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Wintrust Financial (NASDAQ:WTFC)
Q1 2019 earnings call
April 16, 2019 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Wintrust Financial Corporation's first-quarter 2019 earnings conference call. [Operator instructions] Following a review of the results by Edward Wehmer, chief executive officer and president; and David Dykstra, their 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 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 Wehmer -- Chief Executive Officer and President

Good afternoon, everybody. Welcome to our first-quarter earnings call. A beautiful day in Chicago. It's 73 degrees.

Last Sunday, we got 5 inches of snow, so welcome to our world. With me as always are Dave Dykstra; Kate Boege, our general counsel; and Dave Stoehr, our CFO. Again, the same format as we always have. I'll give some general comments regarding the results for the quarter.

I'll turn it over to Dave Dykstra for a more detailed analysis of other income, other expenses and taxes. Back to me for some summary comments about the future, thoughts about the future, questions, and off we go. Very pleased with the first-quarter results. $89 million, up 12% from the fourth quarter last year and about 8.75% from first quarter of '18.

$1.52 a share meet consensus, up 13% from the quarter -- from fourth quarter and 7% from last year. If you were to take out the mortgage servicing right adjustments in all three of those comparative periods, Wintrust would have made close to $95.7 million in the first quarter, $1.64 a share, up 12% from the $85 million that we would have made in the fourth quarter, $1.46 a share, and up 21% from the $78 billion we would have earned in first quarter of '18 or $1.38 a share. So all in all, our performance is pretty good. We do get whipsawed by the last 15 days of every quarter lately.

We've seen sort of some abnormalities in the rate movements, but it is what it is. Our margin increased 9 basis points to 3.72% in the quarter from the fourth quarter. ROA of 1.16% was up from 1.05%, a return on equity of a little over 11%, return on tangible equity of 14%. So good growth across the board for us in earnings.

And in the balance sheet, I'll get into a little bit of it. Results were achieved despite the $8.7 million pre-tax MSR valuation adjustment due to the market volatility experienced in the last two weeks of the first quarter of 2019 -- just must be some but the last two weeks of the quarter. Other one-timers are marginally negative to the quarter results and are highlighted as follows: Negative $1 million nontaxable deduction before fine was basically offset by unrealized gains and equity securities of $1.4 million. We had $464,000 gain on Canadian foreign currency, which is offset by really acquisition expenses and some other smaller items.

Setting this off, we had approximately $0.5 million of pre-tax one-timers, basically all due to MSR valuation, negatively affecting our results. On the positive front, as I mentioned, our FTE margin increased 9 basis points in the quarter to 3.72%. It was kind of a high watermark for recent times. This, coupled with increase in average earning assets of $771 million, resulted in net interest income increasing approximately $8 million during the quarter over the fourth quarter.

I believe that to be kind of remarkable given that the first quarter had two less days than the fourth quarter and it stays with what, Mr. Stoehr, about $2.3 million?

Dave Stoehr -- Chief Financial Officer

$2.5 million.

Edward Wehmer -- Chief Executive Officer and President

$2.5 million pre-tax, so not bad. One more on the margin. Earning asset yields were up 16 basis points. Net cost of funds, including free funds contribution, was up 7 basis points.

CDEC deposits, you all remember CDEC, Chicago Deferred Exchange Corporation, which we acquired mid-month in December. They experienced their expected seasonal drop in Q1 but were still additive to reducing our cost of funds. As this was the first full quarter of CDEC deposits and they're only on the books for a couple of day, really maybe half a month in the fourth quarter last year, comparators are somewhat meaningless. CDEC deposits are down approximately $200 million quarter-end versus quarter-end and a bit more on the average basis through the end of the first -- the end of last year.

We expect these balances to grow through the year due to both seasonality of the business and our marketing efforts, with rates moderating, significant emphasis leaning toward holding down our cost of funds rate increases. The decrease in the overall rate environment has put an end -- a halt, at least for the time being, to our liquidity management laddering program. We've talked about this in previous calls. We'll continue to monitor the rate environment for opportunities to move forward with this plan.

In that regard, the duration of our liquidity management portfolio moved down to 4.8 years from 5.85 years at the end of the year. And it's almost seven years at 3/31 of last year. So you can see we're building up lots of liquidity. It can hurt the margin a bit, but we think it's the right thing to do.

Let's see. Period-end loans exceeded fourth quarter average loans by over $334 million as it has -- and we see in the back end most of our loan growth will give us a head start on Q2 and bodes well for the net interest margin and net interest income. Our pipelines remain consistently strong across the board. In the first quarter, we saw a number of the pipeline loans where we expect to close in the first quarter in the commercial and commercial real estate side move into the first couple of weeks of April.

They have moved through. We've had good loan growth already this year -- this quarter, and so we're feeling pretty good about that. However, we are seeing some additional rate compression and paydowns due to competitive pressures for both banks and non-banks, with the latter being the biggest culprit. That being said, we're still going to grow our portfolio in our terms and to continue to expect loan growth in the mid- to high single digits.

However, as with our peer group, the margin is a bit under assault. At least, we started at a high point here. We believe that we will do our best to mitigate any compression. Expected balance sheet growth and lowering deposit rates should offset any small margin compression should it occur.

We're not giving in on it. We believe that with the rates moderating, we believe we can hold our costs down, and we're still some [Inaudible] in the earning asset side because it does take a full year for any rate increases to work their way through the system. So we think we're in pretty good shape on the margin front. But if I could predict accurately within the penny, I wouldn't be in this business.

I'd be in a sports book some place. Other income other than mortgage-related items was very good numbers. Mortgage was hurt by the MSR valuation and by the expected seasonal decline in volume. If you take those away, the mortgage issues area still made money.

Wealth management continues its slow and steady growth with fees up $1.3 million over the fourth quarter of 2018. We're very happy with their results year over year. Assets under administration surpassed $25 billion, so good growth there. Other expenses are pretty well aligned to be discussed in detail by Dave.

Our net overhead ratio was high at 1.72%, compared to 1.79% in quarter 4. If you were to back out the MSR valuation adjustment, these numbers would have been 1.61% and 1.69%, respectively. It was still higher than what we want. That was acceptable given the slow mortgage production -- the overall mortgage business slowness we saw in the first quarter and within the fourth quarter last year.

We're still on track with our operational efficiency initiatives in the mortgage area. Cycle times and production costs are down. We still have ways to go to reach our desired efficiency levels. We're on track for June 30 of total Phase 1 completion of this work.

On the credit side, credit metrics remained very strong. NPAs increased $1 million in the quarter and recorded 0.43% of assets, down from 0.44% of assets at the year and Q4. NPLs increased $4.4 million, while OREO decreased $3.3 million. Net charge-offs for the fourth quarter were $5.1 million or 9 basis points, down from the $7.1 million or 12 basis points we achieved in the fourth quarter of last year.

