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Wintrust Financial Corp  (NASDAQ:WTFC)
Q3 2018 Earnings Conference Call
Oct. 18, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Wintrust Financial Corporation's Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following review of the results by Edward Wehmer, Chief Executive Officer and President; and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session.

During the course of today's call, Wintrust management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking statements.

The Company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in the third quarter 2018 earnings press release and in the Company's most recent Form 10-K and any subsequent filings on file with the SEC. And as a reminder, this conference call is being recorded.

I will now turn the conference call over to Mr. Edward Wehmer.

Edward Joseph Wehmer -- Chief Executive Officer and President

Good morning, everybody, and welcome to our third quarter earnings call. With me always -- as always we have Mr. Dykstra, Kate Boege, our Legal Counsel or our General Counsel and Dave Stoehr, our CFO. We'll use our usual format, with me giving some general comments on our results, turn over to Dave for a more detailed analysis of other income, other expenses and taxes, back to me for some summary comments about and thoughts about the future, and then turn over for some questions.

So we're pleased to report our 11th straight quarter of record earnings. Net income of almost $92 million or $1.57 a share. We're almost -- we're 40% better than last year on pre-tax earnings, which we look at to take out the effect of the tax cuts, we're $122 million, up 18% from the last -- the same quarter last year. Year-to-date basis, we're $4.50 a share, up 28% on annualized basis and 28% on earnings of $264 million approximately. Pre-tax income up 16.5% to $352 million. Our margin decreased by 2 basis points, ROA was 1.4% (ph) and all are pretty good results.

As readily apparent, our growth trends remain consistently positive, few blips this quarter, which will need some discussion and clarification, specifically net interest margin dropping 2 basis points, one-time changes related to the completed acquisition of Delaware Place Bank, and the moderate respective increase in NPLs. These issues will be discussed in detail.

As relates to the margin, the net interest margin decreased 2 basis points over the second quarter and increased 18 basis points year-over-year. Net interest income grew $9.4 million over the second quarter, due to one more day good earning asset growth, including our loans. Our average earning assets grew $880 million (ph) versus the second quarter, average loans, net of loans held for sale grew $539 million, the remainder of the growth falling into our liquidity management portfolios.

Quarter three period end loan (ph) balances exceed average loan balances by approximately $326 million, which bodes well for the fourth quarter. Earning asset yields increased 15 basis points versus second quarter, while interest expense increased 17 basis points. The free funds contribution was a 2 basis point increase, resulting in that 2 basis point decrease in margin.

Our average loan to deposit ratio for the quarter decreased to 92% from 95.5% in the second quarter. This obviously still remains higher than our desired range of 85% to 90%, which shows pretty good improvement in accordance with the plans we laid out earlier -- in earlier calls. This is a direct result of our core growth initiative, represents a start to our liquidity deployment strategy, which we have also discussed in previous calls.

With the long end moving higher, we've begun lengthening the duration of our liquidity management portfolio. This will be a measured approach and obviously depend on the rate environment. During quarter three, we invested approximately $200 million, which equates to about $75 million on average in longer-term assets and did another $200 million beginning at the fourth -- this quarter.

On a static basis, i.e., just looking at quarter three ending numbers, we need an extra $1 billion to get to our loan-deposit ratio, to the midpoint of our desired loan to deposit range. As you can expect us -- as such you can expect us to continue to push core deposit growth above and beyond what is needed to support loan growth, and deploy those assets in accordance with the aforementioned plan. Obviously, this all depends on the rate environment that we are moving into.

It should be noted that we invested the entire increase in liquidity management, that if we had invested the entire increase in liquidity management assets in the quarter, and not in overnight funds, our margin actually, probably, would have been up in Q3. As mentioned, Q2 was a good quarter for core growth. Our deposit marketing coupled with the successful opening of four new branches and the acquisition of -- on top of the five we opened in the second quarter, the acquisition of Delaware Bank contributed to the $552 million of deposit growth. Our deposit marketing should continue to be effective, so we expect this good growth going forward, and continued progress being made in the loan to deposit ratio in our desired range. Our deposit rate has remained in the range we previously communicated to you.

That we are still very asset sensitive, the additional rate increases, including the one announced in mid-September should still add to the bottom line, despite this increase deposit beta. Every 0.25 point increase, fed funds should add north of $200 million (ph) to net interest income at an annualized basis. The number hasn't changed from past discussions due to the increase in size of our balance sheet. As such, with future rate increases we anticipate our net interest margin to grow slowly but surely over the long term, mitigating factors will be the timing of the execution of the liquidity strategy. (inaudible) it's a full year for these rate increases to work their way through our balance sheet. So the balances of some of the past increases are still being realized.

On the credit front, credit remains good, but everyone know they couldn't stay this low forever. Non-performing loans in the quarter increased approximately $37 million, primary due to the addition of four relationships totaling $46.6 million. Two of these loans totaling $29 million were current, when we turned them on non-accrual as part of the planned exit strategy. The other two loans are in a process of liquidation and collection. Recorded $7.5 million specific reserves on these loans. Those who have followed us know that it is our culture to be very proactive in the area of credit.

We would expect these credits to be cleared by the first quarter 2019. As of now, we do not see this as a deterioration of overall credit numbers, and our ratios are still well below our peer group. So matter of fact, if we hadn't been proactive on these, our non-performing loans actually would have been down, we're up $37 million in non-performing loans, (inaudible) related to these four credits, would have been down. So we don't think it's a trend. However, you do know that we do identify loans with cracks in them, identify exit strategies and it will take some time to execute these sometimes. And that's what we're doing here.

