Wintrust Financial Corp (WTFC) 2006 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Wintrust Financial third-quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. Mr. Wehmer, you may begin, sir.

Thank you. Good morning, everyone. Welcome to our second-ever conference call. With me are Dave Dykstra -- everybody knows Dave, our Chief Operating Officer; and Dave Stoehr, our Chief Financial Officer.

Format today. I will make some comments, followed by some general comments. As is Mr. Dykstra's job description, he you will clean up after me, and give some specific numbers, and talk about some other issues.

As is customary, we would first like to start off with a review of our credit quality. I think that in the last 10 or 12 years, we have all become a little bit immune to the fact that credit quality is always an issue; and we think it is the most important issue in any bank. Pleased to say that our credit quality remains very, very good.

Charge-offs for the quarter were 8 basis points compared to 16 last year; and for the year, 9 basis points. Nonperformers went up a tad, but even since the reporting period, 9/30, $2.5 million of those loans have paid off and there's another 2 to $2.5 million that is scheduled to pay off in this week, actually.

Our up or out philosophy is still in place. We are very quick to identify issues and to either get them fixed or move them out of the bank. So velocity through the nonperformers' cycle is actually very, very good for us. There is actually a little over $2 million of loans that are current that we consider nonperformers, as we hold them past due to help them either get us better terms or to help them find a new home. So we still are very, very conservative when it comes to the credit side of the equation; and we will continue to be very conservative as we work through this part of the cycle.

Franchise value, measured by the balance sheet, remains very strong. Good growth in assets, loans, and deposits, and shareholders' equity. Dave will talk about those numbers specifically. But everything still is working very well in terms of the growth of the franchise value, increase in market share in the towns that we are in. The market is still very conducive to -- receptive to our style of banking.

Our average loan to deposit ratio for the quarter stayed relatively the same, but at period end jumped up to 84% as a result of us not suspending our sale of premium finance loans. I will talk about that a little bit later.

On the earnings side of the equation, it was disappointing for us. But on the bright side, I like to think that at least we made $6 billion more than Ford Motor Company did during the quarter. But we are not pleased with our results.

But a lot of this is basically self-inflicted this quarter. It is our response to the market as it stands, today. Could we have put more covered calls premium on the books? Yes, but the market wasn't really conducive for us to do that, with the rates that we would be going into for long-term securities less than Fed funds. The premiums that we would get on covered calls would have been half of what we're used to getting due to volatility or lack of volatility, perceived volatility, in the market.

We did not do a premium finance loan sale this quarter. We would not have done one last quarter if, in fact, we were not trying to accommodate that acquisition that went away. By not doing the premium finance loan sale, it obviously hurt our other income for the period. But that will be made up in subsequent periods, as those loans -- the income on that -- runs through the margin.

Another reason for not doing it is the fact that the spreads that we were getting, and that is evidenced on the second page of the press release, actually decreased because of the flat yield curve. Our funding costs had increased.

By keeping them on the books we not only will increase the margin, we actually pick up a little bit over a point after-tax on those loans that we keep -- or a point and a half, a little over a point and a half pretax -- even over and above the gain we would have made. So it makes a lot of sense to keep it on. The money has not gone away. It is a timing issue that will come through the margin.

We also had some additional expenses this quarter related to calling our trust preferred securities, the 9%-ers that we had out there.

If you add all that up -- if you add lack of the premium finance sale and some extraordinary expenses related to that -- it is about $0.05 to $0.06 a share depending on what you call extraordinary and what you call core. So the real earnings power of the Corporation, in my opinion, for the quarter was closer to $0.62 per share.

A little note that during the quarter, as we mentioned to you before, we did liquidate the old interest rate swaps we had on our trust preferred securities. As you know, the interpretations of FAS 133, which keep evolving, had made those instruments a non -- you could not get hedge accounting on them. The volatility that took place on our earnings statement was just becoming unacceptable.

We got lucky. We called them out when the 10-year was at 5.25%. So we locked in that and monetized that gain that we had recorded in previous quarters. So that is real money now. And we turned around, and we have swaps now in place on those securities or on the trust preferred securities and subordinated debt, which locks that in with good hedge accounting.

We actually locked in at a rate a little bit higher than what we had before, but still a very, very acceptable rate. I think that would be about a half point, Dave, after-tax that we locked in it. It was a little bit higher than what we had before. But that was in for pretty much the whole quarter. So to the effect of that has been experienced and won't really change in subsequent quarters.

Our margin held very steady for the quarter. We expect that margin -- we're positioning ourselves to have that margin increased. Again, the market itself remains nonconducive to our type of approach. The inverted and flat yield curve is obviously putting pressure on the margin. There are no credit spreads built in anymore.

I think people believe that it's kind of like the tech boom all over; that nothing will ever go bad. We don't share that. We have been through enough cycles to think that you do have to have credit spreads built in.

There still remains a ton of liquidity in the market. There is a lot of money looking for a home, which makes getting the earning assets on our books -- we have to be very, very careful in what we do.

We noticed this last March. We have pulled back a little, we have not changed our lending terms, nor will we ever change our terms to accommodate a market. We still think that this is a long-term play, and we're going to stay the course.

We could have booked premium -- kept the premium finance -- or sold the premium finance loans. We could have done covered call income. We're still getting as many at-bats as we always did, if not more, on the credit side. But we're remaining disciplined.

That is why I say that some of the results that you see here are self-inflicted to us, because of the way we are responding to a market right now. But we think this, long-term, is the right thing to do. This is going to increase shareholder value over the long term, which is what we're concentrating on.

I will tell you personally, if this was a private company and we run it like it is, that we would have done the exact same thing. That is just the way we're going to play the game.

Obviously, this is creating some pain. But we think we have troughed out, and we have got a new baseline here at the $0.62, $0.63 number. We're going to work off of that and build the business.

