% or $6,000,000 to $18,200,000 from $24,200,000 recorded in the prior quarter and was down from the $31,000,000 recorded in the first quarter of last year. The decrease in this category's revenue from the prior quarter resulted primarily from lower levels of loans originated and sold during the quarter and negative fair value adjustments recognized on mortgage servicing rights related to changes in rates and other valuation assumptions and the effect of payoffs. And that revenue headwinds were offset by higher average production margins on the loans that were sold. The company originated $678,000,000 of mortgage loans for sale in the 2019. This compares to $928,000,000 of originations in the prior quarter and $779,000,000 of mortgage loans originated for sale in the first quarter of last year.
The mix of the loan volume originated for sale related to purchased home activity was approximately 67% in the first quarter compared to 71% in the prior quarter. So purchased home activity continues to be the majority of our new origination activity, although we saw a slight uptick in refinancings due to the recent drop in rates. Page 21 of our first quarter earnings release provides a detailed compilation of the components of the origination volumes by delivery channel and also of the mortgage banking revenue, including production revenue, MSR capitalization, MSR fair value and other adjustments and servicing income. Given existing pipelines, we currently expect originations in the 2019 to increase nicely and should approximate at least $1,000,000,000 possibly could be higher than that, but we think it will at least be a $1,000,000,000 range right now given existing pipelines. Moving on, the company recorded gains on investment securities of approximately $1,400,000 during the first quarter, primarily related to the recovery of some of the $2,600,000 of unrealized losses we recorded in the prior quarter associated with an investment in a large cap equity fund that we seed with our asset management company.
Other non interest income totaled $16,900,000 in the first quarter, up from 6.3 up approximately $6,300,000 from $10,600,000 recorded in the fourth quarter of last year. There are two primary reasons for the improvement in this category of revenue, including a positive swing of $1,600,000 of foreign exchange valuation adjustments associated with the U. S.-Canadian dollar exchange rate. The current quarter has a positive valuation adjustment of approximately $464,000 whereas the 2018 had a negative adjustment of approximately $1,150,000 The currency rate volatility was abnormally high in the fourth quarter. It generally is $05,000,000 or less.
So that resulted in a $1,600,000 swing. And for your information, we've begun to disclose a line item for foreign currency valuation gains or losses in the non interest income tables presented in our earnings release. Next, BOLI income was up approximately $2,100,000 from the fourth quarter, primarily as a result of $1,000,000 of earnings on BOLI investments supporting deferred compensation plan benefits, which were positively impacted by equity market returns. And this was compared to $1,100,000 loss on such investments in the prior quarter. So we've got a $2,100,000 swing in BOLI earnings related to the deferred compensation plan benefits.
And this also results in a similar increase in our compensation expense recorded during the quarter. They're somewhat offsetting. If you look at the remaining $2,600,000 of improvement in the other non interest income section, it primarily relates to an increase from investments that we have in certain partnerships and card based and merchant service fees. Turning to non interest expense sections. Non interest expenses totaled $214,400,000 in the first quarter, up approximately $3,000,000 from the prior quarter.
Speaker 1
I'll talk about the few of
Speaker 2
the more significant changes. Salaries and employee benefits expenses category increased approximately $3,600,000 in the 2019 from the prior quarter. The increase was due to a variety of factors, including the $2,000,000 increase in expense related to deferred compensation plans impacted by the positive market returns on the BOLI products that I just discussed. So those again, those somewhat offset in the income and the expense section, but it was a $2,000,000 increase to the salaries as well as the $2,000,000 increase to the noninterest income. We also had the impact of annual base salary increases that generally took effect on February 1 and were in the 3% range.
We had a lower amount of salary deferrals as the loan originations were down a little bit in the first quarter compared to the fourth quarter. So there was less loan origination costs that were deferred. And then we had normal growth as the company continues to expand. These increases were offset somewhat by a lower level of health insurance claims. They tend to be lower in the first quarter as a lot of people try to get their health claims in, in the fourth quarter before their deductibles reset.
And so those were a little bit lower in the first quarter. And we also had a lower level of incentive compensation and commissions related to mortgage banking production management brokerage revenue. Professional fees decreased to $5,500,000 in the first quarter compared to $9,300,000 in the prior quarter. Professional fees can fluctuate on a quarterly basis based on the level of legal services, related acquisitions, litigation, problem loan workout as well as the use of consulting services. This category expenses came down substantially due to a decline in legal fees associated with litigation collections and acquisitions and also experienced a lower level of consulting engagements associated with technology enhancements and other initiatives.
We had quite a few of those engagements going on in the prior two quarters, which we didn't have this quarter. Amortization of intangibles increased by approximately $1,500,000 in the first quarter to $2,900,000 The increase compared to the prior quarter was primarily due to the amortization of certain acquired intangible assets related to the CDAC acquisition in 2018. And then if you look at all the other expense categories other than the ones I just discussed, they were up on an aggregate basis by only 1,600,000 from the fourth quarter and that included the $1,000,000 settlement payment on a regulatory matter, which was included in miscellaneous non interest expenses. So barring that, all the other categories were really up about $600,000 So nothing significant to talk about. And with that, I will turn my presentation
Speaker 1
back over to Ed. Thanks, Dave. Some thoughts about the future. For those of you who listen to our calls regularly, these summary statements are beginning to sound like a broken record. We stick to our knitting here, taking what the market gives us, not getting out over our skis.