Net charge-offs totaled (inaudible) decreased by approximately $7 million a quarter, as we consider to clear these out. Charge-offs totaled $4.7 million. Charge-offs of $7 million were offset by recoveries of $2.3 million. Net charge-offs plus the increase in specific reserves and loan growth resulted in a provision of $11 million, up $5 million from the previous quarter.

So in summary, in spite of a quarter of many blips, credit remains pretty darn good. Total NPAs as a percent of assets increased to 52 basis points from 40 basis points, which is still pretty respectable. Reserves as a percent of NPLs was at 118%, down from 156% at the end of quarter two. Provision as a percent of loans annualized was only 19 basis points, which is still a really good number. We continue to cull the portfolio for cracks and we'll expeditiously move assets out when any such cracks are found. We'll also continue to aggressively work our OREO portfolio to clear the decks. And as I previously mentioned, we don't see this quarter's many blips as an increasing trend. But we all know credit couldn't stay as well as it has been -- as good as it's been forever.

On the other income and other expense side, Dave is going to go though this in detail momentarily, but just a couple of general comments. Dave will take you through the specific numbers in the mortgage area. I will say, though, that we are on track in our efficiency moves in this area that I talked about last quarter. The majority of these initiatives will be totally in place in the first quarter of 2019 and more of the efficiency moves will certainly follow. This market is such, is we've got to drive costs out and there's beginning to be somewhat of a shake-out in this market. So this year, there will be reasonable opportunities there, but will always be subject to the seasonality in the mortgage market.

Our wealth management operations continue to improve. Assets under administration grew by approximately $1.4 billion in the quarter to just about $26 billion. Managed money accounted for $670 million of this increase, which bodes well for future revenue growth. The remainder of growth was in brokerage we realize on trading for revenue. Revenues for the quarter stayed steady at $22.6 million. We expect that to continue as we continue to build -- to continue to increase as we build our -- we continue to build our managed money portfolio.

One-time items, as we view them basically, were offset each other in the quarter and our net overhead ratio for the quarter was at 1.53%, down 4 basis points from quarter two, but above our target of 1.50% or better. Given our overall (ph) growth, we're happy with this number and with the number of branches we've opened, the expansion we're doing, and new initiatives we're doing. Given our overall growth, we're happy with this number, believe our continued organic asset growth will bring this number in line, as we fill out our inefficient branches with good solid (ph) relationships.The net overhead ratio of 1.50% still remains our goal, and we believe it is attainable.

On the balance sheet side, assets grew to over $30 billion, for the first time increasing by $678 million in the quarter. $274 million of this growth could be attributed to Delaware Bank acquisition. I got to tell you, I still pinch myself, I think from a (inaudible) less than 27 years ago to $30 billion, pretty amazing. Loan growth, which is aided by the acquisition of Delaware Place to the tune of $151 million, grew $515 million in the quarter. All categories in residential mortgages and home equity lines grew in the quarter. We continue to achieve muted growth in the commercial real estate area, as payoffs continue and new opportunities are aggressively priced. Same is true for our sponsored equity or private equity-backed deals. Most of our private equity firms are selling (inaudible) down right now, given the frothiness of debt market, and we're getting refinanced out of other deals based on the aggressive nature of non-bank lenders.

Loan pipelines remain consistently strong. Deposit growth was discussed previously. Needless to say, we are heartened by the success, are flipping the switch to concentrate more on organic growth, like we made our goals on originally, through both the opening of new branches and growing underutilized locations is working. We intend to continue our marketing here and also across several other services accounts, these new relationships. This will fund our liquidity play and bring our loan to deposit ratio back to the desired range. That's not to say we are not interested in acquisitions, though. Although expected pricing is relatively high right now, we're willing (ph) to take what the market gives us and stay disciplined on our approach to deals. The acquisition of Delaware Place Bank is being assimilated well. We look forward -- and we look forward to completing the previously announced transaction, acquiring certain assets and liabilities of American Enterprise Bank, to expect a close in the fourth quarter. All along we're pleased with the quarter, and why not be happy pleased with a record quarter.

Now, I'll turn it over to Dave.

David A. Dykstra -- Senior Executive Vice President and Chief Operating Officer

Thanks Ed. As normal, I'll touch briefly on the non-interest income and non-interest expense sections. In non-interest income section, our wealth management revenue held steady at $22.6 million in both the third and the second quarters of this year and was up from the $19.8 million recorded in the year-ago quarter. Brokerage revenue was down approximately $205,000, while trust and asset management revenue offset that decline by increasing $222,000. Overall, as Ed mentioned, we believe the third quarter was another solid quarter for our wealth management segment.

Mortgage banking revenue increased approximately 5% or $2.2 million to $42 million in the third quarter from $39.8 million recorded in the second quarter and was also up from the $28.2 million recorded in the third quarter of last year. The increase in this category's revenue from the prior quarter resulted primarily from loans originated and sold during the quarter, offset by slightly lower production margins on slightly higher origination volumes.

The Company originated approximately $1.2 billion of mortgage loans in the third quarter of 2018. This compares to $1.1 billion of originations in the prior quarter and $1.0 million of mortgage loans originated in the third quarter of last year. The $56 million increase in origination volume was attributable to $187 million increase in our correspondent origination channel, offset by lower volumes in our retail origination channel. Originations related to the Veterans First consumer direct origination channel was essentially flat with the prior quarter. The mix shift contributed to the margin compression, as margins on correspondent originations are lower than our retail origination business. Additionally, the mix of loan volume related to purchased home activity was approximately 76% compared to 80% in the prior quarter.