Reserve coverage stood at 134%, pretty even with what we showed in the fourth quarter but down from 156% experienced last March. And our credit remains very good. Balance sheet growth. Ending assets grew $1.1 billion in the quarter, an increase of 14% over the year-end and 12% from a year ago.

Total loans, net of loans held for sale, were up approximately $400 million quarter-versus-quarter and $2.1 billion over the year, or 6.5% and 9% growth, respectively. As we mentioned, most of the growth was back-end loaded. We started to a head start close to $250 million plus the carryover from what was expected to close in that quarter of about $150 million. And then we expected to close in the first quarter have moved over.

So we feel pretty good about where we are entering this quarter. Loan pipelines, as mentioned, are consistently strong, the second strongest quarter we've had in the last six or 7. The strongest quarter we've had recently has been the fourth quarter. We saw the momentum continue through the first quarter.

6.5% loan growth experienced in the quarter that we expect a little shy of our desired growth. But if you had added in what we expected to close in the first quarter and was pushed over, the number would have been closer to the number we like to get at. We are concerned about payouts, but when the business recover the payouts that we've seen happen. Payouts have basically been consistent for the last six or eight quarters.

Anyhow, they're higher than we'd like, but we use the competitive markets here in Chicago. Deposits grew $710 million and $2.2 million quarter-versus-quarter and year-versus-year, respectively, translating to percentage of 11% and 13%. Loan-to-deposit ratio returned to the high end of our desired range of 85% to 90%, closing the quarter just a smidge above 90%. Our goal is we're going to deposit this -- our desired range.

All in all, good consistent growth quarter for Wintrust. I'm going to turn it over to Dave to discuss other income and other expenses.

Dave Stoehr -- Chief Financial Officer

All right. Thank you, Ed. As normal, I'll touch on the other non-interest income and non-interest expense sections. In the non-interest income section, our wealth management revenue increased to $24.0 million in the first quarter, compared to $22.7 million in the fourth quarter of last year and up 4% from the $23 million recorded in the year ago quarter.

Brokerage revenue was down approximately $481,000, while trust and asset management revenue offset that decline by increasing $1.7 million, with the majority of that $1.7 million increase related to additional revenue generated by CDEC due to a full quarter of activity with CDEC. A number of our assets that we manage are based upon the market value at the beginning of the quarter, so we have a little bit of a good head start for the second quarter as asset valuations are higher at the beginning of the second quarter than they were at the beginning of the first quarter. So all in all, we believe first quarter was another solid quarter for our wealth management segment, and we look forward to continuing to grow that. In the mortgage banking revenue side, those revenues decreased 25% or $6 million to $18.2 million from $24.2 million recorded in the prior quarter, and it was down from the $31 million recorded in the first quarter of last year.

The decrease in this category's revenue from the prior quarter resulted primarily from lower levels of loans originated and sold during the quarter and negative fair value adjustments recognized and mortgage servicing rights related to the changes in rates and other valuation assumptions and the effect of payoffs. And that revenue headwinds were offset by higher average production margins on the loans that were sold. The company originated $678 million of mortgage loans for sale in the first quarter of 2019. This compares to $928 million of originations in the prior quarter and $779 million of mortgage loans originated for sale in the first quarter of last year.

The mix of the loan volume originated for sale related to purchased home activity was approximately 67% in the first quarter, compared to 71% in the prior quarter, so purchased home activity continues to be a majority of our new origination activity, although we saw a slight uptick in refinancings due to the recent drop in rates. Page 21 of our first quarter earnings release provides a detailed compilation of the components of origination volumes by delivery channel and also of the mortgage banking revenue, including production revenue, MSR capitalization, MSR fair value and other adjustments and servicing income. Given existing pipelines, we currently expect originations in the second quarter of 2019 to increase nicely and should approximate at least $1 billion, possibly could be higher than that, but we think it could be at least $1 billion range right now given existing pipelines. Moving on.

The company recorded gains on investment securities of approximately $1.4 million during the first quarter, primarily related to the recovery of some of the $2.6 million of unrealized losses we recorded in the prior quarter associated with an investment in a large-cap equity fund that we seed with our asset management company. Other non-interest income totaled $16.9 million in the first quarter, up approximately $6.3 million from $10.6 million recorded in the fourth quarter of last year. There are two primary reasons for the improvement in this category of revenue, including a positive swing of $1.6 million of foreign exchange valuation adjustments associated with U.S.-Canadian dollar exchange rate, and the current quarter had a positive valuation adjustment of approximately $464,000 versus the fourth quarter of 2018 had a negative adjustment of approximately $1.15 million. The currency rate volatility was abnormally high in the fourth quarter.

It generally is $0.5 million or less. So that resulted in $1.6 million swing. And for your information, we've begun to disclose a line item for foreign currency valuation gains or losses in the non-interest income tables presented in our earnings release. Next, BOLI income was up approximately $2.1 million from the fourth quarter primarily as a result of a $1 million of earnings on BOLI investments supporting deferred compensation plan benefits, which are positively impacted by equity market returns.

And this was compared to $1.1 million loss in such investments in the prior quarter. So we got a $2.1 million swing in BOLI earnings related to the deferred compensation plan benefits, and this also results in a similar increase in our compensation expense recorded during the quarter. They're somewhat offsetting. If you look at the remaining $2.6 million of improvement in the other non-interest income section, it primarily relates to an increase from investments that we have on certain partnerships and card-based and merchant service fees.

Turning to non-interest expense sections. non-interest expenses totaled $214.4 million in the first quarter, up approximately $3 million from the prior quarter. I'll talk about a few of the more significant changes. The salaries and employee benefits expenses category increased approximately $3.6 million in the first quarter of 2019 from the prior quarter.

The increase was due to a variety of factors, including the $2 million increase in expense related to deferred compensation plans impacted by the positive market returns on the BOLI products that I've just discussed. So those again were somewhat offset in the income and the expense section, but it was a $2 million increase to the salaries as well as a $2 million increase to the non-interest income. We also had the impact of annual base salary increases that generally took effect on February 1 and were in the 3% range. We had a lower amount of salary deferrals as the loan originations were down a little bit in the first quarter compared to the fourth quarter, so there was less loan origination costs that were deferred.

And then we had normal growth as the company continues to expand. These increases were offset somewhat by a lower level of health insurance claims. They tend to be lower in the first quarter as a lot of people try to get their health claims in, in the fourth quarter before their deductibles are reset. And so those were a little bit lower in the first quarter.

And we also had a lower level of incentive compensation and commissions related to the mortgage banking production and the wealth management brokerage revenue. Professional fees decreased to $5.5 million in the first quarter, compared to $9.3 million in the prior quarter. Professional fees can fluctuate on a quarterly basis based on the level of legal services related to acquisitions, litigation, term loan workout as well as the use of consulting services. This category of expenses came down substantially due to the decline in legal fees associated with litigation, collections and acquisitions and also experienced a lower level of consulting engagements associated with technology enhancements and other initiatives.

