Wintrust Financial Corp (WTFC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome the Wintrust Financial Corporation first quarter 2010 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. And instructions will be follow at that time. (Operator Instructions). I would now like to introduce your host for today's conference, Ed Wehmer, President and CEO.

Good afternoon. If it sounds a little tinny, we had a technical issue with our usual phones, so Dave and I are are huddled close to this telephone here. Welcome to our first quarter conference call. Dave Dykstra is with me as well as Dave Stoehr, our Chief Financial Officer. I will be going over some highlights of the quarter. Dave will take you through the income statement in detail. And then I will come back with some talks about strategy and summarize.

First quarter and really the first part of this year has been a very active and productive one for Wintrust. We're happy to discuss these highlights with you. Earnings for the quarter were $16 million, or $0.41 per share. Driven by margin improvement, our margin went 3.38% from 3.1% in December. Our cost of funds went from 1.98% in December down to 1.82% as we continued to reprice our legacy portfolio. The chart on page 15 of the press release also shows the potential for additional improvement in the legacy CD portfolio, which stayed constant. Over the next 12 months we have a little over $3.3 billion in CDs coming due where 25 to 35 basis points is probably the right number to use there.

Again, if rates stay constant, so again, there's earnings potential, core earnings that will come from that repricing. Asset yields went from 4.87 up to a little over 5%, 5.01%, loan repricing and new businesses helped to do that as well as accretion and payoffs on the life insurance portfolio we bought. On that accretion issue, just one thing. We heard from a number of analysts about how this accretion is coming in. One thing we want to point out ism we do take a lump accretion if the loan does pay off but for the most part we wrote that portfolio to market and as those loans come due and reprice as they come up for repricing, we do write those at market so people who consider that sort of a one-time sort of issue, it really isn't. We are repricing those loans as they come due to the market and then actually experiencing those rates going forward.

On the liquidity side, the end of the quarter we sat on $1.2 billion of overnight money. Earning about 25 basis points. Again, an opportunity to increase core earnings there if we were to put $500 million to work with this at a 4 point spread, that's $20 million. So between the two, I know I only bring this up because we have shown you these charts in the past, there's $30 million to $35 million of additional earnings as we deploy that liquidity and reprice our portfolio. Notwithstanding growth which we'll talk about a little bit later.

Credit costs, little higher than we would like but they're still -- it appears that the costs are abating a bit. Provision of $29 million versus $38 million in December. Charge-offs of $27 million versus $35 million. Non-performing loans went up approximately $9 million, from $132 million to $141 million. All of that is premium finance loans.

The securitization came back on the book and really $8 million of the $9 million increase relates to premium finance loan increase and then there's one life insurance loan that's out there that still is accruing that it's just an administrative past due and that the borrower has indicated where he wants to pay that loan off and is paying the interest, but needed some things to occur before that happened. So really if you look at it, non-performing loans were basically flat quarter-over-quarter. OREO was up $10 million but that's kind of a good thing as we move that into a sale position to push that out.

The first quarter was a little slower than I would have liked on the clearing but I think a lot of that has to do with the fourth quarter. We made a real rush in the fourth quarter, our guys did a wonderful job in pushing non-performings down and in doing so they pushed all the stuff out. They had to restart on a couple of issues. It was a little bit slow. We're still committed to pushing these things off the balance sheet, and we expect to be able to show improvement or steadiness to improvement going forward. Again, we're still committed to moving that out.

Again, on the non-performings, I always say this, but regulators, accountants and the like, they haven't identified anything we haven't already identified and we're working on. I think we have our arms around the issues. We're working them very hard and we continue to make good progress there. Our overall numbers now are 1.55% down from 1.57%. We're operating at a fraction of our peer group, and our local peer group, and we think we have our credit pretty much under control. However, the cycle isn't over yet, and it could be a little lumpy going forward, but we have our arms around it and we are pushing these things out and working these as well as we can.

I wanted to put a word in on TDRs. They seem to be a buzz word this day. This is, again, if any of you have been around a long time and you look back at when we first entered this cycle and how things had to be marked down, and we took a very conservative approach on the market side of things, the accountants were telling us that that was the way to do it. TDRs are somewhat of a misnomer. This accounting principle is not being consistently applied throughout the banking system. We have $69.4 million worth of TDRs of which $65 million are current.

The other $4.4 million is included in our nonperforming numbers. We in consultation with our accountants and also we went through our normal three year cycle review with the SEC prior to our capital offering, and they confirmed with us that our approach to the how you do TDRs is appropriate. I just don't see it as applied. Let me tell you how we do it. If you have a construction loan or a land loan or any loan where -- that loan comes up for renewal and you offer that customer, say he's at 5 or 6%, the project is working, but if that borrower had come in today with that particular project, would you have offered him 5 or 6% the answer to that is probably no, given the real estate market right now. Probably be in the 7.5 to 8% range. Our understanding, confirmed by the SEC and it was a real hot button with these guys, and the accountants is that is a TDR. So to count he those as a non-performing loan makes absolutely no sense to me. We do disclose them.

We believe we're doing that properly. It's been confirmed we're doing it properly. These loans are not problem loans. If we have a problem loan, they show up in our problem loans. $65 million of that are current and operating as planned. We've taken this conservative approach. We don't believe that this is being consistently applied. But again, we hope that this clears up any issue as what a TDR actually is and what these TDRs on our books really are. Again, $65 million are current. They're moving forward. And we will continue to account for them this way until somebody tells us differently.

