Wintrust Financial Corp (WTFC) 2006 Q4 法說會逐字稿

Good afternoon. My name is Jackie, and I will be your conference operator today. At this time I would like to welcome everyone to the Wintrust Financial fourth quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you. Mr. Wehmer, you may begin your conference.

Thank you. Good morning. Welcome everybody to our conference call. If our voices seem a bit raspy to all of you today there is a good reason for it, it was a little chilly in Soldier Field yesterday but it was very exciting. So Mr. Dykstra and I both are going to be speaking with a deep voice today. Our format, Mr. Dykstra, and Dave Stoehr our CFO are here and our format in keeping with what is now our customary approach; I will be making some comments on the quarter and the year, and Dave Dykstra will follow up with some specifics and as usual cover all the things I probably will forget to talk about.

First and foremost as we always talk about comment on credit quality. As you know, we consider credit quality to be the most important thing month-to-month, quarter-to-quarter on the top of our agenda. Fifteen years of a good credit cycle can make us all tend to forget that credit is what can sink banks, and we continue to be relentless in our search for credit quality. And I think as of the end of the year and the quarter our portfolio remains relatively strong. Charge-offs for the year were 9 basis points for the quarter, were 7 basis points at the end of the year; our nonperforming loans were $37.8 million or 57 basis points. That is really consistent with prior quarters and prior years. A note that was noted in the press release is 4.5 million of that had rolled off on the 15th of the month, 4.5 million, two deals, one was an administrative deal, and the other was a loan that had paid off. So we continue to see good velocity through our nonperforming assets. That is important to us that we identify these things early, we deal with them and we move them out. We don't want to live in a world of denial, and I think we continue to do a good job and we will continue to be relentless in that.

Now onto the year and the quarter in review, I think the quote that is in the press release probably says it all for us; the quarter ends a very uncharacteristic year for Wintrust. Although we achieved franchise growth consistent with prior years and maintained credit quality, overall profitability was down for the first time in our history. The disadvantageous yield curve, a loosened lending environment, devoid of credit spreads, overall market liquidity and our response to this environment have combined to adversely affect financial results.

In our opinion our return on assets and equity are levels that are totally unacceptable to us and quite frankly and personally I am embarrassed by them. We are doing a number of things this year that may seem uncharacteristic but you have to remember that we've always tried to take advantage of what the market, the overall market gives us. We have initiated some steps this year to get financial results back to acceptable levels. Deposit pricing discipline is utmost in that approach. I think in the quarter our earning assets were up 11 or 12 basis points but our deposit pricing was up 18 basis points and that is what hurt that minimal decrease in our margin, but deposit pricing discipline will be extremely important for us.

Expense control and our commercial lending initiatives should help us get better results. Again we will not change our core underwriting standards as we believe we would simply be trading future earnings for -- current earnings for future problems. This will probably slow down our growth a bit this year, but that's okay. We have always thought, we have made a number of commitments last year -- we really opened the Old Plank Trail Community Bank which was off to a very good start for us. When we bought Hinsbrook we spun-off the Charter to the St. Charles that technically was really another startup bank for us, and we opened up a number of branches last year also. Those had all been definitely committed to. There had never been a problem that we couldn't grow through. But as the fourth quarter will show you that we had to grow like that just to stay even. Our goal is that we would really like to cut our relative cost of funds by 20 to 30 basis points, get the yield on earning assets on a relative basis up 10 to 12 basis points and another 5 to 7 or 8 basis points on other income and expenses.

We think that that gets you 40 to 50 basis points pretax earnings growth. We think it probably will cut our growth in half of what you are used to seeing for us. But I think it is just most important for the business to make some money, we have to hunker down and get our primordial statistics back into line. Again, we were unable in this environment to grow into prosperity. So what we will do is in the bigger more mature banks where we have number one or number two market share, we will be cutting back, and I think the environmental cutback also on this. You all know better than I have seen a number of the results come out where everybody is suffering from margin compression. And I think you'll see a little bit of rate day tax going on on the deposit side of things. If we don't we will just be smarter about it, but we do need to cut our cost of funds 25 basis points relative. And I think after fifteen years of pretty staggering growth if you look at it, it is okay to take a year or so until the environment changes to turn inward and just concentrate on profitability this year. And that is exactly what we will be doing.

