Wintrust Financial Corp (WTFC) 2012 Q2 法說會逐字稿

Welcome to the Wintrust Financial Corporation's 2012 second-quarter earnings conference call. At this time all participants are in a listen-only mode. (Operator Instructions). Following a review of the results by Edward Wehmer, Chief Executive Officer and President, and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session.

The Company's forward-looking assumptions are detailed in the second quarter's earnings press release and the Company's Form 10-K on file with the SEC.

I will now turn the conference call over to Mr. Edward Wehmer.

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

We will have our usual format today. I will start out with some general comments on the quarter. Dave Dykstra will get into the detail and give you some color on other income and other expense and then, finally, I will summarize talking about the future direction and plans -- our future direction and plans and how we see the banking world in general. So I know that will be scintillating and you will want to hang on until the end.

Results -- all in all, the second quarter, I think, was pretty darned good. Net income of $25.6 million, up 10% from the first quarter, 118% from last year. Earnings-per-share of $0.52. Pretax pre-provision, as we define it, is getting close to $70 million. Came to about $69 million. Zones grew $486 million notwithstanding covered loans and mortgages held for sale. Our deposits grew by $392 million. Our demand deposits continued to grow as part of the overall deposit growth and now comprise 16% of our overall deposits.

That is not to say -- it wasn't too long ago that we were around 9%. So again this is an indication of how well and how steady our commercial initiative has been in terms of gaining market share in our target markets.

Assets grew $404 million or 10% on an annualized basis. Efficiency and then overhead -- both these numbers were down materially as we continued to grow into the infrastructure. I think a few quarters ago or for the last few quarters we got many comments about our expense -- our run rate on expenses. And I think we replied back that our approach is to put the plumbing in before we flush, and we had built out a lot of infrastructure that we could actually leverage off of and we are doing exactly that.

Expenses were flat quarter to quarter and we still have plenty of leverage that we can build into as we continue to execute our plan. On the earnings side, it was a pretty noiseless quarter. There was really no bargain purchase gain. We did have a $1 million security gain but that was basically offset by trading losses of a like amount.

The trading losses and I want to point out that I am certainly not be -- we are not -- or I am not the whale of London nor am I the minnow of Lake Forest, but we did have $1 million, close to $1 million trading loss. And it is part of the strategy that we have that we have gone out and bought some interest rate caps. We have not worried about whether hedge accounting applies or not. We bought them as almost an interest policy related to our liquidity portfolio and to a fixed-rate lending program that we have instituted in our banks.

So we look at it as an insurance policy and we got -- for $2 million, we got probably four years' worth of coverage on about $400 million notional to -- and the accounting rules are there is no way you can get a swap or you can get hedge accounting on a macro swap like that. But so we have to mark that to market and they did go down by about half of the value that we purchased. But it doesn't mean that they are not effective and not doing exactly what they are supposed to do. You know just, if you have insurance and your house doesn't burn down, it doesn't mean that your insurance isn't effective.

So this is part of the strategy that we are employing. A lot has to do with Basel III and whether some of the regulations that they are talking about coming out with, the duration of your portfolio is only going to take your other comprehensive income, the negative side of that and apply it against your capital. We feel this is a good offset to that and the negligible cost of these things it is just a worthwhile strategy to us to employ and to heck with the accounting on it. Like I said, the insurance is still in force. And it may be something that we do again as we continue to build out.

The margin, it did decrease 4 basis points with assets dropping 16, funding 11, and pre-funds contribution of 1 positive gave us 4 basis points [ahead]. We are all familiar with asset yield headwinds especially in the liquidity portfolio. Loan yields continue and they are also all bit under pressure, but we are able to offset that with continued decreases in our cost of funds.

Particularly to us during this quarter, liquidity yields were down 21 basis points. Loan yields 13, covered asset yields by 48 basis points. But again in that portfolio we did add a full quarter of the charter FDIC assisted deal that we did that come in around -- and those come in around 5% to 6%. So that does negate that a little. Our covered portfolios are acting just as we would anticipate and better than we had initially thought when we acquired those institutions and we are very comfortable with where we are right there.

All in all, a better asset mix; also with our loan to deposit ratio and the like going up a little bit helped the margin from that perspective.

Funding costs were down 11 basis points and they are continuing to remain opportunities for improvement in that area. Page 19 of the press release again shows deposit maturities coming up and you can calculate from there the opportunities that we have and we will be taking advantage of going forward.

Also in the third quarter our securitization, the rest of it will run off fully eliminating the 2% negative carry we have had on this for the first three quarters of this year and that should be very helpful to us. Continued better low-cost deposit mix on our growth is also being very helpful in bringing down our overall deposit costs.

In the short term, we think that these will relatively offset the asset yields, but there are no assurances.

The good news is is that our growth that we are experiencing is coming with negligible overhead expense. Our pipelines remain very full on the lending side of things so our prospects for good profitable growth remain unchanged. Our pipelines now stand about $1.2 million gross, again six-month pipeline heavily weighted for the next three months but if you weight that by probability it goes down to about $750 million. But still that is consistent with the pipelines we have reported to you in the past.