Page 22 of our third quarter earnings release provides a detailed compilation of the components of the mortgage banking revenue, including production revenue, MSR capitalizations, net of payoffs and pay downs, MSR fair value adjustments and servicing income. Given the pipelines, we currently expect originations to soften somewhat in the fourth quarter, due to increased market interest rates and the seasonality of the business.

Other non-interest income totaled $16.2 million in the third quarter of 2018. This was up approximately $2.1 million from the $14.1 million recorded in the second quarter of this year. There are a variety of reasons for the increase in this category of revenue, including an increase of $1.1 million related to income from investments and partnerships; those are primarily FCRA, SBIC- related partnerships. An increase of approximately $1.6 million related to settlements on BOLI policies. A positive swing of $0.9 million of foreign exchange valuation adjustments associated with the US-Canadian dollar exchange rate. And this was offset partially by a lower level of interest rate swap fees of approximately $1.5 million.

Turning to the non-interest expense categories. Non-interest expenses totaled $213.6 million in the third quarter, increasing approximately $6.9 million from the prior quarter. The increase was primarily attributable to approximately $2.2 million of higher salary and employee benefit expense, $3.4 million of higher professional fees, including approximately $2.1 million of mostly non-recurring consulting fees associated with the Delaware Place Bank acquisition, which I will address later; $194,000 of severance and conversion-related costs associated with that acquisition and just other general cost increases as the Company grows.

Turning to the specific detail. The base salary expense increased approximately $2.9 million in the third quarter of 2018 over the second quarter of this year. Approximately $0.5 million of the increase related to the Delaware Place acquisition. And the remaining increase related to the impact of the nine branches added during the second and third quarters of 2018 and normal growth as the Company continues to expand, including further build-out of our IT and information security teams to make sure we're keeping up with technological changes and addressing increasing cyber security risks in the marketplace.

Commissions and incentive compensation expense decreased approximately $1.9 million to $34 million from $35.9 million in the prior quarter. The Company experienced a declining commission expense of approximately $1 million, primarily due to the mix of mortgage origination volumes being more heavily weighted in distribution channels that carry lower commission rates. The remaining decrease was associated with slightly lower long-term and annual incentive compensation accruals during the quarter.

The employee benefits expense was elevated somewhat in the third quarter, due primarily to the impact of a few significant health insurance claims in our employee base. We expect this expense category would retreat from this level, assuming the fourth quarter has more normalized health insurance claims.

Data processing expense increased approximately $583,000 in the third quarter relative to the prior quarter. The increase was related to approximately $130,000 of conversion-related expenses associated with the Delaware Place Bank acquisition and the additional account processing associated with bringing that acquisition on board, as well as general growth in the rest of our business during the quarter.

Marketing expenses decreased by approximately $662,000 from the second quarter to $11.1 million. The slight decrease on the third quarter was due to lower levels of direct mail and mass media marketing during the quarter, as the previous quarter had more marketing associated with the opening of various new branch -- banking locations and general deposit generation advertising campaigns.

Professional fees increased by $3.4 million to $9.9 million in the third quarter from $6.5 million in the prior quarter (ph). The main cause of the increase related to the consulting fees paid to former employees in relation to the acquisition of Delaware Place Bank of approximately $2.1 million. These consulting fees will not continue into the future, other than approximately $147,000 scheduled to be paid in the fourth quarter of 2018.

Occupancy expenses increased during the third quarter to $14.4 million from $13.7 million in the prior quarter. The increase was generally related to the lease expense associated with the recent increase in the number of branch banking locations, increases in property tax accruals and higher utility costs during the quarter. Other than the expense categories just discussed, all other expense categories were up on an aggregate basis by approximately $596,000 from the prior quarter. So de minimis increases across the board for the other categories.

The Company's efficiency rate on a fully tax equivalent basis improved to 61.2% in the third quarter from 61.8% in the second quarter. Additionally as Ed mentioned, the net overhead ratio also improved slightly during the third quarter to 1.53% from 1.57% in the prior quarter, was still slightly above our goal of 1.50%.So progress was made on both those fronts.

And with that I will turn my conversation back over to Ed.

Edward Joseph Wehmer -- Chief Executive Officer and President

Thanks Dave. Summary and some thoughts about the future. Overall, a very good quarter for Wintrust on all fronts. Momentum continues across the board. The reduced taxes and higher interest rates have been beneficial to us. (inaudible) bode well for the future earnings and growth in franchise value. As I've mentioned, we do not see the mini blip in credit as a trend, but as stated, credit can't be as good as it's been forever. We continue our habit of reviewing the portfolio for weaknesses and addressing them expeditiously. In some perverted way I'm kind of happy that we're off the bottom, because the only place to go was up a little bit and this is a very controlled way to go up and it's fitting and fits our culture very well. But we -- as I said, we don't see this as a trend. We know credit is credit, (inaudible).

We are pushing our organic growth agenda, as acquisitions in general become relatively expensive that regardless of the number of new branches planned over the next 18 months in neighborhoods in our designated market area where currently we're not present. Our retail and small business marketing programs, which we embarked on (inaudible) beginning this year are working, (technical difficulty) new accounts and new relationships. As stated earlier, this does not mean we're not investigating potential business combinations in all of the areas of our business, but also as talked about in previous calls, gestation periods of these deals have become a lot longer. We remain well positioned for higher interest rates, and are prepared to protect the downside as rates rise by gradually decreasing overall interest rate sensitivity.