Mortgage side is slow as you would imagine it is in the market. But still acceptable in terms of volumes from where we are at this point in time. The mortgage profitability is hurt by, as I mentioned last quarter, by lack of spread on what is warehoused. That is down 250 basis points for us.

And that hurts a little. That is an issue that we can't really do much about, but ride it out and try to get smarter, and really fix the -- make sure that our fixed variable expense paradigm in that business is in place, so that we can get more profits out of what we're doing now and be positioned for the swings that will come.

Tricom's business is very steady. They are doing a record number of -- record amount of volumes. But again, that business has not immune to the liquidity in the market. Price spreads have been hurting us a little bit there. But again, we stay the course. We don't sacrifice credit quality or how we do business there. This, too, shall pass.

The premium finance side, credit quality remains very strong. They are on course to have yet another record year. Pricing, again, has been hurt a little bit there, by two issues. One, our late fees, where we used to get 2%, 2.25% are down in the 150, 160 basis point range. It is a function of keeping very pristine credit, but also the market in general.

There also has been pricing pressure. But we see that alleviating a bit. As the rate increases have stopped our portfolio is actually catching up. But we still see about a point declination in that market just due to competitive reasons.

Wealth management is steady, but not yet at acceptable performance levels. The final piece of our kind of re-engineering of that company -- which has taken a little longer than we wanted, but I think we're doing it right -- is in place. The strategic plan under our new management there has been put in place. Last Wednesday it was presented, and everybody is on board and ready to roll.

We think that that business will continue and will grow in the fourth quarter and in subsequent years. Again, the thing that we -- we put the new platform in place a year ago, just about a year ago. Now what we are doing is re-engineering kind of the social aspect of it, getting more -- you know, how we are going to go more for fee income, less transactional income, and get back into the recruiting mode.

We are kind of fired up about that. Because if you look at -- our approach on the wealth management side is to distribute -- once these pieces are, and now they are in place -- is to distribute through the banks. Where we have full management operations in the banks, for the last two years the revenues have been up over 50%. In downtown, in the old office of the Wayne Hummer companies, they have been down 16%.

So this new method of doing things, plus now recruiting into -- which we haven't done over the last six months. Didn't think it was fair to recruit people into something we were going to change. But as we now recruit and it's not going to -- I think, when people kind of see the numbers that are out there, the recruiting --.

You know, if you are able to increase your own business by 50, 55% a year distributing through the banks, I think our recruiting will be very, very successful. We expect great things out of this business. It is a great business. It is a great market that we are in for this business. It is one that we think holds great, great promise.

So yes, as I said, we're not happy about these results. But as I always say, it is what it is. We're not sitting and wailing at the moon and bemoaning our --. You know, as the godfather says, this is the business we have chosen. We are in it, and we have to deal with the market as it presents itself. But we have to do without giving up our basic core principles.

We have to find a way to do it. That is exactly what we are doing. This is really (indiscernible) --. We don't have credit issues right now. But notwithstanding that, it is the perfect storm. But we're going to build off of this. We do have plans in place and things underway that will make things better.

On the banking side, we continue to build franchise value. Each branch that we open does better than the last one we open. People are still very responsive to what we have to offer.

We have grown to $9.5 billion. By some numbers we are the second-biggest bank headquartered in Chicago right now, behind the Northern Trust. That says something about the strength of our franchise.

One of the things that we are doing there is we are embarking on a commercial initiative, and we started at last week. 99% of our customers don't know that Wintrust exists. They don't know we are the second-biggest bank headquartered in Chicago. They don't know the size and the capabilities we have to serve the commercial market. They think of us as the local community bank.

We spent a lot of money over the last three quarters getting our products (indiscernible) we have always. You have heard me say a million times, same or better products, same or better delivery systems, and to differentiate with service.

Well, we spent the money to have the same or better products and delivery systems on the commercial side. We are actually coming out of the closet, if you will, and letting people know -- on the commercial side only, not on the retail side -- that we can play this game and that we can service their commercial needs.

We started. We picked the top 100 customers from each of our 15 charter banks, who were retail customers, [who were either] business owners or decision-makers. We started with a direct-mail piece from them. We're bashing them out 25 per bank at a time. They will be followed by calls.

I can tell you by preliminary responses, it has been great. People don't know that we offer the services that they need. We have picked up -- just as we have tested this, we have picked up good business.

What will this do for us in the long run? It will lower our cost of funds as we build our DDA balances from 9 or 10% of our balances. Our goal is to get them up to 13 or 14 over a period of two or three years. It will help us on the loan side, as we get good business and bring it in under our terms. As people who understand our service will build it.

Then we are going to build off of that. We have never really pushed this, and we are doing going to do it now. We continue on -- this will also help us hire commercial lenders who will come in and know our commitment to that side of the business now, and the strength that we have on that side of the business.

So we are excited about that and we think we are going to do very well there. So the loan side and the cost of funds side there will certainly help us in that regard.

We continue to continue our [list out] lender approach to hire new bankers to bring in books of business with them. That has been successful as evidenced by our loan growth over the period. We continue to do that.

On the deposit side, we have what we call a little deposit mix initiative. Over the last three years when rates were as low as they were, you saw a lot of money migrate to CDs. It was the only place where people would get rates. As a result, our good core deposits, which is savings and money market, have declined as a percentage of our overall balance.

We need to get that back in line. We think long-term that will help us maintain -- short-term also -- but maintain and lessen our cost of funds and reliance on CDs. It is logical how we got there, and it is logical how we're going pull back now.

We have plans in place to do that, to solidify the deposit base, get it back to relying more on core type deposits. These are existing customers. We think we can direct that and get that done. So that is another thing that should help us in that regard.

I talked about wealth management there and our plans there. We are fired up about that.

