Wintrust Financial Corporation (WTFC) Q4 2014 Earnings Report, Transcript and Summary

Welcome to Wintrust Financial Corporation's 2014 Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. [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 is, as always, Dave Dykstra; our Chief Operator Officer, Dave Stoehr, our Chief Financial Officer and Lisa Pattis, our General Counsel. Recall we'll 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 and 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 is off to a good start. We closed this morning on our acquisition of Delavan and Delavan Wisconsin, picking up $200 million plus or minus in assets. Four branches, we currently have four in that part of the Wisconsin market. We think there are some cost-out opportunities there. The acquisition makes us the largest bank in the Walworth County and we know Walworth County, that's where Lake Geneva is and 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 and was accomplished in what I would consider a pretty tough banking environment. Not just regulatory, rates, competition, you've heard of all. I don't need to go through it. But earnings were up 10.3% to $151.4, while earnings per share up 8.5% to close to $3.298. 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. TDA for the year was up 30%, up to $3.5 billion now comprises 22% of the overall deposits and this is a credit to the commercial initiative that we embarked four or five years ago. For years, we're running at 9% may be 10% TDA, but our commercial products are selling well. Our treasury and management is selling well. New relationships were coming on and this will bode well when -- bodes well now, but will bode even better when rates move. Our margin was down around seven basis points due to the overall compression you've seen in the industry from 3.53% in 2013 to 3.46% in 2014. Our net overhead ratio dropped to three basis points to 1.76, so some room to go there as we all talk about, constant, close to 80 basis point at 78. Our wealth management is pushed through $20 billion in assets under administration and both wealth management and mortgage had very good years. Wealth management fees for the year 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 and deposits were up 13% or $3 million bucks. So a 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 that -- identify bad assets and get them out of the door. NPOs went down to $78 million and represent 0.55% of loans. The NPA's went down from 0.85% to 0.62% of assets. So still stellar credit, but we will -- we are still looking to clear these assets out, not that we want to make room for the next ones. So 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 inquisitive nature that we've been under over the last five years and analyzing our reserves from 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 and non-performers also, reserve coverage of non-performers also increased. And Dave Dykstra will get into a detail of this to kind of explain it to you, but you'll see some new disclosures on Page 26 and 28 of our press release. And as we stay inquisitive, I think this was kind of how you have to look at your overall reserve position as 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 that regard. So all in all, very good and successful year and we're proud of it. But now on to the fourth quarter, our earnings were $38.1 million or $0.75 a share, that’s an 8% increase over 2013. We had approximately three sets of one timers, 1.3 related to sub-letting our wealth management space. As we talked about previously, we have rented the oil continental Illinois bank building down right at Maine, at LaSalle and Jackson right across the street from the Federal Reserve. It's a wonderful opportunity for us. We were outgoing our space, but we needed to get out of our lease and wealth management was in and that cost us approximately $1.3 million to sub-letting process and the cost related to that. Now we also took $615,000 pre-text charge in closing an acquired branch. Just we need to do a better job with purchase accounting next time around, but we -- 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. Once the loan growth occurred in December, so average loan was actually lower than the $350 million 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%; again DDA made up $266 million of that, again a tribute to our commercial initiative. Net interest margin remained constant at $346 million to $346 million, as we said a lot more liquidity, than we had earlier in the previous quarters, but our goal is obviously to put that to work. Capital ratios remained strong. As we discuss credit earlier, it's still in wonderful shape. We did have -- OREA 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 section. In the non-interest section our wealth management revenue totaled $18.6 million for the fourth quarter of 2014 and 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 now 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 continue to grow it. 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 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 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 re-financing 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. 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 mentioned before, we consistently have utilized these fees to supplement the total return on our treasury and our agency securities in an effort to prior to hedge to margin pressures caused during the 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 contracts that we have not designated as hedges, so that we used 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 of 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 cost that Ed mentioned of $1.7 million and 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 cost. So I'll talk about those cost later, but excluding the cost associated with those specific three reasons, the increase in another non-interest expenses in the aggregate, those approximately $1.2 million are less than 1% over the prior quarter. Let's now 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 primary 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 assessment and changes in the valuation of some pension funds that we inherited with two of the bank acquisitions and we're looking at terminating those pension funds in the future, but now they're in a frozen state and that was just evaluation 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 yearend 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 was 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 in 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, this place will be more economical on a peripheral basis on 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 detail on the activity in the OREO portfolio and the composition at yearend and at yearend 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 nothing was the data processing category and 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 cost associated with recent acquisition activity and the remaining increase was generally a result of addition 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 that related allowance that goes along with those categories, that this quarter we had again our non-accretable discounts on our non -- I am sorry, on our non-covered purchase portfolios and those discounts as you know when we purchased a portfolio, 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 those joint losses going forward. So as Ed mentioned at the end of the year, our core portfolio had 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 am 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. So with that, I will turn it back over to Ed.

