Wintrust Financial Corporation (WTFC) Q2 2012 Earnings Report, Transcript and Summary

Welcome to Wintrust Financial Corporation’s 2012 Second Quarter Earnings Conference Call. [Operator Instructions] Following a review of the results by Edward Wehmer, Chief Executive Officer and President, and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session. The company’s forward-looking assumptions are detailed in the second quarter’s earnings press release in the company’s Form 10-K on file with the SEC. I will now turn the conference call over to Mr. Edward Wehmer.

Thank you. Good afternoon, everybody, and welcome to our second quarter earnings call. With me as always are Dave Dykstra, our Chief Operating Officer; Dave Stoehr, our Chief Financial Officer; and Lisa Pattis, our General Counsel. We’ll have usual format today. I’ll start out with some general comments on the quarter. Dave Dykstra will get into the detail and give you some color on other income and other expense. Then finally, I’ll summarize talking about the future direction and plans -- our future direction and plans and how we see the banking world in general. So, I know that will be scintillating and you want to hang on to the end. Results, all-in-all the second quarter I think was pretty darn good. Net income of $25.6 million, up 10% from the first quarter, 118% from last year. Earnings per share of $0.52. Pre-tax pre-provision, as we define it, getting close to $70 million, came in about $69 million. Loans grew $486 million, notwithstanding covered loans and mortgages held-for-sale. Our deposits grew by $392 million. Our demand deposits continued to grow as part of that overall deposit growth and now comprised 16% of our overall deposits. It wasn’t too long ago that we were around 9%. So, again, this is an indication of how well and how steady our commercial initiative has been in terms of gaining market share in our target markets. Assets grew $404 million or 10% on an annualized basis. Efficiency and then overhead both these numbers were down materially as we continue to grow into the infrastructure. I think a few quarters ago or for the last few quarters, we had many comments about our expense, and run rate on expenses. And I think we replied back that our approach is to put the pluming in before we flush and we had built a lot of infrastructure that we could actually leverage off of, and we are doing exactly that. Our expenses were flat quarter-to-quarter and we still have plenty of leverage that we can build into as we continue to execute our plan. On the earnings side, it was a pretty noiseless quarter. There was really no bargain purchase gain. We did have a $1 million security gain, but that was basically offset by trading losses of a like amount. The trading losses and I want to point out that I am certainly not the -- we are not or I am not the Whale of London nor am I the Minnow of Lake Forest, but we did have a $1 million -- close to $1 million trading loss. It is part of the strategy we have, that we have gone out and bought some interest rate caps. We have not worried about whether the hedge accounting applies or not. We bought them as almost an insurance policy related to our liquidity portfolio and to a fixed rate lending program that we have instituted in our banks. So, we look at it as an insurance policy and then we got -- for $2 million, we got probably 4 years worth of coverage on about $400 million notional to -- the accounting rules are -- there is no way you can get a swap or you can get the hedge accounting on a macro swap like that, but so we have to mark that to market and it did go down by about half of the value that we purchased, but it doesn’t mean that they are not effective and not doing exactly what they are supposed to do. Just if you have insurance and your house doesn’t burn down, it doesn’t mean that your insurance isn’t effective. So, this is part of a strategy that we are employing. Lot has to do with Basel III and whether some of the regulations that you talk about coming out with the duration of your portfolio, they are only going to take your other comprehensive income, the negative side that they have to apply it against your capital. We feel this is a good offset to that and the negligible cost of these things is-- it’s just a worthwhile strategy for us to employ and heck with the accounting on it. Like I’ve said, the insurance is still in force and it maybe something that we do again as we continued to build out. The margin did decrease 4 basis points with assets dropping 16, funding 11, and free funds contribution of one, one positive gave us 4 basis points. We’re all familiar with asset yield headwinds especially in the liquidity portfolio, loan yields continuing, we are also a little bit under pressure. But we were able to offset that with continued decreases in our costs of funds. Particularly, to us, during this quarter, liquidity yields were down 21 basis points, loan yields 13 basis points, total asset yields by 48 basis points. But again in that portfolio we did add a full quarter of the charter FDIC-assisted deal that we did that come in around -- and those come in around 5% to 6%, so that does negate that a little. Our covered portfolios are acting just as we would anticipate and better than we initially thought when we acquired those institutions and we’re very comfortable with where we are right there. All-in-all, better asset mix also with our loan to deposit ratio and the like going up a little bit, helped the margin from that perspective. Funding costs were down 11 basis points, and there are continuing to remain opportunities for improvement in that area. Page 19 of the press release again shows deposit maturities coming up and you can calculate from there the opportunities that we have and we’ll be taking advantage of going forward. Also in the third quarter, our securitization -- the rest of it will run off fully eliminating the 2% negative carry we’ve had on this for the first 3 quarters of this year and that should be very helpful to us. Continued better low cost deposit mix on our growth has also been very helpful in bringing down the overall deposit costs. In the short-term, we think that these will relatively offset the asset yields, but there are no assurances. The good news is that our growth that we’re experiencing is coming with a negligible overhead expense. Our pipelines remain very full on the lending side of things, so our prospects for good profitable growth remain unchanged. Our pipelines now stand above $1.2 million gross again 6 month pipeline heavily weighted for the next 3 months. But if you weight that by probability, it closed down to about $750 million, but still that’s consistent with the pipelines we’ve reported due in the past. Also on the lending side, the insurance market for our premium finance business, our property casualty premium finance business appears to be hardening a bit, which means our average ticket size was off the bottom, which was around $20,000 up to around $22,000 average ticket size. Again, we consider the norm to be about $27,000, so there is still room to move on those, but that will be very helpful to us in terms of building more loan volumes at very good rates. Also, we’ll be helped on that by a full quarter’s worth of income on the asset side from our Canadian premium finance acquisition, where we had 23 days where we owned it. And we’ll have a full quarter going forward and we’re very excited about that. Welcome those folks to Wintrust and they are a great group of folks we are very excited about having them. So if you ask me and I know you will what we think the margin is going to do going forward. I’d like to tell you your guess is as good as mine, but I think that the -- we should be able to offset a lot of this pressure in the near-term by the funding decreases that are inherent that are kind of built in and what we’re working on there and some of the things we’re doing on the asset side of the equation. So, if you talk about maybe the 7 basis point swing either way by the way, it would be my best guess of where we can look going forward, it can go up and down. There’s lots of nuances, that’s a spicy pot of chili, all the accounting rules especially is the right to covered assets, and the other things we’re putting on the book. So, anyhow that’s the over-under, if you will. On the other income side, Dave is going to discuss this in detail. But mortgage operations are very strong right now and our projections look that they’re going to be – they should be and remain this strong through the third quarter. Just based on the inflows that we’ve had recently. Wealth management continues to show good, steady, profitable growth. As we continue our cross sale efforts on both side of the equation, cross selling banking into the wealth management business and wealth management into the banking business, they continued to build and to grow and we’re excited about that. On the other expense side, again Dave will cover in detail, but they were flat quarter-versus-quarter and that just again it exemplifies the fact that we’re going in to the overhead as I previously mentioned. On the credit side, credit costs for the quarter were still higher than we would like. We continue to identify and workout issues on an expedited basis. We have done that for the last 3 or 4 years since this cycle began, and we’ll continue to do that. Net charge-offs of $17.4 million resulted in provision of $18.3 million on our non-covered portfolio. We also took a provision around $2 million in our covered portfolio and remember that, that’s not exactly an indication that their covered portfolio has fallen off a cliff. The accounting on that is we have over how many pools, Mr. Stoehr, 60 pools of assets related to covered loans that we purchased. If 1 or 2 of those pools goes upside down, the projected cash flows coming less than anticipated, you take that provision right away as opposed to the ones are doing better. We take that the betterment that comes in and amortized that over the life of the pool. So, all-in-all, the pools are doing well, but you immediately recognized any pool that may have moved under water. Our OREO expenses were $5.8 million in the quarter, down $700,000 from quarter one. We continue to push OREO out. Net non-performing assets in total remain constant to the percent of assets of 1.17%. OREO was down $3.7 million to $73 million and non-performing loans were up $7 million versus the first quarter to $121 million. That increase was primarily due to $113 million credit. It’s a commercial deal. The company is being sold. It’s under contract. We expect to be out of it in the next 30 days. So, door open on that one. Without that event, we would have continued our historical trend of reducing the absolute level of non-performing loans. That $13 million loan also reflected our NPA inflows for the quarter. Without the event, however, we would have been relatively constant with quarter one. It is a little bit of a break in the $5 million to $10 million inflow reductions we have experienced for the past 5 or 6 quarters. But as we said, as we have often said on this call and to you and when we meet you in person, that landing this airplane could be a little bit bumpy. We don’t manage this number, it is what it is. We find it, we push it out, we deal with the issues. But all-in-all, I think our numbers are still very manageable, much better than peer group and we are not satisfied with the numbers, but eventually these things are going to fall off and those numbers are going to fall to the bottom line and we are committed to getting that done. You will notice on page 35, there is the press release, there is a new disclosure on our reserve for loan losses and what we did there, a lot of times people I referred to as screen scrapers will say, your reserve isn’t as low as your peer group. Well, there is a reason for that. Now, the reason relates to our experiences and what our peer group has been and our diversified portfolio. And I think if you look at page 35, where we take the reserve and we break it out by the types of assets that we have on our books, you will see that we are very well-reserved that when you have a $1.6 billion of your portfolio in these life insurance loans, where we’ve really never experienced a loss, you don’t have to keep much reserve for that. You have $1.6 billion or $1.8 billion right now of premium kind of property and casualty premium finance loans that have charge-offs that are 30, 40 basis points. We put those reserves in. So, I think when you look at that, you’ll get a much better understanding of how our reserve is constructed. Again, I’ve relayed to you in the past that the analysis that we go through to develop the reserve is it comes out looking like the Chicago Yellow Pages, it’s so thick. But there is a lot of detail that goes into that and a lot of work that goes into that and it is a specifically analyzed sort of thing and this gives you an idea and gives you a better idea of the -- of how our loan loss reserve works, where the coverage ratios are, and I think you get very, you get good comfort out of that. In total, the reserve vis-à-vis is a level of non-performing assets is relatively strong compared to our peer group. Now, I’m going to turn over to Dave Dykstra for his comments.