We had quite a few of those engagements going on in the prior two quarters, which we didn't have this quarter. Amortization of intangibles increased by approximately $1.5 million in the first quarter to $2.9 million. The increase compared to the prior quarter was primarily due to the amortization of certain acquired intangible assets related to the CDEC acquisition in mid-December of 2018. And if you look at all the other expense categories other than the ones I just discussed, they were up on an aggregate basis by only $1.6 million from the fourth quarter, and that included the $1 million settlement payment on a regulatory matter, which was included in miscellaneous non-interest expenses.

So barring that, all the other categories were really up about $600,000. So nothing significant to talk about. And with that, I will turn the presentation back over to Ed.

Edward Wehmer -- Chief Executive Officer and President

Thanks, Dave. Some thoughts about the future. For those of you listening to our calls regularly, these summary statements are beginning to sound like a broken record. We will stick to our knitting here, taking what the market gives us, not get out over our skis.

And so we start the second quarter with very good balance sheet growth, strong earnings despite the one-timers with MSRs. We start the second quarter with $350 million head start on loans. Loan pipelines are very strong, and we're booking loans on our terms. The non-bank competition becoming more and more aggressive.

Our brand in the disruption occurring in our market is helping us to continue to gain share. This situation warrants that as our circuit breakers, which are our pricing policies and old policies, trip, we won't be afraid to stop the boulders we had in the past. As of now, we've seen no reason to do so. We expect the margins could be under a bit of pressure in 2019, but we think our expected growth deposit rate moderation, maintaining our strict loan underwriting guidelines and standards and pricing parameters, we expect to hold our own in this regard.

Credit metrics remain strong. However, we will continue to cull the portfolio for any cracks in major relationships, whether these cracks are filed. We always remember your first loss is your best loss, and we never want to kick the can down the road. It takes a full year for short-term rate increases to work their way through an asset portfolio.

Some of the increase certainly helped the first quarter margin, but this and the other increases, which occurred in 2018, are still working their way through the system. This will help with mitigating any margin pressures we discussed earlier. Wealth management should continue its slow and steady climb. In 2018, we opened 10 branches.

We have the same number for 2019. 2018 branches are performing ahead of plan. We expect the same for the ones opening this year. We announced in the quarter our acquisition of Rush-Oak and its subsidiary, Oak Bank.

We expect this transaction to close in Q2. It looks like pricing for banks and our asset -- in our desired asset range continue to become more reasonable. As such, our landing patterns are very full, but the gestation periods remain very slow. You can be assured of our consistent, conservative approach to the acquisitions and other deals.

We also continue to look for other earning asset ventures we can jump into but none yet. We did open our factory operation, our vendor finance operation in the quarter, both of which were off to very good starts. We expect those portfolios to bill out over the rest of the year, and they both have very good rates in them. So we're very comfortable with them, and that should help us.

Our 10-year rate, though hurtful in the fourth quarter for -- first quarter of this year, it should help volumes in the upcoming spring buying season on the mortgage side. We continue with our cost cutting and efficiency progress in this business, many of which will be operational by midyear. As a community bank, we have to be committed and are committed to this business. We still want to achieve a net overhead ratio of 1.5% or better.

G&A number will, in the coming year, may be higher. The number's been 150 is our goal for this year. In short, we're proud of what we've built over the last 27 years. We're going to approach the rest of 2019 confident that we'll able to achieve our goals of double-digit earnings growth and continued growth in tangible book value so as you can be assured of our best efforts.

We appreciate your support. Let's move on to questions. 

Questions and Answers:

Operator

[Operator instructions] And our first question comes from the line of David Long with Raymond James. Your line is open.

David Long -- Raymond James -- Analyst

Good afternoon, gentleman.

Dave Stoehr -- Chief Financial Officer

Hello, David.

David Long -- Raymond James -- Analyst

Regarding your expected IT spending, what are you thinking about with your core operating system and any expenses that you may have to make this year? And then as a follow-up to that, just overall IT spending in 2019. What are we looking at -- be looking at as a growth rate there versus '18?

Dave Stoehr -- Chief Financial Officer

Yes. We're doing a few things on that. You can see if you look at our data processing line, we've had some declines and we're renegotiating some -- a number of different contracts and trying to streamline some of that stuff. So we expect to get some savings out of that, which will be offset by additional expenses that we're doing for digital products and digital enhancements to the system and some other efficiencies that we're trying to do.

So we haven't disclosed exactly what that number is going to be, but we've invested a lot over the last few years in the IT infrastructure side. I actually think what you'll see, as those investments are already baked into the numbers from last year, that they're actually going to moderate some this year as far as increases. So I wouldn't expect a large significant increase in the spending because we've done some other things to save money to offset that.

Edward Wehmer -- Chief Executive Officer and President

Yes. As Dave says, we've not disclosed it, but we have gone back and looked at a lot of contracts and have been able to twist some arms to get some things out of them. That should cover additional investments we're making. We continue to make investments both in the digital side and in information security and other issues, but clearly, we can keep costs where they've been, maybe 1% or 2% given inflation.

But when you read that, don't assume that we're not making the investment -- the required investments. We still live by our model. We stand by the products. We stand by the delivery systems, killing the service.

And we continually look at our offerings and the offerings of our competitors, try to stay with them or ahead of them.

David Long -- Raymond James -- Analyst

Got it. And then, one follow-up, on the deposit side. Living here in your market, I've noticed over the last six months a real slowdown in the amount of promotional deposit mailings that I've gotten. Have you seen any easing on some of the promotional prices that you've seen out there for deposits?

Edward Wehmer -- Chief Executive Officer and President

Yeah, absolutely. The third quarter last year, you were getting like eight in the mail every day of emails or what have you. It's slowed down, which gives us hope that we can continue our growth and moderate our deposit growth in the last month of the year. Half our banks showed -- in the quarter, half our banks showed 0% increase in deposit costs and another half showed 3 or 4 basis points.

We had a meeting yesterday, meeting up the guys on 3 or 4 basis points. I think our growth -- our goal is to grow -- continue to grow our core deposits without an increase in cost of funds from the level it's at. That's our goal. The mix of more CDEC deposits coming on should be helpful in that goal.

Emphasis on getting more demand deposits through the commercial relationships that seasonally move a little at the end of the year in the first quarter. Hopefully, we can hold it all. We can do that. And the rate increases that took place last year continue to work their way through the portfolio, and we believe they can offset any spread compression on newer deals.

But we think we're OK. I mean, there's probably a 3-basis-point spread either way that we're looking at. And we're looking at this really closely all the time, so we know the margin is under assault, and our goal is to make sure we win that battle.

David Long -- Raymond James -- Analyst

Got it. Appreciate the color. Thanks, guys.

