Wintrust Financial Corp (WTFC) 2007 Q4 法說會逐字稿

Good afternoon. My name is Vonda, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wintrust Financial Corporation fourth quarter 2007 earnings 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. I would now like to turn the call cover to Mr. Edward Wehmer, President and CEO. Please go ahead, sir.

Thank you. Good morning, everyone. It is not many quarterly conference calls I can start out by saying that we made $10 billion more than City Corp and $10 billion more than Merrill Lynch in a quarter, but we did. I think generally we are pleased with the quarter. It is, as we anticipated it to be. As is our normal custom we will start with some comments by me on credit quality and then what we saw in the quarter related to what our strategy is and how our strategy is unfolding. And then Dave Dykstra will talk a little bit about the actual numbers and Dave Stoehr will pipe in where necessary. As you've all read, a nonperformance, yes, they were up this quarter some $27 million. Premium finance loans were up a bit but quite frankly charge-offs there stayed the same. We would like to see those go up a little bit higher because that means higher late fees for us. Our late fees have been down over the last three years on average some 60 to 75 basis points.

We certainly would like to see those late fees come back because we think the charge-off numbers there are well within reason and we can make some money. On the core side of things there were three credits that popped into the equation. If you were to take those three credits out, the rest of the portfolio, the core portfolio, is actually down $5 million or $6 million. There's good velocity. Again, as we have said in previous calls, there is very good velocity through the nonperforming process to get these loans, identify them, move them out of the bank, charge them off if you have to and move them out. The three large ones really kind of run the spectrum here. There is one about $6.2 million which is a very granular relationship which really should be out of the bank this year sometime, materially off by June we would think. There's another loan for $10 million related to a condo conversion where there's equity and about $7.5 million of Mez debt behind us. For the life of me, I can't figure out why they haven't taken us out yet of that. We are going to continue going forward with that. We think that would be relatively short-term.

They have some of the Mez debt people appear to have capacity and due have the fiduciary obligation to do that. If they don't, that's a credit where we could blow the rest of them out at auction at less half the purchase price of what they have been paid over the period of time and still actually make money on the transaction. The third is a larger deal that came to us in the Hinsbrook acquisition. It is a land park development deal. We had written it down in purchase accounting when we acquired the company, when we acquired Hinsbrook. This one will be a little bit longer duration for us in terms of the workout. If you -- we carry it at a very low value compared to what the original amount was and our carrying value was less. We believe if you just run IRR calculations and the like that it is almost best to ride this one out.

There is velocity there, slow as it may seem, but working I think our initial plans are to set up this in a L.L.C. and a joint venture arrangement and just run it out because I think we can actually make good money even though we are not in the business of making money on bad loans. In this particular situation, I'm really hesitant in this kind of market to just dump the thing because there is good value there and good money and if you figure $15 million, $16 million in a core portfolio about $6 billion isn't that much to have to work out over a longer period of time. So getting good velocity through there. And again, we have talked about the last three years how we saw this environment coming, how we did go into kind of a rope-a-dope strategy where we did not chase credits. You can notice in just looking back how we have slowed down our growth because we wouldn't chase credits. There's a strategy that came after that that we will talk about, but we anticipated going back to these levels, these are normal-type levels.

If you take our charge-offs from -- just in the charge-offs, very quickly, they were up for the year, they still were below 20 basis points. But if you go from 1991 when we started this Company to 2003, we averaged 25 basis points in charge-offs, the rest of the world was more than double that, our peer group was. For the three years recently we have been at 9 basis points, which has been absolutely extraordinary and has just been part of the times and maybe part of the problem that the times that led up to where we are at right now, I think everybody would agree with that. We have always underwritten our portfolio 20 to 30 basis points of losses and as we've said repeatedly for the last two years, we expect normalization to come back and we will roll into those numbers. And sure enough we have. There's a bit of a sticker shock when you go from nine basis points to into the 20s, but at the same time, that's more of a normal environment.

Our theory is that you need to go through one of these credit cycles every now and then, especially when we were working in an environment that was devoid of any sort of credit spread. If this brings credit spreads back, and we do see that occurring selectively into asset groups in our markets, that's a very good, very good thing for us. We think the rest of the world will return to normal and maybe even more so in terms of charge-offs. Again our 20 to 30 basis points, the rest of the world at 50 to 60 and I think as you have seen in numbers already, a lot of people are giving back a lot of the earnings that they made over the last two years when we were in our rope-a-dope type strategy. We don't anticipate having to do that. The mortgage issue we reported in the third quarter we believe is basically behind us. We didn't incur any additional losses and actually reversed some as we have settled out certain issues.

But we believe that you don't know what's going to pop up next in the biggest mortgage debacle really of all times, where we do a $1.5 billion to $2 billion worth of production every year, for us to have walked away with charges that were in the couple of million dollar range isn't so bad given the nature of the overall environment and hopefully that's behind us. This fourth quarter results really started to show that some tangible results from the strategies that we have been employing over the last couple of years in preparation for the market that we are in right now. We've said that top of the list capital and capital allocation has always been king for us. If you look at our growth, we didn't grow last year, by design. We let one relationship, high priced funding, leave the banks. We grew the smaller banks, shrunk some of the bigger banks, again to preserve capital, and during that time we bought back over $100 million worth of our stock. We think that was the absolute right thing do. Our ratios are still within acceptable ranges for us right given the nature of the portfolio on the capital side. We are comfortable with that.

During that time, remember our loan to deposit ratio, which we like to keep between 85% and 90%, went into the high 70%s as we refused to chase deals with no risk premium and bad terms built in. During the period of time over the last two years we have been able to selectively build that back up, our average loan to deposit ratio for the fourth quarter was 93%, over 93% which is higher than we'd like it to be and the end of quarter around 91% because we reinstituted our program of selling premium finance loans. That resulted in a gain of about $1.6 million for the quarter. We will talk about the ongoing strategy for that going forward. We also, with the falling rates, recall last year we didn't really have a lot covered call income, that's a falling rate strategy that we employ and have employed very successfully, usually in a period when rates go higher our positively gapped position helps us recover those earnings through the margin. It was kind of a weird situation that we had over the last couple of years because although some rates went up not all did.

