Wintrust Financial Corp (WTFC) 2016 Q2 法說會逐字稿

Welcome to the Wintrust Financial Corporation's 2016 second-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 are detailed in the second quarter and year-to-date earnings press release 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.

Thank you. Good afternoon, everybody, and welcome to our second quarter 2016 earnings call.

As said, with me as always are Dave Dykstra, our Chief Operating Officer; Dave Stoehr, our Chief Financial Officer; and Kate Boege, our General Counsel who is here to make sure that I don't go off script and talk like Donald Trump about the huge quarter and how all the analysts love us. But with that, we're going to have our usual format. I'm going to give you some general comments on the quarter. Dave will get into some good detail on other income and other expense. I'll follow up with some summary thoughts and thoughts about the future and then we'll have time for questions. On with it.

All in all, we had a very positive quarter on all fronts with good momentum for the rest of the year. Net income for the quarter was $50 million, or $0.90 a share, up from $43.8 million last year and $0.85 a share, or 14% and 6% respectively in terms of earnings growth. Year-to-date, we almost hit $100 million, $99.2 million, or $1.80 a share, up from $82.9 million last year, or $1.61 a share, that's 20% and 12% respectively. The strong earnings were driven by first of all our balance sheet growth. Assets grew $932 million, or 16% over the first quarter of the year and $3.6 billion, or 17.5% over same period last year.

Loans for the quarter grew almost $700 million, or 16% over the first quarter and $2.6 billion, and 16% over the last year. Loan growth was a balanced loan growth, and all categories showed good expansion. Important to note that earning assets lagged total assets by about $622 million as did loans by $523 million. That is our average assets were less than earning assets by $523 million or loans less than $523 million, which bodes well for the third quarter and beyond.

Our loan pipelines are at an all-time high, consistently strong. Our pull-through rates have been consistent. We will close on the GE deal that we previously announced in the middle of the third quarter, adding north of $500 million of loans to our balance sheet. This bodes well for our net interest income going forward in subsequent quarters.

Deposits grew $727 million, or 14% over the first quarter and $3.3 billion, or almost 18% over the same period last year. Core funding growth is strong. We haven't had to rely on institutional money. This is good core growth, building our franchise and franchise value.

Credit quality continued strong. I can say it's as good as it's going to get. All credit metrics are low and in line. We continue our process of culling the herd for any credits with any signs of cracks. You can be assured of our consistent diligence in terms of trying to identify these things and moving them out.

The margin was down 5 basis points, mostly because of market rates, 2 basis points -- really 3 basis points in liquidity management as market rates plummeted. One basis point through the continued runoff of accretion from previous deals and deposits were up a negligible 1 basis point. We're still in line with the 330, plus or minus 10 that we talked about earlier. Net interest income growth was obviously high due to the very good growth we had during the period.

Mortgages were also a substantial driver. Dave is going to discuss this in detail, but needless to say, mortgages contributed nicely to what we're doing, and it appears that third quarter pipelines are consistently strong and we are expecting similar results in the third quarter.

Just a note on mortgages. When you look at our expense growth, you have to always remember that the mortgage market is a variable market and really we bring down, if you look at the net interest income on the mortgages held for sale, plus the fee income, we always bring down around 13% after tax of that gross income to the bottom line. So expenses go up and down with that volume.

That 13% is down a bit from previous quarters due to -- it's getting harder, it's just getting more expensive to do these loans with Tred and the like. We're undertaking a -- I think you can almost say that over the last three years the cost of doing a mortgage is almost double. The technology is lagging behind this, but we are catching up. Technology in general is lagging behind this, and we're working for the third and fourth quarters on getting more efficient in that business by elevating our technology to get more bang for our buck in that business. It's really a necessity because the mortgage business is an integral part of what we do.

