Wintrust Financial Corporation (NASDAQ:WTFC) Q2 2016 Earnings Conference Call July 20, 2016 2:00 PM ET
Edward Wehmer - CEO
Dave Stoehr - CFO
David Dykstra - COO
Kate Boege - General Counsel
Jon Arfstrom - RBC Capital Markets
Emlen Harmon - Jefferies
Brad Milsaps - Sandler O'Neill
Chris McGratty - KBW
Terry McEvoy - Stephens
Kevin Reevey - D.A. Davidson
Welcome to Wintrust Financial Corporation's 2016 Second Quarter and Year-to-date Earnings Conference Call. At this time all participants are in 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 quarter and year-to-date earnings press release in the company's most recent Form 10-K and any subsequent filings on file with the SEC. As a reminder, this conference call is being recorded.
I will now turn the conference call over to Mr. Edward Wehmer.
Thank you. Good afternoon everybody and welcome to our second quarter 2016 earnings call. As said with me as always is Dave Dykstra, our Chief Operating Officer; Dave Stoehr, our Chief Financial Officer; and Kate Boege, our General Counsel, who is here to make sure that I don’t go off script and talk like Donald Trump about the huge quarter and how all the analyst love us. But with that we are going to have our usual format, I am going to give you some general comments on the quarter, Dave will get into some good detail on other income and other expense. I’ll follow up with some summary thoughts and thoughts about the future and then we will have time for questions.
On with it, all-in-all we had a very positive quarter on all fronts with good momentum for the rest of the year. Net income for the quarter was $50 million or $0.90 a share, up from $43.8 million last and $0.85 a share or 14% and 6% respectively in terms of earnings growth. Year-to-date, we almost hit a $100 million, $99.2 million or $1.80 a share, up from $82.9 million last year or $1.61 a share that’s 20% and 12% respectively. These strong earnings were driven by first of all our balance sheet growth. Assets grew $932 million or 16% over this first quarter of the year and 3.6 billion or 17.5% over same period last year.
Loans for the quarter grew almost $700 million, currently 16% over the first quarter and 2.6 billion and 16% over the last year. Loan growth, it was a balanced loan growth and all categories showed good expansion. Important to note that the earnings assets lagged total assets by about $622 million as did loans by $523 million, so that is our average assets were less than lending assets by $523 million or loans less than by $523 million which bodes well for the third quarter and beyond. Our loan pipelines are at an all-time high, consistently strong, pull through rates have been consistent. We will close on the GE deal that we previously announced in middle of the third quarter adding probably north of $500 million of loans to our balance sheet, this bodes well for our net interest income going forward in subsequent quarters.
Deposits grew $727 million or 14% over the first quarter and $3.3 billion almost 18% over the same period last year. Core funding growth is strong, we haven't have to rely on institutional money, this is good core growth building our franchise and franchise value.
Credit quality continued strong, I guess I can say it’s as good as it’s going to get. All credit metrics are low and inline, we continue our process of culling the heard for any credits with any signs of cracks, so that you can be assured of our consistent diligence in terms of trying to identify these things and moving them out.
Finally, the margins was down 5 basis points mostly because of market rates, 2 basis points -- really 3 basis points in liquidity management as market rates plummeted, 1 basis points continued to run off of accretion from previous deals and deposits were up from negligible 1 basis points. They are still in line with their 330 plus or minus 10 that we talked about earlier. Debt issued interest income growth was obviously high due to the greater growth we had during the period.
Mortgages were also a substantial driver, Dave I was going discuss this in detail, but needless to say mortgages contributed nicely to what we are doing and it appears that third quarter pipelines are consistently strong and we are expecting similar results in the third quarter.
Just a note on mortgages, when you get our expense growth, you have to always remember that the mortgage market is a variable market and really we bring down, if you look at the net interest income and the mortgages held of sale, plus the fee income. We only bring down around 13% after tax of that gross income to the bottom line. So, expect just go up, up and down with that volume, that 13% of down a bit from previous quarters due to -- its getting harder, it just getting more expensive to do these loans with TRID and the like. We are undertaking a -- I think you can almost say that over the last three years the cost due to mortgages is almost doubled.
