Wintrust Financial Corp (WTFC) 2014 Q2 法說會逐字稿

Welcome to Wintrust Financial Corporation 2014 second-quarter earnings conference call. Following a review of results by Edward Wehmer, Chief Executive Officer and President, and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session. The Company's forward-looking assumptions are detailed in the second-quarter's earnings press release and in the Company's most recent Form 10-K on file with the SEC.

As a reminder, this conference call is being recorded. I would now turn the conference call over to Mr. Edward Wehmer. Sir, you may begin.

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

We will have the same protocol as we have had on all of our previous calls. I will give you some general comments on the quarter. Dave Dykstra will give you details the other income and other expense items. He will turn it back to me for some summary comments and thoughts about the future. And then we will, as always, have time for questions.

All in all, the second quarter is pretty clean and solid quarter. Not a lot of noise in the numbers. The closet door is open; the lights are on; not much hiding in there. You can see everything in these numbers.

Good progress was made in all areas of our business, evidencing that our slow and steady approach is working very well.

For the quarter ended June 30, we recorded net income of $38.5 million; year-to-date income of $73 million, up 12% and 10%, respectively. Earnings per share was $0.76 for the quarter; $1.44 for the year to date, up 10% and 7.5%, respectively. And ROA moved up to 84 basis points as we continue that climb through our slow and steady approach.

The margins held steady. They actually up one basis point to 3.62% versus the first quarter as we continue to maintain our very efficient balance sheet with loan-to-deposit ratios at the top of our desired range of 85% to 90%.

Other income -- in total, other income was up $8.6 million versus quarter one. The main component of that was a $7.4 million increase in mortgage banking revenue versus a dismal first quarter when, as we reported, we were all hiding in our houses from the polar vortex.

You can see the graph on page 4 of the release to follow our mortgage production over the last few quarters. And Dave will get into this little bit more in his comments.

The other main contributor was a $1.4 million increase in our wealth management fees versus the first quarter. This resulted from not just from a favorable market but continued increase in new business -- in new accounts in that area.

Assets under administration now total approximately $17 billion, up from $14 billion one year ago, an increase of 21.4% and $16 billion at 12/31. So good progress on the wealth management side. As we said earlier, in previous calls, we have all the pieces in place. The results of our proprietary products are good. Our cross-sale efforts related to both individuals and our middle market customers, so the retail side, and our middle market customers, so 401(k)s and the like, plus the continued good work on the institutional side have continued to push the positive momentum in that area. We are excited about the prospects here. We think we have a great product. The market with some of our competitors going upscale now has opened up for us $5 million, $10 million accounts on the retail side. We still think that's a lot of money with some of our other competitors who have really gone upscale on that. So it's exciting for us there.

Other expenses, Dave will talk in detail but just suffice it to say if you take out variable comp they are pretty much equal to the first quarter last year, variable comp being mortgage and brokerage commissions -- so they were flat versus the first quarter of 2014.

Balance sheet side, good growth across the board. Assets increased $700 million versus quarter one, so $18.9 billion. Deposits were up $427 million. The mix of deposits continues to improve with DDA comprising approximately $300 million of that growth. DDA now represents 20% of deposits, finally. We always had that as a goal to get up to 20%. Now our goal -- of course, we will raise the goal now. But for years and years we were at 9%. So, it just shows how well our middle market initiative is moving or moved into the commercial side with hiring those loan officers and the like. That is going extremely well for us and slow and steady doing business on our terms and not the terms of the market.

Loans -- across the board, good progress. Up $617 million versus the first quarter excluding loans held for sale and covered loans. All major categories shared in that growth with niche businesses up $365 million; core up $251 million versus the first quarter. Loan pipelines remain consistently strong in all areas both core and niche.

