Wintrust Financial Corp (WTFC) 2006 Q2 法說會逐字稿

Good afternoon. My name is [Pashawnta] and I will be your conference operator today. At this time, I would like to welcome everyone to the Wintrust Financial Corporation second quarter earnings conference call. [OPERATOR INSTRUCTIONS]. Thank you. Mr. Wehmer and Mr. Dykstra, you may begin.

Thank you, good morning, Ed Wehmer here with Dave Dykstra and Dave Stoehr, our CFO, is also here.

Welcome to the -- by popular demand, the first ever Wintrust earnings conference call. If we're a little rough around the edges, remember it is our first call. We'll do the best we can. And as time goes forward, I'm sure we'll get much better at this. We, as you know, we put out a fairly substantial press release with lots of data in it. We'll assume all of you have gone through that and memorized it all. But we will spend a little bit of time and give you just an overview. And then we'll open up for questions.

I'll go through the balance sheet and the margin and Dave Dykstra will go through the other income and other expense and then, again open for questions. Results, first of all I think we'll start every conference call by talking about credit quality. I think, in this day and age, where everybody thinks the last three or four years are normal, those of us who have been around the block a couple of times know that it isn't. And the credit quality is still the most important statistic that we are relentless on. That we stay on all the time. And our credit quality remains very, very good. We've talked conferences and the like that we, although we feel these are very challenging times on the credit side of things, we will not and have not changed our credit underwriting standards and we won't do that going forward. We're not going to change them to fit the times, they're going to be constant and going to be for the long haul.

And that all being said, on the balance sheet side, our growth and assets are pretty good. I will point out that on May 31, we did close the Hinsbrook acquisition and those numbers are included on the balance sheet for June 30th. And one month of operations are also included in our results. Pardon me. Without Hinsbrook our growth over 3/31/06, core deposits grew about $254 million or 15%, and loans grew $255 million, or 19%.

Our average loan to deposit ratio really grew 3% from the first quarter to the second quarter. Our first quarter investment and our continued investment in people are paying off. And we'll talk about some other initiatives we're making to work on the credit side of things. Really the issue there is we have made some head way and we put some loans on the books. Our margin stayed relatively steady for the period, but we're in a period right now where we've got a flat rate curve, there's tons of liquidity out there. And everyone has backed out -- there are no credit spreads anymore. And we see that that is really the big issue. Deposit pricing is really, is not as competitive, relatively speaking, as it has been in the past. It's really somewhat rational given the short-term rate environment that we have right now.

It's really the asset side of the equation that that's a challenge for us right now. Some of the things we're going to do to make that up are, continued production out of our new hires. We brought in a couple more teams in the second quarter and they should start paying off bringing in good, quality business, relationship-driven business that's -- We feel that will be very good for us. We -- our commercial banking initiative, as you know, we're probably the second or third biggest bank headquartered in Chicago. Not many people know that. We've often said that 95% of our customers don't know that Wintrust exists, and that's the way we've always marketed ourselves.

But we do have lots of capacity. We spent money to give us the best same or better products and services on the commercial side of the business. And starting in the third quarter, we're going to do some regionalized marketing and we're going to push very hard to bring in additional commercial business. Something we've never done before. And we think the market will be good for that. If we have the same or better products and services and we can add to that our good high touch approach, we think we'll have very good success in that business.

And the premium finance side of the business, that business is still doing well on a volume basis and on the credit side, we look to expand that business and it's in the area that we're in right now. But we are also in fund business, which is really going downstream from maybe the 35 to $40,000 average ticket size to the 20 to $28,000 and yields are closer to 14% in that business. We've devised a way to get into that. We've taken through our systems a lot of the risk points out of that and we feel that we should do well there. In the first month we did over $1 million worth of volume. And we think that that will continue to grow geometrically and will help us along the line. The real issue, again, for us is the pricing on the asset side of the equation. We were very well positioned for rising rates to help us, but consider the following:

We're about $600 million short of our optimum in terms of where we'd like to be on a loan to deposit basis. Consider that our premium finance portfolio, which historically has yielded prime plus 4%, is now down to a little over prime plus 1. Some of that is because late fees have gone from 2.25 down to 1.40 or 1.50, but the liquidity squeeze and the credit squeeze has hit there too. And if you take a $1.1 billion portfolio at 300 basis points, that's a lot of money that the competitive pressures have taken away.

Extrapolate that into our core portfolio and you get a real good idea of what's going on. But all that being said, we think the initiatives that we've made are going to help us in that regard. And this is something you have to work through. You can't sacrifice credit quality. We'll build and we'll grow through that. And that's our game plan.

On the deposit side we had good growth across the board. We opened 8 new branches in the second quarter. 5 we acquired in the Hinsbrook transaction and 3 organically. That part of the model and building franchise value there and building households with multiple accounts is still working. For example, the Old Plank Trail Bank which opened up in the first quarter is already $76 million in total assets and $56 million in deposits, our Elm Grove branch, which just opened about two months ago is $56 million in deposits, all multiple accounts and multiple households. That part of the transaction or the business plan is still working extremely well.

It's again the asset side that is a challenge, one that we have to maintain our discipline on going forward. With that I'll turn it over to Dave to talk about other income and other expense.