Thanks, Ed. As normal, I’ll briefly touch on the non-interest income and non-interest expense sections. Non-interest income, our wealth management revenue increased nicely to $13.4 million in the second quarter of 2012 compared to the previous quarter of $12.4 million and the year ago quarter of $10.6 million. The increase in wealth management revenue from the prior quarter came primarily from the trust and asset management businesses, which increased $918,000. As we noted in the news release, we closed on the acquisition of a trust department from a local community bank on March 30, 2012. So, the current quarter was benefited by that acquisition by nearly $400,000. The assets that we acquired that were under administration related to that trust department were approximately $160 million plus some land trust businesses. On the mortgage banking revenues side, Ed alluded to it but our revenue increased substantially to $25.6 million in the second quarter of 2012 from $18.5 million recorded in the first quarter this year and it was twice as much as the $12.8 million recorded in the year ago quarter. The company originated and sold $854 million of mortgage loans in the second quarter compared to $715 million of mortgage loans originated in the prior quarter and $459 million in the year ago quarter. Mortgage banking revenues improved as a result of the favorable rate environment and the increasing level of mortgage volume related to purchased home activity and better overall pricing metrics in the market. Slightly offsetting this positive revenue results were the mortgage -- from mortgage origination was the decline in the fair market value of our mortgage servicing rates. Those mortgage servicing rates were valued at 68 basis points in the second quarter of 2012, down from 75 basis points in the prior quarter. The value of the MSR portfolio was approximately $554,000 less than the value at March 31, 2012. Obviously, future mortgage origination volumes and servicing rates will be impacted by and be sensitive to the changes in interest rates. However, as Ed noted based on the existing low rate environment in our pipelines, we anticipate the third quarter to be relatively strong. The company did not complete any FDIC deals in the second quarter 2012 and accordingly we didn’t record any bargain purchase gains, but we did record a small true-up adjustment of the negative $55,000 during the second quarter related to the deal that we did in the first quarter of this year. That compares to a bargain purchase gain of $840,000 in the prior quarter and $746,000 recorded in the second quarter of last year. We continued to believe that there should be more FDIC-assisted bank transactions in our market area during the rest of the year. We’ll continue to evaluate them, as they come along, but obviously the timing of such deals is beyond our control. Turning to covered call option income, the fees that we recorded this quarter from that activity totaled $3.1 million and the same that we recorded in the first quarter of this year. And that also compares to the $2.3 million that we recorded in the second quarter of 2011. The company has consistently utilized these fees from covered call options to supplement the total return on our treasury and agency securities in an effort to mitigate the margin pressures that are caused by a low rate environment. Fees we received on these transactions can be impacted by market rates and volatility that’s present in the market at the date you entered into the transactions. If we turn to gains on sale -- gains on available for sale of securities and trading losses looking at those 2 together, we had a net gain of approximately $181,000 during the second quarter that compares to a net gain of $962,000 in the first quarter of 2012 and a net gain of $1.1 million in the second quarter of last year. As Ed mentioned the trading losses in the current quarter were primarily a result of the fair value adjustments related to interest rate contracts not designated as hedges and primarily interest rate cap positions that we use to manage the overall interest rate risk associated with the rising rate environment as it relates to some fixed rate longer term earning assets. Miscellaneous non-interest income continues to be positively impacted by interest rate hedging transactions related to customer-based interest rate swaps. We’ve recognized $2.3 million in revenue in the second quarter compared to $2.5 million in the prior quarter, and $1.5 million in the year ago quarter. Additionally, our other non-interest income included approximately $55,000 in positive evaluation adjustments on limited partnership investments. Although that’s not a lot if compared to the $1.4 million gain that we had in the prior quarter, it did create a little bit of a variance quarter-to-quarter. As we’ve stated before, these limited partnership investments are invested primarily in bank stocks and we detailed the impact on page 18 of the press release. There is nothing else that’s really special mention in non-interest income section. So, we’ll turn briefly to the non-interest expenses. Salaries and employee benefits decreased approximately $891,000 in the second quarter compared to the prior quarter. Base salary expenses remained relatively constant during the quarter with overall benefit costs declined about $2.8 million, primarily as a result of the lower payroll tax expense. As you recall, payroll taxes are usually higher in the first quarter of the year as the Social Security tax limit, its reset and decline as the year goes on. So, the majority of the impact of the benefits was from the lower payroll taxes. Offsetting deposit of impact of the lower benefit cost was an increase of $2.6 million in variable pay primarily associated with higher commissions related to the increase in the mortgage banking revenue. We do believe that the current staffing levels provide us with capacity in the lending area and the frontline deposit gathering area for further growth. And so as Ed mentioned, we really do think the infrastructure will allow us to grow without adding a lot of additional staff. Each of the expense categories of equipment expense, occupancy expense, data processing expense and our advertising and marketing expense stayed relatively constant in the second quarter. And in the aggregate all of those categories only saw a slight increase of approximately $127,000. So, very consistent costs on those despite the growth. Likewise on professional fees, it remained relatively constant in the second quarter compared to the first quarter of this year. It did increased 243,000 to $3.8 million. This category fluctuates depending on the legal and collection cost of resolving non-performing assets and we do believe that as the non-performing assets declined we should see some improvement in this expense category. Ed talked about the OREO expenses of $5.8 million in the second quarter, that was down from $7.2 million in the prior quarter and also down from the $6.5 million that we recorded in the second quarter of last year. The components of that $5.8 million were comprised of $4.7 million in valuation adjustments and approximately $1.2 million in carrying cost. This will fluctuate obviously as we value the properties and get updated appraisals, the market continues to show some stress and values to continue to decline, in general. On page 40 of the earnings release, we provide additional detail on the activity in and the composition of the OREO portfolio, which declined 5% to $72.6 million at June 30 from $76.2 million at the end of the prior quarter. If we turn to the other miscellaneous non-expense category, which is the only other one that had any significant change, it increased by about $1 million relative to the prior quarter, and the largest increase in this category related to loan collection costs and the category was also impacted by $147,000 of costs related to the defeasance of a portion of the securitization debt. We really don’t anticipate having any further defeasance of that debt before this securitization facility unwinds in mid August of 2012. Overall, non-interest expenses, if you take all the categories and put them together, we were down $574,000 from the prior quarter. And this overall decline occurred despite the relatively high commissions that we incurred related to the increased mortgage banking revenue. OREO valuations will continue -- have continued to be unusually high, although they mitigated a little bit this quarter, but we believe that those will subside as we successfully dispose of the property, which should provide some uplift in after-tax revenues. If we’re to exclude the debt defeasance costs, the OREO expenses, covered loan expenses and the impact of the seasonal payroll tax fluctuations, all of which we detail on page 18 of the press release, the efficiency ratio dropped to 61.4% from 62.3%. And you have to remember that our efficiency ratio tends to be little bit higher than our competitors that are similarly situated us, because we have a larger mortgage banking business and generally a larger wealth management business than many of them, and each of those carry a higher efficiency ratio due to the commission-based nature of their businesses. So, we continue to believe that we held the line on cost. We have operating capacity in the system. And going forward, we should be able to leverage that cost to support our growth. And Ed, I’ll turn it back over to you.

