Wintrust Financial's (WTFC) CEO Edward Wehmer on Q2 2014 Results - Earnings Call Transcript

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Wintrust Financial Corporation (NASDAQ:WTFC)

Q2 2014 Results Earnings Conference Call

July 15, 2014, 11:00 AM ET

Executives

Edward J. Wehmer - President and CEO

David A. Dykstra - Senior EVP and COO and Treasurer

David L. Stoehr - EVP and CFO

Analysts

Jon Arfstrom - RBC Capital Markets

Terry McEvoy - Sterne Agee & Leach

David Long - Raymond James

Emlen Briggs Harmon - Jefferies & Co.

Christopher McGratty - Keefe, Bruyette & Woods Inc.

Stephen Geyen - D.A. Davidson

Operator

Welcome to the Wintrust Financial Corporation's 2014 Second Quarter Earnings Conference Call. 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 second quarter's earnings press release and in the company's most recent Form 10-K 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. Sir, you may begin.

Edward J. Wehmer

Thank you. Good morning everybody and welcome to our second quarter earnings call. With me as always are David Dykstra, our Chief Operating Officer; Dave Stoehr, Chief Financial Officer and Lisa Pattis, our General Counsel.

We will have the same protocol as we’ve had on all of our previous calls. I will give you some general comments on the quarter, Dave Dykstra will give you detail of the other income and other expense items. He will turn it back to me for summary and -- some summary comments and thoughts about the future and then we will as always have time for questions.

All in all the second quarter was pretty clean and solid quarter, not a lot of noise in the numbers. The closet door is open, the lights are on, and not much hiding in there. You can see everything in these numbers. Good progress was made in all areas of our business evidencing that our slow and steady approach is working very well.

For the quarter ended June 30th, we recorded net income of $38.5 million, and year-to-date income of $73 million, up 12% and 10% respectively, earnings per share was $0.76 for the quarter and a $1.44 for the year-to-date, up 10% and 7.5% respectively and ROA moved up to 84 basis points as we continued that climb to a slow and steady approach.

The margins held steady. They're actually up one basis point to 3.62% versus the first quarter as we continued to maintain our very efficient balance sheet with loan to deposit ratios at the top of our desired range of 85% to 90%. Other income; in total other income was up $8.6 million versus quarter one. The main component of that was a $7.4 million increase in mortgage banking revenue versus a dismal first quarter when, as we reported, we were all hiding in our houses from the Polar Vortex.

You can see the graph on page four of the release, to follow our mortgage production over the last few quarters, and Dave will get into this a little bit more in his comments. The other main contributor was $1.4 million increase in our wealth management fees versus the first quarter. This resulted from not just from a favorable market, but continued increase in new business, in new accounts in that area.

Assets under administration now total approximately $17 billion, up from $14 billion one year ago, an increase of 21.4% and $16 billion at 12/31, so good progress on the wealth management side. As we said earlier we -- in previous calls we have all the pieces in place. The results of our proprietary products are good. Our cross-sell efforts related to both individuals and our middle market customers at both the retail side and our middle market customers, 401(k)s and the like, plus continued good work on the institutional side have continued to push the positive momentum in that area. We're excited about the prospects here. We think we have a great product. The market with one of our -- some of our competitors going upscale now has opened up for us by $10 million accounts on the retail side. We still think that's a lot of money where some of our other competitors have really gone up upscale in that. So it's exciting for us there.

Other expenses, Dave will talk in detail, but just suffice it to say that, if you take out variable comp they are pretty much equal to the first quarter last year, variable comp being mortgage and brokerage commissions, so they are flat versus the first quarter of 2014. Balance sheet side, a good growth across the board, assets increased $700 million versus quarter one to $18.9 billion. Deposits were up $427 million. The mix of deposits continues to improve with DDA comprising approximately $300 million of that growth. DDA now represents 20% of deposits, final. We always had that as a goal, to get up to 20%, our goal, we, of course we'll raise the goal now. But for years and years we were at 9%. So it just shows the -- how well our middle market initiative is moving, are moving with the commercial side, with hiring those loan officers and the like. That's gone extremely well for us, as have been slow and steady doing business on our terms and not the terms of the market.

