Wintrust Financial Corp (WTFC) 2011 Q2 法說會逐字稿

Welcome to Wintrust Financial Corporation's 2011 second quarter earnings conference call.

At this time, all participants are in a listen-only mode. (Operator Instructions) 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.

As a reminder, this conference call is being recorded. The Company's forward-looking assumptions are detailed in the second quarter's earnings press release and in the Company's Form 10-K on file with the SEC.

I will now turn the conference call over to Mr. Edward Wehmer.

Good afternoon. Thank you very much. Welcome to our second quarter conference call. With me, as stated and as usual, are Dave Dykstra and Dave Starr, our Chief Financial Officer. The second quarter was a very busy quarter for Wintrust with lots of exciting things happening, so let's get on with it.

Before getting into quarterly results, I thought I would spend a little bit of time talking about our recent acquisitions. Starting first with the acquisition we announced yesterday in an unassisted deal acquiring Elgin State Bank. This would be, obviously, probably a close in the fourth quarter. It's a multi-branch -- three branches in Kane County adjacent to our St. Charles operation, where we intend to merge that institution with our St. Charles bank. It has a dominant presence in one of the larger industrial hubs in the state of Illinois. Our market share in Kane County will go from 11 to 6 and only be behind the large banks, kind of just where we want to be right now. $250 million in deposits, $158 million of those are in low-cost deposits, being DDA, savings, NOW and money market accounts. And 22% of their deposits are in DDA. So it's got a very strong deposit base and right-hand side of the balance sheet. It has a great community bank culture. It fits us very well. It was opened in the 1960s, has been owned by one family since that point in time. So we are excited about the opportunities there. It will give us opportunities to grow a low-cost deposit base and dominate that market. It gives us a little extra liquidity there to support loan growth, which we will talk about a little bit later. Our pipelines remain very strong, and we think we can loan this bank -- these deposits out relatively quickly.

When you look at the acquisition itself, and I'm not a big fan of IRRs, but we look at them from a relative basis, so we kind of use the same internal sort of parameters to do that, and this results in a 23% IRR, with pretty conservative parameters on a relative basis. So we are excited about that opportunity and building out that franchise.

Secondly, we can talk about the First Chicago acquisition, which is also a third quarter event for us. This was really a billion dollar -- really about $500 million, $600 million bank in a billion-dollar suit. When we -- after we get through with the adjustments from the FDIC and our marks, $650 million plus or minus would be moving over to our balance sheet. There are 7 branches with that organization, 2 of which overlap with ours, so we expect to see good cost savings out of melding those into our existing locations. The rest of the markets are new to Wintrust. And again, excited about the opportunities to be able to grow out those markets. So this was really a strategic acquisition from that standpoint.

Really, this is kind of an interesting transaction, because it was really a good bank and a bad bank, all in one. The bank started with the acquisitions by the previous owners of [Labe] Savings and Bloomingdale Bank and Trust. Both were good, community-type banks that had long presence in their market areas. And then they actually had brought on some leverage and some real estate loans on top of that, and I think that was really their downfall. So we think that we got there a real strong franchise, with that good bank side of it. And it should be a very, very profitable transaction -- I can't say very, very, I guess - but it should be a good, profitable transaction for us in the long term.

In the press release, we talked about a bargain purchase gain of in the $20 million, plus or minus, range. But also, if you look at our covered asset yields, as have been reported previously, getting us 7% to 8% yield out of this with a cost of funds about 1% should materially affect our margin going forward. And it's something we also think we can grow very nicely in those markets. They fit in very nicely with our expansion, both in the Chicago and into additional markets that we've wanted to get into. Again, a pro forma IRR, based on those numbers, of north of 27% on that transaction. So from a margin standpoint, we expect this, in the third quarter and beyond, to greatly enhance our net interest margin. And we will get into that whole concept a little bit later.

Thirdly, we could talk about Great Lakes Advisors. That closed July 1. Great Lakes Advisors adds materially to our wealth management operation. Our wealth management operation is made up of the Chicago Trust Company, that does all of our trust work, Wayne Hummer Investment, which is our broker dealer, traditional brokerage operation, and now what was Wintrust Capital Management, which Great Lakes merged into, and we are taking the name Great Lakes Advisors for that arm of the business. Great Lakes had $2.4 billion in assets under management. Their client base is 96% institutional and only 4% private clients. This matches up and marries up very nicely with Wintrust's existing asset management portfolio, which is pretty much the mirror opposite, that is 95% private clients and 5% institutional. It gives us a very diversified client base from which to grow from, with opportunities to build both the institutional and the private client aspect of that.

The product mix also complements ours very well. Great Lakes is a large-cap investor and a core fixed income investor. They have beat their benchmark of 1, 3, 5 and 15 years pretty handily in all of those clients. So we have good investment performance. And add that with Wintrust's small cap fixed income and the balanced portfolio approach we work for clients, and we are building out a nice diversified product base to which to sell future clients. But also the prospect of being able with these new products and the results we have had on those products, moving more brokerage accounts out of transaction oriented- business into fee-based business, which will be an impetus for us going forward. So we are excited about that transaction and anticipate an IRR in the 19% range on that, again, using conservative numbers.

