Wintrust Financial Corp (WTFC) 2014 Q4 法說會逐字稿

Welcome to Wintrust Financial Corporation's 2014 fourth-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. 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.

The Company's forward-looking assumptions are detailed in the fourth quarter's earnings press release and in the Company's most recent Form 10-K on file with the SEC. I will now turn the conference call over to Mr. Edward Wehmer.

Thank you very much. Welcome, everybody. Good afternoon. Happy New Year. Welcome to our Wintrust fourth-quarter earnings call.

With me as always are Dave Dykstra, our Chief Operating Officer, Dave Stoehr, our Chief Financial Officer, and Lisa Pattis, our General Counsel.

The call will follow the same protocol as we have in the past. I'll provide some general comments on the quarter and the year. Dave Dykstra will take you into detail on other income and other expense. Then back to me for some summary comments and thoughts about 2015, and then we'll have time for questions.

To start with, 2015's off to a good start. We closed this morning on our acquisition of Delavan in Delavan, Wisconsin, picking up about $200 million, plus or minus, in assets. Four branches, we currently have four in that part of the Wisconsin market.

We think there's some cost-out opportunities there. The acquisition makes us the largest bank in Walworth County. Everybody knows Walworth County, that's where Lake Geneva is. It's a wonderful area. We're excited about that. We welcome the folks from Delavan to the Wintrust family.

2014 was a solid and a record year for Wintrust, really across the board. It was accomplished in what I would consider a pretty tough banking environment. Not just regulatory, rates, competition, you've heard it all; I don't need to go through it. But earnings were up 10.3% to $151.4 million. Earnings per share up 8.5% to close to $3 at $2.98.

Assets pushed through the $20 billion mark and up 10.6% year to year. Loans, not including loans held for sale, were up 10.5%, up to $14.636 billion. Deposits were up 11% to $16.3 billion.

DDA for the year was up 30%, up to $3.5 billion, now comprised of 22% of our overall deposits. And this is a credit to the commercial initiative that we embarked on four or five years ago. For years we were running at 9%, maybe 10% DDA.

But our commercial products are selling well; our treasury and management is selling well. New relationships are coming on. This will bode well when -- bodes well now, but will bode even better when rates move.

Our margin was down around 7 basis points due to the overall compression you've seen in the industry, from 3.53% in 2015 to 3.46% in 2014. Our net overhead to ratio dropped 3 basis points to 1.76%, still some room to go there as we all talk about. And ROA stayed constant, close to 80 basis points at 78.

Our Wealth Management has pushed through $20 billion in assets under administration. Both Wealth Management and Mortgage had very good years. Wealth Management fees for the year were up 13.2%, or $8 million, while Mortgage -- pardon me.

Mortgage revenues were down from a record 2013, but still very strong if you consider the first quarter which was weak due to when we were living in Siberia in weather-related conditions. Service charges on deposits were up 13% or $3 million, so good momentum across the board.

Our already low credit metrics got even better during the year as we made great progress in our ever-present goal to get bad -- identify bad assets and get them out the door. NPLs went down to $78 million and represent 0.55% of loans. NPAs went down from 0.85% to 0.62% of assets.

So still stellar credit, but we are still looking to clear these assets out, not that we want to make room for the next ones. Hopefully there won't be any, but we all know there will. But we just -- that's our style. We make money on other people's bad assets, not on our own.

Because of the acquisitive nature that we've been under over the last five years and analyzing our reserve for loan losses gets a bit complicated. As you know, loans that are acquired in an acquisition come over without any reserve. So although our stated reserve is 64 basis points, when you add in the credit discount on acquired loans that number gets up to 74 basis points, consistent with where we were when you look back in time and we believe it's more than adequate to cover where we are.

And reserve coverage on non-performers -- the reserve coverage of non-performers also increased and Dave Dykstra will get into a detail of this to kind of explain it to you because you'll see some new disclosures on page 26 and 28 of our press release. And as we stay acquisitive I think this is kind of how you have to look at our overall reserve position as it relates to our loans.

During 2014, we increased branch -- total branches by 16 to 140. We did four bank transactions and added to our premium finance operations in Canada. So we had a good year in had that regard. So all in all, very good and successful year and we're proud of it, but now on to the fourth quarter.

