Wintrust Financial Corp (WTFC) 2008 Q2 法說會逐字稿

Welcome to the Wintrust Financial Corporation's second quarter earnings conference call. Following a review of the results by Edward Wehmer, Chief Executive Officer and President, and David Dykstra, Senior Executive Vice-President and Chief Operating Officer, there will be a formal question-and-answer session. (OPERATOR INSTRUCTIONS.)

Any forward-looking statements made during today's conference call are subject to risks and uncertainties. The Company's actual results could differ materially from those projected in such forward-looking statements. Factors that cause could materially -- the Company's following forward-looking assumptions are detailed in the second quarter earnings press release and in the Company's Form 10-K report on file with the SEC. I will now turn the conference over to Mr. Edward Wehmer.

Thank you. Good morning and thanks for taking the time to participate in this call. Based upon the number of people participating, I think we set an indoor world's record. I don't know if it is nice to be popular or just be of interest. With me as usual are Dave Dykstra, Our Senior VP and Chief Operating Officer, and Dave Stoehr, our Chief Financial Officer.

As is our custom, I will begin with some general remarks about the quarter and Dave Dykstra will follow with a more detailed comparative analysis of the operating numbers. For the second quarter in a row, we experienced strong yet measured balance sheet growth while core loans and core deposits were -- growth were again good. Pipelines remain strong, and we are disciplined on the type of business we will take and the pricing we will accept. I'll note here that our growth strategy has really been pushed down to our younger banks.

I think you may all recall if you are familiar with us, back in 2005 where we put the brakes on growth and tried to position ourselves for this storm that we are in right now. We had a number of underutilized, very young branches and banks and we put the brakes on them. As we have been growing, we have been growing in those smaller entities while maintaining share in the larger entities. This is a very effective way for us to grow. And number one, there's no canabilization in the growth. Number two, we are picking up full deposit relationships. And number three, the growth basically comes with no overhead, as the overhead is already embedded in the branches that we have.

During the quarter we experienced net interest margin compression. This is a direct result of the precipitous drop in rates orchestrated by the Fed in the first quarter. We expect the margin to recover through the remainder of 2008. This decline was more than affectively offset by our covered cost hedging programs. As you know, this is a strategy that we have employed since our very early days. We have been doing it for almost 16, 17 years, and I've did that previously in prior lives.

Many of you have struggled with the strategy, and how to model it and how to categorize us. Is this core income or is it noncore income? To assist you in showing the effectiveness of this hedging strategy over time, we added a page to our press release this time. It is page 34. The analysis takes our call option premium and it puts it in the margin as if it were -- where we actually look at it internally. It puts the call option premium up in margins.

We've showed the analysis or five years and for the past five calendar quarters. If you look at that, you will see that this is a very effective and core hedge for us in terms of stabilizing the net interest margin in falling rate environments. Hopefully in the future, this will allow all of you to do a little better modeling and understand how this hedge actually works. We're available now during the call or even after the call to take you through this. But I think you see maybe a ten or 12-basis-point swing in the margin over the periods that are included on the report as a result of this very, very effective hedge.

Notwithstanding these previous comments, the margin was also affected for this quarter by our desire to make our balance sheet a little bit more rate sensitive. We have been very proactive about flipping fixed-rate loans into floating-rate loans to get ourselves to a positively GAAP position. We believe that the probability of rates going up as opposed to going down over the long-term is probably more probable. And I know this hurts us a little bit in the short run. But over the long run, rates do increase, we will get the double whammy of rate decompression as well as a balance sheet that moves accordingly. This should serve us well we think over time.

With the events transpiring of the banking market, liquidity has become a topic that has become front and center. Wintrust Banks have extremely core retail and commercial deposit basis. Because of the high net worth markets that we serve, we probably have more of the large balance than other banks of our size.

A couple of screen [scaper] reports that came out in the last few weeks have suggested that this fact might make us more vulnerable than others in terms of liquidity issues. We think it is quite the contrary. Our relationships are extremely strong, two, three, four accounts per household. But it is augmented by the fact that we can use our 15 charters and have done so with -- to create a product called our MaxSafe account.

Through you that MaxSafe account to a single investor, we can offer $1.5 million of FDI insurance in-house, single-stop with banks that they know. We do this by seamlessly spreading the deposits over our 15 banks and our MaxSafe, and soon-to-be MaxSafe money market account. In fact if you'd look at this and you use the title gain, joint account holders can actually get almost $16 million in coverage by coming into just one of our banks. That being said, all of our banks and the holding Company remain well-capitalized. And we have not, nor do we anticipate, any liquidity-related events.

Finally on credit quality, non-performers remained relatively stable for the quarter. Other than the $35 million related to the three large Hinsbrook-related deals, we had very good velocity in clearing up problem credits. But that doesn't mean in this environment that there's not more washing up on shore. We do have good velocity of pushing these things out of the system.