The technology is lagging behind this, but we are catching up, like technology in general lagging behind these and we are working for the third quarter and fourth quarters on getting more efficient in that business by elevating our technology to get more bank for our buck in that business, it's really a necessity because the mortgage business is integral part of what we do.
I'm not going talk much about expenses other than to say that we did again exceed our goal of 1.5% of that overhead ratio, we expect that to continue going forward that's computing on average assets, so again as assets continue to grow and we continue to fund this loan growth with good core deposits, we should be able to do that without the commensurate increase in expenses and we expect to drive the -- to continue to drive that number down. So rather than being redundant I'm not going to talk about that and let Dave talk about that but before I do, just like to highlight a couple of other things that happened during the quarter.
The second quarter had a full period of expense related to the foundation bank, the small foundation bank acquisition that we closed on the last day of the first quarter. We completed the data processing conversion last weekend, so we should be driving the costs out of that transaction over the next quarter. We also announced the acquisition of First Community Bank of Elgin, we have a 100% market overlap in that community, which was just a $190 million bank should join us and once we are able to convert them and move them out there should be reasonable cost savings there also.
We announced the agreement to buy at most of 500 million of franchise loans from General Electric now this transaction should close in the mid-third quarter, we are not allowed to talk much about this transaction other than the fact that we’re excited about it, it should bring our overall portfolio to south of a $1 billion by little over between $800 million and $1 billion dollars when it’s all said and done, this is an area that we had staffed up for prior to this, so a lot of these expenses related to managing this additional volume are already in our numbers right now.
As you know, we’d like to put the plumbing in before we flush, so that those expenses were there. So we want to be a player in this market, this is a market we’ve identified as something we want to grow in. So it's going to be -- we think it’ll be a substantial niche for us going forward and this is certainly a quick leg up to get that momentum moving.
To support the organic balance sheet growth, the G acquisition the acquisition of First Financial we completed the sale of 3 million shares of common stock, raising $152.8 million of common equity towards the end of the quarter. It should be fairly evident now why we did this. We are putting it to work, we always think shareholders first and we’re pretty stingy with our equity and certainly always have been stinging with any sort of dilution that new equity brings but we feel confident that the returns on this new equity will far surpass -- will not be dilutive at all and help us continue to build and to grow.
With that I’ll turn it over to Dave.
Thanks Ed. As normal, I’ll briefly touch on the non-interest income and non-interest expense sections of the income statement, turning to non-interest income. Our wealth management revenue totalled $18.9 million for the second quarter of 2016, which is up from $18.3 million recorded in the prior quarter and also up from the $18.5 million recorded in the year ago quarter.
The trust and asset management component of this revenue category increased to $12.6 million in the current quarter to $12.3 million in the prior quarter. The brokerage revenue component also increased to approximately $6.3 million in the second quarter compared to $6.1 million in the first quarter of the year. And overall the second quarter of 2016 represented the highest wealth management fee level in our company’s history and we look forward to continued growth in that category.
Mortgage banking revenues increased $15.1 million or 69% compared to the $36.8 million in the second quarter of 2016 and it was also up from the $21.7 million recorded in the prior quarter and was slightly higher than the -- from the $21.7 million recorded in the prior quarter and was slightly higher than the $36 million recorded in the second quarter of last year.
The company originated and sold approximately $1.2 billion of mortgage loans in the second quarter of both 2016 and 2015, and that was compared to $737 million recorded in the first quarter of 2016. As far as the mix goes, our volume related to purchase home activity was stronger in the second quarter instead of 65% compared to 56% in the prior quarter. Similar to our wealth management revenue, the second quarter of 2016 represented the highest mortgage banking fee level in our Company’s history. And as Ed said, the market continues to be strong and we would expect similar volumes in the third quarter.
