Wintrust Financial Corp (WTFC) 2007 Q3 法說會逐字稿

Good morning. My name is Calia and I will be your conference operator today. At this time, I would like to welcome everyone to the Wintrust Financial Corporation third-quarter earnings conference call. All lines have been placed on mute to prevent any background ways. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Mr. Wehmer, you may begin your conference.

Thank you. Good morning. Third-quarter conference call for Wintrust. Welcome, everybody. A little disappointing quarter for Wintrust, the third quarter was. We will keep our comments relatively short. I think our press release was very informative, and I think we would like to get to questions, as I am sure you all have some.

Really, if you look at the quarter on a core basis, the business was pretty good. The margin was up, good growth in the loan side. All the fundamentals are pretty good. The real two issues, as you noted by reading the press release, related to the mortgage side of the business. The fickle finger of the mortgage situation did not pass us over. And on the credit side of things, where our provision was a little bit higher.

Talk first about the mortgage side of the business. If you go line by line, quarter-to-quarter, it cost us $0.25. It was really kind of the perfect storm for the mortgage, with really three major components taking that into -- adding into that number, the biggest of which was a reserve we set aside for putbacks from our wholesale mortgage business. This was an area we substantially exited. We were not in it big time to begin with. We substantially exited it in the middle of the second quarter.

As you know, the mortgage companies out there are being very, very aggressive in terms of what they are trying to put back. Our objective is to deal with this issue just once and move on. There are a number of other -- a number of claimants. Also, you should know that there are also some other tactics we're looking at to deal with this issue. But we are in negotiation with a number of these people, and so sometimes if our comments seem a bit nebulous on that, I think you'll understand why. We are dealing with it as we have, and again, we do have a number of alternatives to deal with that.

The other side of the business, on the credit side, we have been saying for over two years right now that we felt that credit would turn. We underwrite our portfolio -- at least historically, we always think we underwrite it about 25 basis points of loss. Over the past few years, credit has been absolutely terrific, and we have been at 7 or 8 or 9 basis points of losses. This quarter, the losses were up a little and the provision was up a little to cover that. That cost us about $0.05.

So if you take the $0.30 on the mortgage, and then deduct the BOLI income we had from -- we lost during the quarter our good friend and chief marketing fellow, Bob Key. He had -- was a 20-year friend of mine and 13 years with the Company. He's a great loss to us, and -- but when that occurred, there was BOLI income on it that came back. But I think if you add those back and take a normalization of it, the $0.25 line-to-line on the mortgage and the $0.05, that the core earnings are actually basically very good.

On the loan side, growth has been good. You've got to remember the real estate side of the equation -- we have a lot of real estate loans kind of paying off and we are making up for that. So the quarter-to-quarter growth in loans has been very good when you take that into consideration.

On the credit side, just one more comment and then I'll turn it over to Dave Dykstra, who will go through some of the numbers. You know, as I said, for the last couple of years we have kind of been planning for this eventuality on the credit side of things. It is going to take time when your charge-offs, even if we go up to 25 basis points -- which would be more than a doubling from our historical run rates over the last two years -- it is still very, very conservative, given the market where it stands now.

The problem is that the margin, although up, is not keeping pace with this. It is going to take time for credit spreads to work their way back through to cover that. I think everybody would admit that there is a point to 1.25 points to 1.5 points of credit spreads that have exited the market due to liquidity and competition out there. It is going to take some time for those to come back. We have seen them come back. More -- the bigger spreads have come back, obviously, selectively in the real estate side of the business.

On the commercial side of the business, we do not see the spreads coming back as well as they should. I think from the herd mentality, people have moved away from real estate and now the competition is pretty heavy, given the competitive market in Chicago and what is going on there. But you've seen those spreads not move yet. I think you're going to see some more pain before those move.

But our margin keeps going up, a couple basis points, a couple basis points. It is going to take time to filter that through the whole portfolio on the spread side of things. But I would gladly give up another -- 8 or 9 -- go from 9 to 25 basis points in losses to get a point or 1.25 points in spreads. It is going to take some events like us in the overall market to make this happen. We've said that for a couple of years. We've tried to keep our powder dry, conservatively, that we can be the first out of this.

On a prospective basis, I said the core earnings are good. Expenses were very much under control and flat, almost three quarters in a row right now. So I think we have got a good handle on expenses. Our loan-to-deposit ratio has moved up from its low of around 79 to 92%. We're going to turn the growth machine back on to some extent.

On the other side, we are looking at the option of selling premium finance loans again. We will only do that -- and we're talking to a number of people who do it -- we'll only do it if we can get capital relief, because we would like to balance growth in earnings and buying our stock back. We still have over 400,000 shares under our current authorization to buy stock back and we would like to be able to do that. So capital is going to be king going forward, in terms of our balancing buying stock back with required growth to support the growth we're seeing back again in the market and rebuilding from here.

So with that, I'll turn it over to Dave, and take some comments on the numbers themselves. Dave Dykstra.

Thanks, Ed. Just a few things. As Ed mentioned, the core business is pretty stable with the prior quarter, and pretty much I think in line with what we've talked about in the past. The net interest margin was up a basis point from 313 to 314. Our core net interest margin, if you exclude the impact of the trust preferreds and the stock buyback program that we did, was up 3 basis points this quarter from 340 to 343.

We did buy back some shares during the third quarter, 579,000 shares. So as Ed mentioned, about 421,000 shares available under our program that we can buy back at. That does put some pressure on the margin, simply because we are borrowing to buy those shares back.

On the Other income side, pretty steady in most of the major categories. The wealth management area was down slightly, but that was pretty much related to the brokerage side of the business. Our asset management and our trust business increased again, and we continue to see nice growth there. The brokerage side is usually a little quiet in the third quarter as a lot of our customers are on vacation, and some of our brokers too. But it tends to be quiet in the third quarter. But pretty good growth on the asset management side.