Premium finance, we continue to look to try to grow that business, both organically, and we do look at acquisitions, and we look at acquisitions on the niche lending side of the business. Haven't seen anything yet. We have looked at a lot. Haven't seen anything that makes sense. We will be very careful on that. We have in the past and will continue to look for that.

Stock price basis. Let me say one more thing on the --. We're positioning our balance sheet, for a more conventional interest rate curve, when it does happen. We still manage for the environment we are in. We are positioning our balance sheet for hopefully a more conventional rate environment, and one that we can do better in.

On the credit side, we will continue to be relentless, for good credit. Bad credit kills banks. It kills shareholder value over the long term. We're not going to let that happen. We are going to continue to be relentless. Yet we're still going to go out and work real hard to get good credit on the books.

Our stock price now has moved on a little bit. It is book and a half now. It is a bargain -- in our opinion.

As you know, we did approve a stock buyback. We have not done anything on that yet to date. We thought that it didn't make a lot of sense. It wasn't fair to do it prior to release. But afterwards, I can tell you that stocks at these levels, we will be implementing our stock buyback in the near future, like soon.

In summary, the core franchise remains very strong. Nothing is broken here. Some of this, what is going on with our earnings, is self-inflicted. The model still works. It is still well received.

We have to work through this, and we will do it. We think we are doing the right things. We will continue to do what we believe are the right things for long-term shareholder value. I will turn it over to Dave.

That was pretty thorough. I thought I would just give some, a little bit of more highlights on the other income area.

As Ed mentioned, he talked about our brokerage and asset management efforts. If you look at the revenues there, the asset management, trust fees were fairly flat. The brokerage fees were down a little bit, but still within the revenue levels that we have attained over the last five quarters. So looking forward we are optimistic about that business. Third quarter tends to be a little bit slower for us, as a lot of our customers and some of our employees are on vacation in that quarter.

Mortgage banking revenue, Ed talked about that. Again, one of the things that impacted the business there was some valuation adjustments. Our mortgage servicing rights pretax had a negative valuation adjustment of $502,000 pretax versus only $18,000 in the second quarter of '06.

The mortgage banking derivative, which is something that turns around every quarter -- it is just marking to market the valuation of the loans that we have actually closed, or holding on our books but have not yet delivered to the end investor -- that negative impact pretax was $306,000 in the quarter. In the second quarter, that number was actually slightly positive.

We have shown the after-tax impact of those items on page two of the press release. So if you take those valuation adjustments out, our mortgage banking fees really were north of $6 million for the core business. Obviously, that is related to the interest rate environment, as to which directions those might go.

On the premium finance side, Ed talked about our strategy there. Just to give you some numbers that are in the releases, but I will state them here. We sold $203 million of premium finance loans in the second quarter and $100 million in the first quarter. So on average in the first two quarters of the year, we had sold $151 million per quarter. That is pretty similar with what we have done in quarters in 2005. So on average, going forward, we expect to keep that extra $150 million per quarter of loans on our books at those additional spreads that Ed had talked about.

You might have a question as to why did we show any gains on that line item. We had $272,000 worth of gains for premium finance. Those are just the cleanup calls on prior sales as they unwind and there is just a little bit of the loans left. We buy them back from the people that we sold them to, and we adjust the gain for the estimate. So those have been slightly positive the last few quarters. Again this quarter is just the positive impact of that.

On the trading income side, Ed talked about the fact that we have rehedged our trust preferreds. We put hedges on $175 million of the trust preferreds. Then, as we noted in an 8-K, we did another $50 million of trust preferreds to replace the 9%s that we called and to replace some subdebt that we refinanced that was related to the Hinsbrook acquisition.

So in total, $225 million of that debt is now fixed rate at around 7.4% pretax or 4.5% after-tax. So again, we think that is a pretty cheap source of capital for the bank, and we are reasonably pleased with those rates.

On the salaries and employee benefits side, jumping down to other noninterest expense, this line item increased $1.2 million over the second quarter of '06. Over half of that, $650,000, relates to the Hinsbrook acquisition. They were in our numbers for one month last quarter. They are in for a full quarter in the third quarter.

If you exclude that, the salaries and employee benefits grew at a rate of about 7% on an annualized basis, which is less than the growth in our balance sheet and really is there to support the additional de novo growth that we have out in our branches.

The rest of the non-interest expense items, there is nothing really unusual in there to talk about. So I think with that, we will open it up to questions, and go from there.

(OPERATOR INSTRUCTIONS) Kevin Reevey, Ryan Beck. (technical difficulty)

I think we had technical difficulties, not on my end, though. First question is, what is your outlook as far as selling covered calls in the next few quarters? Because that line item is a little lumpy.

A little lumpy? Well, the market, right now, with the way the yield curve is, even though we do have room on an asset liabilities standpoint to do some investments long-term, we don't think it makes a heck of a lot of sense to do it.

We will continue to write covered calls on our existing portfolio. But to -- and I think we had over $100 million securities called away during the swing in the 10-year that took place during the quarter. We didn't reinvest it. Right now it doesn't make a lot of sense.

As I said, in my remarks, the premiums themselves are about half of what they used to be. So when you look at the overall economic side of what we are trying to accomplish there, there is not as much there as there used to be. So to add --.

Long-term it will continue to be part of what we do. The amounts will be a function of what happens in the interest rate environment in general. But we will always try to do that as part -- it's an inbred part of our strategy. But we are only going to do it if it makes sense for us from a long-term standpoint; fits into our balance sheet; and we think there's proper rewards. So chances are it is going to be a little lumpy going forward.

Then, Ed, earlier you talked about recruiting for your wealth management business. Can you talk about what the market is like for new recruits?

Well, the market, really, it has been competitive for a period of time. I imagine it will stay competitive. There hasn't been a marked increase in competition for the people we are looking for that we have seen over the last 12 to 18 months.