I'm not going to talk much about expenses other than to say that we did again exceed our goal of 1.5% net overhead ratio. We expect that to continue going forward. That's computed on average assets. So, again, as assets continue to grow and we continue to fund this loan growth with good core deposits, we should be able to do that without the commensurate increase in expenses and expect to drive -- to continue to drive that number down. So, rather than be redundant, I'm not going to talk about that and let Dave talk about it. Before I do, just like to highlight a couple other things that happened during the quarter.

The second quarter had a full period of expense related to the Foundations Bank, the small Foundations Bank acquisition that we closed on the last day of the first quarter. We completed the data processing conversion last weekend, so we should be driving the costs out of that transaction over the next quarter.

We also announced the acquisition of First Community Bank of Elgin. We have 100% market overlap in that community. So this $190 million bank should join us and once we're able to convert them and move them out, there should be reasonable cost savings there also.

We announced the agreement to buy north of $500 million of franchise loans from General Electric. This transaction should close in the mid third quarter. We're not allowed to talk much about this transaction, other than the fact that we're excited about it. It should bring our overall portfolio just south of a billion dollars, by a little over -- between $800 million and a billion dollars, when it's all said and done.

This is an area we have staffed up for prior to this, so a lot of the expenses related to managing this additional volume are already in our numbers right now. As you know, we like to put the plumbing in before we flush so that those expenses were there. So we want to be a player in this market. This is a market we've identified as something we want to grow in. So it's going to be -- we think it will be a substantial niche for us going forward and this is certainly a quick leg up to get that momentum moving.

To support the organic balance sheet growth, the GE acquisition, the acquisition of First Financial we completed the sale of 3 million shares of common stock raising $152.8 million of common equity towards the end of the quarter. Should be fairly evident now why we did this. We are putting it to work.

We always think shareholders first and we're pretty stingy with our equity and certainly have always been stingy with any sort of dilution that new equity brings. We feel confident that the returns on this new equity will far surpass -- will not be dilutive at all and help us continue to build and to grow.

With that, I'll turn it over to Dave.

Thanks, Ed.

As normal, I'll briefly touch on the non-interest income and non-interest expense sections of the income statement. Turning to non-interest income, our wealth management revenue totaled $18.9 million for the second quarter of 2016, which was up from $18.3 million recorded in the prior quarter and also up from the $18.5 million recorded in the year-ago quarter. The trust and asset management component of this revenue category increased to $12.6 million in the current quarter compared to $12.3 million in the prior quarter.

The brokerage revenue component also increased to approximately $6.3 million in the second quarter compared to $6.1 million in the first quarter of the year. Overall, the second quarter of 2016 represented the highest wealth management fee level in our Company's history and we look forward to continued growth in that category.

Mortgage banking revenues increased $15.1 million, or 69%, compared to the $36.8 million in the second quarter of 2016, and it was also up from the $21.7 million recorded in the prior quarter, and was slightly higher than -- I'm sorry, from the $21.7 million recorded in the prior quarter and was slightly higher than the $36 million recorded in the second quarter of last year. The Company originated and sold approximately $1.2 billion of mortgage loans in the second quarter of both 2016 and 2015 and that was compared to $737 million recorded in the first quarter of 2016.

As far as the mix goes, our volume related to purchased home activity was stronger in the second quarter and stood at 65% compared to 56% in the prior quarter. Similar to our wealth management revenue, the second quarter of 2016 represented the highest mortgage banking fee level in our Company's history. And as Ed said, the market continues to be strong and we would expect similar volumes in the third quarter.

Fees from our covered call options were $4.6 million in the second quarter, compared to $1.7 million in the previous quarter and roughly equivalent to the $4.6 million recorded in the second quarter of last year. As we've discussed previously, the Company consistently has utilized the fees from the covered call options to supplement the total return on our treasury and agency securities held in our portfolio and that's in an effort to provide a hedge to the margin pressures caused during a period of low interest rates.

