Wintrust Financial Corp (WTFC) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Wintrust Financial Corporation's 2012 third-quarter earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference call is being recorded.

Following a review of the results by Edward Wehmer, Chief Executive Officer and President, and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question and answer session.

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

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

Good afternoon, everybody, and welcome to the Wintrust third-quarter earnings call. With me, as always, are Dave Dykstra, as mentioned, with the big long title; Dave Stoehr, our Chief Financial Officer; and Lisa Pattis, our General Counsel.

The format for the call is going to be the usual drill. I'm going to start with some general comments about the quarter's performance; Dave Dykstra will then get into the numbers with a little bit more specificity, especially as they relate to other income and other expense. He will then turn it back to me for some closing comments where I'll try to focus on our thoughts on the future, and then it will be time for questions. So we can help all of you out there reconcile your models.

Overall, we are very, very pleased with the results achieved in this quarter. The quarter is highlighted by $32.6 billion in earnings, a 26% increase over the second quarter and $0.66 a share. It's a record quarter for us, and we feel good about that. Year-to-date earnings of $81.1 million or $1.70 a share, this is almost $4 million over the amount that we earned in all of 2011. So it's safe to say that hopefully we're on a record year pace.

Total assets grew to just over $17 billion, a $443 million increase, despite the fact that we retired the remaining $361 million of our TELF securitization at midpoint during the quarter. Taking that into consideration, core assets grew by almost $800 million in the quarter. The Second Federal FDIC-assisted acquisition added $170 million of assets. The First United FDIC acquisition, which occurred on really the last business day of the month, added $316 million and then core growth of approximately $314 million. So it was a good growth quarter for us.

Deposits grew to almost $13.9 billion from $13 million and pretty much the same split -- Second Federal with $170 million in deposits; First United -- again, those are the two FDIC deals with $316 million of deposits, and core growth of $314 million.

Demand deposits grew $115 million during the quarter and still stand at 16% of total deposits, even in this growing deposit base. It wasn't too long ago that we were stuck at 9%, and I think this is, again, a tribute to the success of the commercial initiative we adopted about two years ago.

Loan growth was very good in the quarter due to historically a very slow quarter in the third quarter with everybody on vacation and the like, but loans grew to -- not including covered loans -- grew to $11.5 billion from $11.2 billion at June 30 for growth of about $287 million.

With the acquisition of First United on the last day of the quarter, covered assets grew to $658 million. We had had a nice paydown of covert assets in the third quarter, and it was offset by us picking up the First United portfolio.

Our pipelines continue to remain very strong. They are consistent with prior pipelines as reported to you, and we keep populating those pipelines. And our pull-through on close rates are pretty good. The close rates in the third quarter are always affected by the seasonality, as I mentioned earlier, but the pipelines are very strong right now and continue at their historical pattern.

Net interest margin stayed relatively flat, down 1 basis point. If you compare it to the second quarter, basically earning asset yield decreases were offset by deposits and interest expense decreases. The interest expense decreases were really brought about by the securitization being paid off, and that, again, was a mid-quarter event. So we'll have the full effect of that in the fourth quarter and continued decrease in our overall deposit structure and, again, developing a much better mix of our deposits going forward.

On the loan side, we were down 8 basis points as a function of both QE Forever or whatever we are going to call it now, and the continued repricing of our own portfolio coming down to market rates. We have not changed our pricing structures. We have not changed our profitability. Most of the decrease really relates to existing good customers who are taking advantage of the market being pushed out a little bit -- still profitable to us. But, as I said in previous calls, we do not deviate from our profitability models, and any new business we bring has to achieve those hurdles.

Going forward, we're hoping in the fourth quarter we can again declare a stalemate. We expect a continued pressure on the earning asset side, but, again, as indicated on page 22 of the press release, we do have a number of deposits repricing where we should be able to lower our cost of funds, and we will get the full effect of the securitization retirement in the fourth quarter.

On the other income side, David is going to talk in more detail, but overall it was a good quarter for all facets of our business.

Of particular note are the efforts of our mortgage company and our mortgage operation. We are currently operating at about 110% of capacity, and right now there are no indications that this is going to let up anytime soon. We actually have raised our pricing because we got to a point where we were over our capacity and was putting time delays in our service, and that's something that we're not going to tolerate. So we're going to manage this thing through the cycle. But it looks pretty good going forward. And again, on the other income side, Dave will get into it later.

Other expenses -- again, Dave will talk about it, but at first glance, we probably gave you all a little bit of heartburn with the increase in our salary numbers. We tried to explain that in there, and Dave will take you through it, and I think you'll gain some comfort going forward with how this occurred and where we expects things to be going forward.

Expenses other than salaries remained constant with the second quarter, and again, there's a lot of leverage in our system going forward, notwithstanding acquisitions, which we think is going to be a fairly active market for us over the next five years. We believe that there is great leverage in our system that we'll be able to take advantage of and keep other operating expenses low so that the growth is going to come in very profitably for us as we continue to play out our strategic plan.

Credit quality improved pretty much on all fronts. Nonperforming assets were down, and the charge-offs were down. TDRs were down. We continue to be committed to identifying and moving problem assets out. This thing isn't over yet. Some people say it is and some people say it isn't, but we're digging pretty deep and going into areas where we think there may be issues. We're not totally convinced that there may not be a rebound backward, and I think it makes great sense to make sure you are as clean as possible in case you have to take on another deluge down the road. But we're committed to doing this.

And when we can get through it, a lot of money falls down to the bottom line. So the long and the short of it is the light at the end of the tunnel seems to be getting brighter, and hopefully we will continue to push down credit costs, and next year, hopefully things will be much better there.

