Wintrust Financial Corp (WTFC) 2008 Q1 法說會逐字稿

Good morning. My name is Connie and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter 2008 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. Mr. Wehmer, you may begin your conference.

Good morning, everyone. Welcome to our first quarter conference call. With me are Dave Dykstra, Chief Operating Officer; and Dave Stoehr, the Company's Chief Financial Officer.

About three years ago, we talked about entering into our rope-a-dope strategy with a view that the classic credit cycle was going to be upon us and sure enough it is. We believe that we're entering the second year of what we think will be a three year credit cycle and as the second year this is probably going to be the most -- the toughest of all of the years of this particular cycle. We think it will be challenging. Our first quarter shows there are some challenges there. At the same time we have spent the period leading up to this trying to position ourselves to get to the other side stronger than when we went in and to just weather this particular storm.

As stated in our press release, there were three factors that generally related to the economy in general that affected our earnings this quarter. First, net interest margin compression. The Fed's dropping of rates as precipitously as they did during the quarter put pressure on our ability to reprice our liabilities fast enough and to reprice liabilities down in a commensurate amount as the overall rate dropped. Market interest rate or net interest margin compression therefore takes place. It's going to take us a quarter or so to get the liabilities repriced and to get back to where we were before and then, hopefully, continue to grow the margin because on the positive side we see spreads moving back into the market. We have a very strong loan pipeline with those spreads built in. We were able to actually pick and choose it.

There's an old adage that we look at that says a lot of bad loans are made in good times but a lot good loans are made in bad times. And by positioning ourselves as we have we think we have the ability to take advantage of this right now and that too will help our margin getting back to what we would consider normal, and it's a customary part of any normal credit cycle that spreads will come back and you need to have the ability to take care of this.

We continue to work on our securitization of premium finance loans. As you know we've been trying to get a $300 million to $500 million securitization in place to open up a whole other balance sheet that will accommodate this additional loan growth at very good spreads. The securitization market appears -- for premium finance loans appears to be opening up a little. We're working with a couple of providers. Hopefully, if we can get that done that will give us the double whammy of being able to put loans -- replace the loans we securitize with the pipeline that we have and at good comparable spreads, the same time we achieved a gain of sale on the sale of premium finance loans which should augment earnings. Again, we're working on this and, as all of you in the industry know, that market is still a bit dicey, but the asset class is still well received. The premium finance asset class is well received. I think we're probably the only of the top three or four premium finance companies who don't, or haven't utilized the securitization. So, hopefully, we can tag on there and that will be a good -- critical part of what we would like to do. It really is a much better use of capital if we're able to do it that way and it also should enhance earnings. So on the net interest margin side, that pretty much explains what went on there.

We had some losses, some securities losses and some other than temporary impairment charges that we took this quarter. The security losses, Dave, I think related to the other than temporary impairment charges, and those related -- we had about a $30 million high yield portfolio that we have kept on our books for a period of time. As you know, in the accounting rules, if they're under water, 10% or so for five or six months, you need to write those to, mark those down to market, we still think the credits there are relatively good. I think this is a market driven situation and the rates there are still pretty strong and it's a positive return for us. But with widening credit spreads and the market where it is, we were subjected to that particular accounting. The other charge that we took, about $900,000, we have $6 million through the course of the last five or six years that the Board and Management allotted to private equity type investments, more fund investments. One of the funds that we invested in basically took it on the chin and we've written that off. I think there's just a little bit immaterial amount left on the books right now in terms of that. The other is investments that we have continued to -- at least to date, perform well and have performed well. Again, that's probably a total of about $6 million investment that we have in total there.

Obviously, the biggest issue was on the credit side. Charge-offs were right around 30 basis points and we stated, we figured 20 to 30 basis points is the range that we would anticipate for charge-offs. We're at the higher end of that range right now but I would anticipate that you would be at the higher range going into this, really, the bottom of the credit cycle which I think we'll experience for the rest of this year.

Non-performings were up a bit but I think if you, again, we always look at the velocity. In this period of time, no matter how well you underwrite, non-performers -- we're not bigger than the market and non-performers are going to wash up onshore. We really have to be working to clean the shore because you know other ones are going to come and get good velocity of assets through that non-performing category and off of our books. In the first quarter that was slower than we had anticipated; however, if you take into consideration what's been resolved to date and what we think will be resolved by the end of the quarter. We have a letter of intent on a $10.4 million loan that will take us out of (inaudible) particular relationships. We're pretty much right about where we were. And we're making good strides and good headway in terms of getting the old ones off to make room for new ones that will -- in this market that will basically come on.

