Wintrust Financial Corp (WTFC) 2010 Q3 法說會逐字稿

Welcome to Wintrust Financial Corporation 2010 third quarter earnings conference call. At this time all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded. Following a review of the results by Edward Wehmer, Chief Executive Officer and President, and Dave Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session. The Company's forward-looking assumptions are detailed in the third quarter's earnings press release and in the Company's form 10K on file with the SEC. I will now turn the call over to Mr. Edward Wehmer.

Good afternoon. As indicated, Dave Dykstra is here with me, also Dave Stoehr, our Chief Financial Officer. As always, we'll go through a general, I'll take you through a general overview of the quarter. Dave Dykstra will talk about some specifics. He'll turn it back to me for kind of a summary and maybe a little bit of a look forward and then we'll have time for questions. In the third quarter, Wintrust had earnings of $20.1 million, or $0.47 a share, up from a second quarter this year 88%, but down from last year. As you recall on the third quarter last year is when we closed our AIG transaction, where we purchased the life insurance portfolio and had a $113 million bargain purchase gain. So we weren't able to find another one of those this quarter, but I think we did okay.

But -- so anyhow, core earnings were really flat quarter to quarter, really as a result of our margin going down a bit. And that's the first thing I'll talk about when I go through the major components really and the numbers and the major trends and the numbers. Our margin, which I think we did a pretty good job of highlighting the change on page two of the release, went from 3.43% to 3.22% this quarter. Liquidity was 14 basis point decrease in the margin, less life incretion as prepays on the life insurance loan purchase was 10 basis points, the sale of certain CMO securities in the quarter was 9 basis points and these were offset by a decrease in our cost of funds of 11 basis points, that makes up the difference. To be a little more specific on this, liquidity, and everybody has been reading about this, in the industry it is an issue. We don't think it's wise to be taking our liquidity long right now.

We have always taken a long-term view on every plan that we've done and we just think that rates have to go up and inflation is going to be an issue down the road, as the only way out of all of this government debt is inflation, doesn't appear the rates are going to go down materially, so we are keeping short on that side and positioning ourselves for higher rates and not trying to lock in a margin right now. As I said, we've always done this is taken a long-term view of things and we don't really try to take short-term solutions to long-term problems and give up long-term opportunities. On the accretion on the life insurance portfolio, as we told you in previous quarters, this is always going to be somewhat lumpy. Prepayments were slower last quarter, but in total, the portfolio is acting pretty much as we anticipated in terms of the average life and the like.

So you will have quarters where we'll have more prepayments and some will have less prepayments, but all in all, to date, the portfolio is acting as we anticipated and as we recorded it. We did sell certain CMOs during the quarter. These were acquired in the first quarter of 2009 and were kind of a dislocated asset purchase for us. We bought $200 million worth of CMOs and we re-REMICed them so we had an A portfolio of initially of a little over $200 million and we had $0.5 million in the Z portfolio. The A portfolio yielded us pretty much 9% during the course of its life and we had recorded a $7.7 million gain on the disposition of that. And during the course of the five plus or minus quarters that this was outstanding, we recorded trading gains on that $0.5 million investment, the original investment in the Z tranche, is about $31.7 million.

So all in all, this had been a very good trade for us. It was a great dislocated asset. You might ask, well, why did you want to get rid of it. We kind of took the approach that it had run its course and people had not been able to refinance the date. It was pretty uncertain to us whether we were going to be able to refinance going forward. We thought that it would get kind of lumpy and were concerned about it, so we said you won't go wrong taking a gain. It's served its purpose and we move forward and sold that out and it was a very good transaction for us, all in all. On the cost of funds side, the cost is 9 basis points in the margin this quarter. On the cost of funds side, we picked up 11 basis points. We through continually price, we are continuing to reprice CDs. In the press release we give you a schedule of CDs repricing and we still think that there is 25, 30, 40 basis points in those.

So we expect to continue to bring our cost of funds down over the next few quarters. The outlook for the margin, page 20 of the release talks about the CD maturity repricings and what we'll get out of that and bringing those down to market rate, so we still think there's a lot of room there. We basically during this quarter probably set a base line really for where the margin is and where it's going to grow from. Again, the CD repricing will help us there. The redeploying liquidity will be very helpful for us there, too. We have very good pipelines in the commercial business and throughout our banking system right now, in terms of loan generation, but we've always considered growing the right-hand side of the balance sheet as being really growing our core franchise. And we have all sorts of opportunities in that area, both through core growth and through acquisitions possibilities going forward. We are not going to take a short-term solution here either.

If there is a transaction where we pick up excess liquidity or we can grow more, but grow the core of the franchise and have some short-term excess liquidity, we will go ahead and do that. We really think that adds value to the organization. It might hurt us a little bit in the short term, but rates are going to turn and we'll have a stronger franchise when that happens. On the loan side we did grow $219 million in loans during the quarter, but again, deposit growth was $337 million, so we didn't make a dent in that $1.2 billion of overnight money. But that being said, it's still our goal to do exactly that, is to redeploy that liquidity into earning assets, but if we can continue to grow the right-hand side in good core growth, picking up households, picking up good core customers, we think that adds value to the Company, to the franchise value and to the long-term value of the Company. So it is our goal to make headway on redeploying liquidity and that's where we're going forward. Moving on to -- let me make sure I covered all of that.

A quick word, I know a hot button these days is on mortgage put backs. The current industry is it's really the industry's current hot button. Let me just set the stage for our position in the mortgage business during the go-go days. We only participated in the go-go days for three or four months in the subprime kind of goofy type mortgages and as such, we would expect the potential problems coming from that would be mitigated by the fact we weren't in the business that long. We did see a spike in the number of put backs earlier in this year, but the numbers really returned to kind of normal in the past few months. They're always going to be put backs in this business. We -- during the beginning of the, when we saw them, we have a very robust process in terms of setting our reserve levels, both specific and expected claims going forward based on business and during the early part of the year, when those peaked up, you can look at our numbers and see that we built a, we spent, expensed a lot of money building up those reserves as a result of that.

