Wintrust Financial Corp (WTFC) 2012 Q1 法說會逐字稿

Welcome to Wintrust Financial Corporation's 2012 first quarter earnings conference call. Following a review of the results by Edward Wehmer, Chief Executive Officer and President, and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session. The Company's forward-looking assumptions are detailed in the first quarter's earnings press release and in the Company's Form 10-K on file with the SEC.

I will now turn the conference over to Mr. Edward Wehmer, you may begin.

Thank you. Good afternoon, everybody, and welcome to our first quarter earnings call. This is the first call we're making from our new intergalactic headquarters, so, if there's -- if you hear some background noise, we're still under construction here, but we thought it would be fun to make the call from Rosemont as opposed to Lake Forest. With me, as usual, are Dave Dykstra, our Chief Operating Officer; Dave Stoehr, our Chief Financial Officer; and Lisa Pattis, our Corporate Counsel.

As is our customary approach, I will make some comments on the quarter in general, Dave Dykstra will then take you into detail as it relates to other income and other expense. Following that, I will take a few minutes to summarize and talk a little bit about future direction, and as always, there will be time for questions at the end.

First of all, I'd like to say that we're very pleased with first quarter results. All of our vital signs continue to trend positively, and our crystal ball shows no reason right now why they should not continue to do so going forward. Our earnings for the first quarter were $23.2 million, or $0.50 per share, up 42% from the same period last year and 21% from the fourth quarter of 2011. This was a relatively noiseless quarter as it relates to one-timers. Securities gains of $816,000 basically offset a one-time expense of $848,000 related to early extinguishment of a portion of our securitization facility, and we'll talk a little bit more about that a little bit later. Other than that, we recorded a pre-tax product and purchase gain of $840,000 pre-tax, or approximately $0.01 per share after tax, related to the Charter National Bank FDIC-assisted transaction completed in the first quarter.

I know Dave will talk a little bit about this later, but I want to say just a word on bargain purchase gains. I know that all of you disregard these numbers when analyzing our results, however, one thing that I think many fail to realize is that embedded in that, in our bargain purchase numbers, are the discounts we include in our bids related to our estimation of the costs associated with the collection of the covered assets acquired in the deal. These costs are expensed as incurred, so, there's no -- so, there is an inherit mismatch in the timing of income statement recognition.

To that end, we are now excluding a portion of these costs, specifically the direct costs, not employee costs, expenses, and not legal expenses, could be -- it's tough to break those out sometimes -- when we compute our pre-tax pre-credit numbers, because we basically think it's only fair to do that. But to that end, pre-tax, pre-credit for the quarter was $64 million, up $4 million quarter-over-quarter, and continuing a positive trend which has been occurring for some time now.

We are delighted that the net interest margin improved by 10 basis points from the fourth quarter of 2011 to 3.55%. The cause for this increase was equally distributed between earning asset deals and cost of funds decreases. Both were up and down 5 basis points, respectively. The asset yield, liquidity investment yields were up 5 basis points versus December quarter-end. Loan yields held relatively stable at 4.78% versus December, and covered asset yields were down a bit due to the inclusion of the Charter National Bank portfolio.

As you know, new portfolios come on our books at a risk-free yield, somewhere in the 4%s. Portfolio performance is enhanced, and we're able to manage these portfolios better than we anticipate at the time when they are booked. I will say that the legacy covered asset deals continue to perform better than originally anticipated, and we have the same hopes for the charter portfolio, but only time will tell.

On the cost of fund side, deposit costs were down 5 basis points. That's a combination of growth at lower rates, and repricing of maturing CDs. Repricing opportunities continue in this area with approximately $2 billion of CDs coming due in the next six months at a weighted average cost of 1.06%. Renewal rates are averaging right now 60 to 70 basis points. Also, our new growth is coming in at a lower cost than the overall current portfolio. Page 21 of the press release provides details on our deposit maturities. Further home loan bank advanced costs were down 44 basis points. As I think we mentioned this in the fourth quarter, we took advantage of repricing restructuring opportunities in this area.

Also during the quarter, we were able to buy back $172 million gross, on an average basis for the quarter was $85 million, of our tail securitization in the open market, which effectively relieved us of an approximate 2% negative spread situation. We booked an $848,000 expense associated with this retirement, which was effectively offset by securities gains in this quarter. The affect of the entire $172 million retirement will be experienced in our financial results in the coming quarter. The rest of the securitization comes due in the third quarter, at which time we will rid ourselves of the negative arm associated with the entire -- that 2% negative arm associated with the entire securitization balance, which will positively affect the margin in a good way. In the interim, we will continue to look for opportunities to buy back these instruments in the open market, but only at terms which will augment our financial results.

Average earning assets were actually down for the quarter. A couple major reasons for this phenomenon -- first, most of our growth really came at the end of the quarter; and secondly, the early retirement of a portion of the tail securitization, both sides of the balance sheet were reduced, and that brought our earning assets down. But I'll call your attention to the graph on page 5 of the earnings release, which shows the relationship of average earning assets during the quarter to period-end assets. The graph illustrates that notwithstanding future growth, which we believe we will have, second quarter net interest income should benefit from an already existing higher level of earning assets quarter-versus-quarter. So, good progression on the margin in net interest income, with expectations of positive trend -- that these positive trends should continue.

On the balance sheet side, total assets increased $278 million versus December 2011. Loan growth for the quarter, including covered loans, but excluding loans held for sale was $236 million. The increase was supported by deposit growth of $359 million. Demand deposit growth made up a little less than one-third of that, indicating, along with the corresponding increases in commercial loan totals, the continued success of our commercial lending initiative. Our deposit mix continues to improve, with demand deposits comprising 15% of total deposits, up from 12% a year ago, and CDs being reduced to 38% of the funding base from 44% a year ago. Our loan-to-deposit ratio including covered loans stood at 93.5%, and excluding covered loans, 88% at the end of the quarter.