Edward Wehmer -- Chief Executive Officer and President

Thanks, Dave.

Operator

Thank you. And our next question comes from the line of John Arfstrom with RBC Capital Markets. Your line is open.

John Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good afternoon.

Edward Wehmer -- Chief Executive Officer and President

Hi, John.

John Arfstrom -- RBC Capital Markets -- Analyst

Hey, just back to the margin question. I heard in your prepared comments, you said I think your quote was NIM compression should it occur. And then Page 1 of your release, you talk about expecting pressure on the margin in the upcoming quarter. Just help us understand -- help us just understand those two comments.

Edward Wehmer -- Chief Executive Officer and President

I think that the issue is we're trying to hold it where we like to see it increase. I think we've got some things we can do to do that, but -- you heard it all. I mean, as I said, if I could predict this stuff, I wouldn't be doing what I'm doing. I'd be in the sports book someplace.

We think that it could go 3 to 4 basis points either way throughout the course of the year. We're working to hold it steady. At least we're starting from a higher point. We know we'll have good asset growth from an NII standpoint.

We think that that's a good thing. But our goal is to maintain the margin and grow it. We're going to do our damnedest to get there, but it's under pressure right now. And we think we can moderate our deposit costs.

As I said in the last -- when I answered David's question. I think we can moderate our deposit, and we can hold that steady. And the increase in -- the rate increase that took place last year continue to work their way through the balance sheet. Hopefully, they can offset compression on newer deals, but that's our goal.

Dave Stoehr -- Chief Financial Officer

Maybe a better way to say that was that we expect some pressure, that we expect headwinds, which you can maybe offset. But whether it's pressure or headwinds, like the 1-year LIBOR rate is down, so the repricing of the life portfolio isn't quite as good as it was maybe three months ago. So there's some headwinds there, but as Ed...

Edward Wehmer -- Chief Executive Officer and President

It was up from last year, a little bit.

Dave Stoehr -- Chief Financial Officer

Just barely. So it's not quite as good as it was, so there are some headwinds. Maybe headwinds is a better way than to say pressure. But as Ed says, we've got a number of different levers we'll pull, and we'll have to see where the growth comes from.

But we're hoping to offset it. If there is some pressure, maybe a few basis points down, but it's possible that if everything went well with the cards, you could be up a couple, too. So.

John Arfstrom -- RBC Capital Markets -- Analyst

OK. OK. That helps. I just -- you read the release and you think that the margin is really going to step down, so that helps.

Also, I've got a question on the pipeline. You talked about some of the deals falling into Q2 from Q1. Curious how significant those -- the size of those loans are. And then the second part, in terms of that increased pipeline, how much of that is warehouse versus maybe just more broad-based?

Edward Wehmer -- Chief Executive Officer and President

Well, the first part of your question, we booked probably $160 million of loans already this quarter related to -- that really should have closed last quarter. That's about the amount that was moved over. I know they're booked. But we give you these pipeline numbers, it's really our commercial and commercial real estate.

It doesn't include our life insurance portfolio, our premium finance, commercial premium finance portfolio, our leasing group and the other groups and the mixed loans that are out there. So just to give you an idea, in December, we were $1.128 billion. In February, that has been the highest. This is gross, not affected by probability of close.

We're $1.1 billion -- $1.188 billion at the end of March. So again, up a little bit from the end of the year and a -- I was going to say on a weighted average basis -- [Inaudible] OK, those numbers are relatively the same. I thought the rates went pretty good. So that being said, good if true, I guess.

But we've got good history to back it up. Our leasing portfolio is doing nicely also. What's going on in town here, the bank that was sold here had a very big leasing portfolio sold to a bank that also had a big leasing portfolio, and some of the vendors they used wanted an additional source. So we've been able to pick those up, where also disruption in the market that's taking place in the last two years, we're starting to reap the benefits of that.

So we feel good about where we are in terms of loan growth, but that's not to say that the non-banks aren't making our life tougher.

Dave Stoehr -- Chief Financial Officer

And Jon, just to follow up on Ed's. I've got the detail he didn't have in front of him, but the $1.18 billion sort of the 13-month rolling average of our pipeline. At the end of March, we were $1.3 billion, with the probability of close of $812 million. And you compare that to the end of the year when we were $1.1 billion, with the probability of close of $671 million.

So it's up over the end of last year and has actually grown a little bit. It's down a little bit from February but just slightly. So we're seeing good growth in that, and the probability of close is good. But like Ed said, you can't always make your customer close when they want to close, so sometimes there's a little back and forth between quarters.

John Arfstrom -- RBC Capital Markets -- Analyst

OK. Got it. So the big picture message, you're still seeing this high single-digit growth and you're essentially going to fight a good fight on the margin but some potential headwinds there? That's what you're trying to say. Is that right?

Edward Wehmer -- Chief Executive Officer and President

Yes. I think that's fair to say. But notwithstanding, I mean, net interest income, which you have to look at, and good asset growth will give us more net interest income. And so we've got to look here, and we're looking at the bottom line.

We'll do our best to control the margin, but what are you going to do?

John Arfstrom -- RBC Capital Markets -- Analyst

Yeah, yeah. OK. Thanks for the help.

Operator

Thank you. Our next question comes from the line of Casey Haire with Jefferies. Your line is open.

Casey Haire -- Jefferies -- Analyst

Thanks. Good afternoon, guys. Ed, I wanted to follow up on your -- you mentioned the leasing opportunity with all the disruption in your market. What else -- what other products? And then are you seeing any opportunities in the deposit side just given all the disruption in your market? And are we in the early innings there? Or are there other examples similar to the leasing one you cited?

Edward Wehmer -- Chief Executive Officer and President

Well, on the commercial side, disruption is always good. One is that our two biggest competitors in the last two years have sold, one to a Canadian bank and one to a Cincinnati bank. We're starting to see more opportunities out of the Canadian bank that was acquired -- that acquired a local bank because they're getting more and more entrenched there. We're seeing more opportunities from there.

First couple of months or years, we didn't see much. From the other bank, we are seeing opportunities. I know we booked a number of them already and more coming. So I think any disruption is always good, especially on the commercial side.

We think there's good opportunities for us. A lot of people want to bank locally. And with us in Midwest, [Inaudible] in town, we'll triple the size of Midwest. And we think we do it better.

We know we do it better. So we think on the deposit side, the deposits are obviously moving to commercial business. And on the retail side, we continue to stick to our tried-and-true method. Retail gets stickier with all the digital stuff that's out there.

We have to find a better way to do that. But with that being said, we've grown nicely. And our new branches will be our new opportunities. Where we've opened new branches and we bought banks, those were doing very well for us.

So it's hard to pinpoint where they come from because we take as many from Chase and Bank of America and Harris as we do from anybody else. So retail deposits are tough. We always take our share from people. But on the loan side, we're taking -- it seems the opportunities are more than it had been lately.

