Wintrust Financial Corp (WTFC) 2008 Q4 法說會逐字稿

Welcome to the Wintrust Financial Corporation's fourth quarter earnings conference call. At this time, all lines have been placed on listen-only mode to prevent any background noise.

Following a review of the results by Edward Wehmer, Chief Executive Officer and President, and Dave Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session. The Company's forward-looking assumptions are detailed in the fourth quarter earnings press release, and in the Company's Form 10-K on file with the SEC.

I will now turn the conference over to Mr. Edward Wehmer.

Good afternoon, and welcome everybody. With me as always are Dave Dykstra, our Chief Operating Officer and Dave Stoehr, our Chief Financial Officer. It is nice to say that this is actually an earnings call this quarter. As is our custom, I will start with an overview of the quarter and the full year, review credit quality, and some significant balance sheet trends. Dave Dykstra will then comment on specific elements of the income statement, and after I make some closing comments, we will be glad to take your questions. I think I can skip the part that says 2008 was a challenging year. You probably have heard enough of that in the conference calls already. So we will leave that where it may be.

We are pretty pleased to report a profit for the fourth quarter and for the full year. During the quarter, we were approved for, and received actually at the end of the quarter, $250 million of TARP money, adding this to the $50 million we raised privately in the third quarter, our already well capitalized position was materially increased.

So our capital position is very strong. I am sure we will get comments on tangible common equity, as seems to be the buzz word of the day, and we will be willing to respond to those. I don't want to take anybody's question away. Actually we have a pool here, we know where it is going to be coming from. So we will see who wins the pool here.

During the quarter, we also closed on the acquisition of various assets of PMP, or Professional Mortgage Partners. PMP had been a customer of our warehouse line operation for many years. Accordingly, we knew them very well. This should allow us to double our historical production in the residential mortgage business, and I think now is a pretty good time to be into that business. Our December was reasonable, but January and February will be extremely strong in that business for us.

On to credit quality. Charge-offs were 53 basis points for the quarter, and 51 basis points for the year. Our allowance is 94 basis points, up from 75 basis points. Our '08 provision was $58 million, compared to $14 million in '07. Again, I will comment on the philosophy. The rules that we use, and we think everybody should be using, as it relates to the building of the reserve, and what you should look at as it relates to our reserve.

We are constantly commented on, that your reserve is lower than peer group. Our reserve is built up based upon the portfolio as it stands. We will take our historical losses, our historical experience, and we will apply that to the portfolio. There after, when a loan, an asset becomes impaired, we immediately take that asset, we look at the collateral available, and we either charge it off, a portion of it off, and/or we reserve for part of it, if this some question as to the ultimate realizability of the value of the property, guarantees, additional collateral, and that sort of thing.

So to that extent, really the entire reserve is basically allocated almost into individual loans. Thing is the rules that you should live by. It is what the SEC wants you to do. If you correlate that back to the new rules, related to if you acquire a bank, and you bring the balance sheet of that bank back over, can you not bring the loan loss reserve over. That loan loss reserve has to be attributed to individual loans.

So in reviewing our credit and the trends of our credit, you really need to look at the provisioning levels that we are providing for, because basically the reserve is allocated to credits, individual credits.

There could theoretically be a a point in time, and it actually would be a good point in time from the perspective of analysts, to say you could have charge-offs go up in a quarter, but the reserve go down. That would mean that in our portfolio, we believe that the losses are well accounted for, and the trend is actually turning. So people ask us what are charge-offs going to be. Well, there are actually some charge-offs embedded in the portfolio that are currently reserved for now, that we won't, until we actually get ultimate control of the property and resolve other issues, won't know what those charge-offs are, but those are adequately reserved for.

So you need to know that we do this on a real-time basis. We don't wait until the quarter end like has been, and come up with big numbers. We are constantly reviewing this, reviewing the portfolio, taking our lumps as they come along, and moving forward. I hope you can take some solace in the fact that when you look at our numbers, it is a reasonably good snapshot of the credit portfolio, as it stands at any point in time.

The majority of our losses and really our non-performings relate to residential development loans. Dave Dykstra will talk about that, or will respond to questions as it relates to that. Non-performing loans increased marginally from $113 million to $136 million, again, pretty much all of this is in the [resi re] area.

On the commercial real estate side, I know everyone is waiting for the other shoe to drop there in the market. We have reviewed our portfolio, I constantly review it. We feel comfortable there. We don't believe we have the relatively speaking resi re exposures that have popped up in the market. The components of our non-performing loans are really adequately disclosed in our press release.

OREO at the end of the year, and this is really a good thing, OREO went up $13 million, to close to $33 million, and it is comprised of any number of relationships. It is a good thing in that we are able to move these things through the process. The process of getting a loan to the point where we actually can control the collateral, and get rid of the collateral, that is a major, that is a good step for us, and when it hits OREO, it is basically written down to the market values, which we think that we will ultimately get.

So of the $33 million that is in OREO right now, it is safe to say that we are working to push that out, close to a little less than a third of that, it is under contract right now to be pushed through. And as I said, it is good news for us, to be able to clear this stuff out, and unfortunately, probably make room for the next ones to come along.

One thing you have to realize too is in coming quarters, in our non-performings, there is approximately, there will be about 40 to $50 million of, and I have mentioned this on previous calls of cornfield type loans, loans we picked up in the acquisition a number of years ago at Hinsbrook. Banks that we will be taking custody of in the next three to six months. Our intention because we will have written these things down to what we believe to be rock bottom numbers, is to probably hold onto those for a period of time until the market comes back. We think there is great value in there.