Loan pipelines remain very strong. In fact, our loan pipelines right now are stronger than they've been in the history of the Company. The gross pipeline, which excludes our niche and specialty lending portfolios, stood at $1.6 billion at March 31. When adjusted for the probability of closing, this number stands at around $1 million in total new commitments. Assuming a draw percentage of about 60%, which has historically been the case, this equates to $600 million plus or minus of new loans -- new loan balances. The pipeline is heavily weighted, as you would expect, to the next four or five months. And when we back tested our reporting on this pipeline, it's proved to be relatively accurate, and hopefully, it's accurate right now. We have no reason to believe it's not.

We're asked often, as we do have such good demand, whether or not we'd change our loan underwriting standards. And be advised that we will not -- have not and will not change our underwriting standards to achieve growth numbers. We always have and always will be conservative in our approach to lending. We do not change loan policies in underwriting standards to fit the times or to fit the competition. So, add to this loan demand that we have -- this core growth loan demand that we have, the $230 million of new balances, which will come on board when we close our Canadian Premium Finance acquisition this quarter. And you can see that the Company is truly back to being in an asset-driven position, a strategy that served us so well during our first 15 years of our existence.

Being in this asset-driven position is going to allow us to actively market the right-hand side of the balance sheet, deposits and full household relationships in all of our markets, especially in the new markets we have picked up in the last few years. To-date, we have been reluctant to market these new -- in these new areas, knowing that every deposit that we brought in was effectively brought in at a negative spread. As a result, and as many of you have been quick to point out to me, we do have operating leverage in the system that we can now take advantage of.

Now that we have assets to cover new growth at acceptable positive spreads, we know that we can bring in this new organic franchise-building deposit growth with little or no related operating expense increases. We've always considered the right-hand side of our balance sheet to represent the true franchise value of the Organization. We're excited to be able to add market share to all facets of the Organization, and of course, this expected growth should add nicely to the overall earnings of the Company.

Notwithstanding our core growth initiatives, we continue to be active in the acquisition arena. First quarter, we announced the aforementioned Canadian Premium Finance business deal, our first international foray. We're excited about our prospects in Canada, as we're partnering up with a tremendous group of people. The staff there is nothing short of outstanding, and we're excited about it. We expect the transaction to close in the current quarter.

We also completed our seventh FDIC-assisted acquisition in the quarter. The acquisition of Charter National Bank gained us access to two markets where we previously had no presence, and we're excited to begin marketing and building share in these two new communities. Again, we inherited some great people in this transaction, some real community bankers who fit us very, very well.

On the last day of the quarter -- last business day of the quarter, we closed on the acquisition of the trust operations of a local Chicago bank. We look forward to serving these new customers. We brought some great people on board; we expect the transaction to be a nice profitable addition to our wealth management operations.

Also in the quarter, we announced the acquisition of a branch in Orland Park, Illinois, again, an area where we had no previous presence. Transaction just recently closed, adding about $50 million in new deposits, and here again, we look forward to building out the franchise in this venerable Chicago suburb.

And finally, we recently announced our plans for opening our first branch in the loop area of downtown Chicago. Branded as the Wintrust Banking Center, this facility will service customers from all of our community banks, as well as our downtown commercial lending office. We've been a little bit of a disadvantage downtown without having a retail -- or a banking outlet. We think there's a lot of pent up demand on the right-hand side of the balance sheet to bring in law firms and downtown businesses where we have great contacts, and they've just been waiting for us to get this open. So, we're excited about that.

We continue to look for acquisition opportunities in all areas of our business -- that includes banks, assisted or unassisted; bank branches; specialty finance; and wealth management. We really truly believe the next five years will offer unprecedented opportunities in these areas as the industry consolidates. We really believe that it will be terribly hard for banks of $1 billion or less in total asset size in metropolitan areas to generate adequate returns going forward. This will not only be caused by the increasing strain and expense of expanded regulatory and capital requirements, but also an inability to generate safe, good earning assets at acceptable spreads.

The days of leveraging up balance sheets with brokered CDs to fund real estate deals are effectively over. Couple this with management fatigue, which has and will beset many bank ownership and management teams as they emerge from this current cycle, and you have the recipe for a very opportunistic period. We believe we're situated perfectly to take advantage of these opportunities as they arise. We continue to be very active in evaluating current opportunities, and as always, we are going to be very prudent in any undertakings here.

Because of this environment and the prospects for good, organic growth, the Company successfully completed a capital offering, raising about $127 million in an overnight deal of convertible preferred securities. This positioning will help us take advantage of the opportunities we've talked about.

Now, before I turn it over to Dave to discuss other income and other expense, a quick word on credit. Credit metrics in the first quarter improved across the board. Non-performing assets were down in absolute dollars and as a percent of assets, non-accrual inflows were $18 million for the quarter, down from $25 million in the fourth quarter of last year. If you recall, in the fourth quarter of last year, quarter-over-quarter, those numbers were reduced $10 million on average each quarter, so that trend is continuing.

Reserve coverage ratios are at a near term high. Charge-offs for the quarter were $14 million, down from $25 million in the fourth quarter of 2012. OREO charges are still high at $7 million. Although we think they're too high, but they really reflect our desire to actively mark these things to market, and move these properties off our balance sheet. We do see some light at the end of the tunnel, but you never know when it comes to credit.

We've been asked about a jump in TDRs, and have had many discussions quarter-over-quarter on these calls about TDRs, and we chalk TDR reporting to be right next to hedge accounting in terms of idiotic accounting rules. If you'll note -- everybody is looking at me in the room here, but that's the way I feel. If you look at our TDRs, they've gone up every quarter over, over, over. And if you look at our non-performings, they've come down. The TDR really means nothing to us. It's a bad loan, it's a bad loan, we put it on non-accrual. We collect it, we move it out. End of story.