And so we start the second quarter with very good balance sheet growth, strong earnings in spite the one time related MSRs. We start the second quarter with $350,000,000 head start on loans. Poland pipelines are very strong. We're booking loans on our terms. The non bank competition becoming more and more aggressive.
Our brand and the disruption occurring in our market is helping us to continue to gain share. The situation warrants that is our circuit breakers, which are pricing policies and oil policies trip, we won't be afraid to stop the boat as we have in the past. As of now, we see no reason to do so. Expect the margin that could be under a bit of pressure in 2019, but we think our expected growth deposit grade moderation, maintaining our strict loan underwriting guidelines and standards and pricing parameters, we expect to hold our own in this regard. Credit metrics remain strong, and we will continue to call the portfolio for any and all cracks and exit relationships where these cracks are found.
We always remember your first loss is your best loss, and we never want to kick the can down the road. It takes a full year for short term rate increases to work their way through our asset portfolio. Semberg increase certainly helped the first quarter margin, but this and the other increases which occurred in 2018 are still working our way through the system. This will help with mitigating any margin pressures we discussed earlier. Wealth management should continue their slow and steady climb.
In 2018, we opened 10 branches. We have the same number on tap pardon me, for 2019. Twenty eighteen branches are performing ahead of plan. Expect the same for the ones opening this year. We announced in the quarter our acquisition of Rush Oak and its subsidiary, Oak Bank.
We expect this transaction to close in Q2. Looks to us like pricing for banks and our asset in our desired asset range continue to become more reasonable. As such, our landing patterns are very full, but the gestation periods remain very slow. You can be assured of us consistent, conservative approach to acquisitions and other deals. We also continue to look for other earning asset niches we can jump into, but none yet.
We did open us our factoring operation, our vendor finance operation in the quarter, both of which are off to very good starts. We expect those portfolios to fill out over the rest of the year and they both have very good rates on them. So we're very comfortable with them that should help us. Lower ten year rate though hurtful in 2000 in the fourth quarter four, the first quarter of this year should have volumes in the upcoming spring Bryant season on the mortgage side. We continue with our cost cutting and efficiency progress in this business, many of which will be operational by mid year.
As a community bank, have to be committed and are committed to this business. We still want to achieve our net overhead ratio 1.5% or better. Achieving that number will in the coming year may be hard, the number of mid-150s is our goal for this year. In short, we're proud of what we've built over the last twenty seven years, then approach the rest of 2019, confidence we'll be able to achieve our goals of double digit earnings growth and continued growth in tangible book value. So as you can be sure to our best efforts, we appreciate your support.
We'll move on to questions.
Speaker 0
Thank you. And our first question comes from the line of David Long with Raymond James. Your line is open.
Speaker 3
Good afternoon, gentlemen.
Speaker 1
Hello, David.
Speaker 3
Regarding your expected IT spending, what are you thinking about with your core operating system and any expenses that you may have to make this year? And And then as a follow-up to that, just overall IT spending in 2019, what will we be looking at as a growth rate there versus 2018?
Speaker 2
Yes. We're doing a few things on that front. You can see if you look at our data processing line, we've had some declines there. We're renegotiating some a number of different contracts and trying to streamline some of that stuff. So we expect to get some savings out of that, which will be offset by additional expenses that we're doing for digital products and digital enhancements to the system and some other efficiencies that we're trying to do.
We haven't disclosed exactly what that number is going to be, but we've invested a lot over the last few years in the IT infrastructure side. I actually think what you'll see is those investments are already baked into the numbers from last year. They're actually going to moderate some this year as far as increases. So I wouldn't expect a large significant increase in the spending because we've done some other things to save
Speaker 1
offset that. As Dave says, we've not disclosed it, but we have gone back and looked at a lot of contracts and have been able to twist some arms and get some things out of them that should cover additional investments we're making. Continue to make investments in both the digital side and in information security and other issues. But hopefully, we can keep costs where they've been, maybe 1% or 2% given inflation. But when you read that, assume that we're not making the investment, the required investments.
We still live by our motto or save better products, save better delivery systems, kill them with service. And we continually look at our offerings and the offerings of our competitors, try to stay with them or ahead of them.
Speaker 3
Got it. And then one follow-up on deposit side. Living here in your market, I've noticed over the last six months a real slowdown in the amount of promotional deposit mailings that I've gotten. Have you seen any easing on some of the promotional prices that you've seen out there in for deposits?
Speaker 1
Absolutely. The third quarter last year, were getting like eight in the mail every day and e mails and what have you, it's slowed down, which gives us hope that we can continue our growth and moderate our deposit growth in the last month of the year. Half our banks showed the quarter, half our banks showed 0% increase in deposit costs and another half showed three or four basis points. We had a meeting yesterday beating up the guys on three or four basis points. I think our growth our goal is to grow continue to grow our core deposits without an increase in the cost of funds from the level it's at.
