Midwest Banc Holdings, Inc. Q1 2008 Earnings Call Transcript

May.13.08 | About: Midwest Banc (MBHI)

Midwest Banc Holdings, Inc. (MBHI) Q1 2008 Earnings Call Transcript April 30, 2008 11:00 AM ET

Executives

John Pelling – VP of IR

Jim Giancola – President and CEO

JoAnn Lilek – EVP and CFO

Jay Fritz – EVP

Analysts

Dave Rochester – FBR Capital Markets

Brad Milsaps – Sandler O'Neill

Ben Crabtree – Stifel Nicolaus

Joe Hallahan [ph] – RBC Capital Markets

David Lisbeth [ph] – Private Investor

Operator

Hello and welcome to the Midwest Banc Holdings Inc. first quarter conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator instructions) Now, I would like to turn this call over to Mr. John Pelling. Mr. Pelling?

John Pelling

Good morning. Thank you for participating in our first quarter earnings conference call. This call may contain forward-looking statements. Actual results may differ materially from the results suggested by these forward-looking statements for a number of reasons. These forward-looking statements are within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Act of 1934 as amended and should be reviewed in conjunction with the company's Annual Report on Form 10-K and other publicly available information regarding the company, copies of which are available from the company upon request in the company's Web site at www.midwestbank.com. Such publicly available information sets forth the certain risks and uncertainties related to the company's business, which should be considered in evaluating forward-looking statements. I'd like to now turn the call over to Jim Giancola, CEO of Midwest Banc Holdings.

Jim Giancola

Thank you, John. Good morning everyone and thank you for participating. First quarter press release as you have seen is pretty complicated and I'm pleased to have our new Chief Financial Officer, JoAnn Lilek, here to help explain some of these numbers. As you know, we previously reported a non-cash impairment charge of $0.40, which caused a $0.22 loss in the first quarter.

We produced economic value of $0.17 a share for our shareholders. But as we stated, that $0.17 is not really comparable to the $0.14 after merger charges of $0.17 before merger charges, a number that we reported in the fourth quarter. This morning I'm going to address three of the most important drivers of our income, that is asset quality, interest rate spreads, and the actual composition of our loan portfolio.

JoAnn will then walk you through the impact of a variety of significant transactions designed to improve earnings going forward, and Jay Fritz will comment on market conditions and then we'll take some questions.

Let's talk about credit first. The best news in this first quarter report concerns credit quality. As we, and I'm sure you, review the credit trends at the Chicago Bank, the fact that we were mired in a housing and banking sector recession is pretty clear. We are not immune from these trends, but feel like the trends in our organization are going in the right direction. Let me comment first on the LPC, the Large Problem Credit, a term I should have protected when we first started using it two years ago and now repeated in almost every press release that we see.

We took the charge-off of $10.8 million, which represents a majority of what we had physically reserved for this credit. We took the charge in the first quarter for three reasons. The first is the finalization of settlement negotiations on the receivable portion of this credit. The second is we have bankruptcy court approval on the sale of two pieces of our collateral pool. And the third is we have two successful court rulings on challenges by the debtor. These facts gave us additional authority on the credit and confirmed our valuation estimate.

Our effort here is to get this credit behind us. We have approximately $18 million on the books now and expect to receive a portion of our proceeds from the settlement of collateral and sales in the amount of $5 million to $8 million in the second quarter, which will further reduce balances on this credit. Our plan is that when this credit below $10 million, we will stop reporting on it separately. Charge-off, excluding the Large Problem Credit were 17 basis points or just over $1 million.

Additions to the loan loss reserve through the provision were $5.4 million. What this means is the loan loss reserve allocated to all credits in the Bank except the LPC increased $4.4 million. However, due to the charge-off on the Large Problem Credit, the absolute level of the reserve declined to 82 basis points of (inaudible).

NPAs to loans continued to slowly decline from 199 to the 190 in the second quarter. The charge-off on the Large Problem Credit reduced NPA by $10.8 million, which was partially offset by an increase of new non-accruals of $7.5 million. We are at the point in the cycle in our organization when the majority of our NPA projects are complete and we will be seeing pay downs as units are sold and liquidation proceedings come to fruition.

