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Wintrust Financial Corp  (NASDAQ:WTFC)
Q4 2018 Earnings Conference Call
Jan. 22, 2019, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Welcome to the Wintrust Financial Corporation's Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following a review of the results by Edward Wehmer, Chief Executive Officer and President and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session. During the course of today's call, Wintrust's 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 statement. The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in the fourth quarter 2018 earnings press release and in the company's most recent Form 10-K and any subsequent filings on file with the SEC. As a reminder, this conference call is being recorded.

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

Edward Joseph Wehmer -- President and Chief Executive Officer

Good morning, everybody. Welcome to a snowy wintery Chicago for our fourth quarter earnings call. With me, as always, are Dave Dykstra, Kate Boege, our legal counsel, and Dave Stoehr, CFO. We will conduct the call under the same format as usual. I'll give some general comments regarding our results, I'll turn over to Dave Dykstra for a more detailed analysis of other income and other expenses and taxes, back to me for some summary comments and thoughts about the future, then we'll have time for some questions.

On the earnings front, net income was $79.657 million for the quarter, down from the previous quarter but up from last year at $68 million, almost $69 million, so up about 16% from last year, down 13% from the year before. On a year-to-date basis, our $343 million, our eighth consecutive year of record earnings, up from $258 million, up 33%.

Earnings per share were $1.35 in the quarter, down from $1.57 but up from $1.17 the previous year and $5.86 for the year, up from $4.40, again 33%. On an apples-to-apples basis, which is the way we like to look at it, pre-tax income for the quarter was up close to 12%, $108 million versus $96 million for the year was up 18%, so notwithstanding we haven't had a tax break, we'd still be reporting record year-end numbers.

Well, if it wasn't for the last few weeks of December, we would have been able to report our 12th consecutive record quarter of earnings. Market volatility took a toll on our results for the quarter; notwithstanding these events, our core business performed extremely well and we were very well positioned for 2019. As indicated in the press release, our fourth quarter results were negatively affected on a pre-tax basis by $8.5 million charge of mortgage servicing rights and unrealized loss and equity securities of $2.6 million, $1.1 million loss on Canadian foreign exchange, $1.6 million of acquisition expenses, so approximately $14 million of negative adjustments pre-tax effect to the earnings. This coupled with other factors in the mortgage business including seasonal reductions in volumes and market driven margin issues account for the majority of the reduction, fourth quarter income versus third quarter income.

Dave will talk to you all about this in detail. If you look at the income statement, you'll see the most of the difference in the quarter took place in the other income section. This had negative effect on our net overhead ratio for the quarter as you can imagine taking it to an unacceptable 1.79%, backing out the quarter's extraordinary items brings it closer to our goals.

On the positive front, our FTE margin increased 2 basis points in the quarter to 3.63%, which coupled with an increase in average earning assets of $581 million resulted in net interest income increasing $6.5 million during the quarter. A little more on the margin, earning asset yields were up 13 basis points to 4.58% while net cost of funds, including the free funds contribution was up 11 basis points.

It should be noted that our acquisition of CDEC, Chicago Deferred Exchange Corporation, had minimal effect on fourth quarter margin. CDEC was acquired in mid-month December, by year-end we had transferred $1.1 billion of CDEC low cost deposits on to the balance sheet. With those deposits, we have paid close to $700 million of much higher priced institutional money, $75 million of much higher priced brokered deposits and $200 million of Federal Home Loan Bank advances.

As mentioned, this had minimal effect in Q4 though it can be expected to help our cost of funds in a meaningful way in the future. The CDEC business and related deposits, which we believe we can grow in the future coupled with mid-December's rate increases other than the notorious 10-year rate and our continued loan growth bodes well for increasing margins in the immediate future. It should be noted that period-end loans exceeded fourth quarter averages by over $650 million, this gives us a nice head start for 2019 and bodes well for the net interest margin and net interest income.

Prior to the tenure collapsing, we have a bit of headway on our laddering program. We've talked about our laundering program earlier, that's the program where we'll be extending our investment portfolio to start a balanced way to lower our interest rate sensitivity, the effects of these minor gains is hidden to some extent by our growth.

However, we did invest close to $400 million in the longer-end of the market. We'll continue to work in the future to reduce our interest rate sensitivity by the previous mentioned laddering program and by other means. We'll continue to monitor the rate environment and to continue our investment duration laddering program. Wealth management continues its slow and steady growth, happy with our results year-over-year. Our expenses are pretty well in line and will be discussed in detail by Dave.

On the annual earnings front, 2018 was a record year for us, eighth in a row as I mentioned. Net income and EPS were up 33% and the pre-tax was up 18%. Our margin increased 17 basis points to 3.61%. The overhead ratio was 1.62% for the year, up from 1.56%. We'd have been closer to the 2017 number had the fourth quarter not turned out like it did. ROA increased 20 basis points to 1.18%. ROE & ROTE for 2018 were 11.26% and 13.95% or from 9.26% and 11.63% the previous year. All-in-all, it's a great year, which we're very proud in spite of the unlucky fourth quarter.

On the credit side, credit metrics remain very strong. Non-performing assets decreased to $18 million in the quarter or 0.44% of assets down from 0.52% at the end of Q3 and 0.47% at the end of 2017. Net charge-offs for the fourth quarter were $7.1 million or 12 basis points, the year-end net charge offs totaled almost $20 million or 9 basis points up from 7 basis points a year ago.

Reserve coverage stood at 134%, up from the 118% we recorded in the third quarter but down from the 153% we experienced a year earlier. Three large loans, which were non-accrual have been resolved as anticipated with one being cleared totally, one expected to clear in late Q1 or Q2 and one on its way to becoming a performing loan. All in all, credit remains extremely good.