Quickly we'll run you through the major categories of other income and other expense.

Wealth management is the first one we list in our release. Revenues were essentially flat with the first quarter of '06, if you exclude the gain of sale of growth fund of $2.4 million and the revenue that the growth fund generated in the first quarter of approximately $270,000, up slightly, brokage revenues for the second quarter in a row exceeded the $5 million level. Obviously that's subject to the trading levels of our customers. What we're finding is that the integration of the brokers into the banks are starting to pay off and we're starting to see a good year-over-year and quarter-over-quarter growth in the revenues generated by the brokers we placed into the bank. So we think that aspect of the business is working well.

On the mortgage banking side, obviously these revenues are subject to the market interest rates, and over the past five quarters, those revenues have ranged from $5.1 million per quarter to $7.8 million and this quarter at the $5.9 million level, so we're right in the range, nothing really unusual to report in that segment. Service charges continue to trend up as the deposit base increases. Premium finance loan sales, we did sell some premium finance loans again in the second quarter as we have since 1999.

The gain on that was approximately $1.5 million, and again that's sort of in the normal range of what we've done in past quarters and past years. The administrative services, as you -- most know, is related to our Tricom subsidiary. This is a business unit that is also being impacted by narrowing margins. As a point of reference, Tricom's customers, which are the temporary staffing agencies that we serve, billed their clients about $257 million in the first six months of 2006, compared to $206 million in the first six months of 2005. They've roughly had an increase of 25% in their volume, their customers' volume that they're financing and doing services for, but their revenues are up only 10%.

And again, there's a lot of liquidity chasing these assets and these services in that marketplace so margins have been squeezed there a little bit. We're happy with the growth in that business. And we believe that we certainly have a lower cost of funds than many of our competitors and we can wait them out and hopefully margins will increase down the road.

Wehmer again, one thing I forgot to mention, Dave brought it up, the sale of premium finance loans. In the first quarter, we've sold $50 million of premium finance loans, and in the second quarter we sold $210 million, and you would say why are you doing that? Given your desire to build up the loan to deposit ratio. We for 5 months had worked on a transaction that would have brought a substantial amount of loans to our balance sheet, but what we felt was 7-10 days from signing the contract.

The deal went away from us. We had committed. We were arranging the balance sheet to accomplish that transaction. We were most disappointed, but that's life in the big city. We needed to fulfill our obligation there to sell those loans, but if you take that into consideration, our loan growth was actually a little bit better than the numbers that I threw out earlier. And based on confidentiality agreements and the like, as Forrest Gump would say, that's all I can say about that.

Continuing, continue on with the other income fees from the covered calls were $684,000 in the second quarter compared to $1.8 million in the first quarter and $2.6 million in the prior year. As expected, the income from this activity has declined as interest rates have risen. And some of you have said "well, I thought your margin was supposed to go up and that would offset this impact." We believe that the strategy has actually worked.

These fees have come down. And if it weren't for the credit spreads that Ed referred to earlier, to the tightening of the credit spreads, and the competition in the marketplace where we've passed on a number of loans due to credit terms, our margin we believe would be up significantly and more than offset the drop in this area. But again these have fallen off and we don't do these just for the sake of doing them. We enter into them in an integrated asset liability strategy and in higher rate environments these amounts fall off.

The biggest swing we had in other income expense was the $2.6 million of trading income on the change in the fair market value of our interest rate swaps that we had in place to head the impact of the trust preferred securities that we had on our balance sheets as rates increased in the second quarter. The net aggregate value of these swaps increased by $2.6 million. We did note in the press release that in the third quarter of this year, so in July of this year, we have sold those swaps and sold them basically at the same value that they were at June 30th. It was just slightly different, I believe $17,000 different from what we had at the end of June.

So we have unwound all of our swaps by selling them in the third quarter, so the volatility related to that line item will cease going forward.

We think we've caught the market, when it was about -- February it was about 5.15. It worked out well. It's down to 5.02. We will work to re-swap those out and to fix those costs. And we'll do that. We'll watch the rates and we'll do that. We didn't just get out of them for earnings volatility -- well, I guess we did. But the fact of the matter is we could never get an effective swap based on those transactions that we had. That we had put in place, put into FASB. We restated last year because of FAS 133.

We never redesignated, and fortunately we didn't do it because we found out there are couple of other issues popped up that are becoming problematic for people, you have seen in other releases. So we're going to redo them and we will relock in. And going forward, it will hurt us a little bit, won't hurt our margin because those numbers are in trading volume, but we'll watch the rates and we will lock it in and still very effective cost to capital and it was the right thing to do at the time.

Moving on to other expenses. Most of them were in line, just maybe talk a little bit about salaries and employee benefits. They were up 14% over the prior year, both on a quarterly and a year to date basis. But were generally flat with the first quarter of 2006, actually they were down just a little bit.

The increase over the prior year, you have to remember, hadn't -- partially been impacted by the adoption of FAS 123, which was the stock options expensing. That amount in addition to the hire of new employees to staff our locations, we had 58 a year ago, we have 72 now. So the cost of those staff, the focus on hiring the additional experienced loan officers that Ed referred to and then general salary increases that we generally handle at the beginning of the year attributed to the 14% increase. If you backed out the stock option expensing and the impact of the Hinsbrook bank acquisition, the increase year-over-year would have been about 8%.