Fees from our covered call options were $4.6 million in the second quarter compared to $1.7 million in the previous quarter and roughly equivalent to the $4.6 million recorded in the second quarter of last year. As we’ve discussed previously the company consistently has utilized the fees from the covered call options to supplement the total return on our treasury and agency security held in our portfolio and that’s in an effort to provide a hedge to the margin pressures caused during a period of low interest rates.
The revenue in the second quarter of 2016 for operating leases totalled $4 million compared to $2.8 million in the prior quarter, increasing 43% during the quarter. The outstanding balances of our operating leases grew to $103.7 million at the end of the second quarter and to be clear these amounts relate just to the operating leases, not to capital leases which are carried in the loan section of the balance sheet.
Other non-interest income declined by $4 million to $11.6 million in the second quarter from $15.6 million in the first quarter this year. The primary reason for the decline in the category of revenue is related to the $4.3 million gain recognized in the first quarter, that was related to the extinguishment of $15 million of our Junior Subordinated debentures. The remaining change in this category of revenue related to lower swap fee income, which was substantially offset by higher revenue from our investments in bank funds honed at the holding company level.
Turning to non-interest expense, our non-interest expenses totaled a $171 million in the second quarter, increased in approximately $17.2 million compared to the $153.7 million recorded in the prior quarter. The increase in non-interest expenses although similarly large, was generally associated with supporting the significant growth in balance sheet of over $900 million, and the significant increase in our mortgage loan production. In fact as I mentioned, despite the increase in expenses during the quarter, the net overhead ratio declined to 1.46% indicating, we were able to leverage that expense base relative to a much larger balance sheet and revenue levels in efficient manner.
So, I’ll talk now about the significant changes of the individual categories compared to the first quarter of this year. Salaries and employee benefit expense increased to approximately $5.1 million in the second quarter compared to the first quarter. The primary reason for the overall increase in salaries and employee benefit expense related to additional commissions and incentive compensation expense of approximately $6.2 million, increasing to $32.5 million from $26.4 million in the prior quarter. The company experienced an increase in commission expense related to the substantially higher mortgage revenue and higher wealth management brokerage revenue that I referred to early in my remarks. Along with the slight increase in accrued incentive compensation from the prior quarter due to increased earnings.
Additionally, the base salary expense component of this category was up approximately $2.6 million in the second quarter, compared to the first quarter. The main reason for the increased expense level related to approximately $1.2 million in increased staffing in our mortgage division to accommodate the higher mortgage origination volumes, severance cost of approximately $600,000 related to certain corporate consolidation efforts and approximately
$175,000 related to the foundations bank acquisition, which occurred on March 31, of this year.
And we also had a full quarter impact of our annual base salary increases for employees, which went into effect at the beginning of February. Offsetting the increases noted above employee benefit expense was down $3.7 million in the current quarter compared to the prior quarter. Significantly impacting this category, which we indicated would happen on our first quarter call, was a reduction in payroll taxes expense, which was approximately $3.3 million lower in the second quarter, compared to the first quarter of 2016.
As you know the payroll taxes are always higher in the first quarter of the year, social security tax limitations reset at the beginning of the year. As I discussed in regard to operating leases in the non-interest income section, the company experienced a similar increase in expenses related to the operating leases as the portfolio has grown. Again we expect this category expense to grow at a rate, some more to the revenue side, as a portfolio of operating leases continues to expand.
Data processing expense increased approximately $619,000 from the prior quarter to $7.1 million, the primary reason for the increase in the expenses related to approximately $354,000 of acquisition related conversion cost, were as the first quarter had no such cost. The reminder of the increase relates to growth in customer accounts including a full quarter of activity related to the Foundations Bank acquisition and increased mortgage banking processing cost through the significant increase in mortgage volume during the quarter.
Marketing expense increased by approximately 3.2 million from the first quarter to $6.9 million, but was relatively consistent with the second quarter of 2015 marketing cost of $6.4 million. As we discussed on our last call, we expected this category of expenses to increase as the second and third quarters of fiscal year tend to be the highest quarters of marketing expending as our sponsorship costs are higher in those quarters.
