Wintrust Financial Corp (WTFC) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Wintrust Financial Corporation's 2015 third-quarter and year-to-date earnings conference call.

(Operator Instructions)

Following a review of the results by Edward Wehmer, Chief Executive Officer and President, and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session.

During the course of today's call, Wintrust 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 second-quarter and year-to-date earnings press release, and in the Company's most recent Form 10-K and any subsequent filings with the SEC.

As a reminder, this conference is being recorded.

I would now like to turn the call over to Mr. Edward Wehmer.

Good afternoon, everybody. Welcome to our third-quarter earnings call.

With me as always are Dave Dykstra, Chief Operating Officer; Dave Stoehr, Chief Financial Officer; and now we have Kate Boege, who is our new General Counsel. We will conduct this call in the usual format: general comments by me regarding the quarter results; Dave Dykstra will take you through detail in other income and in other expense. He has his work cut out for him this quarter. And then back to me for a summary and thoughts about the future, and then time for questions.

You know, we told you we anticipated a noisy quarter this quarter, and we didn't really let you down. In order to provide some clarity to overall results, we included a number of operating bridges in the press release; I hope you all found those relatively helpful. As you know, during July we closed on our three previously announced acquisitions. They added assets of over $920 million, loans of $455 million, and deposits of $802 million. As we reported earlier, these are really cost-out acquisitions due to overlap with our existing branches and a number of redundant overhead categories and expenses.

Accordingly, we anticipated approximately $14 million in cost saves from these deals. I'm happy to report that we project to do better than that by about 10% to 20%. However, these cost saves do come with a cost. In the third quarter, we posted a $5.7 million charge related to these deals. We expect to record an additional $4 million charge in the fourth quarter and the first quarter next year; not -- a cumulative $4 million charge, which will be in the fourth, and first quarter of 2016. And then that should be behind us. Although we are well on our way to achieving these savings, you will not really see the effects, the full implementation until the first quarter of next year.

It's fair to say that we are about two-thirds through the cost save process. There is some extra operating expenses in the third quarter, and there will be some in the fourth quarter also, as we just completed one of the conversions last week, and the next one is scheduled for mid-November. So, there will be some other costs -- redundant costs that will be taken out during that period of time. Those costs will be included in our operating numbers, but they will diminish as the fourth quarter wanes on, and again in the first quarter should pretty much be behind us.

I look at these acquisitions -- and maybe this will help you all -- we picked up, just call it $1 billion worth of assets. And at a margin of 3.4%, that's about $34 million on an annualized basis. Other income is about 40 basis points or $4 million, but we expect other expenses related to this to be about the same, at 40 basis points or $4 million. So, that, with a loan loss reserve of $2 million, would take you down to -- on an annualized basis, would take you to $32 million or $19.5 million after tax.

If you were to allocate about $100 million of the Series D preferred stock that we did on this deal at 6.5%, that would be about $6.5 million, taking you down to $13 million that we anticipate coming from these transactions when they're all said and done. So, all in all, these were very profitable transactions, and again, that's using the preferred stock to be issued -- a portion of it to fund this deal. So, all in all, these transactions are very good, and working out better than we actually anticipated, so we feel very good about that.

Earnings net income for the quarter was $38.4 million or $0.69 per diluted share. If you take the $5.7 million charge out, operating earnings were closer to $42 million or $0.75 a share. It's important to note that the earnings per share was also impacted by about $0.04 due to a full quarter of the dividends on the Series D preferred stock that we issued in the last part of June to support the previously mentioned acquisitions in part, and for other general corporate purposes.

On the balance sheet, if you take away the acquisitions, assets grew about $325 million; deposits $343 million or an 8% growth on that period over period; and loans about $347 million or 9% core loan growth. Demand deposits now comprise approximately 26% of our total deposits; and again, that's a long way from the 9% that we were at just a couple years ago, as it just shows that our commercial initiative is continuing to maintain momentum. Loan growth was also good, and our pipelines still remain seasonably strong, and consistent with prior quarters.

Our new leasing initiative is off to a very good start. Since the first part of the year, we're up $100 million in gross leases, of which $62 million came in this quarter. The yields on these are approaching 5%. Their pipeline is very strong; and as I said, they're off to a very good start. Hopefully this will be part of the diversification that we're working on that will also raise the margin, which I'll talk about in a second.