The values that we have to carry them at are obscured by the fact that there is really only bottom feeders out there right now buying these things. But we will disclose that separately going forward. If we have an OREO portfolio that is kind of a held to maturity if you will. We will be disclosing that in our press releases going forward, and you need to know what our game plan on that is.

We think they are actually, a number of them are working farms where the rent on the farms actually pays the property taxes, so your carrying value is next to nothing, and Mr. Dykstra is from Iowa and tells me he knows how to detassle corn, so we will all be multi-faceted bankers when we take this into our portfolio. All-in-all, relatively speaking, it is not horrible, it is a very manageable number. On our non-performings, we are pleased by the fact that we are starting to see some movement to get some of these icebergs off, and we look forward to doing that going forward.

On the balance sheet, additional capital has allowed us to return to growth trends, which you will remember, historically we have been able to achieve throughout our lifetime, through 2005 when we adopted our Rope-a-Dope-type strategy. Deposits were up $900 million, loans up $800 million, total assets up close to $1.3 billion over the course of the year, majority of that taking place in the fourth quarter. With the $50 million that we picked up in the third quarter, plus the TARP money, we have been able to accelerate our growth plans. Deposits that we are bringing in are core deposits. They are low cost deposits, and they are franchise value-enhancing deposits. Our liquidity as a result is extremely strong.

So we continue to back in the growth mode, to take advantage of the market as it stands, to build relationships in this tumultuous market, to continue to build a very strong right-hand side of the balance sheet, and I think that is very important going forward. The loan growth side in all facets, we have solid loan growth. Pricing has been very good, and we are finally at a point in time, as opposed to the last few years where we can set pricing. The borrowers don't set pricing on us. We actually can set our own pricing. We are very successful in putting floors in place on all, pretty much 99% of all of our deals do have floors in place.

And our pipelines remain relatively strong. We are being very prudent, very selective in terms of what we put on our balance sheet. As a side note, premium finance business is also very good. Our major competitors have, there has been some dislocation in that market. Aon sold their company, Cananwill to BB&T. BB&T has a large network of insurance agencies, and many people don't want to deal with who they perceive to be a competitor, and quite frankly, any time there is a change in the market, it is very good for us so our business there is very good.

Also AIG, with AI Credit, which has always been the 900-pound gorilla in the market is not as aggressive as they have been in the past, really in terms of pricing, and also in terms of volume, so that has been very, very good for us. Last year through the premium finance business, we started out in the life insurance side of that business.

And again, the life insurance side of that business is as wide as the premium finance business, being that you can take from subprime type business, these life settlement type of things, all the way up to the high end business, the high end business being people who legitimately need life insurance policies for estate purposes, succession purposes in their business, and many of them finance it. AI Credit and the AIG subsidiary was the largest in this business. They have pulled back from the market. That business, we are filling that void but only at the high end.

Although we expect good loan production out of that market, I think at the end of the year we had about $90 million of those balances. That number could be much higher by this time next year, when we talk to you. It is very, very good business for us. The rates are very good on it. It is very safe, secured by the cash value of the life policy. Again we selectively pick the life companies we will deal with. In the event there is any shortfall or decrement in the life policy, versus our loan value, for collateral purposes, we take cash collateral. It is a very good business for us, and one that we look forward to growing.

The margin, just quickly, was up a little bit as you all saw. In previous calls we talked about working very hard on increasing our margin, through decreasing our deposit costs, and also repricing our loan portfolios as they came due. Couple that with getting reasonable pricing on our new business, and we felt that we could bring the margin back up to very good levels. The program to date has been very successful. Results have been good.

But I think going forward, at least for the first quarter, although we will continue to do it, the progress will be a little bit slower, just because we need to absorb the margin compression that is brought about by the Feds basically lowering rates to zero. There is an opportunity again to reset the dial on decreasing all of our deposit rates, and some of our older banks have floating rate home equity, part of their home equity portfolios didn't have floors on them, so that hurts us a little bit.

Going forward, we re-price all of this, and I think that we will be back on track to continue to increase the margins, but I think you can expect the first quarter to be a little bit slower. Our liquidity remains extremely strong, both on the asset side, and through the balance sheet side, because of our stable core deposits. I will turn it over to Dave to talk a little bit about the income statement, and then I will have some closing comments before we take questions.

Thank you, Ed. We will quickly run through the income statement. The major components of the non-interest expense and non-interest income.

First, looking at salary and employee benefits expense. This line item was down 2.3% from the third quarter of '08, and it was actually at lowest level in the past two years. And we have been able to control the overall headcount, and the impact of the reduced commissions on the mortgage business, and the wealth management brokerage business last quarter was also a contributing factor, as well as reductions in certain deferred compensation expense items. On a year-to-date basis, salary and employee benefits increased 2.3%. Again demonstrating fairly good control over this area, even as the balance sheet grew by 14%.

Advertising and marketing cost was up for the quarter, $300,000. But was up only $33,000 on the year-to-date basis. So a little seasonality in that number for us, and we continue to invest funds into promoting our MaxSafe deposit product, whereby we were able to offer 15 times the level of FDIC Insurance to our customers, via the fact that we have 15 chartered banks, as well as promoting our commercial capabilities in the Chicago and Milwaukee metropolitan areas, and we really don't expect to see any significant increases in this category in '09, so the increase in the fourth quarter was really more seasonal versus a trend.