Service charges on deposit account, administrative services from our Tricom area, and the other miscellaneous income areas are all fairly flat. As Ed mentioned, we had a death claim on the bank-owned life insurance, so that boosted that line item a little bit.

Fees from covered calls were at their lowest point in a long, long time, probably since we really started the program. As interest rates rise and volatility is low, the market really does not present itself with many opportunities to generate proceeds from that program. And with rates falling and volatility increasing a little bit on interest rates, the market probably is changing there a little bit. And we should hopefully see, if market conditions stay that way, some opportunities in the future.

On the expense side of the equation, as Ed mentioned, it is basically flat. Salaries and employee benefits were down a little bit, so we maintained those fairly stable despite some growth over the last quarters with branches. Part of that, as we mentioned in the release, relates to commission on mortgage banking business and a little bit to commission on the brokerage business under our wealth management side, that those commissions are down a little bit, which helped keep that number under control.

All the other categories are basically flat. We did note in this press release this time, we're starting to break out it separate, is the FDIC insurance. Those assessments are increasing. There were some credits out there that we've used up in the past that were available to banks -- certain of our banks, and those are expiring. So that number has increased a little bit. And without that number, actually, I think we kept expenses very much in line and actually reduced them $932,000 during the quarter.

So pretty much a steady quarter on the expense side and a decent quarter on the margin side. And the Other income sides are pretty much in line with what we would do for our core businesses.

On the balance sheet side, again, we have been working on our deposit mix, and deposits stayed relatively flat during the quarter. But we are working on getting the certificates of deposit down a little bit and moving those to other deposit classes where we can help control our deposit costs, and we continued to do that a little bit during the quarter.

So with that --

Just there is one thing I forgot to mention -- it's Ed again. We mentioned in the press release that in the fourth quarter we will have approximately $5 million of pre-tax onetime gains. In my mind, that pretty much offsets the reserve we put out there. Those gains relate to we had taken up kind of a stakeout position in a bank that was acquired by one of our competitors, and we were able to record a gain on that.

We also had some land that we had acquired for future development where we got an offer we could not refuse, and we did not refuse it, and it is under contract right now. So we anticipate that those onetimers that probably would have gotten credit for in the fourth quarter pretty much offset the reserve that we have had to put in place for the other side -- for the mortgage side of the business.

So I did want to mention that those two will technically offset pretty close, and we can concentrate then on the core business and deal with these one-offs as one-offs -- when is a one-off not a one-off? We hope these truly are one-offs. On the income side, we will take all the income we can get.

With that, we can turn it over to questions.

(OPERATOR INSTRUCTIONS) Brad Vander Ploeg.

A couple questions, maybe just first starting on sort of a smaller item. The gain on sale of premium finance loans. I know you have been portfolioing more of those lately, and I see that third quarter looks like you kept them all. I'm just curious what your outlook is for that going forward.

Okay, really we've been keeping them all for over the last year, I think. And what that gain line has been has been the cleanup of previous sales. We've always tried to be conservative in our recording of those gains and there have been cleanup provisions that required providing more income. But those are pretty much all off the books, so that number has been zero.

As I stated in my comments, with up to 92% loan-to-deposit, we would like to start the growth engine going in our banks. Again, we have a growing the smaller banks while shrinking some of the bigger banks and bringing our cost of funds down. I think there is a balance here.

We would like to find a way to sell whole loans where we do get capital relief, because we are -- we do still want to run at 85 to 90% loan-to-deposit. We do have very good loan backlogs rate now. with the market where it is and with some of the people we have hired. There's good loan backlogs. And what we would like to do is find that balance, maybe starting with slower growth, but sell off some premium finance loans. Which obviously would put us in an optimal position, recording some gain on sales, but still having the margin increase due to mix purposes. So that is something we're working very, very hard on in the fourth quarter.

Critical to it, though, is capital relief, because we would like to take that extra money and continue to buy our stock back. But right now, as we said, we have 400,000 shares -- plus 400 available to acquire, but we do have to manage our capital and our growth. And selling premium finance loans in the future will be -- can be an integral part of that.

We're hoping to close in the fourth quarter the acquisition of Broadway Premium Finance, which should bring about $65 million more of premium finance loans on the books. Those are usually yields that are higher. The Broadway business is the business that is one lower than the business we're in right now in terms of average ticket size, but the yields on those are probably 600 basis points higher than what we're getting right now.

So that ought to be very beneficial to us. And I think that we can get a nice mix of the premium finance loans on the books, sell some premium finance loans, get the gain, fill the hole that is left there by the backlog that we have. So that would bring earnings up and we can also then keep capital (inaudible) to buy our stock back and supports getting back on the growth treadmill.

Okay. Then in terms of the margin outlook, maybe, Dave, it seems like there are a few countervailing factors. Your balance sheet is a little bit liability sensitive, which should be good in this environment, but then you've got increasing nonperformers, which does not help. And I am just curious what your outlook is for the margin. Is it stable? Is it modest pressure?

Well, although our nonperformers went up, they did not go up dramatically. It is still just a handful of loans, and we're still trying to push them through. So I'm not so certain that we will have tremendous pressure from the nonperformers. We are slightly liability sensitive, so a drop in rates would put a little bit of pressure on the margin in the short run.

But I guess we work really hard to try to get that mix changed, and we are -- transaction-by-transaction on the loan side and the deposit side, we're working hard. So we would hope that as we've seen in the past, we would be in a fairly narrow band here, if we can accomplish all those objectives. So I do not see dramatic changes in the short run either direction right now.