The margin was really the issue that hit us this quarter -- down 8 basis points quarter versus quarter. Net interest income was up $8.6 million, but the margin was down 8 basis points. Our cost of funds was really consistent with prior quarters -- no change there -- but loan yields hit us a bit, and basically made up the entire 8-basis-point drop in the margin. Our FIRST Insurance Funding Corporation was 5 -- their portfolios -- their life, their P&C portfolios were 5 basis points of that, with property and casualty being 3, and life being 2 basis points as it relates to the margin.

On the property/casualty side of the 3 basis points, we'll note that the overall yields in that portfolio were relatively consistent; however, we did the number of larger deals that have aged reserves associated with them, and late fees were down also. So, nothing really systemic there, other than a mix of business. Really, this quarter, or really July is our biggest month of the year, since we get a lot of bigger deals that come in. So, there's nothing systemically at issue there. That being said, we are doing a full portfolio review on that, and I'll talk about that in a second.

Life portfolio accounted for 2 basis points of the drop. That really is a market issue. But again, that portfolio, which yields above 3% in total, when no losses associated with it, and very low overhead associated, it is a very profitable business for us. But again, we will be reviewing that portfolio and future pricing also to stem the tide.

CRE was down 3 basis points -- counted for 3 basis points of the drop in the margin. That really is a market effect. A lot of it is doing the refi's of loans coming off our books. Our portfolio still yields about 4% but -- on the commercial real estate side, plus the repricing when we're redoing things that's coming in, the market is our major competitors on fixed-rate five-year deals, which we don't do a lot of, are in the 3.5% to 3.60% range, which is, we think, something that we really don't want to try to match, but we will with existing customers, and that is driving that down a bit.

Commercial loan yields [helped serve] -- they were actually very steady. So, really when you think about this quarter, and I think you'll see this at the end of the discussion, that really the margin was the issue that caused us the heartache or the heartburn that we have right now. And I'll talk at the end about things we're doing in that regard.

With that being said, we anticipate margins to stay within 10 basis points of that 3.40% range that we talked about. We don't see them going down by a lot more, but the market will predict or will be the cause of that, otherwise [we'd know that]. That obviously assumes that rates don't increase. Speaking of a rate increase, if it ever is to occur, we continue to be in good shape from an interest rate sensitivity standpoint. In fact, our position actually improved quarter versus quarter on both a static shock and a ramped scenario.

Credit quality, in keeping with our cacophonous theme this quarter, also had a lot of noise in it for this quarter when you compare it to the second quarter. NPAs increased $19 million in the quarter, but really over 50% of that move was just furniture rearrangement. $4.6 million of the increase was due to OREO we acquired in the three transactions I discussed. $7.3 million was previously covered by the FDIC loss share. The loss share on our first two deals that we did ran off during the quarter, so that number had to be shifted over to uncovered OREO -- to OREO we already had, and we think there's no losses associated with that. We had a $2 million reduction in legacy OREO.

And then finally, non-accruals jumped by $9.4 million, but that really was predominantly due to one relationship which is about $12 million. We've got two partners in a fight; that loan was always current, but they're fighting over property taxes and not paying them, so we put it on non-accrual as a result of that, and are proceeding to get that rectified. We don't anticipate losses in that.

So, overall, our numbers are still very, very low, as you would expect, but we do not consider this to be any sort of a trend. This, again, was rearrangement of furniture, and one relationship that we're working through right now that caused that, but still, again, our numbers are extremely, extremely low.

A quick comment on other income -- again, lots of moving parts here. Covered call income was down by $1.8 million this quarter. That's just a market issue at the time that we wrote those calls; volatility was not as high as it is right now. Last quarter we did have a BOLI death benefit that, thank God, we didn't have another one this quarter, which was about $1.5 million after tax -- that that did not reoccur.

On the wealth management side, fees held relatively constant, notwithstanding a drop in the S&P of 6.4%, Russell 2000 of 8.4% in the quarter, and foreign markets actually doing worse. I don't have to tell you guys all these statistics, but that being said, our fees held constant and our assets under management did drop about 3%, but less than the market, which shows that we're still gaining momentum in the wealth management business, which, as you know, and I've said is an emphasis for us and a real jewel for us going forward.