Our plan for that $35 million of those three larger non-performings is we are working on that right now. We have interviewed a couple of very well-known joint venture partners. We believe that there is money to be made in these things overtime. We intend to look at all options for exit but also, we are not going to just give money away to push them off the balance sheet. We -- our joint venture partners have come up with a number of very good ideas that we can work through these things. We are very confident that we can actually come out of these and make some money. Again, we will look at all aspects in terms of cleaning them up though.

Charge-offs were a little higher than their normal range by 6 basis points, but it is fair to say this current economic environment is a little bit deeper than any of us ever anticipated. Still at 36 basis points I think is still pretty good. Again, we increased the level of the reserve. The reserves were supported by our continuous and detailed analysis of our credit portfolio.

Maybe one more thing that I would like to mention, we didn't put the press release. But we are -- we have a little over $200 million in indirect auto and indirect auto portfolio that we have generated here from local bankers. We have done it for 14 years. We have decided strategically just to exit that market. Our two senior buyers were retiring. The portfolio is acting fine. It is delinquencies are still around 11%. We felt at $200 million, rather than restarting that organization, we can put that money to better use. That portfolio will run off over time. And quite frankly, is more profitable as it runs off as we e are able to eliminate a lot of the overhead related to putting new loans on the books. That's just an aside I'd like to get off to you.

Summary, we think we are in the middle year of this three-year cycle. At such, this is the drags right now. This is the most challenging year for us and for the industry.

It is a period of substantial risk, yet of substantial opportunity for banks that are disciplined and position themselves appropriately. Although no one is bigger than the market, we remain cautiously optimistic about our prospects here. There's a great line from Apollo 13 where the guy says, I feel like I'm driving a toaster through a car wash. That's what it is right now, to maneuver the bank through this period of time.

But again, we are working on a balanced approach of growth, yet being very conservative and trying to take advantage of opportunities that are presenting themselves in a really measured and disciplined way. This is what we anticipated to occur. But it is not -- in 2005 when we pulled back but quite frankly, this is a little bit deeper than any of us thought it would be. But we remain cautiously optimistic. Now I'm going to turn it over to Dave to go through some of the numbers.

Thank you, Ed. This is Dave Dykstra. I will briefly go through the other noninterest income and noninterest expense categories.

Wealth management income remained relatively stable in the first quarter. Really no significant changes, either in our brokerage or asset management revenues from the prior quarter. Pretty much in our normal range. Mortgage banking revenue posted strong results. We were up about $1.4 million over the first quarter of this year. Approximately $162,000 of that amount related to positive valuation adjustments on our mortgage servicing rights.

Service charges on deposit accounts continue to grow. We are up 8% over the first quarter of 2008 or 32% on an annualized basis. The Tricom administrative services revenue grew slightly in the first quarter. This is an area where pricing is still very competitive in the marketplace. We are looking at increasing sales there. But as we do increase sales, the margin compression is having some offsetting effects there. It is business that has significant growth potential, but the margin compressions in that business as well as on the interest side for that business.

Premium finance loan sales, we had gains on the sale of premium finance receivables of $566,000 in the second quarter as a result of $69 million worth of premium finance loans that we sold. In previous quarters, we have talked about securitizing a portion of that portfolio. We do believe that market is open. We know a number of parties that are willing to offer us a securitization facility or conduit facility. But we are on hold in pursuing that path right now, pending the Financial Accounting Standard Board's evaluation of changes to the rules surrounding the securitization.

As we monitor that on an ongoing basis, we are keep you informed. It looks like the current portfolio rules will require those assets to be held on the balance sheet. Although we could get funding from securitizing those loans, the capital relief looks like it could be at jeopardy. We will keep you posted on that as the FAS becomes around on it conclusions. In the meantime, we anticipate that we will continue to sell these assets for the remainder of 2008.

Security losses of $140,000 are primarily represented by an other-than-temporary impairment charge of approximately $200,000 dollars on certain corporate debt securities that we own. Other miscellaneous income is primarily related to the covered call revenue that Ed mentioned earlier in his comments. As the noninterest expenses, salaries and employee benefits increased $304,000 over the first quarter of this year, excluding the impact of about $0.5 million for one-time charge related to a long-term disability due to a former officer. This expense category actually decreased slightly compared to the prior quarter.

Advertising and marking increased $369,000, but simply returned to a more normalized level for us. The first quarter was abnormally low. We continue to market our commercial capabilities as well as our traditional retail community banking products. And then, professional fees and miscellaneous noninterest expenses were up slightly, due to the additional cost associated with resolving non-performing loans and other real estate owned.

Other than that, the remaining categories of expenses had no material changes or unusual fluctuations involved. With that, I will turn it back over to Ed and then we will go to questions.

I think we can go right to questions. We try to give you a fairly comprehensive press release to load you up for questions, so why don't we get going with that.

(OPERATOR INSTRUCTIONS.) We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of John Arfstrom with RBC Capital Markets.

Are you there?

Yes. Hi, John. How are you?

I'm good, good. Question for you on the margin. That was the one piece of the equation that we were a little bit surprised by. And I appreciate the covered call addition and that table in the back. I think that's helpful. But I guess question is, are you seeing the margin improve at this point or was it improving as the quarter progressed? I am just trying to understand what happened to it and how we might think about it going forward.

