Wintrust Financial Corp (WTFC) 2013 Q1 法說會逐字稿

Welcome to Wintrust Financial Corporation's 2013 first-quarter earnings conference call. (Operator instructions). As a reminder, this call may be recorded.

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, and instructions will be given at that time. The Company's forward-looking assumptions are detailed in the first quarter's earnings press release and in the Company's most recent Form 10-K on file with the SEC.

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

Good morning, everybody, and welcome to our first-quarter earnings call. I'd like to say with me as always -- but 6 inches of rain in the last 12 hours has kept me in Lake Forest and David Dykstra, Dave Stoehr, and Lisa Pattis in Rosemont as we battle flooding in the system here. But we will -- we are building an ark, and we will survive.

As usual, I'll give a general overview of the quarter. Dave Dykstra will follow up with -- in a little bit more detail, and then following some summary remarks from me, we will have time for questions.

All in all, we were pleased with the first quarter. Earnings of $32.1 million or $0.65 a share, up 38% from last year and 7% from the fourth quarter. We were at the high end of analyst estimates there and certainly beat the Street by, again, for the umpteenth quarter in a row by a lot.

It's kind of interesting to me that I think if you do go back and look how many times we have beat the Street, but how many times they are reconciled backwards into models, I just find that very interesting as to what's normal and what isn't normal anymore. Just with all the crazy accounting we have to do and the opportunities that we have out here, we've been able to beat the Street just by making money, which is, you know, what our goal is.

Net interest margin was up 1% or 1 basis point -- I which wish it was 1%, but it's just 1 basis point. And our net overhead ratio was 1.47%. We always thought that in the old days, 1.5% net overhead ratio was really considered a very well-run bank. I think in this market with these rates, you really have to keep pushing that number down into the 1.30%s to make that work.

Other income excluding security gains decreased $5.5 million. The majority of that was due to a reduction in mortgage income. Mortgage volumes were down about 16% from a very good fourth quarter to a little bit over $1 billion.

However, our pipelines look strong for the second quarter, and we are optimistic about that. But as you know, that can change in a nanosecond if rates change.

Another bright side, wealth management fees were up 9% on a quarter-versus-quarter basis. Business there is very good and is getting great traction. Other expenses -- operating expenses were down $2.5 million quarter versus the fourth quarter after taking out credit-related OREO expenses -- or in our case, income this quarter.

Credit losses were down significantly, and we did have, as I mentioned, OREO dispositions that gave us income as opposed to a $5.3 million loss in the fourth quarter of last year. Charge-offs decreased significantly to $11.9 million, resulting in a $3.9 million decrease in the provision for loan losses.

We did have a minor increase in the total number of NPAs versus the fourth quarter, with them rising about $9 million. But they still remain about 1% of total assets.

In the past we've stated that there may be some bumpiness in our trajectory as we bring down the level of absolute NPAs. Be advised that as of now, we don't see this as any sort of trend, but rather just a blip. Our portfolio remains properly reserved, and we continue with our commitment to expeditiously identify and clear problem assets.

As an aside, if you look at overall 30 to 90 days past due, they were very low. On the balance sheet side, well, this quarter was something new and different for Wintrust. We actually shrunk.

But in spite of maybe what George Costanza said in that famous Seinfeld episode, in our case, shrinkage was actually a very good thing. As you may recall, last year we needed to shore up on liquidity support growth in the asset side. By year-end as a result of acquisitions and organic growth, we are in a position of having actually too much liquidity through the planned divestiture of Second Federal Savings, which was the FDIC-assisted transaction that we took a Mulligan on, and letting maturing brokered CDs run off and divesting of some excess wealth management deposits, we've been able to right-size the balance sheet. Should asset growth opportunities in the future outpace our funding growth, which we don't think will happen but could, these vehicles other than the Second Federal opportunity still remain available to us to fund the organization.

In general, core growth remains pretty good. We'll also pick up additional excess liquidity to fund future loan growth with the expected closing of the First Lansing Bancorp acquisition, which we expect to occur at the end of this month.

By the way, this deal will actually make up for the first-quarter footings decrease. So we'll be right back where we were, and organic growth should be adding on to that.

On the asset side we obviously were able to reduce the amount of low-yielding liquidity management assets as we ran off those deposits. On loan growth, for loan commercial and CRE growth showed -- CRE loans showed good growth in the first quarter, with an increase of $167 million after taking into consideration an $83 million quarter-to-quarter drop in our mortgage warehouse lending business.

We didn't lose customers. We did have a competitor come in who takes a different view on capital and undercut the market on the right side.