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 they said, well you're going to change the call report and they said, well that will take about four or five years. And he said, you mean, you could do Dodd Frank in two days, but you can't change a 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 greats where they are, low volatile rate environment coupled with competitions, most times seen somewhat irrational. You've 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 example fired in the graphs, which you see on Pages three, four and five of our press release. We've got wonderful smile charts there and our goal is to maintain and to continue to grow and along with the slopes that are indicated in that -- are in those charts. So we feel good where we are going forward. Life science remains -- 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 worth rates where they are. Our brand momentum continues to be very strong. Acquisition opportunities are plentiful just the gestation periods are long. We are concentrating on the prioritized cost-out opportunities to take advantage of the operating leverage within our overall structure. We think that makes a lot of sense to -- and that's what we're seeing a lot these days. So there is 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. Our interest rate sensitivity continues to be very good and our people review that. There is apples and oranges. Some of the reviews are on 200 basis point shock basis, some are on gradual basis. I think we compare very well and we disclose that information to you, but our goal will be 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 and they say, other people are doing it and I say, listen, just because you make a bad loan and it gets paid off means that you're lucky. It's similar to if you're getting your car and you drive home drunk and you make it, it still probably wasn’t a very good idea to get into your car and try. So we're going to maintain our discipline on the credit side of the equation. We'll maintain our interest rate sensitivity. We'll continue to diversify our portfolio with other product types, concentration skill 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'll 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 would 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're going to continue on our goal to be Chicago and Milwaukee banks. You're going to 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.

Hi John.

Hi John.

Hey, just a question on loan growth. You talked about they being backend loaded, any -- just curious is there is any particular reason why? And then also if you could maybe size the pipeline for us how it compares to previous quarters.

There is somewhat of a yearend rush to get things done Jon and I think it's somewhat consistent maybe 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 that's a asset pipeline here as we speak. So…

But that's carried into Q1 -- that backend loaded nature of the growth is carried into Q1.

Well you'll get more average balances in Q1. So a lot of that growth will be performing for us in Q1. The growth pipeline stands at a $1.122 billion with weighted around $700 million. So that's consistent with the numbers we've shown you in the past. We 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 to our own hedge businesses. This is commercial, commercial real estate and other loans. So it doesn’t include the niche businesses, which you know the first quarter is -- 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. So we feel good about where loan growth, where it stands right now, but it's getting harder I'll tell you that and we are in the back end. We're getting poached a little bit, especially on commercial real estate. Some banks out there that are offering third year AMS with 7-year to 10-year fixed rates, something that we're just not going to do. And some of the transaction of real estate, we see some payoffs in that regard. So we got to run a little bit harder to maintain our growth, but that's expected. We saw that last -- part to last year and we did okay. So we'll take a day at a time.

Okay. Good. That's 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 and you referenced it a bit, but just give us an idea of what you're seeing?

Well compared to the first quarter of 2013, we should be -- we should be ahead, but the last -- in this last couple of weeks of December, hang on, I am just pulling it out here, we during the month of December, we averaged 62 applications a day, but that was low in the beginning, but still January to date, we've been taking in 108 applications, which is -- but it sets 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 king of at the max of getting close to the max of where we would want to be and 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. So at least for January we've been maxed and I think the ratio as Dave gave me, you are seeing probably 60% retry and 40% purchase on this. So it should for usually a slow quarter, the first quarter is usually a slow quarter and it looks like it will 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 couple deals closed towards the end of the year, just kind of curious where your outlook would be there. I know you guys are constantly reinvesting in the franchise, new teams; I know you announced a technology team within the last week or so. But just -- any additional color on expenses and what leverage you may have there as you go into 2015, otherwise difficult interest rate environment?

Yes, the deal we closed just happened today. We'll hand the [umbrella down] [ph]. So that really didn't have an impact on the fourth quarter. So there will be a little bit of additional expense with those four branches coming on today. If you look at all those categories, but those unusual items it was pretty flat. Our approach here is continue to grow the franchise but on acquisition opportunities out there, a lot of them sort of overlapping. So I think as we continue to grow and add locations, we're going to be able to take a lot of cost out of the future deals. But other than the acquisitions, we don't expect the expense based to go up dramatically and 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 we do these acquisitions going forward and take the cost out, those will be really beneficial to us. So I am not sure that's answering your question.