Earnings at $38.1 million or $0.75 a share, that's an 8% increase over 2013. We had approximately $0.03 of one-timers, $1.3 million related to subletting our Wealth Management space as we talked about previously. We had rented the old Continental Illinois Bank building down right at Main and Main, at LaSalle and Jackson, right across the street from the Federal Reserve.

It's a wonderful opportunity for us. We were outgrowing our space, but we needed to get out of our lease that Wealth Management was in and that cost us approximately $1.3 million in the subletting process and the costs related to that.

We also took a $615,000 pretax charge on closing an acquired branch. Guess we need to do a better job of purchase accounting next time around, but cost-outs are very important to us going forward in acquisitions that we do.

Assets increased 17% to $20 billion. Loans increased $357 million or 10%, good growth across the board there. And our pipeline has remained consistently strong.

Most of the loan growth occurred in December, so average loan growth was actually lower than the 350 that we showed quarter end to quarter end. So this bodes well for the first quarter of 2015, as does the ample pipeline which I talked about later.

As we talk about deposits, increased 5% and DDA made up $266 million of that. Again, a tribute to our Commercial initiative. Net interest margin remained constant, 3.46% to 3.46%.

As we said, on a lot more liquidity than we had earlier in previous quarters, but our goal is obviously to put that to work. Capital ratios remained strong. As we discussed credit earlier; it's still in wonderful shape. We did have OREO expenses were up a couple million bucks versus the third quarter of $2 million, and as we continue our effort to push out bad assets. Now I'll turn it over to Dave.

Thanks, Ed. As normal, I'll just briefly touch on the non-interest income and non-interest expense sections.

In the non-interest income section our Wealth Management revenue totaled $18.6 million for the fourth quarter of 2014. This was up about $1 million from the $17.7 million in the prior quarter and improved by $2.4 million when compared to the year-ago quarter of $16.3 million.

The Trust and Asset component of this revenue continued its consistent growth, increasing to $10.8 million from $10.5 million in the prior quarter. And on the brokerage revenue side, which can fluctuate based on customer trading activities, we showed an increase of approximately -- increase in revenue to approximately $7.9 million from $7.2 million in the prior quarter.

Overall, this quarter marked a record for us in terms of Wealth Management revenue. We've got an outstanding Wealth Management team and we look forward to continued growth.

On the Mortgage Banking side, the revenue declined to $24.7 million in the fourth quarter from $26.7 million recorded in the prior quarter, but was higher than the year-ago quarter of $19.3 million. The Company originated and sold approximately $838 million of mortgage loans in the fourth quarter, compared to $905 million of mortgage loans originated in the prior quarter and $742 million in the year-ago quarter.

Also as the longer-term interest rates declined at the end of the third quarter and into the fourth quarter, we did experience a higher level of refinancing activity, which resulted in the mix of volume related to purchase home activity declining to slightly less than 60% in the fourth quarter from what was a little bit over 70% in the third quarter of this year.

Now moving on to fees from covered call options. This revenue item increased $3 million in the fourth quarter compared to $2.1 million in the previous quarter and $1.9 million recorded in the fourth quarter of last year. As we've mentioned before, we consistently have utilized these fees to supplement the total return on our Treasury and our agency securities in an effort to try the hedge to margin pressures caused during a period of declining and low interest rates.

Trading losses totaled approximately $507,000 during the fourth quarter. This compares to trading gains of approximately $293,000 in the prior quarter and trading losses of $278,000 in the year-ago quarter.

As we've mentioned in other calls, the trading losses and gains in the current and prior quarters were primarily as a result of fair value adjustments related to interest rate cap contracts that we have not designated as hedges that we use to manage interest rate risk in the portfolio.

If I turn to non-interest expenses, non-interest expenses totaled $143.4 million in the fourth quarter of this year, 2014, increasing approximately $4.9 million compared to the prior quarter. There were really three primary drivers for the increase during the quarter.

One, an increase in the OREO related costs that Ed mentioned of $1.7 million; costs that Ed also mentioned of $1.3 million related to entering into the sublease on our existing downtown Wealth Management office space; and approximately $700,000 related to the transitional reinsurance fee required under the Affordable Care Act and pension liability costs. So I'll talk about those costs later.

But excluding the costs associated with those specific three reasons, the increase in other non-interest expenses in the aggregate rose approximately $1.2 million, or less than 1%, over the prior quarter. Now I'll go through the categories that have some notable fluctuations from the third quarter.