We would like to see it keep (inaudible), even if it is only a couple basis points a quarter. We certainly would like to see that, and we're working on deposit mix issues. I think we've been very successful there, and I think all of our marketing is geared towards that on the retail side of things with --

And with the Broadway acquisition coming on, there's 65ish million dollars' worth of assets that are in the low teens sort of range. And certainly that would offset anything that is in the nonperformers side, I would think.

If you think about it, Brad, if we are able to sell -- take a hunk of premium finance loans and take them off the balance sheet and open up capacity for the loan pipeline we have, that are coming at marginally better and hopefully better and better spreads, that will be -- it will be quicker to get the spreads back into the portfolio. In other words, to take the portfolio over its normal duration and get repriced at higher spreads, to the extent we can do that through new loans and creating capacity for new loans, that could happen sooner.

So if we keep working on the mix and we keep working on the mix of the asset side, we've got to get the margin back up. We've been increasing -- if you look at the core margin, both of these are higher than they have been for three or four years right now, the core and the stated margins. We would like to continue that going up over the next few quarters, but time will tell.

And that is mostly the asset side. How about the deposit side? Even shifting the mix there, is there any pricing flexibility or are prices pretty sticky on the deposit side rate now?

There is pricing flexibility right now. We have been taking advantage of the pricing flexibility that is out there. There is still some outliers out there that -- there's some guys that need funding, like the credit unions in some of our markets are still pricing rather high. Some of the mortgage related banks, national mortgage related banks are in the market pricing very, very high.

But other than that, our competition, everybody is kinda feeling the same pain. So it is not as across-the-board tough as it used to be, and that is why we have been able to relatively improve our position there. Mix is the biggest issue there for us too.

When rates were one -- when fed funds were 1, everybody was running to CDs for rate. And what we've got to do is reverse -- and what we have been doing is reverse that trend and bring more of the retail -- the traditional retail core deposits back into play where you do have better pricing flexibility.

Maybe lastly, I will start this, I'm sure. Others may have questions on this as well. But in terms of the mortgage banking income, maybe -- I don't know if you can give -- can you give some color on how things were in September or how they have been since the end of the quarter, to give us an indication of maybe what we ought to expect that line to look like in the fourth quarter and beyond? Are origination volumes better? Do you feel like all that pushback is behind you or is there possibly some more to come?

Like I said, there's three components to really that $0.25 number. One is the wholesale side of the business issue, which was the largest. Having exited that business -- substantially exited that business in the second -- middle of the second quarter, most of those -- you have to remember everybody's being very aggressive in trying to do what they are doing. And we hope that we have to just deal with that issue once, and hopefully that is the case.

The other issues, with the rates going down in mortgage servicing rates, more mortgage servicing rates. It is silly accounting again, but you've got to deal with that, and that is what it is. And that will be a function of rates going forward.

The derivative number is one that quite frankly just befuddles me why it's in there anyhow. But that fluctuates back and forth depending on what day and how much you have in inventory when that closes; and it always reverses itself. Because it should reverse itself because it is just on while you are holding the loans in the portfolio that are already -- in our cases, they are already sold. They're all sold on a best case -- best efforts basis. We do not really take a position there; that is an accounting entry.

So if you take those out and you look at the overall mortgage business, in the overall mortgage business, applications are actually up. I don't know about closings, but we have to be in the mortgage business. As the community banking alternative, we need to be in that business, and we will be in that business. This was the perfect storm where all three of those components hit going the wrong way. One of them was a one-timer.

So we will be in that business, maybe not the business that got us here on the wholesale side, but certainly on the retail side, we will continue to push that business. It is a very profitable business for us strategically and it is strategically important. So to try to predict what it will be -- we do not do that sort of thing. But we are in the mortgage business, but hopefully -- at least that one big issue is hopefully behind us and we don't want to deal with it again.

Brad, as we broke it out in the press release, the part really related to the volume was a $1.1 million decrease from the second quarter. You got to remember that about half of that is commissions that go out, and then you have expenses on top of that. So the net impact to the bottom line as a result of the volume changes in the mortgage business is not the significant driving factor here.

And with rates down, you would expect the volume to pick up, and we certainly had a decent set of application volumes in August and September. But as Ed said, how many of those actually will end up closing? We are optimistic, but we do not make a projection.

All right. Thanks very much.

Leo Harmon.

I was wondering if you could talk a little bit about the nature of the puts coming back to you from the mortgage side, whether that was related to early payment default or whether that was related to nonperforming assets, and whether that was related to types of mortgages, subprime, Alt-A, and that sort of thing.

There's a variety of factors, some of which we agree with and we do not agree with. So we're negotiating with a number of them. But there are some early payment default claims in there. And there are certain other factors, such as reps and warranties, if the income levels were accurate and the like. Some of those we really are in disagreement on. But at this point, we are being conservative, and if there is a claim from anyone out there, we're trying to make a reasonable estimate of where we think we can fall out.

But a number of them were early payment defaults on businesses, Ed said, that we basically exited. Some of these were higher loan-to-value loans that were out there that early payment defaulted, and we just really are not doing that product mix anymore. We really exited it earlier in the second quarter as something we did not want to be in, but this is hopefully what we think is the tail end of the --.

Usually, they're 90 days, and it has been a lot more than 90 days since we did any last business.

Yes, the majority of them were early payment defaults.

So this was business that was written in the first quarter, or this was business that was written in the May/June timeframe that's coming back to you now, since there is only 90 days to make those claims?

Pretty much, I guess that would be the math of it, yes. But as I said before, as you can imagine these mortgage companies were being extremely aggressive. Like Dave said, a number of them were early payment defaults, but there's also a lot of other issues that, for example, how can you understate income on a non-verified income loan?