Dave will comment on the rest of the income and expense ratios a little bit later but I'm first going to take you through the balance sheet. On the deposit side, all categories of deposits were up for us except for our wealth management deposits. As previously mentioned to you, we did let $225 million of what we called aggregator CDs or aggregator deposits that we took from ScottTrade and Deutsche Bank and some other sources, we took those on at the beginning of the crisis. We had the capital cover and as we took them on as liquidity insurance.

We felt that more liquidity would be better, coming through this cycle, and we had the capital support so we put them on the books. We let those run off. We actually didn't need them, sitting on $1.2 billion of overnight money, I think you can understand that. And also, the wealth management deposits went down because people are putting more money back to work in the stock market. It's coming out, their liquidity is being put to work and I think you can evidence that by looking at the fees on our wealth management operation were up nicely during the quarter. As people go back. But other than that, deposit growth was increased on every other category across the board.

On the loan side, all categories of loans, other than maybe indirect auto, which were running off and have been for a period of time, were up. Loans were up predominantly, the big increase was due to bringing the securitized numbers back on the books of the organization. I will point out that pipelines are extremely strong. And we have a number of initiatives going on on the lending side. I'm going to talk about this later when I kind of take you through our strategy for going forward.

On the capital front, ratios were obviously bolstered by a very successful offering, which we completed during the quarter, TCE is up 6.3%, and risk based is over 15%. As we discussed during the offering, and many of you thereafter, we did that deal as kind of a flexible capital sort of approach. We knew that there would be opportunities for transactions and growth, FDIC or otherwise going forward. We felt that that capital would be good to support those. It was good insurance against a W in this recovery. We felt that that was nice insurance to have if in fact we needed it, and again, finally for the repayment of TARP, when that happens.

A word on that TARP repayment. We'll do that when it's shareholder friendly. We have every intention of paying it off as soon as possible. The market is opening up right now. Trust preferred market. We do have capacity in that market. We feel that the capital raise plus that, notwithstanding other events that may occur going forward, we want to be able to retire that TARP money. But it's a very volatile and interesting opportunistic time right now in terms of growth opportunities, so we really want to hedge our bet and that's what we did with that capital offering.

Turn it over to Dave now to take you through a review of the financials, and he'll give it back to me to talk a little bit about strategy and the FDIC deals that we completed last week.

Thanks, Ed.

Ed talked on the margin and the provision. I'll talk about the other non-interest income and other non-interest expense categories that had any significant changes. One item to note on the margin, though, is we did bring $600 million of funding on the books and the related assets from the securitization and that contributed 6 basis points to the margin this quarter. And that's one component that we highlighted, and I just thought I would bring it out before I dig into the other areas.

On the wealth management revenue it increased $8.7 million in the first quarter of 2010. That's up from $8 million in the prior quarter, the fourth quarter of 2009. Up from $5.9 million in the first quarter of 2009. The increase on the year-over-year basis equates to $2.7 million and in percentage terms equates to 46%. Obviously, improvements in the equity market have helped the fee based business and as Ed mentioned we're seeing customers get back into the market so the brokerage revenue that we get has increased also.

On the mortgage banking side, our mortgage banking revenue totaled $9.7 million in the first quarter of 2010. That's down from approximately $16 million in both the fourth quarter of 2009 and the first quarter of 2009. On page 19 of our news release, we provided a new table that outlines the components of the mortgage banking revenue as well as the volume of loans originated and sold. And the amount and value of our mortgage loans that we service.

The main reason for the decline in revenue was due to the decline in the level of mortgage loans originated and sold during the quarter. Refinancing volumes spiked in 2009 as the mortgage rates fell to very low levels. And that volume has moderated as that initial push of refinancing has concluded and the rates have risen slightly. Mortgage banking revenue was also negatively impacted by indemnification claims from investor pushbacks, primarily for loans made in the 2006 and 2007 time frame. Those were vintages of loans that we're not making any more but the investors have been fairly aggressive in trying to push some of the claims back for indemnification reasons and we had had a total charge in the quarter of $3.5 million in the first quarter compared to $1.7 million in the fourth quarter of last year, and $802,000 in the first quarter of the prior year. Again, that information is all detailed on page 19 of our news release.

Gains on the sale of commercial premium finance receivables were eliminated in the first quarter. And this was a result of the new accounting requirements beginning on January 1st that now require loans sold and transferred into the securitization facility to be accounted for on the balance sheet as secured borrowings rather than a sale. Accordingly, in the loans and the borrowings of approximately $600 million that are in the securitization facility are now on the balance sheet. And no further gains are really anticipated for the rest of the year.

The gain on the bargain purchase the Company recorded all the remaining bargain purchase gain related to the 2009 purchase of the portfolio of the life insurance premium finance receivables and we did that the remainder in the first quarter. The amount of that gain in the first quarter was $10.9 million. As we previously disclosed, the recognition of that bargain purchase gain was deferred until -- a portion of the bargain purchase gain was deferred until a portion of those loans that were in escrow received consent whereby we had control of the collateral and it was in our name. Those consents were received and the escrow account was terminated during the first quarter. All the remaining funds in the escrow were released to the sellers and to us and the gain was fully recognized. So going forward, we'll have no more bargain purchase gains related to the life insurance premium financed portfolio purchase.

