Wintrust Financial Corporation (WTFC) Q3 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to Wintrust Financial Corporation's 2015 Third Quarter and Year-to-Date Earnings Conference Call. At this time all participants are in a listen-only mode. [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 [sic] 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 call is being recorded. I’ll now like to turn the call over to Mr. Edward Wehmer.

Good afternoon everybody and welcome to our third quarter earnings call. With me as always, David 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. David Dykstra will take you through detail and other income and 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 of expenses. Accordingly, we anticipated approximately $14 million in cost saves from these deals. I’m happy to report that we projected 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, and 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 saving process, as such there is an 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 that – redundant costs that will be taken out during the period of time. Those costs will be included in our operating numbers, but they will diminish as the fourth quarter wanes down and again and the first quarter should pretty much be behind us. You know, I look at these acquisitions and maybe this will help you all, we picked up this quarter $1 billion worth of assets and at a margin of three, four, that’s about $34 million on an annualized basis. Other income is about 40 basis points of $4 million. We expect our 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 after-tax. If you were to allocate about 100 million of the Series D preferred stock that we did on this deal of 6.5% that would be about $6.5 million, take you down to $13 million that we anticipate coming from these transactions when they are all said and done. So all-in-all, these were very profitable transactions and again that’s using the preferred stock that we issued a portion of it to fund this deal. So all in all, these transactions are very good and working up 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 will be 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 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 of years ago as we – it just shows that our commercial initiative is continuing to maintain momentum. Loan growth was also good in our pipeline, still remains 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 are up $100 million in gross leases of which $62 million came in this quarter. Yields on these are approaching 5%. Their pipeline is very strong and as I said, they are off to a very good start. Hopefully, this will be part of the diversification that we are working on that will also aid the margin, which I will talk about in a second. 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 basically - 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 five – 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. The property and casualty side of 3 basis points, we will note that the overall yields in that portfolio were relatively consistent, however, the – we did a number of larger deals that have [Indiscernible] reserves associated with them and late fees were down also. So nothing really systemic there other than a mix of business, but really this quarter, really July was our biggest month of the year and as such we get a lot of bigger deals that come in. So there is nothing systemically an issue there. That being said, we are doing a full portfolio review on that, and I will talk about that in a second. Life portfolio was down 2 – kind of 2 basis points of the drop, that really is a market issue, but again that portfolio, which yields above 3% in total, when no loss is associated with it, very low overhead associated with it, 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 – kind of 3 basis points of the drop in the margin, that really is the market effect. A lot of it is doing the refis of loans coming off our books. Our portfolio still yields about 4%. But on the commercial real estate side, the repricing when we are doing things it’s coming in, the market is our major competitor, 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 [Indiscernible] they were actually were steady, so really when you think about this quarter and I think you will see this at the end of the discussion that really the margin was the issue that caused us the heartache or the heart burn that we have right now. I will talk at the end about things we are doing in that regard. With that being said, we anticipate margins to stay within 10 basis points in the 3.40 range. We talked about, we don’t see them going down by a lot more, but the market will predict – will be the cause of that otherwise [Indiscernible]. We are – 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 both a static shock and a ramped scenario. Credit quality, in keeping with our [indiscernible] this quarter also had a lot of noise in it for this quarter when we 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 is due to [a OREO] [ph] we acquired and the three transactions I discussed. $7.3 million was previously covered by the FDIC loss share. The loss share in our first two deals that we did ran off during the quarter, so that number had to be shifted over to uncovered OREO. The OREO we already had, we think there is no losses associated with that. We had $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 was about $12 million. We’ve got two partners in a fight that loan has been – was always current, but they are 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 those to be any sort of a trend. Just again those rearrangement of furniture and one relationship that we are working through right now that caused that, but still again, our numbers are extremely, extremely low. A quick comment on other income, but again lots of moving parts here. Covered call income was really 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. Thank God, we didn’t have another one this quarter, which was $1.5 million after-tax that did not re-occur. 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, foreign markets actually doing worse. They don’t have to tell you guys all these statistics. That being said, our fees held constant and our assets under management did drop about 3%, but less than the market, which shows it was still gaining momentum in the wealth management business, which you know and I have 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 detail level.

