Wintrust Financial Corp (WTFC) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Wintrust Financial Corporation's 2011 first quarter earnings conference call. At this time all participants are in a listen-only mode. Following a review of the results by Edward Wehmer, Chief Executive Officer and President, and David Dykstra Senior Executive Vice President and Chief Operating Officer there will be a formal question and answer session. The Company's forward-looking assumptions are detailed in the first quarter's earnings press release and the Company's in the Form 10-K on file with the SEC. As a remind they are conference may be recorded. Now, I will turn the conference call over to Mr. Edward Wehmer.

Thank you, welcome, everybody, to our first quarter earnings call. With me as usual are Mr. Dykstra our Chief Operating Officer and Dave Stoehr are Chief Financial Officer. As mentioned format will be I'm going to give some general comments on the quarter, Dave Dykstra will take you through some specific numbers and then I'll give you summary thoughts on the quarter and where we stand and where we are going. And we will have time for questions. I was telling the guys earlier before we started I feel like Bill Murray in Groundhog's Day.

For the umpteenth quarter in a row we beat the street and nobody likes how we did it. But I think we will be able to address some of your issue there and in our commentary and obviously in the questions. And we will go from there. Earnings for quarter were $16.4 million or $0.36 per share diluted. Up from $16 million in the fourth quarter of last year and $14.2 million in the first quarter.

Our book value per share rose to $33.06 and tangible book value to $26.65. Again every quarter in a row we have been able to raise our tangible book value and our book value for the foreseeable past. On the good side margin was up two basis points to 3.48% over December. Earning asset yield was down 4 basis points.

We'll talk about that, cost of funds was down 4 basis points. And our free funds contribution was up 2 basis points which made up for that increase. Earning asset yield decreases almost the whole quarter can be attributed to the difference in the whole quarter can be contributed to the decrease in the mortgage banking operation. Basically fell off a cliff in the beginning of February.

Mortgage loans held for sale fell $265 million quarter to quarter while commercial loans our mortgage warehouse lines which are included in our commercial loans fell an even $100 million, losing $365 million and 4% plus assets obviously had a negative effect on the earning asset yield of our margin. Current assets, however, you will note did rise from the yield on that rose to in the 8% range from in the 4% range. We believe that that is sustainable going forward.

We are one year into acquiring our first FDIC deals and we have been very conservative in how we have accounted for those loan pools going forward but they are performing much better than anticipated at the beginning. We have a track record behind us and we believe that the cash flows to be experienced and we do recast those every quarter but are going to be greater and it moved money into the creditable discount category and we believe that that is going be sustainable going forward.

I will note that our pipeline right now is very strong. Our internal pipeline shows in the next six months there is a $1.5 billion of total loans in the pipeline and if you weight that by estimates and probability of closing in the next nine months it is just right around a $1 billion.

A lot is going to depend on the pull-through rate. I polled all of our guys today and in the last few days and they seem very comfortable in those numbers but is a lot is really going to depend on that. I wanted to preface all this by the fact that the first quarter is always kind of a funky quarter in the banking business. You know, lots of FICA expenses, lots of things that occur in the first quarter that normalize over the rest of the year.

Especially in Chicago this year we probably lost a week to the blizzard. There is two days less in the first quarter than there is in the fourth quarter. And on the loan production side, although the pipelines are strong, a lot of things don't get done in the first quarter just because people are waiting for year end numbers and the like. We were pleased that we were able to grow really if you take the $100 million of mortgage warehouse loans out that loans were up $60 million and our pipeline remain very, very strong.

Our cost of funds was down 4 basis points, and that reflects continued repricing of the deposit base. We were also concentrated on moving out single relationship CDs as we have done in the past. We are still sitting on over a $1 billion on over night money that we have a negative spread on with those. So we did make a conscious effort to push out single CD relationships and lose that negative spread and get better capital utilization.

The free funds contribution increased due to both the additional capital raised in the fourth quarter, the net after paying off TARP and growth in DDA deposits. DDA has increased 47% or $410 million since a year ago March and it is up to 12% of our total deposit base.

I think this is indicative of the success of our commercial loan initiative and we expect this trend to continue in the future as the pull-through as we pull through the loans off the pipeline and this will result in a much more diverse deposit base, a much less expensive deposit base, especially when rates rise this will be very helpful to us. It is indicative of the success of our commercial initiatives to date and part of our strategy is to continue to diversify the deposit base going forward. The margin on a dollar standpoint was really only off about $3 million and the majority of that was due to having two less days in the quarter. That made up $2.5 million. So dollar for dollar, we felt pretty good about where that stood given everything else. The remainder of the margin dollar discount, the $500,000 was really due to the fact that because we are letting single CDs run off and kind of losing that arbitrage, average earning assets for the quarter were down $180 million. Most of that was at a negative spread and that did help us. It is masked a little bit by the fact that the FDIC transaction we did for commerce bank was done at the end of the quarter and that is why period to period assets are up. On the other income side again we will talk about mortgages mostly. But as I said, it hit a wall in February.

This precipitous falloff did have a -- not only affected the net interest margin as I talked about earlier but obviously affected our fee income from mortgage banking business. In the fourth quarter we did $1.25 billion in production and that was basically cut in half to $562 million in the first quarter of 2011. Fees dropped from $22.6 million to $11.6 million. This wouldn't look so bad if the fourth quarter wasn't a record quarter for us.