Today we have globally settled with two providers, so we don't, nothing will come back from them and we're dealing with the rest of the fellows on a flow basis. Our average settlements have ranged from $0.19 on the $1.00 to $0.30 on the $1.00 to date that's come back in. We'll stand up, if we have a problem, we'll stand up for it, but many of these put backs are people trying to back up the truck and catch you on technicalities that really aren't right. So our people do a very good job of negotiating that all the way through, so we have a reserve set up right now that's close to $8 million and we continue to add to that reserve based upon our flow and as additional -- if we see a spike in the number of put backs, then we will add to the reserve for that, but we think we have our arms around that, we're working the flow, we're settling things on a weekly basis, so the flow is running through and again, the flow has kind of come back to normal, so we feel pretty good about that, but who knows in this crazy market.

On the credit quality side of things charge-offs were $21 million and we booked provision around $26 million. Reserves stands at about 120 of loans outstanding. Excluding covered assets, our nonperforming loans stayed about constant. And our OREO is down about $10 million. We continue, as we have, to work to identify assets and push them out as fast as we possibly can. We're of the firm belief that your first loss is your best loss and we will continue to do that and as one of our major objectives and we haven't strayed from that. We keep hearing -- to those people who say our credit quality is too good when you compare it to the rest of the Chicago market and people expect that there's going to be another shoe to drop. I would ask just that consider the following. All banks in our market are not the same. We pulled back on the lending side in our rope-a-dope strategy, probably in 2006, two years before this cycle really took hold.

Our portfolio is much more diversified than our local market competitors. We have $3 billion, close to $3 billion in premium finance loans that have had a terrific performance so far. Our $1 million, $1 billion in home equity has had very good performance. We have $2 billion in commercial. We have a diversification in our portfolio that other banks don't have and, as such, we've been able to avoid a lot of the issues just because we don't have the concentrations that they have. We've been through two regulatory cycles and any banker will tell you that the regulators are really diving deep right now and getting down to the bone marrow and doing their job and we've come through those. Historically, if you look back to our 18 years of existence, we've always operated at statistics that were 30% to 50% of the peer group. Even in the good times, we were 30% to 50% of the peer group because of our conservative underwriting standards and because of our diversified portfolio. We believe that that adds into the thinking and the rationalization that people should look at in terms of where we stand in terms of our credit quality.

Our risk rating system is very robust. It's validated by independent reviews by regulatory exams, by auditors, and the boards and management, too. By having 15 banks and having boards of directors who look very closely at credit quality in their individual banks, we're able to bring the materiality limit of what we look at to a level that I would say other banks probably can't do. So we have a lot of eyes looking at the portfolio, validating it, challenging it, looking at our rating system, so I think that that should give some people some comfort that there's not one big shoe waiting to fall. But all of that being said, we're not out of the woods yet. This cycle is still going on. There's still lots of stress in the market, as I referred to last quarter. It's now really the good people, the people who really have tried to work with you and who are just running out of gas. We had $40 million in new inflows in nonperformings this quarter.

We were able to stay ahead of those and push them out. But I tell you, about half of these came from loans that were current and they weren't current because of interest reserves. They were current because the borrowers were able to keep them current, but they show up, they are working closely, they run out of gas, and you have got to deal with the issue. So to try to bring any sort of predictor, it gets kind of hard these days, because a lot of these things are just coming out and people are just throwing up their hands. So we expect this to go forward. We expect to stay ahead of it. We expect flows to stay higher than we would like for some period of time and we just have to stay ahead of the game. A word on TDRs. It's my favorite subject to rail about. Some analysts I've seen out in the market are placing these in nonperforming and I just don't understand it. They are performing.

If they're not performing, they go into nonperforming. If they are performing, they're not non-performing assets. It so really -- I think it's misleading to do that. If they're bad, we move them into bad assets ASAP. Maybe they are a precursor to that nonperforming loans, maybe they're not. These rules are so nebulous and convoluted and they're getting even more nebulous and convoluted. You see how they're changing these things. I'm going to borrow a line I heard today. I think this makes about as much sense as a soup sandwich. The rules, if you -- now they want you to say if -- could this borrower have gone some place else. Well, how do you know? So as a result, I think that our TDRs were at $60 million and we're up to $90 million.

That number is going to continue to grow as we continue to work with borrowers and push credits through and try to keep ours in line, but if you want to give a good borrower a good rate, that he probably couldn't get some place else, if he's a good borrower and he's performing, that becomes a TDR. And it's not all A, B notes where you've charged off part and you haven't -- there's good credits if there. If any of you ever go to Catholic school and had the nuns, they're kind of , TDRs are kind of like limbo to me. Limbo, it's not good, it's not bad, it's someplace in the middle and they don't know what to do with it. I think that that's kind of the only way to look at this sort of thing. But the fact of the matter is, that as you work through this cycle more and more TD, we will have more and more TDRs and I would suggest that you not look at those as any sort of precursor for what's going on in the credit portfolio itself. A couple of more issues just to go over on a general basis. Status of our FDIC deal is done to date. The assimilations have really gone better than we expected.

Our purchase assets division, who is in charge of collecting on the covered loans, are making very good progress. They're ahead of schedule in terms of what we projected for both the time to resolve and the resolution amounts. We have converted systems for two of those banks, the third will take place in the first quarter of next year. In the Lincoln Park situation we're starting to market this quarter. There's 60,000 households within three miles of our branches from that organization, so we intend to start marketing and marketing that hard. In Naperville you may have seen that we acquired a branch. It is a good size, almost 5,000 square foot branch that will be the headquarters for our Naperville operation. We have converted Naperville and we will commence marketing in the fourth quarter there. Naperville is great market for us.

We're looking at doing further expansion in Naperville, but we will start marketing in the tried and true way that we always have. As all of you who have been -- known us for a long time know that our goal is to move to one or two market share both in households and deposits in relatively short order and that has not changed. One other point I'll make is really on the capital side of things. We believe our capital ratios still remain very strong. They're above the levels that are required and, quite frankly, no one has ever, in our 18-year existence, has come around and said that you need more capital, you need more capital. We've always been good stewards of our shareholders capital. We intend to continue to do so, but our capital position is strong and is helping us as we continue to grow and expand and take advantage of the opportunities that we see out there. And I'll comment on a lot of those opportunities after Dave Dykstra goes through some specifics on the numbers. Dave?