But for the last six months, we have kind of pulled back on the recruiting side there. Because as we make this final cultural change to the business and really have the strategic plan in place, that is now in place. We can hire people into it and not be duplicitous about it.

I didn't want to -- I didn't think was right to hire somebody and then change how we are going to be doing business going forward. it wasn't fair to our people, to our existing people, to do that until everything was in place. So we're going to be very active recruiters right now in that business.

As I said, I think that if you look at the numbers that the previous batch of recruits has been able to put up, in terms of revenue generation, as they get out and distribute through the banks, add that to the quality of life issues of being able to work five minutes from home and be in the markets that we are in, we think that we will be very successful in recruiting. We have got a lot of good tailwind on that, and we are ready to rock and roll on that.

Those new recruits, are they 100% commission, or is a combination of a base salary and a bonus?

It will be both. We're talking about the wealth management side really and the brokerage side of the business. But so even a brokerage will bring in -- a part of their portfolio will be commission side.

But the migration, as you have seen happen across the board, to more fee-based income is really one of the -- at the core of -- is one of the pillars that we are basing this new cultural philosophy on.

Then my last question is related to the Hinsdale deal expense saves. Did you realize any expense saves in the quarter from that transaction?

Nothing really material. As you know, when we go into a transaction and we evaluate transactions, we actually add expenses. Because our goal is to grow the franchise. Our opinion has always been -- we do a deal, it should be accretive upfront. But where we create value is our ability to grow that franchise.

So we did experience savings on things like health insurance and the commodity type products, where we can use our bulk to better their situation. But nothing really material. Those things will over time, play out.

But our emphasis -- the breakup of Hinsbrook, and the breakup -- what I mean is, when we acquired Hinsbrook, the franchise itself, as it was when we acquired Northview, is being split into three separate components. We are going to have -- the majority of it will be merged into the Hinsdale Bank. A portion of it will be merged into our existing Wheaton Bank.

Then the charter is going to be flipped out to the St. Charles-Geneva area, where we have no presence right now, and where we will -- we hope to grow it as we have all of our banks in the past. We actually over the last, probably, eight weeks have borne the expense of that Geneva bank; because quite frankly that is like a new bank.

Actually, probably over the last two quarters, we have been bearing expense related to bringing people into the Geneva organization, before they get their charter. Because you need a full gamut of people there, from operations to lending to a new bank president. Those people are in place. Come the first part of November they will be off and running under a new name.

It is almost like opening a new bank for us. So there have been some expenses we have actually incurred as a result of it, as we do in most de novos that we start off.

Great, thank you.

Jon Arfstrom, RBC Capital Markets.

A couple questions on premium finance and then an unrelated question. But are you permanently ceasing the sale of premium finance loans? Did I understand that correctly?

I think we said in the press release we are suspending it right now.

Suspending it?

The problem with the [frans right] with us right now is we are not -- we have always been asset driven. Up until March of last year, we were generating more assets than we needed. We kept selling because we figured, well, this probably might be temporary as we work through this. But it appears now that we have got to work out of the 82% loan to deposit ratio, get us back up to the 85 to 90%.

That coupled with the spread decrease that we get on that gain, it just doesn't make any sense to do it. We make a heck of a lot more money. We have the capacity. As the bank has grown, we don't have the concentration risk that we might have had before. So we are suspending it for the foreseeable future.

But if we get lucky, as you know, we're looking for portfolios that make some sense. And we can -- in one fell swoop, as we thought we had in the second quarter -- push ourselves back to an asset-driven position, we would be back in the market. It is a logical asset for us to sell and maintain those basic operating tents of loan to deposit ratios, liquidity, and concentration that we talked about earlier.

So for the foreseeable future, I can't see us selling loans without some sort of -- our internal growth catching up, or some sort of quick fix through an asset purchase.

Okay. Now my understanding of that business, and just correct me if I am wrong, is that it takes approximately nine months for a loan to fully amortize or to fully pay off. In previous periods, if you were taking those gains in one quarter, we are talking about it maybe takes two to three quarters for you to eventually earn all the income that you would have picked up in the first quarter. Then also (multiple speakers).

It is weighted towards the first quarter because the balances do decrease.

Okay.

That's right. You pick it up over generally three future quarters, Jon.

Okay. Then, Ed, did you make a comment that you are actually picking up incremental income by not selling the loans? Did you make that comment?

1% after-tax.

Okay, so this is something that is going to phase in over the next couple of quarters?

Right.

Correct.

And it is a positive for us.

Okay. This may be the only real question that matters here, but I guess everybody understands what you are doing, and everybody has tried to be patient. But the question is, when are we going to see the turn in earnings? Does it feel like this is the trough? This $0.62 number, is this the trough and are we going to build from here? Or is there still more pressure on your earnings to come?

We sure hope it is the trough. We think that the initiatives we have in place are certainly going to turn it. I think that it is not like we're sitting here doing not anything about this. We understand what the issues are. We understand what the market is. You have got to come up with initiatives that don't violate the basic operating tenets. You have got to be real disciplined.

This is a scary market as far as we are concerned, right now, when you look at some of the things that are going on out there. Some of the deals that walk out to other financial institutions, we just won't do. We think it is the right approach to this market right now.

So to answer your question, is this the trough? We sure as hell hope so. We believe it is. We see a lot of positive things going forward. It has been very painful on the slide down. But I'll tell you, I feel better than I ever have about where we are going and what we are doing.

I think this commercial initiative -- as we have tested this thing, and I have personally gone out and --. I will tell you one quick story if you have a second.

I went to a call out of our Barrington bank on a potential customer. He is a big customer, a big potential customer. We have lunch; I walk in; I sit down; I shake his hands; and I say, the first thing I want to do is thank you for your business. The guy looks at me like -- you arrogant guy, you don't have my business yet, that is what the lunch is about.