On the balance sheet front, ending assets grew $1.1 billion in the quarter and $3.3 billion for the year to $31.24 billion. These are increases of 14% and 11% respectively. The acquisition of American Enterprise Bank in early December contributed $164 million to these totals. American Enterprise Bank is an interesting transaction for us as we did not acquire any branches in the deal given the proximity of their branches to Wintrust branches. We acquired certain assets and assumed certain liabilities of the bank but basically no operating expenses. So pretty much the total cost of our deal will be profitable transaction for us going forward.

Total loans net of loans held us sale were up approximately $700 million quarter versus quarter and $2.2 billion year-over-year or 11.7% and 9.2% respectively. American Enterprise Bank contributed $119 million to this growth.

As mentioned, most of the wealth occurred in December, we start quarter one 2019 with a great head start of over $650 million. Deposits grew $1.18 billion in the quarter and $2.91 billion for the year. Translates into deposit growth of 18% or 11% growth. American Enterprise contributed $151 million to this growth. We're excited about our prospects of growing a deferred exchange business, where our CDEC transaction as these provide a diverse and steady flow of very low cost deposits.

As the year ends, CDEC managed $2.4 billion of deposits for customers, $1.1 billion of that was on our balance sheet, the remainder placed at other third party banks for a fee. These deposits by nature are short term in duration, the customer needs to get their funds invested in three to six months. As such, there can be volatility in aggregate balances. We're largely conservative on our reliance on these core deposits. And as I said earlier, we do think we can grow this business nicely. Our loan-to-deposit ratio returned closer to the desired.of 85% to 90%, closing 2018 at a little over 91%.

My goal is still getting into that desired range. Now I'm going to turn the call over to Dave to take you through other income, other expense and taxes.

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

Thanks, Ed. As Ed noted, fourth quarter had some unusual volatility with the majority of the impact flowing through the net interest income section. So I'll focus on those areas and then provide a bit of background on the non-interest expense category that experienced an overall decline in total expenses relative to the third quarter of 2018.

Turning to the non-interest income section, our wealth management revenue held relatively steady at $22.7 million in the fourth quarter compared to $22.6 million in the third quarter of last year and up 4% from the $21.9 million recorded in the year ago quarter. Brokerage revenue was down approximately $582,000 while our trust and asset management revenue offset that decline by increasing $674,000. Overall, as Ed indicated, we believe the fourth quarter of 2018 was another solid quarter for our wealth management segment despite the volatility experienced in the equity markets late in the fourth quarter.

Mortgage banking revenue decreased approximately 42% or $17.8 million to $24.2 million in the fourth quarter from $42.0 million recorded in the prior quarter and was also down slightly from the $27.4 million recorded in the fourth quarter of last year. Now, the decrease in these categories revenue from the prior quarter resulted primarily from lower levels of loans originated and sold during the quarter and correspondingly we also had lower production margin on those volumes. The company originated approximately 928 million of mortgage loans in the fourth quarter. This compares to 2.1 million of originations in the prior quarter, 1 billion of originations in the prior quarter and 879 million of mortgage loans originated in the fourth quarter of last year. The mix of the loan volume that we originated during the quarter was approximately 71% related to home purchase activity compared to 76% in the prior quarter so purchased home activity continues to be the majority of the new origination activity.

On Page 22 of our earnings release, we provide a detail compiling the components of the origination volumes by delivery channel and also the mortgage banking revenue including production revenue, MSR capitalization, MSR fair value and other adjustments and also the servicing income, so you can look there for further detail on the mortgage banking segment.

Given the existing pipelines, we currently expect originations in the first quarter of 2019 to be similar to the fourth quarter of 2018. The company recorded losses on investment securities of approximately $2.6 million during the fourth quarter primarily related to unrealized losses associated with the large cap equity fund that the holding company has an investment in which was used for seed money for a proprietary mutual fund. As you know, many large cap stock is experience significant drops in value near the end of the year and our holdings which were required to record a market value were similarly impacted.

Thus far in 2019, the fund recouped some of its value as the stock market has rebounded a bit in early 2019. The revenue in the fourth quarter of 2018 for operating leases totaled $10.9 million compared to $9.1 million in the prior quarter increasing 19% during the quarter. The increase in this revenue item compared to the prior quarter is primarily related to growth on the operating lease portfolio as the period end balances of operating leases increased to $233.2 million at December 31, 2018 from $199.2 million at the end of the third quarter.

These amounts relate only to operating leases as capital leases are carried in the loan section of the balance sheet. Other non-interest income totaled $10.6 million in the fourth quarter, down approximately $5.5 million from the $16.2 million recorded in the third quarter of last year. There are two primary reasons for the decline in this category of revenue including a negative swing of $1.5 million of foreign exchange valuation adjustments associated with the U.S, Canadian dollar exchange rate. The current quarter had a negative valuation adjustment of approximately $1.15 million whereas the third quarter of 2018 had a positive adjustment of approximately $350,000, so a swing of $1.5 million. The currency rate volatility was abnormally high during the fourth quarter, we usually don't see that much of a change and again thus far in 2019, that exchange rate has recovered a bit but we'll have to see where it ends up quarter of that. Next, BOLI income was down $3.7 million from the third quarter primarily as a result of the $2.2 million debt benefit recognized in the third quarter with no similar benefit recognized in the fourth quarter and a $1.1 million loss on BOLI investments that support deferred compensation plan benefits that were impacted by equity market returns. I should note that this $1.1 million BOLI loss resulted in a similar reduction in compensation expense during the quarter.

In summary, the volatile market conditions at the end of the quarter influenced mortgage servicing rights valuation, equity security valuations and foreign exchange rates that all negatively impacted our non-interest income revenue amounts. Interestingly, each of these items which are marked to market each quarter had positive adjustments in the third quarter but to a much smaller magnitude. We believe these categories have experienced some recovery in value thus far in the first quarter but we'll have to see whether the recovery continues and where they end up at the end of the first quarter, but typically the swings in value I think were much smaller.