Thanks, Ed. As I normally do, I'll take a quick spin through the other non-interest income and non-interest expense categories. Have to spend a fair amount of time on the margin and the provision for loan losses. As far as the other non-interest income categories go, our wealth management revenue totaled $9 million in the third quarter of 2010 compared to the $7.5 million recorded in the third quarter of last year. This represents a 20% increase in that wealth management revenue. As compared to the prior quarter, the second quarter of 2010, wealth management revenue stayed virtually flat with a slight gain in the brokerage level and a slight reduction in the fees from managed assets due primarily to market value fluctuations, but over time we're seeing nice trends in that business and continue to grow our customer base.

Mortgage banking revenue was up substantially in the third quarter of 2010 at nearly $21 million compared to $8 million in the second quarter of this year and $13.2 million in the third quarter of 2009. We give a fair amount of detail on page 25 of our earnings press release, as far as volumes of loans originated, mortgage servicing rights, and the details of the components of our mortgage banking revenue, so I direct your attention to that for additional detail. If you look at that you will see that the percentage of our mortgage banking gains relative to the volume of loans that we sell into the secondary market has been increasing recently as we've realized better pricing as a result of the Company using some mandatory forward commitments versus all sales being best efforts and we do have a little bit higher mix of our business being retail than wholesale.

We did state in there the pipelines are strong and the rate environment is such that we expect to have another strong quarter in the fourth quarter for mortgage banking revenue and looking out much further than that, it sort of really depends on some of the government actions as far as interest rates and just general market rate conditions, but right now that business is strong for us and we expect it to be strong into the fourth quarter. If we move on to the gains on sales of securities. The gains in this quarter are primarily represented by the gain that Ed referred to of selling our CMO products that we had bought in the first quarter of 2009. We do provide some additional detail on that transaction on page 10 of the earnings release. We did sell the entire portfolio of those CMO products that we bought in the first quarter of '09 and we no longer have any of that investment left on our balance sheet.

The bargain purchase gain of approximately $6.6 million relates entirely to the FDIC assisted transaction for Ravenswood Bank that we completed if the third quarter. We do continue to evaluate FDIC assisted transactions and will continue to bid on those offered banks when they make strategic sense and we will do so in a disciplined manner. There are really no other items of significance in the other non-interest income that I'm going to address on this call. As to the non-interest expenses, salaries and employee benefits increased to $57 million in the third quarter of 2010. That's up from $50.6 million in the prior quarter of this year and approximately $4.4 million of the quarter over quarter increase relates to bonuses and variable rate commissions. As I have discussed in my prior remarks, we did see significant increases in our mortgage banking revenues and some increases in the wealth management brokerage revenues and those are commission-based, variable pay business lines and as the revenue goes up we see the corresponding increase in our salaries and employee benefit lines.

We also saw some increases in the other salary categories related to increases as we've added the staff from the recent FDIC assisted transaction and as we continue to hire commercial lenders and other staff to support our continued growth. Non-interest expenses also include about $4.8 million of OREO related expenses. This is a decrease of $5.5 million when you compare it to the $10.2 million recorded in the third quarter of 2009 and a decrease of $1.1 million if you compare it to the second quarter of this year. These costs include all the costs related to obtaining and maintaining and selling OREO properties. So that number can fluctuate a little bit, but we have seen it decline here a little bit. We're active in marking our OREO portfolios to market and we think we have a good bead on where those valuations are.

There are carrying costs and occassionally we do sell some of those that are slightly below the market value we had and occasionally we sell them at slightly above the market value. So that number can fluctuate a little bit, but it has declined compared to the prior quarter, the link quarter and the sequential quarter. Other than that, if you go through the line items of other non-interest expense you didn't see any significant changes that I think are worthy to note here. There are some increases, slight increases in some of the categories, but generally that relates to the growth. We have got the three FDIC assisted deals that we have added this year and we have added staff to support the growth and that comes with other miscellaneous operating expenses, also, but generally the other costs were in line. So with that, I'll turn it back over to Ed and he can finish up and then we will take some questions.

Thanks, Dave. In summary, I think we talked about the margin ad nauseum, but we think we've set a base line there for something you can work with going forward and there will be margin expansion going forward in the -- due to decreased cost of funds and liquidity redeployment. There's lots of opportunities in the market right now for both core growth and acquisition growth. We -- on the acquisition side, it's in all aspects of our business from wealth management to specialty finance to assisted and unassisted bank deals, and the mortgage side of the business. They're lined up like planes over O'Hare and we are awfully busy around here right now. That is not to say anything is going to happen or not happen, but it's just a very interesting time and it's what we anticipated. And you have got this part of the cycle, the dislocation of banks and other companies looking for homes is -- it's kind of interesting. It's happening a little bit faster than you may anticipate. As always, we'll be very, very disciplined and strategic in how we go after these and look at them.

They have got to make sense for the shareholders and make sense for us and they'll give us an ability to give us platforms and markets we're not in to continue to grow the organization. We continue, as I mentioned earlier, we do take a long-term view on what we do. Some of these potential transactions they may add liquidity to our market and they might cost us a little bit, but long-term you're going to have a franchise value that will far exceed any short-term costs that we may experience as a result of excess liquidity. This is really is what -- this environment is what we expected when we went into rope-a-dope in 2006. We expected the dislocation of people, dislocation of assets, and a dislocation of banks. We're see - we continue -- we don't see the asset side as much as we used to, that shut down much earlier than we had ever anticipated. From the people side and the bank side, it's still very interesting times for us. We're well positioned to take advantage of these.

I think our -- we've been able - we've earned money. We've been profitable throughout this cycle. We have adequate capital to execute these, if they do come along, and it's like in our presentation, you may have seen it, we feel like Forest Gump after the hurricane, we have the only shrimp boats left in town. So we're excited about where we are. We'll continue to focus on increasing core earnings and getting bad credit out of here as fast as possible, and like I said, we're excited about where we are right now, we're excited about our future, even though there's clouds, as we're not out of this thing yet, and there may be some lumpiness along the way, but like I said, I think we're very well positioned to go forward and continue to grow this franchise and return to shareholders. So, with that I will turn it over for questions.

