Wintrust Financial Corp (WTFC) 2011 Q3 法說會逐字稿

Welcome to Wintrust Financial Corporation 2011 third quarter earnings conference call. (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.

The Company's forward-looking assumptions are detailed in the third quarter earnings press release and in the Company's Form 10-K on file with the SEC. I will now turn the conference call over to Mr. Edward Wehmer.

Good afternoon, everybody. Welcome to our third quarter earnings call. With me as always is Dave Dykstra, our Chief Operating Officer and Dave Stoehr, our Chief Financial Officer and new to our group here, Lisa Reategui, who has joined us as Corporate Counsel.

I will give you some general comments on the quarter. Dave will then discuss details of other income and other expense. I will follow up with a summary and a bit of an outlook, and then as he said, we will have time for questions. Obviously lots to talk about.

The third quarter was extremely active for Wintrust and I feel very positive for Wintrust. We closed three acquisitions during the quarter. Great Lakes Asset Management Company was closed at the beginning of the quarter. First Chicago, an FDIC assisted transaction, was closed at the beginning of the quarter and Elgin State Bank was closed on the last day of the quarter. Coupled with strong organic growth achieved in the quarter these acquisitions plus that organic growth resulted in increases in all aspects of our financial statements and operations.

On the balance sheet standpoint the release we put in some extra data for you so that you could parse out the sources of the growth both on an average basis and on a quarter to quarter basis. In summary, assets were up $1.3 billion of which almost $400 million was organic. Loans were up $619 million, $200 million organic there, and deposits up $1.05 billion. So, obviously a very large growth quarter for us.

The margin during the period and we will get right to the margin and talk about the components since that seems to be a stickling point right now, went down 3 basis points, but net interest income was actually up $10 million over quarter two. Down 3 basis points, but up $10 million over quarter two.

It's all that growth we talked about resulted in us having almost $470 million of additional overnight liquidity from quarter end to quarter end. That basically cost us 10 basis points on the margin. That and it really was unanticipated, but we keep lowering deposit rates.

We keep culling through single deposit customers and pricing them out of the bank, but all that being said -- and we haven't even started marketing on the locations. Let me put that into perspective also. This growth just results from the Wintrust franchise growing, and I believe dissatisfaction with some of the bigger banks in the market area. Again, $470 million worth of Fed funds. This mixed aspect cost us about 10 basis points.

On the loan side, the commercial loans grew nicely. Both commercial and CRE loans, up almost $300 million quarter end to quarter end. The yields on those were only down about 3 basis points. Put that into perspective for you, so we went from about 499 to 496 on those yields.

So we had good core loan growth and we didn't give away pricing. Some people say to get that growth -- I have heard from people, "well you must be compromising on your credit standards and the like" and that isn't the case at all. I know those of you who have known us for a long time know that we just won't do that.

Maybe to put it in perspective, I will tell you in the last six months there has been $1 billion worth of deals that we actually turned down and another $500 million which we have approved, but lost the deals based on pricing and terms. We are not going to sacrifice that.

That being said our pipeline remains strong, down a little bit because of closings and because we are getting like Europe and everybody takes August off, but the gross pipeline is down to $1.3 billion and this is for the coming six months. And from a weighted average standpoint it is down about $900 million. But we expect that in the fourth quarter to bulk up again.

Our calls are well received. The name is being additionally received in the market, the Wintrust name. Our marketing is paying off there.

We believe that the prospects for continued loan growth is good. Most of this loan growth is market share. We still do not see any really organic demand in existing lines going forward.

First Insurance Funding. If you look at our aggregate premium finance portfolio that includes life and the commercial, was up $41 million. The yield on those was down from 5.4% in the second quarter to 5.26% in the third quarter. That business has been under pricing strain for some time.

Now that the premium finance companies are all owned by banks. Before they weren't and now they all are. Our competitors are. We see some irrational pricing going on there.

We are holding our own in that market. We believe that we've bottomed out here. It takes nine months for the commercial portfolio to reprice itself. Those are nine month old payout loans. Our guys think that we have bottomed out and it does seem to correlate with the rates we are charging right now.

But again, there has been some compression there. We think we bottomed out there. Time will tell, but we'll just have to wait and see. So that negatively impacted the margin from that perspective.

On a covered asset standpoint, covered assets due to acquisition of First Chicago are up $271 million or 65% versus June 30 numbers. The yield on those went from 8.06% down to 7.54%. I will take you through you a little explanation of how this all works because the new accounting is for these types of acquisitions is a little bit complicated.

When we buy the troubled assets we put them into [old 303] pools they are called. And when you do that they are considered cleansed by the market, and because they are considered cleansed the rate you apply to them has to be the risk free rate which we assume to be about 4.5%. So that 4.5% is what you will achieve until you [recast] cash flows again. And you recast every quarter. Recast the cash flow and if they come in better or worse you will move off of that rate.

The 8.06% that we recorded in the second quarter of the year related to the portfolio at that time obviously when we acquired those institutions they were also booked at a risk-free rate equivalent to what that 4.5%, but the cash flows have been much better resulting in an 8.06% rate.

The dilution caused by the 4.5% on this rate -- if history holds true we will be able to push that back up if we are able to achieve cash flows faster. But again, there is no assurance of that. But it would tell you that on the trend side we have been able to do it. Very confident in our staff.

We have beefed up to handle these FDIC transactions and I'm very confident in our ability to do that and to do better than we anticipated. As you know, we have always tried to be conservative and disciplined in all of our bids in what we do and hopefully that pays off in the long run when we are able to actually achieve better results.

Mortgages held for sale up $31 million versus $630 million. Quarter end volume on the mortgage side was about $642 million. Current projections show fourth quarter to be north of about $800 million and that doesn't include anything under the new HARP program.

We intend to be very active in that HARP program. We would hope that that would be positive for us going forward. And would hopefully maintain volumes beyond what we think will be the end of this current refi boom.

