MB Financial, Inc. (MBFI) CEO Hosts Taylor Capital Merger Conference (Transcript)

Jul.15.13 | About: MB Financial (MBFI)

MB Financial, Inc. (NASDAQ:MBFI)

Taylor Capital Merger Conference

July 15, 2013 10:00 am ET

Executives

Mitchell S. Feiger - Chief Executive Officer, President, Director and Member of Executive Committee

Jill E. York - Chief Financial Officer, Principal Accounting Officer, Vice President, Chief Financial Officer of MB Financial Bank NA, Executive Vice President of MB Financial Bank NA and Director of MB Financial Bank NA

Mark Alexander Heckler - Executive Vice President of Credit Management - M B Financial Bank and Director of the Bank - M B Financial Bank

Mark A. Hoppe - Chief Executive Officer, President, Director, Member of Executive Committee, Chief Executive Officer of Cole Taylor Bank, President of Cole Taylor Bank and Director of Cole Taylor Bank

Edward F. Milefchik - Executive Vice President of Commercial Banking - M B Financial Bank and Director of M B Financial Bank

Randall T. Conte - Chief Operating Officer, Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Stephen G. Geyen - D.A. Davidson & Co., Research Division

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

John V. Moran - Macquarie Research

Brian Joseph Martin - FIG Partners, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the MB Financial and Taylor Capital to Merge conference call. On today's call, we have Mr. Mitchell Feiger, President and Chief Executive Officer; and Jill York, Chief Financial Officer of MB Financial Inc.; as well as Mark Hoppe, President and Chief Executive Officer; and Randall Conte, Chief Operating Officer and Chief Financial Officer of Taylor Capital Group, Inc.

[Operator Instructions] As a reminder, this call is being recorded for replay purposes. Before we begin, I need to remind you that during the course of this call, we may make forward-looking statements about future events and future financial performance. You should not place undue reliance on any forward-looking statements, which speak only as of the date it's made. These statements are subject to numerous factors that could cause actual results to differ materially from those anticipated or projected. For a list of some of these factors, please see MB Financial's and Taylor Capital's forward-looking statement disclosure in their 2013 second quarter earning releases, as well as the forward-looking statements disclosure in the slides for this presentation.

And now I'd like to turn the call over to Mr. Mitchell Feiger, President and Chief Executive Officer. Please proceed, sir.

Mitchell S. Feiger

Okay. Good morning, and thank you for joining us this morning. I just want to introduce to you the other people who are in the room with us today, should you have questions that they might address later: Ed Milefchik, who's our Chief Commercial Banking Officer at MB; Mark Heckler, EVP, Wealth Management and Commercial Services at MB; and Brian Wildman, EVP, Risk Management at MB.

Okay. I'm very excited to speak with you this morning. As I'm sure you know, last night, Taylor Capital Group and MB Financial Inc. issued a joint press release announcing our agreement to merge and published an investor presentation describing the transaction. So that you can have as much information as possible this morning, both of our companies also issued press releases reporting our performance and earnings for the second quarter. I thought both companies had good quarters.

Here is how we're going to proceed this morning. First, Jill is going to report to you on MB's second quarter performance. Then Mark Hoppe will report on Taylor Capital's second quarter results. In the interest of time, because you're probably more interested in learning about our planned merger, comments about second quarter performance are going to be much briefer than normal. Following our second quarter review, I'll begin the merger discussion. Jill will tell you about the financial particulars and how we thought about pricing and valuation. Mark will give you his view about what we've done, and then we'll take your questions.

Okay, let's start with the earnings for the second quarter. Jill?

Jill E. York

Thanks, Mitch, and good morning, everyone. My comments on the second quarter will be brief as our results were quite good and very similar to the first quarter. We are in $25.3 million in the second quarter or $0.46 per share compared to $24.9 million or $0.46 per share last quarter. Our return on average assets was 1.09% compared to 1.07% last quarter. There were many positives in the quarter. Our net interest margin increased by 2 basis points to 3.61%, and our net interest income was stable as we benefited from higher-rate CDs repricing and better yields on our investment portfolio and covered loans. Total loans, excluding covered loans, increased by $53 million, driven by strong lease loan growth.

Deposit flows were good, with low-cost deposits increasing by $116 million. DDA accounts now make up 30% of total deposits.

I continue to be happy with our level of core fee revenues. In Q2, core fee revenues made up 35% of total revenues, which was similar to last quarter.

Credit costs were low as we had net recoveries in the quarter, and for the second quarter in a row, we had OREO gains. All in all, a very good quarter. Mitch, back to you.

Mitchell S. Feiger

Okay. Thanks, Jill. I thought we had an excellent quarter. Mark, I'll turn it over to you.

Mark Alexander Heckler

Thanks, Mitch. First of all, I really appreciate the opportunity to be here, very excited about it, very excited about what the future holds for both companies in the interim, but the merged entity, in particular. So thanks a lot for having us here today. I'm really proud to say we had an outstanding quarter for Taylor Capital in the second quarter of this year. After adjusting for early debt extinguishment costs, our net income was $18.8 million, our net income available to common was $15 million, our earnings per share was $0.49 a share, our return on assets was 1.31%, and our return on common equity was 16.1%. These are all solid numbers that we're proud of, and they all represent increases from the first quarter of 2013 and also the second quarter last year.

Our mortgage revenue was up about 20% in spite of the very volatile interest rate environment, and we were able to do this based on the diversified model in the segment of our company. Total commercial loans were up 6.5% for the quarter or about $183 million. We also were able to repay $37.5 million of 8% subordinated debt in the quarter. Our asset quality continues to improve steadily, and specifically, our OREO was down about $8 million and put us below $20 million for the first time in a number of years.

