Wintrust Financial Corp (WTFC) 2009 Q1 法說會逐字稿

Welcome to Wintrust Financial Corporation's 2009 first quarter earnings conference call. 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. (Operator Instructions). The Company's forward-looking assumptions are detailed in the first quarter's earnings press release and in the Company's Form 10-K on file with the SEC.

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

Thank you. Good afternoon, everybody. As mentioned with me as always are Dave Dykstra, our Chief Operating Officer and Dave Stoehr, our Chief Financial Officer.

As is customary, I'm going to make some general comments about our major business operations and then Dave Dykstra will go through specific numbers and we will have time for some questions. Generally the quarter ended up, we were generally pleased, it ended up pretty where we thought it would end up and with we expected. The margin was a bit down from December, but we expected that. I think we mentioned that in our last call with you folks, this was the first full quarter of basically 0% interest rates and as we mentioned this takes some time for our balance sheet to absorb the deposit repricing that needs to take place when that happens. So we kind of figured this is the low point of the margin and we think going forward now that we have a positive yield curve, they can't go down much more, that we can start working on and will achieve some more margin expansion in the next -- in the foreseeable future.

Interesting thing to note on the deposit repricing side we still have about $2.3 billion worth of certificates of deposits that are coming due in the next 12 months that are north of 3.10, 3.10% that should be repricing down into the 1.75 or 1.80, that in and of itself, you can do the math, but is close to $50 million on a pretax basis that we think we'll pick up just on the deposit repricing side of things. We continue to reprice the existing portfolio on the asset side. We do see better pricing in the markets, that is continuing and we are being successful in repricing the asset side of the balance sheet. If you think about the first quarter and my comment that the margin was probably at a low water mark, the trends for the quarter month to month were actually up every month during the quarter, so we feel pretty good about our ability to recover and have margin expansion.

As you will note, the mortgage side of the business was extremely strong for us. It was aided by the acquisition of PMP in December. You should need to note that really not all of our costs are out of that transaction. We hit the ground running with such terrific volume that our cost cutting in that area and taking advantage of synergies in that area have not been fully anticipated, but have not been achieved as we anticipate them being achieved. Another thing to remember on the mortgage side of the business, the economics of that. Probably, 50% of the gross revenues are paid out in commissions to folks and another 20 or 25% passes through in terms of expenses and that. So the -- and it might be a little towards that high end because, again, we haven't been able to have the time to pull out the costs that we were going to pull out of that -- related to that transaction. So even though the number's very large, the economics of it would actually fall so the bottom line is a little bit different. I'll note that the mortgage business is still going very strong and I think it will as long as rates stay low.

On the recruiting side in the mortgage business, we continue to pick up very established brokers, mortgage brokers, mortgage sales people and bring them in to the business, we call them the homeless ones because of the fall out in the business and we provide them with a great platform to work forward. So we feel very good about where that business is going and where we think it will stay for the rest of the year. Offsetting that, almost T for T was in the Wealth Management area. Our fees were down about $2 million in the Wealth Management area, all of that is market driven, I think you've seen that in a lot of the other banks that you've looked at. On the bright side, though, it's allowing for -- the disruption in the market is allowing for very good recruiting on our part on the brokerage side of the business and we are executing on that very well and that's good for the overall expansion and we continue to make good progress on the reengineering of the asset management side of that business. You'll note that we did close the acquisition at AIP and that's just one more step in terms of making the world class asset management organization that is our goal and objective.

The premium finance side of the business is going very strong. Credit quality there remains very strong. We're hindered a bit by the soft market. I took part in a panel discussion with a number of insurance folks and it was the consensus of that panel that really the -- that AIG and until AIG gets their divestitures done, that to maintain customers, they're really holding on to -- keeping prices relatively low in that area, but there are signs of a hard market coming along which again would be very, very good for us, it would raise our average ticket size. Unit volumes are up double-digits again, so the business itself is very strong. I mentioned credit quality and that particular 1.5 billion portfolio remains strong. We're seeing an increase in late fees, we recorded 1.65% of the balance of late fees this quarter up from 1.48% for all of 2008. I'll remind you all historically, that number has always been between 2 and 2.25%. So we still believe that there's good upside in that business on the profitability side. So we feel very good about what's going on in the premium finance business.