Based on what I laid out, you can see why earning asset yields dropped by 13 basis points from 454 to 441 in the quarter. Some of this is very remediable or hopefully will be remediable by results and by putting some of that liquidity, or hopefully all of that extra liquidity, to work going forward.

Again, that liquidity we consider the right-hand side of the balance sheet is our franchise value. And we have been restraining marketing and the like because we are trying to catch up on the asset side. But there is nothing I can do if people want to bank with us and they are good customers and they will build the value of this franchise, we're going to take them. It hurt us this quarter from a margin statistics standpoint, but from a net interest income standpoint we were up $10 million, so I feel good about that.

As I mentioned, deposit growth was very strong, $551 million of organic growth notwithstanding the acquisitions. What we really like about this growth is it is all, as I mentioned, good core franchise building relationships we are bringing in, and we also like the deposit mix that is resulting from this growth. Demand deposits year-over-year have grown over $600 million or 60%. They now make up 13% of our total deposits.

If you recall we were always stuck about 8% or 9% and I think that this is a tribute to the success of the commercial initiative that we have been working on for the past 18 months. The business we are bringing is in bringing in good demand deposits, good treasury fees and the like. Although the demand deposits don't seem to be worth a lot right now, rates will rise some day and these are good long-term relationships that we can keep and they are very, very valuable.

Savings now and money market accounts have grown $700 million over the year. They are up 15%. That is good core money.

And CDs now only represent 43% of our total deposits. If you back out the open-ended CDs that really act like money markets you are down into 30%.

Over the last two or three years have been able to get a much more diversified and inexpensive deposit base going forward. The cost of interest bearing deposits was down 12 basis points from 95 basis points to 83 basis points in the third quarter. We do expect further reductions from this quarter. At the end of the quarter in September we did lower all of our core rates by 3 to 5 basis points, maybe even a little bit more.

So core rates went down and then you can see in the press release itself that we have in the fourth quarter $1.15 billion of CDs that are a little over 1.1% that we will be pricing down into the 55 to 60 basis points range, so there will be a nice pickup there.

Also in this coming quarter when you look at the cost of total interest bearing liabilities that was down 14 basis points from 132 to 118 in quarter three. We expect this number to continue to climb, but for reasons mentioned above under the deposits, but also from the reduction of the cost of our trust preferred securities from 6% in quarter three down to close to 4% in the fourth quarter and beyond as we instituted new interest rate swaps. So a nice pickup there.

We expect, [Katy by the door] -- we expect deposit costs to continue to decrease and hopefully decrease materially again, at least in the fourth quarter. So we feel very good about that. And based upon what I said we still feel very good about short and long-term margin expansion going forward.

Credit quality was pretty good. We made good progress in this area this quarter. We continue to be dedicated to identifying and moving out troubled assets as quickly as possible. We always have run as at a fraction of our peer group as related to this, and it feels right now that airplane we have been trying to land is coming in on a nice approach.

Nonperforming loans were down $22 million in the quarter. OREO was up $13 million and $10 million of that came from the Elgin acquisition that moved over. So totally we are down $8 million in total, but because of our growth and this decline the total percentages dropped very nicely for us.

I always look at the non performers and back out the premium finance loans because when you do that the premium finance loans have been marked and we are just waiting. It is a 30 day phenomena where we are just waiting for the money to come in. Money has been confirmed to come back from insurance carriers and the like and this is on both the life and the property and casualty business. And you back those out, and we almost have one-to-one coverage right now from our reserve standpoint to nonperforming loans. A little over 1 to 1. So we feel pretty good about that.

NPA inflows not withstanding the premium finance stuff was down to $35 million this quarter from $46 million in quarter two and $54 million in quarter one. Again, we think a very good trend.

Provision, $28 million for charge offs of $27 million. Hopefully the trend will start affecting this relatively soon. We are trying to be very aggressive and continue to move deeper and deeper. We have always done this, but even deeper now into the portfolio to make sure that nothing is going to pop up. We feel good about our trends and our numbers as it relates to that.

From a capital standpoint, capital ratios remain strong estimated at 13.3% [risk face]; 7.4% TCE.

I look at this and think next September we put a securitization on the books in order to accommodate the AIG acquisition and we took a $600 million securitization, put it on our books a couple of years ago. That is going to run off in next August or -- August? Yes, next August. And that cost us about 2% right now and we feel that we should be able to absorb those on to our balance sheet, and actually that will be in August instead of an annualized basis will save us $10 million in the margin also. We thought it was cheap money when we got it, but it turned into be expensive money. I would still pay that price for doing that AIG all over again.

So we feel very good about our capital base and continued earnings plus that securitization run off. We feel good about our capital base. I will turn it over to Dave now to talk about other income and other expense.

Thank you, Ed. I will just briefly touch on the noninterest income and noninterest expense of the income statement.

noninterest income tax and our wealth management revenues increased to $12 million in the third quarter of 2011. This was up from $10.6 million in the second quarter of this year and up from $9 million in the third quarter of 2010.

On a year-over-year basis wealth management revenue totaled $32.8 million. This is up 22% or $6 million from the $26.8 million recorded in the first nine months of last year. The increase in the current quarter was primarily attributable to the July 1 acquisitions of Great Lakes Advisors. Although the increase was hindered somewhat by the overall decline in asset valuations due to the decline that was experienced in the overall equity market during the third quarter.

Mortgage banking revenue improved to $14.5 million on the third quarter from $12.8 million recorded in the second quarter of this year. But this was less than the $21 million recorded in the third quarter of 2010.

The Company originated and sold $642 million of mortgage in the third quarter compared $459 million of mortgage loans in the second quarter of this and the $1.1 billion that we originated in the year-ago quarter. Although mortgage banking revenues were up in the current quarter the amount was adversely impacted by a negative adjustment to our mortgage servicing rights. This adjustment is $2.6 million and wasdue primarily to the decline in mortgage rates. As rates go down the mortgage servicing rates tend to go down also.

