Wintrust Financial Corp (WTFC) 2013 Q2 法說會逐字稿

Welcome to the Wintrust Financial Corporation 2013 second-quarter earnings conference call. At this time, all participants are in listen-only mode. (Operator Instructions). And as a reminder, this call may be 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, and instructions will be given at that time.

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

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

Thank you. Good morning, everybody, and welcome to our call. With me, as always, are Dave Dykstra, our Chief Operating Officer; Dave Stoehr, our Chief Financial Officer; and Lisa Pattis, our General Counsel. We will conduct the call in the usual format. I will give some general comments on the quarter. Mr. Dykstra will take you through a detailed analysis of other income and other expenses, then a little summary for me with some forward-looking comments, and follow that with some questions.

So looking at the second quarter, all-in-all we are very pleased. It was a good quarter across the board with earnings up 34% over last year and $2.2 million over the quarter one of 2013, driven really by our core loan production, which was up $617 million over quarter end to quarter end balances over the March quarter end.

Our pipelines remain consistently strong with a gross of $1.2 billion and $825 million weighted as to the probability of close within the next six months. Our pull-through rate, though a little bit staccato, has been pretty good. Part of that loan growth related to the acquisition of our Lansing bank and some was a little carryover from the first quarter, but all-in-all still very strong loan growth and momentum seems very good there.

This resulted in an increase in the yield on earning assets of 7 basis points to 4.04% of total earning assets. Couple that with a 3 basis point decrease, the cost of funds in our margin increased from 3.41% in the first quarter to 3.50% in the second quarter. After our design shrinkage last quarter, customer growth returned with total assets up $537 million over quarter one and $1 billion over the same period the last year. $365 million of the growth related to the acquisition of First Lansing, which closed on May 1 of 2013.

As a side note, these small acquisitions that we are doing not only have been good for us strategically, but they also come with a great deal of excess liquidity. Our loan production has been able to utilize that liquidity almost immediately. Expense reductions on these deals come at a later date, and they are really conversion dependent. So when the conversion of First United Bank of Crete, which we acquired last -- the end of last -- the third quarter of last year on September 28, was just converted this quarter. Lansing isn't going to convert until late third, early fourth quarter, so the expenses will come out of this.

So these deals have -- the point being these deals have worked out very well for us, and there's still some upside as it relates to cutting expenses for us when we get conversions done. Deposit growth was also very good for the quarter, demand growth we continue to grow our demand deposits. They hold at about 17% on our way to -- our goal is to be north of 20% there as we -- as an ancillary benefit of continuing to execute our middle market strategy.

On the other income and expense front, which Dave will take into more detail, we had a strong mortgage at the quarter. Current projections for the short-term don't show a slowdown, a material slowdown in that business. We will be able to garner a pretty good purchase activity as opposed to refi.

We also -- and we don't talk about this often -- had a strong manage -- Wealth Management quarter, aided both by the market and by new business generation. This is in all lines of our business, both trust, brokerage and asset management.

You'll note we did have an operating gain from the market -- fair market value of our interest-rate caps. This is part of an overall strategy that relates to managing our interest-rate sensitivity. You know, we didn't have much of covered call options, and these all kind of fit together in how we manage the entire balance sheet. I know many of you back these out, but it really is an integrated strategy that we have used for years, and we continue to use. So covered calls income was down because we are certainly not going to be buying a number of longer-term securities and trying to lock in a rate right now forever. But at the same time, over the past year, we have been laddering in interest-rate caps. To date, we have about $875 million of face value of these things.

We consider this kind of an insurance policy for us, but we do not get hedge accounting on this. So we have to market to market every quarter.

You know, the logic behind this every day we get closer to rising rates. When rates rise, the mortgage business, as many of you point out, will slow down, hopefully not as much for us as for other folks because of the mix that we have in our previously stated goal of being one of consolidators of that retail business as the market shakes out, but it will go down. And also as rates go up and the yield curve doesn't go up simultaneously, so there is little delay in the benefits that we will achieve because of our interest-rate sensitivity position and because of the nature of our deposit base, there will be a little bit of a delay.

So this acts as kind of a bridge for that, and it is just part of an overall strategy that we employee on interest-rate sensitivity and just seemed like the right thing to do at the time because these things were relatively cheap, and it has worked out very well for us and it should continue to do so.

The rise that -- so accordingly the rise in the long end of the curve results in a $3.7 million gain for us this quarter.

Expense control actually was pretty good. I know expenses were up, but if you take out the effects of variable cap and credit, they were actually down about $900,000. We continue to believe we have a great deal of excess leverage in this system, and as stated earlier, taking advantage of that leverage is one of our strategic goals going forward.

On the credit quality side, our nonperforming assets kind of rebounded from last quarter's blip, and we continue the process of as we have always referred to as landing the plane. Just kind of getting back to our normal credit metrics that you experienced before the cycle hit.

You know, comparatively we have always had lower credit metrics, but again we are trying to get back to those ultra low credit metrics that really are indicative of the credit policies that we employ here.

NPAs as a percent of total loans decreased to .97%, the lowest level since quarter three 2007. Charge-offs and OREO expenses are still much higher than we would consider to be normal run rates, but we take a different approach on this. I mean we dig very deep, and we push assets out. We don't -- we try to liquidate these. Who knows when the next deal is coming, when the next bad deals are coming, when the next cycle is coming. But our approach is to identify, move them out, take your losses and move on. Industry practice has been for a lot of folks is hang on, hang on, hang on; we're fine, we're fine, we're fine. And then they have a blowup and then they write it down and then they are fine, they are fine, and then they sell it all at $0.50 on the $1.00. We have never done that. That has not been our approach. Our approach is to identify and to move the asset out, take your lumps and move forward.

All that being said, we expect but there is no assurance in this because it is what it is in our book, but we expect credit to continue to get better throughout the rest of this year and might take a little bit into next year, but maybe not to get back to those normalized numbers. And we feel very good about that, and we will have a pristine portfolio at that point in time. But, again, it is what it is.

Now with that, I will turn it over to Dave to go over other income and other expenses.