General banking in the balance sheet itself, deposits and loans were both up around 12%, 250 million in deposits to $8.6 billion in loans up $220 million to $7.8 billion. This is right around where we thought we would be at this juncture. Loan demand remains very good, but we're being very selective and we are getting our pricing on new deals. Core deposit growth remains strong and it's coming in at the -- at pricing that is acceptable to us. Our MaxSafe deposit program where we spread -- where we're able to offer 15 times the FDIC limit is still a very attractive account for us and continues to grow. On the banking side, we do expect to continue to take advantage of the market dislocation and the overall competitive disarray that's going on in the market to grow and to improve our profitability and to grow profitably. The competitive disarray is opening up many recruiting opportunities for us for strong lenders and this bodes well for continued growth on the overall banking side of the business.

Now, on to everybody's favorite topic, credit quality. We have some good news on that front. I'm happy to report that Wintrust has absolutely no reported cases of swine flu in its staff, however, we're pretty sure that amongst our -- some of our bad loans that we do have some swine flu carriers out there, so we're going to deal with that as well as we can. Charge-offs for the quarter were $10 million or 51 basis points, right around where we anticipated them to be. Our provision was $14.5 million, bringing our overall allowance, total allowance for credit losses to 97 basis points at the end of the period, up from 79 basis points a year ago. Like everybody else that we've seen so far, nonperforming assets did increase.

When I do this analysis, I always take out the first insurance numbers because the numbers, the 22 million -- 20, $22 million that's shown as nonperforming and first insurance is basically we've confirmed, returned premiums and are just waiting for insurance companies to return them to us. But if you back those out, nonperforming assets were up to about $38 million to -- nonperforming loans, about $38 million to $153 million again, the vast majority of this increase relates to residential real estate and that is what it is and we will work forward with that.

If you note our trend in the 30 to 89 days is actually down, so I'm not saying we've reached the top of this, but we've had very good, as well as can be expected velocity in terms of trying to turn these nonperforming loans into cash and moving them off our balance sheet, but they continue to roll up on shore and we continue to have to deal with them. As it relates to reserve adequacy, I'll preempt the quarterly question we get. Is our reserve adequate, we think it's very add Q-I want to take you all through the process we go through in determining what the reserve levels should be.

When a loan becomes nonperforming and doesn't have to go 90 days, we just determine that it's a nonperforming asset or we have a problem with that loan, we immediately go out of it if it's basically real estate related or business related, then we do a full evaluation which leads to new appraisals and the like on the collateral that we're sit -- that we have. We -- for larger deals, we will go out and not just get an appraisal, but we hire an outside firm to do two or three other different types of valuations related to the property or the collateral that is in question. If there is a deficit on that, we immediately take the charge-off related to that particular asset. If there is any question as to what collateral may be, what guarantees are worth, what values are, we will take a conservative approach and put a specific reserve into our allowance related to that credit.

And we do this loan by loan by loan. By doing that, we recognize our Charge-offs early, we think we're doing a very good and conservative job of building our reserve, building reserves based upon where we think there might be issues in the portfolio and then we work very hard to work through these assets and to get them off our books as quickly as we can. The allowance then is also built up by a general reserve that relates to our performing assets and relates to our historical Charge-offs by category and that's how we build up the reserve. That analysis also is done loan by loan. And this is done every quarter, as I mentioned earlier, the resulting output is about as big as the Chicago yellow pages are. There's tons of detail and we really spend a lot of time on building this up and we're very, very comfortable with the level of the reserve. As it stands right now, vis-a-vis, where our portfolio is right now.

On the OREO side of the equation, we were able to get assets and once we get them, we work to dispose them. Our OREO was approximately $41.5 million, approximately $4 million of that has been sold so far in the quarter, approximately $15.7 million of that, and I mentioned to you earlier there will be -- in previous calls I mentioned that there will be some OREO property that is going to be with us for a period of time. We've written it down to such levels that we believe that we -- these are hold situations. Right now that number in the OREO number is 15.7 million. I would anticipate that that number when we get through court systems and gaining control of the property could be in the 50 to $60 million and that's not too dissimilar to the numbers that we raised -- that we told you before that may be long-term holds. Another $4.2 million is an end substance foreclosure where we basically -- we have a contract on the property, but we need to clear title before we can execute that contract. Another 17.6 million is being actively marketed.

