Wintrust Financial Corp (WTFC) 2009 Q4 法說會逐字稿

Welcome to Wintrust Financial Corporation's 2009 fourth quarter earnings conference call. Following a review of 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 first quarter's earnings press release and in the Company's Form 10-K on file with the SEC.

I would now like to turn the conference over to Mr. Edward Wehmer. Please go ahead, sir.

Thank you. Welcome everybody. Good afternoon, and thanks for participating in our fourth quarter earnings call. With me, as always, are Dave Dykstra, our Chief Operating Officer, and Dave Stoehr, our Chief Financial Officer. As we have always done I will give some general opening comments. Dave Dykstra will follow with a review of some of the actual numbers and then I will make some closing summary comments. As always, we will leave plenty of time for your questions.

We are pleased to report net income for the year of $73.1 million or $2.18 per share. For the quarter, we made $28.2 million or $0.90 a share. Our annualized pretax pre-provision, pre-bargain purchase, pre-credit, I wish we could come up with a better acronym for that, is rolled up to about $176 million, up a little bit from the third quarter. We expect to achieve even better results going forward, and I will tell you how we are going to get there a little bit later. But we are very pleased with those numbers given the economic situation during the course of the year, and are consistent, we have been able to achieve the plans, and the goals and objectives we laid out earlier in the year.

The margin for the period decreased quarter to quarter from 3.25% to 3.10%. This is in spite of the fact that our cost of funds was down 20 basis points quarter-over-quarter. So it was really the asset side that contributed to what we believe to be just a temporary margin phenomena. Two factors affected the asset side. The first is the fact that for the entire quarter, we had about a $1 billion of overnight money, earning basically nothing. In the third quarter as you remember, we did two transactions. One, we bought the AIG portfolio earlier in the third quarter and then later in that quarter, we did our securitization transaction. Accordingly, we had probably on an average basis a little over $600 million more in overnight money as opposed to being deployed and that had an effect on the asset side of the equation.

The other thing that affected the asset side were less prepayments in the AIG portfolio we experienced in the fourth quarter as opposed to the third quarter. This number is hard to predict. I think going forward, it is going to be somewhat lumpy, if you will. I will point out that we estimated around a five year average life for these loans. If you look at the prepayments over the third and fourth quarters they equate to a 55 month average life of the portfolio. So I guess you could say that the third quarter was high and the fourth quarter was a little bit low but if you put them both together they're pretty close to what we had anticipated. So although we envisioned this would be a little bit lumpy going forward, the portfolio is acting as we had anticipated and that business is still going very well for us.

And to the margin going forward, one of our main objectives, notwithstanding growth which I will talk about later, is to deploy that extra liquidity that we were carrying over the course of the fourth quarter. That liquidity redeployment, we're running at bout 85% loans to deposits right now. As you know we want to run between 85% and 90% loan to deposit. That equates to about $500 million worth of capacity for loans to take us to that high end of the loan to deposit ratio. Again redeploying those assets into the overnight money into higher earning loans is a priority. We made some progress in that regard. We had talked earlier and I will mention this again, about this time in the economy, how there's dislocated assets and dislocated people and dislocated banks. On the dislocated people side, we are finding that there are lots of folks out there who want to come and work for us. We have equated it somewhat to, I don't know if you remember the refugees leaving Cuba, we call it our Cuban lifeboat now. There's a lot of folks who are working for entities that may not be in good shape and don't lend and would really like to come and join our crew.

During the course of the fourth quarter we hired 20 new lenders, and there's two more that will be joining us in the first quarter. That's 22 new people coming from all sorts of places around the system, not all from one place. I think if there was any common denominator to them, many of them had started their career at, or spent some time at the old American National Bank in Chicago. American National used to vie with LaSalle Bank for the -- really the total middle market of Chicago. I think at one point in time, LaSalle had 45%, American National had 45%, everybody else split the other 10%. I think if you talked to those guys back then, I think every year they probably exchanged five clients apiece, and just drove their pricing down. But the fact is these people have that in their DNA. So it really is part of our movement into the commercial side to be more of a force and a presence in Chicago in the commercial side of the market.

We have opened our downtown Chicago office There's a number of people working there right now. We expect that number to grow to 20 to 25 people by the end of the first quarter. It is a loan production office and we anticipate that they will be able to grow both sides of the balance sheet for us helping us on the deposit side with demand deposits but also on the lending side also. We think that that, coupled with the normal work of our existing staff, is going to be very helpful in deploying that liquidity.