As with other financial institutions, our FDIC Insurance expense increased by $337,000 in the fourth quarter over the third quarter, and increased $1.9 million in 2008 over the annual amount recorded in 2007. The increase is obviously a result of the higher rate structure, higher deposit levels, and the fact that there were credits that were issued by the FDIC in prior years that have run out.

The quarter also had some increases in costs related to pursuing the collection of the problem credits, and the associated OREO properties, so there are some small incremental costs there. But overall, other than those costs, there were really no significant dollar increases in any other expense categories.

Moving to the other non-interest income categories, wealth management income declined about $339,000 from the third quarter of '08. Brokerage revenues were essentially flat with the prior quarter. With the bulk of the decline stemming from fees earned in the Asset Management accounts. Obviously the reduction in the overall market values of the underlying securities and bond portfolios we hold for customers, was the cause of the reduced fee level.

Fees on covered call income totaled $7.4 million in the fourth quarter, versus $2.7 million in the third quarter of '08, and $12.1 million in the second quarter of '08. As we have explained before, these fees fluctuate, depending on movements in interest rates, and the market volatility, and are used as a general hedge to offset compression during times of falling interest rates.

It is interesting to note that our net interest margin, if we assume that that covered call income was included in the margin, and again, that is how we look at it, as a hedge to compression of the margin, was 3.14% in 2008 on an annual basis, 3.14% in 2007 on an annual basis, and 3.14% in 2006 on an annual basis. So I think that demonstrates that the covered call income, does work to stabilize the net interest margin, if you consider it as an asset liability hedge during times of great compression.

Mortgage banking income declined $1.35 million from the third quarter of '08, to a level of $3.1 million. This is obviously a low level, and the lowest level experienced in the last five quarters. Clearly, the dormant housing market and the interest rate levels early in the quarter contributed to the decline.

However, the reduction in the market rates late in the year, has generated significant activity in December and January, along with the additional staff that we hired related to the PMP acquisition of their assets. We expect to see substantial growth in this revenue item during the first quarter of '09, and some of that will depend on the actual pull-through rates, but we expect that number to increase substantially, due to the rate environment, and due to the addition of the PMP staff.

Security losses totaled $3.6 million in the fourth quarter. The loss was primarily the result of a $3.9 million non-cash other than temporary impairment charge, on certain corporate debt investment securities. Again this is not cash loss, we still hold the securities. They are still performing securities. It is just applying the other than temporary impairment accounting rules to our portfolio.

Bank loan life insurance actually saw a decline in it's revenue this period. The decline relates almost entirely to reduction in some bank owned life insurance policies that we have to fund a deferred compensation plan. The reduction in income there is almost entirely offset by a reduction in deferred compensation expense in the salary and benefit lines. Other than that, there were no significant dollar changes in any of the other non-interest income areas during the fourth compared to the third quarter.

And Ed touched on the margin, and with that I will throw it back to Ed, and then we can open it up to questions.

Thanks Dave. 2009 is going to be an important year for Wintrust, as it marks the onset, really the third phase of the strategy we adopted, our famous Rope-a-Dope strategy we adopted in 2005.

At that time, in anticipation of a down credit cycle, we suspended our historically aggressive growth and expansion plans, and hunkered down to ride out what we thought to be a looming storm. The ultimate goal of this strategy was to be the first to emerge from this cycle, accompanied by a balance sheet strong enough to take advantage of the significant opportunities, which historically follow periods such as these. Again we knew that we would not be completely unscathed by the expected stressful times, as no one is bigger than the market.

Through careful planning and discipline, we believed that we would not suffer any mortal wounds during the period, thus placing us in an enviable competitive position. Fortunately or unfortunately, and other than the severity of the cycle, which comes really as a surprise to everybody, our predictions have been pretty close to being right, as to both timing and as to events. As such, and I knock on wood, we find ourselves relatively speaking in the competitive position that we had planned for.

Capital is strong. Liquidity is strong. And our portfolio, though bruised is not bloody, and remains under control and very manageable. We are now beginning to see the opportunities and market dislocations which we anticipated. Given the extent of the downturn, we expect these opportunities and dislocations to persist for some time.

Phase three of our strategy has us returning to historical growth levels and profitability levels. This will occur obviously over time, but both through our normal channels, and through selectively and prudently, taking advantage of the opportunities and dislocations that continue to present themselves in the market. So all-in-all, this is kind of what we have been waiting for. We have been waiting for the markets to change and pricing to come back, and to find the areas where you can actually make some money.

I think I have said it before on this call, an old banker told me, he said Eddie, it is times like this when money returns to it's rightful owners. And we want to be those rightful owners, so with all caution, and all due caution, not really knowing how deep and bad this is going to be, we are going to walk slowly, but institute phase three of our plan, slowly at the beginning, but we feel we are well positioned to do that.

With that, I will turn it over to questions. We are ready to do questions.

(Operator Instructions). Your first question comes from Jon Arfstrom.

Good morning, guys. Or afternoon, I should say. Couple of fee questions for you, maybe. What is the overall goal with mortgage banking, and Dave, can you give us an idea of what the breakeven revenues would be in that business?

I am sorry, Jon, which business?

Mortgage banking.