Trading income in the quarter totaled $6 million. That compares to $4.4 million in the prior quarter, and $8.7 million in the first quarter of 2009. As we mentioned before, these trading gains primarily relate to increases in the market value of certain collateralized mortgage obligations held in the trading account. The Company purchased these securities at a significant discount in the first quarter of 2009, and these securities have increased in value since our purchase due to market spreads tightening, increased mortgage prepayment rates, and lower than projected default rates. So that number is subject to fluctuate but we continue to see higher than normal prepayment rates in the market and the default rates less. So that investment has been good for us and we still like the investment.

Salaries and employee benefits expense is turning to non-interest expense category. Totaled $49.1 million in the first quarter. That was up $1.1 million from the fourth quarter of 2009. The increase in the quarter is primarily related to annual base salary increases that were effective in the first quarter. An increase of about $1.7 million over the fourth quarter due to seasonal payroll tax expense and the addition of some additional commercial lending staff. Those increases were offset by the lower level of mortgage banking commissions as a result of the lower loan volumes that I previously discussed.

Moving on down to the OREO section, we had OREO expenses declining $1.3 million in the first quarter. That compared to $5.3 million in the fourth quarter of 2009, and $2.4 million in the first quarter of 2009. As you know, these expenses can vary based upon changes in the market value of the properties that we pulled into OREO and the carrying cost of holding such properties. The lower level of charges in the first quarter of 2010 was a result of less negative valuation adjustments and offset by higher carrying costs for those properties.

The only other category that fluctuated of any significance was really our other miscellaneous expense category, and that declined to $11.1 million in the first quarter, from $13.0 million in the prior quarter. And was up from $8.8 million in the first quarter of 2009. The amounts in this category are generally fluctuating due to the variable costs associated with collecting our problem loans and the growth in the Company's balance sheet in general.

So that covers the highlights for the categories that had any significant changes in non-interest income and non-interest expense and we'll turn it back over to Ed.

Thanks, Dave. I want to spend a little bit of time on some strategy history and where our strategy is right now and where we anticipate it to be going forward. When we started this thing from 1991 to 2006, we really had an asset-driven growth model. But when I say that, what I mean is we always had more assets than we needed on the lending side, and that allowed us to move into the market areas and to gain number one and number two market share in the towns we went into, both in terms of household penetration and in terms of total deposits. So we always could do that and have planned profitable growth and as a result, for that period of time, we were throwing up 20 to 25% growth rates in all of our vital statistics and things were good.

In 2006, as you all know, we went into our stall, our rope a dope strategy in anticipation of this credit cycle being upon us. We did that. We kind of slowed growth and hunkered down in our fox hole to ride it out. In 2008, in the fourth quarter of 2008, when things were kind of at their worst is, when we said it's time to come out and to start growing and building again, because that's the point in time where the market is in disarray, and you can pick up market share and what we intended to do was to come out when our competitors and when the market was disrupted and that allowed us to grow and to retain profitable growth again.

We focused on dislocated assets, dislocated people, clearing our balance sheet of problem assets and restoring core earnings and that's exactly what we did. With the dislocated assets, we expected gains on these and we've been able to achieve those gains. With the AIG portfolio, the CDOs and other portfolios that are currently discounted by many in the investing community as one-timers, the whole concept was to take advantage of those things in order to cover the costs of the higher credit costs that obviously accompany a credit cycle and actually it worked very well for us to date. We have been profitable through every one of the periods that I talked about here. Going forward right now, though, we believe that the cycle isn't over.

There still are opportunities for on the dislocated people side, on the dislocated asset side, maybe not as big as what we did before, maybe not as profitable, but there still are opportunities out there, but we're trying now to focus on the dislocated banks side of things and getting back to that growth-oriented, asset-driven model that was so successful for us going forward. We believe that we have our arms around our credit issues. We're working hard to clear them. We don't have an exorbitant amount of them, and they're well under control and we marked them right and we're going to be pushing them through, but with an eye in the rear view mirror, we are commencing getting back into our growth-oriented mode.

If you remember, there were a couple of mantras that we had during that period and that was open a new bank every two years, each bank that we had would open a branch every two years, and we would be very opportunistic on acquisitions of not just banks but asset platforms, asset generation platforms, and then the wealth management areas and that's what we intend to do going forward. We're going to continue to focus on building those core earnings as I discussed in the first parts of our transaction, bringing our cost of funds down and getting the asset prices, our rates on assets up and deploying a portion of that liquidity that we're sitting on, hopefully all of that liquidity we're sitting on right now.

But a whole part of this is, again, to be asset-driven. Bank loan demand right now is pretty good. Our pipelines are pretty strong. We're evaluating a number of niche opportunities that have been presented to us that we wouldn't be surprised to see us move forward on those. Again, we like to keep one-third of our portfolio from the niche businesses, two-thirds from our general banking business. And we're evaluating a couple of those niche opportunities right now.

We have opened our Chicago loan production office. It is up and running and off to a very good start. The first quarter we have 12 lenders in that office right now and we also moved our asset based group of five people down to that office, consolidating our commercial C&I type lending in one area. Again, it will be distributed out through the banks also, but this is an area of expertise that we brought in some very strong people from the outside.

Today, in just the first quarter, they have $45 million that they've proved booked. There's another $45 million that's committed and should fund within the next 60 days. Their pipeline is north of $200 million. They brought in $25 million, laying over accounts and that's just in the quarter. That's the tip of the iceberg. Again, all of these are commercially -- these are self-generated commercial relationships that we are bringing in. So add to the diversification of the balance sheet in an area where we probably weren't at strong as we could be. They already brought in over $1 million of DDA, and those accounts need to fill out over time. We believe this is a very strong asset generation opportunity for us, and we're very excited about what's going on in the city and what it does for our franchise in total.