We were in that inverted yield curve environment which really didn't help our margin much, if at all, as we -- it just was what it was. So covered call income is again back into our strategy. For 2008, this, again this was the tangible results you started to see in the fourth quarter, the things we are going to be doing in 2008 what we have been preparing for. Again, capital will be king in 2008. We do expect to start showing moderate growth again and again take all of these elements together and I think these variables will make sense when you take the elements I am going to talk about all together. But we will return to some modest growth mode, not the hyper-growth we experienced in the past because we'd like to keep our capital dry for other uses, potential stock buybacks. We don't have anything open right now. We are always reviewing that prospect, but keep in mind, keeping the adequates amounts of capital on the books.

Our loan backlogs remain very strong, both in commercial side where our commercial initiative continues to pay off. I think our timing there was good. With some of the turmoil going on in Chicago right now and on what we call some rebound real estate deals. Those deals that have been through the washing machine already, been repriced and we have been able to secure some of those at pretty good spreads. We need -- because of this we and our loan deposit ratio where it stands, we really need to continue selling premium finance loans, which was always part of our plan. We sold 230 million in the fourth quarter through the old way. We saw Bank of America took it and sold it to their correspondents. We are looking very hard at putting securitizations in place. We would like to be able to sell about $1.5 billion worth of production this year if we are able to pull, if the securitization markets open up, which we for this asset class we understand that they are and get these things in place.

But that would make a hole in the balance sheet to allow that plus the growth, the moderate growth we are anticipating will allow us to book the loan pipelines that we see coming. That will have two benefit, one is the gain on sale of the premium finance loans, it is very helpful to us. Again we are very conservative on how we compute that. It is nine month full payout paper, so I know it used to be a bit of trepidation for investors when they heard gain on sale accounting, but again every clean up call we have had on that in the past when we sold them was always a positive clean up call and nine months the railroad tracks come together very quickly but this makes a hole in our balance sheet and alleviates capital so the return on capital is just terrific if we pull this off. That hole in the balance sheet can be replaced with these loans that are coming in with risk pricing built back in which should help our margin going forward.

With the lower interest rates that coming about also, there will be some margin compression. We saw that back in 2002 where rates fell as low as they did and with our funding base you can't drop your funding cost as low as the loan costs, rates are going to go. But that margin compression will hopefully be made up by the strategy I talked earlier on the asset side of the equation, the covered call program, the new loan spreads, and we expect mortgage banking to rebound also in lower rate environment where if we get a positive spread on that, our carry costs are very helpful to us. In the past, in the negative yield curve environment we were losing $3 million -- not losing but we in opportunity cost about $3 million a year just on the spread between the carrying cost of the warehouse loans that we had and what we sold. Hopefully we can get some of that back in the period going forward also.

Wealth management, things are going there. I hope if you looked at the press release we saw we hired two very strong people and really the last piece that we needed to get done in the asset management side. Dan Cardell and Todd joined us and we are going full speed ahead there. Wayne Hummer had a terrific year, really under Tom Zidar's leadership has really become a very important part of what we are doing and really has been well integrated into the banks. Again, we had another year where bank production on the asset management side grew over 20% across the board. And even downtown production grew. This is new business coming on not just volume related. It is being well accepted and it is really going to be a much more important part of what we are doing going forward. In summary, we weren't exactly crazy about 2007 and our results again, our basic numbers are return on assets and return on equity as stated are unacceptable to us.

We really want to work on those going forward. Expense control will be a big part of what we do has it has -- was last year. I think we did a very good job. It would also be crazy if you weren't guarded about what's going to go on in 2008. It is kind of interesting. This is maybe the fourth credit cycle that I have lived through. I think you kind of know how it is going to turn out but you never know what's going to be around the next corner. But somehow we are optimistic here that all the hard work that we have done in preparing ourselves for this eventuality and we have been doing it for a couple years, will in the discipline that we have employed will really offer a lot of opportunities because during these cycles there are a lot of opportunities to create real wealth.

If we did our job over the last couple of years in keeping our powder dry and making sure our credit portfolio will react as we anticipate that it will react, we should have a lot of opportunities this year that have not been spoken about because we don't know what they are yet, obviously, but to really build value in this organization. So we are not satisfied but we think our strategy has been sound. Our book value did go up this year. We didn't make a lot of money and give it back in one year like a lot of people have done. But I think as a result of that we will be well positioned to continue to move forward next year, but time will tell. Dave, you want to talk about the numbers?

Thank you, Ed. I will briefly go through the other income other expense issues. Ed touched on a number of them briefly, but wealth management and revenue increased $8.3 million in the fourth quarter from $7.6 million recorded in the third quarter, primarily on stronger revenues on the brokerage side of the business, while the trust and the asset management revenues remained relatively steady. Mortgage banking, the production returned to relatively normal levels and the total revenue on that line increased $5.8 million. Based on the current information, we believe the valuation reserves on our books are sufficient, as Ed has indicated, to absorb any future exposure. The core mortgage banking business is obviously hindered a little bit by the depressed residential real estate market that is out there. But, as Ed said, lower rates actually probably should drive some additional refinancing from our existing customers and we will see how the market reacts.

We are hopeful that volumes actually increase here and with hopefully we will get some additional spreads off of the warehouse lines. We are optimistic about that business line. You can look at page 17 in the press release for further details if you want to get some additional component information on the mortgage banking revenue. Gain on sale of premium finance loans that we did sell $230 million of the premium finance to a group of banks that were in need of assets on their books. We recognize the $1.6 million gain. With the strong loan growth that Ed talked about and loan deposit ratios being consistently above the 90% level over the last couple quarters, even with the sale of the $230 million we ended the quarter up at 91% loan to deposits. So we still have a strong balance sheet position as far as loan to deposit ratio goes. We will look at future sales either again through a syndicate of banks that Bank of America put together for us or through a securitization if that market's available. Those sales will depend upon the commercial loan growth within the banks.