Finally, on the acquisition side and as been reported in the press, Wintrust did acquire a building in Rosemont, Illinois to move our world headquarters to. The building is -- intergalactic headquarters, as we call it. Wintrust acquired a 275,000 square-foot building in Rosemont for approximately $23 million. The building is currently half vacant, with the occupied half producing revenue north of -- their net rents north of $2 million. We intend to occupy the remaining one-half of the building, and add about $6 million, plus or minus, in remodeling costs, in order to accommodate us.

Those of you may remember back in 2006, we had a piece of property in Lake Forest where we were going to build a headquarters. And when we went into our rope-a-dope strategy, we didn't think it was appropriate to be building an edifice when we were slowing down and hunkering down to ride what we anticipated to be a credit cycle out. We sold that land. And since then, we have been putting our people pretty much into every nook and cranny throughout our system. And it's becoming somewhat inefficient to do that, and this was a perfect building for us to move into. Centrally located. We will be moving the holding company staff, which includes the executive staff, marketing, finance, compliance, our corporate real estate management division, our managed asset group, our treasury group, planning. They are all moving out of entities existing -- entities that are owned by Wintrust. And our mortgage company will be moving from their Oak Brook location, where they have been leasing. Their leasing costs in that location have averaged about $400,000 per year. So we will be saving that.

All that being said, we will have more efficient operations at really minimal cost to us on a financial statement basis And it gives our banks an opportunity to support the growth that we have had and anticipate, going forward. I consider this acquisition almost to be an acquisition of a dislocated asset, as we approximate the replacement cost of this building to be in the $80 million to $90 million range. Once we occupy the building -- if we wanted to, which we don't want to do right now, we have not intention of doing, we could probably flip this building, with us as a tenant, and probably double our money on it. So we consider it just a real value that we picked up, and one that is strategic for us, and one that really does create -- although it's not on the balance sheet or income statement -- does create value for our shareholders.

So with that now, I will move into the results of the second -- before that, though, I'd like to just comment, that's a lot of activity for one quarter. And some question may be raised then about Wintrust's ability to absorb the recent transaction that we brought on. Just to comment on that, our structure is very conducive to doing multiple deals. We are above the small type nature. They actually just act as bolt-ons to our existing organization. We planned for this. We planned for an environment where growth through acquisition was going to be prevalent. We put the plumbing in early. During the period where we were rope-a-doping, if you will, we didn't just sit on our hands. We built an infrastructure to accommodate additional growth that we expected to experience.

Really, when you think about it, because of our structure, the only place where you get any sort of stress is on our IT and data processing area. That's where all of these have a significant effect. But we did build up that team to accommodate it. We have additional conversion teams and IT teams that are available to us, and they are being absorbed extremely well. So part of that plan was to find these dislocations of asset, people and banks. And we continue to believe that we are going to continue to see opportunities, and that we do have the infrastructure and the capabilities to absorb additional opportunities, if they're strategic, when they come along.

Now to the second quarter results. In general, we are very pleased with our second quarter. Core growth, fueled by the achievement of expected pull through from our loan pipeline and funded by core deposit expansion in both our new and our legacy markets, marked the return of our asset-driven strategy, which served us so well from our formation in 1991 to our planned pull-back in 2006. Our loan pipeline remains strong and we expect this core growth to continue in future quarters. Coupled with the expected positive contributions from the previously discussed acquisitions, we are optimistic about market increases in core earnings in the third and fourth quarter and beyond.

When you look at our income statement, earnings for the quarter were $11.8 million, or $0.25 per diluted share. Our core earnings also rose, as indicated in the press release. Pardon me. As stated, we expect really good improvement in those core earning numbers throughout the rest of the year. And I will talk about that and how we are going to do it.

The net interest income, the margin was down 8 basis points from the first quarter, primarily due to 2 phenomenon. We tried to explain these phenomena graphically in the press release for you. The accretion on the purchased life portfolio was down about $4 million, due to slower prepayments. Now the way the accounting works on that is every quarter we recast cash flows. When you have a lot of -- by recasting those cash flows, the variable in there is the life of the loans. If you have more cash -- prepayments than you anticipate, you actually are accelerating the normal accretion that comes through, notwithstanding just the prepayment accretion. But when those prepayments slow down, both of those numbers would slow down a bit. So the accounting is a little bit funky on it. But as you can see, we have rolled into a yield on that purchased asset, or our life portfolio, of just over 5%. And I think going forward, that that's a pretty good number to use for that portfolio. We think that as this continues to play out that the prepayments will slow down and -- or be right about where they are, I should say. And we should be able to maintain that rate as a base rate.

The other phenomenon that we talked about in the press release was the average earning asset phenomena. You saw quarter-end to quarter-end, our loans grew by over $400 million. But on an average basis, our average loans were pretty well flat. And that's really the result of the first quarter having that intra-quarter spike in the mortgage operations, and then those fall off. So really you didn't get a lot of benefit this quarter from the increased loan portfolio and the new loans we put on the books. But all of that will start pulling through in the third quarter. And that, plus additional pull through from the loan pipeline, should increase our margin very, very nicely. The loans that we are bringing on are coming in at about prime plus a half. So we are not sacrificing our loan pricing or quality to get that, but this phenomena of average balances has kind of hidden what we expect to be a nice job in our margin in the next -- in the next quarter. Excuse me for a second. So this bodes very well for our margin going forward.