Actually, the salaries were down slightly from the first quarter, part of that is a reduction of payroll taxes as we move through the year. And we also had about $300,000 worth of severance costs in the first quarter at our brokerage firm. And we've also done some rationalization in some of our other areas where the growth wasn't as high as expected. So we talked about this in the first quarter, that salaries were up quite a bit, that we made quite a bit of an investment in the Company to bring on the experienced lenders and the staff to help us fill that gap that we have in our loans to deposit ratio. And we've sort of flattened out here in the fourth quarter as we had anticipated.

Occupancy expenses is up as you would expect with the additional locations. And there really isn't anything else that's really significant in the other expense areas that I think needs to be addressed specifically.

With that, I guess, we can open it up for questions.

[OPERATOR INSTRUCTIONS]. We'll pause for just a moment to compile the Q&A roster. Your first question comes from John Arfstrom with RBC Capital Markets.

Morning guys.

Morning, John.

Can you talk a little bit about the premium finance business? What your plans would be as you alluded to missing a transaction that would have brought some new production to your company and that your gain would have been lower and the balance sheet would have been larger. Can you just talk about is that model changing and can we expect something different in the third quarter?

Well, pardon me, first of all I didn't say it was a premium finance transaction that didn't occur. But we did make room on the balance sheet to accommodate that transaction that didn't occur. On the premium finance side, it's still a great business, it's still given us very high returns. We have the issue of, too much liquidity in the market chasing too few deals. Our volume is up in terms of contracts and in terms of overall volume, but we're paying the price on the pricing side.

Our plans there are threefold. We will look for acquisitions in that area if they make sense. Secondly, the in fund business, it's a whole area of the market that we have really not been in. We do -- I guess we dipped our toe in it about three or four years ago and then we -- we found that the volumes that came in, we put it into our existing infrastructure, really choked our existing infrastructure and we couldn't give good service to our main business.

So we actually set up a new company that's located -- head office is in Philadelphia. All new systems have been brought in to take out the risk element. As you move downmarket, there's a lot more risk in that business from broker fraud, agent fraud, really the biggest. And we've got the agent kind of looped out. We pay direct to the insurance company, and money comes directly back to us.

We very rarely touch a piece of paper in this. It's totally mechanized through the Internet and out. We feel that's a good market where we can grow and use our -- we think our credit systems are awfully good there that we can go downstream and build a portfolio. It's going to take a couple years to build up a portfolio of 3, 4, $500 million in this. But we think that's very doable at higher rates and that will help the business.

The third aspect is, and even though rates are low, they're still better than what you're getting at every place else. Is just to go out out and do a little more transactional business in our traditional business. We think we can do that, we think that we can build additional volume there to help fill the hole as we ride through this part of the cycle through. We, we think we're good at it and our systems can handle it and we have plenty of capacity to do it.

So we're going to keep growing and expanding that business by going downstream. And in our traditional business. And eventually credit spreads are going to come back. We can't be like this forever, and when they do, we'll get the premium for being what we think is a very conservative lender. Right now, you can lend anything and you look conservative. But we are conservative lenders, I think over history through the cycles we've been in, we've proven that. But we don't get any credit for it right now. It's actually somewhat painful.

It would be a lot easier to go out and make the loans and follow the competition and -- but we, I think truly we pay the price on a couple because we're not willing to do that. So we'll live through the pain. We'll grow through it. All of the other models are still working. And we feel very confident in our ability to work through this, and continue to execute our plans.

Just two more quick ones. Dave, on the covered call income you talked about a little bit in your prepared comments. But what's the trough on that business? And maybe a worst-case environment where you collect the premium and that's it for the quarter?

Well, I think we're always going to do a little bit of that business. And we generally write the covered calls against agencies and treasuries. And if you've got Ginnie Maes and they're paying down we've tried not -- we've tried to limit it to a certain extent of our balance sheet and I don't have a definite number because the balance sheet is growing and we look at it in conjunction with our overall asset liability management. But as we get pay downs on those Ginnie Maes, and as we grow the balance sheet, we always have a little bit of extra capacity to do some of these covered calls.

It's somewhat subject to volatility in the marketplace. Highly volatile marketplace. You get a lot more premium from selling those calls. But I probably say we're probably close to the trough. Maybe 3-500,000 would be a minimum but, you know, unless rates go down substantially where some of the agencies were we've got some on our books that we can rewrite some calls against going into the money, I'd say you're probably, probably the low end would be 3-500,000, but you're probably not going to get back up to that $4 million level unless rates change dramatically.

Our approach has always been on the investment portfolio to manage it as part of the overall asset liability management. To the extent, we buy those securities not to sell, but to hold., as investments. In the extent that we can, since we're going to hold them, we can sell calls on them and we build that in and we'll do it. I think Dave's right in terms of his numbers.

Okay. Last quick question. Since it's the first call I wanted to ask you this one. But you've done a lot of deals, looked at a lot of acquisitions, and you know how to value companies but we look at your stock you're under 2 times book. You're at 2.7 times tangible. What are we missing? Are you under-earning due to some of the self-inflicted pain and caution in the lending book? In your view, are we missing something in your valuation? and is there something that maybe a buyer would look at if they were looking at your company as a target? What if you look at the Company that maybe isn't being assessed properly. What do you think the Street is missing?