Well, I think toward the end of the quarter, we saw the plateauing out a little bit. Our projections indicate that -- as we have our CD repriced here. If we don't have any further cuts by the Fed. Remember there was a 75 basis point cut close to the end of the first quarter and then another 25 in the second quarter. Our projections are showing that as this CD portfolio reprices that we will begin to show increases in the margin over the latter part of the year.

We expect to see an increase in the third quarter and continuing to see increases further out. And as Ed mentioned, part of the decline is that we have been proactive in the pricing of the loans. You could go along on some of these out there with your customers and fix the rates. And get a little bit more yield out of that loan portfolio, but we have been focusing on keeping these on the variable side. We've had some customers that have come in that have also actually repriced out of a fixed into a variable.

It has put a little pressure on the margin from that perspective, but we think long-term that's going to help us with interest rate sensitivity in a rising rate environment. We have a bias to be in position for rising rates generally.

Over the next 90 days, John, there's close to a $1.5 billion repricing. That coupled with growth we think will bring the -- will get the margin back. Again, there will be less reliance on covered call income as that goes forward. In this rate environment, you can look at -- if you look at it on a combined basis and you see the margin has been -- the core margin over the last quarters has been running between 342 and 358. With the calls in it, John. I think that you can expect to be in that range when looking at the two of them. That's kind of why we included this is to allow you guys -- you never know. It has always been -- it has been out there. No one knows how do I model this and know what you are going to do. I think this should give you a better idea. We have been able to manage this pretty effectively through the use of both of those -- through the use of that technique. We would really like to see you concentrate on looking at it in that perspective.

Okay. Any reason why in --I know this causes you a lot of headache in terms of explaining this. But any reason why you wouldn't entertain some swap rather than mess around with this? I know you have done it for a long time, but it seems to cause a lot of problems for you.

I'm sorry. Some kind of a what?

It seems to cause a lot of issues where you have to explain it away every quarter.

Well, John we are both CPAs I think. If you would like to come out and try tell me how I can get this under 133, trying to do hedges inside the balance sheet and deal with that nightmare, God bless you. But this is -- we have used it for so long and it is very, very effective for us.

I think it helps you, because you have got to have those securities on the books anyhow. It is our liquidity portfolio that we work with. I think that if you look back over time a lot of the questions that were raised by this -- boy you know, you're going to end up with a security that is lower. But they pay off so fast that it doesn't -- this just works so well for us. It is so simple to use, as opposed to trying to find an effective swap out there that actually from a reporting mechanism, will give you what you want. You could find a swap that could give you what you are looking for. But nine times out of ten, the reporting will be absolutely the opposite of what you are try to go do given FAS 133 and that sort of thing.

We are very comfortable with this. It is tried, true and effective. I don't see us moving away from it. That doesn't mean that we would not, and do not, always look at positioning our interest rate sensitivity and working our margin through the use of floors, caps and swaps.

We talk about it as every ALCO meeting every month. Is there some way we could do this or that? And we keep tripping over the accounting rules. But we continue to look for that and we will do swaps, caps and floors on an individual transaction basis. We -- but this is a very important tool for our arsenal.

Okay. Great. Thanks, guys.

Your next question comes from the line of John Pancari with J.P. Morgan.

Good afternoon.

Hi, John.

Can you give us a bit more color on the outlook here when it comes to credit? I know you have been pretty vocal about your charge-off expectations, Ed. I know you had exceeded that level marginally, although it's really low. Are you refining your expectations there? Do you expect that giving the pressure in the economy, that it is weaker than you had expected, as you mentioned in your prepared remarks that this [reshoe] could trend up in the 40 basis point range. Also in light of that, where do you think non-performers could trend as well?

$64,000 question, isn't it? The charge-offs are -- we are trying to be very aggressive in terms of just dealing with our problems and not being in denial. We have said -- in the past, we went back and looked and said, all cycles where our underwriting parameters, even in the tougher times. took us into that 20 to 30 basis point range. This is deeper than we thought it would be.

The housing side is deeper than we thought it would be. You are starting to see it trickle on into some of the other area -- C&I and some other places with stress building up. But again, I am hesitant to give you a range now. I do believe that we will be less than peer group. We have always operated at 30% to 50% of peer group in terms of charge-offs.

I still think that given what we have done I would expect us to be well within those ranges. We are still looking at it all the time. We don't see any huge mushrooming out of this. We are -- it is like I said, we are driving a toaster through a car wash right now. And we are all over it. We are looking at it all the time.

From the charge-off standpoint, I can't give you much more other than the fact to try to bring you in on a relative basis. I am still comfortable with that relative basis. In terms of nonperformings, the $35 million is going to be here for awhile. Those are all going -- dont' own those properties yet. There's not a lot you can do.

You have to work your way through the system, and the courts and that sort of thing. But that probably, they will be with us for a while. But we believe we have a pretty good exit strategy that could be augment by other affects that take place in the market. We are not wedded -- it is a very versatile exit strategy. We have very strong joint venture partners who are willing to join us in this. We feel very confident that from an actual economic standpoint that our strategy is going to play out very nicely.