We have continued strong capital ratios, and we feel this is a really solid quarter that we're proud of. And again, I appreciate the opportunity to be together.

Mitchell S. Feiger

Okay, great. Thanks, Mark. That was a great quarter. Now onto the merger. As I mentioned a few minutes ago, MB Financial and Taylor Capital Group have agreed to merge. Combined, we will be the premier middle market bank in Chicago. We'll have around $15 billion of assets, almost $10 billion of loans, $11 billion of deposits and a long history of successfully serving businesses and consumers in our market. We'll have the ninth largest market share in the Chicago MSA. We'll have the #5 deposit market share position in Cook County behind only Chase, BMO Harris, Bank of America and Northern Trust, and Northern Trust barely counts. You might find it interesting that our average branch size will be over $110 million. This is a great strategic and financial transaction for everyone involved. We'll get to the financial benefits in a minute. First, the strategic ones. Here's how I think about Taylor.

Cole Taylor Bank has 4 business lines: middle-market commercial banking, asset-based lending, consumer or retail banking and mortgage banking. Let's take them one at a time.

Middle-market commercial banking. In middle-market banking, we are combining 2 high-quality businesses. Our middle-market customer bases are similar. We define the market in the same way. We approach the market in the same way, and we're both focused on providing the best full-service, commercial relationship banking possible. Combining our middle-market banking businesses and teams and clients will make us much more competitive in a very competitive market. Conveniently, MB has a number of fit products to offer Taylor's commercial customers that Taylor offers only in a limited way at this time. Those products include capital markets products, foreign exchange, sophisticated and specialty treasury management services, card products and more. Now we have additional customers to sell these products to. We believe that our resulting middle-market market share will be among the highest in the Chicago area. We're very good at commercial banking now. This will make us stronger and more competitive.

Asset-based lending. Taylor's asset-based lending business is a great addition to MB's national business platform. While I very much like our enhanced competitive position in Chicago, I also like the diversification that our national businesses provide. Asset-based lending is a nice addition. This business is very well run. It has over $1 billion of loan commitments and over $600 million of outstanding loans. The business has grown very well over the past 4 years, and credit quality remains strong. You may be interested to know that as part of our due diligence, we looked at loans representing around 75% of asset-based loans outstanding, and we liked what we saw. Again, MB has products that can be sold to Taylor's asset-based lending clients.

Retail banking. Middle-market banking and asset-based lending produce a lot of loans, no doubt, but those loans require funding. At MB, we've been successful increasing our own balance sheet liquidity by sourcing high-quality, low-cost funding. Now we can use some of that liquidity. Taylor, because of its limited branch network, has had less access to sticky low-cost funding. We have it. With regard to branches, Taylor's 9 branches fit quite well with MB's branch network. Taylor's customers will benefit from access to MB's much larger branch footprint, and there's an opportunity for branch consolidation. We're studying that potential now. Again, MB has products to sell to Taylor's consumer clients, including credit and prepaid cards.

Those 3 businesses are the core of what we're interested in the Cole Taylor Bank and Taylor Capital. We are, in our hearts, a commercial bank, and so are they. I started out telling you how Taylor's traditional commercial banking business fits with MB's because that's what we're most interested in in this transaction. And we are acquiring Cole Taylor Bank. That's the key driver of our decision. The bank, however, in this case also comes with a fourth business line, mortgages. We understand that and are happy to have it, but that's not what's motivating us here.

The last few years have been spectacular for the mortgage origination business, and Taylor's mortgage business has done extremely well. And I'm not surprised it's done well. The mortgage company has a great management team. We hope it continues to do well. But you need to know that our financial and strategic analysis for this transaction assumed very, very little future contribution from the mortgage company, so low, in fact, that we would have been willing to buy the bank only for just about the same price they were paying for the bank and the mortgage company.

That said, we've been studying the mortgage business in this particular mortgage company, in particular. As part of our due diligence, we carefully investigated and reviewed the risks associated with purchasing the mortgage business with the bank, and we became comfortable that the risks of owning the business are modest and acceptable, which means, and I hope this is the case, if the business outperforms our very low expectations, we get more upside in the transaction than we expected. Now as a side note, our merger agreement with Taylor allows Taylor, if they choose, to sell the mortgage business for an after-tax gain of more than $57 million plus expenses. So to the degree they receive a gain of more than that amount, a gain of more than $57 million plus expenses after tax, those excess proceeds, the amount above that amount, above the $57 million plus expenses, will be paid, selling Taylor's shareholders. However, please note, and this is very important, we do not expect that the sale of the mortgage business, if it were to occur, would result in any additional shareholder consideration for Taylor's shareholders. In other words, we expect and are assuming that even if Taylor markets the mortgage business for sale, a sale is either unlikely to occur or if it occurred, would be very unlikely to yield an amount sufficient to generate additional merger consideration for Taylor's shareholders. And just to be perfectly clear, you should assume there will be no additional merger consideration as a result of a possible sale of the mortgage business, okay? And that premise is completely consistent with our approach in valuing the mortgage business as part of our merger. And I hope I didn't confuse you with that, but it was important to say. Bottom line, we expect to own the mortgage business, but it added very little to our value calculations.

Okay, let me turn it over to Jill now, who will go through some of the financial particulars with you. And then following Jill, Mark's going to make a few comments, and then we'll open up to questions. Okay, Jill, go for it.