While we still watching a number of significant credits very carefully, we are cautiously optimistic that the modest downward trend in NPA will continue in the coming quarters. Talk about margins for a second. Prime rate, the average prime rate for the first quarter declined 132 basis points. Two primary factors negatively impacted us in the first quarter. We have $700 million in retail CDs and this portfolio lagged rate adjustments on the way down.

We only had $30 million of CD maturities in March, so we didn't get much relief there. However, we had just over $100 million in maturities in April and have $150 million of maturities in May. The cost of these deposits will be reduced by over 200 basis points as the CDs reprise. The other area is in the restructuring of our $130 or restructuring up $130 million of our Federal Home Loan advance, which we did at the very end of the first quarter. This will also reduce our cost deformed [ph] on a portion of the category by over 200 basis points.

The LPC impact was $0.05 a share for the quarter, much of that being felt in the margin. Just to pay downs on this and other non-performing credits should also be margin-friendly going forward. For our internal planning purposes, we're assuming one additional 25-point rate reduction for the remainder of the year, and actually looking at rates starting to tick up as we get toward the end of the year.

The last thing I want to comment on is how our portfolio has structurally changed. I know this is a quarterly release but on Page 2, we put numbers in there to give you some historical perspective. At the end of 2004, we had about 25% of our loans in construction and land development. Today that number is down under 18%, about a 30% concentration reduction.

We identified very early that this was a sector that was going to be a problem and had been reigning in activity in that section. Now you see the numbers has increased significantly 270 to 435 by virtue of acquisition. But as a percentage of our total loan portfolio, that is shrinking. About 22% of our construction loans are residential real estate. About 50% of our nonperforming loans are related to residential real estate development.

So, again, you can see the significance in our strategy of reducing our concentration in that area early on and that has helped us stop some of these bullets [ph]. With that, I would like to now turn the presentation over to our new Chief Financial Officer, and for her analysis after a meaningful six weeks on the job. JoAnn, why don't you take over?

JoAnn Lilek

Good morning, everyone. Thank you, Jim. As Jim said, we had a number of significant transactions during the quarter. Let's start with the OTTI charge, and I just want to reiterate what we've said previously. Unlike the rest of the significant transactions that we had in this past quarter, this charge had absolutely no impact on our cash flows through the quarter or our expected future cash flows. I think we've made our thinking on the OTTI charge pretty clear in our disclosure that we did last week.

We looked through this transaction which deflated earnings per share by about $0.40 when we evaluate our returns to our shareholders'. Without the OTT charge, we had earnings per share of $0.17 for the quarter. I'll highlight the significant transactions that entered into the $0.17 number.

First, we sold our Bucktown branch and that sale contributed $0.33 per share to our earnings number. We delivered $15.2 million pre-tax gain, $9.2 million after tax. So, we turned $3 million non-earning asset into $18 million of cash, which we invested in earning assets and in our operations during the quarter.

We also paid $7.1 million prepayment penalty, which equates to $0.16 a share after tax. We did this to prepay $130 million of FHLB borrowings with an average rate of 4.9%. We expect to refinance these borrowings at approximately 2.5%, which is obviously going to result in a savings for us going forward. Finally, we made the $5.4 million provision for loan loss in the quarter. Above and beyond the charges for our Large Problem Credit, we charged-off $1.1 million.

The amount we provided above and beyond the charge-offs represents about $0.08 a share. So, to recap, putting all of the impacts of the significant transactions together with also some very minor and non-recurring item, we're walking into the second quarter with earnings per share of between $0.10 and $0.12. As I said earlier, we will save money in our borrowing costs because of the prepayment of the FHLB advances and the refinancing.

Our funding costs will start to drop catching up to the declines we've already experienced on the earning asset side. We do add on the weighing up and down, so we should start to experience some positive impact there. Finally, certain other smaller charges we had in the first quarter, we don't anticipate going forward. So, we the earnings per share numbers somewhere between $0.10 and $0.12 right now and increasing or decreasing from there based on our loan and deposit growth and what happens to rate spreads. Keep in mind our effective tax rate will be influenced by where earnings are for the year.