That's our goal. The mix of more CDEC deposits coming on should be helpful in that goal. Emphasis on getting more demand deposits through the commercial relationships that seasonally move a little at the end of the year in the first quarter. Hopefully, we can hold it on. We can do that.
And the increases that took place last year continue to work their way through the portfolio. And then we believe they can offset any spread compression on newer deals. But we think we're okay. I mean, there's probably a three basis point spread either way that we're looking at and we're looking at this really closely all the time. So we know the margin is under assault and our goal is to make sure we win that battle.
Speaker 3
Got it. Appreciate the color. Thanks guys.
Speaker 1
Thanks, David.
Speaker 0
And our next question comes from the line of Jon Armstrong with RBC Capital Markets. Your line is open.
Speaker 4
Thanks. Good afternoon.
Speaker 1
Hi Jon.
Speaker 4
Hey, just back to the margin question. Ed, in your prepared comments you said, I think your quote was NIM compression should it occur. And then Page one of your release, you talk about expecting pressure on the margin in the upcoming quarter. Just help us understand us just understand those two comments.
Speaker 1
Well, think that the issue is we're trying to hold it where we'd like to see it increase. I think we've got some things we can do to do that. But you never know. I mean, as I said, if I could predict this stuff, wouldn't be doing what I'm doing. I'd be at a sports book someplace.
We think that it could go 54 basis points either way throughout the course of the year. We're working to hold it steady. At least we'll start from a higher point. We know we'll have good asset growth from an NII standpoint. We think that that's a good thing.
But our goal is to maintain the margin and grow it. We're going to do our damndest to get there, but it's under pressure right now. And we think we can moderate our deposit costs. As I said in the last when I answered David's question, I think we can moderate our deposit. We can hold that steady.
And the increase in rate increase took place last year continue to work their way through the balance sheet. Hopefully, they can offset pressure on newer deals, but that's our goal.
Speaker 2
Maybe a better way to have said that was we expect some pressure that we expect some headwinds, which you can maybe offset, but whether it's pressure or headwinds like the one year LIBOR rate is down. So the repricing of the life portfolio wasn't quite as good as it was maybe three months ago. So there's some headwinds there, but it's up from last year.
Speaker 1
A little bit.
Speaker 2
Just barely. But so there it's not quite as good as it was. So there's some headwinds. Maybe headwinds is a better way than to say pressure. But as Ed says, we've got a number of different levers we'll pull and we'll have to see where the growth comes from.
But we're hoping to offset it. If there is some pressure, maybe a few basis points down. But it's possible that if everything went well with the cards, you could be up a couple, too.
Speaker 4
Okay. That helps. Just you read the release and you think that the margin is really going to step down, so that helps. Also a question on the pipeline. You talked about some of the deals falling into Q2 from Q1.
Curious how significant those the size of those loans are? And then the second part, in terms of the increased pipeline, how much of that is warehouse versus maybe just more broad based? Well,
Speaker 1
the first part of your question, we booked probably $160,000,000 of loans already this quarter related to that really should have closed last quarter. That's about the amount that was moved over. I know they booked. We give you these pipeline numbers. It's really our commercial real estate.
It doesn't include our life insurance portfolio, our premium finance, commercial premium portfolio, our leasing group and the other groups that the niche loans that are out there. So just to give you an idea, in December, we were $1,000,000,000.12 February, that's been the highest. This is gross, not affected by probability of close. We're 1,000,000,000.18 at the March. So again, up a little bit from the end of the year on a what's that on the sheet?
I was going to say on a weighted average basis, those numbers are relatively the same. Our pull through rates have been pretty good. So that being said, good if true, I guess. But we've got good history to back it up. Our leasing portfolio is doing nicely also.
What's going on in town here, bank that was sold here had a very big leasing portfolio, sold to a bank that also had a big leasing portfolio and some of the vendors used, we wanted an additional source. So we've been able to pick those up. We're also disruption in the market that's taken place over the last two years. We're still we're starting to reap the benefits of that. So we feel good about where we are in terms of loan growth.
But that's not to say that the non banks aren't making our life tougher.
Speaker 2
And John, just to follow-up on Ed's, I've got the detail he didn't have in front of him. $1,180,000,000 is sort of the thirteen month rolling average of our pipeline. At the March, we were $1,300,000,000 with the probability close of $812,000,000 And you compare that to the end of the year when we were $1,100,000,000 with a probability close of $6.71. So it's up over the end of last year and has actually grown a little bit. It's down a little bit from February, but just slightly.
So we're seeing good growth in that and the probability close is good. But like Ed said, you can't always make your customer close when they want to close. So sometimes there's a little back and forth between quarters.
Speaker 4
Okay. Got it. So big picture message, you're still seeing this high single digit growth and you're essentially going to fight the good fight on the margin, but some potential headwinds there. That's what you're trying to say. Is that right?
Speaker 1
Yes. I think that's fair to say. But notwithstanding, I mean, net interest income is what you have to look at and good asset growth will give us more net interest income. And so we got to look at where we were looking at the bottom line. We'll do our best to control the margin, but what are you going to do?
Speaker 4
Yes. Okay. Thanks for the help.