A couple more thoughts before I turn it over to Dave. During the quarter, we announced the acquisition of Hyde Park, HPK Financial, Hyde Park Bank, which has $390 million in assets with a hope of closing that before the end of the year. This is a terrific community bank franchise that could really never, ever be duplicated. We're excited about this prospect and look forward to getting that closed.

The acquisition market, as I reported to you in previous quarters, remains very active, and I think it will continue to be so for a period of time. The market is giving us an opportunity to look at relatively inexpensive acquisition opportunities to put us into areas where we are not. This is a great strategic move for us, and I'll talk about this a little bit later in my closing comments.

One other comment I want to make is that, if you look at our tangible book value per share growth over the last five years and even 10 years, it's been growing at around 10%. I think that that's a real value. That's a real indicator of the value that we're trying to create and we have created for shareholders. I don't think that many people can say that they raised their tangible book value 10% during the worst crisis since the Great Depression, and it shows our commitment to shareholders and achieving shareholder value without being distracted by some of the clutter of the market and that sort of thing.

So, I'll now turn it over to Dave for his comments.

Thank you, Ed. As normal, I'll briefly touch on the other non-interest income and non-interest expense sections, starting with the non-interest income.

Our wealth management revenues remained relatively steady at $13.3 million in the third quarter of 2012 compared to the previous quarter total of $13.4 million and increased nicely from the year-ago quarter of $12 million. The increase in this wealth management revenue from the prior-year quarter came primarily from the trust and asset management business, which increased $1 million. And, as we noted last quarter and this quarter's news release, we did close on an acquisition of a trust company on March 30. And so the second and third quarters benefited from that acquisition by about $300,000 to $400,000 per quarter. And the remaining balance of the increase is due primarily to new business development efforts.

On the mortgage banking revenue side, Ed talked about it, but it improved again this quarter to $31.1 million in the third quarter from $25.6 million recorded in the second quarter and was actually more than twice as much as the $14.5 million recorded in the third quarter of last year.

The Company originated and sold $1.1 billion of mortgage loans in the third quarter compared to $854 million of mortgage loans originated in the prior quarter and $642 million of loans originated in the year-ago quarter.

Now the mortgage banking revenues improved as a result of the favorable rate environment, obviously. Continuing strong volumes related to purchased some activity. This quarter we had between 40% and 41% of our volume was related to purchased home activity and otherwise good pricing metrics in the market as Ed talked about.

Slightly offsetting the positive revenue from the mortgage originations was a decline in the fair market value of the mortgage servicing rights to 63 basis points at the end of the quarter from 68 basis points at the end of the second quarter. The value of the MSR portfolio is approximately $371,000 less than the value that we had been recorded at on June 30. Obviously, the future mortgage origination volumes and the MSR valuations will be subject to movements in interest rates; however, based on what we had in the pipeline now and what we know, we expect the fourth quarter to be another strong quarter for mortgage originations.

The Company completed two FDIC acquisitions in the third quarter. The $6.6 million bargain purchase gain related to the Company's acquisition of First United Bank in Crete, and that accounts for virtually all the gain in the third quarter. This compares to approximately $27.4 million bargain purchase gain recorded in the same quarter of last year, and that related to one FDIC-assisted transaction, which was the First Chicago deal that we completed.

We didn't complete any in the second quarter of this year, but we had a slight adjustment of $55,000 related to a prior deal. So compared to the second quarter, the increase was roughly $6.6 million.

We do believe that there will be more FDIC-assisted transactions going forward through the rest of this year and 2013. We will continue to evaluate them and although the timing of such offerings is obviously beyond our control.

Fees on covered call options totaled $2.1 million in the third quarter. That compares to the $3.1 million recorded in the second quarter of this year and $3.4 million recorded in the third quarter of last year. The lower rate environments tend to have us not invest as much in the longer-dated securities, and the fees on those are down just a little bit for those reasons. The volatility market rate conditions have an impact on that, but as you can see, it's been relatively steady over the last quarters at the $2 million to $3 million range.

Gains on the available for sale securities and trading losses netted to a loss of about $589,000 during the third quarter. This compares to a net gain of $181,000 in the second quarter and $816,000 in the third quarter of last year. The trading losses in the current period in the second quarter this year were primarily a result of the fair value adjustments related to interest rate contracts that were not designated as hedges and are primarily interest rate cap positions that the Company has purchased to manage the interest rate risk associated with the rising rate environment on various fixed-rate and longer-term earning assets that we own.

If you turn to miscellaneous non-interest income, it continues to be positively impacted by interest rate hedging transactions related to customer-based interest rate swaps. We recognize $2.4 million in revenue in the third quarter compared to $2.3 million in the prior quarter and $2.7 million in the year ago quarter.

Additionally, our other non-interest income included about $718,000 positive valuation adjustments on our limited partnership investments that we own at the holding company level compared to $65,000 positive adjustment in the second quarter of this year. And, as we told you before, the limited partnership investments are primarily invested in bank stocks.-

And then offsetting the gains on the limited partnership investments was an $825,000 foreign-currency remeasurement adjustment related to our Canadian subsidiary.

If we turn to the non-interest expense categories, total non-interest expense of $124.5 million in the third quarter, increasing $7.4 million compared to the second quarter of 2012. Of the $7.4 million increase in the current quarter, almost all of the increase, or $7.1 million, was related to salaries and employee benefits. So if we look at the salary employee benefit area, we can categorize it into three main reasons why the expense went up.

First, the mortgage banking division accounted for $3 million of the increase, which supported an elevated level of mortgage banking revenue, and as we've talked before, that revenue went up $5.5 million over the second-quarter level. So this expense included higher commissions, the overtime pay, additional processes and related costs to keep up with the volume to support that additional revenue.