Jill E. York

All right. In terms of deal metrics and multiples, in our investor presentation, we have provided all the standard ones, but I thought it might be helpful to discuss how we thought about modeling this transaction. Our first objective was to come up with a good financial model for the bank, excluding mortgage. A simple way for you to think about this is in the first quarter, the banking segment contributed $11 million net income. If you annualize the first quarter net income, you get banking segment income of $44 million. We then consider what would be an appropriate amount of net income to include for the mortgage business using very conservative estimates as origination volume can be volatile. For our models, we included annualized net income of $9 million for the mortgage business, almost entirely generated from the servicing portfolio. This equates to about 25% of the current net income run rate for the business. Thus, net income for the 2 businesses combined is $53 million. We then backed out about $1 million related to the after-tax impact of the remaining trust preferreds. After the high-rate trust preferreds are redeemed and $8 million in preferred dividends remaining after the former TARP preferreds are paid off, this results in net income to common of approximately $44 million.

Our acquisition price to net income to common modeled in this fashion is $680 million divided by $44 million, which equals 15.4x earnings. Including $18 million in after-tax cost saves, the multiple goes to 11. In terms of other metrics, we expect the transaction to be at least 15% accretive to earnings per share. Once cost saves are fully phased in, we expect to earn back the tangible book value dilution in 3.5 years. And finally, to wrap up the metrics, the internal rate of return on the transaction is 15%. All in all, we feel that the acquisition metrics make good financial sense, especially for a strategic transaction of this size.

Mitch, back to you.

Mitchell S. Feiger

Okay. Thank you, Jill. Well, before I turn over to Mark, I want to talk about social issues really fast. So on the social issue front, I will continue to be President and CEO of MB Financial Inc., our parent company. Mark Hoppe will become President and CEO of MB Financial Bank. I've known Mark for almost 30 years. I have tremendous respect for him. He's a great banker, a great CEO, and he already lives MB values. I look forward very much to working with him.

Now on another note, one name that wasn't mentioned in our call introduction is Bruce Taylor, who's in the room as well. And I look forward to working with Bruce also. Okay, let me turn over to Mark now.

Mark A. Hoppe

Mitch, thanks a lot. I appreciate that, appreciate the kind words. I have to say beyond the shadow of a doubt, our people are very, very excited about this transaction and this opportunity. And we look at it a number of different ways, and quite frankly, I don't think it'll be a surprise to anyone hearing Mitch's comments about our feelings and our approach toward the merged entity when you hear my comments. So number one, these institutions, in my opinion, in our opinion, are very complementary, and they're very complementary on many levels. One instance is -- proving that is that putting these 2 organizations together in the Chicago middle market area will be doubling the market share. We believe that the 2 companies together have about 2,000 clients in the middle market in the Chicago area, and the overlap between the 2 banks is somewhere between 10 and 20 clients, and that's it. So this is very complementary in putting these 2 groups together.

The second is additive. There are many elements of this combination that are additive. Asset-based lending. Asset-based lending is a national business for us that we started about 5 years ago. We're an industry leader. Mitch talked about some of the numbers, and it's a terrific business. With the bigger platform, with the larger organization, that gives us the ability to continue to expand and grow that business and probably even at a quicker pace.

The other interesting one is leasing. Leasing income is obviously very, very important to MB. We have a leasing operation, a leasing operation that started about a year ago. And it's fairly small now, but it's a group that we've hired and has been involved in the leasing industry, for some of the folks, 40 years. And they do the type of leasing that we do in our organization. It's totally different than the variety of leasing that's done in MB. So again, you have a substantially additive business within a line of business that both of the companies understand very well.

Number three, ability to leverage both companies' products and services. Retail. One of the things that I've said since -- in the 5.5 years I've been here, we've needed to expand our retail capability. We have a lot of asset generators, and one of the things we know we would need at some point in time is retail. And with this merger, that adds 85 to our 9, and that's a pretty good -- if you look at the maps, it's a really good coverage of the area and dramatically increases the products and services we can provide to our existing clients as well as we'll be able to offer to prospects.

Wealth management. Now that was a business that we were in a number of years ago but, for a variety of reasons, exited about 3 years ago. I can't tell you how excited I am, our people are, at being able to provide wealth management services within the organization to our clients. There are another 1,000 people -- or 1,000 companies right now when the merger occurs that are likely suspects and prospects for our wealth management business.

The more robust, capital market services, is really obvious. Mitch touched on it a little bit. There are tremendous opportunities out there with our customer base. Not to mention the card services and in general, just a broader platform of products and services.

Number four, and not to be minimized in any way, shape or form, I think there is some specific characteristics of both of the companies, very similar business philosophies. Middle market, family-owned clients have been at the cornerstone of what both of these companies have done for decades and generations. Culture, a culture built on service and relationship banking. Employees who are very highly respected in the industry. Management, in both cases, have acknowledged that national niche businesses are critical to the ultimate success of financial institutions our size. And with the 2 companies together and the enhanced size and capabilities, I think we'll be able to continue to develop all of those areas and further diversify the revenue stream of the combined organization, which I believe is very, very important. Enhanced scale. It manifests its importance not only locally in our retail and middle market businesses but in the combined and national niche businesses, which gives them greater reach. Enhanced scale gives us greater products and services and ability to grow those products and services at a faster pace for our clients, and it also creates greater opportunities for our employees, our clients and our shareholders.

For us, this is incredibly exciting. I really refer to it as a transformational transaction. The Cole Taylor team is proud of what we've accomplished so far and very excited with the opportunity to expand that success in the new bigger and stronger MB Financial. Mitch?