All that being said, we actually add to our provision and took it up to 79 basis points from 72 basis points. I think that we use a methodology there and that methodology with increases in non-performings as a market in general will be for the remainder as long as the accounting stays where it is and the banking market stays where it is and we would be adding to the reserves over time and continue to build that reserve level. We've always been around 70 basis points in our reserves. Our charge-offs has always been about 40% to 50% of what the market has been. We believe we'll still be in that category but, again, no one is bigger than the market and our analytics show us that we'll be increasing that reserve over a period of time if things keep going like they seem to be going. So, charge-offs are right where we thought they would be in this market, non-performings we would like to get a little bit more velocity of getting these things off the books but have had good progress in April and I think you'll see us continue to build the reserves as long as the economics stay the same. They told everyone I'm more afraid of the SEC than anyone else in terms of people used to ask, why don't you just raise your reserve? Well, you can't do that. It has to really correspond with what's going on in the markets today. With the markets where they are, we will be increasing our reserves unless something really changes.

The positive side -- we talked about good loan growth and very stellar loan pipelines. We're in an enviable position, I think, as relates to loan volume is that we're turning down a lot of deals based on people trying to price deals based on pricing from a year or two ago when it had no credit spreads or that weren't built in. So we're able to really pick and choose here, and, again, a lot of good loans are made in bad times and we're finding that this is the case here, especially in the Chicago market where the turmoil continues and still we continue to make very very good headway in terms of picking up new relationships that are profitable to us.

On expense control side, we have very good overall expense control. We are comfortable with that and really continue to put the screws to our expenses as we work through this period of time. Wealth Management and the mortgage companies were strong for us and continue to be on track. We would expect that to continue going forward. We're very -- really excited about the Wealth Management side of things, especially our Wayne Hummer Asset Management and some of the initiatives we're taking there. But that business continues to go well as we push to distribute through the banks.

The premium finance business, just a comment on that. That business still is continuing to do very well for us given the market where it stands. That's in spite of the fact that the very soft insurance market has taken our average ticket size down almost $10,000 from $38,000 to $28,000. We're maintaining our volumes but we're having to do a lot more work to do that. The positive side of that is we're doing a lot more units to maintain the volumes that we had but that means we're gaining market share and I don't think we've changed -- I know we have not changed our underwriting standards. In fact we've probably tightened them up on larger deals but we're holding steady there. Delinquencies will rise there but only to the level that we would consider normal. Late fees you see moving up where at the pristine end of the market they were down to 140 but we're used to 200 to -- 140 basis points, we're used to 2% to 2.25% in terms of late fees. So as charge-offs might go up 10 or 15 basis points in that area, our late fees have already moved up 35 basis points and we would expect those to continue to move and get back to more normalized range. So the premium finance business although challenged just by the soft market continues to do very well for us.

In summary, this is going to be a tough year for banking. I don't think any of you who are listening need to know that. We believe that our prudence over the last few years have positioned us well to get through this and to get through this stronger than when we went into it. Again, though, you are assured of our best efforts to make sure that that actually occurs. Dave? Turn it over to you for some numbers?

Yes, I'll just briefly walk through the other income, other expense areas Ed touched on on the margin and provision. Our Wealth Management revenue, first quarter continued to show strong revenue levels with the results being at the high end of the last five quarters. Really second best over the last five quarters with December of '07 being slightly higher due to a significant amount of trading by our customers for tax positioning in the fourth quarter of last year. But strong numbers there. And we're continuing to see progress in building client relationships out of our banks and from our downtown brokerage area.

On the mortgage banking side we're at $6.1 million, again this is the second highest revenue level over the past five quarters. Results are really in the range that we're comfortable with right now. We're seeing strong volume again in the second quarter. First quarter's results actually had a negative adjustment of about $600,000 for valuations on mortgage servicing rights, although the portfolio that we service increased slightly in the first quarter over the fourth quarter of last year. The market value for servicing rights has declined a little, so included in that number is about a $600,000 MSR valuation adjustment.