The other side of the margin is that deposit pricing should continue to come down. In the next 12 months, we have about [three point three, four, five billion dollars], and this is indicated in the press release so you can validate my numbers there. But roughly about 2.25%. We believe that there's approximately $25 million to $30 million if rates stay where they are, we will pick up as we continue to price the liability side. So, we have good opportunities on both sides of the balance sheet, notwithstanding the growth opportunities that I will talk about a little bit later.

The ancillary benefit of these people, by the way, that we are hiring is it is going to be able to help us support growth. I will talk later about that we think this year could be a fairly acquisitive year and we will have management onboard who will help us absorb that type of growth. It is just a good time to pick up people. Dave Dykstra, a little bit later, will take you through more of the income statement and its components.

Quick comment on credit quality. We had a material reduction in nonperforming loans, about $100 million from $232 million to $132 million, so $100 million reduction in our nonperforming loans. Our OREO increased from $40 million to $80 million. We view that as a good thing. That has allowed us to work through, with the borrowers, the assets, get control of the property, and allow us to liquidate that property. That will still be one of our major objectives this year is to continue to identify and move out problem issues as quickly as we possibly can. But I think overall we had good credit results this quarter. And even if you look at the under 90 days, those numbers look pretty good in terms of the migration of those numbers.

Chargeoffs were $34 million, supported by a provision of $39 million, and if you add overall credit reserves they stand at 1.65% of total loans. So that's the reserve plus the credit discount attributed to loans. All of that being said, this number could fluctuate going forward, it is hard to predict. I know Oppenheimer came out yesterday and said that the credit crisis was over. I said I didn't even know that but the fact of the matter is we don't believe it is. We believe that there's still a bit to go here, and we are dedicated to continue to identify and move these things out of here. We will continue to do that. We have a good basis to start from here. So we are excited about where we stand right now and we think we can take whatever the credit markets throw at us. But, again, we don't think this is over by any means. It was a pretty party that people had, and usually if you're at a big party the hangover is tough but it is long, too. And we've got our guard up related to that.

On the capital front we remain well capitalized on all of the basic measures. We always monitor our capital position, vis-a-vis our growth opportunities in the market. And we will continue to do so. Shareholder value and protecting shareholder value is always a top priority for us. I have said previously on these calls that if we can get through this crisis and add to shareholder value, and not materially dilute our shareholders, that would be a major victory for us. That's the most important thing that we can do. But again we will continue to monitor our capital position. We think this is going to be a very interesting year for us on the growth front, both organic growth and potential acquisition opportunities and we will continue to monitor our capital and we'll do what's appropriate in that regard.

I'm going to turn this over to Dave to go through some of the numbers.

Thank you, Ed. I will quickly go through the noninterest income and noninterest expense numbers. As Ed mentioned, the big items out there are the margin and the credit side of the equation. So when we get into the noninterest income and expense, pretty good control, and not a lot of fluctuation. We'll start with the noninterest income.

Wealth management revenue increased $546,000 over the third quarter of 2009 to $8 million, and increased $1.3 million over the same quarter in 2008. The increase in this category represented the third consecutive quarterly increase and can really be attributable to increased asset valuations due to the equity market improvements, and really the consistent hard work of our wealth management team to expand the customer base during these challenging economic times.

Mortgage banking revenue was strong in the fourth quarter of 2009, at $16.5 million. This quarter's revenue was the second best revenue month in our Company's history, really only bested by the record setting revenue set in the second quarter of 2009. Clearly, 2009 was an outstanding year for our mortgage operations with $4.7 billion of mortgage loans originated and sold compared to only $1.6 billion in 2008. So really about triple the amount of mortgage originations in '09 versus '08. The positive impact of the P&P transaction that we did at the end of 2008 contributed to the revenue growth, as well as targeted expansion of the mortgage banking staff throughout the Chicago Metropolitan area during 2009. Clearly, future growth or declines in the mortgage banking revenue will be impacted by the interest rate environment, the existing residential housing conditions during the course of the year, and growth in our originations staff which we are continuing to attempt to do.