Mitchell S. Feiger

Okay, great. Thanks, Mark. I agree 100% to what Mark just said. Okay, Tracy, I think we're ready to open the call to questions and suggestions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Chris McGratty from KBW.

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Mitch or Jill, on your comments on the branch consolidation, with Taylor's, I mean, roughly 8 to 10 branches today, when you alluded to the potential for branch closures down the road, is that more of a function of Taylor or of you? And was that incorporated in the cost saves that you guys gave us in the slide deck?

Mitchell S. Feiger

Yes, there's some branch consolidation incorporated in our assumptions in the slide deck, not exactly sure how many branches that is. It could be as low as 3 and as many as 6.

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And on the tangible book value earn-back, Jill, can you walk me through how you guys think about it? All the banks seemingly look at it in a different way. I'm wondering, one, if your merger charges that you identified are included in that, and then two, whether any of your own earnings contribution between now and closing are included in that 7% figure.

Jill E. York

Good question, Chris. I mean, we do what we believe is the righteous way to do it, meaning we do include transaction costs. We do factor in an estimated closing date. So in this case, just for my model, I used a closing date of end of first quarter. And then what we do is we build a model for ourselves and project out what our own tangible book value would be. We then have a model for Taylor and then a combined model, and we compare the combined model with the MB original model and compute the dilution and then the amount of time it takes for the earnings accretion to make up for the tangible book value dilution. And I believe this is the correct way to do it.

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Understood. Last one I'll ask, and then I'll jump out. Can you maybe talk about the courtship and the due diligence process, whether it was a competitive process or an auction and kind of how long kind of the diligence process went on between the 2 banks?

Mitchell S. Feiger

I'll address the diligence question, and then the other side is going to have to address the process that you went through because you would know that a lot better than I would.

Mark A. Hoppe

Yes.

Mitchell S. Feiger

Okay. So over the years, we've looked at -- gosh, I don't know how many companies. It's well north of 100 companies done due diligence on. I don't know, 40, 50, 60 different banks. We've acquired 15 companies. I guess maybe this is the 15th since 2000, well more than 20 since I've been here, this company. So we have a due diligence process that we rely on and lean on. It's very deep. We never stop asking questions, and we keep asking until we're satisfied. We understand all there is to know about the company that we're combining with. Now in this case, Taylor also did due diligence on MB, which is exactly the right thing for them to do. There's a significant component of stock that their shareholders are taking, and they needed to be sure that we were what we said we were and what we seem to be, and I think that they became satisfied about that. Before I turn over to Mark on process, does that answer your question about due diligence, or do you want me to be more specific?

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Yes. No, that's fine.

Mitchell S. Feiger

Okay. All right, Mark?

Mark A. Hoppe

Hey, Chris, it's Mark Hoppe. I think it's pretty simple when it comes down to it because as the CEO of a publicly traded company, you've got a number of responsibilities. But clearly, one of your responsibilities is to be thinking about, at all times, your shareholders, your clients and your employees, and you've got to be evaluating what is best for them as you look forward. And we make this evaluation. I mean, you kind of have to think about it every day. It's got to be an everyday part of what you do, and that's an analysis that I've been doing. I do it frequently. And recently, I engaged with our executive committee of the bank, and we determined that for us to be able to continue to grow the way we have, and there's been a substantial transformation in our company over the last 4 or 5 years, and for us to continue that growth and to continue the momentum and the speed at which we've been able to grow, we felt that possibly, the best way for us to move forward was to look at an opportunity to merge with another organization. Mitch mentioned it a little bit. I'll say a little bit more. We've been friends, as he indicated, for nearly 30 years. Mitch was a client of mine in a prior life. We've been personal friends. I've known his bank very, very well. Mitch's father was a good friend of mine. I consider him one of my mentors. And so I knew this bank. They're around the corner from us. Our headquarter's around the corner from each other. We have a good idea of how the bank works. I referred to it when I talked about how we look at relationships and how we look at our employee base and how we look at opportunities going forward. And we felt that there was a very good opportunity and it made sense for us to sit down and have a discussion to see if there was -- see if there would be a meaningful opportunity for the 2 organizations to get together. And there clearly was. There was excitement from the start of the discussions. And as I've said to our employees earlier today, and there was support in the room of 80 or 90 that were there, that this is a very, very logical next step for our company, for our company to be able to do what we've done and going forward, do it even better than we did before, giving us greater resources and greater opportunities to continue in growing the lines of business, to continue at our niche businesses on a national basis, to continue to add to that. And I think that the sum of these 2 is going to be so much greater than the individual parts, and that's really what drove our decision and our approach.

Operator

Your next question comes from Emlen Harmon.

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

I guess first question, Mitch, as you think about the combined entity longer term -- and you guys had been kind of bumping up against $10 billion in assets, and that have been kind of, I guess, maybe a sticking point in terms of growth. As a combined organization, I mean, what's the optimal size for you to operate longer term? And just in terms of doing kind of additional acquisitions, how long do you think that this deal takes you out of the market?

