Wintrust Financial Corp (WTFC) 2007 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Wintrust Financial Corporation second quarter earnings conference call. (OPERATOR INSTRUCTIONS) Thank you.

Mr. Wehmer, you may begin your conference.

Thank you, good morning, everyone and thanks for tuning in. With me are Dave Dykstra, our Chief Operating Officer; and Dave Stoehr, the Company's Chief Financial Officer. As is our custom I'd like to start with some comments on credit quality in total, credit quality in the organization remained pretty good. Charge-offs and non-performers remained steady, as importantly is that we had good velocity of the loans through the process and I've been asked what do you mean when you say good velocity and I mean by that we have good identification of loans early on and we have good speed in moving them through our up or out process either how we're going to fix that loan and get it on track or to get it out of the bank as quickly as we can and I think that that system is working pretty well as we, and we expect it to continue to work pretty well.

The credit environment, a couple comments on that. Credit environment believe it or not is still pretty tough both on the credit standard side and on the pricing side. We have very good loan growth in the quarter. As a result of, pardon me, our commercial initiatives and our new loan officers coming on Board and just general good growth and as part of our overall strategy to get back into equilibrium but all those loans were really done on our terms. we said two years ago when we saw the market moving away from us that we weren't going to follow it. We didn't really tighten. We just didn't change our standards to go with the crowd.

The environment itself we see and I think you all see continues to what we believe return to normalcy. What I mean by normalcy is you've had four, five, six years, ten years maybe of great credit. We underwrite our portfolio over the long term to, we anticipate 25 basis points or so in losses. That's what we under write to in normal times. We don't see that on the horizon right now but we believe that as we return to normal we would be very satisfied if this cycle continues and if we went back to the 25 basis points and we don't anticipate having to fill the area under the curb that occurred over the last eight or nine years when we've been to 8, 10, 12, basis points in terms of charge-offs; however, we're probably one of the only banks out here that you would hear say we would gladly give up 15 basis points more in charge-offs to get 125 to 150 basis points back in credit spreads and quite frankly that might be what it takes to get to normalcy back there, but I just want to clarify , we don't see this in the horizon in terms of our books and what we see coming down the pipe but if the environment keeps going like it's going we would anticipate that to happen. We kind of figured we would take our lumps early and we have, but by doing that we think we come out faster, like the old account in IM we're a FIFO, first in first out, and we've done that.

A comment, I'll talk about our strategy over the last quarter few in terms of what we're doing to combat this environment and to get our earnings back where they need to be and our performance back where it needs to be. The environment itself has been not very conducive to a growth Company such as ours, when the interest rate environment and the lack of credit spreads basically takes profitable growth away and you're a growth company any you're half pregnant in a number of new locations takes some time to work through that and we had adopted a number of strategies that we had laid out to you to deal with that and to get us back where we could come out of this environment fast and get back into growth trends which you have grown accustomed to seeing us in.

We made good progress I think and the numbers show it on all fronts in that regard, controlling our deposit costs really was number one for us. We did that through the deposit pricing discipline and through mix issues. We had a predominant, we had too much of our money in CD's and we were in a position where we were matching some of the market-rates which we really didn't need to do. I think on the mix side, you saw that our CD reliance has gone down and that our core deposits have, as we define them savings as checking, savings, money-market have moved up. That's part of the plan and part of the design and we'll continue to do that and it's really helped our cost of funds and although it has slowed our growth as you've been accustomed to see it, we believe that some of our other initiatives getting us back to an asset driven position above 90% loan to deposit ratio which we did -- are close to achieving this quarter and we would expect to achieve going forward will allow us to get back into the growth trends that you're more accustomed to seeing us. It's not going to be fourth gear, it will be first gear. We'll start out slower. We have been growing our younger banks and has part of the design but we have slowed it down in the older banks. You'll see probably a little bit more growth in the younger banks or in excuse me, in the older banks as we continue to put more quality assets on the books and to grow.