We -- the TDR jump is basically good customers, they never miss -- most of it is good customers who don't miss a payment, they come in, they want an accommodation. They're good, profitable customers to us, we give them accommodation that they really deserve, but could they get it any place else in the market? Probably not. And so, that becomes a TDR.

So, I would draw your attention to the correlation effect that TDRs have gone up probably every quarter because we're very stringent in how we record them because we really don't care about them, but our non-performings have gone down, down, down quarter-over-quarter. So, we have found no correlation between the two, based on the way that we manage the Organization.

So, on overall credit and summary here, trend is our friend. There's no assurances that there won't be some bumps along the way, but we're optimistic that we're seeing some light at the end of an ever-shortening tunnel, and that it's not a freight train. As stated in numerous previous earnings calls, our goal is to be first out of this credit cycle. That is, to be the first one to put the credit cycle and the excess credit costs related to it behind us. This has not changed. We're going to continue to be aggressive in identifying and dealing with problem credits, and clearing them from our books.

Appears we're getting close to the end, but again, there are no assurances -- we land the plane, the ride won't get a little bumpy, and that the trend line might not turn out to be totally linear. But we think it will be positive and continue to -- we will continue to work these things down over time, that is our number one -- continues to remain our number one objective.

I'll turn it over to Dave Dykstra to talk about other income and other expense.

Thanks, Ed. I will touch briefly on the non-interest income and non-interest expense sections. I'll focus more on the first quarter of this year to the fourth quarter of last year, although I'll give some comparisons to the prior year. But as you know, 2011 we had a lot of acquisitions, and so, the changes I think are more relevant from the fourth quarter of last year to the current quarter.

In the non-interest income section, our wealth management revenue increased nicely to $12.4 million from $11.7 million in the previous quarter, and $10.2 million in the year-ago quarter. The increase in wealth management revenue from the prior quarter came fairly evenly from both the brokerage business and from the trust and asset management business.

As we noted in the news release, we closed on the acquisition of the trust department from a local community bank on March 30. So, that you know the current quarter was not impacted by that acquisition, but we should benefit the revenue stream starting in the second quarter. The assets under administration which we acquired related to that trust department approximated $160 million, and it also had some land trust business.

Now, on the mortgage banking front, mortgage banking revenue improved slightly to $18.5 million in the first quarter of 2012, from $18.0 million in the fourth quarter of last year, and was much higher than the $11.6 million that we recorded in the first quarter of last year. The Company originated and sold $715 million of mortgage loans in the first quarter compared to $883 million of mortgage loans originated in the prior quarter, and $562 million in the year-ago quarter. Mortgage banking revenues actually improved despite the lower origination levels due to overall pricing metrics in the marketplace, and a better mix of higher margin loan originations. Future mortgage origination volumes will obviously be impacted by, and be sensitive to, changes in interest rates. First part of the second quarter looks pretty good, and we'll just have to see how the interest rate environment plays out the rest of the quarter and into the third quarter.

The Company, as Ed noted, completed one small FDIC-assisted bank acquisition in the first quarter, and we recorded a bargain purchase gain of $840,000. This compares to having no bargain purchase gain in the fourth quarter of last year, and $9.8 million of bargain purchase gains recorded in the first quarter of last year related to two FDIC acquisition transactions. We actually believe there should be more FDIC-assisted transactions occurring in our marketplace. We will be active in evaluating each of those. But obviously, the timing of those deals and the size of those deals is beyond our control. But we monitor the situations at all time, believe we'll see more coming, and look forward to evaluating them.

Fees on covered call options totaled $3.1 million in the first quarter compared to $5.4 million in the prior quarter, and $2.5 million in the first quarter of 2011. We have consistently utilized these fees from covered call options to supplement the total return on our treasury and agency securities portfolio in an effort to mitigate the margin pressures caused by this low rate environment. Fees from these transactions are impacted by market rates and market volatility conditions, but as we've done for years now, we'll continue to conduct those transactions as they're available to us.

If you look at the miscellaneous non-interest income, it continues to be positively impacted by interest rate hedging transactions related to customer based interest rate swaps. The Company recognized $2.5 million in revenue in the first quarter of this year compared to $1.6 million in the prior quarter and $951,000 in the first quarter of last year.

Additionally, our other non-interest income was positively impacted by approximately $1.4 million in valuation adjustments on limited partnership investments that we own at the holding company level. That was compared to $723,000 gain in the previous quarter. Now, these limited partnership investments are primarily invested in bank stocks, and the valuation impact in this quarter was fairly strong due to strong banking sector market conditions during the first quarter of this year. On page 18 of the press release, we do a reconciliation of what we consider adjusted earnings, and you can see how much gain or loss we had on the investment partnerships on that page. If you look at all the other non-interest income categories, there's really nothing there that deserves special mention on this call.

So, if we turn to the non-interest expense categories, salaries and employee benefits increased $2.3 million in the first quarter of this year. But if you exclude the impact of an increase of $3.1 million related to payroll taxes in the first quarter, if you compare the net amount to the fourth quarter of last year, we've actually declined $800,000, if you take away that increase. Payroll taxes are always higher in the first quarter of the year, as the social security tax limitations reset at the beginning of the year. So, it's a phenomenon we see every year, and if you look at it, we really held the line on the salary range.

We did have increases of 2% to 3% for base salaries at the start of the year. So, despite those increases in the base salary level, if you exclude the seasonal impact of the payroll taxes, we actually reduced our salary employee benefits from the prior quarter. We believe the current staffing levels provide the Company with capacity in the lending areas as we continue to grow the loan portfolio, and on the front line deposit gathering area without really adding any additional staff. So, we think we have capacity and leverage in that regard.