The FDIC deals that we announced and did last week fit very nicely into that strategy. We bought two banks, one in Naperville, Illinois and one on the north side of the City of Chicago, two areas that we are not in at this point in time. We are dealing with these as we would any other acquisition that we have done in the past. We expect to, once we integrate these and get them on our systems and the like, we expect to grow these entities very nicely. Those of you who have been around a long time, the transaction we've done to date, we very quickly double, triple, quadruple them in size. We want to go in and really dominate that market on the retail side of things. This will allow us to do that. It helps us also from a cost of funds standpoint because to support the asset growth that we believe is coming forward, if we didn't -- in the old days, we were always opening new banks and we could count on them to bring in additional deposits.

But if we didn't do these acquisitions to kind of jump start our growth again, the marginal cost of new money would be higher because we would have to cannibalize an existing bank, the existing portfolio of a bank, pay higher rates, those rates go over, marginal cost of money would be very high. In these instances we can bring these deposits in at relatively low cost, build the franchise value organization, and jump start our asset driven growth machine that was so profitable for us in our first 15 years of our life.

The economics of the deals, they're accretive out of the box as you would expect. We are not talking about -- as you know, 141-R and the like, it's very hard to -- we've got to run all the numbers and do all the work before we can talk about bargain purchase gains and all those types of things, so we're not going to disclose anything in that regard other than the fact that we have one but the deals should be accretive right out of the box and we're very excited to bring in two organizations into areas that we're not in. They bring good community bank cultures with them, something we can capitalize on going forward.

So in summary, I'll tell you we've come through this cycle I think very well. We executed our plans that we adopted in 2006. We took advantage of dislocations. We covered our costs, and we remained profitable throughout this very, very trying time. We're one of the few, I think in the market, who can actually say that. Our non-performing assets are under control, and they're a fraction of what the market is, what our peer group is. And we're excited about getting back to what we do best, which is growing an organization, building an organization, profitably for our shareholders.

So with that, I'll turn it over for questions.

Thank you. (Operator Instructions). Our first question comes from John Armstrong from RBC Capital Markets.

Good afternoon, guys.

Hello, John.

Maybe question for you, Dave, to start it out. The comment you made on the margin of how the securitization helped the margin by 6 basis points, was there anything -- is that a permanent change and is there anything else unusual in the margin or is this something you would say is a new run rate?

No, I don't think there's anything real unusual other than that. And as you know, that's a term, securitization facility that's revolving, so we'll continue to keep the $600 million of debt out there until 2012 when it matures and we'll have to look at whether we renew it at the time or not, and we'll keep feeding the assets in there.

So there should be roughly $600 million of debt and related assets on the balance sheet through the rest of this year, and all of 2011 and into 2012, which would not have been there under the old accounting rules that we had up until January 1st of this year. So we noted in the press release that impact was about $6.6 million and we've added into the margin table and the income statement lines that show the cost and the interest expense associated with those borrowings and so you can do the math then. But nothing else that's unusual.

As Ed said, some people talk about this accretion on the life insurance portfolio as saying oh, my gosh, what happens when that goes away? But that was really just a purchase accounting adjustment that you would have in any acquisition, mark them to market and so as that accretion is running down, we're replacing it with new loans at market rates and as long as you stay in the business and you replace those assets, that shouldn't be -- someone shouldn't look at that as a hole that's going to be dug. We do have a little over $1 million from payoffs that went in there, but that probably will continue for some time as loans do prepay during the course of the year. And that's a good thing.

That was my next question is, I'm glad you brought that up. Of the life insurance premium financed loans that have maybe repaid or you've rewritten, how much of it have you captured? So I guess the point is, call it the $8 million or $9 million or $10 million that rolled in this quarter on the margin from the accretion, how much of the loans that rolled off do you think you've recaptured and been able to replace?

Our balance, if you look at it, we I think at the end of each quarter we're growing that balance sheet or we're growing that loan category. At the end of December we were a little under $1.2 billion, $1.197 billion, and at the end of March we were $1.233 billion. So we grew that portfolio despite paydowns. And we show the accretion on page 20 of the press release, but as we continue to grow that portfolio, we're bringing those assets on at market rates and the assets that are rolling off are really rolling off at market rates because we're doing the accretion on them.

So the only odd thing on the accretion would be if you look in our earnings release on page 20, there's $1.4 million of accretion that was recognized due to prepayments. We'll continue to have prepayments for some time to come, so I think that's normal for some period of time. But the rest of that accretion really was just a purchase accounting adjustment to bring it up to market value because the portfolio we bought was a much lower yielding portfolio than what market rates were at the time.

That helps. That helps explain the margin run rate. And then maybe a question for you, Ed. I was going back in some old notes from several years ago that I had written on your Company and I know the old model used to be $40 million to $50 million per bank per year in new growth and when you look at some of the historical growth numbers you were $600 million, $700 million, $800 million a year in loan growth. And I'm just wondering if you feel like your market is healthy enough to get back to that level, if not, how long does it take to get back to that level of growth? Because my sense is you're kind of letting the reins a little bit looser on your subsidiary banks. Is that a good way to look at it?