Loans, across the board, good progress, up $617 million versus the first quarter excluding loans held for sale and covered loans. All major categories are shared in that growth with niche businesses up $365 million, core up $251 million versus the first quarter. Loan pipelines remain consistently strong in all areas both core and niche. And the competitive side we do see on the commercial and the commercial real estate side continued pressure and pricing and terms as you would expect from us. We're doing terms -- we're doing deals on our terms.

Again probably our batting average is going down, but we're getting a lot more [pats] [ph], given our marketing and the like that's getting the [win for us] [ph] out there and our continued expansion. So we're not ready to call rope-a-dope too yet because we have had good growth on our terms. We will -- you can be assured that we will continue to use our circuit breakers effectively, we do not change our loan profitability analysis nor do we change our loan policy to accommodate the terms -- changes in the market. But there is -- our pipelines are still strong and we believe our pull-through rates will still remain very good to get business on our terms.

Credit quality was steady, still low, lower than peer group, NPLs were down, OREO was up a little bit; overall percentages were down. We're operating now at levels consistent with the situation prior to the downturn, to the cycle with the loan loss reserve that have -- is good a coverage as it ever has on non-performing, charge-offs down to those pre-cycle levels but our goal is to continue to push those down, to continue push out bad assets. We like making money on other people's bad assets, you don't make any money on your own. So we're committed to continue to push bad assets -- identify and push assets out because who knows when the next one will -- the next cycle will come along. So with that I am going to turn it over to Dave.

David A. Dykstra

Thanks, Ed. As normal I will briefly touch on the non-interest income and non-interest expense sections. As Ed mentioned all-in-all it was a pretty clean quarter but I'll go through the major categories.

In the non-interest income section our wealth management revenue as Ed mentioned increased nicely to $18.2 million for the second quarter from $16.8 million in the prior quarter and improved by $2.3 million when compared to the year ago quarter total of $15.9 million. Brokerage revenue showed an increase of $8.3 million from $7.1 million in the prior quarter and our trust and asset management revenue showed a slight increase to $10 million from $9.7 million in the prior quarter. The increase in both categories has been attributed primarily to growth in assets under management due to new customer acquisition as-well-as market appreciation.

On the mortgage banking side, mortgage banking revenue increased by 45% to $23.8 million in the second quarter from $16.4 million recorded in the prior quarter and was down from the $31.7 million recorded in the second quarter of last year. Now the company originated and sold $912 million in mortgage loans in the second quarter of 2014 compared to $527 million of mortgage loans originated in the prior quarter and $1.1 billion originated in the year ago quarter.

Also the second quarter continued to show relatively strong mix of volume related to purchased home activity which represented approximately three-quarters of the second quarter volume which was slightly higher than the purchased volume in the prior quarter. The value of the company's mortgage servicing rights portfolio declined slightly to $8.2 million as of the end of the second quarter compared to $8.7 million in the prior quarter as the portfolio was valued at 89 basis points at June 30th versus 92 basis points at the end of March.

Fees from covered call options remained relatively consistent and totaled $1.2 million in the second quarter of 2014 compared to $1.5 million in the previous quarter and $1 million recorded in the same quarter of last year. As we mentioned before the company has consistently utilized these fees from covered call options to supplement the total return on our treasury and agency securities held in its portfolio in an effort to provide a hedge to the margin pressures caused by low interest rate environment.

Trading losses approximated $743,000 during the second quarter. This compares to trading losses of $652,000 in the prior quarter and trading gains of $3.3 million in the year ago quarter. The trading losses and gains in the current and the prior quarters were primarily the result of fair value adjustments related to the interest rate contracts that were not designated as hedges and these were primarily interest rate cash positions that the company uses to manage our interest rate risk associated with rising rates.

The net impact of the trading gains and losses over the past five quarters have in the aggregate been nearly breakeven but slightly negative at a net $68,000 pretax trading loss. The level of other miscellaneous non-interest income categories recorded for the quarter was $6.2 million which was fairly consistent with the $6.1 million recorded in the first quarter of 2014.

Turning to the non-interest income categories, non-interest expense totaled a $133.6 million in the second quarter, increasing approximately $2.3 million when compared to the prior quarter. If you exclude the impact of increased variable compensation expense and a decrease in the employee benefit expense the aggregate of all the other expense categories recorded in the second quarter was virtually unchanged from the first quarter indicating decent overall expense control as the company has grown.