Mitchell S. Feiger

Okay, great question. Let me address the $10 billion thing because it's been so prevalent for people in watching our company. Although we say this, but maybe people don't believe it. We operate this company as if the $10 billion limit did not exist for the past many years. It just so happens that the optimal balance sheet size for us was slightly under $10 billion. My feeling on this is that I would rather be smaller and make more money, so size has never been, asset size, in particular, has never been of interest to me whatsoever. Now I do want to point out one other thing. Obviously, with this transaction, we crossed the $10 billion threshold, and that means that we become subject to the Durbin Debit Card Interchange restrictions, which is really unfortunate. But it is what it is. Assuming the transaction closes in 2014, so after December 31, 2013, we will become subject to the Durbin restrictions on July -- in July 2015, okay? So there's a lot of runway here on the Durbin fees. Now in our financial analysis, Jill may have mentioned this, but in our financial analysis, we included the entire Durbin impact here. So the returns that Jill told you about, the earnings accretion, the internal rate of return, all that stuff is after taking the hit of about $5 million a year because of the Durbin restrictions. Just to put everything on the table, there is a small consideration of going on the acquisition date over $15 billion. Please don't blow on this. But if you acquire over $15 billion, you're under the proposed Basel III rules. Your trust preferreds would phase out over some period of time. Whereas if you acquire under $15 billion, standard $15 billion, they're grandfather in perpetuity. So that's small consideration there. I think as far as timing, this is obviously -- the most important thing we have to do now is completing our merger here and completing it successfully, which our track record in this matters, as you know, is I think excellent. Our team is capable of handling very complex, large and rapidly moving integrations. You may remember in April 2010, we bought 2 FDIC companies on the same day, so we're pretty good at this thing. Our intent is to close the transaction the first half of 2014 and then shortly thereafter, combine our companies and integrate systems and the rest. And I'm quite confident that we should be done right around that time, say, midyear 2015. And once we're done with that, we're good to go 2014 -- sorry, once we're done with that, we're good to go for more, I suppose. But as always, we would be very, very thoughtful about what we do.

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

Got you. That was comprehensive. I appreciate it. And then, Jill, just one -- I guess one point of clarity on kind of your walk-through on accretion. The 15% accretion estimate in 2015, that is based off the current earnings power of the 2 companies and not a projection, whether it's consensus projection or something that you've done internally. But that 15% accretion is based off current earnings. Is that correct?

Jill E. York

No, no. When I did the model -- so we did our own internal models on Taylor using more conservative mortgage business assumptions. And that's what I used for all the metrics that have been disclosed, including the accretion on earnings per share, the earnback, internal rate of return. So we did it more conservatively than what I'd just might say it might be.

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

Got you. So then there will be some -- additionally some assumption about just kind of underlying earnings growth for the 2 companies in terms of where the starting point is versus that 15%, is that fair?

Jill E. York

No. What I provided you was like my starting point. And then of course, in our models we include growth for loans and deposits and all kinds of assumptions. But I wanted to give you a good base for where we started.

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

Got you. Okay. And then just one final, I guess, point of clarity, Mitch, the mortgage clawback in terms of the sale, is that -- how long does that, I guess, clawback provision extend for? Is that through the close of the Taylor acquisition or does that actually continue post-acquisition?

Mitchell S. Feiger

Is it more mortgage putbacks you're talking about?

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

No, the sale of the mortgage business you're noting. Is it -- yes.

Mitchell S. Feiger

The sale of the mortgage -- there is a time period.

Jill E. York

Yes. So the way it works is, the deal has to be signed up by December 31, 2013, and then we it need to close by July 31 of next year.

Operator

Your next question comes from Terry McAvoy from Oppenheimer.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

You highlighted the doubling of the middle market commercial banking market share. And I think earlier in the call, you were trying to get through to us that 1 plus 1 equals more than 2. And Mitch, I was wondering if you could just go through again the near-term opportunities to leverage what both banks bring to the table. And it sounded like a lot of that potentially was in the fee income area?

Mitchell S. Feiger

I think I'll let Mark and our team jump in here. Let me take a crack at this. I'm sure I -- there are so many opportunities here that it's hard to remember them all. Let me see if I can hit some of them, then I'll open up for a bunch of others. Obviously, the fee products, I mean, that's a clear 1. And the fee products are great in two ways. One is it drives more revenues and more profits for a relationship. The other thing it does is it solidifies relationships and it makes retention rates higher. So it's good all the way around. Mark mentioned that our bigger balance sheet will provide some lift for some of our businesses. I agree with that. It's not so much our bigger balance sheet to me but our bigger capital level. I think that some of our -- in some of our businesses, we've held our risk to -- what we have in all of our businesses -- that we hold our risk to a certain level based on the amount of capital that we're willing to put at risk in a business. Having more capital will allow us to do more. Now interestingly, in the middle market banking space, it's the bigger middle market companies that are the aggressive fee product users. So as we go up market and we land larger companies, which interestingly we've both been doing, we've both been moving upmarket anyway. But adding more capital, more products, I think, better reach enables us to move upmarket in that way. Obviously, on the liquidity front, our cost of funds at MB is really low. It was 34 basis points in the second quarter. We have built an engine here that's designed to drive low-cost funding. I believe that low-cost funding is a critical element to having a high-performing bank, and we're committed to that. So our ability to provide low-cost funding to Taylor's lenders is a very powerful thing and I think will enable them to be more effective in the market and allow the company to earn more money. All right. Now I'm not sure I've forgotten others.

Mark A. Hoppe

Well, Mitch, I'll hit on 2 of them from our perspective. And we've got roughly 900 to 1,000 middle-market clients in the Chicago metro area. And with only 9 branches, we don't have very many retail locations that are very close to our client base. And with the 85 additional that MB has, you can drive just a whole another set of products to our clients that they don't have, whether it's to the owners or whether it's to the employees of a company. So I think there's a tremendous opportunity there from a retail perspective. And then the other, of course, is wealth management, which I touched on in my remarks that -- again, you've got 900 companies that every one of them is in some stage of figuring what they're going to do as time goes on, and some of those are in the process of thinking maybe of generational change or the sale of the company, et cetera. And my gosh, we really haven't had that ability to cross-sell that product, and we're really very, very excited about that.

