Welcome to Wintrust Financial Corporation's 2014 Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. Following a review of the results by Edward Wehmer, Chief Executive Officer and President; and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session. The company's forward-looking assumptions are detailed in the fourth quarter's earnings press release and in the company's most recent Form 10-K on file with the SEC. I will now turn the conference call over to Mr. Edward Wehmer.

Thank you very much. Welcome everybody. Good afternoon. Happy New Year. Welcome to our Wintrust fourth quarter earnings call. With me is, as always, Dave Dykstra; our Chief Operator Officer, Dave Stoehr, our Chief Financial Officer and Lisa Pattis, our General Counsel. Recall we'll follow the same protocol as we have in the past. I'll provide some general comments on the quarter and the year. Dave Dykstra will take you into detail and other income and other expense, then back to me for some summary comments and thoughts about 2015. And then, we'll have time for questions. To start with, 2015 is off to a good start. We closed this morning on our acquisition of Delavan and Delavan Wisconsin, picking up $200 million plus or minus in assets. Four branches, we currently have four in that part of the Wisconsin market. We think there are some cost-out opportunities there. The acquisition makes us the largest bank in the Walworth County and we know Walworth County, that's where Lake Geneva is and it's a wonderful area. We're excited about that. We welcome the folks from Delavan to the Wintrust family. 2014 was a solid and a record year for Wintrust really across the Board and was accomplished in what I would consider a pretty tough banking environment. Not just regulatory, rates, competition, you've heard of all. I don't need to go through it. But earnings were up 10.3% to $151.4, while earnings per share up 8.5% to close to $3.298. Assets pushed through the $20 billion mark and up 10.6% year-to-year, loans not including loans held for sale, were up 10.5% up to $14.636 billion. Deposits were up 11%, to $16.3 billion. TDA for the year was up 30%, up to $3.5 billion now comprises 22% of the overall deposits and…

Thanks Ed. As normal, I'll just briefly touch on the non-interest income and non-interest expense section. In the non-interest section our wealth management revenue totaled $18.6 million for the fourth quarter of 2014 and this was up about $1 million from the $17.7 million in the prior quarter and improved by $2.4 million when compared to the year-ago quarter of $16.3 million. The trust and asset component of this revenue continued its consistent growth increasing to $10.8 million from $10.5 million in the prior quarter and on the brokerage revenue side, which can now fluctuate based on customer trading activities, we showed an increase of approximately -- increase in revenue to approximately $7.9 million from $7.2 million in the prior quarter. Overall this quarter marked a record for us in terms of wealth management revenue. We've got an outstanding wealth management team and we look forward to continue to grow it. On the mortgage banking side, the revenue declined to $24.7 million in the fourth quarter from $26.7 million recorded in the prior quarter, but was higher than year ago quarter of $19.3 million. The company originated and sold approximately $838 million of mortgage loans in the fourth quarter, compared to $905 million of mortgage loans originated in the prior quarter and $742 million in the year-ago quarter. Also the longer term interest rates declined at the end of the third quarter and into the fourth quarter. We did experience a higher level of re-financing activity, which resulted in the mix of volume related to purchase home activity declining to slightly less than 60% in the fourth quarter from what was a little bit over 70% in the third quarter of this year. Moving on to fees from covered call options, this revenue item increased $3 million in the fourth…

The call report will catch up with FASB in terms of accounting. Remember Dave asked the regulators once when -- you can't bring the reserve over and they said, well you're going to change the call report and they said, well that will take about four or five years. And he said, you mean, you could do Dodd Frank in two days, but you can't change a call report for five years. So this is the world that we live in. So to summarize, 2015 is shaping up to be another challenging year with the greats where they are, low volatile rate environment coupled with competitions, most times seen somewhat irrational. You've to ask yourself, do bankers have memories at all. But it means that we have our work cut out for us. That being said, I like where we stand and feel very confident that we can continue to prosper and I think this is best example fired in the graphs, which you see on Pages three, four and five of our press release. We've got wonderful smile charts there and our goal is to maintain and to continue to grow and along with the slopes that are indicated in that -- are in those charts. So we feel good where we are going forward. Life science remains -- the loan pipelines remain consistently strong, wealth management continues its steady progress and has very good momentum. Outlook for mortgages in the near term looks pretty good worth rates where they are. Our brand momentum continues to be very strong. Acquisition opportunities are plentiful just the gestation periods are long. We are concentrating on the prioritized cost-out opportunities to take advantage of the operating leverage within our overall structure. We think that makes a lot of sense to -- and…

[Operator Instructions] And our first question comes from Jon Arfstrom from RBC Capital Markets. Please go ahead.