Secondly, the Company recorded an approximately $2.3 million increase in its bonus and long-term incentive program accruals based upon the progress in the quarter toward achieving or exceeding the Company's preestablished goals and objectives. The third-quarter results include higher net income asset growth and other factors that resulted in higher year-to-date projections of incentive compensation paid than we had previously estimated. And as a result, we did some catch-up on our accruals to true them up to what we currently project based upon the improved results in the third quarter.

And then the last main reason for the increase is an additional $1.1 million of salaries and employee benefits caused by the impact of the acquisitions of the Canadian premium finance company and the Second Federal Savings Bank that we did in the current quarter.

Somewhat offsetting the increase in salaries and employee benefits during the quarter was a $2 million reduction in the other real estate owned expense. OREO expenses declined during the quarter to $3.8 million from $5.8 million in the second quarter and $5.1 million in the third quarter of last year. The $3.8 million third-quarter 2012 expenses is comprised of approximately $1.9 million in valuation adjustments and $1.9 million in carrying costs. Obviously, these costs fluctuate as we get updated appraisals, but we are seeing that when we get new appraisals now that the valuations seem to be under less stress, and we're plateauing a bit compared to prior quarters.

If you look at page 42 of our earnings release, it provides additional detail on the activity in and the composition of our OREO portfolio, which declined 7% to $67.4 million at September 30, 2012 from $72.6 million at the end of the prior quarter.

The remaining categories of non-interest expense generally exhibited slight increases during the quarter compared to the second quarter. These increases were generally associated with the impact of having the Canadian Premium Finance Company on for the full quarter, the addition of Second Federal savings Bank during the quarter, as well as some additional non-salary expenses related to the mortgage banking revenue increase.

With that being said, the largest increase in the remaining non-interest expense categories was $806,000 in professional fees. And this category, as we've talked before, remains higher than normal and can fluctuate as we have considerable legal and collection costs related to resolving the nonperforming assets in some legal and professional fees related to our acquisition activity.

And not related to non-interest income or non-interest expense, I want to talk just a bit about the calculation on the earnings per share as there seems to be some questions about how we calculate that number.

As you know, we have two issues of convertible preferred stock outstanding. And the accounting rules require us to look at that calculation assuming that the dividend is paid and no conversion of the shares and then looking at it alternatively assuming the dividend is not paid and we convert all of the shares. So if we do that calculation, in the current quarter, it was more dilutive to assume all of the preferred shares are converted. And if you do that, you have to take the net income before the preferred dividend and divide by the total shares outstanding. So in our case, this time it is the $32.302 million of net income divided by the 48,676,000 shares outstanding. In prior quarters, it was more dilutive to assume that the dividend was paid and that you didn't convert the shares. So if you look at the second quarter, then our calculation would be the $25.595 million divided by the 44,099,000.

So the difference in share count is there's 5,019,000 shares that can be converted. And generally if our earnings-per-share is higher than $0.52 a share, the shares will be deemed to be converted as they will be more dilutive. And if we're less than that, the shares won't be deemed to be dilutive and will count the dividend paid in the calculation.

So some people were trying to take the total share count and take it to the net income applicable to common shares, but if we convert the shares, you have to use the net income number.

So hopefully that helps. And if you can just remember that there's 5,019,000 shares that can be converted, so if you were to look at our other common stock equivalents during the quarter, they would equal 7,276,000. So those are the components of our share count, and that's why the calculation shows an increased share count this quarter and how the earnings per share calculation works.

So with that explanation, which I hope was relatively clear, I'll turn it back over to Ed.

Thanks, Dave. Clear as mud, I think. In subsequent quarters, we will actually put a reconciliation in the press release for you. So we don't have to listen to Dave's accounting class, which I have to hear all the time.

Ed, if I can go back, we had the same issue in the third quarter of last year, and there weren't that many questions. So we apologize for not putting the table in. But it applies to both third quarter of 2012 and third quarter of 2011, but the intervening quarters were calculated in the alternative method.

Thanks, Dave. To summarize, as I said, we're very pleased with the quarter, with our year-to-date results and really where we are right now, and with our prospects for continued growth in both earnings and in franchise value.

But maintaining the margins -- you've heard this on all the calls so far this year I'm sure, from all of our brethren in the banking business, maintaining the margin is going to be a challenge. However, we believe that there are levers that we can still pull and hopefully that we can maintain this margin going forward. Next year we'll see what happens.

But, as I mentioned, briefly mentioned earlier, there still is a lot of operating leverage in our system. I've said, we've put the plumbing in before we flush, and we have done that.

We have lots of room to grow and to build without commensurate increases in expenses. So we think that even if the margin were to go down a bit next year, that the growth that we will be putting on will be extremely profitable to us when it comes to the bottom line, and we continue to position ourselves for rising rates. I think as rates -- the lower they stay, the longer they stay, the greater probability they're going to go up.

You may think that when Dave mentioned that we have taken hits on interest caps we've bought, we consider those -- and they're not treated as hedges -- we consider those to be insurance policies for us. If Basel III goes through and they take other comprehensive income, any fixed rate portfolios, if they take the decrement and other comprehensive income on your fixed-rate securities portfolios against capital, that's going to hurt. And what we feel is that by battering in a number of caps and maintaining -- because caps are so inexpensive right now -- and maintaining this, this is a four and a half year insurance policy for us during this period of time to protect capital for our shareholders.

To the extent we have to mark them down, we mark them down. And we really were concerned with long-term and with the real economic value of the situation.