Well, I think, do I think we're undervalued compared to where the peer group -- absolutely. I think most of the yields will tell you that. I think we have the premier franchise in Chicago. You look at the markets that we're in. You look at the positioning we have in those markets. There's not many people coming in on top of us. The towns won't let them in. We're in the best markets around Chicago. And we still have plenty of opportunity to continue to grow.

And the model still works in terms on of gain and franchise value, as evidenced by Old Plank and the Elm Grove. And everything we open does better than the last one. It's not like we've changed the way we're doing it, it's people really want that service, they like the positioning. And we've got great people to execute that. We're still able to recruit great people. What we've got here is something that's brought in from the outside. And we are paying the price for being conservative.

As I said, we could go out and we could, we could be at 100% loan to deposit if we wanted. And everybody would be -- we wouldn't be having conversations, everybody would be saying you guys are going great. But the fact of the matter is we think that's just the wrong move right now. We've been through enough cycles, you've seen it, you see it in the marketplace, and we have to maintain our discipline or we would be in the soup two years from now. Where we want to be is positioned to clean up after it hits the fan. We want to have our balance sheet clean. We want to be able to go and take advantage of opportunities as they present themselves because it's going to happen.

Maybe we're wrong. Maybe the world is right and we're wrong, but I don't know, this is the way we're playing our hand. We, we're, probably, the second biggest bank headquarters in Chicago right now. In the best marketplaces with the strategy that still works extremely well. We're 15 years old and we've grown, we'll be pushing $10 billion. 15 years old from a card table. Tell me other people who have come in to the Chicago market, who have known how to grow and to gain market share at that level. There's not many who have been able to do it.

This is a very strong franchise with very strong credit quality and a very strong credit culture. And we've got a game plan that's going to work and we're going to have to ride this through and we will feel some pain doing that. And if you say "What would other people look at?" Well, if it is us as a target I think would be exactly that. They would look and say, look at the positioning, look at the franchise. No offense to any of our competitors. They're all -- they're doing a great job in terms of building their franchise, but they're not in the markets we're in, not with the growth we have, not with the people that we have. And, our approach on that hasn't changed. If someone -- there's always a number out there. We project out and we've always been [grand odd and coddled guys] that say, there's a number out there that our shareholders would be better off than being with us.

If our earnings do fall off, that number does decrease and makes us would probably make us a more likely target, and I've told our people and we've talked about it a lot, it's in our hands. If staying independent is in our hands, and it's based on our performance. I truly think if you compare us, we are undervalued and we're paying the price for what we think is doing the right and prudent thing. And in this market right now in long-term it will pay off for us, but I can't control what goes on out there. I can't control lots of the market. All we can control here all of our management is how we react to it and how we keep our franchise safe and growing for the long-term.

So do I think we're undervalued at less than two times book? Absolutely. Do I think as time goes -- if this is an elongated sort of thing -- if time goes on, do we become a more attractive target if we're not able to execute? Absolutely, I think that's the case too. We'll play it by the book. We're in this for the shareholders, we're all shareholders, we've got to do the right thing. So does that answer your question?

Yes, it does, thanks.

Your next question comes from Steven Alexopolous from Sanford O'Neill.

Hey, good morning, guys.

How you doing?

Steve.

Hi. Maybe for Dave, first. Dave, the $709,000 of the trading income for the net cash settlement on swaps, does that now go to zero with the swaps being sold?

Yes, I mean there'll be a little bit in the third quarter simply because we didn't sell them until a few weeks into the quarter. But that goes to zero. That simply was, if you had treated them as a hedge, yes it goes away with the swaps.

We're going to watch the market. We intend to go back in and swap those out again with a swap that hopefully is compliant with the intricacies of FAS 133.

Okay.

Just been awful to try to figure out. But we think since we did that, rates have dropped almost 14 or 15 basis points. And we're going to continue to watch that and we'll lock back in and we still think it's very, very cheap capital, permanent capital even with the rates, we'll swap it in.

Just a clarification question, if rates continue to move up, should we then expect the fees from the covered calls to continue to decline from where it was this quarter?

I think if you go back to John Arfstrom's question, I think they can continue to go down a little bit, but I wouldn't think they'd probably go down much more. Maybe $3 to $500,000 range. We'd always have a little bit of a base out there.

Okay. And just a final question. Ed, we had a really good quarter in terms of the organic loan growth. But there's a lot of talk of a very tough competitive environment. Have you turned the corner in terms of the loan growth now, or this really a one-quarter event that you happened to have a good quarter?

I wish life were linear as you and I have had that discussion. But no our investments and people are paying off. Those people are bringing in relationship-oriented deals. Our emphasis on the going out. And really as I've said, in these comments we have not pushed the commercial side of the business as well as we should, as evidenced by the demand deposits are only 9-10% of our total deposits. We really want to get those numbers up. We spent a lot of money and time and effort to really put a suite of products in here that rivals anybody in the market on the commercial side. And once vacations are over at the end of August, we're going to start marketing pretty heavily into that commercial side of the business. You've seen Cole Taylor do well with it, seen MB do well with it, now you're going to see us do well with it.