On the competitive side, we do see on the commercial real estate side continued pressure on pricing and terms. As you would expect from us, we're doing deals on our terms. Again, probably our batting average is going down, but we are getting a lot more at bats given our marketing and the like that is getting the Wintrust name out there and our continued expansion. So, we're not ready to call Rope-a-Dope 2 yet because we have had good growth on our terms. You can be assured that we will continue to use our circuit breakers effectively. We do not change our loan profitability analysis nor do we change our loan policy to accommodate changes in the market, but our pipelines are still strong and we believe our pull-through rates will still remain very good to get business on our terms.

Credit quality was steady, still low, lower than peer group. NPLs were down; OREO was up a little bit. Overall percentages were down. We're operating now at levels consistent with the situation prior to the downturn, to the cycle. With the loan loss reserves having as good a coverage as it ever has in non-performings. Charge-offs down to those pre-cycle levels, but our goal is to continue to push those down to continue to push out bad assets. We like making money on other people's bad assets. You don't make any money on your own. So, we're committed to continue to identify and push assets out because who knows when the next cycle will come along.

So with that, I'm going to turn it over to David.

Thanks, Ed. As normal, I will briefly touch on the noninterest income and noninterest expense sections. As Ed mentioned, all in all it was a pretty clean quarter, but I will go to the major categories.

In the noninterest income section our wealth management revenue, as Ed mentioned, increased in nicely to $18.2 million for the second quarter from $16.8 million in the prior quarter and improved by $2.3 million when compared to the year-ago quarter total of $15.9 million.

Brokerage revenue showed an increase of $8.3 million from $7.1 million in the prior quarter and our trust and asset management revenue showed a slight increase to $10 million from $9.7 million in the prior quarter. The increase in both categories being attributed primarily to growth in assets under management due to new customer acquisition as well as market appreciation.

On the mortgage banking side, mortgage banking revenue increased by 45% to $23.8 million in the second quarter from $16.4 million recorded in the prior quarter and was down from $31.7 million recorded in the second quarter of last year. The Company originated and sold $912 million in mortgage loans in the second quarter of 2014 compared to $527 million of mortgage loans originated in the prior quarter and $1.1 billion originated in the year-ago quarter. Also, the second quarter continued to show relatively strong mix of volume related to purchased home activity, which represented approximately three-quarters of the second-quarter volume which is slightly higher than the purchase volume in the prior quarter.

The value of the Company's mortgage servicing rights portfolio declined slightly to $8.2 million as of the end of the second quarter compared to $8.7 million in the prior quarter as the portfolio was valued at 89 basis points at June 30 versus 92 basis points at the end of March.

Fees from covered call options remained relatively consistent and totaled $1.2 million in the second quarter of 2014 compared to $1.5 million in the previous quarter and $1 million recorded in the same quarter of last year. As we mentioned before, the Company has consistently utilized these fees from covered call options to supplement the total return on our treasury and agency securities held in its portfolio in an effort to provide the hedge to the margin pressures caused by low interest rate environment.

Trading losses approximated $743,000 during the second quarter. This compares to trading losses of $652,000 in the prior quarter and trading gains of $3.3 million in the year-ago quarter. The trading losses and gains in the current and prior quarters were primarily the result of fair value adjustments related to the interest rate contracts that were not designated as hedges, and these were primarily interest rate cap positions that the Company uses to manage our interest rate risk associated with rising rates.

The net impact of the trading gains and losses over the past five quarters have, in the aggregate, been nearly breakeven but slightly negative at a net $68,000 pretax trading loss.

The level of other miscellaneous noninterest income categories recorded for the quarter was $6.2 million, which was fairly consistent with the $6.1 million recorded in the first quarter of 2014.

Turning to the noninterest income categories, noninterest expense totaled $133.6 million in the second quarter, increasing approximately $2.3 million when compared to the prior quarter. If you exclude the impact of increased variable compensation expense and a decrease in the employee benefit expense, the aggregate of all the other expense categories recorded in the second quarter was virtually unchanged from the first quarter, indicating decent overall expense control as the Company has grown.