If I go back to the AIG accretion issue, if we had the same accretion that we had in the first quarter in the second quarter, our margin actually would have been up 4 basis points. So that really was the major driver in the dropping of the margin, but that's going to steady out, and I think that the new loans coming on the books plus the new acquisitions are going to be very helpful. Couple with our cost of funds, which was down 7 basis points, due to continued repricing of our deposit portfolio during the quarter. We expect the continued decreases in our cost of funds going forward, about approximately $2 billion of legacy CDs that we're pricing in the next 6 months, down from around 1.25% to expected rate of about 75 basis points, barring a rise in the overall rate environment.

Our core growth is coming in at reasonable rates. In other words, we are not having to pay up for the core growth that you've seen. They are averaging less than 70 basis points on that core growth that we picked up. Deposits that we gain through acquisitions, with First Chicago and, eventually, Elgin in the fourth quarter, are also less than 75 basis points. So overall, we expect our cost of funds to continue to drop markedly, both through continued repricing, core growth in our portfolio, and the acquired deposits that we are picking up really paying less.

A fourth element that will really kick in in the fourth quarter and will start at the end of the third quarter is, we entered into some forward contracts to replace hedges on our -- on $135 million of our $242 million in trust preferreds. As a result, -- we -- our repriced trucks will be at about 3.77%, down from 7.63%. So on that $135 million, we will pick up the difference between 7.63% and 3.77%. If you look at total cost to trucks, they will reduce from about 7.11% to 4.96%, resulting in annualized savings of 2.15%, or $5.2 million on an annualized basis. Again, continuing to push our cost of funds down. So between all of those elements, we would expect a nice decrease in our cost of funds. So the margin was affected in the second quarter by some very interesting factors. But given the expected decreases in our overall cost of funds, continued low growth, positive contributions from our recent acquisitions, we expect solid expansion of our net interest margin for the remainder of the year, and hopefully beyond.

In a few minutes Dave Dykstra is going to take you through the other income and other expense side of the results, but I'd like to talk a little bit about our balance sheet in the second quarter. Total assets grew to $14.6 billion at quarter-end, up from $14.1 billion at 3-31. Total loans, not including loans held for sale or covered loans, grew from $9.56 billion to $9.92 billion for the period, or 15% on an annualized basis. We are actually achieving the pull through that we anticipated from the pipelines that we talked about in our previous calls with you. Our commercial initiative, as outlined also to you previously, is actually paying off. The current 6-month gross pipeline stands at about $1.6 billion. And when you weight it by probability of closing, stands at really close to about $1 billion. This amount is similar to what we reported to you in the first quarter. Everybody is showing that the pipeline continues to refresh itself.

There's a lot of chatter out there, and I referenced this a little earlier, about the competition, the competitiveness in the markets, and people dropping terms and dropping rates to get business. As I said earlier, on new business is coming at an average of about 4.5%. We don't give up on terms, and we don't play with rates. Every deal that we bring in is subjected to our internal profitability model, and it's got to pass those hurdles for it to work. And our approach is a little bit different. I think I talked about this earlier, in earlier calls, too. Our approach is to take the market that we are going after, to identify the customers that we want, and to be relentless on getting those customers. We have brought in seasoned people with great relationships. We've been able to build this pipeline on people that we know and business that we want to do. We are not wasting our time calling on businesses that we are not interested in. And again, we are being relentless until we get those. So we are very confident in our pipeline, its continued growth and its continued pull through going forward.

Mortgages held for sale increased from $95 million to $138 million quarter-to-quarter. Although a bit inflated by the recent drop in interest rates, the mortgage company has completed its expense re-sizing, and with the help of the 2 acquisitions we did earlier should normally be in the $400 million to $500 million worth of production and should stay around $125 million to $150 million range in terms of loans outstanding. But again, this is, as you remember, this is somewhat of a choppy market. But the mortgage company's profitability is very good. They've hit their stride and have been able to absorb the deals that we've done and have been able to restructure their expenses from all-time high volumes in the first and then through the first -- through the fourth quarter of last year and the first couple months of this year, and have been able to really right-size properly and are doing very well.

On the deposit side, deposits increased period-to-period by $345 million, with $118 million of that in demand deposits. Another example of how our commercial initiative is paying off. Year-over-year, demand deposits have increased 47%, or almost $450 million. CDs as a percentage of funding have dropped from 48% of deposits a year ago to 43% at the end of the second quarter, reflecting management's concerted effort to change the overall deposit mix of the organization. As mentioned previously, our core growth in deposits is coming in at more than acceptable rates of interest, as is our acquisition growth.

On the covert asset side of the equation, our covered loans are yielding about 8%, with the influx of -- pardon me -- FDIC- assisted transactions in covered loans total about $401 million at the end of the quarter, down from $426 million the previous quarter. To date, these portfolios are performing better than we anticipated. The First Chicago acquisition almost doubled the amount of covered assets in subsequent periods. Be assured that our purchased assets division has in place the people, the infrastructure, the systems to more than accommodate this increase and even more. The 8% -- 8.06% yield on covert assets, covered loans is reasonable and probably sustainable. But again, you would need to use the recasted cash flow analysis of 0303 pools for accounting purposes, but we believe we can stay right around 8% on the covered assets side of the equation.

Credit for the period remained relatively stable in absolute dollars, but fell as a percentage, due to our growth. NPAs totaled $239 million, or 1.57% of assets, down from $241 million, or 1.63% of assets in March. Net charge-offs for the quarter were $26 million and were helped by a $5 million recovery on the premium financial fraud that was recorded last year. For year-to-date, net charge-offs were $51 million, as compared to $65 million in 2010. Our reserve for credit losses rose in dollars, but remained relatively constant as a percent of loans.