There's lots of issues that everybody is looking for I's and T's to cross, and they're coming back. So there is plenty of room to negotiate and work with these, and they're all based on a number of them too. So we're going to play it hard. We have a number of alternatives and tactics that we can use, and we're going to work this hard.

But again, we want to deal with this issue once. So timing, I think, is on our side, and there's some other things that we will negotiate very hard, but hopefully we've put it behind us.

Okay. Next question was, we saw a little bit of a tickup in credit cost during the quarter, not -- certainly, actually pretty good relative to what we have been seeing from some other banks. But can you talk a little bit about where your expect credit cost to normalize, where you expect charge-off to normalize, and where you expect provisioning to normalize on that basis?

I start to wonder what is normal anymore. The whole world is reacting in ways that they should not react to certain things. But anyhow, we have always said that we underwrite our portfolio over time to 25 basis points in loss. We have said this from day one. And given how the market has worked in the past few years, credit quality has been exemplary. I mean, we are at 7, 8, 9 basis points. We're very conservative on the credit side of things; we think we are.

So to go -- because we go from 7 to 18 basis points, it is more than doubling. So it is a big number, but it is a big number on a small number. We would expect our portfolio to average out in normal time periods around 25 basis points in losses. We do not expect to go back and average that. We do not expect that we're going to have to fill the area over the curve for the last three years, but you never know in this market because I do not know what is normal anymore and what is not normal anymore.

But for the last two years, almost two and a half years right on, you've heard us on this conference call saying that we pulled back on the lending side when the market moved away. We did not want to follow the herd as they were doing things that we did not think were appropriate or on the lending side of the business. So our loan to deposit ratio went from over 90% down to 79% because we pulled back.

We are firm believers of the two-year rule, that you're only as good as you are today two years ago. And you're starting to see -- we made the call two and a half years ago. You're starting to see this stuff work through the system. We did not think that we would be totally unblemished by this. The brush is going to have to hit us somewhere, just because nobody is bigger than the market.

But we would hope that and we planned the fact that we will go back to kind of our normal 25 basis points, which would again be a little bit more of an increase, but again, don't be in denial. Push the items through, get good flow-through, identify things early and move them on.

So that will be our approach, and I think that is about all I can say about that.

Thank you.

Jon Arfstrom.

A couple questions. What do you need to do to get capital relief on the premium finance sale?

That's an interesting question. Whole loan sales are the best way to go. What we used to do with LaSalle, we had to keep capital available because there was -- we had some liability on those things. If you go to a securitization or some sort of conduit, there still is four-year residual unless you sell the residual off. There you have to keep capital against that residual in varying degrees.

So we would really like to find a more optimum source and that would be a whole loan sale, where we could limit the amount of capital that we would have to keep against any sale that we put through. The yields are still -- that market, you talk about the perfect storm on the premium finance side.

We are holding our own there, but we're having to do -- premiums are down 19% in this soft market. Our volumes are up 19% in the business, in terms of units processed, but we're keeping -- everything is just steady right now. We're running real hard just to tread water because of the soft insurance market that is going on right now, and those guys are doing a great job holding their own.

There still continues to be pressure on the interest rates in that business, also. We tried to do a -- had a tactic a little while ago where we said, let's just raise some rates with some of our agents because -- you know, bring the spreads back in. And we figured it would be a little bit of rate [detente], where we would raise and everybody else would go, shoo, and raise their rates. Well, one of our biggest competitors who took a week and they were in the markets of our customers in there saying, we will give you a lower rate. So that didn't really work, so that business right now is doing extremely well. But we're having to run a lot harder to stay where we are.

We could use a nice, hard insurance market, would raise -- we would get about 30% to 35% more outstandings if we went back to a normalized insurance market right now. But as the capital relief, it's just got to be the structure of the deal. And if we can do that, I think it really -- it really pushes the balance sheet and pushes earnings, because we do see good, solid loan flow at reasonable pricing in our pipelines right now.

Okay, a couple more questions. I hate to keep talking about mortgage banking, but it is clearly the topic of the quarter. Can you just remind us what you have in terms of mortgage banking operation? I think we all remember the acquisition, but can you talk about wholesale versus retail, prime/nonprime servicing; just give us a quick overview of what you have.

Well, I think we have done about -- if you look at all of our mortgage banking operation, we do, I think, about $1.7 billion in production so far this year. Historically, we probably did 75 to 80% of it in just prime conforming A paper mixes. You always had somebody that would come with Alt-A type of paper, where you could find a couple investors in the end market that would buy that paper. But it was a small piece of our business.

I would say right now, we are probably doing virtually all A, prime-rated paper. And we might do a little bit of Alt-A if the credit scores are high enough and the loan to values are low enough, and if you are willing to keep it in your portfolio if an end investor went away. But it has to meet some very strict criteria to get into that. And we're doing virtually none of that right now. But we might do a little bit if the credit scores are high enough and the borrower is strong enough and the loan to values are there.

But that is what we were talking about basically exiting the business. We're really not doing the high loan to values. We're really not doing that kind of paper anymore. And we are really just focusing on the A type of paper out there. There are not many end investors out there that are buying the other paper anyway. So I would say probably now we're closer to 95% good stuff, as far as what people would deem to be A, and maybe a little bit of Alt-A if it means very strict criteria.

On the wholesale/retail side, you're probably 60% wholesale, 40% retail right now.

Just last question --

One thing. We were not in that business for that long, either. That was like a six-month -- the business that got us in trouble was about maybe a five or six month hiatus into that business, and we jumped out of it pretty quickly, since it doesn't make a lot of sense.

And it was a mistake and it is what it is. Fortunately, we had the offsets that are going to come in on the other side that are going to cover it from an earnings standpoint pretty much. The rest of it is just market and accounting driven stuff.