Salaries and employee benefits expense increased $1.7 million in the fourth quarter, compared to the third quarter of 2014. The increase in this category was primarily due to an increase in employee benefits expense of approximately $1.4 million, including approximately $700,000 related to the Affordable Care Act transitional reinsurance fee assessments and changes in the valuation of some pension funds that we inherited with two of the bank acquisitions. We're looking at terminating those pension funds in the future but now they're in a frozen state, and it was just a valuation issue with the liabilities associated with those pension plans.

And we also had increased payroll taxes of about $249,000 from the prior quarter, and that was primarily related to the taxes on year-end bonuses paid to a portion of our employee base. Salaries, commissions, and incentive compensation expense, other than the employee benefits, increased only slightly over the prior quarter by an aggregate of just $268,000.

Turning to occupancy expenses. They increased by approximately $1.2 million in the fourth quarter to $11.6 million and this is an increase from $10.4 million recorded in the third quarter of the year. The increase in the current quarter is almost entirely a result of the loss incurred upon entering into the sublease agreement.

We have entered into that sublease agreement in preparation for the move to our new location at 231 South LaSalle that Ed talked about. And we believe on a going-forward basis the space will be more economical on a per foot basis than our existing downtown space, so should be beneficial going forward.

The fourth quarter also saw an increase of $1.7 million in net OREO expenses compared to the prior quarter, resulting in net OREO expense of $2.3 million in the current quarter compared to just $581,000 in the third quarter of this year. The current quarter's expense was comprised of approximately $1.2 million related to operating expenses and approximately $1.1 million related to valuation adjustments and net gains and losses on the sale of OREO.

If you look at page 40 of our earnings release it will provide you with the detail on the activity in the OREO portfolio and the composition at year-end. And at year-end the OREO portfolio decreased to $45.6 million and that is down from $50.4 million at the end of the third quarter.

The only other category of non-interest expenses that had a fluctuation worth noting was the data processing category. It increased by $548,000 in the fourth quarter to $5.3 million from $4.8 million in both the third quarter of this year and the fourth quarter of the prior year.

The increase in the current quarter included approximately $247,000 of conversion-related costs associated with recent acquisition activity and the remaining increase was generally a result of additional deposit and loan activity. The remaining categories of non-interest expense, if you exclude the categories I just talked about, were relatively flat with the prior quarter and actually were down by $150,000 in the aggregate.

And then as Ed mentioned, if you look at page 28 and 29 of our press release, we've provided our normal disclosure of the allowance for loan losses where we break it down by category, showing the core portfolio by category and then our consumer niche and purchase portfolios by category.

And in the past we've just shown the related allowance that goes along with those categories, but this quarter we added in our non-accretable discounts on our non--I'm sorry --

Covered.

Our non-covered. I apologize, on our non-covered purchase portfolios. And those discounts as you know, when we purchase a portfolio, you don't -- you're not allowed to bring the allowance over and so those discounts are netted against the gross loan balance at acquisition time.

So what we've done this time, instead of just showing you the allowance, we've also added in the non-accretable credit discounts on the purchase portfolio and provided a total summation of those two items to indicate the total available allowance and discount that we have to absorb losses going forward.

So as Ed mentioned at the end of the year, our core portfolio had a reserve factor of 94 basis points. Our consumer niche and purchase portfolios had a reserve factor of 20 basis points, but if you add in the discounts, the entire portfolio had a reserve of 78 basis points. I'm sorry, 74 basis points.

So we thought it was a better presentation for you to be able to see the total reserves and discounts that were available to absorb losses. And we'll continue to provide that going forward for you. With that, I will turn it back over to Ed.

Someday the call report will catch up with FASB in terms of accounting. Remember Dave asked the regulators once when -- you can't bring the reserve over and he said, well, are you going to change the call report? And they said, well, that will take about four or five years. And he said, you mean you can do Dodd-Frank in two days but you can't change the call report for five years? So this is the world that we live in.

So to summarize, 2015 is shaping up to be another challenging year with the rates where they are, low volatile rate environment coupled with competition that at most times seems somewhat irrational. You have to ask yourself do bankers have memories at all. But it means that we have our work cut out for us.

That being said, I like where we stand and feel very confident that we can continue to prosper. And I think this is best exemplified in the graphs that you see on pages 3, 4, and 5 of our press release. We've got wonderful smile charts there. And our goal is to maintain and to continue to grow along with the slopes that are indicated in that -- on those charts.