On the other nonperforming side of things, we've had good velocity with the rest of it, working problems out. Identifying them early, getting them out of here. We still see that taking the place. We don't -- those $35 million, those are the blocks of ice right now. The others are -- we are working very hard to push them through the system and get them out because there will be others coming down the pipe.

I think again, it will be relatively speaking, I expect this to be less than our peer groups in this sort of thing just because of the way we pulled back and because of our underwriting standards we employed in the past. And I don't see a train coming at me right now, but these are interesting times that it is hard to r predict anything these days. But other than the fact that we are working them very hard and we are not in denial.

Okay. And then in terms over your delinquencies, can you give us an idea of your 30 to 89 delinquencies. What they did in the quarter?

Sure. If you just hang on a second. We don't typically disclose those. But one thing I would say about that, John, is that out of the 30 to 60, and 61 to 90 day categories, we have got probably $23 million to $24 million of what we have in MPAs is this those categories. We've had a little bit of increase, but that increase is actually reflected in the nonperforming numbers that are in our table. There's a little bit of an increase, but as I said, it is not in addition to the $87 million that we have in total out there as MPLs. It is part of that number. Because we don't wait were for it to get to 90 days to put it on nonaccrual if conditions warrant.

That being said, I think your question is how is your migration going. If you back that out, we don't see abnormal migration.

Right. We have actually got some loans that are current that we put on nonaccruals status. That goes to Ed's point of being -- trying to be proactive and agressive in identifying problems and working on them.

Okay. In light of that, Ed I know you had indicated previously that on the reserve perspective, you were comfortable with adding a few basis points of reserve each quarter. In terms of that's a trajectory you've been doing, and that's what you did this quarter. Do you see a need to get bit more aggressive here light of the laws' pressures exceeding your initial expectations. And then, what you are seeing on non-performers right now.

As I said in the past also, this is -- it is programmatically driven right now. It is driven off of what's going on in the markets, coupled with what our loan risk rating system. Our loan risk rating system is constantly under review.

We have outside people come in and audit it every quarter. They look at it. Given we have 15 banks, it's fair to say that at any point in time, there's a regulator some place in this organization. It's like real-time regulatory involvement. People are challenging the basis of this and when the outside accounts -- and challenging the basis of this buildup all the time.

You don't have the leeway. In the hold days, you probably would just say pick a bath, fill the tub, move on. Which would make you happy and everybody happy, but you can't do that now. There's two phone books worth of information that you have to go through to build this reserve up. It gets really down to the granular detailed level. And it's built up from there. That's how we do it. We build it up. We try not to be -- we test ourselves all the time on the risk rating systems. We challenge ourselves. We try not to be in denial.

When in doubt, downgrade it. The one nice thing about credit is that at the end of the game, the end of the day, it is going to work out one way or another. Somebody is going to be right and somebody is going to be wrong. We really -- that's the philosophy we take toward it. We don't try to build the consensus out of it. If somebody says, boy, I don't think -- okay, we will go with you. We will go with the conservative approach.

We are not adverse to building it up. We have got a -- there's a whole process here that you go through, based on the rules that we all have to live by to build this reserve up. We look at it all the time. As I've said many times in the past, and a couple of times they have put paddles on our accountants. I said, can I just build this up so this goes away. They fall over and we put the paddles on them, and we revive them and bring them out.

But we think right now, through this constant exhaustive work that we do, that it is fine. That is the world we live in now. Those are the accounting rules we live by.

John, this is Dave Dykstra again. We book at the reserve on a -- we build it up on a loan-by-loan basis. We are building that reserve based on like Ed said, an exhaustive analysis. We are looking at our problems and we are looking at what we think potential losses are. We are looking at the risk ratings and we're looking at migration. We're looking at all of those things. And we still quite frankly, think the reserve's adequate.

Our losses are substantially less than the peer group. And they always have been substantially less than the peer group and although, our reserve is a little less. Our losses maybe are, like Ed said 30% to 50% of what the peer group is generally. The fact that we think we have been more conservative the last few years would lead us to believe we think our losses would be much better on a relative basis than the peer group going forward. Our reserve is less than the peer group, but it is not less by those percentages. We are not 30% of the peer group on reserves. We are not 50% of the peer group on reserves.

We are higher than that. We are comfortable with where our reserve is at based upon our analysis. We look at it all the time. We do it loan by loan, risk rate by risk rate, loss potential by loss potential. We don't see anything that would say that our reserves inadequate.

If this economic environment continues and worsens, you will see more even with the current loans, you will see more downgrades just take place in the portfolio. Which in and of itself will increase the reserve.

Regardless of whether there's lose potential.

Yes. Regardless of whether there's loss potential in them. This is how the system is going to work. I think you can safely say that over time if this thing stays, and continues to deteriorate that the reserves will continue to grow. And I think that should make pretty good sense.

Again, the reserves and non-performings -- it's interesting during this period of time, because of the way that accounts and regulators look at things now. Your non-performings could increase, but charge-offs might not increase in this day and age. It is very interesting the dynamics that are taking place with the rules here. We will continue to monitor this and as we do all of the time. If this thing continues to spiral downwards, there will be no -- more downgrades and the reserves will be moving up.