I said, quite frankly you have been a customer for 10 years of our Hinsdale bank. He said, oh my God, that is you guys? We were doing mortgage warehouse lines for him. He goes, I love you guys; I didn't know you could do this and do this. Guess what? We got the other business.

I have had that happened four or five times. As people really understand what we can do and what our capabilities are, they are very receptive to working with us on the commercial side of things.

It is a step for us because we have done very, very well positioning ourselves as the local community bank and not the big bank. So we really are making -- being very careful in how we position this. This isn't going to happen on the retail side, just the commercial side.

Five or six years from now, when we go from 75 branches to 100 or 125 branches, if we stick to the course of a branch every two years and maybe an acquisition or two, this is something that can roll into the retail side also.

We think there is -- we are the second-biggest bank headquartered in Chicago. Based on June numbers, we are only $100 million behind the Northern Trust in terms of local deposits. Just as we have done in local communities, we think we can do in the city of Chicago.

It is a Daniel Burnham-like plan and approach. But heck, 15 years ago when we started this thing, we didn't know where we would be, where we are down. What have we got to lose by going after it? If we can deliver and give the service and have the same or better products and services, this is a logical extension for us.

We are gong to copy the Synovus approach in doing that. But we are starting on the commercial side. We're starting with friends of the bank. We are going to build momentum that way. That will add on the DDA side, the fee income side, and the loan side.

We are going to continue to look for other niches to grow. I think we have got -- the wealth management is going to start taking off right now. It has been long, laborious to get where we want to be. But I think we are there.

I am very confident in the leadership there. I am looking forward to all of you who follow us. When you come out next time to meet the leadership there and spend some time with them, and I think you will feel the same way.

So I am kind of bullish. I'm fired up again. As I said for a little while we wailed at the moon and said, oh, woe is us. But again, this is the business we have chosen. We have got plans in place to work through this. I'm very confident going forward that we're going to be able to do extremely well.

We are going to keep concentrating on credit quality, though, because that is the part that always scares me and should scare all of us.

All right. Thanks, Ed.

Andrew Collins, Piper Jaffray.

This is Peter Froehlich for Andy Collins. You talked a little bit about how spreads were disappearing on the loan side. I was wondering if you could tell us a little bit about the other side of the equation, in terms of deposits and competition versus the second quarter.

The rates you guys are paying on interest-bearing deposits was up roughly about the same amount, 29 bps, as it was last quarter to quarter. When does this kind of lag in the deposit pricing finally catch up? When does that start to (inaudible)?

Deposits are actually, in my opinion -- I will let Dave talk about this too -- but are acting somewhat rationally as it relates to the market in this yield curve environment. When the short rates are up, the Fed funds are up, and that is what everybody hears. Rates are up, rates are up.

You would expect this to happen. Sure, there are CDs that reprice. But we are moving them. The migration into the more core deposits is one of our objectives here and should hopefully help mitigate some of this rising rate phenomenon.

But in terms of overall pricing in Chicago, everybody has got a special with something out there. Everybody has always had a special with something out there. The competition on the deposit side, for the 15 years I have been doing this in this Company, since we started it, has always been fierce. I don't see it any different than it was.

There will be -- it is topping out about now as six to eight to 12-month CDs are coming due. They're being put into either renewing or we migrate them; and they will take about a year to hopefully migrate to kind of back to more conventional percentages of the overall deposit base.

But there will still be some upward pressure on the deposit rates. But at the same time, as we continue to build on the loan side, continue to do things on the mix side, we should be able to hold that in check. Dave, do you have any comment on that?

No, it seems like if you talk to the bankers out there now that they are starting to see it stabilize from our competitors also. That maybe they are looking at the pressure on their margins. But they are starting to see the core rates stabilize. You have even seen a couple competitors drop their core rates recently.

So I think, hopefully, as Ed said, that barring any further rate changes out there, that -- on the short end, anyway -- that it has stabilized out there a little bit.

Once some of these CD rates went north of 5%, it seemed to be the magic level where people started to move some out of their money markets and savings and the like into CDs. It's incumbent upon us to try to get that mix back, as Ed said.

But from a competitive environment, it seems to -- other than the specials that people run out there -- the core posted rates that our competitors are putting out there seem to have stabilized.

Okay great. Thanks. Given your new emphasis on retaining the [prudent] finance, can you just give us a little color on how things are going with the InFund operations in Philadelphia?

InFund is off to a reasonable start. Slower than we would like it, but a lot of the blitzes are just taking place right now. The blitzes being where we hit a particular market hard and can follow it up with personal calls.

So we are comfortable with where it stands right now. We are looking at growing that business. We just hired a couple other salespeople, one of whom was even older then Frank Burke -- if you can believe that, those of you who know Frank.

But we are committed to growing that business. I think we have got a couple -- 2 or $3 million outstanding right now; and we would hope that that would grow geometrically.

It will never be as big as our core businesses, just because it won't. But if we could build up over a couple years a 300 to $400 million portfolio in that business, I would be very happy with it.

I think the core is in place. I think we are learning as we go through it. It is a totally different distribution system and operating approach than we have had in -- that we have at First Insurance. That is why we split it out. So we are learning as we go along, too.

Again, the broker doesn't touch the money. It goes straight to the insurance company. So we have eliminated that aspect that has potential fraud elements to it. As we go through it we are fine-tuning it. The blitzes are starting. So we feel pretty good about where we are going in that regard.

It is not material to us yet, but it is just another initiative that we have got to follow through on. The yields in that portfolio to date are -- what are they? 15%, 14 to 15%, so we're certainly going to grow that business.

Okay, thank you.

Ben Crabtree, Stifel Nicolaus.

Ed, I wonder, it kind of went by a little too fast. Could you walk through again how you got from the $0.56 to the $0.62, $0.63 baseline number?

If you have the press release in front of you, Ben, and go to page 2, the first time we kind of put in -- and we are not trying to define core earnings. Because a lot of these elements we consider core. I mean, the covered calls and other issues.