Premium finance loans, we sold about $115 million of premium finance loans in the quarter for a gain of roughly $1.1 million. We continue, as Ed said, to pursue the securitization or the other sales of this portfolio as the pipelines on our remaining loan portfolios remain strong and our loan to deposit ratio is in the 90% to 95% range. We would really like to see that more in the 85% to 90% range. So we'll continue to try to sell some of the premium finance loans as long as the pipelines and the closings on other loan areas remain strong.

Fees on covered call income, we recorded $6.8 million in the first quarter of '08. Lower rates and higher rate volatility contribute to the increase in this area. As we noted in the press release, the continuing volatility in the interest rate environment allowed us to record so far in the second quarter $11 million of covered call income during the second quarter of '08 so far. As we've said before, we consider this program to be a way to offset margin compression during times of lower rates and we continue to take advantage of the program during such times. Ed talked about the losses on securities. Within that line item, we had $1.3 million worth of net losses on available for sale securities. Of that amount there was $1.9 million related to the non-cash other than temporary impairment writedowns on certain corporate debt securities. Each of those securities are performing but given the market conditions and the widening credit spreads, the writedowns were required based on the accounting rules.

Salaries and employee benefits -- held those basically steady. They were up $89,000 over the fourth quarter of '07. The increases really related to some increases in health insurance costs and our normal year-end salary increases. If you take away those costs we really reduce the remaining salary and benefit area in the first quarter relative to the fourth quarter of last year. And if you look at all other expense categories other than salary and employee benefits, they generally are relatively stable and, in fact, decreased $822,000 from the fourth quarter of '07. So Ed mentioned it, but the numbers bear out that we are controlling those expenses and, in fact, saw a decrease over the fourth quarter of '07 if you look at all categories other than the salaries and employee benefits. So pretty stable cost control, good revenue growth. And, with that, I'll turn it back over to Ed.

Well, I think we always try to give you an encompassing press release that talks about where we are and what's going on and what our plans are. So, with that and our narrative, I think you have enough information to pepper us with questions. So I think we can open the floor for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jon Arfstrom.

You guys there?

Good morning, Jon.

Got a couple of questions here, but on the 20 to 30 basis points of anticipated credit losses, does that make you nervous at all, Ed, staying under that high end of the range and publicly stating that?

Well, that's a range that we anticipate, Jon, whether it's 32 or it's 18. We said 20 to 30, it was 18 last year. We're giving you what we think is a relative range of what we've underwritten to for the last -- for our entire existance in normal credit tax, we don't see anything coming down the pipeline that will change that but with that being said, we're not bigger than the economy. We think our underwriting has been very strong. We're not shy about taking the charge-offs early and looking good on recovery and I wouldn't say it I think we were in that range, and I think if you've tried to measure it on a quarterly basis, measure it on an annual basis, and as they got comfortable with that, if it pops up or down in a period of time but given where the portfolio is right now and given how aggressive we are in terms of just trying to look good on recovery I'd feel comfortable with those levels but we'll see.

In terms of the non-performing outlook, that's helpful in terms of what you have out on the LOI, but how do you feel about the in flow so far in the quarter? Do you feel like it's manageable or?

You mean in the second quarter?

Yes.

Well, really, the end of the first quarter we had a surprise the first three weeks of the second quarter and then that would be the end of the first quarter very well, so I think that we were aggressive in terms of recognizing what we have and putting it in there and it's got -- stuff shows up towards the end of the second and third month, it's where we'll be adding too it and we don't see anything huge coming down the pipeline and hopefully we'll continue to push these other ones out the door.

I always think that you have to take the premium finance loans off of our non-performing numbers because the premium finance loans are over $20 million of non-performers, drop those back and just look at core. Those premium finance loans we anticipated those to go up over time but again, hard to believe that that turns into a money maker for us because late fees move up much faster than we anticipate charge-offs moving up on that business, but if you take those out and then look at the overall level of really core non-performings, I think it's still a very reasonable number. We're not kidding ourselves to think that more will not be washing up onshore in this market and again, the secret is to push the old ones off and the first quarter was slower than I would have anticipated in terms of getting some of these things resolved, but I think we've always in the past been able to do that, push these things through and, as I said we're not kidding ourselves. There will be more coming. We're not bigger than this market, but we haven't been surprised in the first two and a half, three weeks of this month.