Okay. Thanks. I will let someone else ask a question. Thanks.

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

Good afternoon.

Brad.

Any update on the line of credit that you guys are in the process of renewing with LaSalle that you got an extension on I think through the end of August?

Yes. As we went through process, there was just some administrative time out there that we needed to get a 90-day renewal. We are in the process of that. We see no issues with it.

Okay.

The 90. If you look at it, it was just an extension of the date. There wasn't any change in terms or interest rate there. There was just some time with the conversion of the team over there where we just needed a little more time to get it through the process. We are in the middle of that and we see absolutely no issues with it.

Okay. Fair enough. I wanted to ask included in the $1.5 billion that you have repricing in the next 90 days. Some of your federal home loan bank advances would they be that bucket? Just noticed the cost there still above 4%. Just curious if you think you will get some additional relief and if you might rely on those a little more?

No. We use wholesale funding and particularly, federal home loan bank funding from an asset liability standpoint only. We would much rather be building our deposit base or our funding base on core relationships and core deposits. As you know, the client always wants what you don't want to give them. We would love to see clients pick five-year CDs, but they want to stay short when rates are low and go long when rates are high. We've used the federal home loan bank financing to work to help us on an interest rate sensitivity and asset liability standpoint.

My recollection is, and I am just talking from the top of my head, that over the next six months there may only be $0.5 million or so of that reprices. Most of it is longer term, out two or three years. Although that pricing is what it is for longer term, I think that it is what it is if you look at it on the daily basis. From a long-term standpoint, it is not too unfavorable.

We actually put our footnote disclosure in our annual reports all of the advances with the rates and all the maturity dates. You can get a feel for when -- the ones that are maturing if you just go our annual report.

Right. Right. Okay. And then the swing in OCI this quarter, is that all interest rate related?

Well clearly, volatility was down this quarter relative to last quarter. There's some interest rate-related and some volatility-related.

Okay. Do you happen to have the total risk-based capital number at June 30?

We haven't disclosed that. I can tell you that we are well-capitalized in all categories.

Okay. Final question just within the loan portfolio, I noticed you had a fair amount of growth in the home equity bucket. Just curious -- running a special there or picking up good customers as other banks back out of the area. Just your thoughts on what was going on in that category.

Two points to make on that. One we haven't seen an increase in draws on lines. Our line draws still remain between 40% and 50%. What we are seeing in the home equity side is actually new customers. We offer now -- the markets that we are in, there's not a big market for jumbo loans out there where is people can go.

We are offering both like a 7% two-year ARM. And we're also -- this is a piggy back program where you can -- they did not raise the limit of -- the dollar limits for conventional mortgages in the Chicago area. We have been putting conventional mortgages in place with a home equity loan behind it. Again these are underwritten in our normal procedures at obviously, lower market values than there were a year ar two ago. We are picking up new customers through this. I would say the majority of that are piggy back deals related to acquisitions of homes in our high net worth areas.

Okay. Great thank you very much.

Your next question comes from the line of [Carl Budka] with B&R.

Ed and Dave, I hope you won't be offended by this question. But as a long-time Wintrust shareholder, I guess the feeling that you're traditional business model is broken at this point. There were no de novo expansions last year. Minimal branch expansions. I get no evidence of market share gains of any significance. Am I being too judgmental on what has happened just in the last year? Or is this the new Wintrust that we have to deal with?

Carl, absolutely not. In 2005, Carl, we saw a storm on the horizon forming and we put the brakes on. We said, I have got -- we were at a period of time where growth -- you could not get profitable growth. We were in an inverted deal environment. And you were in a period of time where people were going crazy in terms of pricing loans.

And we said, you can't make any money. We do not want to deploy any capital right now to go out and not make any money on it, by opening new branches and that sort of thing. What we said was, we've got to just hunker down here for a couple of years until this market rights itself.

Quite the contrary, I think our model works extremely well. It is evidenced by the growth -- the very measured growth we started working up. In 2005, we had about 14 of our branches that were pretty much brand new that had not fulfilled their -- had not grown themselves. We put the brakes on them. That was painful for us, but we couldn't see deploying capital in a position where you couldn't make any money on it.

Right now, our strategy right is -- the growth that you are seeing is predominately coming from those banks. We are starting up that engine again, Carl. We have not broken away from the model. It is just the environment wasn't giving us profitability with the model that we had, so we hunkered down. As we work through -- right now, you are in a period of time where you have to be very, very careful. Again, we see there's substantial opportunities out here. There's also substantial risks out here.

We are being very careful as we start this engine up again. We think we're in the second year of a three-year cycle. If you get through this year relatively well, we think there will be greater opportunities to grow.

We did open a couple of branches last year. We opened in Vernon Hills, probably about a month ago as part of our Libertyville Bank, and that bank is doing extremely well. But your point is well taken, and it was right on point with our strategy.

We did stop build asking growing at previous pace, but we did it for economic reasons. Our model we think still works extremely well.