So our customers, if they headed to fill up their lines, they went to, obviously, the cheaper one first. We are still in the business, and we are picking up new customers. And we would hope to make that difference up down the road.

Mortgages held for sale from our own production decreased $31 million on the balance sheet, a result of the 16% drop in production versus the fourth quarter. As I mentioned previously, at this point in time, second-quarter pipelines were very good.

Covered loans, as you would expect, also decreased quarter-to-quarter by $41 million. Our guys are doing a terrific job in this area, and at the end of the day we have every expectation that the railroad tracks will line up. That is that our indemnification asset will be fully amortized by the time the corresponding loss share periods expire.

We look at this -- we re-recast cash flows every quarter, and we manage this every quarter. And we have every expectation that there is not going to be any sort of explosion in the compost pile there. Those portfolios are acting much better than originally anticipated at bid time, when we bought those FDIC banks, and I think we are managing them very well.

Core loan pipelines also remain consistently strong, with $1.29 billion in gross opportunities. And if you weight that by probability of close, close to $860 million over the next six months. There's about 75% of that pipeline weighted for the next three months.

Now, I'm going to turn it over to Dave to give you a little bit more detail on the numbers.

Thanks, Ed. As normal, I'll just touch briefly on the non-interest income and noninterest expense sections.

Turning to non-interest income first, our wealth management revenue improved by $1.2 million to $14.8 million in the first quarter of 2013. That compares to the previous quarter total of $13.6 million, and it also increased nicely from the year-ago quarter of $12.4 million.

Now, the trust and asset management revenue increased by $331,000 to $7.6 million in the first quarter of this year. That's from $7.2 million in the prior quarter. And our brokerage business did very nicely and saw an $863,000 increase in its revenues as the client trading volumes increased during the quarter.

Ed touched on the mortgage banking revenue. But in summary, it declined by 13% to $30.1 million in the first quarter of 2012 from $34.7 million recorded in the prior quarter and was up 63% from the $18.5 million recorded in the same quarter of last year.

Despite the decline in the overall mortgage banking revenue during the quarter, it still is our third best result in the Company's history. So, still strong, strong revenue there, strong production, and we are pleased with it this quarter.

We originated and sold $974 million of mortgage loans in the first quarter compared to $1.2 billion of mortgage loan production in the prior quarter and $715 million in the year-ago quarter. And then the banking revenues remain relatively strong, despite the slightly less favorable interest rate environment.

We generated strong volume related to the purchased home activity again, representing 34% of our volume in the first quarter, and the pricing metrics remained good. The current quarter was benefited slightly from a higher valuation in the fair market value of our mortgage servicing rights. The valuation increased to 72 basis points from 67 basis points in the prior quarter. That resulted in $594,000 of additional value in that portfolio.

Fees from covered call options totaled $1.6 million in the first quarter of 2013, and that compared to $2.2 million in the prior quarter and $3.1 million in the year-ago quarter. As we have talked about before, we consistently use these fees from covered call options to supplement our total return on treasury and agency securities that we hold in our portfolio, and that's done in an effort to mitigate margin pressures caused by the low rate environment. Now the fees received on those can be impacted quite a bit by market rates and volatility conditions.

Now, a gain on sale of securities and trading losses netted to a negligible loss of approximately $184,000 during this quarter. This compares to a net gain of $962,000 in the first quarter of last year.

The trading losses, as we discussed before in the current quarter and in the prior two quarters, were primarily the result of a fair market value adjustment related interest rate contracts that we don't designate as hedges. These are primarily interest-rate cap positions that the Company uses to manage its interest rate risk associated with the rising rates on various fixed-rate longer-term earning assets.

Miscellaneous non-interest income continues to be positively impacted by interest rate hedging transactions related to customer-based interest-rate swaps. We recognized $2.3 million of revenue in the first quarter, compared to $2.2 million in the prior quarter and $2.5 million in the year ago quarter. So relatively stable revenue from that source.

Additionally, other non-interest income included approximately $1.1 million in positive valuation adjustments on limited partnership investments that we own at the holding company compared to a positive valuation adjustments on these investments in the prior quarter of $373,000 and in the prior-year quarter of $1.4 million. As we discussed in the past, these are primarily investments in bank stocks.

If we turn to noninterest expense, as Ed mentioned, noninterest expense totaled $120.1 million in the first quarter, decreasing $9.4 million compared to the prior quarter and a slight 2% increase from the $2.4 million that we recorded in the first quarter of 2012. Now, if we turn to some of the individual categories, salaries and employee benefits increased by $1.4 million in the first quarter compared to the prior quarter.