I think actually we think our breakeven is right about $90 million worth of production in a given month. So what we are seeing is if we were over $90 million, we were profitable. If we were under $90 million, it was a little more challenging for that individual entity. As a corporate-wide, since we provide them with some of the funding, from our bank subsidiary, that number is probably just a little bit lower than that.

With PMP coming on, and PMP did roughly the same volumes as our Wintrust Mortgage Corporation did. And we get a little bit more leverage out of that, we are thinking that breakeven point is more in the 150 to $160 million range.

That does not include the, you talk about [Anashandy] Mortgage, the warehouse spreads, because that really goes through to the Barrington Bank. But if you take that into consideration, those spreads are back to, what are they now, Dave? Over 3%.

Yes we are generally around at least 3% on those spreads, between what the loan is yielding and what our internal costs are for those loans.

So that, if you recall, when we had the negative yield environment, that spread got down to about 25 basis points. Now if we average 100 million to $150 million, somewhere in that range, there is a net 3% pickup, just as the loans are waiting, as we close, waiting to be sold.

If you had $100 million out there, that is $3 million that we haven't been getting in the past, on a pretax basis that enters the margin. So there is a side light to that business, that doesn't really come through on the mortgage banking side. It is very profitable to us, and actually lowers that breakeven level almost in half.

And applications have been through the roof in late December, and so far in January at each of our locations that is doing the mortgage business. We will be well above that level. I am a little hesitant to say exactly where we are at, because we will have to see where the actual pull-through rates come out. Obviously, some people applying are not going to get appraisals that are going to work, and they are not really aware how much the value of their homes went down.

But we expect at least to get a pull-through rate of 60% on the applications, because some people are actually applying at multiple places, or their applications will be denied for some reason. Historically, that pull-through rate has been probably closer to 85%, but we are thinking it is not going to be that high, because of some of the valuations out there. But even with a pull-through rate of only 60%, we will be well above that breakeven point in the first quarter.

I think it is fair to say, Jon, as long as we are on it, that we anticipate system-wide, not just Wintrust Mortgage, but the banks that still, we have a couple banks that still maintain their own very profitable mortgage operations, that applications in January will be between 500 million and $600 million. And getting stronger. So that business as Dave mentioned in his comments is going to be very strong in the first quarter.

In terms of, obviously it sounds like you have a good loan pipeline. Curious what, this is probably Dykstra's favorite topic, but curious what that means for the premium finance business, and the ability to keep all of this on the balance sheet, curious if you have any update, in terms of the ability to maybe offload some of that, and pick-up some gains that would come through fee income?

Ed never likes me to talk about my favorite subjects so he is going to answer it.

We have no plans to sell the premium finance loans at this point in time. Our liquidity base is very strong. Our deposits are strong. Opportunities to grow our deposits remain strong. We, as you know, when we did that, we would probably lose 1 point to 1.25 points, vis-a-vis holding them in our own books. Right now with the excess capital that we have we do have the ability to hold these things on our own books, use them to go out and to continue to build franchise value on the deposit side.

Dave talked about the MaxSafe deposit doing well. Really, deposits in all categories are doing very well, but we have started on the wholesale IBD, which again is where we take the wealth management money from our Wayne Hummer subsidiaries, and as opposed to that liquidity from our customers' accounts going off to a mutual fund or money market fund somewhere, we put them in our insured bank deposit IBD account, and spread them over the banks, it is very, very low cost funding.

What we are doing is we have contacted any number of smaller broker dealers and some larger ones, who are very interested in putting this platform, this product on their platform. What we are concerned with is some of these, they are so big that we would be drinking from a fire hose.

You can see those deposits went up a little bit over the course of the quarter, as we have been testing the plumbing on this, but we believe also that we have a lot opportunity in this area for low cost core deposits that we can bring in through that product, and I think we would rather keep the premium financed loans on our books at this point in time, while we get the earnings up, and if we ever, the other thing on it too, Jon, there is nobody to sell them to. The premium financed loans, Banc of America is not LaSalle, LaSalle used to buy it, give it to their correspondents. They did it for a couple of quarters. But their correspondents have their own liquidity issues. That market has dried up.

The securitization market has dried up also. That is not say we wouldn't, if the securitization market opened or some other alternative came along, that we would review that again, to double up, if you will, but at this point in time, there is no market. We have the capacity to absorb it, and we literally make more money, so we have no plans to do it right now.

One follow-up on that last question here. Are you seeing some firming in the average ticket size in that business?

Yes, we are seeing some firming there. The insurance market is getting a little harder. There are still some lines that aren't firming up as much as we would like, but generally, we are seeing premiums gradually increase here, which is a good sign for us.

All right. Thank you.

We budgeted no increase, though, Jon but we are seeing it selectively, as Dave said.

It is not dramatically harder, but you are seeing trends, where it is starting to firm up.

That helps. Thanks.

Next question comes from Brad Milsaps.

Hey, good afternoon.

Hi, Brad.

Hey. Just a couple questions, maybe on the balance sheet. Looks like you guys are sitting on at least at the period end, sitting on a lot more cash, Fed funds sold than maybe you have been. Is that in anticipation of stronger loan growth? I caught the trade day security receivable down below there. Just kind of curious, comparing period end numbers to averages, and how to think about earning assets in the first part of the year?

Well, some of that is the $250 million from the TARP money that came in that we haven't deployed yet, and we have tried to reduce our reliance on the investments a little bit, and shorten it up in anticipation of lending some of it out.