The revenue in the second quarter of 2016 for operating leases totaled $4 million compared to $2.8 million in the prior quarter, increasing 43% during the quarter. The outstanding balances of our operating leases grew to $103.7 million at the end of the second quarter and to be clear, these amounts relate just to the operating leases, not the capital leases, which are carried in the loans section of the balance sheet.

Other non-interest income declined by $4 million to $11.6 million in the second quarter from $15.6 million in the first quarter this year. The primary reason for the decline in the category of revenue is related to the $4.3 million gain recognized in the first quarter that was related to the extinguishment of $15 million of our junior subordinated debentures. The remaining change in this category of revenue related to lower swap fee income which was substantially offset by higher revenue from our investments in bank funds owned at the holding company level.

Turning to non-interest expense, our non-interest expenses totaled $171 million in the second quarter, increasing approximately $17.2 million compared to the $153.7 million recorded in the prior quarter. The increase in non-interest expenses, although seemingly large, was generally associated with supporting the significant growth on the balance sheet of over $900 million and the significant increase in our mortgage loan production. In fact, as Ed mentioned, despite the increase in expenses during the quarter, the net overhead ratio declined to 1.46%, indicating we're able to leverage that expense base relative to much larger balance sheet and revenue levels in an efficient manner.

So I'll talk now about the significant changes of the individual categories compared to the first quarter of this year. Salaries and employee benefit expense increased approximately $5.1 million in the second quarter compared to the first quarter. The primary reason for the overall increase in salaries and employee benefits expense related to additional commissions and incentive compensation expense of approximately $6.2 million, increasing to $32.5 million from $26.4 million in the prior quarter. The Company experienced an increase in commission expense related to the substantially higher mortgage revenue and higher wealth management brokerage revenue that I referred to earlier in my remarks, along with the slight increase in accrued incentive compensation from the prior quarter due to increased earnings.

Additionally, the base salary expense component of this category was up approximately $2.6 million in the second quarter compared to the first quarter. The main reasons for the increased expense level related to approximately $1.2 million in increased staffing costs in our mortgage division to accommodate the higher mortgage origination volumes, severance costs of approximately $600,000 related to certain corporate consolidation efforts, and approximately $175,000 related to the Foundations Bank acquisition, which occurred on March 31 of this year, and we also had a full quarter impact of our annual base salary increases for our employees, which went into effect at the beginning of February.

Offsetting the increases noted above, employee benefits expense was down approximately $3.7 million in the current quarter compared to the prior quarter. Significantly impacting this category, which we indicated would happen on our first quarter call, was a reduction in payroll tax expense which was approximately $3.3 million lower in the second quarter compared to the first quarter of 2016. As you know, the payroll taxes are always higher in the first quarter of the year as Social Security tax limitations reset at the beginning of the year.

As I discussed in regard to operating leases in the non-interest income section, the Company experienced a similar increase in expenses related to operating leases as the portfolio has grown. Again, we expect this category expense to grow at a rate similar to the revenue side as the portfolio of operating leases continues to expand. Data processing expense increased approximately $619,000 from the prior quarter to $7.1 million. The primary reason for the increase in expense is related to approximately $354,000 of acquisition-related conversion costs whereas the first quarter had no such costs.

The remainder of the increase relates to growth in customer accounts, including a full quarter of activity related to the Foundations Bank acquisition and increased mortgage banking processing costs through the significant increase in mortgage volume during the quarter.

Marketing expenses increased by approximately $3.2 million from the first quarter to $6.9 million, but was relatively consistent with the second quarter of 2015's marketing costs of $6.4 million. As we discussed on our last call, we expected this category of expenses to increase as the second and third quarters of our fiscal year tend to be the highest quarters of marketing spending as our sponsorship costs are higher in those quarters.

Professional fees were up slightly, increasing to $5.4 million in the current quarter compared to $4.1 million in the prior quarter and $5.1 million in the second quarter of last year. The current quarter increase was influenced by higher legal costs associated with recent acquisition activity, including the recently announced transactions for portfolio franchise loans and a local Community Bank. As you know, professional fees can fluctuate on a quarterly basis based on our level of acquisition activity and problem loan workout activity, as well as any consulting services that the Company utilizes.