If you exclude the impact of the increase of $2.4 million related to payroll taxes that we recorded in the first quarter compared to the fourth quarter of last year, this category of expenses would've actually declined by $1 million. As we have said in prior years, payroll taxes are always higher in the first quarter of the year. Social security limitations reset at the beginning of the year.

You know, additionally, base salaries expense increased slightly as a result of an additional expense associated with a full quarter of having the Hyde Park acquisition. As you recall, we closed on that acquisition on December 12, 2012. And so we only had a few days in the fourth quarter where we had a full quarter of that acquisition in the first quarter of 2013.

The quarter was also impacted by the annual base salary increases that we put in place for employees in the first quarter, which ranged in the 2% to 3% range. Due to lower mortgage origination volumes, we also saw slightly lower commissions expense. So all in all, the category was up slightly but not dramatically.

Now, the first quarter of 2013 saw the $6.9 million decrease in the net OREO expense, resulting in an actual gain of $1.6 million in the first quarter. The gain was primarily related to the settlement of one large OREO property where we recognized a gain of approximately $3.4 million, and then reduced valuation adjustments on other OREO properties that we hold, as well as just having a lower level of OREO property outstanding and expenses associated with maintaining that.

On page 36 of our earnings release, we do provide the detail related to the activity of and composition of our OREO portfolio, which declined 11% to $56.2 million at March 31, 2013, from $62.9 million at the end of the prior quarter. But if you look at all the remaining categories of noninterest expenses, they actually declined by $3.9 million in the first quarter compared to the fourth quarter of last year.

You know, the most significant reason for the decline was that the fourth quarter of 2012 included a $2.1 million charge related to breakage fees paid on terminations of certain longer-term high-rate repurchase agreements. And so the $2.1 million of the $3.9 million increase related to that.

The expense categories also benefited from the divestiture of the branches associated with Second Federal Savings, which were divested in February of 2013. There was some offsetting increases for the Hyde Park Bank acquisition. But if you just exclude the breakage terms that we had last year, the other expenses held their line nicely and actually did show some overall decrease.

So in summary, as I noted earlier, noninterest expenses declined $9.4 million or 7% from the prior quarter, and the Company's efficiency ratio improved to 63.8% for the first quarter of 2013, which is down from the 66.1% result that we had in the prior quarter and the 68.2% result that we recorded in the first quarter of last year.

So happy with the expense control in this quarter. And with that, I'll turn it back to Ed.

Thanks, Dave. In summary, again, it was a pretty good quarter. We have good momentum that appears more than sustainable. We remain committed to grow the franchise and all lines of businesses of the franchise without the commensurate increase of expenses.

That is, we want to fully take advantage of the operating leverage inherent in our infrastructure right now. And I think you saw a little bit of that starting to take place in the first quarter. We expect to continue that going forward.

We continue to see a number of acquisition opportunities in all of our lines of business. You can be assured of our -- that we will maintain our discipline in this area.

It is inevitable that there will be consolidation in the Chicago and Milwaukee markets. It's just going to take a longer -- extended period of time, which is a good thing for all of us, I think. I think we're at the right place at the right time with the perfect vehicle to take advantage of this, but only in a way that will be accretive to shareholder value.

We continue to -- are committed to continue to increase return on tangible equity and our tangible book value per share, which we believe that in this market is the really only true measure of value to increase value to shareholders. It's always been what we do, and we'll continue to be guided by that going forward.

So with that, we can open up for questions.

(Operator instructions). Jon Arfstrom, RBC Capital Markets.

A question for you, Ed, just on lending. You touched on the competitive environment a little bit. When I see the loan growth number, it's a little slower than you guys have had historically.

I'm just curious if there's anything more to read into that other than the competitive environment? And maybe if you could just comment on the pipeline and the outlook as well, that would help.

Sure. You know, the pipeline is -- has been relatively consistent. The pull-through rate had been consistent pretty much the last year. And you've got a first quarter phenomenon where things actually slow down a bit. Because people -- year-end businesses -- you've got these got to wait and see their year-end numbers and the like.

So there is a little bit of seasonality that you see in the commercial side. We are seeing opportunities on the commercial real estate side that are still priced pretty well.

The competitive environment, as you know, Chicago has always been competitive. And believe it or not, Milwaukee is more competitive than that. We do see continued loosening of credit standards and pricing, especially on the middle market commercial side.

However, as we stated before, we have our circuit breakers. So we have our profitability analysis and we have our loan policy, and we don't go outside of it.