Also on the lending side, the insurance market for our premium finance business -- our property-casualty premium finance business -- appears to be hardening a bit which means our average ticket size is off of the bottom which was around $20,000 up to around $22,000 average ticket size. Again, we consider the norm to be about $27,000. So there is still room to move on those but that will be very helpful to us in terms of building more loan volumes at very good rates.

But also we will be helped on that by a full quarter's worth of income on the asset side from our Canadian Premium Finance acquisition where we had 23 days when we owned it and will have a full quarter going forward. And we are very excited about that and welcome those folks to Wintrust and they are a great group of folks. We are very excited about having them.

So if you ask me, and I know you will, what we think the margin is going to do going forward, I would like to tell you your guess is as good as mine. But I think that the -- we should be able to offset a lot of this pressure in the near-term by the funding decreases that are inherent, that are kind of built in in what we are working on there and some other things we do on the asset side of the equation. So if you are talking about maybe a 7 basis point swing either way, by the way, so it will be my best guess of where we can look going forward. I think go up and down, there is lots of nuances that is a spicy kind of chili, all the accounting rules especially is the right to covered assets and other things we are putting on the books.

So anyhow, that is the over under, if you will.

On the other income side, Dave is going to discuss this in detail, but mortgage operations are very strong right now and our projections look that they are going to be -- they should be remain as strong through the third quarter just based on the inflows that we have had recently. Wealth management continues to show good, steady, profitable growth as we continue our cross-sell efforts on both sides of the equation. Cross-selling banking into the wealth management business and wealth management into the banking business. They continue to build and to grow and we are excited about that.

On the other expense side, again Dave cover in detail, but they were flat quarter versus quarter. And that just again exemplifies the fact we are growing into the overhead as I previously mentioned.

On the credit side, credit cost for the quarter was still higher than we would like. We continue to identify and work out issues on an expedited basis. We have done that for the last three or four years since this cycle began, and we will continue to do that. That charge-off is $17.4 million, resulted in a provision of $18.3 million on our noncovered portfolio. We also took a provision of around $2 million in our covered portfolio.

And remember that that is not exactly an indication their covered portfolio has fallen off a cliff. The accounting on that is -- we have over how many pools, Mr. Stoehr?

[64].

60 pools of assets related to covered loans that we've purchased. And one or two of those pools goes upside down, projected cash flows come in less than anticipated, you take that provision right away as opposed to the ones that are doing better. We take that -- the betterment that comes in and amortize that over the life of the pool. So all in all, the polls are doing well. But you immediately recognize any pool that may have moved underwater.

We -- our portfolio expenses were $5.8 million in the quarter, down $700,000 from quarter one. We continue to push OREO out. Net -- non-performing assets [in] total remain constant to the percent of assets at 1.17%. OREO was down $3.7 million to $73 million and nonperforming loans were up $7 million versus the first quarter to $121 million. That increase was primarily due to one $13 million credit. It is a commercial deal. The company is being sold. It is under contract. We expect to be out of it in the next 30 days. So, door open on that one.

Without that event we would have continued our historical trend of reducing the absolute level of nonperforming loans.

That $13 million loan also affected our NPA inflows for the quarter. Without the event however, we would have been relatively constant with quarter one. It is a little bit of a break in the $5 million to $10 million inflow reductions we have experienced for the past five or six quarters.

But as we said, we have often said on this call and to you when we meet you in person that landing this airplane could be a little bit bumpy. We don't manage this number. It is what it is. We find it, we push it out, we deal with the issues.

But all in all, I think our numbers are very manageable, much better than peer group. And we are not satisfied with the numbers, but eventually these things are going to fall off and those numbers are going to fall to the bottom line and we are committed to getting that done.

You will notice on page 35 there is -- the press release, there is a new disclosure on our reserve for loan losses. And what we did there, a lot of times, people I refer to as screen scrapers will say, your reserve isn't as low as your peer group. Well, there is a reason for that. And the reason relates to our experiences in what our peer group has been and our diversified portfolio. And I think if you look at page 35 where we take the reserve and we break it out by types of assets that we have on our books, you'll see that we are very well reserved. That then you have $1.6 billion of your portfolio in these life insurance loans where we really never experienced a loss, you don't have to keep much reserved for that.

You have $1.6 billion or $1.8 billion right now of premium -- property and casualty premium finance loans that have charge-offs that are 30, 40 basis points, we've put those reserves in. So I think when you look at that, you will get a much better understanding of how our reserve is constructed. Again, I have relayed to you in the past that the analysis that we go through to develop the reserve is it comes out looking like the Chicago Yellow Pages, it's so thick. But there's a lot of detail that goes into that and a lot of work that goes into that and it is a specifically analyzed sort of thing. And this gives you an idea and gives you a better idea of how our loan loss reserve works, where the coverage ratios are and I think you get good comfort out of that.

In total, the reserve vis a vis is a level of nonperforming assets that is relatively strong compared to our peer group.