Turning to the non-interest expense categories, non-interest expense totaled $211.3 million in the fourth quarter, down approximately $2.3 million from the prior quarter. I should note that the current quarter included approximately $1.6 million of acquisition related expense items compared to a total of $2.6 million in the prior quarter.

I'll talk about a few of the categories with the most significant changes now. The base salaries and employee benefit expense category decreased approximately $1.7 million in the fourth quarter from the third quarter last year. The decline was due to a variety of factors, including lower commissions related to the mortgage banking production, a higher amount of salary deferrals related to loan origination costs, which reduced the salary expense and a reduction in costs related to deferred compensation plans impacted by the market returns on the BOLI plans, which I've just discussed earlier in the non-interest income discussion.

These declines are partially offset by additional expense related to normal staffing growth as the company continues to expand and an increase in payroll taxes associated with incentive compensation awards payment during the quarter. Marketing expenses decreased by approximately $1.7 million from the third quarter of 2018 to $9.4 million and as we've discussed on prior calls, as category expenses tends to be lower in the fourth and the first quarters of the year as our corporate sponsorship spending is more heavily geared toward the middle two quarters of the year. As I discussed in regard to the operating leases in the non-interest income section, the company experienced a corresponding increase in depreciation expense related to operating leases to the growth in that portfolio. This category of expenses increased $1.1 million in the fourth quarter compared to the prior quarter. Again, we expect this category expense to grow at a similar rate to the revenue side of the portfolio of operating leases -- as the portfolio of operating leases continues to expand.

This is actually a category we're happy to see grow the expenses because it reflects that we're having increased revenue associated with that. If we group all the other expense categories together other than the three that I just discussed, the remaining non-interest expenses were essentially flat on an aggregate basis being up approximately $54,000 in the fourth quarter compared to the prior quarter.

So I won't spend much time on those since the pluses and minuses offset and nothing real significant to discuss there and so with that I'll conclude my comments and throw it back over to Ed.

Edward Joseph Wehmer -- President and Chief Executive Officer

Thanks, Dave. As usual, clear as mud. Thank you. Despite the fourth quarter hiccup, 2018 was an extremely good year for Wintrust as evidenced by another record year of earnings, EPS and balance sheet growth. Although aided by reduced taxes, remind you again, the pre-tax income for the year was up in and of itself 18%. For those of you who have been following us for a long period of time, you should know what our goals are; double-digit earnings growth, exemplary credit metrics and a fortress balance sheet are tops on that list of goals.

To that end, year-end is a nice place to take a look back over the last five years and see how we have delivered. For those last five years, net income growth, five year CAGR is 20%, asset growth five year CAGR, LOAN 12%, growth five year 13%, deposit growth five year CAGR 12%. NPAs as a percent of assets, the five year average is 0.52%, net charge offs for the five year average is 12 basis points a year. Based on the above, would be hard pressed to say we're not achieving our goals not just this year over a much longer period of time. Hopefully, this buys us some credibility in the market.

But history is just that history, that's why we here at Wintrust we have a mascot, it's the Greek god Sisyphus. Those of you who aren't familiar in your Greek mythology, Sisyphus was condemned by the gods to push a rock up the hill every day, at the end of the day the rock would fall down the hill, he had to push it back up again. Just like him every December 31st, that rock rolls back down the hill, and we're fated with having to push it back up again. And the rock is always bigger and the slope is always steeper. But we think we relish that challenge.

We're looking forward to 2019 with a great deal of confidence that we can again deliver on our goals. We're well positioned for the first quarter in particular and beyond. The CDEC acquisition should aid in keeping our interest cost of funds intact. Q1 '19 will be the first full quarter, in the effects of these low cost deposits on earnings and we're embarking on growing that business. The AEB acquisition should be accretive in year one, should be accretive in the first quarter.

We started the year with a $650 million head start on loans, as ending balances exceeded quarterly averages by that [amount]. Loan pipelines remain consistently strong, we're booking loans on our terms. Although non-bank competition is becoming more and more aggressive, our brand and market disruption is helping us to continue to gain market share. The situation warrants, however, that is our circuit breakers, our pricing policies or loan policies trip, we'll not be afraid to stop the Board as we have in the past.

As of now, we see no reason to do this. Exceptions in our portfolio which we monitor monthly remained consistent for the last three years both our new deals and in the overall portfolio and our pricing is holding up as well as can be expected. We expect the margin to go modestly in 2019 assuming a consistent rate environment but nicely. Credit metrics remain strong. However, we'll continue to call the portfolio for any [cracks] and negative relationships where said cracks are found.

We'll always remember the old adage, "Your first loss is your best loss". Let's not try to kick the can down the road. It takes a full year for short term interest rates to work their way through our asset base. December increase is really yet to be seen in our numbers and other increases in 2018 -- that we experienced in 2018 are still working their way through the system. This bodes well for the margin, wealth management should continue at a slow and steady climb.

In 2018, we opened 10 branches and we have the same number untapped for 2019. Pretty much all of the 2018 branches are performing ahead of plan. We expect the same for the ones opening this year. One of ones opening this year will be in Naples, Florida, believe it or not, now that is going to open in the first part of February as a small convenience branch but when you look at the numbers of Illinois refugees in Florida now, name recognition, we're not expecting much out of this but I think it's going to be a lot better than we anticipated.

We completed two bank acquisitions in 2018 as well as CDEC. It looks like pricing for banks and our desired asset range are becoming more reasonable. As such, our landing patterns remain full but gestation periods remain slow. You can be assured of our consistent conservative approach to deals. The lower tenure rate although hurtful in Q4 should help volumes in the upcoming spring bank season in the mortgage business. We continue with our cost cutting and efficiency moves in this business, many of which will be operational by mid-year. As a community bank, we remain committed to the mortgage business. We are committed to achieving a net overhead ratio of 1.5% or better, however, as we are mandated to prepare our platform to become a $50 billion asset bank, you don't have to wonder who that mandate came from. Achieving that number at year-end maybe hard, a number in the mid-150s is our short term goal. In short, we're probably built over the last 27 years and approach 2019 with a great deal of confidence. As always, you can be assured of our best efforts and we appreciate your support.