There aren't a lot of great places in the short market to put the money right now. But we have got the TARP money that came in that hasn't been really deployed yet, and some additional liquidity, because we have had had some fairly strong deposit growth during the quarter.

So we are waiting to deploy it, and then we are doing it selectively, but when the premium finance business is strong and our other loan pipelines are strong, and we will navigate the asset classes, and deploy it, and that is one of the issues is we have got the $250 million in, there is not a lot of places to deploy that, unless you want to lock up really long, and still the yields out there aren't that good for agencies or Treasuries. It is going to give us at least headwinds on the margin, until we can deploy that money.

Although it is not, obviously because where short-term money is, it is not the best from an earnings side. You know, in these markets, it is not so bad to have some extra liquidity, and we probably will be more conservative than we have been in the past, in terms of keeping liquid assets.

Who knows what is going on out there and liquidity is still a very, very, as has been proven over the last six months, liquidity is still extremely important in running a bank. So we probably will have a little bit more liquidity on a percentage basis than we historically have in the past, and some of that is by design.

So, Ed, did you envision, it looks like you added about $300 million in new loans during the quarter. Is that kind of where you see the pipeline, sort of playing out over the near term?

Well loan demand is still strong. It is hard to predict, because the first quarter is usually relatively slow, in terms of loan growth. But in this market, it hasn't been. I mean, we are seeing new business come, we are getting our pricing on it. This intermediate, the assets that were before disintermediated before, have no place to go and hide right now.

There are a number of the GE Capitals of the world are deleveraging, there are a number of companies like that that are actually deleveraging. There are people looking for homes out of there. There are actually portfolios for sale out of there. We would like to see that number be a constant quarter number, but I am hesitant to say because we are still going to be really prudent. We are not being like Mikey on that commercial, hey, Mikey, he will eat anything.

We are being very, very prudent during these times. The old adage that good loans are made in bad times, still holds true here. We have to be very careful. We expect there to be good loan growth during the course of the year. If there isn't in a quarter, one quarter or another, there will be a reason for it.

Okay. Two final questions. I was wondering if you could kind of comment on the expense run rate, absent the higher FDIC costs, that everyone has to deal with. Anything else in your mind that is going to push that higher? Secondly, just kind of curious what you guys have repricing deposit-wise during the first quarter, as you try to work on pushing some of those CD costs down, et cetera.

Well, our CDs are rolling at a fairly normal rate every month. A lot of them are 12-month CDs, so 1/12 is generally repricing every month. It is not exactly, but it is pretty close to that. The CDs that are on the books now that are repricing in the next few quarters or next few months, are slightly over 3% and clearly, we are bringing it on cheaper than that. At least in the low 2s for CDs, to below 1 for certain deposit classes. So we should see some benefit as these things reprice going forward.

And this wholesale IBD product that Ed talked about, is clearly much cheaper than that, in the low 1s. So we should see those deposit costs come down. But if you sort of look at the CD portfolios, and roughly think that 1/12th of it is going to turn over a month, but that is not going to get you too far. We actually don't publish those numbers, but the vast majority of our CDs are one year type of CDs.

Okay. Anything on expenses, and that is it for me.

I am sorry. On expenses, I don't think that there is anything dramatic that is going to happen on the expense line. Clearly, as we work through the non-performing loan issues, we will have some legal expenses, professional fees and we will have some charges to hold the OREO. I don't think that they are going to jump dramatically from what we have right now.

The salary and employee benefit line, again I think we have held that pretty well, and it will be fairly well controlled going forward. We will have cost of living sort of increases, 3% or whatever in the first quarter. But it may jump as the mortgage banking business jumps. We have obviously paid commissions on those. If revenues are up quite a bit, you may see an increase in the salary and employee benefits, but that is variable compensation.

Some of it is variable. We will have, PMP did come over with a fixed portion and a variable portion to their business, so we will have Broadway Premium financed for a full 12 months, when we only had them nine months last year. The merit raises were a little under 3% for this year. Employee benefits were probably, the health insurance was up, what 8 or 9%, we think.

Right.

We are budgeting 20 plus or minus new people during the course of the year. The big number will come from PMP, their base number plus the commission base number, based on this huge real estate boom we are having right now. So it is kind of hard for you to model, given all that, but --

But if you use your model and you put a dollar revenue on the mortgage revenue side, you can think that 40 to 50% would come out as salary or commissions benefits side of the equation. So you could model it that way and get relatively close, but that is the only real line item, other than the FDIC expense increases, that we see having any sort of lift. And again, the lift is due to revenue producing bodies that are on, and a little bit of increase due to health insurance costs.

But nothing other than that, that is dramatic. We don't have four or five new branches coming on-board in the first part of the year, or anything like that. It should really just be those factors.

Okay. Great, thank you.

Your next question comes from Ben Crabtree.

Yes, thank you. Couple of questions. I think that the Illinois tax rules changed a little bit this year. I don't know whether that affects you, what you think the tax rate might be this year?

Well, Ben, our tax rate has usually been in the low to mid-30% range. It is a little bit lower this quarter because our base pretax income number is lower, and we have got some low income housing credits that flow through the tax line as credits, and so that is in the 100,000 to $200,000 range that came through this quarter. So if you adjust that out, the rate gets up closer into the mid-30s. So 33 to 34% most likely.