But you need to understand that we have three plans in place and we were well positioned, you know, we knew it was going to drop off eventually. It was just a matter of when. But it takes 45 to 60 days to institute those plans for when the falloff takes place. You should know that we have instituted the plan. We have let go temporary help and others almost 100 people in those 45 days. That accounts to just in salaries and benefits over $500,000 per month.

So getting the overhead in line takes 60 days but we believe that the mortgage business is going to steady out here about around the $500 million to $600 million a quarter and eventually start growing from that and we have been able to quickly move our fixed overhead expense to accommodate the volumes that we anticipate going forward. So hopefully with that behind us the profitability of the mortgage company is returning and we can, as I said, put that behind us. I'm going to let -- oh, on the Wealth Management side, we see continued progress in Wealth Management both in assets under management and in fee increases as we continue to market and cross sell into our -- into the banking base and particularly the new commercial base that is coming along with our commercial initiative.

It relates to other expenses when Dave Dykstra comes on he will take you through the detail of all of that. One of the things I'm sure that concerned people when they looked this quarter they said well, you core earnings dropped off and, yes, in fact it did drop off from the fourth quarter of about $10 million from $59 million to $49 million.

Basically just to reconcile the two in a simplistic sort of way $2.5 million to $3 million relates to the two less days in the quarter in the margin and the rest really does relates to the mortgage business falling off. We are still very confident that we are going to be able to reach that $300 million run rate, you know, notwithstanding acquisitions and the like the $300 million core earnings pretax, pre provision, pre credit, et cetera run rate by the end of the year.

We expect continued improvement in our cost of funds through both, you know, $2.5 billion of CDs we are pricing in the next nine months at a weighted average of 151. Those going down to -- I think last month our weighted average of renewals was about 65 basis points. So you can do the math there. And also we expect DDA as I mentioned to continue to grow with our commercial initiative and continue to bring our cost of funds down. We think that there is going to be good results in that regard. We still have over a billion dollars in overnight short-term liquidity on the balance sheet that is operating at a negative spread in loan pipelines are very strong as I mentioned with $1.5 billion in the pipeline for the next six months or $1 billion on a weighted average by probability of closing. Really everything boils down to the pull-through rate on that. Those pipelines, too, are growing. That was the pipeline at March 31 and we continue to get terrific reception out there. The Wintrust name is common place in the market and doors are opening for us and we are getting a number of at bats and winning a lot of at bats. As I mentioned the mortgage area has stabilized now and actually will turn to profitability after losses in the first quarter that affected us negatively so we feel good about where that is going. Because of where our pipelines are going a lot, and I will talk about this more in the summary of expansion plans. I'm actually more worried about deposit growth. I think our loans are going to out strip our deposits.

But we positioned ourselves very well to accommodate that. But that additional growth coming on at good spreads will also add to those core earnings. So as I said in the beginning we feel very confident that we will be able to meet the core earnings run rates and quite frankly the number was right on our plan for the first quarter. So If that means anything to you, but we are right on plan and actually I feel pretty good about the fact that I think we are going to be ahead of plan for the rest of the year. On the credit front, I have always wanted to blame things on the Chicago weather and now I get a real chance to do it. But we probably lost over a week and where Easter falls and spring break falls it was just hard to get a lot of things done. Problem assets went up a bit but not a lot. Just we still have our problem assets are fraction of what Peer Group is right now and still very controllable. I had talked earlier that we, you know, throughout the course of this cycle how our landing this plane might be a little lumpy and we got a little lumpy here. But I can tell you in the first 18 days we cleared $10 million and have another $10 million to $15 million under contract right now that should actually close in the next 15 to 20 days and that will bring us right back to where we were and we continue to work extremely hard to push these assets -- to identify them and push those assets out. That all being said and as I said in the past, I haven't changed my opinion on, we as management haven't changed the opinion that credit is going to be just about the same this quarter and probably in the second quarter and our gut tells us that it should start tapering off around the third quarter and start working its way down. I would imagine that credit costs will be the same next quarter and then hopefully start tapering off in the third quarter. But the cycle is not over yet. We remain committed to identify and clear problem assets in a timely basis. As soon as we get rid of the problem assets the sooner the core earnings fall to the bottom line. So we are confident that problem assets are under control, that we are pushing them out. First quarter was a little lumpy.

First quarter was hampered by just getting things done but we have good momentum there and we are going to continue to do it and still going be lumpy on the way down. But we are well under control and I feel comfortable with all of that. With that I will turn it over to Mr. Dykstra to talk about other income and expenses in some detail.

Thank you, Ed. As normal I will touch briefly on the non interest income and non interest expense sections of the income statement. In the non interest income section our Wealth Management revenue increased slightly to $10.2 million in the first quarter of 2011. This was up from $10.1 million in the fourth quarter of 2010 and on a year-over-year basis it was up $1.6 million from the $8.7 million we recorded in the first quarter of 2010. This is the second quarter in a row that we have had revenues surpassing the $10 million mark and actually the second time in the history of the company.