And on the premium finance side, some of the initiatives I've talked about there, have we turned the corner? I would -- I don't think there was -- yeah, I guess we have. We had very good loan growth. But it's the kind of loan growth we want. We're not sacrificing credit quality to get it. We're going to execute that. And I would hope we would be able to fill that gap.

We'll also look at acquisitions. We were well down the pike on one that would have solved our problems in terms of that gap on the loan to deposit ratio. It wasn't a very good day when we got the call that it went some place else at the last minute. But as I said, that's life in the big city. You dust off and you get up and you go at it again. So we know what the issue is, we know what the problem is, we know what we have to solve. We know our own game rules and our culture says about solving that problem, and we're going to do it.

So the momentum we saw in the quarter on the organic loan growth side, you feel pretty comfortable that will be sustainable here?

If lines remain very strong and the initiatives should aid in that.

Okay. Thanks, guys.

Your next question comes from Troy Ward with A.G. Edwards.

Good morning, gentlemen.

Hey, Troy.

Dave just some clarification on some items in the model. In the release I think it referred to expenses just to the acquisition of approximately $900,000 in the quarter. Could you give us some idea of, that was just one month of the quarter. What should we be looking for -- what percentage of those fixed versus variable? And what should we be looking for flowing into Q3 and Q4 on the expense side, related to HBI?

Well, we've, I mean, I think you can look at it. We had them for one full month, so basically if you triple those numbers, you're going to get pretty close.

Okay, so you're saying most of those are salary related so it's going to be a triple?

Yes.

And similarly on the loans -- average loans and average deposits, again the one month. What was the loan to deposit ratio of HIB when you closed it?

Well, I can tell you, at June 30th and the numbers weren't substantially different, but at June 30th, Hinsbrook had $364 million worth of loans and $425 million worth of deposits. So --

Okay. All right. And, Ed, you talked a lot about the transaction that didn't happen. Can you just kind of give us -- I appreciate you can't go into details on that specific transaction. Can you tell us what your appetite is of acquiring a portfolio of assets versus acquiring, another bolt-on acquisition generating business like you have? Are you open to either one of those?

Well, sure we're open to it. We've never really, and unless you go back to the days of the S&Ls, found an opportune time to buy a portfolio business from anybody. I suppose if the government wanted to sell some more, you'd always get a pretty good deal out of those. But when we looked at portfolios out there, somebody selling a home equity portfolio out there, it's never really rung true with us. It just doesn't work for us and fit into our culture.

So we are open to it, but we've never really seen one that made sense to us. We kind of like the bolt-ons of either new business or into an existing business to -- on the acquisition side. You've got to be really careful. You don't want to get somebody else's cancer. So you've got to be really careful.

Can you give us some examples? I know from a financial perspective, there's a lot of different types of financing businesses available out there. Can you give us some examples of the type of businesses that you would look at it? Or some maybe you would avoid? Maybe that'd be a better way to approach it.

If it has subprime in front of it, we won't go near it. It's kind of interesting that there's lots of subprime companies coming on the market, which to me is just indicative, an indicator of where we are in the cycle right now. It reminds me back to the days of Cityscape and all of those deals. And you can kind of follow that through.

There's a lot of subprime stuff that people are pushing out that there we have no interest in. We've never found a leasing company that made any sense to us. We look for a business if it's a newer type of niche business that's got, it's got some sort of differentiator that gives you some franchise value and will allow you to grow. We've seen -- Tricom we'd never heard of until we, it came across our desk from a customer who knew that industry. So there's probably some out there we've never heard of that might make some sense for us. But we continue to scour the market to try to see if there is something out there that can make some sense and hopefully something we can grow going forward.

So in some respects you're asking what don't you know. But I'm sure there's some things out there that will make sense as we move forward. And more, and more I think will start coming up as we continue through this cycle.

Okay. That helps, thanks. And one final one. Obviously, I don't know if it's Ed or Dave, but this large, large hedge gain sale you received early in Q3, expect, I assume significant amount of that to be spent, putting some hedges back on. But with the reiteration that you're comfortable with estimates that are out there, are we to assume that's also assuming that none of this gain falls through to the bottom?

Yeah, this gain, really you mark it to market. The gain on the swaps is pretty much fully loaded in the second quarter numbers. We sold those swaps in the third quarter for basically the same value they were at the end of the second quarter. You're not going to see a big gain come through on the sale of those swaps in the third quarter.

Okay. That's what I was interested in. Thank you.

Yeah, but you know you bring up an interesting point we have been for the past three years we put in that we're comfortable with analysts with the range of estimates which you can actually drive a truck through right about now. We've done a study, and really there's not a lot of people out there doing -- even doing that. So just so everybody's forewarned.

That's the last time that we're going to -- we're getting out of the guidance business. We're not going to put anything in it going forward. We think that's prudent, our attorneys have told us that's really the route we should go. So we put it in this time because we believe it. But that's the last time you'll see it and we don't want to surprise anybody if it's not in there next time that we don't want you reading anything into that. We think it's good corporate governance and have decided not to do that going forward. So, forewarned is forearmed.