Also, as you all know, this category of expenses includes commissions related to mortgage banking revenue, as well as brokerage revenue in our wealth management business. And as you can tell, we had a strong quarter for both those lines of businesses, which kept the commissions levels elevated. Occupancy expenses remained relatively flat during the quarter, up $100,000 to $8.1 million from $8.0 million in the prior quarter. Data processing expenses decreased $444,000 from the fourth quarter of last year to the first quarter of this year, and this decrease was primarily a result of less conversion-related expenses in this quarter than what we had in the last quarter.

Professional fees also declined slightly, approximately $106,000 from the fourth quarter, to $3.6 million in total. This category of expenses continues to remain elevated as we continue to experience higher than normal legal and collection costs related to the resolution of non-performing loans. As these non-performing loans resolve themselves, we expect to see improvement in this category.

Advertising and marketing expenses also decreased in the quarter by $2 million from $3.2 million in the prior quarter -- they decreased to $2 million from $3.2 million in the prior quarter. The primary reason for the decrease in this category was a result of the prior quarter having more significant costs related to our marketing campaign throughout the Wintrust brand, and our ability to offer affiliated banking to all of our customers. As we mentioned last quarter, affiliated banking allows each of the customers of all of our charters to conduct business at any one of our nearly 100 branches throughout our system. We obviously believe the investment in this brand awareness and affiliated banking capability will pay dividends in both the commercial banking and the consumer segments of our business, and we'll continue to promote the brand through a variety of different media channels going forward.

As Ed mentioned, OREO expenses remained elevated at $7.2 million in the first quarter, but they were down from the $8.8 million recorded in the prior quarter. The $7.2 million of first quarter expenses is comprised approximately of $5.6 million in valuation adjustments, and $1.6 million in ongoing carrying costs for those properties. As you're well aware, this category of expenses fluctuates as we continue to get updated appraisals of properties, and the valuations continue to decline and show some stress.

But we're hopeful that we're getting to the bottom of the valuation cycle here, and as we aggressively try to move these properties off of our system, and valuations stabilize, we should see that -- hopefully we'll see that number come down. Page 38 of our earnings release provides additional detail on the activity in, and the composition of, our OREO portfolio, which declined 12% to $76.2 million at March 31, from $86.5 million at the end of the prior quarter.

Other non-interest expenses remained relatively flat with the prior quarter, but actually decreased $395,000. The category declined despite the current quarter being impacted by the $848,000 cost related to the [defeasance] of the portion of the debt associated with our securitization facility, and an additional $455,000 of expenses related to the collection of our covered loans.

So, you put all that together, on an overall basis, our total non-interest expenses actually declined $1 million from the prior quarter. This overall decline occurred despite the cost of the debt defeasance, despite the seasonal increase in the payroll taxes, and the slightly higher cost of our covered loan collection expenses. And as mentioned, OREO valuation adjustments continue to be high, but we are realistic about our property values, we want to move them out and we price them accordingly. We do think that these costs will subside as we're successful in disposing of the properties.

If we look at the efficiency ratio, we had improvement in the efficiency ratio. But one of the ways that we look at it is -- if we exclude these credit costs, these seasonal payroll taxes, the impact of the debt defeasance, if you run the efficiency ratio from that perspective, and we noted this, again, in the press release, our efficiency ratio declined to 62.3% from 64.8%.

And we talk about this sometimes, but in our business, we've got the mortgage banking business and the wealth management business, both which -- the brokerage side of the wealth management business, both of which are commission businesses. And so, on both those lines of business, we pay out about 50% of each revenue dollar in commissions and other payroll-related items. You add that on top of the other overhead expenses, and it's a very high efficiency ratio business, but it's a low capital business. And so, we like the business, it contributes to our franchise, it contributes to the revenue and the income, but it does increase our efficiency ratio relative to other peers of ours that are not in those business lines.

With all that being said, I do believe that we have additional operating capacity in the system. We've got the staff to grow the business. We've got leverage where we can absorb the growth, and not really add to the overhead of the Company.

Ed mentioned earlier the covered loan expenses, and how we treat those when we evaluate an FDIC deal, and I'll just reiterate it here a little bit. But when we evaluate an FDIC deal and we bid on it, we build into our pricing the cost of collection over the FDIC guarantee period, and we do that with the people and we do it with the collection costs and the legal costs, and we discount those back and discount our bid effectively, and that increases the bargain purchase gain. The accounting rules obviously don't let you expense those costs up front, you have to take them over time. And so, as Ed said, there's a mismatch there.

But if you look at these carrying costs that we had in the current quarter, and then add on top of that some of the legal expenses that we don't break out and the personnel expenses, there is a mismatch there. And we just think it's worth noting, because people do back out the bargain purchase gains in their analysis [of it] generally, but they don't back out the expenses that we've built into that gain, and effectively have already pre-paid with the bargain purchase gain upfront.

So, with that being said, we think we have room to grow and improving efficiencies and bringing the expenses into line a little bit more going forward. And we're generally happy with the quarter on the revenue side.

Thanks, Dave. So, to summarize, all in all, a very positive quarter for Wintrust. Pretty much all facets of our operation, with lots of good, positive momentum in all important areas. Our Wintrust branding initiative, whereby we're bringing all of our community banks in under the Wintrust umbrella, yet not losing their identity as a local community bank alternative, is exceeding our expectations. We like where we are positioned now, both on an operating basis and on a strategic basis.

We've always said that in this business, you have to be in a position to take advantage of what the market gives you. We believe our past strategies have shown this, we have done this in our past strategies, and our go-forward strategies will also do this. We look forward to continuing to execute said strategy while taking advantage of opportunistic developments in our marketplace. All in all, in short, it's kind of nice when a plan comes together, even if the plan's been going on for about six years, but it's very nice when it comes together.