Thanks, Ed. As usual, I’ll just briefly touch on non-interest income, non-interest expense, and hit the highlights a little bit. I’ll go through in a little bit 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 $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. And 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 record quarter for us and 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 the purchased home activity increased to the low 70% and that’s up from the low 60% in the prior quarter. And that’s more from a drop off in the reprice and a little bit in the home market. 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 same quarter of last year. These are somewhat dependent on interest rate forecast. More people thing rates are going 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 [sic] quarter was down $2 million from the second quarter and that was primarily due to the death benefits that we recorded in the second quarter not recurring this quarter. Turning to the non-interest expense categories, non-interest expense totaled $160 million in third quarter, increasing approximately $5.7 million compared to the prior quarter. Now clearly the biggest driver of the increase was related to the increase in our acquisition related charges of $3.9 million. We 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 we’ll continue until each of those acquired banks complete their system conversions. So to speak this other 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 less than $1 million, which we believe is reasonable given the total average assets reported by these class increased by approximately $1.4 billion in the second quarter to the third quarter. To put our operating costs 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 and 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 staffing related to the three acquisitions that we completed in July, including permanent staffing of the acquired locations as well as transitional cost of staffs 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 compliance audit 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. Going through the other categories that had some changes, net of the acquisition related charges, equipment and occupancy expense category [Technical Difficulty] largest increase from the prior quarter, increasing approximately $1.4 million from the third quarter -- from the second quarter of this year. Majority of this increase related to the operating costs associated with the three acquisitions and a bit more depreciation expense reported 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 fee can fluctuate on a quarterly basis based on the level of acquisition litigation and problem loan workout activity but that being said, the total professional fees were within the range that we’ve experienced over the past five quarters. So we think that our -- 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 a higher gains that we recognized on non-covered OREO sales in the quarter. If you were to look at all 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 were 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 were reviewing all of our First Insurance Funding pricing in both the life and the property and casualty areas, there is 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 a line on commercial and CRE pricing, we did a good job on the commercial side of things but CRE because of the reprice is hurting us but we’re -- and the market is very frothy right now, so 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 from the fourth quarter in that regard. Our interest rate sensitivity position in again higher than it was in the second quarter and really probably one of the highest I think that you 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 doing some of that also to try to maintain the margin. And we would - we’re 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 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, you never know about December. So I’ll hedge my bet on that but it looks like October, November should be strong quotas. Our home pipeline 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 but - 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. Assimilation of the recent deals is going better than planned and it allows us to get active again. And it doesn’t say that we will. We won’t’ anything but we will be looking at additional opportunities 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’ll start working on probably at the beginning of next year in a lot of these branches that we have enabled to pick up, assuming of course that loan demand is there again, we’re an asset-driven company, if loan demand dries ups and 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 into 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 build 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. Please proceed with your question.

Just a couple of follow ups, you covered a lot of what I wanted to ask. But just on the business pricing review that you’re doing. What are you trying to accomplish on the margin, is it something when you feel like you can change some pricing and put a you know finer point on some of the stuff to get the margin back up or is this something where you’re just fighting to hold the margin around the current level?

More of 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 to -- we think we’re a value added organization across the board on both of those businesses, life and P&C. And I think that, I think we can get better yields, 10 basis points isn’t going to kill anybody and we can’t do much about the late fees which really surprised us is, down in the 120 area that used to be 220. People are paying their bills these days I guess but we think that there, we can, we work one by one and we can actually improve the profitability in that business, stem as the tide and improve the profitability.

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

Well, our pull through rate has been consistent Jon, and our pipelines are also seasonally consistent with over $1 billion in the weighted – closed in the pipeline over the next couple of months. So the way that it's done, the 600, 700, and we always anticipate growth of $250 million to $300 million in the pipeline quarter-to-quarter. Anything over that is gravy for us. But with the leasing side of things, I mean, we have committed to 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. So 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 of -- in our opinion in terms of some prices, especially the five-year fixed rate deals of 3.5%. You can go –out and buy - the credit cost and the cost you have to do that, why don’t you just buy mortgage backs, I don't understand, but it has screwed up the market a little bit. So you have to pick your spots and there are some areas that we won't play and there are some areas that we’ll play, but our market is a pretty big market. We do believe we do bring value-added and our pull through rates has been pretty good. So as of now, I feel very good about maintaining the $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 exercise that you are 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 are two aspects to that, Jon. The first is, as we’ve said previously, our plan is right now the market is giving us acquisition 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, that's what's the market is giving us, and the returns are pretty darn good. When you do that 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. So we have staffs in those marketplaces that when the market moves away from acquisitions, we will go back to organic growth. All of this is 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 call the herd right now and rationalize some of those things when you know you're going to grow those markets in the near future. So there are those opportunities there. And we know that, we call that kinetic operating average that we do have and we would anticipate. We always saw when rates went up, the pricing on these banks should move away. It actually -- who knows if rates will ever go up, but I actually think some of these 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 budget time right now. We are looking at doing some things that would also provide some expense saves, but we are a growth property, we’re built to grow and we know we have an expense base that can support a larger organization. I believe that what we’ll probably see us do next year is some acquisitions that are strategic and cost outs and some organic growth to start building into that also. So both of those two things will help us leverage the cost out, will help us leverage the portfolio too. So we’re going to be looking across the board during the 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. So it's an ongoing process for taking cost out of the system. I don't know what Plan B would be other than just saying we’re going to stop [rolling] [ph] and cut a lot of staff that we would have to replace if we go to organic growth, which should be starting next year.