The extra capital that we generate we will use to complete the stock buyback that we had announced earlier last year. I think our stock at book and a half for this franchise is very cheap right now, and we will be continuing to buy our stock back during a period of growth that will probably be somewhat stunted. We still this year probably -- what the approach will be is, as I said the more mature banks will pull back, but the banks that we opened where we need to gain market share and to grow into our overhead ad we will still be somewhat aggressive down there. But again, I think that will result in probably a half the growth you are used to but, if we are able to achieve those profitability goals that we talked about there, that is all internal. That is all under our control. (indiscernible) better salespeople but I think we will get our numbers back in line and when the market turns we will be able to go back to doing what you are used to seeing us having done. We don't want to stop the boat entirely. It's like stopping a freight train on the growth side to get it going again; it takes a lot of effort and energy and changing culture but I think this is something that we can do to get us back to levels that are appropriate.

A quick comment on our other businesses. Our First Insurance had another very good year in the face of what is a softening market there. So they are not immune to the environment as it stands; we have a softening insurance market, and we still have spread pressure at First Insurance brought about by the market. But they still -- First Insurance had a record year and anticipate having another record year next year even with that environment I mentioned. We picked up -- I might have mentioned this before, but we picked up the endorsement of the second-largest association, Insurance Brokers Association in the country. And we also picked up two new national relationships as that market is somewhat consolidated, we've seen some shaking loose of some of the old guard, and we've been able to pick up good relationships there. Hired probably five or six more salespeople. And we think that although as I said a tough environment the [2000] would be a pretty good year for First Insurance; their credit quality remains very strong also.

On the wealth management side I feel better about this business every day that goes along. Tom Zidar joined us in June to run the organization. He has taken six months to really get that last piece of culture change. We've started recruiting again. I think last year again through our bank distribution networks revenues were up 45% to 50%. So we think that that sells now and we are recruiting very heavily into that market. And as we fill out our franchise with wealth management we think we will do very well in the (technical difficulty). I am feeling better every day.

On the mortgage business that is -- we take a little hit on mortgage servicing rights, but that is going to come and go another accounting issue that makes me sometimes wonder why I've got an accountant at all. But mortgages is a business that we think we're very well positioned to take advantage of the ups and downs of the marketplace. And we're hoping for a better year in that next year. Tricom is steady as ever, credit quality remains very good.

In summary, it was a tough year. Somewhat brought on by our own reaction to the environment, but I think I would rather be conservative than not in this environment. And we think that this is the right course of action for this company at this point in time. This is to really push the profitability and dive deep inside and something we haven't done in the last three or four years. And I think that we will do very well in getting profits back on track. It's a controllable issue; require us to be good salespeople but that's what we do, getting profits back on track is a major objective this year. Dave.

I will spend a little bit of time comparing this quarter to prior quarters. And talk about the margin and the influences that are affecting the margin. I think it's interesting to note that if you look over say the past five quarters our margins really only fluctuated by 5 basis points from the high to the low end. Despite the environment we have been able to maintain a relatively steady margin.

If you drop down to the provision for loan loss basically stable with the prior quarter; again credit quality has been very good, knock on wood, and we don't see anything that would indicate that there is a significant change coming down the pipe as far as provisioning goes.

On the wealth management side revenue is basically flat with the third quarter of this year, is down just slightly one basis point. Mortgage ranking revenues was up 11.8% over the third quarter and was our highest quarterly amount in 2006. In addition we had a fairly good pipeline of loans at the end of the year. So it is obviously dependent upon rates. However, we're working hard to get more production out of our bank facilities where we really do have enhanced distribution channels. Our customers like doing business with us and if we can get more people into those locations we are confident that we can keep that revenue in a pretty positive sloping curve if the rate environment doesn't change substantially.

Service charges on deposit accounts and gains on security sales were really very small fluctuations from prior quarters. The gains on the premium finance receivable, we had a small gain of 165,000. That really just represents a cleanup call on sales that we had previously done, that had concluded. We again sold an all premium finance loans in the quarter and our plans don't contemplate a sale on the first quarter of '07 either.

Administrative services revenue represents the revenue we generate from Tricom, our subsidiary that performs payroll and cash management services to the temporary staffing industry. That revenue remains relatively flat with prior quarters. We have seen increased sales from our Tricom subsidiary, and we are positive about that industry although they are seeing similar competitive pricing pressure. So the increased sales really has been offset by tighter margins in that business also.