With that, I'll turn it over to Dave, and he can take you through other income and other expense in a more detailed level.

Thanks, Ed. As usual, I'll just briefly touch on the non-interest income, non-interest expense, and hit the highlights a little bit. I'll go through in a little bit more detail.

In our non-interest income section, our wealth management revenue totaled $18.2 million in the third quarter, which was down slightly from the $18.5 million recorded in the prior quarter, and was up from the $17.7 million recorded in the year ago quarter. The trust and asset management component of this revenue category remained relatively consistent at $11.7 million in both the current and the prior quarter.

Brokerage revenue also remained relatively flat at approximately $6.6 million this quarter compared to $6.8 million in the prior quarter. Customers sitting on the sidelines as a result of the volatile market conditions during the third quarter contributed to lower customer trading activity, but overall this quarter marked another solid one for the Company and we look forward to future growth in this area.

Mortgage banking revenue decreased $8.1 million to $27.9 million in the third quarter of 2015 from $36 million recorded in the prior quarter, and this was slightly higher than the $26.7 million that we recorded in the same quarter of last year. We originated and sold approximately $974 million of mortgage loans in the third quarter compared to $1.2 billion of mortgage loans originated in the prior quarter, which was really a record quarter for us, and a seasonally high quarter given home sales. And it was also higher than the $905 million we recorded in the year ago quarter.

The mix of the loan volume related to purchased home activity increased to the low 70% range, and that's up from the low 60% range in the prior quarter. And that's more from a drop off in refi's and a little bit in the home markets. Fees from covered calls, as Ed mentioned, declined to $2.8 million in the third quarter compared to $4.6 million in the previous quarter and $2.1 million that we recorded in the (multiple speakers) quarter of last year. These are somewhat dependent on interest rate forecasts.

More people think rates are growing in the volatility, and we'll continue to do this program going forward as we have in the past, and it is a program that we've consistently used to hedge the margin compressions caused by periods of low and declining interest rates.

As Ed mentioned, revenue for our bank owned life insurance assets in the second quarter was down $2 million -- from the second quarter -- and that was primarily due to the death benefit that we recorded in the second quarter not recurring this quarter.

Turning to non-interest expense categories, non-interest expense totaled $160 million in the third quarter, increasing approximately $5.7 million compared to the prior quarter. Clearly, the biggest driver of this increase was related to the increase in our acquisition-related charges of $3.9 million. We've disclosed the acquisition-related charges by category in a chart on page 2 of the press release; so, if you want to look at that in detail, you can. The remaining $1.8 million increase relates to costs associated with the growth of the Company and various overhead costs related to the three acquisitions that will continue until each of those acquired banks complete their system conversions.

So, to state this another way, if we exclude the acquisition-related charges and the transitional costs associated with the recent acquisitions, which will continue until the conversions are completed, our aggregate non-interest expenses were up by less than $1 million, which we believe is reasonable given the total average assets supported by these costs increased by approximately $1.4 billion in the second quarter to the third quarter.

To put our operating cost into further context, I think it would be important to note that other than the salaries and employee benefit category, our aggregate total non-interest expenses excluding the acquisition-related charges increased by only $202,000 in the third quarter from the second quarter again, of this year. Again, this is a relatively nominal increase given the overall growth in the size of the balance sheet.

So, I'll go through a couple of the other significant categories that had changes up and down, but again, excluding the acquisition-related charges, expenses were up really quite nominally. Going to those individual categories, net of the acquisition-related charges, salaries and employee benefit expense increased $1.6 million in the third quarter compared to the second quarter of this year. The increase in this category was due to costs associated with the staffing related to the three acquisitions that we completed in July, including permanent staffing of the acquired locations, as well as transitional costs to staff until the respective conversions are completed.

We also had additional staffing related to the expansion of our leasing initiative and some minor staffing increases dedicated to the compliance, audit and technology areas of the Company. We continue to dedicate sufficient resources there, given the industry-wide regulatory focus of those areas. Offsetting these increases was a reduction in commissions and incentive compensation related primarily to reduced levels of commissions on the lower mortgage banking revenue.