Is that OK? Did I answer your question?

Casey Haire -- Jefferies -- Analyst

Yes. No, that's great. And just following up, I guess, on the M&A outlook. You guys have Oak Bank, I believe, closing this quarter.

Is that opportunity set still a pretty good active one? I would think it would be in the wake of just all the headwinds on the subscale bank group.

Edward Wehmer -- Chief Executive Officer and President

You hit the subscale. I like that. Subscale bank group. Never heard of it put that way.

Yes, we are in the subscale bank group and that's not underwater banks. We don't want those unless we get them -- somebody to support the price like the FDIC. But yes, prices have come back to be attractive again. I think that many of these people thought after the Trump bump and some of the prices that were paid for banks immediately after that thought that they could command those prices, but now they see the Democrats they got tax issues.

The taxes could go back. You could have earning asset issues. They'd seen regulation may have -- you may not have as much new regulation, but the old stuff continues to filter down to them. And I don't think they're going to go through another cycle again.

So as I said, our lending patterns are very, very full to the extent that we actually have to kind of sit and decide which ones we're going to line up first and second and third. But the gestation periods remain longer than they should be. It's just internally, we're finding when you go through due diligence, and we go through very deep due diligence. We seem to find some issues that require more work and on the tax side and on the lending side.

So they're taking a little longer to get done than they used to.

Casey Haire -- Jefferies -- Analyst

All right. Thank you.

Operator

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

Brad Milsaps -- Sandler O'Neill -- Analyst

Hey, good afternon, guys.

Edward Wehmer -- Chief Executive Officer and President

Hi, Brad.

Brad Milsaps -- Sandler O'Neill -- Analyst

Dave or Ed, just back to the NIM discussion. I just want to talk a little more about deposits. I was curious of the $700-or-so million that you brought on this quarter. It looks like it was a mix between a lot of various categories, but kind of curious what the average cost of those deposits were sort of relative to where you were for the rest of the quarter.

Edward Wehmer -- Chief Executive Officer and President

I'll let Dave handle that.

Dave Stoehr -- Chief Financial Officer

Yes. No, Brad. I don't actually have a weighted average cost on the new deposits. And obviously, our prices up a little bit, but a lot of that is CDs maturing.

We had pretty decent growth in the wealth management area. Although some of those come from some of our customers, but we also have some third-party unaffiliated brokerage companies that place money with us. And so we had a little bit of that. But we're having good success on sort of the money market and the savings accounts by marketing to our existing customers, and we're really not outrunning the high-priced ads that someone else referred to.

It's just blocking and tackling and getting in front of them and providing them sort of standard promotion. So I don't have -- I'm dancing around your question because I don't have the number in front of me, Brad. But we're not running an exorbitant special rates, if that's what you're arriving on.

Edward Wehmer -- Chief Executive Officer and President

I will tell you, half in -- is we put -- is the curve flatten more in the month of March, half the bank showed no deposit cost increase and the other half showed 3 or 4-basis-point increase. Those are the ones that get beat up. Yesterday, we showed a 3 or 4 basis points. If that helps you any.

And the growth across of those banks is relatively consistent. So we are moderating those costs now. And as David Long had asked, the competition isn't as bad. I mean the smaller banks and the like are not there offering goofy rates.

So there's -- for the shoppers, there's no reason to match anything. So we're very cognizant of what we need to do on the deposit rate side to maintain our margin. We're going to work our asses off to make sure it happens.

Brad Milsaps -- Sandler O'Neill -- Analyst

No, that's helpful. And just a follow-up, if I heard correctly, it sounds like you once again brought down the duration of the liquidity book. Is there some thought too that the reason you're doing that is that -- are you looking to focus a little more on mix change and maybe that helps the NIM a little bit, and you can hold onto a little more easily that way? Or am I thinking about that incorrectly that you're holding more cash in that book now?

Edward Wehmer -- Chief Executive Officer and President

Well, we are holding more short-term securities in that book, that's correct. We would have thought we would like to be laddering out. We started doing it and then we had a stop. So rates get higher, and it makes no sense to ladder at these levels, in our opinion.

Brad Milsaps -- Sandler O'Neill -- Analyst

OK. And then just final question on the -- on your guidance, around $1 billion in mortgage or so for the quarter, Dave. How much do you siphon on and off the corresponding network? Is that -- is most of that $1 billion coming through your retail channel that carries a higher "going to loan some" margin? How do I think about that mix kind of going forward? I know what you prefer, but just kind of curious how to think about it.

Dave Stoehr -- Chief Financial Officer

Out of our $678 million that we originated for sale in the first quarter is about $148 million. Our thoughts is that it's probably very similar number in the second quarter. So out of that $1 billion, plus or minus number, maybe $150 million would be correspondent. We're actually seeing good origination in our legacy retail origination and some increases in the Veterans First, too.

So I think the big jump will be in our retail origination platform, some in Veterans First and expect correspondent to be relatively flat.

Brad Milsaps -- Sandler O'Neill -- Analyst

Great. Thank you, guys.

Dave Stoehr -- Chief Financial Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Michael Young with SunTrust. Your line is open.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Hey, good afternoon.

Dave Stoehr -- Chief Financial Officer

Hello, Michael.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Just a quick follow-up, we kind of dance around the margin question a good bit. But in the press release, it was stated that you expect that the margin would be down next quarter. But it sounds like you may be backing off that a little bit depending on what you can do on the deposit side. So just in terms of pretty near term, should we still think down in 2Q, but then we hope to defend it for the rest of the year?

Dave Stoehr -- Chief Financial Officer

I think when we're answering the prior question, maybe the answer to that is we should have said, there would be some headwinds to the margin versus pressure on the margin. There are headwinds that we're going to have to fight to keep it there. But as Ed said on the prior call, it could be down a few. It could be up a few.

But it just depends on the mix and how we do on CDEC deposits and some other things. So we're not guiding that. It absolutely will be down. We're just indicating there might be some headwinds.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

OK. And on the growth, just curious how much of that is kind of new production that you're putting on versus are you seeing any increases in utilization levels on C&I lines or even in the dollar volume in the premium finance business?

Edward Wehmer -- Chief Executive Officer and President

Well, we're not seeing big increases in line utilization. So they're fairly standard. The property casualty, as you'd see, we had fairly good growth in that this quarter. So there's a little bit of firmness in the market where premiums are going up a little bit.

And we're getting a little bit of the business back from the regulatory issue we had where we don't have to do certain TIN collections anymore. So we're getting some of that business back. And then just our teams out there selling good service. So we're seeing some good growth there.

Dave Stoehr -- Chief Financial Officer

Yes. The regulatory issue, for those of you who knew, wasn't particular to us. It was a regulation that the Fed was following that said we had to get TIN numbers on all our commercial premium finance contracts. Our competitor -- our major competitor is a non-bank and sold against us.