The actively marketed deals, you should know, our approaches -- once we put a property in -- when we get it, we put it into OREO, we do reappraise it again. We go out and get another valuation of it and then we put it on the books at what we think the value is based on that appraisal. We also -- the appraisal might be a little high compared to some of these because we will do -- we want to get a 90 to -- for other than the long-term hold, we want to get a 90 to 120-day clearing price for properties. Our goal is to get these things off the books, take your lumps, get them off the books right away. We've had good success doing that and clearing these properties. Again, right now in OREO, there is 17.6 million. It's being actively marketed and we hope would clear in that 90 to 120 days.

The process, the court systems are still relatively slow in terms of allowing us to get control of collateral so that we can execute these plans and get them off of our books, but all in all, the numbers of loans that we have were very manageable, we've added people to our mad staff, our managed assets staff and we continue to work these to get control of the collateral and to push them out. Again, we feel comfortable that the situation is under control, that we're moving forward, that we've got good velocity through here, that we've got these things recorded at appropriate values and we will continue to do so.

Now I'll turn it over to Dave who is going to talk about some specific numbers.

Thank you, Ed. As usual, I'll start off with the noninterest income and noninterest expense portions, Ed touched on in the margin. As it relates to the noninterest income, obviously the biggest component increase in the noninterest income during the quarter related to our mortgage banking business. Mortgage banking revenue increased to 16.2 million in the first quarter of 2009 from 3.1 million in the fourth quarter of 2008. The first quarter revenue increase was a result of origination of approximately $1.2 billion in residential mortgage loans. As a comparison, we originated 1.6 billion of these loans during the full calendar year of 2008. So obviously quite a substantial quarter for us. As Ed mentioned, the PMP transaction added -- or aided in this increase as well as the low interest rate environment.

Looking forward, we believe the second quarter of 2009 will continue to be a very strong quarter. I should note for your reference that the PMP staff that we hired in late December 2008 did roughly the same volume as our Wintrust Mortgage and our banking operations within our group did prior to the acquisition. So we nearly doubled our size in that business with the hiring of the PMP producers. Accordingly, even as the interest rates moved a little bit higher, we should be able to sustain increased revenue levels throughout the course of the year simply because of the additional producers that we've added to our staff.

Brokerage and asset management revenue declined again in the first quarter. The decrease in asset valuations for trust and managed money obviously have been impacted by the lower asset values and the fees we receive on that. And our brokerage business, our customers aren't trading as much in these times as they have uncertainties about the equity market. The Company recorded $2 million of security losses in the first quarter, primarily a result of a $2.1 million other than temporary impairment charge related to our investment portfolio. Fees from covered call option transactions declined to $2 million in the first quarter of '09 from 7.4 million in the prior quarter.

If you look at the securities that we write -- covered calls on, which are generally agencies and treasuries, the higher prices and resulting in lower yields than those agency securities that we purchased had an impact on how much of those securities we had in our portfolio. In essence, the longer-term agencies were yielding so little that we really didn't feel they were good longer term investments, the portfolio was less concentrated in those and therefore covered call was lower and volatility was a little bit lower so that the amount of income that we received on the covered calls was less in the first quarter than it was in the prior quarter.

Then, as far as the other income items, most of the other items stayed relatively consistent with the prior quarter other than we had a trading gain of approximately $8.7 million in the first quarter. This was primarily the result of increases in certain securities that we purchased and we held in a trading portfolio rather than classifying them in the available for sale portfolio. We purchased those securities for which we thought market prices were disconnected from the true underlying value of the securities and chose to classify them as trading rather than held to maturity in order to give ourself some flexibility to sell those securities in the future if we felt it was appropriate.

On the other noninterest expense side, salary and employee benefits increased by $8.1 million over the similar period of 2008. And this was primarily the effect of the mortgage banking related costs. Approximately 6.7 million of the $8.1 million increase related to variable pay commissions and the fixed salary related to the staff that we hired in December of 2008 with the PMP transaction and the remaining increase, which was very small, primarily related to our normal year-end salary increases and the additional payroll taxes associated with the higher costs of those increases and the mortgage pay that we were doing in the first quarter.

Equipment expenses, data processing expenses, advertising and marketing and occupancy expenses were all relatively consistent with the prior quarter. In fact, if you take those groups as a whole, these four categories actually had a reduction of about 427,000 from the fourth quarter of 2008. Professional fees continued to trend up slightly in the first quarter to 2.9 million from 2.3 million in the fourth quarter of 2008. This increase is primarily related to the elevated legal costs associated with the collection efforts of our nonperforming loans.