So turning to the details, salaries and employee benefit expense increase $2 million in the second quarter compared to the first quarter. The increase in this category was due to $3.9 million increase in the commissions and bonus expense category, which is primarily a result of increased commissions related to higher mortgage origination and brokerage transactions in the wealth management business. Commissions were $15 million in the second quarter of 2014 compared to $11 million in the prior quarter.

Offsetting the aforementioned increase, employee benefits were approximately $1.4 million lower in the second quarter compared to the first quarter. And this was predominately due to the lower payroll taxes. As we spoke in the first quarter, payroll taxes are always higher during the first quarter of the year as Social Security tax limitations reset at the beginning of the year.

And finally, the base salary expense was relatively flat with the prior quarter but was actually down about $400,000. And as we talked last quarter, we indicated that we thought sort of the base salary employee benefits expense would be $67 million without commissions. And if you add in the $15 million of commissions, that's about $82 million and that is really about where we came out this quarter. We were at $81.963 million. So I think that worked out as we had guided last quarter.

Turning to occupancy expenses, as anticipated the occupancy expenses fell $1.1 million in the second quarter to $9.9 million. And that is down from the $11 million in the first quarter of the year. The current quarter results saw the reduction in utility and snow removal cost versus the first quarter which was impacted on unusually heavily by the cold and snowy winter experienced in our market area.

Professional fees totaled $4 million in the second quarter representing an increase of $592,000 from the prior quarter and a reduction of about $145,000 from the year-ago quarter. The current quarter included legal costs associated with the two recent acquisition announcements for branch locations in Wisconsin.

Professional fees can fluctuate on a quarterly basis based on the level of acquisitions and problem loan workout activity. But that being said, the total professional fees were within the range experienced over the past five quarters.

The second quarter of 2014 saw a decrease of $1.5 million in OREO expenses compared to the prior quarter resulting in net OREO expense of $2.5 million for the current quarter compared to $4 million in the prior quarter. Of the $2.5 million of OREO expense in the current quarter, approximately $1.6 million related to operating expenses with the remaining $900,000 related to valuation reserves and net losses on the sale of other real estate owned.

Page 40 of our earnings release provides additional detail on the activity and on the composition of our noncovered OREO portfolio, which increased to $59.6 million at June 30 from $54.1 million at the end of the prior quarter.

If you look at the other category of noninterest expenses, it increased by $1.7 million to $15.6 million from $13.9 million for the first quarter of 2014 and declined by $554,000 from the $16.1 million recorded in the second quarter of last year. Although this category increased over the prior quarter, the expense level in this category is still at a relatively low level when compared to the previous two years. No single category represented the primary reason for the increase. The category includes things such as loan expenses for core portfolio and recovered portfolio and travel and entertainment expenses; operating losses; postage supplies; directors' fees; and other miscellaneous types of expenses. Accordingly, quarterly fluctuations are not unusual in this category. Again, are relatively well controlled, slight fluctuations in a variety of different categories.

All in all, as we mentioned before, excluding the increase in the commissions and the decrease in the payroll tax expenses, all the (technical difficulty) with the prior quarter. So good expense control quarter from our perspective.

And with that, I will throw it back over to Ed.

Thanks, Dave. Some summary thoughts for you. It was an active quarter in a lot of ways, not just our balance sheet growth and the like, but we also raised $140 million in sub-debt during the quarter. That cash will be used for general corporate purposes. Some of it was used over the weekend when we closed on our acquisition of THE National Bank branch in Pewaukee, which added $90 million in loans and about $37 million in deposits to the balance sheet. Third quarter we will also be closing on the Talmer acquisition which, again, is in southern Wisconsin. That is a deposit-only acquisition but we believe the loans will follow as those customers will want their loans locally and not in Michigan.

So we think that there will be some good loan growth out of that once we get that closed.