Ed previously touched on the impact of the mortgage banking business but I will reiterate some of the comparative financial amounts as it relates to the income statement. Mortgage banking revenues declined to $11.6 million in the first quarter of 2011 from the record quarterly revenue amount of $22.7 million recorded in the prior quarter. However it's interesting to note that the $11.6 million revenue amount is actually higher than the $9.7 million of mortgage banking revenue recorded in the first quarter of 2010 and the $8 million recorded in the second quarter of 2010. The Company originated and sold $562 million of mortgage loans in the first quarter, compared to $1.3 billion of mortgage loan production in the fourth quarter of last year and $687 million in the year-ago quarter. Mortgage origination volumes are obviously impacted and are very sensitive changes in interest rates. But barring any such changes we could expect originations as Ed mentioned earlier to remain relatively constant during the second quarter with what we experienced in the first quarter. Also to update you on investor indemnify cakes claims we do put some of that information in the press release but our reserves for indemnification claims from purchasers of the Company's mortgages loans subsided further in the first quarter and we recognized $103,000 of expense in the first quarter related to potential recourse liabilities on loans that we previously sold which is approximately $1.3 million less than we recorded in the fourth quarter of 2010. The company recorded $9.8 million of bargain purchase gains on two separate FDIC assisted bank acquisitions during the first quarter.

We recorded a gain of approximately $1.9 million related to the acquisition of community first bank of Chicago which had one location and approximately $50 million in assets and we recorded a gain of approximately $7.9 million related to the acquisition of the Bank of Commerce in Wood Dale, Illinois, which also operated one location and had assets of about $160 million.

If you look at all the other non interest income categories there is really no other changes that deserve special mention on this call. If we look at the non interest expense category, salary and employee benefit declined $2.9 million during the quarter compared to the fourth quarter of 2010. The decline from the fourth quarter is primarily due to a $7.3 million decline in variable pay which is primarily the commissions in the mortgage banking area and that was offset some what by slight increases in base salaries resulting from year end increases, staffing with two FDIC acquisitions and about $2.4 million in payroll taxes.

As a normal in the first quarter as the FICA limits reset. And we also had a slight increase in health insurance costs. Our data processing costs also declined during the quarter by $865,000 from the prior quarter primarily as a result of renegotiation and renewal of certain data processing contracts and we had less conversion related activity in regards to the FDIC assisted transactions this quarter relative to the fourth quarter of 2010. Professional fees declined by $1.2 million from the fourth quarter of 2010 to $3.5 million. Despite the decline during the quarter this expense category continues to remain higher than normal and we continue to -- because we continue to have legal and collection costs related to resolving non performing loans. OREO expenses also declined to $5.8 million in the first quarter from $7.4 million in the prior quarter. This category of expenses has fluctuated anywhere between $1.3 million and $7.4 million during the last five quarters and this quarter's results are obviously within the range but towards the higher end and we continue to work hard to push the OREO out of the system. Sometimes clearing these properties at prices that are slightly less than the appraised evaluations that we established and we recorded some additional downward adjustments on properties still owned as the commercial real estate value have continued to trend down slightly in our market. If you look at page 30 of the earnings release we provide additional details on the activity and the composition of the OREO portfolio.

Other net interest expenses decline a bit from the prior quarter but still within the range of what we experienced on a quarterly basis over the past year. The primary reason for the decline this quarter compared to last quarter result of lower loan origination and collection expenses that we experienced during the quarter. We normally don't spend much time talking about income taxes on these calls but given the recent tax rate increase in Illinois I think it is worth noting that our income tax expense was impacted negatively by approximately $500,000 during the quarter. $200,000 of that increase relates to the increase corporate tax rates on our earnings during the quarter. So just really the rate impact relative to our current earnings while the other $300,000 of additional expense is one time adjustment to change the recorded value of our net deferred tax liabilities as of the beginning of 2011. The Illinois corporate tax rate change was effective January 1 of 2011.

All other categories were relatively consistent with prior quarters and were in line with our expectations. So for the other income and expense I think that covers it and I will throw it back to Ed.

Thanks, Dave. Just to summarize a little bit. I actually fell very, very good about where we are right now. The mortgage is right sized and again profitable and according to plan. As I said we knew it was going to fall off. And we are very bullish in the mortgage business and the profitability of that business going forward. As I mentioned NPA are clearing we are re kind of back to where we were last quarter already through the month of April. We don't usually get a lot of inflows in April because we know it's coming it will be there in March. We try to look very far ahead. So we are right about where we were. I feel good about that, and there is good momentum there. Deposit pricing is going forward in the mix is getting better. The loan pipeline as I mention is very strong. It is all about pull-through right now but our guys are confident that that is going to occur. Expansion opportunities in our market continue to be very robust, almost too robust. We continue to get inbound calls. We continue to see opportunities pretty much in every facet of our business right now and we are looking at those and like I said we are -- in some respects we are like the girl who was digging through the pile of manure and say there is a pony out there some place but we are dedicated to find that pony. We are confident we are very confident we going to reach our core earnings run rate goal north of $300 million by the end of the year. And I think right now we are at a very interesting point because as I mentioned earlier I'm starting to be more worried about growing deposits. I think our loan production is going to be very good and part of our plan all along was to restart this engine.