The 25% to 27% effective tax rate that we disclosed in our earnings release would be based on earnings in the 17% to 18% range as we head for the quarter. If we are more in the $0.10 to $0.12 range in earnings per share, the effective tax rate will go down. It will likely be between 13% and 15%. So I wanted to provide you with that information for your understanding so that you would have a range on the effective cash rate, which is a sensitive number.

Thank you. I'd like to turn it over to our President, Jay Fritz.

Jay Fritz

Thank you, JoAnn. With all officer hirings announced by Chicago Banks, let me revisit the recent history on our company. Midwest Banc is a super community bank placing equal emphasis on development of its retail customer banks along with its commercial base of middle market customers. In the past three years, 113 officers have joined our ranks representing 57% of our officer staff. Early hires added business development skills to invigorate our 29 branch network.

The last two years brought officers who strengthened our credit culture and our sales culture in corporate banking, specifically, C&I. Our two acquisitions accounted for 43% of the new officers joining our company. While officer additions and acquisitions have accounted for a 31.5% average rate of the loans growth over the last two years, credit discipline and pricing discipline tempered our growth in the first quarter.

We are focusing on sales promotions in our branches and incentive award on relationship building and cross-selling penetration to both new and existing households. We remain aggressive in seeking quality loans with prudent advance rate by collateral. However, we in sense loan customers to have checking accounts and relationships which include such things like direct deposit, Internet banking, plus an assortment of investments accounts.

Retail core growth has been driven by a new savings product, which rewards customers who use multiple bank services. Average retail core deposits, excluding CDs, were up $11.8 million or 3.2%, December to March. While personal and small business loans were up $3.8 million or 1.5%. Our desire to get paid for credit risk clearly dampened growth opportunities within our company as average loans were up $7 million after $15 million in loan sales and $10.8 million in the loan charge-off.

We will continue to pass on transactions, which do not meet minimum pricing standards and prudent credit standards in this market. Our corporate bankers meet regularly with loan review to discuss lower rate credits, which remain movable to monitor the progress of our customers in improving their corporate performance. In some cases, these credits move to a competitor with a higher risk tolerance.

While this process can soften loan growth rates in a weak economy, we believe the long-term implications are positive for our company. The steady stream of new business coming into Midwest will ultimately be reflected in solid loan growth rates as market conditions improve and as loan officer migration continues to create new business opportunities for us.

Let me make one final comment on wealth management. Combined wealth management revenues consisting of both brokerage and trust were essentially flat for the quarter as revenues from new assets under management were offset by price declines in the equity market. We remain committed to deepen our talent base in wealth management through staff additions, while we seek the acquisition of a local money management firm, which represents a good strategic bet.

Thank you. Let me turn things back over Jim.

Jim Giancola

While I assume that we've made this all perfectly to everyone and there are no questions, but in the off-chance, there's somebody flow out in the crowd that does want to ask a question, we're ready for that right now. So we'll take questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question will come from Dave Rochester at FBR Capital Markets.

Dave Rochester – FBR Capital Markets

Hi, good morning, guys.

Jim Giancola

Good morning.

Jay Fritz

Good morning.

Dave Rochester – FBR Capital Markets

Okay. For the 10% to 12% EPS guidance range for the second quarter, could you provide a little color as to what you're expecting for the provision?

Jim Giancola

We are not providing guidance for the second quarter. I think what we're trying to communicate is where we think the second quarter, April 1st starts which is in the 10% to 12% range. And then the number goes up or down from there based on loan growth, deposit growth and the credit spreads and what happens to net interest margin.

Dave Rochester – FBR Capital Markets

Right. Okay.

Jim Giancola

I want to be clear that we're not providing guidance. We just want because there's so much noise in the first quarter, I wanted everybody to understand where we are starting the second quarter.

Dave Rochester – FBR Capital Markets

Okay. I got you.

Jim Giancola

The provision will be charge-offs plus our estimate of any potential additional new risks in the portfolio. So, we're not going to be – we are using essentially the same methodology to evaluate risk going forward.

Dave Rochester – FBR Capital Markets

Okay. Thank you very much. And it looked like excluding the LPC, the NPA has increased to about $31 million from roughly $22.5 million in the prior quarter. Outside of that large condo project you mentioned in the release, could you give us some color as to what the rest of that increase was?