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

Turning to the non-interest income section, our Wealth Management revenue, as Ed referred to, improved by $1.1 million to $15.9 million in the second quarter compared to the previous quarter total of $14.8 million and increased very nicely from the year ago quarter of $13.4 million. If you look at the press and asset management revenue component of Wealth Management income, it increased by $905,000 to $8.5 million in the second quarter of this year from $7.6 million in the prior quarter. The increase in the trust and asset management revenue was a result of two new months of revenue from the First Lansing Bancorp acquisition and their trust business; trust customer tax preparation fees that we received in the second quarter, as well as growth in the assets under management from new customers and market appreciation.

Our brokerage REIT in those revenues also saw an increase of $159,000 in the quarter over the prior quarter, and those increases were just generally from increased client trading volumes.

Turning to mortgage banking, mortgage banking revenue increased by 5% to $31.7 million in the second quarter of 2013 from $30.1 million recorded in the prior quarter, and it was up 24% from the $25.6 million recorded in the second quarter of last year. Despite the declines in origination-related activity for refinancing activity, the increase in originations related to home mortgage purchases resulted in overall mortgage banking revenue during the current quarter being the second best result in the Company's history.

The Company originated and sold $1.05 billion of mortgage loans in the second quarter compared to $974 million of mortgage loans originated in the first quarter of this year and $854 million in the year ago quarter. We generated relatively strong buying related to the purchased home activity, which represented approximately 55% of the second-quarter volume, and we have continued to benefit from good pricing metrics in the market.

The current quarter also benefited from a slightly higher valuation in the fair market value of our mortgage servicing rights to 87 basis points from 72 basis points in the prior quarter. The value of the MSR portfolio was approximately $1.3 million more than the value at March 31.

Future mortgage origination volumes and mortgage servicing rights will obviously be impacted by and be sensitive to changes in interest rates and the strength of the housing market. And although our pipeline for mortgage refinance business has softened recently with the higher rates, our pipeline for home purchase business remains very healthy, and we expect mortgage reviews to remain relatively strong in the second quarter.

As Ed mentioned, the fees from covered call, our options were down slightly this quarter, and they totaled $1 million compared to $1.6 million in the previous quarter and $3.1 million recorded in the second quarter of last year. We have consistently utilized these fees from the covered call options to supplement the total return on our treasury and agency securities held in the portfolio to offset the margin pressures caused by low rate environments. And these fees are impacted by market rates and market volatility. In a rising rate environment, we generally receive less fees on these covered call options.

Offsetting that, though, if you turn to the trading dates, as Ed mentioned, we had $3.3 million during the second quarter of 2013. This compares to a trading loss of $435,000 in the first quarter of the year and a trading loss of $928,000 in the year ago quarter. And the trading gains in this quarter and the losses in the prior quarters were primarily the result of the fair value adjustments related to interest-rate contracts that are not designated as hedges primarily the interest rate cap positions that we use to manage interest-rate risks associated with rising rates on various fixed rate longer-term earning assets.

Ed talked about our strategy there. It is one that we have employed over the course of the last five quarters, and generally the trading and income and loss line numbers are predominately the change in the market value from the cap transactions.

Miscellaneous non-interest income continues to be positively impacted by interest-rate hedging transactions related to customer-based interest-rate swaps. The Company recorded $1.6 million in revenue in the second quarter of 2013 compared to $2.3 million in the prior quarter and also in the second quarter of last year.

Additionally, many of you like to know the income that we realized on our limited partnerships and bank stocks that we invest in, and we had a positive valuation adjustment on those this quarter, $562,000 compared to $1.1 million in the previous quarter and only $65,000 in the second quarter of last year.

Turn to non-interest expense. It totaled $128.2 million in the second quarter of 2013. This is an increase of $8.1 million compared to the prior quarter and an increase of $11.0 million or 9% compared to the second quarter of last year. As we noted in our news release, the total non-interest expenses were generally effectively managed as evidenced by an $888,000 decline from the first quarter when you exclude the OREO expenses, variable compensation expenses and the expenses associated with the First Lansing Bancorp acquisition. Specifically the First Lansing Bancorp acquisition, which closed on May 1, added approximately $1.2 million to the total noninterest expenses during the second quarter.

Looking at some of the individual categories. Salaries and employee benefit expense increased by $1.7 million from the second quarter compared to the first quarter of the year. If you exclude the $595,000 impact of the First Lansing acquisition, this category of expenses increased approximately $1.1 million. Contributing to this net increase was approximately $3.9 million in increased bonus and commission expenses that were driven by increased earnings and higher revenues on the mortgage banking and wealth management segments, offset by approximately $672,000 in lower salary expense and $2.1 million in lower benefit expense which were primarily payroll tax related.

Turning to OREO expenses, the second quarter saw a $3.9 million increase in net OREO expense, resulting from a net OREO loss in the second quarter of $2.3 million compared to a net gain of $1.6 million in the prior quarter. The net change is primarily a result of a $3.4 million gain recorded on one large OREO property in the prior quarter. Of the $2.3 million of OREO expense in the current quarter, approximately $1.5 million related to operating expenses. So the majority of that cost now is operating expenses rather than valuation adjustments, and as the portfolio declines, we would expect to see those operating expenses also decline.

Page 39 of the earnings release provides additional detail on the activity end and the composition of our OREO portfolio, which increased approximately $908,000 to $57.0 million at June 30 from $56.2 million at the end of the prior quarter. However, it should be noted that the second quarter and OREO balance included approximately $6.8 million related to the acquisition of First Lansing Bancorp. And without that acquisition-related additions, the balance would have declined $6 million from the prior quarter.

All the other non-interest expense categories were generally well managed and within the normal range.

So in summary, as I noted earlier, non-interest expense has actually declined by $880,000, if you exclude the OREO change, the variable compensation-related expenses and First Lansing Bancorp acquisition-related expenses. We continue to believe we have got operating leverage in our system as we continue to grow, convert our recent acquisitions to our data processing platform, and as we continue to work through our nonperforming assets. We are focused on it, and we are working diligently, and we expect to achieve improved operating leverage throughout the course of the year.

So with that, I will turn it back over to Ed.

Thanks, Dave. So to summarize, we are really pleased with the quarter, the trends, and I think they really bear out the execution of the plan that we have been playing out to you for a long time. Our ROA of 80 basis points is up from 63 basis points a year ago. We are continuing on the road to be north of 1%.

