Wintrust Financial Corp (WTFC) 2013 Q3 法說會逐字稿

Welcome to the Wintrust Financial Corporation's 2013 third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. Following a review of the results by Edward Wehmer, Chief Executive Officer, 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's earnings press release and in the Company's most recent Form 10-K, Form 10-Q on file with the SEC. I would now turn the conference call over to Mr. Edward Wehmer.

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

We will follow our usual format with me making some general comments regarding the quarter. Dave Dykstra will then get into some detail regarding other income and other expense. Back to me for some summary comments about the quarter and about the future, and then I will leave some time for questions.

In general, we are very pleased with a somewhat noiseless record third quarter. Net income of $35.6 million was up 10% over the third quarter of 2012. Earnings per share of $0.71, both records. Year to date, we made $102 million, up 26% over last year, and $2.05 per share, up 21% over the previous year.

Our net interest margin increased 7 basis points in the quarter to 3.57%. Net interest income also was up, $6 million for the quarter, more than offsetting a decrease in our mortgage operations.

The increase in the net interest margin was due to a lower cost of funds and, really, an optimal loan to deposit ratio. Going forward, we believe that there is more room for reducing our cost of funds. Cannot expect more -- much more about diverting asset yields without changing our list profile, which we are really unwilling to do.

Future net interest numbers -- net interest margin numbers will be predominantly dependent on maintaining an optimal loan to deposit ratio. That doesn't mean, however, that we'd then expect increased growth in net interest income.

Our loan pipelines remain strong, and as stated in previous calls, core deposit growth opportunities remain good. At heart, we still are a growth company.

On the other income, other expense side, Dave will take you into this in detail. In total, other income was down about $9.3 million versus the second quarter of 2013. $5 million of the decrease relates to the swing in our trading gains as our interest rate caps had a mark to market -- a negative mark to market as opposed to a positive mark to market in the third -- or in the second quarter.

As you'll recall from previous announcements, the Company has layered in approximately $800 million in interest rate caps as a macro hedge against rising interest rates. No hedge accounting on these instruments, so we are marking it to market each quarter.

Wealth management revenues were also up marginally, but the multi-quarter trend here has remained quite positive. Aided by a favorable market, continued increases in assets under administration, now totaling over $16 billion, and considered -- continued above-benchmark results in our managed portfolios, we expect this trend to continue and we are very excited about our prospects here.

Mortgage volume was down about 10% versus the second quarter, and that, coupled with decreasing spreads as the market cooled, makes up the majority of the rest of the decline in other income. MSRs were flat for the quarter after $1 million positive, so that was $1 million of the difference.

Other expenses remained flat in the third quarter versus the second quarter. You would expect other expenses to be down a little bit more, due to the decrease in mortgage production this quarter. Most of that decrease in volume, however, occurred in the last month of the quarter. Accordingly, expense reduction in this area will be seen in the fourth quarter if, in fact, volumes stay down.

We still have a lot of operating leverage in the system. That means we can grow our balance sheet organically without a commensurate increase in expenses, so we intend to take advantage of that, also.

As a result, our efficiency rate was flat in the quarter and our net overhead rate was up just a little bit.

On the credit quality side, nonperforming assets remained flat versus the second quarter, but decreased below 1% due to total asset growth. Overall credit charges for the quarter were about $13.6 million, down from $22.6 million in the second quarter, so a $9 million improvement there, or $5.5 million after tax.

We continue to make good progress on clearing items from our bad asset list. We see light at the end of the tunnel -- we don't think it's a train -- in our efforts to return to historical credit expenses, which we view as approximately $7 million to $9 million per quarter.

If you take out our -- if you look at our nonperforming assets and you take out our premium finance receivables, which, as you know, by contract may go over 90 days, but any losses have already been taken out of them when they do. We are waiting to collect on canceled -- collect unearned premium on canceled policies, but if you take that away and you take away 90 days administrative past due, those loans that are 90 days past due but not nonaccrual, all of which have cleared right now as of this date, our really are at -- our non-performers -- our core non-performers are really around 84 basis points.

So we will continue to identify and move out problem assets on an expedited basis. As I said, I think we are looking -- hopefully looking at the light at the end of the tunnel and getting back to some normalcy. However, you never know. We are not -- we don't tell our guys. We don't give them goals. It is what it is. And we will continue to work through it, and hopefully it will be over soon.

Balance sheet, total assets increased to $17.683 billion, up $69 million for the second quarter. Core growth was closer to $220 million -- I'm sorry, $270 million -- as short-term Federal Home Loan Bank advances used to support mortgages held for sale fell by almost $200 million.

We finance our mortgages held for sale with short-term money so we can accordion that quickly in our balance sheet.

Deposits grew $282 million in the second quarter or -- versus the second quarter, with growth in DDA making up $172 million of this growth. Demand deposits now comprise 18% of our total deposits, up from 9% just a few years ago. All this is a credit to our commercial initiative, which continues to work very strongly.

Time CDs now only make up 29% of our deposit base, down from over 40% a few years ago. There is still some moves for the reductions in those time deposits for the time being. This planned shift to deposits has had a very beneficial effect on our overall cost of funds and should serve us well when rates eventually rise.

Our cost of funds in the future will benefit from -- in September, we repriced $90 million of trust preferreds. We had a swap that ran off and we re-swapped those. Our initial swap was at 7%. We were paying 7% on that. We are now paying 2%, so we should pick up a little over $1 million a quarter going forward, just on that alone. So notwithstanding that, plus some additional room on the pricing of deposits, we still see some room on the cost of funds.