We -- for the three years that was gone out, we probably lost 10% of our book and have to fight like heck to remain -- to keep our overall outstandings constant. Through the work of Mr. Dykstra and a number of people, we've been able to get that all reversed and send reverse it. So the regulatory issue had nothing to do specifically with us.

It has to do with getting a lot changed, which Mr. Dykstra went to Washington and met with Hensarling and Shelby and all the product quals and all the powers that be and got them to change a law, which is pretty remarkable. But I just wanted to make sure you know that it had nothing to do with us. But we are fighting to get that business back that we had lost.

And unfortunately, the business we lost was our more profitable business, kind of a smaller-ticket trucking business, things like that that might have been getting a little higher late fees or what have you. So we are working to get that back little by little, we expect that to occur, but we'll go from there.

Operator

Thank you. Our next question comes from the line of Chris McGratty with KBW. Your line is open.

Chris McGratty -- KBW -- Analyst

Hey, good afternoon. Dave or Ed, maybe a kind of high-level question on capital. I know you don't have the authorization for a buyback, but just kind of interested in your thoughts, philosophically, where your stock's trading given the falling rates, and then you guys, I think, talked about potentially doing one with some sort of a debt component. Any kind of thoughts on buying your stock, where it is today?

Dave Stoehr -- Chief Financial Officer

Well, we don't have a buyback in place. It's something that the board can look at. It's probably a good practice to have a buyback in place at any time in case you find yourself in a position where you want to do it. So that's something we will look at and the board will look at, but we don't have one in place right now.

From a capital side, we understand rates are low. A lot of these acquisitions that we talked about actually come to fruition. We'll need some cash and probably some capital to support that growth, if that's the case. Like you said, interest rates are pretty low so we probably look at sub debt or preferred.

Although I think sub debt as a tax-deductible method is probably a little bit more attractive at this point of the interest rate cycle. And if it's just cash, you need to get the deals done if they're cash deals that we're doing, and that would suffice. But we will just have to look at the time that the buyback's in place. And if you have capital on excess cash where the stock price was at, we'll make a decision.

But I'm not going to say on the call we're going to do one thing or the other, but we will look at putting a buyback authorization in place.

Edward Wehmer -- Chief Executive Officer and President

Yes. I think it makes sense to have one. The other thing is most of the acquisitions we do are probably half stock, half cash. So that helps us from a tangible book value's point of view and works across the board.

So I just wanted to -- most of the deals we do are half and half. Some are a little bit more stock, depending on the ownership of the target. We want to get more tax-free treatment and like the value of our stock where it sits. So we'll be raising capital that way too, if in fact, this come to pass.

But as you know, our track record has always been -- we're very good stewards of our shareholders' money. And we do what we do to an offering to some -- usually, that means there's something coming behind it.

Chris McGratty -- KBW -- Analyst

Understood. Yes. I totally understand. Maybe one more on the margin from a different angle.

Some of your peers have been a little bit more aggressive in taking down rate exposure, asset sensitivity, if you will, given kind of the rate shift that we've seen in the last six months. How should we be thinking about any tweaks to the structure of the balance sheet maybe over the next six months to maybe protect against downside risk?

Edward Wehmer -- Chief Executive Officer and President

We have, if you look, I forget what page it's on. Look, we have taken our position down to probably about a third. I got to look it up. No, we're moderating our asset sensitivity right now, Chris.

And so if you look in the press release, we've gone from 9% on a Ramp Scenario for a 200 basis point increase down to 6.7%. And on a downside, we've reduced the -- from 4.8% to 3.3% on the downside. So we're trying to narrow that gap, and we're doing that by doing some additional fixed rate lending and extending out, which we didn't do much fixed rate lending before. So we're doing a little bit more of that and just working with the liability and the assets like gradually to moderate that asset sensitivity.

Chris McGratty -- KBW -- Analyst

Great, and then maybe one more...

Dave Stoehr -- Chief Financial Officer

We're seeing the need to do more fixed rate assets. Given the rate -- or the term of the rate is -- the rate environment is right now, you can do a fixed rate asset and buy a cap on it for not a lot of money. So we're looking at that to get our upside squared away but protect our downside also. So we never really did a lot of fixed rate loans, but we're seeing some like life insurance market, we're seeing more fixed rate, people coming out of fixed rates that we want to be able to match, and what we want is to protect our upside.

But also downside protects our upside, I'm all for it. So the rates are kind of -- the market is kind of accommodating for us in that regard.

Chris McGratty -- KBW -- Analyst

Great. And Dave, maybe quick on the tax rate. Is this a good rate for the rest of the year?

Dave Stoehr -- Chief Financial Officer

No. Actually, the first quarter tends to be our lowest tax rate because we have the benefits of the excess tax benefits from stock option and restricted tax exercises. So our effective tax rate in the first quarter was 24.86%, compared to the last year in the first quarter was 24.14%. But generally, I think it's probably closer to the 26% range.

Chris McGratty -- KBW -- Analyst

Got it. Thanks.

Operator

Thank you. And our next question comes from the line of Kevin Reevey with D.A. Davidson. Your line is open.

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

Good afternoon.

Dave Stoehr -- Chief Financial Officer

Hi, Kevin.

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

So Ed, I just wanted to make sure I understood your commentary with respect to your net overhead ratio. So you're committed to a 1.50%. Is that for the full year of 2019? Or is that to get to that level at the end of 2019?

Dave Stoehr -- Chief Financial Officer

I think what I said was long term, our goal is to be 1.50% or better. If you took away the MSRs, we are 1.61% this quarter, compared to 1.69% in the fourth quarter, taking away the MSR hits. If you -- I said -- what I said was it would be hard for us to hit that goal this year. We're looking at the mid- to high 1.50% is our goal for 2019.

OK?

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

Great. Yes. Got that. And then your comment on the factoring business that you just started.

Could you give us some color as to where that's located, staffing, etc., and the type of deals that you've been doing?

Edward Wehmer -- Chief Executive Officer and President

Well, the vendor finance is off to a great start. They're up to $20 million, $25 million in outstandings. The deals in the 7% or 8% area. They're out in California.

We have like three businesses out in Orange County now, and where some of our leasing business is out there. So off to a very good start. On the factoring side, this is a logical adjunct to our asset-based lending side to move down into the factoring side. So it's not -- and that's just fledgling now, but the pipelines look very good there.

Our goal would be on both of those new businesses to get them up over the next three years in the $300 million to $400 million range. Their rates are very good. And interestingly, when we studied the factoring business, as we're going to be doing it, is that only the lower end of our asset-based lending, our ABL opportunity. Our ABL business, it gets really good when things get tighter.

It's better when things are bad. It's kind of like our franchise business. It's better when things are bad. Other people eat more at Applebee's or McDonald's than they do when things are good.

So it's a nice hedge in there. But they're both off to good starts. I hope that answers your question, Kevin.