And on top of that, Carl, if you look back, Oak Plank Trail opened up in 2006 and that was a de novo bank. We also really had an effective de novo bank in the St. Charles market as a spin-off from the Hinsbrook acquisition, which is a very small bank out there or branch out there and made it into its own separate charter. In 2006, we really did two de novos. It was an indication that we are still in that business. We typically don't do de novos every year. We look at doing every couple of years. We did two in 2006. That was enough of a bite out of the apple in this environment right now.

One last question. About a year ago, I visited with the two of you in your office. Ed, you said that you didn't think your shareholders were going to stand still for very long with the stock at $40 a share. Are you getting pressure from major shareholders to do something with the stock at roughly half the price it was a year ago?

I think that all of our shareholders realize that we are all being painted with the same brush right now. All financials are in the tank. There's a lot of uncertainty.

Carl, it's a period of time -- I told this to somebody the other day. If I announced today that I'd found oil on all of the bank properties, somebody would tell I have a pollution problem. The issue right now is that all financials are in tank. And they're going to be in the tank until such time as some of the uncertainty works out of the market in terms of what is on people's balance sheets, and people and things can become more predictable.

This is a cycle -- we usually -- it is usual a a ten-year cycle. This one is really 15 years from the last cycle. It was delayed by 9/11 and the amount of money that the Fed pushed into the market at that point in time. This one is a little bigger and deeper.

If you go back to the 1990s, go back to the 1980s, you have gone through these cycles where all financials are down in the tanks. I think most of our shareholders realize it and understand this situation. I have not received -- I mean nobody is happy. Hey, 98% of my net work is tied up in Wintrust stock. I'm a shareholder, too. We understand the situation, but nobody is bigger than the market. We have to prepare ourselves to take advantage of it as it goes forward, get through this, and hopefully, we will be back in the high life again.

More power to you. Thank you.

Thanks, Carl.

Your next question comes from the line of Kenneth James with Robert W. Baird and Company.

Hey, gentlemen.

Go ahead.

Tough to follow that one up. I have a bit more mundane question here. On the deposit growth this quarter and the composition of it -- had a quite a bit of sequential growth across a number of categories, including CDs which you've been -- had been back off of a little bit. Just given that your loan deposit ratio was towards the top end of your comfort range, was wondering if you got a little bit more aggressive on pricing to get some of those deposits in and whether it had something to do with the margin this quarter.

We didn't get more aggressive on the pricing. If you look at it on a relative basis, what we are trying to do is to grow these underutilized branches that we stopped growing at. If you look at the overall pricing in terms of marginal growth. In other words, we didn't have a lot of canabilization. These are smaller branches that we could go out and offer a little bit of a premium rate. But we didn't have any canablization that would make your marginal rate higher, and we didn't have any overhead related to it.

Your point is a good one. It probably did affect us a little bit on the cost of funds in bringing it down, But on an overall basis in terms of looking at overall growth, it actually was cheaper. Does that make sense? I don't know if it does or not, but your point is right. It probably did hurt the margin, but on overall economic basis, it actually was good funding for us.

Okay. And I know you gave some outlook about how to think about the margin in terms of the combined option and common interest net income numbers. If I could just focus on the option income number, can you give me any insight on how the change in the bond markets are -- the way they performing so far this quarter relative to last quarter affect that number. That number last quarter was actually more than you put up in your previous high years. Seems like it could stand to see a pretty substantial drop-off. And it could drop off faster than your core lending deposit margin would recover.

I said earlier that the volatility in the first quarter was extraordinarily high and the rate environment was beneficial. The two things that generally affect call option income is the movement of rates. If rates go up -- the longer rates go up, we generally get less call. But as rates go up, our balance sheet positioned for rising rate environments so we generally make more in the margin.

As volatility goes up, you will get more call option income on those instruments. And volatility increases so you get less. It is really those two factors are where are rates and where our volatility. We are somewhere around $3 million thus far this quarter. Last quarter at this time, we were at $11 million. It doesn't mean that we don't have more coming during the quarter. But just as a point of reference of where we stand now, we are at about $3 million.

I think if you look at the chart on page 34, and you look at the core net interest margin for the quarters and you see them running 342, 343, 345, 357, 358. We anticipate the margin over the rest of the course of the year, the margin element of it not the call option, moving book where it was. There may be some detriment in the third quarter, but by the fourth quarter we think we will be back in those levels. You're dealing with a ten-basis-point range here, a swing here that we think that is a reasonable number to work with. Less call income, but more interest and more margin.

Okay. And then in terms of loan growth and specifically your commercial growth, you referenced a pretty good pipeline. Decent sequentially growth this quarter, a little slower than the previous two. Can you talk about how the demand environment is developing. Are you seeing any drop off there? Is your pipeline primarily new business? Do you think we will see annualized growth more in this mid, single-digit range? Or more closer to the double-digit or higher range in the back half of the year?