If you look at other noninterest expenses besides those categories as they increased to 14.2 million in the first quarter of 2009 from 11.4 million in the fourth quarter of 2008 or an increase of approximately $2.8 million. Of that increase, 1.3 million related to higher FDIC insurance costs and $1.7 million of the increase related to OREO losses and expenses. The other components of the noninterest expense were actually slightly lower in aggregate and no significant variations. So from a noninterest income, noninterest expense perspective, those are the major highlights.

And I'll throw it back to Ed.

Just a couple of summary comments for you. We are proceeding according to plan, as I mentioned at the outset of this call, we were generally pleased with the quarter and it came around a little better than we thought it would come in, mostly due to the mortgage side of the business, but pretty much right on where we thought we would be. If you look at the pretax, preprovision run rate at about $97 million right now, even with the security -- or the trading account gain and take away mortgage servicing rights and OTTI and the like, they kind of wash out a little bit, but right around now, about $97 million. We mentioned the deposits that are repricing and just doing the math on that, if we're able to execute that's worth 40 to $50 million.

Our growth that we are experiencing now and if it were to continue, we're able to execute, it's worth just about the same. So our objective and what our total focus is on right now is improving our core earnings and we think that our -- we're -- that we are succeeding in doing that. We have any number of other initiatives that hope to capitalize on the dislocations in the market, we're working very hard to do that, but again, we're focused on growing our core earnings back to acceptable and over acceptable levels. At the same time, we are focused on staying on top of asset quality, making sure that we identify issues early and move as quickly as we can to resolve them and move them through the system as best we can. Nobody's bigger than the market. We think as we look at our competitors and the peer group and the overall market in general that we're doing pretty well, that our rope-a-dope strategy continues to pay off for us and we feel -- we feel pretty good about what we think, where we're going, going forward. We can execute our plans.

Again, if we can get our core earnings up, we'll be at a point in time where everybody wants -- it is talking about getting out of TARP money. Eventually you're going to have to get out of TARP money. We believe that the TARP money as far as we're concerned is doing exactly what it was originally meant to do. It has helped us bridge a period of time and helped us get back into the lending mode and back into the growth mode and helping us jump start out of our rope a dope strategy back into the growth that we experienced from 1991 to 2005 when we put the brakes on. Our goal would be to get the core earnings up, to continue to bolster our capital from that perspective and with higher earnings, the concept of being able to pay off -- to have enough capital to pay off the TARP money is well within our gun sights right now. We remain well capitalized across the board, although we'll get the question, I'm sure, your tangible common equity ratio and the like. Again, our plan is to grow our core earnings throughout the course of this year and the beginning of next year to be at the point where we can resolve all of those issues and remove TARP from the equation.

There's interesting times right now with all sorts of opportunities. Who knows what's going to come along and come our way, but we are well prepared to take advantage of that and to move forward and to continue to execute our plan, the that was originally laid out in 2005, it's been adapted for the shaking and baking that's gone on with this particular downturn, but we feel very good about where we are and where we're going and with that, before I turn it over to questions, I would just like to thank two gentlemen who have followed us for a long time, both Ben Crabtree, who I understand is retiring at his young age at the end of June and we appreciate -- it's been fun working with you, Ben, and we appreciate all your help and working with you.

Then there is Brad Vander Ploeg who has moved into the private investor mode. Brad has followed Wintrust since we went public. We will miss Brad in his previous role but I am sure as life moves on we will -- our courses will continue to pass but, again, thank you to both of you, we appreciate and enjoyed working with you in the capacities that you have been in, so with that we look forward to your questions.

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

Morning, guys.

Hey, John.

Good afternoon, I should say, sorry.

Hey, John, I'll say nice things about you when you retire, too.

There are days, Ed.

Tell me about it.

I know things can change and they probably will change, but how does the mortgage banking run rate look compared to where it was a quarter ago? Do you feel like this is sustainable type volume levels?

Well, PMP did about as much volume as we did, so notwithstanding anything, we will -- our volumes will be up over where they were last year. Also, it's not just PMP, but there have been a number of little acquisitions, they haven't been acquisitions, just people have come out and joined us in that area as the regulatory environment has made it hard for these stand alone guys. We're very selective on who we bring in, but we've been able to add any number of good franchises and producers into that system. So our core business in and of itself is going to be for a long time, forever I hope. But, this is -- these are extraordinary times. As the fed keeps the rates low, we don't see any degradation in terms of the amount of business that we're doing. These people are still -- they're working 14 hours a day just to keep up with the business that we have right now.