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

That did. Thank you very much. Appreciate the color.

Edward Wehmer -- Chief Executive Officer and President

Thank you.

Operator

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

Terry McEvoy -- Stephens Inc. -- Analyst

Good afternoon.

Dave Stoehr -- Chief Financial Officer

Hello, Terry.

Terry McEvoy -- Stephens Inc. -- Analyst

Hi. Just one question. I was hoping to get your thoughts on your $800 million, $900 million commercial finance portfolio. How much of that is QSRs? I did notice a little bit reserve building in the quarter, but that may be just reflected growth and just more big picture view there.

Dave Stoehr -- Chief Financial Officer

Well, we have -- we've got about $880 million of franchise loans that we're referring to. And most of those franchise loans are franchise or similar to McDonald's, Taco Bell, Dunkin', etc., Arby's, Wendy's, those sorts of franchises.

Edward Wehmer -- Chief Executive Officer and President

We -- as you recall, if you remember the third quarter last year where we added three problem loans we're trying to exit out of through the non-accrual list. Everybody kind of oh, your non-accrual loans are up higher. One of them, they went from nothing to next to nothing. One of them was a franchise deal.

It's a franchise that covered the entire state of Wisconsin. The franchise itself is doing very well every place else except in that market and had to do with the franchisee not following through on things we should have followed through on. That loan will be paid off through the sale of that franchise in May, in mid-May is the plan. All losses have been taken on that.

So I think our reserves grew up a little bit because we -- the loss we took there and the experience we had there was specific reserve related to...

Dave Stoehr -- Chief Financial Officer

For growth.

Edward Wehmer -- Chief Executive Officer and President

Yes, it was for the growth. So you take a charge on something, you expect the reserve factor to move up a little. And that's what it did. So -- but the rest of the portfolio is operating just fine.

It was kind of a one-off.

Dave Stoehr -- Chief Financial Officer

I know there was some noise in the industry over the last week or so about another deal, but we're not seeing any specific stress in our portfolio other than that deal that Ed talked about that we refer to in the third quarter of last year.

Terry McEvoy -- Stephens Inc. -- Analyst

That's what I wanted to hear. Thank you.

Dave Stoehr -- Chief Financial Officer

Thank you.

Operator

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

Nathan Race -- Piper Jaffray -- Analyst

Hey, guys. Good afternoon. I don't mean to beat a dead horse on the NIM, but just kind of thinking about the trajectory of loan yields from here, it sounds like you still have some positive repricing going on from previous rate hikes. So I guess I'm just curious kind of what the weighted average rate on new loan production is today relative to the portfolio yield at 5.06%.

Dave Stoehr -- Chief Financial Officer

Well, it really depends on the mix, Nate. And I mean the premium finance loans are -- on the commercial side are higher than that. Commercial real estate at fixed rate would potentially be higher than that. But if you did just a straight commercial loan or the life loans, they tend to be lower than that.

So it's really sort of a mix and you really got to break it down. So we could tell you what it is, but premium finance is a lot better, a lot worse next quarter. It's going to go up or down. But I think generally, on average, we're doing well there.

And we have some tailwinds with the non-premium finance portfolio.

Nathan Race -- Piper Jaffray -- Analyst

OK. Got it. And then just lastly, any updated thoughts and perhaps hedging out your MSR going forward?

Dave Stoehr -- Chief Financial Officer

Yes, we're going to -- second quarter, where we will have some downside protection there and do some hedging -- full hedging program. We are taking some actions on the downside without really stripping away the prior upside.

Edward Wehmer -- Chief Executive Officer and President

Yes, we finally -- we found the hedges, you get all sorts of different thoughts and plans on how to hedge MSRs and many of them could go the wrong way quickly. We found one that we think is protect the downside and keep the upside alive.

Dave Stoehr -- Chief Financial Officer

And given the shape of the yield curve, some of those options are more affordable now than they had been in the past.

Nathan Race -- Piper Jaffray -- Analyst

OK. Got you. And if I could just ask one more on expenses. Assuming mortgage volumes are kind of flat year over year, can you kind of give us some parameters of what we can expect in terms of all-in expense growth in 2019?

Dave Stoehr -- Chief Financial Officer

In terms of deals done, it's a hard thing to do because we have the leasing number out there. And if you grow that business, those expenses go up and we have acquisitions in there and the like. So certainly, you want that growth -- as I said in my comments earlier, salaries are going to be up 3%. But we try to keep the same sort of sales number down sort of low single digits.

But then if you have the growth through the branches and you have acquisitions, that number can change. But clearly, we want to grow that number where we can get leverage out of it. So mid-single digits on same-store sales is probably the answer.

Nathan Race -- Piper Jaffray -- Analyst

OK. Got it. Appreciate all the color. Thank you.

Operator

Thank you. Our next question comes from the line of Brocker Vandervliet with UBS. Your line is open.

Brocker Vandervliet -- UBS -- Analyst

Great and thanks for the question. Dave, so the CDEC deposits have flowed out. I'm assuming that's seasonal. I would think they would come back in pretty heavily in the second or third quarter?

Dave Stoehr -- Chief Financial Officer

That's been their history, yeah.

Brocker Vandervliet -- UBS -- Analyst

OK.

Dave Stoehr -- Chief Financial Officer

We never really marketed it a lot. And we actually are putting a marketing to get a team together. And so we hope to -- there's only eight people working CDEC that's generating these numbers. It's a wonderful business for us, and we've never marketed it, and we're going out to do that.

So hopefully, we can build on the seasonality also.

Brocker Vandervliet -- UBS -- Analyst

And with that, allow you to then pay down the FHLB a little bit?

Edward Wehmer -- Chief Executive Officer and President

FHLB, we use -- I like to use it to cover the mortgages held for sale. With excess liquidity, we're going to bring it out but the -- it's a nice book and match for us to use those overnight funds, some of the mortgages held for sale. But I think our overall liquidity position sometimes it's lower because we don't need it. You don't want to grow something you got nowhere to put the money.

But that's how I like to use Federal Home Loan Bank advances. Sometimes we use -- we've got some term out there for asset liability for matching purposes, but most of it is overnight.

Dave Stoehr -- Chief Financial Officer

Yes. And that's really what we did at the end of the first quarter was we pay down a lot of the other wholesale funds. So to the extent those FHLBs come due and we have the excess. But at the end, as Ed mentioned, CDEC deposits went down a little bit just because of the seasonality.

We expect them to come back up. So we maybe had a little extra wholesale funds to cover that gap where deposits went down, but we expect that to translate back into CDEC funds in the second quarter here.

Edward Wehmer -- Chief Executive Officer and President

But our plan with CDEC fund is only to keep on our books whatever the rolling 12-month averages. So we don't become really dependent if something were to happen. But the good news is we make a nice spread. And what we don't keep as we sell -- they sell that to other banks as funding.