So we feel good where we are going forward. Pipelines remain -- the loan pipelines remain consistently strong. Wealth Management continues its steady progress and has very good momentum. Outlook for Mortgages in the near term looks pretty good with rates where they are. Our brand momentum continues to be very strong.

Acquisition opportunities are plentiful, but gestation periods are long. We are concentrating and will prioritize cost-out opportunities to take advantage of the operating leverage within our overall structure. We think that makes a lot of sense to -- again that's what we're seeing a lot of these days.

So there's no assurance that anything we're looking at is ever going to happen but we're working very hard on it and we're very busy in that regard. And not just on the banking side but in all aspects of our business.

Interest rate sensitivity continues to be very good. I know people review that as apples and oranges. Some of the reviews are on 200 basis point shock basis; some are on a gradual basis. I think we compare very well and we disclose that information to you. Our goal will be to continue to increase that interest rate sensitivity because eventually they're going to go up.

We still remain committed to our core operating principles: stay disciplined on the credit side, pricing, and underwriting. I tell our guys, I say -- they come in with a bad loan and we're not going to do it. They say other people are doing them. And I said, listen, just because you make a bad loan and it gets paid off means that you're lucky. It's similar to if you get in your car and you drive home drunk and you make it, it still probably wasn't a very good idea to get in your car and try.

So we are going to maintain our discipline on the credit side of the equation. We'll maintain our interest rate sensitivity. We will continue to diversify our portfolio with other product types. Concentrations kill, as I always say.

We're going to take what the market is giving us and not stretch. We're going to continue to position this on a solid foundation to position this organization and take advantage again of what the market is giving us. We will maintain discipline in evaluating acquisitions. We're going to leverage our existing infrastructure to the extent possible in that process.

And in the end I'd just like to say our goal is to increase shareholder value, both franchise value and earnings value. Slow and steady is going to win this race. You've heard me say this before. We are going to continue on our goal to be Chicago and Milwaukee's banks. You can be assured of our best efforts in that regard on all fronts.

So with that I'll turn it over for questions.

(Operator Instructions)

And our first question comes from Jon Arfstrom from RBC Capital Markets. Please go ahead.

Thanks. Good afternoon.

Jon.

Hi, Jon.

Hey. Just a question on loan growth; you talked about it being back-end loaded. Just curious if there was any particular reason why. And then also if you could maybe size the pipeline for us, how it compares to previous quarters.

There's always somewhat of a year-end rush to get things done, Jon. I think it's somewhat consistent, maybe a little more so this time around. I can't pinpoint any particular reason why. It's just it is what it is. In a lot of the quarters we've been front-end loaded, so -- I'm trying to dig out the pipeline here as we speak.

But that's carried into Q1, that back-end loaded nature of the growth is carried into Q1?

You'll get more average balances in Q1, so a lot of that growth will be performing for us in Q1. The gross pipeline stands at [$1.122] billion with weighted around $700 million, so that's consistent with numbers we've shown you in the past.

Really haven't seen any degradation in the pull-through rates; have slacked off a little bit but we've achieved pretty good loan growth this year. And this really only counts -- it doesn't count premium finance, life insurance, sort of our niche businesses. This is commercial, commercial real estate, and other loans.

So it doesn't include the niche businesses which, as you know, the first quarter is our -- January is our second biggest month in premium finance, so that's always helpful to offset some of the first quarter charges, taxes, the payroll taxes and the things that come along. We feel good about where loan growth -- where it stands right now. But it's getting harder, I'll tell you that. We are -- on the back end we're getting poached a little bit, especially on commercial real estate.

Some banks out there that are offering 30 year [ams] with 7- to 10-year fixed rates, something that we're just not going to do and on some of the transactional real estate we see some payoffs in that regard. So we've got to run a little bit harder to maintain our growth, but that's expected. We saw that last part of last year and we did okay. So we'll take it a day at a time.

Okay. Good. That helps. And then just a question on Mortgage Banking, just curious of the magnitude of what you're seeing now. Has it picked up materially? I know you referenced it a bit but just give us an idea of what you're seeing.

Compared to the first quarter of 2013, we should be ahead. But the last couple weeks of December -- hang on, I'm just pulling it out here.