Mortgage origination volumes are obviously impacted by and our sensitive to the changes in the interest rates. The third quarter origination volume saw a bit of a benefit from the rates when they declined in August of this year. As Ed discussed, barring any significant market events we would expect origination volumes to increase again in the fourth quarter as we process the application backlog that we've created and in the third quarter since rates dropped and that have continued into the fourth quarter.

Income from bargain purchase gains was substantially higher in the third quarter as we recognized $27.4 million of the bargain purchase gains on the First Chicago Bank and Trust, FDIC assisted transaction. In the prior year third quarter we recognized $6.6 million of bargain purchase gain on a smaller FDIC assisted transaction that was located on the north side of Chicago.

Miscellaneous noninterest income continues to be positively impacted by interest rate hedging transactions related to customer based interest rate swaps . The Company recognized $2.7 million in revenue in the third quarter of 2011 compared to $1.5 million in the second quarter of this year and $502,000 in the third quarter of last year.

Additionally our other noninterest income was negatively impacted by approximately $1.4 million in evaluation adjustments on limited partnership investments that we own at the holding company level. These limited partnership investments are invested primarily in bank stocks. The valuation impact on these investments has generally been fairly small in prior quarters, but in the third quarter due to the equity markets, specifically around bank stocks, we saw a slightly larger loss due to the declines in bank stock valuations and a couple of the funds that we hold an interest in had abnormally high negative adjustments this quarter. We believe those evaluation adjustments will recover in the future, and if you want to look at detail of those adjustments quarter by quarter, page 19 of our earnings release will detail out the last five quarters of activity in that line item.

If you look at the other noninterest income categories there are really no other significant changes that deserve special mention on this call. If you go to other noninterest expenses, salary and employee benefits increased by $8.8 million inthe third quarter compared to the second quarter of this year. The increase is due primarily tothe employees added as a result of the acquisitions in the third quarter and the slightly larger staffing that we have placed throughout the Company to support the growth. As well as higher levels for commissions and variable bonus payments, and the commissions were primarily related to the increased mortgage originations that we had during the quarter.

A portion of these salary levels are elevated until we fully integrate recent acquisitions and work through the conversions. As we fully get levered into those we expect to be able to manage those salary levels down a bit.

Occupancy expenses increased in the third quarter by about $740,000 compared to the second quarter of 2011. Costs associated with the expansion of our physical locations resulted from an increase in our banking locations going from 88 at the end of the second quarter to 99 at the end of the third quarter and that really accounted for most of the increase.

Our data processing costs increased by $689,000 from the second quarter. The increase in this expense category was impacted negatively by $260,000 worth of conversion related expenses related to our recent acquisitions, and the increased costs of processing additional loan and deposit accounts in the recent acquisition of Great Lakes Advisors.

Moving to the professional fee line account, these expenses increased by about $552,000 in the second quarter to $5.1 million. The increase in this expense category is due primarily to legal costs associated with the three acquisitions that were closed during the third quarter.

Legal and professional fees related to acquisition activity is expensed now and is not deemed to be part a cost of an acquisition. We do not adjust our acquisition related legal fees out of our adjusted earnings calculation that we show on page 19 of the press release, but these costs obviously are not recurring unless we engage in additional acquisition activity. This category of expenses remains higher than normal as we continue to also have legal and collection costs related to resolving nonperforming loans.

OREO expenses decreased slightly to $5.1 million in the third quarter from $6.6 million in the prior quarter. This category of expenses has fluctuated between $4.7 million and $7.4 million during the last five quarters and this quarter's results were within that range, but obviously towards the lower end . We continue to push the OREO out of the system, but sometimes we clear those properties at prices that are slightly less than appraised valuations to move them out, and we have recorded some additional downward valuation adjustments on properties still owned as certain commercial real estate valuations have continued to decline in our market area. If you look at page 37 of our earnings release, you will be provided with additional details on the activity in and the composition of the OREO portfolio.

Other noninterest expenses, the other other category, the miscellaneous noninterest expenses declined somewhat from the prior quarter. The primary reason for the decrease compared to the last quarter was the result of slightly lower loan origination and collection expenses incurred in the second quarter. This category of expenses fluctuates obviously a little bit from quarter to quarter, but if you average out the last five quarters worth of expenses the $12.2 million that we recorded in that category is right in line with the average for the last five quarters. There is really no other noteworthy items to talk about in those categories, so I will throw it back over to Ed.

Thank you, Dave. In summary, the third quarter was an overall positive quarter. We are exhibiting increasing positive trends for Wintrust. Adjusted pretax earnings, and I know that there are about 14 different ways of calculating this and that is why we put it, as Dave said, on page 19 of our press release to use the base numbers that we work off of.

We are up 13%. To annualize it, $244 million. We feel good about our ability to keep increasing that just based upon our ability to continue to decrease cost of funds, to put liquidity to work through our strong loan pipeline, as I said was $1.3 billion or 900 weighted, but probability of close over the next six months.

Also on the loan side we have hired some folks and just put a small -- almost as a niche program, but also to make it more as a lead product in our banks, an SBA operation. We hired four people with a great deal of experience in this market and we intend to -- that coupled with the new small business product that we have created to actually start working very hard on the small business side of the equation. And none of those possibilities have been included in our pipelines to date, but their pipelines are growing also as they are just getting two months off the ground right now. And we expect that to help start trying to sop up some of that liquidity.

So there is opportunities for margin expansion. We anticipate those. Some are built in, some we are going to have to work hard to get, but we are excited about those opportunities and what that means to [coranies] going forward.

The assimilation of Elgin and First Chicago. These take a couple of quarters to get assimilated, as Dave alluded to. We right now have two branches that have acquired branches that are nine irons away from them. We are going to have to consolidate those branches, but that is subject to getting conversion dates and the like, and those are set for the first quarter of next year. It does take time to assimilate these transactions to bring them in and to right size them, and that will be occurring over the next would quarters and hopefully helping expenses from that stand point.