I don't think that -- we usually have been doing about $250 million a quarter. We did about -- call it $170 million rounded on those two lines of businesses.

I don't see the first quarter as any sort of trend. I think there is still a lot of business out there that we can pick up that's within our parameters. It's not as bad -- I think if the shadow banking system was as strong as it was back in 2006, 2007, it would be a heck of a lot worse. It's not that bad. There's still opportunities out there, but you're starting to see the creep -- the better then fed funds thinking come into place, and you're starting to see people do irrational things again, or unnatural things.

But it's a big market. There's less players in it, and that allows us to be very selective. And we believe we should be able to continue to grow the portfolio very nicely throughout the remainder of the year. Does that answer your question?

Yes, that answered my question. Just one follow-up on the margin, either for you, Ed, or Dave. I know you guys aren't giving margin guidance, but is there any big levers or pressures that you see on your margin going forward?

Dave?

You know, I think the way we look at it is just where does the commercial real estate loan competition take those yields? So as the new business comes on, that's the thing that we need to watch and monitor. And we are being selective, and we think we've held our own here. But, if the market just gets too loopy, that would be the pressure.

But we continue to be able to bring down the deposit costs a little bit. There's only so far you can go there. Premium finance yields have held up pretty good. Commercial real estate yields are still fairly decent.

It's just on the commercial side, where is competition going? It's not to the point yet where you won't make loans. So I mean, we can still be selective and still do it, but that's the only thing that really worries me out there.

The other thing, John, is the repricing of loans that are in the books -- the good customers that are coming off higher rates, just because of where the market is right now, and they still qualify, but -- and they fit our parameters, but they are not as profitable as they once were because of the compression of the overall market.

So that -- that's what -- it's not the new business that's really -- new business is coming out where we would like it. But we are having to reprice what were very profitable loans as they come due to maintain the business.

So that's what's -- what drives, really, the earning asset side. And within a year it will be over. We'll have repriced everybody. So hopefully that will go through.

But like we said, our goal this year is to grow with not a commensurate increase in expenses. So we can keep the expense base down, grow net interest income, realizing that the margin may come down a little. Position ourselves for higher rates, which we all -- every day that goes by, we're getting closer to higher rates. Continue to position ourselves for higher rates down the road. That's about the best you can do.

Yes, okay. All right, stay dry. Thanks.

Brad Milsaps, Sandler O'Neill.

Dave, I just wanted to follow up on the mortgage banking line item. It looks like -- I know there were a couple of moving parts in there. You had the MSR recovery, and then there was the putback reserve recovery.

But even with -- even if I back those out, it looks like you're -- again, on loan sale margins stayed pretty flat linked quarter, and we've seen from other banks that come in quite a bit. Just kind of curious what your thoughts are there in terms of kind of what you see? Well, not only volumes, but also sort of the margin you're seeing when you sell the loans in the secondary market.

Well, you know, as Ed mentioned, we think second quarter, based upon the pipeline we have now, is going to be another strong quarter for us. You know, obviously, they have to close, but the pipelines are in good shape, and we see another quarter.

As far as gain on sale margins go, you know, they started out in the first quarter a little lower and improved throughout the quarter, where we were maybe down 10 to 20 basis points range. And the margin on those wasn't dramatic.

Some of it is mix of business, whether you're doing more jumbos now or the like, and government programs, and just what your mix is. So it moves around of a little bit, but it held up pretty good. And if we try to manage that and monitor our volumes as they come in, and if the flow actually gets too large, and Ed has talked about this in the past, we'll increase our pricing a little bit just to control the flow, so we don't overload the system.

Margins came in a little bit. Not dramatically, and the volume outlook is strong for the second quarter.

I think if you look at the numbers, they were in what -- about 13 basis points all in all, which basically was offset by the recourse in loan loss provision reductions. So you know, I think you're -- but we were pretty flat on the overall business, as you say.

But they did come in a little bit, and they probably will stay about this level. It's just a function of the overall market. When the overall market heats up, as it probably will in the second quarter for everybody, that will drive up margins across the board again.

But when it falls, it's a double whammy. You lose the volume, plus you do lose margin. But fortunately we look pretty strong for the second quarter, and we are seeing opportunities out there also.

We think that that market is going to consolidate when this thing slows down, and we are seeing opportunities there. We haven't found any that we are hot to trot on right now, but that mortgage market will continue to consolidate in another area where we can roll up for basic -- for not a lot of money and bring business in without the commensurate increase of expenses. So we -- mortgages are going to be a long-term play for us, something we are committed to, and something I think we are well positioned to take advantage of when the market consolidates.