During the month of December we averaged 62 applications a day. But it was low in the beginning, but January to date we've -- they've been taking in 108 applications, which is -- that's a pretty good number for us. We can handle 110 to 120 applications a day and maintain our service level and our timing levels.

So we're kind of at the max, getting close the max of where we want to be to where we would raise prices and kind of move ourselves out. Service is everything in this area. We don't want to overload the system and then give bad service.

At least for January we've been maxed and I think the ratios Dave gave, you are seeing probably 60% re-fi and 40% purchase on this. For usually a slow quarter, the first quarter's usually a slow quarter. It looks like we'll be okay, but you never know. That's just the projection.

Okay, got it. Okay, thanks a lot.

Our next question comes from Brad Milsaps from Sandler O'Neill. Please go ahead.

Hey, good afternoon.

Hi, Brad.

Dave, just a question on expenses. I know you had the couple deals close towards the end of the year. Just kind of curious what your outlook would be there?

I know you guys are constantly reinvesting in the franchise, new teams. I know you announced the technology team within the last week or so. But just any additional color on expenses and what levers you may have there as you go into 2015, otherwise difficult interest rate environment?

The deal we closed just happened today in Delavan. So that really didn't have an impact on the fourth quarter. So there'll be a little bit of additional expense with those four branches coming on today.

If you looked at all those categories with those unusual items, it was pretty flat. Our approach here is continue to grow the franchise. There's lots of acquisition opportunities out there, a lot of them that are sort of overlapping.

I think as we continue to grow and add locations, we're going to be able to take a lot of costs out of the future deals. But other than the acquisitions, we don't expect the expense base to go up dramatically. We should be able to hold the line pretty well on that.

And then as we add and grow, we've got capacity in the system right now where we can absorb that growth. And then we do these acquisitions going forward and take the cost out, those will be really beneficial to us. So I'm not sure that's answering your question.

Brad, we're going to do a much better job of breaking out the one-time acquisition costs that we get. We've never really bothered doing that because we're in the acquisition business.

But with what we're seeing now, there will be -- if these things don't come to fruition, they may, they may not as I said earlier, there will be more than ever opportunities for cost-outs, which will mean for more one-time charges and what have you. As Dave said, because a lot of these are more proximate, as our base gets bigger, we have more overlap.

And we're going to give those a priority because I've talked earlier about we do have operating leverage in the system that we thought when rates move up the acquisition market will move away from us and we would go back to our tried-and-true internal growth strategy. It's hard to grow internally when rates are this low.

But if we can do this, accomplish the same thing through cost-out acquisitions and leverage our existing infrastructure, that would be a good thing. So that's kind of -- those types of deals will be given priority when we look at them and that's the plan.

But salaries were probably 3% -- 2.5% to 3% increase were given this year to our existing staff. We are investing, as you say. We are known to invest and continue to build a solid franchise.

So there will be some take-outs of people in some directions and there will be some investments in other areas to continue diversifying our portfolio. But as Dave said, we're watching it very closely and I would not expect anything massive to come racing down the pike here.

Got it. Thank you, that's helpful. And just a follow-up question on the balance sheet. Kind of comparing the period end to the average; I know that's always sort of a difficult comparison, but it did look like the FHLB advances were higher. You had a lot more liquidity on 12/31.

Is that just sort of a coincidence that something happened, just at the end of the year kind of relative to where those average balances were? Just kind of get a sense, is there something bigger coming down the pike that you guys are getting ready to fund or is it just, again, maybe coincidence with the timing at the end of the year?

With the market as volatile as it was at the end of the year we made a decision to put out a little extra liquidity to handle that. There were some fluctuations. We're funding a lot of loans, which you saw at the end of the year, and there just seemed to be some volatility.

So over year end we just wanted to make sure that we had enough liquidity to cover any volatility that was popping down in loan fundings and mortgages and what have you. Because there was a lot of activity at the end of the year, as you can see.

Sure, yes. Maybe some of that maybe reverses out or do you suspect that you will --?

It was very short-term. It was more short-term Federal Home Loan Bank funding.

Overnight stuff.

We didn't layer on term Federal Home Loan fundings.

Sure, sure. Okay, thank you, guys.

Our next question comes from Emlen Harmon from Jefferies. Please go ahead.

Hey, afternoon, guys.

Hi, Emlen.