We can open up the line for questions.

Thank you. (Operator Instructions). Our first question comes from Jon Arfstrom of RBC Capital Markets, you may ask your question.

Hey, good afternoon guys.

Hello, Jon.

Nice job. Quick question on the margin, do you see any risks to the current margin level? Obviously, you have the Macquarie stuff coming out of the pipeline, but is there anything else unusual, say in the accretable yield, or anything that you see that has artificially boosted this?

No, I don't -- Jon, this is Dave, we don't see anything on the accretable side that was unusual in this quarter. As we've talked about in the past, if we speed up the collection of the FDIC assets, we do better on them, that might boost the yield a little bit or it could go the other way if they slow down. But it was fairly consistent yield on those as well as the life side, so nothing unusual there.

Like we said, Jon, it was pretty noiseless across the board other than the things we pointed out.

Okay. That's good. Then just one question, I haven't asked you this one in a while, but what kind of growth are you seeing out of your younger banks, call it the youngest half of your banks?

Well, the growth is relatively consistent across, because as I said in my comments that we have not been pushing growth. We did not, when we -- in the old days, we were asset driven, we'd open a new bank and we could really generate and gain a lot of market share because we knew we had assets to cover. We just this quarter have gotten back to being in that position.

So, we have not been marketing deposits and marketing household relationships very hard. We've been focusing on obviously commercial relationships, as indicated by the amount of demand deposits we've been able to pick up. But we didn't want to bring deposits in and put them in at a negative spread and spend a half hour on this call, explaining to everybody why our margin went down. So, we've been trying to time this.

We have almost 21 new locations where we haven't done any new marketing. Markets where we can -- that we think we can unwrap, get in the closet and take our old marketing plans out of the box which served us so well back before 2006 when we went into rope-a-dope and start gaining market share because we know that we can bring those households in and we have assets that cover them, we can do so profitably.

And the other thing is we have the leverage built into the system. As I said, we can probably put on most of this good growth without a lot of increase in expenses. We have great leverage built in, because we haven't grown those new branches yet as we've been waiting for this equilibrium to take place. So, that's a good question to ask. Maybe two quarters from now.

Okay. So it's pretty broad. That's what I was getting at, thank you.

Thank you, our next question comes from Steve Scinicariello of UBS, your line is open.

Afternoon, everybody.

Hello, Stephen.

Couple quick ones for you, just given the huge opportunities that you guys continue to see within your footprint, I'm just curious. Do you think you'll be able to deploy the full $126.5 million of convertible deferred this year, or what's the timing in terms of deploying that accretively?

Well, this year, next year, the issue was the -- we know we have really good loan demand, which is going to require, if it all comes to pass, we're able to execute and we're able to maintain the pull-through rates we have in the past on that pipeline, we're talking about bringing a lot of assets on the books right now. And we know we've got the Canadian Premium Finance acquisition should be closing in this quarter. So, another $230 million.

We need to start growing the balance sheet to accommodate that, so there is some -- that core growth will use some of those numbers. Again, though some of that will be offset by the third quarter, the rest of the securitization going away. But we see good organic growth coming on board.

The other side of it is we believe with the acquisitions that are going to be coming our way, and we need to be prepared and very opportunistic to take care of them. To put a time frame on it, I can't do that, because some of it is co-opportunistic acquisition opportunities that we believe will be coming our way, have been coming our way, we just haven't found any that makes sense for us other than the Elgin State Bank and some of the branches we picked up.

But we believe there's going to be, over the next couple of years, it could be next month, it could be three months, one that comes along that makes a lot of sense for us. In the old days we used to do just in time capital, where we'd push it to the edge of the envelope and then we'd go out and we would raise capital to support that and then we'd run it down again.

The regulators, we've got very good relationships with the regulators, they would like to see us to have the money in place first. The reason we did a convert like this was the cost of the convert was cheaper than what we were seeing in some of the debt markets, and at a $41 price per share conversion price, and it should be pretty accretive to us in terms of tangible book value.

So, it made sense that we needed to pre-load to take advantage to keep the regulators comfortable and to be able to take advantage of these opportunities as they come along. So, it's very hard for me to put a time on that, because some of it is based on opportunistic timing of opportunities.

That makes total sense, Ed, thank you. And just on the Macquarie Premium Finance, I know that right now the book is just over $200 million, but I believe those guys were originating closer to $600 million. So, is it possible that once you bring that platform on deck that maybe you could hook closer to that $500 million to $600 million annual run rates on balance sheet as this thing gets ramped up?

Yes, Steve, the $600 million in originations is what they do now, but because these loans pay off over nine months and they're full payout loans so they're installment loans, $600 million translates into about $230 million of outstandings.

It's like our portfolio, we've got about $3.5 billion of commercial premium finance originations a year and we've got about $1.4 billion to $1.5 billion outstanding. I think I confused some people a little bit when I put the $600 million into the press release and the 8-K. They'll still do that, but $600 million really translates to the $230 outstanding.

We do think that there's opportunities to grow in that marketplace up there. We've talked to agents and brokers in Canada and those that have operations in the US and Canada. They seem to be excited to have us up there with our product line that we have and the system that we have and the customer service that we have.

Macquarie did a great job up there. We just -- I think we've got a few other arrows in our quiver that we can offer up there, and for those of our customers down here that also do business in Canada, they're looking forward to it. So, I do think we can grow that business. But we'll do in a disciplined, ratable way.

Great. Thanks so much, guys.

Thank you.

Thank you. Our next question comes from Brad Milsaps from Sandler O'Neill. Your line is open.

Hey, good afternoon.