On securities gain side, we did record a gain of $2.5 million from the sale of a bank stock. We talked about that last quarter on the earnings call, since it had occurred really by the time we had the earnings call last quarter. So that eventuality occurred. In other income we did have a gain of $2.6 million from a sale of a piece of property that we held for potential future development. And again, we talked about that last quarter, so I won't go into that any further. On the other expense side, salaries and employee benefits were up over the third quarter on a few components of that. We did have the Broadway acquisition in the numbers this quarter that weren't in the third quarter results, accounted for a little bit of the increase. We have been hiring some additional (inaudible) in this market. So there's some additional salary cost related to new hires.

The brokerage business was up and therefore commissions related to the brokerage business on the wealth management side and a little bit on the mortgage banking side given the production increase there, increased the commission side. And in the third quarter we actually reduced some of our incentive bonus accruals given the quarter we were having and we had higher bonus accruals in the fourth quarter as the performance rebounded and we do have a number of our subsidiaries that are performing well. On the occupancy side, it is up a -- oh, yes, and we do think it is important in this environment, it is very competitive, there's a lot of turbulence out there, so we do think that giving the incentive bonuses and retaining people is an important aspect of our business and people that have performed well should be compensated well. But with that being said, Ed and myself have not taken bonuses last year and again this year we won't be taking a bonus. So as we talk about the incentive comp it is really for our staff and the people running the show at the individual subsidiaries.

And again, this is (inaudible). But again as Dave said, we had a lot of companies that actually did very, very well for us. If you take away the mortgage Company and a couple of the smaller banks, a couple of our banks and First Insurance actually hit the cover of (inaudible), so you do need to reward those people. We do our bonuses for senior people formulaically for the most part. Those people should be compensated. These are the times when you have -- it is very easy to see how you can have morale issues when stocks trading where they are and with just the market in general where it is. We need to keep people motivated. They believe in what we are doing. We still have very little turnover, we are able to attract very good people and keep them. This is a time where you have to walk that fine line of not over compensating, but yet keeping people motivated and keeping them involved as owners of the Company. That explains that for you.

Occupancy expenses went up a little bit. Our Wayne Hummer offices moved to a new location, there's some expenses associated with that. We had duplicate offices in one of our cities that is covered by our Wheaton Bank as a result of the Hinsbrook acquisition and we closed down the smaller office and there were some improvements and fixed assets there that we wrote off as we abandoned that branch in favor of the larger branch in that market. Professional expenses were up a little bit, mainly related to some legal and consulting cost related to the nonperforming assets that Ed talked about earlier and working through those issues. FDIC insurance, if you get into the other areas, up again another $200,000. Again, that's just the new rate environment that the FDIC has put into place, it applies to all banks not just us. And no other real unusual items on the expense side.

As far as the margin go, Ed touched on it, we are down six basis points on a link quarter basis. About half of that is really margin compression as rates have been coming down and the other half was really related to interest reversals on some of these new non-accrual loans that went on in the fourth quarter. About three basis points for each of those issues.

With that, I think we are ready to take questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jon Arfstrom with RBC Capital Markets.

Can you hear me?

Yes. Can you hear me now?

I can. Ed, you talked about credit spreads a bit. Can you elaborate a bit on where you are seeing credit spreads come back and where you think they're still too tight?

Credit spreads have come back obviously in the real estate side on the business, rebound real estate as we like to call it, those ones that have been washed through once and coming back repriced you are able to get pretty good spreads on those. The commercial side of the business it is still tight, with LaSalle being bought by Bank of America. With the private bank guys, their move, there's a lot of competition. Every commercial deal, I think I said this last quarter, is a jump ball right now. There's a lot of competition for these good commercial deals. You haven't seen the spreads pop in as they should there. But you are seeing it in other areas. We have not seen it in premium financing either. I didn't talk about premium financing, probably should. That business did very well for us last year in the face of an extremely soft insurance market. Our volumes were about equal with last, the year before, but we had to do about 18% more contracts just to get there. The average ticket sizes were down that much because of the soft insurance market. Because of that, the spreads have not come back into that market yet.

We anticipate that we would love a higher market to come in, an entire insurance market, because that would be very, very helpful to us. We haven't seen the spreads come there. But we are seeing it on the real estate side, a little bit on the commercial but not as much as you would like. My one fear in all of this -- I got a lot of fears -- but it is that these lower rates that are coming about could lead to some of the same stupid, insanity type pricing that we saw in the past. Hopefully the people will learn their lesson but, boy, you never know. That scares me a little bit with the lower rates that it could bring up demand but we believe that this cycle has got another couple of years to run, in which case that you will start seeing more and more spreads come back as more and more issues pop up with maybe some of our competitors across the board. Not as much as you would like, Jon, but we are starting to see some correct.

A question on the premium finance securitization/sale opportunities and also loan growth, if you can actually take $1.5 billion off your balance sheet, you talked a bit about a strong loan pipeline, but is it possible from where you sit right now to fill that hole back up, the entire amount?

Remember $1.5 billion would equate to, of production being sold would equate to about $500 million of outstandings because they pay off so fast.

We would think that we -- there's actually -- given our pipelines where we are right now, given our plans for moderate growth, moving $500 million off the balance sheet we would fill that up. We are actually running a little higher than I like to run. I think you need to have some liquidity here and running in the 90s is not that -- never something that we wanted to do. Just by taking the current portfolio down to 87.5% loan to deposit would be about a sale of, would be about taking $500 million off.