I think you should probably see it in the mid single-digit range. I think makes some sense. We are looking at -- there's a ton of deals we look at. They have to pass credit first which is -- which we have always been very stringent on. Then and more importantly, you have pass pricing. We probably toss our 35% or 40% of good credit deal just on pricing right now. A lot of the larger banks have -- as is normally the case this time of the cycle, are pulling back in the market and we are seeing some good pricing relief out there.

There's still some people doing some things that they think they're -- that life is like it was a couple of years ago. But I think that is a reasonable number. Again, we are balancing, we are balancing the environment. We are balancing it with our capitals. We're balancing it with our earnings, so that we can continue to put good, solid, very profitable growth on the books. I do not anticipate in the environment double-digit growth in those categories as we March through our capital, and really drive that toaster through the car wash.

Okay. Then, we haven't talked about it this quarter yet. Can you give us just a brief update on the premium finance business in general? It's obviously been tough as well for everyone on the pricing side. Can you talk about the pricing and the ticket sizes, and give us an update on some of the things you've talked about previously there.

Ticket sizes have remained relatively where they were last quarter. Again, we are in a very soft market. They're seeing a little bit of pick up in the professional liability stuff, as banks and other financial institutions have some problems. We have seen a little bit of a pick up there just in the market itself. We don't do a lot of banks and financial institutions, but it has hardened the market. But it's still relatively soft out there in terms of average ticket prices. Still in that $27,000 range is a -- $26,000, $27,000 range is a good number.

Pricing remains competitive. Our larger competitors are all working through very aggressively-priced securitizations. Having gone now through the securitization process ourself -- as we were looking at doing that ourselves, you get an understanding that that pricing is going to change for those folks.

We believe that pricing is still not where we would like it to be, but we believe that their deals will have to change due to the markets. That will bring some of the pricing back into the industry itself. Does that make sense?

Yes.

Hopefully the competitors are going to get -- we have competitors doing some of the larger deals at -- coupons in the 2% and yields in the 3%. Because all they want to do is make 1% on this, because dollars. Because the average ticket sizes are down, they're trying to make it up with volume. We won't play that game.

We don't chase that. It's that type of pricing philosophy has worked its way through to some -- to the more regular -- the $27,000 average ticket size deals. But that will have to change in and of itself, given I think their funding costs are going to go up. Our units processed still are growing, and the business itself is growing nicely. We are very happy with the way that business is working.

Delinquencies, charge-offs, quite frankly, we would like to see delinquencies go up a little bit more, because that brings more money under the late fee side of the business which can be very lucrative for us.

Okay. Thank you.

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

Yes. Good afternoon.

Hi, Ben.

Just a couple of maybe follow-ons. In the insurance premium finance business, you broadened your strategy, I don't know maybe a year ago, into the smaller case market. Just looking for an update on that. How that's going in terms of volume, and profitability, and relative to your expectations.

We think it's going fine, along with our expectations. Their business is growing. They have hired new sales people. It is going as expected.

We are not going for hyper-growth there. We just want them to work within their system, and increase volumes generally, and try to hold the margin. And they're doing all of that. We are pleased with the acquisition and see good things to come out of it.

Okay. And then I guess philosophical question or a strategic question or something. You're emphasizing growth coming out of your newer branches. If you are cautious, wouldn't it make more sense to generate the growth out of the older, more well-established branches where you would know the market better?

Let's look at -- do we got to fight for get growth. The younger branches, we need to develop and work into their overhead just on a market-share standpoint. We are predominantly retail- funded out of those. We have not really had the penetration to move us to one or two market shares in those markets, because we basically stopped the growth. From the deposit side, that is the cheapest way for us to grow and to build out. Because again, no canablization and really no overhead related to growing it.

On the lending side, we are not expecting -- the loans, it's not coming out proportionately. Our larger banks where we are not pushing deposits are still generating a good deal of loans. And those loans are being placed with these deposits that we are putting in the other banks. We are right on with you there.

We are not asking these young guys to go out and lend like crazy. We are relying on the expertise of our older banks and their ability to generate credit. And we're utilizing the funding sources in the other banks. One of the benefits of our multi-branded, multi-chartered approach.

A question about the scene in Chicago, Certainly, we have all been talking about regulatory pressures on capital and things like that, In particular emphasis or attention being paid through a lot of smaller banks, making it more uncomfortable for them to be in business. With the expectations that you would be getting more calls of people looking to sell; just wondering if in fact if that is happening at all.

Well, on a relative basis, yes. Given that over the last year, there was nothing going on. But on a relative basis, there is more movement in that area.

Quite frankly, I think that next year and the year after, there will be -- those opportunities will still there be after -- sometime you will be able to figure out what cancer and how much of it maybe some of these guys have. Might be a better time to be dealing with them. Also at a time when we don't have a lot of currency right now. Our stock is trading where it is And we have got enough to do here, and just building out our branches and building it up. We are basically, unless something was extremely compelling, we are not in the market right now. But there is -- has been an increase in chatter.

And would it be wrong to assume that since you have all of the individual charters that in fact you have a steady stream of regulatory exams, rather than like just one big one, so that you get them as you go through the year?

That's our life, Ben.

That's a yes.