If we drop down to the noninterest expense side, in total it only increased 476,000, less than 1%. The entire category represented 2.51% of average assets, which is the lowest level over the last five quarters. But it's really basically been stable with all the other quarters of the year, it's down just slightly in the fourth quarter. There really were no individually significant items to note in any of those categories that I will comment on. So overall every major income statement category was basically flat with the prior quarter, and Ed's comments of what we're going to do to get those ratios improved going forward are on point, and I think we can open it up to questions. Well just one more thing, I guess. If you think it through it and you go well, okay. You guys are going to slow down growth a little bit -- we are not going to slow down growth on the earning asset side, we are still going to try and look and build our loan portfolio up.

If we start pushing through that 90, we've always said we will run at 85 to 90%, we might push through that a little. There seems to -- but we always go back to selling premium finance loans. So we're not slowing down on the asset side, we would like to get more on the loan side out of the investment portfolio. And we can always go back to selling premium finance loans if we have to, we do not think that will occur or be an issue until the third or fourth quarter. Or be a good issue to deal with because it would show that our assets had grown nicely and would be able to get our cost of funds down again that 25 basis points relative. So if we are able to achieve all of this, which I think if you ask any of our CEOs right now they would know exactly what the game plan is and we've already instituted a lot of us, that hopefully we can get back to good numbers going forward.

And again, when the market changes we will still be in a position to go back to growing in manners that you've grown accustomed to see us grow. So with that, I am happy to take questions.

(OPERATOR INSTRUCTIONS) Andrew Collins.

Good morning. On the average earning assets growth going forward can you just talk about what percentage that might be in terms of investment securities? I know it is a little bit tougher to put those things in that to be accretive to the margin.

We're hoping -- what we think will happen is we cut back relatively on our rate environment, our more mature banks, our growth would probably -- we're figuring it might grow to half of what you are used to on an organic basis. When that occurs, and at the same time we are building up the loan portfolio that the investment portfolio actually decreased. They are not [broke.] We are hoping to change the growth we have, put it in the loans and some of the investment portfolio we have right now and put it in the loans.

In terms of your loan growth, I guess a lot of that would be premium finance receivables as we've seen so far this year, or are there other categories that might slow in terms of their lack of growth, if you will?

We will expect the premium finance portfolio to grow. They've been growing around 10% a year. That would take their -- I think they did about $3.24 billion of that paper this year. They do 10% growth that gets them close to $3.7 billion. So I think you could kind of -- that's kind of what they've grown at and what we would anticipate growing at this year. The market on the asset side still remains tough, both -- we just we lost a deal the other day that was almost seven times cash flow. It was taken away from us at 140 over LIBOR with, they call it now there is a new term out there which is -- they call it "covenant light" which basically means you have absolutely no covenants. So it is still kind of tough out there, but we're seeing a couple of things. We're still seeing a good volume growth through our banks. The commercial initiative that we talked about really cobranding the Wintrust [names] right now and getting out and telling people what we are all about on the commercial side of things, how we can compete as -- this is one of the largest banks headquartered in Chicago. We had good results with our first foray into this; we're moving into the second foray. We think that we will be able to garner some business just because of our local nature and our service aspect of us.

Again, we are also seeing some of the deals -- it is kind of interesting, there is about a one year gestation period on some of these deals that we lose for price and terms where people come back and they say, you know what, we will pay the extra quarter and put the terms in just to get service again for crying out loud. So there's kind of a turn there which is kind of interesting, but we still think in spite of a very tough earning asset environment that we should be able to grow loans at levels that you've grown -- the core loans at pretty good levels. That is the plan, at least. As I said, the market is awful tough, though.

Then just secondarily on expenses, can you give us some flavor for what initiatives you are taking in '07 to maybe reign in expenses a little bit, and if you have a goal in terms of operating leverage that would be equally helpful.

We're doing a lot of things on the expense side of things. There is a -- in a growth company a lot of times you do a lot of things -- you anticipation of growth that our more mature banks will be cutting back, so you can kind of cut back for a period of time. We always look at salaries and at occupancy and other expenses. And I think all three of those areas can be cut back. They're different at each Bank obviously depending on the size; some of the banks will still be growing into overhead as we said. But I think in all three areas we have -- you know when you're running real fast and growing and putting up good numbers and you're planning for future growth you do have some overage in there. And we are looking across-the-board. When you say, what are you looking at? We're looking at everything. We are looking at correspondent [trees]. We've been at La Salle forever; we're one of their better customers. We are repricing everything there and (indiscernible) taking that out a bit. We are looking at more doing more things on a consolidated backroom basis, little things that might have slipped. But if you think about it you've got 25 operating companies and kind of the challenge these guys was notwithstanding some of the larger items, but if each operating company can save $1000 a month, so $1000 in January and find $1000 every month, and multiply that by 25, you're talking about $4.5 million, $5 million that you can pull out of operating expenses. I think those numbers are there for us to pull out.