Getting back to the topic of expenses, you did mention there was a bunch in there this quarter. Could you help us think about how we should be thinking about the starting rate for core expenses, just how much of the ACA expense goes away?

I presume the pension could be up and down as that needs to be funded. Sounded like there was some kind of closing costs in there. How should we be thinking about a core expense number for the fourth quarter?

Well, I think if you take out those issues, certainly the leasing is not going to recur. The sale of the bank branches, that was actually up in the non-interest income section. We put the gains and losses through that line, but that's not going to recur.

The ACA, it was a bigger number this year. It's a three-year program, but the plan is that the next two years that it ratchets it down so it's probably not as much. You're right; the pension is just where rates are at. Hopefully if rates go up, then it actually brings the pension liability down a little bit on a discounted basis. But those are fairly small plans and hopefully we're not going to see a lot more fluctuation in those.

I would take out those items that I talked about. And the thing you would say in the first quarter, and every Company has this, is payroll taxes will be higher in the first quarter because the bar resets at zero and everybody has the FICA charges on everybody.

But other than that, other than the acquisitions, I think we should be relatively steady. As the OREO again fluctuates up and down, just we're trying to push this stuff out and do it, but I wouldn't expect that that would go up. We would hope that that would trail its way down over the course of the year on a quarterly basis.

But there wasn't a lot of noise in the other numbers other than what we pulled out and highlighted in the press release. So Ed mentioned that we do all of our salary increases at the end of the year and so roughly a 3% salary increase will come through in the first quarter. But other than that, anything that would be additive would I think really be any acquisitions that we take on.

Got it. That's very helpful. The ACA was I guess kind of the one swing factor we weren't sure on there. So that's helpful, thank you.

And then just on the acquired Talmer franchise, could you give us an update on loan growth there and just how much of a contributor to the organic growth engine that could be potentially?

Well, I think we've got that whole acquisition of the branches converted so we've got all the deposits and the loans that we were going to get out of that transaction over now. And we did retain the lenders up there with the intent that we're going to try to grow that market.

So I don't think it's anything that's going to go to the moon, but we're going to work the Kenosha market where we really haven't been that much. And then over in the Burlington area, Lake Geneva area. And then they've got some other smaller areas where they've got a nice ag lending that we're going to tip our toes into that and begin to try to make a little niche out of that business and grow it.

So I think it will be slow and steady there and I don't think there is anything that's going to be a large increase at any one time now. It's just we've got the customer base in there, in these numbers that we have now. And hopefully we'll have similar growth up there that we had elsewhere, high single-digit, low double-digit type of growth and that would be the plan.

We did, and we mentioned this earlier, we did pick up an ag lending team up there and it's something that we are looking at -- and we picked up some ag loans. We're looking at exploring that as an interesting niche for us to get into on the diversification side of the equation.

That is just in its infancy, but it's something that we're very interested in. You think of Illinois and Wisconsin and Iowa and the surrounding states, biggest industry is agriculture. Might as well be in it. And so we're getting our arms around it, getting our protocols in place and that's something that we're going to be building as time goes on.

So we think that we were able to pick up -- the idea was we got deposits. The loans stayed at Talmer. We're through working with Talmer and other folks were able to bring a lot of those loans back over. People didn't want to have their deposits here and their loans in Michigan.

If you remember, one time that First Banking Center was about $1 billion. And when Talmer owned it they ran a lot of things off, but by their design, that's what they wanted to do. We think there's terrific opportunities for continued growth, but it takes a quarter or two to get everything digested and to get the ball rolling. So we feel good about that.

And as Ed mentioned earlier, we stretch now from Kenosha County over to Walworth County with the majority of those accounts. And if you add the Talmer acquisition with the one we just did today in the Delavan/Lake Geneva area, we are -- on a pro forma basis, if you look at the summary of deposit basis that FDIC puts out, we will be the largest bank in Walworth County and with the most locations.

Those two deals really help get good presence up in that market. We've got a great team of people up there and we expect it to go well.

Okay. Thanks for taking the questions, guys.

Our next question comes from Chris McGratty from KBD. Please go ahead.

Good afternoon, everybody.

Hi, Chris.

Hey. I know you guys looked both at the efficiency ratio and the net overhead, but if you look at it on a full year basis, it was like 1.75% on the overhead ratio.

How should we be thinking about this? A, is this a good way to look at the near term? Is this a decent run rate for the next few quarters? And assuming this rate environment sticks, is there anything else you would point to maybe a better measure at this point?