It does. Understood. Just want to understand how you're thinking about it. Okay, thank you.

All right. Our next question comes from the line of Emlen Harmon from Jefferies. Please proceed with your question.

On the expense saves from the three acquisitions, you guys had noted that you've executed on two-thirds of those. So 9 million or 10 million bucks 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. So was there kind of a catchup 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 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 near the end of September where they’re actually -- you’ve got the exercise for generating the cost saves done, but there was some expenses realized in the third quarter, or it could be the case that all that stuff were done since the deals were closed and those expenses are…?

There are redundant operating expenses that really are yet go away, and they are in the $1.5 million, the $2 million area on a quarterly basis. So if you're talking about redundant expenses, 1.5 to 2, I would say because there is still about maybe closer to 1.5, still about 6 to go. So but there are some fudge in those numbers, so maybe 1.5 to 2 this quarter, there is still 1.5 million to really carve out in the third quarter -- in the fourth quarter I mean to get our run rate going. That's the hard math, because we had two months of operations, we’ll have a full three months. So in the fourth quarter, so will they all be out, will the 1.5 million, call it, be out in the fourth quarter? No. Some of it will, but there is an extra month there we have to pick up. So that’s why I want you to focus on the overall of where it will be in the first quarter. 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 will come out in the first quarter. Does that make sense?

It does. Yes, thank you. And then just on M&A, you’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 kind of figure we didn’t take a break. Given our past history [indiscernible] we are taking our time to secure the conversions have been done, we focus -- the real focus of the conversion is then properly the least amount of customer disruption as possible, you have a bunch of customer disruption that you really want to buy. So we are taking our time, we are putting them in and we have taken really a hiatus to sit back and make sure these things are under control. There is a first cost out we’ve done and especially that. You have to be carefully then, with respect to the people that you are changing their lives and you’ve done all that. But we just want to make sure we did these and did these right and got a template going forward. The branch or the conversion has also involved kind of relocating branches amongst the -- geographically amongst the charter. So they’re a little bit more complicated than just flipping over, flipping a switch and having them on part of one bank. We do reallocate them to the other branches. So we just want to make sure that we get that right, two down, one to go, both the loans that have gone to date have done exceptionally well, it's really a complement to our IT staff. They have had enough experience doing that obviously, but there is one more to go and we would like to kind of get that under our belt, that’s in mid-November and I think we will be getting a little bit more active, but 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 are ready to go in fairly short order event?

At will.

Alright, thanks and good luck to the cubs.

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

Good timing on the sign on the scoreboard Ed.

Great things happen when you partner with Wintrust.

Just a follow-up on the expenses and not to continue to play with the point, but just back to Emlen’s question, if I sort of look at kind of pro forma what the three deals would have added, kind of for the day that would have contributed a little bit around $6 million, less kind of what your mortgage commissions came down, it doesn't really seem to me that you got any cost saves. And so my question would be, do you think you mean backing up the way you said, maybe 1.5 million or 2 million, we’re already in there. It seems to me that maybe they warn 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?

No if I followed your math. Let’s just cut out salary 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 than our expenses. So I'm not sure why you're seeing you don't see any expense saves coming up.

Well if I take a core kind of expense number, ex-RCDI [ph] and the OREO noise, maybe around 151 million, if I add 6 to that, that would get me to 157. You guys are kind of 154 for the quarter because commissions were down about three, so that's kind of where I'm coming from. So 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 kind of enter the first part of the year?

Well, you picked up 1.4 billion with really no increase in expenses quarter over quarter. So then if you want to -- the way you’re looking at is, okay, your commissions were done, granted, they were done. But also those commissions were pretty close to maybe $1 million off of the redundant operating expenses that should come out in the fourth quarter. So 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 that -- we figure 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 billion for with no real increase in expenses, I think that’s taken the expenses out. I’m just 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 you have to come out of the expense base, we are basically flat.

You are up just a little bit and for the redundant cost, I mean we also have some addition for the leasing and few people in the compliance area, but, yeah, I am not following your logic on that.

It's okay. Fair enough, I will follow up with you guys. And I know. Ed, you allude a lot to kind of the net overhead ratio. I think you kind of adjusted for your numbers around 163 basis points. Maybe to follow up on John's question, where do you think you can take that over the next several quarters once I know you obviously talked about a goal of getting that down to 130 basis points, but just to kind of get a sense of kind of where you think core expenses can go.