Thanks, Dave. In summary, again, we are very pleased with the quarter, especially the continued momentum that it had exhibited. Margins are going to be under pressure as we stated, but we believe there are levers we can pull and some inherent gains on the funding side that can help mitigate all of this. And be assured that we work on this every day, not for just a short-term, but as always our decisions are based on what’s right for the long-term and long-term strategies that will ensure our ability to continue to increase overall returns to our shareholders. On the credit side again, our objective is to identify and push things out. We don’t -- this isn’t over yet contrary to popular opinion it, there still are a lot of inflows and there is still -- there still going to be issues out there, but there we do see a light at the end of the tunnel. Hopefully it isn’t a train, but you never know, you never know about credit. Our approach is to just get down and get down in the mud and dig them out and get them out of here. We continue to see multiple opportunities in all facets of our business as it relates to expansion both that’s on the wealth management side, the specialty finance side and the banking side. We as always will continue to be very disciplined and strategic in our approach towards these opportunities. A senior management member asked me this week, he said Ed, would you have been happy back in January if we had shown you that this is where you would be at June 30th? And my response was yes, I think I’d be pretty happy except for the fact that I would have anticipated that the credit would have moved a little bit faster out of here. But, all in all, I’m extremely pleased with the momentum that we have. It’s nice to see a plan, a long-term plan with many facets on it. It’s nice to see it coming together even though we’re still in the middle of execution, if you will. But it’s really nice to see it coming together and we have just terrific momentum. One other side of it too is my job has changed a little bit over the last 2 years as we brought the Wintrust name out into the market and we’ve gone to really pushing our capabilities on the commercial side of the business. So, I’m not on a lot of calls. And I’m telling you I’m very heartened by the fact that these people that I go out and meet that I’ve never met before and when you sit at the table and they say Wintrust has a great reputation in the market. And that really makes me feel good. We have a great reputation. We’ve got great people. We’ve got great momentum. We’ve got solid pipelines. We’ve got a plan in place. We have plenty of capital and we are going to continue to push bad assets out and makes me feel very good about our ability to execute on the plan that we really laid out back and when we went into rope-a-dope in 2006. We like where we sit right now and we like the opportunities that we have in front of us. So with that, we will take some questions please.