We look at the efficiency ratio kind of as a barometer and we do study it because it's a little higher than some of our peers, but I think when you break it down by components, we have two very high efficiency ratio businesses in the Mortgage business and Wealth Management. They operate in the mid-80%s. If you back it down just to the banks, they're in the high 50%s.

So that's one way to look at it. But we manage the organization to the net overhead ratio. Based on the size of the bank and the operation, we know where other income should be, where salary expense should be, where occupancy should be, and where other expenses should be.

And you're in acquisitive mode; it takes you time to get down to those numbers, so we manage off the net overhead ratio. The efficiency -- you can't manage off the efficiency ratio. All you do is say get your margin higher. Oh, okay; we all want that too.

But I think that my past has always said if you can get that number down below 1.5%, you are operating a high performance bank. And we have a number of our banks that are below 1%, some way below, but some of the ones that have done acquisitions are over. And then the Wealth Management and the Mortgages are always going to raise that up a bit, too.

Our goal is to get that down to 1.5% and that's the goal of every CEO in the organization and we'll continue to push that down. But that's how we manage it, so that's what I would look at if I were you.

If I take those comments and kind of what you guys are talking about in terms of cost saves coming from some of the deals, the 1.75% for 2014 should head naturally a little bit lower as you kind of get some expense synergies, is that a fair assumption for 2015?

That's the plan.

One last question on expenses. Obviously we've talked a lot about your charter structure, Ed. Any more thought given that rates apparently aren't going up forever; whether this will be any kind of earnings source in the coming year or so for you guys?

You mean collapsing charters?

Yes.

Believe it or not, we'd lose money if we collapsed charters. It's counterintuitive and it's a question I can -- we always get two questions, the cocktail party questions I call them. One is when are you going to -- you're inefficient, you have too many charters. And two, your reserve is too low, so you have to walk through those.

Trust me, we would lose money on our funding base if you looked at the money we get from the Wealth Management business on having the multiple charters. Remember that everything that doesn't touch a customer is basically centralized or consolidated in our system.

So when you start saying what you would lose, you would -- sure, could you go out and fire all the bank presidents? Yes. But then would you have the growth? Would you have the positioning you have in the market? You'd still have to hire somebody to run that market for you.

There's not as much there as you would imagine. We're not the old Synovus type of multi-chartered system. We hub things. We centralize. We consolidate things, loan operations, compliance. It's not the old school. This is -- consider them to be 15 different divisions in any other bank.

Are there some ancillary costs? Yes, in terms of the regulatory costs and like, but those would come through too because they base that on asset size and what have you. When you add all those up and you look at what you'd have to pay to replace some of the financing we have and, notwithstanding just the financial side of it, the positioning you would lose, the morale that you would lose, it makes no sense right now.

I'm not saying forever that this is going to be the case, but right now it makes no sense for us to do that. And trust me, we look at it. We're questioned all the time. We defend it all the time. We prove it to the Board all the time. Because general thinking is that you have to be inefficient and I'm telling you it isn't the case right now.

And I think our results should show you that it actually isn't the case. We've grown nicely. We've grown earnings nicely. Do we have an expense base equal to say like private? Private doesn't have a retail organization like we have. They don't have 140 branches. We do.

We're building this as a solid franchise with the majority, 90X-odd-percent of all of our funding is core base funding with great solid relationships under it. We're building this thing out of a real foundation. We're not building it on brokered funds and what have you.

That's a mouthful there, but really to answer your question, it's not in the cards right now. That doesn't mean that there might be a time where two of these would come together where one might be petered out and we could see a little bit of operating rate leverage there that we could pick up between two very close market deals. But it's not the case right now.

Very helpful. Thanks, Ed.

Our next question comes from Terry McEvoy from Sterne Agee. Please go ahead.

Thanks, good afternoon. I'm glad Chris asked the charter question so I can cross that off my list.

So are we.

Ed, I guess maybe to start, where are you in the process of fully penetrating the fee generating opportunities at all the banks and branches you've acquired over the last couple years? And could there be more upside in, say, Wealth Management, Mortgage, et cetera?

We definitely believe so, especially on the Wealth Management side. The neat thing, the performance of the Wealth Management operation, performance of their proprietary funds, you can look it up, but it's been very good, benchmark beaters. And it's long and it's consistent.