But we like where we're positioned right now, where the market is right now. And the margin will be a struggle, but we believe that our growth will offset that and bring that plus better credit is going to bring good numbers to our bottom line.

We talked about the mortgage market is very strong. I like the fact that 40% hopefully in the near quarter -- 50% of our volume is going to be in the purchase side of the equation. So when it does fall off, the strategic alliances we've made will continue to bring us business. And it isn't going to fall off the edge of a cliff and then we have a rush to reconcile expenses. We've worked very hard on this to make sure that when mortgages do fall off that we can have the accordion effect on our expenses. 23% of our expenses right now are outsourced and are variable outsourced. If we can do half our business from purchases, half our business from refinances and the refinance business falls off by half, we can cut expenses that day. That's important to us because we don't want to give back what we've earned.

We mentioned -- the market is going to be beneficial for expansion. We truly believe -- and you've heard me say this before -- that community banks under $1 billion in metropolitan areas are just going to find it very hard to achieve their earnings results in the past, and when they get out of this cycle, they're going to be in a position to want to team up with somebody. We are the logical acquirer for those as we continue to take our community banking concept. We think our approach is the approach -- it's the community banks in the future are going to be these consortiums like our model is. And we believe that this is going to be a great opportunity for us going forward to continue to move into areas that are strategic for us and through at very affordable prices.

So we are positioned for that. At the same time, our organic growth is indicated by even by this quarter with $314 million worth of growth has been very strong. Our loan pipelines continue to be strong, and we're excited about where we stand right now.

I will point out, I still get a kick out of the fact that everybody disavows or doesn't count our bargain purchase gains.

We almost considered a line of business these days. If you go back 2009, 2010, 2011 and 2012, we've booked almost $250 million pretax of bargain purchase gains. In the old days, those would be put into the portfolio and run through the margin. I sometimes long for those old days because we would have a margin of about 4.5%, 5% right now if we were able to amortize those costs over time.

But the fact is that these have helped increase shareholder value, have helped us support the credit cycle that we went through; kept us profitable; kept us on track for what will now be if we continue with the same results in the fourth quarter, our third record year during a cycle when everybody else was taking it on the chin.

So based upon all this, we like where we stand. We think we're in the perfect -- to quote George Patton, we are in the perfect place with the perfect instrument at the perfect time to execute our plan to be Chicago's bank and to do it in a prudent way that will continue to increase shareholder value and tangible book value per share as we have in the past. And we're excited about where we are, and thanks to our shareholders who are supporting us and to the great staff and our partners here who we've been able to accumulate, who are all on board here and recognize the opportunities that we have. Morale is terrific here, and we're excited about where we're going.

So with that, we'll turn it over for questions.

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

A question on loan pricing and terms -- do you feel like it's -- I guess what I'm trying to get at is how much pressure is there from your point of view in terms of pricing? And are you starting to see signs of irrationality? Are you competing against better than Fed funds type guys, or do you feel like you can still get appropriate pricing for what you're doing?

That's a good question. I'll preface it by saying that we -- remember, the old quote I gave you from Omar Bradley. We set our course by the stars and not by the lights of other passing ships. Our profitability models have not changed. Our underwriting parameters have not changed. We do not change them to fit the times.

So, from our perspective, we are doing what we have always done and going right down the middle of the path.

As it relates to the overall market, you are seeing -- in certain sectors, you are seeing late battles going on, and you are seeing terms being lightened a bit. This is not -- it's not to the extent it was back in 2006, 2007 yet. Because you really don't have -- there's still so many competitors who are on their back right now and who aren't able to go out and to do stupid things.

But if these low interest rates, as they continue to go on, we can't help but believe you're going to see that same phenomenon take place that took place from 2002 to 2008 where there will be a little bit of a feeding frenzy for earning assets and there will be a little -- a bit better than Fed funds mentality out there.

But all that being said, we just pass on it. Our pipelines are strong enough and we build it into our probability, if we believe that it's going to be a pricing war and that we're not going to win, we're not going to waste our time on it. We'll continue to cultivate that client down the road doing a -- especially as it relates to terms. If you start doing bad deals for clients -- a deal with bad terms is a bad deal for your client, too. I don't care -- he might think he's getting the deal of the century, but you're not doing him any favors if things go sideways and you leave him no room to come back or to turn to when he really needs you.

So I think that going forward you're going to see -- it's going to be trickle down. It's not good to be a rush. It seems to be the term we're using these days, trickle down. But as rates stay low, it's going to get more and more competitive. But be assured, we are not going to change the way we do business and the profitability of our business.

If it gets bad again, we'll rope a dope again. Which will lead to a very interesting strategic question, if we have to go into rope a dope again, which means we slow down the generation of earning assets, what will that do to our acquisition plans? Would you still go out and acquire great franchises at low costs at a breakeven spread for a couple of years until things straighten out again? It's an interesting question, Jon. One we think about all the time. But in the meantime, we're going to keep doing what we're doing.

Just one maybe finer point on the loan growth, what -- obviously you had the Canadian Premium Finance acquisition last quarter, but you had stronger growth this quarter in premium finance as well. I'm just curious if there's anything to report in terms of what the drivers might be.

Third quarter is -- July is our second-biggest month annually -- and usually after quarter end, the month after quarter end is a very strong month for us. But I think the Canadian operations since we've owned it has had three record months. We're excited about that and their prospects. We had a great crew up there that's really energized. Being able to offer some of the additional products and services that we offer here in the states to the market up in Canada has proved very beneficial for us, and they are growing.