We kind of feel a little bit that the trend turning here. Who knows about credit, who knows about the economy at this point in time, with that's going on in Washington and the like. But it appears to us that this trend is starting to turn, and we would hope to see reductions in both the nonperformings and in the charge-offs related to those throughout the rest of the year. So we are holding our breath on that and knocking on wood, but it just feels that way to us right now, just looking at what we see out there, the nature of our portfolio, how we have been digging deeper and deeper and pushing the marginal things out. So we feel that the probability of it getting better is higher than the probability of it getting worse. That's the best way to put it.

Now I will turn it over to Dave to talk about the other income and other expense.

Thank you, Ed.

Ed obviously covered the high points on the balance sheet and the credit side. I will go through the non-interest income and non-interest expense sections relatively quickly. In the non-interest income section, our wealth management revenue increased slightly to $10.6 million in the second quarter of the year. This was up from $10.2 million in the first quarter, and on a year-over-year basis, it was up $3 million from the $17.9 million recorded in the first half of last year. This is the third consecutive quarter that we have had quarterly wealth management revenues surpass the $10 million mark, and with the July 1 acquisition of Great Lakes Advisers, this revenue will increase even further as we bring on their $2.4 billion of additional assets under management.

As we stated in the first quarter conference call, we thought that mortgage banking revenues would stay relatively consistent with the first quarter, and they did, but they improved slightly to $12.8 million from $11.6 million recorded in the first quarter this year. The Company originated and sold $459 million of mortgage loans in the second quarter, compared to $562 million of mortgage loans in the first quarter, and $732 million a year ago. Our revenue recognized per dollar of originations increased in the second quarter, as we instituted certain fee and price increases.

Mortgage origination volumes are obviously impacted by and are sensitive to interest rates, but as Ed mentioned, barring any changes we would expect origination volumes to remain relatively consistent again during the third quarter of 2011.

Income from bargain purchase gains were substantially lower in the second quarter, as we had recognized $9.8 million of bargain purchase gains on 2 separate FDIC-assisted transactions in the first quarter of the year. Looking forward to the third quarter were, we acquired First Chicago Bank and Trust in July in an FDIC-assisted deal. And based upon the preliminary estimates, we expect to record a bargain purchase gain in the third quarter of at least $21 million on that transaction on a pre-tax basis. If you look at the other non-interest income categories, there are really no other significant changes that would deserve attention on this call.

Turning to the non-interest expense categories, salary and employee benefits declined $3 million in the second quarter compared to the first quarter of this year. The decline from the first quarter is due primarily to a decline in payroll taxes of about $1.9 million from the cyclically high levels recorded in the first quarter. And increased loan origination activity resulted in slightly higher salary deferral costs required by the accounting rules.

Professional fees increased by about $1 million from the first quarter, up to $4.5 million. This expense category has ranged between $3.5 million to $4.8 million over the last 5 quarters, and we continue to stay in that range but at the higher end. The elevated level of those costs, again, relate to legal and collection costs related resolving our non-performing loans and liquidating our OREO properties, as well as certain legal fees related to the recent acquisition activity.

FDIC expense for the second quarter was $3.3 million, compared to $4.5 million in the first quarter. The FDIC changed its assessment methodology, effective at the beginning of the second quarter, which resulted in the lower overall assessment rate to our company. OREO expenses increased slightly, to $6.6 million in the second quarter from $5.8 million in the prior quarter. This expense category has fluctuated between $4.7 million and $7.4 million during the last 5 quarters. And again, this was a result within the range. We continue to push the OREO out of the systems, sometimes clearing it at prices that are slightly less than our appraised valuations that we have previously established. And we are continuing to record some additional valuation adjustments on properties that are still in our portfolio. Page 36 of the earnings release provides additional detail on the activity in and the composition of our OREO portfolio.

Other non-interest expense increased somewhat from the prior quarter. The primary reason for the increase compared to last quarter is a result of higher loan origination and collect expenses, as well as a variety of other less noteworthy changes. All in all, if you look at total non-interest expenses in the first quarter of 2011, we were at $98.1 million, and we were able to reduce them in the aggregate to $97.2 million. So I'm trying to keep the expenses in check and controlling it even as we grow the franchise.

So with that, I will throw it back over to Ed.

Thanks, Dave.

So we will talk little bit before questions, just kind of a summary and beyond, where we are going. We continue to execute the plan that we first laid out in late 2006. And that's to take advantage of dislocated assets, people, and banks. We have reached an inflection point, really, on our balance sheet where we are now back to being in an asset-driven mode of operation. If you remember what that was, we always create more assets than we need and that allows us to be aggressive in the markets that we go into to gain market share and build core deposits. We are being able to do that and not having to pay up for deposits, at least at this point in time, nor do we think we will have to, as we've picked up lots of new locations that we're just starting out to market as the loan demand picks up.

Our loan pipelines are strong, and the pull through is being achieved. Growth is being funded at reasonable costs, and core deposits generated from both legacy and new branches. Deposit growth is core growth. Thereby, enhancing the right-hand side of the balance sheet, which those of you who notice, we consider that the franchise value of the organization. The growth is managed to enhance the Company's overall deposit mix, which you know is one of our strategic goals.