What we're trying to, in this formula -- and this is just kind of a little preface to answer your question -- in this reconciliation, it is just to show you, to give a better idea of where our earnings are coming from and what some of the major volatility issues are there.

But I look at the premium finance sale issue. That we didn't sell it, and pretax or after-tax that was going from $900,000 to $160,000 after-tax. Look at the expenses of calling the swap, $188,000 down below. The $115,000 after-tax of the expenses we had to write-off related to that failed acquisition.

I always put in a little bit of the mortgage banking derivatives, because that means nothing to me. It's just because it's another one of these accounting issues that you have to follow, but the value of that is still there and the revenue hasn't changed a bit.

So I always take a bit of that. Because, heck, a lot of that is turned around already with rates having moved up from where they were at the end of the quarter. So I kind of look at that also. That is what gets me to those numbers.

So premium finance, the difference in the gain on sale, the extraordinary expenses related to the trust preferred call, and the aborted acquisition, and some of the mortgage servicing right valuation is that $0.05 to $0.06.

Okay, thanks. Another thing, just to follow on Jon's question on the premium finance, I just want to make sure I understand this. In effect, let's assume that conditions don't change, we have got ourselves a couple more quarters of growth in the loan portfolio from this.

Given the short life of this and probably not as much growth thereafter, I guess the related question is origination volume in the quarter and your expectations for origination volume going forward.

We expect another record year out of our premium finance business. In spite of the fact that it is a tough environment there, too, Frank Burke and his crew have done a great job in terms of continuing to grow.

We have not seen the ticket size -- in other words, the premium that we are financing that aggregate amount has been stable. We are in somewhat of a soft market. If you had a hard market, we would go to the moon with that. A hard market means the ticket size would go up.

But we see a relatively stable ticket size. We are still being able to pick up market share there. So Frank's businesses will grow 8 to 10% this year. We fully expect it to grow 8 to 10% next year. So they are doing a great job there. Their credit quality remains terrific.

We continue to look and hire more salespeople around the country. We are actually evaluating going into Canada, which is someplace where we are not right now. The Canadian business is good, standard, premium finance business for us. We are working on some additional endorsements there.

So there is a lot of momentum there, too, keep building and growing that business. So barring a softer market than we have right now, we would anticipate good growth.

Okay, thanks. Then the last question is a required question on M&A. We have certainly seen a lot of M&A transactions in the house; and everybody seems to be expecting the sellers to start running up against walls. Are you seeing a bigger flow of deals across your desk? Maybe the big question, are you seeing any more rational asking prices?

Yes, and no. There are potential deals out there. There's some books flying around, and there's also some private deals. We're getting calls.

But seller expectations have not changed. Our stock price where it is, I mean, we took advantage of our stock price when it was flying high; and we used that currency. But right now, when you run the numbers, it is very hard to have things makes sense and fit into our criteria, which is it has got to make money out of the box, and it's got to be able to -- we have to be able to grow it.

Again, we only believe we create -- that we are paying full price for an organization. We only believe we create value on what we do after we get it, and our ability to grow it and to fill it out. We haven't seen any of those lately that fit strategically.

When we look at an acquisition, we always put it against, boy, could we do just as well de novo? Would it be just as good to have a Harris Bank, who is still very active, one of the larger banks come in and buy it, and then open up underneath them and create more value that way. So we always take that into consideration.

So as I have said previously, if we don't do another deal for three or four years, it's because nothing worked. It's not that we are not looking at it. We think we can do better other ways.

If we do do a deal, don't be surprised. It will be something that we think makes sense strategically and that we can make money at.

So the velocity has picked up. There has been no change in, really, seller expectations. There was a deal announced this morning that showed some pretty good numbers for our friends in South Bend; and congratulations to them on that transaction. Congratulations to the Irish on their last-second win also. But it's same old same old around here.

Okay, thank you.

Peyton Green, FTN Midwest Securities.

I was just wondering if you could follow up on the issue about expanding the Wintrust brand-name. Has this been a bit of a change from the personnel perspective in how they call on customers? Or what I guess kept them from offering the customer in Hinsdale that you mentioned or -- from doing more over the past 10 years; versus all of a sudden realizing that he could do more now?

How much of an issue is this in terms of, I guess, retraining the banker base that you have in place, versus kind of educating the customers?

We had always had the people in place. We have been growing and doing so well up until recently, where we were -- been able to get the loans out of the market and have the niche businesses grow along with us. That has been going very well.

We were always afraid that we positioned ourselves as the local alternative to the big banks. If we go out and we say we are a big bank, do we lose that positioning? It is something we never had to do.

We always thought down the road it was something that we would do. We have always looked at Synovus as really the poster boy as to how to do that and maintain the kind of best of all worlds approach. Now the time appears to be right. We have 75 locations. We cover a lot of Chicago.

We actually -- I used to laugh at -- not laugh but wonder. Well, laugh a little bit too, I guess, about guys who had one or two locations and would advertise on WGN or do regional advertising, as come to our bank. And they have got one location, and they are hitting 99% of the people [who] aren't going to go over there. It never made sense.

So we felt it wise and still feel it wise on the retail side to maintain that positioning that we have, as the local alternative to the big guys. So we're doing this only on the commercial side. We're starting with friends. Then we are going to migrate this into the commercial market in general, through advertising and business periodicals such as Crain's and business journals and the like. To let people know that we really have this capacity.

You talk about training. There is training going on. We have the people who can do it and training going on right now. I started this morning down in Chicago at the Union League Club, addressing Wintrust Academy Commercial Banking. They had 30 or so bankers who were there to learn about all these new products and services that we can offer and to bring out. So there is a real training approach that is going on right now that will bolster this effort.

One of the things it is also going to do, Peyton, is in the recruiting side of things, we always -- people look at it and say, boy, you're not dedicated to real commercial lending and cash management. Quite frankly, we didn't have the same or better products or services; and you could see that.