Now I am going to turn it over to Dave Dykstra for his comments.

Thanks, Ed. As normal I will briefly touch on the non-interest income and non-interest expense sections.

Non-interest income, our wealth management revenue increased nicely to $13.4 million in the second quarter of 2012 compared to the previous quarter of $12.4 million and the year ago quarter of $10.6 million. The increase in wealth management revenue from the prior quarter came primarily from the trust and asset management businesses which increased $918,000. As we noted in the news release, we closed on the acquisition of a trust department from a local community bank on March 30 of 2012. So the current quarter was benefited by that acquisition by nearly $400,000. The assets that we acquired that were under administration related to that trust department were approximately $160 million plus some land trust businesses.

On the mortgage banking revenue side Ed eluded to it, but our revenue increased substantially to $25.6 million in the second quarter of 2012 from $18.5 million recorded in the first quarter this year; and it was twice as much as the $12.8 million recorded in the year ago quarter.

The Company originated and sold $854 million of mortgage loans in the second quarter compared to $715 million of mortgage loans originated in the prior quarter and $459 million in the year ago quarter. Mortgage banking revenues improved as a result of the favorable rate environment and the increasing level of mortgage buying related to purchased home activity and better overall pricing metrics in the market.

Now. slightly offsetting this positive revenue results were mortgage -- from mortgage origination was a decline in the fair market value of our mortgage servicing rights. Those mortgage servicing rights were valued at 68 basis points in the second quarter of 2012, down from 75 basis points in the prior quarter. The value of the AMSR portfolio was approximately $554,000 less than the value at March 31, 2012.

Obviously future mortgage origination volumes and servicing rights will be impacted by and be sensitive to the changes in interest rates. However as Ed noted, based on the existing low great environ in our pipelines, we anticipate the third quarter to be electively strong.

The Company did not complete any FDIC deals in the second quarter 2012 and, accordingly, we didn't record any bargain purchase games, but we did record a small true-up adjustment of the negative $55,000 during the second quarter related to the deal that we did in the first quarter this year. That compares to a bargain purchase gain of $840,000 in the prior quarter and $746,000 recorded in the second quarter of last year.

Now we continue to believe that there should be more FDIC assisted bank transactions in our market area during the rest of the year. We will continue to evaluate them as they come along, but obviously the timing of such deals is beyond our control.

Turning to covered call option income. But fees that we recorded this quarter from that activity totaled $3.1 million, the same that we recorded in the first quarter of this year. And that also compares to $2.3 million that we recorded in the second quarter of 2011. The Company has consistently utilized these fees from covered call options to supplement the total return in our treasury and agency securities in an effort to mitigate the margin pressures that are caused by low rate environments. Fees received on these transactions can be impacted by market rates and volatility that is present in the market at the date entered into the transactions.

If we turn to gains on sale, gains on available for sale, securities and trading losses. If you net those two together, we had a net gain of approximately $181,000 during the second quarter. That compares to a net gain of $962,000 in the first quarter of 2012 and a net gain of $1.1 million second quarter of last year.

As Ed mentioned, the trading losses in the current quarter were primarily a result of the fair value adjustments related to interest rate contracts not designated as hedges, and primarily interest rate cap positions that we use to manage the overall interest rate risk associated with the rising rate environment as it relates to to some fixed rate and longer term earning assets.

Miscellaneous non-interest income continues to be positively impacted by interest-rate hedging transactions related to customer-based interest rate swaps. We recognized $2.3 million in revenue in the second quarter compared to $2.5 million in the prior quarter and $1.5 million in the year ago quarter. Additionally, our other non-interest income included approximately $65,000 in positive valuation adjustments on limited partnership investments. Although that is not a lot if compared to the $1.4 million gain that we had in the prior quarter it did create a little bit of a variance quarter to quarter. As we have stated before, these limited partnership investments are invested primarily in bank stocks and we detail the impact on page 18 in the press release.

There is nothing else that is really special mention in the non-interest income section so we'll turn briefly to the non-interest expenses.

Salaries and employee benefits decreased approximately $891,000 in the second quarter compared to the prior quarter. Base salary expense remained relatively constant during the quarter with overall benefit cost decline at about $2.8 million primarily as a result of a lower payroll tax expense. And as you recall, payroll taxes are usually higher in the first quarter of the year as the Social Security tax limit is reset and decline as the year goes on. So the majority of the impact of the benefits was from lower payroll taxes.

Offsetting the positive impact of the lower [vented] cost was an increase of $2.6 million in variable pay primarily associated with higher commissions related to the increase in mortgage banking revenue. We do believe that the current staffing levels provide us with capacity in the lending area, in the frontline deposit gathering area for further growth and so as Ed mentioned we really do think the infrastructure will allow us to grow without adding a lot of additional staff.

Each of the expense categories of equipment expense, occupancy expense, data process expense and our advertising and marketing expense stayed relatively constant in the second quarter and in the aggregate, all of those categories only saw a slight increase of approximately $127,000. So very consistent cost on those despite the growth.