Those of you who remember us from 20 years ago when started this entity and one of the major operating tenants was to be asset driven to have more assets then we need and that would allow us to go in and gain more market share in new locations. We have 14 new locations we have picked up in the last year and a half through the FDIC transactions. We also either have under contract or closed on three new locations in very desirable markets where we have bought closed branches. They were duplicate branches in a FDIC transaction we might not have gotten and we have acquired those, moving into Schaumburg and Des Plaines and another one in Crystal Lake and the FDIC deals moved us into areas where we were not. North side of the city of Chicago and Naperville which is one of the largest cities in Illinois. If you kind of look at where we were, we have 88 locations right now and of those 88 locations if you take the 14 new ones out there is 74 locations. And in those 7 -- within three miles of each of those locations are 950,000 households that we service right now. The 14 new locations within three miles of those locations of 390,000 households. That is very exciting to us because we have yet to begin marketing there, I didn't want to start marketing until we could get asset driven again. We are prepared with products and services to go out and really inundate those markets. As those of you who know us -- we did in the past. We have not wanted to do that as we are sitting on a $1.1 billion of liquidity until we get assets to catch up

So we are poised and ready to get that asset driven growth train working again. Everything, again, depends on the pull-through on the asset side of the equation and we are confident of that. So I remain positive about where we are, where we are going, where our positioning is, the opportunities that are going to present themselves to us on the additional acquisitions and expansion side and again we are right on plan and feel we are moving along nicely and there is very good momentum here.

With that, we will turn it over to questions.

Thank you, sir. (Operator Instructions). Our first question is Jon Arfstrom with RBC Capital Markets. Your line is open, sir.

Thanks, good afternoon, guys.

Hi, Jon.

A couple of things. You talked a lot about the pipeline and to me though that is one of the more important elements here and can you talk a little about --

You and me both.

Can you talk a little bit about the profile of it? Is it new clients? Is it existing clients, and maybe a little bit of the mix of what you are seeing in the pipeline, the type of loans.

Sure. It's mostly new client. It's 90% new clients. Our calling efforts are well received and are going very well. I would tell you that it is probably 2/3 on the commercial side of the business and 1/3 on the rebound real estate side of the business. Both are beneficial to us. The rebound real estate side, again, is, you know, there is a lot of well healed borrowers of all makes, shapes and sizes who are buying up real estate right now at very, very low costs. We are able to, you know, they can buy it at 50% of replacement value and we lend them 50% of that. We are getting good rates on that.

That is probably a 1/3 of the pipeline. The other 2/3 is just real strong commercial business that is right in our wheelhouse. Our treasury management products are being received very well. We actually lead with those when we go out and they are opening a lot of doors with us -- for us. And even better in all of that is the cross sale efforts that we have been getting once the commercial guys -- once we have been able to land commercial accounts both in the Wealth Management side of the business and in the deposit side of the business. You can see the success as I said earlier just as we continue to increase our DDA balances as we are being recognized as a go-to commercial bank here in our market area.

And then a question for you on pricing. You explained in your prepared comments that the loan yield drop was really an anomaly caused by mortgage banking. I'm just curious what do you think about the pipeline and the new loans you have been putting on recently? How is the competitive environment do you feel like the pricing is fair?

On the real estate side it is obviously very good because nobody it doing them. So we get pretty good pricing on the real estate of the equation. On the commercial side, you know, it is competitive right now. And especially, you know, we -- the way we do this, Jon, is we pick the clients we want. We are not out cold calling on every door or every factory in Elk Grove Village or the like. We have identified the people that we want to get and we are going to be relentless until we actually get them. But we are not going to drop our drawers on pricing.

It is funny, it is kind of like when you were sitting in the principal's office and they said who did what and everybody points at each other. I hear from our competitors we are the guys dropping our drawers and other guys say the competitors are dropping their drawers. Which means it is a very competitive market out right now out there. But we are holding steady with our pricing. Our over all profitability models are very simple but they are very -- they are very accurate and if something doesn't meet our profitability hurdles we take a walk, end of story.

But I do laugh because it is, you know, our guys say well so and so is dropping their pants and giving it away. And then I hear that somebody says we are doing it. So it is kind of an interesting market. But on the commercial side it is a little bit more competitive. There is a lot of people trying to feed off of that right now. But we lead with our treasury management. Our treasury management because we have state of the art treasury management products but it is kind of like overdraft fees and the like. Year after year people raise their pricing as -- our competitors sit at a budget table and they will say boy we got to make a little bit more money raise their money on certain products. Our pricing on the treasury management side is probably 60% of what the competitors are because we are new to that market. I tell you it is extremely profitable to us. We lead with that and that business is very profitable to us and then the loan yields become kind of a moot point when the potential customer is looking at the overall economics of the situation. We kind of have a competitive advantage there because we he don't have to cannibalize existing clients when we walk in the. I don't know if that makes sense or in the. It is competitive on the commercial side but we are getting our at bats and we are getting hits.

Thanks a lot.

The next question in queue is Brad Milsaps with Sandler O'Neill. Your question, please.

Hi, good afternoon.

Hi, Brad.

I was going to see, Dave, if you could talk more about the expense side of the equation. What you kind of are looking for in the second quarter and over the balance of the year in terms of personnel costs. I know you talked some about the improvements from obviously what you did with mortgage banking but at the same time you have got a couple of more locations coming on. Just kind of what you guys are thinking there in terms of what kind of leverage you might have going forward.