The trust level between -- bankers are somewhat proprietary. You've got a lending officer or a personal banker who's got a really good customer, they go I don't know if I want to turn over these -- they could really screw the pooch on this thing, the Wealth Management guys could. But it takes time to develop that confidence and that relationship and that's all occurring. There's a lot of opportunity for continued cross-sales on the Wealth Management side of the equation.

There's also the opportunity on the Wealth Management side of getting more transaction-oriented accounts out of the brokerage system into the managed money accounts, and we're working on that very hard because we've got the confidence now. I would tell you five years ago, six years ago I wouldn't push that because we didn't have the products and services that Great Lakes have and the performance that Great Lakes has that you can have the confidence in moving -- putting a relationship into another product.

And I don't feel we're putting them in jeopardy at all. I think now we're helping our clients. I think that there on the Wealth Management side it's terrific. The Mortgage side, most of these guys come with -- most of the banks that we team up with come with mortgage professionals. It takes them a little bit of time to get up to speed with our Mortgage operation.

We are by-the-books organization here. Not to say that they weren't before, but we are really by the books here. And it just takes some time to acclimate and to penetrate that market and to advertise and get that going. Probably opportunities on all fronts.

Then just as a follow-up, it looks like purchase accounting accretion was $30 million last year, call it $0.35 a share. What type of headwinds do you face in 2015, assuming that level comes down? Any thoughts there?

Well, I think that's a pretax number to begin with, right?

$30 million pretax, yes. So we will just start with $30 million.

It would be $20 million after tax. On 50 million shares, that would be around there.

Well, as you can see, in the press release there's a chart that shows the accretion and you do see it coming down. If you take that chart over the last couple years, on the static portfolio, yes, that number will be probably coming down. It has every year.

But if you -- we are successful in the acquisition front, we'll be back loading that. And just because it's a covered loan doesn't -- it still has the same accounting as a non-covered transaction. So we would think that in the number of the transactions that may be made available to us, there may be those opportunities if we do our marks right and if we are able to do better than our marks, as we have in the past.

So, yes, the end of the static inventory is coming down and hopefully if this acquisition market will allow us to back load this again and maintain some reasonable accretion coming in. But you never know; you've got to get the deals. You've got to mark them right and you've got to do better than you mark them. Notwithstanding that you would expect accretion to continue to slide as those balances pay off.

Thanks. Have a nice weekend, guys.

You bet. You, too.

Our next question comes from Joe Stephens, Stephens Capital Advisors. Please go ahead.

Hi, Ed.

Hello, Joe.

Ed, I don't have any fundamental questions left, but I do have -- you were starting to talk about loan loss reserves and then the FASB and accounting stuff and I got distracted. Did you guys put some new disclosures in? Or go ahead and just repeat those comments so I can get them. Because I heard you talk about them and you peaked my interest, but I got distracted.

So, Joe, what we did was on pages 28 and 29 of the release, where we used to show our allowance for loan loss broken down by major loan category. And then we grouped that into the core loan and then we grouped it in the purchase and niche loan areas, so we could show you.

Because in our purchased loan area you don't get to carry the allowance over when you buy loans now, so acquisitive organizations like us, the reserve starts to look lower because you got the loan balances out there. But you don't bring any (multiple speakers).

It's a disaster, right, I agree.

What we've tried to do is add to that disclosure what the level of our non-accretable credit discounts on the non-covered purchase portfolio is. Because those discounts are available to absorb losses, but they really don't flow through anywhere in our press release in the past where people could see how much discount is out there to absorb loss, besides the allowance for loan loss.

And the purchased loans are in our loan balances, net of that discount and so they're available, those discounts are available to absorb loss. So what we did was we added those discounts below the allowance, added that number to the allowance to give you a total number of allowance and non-accretable credit discounts.

So you can see what's truly available to absorb losses and then recalculate at the percentage. Our allowance to loans was 64 basis points at the end of the year, but if you consider those discounts that are available to absorb losses, it would be at 74 basis points.

Which includes the extra $15 million on page 28, correct?

Correct.

Okay, got it. Okay, good. Thank you. You're making it -- you guys are at least attempting to connect some dots so I appreciate it. Thanks, guys.

Thank you. That seems like that's it. Thanks everybody for listening and we'll talk to you soon. Good luck to everybody.

Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone have a great day.