Now I can turn over for some questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Jon Arfstrom with RBC Capital Markets. Your line is open.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good morning. Couple questions here. The CDEC deposits, you talked about $1 billion on your balance sheet and maybe, I think, $1.3 billion or $1.4 billion off the balance sheet. What's the plan with the off balance sheet piece of that?

Edward Joseph Wehmer -- President and Chief Executive Officer

We get a nice fee on that, that will run through fee income. We don't want to get overly reliant on this. You'll probably see what we're going to do is look at the 12-month rolling averages because it does go up and down somewhat seasonal for people too to get things done in calendar years or quarters. We'll probably maintain the one year either the max that they have on their books or the one year rolling average. And the rest we will place with other banks and receive the fee on it. Does that makes sense?

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yes, that makes sense. And the general message on loan yields, it sounds like, based on your very last comment there, your expectation if loan yields can continue to rise modestly?

Edward Joseph Wehmer -- President and Chief Executive Officer

Well, because of the structure of the balance sheet, yes, and the rate rises continue to work their way through. So we would expect that to occur, we would hope that it's kind of a weird environment now, but we would hope to be able to mute our deposit cost, our core deposit cost, notwithstanding the effect of CDEC's replacement of higher cost funds to maintain those relatively low. So we'll see, that's the plan at least.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. And then just on mortgage. I know this is tougher. Maybe it's for you, Dave. But you talked about pipelines being consistent, maybe margins being down last quarter. You're also talking about some seasonality. And I guess, we didn't touch on efficiency opportunities. So just kind of can you unpack mortgage for us a little bit in terms of how we should be thinking about Q1 and then headed into Q2 on mortgage?

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

Well, heading into 2Q, we had expected it to increase as the seasonality factors go away. We certainly don't have those pipelines in place yet because we know from the application to closing is generally in the 40-day or less range. So we're not getting applications yet for the second quarter but we would expect that to be the pickup in strength. First quarter, we would expect that the Veterans First consumer direct platform would stay relatively stable. They don't have quite as much seasonality because they're not focused in Midwest like our retail channel is. So we would expect there to continue to be a little bit of pressure on the retail channel in the first quarter. So that would be relatively stable maybe down a little bit, correspondent business would be relatively stable and Veterans First should be relatively stable. So that would be our thoughts. Veterans First tends to have a little bit higher gain on sale margin because it's government products than the other two channels. But when volumes go down, margins generally get compressed because you have so many people competing for a much smaller pie. And so that's where the compression is coming just the competition out there right now.

Edward Joseph Wehmer -- President and Chief Executive Officer

Interestingly, now, Jon, on the competition side, we're seeing a great deal of stress in our competition. We believe that the long awaited consolidation will be taking place. We know some firms are merging, some are going out of business in the markets now, which should bode well for us both in terms of recruitment and less competition in the area. On the efficiency front, we're doing a number of things, one of which could be pretty interesting by mid-year if all goes to plan, our Zoom mortgage, which is our Rocket mortgage platform should be -- we should be able to start marketing that online. So people can kind of like rock it more, you still have a person available to work with you. But through that distribution, we can cut commissions probably by an half or more if applications come in that way. That's the secret to this. So we're still going to rely on that personal service. So still we'll rely on the mortgage reps. We'd like to tilt the balance to be more consumer direct and we're in the process of proving out that concept. Focus groups have told us that our product is better than some of the major competition out there. Time will tell. Hopefully by mid year we can get that -- sometime in the middle of the year we'll get that up and running and start marketing that. Zoom also will cut it, is cutting a couple days off the front end but doing a number other efficiency moves. I'm not going to talk about now. It should bring down our cost and our time to get loans done. So I know some people say why should you be in mortgage, we're a community bank, we got to be a mortgage. Mortgages notwithstanding, even including the fourth quarter was profitable for us for the year in a nice way. And it's something we believe that you got to take the good with the bad, write it out.

Interestingly enough, we were having discussions about hedging our mortgage service pipeline in the fourth quarter, greedy Ed thought rates for the long was going to continue to go up and scheduled for the first quarter. So that one's on me. I screwed that one up. Hard to believe I screwed something up, right Dave?

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

Still going to rely on that personal service. So we'll rely on the mortgage Reps. We'd like to tilt the balance to be more consumer direct and we're in the process of proving out that concept. Focus groups have told us that our product is better than some of the major competition out there. Time will tell. Hopefully by mid year we can get that sometime in the middle of the year we'll get that up and running and start marketing that. Which could do that.

That zoom also will cut it. He's cutting a couple of days off the front end we're doing a number other efficiency moves. I'm not going to talk about now. That should bring down our cost and our time to get loans done. So I know some people say why should you be a mortgage we're a community bank. We got to be a mortgage. Mortgages that we're staying even including the fourth quarter was profitable for us for the year in a nice way. And it's something we believe that he can take the good with the bad write it out.

Interestingly enough the we were having discussions about hedging our mortgage service pipeline in the fourth quarter greedy and thought rates for long and was going to go up and scheduled for the first quarter. So that one's on me. I screwed that one up. Hard to believe I screwed something up right Dave?

Very hard to believe, Ed.

Unidentified Speaker --

Thank you, Dave. But we are looking at that board. We're refining this business, and we think it's going to be a good steady business for us going forward. We'd like to take the volatility out and we'll work to do that when the time is right. Obviously, it was right and I screwed it up but other than that we're OK.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. All right. Thanks for the help guys.

Operator

Thank you. Our next question comes from Brad Milsap with Sandler O'Neill. Your line is open.