Other real estate owned expenses increased by $788,000 in the second quarter compared to the prior quarter. Total OREO expenses totaled $1.3 million in the current quarter compared to $560,000 in the first quarter of 2016. The increase was due to additional valuation allowances of $482,000, increased operating costs of $227,000, and $79,000 less on recorded gains on the sale of OREO properties.

Other miscellaneous non-interest expenses increased by approximately $3.2 million in the second quarter. This increase was generally associated with higher travel and entertainment expenses, which are seasonally higher in the second and the third quarters for us, higher loan expenses associated with the significant loan and mortgage production, and other miscellaneous increases.

In summary, the increased expenses were generally associated with significant increases in loan production and revenue levels, acquisition-related and severance charges, seasonally higher levels of marketing and entertainment expenses, and investments made to support the overall growth in the balance sheet. However, these increases in these expenses were less than the relative growth in the balance sheet and the revenue levels resulting in a lower net overhead ratio indicating improved leverage of those expenses on an overall Company-wide basis.

Further to that end, as we discussed today and in recent quarters we've had a goal of reducing our net overhead ratio to approximately 1.5% for the FY16. Given the steps we took in the last half of 2015, particularly related to recent acquisitions, to consolidate operations, including facilities and staffing, and our ability to leverage our existing infrastructure to support the growth of the Company, we saw progress towards that goal in the first quarter and we saw further progress in the second quarter of this year, with the net overhead ratio for the quarter coming in below the target at 1.46%.

We'll continue to work hard to effectively lever our expense base and keep you posted as the year progresses. But as Ed mentioned, our month end balance sheet was significantly higher than the average last year. We don't expect to have significant new expenses in the third quarter, so we do expect assuming the mortgage market stays relatively stable with the second quarter that we should be able to improve that ratio going forward.

So with that, I will turn it over to Ed.

Thanks, Dave.

So to summarize, second quarter was pretty solid across the board for us and we enter the third quarter with a great deal of momentum. The prospects for continued organic growth appears strong. As I mentioned, loan pipelines are stronger than ever. We entered the quarter with a head start on the average loans and average asset side of $523 million and $600 million ahead respectively. We'll close on the GE transaction in the mid third quarter which should again add to our earnings and our growth and our overall net interest income.

Mortgages should continue to be strong. The costs out of the Foundations acquisition will be executed and will be experienced. Wealth management will continue its slow and steady climb even in this volatile market. We see no signs of credit as going sideways on us. Should continue strong.

In all this expected growth Dave was alluding to should be a accomplished with a fraction of the commensurate growth in operating expenses. Basically anticipate very little expense growth in the fourth quarter -- or in the third quarter. So this should far outweigh any margin pressure that this market's going to bring -- that this rate market is wearing on us. That being said, we still think 330 plus or minus 10 is a good way to look at our margin and the acquisition -- our acquisition pipeline remains strong in all areas of our business. We won't -- we're not going to be stupid, though. We're going to take our time and again earnings accretion is what's important to us.

We talked earlier, the last four, five, six maybe conference calls about what we were trying to accomplish and that is we knew we had a lot of excess or contingent operating leverage that we needed to employ. You can see that through the acquisition, the cost-out acquisitions that we've accomplished through organic growth, through portfolio purchases and the like, we've been able to continue to utilize that and there's still plenty left, by the way.

We still believe that there's lots of room for us to grow it out, commensurate increases in expenses, and we think that's the logical thing to do in a time when your margin -- your net interest margin is going to be under compression. If we can grow net interest income, maintain our solid interest rate sensitivity position for if and when rates ever do go up, I think we positioned ourselves very well for great -- good prospects for strong earnings momentum going forward.

So, with that, I would turn it over to questions.

(Operator Instructions)

Our first question comes from the line of Jon Arfstrom of RBC Capital Markets. Your line is now open.