[Operator Instructions] Our first question comes from Jon Arfstrom with RBC Capital Markets.

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

Well, Jon, like I said, there is a ton of moving parts here. And I wanted to bring, with extra shooting guns at me over here, but I wanted to preempt the question that I knew it was going to come and hone it down a little bit, but there’s so many moving parts. I could tell you right off the bat your model is probably wrong, but I won’t do that. There is pressure on the assets side of the equation. The -on the premium finance side, we think that we’re getting close to bottom on that because of the -- a lot of the higher yielding assets the 9 month full payout are running off and we’re seeing the bottom steady on those and actually move up a little bit. So, we think that that’s a positive side. We think that really that the securitization running off if you run those numbers, where there was a 2% negative spread on that. When we -- if you use these things, we probably defuse them over time to make 50 or 60 basis points. We still had because of the losses that we took right away, I mean it was still expensive to us. But when the whole thing is gone, it’s 2% negative that just walks out the door. You can calculate those numbers. The funding side, our funding right now is coming in less expensive and the mix is better than what the historical portfolio has been and the re-pricing opportunities that will also bring those numbers down. But, we recast on the covered assets every quarter. We recast those cash flows that can go either way, you never know, that’s a wildcard. The pricing on the commercial portfolio, we are augmenting it with this fixed rate loan program that we are putting in, that we covered with these caps that we put on the books that should help and offset that. So, there is a lot of levers here that as I said we can move back and forth. And I think all-in-all, you are never going to be able to nail down exactly what it’s going to be. And so I said, here is your spread, it’s going to be in the up or down about that, and I am very comfortable working in that range, because of the great momentum we have, how we are positioned on our asset liability side for a rising rate situation, which is the old beach ball under water, if you remember how we used to use that analogy going in the old days, but…

I remember it.

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

No adds from me John.

Okay. Just a quick question for you, Dave. In the mortgage banking, revenues are obviously strong, how are you able to keep that comp line down? Is there anything unique going on there?

As rates went down, you get a little bit bigger gains on the portion that you hedged out there. So, we don’t pay commissions on that-- the increase as rates move along, so, it benefit a little bit from actually the move down in rates for the portfolio that we had locked in before.

Our next question comes from Steve Scinicariello with UBS.

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

Well, from the expense side, we believe that there is a great deal of leverage. I think we are probably operating right now in terms of about 70% of expense capacity. Now, it doesn’t mean our expenses won’t go up. We still see great opportunities to hire very talented people and bring them in. You know we’ve always made the investment and been tolerant and waited for the returns on it, but we can’t pass up really good people out there. But we believe there is good leverage left in the expense side of the system. On the lending side, we talked about our pipeline has remain very strong. That’s coming from, not just downtown, that’s coming from all facets of our business. All of our banks are -- have strong pipelines. They are all contributing to this approach by the way we’ve instituted the commercial banking and distributing through, not just through a downtown office, but even through the each of the affiliate bank. So, on the lending side, we see that the pipeline is evenly distributed, maybe a little bit more out of the downtown office, but evenly distributed going forward. Well, the good opportunity is obviously on the deposit side of things. We have been very lucky to be able to continue to grow our deposits and stay with -- and keep up with well, we like the position we are in and where our balance sheet is we’re -- we are asset-driven again. We are generating more assets that we need, which allows us to go out and get better market share, but it’s hard to attract deposits these days. We are doing it, but hard to attract retail deposits without totally cannibalizing the rest of our portfolio on the bank. The way we are structured with multiple brands, you can go out and pulse individual markets and bring that in and minimize cannibalization. But it’s pretty hard to get a guy to go for a teaser rate of 1%, and bring all of us banking over. So, it’s really been more relationships and other things. We try, and I mean I don’t know what would entice people to move, what type of rate it would take to entice people, but it is more than we are willing to pay right now, because our organic growth has been pretty good. But you got to take what the market is giving you as we always say and there will be a time that there will be a really good time that we can really maximize all of the new branches that we have. They are growing nicely. It’s all working. And there’s plenty of capacity continue to grow but I don’t want to spend too much to do it.