The acquisition market remains very active. We're talking to a lot of people, but, again, the gestation periods of these deals is a lot longer than it was a couple of years ago but the market is still very active. We like where we are positioned in that market as most of these banks are community-oriented banks and their cultures fit very well with us. You can be assured of our continued discipline in looking at these transactions. It's not just on the bank side but we are seeing other transactions really in all other areas of our business. We are very active there and again, but, again, we will maintain our disciplined approach.

Right now these deals are working very well for us, because when we get them they actually bring liquidity onto the balance sheet. Many of the deals are deposit-only or have loan-to-deposit ratios in the 50s and 60s. And we came use that growth to -- or that actual liquidity to fund our own loan growth, keeping the balance sheet efficient up at that 90% level, the top of the range we are comfortable with.

When that turns, and it will turn; we don't think it will turn for a couple of years, but it will probably turn when rates get a little higher and people make more money and price expectations will move up, we're prepared to -- we have added a lot of branches over the last couple of years and those branches are not optimized. You know that we are used to being one or two in market share in each town that we are in, but we have not turned on the marketing spigot there as we don't want a lot of excess liquidity when you can't make any money on it.

But when the acquisition market moves away, we have what I could refer to and have referred to as this kinetic operating leverage where we can then -- we were always and still are very good at organic growth. We get a little playing field out here on the rate side of things, we believe that we will be able to grow those under-utilized institutions in the old-fashioned way we used to and fund our loan growth through there and use that excess leverage that we have. We can grow without a commensurate increase in expenses.

So that is the plan, guys. It is just going to continue to look and take advantage of what the market is giving us in terms of the acquisitions. And when that moves away we will be able to turn the spigot on on the organic growth and continue to fund loan growth, assuming, of course, that loan growth does not get absolute totally irrational and we have to pullback -- which we are not afraid to do if that is what happens.

Fortunately, we are diversified enough that if one part doesn't work, other parts are working, be it the mortgage, wealth management, our niche business, and the like. So if we have to pull off of one we will still be able to be working very hard on the others, and we continue to try to add legs to the stool of not just our niche portfolio but other areas of opportunity where we can enter different markets that we are not in, different types of loans that we are not in, continue to diversify the balance sheet, and keep working in that regard.

We are comfortable where we are in our interest rate sensitivity position. Again, our GAAP position is positive because of our funding in the 94%, 95% core funded, conventionally funded. We believe that not only will we get the movement out of the straight GAAP position but also we will get the lag effect out of our core deposits also, which is something that will be very beneficial to us. So we like where we are there.

So in summary, we are pleased with the quarter. The slow and steady progress is going to continue. We're going to be very careful in how we do it. And at the end of it I would probably say, it is almost fun again. I don't think it will ever be totally fun again, as fun as it used to be, but it is almost fun again. We are having -- we've got good morale here; we've got great momentum; and we're excited about where we sit and where we can take this Company in the next two, three, five years.

So with that, I will turn it over for questions.

(Operator Instructions)

Jon Arfstrom, RBC Capital Markets.

First question on mortgage. You obviously had a nice bounce back there and curious what your outlook is for mortgage. Maybe some of this was pulled through from Q1. And are you expecting a bit of a pullback or do you see volumes that can be consistent with what you saw in Q2?

For Q2 to our projections look pretty good. Beyond that, it's hard to say. Rates move. You will have quarters where, hopefully not as bad as the first quarter, but you will have quarters where it's a little slower. And that's just part of being diversified. But all I can do is project what we're looking at in Q2 and that looks pretty good. We continue to look to expand in that area as the whole mortgage industry is contracting. We believe it's an opportunity for us to get more endpoints.

People are always going to need mortgages. And we're coming out of pretty extraordinary times right now. So there will be a period of time where there is some volatility. But I think once rates move up and things get back to normal it will be a little bit steadier than the roller coaster ride that we have had.

And you still in expansionary mode in this business and you see opportunities to add more production in the business?

Yes.