Great. I appreciate the color.

And Dave, I missed this the first time through, but what was the refi versus purchase money percentages during the first quarter?

34% was the first-quarter total. Mark actually was a little bit better than that, but on average, 34% for the first quarter was purchased.

Thank you.

Chris McGratty, KBW.

Dave, on the gain on sale, the 10 and 20 basis point compression that you talked about, what's the -- is this the absolute level that's off of? Is it like a 2% gain on sale? Is it 1.35%, or -- ?

You know, we haven't disclosed that, Chris. I don't have the specific numbers in front of me. So we'll try to put that in the queue, but we haven't put that out in any document yet.

Okay. Ed, one for you on the efficiency. Where do you see this playing out over the next 1.5 years? You talk about the revenue growth, got a lot of expense growth. Where can the efficiency ratio go?

Well, you know what, I hate talking about the efficiency ratio, because your margin -- when your margin is under pressure, it makes you look like you are inefficient. We look at the net overhead ratio. We manage off of that.

And we figure we're about 1.47% right now, and as I said, I think 1.50% was always the market mark of a well-run bank. But now you have lower margins, and you have to do better than that.

We have to get that number into the 1.30%s someplace. So when you think of the efficiency ratio, it's where your margins are going to go, where your expenses are going to go. When you're in inquisitive mode, things aren't as easy to straight-line. You know, you'll pick up an acquisition that's going to take you three or four months to wring the expenses out of it. But that's our goal, is to get down into the 1.30%s in the net overhead ratio and try to hold the margin as good as we can.

Okay, one last one, Dave. On the acquisition, it looks like in the release you are acquiring $370 million of assets. What's the breakdown of those assets? Is it between loans and securities?

You broke up there a little bit. The breakdown of what?

The $370 million of loans that are going to come in with the deal -- the First Lansing deal.

Well, we've got -- they're probably -- I have to go back and look. They're probably about 60% loaned up. So we'll have some liquidity there that we'll have to deal with, and we probably can get rid of some of that.

We don't need all of the investments. But I don't have the specific breakdown in front of me between it all. Their portfolio -- they do have residential and they do have commercial. They do have commercial real estate. It's a nice blend. I don't have the specifics in front of me right now, Chris, but I could follow up with you. It's public information, so I can get it to you..

All right, thanks.

That was about -- over a $450 million bank till they -- when they hit the crisis, they shrunk themselves down to the level they are at right now. It's a great market for us and really shores up the Southside.

We're excited about getting in there. That gives us entrees into Northwest Indiana without a lot of overhead. There is a lot of the business in Northwest Indiana as it flees beautiful Illinois. It's always been a nice business base there that we can service out of that -- those locations.

So we are actually excited about the strategic aspects of that acquisition. And the people we are picking up are good folks and known to us for a long time. So we think that's going to be a good deal for us.

Emlen Harmon, Jefferies.

Maybe start off just on the loan growth side of things. I guess typically see some strength in the T&C financed -- excuse me, premium financing business in the first half of the year. Didn't start to see that come through in the first quarter. Is there anything kind of unusual going on there, or do we expect that to pick up as we head into the second quarter here?

I don't think there's anything unusual going on. That business is actually pretty good for us. The market has been hardening and continues to harden on the premium finance side, and so we -- and yields have stayed pretty stable there for the last year or so.

So we're not seeing the same sort of compression in that business as we do in some other areas, and we're fine with that business. We think it's good. There's nothing there that concerns us.

Okay. So no shifts in market share or anything going on there that I guess would hamper the growth?

No.

Okay. And then kind of stepping back and talking about the deal environment, just in terms of the scrutiny that deals are going to on the regulatory side, are you anticipating that to be or have you found that to be kind of a larger impediment to doing deals? Obviously, it sounds like the First Lansing deal is coming through pretty quickly. So not a problem there, but just about from a big picture perspective.

I think the bigger -- the larger the deal you do, the more you're going to get scrutinized. We are doing smaller deals. We have great relationships with our regulators.

It doesn't mean they're not beating the tar out of us as they are everybody else, but we -- our structure allows us to do these things very efficiently, and we have not seen any issues as it relates to timing or excess regulatory burden related to any of the deals we've done to date.

Okay, great. Thanks for taking the questions.

Steve Scinicariello, UBS.

Just a quick one for you, just on the expense side of things. Great to see the positive operating leverage starting to kick in.