John, I think that is a good way to look at it. You have to remember, it took a long time to stop a 100 car freight train. It's going to take a little while to start up a 100 car freight train, to start scouting out new locations and to get back into that growth mode. That's why I think I used the term on these two FDIC deals, it's kind of a jump start for us, that we can use that while we're getting the train started in our other market areas. We can use these two organizations to kind of jump start that growth and build those franchises like we have every other acquisition that we've ever made. So yes, it's going to take a little bit of time, but these transactions and maybe who knows what happens down the road, some other -- we are looking at other deals. We look at whatever comes along and if it's strategic and it's accretive and something we think we can build and grow on and it's a real franchise we'll go after it.

The meantime, there are a lot of other opportunities out there as they relate to unassisted deals. To date a lot of those are really not attractive to us yet because the jury's still out on the marks on their portfolio and what you would actually be getting. But those will start popping up too as this cycle completes its run, and we would be very interested in playing in that arena also. So again, it's going to be -- it's going to take a little while to get back on that branch every other year for the banks, but in the meantime, we believe that the opportunistic acquisitions will probably be a little more frequent and that will be the jump start.

And then just last question. What's possible from your downtown office? Because it seems like you have some pretty good momentum there and what's possible maybe over the next 12 months and I guess what's the name on it is the other question I had.

Ed's Bank and Trust. No, we don't do that. It's Wintrust Commercial, Wintrust Commercial Banking, and the possibilities, we've hired some very, very good people and people with long roots in Chicago, very strong people. We're playing in an arena that we played in before, but never had the muscle to really pull it off. People looked at our community banks and said you can't be good C&I lenders. We were to a large extent, but we weren't viewed that way. Now we're going to be viewed that way and we are viewed that way. We can handle the new, sophisticated transactions required in middle market lending. A lot of people were trying to play in that game but in some respects there's still some disruption in the market that is opening some opportunities for us to take advantage of there and we intend to do that.

So, what we intend to do, John, is plan profitable growth. We're not growing for growth's sake. These are good, long-term profitable relationships for us. We're not going to try to outstrip ourselves and grow way too fast. But I believe that downtown office can be a real factor. I'm not going to give you any numbers but you can kind of tell by how they started and what's in the pipeline that you're talking about significant balances.

Okay. All right. Thank you.

Our next question comes from the line of Dennis Klaeser from Raymond James.

Good afternoon.

Dennis, I saw you on a video today. You were being interviewed. I saw you. You're a movie star.

Well, not quite. Yes, on Crane's. Thanks for noticing. Hey, Ed, late last year in your investor presentation, you had a chart that showed the growth of your pretax, precredits earnings, and then you had, within that chart you had some guidance that you would expect the annualized rate of that number to get up to $225 million or more. How soon do you think you can get up to that quarterly earnings run rate?

Well the pretax, preprovision, pre-everything?

Exactly.

You operate about 185, 190 right now. In the liquidity redeployment, we're looking at that for this year. We think that the growth should be pretty good and we should be able to deploy those -- that liquidity, should be able to get our cost of funds down, we should be able to take advantage of the growth opportunities in the markets. So that's kind of a -- we're kind of shooting for that for this year.

Okay. Good. You gave a little bit more disclosure in terms of the breakdown of some of your commercial real estate credits in particular, that broad category of land and development. And I noted that roughly I think it's 3% of the loans are in the land category and about 1.5% are in the residential development category and I know that's not a huge part of your portfolio, but that's where a fair amount of risk is. Could you talk a bit about the characteristics of that part of the portfolio, sort of the geographic location of those credits, the average loan size and what's sort of the typical loan to current appraised value with those types of credits?

Well Dennis, that's a tough question to answer on a conference call in terms of breaking those numbers down. I think that most of them are in our target market area, I can tell you that. We do give a breakdown down below of where our business is. But I'd have a hard time breaking that down for you right now on the conference call. I apologize, but we can gather some data and maybe try to present it better next time around, but I think some of it is -- some of it's legacy stuff, older stuff, some of it's new stuff that's coming on the books. The rebound real estate.

Right now, it's not so bad to be lending in the real estate side to people who are buying stuff at 50, 60% of replacement cost or market value and lending them 50% on that. So it's obviously some new, some old. We pulled back in 2006 and didn't do a lot of this stuff. When we did it, we did it very conservatively. So I'd have to dig in pretty deep to figure out individual by individual because I can't answer the question right now.

Well, the only thing I would add is I think we've said this before, I mean, sometimes you have multiple notes to people and we track these things loan by loan and note by note so how do you group and the like. But generally we're not -- some banks in town here have gone out and done 40, 50, 60, $70 million types of deals. Clearly we have the capacity to do that but generally that's not what we've done. I mean, we generally don't like to do any loan over $20 million. We don't have that many that approach that during this cycle. So most of them are $10 million below. And a lot of them are 2, 3, $4 million loans. So to come up with an average size and the like, we could probably work on that sort of by relationship but for a future earnings call.

We certainly have all the data. It's just how you categorize it and summarize it. But they're not big chunks. They're just not huge pieces. It's very manageable. It's spread out around the Chicago metropolitan area, generally, and Southern Wisconsin with town bank. But we're not doing a lot of that stuff around the country like some other people have done. This is in our backyard. We understand the properties. We understand the market values and they're bite sized chunks.

Sure. That's the kind of flavor I was looking for. Thanks. And Ed, you commented on the OREO and your dispositions slowed down a bit here in the first quarter. What's the pipeline look like for -- with the OREO properties? How quickly do you think you can run down those balances?