Continued opportunities to decrease our cost of funds are being realized, and that should continue going forward. The recent acquisitions have all been strategic in nature and should, in the aggregate, materially enhance both short and long-term earnings. We expect continued opportunities in all facets of dislocations, are in position to take advantage of these when they are strategic to the company and when they are accretive to the company, particularly on the bank acquisition front, both assisted and unassisted deals. We expect there to be a flurry of assisted activity, over the next year, and you are starting to see some unassisted deals, where people are coming out and they are fatigued, that fit into areas that we want to go to. I think as evidenced by the Elgin Bank acquisition, we are able to get good people with great cultures that we can build on going forward. We have the capacity and the ability to accommodate more, but only if they make sense.

There will be some questions, I'm sure, about the core earnings and the $300 million core earnings run rate at the end of the year that we have all talked about. I'm not going to run through the math there, but I know I have some wagers out there with some of the listeners here for Chicago-style pizzas if we don't make it. But, I am not starting the oven just yet. I think that I might be -- I think I may be on the good side of that. So we will see how that all works.

I'm sorry that we have been so long-winded here, but it's been a very, very active quarter for us. It's been a really exciting quarter for us. We are poised for the third quarter and beyond to really show marked improvement in core earnings. Credit will be what it will be. But growing the franchise and creating value in doing so. We are uniquely positioned in this market to do that, and we intend to continue to work for the benefit of our shareholders.

So with that, I will turn it over for some questions.

Thank you. (Operator Instructions)

And our first question comes from Jon Arfstrom with RBC Capital Markets.

Thanks. Good afternoon, guys.

Hello, Jon.

Just want to talk about a couple of topics, but the first one is the margin. I want to make sure I have everything captured here and make sure I'm not missing anything. But you are basically saying on AIG you don't expect any material changes one way or the other, so that that 12 basis point drag is likely not going to be there in the future, but we are not expecting any benefit from that either. Is that correct?

Yes. I think for your model purposes, if you used a 5% interest rate on it, which is still a pretty good rate, and those -- you would be very comfortable doing that. It may go up or down, because prepayments may occur, but I can't see it going below 5%, and anything else would be gravy. I guess that's the way to look at it, Jon.

Okay. Then you've got another $650 million in earning assets, roughly, from First Chicago at, call it 7%-type margin. Sounds about right?

Sounds about right.

You got $2 billion in cost of fund reduction, maybe 50 basis points between now and the end of the year?

Sure.

Another $5 million in trust later in the year.

That's correct.

Anything else we're missing? Anything going the other way?

No. Well, not that we know of right now. But I think the only other point, when you look at margin enhancement, is the effect of the loan growth that we are having. The loan growth, you didn't see it this quarter because of that average balance phenomena, but that whole $400 million that we grew in the second quarter will be the base of average loan growth in the third quarter plus what we put on to that, which we expect continued pull through. So if you have the same amount of pull through, you'd have $600 million more in average loans yielding, which we told you the new base of business is coming on at about 4.5%, and that our funding is coming at around 70 basis points. So if you start blending that in, that's also accretive to the margin. The growth portion is the only part you left out.

We are talking about a pretty material increase in the margin. Just doing the math.

You can do your math.

You can do the math. We've stated previously that our models, that we can top out at $360 million to $370 million, maybe a little bit higher. I think when you run the models, you will see that that top out number makes a lot of sense.

Okay.

And then one more thing I wanted to talk about is credit. You've always been the first guy to say it's not over in Chicago yet, but you seem a little bit more optimistic. Is that fair? And just curious how you are thinking about the provision going forward. The provision is a little higher than I thought, but I understand there is some growth involved in that, in terms of holding the reserve up. But you know, maybe comment on those two, the provision and your outlook.

The outlook on credit, obviously, is hard to determine because there are so many macro events going on in the overall market. Who knows what Washington is going to do and whether they've tossed us back into a double dip. Then all bets are off. We handled a lot of bigger deals that had problems in the first part of this year. We don't see a lot of those big deals coming down. We see smaller deals coming in. But our ability to resolve them, we are working rather quickly to do that.

I meet with these guys every month and we go through every problem credit that we have out there, any potential problem credit, and it just seems to me like it's just starting to abate a bit. But you never know. It is what it is. We don't try to manage that number, because it is what it is. We incent people, if it's got a problem, to bring it to our attention. So you just never know in this environment. But it just seems to us that the probability of it getting better is a lot better -- is a lot higher than the probability of it getting worse at this point in time, given what we know right now.

So I would imagine that that were the case, the provision could drop a bit and we still will have to add to the provision to cover what we anticipate to be pretty good loan growth if the pull through continues. So you can do the math on that, too, based on those numbers. But I think your conclusion you came to in your question is probably correct, if all that occurs.

Okay. Thanks a lot, guys.

Our next question comes from Stephen Geyen with Stifel Nicolaus.

Yes. Good afternoon. You mentioned the impact of the net interest margin from the lower accretion, and I appreciate that. I believe it was 12 basis points. I'm just curious if you have some thoughts on maybe what the impact was on the loan yield during the quarter.

Well, the loan yield on life loans went down to 5% from previous quarter -- I don't know. Mr. Stoehr can look that up right now.

Stephen, as I said, we didn't put it in here, but you know that the impact quarter to quarter, second quarter to first quarter was $4 million. And if you just go to our yield page, we show what loans are. So you could just back that out and do the calculation.

Good point. Okay.

And maybe pushing on the liquidity managed assets, the yield increase to 2.04% from 1.75% last quarter, just kind of curious what drove those changes this quarter.