As to the gain on the sale of loans, the Company recognized $4.4 million of gains as a result of transferring $357 million of property and casualty premium finance receivables into our securitization facility during the fourth quarter. The sales are a result of pay downs of loans in that revolving facility. The fourth quarter will be the last quarter that we recognize gains related to the securitization and the transfer of those assets, as these securitization assets will be recorded on the balance sheet of the Company as a secured borrowing effective January 1, of 2010. That is all as a result of the new accounting guidance that requires securitized assets to be placed back on the sheet. Accordingly, beginning in January of 2010, income generated from loans will be recorded as interest income. And interest expense related to the borrowings will be recorded as interest expense rather than the gain calculation that we had done during the last two quarters of 2009.

Trading income for the fourth quarter totaled $4.4 million compared to $6.2 million in the prior quarter. The gain again is related primarily to the market value of certain collateralized mortgage obligations that the Company purchased in the first quarter of 2009. That's when the market value was very disruptive and these assets were purchased at steep discounts. The assets increased in value during the course of the year as rate spreads tightened, prepayment spreads were high and default rates were lower than what was projected at the date that we purchased those assets.

As far as the AIG transaction and the bargain purchase gain, the Company recorded $43 million worth of bargain purchase gain in the fourth quarter of 2009. $14.5 million of that gain resulted from the purchase of the additional life insurance premium finance loans that we purchased on October 2, 2009. And the remaining $28.5 million of that gain was the result of having conditions met whereby the loans that have been placed in escrow related to the July 28, purchase were satisfied and the assets were released, based upon the requisite conditions being satisfied, and therefore we recorded the gain associated with those loans. So $14.5 million related to the October purchase, and $28.5 million related to loans being cleared from the escrow account.

As of December 31, there's approximately $10.9 million of bargain purchase gain remaining to be recognized and in the satisfaction of the conditions to release the loans from the escrow account. And we at management expect the majority of that remaining $10.9 million bargain purchase gain to be recognized in the first quarter of 2010. We are diligently working on getting the third party consents. And again some people have wondered what the process is for getting the loans out of escrow. There were a number of loans where the beneficiary information related to a letter of credit or a brokerage account was in the name of the sellers, and we needed to get those documents amended such that we would be the beneficiary of it. So it just takes a little bit of time to get the banks and the borrowers to get all the paperwork done but we are working hard to clear the rest of those out early in 2010. If you have got a press release available to you, if you don't you can go to our website, but page 23 of our earnings release discloses a detailed analysis of the gain recognition, as well as the roll forward of the accretable yield discounts that Ed mentioned earlier and the non accretable credit discounts. We will continue to provide you with the performance of that portfolio and how the discounts are being recognized into income each quarter.

There are really no other noninterest income items that had meaningful changes during the fourth quarter relative to the third quarter. As far as noninterest expenses go, salaries and employee benefits is our largest component of the noninterest expense category, and it remained relatively flat during the fourth quarter relative to the third quarter of last year. It declined slightly by $133,000, so relatively flat results there.

OREO expenses, which includes the cost of holding the OREO, valuation adjustments and any gains or losses that we have on the sales of the properties that were in OREO, totaled $5.3 million in the fourth quarter, down from $10.2 million in the third quarter of '09, and up from $641,000 in the fourth quarter of '08. During the last two quarters the Company has aggressively worked to obtain control of the properties in order to liquidate the nonperforming assets and will continue to work hard in the coming months and quarters to clear those out.

If you look at the rest of the categories of noninterest expense, generally flat, no large fluctuations, in any one category to speak of. Other miscellaneous expenses increased slightly, generally due to problem loan expenses, that we incurred there, and other than that, nothing of significance to speak about. So, other than the OREO, and the nonperforming loan costs, we really have kept the operating costs in check.

I'll swing it back to Ed.

Just to summarize the year, we set out this year really as the beginning of Phase 3 of a long term plan that we adopted in 2006. We had envisioned that there was a credit cycle coming and we hunkered down with the objective to be first out. When we hit the beginning of this year, the objective was to raise core earnings and to make sure that we identified and cleared our balance sheet of nonperforming assets, as quickly as we possibly could. I think we have accomplished those two things. We relied on a market that had dislocated assets, dislocated people, and dislocated banks. On the asset side, we were able to conduct a couple of transactions that were very profitable to the organization, that were strategic and profitable for us. On the people side, we continually see good people coming our way that should be here to help our balance sheet growth and help us on the management side of the equation as we continue, as we get back into organic growth mode that we experienced throughout our life up until we adopted this plan.