Our other income initiatives, we wanted to increase the other income. We've done that through the maturation and the continued progress of our Wealth Management group and this quarter on the mortgage side of the business. Other expenses I think and Dave will talk about specific numbers when we get to him, but other expenses I think have done very well. We opened four or five I think new branches in the quarter and there were expenses associated with that but even with those considered, I think our expense control has been pretty darn good quarter-over-quarter and we would expect that to continue as we identified some other opportunities and we will continue to be very very close to this aspect of the financial statements and really keep ringing the wash cloth to every extent we can.

We talked about asset yields. We get more loans, change the mix. We have been able to work our loan to deposit ratio back up to close to 90% from a low of 79% which hurt us back then, but also really just getting paid more for what we're doing, as we're selective in our asset generation, we're able to actually try to get that extra 5 or 10 basis points and really get paid for what we're doing and that's the mantra throughout the organization.

Again, it's very important that we continue with this, if we can continue at this pace to get back to an asset driven position. That's really what's been missing for the last couple of quarters is that profitable growth and if we can continue to put good assets on the books we can then start funding underneath it which has always been a fundamental philosophy of this organization.

So one other comment I'll make is our stock buyback program, which we were, we didn't do a lot of in this quarter but I would imagine that where prices are right now that we will be very active in implementing the share buyback program that the Board authorized during the second quarter.

In summary, everything, our plans that we've laid out, we've tried to be very transparent in laying our plans out to you. If we continue to execute we can always do better but I think we're showing good progress across-the-board, and we believe here that if we're able to maintain credit quality which is really what we're focused on and work through and continue to execute on the four point plan that we laid out to you, that the opportunities now in Chicago are very very good, I've said to a number of people lately that it feels like 1991 to me all over again and I don't mean by that that the economic environment seems like 1991 even though it is rather close to that but in terms of opportunity, in 1991 that is when we started this organization and that point in time, we saw a lot of consolidation in the market. We saw a lot of dislocation of people, of customers. We saw an opportunity to differentiate and we feel that that case is here right now. We think we've positioned ourselves well to come out of this environment maybe faster and hopefully well -- better than others on the competitive side of things. We think that the consolidation is taking place in Chicago opens up a wonderful opportunity for us. We think that our style is differentiated from all of, really all of our competitors. Nobody does it how we do it and if we can get back into growth mode, profitable growth if it were able to achieve that, we think the opportunities are terrific for us prospectively, but we still have to stick to our netting and it's going to be a Big 10 football, for a little while longer we're going to go three or four yards and a cloud of dust, but we feel pretty good about where we stand, but we need to be cognizant and aware all the time of the environment. Hopefully we'll get some breaks in that. Then I'll turn it over to Dave. You want to talk specifically about the numbers, Dave Dykstra?

Yes. We'll quickly go through the non-interest income, non-interest expense numbers, nothing real unusual in any of those. Non-interest income as you can see was up $1.1 million over the first quarter where the non-interest expenses increased only 400,000. Wealth Management increased and is the highest it's been in the last five quarters and the second consecutive quarter of growth there.

Mortgage banking revenues, we had a very nice quarter there. Interest rates helped us a little bit as far as valuation for the mortgage servicing rights and just volume I guess during the Spring home buying season. Service charges on deposit accounts are up nicely as we continue to grow the account base, even though we're controlling the number of CD's we're still adding new accounts and that level is going up. We have not had any gain on sale of previous finance loans since the second quarter of '06. That 175,000 should be the last amount that we show on that line item unless we start to sell it again some time in the future, that would be the last clean up call on the last sale that we did so that number should be gone in the future.

Tricom keeps plugging along. Sales are nice there, there's competitive pressures in their industry also, which is keeping the fee income rather stable despite the fact that they're growing their revenue base and on the non-interest expense side, salaries were down as we talked about in the first quarter, first quarter tends to bump up a little bit with higher level payroll taxes related to the FICO side of the equation. Payroll taxes in the second quarter versus the first quarter were down $900,000 so that generally is the majority of the decrease there, although we did, as Ed indicated, we did open up four new branches during the quarter, so I think we've showed very good expense control on the salary side given the fact that we opened up the new branches.