This is probably the number one question from the investors I spoke with this morning. And I think you have covered it, but how confident are you that this is it in terms of the recourse obligation? It sounds like you're highly confident that you've got it all. Is that --?

We believe we have encapsulated it now.

You don't know what you don't know, but like I said, I want to deal with this issue once.

Okay. All right. Thanks, guys.

Mac Hodgson.

On the mortgage business, sorry to add a couple questions there. These -- the $6.7 million or so that you took reserve for, what was the dollar amount of loans that that was against? Just trying to figure out what kind of a haircut you took.

I am not sure I really want to answer that, only because we are in negotiation with a number of people and I do not want to play our hand out right now.

Okay.

If you can appreciate that.

Sure.

But again, we think we have encapsulated it.

Okay. I was going to ask next if you expected these loans to come back on the balance sheet. Obviously, increase in nonperformers, but it sounds like there is a couple things you are trying to do to make sure they don't come back on.

We would hope that they do not come back on the balance sheet. But we are in negotiations now and --

At a price, they come back on the balance sheet.

But we're hopeful now.

Okay. Any update you could give us on -- I know you're planning on opening up an LPO downtown. If you could talk a little bit about that, and any update on kind of your ability to hire some people from LaSalle. Obviously, we saw Private Bancorp announce some hires this morning. I did not know if you were trying to be aggressive in hiring some more people.

We're always interested in hiring very good people. The first part of your question, the LPO is proceeding. There is a couple of options we're taking there; we're talking to a number of people regarding that eventuality. As it relates -- Private Banc is winning the Derby so far as it relates to the LaSalle folks and I'm interested -- congratulations to Ralph. He has done some stuff. We will see how it is going to shake out in his financials and how it is going to work.

But we are very active and have hired a number of people, and we still are looking to hire people -- not just LaSalle, but in our other competitors also. We think we still have a great positioning right here with the best footprint in Chicago to build off of. And I think that we are very attractive to a number of folks and we're working very hard to bring them in.

Some people are turned off by our distributive style and our entrepreneurial style and some people are turned on by it. We need the people who are turned on by it. Sometimes you take a guy from a big bank and you bring them into run something and it's like bringing home a prisoner of war from North Korea. You've got to take them through and reindoctrinate them; they have been so indoctrinated in the big stuff.

But we have been very successful so far in bringing folks in; I think you see it in our lending numbers. And we will continue to look for good people who are our type of people.

Any specific numbers you could give on kind of new hires to date?

I do not have them handy, but it has been -- we have done just fine. I do not have the numbers handy, really, to date, but I would -- in terms of maybe from over the last two quarters, I would say 15 people have come on.

Okay, great. Thanks, guys.

Kenneth James.

I have some questions on your nonperformers. They were up about $19 million, but the press release says excluding premium finance receivables, they were only up $8 million. So I was curious if you could talk about the current position of that $8 million and then why such a large chunk of premium finance receivables this quarter, and are those related to a single counterparty?

No, they are not related to a single counterparty. Premium finance first, premium finance has been operating at very, very low numbers. We actually like to see those numbers go up a little, because that late fee income -- that means late fee income will be moving up, which we had seen decrease by 50 to 75 basis points during this period of no credit losses at anytime.

So when a premium finance loan goes to [non-performance], it just means it's 90 days past due. We have confirmed -- 99% of the time, we have confirmed with the insurance company that the return premium is coming in. If there is any deficiency, we charge it off at that period of time.

So what happens is, in California, it is 90 days from the date that you cancel the policy that the insurance company can give you the money back. And I'll guarantee you, they wait until the 89th day to send you the check. So that is usually 30 days -- it takes you 30 or 45 days to cancel, 90 days for them to pay you back.

But when we look at the premium financing, on the nonperformings, most of the losses are taken right when they go on nonperforming. Again, 99% of the time we have confirmed the return premium to cover the rest of it. So that's why we kind of -- you have to look at that a little bit differently. We -- technically, they are over 90 days, so we include it in there, but the loss has been rung out of that at the time that it hits 90 days. Does that make sense to you?

Yes. I just wanted to make sure that was not a single counterparty where you've got $10 million that were problematic all of a sudden.

No, there's thousands of loans --.

Okay, then on the $8 million piece, is that a single credit, multiple credits?

I would characterize as a handful of additional credits. Actually, if you go back, Ken, to December of last year, we were at similar levels on the commercial and consumer side at that line item, that $22.6 million -- we were at $21 million last December. So that number sort of just fluctuates a little bit depending on what stage of pushing these things out the door, where they are at.

We have to be fairly timely and aggressive in taking the charge-offs, so we would not expect that we would have substantially more loss on those. Because when they get to nonperforming, we're looking at them and we're trying to make assessments on them, and taking those charge-offs upfront. But again, that number was $19 million a year ago. It is $22 million now. And for a $9.5 billion company. that is a pretty small amount. It could really be one or two loans, in reality.

That being said, your last question on credit costs, as I said all along here, we see -- this is just Ed talking -- I cannot -- it appears that credit is starting -- we're not bigger than the market. We think we'll be less than there. But it does not surprise me that they are going up a little, and they might go up a little bit more.

The real issue is we've got to the spreads back to cover it. Again, I would give up -- to get that 100 to 150 basis points back that we were used to, when people actually priced risk, I would gladly give up 18 basis points more in charge-offs to do that. But as I've said, for two years or 2.5 years, we've been trying to be extremely conservative. Most of -- these were a handful of deals.

But a lot of our deals are really legacy deals from the last two acquisitions that we made. It takes time to kind of move some of those deals out that might not have been done in our style or fashion, and we are working through those. But I think the trend is for them to go up, not down.