Well, as quickly as we possibly can. I think we had $10 million run off in the first quarter. I would like to see those numbers up higher, obviously, and there are a lot of things in the works to make sure that that happens. But we need to continually push the flow of assets through this process and get them out the door. We have not changed our approach to say we're going to sit on them for three years or four years and wait for the market to turn around. We still are actively looking at liquidating this stuff and moving it through the system.

So we would expect to see over the course of the year a lot of them out of here by the end of the year. And probably ratably over the course. Just depends. Other stuff's got to move through and go in there and kind of flow through, but I would hope that the majority of it of what you see right now would be out of here by the end of the year.

Okay. Good. Thanks for taking my questions.

Our next question comes from the line of [Emlon Harmon] of Banc of America.

Good afternoon, guys. Thanks for taking my call.

Sure.

Had just a couple of questions on the deals. I know you guys are still working through the financials but do you have maybe just a sense of what the impact of the two deals are going to be on your capital ratios? And then I was also just hoping you could provide a little color around the customer base you guys acquired there in terms of both the loans and deposits.

Obviously, the Lincoln Park one was less than $200 million, and a substantial portion of that is covered under the loss share where the risk based capital is going to be 20%. If you look at that deal, it's really not going to eat up much capital at all, and in Wheatland it's in the $300 million to $400 million range. We'll see where the final balance sheet comes out. But again, the majority of that, the loss share covered a little over $300 million of that. So 20% risk weighted, again, it's a small charge.

As Ed said, we're not really talking about the bargain purchase gain because you really have to work through those numbers and pin it down and we just don't want to put the numbers out there until we finish the final, final valuation. We certainly have an idea. That will provide some of the capital against it. When you net it all down, there's not that significant of a charge there on capital.

It's basically capital neutral at the end of the day. It's not really going to materially move your numbers one way or the other.

As far as the market goes, Ed talked -- Lincoln Park was on the north side of Chicago, actually right across the street from where Ed and I used to work. We understand that market very well. It was an S&L so it's got a fair amount of residential real estate and then what got a bank like that in trouble is the real estate development. So we have guys that understand that market very well. The customer base is fairly loyal. The cost of funds is fairly low. And we think it's an area that we can really grow off of.

It was an old mutual so they never really grew or took advantage of the market that they were in. They grew a little bit and they just were kind of happy where they were. This is a very fertile market. The city of Chicago has a number of neighborhoods, 44, 45, 50 neighborhoods. This is really in the middle of kind of the north side neighborhoods, something that we can build and expand off of and we know how to bank those markets.

We've had a plan since 2006 of how we're going to move into the city and we believe we can handle this like we have other transactions and really move into these different neighborhoods of Chicago and build a very, very strong base. Lincoln Park probably had on the right hand side of the balance sheet was an extremely solid franchise, good, loyal customers, exactly what you would like and we will build off of that and I think we will do very, very well there.

The Wheatland Bank, Naperville is probably, what is it, the second biggest city --

Second or third.

Second or third biggest city in Illinois. It's long and narrow so it's a hard city to kind of bank appropriately. I think it's nine central business districts. We're in the far south end of. Franchise not as good as the Lincoln Park franchise in terms of the right hand side of the balance sheet but it's an entry for us into that market and we intend to branch out and really over the next couple of years to really -- to branch out north and to service every one of those markets, those central business districts and markets that are there. So the Lincoln business, to summarize, the Lincoln Park franchise, strong, very buildable. The Wheatland one, will take a little bit more work but it's a much bigger town that we have to deal with.

We always wanted to get into Naperville. It was a fairly expensive market to get into. As you move north, once you get to the north end, then you hit the Southern part of our Wheaton Bank's territory. Wheaton Bank is our subsidiary that bought that. So it will fit in nicely. Is a great community, lots of growth potential and it's really -- that one's really more for the growth potential and the entry point into Naperville than as much as the existing franchise. That's a huge market. You can grow it much bigger than what it is right now.

Okay. Great. Thanks. And if I could also just one follow-up. I didn't notice it in the press release, but just what were the NPA inflow trends for the quarter?

We didn't disclose that. We'll have to do that going forward. Because I guess that's a question that comes up quite a bit. Obviously, the percentage went down, the NPAs on the commercial side stayed relatively flat but some of that you can tell what went into OREO and what got charged off and without giving a direct number, directionality wise the offset to that is going to be the inflows. We'll add a table next time that details it out.

That would be great. Thanks for taking my questions, guys.

Our next question comes from the line of Stephen Geyen from Stifel Nicholas.

Good afternoon. Ed, maybe a question or -- you mentioned loan growth opportunities in C&I, niche markets. Are there opportunities in commercial real estate or are you stepping back in some of the commercial real estate loan categories or is it really loan specific?

It is really loan specific. It's obviously not like it was a couple years ago. But the rebound real estate market as we call it is still there. There are people that -- there's a lot of money going in to buy some of this distressed stuff that's coming out. If a buyer can get a property at 60% of replacement cost, and you can lend them 50% of that, and he's a strong, liquid borrower, we're doing that all day long. So there is a good opportunity in the rebound real estate area that we are playing in.

There is opportunities and believe it or not, you guys will all die on this, in our market areas, home construction, not tract sort of things but individuals buying houses and building, there's no place else to get that right now. Good customers are building houses and we're doing that too. It's mostly rebound real estate and customer oriented stuff but the valuations right now and the advanced rates that we're applying to it plus the rates you can get on it when you do it, we're still in that ballgame.

