Wintrust Financial Corp. of Lake Forest, Ill., is setting aside more capital than ever to cover potential loan losses, but is it reserving enough?

Edward J. Wehmer, its president and chief executive, insists that it is, saying last week that he believes the credit crisis has hit "the depths of the depths."

But analysts who follow Wintrust disagree strongly, saying the $9.9 billion-asset multibank holding company — which reported its first quarterly loss in 12 years as a result of spikes in chargeoffs and delinquencies — should be bracing for further credit deterioration.

"It seems clear to us the reserve needs to be built further in light of the portfolio's current stress and the worsening economic prospects," Ben Crabtree, an analyst at Stifel, Nicolaus & Co. Inc., wrote in a research note Thursday. "We believe that credit costs and the required loss reserve will be higher than management's previous experience and guidance, putting continuing pressure on profitability."

After recording a $24.1 million loan-loss provision, Wintrust reported a $2.4 million loss for the third quarter. Its allowance for loan losses sat at 0.91% of total loans as of Sept. 30, and the company said the ratio was "a historically high level."

Analysts stopped short of saying what the ratio should be, but they made it clear that they would like it to be more in line with that of companies of similar size in Illinois. First Midwest Bancorp Inc. of Itasca, Ill., had a ratio of loan-loss reserves to total loans of 1.34% at Sept. 30.

Other companies raising their loss reserves to historic highs are also under pressure to set aside even more. Hanmi Financial Corp. in Los Angeles said its ratio was 1.89% on Sept. 30, but Friedman, Billings, Ramsey & Co. Inc. analysts called the ratio "woefully thin" in a research note Friday.

Though Hanmi's management team "recognizes that we are likely in the early innings of an economic slump, its outlook on credit performance within its loan portfolio seems a bit more rosy than the macro outlook would suggest," James Abbott and William Wallace, two analysts at Friedman Billings, wrote in a note.

Wintrust typically sets aside less for loan losses than others of its size in Illinois. In the second quarter its reserve ratio was 0.79% of total loans, or about half the average for banks of its size there, according to data from the Federal Deposit Insurance Corp. A year ago its reserve was 0.7%, compared to the average of 1.2%.

"Of the varying levels of reserves banks take, they have certainly kept theirs on the lower end," said Brad Milsaps, an analyst with Sandler O'Neill & Partners LP. "However, in the past they haven't incurred an elevated level of chargeoffs."

That is no longer the case. Wintrust's third-quarter chargeoffs grew more than fivefold from a year earlier, to $15.4 million. Nonperforming loans increased 141%, to $113 million.

When asked during a conference call last week if Wintrust was reserving enough, given the economic climate, Mr. Wehmer said he believes its level of reserves "to be adequate, or we wouldn't have it." (He did not return calls for comment.)

"We look at our overall portfolio and apply pretty stringent factors to it as it relates to the quality of the portfolio and where it stands," Mr. Wehmer said. "If nonperformers continue to grow, you'll see the reserve continue to grow."

He also said he expects to finish the year in the black.

Mr. Milsaps said he is not so sure — Wintrust is not a big earner, so an increase in problem credits could spell another loss.

"They do not have the earnings to absorb materially higher credit costs," he said. "As they continue to build their reserves, it's going to be detrimental to the bottom line. They have no margin for error."

Mr. Wehmer called Wintrust "lean and mean," but operating its 15 individually chartered banks can be costly. Peyton Green, an analyst with First Horizon National Corp.'s FTN Midwest Securities Corp., said Wintrust is unlikely to change its model, particularly given its opportunity to draw deposits by offering deposit coverage 15 times the FDIC limit.

"That's a funding advantage to them," Mr. Green said. "And any change to it won't be done lightly."

On the income side, Mr. Wehmer said Wintrust's net interest margin, which fell 40 basis points from a year earlier, to 2.74%, has been depressed because of the recent drop in rates. Mr. Milsaps said its noninterest income, which increased 90%, to $21.9 million, is not strong enough to carry the earnings.

One way the company could wade through the credit environment and to take advantage of what it calls good loan demand is to sell preferred shares to the Treasury Department under the government's Troubled Assets Relief Program. Mr. Wehmer said in the conference call that Wintrust is considering participating in the program and would be eligible to receive $80 million to $240 million.

"If we were to choose to do it, we think that the opportunities would be enormous for us," he said. "We're adopting this measured growth approach and making sure we're able to maintain our capital and our cash. With $200 million, hypothetically, of additional capital leveraged 10 times, that's $2 billion worth of growth."

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