I'm going to the other categories that had some changes. Net of the acquisition-related charges, equipment and occupancy expense category (multiple speakers) the largest increase from the prior quarter -- increasing approximately $1.4 million in the third quarter from the second quarter of this year. A majority of this increase related to the operating costs associated with the three acquisitions and a bit more depreciation expense recorded on the operating lease portfolio as that begins to grow.

Professional fees declined by approximately $1 million in the third quarter as compared to the second quarter, and if you exclude the acquisition-related charges, this category declined by $892,000. As you know, our professional fees can fluctuate on a quarterly basis based on the level of acquisition, litigation and problem loan work-out activity. With that being said, the total professional fees were within the range that we've experienced over the past five quarters, so we think they're appropriately controlled at this point.

Other real estate owned expenses declined by $1.2 million in the third quarter compared to the previous quarter, and it was primarily due to higher gains that we recognized on non-covered OREO sales in the quarter. If you were to look at all of the other major categories that we disclosed in the press release, and none of them really had any significant fluctuations in the third quarter from the second quarter, if you exclude the acquisition-related charges that we disclosed.

So, with that, I will throw it back over to Ed.

Thank you, Dave. Sorry, I'm suffering from a little bit of a cold here.

In summary, hopefully we've done a reasonable job today explaining a very complicated quarter. For the most part, things are going really according to plan, other than really the margin. In that regard, we are doing a number of work, and had already commenced doing this work before the end of the quarter.

We're reviewing all of our FIRST Insurance funding pricing in both the life, and the property and casualty, areas. There's a full portfolio review going on, and agent review going on, but I think, as I said, some of that -- most of that was late fees and mix, but still we don't like seeing that go down. It's still our most profitable loan category, and we want to make it more profitable, and stem this tide here.

We're trying to hold the line on commercial and CRE pricing. We did a good job on the commercial side of things, but CRE, because of the refi's, is hurting us, but we're -- and the market is very frothy right now, but we will continue to try to hold the line on that pricing. We are constantly looking to diversify our portfolio. Leasing is off to a wonderful start. Those yields are approaching 5% on the overall portfolio. The pipeline is very strong, and we expect good growth in the fourth quarter in that regard.

Our interest rate sensitivity position is, again, higher than it was in the second quarter, and really probably one of the highest I think that you've ever seen us have, and comparatively high for the market. That gives us a little bit of room to hedge ourselves on the fixed-rate side of things, and we'll be doing some of that also to try to maintain the margin. And we are going to continue to look for other areas of diversification to build on that. So, the margin really was the area that really hurt us this quarter, and that's the one we're working on the most.

Mortgage operations are seasonally strong. We would expect similar results in the fourth quarter as we had in the third quarter, but you never know about December, so I'll hedge my bet on that. But it looks like October/November should be strong quarters.

Our loan pipelines, as I mentioned, are consistently strong across the board. Although the market is frothy, we still are getting deals on our terms. We'd like to get higher rates, as I said, and we'll fight to get those basis point by basis point.

Good core deposit growth with -- our core funding remains in the very high-90 percentile, building core franchise value as we do that. Our acquisition pipelines in all areas are very active. Our assimilation of the recent deals is going better than planned, and it allows us to get active again. That doesn't say that we will or won't do anything, but we will be looking at additional opportunities as -- as I said, the pipelines are active.

We're going to have emphasis on additional cost-out deals, so that we can continue to leverage our overall infrastructure, and in organic growth, which we will start working on probably the beginning of next year in a lot of these branches that we have been able to pick up, assuming, of course, that loan demand is there. Again, we're an asset-driven company, if loan demand dries up or the market moves away from us, then all bets are off in that regard.

We do need -- we understand the need to become more efficient, and to work in and build in to our entity infrastructure we have in place, and we think we can do that. Going forward, you can be assured of our best efforts to continue to build a solid franchise built on solid deposit base and good credit quality loans, and you can be assured of us working on that.

So, with that, I can open it up to questions.

(Operator Instructions)

Our first question comes from the line of Jon Arfstrom from RBC Capital Markets.

Thanks. Afternoon, guys. Just a couple follow-ups, you covered a lot of what I wanted to ask, but just on this business pricing review that you're doing, what are you trying to accomplish on the margin? Is it something where you feel like you can change some pricing and put a finer point on some of this stuff to get the margin back up, or is this something where you're just fighting to hold the margin around the current levels?