(Operator Instructions) And our first question comes from Jon Arfstrom with RBC Capital Market.

Good afternoon, guys.

Hello, Jon.

Ed, I was going to ask you about TDRs, but I decided not to.

(laughing) No, go ahead.

No. A couple questions on C&I growth. We've talked about this on previous calls and I just want to go back to this again. Are you seeing the growth in just the downtown office or is it starting to broaden out into your other franchises?

Predominantly downtown office, but it is starting to grow out. We are embarking on a, really, it's an exciting new approach to how we're going about this and that throughout the system and the philosophy of the downtown guys. And remember they came from probably the preeminent middle market commercial bank ever in the city of Chicago. Some people might argue with that, but I think that most would agree that that's the case and their methodologies and style is something that they've been able to get their crew together downtown right now, get the ball rolling, but most of the calls to date have just been inbound. People wanting to come and follow their lenders or glad that they're back in and being able to support them in a culture that's more conducive to their business.

But starting in December and going forward, this philosophy -- we've already actually kicked it off, but we haven't kicked off the active calling part of it. This philosophy is being pushed down to all of the banks. And we have gone through every middle market customer or prospect. We've divided them up and there's a real rigorous coordinated calling process that -- it's going to be relentless. You don't get them the first time, second time, we're going to in front of everybody who we want to be in front of. What I really like about this process, Jon, is that we're selecting the guys we want to go after. We're not going out and making cold calls to people who we're going to get in and then go we don't want them.

This is a very selective process that we're going through and we intend to dominate that. And that's all kicking off in this quarter. So we're excited about that. The growth to date has been good, as far as we're concerned. They're ahead of where we had planned them to be, but we think going forward with this philosophy and with this coordinated approach that's been tried and seasoned, tried and proven by these fellows, that we're going to really make some hay.

What would the guys that say Lake Forest or Hinsdale or Libertyville or one of your other banks say if we asked them the loan demand question? Would they say it's firming up?

Depends on the bank. I think you would probably get three different answers from guys depending on where their markets are, but the new loan growth throughout the system, pipelines throughout the system are very strong. Our turn down rate is probably in the 50% to 60% range, just stuff we're not -- we're not going to sacrifice credit quality right now, in any way, shape, or form, but still being, sticking with our conservative credit underwriting standards. We have got a, we do have a higher turn down rate than you would imagine. Downtown they've probably, just to give you the downtown issue, they have probably turned down one and a half times or maybe two time the business that they actually booked. But I think across the board they would tell you that they're all very busy with new prospects. Some more than others, but the pipelines are good across the board.

Okay. And then a quick question for you, Dave, on the maturing CDs, looks like you have about $1.2 billion in the next quarter. Given all of your liquidity, is there any temptation to let some of that run off or is that something that you would like to hang on to?

Well, as Ed talked, I mean, if it is good core retail customers that are going to bring over multiple accounts with them and where we can cross sell them on home equity and residential real estate and hopefully get some people in on the retail side where they've also got a family business. We don't want to turn down that good, core, franchise building deposits, but to the extent that someone has been with us for a while and they just keep shopping us for a rate and don't open up any other accounts or something like that, then we're clearly trying to let those people walk out the door if they're just going to shop us for a rate.

So we're lowering our -- we continue to lower our rates with the market and it's -- there's just no place for them to go and we provide good service and so we've continued to see good deposit growth there. But if we can build a franchise, we really do look at this as there's earnings value and there's franchise value and the franchise value ultimately turns into more earnings value, that if we can do that in the short run that we think its worth it. Now, if it persists for three, four, five quarters, you might have to rethink your pricing a little bit to slow it down, but right now we do believe, because of the pipelines that Ed has talked about, that we can redeploy that liquidity into loans and we don't want to take a short-term quarterly view and turn away good franchise value at the same time.

Okay. All right.

Hopefully that answered your question.

Yes, that does. Thanks a lot.

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

Hi, guys. Just curious, you talked a bit about the liquid assets, certainly some will go towards funding loan growth, maybe some acquisitions. Assume it stays in liquidity assets, what might be a good average reinvestment rate for us to consider?

Well, the short end is sort of 30 to 45 basis points unless you start to extend out and we're not too interested in extending out in a lot of Ginnie Maes or Fannie Maes. One, because you generally have to buy those things at a premium and they are prepaying so fast. You don't get much bump to go out two or three or four or five years, even, and works against you as far as your interest rate positioning goes, if you believe rates are going to go up, and we're trying to position ourselves for rates going up. If we continue to invest you get maybe 30 to 50 to 60 basis points, but not much more than that.

Okay, and, Ed, you talked about the $40 million of FBL inflows this quarter (inaudible) the last quarter. Would you anticipate a change in the type or the mix of those loans, like moving to nonaccrual going forward?

I -- you know what, I think it's going to like this for a little while and I think the mix will probably relatively the same. Until you see real estate firm up a little bit, I think it's not -- it's still tough out there. And even with the conservative lending standards we employed, there's people that just running out of gas and I would expect that we want to land this like we're landing a plane and hopefully those numbers will come down.

We'd always figured we got into this thing and hunkered down two years earlier, we would be out of this thing two years faster than everybody else and kind of get the best of both worlds. Very strong core earnings falling to the bottom-line and still the ability to pick up the bargain purchase gains and other dislocation gains that can come along with it, but it's still tough out there and our challenge is to continue to identify and push these things out as fast as you can under the theory that you're first loss is your best loss and let's move on. So I would envision that your inflows are still going to be higher than we would like, but I think very controllable and hopefully our outflows can stay ahead of them and we can keep bringing these numbers down, but who knows, it's a goofy market out there.

Okay and last question. Loans held for sale up a bit over last quarter, certainly the mortgage banking certainly helped that, but just curious if you have any interest in selling mortgage loan sells and holding them on the balance sheet a little bit longer, pick up some margin or pick up a little extra net interest income?

Well, yes, and basically those loans held for sale the increase is the mortgage business. We've never really had a strong interest in holding 30-year fixed rate paper on our books. It just isn't a term that has been very appealing to us. To the extent that you've got some people that want to do some shorter term deals or some arm deals, yes, we are holding those on our balance sheet, but we haven't done the 30 years right now.