Well on the salary side that will fluctuate with the mortgage banking business. My crystal ball doesn't go all the way up to the third and fourth quarter with rates but if it stays relatively consistent in the second quarter the commission levels will stay relatively consistent on the production. And as Ed talked we will see some further reductions on the salary side as we sort of right sized the mortgage banking business as the small office come. The two new locations that we put into place, you know, the one on the north side of Chicago that we got from the FDIC, again, was a one-location shop and most of that expense is in the first quarter. The one in Wood Dale the Bank of Commerce that we acquired was right at the end of the quarter. So that is not in our numbers really to any great extent. But again it is a one office location so I don't think it will impact the numbers dramatically. We continue to try to hire good commercial lenders and good people when they come across, you know, across the transom to us.

I'm going to jump just because Dave is on this. I was talking to our commercial guys and obviously the flow of new people has slowed down but we are still hiring people. But not at the same pace we were. Talking to John McKinnon and Paul Carlile and the crew that kind of oversees our commercial initiative they go we are operating probably right now at probably 30% capacity. When I throw the pipeline numbers out there we actually have the capacity to absorb that and there is not going to be a proportional increase in salaries to bring that on. We have a lot of capacity on the commercial size of the equation right now so I just wanted to pop that in. Sorry Dave.

That's okay. You know, and so, you know, it may fluctuate a little bit just with commissions if the mortgage business moves around but I don't expect a lot of that in the second quarter. In equipment expense the occupancy expense, you know, data processing, advertising, you know, I don't see great changes in that. We have the capacity to operate with what we have in there now. Again, the addition we put on at the end of the year was illegally just one location so that is not going to add a lot to the occupancy. Actually occupancy was maybe a little high in the firing first quarter because we had so much snow removal going on which actually increased our numbers a little bit. Those should be relatively stable. The fluctuations we will see are just in the OREO expenses and maybe the other expenses depending on how we do in pushing the assets out and what prices we can get and how much legal expense we have to do to resolve those. So, and I don't expect to see a lot of variation in those numbers during the course of the year other than the salaries that we talked about.

Okay. And then final question, maybe Ed, spend a few minutes on the premium finance business, what you are seeing there from origination perspective, pricing do you see any kind of stabilization or harding in that market? Just kind of what you outlook or appetite for additional premium financing at this point.

Two pieces on the premium finance business. On the life insurance side that business is going very well. You know, volumes are up and we would expect those to continue to grow. We are the 900 pound gorilla in that business and we have great people and great marketing and we are known in that business. So you have seen that grow and I would expect it to continue to grow kind of at levels that you have seen in the past.

On the PNC side, again, you know, we have been up double digits in terms of units every year for the past as far as I can remember but the market is still very soft. We are having to run harder to stay even. We haven't dropped down a level, we are still operating in the same arena in terms of size of agents and size of deals that we will do. But the market is still very soft. Average ticket sizes are still in the $19,000 to $20,000 range. They are normally in the $28,000 to $30,000 range. In a hard market in the $40,000 range. So it is still extremely soft. I was out visiting agents a couple of weeks ago and asked that specific question is the market getting harder and they said actually that workmen's comp now is been moving up, and they would expect that you will start seeing at least it is not going to continue to get softer that things are actually start moving up. I don't know whether that was wishful thinking on there part, but the empirical evidence said that the workmen's comp was starting to move up.

And hopefully that will be a lead to others. They believe that the Japan tragedy is actually going to have affect on the liquidity in the overall insurance market which should also harden and they were expecting around June that you would start seeing some hardening in the market. And that would be obviously terrific for us. Again, if you just went back to normal, you know, that is $300 million or $400 million worth of assets on our books that we don't have to do any more work for. But we will ride it through you know, there is just certain cycles you have to ride through and we are well prepared to take advantage of it. We continue to pick up market share there. Pricing in that business has stabilized.

All except for the very large deals which we are not playing a lot in right now because we look at the risk reward are doing some of the large deals and doing an $8 million deal with a $1 million worth of risk on it for a nine month full payout loan at 1.5% gross before paying commissions and everything else doesn't make a hell of a lot of sense to us. So we will let those go. So we are as effective or aggressive as we were in normal times for larger deals. But that will come back to. That is going to come back to haunt some people and that will come back too. So the business is very good it is vibrant. There are some changes taking place which is allowing us to pick up additional market share and we are well positioned there.

Thank you.

The next question in queue is Raymond Harmon with Jefferies. Please go ahead.

Good afternoon, guys.

Hi.

What does the improvement in the covered asset yield do to your for the year end margin? I think last quarter you said you thought you could get to 360 basis points. Does the improvement on that portfolio, think you can get any higher than that and just what is your outlook there?

We still think that that 360 to 370, maybe 375 range is appropriate. We are not that far off from that right now. But you are talking about, you know, $300 million, it is really already baked in to the 348 that we got this quarter. So it -- we still think that, you know, if we can -- it really all boils down to the pull-through on the commercial pipelines and continued building of those pipelines. That is what our growth is dependent on, what our new marketing is dependent on. We can't be stupid about that. I always say it is asset stupid but not stupid assets. We need to maintain our discipline that we had through this cycle and all through our life and go forward. But from a margin standpoint you are looking at 360 to -- probably 368 to 375 you will top out. Anything above that is in this this rate environment anything above that would be gravy.

Got you, okay, thanks. One more question on the margin. You talked about kind of where new CDs were pricing and in the past you have gone into color on how much of the book is re-pricing in the future. Could you help us out with that again this quarter.