Loan growth has been good and pipelines remain strong. We continue to look at opportunities to further diversify our portfolio. We are embarking on our liquidity initiative and should have the desired strategic results. So in summary, we're well positioned, we like where we sit. And like I said last quarter, it's times like this when you continue to look around the corner for the bogeyman. Black swines always scare me. We have to worry about the bipolar political world we live in. If tax rates stay this low, how could we protect that. Inflation related to trade wars and tariffs and labor costs, we believe is real. New regulations, who knows if they're coming, but they can't help themselves, there probably will be. We continue to invest heavily in cyber security, in technology, as well as our digital product enhancements. Will rates continue to rise? What are we going to do when (inaudible) whatever that may be.

Back to labor costs. It's interesting that two of the non-performers are basically related to labor. One was a bus company that couldn't find drivers, believe it or not. That was not a planned exit strategy; that actually is a -- problem was we liquidate those buses, but they couldn't find drivers. And another was a for-profit school that people didn't have to go to learn the trades, so they are in the process of closing schools, they are profitable, they are current as I said. We'd like to move that out, but because of that -- people can get jobs anywhere, they're not going to get those. So it's kind of interesting, the effects the tight labor market is having on what were very good businesses.

I bring this up, like, you know, we're actually standing still and assuming that this is a new normal. And (inaudible) soon as you think you have it, you don't have it. As relates to rates, this feels like the late 70s again to me in a lot of respects, with the economy going higher, inflation sneaking up, maybe not as bad as it was in the 70s, but it feels like that all over again and we're somewhat preparing for that in that regard. As my father, he always used to say, hope for the best, plan for the worst. That's what we are doing. You can be assured of our best efforts on the long term franchise growth and to maintain our consistent approach to conservative management to protect the franchise value of the organization.

That being said we can take some questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Jon Arfstrom of RBC Capital Markets. Your line is now open.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks, good morning.

Edward Joseph Wehmer -- Chief Executive Officer and President

Good morning, Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Couple of questions here. I guess to start on mortgage. How do you want us to think about that for Q4 and also into 2019? Do you view this as -- is it a profitability headwind or some of this efficiency potential you talk about, is it not so much of a headwind when we think about Q4 and 2019 ?

Edward Joseph Wehmer -- Chief Executive Officer and President

Well, it's arguably a volume issue. I mean, if we're able to maintain the volumes which we have, we think that prices have been -- the margins have been squeezed, because too many producers chasing not enough loans, the economy stays strong, we believe that housing will continue to pick up. And our efficiency moves should help us in the overall profitability of the product. So the efficiency moves are actually relatively material. The zoom -- our front-end zoom, call it our Rocket Mortgage should be fully deployed. We haven't put that out on the Internet yet, retail wise, but we will be doing that in the first quarter. We've used it as our own internal front end. It's cut two to three days out of processing there. We also are finding ways to cut other processing costs by almost 50%, not all of them but a lot of them, by using different outsourced companies. So we believe that it will be (inaudible) the margins and that the overall profitability should be increasing from where they are now.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. Dave, anything on 4Q, how do you wants us to think about 4Q?

David A. Dykstra -- Senior Executive Vice President and Chief Operating Officer

Well, I think it will be -- again we'll just have to see where rates go and what the home purchasing is -- we've seen the pipeline has decreased a little bit here as we get into the fourth quarter seasonality and rates did pop up a little bit. Now they've come down and they've popped up a little bit again today. So we'll have to see how that builds, but my guess is the volumes will probably decline to something below $1 billion. But we close things relatively quickly now, so you only have a vision out 30, 40 days and reality is, is where your pipelines are, because we're closing them in that 40 day period of time. So we'll have to see how they continue to grow here. But our expectation is that they will be down. But we're also cognizant of accordingly (ph) the expenses -- accordingly as those volumes come down.

So I don't think it's going to be a major impact to the net earnings, because you pay out roughly half of that in compensation type of volume and we have other expenses associated. So what falls to the bottom line is not extraordinarily material, but we do think the volumes will be down. So whether it's $850 million, $900 million would be my guess right now, but it's possible it could be slightly more than that with me being a little conservative here, I think.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, good. Then just maybe a bigger picture question for you Ed, or Dave. Just the loan growth environment and earnings growth environment. I think we can all maybe set aside mortgage, but do you see any threats to your ability to keep this going, this kind of high-single-digit type loan growth and earnings growth pace?

Edward Joseph Wehmer -- Chief Executive Officer and President

Well, there's threats out there. We are seeing some -- well, we use a better term, idiocy in pricing on commercial real estate deals, in our opinion. We're also seeing insurance companies come back very strongly. We also see a number of the construction projects we were involved with getting paid off and refinanced out. And so that will be an issue. On the private equity side, as I said earlier, we're seeing huge prices in private equity deals and the (inaudible) of the world are supporting this with loan terms that we wouldn't even come close to terms of air balls (ph) et cetera, and pricing. They have the ability to withstand time not being regulated. After 90 days they can stay (inaudible) non-accrual. So maybe they're smarter than most, I don't know, but seems to me that that's a very frothy market.

That being said, we're diversified and we're seeing growth in the leasing portfolio, we're seeing growth in the life insurance portfolio of premium finance. We're also seeing good growth in the commercial premium finance. One thing that occurred there was for the last two or three years, we've been subjected to an uneven playing field there, where we were as a bank were required to go out and get TIN numbers on commercial borrowers. And for the first couple of years of this, we were required to do it by the fed. But the fed was -- the different fed offices weren't even applying it across the board. So we were at a competitive disadvantage there to the non-banks and to some of the other banks. We were losing -- probably we had a fight to keep where we are right now. We lost a lot of smaller agents in that process that had better yields and better late fees, because they don't want to collect TIN numbers.