Brad, we're going to do a much better job of breaking out the one-time acquisition cost that we get. We've never really bothered doing that but we're in the acquisition business, but with what we're seeing now there will be, if these things won'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. And 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 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 driving through internal growth strategies. 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 if we -- when we look at them and that's the plan. But salaries were probably 3%, 2.5% to 3% increase we've given this year to our existing staff. We are investing. As you see, we're known to invest and continue to build a solid franchise. So there will be -- there will be some takeouts 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 there was average balances were, just kind of getting 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 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 seems to be some volatility. So over yearend we just want to make sure we had enough of 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. And maybe some of that maybe reverses out or do you suspect that you'll…

It was very short term. It was more short term federal home loan bank fund.

Like overnight stuff.

We didn't layer on term federal home loan funding.

Sure. Sure. Okay. Thank you, guys.

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

Hey. Good afternoon, guys.

Hey Emlen.

Getting back to the topic of expenses, you did mention there was a bunch in there this quarter. So just -- 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. It sounded like there was some kind of like closing comps 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 not going to recur, the sales, the bank branches, that was actually up in the non-interest income section. We put the gains and losses with that line, but that's not going to recur. The ACA it was bigger number this year at the three-year program, but the plan is that over the next two years it ratchets down, so it's probably not as much. And you're right, the pension is just, our rates are out. 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 of more fluctuation in those. So I would take out those items that I talked about and the thing you would see in the first quarter and every company has this, is payroll taxes will be higher in the first quarter because the bars resets at zero and everybody has the Fico chart is on everybody. But other than that, other than the acquisitions, I think we should be relatively steady as the OREO game fluctuates up and down it's just recurring to push their 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% increases will come through in the first quarter, but other than that, anything that would additive would I think really be the any acquisitions that we take on.

Got it. That's very helpful Ed that the ACA was I guess having one 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 so much of a contributor to the organic growth engine that could be potentially?

Well I think we've got -- we've got that whole acquisition of the branches converted. So we've got all the deposits and the loans that we're 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 frankly that's going to grow to the moon, but we're going to work the market where we really haven't been that much, and then over in 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 being 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. They're in the numbers that we have now and hopefully we'll have similar growth up there that we had elsewhere, high single digit, low double-digits type of growth that would be the plan.

Emlen, 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 and we're looking at exploring that as an interesting niche for us again to on the diversification side of the equation. That is just in its infancy, but is something that we're very interested in and you think of Illinois and Wisconsin and Iowa and the surrounding states because the industry is agriculture like it will 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 -- as time goes by. So we think that we were able to pick up the idea whereas we got deposits, the loans stayed at Talmer. We're working with Talmer and other folks that were able to bring a lot of those wells back over. People didn't want to have their either and their loans in Michigan. And if you remember one time that first baking 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 quarter or two to get everything digested and get the ball rolling. So we feel good about it.

And as Ed mentioned earlier, we stretch now from Kenosha County over to Walworth County with the majority of those accounts and the few at the Talmer acquisition with the one we just did today and the Delavan Lake Geneva area on a pro forma basis, if you look at the summary of deposit data that the FDA serves, we will be the largest bank in Walworth County and with the most locations. So, those two deals really help get good presence up in that market. We got a great team of people out 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. If you look at it on a full year basis, it was like 175 on the overhead ratio. How should we be thinking about this? A, is this a good way to look at the near term, there is a decent run rate for the next two quarters assuming this rate environment sticks and is there anything else you would point to or maybe a better measure at this one?

Well we look at the efficiency ratio kind of as a barometer. And we do study it because its 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 80s. If you back it down just to the -- back it down just to the banks, we're in the high 50s. So that’s one way to look at it. But we manage the organization through the net overhead ratio. Based on the size of the bank and the operation we know where other income should be, where other salary expense should be, where occupancy should be, and where other expenses should be. And we're in inquisitive mode, and it takes time to get down through those numbers. So, we manage up the net overhead ratio. The efficiency you can't manage all the efficiency ratio or just to get to margin -- 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're 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 have done acquisition over. And then the other -- the wealth management and the mortgages are always going to raise that up a bit too. So, 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.

Okay. So if I take those comments and kind of what you guys were talking about in terms of cost saves coming from some of the deals, the 175 for '14 should head naturally a little bit lower as you kind of get some expense synergies. Is that a fair assumption for '15?