Marketing was up. We spent a little bit of money on our commercial initiative as well as the new branch openings and we also take the view that as we do try to keep the deposit pricing a little bit lower, that we also need to be up front marketing the other products besides CDs and marketing the image to keep the momentum going on that front, so advertising marketing were up $0.5 million over the first quarter roughly, and the other items are pretty much in line. So we feel pretty comfortable on the expense control side. We're still working it bit by bit. There's no magic wand there to bring it down tremendously in one quarter if we want to continue to grow the organization and the franchise the way we're doing, but we are purely working on trying to maintain good expense control on that front. With that, I think we could--.

Well, one more comment. We did make the acquisition that we announced last week, the small acquisition. That really fits well into our strategy on the premium finance side of the business. Broadway Premium Finance is a wonderful Company and has a real niche in that level. One level lower than we operate in right now. In other words we always act in the really high end of the commercial premium finance side. This is a company that really has ticket sizes of they are probably about half the ticket size is. Yields in that business depending on exactly the mix you want to go to, maybe 14% yields versus in our yields that are in the prime plus 2ish range. So you got a lower ticket size and a higher yield and that's really what we had done in starting our in fund division or always sometimes referred to as our Chevy division, we started that out at probably 20 to $30 million of production in there so far, so 10 to $15 million of outstandings in that division, Broadway has got about [$60] million of outstandings, a couple hundred million dollars of production, so it will really give us a jump start in that arena with a company that's experienced and well respected in the industry.

But really we're very excited about getting it, we think the growth potential there is very good but again growth under our terms, but we think that we can do very well in that business and that will help us on the asset generation side which in turn helps us in getting us back to that asset driven equilibrium which helps us get back into the growth mode of things. First Insurance is doing extremely well by the way. Their number of contracts is up nicely, but with average premiums down 16%, our average tickets in that business are down a little bit too, but that business continues to grow and as part of the perfect storm we have a soft insurance market that is hurting our overall outstandings there, but again, that's potential, when that changes that will be very good for us and in the meantime, the Chevy division, we're excited about Broadway and the people at Broadway are terrific too so we're very excited about that. We're also working into the high end of the life insurance market where we believe there's only one other player out there. We'll step in and we'll hit with our toe before we jump in but we think that AI Credit is the biggest competitor and almost the only game in town out there. We'll deal with the higher end of that, estate planning sorts of things and we believe that that portfolio can also grow to 2 or $300 million in relatively short order and by that I mean 18 months or so, so we think there's a lot of good momentum in the asset side of the business.

In the premium finance side we think there's a lot of good momentum with our commercial initiative especially given the environment here in Chicago and what's going on, we think we're very well positioned and can differentiate there so as I said in my summary remarks, I think that it just feels like 1991 again, that the opportunities are here and that we've really kind of reset our base here and be able to take advantage of those opportunities and that is our focus going forward is to be able to balance growth and profitability, get our numbers back to respectable levels, and at the same time, increase franchise value and we think that it's setting up nicely for us to do that, so with that I think we can turn it over for questions.

(OPERATOR INSTRUCTIONS) The first question is from the line of Brad Vander Ploeg with Raymond James.

Good morning, gentlemen.

Hello, Brad.

I was just curious, you mentioned in the past couple quarters you aren't going to chase loan growth at any price, yet the loan growth is pretty good even if you strip out the retention of premium finance receivables, you've got about 7.5% annualized growth during the quarter and 6% year-over-year, so I'm just curious if anything has changed in your thinking there about the competitive environment or how hard you're chasing loans?

We have not changed our approach on loans. We haven't done it for two years. We certainly aren't going to get to the end of the rates and change it now. However, we talked a couple of quarters ago about hiring new loan officers. We talked about investing in new people to come in and to bring books of business with them. We talked about our commercial initiative in terms of getting out and really going after that middle market business which probably will be up for grabs and we're seeing some cracks in that competitively where we have been able to work our way into it, so it really more is some of our initiatives, our initiatives paying off and working harder. We're still getting a lot of at bats and turning a lot of deals down so we are not changing the way we have been underwriting loans for the past two years or the past 15 years for that matter. The fact is that we're working harder, competitively we're able to get in we're able to get our pricing and get our terms with more customers than that. A lot of it is just a lot more at bats and just working a lot harder to get deals in the door that they want to do that we can do at our terms and our pricing.