On the loan side, we actually had a very good quarter in loan growth, although this was somewhat disguised in our balance sheet due to the decrease in our mortgage warehouse portfolio. As you would expect, mortgage warehouse balances were down. They were down $102 million from $173 million to $71 million.

If you were to disregard that, our actual loans increased -- commercial loans and core loans increased $167 million for the quarter. So apples to apples, this is pretty good -- this is pretty good performance, especially in a third quarter when everybody is on vacation. It's historically slow.

Pipelines remain strong and consistent with prior quarters and pullthrough rates still remain pretty good. Covered loans decreased as we continue to collect bad assets acquired in FDIC-related deals. We have every expectation that the railroad tracks are going to come together on this. What I mean by that is that we will have moved out the bad assets by the time that the loss share goes away, so we don't expect there to be any disconnect in that regard.

The overall covered asset portfolio has performed better than expected. We only wish there were more.

Mortgage loans held for sale fell, as you expect. We feel really good about where we stand in terms of continued earning asset production going forward.

With that, I'll turn it over to Dave.

Thanks, Ed. As normal, as Ed mentioned, I will just briefly touch on the non-interest income and non-interest expense categories.

As Ed mentioned, in the non-interest income section, our wealth management revenue increased slightly to $16.1 million for the third quarter from $15.9 million in the second quarter of the year and improved by $2.8 million when you compare it to the year-ago quarter of $13.3 million of revenue.

The brokerage revenue component was essentially flat at $7.4 million compared to the second quarter, while the trust and asset management revenue showed a slight increase to $8.7 million of revenue from $8.5 million in the prior quarter.

Mortgage banking revenue declined 19% to 27 point -- or $25.7 million in the third quarter of 2013 from $31.7 million recorded in the prior quarter, and was down 17% from the $31.1 million recorded in the third quarter of last year.

The Company originated and sold $941 million of mortgage loans in the third quarter, compared to $1.05 billion of mortgage loans originated in the prior quarter and $1.1 billion in the year-ago quarter.

We generated relatively strong volume related to purchased home activity, which represented approximately 70% of our volume during the third quarter, compared to approximately 56% of the volume in the second quarter of this year.

The value of the Company's mortgage servicing rights stayed relatively stable at $8.6 million as of the end of the second and the third quarters, respectively.

As you know, future mortgage origination volumes and mortgage servicing rights will obviously be impacted and be sensitive to changes in interest rates on the strength of the housing market. Although our pipeline for mortgage refinance business has softened recently with the higher rates, some of the decline in the mortgage pipeline will be offset by the additional volume related to the October 1 acquisition of certain assets of Surety Financial Services.

For your information, the production that Surety originated over the past four quarters was generally about one-fourth of Wintrust's production, and the purchase versus refinance percentages tracked reasonably close over that time period with our origination mix.

Fees from covered calls totaled just $285,000 in the third quarter, compared to $1.0 million in the previous quarter and $2.1 million recorded in the third quarter of last year. The Company has consistently utilized fees from covered call options to supplement the total return on our Treasury and agency portfolio in efforts to mitigate any margin compression that might happen during a period of falling rates. The recent increases in the longer end of the yield curve have negatively impacted our ability to generate fees received on lease transactions.

Ed talked briefly about the trading losses. They totaled $1.7 million during the third quarter of 2013. This compares to trading gains of $3.3 million in the second quarter of this year and a trading loss of $1.0 million in the year-ago quarter. The trading losses and gains in the current and prior quarters were primarily the result of a fair value adjustment related to interest rate contracts that are not designated as hedges, primarily interest rate cap positions that the Company uses to manage interest rate risk associated with rising rates.

The net impact of the trading gains and losses over the past five quarters has, in the aggregate, been essentially flat and has totaled $52,000. So over the last five quarters, it has really just netted to a $52,000 gain. They do provide protection, though, for rising rates.

Miscellaneous non-interest income continues to be positively impacted by interest rate hedging transactions related to customer-based interest rate swaps. The Company recognized $2.2 million in revenue in the third quarter of this year, compared to $1.6 million in the prior quarter and $2.4 million in the third quarter of last year.

Additionally, our other non-interest income included a benefit related to the FDIC indemnification asset accretion from adjusting for certain factors, primarily the evaluation of our cumulative servicing costs, which in turn will reduce the projected clawback liability.

A summary of the net adjustments related to the FDIC indemnification asset accretion and amortization is shown on the table on page 15 of our press release.

Turning to the non-interest expense categories, non-interest expenses totaled $127.2 million in the third quarter of this year, decreasing approximately 1%, or $939,000, compared to the prior quarter and increasing $2.7 million, or 2%, compared to the third quarter of last year.

I'd like to note that the third-quarter expenses just referenced include a full quarter of the First Lansing Bancorp acquisition, which closed on May 1, whereas the second quarter of this year only included two months of such expenses.

The incremental total non-interest expense related to that acquisition for having a full quarter of activity is approximately $800,000 compared to the second quarter.

Looking at the individual categories of non-interest expense, salaries and employee benefits declined by $1.2 million in the third quarter, compared to the second quarter. Contributing to this decrease was approximately $1.7 million in reduced bonus and commission expense, driven primarily by a reduction in commissions related to mortgage originations, and approximately $600,000 of lower employee benefit costs, primarily related to lower payroll taxes.

Offsetting some of the decline was a full quarter of expenses related to the First Lansing acquisition, and, again, compared to only two months in the prior quarter.

Data processing expenses increased by $526,000 in the third quarter of this year when compared to the prior quarter, and this was primarily the result of [convergent] costs of approximately $337,000 related to recent acquisitions.