Well, anything under 150 is the goal right now. We have some banks that are operating at 80 basis points, I mean they are doing very well. So 130 would be great, but we're -- a lot of it depends on the other income and they got a little bit off because of the mortgage revenue and their covered cost 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 is – will be our goal for next year. To be under 150, hopefully around 145, 150, that's the goal and we can proceed after that. So I think those would be good numbers for us.

Fair enough and then finally --

Especially given – yeah, unless we made the decision to that we are never going to grow again and we are going to cut that 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 kind of any MSR activity that might reverse out that otherwise kind of hurt that revenue number?

Yeah, it was a very small number. I don't remember exactly what it was, but it was a nominal number.

Okay, great. Thanks a lot.

Thanks, Brad.

Okay, thank you.

Our next question comes from line of Chris McGratty from KBW. Please proceed with your question.

Good afternoon, guys.

Hi, Chris.

Ed, on your loan growth comments, I think it was 250 to 300 is what you kind of said, it’s kind of 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 we've been talking more about kind of going back to the [indiscernible] the market kind of went against you. But is that what you would think is the kind of near term trajectory of organic loan growth or is that Wintrust conservatism?

I think it’s probably the latter given some of the things that are going on right now, but [indiscernible] 2.50 to 3 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 leasing business which is just hitting the stride will kind of add to that. So it could be on the conservative side, yes, but I am a conservative guy.

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

Well, I hope it would be more immediate than over time. I mean, over time we hope to continue to push that, but hopefully we are working on it. We said it before the end of the quarter, so we are working at it now. The premium finance business and the property and casualty side is a commoditized sort of market right now and you can’t just follow the market. There are some banks in there that have giving it away. We can’t allow that to happen. 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, you get another 10 basis points out of it and life is good, right. Also with the agent reserves, which is what you – an interesting thing about that business is 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 is kind of like indirect auto in some respect they get a – they disclose them all and they do get a piece on the deal. So the overall yield might be less than what we experienced and that has been a – it’s been a fixed number even as rates have come down. And so 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. So there is really two ends, getting a higher yield and also cutting some of the cost to produce that business. Some should be immediate and some will be over time. On the life side, the life business is just so good for us and I think we just need to – [indiscernible] growing that business. We do have value added in that business by a factor of 10 already that we compete with and we should be paid for that and it’s just we will just emphasize we need to get another 5, 10 basis points out of that business and not let it go down anymore. So that will be longer term, but we will push it.

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

Yeah, I think I might have grossed over, 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 got – we picked up a lot of liquidity with these deals and yes, as soon as I do it, rates will go up. So that would 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 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 are not going to let it do it any differently and then they are not going to want to increase deficit by raising rates on all the debt that’s out there. So call me a cynic if you want, but I also think that the international community would not want that to happen and I don’t think we need a stronger dollar. So I am with you, I don’t think they are going to be and I think that does give us an opportunity to extend probably on the loan side, you don’t want to do the fixed rate loans, because if those rates and the credit risk you have within real estate it is just idiocy to me. I don’t get it. You don’t want to cannibalize the business we got already which could happen if you went out and set up, here’s $500 million, 3.5% money, go compete with Chases out there. You would cannibalize it, you would be bringing on new business and probably 2% when you look at the overall cost of doing that. So we will look at the investment portfolio and might extend that a bit. It does give us that opportunity and we will do that. So it’s good point and thanks for bringing it up.

All right, thank you very much.

[Operator Instructions] Our final question comes from the line of David Long from Raymond James. Please proceed.

Hey, guys.

Hello, David.

I hate to beat the dead horse here on expenses, but it sounds like absent the acquisitions, expenses would have been relatively flat quarter-to-quarter, but I am looking at the mortgage line coming in, coming down 8 million and 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 everything else?

Well, the only area that we sort of break out is the commissions areas and so as you saw there, the commissions were down about $3.6 million, commissions for the comp. So that did net out of the salaries and so the salaries net of the acquisition were only up $1.6 million. If you would add back in 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 concessional 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 few of the other areas I previously mentioned. But I’m not sure if I am answering your question, but that’s the only area that we really saw increase in the salary side. And if you go to all the other non-interest expenses, we really – other than the equipments and occupancy area, because we obviously have more locations out there and the equipment to support those, we really held the line pretty well on all the other categories. On the salary side, it is inflated because we got those extra people in there until we get the system conversions done.

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

Thanks, 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 [indiscernible] we are on that and we will be dealing with that going forward. We like where we stand right now and thanks for putting up with a complicated quarter. I will 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.