So through the work of Dave Dykstra, Kate Boege, a little bit of me and Frank Burke and Mark Steinberg (ph) at the premium finance company, for the last two years we initiated and then we worked with the industry itself with -- we brought in congressmen, senators, Mr. Dykstra went to Washington. He's a fine lobbyist, by the way. That was (inaudible) as of the beginning of October, or September?

David A. Dykstra -- Senior Executive Vice President and Chief Operating Officer

September.

Edward Joseph Wehmer -- Chief Executive Officer and President

September, that law was changed. We know we are not required to get TIN numbers anymore. So we are coming back with a vengeance to regain those lost share. And we're blitzkrieging right now, as we like to call it. We're getting on -- we trying to get all our old clients back. We had some successes already doing that. So we believe that that program should do very well for us, making up for similar losses we're seeing in some of the other areas.

The commercial side, we still see that there's good growth out there. We continue to get a lot of advance and winning our share of deals. That market was kind of -- it's been for a long time priced about as low as it's ever going to be priced. So we don't see that getting stupid right now. Actually it's kind of good. That seems like the new norm. But -- so that growth has been pretty good. So when you think about it, some things work, some things don't. That's the beauty of being as diversified as we are. So -- and on the deposit side, we are having good success, we have good momentum there. Do we pay up a little bit for -- to bring in new accounts? Yes, we do use teaser rates to bring people in on the retail side and bring their deposit relationships in. We're able to rifle-shoot that and not shotgun it, because of our structure and how we brand that we can rifle-shoot it into a specific inefficient branch or a new branch and that will -- that has caused our rates to go up there. But at the same time, if you look at it, our margin (inaudible) 2 basis points, but our overhead ratio went down 4 basis points. So that's kind of a win-win, as we go into our overhead with that. But -- and it also will fund our liquidity play and we're looking at about $200 million a quarter, depending on rates could be more, could be less. Again, as I said, it could be another $1 billion to get to the 87.5 (ph) on a static basis, we continue to grow and be more. That's a lot of liquidity to play with and if we're able to put that off at a positive spread that should be very beneficial to our earnings going forward. So that's the plan in a nutshell. We are also doing balances with our investments too. We're also doing some fixed rate loan programs in the homeowners association area, in the premium finance life insurance area, and commercial real estate area, to name three. We've got buckets set aside to actually get fixed rate sensitive deals. Our goal over the next 10 months or 10 quarters, I would say, 8 to 10 quarters is to get our -- we think that's when -- again this is subject to the rate environment. Actually we think that's when rates are going to kind of get close to peaking, should take our GAAP (ph) down to about 20% to 25% of where it is right now, still leaving upside potential for us for covering the downside. So we're going to do it through those, and every one of those should make us money, more money. So it's a multi-pronged strategy. I'm rambling on here, but we believe it's appropriate for the time. Will there be headwinds? Yes, there'll always be headwinds, but I think that we should be able to continue to build the franchise out consistently what we've done in the past.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. So continuation of the current trends, maybe some modest lift in the margin over time, is basically the message?

Edward Joseph Wehmer -- Chief Executive Officer and President

Yes, I think it's just -- over time, yes, because like this quarter was a timing issues. We lost a couple of basis points, because we picked up -- if you look on average, $1.5 billion in deposits quarter-over-quarter. So we are not going to do that all at once, we're going to time it and get in. And if we had invested it off, our margin would've been up, though, we wouldn't be having this conversation. But we're going to just be gentle on this and take our time. And again, we put up a nice record quarter. So it's all about balance in that regard.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yes, OK. Okay, thanks a lot.

Operator

Thank you. And our next question comes from Brad Milsaps of Sandler O'Neill. Your line is now open.

Brad Milsaps -- Sandler O'Neill -- Analyst

Hey, good morning guys.

Edward Joseph Wehmer -- Chief Executive Officer and President

Hi Brad, how are you?

Brad Milsaps -- Sandler O'Neill -- Analyst

Good, good. Dave, just wanted to follow up on the mortgage, kind of some of the servicing line items that you guys disclose on page 22. Some of those numbers maybe had a bigger increase maybe than I thought. Anything in there, in your mind that you kind of call out that, that wouldn't be run rate, just kind of curious on how best to sort of think about the go forward on some of those other line items? I kind of feel pretty good about the origination side, but I just want to get your sense on some of those other items.

David A. Dykstra -- Senior Executive Vice President and Chief Operating Officer

Well, the MSR fair value adjustment is just really going to be tied to rates. I mean if rates -- if the longer rates go up, then I think you'll continue to see that portfolio price up and we sort of look at that as a hedge to the production volume through a certain extent. As rates go up, we generally lose some production volume, but you gain on the MSR valuation side. So that will be tied to rate. So if rates do go up and stay up in the fourth quarter and you value them at the end of the quarter. So it really depends on where they are at the end of the quarter. Then I would expect that that number would continue to trend up. MSR capitalization, just how many loans do we retain the servicing on and we retained a little bit more of those loans this quarter than the prior quarter, but we continue to retain that servicing. So I think that that number would stay up. There's a little bit a trade-off there that if you retain the servicing you have a little bit less on the gain on sale, but you have more on the servicing side. So if you didn't retain it, the drag (ph), if you would just flip back to the production revenue line a little bit more. But I think all in all, those -- servicing should continue to trend up as we retain more of that servicing as far as servicing income per se. So I think it's just volume-driven here, as to where those numbers are going to be. So I'm pretty consistent as far as overall revenue relative to volumes, I think.