What we hadn't done last year was to really participate in looking at the bank acquisition side of the equation, the troubled banks or the FDIC assisted banks or the non-assisted banks. Our objective there was let's get our own house in order, let's accomplish our goals and have a clean house so that we can then turn and take advantage of this opportunity. We felt that acquisition opportunities would be something that would be with us for two, three, four years. And I think we are in a position now to do that. We believe that this could be a very acquisitive year for us. Firstly I'll say, we believe that this will be a very good organic growth year for us. Secondly, we believe that this could be a very acquisitive year for us. But the fact is we could do four, or we could do none, it just depends on how the market works. We are going to be very disciplined in our approach. It has got to be strategic for us to be involved in it, something that, as you know, that the deals we have done in the past, our goal was to get good geographic dispersion and to get a franchise and to grow it. We will grow our required entities, two, three, four, five times, in relatively short order after we got them and that would be our objective here also.

But with our house in order, we believe now that the time is right for us to get involved in that. Again, we could do a number of them, or we could do none of them depending on the pricing of these transactions and what transactions show up. But we are back in that ballgame, and we are back in our normal organic growth ballgame going forward. And barring any unforeseen issues we intend to make that part of our objectives for this year.

With that we can turn it over for questions.

(Operator Instructions). We will take the first question from Jon Arfstrom with RBC Capital Markets.

Good afternoon, guys. Quick question for you, Dave, on the securitization gains that will now roll through income, is that similar to when you stopped selling premium finance loans a couple of years ago where it now just rolls into income over a nine month period?

Yes, that would be right. On January 1st, we will bring the loans that were in the securitization back on to the balance sheet, and you will see $600 million of borrowings on the liability side. Where we stopped selling before to a third party, that just gradually ran down and then as the new production came on, it came on our books. The only real difference is that this is all going to happen on day one with $600 million coming on to the balance sheet. From a capital perspective, the Feds have provided regulatory capital relief on that. So that the capital rules would be the same as if it were securitized through June, and then the regulatory capital relief would start to phase out from July 1 through the end of the year. So, it is the same other than it is all going to happen at once versus the old portfolio running off and the new production coming on.

And there will be financing on the books as opposed to we did it before we absorbed it into our deposit base because we did it at a time where we were hunkering down and not making as many loans in our (inaudible) period. This time it comes on, is $600 million worth of assets and $600 million worth of borrowings.

Ed, you touched on this a little bit but the excess liquidity, where does that go and how quickly can you put that to work? I was trying to compare the average in the period end balance sheet and it looks like it's starting but could you talk a little bit about how long you think it takes for you to put that to work?

That will depend, John. One thing I did leave out of there is, we have hired a number of people, and we are not creating business, we are basically taking market share from folks when we do that. It will take them time to get up and to get running and to move portfolios, move businesses over. Hopefully we will be successful in doing that. Some of the folks do have non-competes, so we have to be very careful. We always abide by the letter of anybody's agreement in that regard. But we believe that should start happening relatively soon. We will start seeing that pick up.

We are still in the market for dislocated assets, both dislocated assets and platforms for dislocated assets. So we are continuously searching. We would love this year to have the opportunity to pick up another niche, a niche that could grow to $200 million, $300 million, $400 million, $500 million, and build that out. It could probably take into the middle or to the end of the second quarter, beginning of the third quarter to effectively do that. We are not changing our underwriting standards in any way, shape or form, but over time we expect to optimize our balance sheet and get that loan to deposit ratio back up to the middle to higher end of the spectrum that we would want to get it at. We also anticipate some pretty reasonable royalties. We are back on what we consider our normal growth patterns which is $1 billion to $1.5 billion a year depending on the markets. So we need to absorb those deposits and put them to work as they come onboard too. We think the competitive environment here in Chicago has a number of -- well, not as many and probably won't be as many competitors as there were a year ago. Some of the competitors right not are pulling back a little bit. This is what we planned, that people need to look inward and if we could be first out of this thing that we would have the opportunity to be a little bit more aggressive picking up good business. So this is really part of the plan of what we anticipated. We would hope to be able to get that absorbed but we still have to absorb the growth we expect to experience also.

Okay. I know there are others on the line but just one quick question. You've taken some pretty big chargeoffs the last couple of quarters and I am just guessing that a lot of that has to do with some of the REO writedowns, and I'm curious how aggressive you want to be in moving out some of those properties.