Okay. And you were saying Q2, I am assuming you mean Q3, is that right?

Yes. Q3, thank you.

Okay, good.

And then in terms of the margin, Ed, you touched a little bit on funding, but you don't really expect that to be an issue in a couple of years. Just curious how you're feeling about margin sustainability. And then maybe overall, asset sensitivity of the Company. Is it still the beach ball scenario? Or is there anything different in your mind?

In this rate environment if we can maintain the upper end of our desired range of loan to deposits, we should be at the upper end of that margin range we discussed -- we've laid out to you before. If you get down to 85% loan to deposit you're probably 345, 350 on the margin. So it's very dependent on the amount of liquidity you have on your books not making any money.

So, we are trying and have over the last few quarters been very efficient in how we fund ourselves and how we work that margin and its effect on the margin.

Going forward, yes, we are positively GAAP. And I think one thing that is lost is the lag -- some companies are funded a lot with institutional money. And you don't get the spread differential when rates go up. If you have got savings accounts and NOW accounts and the like, they don't go point for point when rates go up. So you lag them a bit and then there is built-in caps on a lot of those. Certainly there will be a little bit of deposit shift when that occurs out of money markets maybe back into CDs.

Our CDs have fallen off the planet. We are not chasing them, we can always get them back. But between the rate sensitivity and the way we are funded and the spread relationship there, we believe that nothing has changed in terms of where we would be at the end of -- if we have a 4 point parallel shift in the yield curve, where we would be at the end of two years -- over two years where we would be at the end of those two years.

And that's a margin in the 4.5 range. Notwithstanding all of that, and who knows what growth will bring, that is what shows now.

So as I said in our comments, we feel very comfortable about where we are right now. It is a constant battle because a lot of our competitors that the market has moved away -- a lot of guys are doing some fixed-rate lending at what we think to be irrational rates. We continue to rely on swaps. Any fixed-rate loan of any size has to be approved by me, Dave, or Rich Murphy because the market is doing it, the guys always want to do it. And you have just got to stay disciplined on it.

So we are pushing the swaps hard. Customers don't want them. Actually, rates are going to go up, and it would be in the customer's best interest to take the swap because it becomes a piggybank for them at the end of the day in terms of the value of the swap when rates go up.

So we are selling much harder on that and not trying to follow the market. But you are seeing -- that is one of the things we see competitively in the market is some irrational 5-, 7-, 10-year deals. It's like man, I don't want to lock this margin in. And we're not going to do that.

So it is a constant fight because of the markets but we're being very disciplined and want to take advantage of when rates do move.

Okay, that makes sense. Thanks.

Terry McEvoy, Sterne, Agee.

I was looking -- the accretion to interest income jumped up about $1.5 million. And the yield on the covered loans was the highest in five quarters here, almost to 10%. Could you just talk about the outlook for covered loans?

And then as part of that question, it looks like you have another $16 million from the FDIC indemnification assets that will come into interest income. Talk about maybe what time frame you see that happening and any thoughts on some sort of earnings headwind, when you lose that asset and particularly given the yield on that asset.

We will talk about covered loans first. On the covered loans side, that portfolio is running off very nicely. And I think it is becoming less and less of a component of our earnings than it was earlier. Some of the loss share agreements will start running off next year and over the next three years after that.

All of our railroad tracks are lining up very nicely in that regard. The indemn asset actually goes against earnings as we accrete that down for the losses.

But we review that and manage that very nicely. We think the railroad tracks will come together that those yields will be consistent but on a portfolio that runs off.

So you can take as it relates to covered assets from a modeling standpoint, if I were you I would just take the runoff that we have experienced and just keep that trend going at about the same yield and with our assurance that the railroad tracks and the indemn asset are coming together and that should give you what you need. Does that make sense?

It does, thanks.