Thanks. Good afternoon.

Hi John.

Hi John.

Hey, just a question on loan growth. You talked about they being backend loaded, any -- just curious is there is any particular reason why? And then also if you could maybe size the pipeline for us how it compares to previous quarters.

There is somewhat of a yearend rush to get things done Jon and I think it's somewhat consistent maybe little more so this time around. I can't pinpoint any particular reason why it's just -- it is what it is. In a lot of the quarters we've been front end loaded. So that's a asset pipeline here as we speak. So…

But that's carried into Q1 -- that backend loaded nature of the growth is carried into Q1.

Well you'll get more average balances in Q1. So a lot of that growth will be performing for us in Q1. The growth pipeline stands at a $1.122 billion with weighted around $700 million. So that's consistent with the numbers we've shown you in the past. We really haven’t seen any degradation in the pull-through rates, have slacked off a little bit, but we've achieved pretty good loan growth this year and this really only counts -- it doesn’t count premium finance, life insurance to our own hedge businesses. This is commercial, commercial real estate and other loans. So it doesn’t include the niche businesses, which you know the first quarter is -- January is our second biggest month in premium finance. So that's always helpful to offset some of the first quarter charges, taxes, the payroll taxes and the things that come along. So we feel good about where loan growth, where it stands right now, but it's getting harder I'll tell you that and we are in the back end. We're getting poached a little bit, especially on commercial real estate. Some banks out there that are offering third year AMS with 7-year to 10-year fixed rates, something that we're just not going to do. And some of the transaction of real estate, we see some payoffs in that regard. So we got to run a little bit harder to maintain our growth, but that's expected. We saw that last -- part to last year and we did okay. So we'll take a day at a time.

Okay. Good. That's helps and then just a question on mortgage banking, just curious of the magnitude of what you're seeing now? Has it picked up materially and you referenced it a bit, but just give us an idea of what you're seeing?

Well compared to the first quarter of 2013, we should be -- we should be ahead, but the last -- in this last couple of weeks of December, hang on, I am just pulling it out here, we during the month of December, we averaged 62 applications a day, but that was low in the beginning, but still January to date, we've been taking in 108 applications, which is -- but it sets a pretty good number for us. We can handle 110 to 120 applications a day and maintain our service level and our timing levels. So we're king of at the max of getting close to the max of where we would want to be and where we would raise prices and kind of move ourselves out. Service is everything in this area. We don't want to overload the system and then give bad service. So at least for January we've been maxed and I think the ratio as Dave gave me, you are seeing probably 60% retry and 40% purchase on this. So it should for usually a slow quarter, the first quarter is usually a slow quarter and it looks like it will be okay, but you never know. That's just the projection.

Okay. Got it. Okay. Thanks a lot.

Our next question comes from Brad Milsaps from Sandler O'Neill. Please go ahead.

Hey, good afternoon.

Hi Brad.

Dave, just a question on expenses, I know you had couple deals closed towards the end of the year, just kind of curious where your outlook would be there. I know you guys are constantly reinvesting in the franchise, new teams; I know you announced a technology team within the last week or so. But just -- any additional color on expenses and what leverage you may have there as you go into 2015, otherwise difficult interest rate environment?

Yes, the deal we closed just happened today. We'll hand the [umbrella down] [ph]. So that really didn't have an impact on the fourth quarter. So there will be a little bit of additional expense with those four branches coming on today. If you look at all those categories, but those unusual items it was pretty flat. Our approach here is continue to grow the franchise but on acquisition opportunities out there, a lot of them sort of overlapping. So I think as we continue to grow and add locations, we're going to be able to take a lot of cost out of the future deals. But other than the acquisitions, we don't expect the expense based to go up dramatically and we should be able to hold the line pretty well on that. And then as we add and grow, we've got capacity in the system right now where we can absorb that growth and we do these acquisitions going forward and take the cost out, those will be really beneficial to us. So I am not sure that's answering your question.

Brad, we're going to do a much better job of breaking out the one-time acquisition cost that we get. We've never really bothered doing that but we're in the acquisition business, but with what we're seeing now there will be, if these things won't come to fruition, they may, they may not as I said earlier, there will be more than ever opportunities for cost outs, which will mean for more one-time charges and what have you. And as Dave said, because a lot of these are more proximate as our base gets bigger, we have more overlap. And we're going to give those priority because I've talked earlier about we do have operating leverage in the system that we thought when rates move up, the acquisition market will move away from us and we would go back to our driving through internal growth strategies. It's hard to grow internally, when rates are this low. But if we can do this, accomplish the same thing through cost-out acquisitions and leverage our existing infrastructure, that would be a good thing. So that's kind of -- those types of deals will be given priority if we -- when we look at them and that's the plan. But salaries were probably 3%, 2.5% to 3% increase we've given this year to our existing staff. We are investing. As you see, we're known to invest and continue to build a solid franchise. So there will be -- there will be some takeouts of people in some directions and there will be some investments in other areas to continue diversifying our portfolio. But as Dave said, we're watching it very closely and I would not expect anything massive to come racing down the pike here.