So turning to the details salaries and employee benefit expense increased $2 million in the second quarter compared to the first quarter. The increase in this category was due to a $3.9 million increase in the commissions and bonus expense category which was primarily a result of increased commissions related to higher mortgage originations and brokerage transactions in the loss management business.

Commissions were $15 million in the second quarter of 2014 compared to $11 million in the prior quarter. Offsetting the aforementioned increase employee benefits were approximately $1.4 million lower in the second quarter compared to the first quarter and this was predominantly due to lower payroll taxes. As we spoke in the first quarter payroll tax is always higher during the first quarter of the year as social security tax limitations reset at the beginning of the year.

And finally, the base salary expense was relatively flat with the prior quarter but was actually down about $400,000. And as we talked last quarter we indicated that we pass through the base salary employee benefits, expense would be $67 million without commissions and if you added $15 million of commissions that’s about $82 million and that’s really about where we came out this quarter. We’re at $81.963 million. So I think that, that worked out as we had guided last quarter.

Turning to occupancy expenses, as anticipated the occupancy expenses fell $1.1 million in the second quarter to $9.9 million and that’s down from the $11 million from the first quarter of the year. The current quarter results saw a reduction in utility and snow removal cost versus the first quarter which was impacted unusually heavily by the cold and snowy winter experience in our market area.

Professional fees totaled $4 million in the second quarter representing an increase of $592,000 from the prior quarter and a reduction of about $145,000 from the year ago quarter. The current quarter included legal costs associated with the two recent acquisition announced from branch locations in Wisconsin. Professional fees can fluctuate on a quarterly basis based on the level of acquisition problem loan work out activity but that being said the total professional fees were within the range experienced over the past five quarters.

The second quarter of 2014 saw a decrease of $1.5 million in OREO expenses compared to the prior quarter resulting in net OREO expense of $2.5 million for the current quarter compared to $4 million in the prior quarter. Of the $2.5 million of OREO expenses in the current quarter approximately $1.6 million related to operating expenses with remaining $900,000 related to valuation reserves and net losses on the sale of other real estate owned.

Page 40 of our earnings release provides additional detail on the activity and the composition of our non-covered OREO portfolio which increased to $59.6 million at June 30th from $54.1 million at the end of the prior quarter. If you look at the other category of non-interest expenses it increased by $1.7 million to $15.6 million from $13.9 million for the first quarter of 2014 and declined by $554,000 from the $16.1 million recorded in the second quarter of last year. Although this category increased over the prior quarter the expense level in this category is still at relatively low level when compared to the previous two years.

No single category represented the primary reason for the increase. The category includes things such as loan expenses for core portfolio and the covered portfolio and travel and entertainment expenses, operating losses, postage, supplies, director’s fees and other miscellaneous types of expenses. Accordingly quarterly fluctuations are not unusual in this category. Again relatively well controlled, slight fluctuations in a variety of different categories.

All-in-all as we mentioned before excluding the increase in the commissions and the decrease in payroll tax expenses all -- with the prior quarter. So good expenses control quarter from our perspective and with that I will throw it back over to Ed.

Edward J. Wehmer

Thanks Dave. Some summary thoughts for you. It was an active quarter in a lot of ways not just the balance sheet growth and the like but we also raised a $140 million in sub debt during the quarter. That cash will be used for general corporate purposes, some of it was used over the weekend when we close down our acquisition of the National Bank branch in Milwaukee which added $90 million of loans and about $37 million of deposits to the balance sheet. Third quarter we’ll also be closing on the Talmer acquisition which again is in southern Wisconsin. That’s a deposit-only acquisition but we believe that the loans will follow as those customers would want their loans locally and not in Michigan. So we think that there’ll be some good loan growth out of that once we get that closed.

The acquisition market remains very active. We’re talking to a lot of people but again the gestation period for these deals was a lot longer than it was a couple of years ago but it's -- you know the market is, is still very active. We like where we are positioned in that market as most of these banks are community-oriented banks and our cultures fit very well with us. You can be assured of our continued discipline in looking at these transactions. It’s not just on the bank side but we are seeing other transactions really in all areas of our business. So we are very active there but again we will maintain our disciplined approach.

Right now these deals are working very well for us because when we get them they actually bring liquidity on to the balance sheet as many of the deals are deposit-only or have loans, loan-to-deposit ratios in the 50s and 60s and well we can use that growth to -- or that excess liquidity to fund our own loan growth keeping the balance sheet efficient at that 90% level, at the top of the range we're comfortable with.

