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Wintrust Financial Corporation (NASDAQ:WTFC)

Q4 2009 Earnings Call

January 27, 2010 02:00 p.m. ET

Executives

Edward Wehmer - President and CEO

Dave Dykstra - SVP and COO

Analysts

Jon Arfstrom - RBC Capital Markets

Dennis Klaeser - Raymond James

Adam Klauber - Macquarie

Mac Hodgson - Suntrust Robinson Humphrey

Brad Milsaps - Sandler O'Neill

Peyton Green - Sterne Agee

Operator

Welcome to Wintrust Financial Corporation's 2009 fourth 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.

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

Edward Wehmer

Thank you and 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’ve 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 there will be 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 pre-tax, pre-provision, pre-bargain purchase, pre-credit has rolled up to about a $176 million, up a little bit from the third quarter.

We expect to achieve even better results going forward and we are going to get there a little bit later. But we are very pleased with those numbers, given the economic situation at the time during the course of the year and are consistent. We’ve been able to achieve the plans and goals and objectives we laid out earlier in the year.

The margin for the period decreased quarter-to-quarter from 3% in a quarter 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's really the asset side that contributed to what we believe to be just a temporary margin phenomenon. 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 if 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 affect on the asset side of the equation.

The other thing that affected the asset side were less pre-payments in the AIG portfolio experienced in the fourth quarter as opposed to the third quarter. These numbers are kind of hard to predict. I think going forward it’s 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 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 envision that this will 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 so the margin going forward, one of our main objects, notwithstanding growth which I'll 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 it at about 85% loan-to-deposits right now. 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, the overnight money into higher earning loans is a priority. We made some progress in that regard.

We had talked earlier and I'll mention this again about this type of, this time in the economy, all these dislocated assets and dislocated people and dislocated banks. The dislocated people say we are finding that there are lots of folks out there who want to come and work for us. We've equated it somewhat to, if you remember the refugees leaving Cuba, we call it our Cuban life boat 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. There is 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 carrier back, it’s been some time at the old American National Bank in Chicago.

The American National use to vie with LaSalle Bank for the total middle market of Chicago. I think at one point in time, LaSalle had 45%, The American National had 45%, everybody else split the other 10%. I think if you talk to those guys back then, I think every year they probably exchanged five clients a piece 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 as 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’s 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 and we think that coupled with our normal work of our existing staff is going to be very helpful in deploying that liquidity.

The other side of the margin is that the deposit pricing should continue to come down. In the next 12 months, we have about $3.345 billion and this is indicated in the press release. So you can validate my numbers here, roughly about 2.25%, we believe that there is approximately $25 million to $30 million of 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're hiring is it’s going to be able to help us support growth. I'll talk later about what we think that this year could be a fairly acquisitive year and we'll have management on board that will help us absorb us that type of growth and it’s 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.

A quick comment on credit quality. We had a material reduction in non-performing loans, about a $100 million from $232 million to $132 million, so a $100 million reduction in our non-performing loans. Our OREO increased from $40 million to $80 million, but we view that as a good thing that’s allowed us to work with the [borrowers], the assets that get control of the property and allow us to liquidate that property.

That will still be one of our major objective this year as to continue to identify and move out problem issues as quickly as we possibly can, but I think overall we have 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.

Charge-offs were $34 million supported by a provision of $39 million and the overall credit reserves stand at 1.65% of total loans, that’s the reserve plus the credit discounts attributed to loan.

All that being said, this number could fluctuate going forward. It’s hard to predict, Oppenheimer came out yesterday and said that the credit crisis is over and I said, phew 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're 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 throws at us, but again, we don’t think this is over by any means. It was a pretty big party that people had and usually due to a big party, the hangover is tough, but it’s kind of long too, and we’ve got our guard up related to that.

On the capital front, we remain well capitalized and all of the basic measures. We always monitor our capital position vis-à-vis our growth opportunities in the market and we will continue to do so. Protecting shareholder value is always a top priority for us. As we said in previously on these calls that if we can get through this crisis and add to shareholder value and not materially dilute our shareholders, that will 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. Now I am going to turn this over to Dave to go through some of the numbers.

David Dykstra

Thank you, Ed. I’ll quickly go through the non-interest income and non-interest expense numbers. As Ed mentioned, the big items out there are the margins and the credit side of the equation. So when we get into the non-interest income and expense, pretty good control and not a lot of fluctuations, but we will start with the non-interest income. Wealth management revenue increase $546,000 over the third quarter of 2009 to $8 million and increased $1.3 million over the same quarter in 2008.