Okay, good. That's what I was looking for on that. And then Dave, can you talk a little bit about the margin, how it trended throughout the quarter? I know we haven't asked for margin by month in a long time but just trying to square some of the comments on funding costs and how long it will take your margin to get back to expansion mode?

Well, the key, I think, is how fast your CDs are going to reprice. We had a lot of assets reprice and the CDs are shorter and the compression only occurred because you've got your NOW accounts and your free money and savings accounts and money-markets that you really couldn't take down as much as the market move. So where you're going to get relief on the funding side is from the repricing of your CDs. The biggest category of ours are 12 month CDs. So I think there will still be some pressure in the second quarter and then I think as we get into the third and the fourth quarter I would expect that to stabilize and turn around just given the fact that you've got more than half of your CD portfolio repricing in a lower environment, and we need that to happen to help us. March was an encouraging month, but I don't think you're going to see substantial expansion in the second quarter. You may see a few basis points of compression, but it should be relatively stable but I don't think you're going to see it start rising until the majority of that CD portfolio starts to reprice.

Okay, that's helpful and then just one last one. Any projected timing on your securitization?

Yes, Dave, any projected timing on the securitization?

Sorry, Dave.

We actually do have, it's a tough market out there and we have been able to do loan sales. We did a little less in loan sales this quarter, simply because we've been out of the market for awhile and the people that bought in the fourth quarter of last year really filled up their capacity quite a bit and didn't come back in for as much the second go around because they still had a number of loans still on their books from the fourth quarter purchase that they did. But that 115 million is not dissimilar to what we were doing when the program was up and running in its full stages, prior to 2006. So we are happy with that result but we have had two or three firms contact us and say they are interested in doing the securitization. They like the asset class of premium finance loans. They're familiar with the asset class. They're already involved with the asset class, and they're preparing I guess term sheets I guess for us to see whether we can agree that the pricing and the other terms and conditions are satisfactory. So we've got meetings on that next week set up, and so we should know really by the first week of May whether that's a doable thing or not, but I guess we have encouraging signs from a number of outside parties that have actually contacted us after we had contacted them last year and now they're saying that they are interested getting back into the market. So I don't have their final pricing terms yet, so at what level they're interested in getting into the market is the key question.

All right, thank you.

Your next question comes from the line of John Pancari.

Good morning. Dave, you had indicated a likely bottoming there of the margin third quarter or so. What are you assuming by way of Fed cuts?

Nothing. We don't, what Dave was just talking about, it's staying flat. If the Fed were to cut another quarter, again that compression aspect would kick in. We can't lower some of the deposit rates much more than that. So if the Fed had additional rate cuts, that would not be -- it wouldn't be basis point per basis point but it would certainly take us a little longer to get that margin going on the upward trend again.

Really, the secret is going to be on the asset side. We can get the securitization done. We know how we're going to reprice the liabilities, but if we can get that securitization done, we can -- where our pipeline has replaced those assets and higher yields and we think that that is really what's start kicking the margin is just getting the spreads back in that just weren't there over the last two and a half, three years. We finally have a positive slope to the yield curve which is good for us and one of our -- there's a number of different models that we run, but the one that we really like a lot is the fact that there is inflation out in the market and what would be better for us is a positive yield curve a little bit higher and after the election rates start moving up that has a very positive effect on us but any additional rate decreases would exacerbate compression issues and lengthen the time to get back to normal. I think that's just logical.

Okay, that's helpful. And can you remind us on the CD maturities just the size of what's maturing, just and then the rate that they're coming off at?

Well, we haven't published that but as I said the vast majority of our CDs are 12 month CDs and they come on relatively ratably, so you're going to see about a quarter of that portfolio reprice over time.

Okay. All right and then one question on capital. I know Ed, that you had indicated that the reserve will likely edge higher here if we still see more of the same of what we're seeing this quarter. So assuming that, I mean what type of range do you think is reasonable that we could see a mid 80s ratio here in comparison to your loan portfolio?

I think if you just, it's tough to say because it's, this is, we have a methodology that we employ. It's a fairly extensive methodology. We actually run two methodologies side by side and it's become quite a process. So this is very numerically driven but I would say that if things continue as they are that the same element of increase could be expected going forward, seven to eight basis points a quarter which would get you into the 90s by the end of the year -- I think that works, if the math works there, so I think that would make some sense and again, that could change depending on what flows down the river.

Okay, thank you.