And along those lines, I know you're going to tell me that you're just smarter than the next guy.

You know better than that.

Well, I know better. You haven't had the same bump up in non-performers or net charge-offs and I know you took sort of a cautionary tone in saying eventual return to 25 basis point net charge-offs but you haven't had any big loans come into the non-performer portfolio the way that some other very high quality companies have and I'm just curious if it's your loan mix that's allowing that to happen or just the vigilance that you started a year ago?

Well, hopefully we started the vigilance 15 years ago, but in a normalized environment and this is just hypothetically speaking, our charge-offs would be doubled and our non- performings would be doubled, and we would consider that to be, normally we consider that's just over time that's what we under write the portfolio to. So we're trying to identify these things early and get them out, get them resolved and move them through the system and we've had very good velocity in being able to do that. That doesn't mean that one isn't just going to pop-up out of the blue which seems to be when these things start turning this is just from experience and also something that you find is going to just pop-up. We do have credits out there. They are on our watch list that could move one way or another. We're working through them. We have good track record on it and we think we're pretty good shape. We try to identify and push through losses early. I think if you look at our recoveries as compared to charge-offs, you can see we're trying to be very conservative and look good on the recovery. I don't know, don't think we're smarter than anybody else. I just think that we might be more conservative.

I think the worst thing you can get into is denial on this stuff, and if you get into denial, everything is fine. Everything is fine, everything is fine and then everything blows up. I think just identify them early, push them through, take your lumps and move on and try to look good on recovery. That's the philosophy around here. It's what we've stuck to, as I said though, you have to do this in what we consider, view it in what we consider to be an overall normalized environment and I don't think anybody on the phone here would say that they don't think the credit is returning to maybe more normal. We think that our -- we haven't done anything stupid that's going to jump us up and make us fill that area under the curve in terms of charge-offs that we've had for the past few years. So I don't know if we're better or worse than anybody else. We've just doing what we always do and we'll continue to do that.

All right, and Dave or Dave, it appears that the margin troughed out in the fourth quarter of last year and has improved just a little bit the past couple of quarters. I'm just curious, is that due to the competitive environment here or is it more on the funding side? What's driving that?

Well, there's a few things out there, Brad. We are working on the cost side and on our deposit side, we made some progress this quarter where the cost of our interest bearing deposits were at 429 for the quarter versus 435 per last quarter, so I think we've made some progress there, but a big piece of it is the mix of the balance sheet also. Our loan to deposit ratio has gone up and we've been funding those loans really not so much with deposit growth but the run-off from the investment portfolio so we're replacing lower yielding, shorter term investments with higher yielding loans and as they come on. So it's the mix of the balance sheet, good deposit pricing discipline out there, and one thing that is not real apparent in here always, we try to talk about it briefly is our market is up 3 basis points over the last quarter and it was 3 basis points up in the first quarter over the fourth quarter, so we've got two quarters sequentially where we're up 3 basis points or 6 in total. We would have been up really another 6 basis points, had it not been for the share re purchase program, that cost us some margin because we're taking free capital where we're earning money on that and really converting it to paying on debt where we're using that to buy the stock back, so we're actually even I think making more progress on the core basis than we did otherwise. We'd really, we put that in the supplemental data and the chart but our core net interest margin if you take out the trust preferred funding and the share buyback, we're really up 12 basis points, so we're pretty happy with the progress and we certainly always like to make more, but it really is changing the mix of the balance sheet, getting back to being asset driven and watching the cost side of the pay in liabilities.

All right, and lastly if I could, you had a nice bump up in mortgage banking fees during the quarter. Is there anything unusual in there or should we expect that sort of level is going to continue?

It's very dependent on interest rates as you know. We've got a little bit of a benefit from the way rates moved our servicing portfolio which we have to mark-to-market every quarter benefited a little bit from where rates were at the end of the quarter, and just a little bit of growth throughout the system.