But now, I think when people see that we are committed to it, we do have the resources, we do have the products that are competitive, we do have the lending limit that is competitive, we're going to be able to attract those guys out of the bigger banks and bring commercial books of business over with them.

So it is a bit of a change. It is involving some training. We do have the core personnel to pull this off. But as it evolves and hopefully gets bigger and bigger, we need to continue to train our existing people. We need to bring in some of these high-powered real commercial-type lenders to augment what we're doing. We think we are well positioned to do that.

Okay, so it was a bit of a product issue from the commercial side that is now behind you. It's just a matter of actually making the calls and saying, by the way, we do this.

Right, yes, exactly. (multiple speakers) coming out of the closet here on this thing. People are amazed when you talk to them. They say, you're what? You've got that? You can do that? It is really kind of fun. It fires you up.

It is actually getting me out of my office, dealing with other issues and getting me out selling again, which me, personally, I love doing. I think I loved it when we started the banks, and I am really enjoying it.

I think everybody is enjoying it. Everybody is taking it as a great challenge. It is a Daniel Burnham, make no small plan approach that we have here. We are all kind of fired up about being the underdog and getting it done.

Okay. So in the past year, how much of your time has transitioned from nonsales oriented to more sales oriented?

Well, it is basically just starting over the last month or two as now we have got the things in place. We can do remote capture. We can do -- before we were not set up so that a customer at the Hinsdale Bank could make a deposit in our bank in Elm Grove Village. Now we can do all of that.

We have made ourselves on the commercial side much more convenient. We didn't want to go out and sell it till we had it, because that would have been a disaster. But now we're comfortable we have got it, we can deliver, we have tested it, piloted it. We are ready to rock and roll.

Okay, great. Thank you very much.

John Rowan, Sidoti & Company.

Ed, just thinking about the premium finance receivables, as they are obviously going to become a larger portion of your loan portfolio. I know they don't carry a lot of credit risk, but have you changed the carriers that you're writing these loans against at all? I know you generally only use Tier 1 carriers. How does that translate into your proposed venture into Canada?

We have not changed our underwriting parameters or principles at all on any of our businesses including that. So we have not gone downgrade in terms of carriers at all. We continue to use the same performance criteria, the best ratings that we used before. It is just greater penetration into the markets. So from a quality standpoint, no change at all.

Okay. Just talking about the share purchase program, at these current prices, what do you see are potential appetite for repurchases in a given quarter?

Dave, we have approved --?

Well, we approved a 2 million share buyback. So we will just monitor the market, and look at it, and see how it is reacting. Obviously, it is capital. If we have other opportunities on the horizon, like Ed said, if there is a strategic acquisition and we are going to need the capital, we will look at that. We will look at the alternatives to the buyback.

But given that we bought -- or we issued shares in the upper 50s and the lower 50s, when you start to trade down close to this 1.5 times book, it seems pretty compelling given the franchise value and the growth value that we have out there.

We are not excited about buy -- stock buybacks have to be economically compelling. Because it sends a signal that you've got nothing else to do with your capital.

But we have generated internal capital. Growth is still good. We had more capacity for trust preferred. We put that line of trust -- we have a $50 million trust preferred line that we would use to buy the stock back. So it is compelling if you can buy your stock back at book and a half and, as Dave said, raise it at 52 and at 59. You should be buying your stock back and we will do that.

So anything [60] and down, as Dave and I argue about this all the time, but we will be buying it back.

Someone asked me at a conference in Boston last month, how do you allocate it? I think you're always going to look at your internal de novo growth first. That is clearly the best investment that we have. Acquisitions if they are there, and they are strategic, look at that second.

Then you would look at the buyback after that. But so we will weigh all those things together and then make our decisions as we go along.

Okay, great. Thanks.

Troy Ward, A.G. Edwards.

On the premium finance again, just a follow-up one more time. I know last couple of quarters you have kept an additional amount of premium finance on the balance sheet; and now you have kept it all. So at what point does the net growth on the balance sheet in that line item start to hit what you think the annualized run rate is? I think you said, Ed, it was like 8 to 10% organic growth. At what point does the net start hitting that in that line item on the model?

Well, I think for the foreseeable future, we have plenty of capacity to keep those on our balance sheet. We will continue to do that, given we don't anticipate our growth slowing down; so we will generate additional capacity.

You know, it will come to a point where as the other loan categories continue to build up, and we can get ourselves back to a desired 85 to 90% loan to deposit range, that is still the logical asset to sell. That is what we would look at.

So at what point? I would look for it when we could get back up to 90% loan to deposit; and then we would sell. We would go back to the program of selling premium finance loans if in fact the spreads made some sense.

Even at this point in time, this 1.5 point pretax spread -- and you can see that on page 2. The profitability on these sales had decreased, because our cost of funds had come up a little bit underneath it. You know, I think I would rather make the money.

Let me rephrase that. What I was trying to get at was --.

Let me see if I can answer that how I heard you as it. We normally would have sold at the end of the quarter, if you followed our past quarters, roughly $150 million of premium finance loans. So we have at the end of the third quarter $150 million more on our outstandings than normally would have been there.

It is not in the average balance. That average balance over the next quarter will be increased, because they are on our books for the whole quarter when they normally would not have. But at the end of the third quarter, there is $150 million more than we normally would have had that is going to benefit us in the future three quarters.

That's it. Okay, thank you. On the acquisition and kind of related to the buyback, is it fair to say, Ed, that maybe your attitude towards acquisitions today versus maybe the call even last quarter is a little bit different? You have kind of hit the trough earnings that maybe you were trying to do acquisition to avoid? Could you say potentially if you're maybe less interested in the acquisition market at this point?