We have been aggressive in moving them out to date and I think we will continue to be aggressive going forward doing that. We think that it is good to get them off the books now. We think that there's going to be a lot more banks and people trying to liquidate their portfolios of problem assets, and we think that will dilute the market even more. So, one of our theories last year -- we probably, Jon, left maybe $10 million on the table last year in terms of pushing things out. But, I would trade that for the rise in our stock price any day of the week. I think if we had hung on to them, we probably would have lost that even more. So we will continue to be aggressive. The marks are tough, you have to work hard to find them.

We try to mark everything to what we think the realizable value is when we do it. We go down about three or four or four paths every time we are trying to sell assets. We were trying to sell individual asset, we're trying to sell pools of assets. So you will put pools of assets together but one loan might be in four different pools going to four different buyers potentially. So we try be as aggressive as we can on pricing these things down to what we think is realizable value, but as it happened in the second quarter realizable value kept falling away from us. It could happen again. On the other side, we've had a couple that have come through with gains on them this quarter. So, it is tough right now. You have to get the right buyers at the right time and the right price, you have to look at it vis-a-vis what the property is itself, or what you are trying to get rid of or what you think the odds are to push it out, and sometimes you make some money and sometimes you lose some money.

Thanks, guys.

Our next question comes from Dennis Klaeser with Raymond James.

Good afternoon. You mentioned in your press release about $32 million worth of restructured loans that are still accruing. And I presume that's the total balance of restructured loans that you currently have on your balance sheet. Can you give us a little bit more detail about those loans, what type of loans those are, and what's involved in your decision to leave them on accruing status.

We will start with the back end first. We will look at these transactions. If there's life in the transaction, what we want to do is what's best for us and best for the borrower. The borrower is working with you, and you realize there's a level that this thing could actually work. You can the AB route and you charge off part of the loan, and you can split it into an A note and a B note, and the thing actually underwrites pretty well. It is just a valuation issue with borrowers who want to work with you and you had rather keep them doing what their doing and put it out.

We are not talking about issues where we're kicking the can down the road, Dennis. We are talking about where we go, OK, we'll give you a 1% interest rate or something. We don't do that. We look at it vis-a-vis where the Company can do the best it can in terms of ultimate realization on an issue, and where the borrower can do well. So most of these, the AB notes are maybe a minor change in terms or maybe a minor reduction in interest. But we are not kicking the can down the road. If the thing is a piece of garbage then we will deal with it that way, we're going to take it in, we're going to be move it out and be done with it. This is not any sort of extended pretend sort of strategy. It really is based on the bottom line and based on numbers and that make sense for everybody involved.

Okay. In terms of your mortgage banking it is nice to see that that increased nicely sequentially. What are the trends there and what is driving the good returns you are getting with mortgage banking?

Similarly to P&P coming on board, it was very helpful to us. We did, just on the mortgage company, remember there's still three banks that actually do their own mortgages, but we did over $4 billion worth of business. We did, over the course of the year where we acquired P&P and partnered up with them right at the beginning of last year, and it took the whole year to actually -- volumes were so hard we couldn't squeeze the cost out that we wanted to squeeze out of there. So I think quality control is very good. I think the volumes have been very good. The guys told me today, if you look at the Chicago MSA and you take our entire mortgage operation, including the banks -- we want to validate this -- they said we were the number one producer through October in Chicago. So I think that the brand is working well.

When you get down to economics, the warehouse spread is as good as it has been. If you remember, a year ago, you were talking about 20, 30 basis point warehouse spreads, that's up into a couple of -- you have a 300 point basis spread right now on the warehouse spreads. And we continue, because of our volumes, being able to get better underwriting and sales spreads also. So, I think it is a combination of those three things-- better expense control as we have assimilated P&P, better warehouse spreads, and better overall spreads on the sales that have helped us do that. This is a big line of business for us. Returns on equity in that business are very good. Cross sell opportunities are very good. Our quality control, which has always been an issue in this type of business, we feel very very comfortable with right now and we think it is a business we would like to continue to expand going forward.

And in regards to acquisitions, I heard your comments about now being a bit more interested in looking at the FDIC assisted deals but I am particularly interested in your suggestion that you will also be looking at the prospect of doing unassisted deals. What do you think about the prospects of companies willing to sell in this current environment, and how likely you think you could be doing these regular way transactions?