It's springtime and springtime is probably the best time for that too, so I'm not sure if one quarter makes a trend, Brad, so we'll watch and we'll see how the housing market is. If the housing market is still pretty slow, I'm not sure, sometimes you get into the third quarter and there is the doldrums out there. People are on vacation and people are doing other things and things slow down a bit so we'll watch it. No promises there.

Right. Okay, thanks very much.

Okay.

The next question is from the line of Jon Arfstrom with RBC Capital Markets.

Good morning, guys.

Hello, Arf.

Question for you on some of your balance sheet comments in the press release. You talked about balance sheet growth returning in the second half of the year and then you also have the desire to keep the loan to deposit ratio up. Can you talk a little bit about how you expect the earning asset mix to change in the second half and how you expect to fund the balance sheet growth?

Well, a couple options there. We do want to get back, getting back to asset driven is probably the most important thing we can do. It's the one thing that was missing in our formula that really caused us to slowdown. We have a couple options there. We could go back to selling premium finance loans, I doubt we'll do that throughout the remainder of the year. I think what we'll do is in our younger banks, we will, we've been growing the younger banks as the older banks have kind of let some of the monorelationship pot money run-off. We can always get that back. As an aside, a lot of that money has moved in through Wayne Hummer and been but put into brokerage CDs so we never really lost the customer. It's actually been kind of nice.

It's really helped to open new accounts at Wayne Hummer and open new relationships there so we haven't lost customers per se which is kind of a neat thing, but what we're pushing hard now is the core deposits, the money-markets, the NOWs, the savings accounts, to try to build those core numbers back up. When rates were 1 and 4 when you had 1% Fed funds and 4 prime, everybody flocked to CDs and the only place to get rate and that kind of through our balance sheet out of historical whack and what we want to do now is get it back into whack and get a better mix. That mix will bring our cost of funds down.

So we would anticipate that getting above 90 for a couple of quarters will allow us to get aggressive then in terms of getting more households and get back to what you were used to seeing with us. You got the assets to cover, go pick up households and get two or three or four accounts per household and build the franchise that way, so we're excited about that opportunity. We can hopefully hold this above 90% loan to deposit ratio and we aren't going to jump right into it really big and knock ourselves back down to 79% loan to deposits or 80%. We'll be very measured on this and make sure that our loan growth is sustainable and we can stay in this asset driven position for a period and then with the market and all the things changing here we think it's a great opportunity for us to grow the franchise as you're used to seeing it grow that franchise value up. We're working awfully hard also on this commercial initiative.

Don't know if you've seen any of our adds in Cranes and in the Wall Street Journal but that's starting to bear some fruit also. We really need to pick up our demand deposit balances and we're out hiring people now in the commercial side of the business. We plan in the late third, early fourth quarter to open a loan production office in downtown Chicago to start to really work that commercial side of the business. If all goes well with that, again we're leading with assets, we'll if that organization, that downtown location can generate enough assets we'll actually build the downtown bank around it, we actually could charter that LPO down the road and build something there so we have a strategy to pull this off but we don't want to fall back into the non-asset driven situation, so hopefully we won't have to rely on wholesale funding. We really want to rely on building the franchise which is going back to our roots which is earnings value and franchise value. We need to get back into building market share, household share, to really create that value.

Just two other quick questions. Buyback appetite?

Starving. Of course I'm always starving, Arf, so no, but we kind of knew, at least we didn't know we theorized that we'll take our lumps early and come out of it but if everybody else, if the environment turns like it appears like we thought it would two years ago that we would be painted with that same brush too, that there might be an overall multiple depression that we could bust out of, so we kind of had kept our powder dry on this one and unfortunately, our stock has been painted with that same brush and it gives us an opportunity to buy it back also but we think it's probably one of the best investments we can make right now so I would anticipate that we will be active in that.

Okay. And then Dave Dykstra, maybe for you. In terms of the margin trends, if you got maybe a slowing in the earning asset mix shift out of securities and maybe a little more buyback activity can the margin continue its trend upward or you would expect it to stabilize somewhat in the second half of the year?

I think certainly the share buyback program impacts the margin, but I think we're going to continue to work on the cost side and I think the mix will continue to change a little bit, so I would anticipate that -- our hope is that it continues to trend up slightly, the remaining two quarters of this year.