Just kind of curious, when I kind of weigh all the puts and takes in that expense line, is that $120 million kind of a good core level to then kind of build from? Or were there maybe some other things just to be aware of as we look forward?

No. I think it's actually pretty good number, Steve. The OREO is the line item. That is included in the $120 million there. And obviously, we had a net gain on that line item, which is not normal for us, but we also see valuations stabilizing there, and we had lower write-downs on existing properties. And the portfolio is coming down.

So you sort of have to look at the OREO income expense line there and make your own decisions. You know, we believe that that could be a fairly low number going forward, but I'm not so certain it will be again every quarter.

Other than that, our loan collection expenses and our covered loan expenses have gradually come down, and some of these categories increased a little bit. But we also had the Hyde Park acquisition come on and added to some of the categories.

The only other caveat would be mortgage banking revenue. So we think they'll be relatively stable; then the salary line with commissions will be relatively stable. But if that jumps up or falls down a little bit, as you know, commissions and other benefits are about 50% of the revenue line. So there could be some movement with that. But other than that it should be a fairly clean quarter.

Got it. Makes sense. And then just in terms of kind of the OREO, when I look at the trends and the gains and the valuation adjustments, it certainly looks like much more positive trend there.

Should I read anything into it? Or is that just going to be lumpy as we go forward? Because just continued improvement there, and definitely good to see a lot of the things moving in the right direction. But just kind of looking to get some more color on that.

Continued improvement on a lumpy basis. How's that?

That sums it up perfectly.

Yes, it's like the weather today. This airplane is coming down, and we are going to land this plane, but it's going to -- as the numbers get lower, too, you can have $1 million or $2 million swing one way or the other, which will materially affect a lower base number you're working off of.

But we think the market is stabilized. We are seeing real estate stabilize. I think we've identified most of our issues. That doesn't mean they don't pop up.

We don't look at migration that much, because with the way we look at it, you can have a loan that's current that we're going to put on nonaccrual and work out. So, the -- we think that credit should continually get better, and that's our goal.

Perfect. Thanks so much, guys.

David Long, Raymond James.

Looking at the M&A environment, you guys have talked in the past about the number of incoming calls from prospective sellers increasing over the last several months. Can you give us an update on that? Are you still receiving calls from prospective sellers? And how have your expectations changed?

You know, as time goes by and it's taking longer for these guys to kind of work out of their issues, because they -- their core earnings aren't growing like they would like, because they can't lend the money. They have too much real estate already, or too much something. And it's taking them longer to earn out of their situation.

But we are starting to get rebound calls. Guys we've talked to -- more rebound calls than new inbounds. Guys we talked to a year ago or 18 months ago, who when we went in and melted them down, they really had some work to do before they were worth anything.

But they -- they're starting to make progress and get out of it. Not all of them have made it. Some are actually looking pretty good, and we just have to see how it goes.

But I think the expectations aren't any different than they were a year ago. I think a lot of them would like to get -- they'd like to get close to book value if they could. What we do is we go in and we melt them down. We come up with a revised equity number, and based on the value of the franchise, you pay a multiple off of that revised equity number.

That may or may not be above book value as stated, but book value is kind of what they're looking at. If they can get away with that, they'd like to get out of this goofy business and move on, because as they all tell you, they're just really tired. And they don't see a lot of -- they just don't see the upside in the future for banks, especially the ones under $1 billion. They just don't see the upside for them on the earning asset side, the excess capital side, the excess regulatory side.

And they've just been through -- it's been like they have been in a submarine being depth charged for the last three years. They're all shellshocked, and I think they'd like to put their money other places. And that's to our benefit, because with our size we can take advantage of the situation and this rollup at very, very effective prices, and everybody wins.

Great. And then as a follow-up, as far as from the buyer side, I think you guys have done some pretty good prices on some of the deals you've done because there hasn't been a lot of competition. Are you seeing, as other banks improve their health, more competition for some of these potential deals?

We would expect to see that. But I think what gives us a leg up and what really give us a leg up before the crisis, when we were doing some deals, was that our culture -- if you think the banks under $1 billion are really community banks, and they -- our culture fits them much better than, say, a commoditizer who's going to come in and wipe them out, and just make them teller stations with one lender in there.

We want to move in, and we do it strategically. We may do that in a situation if it's just an add-on to an existing bank, but if it can move us into a new geography, we want to build that geography out.

And so our culture really makes us a better fit for them. And a lot of these owners -- there might be one or two, or a handful of owners in these banks, and they would like to take advantage of -- they want to take care of their people as best as they can. And we have the ability to, even when we -- we have enough turnover here that we can absorb people and not do the draconian cuts, but rather through attrition be able to take care of their people also.