Hi, Brad.

Ed, just on the premium finance business, you guys had nice growth here in the first quarter, about $100 million. I know the renewal season may tend to be heavier at the first of the year, but just curious. You're up about 13% year-over-year. Is it an increase in the number of units or are we starting to see a little bit more of a harder market like we've been talking about for the last few quarters? Are you starting to see the price increase in your average ticket size go up?

We are starting to see it go up on a spotty basis, but yes, the market is hardening, but nothing like we would like to see it. But there -- but we have seen a little bit of a spike in average ticket size. But again, we continue. Our units processed have been up double digit every year. We've gained market share in that business every year, even as the ticket sizes have gone down.

But I think that we are seeing, as you see it, and your -- our commercial clients are seeing 10% to 15% increases in their premiums, so we expect that to continue to build. It's not going to be an overnight, beach ball under water sort of thing, but it will build over time. But we also continue to pick up market share in that business, so we're looking forward to rates.

The other phenomena when premiums go up is more people finance. And we like that too, so basically, it's probably a combination of both right now, but not like a really big pick up in average ticket size, but we're starting to see it happen, though.

Okay. And then I know we talked about this a little bit last night, but on the 30 to 89 days past dues, they were up a fair amount in the quarter. As you delve into that number a little bit more, did anything stand out there out there? Is it more administrative with the renewal process? Just want to get a little more color on that increase on a link quarter basis.

Well, the 60 to 89 days stayed relatively constant; that was relatively stable. There was a pick up in the 30 to 60 day category by, what, about $40 million, Dave? And lot of that is -- most of that is, what's the word I'm looking for? Administrative. So, as you know our philosophy, Brad, if it's bad, call it bad. Deal with the issue.

So we did have some administrative issues pop through on the first quarter, this is a year-end phenomena. And we do concentrate very heavily on making sure they don't get over 90, because you'll see we basically have none, no administrative past dues over 90 days. So, we don't -- we're not concerned by that number, if that's the issue.

Got it.

And Brad, if you go after the 60 to 89, Ed says it's relatively flat, which is a true statement, but --

Why would I lie, Dave (laughter)?

No, I just give you credit for that Ed. It fluctuated between the low 40s to the mid 60s, so we're in the range of where that is. And again, a lot of it is just administrative out there.

Okay. Great. Thanks for the color guys, I appreciate it.

You bet.

Thank you. Our next question comes from the Christie McGratty of KBW, your line is open.

Hi, good afternoon guys. Question on the loan growth. Maybe I'll ask it a little bit different. The -- Ed, the -- if you look at the premium businesses, they were last year up about 11% and 12% for the life and the commercial. Aside from the Macquarie acquisition, is that a fair ballpark for these businesses this year?

I think that's a fair ballpark for this year, notwithstanding any sort of inflation in premiums.

Okay.

In other words, we've been, like I said, we've been growing double digit in units processed, 10% plus every year, and that's indicative in those balances going up by that number. So, if we get any sort of increase in average ticket sizes, vis-a-vis, premiums going up, that will all be gravy. So, we think that's a reasonable number to use in a flat premium environment. In a rising premium environment, numbers should get better.

Okay. Dave, on the margin, you guys, you gave quite a bit of detail on the securitizations and the impact going forward. Maybe you can just talk a little bit more. You did 355 NIM this quarter, I think in the past you've talked, Ed, about 360, 370 in this rate environment. Maybe you could bridge the gap and offer any kind of guidance in terms of numbers in the next couple of quarters.

Yes, the last time I did that, you guys all filleted me. The -- I think we said in the middle of last year, we said, yes, that is our goal, that's where our models say that we can be in this rate environment. But then when the QE, whatever it was, came in, I think the twist, the QE3 twist, the new dance came in, we said boy, it might take us a couple more quarters to get there and I think that's what we're seeing right now.

We still believe that there's good opportunities in our cost of funds that continue to bring them down in the repricing side of the equation, plus new balances coming on are coming in cheaper than the overall portfolio was, so that should bring those numbers down. Bringing down the cost to where the entire securitization goes away has a material effect on our cost of funds, so we should see good, reasonable decreases in our cost of funds.

The Macquarie transaction, the rates on that premium finance business are higher than what we get in our market. We can't talk about them directly now as we don't own the company, but it's -- they're good yielding assets, and we're trying to hold the line. There still is pricing pressure on the commercial asset, the commercial side of the equation, but we do not bend off of our profitability analysis, so we're trying to hold those constant.

The one area where we see some pressure continues to be in the premium finance side of the business on pricing. That seems to have abated now where we maybe hit a bottom. So, hopefully we can continue to hold steady or grow the asset side of the margins. We only need 5 basis points, though, you guys let me off the hook on that 360 to 370 side, so it's in my mind. But it will be what it will be.

We think that trends are good for us there. Most of it will be what happens on the asset side of the equation, but I think we'll get a good boost from what we get on the Macquarie deal. And if we hold steady on everything else, it should be okay. Dave, do you have anything to add to that?

No, I think the challenges will be where's competition on the commercial side, and if anybody starts to move on the deposit side. But most of our competitors out there I think have more liquidity than they need, so they're not being aggressive on the deposit side. So, hopefully we won't see that move and we'll just have to see how the competition goes on the loan side.

Okay. Just last one on the expenses. Aside from the seasonal $3 million or so in the personnel costs, in the decline in the OREO cost going forward, should we see material growth in expenses next quarter? Or should expenses be down?

Well, we don't anticipate adding a lot of new people, nor do we have any layoffs planned per se, so salaries should be relatively flat, barring an acquisition. We're not adding any new locations now. And so I don't see major changes here unless we do some acquisitions out there. OREO is going to be what expenses are going to be what they're going to be and hopefully, they'll come down.