Thanks. Good afternoon, guys.

Hello, Jon.

Hi. Just maybe start with loan growth. You had a big quarter organically and huge, as you said, Ed.

No, I wasn't allowed to say that, Jon.

Okay, you inferred it. The C&I number I guess is the one I was looking at. That was a very strong quarter and I'm just curious if you could give us any idea what's driving that and particularly also maybe in overall loans maybe the quarter end strength versus the average strength, give us an idea what's happening there?

Well, it's been across -- the growth has been across the board. We started the year with premium finance loans going under a little bit of pressure because of some regulatory guidelines that came out and we've been able to divert us a little bit regarding know your customer stuff. We've been able to fight back from that, bring those balances back. I'm l very proud of the guys for doing that.

On the C&I side, this is not, again, a show of the economy expanding. I think our draw rates have been consistent, our lines have been consistent all along. This is just the momentum that we have as a franchise here in the market.

Our marketing is paying off. There's not a deal in Chicago we don't get a bat at, so that's very helpful for us.

Mortgage warehouses lending by the way, we have that division of mortgage warehouse lending through outside third parties, those were up $77 million also. Some of that growth can be attributed to that.

We really -- our leasing division's going well. We expect good growth even in the franchise division, even after that's done where we get the GE deal done. We expect continued good growth there as we basically hired the players prior to even getting into this deal. We had hired players who were with that firm and know the customers and are well-known in that space.

So it's hard to pinpoint one thing, Jon. It's just a lot of good momentum and a lot of places without violating our core underwriting parameters and profitability parameters and principles. So it's kind of more of the same but just really good momentum.

Okay. That's good. And just on the GE piece, you talked about maybe adding some expenses earlier on. Is it fair to say that the hiring is done in that business and it's just basically as simple as pulling the assets. Do you feel like you need to hire some more people in that business?

We will be hiring more people in that business as the transaction closes but we did -- we hired the main players, the senior people. I would imagine that there will be maybe one more senior person that might join us and maybe six support and junior officer types to help support that business as we bring it on, so that's in process as we speak right now. So nothing material. The senior guys we had on board.

Okay. So very little really in terms of --

Very little, I would say.

Okay. Good. All right. That's --

We had a business. We had about $300 million in it, so we did have a staff already that was familiar with this business. This is just a giant step forward. So this isn't like new to us. We knew a lot of these people already and it's something we worked on for a long time, so --

Okay. All right. Thank you.

Thank you. Our next question comes from the line of Emlen Harmon of Jefferies. Your line is now open.

Hey, good afternoon.

Hello, Emlen.

Could you quantify just how meaningful the profit margin opportunity is in the mortgage banking business and I guess really just where do you think you can go from 13% that you did this quarter?

Well, that number I should -- you almost have to bracket it because of where volumes are. Right now volumes are very strong so pricing gets a little bit better, but I think that number should be at least 4%, 5% higher going forward. That's what we'd like it to be.

Your spreads on the mortgage warehouse lending on the -- mortgages held for sale are down substantially. In normal markets those would be up a little bit higher, so that's one aspect of it. The other aspect is it's just -- man, it takes a lot of work with TRID and with all of the Dodd-Frank stuff you have to do and we want to do it right. It's taken a lot of work and the technology hasn't kept up. But I think long term our goal would be to add on a relative basis 4% to 5% to that margin.

Got it. That's helpful. Thanks. And then just a quick follow-on on Jon's question. I think you guys had mentioned that the commercial loan pipeline is at an all-time high. Just be kind of curious how that compares to where it was last quarter? Just trying to get a sense for how far ahead you are there.

Based on a gross basis it's $300 million ahead. On a net basis it's probably $110 million ahead.

Got it.

By the way, that doesn't include leasing. It doesn't include premium finance. Those are not included in those projections. This is our commercial and commercial real estate business.

Got it. Perfect. Thank you.

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

Hey, guys, nice quarter.