As long as rates stay low and -- I think you're going to start seeing this pint up demand come through for purchases coming into the spring purchase time, so not just refinances, but purchases. I think for the foreseeable future that we'll have extraordinary volumes, but notwithstanding that, we certainly have a much stronger mortgage operation with the PMP coming in, so our volumes should be up -- we expect to take -- and not people costs out, but just redundant costs out of that system because we put the two companies together. We did it in January -- or in December, and, boy, we were inundated with new volume. We haven't been able to focus on doing that right now. So I think volumes are going to stay up, they're going to be extraordinarily high for the foreseeable future and that the economics and the profitability of that business are going to -- there will be more money coming to the bottom line going forward as we work through the cost side of it.

Okay. In terms of timing or the ability to take out some of those costs, I'm assuming that's happening right now?

No. Some, but -- these guys are working so hard right now, John, that just putting production through and keeping good, quality control on the production, that it's -- when volume falls off a little, we'll have the opportunity to go in and do that. Right now we want them focused on good quality -- making sure that this extraordinary throughput is getting through, getting through right, with no quality control issues and that we service our customers most importantly as well as we possibly can. So I think that those things will start coming through when you start seeing a decrease in volumes from these extraordinary levels.

Okay. Dave, a question for you on the covered call environment. Good news, I like what you're saying about the margin, but I guess, you know, this is part of it in terms of the way you manage the business and I'm curious how that environment looks given that some of the yields have started to creep up a bit? I mean you have treasury yields rising and mortgage backed securities -- or mortgage yields falling and I'm just curious what the outlook is for that line of business?

Well, probably for the near-term, it will probably stay relatively low. I mean by the Fannie Mae's at their existing levels just doesn't seem that desirable to us given the long-term nature of those securities and the fact that we believe over the long -- long-term here that rates may rise substantially given the -- what's been going on in the economy. So we don't necessarily want to get stuck with those longer term Jenny's at these low yields. So we don't have as many of those in our portfolio as we've had in the past. If the yields on those agency securities rise and volatility increases, we may do more of that, but as yields rise, we should hopefully get an increase in our margin and Ed said, we expect that we would would hit the low point of the margin, so the margins are set to make up for the lower part of those covered calls.

The first quarter, it all sort of came together, we had our first quarter with the very low interest rates and that caused us to not do as much of the covered call income because we just didn't want to buy those securities that got called away at the end of last year, we didn't want to buy them again because of the yields. And so they both came together in this quarter and provided probably for a lower level of revenue, but we fully expect that the margin will expand in the second quarter and will make up for some of that lower level of covered call income that we had. We'll play it by ear, we'll watch what's happening with the yields on the agencies and where volatility is at and if there's a point in the market where we're comfortable diving into it given our overall asset liability structure, we'll do some more of it. But in the short run here, the way the rates have been held down on those agencies, we're not expecting to do a lot of that in the short run.

We have maintained, short-term investments from where those things usually would be, so we are maintaining liquidity -- we think liquidity is important right now, too. So given what we're seeing in the market and some of this dislocation on some other types of loans and other assets out there, that we -- we want to keep the liquidity and not lock those assets up. We think that that's where the opportunity is too, Jon, so --

We've always looked at that program sort of holistically from an interest rate risk and sensitivity perspective. We certainly could have made more money in the first quarter had we gone and invested in some 4% agencies and written some calls against them and not had that in shorter term much more yielding liquid assets, but from an interest rate risk perspective, we think that wasn't a smart move and there are other opportunities out there that we'd like to keep our liquidity in place and liquidity in these sort of environments is an important thing.

Okay. And then just one small item, do you have the average ticket in the premium finance business or at least maybe what it did over the last couple of quarters?

Yes, it's been sort of in the 23 to $25,000 range, which is historically very low. I mean it's at the point where soft -- soft markets in the past have been. We typically don't get down this low. So the markets are very soft. As a point of reference, we might have said this before, but the last time we had a hard market, our average ticket size hit right around $40,000. So if you sort of do the math on that, let's just say the market harden by 20% and premiums go up by 20% so our loan balances go up by 20%, that's only getting you to a $30,000 average ticket size. So we could take that -- our loan balances in the premium finance business, which right now are about a 1.4 billion, increase them 20%, that's 280 million of additional volume for which we don't have to add any additional overhead or cost, it's just an increase in the average ticket. If the market hardens by more than that, you can all do the math, but we're hoping that -- from many respects that the market does firm up a little bit and the premiums start to rise. So they are at a very low level for us right now and it's just a function of where the insurance premiums are in the market.