Got it. Thank you. That's helpful and just a follow-up question on the balance sheet, kind of comparing the period end to the average, I know that's always sort of a difficult comparison, but it did look like the FHLB advances were higher, you had a lot more liquidity on 12/31. Is that just sort of a coincidence that something happened just at the end of the year kind of relative to where there was average balances were, just kind of getting a sense is there something bigger coming down the pike, that you guys are getting ready to fund or is it just again maybe coincidence with the timing at the end of the year?

With the market as volatile as it was at the end of the year, we made a decision to put out little extra liquidity to handle that. There were some fluctuations. We're funding a lot of loans, which you saw at the end of the year and there just seems to be some volatility. So over yearend we just want to make sure we had enough of liquidity to cover any volatility that was popping down in loan fundings and mortgages and what have you because there was a lot of activity at the end of the year as you can see.

Sure. And maybe some of that maybe reverses out or do you suspect that you'll…

It was very short term. It was more short term federal home loan bank fund.

Like overnight stuff.

We didn't layer on term federal home loan funding.

Sure. Sure. Okay. Thank you, guys.

Our next question comes from Emlen Harmon from Jefferies. Please go ahead.

Hey. Good afternoon, guys.

Hey Emlen.

Getting back to the topic of expenses, you did mention there was a bunch in there this quarter. So just -- could you help us think about how we should be thinking about the starting rate for core expenses? Just how much of the ACA expense goes away? I presume the pension could be up and down as that needs to be funded. It sounded like there was some kind of like closing comps in there. How should we be thinking about a core expense number for the fourth quarter?

Well I think if you take out those issues, certainly the leasing not going to recur, the sales, the bank branches, that was actually up in the non-interest income section. We put the gains and losses with that line, but that's not going to recur. The ACA it was bigger number this year at the three-year program, but the plan is that over the next two years it ratchets down, so it's probably not as much. And you're right, the pension is just, our rates are out. Hopefully if rates go up, then it actually brings the pension liability down a little bit on a discounted basis, but those are fairly small plans and hopefully we're not going to see a lot of more fluctuation in those. So I would take out those items that I talked about and the thing you would see in the first quarter and every company has this, is payroll taxes will be higher in the first quarter because the bars resets at zero and everybody has the Fico chart is on everybody. But other than that, other than the acquisitions, I think we should be relatively steady as the OREO game fluctuates up and down it's just recurring to push their stuff out and do it, but I wouldn’t expect that that would go up. We would hope that that would trail its way down over the course of the year on a quarterly basis. But there wasn’t a lot of noise in the other numbers other than what we pulled out and highlighted in the press release. So Ed mentioned that we do all of our salary increases at the end of the year and so roughly a 3% increases will come through in the first quarter, but other than that, anything that would additive would I think really be the any acquisitions that we take on.

Got it. That's very helpful Ed that the ACA was I guess having one factor we weren’t sure on there. So that's helpful. Thank you. And then just on the acquired Talmer franchise, could you give us an update on loan growth there and just so much of a contributor to the organic growth engine that could be potentially?

Well I think we've got -- we've got that whole acquisition of the branches converted. So we've got all the deposits and the loans that we're going to get out of that transaction over now and we did retain the lenders up there with the intent that we're going to try to grow that market. So I don't think frankly that's going to grow to the moon, but we're going to work the market where we really haven't been that much, and then over in Burlington area, Lake Geneva area and then they've got some other smaller areas where they've got a nice Ag lending that we're going to tip our toes into that and being to try to make a little niche out of that business and grow it. So I think it will be slow and steady there and I don't think there is anything that's going to be a large increase at any one time now. It's just we've got the customer base in. They're in the numbers that we have now and hopefully we'll have similar growth up there that we had elsewhere, high single digit, low double-digits type of growth that would be the plan.