There are some areas on the occupancy side that we'll be working on that we can rationalize some space better and rent some additional space and keep that number in check. And on the personnel side we will always look at that; we've never gone through a period where we've had the rightsizing or any of that. I don't anticipate us having to do that. Basically there are some areas where we are overstaffed but through attrition in the first six months of the year we should be able to get that done. But we will be -- it is more of a change from heavy-duty growth than investing in heavy-duty growth and some of the mature banks are bringing that backwards for a period of 12 to maybe 18 months till this environment changes where we will gear back up again. So I am not going to give you any goals per se. I kind of just sit across the board that relatively speaking we would like to cut our cost of funds 25 or 20 to 30 basis points. We'd like to get the earning assets up 8 to 12 basis points and 5 to 10 on the other income, other expense side. If you hit the middle of the road there you're talking 40 to 50 basis points that we just pick up; on our current environment that will be 30 or 35 after-tax. That is $30 million and then you're back kind of and you don't have a lot of growth -- you are back in the 95 basis point area. Notwithstanding hopefully some other positive things -- we are due, the due factors on our side for some positive stuff. And we are back at least we've got our numbers at a reasonable level, and we will keep working on that.

Finally do you think you've reached the trough level on net interest margins and how are you relying upon the yield curve in terms of going forward?

It is an interesting yield curve. We think if you are able -- again we hope we've hit a trough, but with the strategies we have in place, we leverage up a little more on the loan side, we will cut our cost of funds and hopefully we have been in a trough and the margin will start moving up. That is the whole game plan here. So what we are planning on -- I mean you have to run now usually pretty easy, but you have to run all sorts of multiple scenarios to make sure that you are covered. How will the yield curve get sloping again? Is one end going to drop or one end going to go up, is the whole thing going to go up? Is the whole thing going to go down? I mean the worst case environment would be the negatively sloped yield curve been a parallel shift downwards right now because then you would get the compression side built back in. Hopefully that won't occur, and we are trying to position ourselves to take advantage of any way that the yield curve moves. Only one that's hard to take advantage of is that parallel shift downward.

Ben Crabtree.

Good morning. Maybe a follow-on from Andy's questions but flip over to the funding side. If I look at how things changed from the third to the fourth quarter, it looks like the big pressure on the margin really came in the interest-bearing deposit line. And so kind of wondering what's going on there? I am assuming that what we are looking at there is a catch-up on the deposit side as some cheaper CDs roll over. The two questions would be one, do you have a lot of cheaper stuff that is going to role over, and is that going to be something we see in the first quarter? And the second question would be we are starting to pick up some indications that deposit pricing is getting a little more rational in some markets. I am wondering if you are seeing that in your Chicago markets.

Okay, two points, the first point is will we have lower-priced CDs. That is what occurred in the fourth quarter. So we did have a lot of repricing going on but with our new approach trying to cut that pricing out, drop that 20 to 30 basis points that hopefully you won't see that phenomenon occur again. Hopefully you will see stabilization and reduction over the future. I think that there is always going to be some outliers out there on the deposit side, but everybody has experienced -- everybody I have read their earnings come out has experienced the same issues, and they're going to be looking for -- I think you will see deposit side come down and as I said it will be deposit rate date (indiscernible). Everybody will just kind of lower a little bit but we are not going to wait for that. We are just going to go ahead and move ahead and lower our rates and get our cost of funds back in line. That is the one thing we can control here. It's very hard to control your earning asset side in this market right now. You try to be disciplined on it on the asset side, but you lose deals as a result of it, and so be it, you lose the deals.

But on the deposit side we can do it, we can afford a year of a little lesser growth and 25 to 30 basis points on $10 billion is a lot of money. And it's really the primary emphasis for us to get our numbers back where they need to be. So the other thing going back to your first question, too, given all the banks that we opened last year, the Old Plank Bank, the St. Charles Bank, the number of branches we opened, a lot of those CDs will be repricing downwards. They come out at a premium rate as we open the Banks and bring in bundled packages of accounts; we would anticipate those being repriced 30 to 40 basis points lower. So we hope that you will see our overall cost of funds -- the plan is that it will come down on a relative basis.