Thank you, that was probably wise to forewarn us of that. Thank you much.

Your next question comes from John Rowan with Sidoti & Company.

Good morning.

Hey, John. How are you?

Good. Dave, can you just kind of tell us. The motivation for eliminating the swaps, was it more, to eliminate the earnings volatility? Or was it more, did you find it to be ineffective when you were going to lock them in on the long haul method?

I think economically they were very effective. What we were finding was that from a FAS 133 perspective, the thoughts from the accountants and the SEC are continuing to change a little bit. And what people thought was an effective hedge a year ago, people are now questioning whether they can be effective now. And as you know, we've restated because of that issue. And there's been some other evolving issues that our accountants have said they're talking to the SEC about related to some of the attributes of the swaps that we have on there. And they're questioning whether you can even get effectiveness out of it.

So from what we're understanding is, the way we have these hedges structured is, you may not be able to get them to be effective hedges under 133 from an accounting perspective. From an economic perspective they were very effective. So we felt with where the interest rates were that if we can't get effective hedge accounting that we should, we should sell them and take the gains and take some of that money and reinvest them at the appropriate time to buy some new swaps. But it was really --

A big bond swap is what it was.

Really, we didn't want to have the volatility going forward at the interest rates, the ten year comes down to in the 4.90s, or something. That would be a very expensive proposition for us from a market value perspective. So we decided that given where rates were and given the volatility in the marketplace and the rate environment and the way the world stands right now it was more prudent just to get out of them right now and go back in and buy some more plain vanilla hedges that you could certainly get the long haul method applied to and enter into swaps down the road.

Our timing was, we were fortuitous in our timing as the ten year has dropped off pretty dramatically from when we actually executed that transaction. Which will make our, as I called it earlier, little bond swap related to the, tradition, the old days where you do the bond swap calculations. We'll make this even more effective for us. Monetizing those things made a heck of a lot of sense. And we'll be able to lock in at still very low rates and onward.

Okay. And just looking at the mortgage banking income. Obviously there was an increase here in the quarter. And you made a comment in the press release that traditional mortgage banking income is decreasing, but you had a $1.1 million increase in the quarter from the change of the market value of mortgage banking derivatives. What should we expect from the mortgage line going forward?

Well -- you can tell me where interest rates are going forward, John, and I could probably give you a little bit more heads-up there. That derivative is really -- when we close on loans with our customers, we hold them in the pipeline, for three days, five days, ten days, twenty days. Whatever -- however long we have to sell it to the end investor. And what that derivative is that we referred to in there is the value of that, commitment to deliver those loans to the end investors. We do it on a best, on a basis where we're not doing forwards or anything like that.

It's just best efforts, but the accountants tell you that even though they're locked in to the end investor, that you've got to value them. So that number is constantly moving around as rates go up and rates go down. It's a quarter end, we have the gain. If rates go down, that gain gets bigger, if rates go up, that amount goes negative.

But the interesting thing about that, is after you close out those loans it goes away.

Yes.

It's a calculation you've got to make at tend of the quarter based on what you're holding in the pipeline that's really going to be sold in three days. It's really a nonevent. That derivative aspect is an accounting derivative that closes out within four days and we only do the calculation once because the accountants make us do it. It closes itself out. It isn't even monetary because every one of those loans is sold already. And there's really no risk in the transaction itself. Does that make sense to you?

Yes. Just one more housekeeping question. Dave, do you have the balance of CDs that are greater than 100,000 at the end of the quarter?

I don't have it handy here, John.

Okay, well, thank you.

Your next question comes from Ben Crabtree with Stifel Nicolaus.

Yes, thanks. Couple of questions. Ed, you mentioned that the -- you'd hired additional banking teams in the second quarter. Be curious as to how many bankers there might have been there, what the timing was. I guess the issue being, how much of their costs were there. I assume very little of their production was in the quarter.

We brought a team on for St. Charles. With the transaction buying Hinsbrook in the fourth quarter, we will do -- we'll do what we did with Northview. Three of the branches of Hinsbrook will be merged into Hinsdale Bank. Another one will be merged into our Wheaton Bank. We're going to flip the charter out to St. Charles, Illinois, where we don't have a presence right now.

We basically hired the president and entire lending staff for that organization because that's really going to be almost like a new charter. So that was a big expense. They came on about the beginning of the quarter. And then there were, there was another team that they came on also. We continue to look to bring these folks on to augment our lending staff. Really, none of their production has been included. But the guys in the first quarter, their production has been included in and they were very fruitful in terms of helping us get that momentum that you saw in the numbers. So we'll continue to do that.

And overall, Dave, told you, quarter to quarter, the actual salary number was down. We did some other things on the salary side of the equation, every time the bank hits $100 million you really -- you go and you reinvent it, and you have to go in and we did some things we don't normally do. We usually have let attrition take -- our culture is allowed attrition to take care of things and the like. We did some rationalizations, some right-sizing, whatever you want to call it, which is new for us. But that's the kind of -- we're going to have to bite deeper now to work our way on the expense side to work our way through this part, this phase of the environment.