Now the increase in this category represented the third consecutive quarterly increase and can really be attributable to increased asset valuations due to the recent 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 PMP transaction that we did at the end of the 2008 contributed to the revenue growth as well as targeted expansion of the mortgage banking staff throughout 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 origination 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 paydowns 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 2010. That’s all of a result of the new accounting guidance that requires securitized assets to be placed back on the balance sheet.

Accordingly beginning in January 2010, income generated from the 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 have done during the last two quarters of 2009.

Trading income for the fourth quarter totaled to $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 discount. The assets increased in value during the course of the year as rate spreads tightened, prepayments spreads were high and default rates were lower than what was projected at the date that we purchased those assets.

As far as 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 where by the loans that have been placed in escrow related to the July 28 purchase were satisfied and the assets were released and based upon the requisite conditions been 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 management expect the majority of that remaining $10.9 million bargain purchase gain to be recognized in the first quarter of 2010.

And 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 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.

And it’s takes a little bit of time to get the banks and the borrowers to get all the paper work done. But we are working hard to clear the rest of those out early in 2010. We’ve got a press release available to you. If you don’t, you can go to our website to 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 a non- accretable credit discount. So we will continue to provide with the performance of that portfolio and how the discounts have been recognized into income each quarter.

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

OREO expenses, which includes the cost of holding the OREO valuation adjustments in any gains or losses that we have on the sales of property that were in OREO. Total $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 properties in order to liquidate the non-performing assets and will continue to work hard in the coming months and quarters to carry those out. If you look at the rest of the categories of non-interest expense, generally flat, no large fluctuations in any one category to speak of and 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 non-performing loan costs, we really have kept operating costs in check. I’ll swing it back to Ed.

Edward Wehmer

Just to summarize, this really is the beginning of Phase III of our 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, we had the objective to raise core earnings and to make sure that we identified and cleared our balance sheet of non-performing assets as quickly as we possibly could. I think we accomplished those two things. We relied on a market that had dislocated assets, dislocated people and dislocated banks. On the asset side, I think we were able to conduct a couple of transactions that were very profitable to the organization, that have been 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 get back into our organic growth mode that we experienced throughout our life up until we adapted this plan.

Looking at the bank acquisition side of the equation, the troubled banks, the FDIC-assisted banks, the non-assisted banks and our objective there was, let’s get our own house in order to 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 will with us for 2-3-4 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. 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 4 or we could none. It just depends on how the market works. We are going to be very disciplined in our approach. It’s got to be strategic for us to be involved and it’s something as you know that the deals we’ve done in the past and our goal is to get good geographic dispersion and to get a franchise and to grow it.

We will grow our acquired entities 2-3-4-5 times in a 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 ball game, and we are back in our normal organic growth ball game going forward and borrowing any unforeseen issues we intend to make that part of our objectives for this year.

With that we can turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will take our first question from Jon Arfstrom with RBC Capital Markets.

Jon Arfstrom - RBC Capital Markets

Just a 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 where it now just rolls into income over a nine-month period?

David Dykstra

Yes, that would be right. On January 1, 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. So, 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 a regulatory capital release on that. So, that the capital rules would be the same as if it was securitized through June and then a 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’s all going to happen at once versus the old portfolio running off and the new production coming on.

Edward Wehmer

And Jon there will be financing on the books, we did it before. We absorbed it into our deposit base because we did it at a time when we were hunkering down and not making as many loans in our rope-a-dope period. This time it comes on as $600 million worth of assets and $600 million worth of borrowings.

Jon Arfstrom - RBC Capital Markets

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 talk a little bit about how long do you think it takes for you to put that to work?

Edward Wehmer

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

We still are in the market for dislocated assets and both, dislocated assets and platforms for dislocated assets. So we are continually searching. We would love this year to have the opportunity to pick up another niche, a niche that could grow to $200 million to $300 million to $400 million to $500 million and build that out. So I think that it could probably take into the middle of this to the end of the second quarter, beginning of third quarter to effectively do that.

We’re not changing our underwriting standards and in anyway, shape or form, but overtime we expect to optimize our balance sheet, we can get that loan-to-deposit ratio back up to the middle to higher end of that of the spectrum that we would want to get it at. We also anticipate some pretty reasonable royalties, we're back on what we considered 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 on board too, so we think it's a competitive environment here in Chicago, that as many and probably won’t be as many competitors as there were a year ago. Some of the competitors right now are pulling back a little bit. This was what we'd planned that people need to look inward and if we could be first out of this thing, then we would have the opportunity to be a little bit more aggressive, picking up good business.