So, we actually have room for even more than that in terms of sales capacity, given the pipelines that we have but we will probably run closer to the 90% number in the first half of the year. It is very possible, as Mr Dykstra continue to tell them the most important thing he can do this year is to get the -- he succeeded in the fourth quarter, I got the $230 million sale off, the most important thing he can do is to get that sale in place and open up the hole on balance sheet. It is possible that in the second quarter that we could sell or in the second half of the year we could sell even more than that, Jon, given what we see in the pipelines right now. We'e love to sell as much as we can and just have as much free capital as we can to allocate to growth and to other corporate uses. Again, the loan sale will give you a nice break on capital, which is nice.

Just one more on this topic, is there any difference in the gain that you would realize from the securitization versus the sale to B of A where they would distribute it through their correspondents.

Well, it is a negotiated rate. I think the rates -- .

The question is is there any advantage to ding the securitization over the straight sale.

The securitization would give us flow as opposed to we do kind of a warehouse deal now, we bulk it up and then we sell in one fell swoop. Securitization would allow us to sell on flow, which would be a lot easier for us in terms of the balance sheet, management, if we just would sell every week as opposed to once a quarter, that would be very helpful to us. The pricing, as Dave said, is a negotiated pricing. We think that whether there's advantage or not, it wouldn't be material, I don't believe.

What we do through the bank of America situation is really a best efforts. We'd have -- we will give them a volume that we would like to sell and they will work with a group of banks to see whether they can pull it off. If you went to securitization, you really have a committed line, but you would have a committed line and you would have to, there's advantages and disadvantages there. If for some reason commercial loan volume really fell off and you wanted to keep those on your books, you would be paying an unused line fee on a securitization, where through the Bank of America deal it's best efforts on our part.

If we don't have any to sale, we don't pay anything. So there's pros and cons. The pricing, what we did this quarter was just a little bit more expensive than what my understanding of what a securitization could have got done with in the fourth quarter. That market was really difficult, according to the large players that we talked to as far as pricing and getting something done in the fourth quarter. So I don't think there would have been much difference in the fourth quarter. If the securitization market settles down a little bit and goes back to sort of historical pricing levels or even 20 or 30 basis points better than historical -- or worse than historical pricing levels, then the securitization is probably a little bit cheaper or a little better for us.

Okay. Great. Thank you.

Your next question comes from the line of Brad Vander Ploeg with Raymond James.

Morning.

Hello, Brad.

Back to just follow up on Jon's question about lending. You talked a little bit about pricing, I am just curious how terms are these days. Are people still pretty tight on the terms or is that loosened up at all?

On the commercial side of the business it is -- . Yes, underwriting terms. You are talking about underwriting terms?

Yes, exactly.

You would like to see more on the commercial side of the business, but we haven't wavered from what we want. We don't competitively give in, we didn't do it for the two years it would be stupid to do it right now. We have stuck with the same underwriting standards for 16 years. They have not gone the way you would want them to go as much as you think they should because of the competitive nature right now, what's going on in the markets.

Okay.

On the real estate side, absolutely, on the individual side for -- the true CNI stuff, you haven't seen crunch pricing come and terms come through yet, which it is a little bit same old, same old. That's what I worry about a little with this drop in rates and the competition, whether that will happen or not. But the good news on that front is, Brad, that every, as I said, everything where you couldn't get into places before, pretty much every deal out there is a jump ball. We are getting a lot more opportunities to quote on deals and are picking up a lot of business. I try to go out now once every two weeks or once a week on a full day of calls with one of the banks. It is really kind of interesting the opportunities that we are getting. So, you would like to get better terms and pricing on it, but we pass on some where we don't get what we want, but for the most part we are getting some good success.

Then on the deposit side, just in the context of the Fed cut yesterday and potential future cuts. I know pricing is very sticky, but I am wondering with such a big move yesterday and maybe another 50 coming up, does that shake things lose a little, do you think, and get you to, allow you to bring rates down a little more aggressively than you have been able to in the past?

Well, we are aggressive and most of our competition is aggressive in cutting their rates right now. But, the best thing will happen is when Countrywide stops offering what they offer to public sales out there. They are really the outliers but you are going to run into compression. If we all get another 50 next week, you are getting to the point where the asset rates just have more to fall than the liability rates and you have to pay something. That's where compression is a real possibility of entering into the equation again as it did back after 2001. Again, but that opens up the opportunity on the covered call side for us which has always been, for those of you who have known us for a period of time, it has always been a very effective hedging against that sort of thing too. A real secret for us, Brad, is on the commercial side in getting more and more DDA balances built up. That's really what we are concentrating a lot on this year and what's at really the top of everybody's list.

Okay. And you mentioned, Ed, earlier about trying to keep some powder dry on the capital side. I am just curious, being a buyer in this market what you are seeing, if there's any more willingness to sell than usual or are people still holding out for unrealistic prices or how is the acquisition market in Chicago right now?

The acquisition market is kind of dry right now. There's not a lot of books flying around. Everybody is trying to sort out where they are at. But if this thing plays out like the last ones have and it does go, I have always been a believer in cycles. And again, I think this started in March of last year and it is going to go as long as that inverted yield curve environment was, which is about three years. If you get probably toward the middle to the end of the year, there's going to be some banks out there that are going to have some issues that are going to have to sell, and that's where some of these opportunities come in.

I can recall back in the 1985 through 1990 where I was before we started this thing, we bought ten banks in that time frame and I believe paid about average book 15 to book and a quarter for them. They were broken banks but with great deposit bases and great opportunities and through the miracles of purchase accounting you were able to kind of fix the balance sheet. Because you have got very good loan demand you can make those things profitable right out of the box. If this plays out like the previous cycles have played out, there should be opportunities, in my opinion, starting in the second quarter of the year for some strategic acquisitions, smaller deals probably in markets where we are not in it can really build off of. So we are actually looking forward to that.