So culturally I think we stand out. I think it will get more competitive. But it is what it is, and we're not going to do anything stupid. It won't be anything we haven't seen before.

Yes. The only thing that I would add on there, Dave, is we have more that we're talking to that don't have investment bankers associated with them. It's just direct talks.

So obviously, we don't know who else they're talking to on the other end, but a fair number of them are just direct bankers to bankers talking and not coming through investment bankers. So that would sort of lead us to believe that people are trying to pick who they want to partner up with.

Good point.

Got it. Thanks for the color, guys. Appreciate it.

Herman Chan, Wells Fargo Securities.

Thanks. Ed, you mentioned in your prepared remarks that mortgage warehouse was more competitive as well. Talk about your outlook there as we get into a seasonally stronger Q2.

We've picked up some additional clients, and we would hope to rebuild some of the lost business. We haven't lost clients. What we did -- many of these warehouse -- these mortgage operators have more than one line. And when their business drops off, we're the first that drops off, because we're more than more expensive than this competition that's come in.

And we're not going to drop our pricing. We keep 100% risk ratings on these things, and we have collateral -- we have returns we have to make. So we think we can pick up some additional market share just by new business.

We are very selective in who we do business with. But we're not going to cut our pricing to pick up new business in that area. We think it's priced just fine for the amount of work that we have to do, and we'll just see where that goes.

But we would hope we could build off the number that we -- the low point that we had in the first quarter.

Got it. And can you talk about the decline in noninterest-bearing deposits in the quarter? With commercial deposit growth in recent quarters, are you seeing some more seasonality in those balances in Q1? And further, did tag expiration affect deposit balances at all?

That's a good -- I don't believe -- I've not heard anything about tag expiration affecting deposit balances in the quarter. That's not been an issue.

I think just at the year end, there was just a lot of window dressing going on at our corporate clients. We actually continue to pick up new business and new deposit accounts. Our overall deposit numbers are up.

It's just that the levels of DDA were down. I think you've seen that in some of our other competitors, too, where their DDA dropped down, but it wasn't because deposits or customers left, actually.

You know, we picked up a number of very good customers in the first quarter. I think we think it's seasonality. We're looking at it a little bit deeper, and we'll know better -- we'll see what happens in the second quarter.

Got it. Thanks for taking my questions.

Joe Stieven, Stieven Capital.

Listen, almost all my specific questions were answered. The only thing you really didn't talk about -- a little bit more general -- is just sort of the health of the Chicago real estate market. Your market sort of -- was sort of later into the cycle, sort of seems a little later coming out of the cycle. So just -- can you give some of your general overall thoughts? Thanks, Ed. Good quarter.

Thank you, Joe. The Chicago market is stabilizing, and based on property type and based upon actual location, Chicago is a huge market. You know, rental properties in the city -- going through the roof right now. You're looking at values that were -- you're going back to 2006 values and 2006 cap rates, and you've seen some kind of goofy pricing of people going in and trying to finance those businesses.

And then you can go out -- if you go back to the infernal triangle as I call it, the land between Plainfield and Hinsdale, there's still a lot of land out there that you can't give away. So it all depends on where you are and what you've got.

Housing in the city of Chicago -- you put something on the market, and you've got it priced reasonably, you'll have two bids in a day. It's very, very regionalized right now. If you go into Winnetka or some of the higher net worth areas, things are moving a lot faster. In the slower areas they're moving a lot slower.

So it's recovering in a spotty sort of way, dependent upon the type of property, dependent upon geography. But it's stabilized and is recovering.

Okay, thank you, Ed.

Peyton Green, Sterne, Agee.

A question for you, Ed and Dave, on the C&I decline. How much of that do you think was attributable to customers moving their non-interest-bearing balances to pay down C&I balances on a linked quarter basis?

As I said, we are looking into that, Peyton. We think it was seasonal. We think people did bulk up at the end of the year, and -- tax payments and all sorts of things -- our clients did very well last year. Tax payments and all sorts of things brought those numbers down, but it did pop up a little bit.

But we're looking into it, and we'll let you know when we figure out what's going on. But we think it was just a seasonal issue. As I said, our clients are doing very well, and we continue to add more and more business there. We'll let you know.

Okay. And then in terms of thinking about the loan yield pressure going forward, it's been fairly consistent over the last three quarters. What kind of rate are you getting kind of on the blended bucket of new loan yields, and what kind of renewal spread pressure are you seeing compared to loans that rolled a year ago that are going to roll now?