Thank you, Brad.

Ed, just wanted to follow up on your NIM guidance. Just kind of looking year-over-year, I guess you've lost maybe 14 basis points in NIM. Obviously you guys have been able to grow through that nicely.

Sort of the GE acquisition aside, what makes you feel confident you can kind of hold the NIM here. We had one fed increase in that time period. It doesn't look like we're going to get many more.

Do you think you can hold really the line on loan pricing here going forward? Just kind of curious kind of more of your thinking behind being able to hold the NIM kind of viewed in the context of kind of being down 13 or 14 basis points year-over-year.

Yes, sure. A lot of that down is liquidity management. When you're looking at the five- and the ten-year bonds, I never thought they'd be here in this market. You've got a bull market going on and rates are falling. Go figure.

A lot of it is in liquidity management and the accretion that's run off. We've been fighting accretion headwinds and have not gone out and done a big deal and tried to take another shot of dope to get us through the period of time until rates go back up. So that's really the reason.

If you look, last quarter the only decrease in our loans on the margin related to loans was 1 basis point due to accretion. Loans pricing held up pretty nicely last quarter. There was no difference between the second and third quarter.

So I'd like to say we bottomed out but I think a lot of that is where we get pricing pressure on loans is when loans are running out the back door that we have priced higher, if you follow my drift on that one. It's the runoff on refinance of loans out the back door of the portfolio.

New stuff is coming on and I think we maintain our profitability models, we should be able to -- which we live -- that's our Bible, we should be able to hold loan relatively constant and hopefully grow some. Our leasing portfolio should give us some better yields. As that continues to grow, the franchise portfolio in general should give us better yields.

The mix issue of getting more and more premium finance, getting -- when those were kind of falling off the beginning of the year and coming back on, those are our best yielding assets and those are growing. So we should be able to hold our own and it's just we got [whip sub] by 3 basis points of the 5 and liquidity management and blame Brexit. A lot of money flying into this country right now.

Sure, sure. And then just a follow-up on the GE deal and I'm sorry if I missed it. Can you talk about funding plans? You're kind of above your sort of historic comfort zone in the loan deposit ratio. Can you talk about that a little bit more and sort of what you plan to do in the interim until you sort of catch the funding up with the new loans that are coming in?

Yes. We're climbing the ladder again. We need deposits. We need loans. We need deposits. It's like the old days again. We've been marketing recently. We've been pulling in close to $40 million of new money a week on our terms and to build out our franchises. We've selected, we marketed.

One of the benefits of the multiple -- charter multiple brand approach we have is we can go to different markets and gain market share without cannibalizing existing deposits and thereby making your marginal cost of funds way too high. We've been bringing in $40 million. We'd like to -- we're going to open that up in some other places to hopefully get up to $50 million, $55 million.

We may this quarter have to rely a little bit more on institutional funding than we have in the past to fill that gap, so some short-term brokered funds and the like. We have the benefit of having a very good net interest rate sensitivity position, so we may -- we are able to bring in some short funding in the interim to bridge us. That is certainly part of the plan.

But long term is we don't like -- we like -- this is the opportunity for us to grow the franchise by bringing solid relationships in with three or four different accounts per household. This is really where we want to be right now. We wish rates were a little bit higher. I think everybody does because it makes it easier to do it, but the marketing and how we position it has been working pretty good.

If we can bring in on a limited basis that amount of money we can now expand that to grow. If you can be asset driven, we can then expand the franchise, the real core franchise, which is the deposit base. People don't in this rate environment don't consider deposit base to be worth much. We do. We think it's worth a lot. Rates go up it will be worth even more.

So, this is where we want to be here. The long and the short of it is we're going to continue to fund ourselves organically, continue to grow and push that aspect of it. In the meantime, we might have to bridge ourselves with some brokered or institutional funding this quarter.

Great. Thank you.

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

Hi, good afternoon. Ed, a question on competition. One of your larger competitors got taken out in the quarter. Obviously it's early.