Sure. In the next nine months I'm focusing on run rate in December. Between the first quarter and then so nine months there is $2.5 billion of CDs we are pricing at a weighted average rate of 1.51%. Last month our average CD re-pricing was 65 basis point. So again, you can do the math on that. But comes up to on an annualized basis north of $20 million that you pick up. And that is barring changes in rates and the like.

We have a chart on page 17 of or earnings release that details it out on maturity buckets and rates related to the maturity bucket for the CD portfolio.

Okay. Got you. I will check that out. Thanks, guys.

Thank you. Are the next question from from Mac Hodgson with SunTrust Robinson. Please go ahead.

Hey, good afternoon.

Hi, Matt.

Just wanted to be sure I understood your comments on the pipeline earlier you said the raw or gross pipeline is $1.5 billion but based on probabilities it is more like a $1 billion that you would expect to close?

Yeah, if -- what I have them do is lay out what is in the pipeline, when is it funding and what is the probability of close and for the next six months. And it was a total $1.5 billion in the pipeline. And that was as of March 31. And if you just apply the simple probability to those it was a $1 billion.

What sort of runoff do you have and just kind of the existing book that would offset that growth?

Well, let's see, charge offs are $25 million.

Just like pay downs and things like that. Obviously if you had a billion dollars in growth the next two quarters that would be a 20% kind of growth rate. I just didn't know if there were any kind of head winds, paydown or reducing construction portfolios, things like that.

I don't have those numbers handy. I'm sorry, I was just working on the gross. We can get that data and find a way to get it in front of everybody. But I don't have that offhand. I was just looking at the new growth. Some stuff you don't know because you do lose some business but even that, I think in previous calls I said our total growth for the year we anticipated or budgeted a $1.5 billion in net new growth and I think we are well on our way to do that. We figured that growth could cover a $1 billion of it and $0.5 billion could to take away the liquidity. Take the billion plus of liquidity and put $0.5 billion on loans and get a $1 billion worth of growth, which we think we can do. We are just timing it, like I said earlier I don't want to bring in a bunch of new liquidity until I know we have the assets to cover but we feel comfortable we will be able to achieve those numbers.

On the pretax provision target run rate of $300 million, you are running around $200 million now and it sounds like expenses might be in a relatively good core expenses at a relatively good run rate absent declines on the personnel expenses. And then fee income if mortgage stays flat it seems like it is all driven by spread income.

Not really, we were $235 million at the end of the year if you annualized it and it is $200 million right now. You know, let me just quick numbers to reconcile that for you. We had two less days in the first quarter. That was $2.5 million on the margin. That is $10 million annualized. So that would take our $200 million to $210 million. I'm just reconciling here for you. So that takes that to $210 million.

You had about, you know, in the mortgage business itself, some margin, some otherwise but about $3 million worth of expenses that related to overhead and the like that we had to cut out and move out and that is another $12 million. That brings you to $222 million so you really went from and then the loss of mortgage business made up the rest of it. So when I think of it in my head we really went from $237 million down to about $223 million or $233 million and that was the actual loss of the mortgage business that went out the door, both in spreads and in net fees that came down. In my mind I'm running off of a starting base of about $222 million and then if you take the growth we talked about, the deposit re-pricing we talked about and the like that gets you, you know, those deposit re-pricing, loan growth and overall growth that takes you to -- that will get you north of $300 million. That is not withstanding acquisitions and any other opportunities you know that we will take advantage of if they make sense going forward. So I hope that quick math made some sense to you.

That's helpful. Is there a level of kind of earning assets that you are thinking of when you get there obviously the margin should go up. What sort of level of earning assets. You are obviously around $13 billion today.

We are talking about a, you know, $1.5 billion of loan growth but probably about $1.1 billion or $1.2 billion of deposit growth. And a $1 billion alone growth 500 of that takes down the liquidity and the other $1 billion goes along with the growth that we intend to put on the books. Not knowing where your starting point was if you start in December not withstanding acquisitions if you started with our December numbers we expect $1.2 billion of total growth and $1.5 billion of loan growth with that number. That should help you kind of reconcile to the earning asset number.

That's helpful. I think that's it, thanks.

Sure.

Our next question in queue is Steven with Macquarie. Please go ahead.

Hi, guys.

Hi, Steve.

Just a couple quick ones for you. Given the focus on mortgage banking revenues this quart I just wanted to check in with you and just kind of see in terms of the two mortgage banking platforms you added at Woodfield and River City what might those mean as maybe an offset to the weakness that we had this quarter as you look out and I know you mentioned that, you know, $500 million to $600 million run rate is that with those in the mix or could these maybe kind of be gravy as you look out?

I believe that in the 5 to 6 Woodfield planning is included, it is not included, the River City volume is not included in there which would probably add --

They only did a couple million dollars last year so obviously rates have fallen off. They are fairly optimistic in their market up there. So we'll just have to see how it plays in and how the transition goes.

They could add another 25 to 50 for quarter.

Probably on a quarterly are basis.

I'm glad you bring that up. The reason we think the mortgage business is consolidating. We think the actually the numbers are getting actual model itself is getting better with the new employment, how you can pay these guys under Dodd Frank that is worth about 8% on overall costs, 8% pickup for us in that regard. We also, you know, one of the reasons to do this is to get some diversification in the markets that we have, but also every one of these deals that we do lowers our fixed overhead because we don't need as much fixed overhead to cover that production.