Credit trends remain very good and we continue to be committed to pushing the stuff off the balance sheet as quickly as we possibly can. Identifying new loans that are a problem and push them off the balance sheet. We still want to stay ahead of that game. Pardon me.

And again, remember, we have held off on marketing our new locations. Of all of locations we picked up this year there may be two that we are actively marketing in right now because we don't need any more deposits. So that really is potential growth that we will be able to achieve once the asset side catches up with the right-hand side of the balance sheet.

Expansion opportunities remain very plentiful. Although the FDIC related activity has slowed down markedly throughout the course of this year, and now we still are getting one to two inbound calls per weak from banks that would be strategic to us that we may have interest in. Unfortunately, many of them we go in and we find that the marks you would have to take really mean that there is nothing there.

But the Elgin State Bank is an indication of our -- sometimes you can find great organizations that match up with us culturally and strategically from a geographic standpoint and should be accretive to us going forward. We are excited about Elgin transaction and we believe that will be accretive right out of the box to us, and we look forward to working in that market.

But, there are lots of opportunities on the expansion side. We explore it them. We will maintain our discipline as it relates to this.

And we look at the future very brightly that we have positioned ourselves well. We have done everything that we really said we are going to do.

We have been -- from the margin standpoint I know there is some concern and the goal that we talked about before -- remember, some people say it is a promise and I had always said it is a goal. We would really like to get that core pretax earnings, as we define it, up to $300 million. A couple quarters I said it might take an extra quarter or so to get there, but we didn't anticipate all this extra liquidity.

We certainly didn't anticipate the twist coming on. I know that there is a 50% probability -- there are even some economists saying of QE3 coming. All these external elements affect our plan. But nothing has changed our commitment to get there. It doesn't change us. Modifying our strategy to get there.

It is a goal. It is not a commitment. It is a goal. We will work very hard to do that and get beyond that.

We are major shareholders in this organization. Our net worths are tied up. We understand how it is played. But we are going to play by the [grand don and coddle] book.

We work with GAAP. GAAP earnings are GAAP earnings. I was joking with an analyst earlier today, I said well, there is GAAP and then there is AAAP, analyst accepted accounting principles. There is 20 different formats of AAAP and what people count and what they don't count.

And in talking about that, I said it is kind of interesting since 2009 when remember we pulled back in 2008, in 2006 and came out in the fourth quarter of 2008. We have grown 60%. We have generated income of $283 million on a pretax basis of bargain purchase gains.

Gains on other dislocated assets that haven't been counted by The Street, to the extent to wondering if they want them to give us back. We have done what we said we were going to do. We have been able to increase shareholder value.

You know that has always been at the basis of what you are trying to accomplish. We are going to run this out of the Grand Don and Coddle book by basic finance, smart finance, plan the profitable growth as best we can. As we saw this quarter some of that growth we couldn't stop it.

This fourth quarter will mark the 20th anniversary of us opening Lake Forest Bank and Trust, our first bank. Our footings on that day were zero. I'm very proud of what this organization has accomplished. I am very excited about what the future holds for us because of our positioning in the market. And even though we are larger than we were back then or ever we thought we'd be, we are still the same old bank, just bigger. We still are customer oriented, shareholder oriented, community oriented, and we are not going to change that. We are dedicated to that and our modus operandi going forward will continue to be dedicated to that. And we thank you for your support going forward, and look forward to your questions coming up.

Thank you. (Operator Instructions). Our first question comes from John Arfstrom with RBC Capital Markets.

Good afternoon, everyone.

Hello, John.

I have a question about the margin.

That's a surprise.

The First Chicago loan I understand what you are saying about the recap. Is there anything particular about those loans that leads you to believe they are going to perform any differently than your other covered assets once you have a quarter of experience?

No, the answer to that would be no. We are consistent in our application of marks on these portfolios, and we go in and we have always been relatively conservative. This portfolio, it was a bit of an interesting portfolio in the fact that there was a bad bank and a good bank in this bank, basically.

There was some really good middle market type business that we have retained and that is fine, but the bad portfolio it has its issues. No different than those that -- we on average we accounted between Wheatland and Ravenswood and some of the others.

So I don't believe that there should be. We are very conservative because who knows what the market is going to be when we make these bids and when we go forward. So I can't imagine that it should be any different, but timing is what it is.

We have staffed up, our systems are in place, so it was not a burden on us to pick up trouble at 60% increase in troubled assets. But time will tell. But we would envision that we can make that work.

Okay. And then the $271 million face value that you would use that would give us an adjusted face value. Is that the number the recast happens on, or is there a different loan amount?

Are you saying that the $271 million that is on our books is what the actual unpaid balance on those loans is, is that the question?

Yes.

So what discount we took on those?

Yes.

I don't have that number off hand. Give us a second and Dave will look it up.

Okay. Then just a couple other margin questions. In your prepared comments or in your release you talked about $1 million free from your trust preferred swap, and I just want to make sure that number is a separate number from what you expect to gain from the repricing of the CDs.

Oh, yes, absolutely. There are three elements on you will see in the fourth quarter. One immediately starting on day one of the fourth quarter is the 2% drop on $250 million in trust preferred securities. So that is very helpful.

We believe that our core deposits, money market now savings that we did when the Fed decided to play chubby checker and twist again, we dropped core rates by between 5 and 10 basis points which doesn't seem a lot, but it is material when you put it on $7 billion-plus worth of assets or liabilities. And then CDs, as I think it is 1.12% should be coming down into the 65 basis points range. Those three aspects should be very helpful to the cost of paying liabilities going forward.

John, the $271 million was the increase in the loans including covered loans. I mean the increase related to covered loans.