We've actually also seen not to a great extent, but the average ticket size has gone from what was $20,000 last year -- we considered $27,000 as an average ticket size on our property and casualty business to be the norm. We have been operating at $19,000 to $20,000 during the crisis. It's now moved up to about $22,000. So as those portfolios reprice because, remember, they are refinanced because, remember, these are nine-month full payout loans and 12 months later they come back to the market, we are getting a higher ticket size on this turnover.

So it's been market share pickup in Canada; continued market share pickup in the United States plus additional average ticket size. Plus, July is probably our second-strongest month. So those are the facets of that. But the business still continues to go well.

If we could just get back to $27,000 in average ticket size, you think about that and what that would do to the portfolio, raising it 20% without any additional work, and those are still good-yielding assets -- they are best other than cover assets -- that would be a very good thing.

So we hope for catastrophes where nobody gets hurt in the insurance market.

All right. Thank you.

Steven Geyen, Stifel Nicolaus.

Just curious, the yield on liquidity management assets declined 20 basis points from last quarter. Just curious what the major drivers to the decline where and if there were any increases in the Fed funds sold that could eventually put to work at higher yield.

Well, it depends on are you looking at month end numbers, Steven?

Average --

So you're looking at -- so the average breakdown. We had some securities called at the end of last quarter, and we've reinvested in the rates on longer-term Freddies and Fannies and agencies that we replace some of those with as the yields were down. So, as we're replacing those securities and the yield curve has come down, we're replacing them at lower-yielding securities.

We would hope to take those excess funds and loan them out. So the premium finance business that we just talked about is strong, and our pipelines are strong, and the mortgage business is strong. So hopefully we will be able to put that liquidity to work in loans.

Yes, our portfolio is pretty well barbelled between overnight money and the longer-term securities. So there is opportunity to put Fed funds to work. And this is going to be an ebb and flow if everything keeps playing out as it is, some of these acquisitions that -- if we are successful in continuing our -- on the acquisition side of things, you do pick up extra liquidity there. And it is going to take time to deploy it.

So we're not able to do it all in a quarter. It would be nice if we could do that. So it will ebb and flow in terms of total efficiency of our liquidity. And right now we probably have a little bit more on the short end of the barbell than we would like. But we continue to manage that, and the loan pipelines remain strong.

We continue to look, by the way, to add additional niches to our niche lending programs. We believe in diversification of those programs, and we do look at a lot of different things. I think we've looked at every leasing company in the country twice and have taken a pass. But -- I'm being facetious there -- Lisa just gave me a funny look.

But it's all going to be about earning assets going forward in diversification of earning assets. And that's really going to drive a lot of things. But we do have additional liquidity that we can put to work. The pipelines remain strong. We continue on the diversified earning asset front to put it to work.

Okay. And Dave, you did touch on this a little bit, but I was just curious for a little bit more color. Historically Wintrust has had some pretty good success offsetting the margin compression with call strategy, the cover call strategy. I'm just curious if in a very low-rate environment, if there is a point where that strategy no longer make sense.

Well, as we continue to grow, we sort of barbell for portfolio to the extent that we have a long end out there that we put some of that excess liquidity to work, there'll be a little bit. To the extent the securities get called and we reinvest, we would always write on those. But where that probably goes away is, if rates start to rise a little bit, the securities don't get called, then you won't get as much premium on those. And so you just won't be able to write against them and get any premium.

But if rates stay relatively flat, the securities will get called or they won't, but you will be close enough in the money that you can always rewrite on those securities. So where -- it's just -- there's not as much volatility at the low end of the market right now, so we're not getting as bake of premiums as we maybe got during higher volatility times. I think with the Fed saying rates are going to stay low for an extended period of time and take some of that volatility out of the market.

But as long as we're investing in agencies and treasuries, we will write against them if we can. So if rates stay relatively flat, we'll probably stay in this $2 million to $3 million range. If they go up a little bit, then they actually could -- if rates go up a little bit, that income could fall a little bit because the securities won't get called away, and you won't get as much premium for writing against a security that is out of the money a little bit. But our margins should respond favorably to offset it, and that's the whole purpose of the program.

Sure. It makes sense.

And if rates go up, the barbell is uneven right now. We probably have more in liquidity, in overnight liquidity than we have invested, and that makes sense. I mean, we invested long. If rates start moving up, you could see us actually laddering and going a little bit longer with the portfolio if rates start moving up also.

But the margin would cover it, as Dave said. So there is a scenario where it could go to -- it could decrease. But in most scenarios because they'll increase if there's growth; there's increase if there's rising rates; if nothing happens, then you just keep writing, and you would write on the growth. So there's a scenario where it could go to zero, but it really depends on growth and where interest rates move.

And the other thing is that if you run the sensitivity analysis, why we're barbelled right now and uneven barbelled is because of this Basel III stuff. And if we have to take our long-term portfolio in any decrement in that against our capital, that could be -- I mean, that's a brutal concept. That's why we put those caps in place is just to cover for that.

So we're trying to protect capital and protect shareholder value in a lot of different ways. And we do it in how we can think about our investments and the rate environment that we're in.

Okay. I appreciate the commentary. And just one small last question, regarding the bonus, $2.3 million, you had mentioned that part of that was catchup or was all of it catchup?

Well, it is all tip and bonus. It is the long-term incentive plus the short-term incentive. But I will let Dave answer the --.

No, it's not all catchup. That is is we get bigger and we've added more people. You have some additional there. And as you make more money, just gradually the short-term bonus accrual will go up. On LTIP, those are multi-year plans, and as your target goes up, there is a little bit of a catchup there.

So it's a little bit of growth and catchup and just the normal increased accruals. As we project throughout the year to have higher performance and better performance, our bonus accruals go up. But we just sort of true it up to what we think the performances now. We run the models and we book what it is. But on the long-term incentive plans, there is some catchup because they cover multiple periods.