Mitchell S. Feiger

I have just one thing to add to that. And pretty everybody else knows [ph] this, too. I know we're giving long answers, but I think this is really important to us. Let's not forget, this is an in-market merger. So all of our networks and all of our contacts and all of the marketing and advertising we're doing get double leverage here. It's just the market power, the marketing power and the market power that adds to both our companies, it's very significant. It's hard to put a dollar value on it, but it's really important.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Just the next question. Both of your companies have benefited from market disruption and consolidation in and around Chicago. I guess Mark's the perfect example. Does this deal allow you to lock in those bankers with contracts that you want to make sure continue with the combined company?

Mitchell S. Feiger

Well, we want -- if you're talking about our staff, it is critical to our business that we retain all of our talents and employees. I mean, that's been a mission of ours all along. This doesn't change any of that. We're interested in retaining all of our talented people. I don't -- there's nothing to say I think beyond this.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

And just a question for Jill. Could you talk about the size of the securities portfolio relative to assets on a pro forma basis? Yours is quite a bit smaller than Taylor. And just to help us with the modeling and then as it relates to future capital actions in terms of their ability to redeem, put some preferred and trust preferred, as you built out your model, did you have the expenses related to those capital instruments in your model or do you think we should remove them by the time of closing?

Jill E. York

Yes, let me talk about the capital actions first and how I thought about that in modeling the transaction. I guess, first I thought about what Taylor would be able to do on their own in the relatively near term. So for example, paying off the former TARP preferred. I thought that was a pretty obvious capital action that they could take care of on their own. They've already paid off 25%. So I've factored that into their model. I also felt that it was logical that within a relatively short amount of time, they will be able to pay off the higher-rate TARP, the 9.75% TARP. So I factored that into the capital action. In addition, as you know, the announced repayment of some sub debt in the second quarter, and it was appropriate to reflect that in the model as well. And quite honestly, that really helped the economics. Getting rid of higher-rate sub debt, higher-rate trust preferred and TARP really helps. So those were things that I felt Taylor could do on their own within a relatively short amount of time. So I built those items in. In terms of the investment portfolio, I don't have the numbers right off my fingertips, but here's what I thought about their investment portfolio: They employ strategy, what I would call barbell strategy, very similar to MB, where they have mortgage-backed securities that make up most of the portfolio, and they've layered on some longer-term municipal investments. And that's exactly the same approach that we've taken at MB. We like the approach. We had our treasurer take a detailed look at the securities portfolio. We're very comfortable with what they have in the portfolio. It's possible that we may rejigger some things once we're together to make sure that we're set up exactly where we want to from an interest rate and risk perspective. But overall, I was very happy with their investment portfolio.

Operator

And your next question comes from the line of Stephen Geyen from DA Davidson.

Stephen G. Geyen - D.A. Davidson & Co., Research Division

Jill, maybe if you could give me just a rough idea of how the purchase price has adjusted for whatever kind of remains on Taylor's balance sheet as far as the TARP and the sub debt?

Jill E. York

Okay. So it really doesn't impact our purchase price in terms of what we're paying for the common shares outstanding. But again, in thinking about their balance sheet, their capital base, again, what I did was I prepared a pro forma target model that would back out -- they're essentially paying or borrowing to pay off those items. So that was how I thought about it.

Stephen G. Geyen - D.A. Davidson & Co., Research Division

Got it, okay. That makes sense. All right And you mentioned the 3.5-year earnback period. Just curious, you talked about the mortgage business and how you adjusted that going forward. And I'm just curious if other synergies haven't been included in kind of the outlook in the 3.5 years. For example, have you included some additional enhancement from cards, treasury management and capital market?

Mitchell S. Feiger

No, no, no. Hold on, hold on, hold on. We never include our revenue enhancements in our analyses, okay? All the once we've talked about we believe are there. We believe they're significant. But none of the numbers, and we've never done it, none of the numbers include revenue enhancements.

Stephen G. Geyen - D.A. Davidson & Co., Research Division

Yes, that makes sense. I just wanted to be sure. And as far as you guys getting a little bit bigger, you talked a little bit about going upmarket. Could you kind of define that market for us now under the combined company?

Mitchell S. Feiger

Anybody want to take a crack at that? Mark?

Mark Alexander Heckler

I'll take it. So we define the middle market generally as companies with sales between $10 million and $250 million, all right. And that measure has moved up over the years as our company has grown in capability and sophistication. I remember years ago, it was $5 million to $25 million. Then it was $5 million to $50 million. Then we went, I think, $5 million to $75 million to $110 million -- to $110 million -- now we're $10 million to $250 million. And I think that's a very natural evolution of a bank as it grows and grows in sophistication. So I think most of what's going to happen here is, of course, I think is that the volume of clients that we have towards the upper end of that range, if you look at the percentage of the clients that we book and get toward the upper end of that range, it will probably increase, which is very exciting to me, very exciting.

Mark A. Hoppe

The only thing I'll add to that, Mitch, is that with the expanded product suite that MB has that gives us an opportunity to really delve into that market. We've had good products, very solid products and excellent for the market that is our traditional market of $5 million to $200 million in revenues. But the ability to go up, I agree with you, is one that we can avail ourselves off now with the greater product capability and because you have to be able to cross-sell to have that business make sense because the lending margins are so narrow. But the cross-sell opportunity, that gives us the opportunity to kind of start delving into that market, which we have kind of stayed away from over the last few years.