Likewise on professional fees. They remained relatively constant in the second quarter compared to the first quarter of this year. It did increase 243,000 to $3.8 million. This category fluctuates, depending on the legal and collection costs of resolving nonperforming assets. And we do believe that as a nonperforming asset decline, we should see some improvement in this expense category.

Ed talked about the OREO expenses of $5.8 million in the second quarter. That was down from $7.2 million in the prior quarter and also down from the $6.5 million that we recorded in the second quarter of last year. The components of that $5.8 million were comprised of $4.7 million in valuation adjustments and approximately $1.2 million in carrying cost. This will fluctuate obviously as we value the properties and get updated appraisals. The market continues to show some stress and values continued to decline in general.

On page 40 of the earnings release, we provide additional detail on the activity in and the composition of the OREO portfolio, which declined 5% to $72.6 million at June 30 from $76.2 million at the end of the prior quarter.

If we turn to the other miscellaneous non-expense category, which is the only other one that has any significant change, it increased by about $1 million relative to the prior quarter. The largest increase in this category related to loan collection cost and the category was also impacted by $147,000 of costs related to the defeasance of a portion of the securitization debt. We really don't anticipate having any further defeasance of that debt before the securitization facility unwinds in mid-August of 2012.

Overall, non-interest expenses if you take all the categories and put them together, we were down $574,000 from the prior quarter. And this overall decline occurred despite the relatively high commissions that we incurred related to the increased mortgage banking revenue. OREO valuations will continue -- have continued to be unusually high although they mitigated a little bit this quarter, but we believe that those will subside as we successfully dispose of the property which should provide some uplift in after-tax revenues.

If we are to exclude the debt defeasance costs, the OREO expenses, covered loan expenses and the impact of the seasonal payroll tax fluctuation, all of which we detail on page 18 of the press release, the efficiency ratio dropped from -- to 61.4% from 62.3%. And you have to remember that our efficiency ratio tends to be a little bit higher than our competitors that are similarly situated to us because we have a larger mortgage banking business and generally a larger wealth management business than many of them. And each of those carry a higher efficiency ratio due to the commission-based nature of their businesses.

So we continue to believe that we held the line on costs. We have operating capacity in the system and going forward we should be able to leverage that cost to support our growth. And Ed, I will turn it back over to you.

Thanks, Dave. In summary, again we are very pleased with the quarter especially the continued momentum that it exhibited. Margins are going to be under pressure as we stated but we believe there are levers we can pull and [cement inherent] gains on the funding side that can help mitigate all of this. You can be assured that we work on this every day and not for just the short term, but as always our decisions are based on what is right for the long term and long-term strategies that will ensure our ability to continue to increase overall returns to our shareholders.

The credit side, again, our objective is to identify and push things out. We don't -- this isn't over yet. Contrary to popular opinion, there still are inflows and they're still right around -- there are still going to be issues out there, but we do see a light at the end of the tunnel. Hopefully it isn't a train, but you never know. You never know about credit. Our approach is just get down and get down in the mud and dig them out and get them out of here.

We continue to see multiple opportunities in all facets of our business as it relates to expansion, both that's on the wealth management side, specialty finance side and the banking side. We as always will continue to be very disciplined and strategic in our approach towards these opportunities.

A senior management member asked me this week, he said, Ed, would you have been happy back in January if we had shown you that this is where you would be at June 30? And my response was, yes, I think I would be pretty happy except for the fact that I would have anticipated that the credit would have moved a little bit faster out of here.

But all in all I was just extremely pleased with the momentum that we have. It is nice to see a plan, a long-term plan, with many facets on it. It's nice to see it coming together even though we are still in the middle of execution, if you will. But it is really nice to see it coming together and we have just terrific momentum.

And one other side of it, too, is my job has changed a little bit over the last two years as we have brought the Wintrust name out into the market and we have gone to really pushing our capabilities on the commercial side of the business. So I am not on a lot of calls. And I tell you I am very heartened by the fact that these people that I go out and meet that I've never met before and you sit at a table and they say, Wintrust has a great reputation in the market and that really makes me feel good.

We have a great reputation. We have got great people, we have got great momentum. We have got solid pipelines. We have got a plan in place. We have plenty of capital. We will continue to push bad assets out. It makes me feel very good about our ability to execute on the plan that we really laid out back when we went into Rope-a-Dope in 2006. We like where we sit right now and we like the opportunities that we have in front of us.

So, with that, we will take some questions, please.

(Operator Instructions). Jon Arfstrom, RBC Capital Markets.

Good afternoon. Ed, your plus or minus 7 basis points guidance doesn't fit into my model. So my question is just how much -- I think we can all do the math on the deposits and the securitization and also on the premium finance loans. But how much pricing pressure is there in your core business? And is it rational, and does it make you nervous at all?

Like I said, there is a ton of moving parts here. And I wanted to bring Dykstra is shooting guns at me over here, but I wanted to preempt the question that I knew was going to come. And hone it down a little bit.