Your next question comes from the line of Brad Milsaps.

Hi, good afternoon.

Hello, Brad.

Dave, just a question on the period end balance sheet. You noted in the release I guess you sold some securities or maybe some securities got called away in the first quarter that didn't settle until the second. I'm just kind of curious how all that flows through, if there will be any kind of gain in the second quarter and just kind of how to think about the overall level of earning assets, et cetera, just with those accrued assets and liabilities that you show at the end of the quarter?

Yes, we mention that only because it grows the balance sheet up, it's trade date versus settlement date accounting, we purchased some securities and there's some securities that were called away and the trade date was in March and the settlement date flipped over into April. So we've got it set up, the receivables and the payables for those and it just inflates the quarter end balance sheet by the amounts that we noted in the press release, but there's no significant gains or losses on those. It's just the settlement.

Okay. I just wanted to check and see, and then also at the end of the quarter you had a fairly high number of Fed funds as well?

Yes. Well, hopefully, we're going to deploy those into loans going forward, but we may do a little bit investments there, but for a bank that's a $9 billion plus bank holding Company, that's not a ton of extra liquidity.

And one of the things too is that the markets actually haven't been the most stable and you always have enough liquidity until you need it. So we're very much aware of liquidity issues in this market and how tenuous the overall market and the banking side of things is. So keeping some liquidity around seems to be a relatively prudent thing to do.

You'd rather be selling a little bit of funds than being tied up on the purchase side.

Absolutely. Okay, and then I think total capital at the end of the year was around 10.2%. Do you have that for what it was at March 31?

We haven't published that yet. It's not going to change dramatically.

Okay, all right thank you very much.

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

Good morning.

Hi, Brad.

Just curious for a little more clarification. I mean with the huge result in the covered call number that you're going to get in the second quarter here, since that typically moves in contrast to the margin, why the margin wouldn't be contracting a little bit more than those few basis points that you indicated?

Humongous volatility when we place those orders. You usually get 1 to 1.25% when you do this thing and kind of what you talked normal volatility, at the time we did it, it was at 2%. So it was kind of the luck of the draw I guess.

Yes, I'd agree with what Ed's saying there. It's just volatility was much higher than we ever seen before and although they move somewhat in concert against each other like you indicated, Brad, it really depends on volatility in the marketplace that drives that pricing more than anything else, and volatility was extraordinarily high so.

Right, okay. So it's entirely possible that we could see -- the market has been pretty volatile for awhile now if that continues you could have both the margin expanding and have that number continue to be quite strong.

And the securitization gain on sale of loans. I mean that would--. Now you're talking about a good thing.

A lot of people ask me, how should I model covered call option income, and they want to put it in and get some sort of hard and fast formula for it, but there is no hard and fast formula. We would not have guessed that we would have received this much in the second quarter because we've never seen volatility that high when we've done this program in the past. So, but the generalities are in a falling rate environment and higher volatility that income will go up, and if rates are coming down and volatility is high we'll do that. If rates start to move up and volatility comes down you'll see that number fall, but we can't predict volatility in the marketplace or interest rate movements. We just take advantage of it while it's there.

Right. And on the securitization that you're working on I'm just curious if there's any sort of significant difference in terms of structure whether it be recourse or you holding subordinated traunches or anything like that that's different than your whole loan sales of the past?

No, they're very similar. We probably would have a little less recourse obligation under securitization than what we're selling, and we don't have much with what we're selling, but they would end up being similar. It would just be the pricing, the funding costs of that securitization and where that falls out. But the accounting for it should be very similar.

Might actually be slightly lower risk profile than whole loan sales in terms of recourse?

It -- quite possibly.

It should be slightly lower than that. Yes.

Okay. I think that's all I had. Thank you very much.

Thank you.

Your next question comes from the line of Ben Crabtree.

Yes, thanks. Most of my questions have been asked. Just a real small one. This isn't a real big item but I noticed a sharp increase in the professional fees, the fees paid in the quarter, just wonder what's going on there.

Well, when you get more problem loans, you end up paying our friends, the attorneys a little bit more money to work through them. I think that's probably the majority of that.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Peyton Green.

Wondered if you could comment a little bit on the size of the watch list, I guess the velocity of things moving out of the watch list. Are you still able to move loans out of the bank at all to others? And then also the level of 30 day past dues?