Professional fees totaled $3.4 million in the third quarter, representing a reduction of $813,000 from the prior quarter and a reduction of $1.3 million from the year-ago quarter. The primary reason for the reduction was reduced legal fees related to nonperforming assets and other acquisition matters.

The second quarter of 2013 saw a slight increase of $215,000 for net OREO expenses during the quarter, resulting in net OREO loss of $2.5 million compared to a net OREO loss of $2.3 million in the prior quarter. Of the $2.5 million of OREO expenses in the current quarter, approximately $2.0 million related to operating expenses.

Page 40 of our earnings release provides additional detail on the activity and the composition of the OREO portfolio, which decreased approximately $1.8 million to $55.2 million at September 30 from $57.0 million at the end of the prior quarter.

And all other non-interest expense categories were generally well managed and within a normal range.

And the only other thing I would like to mention is we get a few calls on this and it doesn't relate to expenses or income, but many of you have asked about our tangible equity units, which will settle out on December 15 of this year, and how we would treat those as far as outstanding shares.

Right now, we include 6.133 million shares in our common share equivalents. In December, those tangible equity units will convert, and assuming the price is at its current level, 6.133 million shares will be outstanding in December. And so, what you'll simply have is 6,133,000 shares come out of our common share equivalents and move into outstanding shares.

So our total shares outstanding for EPS calculations will be unchanged. There will just be a geography move of moving those shares out of common share equivalents up into outstanding common shares. So, had a number of calls and questions on that, so I thought I would clarify it as long as everyone has dialed in today.

With that, I'll turn it back over to Ed.

Thanks, Dave. I now understand tangible equity units. I never really did. I'm like these guys. Just kidding.

To summarize, we feel very, very good about where we stand right now. We're starting to really hit on all cylinders. Hopefully, we can continue that.

Margins are hanging in there. Again, we still think there is room on the cost of funds side to bring margins in a little bit, but it really will be dependent on maintaining an optimal loan to deposit ratio.

Credit appears to be easing. Loan pipelines remain strong. The system has operating leverage to help support ongoing growth without commensurate increases in expenses. Wealth management continues its steady progress. The mortgage market is moving away a bit, but we are quoting our expenses accordingly.

The acquisition of Surety will help buffer the shrinking market; further, we intend to continue to take advantage of the inevitable consolidation in this market through additional transactions, transactions like Surety, as well as picking up displaced producers.

We remain very, very busy right now in evaluating additional business combination opportunities in all aspects of our business. As always, we will be discerning and prudent in our approach.

The acquisition of Diamond Bank should close shortly, which should add a couple hundred million to our balance sheet and some very nice locations for us to continue our growth. So we feel pretty good about where we are. If we could just get the regulators to back off a little -- well, that's not going to happen, so we're going to live with it. In the words of Hyman Roth as what he told Michael Corleone, this is the business we've chosen. We're going to have to deal with it.

So we feel good working into the fourth quarter, which is historically a pretty strong quarter for us, and we should be very busy in that quarter, continuing to execute the plans that we laid out to you.

So with that, I'd open it up for questions.

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

A question on the loan pipeline, and you talked about, I guess, people being on vacation in July and August and just curious how true that is. Maybe compare and contrast July and August versus what you are seeing in September and October and how you feel about growth for the rest of the year.

I think growth will be consistent with the rest. If you average it out, we've been growing -- averaging about $225 million worth of loan growth a quarter this year. I think that you can probably expect that.

So, plus or minus a little bit. We don't know what payoffs are going to be, but we work very hard to get the pullthroughs in and we will continue to do that. But the pipeline still is over $1 billion gross and close to $750 million on a weighted average basis, so we feel good about where that stands, and there is added incentive for our guys to continue to really work it.

The market is still pretty good. Pricing has not moved outside of our failsafe profitability analysis, and terms and conditions have not moved out of our credit policy. So we feel very good about where we are as we continue to build relationships and expand our footprint.

We're opening up a little bit of a new market for us with Lansing. Lansing is right on the Indiana border, so it will move us into northwest Indiana. That's an area that we have not concentrated on. There is a lot of business down there, and that's an area that we are concentrating on now, as well as the Kenosha/Racine area, another area that we really haven't concentrated on.

So, there are a couple of new markets where we are focusing, and hopefully that will continue to add to the pipeline as we get penetration in those markets.

Okay, that helps. And then, just on mortgage, particularly on Surety, is there anything that changes with their production or mix post-acquisition? I guess the reason I ask that is it's a pretty big percentage of your production, and obviously, I think we are all expecting the numbers to come down, but with that kind of production coming in, I'm curious if anything changes with those guys or we can assume that stays on pace?

They will move with the market, obviously. We won't pick up -- they have a pipeline that's theirs that needs to be closed. I think their pipeline was close to $90 million that they needed to close, then that goes back to them on their own dime, so we'll take a while to pick up the actual volume there. We will lose a month, really.

But their profitability is -- Chicago still is one of the tougher markets in everything, including mortgages in terms of spreads. So I think that the business we get there will be more profitable, and we are offering them a lot more tools than they had in the past in terms of places to sell the mortgages. They didn't have access -- a lot of their loans out there are jumbo loans and they did not have access to a number of sources that we have access to to place those loans.

So we will be giving them a competitive advantage in that regard, and notwithstanding our ability to fund their warehouse less expensively than they were. So they are all pumped up out there. It's a great group of people, they really are, and we are excited to have them on the team, and we -- they are motivated by the terms of -- just because they are a motivated people, number one, but the business itself is eat what you kill sort of thing, but also a majority of their purchase price on this is based on an earnout.