Arf, what happens is that we -- in some of the banks where we haven't had growth, we've had earnings and we take those dividends out and we retire the debt we used to buy the stock in the last quarter, and so the relative effect of buying new stock back should be marginal because you'll pay off some of that debt, then you'll borrow it again so I don't imagine -- in other words, I don't imagine our debt going up too much to initiate the second half of the stock buyback. Does that make sense to you?

Yes, makes sense. Thank you.

The next question is from the line of Ben Crabtree of Stifel Nicolaus.

Yes, excuse me. Just a couple of quick questions. You obviously had a pretty heavy de novo branch opening quarter. What do you have scheduled for the second half of the year?

Down at Old Plank Trail, we have two permanent facilities coming online. I think one, the second half of this year and then one the first quarter of next year and that's going from temporary to permanent. I think we have probably two to three other branches that will come on line in the third and fourth quarter. Just depends on building.

All right, so we're not going to have this quarterly level in the second half of the year? Maybe you do it in the second half what you did one quarter here?

Well, part of that branch opening will be the downtown loan production office, and we're not exactly going after inexpensive people to do that if you follow my drift there.

Right.

We think with what's going on in the market here, with consolidation that's freeing up some fairly heavy duty people that downtown branch opening could cost us some initial money but I think it will pay off in spades down the road, so I think Dave Stoehr, we had between 450,000 and $500,000 of costs in the second quarter related to new branch openings, I would imagine that if I were you, I probably would consider that to be a reasonable number for the next couple of quarters.

Okay, and that leads into in your initial comments you said that you are beginning to see some cracks competitively which I think is what you just said here a second ago. Are we, I'm assuming that we're not going to actually see many LaSalle Bankers until they get to see what kind of retention package is out there, but are you beginning to see the customers more easily knocked loose because of the probability of it becoming a consumer bank?

Well, LaSalle and Banc of America, whoever ends up with them, they aren't going to just roll over and die. They are going to fight very hard. They are a fine organization and they haven't been able to build off what they build and I think everybody who is thinking of this as this carcass and we're all a bunch of buzzards flying over it. I don't think so at all. I think you're looking at a very healthy wild animal down there that is going to do everything they can to retain their business, however any time there's change and you got it with Mid America, and you got it with other entities here in Chicago. Not just LaSalle.

There's just an overall change that's taking place in the Chicago competitive environment that will allow us and probably you've heard it from some of our other competitors an opportunity to do some things. We believe that we are well positioned. We think that our approach is more unique and more entrepreneurial than-- just because of the style that we have to bring people in and let them come build a business. We offer them something different on the management side than maybe some of the other folks can offer, and it's exciting to some people, but not just we don't want to pick on LaSalle. They're our main correspondent and have been our friends forever but we kind of see it across-the-board that this shakes up a lot of different things and we can garner opportunity from lots of different competitors. The ability to shake loose? Certainly change does dislocate people.

Certainly, our position is the second largest bank, commercial bank, of course headquarters in Chicago where people start learning about this and what we're all about, how we tie the good personal service together that's kind of like the antithesis of the old Continental ad. They used to say the big bank with a little bank inside. We're the little bank with the big bank behind it so we can give that good personal service but still give every product and have every delivery system the big guys have. People are starting to recognize that and viewing us as a very viable alternative and when there's disruption on one side on a very viable service-oriented alternative on the other side, we are getting more advanced in that arena than we have in the past.

And then one little kind of a housekeeping question I guess. Given the relatively short life of these premium finance loans, I'm guessing that you're giving close to kind of a peak level that might be on the portfolio?

Well, I would hope not, given the -- right now, average ticket sizes are down probably 20% over the last couple of years. If you had a hard market, your plan portfolio would grow 20% without doing anymore contracts. We're doing probably 17 or 18% more contracts than we've done in previous years just to stay even to where we are so that business in its conventional state what you're used to seeing is growing, but also the movement, the acquisition of Broadway, jump starting our Chevy division, we think that that's right now that Chevy division will start with their [60] million and our 10 to 15 million, we believe that portfolio can be a 300 or $400 million portfolio over time. We also believe over the next few years the life insurance aspect that we're getting into on that side can be a 300 or $400 million portfolio also, so we believe that assets generated out of that particular business although a little broader now in scope than they have been in the past can continue to grow in relationship with the overall portfolio, so I don't think, we hope we're not topping out there, Ben. We hope that -- we love this business. The guys we have working there know it and do a pretty good job, knock on wood and have in the past and we think we've got some exciting opportunities there too that will help and fits very nicely into our overall strategy.