Our professional fees were up slightly increasing to $5.4 million in the current quarter compared to 4.1 million in the prior quarter and 5.1 million in the second quarter of last year. The current quarter increase was influenced by higher legal cost associated with recent acquisition activity including the recently announced transactions for portfolio franchise loans and a local community bank. As you know professional fees can fluctuate on a quarterly basis based on our level of acquisition activity and problem loan workout activity as well as any consulting services that the Company utilizes.
Other real estate owned expenses increase by $788,000 in the second quarter compared to the prior quarter. Total OREO expenses totaled $1.3 million in the current quarter compared to $560,000 in the first quarter 2016. The increase was due to additional valuation allowances of $482,000, increased operating costs of $227,000 and $79,000 less on recorded gains on the sale of OREO properties. Other miscellaneous non-interest expense increased by approximately $3.2 million in the second quarter, this increase was generally associated with higher travelling entertainment expenses which are seasonally higher in the second and third quarters for us. Higher loan expenses associated with the significant loan and mortgage production and other miscellaneous increases.
In summary, the increase expenses were generally associated with significant increases in loan production and revenue levels. Acquisition related and severance charges seasonally higher levels of marketing and entertainment expenses and investments made to support the overall growth on the balance sheet; however, these increases and these expenses were less than the relatively growth in the balance sheet and the revenue levels resulting on a lower net overhead ratio indicating improved leverage of those expenses on an overall companywide basis.
Further to that end as we discussed today and in recent quarters, we've had a goal of reducing our net overhead ratio to approximately 1.5% for the fiscal year 2016, given the steps we took in the last half of 2015 particularly related to recent acquisition to consolidate operations including facilities and staffing and our ability to leverage our existing infrastructure to support the growth of the Company, we saw progress towards that goal in the first quarter and we saw further progress in the second quarter of this year with the net overhead ratio for the quarter coming in below the target at 1.46%.
We will continue to work hard to effectively leverage our expense base and keep you posted as the year progresses. But as Ed mentioned, our month-end balance sheet was significantly higher than the average last year. We don't expect to have significant new expenses in the third quarter, so we do expect assuming the mortgage markets stays relatively stable with the second quarter that we should be able to improve that ratio going forward.
So with that, I will turn it over to Ed.
Thanks, Dave. So to summary, second quarter was pretty solid across the board for us and we entered the third quarter with a great deal of momentum. The prospects for continued organic growth appears strong. As I mentioned, the loan pipelines are stronger than ever. We ended the quarter with the head start in the average loans and average assets side, $523 million and over $600 million ahead respectively. We will close on a GE transaction in the mid third quarter, which should again add to our earnings and our growth and our overall net interest income.
Mortgages should continue to be strong. The cost out of the Foundations acquisition will be executed and will be experienced. Wealth management will continue its slow and steady climb even in this volatile market. We see no signs if credit is going sidewise on us and it should continue strong. And all these expected growth as Dave was alluding to should be accomplished with the fraction of the commensurate growth in operating expenses, we basically anticipate very little expense growth in the fourth quarter or in the third quarter. So this should far outweigh any margin pressure that those markets going to bring, that this rate market is wearing on us.
That being said, we still think 330 plus or minus 10 is a good way to look at our margin and our acquisition pipeline remains strong in all areas of our business. We are not going to be stupid though, we are going to take our time and again earnings accretion is what's important to us. You know we have talked earlier that the last four, five, six maybe conference calls about what we were trying accomplish and that is we knew we had a lot of excess for contingent operating leverage that we needed to employ.
You can see that through the acquisition, the cost out acquisitions that we have accomplished through organic growth, through portfolio purchases and the like we’ve been able to continue to utilize that and there is still plenty left by the way. We still believe that there is lots of room for us to grow without commensurate increases in expenses. And we think that’s the logical thing to do and at time when your margin -- your net interest margin is going to be under compression if we can grow net interest income maintain our solid interest rate sensitivity position for if and when rates ever do go up. I think we positioned ourselves very well for great price -- good prospects for strong earnings momentum going forward.