And as you know, this is a volume business and as you saw this quarter when volumes go up or go down it takes a little while to adjust for your fixed overhead for that and what we want to do is continue to bring our fixed overhead ratios down as a percentage of total revenues and these types of acquisitions you really don't pay anything for it other than the fix the assets it is all on the come based on profitability. So we don't have a lot of dollars out.

What we are doing is picking up volume at better efficiency spreads. So we are getting much more effiency spread. So we are getting much more efficient with more volume and that should aid the profitability. And that is kind of the logic behind it. We think that this market is going to consolidate, and we will be focusing more now in picking up people and plus or minus businesses that make sense and fit our character and our operating philosophy and culture in our target market area, in the Chicago/Milwaukee area. That is where we are going to focus on building the mortgage business out. There is going be, we believe, a huge consolidation as these poor guys that have never really been regulated get the first taste of regulation they going to run for cover as quickly as they can. And we -- if they fit us we will be looking at them. We intend to continue to look to expand that business and become more efficient and profitable as a result of it.

Got it. So as you see more of those we should hopefully expect you to bolt on more of those in addition to more FDIC deals, right?

We continue to look at FDIC deals. We win some, we lose some. We have not really walked away from our discipline pricing. When we loss we lose big sometimes. We actually had a map we were going to put in here to show you the expansion that we have done over the last two years with the FDIC deals and with other branches that we required. And some of the branches that we are going to be opening up. As it is a continues to move us into the target market area. So an FDIC deal comes up we got it down now I think that history when you see what we did the covered assets and deals were very conservative is to how we not just bid them but how we book them once we get them. If we can find deals that fit us strategically and can make us money we will be all over them and we are not backing off of that at all.

Makes sense. I can't resist on Ed' s favorite topic. On the guidelines that came out from FASB regarding TDRs. I was just wondering if you saw anything in there that maybe you feel gives you a little bit more political cover and actually was a positive coming out in these things. I know in the past you have kind of been forced to put things on that more because of a lack of a market rate or slightly below market rate and I thought those guidelines, I don't know what you thought about, it but I don't know if you felt anything coming out of there could have -- is going to be a little more helpful going forward.

I got it and I put it on the bottom of my birdcage. No, I'm teasing. Our TDR expert, Mr. Dave Stoehr our CFO who is sitting here I'm going to turn that it over to him.

Thanks, Ed. I think our opinion of that release is that it really is leveling the playing field for everyone else that it really doesn't change much that we have been doing over the past year and a half. It will hopefully make things more consistent and more sound throughout the industry and everybody will be doing it the same way. We believe more aligned with how we have been recording fee hours over the past 1.5 years to 2 years. We think it is still some what vague but at the same time it should level the playing field a little bit.

Great. Thanks very much, guys.

Thanks, Steve.

Our next question in queue is Stephen Guyan -- Stifel Nicolaus Please go ahead.

Good afternoon.

Hi, Steven.

Just a question on page 41 on the yield margin looking at the yield on liquidity management asset I guess it was up about 43 basis points to 1.75%. How do I reconcile this as looking at the liquidity management asset as a funding source for loan growth and the higher yield was the higher yield on the use of -- on the assets from pushing up maturity.

As some of the mortgage -- as we saw the mortgage banking fall off we did take some of the liquidity that was provided by not having loans available for sale and by not having the mortgage warehouse lending out there we did take some of those funds and put them into some agencies.

But we remain more positively GAAPed than we were at the by beginning of the quarter just because of additional DDA and the like. Our extension is really based upon trying to continue to increase our interest rate sensitivity position and there was room in there to do that and still keep us in the growing mode and our plans show us to continue to increase that interest rate sensitivity position, because we believe that, you know, long-term or maybe in short-term that is the beach ball under water as it relates to the margin and when rates move, that is when our margin, you know, based on our models can pop up to the 4% to 4.5% range. Right now we continue to play in the red zone from a football vernacular we don't have a lot of field to play with, with where the overall rate environment it is. We are really working hard to position ourselves and take advantage of what we feel will be a beach ball under water popping up.

Thank you.

Thank you. Our next question in queue is Zachary Long with Sterne, Agee & Leach,. Please go ahead.

Hi, yes, this is actually Peyton Green. Question for you all. In terms of the loan portfolio.

Peyton are you wanted some place that you are going by a different name or what?

You know, sometimes that is how you get your question asked.

We wouldn't have let this one come through.

Exactly. What is the percent of the loan portfolio that is variable that is not at a floor? And also what percent is at a floor? And how much, you know, in the money is the floor?

I don't have that data in my hands right here.

We haven't disclosed that yet, Peyton. We don't have it handy here and we haven't disclosed it. Maybe we will try to get it into the 10-Q this quarter so everybody can have that it is a common question. It is just something we haven't put in the press release. It is not a good answer for you but I don't have it handy here with me.

Okay.

I will tell you that when you do get it you will see that we have been able to decrease the debt zone which we call it to below 1%. So, on the portfolio that you see. So we will -- we will get that in the Q and we can talk after that is in there.

And then I have one more question. When the Company was run with a much lower tangible common equity ratio and less cushion on the capital ratios in general.

The good 'Ole days.