Okay. Thank you.

Our next question from the line of Brad Milsaps with Sandler O'Neill.

Hi, good afternoon. Hello, Brad. Nice quarter, guys. Just wanted to ask, maybe, Ed, on the insurance premium finance business, you guys continue to see good growth, particularly in the life segment. Just wanted to see kind of what your appetite was sort of size relative to the total portfolio in either the commercial or the life category and just kind of what your view is there for growth going forward.

Good question. Actually the dollar value of the life insurance loans has gone up as we continue to make those loans. Those are five year usually average term loans. That business is going very well for us. The P&C side, believe it or not, our units processed again for maybe probably the second or third year in a row are up in the teens. We're actually picking up market share there. The problem is the average ticket is of market is so soft, the average ticket size has come down. Usually we have a $30,000 average ticket size normally, $28,000 to $30,000 and it's down around $20,000 right now because the insurance market is so soft. But we continue to pick up market share there. As to -- so both businesses are really, knock on wood, doing pretty good, pretty well. The -- as to the concentrations in that business, we always said we had a third of our portfolio is dedicated to our niche businesses.

We are actively looking for other legs to that stool. Obviously, the two premium finance businesses, the $1.5 billion in one, $1.5 billion in the other, make up the majority of that. We do have other smaller niches that we're in. We actually have reentered the indirect auto business. As you may recall we were in that business, ran a $300 million to $400 million portfolio, ran it profitably. We had delinquencies were always around 1% and we figured fully loaded it returned about 1.25 to the bottom-line fully loaded. We pulled out of that in 2006 and we're getting back in that business. If you look at -- if Tom Brown is on the phone, we looked at his chart that showed what the impending demand is going to be for new cars, because of the obsolescence of the current fleet plus new people coming in. We said maybe it's the time to get back into that business when everybody else is out of it.

So we are consistently looking for new legs to that stool. But we -- I think that you can expect the two premium finance businesses to grow proportionally with the overall organization to a little bit less than that. We do monitor exposure to insurance companies internally on that business, also, and so we try to get very granular in looking at the exposures, but probably we'll grow, but a little bit less than the overall growth right now. And if we -- that will not make us stop in that business. If you recall in the old days, we would take excess production that were above our concentration limits and sell that off into a poor man's securitization through the old LaSalle Bank and they would then sell them on to their correspondents. We, if we got to a level where we were uncomfortable with that concentration, but the business was going very well, we would look to conduits or other type of instruments or markets to sell some of that business, but we would not by any means stop production.

Okay. And second and final question. Ed, you listed a number of likely M&A opportunities that you guys are potentially looking at out there. If you sort of had to rank in order of preference being an asset purchase, FDIC assisted deal, regular way M&A or something like else, what do you think is most likely and would be kind of what you guys would prefer at this point?

Well, what we would prefer -- we're very opportunistic and there are obviously, in each of those categories, there's triaging that goes on in terms of prioritizing which if any targets are in those categories, which are the most important to us. So it's hard to break it down whether I would rather do -- obviously doing an assisted deal at the right price in a market we want to get into is, is very beneficial to us because you get in the market without a lot of risk and hopefully you get an upfront gain on it. But there are some franchises out there that when you burn 'em down, they're -- they may just survive and they're good markets, but they're kind of, they're walking that tight rope and to us that's a very interesting opportunity to go in and be able to partner up with a good franchise that we're pretty sure has value there. You pay them for that value.

If there's a discrepancy in terms of marks, then we are not adverse to hold backs. We have done those previously in our existence and we're not adverse to that, so those, if structured properly, can be on the same level as an FDIC-assisted deal. You don't have all of the subsequent reporting on it, so that's kind of, that's offset to the unassisted deal. But you've got to be careful. You have got to know what you're doing. You have got to be thorough, you really don't want a cancer transplant, so there's maybe a little bit more risk there, so the reward would have to be substantial. On the wealth management and specialty finance side of the businesses, we're just very opportunistic.

We know, in wealth management we know we want to continue to build out our asset management capabilities and our products in that business, but you've got to have -- when we look at any sort of deal that we have control over, that FDIC, culture is everything and especially if that business, you have to have the right culture. So we would -- we're very excited about doing those two and on especially asset side, it's just very opportunistic. One of the beauties of having 23 operating companies, you have 15 banks, you have the wealth management operation and you have the specialty finance operations under one guy, if you were to go out none of these are mutually exclusive. We could do one of each of them. And what's interesting about it is we've done three FDIC deals to date and we've done it out of two banks. One bank bought two of them and one bank bought one of them.

We still have 12 other banks that have not been affected by this at all. So in terms of the capacity to pick these things up and the ability to absorb them, the only place we put stress on is our technology group and we've beefed that up substantially to accommodate this sort of thing. So we have the capacity to do more than one of these, they're not mutually exclusive and we will continue to be very opportunistic. These have to be strategic deals and if we run into one or two or three, we have to decide that whether or not we can do it. I'll tell you, there was one FDIC assisted deal that we looked at and we priced it very conservatively, because we just had some question about whether we would be able to do this one right and so we priced in some more gain. We're very conscientious on how we do it, how it affects our capacity to take it in and make it work and go on. So I would tell you I can't rank 'em, but they're all of interest to us.

Okay. Great. Thank you, guys.

Our next question comes from the line of [Steven Senecarillo] with Macquarie.

Hi, guys

Steve, how is life on the dark side now?

It's good, it's good. Thanks for asking. (laughing)Just a quick question for you. On the accretion on the life insurance premium finance portfolio, I know it cost you 10 bps this quarter due to the slower prepayments and I was just wondering if you could give us a sense of what are the key drivers of the things that slow down the prepayments, just so I can model this better going forward. Thanks.