It all depends. You have to look at the overall market right now. Capital for some of these banks is still nonexistent. They can't grow, they're kind of in the doldrums right now. We think this phenomenon is going to take place for two or three or four years. So they can't get capital, they can't grow, they're stuck in irons right now. And you've got a little bit of management fatigue there also. It is not the banks that are in hospice, it's the ones that are relatively healthy that could use the capital support to grow and to build where you can get a reasonable price on it, and it's strategic for us. We had preliminary discussions -- we're always talking to lots of folks and some you're interested, some you are not. I expect that as we move farther away from what probably was the real crux of this credit cycle there will be more and more of those opportunities coming forward where people are just fatigued, they're stuck, they can't compete, they need a little muscle to work out of it. We would definitely look at those and I wouldn't be surprised to see us be successful in those.

Thanks. I will pass the questions on to someone else now. Thanks.

Our next question comes from Adam Klauber with Macquarie.

Thanks, good afternoon. What was the dollar amount of real estate sales in the quarter, and what is the average markdown of those sales to get them to sale?

The overall markdown was about $5 million of stuff moving into OREO, or the revaluations of OREO. But I think it is in the Press Release, isn't it?

Yes, page 31. We show that we had $68.6 million of assets transferred in at their fair value, and we resolved at $28.3 million.

Okay. And what was your gross NPLs for the quarter?

If you go through the analysis, we had about $39 million of new NPLs coming in. Obviously we transferred some to OREO, we cleared some accounts in current, we charged some off. The net of all of that is we had about $38 million, $39 million of new NPLs during the quarter.

If we look at the organic growth rate of the premium finance, what would you say organic was in 2009, and what type of expectations are you looking for in 2010?

The P&C or life or both?

Both.

The P&C business, actually dollars were up around 20%. The actual tickets were up 30% on the P&C side of the business. So we were up on both of those in terms of volumes. We picked up more and more market share in that regard. It is still a relatively soft market out there. The average ticket sizes are still in the $22,000, $23,000 range as opposed to a normal market of about $30,000. And hard market of about $40,000. But for the second year in a row we've had very good growth in units.

The P&C side would be all organic. We didn't buy any portfolios there. The life side, you can see on page 23 we show what the gross balance was and what the discounts were. We bought about $1 billion with roughly a $300 million discount. So roughly $700 million of the life portfolio was purchased, from a book value perspective. The rest of that would have been our own organic growth from our operations and then growth that we have seen since we did the AIG acquisition.

We are looking at the last couple of months of between $20 million and $30 million of new loans originated on the life side, if that helps.

Okay, very helpful, thank you.

Our next question comes from Mac Hodgson with SunTrust Robinson and Humphrey.

Good afternoon. I had a question just on general credit. It sounded like in your prepared remarks, you seem maybe a little bit more cautious on credit than I would have thought, given the sharp decline in non-performers. Should we take that to mean it could be maybe not a straight line down on NPA, it could be a little volatile in 2010?

I think where we stand right now, of course we think we are all right and we have got good, the trends are our friend. But we are hedging our bet because just the overall economic environment, not anything we really see in our portfolio. We are cautious guys and we are proponents I think around here of a little bit of a W in this recovery. We're worried unemployment is not moving, and we are just worried, the stimulus runs out. We are just worried there might be another little leg on this thing. So that was the purpose of my comment there, that we are just being really vigilant and making sure we're on top of this. And nobody around here believes it is over. I think it is general economic factors may not be as good as everybody thinks and we are just being conservative. So don't read it into anything we see. We don't see a freight train coming at us but I just think it is going to be lumpy this year.

Great. Another question on the restructured loans, the $30 million or so, were those previously performing loans or were those in the 90 plus bucket? Where did they come from this quarter?

Those were mostly performing loans. We try to be very very proactive on this and getting out, and I think you see that in the migration numbers that we put out on 30, 60, 90 days past due. We are trying to be very proactive with our borrowers. If we see an issue, just be cooperative with them, work with them, before it comes to a point where there's an issue. There some economic realities out there, and we could hide our head in the sand or we could deal with them up front. We are trying to get as far ahead of this as we possibly can. A number of these thing, the borrowers are good people, they won't to work with you, but they're stuck. But the deals will work if you can work them and restructure them and maybe get something at the tail end that's not on your books. But, they were predominantly performing loans that we were proactive on.

Okay. Great. Just one last one. The commercial real estate breakout that you give in the release, does that include any owner occupied commercial real estate, or is that all investor?

There's a lot owner occupied in there.

How much would that be? $3.3 billion I think was the total portfolio.