Speaker 0
Thank you. Our next question comes from the line of Casey Haire with Jefferies. Your line is open.
Speaker 1
Thanks. Good afternoon, guys.
Speaker 5
Ed, I wanted to follow-up on your you mentioned the leasing opportunity with all the disruption in your market. What else what other products? And then are you seeing any opportunities in the deposit side, just given all the disruption in your market? Are we in the early innings there? Or are there other examples, similar to the leasing one you cited?
Speaker 1
Well, on the commercial side, disruption is always good. One is our two biggest competitors in the last two years have sold, one to a Canadian bank and one to a Cincinnati bank. We're starting to see more opportunities out of the Canadian bank. There was acquired they acquired a local bank as they're getting more and more entrenched there. We're seeing more opportunities from there.
First couple of months, we've years we didn't see much. From the other bank, we are seeing opportunities. I know we booked a number of them already and more coming. So I think any disruptions is always good, especially in the commercial side. We think there's good opportunities for us.
A lot of people want to bank locally and with us and Midwest, the only games in town and we're triple the size of Midwest, and we think we do it better. We know we do it better. So we think on the deposit side, deposits obviously move with the commercial business. And on the retail side, we continue to stick to our tried and true method. Gets stickier with all the digital stuff that's out there.
We have to find a better way to do that. But with that being said, we've grown nicely in our new branches and our equity our new opportunities of where we've opened new branches and we bought banks, those are moving very well for us. So it's hard to pinpoint where they come from because we take as many from Chase and Bank of America and Harris as we do for anybody else. Retail deposits are tough. We've always taken share from people.
But on the loan side, we're taking it seems the opportunities are more than they've been lately. Is that okay? Did I answer your question?
Speaker 5
Yes. No, that's great. And just following up, I guess, on the M and A outlook. You guys have Oak Bank, I believe, closing this quarter. Is that opportunity set still a pretty good active one?
I would think it would be in the wake of just all the headwinds on subscale bank group.
Speaker 1
You hit the subscale bank. Like that subscale bank group. Never heard that put that way. Yes, we are into the subscale bank group and that's not underwater banks. We don't want those unless we get somebody to support the price like the FDIC.
But, yes, prices have come back to be attractive again. I think that many of these people thought after the Trump bump and some of the prices that were paid for banks immediately after that thought that they could command those prices. But now they see Democrats are going to have tax issues. The taxes could go back. You could they're having earning asset issues.
They've seen regulation may have they may not have as much new regulation, but the old stuff continues to filter down to them. And looking at it, I don't think they're going to go through another cycle again. So, as I said, our landing patterns are very, very full to the extent that we actually have to kind of sit in room and decide which ones we want to line up first and second and third. But the gestation periods remain longer than they should be. It's just internally, we're finding when you go through due diligence and we go through very deep due diligence, we seem to find some issues that require more work and on the tax side and then on the lending side.
So they're coming they take a little longer to get done than they used to.
Speaker 5
All right. Thank you.
Speaker 0
Thank you. Our next question comes from the line of Brad Milsaps with Sandler O'Neill. Your line is open.
Speaker 3
Hey, good afternoon, guys.
Speaker 1
Hi, Brad.
Speaker 6
Dave, Brad, just back to the NIM discussion. I just wanted to talk a little bit more about deposits. I was curious of the 700 or so that you brought on this quarter, it looks like it was a mix between a lot of various categories, but kind of curious what the average cost of those deposits were sort of relative to where you were for the rest of the quarter?
Speaker 1
I'll let Dave answer that.
Speaker 2
Brad, actually I don't actually have a weighted average cost on the new deposits. Obviously, price is up a little bit, but a lot of that is CDs maturing. We had pretty decent growth in the wealth management area. Those some of those come from some of our customers, but we also have some third party unaffiliated brokerage companies that place money with us. And so we had a little bit of that.
But we're having good success on sort of the money market and the savings accounts by marketing to our existing customers. We're really not outrunning the high priced ads that someone else referred to. It's just blocking and tackling and getting in front of them and providing them sort of standard promotions. So I don't have I'm dancing around your question because I don't have the number in front of me, Brad. But we're not running the unabsorbent special rate, if that's what you're driving on.
Speaker 1
I will tell you, half is we put is the curve flattened more in the month of March. Half the bank showed no deposit cost increase and the other half showed three basis or four basis point increase. Those are the ones that got beat up yesterday. They showed the three basis or four basis points, if that helps you any. And the growth across those banks was relatively consistent.
So we are moderating those costs now. And as David Long had asked, the competition isn't as bad. I mean, the smaller banks and the like aren't out there offering goofy rates. So there's for the shoppers, there's no reason to match anything. So we're very cognizant of what we need to do on the deposit rate side to maintain our margin.
We're going work our asses off to make sure it happens.
Speaker 6
No, that's helpful. And just to follow-up, if I heard correctly, it sounds like you once again brought down the duration of the liquidity book. Is there some thought to that the reason you're doing that is that are you looking to focus a little more on mix change and maybe that helps the NIM a little bit and you can hold on to a little bit more easily that way? Or am I thinking about that incorrectly that you're holding more cash in that book now?