More the former, Jon. I think that water seeks its own level, and sometimes you just got to go back in and kick some people in the butt. We think we're a value added organization across the board on both of those businesses, Life and P&C, and I think that we can get better yields.

Ten basis points isn't going to kill anybody, and we can't do much about the late fees, which really surprises us. It is down in the 120 area, it used to be 220. People are paying their bills these days, I guess. But we think that we can--we work one by one and we can actually improve the profitability in that business, stem the tide and improve the profitability.

Okay, and then in the overall competitive environment, you feel like there's still--it's rational enough for you to continue this kind of loan growth pace without having incremental pressure on the margin?

Our pull through rate has been consistent, Jon, and our pipelines are also seasonally consistent with over $1 billion of weighted -- gross in the pipeline over the next couple of months. The weighted, it's down in the $600 million, $700 million, and we always anticipate growth of $250 million to $300 million in the pipeline in quarter-to-quarter. Anything over that is gravy for us.

But with the leasing side of things, we have committed to and expect this right now, notwithstanding other things, $62 million worth of new leases coming on and there may be some portfolio purchases in our future too that would help that. We think that the pull through rate, we haven't seen any fall off in that, and that's getting deals done on our terms. The market is irrational in terms -- in our opinion, in terms of some prices, especially that five year fixed rate deals at 3.5%. You can go out and buy -- with the credit costs and the costs you have to do that, why don't you just buy mortgage back? I don't understand, but it has screwed up the market a little bit. You have to pick your spots, and there's some areas that we won't play and there's some areas we will play. But our market is a pretty big market. We do believe we do bring value added, and our pull through rate has been pretty good. As of now I feel very good about maintaining that $250 million to $300 million growth this quarter, but you never know.

Okay, and then just one on expenses. If rate hikes don't come through, the revenue environment remains challenging and some of these margin exercises that you're going through become more difficult, how do you guys think about the expense base? Do you have kind of a Plan B where you need to get tougher on expenses, or what is your thought process there?

Well there's two aspects to that, Jon. The first is as we've said previously, our plan is, right now the market is giving us acquisitions that are pretty accretive, especially these cost out deals. And some geography increases, but also the cost out opportunities, and we will continue to take advantage of those, and that's what the market is giving us, and the returns are pretty darn good.

When you do that sort of thing, we have built up through the FDIC deals and some of the deals we've done, we're used to being one or two in market share in each of the towns that we're in. We have staffs in those marketplaces that when the market moves away from acquisitions, we will go back to organic growth. All this, again, dependent on our ability to have assets to cover.

We have the infrastructure to support a lot more assets in the system than we do. It doesn't make sense to go through and cull the herd right now and rationalize some of those things when you know you're going to grow those markets in the near future. There are those opportunities there, and we know that. We call that kinetic operating leverage that we do have, and we would anticipate -- we always thought when rates went up the pricing on these [banks] would move away. And actually, who knows if rates will ever go up, but I actually think some of this pricing might start moving away relatively quicker, which will push us into the organic growth mode, which will allow us to leverage those expenses.

That being said, we're always looking for opportunities to cut costs, it's a budget time right now. We're looking at doing some things that would also provide some expense saves, but we're a growth Company. We're built to grow, and we know we have an expense base that can support a larger organization.

I believe that what you'll probably see us do next year is some acquisitions that are strategic in cost outs and some organic growth to start building into that also. Both of those two things will help us leverage; the cost out deals help us leverage the portfolio too. We're going to be looking across the board during budget time. We will be looking as we always do at producers out there. Those who don't produce, we'll be thinking about other opportunities in the market, but we continually do that also.

It's an ongoing process for taking costs out of the system. I don't know what Plan B would be other than just saying we're going to stop growing and cut a lot of staff that we would have to replace when we would go to organic growth which should be starting next year. I don't know if that makes sense, I rambled.

Yes it does, understood, I just wanted to understand how you're thinking about it. Okay, thank you.

Our next question comes from Emlen Harmon from Jefferies.

Good afternoon, guys. Just on the expense saves from the three acquisitions, you guys had noted that you've executed on two-thirds of those, so it would $9 million or $10 million with another $5 million at least to come. How much of that $9 million to $10 million you executed on was actually in the run rate for the third quarter? Is there kind of a catch-up effect of stuff that you've executed on, but there actually was some expense that you realized in the third quarter?