I think we would have to get you the number. We will look at disclosing that next quarter going forward but I don't have those numbers offhand. But a lot of it is owner occupied stuff.

That's it for me, thanks.

Our next question comes from Brad Milsaps with Sandler O'Neill.

Good afternoon. Ed, of the 20 lenders you hired, plus the two this quarter, I know you mentioned primarily commercial lenders. Any certain niche of the market that they concentrate on, and average years of experience? Just trying to get a sense of what potentially these folks could bring over to you.

It is an interesting question because they come from all forms of life, mostly on the commercial side of the equation. We picked up a number of folks from Park National Bank which was part of FBOP. And Park was,, if you remember, the FBOP group was the one bank that was actually doing okay in the whole scheme of things, and we picked up their commercial lending group and brought them over. They will be operating out of our Beverly bank. They predominantly operated on the south side of Chicago. They're primarily commercial lenders but they do have other relationships and we think that that is a pretty good move for us bolstering up our south side presence with guys that have worked there for a long time. We picked up a number of them from some of the larger banks. Park National is probably the biggest group of guys we picked up, but you name it, from across the board. From every one of our competitors we have been able to pick guys up who jumped in our life boat.

They're predominantly commercial lenders. They're predominantly in that middle market commercial lending area. It is an area we really want to build and grow. We are not adopting, by the way, and I am not casting aspersions on any of our competitors, but we don't anticipate their growth to rival what Private's growth did when they brought all the LaSalle guys over. We are not anticipating that sort of growth. We want measured, controllable growth. We have the capacity to put relationships and loans on the books, but we do have, if you looked at us comparatively, compared to our competitors our commercial book is smaller than theirs and we are making a big push in that area to build up that side of the business.

Would it be fair to assume that these lenders would have anywhere from low teens up to triple digit size loan books?

I think that would be fair to say.

Okay. And you mentioned the 22 lenders. Dave just curious, are there additional support people that would be in the run rate operating expenses going forward? Just curious, do they come in later in the quarter or is it an even sort of hiring process?

There will be, on the Chicago office, particularly as we build that out to 25 folks, we are supporting them now out of our North Shore bank but as that grows out there will be additional folks coming in. I think if you looked at the folks we hired, and this includes some operational people because we actually hired close to 28 people, there's six of them in there of the people we hired are more operational type of folks, I think the salaries were between -- I have the number somewhere, hang on just a second.

The answer, Brad, is that most of these people we absorbed with our existing loan operations staff but as the downtown office, the C&I business in the downtown office grows, we will probably need to add support staff there.

All of the folks we hired in the fourth quarter, it adds about $3.2 million to gross salaries.

Okay. And then, final question, the premium finance segment of your business, can you refresh my memory and maybe just update us on what type of pricing you are getting there on new business that you're originating right now.

Life or P&C?

Both.

The P&C business historically and right now, you're probably, net of everything, prime plus three, or somewhere in that range. The life side it's five, five-and-a-half and a fee. The life side, we usually have floors on it, too.

Okay, great, thank you very much.

Our next question comes from Peyton Green with Sterne Agee.

Good afternoon. A couple of questions. With regard to the mortgage business, thinking about their contribution to your pretax income, how did that change year-over-year?

I think the way to look at it, If you look at the revenue numbers, roughly half of that is going to go through salaries and employee benefit. We have some fixed costs there but the vast majority of that is commissions. Roughly half or so of that you can carve away some commissions. We usually think about taking another, these are rough numbers, but another 25% away for overhead and other operating costs. So maybe 25% drops to the bottom line pretax, and then you tax effect it. So even though those numbers are pretty big on the revenue side, by the time you carve out the commissions and the employee benefits, the salaries, and the operating costs, we look at the model, as roughly in those metrics.

Depending on what you are doing at the time and where the spreads are, somewhere between 12.5% and 18% of revenues fall to the after tax bottom line.

Okay. great. And then with respect to the kind of $1 billion growth target that you've got for 2010, what kind of profit margin would you hope to get? I know in times past, sometimes the overhead has gotten a little bit ahead of the profitability of the business when you brought it on. How are you focused on that?