Jim Giancola

We had $7.5 million increase offsetting the $10.8 million decrease. That's one project, it's a condo project to about a third sold and we have sales scheduled for this quarter. So, it's really just one big project –

Jay Fritz

Two would be correct.

Jim Giancola

One project that went in at $7.5 million. And as I said, it's a completed project. It's about a third full and we expect pay downs as units that we have in the queue continue to close during the quarter.

Dave Rochester – FBR Capital Markets

Okay. Thanks. And the net charge-offs outside of the LPC, what were those, the $1.1 million?

Jim Giancola

A variety of small things, nothing with any substance.

Dave Rochester – FBR Capital Markets

Were they primarily commercial credits or –?

Jim Giancola

Yes.

Dave Rochester – FBR Capital Markets

And just following on that, on the commercial credit trends you're seeing, are you seeing any increased stress in any portion of the portfolio, perhaps in the industries with more direct exposure to the housing market?

Jim Giancola

Well, I think, as I said, half of our non-performing loans are in the construction state. Absorption rates are slow, spread that the builders are experiencing on the sales that they are getting are narrower than they had been in the past. But there is no particular area that stands out in our portfolio.

Jay Fritz

However, for the past two years, we've been focusing on contractors because of the potential volatility that that industry encounters.

Dave Rochester – FBR Capital Markets

Okay. Is that primarily where you saw the smaller charge-offs?

Jay Fritz

The smaller charge-offs basically came from the small business sector, as I understand.

Jim Giancola

Small business loans?

Jay Fritz

Right.

Dave Rochester – FBR Capital Markets

Got you. Okay. And just one quick one here on the credit policy, how often do you get financial savings from your commercial business customers generally? And could you comment on any trends you're seeing in accounts receivable or inventory turn over ratios over the quarter? Have these been increasing or decreasing?

Jim Giancola

The larger the credit we certainly would be getting audited financial statements annually and reviewing quarterly updates. And so we're getting quarterly reviews. We're getting forecasts for the coming year. And, again, as we monitor, things are a little slow but we don't see any trends that are particularly alarming as it relates to inventory turns or days on the receivables.

Dave Rochester – FBR Capital Markets

Okay. And just one last one on the watch list, with the growth in the portfolio and given what NPAs we are doing, it looked like the provision was a little bit larger than one would have expected. So, I'm just curious as to what the watch listed or I would imagine that went up, but if you could quantify what that change was and where it is now, that'll be great?

Jim Giancola

There were small additions in our 114 credits. As we continue as you suggested, as we review updated appraisals and as we review updated financial statements, we made some 114 adjustments. We also made some FAS 5 adjustments as it relates to overall economic conditions. And so both of those, in our opinion, warranted some increases and we took those increases.

Dave Rochester – FBR Capital Markets

Any sense for what portion of that was based on general economic conditions?

Jim Giancola

The majority of it was FAS 5 related, which would be economic conditions.

Dave Rochester – FBR Capital Markets

Okay, great. All right, thanks, guys.

Operator

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

Brad Milsaps – Sandler O'Neill

Hi, good morning.

Jim Giancola

Good morning, Brad.

JoAnn Lilek

Good morning.

Brad Milsaps – Sandler O'Neill

Hi, Jim, just curious, what is the specific reserve allocation for the large non-performing loan credit at this point? It was my understanding they essentially wiped out the entire amount you had reserved with the charge this quarter. Is that correct?

Jim Giancola

That is correct. We have some left out there but it's not a huge amount of money. And we're not, obviously, we're still working with the borrower and I would like to not disclose that number. I'll tell you it is not a significant piece of the $18 million that's remaining out there.

Brad Milsaps – Sandler O'Neill

Okay. And so assuming you get that $5 million to $8 million payment, you feel like you've got plenty of collateral to pursue in order to collect the remainder?

Jim Giancola

We do. That credit gets reviewed in great detail with our Board, with our auditors and next month with our examiners, although we update our examination team on it regularly. So, we feel like we have the current numbers in there, and the realization on the three individual items that I addressed in my comments have come in right on what our estimates were.

Brad Milsaps – Sandler O'Neill

Okay. And then secondly, if you could, the rest of the NPAs, if you had to break those down between sort of legacy MBHI credits, credits I guess that would have come on since you've arrived and then maybe credits that you've acquired? What would that breakdown be roughly?