Okay. Great. Thank you.

Your next question comes from Ben Crabtree.

Yes, I just wanted to say, Ed, thanks for the kind words, but you risk a serious damage to your credibility by calling me young.

It's all relative. If you're young, I'm younger.

Okay. That makes sense. Okay. That's all I had.

Thanks, Ben.

Good luck.

Yes, thanks.

Your next question comes from Brad Milsap.

Hey, good afternoon.

Brad.

Ed, just kind of a more 10,000-foot view question. As you travel around and speak with your customers, obviously you guys have -- you made the decision several years ago to only bank the cream of the crop. Can you just talk a little bit about what they're seeing out there in terms of their businesses, you know, are things getter better or worse, are they beginning to think about making investments, drawing down on lines of credit, et cetera? Just kind of want a little bit more color on what you see is going on in the market.

It's kind of interesting. In the last couple of weeks, I've been out on a number of calls just trying to ascertain some of that intelligence for myself. On the industrial side, it's been kind of interesting. They -- many of these guys, of our customers, would be down 30 to 40% in terms of volumes. What they're seeing now, though, is that people drew their inventories down these are metal benders and people who really make things in this world, inventories have been drawn down to such a level that they're starting to see demand pick up a bit. They -- so many of them who would really manage their businesses well, I've been on maybe six calls in the last two weeks, they managed their businesses extremely well through this period of time, their business might be off 30 or 40 or in one case 45%, they may have shut down a couple of their production lines, they may have laid off -- in one case over half their people, but they have been able to maintain profitability during that period of time and they're talking now about making investments, they're finding other similar businesses where people aren't doing well, where they can pick up and they're add ons to their businesses.

So kind of similar to banking, a disarray and dislocation that's taking place for our stronger customers is becoming somewhat of a benefit to them in terms of making investments now for the long-term by bringing in new product lines at relatively inexpensive prices. But I think the most important thing to take out of it is that this inventory draw down that took place in the fourth quarter and the early part of the first quarter, really the whole first quarter, is starting to turn back and the production is picking up. So that was -- that's kind of the general consensus from the industrial side of things. The real estate side of stuff is still -- is still pretty tough. I will say the larger projects that we have there are clearing prices for these things. If you -- if you're honest with yourself and you -- and again, we go to realtors and say what's the 90 to 120 day clearing price for this particular building or this particular unit, it's there and it's hit. So from that perspective, there is demand. It seems like we're kind of hitting the bottom that maybe there is some reality coming back in, maybe it's forced reality, but you're starting to see -- at least there's a market out there where you can push this stuff through. That being said, I said earlier there's still -- we'll probably end up with 40 to $60 million of longer term OREO property that we've written down to such levels that we think that based on an $11 billion bank, holding those for a period of time they break even cash flow wise for us being farms or whatever the heck they are, that we can work out of this stuff over a period of time, but all in all, people are just beginning and bearing it and working their way through it.

One more interesting note I'll give you, Brad. What we've seen -- what we've heard about and we've actually seen maybe two occasions of it now is more fraud coming into the market. In other words, where borrowers are just -- you got to be all over them because they're -- they're hanging -- they may be hanging on by their fingernails and they -- they'll -- they will maybe give you a fictitious borrowing based certificate or the like and we're hearing that -- it's not so much with us, we've heard it from a number of other people that that's picking up a little bit, which means that you're kind of -- some people are in the desperation mode, the smarter guys are the ones who are -- who prepared themselves for this are actually going to come out of it pretty good and much stronger than they were. So maybe with that inflection point right now.

Thanks for the color, Ed. When you guys sit down and do your reserve calculation every quarter, with that back drop you just gave me, we're getting -- it seems you can kind of have a little bit more clarity on the residential real estate side possibly, but how do you guys think about and make your reserve allocations when it comes to sort of the unknown that's out there in terms of commercial real estate and CNI, what may happen to those line items as we move kind of throughout 2009? Just kind of curious what your general thoughts are there. Thank you.