All right. I guess that just surprises me a bit that that hasn't happened already, that there hasn't been any panic as the problems have been out there for a while and you do have some potential sellers trading at book and a quarter. But it sounds like that hasn't really happened yet.

We are not seeing much flow come across our desk, hardly any flow.

Okay. Thanks.

Your next question comes from the line of John Pancari with JPMorgan.

Good afternoon. Ed, can you just comment a little bit on, and I am sure you are fielding this question a lot, but on your reserves just given the general direction in delinquencies and the credit pressures that we are seeing across the space right now, has anything changed in terms of your comfort in your loan loss reserve in the level that you are looking at right now? And if not, what do you forecast could potentially make a or bring about a change in that view where you may need to bolster your position there?

If we were uncomfortable with the level of reserves they wouldn't be there. They are what we are comfortable with. The absolute level did go up this quarter as a percentage. I think if you go back in history and you look at our charge-off, if you look at where we anticipate to be 20, 25 basis points charge-offs, we are comfortable with the level of reserve right now. If this continues going forward, obviously, we would have to adjust the reserve. The reserve calculation itself is now so formulaic based upon our history, our loan grading system, which is audited not just by the regulators but we have special auditors come in and review that at all the banks on a quarterly basis, review loans and the loan grading system based upon where our nonperformings are.

We feel that, we feel comfortable with where that level of the reserve is. The real philosophy on reserves, even though you can't -- we are driven by the logic and the formulas that we have employed, if the reserve was hypothetically 110 basis points, you would still be replenishing it with any charge-offs that you have. That's the way it is going to work. So it is really an overall reserve and capital position that you look at. But again the numbers that come up are based upon quality of our portfolio, we don't make them up. There's a huge analysis that we go through to analyze that. If nonperformings were to continue to rise, I would imagine the loan loss reserve and provisions would rise along with it.

Okay. Yes, and we just have a lot of banks in this space where the past few quarters that have been pointing to the formulaic nature of the reserve and therefore didn't see the need to. And then we've had a couple completely make a about face and bolster the reserves over the past several months.

If you think about it, we operate and we have operated at half of our peer group, in terms of charge-offs for pretty much our entire life. I mean you can go back to 1991 until current and we operate half or less of our peer group in terms of charge-offs and portfolio quality. If in fact we were to approach our peer group in terms of charge-offs, then I think that you would logically see our reserve approach our peer group. As long as we are in this range that is about half, doesn't it make sense to you that it would be where it is? I tell our guys here, I said listen, you have got to make sense in the logic, we have got to make sure we are comfortable with this, because quite frankly I am more afraid of the SEC than I am of the investors. We have got to do this right and make sure that it is perfect and that it really relates to the quality of the portfolio where we are at any point in time. We take all of the guess work out of it.

Okay. Fair enough. Then just want to touch on one other thing, on the banker hiring and potential hiring coming out of LaSalle and you kind of alluded to some potential there. I just want to get an update from you on what you are seeing in terms of the opportunities to pick up some people from La Salle in your key markets there.

We have actually had great success in picking up people from other than LaSalle. Just hired a young man as senior lender out at our St. Charles bank who came from a different competitor who's very strong. We are very excited to have him. We picked up some other folks for our Advantage bank. The LaSalle situation is there's still a lot of folks that we are talking to. I think the end of February is their like get your money date. We are finding a bit of a disconnect between the compensation of some of these people and what our cultural compensation is. LaSalle didn't have a lot of equity to hand out so they paid people a lot of money.

In some situations, we have taken a pass on some folks because culturally it would just screw us up. On the hiring front we have picked up a lot of good people, some from LaSalle but some from other banks in the area that have been very productive for us as evidence by our growth in loans and our pipelines right now, especially on the commercial side of things. But, we -- if you hold us up against maybe some of our competitors who have taken lots of folks from LaSalle, we are not in that ballpark. But it is a bit mitigated, too, by the fact that we are getting into a lot of these customers. There are relationships that were outside of there that we have been able to pick up a lot of good business.

Okay. All right. That's helpful. Thank you.

Your next question comes from the line of Ben Crabtree with Stifel Nicolaus.

Yes, thank you. Good morning. The fourth quarter, the occupancy equipment expense in the quarter, does that -- is pretty much everything in there, in other words, is that a good run rate going forward?

As I said in my comments, Ben, there's a couple of hundred thousand dollars in there for some leaseholds that we and other fixed assets that we wrote off as we consolidated branches in one of our cities where we had some overlap from the Hinsbrook acquisition. And Wayne Hummer moved offices so there's some cost in there related to their move. On a going forward basis, those offices are much nicer, much more conducive to doing their business and cheaper than what they were paying in the past. But there is some cost of doing the move and some of that is in there. So there are a few unusual items in the occupancy expenses.

Say what about 200,000, $200,000 or $300,000 of unusual in the quarter.

Yes, there's $200,000 for the write-offs and I don't have the exact number for the move expense but there's probably $300,000 to $400,000 range in there of unusual items.

And the Broadways completely in there?

And that would be another thing, Broadway contributed to the increase in occupancy, but they would be in there for two months of the three.

Two months of the three, okay. I guess I would like to talk a little bit about your, how do you view your capital ratios. The way I calculate tangible equity ratios 4.8%. Given what you say about capital being king and given the environment, we see a lot of other banks feeling as those they want to have extra capital around. I wonder how you feel about that and whether or not you are going to be pushing to one way or another get that ratio up significantly.

I think we are comfortable with the level that it is at right now, 4.5% to 5%, given the nature of the balance sheet. We see no need to run out and get extra capital right now. We don't see anything on the horizon that can't be handled under the current capital base. One thing that everybody forgets about us is because of our structure we do have the ability to sell a bank or a Company. I mean we do have that ability out there if we ever needed capital, I could spin off a bank and a good earning bank, if I ever needed it. I think our footprint is so desirable and our position again there is so desirable that a fire sell basis, you don't have to sell the whole bank, you just sell a bank off and that would be very helpful.