It will be different than the past, because we still are absorbing -- when we went into Rope-A-Dope, we had a bunch of juvenile banks there that really had not grown into their overhead. We did not, by design, we didn't go through and risk people and the like. We figured it was a temporarily issue and we were going to need these people to grow. We have capacity to bring a lot of that in. Notwithstanding that though, the overhead now is going to be coming on that asset side as we have hired new lenders. We're back to trying to be an asset driven company. We always, before we went into the stall period, we always had more assets than we needed and that allowed us to be aggressive to gain market share in the towns we are in. So we think that we have capacity to put this on, but we will be adding overhead on the asset side of the equation.

Okay. And then last question, is the spread on the $600 million securitization that you are bringing back on the balance sheet, if you took gains to sell that into the securitization, wouldn't it come back on your balance sheet at a lower spread? If you can walk through the mechanics of how it will work.

The remaining gain that's on those assets that existed at 1/1/2010, the accounting rules say that that gain gets reversed against your equity. So the spread that you had discounted back to get to your gain calculation all goes back to be earned out over the life of those assets going forward. So, yes you don't discount that gain against your future cash flows. The gain just gets reversed and then you put the assets on and the liabilities on, and away you go as far as just having the financing on your liability side, and the assets as a loan. If you look at our securitization --

What you're saying is your book value is going to go down. It is not going to be an income statement effect, it'll be a capital changes.

Right, change in accounting policy. And then once you're going forward you can have $600 million on the books where your assets are yielding, these particular assets are yielding in the 6.5% to 7% range, and you are borrowing at 2% about.

Why not pay off the borrowings and just take the liquidity that you have overnight and fund it?

The borrowings are part of the TALF program, that somebody else had TALF funding. We have a three year securitization. We think that would be a good idea, and then you'd be done but we actually believe we are going to be able to fill that hole with good core franchise building business.

And so that is a liability at 2%. Is that right?

It is LIBOR plus 1.45. So it is relatively cheap funding out there that we have in the securitization facility. But if you did that, you would suck up a lot of your liquidity and not have much, and then if you had to grow your business, you would have to go raise funds probably at higher rates to try to attract them quickly. So we have the liquidity now on the balance sheet. We think we can deploy it, and as we do that, we expect the margin to expand. But for the time being, that funding that we had along with it is relatively cheap.

Okay. And then I guess the $1 billion or so that you have in overnight, what is the timing on trying to reduce that?

You want our loan payment?

Will you not renew CDs in the first couple of quarters to shrink the excess cash that you have in overnight?

That's a good question. We will renew core customer CDs. But we did have a couple hundred million dollars on the books -- I think I mentioned this in the last conference call -- related to aggregator deposits some of the guys were coming out. And we took those on the books at the beginning of 2009 because we had the capital supported. If you remember, being in 2009, the whole world is coming to an end. We wanted to have extra liquidity on the books. We took a couple hundred million dollars in. We're letting that run off. Some of it has ran off, $100 million-something ran off already, this other. It is split $115 million and $115 million. $115 million ran off already this month, and in February another $115 million runs off.

So we are letting those run off but we certainly are not letting customer accounts roll off. We are trying to gain more of those. That will be part of that equation, but we are not letting anything else run off. We are back in growth mode, Peyton. We think that given the state of the banking industry, in general we are in a pretty good position to build franchise value right now by growing the organization. So we are back in that ball game again. We will try to be unless something comes along and makes us go backwards. If it looks like it's going to be a W with a pretty big second loop we may change our plans. But right now, we think competitively we are in an excellent position, we are attracting good people. We are back like the good old days.

Okay. And then I promise last question, but you have about $1.15 billion in CDs that roll in the first three months of this year at 2.12% and another $866 million at 2.32% in the June quarter. How much of a savings would you hope to wrest out of that given current pricing?

Certainly below 1.5% based upon what we've seen the last few months. Competition or market conditions have changed. But a lot of these CDs are renewing between 1% and 1.5%.

Okay. Great. Thank you very much.

It depends on the term and what the customers want but that's the rate.

But it is material, it's a big number.

The question is still 100 basis points, or 75 to 100 basis points potentially

That's a good thing.

All right. Thank you.

Our final question comes from Steve Covington with Steven Capital.

Hi Ed, Dave, it is actually Joe Steven. How are you? Peyton just got my last question, but you guys had a great quarter. Thank you.

He's always been a step ahead of you, Joe.

As normal.

Thanks, Joe.

Okay. We thank everybody for listening in. As always if you have any other questions, you can call Mr. Dykstra or myself, we'd be happy to try to answer them. Thank you all for listening in.

That does conclude today's conference. Thank you for your participation.