Okay. Thanks. I guess, maybe kind of a philosophical question or something about the premium finance business. You mentioned in your discussion about what had happened to spreads of that business, is this a function of new competitors entering the market and are there significant barriers to entry to this market? Has the whole supply-demand picture changed in that business?

I don't think it's a function of new competitors coming in. We really don't see that. I think it's the same thing that you see across all earning assets. That everybody is out there looking for yield and with the yield curve the way it is. With the amount of liquidity that's in the market, everybody is diving in and trying to get more and more -- everybody's in the same position. This is a good business. Rates have moved up. They have not moved proportional to the rise in rates. New competitors, we don't -- we're actually growing and growing nicely. But it's it's just tough out there. Everybody has taken credit spreads out on the market too.

So if you figure we're down 300 basis points, Ben. 85 basis points relates to late fees that we normally would get, but credit quality is so good right now, and some of that's our own -- we're -- our systems get better and better, and that's our own doing, but some of that is obviously the market across the board is better, but the rest of it is, it's just kind of a feeding frenzy out there that it's going to take a little bit of a credit crunch someplace to get everybody back in line to realize that there is risk in this world.

And that would be a statement that would go both for your end market loans and the premium finance business?

Yes, sir, I think you see the same sort of proportional decrease in spreads on our end market loans, even the ones we're bringing on, prime used to be prime. Gave you best customers, means nothing anymore. The pricing has come down and spreads have come down because no one is pricing credit into the equation. In our opinion. We'll see how that shakes out and we're going to -- we'll ride through it.

Okay. Thank you.

Your next question comes from Kevin Reevey with Ryan Beck.

Hey, guys, how are you?

Hello, Kevin.

Ed, can you talk about the competition for new hires? And do you see -- have you seen that intensifying, and if so, how do you plan to deal with the heightened competition for new hires since I think it's going to impact your ability to grow organically?

There's always been competition for new hires. I think that, our approach, our culture, the way we're structured, the entrepreneurial style that we have, the ability to build the business is so much different than the people that we have to compete with that we're able to get our fair share. I don't think on a relative basis that the competition is any more, I think it was probably higher in the first quarter with some of the competitors doing some things we heard about.

But for us to find the right people, somebody who -- it takes a certain type of person to come into our environment and to be successful. If your first question is who types this for me and who gets my coffee, you're in the wrong shop. You want people who are going to get down. We're looking for linemen actually, we're not looking for star running backs. We want guys who get down and put their head down and plow through it and really want to be a significant part of building a business. And not many of our competitors are able to do that. And giving them the freedom and come with our culture that lets them grow professionally and be what they want to be.

We try to take all of the politics out of it and we're just, big ten Midwest sort of culture that we run here. So I think that differentiation from maybe some of the biggest banks who are always trying to hire is important for people. If you've been through that cycle. Again it's that certain type of person, and we still -- we still have the ability, if you look at our growth and the number of branches and the banks that we've opened. We've been able to staff them pretty well. And we don't see any inability to do that going forward.

And Ed, have your new hires, have they been coming mainly from the bigger banks?

Well, predominately, yes. I would say yes, but many of them are people who were from smaller banks that became bigger banks and then want to come back to the smaller bank environment. Our new president out at the St. Charles organization, is a lifetime banker, but he came actually from a smaller bank from a de novo bank that had grown very nicely, but he wanted a bigger challenge and to come over here. So we really -- culture is the most important thing. We bring a guy who spends too much time at a big bank, it will take us a year to reindoctrinate him. But they usually drink the Kool-Aid and come on board, so -- majority from larger banks, but most with smaller bank backgrounds.

And then can you give us a little more color on your regionalized marketing plan that you talked about earlier. How are you going about it? Do you have any milestones in place to track success?

Well, it's not going to occur really, we don't think it makes a lot of sense to do anything now, because, like you, everybody goes on vacation in August. So coming in September, that marketing will take place. Each of the banks is -- remember, we've got banks that are six months old and we've got banks that are 15 years old. Each of them will have their own individual milestones because each of them will have their own individual capabilities.

So we, as we do everything, you push it down to the operating level and all of those people will have their bogeys they need to hit both on the deposit and the loan side. Right now the advertising and the marketing is being completed. This is a business where references and call programs are very important. But again, you're going to need something to differentiate yourself. And I'm not going to tip my hand to our competitors, but we think we've got some interesting things that will provide some differentiation in the marketplace that will let us stand out. We're excited about it, it's kind of fun.

And then one last question, which is a housekeeping question. What was your period end diluted shares outstanding?

Well, common shares outstanding, just the shares themselves at the end of the period were 25,619,231 shares, and the common share equivalents were roughly 900,000.

Great, thank you.

Your next question comes from Casey Ambrich with Millennium.

Hi, Ed. Thanks for taking my question.

Hey, Casey. How are you?

Good, good, thanks. Listen, could you kind of, I know you're trying to get away from giving guidance, but last quarter the consensus estimate was $3.11 to $3.28. Now it's $2.81 to $3.12. People are looking for cores around $0.62-ish for the quarter. I'm just trying to figure out what you think is a reasonable core number to set estimates low enough, instead of kind of having this $0.20, $0.30 bleed every quarter. You know, I don't want you giving guidance -- I know it's kind of a dangerous game to start giving guidance. But the problem is people don't know what the core is. You said yourself that's why there's such a large band of estimates.