So with that I would turn it over to questions.
[Operator Instruction] Our first question comes from line of John Arfstrom of RBC Capital Markets. Your line is now open.
Just maybe to start with loan growth, we had a big quarter organically and huge as you said Ed.
No I wasn’t allowed to say that John.
You weren’t allowed to that okay, you inferred it. The C&I number I guess is the one I was looking at. That was a very strong quarter and I'm just curious if you could give us any idea what's driving that and particularly also maybe in overall loans maybe the quarter end strength versus the average strength, give us an idea what's happening there?
Well, it's been across -- the growth has been across to the board, I mean we started the year with premium finance loans going longer little bit a pressure because of some regulatory guidelines that came out and we have been able -- they’ve hurt us a little bit regarding know your customer's stuff. We have been able to fight back from that and bring those balances back, I’m very proud of that guys for doing that.
On the C&I side, this is not again a show of the economy expanding. I think our draw rates have been consistent, our lines have been consistent along, this is just the momentum that we have as a franchise here in the market is, our market is playing off, there is not a deal in Chicago we don’t get a bat at, so that's very helpful for us.
Mortgage warehouses lending by the way, we have that division of mortgage warehouse lending to outside third parties those were up $77 million also. So some of that growth can be attributed to that, but we really -- our leasing division is going well, we expect good growth even in the franchise division, even after that's done when we get the GE deal done we expect continued good growth there and as we, we basically hired the players prior to even getting into this deal we had hired player who were with that firm and had no other customers and are well known in that space.
So it's hard to point -- pinpoint one thing John, it's just a lot of good momentum in a lot of places without violating our core underwriting parameters and profitability parameters and principle. So it's kind of more or the same, but just very good momentum.
Okay. That's good. And just on the GE piece, you talked about maybe adding some expenses earlier on. Is it fair to say that the hiring is done in that business and it's just basically as simple as pulling the assets. Do you feel like you need to hire some more people in that business?
We will be hiring more people in that business as the transaction closes and -- but we did, we hired the main players, the senior people. I would imagine that there will be maybe one more senior person that might join us and then maybe six support and junior officer types, to help support that business as we bring it on. So that's in process as we speak right now.
So nothing material, the senior guys we had on board.
Okay. So very little really in terms of --.
Very little I would say.
Okay, good alright.
We had a business, we had about 300 million in it, so we did have a staff already that was familiar with this business this is just a giant step forward. So this isn’t like new to us, we knew a lot of these people already and this is something we’ve been working on for a long of time.
Okay, alright. Thank you.
Thank you. Our next question comes from the line of Emlen Harmon of Jefferies. Your line is now open.
Could you quantify just how meaningful the profit margin opportunity is in the mortgage banking business and I guess really just thinking, where do you think you can go from 13% that you did this quarter?
Well, that number I should -- you almost have to bracket it because of where volumes are. Right now volumes are very strong so pricing gets a little bit better. But I think that that number should be at least 4% or 5% higher going forward that's what we like it to be. Your spreads and the mortgage warehouse lending and the mortgages held for sale are down substantially, in normal market sales would be up a little bit higher.
So that's one aspect of it, the other aspect is it's just -- man it takes a lot of work with this -- with TRID and with all of the Dodd-Frank stuff you have to do and we want to do it right, it's taken a lot of work and the technology hasn’t kept up. But I think long-term our goal would be to add on relative basis 4% to 5% to that margin.
Got it. That's helpful. Thanks. And then just a quick follow-on on Jon's question. I think you guys had mentioned that the commercial loan pipeline is at an all-time high. Just be kind of curious how that compares to where it was last quarter? Just trying to get a sense for how far ahead you are there.
Based on, on a growth basis, its $300 million ahead. On a net basis, it's probably $110 million ahead.
I mean that doesn’t include our niche business by the way, that doesn’t include leasing, it doesn’t include premium finance. Those are not included in those projections, this is commercial and commercial real-estate business.