That’s great color. And then just one other one, it might be tough to answer, but I think I’ll throw it out at you anyway. Just given the additions that you guys have been making over the past 1 year or 2 especially to the mortgage banking platform, how much of this kind of increase in revenues could you attribute to that kind of increase in the platform rather than just the environment?

Maybe a tough one to answer Steve, but I -- maybe the one angle I’d take on that is, more than 50% of our revenue this quarter really came from purchased-- people purchasing homes versus refinancing and we spent a lot of time with our staff trying to get in with the realtors and the like ahead of the point when rates go up and then everybody is going to scramble and do that. There is a lot of our competitors, they’re just out there taking all of the refinance activity while it’s there, and focusing on that. We’re doing the same thing, but we’re also making a distinct effort to be able to accommodate the purchased side. So, it’s really sort of hard to dissect between the different components that you said, but we’re trying to build this thing. So, if rates do go up at some point in time and the refinance activity tails off, that we have sort of built it back in with the purchase side, And it’s going to make a much smoother transition at such point that the rates go up. And we’ll continue to add people where we can and it’s commission based, so we’re not incurring a lot of salary costs with that and we’ll hopefully make the smooth transition.

Yes, I think one of the things Steve that’s helped us is this whole Wintrust name recognition marketing that we’re doing with the billboards, at the radio advertising, the advertising at Wrigley Field. 18 months ago, 2 years ago people never really heard of the Wintrust name, and that was by design. Now that we’ve kind of bundled the Wintrust Community Bank sub-branding into our banks, Wintrust Mortgage, Wintrust Wealth Management, put the billboards up. I think and then we run a lot of radio ads for Wintrust Mortgage. I think that name recognition is helping us out a lot in that regard, plus we continued to get -- this mortgage business is going to consolidate. I think a lot when this refi boom is over, I think many of the independents, and when the new Department of Consumer Protection rolls into these guys, I think a lot of these independents are going to go away. And we want to continue to bring in good producers. We think it’s a consolidating market something that we can take advantage of and we’re building a brand in the process. I think some of that branding is paying off with additional business.

Our next question comes from Brad Milsaps with Sandler O’Neill.

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

I’ll tell you Brad it just depends on the deal. We were talking about all the deals we’re getting. We didn’t to talk about -- we probably turned down twice as many deals as we’re putting on the books because the market is -- you start to see a little bit of return to rate in term buying a business by other people in the market. We never have and we will not play that game. So, if these -- the pricing doesn’t meet our profitability criteria, we’re not going to do it and we don’t buy a lot on the comp. If you know what I mean because we have great lenders, we got great calling officers, we’ve great guys who have great relationships and they – whoa-ah and then we’re going to get this as a result, then we’re going to get that. We won’t buy a lot of that stuff. So, the pricing is really dependent and the type of asset it is—be it on rebound real estate you can get a little bit better pricing smaller real estate rebound real estate in the fixed rate program we are going out at 4.75 on that 5 year fixed some of the bigger -- for bigger deals guys are going out and getting them as 3s and 3.5 we’re holding that level we’re seeing some pretty good volume there in that business. So on a really bigger commercial deals, you may be looking at LIBOR plus 1.75% on those, but again the DDA balances have come in plus cross sales under the wealth management business, plus the personal accounts. All-in-all, those relationships meet our profitability hurdles. So, it really all depends on the type of asset it is. You can get deals that are between LIBOR plus 1.75% and the LIBOR plus 400. It just all depends on the deal itself and how you underwrite it. Really, the pressure on the margin, our new business has been coming in at about the same -- these same levels for the last 1 year I would say. What you are getting is re-pricing of the existing portfolio and that’s where the pressure is coming in, where we had better pricing and guys are going hey, and you got to bring those numbers down a little bit. That’s mostly where your pressure is coming in. We haven’t changed our pricing parameters to go after stuff. It doesn’t meet -- if it doesn’t meet our profitability criteria, it doesn’t meet it now, it didn’t meet it a 1 year ago, you are not going to do that deal, but where this is our -- is in the re-pricing of our existing portfolio and our good customers and you kind of stuck there. So, I hope that answers your question.