Edward F. Milefchik

And this is Ed Milefchik. Let me answer. I just want to say one other thing on that, that one of the things we've seen is the larger banks given the relatively soft loan growth in the marketplace, larger banks have really started to push down market and have become very, very aggressive in that upper end of our top range of our market. And given the additional size and capacity that we now have, we'll be able to serve our larger clients better with a larger balance sheet with less risk for the bank. So I think that allows us to execute on a more favorable basis our going upmarket strategy.

Mark A. Hoppe

Right.

Stephen G. Geyen - D.A. Davidson & Co., Research Division

Okay. And Mitch, you kind of downplayed the mortgage business as far as the reasons for the acquisition. But maybe assuming it's still part of the entire bank once the transaction is complete, can you kind of talk about -- or maybe this is a better question for Mark, but did that [ph] opportunity to expand it?

Mitchell S. Feiger

Let me take a crack at it first. And Mark, you can add -- feel free to add. Okay, so I think it's a very well-run mortgage company. I think Willy Newman and his team are experts in the Mortgage business, and they've done a fantastic job filling that business really over the last, what, 3.5 years, maybe 4 years at the most. It's pretty remarkable what they've done and what they've built. And not only -- I'm not just talking about volume; I'm talking about quality. I think that the quality of the company, the quality of operations, the quality of the loans is really great. Okay. That said, we've been moving at a very fast pace here. I'm sure you appreciate how these things get done. And so we've been talking in depth, let's say for 4 weeks. That is not enough time for me, and I think the management team on the MB side, to have thought through and investigate thoroughly enough the mortgage business to understand what direction we should take and whether we want to take it. I need time to sit with Willy and his team, to hear from them about what's possible. Our approach here from a valuation and a merger perspective was more limited than that. It was more around, what are the risks in the business, are those risks acceptable to us, and what is the minimum amount we think it will earn, and base our valuations and pricing on that. So the second step is yet to happen, but I'm excited to have that conversation with Willy and his team.

Mark A. Hoppe

As Mitch said, it's been an incredible story in what a group that started with one person in December of '09 has been able to accomplish. And here they've run 3 quarters in a row now of $1.9 billion in mortgage originations. But the other thing that's really important, and one of the things that have given us -- the Taylor Capital organization even more excitement about the business is the ability not only to grow it, and as Mitch said, to grow it and do it in a quality way, is that we're able to diversify the business. We were able to -- we did have some mortgages on the balance sheet as a diversification, but really, diversification in the servicing side. Both an investment if you will, in "mortgage servicing rights," but also in the ability to become a servicer ourselves. And we've taken steps in the second quarter to do that, and we'll continue -- the mortgage operations will continue down that path as time goes on. So it grew fast, but it grew with a lot of thought and skill and analysis behind it. And it's also been diversified. So there's an opportunity there, which, like Mitch says, which we totally understand. There's a long learning curve in getting up the speed on this business. It's not intuitively obvious. And so there's an opportunity there. And the combined organization has to analyze this and determine the best and most intelligent way to move forward for everybody involved.

Mitchell S. Feiger

Let me just add one thing. This kind of thing, merging with a company that has a business line that we don't -- that we want to understand better and that there may be opportunities, it's very common, as a matter of fact. You think about buying a company. What are the chances when you buy a company that you like every single thing that they have? Well, that never happens. So our approach to these things has always been, when we're looking at a company, when we're thinking about a partner, what is it that's inside that company that's real value for us? All right. What do we really love and what has real value? And I talked about that in my prior comments. And then you look at the remaining piece, right. Some of the remaining pieces may be toxic, and you say, "Listen, I'm buying your company if you have those things or I'm going to dispose of them immediately." That's not the case here at all. Other cases, they have businesses that could be very exciting. And I'll give you an example. When we acquired the deposits of Corus Bank back in September 2009, you may remember we bought $6.5 billion of deposits. Along with that came two things: one, $3 billion deposits out of market; and two, a business providing banking services to check cashers in Chicago. The $3 billion of deposits out of Chicago, we'd say we didn't want. We wrote checks in the first week that closed accounts for $3 billion to send out checks. I don't know if that's ever been done before, but we did it. With regard to the banking services for check cashers, we took our time. We studied that business for quite a while. We decided we liked it. There was great potential in it. We reengineered it. We rebuilt it. And it's a very important business for us now. And I think that, that kind of thought process, which we've applied many times, has added great value to our company, and we're going to do the same thing here.

Operator

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

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

A couple of questions. Maybe Mark can jump in first on this. But out of Taylor's mortgage business, how much of the $1.9 billion in originations was refi versus purchase? And then I noticed in your [ph] release today that you moved some loans out of held-for-investment into available-for-sale that were jumbos. And I was just wondering how much more jumbo products you had on balance sheet that you'd be interested in selling in terms of just managing the balance sheet?

Mark A. Hoppe

Sure. 52% of the $1.9 billion was refi. So the group has really been very adept at moving from refi, which -- there were probably times and we were coming close to 90% refi. And certainly, I'm sure there are a lot of weeks we were close to 90% refi. And on a steady basis we've been increasing -- the purchases have been increasing at a percentage of the whole. So again, what we are viewing, what we think is happening is a further diversification of that business away from the historical "just refi". So we're very heartened by that fact. The second thing is from the portfolio perspective, quite frankly, we put -- I think it's maybe 1.5 years ago, Randy, we put over a period of time for about $300 million in mortgages on our balance sheet. And we did that purely for earning purposes. And some of those were ARMs and some of those were jumbos. And we just had an opportunity to sell those jumbos at what we felt was a good price, and we felt we are going to make -- it was better for the organization for us to sell those in the second quarter from a -- really from an ALCO perspective. This portfolio of mortgages we've kept on our books has been purely ALCO related. It didn't really have anything to do with debt. The underwriting on those loans, the underwriters have no idea where those loans are going. They're not underwriting it in a different way for the bank or anything else. And we just decided this is the right opportunity to do it.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

So would you say you've pretty much done what you can do there?