So some of that was an addition from the First Chicago acquisition, but we also had some reductions from loans in the prior acquisitions. When we bought First Chicago on the opening day we added about $330 million worth of par value those loans. That was at about a $300 million discount. So they were a little over $600 million face value. So there is about a 50% write down on those loans.

The faster those go down now, John, the higher the yield will be. That is basically how that works.

As Dave said, we had a nice reduction in previous covered assets from previous deals during the quarter, and then $331 million were added, but there is $300 million worth of discount. Some of it as accretable and some of it is collectible. In the extent that you collect more than you anticipate on those cash flows that is where the increase in yields come in.

So the timing, the extent -- you can get them done faster than you anticipated at lower losses obviously that number is going to come in through the yield. It is kind of interesting accounting because if these pools of which each bank probably has eight or nine pools that we acquired, some of them perform extremely well. When they do that collectability discount rolls into accretable discount and that is taking over the remaining life. So it comes in over time and increases the yield on that balance.

But if you have one with an impairment in it you take a reserve right away on any impaired pool that you may have to the extent that impairment may go away. It never goes back. So it is an interesting phenomena that it goes back and gets accreted over time, but you don't undo the provision. So it is kind of interesting.

We show on page -- John, this is Dave again. We show on page 39 the roll forward of the accretable and what came in from acquisitions during the quarter, and the rest of it would be nonaccretable or credit related at this point.

Okay. So that is a big number for that pool.

Yes.

Okay. And just one question, bigger picture on credit. You always say it is not over on credit. I heard you say that probably 20 times over the last few years. Other than the OREO brought over, credit looks a lot better. Can you give us your updated thoughts. Is it over yet?

I don't feel like I want to be like George Bush on the aircraft carrier. I don't know what the future is going to bring. Who knows where this economy is going. Somebody in France hiccups and something happens here. And that is why we continue to dig deeper and deeper and make sure that we are very, very, very comfortable.

If you just look at the trends and inflows, you look at the trends decreasing almost $10 million a quarter, you look at our ability to get things out. Yes, it is getting better. I think our portfolio itself we have gotten rid of a lot of the big baddies. Most all related to real estate and construction.

So you know you hate to call it over, butit seems to be getting better. But in any event, if it does get worse our relative position is pretty darn good because we are starting with a very low number to begin with. The real thing for us to do now in terms of cleaning up is that $80 million, $90 million worth of OREO.

I will tell you a funny story. We had a piece of property appraised. It was a farm that was going to be a development up in Wisconsin. And the appraiser came in and said it is worth nothing. We said how can it be worth nothing? He said well, if it is worth $1 million, you'd have to do $1 million worth of improvement, so it is worth $0. I said what is it worth as farmland. He said $2 million. I said well, maybe we will just leave it as farmland.

Cause we have got to find a way to move this $80 million off the balance sheet right now of this stuff and that is really a primary objective of me personally. We are actively selling stuff back to farmers. We are actively looking at the ability to knock out pavement and fire hydrants and turn it back into farms because they have more value as farms than anything else.

We would like to continue to push those things out. I think we can stay ahead of the inflows. Our current projections and there is no assurances, these are projection, it is not a commitment. I don't want anybody to question our credibility on this stuff, but based on what we know right now, our current projections show there could be a nice decrease again. The plane is coming down in a measured basis in terms of just overall nonperformers.

I'm not ready to declare it over because I don't know what the future is going to bring but I like where we stand right now relative to everybody else, and our ability if it does pop up a little bit it, its going to pop up for everybody, and our ability to take care of issues because we do have the expertise and capacity to do it. We are going to keep trying to land this plane, that is all I can tell you.

Okay. Thank you.

Our next question comes from the line of Chris McGratty with Keefe, Bruyette & Wood.

Good afternoon, guys. Not to belabor the margin, but I will. On the asset side you talked about the liability dynamics. If we take a step back, are you suggesting margins will be up next quarter?

I'm suggesting that net interest income will be up, but with my luck I will have another inflow of liquidity I can't stop and it will drive it down again. We didn't anticipate overnight liquidity being up by $400 million-plus this quarter, and this wasn't by design.

When you think about the margin you have got to look at the percent and then you have to look at net interest income. I tell you net interest income is going to be up. I hope that liquidity doesn't keep pouring in the door. We keep lowering rates, but for whatever reason it keeps coming.

I am confident in our ability to pull through the pipeline. I think we have shown that over the last three quarters or four quarters that we have been able to grow our commercial loans outstanding. We want to. It is an objective of ours to be asset driven again, to have more assets than we need, so we can go out and then start dominating the markets that we move into. The ones we haven't even started to do yet. If we hadn't had that liquidity like I said, our margin would be up 7 basis points and it wouldn't be an issue right now. All in all I look at the net interest income up $10 million. I feel good about that. Not withstanding additional liquidity coming onboard I believe that, yes, it will be increased. Everything points to that.

Okay. Quick question on the expense run rate. Now that you have all of the acquisitions more or less in the numbers. Should we be using the 106 and change number as a starting off point, or there are some expense synergies you guys are expecting over the next several quarters?

Well, that said, there is some of these banks that we are still running on their old system and we have got staff on for that conversion. Once we get them moved over to ours we should save some data processing expense. We have a couple of locations that we are going to merge into existing facilities and so we will be able to save some occupancy expense there. We think there is some synergies that we can drive out of this yet.

And another point just because when you think about it what is important for us for raising these core earnings as we all define them or call them. Our cost of funds is going to get down about as low as it can once all those CDs -- I can't say core earnings any more, I have to say pretax adjusted earnings. But we know what the CDs are going to reprice, what are they going to reprice at. We know there is a little bit left in the core deposits that we can come down a bit. We kind of know where that is going to end up.

We have got our trust preferreds where they are going to be for a little while. We have swaps that are holding up. A couple more that eventually in 2013 we can bring down. The securitization will run off next August which should get rid of $600 million or 2% cost of funds there.