But most of those are banks that we have acquired, we have more than doubled in size and the earnings are strong and they're pretty good. We should be able to do something like that. There's lots of alternatives when we look at -- at capital and what we can do. You could shrink assets, you could sell a bank and shrink your assets and recover capital and a gain on that which would be very helpful. There's a lot of different things you can do right now. But I have got to tell you with what we see on our balance sheet and where the business that we are doing, we are comfortable that the capital level that we are at right now and don't see a real need to go out and shore it up.

As I said, the last two years we have tried to be as conservative as we have always been on the lending front. So we don't see any large train coming down the tunnel at us on the credit quality side.

Right. And if I interpreted your comment earlier when you were talking about the mixed change in loan portfolio, I guess I would have assumed that the premium finance loans had higher margins than a typical commercial loan, but what you are kind of implying is that a shift from premium loans to finance loans to commercial loans would actually help the margin?

The shift from premium to finance loans, of premium finance loans to other loans we hope would be neutral in the market.

Okay. And then the final question relates to the tax rate. I mean I guess I have got a 35% rate built in going forward. Is that reasonable?

We generally been a little bit over 35%. It is 35% to 36% you are probably fine.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Kenneth James with Robert W. Baird.

Hi. Good morning. I had a question on your strong commercial loan growth this quarter. I was wondering if you could break that category down a little bit between kind of peer CNI lending and commercial real estate lending?

As far as the growth goes or -- ?

Yes, just in terms of the dollar, I mean, a couple hundred million of link quarter growth there and I was wondering if it is all commercial real estate of if it was more tilted toward CNI or -- ?

Most CNI have some commercial real estate built into it, so we have a little trouble bifurcating that out because usually you pick up a CNI relationship you will get the guys building and then you will get his working capital line and some equipment notes. But I would say that it is probably one-third rebound real estate, one-third commercial, and the other third other type of loans.

Okay. And then the growth you saw this quarter would you attribute that more toward your existing customer, demand from your existing customer base or picking up new customers given kind of the shake up in the market?

The latter.

Okay. And then a question on the margin. You alluded to this cycle being similar possibly to the steeper rate cuts we saw in early '01 or in the '01, '02 period. During that period your margin gave up almost 50 basis points. I just want to be clear that you are not seeing perspectively pressure anything near that or do you think that's a possibility?

If you go back to the one in four environment that we were in after 9/11, our margin, our core margin, if you take out the trust preferreds and the holding Company funding, was close to 390 and actually went town into the 330 range. I think that we would probably hold steady in the 330 type range. I don't think there's another 50. We never really recovered coming out of that, the inverted yield curve and kind of the craziness on the credit side of things and lack of spreads never really allowed anybody, any of the banks to come out of those initial compression cuts the way we would have liked to in normalized times. So I think that what you are going to see is the margin will, again, not increase substantially. I think it will keep playing in that kind of tight band that you have seen for the last four years.

Okay. That's helpful. Thank you.

Your next question comes from the line of Brad Milsaps with Sandler O'Neill.

Hi, good afternoon.

Hi, Brad.

Dave, just a quick question on there was like $990,000 related to some losses on investment partnerships. Is that a deduction to other non-interest income. Just trying to figure out where that played in there on the go forward basis or was that more of a 12 month number?

That was a -- that is a deduction from other income.

Okay.

In the quarter. Over time, we've had generally, you could have a quarter where you have $200,000 or $300,000 worth of gain, $100,000 worth of gain, $300,000 worth of gain and a small loss. This one was just a little bit larger. We have just got some investments in some limited partnerships that invest in the financial services industry and a couple of those got hit in the fourth quarter a little bit, more than normal. Over the long haul they have been very profitable for us. It is just this quarter it took a little bit larger hit than normal. Normally we don't get down to that sort of granularity if it is a $200,000 or $300,000 gain in a quarter, but given the size of this loss we broke it out separate.

I was just trying to get a sense of kind of run rate going forward. Sort of in that vein, Ed or Dave, last quarter you had several things that worked against you in terms of sort of extraneous losses and this quarter you, of course, had several gains. Would you sort of view kind of run rate earnings going forward somewhere kind of in between the third and fourth quarter?

We don't give estimates.

What I tried to do earlier was to say what our philosophy was and what we intend to do. I will tell you, Brad, I think one of the interesting things about analysts and I'm not comment just in general, is that I think everybody thinks that life is linear, life isn't linear. I tell my kids, I go, it is spread sheet mentality that you can build into a spread and think things are linear. They really aren't always that way. If you look at the covered call issues, which we had none last year, you can kind of get an idea if you go back to that we will be writing those volatilities back in a market in a falling rate environment, you can kind of see how that worked. You would need to incorporate that into your run rates.

You need to incorporate the additional maintaining the loan value in where we are and the anticipated loan sales that we are talking about. You have to extrapolate every -- I took some time to walk everybody through the strategy, to say guys, extrapolate this and you saw a little bit of it popping out in the fourth quarter. We have given you kind of what our plans are and what our numbers are for you guys to determine, come up with a best guess of where you think we will be on run rates going forward. We don't give guidance.

Fair enough. Fair enough. Final question, Ed, you talked about maybe this time last year, maybe it was in the second quarter, really asking all your subsidiary banks to figure out a way to save I think it was something like $25,000 a month or something like that. You certainly made good headway there. Just curious as to where you were in that process, how satisfied you are and will you continue to kind of hammer on that sort of mind set going into 2008?

Absolutely. Absolutely. We have an all hands on deck meeting February 5th to respread that gospel. I was very pleased with expense control last year. I think a lot of the different organizations did a lot of fun things that related to getting everybody involved in saving money and really wringing the wash cloth. I think there still are opportunities and we continue to identify other opportunities that are popping up and that will still be the modus operandi here as good strong expense control.