But on the other side we have done four deals that were not assisted deals. And again, there's a number of those that are in the [2003] pools and those are all performing better than anticipated, also. So that's part of that accretion that doesn't come in. And again, those yields should be consistent. But they should be around maybe a little bit longer because those deals were done later. But those yields should also be consistent.

And the third element is the AIG portfolio that is running off also. There basically were not a lot of prepayments in that portfolio in the second quarter so there wasn't any sort of hiccup in those yields.

So, I think you just have to look at it as a running off -- a portfolio that is running off at yields consistent with what they are right now is becoming a lesser and lesser part of what we are doing -- barring another acquisition that make come longer we add additional pool.

Just on the mortgage business, all your business I am guessing, is conforming mortgages. Any desire at all to move into different credits boxes to capture growth and increased market share?

Funny you should ask that. Yes, most all -- the mortgage company, everything we do is sold. We sell everything: all the conventional, all the conforming stuff we sell. And prior to 2004, 2005, 2006 when you basically could put any product out there and sell it in the secondary market, we have a very vibrant portfolio of ARM loans: 2/3, 1/3 and five-year ARMs that were for nonconforming loans. And we charged a little bit of a premium for that, but they would go out in the market. And we would book those up it, and usually within a year or two the condition that caused the nonqualified state of that loan would go away and then we would place that loan in the secondary market.

But from 2005 until really the beginning of this year, there's been no need for that. But we embarked on that portfolio. There is a need for that sort of thing. We believe we can build a $400 million, $500 million portfolio over a two-year period on the base that we have right now, the base assets that we have right now. And that will churn. And finally we have an opportunity to do that. So it is an initiative that we are embarking on. I don't know of the actual numbers that we have to date. Mr. Stoehr, do you know that offhand?

I think it is in the $70 million, $80 million range, somewhere around there. But slow and steady will win that. And we believe we can build that up $400 million, $500 million and it fits nicely into our asset liability management situation also.

Appreciate it. Thanks.

David Long, Raymond James.

A couple of things. The first one, looking at C&I loan growth, the commercial loan growth in the quarter, almost 24% annualized. What was the driver of that? Was that more line usage are just adding clients?

Adding clients.

Got you.

Line usage hasn't really moved.

Okay. And as far as the yields that you are putting on versus the yields that are coming off there in the C&I, how does that compare?

Basically bottomed out. I think we are -- Dave, do you want to comment on that?

Yes. For the total loan portfolio I think we're still, as we talked about before, probably averaging out around 4%. Obviously, C&I is one of the lower-yielding classes, but the CRE portfolio is a little higher and clearly the C&I premium finance portfolio is higher. But the overall blend is pretty close to the 4% where they're coming on that. And the portfolio is just a little bit higher than that. And it's a little dilutive to the margin right now, but not terribly dilutive.

It is hard, David. When I say we bottomed out, I mentioned about -- we lost a number of deals to some really irrational rates, in our opinion. But our profitability model, you can't get much -- we are right where we need to be there. And if it gets a lot lower, we're not good to do those deals.

So the fact of the matter is we have bottomed out on that C&I business. You're not seeing a lot of ups and downs -- churns where we are losing stuff at higher rates or having to rebook them at lower rates. It is what it is right now. Does that make sense?

Yes. And then specifically to the premium finance business, in April you closed an acquisition, a couple of small acquisitions. Did those have any impact on the growth that we saw in the quarter?

No -- very small.

Very small. Just to give you a little background, the first quarter of this year we processed 48,620 contracts at an average ticket size of $24,470; in the second quarter we processed 50,880 at an average ticket size of $24,311. So no change in the ticket size. Again, just picking up market share in that business.

So that business continues to grow. And as we have often told you, $27,000 has always been the average in a normal market. So there's still some upside there if the market gets a little bit harder for us in that portfolio. But it's just been slow and steady market share growth every year.

And what about the spreads in that business, specifically?

They are holding in pretty steady. They have actually been relatively stable for the last couple of years now. Pricing has been fairly rational in that business. It is actually probably picked up a little bit since last year, but not anything dramatic. So pretty steady.