Well, we don't publish the 30 days past due. Our watch list is increasing slightly and simply for the reason that the velocity has slowed down a little bit. It's a little bit tougher moving the assets off the balance sheet these days than it was a year ago or so. A year ago or so, people were taking some of these borrowers out and people were still buying some of the properties in a little higher degree than they are today.

First quarter is tough to do that also. We had a lousy winter up here and it does factor into it. People aren't around but we're actually seeing a lot more, let me tell you, there are a lot of smart people now on the other end of this cycle who are starting to accumulate assets, and more and more funds have been put together that are coming along that are giving us options as to where to place some of these assets and get rid of them. So we would expect, we've always had very very good velocity as we work through our portfolio and first quarter was just slower than we thought, we anticipated but we would hope to be able to -- I mean, it's -- there have been a number of all caps e-mails going out to the guys that we have got to really pick up the pace here and we put a department in place towards the end of last year with three people soon to be four called our Managed Assets Division and we were going to call it Special Assets but we figured we didn't want to be SAD, we wanted to be MAD, so we actually have a group of people who are really devoted now to pushing these things through and working with the bank to get this done. And that's proved very effective for us also.

They're really in their -- the first quarter was really their first full quarter of operations and they're hitting the ground running and we got a lot of good things going on but like I said there's going to be more stuff that washes up onshore, you can be assured of that and hopefully we underwrote it properly, it's just going to be a matter of getting them off the books and that's why we say the losses in the 20 to 30 basis points we are comfortable with, because as we stuff with our underwriting during this period of time. We didn't change it, we didn't change things, we feel that we've underwritten properly, we underwritten anticipating the credit cycle that we're in right now, and so more is going to show up but will it relate to losses? Hopefully not and we have to clear off the old stuff. So slow in the first quarter, we anticipate it picking up and getting back to normal going forward, but going through the market and working pretty hard at it.

Sure, okay and then in terms of the premium finance business what was the origination volume in the quarter? And then also, to what degree did you write options against the bond portfolio? Was it the entire bond portfolio or was it apportion of it?

Well, it's apportion of it. Not everything you can write against, so the vast majority of it we wrote against during the quarter as far as covered calls but there is a portion of it and I don't have the exact numbers in front of me, Peyton, but the vast majority of it, we did. Premium finance volume actually I don't happen to have in front of me either. My guess is I probably shouldn't guess in a public forum, but they're probably resonating 250 million to $300 million a month.

What's happening in that side, just something that I was going to mention and forgot to, we are doing, we are expanding our market share in that business with lower ticket sizes. One of the other issues relates to lower ticket sizes. In the larger deals, those deals of a couple hundred thousand, up to 5 million, $10 million which come through, the pricing on that is still absurd because our competitors, they securitize most of their work. They usually try to work off of 100 basis point spread and with lower general volumes there, they are being very aggressive on the larger deals and we are not being aggressive. We basically if it's not a relationship, a very strong relationship oriented, we're not going out and doing those deals because the pricing is just way way way too thick. When pricing comes back to normal and it will in that market, the deals that we passed up on are more bid type situations, transaction type situations and with a phone call we're back into that pinwheel really quickly. So that that's why it's off a little bit from last year because mostly the really big deals which we've pulled back from pricing.

Just as a point of reference, there's some of those deals that are going in the low 3% range and we're just not going to chase that.

Okay and then in terms of you all trying to uptake the overall small ticket side going versus what you would have thought, is it better?

It's probably about--.

Are you referring to the Broadway acquisition or in general business?

Just, I guess before the Broadway acquisition you were noticeably trying to increase--?

Yes, we folded that into the Broadway acquisition. Broadway was actually in that market, the market that was one traunch below what we were doing and that business is going very very well. We're very comfortable with that business. We feel that there is terrific growth opportunities in that business. They are moving their offices from downtown Manhattan out to Long Island, and that will save us a little bit of money and they will be converting to our first system which we think is both from an accounting side of things plus from a customer delivery side of things is head and shoulders above the competition. So we hired some additional salespeople there and once they get through these logistical changes we think they will do very very well for us.

Okay, so the growth initiatives are really to come in that business over the balance of '08?

Yes, they've grown a little bit but nothing material, and we think that going forward that's the case.

Okay, great.

Thank you very much.

You're welcome. Your next question comes from the line of (inaudible).

Hi, guys.

Good morning.