In actuality, if you took out our -- if you just took our credit losses back down to what we would consider normal, which is normal being $6 million to $7 million a quarter, we are already over an ROA over 1%. Add to that the -- if we are able to continue to execute our plan, which includes leveraging our expense space, so bringing on growth without a commensurate increase in expenses, we think there is upside there also.

To note this quarter, this is probably the first quarter that I can say that we were back to our asset-driven approach. Now many of you who watched us for or known us for a long time know that prior to, well, since our inception up until 2006 when we went into our rope-a-dope strategy, we were always asset driven. We always had more assets, generated more earning assets than we needed, and that allowed us to grow underneath and built the franchise value of the organization.

Now we hope this trend will continue momentum, and every indication appears that we should be able to continue to grow our earning asset base, which should allow us to grow organically at very profitable spreads without that commensurate increase of expenses. So we will see if this sustains or whether this was just a blip, but it would appear, based on what we know right now, that maybe we are back in the asset-driven mode. Our model had always been, it is assets, stupid, but not stupid assets. And we are back to that.

On the acquisition front for Wintrust, we continue to be very active in all lines of business, looking at opportunities, and we will continue our prudent approach to this and not do anything stupid, I guess is the best way to put it. So we are very busy right now in that regard and looking at opportunities and trying to find that pony that is buried in there someplace.

So all-in-all we like where we stand right now. I guess what I would say we really like where we stand right now and how we are positioned. We like our prospects for success, but we have to execute and nothing is for certain, but we really like our positioning right now and feel that we are executing the plan that we have laid out to you previously.

So with that, we can open up to questions.

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

Thanks. Good morning. Question for you on the margin. What is the biggest driver, do you think, of the margin expansion? Is it just loan growth being funded by cash, and if that is the case, is there more to come here, or do you feel like 3.50% is the right margin level for the Company?

That is a good question. We still have some movement in the liability side of the equation. I said that, you know, what we paid on our paying liabilities is down 3 basis points, and we think there's still some room there. Certainly not what there had been in the past, but there is a little bit of room there to see these mature. We have got some trust preferred securities that were swaptions running off where we have pre -- the day we pre-bought a swap on that or a cap on that. We will be cutting those expenses materially on that particular one. So it is -- the liability side is actually contributing, but it is moving liquidity assets into good loan growth.

And our loan growth, although we talked about the competition in Chicago for C&I and that sort of thing, we've told you always that we have our profitability models and we stand by them. And there's also -- so in the middle-market side, you may get a little bit less on the loan volume. On a commercial loan, you may get a little less yield than you would like, but it is made up with ancillary businesses, deposit businesses and fees and the like. But at the same time, we have got premium finance business, which has grown nicely, commercial real estate we have seen jump up a little bit as we are seeing a lot of rebound real estate come in, good deals, fit our parameters. So we are able to blend that nicely.

And so your question, is 3.50% your comfortable number? I'll go back to what I said one or two calls ago. I think there's probably a 10 or 12 basis point swing on either side of that. Because it is life isn't linear. You know, we may end up a quarter with a little bit more liquidity, it might go down a bit, and we may end the quarter with less liquidity. So we kind of think that is a reasonable range if that answers your question.

Yes, it does. It seems to me that if you keep doing what you are doing, that has got to go up. (multiple speakers)

Well, certainly (multiple speakers) net interest income will go up, which is the important thing.

Yes. The other question was just on mortgage, and I'm sure there will be more questions on this, but you talked, Dave, you said it was strong in Q2 and, Ed, you said no material slowdown. I am just curious how much of this is going to be purchased as we move forward versus refinance. Is Q2 still refinance driven to keep that number relatively flat, or is it more purchase driven?

Well, on the second quarter -- this is Dave -- it was about 55% purchased, 45% refi financed. The pipelines are looking more like it is in the 70% range purchased through where we're at right now, and that could change over time during the course of the quarter. But clearly it is being driven more by the purchase business now than the refinance business. But the pipelines are strong, and the purchase business has been able to fill the void of the decline in the refinance business. And as I have said, we are continuing to look just to pick up additional producers and other smaller brokerage companies out there that can also fill in. We think there will be consolidation as the time goes forward, but in the near-term here, what is keeping us strong is the purchase market.

What we're saying, Jon, just to comment on the last part of what Dave said. We have said before on these calls and to a number of you individually, we just see that the mortgage business itself when it starts slowing down a little bit is people are going to drop out. There is going to be disruptions. There is going to be consolidation in that industry. We are starting to see some of that already in terms of opportunities. Again, we are very discerning in what we look at, but I think that it may be lumpy, but we should be able to by picking up market share as the industry consolidates, our goal over the long-term is to maintain a pretty good mortgage business here, and we think that, as I said, it may be lumpy, it might not be good for anybody trying to model it because it could be down a couple of quarters. But you go down a couple quarters, but we think there is a consolidation opportunity here over the long-term, which should keep these numbers relatively strong if you look at them over a longer period of time.

Okay. All right, thanks.

Terry McEvoy, Oppenheimer.

My first question is, like I say, investor criticism over the years has been on for Wintrust has been a great growth story, but some criticism on the expenses in the ROA and just general profitability. You spent a lot of time today talking about expenses, and right on the highlights for the quarter in the press release, you talk about the effective expense management. Is there a new philosophy or a new process as it relates to managing expenses going forward that is different from the past that can drive an improvement in profitability?

That is a good question. But you have to remember from a bias standpoint, I think that criticism was relatively ill-founded during our early days. Remember, we started in 19 -- the end of 1991 with nothing. And what -- we were building a franchise. We were investing in a franchise. So we were doing a lot of it de novo, which meant there were expenses upfront and earnings down the road. And we would ask investors back then, would you rather have 30% increase in earnings, or do you want me to stopped and be at 1% or be at whatever the metric was at that point in time and not grow? And the answer was no keep growing the earnings, which we believe was the right answer, and it served us very well.