But there's so many moving parts. I could tell you right off the bat your model is probably wrong. But I won't do that.

There is pressure on the asset side of the equation. The -- on the premium finance side, we think that we are getting close to bottom on that because of the -- a lot of the higher yielding assets the nine months payout are running off and we are seeing the bottom steady on those and actually moved up a little bit. So we think that that is a positive side.

We think that really that the securitization running off if you run those numbers and with a 2% negative spread on that, when we defease these things we probably defease them over time to make 50 or 60 basis points. We still had because of the losses that we took right away, I mean they were still expensive to us, but when the whole thing is gone it's 2% negative, there's just -- it walks out the door. You can calculate those numbers.

The funding side. Our funding right now is coming in less expensive and the mix is better than what the historical portfolio has been; and the repricing opportunities there will also bring those numbers down.

But we recast on the covered assets every quarter. We recast those cash flows. That can go either way. You never know. That is a wild card.

The pricing on the commercial portfolio we are augmenting it with this fixed rate loan program that we are putting in that we covered with these caps that we put on the books. That should help and offset that. So there's a lot of levers here that as I said we can move back and forth. And I think all in all, you are never going to be able to nail down exactly what it's going to be.

Hence I said, here's your spread. It is going to be up or down about that. And I am very comfortable working in that range because of the great momentum we have, how we are positioned on our asset liability side for rising rate situation which is the old beach ball underwater if you remember how we used to use that analogy going in the old days. But --.

I remember it.

Yes. So there's just lots of moving parts and that is why maybe you got that widespread and I know that you want to come up with numbers. But mortgage is going to be very strong. There's just lots of good momentum. There's mix issues coming on. So it is very complicated to even narrow it down more than that. So that is the best I can give you unless Dave wants to add something.

No adds for me.

Just a quick question for you, Dave. The mortgage banking revenues are obviously strong. How are you able to keep that comp lying down? Is there anything unique going on there?

As rates went down you got a little bit bigger gains on the portion that you hedged out there; so we don't pay commissions on that increase as rates move along. So it benefited a little bit from actually the move down in rate for the portfolio that we had locked in before.

Thanks.

Steve Scinicariello, UBS.

Good afternoon, everyone. A couple of quick ones for you. We always spend a lot of time talking about a lot of the inorganic opportunities that you guys have. I was just wondering as you look out there, maybe give us a little bit of color on the organic opportunities that you have coming from just the seasoning of some of your affiliate banks that I know back when you did the Rope-a-Dope strategy, you kind of turned them off. How much built-in capacity do you think there is there in terms of loan or deposit growth as just turning the spigots back on there in terms of leveraging that affiliate base?

Well. from the expense side, we believe that there is a great deal of leverage. I think we are probably operating right now in terms of about 70% of expense capacity. Now it doesn't mean our expenses won't go up. We still see great opportunities to hire very talented people and bring them in. We have always made the investment and been tolerant and waited for the returns on it. But we can't pass up really good people out there.

But we believe there is good leverage left in the expense side of the system.

On the lending side, we talked about our pipelines remain very strong. That is coming from not just downtown, that is coming from all facets of our business. All of our banks are -- have strong pipelines, they are all contributing to this, to this approach by the way we have instituted the commercial banking and distributing through not just through our downtown office, but even through each of the affiliate banks.

So on the lending side, we see the pipelines evenly distributed. Maybe a little bit more out of the downtown office, but evenly distributed going forward. Where the real opportunity is is, obviously, on the deposit side of things. We have been very lucky to be able to continue to grow our deposits and stay with and keep up with loans. We like the position we are in where our balance sheet is, we're asset-driven again. We are generating more assets than we need which allows us to go out and get better market share.

But it is hard to attract deposits these days -- we are doing it but hard to attract retail deposits without totally cannibalizing the rest of our portfolio at the bank. The way we are structured with multiple brands you can go out and post individual markets and bring that in and minimize cannibalization, but it is pretty hard to get a guy to go for a teaser rate of 1% and bring all of his banking over.

So it has really been more relationships and other things. We are trying. I mean, I don't know what would entice people to move, what type of rate it would take to entice people but it is more than we are willing to pay right now because our organic growth has been pretty good. But you have got to take what the market is giving you, as we always say. And there will be a time that -- there will be a really good time that we can really maximize all of the new branches that we have. They are growing nicely. It is all working. There is plenty of capacity to continue to grow, but I don't want to spend too much to do it.

That's great color. And then one other one. Might be tough to answer, but I figure I will throw it out at you anyway.

Just given the additions that you guys have been making over the past year or two especially to the mortgage banking platform, how much of this increase in revenues could you attribute to that increase in the platform rather than just the environment?

Maybe a tough one to answer, but maybe the one angle I would take on that is more than 50% of our revenue this quarter really came from purchased --people purchasing homes versus refinancing. And we spend a lot of time with our staff trying to get in with the realtors and the like, ahead of the point when rates go up and then everybody is going to scramble to do that.