So we kind of know as good as we can do in terms of bringing our costs funds down and that is just going to happen. The pull through and the continued deployment of assets into loans is we need to continue to refill the pipeline and get good pull through. I'm confident in our ability to o do that.

Our small business initiative and SBA initiative should hopefully be additive to that. We continue to look for additional niche programs to keep diversified and add other earning assets. That is a priority.

What you are left with obviously is other income and other expense. During this budgeting season which is starting as we speak, significant emphasis is going to be placed on revenue generation on the fee side. We still undercut -- not undercut, but we are under on a lot of fees that we think that there is some room in.

And also on the expense side. When you go through an expansion like this there will be, as Dave said, in these acquisition there's is going be cost savings that are going to come as they get fully assimilated. But also you do grow and you plan for growth and we have grown 60% in two years. And we are going back and taking a look at every expense in the organization. Because that is what is left as you start cutting expenses and making sure we are as efficient as we can be. That is something that is going to be going on in the fourth quarter.

We are going to make sure we have the best people doing the job of two people and we are going to make sure that there is no superfluous expenses out there and we will start cutting those, too. We did gear up for 60%growth and I think there is more efficiencies we can pull out there. We are going to work onaspects of this, but those are really the four elements that are going to generate earnings for us on a core basis going forward.

We will continue to look for dislocated banks and assets. And if the FDIC is not going to be posting banks we will be looking. We have no shortage of opportunities there, but we are going to be disciplined in how we look at them because quite frankly even when you buy a bank that is not FDIC assisted you still have the old 303 pools, you have the accretion and the like and that is one of the better places that you can get earning assets right now. We got to sop up this liquidity and get the ball moving. We are focused on all of these things and feel pretty good about -- we got them under control.

Okay. One quick technical follow-up. The share count. What should we be using for the share count? I know there was probably some noise in the quarter given the [DEUs].

If you look at the outstanding share number. The actual just outstanding. Not the common stock equivalent. That number went up a little bit because we issued shares for the Great Lakes Advisor acquisition and some for part of the consideration for the Elgin so right at end of the quarter some of those came on. Our end of quarter share count was 35,000,924.

The common share number or common share equivalent number bounced around. You have to do the calculation as with and without as far as preferred stock goes. And in the second quarter, in the first quarter of this year, it was more dilutive to us to have the shares in there versus having the dividend pulled out. So you have to look at preferred stock dividend and deduct it and do it without the shares, or you have to leave the preferred stock dividend out and put the shares in. And in the third quarter it was less diluted to put the shares in. There is a 1,000,944 shares that were in the common share equivalents this quarter that weren't there in the past. Assuming that our profitability stays up at decent levels that number will be up by $2 million over what we normally ran out.

A couple million shares.

A couple million shares, I'm sorry.

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

Hi, good afternoon.

Hello, Brad.

Dave, just a quick question on the overall size of the balance sheet. It looks like maybe at end of the quarter you had some securities that maybe you traded. Notice a big trade day receivable. Just curious if you expect -- would the size of the investment portfolio go larger as you go into the fourth quarter? Just trying to get a sense of what the best number around average earning assets would be to use within a range in the fourth quarter based on all the moving parts you had during the third quarter.

Put it in a nut shell. As we had securities called away we reinvested those, but we obviously had to reinvest more to maintain the same spread of margin on those. Yes, it should go up. Securities invested will go up. $200 million.

Yes. You have got that $637 million we had in trade day securities receivable. In reality those are securities that are still on the books, so you should add them in to the available for sale securities at the end of the quarter. That's how I look at it. Because they were still earning you interest at that point in time. Then they will settle in the third quarter and we reinvest it.

Okay. Did I hear you correctly next year when the securitization rolls off you plan to just absorb that funding just maybe with existing cash?

Yeah. Exactly. If we are sitting on as much liquidity as we are right now that would be fine. Hopefully we'll have put that liquidity to work and we can time this with marketing in all of these new locations and we will just bring it on.

It becomes some what superfluous funding. Well, it is right now. We don't need it and I think at that period of time it will just go away and we will absorb those loans on our balance sheet.

Great, thank you.

That is a savings of $10 million right there, so we are looking forward to that.

Our next question comes from Terry McEvoy with Oppenheimer.

Hi. Good afternoon.

Hi, Terry.

I get it the margin is down, but net interest income is up, and there is some levers in place to reduce funding costs and hopefully have a positive impact on the margin. I guess my one concern is, the one thing that could change that is additional acquisitions. The two this quarter simply brought in more deposits than assets, and my concern would be three months from today we are having the same discussion as excess liquidity to keep the margin where it was in the second quarter and third quarter.

I guess my direct question is are you looking at acquisitions maybe a little differently now given all of this excess funding to hopefully avoid keeping the margin where it is, and helping it improve? Just given how sensitive, at least the market place is to the net interest margin today.

That is actually a very good question, Terry. When we are moving into a market area and some of these acquisitions we want to be strategic. And we always think of the right-hand side of the balance sheet as the franchise value of the organization. And we got too much franchise value right now. Nobody recognized it, in our mind, you know what I mean.

Does it change our philosophy? Yes, and no. In that before we would only look at deals that had good right-hand sides of the balance sheet and good prospects for growth. Good locations, good prospects for growth. We are looking a little bit more at organizations that may not have a good right-hand side of the balance sheet and do have a loan portfolio that when melted down there is still something there.

So in other words, we could push out the deposits, bring on acquired assets, marked properly, yielding properly to absorb some of that liquidity. We never really looked at those before. We really wanted a solid right-hand side. It has changed our thinking in that we've opened it up for left-hand side deals that are still in strategic locations that we can build when necessary. We want to sop up this liquidity as much as everybody. But we still want to make money, too. What it boils down to is making money also.

I appreciate it. That's the only thing on my list. Thanks.

Thank you.

Our next question comes from Emlen Harmon with Jefferies.

Good afternoon, guys.

Emlen.