Our next question comes from the line of Brad Milsaps of Sandler O'Neill. Your line is now open.
Ed, just wanted to follow up on your NIM guidance. Just kind of looking year-over-year, I guess you've lost maybe 14 basis points in NIM. Obviously you guys have been able to grow through that nicely. Sort of the GE acquisition aside, what makes you feel confident you can kind of hold the NIM here?
We had one fed increase in that time period. It doesn't look like we're going to get many more. Do you think you can hold really the line on loan pricing here going forward? Just kind of curious kind of more of your thinking behind being able to hold the NIM viewed in the context of being down 13 or 14 basis points year-over-year.
Sure. Lot of that down is liquidity management you're looking at the five and 10 year bonds, I never thought they’d be here in those markets. I mean you’ve got a bull market going out and rates are flowing, go figure. So a lot of it is in liquidity management and the accretion that’s run off we’ve been fighting increasing headwinds and have not gone out and done a big deal and try to think another shot of dope to get us through the period of time until rates go back up. So that’s really the reason.
If you look the last quarter the only decrease in our loans on the margin related to loans was 1 basis point due to accretion. Loans pricing held up pretty nicely last quarter, and there was no difference between the second and third quarter. So, I’d like to say we bottomed out, but I think a lot of that is -- where we get pricing pressure on loans is when loans are running out the back door that we have priced higher, if you follow my drift on that one, it's the run off of refinance of loans out the back door the portfolio. New stuff is coming out and I think we maintain our profitability models, we should be able to -- which were we live that’s our bible. So we should be able to hold loan relatively constant and hopefully grow some.
Our leasing portfolio should give us some better yields as that continues to grow the franchise portfolio in general should give us better yields, is the mix issue of getting more and more premium finance getting, when those would kind of fall off at the beginning the year and coming back on, those are our best dealing assets and those are growing. So, we should be able to hold our own and it's just we got [indiscernible] up by 3 basis points and 5 in liquidity management and, blame Brexit, lot of money flying onto this country right now.
Sure, sure. And then just a follow-up on the GE deal and I'm sorry if I missed it. Can you talk about funding plans? You're kind of above your sort of historic comfort zone in the loan deposit ratio. Can you talk about that a little bit more and sort of what you plan to do in the interim until you sort of catch the funding up with the new loans that are coming in?
Yes, so we’re climbing the ladder again, we do deposits, we do loans, we do deposits like the old days again. We have been marketing recently, we’ve been pulling in close to $40 million of new money a week on our terms and to build out our franchises, we’ve selectively marketed and one of the benefits for the multiple -- charted multiple brand approach we have is we can go to different markets and gain market share without cannibalizing existing deposits and thereby making you marginal cost of funds way to high.
We been bringing in $40 million, we like to, we can open that up in some other place to hopefully get up to $50 million to $55 million, we may this quarter have to relay a little bit more on institutional funding than we have in the past, to fill that gap, some short term brokered funds in the like, we have the benefit of having a very good net interest rate sensitivity position. So we’re able to bring in some short funding in the interim the bridges that is certainly part of the plan, but long term is that we don’t like -- we like -- this is the opportunity for us to grow the franchise, by brining solid relationships in the three or four different accounts per household.
This is really were we want to be right now, we wish the rates were a little bit higher, I think everybody does, because it makes it easier to do it, but the marketing and how we position it has been working pretty good and we can bring in an on limited basis, that amount of money, we can now expand that to grow, but if we can be asset driven, we can now expand the franchise and the real core franchise, which is the deposit base. So people don’t, in the rate environment don’t consider deposited base to be worth much, but we do, we think its worth a lot, when rates go up it will be worth even more. So this is where we want to be here.
So the long and the short of it is, we’re going to continue to fund ourselves organically continue to grow and push that aspect of it, in the meantime we might have to bridge ourselves with some brokered or institutional funding this quarter.
Thank you and our next question comes from Chris McGratty of KBW. Your line is now open.