Emlen, we did and we mentioned this earlier, we did pick up an Ag lending team up there and it's something that we are looking at and we picked up some Ag loans and we're looking at exploring that as an interesting niche for us again to on the diversification side of the equation. That is just in its infancy, but is something that we're very interested in and you think of Illinois and Wisconsin and Iowa and the surrounding states because the industry is agriculture like it will be in it. And so we're getting our arms around it, getting our protocols in place and that's something that we're going to be building as time goes -- as time goes by. So we think that we were able to pick up the idea whereas we got deposits, the loans stayed at Talmer. We're working with Talmer and other folks that were able to bring a lot of those wells back over. People didn't want to have their either and their loans in Michigan. And if you remember one time that first baking center was about $1 billion and when Talmer owned it they ran a lot of things off. But by their design that's what they wanted to do. We think there's terrific opportunities for continued growth, but it takes quarter or two to get everything digested and get the ball rolling. So we feel good about it.

And as Ed mentioned earlier, we stretch now from Kenosha County over to Walworth County with the majority of those accounts and the few at the Talmer acquisition with the one we just did today and the Delavan Lake Geneva area on a pro forma basis, if you look at the summary of deposit data that the FDA serves, we will be the largest bank in Walworth County and with the most locations. So, those two deals really help get good presence up in that market. We got a great team of people out there and we expect it to go well.

Okay. Thanks for taking the questions guys.

Our next question comes from Chris McGratty from KBD. Please go ahead.

Good afternoon, everybody.

Hi Chris.

Hey, I know you guys looked both at the efficiency ratio and the net overhead. If you look at it on a full year basis, it was like 175 on the overhead ratio. How should we be thinking about this? A, is this a good way to look at the near term, there is a decent run rate for the next two quarters assuming this rate environment sticks and is there anything else you would point to or maybe a better measure at this one?

Well we look at the efficiency ratio kind of as a barometer. And we do study it because its little higher than some of our peers, but I think when you break it down by components, we have two very high efficiency ratio businesses in the mortgage business and wealth management. They operate in the mid 80s. If you back it down just to the -- back it down just to the banks, we're in the high 50s. So that’s one way to look at it. But we manage the organization through the net overhead ratio. Based on the size of the bank and the operation we know where other income should be, where other salary expense should be, where occupancy should be, and where other expenses should be. And we're in inquisitive mode, and it takes time to get down through those numbers. So, we manage up the net overhead ratio. The efficiency you can't manage all the efficiency ratio or just to get to margin -- okay, we all want that too, but I think that my past has always said, if you can get that number down below 1.5%, you're operating a high performance bank and we have a number of our banks that are below 1%, some way below. But some of the ones have done acquisition over. And then the other -- the wealth management and the mortgages are always going to raise that up a bit too. So, our goal is to get that down to 1.5% and that’s the goal of every CEO in the organization and we’ll continue to push that down. But that’s how we manage it, so that’s what I would look at if I were you.

Okay. So if I take those comments and kind of what you guys were talking about in terms of cost saves coming from some of the deals, the 175 for '14 should head naturally a little bit lower as you kind of get some expense synergies. Is that a fair assumption for '15?

That’s the plan.

Okay. One last question on expenses, obviously we’ve talked a lot about your charter structure Ed, any more thoughts given that rates apparently are going up forever? Whether this will be any kind of an earning source in the coming years for you guys?

You mean collapse in charters?

Yes.

Believe it or not, we would lose money if we collapsed charters. It's counterintuitive and it's a question -- we always get two questions, their cocktail party questions I call them, because one is you're inefficient if you have too many charters and two, your reserve is too low. And it’s -- so you have to work through those. But trust me, we would lose money on our funding base, which we look at the money we get from the wealth management business and having the multiple charters. Remember that everything that doesn’t touch a customer is basically centralized or consolidated in our system. So when you start saying what you would lose you would sure, you've got fired all the bank Presidents, yeah, but then would you have the growth, would have the positioning you have in the market. You’d still have to hire somebody to run that market for you. There is not as much there as you would imagine. We're not the old Synovus type of multi chartered system. We hob things, we centralize, we consolidate things, the loan operations, compliance, it's not the old school, this is -- consider them to be 15 different divisions that in any other bank. Are there some ancillary cost? Yes, in terms of the regulatory cost and the like, but those haven’t come through too, because we're based there on asset size and what have you. So when you add all those up and you look at what you have to pay to replace some of the financing we have and then notwithstanding just the financial side of it to positioning you would lose, the morale that you would lose, it makes no sense right now. I'm not saying forever that this is going to be the case, but right…

All right. Very helpful. Thanks Ed.

Our next question comes from Terry McEvoy from Sterne Agee. Please go ahead.