And we hit the 9/11 and rates went to 0%. I mean we had moved up to get close to [one-off] assets at that point in time, and we continually invested underneath it. And then we've, through 9/11 until now, we have had -- no one can really argue the fact that it has been a crummy rate environment for somebody who is funded like we are funded with a conservative classical type of funding of the organization. So, yes, everybody's earnings came under pressure during that period of time, and then we didn't play in the reindeer games of the big -- in 2006 to 2009. But we have always said -- and we haven't gotten away from this -- is that in the old days, we ran banks, and we never made less than [1.75%] on assets. And we have always been looking at profitability.

We are big enough now as we work out of this. So we will be -- we do look at expenses at a mature bank. We know where they need to be. It is a different -- we aren't not doing as much they know, well, it doesn't need as much upfront investment to do it. Not that we are afraid to start a business and do that if it makes sense, but materiality speak -- from a materiality standpoint, it doesn't affect us as much as it did when we were smaller.

So if you take the credit -- you look at our efficiency ratios, it is as good or better as anybody else's right now. You have to look at our mix of business and bring it up. But we have every intention of being extremely efficient. We know that we have excess leverage in the system right now, and we have stated for a number of quarters that our goal is to utilize it at excess leverage and grow without a commensurate increase in expenses. And we think we can do that.

So to say it is a new emphasis, no. To say that it is coming to the forefront a little bit more, yes, just because we know that we have leverage in the system. That is why getting back to being asset driven is so important that this growth that we can experience, that we can do it without a commensurate increase in expenses, that will be very important to us. So, we are all over it, I guess is the way to say it, but you have to put it into context.

Appreciate that. And then just one follow-up. You mentioned the strength in Wealth Management in the second quarter, and you talked about just looking at a lot of acquisition opportunities. Are the opportunities primarily bank focused, or could some of them be either Wealth Management fee generating or maybe some specialized lending areas?

We are active in all fronts -- the mortgage side, the Wealth Management side, the banking side and the specialty asset side. We see opportunities every week on those. Some are -- they are opportunities.

Now you triage them pretty quick and figure out what you want and what you don't want and go through it, but we are interested in -- on all fronts, and as we always have been if it makes sense to our shareholders who go through with it.

We believe on the banking side that -- and still believe that there is going to be a five-year contraction. We think there is still a lot of pain out there as indicated by the number of banks that we have been in and done due diligence and come out and saying there really isn't a deal there yet until they get healthier. But we think any bank under $1 billion in a metro area is going to be very hard for them to compete going forward.

We think they are coming out tired, and we think over time it is taking them longer and longer to get healthy. In the old days, you could get rid of a bad loan and reinvest that in something you can make a spread on. Right now with the zero rate environment, these banks are having to put it out at 0%, and they can't earn out of it as fast as they would like. So it is going to take a little bit of time. But at the end of the day, because of regulatory costs, because of the competitiveness in this market for earning assets, because of the regulations related to concentrations and the like, a lot of these banks aren't going to be able to thrive like they were and many of them are very tired.

So we see there will be great opportunities there. We also see that on the mortgage side that as Dodd Frank and CFPB make their way into the mortgage broker end of the world and those regulations take place, I think these guys are just trying to ride out this last wave, and we haven't had an uptick in incoming calls from people looking to partner up with us. But, again, we are very discerning when we look at that, and who knows whatever what will ever happen out of it. But we see great activity in those.

The Wealth Management side is there, but not as new opportunities are not falling on us as frequently as they are on those other two areas. So we continue to look at all aspects of our business, and we see a lot of opportunities. We are able to look at the lot of opportunities and we will go from there.

Appreciate it. Thank you.

Chris McGratty, KBW.

Good morning, guys. Dave, on the $1 billion of mortgage production in the quarter, could you maybe comment on the production by month? Maybe compare April to June?

Well, we are shuffling through papers here. Hold on a second. No, it was relatively consistent each month, Chris. It wasn't a big fluctuation up or down from any month. I don't have the exact numbers, but it was really in the $300 millions each month.

Okay. And what was the pipeline today? I think you said it was still strong. What was it today versus the end of March?

I would say it is pretty similar right now. It is more purchase. The mix has changed, but the pipeline right now is pretty similar. Now we'll have to see what that translates into as pull-through obviously to make sure it stays and whether it carries through to the last month of the quarter or so, but right now we look at it and say it is very similar to what we were three months ago. It is just the mix has changed.

Okay and then one last out of mortgage. What are your expectations given the rate move in the quarter? Are you looking out to next year in terms of the decline in purchase volume or, excuse me, in origination volumes? I think the NBA has it down 30%. I was wondering what your forecast projects?

I don't think that's too far out of the question in terms of refinance. We think purchases will stay strong. We have been and then we have said this in previous calls, we have really been hitting that channel very hard, working on developing relationships with realtors and attorneys and the like so that we can be a real player in the purchase side of things. We have actually been -- well, but we -- so the important thing about it is that you would lose -- if rates go up and refis fall off, you will lose some revenue. We still have 23%. So if we drop -- if 45% of our business is refi and it drops in half, so we lose 22.5% of our refi business, we have got about 25% of our labor force and the like in that business is variable. Those costs are variable. So we can collapse it right away. So we wouldn't experience a loss in it.

But we think that when that occurs, we will have opportunities to pick up -- the market is going to consolidate. So long-term we think we will be in pretty good shape. But if six, eight months from now, would we -- if refis are down 25%, we would lose a bit of profitability. Remember not all of that falls to the bottom line. It is what about 12% pretax. You figure half of it goes out to the brokers. So if you are down to that and then you have got 25% or so, 25% to 30% in costs. So you are down to 20%, after-tax around 12.5%, 13% that falls to the bottom line. So you can run the numbers on that, but it is not as devastating as people lay it out to be.

We actually think when it happens it will be a great opportunity for us long-term to get market share and to grow. At the same time, rates would be going up, and our caps would kick in and kind of bridge over that as would pricing on assets. So we think we have a pretty good plan for rising and falling rates right now, and we are very, very -- we said in the past rising rates are the beach ball underwater for us. We've worked very hard to position our balance sheet to take advantage of that, and in the meantime we are playing on the field that is given to us, which is the 0% rate environment and working to get north to 1%. If rates go up, that is just good for us and our margin and our profitability going forward.