That's a yes. Yes. We live with them all year. I feel like I am at a teaching hospital most of the time. Somebody is always poking me and prodding me somewhere?

Would you like me to go down stairs and find one for you, Ed? You are right. With 15 different charters, it is a constant flow. That's fine. But yes.

You don't have one great big event during the year?

No.

Thank you.

Your final question comes from the line of Peyton Green with Ftn Midwest Securities.

Afternoon. I just had a question maybe over a 3 to 5-year period. If you think back a couple years ago when you all did tighten down on the balance sheet growth. What would you hope to achieve from an ROA perspective on current balance sheet size? What do you really have to do to get there? What has to move your way?

Well.

Is there - is it all deposit mix? Is there still too much pressure on the loan side? Is it a combination of things?

Number one, you keep deposit with sloping yield curves. Number two, get a little bit of a higher rate. We are dealing with a very compressed --

We are in the red zone right now. There's not a lot of room to maneuver given where rates are. We would love to see higher rates. That would be very, very helpful for us.

Secondly, we do need to -- loan spreads are coming back. We need to work those through the portfolio which is going to take time and also, make sure we employee them on our new assets that we are bringing on the books. Thirdly, if you were to look at our margin versus some of our competitors margins, the difference between our just core margin without the cover calls and their margin, is they get a much better contribution from free funds.

We continue to push our C&I initiative, very cautiously mind you. The market in Chicago to do that has been a little bit -- some of the competitors are still buying business. Some of the fellows -- the off-shoots where all of the LaSalle guys end up. They're still pricing at old LaSalle pricing to get deals in. That market -- the pricing on that market has not caught up yet, because of competitive issues.

The third element or fourth element really is, we have to got to grow into the overhead that we had put in place that has not been fully utilized yet. That's what we are trying to do with our growth strategy now, is to build those banks up. Lend them up with good production from the other banks. And first insurance loans, as we spread those out through system. We need to work through that. But it literally is a rate environment issue right now, and get through these credit cycle. Because that's still a wild card out there. How long and deep is this going to be?

Wealth management side of the business is progressing nicely. The mortgage side is really progressing very nicely for us. Those still need to grow and become more profitable. Again, we were caught at the wrong time for a growth company where you couldn't get profitable growth. We have to catch that and then we can turn the engines on full speed again. Hopefully, that will be when we're through this environment. It literally is margin and growth driven.

Okay. Then on the credit cycle, you all were pretty early in saying that it was coming. But do you see any signs of migration from just residential-oriented credit issues into more commercial?

A little bit. A little bit. There's some trickle down.

Okay.

Nothing to write home about. If one -- if a bank had one or zero, he might have one now. It is just -- it is a little bit, but you can feel it a little.

Okay. Then in terms of regulatory climate change, are you all seeing that as they visit you all? Or is it are you start to go hear more stories about it?

Oh no. They're doing their job. They come in loaded for bear. That's okay. That's what they shall do. They should have done it a couple of years ago, but they come in now. But again, we are very open.

I will tell you one thing. Peyton, anything that anyone has ever come up with, like a regulator who comes in. They might come in and say, boy, we want to downgrade this credit. That's fine. They've never surprised us with anything. They have never come in and said, hey, you have a problem with this loan and we went whoa, what's that.

Hopefully, that tells you that we are on top of it. They take some comfort in the fact that we are on top of it. We are very aggressive and progressive in trying to solve these things. Again the real issue is if this gets bigger and deeper that will cause ratings changes that will cause margin or that will cause provision increases. That's -- it just depends how long and deep this thing is. Regulators are regulators. And again, we have them in all the time. We have gotten used to them.

We have been talking to them. We talk to them all the time. We -- it is not like they came in last April and they came back this April and said, okay we have changed. We talk to them all the time. They're in all the time, because they're in all the time so there's no surprises on our end out there.

What we are hearing is that they do have some banks in the system where people have their heads in the sand, and haven't got updated appraisals. Haven't reviewed the cash flow of their borrowers. Haven't gone though and updated underwriting of their credits, and said well, geez I have lots of collateral, what's the problem. Those are the banks that they're --

Not our banks.

Not our banks, no. Other banks outside the system, those are the types of banks where we are hearing -- that is where the scrutiny is getting much, much, much tougher. But for us, we've had discussions with them ongoing all the time. We think we are on the same page.

We understand where they're coming from. We are --we want to be proactive on our credits, too. Our entire net worth is tied up in this organization and we need to be proactive. That's the reason a few years ago, we took the strategy that we did. Yes, are they a little tougher in their tone now? Absolutely, but they should.

Okay. And last question is just -- to what degree do you have opportunity to reprice CDs down over the back half of the year?

Like we said, in the next 90 days, there's about $1.5 billion that will be -- being repriced. To put it in context, the most popular CD term that we have is 12 months.

Okay.

You can look at it at a fair amount of that portfolio repricing every month.

Okay. Okay. Great. Thank you.

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

No. Thank you everybody. I am sure we kept you here longer than usual, but we appreciate your questions. And you can all feel free to call either Dave Stoehr, Dave Dykstra, myself if you have any follow-ups. Thanks for listening.

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