Got it.

And one thing to remember is we are doing better than we anticipated. So but at the end of the year, we reset that far. So there will be new short-term incentives for everybody that obviously will stretch these guys for next year. But the payout would be what the normal payout would be this year, if you follow what I'm saying.

So we're doing better this year, but we do reset the bar. We won't be resetting what people's target bonuses are, but we are resetting the target. And I would like to be in the same position next year in the third quarter to tell everybody that, yes, we had to do a catchup because we're doing a lot better.

That's helpful. Thank you.

Brad Milsaps, Sandler O'Neill.

Ed, I think you mentioned it briefly in your comments or maybe it was Dave, but you mentioned you had a large pay down in the covered loan category. I was just trying to see if you could add a little bit more color to that because you had, I think, roughly $170 million in covered assets that came over in the larger deal you did in the quarter. So we're just trying to see if I can understand that a little bit better.

It wasn't one large paydown. It is just continued paydown. Our purchase assets division does a fine job, and you can validate that by just looking at the rates that we earned on our covered asset portfolio.

But I think you'd see, some of it went into OREO. Our OREO went up on covered assets. And the rest were actually paydowns of those loans that we've been able to -- the quicker you can pay those things down, the better the yield and the better earnings you are going to get on the discounts you took on them.

So it was just same old, same old of continued progress on that portfolio. And it was just a really good quarter in terms of cleaning some of that stuff up.

Okay. And then Dave, I know you guys typically like to bring those, and it can be a quarter delay in how you look at the different pools of the assets of any individual bank that you bring over. Do you think the yield on the covered book could get a bump in the fourth quarter based on how you guys -- you have another 90 days to really look at it and see how things fall out.

Trying to figure out that, Brad, is like trying to figure out the units on your phone bill. It's so complicated.

That's why I'm asking.

Obviously, Brad, this occurred on the last busy day of the quarter. We've spent a lot of time digging through that and doing our best estimates, and we'll continue to just make sure we have it right.

We think we have it right. We put a lot of effort into it. But -- and so, I think the answer is, you don't expect it to go up, but if our purchase asset division does a lot better than what we projected as they have on the prior deals, then it could go up. But GAAP would tell you it should be level yields until they show better progress than what we booked it at. And if you get three, four months out, maybe you find out new information on some of these credits as you get further into them and our situations changed, which we have on the prior deals, and then the yield would go up.

I think from a GAAP perspective, you'd say you'd have to book it right here, and that is what we think is the right answer. But once we get our purchase asset guys in there and really working it hard, they sometimes, most of the time, actually, surprise us and do a great job early on and blow some of the stuff out, which helps us increase the yield. So I'm not sure if that's a great answer, but you really can't predict until the guys get in there and --.

It's usually two quarters before you see anything material come out of there. It just takes one way or the other. But the existing portfolio -- we have a big -- the existing portfolio pooled loans from the previous transactions. And those can move one way or another by 50 basis points in a quarter, just because we recast the cash flows on all of those loans every quarter. And you could have one big one payoff if it comes in early in that discount comes in and gets amortized, it could go 50 basis points either way.

And so the probability notwithstanding an additional transaction, but the probability of any rate movement could probably be better stuck on the existing portfolio than the new portfolio coming in in the next six months.

Great. Thank you, guys.

Steve Scinicariello, UBS.

Just a quick one for you. So, as strong as your asset generation has been lately, some of these FDIC deals have actually boosted up your deposit funding even more so. Your loan deposit ratios has gone from 91% down to sub- 87%. And so I just kind wondered if you could talk a little bit about this leveraging opportunity that you guys have to loan up some of these deposit franchises. I think HPK is a good example with the 55% loan deposit ratio. So just wondering, is that one big source of operating leverage as you look ahead and just looking to get a little more color on that?

Well, it certainly is. Our ability to bring those up to optimization is a critical part in our thinking. And it's very hard now to -- even though we were able to do it in the third quarter, the core growth is harder to come by, just because of the rate environment and trying to get people to move. We're doing good advertising, and it is working. But to be able to pick up a great franchise like Hyde Park and it has the capacity to put loans on the books and is an integral part of our thinking here.

But we can't do it all in the same quarter. We're not going to chase assets. There will be periods where we have excess liquidity. That will affect the margin. And when we don't have enough liquidity.

The first quarter of this year I remember we were scrambling to get liquidity in here. So I say it is like climbing a ladder -- I need deposits; I need loans; I need deposits; I need loans. But that is a terrific opportunity because we get great core deposits, and then we're able to lend them out and get a great spread on them.

Where we really have the leverage is in our existing infrastructure where we can bring on good growth, good asset growth without commensurate increases in expenses. That's really -- so if you figure, let's just hypothetically say -- and I am not projecting anything -- but if you had a margin of 3.51 -- let's say it fell to 3.25 next year, just hypothetically -- but your cost of bringing on new loans and new growth is only 40 basis points, that growth would come on after tax, that's like 1.60. 1.60 on assets for that additional growth. So leveraging those expenses and managing those expenses is really where we see the benefit of the leverage we have in our system.

Perfect. Thanks so much, guys.

Chris McGratty, KBW.

Dave, on the two deals, the Old Plank deal and the Hyde deal, can you just break out the assets between loans and deposits -- or, excuse me, loans and securities?

On which deals, Chris?

On the one that is slated -- the FDIC deal that closed in the quarter and the one that is closing -- the one that closed in September. The Hyde -- it says it was $300 million in assets. I was just wondering how the $390 million in assets broke out between --.

Well, Second Federal was $170 million, and it was deposit only. Is that what you're asking?