Brad Milsap -- Sandler O'Neill -- Analyst

Hi. Good morning, guys.

Edward Joseph Wehmer -- President and Chief Executive Officer

Hi, Brad.

Brad Milsap -- Sandler O'Neill -- Analyst

I just wanted to follow up on the NIM discussion and maybe the size of the balance sheet as it relates to the CDEC deposits. I guess maybe initially I thought that you would use that funding to sort of grow the overall size of the balance sheet but smartly so you guys opted to pay off some higher cost deposits. As you think about funding your $2 billion-ish loan growth this year, I assume you want to do that with core. Do you bring back some of the more wholesale sources to lever up into the bond book, if rates behave the way you want them to? Just kind of want to get a sense of kind of what you're thinking in terms of size of the balance sheet and how best to deploy that liquidity going forward?

Edward Joseph Wehmer -- President and Chief Executive Officer

Well, our prospects for loan growth are consistent with prior years. So we need to be able to bring deposits in to do that. We've worked very hard to develop a diverse deposit base but for the most part core, we only use the brokerage stuff when we have to or to control our asset liability management, so our interest rate sensitivity. The $700 million that we paid off was brought on was longer-term deposits. When we took on about approximately the same amount of franchise loans, we bought those from GE. We had to fund that right away. Now we consider these two things to be core and we really don't want to have a lot of reliance on institutional funds.

Now it's nice to have them there. We basically have brought those numbers down significantly to hardly -- to almost 3% or 4% of our total deposits but we have that available should the markets so warrant. So it's nice having that capacity available to grow if rates get [goofier]. We find it hard for some reason to grow organically.

If you look at Wintrust over years, we grew organically for a long period of time. We got into acquisitions and now we're back to filling out the franchise and growing organically. Mostly, the growth this year was organic. We feel pretty good about our ability to do that. Our branches are performing better than we experienced but we think that the deposit side of our balance sheet is really our franchise value, those core deposits and we're going to stick to trying to grow those, not lever up unless there's some situation where we can play an arbitrage someplace and make us a lot of money.

We don't see that happening with the flat yield curve but it's nice to have that in our back pocket in the event that were to occur. So in short, we like core deposits, we're going to continue to grow core deposits, continue to fill out the franchise where we can grow without the commensurate increase in expenses and be very flexible. It's hard to believe. I like being flexible, I wish I could be personally but we will certainly be on the business side.

Brad Milsap -- Sandler O'Neill -- Analyst

So in summary, basically adding the excess billion above the $2 billion that you need for loan growth, you just want to be flexible is really going to depend on kind of what the yield curve gives you?

Edward Joseph Wehmer -- President and Chief Executive Officer

Yeah. And we want to be conservative. We, obviously, don't make as much as we make on in the margin and taking all the CDEC money in. But you do not want to rely on it too much. And then you find yourself get whipsawed in what do you do. So we're going to conservative and we make good money. It was a great deal for us, they are wonderful people, they have a great market presence that we think we can enhance. So we're excited about those prospects and we want to get to know the business better before we get out over our skis and have a funding issue that we have to deal with later.

Brad Milsap -- Sandler O'Neill -- Analyst

And Dave, I don't know if you look at it this way. But I know you mentioned there was a huge impact to the CDEC money in the fourth quarter. But would the December margin be appreciably higher than say the October margin?

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

Yes. So December margin was higher than the October margin or was actually higher than our ending margin. That's why we believe that the margin will increase in the first quarter and we gave that guidance.

Brad Milsap -- Sandler O'Neill -- Analyst

Got it. Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from Kevin Reevey with D.A. Davidson. Your line is open.

Kevin Reevey -- D.A. Davidson -- Analyst

Good morning.

Edward Joseph Wehmer -- President and Chief Executive Officer

Hello, Kevin.

Kevin Reevey -- D.A. Davidson -- Analyst

How are you?

Edward Joseph Wehmer -- President and Chief Executive Officer

Living a dream every day my friend, every day.

Kevin Reevey -- D.A. Davidson -- Analyst

Yes. So my question relates to core operating expenses, I'm coming up for the fourth quarter roughly with a number around $210 million. Is that kind of a good number to use going forward assuming a modest rate of inflation and, obviously, you've got some other things going on, is that kind of a good start?

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

Kevin, we never really give guidance on the expense side because it moves around quite a bit. It's dependent on what happens with the mortgage business, and as I've mentioned, the marketing and advertising costs spike up a little bit in the second and third quarters. But the things that could impact that again would be the commissions on the mortgages. We tend to give salary increases in the first quarter starting in February. So roughly, 3% is a plus or minus number that you can use on average starting in February. So that generally kicks in. The rest of it, operating lease depreciation again, you can see on that category, it went up $1.1 million this quarter but that's good because we had a more corresponding revenue come on with those balances. So because of all the moving parts, we really haven't given a ton of guidance on that. But if you can look at the $1.6 million of acquisition related expenses we had for the quarter, those were unusual but the rest was sort of standard as far as the variability goes.

Kevin Reevey -- D.A. Davidson -- Analyst

Okay. And then how should we think about the gap in the FTE tax rate for 2019?

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

The guidance we gave before, I think sort of the 26.5% plus or minus would be sort of where we would think it would fall other than the credit you get for when you have stock equity, award grants and you sometimes get credits for that with the stock prices higher than what the award price was and so we give those numbers in the press release and in our Qs as to what they were in the year. So you can look at that and make an estimate I guess depending where you think the stock price is going to be. But it would be somewhat lower than that with those equity award credits that come through but barring that I would still think would be in a sort of the 26.5% range.

Kevin Reevey -- D.A. Davidson -- Analyst

That's helpful. Thank you.