Jim Giancola

The overwhelming majority of our problem loan list are legacy credits. More specifically, they are old participations that we purchased years ago. I believe there's one significant 114 in there, that's a relatively new credit that we're liquidating right now but it is less than 10% of our NPAs or credits that are being originated in the last couple of years.

Brad Milsaps – Sandler O'Neill

And you used to provide a statistic I think regarding how you adjust in a lot of those participations off the balance sheet, larger credits versus smaller credits. You don't have an update of that? I can go back and look at previous quarters but just curious what that breakdown was?

Jim Giancola

Our purchased participation totals continue to trail down as we get pinned. And we're not adding to those totals. I don't have those totals in front of me, Brad, but I'll give you a call back and give you the specific numbers.

Brad Milsaps – Sandler O'Neill

Okay. And then on the margin, certainly mechanically, I understand what happened in the quarter like a lot of banks. But I know in the last call you mentioned a December margin of 307 and then a few investor conferences you talked about the potential for some margin expansion the first quarter. Just curious what additional color you might have there and I guess March was a tougher month than maybe you thought?

Jim Giancola

February and March were both really tough because we got that big rate adjustment towards the end of February and again that takes awhile for it to work through our balance sheet. We did not forecast the kind of rate reduction that we had. I don't think anybody did. When you get surprised by 50 basis point cuts, we immediately go to work on the price of it but as I said because of the old balance sheet that we have here with lots of CDs, it takes awhile to work through. I think we will see some benefit and I think Don Weist is our Chief Investment Officer and JoAnn they've been battling on the numbers and again, we think they're going to get better in the second quarter. I assume we don't have a precipitous drop in interest rates, which I don't think anybody has forecasted at this point.

Brad Milsaps – Sandler O'Neill

Okay. And final question, you talked about, $0.10 to $0.12 quarterly run rate type EPS as you start April 1, certainly we can adjust up and down from there. But how should we think about your quarterly dividend payment, assuming you might be on the lower end of that range at $0.13 per share per quarter? Or how you guys thinking about it?

Jim Giancola

The way we're thinking about it is all of our incentive comp is tied to making at least the dividends that we owe on our preferred and common stock. And so there's a big economic incentive for everybody in the company. We are a third owned retail, we are a third owned by insiders, roughly. And the dividends are very important to us, much, much so than it would be to somebody that is 100% institutionally owned or majority institutionally owned. So, here the dividend is very important and that is not on the table right now. And obviously, we look at it all the time, but our plan is to make enough money to pay that dividend and to maintain adequate capital (inaudible).

Brad Milsaps – Sandler O'Neill

Okay. So just to assume all of your incentive comp is tied to at least making the dividend and the preferred dividend?

Jim Giancola

That is correct.

Brad Milsaps – Sandler O'Neill

Okay. All right. Thank you very much.

Jim Giancola

Thanks, Brad.

Operator

Our next question comes from Ben Crabtree at Stifel Nicolaus.

Ben Crabtree – Stifel Nicolaus

Yes. Good morning. And maybe a little bit follow on, if we haven't beaten it to death on the margin question. I appreciate the guidance on the $0.10 to $0.12 going into the quarter. The question I would have is what margin is assumed in that number?

Jim Giancola

Well, that essentially gives you the answer to the question for the first quarter and we're not providing that specific a guidance. JoAnn, I'm going put you on the spot and ask you to just comment on the $10 million of loans is worth.

JoAnn Lilek

$10 million of loan what I would consider to be a typical accessible thread for us on our commercial loans is going to be worth about 3% is where that would come out. So, few hundred thousand dollar, as we do the math, $455,000 pretax is $0.01 per share. So it doesn't take a lot going up or down to really improve our numbers. We need to have some growth. The other thing that factors into our margins without providing specific guidance but giving a general flavor for what we're thinking is we've got 2 points on the FHLB borrowing that we're refinancing. That factors into our thinking. And with these rate spreads eventually have to catch up. We're still going down. So it's going to take awhile for that to work its way through. We have a half a month of the prime rate drop in March. We've got to see another drop apparently today. So, it takes awhile for that to factor through as we try to be conservative when we think about that but those are factors that enter into our thinking and growth is all our sight for us right now in the way we've thought about the 10% to 12%. So, any growth that we get that is profitable growth will be good for us.