Okay, great. Thanks.

The next question is from the line of [Matt Hodgson] of SunTrust Robinson Humphrey.

Hi, guys. Just a quick question. You made the comment that you're shifting hopefully the second half of this year to a more asset driven position. Could you comment a little bit about your appetite for acquisitions? Are you still focused more internally at this point or has that changed?

We're basically focused internally right now. Our currency is not anything to jump up and down about right now. Sellers expectations are still, they are still very high. We see a lot of potential transactions and we pass on them right now. We believe that th -- we've always believed that the de novo approach is better for the overall creation of value. Any acquisition that we've done in the past has been with the idea that we could grow it substantially and that's where we would create value.

Right now, the things we're seeing what you'd have to pay for them, the ability to grow, we're better off growing ourselves internally than taking on somebody else's issues right now, so our appetite on the banking side is not very voracious right now. We continue to look on the Wealth Management side and on the specialty asset/asset generation side. We would be hungry in those areas. So I hope that answers your question.

Yes, it's helpful. Thanks.

The next question is from the line of John Rowan with Sidoti & Company.

Hello?

Yes.

Can you hear me?

Yes, got you.

Okay, Ed, are you going to give out the deal terms for the Broadway acquisition?

It's not our intention to do it right now, but the deal is not closed and it was an agreement between the parties that we wouldn't disclose the terms at this time.

Okay. And there was a, you had a fair value adjustment in the quarter, correct? Do you have the pre-tax number for that?

Fair value adjustment?

On the interest rate swaps?

The interest rate swaps, that was last year, right?

I thought I read that you had one in the first quarter. I could have read it incorrectly.

That was a comparison to last years one. That's why last year's income was up a fair amount was the market value on those swaps.

Okay.

If you look at page two, there's a reconciliation that shows those numbers.

Okay, that's fine and just one more question. Do you have any authorization left under your buyback program? I know you have authorization but what is it?

The Board authorized a million shares and we still have a million outstanding at this point.

Okay, thank you.

You're welcome.

The next question is from the line of Peyton Green, FTN Midwest Securities.

Just wondered if you could comment strategically on the Broadway deal in terms of what you can do differently that they couldn't do on their own independently.

Why don't you answer that, Dave.

Yes. Peyton, we never really focused on that niche of the market, so they've established themselves, they are well known in that niche of the market, which is just really the next level down for agency size and ticket size, so they have established themselves that the collection routines are just a little bit different than the higher ticket size and they do a good job at that. They've actually got better credit quality statistics than we are so they have been a very conservative company. We know their business well. We actually think that there are certain products that we can offer. We can provide some of their agents bank services which they can't do right now. They've been very conservative in their terms, we actually think they can be just a little less conservative in their terms without really increasing credit risk where we maybe do 15 to 20% down payments they generally are doing 25% down payments which is very conservative. You can take that down to a 20% down payment and you're picking up a few extra percent in outstandings right out of the box.

We usually do nine or ten month average terms, they generally do nine months, you extend that by a month, you also pick up average balances and you increase them for longer periods of time, so I think there are things we can do to tweek the portfolio because we understand the risk pretty well and their current parent was just a little bit more conservative on that front, but we plan to give them the funding and the latitude to hire more salespeople, broaden their reach throughout the country in that niche. Currently, the majority of their business is done in New York, New Jersey, and California, so there's 47 other states out there and the District of Columbia where we think we can expand fairly well. So I think just giving them a little bit more support from a funding and strategic growth perspective will work well. Now, we're going to do it in a controlled fashion. We're not going to let it get out of hand but we think there are ways that we can grow there and can grow at a reasonable pace going forward and as you know, we were focused on that area. That's why we started the division, to go after that. They just got more solid footing and more name recognition in the marketplace.