So, is your question -- I want to understand your question. Is your question how much was in the third quarter that we expect to take out?

So, you've got another $5 million in cost saves to execute on. How much of the, say $10 million, that you executed on already is fully out of the third quarter expense base? So there may be some projects that you completed, say near the end of September, where they're actually -- you've got the exercise for generating the cost saves done, but there was some expense realized in the third quarter. Or it could be the case that all that stuff was done as soon as the deals were closed and those expenses were (multiple speakers)

No, no, there's some redundant operating expenses that are yet to go away, and they're in the $1.5 million, the $2 million area on a quarterly basis. So, if you're talking about redundant expenses, $1.5 million to $2 million I'd say, because they are still about maybe closer to $1.5 million, there's still about $6 million to go so -- but there's some fudge in those numbers, so maybe $1.5 million to $2 million this quarter. There's still $1.5 million to really carve out in the third quarter to -- or in the fourth quarter I mean, to get our run rate going.

Got you.

That's the hard math, because we only had two months of operations. We'll have a full three months in the fourth quarter, so will they all be out? Will that $1.5 million, call it, be out in the fourth quarter? No, because some of it will, but there's an extra month there we have to pick up. So, that's why we want you to focus on the overall and where it will be in the first quarter.

Got you.

But it will be diminishing over the fourth quarter, but -- because of the extra month that's in there, there might be another $1 million in the fourth quarter that needs -- would come out in the first quarter. That make sense?

It does, yes, thank you. And then just on M&A. We've closed these three deals this quarter. Do you feel like you need to take a little bit of a break to digest, or are you guys ready to do more deals as soon as they come available?

Well, we figured we did take a break. Given our past history, we've done four banks this year, but we are taking our time. Two of the conversions have been done.

We focused -- the real focus of the conversion is you end up properly with the least amount of customer disruption as possible. That's -- you have a bunch of customer disruption, really what did you buy? So we are taking our time. We are putting them in, and we have taken really a hiatus to step back and make sure these things are under control. There's the first cost outs we've done, especially en masse. You have to be very careful with that and be sensitive to the people that you're changing their lives, and we've done all that. And we just want to make sure we did these and did these right and got a template going forward.

The branch -- or the conversions also involve relocating branches amongst the -- geographically amongst the charter. So, they are a little bit more complicated than just flipping over, flipping a switch and having them all part of one bank. We do reallocate them to the other branches, so we just want to make sure we get that right.

Two down, one to go. Both the ones that have gone to date have done exceptionally well. It's really a compliment to our IT staff. They have had enough experience doing it obviously, but there's one more to go, and we would like to get that under our belt. That's in mid-November, and I think we'll be getting a little bit more active. But we did -- we actually did sit on the sidelines for a little while and -- just to make sure that these all went well.

So it sounds like you're ready to go in fairly short order then?

God willing.

All right, thanks, and good luck to the Cubs.

Our next question comes from the line of Brad Milsaps from Sandler O'Neill.

Good afternoon. Good timing on the sign on the scoreboard, Ed.

Great things happen when you partner with Wintrust. That's what I keep telling everybody.

Too bad he's not a righty, right?

Just to follow up on the expenses, and not to continue to belabor the point, but just back to Emlen's question. If I look at pro forma, what the three deals would have added for the days they would have contributed, it would have been around $6 million, less what your mortgage commissions came down. It doesn't really seem to me that you got any cost saves, so my question would be do you think you need backing up to what you said maybe $1.5 million or $2 million are already in there. It seems to me that maybe they weren't and you could get even more in the fourth quarter and come down off this expense run rate even more meaningfully than you may have just suggested. Does that make sense?

I'm not sure. No, I don't know if I followed your math. Let's just cut out salaries to take the noise out of the commissions. If you take out the one-time charges we had for DP and the like, all of our other non-interest expenses were only up $200,000 in the quarter, and clearly those three banks had more than $200,000 quarterly run rate in their expenses. I'm not sure why you're saying you don't see any expense saves coming out.