We won't have any debt defeasance cost going forward unless we buy some more of those notes back. That's not something we can -- that defeasement wasn't us pre-paying the notes. It was us buying notes in the marketplace when people were willing to sell them, and there was some activity in the first quarter.

It's slowed down a little bit here in the second quarter where we haven't seen people selling them, but if people would offer those in the marketplace at the right price, we probably would look at buying those back early again because it's helpful to the margin and our profitability. But barring that, we shouldn't have the debt defeasement cost next quarter. I don't see major changes unless we have some acquisitions or the OREO improves.

Okay. Thanks a lot.

Thank you, our next question comes from Emlen Harmon of Jefferies, your line is open.

Good afternoon.

Emlen.

Couple questions for you on credit. Nice improvement on the charge-off funds this quarter. You talked a little bit about just dealing with problems as you see them. But, as you look at underlying loan migration on the commercial credit side, is there room for further improvement in charge-offs there? I think the second part of my question would be, thinking out a few quarters, how do you think about total loss rate on the loan portfolio, and is there more room for improvement from these levels?

Oh, absolutely there's room for improvement. If you go back in time, we -- our credit philosophy always resulted in credit statistics that were one-third to, maybe in a bad year, one-half of what peer group was. They were very -- in history, if you go back in time, history will show you that. We will tell you when we get back to those types of ratios, then I think we can call it over.

No, we believe that our credit cost, even at current charge-off levels as are very elevated for where we want to be. And when we can get back to percentage type levels that were equal to our first 15 years of existence, then we'll officially call the cycle over as it relates to us. But there's a lot of room there for us to improve.

Got you. Thinking about that more in terms in the short term -- in terms of what we've seen in the near term, is that -- do you think we see a slope down from these levels, or is there room for some lumpiness here in the near future?

Well, trend has been our friend for the last five or six quarters and we would hope, as you look at the inflows that have come down from 55, 45, 35, 25, now 18, we would like to see that trend continue to go forward. I think I said in my prepared comments it may the not be linear and it may be a little lumpy. What I don't want to do is have our people start to manage to a number or manage to trying to maintain this slope or this curve of credit -- of this positive trend of credit statistics. What happens then is, you'll have an explosion in a compost pile down the road.

We still understand this isn't over. We still understand that there is stress out there, but our goal is to be first out of this thing. Identify them quickly and get them out of here as quickly as you can. We don't anticipate a freight train coming at us, we would like to see numbers to stay stable, to continue to go down.

That doesn't mean that there won't be -- it won't be a little bit lumpy, but because the numbers are smaller -- small enough now, that lumpiness, if you had a $10 million hiccup, the number is going to look like, oh, you're up 10% in non-performings. But in fact, the number is low enough now that it might just be one deal that would do that. So, it's going to be a little bit lumpy.

We continue to try to land this airplane but we envision, we like to -- the light at the end of the tunnel we see, seems like they're coming down. All the statistics show they should be coming down and credit costs should be getting less, but we won't call it victory until we're back to level equal to our first 15 years of existence.

Got you. All right. Thanks. Appreciate it.

Thank you. Our next question comes from Terry McEvoy from Oppenheimer. Your line is open.

Thanks, good afternoon. I know you've had a couple more months to spend with the new Canadian team, do you still feel like and still believe yield, credit will be better out of the Canadian portfolio versus the US?

Yield, certainly. Credit is about the same as ours.

It's a little bit better, they don't do workers' comp up in Canada, and so workers' comp policies tend to have a little bit higher rate than the rest. So, credit will be a little bit better for that reason, and yields, like we said, are better than ours.

And it's a great group of people. We're very excited to be working with them; they're excited to be working with us. So, we have high hopes for that organization and being able to really grow that and take -- we're number two. Once that entity is number two in the Canadian market, we have our sights on being number one. So, we're having fun.

And we're just waiting for the day we can close. Regulatory process between two different countries just takes a while.

We've got to get Dykstra a passport too. He's from Iowa, he's never gone anywhere (laughter).

And I was nice to you earlier. I don't understand why. (laughter).

And just a question on the new downtown location. At first blush, it's another bank opening a new branch in Chicago. It sounds like from your remarks earlier, you've got more of a focused, targeted approach really trying to leverage the commercial business.

But if you sit outside of that location on West Madison and polled people and asked them, who is Wintrust? Do people know who Wintrust is? Or is it, on your part, being very proactive in going after the commercial customers and it sounds like trying get more corporate and commercial deposits is the initial strategy there?

Our guys downtown say that office is worth $200 million in deposits to us. We'll see if it happens, but that's what they say. But if you think of it on the retail side of things, in all the markets that we're in, there are 101 branches in different markets where people work downtown that are now right in the center of the loop, going to have the ability to go in and conduct banking business.

It will be called the Wintrust Banking Center. And then it's got like 15 windows on the outside of it, and we'll be flashing the names of banks up there and the like. And people now know over the last 18 months, as we have adopted this new branding strategy where we override it with the Wintrust name. And if you come to Chicago, you'll see billboards up, you'll go to Wrigley Field and our name's up all over there. Although the Cubs aren't doing well. I hope we're not a Jonah to them. But I guess they haven't done well in a long time, so they can't blame us.

This actually is going to be well received by our retail base to have that outlet down there too. But so we think -- we're looking at -- we believe that in the long run we will need more than one down there to service that client base. So, this is the first one. We'll learn from it. See where it goes, but we're excited about it. So it's going to be pretty interesting, but if you can pick up $200 million out of there just servicing the commercial clients and the referral sources, the accounting firms and the lawyers and the like, that's a good move for us.

Thanks, that was the color I was looking for. Appreciate it.

Thank you. Our next question is from Stephen Geyen of Stifel Nicolaus, your line is open.