The mortgage banking, the loss indemnification, are you ahead on this, or is it just too granular, or maybe too many verticals in the loan documentation to estimate future exposure.

What we understand happened is that a lot of the big guys including Freddy and Fannie hired consultants to come in and pore through their portfolios looking for nits, nats, dips and dots and real issues too and they've come and they tried to back up the truck. We didn't play a lot in that game back in those vintage years. But there's been a flurry of activity where the putback's kind of picked up and I would expect them to fall off relatively soon. We think we're ahead of it in terms of how we provisioned for it. But I think it's going to be a phenomenon to -- a lot of this stuff that comes in really has no merit. Some stuff has merit. We'll stand by our word but some of the stuff has absolutely no merit and we're not going to be chumps on this thing.

We're ahead of the game. We think it will play out over the next quarter or two and there really won't be anything to go back and moan about. None of the putbacks we've had to date have come from vintages outside of that and nor would we expect them to. Really coming from the old hey day if you will.

Just an accounting question. How would the equity appreciation instrument, provided the FDIC treated it if it's paid? Is it a non-interest expense?

It's contingent purchase price, netted against the overall settlement and the capitalization of goodwill or negative goodwill.

Got it. Thank you.

And our final question comes from Mac Hodgson from SunTrust Robinson.

Couple questions. One, Ed, on the pipeline. Just trying to get more color on -- is that predominantly loans that your new hires are bringing over from their old shops? Most competitors in the Chicago market indicate the demand is really weak. Just trying to get more color if there's organic opportunities out there that you guys are missing and you guys are going after or if it's just market share shift.

Market share shift. Some organic opportunities but mostly market share shift. I think that's a fair way to assess it.

Got you. And just following back up on the FDIC --

By the way, if I may, the new guys are bringing in business, but the banks themselves are actually generating business also. I mean, being in business, lending, being in the shape we are, we're out actively looking for business. So it's not just the new guys, it's kind of system wide. and thirdly, the niche businesses are going fine also. The life insurance business, dollars were up. We expect them to be up again the next quarter.

Again, we're monitoring that one-third, two-thirds thing pretty closely but the life insurance business is doing pretty well. There's some other niche lending opportunities that we are looking at that could be very fruitful for us. Again, it's starting up the engine for the asset-driven growth strategy that we employed so successfully before.

And on the M&A side, how large an institution would you look to take over in an FDIC assisted deal? And then how do you feel like your infrastructure as a Company is set up to handle multiple transactions?

Second part first. I think our infrastructure is set up extremely well, I think better than most. We just bought two banks and 13 of our banks, didn't affect it one bit. Two of our banks are working with the holding Company staff on the integration of those and bringing those involved. Really, we're able to integrate these things without a lot of disruption to the system. Really good folks that have come in and making -- tying the strings together to make the simulation and transition work. So it really does not stress our system much at all to acquire and bring these on-board. It's actually exhilarating.

We had 24 hours notice on this within and I couldn't have been prouder of the way our staff handled it, jumped to the occasion, routed the field and handled it and really did a marvelous job so I'm very confident in our ability to assimilate these deals and not put any stress on the system. As to the size of the deal, we're not going to limit ourselves. If things make sense, we look at them. And the smaller deals, if they give us footholds and they're strategic, we'll go ahead and look at them and do them. But we're not going to be stupid in our bids. We're going to be very disciplined as we always have been, and make sure that we get them on our terms, and then the cultures are right that we can grow them and make something of them once we get them.

Maybe one last one. On the credit costs I think, Ed, you mentioned that maybe provision was a little bit higher than you would have liked or thought this quarter. How does your outlook for credit look? Do you think it will be lumpy, as well as OREO costs going forward.

I think it will be lumpy, but I certainly expect it to come down. As I said, this isn't over yet. We will deal with the issues as they come along. We still are dedicated to pushing this stuff out. It came down this quarter. I would expect it to hopefully continue to come down. At least by the end of the year, to have most of this stuff behind us and we'll see what happens, though, but it could have a W, all sorts of things could happen. We certainly would like that to happen.

I kind of look back and say our strategy through this whole thing to take advantage of these dislocations and have these gains to cover these costs, even though a lot of analysts take out the one side and leave the other side in like they're going to be there forever. That was our strategy all along was to cover that and to build the core and to be able to move out of this very quickly. The good news is, if we get our core earnings up, we can absorb anything credit has to throw at us. Additional deals, could bring additional bargain purchase gains, additional dislocated assets could do the same, where we have these one time sort of gains and the idea is to offset these one time sort of cycle losses, and we look for those all the time. I'm hoping that barring a W, that we can continue to show good progress bringing the numbers down. We're dedicated to doing it.

And if you ask our people in the managed asset division, they'll tell you that I'm a bear when it comes to this stuff. So I'm all over it. I personally meet with them once a month or more and go over every deal we're working on and how we're getting out of it and what we're doing. So it's really top on my mind as to clear this balance sheet out and at the same time kind of getting excited about getting back into growing and building the franchise like we used to do.

Okay. Great.

I think one more call I think from Peyton Green.

Our next question comes from the line of Peyton Green with Sterne Agee.

Thank you very much. Question for you. Just wondering if you could comment maybe on how the financial condition of your customers looks . I guess everybody's had some time to adjust to the cycle. Certainly with lower carry rate on most of their loans. What are you seeing any signs that their balance sheets are getting better or their revenue generation is getting better or is it still pretty flat?