There's a lot of our competitors that are just out there taking all of the refinance activity while it's there and focusing on that.

We are doing the same thing, but we are also making a distinct effort to be able to accommodate the purchased side. So we've -- it is really sort of hard to dissect it between the different components that you said, but we are trying to build this thing so if rates do go up at some point in time and the refinance activity tails off, that we have sort of built it back in with the purchase side. And it is going to make it a much smoother transition at such a point that the rates go up and we will continue to add people where we can and it is commission based. So it's -- and we are not incurring a lot of salary cost with that and we will hopefully make a smooth transition.

I think one of the things that's helped us is this whole Wintrust name recognition marketing that we are doing with the billboards, the radio advertising, the advertising at Wrigley Field. 18 months ago, two years ago, people never really heard of the Wintrust name and that was by design. Now that we have kind of bundled the Wintrust Community Bank sub branding into our banks 0 Wintrust mortgage, Wintrust wealth management, put the billboards up. I think and we run a lot of radio ads for Wintrust Mortgage. I think the name recognition is helping us out a lot in that regard.

Plus, we continued to get -- this mortgage business is going to consolidate. I think a lot -- when this refi boom is over, I think many of the independents and when the new Department of Consumer Protection rolls into these guys, I think a lot of these independents are going to go away. And we want to continue to bring in good producers. And we think it is a consolidating market something that we can take advantage of and we are building a brand in the process. And I think some of that branding is paying off with additional business.

Thanks so much.

Brad Milsaps, Sandler O'Neill.

Good afternoon. Ed, just to tail on to Jon's question about the margin. Maybe ask a different way. You mentioned you are going on more and more calls to visit with commercial customers. Just kind of curious in these conversations you are having, what types of pricing are they commanding in this market versus where your current loan yields are. Just trying to get an idea of where the market is versus your existing book and certainly with the loan growth you've had, it seems you are getting a look at almost every credit and winning. So great job there. But just curious where the pricings falling out as you are in seemingly more and more of these meetings.

It depends on the deal. We were talking about all of the deals we were getting. We didn't talk about -- we probably turn down twice as many deals as we are putting on the books. Because there -- the market is -- you are starting to see a little bit of return to rate and term buying a business by other people in the market. We never have and we will not play that game.

So if the pricing doesn't meet our profitability criteria, we are not going to do it. And we don't buy a lot on the [cone], if you know what I mean. Because we have great lenders. We have got great calling officers. We have great guys who are great relationships and they go, ooo, wow, and then we are going get this as a result and then we are going to get that. We won't buy a lot of that stuff.

So the pricing is really dependent on the type of asset it is and rebound real estate you can get a little bit better pricing, smaller real estate date, rebound real estate in this fixed rate program we are going out at 4 3/4 on that. Five-year fix. Some of the bigger -- for bigger deals, guys are going out and getting in the 3's and 3 1/2's. We are holding at that level and we are seeing some pretty good volume there in that business.

So on a really bigger commercial deal, you may be looking at LIBOR plus 175 on those. But again the DDA balances that come in plus cross sales into the wealth management business plus the personal accounts, all in all, those relationships meet our profitability hurdles. So it really all depends on the type of asset it is. You can get deals that are between LIBOR plus 175 and LIBOR plus 400. It just all depends on the deal itself and how you underwrite it.

Really the pressure on the margin, our new business has been coming in at about the same -- these same levels for the last year, I would say. But what you are getting is re-pricing the existing portfolio and that is where the pressure is coming in. Where we have better pricing and guys are saying, hey, you have got to bring those numbers down all of it, that is mostly where your pressure is coming in. We haven't changed our pricing parameters to go after stuff. It doesn't meet -- if it doesn't meet our profitability criteria, it doesn't meet it now, it didn't meet it a year ago, we are not going to do that deal.

But where it is is in the repricing of our existing portfolio and our good customers and you kind of stuck there. So I hope that answers your question.

That's great color. And then just a question on the balance sheet. I know you guys have been building liquidity for a couple of quarters in anticipation of paying back the securitization. But at June 30 you are up to about $1.1 billion in cash. Just kind of curious what your plans are after that. Is -- after the securitization is off the books kind of where you feel comfortable bringing that down to in terms of -- I'm sure you've got other things you are thinking about funding out there. But just trying to get a sense of how the mix can change within that liquidity as well at the security's portfolio once you get that liquidity event behind you.

Well, you are right. And we have got about [$306 -- 60] million on the debt side out there that will go away and so the balance sheet will come down by that much in total. But I -- the way we look at liquidity, Brad, is we are generally 85% to 90% loan to deposit and we are sort of in the a little bit over that right now if you put in the covered loans in the low 90s. That is about as high as we want to go and the rest is going to be in liquidity assets and then it is just interest rate management as to whether you are going to keep it in cash with the Fed or whether you are going to extend out on the yield curve and invest in agencies, treasuries, or corporates of some sort.