When that turns in a real turn well, we don't think it will turn for a couple of years, but it will probably turn when rates get a higher and people make more money and price expectations will move up, we are prepared to -- we added a lot of branches over the last couple of years and those branches are not optimized. You know that we are -- we are used to being one or two in market share in each town that we're in but we have now turned down the marketing spigot there as we don't want a lot of excess liquidity when you can't make any money on it. But when the acquisition market moves away we have what I could refer to and have referred to is this kinetic operating leverage where we can, then we were always and still are very good at organic growth. We got a little playing field out here on the rate side of things, we believe that we will be able to grow those underutilized institutions in the old fashioned way we’re used to and fund our loan growth through there and use that excess leverage that we have.

We can grow without a commensurate increase in expenses. So that's kind of the plan guide, it's just going to continue to look and take advantage of what the markets giving us in terms of the acquisitions and when that moves away we will be able to turn the spigot on, on the organic growth and continue to fund loan growth assuming of course that loan growth does not get absolutely totally irrational and we have to pull back which we are not afraid to do if that's what happens.

Fortunately we're diversified enough that if one parts doesn't work other part are working, we have the mortgage, wealth management, our niche businesses and the like, so we have to pull off of one but still be able to be working very hard on the others and we continue to try to add legs to the stool of not just our niche portfolio but other areas of opportunity where we -- where we can enter different markets that we are not it, different types of loans that we are not in, continue to diversify the balance sheet and keep working in that regard.

We are comfortable where we are in our interest rate sensitivity position. Again our GAAP position is positive, because of our funding and a 94%, 95% core funded conventionally funded. We believe that only we will get the movement out of the straight GAAP position but also we will get the lag effect out of our core deposits also, which is something that will be very beneficial to us, so we like where we are there.

So in summary we are pleased with the quarter. This slow and steady progress is going to continue. We are going to be very careful in how we do it and at the end of the day I would say, it's almost fun again, I don’t think that will be totally fun again but -- as much as it used to be but it’s almost fun again. We are having -- we got good morale here, we got great momentum and we are excited about where we sit and where we can take this company in the next two, three, five years. So with that I'll turn it over for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Jon Arfstrom from RBC Capital Markets. Your line is open.

Jon Arfstrom - RBC Capital Markets

Good morning.

Edward J. Wehmer

Hello, Jon.

Jon Arfstrom - RBC Capital Markets

Question, I guess first question on mortgage, you obviously had a nice bounce back there and curious what your outlook is for mortgage? Maybe some of this was pulled through from Q1 and are you expecting a bit of a pullback or do you see volumes that can be consistent with what you saw in Q2?

Edward J. Wehmer

You know for Q2 our projections look pretty good, it's hard to say, rates move, you can have -- you will have quarters where hopefully not as bad as the first quarter, but you will have quarters where it’s a little slower. And that’s just part of [being diversified] [ph]. But all I can do is project where we are looking at Q2 and that looks pretty good. We continue to look to expand in that area as the whole mortgage industry is contracting. We believe that this is an opportunity for us to get more end points and people always are going to need mortgages. And we were coming in pretty extraordinary times right now. So there will be a period of time where there is some volatility but I think once rates move up and things get back to normal it will be a little bit steadier then the roller coaster ride that we have had.

Jon Arfstrom - RBC Capital Markets

And you are still in expansionary mode in this business and you see opportunities to add more production in the business?

Edward J. Wehmer

Yes.

Jon Arfstrom - RBC Capital Markets

Okay. And you were saying Q2, I am assuming you mean Q3, is that right?

Edward J. Wehmer

Yes.

Jon Arfstrom - RBC Capital Markets

Yeah, okay.

Edward J. Wehmer

Thank you.

Jon Arfstrom - RBC Capital Markets

Okay, good. And then in terms of the margins and you touched a little bit on funding but you don’t really expect that to be an issue in a couple of years. Just curious how you are feeling about margin sustainability and then maybe overall asset sensitivity of the company, is it still the beach ball scenario or is there anything different in your mind?