Speaker 1
We are holding more short term securities in that book. That's correct. We would have thought we would like to be laddering out. We had started doing it and then we had to stop. Just so rates get higher, it makes no sense to ladder at these levels in our opinion.
Speaker 6
Okay. And then just final question on the on your guidance around $1,000,000,000 in mortgage or so for the quarter, Dave. How much do you siphon on and off the correspondent network? Is that is most of that $1,000,000,000 coming through your retail channel that carries a higher gain on loan sale margin? Or how do I think about that mix kind of going forward?
I know what you prefer, but just kind of curious how to think about it.
Speaker 2
Out of our $678,000,000 that we originated for sale in the first quarter, it was about $148,000,000 Our thought is that it's probably very similar number in the second quarter. So out of that $1,000,000,000 plus or minus number, maybe 150,000,000 would be correspondent. We're actually seeing good origination in our legacy retail origination and some increases in the Veterans First too. So I think the big jump will be in our retail origination platform, some in Veterans First, and I expect correspondent to be relatively flat.
Speaker 6
Great. Thank you, guys.
Speaker 2
Thank you.
Speaker 0
Thank you. And our next question comes from the line of Michael Young with SunTrust. Your line is open.
Speaker 7
Hey, good afternoon.
Speaker 1
Hello, Michael.
Speaker 7
Just a quick follow-up, kind of danced around the margin question a good bit. But in the press release, it was stated that you expected the margin to be down next quarter. But it sounds like you may be backing off that a little bit depending on what you can do on the deposit side. So just in terms of pretty near term, should we still think down in 2Q, but then we hope to defend it for the rest of the year?
Speaker 2
I think when we're answering the prior question, maybe the answer to that is that we should have said there'll be some headwinds to the margin versus pressure on the margin. There are headwinds, so we're going have to fight to keep it there. But as Ed said on the prior call, it could be down a few, it could be up a few, but it just depends on the mix and how we do on CDEC deposits and some other things. So we're not guiding that it absolutely will be down. We're just indicating there might be some headwind.
Speaker 7
Okay. And on the growth, just curious how much of that is kind of new production that you're putting on versus are you seeing any increases increases in utilization levels on C and I lines or even in the dollar volume in the premium finance business?
Speaker 2
Well, we're not seeing big increases in line utilization. So they're fairly standard. Property casualty, as you'd see, we had fairly good growth in that this quarter. So there's a little bit of firmness in the market where premiums are going up a little bit, and we're getting a little bit of the business back from the regulatory issue we had where we don't have to do certain tin collections anymore. So we're getting some of that business back and then just our teams out there selling good service.
So we're seeing some good growth
Speaker 1
there. Yes. The regulatory issue wasn't for those of you who knew, wasn't particular to us. It regulation was that the Fed was following that said we had to get 10 numbers on all our commercial premium finance contracts. Our competitor our major competitor is a non bank and sold against us.
We for the three years that was going out, we probably lost 10% of our book and had a fight like heck to remain to keep our overall outstandings constant. Through the work of Mr. Dykstra and a number of people, we've been able to get that all reversed. FinCEN reversed it. So the regulatory issue had nothing to do specifically with us, which should do with getting a law changed, which Mr.
Dykstra went to Washington and met with Henscheling and Shelby and all the quarrels and all the powers that be and got them to change the law, which is pretty remarkable. But I just want to make sure you knew that it had nothing to do with us. But we are fighting to get that business back that we had lost. And unfortunately, it's the business we lost was our more profitable business, kind of a smaller ticket trucking business, things like that, that might have been a lot higher late fees and what have you. So we are working to get that back.
Little by little, we expect that to occur, but we'll go from there.
Speaker 0
Thank you. Our next question comes from the line of Chris McGratty with KBW. Your line is open.
Speaker 7
Hey, good afternoon. Dave or Ed, maybe a kind of a high level question on capital. I know you don't have the authorization for a buyback, but just kind of interested in your thoughts philosophically, where your stock's trading, given the fall in rates. And you guys, I think, talked about potentially doing one with some sort of a debt component. Any kind of thoughts on buying your stock where it is today?
Speaker 1
Well,
Speaker 2
we don't have a buyback in place. It's something that the Board can look at. It's probably a good practice to have a buyback in place at any time in case, you find yourself in a position where you want to do it. So that's something we will look at and the Board will look at, but we don't have one in place right now. From a capital side, We understand rates are low.
If a lot of these acquisitions that we've talked about actually come to fruition, we'll need some cash and probably some capital to support that growth. If that's the case, like you said, interest rates are pretty low. So we'd probably look at sub debt or preferred, although I think sub debt as a tax deductible method is probably a little bit more attractive at this point of the interest rate cycle. And if it's just cash, you need to get the deals done. If they're cash deals that we're doing, then that would suffice.
But we would just have to look at the time that the buybacks in place and if you had capital and excess cash, where the stock price was at and we'd make a decision. But I'm not to say on the call, we're going to do one thing or the other, but we will look at putting a buyback authorization in place.
Speaker 1
Yes, I think it makes sense to have one. The other thing is most of the acquisitions we do are probably half stock, half cash. So that helps us from a tangible book value's point of view and works across the board. So I just want to most of the deals we do are half and half, some are a little bit more stock depending on the ownership of the target. We want to get more tax free treatment and like the value of our stock where it sits.