But I think once we take the securitization out and pay that off, it is going to stay about relatively the same other than if your balance sheet grows, then the liquidity will grow a little bit. We may stay in the low 90% loan to deposit ratio in the foreseeable future with the covered loans in there. But generally the 85% to 90% is our target and that is where we want to get to. And then the liquidity is just interest rate risk management where we put it.

Yes, we put those those caps on the books to cover the mortgage-backed securities and [like some] investments. We are going to -- we are not going to barbell the whole thing. You know -- barbell the portfolio, but we will be -- there will be some longer term assets on the books. And you can buy these caps for next to nothing and basically cover your interest rate risk on that and gives you some sort of yield. So you are going to see a semi-laddered portfolio probably leaning towards the shorter end. Anything we do on the long end as long as caps stay as cheap as they are, we probably will offset them, buy some of that insurance. To make sure we don't get [whip side] down the road.

And one final balance sheet housekeeping question. There was a line here, accrued interest receivable and other assets was up maybe $250 million linked quarter. Any color there? It is probably pretty obvious but I was just kind of curious.

It is probably not obvious but it is sort of a unique and accounting issue was we had some funding out there on repo that we had secured by some agency that got called away. And we didn't reinvest in those right away. And so we pledged cash against that repo as collateral and the insane accounting rules say if you pledge cash against a repo it must be classified as another asset and not as cash. So, you actually could look at that couple of hundred million dollar increase in that line item and consider that to be cash from my perspective.

Right so there's no liquidity.

It's additional liquidity.

So there is even more cash there than meets the eye.

Yes.

Yes.

Great. Thanks for that color.

Chris McGratty, KBW.

Good afternoon. Ed, can you talk about -- you talked about the near-term margin. Can you just comment on how much more difficult it gets to be coming to defend the NIM next year if the rate environment stays where it is?

It's not just the rate environment -- competitive environment, rate environment, well, eventually the -- our whole portfolio will be repriced. But it is going to be a challenge. I mean, it's -- there will come a point where our asset side won't get much lower, but it is really going to be the repricing of our existing assets. And one of the benefits we have to offset that and I hope I made this point and juxtaposed it in my comments, was that the growth we are putting on even as it may come on at a little bit of a lower head, lower overhead, not a lot of overhead associated with it. So it should be pretty profitable growth and should allow us to continue to grow the bottom line.

But there will come a point where we can't lower our deposits anymore, and that is probably going to happen in the first quarter next year. We are going to be at a point where we kind of bottomed out on that. And so, we run out. As I said leverage to pull. So it isn't going to be -- it is going to be a challenge in this rate environment. And the real challenges, is it's like going back to 2006 and 2007, is to not do stupid things. You have got to just go with the market and not, we don't change our lending parameters. We don't -- we don't change to fit the times.

You remember that I used that phrase that Omar Bradley used, we set our course by the stars and not by the lights of other passing ships. We -- so it is going -- it's going to be tough. But on the bright side, we continue to find things like Macquarie Premium Finance to come in, we think we can grow that portfolio. Those yields are substantially better than -- they are better than the ones we get in the United States.

We think there should be more FDIC deals coming along which we can add to that portfolio. And if we price right and if the market doesn't get stupid on us, we can put those assets in and try to offset it. I said in our preferred comments, we plan and we work on this every day.. We recognize what the issues are and it's asset stupid. But it is not stupid assets.

And you can't give up pricing and you can't give up our terms and your credibility in the marketplace to get those assets. So yes, I think again -- and I think it is the industry perspective that it is going to be under pressure. I worry more about the [per loan] portfolio will do what it will do. It is the investment side of things that is so much money flying in there, I mean, it is starting to get silly in terms of do you really want to buy a mortgage back to [year X]? And that is why we buy them. We are going to cap them out to make sure that we are comfortable with that because we are of the opinion that rates have got to go up at some point in time.

You remember -- Ed putting on his economics hat here, technically speaking we looked and said this credit cycle was upon us when we saw the inverted yield curve coming and we knew in the past that that has always been followed by a credit cycle. I will tell you every time national debt has approached 100% of GDP, it is followed by a period of double-digit inflation the same period of time that the spending took place. Every single time that's happened. And hey, it is happening again.

So we continue to prepare for higher rates that beachball under water. And in the meantime, we have to fight the battle every day just like everybody else. You listen to their conference calls and I think we are in pretty good shape.

Come out as best as we can. (multiple speakers).

One further question on the securitization. Dave, can you just walk through the size of that -- did you say 600?

Yes. The facility is $600 million. So that will come back to us. But we defease, we are down to $360,000. So we actually own some of our own debt. So we will pay ourselves back. So the net liquidity that is going to get eaten up is the 360 -- or $360 million. I'm sorry $360 million that is on the liability side of the equation.

Thank you very much.

Emlen Harmon, Jefferies.

Good afternoon. Not to beat a dead horse on the asset yields here, but I was just hoping we could talk on the pace of the client and the securities book. Seemed to accelerate a little bit this quarter. Was that essentially the liquidity you are putting on the balance sheet? Is there something else we should be aware of there? And would you expect that that starts to taper out a little bit over the near future?