Edward J. Wehmer

Well, you know in this rate environment if we can maintain the upper end of our desired range of loan to deposits we should be at the upper end of that margin range that we discussed, that we have laid out to you before. If you get down to 85% loan deposit you are probably 345-350 on the margin. So it’s very dependent on the amount of liquidity you have on your books not making any money. So we’re trying and have over the last few quarters been very efficient at how we fund ourselves and how we work that margin, and its effect on the margin. Going forward yeah, we are positively GAAP and I think the one thing that’s lost is the lag of -- some companies are funded a lot with institutional money and you don’t get the spread differential when rates go up. You’ve got savings accounts, and [null] [ph] accounts and the like. They don’t go point-for-point when rates go up. So you lag them a bit and then there is built-in caps on a lot of those.

Certainly there will be a little bit of deposit shift when that occurs at the money markets, maybe back in the CDs. I mean our CDs are falling off the planet. We are not chasing them, we can always give them back but between the rate sensitivity and the way we’re funded and the spread relationship there we believe that nothing has changed in terms of where we would be at the end of -- if we have four point parallel shift in the yield curve where we would be at the end of the two -- over two years, where we’d be at the end of that two years. And that’s a margin in the 4.5% range. So notwithstanding all of that and what the growth will bring, that’s what it shows now.

So as I said in our comments we feel very comfortable on where we are right now. It’s a constant battle because a lot of our competitors, the market has moved away and lot of guys are doing some fixed rate lending, at kind of what we think to be irrational rates. We continue to rely on swaps, any fixed rate loan of any size that’s approved by me, Dave or Rich Murphy because the markets is doing what the guys always want to do and you just got to stay disciplined at it.

So we are pushing the swaps hard, customer don’t want them and actually rates are going to go up and that would be in the customer’s best interest to take the swap because it becomes a piggy bank for them at the end of the day in terms of the value of the swap when rates go up. So we are selling much harder on that and not trying to follow the market but you are seeing -- that’s one of the things we see competitively in the market is some irrational five, seven, ten year deals. So like man I don’t want to lock this margin in and we are not going to it.

So it’s a constant fight because of the markets but we are being very disciplined and want to take advantage of when rates do move.

Jon Arfstrom - RBC Capital Markets

Okay, that makes sense. Thanks.

Operator

Thank you. Our next question comes from the line of Terry McEvoy with Sterne Agee. Your line is open.

Terry McEvoy - Sterne Agee & Leach

Thanks, good morning.

Edward J. Wehmer

Hi, Terry.

Terry McEvoy - Sterne Agee & Leach

Hi. I just was look at the accretion to interest income jumped up about $1.5 million and the covered deals on the covered loans was the highest in five quarters here, almost to 10%. Could you just talk about the outlook for covered loans? And then as part of that question it looks like you have another $16 million from the FDIC indemnification asset that will come in to interest income. Talk about maybe what time frame you see that happening and any thoughts on some sort of earnings headwind when you lose that asset and particularly given the yield on that asset?

Edward J. Wehmer

Well, we will talk about covered loans first. On the covered loans side that portfolio is running off very nicely and I think it's becoming less and less of a component of our earnings than it was earlier. Some of the loss share agreements will start running off next year and over the next three years after that. All our railroad tracks are lining up very nicely in that regard, indem assets actually goes against earnings as we accrete that down for the losses. But we review that and manage that very nicely. We think the railroad tracks will come together, that those yields will be consistent but are running on a portfolio that runs off.

So you can take the -- as it relates to covered assets from a modeling standpoint if I were you I would just take the runoff that we've experienced and just keep that trend going at about the same yield and with our assurance that the railroad track and the indem asset are coming together and that should give you what you need. Does that make sense?

Terry McEvoy - Sterne Agee & Leach

It does thanks.

Edward J. Wehmer

And on the other side, we've done four deals that were not assisted deals and again there is number of those that are in the [inaudible] three pools and those are all performing better than anticipated also. So that's part of that accretion that does come in and again those yields should be consistent but they should be around maybe a little bit longer because those deals were done later, but those yields should also be consistent. And the third element is the AIG portfolio that's running off also; there basically we're not allowed prepayments in that portfolio in the second quarter. So there wasn't any sort of pickup in those yields.

So I think you just have to look at it as a running off portfolio that's running off at yields consistent with what they are right now and is becoming a lesser and lesser part of what we're doing barring another acquisition that may come along where we add additional pools.

Terry McEvoy - Sterne Agee & Leach

Just on the mortgage business, all your business I am guessing is conforming mortgages, any desire at all to move into different credit boxes to capture growth and increase market share?