Ben, we actually need a governor, if we are going to have tax increase in the state of Illinois. Dykstra said he would make a political contribution to try to keep it as low as possible. We are keeping our fingers crossed.

I was shooting for the Senate seat, but that is gone now, so --

Do you have, I didn't see in the actual capital ratios, the Tier 1 total and tangible common?

Yes. We didn't put those in the press release. We obviously have the total risk based capital at 13%.

13 even?

Yes, 13 even. 13.0-something, so that is the total risked based capital is at that level. And the rest will be disclosed in the Q. They are not going to be significantly different. The majority of the TARP went into the Tier 1 level, but it ate up some of the capacity where trust preferreds was filling up that bucket. So they will be up a little bit, but the other categories will be up a little bit but not dramatically.

All right. That is all I had. Thanks.

Next question comes from John Pancari.

Good afternoon.

Hello, John.

Ed, I would tell you that Dykstra called me before the call and told me to ask about capital.

(laughter). I win the money. I win the pool here. I figured your first question would be tangible capital levels. I read your note this morning.

All right. Well, I am going to prove you right. I will ask it this way. I know you indicated right when you started the call that you are happy to talk about earnings now in this quarter, and I know you are relatively pleased with how the quarter panned out. So given, if you see a quarter like this again, this quarter you shed 13 basis points off the tangible common equity ratio, so in your projections are you expecting to shed additional bips off the tangible ratio for next quarter, and what are your thoughts about the ratios specifically?

I do get a kick out of, we put $300 million in extra capital on the books and everybody, that is still not enough, we have to go to tangible. I know what your thinking is on all of that. John, we understand that, we are comfortable with our overall capital ratio, and we are comfortable with our tangible ratio right now. We feel that the TARP money has given us a 12 to 18 month head start on Phase III of our plan, which is getting back to growth, and pushing the earnings up.

Will we be raising common equity in the next five years? I can pretty much tell you we probably will have to. If you just look at the numbers, and you put them out. I don't think we want to be beholding to the government forever.

But in the meantime, this TARP money acts as a very useful bridge. I am not going to go out and raise tangible common equity at this point in time, when the stock is where it is. We believe we can be first out of this. We believe our earnings will be first out of this. That is what the plan is.

We are subject to the overall economic environment. We are not bigger than that. But we believe we are in pretty good shape to start executing this, and I think our growth in the fourth quarter, and what you will see during the course of this year should bear that out. At that point in time, we will continually look at those capital numbers, but right now we are comfortable with given the risk profile of the balance sheet, given where we stand, given where we think earnings are going, to utilize the capital that we raised, the TARP money that we raised as bridge money, to eventually bolster your common tangible equity ratio.

Also keep in mind that the 50 that we raised from CIBC is convertible, and at some point in time that will be converted into common stock. Three or four years from now, whenever they decide, that will be their exit strategy. So I can understand the fixation that people have on tangible common equity. As it relates to us, we are using the TARP money as bridge money to jump start our growth, and get back in the ballgame, earnings will follow.

At that point in time, we have anticipated stock prices following to a level, where raising common equity may or may not make sense, and that is the plan. So if tangible common goes to 4.5 over the year, then that will be where it goes.

But I think we will be very prudent and watching that level, looking at the opportunities for growth, and making sure that they are profitable opportunities for growth and it serves that end of profitability, higher stock price, and then reviewing that issue when we take care of our TARP.

Does that make sense?

Yes, I appreciate you addressing it. I just have one other question on the credit side. I know you kind of talked about reserves already. I am looking for a little bit more granularity on your thoughts on reserve allocations. Just looking at your charge-off expectations, you admitted that they have exceeded, your charge-offs exceeded your original expectations, and so the loss content of your non-performers have exceeded what you thought. How do you justify the coverage ratio near 50% in this type of environment, with losses exceeding your original expectations?

Well losses are exceeding original expectations, but I think we also said that we were going to end up being half of where the peer group is. So I would ask what that number is, you follow it more than I do. I think we are probably right about there, aren't we?

In terms of the loss ratio, I would say you are probably just over about half for the small banks, yes, right now, for this quarter.

That was my mulligan. When I said the 20 to 30 wasn't going to flat. I said we think we will be lower, we will be half of where people are for that period of time. The coverage ratio, you have to understand, John, I went through it, where the reserve itself is fully allocated to these loans. We go through, we do this all the time. We don't do it at the end of one quarter. You know? At the end of the last quarter of the year. All of the time. We look at a loan. It comes in on an individual basis. We take that loan.

We look at the value of the collateral. We go, we use FAS 157, which other people don't actually do. We value that collateral. We look at what the outside sources are. We will charge that off if we feel there is a loss right then, we will charge it off. If there is any mitigating circumstance, where we don't know what the value of certain collateral will be, we will take the estimate and we will put a specific reserve on that loan.

Theoretically, this is the way the SEC wants you to do it, I mean, this is their guidance and their reality. Our auditors tell us that we are right on point with what they want done, and we are ahead of our competition, in terms of applying it and doing it. So the numbers are what they are. You could argue and say you need a more, there are two elements to the reserve, there is the specific that I talked about that goes loan by loan, collateral by collateral, reviewed ad nauseum by our auditors. Their national office has gone to all of their clients in town, and reviewed our calculations, reviewed every appraisal, down to the bone marrow.