Part of it is we do our covered call program and so those agencies that we own got called away and you have to -- if you reinvest you reinvest at lower yields. So, we have reinvested some of those agencies, but at lower yields and then kept some of it short.

So I think most of the pressure there has been web our covered call program where the securities we get called away and then, we reinvest at lower rates. But over the longer period of time, that has always worked out for us economically because of the call premiums have offset the lower yields on it. So I would say the majority of that is staying a little bit shorter and just reinvesting when our security got called.

Got you. And in one quick housekeeping item. Could you -- do you have a number in terms of the expenses that came over with the Macquarie deal? Just kind of curious as to what the ramp-up could be there heading into the second quarter since you only had them for a limited period here in 2Q.

I don't have that number in front of me. It came on at June 8 so we really only had 23 days or 22 or 23 days on the books. The size of that stuff up there is probably 40 people or so. So you can probably use that as a gauge.

Got you. Thanks. Appreciate it.

Stephen Geyen, Stifel Nicolaus.

Just a couple of questions. Ed, I think you touched on this a little bit but Macquarie, but just curious -- wondering what the opportunities are there, what their business focus is and maybe if there are other opportunities as well, other business volumes that you think are maybe appealing up there?

Well, we do think there's -- this is Dave -- we do think there's opportunity up there. We are committed to growing it in the Canadian market. We have had good reception from the agents and the brokers that we serve here in the US that also do business in Canada. We do do some blending in the US here where we lend money to agencies to finance either the purchase of a new agency, the buyout of a partner or purchases of equipment or the like. And we do have a small business in the US where we do that.

Apparently no one in Canada is doing much of that business, and so there's some demand there. And if you do that business and you do it right, you can get a good earning asset on your books, a safe earning asset. And you also get the loyalty of that agent and broker to send you more business. So we will look at doing things like that.

We also believe that we have a team in our life insurance and premium finance side that handles Canadian life insurance premium financing and the unit we bought didn't do that type of lending. But at some point we probably will dip our toes into the water end (multiple speakers). Yes.

(multiple speakers), Dave. I was with the Division President of the life business yesterday and our first Canadian case came in. So we are looking at that business and we are having some success already there. So it will -- we believe -- we believe that Macquarie for whatever reason held back the reins on that business for a year or so as they were preparing to sell it and going through some other things and they were great folks to deal with.

But we think that with our marketing and our ability to tie into these agents that we can really build that business up in Canada and we are excited about it. So we think there is plenty of opportunity up there and looking forward to taking advantage of it.

I think we have got a great staff up there that is energized to. So we are excited about the momentum that we think we will have there.

And last question I guess is really about deposits. Just briefly, you had pretty decent deposit growth, enough to support the growth you had inside of the balance sheet, but just curious where the deposit growth is coming from. Is it a good mix between commercial and retail? Where do you see the best levers to pull in order to support the growth?

If you look at our demand deposits, most of that -- almost all of that is going to be on the commercial side. So the commercial offers that we have had and the ability for our lenders to draw on the deposits so we were $1.901 billion in the first quarter and $2.048 billion in the second quarter. So we had good growth there. Wasn't on the retail side, it was sort of spread across the different categories.

So anyone saying there is one big driver out there, we are just all plugging away and pushing because we have got the loan demand. But our guys are out marketing, but as Ed said, it is tough to get people excited about 1% products. But you give good service and you get involved in the community and you plug away at it and you get some growth.

We are right where we want to be in terms of being asset driven. That [doesn't] allow us to go out and go after deposits. So we will say we opened our all service branch in the loop earlier this week. We -- many of the centers of influence in Chicago who we've connected with and who are sending us the accountants, the lawyers, and a lot of downtown business week have not been able to bank them yet on the deposit side because we haven't had the facility to do so. Now we do. Right at Clark and Madison and it is off to a great start. Our intentions are over the next year or so to open up a couple more of those types of convenience facilities in the loop and our downtown guys have been -- they have been given a challenge. They raised a couple hundred million dollars of deposits out of there. We will see if they come through with it.

But we also -- in Napierville, we just opened a new location. So we do have some de novo coming online and we continue to market probably more heavily in the newer banks that we picked up that are small -- $20 million, $30 million, $40 million branches because the cannibalization is all a lot less when we try to pick up market share again. We consider the right-hand side of the balance sheet to be our franchise value.

So we do have plenty of marketing going on right now and we are getting lots of good deposits from the commercial business and cross-selling right into the owners and managers of those businesses. So it is coming across the board. We have to do it smartly because your marginal cost of funds could be brutal if you go into a very mature market and try to buy market share. You can get hammered.

So we are being very, very careful and hitting lots of singles and not a lot of home runs.

I am showing no further questions at this time. I would now like to turn the conference back over for closing remarks.

We are done here. Thank you very much -- thank you, everybody, very much. You know you can always call Dave or me or Dave Stoehr if you have any further questions. Everybody have a good rest of the summer. Thank you.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation, have a wonderful day.