Wintrust Financial Corp. (

WTFC

)

Q3 2010 Earnings Call

October 27, 2010; 02:00 pm ET

Executives

Edward Wehmer – Chief Executive Officer and President

David Dykstra – Senior Executive Vice President and Chief Operating Officer

David Stoehr – Chief Financial Officer

Analysts

Jon Arfstrom – RBC Capital Market

Stephen Guyan - Stifel Nicolaus

Brad Milsaps - Sandler O'Neill

Peyton Green – Sterne, Agee

John Rodis – Howe Barnes

Julienne Cassarino - Prospector Partners

Presentation

Operator

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Previous Statements by WTFC
» Wintrust Financial Corporation Q2 2010 Earnings Call Transcript
» Wintrust Financial Corporation Q1 2010 Earnings Call Transcript
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» Wintrust Financial Corporation Q3 2009 Earnings Call Transcript

Welcome to Wintrust Financial Corporation's 2010 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

Following a review of the results by Edward Wehmer, Chief Executive Officer and President and Dave Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session. The company's forward-looking assumptions are detailed in the third quarter’s earnings press release and in the company’s Form 10-K on file with the SEC.

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

Edward Wehmer

Good afternoon. As indicated, Dave Dykstra is here with me, also Dave Stoehr, Chief Financial Officer. As always, we’ll go through the general. I’ll take you through the general overview of the quarter. Dave Dykstra will talk about some specifics, he’ll turn it back to me for kind of a summary and maybe a little bit of a look forward and then we’ll have time for questions.

In the third quarter, Wintrust had earning of $20.1 million or $0.47 a share, up from the second quarter this year 88% but down from last year, to call on the third quarter last year when we closed our AIG transaction, where we purchased a life insurance portfolio and had $113 million bargain purchase gain. So we weren’t able to find another one of those this quarter, but I think we did okay, so anyhow our core earnings were really flat quarter-to-quarter really as a result of margin going down a bit and that’s the first thing I’ll talk about when I go through the major components really and the numbers and the major trends and the numbers.

Our margin, which I think we did a pretty good job of highlighting the change on page two of the release, went from 3.43% to 3.22% this quarter. Liquidity was 14 basis point decrease in the margin, less life accretion as prepays and the life insurance loan purchase was 10 basis points. The sale of certain CMO securities in the quarter was 9 basis points and these were offset by and then a decrease in our cost of funds of 11 basis points, that makes up the difference.

We will be more specific on those, liquidity, everybody has been reading about this, in the industry it as an issue. We don’t think it’s wise to be taking our liquidity long right now. We’ve always taken a long-term view in every plan that we’ve done. And we just think that rates have to go up, and inflation is going to be an issue down the road, as the only way out all this government debt is inflation, it doesn’t appear that the rates are going to go down materially.

So we are keeping short on that side and positioning ourselves for higher rates and not try to lock in our margin right now. As I said, we’ve always done this, taken a long-term view of thinks and we don’t really try to take short-term solutions to long-term problems and give up long-term opportunities.

The accretion on the life insurance portfolio, as we told you in previous quarters, this was always going to be somewhat lumpy, pre-payments were slower last quarter, but in total the portfolio was acting pretty much as we anticipated in terms of the average life and the life. So you will have quarters where we will have more pre-payments and some will have less pre-payments, but all in all to-date the portfolio is acting as we anticipated and as we recorded it.

We did certain CMOs during the quarter. These were acquired in the first quarter of 2009 and were kind of a dislocated asset purchase for us. We bought – seen a couple of hundred million dollars with the CMOs and we remit them, so we had an A portfolio initially a little over $200 million and we had $0.5 million in the Z portfolio. The A portfolio yielded us pretty much 9% during the course of its life and we had recorded a $7.7 million gain on the disposition of that.

And during the course of the five plus or minus quarters, but this was outstanding, we recorded trading gains on that $0.5 million investment, the original investment. And the Z tracks is about $31.7 million and all in all this had been a very good trade for us, was a great dislocated asset, you might ask but why did you want to get ride of it? We kind of took the approach that it had run its course and people had not been able to refinance the date. It was pretty uncertain to us whether they were going to be able to refinance going forward.

We thought that it would get kind of lumpy and were concerned about it, so we said you don’t go around take it again. It served its purpose and we move forward and sold that out and it was a very good transaction for us all in all.

On the cost of fund side, the cost was 9 basis points in the margin this quarter. On the cost of fund side, we picked up 11 basis points, we are continuing – we probably were continuing to re-price CDs. In the press release, we give you a schedule of CDs re-pricing and we still think that there is 5, 30, 40 basis points in those. So we expect to continue to bring our cost of funds down over the next few quarters.

The outlook for the margin, page 20 in the release talks about the CD maturity re-pricings and what we’ll get out of that and bringing those down to market rate. So we still think there is a lot of room there. We basically, during this quarter we’d probably set a baseline, really for where the margin is and where it’s going to grow from. Again, the CD re-pricing will help us there. Re-deploying liquidity will be very helpful for us there too.

We have very good pipelines in the commercial business and throughout our banking system right now in terms of loan generation, but we have always considered to grow in the right hand side of the balance sheet as being really growing our core franchisee and we have all sorts of opportunities in that area, both through core growth and through acquisitions, possibilities going forward.

We are not going to take a short-term solution here either. I mean, if there is a transaction where we pick up excess liquidity or we can grow more but grow the franchise and have some short-term excess liquidity, we will go ahead and do that. We really think that adds value to the organization, it might hurt us a little bit in the short term, but rates are going to turn and we will have a stronger franchise when that happens.

On the loan side, we did grow $219 million in loans during the quarter, but again deposit growth was $337 million. So we didn’t make a dent in that $1.02 billion of overnight money. But that being said, it’s still our goal to do exactly, that is, to re-deploy that liquidity into earning assets, but we can continue to grow the right hand side and good core growth picking up households, picking up good core customers, we think that adds value to the company, the franchise value into the long-term value of the company.

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