Well, if I take a core expense number, ex your CDI and the OREO noise, maybe of around $151 million, if I add $6 million to that, that will get me to $157 million. You guys are $154 million for the quarter because commissions were down about $3 million, so that's where I'm coming from. I was just curious that maybe you've got even more to come, just trying to get maybe where you could be. Can you push this below $150 million as you enter the first part of the year?

Well, you picked up $1.4 billion with really no increase in expenses quarter-over-quarter. Then if you want to -- the way you're looking at is, okay, your commissions were down, granted, they were down. But also, we -- those commissions were pretty close to maybe $1 million off of the redundant operating expenses that should come out in the fourth quarter. We basically picked up $1.4 billion flat expenses, so you are picking up expenses with this transaction, do you know what I mean? It's not like there's none. We figure $4 million to a little over $4 million on an ongoing basis annually to pick these things up. So, you are picking up some additional expenses that will be with us forever, but if you pick up $1.4 billion with no real increase in expenses, I think that's taken the expenses out. So, I'm having trouble following your thoughts.

Again, if you focus on the commission expense being down, because the mortgage revenue was down and understand that we had some redundant expenses, call that what's yet to come out of the market -- out of the expense base, we're basically flat.

You're up just a little bit for the redundant cost and then we also had some addition for the leasing and a few people in the compliance area, but yes, I'm not following your logic on that.

Okay, fair enough. I'll follow up with you guys. And I know, Ed, you allude a lot to the net overhead ratio. Think you adjusted for your numbers around 163 basis points. Maybe to follow up on Jon's question, where do you think you can take that over the next several quarters, once -- I know you all have talked about a goal of getting that down to 130 basis points, but just get a sense of where you think core expenses can go?

Well, anything under 150 basis points is the goal right now, and we have some banks that are operating at 80 basis points. They are doing very well. So, 130 basis points would be great, but a lot of it depends on the other income. And it got a little bit off because of the mortgage revenue and covered calls on the other income side this time but -- so you have to look at that component of the net overhead ratio too. But anything under 150 basis points will be our goal for next year. To be under 150 basis points, hopefully around 145 basis points, 150 basis points, that's the goal, and we can proceed after that. I think those would be good numbers for us.

Fair enough, and finally--

Especially given -- unless we made the decision to -- we are never going to grow again and we're going to cut the infrastructure that's prepared for growth. Then that number comes down more, but we would then start giving up service, too.

And then finally, was there any noise in the mortgage number this quarter related to any MSR activity that might reverse out that otherwise hurt that revenue number?

Yes, it was a very small number. I don't remember exactly what it was, but it was a nominal number. Under $100,000 I think, Brad.

Okay, great. Thank you.

Our next question comes from the line of Chris McGratty from KBW.

Afternoon guys. Ed, on your loan growth comments, I think it was $250 million to $300 million is what you said is the near-term goal. It seems a bit conservative. Is that just your conservatism or is it all -- I know in the last 90 days or 120 days you've been talking more about going back to the rope-a-dope if the market went against you. But is that what you would think as the near-term trajectory of organic loan growth, or is that just Wintrust conservatism?

I think it's, I hate to say it's probably the latter, given some of the things going on right now. But I want to hedge my bets there.

Just $250 million to $300 million would be a great number, but our pipeline, if you look at past history, our pipelines remain consistently strong. Fourth quarter is usually a pretty good funding quarter for us, lots of pull through there, and our leasing business, which is just hitting its stride, will add to that. So, it could be on the conservative side, yes, but I'm a conservative guy, you know?

Thanks for that. The margin -- you talk about looking at the portfolio and looking at what you can get out of your customers. How long did that process take? Meaning is this a multi-quarter development that we're going to see some incremental margin pressure as this occurs and over time it sets you up better, or is this something immediate?

I hope it would be more immediate than over time. Over time we hope to continue to push that, but hopefully we're working on it. We started before the end of the quarter, so we're working on it now.

The premium finance business on the Property and Casualty side is a commoditized market right now, and you can't just follow the market. There's some banks in there that are giving it away. We can't allow that to happen. We have to -- we do have a value add that we can give. So, we need to do a better job and we just need to focus on it. And like I said, if we can get another 10 basis points out of it, then life is good, right? Also with the agent reserves, which is what you -- an interesting thing about that business is that even as the rates come down, the agents don't -- the agent reserves are not variable, which hurts the profitability. Those need to be revisited also.