Operator

Thank you. Our next question comes from Christopher McGratty with KBW. Your line is open.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Good morning. Thanks for the question, Dave, on the margin just want to come back to for a minute, the first quarter it seems like a pretty good setup from the deal and kind of the back-ended loan growth in the quarter. If the Fed doesn't move anymore, can you speak to the kind of the trajectory of the margin, your comments on moderating deposit betas was interesting. but once you get that lift in Q1 what's the outlook if the Fed doesn't move anymore?

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

Well, I mean, we show what our variable on the fixed rate loans are in the press release, you can kind of look at that but there are some tailwinds with the life portfolio that we have, the premium finance life portfolio we have. There's approximately $4.5 billion of those loans that are generally tied to a 12-month LIBOR rate and those repriced once a year. So theoretically about one-twelfth of those reprice a year, so if the 12-month LIBOR doesn't change, then we've got some tailwinds in that regard and we put a graph on Page 20 of our press release that sort of shows where that rate was a year ago and where it is now. So you get some benefit from that. Similarly our $2.5 billion of property and casualty premium finance loans are fixed rate and generally have a nine month life so about one-ninth of that portfolio was repricing as they come due at a higher rate.

So those two things have a little bit of tailwind, the positive pricing you still get a little bit of CD repricing out there as upward pressure but if rates don't move then as Ed said, we think we can sort of hold the increases on the deposits elsewhere pretty well and then the mix change with the CDEC versus some of the wholesale funding should help. But what we've sort of seen in the marketplaces and I think it's probably a perception that people now believe that maybe the Fed may not raise and so you're seeing people get less aggressive on deposit prices and you're actually seeing the longer and wholesale brokered fund pricing back off a little bit. So it just seems like the marketplace is sort of taking a pause, they're waiting to see what's going to happen and we'll certainly pause along with it on the deposit side.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Great. If I could sneak one more in on capital. You guys have historically been pretty shareholder friendly, given the move in the stock in the group, can you speak to thoughts on a buyback, whether it be stand-alone or kind of funded with some sort of alternative instrument? Thanks.

Edward Joseph Wehmer -- President and Chief Executive Officer

Well you know we always look at that but we are a growth company. We've got to concentrate on our TCE ratios and the like. But it's something we review all the time and [maybe] where the market goes, we'll see where we end up. If we saw a period of rope-a-dope 2 coming on board, we'd probably go out and raise a bunch of capital and wait to buy some stock back I would imagine. But right now, we are still experiencing good growth. And the acquisition market's strong. So it doesn't seem to make a lot of sense now but something we always look at and we'll continue to look at. Dave.

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

Yes. Well, the other thing is if you look at our total capital ratio, which tends to be our limiting one, we're 11.6% at the end of the quarter. And that fell really because of the acquisitions and the associated goodwill that goes along with that. But generally our earnings are supporting our growth but we generally wouldn't want to fall into the lower 11s or high 10s, and so we don't have that much excess capital. So to the extent that we thought that we wanted to enter into a stock buyback, we would probably have to raise some debt or preferred or something like that in order to accommodate the repurchase of it because we generally don't like our total capital ratio to fall much lower than that.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Got it. Thanks a lot.

Operator

Thank you. Our next question comes from Terry McEvoy with Stephens. Your line is open.

Terry McEvoy -- Stephens -- Analyst

Good morning.

Edward Joseph Wehmer -- President and Chief Executive Officer

Hi, Terry.

Terry McEvoy -- Stephens -- Analyst

Just in your closing remarks, you finished with Wintrust crossing $50 billion and making some comments about the expenses this year reflecting crossing that threshold, which caught me a little bit off guard, given your $31 billion today that's a what, 50%, 60% increase from where we are. So maybe could you just expand a little bit on why '19 you expect to start building up those expenses. Do you have any thoughts organically with the deal pipeline when that actually will happen and just help us gauge the build up of those specific expenses and put some sort of timeframe around it as well.

Edward Joseph Wehmer -- President and Chief Executive Officer

So, well this expectation was put on, was probably a year and a half ago and now we've added 110 people in IT for God's sake. We're a growth company and I'd like to say we're kind of like in puberty right now at quarter-end. We have to grow into the overhead we put on. There's still a someone telling -- the regulators are pushing us because of it and so you got to be ready and we like have a $50 billion platform. We don't use it, what if the expenses are coming. We've experienced probably more of them than we'd like already. And some more coming but we don't -- I can't tell you we're going to hit 50. I'm just telling what the expectations are. We have to have this platform ready, the referees, the regulators are referees and only I'm allowed to bump the ref. The other guys can yell at him, I can bump them. But we want to have good relationships with them all in all, we're making investments in the business that allow us to get there. So we need to grow into our clothes. We intend to grow consistently like we have in previous years. We don't intend to look at very large acquisitions we never know what comes along. So business as usual for us, which would get us there, feel good that way and nothing would have changed, we'll get you there five years probably.

But that's what's expected of us. And we need to grow into it to get that overhead ratio where we want. So I was just being open with you that the 150 is kind of hard to reach when we have to go to a committee and committees now to figure out what else is going on. We've put the infrastructure in place, we're very happy with it. Everybody's happy with it. And there'll be some more additions we'll need to bring on over the next year and a half or two years to make everybody happy whether if you follow my drift.

Terry McEvoy -- Stephens -- Analyst

Rright. Appreciate that. And then just as a follow up, the premium finance commercial business was up 8% last year the life side was up 13%. Is that a reasonable growth outlook kind of 8% to 10% for 2019 for those two specific lines of business ?

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

Yes, I mean, generally we think about our loan portfolio growing in the high single digits and generally we like those to sort of grow in concert with the total balance sheet. P&C could get a little bit better boost, I mean, the market is hardening just slightly in certain areas but the fact that there were some regulatory relief on collecting tax ID numbers and certain sort of know your customer rules out there for the premium finance business that were implemented late last year, we lost a fair amount of business over the last couple of years because we had to collect those 10 numbers whereas some of our competitors didn't. We hope to gain some of that back and we already are starting to gain some of that back but it takes time because these customers buy annual policies and they only come up once a year. So there could be a little bit of tailwind in that regard and, of course, we'll always want to grow it but I would think that those would be reasonable expectations maybe the P&C could be a little bit higher depending on market hardening aspects that may occur during the year and how well we do on regaining some of that lost business we have because of the unleveled regulatory playing field.