So this is really part of the plan on 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.

Jon Arfstrom - RBC Capital Markets

One quick question, you’ve taken some pretty big charge offs the last couple of quarters and I am just guessing that a lot of that has to do with some of the OREO writedowns and I am curious, how aggressive do you want to be in moving out some of those properties?

Edward Wehmer

Well, 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's good to get them off the books. Now we think there would 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.

We probably Jon left maybe $10 million bucks 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 and I think that if we had hung on to them, we probably would have lost that even more. So we will continue to be aggressive, the markets are tough, you got to work hard to find them. We try to mark everything to what we think the realizable value is when we do it, but we go down about 3 or 4 or 5 paths as every time we're trying to sell assets.

We were trying to sell individual assets, we're trying to sell pools of assets. So you'll put pools of assets together, but one alone might be in four different pools and go into four different buyers potentially. So we try to be as aggressive as we can on pricing these things down. So we think it’s 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 of that has come through with gains this quarter. So it’s tough right now. You got to get the right buyers at the right time and the right price. You have to look at it vis-à-vis what the property is itself or what you're trying to get rid off and what you think the odds are and to push it out. Sometimes you make some money and sometimes you lose some money.

Operator

Our next question comes from Dennis Klaeser with Raymond James.

Dennis Klaeser - Raymond James

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 in your balance sheet and could 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.

Edward Wehmer

We will start with backend first, we look at these transactions and if there’s life in the transaction, we want to do is best for us, and best for the borrower. The borrower is working with you and you realize that there is a level that this thing could actually work. You go to AB route, you charge off part of the loan and you split it into an A note and a B note and the thing actually underwrites pretty well.

It’s just the evaluation issue with borrowers who want to work with you and you’d rather keep them doing what they are doing and put it out. But we are talking about issues where we are kicking the can down the road. Dennis, we are talking about where we are going, okay we will give you a 1% interest rate or something. We don’t do that, we look at it vis-à-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 the AB notes or they 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 are going to deal with it that way, we are going to take it in, we are going to move it out and be done with it. This is not any sort of extended pretense sort of strategy. It really is based on the bottom line and based on numbers and this makes sense for everybody involved.

Dennis Klaeser - Raymond James

In terms of your mortgage backing, it’s nice to see that increased nicely, sequentially what's kind of the trends there and what's driving the good returns that you are getting with mortgage banking?

Edward Wehmer

The PMP coming on board was very helpful to them. We are just out of the mortgage company, remember there’s still three banks that actually do their own mortgages, but we did over $4 billion worth of business. The course of the year where we acquired PMP and partnered up with them right at the beginning of last year and the volumes were so hard, we couldn’t squeeze the costs 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 that if you look at the Chicago MSA and you take our entire mortgage operation including the banks that we want to validate this, but we are the number one producer through October in Chicago.

So I think that the brand is working well. You get down to the economics, the warehouse spread is as good as it’s been. Remember a year ago, we were talking about 20 to 30 basis point warehouse spreads, that’s up to a 300 point basis spread right now on the warehouse spreads and we continued because of our volumes, we’ll be able to get better underwriting and sales spreads also.

So I think it’s a combination of all three of those things. Better expense control as we have assimilated PMP, 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, cost sale 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.

We think it’s a business that we would like to continue to expand going forward.

Dennis Klaeser - Raymond James

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?

Edward Wehmer

Well, it all depends, you have to look at the overall market right now. The capital for some of these banks is still non-existent. They can’t grow, they are kind of in the doldrums right now and 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 are kind of stuck in irons right now and you got a little bit of management fatigue there also.

So, it’s 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 at it and it’s strategic for us. So, we’re in preliminary discussions with a lot, we are always talking to lots of folks and some you are interested, some you are not.

I expected 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 are stuck, they can’t compete, they need a little muscle to work out of it and we will definitely look at those and I wouldn’t be surprised to see us be successful in those.

Operator

Our next question comes from Adam Klauber with Macquarie.

Adam Klauber - Macquarie

What was the dollar amount of real state sales on the quarter and what was the average markdown of the sales?

Edward Wehmer

The overall markdown was about $5 million of stuff moving into OREO or revaluations of OREO, but I think it’s in the press release.

David Dykstra

It’s 31. We show that we had $68.6 million of assets transferred at their fair value and we resolved $28.3 million.

Adam Klauber – Macquarie

Okay, what was your gross inflows of NPLs in the quarter?

David Dykstra

Well, if you go through the analysis, we had about $39 million of new NPLs coming in

Obviously we transferred some to OREO and we cleared some accounts, in current we charged some off and the net of all of that as we had about $38 million to $39 million in new NPLs during the quarter.