Heading back to the margin for just a minute. Could you talk outside of the covered portfolio which obviously has an impact on what we are seeing in the loan yields quarter over quarter. Could you talk about just the trends you are seeing in the core loan portfolio by category, and what is happening to pricing there? And if you are continuing to see any yield pressure in the non covered part of the loan book?

We talked about this earlier, but the commercial real estate portfolio is hanging in there. It was down 3 basis points but it could be up 3 basis points this quarter. It is hanging in there.

We are hanging on to our pricing. We are not buying deals. We are not giving up terms. Even with that good growth it's hung in there. I feel good about that pricing.

The premium finance pricing was down, but we feel that it did hit bottom this quarter. Who the heck knows. I mean there are a lot of people trying to sop up liquidity right now. And our biggest competitors are BB&T and Wells Fargo, and that is who we compete with and they are putting pressure on those yields.

But our guys seem to think that they've bottomed out a bit. That doesn't mean somebody won't do something stupid to make a year end budget. I'm just going back to my notes.

If you look at our home equity portfolio that is fairly stable because it is generally tried to prime, and prime hasn't been changing. Those are the three biggest chunks of our portfolio out there.

The premium finance went from 540 to 526. Hopefully it's going to stay around there. We hope it is stabilized, but we can't do much about the premium finance side. We can about our own generated loans, and we are not trying to drop price to get deals.

Okay. Got you. Thanks for answering that. Sorry, trying to do a couple of things here so I must have missed that before.

No sweat.

Our next question comes from the line of Peyton Green with Sterne, Agee.

A couple of questions. One, I was just curious how much of your liquidity management assets are unpledged or unrestricted as it would relate to your deposits or other liabilities?

That is a good one. The overnight money at $1.2 billion is obviously not pledged. I don't actually have that other number in front of me. So I can't answer that right now.

Okay.

I don't have it either. We actually have that number, Peyton. We just don't have it in front of us right now. I think we actually could probably disclose that in the Q if that is helpful to you.

Okay. No. Just curious. Out of the overnight, is it $1.2 billion overnight or is that Fed funds and there is some interest bearing deposit?

Overnight. We got some short-term CDs like two or three month CDs in there, too, with other banks that we purchased, but it is mostly overnight money. All liquid. Like real liquid money.

If you look at the balance sheet, Peyton, you are going to get $1.1 billion in interest bearing deposits with other banks and $147 million just in cash and then $13 million in Fed funds. But the majority of that interest bearing deposits with other banks is with the Federal Reserve Bank. That is overnight money at the Fed.

They pay more than Fed funds. They have to support QE1 and QE2.

Right. Okay. And then in terms of I guess the banks that I cover. You are one of few that has actually had an increase in provision expense whether it is an absolute basis or even a relative basis. I was wondering how we should think about provision expense going forward on the "newly bad loans" and marginal loan growth. Because you are one of the few that actually has loan growth. If you could give us help on that, that would be great.

It is sort of an interesting question to answer because it takes on different angles that you can look at it. Obviously as the loan growth grows, we are providing for that as you indicated, and that is really going to depend on where it comes from. How we provision is we set aside provision based upon what loan is originated and what collateral it has and what risk rating it has and the like. And so commercial real estate loan is going to require more provision than a stock secured loan and the like. And then it's really going to depend on end close of NPLs and the like. But, --

I'm going to guess what about in the third quarter? Any idea as to how much of the provision expenses related to new loan growth versus new bad loan formation, so to speak?

It's not something we've disclosed, Peyton. I don't want to get myself into FD-hell here. I don't have that number. I don't have that number in front of me.

Peyton, we will address that in the Q.

We will make sure we address it in the Q just so we can get it out to everybody.

We got our lawyer sitting here now, Peyton, we got to be very careful.

Just something that is --

You know the school teacher with the little wand that whacks you on the knuckles. She is hovering right over us.

That is a very good question. And something that we should disclose. Because we know the answer, but we got to put it in the right form.

The calculation is about a foot thick in the binder, but we could probably break that out. I think it is a Good disclosure to show how much was related to growth. Because as you said, most of the banks in our marketplace aren't showing the growth, so it is a differentiating factor as far as the expense amount.

And then a related question would be, if you hit your pretax adjusted number of $300 million you're basically trading hands for about 4.3 times your pretax adjusted number. Why not buy Wintrust stock instead of going through the integration risk with everything else under the sun that is out there?

That is a good question, too, Peyton. This is a period of time, and you are going to have that period of time I think for another three or four years, where the opportunity to grow your franchise at next to nothing.

You're not going to see this again, at least in my career, where the government either pays you to take these over. Where your returns are absolutely infinite given bargain purchase and the like. Infinite is the wrong word, but very high. Even too the fact of an Elgin state bank where we were able to acquire a very nice sized bank with a very nice right-hand side of the balance sheet and something we could grow for very little amount of money.

That is the market right now and everybody is happy with that transaction. We are going to see more and more of those.

Now I would rather be able to take advantage of this because I think the long-term returns from doing this are going to be very, very good. And applying capital against those, yes, you have to apply capital against them, but a limited amount of goodwill, if any. And a limited amount of purchase price, marking these things to market.

Your getting good yielding assets out of these because many -- whatever problems they have are going into the pools and then you've got accretion coming in on them. It's one of the few places you can get really good earning assets is in these deals.

It's a actually a very good place for long-term investor shareholder value to bring it out. We would like to see our stock higher? Would it make it make more sense to have -- yes, we would love to have our stock higher.

I feel like we are back in the tech boom where we put earnings out and we show good growth. We show good growth in earnings. People say we are not going to count those earnings. We really don't care.

Anybody gives a hoot here it is how you did. We've raised book value. We've done all the right things going forward. This is the time I think where you can really plant the seeds inexpensively and not have to look for growth down the road where you got to pay two times the book for it and bring a bunch of goodwill and your returns are going to be muted because all you can do is put common equity against them. They are never going to work.