Brad Milsaps -- Sandler O'Neill -- Analyst

Okay great, that's helpful. And just to kind of follow up on loan growth some, do you consider yourself, based on the market that's out there, still kind of in that kind of high-single-digit type loan growth, kind of looking out as far as you can see anyway?

Edward Joseph Wehmer -- Chief Executive Officer and President

Well, I don't see very far when it comes to that, because we don't want to set goals out there that would make people be squishy on their underwriting. But yeah, for the next quarter at least and probably the next two quarters, we feel pretty good about where loan growth is. We don't know about its pay-offs, because our loan growth, really, net new loan growth and new relationships coming into the quarter was actually very good. We're getting a lot of payoffs. So if payoffs continue to accelerate due to people just doing dumb things and then we'll bear that burden, but I can't control that, I'm not going to chase those deals, we're not going to chase those deals, if they leave. And they don't set our underwriting or profitability parameters, we're not going to do them. But in terms of new loan growth, yes, I think we're doing just fine and I'm really kind of excited about what we are doing on that premium finance side. We are getting our mojo back there, and we are now being offensive, we're not playing defense all the time. As you know, I'd like to be offensive as people will tell you.

David A. Dykstra -- Senior Executive Vice President and Chief Operating Officer

And Brad the pipelines are consistently strong. Third quarter tends to be a little softer, because of the -- just people on vacation and the like, customers and the like, and fourth quarter tends to pick back up, but we are really not seeing any major degradation of our pipeline, so we're optimistic that that can still continue forward.

Brad Milsaps -- Sandler O'Neill -- Analyst

Great, thank you.

Operator

Thank you. And our next question comes from Chris McGrady of KBW, your line is now open.

Chris McGrady -- KBW -- Analyst

Good morning. Thanks for the question. Dave, I'm going to start on the margin -- go back to the margin for a second. So this quarter was 3.61% and there was -- you called out 2 basis point from liquidity. Is the right way to think about, given where LIBOR is now versus last quarter, a 3.63% start, and then maybe a couple basis points per quarter, based on your balance sheet setup, because I think most banks are enjoying less incremental benefit from each hike. I mean the last few quarters you were getting 5 basis points, 6 basis points per quarter of expansion. Is that the right message you're trying to tell on the margin. like low 3.60s, probably heading to 3.70% over the course of '19?

David A. Dykstra -- Senior Executive Vice President and Chief Operating Officer

That's probably generally right. Like you said, we've taken our interest bearing cash, just the incremental piece that we put on in this quarter that if we would have invested that, the margin would have been basically flat, the 2 basis points. Had we taken some of that, even more liquidity that we have there that we've been waiting to invest, the margin actually would have been up. So as we continue to leg into this, and (inaudible) it depends on rates -- where rates are at, how fast we do it. But if we continue to do a couple of hundred million of that liquidity a quarter, and then we get the tailwinds on some of the repricing, like on the life portfolio -- life insurance premium finance portfolio, those are tied to 12 month LIBOR, and they are repriced once a year. And the premium finance loan on the commercial side are fixed rate and nine month full payout type of loan. So it really takes almost a year for those to fully reprice also. So we do have some tailwinds there. We were fairly aggressive with our new branch openings and as I said, that on average up about $1.5 billion in deposits in the quarter.

So some of that special pricing that we had on those deposits, that's not going to continue at that same rate going forward most likely and (multiple speakers) new ones, but we had a $1 billion in the second quarter itself. So that might moderate a little bit. But the other thing with those specials, as rates continue to go up, those specials, they're not as high rates anymore. So we gave a CD rate back then and rates go up 75 basis points, those special rates are more like normal rates now. So, yes, I think you block those in for a little bit of time on those specials, so as rates go up you'll benefit on those deposits. So I think we look at it that way. If we can get a couple of basis points a quarter, increase, two or three, depending on rates obviously that would be our goal, is just a -- that's a -- gradually grind the margin up.

Edward Joseph Wehmer -- Chief Executive Officer and President

Hey, maybe you could tell us where is the 10 year going to be at the end of this year and at the end -- at the next year?

Chris McGrady -- KBW -- Analyst

I'll follow up with you on that one.

Edward Joseph Wehmer -- Chief Executive Officer and President

Well, yes, you could ask us questions.

Chris McGrady -- KBW -- Analyst

It's a one-way street here. If I could sneak one more in on the mortgage comments, the expenses that you said will be kind of the rightsizing by the first quarter. Is the goal with that process improvement to get that one -- to get to a 1.50% overhead ratio in '19, is that something maybe on a quarterly basis you can get to with the changes that you are making to the business?

Edward Joseph Wehmer -- Chief Executive Officer and President

Well, that's part of it, but there was obviously a lot of growth, a lot of expenses related to open up these branches that we're putting out in the network. So it's a balance of that. That will help obviously, but there's other -- growth -- throwing out our inefficient branches with the deposits and building these new ones will help us get that. It's more of a growth issue. Any deposit -- any cost we can cut, we'll cut. But when you think about why we flipped the switch from acquisitions to organic, you do an acquisition you can overpay and it goes into goodwill and you'd probably dilute yourself out -- so you give away some earnings. We're taking much less of that, but we're taking -- it's much more cost efficient to do what we're doing right now, but it runs through the income statement.

So we have to balance that and that's what we're trying to do is balance that to get to that 1.50%, 1.50% is a goal and it's an aspiration, something we beat up everybody on, but there are certain opportunities we take advantage of where we top above it and we deal with that. But that's the goal and that's -- a number of our banks are operating -- we've got some banks operating around 1% in net overhead ratios. So as they get larger they're able to do that. So it's all about growth and controlling costs, but probably getting it -- the overall effect will be growth more than the cost cuts, though, we are going to do both to get to the 1.50%.