Ed, a question on competition. One of your larger competitors got taken out in the quarter. Obviously it's early.
Who is that Chris, did somebody get bust?
The question is what's the potential fallout or how do you see the potential fallout from dislocation? Typically with situations like this are pretty infrequent but there's typically a land grab for lenders. Wondering the capacity and the interest.
Well for lenders, anytime there is a change in the market, there is going to be some disruption. I don’t think this one is going to have as much as other have in the past. I think that, the Canadian has bought a franchise and they would like to build and grow it, they have shown their commitment by giving the senior people contracts to stay on. It is my understanding that’s what happened.
So I really think that organization will continue to be a solid competitor, but it doesn’t provide for some disruption if there are, you won’t know for couple of years if there are cultural issue, were they don’t line by, I have no idea, they are or they aren’t. I’m sure that they figured that out before they signed and put ink on the paper. But in some respects you could make that particular competitor a little bit stronger with more capital with a bigger hold level. They could become more aggressive. So we're looking at all aspects of this but in anytime there was an acquisition such as this, it does bring disruption and dislocation and that does bring some opportunities both in people and in assets and clients. So we don't think it’s going to be any less competitive. These guys are just going to go by the sidelines, we think in effect it might make them a little bit more competitive and we're ready for the challenges.
Great. Thanks. If I could, a follow-up. With the growth outlook, can you remind us -- you put some but not all the capital to work through organic and deals. Can you remind us the comfort in terms of capital targets and what you estimate might be left in terms of deployment ability?
Chris, this is Dave. I think the thing we look at most of it is our total risk based capital ratio as being the limiting factor for us and that was getting down around the 12% range or the higher 11% before we raised this last 3 million shares of common in June. So I think if you start to get into in sort of the 11.5% range that would probably be the low end for us before we started thinking about raising more capital.
So probably 11.5% to 12% would be a range, that’s not hard and fast if the prospects look like they were going to slow for reason which is not the case, maybe it would let the earnings generation build that back up. But to the extent that we have the momentum that we have this quarter and then it looks like we're going to have for next quarter. And for the foreseeable future then we would probably look at doing some form of capital if we started getting that 11.5% to 12% total risk based capital range.
So potentially a capital -- you may cross that bridge at some point next year if the growth continues but not necessarily common, is that the right way to interpret it?
It would depend on growth and whether you do more acquisitions and whether the pipelines pull through. But yes, so you can sort of project that out and once you start to go below 12 and start approaching sort of mid-11s, then we probably would be looking in that range to do something. But it really depends on like this last capital raise we did, everybody questioned, why did we do if we hadn't announced the deal, but clearly you can see now that we had deals in the pipeline that we knew were coming and we had significant loan growth coming and we felt it was appropriate to raise the capital at that time before you sort of got to a blackout period at the end of the quarter and during earnings season.
So we could do it a little bit earlier than normal just depends on what we see in the pipeline and this time we saw the pipelines growing and the acquisitions being there. If those go away for some reason then you might let the earnings supportive.
[Operator Instructions] Our next question comes from the line of Terry McEvoy of Stephens. Your line is now open.
I just want to follow up on Chris' question. How much of the $153 million was allocated for the portfolio purchase? And the reason I ask is I think some investors were a little frustrated because you raise capital, estimates go down and then you announce the deal and they didn't really go back to where they started and so it was viewed as a dilutive capital raise. I'm trying to figure out now that we've seen this quarter's growth in the pipeline, trying to then quantify what that additional capital will mean to future earnings. Maybe help better respond to that dilution question that a couple of us got?
If you listen and if you follow-up on what I said to Chris, the 12% -- 11.5%, 12% is sort of the range, you take the 581 million of loans that we bring on and 11.5%, 12% of that would be allocated to the capital. And then the Community Bank in Elgin that will be $150 million to $200 million of additional growth and 11.5% and 12% goes to that. But we also had more than our target loan growth this quarter. So I think you just kind of think about if you look at those buckets of growth and apply 11.5%, 12% with that how much capital will allocate to it.