I just have one quick question, I may have missed this in the release or your comments. Where does the private equity impairment charge or loss show up on the income statement?

Yes, we do note in the back, there's about 900,000 and its in other income.

Okay. So that miscellaneous?

Yes.

Okay. And then I know last quarter you talked about kind of the three large NPAs. I'm assuming that LOI is related to one of them. I didn't know if you could provide a detail, if there's any update on those other two?

On the other two?

Yes.

Well, the one is going to be with us for a period of time. We're working forward on -- with the joint -- identifying joint venture partners where the property is in foreclosure. The working out a monetary agreement with the guarantors which is in the process. So it's all in the process of collections but when all that occurs that's going to be put down into an LLC that we will joint venture and look for a home for, I mean, we'll get out of it if we can but, in the meantime we're ready to just sit on that one for a period of three or four years until it's absorbed. There is a little bit of velocity but nothing to write home about on that particular project.

The other one is working its way out just through the general course of business. We don't anticipate any additional losses on that entire relationship. That relationship is made up of probably about seven different loans and we made some progress on that, I think about $1.5 million in the quarter, the first quarter, up to $2 million of that was pushed through and we believe that there's two really large remaining projects, one was a very strong guarantor, who has indicated the desire to step up and just move into that with some complications. And the other is a project that's an office condo project that is basically sold out. We just are funding it to completion and it will be sold out. So other than the litigating aspects of the actual borrowers themselves, the projects themselves are moving along and should work their way out of here. So one is working along pretty nicely and the other one is going to be with us for awhile.

Okay thanks for the color. Appreciate it.

Your next question comes from the line of Tom Doheny.

Hi, good afternoon, thanks for -- or good morning your time, I guess. Thanks for taking the question. I'm curious, you noted in the release in the non-performing commercial, consumer and other about $40 million of that is collateralized by residential real estate development. What about, is that true of the losses taken this quarter in terms of commercial and commercial real estate as well, the $4 million or so of losses? Is that coming from residential real estate development as well or what's the composition of that this quarter?

Well, give us a second here. Yes, I'd say the majority of it is probably related. I don't have the detail in front of me, but the majority of it is probably related from residential development loans.

And then what's the overall size of the residential development and land portfolio?

Well, it's less than 10% of the loan portfolio.

Okay, and that includes land for the purpose of residential construction?

If you could put together the sort of the onesy, twosy, residential construction loans that we do, land that we -- just land that we went on and as well as commercial residential construction which I would say would be the home builders with the bigger tracks, if you add all of that up it's less than 10%.

Of the 4 million about 1.5 million or 1.6 million related to commercial relationships and about the remainder of it related to real estate oriented and probably $0.5 million was a commercial real estate deal.

Okay and going back to the loan portfolio, again, that's 10% of the total loan portfolio?

Yes, a little under 10% of the total loan portfolio.

Great. Appreciate it, thanks.

There are no further questions at this time. Are there any closing remarks?

Well, we thank you all for participating and just as an aside, I was talking to an old time banker the other day and we were talking about this particular credit cycle and how severe it really is and where we stand in it, and he said, "You know what? This is one of those where you just keep your head down you do the right things and you just want to come out of it as a strong survivor", and I think that's what we have been planning to do for a couple of years and that's that we're trying to do here. Not trying to have to go out and raise a bunch of equity to bail us out. We're trying to avoid the very large losses that are being experienced across-the-board in the industry itself.

I think this is the middle year where the part of the year that's the perfect storm, we've got margin compression plus increased credit cost and I think that during the course of this year you're going to see some of that but I think for us hopefully you're going to start seeing that abate, and as we uncork our growth initiatives and free up some room on our balance sheet, hopefully the earnings will start coming along and that's what -- we've iterated this plan to everyone who has listened for the past couple of years. This is our part of it right now and our staff and our people here understand it, it's been well communicated to our people and many of them have been through credit cycles before, maybe not this severity but we're cautiously optimistic that our planning will pay off and that we will come out of this much stronger. In the meantime it's going to be a battle but we're up for it. I appreciate everybody taking the time and if anyone has additional questions, you can feel free to call any of the three of us, Mr. Stoehr, Mr. Dykstra, or myself, and we look forward to hearing from you. So thank you and we'll talk to you soon.

This concludes today's first quarter 2008 earnings call. You may now disconnect.