Okay. And then question -- tie that in to kind of provisioning. You talked about the number this quarter being a little elevated. It seems like to me if the charge-offs you reported this quarter, if we're going to be somewhere between 15 and 20 basis points, and you think that you can grow the loan portfolio 8 to 10% at least, which I know you do, it seems like provisions of $4 million, or in that neighborhood, are going to become the norm, not the exception, here going forward. Is that fair? Unless you're talking about running your reserve down to in the 60 basis points?

I cannot imagine that is going to happen in this market. But the actual reserve calculation is so mechanical right now. I mean, the regulators, the SEC -- I mean, this is a very mechanical calculation that comes through based on our loan grading systems and our nonperformings and our charge-offs.

There is a little bit of sway in there in terms of where is the market going, where are your trends going and that sort of thing. But it just -- that number just kind of pops out now, based upon reality, and that is a good thing. I think it is fair to say that if the market keeps going like it is, that our number would be up a little.

But I don't know. Again, it just depends at that point in time where things are. The trend obviously across the board is for credit issues to pop. We do not think ours are going to -- we do not think we have as many past sins to pay for as maybe the industry does.

Okay, thank you.

Ben Crabtree.

I just have one remaining question. On the tax rate, it was definitely lower than I thought. And wondering what is behind that and wondering what we should think about going forward.

The life insurance proceeds we got are tax-free to us, so (multiple speakers) an issue with the tax rate. So I think you can kind of go back to prior quarters and get a good idea of the reasonable level of that. You can back out the life insurance proceeds and calculate it.

Okay, good. Thank you.

Brad Milsaps.

Just a couple quick questions related to premium finance. I know you guys have been out of selling the loans. But have the premiums -- do you think you would be able to [get on] those loans changed at all versus a year ago when you're more aggressive selling those?

We're talking to a number of parties right now. We have not gotten down to final pricing as to indications from them yet. But we would hope that they would be at better than they were a year ago when we got out. But until we get sort of final bids from people, I'm not sure we can answer that definitively.

We are looking at it totally different. We used to sell them through LaSalle to LaSalle's correspondents, so there was -- there were a lot of middleman taking pieces. If we get rid of the middleman, then that would be good for us. And with the blend we can bring in with Broadway coming on with higher rates, we can blend it out a little bit better, and it should be a more attractive package. That's what we're shooting for.

And, Ed, has that market got -- obviously, you talked about it being competitive on rate. Have people gotten more competitive on terms in terms of doing more of those loans on an unsecured basis at this point?

No. More competitive? No, it never really -- premium finance loan on an unsecured basis would be something that I do not think we would look at. Sometimes you do take some risk in some of the deals. So I guess where you're looking back to the company is the obligor. But we have not seen that taking place. That industry is -- premium dollars are down and the rates are highly competitive right now, as they have been for the last three years.

Okay, and final question. Any additional color on the loan reclassification that you guys had in the quarter?

You mean from commercial down into the other section?

Yes.

We're doing a little bit of, as we do from time to time, scrubbing. But that actually related -- we have some loans that are stock-secured, and in the past we've had them up sort of in the commercial area, depending on the nature of the borrower. And based upon some of the regulatory classifications and stock-secured loans, we're putting down in other now. So that is not all of it, but that's primarily what that is.

Okay, great. Thank you.

Steve (inaudible).

Just hoping you could help me reconcile this quarter and some of the comments as you look ahead as to what is core earnings? So I just want to be crystal clear that, Ed, are you steering us to kind of a mid-60s kind of core quarterly EPS as we look into the future?

Steve, we do not steer anymore. I think you have to actually just go through the numbers, and we have tried to give all of the elements of the numbers and contrast them versus core and the onetimer sort of things and give you enough detail to actually do that. I think if you look at this quarter and you take the BOLI out and you add back the mortgage line and the provision line -- so the margin was up almost $1 million. And keeping our expenses where they are going, I think you should be able to go in on that.

We did say next quarter we will have $5 million pretax, plus or minus, of onetimers that will pop up, too, that should offset some of this. So you should have all the data you need in the press release to come to your own conclusion as to what core earnings are.

Just something I have been wrestling with over the past couple quarters, and I thought basically saying add that $0.25 back, and I just wanted to double check, make sure that you're comfortable with that as well. And that's what I'm hearing. I just wanted to check in.

And maybe just on another topic, I know you can't give out too many specifics on the $6.7 million accrual, but what is it that does give you the confidence that it is going to be a onetimer on that?

I think that -- I guess it is just the rate of the claims coming in and what we are seeing from our investors out there. We are not continuing to see a big flow coming through. And just our negotiating stance that we're taking and the reality of the negotiating stance is that we are pretty comfortable that that should be enough to [encapsulize] it.

As shareholders, you should know we are being extremely aggressive on this, and we do have a number of approaches and tactics, and we think some of you guys are way off base on a number of issues. So you don't want to get my dander up --. But there are a number of ways that we're dealing with this that make us feel comfortable that we can say that we do not have to deal with this anymore.

But you never know -- and this market is still very volatile on that. But I think if you look at the timing and you look when we're in and when we are out, and look at where we are at and not wanting to deal with it again, I hope you take some comfort in that. But it is still kind of fluid out there, and we are ready to go to the mat with anybody, anytime, anywhere if we think they're off base, and take drastic measures if we have to.

Then just lastly, I was looking to get your opinion. Clearly you guys are not getting the credit for your valuable franchise that you have in Chicago. Right now, you're less than 2 times tangible book, as I'm looking at my screen here. Does this type of thing and maybe these challenging market conditions make you maybe more likely to -- for you and the Board to pursue more strategic options and sell to a larger, bigger player?

As you know, we do not comment on those types of issues. We're not allowed to. They'd string me up by my toes if we commented on that. You do know that we are (inaudible) guys and we're going to run this thing --- I got my net worth invested in this. We think -- we knew 2.5 years ago.