Okay, great. And one small question. Given the fact the premium financed loans have stayed on the balance sheet, what is the net interest margin impact of having those on the -- are they a wider margin product than the rest of your portfolio or similar, or less?

It used to be really wide margin portfolio. Used to come in around prime plus 4, when you took late fees ladies into consideration. But credit quality has been so good that our late fees are down to around 1.5 and the market itself has taken pricing out of the equation. So we're looking at prime plus 2.5 right now really is a rate, so it is still a very, very good rate for us and we are happy to get it.

But the impact on the margin in the fourth quarter wouldn't have been huge whether or not you sold them or kept them?

Well, I think it impacted -- the overall portfolio rate in the fourth quarter for premium finance loans was up 25 basis points. Keeping them did help our margin and it did help the overall earning asset side go up by 11 or 12 basis points. Where we got hammered was on that repricing that you talked about and really some disciplined fall downs in terms of pricing on the deposit side where that was up 18 basis points. Got to reverse that deposit trend. That is what we have to do. Concentrate on good building premium finance volume, building on the loan volume at good pricing and cut our cost of funds by 20 to 30 basis points relative. That is the name of the game.

Do you think that is a realistic expectation on the deposit side?

Well, yes. I hope so.

Jon Arfstrom.

Can you talk a little bit about your buyback appetite? I know you touched on a little bit, but do you have any pricing constraints and how far do you have to go on your authorization?

We bought I believe about 344,000 shares back through the end of the year. So the authorization was for 2 million shares. We haven't been going out and doing large blocks, Jon. We've been sort of doing daily purchases when the market was south of $48 a share, I think. So our average cost in '06 was at $47.50 a share. I think if we stay in this trading range we will continue just to buy back in the open market on a daily basis.

I had a question for you on the '07 budget process with each of your banks. Typically you have talked about so much in earning asset growth, so much in improvement return, an improvement in the overall returns of the Bank. What is different about that in the current year? It seems like it's going to be more about return and less about earning asset growth. And then I guess what is the reaction been from your bank as when you talk about some of the changes in the model?

The younger banks and the younger branches will still be in a growth mode. They do need to build it, growing into -- you only open once, you got to grow into your overhead, you got to take advantage of that. There is a momentum there that you want to maintain to keep those things building because you've got to get them to profitability. The other banks, stay grow at 4, 5% a year, that is just fine this year. You kind of -- the old rule was if you did nothing you grew at 4, 5%; every bank did just by compounded interest. So it is the same in some banks. It is different, same in the younger banks but much different in the older banks as we concentrate down. I think everybody knows, Jon, nobody is very happy with the numbers that have been put up. Again, the hardest thing is the self-infliction that we've caused. You get lenders out there who get a little bit frustrated every now and then because we won't do some deals. We're not going to do deals that we consider to be out -- that don't fit into our age-old underwriting standards. I think that everybody understands where we are and has taken this challenge on. They're not happy. They are all owners of this place. They think that way, they feel that way, we've got a great team of people. I think they are all looking forward to not getting, all have capped e-mails from Ed anymore on their performance. So we are -- I think at times when you are riding high you get sometimes you get a little cocky, and I think that everybody is down and we are not happy with the results. We know this is the right thing to do right now. We know everybody is on board; everybody is on board pushing and it's going down to everybody in the organization.

We will have a meeting. We probably won't do our -- you're off the hook, John we won't do our June meeting this year. We are going to have a couple smaller meetings where during the course of the year just up here, we will do it in an afternoon and again under cost cutting that we've got to set from the top here. But at the same time we will have more meetings where we will just continually monitor pulse, get the message across that those four things I laid out how important those are to accomplish this year. So everybody is on board and fired up; we're not happy with last year.

I think if I ever got a lower case e-mail from you I'd be very worried. Just one question on wealth management. Talk a little bit more about what's going on there, what has Tom done to change the culture, and what are your expectations for that business?

When we started the wealth management operation -- a little history -- built it up to about half $1 billion and we teamed up with Wayne Hummer companies, the 75-year-old money management operation, great culture, that they were going to be the customer first culture, same thing as we have, fits in very well with us. The problem was that they were kind of in the dark ages in terms of the platform that they offered. And what we originally did, we got put off on -- you've heard this story before -- is converting to the first clearing platform which within our self-clearing New York Stock Exchange member, that was all done in last year, year before last. So now, they've got a state-of-the-art platform.