Last one. Given the market share comment and the disruption in the market earlier this week, any interest in presumably getting a little bit bigger in the mortgage business if a business came up for sale?

Yes. We are looking at -- we have opportunities. We think that that is actually going to occur. We think that that market is going to consolidate. But, again, you have got to have a very good cultural fit. You have got to have -- we have done a number of deals in the mortgage business. We bought River City up in Minneapolis. P&P basically doubled our size. Our modus operandi has been to really pay nothing upfront and pay it on a earnout. So we don't put our shareholders at a lot of risk and which it kind of almost guarantees that if you run it properly that any deal you pick up would be accretive to you.

So we will be -- we actually believe that we will be growing in that business and that the disruption that -- not the disruption, but -- well, call it disruption, is going to make that business consolidate. (multiple speakers).

Then you'd be okay with the national business mortgage -- national mortgage business is okay with you guys?

We're already in it. We already have (multiple speakers).

Adding to that. Okay. Thanks.

Yes, the only thing I would add to that, we are not to interested in businesses that do wholesale lending. We are interested in those that have similar cultures and do a lot of retail lending.

We don't do wholesale lending right now. We think -- we don't like that business. I won't give you the analogy I gave somebody earlier that -- with Lisa sitting here, but call me off-line. I will tell you the analogy that I use when I look at the wholesale mortgage lending business.

Good enough. Thanks.

Brad Milsaps, Sandler O'Neill.

Good morning, guys. Just a couple of questions on the components of the margin. Ed, it looks like your loan yields actually went up a couple basis points. Do you think that the market in terms of what other banks are willing to offer is beginning to stabilize in terms of what you're seeing in fixed rate or variable rate product that is out there? Could we see your loan yields flatten out from here, which would obviously certainly be a help to the margin?

Well, I don't think the market has changed that much, but I think our discipline -- I know our discipline hasn't changed and our profitability models haven't changed. I think some of it has to do with we are getting -- on some deals that we just booked, we got some better deals. I think some of it had to do with mix, you know, with a nice increase in premium finance loans and in commercial real estate, which bears a higher rate than the -- what we are seeing in the middle market right now, but we are always striving for higher rates.

Do I think it is getting worse? No. I think that we have bottomed out in terms of how low can you go in terms of competitive pricing. Now I say that, you know, (laughter), but no I think they bottomed out, and I think that there is -- if anything, the pendulum will start swinging back towards better pricing.

Okay. And then, Dave, in terms of the liquidity management assets, I see the link quarter reduction in average balances, but you had a nice move, I guess, up about 20 basis points in the yield. Is all that really since I can't see the components, but is all that really just mixed change, reducing Fed funds? Anything else you are doing in the bond portfolio that would have driven that up so much this quarter and really since the end of the year?

Yes, no, Brad I would say it is really just a mix change. I mean if you look at our balance sheet, if you look at interest-bearing deposits with banks, that is really our money sitting at the Fed, which is making overnight money rates. And in December, it was $1 billion. In March it was $685 million, and it is down to $140 million at the June. So the increase is really getting rid of 25 basis point money, and what is left is a little bit higher-yielding. So we are not going long right now, as Ed mentioned earlier. It is really just getting rid of some of the short liquidity that is earning you overnight rates, and the result is that the remaining portfolio yield is higher.

Okay and then final question. I think, Ed, you mentioned the release, maybe five new branches over the back half of the year. How do you balance it out with what might be out there to acquire and actually maybe consolidating some locations as you look at your acquisition plans?

That's a good question. We do have the big map, the world according to Ed, as these guys refer to it, and we know where targets are, where smaller banks are that fit those that fit our parameters. And where we are moving into with some of these branches, with these branches are places where we -- that wouldn't be that opportunity for us to grow elsewhere. We think there is a little probability for us to get in there elsewhere.

So one of the branches we acquired from the Northern Trust they are closing down. And one was an old bank building that had been -- the FDIC sold off. So there were just opportunities to go in and do this in areas where maybe there wouldn't be an acquisition opportunity or not one that we would be interested in.

So it is strategic. There is a map. We know what we want to be and where we want to go, and we are opportunistic when opportunities come up.

Okay. Great. Appreciate the color. Thank you.

Emlen Harmon, Jefferies.

Just a couple of quick ones on loan demand. You noted in the release -- we actually saw in the credit line the allowance for undrawn commitments came down because you had seen a pickup in line of credit usage. Could you talk a little bit more broadly just about what you are seeing in terms of line credit usage? Do you see that starting to pick up? And then just maybe additionally just be interested in what the six-month pipeline looks like for you guys?

Well, on the first part of your question, it was really -- there was really a letter of credit. There really wasn't a line -- lines of credit; there was a letter of credit that was outstanding with one of the banks we bought from the FDIC. And (multiple speakers) specific reserve against that letter of credit knowing that it would probably have to be funded to the beneficiary and it funded. So once it funded, that credit discount went away that we had there.

So that really had nothing to do with more lines of credits being utilized. It really had to do with one specific instance with one specific credit that we acquired in an FDIC deal.

Got it.

As it relates to utilization, you know, we -- that hasn't moved. That needle hasn't moved. Our growth is strictly picking up market share across the board, but we don't -- the only place where you can see any sort of increase in ticket size is the premium finance businesses as that industry, the premium business continued -- premiums continue to harden. We are getting back to normalized numbers in terms of average ticket size for premium finance, which is a good thing for us.

I mean the average ticket size was always $27,000 in that business. It -- when in the cycle when premiums went way down, we are at $19,000. That is back up close to a little over $23,000 now and working its way up. And that is just gravy because the average ticket size goes up, it doesn't cost us anymore to do that. It is just more outstandings and probably our highest asset yield class. But other than that, our commercial business is just picking up market share. We have got a lot of momentum out there. Our advertising has been working. There was people are talking because they are -- we have been able to garner market share and our customers who we survey regularly are feeling really good about coming over and they like the relationship, they are talking.

So we have got a good vibe going here. I know that I think everyone of my competitors now in someplace or another said they are the premier middle-market lender in the Chicago area. So I have got to think of a better term than premier. What is higher than premier? But we are that, whatever it is. Just to outdo them once. But no, we haven't seen any increase in line utilization. Hopefully we will, and that, again, would be nothing more than a pickup for us.