We'll be raising capital that way too, if in fact, these come to pass. But as you know, our track record has always been we're very good stewards of our shareholders' money. And we do an offering, there's some usually that means there's some come behind it.
Speaker 7
Understood. Yes, I totally understand. Maybe one more on the margin from a different angle. Some of your peers have been a little bit more aggressive in taking down rate exposure, asset sensitivity, if you will, given kind of the rate shift that we've seen in the last six months. How should we be thinking about any tweaks to the structure of the balance sheet maybe over the next six months to protect against downside risk?
Thanks.
Speaker 1
We have if you look, I forget what page is on. We have look, we have taken our position down to probably by about a third. I got to look it up.
Speaker 2
No, we're moderating our asset sensitivity right now, Chris. And so if you look in the press release, we've gone from 9% on a ramp scenario for a 200 basis point increase down to 6.7%. And on a downside, we've reduced from 4.8% to 3.3% on the downside. So we're trying to narrow that gap and we're doing that by doing some additional fixed rate lending and extending out that, which we didn't do much fixed rate lending before. So we're doing a little bit more of that and just working with the liability and the assets side gradually to moderate that asset sensitivity.
Speaker 7
Great.
Speaker 1
We're And maybe one more on seeing the need to do more fixed rate assets. Given the way the rate environment is right now, you can do a fixed rate asset and buy a cap on it for not a lot of money. So we're looking at that to get our upside squared away, but protect our downside also. So we never really did a lot of fixed rate loans, but we're seeing some like in the life insurance market, we're seeing more fixed rate. People can't have a fixed rates that we want to be able to match and we want to protect our upside.
It helps our downside protects our upside. I'm all for it. So the rates are kind of the market is kind of accommodating for us in that regard.
Speaker 7
Great. Thanks. And Dave, maybe quick on the tax rate. This is good rate for the rest of the year?
Speaker 2
No. Actually, first quarter tends to be our lowest tax rate because we have the benefits of the excess tax benefits from stock option and restricted stock exercises. So our effective tax rate in the first quarter was 24.86 compared to last year in the first quarter was 24.14. Percent. But generally, I think it's probably closer to the 26% range.
Speaker 7
Got it. Thanks.
Speaker 0
Thank you. And our next question comes from the line of Kevin Reevey with D. A. Davidson. Your line is open.
Speaker 1
Good afternoon. Hi, Kevin.
Speaker 8
Ed, I just wanted to make sure I understood your commentary with respect to your net overhead ratio. So you're committed to a 150. Is that for the full year of 2019? Or is that to get to that level at the end of 2019?
Speaker 1
I think what I said was long term, our goal is to be 150 or better. If you took away the MSRs, were 161 this quarter compared to 169 in the fourth quarter taking away the MSR hits. If you I said what I said was, it'd be hard for us to hit that goal this year. We're looking at the mid to high 150s as our goal for 2019.
Speaker 8
Great. Yes, got that. And then your comment on the factoring business that you just started. Could you give us some color as to where that's located, staffing, etcetera, and the type of deals that you've been doing?
Speaker 1
Well, the vendor finance is off to a great start. They're up to 20,000,025 million dollars in outstandings. The deals in the 7% or 8% area. They're out in California. We have like three businesses out in Orange County now where some of our leasing business is out there, this guy.
So we're off to a very good start. On the factoring side, this is a logical adjunct to our asset based lending side to move down into the factoring side. So it's not and that's just fledgling now, but the pipelines look very good there. Our goal would be on both of those new businesses to get them up over the next three years into the 300 to $400,000,000 range. Their rates are very good.
And interestingly, when we studied the factoring business, as we're going be doing it is really the lower end of our asset based lending, our ABL opportunity, our ABL business, it gets really good when things get tighter. It's better when things are bad. It's kind like our franchise business is better when things are bad. Other people eat more at Applebee's or McDonald's than they do when things are good. So it's a nice hedge in there.
But they're both off to good starts. I hope that answers your question, Kevin.
Speaker 8
That did. Thank you very much. Appreciate the color.
Speaker 1
Thank you.
Speaker 0
Thank you. Our next question comes from the line of Terry McEvoy with Stephens. Your line is open.
Speaker 1
Good afternoon. Hello, Terry. Hi. Just one question. I was hoping to get your thoughts on your $8,900,000,000 commercial finance portfolio.
How much of that is QSRs? I did notice a little bit reserve building in the quarter, but that maybe just reflected growth. And just an overall big picture view there.
Speaker 2
Well, we have we've got about $880,000,000 franchise loans that you're referring to. And most of those franchise loans are franchisors similar to McDonald's, Taco Bell, Dunkin', etcetera. So Arby's, Wendy's, those sorts of franchises.
Speaker 1
We as you recall, if you remember the third quarter, it was third quarter last year where we added three problem loans that we're trying to exit out of through the non accrual list. And everybody kind of had a hard, oh, your non accruals are up higher. One of them, they went from nothing to next to nothing. One of them was a franchise deal. It's a franchise that covered the entire state of Wisconsin.