I mean, they were very, very on top of all of this, and then they have on the specific allocations, the general allocations are based upon our history, our historical losses. And all this stuff is coming through,and then we get to put a general economic trend in there, which we have done also in calculating those numbers, and this is where the number turns out. This is why I am comfortable in saying where we are. We have charged, when you say the non-performers are up. We charged them down over the last three or four quarters that we were carrying them, at a value we believe is realizable.

So this isn't the old days, where you just kind of make it up and say I need some, I need that. It is very granular. It gets down to individual loans, and they are scrutinized every quarter, not only by us and our staff, and by internal audit, by the regulators, and by the auditors every quarter. So how do I justify it?

I justify it by having gone through every stinking one of these things, and being comfortable with where we have valued them, and where they are on the books right now. That is all I can tell you. That is how I justify it. I can't address how other people do it. I can't address how other people can go through an entire year and come up with gobs of charge-offs at one period of time. We play by the rules that we are told the SEC goes by, and that the accountants go by, and that is what we do.

Granularity, I can tell you every single loan in that non-performing area, and I can tell you what we have allocated to it. I can pretty much tell you the color of the borrower's eyes right now. So we are all over this. It would have been easy in the old days to just say, take a bath, fill the tub, build it up, and move on. I don't think that, you can't do that these days.

And I am very comfortable right now with the portfolio at 12/31, that we have marked them to where they should be marked. That doesn't mean it is not going to change if things get worse or better. If they get better you can't do anything about it. Other than realize a recovery on it. But I am very comfortable with where we stand right now. This process is very exhaustive. You want to add anything to that?

I think that that is right. We can go into every commercial loan in the system, and tell you the specific reserve or general reserve that we have allocated to it and why. Do it by collateral codes. We do it by risk rating. So as loans if they get downgraded, as far as credit quality goes, we are applying additional reserves to it, and we have specific reserves.

The non-performing asset number we have out there, we have already charged those down. So unless you think that our valuations are so far off the mark, the losses should already be out of those loans, or already through the charge-offs, or specifically allocated in the reserve, and so and the vast majority of the reserve is a general reserve, not a specific reserve, because we have taken most of the specifics as charge-offs.

So you are looking at a number that should be a realizable number, and on the premium finance side, that is a number that chews up a bit of the NPAs, and that is just processing time really. Really not any additional credit risk, it is just waiting for the money to come back from the insurance companies, as we pay off the loans.

So we really spend a significant amount of time on this and I think if you look at it, and if you are right as far as the peer group goes, and if our charge-offs are half of the peer group, and if you took our reserve and doubled it, so it would be similar to the peer group on a relative basis, we would be at 180 basis points, or something like that, 190, and people would be saying oh, that is a great rate.

And if our reserve was twice that, they would say that is great coverage. But our charge-offs are half of what the peer group is. So we spend a lot of time on this, you can see quarter to quarter to quarter, we have varying levels of charge-offs because we take them as they come, we evaluate them on a day-to-day, a week-to-week, and a month-to-month basis, and as Ed said, it is what it is, and we do our best to do it on a loan by loan basis, and we think we do a good job at it. We clearly think the reserve is adequate.

As I mentioned earlier, John, give them a point in time where we have specific reserves up against certain loans, and those loans come through, where we get the property back or we settle it, and that would result in those specific reserves becoming a charge-off. So you really have to monitor our credit quality, you need to look, assume that the level of reserve is already gone. Those are applied to loans and that is our best guess as to what they are worth. You really need to look at the provisioning level to make sense out of where the portfolio is deteriorating or not.

Okay. Thanks, guys.

Sure.

Your next question comes from Stuart Quint.

Aberdeen Asset Management. Just a couple of questions, regarding one of the deposit growth. If you could comment a little bit, just what particularly happened in the fourth quarter that stoked your growth, it is pretty impressive.

My second question relates, I guess it is looking forward on your credit outlook as you look into '09, maybe from a different angle, can you talk a little bit about trends that you are seeing in your watch list or your classified loans if you disclose numbers, or at least just the qualitative aspect?

I will take the deposit side, and Dave can take the loan side. The deposit side was really a number of factors. One, we really had increases in deposits across the board. We talked about the wealth management deposits that came in. Again, that is our IBD product as we are taking that, as we call it on a wholesale basis, and getting it on other people's platforms, as opposed to them putting the money in a money market mutual fund, they can put it in an insured bank deposit account, and it works very well for them, and it is something we continue to test the plumbing on, and something we can roll out. Again, we have got multiple opportunities there but if we took advantage of them all right now, we would be drinking from a fire hose, and that is not something we want.

Our MaxSafe account, which is the account where we utilize the 15 charters to offer 15 times the level of FDIC Insurance, you notice that our advertising was up. Dave mentioned our advertising was up for the quarter. We did radio advertising and some print ad, additional print advertising to advertise that product throughout the city of Chicago, and those balances grew to almost $400 million. That has been a very active account. And then we immediately move in and cross-sell those accounts. So that has been a very attractive account for people to give them comfort and safety, and we found we really don't have to pay top dollar to get that money in.

People are very comfortable with the safety aspects of the product itself. The rest of it is knowing that we had the $50 million in privately raised money plus the 250 of TARP money, we knew we wanted to kind of not jump start, but start the growth engine again. If you go back in our life, we were always pretty good at growing, and growing franchise value. We don't rely a lot on institutional funding, we grow with household penetration and growth, and what we wanted to do was to get that ball rolling again, and we did mark some specific marketing to actually go out to households and to start building on the retail side, to start building the franchises again. We have been waiting to do this since we put the brakes on in 2005. We are getting back into the mode that most of us, those of you that have been around for a long time would have been used to seeing us in, and that is on building franchise value.