Thanks. Good afternoon. I'm glad Chris asked the charter question, so I can cross it off from my list. Ed, I guess where are you on the process of fully penetrating the fee generating opportunities at all the banks and branches you've acquired over the last couple of years and could there be more upside in say wealth management, mortgage etcetera?

We definitely believe so, especially on the wealth management side. The new thing, the performance of the wealth management operation, performance of their proprietary funds, you can look it up, but it's been very good, benchmark leaders and it’s long and its consistent. The trust level between -- bankers are somewhat proprietary, you get a lending officer, a personal banker who has got a really good customer and I don't know for my internal reasons, they could really screw the pooch on this thing, the wealth management guys could. But it takes time to develop that confidence and that relationship and that’s all occurring and there is a lot of opportunity for continued cross sales on the wealth management side of the equation. There is also the opportunity on the wealth management side of getting more transaction oriented account out of the brokerage system into the manage money accounts and we’re working on that very hard because we’ve got the confidence now. I would tell you five years ago, six years ago, I wouldn’t push that because we didn’t have the products and services the Great Lakes have and the performance Great Lakes has that you can have the confidence of moving -- putting a relationship into another product and I don’t feel like putting them in jeopardy at all. I think now we're helping our clients. So I think that there on the wealth management side its terrific. The mortgage side, most of these guys come with most of the banks that we team up come up with mortgage professionals. It takes them a little bit of time to get up to speed with our mortgage operation. We are buy the books organization here not to say that the -- they weren’t before, but we are really by the books here. And it just takes some time to acclimate and to penetrate that market and to advertise to get that going. So probably opportunities on all fronts.

And then just as a follow up, it looks like purchase accounting accretion was $30 million last year or call it $0.35 a share, what type of headwinds do you face in '15 assuming that level comes down; any thoughts there?

Well, I think that’s a pre-tax number to begin with, right.

$30 million pre-tax, yes…

20 after tax on 50 million shares, around there. Well that, as you can see in the press release there is a chart that shows the accretion and you do see it coming down. And if you take that chart over the last couple of years, on the static portfolio, yes that number will be probably coming down, it has every year. But if you -- if we're successful in the acquisition front, we’ll be back loading that and just because it’s a covered loan, it still has the same accounting as a non covered transaction. So we would think in the number of the transactions that be made available to us. There maybe those opportunities if we do our marks right, and if we are able to do better than our marks as we have in the past. So yes, we ended the static inventory as coming down and hopefully is this acquisition market will allow us to back load this again and maintain some reasonable accretion coming in, but you never know, we had to get the deals, we got to mark them right and we got to do better than your markup. So notwithstanding that, we would expect accretion to continue to slide as those balances pay up [ph].

Okay. Thanks. Have a nice weekend guys.

You bet. You too.

Our next question comes from Joe Stieven from Stieven Capital Advisors. Please go ahead.

Hi Ed.

Hello Joe.

Ed, I don't have any fundamental questions, but I do have you -- we're starting to talk about loan loss reserves and then the FASB and accounting stuff and I got distracted. So did you guys put some new disclosures in or go ahead and just repeat those comments. So I can get them because I heard you talk about them and you picked my interest, but I got distracted.

So Joe, what we did was on pages 28 and 29 of the release where we used to show our allowance for loan loss broken down by major loan category and then we grouped that in the core loan and then we grouped it in the purchase and niche loan areas. So we could show you -- it is in our purchased loan area. You don't get to carry the allowance over when you buy loans now. So inquisitive organizations like us, the reserve starts to look lower because you got the loan balances right, but you don't bring it in.

It's a disaster right. I agree.

And so what we try to do is add to that disclosure what the level of our non-accretable credit discounts on the non-covered purchase portfolio is because those discounts are available to absorb losses, but they really don't flow through anywhere in our press release in the past where people could see how much discount is out there to absorb loss besides the allowance for loan loss. And the purchased loans are in our loan balances, net of that discount and so they're available those discounts are available to absorb loss. So what we did was we added those discounts below the allowance, added that number through the allowance to give you a total number of allowance and non-accretable credit discounts, so you can see what's truly available to absorb losses and then recalculate at the percentage. So our allowance to loans was 64 basis points at the end of the year, but if you consider those discounts that are available to absorb losses, it would be at 74 basis points.

Yes, and which includes the extra $15 million on Page 28, correct.

Correct.

Okay. Got it. Okay. Good. Thank you. You're making it -- at least, you guys are at least attempting to connect some dots. So I appreciate it. Thanks guys.

Thank you.

All right. That seems like that's it. Thanks everybody for listening and we'll talk to you soon. Good luck to everybody.

Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone, have a great day.