Yes, I guess I'm asking the Hyde Park one -- the $390 million.

The one that will close in the fourth quarter?

Right.

Yes, I actually don't have the number right in front of me right now. The call report is out there, but they said they are about 55% loan to deposit. So that number is in the $100 million to $200 million range. I just don't remember exactly what the number is right now, Chris.

Okay. And then the Old Plank deal, the $310 million of assets, do you have that in front of you, or is that something I should check?

Well, I think it's in the press release. Actually we picked up -- on the deposit side, we picked up about $216 million but only $310 million of assets. And it added what $100 and something million to covered loans?

Yes, I don't --

$75 million covered in asset discounts.

Yes, I'm pausing because it depends on how you present this. If you apply the discount that we put against this loan, then you have grossed loans, which you have to bring them over net of the credit discount that you apply to them. It was closer to $75 million that would run through the loan item. But it goes through the covered loan section, not our normal loan line on the balance sheet.

Yes, understood. Thanks for the clarity on the share count. I just want to make sure I have it correct.

If the level of profitability continues or grows from here, the 48,700,000 is the share count we should be using to calculate earnings, and the only adjustment would be to not forecast the preferred dividend, is that correct?

That would be correct.

And that's assuming everything, including the potential convert. That's basically the average fully diluted share count that we could see, even with the TEUs and everything. That is everything.

The TEUs are at their -- and we show that in our adjusted net income section, but the TEUs are 6,133,000. And that's as low as they can go because we're over the $37.50 cap on that. So if our stock price went below $37.50, that TEU number could go up a little bit, and you can see in the prior quarters it was 6.7 million and 6.5 million. The highest it could go would be 7.6 million. But as long as the stock price stays relatively close to where it's at right now, then you shouldn't see any change in those TEUs. And so you're right. You would take -- all things being equal with the stock price, you take the 48,700,000, and then you would take the net income number and assume zero preferred dividends.

Okay. And then for the book value calculation, we obviously in the past added to TEUs. Is the 48,700,000 give or take a little bit -- is that the right book value number of shares to use going forward?

Well, the EPS is just a GAAP measure. What we do -- if you look on page 19 -- is we use our actual shares outstanding of 36,411,000 and add in the TEUs of 6,133,000. So for book value calculations, we use 42,544,000.

Okay. Thank you.

And we don't assume the preferred converts for book value calculation.

That was my question. Okay. Thanks.

Emlen Harmon, Jefferies.

So I guess the question that I had just more big picture in nature, but will you lay out for us what the CD repricing opportunities that you have coming up are? Historically you guys have carried a bit higher deposit costs than peers, just given your footprint and customer base. Could you talk a little bit about where you think your deposit costs go relative to the industry given that your footprint has changed some? And then also just the fact that we're in a lower rate environment and customers are just getting less yield elsewhere and what your ability is to bring that pricing level down a little closer to where the industry average is.

We think exactly like that, that we can bring it closer to where the industry average is. People are not fighting up and down for 3 basis points or 5. We think that there is good opportunity to continued opportunity there to bring our costs down and to have them closer. And to continue to grow DDA. Although you don't get as much out of DDA as you used to, you will some day. And we're going to continue to grow that.

What we like to get and what we're pushing for also is a better deposit mix. You've seen our CD numbers come down as a percentage of totals. Why we have more CDs than anybody else was really a function of our growth in the past and trying to do and get people in without cannibalizing the rates on everything else. But in this market, we can direct people to the savings in the money markets where we can be a little bit more inelastic in terms of raising rates when they finally do go up.

So I think you hit the nail on the head. It's not just the CD repricing, but overall core repricing is what we're doing also. And we would expect over the course of the next year to be able to bring it down. Probably not totally to peer group because we still are in a number of markets that wouldn't accept that, but to continue to narrow that gap.

Okay. Thanks. And then one other quick one on the Hyde Park deal. Just reading the deal docs, it mentioned that there is a TARP walkaway provision on the deal. Can you just explain to us how that works, and is it contingent on the Hyde Park paying back TARP prior to deal close? Or is that the function of you being able to do it? If you could just maybe give us some color around that.

Well, what we put in the 8-K is that a condition of the closing of the transaction is that the TARP no longer be outstanding. So we have a right to walk away if the TARP is still outstanding at closing. We could waive the condition of closing and close if we wanted to, but right now the condition of closing is that that TARP be repaid before we consummate that deal.

And I would probably tell you that the probability of us pulling ahead if the TARP wasn't paid off -- there's more probability of me having a dead rat in my mouth than that occurring. So, been there, done that. We don't want to go back to TARP.

Got it. All right. I appreciate it. Thanks, guys.

Peyton Green, Sterne, Agee.

The overnight liquidity and just low yielding liquidity management assets has been this way for a couple of years. And certainly you've done a lot of FDIC-assisted deals, which have contributed liquidity. And I guess I'm just wondering, what level can you drive it down to as a percent of earning assets? How much of the overnight liquidity is for deposit purposes or pledging purposes?

That's a good question. We obviously -- and it is not like you haven't talked to me about this before, Peyton.

I think the way to look at that, Peyton, is we generally have said we want to be 85% to 90% loan to deposit. In this rate environment, you might go a little bit higher, and then the liquidity -- if you establish those goals and hit them, then your liquidity falls out. We're not maintaining liquidity for the sole purpose of collateral. We will use it if we have it for municipal deposits and the like, but we're not going out and buying it just so we can go get new deposits. That's not profitable business. You can't make money doing that.

So the driving force is really how much do you have loans.