Edward Joseph Wehmer -- President and Chief Executive Officer

On the life side, I think the law of large numbers will catch up with us eventually. If I had to guess, probability-wise it's probably more probable that the P&C business will be up more on a percentage basis in the life business.

Terry McEvoy -- Stephens -- Analyst

Great. Thank you both.

Edward Joseph Wehmer -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from David Long with Raymond James. Your line is open.

David Long -- Raymond James -- Analyst

Good morning, gentlemen.

Edward Joseph Wehmer -- President and Chief Executive Officer

Hello, David. How did you like our double doink in the quarter?

David Long -- Raymond James -- Analyst

I was hoping for another Vegas Vacation comment, which did not happen. So we will go back to that next quarter.

Edward Joseph Wehmer -- President and Chief Executive Officer

Doink for those of you who don't know was our Bears kicker hitting the upright on the crossfire to lose the game. It's known as double doink in Chicago. We're calling the [fourth quarter] our double doink.

David Long -- Raymond James -- Analyst

Yes. I prefer to get back to another quarter, another record. So that said, following up on Terry's comments about the premium finance business. My sense has always been that there are more repricings happened early in the year on both the life and the commercial side. Is that the right way to think about it?

Edward Joseph Wehmer -- President and Chief Executive Officer

No. The business, it fluctuates a little bit as far as volumes go, because a lot of people have policies that renew in December and generally, the loans flow through in January. So January tends to be a large month and July, because the other high quarter-end month is June. So quarter ends tend to be a little bit higher, but not so dramatically that it would change the landscape as far as the rate environment too much.

David Long -- Raymond James -- Analyst

Got it. And then you talked a little bit about deposit competition maybe easing to some extent. And I have not seen as many teaser rates, if you will, or the 2.5%, 3% rates on deposits on some of the mailers going out. Where do you guys stand on some of these promotional deposit yields that you have previously focused on?

Edward Joseph Wehmer -- President and Chief Executive Officer

Well, we opened a new branch. We still use them. We opened 10 last year. We'll open 10 -- scheduled to open 10 this year. We will be using them at those locations. But again though, then we take those taper off as time goes by. And half the ones we did last year are tapered already. So I would expect there to be some hiccup there or increase there. But as a percentage of our total deposits, it becomes less and less. But we agree with you. There's not as many silly things going on in the market right now. I think people are taking a breath. We had great loan growth because of our diversification in the quarter. I don't think you're seeing that in the smaller banks and other places right now. And if they get off of the fund, they're not going to get paid that kind of money. So, yes, I believe the competitive environment for deposits is taking a breather, as Dave said.

David Long -- Raymond James -- Analyst

Got it, that's all I have. Thanks guys.

Operator

Thank you. (Operator Instructions) Our next question comes from Nathan Race with Piper Jaffray. Your line is open.

Nathan Race -- Piper Jaffray -- Analyst

Hey, guys. Good morning.

Edward Joseph Wehmer -- President and Chief Executive Officer

Good morning, Nathan.

Nathan Race -- Piper Jaffray -- Analyst

Going back to the discussion around CDEC, Dave, just wondering if you could paint a little more color around what the specific fee income and non-interest expense impact we should expect in 1Q as you guys get the full quarter impact of that deal?

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

We haven't disclosed that yet. And it sort of depends on the volume of deposits and that's what they can throw up and down. So I think we'll take a pass on giving you that information until we let first quarter go.

Nathan Race -- Piper Jaffray -- Analyst

Okay, sounds good. And then just maybe a broader question for Ed, there's been a lot of M&A in Chicago not only in the last year, but in the last few years. So just curious as you kind of sit here today, how you kind of -- if you're more or less optimistic on loan and deposit growth opportunities into 2019 than maybe you would have thought 8, 12 months ago?

Edward Joseph Wehmer -- President and Chief Executive Officer

On the acquisition front, I think I said in my comments that it's actually, the pricing expectations are coming down a bit. I think, especially in the under $1 billion banks, which is what we focus on. I think, they're all getting a little worried that they want to get out now before the next wave hits. We don't see that next wave yet, but there always is one and their expectations have come back a little bit. So we believe that the acquisition front to be very interesting this year. On the organic loan and deposit growth, we talked a little bit about premium finance, where we think that's going. But again, our loan pipelines are as strong as they've ever been and our ability to book these loans on our terms is holding up. As I mentioned, our critical exceptions is both a percent of new deals and in the portfolio just exceptions in general and the portfolio in total has been relatively consistent and a little bit trending down over the last two quarters.

So we are able to get deals on our terms. And again, we've always been an asset-driven company. If the assets dry up, we're not going to go out and raise a bunch of deposits. We'll hunker down and wait for everything to hit the fan and hopefully clean up again.

So there's some disruption in the market with our neighbor over here striking to close pretty soon, that always is good for us. So we like where we sit right now. But at the end the first quarter, I might not like what I said. We'll see where it goes. Most of the competition is not coming from banks, it's coming from non-banks on at least the pricing and the leverage in term side is getting a little bit goofy out there. But that being said, our reputation plus the turmoil in the market is OK right now. Our pipelines remain strong. So we feel pretty good about where we are.

Nathan Race -- Piper Jaffray -- Analyst

Yes, that's a great color. I appreciate you guys taking the questions.

Operator

Thank you. Our next question comes from Brock Vanderbilt with UBS. Your line is open.