Well, we had a little bit more invested in agencies. We went out on the curve just a little bit more, as we had some collateral we needed for some of our municipal accounts out there. And so we've just had a little bit more that we put out in longer agencies.

Okay.

Nothing exotic.

Okay. Yes. I got it.

And I guess, last question. You guys have acquired quite a few branches over the last 1 to 2 years. Just kind of curious how the hiring of commercial bankers, what that may look like and maybe where it's at right now and where it may go, over the next 6 to 12 months.

Well, 2 points to your question. We have acquired a lot of branches, and we've acquired branches in new locations for us. We are just now starting to market to those new locations. We have tried to manage our liquidity. I didn't want to bring in a lot of deposits right up front and lay them off at a negative yield, but what we are trying to do is match them up with the loan growth and target our marketing to do that. Because the loan growth, as you have seen from this quarter, the pipelines are good and the loans are coming in. So we are trying to manage our marketing in bringing in new business to be as efficient as we possibly can.

As it relates to new lending officers, we are picking up a few. But we picked up, a lot of people over the course of the last few years. And it takes a little while to get the -- to get the ball rolling, to put in place all the protocols necessary, to do the planning necessary, to do the commercial initiative that we are doing. If we talk to John [Mckinnon] down in Chicago who, he and Paul Carlisle really run the commercial initiative, they'd tell you that those people right now even with what they have on the books and what they are bringing in are probably only about 30%, 35% utilized. So we have a lot of capacity for those guys to continue to build their portfolios. We are looking at bringing in additional people as we find good people. There still are very good people out there.

One of the things we are looking to do is actually formalize -- we offer SBA loans out of each of our banks right now, but it's kind of a secondary thing. We have one person in each bank who is theoretically an expert on SBA loans. But we think that there is an opportunity there and we recently, acquired someone who is an expert in SBA loans, who will actually allow us to be more active players in that. We can turn it into a secondary type product to a marketed type product and go out and compete in that product for the small business side of it. So we continue to bring in commercial bankers to service this middle-market initiative. But we are also looking at other initiatives, like this SBA, where we can go. And that will help us with our small business initiative, which is kind of following on the heels of the large business initiative also.

So, we are picking our spots. There's a lot of good people out there. We are getting at bats with people we never -- 3 or 4 years ago, we would never have gotten at-bats at. People are bringing over good books and good portfolios. So if we are presented with those opportunities, we will continue to grow and expand. But we have good capacity right now with the resources we have.

Does that answer your question?

It does. Thank you.

You're welcome.

Our next question comes from the line of Emlen Harmon with Jefferies.

Good morning, guys -- or I guess it's afternoon now.

Can we talk about just the step-down and kind of the normal accretion that you see on the life insurance portfolio? How is that, I guess, driven quarter to quarter by the level of prepayments? Or are you kind of looking at on a lagged basis? Because it doesn't -- just kind of looking at that table on the first page, it doesn't look like it is necessarily one-to-one. There are some quarters where the prepayments step up, and the accretion has gone down, or vice versa. Could you just maybe talk me through that a little bit?

Dave Stoehr, our Chief Financial Officer, will answer that.

Sure. The prepayment is done on a quarterly basis. We will talk about prepayments first. One of the things that affects them is the size and the nature of the loan that actually prepaid. It depends on how much discount has actually been assigned to that individual loan within that pool. So there really isn't any way to predict kind of a correlation of the amount of prepayment based on the dollars of loans that prepaid. Because in the one quarter we had the big quarter of prepayments, I think it was the fourth quarter we had a fair number of large loans with a fair amount of discounted tax on them that prepaid, so we were able to recognize a larger amount of income on those loans. So that's one of the things that makes it difficult.

As they prepay, we continue, as Ed mentioned earlier, we continue to reforecast those cash flows. And yes, it is done on a lag basis at the end of every quarter -- or during the quarter, we are forecasting out those cash flows and looking at that projected life. And you are really basing it on the history of what you've just incurred. So this quarter -- or last quarter, they slowed down. This quarter, they slow down again. So the projected cash flow has lengthened out that life quite a bit, compared to where we were at year-end.

Okay.

By way of example, in the past quarter we saw prepayments drop down from like 2.7 to 1.5. I think the term is, how many policy maturities does it take to generate like 1.5 in prepayment?

I think this quarter we had in the range of 10 or 12 loans that prepaid. You know, if you go back a quarter, they were probably 2 or 3 times that many. And again, just depending on the discount that's attached to that loan, that might not be a linear relationship. So this quarter it was a much smaller number of individual loans.

Got you. Okay.

Your best bet going forward, Emlen, is just use -- it's 5%.

Do the 5%.

Everything else is gravy after that. And there may be spikes up and down in it, but -- we can't control.

And the accretion recognized this quarter is really based on what you see now being your run rate. Obviously, going down slightly as you go forward, but this quarter would be a base.

Got you. Okay.

And then if I could, maybe just one additional point of clarity, on consolidating the number of functions into your new headquarters, are there any efficiencies that you would get there? I think at one point you mentioned it was getting kind of inefficient to have people kind of spread throughout your facilities. But you also mentioned minimal impact to the income statement. So I was just hoping you could clarify a little bit on that point.

The efficiencies are operational efficiencies. I am in Lake Forest and Dave Stoehr is in Highland Park, and marketing is in Skokie. And if you want to get anything done, it's just hard to get together. And they are all really excited about working very close to me, as you can imagine. Now we can just get things done and get them done on a much more efficient basis.