So that doesn't mean that our quality control won't be in place, but we expect, hopefully, they can pick up market share there because of the additional tools that we are giving them.

Okay, and then just last question. How did you get the purchase volumes up to 70%? It seems like it was a pretty big jump.

They have been trending up for a long time, but we -- I think I talked about this in a previous call. We are very disciplined in our mortgage area. We don't take on a lot of volume when we can't support it. We really focus on time from application to close and servicing customers. That comes first is really the quality of our business.

So when we would -- when things were really going hot, where we're hot and bothered, we would -- we knew we could take 100 nut and 20 applications a day and service them properly and work them through. When the market got more frothy, we would actually raise the pricing on the refi type of business and lower it on the purchase price, because for the last year, we have been working on developing relationships, strategic relationships, with people in the real estate sales business to have them direct their business to us.

We have been focusing very hard on that, knowing that the refi market would come to an end. So I think it's a function of how we price our business, how we control our business, but also the strategic move to align ourselves with people associated with the purchase process, be it attorneys, be it realtors and the like, to continue to build that business because historically, it's been probably a 60/40 business in terms of purchase versus refi. So we're going to work -- continue to work very hard on those channels.

Okay, all right. Thanks.

Chris McGratty, KBW.

Dave, on the securities book, the yields were up about 15 basis points. Can you speak to the reason why? Was it lower premium [am] or was it maybe getting a little bit better yield on what you are buying, or a combination of both?

No, I'd say the primary reason is if you look at the average balance on our liquidity portfolio, it went down quarter over quarter, and where we utilized the funds was taking them out of liquidity that was sitting at the Fed, earning 25 basis points.

So if you take out 25 basis points and leave the rest of your portfolio there, the higher-yielding stuff stays in the portfolio and you get rid of the 25 basis-point liquidity that is just going to bring your yield up because you've gotten rid of the lower yielding assets.

So we didn't go out and extend the portfolio or do anything funky like that. We just got rid of some of the lower yielding assets in there, which caused the remainder to have a little bit higher yields (multiple speakers). It's just a mix issue. Right.

Okay, if I looked at the EOP balances, it looked like it went up at the end of the quarter. So does this suggest maybe yields maybe moderate a little bit in the fourth quarter?

Yes, you're right. We did see a pretty good inflow of liquidity towards the end of the quarter, so on average, it was down, but at the end of the quarter, it was fairly strong.

So we got to put that liquidity to work. Some of it was maybe a little bit of inflows from municipalities because tax payments came in in September and some of that will go out as the municipalities spend the money.

But yes, we probably are close to the low point of that. It can fluctuate. As Ed has said in the past, liquidity can go up and down. We can't manage it precisely with customer input at the end of the quarter. But we will try to put that money to work and should be fine in the fourth quarter.

Okay, and just to follow up on the NII comment I think, Ed, you made, if I add up your comments on the securities book and what you said about the loan book, should we be expecting NII to grow, did I hear that correctly, in the fourth quarter, from the third quarter?

I think that if we -- we continue to grow and put assets on the books without a commensurate increase in expenses, plus just the truck repricing alone will bring you down $1 million, yes, we would hope. That's the name of the game.

We have always said, it's assets, stupid, but not stupid assets. So our ability to generate assets, and our approach forever, up until we did our rope-a-dope, was to be an asset-driven company. We always generated more assets than we needed, which allowed us to go out and gain market share on the right-hand side of the balance sheet, which we consider the real franchise -- franchise value of the organization.

So as long as we can maintain our asset-driven stature, we're in good shape to continue to grow and hopefully grow without that increase in expenses, if it's organic growth, because we have leverage in the system.

So that's the game plan, as of now, is to get back to the future, as we said, to get back to what we used to do so well in the past, and that's good growth. I've always said that the one thing that could screw this model up is if rates and/or terms move outside of our -- what we call our circuit breakers, our profitability analysis and our credit policies.

We don't change our credit policies to follow the times. You have heard me say before Omar Bradley's quote, we set our course by the stars and not by the lights of other passing ships. So if the market moves away from us, then we fall back into a rope-a-dope situation. But we don't see that happening now. Pipelines remain strong, and they are well within our risk parameters and our profitability parameters.

So yes, we would hope -- that's the name of the game now is to continue to grow that and build out this franchise.

Last one, Ed, for you on M&A. You allocated more capital to mortgage this quarter. Obviously, everything has a price. I'm assuming that's why the decision was made. Can you speak to whole bank acquisitions or deposit acquisitions? Obviously, the rumor in the market is Charter One, whether this would be a transaction if it were to be sold in pieces that you would consider?

We don't comment on any specific things we are working on. All I can tell you is that we certainly have -- we get at-bats of anything that comes along.

We have in the past have found that the smaller acquisitions have been to our liking. They bolt right on. They really don't provide a disruption and there is a great cultural fit there. So we are very active in continuing to look at those.

If you think about it, the banks that are trying -- wanting to link up are community banks, and our philosophy and our approach really fits hand in glove with them, so we are very, very busy in that regard.

There are some larger opportunities that are talked about, that may come along. That doesn't mean we wouldn't look at those. But we have to balance it all out, look at our odds and see what's going on.

So we don't leave any stone unturned, and we certainly have a goal to be Chicago's bank and to continue to fill out our franchise in the Chicago and Milwaukee markets. And if opportunities come along, we certainly will give them a hard look.

Thanks.

Brad Milsaps, Sandler O'Neill.