All depends on the industry. On the C&I business those who have pulled through and survived are starting to kick it in. A lot of other guys were in rope a dope like we were in other industries and you see things picking up. You see the mood picking up. You see everybody feeling a little bit better. Unless of course you're in the real estate business, and if you're on the long end of the real estate business and have been for some time, you're still fighting it.

There's still a lot of money on the sidelines but there's a lot of inventory that needs to be cleared. You're getting close to a bottom and you're starting to see bids actually starting to come up a little bit on these but it's spotty still. Money's still on the sidelines looking for a bottom. So all in all, people are happy to be through it. I think that it's such a psychological thing as people talk about the economy expanding and talk about better things, people feel better and they start doing more things. But the guys who survived are coming out pretty strong and they're doing well. The weak guys have fallen by the wayside and so we are seeing a better mood out there unless of course you're long dirt and your tank is getting empty.

Separate question, in terms of the yield, on the premium finance receivables, what's the difference or what are kind of the current market yields on the PNC stuff versus the life?

Well, if you get in on the PNC side with late fees and everything else you're north of 6%.

Yes. The market's competitive. The old days, you were prime plus 4 on that business in terms of yields plus late fees. Funny thing, the late fees have not grown. Would you think they would pop up to that 2% or 2.25% that you see in distressed times. People are paying their insurance. They don't want to lose it. Those numbers have not come back to where they were a couple years ago which is surprising because that's economics, driven economically.

The aggregate yield on that business has come down a little bit also. I think it's a function of the market has gotten competitive. We've had in the old days insurance companies or someone else owned our competitors and unfortunately now other banks own them just like banks always do, they're screwing the market up by trying to buy a lot of market share and drive the rates down.

We're holding our own. We're doing fine. Our volumes are very good. We certainly would love a hard market, average ticket size is still down in the low 20s when normally it's in the 30 or 35 range or in the 30s. So some built in growth there some day when that market turns. On the life insurance side, our AIG was probably doing in the LIBOR plus -- this is a couple years ago when they were big in the business before we acquired it, they were doing --

They were one year LIBOR plus 190 is really where we bought their portfolio at but that was -- that's what we thought was below market. Part of this accretion that we had was to bring it up to more market driven rates.

That's what I'm just trying to understand.

We're offering the product that they were for the prime plus 0.5 to prime plus 1.5 sort of range depending on the borrower and the situation there so we have raised the pricing on there to more of market pricing.

And generally upfront fee too that gets amortized or accreted in over time. We'll charge them that interest rate plus collect a fee up front.

Okay. Great. Just in terms of the landscape and doing FDIC assisted deals, do you think there's -- will there -- do you look at it more as a way to extend the footprint or are there opportunities to maybe build up some of your separately chartered smaller franchises, which is more important I guess?

Well, both, really, because when you buy -- you do an FDIC deal you don't get a charter so we're going to have to hook it on to somebody. So it will be expanding our existing franchises but normally in new market areas. If you did a larger deal there might be -- who knows what's coming down the pike but there might be some overlap where you would be able to close branches and the like because you cover it but we like to do it from a strategic standpoint, and get into areas where we're not and build them out. That's what we do best. If we don't build them out that way, and so a big bank goes in and buys it or somebody else comes, we're probably going to get to it eventually and we have to do it de novo.

We're really excited about the aftermath of the FDIC deals because if this holds true to past cycles, any number of exhausted, tired individuals and banks are going to walk out of it and really want to link up with people who they can keep their job but they don't -- they're going to be beat up pretty bad and that really is a very good opportunity for us to build and grow because I think as an acquirer you go into FDIC deal and it's all numbers. You go into a deal like this and as an acquirer, our culture, our style, how we run the bank is a lot different from the guys who come in and strip them down and commoditize them. So we're excited about that next phase in terms of expansion opportunities. But we're going to play this phase out while it's here.

Okay. But I mean, the life back bank deal, that would be more 2011 or is that sooner do you think?

Which deal?

The potential for life backs, is that more 2011?

The fatigued banks?

Yes.

We're talking to them now. There are some fatigued banks that maybe aren't fatigued but more in hospice when you go in and look at them. You almost think you might as well wait until they go FDIC assisted. But we're talking to them. If it's a bank you can get your hands around, these guys may just want to ride your stock up.

Now, obviously we're focused on the FDIC assisted ones right now because there were so many in the marketplace here recently. But we will talk. We will listen. And to date there really haven't been fatigued ones that were just fatigued. I think 2011, it will be active but that doesn't shut down 2010.

Okay. And then this is going to be a hard one to answer, but I'm going to ask it anyway. Do you think the odds another AIG-like purchase from a specialty lending perspective, or an FDIC assisted situation.

I don't think we'll ever find -- never say never. I think that was our one shot in a lifetime at that.

With the $1.2 billion in liquidity, I mean, it just typically these -- the FDIC assisted deals bring their fair share of liquidity too. It doesn't necessarily help you from that perspective.

Exactly. I would probably focus on smaller type of dislocated platform purchases but something that we can build on. So -- and the concept of additional FDIC. I mean, your guess is as good as mine. We've never walked into a bid where we didn't handicap ourselves, maybe 25% chance of winning it because we think that that market is going to be competitive going forward and has been competitive. So do I think we'll get another one? Yes, I think we'll get another one. Do I think we will find other dislocated assets? Yes, I think we'll find them but not in the $1 billion range.

Okay. Okay. Great. Thank you very much.

I'm showing no further questions.

Thanks, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.