Your next question comes from the line of Mac Hodgson with SunTrust Robinson.

Questions on credit quality. It appears as though the, of the three credits the one that gives you maybe the most concern is the one that came out of Hinsbrook, the $60 million loan. I didn't know if you could provide any more detail on the type of residential development that it is, the number of lots, that sort of thing just to give us more clarity on that project.

It is two different developments of which there are two phases of each development, split pretty well evenly. The one development actually has reasonable velocity right now. You know, one a month, which is pretty reasonable given this. So it is well along, they're both very, very well situated. The questions will be phase two a couple of years down the road, whether they're sold in bulk or what we end up doing with that. The other one is a little bit slower and more problematic, probably maybe only 10% of the lots have been, have been sold and probably will be a little bit longer in the absorption rate. But if you run -- you are close to capital and you say okay, let's take a five year period or four year period to resolve this thing. Look at where we are in at on these loans.

We are working with identifying any number of three very quality joint venture partners in this transaction. Take our cost, our cost to capital, and run it out, you get IRRs that are really -- and you're running it out at absorption of one a month for five years, the IRRs are still very, very strong. There's no reason not really to ride this one out. If I had a $100 million of this stuff, then maybe your answer is -- maybe write them all off then too, but your answer is a little bit different. But on this one it is just very, very clear that you want to take some time on this. The other deals -- so, it is a classic land development deal that the guys ran out of juice and we are going to own it.

Okay. And maybe, remind us again what the total size of your residential construction development portfolio is and then maybe if you could comment at all on trends you have seen in your watch list over the quarter absent this uptick in non-accruals.

Dave is looking up the number.

The land, this sort of land development deal, they're less than 5% of the portfolio. It is not a significant piece of what we do. You have to remember this one was done by Hinsbrook and not under the underwriting standards that we probably would have done. When we reviewed it, these projects still had velocities, they still had sales, they are desirable areas, and although it maybe wasn't underwritten the way we wanted to do it, it could stand on its own at that time. It is just one that we monitored. Obviously the severe change in the markets caused stress there. So probably that one went into stress a little bit faster than what we would do in our own portfolio the way we underwrite them. But it is less than 5% of the portfolio is land development type of deals like that.

Okay. Any comments on watch list trends?

Actually watch list trends are kind of interesting. They actually kind of went -- they went down at the end of the quarter in terms of total numbers on, notwithstanding carve these guys out. But they have been on the watch list for a period of time. The actual numbers went down. We had good clearance in the fourth quarter of older deals. I don't think that there's a deal on the watch list other than these three that is over a $3 million, is there, Dave?

They're nonperforming. If you carve these out there's not a deal in our nonperforming that's more than $3 million if you take those three out. It is very granular. There's -- and so we are comfortable with it. And I am -- and I don't think we have any really large ones in like this $15 million deal staring us in the face either. We are comfortable with our -- we have got these three, but they're all kind of different too. You have one that's sort of a land development. One that was a low rise apartment complex that is being converted to condos right in the heart of one of our primary market areas.

And another one that is a residential development deal but it is onesies, twosies in different areas. It is not a big development deal. It is not like there's a segment of our portfolio where we did some sort of large amount of lending with some sort of suspect terms that now is showing stress. These are just a couple of one offs. Other than the one we inherited from Hinsbrook, the other two we actually feel pretty comfortable they will get pushed through this year.

There's a couple other corn field deals out there, if you want to call them corn field deals, but they're performing with strong borrowers and Mez behind them. They have actually been kind of interesting to deal with because of the borrowers being as strong as they are, how they have reacted to this and to the lower velocity and how that is all working. We've had some, on some of these onesies, twosies, there's a commercial development right in our market area here where the borrower paid down $2 million, finished the one building and put the other two in moth balls and just brought our loan down to next to nothing and we'll ride it out for two years and actually has more than the wherewithal to do it. It is onesies, twosies that will come. That all being said, in this market, who knows what's going to pop up. Sometimes they just, they pop up.

We do a really good job. I've read a lot of press releases this quarter people saying well we went to scrub the entire portfolio. We do that all the time. We are constantly scrubbing, identifying issues and moving forward, trying to get them out of here while they are still breathing or dealing with them when right away and not being in denial. I think if you look back at our recovery, the charge-off ratio, you can see that it is probably one of the highest that you are going to run across. So we try to maintain this very conservative credit philosophy and never ever be in denial, but there will be things that wash up on shore this year. We have just got to make sure that you take the stuff that washed up last quarter and get it out of here to make room for the stuff that will come up. It is a built in part of our philosophy.

Great. I appreciate that color. Thanks, guys.

Your next question comes from the line of Ken Puglisi from Sandler O'Neill.

Afternoon, guys. I wonder if you can just clarify for me the size of the reversal of the estimated loss on the mortgage obligations. I am looking at two press releases that were on your web site, one says $707,000 and then in the larger one it says $1.3 million.

The 707 is the net, if you go back to -- if you look on I don't know what you are looking at. But on the non-interest income section, right under the table, we had a $1.3 million that we reversed on recourse obligation, sort of the put back. But we also had an additional $583,000 worth of valuation expense related to mortgages held for sale, where we were unable to place those mortgages that were in the pipeline with the end investor because the end investor's away. So the net of those two is the 707. Both of those are deemed to be valuation adjustments in our mind.

Got it. Thanks a lot.

You're welcome.

Your next question comes from the line of Peyton Green with FTN Midwest Securities.

Yes. My question, just in terms of the psychology of your borrowers now, I mean how are they feeling about deals prospectively that they're looking at? Do you feel more tentativeness of your borrowers? If so, do you think that the rate cuts that have been done over the last 30 or 45 days are going to change their attitude? Was it a real demand problem?

For me to comment on the psychology of my borrowers, I don't know what I could possibly say. You are going to get me in trouble.