Who was that, Chris? Did somebody get bought?

The question is what's the potential fallout or how do you see the potential fallout from dislocation? Typically with situations like this are pretty infrequent but there's typically a land grab for lenders. Wondering the capacity and the interest.

Well, for lenders any time there's a change in the market there's going to be some disruption. I don't think this one's going to have as much as others have in the past.

I think that the Canadians have bought a franchise and they'd like to build and grow it. They've shown their commitment by giving the senior people contracts to stay on. It is my understanding that's what's happened.

So I really think that organization will continue to be a solid competitor, but it does provide for some disruption if there are. You won't know for a couple of years if there are cultural issues where they don't line up. I you have no idea if there are or there aren't. I'm sure that they figured that out before they put ink on the paper.

In some respects it could make that particular competitor a little bit stronger with more capital, with a bigger hold level. They could become more aggressive.

So we're looking at all aspects of it. Any time there is an acquisition such as this it does bring disruption and dislocation and that does bring some opportunities, both in people and in assets and clients.

So we don't think it's going to be any less competitive. These guys are going to go buy the sidelines. We think it might make them a little bit more competitive and we're ready for the challenge.

Great. Thanks. If I could, a follow-up. With the growth outlook, can you remind us -- you put some but not all the capital to work through organic and deals. Can you remind us the comfort in terms of capital targets and what you estimate might be left in terms of deployment ability?

Chris, this is Dave. I think the thing we look at most often is our total risk based capital ratio as being the limiting factor for us. And that was getting down around the 12% range or the high 11% before we raised this last three million shares of common in June.

So I think if you start to get into sort of the 11.5% range that would probably be the low end for us before we started thinking about raising more capital. So probably 11.5% to 12% would be a range. It's not hard and fast.

If the growth prospects look like they were going to slow for some reason, which is not the case, maybe you would let the earnings generation build that back up, but to the extent that we have the momentum that we have this quarter and then it looks like we are going to have for next quarter and for the foreseeable future, then we would probably look at doing some form of capital if we started getting that 11.5% to 12% total risk based capital range.

So potentially a capital -- you may cross that bridge at some point next year if the growth continues but not necessarily common, is that the right way to interpret it?

It would depend on growth and whether you do more acquisitions and whether the pipelines pull through. But, yes. You can sort of project that out and once you start to go below 12 and start approaching sort of mid-11s, then we probably would be looking in that range to do something.

But it really depends on -- like this last capital raise we did everybody questioned why did we do it if we hadn't announced a deal. Clearly you can see now that we had deals in the pipeline that we knew were coming and we had significant loan growth coming and we felt it was appropriate to raise the capital at that time before you sort of got into a blackout period at the end of the quarter and during earnings season.

So we could do it a little bit earlier than normal, it just it depends on what we see in the pipelines. And this time we saw the pipelines growing and the acquisitions being there. If those go away for some reason, then you might let the earnings support it.

Great. Great color. Thank you.

Thank you.

(Operator Instructions)

Our next question comes from the line of Terry McEvoy of Stephens. Your line is now open.

Hi. Thanks. Good afternoon.

Hi, Terry.

I just want to follow up on Chris' question. How much of the $153 million was allocated for the portfolio purchase? And the reason I ask is I think some investors were a little frustrated because you raise capital, estimates go down and then you announce the deal and they didn't really go back to where they started and so it was viewed as a dilutive capital raise.

I'm trying to figure out now that we've seen this quarter's growth in the pipeline trying to then quantify what that additional capital will mean to future earnings. Maybe help better respond to that dilution question.

If you listen, if you follow up on what I said to Chris, 12% -- 11.5%, 12% is sort of the range. You take the $581 million of loans that we bring on and 11.5%, 12% of that would be allocated to the capital and then the Community Bank in Elgin, that will be $150 million to $200 million of additional growth and 11.5% to 12% goes to that.