I think it is -- we are not less interested. It just doesn't make a lot of sense right now from an economic standpoint. We are actually not seeing compelling deals that are compelling and franchise changing.

When we did a deal before, it was acquiring somebody who was in a market we wanted to get into. All of them have been de novo banks except one. They were in a market, they had the staff, they had the people, their growth had been stunted. We felt we could to a lot more with them and make money off them.

We're not seeing those types of acquisitions now. We're not seeing a deal where we can make money right out of the box with it, which is one of our parameters.

So you know, with our stock being low, it's an economic reality. If we did see a deal that made some sense, as we accumulate capital and cash over the next year, we will take a look at it. But it just doesn't seem feasible right now that we would be able to pull it off under the guides and parameters that we work under.

Okay, then a follow-up on wealth management. The text you made the comment that the growth is really being generated in the banking locations and not the traditional downtown sources. But it was relatively flat year-over-year. I apologize if I missed this; is the traditional downtown locations -- are they negative right now?

They have been down probably 16% over the last two years.

Okay.

And the in-bank locations are up over 50%.

Is that a function more of your franchise, or is that a function of what is going on in other markets as well?

The people downtown do a great job down there. Don't get me wrong, and we love them. But the fact is that the model itself, the traditional brokerage model, needs to be changed. That is why this last piece, this last strategic piece of building the platform is changing the culture down there. They need to get more into the fee-based revenue. They need to not be so transactional oriented.

Obviously, when you have got hundreds of thousands of customers out in the banks where we have virtually no overlap, that is a very fertile field. Our whole approach is going to be to distribute out through the banks. [Now] we can recruit into this, into the right culture, into the right economic model that allow us to do that.

The brokerage model is -- you have read it all over -- brokerage on a stand-alone transaction basis is dying a slow death. You need to transform. That is the last piece that has been put into place.

So we feel very confident that showing the numbers to potential recruits and building the wealth management staffs out in the banks to distribute through the banks is going to build this business long-term.

At the same time we will always have that downtown alternative. We can bring in guys to the Chicago downtown office that can build their business down there also, through more generalized distribution methods, but more on fee basis as opposed to transaction basis.

Okay, great. Dave, one follow-up on the expense line. Did you outline any additional expenses related to the refinancing of the trust preferred?

Yes, it is on the first page. The after-tax costs of that accelerated amortization was after-tax $188,000. It was $300,000 pretax.

Okay, I'm sorry. I didn't catch that. Thanks, guys.

That was in the margin. I think we have got time for two more questions.

Ron Peterson, Sterne, Agee.

Just a follow-up on the reconciliation between GAAP and your core run rate. Does your core number add back? On your press release you list the stock option expense. Does your core number add that back in?

It is not core. Don't get me in trouble here now. This is a reconciliation of items that are different year-to-year. We are not trying to reconcile the core, because that would get me in trouble with the SEC and all sorts of people.

What we thought, it would be easier for anybody analyzing the Company to take a look at what the differences year-to-year, the major differences that are happening.

Items that are affecting comparability between the periods.

Okay, but --.

So stock option expense certainly is going to continue going forward, because that is the law of the land now. But it wasn't there in '05. So it was a significant number that affected comparability. So that is what we were trying to do, was show items that impacted comparability between the periods.

Okay, but when you say like a $0.62 run rate for the current quarter, did that include the $1 million after-tax option expense?

No. As I answered earlier, Ron, it is really the gain on the sale -- or lack of gain on sale plus the extraordinary expenses related to the failed acquisition effort, and the accelerated trust preferred costs, and a little bit of the mortgage servicing rights. (multiple speakers) So that is what I look at, and that is just me internally kind of figuring out where we are at.

Okay, very good. Thanks very much.

Last question?

[Norm Fair], [Nova] Capital.

Can you just discuss, generally speaking, what you are seeing in asset quality trends?

Sure.

On the commercial and residential side, please, particularly commercial real estate and things like that.

We have -- our trends that remained relatively stable. We don't seen a lot more than we normally did in terms of deals that are turning sour. But again, we come from a very conservative underwriting standpoint.

Again, we haven't changed our underwriting. We don't do a lot of big land deals or development deals. We love apartment buildings, we love with great sources of rent that come in. A lot of our commercial real estate is related to businesses.

So we haven't seen a trend of nonperforming. Interestingly enough, what we have seen is a trend. Recently it has been kind of funny that some big land development deals have kind of shown up, and people have asked us to take a look at them. We have kind of backed; we said, no, we're really not interested in it.

But our guys kind of look at me cockeyed. I said -- hey guys, do you think they're coming to us because like we're really good-looking or we don't -- ? It's because other people are not doing them right now. So you are seeing a little bit of a squeeze out there now, market-wide, of people kind of backing off because all the issues that we have obviously read about.

So on the commercial side, you are actually seeing a little bit of rationality coming in, in new deals. Not a lot. But there are still deals out there that don't make a lot of sense to us that are getting done. So trend-wise, we might not be the right guys to ask. Because if we see anything cockeyed, we get them on the up or out, and move ahead.

On the residential and the home equity side, in terms of -- and we're coming out very low numbers. So it is really hard; if you see like five more deals that are going bad, I guess that is a trend. But we don't seen a lot of them. But we do see a little bit more stress than we are used to in that particular area.

I have got probably -- but we have never had a lot. But we probably have twice as many foreclosures going on as we usually have on that side of the business. You can call that a trend if you want. But we're probably the wrong guys to ask because we have had such good quality.

Thanks a lot.

Thank you. At this time, there are no further questions. Mr. Wehmer, are there any closing remarks?

No. Thank everybody for attending, and keep the faith, and remember we did make $6 billion more than Ford Motor Company. So call if you have any other questions. We would be happy to answer them. Dave and I will be around the rest of the day. So again, thank you very much.

Thank you. This concludes today's Wintrust Financial third-quarter earnings release conference call. You may now disconnect.