Okay, great. Thanks, guys.

Emlen Harmon, Jefferies.

Ed, I was hoping you could talk a little bit about the trajectory for charge-offs from here. You guys have made very good progress over the course of the past year. You are at what many would consider to be the lower end of normal levels for the industry. Do you feel like you can continue to push those lower from the level they are at in the second quarter here?

They are what they are. So I hate saying, boy, we could push them lower because then guys try to manage that expectation. It is what it is. Your first loss is your best loss.

But historically we have always operated at a third to a half of what peer group is. 25 basis points, I think at the low point we were 8 or 9 or 10 basis points. I still think we can bring that lower but a lot depends on the economy. But it will have little blips in it here and there because they are still low right now. But I don't think it's anything to get excited about. If you rely on past history and rely on our underwriting standards and how we have gotten through previous cycles and the like, you can see that we are back to where we were prior to this cycle. And certainly will try to continue to push them lower but it is what it is. But I would expect that we would still operate at a third to a half of our peer group in charge-offs.

Got it, thanks. And then as a follow-on to that, as you noted in your prepared remarks, the coverage ratios on NPLs continue to get better. And you guys did match the charge-offs this quarter just based on loan growth. How do you think about what the provision is against that kind of incremental dollar of loan growth? And actually, how do you differentiate between just the held-for-investment portfolio as a whole and the premium finance portfolio?

Probably the best way to look at past is we put the page in the press release that details out what our allowance is. That was [fit] to each of the portfolios. And if you look at that and look at what the reserve ratios are, it would probably be a good indicator of how we will provide for them going forward.

So, the premium finance portfolios on the life side, our losses have been virtually nothing, knocking on wood. But some minor losses here and there but very close to zero. And even if you go back with the AIG portfolio that we bought seven years before that, the losses were less than 5 basis points. If that portfolio grows we would expect losses to continue to be low and you don't have to provide much for it.

And on the premium finance commercial side, it is the same way. You can look in the press release and what we provide for those.

So as we get growth in those, those are maybe running plus or minus 25 basis points is where the reserve levels are. So we get good growth on that third of the niche portfolio and some of those other portfolios like our Community Advantage homeowner's association product and our franchise lending products tend to be a little bit less than what you would see for the commercial or residential construction and land and the like.

So if the portfolio grows with those in niche portfolios, it is going to be a lower reserved. So, I think it's going to depend on the mix of where we get it. C&I and commercial real estate are obviously higher than the other third of the portfolio.

But before the crisis we were running basically where our reserved at loans are right now. And if we keep the mix the same I would expect it to stay relatively consistent with those levels.

And another way to look at it is, barring some blowup in one of these categories, you are about 1% on the core portfolio and about 20 basis points on the niche portfolio. Barring any sort of trend that knocks us out, but that is a good way to look at it, I think.

Got it. All right, that's helpful. Appreciate it, guys.

Chris McGratty, KBW.

Ed, on the mortgage business I want to make sure I am hearing your guidance or your outlook the right way.

I'm thinking about the revenue. You have $24 million in [T-note] sales in the quarter. Obviously, you are up considerably in the last quarter. Are you assuming that volume in Q3 are consistent with the 900-plus that occurred in the second quarter in consistent margins?

That is what our projections show right now. Yes.

Okay. And how much of the improvements in the quarter was legacy Wintrust versus the investment you made late last year out west?

The surety was about a quarter of what our volume has always been. It probably is relatively the same percentages.

Okay. In terms of loan growth, we've seen headlines about regulators in leverage lending. Can you just remind us what the size of the SNC book is for you guys and maybe how much of the growth, if there was any, was in the second quarter?

I'm sorry, you broke up there. We didn't understand the question.

The shared national credit portfolio at the bank, how large is it? I know the regulators have been pushing on this as an industry issue.