We also had more than our target loan growth this quarter. So I think you've just got to think about it. If you look at those buckets of growth and apply 11.5%, 12% to it, that's how much capital we would allocate to it.

There's been a lot of talk on CRE over the last week. How do you feel about continued growth in that portfolio? And then as you talk to potential sellers, is CRE coming up more in your conversations with, again, potential sellers?

Absolutely. CRE is on the front burner of every regulator, that and IT are on the front burner of every regulator in the country. Fortunately, our ratios are pretty good when its comes to that. We're not approaching the 300 levels that they refer to, but it certainly is becoming an issue for a lot of other different banks.

We are seeing lots of opportunities in the CRE space right now as a result. So it's somewhat of a -- finally we've got somewhat of a lenders' market here, but you have to be very careful about who you pick and sponsors you deal with.

We are growing that portfolio on a selective basis, profitable deals with extremely good sponsors and very, very good loan to value, loan to cost metrics, people we've done business with for a long time. Not a lot of land development going on anywhere right now, but some vertical development going on.

But CRE is a hot button right now. It is an issue. From our perspective, we maintain our discipline, which history would say we've been able to do relatively speaking. It can be a very profitable business for us right now because of our dry powder.

Thanks. And then just one quick follow-up. The change in MSR from 10.1 to 13.4, that difference flows in through the mortgage banking line and I just want to understand in Q3 should we maybe not expect that type of change in the MSR?

We'll have to see where it goes. A couple things happened there. We are growing that portfolio a little bit and it depends upon the mix of business and we're doing a little bit more of that mix with loan types that have a little bit higher service fee level with them.

The other thing that we saw is that the 10-year as it dropped at the end of the year our mortgage rates didn't drop at the same level and so the mortgage rates really -- there was a little bit of a disconnect in June from the 10-year and the mortgage rates that we had. So we saw some actually some expansion in the spreads there, but if rates stay really low and prepayments pick up in the third quarter, I think it's maybe reasonable to believe that you would see that not have that growth in the third quarter.

Thank you.

Good news, Terry, is that the second half of the year is always my favorite, not just because of the holidays and cubs going to be in the world series but each quarter has an extra day in it. So that extra day is about $2 million, a little over $2 million more in net interest income that comes through each quarter.

So each day's worth a little over $2 million of net interest income to us. That number will continue to grow obviously as the bank grows. So we like that too. That's nice. Calendar's on our side in that regard.

Sounds great.

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

Hey, guys.

Hello, Kevin.

So first, wanted to make sure I heard you correctly as far as the cost savings from the Generations deal and the Suburban deal. Those have all been realized; is that correct?

The cost savings on the three deals we did last year, which includes Suburban, those have all really been realized. Foundations we closed on March 31 of this year. We just converted it to our system in July, so last weekend. So we'll start to see some of those savings on the Foundations deal here in the third quarter. So those are not fully realized yet.

Okay. And then --

Although if you listen to my remarks, there were some conversion charges and a little bit of severance charges related to them. Getting a full savings out of that really doesn't incur until the conversions are done and the systems are one and locations are combined. So that will start happening in the third quarter here.

Okay. And then given the strong dollar, what are your commercial customers saying? Are they feeling any of the negative impact? Are you starting to see any of that show up kind of in some of your credit stress testing at all?

For those doing business overseas, it certainly is not helpful to them in a lot of respects. Our customers have built -- most have built pretty much fortressed balance sheets to withstand that sort of thing.

Our commercial customers are all doing pretty darn good. I don't hear many of them complaining about the strong dollar right now. Many of them are -- they somewhat like the dislocation overseas and it's helping them in their markets, given their stability and their ability to deliver. So it has not been something that our customers have been complaining about in mass.

Okay. Great. Thanks a lot.

Thank you. I'm showing no further questions at this time.

Okay. Looks like we're done. Thank you all very much for participating. Look forward to talking to you in October with good results. So everybody have a good summer. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a good day, everyone.