What Tom has done really is to now take the culture and change the culture to more of a managed money culture, to more of a team approach to -- he has just done a lot of things that will change how we get our revenue out of the organization. And quite frankly, for all of the financial reps that we have, it is a better deal for them, too. It's just hard to get all the horses to change.

So not without some pain, we've been able to -- he in six months has interviewed everybody, is changing the culture, has put a plan forth that everybody has embraced. And I was unwilling to recruit people during that six months because I just didn't think it was fair to recruit people into a culture that was changing and say, here it is and say, oh, now here it's going to be.

That has changed and we're back out recruiting heavily, because the real issue here is now that you've got the same or better products, you've got the same or better delivery systems, you've got it priced properly so that everybody benefits from it. The real distribution system for us is proven when we get the guys out in the banks into those fertile fields, they go up 50% a year. It is easier to recruit into that now. We're recruiting into a culture that's not going to be changed on them, and we picked up two good guys already just this year.

So Tom is recruiting very heavily into that market so that we can go out and distribute through the banks. The banks are working very well with Wayne Hummer in the wealth management side of things. So it was a long time coming. It's a little frustrating, but we got it all together now, and we are building and growing there.

Okay. Thanks a lot.

Brad Vander Ploeg.

My voice is low as well.

Were you at the game yesterday, Brad?

I wasn't, but it was probably harder to not be at the game. A question about asset quality. It was very, very good during the quarter, which is commendable. I imagine that has a lot to do with the fact that you haven't been stretching for growth. But even some of the companies here in our market that have been careful have seen an uptick in nonperformers and charge-offs, and I'm just curious whether you're expecting any sort of different experience in upcoming quarters, any sort of uptick there, or if your being careful is likely to lead to similar experience in coming quarters?

When we budget, we budget 25 basis points a charge. We kind of figure that in a normalized environment -- what is normal -- but in a normalized environment, our credit culture ends up with 25 basis points in losses on average. I think if you go back six or seven years, you'll see we're kind of running there, and we've all had the benefit of a good economy and a good credit culture right now.

So we kind of figure if things go bad, that is where we would be, averaging out to about those numbers. We don't see anything right now. We are trying to be just relentless on credit quality. That's why I commented earlier on the velocity of deals that you identify them and you either get them up or out and push them through. You will see -- I always look at a number when I am looking at banks, recoveries to charge-offs.

To me that says how aggressive are people in terms of identifying a problem and then looking good on recovery, which is what we try to do; identify them, take your lumps and look good on recovery. We run about 30 or 40%, which to me is a pretty good number. I look at that very closely. I think the last thing we want to do is to get into denial, and I'm not talking about a river in Egypt. You don't want to get into denial because it (multiple speakers) all of a sudden you're doing fine, you're doing fine, and then you blow up and we can't have that. We just got to be honest. You got to know where you are standing. So we hope to just continue to identify things and push them through. There are still a number of financial institutions in our market who are ravenous in terms of earning assets. You've heard me call them the Mikey's, remember that old commercial give it to Mikey, he will eat anything. To the extent you can identify something early and get it out there is somebody out there that will pick it up while it is still breathing. So we try to do that. Sometimes it hurts us a little, but we are not right all the time but I think I would rather be conservative on the credit side. But we still look at 25 basis points is the average of where our underwriting would end up over a long period of time in terms of charge-offs.

Okay and one other thing I guess sort of implicit in your earlier comments about watching expenses, '05 and '06 were very rapid expansion years for you; a couple of acquisitions but a lot of de novo. And I would imagine it sounds like you are saying maybe more mature banks are not going to have as many branch openings, maybe we won't see a new bank. Is that the right way to characterize it?

That is the correct way to characterize it. I think last year we opened 11 locations.

In essence Brad, we had two de novo openings, like Ed said last year, and we've sort of said as new charters go, our premise has always been one every couple of years so this would sort of be an off year for a new charter bank.

And I would think if we did four to five new branches this year, and mostly smaller branches, I think what we have planned for this year are I think five, one of which is kind of a medium-size branch. The others are much smaller branches; more convenience type facilities that won't require full staffing. Those are the ones in the ground right now so you are talking about half the growth that we had in terms of branches this year. I think after 15 years of pretty mega growth and I think we've managed it pretty well, it is okay to take a year and to look inward and rationalize everything and build a good, strong earnings base to go forward. I think I have always said that we could stop this boat and turn the profitability pretty good. Now we've got to do it, we are not going to stop the boat all the way, but we will be slowing it down a bit while we really have to get our profitability back in line. But it will be a slower growth year.