Exactly. You had a bond portfolio that I guess went from kind of an average market yield in the 5% range down to 130, I think was the loan rate in the fourth quarter of last year sand you still have about $2.6 billion at an average yield of 175. Coupled with the higher capital account and the stronger DDA growth, some of which is cyclical but certainly you are doing a better job going after it, why wouldn't you run the portfolio a little bit more instead of ultra conservative maybe move towards conservative and earn more any.

It is a good question Peyton and I know we talked about this. We did put some money to work in there. Because it did fit what we trying to do. We are trying to maintain because of everything that is going on the loan side of the equation and our confidence in the ability to book the loans through I need that liquidity to cover that.

What we have been trying to do, Peyton, is to time this, maybe timed it too closely but we -- as I said I'm worried -- well, I'm not worried. What concerns me and what keeps me up at night is we are going to need deposits because I think these loans going to come on the books and suck down liquidity and the regulators will be all over us for more liquidity. We never wanted to run at a 100% or 110% of deposits and we are just not going to do that. We do have enough room to put $405 million on and then I want the liquidity to cover that and then we are going to kick into this growth mode. And we are going to try to hit these 400,000 new or -- Try to hit the 390,000 new households in these new markets and get back be on the growth train that you are used to. Once I am confident that train is running then I can actually manage my liquidity a little better, and I hope this is making sense to you. We are just trying to be very conservative because we really think these loans are going to come on the books and I want to have the liquidity to cover it.

I don't want the regulators jumping down my back and then I want to make sure that our growth plans actually work. We are confident that they will but we never relied on brokered funds or wholesale money for our core funding and we don't want to do that now. We agree with you. We are ultraconservative but it is really part of an overall longer term plan to really get the balance sheet optimized and if we didn't have the loan production coming on the books we would do exactly what you are talking about right now. I think as we said we are confident that our investment in the commercial initiative and all of the great people we brought on board here we are just the tip of the iceberg in terms of this thing starting to pay off. It is more strategic and I would agree with you if we did not see those opportunities.

Okay. And how low would you let the portfolio go as a percentage of earning assets before you maybe went the other side and started to raise deposit rates to grow the deposit side again.

Hopefully we won't have to raise deposit rates. Let me make that point perfectly clear. But we want to run, you know, take out the tail funding, the securitization of $600 million and kind of move that to the side because that is one for one but just say then net loans and net deposits we still want to run at 85% to 90%. We will let it one-run up to 91% or 92%. And then the rest is in the liquidity portfolio. We haven't changed that parameter just coming at it from different direction. We want a 85% to 95% loan to deposit and everything that is left will be in the securities or liquidity portfolio. The side comment you made we have to raise rates to grow. We don't believe we have to do that.

We are in new markets right now and we are going into market that are dominated now because really the community banks that are working in those markets, most are kind of on their heels right now working through this cycle and it is taking them a lot longer because they don't have access to -- you know, the whole litany of stories. But they are weak right now. The large banks that are servicing our are new markets are, you know starting to inundate people with fees and expenses. It is just a mess and people are very unhappy. We don't believe we have to pay up to get them. What we need to offer them competitive products that make sense and we think we can do that. I talked on the last call about what is a major bank charge for an overdraft, you know, $40 right now. You know what it costs to clear an overdraft? $3.50.

We could charge $18 or $19 and cut the market in half and attract a lot of business over here. We don't have the cannibalistic our marketing structure the way we are positioned. Plus the fact we never charged a lot of nuisance fees. We don't have the cannibal factor that our larger competitors are going to have. They can't drop those fees and we can come right in underneath them. We think the market is right for us to move into the areas. And not have to pay up for the deposits. We think people are just sick and tired of their alternatives and we have great opportunity.

So we are chomping on the bit to get going on this we just have to make sure that the pull-through comes through, and we get back to that assets driven mode that had our earnings going to 20% to 25% a year before we went into our stall period. We take long-term views of this stuff and have long-term strategies. Unfortunately, and a lot of times we have to shuck and jive and make them work because of the markets but we are in this for the long haul and we think our strategy is solid right now and we know that we can always go back and do that investment side. We have no intention of paying up for deposits right now nor do we think we have to, to fund our growth.

Okay. I just want to be clear I understood this right. You are going to hold off on the more aggressive marketing on the deposit end in terms of product initiative until you see the loan growth land on the shores. Is that fair to say?

Right. And we are seeing it now. April has been pretty good to us so far and, you know, or our guys are confident over the next six months. We are talking about within three to four months we will have a really good idea of whether the pull-through are real and we are going to have to start rocking and rolling to stay ahead of the game on the deposit side. But we have the stuff ready to go. We just need to pull the trigger and we're timing it.

Thank you for taking my questions.

You're welcome. Take care.

Thank you. We do have one final question in queue it is Bryce Rowe with Robert W. Baird.

I am sorry I didn't know how to get out of queue. My question is answered, thank you.

I'm show nothing additional questioners in the queue. I would like to turn the program back to Mr. Wehmer for any closing remarks.

We appreciate everybody listening in to our droning and I hope you can sense there is a grand plan here, we are on it. Life is not linear. We would love it if it was. But, you know, we are moving with it. We continue to make money. We continue to create shareholders value. Even though don't want to give us credit for a lot of it. But on the core side we are confident we going to get there. We are excited about where we are right now and you can be assured of our best efforts. Thanks everybody for listening in and we look forward to talking to you either in person or feel free to call us otherwise talk to you in a quarter/ Thank you

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day.