Brock Vanderbilt -- UBS -- Analyst

Good morning, guys. Can we just go back to the mortgage business and it sounded like you made the call not to hedge the pipeline, going forward is that going to be hedged is the pipeline going to be hedged as a matter of course or are you going to reevaluate every quarter ?

Edward Joseph Wehmer -- President and Chief Executive Officer

We'll reevaluate every quarter.

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

And it's the servicing portfolio, we do hedge sort of most of our pipeline. So it's just the servicing portfolio that we're referring to as a hedge.

Brock Vanderbilt -- UBS -- Analyst

Okay. Well, that was my next question, whether you hedge the MSR? And your MSR capitalized values basically doubled, more than doubled in the last year. Is that's not hedged at the moment?

Edward Joseph Wehmer -- President and Chief Executive Officer

Yes. That's what I was referring to was that, our pipeline, we do hedge and that works fine for us. But I sometimes made the call that something we would do in the first quarter. If you recall, the tenure got up very nicely during the fourth quarter before it tumbled and it appeared that was going to be consistent. And my call was to say that's something we're going to look at it in the first quarter and started legging into it, then it fell off again, so now we are reevaluating. Did that makes sense?

Brock Vanderbilt -- UBS -- Analyst

It does. I know, MSR marks have bitten many banks over time. I'm just a little surprised with it growing. You're not just going to hedge out that exposure or large portion of it?

Edward Joseph Wehmer -- President and Chief Executive Officer

Well, it is growing over time and we are looking at it. So it was something that was a nice run up for us. It was my fault. I should have looked at it and then while conservative but it is something we're looking at now and we'll get back to you on it. But I'll fall on the grenade for that one. But I think I made enough money on the other stuff I think.

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

In reality, Brock, if you look at the MSR valuations were almost flat for the year. I mean, we had gains in the first three quarters and I gave it all back at the end. So on an annual basis, it was somewhat flat but if your viewpoint is that you think rates are going to rise a little bit, you could ride up that value and then hedge it in and we just felt that the long end would not tumble like it did and it's come back a little bit since the end of the year. So you could see some pickup in those MSRs, we're not even near the end of the quarter yet and with the volatility we saw in the fourth quarter, who knows but we have a hedging strategy in place and we'll evaluate it. It's just the timing of when you implement it.

Brock Vanderbilt -- UBS -- Analyst

Okay. Fair enough. And just as a quick follow-up, what would be your general sense of -- can you give us any sense of 2019 volumes assuming say, no further hikes in your mortgage business. Is that kind of flat or up small or --?

Edward Joseph Wehmer -- President and Chief Executive Officer

I would say flat.

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

And I'd say generally flat.

Brock Vanderbilt -- UBS -- Analyst

Flat assuming no hikes. Ok. Thank you.

Operator

Thank you. Our next question comes from Michael Young with SunTrust. Your line is open.

Michael Young -- SunTrust -- Analyst

Hey, good morning. Just wanted to touch really quickly on the loan-to-deposit ratio. You guys have done a nice job of bringing that down from kind of 95% at the beginning of 2018 and we're almost at kind of the high-end of the range here headed into 2019 of that 85% to 90% that you guys are targeting. Any color on kind of where you feel like that will trend or what you're watching in terms of being able to bring that lower throughout the year?

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

Yes. Well, our goal is still the 85% to 90%. And we could have easily been there had we not get rid of the brokered funds here in the fourth quarter, when we brought CDEC on, so we could have just grown that. But with the long end coming down, there really was no place to put those funds, so we elected to use those funds to get rid of some of the higher-priced wholesale brokered and Federal Home Loan Bank funding that we had.

So we still have the goal to just gradually bring that down. And if the market -- if the long end would go up, as Ed said, you could potentially lever and get there right away But in the interim, we hope to just gradually continue to bring that down into the 90s or the 85% to 90% range in 2019. But we'll just have to see what happens to the yield curve and how fast you do that. You don't want to raise all the deposits and have no place to go with them. So we'll monitor the curve and go from there.

Michael Young -- SunTrust -- Analyst

And just wanted to follow-up on the comments that you guys started to kind of ladder back out sometime this quarter and kind of last quarter. Any chance that the covered call income is going to take up here in 2019, or is that still likely going to be steady at kind of this lower run rate?

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

We write them on some of the securities. So generally, you get more covered call when rates are going down, because people pay you more for those. With the thought that the rates may be relatively flat at this point on the long end to going up, you don't get that much and you can see that we have some of our securities called away. We'll reinvest those but that's sort of typical.

So, I wouldn't expect too much difference in that. It just really sort of depends on what the market perception is, where rates are going, what the volatility is -- to be in the quarter when we write those, but probably not dramatically different.

Michael Young -- SunTrust -- Analyst

Okay, thanks.

Operator

Thank you. I'm showing no further questions at this time, I'd like to turn the call back over to Ed Wehmer for closing remarks.

Edward Joseph Wehmer -- President and Chief Executive Officer

Thanks, everybody, for dialing in. Put the double doink quarter behind us and we're going to look forward to a very good first quarter hopefully, knock on wood and talk to you again in April. If you have any additional questions or follow-ups, feel free to call Dave Stoehr, Dave Dykstra and myself, happy to talk to you. Talk to you later when pitchers and catchers are in. Thanks. Bye.

Operator

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.

Duration: 69 minutes

Call participants:

Edward Joseph Wehmer -- President and Chief Executive Officer

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

Jon Arfstrom -- RBC Capital Markets -- Analyst

Unidentified Speaker --

Brad Milsap -- Sandler O'Neill -- Analyst

Kevin Reevey -- D.A. Davidson -- Analyst

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Terry McEvoy -- Stephens -- Analyst

David Long -- Raymond James -- Analyst

Nathan Race -- Piper Jaffray -- Analyst

Brock Vanderbilt -- UBS -- Analyst

Michael Young -- SunTrust -- Analyst

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