That’s the plan.

Okay. One last question on expenses, obviously we’ve talked a lot about your charter structure Ed, any more thoughts given that rates apparently are going up forever? Whether this will be any kind of an earning source in the coming years for you guys?

You mean collapse in charters?

Yes.

Believe it or not, we would lose money if we collapsed charters. It's counterintuitive and it's a question -- we always get two questions, their cocktail party questions I call them, because one is you're inefficient if you have too many charters and two, your reserve is too low. And it’s -- so you have to work through those. But trust me, we would lose money on our funding base, which we look at the money we get from the wealth management business and 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, you've got fired all the bank Presidents, yeah, but then would you have the growth, would have the positioning you have in the market. You’d still have to hire somebody to run that market for you. There is not as much there as you would imagine. We're not the old Synovus type of multi chartered system. We hob things, we centralize, we consolidate things, the loan operations, compliance, it's not the old school, this is -- consider them to be 15 different divisions that in any other bank. Are there some ancillary cost? Yes, in terms of the regulatory cost and the like, but those haven’t come through too, because we're based there on asset size and what have you. So when you add all those up and you look at what you have to pay to replace some of the financing we have and then notwithstanding just the financial side of it to 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 that 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, 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 90-X add percent of all of our funding is core based funding with great solid relationships under it. We're building this thing out on a real foundation. We're not building it on broker funds and what have you. So 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 repeat it out and we could see a little bit of operating leverage there that we would pick up between two very close market deals but it’s not the case right now.

All right. 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 it off from my list. Ed, I guess where are you on the process of fully penetrating the fee generating opportunities at all the banks and branches you've acquired over the last couple of years and could there be more upside in say wealth management, mortgage etcetera?

We definitely believe so, especially on the wealth management side. The new 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 leaders and it’s long and its consistent. The trust level between -- bankers are somewhat proprietary, you get a lending officer, a personal banker who has got a really good customer and I don't know for my internal reasons, 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 and there is a lot of opportunity for continued cross sales on the wealth management side of the equation. There is also the opportunity on the wealth management side of getting more transaction oriented account out of the brokerage system into the manage 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 the Great Lakes have and the performance Great Lakes has that you can have the confidence of moving -- putting a relationship into another product and I don’t feel like putting them in jeopardy at all. I think now we're helping our clients. So I think that there on the wealth management side its terrific. The mortgage side, most of these guys come with most of the banks that we team up come up with mortgage professionals. It takes them a little bit of time to get up to speed with our mortgage operation. We are buy the books organization here not to say that the -- 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 to get that going. So probably opportunities on all fronts.

And then just as a follow up, it looks like purchase accounting accretion was $30 million last year or call it $0.35 a share, what type of headwinds do you face in '15 assuming that level comes down; any thoughts there?

Well, I think that’s a pre-tax number to begin with, right.

$30 million pre-tax, yes…

20 after tax on 50 million shares, around there. Well that, as you can see in the press release there is a chart that shows the accretion and you do see it coming down. And if you take that chart over the last couple of years, on the static portfolio, yes that number will be probably coming down, it has every year. But if you -- if we're successful in the acquisition front, we’ll be back loading that and just because it’s a covered loan, it still has the same accounting as a non covered transaction. So we would think in the number of the transactions that be made available to us. There maybe 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, we ended the static inventory as coming down and hopefully is this acquisition market will allow us to back load this again and maintain some reasonable accretion coming in, but you never know, we had to get the deals, we got to mark them right and we got to do better than your markup. So notwithstanding that, we would expect accretion to continue to slide as those balances pay up [ph].

Okay. Thanks. Have a nice weekend guys.

You bet. You too.

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

Hi Ed.

Hello Joe.

Ed, I don't have any fundamental questions, but I do have you -- we're starting to talk about loan loss reserves and then the FASB and accounting stuff and I got distracted. So 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 picked 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 in the core loan and then we grouped it in the purchase and niche loan areas. So we could show you -- it is in our purchased loan area. You don't get to carry the allowance over when you buy loans now. So inquisitive organizations like us, the reserve starts to look lower because you got the loan balances right, but you don't bring it in.

It's a disaster right. I agree.

And so what we try 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 through 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. So 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.

Yes, and which includes the extra $15 million on Page 28, correct.

Correct.

Okay. Got it. Okay. Good. Thank you. You're making it -- at least, you guys are at least attempting to connect some dots. So I appreciate it. Thanks guys.

Thank you.

All right. 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.