Right. But you know, we're not going to give guidance.

So what do you think the core number is for the quarter, then?

$0.62, $0.63.

$0.62, $0.63?

The AAAP number, the Analyst's Accepted Accounting Principle? $0.63.

Okay, that's all I need to know. And one last thing, what do you think is a reasonable kind of growth rate?

Well, we drew $0.05 or $0.06 depending on how you estimate it on core numbers last quarter, and so that's history. You can go back and look at our history and see what you think there. But investments will start paying off and, -- you guys have to figure that out. That's --

Okay. So $0.62 and $0.05 to $0.06 per quarter of earnings growth until the environment kind of improves?

Unless we're really good.

Okay. Okay, great. I mean, I think that's going to all balance. Because there's analysts -- there's estimates out there of '07 of $3.60, and it seems like, that might be a little aggressive.

Well, you never know. So much of it is now controlled by the outside. The flat-yield curve, the spreads in the marketplace, things that we can't control. So a lot depends on interest rates, a lot depends on a lot of different factors. And it's, as I told Steve earlier, I wish life were linear then my handicap might not be going as high as it is. I don't want to play the 20 my whole life. I'd actually like to play again. But it's not linear. And this is a very fluid environment out there right now. It's a lot of moving parts out there and there's a lot that you can't control if you just -- so I said at the beginning of the thing, you start with good sound basic credit -- credit culture and you stick to that and you build off of that.

Okay. Great. Thank you very much for taking the question.

Your next question comes from Ron Peterson with Sterne, Agee.

Thanks, good morning. Just wondering if you could give us some color on what category the loan growth is coming in this quarter. I see that the mix hasn't shifted a lot in your loan portfolio, but obviously Hinsbrook would play a role. I was wondering if you could provide some color on where the recent growth is coming from?

Well, I think if you look on, page 13 of the release, we sort of show where the mix is at. Obviously commercial real estate was one of the larger areas this year. We're actually down a little bit as far as the mix goes in home equity and residential and alike. So the commercial, commercial real estate is clearly the largest area. I mean, home equities are up a little bit, but not much and so they've dropped in the mix.

But from the end of the year, commercial, commercial real estate is up 40%, premium finance is up 30%, and direct auto is not a big chunk, but that's up 30%. And so it's pretty much, other than home equity lines, it's pretty much across the board with more emphasis on the commercial, commercial real estate. Hinsbrook was very much a commercial real estate driven company, so the vast majority of their loans were in that category.

Okay. And with regards to the brokerage subsidiary, you switched to the third party servicer third quarter of last year, have you seen pretty much all of the cost savings you plan to get from that? And should we expect any improvement in that subsidiary coming through top line growth? Or is there more cost savings to be had?

Well, in the first quarter as I said earlier, we had some severance costs there, so some of those costs went away. I think we've, right now, right-sized it or rationalized it like we think we should. And so it is the top line revenue growth. What's really encouraging is that the brokerage that we put into the banks are growing their books of business substantially better than the traditional broker model that we had in the downtown office

And we're in the -- we're in these great markets, we think as far as wealth management goes. And so as we get more and more of these brokers hired and out into the banks, and they are able to pull their book over, and get integrated in with the banking staff, we do hope that we'll see this top line revenue growth drive it. But we'd also, as we've said before, we're going to try really hard to try to convert some of the brokerage accounts to asset managed accounts. We get rid of some of that volatility in the trading income going into fee income.

Just to put some numbers to that, the brokers that have moved out, now financial advisers, they're no longer brokers as we move our model from, the next step is to move it from commission-driven to more asset driven like everybody else has done. This conversion is a lot more than just a systems conversion, but the fellows that have moved out into the banks, they're up 55% year-over-year in terms of production. It's a very fertile market, it's starting to take hold. Those are the types of numbers that are going to help our recruiting to get people out. And we're probably only full service in, we've got 72 locations. We're probably full service in about 8 of them right now. There's plenty of opportunity to grow there.

And I think that people start looking at those numbers and look at the systems now, we have state of the art systems, we've got state of the art comp, you name it, we've got it. Same or better products, same or better delivery systems, and we should be able to recruit very well into that. We hired Tom [Zadar] to come in and manage that. I wasn't doing a good job and we need someone who knows that business to come in and help Jim Duca do that, but these numbers are very compelling and should aid in us getting these financial advisors to move over and hopefully bring a little bit of their book of the customers that want to follow them.

But it's good feeding grounds here, as we have very little customer overlap with the old hummer, and we are committed to that business. Again, we're going to grow that business, and we're going to do well at it. The commitment is there to do it. The pieces -- I sound like Dave Wannstedt and the Bears, the pieces are in place. I think after he said that, though, we had a very bad season. Maybe that's a bad analogy, but it's moving along and there's reason to be very excited about what's going on there.

Okay. Thank you.

At this time, there are no further questions. Are there any closing remarks?

Well, it wasn't as bad as we thought it would be, so we'll do it again next quarter. But thank everybody for listening in and onward and upward for Wintrust. Thank you.

Thank you, this concludes today's Wintrust Financial Corporation second quarter earnings conference call. You may now disconnect.