Got it. And in the past, you had given us what your six-month commercial pipeline is. Do you have that on hand today?

Yes, I did. I am going to go back. I gave it in my original comments.

Sorry. I'm sorry. If you gave it in the prepared, I must have missed that.

No, no, no, I can -- I am happy to repeat myself here. It is consistent with what it has been in the past, about $1.2 billion gross, about $865 million weighted.

Got it. And then just one quick last one on the -- on liquidity and kind of a model liquidity, you have to churn into the loan book. How are you -- brought that down a little bit -- bringing down bank deposits this quarter. But how are you thinking about the liquidity this last two to roll in the loan book?

Well, we are getting back to that asset-driven mentality again. We generate more assets, so we needed a lot of this to start rebuilding these franchises, taking advantage of the leverage that we have in the system and coverage we have in the system. And so we take advantage of the leverage. We build franchise value by getting more and more market share in the system because we know we have assets to cover. And for the first time in a long time, I can (technical difficulty) we will see if we can maintain this, but we are kind of back to where we were, back to the future, if you will.

We are going to run at 85% to 90% loan to deposit. We were a little over that on an average basis this quarter, but 85% to 90% is the number we have always used and we'll continue to do that. If we get up close to that 90% number, that is a good thing because it allows us to go out and start getting aggressive in terms of picking up building the franchise.

We are building these underutilized franchises we picked up in acquisitions. That being said, I also stated earlier that these smaller deals that we do usually come with a great deal of liquidity. Like Lansing came with, I think, $140 million worth of excess liquidity that we were able to sop up right away with loan demand. So its -- there's opportunities there, but we are going to run at 85% to 90% like we always have, and to the extent that we go over that, that is a good thing. It allows us to keep building the -- building out the infrastructure without the commensurate increase in costs. That is good for the bottom line.

Got it. All right. Thanks for taking my questions.

Steve Scinicariello, UBS.

Good morning, everyone. Ed, just a couple of quick ones for you. So just given the recent acquisition in your backyard, just kind of curious your take on how this may or may not change the competitive dynamics in your market whether it is pricing or even potentially providing you some more growth opportunities?

Was there a deal done here? (laughter). Well, we have had to compete with both, so I am happy for them. I think it is a nice deal for those guys and -- but we have competed with them in the past. So, from our perspective, it takes a competitor out of the market. They will come together. Will they be stronger or do things differently? I don't know. But we will look forward to competing with them. But anytime that there is any change in the market, that leads to disruption in the market, and we have made a living out of standing underneath all the destruction with our net and catching the good things that fall out. So we look forward to competing with them. We wish them -- in the words of my favorite movie, The Godfather, we wish them the best of luck as long as their interests don't conflict with ours. But we think, if anything, it takes a competitor out and there would be opportunity, and we look forward to it.

That makes sense. And, you know, I don't know also just on the pricing side of the equation, too, I don't know if maybe it helps bring a little more rationality in some segments or not, but seems like a good potential opportunity for you.

And then just the other one I had for you was when I look at the adjusted pipeline, your conversion rate still at 70% plus on your pipeline, great number. What do you think could even drive it even higher?

All my competitors getting out of the market. (laughter). We, you know, one of the things about working with a pipeline is making sure that the guys are honest when they put stuff in. And we are absolute -- garbage in, garbage out. We go back and back test this stuff. So loan officer A says, I got $500 million booked in it. And I give it an 80% probability the number that comes through, he gets slapped upside the head. We think it is just -- it's we have got really good data, and we push them on this so that we can plan accordingly, and so it is more really good data than it is on the pull-through side of things.

Now the other part of that question is, why are we getting so many good leads, and it is really -- I think I mentioned earlier I think we are -- our advertising has been working off as we blended a large Wintrust into small delivery that we have always had and not really lost our culture in doing this, but has resonated with the community that we can give that old cash and type service, but still have all of the capabilities of a large bank. We -- and we kept our discipline here, too.

So I think the real secret is our ability to get birds up that we want to get up. And just I will add one more thing to that. The old American National philosophy, remember our middle market guys and our commercial guys all have some American National Bank DNA in them. And American National had half the markets in the old days and LaSalle had half the market. The American National guys look at the market. They look at the whole middle market. They define the middle market, they look at it, they take all the prospects, they decided which ones they want, they cull, and their whole approach was to stay after it and be relentless until you get the business. So we are very focused on who we are going after. We don't have guys out there who are just cold-calling and knocking on doors. This is a really coordinated, relentless approach that these guys have utilized in the past that is paying dividends for us right now. They are real pros at this, and they are doing a great job.

So the real secret is getting the birds up, and they are doing a wonderful job of doing that and getting really good data. That is the pull through.

Great. Great color as always. Thank you.

Herman Chan, Wells Fargo.

Within your commercial balances, it does seem like asset-based lending really helped propel those balances higher in the quarter. Can you talk about what type of lending you do there, and is that lending confined to your local markets? Thanks.

The ABL side of the equation, is that the question?

That's right.

We do not have a national ABL business, but we -- anything that we do has to really have a local market access. So you may end up with a piece of business that's in Phoenix or someplace around the country, but it is really a Chicago-based or a Milwaukee-based company that we are dealing with. We do not have any desire to be a national ABL. I think that business you would like to be able to go out and kick the tires and see what is going on and be close to it and understand it. It's better. Not that other people have a different expertise and it works really well for them. We just with our skill sets right now, we think we are doing the right thing in that regard.

We are getting some additional traction in that business, just as a result of the calling efforts of the middle-market team and the commercial team that I referenced earlier. There's just more birds popping up because of the nature of their business. They are subject to the ABL approach. Our ABL team is pretty strong. They have a lot of experience, especially in the local market.

It is not too often where we get a client up that somebody in this organization hasn't had a relationship with them already, and that is very helpful to us in terms of segregating who we want and who we don't want but in getting this business in. So really our calling efforts have led to -- as the portfolio has grown, there will be more ABL in it on a proportional basis.