The franchise itself is doing very well every place else except in that market. And that had to do with franchisee not following through on things he should have followed through on. That loan will be paid off through the sale of that franchise in May, in mid May is the plan. All losses have been taken on that. So I think our reserves grew up a little bit because we the loss we took there and the experience we had there plus the specific reserve related to For growth.
Yeah, so the growth. So take a charge on something, you expect that reserve factor move up a little. And that's what it did. But the rest of the portfolio is operating just fine. That was kind of a one off.
Speaker 2
I know there was some noise in the industry over the last week or so about another deal, but we're not seeing any specific stress in our portfolio other than that deal that Ed talked about that we referred to in the third quarter of last year. That's what I wanted to hear. Thank you. Thank you.
Speaker 0
Thank you. And our next question comes from the line of Nathan Race with Piper Jaffray. Your line is open.
Speaker 9
Hey guys. Good afternoon.
Speaker 1
I don't
Speaker 9
mean to beat a dead horse on the NIM, but just kind of thinking about the trajectory of loan yields from here. It sounds like you still have some positive repricing going on from previous rate hikes. So I guess I'm just curious kind of what the weighted average rate on new loan production is today relative to the portfolio yield at 5.06?
Speaker 2
Well, it really depends on the mix, Nathan. I mean, the premium finance loans are on the commercial side are higher than that. Commercial real estate that's fixed rate would potentially be higher than that. But if you do just a straight commercial loan or the life loans, they tend to be lower than that. So it's really sort of a mix and you've really got to break it down.
So we can tell you what it is, but if premium finance is a lot better or a lot worse next quarter, it's going to go up or down. But I think generally, on average, we're doing well there and we have some tailwinds with the premium finance portfolio.
Speaker 9
Okay, got it. And then just lastly, any updated thoughts on perhaps hedging out your MSR going forward?
Speaker 2
Yes. We're going to second quarter,
Speaker 1
will
Speaker 2
have some downside protection there and do some hedging. It won't be a full hedging program, but we are taking some actions to limit the downside without really stripping away the entire upside.
Speaker 1
Yes. We finally we found hedges, you get all sorts of different thoughts and plans on how to hedge MSRs and many of them could go the wrong way on it quickly. We found one where we think of it is protect the downside and keep the upside alive. And given the shape
Speaker 2
of the yield curve, some of those options are more affordable now than they have been in the past.
Speaker 9
Okay, got you. And if I could just ask one more on expenses. Assuming mortgage volumes are kind of flat year over year, can you kind of give us some parameters of what we can expect in terms of all in expense growth in 2019?
Speaker 1
Depends on deals done. It's a hard thing to do because we have
Speaker 2
the leasing number out there. And if you grow that business, those expenses go up and we have acquisitions in there and the like. So certainly, you want that growth. As we said in my comments earlier, the salaries are going to be up 3%. But we try to keep the same store sales number down to sort of low single digits.
But then if you had the growth through the branches and you have acquisitions, that number can change. But clearly, if we want to grow that number, where we can get leverage out of it. So low to mid single digits on same store sales is probably the answer.
Speaker 9
Okay, got it. I appreciate all the color. Thank you.
Speaker 0
Thank you. Our next question comes from the line of Brock Vandervliet with UBS. Your line is open.
Speaker 10
Great. Thanks for the question. Dave, so the deposits have flowed out. I'm assuming that seasonal. I would think they would come back in pretty heavily in the second or third quarter.
Speaker 1
Is That's that been their history, yes. They haven't really marketed a lot. And we actually are putting a marketing team together. And so we hope to there's only eight people work at C Tech. It's generating these numbers.
It's a wonderful business for us. And we've never marketed it and we're going out to do that. So hopefully, we can build on the seasonality also.
Speaker 10
And would that allow you to then pay down the FHLB a little bit?
Speaker 1
FHLB, use I like to use it to cover the mortgages held for sale. We access liquidity, we won't bring it out. But the FAA it's a nice book and match for us to use those overnight funds, cover the mortgages held for sale. But I got overall liquidity position, sometimes it's lower because we don't need it. You want to grow something, you get nowhere to put the money.
But that's how I like to use Federal Home Loan Bank advances. Sometimes we use we've got some term out there for asset liability for matching purposes, but most of it's overnight.
Speaker 2
Yes. And that's really what we did at the end of the first quarter was we paid down a lot of the other wholesale funds. So to the extent those FHLBs come due and we have the excess, but at the end, as Ed mentioned, CDEC deposits went down a little bit just because of the seasonality. We expect them to come back up. So we maybe had a little extra wholesale funds to cover that gap where their deposits went down, but we expect that to translate back into CDEC funds in the second quarter here.
Speaker 1
And our plan with CDEC funds is only to keep on our books whatever the rolling twelve month averages, so we don't become overly dependent if something were to happen. But the good news is we make a nice spread on what we don't keep as we sell they sell that in the to other banks as funding. So we get X, they get X plus 1% or 2%, one percent point right now. That's fee income to us. So we like that too.
Speaker 10
Got it. And separately, you're kind of scratching the laddering program for now. I'm assuming we should build in less investment securities growth as a result?