We will call him Dr. Ed. (LAUGHTER)

In terms of sentiment, it runs across the board right now. You see -- you can't help but see caution in most people as they want to see how this is going to play out and when the bottom is the bottom. Everything you read, everything you hear, the psychology of it all is some what negative. Fortunately, our borrowers, especially in the markets that we are in, are in the better, more well to do areas. Everything is a little bit more muffled. A lot of people look at - as I said earlier I have gone out on a lot of calls over the last quarter and will continue to do it. I am actually enjoying it. I am meeting with a lot of people who are looking at the opportunities that are coming out of this repricing of the world and we are getting a lot of opportunities with that. A lot of wealthy people who have been sitting on cash with nothing to do and can pick up some of this rebound real estate.

Really it is kind of across the board who you talk to. Not many happy real estate developers these days but there's a lot of happy guys who are picking up real bargains that have the wherewithal to carry. On the CNI side we have not seen the commercial side, commercial construction nor the CNI side get pushed really, really hard yet. If this thing holds to the past cycles, commercial construction usually follows 12 to 16 months behind residential. So if you figure that started last March, by mid-year this year you could see commercial real estate take a bit of a downturn. That being said, the guys that I talk to on the commercial construction side, went on some calls there, we have a number of customers there say their backlogs are humongous and that their business is very, very good right now. It is kind of across the board depending on the sector. But a lot of smart people are viewing this as an opportunity.

Okay. So it doesn't feel materially worse than it would have six months ago?

I think for real estate developers that don't have deep pockets it certainly does.

Sure. I was trying to get more at your customer base. Okay. And then in terms of the efficiency efforts that you all have been looking at, are there any major efforts that you have come up with that might be a good opportunity for you all to exploit over the next year or so or is it really going to take more revenue across all of the banks to -- ?

It's more revenue. We operated, we operate very lean and mean. Take our biggest bank, Lake Forest Bank, it is $1.5 billion bank with a margin of around a little over 3%, operates at a 40%, a 39% or 40% efficiency ratio. If you take our banks by the age of the banks, the older banks are so efficient right now that what we are finding is the onesies, twosies, that sort of thing, there is not a major, major initiative that can take right now to save massive megabucks. And our efficiency ratio tends to be a little bit higher as we have got a brokerage operation with a lot of our peer banks our size don't have.

Some mortgage operation and the newer de novo banks that are in there. It is the revenue side. If our margin was a little bit better our efficiency ratio would be right in the sweet spot. Part of that margin compression was the growth of the bank and the higher rate CDs and we are working to get those down. Revenue is -- we are going to watch the expenses but it is the revenue side where you will get the gains.

And you figure over the last two years, Peyton, that you saw our efficiency ratio pop up, it was really a function of -- we had hardly any covered call income last year and hardly any gain on sales. In previous years that falls into the other income category and really upped your efficiency ratio. We kind of think some of that should be in the margins, but we're not allowed to do that. As those pick up again in this falling rate environment with the strategy we laid out, you are going to get that additional revenue. We think mortgages will also add to that. We think wealth management is on a good track also. It is really the revenue side that needs to drive this equation. Revenue side, deposit mix, more DDA balances, and getting spreads on loans that would be great.

I may have misheard this but I thought you said that you're more interest in M&A targets would be in markets that would extend your footprint. Wouldn't it be more attractive to kind of double down in some of the markets where you do have smaller banks and you can gain a lot of efficiency by putting two or three branches on top of your one or two branches?

Yes. We have done that in one town, we did that, consolidated them. There's -- we would be more than willing to look at that. That makes a lot of sense.

Okay. Where do you think, in terms of capital levels, I mean is this a year where you would prefer to build capital or just maintain where you are?

You play it by ear. As I said, we are comfortable in that 4.5 to 5 tangible level. If the outlook looks worse, we would build capital and we do that by slowing down growth or not growing at all as we did last year or slowing down growth. As I said earlier you can always sale a bank, too, if you had to, if you thought it made sense to do something like that. We are comfortable at our capital levels right now. We are not running out to raise any at these levels, that's for sure.

All right. And then in terms of have you all seen any pick up in your mortgage business since the first of the year?

You take this.

I think it has been pretty steady. I haven't got any indications that the refinance boom or any other significant increases occurred. So it has been pretty steady.

All right. Thank you.

Your last question comes from the line of John Rowan with Sidoti.

Good afternoon. One really quick question, just so I understand how your margin is going to react a little bit better. Obviously you are going to have some compression from further rate cuts, but do you even see a little bit of a benefit from the first round of rate cutting earlier in this year potentially later on in 2008?

I think the rate cut will just be helpful on the credit side of the equation. The biggest economic -- if you look at what's going on on the credit side, most of it is in the real estate. And what real estate guys need is time. If you cut their rates or their cost of carry you bought them more time. That's, I think, the biggest factor for the overall industry in dropping the rates is more cash and more time for people. As it relates to our margin, again you really have got to pick it up on the asset side. We will drop our rates accordingly, but you are going to enter a zone where you are going to start getting compressed. That is the hard part.

So, again, we think we will take -- our margin will trade in kind of that tight band that it has been in over the last five years, a little positive slope to the yield curve would help the margin also. That would be very helpful to us if they drop rates enough where you get a reasonable curve in there and things where you weren't making any spread at all, you will start making some spreads and that will be very helpful. That's why I think you are just going to be in the tight, tight band that we've basically been running in for the past four or five years.

Okay. Thank you.

Thank you. I would like to turn the call back over to Mr. Wehmer for any closing remarks.

Thanks, everybody, for calling in. We appreciate your time and if you have other questions, as you all know you can call Mr. Dykstra or myself. Anything pops up, feel free to call us. We look forward to hearing from you and we look forward to 2008 and seeing you all very soon. Thanks.

This concludes today's Wintrust Financial Corporation fourth quarter 2007 earnings conference call. You may now disconnect.