Most of my questions have been asked, but just wanted to follow up on the mortgage banking piece. Can you guys comment on the gain on loan sale margin? It looks like it was maybe down 30 basis points. I know we have talked about it in the past, but directionally, what are your thoughts there, and maybe how does it compare to what the folks at Surety were receiving?

The gain on sale did come in a little bit on our retail side. So as volumes were way up, there is a lot more flow coming in, and what you saw us do and our competitors do is as that flow came in, you try to governor it by raising your prices a little bit. So as the volumes have come down, spreads have tightened a little bit on the retail side.

The other thing is we did a little bit more in the correspondent channel this time. Maybe 8% of our volume in the second quarter was correspondent and about 18% was correspondent in the third quarter. Spreads in the correspondent are a little less, but the expenses associated with that are a little less, also.

And the Surety business, as Ed mentioned in his opening comments, or in response to one of the questions, I don't recall, but the spreads on the business outside of Illinois are generally higher. So it really depends on the product mix and the marketplace, but we see in other parts of the country that sometimes those spreads are 15, 20, 30 basis points wider than what we get in Illinois.

So, we're hopeful that holds up in California. We will have to see how that works, but not too dramatic. I think it's just competitive pricing and a little bit of a mix change between retail and correspondent on our part.

Okay, but do you guys see -- obviously, there's a lot of moving parts, but you can hold it in this range or you potentially have got further downside because the fourth quarter is a little bit weaker, then maybe you get some bounceback as volumes pick up into the stronger months in 2014?

It's reverting to the mean. It's reverting to -- the spreads are just coming back to what are normal. So I think what you saw this quarter was more normalized spreads.

When I look at our budget and what we hold our mortgage guys accountable to, they were still this quarter a little bit above that. So we have seen abnormal spreads due to the cow going through the boa constrictor; people are charging more. And so when that volume runs off, the spreads are reverting to the mean, you are very close this quarter to what the normal should be. It actually could come back a little, and hopefully that would be offset by higher profitability out of Surety.

So it's hard to tell whether we are dealing with nits and nats here, but this is more -- what you saw this quarter is closer to what historically is the case.

Got it. And then I know, Ed, you've talked a lot about the lag between production slowing down and you are able to lower the expense base in the following month or the following quarter. If you had to try to pinpoint it, how much excess expense were you carrying in the third quarter that you think will fall off in the fourth, all else being equal in terms of volume?

Boy, that's hard to say. In this rite of business, there is a lot of moving parts there.

Obviously, commission expense, which glides a little bit, will come down. And there are some people costs that will come down, but we are looking at that right now, and the mortgage department is -- they got this thing pretty cookie-cutter, Brad, where they know exactly -- they look at what their projections are going to be. They know how many to keep our quality of service up.

One thing we are very proud of here is the quality of the service that we provide. I can't tell you how many people, be them attorneys, be them guys -- fellows who own title companies, will say how happy they are when they go to closing and see it's a Wintrust package because they know it's right and it's good.

Because of that, we have our benchmarks set up. We know exactly how many processors, how many post-closers, how many pre-closers, the numbers that we need, and it will shrink proportionally with that. Obviously, you lose a little bit because of your -- you don't get to leverage your executive staff as much over -- you are leveraging that over less volume, but proportional in terms of 80%, maybe, would be what I'd look at. If volume drops, that percentage would be about 80% in terms of expense costs.

It just depends how that would ratchet up. If it falls off the cliff and there's nothing, we'd be left with nothing but overhead, right?

So you can -- it's kind of like calculus, which I got a D in, anyhow. But I can't give you an exact number.

Okay, thank you, guys.

Steve Scinicariello, UBS.

I just want to follow up on some questions around Surety, just given the significant origination generation potential that platform brings to you guys. Just curious, are there more types of Surety-like deals out there that can help mitigate the origination volume decline going forward?

That's the plan, Steve. We have talked about that previously. We believe that market will consolidate and we see it consolidating when this refi binge is over.

A lot of the independents out there, which there are still many, and by independent, I mean those not affiliated with a financial institution, see Dodd-Frank coming down the road at them and they wanted to hang around long enough to take advantage of this, and they are going to give up the ghost. They have not experienced, they have no idea the pain -- the difference in operations that compliance costs will bring to them and real scrutiny on compliance costs.

I've talked in the past about the more independent mortgage brokers, at least in the state of Illinois, and we are looking nationally, by the way, and our platform is national. But in the state of Illinois, the Department of Financial Institutions had two guys to look at close to 1,000 mortgage producers. And they never had any scrutiny.

As Dodd-Frank comes into being and capital's required and more strict penalties come for violations of that, these guys all are going to want out.

So they are going to ride this horse as long as they can, and that's always been our theory. So yes, we believe there will be other opportunities there not just for platforms in Illinois and around the country, but also to pick up producers, real quality producers who would be leaving companies that are either just shutting the door or moving somewhere else that we can continue to build this up.

So we think it's a displaced opportunity, and, as you know, we like taking advantage of dislocated assets and people. So we believe it's an opportunity for us to really build this platform and become a real force in this business.

No, and it makes sense, too, and that's why they are probably happy to get the kind of earnout type of incentives that you are offering, I would assume.

They are a motivated bunch.

And then, my second question, just in terms of the expense management looked really good this quarter, and just putting together some of the comments in terms of having higher net interest income, getting a lot of the expense leverage, starting to see that, out of the infrastructure, and then rightsizing the mortgage side, just want to check in and get any color. Any reason why we shouldn't see the efficiency ratio continue to trend downward as we go forward?

That would certainly be our hope, Stephen. Obviously, part of the equation there is the margin, too, so we've got to work on the margin aspect.