If you are going to do it now is the time to do it. Those numbers are extraordinary. When you look at them over a period of time on a relative basis.

It's a good thought. We think about that. Should we be buying our stock back as oppose to expanding? For what we want to accomplish, and what we think our long-term goals are, and long-term returns to the shareholders, we believe that these deals priced where they are have much better returns.

Last question, I promise. What do you think is a good prospective on long-term ROA and ROE with the current interest rate environment sticking around for another three years?

You tell me what the long-term government position on overcapitalization is and I can answer that question on return on equity.

Well what about the asset piece? What if we just look at per unit profitability rather than the --

Well, you tell me what the [EO]. Right now we are playing in the bottom of the red zone in terms of the ability for good margin expansion. What is long-term? I think we can get up to 1%. In this rate environment I think that can happen.

I will think if you run the $300 million pretax and take out this -- take our asset base, get rid of the $600 million securitization and put those earnings in. And you run at about a $15 billion, $15.5 billion bank you make $300 million pretax. If you take a $40 million provision which historically would be about right for a bank our size with the charge offs we have had historically over a long period of time you are a little over 1%. If you run those numbers that way. So I think that works.

When rates rise we want to be in a position -- we believe and we said if a four point rise in rates over a two year period, and that is assuming a total shift [the deal curve] up 400 basis points gradually. Our margin goes to 4.5%. Then you can get back to the good old days of 1.5% to 2% on assets. Unless we do something drastic, or find something that has got great fee income returns, it is very hard right now in this environment to get much higher than that without drastically changing your business.

Great. Thank you very much.

And just our crack staff let us know that we have $635 million of unpledged securities if you look at the available for sale portfolio as of September 30, 2011.

Our next question from Stephen Geyen with Stifel Nicolaus.

Hey. Good afternoon. Ed, you gave an update on the loan pipeline. Could you provide a high level evaluation of the bank's success, maybe pulling through those loans to the balance sheet?

Yes, actually the pull through has been terrific. If you look at what we thought over the last six months. I don't have the one from the last quarter, darn it. I didn't bring that in with me. My recollection was that showed about $1 billion over the next six months and it takes a I while for these things to fill out, the loans to fill out.

But the pull through has been on initial draws about 60% of that number. So they been coming in. If you figure if we booked $300 million in new loans that is really $500 million worth of commitments coming in at about 60%.

It has been coming in as we anticipated off of this. We have this fandangled pretty extensive relationship management system that our bankers are absolutely hawks on. And the close probabilities, the timing probabilities are reviewed very closely by people because they are held accountable to this.

You would say that right now in this pipeline it shows that over the next three months, and this is as of September 30, anticipated on a weighted average basis $678 million closing. Take 60% of that as (inaudible -- scraping noise) and that might help. If that were to happen that would happen. But it has been coming in right about where we anticipated it to be coming in.

Okay. And then last question. Just curious about the outlook for the recently acquired deposits, the FDIC deposits, Elgin. Are acquired deposits more oriented toward time deposits than legacy [pullin]? Is there likely to be a fair amount of movement from timed deposits to the [lowered] cost deposits? Does this mean the rates stay low?

On Elgin or First Chicago?

Across the board. Have you seen that movement?

Actually depends on the bank. Elgin was a pretty well mixed portfolio on the right-hand side. I mean they had great DDA balances. Good savings down. So probably more towards core accounts than to CDs.

When you go to First Chicago or Bank of Commerce there were a lot of CDs we ran out already. Either brokered or that we just sent their money back or repriced, and people took the money out. We are not maintaining any overly priced CD or any single CD if we can help it. Any single account CD.

But really it depends on the bank. As I said, Bank of Commerce was predominately a CD bank. And we did that bank and I think the second quarter that was more of an asset purchase for us because we let a lot of the funding run off.

So it all depends. We anticipate to continue to better our mix even with the acquisitions because we are trying to push CDs that aren't relationship driven and have other accounts out of the banks right away.

Okay. Thank you.

Our next question comes from the line of Joe Stieven with Stieven Capital.

Hey, Ed. Hey, Dave.

Hey, Joe, who is going to win the World Series?

Let's hope the Cards win tonight. I got most of my questions have been answered, but some of your new disclosures are actually very good, that is number one. Number two, your noninterest bearing DDAs were up $240 million this quarter. Obviously you had the acquisitions, but I got to assume that the acquisitions didn't really drive all of that. Your noninterest bearing growth was a lot higher than we expected. So could you just comment on that?

A lot of it is continued success in filling out of the commercial initiative. People open accounts. It takes them a little while to move over and to fund them.

We did make up a nice demand deposit base with Elgin. I think they were -- I forget the percentage, but it was 20% or better in terms of what the overall deposit base was. But most of this it is just organic growth as we continue to push the commercial lending and we would expect -- we are hoping that will continue, Joe. We would like to get that number up over the next couple of years up to 17% or 18% of our overall deposit base and we'll see if it happens.

But our reception from -- we are going through this branding program right now, and like I've told you in the past, a year and a half ago people didn't know what a Wintrust was. Now you can go to anybody in the Chicago or even Milwaukee area and say you are from Wintrust and they know exactly who you are.

Great name recognition when we walk in the door. Hopefully good reputation when we walk in the door, at least that is what we hear from people. Our service oriented approach is ringing true with these folks, and I would anticipate our ability to continue to grow that business. And although as I said in the text of our remarks, not as valuable -- they are very valuable even though they don't show it now. Going forward they are going to be extremely valuable.

Not saying the overall relationships we are picking up. It is a priority for us to continue to build our DDA balances, and in turn that builds your loan portfolio, too.

Okay. Listen, thanks for the new disclosures. They are really good. Thank you.

Thanks, Joe.

At this time I would like to turn it --

I think that is it. Thank you all very much. You know you can call us if you have subsequent questions. Dave, or myself or Dave Stoehr. We are at your disposal. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.