Well, I'm not -- the reasons that you have, there's a number of reasons you have prepayment. Sometimes people mature, as they say in the industry, or die and certainly we can't forecast that. Some people may have another installment coming due on their premium and they just may reassess the deal and decide you know what, I've got some excess liquidity and I'm not sure that I need this loan anymore and they just pay it off. Some people's estate plans change, they reevaluate them, they decide they don't need this component anymore and they pay them off. So I'm not so certain that we can predict it with any certainty, but we did do a fair amount of due diligence when we bought the portfolio going back a number of years and generally the prepayment rates were anywhere from 16%, 17% of the portfolio up to the low 20%s. So generally it was sort of five to seven years and it really didn't go outside of that range.

And we sort of looked at it and thought five years is about the right range for these prepayments and it's been tracking pretty good in the aggregate that way. But as Ed mentioned earlier, I think you're just going to have a quarter where it's up a little and then you're going to have a quarter where it's down a little, but we have no reason to believe that it's going to slow down materially or pick up speed materially in future quarters. We still believe, based upon just the history of the business over time, that sort of a five-year average life on these is appropriate and I just think it's going to be a little up and down on a quarter by quarter basis.

Yes, we're tracking to the five years, if you add them all, if you kind of look at all the prepayments to date, it's all -- this was a catch-up quarter, I think, in some respects.

Got you.

A lot of people die in the first quarter.

All right. Thanks very much, that's very helpful. Thanks, guys.

All right.

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

Hello, good afternoon. Was wondering if you could tell me how much of the personnel expense increase was related to the mortgage business on a link quarter basis?

Peyton, I don't have that number right in front of me. I know --

Peyton, the rule of thumb is 50% or 52% of the mortgage revenue. About 50%.

Okay.

Will give you a good handle for the salary side of the equation.

Okay. All right.

And clearly with, I think, the majority of what we had out there, but I don't have the number in front of me right now.

Okay. Great. And then in terms of, I mean, I guess, what has to happen stepping back a little bit longer term? I mean, what has to happen in the Chicago MSA for profitability to be meaningfully restored. I guess we look at your numbers, your all are doing somewhere between a 119 and the 165 pretax, precredit ROA and that still doesn't support the best ROA in the world in terms of generating a strong ROE and I was just wondering maybe if you could talk about how you see in the next two to four years playing out, and what that --

Oh, sure, yes. Well, I don't know where you -- we're about $200 million pre-everything, pretax, preprovision. We think in this, we'll talk about us for a second and then we can talk to the market in general, but we think if we're able to continue to execute our plan notwithstanding big inflows of liquidity because of deals that will help us in the long-term, our margin at 3.55%, 3.60%, is where we would top out in this rate environment. It's just we're playing in the red zone right now and you don't have a lot of field to work with when rates are zero, which is why we're building liquidity, trying to stay short and this relates to general populous, too.

If rates were to go up 200 basis points over a two-year period or even better 400 basis points with a parallel shift in the yield curve, you're talking about margins that are getting back in the 4.50% to 4.60% range. One of the things that this downturn has allowed us to do, you've been around long enough, Peyton, that you remember when we were growing at 20% to 30% a year, our larger banks were returning really good profits and then we would dilute them by putting new banks in, but our growth was so good that we had a premium on our stock price, we were creating a lot of value. One of the things that we've been able to do during this period of time is kind of catch everybody up, so we don't have a lot of the younger banks that are going to be dragging us down.

We've been able to kind of grow them and bring them up during this cycle, maybe shrink some of the bigger ones and get their potential profitability built up. So I think that we can -- the rate environment hurts you, especially when the you're funded like we are. We don't play the yield curve and borrow short and lend long sort of thing. We run a conventional sort of approach on our asset liability management and we are positioning ourselves, as indicated by how we are dealing with liquidity right now, positioning ourselves for a higher rate environment. That will be severe as -- not severe is the wrong word, but --

Beneficial.

Beneficial. That would be the most beneficial thing that could happen for overall profitability in the market. The other thing, credit has got to get back to some degree of normalcy. We always thought that getting in a couple of years early we would get out a couple of years early and the core profitability would fall to the bottom-line faster and we would be able to take advantage of that falling into the bottom-line faster, plus being in a position to do more deals and get more bargain, we would get the best of all world's, with great core profitability and great extra profitability coming in and not having to offset the credit side of the equation.

So from our perspective, getting credit bound into a normal, whatever normal is, but a more normal range for us would be a probably a $40 million provision every year and at this level given normal credit statistics we experienced since our existence and getting a boost in rates, but credit and the rate environment. Other than that we think we're cranking along pretty good other than that. It's just -- it's just tough right now. And we think we'll be out of credit, we have less, we're on it faster, we think, and we think we'll be out of credit sooner than everybody else. So talk to me in a year.

Okay. All right. And then with regard to the TDRs, I mean, this is something where you see a fair amount of difference in opinion or treatment on this and I guess just wondering if you could give some anecdotal commentary on how yours are different, and what -- how does one vary versus a performing loan or nonperforming.

Sure. Well, let's look at the industry first. Up until a couple of quarters ago, you had banks out there that didn't have any TDRs. (inaudible) would say how could that be? We were ahead of this game and really on top of it from day one. We're all accountants here, so don't hold that against us, but we were on top of that from day one and you can look back and see we were always recording these things. But TDRs now encompasses this broad breadth of potential restructurings or just renewals of loans. It goes from what used to be a TDR would be like if you did a, back in the good old days if you did an A-B type loan, where you said, okay, I'm going to write this off and put it back on accrual because I have restructured it so it makes sense. I've written some off. It truly was a problem credit that was restructured.

If -- but now you go to a point where Dave Dykstra walks in, he's been a customer for five years, he has got to renew his loan. His loan was at prime. Okay? And it's a real estate loan and has gone from 60% to, 60% loan to value up to 90% loan to value. If Dave Dykstra walked in and you didn't know him today, would you give him the rate on that loan? The answer is no, it's a TDR. Now he has been a good customer, never missed a payment, has got a good balance sheet behind him, but that's a TDR. It's kind of limbo. It's throwing this stuff in here and that's why I always try to make the differentiation (inaudible) that if it's bad, we're going to call it bad right away.

Even if it's a TDR, if it is bad, we throw it right into nonaccrual. If it is bad, it's bad, move it over. If it is good, then let's deal with it. It's not a problem. So I can't tell you how other people are doing it, other than the fact that many of them just really started recognizing these issues, but if it's up -- when you look at us, concentrate on what the problem loans are and that trend. That's about the only thing you can look at, the real nonperformers, because the TDRs, Dave Stoehr, you are our TDR expert, did I miss anything there?