Hey, good morning, or good afternoon. Just a handful of questions here. There's certainly some good potential for some solid loan growth in the second quarter. How should we look at as far as the funding and the changes in balance sheet relating to the investment securities and the deposit growth?

We're back to the asset-driven mode, so we've used up a lot of our excess liquidity now, and we're back after the growth side. We'll go out to all of these new locations we had in the communities on the north side of Chicago and out where we've got some of the other banks that we picked up from an FDIC perspective, the new ones in the Charter National Bank area that we've picked up, and we'll do our normal group of products that we do there.

But we also think that we'll pick up -- continue to pick up DDA from the commercial business that we have out there. So, as Ed said, the new accounts are coming in at cheaper rates than what's on our books here. We think we'll be successful. We always have been from our retail schmaltzy marketing out there, so should be across the board, with less emphasis, though, on CDs than what we used to do when we opened up bank or promoting it out there.

And maybe just a follow-up to that. How should we look at the investment securities? I guess you talked a little bit about that it's going to be really driven from the liability side, the deposit side, to support that growth, but just curious about the investment securities. Should we look at that as more of an end of period run rate or an average quarter run rate?

Well end of period is probably accurate this quarter. We had no securities called away or anything like that. So what we have at end of period now is there. We target the 85% to 90% loan to deposit ratio, and we're at the higher end of that right now.

So, as the balance sheet grows, the liquidity assets, the investment portfolio may grow a little bit. We want to put whatever new deposit growth we get, 90% of that into loans, and a little bit of it will go into investments. As the balance sheet grows, you may see the investment portfolio grow modestly, but end of period should be relatively --

10% to 15%,of overall growth will be added to the investment portfolio into liquidity balances.

Got it. Okay, that's helpful. And as far as Macquarie, I know you can't comment on operating costs, but I'm curious about how many employees are coming over and if there are some other large costs that maybe we should consider.

Well, no, they run a fairly efficient business up there. We can't talk about their cost structure at all, and we're still haven't closed yet, and we can't talk about it. We, we will bring over all of their employees initially, but just because of the confidentiality that we've signed with them, we really aren't supposed to talk about their operating metrics right now.

We'll bring them over initially and we hope to expand there also. I don't want anybody to think that we're initially we're going to do that and we have economies of scale. We will have economies of scale, but we're going to need the rest of, just based on some operating leverage of systems and the like, but we -- the move to number one, we're going to need every body that's up there and then some to achieve the goals that we want to achieve up there and to achieve the goals they want to achieve up there.

It's a great group of people. I like Canada. The people up there were -- couldn't have been nicer, and we had a great time when we were up and visited them, and they're very much looking forward to -- they're more competitive than we are, I think in a lot of ways, and they want to be number one. We will, once that deal gets closed, we'll -- we can give you some more information on that, but we think it's a great opportunity for us.

Okay. And last question, just curious what the trends might be in SBA. I know you guys dived into that market, I guess late last year, what -- how does it look right now?

The on the SBA side, well, I don't have the -- I'll have them next time or I can call you back with it, Stephen, but I will tell you in the first quarter, we were number two in production in the state of Illinois. We were number two in overall production in the state of Illinois, so they are off and running and doing a fine job. But I can call you offline and get you those numbers or Dave can down the road. I don't have them in front of me, but I do know that we are number two in production in the first quarter.

Okay. Appreciate it. Thanks for your time.

Thank you. (Operator Instructions) Our next question comes from Mac Hodgson from SunTrust, your line is open.

Hey, good afternoon.

Hey Mac.

Most of mine have been asked, but just a couple follow-ups. In the press release you mentioned higher yields on premium finance loans positively impacting the margin. Can you give us specifics on what change in yields there were?

Yes, we -- well, we -- the commercial side stayed relatively flat, so we think we're seeing that, competitive pricing pressures subside. We did a little bit better on the life side this quarter. Not dramatically but a little bit better. So, life contributed a little bit better, the commercial side plateaued out there.

And on the life side, was that just less competition so you're able to get better yields?

No there's a good deal of competition now on the life side. But we -- our guy's have been holding the line and doing a nice job.

Okay. And then period end interest bearing deposits on the balance sheet your excess liquidity were I think $900 million. Was it very different from an average balance standpoint during the quarter? I may have missed it in the release. Just checking there.

No. I don't think there would have been much difference from that perspective. I don't -- I'm just looking here real quick. But nothing funny would have happened there. Some quarters we have securities called away, and then they're down below at the bottom, but it was about the same for an average balance.

Okay.

Dave Stoehr will confirm that.

Okay, great. And you talk about driving deposit growth to fund asset generation, but it does seem like you still have a lot of excess liquidity, even --.

Remember, Mac, remember we're going to have to pay off debt securitization.

Yes.

There's $400 million-some that's sitting in a trust fund right now making $1 or 280 basis points. That's that negative spread. That has to stay there. You net that out, we're getting a little light.

Okay, so you don't think you would like to take it below $400 million or $500 million in excess liquidity.

No, if you look at that, that would mean you would get your loan to deposit ratios way up in the mid 90s, and that's not one of our goals.

Okay.

We still think liquidity is important, so.

Got you. I appreciate the color, thanks.

Thank you. Our final question comes from John Rodis from FIG partners. Your line is open.

Save the best to last, John.

Actually, Ed, all my questions answered -- asked and answered, so nice quarter though.

Thank you, John.

That was the best for last.

Wow, yes (laughter). Well, thank you all very much. We appreciate your support and your interest in Wintrust. We're excited about where we are right now. Any follow-up things that come to mind later tonight over a beer or two, give Mr. Dykstra or myself or Mr. Stoehr a call. But thank you all for listening in, and we'll talk to you again soon.

Thank you, ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.