Chris McGrady -- KBW -- Analyst

Got it. Thanks for the color. And Dave, on the tax rate, Q3 a good run rate for perspective?

David A. Dykstra -- Senior Executive Vice President and Chief Operating Officer

Q3 was probably a little bit low, we had some true-ups with the final adjustments from the tax reform act. We had about a year to get all those through and as we got clarity on some issues, we got a little bit of benefit. I would still think -- I would think it would be more in the low 26% range, is more of a normal rate to look at.

Chris McGrady -- KBW -- Analyst

Great. Thanks a lot.

Operator

Thank you. And our next question comes from Terry McEvoy of Stephens, your line is now open.

Terry McEvoy -- Stephens -- Analyst

Thanks. Good morning guys. Yes, in the press you called out --

Edward Joseph Wehmer -- Chief Executive Officer and President

Terry, what do you think the 10-year is going to be?

Terry McEvoy -- Stephens -- Analyst

I'll have to take that offline as well. I was hoping (multiple speakers). The 2 basis point impact of just excess cash was called out on the call and in the release. Was the NIM impact at all from just the LIBOR not moving as expected during the third quarter and if so, any thoughts on what that impact was ?

David A. Dykstra -- Senior Executive Vice President and Chief Operating Officer

We haven't calculated the impact, but clearly the 30 day LIBOR, as everybody knows and as we've actually shown in the chart on page 20 of our press release, stayed fairly flat for most of the quarter and then started to bump up a little at the end of the quarter. And we've got -- in our portfolio we've got about $7.7 billion worth of loans that are tied to that 30 day LIBOR rate. So it did have -- that did have a little bit of headwind for us and I assume most banks that have any portfolio of size that's tied to the 30 day LIBOR, but it did pop up a little bit at the end of the quarter, which should be helpful running into the fourth quarter. But yes, that did create a little bit of a headwind. The depositors don't really look at LIBOR, retail depositors. So the flattening on the LIBOR curve really didn't change their expectations, but it certainly did change -- hold down the pricing on the loans for a good portion of the quarter.

Terry McEvoy -- Stephens -- Analyst

Okay, yes, that's what I was getting at. Thank you. And then just as a follow-up, CD balances were up $1 billion year-to-date and average balances were up $600 million, $700 million. Could you just talk about where those customers are coming from, is it within the existing branches or are they new customers walking in the door, existing customers? And then as you mentioned kind of cross-selling, those new customers, how do you quantify that in specific products, where do you see some upside?

Edward Joseph Wehmer -- Chief Executive Officer and President

Most of those are new customers, as we opened the new branches and we target the inefficient branches. We offer a bundled package of accounts, your checking account, your safe deposit box, home equity line and you get a teaser account, that's usually a CD. So, you open all those up. So it's mostly new accounts, I would say. And then once you get them in, you cross-sell them into wealth management and anything else you can think of.

So, it's consistent with what we did back before 2006 when we were mostly organically driven, before we went -- when the market gave us those well-priced acquisitions. So, it's consistent with what we did in the past and that's how we grew this thing to be where it is, is gaining deposit market share. So, if you go back and you look way back when we had a lot of CDs on the books, because of the way we were growing, and then it was down to basically nothing. Now we're using those as teaser rates to grow again. Does that make sense?

Terry McEvoy -- Stephens -- Analyst

Yes, It does, definitely makes sense. Thanks, guys.

Operator

Thank you. And our next question comes from Nathan Race of Piper Jaffray. Your line is now open.

Nathan Race -- Piper Jaffray -- Analyst

Hey guys. Good morning.

Edward Joseph Wehmer -- Chief Executive Officer and President

Morning, Nathan.

Nathan Race -- Piper Jaffray -- Analyst

Going back to the last question from Terry in terms of deposit growth strategies and pricing. I'm just curious, as you guys look to get your loan deposit ratio back toward 90%, do you expect the deposit beta that you had in this quarter to kind of persist as the Fed continues to raise short-term rates, or do you think this was kind of more of a one-off increase, just given some of the promotional activities that you guys took on this quarter?

Edward Joseph Wehmer -- Chief Executive Officer and President

Well, the new branch impact -- well, overall -- let me get this right. Cycle-to-date, our total deposit beta is 33%. Not bad. But it's popped up a little. We expect that in aggregate to end up in the 40% to 50% range. So if you're 33% now, it's going to be higher to get to that number on a cycle-to-date basis. So, we would expect the -- our overall beta without new branches this quarter was 62%. Without the new branches, so the rest of it was the new branches coming on, the way we look at it. So, I think you have to view it in the aggregate and say, as rates continue to rise we're going to go to -- closer to 40% to 50% beta, hopefully closer to 40%, which is -- always it's been our number in the past, but that will mean that it should stay about the same as we go through this growth spurt and rates continue to go up.

Fortunately, when you are priced like, when you are funded like we are in retail deposits, you start hitting caps, like the spread -- the decompression that takes place in money markets and savings and some of those kind of hit caps at a point in time. We don't have to raise those anymore at all, especially, on the savings side, which believe it or not, savings accounts have passbooks, still sell in a number of the new neighborhoods we've been to in Chicago and Milwaukee. That's a good solid core base for us. So we are going to continue to push those and we expect to end up like what I said, 40% to 50%, hopefully closer to 40%.