Ben Crabtree – Stifel Nicolaus

I gather from your comments that you have not yet replaced all the $130 million of borrowings?

Jim Giancola

We replaced $100 million of it long term, and we'll replace the other $30 million in the very near term.

Ben Crabtree – Stifel Nicolaus

Okay. Okay. And, again, obviously no one knows the real answer to this. But of the remaining $18 million of the large – of the LPC, what do you think, Jim, the prospects are of that being able to be turned into earning assets by let's say the end of the year?

Jim Giancola

I think there's a pretty good likelihood that half of it will be earning assets by the end of the year and the rest of it will drag out in litigation and will be liquidated in '09.

Ben Crabtree – Stifel Nicolaus

Okay. And I guess one other question. The salary number caught me by surprise. There was some commentary in there that there was a severance and then some other non-recurring charges. I mean it's not a big deal $224,000 but I'm wondering what that might have been?

Jim Giancola

JoAnn, do you want to comment on that?

JoAnn Lilek

Yes. Looking at the press release and I'm focused on the $13 million salary and benefits for the March quarter versus the $11,665 for December. So, I guess the first thing to keep in mind is December – the fourth quarter compared to the first quarter will be typically impacted by just the higher levels of payroll taxes. Our people who max out on all their payroll taxes towards the end of the year, all that comes back on stream for all of us and as we see it in our paycheck, Midwest sees it in their expense line. So, there's an element of that that just goes on between the fourth quarter and the first quarter. Also we start out the year improving our incentives and all those types of things as if we're going to hit our target. So to the degree that we didn't quite hit target for last year, some of those numbers are also going to be higher. And we have the impact of certain post-retirement benefits kicking in on our Northwest Suburban employees. So, those are all the different factors that go into it. I don't think there's anything other than we did highlight some non-recurring things. There's nothing else that would be non-routine in that comparison.

Jim Giancola

I think the important thing, Ben, is we're not adding to staff.

Ben Crabtree – Stifel Nicolaus

Right. Right. Right. Okay. And one final question. This is probably fairly small too. But in the discussion of delinquencies, you talked about half of the increase being administrative and not credit related which just in our minds raises the issue of procedures and controls. Is there an issue here?

Jim Giancola

The issue is two or three or three actually substantial credits that are performing credits. We had people out of town, we have officers that did not get mature notes renewed in a timely fashion. And I think it's fair to say that we've had conversations with those people and that should be a non-recurring item.

Jay Fritz

It was actually – he did very silly things. We had a customer out of the country. We had a renewal that went through that didn't have the – it was off $10 in terms of the renewal amount and which is silly thing.

Ben Crabtree – Stifel Nicolaus

S, we should everything else being equal should see that number retreat in this quarter?

Jim Giancola

Yes.

Ben Crabtree – Stifel Nicolaus

Okay. Thank you.

Operator

(Operator instructions) Our next question comes from Joe Hallahan [ph] at RBC.

Joe Hallahan – RBC Capital Markets

Yes, good morning, gentlemen. Questions that I have for you, in regarding the prepayment of the Federal Home Loan advances, your press release says that you have replacement (inaudible) of 2.5% with a 10-year term. Is that the entire amount, the entire $100 million or $110 million that you've so far done, has that been funded entirely for 10 years at 2.5%? If it is, I think it's very, very good.

Jim Giancola

10-year, non-callable for two years at 2.5%, and I think that structure, and I think it's attractive funding for us going forward.

Joe Hallahan – RBC Capital Markets

So, it's not a 10-year term at 2.5%

Jim Giancola

Ten years –

Joe Hallahan – RBC Capital Markets

It floats after two years?

Jim Giancola

It can be called after two years.

Joe Hallahan – RBC Capital Markets

At Midwest, at your terms or at the lender's terms?

Jim Giancola

No. At the Federal Home Loan Bank's option. It's typical of the way they do all their advances. They do shorter-term ones. We've taken a ten-year non-callable after two years at that rate.