So we get x, they get x plus 1% or 2%, 1%, 1.5% right now that's fee income to us. So we like that too.

Brocker Vandervliet -- UBS -- Analyst

Got it. And separately, you're kind of scratching the laddering program for now. I'm assuming we should build in less investment securities growth as a result?

Edward Wehmer -- Chief Executive Officer and President

Yes, long term. We'll still have investment securities but that will be shorter. So you mostly have to work on your yield, not your and I keep it all at Fed funds. But it will allow 60, 90, 180 days, but not 70 years or five years or whatever.

Brocker Vandervliet -- UBS -- Analyst

Right. But just in terms of the growth of that portfolio, I'm assuming it should grow somewhat more slowly?

Edward Wehmer -- Chief Executive Officer and President

Of the longer end of it, yes.

Brocker Vandervliet -- UBS -- Analyst

Got it. OK. Great. Thank you.

Operator

[Operator instructions] Our next question comes from the line of David Chiaverini with Wedbush Securities. Your line is open.

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. A couple of questions for you. So I just want to clarify the loan growth guidance. So I think in the prepared comments, you had mentioned mid- to high single-digit growth.

And then in response to an earlier question, you had referred to high single digit. I don't want to parse your words too much, but just curious as to what the official message is there.

Edward Wehmer -- Chief Executive Officer and President

Mid- to high.

David Chiaverini -- Wedbush Securities -- Analyst

Got it. Thank you for that.

Edward Wehmer -- Chief Executive Officer and President

So 7.5.

David Chiaverini -- Wedbush Securities -- Analyst

OK. OK. Fair enough. And then a follow-up on the CDEC, so when do you expect to reach that sort of 12-month kind of pro forma average such that we wouldn't see the volatility of a couple hundred million per quarter?

Edward Wehmer -- Chief Executive Officer and President

Well, you'll always see that volatility because that 12-month there puts seasonality of the business. So you'll always see some movement there, but you figure $1.1 billion was what their 12-month average was, and then it fell off. By the fourth quarter, we expect to be back to $1.1 billion plus our existing whatever growth we have. So whatever growth that we bring in, in excess of what they've been doing historically.

Does that make sense?

David Chiaverini -- Wedbush Securities -- Analyst

Yes, I thought that the idea...

Dave Stoehr -- Chief Financial Officer

First quarter tends to beat us. If you're on average, obviously some quarters you're going to be below and some you're going to be above. And first quarter is a seasonally slow quarter. So I would expect this to actually -- and the fourth quarter tends to be very large.

On the middle quarters, you're probably right around that average. So I would expect to be much closer to that average in the second and third quarter.

David Chiaverini -- Wedbush Securities -- Analyst

Got it. I thought the idea would be that we would see the volatility in the fee income line but not on the deposits you would actually hold on balance sheet.

Edward Wehmer -- Chief Executive Officer and President

I think you'll see them both.

Dave Stoehr -- Chief Financial Officer

And just if you're going to stay at the average, you're going to have a couple of quarters that are below and a couple of quarters that are above and hopefully, it's not that wild of a swing. But even if there's a couple hundred million for a month or so, we can easily cover that with other sorts of funding in the interim. So I'd cry to think of it as an overall average for the year and not worry about the exact timing of the months and the quarters.

David Chiaverini -- Wedbush Securities -- Analyst

OK. Got it. And then shifting gears, you had mentioned about and I missed what you were referring to, but you said by June 30, Phase 1 would be completed related to some work that you have going on. What were you referring to with that?

Dave Stoehr -- Chief Financial Officer

It was our mortgage business, our mortgage efficiency initiatives where we put in a totally electronic front end that we're now marketing. Our goal is to get more of the business through this front end than through the normal -- the historical way of loan brokers -- our originators out there. We bring it in through the electronic front end and cut your commission expense down to 30% from 50%, 52%. That's a good thing.

So that should help mitigate that expense. It also has added to -- has helped us reduce cycle time. We can get things done faster by doing this. Assuming we increase cycle time means less expenses associated with it.

And we're also looking at outsourcing some work that's now done internally that's on a -- it's on a variable basis under the outsourced approach as opposed to a fixed basis. So like in the first quarter, we had a lot of costs in that business. If we move some of this non-customer-facing work to a variable basis in about 40% to 50% of the cost, that would help us tremendously. It also can be done because of the location of the outsourcer.

It can be done at night while we're sleeping to help cycle times, too. So we're working on a number of those initiatives that should help bring down our overall costs of doing business over the long term. So again, if we can get -- right now, we've got maybe 80%, 90% of our business coming through the old-fashioned distribution method using the mortgage broker. If we get that down to 50% and can cut the expenses related to commissions down to 30% of that that's real money.

So those are the things we're working on is to get more and more efficient in this market area. We're also testing out some other areas where we can utilize robotics to do monotonous sort of work. So we're really moving ahead on this stuff. And the Phase 1 doesn't include robotics.

It just includes some of the things I just discussed. So to me, breaking cost out of mortgage and making them more variable, therefore, making our business more profitable on a consistent basis.

David Chiaverini -- Wedbush Securities -- Analyst

I see. OK. So June 30 is the completion of Phase 1. What's the time frame to complete the project?

Edward Wehmer -- Chief Executive Officer and President

Probably forever. We'll always be looking at ways to do this. I think the -- this is a business that's becoming more commoditized. And it's one that we believe that if we can add personal service to the commoditization of the business, we've got the best of both worlds.

People can still go to their bank and get the stuff and know the person they're dealing with and that somebody on the screen, we think we can serve our clients very well. So what's the end? There'll never be an end. We'll always look to be more efficient. So this is just some of the low-hanging fruit we can take down.

Phase 2 could be the robotics side and some other outsourcing that we can do. Non-customer-facing outsourcing, we've got to walk before we could run here. So we expect continued improvement in the overall profitability in the mortgage business, notwithstanding what goes on with the actual sales margins themselves, just the production side.

David Chiaverini -- Wedbush Securities -- Analyst

That make sense. Thanks very much.

Operator

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

Edward Wehmer -- Chief Executive Officer and President

Thanks, everybody, for dialing in. And if you have any issues or other questions, feel free to call Dave or myself. Thank you very much.

Operator

[Operator signoff]

Duration: 75 minutes

Call Participants:

Edward Wehmer -- Chief Executive Officer and President

Dave Stoehr -- Chief Financial Officer

David Long -- Raymond James -- Analyst

John Arfstrom -- RBC Capital Markets -- Analyst

Casey Haire -- Jefferies -- Analyst

Brad Milsaps -- Sandler O'Neill -- Analyst

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Chris McGratty -- KBW -- Analyst

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

Terry McEvoy -- Stephens Inc. -- Analyst

Nathan Race -- Piper Jaffray -- Analyst

Brocker Vandervliet -- UBS -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

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