Well, Brad, as Ed said, how we build our reserve is by risk classes and it's by collateral codes and obviously if a loan gets down graded in our process, the reserve factor is going to be higher. But then if you get into sort of the -- the gist of what you're asking is let's look at the individual collateral types and the types of businesses, if you're into CNI and you have specific collateral types or residential or commercial real estate and you have different -- specific types of collateral, that's -- those are the things we focus on and what we'll -- what we do on an ongoing basis is we're talking with our senior lenders and our managed asset division people and across the board and getting the feedback and the color from them as to what they're seeing in the marketplace and if we're seeing any deterioration there, then we're going to I object crease those lines for that specific lines of business. Our reserve factors are higher than our loss ratios to begin with to cover this poor economic environment, but if we see deterioration and our senior lenders are meeting weekly and we're having constant meetings with our managed asset division during these times and we're getting continuous feedback, so to the extent that we're seeing any movement related to any of those asset classes, we're going to go in and work with those factors and increase them.

The third element to that is really the loan grading system. Remember when a loan goes bad, we go in and have specific reserves allocated to it based upon real life data. So let's put that aside and just go to this general reserve calculation. As Dave was talking about, it's based on note time, it's based on collateral, but it's also based on how the loan was rated in our internal loan rating system. Boy, how do you look at that? Well, the regulators -- I can guarantee you the regulators take a very hard look at that and at any point in time there's one of them in one of our banks someplace. We also have a loan review process, an independent loan review process that goes into all the banks on a quarterly basis and works through those. The auditors work through that. The loan committees and the -- the internal loan committees and the board loan committees work through all of that, too.

So there are a lot of different filters that challenge the actual loan ratings. I mean you could have a piece of commercial real estate and say, boy, we want to take this broad brush approach and all commercial real estate is bad. Well, this could be a 50% advance ratio with a 2.25 coverage, what should that be rated? That's fine. So it then boils down to the underwriting that you did when you put these loans on the books. We think we did a pretty good job of that and I think our rating system and all the tests that go into that bear it out. Once those things are done, as Dave talked about, we look at the actual reserve factor that goes into it, the factor we apply to the outstanding balance, and that is based not just on our history, but it's based upon the market as it stands right now. So, we spend an awful lot of time on this thing and there's hundreds of different types and it's quite -- it's quite a process that we have probably two people working on full-time.

Okay. Great. Thank you.

Your next question comes from Matt Hodson.

Good afternoon.

Hi.

What were the trading securities that you referenced, Dave? Were those bank stocks? Can you give any more color there?

I've actually had a couple of voice mails from people asking me that question. We didn't put it in the release and so since it's not in the release, I'm hesitant to talk about it now so I don't have to file an 8-K. I think what we'll do is commit to you that we'll get more color in the 10-Q that will be filed in the next couple of weeks. But they're normal bank investments, nothing exotic, equity securities or anything like that. They're bank -- bank holding company types of investments that we would make. So I'm not trying to avoid the question, Matt, we'll just tell you that in the 10-Q. We'll put more color around it.

Okay. That's fine. And then maybe on the margin, I think, Ed, you mentioned that the margin was trending positively, you know, intraquarter. Could you give any color on what the margin would have been for the month of March?

Probably can't do that for the same reason being just -- Dave just gave. I think you can interpolate through some of the numbers I gave out that where we are repricing the assets nicely, the liability side is catching up and coming down and the growth is coming at a pretty good spread.

We don't give guidance on that.

Okay. Fine. Maybe any color you can give on the OREO sales during the quarter would be helpful, maybe a description of what you sold and maybe what prices you got relative to the original loan balance.

Well, I'm looking right here. For what we've sold -- for what we've sold to date, pretty much right on.

You sold at right on the OREO --

Right at what we carried them at.

What about the loan balance? I know you've already taken the charge-offs in relation to that, but do you have that data of where it would have been in relation to the original loan balance?

You mean the charge-offs we actually took on these things? I don't have that, but I'll guarantee you we did take some charge-offs on them. Ready to take them down to the carrying value and then --

Pretty much right on where we were carrying them at for the ones that have gone out the door.

We have the data, we just don't have it in front of us to give you a specific number.

Okay. Thanks, guys.

Yes.

Your next question comes from Joe Stieven.

Good afternoon, guys.

Hi, Joe.

Most of my questions have been asked. My most recent one was on the margin, but let me ask you a different one. There appear to be a couple middle sized Chicago institutions, somewhat let's say battered and bruised. I mean are you guys in a position, Ed, to look at something on an assisted basis even if it's somewhat significant in size? Thanks.