Adam Klauber – Macquarie

If we look at the organic growth rate of the Premium Finance, what would say organic was in 2009 and I guess what type of expectations are you working for in 2010?

Edward Wehmer

The P&C or the life or both.

Adam Klauber – Macquarie

Both

Edward Wehmer

In 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’s still a relatively soft market out there. Average ticket sizes are still in the $22,000 to $23000 range as opposed to a normal market of about $30,000 and hard market of about $40,000. So, but for the second year in a row, we’ve had very good growth in units.

David Dykstra

The P&C side would be all organic, we didn’t buy any portfolio 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 $300 million discounts and roughly $700 million of life portfolio was purchased from a book value perspective. The rest of that would have been our organic growth from our operations and then growth of that we've seen as we did the AIG acquisition.

Edward Wehmer

We're looking at the last couple of months of between $20 million and $30 million of new loans originated on the life side.

Operator

Our next question comes from Mac Hodgson with Suntrust Robinson Humphrey.

Mac Hodgson - Suntrust Robinson Humphrey

I had a question on just on general credit. You sounded like in your prepared remarks, still 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, even on a straight line down on NPA, that could be a little volatile in 2010?

Edward Wehmer

I think where we stand right now, we think we are all right and the trends are our friend, but we are hedging our debt because just the overall economic environment, not anything we really see in our portfolio. I think we're cautious guys and we're proponents I think around here of a little bit of a W in this recovery where unemployment is not moving, we're just worried and the stimulus runs out. We’re just worried that there might be another little leg on those things. So, that was the purpose of my comment there that we are just being really vigilant and making sure that we are on top of this and nobody around here believes it’s over. I think it’s 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.

Mac Hodgson - Suntrust Robinson Humphrey

Another question on the restructured loans, the $30 million, were those previously performing loans or are those in the 90-plus bucket, where did they come from this quarter?

Edward Wehmer

Those were mostly performing loans. We are trying to be very, very proactive on this in getting out and I think you see that in the migration numbers that we put out on the 30-60-90 day past dues. We’re trying to be very proactive with our borrowers and we see an issue, just be cooperative with them, work with them before it comes to a point where there is an issue.

There is some economic realities out there and we could hide our head in the sand or we could deal with them upfront. We are trying to get as far ahead of this as we possibly can. I said a number of these things, the borrowers are good people, they want to work with you, but they are kind of stuck, but the deals will work if you can work with them and restructure them and maybe you get something at the tail end that’s not on your books, but they were predominantly performing loans that we were proactive on.

Mac Hodgson - Suntrust Robinson Humphrey

The commercial real estate breakout that you gave in the release, does that include any owner-occupied commercial real estate or is that all investor?

Edward Wehmer

A lot of owner occupied in there.

Mac Hodgson - Suntrust Robinson Humphrey

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

Edward Wehmer

I think we’ll have to get to that number. We’ll look at disclosing that next quarter going forward. But I don’t have those numbers off hand. But a lot of it is owner occupied stuff.

Operator

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

Brad Milsaps - Sandler O'Neill

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 sort of average years of experience, just trying to get a sense of what potentially these folks could bring over to you?

Edward Wehmer

It’s 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 is part of FBOP. The FBOP group was the one bank that actually was doing okay in the whole scheme of things and we picked up their commercial lending group and brought them over, they will operating out of our Beverly bank. They predominately operate in the south side of Chicago.

So predominately commercial lenders, but they do have other relationships and we think that’s 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. The Park National is probably the biggest group of guys we picked up, but from across the board, from everyone of our competitors we have been able to pick guys up and I think jumped in our life boat.

Predominantly commercial lenders, they are probably in predominantly in that middle market, commercial lending area, it's an area that we really want to build and grow. We are not adopting by the way and I'm not casting dispersions on any of our competitors, but we don’t anticipate their growth to rival what Private's growth did when they brought the LaSalle guys over.

We're not anticipating that sort of growth. We want measured, controllable growth. We have the capacity to put relationships and loans on the books, 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.

Brad Milsaps - Sandler O'Neill

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

Edward Wehmer

I think that would be fair to say.

Brad Milsaps - Sandler O'Neill

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

David Dykstra

There will be in the Chicago office and particularly as we build that out to 25 folks. We're 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, six of the people we hired are more operational type of folks.

Edward Wehmer

Most of these people we absorbed with our existing loan operation staff, but as the C&I business in the downtown office grows, we'll probably need to have support staff there.