Randall T. Conte

This is Randy. I'll jump in on that one. I think the way to answer that is we're going to continue to look at the assets across the entirety of the bank and look for opportunities when they come along, and we're going to hook when they're best for our shareholders and take advantage of them, just like you've heard throughout the call here.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Okay. And then for both of you all, I guess MB had about $2.2 billion in securities at the end of the quarter. How much of that was pledged? And then also for Taylor, if I could get the same numbers, the amount of securities booked and then how much of it is pledged?

Jill E. York

That is in the Q. I don't have those numbers in my fingertips, but we'll file our Q in a couple weeks. You can pick up that number.

Mitchell S. Feiger

Can you look at the prior Q and it's going to be about the same?

Jill E. York

Yes, yes. Exactly.

Mitchell S. Feiger

Okay. So for MB, you can look at the prior Q. You'll get pretty much the right answer.

Mark A. Hoppe

I would think that's got to be directionally correct for us as well.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Okay. No, I guess I was just trying to get an idea of once you're a bigger company with the cost saves, you don't need as much, I guess, securities-related liquidity. You can balance the balance sheet, again, more profitably, and I guess, a bit smaller. Is that -- would you say that's a fair way to think about it?

Jill E. York

It fairly is for us.

Mitchell S. Feiger

Yes, yes, yes. I think so.

Operator

Your next question comes from the line of John Moran from Macquarie Capital.

John V. Moran - Macquarie Research

I just had a quick question. Forgive me here. I'm not totally familiar with Taylor's business model on the mortgage side. But assuming that it's still around, is there a wholesale warehouse piece to that? And if so, what's the size of the balances there at the end of the quarter?

Mark A. Hoppe

On the balance sheet, if you look at -- there should be loans held for sale and it should be identified and -- hold on 1 second. I have to go to another page here.

Randall T. Conte

It's $693 million in the loans held for sale at the end of the quarter.

Unknown Executive

We generated our own.

Randall T. Conte

Those are loans that we generated, we underwrote to our standards, and obviously, are in the process of being outpackaged and sold in the normal course just like we've been doing for the last several years.

John V. Moran - Macquarie Research

Got you, got you. so there's no warehouse business per se?

Mark A. Hoppe

No. We don't have. No.

John V. Moran - Macquarie Research

Okay, I appreciate that. And then just kind of shifting off the deal and toward the quarter, I guess Mitch and Mark, both, any commentary that you could give in terms of kind of pipelines, commitments, demand drivers on the loan side, how things are holding up price structure? I know that we -- obviously, we focus a lot on the deal here and less on the fundamentals of the quarter. But anything you can give us in terms of kind of a forward look there would be very much appreciated.

Mitchell S. Feiger

Anybody on the MB team have a view?

Edward F. Milefchik

I'll take that. In the market I think it's still extremely, extremely competitive. Companies are continuing to do pretty well. Loan demand is moderate at best. Competition is extremely high. Our pipeline looks decent. But again, I'm always hesitant to say how good it will be because of the competitive landscape and trying to understand exactly what percentage of those deals will push through the pipeline and are closing. I'm confident usually the second half of the year is very good for us, and I would expect or hope that would happen again this year. But right now I'm optimistic but cautiously optimistic.

Mark A. Hoppe

Yes. This is Mark for Cole Taylor. I'd just say exactly the same team. I mean, this market is very tough. Margins are really squeezed. You're looking at 3 to 5 banks looking at almost any transaction. You're looking at from a prospect perspective. And on the ABL side, probably a little bit better and a little bit less competition, but it's tough there, as well. So lending is a challenging market, and Mitch mentioned one other and Ed did as well. The larger corporate which we think that that's an opportunity for us going forward. That's gotten really tough, which leads us back to the debt as an attractive business if you can successfully cross-sell noncredit products. So it's a pretty tough market out there. I think the economy is getting a little bit better, but just a little.

Edward F. Milefchik

Yes. Just to add to that. I think when I look at our pipeline, we see the best opportunities right now for, quite frankly, non-borrowing type of clients. We Continue to do just a terrific job on the deposit generation side. Fee income looks decent. So again, companies just are not is growing that much these days. They delevered and they continue to delever. And Mark mentioned 3 to 5. There's some instances I double that number of banks throughout their bidding on deals. So again, we're just trying to pick our point and stay with our strategy.

Operator

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

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

I was wondering if you could comment maybe on the expectation for mortgage volume going forward in the third quarter and also the outlook for margins versus where they were in the first and second quarter?

Mark A. Hoppe

We think that both on the origination side as well as the margin side, it'll be flat in the second quarter.

Jill E. York

And for the MB side, I would expect the margin to be relatively stable.

Operator

And your next question comes from the line of Brian Martin from FIG Partners.

Brian Joseph Martin - FIG Partners, LLC, Research Division

My question was just answered on the margins.

Operator

I'd now like to turn the call over to Mr. Feiger for closing remarks. Please proceed.

Mitchell S. Feiger

Okay. Thank you for visiting with us again this quarter. This was a rather unusual quarterly earnings call, but we're very excited about -- very excited about the opportunities here. And I really look forward to working with our merger partners at Cole Taylor Bank. As always, should you have any questions or concerns and, of course, suggestions -- we love hearing your suggestions -- please, call anyone of us at your convenience. All right. Talk to you again in 3 months.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!