That is a good question, Joe. We've been asked that a lot. Our focus right now is on core earnings. There are any number of opportunities for both assisted transactions and unassisted transactions that are coming across our plates. I think Dave and I can honestly tell you we probably each get two calls a week related to people who really would like to team up with us right now, but we have -- the plan that I referenced earlier that we -- that what we're trying to accomplish to get core earnings back where we -- where they should be, we are moving very well along those lines. I really do not want to change the focus of the organization right now to having to take on either assisted or unassisted deal and work -- have to integrate that into our systems to take our minds off of the things that are going on. We see such opportunities in the market right now because of the dislocation of the assets themselves and the disarray in the competitive environment that this is a great opportunity for us just to concentrate on core earnings. Now, that being said, if there were an assisted transaction that came along and there was an offer that we couldn't refuse or was something very strategic to us, never say never, we probably would -- we would evaluate it and take a look at it. But really our focus right now is to concentrate on the core earnings side of the equation.

We believe that this is playing out just like -- and knock on wood and it's not that we're smart or anything, but maybe we just remembered better, but this is playing out kind of like the 1980s did and I've said this before on these calls that everybody says this is much worse than the '80s and I think it's kind of like childbirth, you kind of forget about the pain of the '80s, but I'll tell you, 23% interest rates and 11% unemployment and 3,000 financial institutions going out of business in the 1980s was no -- was no field day. But what happens in that period of time is, yes, you'll have a number of assisted transactions that will come, but these are going to go on for a period of time. There are also going to be situations where banks get through it, but they come through and they're tired, they're exhausted, they want to link up with somebody. We believe that 12 months from now and probably for -- 12 months for now and for two years after that, those opportunities are still going to be here. We need to execute the third leg of our rope a dope strategy which is coming out of this thing fast, which is getting our core profitability back, work through the bruises that we've got in our portfolio and then be that only shrimp boat left in town, be the guys that are able to take advantage of the opportunities because we think that they're going to go on for a period of time. But right now we're concentrating internally, everybody's focused on achieving the plan and we -- it was very painful in 2005 to put the brakes on when everybody else was still at the party having a great time.

Our objective when we did that was to be the first out of this thing and that is what we're focused on, what everybody in this organization is focused on, everybody has got it right now, I don't want to clutter it up with having to bring in an -- absorb an institution right now. We're not that far away from getting to that -- the successful execution of that third leg, we really aren't. So we're looking forward to it and that's why we're cautiously optimistic about our ability to execute that and going forward, never say never, but we think the opportunities are going to be there for an extended period of time.

Ed, can I follow up with one more?

Sure.

On the loan pricing, I mean, obviously deposit rates can't come down any further or to any great extent. It's really a function of management teams being able to reprice loans properly because the last five years have destroyed loan pricing. How much room -- like, for example, when you're repricing a loan right now when somebody comes up for renewal, how much are you able to push to move a rate compared to what you were able to do it 9 or 12 months ago?

There's no such thing as subprime -- subprime is a bad word. Excuse me, rates that are less than the prime rate. You're seeing pricing come back where the prime rate used to be the prime rate and suddenly that all went away. The inverted deal curve had a lot to do with that and the amount of liquidity flying around the system and being handed out by the bankers had a lot to do with that, but it's getting back to normal pricing, just what we're getting to is not [czar] I couldn't say, it's just going back to the way it was where you get paid for risk and reward, you get paid for what you're doing. So, what used to be priced -- the market might have been prime less one or LIBOR plus 100, you are know, you're now prime plus on those things and LIBOR 300 to 350. Those rates are now back in vogue. At least in our shop they are. We -- there's still a couple of folks out there that leave some money on the table, let's just put it that way and kind of screw up the market, but there's so much opportunity out there that, you know what, you just go on to the next one. There's always another one lined up behind it. So you're talking about, Joe, getting an extra point and a half to .75 out of a lot of these deals and maybe even 2%, a lot of these deals that are coming through. You're also able to get right now 4s on these deals. So we -- which leads to another challenge, which is if you -- you've got 2 or $3 billion worth of loans that are floored at a point and a half -- you're a point and a half now over the notional actual rate with your floor if rates start moving, what's that going to do to your margin and we are all over that and we are actively managing that to make sure that we maintain a very positive GAAP and a positive -- that we can make more money in a rising interest rate environment is that we don't -- we don't get stalled for the first point and a half of any rate move that inevitably will take place. But on the pricing side of things, you can get a couple of hundred basis points more right now and that's what we're doing.

Okay. Thanks, guys.

There are no more questions in queue.

No more questions, we thank everybody and tell you all to keep the faith and avoid the slide. Thanks everybody for dialing in.

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