Nathan Race -- Piper Jaffray -- Analyst

Got it. That's helpful. Thanks Ed. And just kind of changing gears a little bit and thinking about capital -- total capital kind of ticked down that ratio in the quarter. I think historically you guys want to stay above 11.5% or 11%. So just curious to get kind of your updated thoughts on capital planning and obviously within the context of potential acquisition opportunities, obviously we saw one big acquisition announcement here in Chicago last night. So just curious to get kind of your updated thoughts on where you guys are seeing more opportunities versus maybe Wisconsin and here in Chicago.

David A. Dykstra -- Senior Executive Vice President and Chief Operating Officer

Look, on the capital front, I know it was down just a hair, if you're making the $90-plus-million that we made this quarter and you extend that out going forward, generally that should support our internal growth fairly well. So I would expect it to sort of stay in that range, barring some acquisitions or outsized growth, but you're right, if that number starts to tick down into 11.5% range, toward that range, we would look to do more, but currently barring any sizable acquisitions, we think we can be self-sufficient.

Nathan Race -- Piper Jaffray -- Analyst

Got it. And then Ed, any thoughts on acquisition opportunities or any current thoughts on what you're seeing?

Edward Joseph Wehmer -- Chief Executive Officer and President

Well, we -- let me put it this way, we tell this to investment bankers. Our landing pattern is full of opportunities. But I don't know if they're all going to land. Our gestation periods are longer, expectations are higher and it's in all areas of our business. So we continue to be very busy in that regard. But we're going to be very selective. And it has to make sense financially and geographically for us strategically, on the banking side and on the wealth management side, or on the specialty finance side. So, in some, like in specialty finance and a number of -- we've looked at a number of different companies. It's better to start them from scratch really, when you look at what the price expectations are right now. So we continue to look, we've shown a lot of opportunities. (inaudible) what goes on in our market area, we've taken a look at, but we're very selective in where we want to go and what we want to do. So like I said, don't be surprised if we do something, but don't be surprised if we don't either.

Nathan Race -- Piper Jaffray -- Analyst

Got it. I appreciate the color guys.

Operator

(Operator Instructions) And our next question comes from Brock Vanderbilt of UBS. Your line is now open.

Brock Vanderbilt -- UBS -- Analyst

Great. So, are you likely to maintain this pace of branch acquisitions or branch expansions in 2019 or step off the gas somewhat?

Edward Joseph Wehmer -- Chief Executive Officer and President

We are likely to maintain, maybe not 10 or 12, but certainly five, six, seven, something like that next year. We announced we're gradually opening a branch in Naples, Florida to get everybody who's running away from Chicago these days. That will open the beginning of next year. Simply a convenience branch. This is not a -- just to make it very clear, this is not a move to Florida by Wintrust. This is to accommodate our Chicago customers who are snow bunnies and live down there, have changed residence down there or whatever. We think, actually, we should do very well down there, just with the Chicago transplants and snow bunnies that are there. So we are -- it's a very small branch for us, but things like that we are doing strategically to maintain those customers. They came really as response to our customers asking us to do it. But, Milwaukee is going very well for us and we continue to build out of there. We expect a couple of branches up there and we have a number of opportunities here, as we fill out our franchise throughout Chicago. So yes, I would imagine we would open six to eight next year, on the plans, but that's the plan at least right now. And again, let's probably think what the market gives us. When we did all these acquisitions, we didn't have a choice of where -- they are all strategic, but they left holes in our market that we need to fill. So that's taking this opportunity do that right now, especially as we continue to be growing and making more money, we can make that investment and still balance that overhead ratio accordingly.

Brock Vanderbilt -- UBS -- Analyst

Okay. And separately on mortgage, I know you've bolted on a number of parts of the business and servicing origination over time. Is this what we see is what we get here, or are there missing pieces in your -- from your perspective that still exists? And are most of the efficiency gains already been scored, or are we still early in that process?

Edward Joseph Wehmer -- Chief Executive Officer and President

I think what you see is what you get. And we've got -- I sound like Dave Watts (ph) that all the pieces are in place here. We've been able to fix our product mix to get more government loans, which actually obviously have higher margins, did the Veterans First acquisition. They also have different distribution model, which is something we hope to migrate into our current system over time. But no -- so I think what you see is what you get as it relates to the infrastructure or the footprint that we have. But you've not seen the results of the efficiency moves, the zoom mortgage as we get that out and take more mortgages as house deals as opposed to coming through a broker. The efficiencies of that, the two to three days you've seen that pop in, two to three days was processing time, by using zoom. But you've not seen the backroom efficiencies that should be coming in January and henceforth where we can cut a lot of the cost related to -- and make them more variable by outsourcing. So you've not seen the majority of the efficiencies in the process in the current infrastructure we have, you haven't seen that yet.

Brock Vanderbilt -- UBS -- Analyst

Great. Very helpful, thank you.

Operator

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. Wehmer for any closing remarks.

Edward Joseph Wehmer -- Chief Executive Officer and President

Thank you everybody. Again another record quarter for Wintrust. Well, the market doesn't seem to like record quarters, but nothing we can do about that other than continue to build our earnings double digits, continue to build our franchise the way we have in the past, which is conservative and focused on shareholder value and we intend to continue to do that. And we'll talk to you'll next quarter. If you have any other questions, please feel free to call Dave or me. Thanks.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duration: 61 minutes

Call participants:

Edward Joseph Wehmer -- Chief Executive Officer and President

David A. Dykstra -- Senior Executive Vice President and Chief Operating Officer

Jon Arfstrom -- RBC Capital Markets -- Analyst

Brad Milsaps -- Sandler O'Neill -- Analyst

Chris McGrady -- KBW -- Analyst

Terry McEvoy -- Stephens -- Analyst

Nathan Race -- Piper Jaffray -- Analyst

Brock Vanderbilt -- UBS -- Analyst

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