Edward J. Wehmer

Funny, you should ask that. Yeah, most -- all the mortgage number you have -- everything we do is so, we sell everything, all the conventional, all the conforming stuff we sell. And prior to 2004, '05, '06 when you basically could put any product out there and sell in the secondary market, we've a very vibrant portfolio of ARM lots, two-three, one-three and 5 year ARMS that were for non-conforming loans and they would -- we charged a little bit of a premium for that but they go out on the market and we would book those and usually within a year or two the condition that caused the non-qualified state of that loan would go away and then we place that loan in the secondary market. But from 2005 and until last, really the beginning of this year there has been no need for that. But we have re-embarked on that portfolio. There is a need for that sort of thing. We believe we can build a $400 million to $500 million over a two year period on the base that we have right now -- the base assets that we have right now and that will churn and finally we have an opportunity to do that.

So it is an initiative that we're embarking on. I don't know the actual number that we have to-date. Mr. Stoehr do you know that, off hand? I think it's in $70 million to $80 million range somewhere around there but slow and steady will win that and we believe that we can build that up $400 million to $500 million and it fits nicely into our asset liability management situation also.

Terry McEvoy - Sterne Agee & Leach

I appreciate it. Thanks.

Operator

Thank you. Our next question comes from the line of David Long with Raymond James. Your line is open.

David Long - Raymond James

Good morning guys.

Edward J. Wehmer

Good morning.

David Long - Raymond James

A couple of things, the first one, looking at the C&I loan growth and the commercial loan growth in the quarter, almost 24% annualized. What was the driver there, was that more line usage or just adding clients?

David A. Dykstra

Adding clients.

Edward J. Wehmer

Line usage is still, hasn't really moved.

David Long - Raymond James

Okay, and as far as the yields that you're putting on versus the yields that are coming off there in the C&I, how does that compare?

Edward J. Wehmer

Basically bottomed out, I mean I think we're -- Dave you want to comment on that.

David L. Stoehr

Yes. For the total loan portfolio, I think we're still as we talked about before probably averaging out around 4%. Obviously C&I is one of the lower yielding classes, but the CRE portfolios a little higher and clearly the C&I premium finance portfolio is higher, but the overall blend is pretty close to the 4% that they are coming and the portfolios is just a little bit higher than that. So, it's a dilutive to the margin right now, but now terribly dilutive.

Edward J. Wehmer

It's hard David, I mean while I say we’ve bottomed out, we have lost -- I mentioned about, we've lost a number of deals to some really irrational rates in our opinion, but our profitability model, you can't get bunched, you were right where we need to be there and if we get a lot lower, we're not going to do those deals. So the fact of the matter is, we’ve kind of bottomed out on that C&I business, you're not seeing a lot of ups and down, churns where we're losing stuff at higher rates or having to rebook them at lower rates, it's kind of -- it is what it is right now, does that make sense?

David Long - Raymond James

Yes. And then specifically to the premium finance business in April you closed an acquisition a couple of small acquisitions. Any impact -- did those have any impact on the growth that we saw in the quarter?

Edward J. Wehmer

No.

David A. Dykstra

No. They're very small.

Edward J. Wehmer

Very small. Just to give you a little background, the first quarter, our -- we -- this year we processed 48,620 contracts at an average ticket size of 24,470. In the second quarter, we processed 50,880 at an average ticket size of 24,311. So no change in the ticket size again, just picking up market share in that business. So that business continues to grow and as we've often told you $27,000 is kind of always been the average in a normal market. So there is still some upside there that the market gets a little bit higher or harder for us in that portfolio, but that's just been slow and steady market share growth every year.

David Long - Raymond James

And what about the spreads in that business specifically?

David A. Dykstra

They are holding in pretty steady. They've actually been relatively stable for the last couple of years now, so our pricing has been fairly rational in that business. It's actually probably ticked up a little bit since last year, but not anything dramatic, so pretty steady.

David Long - Raymond James

Okay, great. Thanks guys.

Operator

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

Emlen Briggs Harmon - Jefferies & Co.

Hi. Good morning guys.

Edward J. Wehmer

Good morning, Harmon.

Emlen Briggs Harmon - Jefferies & Co.