Understood and another question on M&A. In recent years, the bank has been more focused on smaller deals both on the assisted side and the whole bank side. But what about a more transformational type of acquisition? How would you characterize your appetite to partner for a larger type of transaction in your Chicago market? Thanks.

Well, you talking about me and appetite, that is an interesting equation. We think that the opportunities are in the $1 billion and under banks. There culturally they fit very well with us. These are all really -- Chicago was overbanked. You know the history. The last state to change their bank laws. Many Community Banks in this town. One of the reasons we have been able to succeed is that people are used to that type of delivery approach. So culturally that is the segment that really is consolidating right now. You can get them, they are less expensive. Our structure is one that allows us to do a number of those, and like I said earlier, we have a map, we know where we want to go. We know who the targets are. We know we want to be Chicago's bank, which means we have to serve all areas of Chicago. So we know where we want to be. And that is the approach that we are taking. We think that is where the opportunity is. We think that is where the return for shareholders is going to be, and our acquisitions to date have shown that.

We relate to larger and more transformational deals. There's only a couple out there that you could be referring to, and you know I don't know I think everybody has got their game plans and they are going forward, and we will talk to anybody about anything. It's â€" we have a fiduciary obligation to do those types of things. But, you know, my history -- and this one precludes the discussion with somebody -- but MOEs you know very rarely work, and I think you can look back and see historically that that is the case. And it is all cultural what you really get.

So I think I respect our guys our competitors. They all have a game plan. They all seem to be doing well, and we look forward to competing with them, again as long as their interests don't conflict with ours and something pops it pops. But we really are focused on that other area. That -- we are the perfect partner for these guys just because of the cultural side of the equation. We are a consortium of community banks, and that is our culture. These guys fit right in. They know the towns. We can do our shtick there, and people want to come to us because we do that.

We are not the commoditizer. We are going to come in and shut everybody down. We want to grow those institutions when we get them. So that is where our focus is.

Understood. And last question for me on mortgage warehouse. Last quarter I believe you mentioned you guys saw a pickup in new clients. Was that new client activity driving those mortgage warehouse balances higher in the second quarter? And further you also mentioned the competition last quarter for that particular one type of affected -- had affected balances in the first quarter. So I am curious to know how pricing trended for you guys in Q2. Thanks.

We didn't -- we did not change our pricing, but we did pick up additional clients.

Okay. Thank you very much.

[Stephen Gann], DA Davidson.

Good afternoon or good morning, guys. Just a question on the premium finance business, and maybe you could touch on each of them separately, the commercial and the life. But just curious about -- certainly it looks like there are some seasonal factors with the increase or the growth that we have seen, but maybe like year over year, what is driving it? Is it the size of the relationships, pricing, market share gains; where are you seeing the growth?

I wouldn't say it is really seasonal. I mean January and July tend to be higher months because they coincide with December renewals and June 30 renewals. But the growth really is, as Ed mentioned earlier, we are seeing the market hardening a little bit. We are -- we back off of doing some of the larger deals because the pricing got awfully tight, but we have done a few more larger deals recently because the pricing has rationalized a little bit there. But -- and we are picking up market share. So it is sort of all of the above. But I wouldn't say there was much seasonality in the second quarter. It is really increased ticket sizes and picking up new volume from our customers.

Okay. Thank you.

John Moran, Macquarie Capital.

Must of mine have been asked and answered. I have one ticky-tack one on mortgage, just kind of circling back on gain on sale. Dave or Ed, it sounded like $1.1 billion sold this quarter versus $975 million round numbers last quarter. What was the actual gain associated with that?

No, we haven't broken that out separately because there's components. We have secondary market gains, and we have certain fees and mortgage servicing rights, et cetera, but the pricing was relatively -- it was very stable second quarter to first quarter.

Okay.

As far as our â€" we saw the pricing stay very stable. I mean it might have fluctuated 5 to 10 basis points, but it was very stable.

Okay. So gain on sale margins, essentially unchanged then?

Yes.

That was the only one that I had remaining. So thanks very much.

Peyton Green, Sterne, Agee.

Good morning. Ed, a question just to clarify on the loan to earning asset mix or the loan to deposit ratio. I mean pulling down the liquidity management assets has been good for the margin. How much of the balance is required for pledging on deposits or cash?

Of the securities portfolio?

Yes.

Well, we've got what, $500 million, $600 million in bank deposits overnight, and the rest is insecurities. I can't tell you that offhand. Maybe, Dave, you know.

I don't recall, but we have it in our Q, but I don't recall it off the top of my head right now, Peyton.

We do get the benefit, Peyton, of our MaxSafe account. Because of the 15 charters, we can offer 15 times the FDIC insurance. And a lot of smaller municipalities we deal in, we are able to accommodate them with that package and not have to put collateral up. So that is helpful to us. But we don't have the number, but we can get that to you (multiple speakers).

Yes, we certainly have -- we are not close to being maxed out there, if that is your question, because we reduced the liquidity more. But as that's said, we are sort of at that point now where loan to deposit ratios is in the low 90%s, and we generally like to run from 85% to 90%. So to the extent we get additional loan demand, we will probably put on additional funding also, which is good, because we can increase the franchise through deposit growth in these underutilized smaller branches that we have acquired.

But we have always said 85% to 90% is sort of our desired area. We are right at the top end of that. So could you take the liquidity down a little bit more in the short run? Yes. And do we have liquidity that could go away? Certainly. And, in fact, if you look at the [440], that is all sitting at the Fed, and so clearly that is not pledged to anybody. But you certainly I don't think would go down much more than that.

So if the question is, do we have availability to take it down more, it is certainly yes, but it is not our desire to go down too much more.

Maybe I will ask it a different way. If you had a static liquidity management asset base and the loans grew $1.5 billion over the next year, would you be perfectly comfortable funding it with just $1.5 billion of deposits at the margin, or would you be willing to say we will find it with $750 million of deposits, $250 million in borrowings -- I mean, or $1.5 billion, I guess, [$1.25 million] in deposits, $250 million in borrowings? Or how do we think about it at the margin if the liquidity management assets stay flat, but you still have loan growth driving the balance sheet growth, which is going to change the earning asset mix and the deposit leverage? when do you get the â€" (multiple speakers)?