But as Ed indicated, it looks like on the credit side, we hope that continues to work its way through, and I think you'll get less professional fees with that, less collection costs with that, hopefully, and then as we build out the smaller facilities and the leverage we have in them, I think so.

And the mortgage business, although we hope it continues to stay high and we can fill in with other deals and picking up new producers, if that does fall off, that generally is a higher efficiency ratio business. So if it does come down, then that would aid the efficiency ratio, although we would clearly prefer those revenues to stay up.

So yes, I think we have leverage in the system and we would think that would be the case. Obviously, we have to execute.

Yes, we actually -- the efficiency ratio, because it is a function of the margin and your expenses, we don't manage with that because if you did, you'd just shrink your bank to nothing, if you follow that logic through.

We look at net overhead ratio. This quarter, it was a 1.65%. We strive to be below 1.50%. Our goal is to be 1.40%. Because of the little bit of a lag on the mortgage side of the business and just some other mix issues, it jumped from 1.50% to 1.65%. So although expense control on the surface of things looks good, in my mind we can do better. That's not -- high-performance banks should be -- have a net overhead ratio of 1.40% to 1.50%, or anything below it.

Some of our bigger banks run net overhead ratios of 90 basis points, and we need to -- there is leverage in the system that needs to be built out. That has to happen.

So yes, expense control looked pretty good on the surface of things, but in my mind, it was -- our expenses were too high. We weren't below that -- at 1.50% or below. So there is more to do there. (multiple speakers). That's how we look at it.

Great, thanks, guys.

Herman Chan, Wells Fargo.

Following up on the loan pipeline, it does look like the pipeline has declined somewhat in the last couple of quarters. Is there anything of note you would point to there?

Better reporting? (laughter). I think the opportunities -- as the pipeline has evolved, we have been able to get more accurate reporting out of it. So I think that's one issue. The other issue is just in the third quarter, it's just always slow.

Probably I'd say if you look at the decrease, which is not that much, but -- not that material, but I'd say 20% of that decrease is due to better reporting of opportunities and 80% of it is just due to a third quarter -- everybody is on vacation and riding it out. So we would expect -- I'm still very pleased with that pipeline where it is right now, and off we go.

Understood. And with the few months after the announced deal to consolidate two of your competitors, have you seen any changes to the competitive dynamic in the commercial market?

Not really. It's the same old, same old. Like I said earlier, we have always competed with those two institutions. We continue to compete with them. No one has changed their approach.

So, no, I'd say it's still very competitive, but then, again, I can't remember in my career when it wasn't very competitive in Chicago. So we have not seen any significant -- really any change in the (technical difficulty) since that announcement.

Okay, great. Thanks for your time.

Peyton Green, Sterne, Agee.

A couple of questions, not to beat a dead horse, but maybe to clarify on the mortgage business. One, do you all book on -- do you book your gains at lock or at funding?

Funds, funding. (multiple speakers).

Okay, and then maybe, Dave, on the margin, kind of thinking about the held for sale that existed a quarter ago, which was around roughly $540 million, and the held for sale was down to about $335 million at the end of the current quarter, or recent quarter, how is the margin on the volume, say, that existed at June 30 that carried over and might have helped results versus the margin that you would carry over, so to speak, into the fourth quarter on the $335 million?

If you look at the second quarter, our average mortgages held for sale were about $382 million and yielded about 3.31%. And in the third quarter, the average -- even though -- at the end of the quarter, the average was higher at $481 million and it yielded 3.61%, so we actually had a little bit more average outstanding at about 30 basis points higher.

Okay, all right. And then, Ed, what do you think has to happen to get to the net overhead goal of 1.40%? Is it something that you think is doable by the middle of next year or is it longer term?

There is a lot of moving parts there. But really, building in -- we were 1.50% last quarter. There are some mix issues there. I think some of the expenses, the accordioning of the mortgage business with lower volumes, will be helpful there.

But again, it's the leverage we have built into our system right now that we do -- we are carrying a little bit more overhead than we would like for the size and the number of our branches, but we have not turned on the spigot, like we used to in the old days, because we were trying to maintain an optimal loan to deposit ratio.

And we have been able to, through acquisitions, pick up liquidity that we have been sucking up with our loan production.

So we need -- we're going to need to start drawing deposits at some time, and we need to take advantage of that leverage that's out there -- in other words, that growth without commensurate increases in expenses -- that will drop that number down.

And Peyton, if you look at the prior four quarters before this one, we were in the upper 1.40%s, and this one popped up a little bit, and part of that is the cap loss, the trading loss in there also hurt that ratio a little bit this quarter.

Okay, and then maybe thinking about the overall deposit growth, looking at your loan to deposit ratio is around 94%, which I know was above your targeted range long term of 85% to 90%, and the strong loan growth, also, has pushed the loan to earning asset mix up to about 86%, which is about 300 basis points higher year over year in linked quarter.

How much more leveraged are you comfortable running those over the next two to three quarters?

Not much.

Okay.

We look at it -- we take the covered loans out when we are looking at the non-performers. They are at the loan to deposit right now (technical difficulty) running off. So we have allowed ourselves to go a little bit above our -- what we have stated is our normal operating parameters, but we are right in the parameters if you look at core loan growth, so -- or core loans to deposits.

And at the end of the quarter, we were more around 89%, so that inflow of deposits towards the end of the quarter, although the average was a little higher, the end of the quarter was closer to the target.

And then, I guess, maybe another question. Ed, do you get any sense that the deposit environment is changing where it may be worth spending a little extra now to go out and get some additional deposit flows, or is it still not there yet?