We have talked for a long time, Steve. We said 2.5 years ago, boy, we're going to do this. We're going to pull back because we think the market is getting goofy, and we're going to pay the price for it. And when it does get goofy, we're going pay the price again, even though we did not follow the herd.

And the idea is that we have to be first out of this. When everybody else is licking their wounds and coming out in denial -- and I'm not saying everybody. You know what I'm saying here; I'm not pointing fingers at any competitor per se, but just the nature the industry right now. We want to be first out because we think that this will be one heck of an opportunity. If we have kept our powder relatively dry compared to everybody else, we're looking forward to full speed ahead. If we can sell these premium finance loans, we can turn on the engine again to start growing.

When you look at our small banks, we have shrunk our bigger banks by letting the higher-priced CDs run off, really working on relationships, really working on building that franchise and making it really, really solid.

But boy, you look at our younger banks and the Old Plank Trail that is down south, we just opened two of the permanent facilities and they're growing like a weed. What we have still works and works very well. But what we did not want to do was to go -- we could have put up two really good years over the last two years if we had followed the herd and put pricing in and done terms. But I still believe I would do it the same way over again, that we would pay for it six times over.

I am of the opinion that we will be first out of this thing, and there is going to be one heck of a lot of opportunities for us. And if we are not and we've taken this pain for nothing, then it is my fault. But I would run it the same way and do the same thing, and I still think our future is extremely, extremely bright. And we're going to play this thing like we're the last guys up. We think there is great opportunity.

And be advised that this Board has always been as responsible as any Board can possibly ever be. So we will leave that at that, and hopefully that did answer your question, but I'm not allowed to answer your question directly.

We do appreciate the fact you think our franchise is attractive, though.

I am trying. Thanks, guys, and I look forward to seeing that play out. Thanks again.

Peyton Green.

A couple questions around things that seem pretty favorable in the quarter. Your wealth management and brokerage business seemed to turn up pretty nicely year-over-year. And I was wondering if you could give some color as to whether that is finally progressing as you would have expected and also do you have more of an outlook for improved performance going forward.

The wealth management business is, as you say, a shining star. Tom Zidar, who has come into take that over, has just done, I think, just a stupendous job. Our earnings are up substantially over previous years, and I would expect that that would continue as his leadership plays this out, and we continue to distribute through the banks.

I mean, the bank distribution numbers are -- when we get good people in there and we build it out, the bank distribution numbers are off the charts amazing on the wealth management side. We still have one issue left, and that is really, really bolstering up the asset management side. We have got a great asset management company, but we have some opportunities to really bolster that side and really make a name. So we're looking at a number of those.

But the wealth management is -- knock on wood -- it is a perfect storm, and that one is holding up pretty well right now. They are doing terrific and that model is working well and Tom's doing a great job there. So thank you. I probably should have mentioned that in my comments, but they are doing very, very well, and the prospects that we can keep getting really good people and put them into that distribution network, the prospects remain very, very good.

Okay, great. And then two other things. The wealth management deposits, which I do not guess are reflected in the noninterest income side -- they go through to the bank's margin -- but they were up about 12% year-over-year versus your more typical money market balances up about 6%. What -- why are you seeing the reason for success in that now? And then, what is the cost differential?

That is just growth in business. The basic metrics of that are people keep 10% of their accounts pretty much liquid at any point in time, with dividends coming in and what have you. Those numbers are up basically because our business is up. And that business -- that is one of the nice offsets of the offshoots of that business, is that the more we grow, 10% of that becomes core deposits for us at rates that are more like money market rates. That is good funding for us.

So the profitability on that, especially when we're at 92% loans and deposits, is very good. So most of that is just growth in our overall business.

Okay. Then in terms of the cost differential of those accounts versus your more typical money market.

We price them reasonably competitively with standard money market accounts with other brokerages out there. We sort of do market studies. We look at what everybody else is paying and we try to be competitive. So it moves around with market rates a little bit, but we try to sort of average ours out with a large group of other participants in the market and be competitive there.

We're basically right on market for money market accounts.

Okay. Then third, your marginal cost of NOW and money market balances, which increased for the overall bank very nicely versus CDs, which you were able to break down, how much of a benefit is there in that and do you see a lot more opportunity going forward?

There is two benefits that come out of it. One is the initial nominal benefit of rates, which I will let our CFO look up while we're talking. But you also get the flexibility there. In a lower rate environment, CDs will always be at market and they always bring people to a decision point. Whereas when you get people into money markets and to savings accounts and the like, they really become a nondecision point issue. They are just there and you pay a reasonable rate and you're going to keep that balance, and not make your customer go out and keep looking for others.

While they are looking that up, I tell you, the biggest issue that we have got it, and we're working on very hard, the mix issue is coming along great. As you can see, the CDs are coming down; the other aspects are coming up. So we are able to -- we empirically can show you the results where that is happening.

We only have 9% demand deposits. If you look at our competitors, they are about 18 or 19%. We are really pushing hard on the commercial side right now. That would be -- if you run the numbers -- almost 40 basis points in the margin. If you look at our competitors, our asset yields are higher than our competitors. It is our cost of funds that hurts us. And our cost of funds hurts us because of that mix issue and lack of demand. We really are pushing very hard with our cash management and demand to build that business up. That is the biggest, most important thing that we can do right now, and that is what we're working on very hard.

The free money contribution for us of 25 basis points or 26, whatever it is, in the margin, we need to double that. And we do that, and that is a good number for us.

No, I was just also asking on the money market/NOW side, because, as you pointed out, it tends to be more of an administered rate. And I just didn't know if you had more flexibility on that over the next couple quarters now that the Fed has cut rates versus CDs, which could still tend to lag, I guess, on the pricing.