I was hoping you could talk a little bit about the trajectory for charge-offs from here. I think you guys have made very good progress over the course of the past year. I think you're at kind of what many would consider to be the lower end of normal levels for the industry. Do you feel like you can continue to push those lower kind of from the levels they're at in the second quarter here?

Edward J. Wehmer

You know, they are what they are. So I hate saying, where we could push them lower because then guys try to manage that expectation. It is what it is, your first loss is your best loss, but historically we've always operated at a third to half of what peer group is, 25 basis points, I think in the low point we're eight or nine or 10 basis points. I still think we can bring that lower, but lot depends on the economy, but it'll have little blips in it here and there because they are still low right now, but I don't think it's anything to get excited about. I think if you rely on past history and rely on our underwriting standards and how we've gotten through previous cycles and the like, you can see that we're kind of back to where we were prior to the cycle and certainly will try to continue to push them lower, but it is what it is. But I would expect that we would still operate at a third to a half of our peer group in charge-offs.

Emlen Briggs Harmon - Jefferies & Co.

Got it. Thanks. And then just kind of a follow on to that, as you noted in your prepared remarks, the coverage ratios on NPL continue to get better and you guys actually, you guys did match the charge-offs this quarter just based on loan growth. How do you think about what the provision is against that kind of incremental dollar loan growth and actually how do you differentiate between just kind of held for investment portfolio as a whole and the premium finance portfolio?

Edward J. Wehmer

All right, probably the best way to look at that is we put a page in the press release that details out what our allowance is relative to each of the portfolios and I think if you look at that and sort of look at what the reserve ratios are probably be a good indicator of how we’ll provide for them going forward. So the premium finance portfolios on the life side are losses and virtually nothing knocking on wood. But some minor losses here and there but very close to zero and even if you go back with the AIG portfolio that we bought seven years before that losses were less than five basis points. So if that portfolio grows we would expect losses to continue to be low and you don’t have to provide much for it.

And then on the premium finance commercial side it’s sort of the same way you can look in the press release and what we provide for those. So as we get growth in those, those are may be running plus or minus 25 basis points is where the reserve levels are. So we get good growth in that third of the niche portfolio and some of those other portfolios, like our community advantage, home owners association product and our franchise lending products they tend to be a little bit less than what you would see for the commercial and residential construction on land and the like and so if the portfolio grows with those, the niche portfolios it’s going to be a lower reserve.

So I think it’s going to depend on the mix of where we get it, C&I and commercial real estate are obviously higher than the other third of the portfolio but before the crisis we’re running basically where our reserve back loans are right now and if we keep the mix the same I would expect it to stay relatively consistent with those levels.

David A. Dykstra

And another way to look at it is barring some blow up in one of these categories, you know you will about grow about 1% on the core portfolio and about 20 basis points on the niche portfolio, barring any sort of trend that maxes out but that’s kind of a good way to look at it I think.

Emlen Briggs Harmon - Jefferies & Co.

Got it, thanks, that’s helpful, appreciate it guys.

Operator

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

Christopher McGratty - Keefe, Bruyette & Woods Inc.

Hey good morning guys.

Edward J. Wehmer

Good morning.

Christopher McGratty - Keefe, Bruyette & Woods Inc.

Ed, on the mortgage business I want to make sure I'm hearing your guidance or your outlook the right way. I'm thinking about the revenue $24 million in the quarter, obviously up considerably from last quarter, are you assuming that volumes in Q3 are consistent with kind of the 900 plus that occurred the second quarter and kind of consistent margins?

Edward J. Wehmer

That’s what our projections show right now, yes.

Christopher McGratty - Keefe, Bruyette & Woods Inc.

Okay and how much of the improvement in the quarter was legacy Wintrust versus the investment you made late last year?

Edward J. Wehmer

The surety was about a quarter of what our buying has always been. It probably is relatively the same percentages.

Christopher McGratty - Keefe, Bruyette & Woods Inc.

Okay and in terms of loan growth you have seen the headlines about regulators in [leveraged lending] can you just remind us what the size of this check book is for you guys and then maybe how much of the growth if there was any was in the second quarter?

Edward J. Wehmer

I'm sorry you broke up there. I didn’t understand the question.

Christopher McGratty - Keefe, Bruyette & Woods Inc.

The shared national credit portfolio at the bank, how large is it? I know the regulators are pushing on this as an industry this year.