We don't go out and do SNC's as a normal course of business. If there happens to be a larger credit that has got a Chicago nexus that we have a relationship, we would do them. But we really got a handful of credits. And it is nothing that is a normal course of business for us. SNC's is not a product line that we really pursue unless we happen to have a customer that falls into that category. And we generally like to be the lead on them -- very few, very few where we would be into a credit where we are not the lead that's a SNC.

There's a couple.

There is a couple, but they have the Chicago nexus to them and a company that we need relationship with.

If the total SNC portfolio is above $150 million, I would be very surprised. I think it's probably closer to $80 million to $100 million. And they are all local named companies around here where we have ancillary business with them also.

We don't play -- we don't like being the beast of burden and just jumping in a deal, SNC deal, just to get outstandings. There has to be some sort of relationship there that we can garner extra income from.

Great. And just one last one. On the Talmer opportunity, what is the loan that may or may not come, can you help size up with the potential opportunity might be over the next six to 12 months?

I am hesitant to do that right now since it still hasn't closed and we haven't had that discussion publicly with Talmer right now. And they are a public company. We are a public company. So, I'd rather not discuss that until we close the deal.

All right. Good enough. No problem. Thanks.

(Operator Instructions)

Stephen Geyen, D.A. Davidson.

Most of my questions have been answered, but Ed, if you could just give your overall thoughts on the economy. It seems like maybe a quarter doesn't go by where there is some economic data that gives people a pause about where the economy may go. What are you hearing from customers?

Customers feel very good about -- all of our customers feel -- they have all survived the cycle. Many of them have been able to add lines very inexpensively as they have picked over the bones of the competitors that haven't been able -- that weren't able to get through it.

Our customers are feeling very good about where they are right now. Even the construction industry is picking up. It's funny, I'm hearing a lot of -- nobody can get good labor which is really an interesting situation given the unemployment rate that even the construction industry says, a lot of the guys left the industry and we can't get qualified people back.

So you feel like you are right on the edge. Manufacturing is good. Guys are running extra shifts around here and our customers are. So people are feeling very good, but still measured. They are still maintaining fortress balance sheets.

The private equity side, we're seeing a lot of deals with big multiples on them. I think a lot of the established PE guys are selling everything that isn't nailed down right now. And one of the scary parts from the banking side is that you are seeing 7- and 10-year air balls being financed. We don't do that but you are seeing deals go out and the financing, it's like they are getting five or six different offers again for them from different banks. That's a little scary that that's going on.

But all in all, the biggest issue in our market obviously, at least in Illinois market is what is going on with the state and the like. And that still scares people. It scares us a little bit that many of the people we talk to are talking expansion. They have so much fixed costs in Illinois they can't move, but they are expanding. They are going to Tennessee or Texas and what have you, or Wisconsin, Northwest Indiana.

Our move into Wisconsin is not just to bolster that market and take advantage of our positioning there, but in some respects it is to catch the refugees when they come across the border. They run up to Wisconsin.

And our move will be looking at Northwest Indiana also as our clients move there.

So that is the thing on everybody's mind is that we've got to get this state figured out. And there's ways to do it. The election will be in November and we will see how that shakes out. But that is what bothers most people about Illinois.

And you see a lot of wealth leaving Illinois, too, which is scary. That people who have made it -- they are going to Florida. They are going to different states and becoming residents. And there's a giant sucking sound of wealth leaving the state. And you can't blame them.

So that has to be turned around. It's not good and that is what is on most people's minds. But from an economic standpoint, people are feeling pretty good about where they are right now and where their prospects are, if that helps you.

Okay. Thank you.

I am showing no further questions at this time. I would like to turn the call back to Edward Wehmer for further remarks.

Great. Thanks, everybody. We will talk to you at the end of the third quarter. Everybody have a wonderful summer. Always call Dave, or me, or Dave Stoehr if you have any questions. So thanks very much for listening and thanks for being shareholders.

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