David Dykstra

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

Brad Milsaps - Sandler O'Neill

Final question on the Premium Finance segment of your business, can you just refresh my memory and maybe just update us on what type of pricing you're getting there on new business that you're originating right now?

Edward Wehmer

Life or P&C?

Brad Milsaps - Sandler O'Neill

Both.

Edward Wehmer

Well, the P&C business historically and roughly now, you're probably net of everything, prime plus three or somewhere in that range and the Life side, it’s five and a half on the fee.

David Dykstra

The Life side, we usually have floors on it too.

Operator

Our next question comes from Peyton Green with Sterne, Agee.

Peyton Green - Sterne Agee

With regard to the mortgage business, just thinking about their contribution to your pretax income, how did that change year-over-year?

David Dykstra

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

Edward Wehmer

Depending upon 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.

Peyton Green - Sterne Agee

With respect to the kind of $1 billion growth target that you have got for 2010, what kind of profit margin would you hope to get? I know, in times past some times, the overheads got a little bit ahead of the profitability of the business when you all brought it on. How are you focused on that?

David Dykstra

It will be different than the past and because we still are absorbing, we went into rope-a-dope. We had a bunch of juvenile banks there that really had not grown into their overhead and we did not buy design, we didn’t go through and risk people and the like. We figured it was a temporary issue and we are going to need these people to grow. So we have capacity to bring a lot of that in. Not withstanding 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. Before we went into the stall period, we always had more assets than we needed and that allowed us to be aggressive to go gain market share in the towns that 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.

Peyton Green - Sterne Agee

The spread on the $600 million securitization that you are bringing back on the balance sheet and if you took gains to sell that into the securitization I mean wouldn’t it comeback on your balance sheet at kind of a lower spread and if you can kind of walk through the mechanics of how that will work.

David Dykstra

The remaining gain on those assets that existed at 1/1/2010, the accounting rules say that that gain gets reversed against your equity and so the spread that you had discounted back to get to your gain calculation, really all kind of goes back to be earned out over the life of those assets going forward.

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 the way you go as far as just having the financing on your liability side and the assets as a loan.

Peyton Green - Sterne Agee

What your saying is your book value is going to go down, it’s not going to be an income statement effect, it will be capital changes?

Edward Wehmer

Right, a change in the accounting policy and then once going forward, then you have $600 million on the books where each particular assets were yielding in the 6.5% to 7% range and you are borrowing at 2% about.

Peyton Green - Sterne Agee

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

David Dykstra

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

Peyton Green - Sterne Agee

And so that’s a liability at 2%, is that right?

David Dykstra

Well it’s LIBOR plus 145. So it’s relatively cheap funding out there that we have in the securitization facility, but if you did that you’d 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 and correct them quickly. So we’ve got 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 relative cheap.

Peyton Green - Sterne Agee

Okay and then I guess the billion or so that you are having overnight, what is the timing on trying to reduce that

Edward Wehmer

You want our loan thing?

Peyton Green - Sterne Agee

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

David Dykstra

That’s a good question. No, we will renew core customer CDs, but we did have a couple of 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 support and if you remember at the beginning of 2009, the whole world was coming to an end and we wanted to have extra liquidity on the books.

And we took a couple of hundred million dollars in. We are letting that run off. Some of it’s ran off already, it’s $100 million, it’s like split $115 million and $115 million. $115 million ran off already this month and then 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.

So that will be a part of that equation, but we are not letting anything else run off. We are back in growth mode, Peyton and we think that given the state of the banking industry in general, we think we are in a pretty good position to build franchise value right now by growing the organization. So we are back in the ballgame again and we are going to try to be unless something comes along and makes us go backwards and 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 a excellent position. We are attracting good people, we think we back like the good old days.

Peyton Green - Sterne Agee

You have about $1.150 billion in CDs that roll in the first three months this year at 212, another 866 at 232 in the June quarter. How much of the savings would you to help to rest out of that given current pricing?

David Dykstra

We certainly will be below 1.5 based on what we have seen in the last few months now. I guess competition or market conditions have changed, but a lot of these CDs are renewing between 1 and 1.5. But it depends on the term and what the customer wants, but that’s the decent rate.

Peyton Green - Sterne Agee

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

David Dykstra

I guess question is still a 100 basis points, so 75 to 100 basis points potentially.

Edward Wehmer

Okay well, we thank everybody for listening in. If you, as always if you have any other questions you can call Mr. Dykstra or myself, we will be happy to try and answer that, but thank you all for listening in.

Operator

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

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Source: Wintrust Financial Corporation. Q4 2009 Earnings Call Transcript

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