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

Well, you’re right. And I mean, we’ve got about $360 million on the debt side out there that will go away and so the balance sheet will come down by that much in total. But I -- the way we look at the liquidity we’re at is we’re generally 85% to 90% loan to deposits and we are sort of in the little bit over that right now, if you put in the covered loans in the low 90s. That’s about as high as we want to go and the rest is going to be in liquidity assets and then it’s just interest rate management as to whether you’re, you’re going to keep it in cash with the fed or whether you’re going to extend out and on the yield curve and invest in agencies, treasuries, or corporates of some sort. But I think once we take the securitization out and pay that off, it’s going to stay above relatively the same other than if your balance sheet grows than that liquidity will grow a little bit. We may stay in the low 90% loan to deposit ratio in the foreseeable future with the covered loans in there, but generally the 85% to 90% is our target, and that’s where we want to get to and then the liquidity is just interest rate risk management, where we put it.

We put those caps on the books to cover the mortgage-backed securities and like some investments. We’re are going to -- we’re not going to barbell the whole thing, but barbell the portfolio, but we will be -- there will be some longer term assets on the book. And you could buy these caps when that’s been up I know basically it covers your interest rate risk on that and give you some sort of yield. So, you are going to see a semi-laddered portfolio probably leaning towards the shorter end. And anything we do in the long end as long as caps stay as cheap as they are, we probably will offset that by some of that insurance to make sure we don’t get ripped-sawed down the road.

Okay. Then and just one final kind of balance sheet housekeeping question, there is a line your accrued interest received on other assets was up maybe $250 million linked quarter, any color there. It’s probably pretty obvious, but I was just kind of curious?

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

Right. So, there is some liquidity?

It’s additional liquidity.

So, there is even more cash there than we see?

Yes, sir.

Our next question comes from Chris McGratty with KBW.

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

That is the rate environment, competitive environment and rate environment, well eventually our whole portfolio will be replaced, but it’s going to be -- it’s going to be a challenge. I mean, it’s -- there’ll come a point where -- where our asset side won’t get much lower, but it’s really going to be the re-pricing of our existing assets. And one of the benefits we have to offset that and I hope I made this point and juxtaposed it in my comments was that the growth we are putting on even if they come on at a little bit of lower heads, low overhead, not a lot of overhead is associated with it. So, it should be pretty profitable growth and should allow us to continue to grow the bottom line, but there’ll come a point where we can’t lower our deposits anymore. And that’s probably going to happen in the first quarter next year. We’re going to be at a point where we kind of -- we kind of bottomed out on that, and so run out of it, as I said, leverage to pull. So, it is going to be -- it is going to be a challenge in this rate environment. And the real challenge is, it’s like going back to 2006 and 2007, you cannot do stupid things. You’ve got to just go with the market and that we don’t change our lending parameters. We don’t -- we don’t change to fit to times, you remember that I have used that phrase that the Omar Bradley used, we set our course by the stars and not by the lights of other passing ships. So, it’s going to -- it’s going to be tough, but on the bright side, we continue to find things like Macquarie Premium Finance to come in. We think we can grow that portfolio. Those yields are substantially better than -- they are better than the ones we get in the United States. We think there should be more FDIC deals coming along, which we can add to that portfolio and if we price right and if the market doesn’t get stupid on us, we can put those assets and then try to offset it. I said in our prepared comments, we planned and we work on this every day. We recognize what the issues are. It’s asset stupid, but it’s not stupid assets and you can’t give up pricing and you can’t give up your terms and your credibility in the marketplace to get those assets. So, yes, I think again, and I think it’s the industry perspective that it’s going to be under pressure. I worry more about -- the loan portfolio will do what it’ll do. It’s the investment side of things is there’s so much money flying in there. I mean, it’s starting to get kind of silly in terms of you really want to buy a mortgage backed to yield back and then that’s why we buy them. We’re going to cap them out to make sure that we’re comfortable with that, because we are of the opinion that rates have got to go up at some point in time. You remember, Ed, putting out his economics hat here, technically speaking, we looked and said this credit cycle was upon us when we saw the inverted yield curve coming and we knew in the past that, that’s always been followed by credit cycle. I’ll tell you, every time national debt is approached the 100% of GDP it’s followed by a period of double-digit inflation. The same period of time the spending took place. Every single time that happened and it’s happening again. So, we continue to pray for higher rates that beach ball under water. In the meantime, we have to fight the battle everyday just like everybody else who listen to their conference calls at and but I think we are in pretty good shape, come out as best as we can.

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

Yes. The facility is $600 million. So, that will come back to us, but with the fees we are down to $360,000. So, we actually own some of our own debt, so we’ll pay ourselves back. So, the net liquidity that’s going to get eaten up is the $360 million, I’m sorry $360 million that’s on the liability side of the equation.