Okay, and just on the Old Plank Trail bank.

Are you a customer yet, by the way?

No, I will be though; I actually have been in the branch.

Want a nice low-cost, low-priced CD?

I didn't get my brick in the ground, though. But I was just curious how the permanent locations are coming along and when those will come online and if there is some expense associated with that?

Yes, there will be. Two more will come online this year, and the Frankfurt one will come online next year. There will be some expenses associated with those franchises, those buildings, not so much -- I mean the people are all in place. There will be a couple extra people, but there will be some occupancy expenses that obviously come into play there. We have accommodated that with hopefully the savings we will get out of some of the other banks we are working with. But there is also a lot of rental space in that for room for us to expand and we are working to get those all preleased up and we think we will be okay in that regard. That bank is off to a terrific start. We've got a great group of people down there. We are very pleased with how that has worked and the reception that we've had down there to push through $100 million in footings in six or seven months is all-time indoor record for us and the growth continues. It is in that location, too, that a lot of the founders rate CDs that will be coming due where you will pick up 40 or 50 basis points on those as those reprice. So we are pleased but next year or this 2007 will be a looking inward year.

Peyton Green.

Just in going through some of the numbers there was about $1 million increase in personnel and about a $600,000 drop in professional. Are those good run rates, or there, I guess when is your annual recess in terms of base salaries and the like?

The base salary reset takes place on December 31st and January 31st. So there will be some increase there.

(multiple speakers) professional fees, they vary a little bit but we probably had a little bit more for anticipated some audit expenses and we trued that up, so that brought it down a little bit, it wasn't the full amount. Legal fees and some other professional fees also go in there. But if you look at the run rates throughout the years it has sort of been in the million to 1.8 million, (indiscernible) million probably a little lighter than normal than you are probably somewhere between those two numbers.

I think also while our restricted stock accrual will probably go down a little bit next year, more cash bonuses paid out this year, will be paid out as opposed to restricted stock. So I think that number will come down a little, too. So you might be at a good run rate now.

And on the BOLI side, is that -- were there any debts that you received gains on or is that just an increased asset or is there a change in the yield on the asset?

Yields are going up a little bit Peyton, and then we have one new policy that went on that increased it a little bit. But no [deaths].

Okay, so that is just the normal growth in the asset and a little bit of a reset? Okay, and then in terms of how you look at hiring through -- I guess you're existing offices where maybe you're a little bit capacity constrained, how do you view that in '07 given the focus on costs and the like?

I think on the lending side if we can bring in a good (indiscernible) lender we will continue to do that. There still is a bit of turmoil down at the larger banks in Chicago and there have been some pretty good feeding grounds for us. But we will continue to bring in lenders. A good lender can pay for himself with just bringing $6, $7 million worth of volume over with him. So that is a pretty easy decision to make. We will always look for good lenders to kind of we got to get back to being asset driven and have more assets than be worried about funding them. So that market still is pretty good for us and we were able to staff two de novo banks last year, and have brought on a number of lenders. We will continue to look to do that. And the other side of the equation we will be looking to make sure that we are rationalizing across the board on the operation side. So the market is still pretty good for hiring, I would say.

I guess on the trust and asset management brokerage side you mentioned that you all were reluctant to hire while I guess the management change was going on. Did you hire more in the fourth quarter, or is that really an '07 event?

Well, mostly expected to be an '07 event. We did in December did bring them out, but you won't see any production out of them for a little while. But we brought some folks on and will continue but in '07 we would hope to bring 10 to 15 new people on.

Okay, so that is not something that would have helped 2006 at all. It is really an '07 initiative?

Yes, sir.

All right. Good enough. And do you see I guess last question, do you see any slowdown in the pricing craziness on the loan side, or is it still pretty robust that people are taking a lot of credits that might be problems a year down the road?

I am in the camp of the latter; that it still is a little goofy out there. Maybe we're wrong. That is the thing I always worry about is maybe we are missing the biggest boom of all-times, but I don't think so. I think you've got to be true to your credit standards, you can't change them to fit the times. It just doesn't work so yes, we still see it being what we would consider to be irrational out there. We still need this new -- there is a euphemism for everything but they call it covenant light is just -- I mean you're giving it away right? Yes, we are giving it away. They are even making up new terms for this type of lending. So I don't know, I still think it is irrational right now. We will hold to our guns here.