You were perfect, Ed.

I was perfect. I've never been perfect. So I hope that answers your question.

Okay.So I guess so at the time something like that happens, do you make them make a curtailment to reduce the LTV to a level or do you give a rate concession or is it just really a function of loan to value?

No, it's like -- and now, I'll tell you, it's getting worse, because we now have to make an evaluation as to whether he could go some place else and move that loan.

Okay.

I don't know how the hell you're going to do that.

Yes, they are talking, Peyton, this is Dave Dykstra, they're talking about that in some of the FASB proposals is that if you're borrower -- you've got to determine whether your borrower went some place else to get the loan and if they couldn't get the loan, then it would be a TDR. And I'm not sure whether that will make it through the final version, but I would say most of ours are rate concessions. If the guy's under water and it doesn't look like he's got life, we're not going to make a TDR just to try to string him out, we're going to face the issue and move it on.

We have hard conversations with the guys when they come up for renewals that they have got to, a lot of them have to come up with cash to get the loan to value in line. But a lot of these are simply the guys are performing, they're cash flowing where it's at, but if you jack the rate up to 8%, 9% you just create a problem and if you renew them at the same rate or maybe just a rate a little bit above where they were, they can still make it, they can still service it and you have got a good customer that's gone out and we renew it and maybe renew it just slightly better, but it's less than what the market would be. And if that's the case, then it is a TDR. The guy has got the same rent roll, he has got the same cash flow, he has got the same servicing capacity, you have just given him a little bit of a break on the rate and that's a TDR.

Okay. But I mean to think about this, you've given him a break on the rate versus what someone else might do a 90% LTV loan, but you are not, it's not a break on your rate versus what he was paying you.

Right, doesn't have to be. It could be the same rate as he had coming in -- .

It could be a higher rate than he had coming in, but if it's less than what the market would be for that guy in a comparable position it's a TDR.

Okay. All right, good enough. And then the last question I had was just on the land loans, you all have about $263 million of those and I guess about $27 million is NVL. Then there was an allocated reserve of about $11 million. How much has that been charged down over the course of time? I mean is that $263 million -- what percent is that a carrying -- what percentage of that value of original.

Well, you mean of the $27 million whatever that's not -- you have to look at the nonperforming side. That's the only side that's been charged down.

Okay. So I mean there's no reserve to the $263 million, it would all be to the $27 million?

Well, it's built into the general reserve. When you build up the reserve you do a specific reserves and then you do the general reserve. The general allocation and the factor for the general allocation is obviously a lot higher for land loans, but if it's current and -- one of the things, Peyton, that's going on, is there's a lot of rebound real estate out there and I've talked about this in previous calls, where we're -- we may be lending money to the guy whose buying the land from some other bank at cents on the dollar and lending the money at 50% of that to real qualified people. So not all of it is vintage hay day. Some of it is vintage now, where and these are the guys that are going to make a lot of money. So if you really have to think about that, also, but the write-downs have occurred and you can, I think you can get into our Q and figure out what the write-downs have been on that, on the land portfolio.

Okay. All right. And then I apologize, this is the last question, but any idea on what you expect to see as your CRE loans mature over the next year? Do you think there's more maturity default risk over the next year or do you think it was worse in 2010?

Well, I think that, like I said earlier, I think the bad guys are out. The good guys are in. It's just their ability to -- it's a very diversified portfolio on the CRE side. No owner occupied buildings, factories, multifamilies, rebound real estate where guys are buying some of this stuff out, so I think it depends really -- it's hard to predict where it'd come from. If we think it's going to be a problem, if we look at something now, and we review this stuff constantly, if we look at it now and think it would be a problem next year, we might call the problem right now and make it nonaccrual and deal with it. So we're already dealing with -- we're diving deep into the current portfolio to deal with issues, too. Like I said before, probably 50% of the nonperformers of that flow that came on came right out of current, so I don't think -- you were talking about the market in general.

I don't think the market is getting any better. I think it's stabilized to some extent. I don't think it's getting any better. I think that appraisals now, because appraisers have 20/20 hindsight, and they keep driving -- the whole appraisal issue drives the market down in and of itself. It drives it up in good times and drives it down in bad time. They look backwards and they say, well, this is sold for X, so this must be worth X. And then when they start falling off and now it sold for half of X and now everything is now worth half of X. So it's kind of a crazy thing to, the part of that industry, but as I said earlier, I just -- I think that the flow is going to be higher than we would like. I think it will be relatively constant, but I don't know. I mean we just have to stay on top of it. What I do say with maybe some certainty is if there is a bigger spike in this sort of thing, then the rest of the industry will have a much bigger spike than us, because I think we're ahead of the game.

Okay, great. All right, thanks. I appreciate the color. Thank you.

Our next question comes from John Rodis with Howe Barnes.

Good afternoon, guys. Hi, John. Hi, Ed. I guess just on top of Peyton's question, as far as your commercial real estate portfolio, $3.3 billion, what percent comes due in the next say 12 months or so?

We haven't really disclosed that, John. We can -- we'll look at it and if we can slide that into our Q, we'll do that, but I hate to say it on a call here if we haven't disclosed it. And I don't have the exact number in front of us.

Okay. And, Ed, you talked a little bit about earlier about your turndown rate, you said it was maybe 50% to 60% today, how does that sort of compare to where you were at in the past?

Oh, higher. I think it's -- I think generally it's a little higher just because there's more people -- there's less banks, there's more people who are struggling through, so we're getting more at bats and -- than we used to get. Does that make sense to you? I mean there's just -- we've gotten a higher profile now, so we have got more people on the commercial side coming to look at us than they ever did and we're being very, very selective.

No, that makes sense. And Dave, just one follow up on the salary expense. I think you, I just wanted to confirm you said $4.4 million of the increased linked quarter was bonus and commission? Is that correct?

Yes.

And now was that primarily related to the mortgage business?

The mortgage and wealth management.

Yes, a little bit. The heavier to the mortgage side. Our, obviously, our mortgage revenues are up dramatically and that said, roughly 50% goes out in --

Compensation.