In other words, many of the agents -- it's kind of like indirect auto in some respects where they get -- they disclose it all and all that stuff, but they do get a [spit] on the deal. So, the overall yield might be less than what we experienced, and that has been a fixed number even as rates have come down. That will be a longer term deal just revisiting as those relationships come up for renewal. Revisiting those and trying to work a better deal on that end.

There's really two ends: getting a higher yield and also cutting some of the costs to produce that business. Some should be immediate and some will be over time.

On the Life side, that Life business is just so good for us, and I think we just need to -- we are the 900 pound gorilla in that business. We do have value added in that business by a factor of 10 over anybody we compete with, and we should be paid for that. And it's just -- we will just emphasize we need to get another 5 or 10 basis points out of that business and not let it go down anymore. So, that will be longer term, but we'll push it.

Great. Just one more if I could. On the growing belief that rates are going to stay lower for longer, any thoughts -- and your comments that your added sensitivity actually grew in the quarter. Is there any thoughts of pulling that in at all and recognizing or monetizing that, at least over the near term?

Yes, I might have glossed over it, but I think I did mention that. It does give us the opportunity, if you look at the duration of the investment portfolio, part of that was it got -- we picked up a lot of liquidity with these deals and yes -- I know as soon as I do it, rates will go up, so that will be helpful too.

But it does give us more room to do that. I am of the opinion, as you are, that rates are going to stay low for a long period of time. I used to think they had to go up, but now I just think it's so political it's just not going to happen. The Fed is loving turning over $100 billion to the Treasury every year, and in an election year they aren't going to want to do it any differently and they aren't going to want to increase the deficit by raising rates on all the debt that's out there.

Call me a cynic if you want; and I also think the international community would not want that to happen and I don't think we need a stronger dollar.

So, I'm with you. I don't think they're going to be, and I think that does give us an opportunity to extend -- the problem on the loan side is you don't want to do the fixed rate loans because at those rates and the credit risk you have with them in real estate is just idiocy to me. I don't get it.

And you don't want to cannibalize the business we've got already, which could happen if you went out and said, here is $500 million of 3.5% money. Go compete with Chase out there. You'd cannibalize it, you'd be bringing on new business at probably 2%, when you look at the overall cost of doing that.

We will look at the investment portfolio, and might extend that a bit. It does give us that opportunity and we will do that. It's a good point, and thanks for bringing it up.

Thank you very much.

(Operator Instructions)

Our final question comes from the line of David Long from Raymond James.

Hi guys. I hate to beat a dead horse here on expenses, but it sounds like absent the acquisitions, expenses would have been relatively flat quarter-to-quarter. But I'm looking at the mortgage line coming in, coming down $8 million, and just if you just break out the mortgage business, what was the impact on expenses in the quarter, just on the mortgages coming down, including the commissions and anything else?

Well, the only area that we break out is the commissions area. And so as you saw there, the commissions were down about $3.6 million, commission incentive comp. That did net out of the salaries, and so the salaries net of the acquisitions were only up $1.6 million. If you would add back in a reduction from commissions, they were up about $5 million. A good chunk of that is the staff that we have permanently to staff these new acquisitions and then we have that transitional cost of that staff to support us until we get through the conversions. And then just some general growth in headcount like in the leasing area and a few of the other areas I previously have mentioned.

I'm not sure if I'm answering your question, but that's the only area that we really saw increase in was the salary side. And if you go to all of the other non-interest expenses, we really didn't, other than the equipment and occupancy area, because we obviously have more locations out there, and the equipment to support those, we've really held the line pretty well on all the other categories. And the salary side is inflated, because we've got those extra people in there until we get the system conversions done in the fourth quarter.

Got it, okay, thanks for the color, Dave.

I think that's the last question? With that, thanks, everybody, and please call us if you have other questions. Again, I think that I'll go back to the fact that everything is going as we thought except for the margin and we're on that, and we'll be dealing with that going forward. We like where we stand right now, and thanks for putting up with a complicated quarter. We'll talk to you next quarter, if not sooner, thank you.

Ladies and gentlemen, thank you for attending today's conference. This does conclude the conference. You may now disconnect and have a wonderful day.