When I commented on the financial ramifications of it, we got it at such a reasonable cost, and we have half the building rented, bringing in $2 million worth of revenue, plus saving $400,000, plus or minus, on the Oak Brook rent that the mortgage company was paying, should bring the affects of us -- the occupancy costs effects of us moving to be relatively immaterial. That was my point there.

Got you. Okay. Great. Thanks for taking the questions.

Sure.

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

Hello. Good afternoon, guys.

Hello, Brad.

Ed -- or Dave, just on the margin. I know last call you guys alluded to the 3.6%, 3.7%, sort of topping out in that range, but obviously that was before the First Chicago deal. Just kind of curious, is it more -- just related to the accretion income on the AIG loans? Would've thought maybe you would've come in a little bit higher than that, just with some of the moves you made since the last call.

You know, again, it's those two phenomena. The AIG cost us 12 basis points quarter. It is what it is. But you haven't seen the effect of the growth in the margin yet. The graph we put in there just shows you that average loans stayed the same, but you will see the affect of the --

Brad, are you asking whether you think our 3.6% to 3.7% target should be moving higher?

Yes. That's all potentially -- that's exactly it, David. It potentially could be moving higher, kind of based on where you thought you were a couple quarters ago, based on just on the deposit repricing and the loans that are actual coming in that you said that they would, but now that you've got this additional income from First Chicago, can you do better than that?

It certainly is possible, but I have been chastised by Mr. Dykstra not to over promise.

If you use the accretion as a base, if these do continue to stay slow, you've lost a little, so you've got to make that up. Clearly, we think we can do that with the First Chicago deal. You can kind of run the numbers, based upon what we said on the First Chicago deal. But it is only -- if you bring $600 million in on a $15-plus billion holding company, it's a good margin and it's accretive, but it's not like 20% of our balance sheet is repricing. You can run the math. Potentially it could be better. Maybe we will talk about being at the high end of that range.

Got it. Okay.

And, David, initially is it fair to just kind of layer the existing First Chicago expense infrastructure on top of you guys, and then -- just kind of curious what your plans were for cost savings, anything in that regard.

We certainly have built in and are experiencing cost savings. Obviously, you don't need all the infrastructure they had to run the organization from the senior level on down. We will have two branches that will end up being consolidated with our branches, and we certainly always want to keep the really good people. And we have done that. But we do expect there to be pretty legitimate cost savings in the assimilation of that organization. Pretty much across the board, in every category.

Great.

And then final question. I know the deal this week was small, but obviously the metrics of it were attractive. Just kind of curious what the acquisition pipeline looks like. Did you think this kind of marks the beginning of others kind of realizing what the expectations are out there and can you guys, maybe pull a couple more of these, before the end of the year? Just kind of curious some of the additional color behind this one that you announced yesterday.

Sure, Brad.

The interesting thing is that we reported to you previously that we have been in any number of banks to date where we have gone in and met with folks, and have kind of walked out and said, really when you melt them down, given how we mark things, there is really not a lot there, or the right-hand side of the balance sheet doesn't add up properly. We have been in 25 or 30 banks and have found one that we have been able to come to terms with and are excited about. They are still few and far between right now, on the tired bank concept,. But I think over time, you are going to have the survivors and the non-survivors, and the survivors that come out are going to be tired, and we are right there for them.

We continue to get inbound calls, averaging one a week. We continue to look and make friends with people. For the most part, they are all good people just trying to work through this thing. And if they are strategic, we will move on them, but they've got to make sense strategically. They have to have something when you melt them down. And they have to make sense culturally. So we will continue to look at that and to continue to talk to people and build relationships. Some of the seeds that are planting now may come to fruition a year and a half from now when things get better for them.

I have no way to predict if in the next 6 months there will be zero or 6 unassisted deals. But there will be more assisted deals coming down the pike and you can all read the Texas ratio lists and look at people's longevity on those lists and can predict that. There will be some that fit us very strategically. There are a couple that we have pegged, that we will still be disciplined, but we will go after. If it doesn't make sense strategically, we won't do it. But I imagine that we are going to be relatively active for the next 18 months plus in this arena.

Great. Thank you.

Our next question comes from Chris McGratty with KBW.

Good afternoon, guys.

Just a question on the wealth management acquisition. Do you have the breakdown of the assets under management that you're acquiring? I am trying to back into kind of an estimated revenue number. Or maybe you could, either way, you could get to the revenue concept.

Well, we actually haven't disclosed -- we brought on $2.4 billion of more assets under management, which really almost doubled what we had out there. But we haven't really disclosed yet what the revenue is on those new assets.

The split is 63% equity, 34% fixed income, and 3% cash in the business. Remember, it's institutional, so you are not going to get -- your fee revenue is muted by larger accounts that are institutional, so --

That's helpful, that's helpful. That's all I had. Thanks.

Our next question comes from the line of Mac Hodgson with SunTrust.

Hello. Good afternoon.

Hello, Mac.

On the strong loan growth you saw this quarter, is that coming mostly out of the downtown -- the new kind of downtown office and that effort there, or is in other markets? Some color there would be helpful.

Interesting question. I don't know if I can have the answer to that.