Joe Hallahan – RBC Capital Markets

Yes, well, then it seems to me then that you've replaced – you've paid up front like the $7.1 million prepayment penalty that you had is saving a – it amounts like $300,000 to $400,000 over a 2.5 year period term. That doesn't look like all that great benefit. You're paying the entire prepayment up front. If you ask me, that's playing the curve a little bit since you didn't really extend, you paid fully up front here, your anticipated savings. Unless you're expecting to see rates dramatically lower two years from now?

Jim Giancola

What we're trying to do is produce core earnings that produce shareholder value. Using – realizing a one time gain does not produce core income or shareholder value. We get no credit for that. So, we look for an opportunity to transfer a one-time gain into core earnings going forward, which produce enhanced shareholder value going forward. And again, your math is approximately correct if you were not a publicly traded company, the transaction is marginally profitable. But you are a publicly traded company transaction it's significantly revenue enhancing and shareholder positive for us.

Joe Hallahan – RBC Capital Markets

Okay. Thanks. Another question I have for you then. Regarding this condo loan, you said it was a participation loan and that's accounted for the majority of the increase of $7.5 million. Should I be worried about the size of this given the state of the condo markets in the Chicago area and the country in general? Is this another big loan that if the condo sales and house sales continue to stutter that's there's more big allowances coming from this to the size of the overall loan?

Jim Giancola

We do not. Think that the total loan is $9.5 million. We own about $7.5 million of it. As I said, about a third of it is already sold. We have contracts for an additional how many units?

Jay Fritz

I believe that there's – it's over half.

Jim Giancola

Over half of the units have contracts on them, and we have some specific reserve on it so –

Joe Hallahan – RBC Capital Markets

The total is only $9 million. So, it's not like another $30 million (inaudible).

Jim Giancola

No, no, no, it is not.

Joe Hallahan – RBC Capital Markets

Type of deal?

Jim Giancola

No, it is not.

Joe Hallahan – RBC Capital Markets

Okay. Another item. You had mentioned in the comments saying that incentive compensation is basically 100% tied to maintaining and earning the dividend. Was I correct in hearing that?

Jim Giancola

We do not. No one gets incentive compensation if we do not at least earn the dividend on the preferred and the common. Individual incentive comp is a function of how much we earn in individual performance, but there is a threshold that we have to exceed before any funding is paid or any of these incentives are paid.

Joe Hallahan – RBC Capital Markets

Okay. I just wanted to make sure that there's no incentives getting paid just for maintaining a status quo since the dividend has been the same that there's no incentives going out and that the shareholders' that have seen nothing but the loss and pain over the last couple years is not getting the same reward as management may be getting for just maintaining the status quo.

Jim Giancola

You are correct. And I think it's important to point out that when you look at the performance of our stock and compare it to the other Chicago banks, we're about in the middle of the pack. We are in a banking sector recession and we're getting dragged down with everyone else. It's a tough environment out there and all of us have significant holdings in that stock by design so our interests and the shareholders' interests are coherent.

Joe Hallahan – RBC Capital Markets

Thank you.

Jim Giancola

Thank you.

Operator

Our next question comes from David Lisbeth [ph], Private Investor.

David Lisbeth

Jim, good morning. Just one macro question for Jay, if you want to speak to it. Is there anything on the table that you guys see that would necessitate another preferred offering or anything that would dilute the existing comments?

Jay Fritz

We're going to let JoAnn comment on that.

Jim Giancola

Yes, there is nothing on the table for an additional capital raise right now. We do have a shelf out there. We have no short-term plans to use it. We have converted a portion of our debt in subordinated debt to improve our risk rate capital ratios and so I guess that's a long answer to your question. The short answer of which is, no there's nothing on the table right now.

David Lisbeth

And you're comfortable with the capital structure?

Jim Giancola

Capital ratios are all well above the well capitalized requirements. That's an important consideration for all of us to keep them at that level.

David Lisbeth

Okay.

Jim Giancola

Thanks. If there are no other questions, again, I thank you for your interest, and John and I and others will be around, JoAnn, to take any additional questions you might have. Thanks.

JoAnn Lilek

Thank you.

Jay Fritz

Thank you.

Jim Giancola

Bye.

Operator

And that concludes today's conference. Thank you for attending. You may now disconnect.

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