Mr. Stoehr, you did that report.

Yes, you know, the new stuff. This is David Dykstra. The new stuff really, generally, I think is coming on the on average in the low 4%s if you blend it all together. We are seeing -- where you're seeing some of the pressure is in some of the older stuff was in the upper 5%s and close to 6%. That's coming up for renewal and rolling in.

So when you go with the older fixed rates that were coming due and you have that kind of reset, it's causing some pressure. So it's really in that. If you have got some variable rate loans that are out there, there's really not much pressure on that. And if you've got some short one-year deals, maybe they're going from the high 4%s -- you know, 4.75% down to 4.25% on average. But the real pressure is coming from the older fixed-rate deals that are up for renewal.

And any sense of how much volumized you have that rolls over the next nine months, and what kind of blended yield it is?

I guess the only thing I would tell you there is to look at our K where we showed the maturity schedules.

Okay, all right. Great. Thank you very much.

Thank you. Our final question is from John Moran of Macquarie Capital.

Thanks for taking the question. I guess, firstly, 2006 cap rates and values on certain assets in Chicago -- may be time to shift back to the rope a dope on that asset class anyway.

Yes, well, that's automatic. I mean, that will not fit our underwriting parameters nor our loan -- our profitability. You know, you've got 10 year deals going out in the high 3%s non-swapped? No, thank you. I'll pass on that.

I did -- you know, on a more serious note, I did want to just revisit the insurance premium finance business. And I think it was touched on earlier in the Q&A. But can you remind us, with a harder insurance market -- and do you see evidence of that happening, and is it sustainable? And what could that mean for those balances, sort of organic growth aside, just if things kind of firm up? We can that go?

You know, when it hit its low, it was a -- let's put it in perspective. Normal is $27,000 is the average ticket size. In a hard market it can get up to $44,000. That was the last hard market, that was the average ticket size.

In this soft market it was down to $19,500. It is working its way back up to around $22,000, $23,000. And we expect that to continue at least up to $27,000. So that's just additional loan volume with really no excess expenses related to that. There are no -- it's just processing another loan, just at a higher ticket value.

So we expect that by the end of the year, that will move back to $27,000 plus or minus, which obviously, from $20,000, we'll add whatever percentage that is to our outstandings. And we have seen prices stabilize to move up a bit, and move up a little bit. Hopefully that will continue to be the trend.

So that could be a nice driver for us if it continues to occur. And over the last few years we've been able to continue to pick up market share. We've done in double-digit overall ticket process -- the volume of loans, if you do it by number of transactions, our number of transactions have gone up by double digit over the last three or four years. And we would -- hopefully, that would continue again this year. So you'd actually have both volume and ticket size increases in that business.

Yes. And I'd say over the last 15 months or so, it's -- if you look at what the premiums were in the year-ago quarter or year-ago month versus for the current month, we've seen consistent, not dramatic, but small increases in premiums. So the market has gradually been hardening for the last 15 months.

You have to remember that these loans don't reprice every month. So they come up for renewal every year. So a deal that was out there last March is going to reprice this year in March when it comes again. So they are fixed for the life of the loan. And then when they come up for renewal, you'll do them again.

So you'll start to see some of that impact of when the renewals come up -- the market that's been hardening over the last 15 or so months.

Okay. That is helpful. And I guess just for Dave. I jumped on a little late. So I apologize if I missed the commentary around it. But just, if you could -- when we think about the NIM kind of puts and takes, opportunities on the funding side for you guys, particularly the CD book. If you could just refresh on what those may be over the next couple of quarters.

Well, it was on -- if you look at page 16 of our press release, our CDs for the next three months, the average maturing rate on those is 58 basis points. 4 to 6 months out it's 79 basis points. 7 to 9 months out it is 72, and then 10 to 12 it is 82.

So, you're probably on average over the next year in the 70s someplace. And you're really generally renewing the CDs less than 50 basis points now on average. Some people could go along, and certainly there may be some that are out -- renewed at higher than that, but generally, you're less than 50 basis points. So you're going to get some there, but it's not as dramatic as it was a year ago.

Got you. So, net net, call it 40 basis points or so on whatever it's kind of rolling.

Yes. You know, overall, that CD portfolio is 92 basis points. So over time I think you can -- assuming rates don't do anything else, there's probably 40 basis points there.

Okay. Thanks very much for taking the questions, guys.

Thank you. Great. Thank you, everybody, for participating, and we look forward to talking to you next quarter. If you have any other questions, please feel free to call either me or Dave, and everybody have a great day. Thank you.

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