Speaker 1
Yes, long term. We'll still have investment securities, but that will be shorter. So mostly have to work on your yield, not your band. We're not keeping all Fed funds, but we'll go out sixty, ninety, one hundred and eighty days, but not seven years or five years or whatever.
Speaker 10
Right. But just in terms of the growth of that portfolio, I'm assuming it should grow somewhat more slowly.
Speaker 1
Of the longer end of it, yes.
Speaker 3
Got it. Okay, great. Thank you.
Speaker 0
Thank you. Our next question comes from the line of David Shavarini with Wedbush Securities. Your line is open.
Speaker 11
Hi, thanks. Couple of questions for you. So I just want to clarify the loan growth guidance. So I think in the prepared comments you had mentioned mid to high single digit, growth. Then, in response to an earlier question you had referred to high single digit.
I don't want to parse your words too much, but just curious as to what the official message is there.
Speaker 1
Mid to high.
Speaker 11
Got it. Thank you for that. So it's seven and a okay fair enough. And then a follow-up on the C deck. So when do you expect to reach that sort of twelve month kind of pro form a average such that we wouldn't see the volatility of a couple 100,000,000 per quarter?
Speaker 1
Well, you'll always see that volatility because that twelve month because of seasonality of the business. So you'll always see some movement there, but you figure $1,000,000,000 was what their twelve month average was and then it fell off. By the fourth quarter, we expect to be back to 1,000,000,000 point dollars plus our existing whatever growth we have. So whatever growth that we bring in, in excess of what they've been doing historically. Does that make sense?
Speaker 7
Yes. I thought that the idea quarter
Speaker 2
tends to be the so if you're an average, obviously, some quarters are going be below and some are going to be above. And first quarter is a seasonally slow quarter. So I would expect this actually in the fourth quarter tends to be very large. So in the middle quarters, you're probably right around that average. So I would expect to be much closer to that average in the second and third quarter.
Speaker 11
Got it. I thought the idea would be that we would see the volatility in the fee income line but not on the deposits you would actually hold on balance sheet.
Speaker 1
I think you'll see them both. Just
Speaker 2
if you're going to stay at the average, you're going to have a couple of quarters that are below and a couple of quarters that are above. And hopefully, it's not that wall of a swing. But even if there's a couple of 100,000,000 for a month or so, we can easily cover that with other sorts of funding in the interim. So I'd try to think of it as an overall average for the year and not worry about the exact timing of the months and the quarters.
Speaker 11
Okay, got it. And then shifting gears, you had mentioned about and I missed what you were referring to, but you said by June 30, Phase one would be completed related to some work that you have going on. What were you referring to with that?
Speaker 1
It was our mortgage business, our mortgage efficiency initiatives, where we're we put in a totally electronic front end. We're now marketing. Our goal is to get more of the business through this front end than through the normal the historical way of loan brokers, our originators out there. We bring it in through electronic front end, you can cut your commission expense down to 30% from 50%, 52%. That's a good thing.
So that should help mitigate that expense. It also has added to has helped us reduce cycle time. We can get things done faster by doing this. So increased cycle time means less expenses associated with it. And we're also looking at outsourcing some work that's now done internally.
That's on a variable basis under the outsourced approach as opposed to a fixed basis. So like in the first quarter, had a lot of costs and not the business. If we move some of this non customer facing work to a variable basis at about 40% to 50% of the cost that will help us tremendously. It also can be done because of the location of the outsourcer. It can be done at night while we're sleeping should help cycle times too.
So we're working on a number of those initiatives that should help bring down our overall costs of doing business over the long term. So again, if get we right now, we've got maybe 80%, 90% of our business coming through the old fashioned distribution method using the mortgage broker. We get that down to 50% and can cut expenses related to commissions down to 30% of that, that's real money. So those are the things we're working on is to get more and more efficient in this market area. We're also testing out some other areas where we can utilize robotics to do monotonous sort of work.
So we're really moving ahead on this stuff and that's but Phase one doesn't include robotics. It just includes some of the things I just discussed. So breaking costs out of mortgage and making them more variable, therefore making the whole business more profitable on a consistent basis.
Speaker 11
I see. So okay, so June 30 is the completion of Phase one. What's the timeframe to complete the project?
Speaker 1
Probably forever. We'll always be looking at ways to do this. I think this is a business that's becoming more commoditized and it's one that we believe that if we can add personal service to the commoditization of the business, we can have the best of all worlds. People can still go in their bank and get this stuff and know the person they're dealing with and that somebody on a screen, think we can serve our clients very well. So what's the end?
There'll never be an end. We'll always look to be more efficient. So this is just some of the low hanging fruit we can take down. Phase two can be the robotic side and some other outsourcing that we can do. Non customer facing outsourcing.
We got to walk before we could run here. So we expect continued improvement in the overall profitability of the mortgage business, notwithstanding what goes on with the actual sale margins themselves, just the production side.
Speaker 11
That makes sense. Thanks very much.
Speaker 0
Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Ed Wehmer for closing remarks.
Speaker 1
Thanks everybody for dialing in. And if you have any issues or other questions, feel free to call Dave or myself. Thank you very much.
Speaker 0
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.