Also on the lending side, the commercial side of the business is growing nicely, as people still pull back from the bigger banks, and a lot of banks have just stopped lending, or the smaller banks too have kind of pulled their horns in, as they deal with their issues, which is something that normally happens at this point in time in the cycle. Us being relatively healthy, we are able to bring in business banking and full relationships as they come with that.

It is a couple of new products and services that are timely in their nature, but it is also us kind of getting back to what we do best and that is building and growing a franchise, and we think that the growth, we are looking forward to some pretty good growth in the coming year. Dave, want to talk about loans?

Yes, well, I mean asset quality, I would say there are no significant trends that are concerning us. There are certainly levels of stress in the home equity and residential real estate that we haven't seen before, but they are not significant. I mean it used to be we have virtually none of those, one or two here and there. We might have one or two at a bank that we are worried about, but clearly it is a manageable process at the individual bank levels.

Commercial and commercial real estate, the big issues still are the development loans, and most of those issues have surfaced already. So we are not to say that other ones won't pop up, but we have looked at the large ones and evaluated those, and are dealing with them accordingly. The question is, is commercial real estate going to be the next shoe to drop, and how do you stand there? We are seeing a little stress there, but it is very small right now.

We are fairly diversified across the lines, and the amount of commercial real estate, collateral and related property that we have, is very small right now. So again, knocking on wood, we are not seeing significant adverse trends right there. So we don't know where the market is going from the economy perspective, but if we are at where we are at right now, there is no big significant event coming down the pike that is concerning us. If it was, we would be allocating more reserves to those loans than what we have. But it is not a good answer, but we are just not seeing major trends of any adversity anywhere, general softening across the board, but not anything that has got bright lines to it, where it is a major red flag that is going up.

I mentioned earlier, it was good, the OREO is actually a good thing, it means that the process has moved through and gives us the ability to liquidate the collateral and move on, hopefully having taken, and valued our collateral properly and being able to move on. We would like to see, and again, the courts are extremely slow right now, and people are able to play them. We would like to get better flow-through if we could of the non-performers to where actually we can control the collateral and liquidate it. Some borrowers will work with you, and if they do, we will work with them, and we can resolve things quickly.

Those who play hard to get, and I would say use the term, I will spend $3 to collect $2, and hound them until the day they die, and that is what we will do on those folks. All of that being said, it is important to move those things on, because I can guarantee you there is more coming behind it. There is more stuff that is going to wash in.

Just because of the economy and where it stands, we continually review all of our portfolios. We did a full review of our home equity portfolio, and we are all over this and looking at it. But things will continue to wash out, we have got to get them out of here. We have got to get the old ones out of here, because I can assure you they are going to continue to wash up on shore.

Just a follow-up on the credit side. What do you think that regulators, the last five years it has been the SEC just in time reserving, et cetera, and typically regulators like to see more reserves rather than less. Do you see that power, balance of powers tipping back to the regulators, where at some point you may have to talk about taking a big reserve, just because of the landscape?

And second question related to that is when you say you use historical losses in terms of thinking about your reserves, basically the last, it has been a pretty mild decade, if you compare it relative to let's say the early '90s, so just I guess the question is, just if you could elaborate a little bit of how you built, what you mean by historical? Are you saying the last five years where you have had very great credit, and could that be artificially depressing reserves, or am I misunderstanding that?

Very good question. First, no, we actually have not applied market factors to our historical reserves. So where there is an adjusting factor in there that multiplies those numbers, because yes it has been good. Remember also that all through time our underwriting has given us a level that is 50% of what peer group has been. In 2005 we pulled back, and didn't do a lot of the things that we saw our competitors doing. It kind of all makes sense when you take it into consideration from that perspective.

But no, we don't just take five really good years, and say we don't have any issues. We do apply outside market factors to build that up. As it relates to the first part of your question, regulators have been through our methodology, and have no issues with us as it relates to how we build it up, what we do, how we do it. If the regulators want to get together with the SEC and figure out how they want it done, God bless them. I could not have to answer these questions any more.

But we are doing it the right way. We are doing it the way it is pronounced, and again, I think if you think about it in terms of what they have done with 141-R, and acquiring new banks and what happens to that reserve, that same DNA of that methodology rolls into how you are supposed to build your own reserves, and that is exactly what we're doing. If the market were to materially, that is why I said.

Watch our provisioning to see where our portfolio is going. It is a pretty good barometer of risk rating movement, loans and higher risk ratings obviously get higher allocations. It is a big old matrix we have got to run it through to get higher allocations. If you monitor our provisioning, you will monitor how the credit portfolio is actually moving.

This is Dave. To follow up on it, we haven't had any significant discussions with the regulators, where they have been telling us that they see anything changing from their perspective. Now maybe they are having internal discussions with the SEC about it, but that has not filtered down to us and as Ed said, they have been into our banks and they have reviewed our portfolio and they have reviewed our reserved methodology, and I think they are comfortable with where we are at. We are certainly comfortable with where we are at. But whatever they want to do, they can do. We follow the rules and we play by the rules.

Thank you very much.

I think that is it. Thanks everybody for listening in, if you have any other questions feel free to call Dave or myself, and we will be happy to do our best to answer them.

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