You can always go get them if you want to pay for them. But we have not really pulled -- we have not uncorked our age-old marketing in a number of places yet because we don't have the loans to cover it.

So when we do -- that's the leverage they talk about, we do have the ability, because of our structure, we can go out and raise deposits in Park Ridge, for example, where we have a smaller branch, but in a wonderful community, and we can do that without having to raise them across the system. So we don't cannibalize ourselves; your marginal cost of funds are relatively low. That's what we are looking forward to doing.

If you recall in the past, when we would go into a town, we would move (technical difficulty) here very quickly, but we have not done that because we haven't had the loans to cover yet and we're picking up -- with the acquisitions that we've been able to do, we've picked up -- most of those guys are 50% loan to deposit when we get them. We pick up that liquidity and we sap that up with our loan growth.

So from our perspective, that's all to come down the road when maybe the acquisitions dry up and we have -- we do have a number of outposts that we can start growing organically with our age-old approach and be able to fund loans that way.

But again, being asset driven and managing, not carrying too much liquidity in this rate environment right now, is what we want to do. We're just holding off on that. You don't want to go out and make a big splash now; we would rather do it when we have the assets to cover or at least you can get some spread on the investment portfolio.

I know you have always been one to say we should extend out there, but you and I don't agree on that. We're going to barbell for the time being.

That was three years ago, not necessarily now.

He's got a long memory, Peyton.

Anyway, sometimes. And I guess, maybe Ed, it seems like we are all waiting for a bit of a consolidation wave to start rolling. Do you get any sense that anything is picking up or is it still chatter? With currencies higher, has the bid/ask spread tightened? Maybe some color on that.

I think our opinion has been, and consistently, that this is going to be -- a year ago, we said it would be a five-year consolidation. It's just going to take time.

There is still a lot of pain out there in a number of banks. We have talked about the number of banks that we have been in that, once we apply our marks to their portfolio, know they still have a lot of work to do to get anything out of it.

So I think it's just -- for the banks $1 billion and under, they are going to have to do something, just because the market is not set up for them to get reasonable returns. They just can't afford this regulatory environment, nor can they afford -- can they get the earning assets to cover the real estate. They can't put any more real estate on.

So they've just got to get healthy. So that's what's going to happen in that regard. Are price expectations high? Yes, I think they are, a little. They have gone up a little bit, but reality is also setting in, too.

It's offset by fatigue. These guys, another year in the coal mines trying to work out of their credit problems, and another year of the regulatory burden, and another year of taking liquidity and not being able to deploy it is making them very tired.

So you just got to find the right place at the right time, but I would say that expectations are rising, and I think that some of that -- there hasn't really been anything -- any precedent set in the market, other than the [Taylor] deal, which was a pretty good multiple on that. There haven't been any precedents set for the smaller banks at big multiples.

But I think a lot of investment bankers are out there selling happy gas. (laughter) is the only way I can put it. That things -- they can get two again if they just hang on.

So it's interesting, but that all being said, we're not at a loss for things to do.

Okay, great. Thank you very much for taking my questions.

Emlen Harmon, Jefferies.

I had one a little bit more technical question left for you, I guess. In terms of the gains on the interest rate caps, what part of the yield curve should we be looking at in terms of where that becomes a more consistent source of income for you?

We put the maturities of each of the cap contracts in the 10-Q, so people can go out and look at those, but generally what we were doing was buying caps that had a life of 3.5 to 4 years on them. And we haven't bought any in the last quarter or so, so they have moved down the curve a little bit.

But I think if you are in the 2.5 to 3.5 year part of the curve, that is probably where we would get the most benefit.

And (multiple speakers).

And volatility.

Volatility (inaudible)

Yes, rates get moved tremendously during the quarter. I mean, they moved up and down. There's a fair amount of movement, but volatility has a pretty big impact on it, too.

Okay, got it. Thanks. I had just that one. Appreciate it, guys.

Terry McEvoy, Oppenheimer & Co.

About 75% of the call has been discussing the mortgage business, which over the years has been volatile and a low multiple business. How do you think about continuing to invest in mortgage versus, say, wealth management or specialized lending? And is it just the mortgage producers and platforms are available today, so you're taking advantage of that, or do you see better risk-adjusted returns in mortgage versus some of the other options, looking ahead?

We do not do it to the exclusion of the other options. We continue to look at all facets of our business where we are active in looking at opportunities.

On the mortgage side, it is what the market is giving us right now. We were able to pick up this type of production going forward, and being able to control the costs, it can be a nice, profitable business for us where you don't have to really put a lot of capital into it if you are not holding -- if you don't run into MSR issues with the Basel stuff.

So, the returns can be very good if you look at that, the same as wealth management. But we don't shortchange any one of our businesses, but right now, this is what the market has given us and it's just like the banking side. These banks under $1 billion, the types of consolidations take place a couple of times in a career, and you need to be able to take advantage of them.

So -- and they all work together in an internally hedged balance sheet, something that is -- something is not working, something does. Rates go down, your margin gets hit, but mortgages go up.

Wealth management is always there, and as I said earlier, we're on the cusp there of that $16 billion and really starting to get some traction in that business. Our results on the reported -- our managed funds that are reported out there by Morningstar and the like are well above benchmarks and have been for a period of time. So that's starting to take hold and grow that business, too.

We continue to look at filling out our wealth management business, but we've been able to do some of that internally, so by -- organically by starting different funds ourselves. So we don't shortchange any business anywhere. This is what the market has given us here. At the same time, we are looking at other asset generators and we are looking at other banks.