It's actually, coming from all of the markets. The majority is coming from downtown. But if I look at our pipeline right now, and I think that the pull through rate has been consistent across the board, approximately 18% to 20% of it is coming from downtown. But remember, what we did was we had the hub downtown, but we dispersed commercial lenders throughout the system, working for the individual banks subject to the protocols that we put in place. And it's kind of dotted line managed by downtown.

So the whole initiative is being undertaken by the entire system with downtown kind of acting as the hub. Of the pipeline they're, they're 18% of the current pipeline right now. Lake Forest Bank is 11% of the pipeline, Northbrook Bank is 12% of the pipeline. I've got 1, 2, 3, 4 -- 4 banks at around 9% and the rest around 5% or 6%.

So it's equally distributed, but it's all part of the initiative that's being led by downtown. And they do have the lions share of the growth right now.

Great. That's helpful.

And on the life insurance premium finance loan, remind me what kind of the core yield or kind of spread on those loans are, excluding any accretion. What they are being put on for.

Well, I think that we generally look at, in this environment it's sort of maybe prime plus a half -ish right now, for new production.

Okay.

And what do you think is the remaining life of the accretable discount? Obviously, if prepayment's slow, it extends out some. I'm just trying to get a sense of how much longer maybe the $5 million or so of accretion will run through spread income per quarter.

You know, I think probably is in the 3 to 4 year range.

Okay.

Is just sort of depends on how prepayments happen going forward. But it's probably a little-- probably in that range.

And then Ed and Dave, on capital, obviously, you've shown really strong growth in doing several deals. Remind us again kind of the comfort level on the capital ratios and maybe how much excess liquidity you have at the holding company to support organic growth of the banks in deals and things like that.

Well, even with these deals, if you throw First Chicago into the mix, your TCE ratio still stays well above 7%. We have had over $100 million of cash at the holding company in the prior quarters. We've got lines of credit and we have access to additional debt. When we raised our capital last time, we did all common, basically. It gives us a lot of room for tier 2, if we need it down the road. So we could look at that to supplement it in the interim. But for the time being the liquidity at the holding company is still there where we haven't dipped into any lines and the capital ratios are still comfortable for us.

Core growth will be an interesting thing to watch, and the returns on the core growth. So we feel comfortable right now where we are at, and -- but these opportunities aren't linear. They come when they come, and we feel that we can continue the core loan growth that we have here. We think that as -- you have to do the math, but good profitability throughout the rest the year should be able to support that. We want to stay -- we want to stay on everybody's good side here, in terms of the regulators and the like. We are going to play, as we always have, we play it by ear, try to the best thing we can for our shareholders, in terms of managing capital to the right levels. We want the regulators happy with us, as always, as they are right now, and allowing us to partake in this consolidation that's taking place.

So we think we are comfortable right now, and -- well, we don't think we are, we are comfortable right now. And we will continue to play it by ear. This is a very interesting, volatile, opportunistic market right now that we intend to take advantage of. We will never say never, but right now with the way things look and what we've got going, we're pretty comfortable with where we stand, especially our capacity to pick up some tier 2.

We also intend to get long-term financing on the building. Once we put $6 million into it, we will be all in around $30 million bucks, and we will probably try to take advantage of these low rates and put some long-term financing on the building to generate a little more holding company cash, too. ¶ Hope that answers your question.

That does. You said pick up tier 2 capital, is that what you meant, is that what you are implying?

Yes. We have plenty of sub-debt capacity. To if we needed it, that would be the first place we'd turn. Unless we were faced with insurmountable opportunities that required us to get TCE up higher to support a larger deal.

We don't like larger deals, to be honest with you. We like the smaller, bite-sized deals. $500 million, $600 million coming on the balance sheet is -- or, you've seen us do a deal for $50 million. A $50 million acquisition, on an FDIC basis, because it was strategic. Because they bolt right on. We've got the infrastructure, the systems.

I was really proud of our people to go out here on a Tuesday and be out there on a Thursday and Friday and really seamlessly assimilate the First Chicago transaction and get everything running. We like those smaller deals, but you never know. A big one comes along and it could change the ballgame. We are going to continue to be opportunistic.

These types of cycles come around maybe twice in your career, if you are dumb enough to hang around banking for as long as I have. And you've got to take advantage of them when they occur.

Okay, great. That's very helpful. Thank you.

Our next question comes from Bryce Rowe with Robert W. Baird.

Thanks. Good afternoon.

Hello, Bryce.

Dave or Ed, can you guys comment on the mark that you preliminarily plan to take on the Elgin deal?

No, we haven't disclosed that yet. I mean, you could actually go to their call report and see they've only got a few million dollars worth of NPLs out there, and they've got, I believe, $15 million of OREO recorded on their call report. Their credit quality -- they've got their hands around it. And that's why this deal was doable. And that's because they've got their hands around their credit quality, where a lot of the other banks we've been in really don't and haven't lived up to taking the marks that they need to take.

So we haven't disclosed that. I'm not sure it would be fair to them for us to make that public until the deal closes.

Okay. That's fair.

I think that's all I had. Thank you.

Okay.

And our final question comes from Joe Stieven with Stieven Capital.

Hello, Ed. Good afternoon.

Hello, Joe.

Listen, actually Brad Millsap had my last question on the margin, so I'm actually done, but thanks for the outlook.

Thanks, Joe.

Okay. Well, thank you, everybody for listening in. You know you can always call us if you have additional questions. We are excited about where we are right now and really excited about the second half of the year.

But thank you all. And again, call us if anything pops into your mind.

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