That is probably the best way I would characterize it, Peyton, is that they are administered rates and we do have more flexibility there. We like those accounts more because the customer doesn't have a decision point to come to at maturity. And we try to be competitive with those, but clearly NOW accounts and money market accounts have much more favorable rates than term CDs in this environment.

Okay. And then last question. What kind of success are you having with the Wintrust brand versus the individual banks?

We have finished our second round of ads and the third round is coming up. There are a number of marketing -- as I mentioned, we lost our marketing guy after a long battle with cancer. And as a result, we got a little bit stagnant for a month or so in there.

[Matt Doubleday] has taken over in that business. Matt was with First Insurance for over 11 years, and really helped build that business from $300 million to $3.5 billion in volume, a young guy with a lot of energy. And we now are -- now that we have done the initial kind of ads, we're hitting hard on direct-mail to people.

Our calling program is terrific right now. We've made hundreds and hundreds of calls per banks and they're now coming to fruition. I was talking to one of our bank presidents out in a very industrial area, and 56 packages and live leads right now that we need to -- we had to send reinforcements in to help them follow up on it. So when we present this story to people, we tell them who we are and how we do it, its uniqueness plus its capacity is a great sale, and we are getting good growth.

I think I said in my comments, you got a lot of real estate rolling off the books right now. And we are replacing it with different types of business. So loan demand has been pretty good, and so we are -- we've got to get those demand balances up. That is very important.

Okay, great. Thank you very much.

Ron Peterson.

Thanks. Good morning. As far as the loans held for sale, could you give a breakdown of the amount that is -- you would classify as maybe either subprime or Alt-A?

I am sorry, Ron. Could you say that again?

In the -- what is it -- $105 million of loans held for sale, about how much of that would you consider to be subprime or Alt-A type --?

De minimis right now. As I have said, we pretty much changed our approach to almost probably 95% high-quality products that would not fit into any of these Alt-A right now.

Okay. But I guess previously, before the beginning of the second quarter, you're doing 20 to 25% subprime (multiple speakers) Alt-A types?

Not that much.

I wouldn't even -- I'm not sure if it is all called subprime, depending on how you characterize some of this Alt-A stuff. But it might have been around 20% at some point, if you put in all the different product types that are not sort of the conforming A products.

But now I would say we're probably very close to 95% high-quality stuff. And the only time we l actually even look at doing some of these other deals if we have two investors out there that are willing to take it, and it is something that if both investors want to wait, we would not mind portfolioing in our own balance sheet.

All right. Then in the commercial portfolio, about how much exposure do you have to residential builders or condos -- or could you give some color of what's going on in those markets?

Those are, I guess, distressed markets right now. We're not really seeing a lot of new business in those markets, as a lot of our lenders have said that a while back, that that business has sort of fallen off the face of the earth. And as Ed has mentioned earlier, we're seeing some runoff in that. So our loan growth that we're showing now is really running pretty hard to make up for some of that runoff.

But we do not -- we have not disclosed that number, Ron. But in the past, as we've done those types of loans, we really look to the strength of the borrower in those cases to be able to carry a loan for two years or whatever, in the event that sales subsided. And that is generally how we try to look at those development loans.

We're not doing it just on value and hoping a guy can complete it, sell it, and earn it out. We look at it saying what happens if and can he carry it for a couple years? So other than a few of the deals that may be, as Ed inferred before, that we inherited from a couple of the acquisitions, we hopefully have priced it accordingly when we bought the bank and used purchase accounting on them. The portfolio of those loans that we have, we feel fairly comfortable that we underwrote them appropriately.

Okay, good. Thanks.

Brad Vander Ploeg.

You're like the bread on a sandwich, Brad. You're the first and the last.

Imagine that. I just wanted to clarify real quickly, when you were talking about the mortgage banking profile in terms of wholesale versus retail originations, I think you said it used to be -- I think what you're saying is that it used to be 60% wholesale. Is that what is in portfolio or what you have sold year-to-date or --?

Volume, that is volume.

Total volume. Okay. So now, it is zero or close to it.

No, no, no. Wholesale. We're just not doing the Alt-A stuff. I mean, very minimum Alt-A. They jumped in when the whole market jumped in on our mortgage banking side and the mortgage company and started doing this stuff, just like the world did. And we took a look at it and we went -- after a about a couple months -- we said, this is not worth it. Let's get out of this.

So we got out of it in the middle of the second quarter. And so fortunately, we were not in it up until it all hit the fan, but -- so our potential losses were minimal on that. But our distribution system is we have retail operations throughout our banking network. We also have a wholesale operation that does business nationally. But we're dealing only the A-type paper.

Great. So it is just the Alt-A that you shut down or decreased in the second quarter?

Right. Yes, sir.

And then just maybe one other quick thing. You mentioned briefly the Old Plank Trail Bank, which --

Are you banking there yet?

The one in Frankfort is not open yet, so --

There is a temporary open.

I will get on that.

Open a demand account. I don't want to pay any interest.

Okay, absolutely.

Always the salesman, isn't he, Brad?

Yes. Well, that is what we like. So, two of the permanent ones are open, and I'm just curious -- you said -- was that after the quarter end, because I do not think I saw that in the press releases in terms of new openings.

No. As far as the total numbers, they would have shut down the temporary one and opened the permanent one. So the total number would not have changed.

It's just the replacements.

But there's a lot of people that until you get that permanent facility open with an attached drive-through and they can see that you're there to stay are not as interested in opening up a bank account in some of these temporary facilities. Although they are nice temporary facilities, they are still temporary, and it is hard to get the real flow in to some of those until you get the attached drive-through and all the ancillary safe deposit boxes, etc.

All right. Thank you very much.

Thanks, everybody, and we look forward to better conference calls in the future.