Our next question comes from Emlen Harmon with Jefferies.

Not to beat a dead horse on the asset yields here boost, just hoping we could talk on the pace of the client and the securities book. Seemed to accelerate a little bit this quarter, was that essentially that the liquidity you’re putting on the balance sheet? Is there something else we should be aware of there, and would you expect that, that’s first to taper out a little bit over the near future here? _

Well, part of it is, we do our covered call program, and so those agencies that we own get called away and you have to reinvest, you reinvest at lower yield. So, we’ve reinvested some of those agencies, but at lower yields and then kept some of it short. So, I think most of the pressure there has been with our covered call program where that the securities get called away, and then we reinvest at lower rates. But over the longer period of time that’s always worked out for us economically because of the call premiums have offset the lower yield on it. So, I would say the majority of that is staying a little bit shorter and just reinvesting when our securities get called.

Got you and then one quick housekeeping item, could you, do you have a number in terms of the expenses that came over with the Macquarie deal, just kind of curious is to what the ramp up could be there embedded into the second quarter since you only have them for a limited period here in 2Q?

I don’t have that number in front of me. It was really -- it came out on June 8, so we really only have 20, 30 days or 22 or 23 days on the books. The size of that staff up there is probably 40 people or so. So, you can probably use that as a sort of a gauge.

Our last question is from Stephen Geyen with Stifel, Nicolaus.

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

Well, we do think there is opportunity up there. We do think there is opportunity up there. We are committed to growing that in the Canadian market. We’ve had good reception from the agents and the brokers that we serve here in the U.S. that also to do business in Canada. We do some blending in the U.S. here where we lend money to agencies to finance to either purchase of a new agency the buyout of a partner or purchases of equipment or the like. And we do have a small business in the U.S. where we do that; apparently no one in Canada is doing much of that business and so there is some demand there. And if you do that business and you do it right you can get a good earning asset on your books, a safe earning asset and you also get the loyalty of that agent and broker to send you more business. So, we will look at doing things like that. We also believe that we have a team in our life insurance premium finance side that handled Canadian Life Insurance Premium Financing. And the unit we brought didn’t do that type of lending, but at some point we probably will dip our toes into the water.

Dave I was with the presently the Division President of the life business yesterday and our first Canadian case came in. So, we’re looking at that business and we’re having some success already there. So, we believe that Macquarie for whatever reason kind of helped back to range on that business for a year or so as they were preparing to sell it and go onto some other things. And they are great folks to deal with. But we think that with our marketing and our ability to tie into these agents that we can really build that business up in Canada and we’re excited about it. So, we think there is plenty of opportunity up there and looking forward to taking advantage of it.

And we got a great staff up there that’s energized too. So, we were excited about the momentum that we think we'll have there.

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

I mean, if you look at our demand deposits, most of that -- almost all of that is going to be on the commercial side and so the commercial efforts that we’ve had and the ability for our lenders to draw on the deposits. So, we were $1.901 billion in the first quarter and $2.048 billion in the second quarter. So, we had a good growth there, it wasn’t -- on the retail side it was sort of spread across the different categories. So, I won’t say there is one big driver out there. We are just out plugging away and pushing, because we’ve got the loan demand. So, our guys are out marketing, but as Ed said, it’s tough to get people excited about 1% products, but you give good service and you get involved in the community and you plug away at it and you can get some growth.

Wherever we want to be in terms of being asset driven, it does allow us to go out and go after deposits. So, let’s say, we opened our all service branch in the loop earlier this week. We -- many of the centers of influence in Chicago who we have connected with and who are sending us business, the accountants, the lawyers, and a lot of downtown business that we’ve not been able to bank them yet on the deposit side, because we haven’t had a facility to do so. Now, we do right at Clark and Madison and it’s off to a great start. Our intentions are over the next year or so to open up a couple of more of those types of convenience facilities in the loop and downtown guys have been -- they have been given a challenge to raise couple of hundred million dollars in deposit side of there. We’ll see if they come through with it, but we also in Naperville we just opened a new location. So, we do have some de novo locations coming online and we continue to market probably more heavily in the newer banks that we’ve picked up that are small, the $20 million, $30 million, $40 million brands, because the cannibalization is a lot less and we try to pick up market share. Again, we consider the right hand side of the balance sheet to be our franchise value. So, we do have plenty of marketing going on right now and we are getting lots of good deposits from the commercial business and cross-selling right into the owners and managers of those businesses. So, it’s coming across the board. We have to do it smartly, because your margin across the funds could be brutal. If you are go into a very mature market and try to buy market share, you can get hammered. So, we’re being very, very careful and hitting lots of singles and not a lot of home loans.

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

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

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.