Compensation-related costs.

Okay. And then I guess the other piece would have probably been primarily related to the FDIC acquisition?

And generally staff increase. There was Ravenswood came under in the quarter. Wheatland and Lincoln Park had already been on, they came on the middle of the second quarter, so it wasn't fully loaded in the second quarter, so you had a fully loaded third quarter for those two deals and then you had a partial quarter for Ravenswood. So that's a big chunk of it and then we are growing the franchise and we continue to expand and grow and so we do add a little bit of infrastructure to support that growth.

Okay. Thanks, guys.

Our final question comes from Julienne Cassarino with Prospector Partners

Hi, what was the tier 1 common risk-based capital ratio?

Tier 1 common risk-based capital ratio is -- let me look here real quick. 12.7%.

Tier 1 common?

Common.

Oh, well -- that's just the tier 1, the capital -- I don't have that in front of me. Our TCE ratio is 5.9, the tier 1 risk-base is 12.7, the leverage is 10, and the total risk-based is 14.1. I just don't have the -- that number in front of me, but you just have to back off the preferred stock number and -- from the numerator, but I could certainly call you back with that, Julienne, if you would like.

That's all right. And the TARP -- actually, what's the amount of preferred stock that's non-TARP?

Yes, we have $50 million of preferreds, convertible preferred stock that is non-TARP.

And how much does that -- how much of that -- what does that cost per quarter in terms of net income that's not available to common?

It's a $1 million dividend per quarter.

$1 million per quarter. Okay. Non-TARP.

Right.

And what do you think the odds are of being able to repay TARP without a capital rate?

Well, if you look at our capital ratios, we have fairly strong capital ratios, but we've grown the institution dramatically since we took TARP and so we're over $14 billion now and I have to go back and look at the exact number, but we were closer to $10 billion when we took TARP, so we've grown the organization quite a bit. So we've used the TRAP to grow the franchise, grow the balance sheet, increase our loans and to a certain extent we've put some of that TARP to work. So if you were to pay TARP off, you would have to replace that with some capital in order to support the growth that you already have in place.

Or earnings, earnings can come in. If you look at the -- we have plenty of debt capacity at the holding Company and we've already raised during the year 200 and some-odd million dollar of capital in addition of that to support it. So there's lots of alternatives as they relate to that. We have always talked about TARP as when it started affecting the business or when it's shareholder friendly, we'll deal with that issue at that point in time and so we'll deal with that issue at that point in time, but there are lots of different alternatives out there that could allow us to repay it.

Okay. Your -- are you kind of maxed out on trust preferred capital? You wouldn't issue more trust preferred?

That's an option. I mean, the trust preferred we have, just as a matter of point, we're less than $15 billion when the new rules went in place so that still counts for us. Our understanding is that market is still open, it would just count as a tier 2 capital. So as we talk to investment bankers out there, they say that that market is available if you wanted to avail yourself of it, but you would have to understand that it's tier 2 and then you would have to understand how the new Basel III rules are going to apply going forward and take all of that into consideration, but we would have some capacity there.

Yes, we're very careful with our shareholder money. We've increased book value throughout this period of time. We have not tried to have our shareholders shoulder the burden of through too dilution of, like many other banks have had to do, to get through this period. We've been able to increase shareholder value and you should understand that anything as it relates to our financings going forward will be with the shareholder in mind. So -- but we do have -- there's lots of different alternatives here and we already did raise $200 million of capital this year, so we'll play it by ear and when it makes sense we will deal with it.

Okay. And how much is unearned income, if you will. Like how much is left to accrete into earnings over time with the balance?

Of what?

The balance of what?

Isn't there some unearned accretion still out there on the life insurance portfolio? You referenced the five-year time frame and it comes in lumpy. How much of it is left?

Okay. We've got a table in our press release on that. I can look on the page, but we roll it forward for you every quarter. So we've got about $44.9 million of accretable discounts that are still out there and we also have $26.4 million of what are non-accretable credit discounts that if the credit environment improves, can turn into accretable yield discount going forward. And that's on page seven of the earnings release. The thing you have to remember, though, is that that accretability discount is really related to just a purchase accounting yield adjustment, just as if you bought any other portfolio. So what that accretion does is bring those loans back up to what the market value was at the time that we bought the portfolio and that's really no different than the yields that we're getting on new loans.

So as that accretion is realized, and I'm not saying that this is the rate, but just let's say your yield was 5% and maybe we bought them at a yield less than that, if that accretion would bring them up to 5%, when those loans pay off early, I'm going to lose an all-in 5% yielding asset, but I'm making new loans at 5%. So as long as I stay in business and I replace those loans with new business at the existing market rates that the old loans are on with the accretion, there's really no degradation in our earnings flow going forward. So it's really just, that's just really a purchase accounting adjustment to bring them to the appropriate yield.

Okay. Those two columns are separate, right? There are not -- one is not included in the other?

Right.

Okay. And you mentioned $8 million of reserves set up for potential or possible put back. How does that $8 million in reserves relate to how much was sold in, say, the '05 to '07 timeframe? Like what's the -- what is the $8 million? How do I relate it? What number to relate it to?

We have not disclosed those numbers, but I think I know what you're trying to get at and I talked earlier I said that we really did not play in that market for that long a period of time. They got into it and we kind of looked and went ooph, we don't want to be in this. So I think that the specific vintages and the specific product types, we have not disclosed.

Right. And we do believe we're very well reserved on that, but for us to start giving a ton of detail would sort of play against us negotiating with the end investors, they'd know how much we've reserved for how many loans and I really don't want to negotiate against myself in a public document.

Okay. Were any of those sold into private label securities?

We don't know where they ended up.

We sell them to investors and what they do with them, I can't tell you.

Well, were they sold to private label aggregators?

Well, if you consider Citi Corp or Bank of America to be private label, we don't know what they did with them once they got them.

There is a number of -- we sold to a lot of large investors and I'm sure some of them might have done that and we -- I can't speak to what the investors we sold to did with those loans ultimately.

Right. Okay. Thank you.

All right, everybody, thank you very much for listening in and call us if you have any other questions.

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