But I think Peyton was addressing the or asking about the uneven barbell right now that we really have a lot more overnight, including that we have invested in. And that is a conscious effort, Peyton, because could we get better yield if we went out and took half of our overnight liquidity and threw it into longer-term assets? Yes.

But when you run the sensitivities on that and you look at what a rise in rates would do, 2% or 3%, what that would do -- and if that was then had to go against your capital, your returns on that could be awful. And it could really turn around and boomerang on you. And that's why we're very careful. That's why we put the interest rate caps in place for the portfolio that we have in long-term securities. Because we write $1 billion of mortgage-backs on the books and bought them at these levels and rates went up, you could lose $400 million or $500 million worth of capital. And that would make my shareholders very happy.

So would we like to do it? Yes. It certainly would make life easy. It would be a short-term situation to maintain margin, but long-term I think it would turn around and bite you.

So we're very -- we look at it all the time. What is the appropriate level and maybe I'll do it on percentages, but should we be -- where should we be in terms of the duration of all of our liquidity? And right now we're leaning toward shorter as opposed to longer.

As we grow, you'll probably see us maintain that same percentage of short versus -- long versus short. And we'll just see where things go and where Basel ends up if it ends up at all. But I just saw it as a short-term fix for a long-term headache to try to go out and invest more right now. And, as you know, that's not what we do. We look long term.

But it always is enticing to say, man, if I could invest a little bit higher, I could be king and Pope. But I'd be run out of office in a couple of years, and I'm not excited about that prospect.

Okay. Well, maybe another way to look at it is, when you've got about $450 million in FHLB advances and probably about $500 million or so in note payables and other borrowings that yield around 2.25% blended, why not restructure those with the bargain purchase gains and get the term better at a lower cost or just run more deposits funded where your spread would be better?

Under review. Always under review. Looking at that.

Okay.

We have driven those costs down on the Federal Home Loan Bank advances. A lot of those are for overall asset liability purposes, but that's the purpose they were on. But that's always under review as to how to bring those costs down. And it is now our leading cost of funds in our Federal Home Loan Bank numbers. So it is something that we look at all the time.

Okay. And then in terms of thinking of the loan yield at the margin, what was, if you know it, what was the blended organic loan yield on originations and renewals in the third quarter?

It's not something we've disclosed, so maybe it's something we'll put in future disclosures if that's of interest to everybody. We can run a lap schedule of what runs off and what runs on, what's renewed. We'll take a look at that, but it's not something we've disclosed yet. And I'm hesitant to do it now because my General Counsel has put a shock collar on me. I have to be very careful about what I say.

Okay. And then the last question is -- certainly you get credit for the bargain purchase gains over time and book value on the multiples you get on book value, no doubt about it, but thinking about the near-term income statement effect, in looking at the quarter, I mean you had about $7 million of good, strong core revenue growth. But there was about $6 million in core expense growth. And, I guess, how much of the expense growth which you expect to receive in the fourth quarter where you might get some more operating leverage out of such a strong revenue number?

And, well, the expense growth was all on the salary side, and Dave went through that. Some of it is catchup; some of it is just the fact that we're doing a lot better than we thought we're going to do. It's got to be put into those variable rate plans. A lot of -- half of it, basically is plus or minus is due to the mortgage side of the business doing as well as it's doing. So the other -- if the mortgage business continues to do well, that's a net-net positive for us. And the rest of it is just going to be based on how well we do. So we're going to continue to increase revenues and the like. We have good growth here, good leverage built-in here. We would much rather have not seen that increase, but it is what it is. It's $1 million or $2 million of it relates to the two very good acquisitions that we did.

And it does take some time on the bank side of acquisitions, especially FBICs, to weed out some of those calls. I think you've seen us do it in the past. We've done I think more FDIC deals than anybody else. But it takes you a good six months, at least until you get through conversion, before you can really experience -- the conversion of the data processing systems, before you can experience the real cost savings there. And given the number of deals we've done, we have conversions lined up like planes over O'Hare. So it's just might be three or four months before we can get that accomplished and get those numbers down.

But pushing continued revenue growth can maintain the margin. And keep our expenses, not withstanding acquisition expenses, keep them flat to up a little bit is our goal for the next year.

On a same-store sales basis, that's what the goal is, is to keep expenses relatively flat next year. So we can deal with -- and take advantage of that leverage, even if our margin has to go down a little bit. It would still be really good profitable growth.

Okay. So looking at it this way, I guess, if revenue growth was 7% in 2011 and we're projecting it to be around 13% for 2012 and you have had expense growth of 10% in 2011 and estimated at 15% for 2012, you would expect those to flip-flop in 2013, and revenue growth or expense growth should be less on a percentage rate basis than revenue growth. Is that fair?

It depends on the number of deals we do. I mean on same-store sales, we would like to keep our -- on a relative run rate basis, when we hit December, they all -- when you take out the -- on a same-store sales basis, we'd like to keep those expenses constant. That is what the goal is.

Now budgets are being done now, and we'll see where that ends up. But we expect to be very active in the acquisition side, which certainly adds to your expense base going forward. Maybe not the commensurate add to your revenue base right out of the box because it does take us some time to achieve those expense savings and to get those banks loaned up. So if you view it on a same-store sales, which we don't present anywhere, that's what our goal is.

So it's kind of hard for me to reconcile those numbers because there is a ton of variables that could enter into it.

Okay.

But I think over a beer or two, you and I can figure it all out. Next time I see you.

Okay. Thank you.

As long as it's public.

Thank you. I'm showing no further questions at this time.

Well, thank you very much, for everybody. We'll talk to you after the end of the fourth quarter, and everybody have a great holiday season, starting with Halloween. I guess that's when it kicks in. So thanks, everybody, for dialing in.

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