And then, just one quick follow-up. Ed, you said normal credit expense is $7 million to $9 million. They were roughly $11 million last quarter. Where in -- I am guessing CRE -- do you expect to see the improvement over the near term to bring that number down?

CRE. All the big -- we are surprised by some of the ones that pop up. You never know what's going to happen on credit.

It looks to us when you look at migration of risk rating, they are getting better and better. Things just pop up out of the blue, but all the big baddies are gone, basically. We've got to clear out the rest of the OREO, which we are doing as quickly as we can. As the market turns, that's been helpful to us.

We have been very religious about writing them down, so we put them in the OREO portfolio, and we -- a lot of the bigger baddies have made their way through the system. So we are seeing smaller deals come on right now, and those are usually not as (technical difficulty) as some of the big old land deals.

But it's mostly real estate where you are going to see just the rest of this thing shake out. We have seen an increase in home equity loans, smaller transactions, an increase in the nonperformers there as of late, but usually the losses there are not that bad.

Great, thank you.

John Moran, Macquarie Capital.

Just really one or two ticky-tack questions left for me. On the indemnification asset and the change in assumptions, I just want to make sure that I am clear here. We should look at this quarter's run rate as what we should -- granted, there is some noise and bumpiness in this number, right -- but this is the new run rate going forward or was this quarter just a one-time catch-up?

I think this quarter is a little bit of a catch-up in there. So you can probably go back to page 15 of the release and look at the past five quarters and smooth it out.

It does go up and down. You do get -- some quarters, you get things paying off faster, and your projected lives slow down, and sometimes they slow down and they extend out.

But we did do a little bit of -- we think we're just a little bit conservative on our servicing cost estimates in prior quarters, and we really did a deep dive on those and fine-tuned those calculations a little bit better.

Okay, got it. That's helpful. And then, Dave, I missed the number here in your prepared remarks, but I think you had called out on the expense side maybe some conversion expenses and a couple of other smaller things that might be nonrecurring in nature. Could you just run through that real quick, again?

Yes, the conversion expenses, we had about $337,000 related to conversion costs that occurred during the quarter. So that's one number that we called out.

There wasn't anything really, other than that, real special. We had some changes and professional fees were better.

And one thing that a lot of people ask me, and so I talk about it during remarks, is of our OREO costs, and we had $2.5 million of those, how much of that was valuation and how much was operating. So people want to understand if we are getting gains or losses on that. And $2 million of the $2.5 million was operating costs. So those were the specific numbers I really called out.

And the other one, I guess, is there was an extra $800,000 of costs related to the First Lansing acquisition, having it for three months during the quarter versus just two last time.

Got it, got it. That's helpful. Thanks very much, guys.

Stephen Geyen, D.A. Davidson.

Ed, you talked a bit about the pipeline and the strength of it, and then you mentioned pullthrough, and I was just curious if you've seen any changes in pullthrough as far as when deals are coming to close, if there is a bit more surprise as far as somebody else jumping in with more competitive bidding?

No, our pullthrough rates have been pretty good. It actually got -- sneaked up a bit, just because I think our data -- we are more discerning on the data going in there and looking at it a little bit more. Looking at it a little bit harder.

So I think our pullthrough rates are still pretty good. So no, we feel okay on that.

Okay. And if I remember back a few quarters ago, you had mentioned, I guess, the roughly $750 million, maybe $800 million in loans that are on a weighted basis in the pipeline, and that you typically see a good portion of those come to fruition in six months or so. Is that a good measure?

Yes, yes. It's usually weighted towards the first 90 days, actually, but remember, too, that a lot of the lines we are putting on, our average draw remains around 52%, so when you say you got $700 million, you're going to draw on that, and if two-thirds of that are lines of credit and what have you, then only half of that is going to show as outstanding balances.

So you have to remember that. That's why we've been averaging -- premium finance has been doing very well, also, both on the life side and the property and casualty side. The property and casualty side, we continue to see -- we continue to gain market share in terms of number of tickets processed. For the past -- I think I mentioned on the last call, for the past X number of years, we have had double-digit growth. Now the wild large numbers are catching up, and we're 8% or 9% in terms of actual tickets processed, so the number of volume of loans we are doing.

But the average ticket size continues to move up where from a low of 19 a couple of years ago, up to over 24 right now. So as that continues to move, and again, we -- 27 to 28 is the average for an average market, so there is still some room there. You can pick up an extra $3,000 or $4,000 on the number of contracts we are processing; that adds to some growth, too.

And the life business continues, although that's always competitive as people pulse in and pulse out of that, but he has been able to continue to grow that business. So you add those with the other businesses, the consumer business and the SBA that don't fall into our pipelines here, we still see pretty good loan growth, and [200] to [250] a quarter is not bad loan growth for us. Sure, we would like to see more, but that's good, steady growth.

This is -- slow and steady is going to win this race here. And the way I -- we have often said why -- you guys got to be at 1%. And I said, well, if we took zero provision, we would be over 1%.

So, slow, but steady, we are banking our way up 80 basis points. Hopefully next year, we can get higher than that and continue to work towards those numbers, but we're not going to change our risk parameters to get there. We're going to take advantage of the growth that's out there, the opportunities that are there, and continue -- if we can continue to put up double-digit earnings growth, I don't think anybody will complain too much. There you have it.

All right, thanks for your time.

That concludes our question-and-answer session. I will now turn the conference back to Edward Wehmer for closing remarks.

Thanks very much, everybody, for dialing in. If you do have any questions, you know where to find Dave or myself, and everybody, have a great week. We will talk to you soon.

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