Edward J. Wehmer

We only have a -- we don’t go out and do SNC as a normal course of the business, if there happens to be a larger credit that’s got a [Chicago and Nexus] that we have a relationship, if we do them. But we’ve really got a handful of credits and it’s nothing that is the normal course of business for us. So SNC is not a product line that we really pursue unless we happen to have a customer that falls in to that category and we generally like to be the lead on them and probably very few, very few where we would be -- into our credit where we’re not the lead and that’s the SNC and there’s a couple but they have a Chicago and Nexus to them and a company that we need a relationship with.

David A. Dykstra

If the total SNC portfolio was about a $150 million I'd be very surprised. I think it is probably closer to $80 million to $100 million but we…

Edward J. Wehmer

And they are all local main companies around here where we have ancillary business with them also. So it's we don't play the -- we don't like being the beast of burden, just jumping in a deal, SNC deal just to get outstanding. There has to be some sort of relationship there that we can garner extra income from.

Christopher McGratty - Keefe, Bruyette & Woods Inc.

Just one last on the Talmer opportunity which the loan that may or may not come, can you help size up what the potential opportunity might be over the next six months to 12 months?

Edward J. Wehmer

I am sort of hesitant to do that right now since the deal hasn't been closed and we haven't had that discussion publicly with Talmer right now and they are a public company and we're a public company. So I'd rather not discuss that until we close the deal.

Christopher McGratty - Keefe, Bruyette & Woods Inc.

Fair enough. Thanks.

Operator

(Operator Instructions). Our next question comes from the line of Stephen Geyen with D.A. Davidson. Your line is open.

Stephen Geyen - D.A. Davidson

Just, I guess most of my questions have been answered but just Ed if you could just give your overall thoughts on the economy, it seems like maybe a quarter doesn't go by where there is some economic data that gives the people a pause about what the -- where the economy may go? What are you hearing from customers?

Edward J. Wehmer

Customers feel very good about -- all our customers feel that they have all survived the cycle. Many of them have been able to add lines very inexpensively as they have picked over the bones of the competitors that haven't been able to -- that weren’t able get through it. Our customers are feeling very good about where they are right now. Even the construction industry is picking up. It's funny I am hearing a lot of they can't -- nobody can get good labor which is really kind of an interesting situation.

The employment rate that even the construction guys say a lot of the guys left the industry and we can't get qualified people back. So you kind of feel that you are right on the edge, that manufacturing is good, guys were running extra shifts around here and our customer are and so people are feeling very good but still measured. They are still maintaining fortress balance sheets. The private equity side we're seeing a lot of deals with big multiples on them. I think a lot of the established PE guys are selling everything that isn't nailed down right now and it's one of the scary parts from the banking side is that you are seeing seven year and 10 year air balls being financed.

We don't do that but you are seeing deals go out into financing, it's like they are getting five and six offers again from different banks. So yeah that's a little scary that that's going on. But all-in-all the biggest issue in our market obviously, at least in the Illinois market is what's going on with the state and the like. And that still scares people, it scares us a little bit that many of the people we talk, they are talking expansion they have so much fixed cost in Illinois they can't move but they are expanding, they are going to Tennessee or Texas and what have you or Wisconsin, Northwest Indiana.

Our move in Wisconsin is not just to bolster that market and take advantage of our positioning there but in some respects it's to catch the refugees when they come across the border, they run up to Wisconsin and our move will be looking at Northwest Indiana also as our clients kind of move there.

So that's the thing on everybody's mind is that we got to get this state figured out and there is ways to do it, the election will be in November and we will see how that shapes out but that's what bothers most people about Illinois. And you see a lot of wealth leaving Illinois too which is scary as it. People who have made it and they are going to Florida. They are going to different states and becoming residents and there is a giant sucking sound of wealth leaving the state and you can't blame them. So that has to be turned around. It's not good and that's what's on most people's mind. But from an economic standpoint people are feeling pretty good about where they are right now and where their prospects are. That helps you.

Stephen Geyen - D.A. Davidson

Okay. Thank you.

Operator

I'm showing no further questions at this time. I would like to turn the call back to Edward Wehmer for further remarks.

Edward J. Wehmer

Great and thanks everybody. We will talk to you at the end of the third quarter. Everybody have a wonderful summer. Always call Dave or me or Dave Stoehr, if you have any questions. So thanks very much for listening and thanks for being shareholders.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.

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