And then last question on the I guess looking at pretax income over the last couple quarters to earning assets it has been at about the 110 to 150 basis point range on an annualized basis. Just wondering if you think you can get 40 basis points is it more back end loaded or do you think there is some changes that took place in the fourth quarter in terms of procedure that will give you some lift sooner rather than later?

Takes time to the portfolio over prices. It's going to take us over the course of the year to get that done, and the deposits reprice, some of it you can do right away. 10 or 20 basis points on certain categories you can do right away; certain things you can do on your earnings credits, certain things you can do across the board that help you right away but the rest of the portfolio will be eased into.

[John Rowen].

Ed, just to be clear here, when you say you're looking for 40 basis points of improvement in profitability you're talking about pretax income to earning assets?

I'm looking at 40 to 50 basis points in earnings profitability to total assets.

Earnings to total assets, okay. And then Dave, can you just go over quickly the --.

Here again, it is going to take time to work into. That is the ultimate goal.

Okay. And Dave, can you go over the increase in the mortgage banking, as well? I know in the press release it mentioned 149,000 in MSR amortization; then another $426,000 in derivative income. The $426,000 was in the fourth quarter, correct?

I think we had $75,000 in mortgage -- after tax, $75,000 income impact on mortgage derivatives, after tax in the quarter.

Okay.

If you look on page two of the release we show that quarter by quarter by quarter out there.

I was wanting to be clear on that. Okay. Thank you.

Ronald Peterson.

A follow-up question on the balance sheet growth. You talk about looking inward growth in the fourth quarter obviously was in both loans and (indiscernible) assets was somewhat less than what we've cyclically seen for Wintrust. Is this kind of like a growth rate you expect going forward or were there some unusual items affecting the fourth quarter?

I think if you look at some of the components of the ups and downs, you look at other liabilities and the like I think they were down $100 million. I think our growth on the deposit side was actually pretty consistent with what you've seen in non acquisition quarters, if you will. The balance sheet had some components that looked a little strange, but I think your guess is as good as mine. You can predict what you want but the reaction to our rate rationalization in the market is my guess is that we would be growing at about half the level we used to. So if you are a $9.5 billion bank we would usually grow $1.5 billion range I think that you would probably be about $500 to $700 million, is what I am anticipating would be our growth for the year. Filling out the younger franchises and the older ones if we weed out some CD hunters and the like, that's okay. I think this rationalization makes a lot of sense at this point in time for the market in the environment and in the market for us.

And as far as acquisitions, what is your appetite there? What are you seeing in the market currently?

Our appetite has always been when our stock -- when we were performing well and our stock was doing very well we took advantage of having that currency in place to do deals that would fit the parameters we've always talked about. Accretive deal in a market that we wanted to get into and a good culture. Our stock price right now is not where we would like it because our earnings are not where we would like them. So our currency being where it is that limits us a little bit. Prices are still pretty high for what we have seen in the market. I think it would have to be a really strategic move or something that was in an area we wanted to get into that might be smaller than you would imagine. We might be interested in doing something like that but I really want to focus on our profitability. I do not want to be distracted; we've done a deal or two every year for the past three years, we have opened a lot. I really want all the management to really focus on these three or four things that we are talking about here. Grow their own portfolio soundly, to keep credit quality sound, to rationalize their cost of funds, to make sure their people are at -- we have the right number of people doing the right things and we're getting performance out of the people that we have. That all of our other expenses are not getting -- I really wanted to look internally and just diet down and take this opportunity to reset the benchmark for us, reboot the machine if you will and get those earnings back where they belong. If we do that and momentum gets back on your side, hopefully your stock price moves with it and that opens up all these other doors again.

If you get the environment changing, then our theme song this year I told some of the guys is Steve Winwood's We Will Be Back In the High Life Again. And we will be. But I think that you need to, as I said at the beginning, give what the environment gives you. The environment has not given us good profitable growth right now; so we got to pick our spots, it is an opportunity for us to just get our earnings back where they belong.

At this time there are no further questions.

Thanks, everybody. You know you can always call any of the three of us if you have questions. And we appreciate your support. And we will be back in the high life again. Thank you.

This concludes today's conference call. You may now disconnect.