There's been a lot of talk on CRE over the last week. How do you feel about continued growth in that portfolio? And then as you talk to potential sellers, is CRE coming up more in your conversations with, again, potential sellers?
Absolutely. CRE is on the front burner of every regulator that and IT are on the front burner of every regulator in the country. Fortunately, our ratios are pretty good when it comes to that, we don’t -- we are not approaching the 300 levels of they refer to, but it certainly is becoming an issue for a lot of other different banks. We are seeing lots of opportunities in the CRE space right now as a result, so it’s somewhat of a -- finally we got some of the lenders market here.
But we have to very careful about who you pick and the sponsors you deal with. We are growing that portfolio on a selective basis, profitable deals with extremely good sponsors and very, very good loan to value, loan to cost metrics people we’ve done business with for a long time. Not a lot of land development going on anywhere right now, some vertical development going on. But CRE is a hot button right now, it is an issue from our perspectives, we maintain our discipline which history would say we had been able to do. Relatively speaking, it can be a very profitable business for us right now because of our dry powder.
Thanks. And then just one quick follow-up. The change in MSR from 10.1 to 13.4, that difference flows in through the mortgage banking line and I just want to understand in Q3 should we maybe not expect that type of change in the MSR?
We will have to see where it goes -- just couple things happen there, I mean we are growing that portfolio a little bit and it depends upon the mix of business and we are doing a little bit more of that mix with loan types that have a little bit higher service fee level with them. The other thing that we saw is that the 10-year has a drop at the end of the year, our mortgage rates didn’t drop at the same level. And so the mortgage rates truly there is a little bit of a disconnect in June from the 10-year and the mortgage rates that we had. So we saw some -- actually some expansion in this spread there. But if rates stay really low and prepayments pick up in the third quarter and I think it's maybe reasonable to believe that you would see that -- not have that growth in the third quarter.
Good news Terry is that the second half of the year is always my favorite, not just because of the holidays and Cubs are going to be in the World Series, but each quarter has an extra day in it. So that’s of today is about $2 million little over $2 million more in net interest income that comes to the -- to each quarter. So in each days with over $2 million of net interest income to us, that number will continue to grow obviously as the bank grows. So we like that too. That's nice. Calendar's on our side in that regard.
Thank you. And our next question comes from the line of Kevin Reevey of D.A. Davidson. Your line is now open.
So first, just wanted to make sure I heard you correctly as far as the cost savings from the Generations deal and the Suburban deal. Those have all been realized, is that correct?
No the cost savings on the three deals we did last year which includes Suburban those have all really been realized. Foundations we close on March 31st of this year, we just converted it to our system in July, so last weekend, so will start to see some of those savings on the Foundations deal here in the third quarter. Those are not fully realized yet.
Although if you listen to my remarks there were some conversion charges and a little bit of severance charges related to them, but a full savings out of that really doesn’t incur until the conversion are done and the systems are one and locations are combined. So that will start happening into the third quarter here.
Okay. And then given the strong dollar, what are your commercial customers saying? Are they feeling any of the negative impact? Are you starting to see any of that show up kind of in some of your credit stress testing at all?
It's certainly is -- for those doing business overseas it's certainly is not helpful to them in a lot of respects, but many of our customers have built -- most have built pretty much fortress balance sheets to withstand that sort of thing. So our commercial customers are all doing pretty darn good, I don’t hear many of them complaining about the strong dollar right now. Many of them are -- they somewhat like the dislocation overseas and it's helping them and their markets, gaining their stability and their ability to deliver. So it has not been something that's that our customers have been complaining about in mass.
Okay, great. Thanks a lot.
Thank you. And I'm showing no further questions at this time.
Okay, it looks like we are done. Thank you all very much for participating. Look forward to talking to you in October with good results. So everybody have a good summer. Thanks.
Ladies and gentlemen, thank you for your participation in today's conference. That does conclude today's program. You may all disconnect. Have a good day everyone.
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