(multiple speakers) The liquidity mix it is going to increase because we are running 85% to 90% loan to deposit we will go out and start bringing deposits in, and so the liquidity base would actually increase.

If your loans are going up $1 billion, you would probably say about 10% of that would go into liquidity because you would be 90% loan to deposit. I mean you have got capital implications there, but roughly speaking that would be the case. So we would probably actually increase the liquidity a little bit as the balance sheet grows.

Okay. And I guess (multiple speakers).

Simply because if we are going to say 90% loan to deposit and we are there, if we grow our loans, we will keep a little bit more liquidity.

Peyton, it sounds like you have a strategy you want to lay on me. You can call me afterwards.

No, no. I guess my only question is, I mean if deposit balances were flat on average linked quarter, I'm just trying to understand what does it take to grow deposits $1.5 billion, I guess is the real question?

Well, through acquisitions and through marketing in â€" this is the first time, like I said, we are asset driven again. We have always not had -- we haven't had to worry about this since really when we went into rope-a-dope. And as we gear up and we are going back to the future, that is what we did for a living for a long time was open de novo banks and build them to gain market share and the like. We haven't -- we have not done that in a long time. We have been growing through acquisition, and that is where the leverage is that we can take these smaller banks that we have acquired and really start taking them to town and build franchises around them. We didn't want it to do before and build up a bunch of liquidity we had nowhere to go. So but now being loan driven and asset driven if this -- if we maintain this, this opens up the organic growth opportunities for us that we are very well suited with and again back to the future for us.

And if you look at the components, Peyton, all the deposit categories increased, except for certificates of deposit in the last quarter. So we have let some of the people that maybe were in with just one CD that really had not taken other products. They have sort of gone out as our rates have come down, and we have let some brokered CDs run off. So we are growing the other areas, and we thought it was prudent to get that mix a little bit better. But we have got a lot of capacity to grow. We don't have much in the way of brokered CDs or wholesale funding. So in the interim, we can fix it, but we are going to growth the franchise for our retail marketing, like Ed says, but in the short term, we have lots of leverage we can pull. So whether it be wholesale funding or on the non-deposit side or whether it's some brokered -- short-term brokerage CDs to cover the gap until the retail deposits come in and the commercial deposits come along with the commercial business, we can fill the gap. But we are pretty confident in our ability to grow deposits.

I guess, okay. So my question is this, I mean if we are going back to where we once were and you rely on interest-bearing deposits to drive or fund loan growth at the margin and really deposits have walked in the bank for the last four and a half years, then you have to go to a more aggressive stance, I mean how much would you have to pay versus your blended interest-bearing deposit cost of 47 basis points? I mean would you have to have the margin pay 20 basis points more to get money to show up, or I am just trying to understand where we are relative to what we have gone through?

Well, we -- that is a complicated question because it gets into all of our marketing strategies, our bundled account packages and how we go about doing this. I am happy to take it up with you off-line, but it is more complicated than I can answer here.

Will it cost a little bit more than what we are paying right now to go out and not cannibalize and push? Yes, probably it will cost a little bit -- 5, 10 basis points. But where we pick up the benefit of that is maybe 20 basis points. But we are not talking about a lot of money relatively speaking vis-a-vis the overall balance sheet. But we can bring this on at basically no increase in expenses. So everything falls by our mark. We have got assets yielding 4% and you have got to bring it out at 60, 70 basis points. So, we want to make -- I am making [330] pretax on that. It would take 30 basis points to expense it. I'm making 3%. After-tax, I'm making 1.80%. That would be a good thing.

So marginally speaking, that works. And that's the benefit of having the leverage in the system that we have right now that we have been waiting to get back to being asset driven so we can take advantage of this, and it is all accretive to ROA at the end of the day.

So I can take you through it off-line.

It is a mix issue. I mean CDs might be a little bit more costly than that right now, but if you are bringing money markets and DDA and the like, we will see where it goes. But it is not a -- it is not just a --

On the margin, it is very accretive the way we battle it out. We can take you through it.

No, no. I get that. But I guess just looking back over the past year, I mean if you look at revenue growth of $21 million give or take and you've had expense growth of about $11 million, I mean is a 50% marginal efficiency ratio a reasonable way to think about it knowing that you have got -- you are consistently have growth initiatives going on â€" (multiple speakers)?

Less than that under the scenario I laid out.

No, I know, but I guess my point is things always change, and opportunities come up that you don't necessarily have in the plan.

Right.

I am just trying to maybe think of a more practically conservative weight as opposed to the model, which may not take (multiple speakers).

We can talk about it off-line.

Okay. All right. Thank you.

John Rodis, FIG Partners.

Good morning, guys. Most of my questions were asked, but just a follow-up on the asset-based lending. Can you talk about what is the average ticket or loan size for deals you are doing, and what sort of rate are you getting on that today? Thanks.

Not middle-market, you wanted asset-based?

Yes, the asset-based lending. The growth you saw this quarter.

Well, in the asset-based or middle-market and --?

The ABL lending in commercial.

Well, the ABL -- ABL lending is one of your better yielding assets, but it also has a number of fees and everything else associated with it. The average ticket size is probably $5 million to $7 million somewhere in there on average.

Okay.

Some are $1 million; some are $10 million.

So, I'm mean this -- but this quarter the growth was about $240 million over the first quarter. So were there any bigger credits in there this quarter?

No. In ABLs? (multiple speakers). We had fairly good growth there. We also had with some of our acquisitions we did a bit of reclass out of some of the other categories into the ABL. So some of that is a little bit of reclass as we would scrub out these acquisitions.

Okay. That probably explains (multiple speakers).

But no, our whole -- just basically generally speaking, I miss the acquisition side. That's on the ABL side. But generally speaking our -- we keep -- our hold limits are $25 million on any bigger transaction now. We really like the $5 millions to $15 millions. I mean that is where we like to play. We don't go higher than that. So it is not anything like really massive deals in there because it's just we don't do that.

Okay. Fair enough. Thanks, guys.

Thank you and I am not showing any further questions in the queue. I would like to turn the call back over to management for any further remarks.

Okay. Thanks, everybody. Feel free to call Dave or me if you have any other questions, and everybody enjoy the summer. Talk to you soon.

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