And the salesforce. I mean, we started our division 15 months ago and we didn't have a salesforce. We did it all through direct mail and it was all electronic. These guys have a salesforce and we're looking at almost doubling that salesforce. I think that what we found although we built up pretty nice volume for a very low operation in what we did de novo is that this business does need that personal touch in that salesforce and these fellows have a salesforce that's out there, combining what we've done with what they've done I think we'll get the best of all world's in that also, and it's just a great jump start and we're very excited about the people, the guys who run that business are really bright guys and we're looking forward to turning them loose a little more than they maybe were in the past and going after it.

Sure, and in terms of I guess the benefit to you all it obviously sounds like you go from one delivery channel to two with the most important being the personal side of it. Is this something that is modestly accretive or is it something that can be significantly accretive once you get a year to two out?

$[60] million at 14% yields. That's, if we can grow at that level and their charge-offs now are better than ours, so maybe take a little bit more in charge-offs, but that's like getting 120 million of somebody else's loans, but we think that over time, this will be, we should be very accretive to us over time. We didn't comment on it in the press release. I don't think we can now in terms of immediate stuff but over time, we see this as a really nice asset an asset that we know a lot about it, that they bring a lot to the table on that we can, I'd rather do loans at 14 than at 7 any day of the week, wouldn't you.

I think you can probably do the math on it. [60] million right now is not a big piece of our balance sheet , so it's not going to be wildly accretive and we don't think it's going to have much of an impact for the rest of this year. We probably won't close until the latter part of the third quarter early fourth quarter, it really just depends on how regulatory approvals come in so there's not going to be much impact for '07 but you could probably do the math on that and see that [60] million on a $9 billion Company is not that big of a deal , but the key is going to be how we can grow it going forward and if we can grow it, I think there's some accretion there to pick up. We wouldn't have done the deal if we couldn't have done that.

Have they been selling production or do they keep it all funded?

No. They keep it all and fund it themselves.

Okay, great.

And they were owned by a bank.

Okay, thank you.

The next question is from the line of Brad Milsaps, Sandler O'Neill.

Hi, good morning, guys. Most of my questions have been answered. Just a couple things. Any major movement on or off in the NPA, NPL list that sticks out in your guys mind? Obviously still a very low level but didn't know if there was anything that sort of rolled off and something else that came on that caused a little bit higher loan loss provision than maybe you've had in previous quarters? And then final question to Dave would be sort of the tax rate going forward, a little bit lower than it has been this quarter and just wanted to figure that out for modeling purposes. Thank you.

There's always good flow through and there's nothing that comes to mind coming out or coming off but there's always good flow through on the non-performing side of things. So nothing really comes to mind other than some went off and some came on. I mean we keep pushing them through. The higher provision, we do that. That is so regulated now in terms of how that number is calculated and put through. We actually have more loans on the books than we have to apply our formulas to to come up with that number and also, just a little bit on the economic side of things. The growth charge-offs were up a little bit and we had really good recoveries, but gross charge-offs were up a little. So I think that the higher loan portfolio and the economics just brought the provision up a little bit. As you would expect. On the tax side of things I'll turn it over to my gurus over here.

And we probably also put a couple more loans on the watch list just to be conservative in these times and the way we do the provision is we apply a higher factor to problem loans that are on the problem loan list that aren't necessarily non-performing and probably a lot of them aren't even not current. They are current but just things we want to watch and we plan a higher factor there. Tax rate, we probably have got a little -- we've done some municipal loans recently so we probably have a little bit higher ratio of that there but I would think that as we continue to grow the taxable loan side of the balance sheet and some of these other municipal investments and loans run-off, you'll probably see that we're below 35% this quarter. I would think on a going forward basis as the mix changes back again that you'll be just North of 35 would a good number to work with.

Thank you.

Thank you, there are no further questions at this time. Are there any further remarks?

Thanks, everybody for listening in and if you have other questions you can always feel free to call any of the three of us. We always look forward to hearing from you. Everybody have a good week. Thank you.

Thank you. This concludes your conference. You may now disconnect.